Hello everyone. This is Jeff Palmer from NXP. Thank you and welcome to NXP Semiconductors Third 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 the financial results for the fourth 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 third 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 at nxp.com. Now I'd like to turn the call over to Kurt.

Thank you, Jeff and good morning, everyone. We appreciate you joining our call this morning. Beginning with quarter three, NXP delivered quarterly revenue of $3.25 billion in line with our overall guidance of down 5% year-on-year and up 4% sequentially. While we experienced some strengths against our expectations in the communication infrastructure, mobile, and automotive end markets, we were confronted with increasing macro-related weakness in the industrial and IoT markets. At the total company level, sequential growth was led by China. Non-GAAP operating margin in quarter three was 35.5%, 50 basis points above the year-ago period and 40 basis points above the midpoint of our guidance. Year-on-year operating profit performance was due to a combination of lower revenue and gross profit, partially offset by favorable operating expenses. Now let me turn to the specific trends in our focus end markets. In automotive, revenue was $1.83 billion down 3% versus the year-ago period and in line with our guidance range. The inventory digestion at our main Tier 1 customers continues to occur with further pressure coming from slowing European and North American car OEM end demand. At the same time, we experienced healthy growth in the China and Asia-Pacific automotive end markets. Turning to Industrial & IoT, revenue was $563 million, down 7% versus the year-ago period and below our guidance range. During the quarter, we experienced weaker-than-expected trends globally. In Mobile, revenue was $407 million, up 8% versus the year-ago period and at the high end of our guidance range, in what is normally a seasonally strong period. In Communication, infrastructure, and other, revenue was $451 million, down 19% year-on-year and above the high end of our guidance as several RFID programs ramped stronger than originally anticipated. From a Channel perspective, distribution inventory was 1.9 months up from the 1.7 months in quarter two, following our attempts to stage dedicated mass market products in the channel. While at the same time, sell-through to distribution service customers in the European and American markets was somewhat slower. Now, let me turn to our expectations for quarter four 2024. We are guiding quarter four revenue to $3.1 billion, down about 9% versus the fourth quarter of 2023, and down about 5% sequentially. Relative to our earlier expectations, we are taking a more conservative stance for quarter four; hence, we will also aim to hold channel inventory approximately flat sequentially at 1.9 months or about eight weeks. This is because we began to see increasing weakness in the Industrial and IoT market already during quarter three, as well as an unexpected contraction in manufacturing PMI below 50 across all regions except China. Furthermore, we find ourselves exposed to a broad slowdown of European and North American automotive OEM outlooks for 2024, only partially compensated by the aforementioned strength in China automotive. This leads to more stringent inventory reductions at our Tier 1 customers below the natural end demand. So at the midpoint, we anticipate the following trends in our business during quarter four. Automotive is anticipated to be down in the high single-digit percent range versus quarter three, 2023. Excuse me, versus quarter four 2023 and down in the mid-single-digit percent range versus quarter three 2024. Industrial and IoT is expected to be down by 20% versus quarter four 2023, and down in the mid-single-digit percent range sequentially. Mobile is expected to be down in the low single-digit percent range both versus quarter four of 2023 and sequentially. And finally, communication, infrastructure, and other is expected to be down in the mid-single-digit percent range both versus quarter four 2023 and sequentially. In summary, our guidance for the fourth quarter reflects broader macro weakness in Europe and North America, only partially compensated by strength in China. The cyclical rebound, which we had anticipated for the second half of 2024, has not materialized. The soft and uncertain demand environment appears to be causing the Tier 1 customers to take a very cautious stance on their inventory positions. These trends are consistent with the multiple profit warnings issued by major Western automotive OEMs as well as the contracting global manufacturing PMI trends, which are weighing on demand in the Industrial and IoT market. The net impact to NXP is lower-than-expected order trends from our direct customers and distribution partners. Notwithstanding this more challenging short-term demand environment, we are very confident we have deployed a long-term winning strategy, focusing our investments to succeed in the fastest-growing secular end markets of automotive and industrial IoT. In the short term, we will maniacally focus on managing what is in our control while making the right decisions for the long-term health of the business. This will enable NXP to drive resilient profitability and earnings, even in an uncertain demand environment. And now I would like to pass the call to 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 Q3 and provided our revenue outlook for Q4, I will move to the financial highlights. Overall, our Q3 financial performance was good. Revenue was in line, non-GAAP gross margin was near the low end of our guidance, more than offset by favorable operating expenses resulting in better operating profit. Turning to Q3 specifics, total revenue was $3.25 billion, down 5% year-on-year. We generated $1.89 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 58.2%, down 30 basis points year-on-year and 30 basis points below the midpoint of our guidance range due to product mix. Total non-GAAP operating expenses were $738 million or 22.7% of revenue, down $65 million year-on-year, although this was $22 million below the midpoint of our guidance due to lower variable compensation, project spend, and payroll. From a total operating profit perspective, non-GAAP operating profit was $1.15 billion; and non-GAAP operating margin was 35.5%, up 50 basis points year-on-year and 40 basis points above the midpoint of our guidance. Non-GAAP interest expenses were $70 million, with taxes for ongoing operations of $182 million or a 16.8% non-GAAP effective tax rate. Non-controlling interest was $11 million and stock-based compensation, which is not included in our non-GAAP earnings, was $115 million. Taken together, we delivered non-GAAP earnings per share of $3.45, slightly ahead of our midpoint guidance of $3.42. Now I would like to turn to the changes in our cash and debt. Our total debt at the end of Q3 was $10.18 billion with our cash balance of $3.15 billion, down $111 million sequentially due to the cumulative effect of capital returns, internal CAPEX, investments in previously announced equity accounted foundry joint ventures, and cash generation during the quarter. The resulting net debt was $7.03 billion, and we exited the quarter with a trailing 12-month adjusted EBITDA of $5.24 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q3 was at 1.3 times and our 12-month adjusted EBITDA interest coverage ratio was 22.9 times. During Q3, we paid $259 million in cash dividends and repurchased $305 million of our shares. Taken together, we returned $564 million to our shareholders, representing 95% of non-GAAP free cash flow. In addition, on August 29th, the NXP Board of Directors authorized an increase of our existing capacity to purchase an additional $2 billion of buybacks with a total balance of $2.64 billion at the end of Q3. Furthermore, since the end of Q3 and through Friday, November 1st, we repurchased an additional $117 million of our shares under an established 10b5-1 program. Turning to working capital metrics, days of inventory was 149 days, an increase of one day sequentially, while distribution channel inventory was 1.9 months or approximately eight weeks. Days receivable were 30 days, up three days sequentially; and days payable were 60 days, a decrease of four days versus the prior quarter. Taken together, our cash conversion cycle was 119 days, an increase of eight days versus the prior quarter. Cash flow from operations was $779 million, and net CAPEX was $186 million or 6% of revenue, resulting in non-GAAP free cash flow of $593 million or 18% of revenue. Turning to our expectations for the fourth quarter, as Kurt mentioned, we anticipate Q4 revenue to be $3.1 billion plus or minus about $100 million. At the midpoint, this is down 9% year-on-year and down 5% sequentially. We expect non-GAAP gross margin to be about 57.5%, plus or minus 50 basis points. Furthermore, our guidance assumes flat channel inventory at about eight weeks exiting Q4; this reflects our continued discipline of proactively managing our distribution channel, especially during uncertain demand environments. Operating expenses are expected to be $725 million, plus or minus $10 million. Taken together, we see non-GAAP operating margin to be 34.1% at the midpoint. We estimate non-GAAP financial expenses to be $77 million with the non-GAAP tax rate to be 16.8% of profit before tax at the midpoint; non-controlling interest and other will be $9 million. Our guidance assumes a $2 million loss from our equity accounted boundary joint ventures; we suggest for modeling purposes, you use an average share count of 257 million shares. Taken together at the midpoint, this implies a non-GAAP earnings per share of $3.13. We expect stock-based compensation, which is not included in our non-GAAP guidance to be $118 million. Turning to uses of cash. We expect capital expenditures to be around 5% of revenue. We also will make a $400 million capacity access fee and a $120 million equity investment into BSMC as well as a $52 million equity investment into ESMC, which are our two equity accounted foundry joint ventures, which are under construction. In closing, I would like to highlight three items. First, we will continue to return all excess cash to our owners through buybacks and dividends. We expect our Q4 capital returns to be above $700 million. Second, despite the macro headwinds, NXP will continue to navigate and operate within its long-term financial model. And lastly, we look forward to you joining our 2024 Investor Day on Thursday, November 7th at 8:30 A.M., where we will provide an update to our long-term strategic plan and financial models. I'd like to now turn it back to the operator for your questions.

Hi guys, thanks for taking my questions. Kurt, seems like a lot of things changed during the course of the quarter. You're not alone in highlighting weakness, and I don't think it's NXP specific. But can you just talk a little bit about the specific customer behavior changes you saw because up until now you seem to have set things up pretty conservatively throughout the year. So the guide down seems to be a little more of a surprise for you guys than the peers just given the setup appeared to be a little more favorable heading into the quarter and guide?

Yes, thanks and good morning Ross. Indeed, we were taken by some surprise, I would say, in the August timeframe during quarter three by a broadening weakness in the Industrial and IoT market pretty much across the board, which led to a much more cautious stance on their side, Ross, relative to also their inventory positions. And the same is now broadening when you ask for the guidance for Q4; it's clearly broadening into the automotive segment. There I would exclude China from these discussions. I think you've heard similar from our peers. China actually appears to be quite strong. Our growth was led by China in quarter three and the sequential growth. And also in quarter four, China actually will grow from a sequential perspective over quarter three across automotive and Industrial and IoT. But that weakness and that customer behavior you were asking for is really specifically strong now in the fourth quarter in the Western Automotive and Industrial segments. Their customers, and you saw all the profit warnings from the car OEMs, for example, where now the Tier 1s are aiming to further reduce their inventory. So our trends to under ship against natural end demand is becoming even tougher, Ross. That's how I would characterize the customer behavior. It almost felt like everybody from them kept up their forecast and then suddenly, August, September, they started to drop. And that is now ripping through to the Tier 1s, which are becoming even more cautious on what they want to hold from NXP in terms of inventory. You know that we have talked about this extended inventory digestion before, but that has now extended because of the end market weakness.

Yes. Thank you, Ross. And quickly on our Q3, our gross margin was missed, and you can probably see that very clearly through our segment reporting, where industrial IoT revenues, where 80% of that is serviced through the distribution and carry accretive margins for us. And we also had a bit stronger mobile revenues, which are slightly dilutive to corporate margin. And so that's why we missed 30 basis points in Q3. We obviously see that trend. Kurt talked about the segments where clearly, Industrial and IoT will be stepping down again. So that becomes a mix headwind going into Q4. In addition, obviously, declining by $150 million a year also we had some fall through over our fixed costs. Related to inventory, you saw from a day’s perspective we’re kind of holding ourselves but clearly, when you see our Q report, you're going to see increased finished goods. And basically, those finished goods we were going to put in the channel. But the sell-through wasn't there, so we held them on our balance sheet. And so it will probably take us a quarter to get back to where we want to be from an inventory perspective. Now more long-term on the gross margins, again clearly, we're running our utilization in the low 70s. We expect to continue around them in the low 70s, probably at least for the first half of 2025. So that will flip and become a tailwind when we decide and see sequential improvements in our revenue sometime in 2025 related to it. Clearly, we have mix that's a tailwind that will come in our way into the future as we continue to ramp our new products. More importantly, we're going to talk about during Analyst Day, our real strategic structural changes that we plan to make more longer term, which obviously I said many times, that 58% is not our final destination. And please hold tight for a couple more days, and I'm going to walk you through that gross margin journey over the next three years and plus some as well related to it. But we feel pretty good. Obviously, we have to make sure we burn off some finished goods here and going into Q4 and in Q1 and rebalance the inventory a bit. But remember, we're holding about three weeks on to our balance sheet, which is margin accretive when we do ship it into the channel. We're holding that quite tightly at about eight weeks. We believe eight weeks is probably one of the lowest compared to all our peers. And once the environment normalizes, we will bring that back up to 11 weeks. It's just a matter of when that will be when the macro improves.

Yes, thank you. Good morning. I guess the first question is with regard to the channel inventory. And I know that you wanted to increase that somewhat. I guess it is right to interpret that the increase in channel inventory was just a function of the end markets being larger than you thought. And I guess, in the context of your customers taking the inventory down so low, how does that affect your view of where you want your own inventory to be as you go into next year on both a channel basis or on an internal basis?

So Chris, let me take the channel question and the internal inventory question will be answered by Bill in a minute. So on the channel, yes, I think you got it exactly right. We wanted to increase by a digit from 1.7 to 1.8, which we did. And by the way, let me remind you why we want to do this: we want to be sure that critical product for competitiveness in the channel is probably staged on the shelves. Since most of our competitors have higher positions there, we want to be sure we don't fall behind in terms of competitiveness. And yes, we inched another digit higher, which was then a function of the late weakness in the quarter, which I just talked about, which reduced the sell-through more than we had anticipated. That's why we indeed inched a little bit higher than we had anticipated in the plan. And Bill, maybe you'll speak about the internal inventory targets.

Absolutely. Clearly, the macro environment is weaker now than 90 days ago, as Kurt explained. So I expect our inventory levels internally to remain elevated for the next couple of quarters until we obviously grow revenues again from a sequential standpoint. But again, at the same time, we are proactively reducing our foundry purchases which are more variable in nature for us, and this will probably have an impact in the first quarter of 2025. Q4 obviously is limited because we placed these orders already in Q3. And again, as I talk to Ross, we're holding about three weeks of finished goods of inventory on our balance sheet. So we'll proactively manage that. And then as we replenish the channel, we will get that benefit relief with inventory coming down internally. Again, we think it's important to hold it very tightly and low at eight weeks and sometime in 2025, we'll bring this back to the 11 weeks when the macro improves. And again, I have to say the majority of our inventory is long-lived supporting our auto industrial markets and had very, very low obsolescence.

Yes, let me try and go at it. This is a number of complex questions. So first of all, clearly, the forward-looking, there is a lot of uncertainty around this. I mean, with all the unexpected downticks from a macro perspective in automotive and industrial, which we've seen over the past say 10 weeks, I want to be really careful in making strong statements for the longer future into next year. However, what we can offer is we do believe that probably quarter one will follow a pretty normal seasonal pattern for NXP, which is a high single-digit sequential down from quarter four into quarter one. We see no reason why we should be different to normal seasonality here into quarter one. I don't want to go that far, Chris, to call the trough because I just don't know what the macro is going to do with all the uncertainty around us. I don't think we can do this yet. I do agree with you that with our strong discipline on the channel inventory, and I had it in my prepared remarks, we keep it now flat again into quarter four. So where we start to stage a bit into the third quarter, we hold here. So we keep it flat into the fourth quarter, which keeps us at a very low level of eight weeks only. And also, indeed, with the direct customers at some point, inventory is just burned. So yes, at some point, of course, that sets us up for a good growth. I just cannot call and don't want to call when that moment is. But I would say NXP from an inventory in the customer space perspective is actually pretty well positioned.

Thanks for taking my question. Kurt, what's NXP's relative exposure in the China-based car versus European premium cars, so if let's say, your China customers continue to take share, how does that content play out for NXP? And then this China trend, yes, you have mentioned it and the peers have mentioned it. How much of that is kind of pre-buying before the elections and does that kind of keep the industry exposed to in-sourcing risks on a longer-term basis?

Hi Vivek, regarding our content per vehicle exposure in China compared to premium Western vehicles, high-end cars in China have a similar range of features to those in the West. For higher-end cars in China, our content per vehicle exposure is comparable to what we see in the Western market. Additionally, since they are developing new platforms at a faster pace, I would suggest that the growth of our content exposure in China is likely outpacing that in other regions due to quicker innovations. New platforms are being developed every two to three years, allowing us to seize higher content opportunities more rapidly, which has been advantageous. As for your second question, I do not believe they are stockpiling inventory due to elections or any external factors; it's primarily about the success of the Chinese industry. If we look at the global market, it is projected to decline by 2% this year, while China is expected to grow by 2%. This illustrates that China's performance is surpassing the rest of the world, which positively influences our revenue growth in the region. The same applies to discussions about electric vehicle penetration. In China, this sector remains robust, with recent data showing that in September, 46% of vehicles sold were electric, indicating strong progress in EV adoption. Overall, the market is thriving in China, and EV penetration is higher than in other parts of the world. For these reasons, I believe the growth we are seeing in China is sustainable, reflecting their competitive stance both locally and against Western companies. It seems what is being lost in the West is being gained in China.

Right. And for my follow-up, I think you mentioned that Q1, you expect to be seasonal, if I heard correctly, which is down high single digits. But if I were to just take the average of just your automotive business over the last seven years, including the COVID, that is more down like 1%, 2% or so on an average. I understand seasonality could mean different things at different times. But what explains this large difference between what we have seen with NXP over the last six or seven years in Q1, especially in your automotive business versus what I think you are kind of alluding to for Q1 2025? Thank you.

Vivek, I'll take that. It's Jeff here. I don't think we're going to provide a guidance by segment into Q1. As Kurt said on a previous question, we do expect total company to be seasonally down into Q1. And I think that's probably about as far ahead of our skews as we're going to get today.

Good morning and good afternoon. Thank you for taking my question. I would like to get more insight into the industrial slowdown you are experiencing. You mentioned strong performance in China, which I assume is related to IoT. I would appreciate your thoughts on any changes regarding North America and Europe, particularly whether the weakness is widespread or limited to sectors like factory automation.

Yes, hi Chris. Indeed, let me reconfirm the weakness in Q3, but also now specifically going to Q4 is predominantly across the board from Europe and the U.S. in industrial and IoT. So across also most sub-segments. But mind you that we are not that big in Europe and the U.S. in Industrial and IoT. So we are actually a relatively small player there. If you want to get a little bit of color, I would say, especially factory automation appears to be particularly weak there in the West, in Europe and the U.S. The strength in China is more in the consumer IoT part, that 40% portion of our industrial IoT segment than in the core industrial. It's not that core industrial is particularly weak in China, but if you want to have color between the two in Q4 in China, then the stronger one is the consumer IoT, which I guess is also a bit of a seasonal strength into the fourth quarter. Yes, CJ, I'm happy you're asking because I fail to understand the logic why we would come back less strong than others because we have fared somewhat better so far. And I fail to understand that because the only one reason why we are declining less this year, for example, with our guidance, you will see that NXP is like 5% down this year versus most of our direct peers more double-digit down. The reason for that is that we hit the brakes earlier. It's not that we took anything away from the future. The only thing is we didn't do it in the first place. So we did a little less and a little softer in 2022 and 2023, which helped us not have to hit the brakes so hard in 2024. But that puts us at the same starting point into any recovery. So that is our firm position here. And I think it all comes back down to what we discussed a little earlier in this call, which is the actual inventory position, which we have in the channel and Bill said it, 1.9 months or about 8 weeks currently, which is still quite a bit away from the longer-term target of 11 weeks or 2.5 months. So that we still have like, I think, $300 million or so under the belt to be shipped in, which we don't do in the current environment. Again, we stay cautious. We could do, but we don't do it because we want to do it when it makes sense, when the recovery happens. And on the direct customer inventory, I can, of course only assume, CJ, but I don't see a reason why we would be any worse or any better than typical peers. I mean that's the treatment you get from the customers. We can control that, but I don't think we should be any different from our peers. So therefore, no, I don't think there is a reason to believe we have less of a recovery ahead of us. We actually feel good about the soft landing strategy, which in fact only brought us down by 5% this year, thanks to cautious behavior the year before.

Hi guys, thanks for taking my questions. My first one just around the auto, like 90 days ago, you were sort of suggesting to us that auto would be stronger into the end of the year because of company-specific wins in radar and other things that were going to be ramping. So part of the incremental, because I'm a little confused, did that stuff just not ramp or did it ramp less than you thought or is it ramping later than you thought or what is it because it certainly doesn't seem to be enough to offset the other of the broader weakness that we're seeing, like what's going on with that?

Yes, Stacy, absolutely. I can confirm we did say that half two would grow over half one, driven by two factors. One was the anticipated recovery, and the other one was company-specific growth. We went very deeply into this and tried to find what happened and what didn't happen. The company-specific growth, Stacy, is happening. I mean it's a little softer because if they build a little less cars, then of course, you ramp also a little bit less. But the fundamental mechanisms of RADAR and S32 ramps are happening; we are actually growing quite nicely in the second half over the first half. But it is wiped away by the recovery not happening and on the contrary, of macro weakness, which is actually superseding all of that. So underneath the company-specific drivers are intact. We will show a bit more detail on Thursday in our Investor Day in Boston. But it's not strong enough to overcome the macro weakness, Stacy.

Yes, Stacy, this is Bill. First, we're not going to guide to Q1. But for modeling purposes, I would suggest when incorporating what Kurt said about the seasonal adjustments to revenues, probably best to use a gross margin similar to those revenue levels in the absence of the guide. Again, we just don't know, it's not fully order booked yet. So mix will play a role, of course, but I'm just not that smart enough. But for modeling, I would just use something along those lines during the last three years of those revenues.

Thank you very much. My first question is about pricing. As we approach the end of the year, I understand you are in negotiations with your auto customers. Given the challenging market conditions, I have heard from many peers that pricing discussions are quite intense. So, I would like to know how NXP plans to approach its pricing strategy and how you expect pricing to evolve, especially with the increased pressure into next year. That would be very helpful. I have a follow-up question afterward if that’s alright.

Yes. Thanks, Francois, absolutely. Let me confirm indeed two data points here. The one is, and we talked about this through this year, we can now say with a lot of confidence that for this year, pricing will have been neutral. So we will end the year with a flat pricing over the previous calendar year 2023. And from anything we can see today relative to next year's pricing across the entire company, so that's all the segments, all the channels together, it will probably be a low single-digit ASP erosion, which is very typical, I would say. And that's also what we have anticipated. So after this whole swing, after COVID, and the supply crisis, where prices were up, they went into flat this year. And we assume that for next year, but also the years after, it is reasonable to assume we are back to a low single-digit ASP erosion annually, which is very much in line, by the way, with what we have experienced in the years before the supply crisis and before COVID. And I know you hear different data points from different people, Francois, but mind you that we have a pretty differentiated portfolio. So a lot of our product is very far away from catalog or commodity products, which gives us also in a period like now a relatively strong standing when it comes to pricing.

That's very clear, thank you, Kurt. And maybe a follow-up. It's a bit kind of a medium term, but still it impacts the short term, given these challenges on the cycle, you have this China uncertainty with local players probably going after pricing. Even if you have a sticky and strong differentiation, as you described, Kurt, it's fair to assume maybe that the pricing environment and the oversupply that will take a bit longer to feel how NXP tends to play in that role. I mean, the trade-off between market share and gross margin, for example, would you consider like to exit some product as soon as you see something that doesn't play your way or cost-saving program as well, given the very long down cycle, is it something that you consider as well potentially just strategy?

Absolutely. You will learn more about our new financial model and gross margin forecast on Thursday. Regarding pricing, we will not compete solely on price. If we find ourselves in a situation where price is our only competitive advantage, then we are in the wrong product category. While we need to remain competitive, if winning relies only on price, we would consider exiting that market. We've done this before with powertrain microcontrollers in automotive and exited certain sub-segments after acquiring Freescale, which our competitors have since taken over. Similar actions happened years ago in the banking cup business. We prefer not to compete on price. There is also the aspect of our cost competitiveness. We are dedicated to reducing our own costs, and our recent moves, such as the BSMC joint venture in Singapore, are helping us achieve a competitive cost base. Price is influenced by the costs we can manage, and we are putting in significant effort there as well. Ultimately, we are not a company that will sacrifice gross margin for short-term market share; that is not how we operate.

Hey guys, thanks for taking my question. I'm sorry for harping on gross margin, but it's the one that’s in my inbox the most last night and this morning. I guess if we zoom out, I mean, your gross margins have been remarkably stable for like 10, 11 quarters and now are starting to see some leverage with revenue. Like can you, I guess, maybe walk through why now and it sounds like it's all maybe fixed cost coverage and utilization rates, and there's nothing going on with pricing, but the mix by end market isn't really changing anything within the mix of products that we should be aware of or any other factors beyond, again, fixed cost coverage and purchase agreements that are really driving the sequential decline in gross margins in both the fourth quarter and I guess, what you're implying for the March quarter, which is another leg down? Thank you.

Sure, Josh. Thank you. It's essentially about how revenue levels interact with our fixed cost structure. The product mix did have an impact in Q3 and will continue to play a role in Q4, particularly with lower revenues. The decrease we expect as we enter Q1 will primarily be due to total revenue levels. Fundamentally, there aren’t any significant changes; we just need to rebalance inventory, which means we might not produce as many goods and will need to make adjustments in our foundry operations. I'll discuss our gross margin strategy in detail this Thursday. I believe we have shown considerable resilience compared to many competitors, especially given how revenue fluctuations can affect gross margins and customer service or inventory management. Overall, we feel positive about our current position. In the short term, revenue will be the key factor, but we are enthusiastic about potential improvements once the macro environment stabilizes, and we see long-term opportunities to lift our gross margin beyond the upper limit of our current projections.

Yes, Josh. So in summary, there is no change we see fundamentally on the content at customers if it comes to what products we deliver there. So in the end, we’re obviously cautious going into Q1, which will naturally have an impact on what the margins will look like, but more for the utilization-driven it is for the overall production levels that we see.

Hi, good morning. Thank you so much for taking the questions. I have two quick ones on automotive. Just wanted to clarify, Kurt, the incremental weakness you're seeing in auto, is that at this point purely due to weakening end demand or are your Tier 1s bringing down their inventory levels as we speak as well? I think last quarter, you gave a range of something like 2 to 12 weeks in terms of how they're managing their inventory, have you seen any changes to how they think about optimal inventory levels?

It is indeed both, Toshiya. They have reduced the expected unit numbers for production. I mentioned earlier that the SAR for this year is now down by 2%, and in Europe, it's down by 5% year-over-year. As a result, the 2 to 12 weeks becomes a lower number, which is the main issue. The OEMs are informing the Tier 1s that they need fewer parts, leading them to forecast a lower inventory target. This creates a double whammy for us. We are impacted directly by the reduced production numbers and also suffer from the resulting lower inventory in absolute dollar terms. Therefore, I would say the 2 to 12 weeks still applies but against a lower revenue number. There’s also an emotional aspect as they approach year-end with a poor outlook. They do not want to end the year with high inventory levels, so they prefer to lower it. So yes, it is both; one overlays the other. However, on the positive side, this sets the stage for a stronger recovery when it happens. I don't want to speculate on when that recovery will occur, but historically, when growth resumes, it tends to be quite strong, as we’ve seen in the last three cycles from similar situations.

Yes, that makes a lot of sense. Thank you. And then as my follow-up, you've seen a mix shift in favor of hybrids at the expense of EVs, maybe not at the expense of EVs, but EV adoption has kind of stalled over the past several quarters. I think the industry consensus view is that over the long run, EVs do grow pretty materially. But as you talk to your partners and customers into 2025 and maybe early part of 2026, do you have a view on how hybrids perform or EVs perform relative to one another and more importantly, what are the implications from a content perspective for you guys at NXP? Thank you.

Yes, so we don't have that much of a differential between hybrids and EVs because as you know, we don't have power discretes, which are much more sensitive to the difference between hybrids and full EVs. Our main thrust in the electrification space is the battery management systems, and they don't differ that much from a dollar content perspective between the two. So therefore, we don't have a sharp eye on the specific mix change between hybrid and full EV. At the same time, I just want to slightly maybe adjust what you said, the overall XEV, it has slowed absolutely, but it is still going to be a 14% growth this year. So in units, XEVs worldwide this year will grow by 14% over the year before, while the total SAR is declining by 2%. So I mean, that is still a very, very strong growth and it will be 37% of the total vehicle production this year. So 37% of all vehicles produced on the planet this year are actually XEVs. So it is moderated from a pace perspective relative to what it was forecasted to be, but it is still growing very sharply, and that continues to help us. And yes, the other half of your question, yes, we do continue that over the longer term, we do continue to believe it will grow. We think something like a 75% global XEV penetration by 2030. That's kind of the data point which we have ahead of us.

I'm going to ask one question. I'm a bit confused about the weaker-than-expected results in Industrial and IoT, especially given the strength in China. I always thought this segment was heavily focused on China and its distribution. Can you clarify if my understanding is correct? Is it that the performance outside of China is very weak, or is my recollection of the geographical and channel mix outdated?

It has a majority in China, that is very true. So you don't miscall it. The U.S. and Europe are very weak. And what we did say is that about 80% of the whole Industrial and IoT business is going through the distribution channel. So maybe you mix this with the China exposure. Not all of that 80% is in China, but 80% of the total segment is going through the channel. And since we keep up our channel discipline and don't over ship there, we basically are really fully exposed to the end demand because we are down to our eight weeks, and we keep it flat there. So therefore, the strength in China cannot overcompensate the weakness in Europe and the U.S. Yet China as a whole, as I said before, will grow into Q4 in both the industrial and the auto segment. But the rest is just falling so much that it can’t hold up.

Thank you. One moment for our next question. Our last question comes from the line of Chris Danely of Citi. Your line is now open.

Hey gang, thanks for squeezing me in. Just two quick ones. So guys, can you just give us a sense of how much of your auto business is China? And then I'm sure you were at the Paris Auto Show as well, it seemed like there were dozens of China sort of EV companies and start-ups. If China gains a bunch of share in the EV market, what's the impact to NXP, is it good, is it bad, is it indifferent, how would that be?

Chris, we don't provide a breakdown of our geographic segments. However, since the auto segment represents around 56% to 58% of NXP, and you can see in the quarterly report that China accounts for about 35% to 37% of our total regions, particularly with its strengths. We can assume that the auto segment is likely close to this corporate average. Therefore, with China's growth, I agree that there is a significant emergence of electric vehicles from China that will eventually reach global markets. This situation is favorable for NXP because these companies are quicker and more innovative, leading to our newer products being produced at a much faster rate than with Western OEMs. If we maintain this momentum and keep our operations moving efficiently, it will continue to benefit NXP.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.