Yahoo Finance NXP Semiconductors N.V. (NASDAQ:NXPI) Q1 2024 Earnings Call Transcript
NXP Semiconductors N.V. (NASDAQ:NXPI) Q1 2024 Earnings Call Transcript April 30, 2024
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Operator: Hello, and thank you for standing by. Welcome to NXP's First Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jeff Palmer, Senior VP of Investor Relations. You may begin.
Jeff Palmer: Thank you, Tawanda, and good morning, everyone. Welcome to NXP Semiconductor's first 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 macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products and our expectations for our financial results for the second quarter of 2024.
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 first quarter 2024 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 the call over to Kurt.
Kurt Sievers: Thank you, Jeff, and good morning, everyone. We appreciate you joining our call this morning. Beginning with quarter one, revenue trends in all our focused end markets were in line with the midpoint of our guidance. NXP delivered quarter one revenue of $3.13 billion, essentially flat year-on-year. Non-GAAP operating margin in quarter one was 34.5%, 30 basis points below the year ago period and 60 basis points above the midpoint of our guidance. Year-on-year performance was a result of consistent gross profit generation, offset by slightly higher operating expenses as we continue to invest in our future business. From a channel perspective, we helped distribution inventory at a tight 1.6 months level, consistent with our guidance and well below our long-term target of 2.5 months of inventory EBITDA.
Now let me turn to the specific trends in our focus end markets. In automotive, revenue was $1.80 billion, down 1% versus the year ago period and in line with our guidance. We continue to manage an orderly process of inventory digestion with our major direct automotive Tier 1 customers. In Industrial & IoT, revenue was $574 million, up 14% versus the year ago period and in line with our guidance. Our performance compares favorably versus the year ago period when the business had dropped. Since 1Q 2023, we have seen a steady sequential improvement in the industrial and IoT demand trends, so not yet back to the long-term levels, which we would expect. In Mobile, revenue was $349 million, up 34% versus the year ago period, where again, the business had troughed already back in 1Q 2023.
And lastly, in Communication Infrastructure & Other revenue was $399 million, down 25% year-on-year and in line with our guidance. And now let me turn to our expectations for the second quarter 2024. We are guiding quarter two revenue to $3.125 billion, down 5% versus the second quarter of 2023 and flat sequentially. In the Automotive end market, revenue trends during the first half of 2024 reflect a continued inventory digestion process at our direct Tier 1 automotive customers compounded by a soft automotive macro environment. In the Industrial & IoT end markets, we had already troughed in 1Q 2023. We see improving demand in China, in part, thanks to our lean channel position as well as thanks to incrementally healthier end demand. This is expected to be partially offset by soft end demand in Europe and the Americas.
In the Mobile end market, we continue to witness the expected modest cyclical recovery. And finally, within the Communications Infrastructure &Other end markets, our resumption of sequential growth is primarily driven by secure RFID tagging. Taken together at the midpoint, we anticipate the following trends in our business during the second quarter. Automotive is expected to be down in the high-single-digit percent range versus quarter two 2023 and down in the mid-single-digit percent range versus quarter one, 2024. Industrial & IoT is expected to be up in the high-single-digit percent range for both year-on-year and versus quarter one 2024. Mobile is expected to be up in the low 20% range year-on-year and about flat versus Q1 2024. And finally, Communication Infrastructure and Other is expected to be down in the mid-20% range year-on-year and up in the high-single-digit percent range versus quarter one, 2024.
So in summary, we are beginning to see incrementally improving demand signals for the second half of 2024 across all end markets. Hence, during quarter two, we will begin to state slightly higher inventory in the channel to support our competitiveness for the anticipated second half growth. Therefore, our guidance assumes approximately 1.7 months of distribution channel inventory exiting quarter two, and if demand momentum continues, we will stage additional channel inventory during the second half, however, in a very controlled and targeted manner. So it is unlikely that we grow channel inventory back to our long-term target of 2.5 months within this calendar year. And taken all together, the potential outcome for 2024 should be in the range of a modest annual revenue growth or decline, just consistent with our views from a quarter ago.
Overall, we continue to manage what is in our control, enabling NXP to drive solid profitability and earnings in a challenging demand environment. Our first quarter results, our guidance for the second quarter and our early views into the second half of the year underpin a cautious optimism that NXP is successfully navigating through this industry-wide cyclical downturn. And now before turning the call over to Bill, and while we are very focused on managing the soft landing through the cycle, I would like to take a minute to highlight a couple of important innovation announcements, which we made during the first quarter. This includes our S32 core right platform for next-generation software-defined vehicles. It represents the industry's first platform to combine High-Performance Automotive Processing, Vehicle Networking and System Power Management, along with integrated software to address the Complexity, The Scalability and the cost efficiency required for the software-defined vehicle.
And as part of that announcement, we also introduced our 5-nanometer S32M processor, a milestone in the expansion of our S32 processing summary. Additionally, we introduced industry's first 28-nanometer RFCMOS single-chip automotive radar, which enables next-generation automotive ADAS systems. This new product further expands our market-leading franchise and it enables next-generation highly performing coherent radar systems in a very cost-effective manner. Lastly, NXP and Honeywell, who is a leader in building automation systems, signed a memorandum of understanding. This collaboration aims to help make them operate more intelligently by integrating NXP's neural network enabled industrial grade applications processes into Honeywell's building management systems.
That agreement is another great example of how NXP will participate and potentially lead in the revolution of AI processing at the edge in industrial applications. And now I would like to pass the call over to you, Bill for a review of our financial performance. Bill?
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 Q1, and provided our revenue outlook for Q2. I will move to the financial highlights. Overall, the Q1 financial performance was good. Revenue was in line with the midpoint of our guidance range, with non-GAAP gross margin slightly above the midpoint of our guidance, while inventory in the distribution channel continues to remain below our long-term target. Turning to Q1 results. Total revenue was $3.13 billion, flat year-on-year, in line with the midpoint of our guidance range. We generated $1.82 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 58.2%, flat year-on-year, though 20 basis points above the midpoint of our guidance range.
The incremental margin was due to an increase in the estimated useful lives of our internal front-end manufacturing equipment, from five to 10 years. This was about 30 basis points favorable to the results, which was not in our guidance. Total non-GAAP operating expenses were $736 million, or 23.5% of revenue, up $8 million year-on-year and down $55 million from Q4. This was $19 million below the midpoint of our guidance range, primarily due to a combination of reduced variable compensation and proactive expense controls. From a total operating profit perspective, non-GAAP operating profit was $1.08 billion, and non-GAAP operating margin was 34.5%, down 30 basis points year-on-year and 60 basis points above the midpoint of our guidance range.
Non-GAAP interest expense was $64 million, with taxes for ongoing operations of $171 million or a 16.8% non-GAAP effective tax rate. Noncontrolling interest was $5 million and stock-based compensation, which is not included in our non-GAAP earnings, was $115 million. Now, I would like to turn to the changes in our cash and debt. Our total debt at the end of Q1 was $10.18 billion, down $997 million, as we repaid the 4.875% in bonds that was due on March 1, 2024. Our ending cash balance, including short-term deposits was $3.31 billion, down $963 million sequentially due to the cumulative effect of debt repayment, capital returns, CapEx investments and cash generation during Q1. The resulting net debt was $6.9 billion, and we exited the quarter with a trailing 12-month adjusted EBITDA of $5.4 billion.
Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q1 was 1.3 times, and our 12-month adjusted EBITDA interest coverage ratio was 22.8 times. During Q1, we paid $261 million in cash dividends, and we repurchased $303 million of our shares. Subsequent to the end of Q1, and through Friday, April 26, we repurchased an additional $97 million of shares under an established 10b5-1 program. Turning to working capital metrics. Days of inventory was 144 days, an increase of 12 days sequentially, while distribution channel inventory was 1.6 months or about 7 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 receivables were in 6 days, up 2 days sequentially and days payable were 65 days, a decrease of 7 days versus the prior quarter. Taken together, our cash conversion cycle was 105 days, an increase of 21 days versus the prior quarter. Cash flow from operations was $851 million, and net CapEx was $224 million or approximately 7% of revenue, resulting in non-GAAP free cash flow of $627 million or about 20% of revenue. Turning now to our expectations for the second quarter. As Kurt mentioned, we anticipate Q2 revenue to be $3.125 billion, plus or minus about $100 million. At the midpoint, this is down 5% year-on-year and flat sequentially. We expect non-GAAP gross margin to be about 58.5% plus or minus 50 basis points, which includes approximately 60 basis points associated with the change of our useful life estimates for our internal front-end manufacturing equipment.
As Kurt noted in his prepared remarks, we will begin to stage slightly higher inventory in the channel to support our competitiveness for the anticipated second half growth. Therefore, our guidance assumes approximately 1.7 months of distribution channel inventory exiting Q2. Operating expenses are expected to be about $765 million, plus or minus about $10 million. The sequential increase is primarily driven by our annual merit increases and the $15 million license fee paid to Impinj as part of our legal settlement. Taken together, we see non-GAAP operating margin to be 34% at the midpoint. We estimate non-GAAP financial expense to be $63 million, with a non-GAAP tax rate to be 16.8% of profit before tax. Non-controlling interest and other will be about $5 million.
For Q2, we suggest for modeling purposes, you use an average share count of 258.5 million shares. We expect stock-based compensation, which is not included in our non-GAAP guidance to be $115 million. For capital expenditures, we expect to be around 6%. Taken together at the midpoint, this implies a non-GAAP earnings per share of $3.20. In closing, looking through the remainder of 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 with a cautious optimism for a second half improvement in our business. Second, we will continue to be disciplined to manage what is in our control and stay within our long-term financial model.
Specifically, we expect our gross margin will continue to perform at or above the high end of the long-term model while maintaining internal fab utilization levels in the low 70s for the remainder of the year. Third, there is no change to our capital allocation policy, where we have returned $2.4 billion over the last 12 months. Furthermore, we will continue to be active in the market repurchasing NXP shares. And lastly, we are excited to host an Investor Day on November 7 in Boston. The specific details will be available soon on the NXP Investor Relations homepage. We look forward to you joining us. I'd like to now turn it back to the operator for questions.
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