Release Date: July 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- NXP Semiconductors NV (NXPI, Financial) reported Q2 revenue of $3.127 billion, which was in line with the midpoint of their guidance range.
- The company achieved a non-GAAP operating margin of 34.3%, which was 30 basis points above the midpoint of their guidance.
- Revenue in the industrial and IoT segment increased by 7% year-over-year, driven by demand in China and Asia-Pacific.
- The mobile segment saw a significant revenue increase of 21% year-over-year.
- NXP Semiconductors NV (NXPI) announced a strategic joint venture with Vanguard International Semiconductor to build a 300-millimeter fab in Singapore, enhancing their manufacturing capabilities and geographic resilience.
Negative Points
- Overall Q2 revenue was down 5% year-over-year, indicating a decline in sales.
- The automotive segment experienced a 7% year-over-year revenue decline, impacted by inventory digestion at Tier 1 customers.
- The communications infrastructure and other segment saw a significant 23% year-over-year revenue decline.
- The company expects continued weakness in core industrial demand in Europe and the Americas.
- Inventory digestion at Tier 1 automotive customers is taking longer than initially expected, extending into the second half of 2024.
Q & A Highlights
Q: For this calendar year, Kurt, you're suggesting total sales down low single digit, which Bill also mentioned. I think that suggests Q4 up mid to high single-digit sequentially. Normally, your Q4s are kind of flat or down. So I'm curious, what is giving NXP the confidence that you can have sequential growth in Q4? Are there certain end markets you think will do better than seasonality, or is this all kind of channel inventory refill? I'm just trying to understand the dynamics as you see it for Q4 right now.
A: Certainly, it's not the channel refill. We continue to be very thoughtful and cautious with channel refill. We've worked very hard over a long period of time to keep the channel lean. So we want to really tune this to the growth in the coming quarters in a careful manner. The channel is going to go nowhere near our longer-term target of 2.5 months. What is much more behind that continued resumption of growth now in the second half, which then includes quarter four, is a re-acceleration of automotive. You see that actually in the third quarter. We turned the corner from a quarter-two performance in automotive, which was a mid-single-digit decline to now a mid-single-digit growth sequentially in automotive. And we definitely want to continue, which has two legs. One is company-specific drivers, which is led by radar, but also a couple of other new platforms which are ramping, but also less and less need for digestion of over-inventory at our Tier 1 automotive customers. That will be getting less, while at the same time -- I also have to say in this call -- it takes longer than we thought. So it reaches now into the third quarter. We were hopeful it would end a little earlier. So that is protracted longer, which is one of the reasons why actually the second-half growth is a little less than we had assumed earlier. Still, it does grow. So automotive is the source of that. Secondly, the RFID secure tagging, which I mentioned earlier, is a company-specific growth, which is going to be with us both in the third as well as in the fourth quarter. And we are also optimistic that industrial IoT will keep growing from our lean inventory position in the channel.
Q: Post COVID, a lot of OEMs and Tier 1s built up a lot of inventory to avoid the problems they ran into as they were recovering. Do you think that process is now behind us? Do you think they will hold to those levels? Do you think they will start to go back to the prior trends? The reason I ask the question is that, just as you're kind of signaling somewhat of a turn in automotive, auto production is not that great. And there is just a lot of concern that maybe inventory levels are still too high, which is why it's kind of pleasantly surprising to hear you be somewhat more positive on the automotive recovery. So maybe just give us a sense of where we are in the supply-demand dynamic for automotive in the second half of this year versus what you thought it would be three months ago.
A: First of all, indeed, the latest S&P forecast for SAR for the calendar year '24 dropped a little to a 2% decline. So we were more in the flattish kind of area, and now they forecast a 2% decline. So, yes, the auto macro has deteriorated a little from the views which we had 90 days ago. I do believe the bigger factor is actually that, indeed, the inventory digestion at the Tier 1 automotive customers, which is the direct customers of NXP -- so that is the 60% of our automotive business, which goes through direct. That takes longer, which, indeed, is a function of two things. One is, they are further down adjusting, in some cases, their inventory targets. And it is all over the place. So for our customers, inventory targets range between 2 and 12 weeks. So we have automotive Tier 1 customers who go for a 12-week target and others who are as far down as a 2-week target. We have our views on this, and I guess, we will discuss a bit more in that call here. Because going so low, clearly, will lead to a pretty sharp need to refill later. I mean, that led to the whole supply crisis in the first place a couple of years ago. But they are adjusting these targets on the go, and that is also what keeps us to be very transparent. It keeps us growing a little bit less into quarter three than we would have thought 90 days ago, because that keeps going a bit longer. Where exactly it's going to land is hard to say. So it's hard to say what the target average of those inventory and numbers is from the Tier 1s. Because it's also going to change, probably, how they think about their future. If they get higher call-offs from the OEMs, they will start to want to increase their inventories again pretty quickly. But again, I can tell you today their targets are between 2 and 12 weeks. And we still have a little bit of work to do in the third quarter to get there. But you see it is already much less than before, which is, indeed, why our automotive growth has now snapped back into positive sequential and into what is only a low single-digit annual decline, which was a high single-digit annual decline in the past quarter. So you see the tide is already changing, but we are not through.
Q: Can you kind of drill down by end market, between radar, BMS, advanced analog, and really kind of, I guess, help us understand where you think inventory is clear and maybe where there still remain excesses. And then as we look into 2025, how are you thinking about acceleration by these different segments?
A: Relative to how is the inventory at the Tier 1s between those different product segments, it is completely customer specific. There is no overriding pattern because it really depended on what they thought they had to order through all of this NCNR time during the last two years. So we don't have a pattern there. There is no answer to that question because it is absolutely different customer by customer. We also have Tier 1 customers where we are done with inventory digestion, which is actually driving the growth into the third quarter, where none of the product categories has any more surplus inventory. So it's a completely uneven picture. And secondly, mind you that their targets are not the same. I think I said earlier, targets range between 2 and 12 weeks. So the one would declare 12 weeks as being on target and no over-inventory. The other, with three weeks, says I still have a week too much because my target is two. So therefore, I can't answer that question because it's just all over the place. However, in general, our accelerated growth drivers -- think about the electrification BMS chips. Think about S32 CoreRide processing. Think about radar. They tend to grow now anyway because they all have ramping platforms in
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
