Hello, and thank you for being here. Welcome to NXP's First Quarter 2024 Earnings Conference Call. I would now like to hand the call over to Jeff Palmer, Senior VP of Investor Relations. You may start.

Thank you, Towanda, 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.

Thank you, Jeff, and good morning, everyone. We appreciate you joining the call this morning. Beginning with quarter 1, revenue trends in all our focused end markets were in line with the midpoint of our guidance. NXP delivered quarter 1 revenue of $3.13 billion, essentially flat year-on-year. Non-GAAP operating margin in quarter 1 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 held 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 focused 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 '23, we have seen a steady sequential improvement in the Industrial & IoT demand trends, though 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 '23. And lastly, in Communication Infrastructure & Other, revenue was $399 million, down 25% year-on-year and in line with our guidance. Now let me turn to our expectations for the second quarter 2024. We are guiding quarter 2 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 begun to trust in 1Q '23. 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 Communication 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 2 '23 and down in the mid-single-digit percent range versus quarter 1, '24. Industrial & IoT is expected to be up in the high single-digit percent range for both year-on-year and versus quarter 1 '24. Mobile is expected to be up in the low 20% range year-on-year and about flat versus Q1 '24. And finally, Communication Infrastructure & 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 1, '24. So in summary, we are beginning to see incrementally improving demand signals for the second half of '24 across all end markets. Hence, during quarter 2, 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 2. If demand momentum continues, we will stage additional channel inventory during the second half, however, in a very controlled and targeted manner. It is unlikely that we grow channel inventory back to our long-term target of 2.5 months within this calendar year. Taken all together, the potential outcome for 2024 should be in the range of 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. 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 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. 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 the 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 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. Now I would like to pass the call over 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 Q1 and provided our revenue outlook for Q2, I will move to the 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 5 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% bonds that were 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 1.3x, and our 12-month adjusted EBITDA interest coverage ratio was 22.8x. 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 26 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. Noncontrolling 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. 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.

Our first question comes from the line of Vivek Arya with Bank of America Securities.

For the first question, Kurt, you provided a clear overview of the cautious optimism surrounding Automotive for the second half of the year. I have a medium- to long-term question. Previously, you set a growth target of 9% to 14% for your Automotive business. However, many factors have shifted since then, including the slowdown in EVs, inflation, and other issues. How should we view NXP's long-term Automotive growth prospects? Is there a straightforward formula that links production growth to your sales growth targets?

Yes. So first of all, let me augment what you said: the cautious optimism, which I expressed for the second half is not limited to Automotive. It is important to note that that cautious optimism for second half growth over first half is actually across the company. It's very broad-based. It's across distribution and direct, and it is across all of our segments. Now coming back to your original question on longer-term Automotive growth. Yes, we had a guide of 9% to 14% from '21 to '24. Now we are in '24. It's actually good to see that Automotive is probably the one segment which is going to hit the target this year of the 9% to 14%, and we will, as Bill said at the end of his prepared remarks, we will host an Investor Day in November where we will come out with the new growth targets for the next 3 years for all of our segments, including Automotive. Now, so I will not be able to give you a number today for the next 3 years for Automotive, but directionally, Vivek, I would say the algorithm isn't that much different from the history because we see the content drivers very much in place. You know that we are, as NXP, benefiting greatly from ADAS as well as from the electrification trends and mainly on the mid- to longer-term basis from a trend to software-defined vehicles where our industry-leading franchise in processing is certainly going to win. So that continues, which means in the end, the SAAR as an underlying mechanism probably becomes less relevant. I would also tell you that we think pricing will certainly start sustainably from where we come from. You know that NXP has increased prices over the past 3 years. We said it will be neutral this year. And as I said earlier, for the coming years, maybe we go back to a very small, low single-digit ASP erosion per year. I mean, that is to be discussed in the coming years. But nothing out of the normal, I would say, and especially not pricing coming back to where it was pre-COVID. I mean, that's really important for that algorithm. So please bear with us, Vivek, for the November Investor Day, and we will come with exact numbers. But I just wanted to signal to you, you should not expect massive changes here.

Got it. And then, Kurt, kind of a more near-term or sort of just calendar '24 question on your Automotive business. So last year, your Auto sales grew about 9%, about in line with Auto production, right? So despite better pricing, i.e., you somewhat undershipped. What is the assumption for the entirety of calendar '24 because your Auto sales seem to be declining sequentially in Q2. So is the assumption that they pick back up and they do better than production in the back up? Just what is kind of the puts and takes for how you're thinking about Automotive for the entire year?

Yes, you are correct about last year's performance. The 9% growth in Automotive revenues occurred during a strong SAAR year, which was nearly a 10% increase year-on-year. NXP raised prices by 8%. We did undersell last year as part of a soft lending strategy we are implementing. We believe we have started to address the Automotive revenue and inventory issues with direct customers since mid last year and in the distribution channel even earlier because our numbers exceeded 1.6. Looking at this year, the macroeconomic situation is somewhat different. According to the latest S&P numbers, this year's SAAR is projected at 0% with a slight moderation in EV penetration. However, I want to emphasize that the reports of an EV slowdown may be more alarming than the reality. S&P forecasts over 20% unit growth for hybrids and full EVs this year, which is still robust growth. What will drive our revenue this year is the inventory digestion with our direct customers. In Q1, and based on our guidance for the second quarter, we are working on inventory with our direct Automotive Tier 1 customers. It’s uncertain whether this process will be completed by the end of Q2 or extend into Q3. However, we anticipate that the second half of this year will show solid growth in Automotive compared to the first half. This growth will be supported by specific company initiatives, such as the ramping up of RADAR platforms in the second half, as well as by normalizing inventory digestion. This means we would transition from underselling against demand to meeting that demand. I won’t provide a full-year growth estimate since we only guide on a quarterly basis. However, since Automotive constitutes more than 50% of the entire company and we anticipate a modest change overall, you can infer that Automotive’s performance will likely align closely with that estimate.

Our next question comes from the line of Ross Seymore with Deutsche Bank.

Kurt, I want to get into a little bit of the increased comfort that apparently you're feeling with the desire to start refilling the channel. I know you did a little bit of it in the first quarter, but in the second quarter, it seems like your optimism has increased a little bit sequentially, even despite the Automotive side being guided down. And I know you went through each of the segments specifically. But if you step back at a higher level, what's giving you the confidence? What's improved to give you the confidence to fill the channel?

Yes. First of all, in Q1, we saw a figure of 1.6, which slightly increased from 1.5 in Q4. The numbers have been fluctuating between 1.5 and 1.6 for some time, making it challenging to pinpoint a single figure. Therefore, Q1 wasn’t a deliberate target; rather, it's been consistent. Looking ahead to Q2, however, we aim to reach 1.7 by the end of the quarter, fueled by cautious optimism for the second half of the year. This optimism stems from a combination of cyclical trends and company-specific developments. As I mentioned earlier regarding Automotive, we have specific platforms that will ramp up in the second half, and we are regularly engaging with our customers to facilitate this process. Additionally, the recent settlement with Impinj in the RFID tagging sector, along with the collaboration between leading companies like NXP and Impinj, serves as a positive catalyst for market growth in this area. This development will also benefit our Communication Infrastructure and Other businesses in the second half. On the cyclical front, we anticipate that Automotive Tier 1 inventories will stabilize, allowing us to resume shipping at normal rates. While the demand is already present, we are still working through existing inventory. We don’t foresee an increase in car production or electric vehicles in the short term; rather, we'll be aligning our shipments with actual end demand. The same applies even more to Industrial and IoT, where we are coming off a very lean inventory situation, particularly affected by the Chinese market. Notably, the PMI in China is showing positive trends, and we are observing improvements in both the core Industrial and Consumer IoT sectors. This is primarily why we are strategically positioning ourselves to ensure we have a competitive edge with our distribution partners as we move into the third and fourth quarters.

I guess since you mentioned the Impinj side, Bill, you're doing a great job on the OpEx. You came in below your guide in the first quarter. The second quarter, you included, you said a $15 million payment for that. Can you just give us an idea of, one, is that Impinj payment a one-time deal, and so it goes away after this quarter? And then more importantly, what are your thoughts on the OpEx side of things? If the optimism on the revenue side is increasing, should we expect the OpEx to increase with variable comp or any of those sorts of drivers?

Sure. Let me break those 2 apart. So the agreement that we have with Impinj is the annual cross-licensing payment, which will impact us on a go-forward basis, about $15 million in the second quarter and it rose slightly, but that could stop anytime in the future once we have the workaround complete. And again, I don't know exactly the exact timing, but that's something that we're pursuing internally. Related to our OpEx, clearly, you can see we're somewhat out of model in Q2, but that's really driven by our annual merit increases. So we have a combination of both those impacts occurring in Q2: the $15 million plus the annual merit increases. But what's offsetting some of that impact is also our proactiveness on our expense controls, and you saw that in Q1 as well and some lower variable compensation. So as we think about the second half, and I think this is where you're going, is where are we headed with OpEx. And what we're going to try to do is make sure we get back into that model, as you know, around that 23% as we think about the second half.

Our next question comes from the line of C.J. Muse with Cantor Fitzgerald.

I have a question about gross margins. Considering the change in equipment depreciation, it seems you are guiding for gross margins to remain flat. I would have expected there might be a slight decline due to the channel refill taking an additional month. Can you provide any insights on what might be countering that? Additionally, with your outlook on utilization rates staying stable for the rest of the year, how should we view the gross margin trajectory for the second half?

Yes, you're correct. If we adjust for accounting, we're essentially guiding for flat gross margins, which is within our range of plus or minus 50 basis points. I'm not particularly concerned about a $3 million impact or 10 basis points. There are various factors at play, including the accounting change regarding useful life. Each year, we review this in relation to the NXP product lifecycle, tool ages, and market analysis. We felt it was necessary to make these adjustments, and we believe it was the right decision. We're making it clear that we expect to operate at or above our long-term model, as opposed to our earlier indication of near or at gross margin. In terms of positive factors, our utilization rates are currently below 70%, and we anticipate that will improve, providing a tailwind for us. We expect increased revenues to flow through our fixed costs, which should also be beneficial. We previously discussed the need to replenish our distribution channel, which will positively impact our margins as we bring things back to target. Another focus for us is expanding our customer base in the mass market, although that requires time. Internally, our team is dedicated to improving productivity and reducing costs. Over the long term, we aim to layer new product introductions to strengthen our business. We have an Analyst Day or Investor Day scheduled for November 7, where we will provide more detailed updates on our model. Even through current challenges, we are managing our margins effectively, and while we are at 58% or 58.5% after accounting adjustments, this is not where we aim to stay.

Excellent. And then a question for Kurt. As you look back to the COVID period and kind of the initiation of NCNR programs, it sounds like that has really been at the most senior levels with you and focused on volume, not price. I'm curious, just as you look forward, how did that kind of help nurture your customer relationships? And what potential benefits might you see ahead as we progress into a world where NCNRs are no longer part of the business?

Yes. A couple of considerations here, C.J. The one is just to remind everybody that our NCNR programs ended with the calendar year 2023. Since January 1, there has been nothing under any NCNR program. However, I want to emphasize that our approach to the program was effective and I would do it again. It helped us by bringing us closer to our customers and allowing us to identify over-inventory issues sooner, as there was an agreement that prompted discussions when inventories were too high. This is why we intentionally undershot in Automotive all of last year. I mentioned in the Q1 earnings call last year that we started to see signs of inventory buildup with Tier 1 Automotive customers. Without NCNR, we wouldn't have detected this early on. From a strategic standpoint, it's important for the industry to learn from the supply crisis and avoid future issues with just-in-time practices for semiconductor products, which have a 3 to 4 month manufacturing cycle. I have mixed feelings about this, C.J. On one hand, some Automotive OEM and Industrial OEM customers are being thoughtful, and we have entered long-term agreements to manage inventory for critical products specifically. There is good progress beyond NCNRs. On the other hand, some of our direct customers are becoming very tactical under pressure to manage working capital and are reducing inventories too much. I believe that some of their inventory targets are becoming risky as we move towards the next demand increase. This could lead to supply issues again, as the response time needed for shipping more suddenly will be challenging. The supply chain is complex, often involving multiple partners before reaching the car manufacturers, and they all tend to reduce inventory together. Eventually, they will want to increase inventory again, driving the cycle. So on the OEM side, there are good lessons learned post-NCNR; with our direct customers, it's a more mixed situation.

Our next question comes from the line of Chris Danely with Citi.

Kurt, just, I guess, a longer-term question on the Automotive end market. What are your thoughts on the relative growth rates of hybrids versus EVs? And then also, it seems like BYD has been a little bit better than Tesla this year. Do you expect those 2 trends to continue? And then what are the impacts, if any, to NXP? Or does it not matter?

These are intriguing questions, Chris, that we also ponder deeply. Let me break it down. First, the combined market for hybrids and battery electric vehicles continues to grow significantly, mainly driven by China. Many media reports indicate that the market isn't performing well because Europe and the U.S. represent only a small share of xEVs. Specifically, only 12% of xEVs globally are in the U.S. and 24% in Europe, while China accounts for 44%, with BYD playing a significant role. This 44% in China is projected to grow by 27% this year, according to S&P. Overall, the xEV segment is expanding nicely. When we look at the breakdown between battery electric vehicles and hybrids, it becomes clearer. Currently, battery electric vehicles constitute just 15% of the total but are growing at a rate of 25%. In contrast, hybrids make up 24% and are experiencing a growth rate of 17%. Thus, the battery electric vehicles have a smaller starting point but are growing faster, while hybrids have a larger base but their growth is slightly slower. I believe that in the long run, battery electric vehicles will come out on top from a technical standpoint. Hybrid vehicles are merely a transitional stage, and eventually, as battery technology advances, the hybrid concept may no longer be relevant. For NXP, this distinction is less critical compared to some competitors because only a small portion of our product offerings is specifically tied to battery electric vehicles; primarily, that's our high-voltage battery management solutions. The rest of our products are applicable to hybrids as well, differing from companies that focus solely on silicon carbide, which is exclusive to one type of vehicle. Therefore, I’m uncertain how this will play out in the short term, but it has limited relevance to our revenue. I believe that in the long term, the market will pivot back towards electric vehicles. Regarding Tesla versus BYD, I won't make a prediction, but I can say that Chinese competitors like BYD are extremely competitive and aggressive. We are fortunate to have significant exposure to them, as I believe a considerable portion of global electric vehicle growth will continue to originate from China. I can't say for sure how Tesla fits into that picture, but China will likely dominate in the end, especially with BYD's participation.

Great. And then just a quick follow-up for Bill. Bill, you said your utilization rates are going to remain kind of flattish in the second half of the year. What would be the catalyst to take them higher? Would it be some sort of inventory days level or even better demand outlook or some combo of both? Can you share what would be a catalyst for higher utilization rates?

You're right. It's a combination of both. Currently, we're at the upper limit of our model when assessing what's in the channel and what we have in stock. We're working to balance this appropriately for growth in the second half. We're managing it quarter by quarter, but we must ensure we continue to do the right thing and keep inventory in check. Some of the inventory being held for 144 days is a result of the revenue decline from Q4, and the revenue cost is likely affecting that decline by about 14 days. We reduced our inventory dollars this quarter by about 2 days or $32 million. We're trying to manage all these moving parts. I anticipate that we will aim to tighten inventory a bit in the second half, but if growth exceeds our current expectations, we can certainly adjust our factory operations to increase utilization.

Our next question comes from the line of Gary Mobley with Wells Fargo Securities.

Kurt, you seem to be implying that the second half revenue is about 12% higher than the first half or in dollar terms, about $750 million higher. Correct me if I'm wrong, but I would imagine the majority of that delta is inventory restock direct in through distribution. But maybe you can give us a sense of the magnitude of the impact from improving end demand or seasonality there?

Yes. First of all, that's not what I meant. I stated that the second quarter is projected at $3.125 billion, so you can determine the revenue for the first half. I also mentioned that the full year will be somewhere between slightly down and slightly up. It's important to emphasize that the growth in the second half compared to the first half won't just come from the channel. We have data from order patterns showing that our direct business is also expected to grow in the second half. I provided two examples earlier with Ross. One is automotive platforms, which are ramping up and are completely independent of the cycle, with no products in inventory since it's a new product that is just being introduced to the customer. The other is RFID tagging, which involves direct customers and has no relation to the cycle; it's more about the industry's recovery following the settlement between NXP and Impinj in that market. I also want to stress that it is very unlikely we would reduce channel inventory to 2.5 months. What I mentioned is that in the second quarter, we aim for 1.7 months of channel inventory, which is an increase from the current 1.6. If demand continues as we anticipate, we might see a slight increase in Q3 and Q4. I really can't envision a scenario in which we would reach 2.4 or 2.5 months of inventory. Therefore, the modest changes for the full year won't depend on increasing channel inventory to 2.5 months. I apologize if that wasn't clear earlier, so I appreciate your question, but that's really not the context for it.

Okay. Just a quick follow-up for Bill. You did a good job of highlighting the increased depreciation schedule for 5 years to 10 years on internal front-end equipment. What does that do for the long-term capital intensity for the overall company?

No change. Our current view is our CapEx is to spend 6% to 8%. Again, this is really an accounting change that we just dealt with and moved on.

Our next question comes from the line of Stacy Rasgon with Bernstein Research.

For the first one, I also wanted to revisit the ramp in the second half of the year. It seems clear that if the full year is flat, you're experiencing decent double-digit growth half over half. Does that begin in Q3? Is Q3 expected to perform above the seasonal average to help achieve that? Based on our current position, how would you characterize the expected seasonality for Q3 compared to historical trends?

Stacy, we really can't go there. I mean I'm already leaning out of the window here with giving kind of a directional full year guidance, which we thought is useful given the dramatic cycle we are all going through. But now calling it into Q3 and Q4 separately, I'm sorry, we don't provide that. So it is for the full year. Honestly, it's also hard to say, Stacy, because you know that inventory digestion is not an actual sheet. I mean this is a number of customers. Each of them has their own dynamics, has moving targets. So things could be settled earlier could be set a little later and calling that exact by the quarter end is virtually impossible.

Okay. To expand on that point, regarding Autos, last year you indicated that you had shipped less than expected; you experienced strong pricing; and you underperformed in the market. If you were already shipping less last year, why are you still experiencing an inventory correction now? It has been six quarters.

Because we wanted to spread this out, Stacy, that was the whole idea. I think last quarter, we discussed about our understanding of that so-called soft landing strategy for NXP. Our whole target was to actually have not a sharp peak to trough in Automotive because there would be a bad impact on our factories and Bill would come back with heavy underloading and negative margin impact. So the idea was to spread this over a longer period of time, which is why we started early but didn't want to overdo it in any given quarter. Say we started in Q3 last year for the direct side of Automotive. Obviously, it goes at least until the end of the second quarter of this year, so that would be a full year of correction on the direct side, maybe a little bit spreading into the third quarter. Mind you that at the same time, our distribution Automotive business, which is 40% of the total Automotive revenue, has always been at 1.6 only. So on that side of the house, we haven't had to correct at all. So that's the way how you should think about it, which explains also some of the confusion I'm reading in a lot of reports about the peak to trough behavior of NXP versus others. In Pumps Infra, in Industrial, and Mobile, we have a 30% peak to trough more or less. It's just that our trough was already a year ago because of our channel discipline. But it's the same peak to trough as everybody else. It's just in Automotive, it's probably more in the 9% to 10%, and because I believe we troughed in Automotive this quarter 2 right now. But again, that is intentional, as I just explained.

Got it. So is it demand getting worse now? Or is it just your inventory behavior taking a harder line on inventories because it does feel like the general trajectory is getting worse over the last quarter and Q4, Q1, Q2?

No, it's really the inventory. We don't see you have to take the offset from the SAAR, Stacy. I said earlier that last year, there was a SAAR growth of 10%; this year, it is flat. If you compare like-for-like, then this year is, of course, a less positive environment from a macro perspective. But everything else, which is the company-specific positions we have, the content increase offered by the industry, and the pricing, which is also flat for us this year, is totally in place. So no, it's just inventory.

Our next question comes from the line of Joshua Buchalter with TD Cowen.

Congrats on results. For my first one, I think there's a perception out there that there's a line to draw between software-defined vehicles and EVs and then it's much more difficult to do in SPV architecture on an ICE engine. Maybe you could spend a minute or 2 talking about what you're seeing from your customers? I mean, is there a big correlation between that digital architecture change versus electric vehicles because they're rearchitecting and what are you seeing on ICE engines for a software-defined vehicle?

Yes. I would say no. Fundamentally, the concept of a software-defined vehicle, which is actually moving a lot of performance parameters from hardware to software and creating much more flexibility, is completely independent of what kind of powertrain it has. Now the matter of fact is, however, that all OEMs, I know, are extremely busy with developing electric powertrain-based new vehicles. For most of them, it is actually the core of their activity going forward. That is, of course, the reason why when they think then about STB implementations, it falls together with electric drivetrains, but that is not because there would be a technical reason. I actually know that several STB implementations where we are a leading partner for OEMs, this comprehends both ICE and electric drivetrains. So it is the same STB content which splits then on a much lower level into an implementation for a combustion engine car or an implementation for a battery electric vehicle car. Fundamental differences do not exist.

Appreciate the color there. And maybe for Bill. As you just paid down the $1 million note in March, I think you don't have anything to do for over a year now and only $500 million next year. In the passing of NXP has been more aggressive utilizing the balance sheet. And I think your past target was 2x levered. Can you maybe talk about how you're thinking about utilizing the balance sheet and the capital returns here?

Yes, absolutely. So once again, Josh, our capital allocation strategy remains unchanged. Looking back over the last three years, we returned $8.4 billion, which is 107% of our free cash flow over the last 12 months; this is below 100% due to the debt repayment you mentioned, bringing it to about 82%. In the past quarter, we achieved 90%. We took the opportunity to reduce the company's debt load. Our gross leverage ratio has improved from 2.1x to 1.9x, and we aim to reduce it further below 1.5, keeping in line with credit rating agencies' expectations. We will continue to actively repurchase shares, as we believe this is a strong use of our cash, with about $1.1 billion remaining under our buyback authorization this year. We also maintain a healthy dividend, which represents approximately 28% of our cash flow from operations over the past year. As previously mentioned, we treat dividends as a fixed cost; our primary focus remains on investing in the business. We plan to adhere to our financial model and pursue smaller M&A opportunities. Overall, we are committed to returning excess free cash flow to our shareholders.

Towanda, we'll take one more question here today.

Our final question comes from Chris Caso with Wolfe Research.

I wonder if you could talk a little bit more about the China for China manufacturing strategy that you've spoken to in the past. I mean, I guess in one point, how that protects the business in China? And then secondly, what margin implication that may have if you change that manufacturing strategy going forward?

Yes, Chris, that is indeed a very important point. There are clear and increasing requirements from our Chinese customers in Automotive and beyond for localized manufacturing. We are pursuing this actively. We have selected the Nanjing factory of TSMC, which hosts the 16 FinFET, 16-nanometer technology, essential for our microprocessors in Automotive. We are continuing our collaboration with SMIC outside of Automotive, and we recently chose a third foundry partner for the analog mixed-signal space to produce our products in China for the Chinese market. This approach helps us in two ways. Firstly, it allows us to meet the demand for local manufacturing. I believe NXP is in a relatively good position here, as several of our competitors operate their own factories, making it challenging for them to move to China. Secondly, regarding costs, there is definitely a competitive market in China. To compete successfully against local Chinese competitors, who will continue to emerge over time, it is advantageous to utilize the same local cost base that they do, which involves local foundries in China. Ideally, we anticipate that this will not affect our margins, while keeping us competitive. The key is that we can effectively compete with them by leveraging the same cost advantages available in the local manufacturing environment. I look at Jeff here. Do you have a follow-up?

Yes, I do. And if I could follow up also with China from a competitive standpoint regarding what they could actually produce. And you've addressed it from a manufacturing standpoint and putting you on an equal cost base with them. What do you think about the capabilities of some of these local players? Obviously, there's an imperative in time to try to bring as much content locally as possible. Do you see the competitive threat rising in terms of the capabilities of some of the local players that could be a factor going forward?

Look, Chris, in principle, and that's an overriding statement, we are always paranoid about competition because I've learned in my career in this industry, you better be paranoid at all times because it keeps you hot to run successfully against competition. Actually, in that particular case, we see 2 areas where China is very, very busy from a local competition perspective. One is power discretes, especially for Automotive, and that ranges all the way from IGBTs, MOSFETs to silicon carbide. We just observed that for us, it doesn't matter since you know that this is not part of our portfolio. That’s something where it appears they actually make quite good progress. Secondly, lower-end microcontrollers. There are a number of companies, and they together have a couple of hundred million dollar business already. That's outside of Automotive. We think with the fast move and requirements for higher processing performance and a lot more software in Automotive, this is a long way for them. Again, we are paranoid about it, but I think it's just another set of competitors which we are facing like in other places in the world. We are not fearful of this anytime soon. In the analog space, I could imagine, again, we haven't really seen much, but I could also imagine that they get into the lower-end catalog analog at some point. I mean if I was China, I would try and do this. Overall, clearly a trend, so I completely agree with you that this is something which they want to do. We don't see it really moving in our space at this time. And certainly, with the localization of our manufacturing, we kind of want to counter that, at least from a competitive cost base and from a compliance perspective. Good. With that, we are a little bit over time. I want to conclude the call with summarizing and just making the remark again. This is a tough cycle. We have, over many quarters, operated a soft landing strategy in order to keep the P&L earnings and profitability in reasonable shape. With some cautious optimism, we are seeing now that the second half is turning around. It's hard to say what the slope of that is going to be. But given our low inventory position going into this, we are cautiously optimistic that we can land the year in this plus/minus 0 kind of fashion which we discussed during the call. In the meantime, we keep every possible control on anything we can do about gross margin and OpEx as well as CapEx. With that, I would like to conclude the call and thank all of you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.