NXP Semiconductors NV Stock

Good morning, everybody. Welcome to the Goldman Sachs Communacopia and Technology Conference. I'm Jim Schneider, semiconductor analyst here at Goldman Sachs. It's my pleasure to welcome NXP Semiconductors' CEO, Rafael Sotomayor; and Head of Investor Relations, Mike Lucarelli. Welcome, guys. Thanks for being here.

Thank you.

Thank you, Jim. Thank you for having us.

Of course. Maybe starting with a high-level question for you, Rafael. You're just a little less than 1 year into the job thus far. I think as you -- it appears that you're, kind of, trying to transition the company and really pivot to this theme of physical AI to some extent. So tell us about your vision for the company, both in the short term and the longer term especially relative to that theme?

Yes. Well, thank -- first of all, thank you for the question. It's good to be here. Yes, it's been almost a year now. I think what it was very apparent to me, I think the market is coming to us. Again, my job now as the CEO is to make sure that we go to the market at the same level of speed, right? Not just to participate in this new phase of what's happening with edge devices, but just to lead. And I think NXP has spent decades, right, earning credibility with edge devices.

Talk about safer cars, smarter factories, more efficient infrastructure. And these are systems that, kind of, value performance, value of security, value of reliability. And now the world is changing. It's massive value creation in AI and the cloud, and this IP is now moving to the edge. And now these devices with AI is able to perceive the world, make sense of the world, make decisions, act, become autonomous. And that autonomy raises the bar in terms of engineering. I mean these devices, they usually are going to operate next to us, next to the high-value assets. They don't need just security, right? They need world-class security. They don't need just functional safety, they need world-class functional safety. They don't need to just operate, they need to operate deterministically under all conditions. And these are the things that NXP spent decades investing on.

And so we're quite excited about it. Now the pivot and the transformation that you referred to is, well, there's in 3 areas, right? There are 3 things -- areas that I'm focused on. One is focusing the portfolio towards this notion of physical AI or intelligent systems at the edge. That means divesting things that don't point their way or doubling down on areas in talent and IP that helps us get there faster.

The second thing that was a realization that Intelligent Systems is complex for our customers. They have compute. They have analog. They have sensors. They have all sorts of technology that needs to come together and that complexity creates an obstacle. And so we needed to make sure that this obstacle gets removed. And so we invested heavily on systems. So we are -- now looking at our road map not only from a component perspective, but from a system perspective. So that's the second change.

And the third one is a little bit more of an internal change, but this just we need to keep pace with innovation and with the speed of the world. And that means our intensity of execution needs to go up. And so significant effort internally to synergize IP development, make sure that we have transversal technology that applies to different markets that we reduce, that we don't overlap, very, very ambitious and aggressive deployment of AI tools to actually increase productivity, and we're already starting to seeing it in our output. And so that's kind of the change, right? The change is moving to what intelligent is, and that's, kind of, the pivot that we're making with the company.

Great. Now I want to continue on in terms of the portfolio piece of the topic. Portfolio today is pretty heavily focused on automotive, a little over half of your business today. Within that portfolio, the products span the processor side of things, control plane, zonal microcontrollers, sensors, mixed signal, including radar, digital, networking ethernet, wireless, et cetera. So first of all, as you think about the portfolio within automotive, how do you feel about the portfolio stand today?

I think my perspective is NXP has the most comprehensive automotive road map and portfolio, processors, analog sensors and radar, connectivity, both wireless and wired and so battery management and electrification and so it's a quite comprehensive portfolio and the whole point of this comprehensive portfolio is not just to sell a bag of components, right? It's about really deploying those assets with a system solution because this is a massive, massive transformation that is happening in automotive.

This adoption of, I mean, 2 areas. First one and the most important one is that the adoption of software-defined architectures. And the other one is autonomy. Both of them are having a massive transformation. So the investment that we have right now, I think, is very well positioned for these 2 megatrends.

Yes. And then maybe highlight some of the biggest vectors within that vertical with -- in terms of the -- you talked about them like self-driving, autonomous move to EVs, maybe -- and software defined. Like just talk about some of the products and where the fastest growth areas are within that portfolio?

Well, I mean, let's start with the most transformative one that is the software-defined vehicle. I think the software-defined vehicle is, I think, it's underappreciated in terms of how the transformative aspect of adopting this technology or this architecture, right? The whole notion that you go from these hardware-bound static functions, right, to a more dynamic digital platform that can continue to be updated over time, it's creating just a massive transformation in the industry, and it's bringing a lot of content growth, right?

You're removing all these low-end hundreds of ECUs and MCUs scattered all over the place, isolated, developed by different people, different companies to a, kind of, common platform where you aggregate all this with higher performance processors. And their road map of NXP is a road map for that future where all this aggregation of this -- all this disparate ECUs are happening with high-performance processors.

They're real-time, and it brings new challenges and new opportunities, right? These processors are not just processors, they're networking products, right? Because now you aggregated all the ECUs and you have to connect all these sensors. And so there's a massive opportunity to create a new class of products, which actually NXP is already ahead with 16 nanometers for zonal products and 5 nanometers for central compute platforms. And so I think the road map of NXP, and I'm quite bullish on it, is primed for the architectures that are being adopted right now by our customers.

And so I think that is the most transformative aspect of the growth drivers that we have, which is SDV. Of course, radar as autonomy improves, and we go to Level 3, Level 4, you will need more sensors, including radar. We have electrification as one of our growth drivers and then connectivity. But SDV is the largest of all of them. By the way, if you put all these accelerated growth drivers. In Q2, they were very close to 50% of our revenue already and these are accelerated growth drivers of automotive, kind of, indicate the portfolio that is tapped into the secular drivers of growth in automotive. And so -- and these, by the way, that we're growing at close to 20%. And so we have half of the portfolio in automotive growing at 20% plus. And so quite exciting and tied to secular drivers. And so you have 2 impacts in this portfolio, you have the content growth. But then what is -- I also think is underappreciated is that the leadership on these products also is going to generate share gains. And so these 2 are going to compound and they're quite important for NXP.

Yes. It sounds very compelling. But how do you think about the risk to the portfolio, let's say, if the world moves to an automotive architecture that's, kind of, far more centralized in, kind of, a centralized single-order processor or GPU-CPU combination.

Let me challenge a little bit that premise, okay? I think this notion that -- I think, first of all, let me dispel the notion that all CPU cycles in the car are the same, right? If you look at the different domains and you mentioned and I assume you mentioned IVI, you mentioned ADAS, as you mentioned, core function of the vehicle. I mean, each one of these has different technical merits, a particular purpose. And so the whole notion that all CPU cycles are the same, let me dispel that. I think about the scenario that you painted, you have one chip that handles all your infotainment. They handle -- processes all the data to actually create autonomy and at the same time, manages all the actuators in the car. It manages all your power and all your connectivity. That just doesn't seem realistic, okay?

So I don't think that is necessarily a threat. I think the threat for us will be to show up, like I said, to a customer with a bag of components instead of showing up with a customer with a system solution that leads the transformation and the architecture of the customer into SDV. And so I think that's where our focus is.

Yes. Very fair. Now how do you think about, sort of, your customer relationships, especially with the Chinese automotive OEMs, what level of competition do you see in that market from domestic chip providers? And sort of, how do you expect that level of competition to change medium term?

Yes. Well, let's step back and say, I'm going to give you my perspective on China, right? China -- as a market in China, OEMs as customers, right, on Tier 1s. And I think both are extremely important, right? I mean markets go up and down and there's some weaknesses here and there, but it's a very large market that attracts a lot of innovation. People are eager to try and to iterate and is an attractive market just to participate in.

The OEMs in China are also very important because they're not relegated to China. They're actually winning overseas. And so access to make sure that we -- NXP wins with the winners is very important to participate in NXP. Now the relationship with the Chinese OEMs is strong and it's getting stronger by the fact that we have a lot of innovative products that they can take advantage of.

And so I think it's strategically, I think, an advantage, our relationship with the Chinese OEMs, primarily driven by our portfolio. Now let's admit that there is competition in China, right? There is an indigenous and very, very strong competition in different areas where they -- Chinese players have done very well in infotainment. They've done very well with their own ADAS solutions. They've done well with power discretes. They've done well with even low-end MCUs. And so I will admit that. But our goal is not to compete directly with component solutions. And it's also not our goal to compete in the low end. We must take our playbook and be disciplined with our playbook, which is we must win the architecture of the customer. And that's how -- what are we doing right now.

I'm quite -- by the way, I'm quite excited about the traction that we're getting right now with our S32K5 family of products, which is a unique zonal product for these new architectures. High-performance, 16-nanometers embedded MRAM or embedded type of flash embedded into the product in 16-nanometers, quite unique, phenomenal networking performance, world-class security, unique product being adopted heavily and right now to have -- in China, the POCs on K5 are quite exciting.

And so I'd give you that perspective is that our playbook in China is acknowledging that we have competition, but also acknowledge the fact that innovation is the only way to win there and making sure that China competes very well with our products.

Great. Final high-level question for you. So over the last several years, you made a number of divestitures to, kind of, refocus the product portfolio. You referred to that before, acquisitions that are mainly, kind of, enhanced your automotive exposure. So how do you think about the portfolio more broadly beyond automotive? And would you consider a larger, more transformative acquisition that will give you some exposure to some emerging verticals whether that's robotics, data centers, other areas that are filled through AI, et cetera.

Jim, let me push back a little bit on the notion that our acquisitions were auto driven, right? Because we don't consider ourselves an auto company with adjacencies. We consider ourselves a physical AI company where auto is our biggest market. But over time, robotics industrial is going to outgrow the auto market. And so we're positioning the company that way. If you look at the M&As that we did, right, if you look at Aviva Links, I mean, this is about high-speed serial interfaces, right? That is, yes, and it's applicable to automotive, but it's going to be used in industrial significantly.

It's going to be used in robotics. If you look at the investment that we did in Kinara for AI inferencing, I mean, AI is transversal, it applies to just about every single market and every single product. And the acquisition of TTTech was all about enhancing our system solutions, software-defined vehicles was also going to be applicable to software-defined anything and so the whole notion of getting people who are very well versed with real-time systems was something that we aspire to do.

With respect to the -- are we going to -- are we consider something bigger and more transformative, I mean these are things that we always evaluate, right? And yes, there is a high bar to pass if we were to actually, kind of, acquire somebody. But as long as it, kind of, accelerates our path, our North Star not just revenue, but our path to a strategic direction, we would evaluate it.

Great. So let me just kind of turning back to, sort of, your current business trends for a moment. You reported a pretty solid quarter, very constructive commentary on demand trends across most markets. How do you characterize the end demand trends as you're seeing them right now across automotive, IoT, mobile and communications and sort of where are you seeing the strongest orders on a relative basis?

Yes. Well, we just finished Q2, right? It was a record quarter for NXP, record quarter in automotive, record quarter in Industrial. We just guided also a very strong growth. I think Q2 was close to 20%. I think once you exclude sensors, it was 20%, similar trajectory that we grew in Q3. So that, kind of, tells you the demand environment is strong, right? Q2 growth came from all regions in all segments. So that, kind of, gives you confidence of the demand environment that we have, I think visibility has also improved. We have extended our lead time.

So that has also helped having the conversation about what is the products that our customers need and requires so it gives us visibility to make sure that we build in the right products for Q3, for Q4, for Q1 next year. And so I think the demand environment today, for the most part, in industrial and IoT and automotive and some of the demands that we have on comps and infra are quite healthy.

Very good. And then in terms of, sort of, the balance sheet metrics and inventory levels, I think your internal inventories are down on days, flattish in dollars this past quarter, the inventory flattish 11 weeks. You also talked about though increasing book-to-bill trends, lead times and more customer expedites on the margin. So how do you, sort of, characterize your OEM customers' behavior at this point, their willingness to potentially increase their own inventory levels of components or not. And if you -- they have not started restock yet, what do you think might prompt that because that's normally behavior we start to see at this point in the cycle?

Yes. So I think -- let me address the inventory comment first. I think the inventory, I think, is under control. I think our inventory days went down to 156 days. So we're down quarter-on-quarter. The channel inventory that we have kept steady at 11 weeks, so it's quite normal and this is consistent with our long-term growth targets. With respect to visibility on the end customers' inventory, I would say that inventories continue to be lean. And none of the forecasts and the projections incorporates this changing, right, that we have. And by the way, when you speak of OEMs, I mean, it could be Tier 1s, it could be OEMs, but at the end of the day, at the right customer, I think that, that inventory is basically kind of consistent, right? The level of inventory is consistent.

What would change that? I think the fear of putting lines down at the expense of carrying that -- getting that capital stuck with inventory. I think that will change that. But silver lining, I think, is that leads extending has helped us with disability. And so the conversations even though customers have not increased inventory, conversations are quite constructive. It is heavy visibility into what they need, when they need it, having a conversation about the tightness of supply because it's just a tighter -- there is tightness in supply. And I think that those conversations are a lot more constructive, a lot more transparency, which overcomes the fact that these -- some of these companies are being squeezed, and they're taking care of the working capital in a very, very disciplined way. I think we have to acknowledge that the value of some of these products has decreased in Tier 1s. And so cash flow is important for them.

But having said that, I think we work with that to make sure that we have transparency all the way from the OEM to the Tier 1 to be able to make sure that we build the right things and we deliver the right things on time.

Yes. Excellent. Now among investors, it seems like the hardest debate right now relative to analog is the topic of pricing. Now you've talked about starting to see some pricing increase selectively, but that's not had a positive -- net positive impact yet on your margins. Help us understand when investors should help to -- expect to see some of the biggest impact of pricing for the company and some of the product groups where those price increases or changes could be most significant.

Well, let's just talk about pricing in general, just because I think the landscape of pricing is changing even at a structural level, right? I think -- and let me talk -- I'm going to address your comment that I think it was more on the reactive side of inflationary supply. But just step back, what's happening with pricing in the landscape is very different than what happened in the previous 10 years in semiconductors. And I would say they start with the fact that semiconductors have become a bigger part of the value proposition of the new systems, right? They are at the core of innovation. They are the core of the value proposition. It is the core of the ROI of those devices and that carries a significant amount of weight.

So innovation carries a significant amount of weight, and customers are willing to pay for that innovation. And of course, I'm not saying that, that removes price pressure or competition. All I'm saying is that the heavy headwinds of price erosion on a yearly basis they used to have back in the past 5 to 10 years is going to be different, more and more going forward just because of how critical it is to deliver the value proposition of our product through semiconductors.

And the pace of innovation that is happening more and more, the next generation delivers more value, integrates more BOM and by definition, that price will continue to go up with true value capture. So that is a very important structural change that is happening on pricing.

And the second one is that right now is supply is tight and input costs have gone up. And so now you have more of how we react to these disruptions in the market and both are combining to a price environment that is significantly more benign for semiconductor companies. I think the impact that you used to model and your pricing over time every year by several points of price decline. I think that's just going to get better from a semiconductor perspective. It's going to get better.

Now the question you asked about how we see the impact, now we see it already, okay? I mean it's just gradual because you deploy price increases by having conversations with your customers, some of them you have contractual obligations. So there's timing associated with these price increases.

You deploy gradually through some selected products and over time, you kind of deploy it. So the impact to your top line in terms of these price increases is gradual, but it accumulates like every month, it's a little bit more and more and more because it's not one step function is there, it's a gradual impact. We expect to see that more and more in Q3 and Q4 and going into next year because it's just going to accumulate more and more.

Great. A couple of questions there on end markets. I think we covered automotive fairly thoroughly. On data centers for a second. With market, you've guided to revenue more than doubling this year versus last. It kind of appears to be shaking out to be a pretty strong business segment for the company as with many of your peers. Maybe speak to some of the specific opportunities for NXP in data center and how you're positioned there?

Yes. So the way we approach that data center is very much as an infrastructure play for us, right? We approach the data center, invest in a lease portfolio for us as particularly the control plane. These are top of rack, which is in processing that goes into the boards that handles and monitors the well-being of the rack, right? These devices are very complex systems and making sure that you manage uptime and cooling and power into these devices, is fundamental for the investment of these racks to actually be up and running all the time.

And so we invested in areas where we have strength, which is part of our industrial play. This business has grown and we'll grow it to -- we provided guidance this year of 500 growing from 200 last year and it probably continues to kind of grow into the next year on 20%. This is based on the current design wins and the current portfolio that we have. But the trend that you see right now in data center is if you go now and look at what's happening on the data plane. These -- our networking products are going from 400 gigabits to 800 to somewhere in 1.6 terabytes. And so when you have speeds -- they're going at that level, the infrastructure required to manage that -- those racks need to also go up in performance.

And so there's going to be a lot of opportunity as the complexity of these racks goes up, I think there's going to be plenty of opportunities to continue to drive innovation and the control plane associated with controlling the fans, the type of connectivity that you have, the type of crypto that you actually deploy into it. And so monitoring that the well-being of that rack is going to become more complicated. And I think there's going to be more innovation. And so today, we gave you the forecast that we have with the current products, but you should expect NXP to continue to expand our product portfolio to expand our SAM and hopefully continue to grow faster in this market. And as we make progress with the visibility of those products, we'll provide updates.

Great. And then maybe switching gears for just a second to touch on physical AI and humanoid robots, which you've kind of led with. What do you think about the available market for NXP and your portfolio in the humanoid and sort of what are the biggest components that drive that?

Yes. I think autonomous machines, in general, right, it's just a matter of not if, but when, right? And you mentioned, obviously, humanoids. And I think human is the ultimate expression of physical AI and robotics, right? It's probably the most complicated form factor. And today, I think there's this notion that the big challenge in robotics it just compute. It's a big -- put a big brain in there and things will happen. And in reality, I mean, humanoids -- particularly humanoids is a system problem.

And so we have done analysis on what we're doing right now with robotics, and we see the fact that intelligence for robotics, very similar to what happens. Intelligence and humanoids, they're very similar to what happens to intelligence in the human body. I mean, it's just very similar.

It's not about one big brain, it is about having a hierarchical level of intelligence through -- throughout the humanoid and what does this mean is very similar to us. We have a big brain. We have a cerebrum that is powerful. It does a lot of reasoning you're going to have a similar, kind of, reasoning layer of intelligence and robotics.

Then you have the next layer of demand, just coordination in our body as a set of elements, the ability to actually be able to walk without really thinking about it, super low power, high performance, intelligent, but not intelligence as our ability to reason with the body.

Well, we have a similar concept in humanoids and in robotics, which is coordination layer. And for instance, in a car that will be the equivalent to our S32M product, which is our central compute platform, which is just heavy networking, heavy compute power processing, but it's still real-time performance and low latency.

And then the third level in humanoids will be the reflex layer, which is the equivalent for us for our spinal core things. Think about our ability to react very quickly to things. This in a robot will be actuators and motor controls and anything on the limbs and the nodes. And now you have 3 layers of intelligence or coordinated or align and that's the system solution for robotics.

Of course, things need to happen in many ways, areas that we envision to participate, and I'll tell you, I mean, if we were to take an estimate of western robot today from a BOM perspective, it can go from anything from $1,500 to $4,000 from a BOM perspective. And I think with the current portfolio, NXP can address about half of that. And these are areas where we just talked about the different processors or an AI.

We talked about -- there are about -- by the way, there are about 300 to 100 joints in a robot. Each one of them requires some kind of motor peripheral and so motor control is a big part of it. You have connectivity, basically low-latency deterministic connectivity. So think about TSN and Ethernet that also participate for us, sensing whether it's vision, whether it's radar, whether it's UWB, the ability to actually kind of figure it out what happened around it.

That's another area that we can participate on it. Battery management, obviously, and so I think we're quite excited. Of course, this is -- I would say there's more of a 2032 type of, kind of, market. But between now and then, there are other form factors that they're important in robotics, drones, AMRs, robotics in smart factories. And so for us, a path to humanoid involves making sure that we're very relevant with our robotic customers today, in different form factors, and form factors that are a little bit more constrained, factories, law enforcement, delivery, things that are a little bit less challenging from a form factor but you still apply the same principles of hierarchical AI, sensing, perception, battery management and actuation.

Yes. Got it. Speaking of somebody who needs a bigger cerebrum, I hope you're right. Okay. So want to hit on 2 more common investor questions. One is on financial targets. In 2024, you laid out financial targets for 2027 for compounded revenue growth of 6% to 8%, gross margin of 57% to 63% and op margin is 34% to 40%. Since then, you've made some divestitures, acquisitions we just talked about. So looking forward to next year, what's your level of confidence in, sort of, hitting those targets? And are there any caveats investors to be aware of when considering your performance next year?

Well, if you look at the performance that we had on the first half of the year, and the guide that we gave you. I think you can probably see that -- I think we are on track from a revenue perspective on hitting those targets. And nothing today would indicate that this will give the rail. I mean, listen, things could happen. But I think right now, the trajectory that we have on our revenue, the customer traction, the design wins that are shipping already. I think that, kind of, leads to a very high conviction that we're going to achieve our growth targets in 2027. Gross margin we just guided to about 58%, I think 58.5% -- 58.5 in Q3. And we expect that leverage on and continue this projection towards the [ 6 ] handle of gross margin to continue to actually increase as we grow revenue.

The operating income, I think, is within kind of inches away from 37%. So I think the targets that you gave me there are well within reach. So you can see that we're actually creating a lot of leverage as revenue growth. And I think in 2027, this will continue. Now where I'm focused on 2027, it's not necessarily on the targets that we have because I think we're on track.

My biggest desire is to make sure that 2027, especially towards the end, it, kind of, has that momentum to even bigger opportunities in 2028 because some of the things that we talked about this new platforms for SDV and the new platforms for physical AI, they don't even start ramping until right literally at the end of 2027. So for us, okay -- okay. The results that you gave me, yes, it reflects some of the portfolio that we have now. But the traction of the new portfolio, I think it's even more exciting and it's going to reflect on some of the things that happened towards the 2027.

Yes. Okay. Final question. One question I get a lot from investors are -- is if we have heck of an industry upturn ahead of us and that last longer and stronger than any of us expect today, how do you think about the available capacity to satisfy that higher level of demand? Your strategy has a mix of internal fabs, external foundries, joint venture structures, maybe address the overall manufacturing strategy, especially the JVs, VSMC, ESMC. How they fit in your business model? And then why are those JVs a good use of shareholder capital?

All right. It's going to be challenged for me to answer that in one minute, but it just kind of tell you the following, right. When you look at a manufacturing strategy, there's 3 goals, right? One is access to supply. It's very important. Two, supply resilience. And that means a lot of things, but many once our customers require diversity, and we want supply resilience. And then lastly, but not least, is access to cost, right, competitive cost.

And so what we have established from a manufacturing strategy is that we decided to go asset light on the fab and so right now, we're 60-40, meaning 60 -- 60 external, 40% internal. And we're moving that to even 80-20. And that reflects the portfolio that we have. More and more of our products are moved to 16 nanometers, 5 nanometers in. So that reflects a little bit of the strategy we have in the portfolio. We created 2 JVs. I think the JV is a 10% ownership that we have on ESMC in Dresden in Germany and about 40% in Vanguard. That gives us not only access to capacity, it gives us assets to cost right? And also structurally, we move a lot of products that are in 200-millimeter fabs into 300, right?

And so that also structurally is a better cost. So -- and then on top of that, we decided to actually own our own back end. So our back end is about 80% internal, 20% external. And so we have this external fabs internal back end and that gives us enough flexibility to do the things that we need to have.

Excellent. I think with that, unfortunately, we're out of time. Rafael, Mike, thanks for being here.

Appreciate it.

Appreciate it.

Great. Good morning, everybody. My name is John Vinh. I cover semis here at KeyBanc Capital Markets. We're very fortunate this morning to have NXPI with us. We've got Jeff Palmer, Senior VP of Investor Relations. Congratulations on your retirement, Jeff. It's been great to work with you all these years. I'm very glad that you were able to include us in your farewell tour and...

I'm still here for a few more months, John.

And welcome Mike, back to the world of semis. I'm sure you're -- so anyways, why don't we just kick things off, and just talk about the cycle, right? Maybe, Jeff, can you just walk us through kind of what are the key trends that you're seeing right now?

Yes. So we reported earnings just a couple of weeks ago, so there's not a lot of new news. But what I would say is our view of the environment is considerably better now than it was 90 days ago and even 12 months ago, so things have clearly gotten better. Lead times are stretching out a little bit in certain areas, book-to-bill is solidly above 1 across all end markets, which is good. I would say distribution is in great shape. We're running at 11 weeks, which is our target. We have been running under that for a couple of years during the downturn, but we're back to 11 weeks in the channel.

We are seeing escalations go up, so these are folks that come in late inside of lead time and place orders. And so we monitor those on a kind of event type of basis and they're up. We have had to do a little bit of price increases as we are seeing some inflationary input costs come in. It's been kind of targeted here in the first half and immaterial to the overall financials, maybe a little bit more so in the second half, we'll know when we -- the second half is all done.

But all in all, I'd say we feel very good about where things are at. One of the questions you had earlier, John, I can maybe circumvent this, about restocking. Now as you know, in our auto business, about 60% of our auto business is we do direct with the big Tier 1s in North America and in Europe. And then the other 40% we manage through the channels, primarily in Asia, Korea, Japan, China and Southeast Asia.

I would say the challenge we still face is some of the large Tier 1s are still holding very low levels of NXP inventory. Our ideals for them to hold somewhere between 10 to 12 weeks, and there are a few who do that, and that's fine. We have a great relationship with them, but there are quite a few of large Tier 1s who are still between 3 and 6 weeks. And I just think the challenge is some of them don't have great working capital metrics and are going to just hope that we will manage the inventory for them.

So yes, that's a great, interesting commentary that you guys had talked about. So maybe we can just maybe dig into that a little bit. So how do you think this ultimately plays out, Jeff? And then are you planning to maybe hold a little bit more inventory for them? And then talking to one of your peers last night and they said that they're actually seeing signs that some of the OEMs are actually starting to hold inventory on behalf of the Tier 1s. Is that a trend that you're also seeing?

Yes, but it's not broad-based. It's very specific and targeted because the OEMs know fully that their Tier 1 partners are challenged and don't want to bring in too much inventory, but it's not broad-based, so what triggers it to change? I think the first time one of the -- here's the calculus, I think a Tier 1 is going through, they look at NXP and they say, lead times are sort of reasonable. They look at our balance sheet and they say, they've got 156 days of inventory, so things look good. That will work fine if you come in and we have a product that can finish goods. It will even work fine if we have the die and we can put it through the back end within the quarter.

But there's going to be a day where someone's going to come in with an order, and we're going to be like, we're going to have to go to raw die, right? You're going to have to build a wafer, and that's 16 weeks minimum. And I think that will be the wake up call.

Okay. Just relative to previous cycles, are you planning to hold slightly higher levels of inventory going into this up cycle here?

So we're holding -- our target is 110 days, so we're holding 156 days today. Probably by the end of the year, about 15 to 20 days will be buffer stock for some of our fab rationalizations we're going through, so we'd actually like to get inventory down a little bit. So there's not a plan for us to hold inventory on behalf of Tier 1s. I think one of the fallacies that people don't realize is our business is fundamentally a build-to-order model, right? So we don't generically build products and hope you come and buy it. If you, as a customer, don't forecast your demands on us, we're not going to make a guess. We have just too many SKUs, too many performance targets to hit, and so we're just not going to do it.

I would imagine with lead times extending that you are getting better visibility at this point. How far out do you have visibility at this point?

It depends. It's customer by customer. I mean you get some customers that give you a rolling 6-month forecast and you roll into that at all time. So you have other people give you a month forecast. So it varies. I don't want to give you a flat number, John. It's very end market specific, I would say one of the things that's unique to NXP is the size of our channel business through global distribution. We manage it very tightly. We have the ability to see what we ship into the channel, what the distributors ship at on a part level, customer level, but we also have the ability to see customers' backlog into distribution. So if, let's say, you are a customer buying from one of the large distributors, I could see your backlog building. I can't touch it, but I can see this building and I can see when you're ebbing and flowing. And that gives us a good insight on how the channel health is. And we feel very good about it.

Being a veteran of many cycles, Jeff, anything you'd want to call out in terms of differences with what you're seeing in the current cycle versus past cycles?

They all seem different. I mean the last one was post-COVID and it was -- I don't think any of us want to go through that again. But no, nothing unusual.

Okay. Maybe you can dive into auto in a little bit more detail. Can you just talk about the trends you're seeing in automotive by regions? And maybe between what you're seeing in EVs versus non-EVs?

Sure. So overall, auto really started to turn the corner for us exiting Q3 of last year and into Q4, notwithstanding the low order rates or inventory levels some of our Tier 1s have, I'd say auto is in very good shape. In this most recent quarter, all geographies were up, all product categories were up. We're feeling very good about product categories. So I think we feel good about auto other than just the issue we have with a few Tier 1s.

Okay. What about between Europe and China? It seems like the Chinese automakers are doing extremely well, and the European automakers are struggling a little bit. Are you seeing a little bit of that?

We see the same news you see, John. I mean our view of auto is we think the auto industry fundamentally is a 90 million unit marketplace. You might have a little above that, some years, a little below, but that's about steady state. We try to win with every partner we can and then we let the consumer decide which car they want to buy. We don't obsess too much about car sales. We've obsessed a bit about global production, so we see how it's going. .

And we see exactly what you just mentioned, John, we see the Chinese clearly have won the EV battle from our perspective. Domestic China sales are a bit weaker, but some of the bigger guys are offsetting that with exports. So the market in China has not been that bad in totality, right? The Europeans, I think are trying to figure out the next phase for themselves. It's challenging, but I think they're doing well. I think the big brands, the luxury brands will continue to sell on brand loyalty.

Great. So if you think about the growth for NXP and autos over the next 2 years, what do you see as the main key drivers? Is it going to be the same kind of company specific drivers that you guys have called out in the past, such as SDV, radar, BMS? Or are there other kind of emerging opportunities that could start to move the needle for you over the next 2 years?

Given the dynamics of the auto market where it's usually a 2- to 3-year design to revenue cycle, right? And I know you guys probably get tired of hearing us talk about SDVs and radar and stuff like that. But we're in the very early innings of that up cycle. We feel very good about it.

Of this last quarter, it looks like the accelerated growth drivers were just under 50% of our auto revenue, up very strongly year-on-year. The nice thing also is the core business was up as well, so overall, things are good. We have engagements with customers that won't go into production until probably late '27 into '28 and '30, which are very interesting, like our 5-nanometer S32 end product. The alpha customer on that actually goes to production, probably model year '28, so they'll start taking some product late '27.

The K5, which is our next-generation 16-nanometer zonal product is just, no better way to put it but on fire in terms of customer engagements, but that won't turn into revenue for a couple of years. We are seeing -- one of your other questions was, are we seeing any interest in AI in the auto industry? And we are. It's kind of -- we're seeing some in-cabin applications, which are kind of interesting where if you sit in the car today, you have a lot of electromechanical switches.

I think the vision some OEMs have is why have you actually turn the button on for your windshield wiper, why not just say, turn windshield wipers on. And so there's some ideas around using large language models distilled to run inside the cabin that we're working on. That's kind of with our Kinara product. But there's nothing in revenue just yet.

Yes. Maybe following up on that, right? You talked a little bit about what this AI car thing is. Is it simply just an LLM running inside the car? Are there other kind of attributes of what people are trying to define what this AI car is all about?

I think there are, John. I have to be upfront, I think it's very early days. I don't have enough of an insight to be the spokesman for it. I just know the one application I heard of is this kind of compressor distilled LLM that the car OEMs want to own themselves, which has to be able to interpret language from around the world and they want to be able to own that model, and they want to own the kind of, let's call it, the voice box, if you will.

They don't want it owned by someone else, right? So there are some interesting ideas a couple of guys are working out.

That's great. Any questions? Great. So you mentioned Kinara, right? So I think there was -- it seemed like a pretty big pivot from a messaging perspective in those last earnings call that you guys are pretty excited about physical AI. It sounds like you've got a compelling NPU from Kinara which you acquired quite a few years ago. Can you just talk about the NPU that you have from Kinara and how it's differentiated?

Yes. So I want to take a little step back. So Kinara not the only NPU we have. So back in '23, we developed a smaller NPU that's embedded into our industrial microcontrollers, our Kinetis family, the MCX family, i.MX family, and it's a good small NPU. It's about 2 TOPS, not super powerful, but it gives customers the ability to start testing the water, right?

What we've seen with those microcontrollers and processors that have that small NPU in it, in '25, they made up about 6% of our total industrial IoT processors. In '26, it looks like it will be about 15%. So clearly, the trajectory is up. And so what we're seeing when we talk to customers is they're trying to future proof their systems, right, so that's on the kind of integrated NPU of small performance.

Kinara is a much higher performance. It's about a 40 TOPS to us today. And the way it works is Kinara device has to slave off an application process, or in our case, the i.MX. And so the i.MX views the Kinara NPU as a compute resource, and you can gang up to three on one i.MX, and so there's good ASP uplift. But also from a customer perspective, they can scale their performance as they need it.

And so the message we're hearing is customers want to be able to run large language models that are distilled to run in a non-cloud-connected environment, very much an industrial type of environment. The Kinara opportunity pipeline has been the fastest-growing pipeline we've had in the history of the company. It was $1 billion last year, exiting last year. It's about $1.5 billion now. That's an opportunity pipeline. We start to convert proof of concepts and opportunities to design wins, and design wins to revenue. But it's a pretty good trend early on.

Yes. When you -- you seem pretty excited about physical AI. When you look at the physical AI TAM what's the most exciting thing to you guys about physical AI?

Initially, when we started talking about it, I thought it was going to be all about industrial. I thought that would be the focus of it, and then we started really looking at that opportunity funnel. It's both industrial and automotive. Now they both have different cadences. The industrial cadence can be 18 to 24 months from an opportunity to maybe early revenues. Automotive is your usual 2 to 3 years. So they have different cadences.

Okay. You also talked about, as you think about physical AI that there are potentially full stack opportunities with software. Can you talk about that opportunity with software and your ability to monetize software going forward?

So the monetizing software is very much something we're looking at inside automotive with our CoreRide platform, right? Remember, we bought a company called TTTech Auto, and what they brought to NXP was about 1,000 very skilled security, functional safety, auto engineers. So basically, it was a make versus buy. We knew we needed more software resources and so we acquired the asset, and they're helping us develop the CoreRide product. Their middleware products called MotionWise, and it's doing well, but it's early days.

We don't have a similar type holistic product in industrial. We have a development environment for NPU development for AI, physical AI development called eIQ. We are going to invest more there. One of the challenges we have is the ability to create semi-automatic model distillation. So right now, when we take a large language model, there's a lot of handholding for specific customers. That's great. But when you look at the industrial market, it's tens of thousands of customers. You can't handhold every model distillation. So we're investing on how we evolve that model compilation, if you will. And that's something we're investing in pretty heavily right now.

So in the industrial markets, it sounds like most of the models that you're implementing is your customer's models? Or do you have the...

Third-party models, yes. So we're not developing the models ourselves, right?

Maybe we talked about data center, right? Obviously, really exciting growth area for you. It's going to double for you at $500 million this year. I think you talked about kind of where you participated. I think you mentioned top of rack switch controls, retimers, monitoring, control security. Maybe you could talk about where are you investing in this area? And are there other opportunities you see to expand your footprint beyond what it is today?

John, when we look at the data center, we kind of two halves of one story. On the one half -- well, first, I'll take one quick step back. All we focus on in the data center is control plane management. So we're not in the data plane, we're not in the power delivery to the power of the data centers. We're really in a control plane application.

And there's really two halves to that. On the one half is control plane switches. It's our Layerscape family. These are -- it's a 16-nanometer family. It's 16 ARM cores with a very, very heavy duty Ethernet switch in it. And it has gotten good traction with a small number of hyperscalers that we sell to directly. We won these designs a number of years ago. And like all design wins after a period of time, you start to say, are these getting stale? They weren't going to revenue. And then all of a sudden, they start to ramp very heavily. That business is about half of our data center business today.

And we are going to invest -- we've talked about this on our most recent call, we are investing in a next-generation family, and there's kind of an interesting story here. So when we -- we've had the Layerscape family since we merged with Freescale, that was 16-nanometer family. We moved some of that IP into automotive to do the S32 family, so it's some of the networking IP. We built that family at 5 nanometers. We're not taking some of that IP at 5-nanometer and bringing it back into the data center. Some of the fundamental switch fabrics and cores and things like that.

And so that's something you're going to see at NXP more is not so much a siloed development model, but leveraging R&D across end markets. So we are investing in next-generation product at 5 nanometers, it's probably samples sometime in '27 ramps production in maybe '28 and beyond. So that's on the -- and we think if the product rolls out the way we think it should, it should open the SAM for us with other hyperscalers. That's our goal.

On the other side of the coin is the kind of board management control. And that's kind of a more broader-based business. We sell it to people like the ecosystem players like NVIDIA. We're working with the server OEMs in Taiwan. We work with other hyperscalers. It's a broader type of business. And what we do there is board management control, controlling root-of-trust security, controlling power, controlling cooling at a card level. And it's very similar to what we do in industrial already.

So it's not really a new market for us. It's just different application of a similar type of functionality. And so we think that will continue to grow. I think they're also -- you'll hear this more and more from us, there is some software investment that needs to be made. It's less hardware problem for us. It's more software like board management controls or BMC software and things like that.

Right. When you think about your data center business today, can you give us a sense of how much of it is general purpose servers versus AI service within that mix?

Yes, John, I'm not as smart on that, I probably really couldn't.

Okay. Layerscape obviously seems to be a significant portion of your revenues. Just what's the competitive differentiation on Layerscape and why you win?

Performance per watt is really what it is. But I mean, our main competitor there is the old Cavium product, the Octeon, product that Marvell now owns, and they do a very good job. They are a bit higher performance and also with the higher power consumption. And so we have a niche, right? It's a trade-off between power and performance. And that's what you'll see across the portfolio in general.

Great. Industrial saw a pretty nice growth, almost 40% year-over-year. Can you talk about what's driving the growth there?

Yes. So there are -- we have this concept of accelerated growth drivers in both auto and industrial. In the industrial side, it's three kind of sub portfolios. So it's our newest processor families, so the MCX microcontrollers, the RT, which is kind of a hybrid product and our i.X9 family. Those three families are literally on fire right now. And then they pull along things like PMICs, other analog connectivity and security.

So really what's been driving it, and it is our go-to-market, and we engage with an industrial customer. The first area we try to win is the processor footprint, whether it's a microcontroller or an application process or the RT is very well respected being very low power, but higher performance. So that's our go-to-market.

When you think about the supply chain, right, I think we've heard a lot of commentary out there that input costs are going up. You've talked about selective price increases. It sounds like there's a lot of just shortages out there more broadly. Are you seeing any sort of shortages out there? And in what areas?

Yes, there's been -- things that are tight. I think it's not on the wafer side. Our main partners for wafer supplier, TSM and GlobalFoundries, very good partners. We tend to negotiate with them kind of in the second half of each year for the following year's requirements. And so long as we stay within that envelope of volume and mix, we're in pretty good shape.

Where we are seeing costs go up are on the back end. Precious metals, substrates, even third-party test and packaging. We do about 80% of our package test internally, but we do go to the open market for about 20%. And it is tight okay? And we are seeing price ups there.

Now our first go-to move on inflationary input costs is try to operationally digest them. We don't want to go get -- pass them on to our customers. But there always comes to a point where you just can't squeeze any more out of that rock. And what we have to do in those cases is we selectively gross up those input costs and pass them on to customers. Not a great thing. We don't like having that conversation with customers, but we don't raise prices to pad our margins. We raise prices to maintain our financial structure.

Yes, makes sense. What percentage of your wafers are in-house versus outsourced? And then maybe can you give us an update on the JV and what does that mix look like once you're through the JV?

So today, it's about 60% outsourced. The way you want to think about that is anything that's 90 nanometers and below kind of bulk CMOS we buy in the open from the foundry marketplace. Anything that's 90 nanometers above mixed signal, we build internally, so it's a 60-40 split.

The JV in Singapore, VSMC that will be a 55,000 wafer per month factory. We'll own 40% of the output. It's a very advantageous financial model for us. When that is up and fully running, you probably can see our mix move to probably 80-20. We'll never be 100% outsourced, but moving towards it quite aggressively. As Bill, our CFO has talked about, we have three 8-inch factories internally. Most of them are fairly old, 35, 40 years old. And so we are going through the process of rationalizing our internal footprint. We want to do it judiciously with customer involvement, so we'll probably do it one at a time. Maybe we'll parallelize it a little bit. But the way you want to think about it is we'll do it one at a time.

Okay. Great. Last thing for me would be on gross margins. What's the path to 60% gross margins from here? Is it mostly going to be utilization driven? Or are there other puts and takes we should think about?

Yes, our rule of thumb, John, given that we are not a pure IDM and we're not a pure foundry is revenue is our friend. The rule of thumb we've given is for every incremental $1 billion, we can throw off 100 basis points of gross margin. And you saw that in play this most recent quarter. Revenue was up about $500 million year-on-year. Gross margins were up $150 million, so there's always a little variation, but the model holds. And so utilization is one piece, but it's only one piece of the 40% that we build internally, right? So really, revenue is our friend. And I think you've heard us speak the last several quarters, we feel very confident that we can achieve our long-term targets, which puts the revenue in '27 with $16 billion, 60% gross margin, plus or minus.

That's great. Great. Thank you, Jeff.

Thank you, John. Hey John, I'd like to also say thank you to you. This is the 15th year I've been to this conference with John. And so I appreciate it, and we've had a great relationship.

Yes. Thank you so much, Jeff.

Thank you, John.

Good day, and thank you for standing by. Welcome to NXP Second Quarter 2026 Earnings Conference Call.

[Operator Instructions]

Please be advised that today's conference is being recorded. I would now like to turn the conference over to Jeff Palmer, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Lisa, and good morning, everyone. Welcome to NXP's second quarter earnings call. With me on the call today is Rafael Sotomayor, NXP's President and CEO; Bill Betz, our CFO; and Michael Lucarelli, our incoming Head of Investor Relations. 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 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 of the non-GAAP financial measures to the most directly comparable GAAP measures in our second quarter 2026 earnings press release, which will be furnished to the SEC on Form 8-K and is available on NXP's website in the Investor Relations section at nxp.com. Now I'll turn the call over to Rafael.

Thank you, Jeff, and good afternoon. Our second quarter performance exceeded expectations once again as the strong momentum we saw in the first quarter continue into Q2, setting the stage for a strong second half. Demand improved across all end markets highlighted by strength in both our company-specific growth drivers and core business. This combination of secular and cyclical growth is enabling a durable revenue stream that expands margins and drive strong earnings growth. Second quarter revenue was $3.5 billion, up 19% year-over-year, non-GAAP operating margin of 35% and non-GAAP EPS of $3.61, all exceeding the midpoint of our guidance. All-in markets and regions grew versus the prior year. Our company-specific growth drivers grew in the mid-20% range year-over-year, and represented roughly 1/3 of second quarter revenue. In addition, our core businesses increased in the high teens range year-over-year that broad-based momentum is also contributing to our growth.

Now turning to end market performance. In automotive, revenue was $1.94 billion, up 12% year-over-year and slightly above expectations. Adjusted for the sales of the MEMS sensor business earlier this year, automotive growth was up 17% year-over-year. The company's specific growth drivers grew in the low 20% range year-on-year and represented 47% of the auto business. Growth was driven primarily by software-defined vehicle electrification and connectivity. SDD processor design wins continue to accelerate, including S32 and S32K series platforms. Additionally, we secured new design awards for our next-generation multi-gigabit Ethernet switches, purpose-built for SDV in-vehicle network architectures. These are multiyear platform commitments that expand NXP's content per vehicle. In industrial and IoT, revenue was $755 million, up 38% year-over-year and in line with our guidance.

The company-specific growth drivers, which include our newest processing portfolio of [indiscernible] and RT and MCX grew at 40% year-on-year and represented 36% of the industrial and IoT business. Communication Infrastructure revenue was $452 million, up 41% year-on-year at the high end of guidance. Growth was driven by digital networking exposure to data center and continued ramps of our UCOD RFID products. And lastly, mobile revenue was $351 million, up 6% year-over-year and in line with guidance, reflecting normal midyear seasonal trends in our secure mobile transactions franchise.

Now turning to our data center exposure. [ 90 ] days ago, we quantified this exposure for the first time. To recap, 2025, revenue was approximately $200 million, and we expect to exceed $500 million in 2026. Our position is squarely in the control plane of AI infrastructure, the same domain where NXP has built deep expertise across vehicles and factories for decades, now operating at hyperscale infrastructure specifically in 2 franchises. First, top-of-rack switching to smart make control anchored by our Layerscape family, which is ramping across leading hyperscalers. With every new data plane switch generation as speed increases, the control plane performance must also increase as they are simply more to manage, monitor and secure, hence we are accelerating our Layerscape road map to deliver the control plane performance each new generation demands. Customer engagement gives us confidence that these programs materially broaden our addressable content and extend the franchise well into the future.

Second, the processes that control, monitor cool and secure every component within a rack. Data center infrastructure is converging towards industrial-grade principles where reliability, real-time monitoring control and serial tolerance for downtime is critical. NXP is uniquely positioned as these functions thrive on key industrial processing attributes, what our portfolio is differentiated.

Now I want to address something fundamental. AI is moving from the cloud to the physical world into vehicles, factories and robots. It is moving directly into the markets where NXP already has leadership positions. Intelligence deployed at the edge demands real-time performance, ultra-low power and design in safety and security. True physical intelligence also requires distributing AI workloads across multiple layers of the system, an architecture we call the neural axis, which is the foundation for deterministic and safe operation or physical AI. These are capabilities, again, NXP has spent decades building.

Our differentiated position rest in 3 areas: First, NXP offers the industry's broadest and most differentiated edge AI compute platform. Our portfolio places the right intelligence at the right layer from high-performance recently in coordination in our I.MX and S32N processors to real time reflects the control in our S32K and I.MX RT families, all unified under our EiQ software environment. This has already translated into measurable growth. We estimate AI-enabled processors will represent approximately 15% of industrial and IoT processor revenue in 2026, more than doubling from last year. Second, physical AI, it's a system problem, not just a compute problem. Intelligent machines must sense, connect and act in real time. NXP is the only company that delivers all of this in one integrated trusted platform something no compute-only competitor can replicate. Third, winning in physical AI requires reaching a highly fragmented market at scale. Unlike Cloud AI, the edge spans thousands of applications and customers across automotive, industrial and IoT markets. NXP's ecosystem of distribution partners, reference to science and field support gives us unmatched reach into this market. Taken together, compute, system and reach, physical AI is already showing up in our revenue, and we expect it to accelerate.

Now turning to the third quarter. The operational metrics we track to assess business health continued to strengthen, and our outlook is better than we anticipated 90 days ago. We are guiding third quarter revenue to $3.75 billion, up 21% year-over-year adjusted for the MEMS sensor sale and up 7% sequentially. We expect all regions and all end markets to be up sequentially, a reflection of expanded customer adoption of our differentiated portfolio. At the midpoint, we expect the following trends in our business during Q3. Automotive is expected to be up in the low double-digit percent range over -- year-over-year and up in the mid-single-digit range sequentially. Adjusted for the sales of the MEMS sensor business, our guidance implies a high-teens percentage growth year-over-year. Industrial and IoT is expected to be up in the high 30% range year-over-year and up in the mid-single-digit range sequentially, continuing the strength we saw in Q2. Mobile is expected to be down in the mid-single-digit percent range year-over-year and up in the mid-teens digit range on a sequential basis.

And finally, communication infrastructure and other is expected to be above to be up about 50% year-over-year and up in the high single-digit range versus Q2 2026. What you saw this quarter, double-digit growth driven by company-specific growth drivers, and a 35% operating margin is the compounding result to staying disciplined on the right priorities. And now I would like to pass the call to Bill for a review of our financial performance.

Thank you, Rafael, and good afternoon to everyone on today's call. Q2 was a strong quarter with record revenue of $3.5 billion, up 19% year-on-year and 10% sequentially. All end markets performed above the midpoint of guidance, led by our company-specific growth drivers in software-designed vehicles electrification, industrial edge processing, connectivity and increasing data center content. Non-GAAP gross profit was $2.03 billion, an increase of $376 million or 23% year-on-year. Non-GAAP gross margin was 58%, in line with guidance and expanding approximately 150 basis points year-on-year and 90 basis points sequentially. Our gross margin performance reflects better product mix, improved factory utilization and solid fall-through on higher revenue. Non-GAAP operating expenses were $794 million or 22.7% of revenue within our long-term operating model.

Non-GAAP operating profit was $1.23 billion, up 31% year-on-year. Non-GAAP operating margin was 35.1%, expanding 310 basis points year-on-year and 40 basis points above the midpoint of guidance. Taken together, our second quarter results demonstrate that the margin expansion we are delivering is structural, driven by product mix, factory utilization discipline and operational leverage across our fixed cost base.

Below the line, non-GAAP interest expense was $87 million. Taxes were $205 million, noncontrolling interest was $15 million and results from equity accounted investees were a $3 million loss, collectively in line with guidance. This resulted in non-GAAP earnings per share of $3.61, $0.11 above guidance.

Turning to changes in cash, debt and capital returns. Our balance sheet remains strong and provides flexibility to invest in our strategic priorities and hybrid manufacturing plans. We ended Q2 with $10.98 billion in total debt and $3.2 billion in cash. Net debt was $7.7 billion or 1.5x adjusted EBITDA, and our adjusted EBITDA interest coverage ratio was 15x. In Q2, we returned $360 million to our owners made up of $256 million in dividends and $104 million in share repurchases. We remain committed to our long-term capital allocation strategy balancing returns to shareholders with disciplined investments in the business to support long-term profitable growth.

Turning to working capital. Our cash conversion cycle improved to 129 days from 140 days in Q1. Days of inventory improved to 156 from 165 days inclusive of approximately 9 days of prebuilds for our planned front-end factory consolidations. Receivables were 33 days, and payables were 60 days slightly better than last quarter. During the quarter, we generated $860 million in operating cash flow, which helped fund the $750 million debt retirement, $360 million of capital returns, $174 million into DSMC, $12 million into ESMC and $69 million of net CapEx. Taken together, we generated non-GAAP free cash flow of $791 million or approximately 23% of revenue. On a trailing 12-month basis, free cash flow was approximately $2.8 billion or 21% of revenue.

Now turning to our expectations for Q3. We expect revenue of $3.75 billion plus or minus $100 million, which is up 18% year-on-year and 7% sequentially. We expect non-GAAP gross margin of 58.5%, plus or minus 50 basis points which is up 150 basis points year-on-year and up 50 basis points sequentially, driven by the higher revenue and our manufacturing utilization. We expect operating expenses of $810 million, plus or minus $10 million. At the midpoint, this results in a non-GAAP operating margin of 36.9%. Below the line, we expect non-GAAP financial expenses to be approximately $85 million and our non-GAAP tax rate to be 18%. We expect noncontrolling interest to be $15 million including $5 million losses in our equity accounted investees for BSMC and ESMC. This implies Q3 non-GAAP earnings per share of $4.11 at the midpoint.

Turning to Q3 uses of cash. We expect capital expenditures to be approximately 3% of revenue with BSMC capacity access fee of $70 million and equity investment of $80 million. For ESMC, we expect equity investments of $30 million. This brings our cumulative investment in BSMC and ESMC to approximately $2.4 billion or about 70% of the total planned commitment across the 2 joint ventures. At the midpoint of our Q3 guidance, the year-to-date revenue was $10.4 billion, up 17% versus the same period in 2025 and consistent with a double-digit growth trajectory. Our growth continues to be driven by the compounding effect of our company-specific growth drivers and the return to expansion of our core franchises. We remain confident that we will deliver on our financial commitments. I would like to now turn the call back to the operator for your questions.

[Operator Instructions]

And our first question is coming from the line of Joe Moore of Morgan Stanley.

I was quite interested in the conversation about physical AI and how it's maybe changing your thinking and the products that you have aligned to that. Can you just talk to how that intercepts customer interest areas like software-defined vehicles, are they thinking along those lines? And just how quickly do you think that this transforms into something that's more of a physical AI driven market?

Yes. Thanks, Joe, for the question. The whole notion of cognification on the edge, whether it's industrial and auto, conversation is now. I don't think we will get a design win without having a big part of a very, very strong value proposition with respect to AI. So it's happening now. But everything starts before you put AI in the system, everything starts with creating a software-defined system whether it's a vehicle or whether it's in industrial. And so I think that's the beginning, right? The beginning is how do you create a software-defined system, what is the platform? And then what is the overlay that you do with AI? It's already happening.

I think one of the prepared remarks we said that AI-enabled products in industrial and IoT already composed, I think, 15% of our revenue was around basically AI-enabled products. I think this is going to become even more material and bigger as we go into 2027, but there is simply no actually activity with our customer today rarely without having a really material conversation around how AI is going to get deployed.

Okay. And then just on the broader -- on the automotive market. Can you talk about some of the dynamics there. Some of your peers have talked about maybe the beginnings of restocking from very low levels? I know you've talked about Tier 1 inventories being quite low. Are you seeing anything that's different along those lines?

Yes. Great question on the auto side since auto, I think this is where our secular story shows up very clearly. You saw in Q2, we're growing into the high teens. This is removing sensor. And I would say that for us, we actually see no restocking, right? What we see in what's driving our revenue, if you look at it, our accelerated growth drivers grew 22% this year, as we stated. They are becoming almost close to half of the revenue. And so the drive there is around content. It's around content driven by an architecture transformation that SBB is doing with the vehicles, and we have aligned a road map to lead this architecture shift towards [indiscernible], which by the way, is still in early, early phases of adoption. So I don't think necessarily auto is about restocking and a sort of a cycle. I think this is compounding on content and I think we're very well positioned with our SDB road map.

The next question -- and our next question is coming from the line of Matthew Prisco of Cantor.

Starting on the industrial side, can you maybe break down the trends you're seeing between the core industrial and the IoT side of the business? And also anything to highlight in this segment from a geographic demand perspective?

The industrial -- you saw the industrial growth is quite strong and is growing. And I think in the -- what is it, the high 30s into Q2. The industrial and IT, the accelerated growth drivers were in the 40% range year-on-year for Q2, Matthew, dip, but also what's happening in the core business is coming back. And you see that our core business also grew in the high 30s. And so very strong growth in industrial and IoT for a total growth for the quarter into the high 30s. And by the way, this is now -- this -- I think that now is the second year in the year that grew in the high 30s. This is actually a market that's performing quite well for us.

And then maybe the pricing side, how are you seeing that as a benefit today? And maybe how much of that is impacting the 3Q guide? And how are you thinking about pricing dynamics through the year?

Yes. I think your question highlights and that has been on the press quite a lot, which is this issue that we -- all of us are facing with respect to inflationary pressure and I'll start the answer by saying our first move is always to mitigate the price pressure through operational efficiency. We did make some price adjustments to selected products. These are judgments are not across the board. Price for Q2 was essentially neutral. In Q3, our guide already incorporates an estimate, but we won't know the exact impact until much later.

And our next question is coming from the line of Francois Bouvignies of UBS.

My first question is on STVs. I mean, is it possible to get an update on where you are in terms of revenues. I believe you said that it represented $1 billion revenues in '24, and you expect it to double at $2 billion in '27 to reach your targets? And you said that STV doing very well with high growth. Can you maybe help us quantify it for this year or the growth rate? Anything on that would be great? That's my first question.

Just to maybe recap what we said, while the accelerate growth drivers in automotive, they grew 22% in Q2 year-on-year, and they become close to 50% of the total revenue of the company. SDV is the highest growing part of the accelerated growth drivers. Remember, we have radar electrification, connectivity and SDV. And SDV is the one is performing the best. And obviously, that is the driver for the architecture transformation that has happened in automotive. And we're very well positioned with respect to our road map. What is even more encouraging to think about this is that the current outperformance in auto, and I think our auto business is doing quite well is happening without our latest products, S32N 5-nanometer products, the S32K5, which is our flagship Sonal products and 16-nanometer, they haven't even begun ramping yet. And so they're in the design win phase. And so I think we're quite encouraged about the performance of our SDV portfolio because they're more to come with the next-generation products.

And my follow-up would be, again, on the automotive side. I mean, you guided Q3 mid-single digit quarter-on-quarter, if I'm not mistaken, which seems to be like roughly in line with what we have seen before. I mean if I look at your 9-year seasonality, it was even a bit higher than 5%. So it doesn't translate so much the automotive recovery when we look at the quarter-on-quarter pattern if that makes sense? So year-on-year, yes, because maybe you destocked last year, but we don't see a strong recovery and maybe one would expect when we hear TI, STM. Is there any drag we should be aware of that is limiting your growth? Or it just to come or it could come later?

Well, Francois, I mean the way we look at our business given the fact that more and more of the revenue in automotive is driven by the accelerated growth drivers as year-on-year. because year-on-year, this is where true content growth shows up. You will always have sequentially blurred product ramps. And so I think the better way to look at it is to look at our growth year-on-year. And if you look at what we're guiding into Q3 is a high teens -- is a mid-teens growth year-on-year, which ex-sensor, that is quite strong, and it is above our model.

Our next question is coming from the line of Vivek Arya of Bank of America Securities.

Rafael, historically, NXP visibility has kind of been quarter-on-quarter plus or so. And I'm curious how far does your visibility extend right now? Which areas would you say you have better visibility? And where do you see lead times stretching out?

Well, lead times are stretching out and visibility has improved across all end segments. We have better visibility into Q4, we have visibility into Q1. And we've seen that really happened -- basically visibility has improved throughout the year [indiscernible].

Yes. Maybe I'd just add to what Rafael said versus 90 days ago, some of those other health signals that we measure internally. Rafael is absolutely correct. Our backlog continues to grow quarter 1, quarter plus 2, quarter plus 3. So we have a signal of 18 months out. Our distribution backlogs when we look into their books, they continue to follow similar patterns as ours. Clearly, our book-to-bill ratio is above 1, and it's above last quarter again.

As lead times will continue to extend and we start to extend them, if you remember, maybe 3 or 4 quarters ago. Customer escalations, which we track in the quarter have doubled since last quarter. So everything, all the signals continue to show even the term parts that we get, the late orders in the quarter continue to climb as well. So everything much better or continues to improve versus 90 days ago, in fact.

Got it. And for my follow-up, I was hoping you could remind us of how you view your typical seasonal pattern in Q4. And given there's visibility, if you could care to give us some directional indication of how it might shape up. And if I zoom out, I think on the last call, Rafael, you mentioned you're still comfortable with the '27 outlook, right, which at a midpoint of $16 billion or so. But at that time, when you had given that outlook, data center was not expected to be a big driver, and now data center is a bigger driver. So is there a different way we should think about the NXP prospects for '27, including the upside from data center.

All right. I think, Vivek, you're essentially asking me to guide Q4 in 2027. So I'm going to pick your Q4 number real quick. Listen, I think what you're asking me with Q4 is 1 way to ask me to guide. As you know, we guide 1 quarter at a time. But I'll leave it with the following. I think we feel very good what's happening right now with our business, right? The signals that we track, they're all pointing in the right way. And I think Bill mentioned some of these signals, right? There are quarters continues to strengthen. Backlog continues to build. And very importantly, for 2027, I think design win ramps are going to plan. So we like the momentum. And I think that we're not -- we're not going to give you a Q4 number, but I'll give you that the momentum that we have of -- into Q3 continues into Q4. And then with respect to '27, I think that the strength of the business and the strength that we have into 2026, it only translates to a stronger -- to a strong 2027. And in things have improved, continue to improve. And I think our confidence in our long-term growth rate has only increased in the portfolio behind this even better.

And our next question is coming from the line of Jim Schneider of Goldman Sachs.

I was wondering if you could maybe following up with the prior question, just sort of reiterate the double-digit growth outlook you expressed last quarter on the call in terms of 2027. And specifically, the 60% kind of gross margin level that you expressed. Anything that kind of like changes your confidence there? Or is your confidence, in fact, increased on those targets for next year?

Jim, this is Bill. There's no change of what we previously said. As you hear, we continue to see things improve on the revenue side. So that's all intact. Related to gross margins, again, we feel very confident of hitting what we shared using our rule of thumb. You can see that play out in our results from a year-over-year perspective, actually do a bit better. So everything intact way to the higher revenues we plan for and scales very nicely into our model.

Jim, let me -- with respect to [ '27 ], I think that the wide way to think about 2027, right, is the way we think about it, and we're excited about the strength that we have is the runway that we have ahead, the opportunity that we have ahead and our ability to compound into it. I think I mentioned it before, one of the perspectives that we take is we have the strength in the newest products in automotive has not even launched and physical AI is in early stages right off basically the signings and the heavy deployments have not even started. And so I think 2027, quite now, we're looking at a very constructive manner, and it really underpins our long-term growth rates that we have established.

Yes. Maybe I just held on that because what Rafael said about physical AI, I know you shared about the 15% enablement more than doubling. There's another metric we do track, as you mentioned, it's early innings. As you all know, we acquired an asset called Canara and the design win funnel that we shared with you of the engagement, the excitement the amount of input we're getting from our customers. That grew last quarter to over $1 billion. I would say this quarter, over $1.5 billion in the funnel. And obviously, we'll have to convert those into design wins. But that's a leading indicator. Again, it's an early inning stage for physical AI, and we're excited about it.

Just to add to that, Bill. We have the $1.5 billion pipeline represents over 200 unique and distinct customers. So it's very broad-based.

And then just a quick follow-up. Can you maybe comment on what channel inventories did in the quarter? What you're expecting for next quarter in terms of weeks, et cetera?

Yes. No. Like we said in the past, we want to run in that target. It was 11 weeks last quarter. So we feel good about it and make sure we service our customers and get our fair share of market share.

Next question is coming from the line of Joshua Buchalter of TD Cowen.

Maybe following up on Francois' question from earlier. You've had a couple of your peers very clearly call out restocking in the auto market. You guys during this past cycle, I think, for good reason, we're conservative with inventory on your books and in the channel. I guess is there any reason -- anything about your portfolio that makes it where -- reason why you would see restocking later? Or is there any conservatism on your part that's driving the comment about not seeing restocking?

Yes, Joshua, this is Bill. I think one of the unique things about NXP is our company-specific growth drivers, where Rafael shared in his prepared remarks, that 47% is coming from this content that is typically, I would say, 3x larger than our core. And so we are in a different area. We play in a different area of auto. And we expect that 47% to growth towards 50% next year. Related to restocking, again, we have a very good handle on distribution. We know exactly what's going in and what's going out, that's serving more broader customers. And specifically in auto, a majority of our Asia customers go through the channel. But in the Western Tier 1s, we track on that and we triangulate it. And as you all know, the Tier 1s, the working capital needs are quite tight. We still see late orders coming in and hand to mouth and margins for them are quite not that healthy. And so they know we have some inventory. You see it on our balance sheet. And they are still providing late orders to us. And so we monitor this very carefully, but we have not seen the restocking effect specifically with our Western Tier 1s.

Okay. I appreciate that. And then just hoping to ask about gross margins in the second half. I think on the previous call, you talked about utilization rates going from the low 80s to the mid-80s. Is that sort of still the right metric to think about as we continue in this up cycle. And as we think about the third quarter gross margin guide, last quarter, you called out some higher I think wafer access fees that could potentially impact you? Did those play any role in the quarter of the guide?

Sure. Let me first address. So obviously, our gross margins are doing quite well. From Q1 year-over-year, they're up 150 basis points last year. They're going up another 150 basis points in [indiscernible] and plan to bring them into the mid-80s, so I'd like to confirm that, and that does help the second half of their gross margins to continue to improve. And related to increased cost from foundries and access fees, we haven't seen that play out yet. That's something more, I would think that comes into us maybe in Q4 but more in 2027 when we enter into new agreements with our foundry partners.

Sure. And Josh, what we said last quarter was we did see inflationary input costs on back-end type of things. So piece parts, substrates, precious metals, things like that. But in terms of wafers on the front end, we operate within kind of a boundary condition and an envelope. As long as we operate within that envelope agreed to with our partners, we don't see tactical price increases. If we go outside of that envelope, yes, we would see price increases and we would then have to pass that along to our customers.

Our next question is coming from the line of Tom O'Malley of Barclays.

I wanted to dive back into the Canara commentary. So the funnel is expanding going to $1.5 billion. You've seen in the industry a lot of acquisitions taking place, both Synaptics and Halo. So do you think that these acquisitions are going after that same area that you guys have already kind of targeted. And then when you look at the TAM and how big that can be, maybe could you try to size what that market looks like in a couple of years just because the funnel would indicate it's a pretty large opportunity.

Indeed, I think that -- I think you pointed out to basically -- the acquisitions that I think you mentioned is just a confirmation of our strategy the cognification of the hedge is happening. And I think you are not able to play without having a strong AI platform and a strong AI road map. And so yes, I think that's exactly the case. I think we do believe that our platform that we have and the asset that we acquired now has been incorporated into NXP roadmap is best-in-class. We have incorporated now that IP of AI into monolithic integration into our i.MX processors and our S32N platform in automotive. We are discussing how to actually kind of engage with customers on a discrete NPU, which attaches to other platforms, even non-NXP. And not only that, we're developing a very complex AI framework software framework, which includes now agentic AI, which is going to be the way that the edge becomes completely autonomous. So it's now while other companies are acquiring assets and trying to integrate them, we are trying to evolve into what is going to be the next phase of AI, which we strongly believe is going to be the deployment of AI and agentic AI.

And then on the auto side, I know that you're saying that you're not seeing Tier 1 bringing back up inventory. But I know that kind of around the last quarter, there was a great variation among customers where some were well below kind of the standard channel number of [indiscernible] and some are well above. Have you at least seen some normalization there where there's been some standardization around that 11-week mark, both an end customer and maybe at disti, you can't comment on the metrics as you will. Or do you still see this big disparity where some people really aren't getting it? I just want to see if there's still some normalization yet to come is the genesis of the question.

Yes. Tom, it's similar to what we've seen in the previous quarters. There is a dislocation between low and high, there's a mix for whatever reason, how they want to control their own working capital and so forth. So no change there. But we track this very carefully. We're just basically -- finally, I think in Q4, Q1, we were finally shipping to real end demand, inventory digestion is behind us, but we have not seen any pull forwards or restocking efforts specifically with their Tier 1s in the Western world.

Our next question is coming from the line of Tore Svanberg of Stifel.

And congratulations on the record revenue. Rafael, I wanted to go back to the physical AI pipeline, the $1.5 billion. How broad-based is that? Is this a few verticals? Is it many different applications? And which sort of application should we assume you're going to ramp the earliest?

Well, the excitement is that there is actually broad-based interest on deployment of physical AI or edge AI. And it's happening, whether is think about HMI applications basically where a human controls the device via voice commands and replaces whether mechanical bottoms or display buttons, there is -- and the support is -- there's all sorts of use cases around there's plenty of use cases around visual ambition. There's plenty of cases of predictive maintenance. The deployment of physical AI is really broad-based. I think we see a very strong interest in Industrial. We saw a strong interest also in automotive or in-cabin type of applications that we're getting pulled into. And so I think the really is going to be such a massive, massive opportunity, massive, I would say, transformation that is happening at the edge. And it's going to be physical AI we have determined is the driver for content growth in industrial, and it's also an additional content driver for automotive moving forward.

And then as my follow-up, if we think about the current environment, it's a bit strange because you're seeing obviously, great bookings momentum, a lot of demand. And on the other hand, we have these, obviously, capacity constraints with other components and so on and so forth. So I'm just wondering, are you seeing any of that potentially impacting some of your customers' demand, meaning they want to do more, but they can't because there's shortages of components.

Well, I think that -- let me answer the question with a specific. I mean you can see our Q3 guide has mobile already down year-on-year, even though it grew sequentially, and our position with respect to market share has not changed, already seen an impact right off year-over-year. Mobile is down. And so I would say that you're starting to -- you see it. You saw it in mobile. Now the concern about memory, especially in memory and the constraints that right now the market isn't literally everybody is talking about it. Everybody is trying to actually design around it whether it's different products, different packages, different types of BDDR, and I think we are literally helping our customers to actually go and make sure that we help them with the constraints they have. So in pockets, we see.

The next question is coming from the line of William Stein of Truist Securities.

I wanted to ask about the the interplay between the backlog that keeps growing at your lead times and your customer intentions, if your lead times were shorter, would you have been shipping more? In other words, are customers wanting more than what you can deliver now in your sort of you're facing some constraints have grown, and that's why the backlog is growing? Or is it that customers feel emboldened given the demand signals they see in the market? And so they're just lining up to place orders with longer duration. If you could linger on that for a moment, I think it would help us understand what's going on there.

Will, this is Bill. Yes. I mean, I think what you're saying is what we see, right, we do see escalations. You see our inventory coming down. late orders have been coming in over the last couple of quarters. And now they're realizing they have to place orders, specifically in areas where lead times are longer. I mean, it's not our whole entire portfolio, but I would say that it's greater than 16 weeks, a big chunk of our portfolio has extended versus last quarter. And so there's -- you got to place your orders in line. And so we're seeing that play out, but we're still seeing these late orders come in. So it's a combination of both. I would say, but it's going back to more of a normal type of way of how you should place orders with us in the appropriate lead times. But there are folks that are still trying to place late orders and struggle with it.

Great. And then one follow-up, if I can. There are some things going on in the world that are normally disruptive to the electronic supply chain, the wars in particular. Have you seen any change in the impact on your supply chain from the renewed activity in Iran or anything else. Any other geopolitical developments? Or are you seeing any effect of that that's different from what we've seen over the last few months?

No, I would say it's similar. Obviously, we are getting a direct impact higher input costs. And like as Rafael said, we try to offset those operationally first. And if we can we want to protect our gross margins. And unfortunately, we have to pass those on to our customers. So that has been the move we start to work in. We started to see this in Q2. We're in the mode of Q3 related to it. Indirectly, I mean, of course, there's probably things that will impact us indirectly, which is more macro. But if you look at the macro indications, both PMI is doing quite well. GDP has ticked up slightly. Next year's GDP, as you know, is sitting at 3.2 versus today's, I believe, 2.5 or 2.6. So I mean, it's a balance, I would say. And so we see the macro signals, we see our own internal signals, and we just want to make sure that we're there to support our customers and provide the value for them.

And Lisa, we'll take our last question here today.

And that last question will be coming from the line of Chris Caso of Wolfe Research.

Just a follow-up question with regard to what you had said on pricing. And when pricing was starting to move higher during the last cycle, you guys were very specific about it being neutral to gross margins. Is that the case today? And in terms of what you're seeing with regard to pricing, could you level set us with regard to the magnitude of that? I know you said you're going to have to wait a while to see the magnitude, but you've obviously made some assumption in terms of your third quarter guidance.

Yes, Chris, let me tackle the -- I'll let Bill tackle the gross margin piece, but let me tackle the way we account for pricing because I want to be clear, right, pricing is not necessarily what drives our model. The driver is content growth, this architecture led content growth per system. And so that's the main driver for our revenue. In pricing, with respect to the way right now we're framing it, pricing seems to be a little bit more holistic in the way we or framing the question with respect to just a tactical move to overcome higher input costs. But in reality, pricing is very dynamic, and it's a strategic lever for us, right? We use pricing sometimes to capture value. Sometimes we use it to increase market share in some cases like the one we discussed right now to offset input costs, but we do price adjustments every quarter. And every quarter, we provide a next quarter guide that has an estimate of that. And so I don't think this time is any different. So Bill, do you want to...?

Yes, I would just add to what Rafael said is on pricing, right, typically, we give an update once a year. In the beginning of this year, we said we'd be down in the low single digits. At the end of this year, we'll update that we'll probably be a bit better, I would say, because again, with the selective pricing we're doing because of these higher input costs. And the related to gross margins, obviously, we want to make sure the value we capture, we pass that on to the owners. And obviously, if there's one that we can offset and it's a higher input cost like inflation, we have to make sure that -- Unfortunately, we have to pass that to our customers and you see that play out throughout the entire supply chain on it. But I think we've been very disciplined here. It is a bit different than COVID, which was more broad-based, and it was a supply issue. This is more of an inflationary issue, I would say, at this time of where we are.

Got it. And as a follow-up, if you go a little more detail, you talked a bit about the AI-enabled processors. And how does that value come to NXP? Is it a form of higher content, higher ASPs for the products that drive unit growth? Is it market share, perhaps a combination of all those?

I think you kind of answered the question, but I'm going to -- let me -- I'll just rephrase what you said. It starts with the products themselves they have more content, right? So physical AI will drive content from a product perspective. They tend to be higher performance processors, more AI inference content, more software content and more enablement then the system itself becomes also more complex. You have more connectivity because of AI, you have more security. And in the case of physical AI and robotics, you must have functional safety. And then from -- and then you go in the evolution of what's going to happen right now with respect to agentic AI, do you have a little bit more of a software framework associated with that. So in reality, physical AI for us is a very important driver of content growth and we intend to actually position our road map to be in this market.

Thank you. And that concludes the Q&A session for today. I would like to turn the call back over to Rafael, CEO, for closing remarks. Please go ahead.

Thank you, everyone, for joining us and for your thoughtful questions. I want to leave you with 3 thoughts: First, our growth is structural, driven by software-defined vehicles physical AI at the industrial edge in a nascent data center franchise; second, we're entering a decade-long adoption of physical AI, which is transforming industries. Through relentless innovation and customer intimacy, NXP is best positioned to meet this transformation; third, our financial model is scaling exactly as designed. Margin expansion is structural, capital allocation is disciplined, and we are positioned to deliver expanding profitability and growing returns for years to come. The long-term opportunity for NXP has never been clearer. Thank you.

Thank you so much for joining. You may now disconnect.

Good morning. Welcome to TD Cowen's TMT Conference. I'm Josh Buchalter, semiconductor analyst here. Very pleased to be joined by Jeff Palmer, EVP of IR from NXP Semis.

Sure. Hi, Josh. Thanks for having us.

Thanks for being here. I guess to start, we were just talking off to the side. There's a lot of positivity in the mature node semiconductor space. And there's, I think, some element of an AI and data center halo involved there, but also some legitimately improving cyclical elements. Maybe you could just spend a couple of minutes talking through overall the backdrop, what you guys are seeing coming out of your 1Q earnings call.

Yes. A great place to start. I'd say compared to 90, 180 days ago, I think we're more optimistic than we have been in a while. I think with Automotive being 58% of the company, when Automotive starts feeling good, in general, we feel good, even though other parts of the company are doing well.

We track a number of KPIs to kind of give us an insight on how the business is transforming -- acting. Those KPIs are things like book-to-bill solidly above 1, and customer backlog through distribution, very nice and building. Late orders coming in and expedites going up, lead times stretching out. We have had to raise some prices in Q1. We're feeling some inflationary input costs.

And our model is to gross up any inflationary input costs and pass to customers if we cannot digest it before doing so. We've also looked like we're going to have to raise prices into the second half. This is primarily in the area of energy, transportation, precious metals, substrates, not on the wafer side as much.

Okay. And I guess maybe on that topic, anything you can give us on the scope of the pricing increases, how they're being received by customers? Is it generally like everyone went through this kind of already a few years ago when there's empathy and understanding or...

Customers never like price increases. I think we've tried to be -- we're consistent with our approach as we have been in the past. We are not trying to pat our margins. All we're looking to do is maintain our gross margins. So as I said, our first course of action is to determine can we digest and operationally take care of any inflationary input costs. When we cannot, we do have to gross those up and pass them to customers. They don't like it. I mean, I can understand that. But we try to be transparent and fair about what we're doing.

Okay. And I'm going to try to get some of the cycle stuff out of the way before we get to the more fund product discussion. So I think Bill guided internal utilization rates to run in the low 80% range in the first half and the mid-80s in the second half. Can you walk through maybe what are the key drivers of that? And any major differences on your internal versus external loadings?

So as you know, internal, external. So externally, we produce about 60% of our wafers, internal 40%. Utilization is really only an effect on the internal portion, right? Because we have no effect of utilization externally. Remember, we have 4 main 8-inch factories, which are not fungible. They run different processes and products, 2 in the United States, 1 in the Netherlands and a joint venture in Singapore with TSMC. While we are building some bridge stock on one of the factories, as we're planning to decommission it. The others are really doing better on fundamental end demand.

Okay. And is there any way to quantify how much of that utilization rate increase is from the bridge inventory versus the sell-through or?

No, not really.

Okay. And last one on this topic. Correct me if I'm wrong, I believe Auto is over-indexed to internal manufacturing. Is that right? And should we think about better Auto demand equals higher share of internal utilization rates increasing?

That's not actually correct, Josh. So a number of years ago, what we did was we moved all of our bulk CMOS products out of our internal factories. So internal factories today are all primarily proprietary mixed signal factories. Anything that's on CMOS, including Automotive, is done in the foundry node.

Okay. So no major mix...

No. So the way to really think about it is, if you hear us speak about any of our analog products or our mixed signal products or RF products, those tend to be built internally.

Got it. Okay. I think there's been a lot of debate in the investment community on the China Auto backdrop. I mean, people saw weak domestic consumption in the first quarter and were concerned, but exports have obviously been very strong. Given your vantage, could you maybe speak to us about what you guys are seeing in the China Auto market and from both a unit and also content standpoint?

Yes. I read that question last I've thought about it for a while. I think, Josh, we have to take a step back. If you think about the Auto industry, it's been running high 80s, 90 million cars a year for many, many years, essentially flattish, right? Our Auto business has been up 9% CAGR over the last 3 years and up 13% in the last 5 years, which really reflects and underpins it's a content per vehicle story. And that's really what we're focused on.

As China has become bigger, it's about 1/3 of the total global production right now. It has its own unique seasonal trends. They tend to push really hard into the fourth quarter, take a little bit of pause into the first quarter and then resume. And that was contemplated in our guidance for Q1. That's why we were not surprised when we saw a little bit of weakness in China. And as you said, export is really what is driving that industry right now. I'd say we feel overall, compared to last year, very positive about the Auto industry. I'd say Auto in general will be up this year. I'd say China Auto will be up this year.

And when you say you're positive on Auto, it sounds like certainly China. I mean, do you feel similarly about North America and Europe?

Holistically, the business has improved. As you remember, last year, one of the headwinds we faced was in the Western markets, North America and Europe, we had quite a few of the Tier 1s who were over-inventory. We thought that over-inventory situation would digest in 90 days, maybe 180 tops. It went on 9 quarters. And it was very brutal, right? And that's finally behind us. They're buying -- most of them are buying what I'd say 2 end demand. Some of them are still highly under-inventory. They're run very, very lean. We're not expecting any restocking to occur. We think we're just going to have to accept that many of the Tier 1s are going to run lower working capital metrics than they have in the past.

Yes. I mean, is that something that surprised you? I mean, after the shortages in 2021 and 2022, maybe I was a bit naive, but I assumed that the Tier 1s wouldn't necessarily put themselves in that position again to be under inventoried. Can you maybe speak to what's driving that? And also, what could potentially break that and force them to change the trends of carrying too little inventory?

First, we should be clear. While the Tier 1 situation is in a Western market, is North America and Europe, that's about 60% of Automotive. It's not a one size fits all. We have some very large Tier 1s who are sitting right at the number of weeks of inventory that we would expect and given us forecast as we would expect, everything is fine. We have a few other large Tier 1s who are running 3 and 4 weeks. And the view from their perspective is they just have very, very thin margins. They just aren't getting any compensation from the OEMs, and they're going to run at just very, very low metrics going into the cycle.

What could change that? Well, as you know, we put a letter out to customers last year, said, look, our cycle times are 3 to 6 months fab to finished product, get your -- at least your forecast to it so we can get you in the queue. If a customer decides they're just not going to do that, they are probably going to go line down at some point.

Got you.

And then, I know you had another question there, but while we have some shortages on substrates and precious metals are high and labor and transportation are high, wafers, natural wafers themselves, we have a fairly well-defined envelope of what we can expect this year. If we have a customer who comes into us and says, "Oh, I didn't forecast." And they take us outside of that envelope, we will be charged for those additional wafers, and we will have to pass that on to those customers.

And I guess on that topic, do you think there's enough capacity out there in the short term to handle an increase in expedite orders? And then maybe perhaps more importantly, I think there's increasing concern that there has not been enough investment in mature node semis capacity. You guys are sort of doing that with your partners in some of these JVs. How do you feel about structurally the industry's ability to support 9% Auto CAGR and then also seemingly some data center demand as well?

I think companies like our peers probably have to plan out a road map for a wafer supply quite farther out in time. We started working on VSMC, our joint venture in Singapore 3, 4 years ago. So it's -- and it's not even up and fully running yet. So it takes time. Our partners, TSMC and GlobalFoundries, are great partners. They try to accommodate whenever we can.

When you say short term, you have to remember there's a certain amount of physics that go into this. If you don't forecast and you come to us and we do not have the product, you're probably looking at a full 3- to 6-month cycle time. There's nothing we can do about that. And that doesn't even take into the fact that there's demand from other customers on that capacity.

Got you. Sorry, one more on the Auto cyclicality piece. So one of your peers said on their earnings call recently that in particular, in China, things strengthened at the end of the quarter. Anything -- I guess, I know you can't speak to what happened after the print, but like linearly, can you maybe speak to what happened in 1Q with China Auto? Was like February super weak?

So not that granular, Josh. But what I will say is contrary to popular China Auto for NXP in Q1 was actually up. That wasn't up great. There were other regions up stronger. And we've guided Auto to be up again here in Q2, of which China is a participant on that. Probably the closest I'm going to get to that.

Okay. Understood. It's a good segue, though. I think you and your peers, in particular, this earnings call, but for years, have been leaning into you shouldn't think about us as tied to SAAR. We are much more a content story. I think with inventory now normalized, we hopefully should be able to see the evidence of that in your and your peers' models. Could you maybe walk through what are the key vectors for content growth that you see and you're most excited about at NXP?

Yes. So the way we've defined it, Josh, as I think you know, we've looked at our Auto business, and we've said there's a certain portion of it, which we call our core business. These are franchises where we have a high market share, and it's unlikely that we're going to outgrow the market. That core, we think, will grow at about low single digits. There's a layer on top of that, which we call our accelerated growth drivers. And there's 4 very well-defined accelerated growth drivers. The largest one has been the effort towards software-defined vehicles, which is really around our S32 MPU family, our K1 Series zonal processors, Auto Ethernet and software. That business was $1 billion in '24. It was over $1 billion in '25 and is expected to be about $2 billion by the end of '27.

That's -- and in that horizon, Josh, that is not design wins we don't get. We have the design wins. We have to just wait for customers to get ready to go to production. So that's a good chunk of that.

Our radar business, 77 gigahertz radar, that's probably going to grow at 15% to 20%. It was about a little under $900 million in '24. Had a little bit of a soft year last year, grew but a little softer as we're going through a product transition towards imaging radar, but that's, I think, really a good franchise for us.

Electric vehicles is primarily focused there is battery management systems and gate drivers. Last year, we did have a program that kind of went sideways on us coming back this year. We feel good about that. That's probably -- it was about $500 million in '24, should grow at about a 15% to 20% CAGR.

And then lastly is connectivity. And by connectivity, it's really 2 types. There's in-cabin connectivity, WiFi, Bluetooth for the passengers and things like that. And then there's ultra-wideband connectivity, which goes into your phone as well as into the car.

Okay. So a lot there.

I know a lot there, but I wanted to give you the long nuance.

Very helpful. Let's start with S32. So your guys' approach and investments in your S32 and 5-nanometer MPU family is a bit different than a lot of the other Auto -- legacy Auto microcontroller players. Can you walk through why you made those investments in more advanced process geometry, microcontrollers, SoCs and microprocessors, what you're seeing in the trend of the software-defined vehicle and why that's important?

Sure. So about 7 years ago, we made the decision, we said, where is the puck going to go and where is it today? If we wanted to be just continue along with our peers, we would have invested in another Auto microcontroller family. We made the decision based on conversations with OEMs that the current flat point-to-point architecture in the car had kind of reached its useful life. And the OEMs are starting to contemplate how they could move more towards a hierarchical switching fabric in a car.

And so we made the decision at that time to invest in a whole family of MPUs. These are high performance, primarily 16- and 5-nanometer products on MPUs. This ranges from the N Series, which is not even in production yet, the 32G, which is a gateway product, 32R, which is a radar product and other product families.

The idea here is to create a hierarchy of processing and different companies are approaching it different ways. Some companies are going more of a zonal approach where you'll have powerful microcontrollers in 4 or 5 different zones around the car, maybe a gateway as a kind of a traffic cop type of a thing, whereas others are going full on central compute with lighter I/O aggregator zones around the edge.

Our view is not to dictate to our customers what architecture is better or worse. We try to have a portfolio of products of both processors, microcontrollers, Ethernet products and software enablement to allow them to develop the car they want to do.

Okay. And maybe you can help us like where are we in that evolution? I think we've been talking about software-defined vehicle for a while, but it feels like this is the year when it's supposedly hitting the knee in the curve. What's taken so long? And what, I guess, are the benefits that can be unlocked by the software-defined vehicle from your customer standpoint?

I think what's taken so long from your perspective is the software lifting, especially for those customers who are thinking about going towards a central compute model. It is just such a different way to build a car.

If you think back to how cars have been built just a few short years ago, the awards were given to different Tier 1s who would develop different parts of the car, different ECUs independently and then put the car together and deliver it to the OEM and say, here you go, figure out how to write software for these islands of different computing architectures.

The idea of software-defined vehicles is to have a holistic processing architecture so they can have software that can be pushed down to any layer of the vehicle. So you park your car at night, you get an update overnight. Over the time you're driving the car, the car tends to learn your behaviors, maybe update software to your driving behaviors.

I'd say that the big -- when you start to see Western car makers rolling out SUV cars, probably the 28-year model year going to late '27. That's our current plan. Our current business has been primarily driven by a number of the Chinese and Korean OEMs.

Okay. And maybe can you talk about sort of the 5-nanometer MPU? I believe a couple of years ago, you talked about having 1 or 2 lead customers. Any updates there you're able to share and how material that could be?

What I can say is that probably the last time we spoke, it was probably a more fragmented market globally. I would say today, fast forward, every Auto OEM in the world has an SCD program. They're either running a program today actively, and we're engaging with them, trying to win business. They're architecting it. We're trying to influence that architecture or they're thinking about how they're going to roll it out. This will be the secular change in how cars will be built in the future.

Okay. And then maybe 2 more on this topic, and then I'll leave it alone. You guys also recently made a few acquisitions, I think, to bolster your portfolio, specifically on the software side for -- and middleware for software-defined vehicles. Can you maybe walk through the rationale of those deals and how they differentiate you? And then I'll just squeeze both questions in at once. You described this hierarchical architecture in the vehicle. How synergistic is it? So for instance, if you own the central compute, does that mean you will get higher share in the ECUs? Or is that not really how it works?

Right. Okay. So let's start with the software. So we acquired 2 kind of what I'll call Auto-centric companies. One was a company called TTTech Auto out of Austria. Their product was something called MotionWise, which was a middleware operating system for auto OEMs. Their expertise was in the area of functional safety and security. So we looked at them and it was really a make versus buy. We knew we were going to need more software engineers going forward than we currently had.

And so by acquiring them and we engaged with them, it was 1,200 very, very well versed, very well industry respected Auto software security people, and it was really make first buy.

And so their products have been -- the idea here is to not only have them continue to focus on MotionWise, which is the product, but to also help us enable the software on top of the S32 families. So that's going well, but it was really a make-first buy decision.

The second acquisition was something called Aviva Links. And what Aviva Links offers is a multi-gigabit asymmetric Certus technology, a lot of geeky words there. But the idea is you have certain applications in a car where the data from the end node, the sensor is higher upstream than the amount of data you have to push down to the center, so asymmetric. And so it's perfect for things like ADAS applications where you have multiple cameras or multiple radars or even LiDAR in certain situations. It also works very well for things like in-cabin where you may have multiple screens and you're only looking to push data one way to those screens. It's a early, early acquisition. The nice thing is a couple of our customers kind of nudged us towards it. So we already have design wins. We probably won't see revenue until next year at the earliest.

Okay.

And your second question was?

Synergies between...

Yes. If you win the central computers.

Yes.

So the thing to understand about the -- the S32N product, it's very interesting. It is effectively a virtual ECU. It has 16 independent ECUs built into the same die with independent resources, switching capability. And so what you're really doing is you're aggregating all the ECUs from around the car into a single device. And you'll probably have more than one for redundancy.

What you tend to see in those applications is customers then going to a lighter, more of a zonal aggregator around the edge, grabbing the data from different sensors, packaging it up, putting it up to the central compute.

The interesting thing about the S32N is, it can dynamically change its function depending on how the software is. It's not like fits like ECU 1 through N, only does one type of function. It can actually be dynamically programmed by the car company.

Does it give us a lead on pulling other data, other sockets along? Sure, of course. But it would be naive for me to say that it's a slam dunk. I will say SDV is probably more like the opportunities are bigger, the opportunities to win are bigger. But if you don't win them, if they decide to go in a different direction, it can be big as well, to the negative.

Okay. I'll stop on Auto, finally. You guys, I think, for the first time, called out your data center business on your most recent earnings call, the $200 million is expected to go to $500 million this year. Can you walk through the key components of that? A few different buckets that are contributing to that revenue?

Yes. So it's really 2 kind of functional areas. I should be real clear upfront here. You are probably smarter at data center than I am, Josh. So we're a bit new on this topic. But fundamentally, we only focus on the control plane. So we're not in the data plane at all. We don't compete with the accelerated guys. It's really in control plane.

Think about those functions that are doing kind of housekeeping, monitoring across the rack and communicating between the rack. So there are really 2 types of products. There's the Layerscape-based products, which are top-of-rack switches. This is technology we've had for many years. We've continued to invest in it in other parts of the business. It's a 16-nanometer product. It's 16 core -- 16 64-bit ARM cores with a really big switch fabric in it. That's sold into top-of-rack switches and also an 8-core version which go into NIC. That's which we reflect in our digital networking business.

We didn't talk about it until recently because we've been awarded the design win several years ago. They just weren't going anywhere. Like every company, we get design wins until they turn to revenue, they're not worth the paper they're printed on. And it wasn't until late last year that they started to accelerate, have contributed to the $200 million last year and have really accelerated this year, contributing to the $500 million we talked about. So that's kind of one half of the business.

The other half of the business in data center is what the industry term is board management control. And these are functions on the different line cards interact that manage cooling, power management, security, intercard security, zone of trust security. It's similar to the type of function that we do in factory automation. So it's really kind of in our wheelhouse of strength, if you will. Products there are our i.MX application processors, also our MCX Rooter Trust security microcontrollers. We have a pretty decent portfolio of what's known as I2C and I3C for high-speed data movement, things like that, different sensor products. But I would say on the board management control, it's more akin to what we do in core industrial. It's a broader customer base. We have engagements with different hyperscalers, different server OEMs in Taiwan and certain key reference design OEMs in the States.

Okay. And is the comm infrastructure -- sorry, is the digital networking piece in comm infrastructure and then the board management in IoT?

Correct. We know it's confusing, and we are thinking about maybe how -- looking at how we may change the segments a little bit.

Because that it is confusing. So I guess you mentioned it started to take off end of last year into this year. Why that timing? Was there specific programs? And is it tied more to accelerated computing? Or is it general purpose data center build?

I would say on the Layerscape products, the top of rack switches, that is a few hyperscalers who are building out their own proprietary AI kind of racks, if you will. And we've been awarded the designs a number of years ago. It just took them a long time to go to production. I couldn't give you more insight than that, Josh. And if it had gone to market sooner, we probably would have announced it sooner.

And investors like big round numbers. Have you spoken to how big this opportunity could be long term? Any kind of TAM?

So we said the SAM, and I will tell you that a few investors laughed at us when I shared this data, but we think the SAM is about $4 billion, growing at about a 10% CAGR. It's not the whole AI data center, but it's a decent size. We think we can grow our $500 million at some multiple of that SAM. So if SAM is at 10, and we like to -- our ideal sweet spot is to grow 2x the SAM. You can kind of do a matrix and figure between 2x to 1x the SAM, get a sense of how much you know.

Okay. Thank you for the color there. Switching to the industrial IoT business. There's a lot of questions of when AI is going to migrate out of the data center into edge environment. I think you guys have talked -- you and your peers have talked about this trend for a while. Can you maybe talk about what you're seeing with your i.MX family and how we should think about Edge AI or Edge computing, whatever buzzword you want to throw around it as contributing and changing the long-term growth trajectory of your broader industrial business?

Yes. So what we're seeing in the core industrial part is more and more of our customers are looking to run distilled models locally without having to go to the cloud. And so we're starting to see them be more forward-thinking and future-proofing their processor decisions. They want to have more headroom in the processor choice that they're picking.

Now today, most of our industrial and IoT processor families do have variants that have embedded, I'll call moderate performance NPUs in them. The brand name is EIQ. It's a smaller performance. But most of the -- and we're seeing customers starting to use that lower performance NPU to kind of sandbox ideas. But we acquired a company called Kinara, which is a much higher performance Ara-based, the family is called Ara NPUs that can be multiple gang up on 1 i.MX.

So the way to think about it is the i.MX views the NPU from Kinara as just a resource. And you can -- it can use up to 3 different NPUs with 1 instance. And we're really kind of amazed with the ideas customers are coming up with. I'd say there's -- they range in all sorts of forms and fashions. But fundamentally, the idea is they're taking large language models. They want to distill those and have them run locally without having to go to the cloud on an ongoing basis.

Okay. All right. We're bumping up on time. I did my best, but -- to avoid talking about gross margins, but I have to get there. So you have a 57% to 63% gross margin target. You're sort of operating in the middle of that right now. Your internal utilization rates, as you mentioned, 80% range. So there's a little room there. But can you maybe walk through some of the drivers that will get you further into the top half of that range and how we should think about the timing of that?

Sure. So given our hybrid manufacturing that 40% of our wafers come internally, which are affected by utilization, the other 60% external are not affected. The rule of thumb that we have given is for every $1 billion of incremental revenue, we believe we can throw off 100 basis points of gross margin expansion.

And you heard us very clearly on the Q1 call, and we tried on our Q4 call to clearly state that we believe we can grow in the low double digits this year and next year. You can do the math. That kind of points if you get to $15 billion, $15.5 billion, you should be about 60% gross margin using the rule of thumb.

Now the one thing I know I've warned you on is don't take the rule of thumb and divide it by 4 and think you're going to get it every quarter. It's -- mix does play an influence on gross margin. That gets you into the '27 horizon. The benefits from VSMC, which is the joint venture in Singapore don't come to the table until '28. At full load in '28, it should add about 200 basis points of incremental gross margin at the corporate level. So if we exit '27 at, let's just do the math at 60%, that would say that VSMC in its first full year of loading would add another 200 basis points.

Okay. Last question. I think NXP perpetually seems to represent an underappreciated capital return story. Can you speak to your priorities for uses of cash for the next few years with those investments in mind?

Yes. So our capital allocation policy hasn't changed. It's to return all excess free cash flow to our owners in the form of either dividends or buybacks. The keyword there is excess free cash flow not invested in the business. I think most investors would agree the best thing we can do with your free cash flow is to help build the business. The last few years, we have had a number of requirements on the cash we generated. The 3 acquisitions we talked about. We also have the joint venture fab in Singapore. So these have been all calls on cash. Those are starting to tail off.

I think we're going to be past the big demands on cash here in '26 and '27, and we believe we can get back to that 100% free cash flow return. We've returned, I think, almost $23 billion in the last 10 years, which represented almost 95%, 96% of all free cash flow we've generated. So I think in the long term, we're consistent, but we will have periods when we're going to look at decisions to invest in the business versus giving cash back to owners.

Got it. All right. Well, we are out of time. Jeff, I appreciate you joining us. It's nice to be on the other side of the cycle this time.

Yes. Thanks.

Okay. Good morning, and welcome to the third day of JPMorgan's 54th Annual Technology, Media and Communications Conference. My name is Harlan Sur. I'm the semiconductor and semiconductor capital equipment analyst for the firm. Very pleased to have the NXP Semiconductor team here with us today. Bill Betz, Executive Vice President, Chief Financial Officer; Jeff Palmer, Senior Vice President of Investor Relations, here with us this morning. So gentlemen, thank you for joining us this morning.

Thank you, Harlan, and thank you, JPMorgan, and of course, all our support and ownership in the room. Great to be here.

Yes, absolutely. Let's start off with -- you had your earnings call 2 weeks ago. Rewinding back to last year, the team and customers were still working through demand inventory dynamics in the first half of the year. After 6 quarters of year-over-year declines, you drove the positive inflection in the second half of last year as demand began to accelerate, those strong trends continued into this year. Maybe just -- this is a good starting point. Just talk about the industry environment and what you're seeing right now.

Yes. Let me take that, Jeff. And first start off with the signals that we can see. Internally, the demand signals remain strong. They continue to gain momentum. This shows up in the metrics that we measure such as book-to-bill ratios or our backlogs for next quarter, the quarter after next quarter. Our distribution backlogs continue to be strong and to improve. Customer escalations continue to increase. And so we feel pretty good across all the signals, specifically with our company-specific growth drivers. As we mentioned a couple of weeks ago, those are intact and doing quite well, which we feel very confident and conviction on the growth targets and the growth of more than double-digit growth for this year and next year gives us confidence.

Absolutely. First phase of the cyclical recovery, shipments rising to the level of consumption. Second phase is customers feeling confident on sustainability of their demand profiles and then starting to restock inventories, right? Rafael said -- CEO, Rafael said back in March that the team was not seeing signs of broad-based restocking. It's not baked into any of your forward outlooks. Some of your peers more recently have talked about seeing signs of restocking at disty customers, harder to tell with direct, right? But is the team now seeing any signs of broad-based restocking?

At this time, no. The way to think about our business, as you know, is close -- more than half the business is through distribution. In distribution, we have a really good handle. We're finally back where we want to be at 11 weeks to support the strong demand that we're seeing. The other half is linked to automotive, that distribution split is probably 60% direct, 40% distribution inside auto. And what we see with our Tier 1s, working capital for them are quite tight. Their margins are kind of thin. They're going through an inflationary environment, just like many companies are. And so we don't see pull aheads. We're not seeing anything that have them doing restocking at this point in time. So no, no, at this time.

Okay. So that's a little bit of somewhat of a tailwind that's kind of still in front of the team when it does happen.

Absolutely. Along with, obviously, on the top line, with the inflationary costs improving, we expect more of a price increases to offset some of those higher input costs. And that's more of a second half for NXP.

Yes. Actually, that was going to be my next question because on the pricing environment, the team came into this view -- came into this year with a view of low-single-digit percentage type price declines in line with historical trends. However, given the tight supply environment, as you just mentioned, accelerating end demand profile from your customers, we have seen some reports that competitors and NXP are raising prices more broadly in the second half of the year. But it was interesting, right, because that earnings -- so Rafael said, yes, the team is selectively making small pricing adjustments on rising cost pressures, but nothing material in Q2. But is the team raising prices more broadly as you look at the second half profile?

Yes. First, with pricing, obviously, the inflationary costs are out there. The first line of defense that we try to do for our customers is through productivity, operational efficiency. Then after that, if we still have a headwind, we kicked off first with our distribution channel. And so we're working through that this quarter on selective areas, as Rafael shared several weeks ago. And then if it continues, then unfortunately, we'll have to do more of this with other customers, maybe broadening it. But I wouldn't say we're at the level of during COVID when it was kind of broad-based. I think it's still a selective area at this time.

I see. But would it be fair to assume that with a lot of these discussions and if some of these discussions hold that more of the selective or broad, however it plays out, will be probably more of a second half dynamic for the NXP team.

Yes, that's the way to think about it.

Yes. Okay. In the January earnings call, the team was a bit reluctant to articulate the 2027 revenue and earnings profile relative to your Analyst Day targets. 90 days later, on the April earnings call, you were very definitive on driving, as you mentioned this morning, double-digits growth this year and double-digit growth next year, hitting your 2027 revenue, margin -- gross margin, operating margin targets. What was that big inflection over the past 90 days up until the last earnings season that gave the team the confidence on calling out that strong growth profile through 2027?

Yes. I'm not sure if we ever -- there was a trigger event between Q1 and Q2. I really think if you look back during Investor Day, we were convinced that our company specific growth drivers will grow. They grew nicely last year, but it was disguised by the inventory digestion for primarily auto in our core part of the business. In Q4, they started to shine through more in the Q1 results. And now what we can see and gives us more confidence is that all our company growth drivers are actually at the high end of the growth model or above. And so the way to think about our company-specific growth drivers in auto, call them in the mid- to high 40s. We're working to get half of that portfolio at 50%. And when it's at 50%, think about growing somewhere between 15% and 20% a year.

On the industrial IoT, I think we shared we're about 1/3, about 35%, growing at 30% clip, going to 40% clip. And this is really about design wins that occurred several years ago. They are now just ramping very company-specific, and they will continue to ramp, and we feel very confident. We see that in all the signals. And when you're ramping new products, obviously, you have to be prepared for them. So you get more signals than just versus the broad base.

So for the first time, and we'll go back to some of the growth driver dynamics in your various segments. But for the first time, the NXP team actually broke out your data center revenues, right? It was $200 million last year, expected to more than double to like $500 million this year. 50% of the mix is industrial IoT, 50% comms infrastructure, targeting applications in systems, cooling, power supply, board management, control plane switching applications, right? You're attacking much of this with your i.MX processor family for board management, your MCU families for security and cooling, your digital networking processors. Given this new segment of growth relative to your Analyst Day, how should we think about the 3-year revenue growth profile of this particular new end market?

Yes. So it's embedded, as we said, both in industrial IoT and our comms infrastructure. And as you said, the networking side is in the comm infra and more of the board base on our i.MX and MCX families or on industrial IoT. And so the way to think about it, and it's coming through our numbers. And so as we sat back and we're like, oh, we now have to explain this, and it's getting sizable. And so that's what you saw us do in this last earnings is talk about it. I think the way to think about it post this year, at this point in time, we're comfortable saying we'll grow better than the SAM of this market. I think Rafael shared that. And as we get and as we ramp through it, we'll give regular updates on the opportunities of our data center exposure to you all on a quarterly basis.

And as the data center opportunity, whether that's being driven by these agentic workloads or training workloads as they continue to drive a strong growth profile, it's pretty clear that compute is a key part of all of this, right? And we all tend to think about XPUs and GPUs, but there's a lot of other compute that supports these architectures, right? A big part of it is switching and control plane, which is an area where NXP actually has quite a bit of leadership, right? And switching and control plane, that's your digital networking franchise, right? And it's great to see the team leverage its historical leadership in compute, right? You've historically had a portfolio of PowerPC, your QorIQ processor family, your Arm-based Layerscape processor family. What processor families are you winning with now in data center? And given this sort of refocusing on control plane and switching for these AI compute workloads, like is the team planning on re-architecting a new data center portfolio -- processor family?

Yes. Let me first start off. And so on the networking side, it's really linked to our Layerscape platform of products that exist in the portfolio. Networking, as you mentioned, we reuse in other parts and very important for high-performance compute in our products and solutions. Our exposure there is to several hyperscalers and several OEMs. So that's more of a direct. If you think about the board compute and the cooling and so forth, think about multiple more customers in that case, and we're supporting that both direct and through our distribution channel across the board. So it is an area that we have. We have a broad portfolio, and there's opportunities to continue to invest in those areas, and we plan to do so and to be competitive in that space in the control panel, not the [indiscernible] panel.

Yes. We're looking forward to seeing some of those new product announcements. Let's turn to your flagship industrial and IoT business. I'm going to buck the trend, right? Most people like to start off with automotive. I'm going to start off with industrial and IoT, partially because we do like your embedded business, right? And we often feel like your leadership in compute is a little bit underappreciated. But the other interesting thing is Rafael, who's been on board about for a year now as CEO. I mean, he came from -- a big part of his upbringing at NXP was embedded, right?

And so -- but I believe that, again, the market under appreciates NXP's leadership in the embedded space. You're #2 global share leader in the microcontroller market. You're #2 global share leader in auto and industrial MCUs. You're a top 10 supplier of embedded processors, right? You've got a 3-year target growth CAGR of 8% to 12% with the accelerated growth drivers in IIoT driving 20% to 30% CAGR, right? One of the fastest-growing accelerator product categories that you guys laid out at Analyst Day, right?

Looking more recently, Q1 IIoT was up 24% year-over-year, expected to be up high 30s here in the June quarter, again, well above your 8% to 12% CAGR. How much of this outsized growth is sort of the core industrial business, cyclical recovery? How much is due to the accelerated growth drivers? And does the focus on physical AI, bringing more intelligence to all of your focus areas actually drive a higher CAGR than what you projected at the Analyst Day?

No, it's a really great question. Let me try to parse out our Industrial IoT business. First step back, about 60% of it's industrial, 40% of it is IoT. If we break it out between our company-specific growth drivers that are growing even better than the 20% to 30% that you called out. That's approximately in Q1, about 35% of the portfolio. And we believe over time, we'll get that into the 40s. The mature core or broad-based part of the portfolio, that grew in Q1 at about a 15% clip related to it.

Got it. And then one of your strategies has been to expand your -- this is the one dynamic that I actually like is the strategy is to expand your presence in the distribution channel focused on broad market and mass market segments, right? It's this long tail small- to medium-sized customers. More focus here will definitely help to drive a higher gross margin profile, right? The team has been adding more to its family of general purpose, high-performance microcontrollers, like your MCX family is a good example, but also focusing on systems-level solutions. Any way to quantify the systems level strategy in terms of pipeline expansion, dollar content uplift per new customer opportunity? And just a basic question, like how large is your long-tail mass market business today?

Yes. So if we step back, Industrial IoT, approximately 80% of that business goes through the channel servicing the tens of thousands of customers. As I think I mentioned in the past, gross margins with the low-volume type of customers, the margins are greater than shipping large volumes to direct customers. So that area is a focus. That go-to-market is very focused for us. It's very fragmented. The system plays very important to us. And really, the next real leg of growth is that physical AI on the edge, right? That's where we want to be a leader in. We're setting ourselves to be that. And we're really -- if I use the baseball analogy, we're in spring training. We haven't even gotten to the game with AI on the edge in that space. But I would think of that type of business as margin accretive because it's fragmented low-volume customers, higher margins.

Right. Yes, exactly. And that's a good segue into my next question as you focused on edge AI and physical AI, right? Because not a lot of people know this, but the NXP team was one of the first to adopt and integrate your own organically designed, we call them neural processing engines, NPU cores. These are purpose-built cores to accelerate like machine learning and AI applications, right? NXP was one of the first to embed these NPU cores into your microcontroller and microprocessor families way before Gen AI, right, and before your recent Kinara acquisition. But with Kinara on board, they have a stand-alone NPU architecture. This is purpose-built for more high-performance compute applications. With your organic -- combined with your organic sort of MPU sort of like what's the overall traction been like for edge and endpoint-based compute applications, with Kinara, with your embedded NPU, MCUs, MPUs? And is the team planning on integrating at some point, Kinara's high-performance NPU accelerator into your processor and MCU product lines?

Sure. So it's extremely -- it's part of our strategy. AI on the edge is super important. We believe that market hasn't even played out, as I mentioned earlier. The way to think about it and the way I measure it with Rafael and many others in the company is the penetration. So we call it AI enablement, that capability that we're putting in our products and specifically Industrial IoT, Eventually, it will be auto as well. But if we look at Industrial IoT, I think Rafael has shared a metric where in 2025, total Industrial IoT probably had AI enablement of about 5% -- 4%, 5%. We expect that AI enablement in 2026 with the growth of Industrial IoT be approximately about 12%. And you're right, that doesn't even include Kinara where that revenue doesn't come to be until 2027.

So how we're measuring Kinara since we've acquired it over the last year is really -- if you think about it, it's all about engagements, which then turn into design wins and then converts into revenue. And the engagements, I think we shared 2 quarters ago, we had a funnel of $750 million. We just surpassed $1 billion of that funnel as you work through these proof of concepts with your customers, but it's a huge long tail. So obviously, you focus on the ones that are really going to move the needle direct, but then we also train our distribution partners to go work on the ones from a system and a solution standpoint on that long tail. So it's very early innings there. But again, that pipeline, the engagement, the excitement, the interaction with our customers are quite good at this time.

Perfect. Before I move over to your automotive franchise, let's see if there's any questions from the audience. If you do have any questions, raise your hands, and we'll get a mic over to you relatively quickly. Any questions from the audience? Let's move over to your automotive franchise. 8% to 12% 3-year CAGR on target growth. You drove 10% year-over-year growth ex MEMS divestiture in the first quarter. Your guidance implies high teens percentage year-over-year growth this quarter, suggesting acceleration last year. Your accelerated growth drivers, S32, software-defined vehicle, radar, electrification, connectivity drove 10% growth when your overall business was flat. Are the accelerator growth drivers in the first half of this year driving within or above that sort of 20% to 30% sort of growth target?

Yes. For -- the way to think about total auto, approximately today, about 45%, 46% of that business is linked to those 4 growth drivers that you just shared. Last year, they were all growing, except for BMS was kind of sideways. However, that is back now to growing. I would say, as I look at the first half of this year, of those accelerated growth drivers, they are all at or above the target that we shared out during Investor Day, which is obviously double-digit growth. And as we continue to mix up the portfolio and drive that to about 50% of the automotive business.

The team continues to drive pretty good traction with very good traction with its software-defined vehicle SDV portfolio of system-level products, strong software development platform, target of hitting $2 billion in sales by 2027 or up 2x versus 2024, right? There are several ways to implement a software-defined vehicle, right? You have central compute, leveraging your flagship sort of S32 and 5-nanometer processor. But you can either implement that with a hybrid sort of domain/zonal-based architecture or moving to a full-blown zonal architecture, right? And again, this is going to be moving to a full-blown zonal architecture leverages your 5-nanometer processor, but it also leverages your S32K sort of zonal MCU microcontroller family of products, which is the ideal architecture because it reduces wiring, it reduces weight, it's easy software and over-the-air updates, right? So what's the revenue outlook this year, first of all, for your S32 SDV platform? And if you look at your forward pipeline, what's kind of that mix of hybrid versus full zonal implementation?

Yes. So if you step back, the software-defined vehicle, again, going back to a baseball analogy, we're in the early innings, so call it inning 1, inning 2 of the real growth. What we're servicing today is the software-defined vehicle with the domains, the different type of domain infrastructures that we have. As you point out, as you look ahead, there's 2 extremes. There's one extreme where you go all zonal and there's another extreme that you go central compute. And then there's many variations in between. And what's the beauty about NXP is we're setting ourselves up with a total platform to support all architectures.

And so as you mentioned, our flagship S32N is on the central compute side of the house. And another flagship that is going -- sampling and we hope to go to production in 2027 is our K5, which is the most superior product out there. And so we believe that will get more traction first into China because China typically is going with the zonal architecture at this point in time. That's their next leg in the architecture journey. And the Westerns are -- seem to be more going towards the central compute. And so we have examples of both. And there's some mix in between, of course. But we're super excited. We're on target. As I mentioned, the software-defined vehicle is $1 billion going to $2 billion. That is tracking or tracking ahead. But the real growth with the acquisition of TTTech, which accelerates our CoreRide platform, really doesn't take effect until '27 and '28 when we start getting meaningful revenue related to that transaction as well, which brought in a lot of software expertise and move us up the stack for supplying and the value that we provide to our customers.

Yes. And that's actually a good point because it's one thing to -- when you're developing these platform solutions, it's one thing to have the right portfolio of silicon compute. But if you don't have the software, the firmware, it makes it extremely difficult, right? And so maybe help us understand TTTech Auto and just the NXP teams, you call it your CoreRide platform, right? That's your integrated full platform approach. Talk about where TTTech Auto sort of fits into -- because the software stack is very complicated, right? There's like so many layers. The customer only cares about that top layer, which is the application layer that they can customize, but help us fill in the gaps below that, like how has NXP sort of filled out that entire stack, make it easier for their customers to implement their silicon, put their customization on the core application software layer and then bring it to market, right? Is that -- that's the idea of the CoreRide platform? And is that what is driving sort of the leadership in this segment of the market? Is the platform and maybe less so on the silicon and some of the other building blocks?

It's the platform, it's the knowledge, it's the expertise. So the biggest takeaway now in the future, you win with the engineers, you win with the OEMs, you don't win with the Tier 1s. And so as you get ingrained and the stickiness and you're working as a partner to develop and get ahead and have the software ahead of the hardware, there is a competitive advantage to that. And that's the things that our customers like. It's a partnership both ways. And once you're in, obviously, it's -- the barriers of entry are quite hard. or the switching costs are quite expensive as simple terms I can put it. But Jeff, maybe if you want to share a little bit more technical on TTTech itself.

Yes. One of the things I would add also, Harlan, you alluded to this earlier. If you step back for a second and look at NXP, not from end markets, but kind of products that we offer to market, almost 60% of our revenue is processor based. So that's the first thing to remember. The days of being able to just walk into a customer just with a piece of silicon and be successful are in the past. You have to provide software enablement tools, you have to provide firmware. And we're finding more and more that the further up the stack we can go, the more sticky and more interested customers become, right?

So the TTTech acquisition actually was a middleware product called MotionWise. And so that is the layer that sits right below the application layer that the OEMs write to. So we're silicon guys at the bottom. That's right. We work with a number of partners for that next layer, that OS layer above it, and then we have TTTech above that for middleware. And so our vision long-term is to constantly push further and further up the stack. We won't become application providers to the OEMs. They'll develop that themselves. We don't envision ourselves taking a toll, if you will, from our customers. Some of our partners have talked about that.

Yes. Yes. And I better say this. So TTTech, obviously, our marketing guys, we have renamed it to TrustMotion. I think we had an announcement on that as well recently. So I better name change, but you all know what we acquired, but the branding of it is called TrustMotion.

Yes. No, it's good to see NXP moving in the direction. What we've been seeing for a while is that great semiconductor companies don't just design chips, right? Great semiconductor companies bring system-level solutions and a strong focus on software and firmware. And this is pretty apparent as you look across NXP's sort of entire portfolio, right? And so good to see the team continuing to drive that strategy going forward.

Before I move on to the manufacturing and financials, are there any questions from the audience? I just want to make sure we address any investor questions. If you do raise your hand, we'll get a mic over to you. If not, let's talk about the manufacturing and capacity outlook. So on the 200-millimeter consolidation plans, 300-millimeter expansion initiatives, your objective is to drive from 38% of your wafer capacity internal mix in '24 to 20% in 2030. The primary initiatives to achieve this are going to be the eSMC and VSMC 300-millimeter joint ventures. I believe you're targeting first advanced node wafers out of VSMC next year, first analog, power, mixed signal products out of VSMC in second half of next year. VSMC alone will drive an incremental 200 basis points of gross margin in 2028. Can you just give us an update on the build-outs?

Yes. No, everything is going really well with VSMC. I believe like you said, it will start to ramp in 2027. And then in 2028, how does that ramp go? We're qualifying products today. Clearly, if it ramps better, we'll get more of the 200 basis points. Do we get a partial of it? We'll have to see how that plays out with any factory that you ramp. So -- and the other good news about -- and I think our partner, Vanguard released this a couple of weeks ago is that also that facility combined is going to be cheaper. So I think it's coming in over $1 billion less than originally thought. So they're doing a really nice job on the construction build, the tooling and so forth, but also from a cost standpoint for something that size coming. Typically, you don't have large projects that come in under budget. This one has. Typically, they're over budget. So we feel really good about what's coming to be there.

And VSMC, which is going to be more focused on analog, power, maybe some of your older generation MCU products, that's a very different financial profile than your average foundry engagement. And so -- and versus internal, which is 200-millimeter. So have you quantified like 300-millimeter VSMC cost profile advantage either relative to foundry or relative to your internal 200-millimeter capabilities?

Absolutely. Today, obviously, we buy from the outside on 300-millimeter, but that's at a market price. The beauty about VSMC, it's a cost-plus type of model since we're owners of it. And so that's part of the 200 basis points improvement. You take the geometry scale part of it. You take in -- obviously, we want a little bit more of that capacity upfront. That's why we're paying these capacity access fees to help us to get more of that supply. And that technology is TSMC proprietary technology. And so you know our 2 largest foundries are GlobalFoundries as well as TSMC, great partners of ours. And so it's very common to even in some cases, have dual source between TSMC and VSMC as well. And many of our customers want dual source. So it's an advantage that way. But that's all contemplated into our 200 basis points improvement once it's fully ramped.

And often overlooked, but I think a very strong competitive weapon for NXP is your internal assembly and test, right? It's 80% of your back-end mix. The team was targeting to build out your second facility, right, ATKL in Kuala Lumpur, Malaysia, total output, I think, 6 million units per week. Has this facility come online? And how does the team's internal back-end cost compared to some of the big like Asia-based OSATs?

Yes. So actually, I was in Malaysia last week reviewing the plans of what we call ATKL2. That will break ground in Q2. And I would say that will be up and running in line with 2028 linked to our VSMC plans. So that's all on schedule and very automated in advance. And that's where I spent my time last week making sure it's all a go, everything. And so look forward to that supporting. And you're right. From a competitive standpoint, you get to control the inventory. So you don't have to build all the way out to finished goods. While if you use OSATs, you have to buy finished goods. And so sometimes that becomes an obsolescence risk.

For us, we don't build it out until we actually have the physical order. So that helps us there. But also from a cost standpoint, clearly, you can do a lot more from controlling your inventory and timing it for your customers the appropriate way throughout the quarter when shipping your product. So all a good go there on ATKL2, we call it.

Perfect. Good to see the execution there. On the financials, team has a long-term target of 60% gross margins. You just guided June quarter 58% with the biggest lever to 60% from where we are today being utilizations, right? Every $1 billion of annualized revenue drives 100 basis points of gross margins. You will be in the mid-80s utilizations in the second half versus low 80s here in the first half. Mix is the other driver. This is where I kind of want to dig into because if you look at your pipeline, we just talked about data center, we talked about software-defined vehicle. We talked about mass market, broad market, right? And so if you look at your pipeline of design wins that are starting to ramp now and over the next several years, I mean, what type of gross margin profile do these products have?

Yes. So as you know, probably about 4 or 5 years ago, our entitlement model to our R&D spend probably back then was anything we're investing and had to drive something at 55% or higher. So think about those type of products now just ramping, come into production, we'll have that kind of 55% or higher, obviously higher, some maybe a little lower that you work through the process to get them where they need to be. But in general, in that ballpark, anything that we invest today has an entitlement model of 60%. So think 3 to 5 years, you overlay those type of investments in those type of products, and that's why we continue to move up the stack and why we really are doubled down in our investments and really excited about 2 things I want you to take away today is really the growth in SDVs, early innings and physical AI, which we're still in spring training. And there's so many opportunities, and we feel very confident with the pipeline, the first engagements that you can see that there's a lot of traction.

Now it's about execution. And so that's what we talk about constantly. When we get together as an MT, we spend our time talking about the next 5 to 10 years. And I think you'll hear more about NXP, specifically AI on the edge.

Great insights. Really appreciate the participation today. Thanks, Bill. Thanks, Jeff. Really appreciate it.

Thank you all for the support.

Thank you.

Good day, and thank you for standing by. Welcome to the NXP First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to turn the conference over to Jeff Palmer, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Lisa. Good afternoon, everyone. Welcome to NXP Semiconductor's first quarter earnings call. 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. 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 second quarter of 2026. 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 performance. Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our first quarter 2026 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 afternoon. We appreciate you joining us today. Our first quarter performance exceeded expectations with broad-based improvements across all our focus end markets, led by our company specific well drivers and importantly, with momentum now visibly broadening into the core of our business. What we're seeing today is the compounding result of sustained investment, disciplined execution and deepening customer adoption across our differentiated portfolio that is increasingly well positioned for the most durable secular trends and semiconductors, software defined vehicles, physical AI and now with greater visibility than before data center infrastructure.

The remainder of 2026 is set up to be stronger than we anticipated just 90 days ago.

Now I want to walk you through the key drivers behind that improvement. Turning to the quarter. We delivered revenue of $3.18 billion, up 12% year-over-year and seasonally down 5% sequentially. While markets grew year-over-year and in aggregate, we outperformed by $31 million, above the midpoint of our guidance. Our company's specific strategic growth drivers across the auto and industrial and IoT end markets grew 18% year-over-year and represented roughly 1/3 of first quarter revenue.

Our core business is encompassing all end markets increased 10% year-over-year, underscoring the momentum is bringing beyond the strategic drivers. Non-GAAP operating margin was about 33%, 120 basis points above last year and 40 basis points above the midpoint of our guidance. Taken together, we delivered non-GAAP earnings per share of $3.05, $0.08 above the midpoint of our guidance.

Now turning to end market performance. In automotive, revenue was $1.78 billion, up 6% year-over-year and in line with expectations. Adjusted for the sales of the MEMS sensor business, automotive growth was 10% year-over-year. During the quarter, the growth was driven primarily by accelerating customer software-defined vehicle programs, improved electrification trends and continued momentum and radar connectivity.

Together, the auto accelerated growth drivers contributed nearly 90% of the year-over-year growth. From a customer adoption perspective, we're seeing strong design win traction for our S32N and S32 products, platforms that will serve as the backbone of our automotive processing franchise for the years to come.

We also secured new radar awards for imaging radar solutions, along with wins for 10-gigabit automotive center products. These are multiyear platform commitments that expand NXP content per vehicle and deepen the structural relationship with our customers. The automotive opportunity is a long-duration compounding story and our progress reinforces that trajectory.

In industrial and IoT, revenue was $628 million, up 24% year-over-year and near the high end of our guidance. Growth was driven by our lower industry processing solutions, including IMX, RP and MCX. Together, these products grew about 75% year-over-year and contributed nearly half the end market growth versus Q1 2015. Within the end market, industrial was strong, with notable strength in factor innovation, data centers and energy storage.

Looking ahead, the industrial IoT market is entering a transformative phase of physical AI moves intelligence into real all systems and robotics. This is creating significant bump-and-growth opportunities for NXP, particularly in processing, connectivity and security. As AI is deployed at the edge, customers need greater processing headroom to future-proof their platforms. As a result, we're seeing customers making deeper multigenerational commitments to NXP because of the strength of our AI-enabled product portfolio.

Now I want to take a moment to speak directly about our data center exposure because this is an area that we haven't previously emphasized. In 2025, revenue related to data center applications was about $200 million, and it was reflected evenly in both our industrial and IoT and communication infrastructure end markets. Based on the [indiscernible] programs now ramping, we believe this business will be north of $500 million this year with a similar end market split. We have established meaningful positions in system cooling, power supply, board management and control plane switching applications. Across these subsystems, customers choose NXP for processing depth and security capabilities.

Based on customer engagement, we are reinforcing our IMX application processor family for this opportunity creating a durable and expanding revenue presence in data centers. With communications infrastructure, revenue was $380 million, up 21% year-on-year and at the high end of our guidance. Growth was driven by digital networking exposure to data center and continued ramps of our new RF products.

And lastly, mobile revenue was $391 million, up 16% year-over-year and in line with guidance, reflecting continued strength in our secure mobile transactions franchise.

Now turning to the second quarter. Our outlook is better than we anticipated 90 days ago. We are guiding second quarter revenue to $3.45 billion, up 18% year-over-year and up 8% sequentially. This sequential growth represents an acceleration of our company-specific drivers. We expect all regions in all the markets to be up year-on-year, a reflection of expanded customer adoption of our differentiated portfolio.

At the midpoint, we expect the following trends in our business during Q2. Automotive is expected to be up in the low double-digit percent range year-on-year and up in the high single-digit range sequentially. Adjusted for the sales of the MEMS sensor business, our guidance implies a high-teens percentage growth year-over-year and 10% sequentially.

Industrial and IoT is expected to be up in the high 30% range year-over-year and up in the high teens range sequentially, continuing the acceleration we saw in Q1. Mobile is expected to be up in the low single-digit percent range year-over-year and down in the low double-digit percent range on a sequential basis.

And finally, communication infrastructure and other is expected to be up in the mid-30% range versus Q2 2025 and up in the mid-teens percent range versus Q1 2026.

In summary, our second quarter outlook and our growth trajectory in 2026 reflect the story of breadth, depth and acceleration. Our company-specific growth drivers are performing as designed, our core business is inflecting. And today, we have made the growth of our data center revenue transparent to support your understanding of our exposure to this important market.

Data center revenue is ramping now and it will more than double in 2026 from a year ago. We remain disciplined in how we invest, how we allocate capital and how we manage the factors we can control. Our framework is unchanged, investment growth, pursue targeted M&A to strengthen the portfolio and return excess cash to dividends and buybacks, consisting with our long-term model.

And now, I'd like to pass the call to Bill for a review of our financial performance.

Thank you, Rafael, and good afternoon to everyone on today's call. As Rafael has already covered the revenue drivers, I will turn to the financial highlights.

Overall, our Q1 results were solid, which were led by our company-specific growth drivers across our focused end markets, reinforcing the strength of our strategic priorities. We continue to ramp our new products and see strong customer adoption and design win momentum across our latest products and solutions. This momentum reinforces the value of our long-term R&D investments and the strength of our product road map.

In summary, revenue, gross profit and operating profit were all better than the midpoint of guidance, and we delivered non-GAAP earnings per share of $3.05 or $0.08 better than the midpoint. Non-GAAP gross profit was $1.82 billion, with a 57.1% non-GAAP gross margin, modestly above guidance, driven by solid fall-through on higher revenues.

Non-GAAP operating expenses were $758 million or 23.8% of revenue, favorable to guidance driven by efficiency gains. Non-GAAP operating profit was $1.05 billion, and non-GAAP operating margin was 33.1%, 40 basis points above guidance.

Below the line, non-GAAP interest expense was $90 million, and taxes were $173 million. Noncontrolling interest expense was $11 million, and results from equity accounted investees were a $4 million loss. Taken together, below-the-line items were $3 million unfavorable to guidance.

During the quarter, stock-based compensation was $109 million, and it is excluded from our non-GAAP earnings.

Turning to changes in cash, debt and capital returns. Our balance sheet remains strong and provides flexibility to invest in our strategic priorities and hybrid manufacturing plans. We ended Q1 with $11.7 billion in total debt, and $3.7 billion in cash. Cash usage during the quarter reflected debt repayments, joint venture investments, capital returns and CapEx, partially offset by cash generation, including $878 million of proceeds from the sale of the MEMS sensor business.

Net debt was $8 billion or 1.7x adjusted EBITDA and our adjusted EBITDA interest coverage ratio was 14.5x. During Q1, we retired the $500 million, 5.35% tranche due in March and after the end of the quarter, we retired the $750 million 3.875% tranche due in June. In Q1, we returned $358 million to our owners comprised of $256 million in dividends and $102 million in share repurchases.

After quarter end, we repurchased another $32 million under our 10b5-1 program. We remain committed to our long-term capital allocation strategy balancing returns to shareholders with disciplined investments in the business to support long-term profitable growth.

Turning to working capital. Days of inventory were 165 days, including 7 days of prebuilds. Receivables were 34 days, and payables were 59 days, resulting in a cash conversion cycle of 140 days. Inventory levels remain aligned to support our future growth and our planned front-end factory consolidation plans.

Cash flow from operations was $793 million, and net CapEx was $79 million, resulting in non-GAAP free cash flow of $714 million or 22% of revenue. From a cash deployment perspective, during Q1, we continue to advance our manufacturing strategy, which supports our long-term supply resiliency. Over time, this is expected to contribute approximately 200 basis points of structural gross margin expansion once the facility is fully operational in 2028.

In the quarter, we invested $385 million in VSMC, our manufacturing joint venture in Singapore. This is comprised of $189 million in long-term capacity access fees and $196 million in equity contributions. Overall, we are about 67% through the investment cycle for BSMC. And about 30% for ESMC. For DSMC, we expect an additional $425 million in 2026. For ESMC, we expect that 2026 investments to be about $50 million.

Now turning to our expectations for Q2. We expect Q2 revenue of $3.45 billion, plus or minus $100 million. This is up 18% year-on-year and 8% sequentially. The expected first half results support our view that NXP's growth is increasingly company-specific and reinforces our confidence in achieving our long-term revenue growth targets. We expect non-GAAP gross margin of 58%, plus or minus 50 basis points, up 150 basis points year-on-year and up 90 basis points sequentially. This is driven by higher revenue, product mix and front-end utilization improvements. We expect operating expenses of $800 million, plus or minus $10 million. This reflects the $17 million annual RFID licensing fees and normal annual merit increases.

At the midpoint, this results into a non-GAAP operating margin of 34.7%. Below the line, we expect non-GAAP financial expense to be approximately $92 million and our non-GAAP tax rate to be 18%. We expect noncontrolling interest to be $14 million including $4 million losses in our equity accounted investees. Stock-based compensation is expected to be approximately $107 million and is excluded from our non-GAAP guidance. This implies Q2 non-GAAP earnings per share of $3.50 at the midpoint.

Turning to Q2 uses of cash. We expect capital expenditures to be approximately 3% of revenue, with a capacity access fee payment to BSMC of $55 million and equity investments into BSMC of $125 million and for ESMC $10 million.

Overall, our first half performance and expectations reinforce the durability of our financial model driven by our company-specific growth drivers, finally shining through. Gross margin back to expansion mode and improved efficiency in our operating expenses.

In closing, we remain confident in delivering our 2027 financial commitments, which implies double-digit revenue growth in both 2026 and 2027, gross margin expanding towards 60-plus percent and continued discipline in our operating expenses.

I would like to now turn the call back to the operator for your questions.

[Operator Instructions]

First question will be coming from the line of Vivek Arya of Bank of America Securities.

Rafael, I was hoping that you could give us a sense for what is driving the growth in your automotive business, both kind of within China and outside of China? And then how much of a pricing benefit are you seeing because everything appears to be in kind of short supply right now. And I was wondering if NXP is seeing any benefit from the pricing side of the equation? Or you think this is more just kind of company specific and these are more unit rather than pricing-driven growth upside that you're seeing right now in autos.

Yes. Thank you, Vivek, for the question. I think let me tackle the question in a lot of ways. I think that we have right now is a backdrop of constant news of our being down and maybe people getting confused about what is a need for us in an auto business. I would say. Out of the bat, while gives you how many vehicles are produced, there's nothing about semiconductor company for vehicle.

Now in this environment, our auto business, NXP has performed well. And you can see from the front in Q1, it grew 10% after new account for the sensor business and Q2 guide implies a high teens year-over-year growth on the same basis. So you can see that clearly, the momentum is improving. And so that tells you already that this is not necessarily a story about unit growth. This is a story about the transformation, the architecture transformation that is on content.

So my answer to you is architecture-led. And that's a real story, right? For us, it's a content story that started to show in our numbers. The one thing I want to leave you as well is this growth is increasingly structural. What does that mean? Well, our accelerated growth drivers have been growing double digits since Q4. And that also happened in Q1 is going to continue to do, and they're contributing to 90% or 90-plus percent of the growth of the segment.

And that kind of tells you that our growth is increasingly structural. You talk about China, you talk about some the event that says production is down. But every segment I'm sorry, every region in automotive is up year-over-year. Despite the sequential decline in a quarter, year-on-year, we're actually growing year-over-year in every segment, and that continues into Q2.

And for my follow-up, perhaps on the comms infrastructure segment, I think in the last call, you kind of broke it out, right, half, I think, in your timing products and then digital networking and RF power. And back at your Analyst Day, you had said essentially kind of a flattish outlook from '24 to '27. What is the right way to think about this business? How much of this do you still plan to exit? How much of this are you reinvesting in? So what is kind of the true growth rate of your comms infrastructure business in '26 and '27 that we should be looking forward to versus what you thought of at Analyst Day.

So let me answer just by saying that we're not going to change the long-term model of comps in Infra, but I think your question is very valid with respect to the composition of what's in it comes at infra. And if you were -- if you remember what I said is that this end market is going to be flat CAGR basically flat for the next 3 years between '24 and '27. And we experienced a decline on cost 25% last year. Now we closed the year on the segment with about 50% of this revenue being tied to secure cards, about 1/4 of that was the digital networking and 1/4 of that was our power.

Now you can see that the market -- the comps in infra end market is recovering, primarily on the back of the strength of secured cards, RFID is actually going up. And our exposure to data centers through our digital networking products is actually rebounding. And so I think the composition of this segment is going to shift a little bit more into -- from RF power, which we actually deemphasizing and is going to probably start decelerating in 2027. The revenue composition is going to change from RF power more towards digital network and secure cars is likely to stay around 50%. And that's the way you should think about it.

And our next question will be coming from the line of Ross Seymore of Deutsche Bank.

One of the lines you said in your preamble, Rafael as well as in your press release was about the momentum accelerating throughout the rest of the year. Can you just talk about what that is, and I'm not trying to get you to guide for the back half of the year. But just is your visibility improving, what gives you the confidence in that? How much is cyclical versus secular, those sorts of things?

No, I think it is a fair question. First of all, I will go to resonate with you. I'm not going to give some has today. But I would say the setup is clearly improved. And if you take the Q2 guide, you can probably estimate a 50% growth in the first half of 2026 versus second half -- first -- sorry, first half of this year versus first half of last year. And actually, it's 18% if you adjust for sensors. So actually, you can see that we're starting the year strongly. What exchange visibility has improved..

I think what has changed, direct order book continues to strengthen. The distribution backlog continues to improve. So I think we believe the momentum continues. And so we're going to stay disciplined the way we guide. But the signals that we try to give us confidence in the momentum of our company-specific growth drivers will continue throughout the year, and it's going to drive what we believe is going to be growth in the second half.

And I guess for my follow-up, thanks for breaking out the data center side. Talk a little bit about that $200 million more than doubling this year. You went through a few of the drivers there. But -- are these new products? Is this just the rising tide of that CapEx lifting all the boats you included? Or is this a strategic area that you're targeting? Just talk a little bit about what gives you the confidence in that and how NXP is differentiated?

Yes. Maybe, Ross, I'll start by maybe explain what is our exposure to data centers because that could be confusing. So off the bat, right, I would say we're not claiming exposure to the data plan. So no GPUs, no accelerators, no high-speed AI connectivity. So our domain is in the control plane. So the way to think about it as a data center scales, the constraints are not just compute in memory, they're also power, cooling, uptime, secure controls. And I think this is where NXP plays. We're on our products are Layerscape networking processing for control plane networking.

We have our IMEX products for Board management. We have our MCUs [indiscernible] be part of the cooling system. So -- the way to think about it is we play in the part of the system with a unique high reliability and low life cycle applications. And I think this is where NXP's industrial strength portfolio is differentiated. And so the growth that we anticipated from last year to this year is underpinned. I mean, these are products that they're not only the signing, but they're ramping. And I think this is just about just making sure the momentum continues into the second half.

And our next question will be coming from the line of Thomas O'Malley of Barclays.

Just on the channel, you guys went from 9 weeks to 10 weeks now. It looks like 10 weeks to 11 weeks. Clearly, the demand profile for the rest of the year is stronger. I was curious if you guys had any additional views on the channel, do you think that you would expand it just given the stronger demand profile? Are you comfortable with it at that 11 weeks mark that you guys have kind of described in the past?

Yes. So this quarter, right, in Q1, we went through a lot of needs. And if you remember, our guide of Q1 last quarter already reflected the 1 week increase in our inventory. It was primarily to actually service what it was a much stronger demand environment. And if you look at our growth in industrial and in Q1, it grew over 20% and 80% of that business is serviced through distribution. So you can see that we already had an idea of what the is going to come.

And then our Q2 guide in Industrial IT, which is remember, 80% of that comes from the channel is guiding towards high 30%. So we're clearly servicing the channel. Q2 guide is based on inventory channels staying flat, staying at 11 weeks. So we intend to stay in our long-term target, which is 11 weeks.

And then just as a follow-up on the data center side, you guys are obviously seeing gross margin benefit from volume. And you also talked about mix as well. You guys don't give specific gross margin targets on your segments. But could you maybe give us a flavor of are these new products beneficial to corporate gross margins? And as that scales, should you see a tailwind from the data center business as well on the gross margin line?

Yes. Tom, this is Bill. Thanks for the question. Let me address the gross margin in general and specifically your question. Our gross margins continued to expand, driven by the higher revenue, the product mix and the utilization levels.

Our utilization on our front end, think about the first half to be in the low 80s and think about the second half to be in the mid-80s. So we'll get benefit from that from the utilization levels for our gross margin. Again, all the investments we're making is all about and servicing is all about focus being accretive to our corporate gross margins. So in these areas and when we make investments or provide our broad portfolio into different applications, it's extremely important that we attract value and also create value for our customers.

So the way to think about that, to your question is yes, they are very favorable to the corporate gross margin, but we'll continue to drive and focus there.

Lisa, we'll take the next caller.

And the next question will come from the line of Francois Bouvignies of UBS.

I wanted to follow up on the -- maybe on the pricing dynamics. I mean we have seen pricing increase in the industry so far in the beginning of the year. And also, we have seen some reports that NXP is also involved in this pricing dynamics. You don't talk much about pricing. So maybe I'm I think that maybe it's not that a big impact yet. But should we impact the pricing move for the rest of the year as an upside potential if it's getting tighter and Bill, you mentioned 85 million the second half of the year. So maybe you are reaching a level where maybe you could increase the pricing over time. Is that a scenario possible?

Francois, let me answer the question here with the way we see I mean I think your question relates to inflationary costs and the impact into pricing. And pressure in terms of cost, it's always a challenge and this is something that we do that we're paid to actually handle. And so we must tackle it. So our first reaction to cost increase is always to mitigate through operational efficiency. And that for us is our preferred approach.

That said, in selected areas, we are seeing high input cost pressure. And so we are taking selectively small pricing adjustments to protect the economics of the business. The reason we haven't talked about it is because the Q2 impact is immaterial. Now we will continue to be disciplined and protect gross margins when cost inflation requires a response. And so we'll keep you updated if things change.

Makes sense. And maybe the second question is on this broad-based recovery across all products and China when you said China is also growing. And of course, when we look at Q1, the China to car sales, at least for the domestic part is actually down meaningfully, I mean, mid-teens percentage year-on-year. So do you see as well China still strong year-on-year in Q2 and for the remainder of the year? Or do you see as well some impact from that data we see for the sales of cars in China or the content is higher and offsetting any color on this China specifically would be great.

Francois, I acknowledge the headlines in China, right? I think it's been very public that the production in China was weak primarily driven by the weakness on the feralconsumption. -- and some of the headlines that the Chinese OEMs are focusing more on export to overcome some of the challenges that are happening with the domestic market. But I think the contradiction is that -- and I continue to say is that production volatility is very small compared to content growth.

And China is no different than the rest of the world. It's like I tell you, for us, China grew year-on-year in Q1. I mean it was necessarily massive, but it grew and it continues to grow into Q2. And so I think that is the story. Story doesn't change. Content growth overcomes unit volatility.

And our next question Jim Schneider of Goldman Sachs.

Given the commentary you made in the rat growth drivers you're seeing relative to '26 and '27, I just wanted to clarify that you still on track to sort of deliver to your Analyst Day targets from 2024 out into 2027. And maybe you can confirm both the revenue and gross margin side of that.

Yes, I think the question on 2027, we were specific both in our script, both Bill and I in our prepared remarks is that we are confident and we have a conviction on the trajectory that we have with our secular growth drivers that 2027 is achievable. And so I think the answer is yes. We stay without doing 2027 targets.

Yes. So just to add the secular drivers. They continue to perform very, very well. We expect for the auto ones to be above our high end in Q2 and also for industrial IoT, the growth rates be above the high end of what we said for our industrial IoT growth drivers that are company specific.

That's helpful. And then relative to the data center disclosure you provided, that by all accounts appears to be at least at or potentially above the rate of data center growth for many of your analog peers. Can you maybe talk about whether there's any specific areas that are growing sort of outgrowing the overall envelope there? And what do you plan to deliver or introduce any new products to further apply towards that opportunity?

Yes. The data center. So the way to think about the data center is that we are just ramping, right? So the growth. And again, we're going to be focusing the control plane of the data center. The growth of that exposure to that segment is just beginning because we're just ramping in so if you look at our SAM on the control plane, it's probably growing about 10% to 11% per year.

We are going to outgrow the SAM because we're just ramping and I expect that to continue to happen at '26 and '27. We are doubling down in some of the products to actually size kind of the opportunity that we have and the current engagements. We are talking to our customers what the next generation of products is going to be.

And I'll tell you, the exposure in the data centers has about 20 to 25 products. Obviously, some of the higher ASP products are in the networking side and the IMAX products for both management control. And so we're speaking to our customers what the next-generation needs are going to be, and we're developing those products.

And our next question is coming from the line of Matthew Prisco of Cantor.

Just to kick it off, can you share a little more color on the customer ordering patterns that you've seen? What's changed over kind of the past 90 days and have you seen any impact from memory dynamics out there or a Middle East conflicts, either any order patterns today or in customer conversations?

Well, the visibility on our backlog and the distributors backlog has improved significantly. And that's what gives us the confidence that we have going into the second half of the year. That the demand is strong.

Memory is always a topic. And our customers are doing everything possible to actually secure supply. This is more of a supply issue versus a price issue. We all know what the prices are in the memory. We are if you look at our customers on the consumer side, they are very well-funded customers that they have the ability to actually go and get the supply the need. So we haven't seen any impact in our orders yet in industriality and automotive due to memory even though memory is still a big conversation in every customer meeting that we have.

Helpful. And then maybe talking about the supply backdrop a bit. Do you see any tightness out there impacting the business as we kind of see those Tier 2 wafer pricing increases? And and how we're talking about supply and update on VSMC or ESMC timing?.

Sure. Let me let me take your last question first on the timing of BSMC and ESC. -- both are on sedul BSMC maybe I know the tools are installed. They start ramping soon. And hopefully, we get up and running in 2028, where we get the -- expanding our structural gross margin by another 200 basis points.

We like to others to plot factory supplying different parts of the supply chain are tight. And we do see these inflationary costs that Rafael referred to. And if we can offset them internally from operational efficiency or productivity, we then unfortunately have to pass them along to our customers. And so -- we are starting to do that in selected areas, but trying to do that in a controlled way. If things get really tight, we'll do what we did during COVID to make sure that we protect our gross margins related to. But we are seeing bottlenecks, slight bottlenecks in certain parts of the supply chain.

And the next question will come from the line of Joe Moore of Morgan Stanley.

I wonder if you could talk about the growth drivers in the auto space, and you sort of talked about seeing your business get better from that. Any -- is that kind of an indication of 2027 model year? Or I sort of think of these as 5-year rolling programs? Just anything you can do to help us what's giving you the confidence to sort of call that an inflection rather than something cyclical.

Yes. So let me talk about the auto growth drivers. They've become a very important part of the business now, and it's really changing the composition of the revenue in auto. The growth drivers, just to give you a sense, the growth drivers in Q1, there were more than 45% of the revenue now composition.

And so we continue to see growth in terms of give you a sense. This is now coming from a 39 composition. I think we're going to end up the year at 36 closer to the 50% range as opposed to the mid-40s. And because they are growing strongly, right, they are growing double digits. And it's driven by the software-defined vehicle portfolio that we have. That is the strength of NXP and automotive is we have products in the processing portfolio that today don't have equivalents in the market, and they are really well positioned for [ Sonal ] architectures and central compute architecture. So we expect this transition into SDB to really be a very, very strong tailwind and position NXPs of leadership in automotive. But it's all driven by our SDV platform.

Great. And is there anything different about that in the in the China market, I was sort of thinking when you build the car architecture from scratch, it's probably easier to build around software-defined vehicles than it is if you're sort of in an entrenched architecture. On the other hand, there's local suppliers and things like that. Just PAUSE is the China market any different in terms of those growth drivers?

It is not necessarily different in terms of the adoption of the growth drivers. I think what is different is in the speed in which they adopt the products. And for instance, I would say that -- let me just take an example, S325, which is our 16-nanometer latest 16-nanometer zone product, a product with a lot of performance.

We expect the K5 to go to production in China despite the fact that this product has been sampled to Western customers first. So the speed in which they adopt the next-generation architectures is what is different. Now you made a comment with respect to local competitors. I think that the shift in architecture is also benefiting us because at the end of the day, you will see local competitors emerge in the automotive market and are they likely to emerge in the low end. But this architectural shift is so in one central compute, it favors higher processing capabilities they have. It favors higher redundancy PAUSE -- the other thing that you have to take into account, China is moving fast to automation to level 3, level 4 ADAS PAUSE -- so that also requires more redundancy, better security, better safety j

And so this is where I think innovation in MCUs and MPUs is going to be key to actually win in the market. So we're quite excited about the transformative move that Chinese are making and architectures and the speed in which we're doing it because we have the right road map for them.

And the next question will come from the line of Chris Caso of Wolfe Research.

Yes. The first question is coming back to some of the comments you made about input costs rising and if you could talk to us about what you're seeing with regard to foundry wafer pricing now? And how that gets affected as BSMC starts to ramp next year? What impact is that on you? And perhaps does that provide you with some sort of an advantage if pricing does go up as BSMC ramps?

Yes. Let me take that one. The way to think about the supply, the BSMC service is one sort of supply which we kind of have a little bit more control over. And why we're paying additional capacity access fees to get additional supply. But that's probably more related to some of our technologies that are mostly in-house from part of our consolidation, rationalization project that we're doing.

The other capacity, what we're seeing is when you want additional, so if you have surprises above what the agreement that you kind of entered at the beginning of the year, we're seeing additional charges because they may need to obviously capacity gets tight. So they also may need to add new tools and so forth to help you supply. But we're not -- from the current agreement, it's probably more upside that they charge and then can we offset that internally if we can't, then we pass it along to our customers.

Great. Understood. As a follow-up, you mentioned in your opening remarks that the -- I guess, you were confident still in the Analyst Day targets and that implied double-digit growth for '26 and '27. Obviously, '27 is far away. I'm not sure what we should read into that. Is there any particular visibility that you have? Or is this just some confidence that perhaps we finally turned corner. And if that's the case, we get a good growth year next year, not sure how much we should read into those comments.

Well, let me -- let me address that because I think it's a question on the model and why we're doubling down on basically our commitments in 2027, which will imply just doing the math, a particular growth rate in '26 and '27 and a conviction of revenue targets emanates from the traction that we have in our actual growth drivers, and the traction that we have now the data center and the traction that we show you in both Industrial and IT. And I think you can get there to different contributions by the different end markets and some segments are going to be in the low end of the range, some sectors are going to be the higher end of the range.

But our target is for us in 2027, they seem to be within reach. Now just the pro internally in NXP, we don't see 2027 as a destination, of course, just a milestone. And if you were to look into 2027 getting what's important, obviously, from you from a revenue perspective, that's why we have the conviction, but for us internally is how we close the year and enter 2028 with momentum in our focus markets.

the programs we make in our portfolio, the traction that we have on becoming mission critical to our customers. And I think the conviction that we have is the progress we're making right now in 2026 and last year with the adoption of our customers in our new products, I think makes our view on this path towards 2027 very, very constructive..

Yes. And maybe I'd just add, just on the secular growth drivers. Obviously, we have visibility next quarter, the quarter after in the following quarter. And the order intake on those secular growth drivers for the company specific, are all at high end or above of what we said during Investor Day. So really a lot of company-specific growth that's given us confidence behind it because, again, it's a content. It's a ramp of products, design wins have one. and they're ramping now. And so since they're tracking to at the high end or above the high end of the model that we provided, we feel very confident that this will continue because of the adoption of our solutions.

And our next question is coming from the line of Gary Mobley of Loop Capital.

I was hoping that you can give us an update on the integration of Kinara, Aviva, TTTech how that's progressing, whether it relates to enhancements to existing road maps or full commercialization on an independent basis? Any update there would be helpful.

Yes. I'll give you an update. This is Rafael. So let's start with TTTech is a great engineering organization. They have been redeployed now to our internal efforts to do as 32 core ride. This is a very important kind of initiative that we have. We expect to sample our customers in Q3 this sonogreference design, the Sono reference design that involves not only the K5 but other MCUs and our 48-volt architecture, and we're doing it both in the East and the West.

I think we have high single-digit number of customers engaged in BOC. So it's quite exciting. And we do expect that this number is going to accelerate the K5 adoption in 2027.

Aviva Link it's a great platform that we got in Service platform. This is an open standard, very important for SDV given the fact that the sensor and displays are multiplying and next-generation vehicles and all these are connected to SerDes. And I think companies are looking for an open platform versus their proprietary solutions they have today. We have customer awards now, and we expect to be in production with them in 2028. So this is a new sub for us. This is a new market that we haven't entered and in the past is. There were 2 very entrenched obviously, competitors are there. But now with this open standard allows NXP to come and compete and compete with great technology.

And the last one on Kinara, Kinara a great acquisition directly in the middle of our North Star, which is becoming intelligent systems at the edge. And Kinara is -- it's been a perfect combination for our i.MX platform. That is our application processor. It allows us to really engage with customers in ways that we couldn't have done in the past just because we didn't have the capability and we didn't even have the credibility on it.

And so today, sales funnel is quite large. And literally over $1 billion of sales funnel. So obviously, a lot of things go and chase. Our customer reaction is really good. We have I think we have more than 30 POCs going on, and we expect -- again, we are on track to have some revenue of combination of the Kinara asset with i.MX in the second half 2027 and 2028.

The other important thing is that we started to integrate the Kinara IP already into our industrial processors and our auto processors. This is monolithic integration of the IP. So this is also going to be part of our next-generation processing for our auto and industrial products.

I appreciate it, Rafael. I want to ask really more of a direct question on your comfort to the 2027 targets. We all know what the revenue would materialize to a $15.8 billion if you hit the growth targets as laid out November 2024. But we've had, of course, the divestiture of the MEMS sensor business. So should we think about the endpoint or I guess the milestone for 2027 is about $15.4 billion in revenue.

So Gary, let me take that modeling question. So first, in your calculation, remember, you've got to back off the sale in that business. That's just a housekeeping item. But I think what you've heard from both Rafael and Bill today is we are standing solidly behind our long-term growth rates. At the total company level, that means we're going to hit 6% to 10% total company. And I know you guys know how to do modeling better than anybody. You can kind of back into what that means for '26 and '27. And we're going to leave that exercise to you. But we are not backing away from those targets. And I would say, the thing to take away from maybe some of the comments from both Bill and Rafael is the design wins we have, and they're starting to go into production. So our clarity and our belief in achieving those targets is increasing daily.

And the next question will be coming from the line of Quinn Bolton of Needham & Company.

I guess I wanted to come back to the IIoT business. And if I've got my numbers right, it looks like PA business will hit a record revenue level in the second quarter. How much of that is just broad-based industrial end market recovery versus your company-specific growth drivers? And then I've got a quick follow-up for Bill.

Yes, let me jump on that one. I think you're right. I think the strength of IoT, industrial and for us, started showing strength in Q3 last year. We're starting to grow year-over-year, and that growth continued in Q4, continued in Q1 with a 20-plus percent range, and that will be guiding to the item. So and we said it clearly, the strength is spot based is all geographical regions in all markets. We have certain products right now. They're driving the growth. As we said, the half done growth came from new industrial processing portfolio. That is on -- that is accelerated secular growth drivers.

What is also very encouraging as we see in the core part of Industrial IoT also growing. This is a part of the revenue of the last year decline now is back growth. In Q1, it grew 5% year-on-year. And so you can see that the rest of the portfolio is also recovering. So it's very -- it's broad-based now. It's also not only the accelerated growth drivers performing by the core part of our business in the Industrial IoT is coming back. And so that kind of tells you, hopefully, a little bit of flavor of the strength of the momentum that we have going into Q2 and likely carry in the second half of the year.

Yes. Maybe I'll just put a number there. The way to think about industrial IoT, the secular growth drivers are representing about 37% and they're growing north of 40%, 50% kind of like just to give.

Great. And then for Bill, you've talked about the 200 basis points that you get from the ramp of SMC and insourcing or moving production from 200-millimeter to 300-millimeter. Can you give us a sense, as that facility comes online, how quickly do you get that benefit? Does it -- can you see it all in 1 year? Or does it take several years to achieve the full 200 basis points?

Yes, it's a great question. Typically, we should start to see it when the factory is fully utilized, which is probably a good utilization number for that type of factory runs 90%, 95%. And so it will take several quarters to get that full benefit, depending on the rent, of course. So my guess is you probably get a archon it for sure in 2028. We did the full amount not sure it all depends on the timing of the ramp, but we're pushing strong, and we want to get it as well and drive it.

That will be our last question, and I think we'll pass it back to Rafael to conclude the call today.

Thank you, everyone, for joining us today and for your thoughtful questions. In closing, I would like to leave you with 3 takeaways. First, NXP growth is driven by leadership in SDV and physical AI and industrial IoT. Second, our company-specific growth drivers are performing as the sign. Lastly, we're reaffirming our analyst commitments, which implies double-digit growth in both 2026 and 2027.

This quarter reaffirms the strength of the execution to our strategy. We remain committed to disciplined investment, margin expansion and portfolio optimizations to deliver sustainable long-term value for our shareholders. Thank you.

Thank you. This does conclude today's program. Thank you all for joining. You may now disconnect.

p

Good morning all. I'm Matthew Prisco, analyst at Cantor Fitzgerald, covering semis and semi-cap equipment. And today, I have the pleasure of hosting this fireside chat with Jeff Palmer, Senior VP of IR for NXP. Thank you so much for joining us today.

Good morning. Thanks, Matt.

So we'll be opening with a little near term. Okay. The analog story has been one of head fakes over the past few years. And last quarter, you highlighted a number of positive trends across your tracked KPIs. Are there characteristics in these trends today that make you believe we're perhaps truly on the other side of the cycle this time? And are there any surprise in trends, thus far, through 1Q?

So we were joking about this at the beginning, Matt. We're not going to be updating guidance today, sorry. But in terms of the KPIs that we do track, they do look like we have passed the bottom in terms of the cycle. Direct and disti backlog continues to build nicely. Customer escalations are continuing, so that kind of tells you that people maybe didn't lay in the right amount of material. We are starting to see short-term orders increase, escalations and expedites. EDI feeds from our direct Tier 1 customers continue to build, so those are all positive things.

But the only challenge -- and I know these all sound positives. We don't see a V-shaped recovery. We think this is a bit of a grind higher from here.

Perfect. And then maybe digging into that, would be great to walk through your thoughts on the recovery side set of across maybe individual end market, starting with auto. As of last quarter, essentially back at peak levels, but you guys guided 1Q down mid-single digit sequentially, a somewhat seasonal guide despite tailwinds of now shipping closer to end demand and secular business strength, which we'll dig into a little bit later. Obviously, exited MEMS business, a headwind here. But why should we not see more of a cyclical snapback given that setup?

Well, I think a snapback makes you feel like the amount of inventory that's with customers is below what they need. What we've actually seen over the last 9 quarters is a lot of our Tier 1s in automotive burn down inventory to appropriate levels. Our view of appropriate levels is 10 to 12 weeks. And we track about 25 different Tier 1s. I'd say a large percentage of them are at that kind of appropriate level. We have a few that are actually below that, quite a bit below and -- but we've just not seen a snapback in terms of a V-shaped type of recovery.

I think in terms of your question about auto guidance into Q1, you have to remember, you can look at it 1 [ or ] 2 ways. You can either rationalize out the MEMS business for Q1, where we have 1 month in the guidance, and then you rationalize it off of Q1 of last year in Q4. And you see it's pretty decent year-on-year growth.

Perfect. And then in industrial, I believe we're still about 10% to 15% below prior peak. So how should we think about the slope of this recovery, PMI trends and your kind of cyclical KPIs improved, just be more robust than an automotive growth from here?

I think so. I mean we think that the industrial business has some really good trends behind it. One of the things -- our Industrial & IoT business, about 80% of that goes to the channel. So it's a very much a channel-driven business, very long tail. One of the things that we look at there is end customer backlogs in distribution. So if you were a customer of ours, an industrial customer and buying through distribution, we can see your backlog.

And what we've been noticing is backlogs have been building consistently month on month, week on week. That gives us 2 pieces of data. At least, we interpret it that way. If you're a small- or mid-sized industrial company and you continue to build backlog, you probably don't have any excess inventory. Two, you're probably feeling more optimistic about your business. Otherwise, why would you be putting backlog on. So we're feeling optimistic about what we're seeing.

We're also seeing very good trends. I think we're going to go in just a little later on, Matt, for some of our newer products in the industrial IoT business.

All right. Perfect. Maybe hitting on the channel fill dynamic here a little bit. Last quarter, you talked about hitting the 11 weeks in 1Q and kind of holding steady from there, which, by my calculation, adds about $100 million to the 1Q revenue and sets up for a bit of a challenging 2Q growth compare. So as most conversations today kind of center around growth versus seasonality and you have a little bit more visibility into 2Q versus 5 weeks ago, how do you think about this dynamic where consensus currently modeling 2Q revenues kind of up high single digits when we adjust for that channel fill versus pre- and post-COVID seasonality kind of plus low single digits?

I know this isn't going to scratch the itch, Matt, but we're not going to talk about Q2 sitting here today. Our target long term in the channel has been to get to 11 weeks. We've been very clear about that. We've been below our 11-week target. I did the math last night. We've been below 11 weeks for 37 quarters. So that's how tightly we've managed the channel. And all we want to do is get back to 11 weeks. And once we get there, it's steady state from there. .

Perfect. How about on the memory side? Do you have any update on customer conversations there, maybe impacting end demand? I know you last talked about being an area of concern for customers into the back half, but since then, supply-demand imbalance and pricing really have only become more challenging. So have you seen any headwinds kind of surfacing there? Any conversations?

Yes. So we're not a buyer of memory. So we don't repackage memory in any of our products like some of our peers do. The topic of memory comes up in probably every customer engagement conversation. And it's kind of 2 flavors. You have certain customers who I would call very advanced and strategic in their supply chain management. Those conversations, they're more just annoyed of what they have to pay for the memory, but they've got their supply locked in. You then have other customers who, I think, take a maybe not as a strategic view of their supply chain and they're annoyed that they can't get product and they're having to pay a lot for it. But we're not yet, at this time, seeing any demand destruction from the challenges in the memory market.

Perfect. And then maybe lastly on the near-term side, pricing. We've already seen a few analog price increases year-to-date from peers. Should we expect the same from NXP? And how are you thinking about the pricing dynamics for the year?

So for our large direct customers and mostly in the automotive marketplace, we do annual price negotiations. They take place in December and take effect in January of the new year. For '26, they're all complete. They range in the low single-digit range like we thought they would. So that's good.

We are seeing some increasing inflationary costs. There's kind of a breakpoint where if we can't operationally kind of digest some of those increases, we do have to pass on increases to our customers as we've done in the past, and we will do so again. But nothing to announce today about raising prices.

Perfect. Maybe moving on to the bigger picture setup, and once again, I'd like to start with kind of Auto here. You've got your core business and then the accelerated growth drivers. But in order to hit the midpoint of your target model in '27, excluding the MEMS business exit, you'd have to see this business grow in aggregate about 13% CAGR over the next 2 years. So this would also have to occur within a backdrop where end demand remains relatively subdued. The EV mix is a bit of a headwind. So can you discuss the drivers that give you confidence behind that growth rate despite these headwinds?

Yes. So what we've been most focused on, the core business really does tend to track production, right? And we said our core business should grow in the low single-digit range over the '24 to '27 horizon. Well, we've really been focused on our accelerated growth drivers.

Now the first part of '25, there were some headwinds that impacted the accelerated growth drivers. But as we move through the second half, they did start to perform as we would expect. I think the math you're pointing to is correct. We're not backing away from our target for Auto growing 8% to 12%, which would mean you would have to be above that rate in '26 and '27. But we're not backing away from it right now.

It's really a content per vehicle story. It's not about hoping that units, global production grows astronomically. It's about taking more share of wallet. And that's really around higher ASPs, higher value products that we've been awarded projects, and that really is what underpins a lot of our long-term growth outlooks.

All right. Perfect. And then maybe focusing in on the software-defined vehicle, which I would think, over those 2 years, is probably 1 of the leading growth drivers for the company, so correct me if I'm wrong there. But we know processing is at the core here for NXP. But what is it that differentiates the offering here? What drives the wins? Why is somebody choosing an NXP processor over the competition and maybe how to think about the stickiness there and ability to leverage those processor wins into further analog connectivity, auto attach?

I think what we're experiencing right now in the auto electronics market is kind of a shift in architectures. Historically, most cars were kind of these flat point-to-point architectures with many different vendors supplying different processors in different parts of the car. And that was fine for many years, but that did limit the car companies from being able to develop kind of a software upgrade type of a model, sort of like what maybe a Tesla would do.

And we've seen, over the last couple of years, companies wanting to go towards this more software-defined type of model. And so what they want to do is build a hierarchy of processing fabric, if you will, starting with kind of a vehicle computer and the core electronics of the car, then kind of domains and then zones and edge nodes.

The NXP SDV product line is a broad portfolio of MPUs, zone processors and domain processors. They are very high performance. It's a breadth of the products. It's also the other products that we can offer to the customer like automotive Ethernet. It's the software enablement, the digital twins we're providing. So it's really we're basically working with the auto OEMs to help them implement this new architecture of the cars. It's a much bigger software effort than, let's say, just selling a socket to a customer.

And a lot of what we're guaranteeing is the performance at the system level, not just the performance at our socket level but saying, okay, if you think about a zone, a complete zone in a car, we can guarantee the performance on its own because we do all the products within it, that makes sense.

It tends to be a much stickier business because if you're selling a processor to a customer, they're committing to writing software on your platform for a number of years. It's not something that gets swapped in and out every year.

Do you find that -- I mean, when you think about competition in this type, are there other guys you're competing with on the system-level approach really tying this all together? Or are you more competing today with discrete solutions and trying to displace those?

So the way we'd ask you to think about the modern car, kind of SDV, there's kind of 3 big functional areas. There's the IVI space or in-vehicle infotainment; and in that space, we have to give it to our peer Qualcomm. They've done very well with the immersive dashboards. Then, the other big kind of space is ADAS. And in that area, we participate in radar type of solutions. We don't do cameras. We don't do LiDAR. But there is also an opportunity for something they called ADAS fusion. And that's usually something like Qualcomm or NVIDIA. Those are tougher areas given our product portfolio and where we're focused in.

The third area is what kind of we termed the core electronics of the car, what makes a car a car. And that's where the S32 family is really focused on.

Okay. And maybe digging into that, how do we think about the product road map here and design win traction? Early feedback on that S32, I think you guys have the N5 (sic) [ N55 ] and N7, K5 iterations, maybe timing of those ramps, relative magnitude of contribution. And any step function increases we should be thinking about as these products ramp and kind of open new opportunities?

Sure. So the S32 family, we said would grow kind of a 20% to 30% CAGR '24 to '27. The baseline of that in '24 is about $1 billion of business, and these were primarily our 16-nanometer and larger type of domain processors. In '25, that business, the SDV business, grew in the low teens year-on-year. It was a little weaker in the first half, accelerated above that in the second half. So we feel the trajectory is coming back correctly.

The design win traction for the 5-nanometer products is very good, but they won't go into production till probably late '26, early '27. There's still a little ways away. The K5, which is the industry's first 16-nanometer auto microcontroller family, zonal microcontroller family, we just released to sampling to customers. Traction has been very, very good. But again, given our design-to-revenue cycle, it's not going to impact materially our '27 target.

Okay. Makes sense. So I guess moving to industrial and the intelligent edge. I feel like the industrial story historically been a bit more difficult to conceptualize versus auto, but few would argue today the prospects of the industrial edge within this new AI paradigm. So maybe we could start with what drives the wins for NXP here. Are there anchor products that we should be greater focused on? And how important is it to think about the opportunity being at a system level versus selling these more discrete components to customers?

Sure. So in the Industrial & IoT business as well as for the complete company, over 50% of the revenue is processor-based. In Industrial & IoT specifically, we have a broad portfolio of microcontroller families, the MCX microcontroller family; the RT family, which is kind of a hybrid microcontroller apps product family; and then we have the i.MX application processor, which is the industry-leading industrial application processor.

When our teams go into these industrial and IoT markets, they always lead with the processor first. If we can win that, then you as a customer are making a commitment to write software on my platform. Once I've been awarded the processor, I pull along PMICs because most of these products are built with companion devices that are matched with them. So you win the PMU.

You then look to pull in other things like connectivity and security and other analog type components. And you really do build reference designs for customers. These are a long-tail business, tens of thousands of customers, and they're very, very smart in their end markets, but they're not real smart in picking and wanting to choose individual semiconductor socket, so to speak. They really want a company to come to them and say, "Here, we've taken that kind of reference design problem off your shoulders." And some of the companies pick up the reference designs as is. Some relay them out, but that's how we go to market.

Perfect. And maybe to finish on this product or this topic of product differentiation, can you perhaps walk us through recent acquisitions and how these potentially allow for further differentiation of NXP's offering?

Sure. There was 3 acquisitions last year. They all happened very quickly, and I think some folks misinterpreted that maybe we were changing our M&A strategy. It was really more around deal timing that they just all happened in a short time.

Starting first off in automotive. TTTech Auto is a software company that we acquired. The reason we acquired them, they were about 1,000 very experienced software engineers in the automotive market focused on functional safety and security, and we really wanted to use that capability to complement our S32 CoreRide platform.

So it's really around -- as I said at the beginning of the conversation, Matt, this SDV effort is much more software oriented, and so having that capability in-house and being able to engage with our customer software teams is key to being successful. So that's why we bought TTTech Auto.

They also have a product that's called motion-wise, which is a middleware product that kind of sits above the operating system but below the application layer in the car. And it's early days there. It will take a number of years to really kind of productize that to where customers are very excited about it. So TTTech, while very strategic, will not yield any real revenue before '28.

The second one in automotive is a company called Aviva Links. Aviva Links is a small startup in the Valley that delivers high-speed asynchronous SerDes type technology. Think about an ADAS system where you'll have multiple modalities, cameras, LiDAR, radar, all generating a lot of data that they need to force back to the kind of a central processor, but they don't need the same amount of data back from the processor to the edge node, so kind of asynchronous type of a structure. And that's what this Aviva Links product does. We acquired the company very much at the complement or kind of pushing of a customer. And so there's already design wins that have come with it. It complements our in-vehicle networking technology, revenue probably late '27, early '28.

And then lastly, in the industrial and IoT space, we acquired a company called Kinara. And Kinara's another Silicon Valley startup doing neural processing engines for running large language models in an inference environment at the edge. And so we've been working with them for a while. These products have to slave off of kind of the central processor of the system. And so we've been showing some really interesting engagements with customers. Customers are coming to us with very innovative and creative ideas how they want to use this technology.

So this is not doing learning at the edge. This is running actually the inference at the edge. A lot of the customers, the reason why they want to do that is they don't want to go to the cloud and come back and incur the latency of the round trip to the cloud and back. They also want a much more higher security environment. And so early engagements are very, very good, but like a lot of things in industrial, the time to revenue is probably at least a year or 2 away.

Sure. All right. Help moving to the operating leverage side. You guys have undergone a structural transition over the past 5, 10 years, resulting in meaningful resiliency through this past cycle with operating margins contracted roughly 5 points peak to trough for you guys versus peers over 20 points. Can you walk us through what has changed to drive that resiliency, the sustainability of that dynamic moving forward? And any changes to come with new CEO now at the helm?

So the biggest thing that changed kind of the financial structure of the company occurred over the last decade where when I started with the company probably over a decade now, our fixed versus variable cost structure was we were about 70% fixed cost and only 30% variable, so very IDM-like, right?

Over the last decade, we've flipped that 180 degrees. We're now currently 70% variable cost and only 30% fixed. And that 70-30 mix will probably go to 80-20 over the next number of years as we rationalize our legacy 8-inch factories in the U.S. and in Europe. So we are moving more and more towards a variable cost model.

The question about sustainability, we believe it's sustainable. We believe it's -- the model has shown to be fairly resilient in the last cycle, where our peak to trough was much less than many of our peers. We did not take our utilization of our factories really, really way down, so we're able to maintain utilization at reasonable levels.

And in terms of the new CEO, he's been with the company now 11 years. And so the strategy you've seen out of NXP or the messaging, he's been part of that, right? He was one of Kurt's direct reports, Kurt Sievers, our prior CEO. So I don't think you should expect [ brand-new ] data. I don't think you should expect any change in the financial model because Rafael is now at the helm.

Perfect. And then as we contemplate the leverage into the up cycle, you've talked about for every $1 billion in revenues, should drive about 100 basis points gross margin expansion. Is that still the right bogey to be using today? And then maybe outside the dynamic, what are kind of the rank order primary levers we should be thinking about to get those gross margins towards the higher end of the targeted 57% to 63% range?

Right. So yes, the $1 billion driving about 100 basis points of gross margin expansion is still valid. That rule of thumb contemplates revenue growth, improving utilization, mix and pricing. So it's kind of altogether, right? That -- what that encompasses.

In terms of how to get it towards the higher end, well, as you know, each one of our end markets has a range for revenue growth. And so if you want to drive to the higher gross profit, you have to drive the higher end of revenue, very simple.

All right. So revenue, primary driver to drive [indiscernible].

Revenue is our friend.

Okay. Perfect. And then maybe as we start to think beyond that target model, can you walk us through the VSMC dynamics, the latest thoughts on progress versus plans, P&L impact ahead of the ramp and maybe the timing of the ramp in subsequent 200 basis points flow-through to gross margins?

So the VSMC joint venture is going very well. I'd say they're ahead of schedule. For those who maybe are not aware, VSMC is a joint venture we've developed with Vanguard in Singapore. They're building out a 2-phase 300-millimeter factory for trailing and mixed signal. First phase is already -- the facility, all the shelves are built. The utilities are in. They're starting to load equipment in, so the progress is going very, very well.

I think what we really want to highlight is how appreciative we are of TSMC's effort in this. If you know, TSMC owns 30% of Vanguard, and so they're kind of an invisible hand in this JV, if you will. Because of that, the factory that's being built in Singapore is a match exact to a factor you might see in TSMC's network. We are actually licensing TSMC's process flows to run in that factory, so it should be very match exact for what we already buy from TSMC.

In terms of the investment, our original cost of the investment was $2.8 billion. We're about 50% through that investment. The other 50% will go out probably in '26 and '27, is the current plan.

And then I think you had a question you want to talk about the equity accounted investees related to that. So as you know, since we will be a 40% owner of this JV, there's 2 ways we get a benefit. One, we're able to access lower-cost wafers. So our -- that will flow through our COGS on the P&L, and that is what gives you the 200 basis point gross margin expansion. But below the EBIT line, we have an entry called equity accounted investees. This is where we would recognize our proportionate share of losses as well as profits.

Now the losses occur because you're building a new factory. Now when we originally announced this JV, we thought that those losses would amount to about $200 million in aggregate between '24 and '27. In '25, the losses were only $4 million. We think this year, there'll be about $20 million total. And so when we look out into '27, we actually think the losses will only amount to about $100 million, so about $75 million below what we originally thought. So you put that all together, instead of $200 million of start-up losses, we think it's about $125 million in aggregate over the 3-year period.

And does the remainder of that get pushed out? Or are there efficiencies that you've experienced and now the costs are lower than expected or...

No, to be upfront, Matt, we were probably too conservative when we gave the $200 million, right? It was our best estimate at that time. That was even before shovel was in the ground, right? We looked at other projects, consulted with other folks in our operational team. And we thought, all right, $200 million is a good placeholder. But now here, we're moving through it and it's just moving along better than we thought.

Got you. And then maybe just one more on that, that 200 basis points benefit from when VSMC ramps, how do we think about timing there? How quickly can we get up to that level of benefit?

Well, the Vanguard team wants to get the factory online very quickly because while we own 40% of it, the other 60% is a commercial foundry for mixed signal. And there's a lot of demand for that, especially with TSMC's messaging. They don't want to do trailing edge that much anymore.

Our current plan of record is that factory will be up and online in '28 and will be fully loaded in '28. And so over the course of '28, it's how you'll get the 200 basis point benefit.

So hopefully exiting that year.

Yes. So if you think -- if you kind of put it all together, if we continue to execute to our long-term revenue growth, right, between now and '27, we should hit roughly $15 billion, plus or minus, in '27. Given our rule of thumb of $1 billion, 100 basis points, that means you're going to be at about 60% gross margin exiting -- or in '27. Once the fab in Singapore is up and fully running, you'd get another 200 basis points on top of that.

Perfect. On the OpEx side, you guys have been very clear about your focus managing the business intensity of 23% through cycle. But as revenue growth theoretically outpaces that target model over the next couple of years and intensity is already sitting at that target, how should we be thinking about midterm OpEx growth and potential leverage from that dynamic?

Yes. So the model doesn't change, Matt. So the model still is -- we think 16% is the right amount to invest. 7% on SG&A is correct. You'll get a little bit of leverage on G&A. And yes, I understand the question that, okay, if we're growing above our target rates, shouldn't we get lower intensity of R&D dollars. Possibly, it might be because we won't be able to hire as many people. But the model has not changed, 16% and 7%.

Okay. I was going to say, basically, can OpEx even keep up.

Well, that's really what it is, right? I mean, if we really can drive above trend line growth, can we hire enough people at a 16% hiring rate? I don't know.

All right. Perfect. So China, historically, I believe NXP's exposure here, oftentimes misunderstood. And hopefully, that dynamic has remedied a bit by accounting for the region not changing to a headquarter basis. I think at '25, 17% of revenue's from China, slightly below China's contribution to GDP. So it kind of makes sense there.

But thinking big picture, as China works to minimize U.S. exposure and source domestically as much as possible, how do you view your positioning in the region as a Netherlands-based company? How defensible is your portfolio? And are revenues here something that should grow in line with the company over time or perhaps even decline as China looks to source more and more domestically?

So from our perspective, China is a strategic market for us, very important for us in multiple end markets, automotive, industrial and other areas. So we are going to stay engaged. In terms of the competitive dynamics in China, the reality is we continue to compete with our Western peers in China. Kind of paraphrase one of the large electronic -- electric car companies in China, they say to us, "Hey, if you can innovate at our rate and stay on our design cycles with us and continue to bring us value, you will always have a place here at our company. You'll always win awards. If you fall behind or you don't innovate like we think you should, we'll choose another vendor." But we don't really see today local players doing the same type of products that we do.

Do you think there's an advantage to being the Netherlands-based in this conversation versus the U.S. peers? Or does that not really factor in?

It's not a hall pass. I mean it's nice, but at the end of the day, in the Chinese market, it is very much an innovation game. If you bring innovative products and you can keep up with this kind of development cycles that the Chinese customers are running at, that's what matters, not that you're a -- hold a Dutch passport.

Perfect. Last quarter, team reiterated long-term model remains intact, which suggests revenues, by my calculation, roughly [ $15.5 billion ] in '27 when excluding the MEMS business impact. So can you maybe provide an update on how you see the individual end markets tracking versus the prior growth ranges? And has anything structurally changed for NXP since initiating this target back in 2024, either operating custom partnerships or secular growth opportunities?

No, nothing has changed in terms of our focus. In our businesses, especially in automotive and industrial, which is over 80% of the revenue, these are very long design-to-revenue cycles. And as more and more software is -- these design cycles are software dependent, those -- that design-to-revenue cycle stretches and becomes longer and longer in nature.

There's no change to our growth rates. Automotive, we think will grow 8% to 12% on a 3-year CAGR, Industrial & IoT at 8% to 12%, mobile at 0% to 4%, and we think our comm infra business kind of stays flattish. Depending on what corner of that kind of ranges drives the total in the 6% to 10% rate, Matt. But there's nothing really new to update from that perspective.

Perfect. So looks like a minute left. It's been a busy conference season for you. Across all your conversations, anything you think the Street is underappreciating from a portfolio quality standpoint or just the overall NXP that you'd kind of highlight?

Well, I mean, we have kind of a simple thesis that we offer, and that is we believe we can grow in the high single digits over a number of years. We think we can drive our gross margins into that north of 60% range over the next number of years. We'll throw off very robust free cash flow, which will return to our owners, and we think that results in our EPS doubling between 2024 and 2030.

Perfect. Perfect wrap-up. Thank you, Jeff. I really appreciate it.

Thanks, Matt.

So I'm Joe Moore, Morgan Stanley semiconductor team. I'm very happy to have with us today the CEO of NXP, Rafael Sotomayor and CFO, Bill Betz. Thank you, guys. So maybe just talk generally, we've had the CEO transition. How you're thinking about the business any differently than the way you thought about it in the past, your priorities for the next year, start with that.

No, I think that we get very excited about the current trajectory that we have of bringing intelligent systems to the edge. I think it's -- it gets even -- now is even the things that are happening in the industry, it gives us more conviction that we're on the right path and just accelerating what we have already on the pipe.

Yes, yes. Okay. You had a pretty strong Q4 result, pretty good Q1 outlook. You talked about things being better than expected 90 days earlier. Can you just talk generally about the industry environment that you're seeing now?

No, indeed, I think Q1, the outlook that we gave in Q1 is -- the performance of Q1 is definitely more robust than we thought about 90 days ago. And that's kind of driven by visibility, right? The current backlog that we have in direct and the channel strengthens. And if you look at the recovery that we gave from a Q1 perspective, it was broad-based. All segments are improving year-on-year. And so that's quite healthy for us.

Now if you look at under the hood, I guess there are 3 main drivers you would think of in auto, you can see that the normalization of inventory is healthy, is good. So now we're starting to ship to end demand and now the story of content growth, which is a real story in auto is starting to kind of drive top line growth. Industrial, you see broad-based recovery, and that is truly broad-based. And what we see in industrial is a bit more of a, I would say, kind of a flight to safety -- flight to quality, I would say, in industrial.

You can see the leadership that we have in processing is starting to take -- kind of take share of some of the recovery demand that we have in the segment. And the last one is company-specific product -- project ramps. We have NXP-specific ramps in auto and industrial and mobile, and that we're executing to that. So backlog has strengthened and some of the company-specific drivers starting to kind of really perform.

Yes. That makes sense. You sort of talked about not seeing or anticipating any kind of restocking in customer inventories. And I see the same thing, but I'm sort of surprised by it. You've had this kind of next period situation, which had people wind down fairly quickly, kind of resolved pretty quickly, too, but like it sort of showed how little inventory there is. There's like angst on DDR4 memory going into cars. Don't those kinds of supply situations trigger the feeling like, hey, we probably need a little bit more inventory to deal with all of this.

It may and it should, but we're operating on the assumptions that the current demand environment is the new normal, right? So just to be clear, we have no broad-based restocking in any of our outlooks. And by the way, we don't depend on it either, okay? So it's the demand environment, I mean we -- it's also important to also acknowledge that the auto supply chain is kind of difficult to really kind of analyze, it's complex, and it varies by Tier 1, by OEMs.

But we are -- at the aggregate level, we are operating, I think we consider deemed the inventory levels to be below our manufacturing cycle time. And so that kind of makes it very tight and potentially sensitive to disruption in demand. But right now -- I mean, this is how companies are managing their working capital. And the good thing is that we're now shipping to end demand. And so that gives us transparency. It gives predictability. But yes, we don't see broad-based recovery.

We will see it if it happens. And if it happens, we will see it as a consequence of improving fundamentals. But the way we see it, we will see it in our orders direct. We will see it in our channel backlog. We will see it on sell-through in the channel. We will see it in spike in short orders. But regardless, we kind of remain disciplined. We basically plan for what we see. And if the signal says something else, we will adjust accordingly.

Great. So within autos, you're shipping to end demand and you're starting to see content increases matter. Can you talk generally about the state of that market? And I guess you talked about the complexity. It seems like regionally, there are a lot of differences. The Chinese market is sort of off sync with other parts of the world timing-wise. Can you just talk about the general enthusiasm that you have for automotive as an end market?

Well, let's start with the fact that 2025 was a transition year, right? It was clouded by inventory digestion, primarily coming from Western Tier 1s. And now with that inventory digestion kind of behind us, you can now see that the true story in auto, which is content growth driven by this transition to software-defined vehicles is actually emerging.

And this is actually our play. Our play is on that transition to new architectures to higher compute to digitization of the vehicle. And I think this is universal. It's happening in China. It's happening here in the U.S. It's happening in Europe. And this is kind of a better way to actually make a car.

And we're all in the core of the NXP strategy is around software-defined vehicle and the processing unit that goes around the different type of architectures. And that's what is making the transition of NXP to a component player to a strategic kind of a strategic vendor for the OEMs since this is kind of a big investment for them in terms of software, in terms of architectures.

So you grew in those accelerated growth drivers, I think, 10% last year. Can you talk about software-defined vehicles specifically and sort of how does that get provisioned? Where are you in kind of the S-curve of adoption with software-defined vehicles?

Great question. So just to get into a little bit on the growth drivers last year, it was essentially flat, maybe slightly declined, but essentially flat year-on-year for auto for NXP. And the growth drivers in the year grew 10%, which is slightly below our model, but they grew in a very tough environment in an environment that was all about kind of inventory digestion.

So clearly, kind of basically points to not only the strength of the trend towards software-defined vehicles but also points to the strength of our portfolio target to software-defined vehicles. We're nascent. We're basically in the beginnings of transition to software-defined vehicles and platforms as all OEMs are in different stages in this journey.

The way you should think about our strategy from an NXP perspective is software-defined vehicle is the core. Think about a hub and the rest are somewhat attached to the platform, think about like the spokes. The stronger the software-defined vehicle platform is, the stronger your attach story is going to be from a system perspective. And that's the way we approach it.

We know there's not a one-size-fits-all for software-defined vehicles. It goes from zone all the way to central compute. But our road map and our technology investment is geared towards higher-performance compute, where all these compute devices are going to basically incorporate what it used to be all this kind of a myriad of ECUs around the nodes.

They're going to basically integrate them through high-performance compute and heterogeneous compute. And you need a particular flavor if you're going zonal, you need a particular flavor if you're in central compute. And we made our investments where the industry is going to go towards these high-performance compute platforms.

And where do you see the competition coming from? Is it sort of traditional microcontroller competitors moving in that direction? Is it people doing infotainment sort of centralized CPUs that are trying to incorporate some of those software-defined vehicles into their software like Qualcomm is trying to do? Just how do you see that competitive dynamic? I know your position is fairly unique.

The way we look at automotive from a vehicle architecture perspective, think about it -- and I'm just going to be a bit kind of a primitive in the way I mentioned it just to kind of basically simplify the concept. But think about 3 domains. Think about the infotainment domain, your cockpit. Think about ADAS, which is the big brain that is making decisions, how to -- basically make decisions how the car drives.

And then you think about the vehicle core function of the car, right, the vehicle core functions. These are real-time, low latency, high security, high functional safety, high redundancy. The 3 of them, you could make an argument that they're quite distinct from one another, okay? Today, the core function of the vehicle is very specific, and it requires a certain domain expertise and different certain skill sets.

And this is where we see today as the legacy players challenge that we have in this market is that this particular function requires higher performance compute, more heterogeneous compute, more cores, more advanced processing nodes. And so I think this is where the advantage of NXP is that we invested way ahead of the competition in 5 nanometers.

We're the only company right now with an automotive-grade processor in 5-nanometer. So it's not only one. We have several ones now. And so I think this is where the market is going. And I think we saw that about 6, 7 years ago to actually invest ahead and just be ready for the future demand of the products.

And maybe, Joe, maybe I'll remind everyone, this is our largest accelerated growth driver. In 2021, it was about $500 million, in 2024, it surpassed $1 billion, and we expect it to double in 2027 to $2 billion. The traction we see, as mentioned before, the first half of 2025, it grew in the high single digits -- I'm sorry, in the low -- high single digits, but the second half accelerated to the high double digits. And so that came across very good. We see that trend continuing. That's well on track to grow at those growth rates that we shared during Analyst Day for SDVs.

Very helpful. Can you talk about maybe competing priorities within the automakers between EV power? And I know you're also focused on that as a growth driver as well, doing battery management, but also ADAS and things like that. It seems like those functions have kind of gone back and forth in importance. Are we now prioritizing both? And are people taking -- I think feel like to really do software-defined vehicles, you sort of have to top down, redesign the whole ecosystem of the car. Are those investments happening at your customers now?

For sure. But I think you touched several things. You talk about EVs, and you talk about SDVs. I think the megatrend is SDVs. But just kind of put it, it's just a new way of thinking about the architecture of the vehicle, the way you remove features from hardware, you add them in software, the way you think about a life cycle management of a vehicle, over-the-air updates, how do the OEMs stay connected with the consumer post the initial sale, the whole concept of the car driving the worst the first day you drive it because a year later, it learns how you drive and it just becomes better, this whole paradigm has shifted.

So SDV is the main driver, I would say. Now what -- how you choose like the powertrain that you choose is a different aspect of it, whether you choose a hybrid or EV or an ICE. So we continue to see a massive trend of EVs, especially outside the United States and China. And EVs continues to be kind of the main category in some of these high-growing markets in automotive. And we -- again, we play in SDV and in the areas where EV is being taken, we play as part of our kind of basically our BMS portfolio that we have.

Great. And then maybe talk about the role of China a little bit. We're seeing a lot of the innovation in the automotive market is happening in China, incorporating these types of features into lower price point cars and things like that. How is NXP positioned to take advantage of that?

Well, very much -- and by the way, there was a new -- kind of a new regulation that it just kind of passed out in China where the Chinese government are increasing the reliability and the safety standards what it takes to kind of go into market in China. And I'll tell you that, that is a nice tailwind that is going to basically cascade from the high end to the low end of the supply chain.

And obviously, the intent that China did there was, listen, there are 3, obviously, multifaceted reasons why they want to do that. They want to basically, I would say, curb the destructive pricing competition they have, what they call involution. They want to, for sure, increase the safety of the vehicles. They want to avoid some of the headlines that the kind of high-profile incidents that happened last year with respect to safety.

And the last one they want to do is probably align more to the global standards in safety and security benchmarks to basically enable the Chinese OEM to continue to expand overseas. That is a really nice tailwind for NXP because it's no longer about the product itself, right? It's about the product; it's about the level of service that you provide to the customers in terms of technical support over the life cycle of the product. It's about the safety; it's about the security.

And so when -- what's happening in China right now, I think, is customers are assessing or reassessing the semiconductor basic partners in order to really incorporate the kind of these aspects associated with what is it going to take for them to be competitive in China given the new regulations. So I think that is a tailwind for us. In China, it's very clear. The playbook for us doesn't change. We compete by being better and being faster. I mean the level of innovation and competitiveness in the Chinese market is massive.

Yes. And the state of Chinese competition within semiconductors to serve those markets?

Well, for sure. I mean, I think you can argue, arguably, China auto market is probably the most competitive market in the world, and we treat it as that. And for sure, right, it is the customers demand the highest level of innovation, the fastest time to market. And China has an indigenous semiconductor industry. They've been successful in high-performance compute for ADAS.

They've been successful in high-performance compute for infotainment. They've been successful in some areas of analog and discrete power. But the area that we compete, which is a core function of the vehicle, I mean, this is an area we still compete with the Western peers. And the reason for that is the products there are not just the spec sheet, right?

This is about decades, multi-decades of IP development products that they are automotive grade in terms of reliability, in terms of safety, functionality, longevity. And so this is not just about products, this is about IP and know-how that has been developed over decades. But we still remain very kind of alert to the competition. Again, playbook is you need to be better, you need to be faster in China to be able to compete.

And manufacturing in China for China helps you guys as well?

Well, I think it's mandatory. I think it's just part for the course. I mean it's just kind of it gives us the ability to compete. We have invested heavily in making sure that we remove objections in terms of supply chain. We invested in -- we have several fabs with SMIC, TSMC, and I believe the third one is HS Grace.

We have basically a packaging that is NXP-owned in Tianjin close to Beijing. And so we have now a really nice robust supply chain for China for China. And we have also a robust chain for China for the rest of the world as well.

Okay. Great. Other elements of automotive, you've talked about electrification, you've talked about radar as key growth drivers. Can you give us an update on those?

Yes. So we said SDV is the core. And I think you mentioned that we grew in 2025 with SDV in the, I would say, the low teens. Connectivity was a standout in 2025. I think grew in the high 20s above our model. And we have very strong franchises in connectivity as well. And also the car is becoming just a big networking engine, right?

When you have so much digitization of the functions, you need high-performance throughput around the car. So connectivity is a standout. It's doing quite well. Radar grew on the low single digits in 2025. I mean that was one of the franchises that got caught up in inventory digestion. But I think now that as normalization happens, we see that going back to a long-term model. BMS was below our model.

I think it was also another franchise that got caught into program -- basically inventory digestion, but we also saw a delay in some program ramps that we anticipated. We see 2025 a bit of a deviation from what we wanted to do, but I think we expect this to go back to -- the trend around electrification is very strong and it's going to get back to trend. And overall, I think we expect the investments that we're doing on this transformation of the vehicle are starting to scale right now.

Yes. Okay. So you're seeing return to the automotive market shipping to production, you've got good traction with the good -- accelerated growth drivers and kind of seeing all of them essentially contribute this year.

The way I would frame it is inventory digestion removes the headwind and now the secular drivers are the growth engine for the rest of auto. Okay.

Yes. Just maybe to add, just to give you a feel of the accelerated growth drivers in the auto bucket, in 2024, it represented 39% of the auto composition of the revenue. In 2025, it was 43%. And we feel very comfortable and confident that we'll get this to above 50% by 2027 based on the traction we're seeing.

Now what dragged us down the first 2 to 3 quarters was the inventory digestion related to our core business. Our core business inside auto finally turned slightly positive in Q4. And what we expect in Q1, that's back to that low single digit for the core business. And therefore, you also see the total company doing quite well above model at plus 11% in our guide for Q1 as a total company.

But Joe, I think this point that you just made in terms of the composition of the revenue in auto being growth drivers around 50%, basically, that's where we're moving to is very meaningful because that kind of gives you a sense of why we feel so strongly that the auto revenues now become structural. The shift towards kind of the secular trends that make the new cars is tying our products and our revenue to that secular trend is what gives the conviction that auto is becoming more and more and more structural for NXP.

Maybe we shift to industrial. If you could talk about industrial, IoT strong growth year-over-year. Can you talk about where we are there cyclically and then versus the growth drivers in that space?

Yes. I would -- yes, it's a great question, industrial because I think I would -- because 2025 was a tough year for industrial. And the way I would frame industrial is both a broad-based recovery, but also a broad-based structural opportunity, a structural opportunity for us. So we are seeing -- and you can see in Q1 guide was a strong guide, but we're seeing broad-based.

We are seeing products emerging in our core industrial and industrial and IoT. We're seeing products in factory automation, energy storage, building automation. It's quite healthy in terms of broad-based. No single vertical is driving the business right now, and that's what it gives us conviction. There are some new areas like energy storage, which is actually coming strong.

But I think the way you should think about industrial, it seems like every single segment is getting a transformation. Every real segment is getting reinvention. Now what makes NXP different than other industrial companies is that we are a processor-first company. We lead with processors. And so we kind of really go to this market with the strength of our processing portfolio.

And what we're seeing right now based on the engagement that we have our customers is not only new areas they're emerging, but it just seems like there are a lot of use cases that are getting reinvented, whether it's managing kind of deterministic networks for factory automation, whether it's doing new types of controls for building management or secure access or in health care, patient monitoring, different types of instrumentation.

These are requiring kind of new products, new type of silicon solutions. And so we see this -- we also see the complexity that these systems are taking. So we're taking an approach that says, listen, product is no longer enough. We need to remove complexity for our customers. So we incorporate connectivity. We're going to incorporate security, the processing, the PMUs, the analog piece.

And so we're taking a system approach, very similar to what we do in the auto, we're applying it into industrial. And so we kind of go out there and said, okay, this is how we're going to remove complexity to our customers. So industrial is -- it has this transformation happening. And the true secular trend that is happening in industrial is AI at the edge, physical AI, edge AI at the edge.

And it's at the center of every conversation that we have with our industrial customers. You can't avoid walking into a customer and not having a conversation on how to deploy AI to either augment their current offerings or create new ones. We see it. Our customers are developing platforms with room in terms of headroom, in terms of processing.

So they don't know what they want to do, but they know that we need to evolve that platform to basically over the air, update these features, make them secure by design, make sure they augment it with other functionality. And this transformation is very visible. They're going from very similar to what happened in automotive to hardware-defined features to more software-defined systems. And NXP is kind of a prime position to help them in that journey.

I guess in autos, it's very clear why that needs to be at the edge because you can't be going to the cloud for stuff when you're driving a car in real time. Is that same thing true in industrial? Why do you need -- why can't I just call in the cloud for that information? Why do I need the actual AI capabilities at the edge?

Well, it depends, right? It depends. I think it's going to be a hybrid model. There are -- I think even the car is still connected because you still need to update the models and actually kind of go back to a client for training. But anything that is low latency, anything that is high level of security, anything that is going to tamper with the actual functionality of the system, you want it to have control.

You want it to be at the edge. But I think that's what is just the one thing that is quite wonderful about industrial right now is companies are thinking about what the software-defined systems are going to look like. And these are the type of conversations they're having with us because of the capabilities that we have, not only on processing and on security, on deterministic networking, but the new capabilities that we have with AI.

And I tell you the level of interest that they have on our AI platforms, our customers are massive. And this is what gives us the conviction. I think in many ways, we feel internally at NXP that industrial is a sleeping giant for -- in our portfolio for NXP because there's massive interest of AI at the edge.

And maybe, Joe, let me hopefully hear the excitement and the investments we're making in physical AI. Let me for our owners out there and provide some numbers. Remember, our industrial, IoT end market, 60% is industrial, 40% is IoT. In Q4, this was up 24% year over year, and we just guided Q1 up in the low 20s.

The accelerated growth drivers, there's a bucket of them focused on processing, analog and security. In 2021, this bucket was about $500 million, 2024 was $600 million, and really, the growth has just taken off. This grew above model near 30% in 2025. And our ambition is to be above $1.2 billion in 2027.

During that, the core even declined by about 10% in 2025. So you'll see the strength of our industrial, IoT comes across. And a composition of that end market, think about it in 2024, the growth drivers were 28%. In 2025, they were 36%, and we're well on our path to have the growth drivers be meaningful to plus 40% by 2027.

And just to put, even add another layer kind of data that gives you the strength of our of kind of the ramp of AI in our portfolio. In 2025, the revenue that has some AI component in industrial was only 3%. And we expect this to more than double in 2026, and this doubling also in a year where industrial is going to grow. And so you can see from an actually absolute value perspective, AI is becoming more and more of the portfolio of industrial.

And this doesn't even include the Gen AI capabilities that we acquired through Kinara through the neural processing unit that they have that is discrete. It includes nothing of that. This is actually organic growth over our previous AI solution. So again, this is actually a really, really strong tailwind that NXP and it is going to differentiate NXP at industrial.

Yes. I mean I assume you have a lot of long-lived sockets. So when you have that kind of approach, it means a lot of your new activities around those areas.

Yes. Well, I think AI is actually kind of becoming a transformative move. You must have it. And I think the transformation that's happening is challenging incumbencies, right? You can't assume that incumbency the same way you assume incumbency a while back in industrial. AI is going to transform that.

Now the good thing about what we are positioned in NXP is incumbency is going to get strengthened by the addition of AI, but it's also an opportunity for us to kind of -- to actually challenge other incumbents in the market with maybe less optimal or less innovative solutions with respect to AI.

Great. So maybe just to round out the product portfolio. Talk about your communications exposure, sort of transitioning from RF to secure cards, just how to think about that.

Well, we've been transparent, right, on the structural change in the revenue of comms and infra. And just to remind you, in 2024 in Analyst Day, we said this segment was going to be essentially flat throughout 2027 with secure cards really kind of mitigating some of the decline on the other 2 segments with digital networking and RF power. So in 2025, secure cards was north of, I would say, north of 50% of the revenue.

And the other 2, digital networking and just took the other 2 equally, almost equally. What I want to highlight what is -- and one thing that's probably being masked is this headline of flat over a period of 3 years. I think it's masking a structural shift towards higher quality, more predictable revenue because it goes away from lumpy businesses, our power, digital network that we have -- we stopped investing towards franchises that they are more -- basically, we have more visibility to predict.

It's got higher -- kind of higher growth areas. Just to remind you, in secure cards, we have very, very strong franchises like MIFARE QR code, which is our RFID product that's seeing really, really good growth in the market. So that's what I'll leave you is there is a structural change. It comes in infra from revenue from -- away from digital networks and our power towards secure cards, and that gives us more visibility and more predictability.

Okay. Helpful. And then finally, on mobile, you're sort of become more of a niche premium supplier to that market. What are you seeing there? Any turbulence around memory, things like that?

Well, I can't necessarily comment -- we don't purchase memory, so I'm not going to be able to actually have provide -- I mean, memory is a conversation with every customer, okay, no matter what flavor of memory they use. But mobile, we focus on a franchise that has deep technical moats that relies on ecosystem. And this is a mobile franchise. We also do some analog-specific products for some of our customers.

Last year, we saw a growth in mobile business close to 6%, is a bit shy of 6%. And it was driven by the strength of our mobile portfolio in the mobile wallet. It was strength by content gains that we have in mobile. The way we see this basically uplift is in terms of longevity, I think this is -- this growth is durable.

The franchise that we have in the mobile wallet is strong as deep moats technically in use cases, ecosystem. And the content gains that we have tend to be kind of multiyear design wins. And so we feel strongly that right now, the mobile is in a good trajectory.

Great. So I have one more question, and then I'll turn it to the audience. Maybe if you could just remind us, you talked about a gross margin model of 57% to 63%. Can you talk about the puts and takes there as you approach.

Yes, sure. In the short term, typically, you have utilization, you have mix changes. But more exciting, we use a rule of thumb for every $1 billion, think about 100 basis points on top of our model. Everything is projecting and forecasting to what we expect, and things are just grinding higher as revenue grows at this point in time.

The real uplift that will occur probably a step function more material for the company is probably in 2028, 2029 with a 200 basis points increase related to our joint venture with VSMC out of Singapore, where basically we'll just get the economies of scale from going from 200 to 300-millimeter as well as more of a cost-plus type of model so that we can compete with other peers.

See if we have questions from the audience.

Rafael, you mentioned inside the drivers for industrial that you mentioned the energy storage systems. I just wonder if you could size that out for us? And is there any growth outside of data centers for ESS right now?

Well, this is definitely an emerging market for us that we target as a complete total system solution. We don't sell necessarily our BMS product. We actually tend to sell the entire system solution because it needs to be certified with both security and functional safety. So we ended up kind of helping our customers basically go to market with these systems. This is a nascent market.

And it actually didn't start with data centers. It started with a lot of systems that were used to actually load balance the grid, and this is where we saw it. Also for some systems that actually create some, I would say, some basically resilience for buildings.

We are starting to see now more and more that data centers are going to be driving the need to be able to kind of really load balance the center and the spikes in terms of both power that they need to have is going to be something that is going to be a tailwind for us. I can't tell you right now, the data in terms of how big the market is, it's still evolving.

We're going to be looking at. But this is an area we believe is actually an area that is going to be an area of focus for us, given the system solution and the kind of the portfolio that we have is quite good for this market. And it's not just on the energy storage system, but it's all the way to charging and the management of bidirectional charging and bidirectional charging from the buildings to the grid. And this is an area that we -- it's kind of our portfolio is very well suited for it.

Any questions? If not, we'll wrap it up there. Rafael, Bill, thank you so much.

Thank you.

Thank you, Joe.

Ladies and gentlemen, thank you for standing by. Welcome to NXP Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn your conference over to Jeff Palmer, Senior Vice President, Investor Relations. Please go ahead.

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 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 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 to the non-GAAP financial measures to the most directly comparable GAAP measures and 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 2 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 that gets behind us, the second half performance aligns with our group, our 8 to 12 long-term growth outlook, reflecting the underlying strength of our auto portfolio.

A few examples which underpin our optimism includes our efforts in software-defined vehicles what we have seen strong global adoption of NXP products. This includes the signing rates for our S32 and family of 5-nanometer vehicle compute processors, the newly introduced S 32K family of 50-nanometer sona 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, the early conversations with customers from the recently acquired technologies from TTTech Auto and Aviva links are accelerating interest in NXP's SDB portfolio.

The potential revenue contribution from these engagements should materialize beyond 2027. This multiyear SDE platforms deepen customer commitment and support 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 and IoT. Supporting our ambition to lead an intelligent systems at the edge, we continue to see strong customer engagements in the emerging markets or physical AI. By combining the industry-leading IMX family of industrial application processors with the recently acquired Kinar 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 system in industrial markets logistic 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 validates 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 center on secured 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 eco 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 and auto Tier 1s, broadening order strength across both core industrial and consumer and IoT and program ramps in the premium mobile market, consistent with seasonal patterns. Our guide does not assume broad-based restockings.

At the midpoint, we expect the following trends in our business during Q1. We Automotive is expected to be up in the mid-single digits 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 1 month of revenue contribution from the MEMS sensor business. Industrial and IoT is 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-30% range year-on-year and down in the 20% range on a sequential basis. And finally, communication infrastructure and other is expected to be up in the mid-teens 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 when 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 the 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'll 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 and 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 is driven by our 2 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 plants. We ended Q4 with a $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 for 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. And 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 was 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 BSMC and ESMC. This will lead to a 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 payments to BSMC and a $44 million equity payment at ESMC. Taken together, we are about 50% through the investment cycle for both BSMC and ESMC having invested about $1.7 billion of the $3.4 billion claimed 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 BSMC 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 in an approximately $90 million restructuring charge which is reflected in our fourth quarter GAAP results. We will direct our focus -- 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, ST Microelectronics 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 onetime 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. And 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 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.

[Operator Instructions] The first question will come from Tom O'Malley with Barclays.

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 account strategy has shifted from what before we consider time 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. And the reason we're doing that is the confidence 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, and 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 really -- some 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. And you remember, C&I includes 3 distinct business secure cars, digital networks and power -- and they -- all of these 3 businesses can move differently quarter-to-quarter. And C&I, I think, right now is benefiting from the fact that, one, there's [indiscernible] in the digital networking business, but there's growth coming from the secured card and that strength really will benefit C&I throughout 2026.

And the next question will come from Matthew Prisco with Cantor.

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.

Asking about kind of the trends that we track internally. Is that what you're asking? We couldn't figure your question. We apologize. .

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

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

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, 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. And so we feel very confident about being in a long-term business model for 2026. .

And maybe I'll just add 1 thing, Bill. If you kind of step back that we look at kind of the trends in the second half of '25, they're 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, we 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. So we -- I think there are a few questions there in auto. If you look at what -- if you look at auto -- and the reason why we remain quite optimistic in auto in Q4, our business returned to growth year-on-year. And the guide that we provided continues year-on-year the Q1 guide gives you growth as well year-on-year. And so -- and what we see is that thesis remains unchanged with respect to content gains. You asked me about pricing. Second question was on pricing, the PAs for the most part are done, right, with -- in the pricing that is already reflected in our Q1 guide. And we are modeling low single-digit price declines, and that's what we see not only on auto but across the business. .

And our next question will come from Ross Seymore with Deutsche Bank.

Just sticking on the auto side of things, it's been pretty much flat for, call 2, 3 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. .

I think what I said on the prepared remarks, right, auto in our business in general in 2025 was a story of 2 halves. In the first half was all about inventory digestion and it will mask the true dynamics of our business. For the full year, the auto accelerated drivers we're slightly below model. Remember, a model, we said that we were going to grow 8% to 12%, but they were still growing in a year where auto was flat. And they were about 10% and it was all led by our SPV efforts, our radar and our productivity. What you see right now in auto is our auto is shifting -- our auto exposure shifting to more and more structural and less cyclical, and it's driven by tying our road map towards circular trends and really transforming the architectures of ours. So we feel quite optimistic. The answer to the question on the core drivers, the whole story that thesis is completely intact, and we feel stronger than ever that our road map is really addressing the needs of the market.

And I guess you had the MEMS divestiture and now the exit of the RF side of things. Can you aggregate how much of a headwind those exits are going to be for this year? And I obviously know where the RF sits, but is the MEMS headwind in the auto side? Just want to kind of make sure to level set on that.

Sure. The way to think about -- this is Bill, Ross. The way to think about the sensors divestment, it runs around $300 million per year and Rafael shared, we recognized $25 million in the first quarter. And I think you guys do the math of the impact that has from a year-over-year compare in our auto end market. Related to the RF business, the RF business is probably going to track similar to what the ended. If you recall, our digital networking business, when we walked away from it, I don't know, 8 years ago, it lives quite long. And so what we're actually doing is stop investing next-generation products. So that will probably stay with us for at least the next 2 years is what we're projecting at the current rate.

And I think, Jeff, if we had to break out 2025 as a percentage of comms infra pieces, I don't have that at my fingertips, so we all share that. But maybe you can share how the 3 businesses fared in 2025 to get the size of it.

Sure. Well, so the secure cards business was just over 50% and both the digital network and RF power businesses were each of that 25%. .

And our next question will come from Joe Moore with Morgan Stanley.

Great. In the auto business, there's been a number of sort of the supply disruptions we had in 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. Let me take that, Joe. So the Nexperia is the next area is not a conversation. It's not been a nonissue for NXP. The discussions on memory, there's always the chatter on memory is not just in auto, it's across our end markets. We have not seen memory impact the orders of our customers, but clearly, it's a conversation that our customers discuss with us. It's an area of concern for the second half of the year, but nothing has been reflected in our orders.

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 in particular to comment on. I think the auto business, we believe it's going to be within model for 2026 for us. It's strong, the accelerated growth drivers are executing. So we expect our thesis to continue towards 2026.

And our next question will come from Joshua Buchalter with TD Cowen.

I apologize for a bit of a nitpicky symantec one, but it's 1 I've gotten a couple of times. So in your prepared remarks, you said for 2026, you expect to operate within your target model this year. I think you're -- given the -- where we ended 2025 to hit your 6% to 10% long-term CAGR, '26 and 2027 would have to be higher than that. Are you guys suggesting that this year is within the 6% to 10%? Or are you saying that you should track towards the 6% to 10% over a 3-year period in '26 and '27.

I think, Josh, what we're saying is the long-term model is intact. I think it's not to be nitpicky back, but I think we now do [indiscernible] and you can probably do the chain all on that, but we feel very strongly that after the inventory digestion in the first half of '25, the interest 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 DI bank builds that boosted utilization rates at the end of the year? And that was done? How should we think about utilization rates from here?

Yes. Let me take that one. So I would say gross margins are performing to our expectations into Q1, and 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. Again, I think for modeling purposes, the best way to think about our gross margins due to that rule of thumb, I've provided in the past for every $1 billion of revenue.

We're entitled approximately 100 basis points expansion gain to our gross margin on a full year basis. And of course, that's the plus or minus normal mix changes that we share on a quarterly basis. Now as shared in the past, we will continue to work on mixing up our portfolio through our new product introductions Also, we're 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. And in Q1, they will remain in the high 70s. Obviously, 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. And as you know, we always do the normal blocking tackling on improving our yields and test time reductions.

Now longer term, we're quite excited on our hybrid manufacturing strategy, especially when DSMC is fully loaded in 2028, it is on track. And beyond, we expect our gross margins to be listed by another 200 basis points at the company level. So I would say, in general, we are very committed to improving our gross margins over the long term. Related to inventory question. Again, our prebuilds were $7 million -- 7 days, sorry, at the end of 2025. As you all know, our consolidation efforts in our manufacturing footprint are underway. I would expect the prebuild by the end of 2026, be about 15 to 20 days related to that. But including those prebuilds, we also 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 what we plan to take internal inventory.

Our next question will come from Vivek Arya with Bank of America Securities.

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? 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've seen right now in industrial, right? And the growth, you saw the investors began recovering in Q3 and continue into Q4. I think Q4 was 20% year-on-year growth. The growth is fairly broad-based and it's not a single segment that is driving the growth. Just to give you an answer on the question specifically, we have about 60% of our business there is core industrial, 40% is in the consumer side. But the growth is broad-based. But we saw -- I mean, I would give you -- we have some notable traction on fuel sockets in health care, and smart glasses, we've seen strength in factory automation and energy storage. And so very, very strong design wins with a very differentiated product that we have in industrial and IoT and that strength opposing 2025 continues into 2026. And you see the Q1 guide was also growing year-on-year 20%. And we feel very good about 2026 for industrial and IoT.

All right. And for my follow-up, I would be remiss not to ask the seasonality question as we look at Q2 and Q3. And I ask that just because of all the kind of the exits and things that you're considering this year. So based on historical patterns and normalizing for all your business divestitures, what would you consider normal seasonal trends in Q2, Q3? And 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 a guide beyond Q1. But 1 of the things that you should take away, things have gotten better since 90 days ago. and Bill referred to the order patterns that we have visibility into Q1 improved as well, we have the conversations with our customers that we're having, it gives them optimism for the second half of the year. So we like the momentum. We like the strength that we closed in 2025. I mean Q4, the growth was broad-based. And we like the momentum we enter in 2026 because that momentum is also carrying also broad-based. And so -- and the way you should think about it, both in auto and industrial, the strength is increasingly structural, rather than purely cyclical. And we feel good about the trajectory we carry in here towards the second half of the year. .

And our next question is going to come from Joe Quatrochi with Wells Fargo. .

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

Yes. So the 3 acquisitions there that we discussed. On the auto side, TTTech auto has been really an injection of horsepower to accelerate our software defined vehicle story. One of the deliverables that we have that are very important for us and for some of our customers is the deliverable of sap-defined architecture will be literally a system around Sonos towards the end of the year. And so TTTech auto and the injection of the TTTech really accelerate our path into delivering a Sonos architecture and Sonos systems by the end of the year. They also come in with a middleware and now we're a different [indiscernible] and that engagement right now is 1 thing, we're taking -- I think the interest of our customers is quite high now when they move into SPVs.

On the industrial and IoT -- in my prepared remarks, we talked about the interest level that our customers are not showing for physical AI and the capabilities that we have in our NXP platform. And I just want to double down with that. the interest in the combination of the Kinara NPO and the IMX family of products that we have is really, really strong. And the level of the conversations right now that we have with our customers has changed significantly. The traction that we get has changed significantly. So we're starting right now in that engagement, I think that it's going to result in strong design wins in 2026.

And then as a follow-up, on the automotive side, is there any color you can share just geographically on the demand you're seeing in the fourth quarter and then kind of what's embedded in 1Q.

Yes. On the auto side, I mean so I think this is an important question, just to give you a perspective. And let's look at the data closely in auto, right? The inventory correction, what we said, is largely behind us. Q4, we returned year-on-year growth. Q4 auto finished within 1% of its prior peak in 2023. And we're guiding automotive to grow in Q1 year-over-year. and our guide in Q1 only includes 1 month of the sensor business. And so the sequentially, I think it would have been very close to mobile seasonality. So regionally, not a whole lot of differences. Usually, in Q1, you have a normal seasonality because now the way that China has in the market. But fundamentally, are pieces hasn't changed, it. The shift to SDs [indiscernible] these are multiyear platform transitions, and they're going to drive content growth. And this is what we, at NXP, are very strong portfolio.

And our next question will come from Chris Caso with Wolfe Research.

If I could follow up on auto again and specifically the areas of accelerated growth drivers. What you said last year is that those accelerated growth drivers were a bit below plan. And 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 you believe it was below plan last year? And I guess the question is because going forward, it doesn't sound like you're assuming that SAAR improved -- so what's driving the change that get those accelerated growth drivers back in contract?

So 2025, Chris, I mean, if you remember, first half of the year was a tough year with a lot of inventory digestion, that period put a pause in some of the accelerated growth drivers because, for instance, some of the business like radar got cut up into inventory digestion. electrification that caught up into inventory digestion. It slowed down the ramp of new models that basically address some of the -- slightly less growth, I would say, in the SEB piece. But we saw that second half accelerate. Once the inventory digestion, all the thesis became true, right? The accelerated growth drivers starting to grow. By the way [indiscernible] grew in 2025, just didn't grow at target because of the challenges that we have in the first half of the year.

And now that thesis continues to do with it, we see our accelerated providers now being within model or even better. And so we see that traction being in 2026 taking hold.

As a follow-up, if I could follow up on operating margin expectations and what you said for the year, returning to the long-term model, I assume that involve operating margins as well. I guess you've given some indication with regard to gross margins, but what does that mean for OpEx and operating leverage as you go forward through the year?

Yes, sure. As I mentioned in my prepared remarks related to OpEx, typically, as the expense as a percentage of revenue for the first half are typically higher than the second half, driven by our seasonal revenue profile. The timing effect of our U.S. benefits of the start of the new year. That's why you see our guide up in Q1. Q2, I'll remind you, we have our Q2 annual merits and promotions. And then we also have, at the moment, that onetime IP license impact in Q2 that we previously shared that occurs every year. So we're typically on the model in the first half, but then we expect to get below that 23% model in the second half, leading to a full year of about 23% or below.

Obviously, we always have leverage on the SG&A side of the house, but the investments that are required for SPVs and physical AI and where we want to take the company, we want to keep that at that 16% level, I would say, to make sure that we can capture that growth, that long-term growth that we're after. So for your modeling purposes, I gave you the gross margin. We gave you the revenue. Here's the OpEx. I think you can get to the answer.

And our next question will come from Gary Mobley with Loop Capital.

I know I'm going to make Jeff cringe here, but I did want to ask a follow-up question with respect to your statement on long-term operating model. We laid out in November 2024 that long-term operating model, the base off which you are guiding from was 2024, obviously. And so that would indicate $15.8 billion of revenue in fiscal year '27 based on that 6% to 10% revenue growth rate minus sales to MEMS center business and whatever other adjustments since then. So for the fiscal year '26 commentary about being on target, is that with respect to 6% to 10% growth or that 2027 destination for revenue.

It's a model as we laid out at the Analyst Day. I think, Gary, we both agree with you on the endpoint where we want to get to. We look on what we have to do to get there. We're going to leave it to you in the analyst community to figure out how that march is. But we feel very good that after coming out of the first half or 25 inventory digestion, we can accelerate through the next 2 years. I think that's the best we can do.

I appreciate, what you gave there, Jeff. As a follow-up, I wanted to ask about the impact on the expense side from the sale of the MEMS sensor business. We know the revenue impact of $300 million. But what's the impact to gross margin and OpEx?

Yes. This is Bill. I mean, to think about with the sales about 100 people. On gross margin, as we said, I think, are shared in the past, it was lower corporate margins. So I mean not much, maybe 10, 20 basis points improvement related to that model. But it's -- those are the color I can give you on it.

And remember again, that we did go through some corporate restructuring along with this to make room for the new head count from the [indiscernible] TTTech and Kinara. So I still like to say we made room for the additional headcount.

Yes. And I also remind you, the other reason for divesting this business is we did see headwinds as we know the current acquired the buyer actually manufactures the front end. And so we saw this as a great opportunity to prevent headwinds to our gross margin in the future as well. .

And our next question will come from Jim Schneider with Goldman Sachs.

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.

Jim, it's Jeff again. 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.

Okay. Fair enough. And then maybe just on the capital allocation side of things at this point. I mean you've made a decent amount of investment in the fab relationships, et cetera. I mean, do you think that you're going to get into a place where you could or you see that we're way clear to sort of increasing the buyback component of that at some point this year?

Yes. I mean our capital allocation policy strategy has not changed 1 bit. We are very comfortable buying back the stock as long as we're below our net leverage ratio 2x. And I think in Q4, we were at 1.9x. So there's lots of opportunity with our investments in the long term of the business, along with buybacks. And I hope into the future, as we expand, we also increase our dividend as the company performs better.

So again, we are doing multiple things. We're very flexible, and we demonstrate that, and we're committed to returning 100% of our excess free cash flow back to our owners.

And our next question comes from Tore Svanberg with Stifel.

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

Yes, let me start the that one. That question why doing now. This new way of reporting really reflects how we manage the company internally. how we direct our resources, how we direct our sales organization. I mean think about the way we report today a major handset maker will receive products in Asia, in the U.S. But in reality, most of the decisions are being in 1 place and will be here in the U.S. And so -- and that gives you an example there that kind of gives you the ability to really think about how we internally were organizing our sales force and our marketing is to go after the sign wins and address customers.

So this is how we manage internally, and I think it's better to reflect our business that way.

Yes, that's very helpful. And as a follow-up for you, Bill, Bill, I think you mentioned you'll get your $3.4 billion capacity expansion investment in 2026. Just curious between BSMC and ESMC, what's the split going to be when the year is complete?

Yes. I would say majority of the investments ESMC is ahead of schedule or just purely timing, right? I think it's expected to start ramping in '27 and then being full load in 2028. And so majority of our investments will be out in 2026. Now maybe a little bit into Q1 2027. I don't know we'll see on the timing of that on the equity side, but I think the majority will be out in '26. ESMC since that ramp occurs later. Think about some payments going out this year, but then there's a still shrink of payments that go out from 27% to 29%, which is much smaller in the aggregate. But the majority of most of the payments, hopefully, we will be done at the end of 2026.

And our next question will come from Vijay Rakesh with Mizuho.

Bill, just a quick question on the auto side. Just wondering, as you look at the software-defined vehicles and you mentioned a structural pickup there in order -- how are you looking at that auto segment revenue growth versus LVP, like should it grow like high single digit above LVP or how should we look at it?

Vijay, it's Jeff. I think for next year, the way our [indiscernible] works is we assumed over a multiyear period that SAAR would grow the low single digits. The long-term math for auto was 9% to 12% -- 8% to 12%, excuse me. And so if you were to say, flattish start, you kind of back that out of that total rate and take you down. But we still see content per vehicle as the real accelerator of automotive growth. .

Got it and then...

Vijay, just maybe just to kind of give you the 1 piece that we have. We use S&P as our kind of viable form for SAR. And they're looking at '26 at just a little almost 93 million, 92.6 million cars in '26, which is kind of flattish year-on-year from '25, but when you kind of peel that back, you still see good acceleration of EVs and good market share gains of the Chinese OEMs. So you kind of use that with the CPV content. .

Got it. And then as you look at '25, I think you guys mentioned orders were $7 billion, $7.1 billion-ish. And I think you've put out a long term, I think 2027, [$9.5 billion]. I know there's been a lot of puts and takes with acquisitions and divestitures, but just wondering how you are looking at that $9.5 billion by '27 number .

Yes. The only change that we would make to the model is in '24 to be honest, you probably have to back out the $300 million in sale of sensors. Off that baseline in '24 and then apply the 8% to 12% growth rate off of that. .

And our next question will come from William Stein with Truist Securities.

First, I'd like to ask another 1 on automotive. A couple of other suppliers have discussed this EV incentive expiry in China as damaging their Q1 outlook somewhat. And I wonder if you're seeing that dynamic as well, and that's -- and your guidance is certainly net of any of those effects. But -- can you discuss whether that's influencing your outlook either in Q1 or for the rest of the year? And then I have a follow-up. .

No. We don't see -- we don't have the same perspective. As a matter fact, 1 of the changes well that we see in China, a couple of changes. You mentioned incentives which tells the incented towards more of a high end of the vehicles. The other change that China has made is that they increase certain regulations to improve the quality and resilience of the vehicles. And I think the both attempts is to reduce the evolution in the market. I think we see both of those initiatives to be good for us. the resilience or quality requirements are putting in place right now, I think, is really going to be a tailwind for us and design wins for 2026. So we see some of the changes actually good for us for NXP in our auto business growth.

Great. And as a follow-up, there's rapid growth area in semi as we all know, not just endpoint physical AI, but data center AI. And I think historically, you haven't talked about any exposure there, but my best guess is that you have something in that market. Can you discuss any ongoing development or any exposure to that market? .

Yes. Well, so today, our data center revenue sits within the Industrial segment. And our exposure is, indeed, you mentioned 2 processors to support the data center infrastructure. I think there will be things like power supplies, net cars, cooling systems. But we also have our high-performance products there for control functions and things that they need probably security like PQC. We don't break this revenue out separately, but it is growing nicely and it will contribute to industrial momentum of 2026.

Thank you. I would now like to turn the call back over to Rafael for closing remarks.

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, focus 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. .

This concludes today's conference call. Thank you for participating, and you may now disconnect.

Hello, everyone, here from Las Vegas. And you might ask yourself why I'm starting the booth walk around via this little hole here kneeling on the ground. Well, the answer is a very simple one because I was watching the camera via this hole here in the in-wheel motor of this Verge motorcycle. This is a complete motor, no powertrain anymore in this bike, solid-state battery and NXP-enabled electronics. The i.MX 95 is operating the central brain of this 200-horsepower ultrafast sports motorcycle. So just for the geeks, 0 to 60 miles in 2.5 seconds. That is very close to a rocket launch. Fantastic motorcycle. And if you are an average motorcycle driver like me, I'm going to show you what NXP Electronics is doing to guys like me. We have here a smart i.MX RT-enabled helmet. We have the automated brake light in here.

So if the bike is decelerating, even if I'm not braking, but if my head is decelerating, the brake light switches on, I have noise cancellation in here. And if I fall off the bike or if I have an accident, this helmet is doing the automated e-call, so automatically calling the ambulance, even if I cannot do that anymore. So you have great safety, you have great driving experience. And we have partners like Enphase who are taking care that the electrons are getting back into the machine in 10 minutes via the solid-state battery, you are charging that device to have a driving range of 600 kilometers roughly. So you can imagine how much NXP electronics AI intelligent systems at the edge start changing the traffic experience.

And then we continue looking at smaller other driving experiences with intelligence. Just follow me here. We have our AI-enabled systems, a little robot here, and this robot is observing the ground, is observing that there is an oil leak on the manufacturing floor and can start cleaning action. So can start classifying with our AI systems in the device like small large language models, starts classifying what it has in front of itself and then takes the right action autonomously.

Furthermore, what we have is the devices are getting on the same functional safety criticality, smaller and they are getting closer to me with my body. You see here our insulin pumps, of course, highly functional safety relevant. You see hearing aids, cochlear implants, you see smart glasses, all operated by our ultra-energy-efficient, small i.MX RT microcontrollers. So i.MX RT microcontrollers. So i.MX every time, same family, microcontrollers, small, tiny, energy-efficient microprocessors, the big ones carrying a lot of AI and smartness, energy efficient for the edge, but that is basically what the entire game is about.

And of course, that moves forward here. You have here facial biometry. You have systems like scanners in your retail stores. You have them here in a very, very efficient, smart, nicely designed way. We have start-up sections here from the firmly installed form factors also to things that you can see here again moving. You have little driving robot, reference designs from NXP. You have drone kits from NXP. So this here, for example, our drone kits, drone form factors. Again, software-defined radio connectivity, the i.MX microprocessors that are running these devices. And what we also have is we have ultra-wideband advanced sensors with millimeter accuracy, not centimeter accuracy anymore.

And all of that together, our partners, companies, for example, like Auterion or HELLA, they are using these type of devices for their flying form factors. You might have seen some videos with me in the past already on this device here, but also where do we have it? Here is these Auterion form factors that are really in series production. So reference design from NXP, start-up acceleration and then guys get going and industrialize what we have on the shelf. We are not a set maker, but we help these set makers.

And of course, my favorite use case is Lars needs a pizza or Lars needs a beer. Regardless of where Lars is, he gets it delivered automatically, autonomously. And we are working at the moment with all our radar and sensor electronics on full autonomy of these drones. So we have the first demos whether drones are doing slalom between the trees or other obstacles, where these drones can hang themselves onto a skyscraper wall positioned by ultra-wideband and where the drone in the tenth floor is hanging itself to the wall, you open the window, you empty the drone, you fill the belly of the drone again, close the window, drone lifts off. You don't need any landing places in cities, and that makes life and certification, of course, much easier.

Now with all of that, that we have on display outside of the booth here, the deep tech stuff, how NXP enables the world that anticipates and automate is happening inside. We have 3 big themes lined up brighter journeys, brighter places and brighter lives or in other words, we're bringing intelligent systems to the edge in all 3 segments. We are enabling the great robot awakening AI at the edge. Join me, I want to show you what that means.

As I said earlier, we have here the booth separated in 3 segments: in green, the brighter lives; in blue, the brighter places and infrastructure; and in orange, so in the NXP colors, the brighter journeys. And I'm going to take you now first to the brighter lives section because it is mega cool use cases that we are especially driving with our latest acquisition. You might know that we have acquired Kinara an AI accelerator company. And together with our functional, safe and secure microprocessors and these AI accelerators, we are able to build super efficient systems at the edge with a high functional safety requirements.

And our partner, General Electric has 2 demos here, 2 showcases with us that are really, really outstanding. So the outstanding part that you're going to see here is basically an anesthesia measurement. And for my next surgery, whenever it comes, I want to be treated by these type of devices. Why? Well, very simple, the anesthetist has his or her hands full to do for working with all the pipes and needles around my body. Now this system here contains a little large language model, and you can voice operate certain parameters. Give me that or that level of narcotics. You need more oxygen, all of these type of things. So you have a robot assisting the anesthetist making sure that this person is super relaxed, has everything in control and the manual tasks are taken over by this device here. So this is how a robot today is looking like. These are the robots that I'm talking about, and these robots are going to change your life to the better.

What you also have here is a very, very dramatic use case can be very dramatic. You have the same AI system in a child detector. So you have a newborn baby. And of course, it's the worry of every nurse in neonatology that you have 10 of the little babies and you cannot observe them all, how they are doing. So what you're seeing here, the moment where the baby is face down in its bed, the system detects it and warns the nurse, just says, hey, look at that baby. It was okay 2 minutes ago. Now this little -- toddler is face down and we need we need to do something just as an early warning. So in other words, you are making the life of the intensive care nurses much, much better, much easier because they don't have these panic moments anymore. They can be there, treat all the kids in a calm way. And in case there is an alarm, to hop in and move, requires, of course, high accuracy, high efficiency, functional safety and of course, also hacking security.

Now what is happening with the same electronics, if you're moving a little bit closer here is, you can take our electronics for tasks like access control. So you see here an NXP setup of how do you operate with a smart door lock, camera, face detection, ultra-wideband. So via the phone, like in the car access case. Lars is coming with his phone to the front door, okay. Is he authorized to open the door? Door open. And if I recognize his face, I have even 2 factor authentication and these type of things, our microcontrollers, microprocessors and also our ultra-wideband and camera electronics are doing and how that is looking like. You see over here in this little form factor. This here is really the condensed version of this door lock. So this is how it will show up at your office door, at your workshop entrance, at your factory or at home.

Furthermore, what we have in our electronics, we're using the similar connectivity for complete home gateways. So these home gateways, again, are containing Bluetooth, WiFi, ultra-wideband, they contain AI and they contain NFC. And with all of that, you are able to have a super energy-efficient device that is operating your house and that device is usually in power saving mode. So ultra-wideband here works as a proximity detector. So the moment where Lars is getting close to the device, it recognizes very energy efficiently, there is a human being coming my way and only then waking up. The same for the door lock. So these devices are mainly at sleep, mainly in an ultra-low power observation stage. And the moment they are getting into the ultra-wideband signal, wake up and you wake up the different stages of AI or authentication control. So this is what we are doing here with the NXP silicon.

And we have here a couple of partners already, partners that are doing really productization again. So we have 50 customer demos on the booth here, partner demos, showing our reference designs from the eval boards really into these form factors and then into how customers are realizing the products. Well, and you can, of course, take that further on. So you have here the different door lock form factors from the different customers. You even have our i.MXs here in these remarkables, yes. So where you have basically your e-paper, same electronics, same AI capabilities, same low-power capabilities, and you can operate these devices for weeks on one battery loading.

And then, of course, one of my favorite use cases, I have to admit, I'm a lousy cook. I'm a passionate eater, but a lousy cook. So Thermomix is one of these devices that makes my life higher quality. And of course, also there, again, same electronics, same connectivity, same AI and same compute performance in the devices can be used in kitchen appliances, in access appliances and what you have seen earlier in medical appliances. If you take that into a more heavy-duty environment, so industrialization, building control and home control, you're getting close to one of our favorite partners, Honeywell and NXP, we are working since years on driving the portfolio to the next scalable level.

You know that companies like Honeywell are broad in valves, building control, avionics, a lot of segments. And what we are trying to do is we are trying to use NXP silicon and changing the form factors of these sensors, of these control panels of the compute device of the AI, make that scalable via the, for example, i.MX scalability of the platform via the S32 microcontroller microprocessors and also via the AI accelerators and sensing electronics. And from there, you can go from a tiny little valve that has to live for a decade on a lithium battery somewhere in the desert, you can go really to complete building management units. Here, you're seeing a partner wall with very, very different partners -- different form factors.

You see iThinx is a company -- a daughter company of Carrier for connectivity to heat pumps. You see the EV charging wall boxes here. I could go now over tons of these energy and building management use cases into what we have stolen years ago from the automotive battery management. And how do you operate your car? Well, take the wheels off that car. I have that thing at home. I need for my solar cells an energy storage because I don't want to operate my house only when the sun is shining. I want to have that, of course, agnostic. So these type of battery storage devices are derived from automotive battery management, 1,500-volt type of systems, lower voltage systems. But in principle, this is how your energy storage in your house is going to look like -- and of course, I showed it outside already with our partners, Enphase, how I get these electrons that I have stored in the battery, how I bring them into all my appliances, including my rolling appliances.

What that does in a nutshell is very nicely visible here because what you can start doing is now you can start trading the energy in your rolling power bank. Just imagine your car comes to a parking lot and you hook it up to the grid. So I move it in here. Then if you have the right security, if you have the right electronics in there, like in a banking application, you can authenticate the source of energy, you can start trading that energy with the utility supplier and you can operate and stabilize the entire grid. For example, if the grid gets out of service, we had that incident in Berlin 2 days ago, where there was a big energy dispatching system on fire. So the grid gets disconnected. This system here, the rolling power banks, they start taking over the supply. Grid comes on again, but you have some sabotage maybe coming up.

So we have here an unauthorized energy supplier in the system. What we are doing is we are taking the chips of the electronic passports, we are putting the same security in here. And we even have systems that are carrying post-quantum cryptography. So i.MX 943 is the first microprocessor with post-quantum crypto in it. And these devices automatically do the negotiation with the grid provider and make sure that only authorized energy sources, non-corrupt energy sources are in the system and that the grid is stable.

Now if you take all of that, energy supply is clear. How do you operate your actuators? How do you operate really your robots on the shop floor? How do you operate an entire factory? Well, first thing is you have very different old and legacy field bus systems in these factories, for example, EtherCAT or Ethernet. Now what you need is lots of electronics. Here is some old electronics from NXP with an i.MX 8 enabled, so bulky boxes that you have to make sure that from the manufacturing robot via the field bus all the controlling and management is done. You need switches for the connectivity. We have integrated all of that in the i.MX 943 including the post-quantum crypto security.

So in other words, if I am switching here, the field bus protocol from EtherCAT into Ethernet, it is software-defined architecture, a word that you know from the automotive electronics only. This is software-defined factory. You're just reprogramming this switch here and you are reprogramming the i.MX 943. You can upgrade the security standards if needed and all of that on this tiny little stamp size microprocessor here. And all of that via the different field bus systems, very important. Very high cost of -- bill of material if you want to do this in discrete way.

Now what that is going to get us into is, that is going to get us into an i.MX 943 system here and one i.MX 943 system here. And what you see here is an air gap and antennas. So what have we done? We have taken Ethernet, TSN over Wi-Fi. So we are sitting here on a 943 post-quantum crypto-enabled system. We are transmitting via WiFi, the time-sensitive Ethernet signals to this device here in the shop floor. And this unit here is operating our robot here that is at the moment filling the different vessels with NXP colors. So a pharmaceutical robot with motor control with everything in here. That is how these devices on the robot side in the factory floor are working and you're saving a lot of real estate because you're getting wireless with time-sensitive networking.

Yes. If you take this to my favorite segment of the rolling robots, you're going to go into these type of demos here. What we have here is a pretty well-known demo also over the last years is how does a driver workplace? How does a car cockpit look like? How do we evolve with our electronics, the way how you drive your car in the future. Now what you're going to see here is the following. You have an i.MX 95, the same like in the motorcycle, the same like in a lot of these other appliances here. And this i.MX 95 is operating the displays. Now what you also have is you have the camera detection here and the AI accelerator on that i.MX 95 is detecting that Lars, the driver, is sitting here in the driver workplace, is recognizing me, is authorizing me.

And also what we then here can see, my friend, Brian has a smartwatch connected to the dashboard here via Bluetooth. It says, okay, heartbeat of 100 beats per minute at the moment. So he seems to be nervous. But what the system also is doing via our ultra-wideband chips, the same chips that we are using for car access for door opening, these chips are working like a motion detector, like a radar system, and these systems are measuring the movement of my chest or here at the moment, the crazy moves of my hands. But in principle, what we measure is we're saying, okay, you are breathing at a certain rate. Lars you are breathing at 20 times per minute, you are nervous. You're breathing 6 times per minute, don't fall asleep. We have vibration control and sound here in the headrest. So I can easily hear here my personal sound space, the others don't. And if I'm falling asleep, the seat starts vibrating.

And also if an ambulance comes from behind or a bicycle rider comes from behind and is ringing the bell, then what is happening is in our car radio chip in the quantum, the AI, tiny little AI is operating the in-cabin microphones and is saying, hey, Lars outside from the rear right side, there is a bicycle rider or an ambulance is coming, vibrate the seats, get Lars' attention, hey, there is something happening. Don't listen to AC/DC, Full Throttle all the time, but be aware of what we are doing here.

Now what the guys have also done is they have taken little loud speakers here putting ultrasound on top of the audio signal and having little microphones. So redundant to the ultra-wideband signals, they are also measuring my chest movement here via the ultrasound. So we have redundant sensing, ultracheap, car access is anyhow in the vehicle and the other part is using simple infrastructure that we also have, and that is all that we have and then you need to connect this to the outside of the vehicle, and this is our connectivity unit driven by i.MX 943, operating a complete telematics unit, everything that operates electromagnetic device waves to and from the car. So super cool thing for the driver workplace.

If this is too boring for you in a car. Of course, what we are also doing, we are moving this into very different form factors. We are using together with our acquisition, TTTech Automotive, these type of ECUs have a lot of that electronics and of these use cases in these boxes here, the fusion boxes, and we are moving these boxes, for example, into the big snow groomers into the advanced displays in special vehicles. So it is not only all for normal car driver and the leisure driving of Lars going on vacation. This is very, very heavy-duty and very dangerous workplaces where we need to make sure that never ever a mistake happens, there is still way too many fatalities of skiers on the road that we need to get down to 0.

Now, from all of that, I started talking already about software-defined factories earlier. And the software-defined factories are a simple derivative of the year-long discussion that we had on software-defined vehicles, software-defined architectures in the widest sense, having a simple domain-based architecture, sometimes even split the domain into zones, the zonal discussion on the car and then taking NXP microcontrollers and microprocessors for the central networking device, our S32N family and for the body control and zonal control, our S32K family. And here, what you're seeing is a very nice partner wall with guys like Quanta, Delta, Hirain, Applied EV, Desay, Aumovio, Delta, I cannot read them all. But what you're seeing is the S32N in the center. You see the S32K as zonal microprocessors. And all of that is delivering you a very clean setup of vehicle architecture connected via [ SerDes ], ethernet, CAN, LIN and FlexRay.

And then what you're getting is you're getting basically to these type of reference designs. So what you're going to see here is we call it our CoreRide platform. We have exactly these ECUs for the zonal control, for the central compute, and we acquired TTTech Automotive this year to make sure that we have one software level on all of these ECUs. Now what you can do with that is you can easily -- if you have one operating system everywhere, move functionality around. And if you -- so we have it here on display. You have your small, medium and large type of vehicles, you can populate now your function blocks on the various zones or on the central compute.

If you have a small simple car, you have everything on the central unit. If you have a big and very feature-rich car, you start distributing all of the functions to the front zones to the rear zones and so on. But in principle, you can play with it. It's software movement. It's not hardware movements anymore. And that, of course, makes the entire thing super, super sexy. The moment that you have these software-defined architectures, the car OEMs and the Tier 1s have ultimate flexibility. It's only a horsepower discussion then. But in the end, you are just moving stuff around.

Now what is that stuff that you are processing in these zones and that you're processing on the central units? Well, to a large extent, this is sensor data from within the vehicle. I've shown you all of that on the driver workplace, but it is also sensor data from around the car. And sensor data from around the car, I mean, most of us know from the autonomous driving discussions is, of course, radar sensor data. And this here is our next big step into radar system cost down. And it is also LiDAR data. Here, a very advanced concept of a LiDAR with our partner, Valeo, where you use the headlamp, sending out the signal and getting the echo back and you have an ultra-cheap headlamp-driven LiDAR proximity detector. You can take both of these signals, radar and LiDAR signals, bring them together, fuse them, have a camera as well, detect the object. And then via LiDAR and radar, you are detecting what that object is doing, whether it's moving towards you, away from you, so all the Doppler shifts and all that stuff. And all of that is processed here on this device.

Now that is one tiny radar sensor that is doing an awesome job. But how can we push the boundaries of physics? Well, very simply, we are pushing the boundaries of physics by taking our big 5-nanometer devices, 13 billion transistors, the S32N. And this device has isolated segments so that no source code can go from left to right, no executable code can corrupt the other segments. So we are seeing one of these segments. We are taking the radar data, and we are taking that radar data here, not raw data, by the way, not raw data. We are pumping over 100 megabit Ethernet line, but we are taking that data and we have optimized data here already on the central compute infrastructure optimized data. And then whoever wants to bring an AI accelerator on top of that. So the NVIDIA's Mobileyes, Qualcomms of this world can use that super advanced artifact-free data and can do their autonomous driving on top of it.

So the claim or fame of NXP is that we are working with this integration infrastructure. Now how does that look in real life? Well, for example, we have this isolation, what I mentioned earlier, in microcontrollers, and you have different separated segments. So source code from the one area, from the traction inverter or from the DC-DC controls cannot be cross charged if one area stalls, for example, an [ ASIL ] B area stalls, the other ASIL D segments are unaffected in one piece of silicon for the functional safe power management, IC, these microprocessors here, you can operate all of that and you see the functionalities that we can integrate or you see it here in the slide in the lineup, whatever you are bringing in energy management use cases, you can combine in one control unit. And basically, all the high-voltage difficult case, ASIL D relevant case, the high-voltage energy management of that entire rolling robot gets managed by one ECU.

If you follow me over here, how does that look now in real life? Well, very simply, you have these type of fantastic rolling robots here, more than 30 NXP chips in these devices here in this Audi SQ6 from networking, of course, ultra-wideband, of course, radar, all of these type of things, the in-vehicle networking, the microcontrollers, microprocessors, more than 35 chips in this device, and it's an electric vehicle. And what we have here is with partners like Easelink. Easelink is driving the charging infrastructure to the next level. What you're seeing here, and that is very relevant, not only for the consumer cars, but also for all other sorts of warehouse robots, rolling skateboards of all kinds. It's not a wireless charging, but it's a galvanic connected charge grid based on NXP electronics. And you see this snorkel here moving down. This is the stuff how robots are going to feed themselves in future. Yes, they just drive to the parking spot, socket down, charge the vehicle without any losses like a galvanic direct connection. You see the metal pins here, functional safe, and this is how we are autonomously also feeding our robots that anticipate and automate the world.

I hope I could show you with a bit of a fast-paced walk through here, how NXP is really bringing the intelligent systems to the edge. None of these systems needs AI at the cloud. None of these systems need AI at the cloud. We are dreaming of 50 billion smart connected robots that are making my life easier in future. I urgently need it before I go into retirement age, I need all these helpers around me. And you have seen it in brighter lives doing my medical care, helping me with keeping the body healthy and monitored. In brighter places, building the cocoon around me, my house that protects me, is always warm, is always climatized, has a filled fridge, has low maintenance.

And then, of course, whenever Lars wants to start roaming around, my robot grabs me by the hand, transports me to wherever I like and if I like to drive myself either in this fantastic device here or with the Verge motorcycle, it will be a safe and reliable experience.

So we are at the moment at the edge where the robots are able to take responsibility from Lars, the human being and Lars can trust the devices and doesn't need the cloud for that. That's the important message, and NXP is enabling that with a complete portfolio. So if you want to dive into that deeper. If you are a startup, if you're a customer, if you're a large-scale customer as well, make sure you're going to nxp.com, chase me, chase my team, and we are keen on talking to you, diving deeper with you and looking forward to the fairs throughout the year and of course, also the next CES to come. Thank you.

All right. Thanks, everyone, for joining. I'm Tom O'Malley, semi and semi-cap analyst here at Barclays. It's a pleasure to have Bill Betz and Jeff Palmer with NXP. Thanks for being here today.

Great. Thanks, Tom. Why don't I start off Tom. We've got Bill with us today, our CFO. He's got a bit of laryngitis so I'm going to probably take most of the questions so I apologize upfront for that. But he'll take the hard ones, I'm sure if he has to.

I'll chime in as you can hear my voice is a little not so well.

That's no problem at all. So why don't we start with just a broader topic. So a thematic for the conference here is AI. How are you intersecting that spending trend? Where are you on that journey today? And maybe talk about your portfolio and where you're focused on bringing those big amounts of dollars into kind of the NXP umbrella?

Great. So I know AI build-out has just been a hot topic for a couple of years now, and it's been fun to watch. Unfortunately, we don't really participate in the data center. So that's really not our value from a portfolio perspective. Where we're really focused on in terms of AI is bringing what we term intelligence to the edge. So this is really in the broad industrial edge market as well as in the automotive market. As you know, we just recently acquired a company called Kinara. And Kinara is a Silicon Valley start-up that has developed an NPU for accelerating large language models. We've been able to take that NPU and made it with our industry-leading i.MX application processor to create some fairly interesting edge applications.

And if you think about what customers on the edge want, they basically want an ability to run these large language models, but without having to go to the cloud you run it. So kind of in a non-wired or wireless type of environment. And so to give you an example of maybe kind of paint a picture. So we have a large industrial customer who has a pretty robust aftermarket maintenance business. And so these are very heavy-duty industrial pieces of equipment, many, many years old. The manuals to operate these pieces of equipments are like you can fill a shelf. And so what happens is, how does a person in the field figure out what's going on with that piece of equipment.

So we work with this customer to develop a handheld voice-activated, very inexpensive kind of computer. And this computer is, call it roughly a $500 computer for the customer type of the thing. Inside of it is a wireless -- excuse me, a voice-activated system using our i.MX application processor and the Kinara NPU. And what a customer can do, the field technician can do, he can say, Hey, I have Model XYZ here, and I see the yellow light blinking every 10 seconds, and I don't really remember how to fix it. And so he voice activates that, and he gets the response back. And so you might say, well, that doesn't seem really interesting.

But if you think about the industrial market, which is very fragmented, thousands and thousands of customers, very different opportunities. And so there's not a one size fits all, like there is in the data center. I said the data center is more of a homogenous market, a smaller number of customers, building out the data centers. The industrial market is tens of thousands of customers where we already have known capabilities. We have go-to-market reach. We have a good channel for dealing with them. And these applications are not one size fits all. So there's a lot of customer enablement and working with them to exactly fit a solution to their requirement.

So very different than I'd say what you see in the data center market. And we're pretty excited about it. So if you think about the industrial market overall, it was about $32 billion kind of a SAM, if you would, last year, '24 going to about $45 billion by '27. And so that's just our current market. So if you think we're able to add intelligence to the edge in that SAM, it's probably some adder. We've not got a figure for it at this point. It's still very early days. We probably won't see initial revenue from the Kinara NPU till late '27, early '28. So that's our play on intelligence at the edge conference.

So it's already intersected. You feel like you can always bring technology to the market today. But in terms of like the crossover in terms of revenue contribution over the next several years, it's kind of early days wait and see.

Very well put, Tom. And I think the thing that's key to understand is we already have a very large footprint with our i.MX application processor in industrial. It's the most well-used ops processor in industrial applications. So we already have the customer relationships, the situational experience and understanding, and it's really working with them because they're watching the build-out of the data centers. They're watching what you can do with ChatGPT and other things and they're thinking, how can we leverage that in our businesses, but their businesses are different than a data center.

Got you. All right. So that's the macro side. Let's dive in a little bit more to the company-specific side. So we've heard your comments on NXP's performance in the broader macro environment over the last couple of weeks, both in industrial and in auto. Can you talk about what you're seeing in the market today. It sounded from your recent comments like things were stable to maybe slightly improving. Maybe give us an update on how things are trending as we get to today.

Yes. I think actually, we're more optimistic on our Q3 call, we are more optimistic than we were on our Q2 call. We clearly see that this prior 8-plus quarter cyclical peak to trough has been pretty tough. We think that things have troughed probably in Q1 of this year across the business. We start to see accelerating trends in our automotive business. And in automotive, what we are looking for is the digestion of on-hand inventory at the Western Tier 1. So this is in North America and Europe, the big Tier 1s. That makes up about 60% of our automotive business, right?

And so that excess inventory had been built up during the prior cycle during post COVID, and it was just -- it was taking longer than we had anticipated to digest it. So that really has started to become clear as being addressed here in Q3 and into Q4. In our industrial market, that business actually troughed Q1 of last year or the year before, I think Q1 '23, it's just been a slow grind improving. Now into Q4 this year, we did guide our industrial and IoT business up 10% sequentially, but that was on company-specific design wins that we have won a number of periods ago, and we're finally coming into production.

Got you. And then...

Maybe if I just add, what I would say is the metrics that we measure, they continue to improve. So customer escalations continue to increase. Our backlogs continue to improve, both NXP and our distribution backlogs. And so we feel more and more confident that we're slowly getting back to that normal environment that we have been waiting for, for quite a while.

So marrying that with what you're doing with the channel, you've talked about moving from 9 weeks to 11 weeks. When you got to the call last quarter, you got a lot of questions on why hasn't the channel increased, it was kind of a [ shoot ] to either way, right? If you don't increase the channel, then the demand profile isn't good, if you do increase channel like no one else is seeing that, right? But you talked about a dual dynamic, right? There is the sell-in and then there's the sell-through, right? Could you talk about do you see customer inventory build through the channel, essentially like are people pulling more from the channel than you can put in? Or are you just deciding not to put more...

Well, one of the KPIs that Bill alluded to that we have the unique ability to see is we can see end customer backlog through distribution so let's say Tom you are a customer buying from one of the big distys. I can see your backlog and see how you're building backlog. I can't modify it, but I can observe it, and we can get that data almost daily. If you think about these customers kind of mid-tier industrial customers, IoT customers buying through distribution, they're not going to be building their backlog if they have excess inventory on hand. They're not going to be building backlog if they don't see the end markets improving.

And so we're seeing basically backlog of end customers and distribution actually improving quarter-on-quarter. And I actually say that's a positive sign for us. So our goal to your specific question about sell-in versus sellout. If we wanted to just fill the channel and get back to 11 weeks kind of imminently, we could do that automatically, just put whatever product we want in there. But we want to be much more strategic in what product we put into the channel. So our goal is to put in high velocity sell-through products, products that are in high demand that when we put them into the channel, we have a very high confidence they're going to go out of the channel either during the quarter or very early into the next quarter.

And so that's our focus. I think to be really clear about this weeks of inventory in the channel, our stated goal, and I want to be real clear about this is we want to get back to 11 weeks. That's what our systems are built around. Anything below 11 weeks, actually, we have to override our ERP systems internally. And so when Rafael gave the guidance for Q4, he made the statement, we will fluctuate between 9 and 10 weeks going into the fourth quarter. And the reason for that statement of fluctuation is if you put a product in and it sells out, you could still be at 9 weeks, even though you're putting more product in.

You could put products in and it tips over and now it's 10 weeks. But I think the key thing here is don't get too hung up about how many weeks. We want to get back to 11 weeks. We've managed the channel, I think better than most companies. We have a very systematic methodology for managing the channel. We see what goes into the channel on a daily basis. We see what's in the channel every day, and we see what sells out of the channel every day. And I think we're unique in that aspect.

So as sell-siders do often, you'll take some information you give us and we'll try to extrapolate it into the next quarter, right? So on the call as well, you offered out normal seasonality kind of down high single digits into Q1. And that wasn't guidance. You were just offering up. This is what normal seasonality is. We marry that with the idea that you're moving from 9 weeks to 11 weeks and we think, "Oh, well, isn't the natural reaction here that they're doing a bit better than that because the channel helps them out." Could you talk about seasonal trends into Q1? Why this year may be a little different than other years? Or you can just leave it at what you...

Well, so I'll be the bad IR guy here for a second. So my view is we only should guide 1 quarter at a time. But at any points of discontinuity either when a cycle peaks or when a cycle troughs, you want to give a little bit more comfort to the sell side and to the owners of the stock. And so what we decided to do when asked about, hey, tell us about Q1, our best advice was to think of it as kind of historically seasonal trends into Q1 from Q4, right? Normally, you see our mobile business does tend to trough in the first half of every year and accelerate in the second half. You do see automotive trends in China be a little bit weaker in the first quarter after pushing through the strong year-end. And so those are just some of the things we wanted to give. We're not going to go into specifics about each segment or margins or anything like that. But we just want to give you something that you can model.

Perfect. So why don't we talk about the things that you talk about more generally in the long-term guidance that you guys kind of give out. So you've talked about more and more of your business moving to higher-value solutions with your customers. As we move into 2026, could you talk about certain areas that you're really excited about and where do you think you may see some growth drivers, particularly in the auto space. We've talked as the year has gone along about areas where there may be a little bit faster growth than the general market so...

Yes. So last year, in November '24, we had at our Analyst Day. And then during that event, we outlined a number of accelerated growth drivers in both automotive and industrial and IoT. With automotive being over 55% of the revenue, we know that's a real focus. So we highlighted 4 very specific accelerated growth drivers in automotive. The first being our software-defined vehicle efforts. This includes our S32 products, our automotive Ethernet products, some of our software enablement, things like that. That business was $1 billion in 2024 up from $500 million in 2021. We expect that business to grow to be about $2 billion by 2027.

It's a global business. meaning it's not just tied to 1 OEM and 1 geography, it's across the world. Every major OEM globally has a software defined vehicle architecture on their road map, but there are different places, if you will. So we're very excited about that. The second area would be our 77 gigahertz radar. So that's our play in the ADAS domain, if you would. That business was just under $900 million in '24 up from about $600 million in '21, and we expect it to grow to about $1.3 billion or so out in '27. We're a market leader in 77 gigahertz radar. It continues to be an evolving market and kind of the algorithm we explained to investors think about every year, there's more cars with radar. Every year, there are more radar nodes per car and every year, customers are driving us to add more functionality to each node, which we get paid for.

So that's kind of the multiplicative model that we advise you to think about in the growth of that business. The third area of accelerated growth drivers in automotive is electrification. This is really our play on battery management systems, high-voltage gate drivers for XEVs. That business was about $500 million in '21 -- I mean, '24, excuse me, and it was up from about $250 million in '21. So a nice growth in the last 3 years. We think that will be just under $900 million in '27. That's the only piece of business that we have that is exclusively just tied to the powertrain of EVs. We do many, many other functions in EVs and ICE vehicles, but we do get asked about what is your exposure just to EVs.

And then lastly, we introduced a new accelerated growth driver called connectivity. And what this really is, is smart car access using ultrawide band technology as well as in-cabin, Wi-Fi and Bluetooth low energy type applications. That was about $400 million in '24, up from $100 million in '21, and we think it will grow to about $700 million in '27. So a nice curve of growth.

Now when we gave these outlooks for growth for our automotive business, which we said would be 8% to 12%, '24 to '27. We knew that '25 was going to be a challenging year. And it has turned out to be maybe a little more so in terms of inventory digestion. So it does mean the math that we will have to grow above trend line in '26 and '27 to hit the target.

Okay. And then maybe talking on the industrial side, you just laid out the auto drivers. I think Industrial is a little more difficult just because it's just much more broad facing, maybe talk about your differentiation there and also products you're excited about for the next...

Yes. So in industrial IoT, the kind of the tip of our spear is really our processing portfolio so in almost all of our businesses, about half of the revenue is tied to processors. In industrial, it's driven by our i.MX application processors, our RT crossovers and then our general purpose microcontrollers. It's not as clear cut as the auto business where I can say there's this function and that function. As you said, Tom, it's a very diversified business. But we've seen there's probably a little over $500 million of accelerated growth drivers, new application processors, new connectivity, new security products that are kind of doing very well. And we think that should grow in a very reasonable way through the next couple of years.

So a question that I get a lot, and I think one that is yet to be fully answered in the stock is, how have you guys managed to do a bit better in terms of your auto business over the cycle, at least from a channel perspective. And if you plot out long-term growth trajectories, it does look like you guys have hung in a little bit better than peers. People ask, is that channel management? Are you going to see some sort of cliff over the next several quarters? I feel like you guys feel that question well as well. So I guess looking into the out year, I think that the general outlook for auto is modest to maybe slightly better than modest growth, right?

So nothing heroic. When you guys look at your business and how that compares to the broader SAAR environment, what are your kind of initial takes, why would you be better than that? And why has your strategy that you've kind of deployed so far, which has looked pretty good, going to work again here in this out year.

Okay. So let me take in reverse order there. So first off, while we have to focus on global production SAAR, that's not really what drives the business. What drives our business is content per vehicle. So you're right, probably SAAR in the next couple of years is going to be low single digits. We think against that, our content per vehicle on average will be mid- to high single digits at or on top of SAAR. So it's not a -- we get asked a lot of times, well, SAAR is up x, why is your business up better than that because it's not just tied to units. It's content per vehicle.

In terms of your first comment about the channel, I think we have a long history with how we manage the channel. This comes from lessons learned back in 2016. We put in place a very highly automated system in the channel where we can measure what goes into the channel. What is actually in the channel and what sells out of the channel on a geo-by-geo basis, Disty by disty, product by product. So it's a massive amount of data. We get that data daily. And as a management team, we analyze it on a weekly basis. I think the way we manage the channel through COVID into the peak of this prior cycle showed our ability to have a very steady hand in how the channels manage.

And so as we started to see signals that the top was kind of happening in the prior cycle, we decided to pull the brains back on the channel, not put as much inventory into the channel as some of our peers were doing, right, because you recognize revenue and sell it into the channel. So we held back so our peak was probably less than some of our peers, but it allowed us to very, very steadily manage the channels and started to roll over into the trough. Now we're going to manage from the trough back up to the next peak in a very similar strategic very steady manner.

So 2, I would say, non-NXP specific items that could come up in 2026 are on China, which people asked about a lot. How much does China impact your business? Do you have domestic supply coming online? Do you get concerned about that? And then the second, which is talked about a lot, is memory, which is a newer one where you're seeing global memory shortages, auto and industrial tend to be much more specific. So it doesn't impact as much, but I would love to get your opinion kind of on both.

Yes. So Tom, nothing to update on the memory comment. I mean it's something we observe. We're not seeing the shortage of memory or the pricing of memory affect our order book or our expectations. So I really can't comment on that. In terms of China, China is a very important market for us. It's about 39% of our revenue last quarter. The way we like to describe that business, and that's on a sell-through basis. So about half of our China business is what we would term multinationals for re-export out of China. So they're manufacturing in China, were exported around the world. The other half of the business is for China headquartered companies. I would say the China headquarter companies are starting to be much more sensitive about having a segregated supply chain inside of China.

And a couple of years ago, we started to put in place the capability to offer that to our customers. So on the front end, that includes working with 3 front-end fab partners TSMC and Nanjing for 16 and 28-nanometer, SMIC for any other bulk CMOS above 28 and then HH goes for a mixed signal. On the back-end packages assembly, we have 1 of our largest packaged assembly sites in Tianjin. So we have a completely segregated supply flow in China if our customers there want it. Of that 17%, 18% of our revenue that is China headquartered companies, about 1/3 use that segregated supply chain. It's not something we're forcing them to do. It's an option for them.

Okay. So 6% of your business give or take. Yes. Okay. So we went into auto. We talked about China. How about Industrial and IoT. I asked after China because you do have a bit of a unique exposure in our industrial IoT business, it's not as much broad facing. You have a higher concentration of IoT than I'd say most. Could you talk into next year, I look at the PMI data, it still is contractionary. Is there a way that you can offset maybe dampened global trends into next year because of some higher growth areas in that IoT business in particular?

So our Industrial IoT business may be a little different than what you remember. So about 40% of our industrial IoT business is what we would call consumer IoT. 60% is actually industrial. So it's actually more industrial facing. Even with that being said, it is a super long tail business, tens of thousands of customers. Our product portfolio is very process-oriented and what's going to give us confidence that we can achieve our long-term growth or actually company-specific design wins. Again, similar to SAAR, PMI is important. But if all I say to you, Thomas, Oh, my business is just going to flop with the wind with PMI, how interesting is that, right?" We have to make our own luck, if you will.

Got you. Maybe pivoting a little bit to the operating model. So you laid out, I think, a very clear gross margin trajectory. Could you remind us what you said about the revenue dollars to get to the target model? And then the incremental dollars that come in, what does that mean for gross margins and that progression?

Yes. So our model is 57% to 63% non-GAAP gross margin. The rule of thumb that we've given is for every $1 billion of incremental revenue on an annual basis, we should see about 100 basis points of gross margin improvement. And so if you think just swag by 2027, we hit $15 billion, that means we should be at 60% gross margin. Now beyond '27, we have leverage to take that up into the 60s plus range. The most obvious one of those one we've talked the most about is our joint venture that we've invested in with Vanguard in Singapore, that's called VSMC.

When that fab, it's a 300-millimeter mixed signal factory in Singapore, it basically will be in 40% equity owner of that factory. When that factory is up and fully loaded in 2028, that will add about 200 basis points to our then gross margin. So if you just assume our NXP exits '27 at 60%. Exiting '28, we should be in about 62%. And then there are other levers that also can get layered on, on top of it. As you know, you've probably heard Bill talk about rationalizing our internal factory footprint. We have 3 8-inch mixed signal factories, 2 in the U.S. and one in the Netherlands. These are 35-plus-year-old factories. They're close to the end of their useful life. And so we have kicked off a process to start to rationalize and decommission those factories over the next several years.

Helpful. Why don't we pivot to capital allocation? So you talked about the acquisitions that you just made. Clearly, times right now are a bit turbulent in just the broader macro. You're saying things are improving off of the bottom.

How do you feel about stock buybacks? How do you feel about capital returns? Maybe remind us on your strategy and where you would direct capital from?

Yes. So our capital return strategy is fairly simple. We're going to aim to return 100% of all excess free cash flow to our owners through a combination of dividends and buybacks. The dividend is -- we kind of view a dividend as like debt. So there's not a lot to talk about there. It's going to be consistent. As the environment improves, we may consider increasing the dividend. So on the buybacks so long as our net debt to trailing 12-month adjusted EBITDA leverage is at 2x or below will be in the market buying the stock.

Very simple.

It is very simple. .

Yes. In terms of future acquisitions as well, I think you've done a good job of kind of both addressing the software needs as well as the hardware needs. If you look at that portfolio today, I think you're probably always looking for ways to get better. But where do you see an area in which you could probably tack on future acquisitions? Or is there a certain area in which you would wish you could do an acquisition, but you can't. How about M&A in general.

So every year, we review the portfolio in excruciating detail. And we tend to look at our portfolio along 2 axes. Growth, growth potential and relative market share along the Y axis. And we try to fit in our different products into that kind of 4 box quadrant of high growth, high RMS, high growth, lower RMS and so on and so forth. I would say the 3 M&A deals that we did this year, they kind of fall into that high growth potential, low relative market share, early days receiving investments for the future.

Our accelerated growth drivers that we talked about earlier, I would put those in the high growth, high relative market share quadrant. And then the other kind of 2 quadrants of lower growth and a variation on RMS is kind of our core business. So every year, we look at our portfolio and say, what fits, where do we want to put more R&D dollars into? What doesn't fit? What do we want to deemphasize. You saw us announce earlier this summer that we were going to sell a sensor -- automotive sensor business to STMicro. And the reason we made that decision, it's a very nice business. It's a little bit below the growth rate we want to achieve and target. It's a little bit below our gross margin targets but it doesn't make it a bad business.

So that kind of falls into that lower growth, lower relative market share. And so we said, look, this is going to fit better in someone else's portfolio. We got a very -- it was a $300 million a year business. We got $950 million, not too bad. And that allowed us to actually fund those 3 other acquisitions we did. And you've heard Bill talk about in the past about OpEx and making room for fitting in acquisitions. The idea is we have a pretty strong model for how to think about OpEx, 23% of revenues are OpEx model. That's our guidelines, if you will. We didn't think it was right for us to buy 3 companies, pour it into the OpEx expense without taking some actions on the rest of the company. That's how we're always thinking about M&A. If we're going to buy something, it's got to fit inside the model.

Perfect. Well, we've covered a lot. I really appreciate you both being here and enjoy the next couple of days.

Great. Thanks, Tom. Appreciate it. Thank you, everyone.

Hi, everyone, my name is Francois-Xavier Bouvignies from UBS. I'm the Head of the European tech hardware and semiconductor team at UBS. So thank you all for joining. So we are very happy to have NXP. And of course, Rafael, the CEO of NXP joining this on time. Perfect. Thanks, Rafael. Bill, CFO; and Jeff, Head of IR.

So just a reminder, NXP is the top 3 semiconductor auto semis in the world. So that's a very -- good to have your insight, especially on the automotive side, but you have a lot of opportunities in the industrial that we will discuss, of course, as well. But in any way, a leading global semiconductor analogue company in the world. So thank you for being with us.

So let me start, maybe, Rafael, with the first question, or Bill actually, one of you, on the short term. So if you look at the next quarter, which is something that you just guided, you guided for revenues up 4% quarter-on-quarter in Q4, seasonality is flat to up. So you are above seasonal, which is kind of better than most of your peers that are more in line and some are even below. I won't name anybody. But can you explain maybe the drivers of this outperformance and why you are standing out here?

Yes. Let me take that one. And so indeed, we're guiding 4% sequential growth, which is above seasonality, typical seasonality. And if you look at the drivers, they're mostly company-specific drivers. Mobile is growing, let's put that one aside. We're guiding industrial 10% up sequentially. And that is driven by design wins that we had early on energy storage and building automation. These are starting to ship. We also have early contributions now of Edge AI with wearables and some smart devices actually starting to ship as well. So these are company-specific drivers in industrial, a strong kind of industrial recovery there.

In auto, I think auto, you can see resilience in auto, despite all the noise that we hear in the market. The company-specific growth drivers in SCD and radar and electrification continues to perform. And so the content growth for NXP continues to kind of be there in auto.

And the least, I guess, normalization of inventory, right? I mean we're starting to ship now finally to end demand. So all these 3 things are contributing to a better Q4 guidance.

And maybe, Bill, where do you see the inventories now in the channel and on the direct one as well. So on both sides, in another word that I'm asking you is like, where do you think we are in the cycle right now?

Related to the cycle, I would say it's very early innings. We've been consistent there. The signals that we see quarter in, quarter out continue to improve regarding our distributions backlog, our backlog improvements, I think the sell-through is very healthy.

As Rafael mentioned during our earnings call, we targeted to be either 9 or 10, and that's a function of what sell-through does. And I think sometime in 2026, related directly to the channel itself. We should be back to that 11 weeks. And the way we look at that is consistent year-over-year growth. And I think what we guided, we turned back into the model, plus 6% for NXP in Q4. We signaled Q1 of growth year-over-year, again, back into our financial model. So we're pretty -- feeling pretty good to make sure that we have the inventory in place to service our customers, especially in those fast turning parts from a channel perspective. I'll let Rafael comment on the direct side.

And I think -- what is standing out when you speak to many of your peers in the industry is that there is still a lack of visibility still. I mean we all sit on the companies that sit on a lot of inventories on their balance sheet, your customers, they know that. So I guess the lead times are quite strong still. But still, you are still very optimistic versus your peers. So it's why I'm turning to you a little bit as to where is it coming from, if we have no visibility. So it's very interesting to hear from you.

Yes. I mean the short-term cycle orders continue to improve quarter in, quarter out since Q1. We see customer escalations increase across the portfolio. And we see short-term orders improve across specifically with our growth drivers, our company-specific growth drivers, they are all intact to that, I think we said 15% to 25% across the board depending on 1 of the 5. They're all intact, and we'll share what those results are at the end of the year, like we usually do.

But we're seeing -- with inventory digestion behind us, as Rafael said in his opening remarks, we feel pretty confident at this point in time based on the signals and the data trends we see across the board and they continue to improve.

Francois, you just take back, right? And the reason we are optimistic, right, is if you look at the dynamics behind the business. We mentioned channel inventory right now. We manage channel inventory. We manage it differently in the downturn, and we're managing it very carefully right now. So we believe that we have a nice setup right now from a channel inventory perspective on 9 weeks going to 10, potentially to finally 11, right? So we have control of that channel inventory.

And second piece is our growth drivers. These are company-specific growth drivers, whether it's SDV, whether it's radar, whether it's some of the edge compute in the industrial, they're actually quite performing and performing well.

And the last one is we talk a little bit about normalization of inventory and the direct customers in auto, that normalization is happening, right? That digestion of inventory, I think, is behind us. And what's going to happen now is that we're going to start shipping to end demand. We're going to start having visibility now. And shipping to end demand is already very good for the industry. It's very good for NXP and auto. And so when you look at these 3 things combined, that provides a really robust momentum towards the end of the year and going into 2026. And so that's what it really captures the optimism that we have in NXP moving into next year.

Makes sense. And maybe if I move, it's a good transition for my question on '26 as a whole. We talked about more short-term Q1 But you mentioned that content is an important driver. So if we look at '26 right now, what are the main content drivers for NXP that you think will help? You can maybe some design wins, ADAS components, infotainment, electrification BMS. I mean, you can name a few drivers -- key drivers that you see for '26 for NXP?

Yes. The really important design wins both in auto and industrial, those design wins have been captured already, right? So now we're entering this phase in '26 and 2027 with these products now starting to launch. I mean, they move to SDV and auto is undeniable. It's just a better way to make a car, it's just the future of the vehicle. And so the way we are positioned in NXP with our portfolio, both for personal and central compute, it's quite unique and probably unparalleled the industry.

ADAS adoption, driving a lot of radar sensors for us and that NXP being the leader in radar, we get benefit from not only more nodes per car but also more complexity of radar nodes per car. And then I guess the cognification of everything in industrial is driving a high-performance compute. We see low end MCUs, now transition into heterogeneous compute architectures, which drive our i.MX portfolio, which is industry leader in industrial processors. And so we get benefit from that cognification of the industrial space which brings connectivity, we bring security. And so we also have an attach rate story that is very compelling.

Yes. Maybe if I can just add some colors of the size of the buckets that Rafael just talked about. The SDV, our company-specific group system solution, that business was only $500 million in '21. It doubled to $1 billion in '24, and we're going to double it again in '27 to $2 billion.

The radar business, again, was just shy of $900 million in '24, and that's expected to be over $1.3 billion in '27. Related to electrification that surpassed the $500 million mark in '24. And we'll probably be just shy of $900 million. And again, as I mentioned, these are all intact 4 quarters in to our 12-quarter journey.

And then lastly, which is our newest one is connectivity, and connectivity was only about $100 million in '21. It went to $400 million in '24 and we're expected to be above $700 million in 2027 on the company-specific growth drivers, specifically for auto.

Industrial IoT related to processing, connectivity, security. I'd say that the growth drivers there were about $600 million in '24, and we're on track with the design wins and the ramps that Rafael just talked about to double that to $1.2 billion in 2027. So we feel very confident on the company-specific drivers, which will drive the growth of the company and deliver to our financial targets as we go ahead.

Very clear. Thank you for all these details. Gross margin, Bill, I guess it's for you this one because obviously, top line is an important driver, but gross margin is also key. And I have to say, again, you have been standing out on the gross margin side in this down cycle. Of course, you're have much less volatility, very steady gross margin. As we came out of this down cycle as you seem to allude to. How should we think about your gross margin? Do you think you have a lot of operating leverage in line with this top line story? And what are the drivers?

Thank you, Francois. I think if you think about 57%, 63% is our model. We got into a model in Q3 after a first slow start on the top line in the first half of 2025. We guided Q4 at 57.5%, we expect 2026 to be back into model for the full year. The short-term drivers, the way to think about it is our internal utilization, as you know, they were in the mid-70s. They're now going to the high 70s. There is leverage when we bring them into the mid-80s. So that will be a benefit just from -- as well as if there's 200-millimeter consolidation, we just started that Phase 1, we announced will carry about 6 or 7 extra days at the end of the year. But we'll have -- that's a journey, right? That's probably a 6- to 9-year journey on that consolidation efforts, which will trigger benefits into the gross margin for NXP.

Other areas is typically Q1, we have the low single-digit price gives, but we offset those through productivity improvements throughout the year. So those 2 kind of wash, I would say. And then you have more of the company-specific growth drivers. And typically, the mix can play a role in any given color. But we feel very comfortable of delivering that 60% mark at $15 billion. Again, the rule of thumb for modeling purposes that we provided think about every $1 billion worth of revenue at 100 basis points. And that incorporates all these puts and takes that we managed quarter in and quarter out.

Very clear. Rafael, on the China side, I wanted to ask, obviously, it's a very important topic in the industry. We all see China trying to localize as much as possible. It's a threat potentially to share, but also pricing, the economics in that region. Can you remind us, first, what is your percentage of China business right now? How much was the growth maybe or is the growth in '25 or in China? And what do you see for the China business in the short term and medium term for you?

So China, I do confirm China is an important market for NXP. We -- I think Q4 -- sorry, Q3, our ship to revenue in China was mid-30, say, high 30s to 38% or so. And the way you think about that revenue, about half of that is for Chinese OEMs, Chinese indigenous headquarter companies and half of them is for multinational for reexport. So about half of that revenue is China for China.

And China is a competitive market. In all aspects, right, is in auto, they're extremely competitive among each other. I think in industrial, they are very competitive. And then when you look at indigenous Chinese semiconductor companies, we see emergence now, companies doing IVI infotainment products, ADAS. We see catalog, analogue cars showing up. We see low in MCUs coming into either auto or industrial in some places.

And these are areas where NXP has either little exposure or we decide to compete in highly differentiated segments of those categories. Our positioning in China is very specific to the vehicle core architecture of the car. That's where kind of where we decided that we are going to create our differentiation through innovation through time to market is making sure the OEMs in China have a safety anchor with processing from NXP.

And so that's our differentiation, right? The vehicle core architecture that requires a lot of IP and functional safety requires a lot of IP and security, isolation, redundancy. And so these are products are quite unique.

The way we address China right now, we don't fight for sockets. We fight for architectures because that's the way we actually add end-to-end value with our central compute architectures and products and our inner Zonal architectures. And that's our playbook in China, innovation and speed.

In many ways, I think the way we see China, we embrace the competition in China in many ways because for us, it's more of a fitness center right now, especially in EVs, that a fitness center. So if you're able to deliver innovation to win in China, that kind of really strengthens your ability to compete everywhere else.

And is EV very important for you in China?

Well, what is important for us is SDV. It just happens, the EV is the lion's share of the production in China. But SDV,this is where we tie our kind of our strategy in automotive is independent of the powertrain. It could be EV, it could be hybrid, it could be ICUs. And SDV is the secular trend that we really tie to most of our innovation and most of our products that we -- the NXP does ships in auto.

So what was your growth in China in '25? Or what is your current performance there?

You're talking about profitability growth...

More on the top line actually.

On the top line, it's in the...

It's about 1/3 of the business, Francois.

And growing this year?

Yes, it has been growing, yes.

Yes, yes. And you expect to grow as well in '26, it would be...

Absolutely. Indeed. I think China has actually been one of the bright spots for NXP, right?

Yes. Maybe moving to more long term. I mean, NXP targets $16 billion in '27. You mentioned a bit the building blocks, Bill. So that's a 6% to 10% revenue CAGR. But based on '25 numbers, if I take the consensus and your guidance actually midpoint, it implies a 14% CAGR, '25 to '27. So you have actually -- it's a guidance that is more H2 loaded for the reason that we know. Are you still very confident? I mean, is there any risk to this guidance? Because obviously, it's a bit of a hockey stick right now. So I just want to have a view on that?

So I acknowledge, Francois, the math, especially when you start with kind of a slow 2025. But the reason we -- I mean, I'd say we remain committed to what we've said in our Analyst Day in 2024. And the reason we remain confident even though I'm not going to comment -- I'm not going to guide 2026, so I'm not going to comment on the linearity between now and the 2027. The reason we remain confident is because the growth drivers are intact. They're not only intact, I think they're getting strength to move to SDVs is getting strength. They move to more autonomous driving with -- and the pull-through for more sensors is getting stronger.

I think the push for AI at the edge, whether it's auto or industrial, it just continues, right, the more connectivity, more security. And so I think the drivers on our S32 platform and our radar and our i.MX, our connectivity and auto continues to be intact. And not only that, they're performing today, they're performing very well. And I think you heard from Bill what we -- the trajectory we have on those growth drivers.

We also operated in 2025 for most of the year in a trough period. So now we are kind of going back into normalization. And so we're going to enter at a minimum, a period of normalization inventory, we're going to start shipping to end demand and that already is going to be very good and not even counting restocking for that.

And so I think when you put it together, I think we remain committed, normalization, the growth drivers that we have for the company. That is what keeps us confident that -- and remain committed to actually achieving the targets that we set forth.

Makes sense. Thank you, Rafael. Bill, on the gross margin side, I forgot to ask you about the China business, we talked about the top line drivers. But is it accretive to the China business or group average? I mean, how is the profitability in China?

Yes, we don't break out the profitability of the gross margin. But as we said, generally, with our end segments, the gross margins are all kind of similar in the same ZIP code. We've improved that over the years through our disciplined approach of getting out of low-margin business or through the R&D investments we make through the hurdle rates to drive future gross margin for the company as we go forward.

Rafael, I mean, you did not recently joined NXP. But as CEO, it's recently new. So maybe can you tell us about your experience, what's your strategy as a CEO. Now you have been a few months into the job. Do you want to do something differently? Anything you could bring to the company as a fresh ideas?

I've been at the company since 2014. And so I was intimately involved in crafting the strategy for NXP with Kurt and with the rest of the -- to the management team with Bill. And so you should not expect kind of a hard turn left on the strategy, right? Where you should expect is an acceleration of the execution of it.

I think we have -- one of the things that probably is kind of lost is we have a massive opportunity with these complex devices and systems at the edge to move from component to more of a system architect and co-creation of systems with our customers. And so we have this massive opportunity to actually become much more intimate with our customers.

And my goal is to actually go and accelerate that. And if you look at the products that we have in processing and connectivity and AI and some of the acquisitions that we've done on to actually fill the gaps that we have to complete the system and look at TTTech Auto from middleware for SDV, the gaps that we fill with Aviva Links to kind of create high-speed links for both industrial and auto. And link in our own AI, we're starting to fill the gaps that complete the system from a technical perspective. So I'm quite excited to just go and accelerate our vision of bringing intelligence systems to the edge in auto and industrial, and that's what we're focused on.

Okay. And when you say accelerating, you have been through -- you did a few M&As recently. Is it what you mean by accelerating? Or is there anything concretely that you mean by accelerating like R&D, CapEx, more M&A coming just to get more ideas on that?

Well, I mean, there's a lot of layers. So let's just go into the M&A acquisition, the M&A that we just completed, 3 acquisitions happened. We're not only integrating these teams. We're also integrating their technology with the integrating the portfolio, we're bringing them into the rest of the NXP portfolio, validating integrating and then delivering these 2 either auto customers or to the long tail and the channel for industrial. So we are going to really augment the portfolio with the acquisition of these companies and we just need to make sure that's seamless for our customers.

Culturally, internally, we are focusing on agility. I mean we talk about being competitive in China. I believe that speed is going to be a new parameter, a new variable in industrial and auto. And it's not just going to be a China factory. And so I think adopting a more agile culture is going to be also part of what I'm focused on.

And maybe moving more to the longer term on the gross margin side, Bill, I mean, 57% to 63% is your target for '27, which is a very nice target to have. Now if you think about more longer term for the company, can you go into this high 60s, mid-60s at some point? And what would be the, I mean...

We're not stopping at 60% because, again, if you think about our longer-term play in the gross margin, there's 2 fundamental foundational shifts that we focus on. One is the portfolio and how we manage our R&D and continue to move up the stack. The value we provide to our customers. And that's a hurdle rate. So today's hurdle rate around 60%. And so all new R&D has to produce products 3 or 4 years from now at those type of rates or above. And so that gets layered on.

The other shift is the hybrid manufacturing strategy. We've talked about this for the last couple of years. We're super excited with our joint venture of BSMC coming on board in 2027. We believe it will be fully ramped in 2028, which will add an incremental 200 basis points to our gross margin wherever our gross margin is in 2027. So we're excited about those levers. Obviously, there's much more, and we'll probably share more about that in our 2027 Investor Day, Francois. But I feel very comfortable with gross margins hitting 60% at that $15 billion mark and then going beyond 60% as we continue to grow the business and execute to it.

It's a good teaser. For your divestments strategies, I mean, obviously, you have been very agile as well in the way you run the business in terms of divesting some business that you believe are not fitting anymore your targets. So is this still the case today, you feel like you have some portfolios that you might adjust?

Yes. I mean, this is nothing new. I think NXP has a track record of reviewing their portfolio on an annual basis. We kind of do it on quarterly, on a performance standpoint, but annually, we go through our strategic reviews. We're not shy of stopping or getting out of certain businesses. We've demonstrated that in the past. And as you know, Francois, over the summer, we announced the divestment of our sensor business to one of our peers. And that works out very well for us. It also works out very well for our peer.

The main purpose of selling this business is the fact that it was slightly below the corporate margins. It only grew 2% or 3% for us. And we saw a gross margin headwind challenge with this business because guess who manufactures those front-end wafers for us? It's that peer. And so it made sense at this time where it's better off in somebody else's hands and they can do more with that business. So it was a win-win, I would say.

But we constantly look at the portfolio. If there's opportunities to prune, we will or to divest other parts of the business, absolutely. But really, think about that divestment of $950 million help fund the higher profitability businesses that we just acquired for about $1.1 billion, $1.2 billion of TTTech, Aviva Links and Kinara. So we like that trade-off.

And you mentioned about accelerating the business, Rafael mentioned it. Is there any impact on the capital allocation that NXP will have? Maybe you can remind the capital ratio policy and how you think about that?

I think the capital allocation strategy inside NXP is very sound. For the last 10 years, I think we returned close to or above $20 billion in the form of dividends and buybacks to our owners. We're going to continue to do that. I think we share that from now until 2027, we'll add another $8 billion or $9 billion to that level of returns.

The way to think about it is we'll return all excess free cash flow. So think about 100% of free cash flow back to the owners. Clearly, we still have some investments that will go out in 2026 linked to our joint venture with Vanguard called VSMC. But once we get past that, I hope to be able to even get more money back to our owners through the form of both dividends and buybacks. But the way to think about it very simple, we manage this through our net debt leverage ratio. As long as this is at 2 or below, we are actively buying back the stock.

Rafael, maybe a very important topic is AI. Many of your peers start talking about data centers, AI tractions. Can you maybe lay out the opportunities there for data centers, AI more specifically? And how do you intend to capture some growth there?

Yes. First of all, I want to be specific in the way we address AI because I think NXP, we see -- we play in the systems. What's happening in the market right now is everything is getting software defined. So let's start with that. So our play is at the edge, both in auto and industrial. So everything is getting software defined. And that creates the foundation, what comes next with the next frontier, which everything is AI defined.

This next phase, and you see all the investments that are happening on AI at the cloud, the true transformation is when all this phenomenal IP, this great models move to the edge. And they really transform our everyday devices and they will transform really impact the way we work and we play. That playbook of bringing AI to the edge has not been written yet. And so this is what we intend to play. And we -- our road map is focused on bringing that intelligence to the edge because AI at the edge is application-specific, resource constrained, fit for purpose, and that's where NXP actually does very well, bringing complex technology and deploying it to the masses in the channel. And you will see a portfolio that is going to be unique and unparalleled with the competition.

Great. Thank you. We're running out of time. And thank you all for listening, and thank you for being with us today.

Thank you, Francois.

Okay. Thanks, everyone. So this is Morgan Stanley Day 2, 25th Anniversary TMT European Conference. And we're very glad to welcome to the stage, CEO of NXP, Rafael Sotomayor; and the CFO, Bill Betz. So welcome, gentlemen. Welcome to Barcelona. Glad to see you here.

Thank you.

Maybe I'll just kick things off just to level set everyone in the audience. Maybe walk us through again, key points from Q3 and what you talked about for guide, maybe even by end markets, but what was the key points at least anyway?

Thank you. Yes, absolutely. In Q3, well, first of all, I think there are several signals, right, and several reasons why we feel good about the trajectory of the business so far. If you look at -- this Q3 now will be the 2 quarters in a row, we have sequential growth. And let's start with the first one. First one, we delivered $3.17 billion of revenue in Q3, which is slightly above the midpoint of our guidance. And what is encouraging is what's behind it, which is it was broad-based. Every region was up, every end market was up. Our direct customers were up, the channel was up. So when you look at a company with this level of diversity, and you have this, I would say, this synchronized improvement, that is actually a very healthy indication of, I would say, business improvement. When you have this, kind of everything is actually going well.

Second piece for us is very, very -- kind of very bullish is the areas where we invest more, the areas where we believe there are growth engines, the differentiator of NXP. Why do you own NXP? Why our customers select NXP? These are the areas that are very NXP specific. And these areas in software-defined vehicle and the transformation of edge, AI and industrial, all these things are actually performing. Performing in an environment that is actually quite challenging, right? So that means they're growing, they're doing even slightly better than what we think they're going to be doing. So that's the second piece.

Now when you look at a broad base the KPIs from a cyclical perspective, the things that we watched. Let's start with the most important one that we mentioned in the last earnings call. We see now inventory normalization, right? It seems that inventory digestion for the Tier 1 auto customers that we have is finally coming to an end, which means that we're going to start shipping to end demand, which shipping to end demand is actually quite good in auto, right? For us, we see this as a very nice thing to see finally coming to the end of the inventory normal -- coming to the end of inventory digestion.

Now we look at the channel. The backlog of the channel is improving. The sell-through on the channel is improving. And even our direct orders, the EDI signals that we get from our Tier 1s and our customers is also improving. So you can see the overall -- the demand for NXP products is in a different setting. Now visibility continues to be low. That's one thing that seems to be universal. Uncertainty actually kind of makes customers kind of put orders very late, right? And that continues to lead to customer escalations and those escalations have kind of -- every quarter, they have actually increased, the number of escalations, not necessarily the number of dollars, but the escalations have increased. But nonetheless, I think that kind of shows you that demand kind of continues to be improving, the demand conditions.

Now that leads me to the final point I will say, which is our Q4 guide. Like we guided to 3.3%, which is 4% sequential growth, which is above seasonality. And that puts us for the first time this year on a year-over-year growth of 6%. And that's at the low end of our guide, but we're quite excited about the fact that we kind of go back to growth year-over-year. And if you look at what also is behind our guide is strength in company-specific drivers in industrial, which is quite encouraging. These are company-specific. These are design wins that we had in energy storage, battery management, some design wins we have on a particular category of wearable devices is doing quite well in smart glasses. And that growth sequentially is 10% just quarter-over-quarter in industrial. And so we feel optimistic on how the year is closing and how we are going to start 2026.

Great. So it seems like most end markets doing well. Channel is quite lean. Industrial strength being seen. Margin and the guide looks like it's at least seasonal. Things are going well, or at least well enough through the bottom of the cycle.

That's how we see it. Listen, I'm not going to go and say this is the lens for the entire industry, and I know that some of my peers have different kind of messages. But the way we see it is things are improving and are going in the right direction, and we like the setup.

Perfect. Okay. Maybe if we drill into some of the end markets. I mean, it did look as though automotive in Q3 was a little flat, but other markets were up. One did stand out, communication infrastructure was down a little bit. Maybe help us understand what's happening there? And then what is the strategy to see that recovery coming back there?

Yes. So if you step back in Comms and Infra, maybe we start with the premise. Comms and Infra today is composed of 3 unrelated businesses. So it's literally kind of a bucket of a cat that is not mobile, not industrial, not auto. Let me put it kind of that way, right? And so there are 3 businesses there. In November Analyst Day, we basically gave a projection that this particular segment, this particular revenue bucket for NXP was going to be flat for the next 3 years.

Now let me tell you the dynamics behind that. You have 3 businesses. One is the networking edge business. This is a networking product that we stopped investing a long time ago, and we said that it's going to go to 0 by the end of 2027, okay? So that means it's declined. You have radio power, which is radio for basebands for networking devices and infrastructure, 5G, 4G and 6G. And that's a bit of a choppy business. It's a small business. It is relegated to 2 or 3 big customers, and that's kind of flat over the years. And then you have the Secure Card business, right? So you can imagine, if you have a business that is declining, it means the secure card business is growing. And so that is the dynamic that you see is at the end of the day, at the aggregate level, that bucket is going to stay flat. But in reality, the one portion of the business that is actually performing and keeping it flat is the secure card business. And these are products that go into payment cards, passports, ticketing, MIFARE and RFID.

So Secure Card is really holding the floor together to flat, but somewhat declining...

Declining, yes.

Got you. Bill, maybe if we turn to yourself on margins. I think last print, we talked about return to the long-term financial model. I think 57% to 63% is target. 57.5%, I believe, was margin for the next quarter. So maybe help us understand what are the moving parts in the margin? And how does Q4 set you up potentially for next year as well?

Yes, absolutely. Our model is 57% to 63%. The very simplistic way to think about gross margins is for every $1 billion of revenue, it will drive an incremental 100 basis points to our gross margins. And so think about $15 billion, we should be around 60%. Now what has occurred with gross margin, and there's the structural foundation of gross margin, the discipline inside the company, and that's driven by 2 factors. The first factor is our portfolio. And it happens over many years. When I joined the company and sure when Rafael joined the company, the gross margins were at 45%. And so what that meant with our R&D investment dollars, and you think about the ramps of our products in both industrial and auto, it takes 3, 4 years to that ramp. So the investment dollars and the choices we had 10, 15 years ago, that hurdle rate for the company was 45%.

As we expanded and grew, it went to 50%, then it went to 55%. And so think about today, all our new investments and choices that we're making inside our portfolio, that hurdle rate today is at the midpoint of our 57% to 63%, which is 60%. And so those investments that we'll see, which you'll probably see post 2027, be beyond 60%.

Now the other foundational change, to get gross margins more resilient. So if you compare us compared to our peers, what has occurred is, in the past, I would say when we went through a cycle, our gross margins would probably have a quite variability. How we managed this last down cycle? We think we navigated it quite well. We kept utilizations at the 70% internally. But more importantly, our hybrid manufacturing strategy allowed us to diversify and become more flexible, more resilient for our supply, but also more cost competitive in our supply. Therefore, I would say, when we joined, Rafael and myself, again, 15 years ago or so, we were 70% fixed. Today, we're only 30% fixed.

And so through that transition, your variability on the gross margins become more variable in nature, so you shouldn't see the large swings. We're not taking business to go fill our factories. That's not what we're about. We're about making sure we provide the value to our customers and what they need and at a cost competitive that's helpful for them. So those are the foundational structural changes, I would say.

Now what's in the short term to medium term? What's going to drive gross margins? Obviously, the function of revenue, we get back into model with Q4 guide, plus our modeling soft guide gets us back to growth year-over-year. We feel very confident that we will deliver in our financial model for next year and beyond. We're not backing away from the entire financial model.

And I would say utilization, as we mentioned, is we're just beginning our 200-millimeter consolidation. And so think about these internal factories that run 90 nanometers and above. And so what's occurring is all our new design wins are on below 90 nanometers. And so there's a shift to make sure we support that. And we will be structurally moving and transferring product to our foundry partners of TSMC or Samsung or GlobalFoundry for that resilience of supply. But more importantly, we also have joint ventures that we're investing in that we own, whether it's 10% of ESMC with the likes of Infineon and Bosch and TSMC for resilience in Europe, or our VSMC, our newest joint venture that will be up and running in 2028 in full production with the likes of Vanguard, our partner, also supported and backed by TSMC.

That brings us a very cost competitive and be able to support and supply this ramp. We have this huge design win funnel that we have to go deliver and execute to. And so over the next couple of years, you're going to see us execute and grind gross margin higher through our hybrid manufacturing strategy. So again, short-term utilizations, the 200-millimeter consolidation, when we finally build the end-of-life products, utilization improves. We may sell these factories. Again, that's all -- we'll update that on a quarterly basis.

And other things I would say is the mix of our products. Over time, these new product introductions, like I talked about in the portfolio, grind the gross margin higher and also something that we like is the industrial space and our go-to-market through the distribution. The higher the distribution, think about it, it's low volume, higher margin. And so we want to continue to invest in our go-to-market. And so we feel pretty confident to get our gross margins not just at 60%, but think about post 2027, with just the likes of entering and filling up our VSMC joint venture, we will get an incremental 200 basis points on top of the corporate margins post 2028. So we'll update more about that in our next Analyst Day in 2027, but we feel very confident in our gross margin projections with the support of our revenue growth in the markets we play in.

Got you. Sounds very healthy. So sensible hurdle rates, good variability and flexibility in the manufacturing, and a transition as well, where you're managing joint ventures at the same time. So it seems in good shape. And you talked about industrial growth. I think if I stay with you, Bill, actually, there is always pricing pressure. I think low single digits usually is muted. And it's right about this time of the year, you see the price negotiations. So how does that set us up for Q1 and the kind of margins you'd expect? And maybe just if I add on to there, you did talk about migrations, but is there anything else you're doing in cost management or cost reduction programs, restructuring maybe?

Yes, absolutely. So in Investor Day, what we assumed in those growth rates of 6% to 10% is an annual low single-digit price reduction, which majority of it happens in Q1, because with the automotive exposure we have, that's when it takes place. And the way to think about that is you get an impact in that first quarter.

But going to your second part of your question is, we then get the cost improvement, the yield improvements, the test time reductions, the cost reductions that we get back. And so the way to think about the low single-digit price, that's just normal being competitive in the business, that all gets offset with the cost improvements that we make throughout the year. So those 2 kind of offset each other really from it. And typically, Q1 is our lowest quarter of the year. So yes, we kind of made sure that we get those gross margins. We still think there'll be a model. It's hard to always hold from Q4 to Q1 with our revenue typically seasonally down and also our price gives, but we feel very confident we'll get and grind those gross margins above current levels of Q4.

Got you. So maybe if we turn back to yourself, Rafael, and I look at autos in particular, 2 main drivers really. We had xEVs obviously pushing for a lot of dollar content increase, but obviously, software-defined vehicles becoming a big play. I know you've got the S32 family. You're well positioned in this space. Help us understand how does the dollar content increase maybe next year and the year after as you see things?

Yes. No, happy to get into that. So I think probably, step back and look at it from the content -- the way to look at NXP is that we don't have a fixed content per vehicle. When you have the exposure that we have in automotive, NXP -- I mean, it's likely you pick a car randomly in the world, there will be an NXP part, right? And so the content per vehicle really varies from as low as $100 all the way to greater than $1,000. And it really varies that much. And it tends to be related with the architecture of the vehicle or the type of vehicle, the type of features, it's an older model or a newer model.

Maybe a more probably interesting way to look at it is to look at the subsystems of the car. So you can see kind of the drivers of content growth. And I'll start with what you talked about. You mentioned SDVs, right, the software-defined vehicle, and that is at the core of our processing portfolio. And these are portfolios that go from relatively kind of low power type in the lower-end MCUs, even though for us, they're not super low end. We tend to be in the high-performance part of the spectrum in all our processing. But that will be in, let's say, on the $10. And then you have the products that are driving more the zonal architectures, right, that tend to be in the $15 to the $25 depending on the features and the memory and all that. And then now you get into our 5-nanometer products who are the latest and greatest that we have for the transition that is happening to central compute architectures.

And you see the spectrum, right, of choices and architectures, but also spectrum and the choices you select for your microprocessor needs or microcontroller needs. And that tells you -- and where you are in that spectrum is really largely determined by where the OEM is in their SDV journey, okay? And there are customers who are in the zonal architectures, driving a lot of the next-generation zonal architectures with our K5 family, which is our 60-nanometer with MRAM incorporated. And the other ones who are more progressive and going towards more of a central compute, where we are going to see content right there with 4 or 5 of these chips at a $50-plus range. And so that's big content. Big content growth by the selection of the architecture, right? So that's one driver, and that one is undeniable is happening. The move to SDVs is unstoppable. It's just a matter of where the OEM is in that journey.

And you have the push for more ADAS, right, the higher level of ADAS, which for us is a driver for sensors. So the way you got to look at it is, the push for higher autonomy in the car drives the need for more radar and NXP is the leader in radar. And so what it means is that not only more cars adopt radar or more cars adopt more nodes of radar, right, as they go from 1 to 3 to even 4 radar nodes. And every radar node is about $20. So there's some content growth there.

And then you have, obviously, the electrification piece, right, the BMS piece, which for us will be -- I think it will be for a low-end 400 volt, that will be about $60, and for a higher end, 800 volt will be twice that. And then you have all the other stuff, networking, connectivity, car access. And I'm sure I'm missing some. And all that also is driven by the fact that the car requires more and more data. The car becomes a massive networking machine. And so that is also content growth.

And so when you look at 2026 and you put all these things together, obviously, at least you understand the drivers from the content growth. Now if you were to put numbers in it, and I'm going to use the guidance that we gave at Analyst Day, our Auto business is going to grow in a range between 8% and 12%. If you assume a SAR growth of 2% or mid-single digits and low single digits, then you can see, at that level, at that average level, you can see at least a content growth that goes from whether that would be 6% to 10%, right? So that will give you a sense of what the content growth is in the way we're measuring it.

Really interesting, the changes. I mean, I think you alluded to it a little bit there that there are different routes to this EE architecture or SDV play. And it's interesting that you go from microcontroller to microprocessor. What is really pulling that microprocessor story? And why are people coming to NXP in particular, do you think?

Well, first of all, I think the processing needs of the next-generation architectures are just driving higher performance, just driving higher performance. And about literally like almost 7 years ago, we decided to actually basically tilt our focus into not what the business was then or even it is today, but what the business was going to be. And what you will require is that we ended up with investments to develop products that are quite differentiated. I mean some of our products are original. They are original, meaning is there's nothing like them in the market. And now I think the OEMs have caught up the idea that they need to own the software. They need to own the architecture. They need to keep up what happened that was originally initiated by Tesla and some of the Silicon Valley customers, right? It opened a new car entry, but the Chinese quickly follow. So a lot of the legacy OEMs are now coming up to the realization they need to adopt a software-first mindset.

And the products that we were using before and the dependencies of the supply chain and the automotive, they just no longer work for them. And so what they now go and say, okay, well, now I need to develop the software. What is the right architecture? Well, the old products don't fit anymore. So you need to look at this high-performance microcontrollers, the high-performance microprocessors, because you need to develop software. And not only that, you need to also have -- you need to have the ability to have extra CPUs, extra cycles to be able to deploy future software, right?

So you got to think about a software-defined vehicle, very interesting. The worst driving experience is going to be the first day you buy the car. And the car will get better over time, which is like the reality is backwards, right? How it gets better is it learns how you drive, how you like it. It learns how the vehicle is operating in the environment, it gets updated. And for that, you need a really robust processing foundation and the right software on top of it. And that's what is making NXP different.

So good hardware redundancy for the over-the-air upgrades that you have?

Absolutely.

Got you. Maybe just staying with -- I think you just touched on China and China's adoption of software-defined vehicles. I think China grew 13% Q-on-Q for you guys. I mean help us understand how does that sort of maintain itself going into next year? We do hear about xEVs peaking somewhat in China, 50%, 60% penetration. So it's got to be SDVs, it's got to be the content increase there. But what is driving that?

Yes. So start with the premise that China is a very important market for NXP. And if you look at, the latest we have is 39% of our business was shipped to China. Half of that was for indigenous companies like Chinese headquartered companies. Whether the product stays in China or goes overseas, at the end of the day, it's really hard to tell how much of that is, but it's for Chinese customers, so half of that is. So you can see that China headquartered companies, of course, about 20% of our revenue. So it's a very important part of our business.

And I would say that for auto, just kind of step back, for auto, we like China, because they're fast movers. They tend to adopt our latest and greatest innovation the fastest. And so we tend to see what works and what doesn't work first in China. So being there in China allows us to have a peek of what is going to work for the rest of the world a little ahead. So strategically, we tend to consider China very important. If you can keep up with China, you can keep up with anywhere, right?

Now I think today, competition in China, especially in auto, it continues to be the same people we compete outside China. It continues to be the Infineon, the ST, the Renesas and the same players. I don't intend to say that the indigenous kind of semiconductor is not going to be there. All I'm saying is that where we play today, we don't see it, right? And when and how we're going to see it, I can't really predict that. But the way we see China is, it's an overcompetitive market among themselves. I'm talking about now car OEMs competing with other car OEMs and competing for the outside world. And I believe that if we continue to play our playbook and execute our playbook, which is be ahead with innovation, be ahead with a product that creates value for the Chinese OEM and the Chinese Tier 1, I think that playbook has worked so far. And I think it will continue to work as long as we're able to keep up with innovation that adds value.

Okay. So innovation is key there in that market. I've got a couple more questions for you, Rafael, and maybe I'll turn back to Bill later. But at this point, I'll ask if there are any questions from the floor before I move on.

Not at this point.

So Rafael, maybe just changing to Mobile. I think Mobile revenue has been a little volatile, it looks from the outside. So what is your outlook for this segment going forward? And what drives the business for you guys?

Well, maybe I'll rephrase your comment on volatile, especially the volatile part, because I think it's seasonal. I don't consider the Mobile revenue volatile. Actually it's one of the ones that has actually been quite stable. But it's seasonal. I mean the first half tends to be weaker than the second half because both of our biggest customers tend to introduce new products in the second half of the year and then kind of basically be weaker in the first half.

But our exposure to Mobile is very limited to a particular niche category, right? Most of our revenue is driven by the mobile wallet, which we have a very big kind of share there, and we have very important customers. We like that. It's a good franchise for us. It's something that we don't talk too much about it because -- but it's mostly an ecosystem play. We got to think about mobile wallet as an ecosystem play. It's a product that develops -- that enables secure transactions. So if you have your pay in your phone, it's very likely to be driven by NXP technology, very likely.

And it's a system solution that drives the NFC, near-field communications ecosystem and security. And that evolution of the mobile wallet continues to happen. We continue to add more and more functionality to it. We do mobile payments and then we did mobile transit and now you can use your phone to actually do mobile transit. Even today, here in Spain, you can go to Madrid and use your phone using the mobile wallet from NXP.

But the other thing that you can also now do is we are now today working on embedding the SIM. The SIM is another secure product that occupies too much space on the phone, and we're going to incorporate that functionality into the mobile wallet. So the mobile wallet now becomes a very secure enclave for all sorts of secure transactions that they are sensitive from a security perspective. And that business is solid. Again, it's solid. We're a niche player in Mobile. We don't represent more than that, and it will continue to be a good business there.

Got you. So seasonal on product cycles, but a good dependable niche in secure ICs around the payment ecosystem?

You got it.

Perfect. I kind of was also curious that you talked about growth in Industrial. And some of your peers over here in Europe are still somewhat struggling. It looks -- I mean, very much focused on general purpose microcontrollers and are hostages to factory automation and the slow orders we're seeing there. Yes. So maybe help us understand where are you positioned differently? How are you seeing things in Industrial, frankly?

So I did get a lot of questions on Industrial because the performance -- what is considered the overperformance on our guidance for Q4. And again, when you compare us and the comparison to our peers who are representative of Industrial, I think it's not necessarily constructive, let me put it this way, right? Because we -- and I said it in earnings, we don't consider ourselves a bellwether for Industrial. Our exposure to Industrial is different. Our exposure to Industrial is, if you look at our -- our Industrial exposure is mostly on the digital side. So we are not a catalog component. Most of our processing that we -- whether it's microprocessors or microcontrollers, we have both, right, are application-specific.

And so I think that if you look at some of the performance that we have in Industrial, I mentioned it, they seem to be driven by very company-specific drivers, right? And so it may not necessarily indicate the health of the industry. It just indicates the health of our business, which I would say we feel good about it. We also have a system solution. Every time we do a processor, likely, we also get the connectivity piece. And energy storage systems, for instance, is -- the way we won in that area is by doing complete system designs, right? And so we deliver system solutions to our customers who are actually prequalified, precertified, because most ESS need certification, by the way. And so there's actually a go-to-market aspect that is very strategic in which we position NXP for Industrial.

The other thing not to completely overlook is how we managed the downturn, right? The downturn was managed with us managing the channel. Industrial, 80% of the business goes through the channel. So having a healthy lean position in the channel makes it easy for you to address today's needs, because you don't have to carry the burden of inventory that used to address yesterday's needs. And that is quite different than some of our peers. Today, our inventory in the channel and at the end customer is in a healthy manner. So I'm able to actually stage products that we have high conviction that they're going to sell through, and that's what is going to lead to overperformance in Industrial for NXP.

And just to add related to Industrial & IoT, I think a lot of it also is company-specific, as Rafael said. So there's a subset of products that we shared during Investor Day, which is processing, connectivity, analog and security. And that size was about $600 million in '24. And we are well on pace to double it to $1.2 billion specifically, as now the design wins and the cycles kick in, we feel really good about it. And as we said during earnings, all our accelerated growth drivers are tracking to those plans of that 20% clip. We'll break out a little bit more granularity at the end of the year, but we feel very confident of what we're doing. And those company-specific drivers is what's really probably given us a bit better than our peers, what we can see, along with that lean channel inventory that Rafael mentioned.

Yes. So that was the message I was getting. Good lean channel inventory management, application-specific bias rather than general purpose, and $1.2 billion run rate is target. So it looks healthy.

Maybe, Bill, if I turn to you then, last question here for me. So what are the key assumptions? I think your goal for earnings here by 2030 plus. I think you gave something at the Capital Markets Day. It evades me. It's not on my paper here. Maybe help us understand what the long-term game is.

Yes, absolutely. It's quite simple, actually. If you don't remember anything today, remember these 3 or 4 things, right? First off, we're going to grow our revenue. We feel very confident in the high single digits. So we guided 6% to 10%. So I just assume 8% in the model, right? Simple math in excel. Gross margins, we're going to expand them above 60%. Think by 2030, we should be well above that by just applying for every $1 billion, 100 basis points improvement in gross margin.

As you all know, we're very disciplined in OpEx, right? We have a model of 23%. We'll probably get some fall through and improve on our SG&A as we adopt AI automation internally and so forth, just like every other company. And we feel very confident, and look what we just did? We basically took on 3 acquisitions that were dilutive to us, because that revenue doesn't show up until 2027 and beyond, and fit it in our portfolio and transformed the company and get it ready. As what Rafael talks about is, we're playing for the future. We're not playing today. We're playing where we believe the future will be 5, 10 years down the road. So if you just put that all in your excel model, it will basically spit out an answer that says that $13 of earnings per share back in 2024 will be easily $26 in 2030.

And then on top of it, besides doubling our earnings, we feel very confident about just think about the amount of cash that we return to our owners. That's very important. We have a track record over the last 10 years. We have returned over $20 billion in the form of dividends and buybacks to you all as well as expand and improve the earnings of the company. And I think if I laid out in Investor Day, I think there's another $8 billion we're going to return or $9 billion from now until 2030, as well as delivering to that financial model.

I lied about the last question. I have 2 more, if I could.

We've got 8 minutes left. So...

Yes, go ahead.

Yes. It's interesting, you touched on the acquisitions. And I think you've made 2, I'll call them, bolt-ons, Aviva Links and Kinara. But as far as I understand, I think there's 2 months of impact in the upcoming quarter in OpEx. So how do you manage bolt-ons like this feathering in? I presume there's annual bolt-ons as well. So how do you manage the OpEx integration story there?