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NXP Semiconductors N.V. (NASDAQ:NXPI) Q4 2023 Earnings Call Transcript

NXP Semiconductors N.V. (NASDAQ:NXPI) Q4 2023 Earnings Call Transcript February 6, 2024

NXP Semiconductors N.V. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the NXP 4Q '23 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would now like to turn the call over to Jeff Palmer, Senior Vice President of Investor Relations. You may begin.

Jeff Palmer: Thank you, Michelle, and good morning everyone. Welcome to the NXP Semiconductors Fourth Quarter Earnings Call. With me on the call today is Kurt Sievers, NXP's President and CEO, and Bill Betz, our CFO. The call today is being recorded and will be available for replay from our corporate website. Today's call will include forward-looking statements that involve risks and uncertainties that could cause NXP's results to differ materially from management's current expectations. These risks and uncertainties include, but are not limited to, statements regarding the macro impact on the specific end-markets in which we operate, the sale of new and existing products, and our expectations for financial results for the first quarter of 2024.

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Please be reminded that NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure on forward-looking statements, please refer to our press release. Additionally, we will refer to certain non-GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance. Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our fourth quarter 2023 earnings press release, which will be furnished to the SEC on Form 8-K and available on NXP's website in the Investor Relations section. Now, I'd like to turn it over to Kurt.

Kurt Sievers: Thank you, Jeff, and good morning, everyone. We really appreciate you joining our call this morning. I will review both our quarter four and our full year 2023 performance, and then discuss our guidance for quarter one. Beginning with quarter four, our revenue was $22 million better than the midpoint of our guidance with the trends in the Mobile market performing better than our expectations, with Automotive and, Industrial and IoT performance in-line with our guidance, and Communication Infrastructure slightly below our expectations. Taken together, NXP delivered quarter four revenue of $3.42 billion, an increase of 3% year-on-year. Non-GAAP operating margin in quarter four was 35.6%. 90 basis points below the year-ago period and about 20 basis points above the midpoint of our guidance.

The year-on-year performance was a result of solid gross profit growth, offset by higher operating expenses as we continue to invest in new product development. From a channel perspective, we maintained distribution inventory at a tight 1.5-months level, well below our long-term target of 2.5 months. In addition, we continue to partner with our direct customers on the normalization of their on-hand inventory. For the full year, revenue was $13.28 billion, an increase of about 1% year-on-year. Passing the revenue growth, we increased our pricing by approximately 8% in 2023, offsetting our higher input cost to maintain our gross profit percentage. And at the same time, our unit volumes were down by approximately 7% through 2023. We believe this underpins our view that we have intentionally under-shipped fundamental end demand in order to limit inventory build in the channel and at our direct customers.

Full year non-GAAP operating margin was 35.1%, a 120 basis-point compression versus the year-ago period as a result of the improved gross profit performance, offset by increased operating expenses primarily in products and system innovation investments. Now, let me turn to the specific full-year 2023 trends in our focused end markets. In Automotive, full-year revenue was $7.48 billion, up 9% year-on-year, which is a reflection of higher pricing, strong company-specific growth drivers, offset by lower shipment volumes. For quarter four, Automotive revenue was $1.89 billion, up 5% versus the year-ago period and in line with our guidance. Turning to Industrial and IoT. Full year revenue was $2.35 billion, down 13% year-on-year, a reflection of our tight channel management in a cyclically weak end market offsetting price increases.

We saw the trough for the Industrial and IoT business back in quarter one 2023. For quarter four, Industrial and IoT Revenue was $662 million, up 9% versus the year-ago period and in line with our guidance. In Mobile, full-year revenue was $1.33 billion, down 17% year-on-year because of weak trends and inventory digestion in the handset marketplace. For quarter four, Mobile revenue was $406 million, flat versus the year-ago period and better than our guidance. Finally, in Communication Infrastructure and Other, full-year revenue was $2.11 billion, up 5% year-on-year. The year-on-year growth was due to a combination of increased sales of secured card and tracking solutions, higher pricing, and last-time buys of select legacy network processor solutions.

And that was offset by declines of RF Power products for the cellular base station markets. For quarter four, revenue was $455 million, down 8% year-on-year and below our guidance. Now, like every year, I would like to provide the annual progress update on our six accelerated growth drivers, which we highlighted during our Analyst Day in November 2021. Starting with Automotive, the accelerated growth drivers are radar, electrification and our S32 processor family for the software-defined vehicle. Looking at our performance in 2023, both the S32 processor family and our electrification solutions are tracking ahead of plan. Revenue from radar is tracking below plan as we took strong actions to limit shipments to customers who are [digesting] (ph) inventory.

Taken together, the Automotive's accelerated growth drivers in aggregate are tracking above plan. The underlying core Auto business grew in line with our longer-term expectations. Within Industrial and IoT, we are trading below our expected growth range. We believe the underperformance is a reflection of significant cyclical end-market weakness and of our disciplined approach to managing the distribution channel. So remember, we served approximately 80% of the Industrial and IoT end-markets through our distribution channel to efficiently address the needs of tens of thousands of small customers, the majority of whom are in the Asia-Pacific and the Greater China region. Within Mobile, we are below our expected revenue growth range for the ultra-wideband accelerated growth driver due to the well-documented weakness in the Android handset market.

However, ultra-wideband traction in the Automotive market, which is the first well-defined use-case for ultra-wideband is progressing very well. 18 out of 20 Automotive platforms have been awarded to NXP and another 15 platforms are evaluating NXP solutions as we speak. And at this point in time, the ultra-wideband revenue stream is being driven by about seven automotive platforms and the few premier handset OEMs. Finally, for RF power amplifiers within Communications Infrastructure, we are below our expected revenue growth range. The challenge we faced was a combination of weaker base station deployments globally in 2023 and the faster-than-expected OEM transition to gallium nitride from LDMOS technology. However, the underlying core portion of Communications Infrastructure performed very well in 2023 as a result of serving pent-up demand for various secure cards and tracking solutions including RFID for intelligent labels.

Taken together, we are ahead of plan for the Communications Infrastructure segment. Now, let me turn to our expectations for quarter one 2024. We are guiding quarter one revenue to $3.125 billion, about flat versus the first quarter of 2023. From a sequential perspective, this represents a deceleration of about 9% at the midpoint, versus the prior quarter, which is consistent with our original outlook for quarter one to be down in the mids to high single-digit range. Our tempered outlook for quarter one reflects typical seasonality compounded by our continued desire to enable the normalization of on-hand inventories at our direct customers. And we will continue to hold channel inventory in a tight range. Regarding pricing, we see improving input costs trend versus previous years, which allow us to assume flat pricing for 2024.

So at the midpoint, we anticipate the following trends in our business during quarter one. Automotive is expected to be down in the low-single-digit percent range versus quarter one, 2023, and down in the mid-single-digit percent range versus quarter four 2023. Industrial and IoT is expected to be up in the mid-teens percent range year-on-year and down in the low-double-digit percent range versus quarter four 2023. Mobile is expected to be up in the low 30% range year-on-year and down in the mid-teens percent range versus quarter four 2023. Finally, Communications Infrastructure and Other is expected to be down in the mid-20% range year-on-year and down in the low double-digit percent range versus quarter four 2023. In review, during 2023, thanks to our company's specific end-market exposure, we experienced the variations of the semiconductor cycle at distinctly different points of time for the various parts of our portfolio.

On the one hand, full-year revenue performance in our more consumer-oriented segments of Industrial and IoT, and Mobile was underwhelming. However, following our tight channel management, these businesses troughed already back in quarter one 2023 after experiencing a traumatic post-COVID reset. Ever since, we have seen a gradual improvement, and we do think these growth trends should continue throughout 2024. On the other hand, within Automotive and core Industrial, we experienced solid trends in the early part of 2023. But have entered the multi-quarter inventory correction phase with our direct customers starting in the second quarter of 2023. This should continue through the first half of 2024. In the second half of 2024, we expect also in the Automotive and core Industrial segments to shift to end demand and resume growth.

A close-up of a semiconductor component, highlighting its complex design.
A close-up of a semiconductor component, highlighting its complex design.

Regarding our Communications Infrastructure and Other business, we expect 2024 revenue to decline over 2023, consistent with our prior view we shared on the Q3 earnings call. So as we look ahead to 2024, we do think the macro has deteriorated from our view 90 days ago. We now expect the first half of 2024 will decline versus the first half of 2023 due to longer than anticipated inventory digestion at our direct automotive customers. However, we expect our company revenue in the second half of 2024 will grow over the first half of 2024, as we believe we will be shipping again to end demand by then. Overall, we have and will continue to manage everything in our control to navigate a soft landing for our business. As such, we have kept a very tight handle on our distribution channel and we are supporting our direct customers to facilitate inventory digestion as appropriate.

This enables us to take advantage of the cyclical improvement as soon as it materializes per segment. And based on everything I've said, the potential outcome for 2024 should be in the range of a modest annual revenue growth or decline. So now, I would like to pass the call to you Bill for a review of our financial performance.

Bill Betz: Thank you, Kurt, and good morning to everyone on today's call. As Kurt has already covered the drivers of the revenue during Q4 and provided our revenue outlook for Q1, I will move to the financial highlights. Overall, our Q4 financial performance was good. Revenue was slightly above the midpoint of our guidance range. And non-GAAP gross profit was above the midpoint of our guidance range, driven by a higher mix from sales into distribution channel even as months of supply in the channel remained flat at 1.5 months for about six weeks. I will first provide full-year highlights and then move to the Q4 results. Full year revenue for 2023 was $13.28 billion or up 1% year-on-year. We generated $7.76 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 58.5%, up 60 basis points year-on-year.

Total non-GAAP operating expenses were $3.09 billion or 23.3% of revenue, slightly above our long-term financial model as we continue to invest in our strategy, supporting long-term profitable growth. Total non-GAAP operating profit was $4.66 billion, down 3% year-on-year. This reflects a non-GAAP operating margin of 35.1%, down 120 basis points year-on-year and in line with our current long-term financial model. Non-GAAP interest expense was $283 million. Taxes related to ongoing operations were $693 million or a 15.8% non-GAAP effective tax rate. Non-controlling interests were $25 million and stock-based compensation, which is not included in our non-GAAP earnings, was $411 million. Turning to full-year cash-flow performance. We generated $3.51 billion in cash flow from operations and invested $826 million in net CapEx or 6% of revenue.

Taken together, this resulted in $2.69 billion of non-GAAP free cash flow or 20% of revenue. During 2023, we repurchased 5.46 million shares for $1.05 billion and paid cash dividends of $1.01 billion or 29% of cash flow from operations. In total, we returned $2.06 billion to our owners, which was 77% of the total non-GAAP free cash flow generated during the year. Now, moving to the details of Q4. Total revenue was $3.42 billion, up 3% year-on-year, modestly above the midpoint of our guidance range. We generated $2.01 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 58.7%, up 70 basis points year-on-year and 20 basis points above the midpoint of our guidance range, driven primarily by mix. Total non-GAAP operating expenses were $791 million or 23.1% of revenue, up $78 million year-on-year, though down $12 million from Q3 and within our guidance range.

From a total operating profit perspective, non-GAAP operating profit was $1.22 billion and non-GAAP operating margin was 35.6%, down 90 basis points year-on-year, above the midpoint of our guidance range. Non-GAAP interest expense was $69 million with taxes for ongoing operations were $178 million or a 15.5% non-GAAP effective tax rate. Non-controlling interest was $6 million and stock-based compensation, which is not included in our non-GAAP earnings, was $107 million. Now, I would like to turn to the changes in our cash and debt. Our total debt at the end of Q4 was $11.17 billion, essentially flat sequentially. Our ending cash balance including short-term deposits was $4.27 billion, up $229 million sequentially due to the cumulative effect of capital returns, CapEx investments, and cash generation during Q4.

The resulting net debt was $6.9 billion and we exited the quarter with a trailing 12-month adjusted EBITDA of $5.41 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q4 was 1.3 times and our 12-month adjusted EBITDA interest coverage ratio was 21.6 times. During Q4, we paid $261 million in cash dividends and we repurchased $434 million of our shares. Turning to working capital metrics. Days of inventory was 132 days, a decrease of two days sequentially, while we maintained distribution channel inventory at 1.5 months or about six weeks. As we have highlighted throughout the previous year, given the uncertain demand environment, we continue to make the intentional choice to limit inventory in the channel, while keeping inventory on our balance sheet to enable greater flexibility to redirect product as needed.

Days receivable were 24 days, down one day sequentially and days payable were 72 days, an increase of 12 days versus the prior quarter due to increased external material sourcing. Taken together, our cash conversion cycle was 84 days and an improvement of 15 days versus the prior quarter. Cash flow from operations was $1.14 billion and net CapEx was $175 million, resulting in non-GAAP free cash flow of $962 million or 28% of revenue. Turning now to our expectations for the first quarter. As Kurt mentioned, we anticipate Q1 revenue to be $3.125 billion, plus or minus about $100 million. At the midpoint, this is flat year-on-year and down 19% sequentially. We expect non-GAAP gross margin to be about 58% plus or minus 50 basis points, driven primarily related to lower distribution sales as we maintain our months of sales in the channel at 1.6 or below.

Operating expenses are expected to be about $755 million, plus or minus about $10 million. Taken together, we see non-GAAP operating margin to be 33.9% at the midpoint. We estimate non-GAAP financial expense to be about $66 million. We anticipate the non-GAAP tax rate to be 16.9% of profit before tax. Non-controlling interest and other will be about $3 million. For Q1, we suggest for modeling purposes, you use an average share count of 259 million shares. We expect stock-based compensation, which is not included in our non-GAAP guidance to be $127 million higher-than-normal, driven by our restructuring activities taken in Q4 as we continue to refine the portfolio. For capital expenditures, we expect to be around 7%. Taken together, at the midpoint this implies a non-GAAP earnings per share of $3.17.

For full-year 2024 modeling purposes, we expect non-GAAP gross margin to be around the high end of our long-term model of plus or minus the normal 50 basis points. We expect operating expenses to stay within our long-term model and fluctuate by quarter driven by annualized merits occurring in the second quarter and variable compensation movements pending actual performance. We suggest for non-GAAP tax rate, use a range between 16.4% to 17.4%. For stock-based compensation, we suggest to use $480 million where Q1 is the peak for the year. For non-controlling interests, we suggest to use $25 million. For capital expenditures, we expect to stay within the long-term model of 6% to 8% of sales. In closing, looking ahead into 2024, I'd like to highlight a few focus areas for NXP.

First, from a performance standpoint, we will continue to navigate a soft landing, through a challenging and cyclical demand environment. Therefore, we will continue to be disciplined to manage what is in our control and stay within our long-term financial model. Second, operationally, the Q1 guidance assumes internal factory utilization will continue to be in the low to mid-70s range, a level we expect to hold until internal inventory normalizes. Lastly, we will retire, the $1 billion 2024 debt tranche when it comes due on March 1st with cash on hand. Finally, there is no change to our capital allocation strategy, where we will continue to return all excess free cash flow back to our owners. In addition, since the beginning of Q1 2024, we repurchased $116 million worth of shares under our existing [10b-51] (ph) program.

Overall, we will remain active repurchasing our shares. I'd like to now turn it back to the operator for questions.

Operator: Thank you. [Operator Instructions] Our first question comes from Ross Seymore with Deutsche Bank. Your line is open.

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