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.

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. 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.

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 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 mid 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. 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.

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

Thank you. Our first question comes from Ross Seymore with Deutsche Bank. Your line is open.

Hey guys, thanks for letting me ask a question. First on the inventory management in general, Kurt, it sounded a lot like you've done a great job on the channel side, but the OEM side has gotten a little bit into the excess category. Can you just talk about, I guess on the channel side, do you have any plans for that $500 million coming into the plan in 2024, if that's still the number? And on the OEM side, when do you think that normalizes throughout the year?

Thank you, Ross. Good morning. I agree with your observations. On the channel side, we are confident and well-managed regarding inventory. For the first quarter, we do not plan to exceed the 1.6 range and expect it to remain between 1.5 and 1.6. We achieved 1.5 for the last two quarters, so you could consider a potential 1.6 for Q1, but that wouldn't signify an increase; rather, it's about maintaining precision. We have no plans to raise general inventory in the first quarter. For the rest of the year, our strategy is consistent with prior quarters; we will only start replenishing inventory when we see enough market momentum to warrant it. Therefore, there's no assurance we will reach the 2.5 inventory target by year-end, and we will not take any rapid actions. However, we anticipate some market recovery in the second half of the year, which may increase the likelihood of replenishing the channel by then, depending on market conditions. The target size remains at $500 million, as discussed previously, but this figure does not directly impact our annual revenue considerations. Regarding excess inventory at direct customers, we began addressing this in the second quarter of last year. I previously mentioned that some automotive Tier 1 customers had significant excess inventory. Our awareness of this situation was facilitated by our NCNR system, which differs from our peers' constructs. Our NCNR orders were annual, linked to the calendar year, and we currently have no active NCNR orders, as they concluded at the end of 2023. In retrospect, those NCNR orders proved beneficial, allowing customers to inform us about inventory buildup issues. Since last year's second quarter, we have been working to normalize this situation steadily, which is also beneficial for our finances. To answer your question, we anticipate continuing this effort through the middle of this year, primarily in the automotive sector. By mid-year, we expect to have this resolved and shift from under-shipping to fulfilling end demand for automotive customers once again in the second half.

Thanks for that color. And I guess as my second question, focusing on the auto side, it was helpful to hear about the six growth drivers overall. But in automotive, the radar below plan, EV above, and S32 above. Can you just talk about what your expectations are for those growth drivers in fiscal '24?

In principle, if there were no excess inventory and we were in a normal situation, I would say we maintain our long-term growth projection of 9% to 14%. This projection includes the performance of the growth drivers we outlined during our Analyst Day in November 2021. While there have been some fluctuations, we provided clarity on the past year based on the speed of inventory management. You may have noted that radar did not meet its targets. This is primarily due to its concentrated customer base, which consists of direct customers, making inventory control easier with its narrow product range. I believe that inventory control issues for radar are now behind us, which will lead to a significantly better year in 2024. Looking at the longer term, over the next three years, we anticipate that all growth drivers will move towards the targets we specified in November 2021.

Thank you.

Thank you. Our next question comes from Vivek Arya with Bank of America. Your line is open.

Thanks for taking my question. Kurt, last quarter you were good enough to kind of give us a little bit of color one quarter ahead and I was hoping you could share your thoughts on how you see Q2 just generically shaping up, flat up down sequentially. And then when I take your commentary about the full year, I think you mentioned sort of flattish growth overall, that still suggests, kind of double-digit growth in the back half. So I realize visibility is limited and so forth, but any other market color that you can share that gives you the confidence about that sort of double-digit growth in the backup would be very useful?

So good morning, Vivek. Yeah, apparently I was a good man last time relative to the next quarter. I think you just reiterated the pieces which we gave you, but I'm happy to give you a bit more color around those. So we really see the different parts of our revenue being dependent on the cycle they are exposed to. So all the consumer-oriented businesses, and that's the IoT part of Industrial and IoT and Mobile, we think we left the trough way behind us in the first quarter of last year, and other than some seasonal fluctuations, they will continue to grow throughout the calendar year 2024, which has to do that a large part of that is anyway supplied through the channel, so we are not suffering from excess inventory digestion. So we are pretty positive that that part of the company will grow. At the same time, I reiterate what I said last time, the Comms Infra & Other business will decline from a year-on-year perspective. So '24 revenue for Comms Infra & Other will be down versus the calendar year '23. I think we discussed at length the bits and pieces in there why that is. And then you come to the bottom of Automotive and core Industrial where indeed there is something between first half and second half which has to do with the inventory digestion at the direct customers in automotive which I just discussed with the question of Ross a minute ago, where we do believe the turning point is somewhere around the middle of the year, where that over-inventory which is still sitting there is being digested. If you put all of these pieces together, Vivek, then obviously, half two is going to be bigger than half one. Obviously, half one of this year, of 2024, is going to be down against the half one of last year. And that puts it somewhere in this flat plus/minus range for the full year, indeed. So the confidence really comes from the view which we have on the inventory digestion on the Automotive and core Industrial side. At the end, at the very same time, the continued gradual improvement in the consumer-oriented businesses where given our tight channel management, we have no excess inventory. This is really where it comes from.

All right. Thank you, Kurt. And for my follow-up, your industrial trends are in big contrast to your peers. So I get what you did, right? You were early to spot it. You were undergrowing in the first half of last year and now you're doing much better now. But how long can you maintain such a contrast with your peers, right, who are seeing these kind of 20%, 30%, 40% declines in their Industrial & IoT business? Is it not apples-to-apples comparison? When do you think that there is somewhat of a convergence between what your peers are reporting in terms of their industrial correction versus the strength that NXP is seeing right now?

I can't assess exactly what others are doing, but the difference will remain as long as they are dealing with their excess inventory. We don't have that issue because we managed our channel effectively. In the second quarter of 2022, we started controlling our inventory to maintain a level of 1.6 to 1.5 months. In fact, we even reduced our inventory in the first quarter of 2023 and have kept it stable since then. Meanwhile, some competitors continued to ship aggressively, which means they will need to make adjustments. The disparity will fade once they get past their over-shipping phase. For context, NXP's revenue grew by 1% last year while our pricing increased by 8%. This indicates a notable volume decline from a supply standpoint. The factors show we under-shipped compared to market demand, especially relative to peers who shipped more in the first three quarters of last year. Ultimately, it all comes down to shipping timing and the need to adjust shipments. I believe there's no fundamental difference; we simply managed our business more carefully at an earlier stage.

Thank you.

Thank you. Our next question comes from Stacy Rasgon with Bernstein Research. Your line is open.

Hello?

I can hear you, Stacy. Good morning.

I don't know what was going on there. Thanks for taking my questions. I had a question about the IoT trend. It clearly reached its lowest point in Q1 last year. Could you explain the recovery trends between the Consumer segment and the core Industrial segment? We all know that the Consumer sector is improving. Has the increase from the low point last year been entirely driven by Consumer, or has the general purpose IoT begun to recover as well? What are the trends for those two segments?

Thanks, Stacy. That's a good question because the two are indeed trending differently. The IoT segment, which accounts for about 40% of that area, has improved gradually since it hit a low point in the first quarter of last year. This gradual improvement means it's getting better consistently, but it's still below its previous peak levels. It's not where it used to be, although it is making progress. A significant portion of this improvement is in China, so you can view it as primarily a distribution-oriented, China-focused IoT business. The trend has been steadily improving since the bottom of Q1 last year, and we expect this to continue throughout the rest of this year. The core Industrial segment, on the other hand, is facing different challenges. It's more akin to the Automotive sector, which is currently dealing with some over-inventory and modest end market weakness. Therefore, the core Industrial segment is in comparatively less favorable shape, which has transitioned some of the challenges over to the IoT portion.

Got it. Thank you. My follow-up, I wanted to ask about lead times. Have they normalized to pre-COVID levels? And is that part of what's enabling you to keep pricing flat? Do you have just like better control of pricing because you have a better controlled lead times? You've got a lot of competitors that are talking about pricing starting to come down now.

Regarding the first part of your question, yes, lead times have returned to normal, similar to pre-COVID levels. This improvement also enhances visibility for us, as we move past issues like double ordering and the need for non-cancellable and non-returnable agreements. There’s no significant relationship between lead times and pricing. Our pricing, which I stated is expected to remain flat this year, mainly reflects input costs. After experiencing sharply rising input costs over the last three years, the situation now appears more stable. Our outlook on input costs for this year is around zero, which is why we have proposed this pricing for 2024, and our customers have accepted it. The relationship you mentioned regarding lead times doesn’t apply here, especially since we do not operate in a commodity-driven environment.

Got it. That’s helpful. Thank you guys.

Thank you. Our next question comes from Gary Mobley with Wells Fargo Securities. Your line is open.

Hey guys. Thanks for taking my question. Kurt, you called out some better-than-expected revenue on the Mobile side, and you appear to be poised for some pretty significant year-over-year growth in Mobile in the first half of fiscal year '24. Is that a function of the Android market being last bad? Is it largely a function of maybe some traction in ultra-wideband or is it a function of content gains at your largest Mobile customer?

So, Gary, in full transparency, most of all, it's a function of the weak compares of last year. I just have to pull it out. I mean if you look at our Q1 of last year, it was horrendously low as a function of everything I explained in the last 10 minutes. So very, very clearly, mainly a function of weak compares. However, you mentioned at least one other thing, which is certainly the case. We clearly see that the Android inventory digestion is completely behind us. I would almost claim already in Q4, it was largely behind us. So in Android, we are shipping to end demand and you could also be somewhat hopeful about the Android market development going forward. So that is certainly a case. And our premium handset customer is also in, I would say, in a decent shape relative to volume development. But that's it. So again, it is very much a function of us trying to get as quickly as possible to true end demand and not suffering from excess inventory. I mean, that's a good example of where that also helps you then on the other side of the equation to quickly come back into growth.

Thank you for that, Kurt. And Bill, you seem to be calling out 58% gross margin for fiscal year '24, which is down only 50 basis points from the prior year. And that's quite commendable considering what's going on in the industry and whatnot. And it seems like you have a lot of gross margin headwinds from utilization to mix headwinds and whatnot. Maybe if you can give us some additional color in terms of the offsets to those headwinds and what's allowing for this gross margin resiliency?

Sure. Let me take Q4 as an example for Q1 and discuss some of the factors involved, both positive and negative. In Q4, we performed slightly better, improving by 20 basis points, primarily due to our distribution mix, which accounted for 61% of our sales, up from 57% in Q3. For Q1, we anticipate a decrease of 70 basis points, mainly due to a lower distribution mix and a slight decline in sales efficiency. We are seasonally adjusting our distribution sales, which will be down, but we expect it to be better than last year in terms of mix. Last year, distribution sales were around 49% in Q1, and we believe we will surpass that, offsetting some underutilization. Last year, our Q1 utilization was in the low 80s, and now we are in the low 70s. So, there are various factors to consider when comparing year-over-year, but quarter-over-quarter, the mix is the primary driver. Regarding positive and negative influences, we know that if we dip below our current low 70s utilization, it will be challenging for us. We have been managing to maintain this level, and for the past three quarters, our internal factories, which provide 40% of our sourced wafers, have been operating consistently. Another challenge is that decreased revenues lead to reduced efficiency over our fixed costs. If we experience lower pricing, we have managed to keep things stable year-over-year so far. However, if pricing does decline, it will be our responsibility to offset that with reduced costs and improved productivity, which is more of a long-term challenge. Additionally, delays in introducing new products could also impact results from quarter to quarter. On the positive side, increased revenues could support our fixed cost structure, providing some benefits. If we can replenish our channel to normal levels, as Kurt mentioned regarding the $500 million, it would enhance our mix. When we achieve this, it will serve as a positive factor. Improving our internal utilization towards the mid-80s is also beneficial. Furthermore, we aim to expand our distribution network and reach more mass market customers, as we believe there is room for improvement compared to our peers. We will focus on enhancing our customer reach and continue to work on productivity gains. Long-term, ramping up new product introductions will positively impact our gross margins. Overall, managing these positive and negative factors each quarter is crucial, and we will strive to position ourselves near the high end of our model at these revenue levels.

Helpful. Thanks, Bill.

Thank you.

Thank you. Our next question comes from Francois Bouvignies with UBS. Your line is open.

Thank you very much. I have a follow-up to the previous question. The first one is on Automotive. You mentioned that you are managing the channel and under-shipping at the moment, with a clearer picture expected in the second half of the year. Can you quantify how much you under-shipped the demand in the last two quarters? When I look at your Auto revenues, they were up 1% year-over-year, while car production was obviously much higher. Do you have any insight into how much you are currently under-shipping in Automotive, which seems relevant as you navigate a soft down cycle? Any quantification on that would be very helpful.

Hi, Francois. While I can't provide an exact figure, I can share some insights. It's not very informative to focus on just one quarter. Now that the full calendar year '23 is behind us, we can see that our Auto business grew by 9% for the year. We also raised prices by 8%. If we assume a similar price increase in the Auto sector, we were essentially at a zero supply growth rate last year in Automotive. This means no growth in supply or units, which contrasts with the strong demand in Automotive that saw a 9% increase in the seasonally adjusted annual rate, reaching 90 million units, alongside significant growth in electric vehicles, which increased by 45% year-over-year. This discrepancy highlights how we under-shipped throughout last year. However, we did over-ship previously, and we began to manage that over-shipment proactively. Throughout last year, we under-delivered in regards to Automotive distribution, which makes up 40% of our revenue. We started taking more decisive measures in the second quarter last year to regulate over-shipments in direct sales, although that effort is still ongoing. It's challenging to quantify this accurately, as we don't know how much inventory individual Tier 1 customers want to maintain long-term, which also varies significantly between them. Their inventory targets could range between two and eighteen weeks, and these needs fluctuate over time based on their expectations for business growth. Ultimately, we expect to have this situation resolved by the middle of calendar year '24.

That's great answer. Thank you. And the second follow-up is on the pricing. I mean you said flattish pricing in '24 and obviously, it seems to be like better than peers, and I understand the commodity part and also the input cost. If we look at the input cost, the electricity is coming down, I mean, obviously, from the peak you have the silicon wafers coming down. You have the mature nodes at the foundry level that are coming under pressure for many, many Tier 2, Tier 3 foundries. I was just wondering if the input cost is the main tracker of your pricing, how should we think about 2025 or through the year as we see input costs are also coming under pressure, if you see what I mean?

Look, a couple of things, Francois. First of all, I'm glad we get well through '24. I can't get my head around '25, that's a little early, to be honest. Now at the same time, I think you put good pieces together relative to input costs, the one which you didn't put up is the fact that the Tier 1 foundries are still a bit tight lipped when it is to cost decreases. And the biggest part of our input is Tier 1 foundries, not Tier 2 and Tier 3 foundries because we need these Tier 1 foundries for our Automotive and Core Industrial business. And there, unfortunately, the trends are not quite as ambitious as you mentioned them. Over time, Francois, I do believe, say, mid to longer term, that the industry will return to low single-digit ASP erosion year-over-year. That is what we had in the pre-COVID period in the application-specific business like ours. And I think it is reasonable to assume that, that is also going to happen in the mid to longer-term future. However, this year is a transition year because the input is not yet the input cost and the inflationary environment is just not yet at that level as it used to be in the past. And very important, and I know it's probably very clear, but I just want to reiterate that very clearly. This does not mean falling back to the levels which we had pre-COVID. What I'm saying is, from the levels which we have achieved now, we possibly have that in the mid to longer-term future, this very low single-digit ASP erosion per year, but we absolutely see no scenario that falls back to the levels of pre-COVID.

Great. Thank you very much.

Thank you. Our next question comes from Chris Danely with Citi. Your line is open.

Hey, thanks guys. Just in terms of the things getting a little bit tougher over the last months, Kurt, is there any way to tell how much of this is, I guess, worsening demand versus a little more inventory than we thought? Any which way or the other on either side of that?

Hey, good morning, Chris. Yeah, clearly, first of all, I confirm what you say. It got worse over the last 90 days or at least our view on what we are exposed to got worse. I would say the end demand in Auto has weakened. I mean the latest S&P data is now almost a percentage point down year-on-year in terms of SAAR, so that's a little less than it was before. The xEV penetration is a little slowing. Again, it is still up, but it is a little slowing. So these are just gradual movements to the less positive side than what it was 90 days ago. But I think what is probably the somewhat bigger part in here is that we just got a better handle now, what is the remaining size of the excess inventory with our Tier 1 Automotive customers, which we are working down through the first half. So I cannot pass in percentage, which one of the two is contributing how much. But I'd say it is in that, say, combination of Automotive, core Industrial over-inventory and at the same time a weakening macro.

Great. For my follow-up, I believe Bill mentioned that distribution accounted for 49% of sales in Q1 of last year and then 61% in Q4. Did I hear that correctly?

That's correct, Chris.

So my question is, your sales grew about 10% from Q1 to Q4. This suggests that your sales into distribution grew significantly more than that. Why would that be the case if the overall environment, at least outside the US, was a bit more challenging?

Basically it is matching to the sell-through. Kurt?

Chris, I think the background here is mainly that the exposure to distribution is larger in our Industrial and IoT business. And that is the one where we have seen the trough already in the first quarter of last year. So that gradual improvement throughout the quarters I discussed earlier, that shows up more on the distribution side because those are the segments which had that improvement. Where, in Automotive, distribution is only 40%, as I described, we have now the direct customer excess inventory digestion and distribution is a smaller part. So I think it is just a reflection of our exposure to the different end market segments.

Got it. Thanks for all the color guys.

Thanks, Chris.

Thank you. Our next question comes from Joshua Buchalter with TD Cowen. Your line is open.

Good morning or good afternoon, everyone, depending on your location. I appreciate you fitting me in. In the automotive sector, there's been some feedback from the supply chain regarding a tension between OEMs and Tier 1 suppliers. The OEMs are pushing for Tier 1s to maintain higher inventory levels, while the Tier 1s are attempting to reduce their working capital by carrying less. I'm interested to know if you're experiencing this situation as well and if the Tier 1s' desire to lower their inventory levels is impacting the current adjustments you're observing. Thank you.

Joshua, absolutely. That's a horrendous fight and that's why I said earlier, it is really hard to call the final exact landing place for the size of inventory for Tier 1 because it is a matter of their negotiation with the OEM customers. The midterm trend is that every piece of new business they are winning, OEMs are now often enforcing for the new business to hold a certain amount of inventory for specific semiconductor components. So that becomes very explicit, but it's only for new business. So think about it as something which will be layering in over the next couple of years as those new design wins are materializing. That's the way how the OEMs want to get a firm handle on the size of inventory at Tier 1s. At the moment, it's still Wild West because none of this is really contractually anchored because it's old contracts, which didn't have these articulations, which is why it is indeed all over the place, and that makes it also a bit harder to be precise.

I think you have one more, Josh?

I would like to ask about the policy of repurchases. You mentioned it's still returning 100% of free cash flow, but it has been running a bit below that in the last several quarters. Should we expect that after you pay down the debt in March, repurchases will increase? Or is it more closely tied to the business environment? Thank you.

Our capital allocation strategy remains unchanged. Over the past three years, we have returned $8.8 billion, which represents 113%. In the trailing 12 months, the return was 77%, and in the current quarter, it was 72%. We have set aside some cash to retire some of our debt and reduce the company's leverage, which we believe is a prudent use of our cash. We will continue to maintain flexibility in our balance sheet and focus on dividends, buybacks, debt management, and small acquisitions, with no changes to our current approach.

Thanks, Josh.

Yeah, I guess that gets us to the end of the call. So, thanks everybody for joining the call this morning. Clearly continues to be a tough environment where NXP takes any control possible, and I dare to say we have started to take that control, especially relative to inventory builds externally and inventory management internally. We started to take that control in a very disciplined manner early, in the mid of 2022 for the distribution site, and starting in the second quarter of last year on the direct customer side, which we believe allows us to continue to drive a safe landing and soft landing in this tough environment. Mid and longer term, we continue to be fully focused on the Automotive and Industrial markets to innovate and drive profitable growth. Thank you all.

Thank you for your participation. This does conclude the program and you may now disconnect. Everyone, have a great day.