Good day, and thank you for standing by. Welcome to the NXP First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your first speaker today, Jeff Palmer, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Tanya, 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 the financial results for the second quarter of 2025. NSP 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 2025 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 pass the call to Kurt.

Thank you, Jeff, and good morning, everyone. We appreciate you joining our call today. I will review our quarter one performance and then discuss our guidance for quarter two. Beginning with quarter one, our revenue was $10 million better than the midpoint of our guidance. The revenue trends in the mobile and communication infrastructure markets were slightly above expectations, while performance in the automotive and industrial and IoT markets were slightly below our expectations. Taken together, NXP delivered Q1 revenue of $2.84 billion, a decrease of 9% year-on-year. Non-GAAP operating margin in quarter one was 31.9%, 260 points below the year ago period and about 40 basis points above the midpoint of our guidance. Year-on-year performance was a result of the lower revenue and related gross profit fall through, partially offset by lower operating expenses. From a channel perspective, distribution inventory was in line with our guidance at 9 weeks below our long-term target of 11 weeks. From a direct sales perspective, we continue to support Western Tier 1 auto customers with their ongoing digestion of on-hand inventory against the backdrop of a cloudy automotive demand environment. Now, let me turn to our expectations for the second quarter. We are operating in a very uncertain environment influenced by tariffs with volatile direct and indirect effects. As of today, the direct impact of the current tariffs is immaterial to our financials. However, the indirect impacts of current tariffs related to future demand and supply chain remain unknown. As of now, we are not seeing any abnormal customer order pull-ins or push-outs which could be associated with the tariffs. And other than the potential indirect impacts of tariffs, we are seeing some positive trends. These trends include improving distribution customer backlog levels as well as stabilized order signals from our direct customers. Additionally, we are experiencing an increase in short cycle orders as well as some spot product shortages leading to customer escalations. Taken together, these trends have historically been indicative of the early innings of improving cycle dynamics. Therefore, our guidance reflects these improving cycle trends and the immaterial direct tariff impact, but we have not incorporated any judgment of indirect impact from tariffs. Given the uncertain macro environment, we are only providing guidance for the second quarter. We are guiding Q2 revenue to $2.9 billion, down 7% versus the second quarter of 2024, and up 2% sequentially. At the midpoint, we expect the following trends in our business during quarter two. Automotive is expected to be flat versus quarter two 2024 and up in the low single-digit percent range versus quarter one 2025. Industrial and IoT is expected to be down in the mid-teens percent range year-on-year and up in the mid-single-digit percent range versus quarter one 2025. Mobile is expected to be down in the mid-single-digit percent range on both the year-on-year and the sequential basis. And finally, communication infrastructure and other is expected to be down in the high 20% range versus quarter two '24, flat versus quarter one '25. Our outlook assumes that we will continue to undership end demand in automotive, and we expect channel inventory to be flattish at 9 weeks against our long-term target of 11 weeks. Before turning to your questions, I would like to review a strategic acquisition which we announced in the first quarter. On February 10, we announced the intention to acquire Kinara for $307 million, an industry leader in high-performance, energy efficient, and programmable neural processors. This acquisition provides a scalable platform for AI-powered edge-based systems combining NXP's broad portfolio of processing, connectivity, security, and advanced analog solutions with Kinara's AI NPU hardware and software. We believe there is an inflection point in the industrial and IoT markets which is creating demand for intelligent edge AI compute solutions. Customers need high-performance, secure low-power processing which takes place locally at the edge. This eliminates the requirement to connect to the cloud for the execution of AI models in order to meet the critical latency, security, and real-time edge requirements. Kinara already has meaningful customer engagements within the factory automation, building and energy management, healthcare, and smart home end markets. We expect the regulatory approval should be complete by the end of the second quarter. The transaction will not have a material impact on the financial model shared at our Investor Day in November. We expect Kinara to be accretive to our current financial model by 2028 and it will accelerate our overall position in the industrial and IoT markets. In summary, NXP's first quarter results and guidance for the second quarter underpin our optimism that NXP continues to effectively navigate a challenging set of market conditions. We are operating in a very uncertain environment influenced by tariffs with volatile direct and indirect effects. Considering these external factors, we are redoubling our efforts to manage what is in our direct control, enabling NXP to drive solid profitability and earnings. Now, finally, on a more personal note, after deep reflection, I have decided to retire from NXP at the end of 2025. My past 30 proud years with NXP, including 7 years as President and 5 years as CEO, have been hugely fulfilling. I am incredibly thankful for the invaluable privilege to work with so many amazing people and having the opportunity to co-create NXP's future and drive technological leadership for a better world. For three decades, I've passionately prioritized and dedicated my energy to NXP and all of our stakeholders. Now, the time has come to start planning for a shift and focus on my personal journey. I am looking forward to entering the next chapter of my life in good health, taking more time for family, friends, and personal passions. And I would like to congratulate Rafael on his promotion to President of NXP. I look much forward to the next six months of transition period before Rafael assumes the Chief Executive Officer role for NXP in October. I've worked very closely with all of you in the upcoming period. Building on more than 10 years of experience in NXP, Rafael will be an excellent leader to execute on NXP's strategy to bring intelligent systems to the edge in the automotive and industrial IoT end markets. And with that, 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 financial highlights. Overall, our Q1 financial performance was good. Revenue was slightly above the midpoint of our guidance range, while gross profit was in line and operating expenses were below the midpoint of our guidance. Taken together, we delivered non-GAAP earnings per share of $2.64 or $0.05 better than the midpoint of our guidance. We continue to manage sales into the distribution channel consistent with our guidance of 9 weeks. Now, moving to the details of Q1. Total revenue was $2.84 billion, down 9% year-on-year, slightly above the midpoint of our guidance range. We generated $1.59 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 56.1%, down 210 basis points a year-on-year, and 20 basis points below the midpoint of our guidance range due to product and channel mix. Total non-GAAP operating expenses were $686 million, or 24.2% of revenue, down $50 million year-on-year, and $14 million below the midpoint of our guidance range. From a total operating profit perspective, non-GAAP operating profit was $904 million, and non-GAAP operating margin was 31.9%, down 260 basis points year on year, and 40 basis points above the midpoint of our guidance range. Non-GAAP interest expense was $80 million, while taxes for ongoing operations were $143 million, or a 17.4% non-GAAP effective tax rate. Non-controlling interest was $7 million, and results from equity account investees associated with our joint venture manufacturing partnerships was $1 million. Taken together, below the line items were $3 million unfavorable, which is our guidance. Stock based compensation, which is not included in our non-GAAP earnings, was $127 million. Now, I would like to turn to the changes in our cash and debt. Our total debt at the end of Q1 was $11.73 billion, up $871 million sequentially due to a combination of a second tranche of the European investment bank loan and the initial results of our new commercial paper program. Our ending cash balance was $3.99 billion, up $696 million sequentially due to the cumulative effect of additional liquidity, capital returns, CapEx investments and cash generation during the quarter. The resulting net debt was $7.74 billion and we exited the quarter with a trailing 12-month adjusted EBITDA of $4.89 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q1 was 1.6x, and our 12-month adjusted EBITDA interest coverage ratio was 19.2x. During Q1, we repurchased $303 million of our shares and paid $258 million in cash dividends. After the end of the quarter and through April 25th, we bought an additional $90 million of our shares under an established 10b5-1 program. Turning to working capital metrics, days of inventory was 169 days, an increase of 18 days sequentially and slashing on a dollar basis. Days receivable were 34 days, up 4 days sequentially and days payable were 62 days, down 3 days sequentially. Taken together, our cash conversion cycle was 141 days. Cash flow from operations was $565 million, and net CapEx was $138 million or 5% of revenue, resulting in non-GAAP free cash flow of $427 million or 15% of revenue. During Q1, we paid a $125 million capacity access fee related to VSMC, which is included in our cash flow from operations. Additionally, we paid $16 million into ESMC, our equity accounting foundry joint venture under construction in Germany, and a $20 million into VSMC, our equity accounted Foundry joint venture under construction in Sinaloa, both of which are included in our cash flow from investing. Now, turning to our expectations for the second quarter. As Kurt mentioned, we anticipate Q2 revenue to be $2.9 billion plus or minus about $100 million. At the midpoint, this is down about 7% year-on-year and up about 2% sequentially. We expect non-GAAP gross margin to be 56.3% plus or minus 50 basis points. Operating expenses are expected to be about $710 million plus or minus about $10 million. The sequential increase is driven by the normal annual merit increases and the previously disclosed annual license payment, modestly offset by our ongoing restructuring to make room for the three pending acquisitions. Taken together, we see a non-GAAP operating margin to be 31.8% at the midpoint. Please note our second quarter guidance does not incorporate the three pending acquisitions. We estimate non-GAAP financial expense to be about $88 million. We expect the non-GAAP tax rate to be 17.4% of profit before tax. Non-controlling interest will be about $9 million and results from equity account investees about $2 million. For Q2, we suggest for modeling purposes, you use an average share count of 255 million shares. We expect stock-based compensation, which is not included in our non-GAAP guidance, to be $115 million. Taken together at the midpoint, this implies a non-GAAP earnings per share of $2.66. Furthermore, we continue to operate our internal fabs in the low 70% range, and we expect our days of inventory to be flattish into Q2. Turning to uses of cash, we expect capital expenditures to be around 4% of that. We will pay a $35 million capacity access fee to VSMC. Additionally, we will make a $60 million equity investment into ESMC and a $50 million equity investment into VSMC, our two equity accounted foundry joint ventures under construction. Pending the regulatory approval of the three acquisitions, it will result in a cash payment of $1.1 billion, and we will redeem the $500 million tranche of debt due in May from our current cash balance of $4 billion. After closing these acquisitions, our ongoing restructuring actions are intended to enable NXP to get into its stated long-term operating expense model of 23% in the second half of 2025. In closing, I would like to highlight a few focus areas for NXP. First, as Kurt mentioned in his prepared remarks, our outlook does not consider unknown indirect and market demand impacts because of global tariffs, while the direct impact of the current tariffs are immaterial to our financial guidance. Second, with the upcoming CEO transition, there is no change to our long-term financial model and capital allocation strategy, and lastly, we are operating in a very uncertain environment influenced by global tariffs. Considering these external factors on the end markets we operate, we are redoubling our efforts to manage what is in our direct control, enabling NXP to drive solid profitability and earnings while executing our growth strategy. With that, I would like to now turn it back to the operator for your question.

Our first question will be coming from Christopher Muse of Cantor Fitzgerald.

Kurt, you will clearly be very missed. Thank you for everything that you have done over the last five years and obviously before that as President. I guess, maybe first question, you highlighted in your prepared remarks the Kinara acquisition, but you have also made acquisitions with Aviva and TTTech. I guess my question is this. As you think about competition from China in the MCU world, how much of these acquisitions are defensive in terms of a world where MCU discrete purchases probably decrease and focus on software is more important or conversely more offensive in terms of true differentiation both in the auto and in the industrial side of things where you look to really separate yourselves?

Many thanks, and good morning, CJ. Indeed, we have had three acquisitions now, Kinara, Aviva, and TTTech Auto. Kinara is the AI edge compute, which I just discussed briefly on the call. Aviva is about asynchronous connectivity in the car between displays and cameras and for very high data rates in one direction versus not in the other, so clearly beating what Ethernet can do. And TTTech Auto is indeed a very strong software complement to our platform. And to answer your question in brief, this is clearly an offensive addition, complement to our product strategy as we have it today to make us more differentiated with our compute portfolio. I was a little bit hesitating, CJ, because it's not just the compute portfolio because especially the Aviva and TTTech Auto is the whole offering with our core right platform for the software region. Clearly, this will come to good play in China, but I have to emphasize, CJ, not only in China. I mean, this is a global offering, but it will certainly also further help our, China for China strategy.

Very helpful. Then as a quick follow-up, could you give us a kind of, level set where we are in the auto correction? You talked about under-shipping and demand. I guess, when you now expect excess inventory to be digested and how are you thinking from a geographic perspective? I think three months ago, you talked about China strong, America is kind of slowly recovering and Europe weak. Is that kind of consistent with where we are again today?

Yes. Actually, quarter two guidance is a bit of a turning point. Above and beyond the comments I made in my prepared remarks about better backlog with some distribution customers, about stabilization of the order patterns from direct customers, some early innings of escalations because of supply shortages with very short-term orders. But the turning point of order in the second quarter is actually in my view that second quarter we are flat year-on-year. And that's the first time after five quarters. So, we look now back to five quarters of year-on-year declines in automotive and this second quarter of calendar 2025 is the first time that we are flat. It is indeed, CJ, a combination of a stabilizing order pattern from the direct customers with somewhat slower digestion of above inventory in the Western Tier 1s. I'd say, some was slower because some of them are done, and we still have a few left, which are still absorbing over inventory. So, this is still undershiping through their end demand. At the same time, we see a pretty nice pickup in order pace, especially from Asia for the second quarter automotive. And Asia here is a combination of China and Japan. There admittedly that also has seasonal components. China automotive is always seasonally weak in Q1 and then picks up the pace in Q2 and that's exactly what we see. And in Japan, there is another element, which makes Q2 always stronger than Q1, which has to do with the price adjustment. I talked about global pricing, in the last earnings call, and I hope I made a clear comment that most of the Western customers will settle pricing for the full year by January 1. For Japan, that is by April 1. And natural customer behavior is that they hesitate to buy before they have the new prices. So, Japan was waiting, and that's why we see now an uptick in Japan into the second quarter. Since it will be one of the next questions for sure, I'd say it upfront. With having all the price negotiations with the large customers now settled for the year, I can reconfirm and with confidence what I said last earnings, which is we will have for this year a low single-digit price erosion for the whole company for the year. So, no change to what we said last year. It's just that now the confidence is fully in place since we also closed and operate and execute in Japan.

Our next question will be coming from Ross Seymore of Deutsche Bank.

Hi, guys. Thanks for having me ask a couple of questions. And Kurt, I want to echo what CJ said. Thank you so much for all your help over the years and congrats and best of luck in retirement. So, I guess my first question is, I know you talked about the direct and indirect not really having an impact on the tariff front. But can you just talk a little bit about how NXP is viewed by the customers and by the various governments? I know where you're technically headquartered, but are you a U.S. company to China? Are you U.S. for China strategy? Or does the U.S. consider you a European company? Just trying to talk through the manufacturing footprints you have and the flexibility that might provide.

Yeah, thanks. Thanks, Ross, and good morning. Let me first reiterate indeed what I said about direct and indirect impact. The direct impact of the current tariffs we consider immaterial to our financial guidance. So there is a tiny little bit, but it is immaterial. Therefore, consider zero. What I did say about the indirect impact is that it is completely confusing because things are changing by the day. I think today is another reiteration planned for the 25% auto. So that keeps changing and we don't see a consistent pattern. But I would also clearly say we have been very busy talking to all of our customers across the world, asking them what they plan to do, what they have possibly done. And there is neither pull in nor push out effects at this point in time. And we also don't, we didn't really foresee anything for the second quarter from an indirect perspective. So that's why the comment in my prepared remarks. The second part of your question is indeed yielding something we essentially see as an opportunity. Especially in China, Ross, as we are seen and of course we position ourselves that way as a European company. Very clearly as a European company with a lot of our manufacturing operations, given our hybrid manufacturing strategy outside of the U.S., so that makes us, I'd say a pretty much appreciated partner for the industry and our customers in China. Now, tariffs have been exempted and coming and going over the last couple of weeks. But clearly, we've seen an opportunity with our China for China strategy from these tariffs. Because our manufacturing structure and our hybrid manufacturing network, which I think I've discussed over the past couple of quarters already, which is very much emphasizing and strongly building a local manufacturing network, is a positive in this. So it's not just how we are seen, Ross, but it's also factually such that I think more than a third of our China for China business today is already manufactured in China. So we already have made a lot of progress in leveraging this advantage. Now, you also asked, are we seen in the U.S.? Well, both in the U.S. we are seen as a U.S. company, which means we are complying with anything that is being asked from us. But I think that the part which gives us potentially a boost and we try to leverage is that the Chinese are seeing us as European and we have already spent, I'd say, two years of changing our supply network to be a better partner from a China for China manufacturing perspective.

I guess for my follow-up, I just want to pivot over to the industrial side of things. You gave a lot of color about the order patterns, et cetera, and automotive channel versus direct, et cetera. We've heard from other companies that they're seeing some of the green shoots, and I know those are dangerous words these days, but nonetheless, in the industrial business, I just wondered what you're seeing on that side of things, both kind of direct or geographically, and then, of course, via the channel.

Yeah. As a precursor to this, I'm a little bit humble when it comes to looking at NXP as a bellwether for the industrial sector. I mean, we are comparably small, so I'm a little bit careful in taking my commentary now as a strong direction for the whole industry. What we are seeing is that, actually, in Q1 from a performance perspective, actual performance, but also for the guidance of the second quarter, which is up mid-single-digit. It is more or less by the consumer IoT part than the core industrial part. The ratio is still about the same as we discussed earlier, Ross, which is the 60-40 between core industrial and consumer IoT. But directionally both in Q1, but also now into Q2, it is the consumer IoT part, which is strong on a relative basis. However, I do believe, Ross, that also has to do with company specific design wins. We just have a number of really strong design wins. And again, they are specifically in China, which are now playing out nicely in the first half of this year. So, I don't know if we can take this as a proxy for the industry. It's probably pretty specific to NXP.

Our next question will be coming from Chris Caso of Wolfe Research.

Yes. Thank you. Good morning. I wonder if you could expand a little bit on some of the comments you made on your China for China strategy and I guess how far that progresses. And I guess ultimately within China, how much of your China revenue do you expect to be able to supply domestically and under which time? And then, maybe you could speak a little bit to the U.S., obviously, because that's something we're waiting for regarding the regulations and how much of the U.S. you'd be able to satisfy from the U.S. fab?

Good morning, Chris. The China for China strategy consists of two main components. One is manufacturing, which I will elaborate on shortly. The second, and arguably more critical aspect, is the product development and planning specifically tailored for Chinese customers, who we view as lead customers due to their significant influence on innovation in the automotive and industrial sectors. Last fall, I mentioned that I adjusted the management team at NXP to include a leader who directly oversees the China business, ensuring we have top-level visibility into the specific product requirements. Thus, product road mapping is a key strategic focus. Regarding manufacturing, I want to clarify that I'm speaking strictly about wafer manufacturing, as there are different factors involved when discussing backend processes like testing and assembly. Currently, we have approximately 30% of our wafer manufacturing capabilities dedicated to our China for China business, meaning that out of the revenues we ship, 30% are sourced from China. We are actively working to increase this percentage. However, it’s important to note that the remaining 70% is not solely from the U.S.; about 60% of our overall sources come from regions outside the U.S., mainly from Europe and other parts of Asia supporting our China operations. Therefore, the actual percentage of non-U.S. sourcing is significantly higher than the 30% sourced in China. Our objective is to raise this percentage as soon as practicable to ensure maximum independence from potential tariffs. The current tariffs do add a layer of uncertainty and complexity, but our China for China strategy has been in place for more than two years, long before these tariffs were implemented. This strategy is rooted in the revenue opportunities we identify within our key markets of automotive and industrial sectors in China, particularly as the Chinese industry is leading globally in technology advancements, prompting us to invest in this strategy well ahead of any tariff considerations.

As a follow-up question for Bill, I believe you mentioned that you would achieve your 23% expenses as a percentage of revenue target in the second half of the year after accounting for the acquisitions. Could you provide a bit more detail on that and what assumptions you are using to reach those figures?

Yeah, sure. So, on operating expenses, right, we're not guiding the second half. You can see in Q1 we were favorable against our guidance. So, that means we're ahead of the plan of the restructuring activities. And we're going to continue that into Q2 and Q3 because it's time phased. Think about, at the end of June 30th, we will have probably 1,250 extra employees joining us for a full quarter effect starting Q3 and Q4. And you're right in my prepared remarks. Basically, what we're doing is continue making space for those acquisitions so that we can absorb and hit our model at 23%. Obviously, we're not guiding the second half, but we have scenarios on what revenue we think we want to go do and different levers to go pull against that. But we feel pretty confident we'll land sometime in the second half of 2025 at the model.

And our next question will be coming from Francois Bouvignies of UBS.

And again, Kurt, thank you very much for your help. And you will be missed. Sad to see you leaving, but well-deserved, I have to say as well. The two questions I had is on, firstly, you said, Kurt that you don't see much pull-in so far and not much impact there in terms of all the behavior. Obviously, you managed very well during COVID the inventories in the channel. So my question is, if you were seeing some pull-in at some point, would you allow your customer to increase their inventories or would you control it the way you did during COVID? I mean, how do you want to play this dynamic here, given, I mean, your customers, maybe they would like to increase the buffer and inventories maybe above some level that you would like to see?

Yeah, thanks, and good afternoon, Francois. And by the way, I'm still around for a full half year. So this is not a good time to work. On the pull-ins, so yes, I first of all reconfirm through Q1 and through quarter to date Q2, we have not seen pull-ins. I say that very explicitly. We checked it very carefully, customer-by-customer, because we wanted to be sure that this is clean of that. If it was to happen, I think the underlying policy, Francois, continues to be we don't want this. We don't like that. Now, there could be specific reasons and specific cases with specific customers, where they can explain us why it makes sense, and we might want to do it. But I would say, especially on the distribution side, which is more than 50% of NXP, I think I said in my prepared remarks, we want to stay flat to the 9 weeks inventory into the second quarter, where again, we wouldn't want to allow it. And I also said, and I don't know if CJ or Ross asked earlier, we are still busy with some Tier 1 automotive customers to digest inventory. And for that same reason, we don't have a hell of a lot of appetite to consider pull-ins. So, I'd say with possible exceptions always in the range of the moment, we don't want that. We would not want to support.

Great. Thank you, Kurt. And maybe my follow-up would be for Bill on the gross margin side. I mean, your inventory days are relatively high when you look at the history. You said, you think it will be flat. And then, when I look at the gross margin, you are around 56%, low 56% in H1. I look at the consensus, it has more than 57% gross margin in the second half of the year. So, how should we think about the gross margin here? Because it seems tricky to get a big improvement of gross margin with inventories having to come down on your balance sheet, maybe not in Q2, but in Q3, Q4. So, can you help us our ratio as on the gross margin side trajectory in the second half of the year? Can it go up, despite inventories coming down on your balance sheet? And maybe you can remind us the mix effect.

Sure, absolutely. Very fair question. So, let me just repeat. In Q1, we had a slight mix, driven by our product and channel mix. And if we hold everything equally and going into Q2, we're just saying, okay, right now our order book is pretty full. We actually see the mix and it says similar mix as Q1 and we're getting the fall through on the higher revenues over fixed cost. That's why we guided the 56.3%. Now, without providing guidance for the second half of 2025, the best way to think about our gross margin is a function of revenue levels before any of our company specific drivers to influence it. So, for example, at a $13 billion revenue annual number level, we will feel very confident at 58% plus or minus; $12 billion, 57%; and $11 billion, 56%, and again that's a plus or minus 50 basis points. And we demonstrate those levels in the past. Now, from an upside perspective, we obviously have these additional levers to drive gross margin much higher, and they include increasing of our internal utilization, again, that's 70%, and it's staying at 70% because our inventory, as you said, is at the higher. The consolidation of our 200 millimeter factories, we will be talking more about that in the second half. We're increasing our industrial and IoT go-to-market through our channel. So, we want to focus on addressing that mass market. We also have, and by the way, our company-specific accelerated growth drivers are tracking to our growth plans versus Investor Day. I know we're only one quarter in, but everything is good there. We have the normal operational efficiency of our projects to offset just these annual pricing, low single-digit that we occur, so those two offset each other. And a bit longer term, which we've shared all of last year, we will leverage our VSMC 300 millimeter joint venture with Vanguard, which is tracking slightly ahead of schedule. So we feel pretty good about that. So overall, stepping back with the revenue numbers I just gave you, we feel very confident to deliver our long-term gross margin range of 57% to 63%. It really is where revenue comes from and the influence at the starting point, and then you have these levers. On inventory, again, you're right, 169 days is probably the upper bound in my liking for sure related to it. Now you have to think, we managed Q4 going into Q1, we had to manage the absolute dollars because it was the variable orders with our suppliers and we kept utilizations internally. So going into Q2 and also Q3, again, 169 because we have a backlog that we see actually is okay so far for Q3, and so we have to make sure we take that into account to make sure we build the proper product. But as you all know, with the uncertainty around the macro effects related to global tariffs, and more importantly, the number of potential disruptions from a supply chain perspective that could occur and we're starting to read about, we believe holding a bit more inventory is important from the lessons learned from the past. But again, I agree with you, the 169 is the upper balance and we're going to probably adjust this once we learn a little bit more about second half and confidence of second half revenue.

One moment for our next question, which is coming from Stacy Rasgon of Bernstein Research.

Bill, first a question for you. So I know you said you weren't guiding the second half. That being said, the OpEx targets, I mean, you're running $710 million a quarter in OpEx, 23% of that would be like $3.1 billion at some point in the second half. You got close to $50 million a quarter in OpEx coming in Q3. So I mean, $750 a quarter would be like $3.3 billion at some point in the second half. I mean, are these the kinds of revenue targets into the second half that you have in mind when you give those OpEx targets? Like, how do we think about that in the context of everything else?

Well, let me remind you about the Q2 OpEx number. There is a one-time payment from a reoccurring license that occurs each year. That's about $16 million to one of our peers. And I've had that in my prepared remarks. I also mentioned that we continue to restructure the company to make space for these new acquisitions, which I have not disclosed the size from an operating expense standpoint related to it. So we feel pretty confident under the different types of revenue scenarios that we can model because we have other levers to make sure. And remember what I said, where our whole message is we are redoubling our efforts on the areas that we can control. And as you know, Stacy, the two things that we like to control is our spend because that we can do as well as to some extent the inventory time based on what we're building and not building and taking and placing bets with those orders with the unknown macro environment. Hopefully, that helps provide additional context.

That is helpful. And I guess my follow-up, I guess I'm going to try it. So I know, again, you said you didn't want to give color on the backup, but I mean, any just even soft commentary on how you guys are seeing Q3 right now? Like, I mean, what's typical seasonality in Q3? Is there any reason to expect you could be above or below that typical seasonality? I'm sympathetic to the idea that nobody knows what the hell is going on at all right now, but any color you can give us at all, even a little bit farther out would be helpful if you're so inclined.

Yes. Good morning, Steve. This is Kurt. Look, last year, we did this. And you know that we were wrong. We called the cycle which didn't happen. And one of the learnings from that was that we would not want to repeat this. Now, this year, the situation is even more complex because, as I said in my prepared remarks, on the one hand, we do see now what has been always good early innings of the cycle recovery. I mean, that's very positive, what we see there. At the same time, we have this pretty material uncertainty of the indirect impacts from the tariff, which we just cannot figure out what they would possibly mean for the second half. Therefore, we wanted to draw here a clear line, not even for a soft cut for the second half. We just can't. It would be really irresponsible to do it, so we stick to quarter two.

I mean, how do you even tell the difference between, like, a cycle recovery or green shoots and pull forwards and short-term orders and things like that? Like, wouldn't they look the same?

We can clearly see that because as I gave you a couple of elements. One of them was that the backlog of our distribution end customers, which we see by product, is starting to grow after a long, long period of absolutely no growth or even decline. And that is different customers, new customers, new products. That is totally different to a pull in. Absolutely not pull-in. I also talked about a nicely stabilized order pattern from our direct customers, which has been in decline for long, long, long periods and has now stabilized across the board, which is not a pull in because it's far too even, to be a pull-in. So, we think we can clearly differentiate between those because as I said earlier to our things going forward, we want to avoid, to entertain pull-ins and increase inventories again. So, Sandy, that's for us a pretty potent point. So, therefore, no, let's stick to the second quarter and see how that plays out with the uncertainty, which is provided to us from the tariff landscape to our customers. What we do is, we speak to our customers, and that's where that uncertainty comes from. I mean, it's not us inventing it, but we have no better source than speaking to our customers, big and small across the different segments, and they have no idea what's what the second half should look like. So, how should we make it up?

Our next question will be coming from Vivek Arya of Bank of America Securities.

Thanks for taking my question. Kurt, I just wanted to go back to these, the green shoots that were discussed because when I look at your Q1 results, auto and industrial sales, industrial IoT sales were actually modestly below expectations. I think the upside came from mobile and the comm segment. And Q2, you're largely guiding to kind of seasonal trends. So, if there are green shoots, is it fair to say they have not yet shown up in this first half and they could show up in the second half? I'm just trying to get a sense for where are these green shoots showing up, if any?

Well, Vivek, we had already anticipated a soft decline for Q2, where I mentioned that it might be flat or only slightly up. In your question, it's important to note that in Q1, the auto, industrial, and IoT sectors were slightly below our guidance, while the other two segments performed somewhat better. This can be attributed to seasonal weaknesses in the Chinese automotive market, which were stronger than we expected. Although we anticipated this decline, it wasn't to the extent we observed. In Japan, there was a price reduction that allowed customers, who have seen either price increases or stable pricing for several years, to wait before making purchases to benefit from the lower Q2 prices. For Q2, we anticipate improvements. However, we must also consider the ongoing inventory adjustments with Tier 1 automotive customers, which is affecting some of the positive trends we are observing. While I see signs of early recovery in the cycle, we are not at a point where we can confidently say everything is on the rise, especially given the uncertainties our customers are facing.

And for my follow-up, the last, I think, forecast that we saw from IHS or S&P was for light vehicle production to be down, I think kind of low single digit. So let's assume that that is the case, right, including all the effects of tariffs and whatnot. So if that is the industry backdrop, what does that tell us about what NXP's automotive business could do this year, given all your company specific growth drivers?

Well, let me confirm Vivek that indeed S&P just published their latest forecast for the year, which says the SAAR is going to be down by almost 2% this year, which compares to a flat line last quarter. So it has degraded, which maybe or maybe not is a consequence of the tariff fears, could be. But the matter of the fact is indeed, it is now a 2% decline in the forecast versus the flat line before. As we said earlier, we are not guiding the year and we are also not guiding the year for automotive, Vivek. However, the much bigger role continues to play the content increases. All of the growth drivers, which we had laid out at the last Investor Day in November, think about SDVs, think about radar, think about electrification, are nicely at work. So we are on-track on those. And I think it is those content increases which should continue to make us very optimistic about automotive, not that much the SAAR. This is Kurt. I'll take that. I really think we're going to hold off giving any real color on where the second half could be revenue-wise. And you also have to remember, our revenue does not synchronize with global production quarter-over-quarter. There's always a six month or so lag between when we recognize revenue and when a car comes out of the factory somewhere in the world has counted and so. But we really do want to respectfully not address revenue targets or potentials in the second half.

Tanya, this will probably be our last analyst question, if you would. And our last question will come from Mark Lipacis of Evercore ISI.

Great. Thanks for taking my question. And Kurt, congrats on your retirement. Really appreciate all your great insights and help over the years and wish you luck. The question, Kurt, is for you. Every two to three years, there's like a new theory on inventory stocking that gets proposed. Before COVID, it was just in time and then during COVID, it became just in case and now it's just in time. And, you know, I think our own checks are consistent with your own that some of the Tier 1s are well below normal for their inventory stocking on semis at least. And my question is about like what would you what would you expect on a restocking cycle? Are you of the view that something has foundationally changed like you and your semiconductor peers keep inventories well above normal and your lead times lower than where they had been historically? And then, downstream, your supply chain feels comfortable with the idea of just keeping things very low and then you don't really benefit from a restocking cycle? Or are you of the view that really nothing has changed and this is all driven by lead times, and when lead times stretch, everybody's just going to restock again?

I fear Mark, I have a bit of a frustrating answer. It's more the latter than the first. I'd say more than because there are notable exceptions to this. I don't think that semiconductor companies in general will hold more inventory because it would be just the wrong inventory. That always creates a mix issue. What has got better in several cases is the communication and the alignment between customers and us on understanding the future, on understanding the future, on understanding where it could be bottlenecks. And of course, given the whole geopolitical turmoil, there is also a more sophisticated, diversified supply chain in place now across the world, which eventually, eventually has going forward. But fundamentally, Mark, I fear, as an industry in total, intellectually, we've all learned a lot. Practically not much of that is actually, happening as we speak. The working capital pressure, across the supply chain is just too high, to allow that to happen.

With that, I guess, just to go to the last question, let me, Mark, have a follow-up.

Sure.

No. That that's all I had. It was simple as that. Thanks so much, Kurt. Appreciate it.

Thank you, Mark. I appreciate it. I want to make a few closing remarks. We are currently facing significant macroeconomic uncertainty due to tariffs, primarily their indirect impact, which is more relevant to us than the direct effects. This is contrasting with the clear early stages of a recovery cycle. For instance, the automotive sector is flat year-over-year as we enter the second quarter. These factors are challenging to predict as we move through the year. Nevertheless, we continue to display strong resilience in the truck cycle and have excellent opportunities for growth, particularly in the automotive and industrial sectors. When we look at the bigger picture, we are on track to double our earnings per share by 2030, as we outlined during our Investor Day last November. While there is considerable short-term turmoil and macro uncertainty due to tariffs, we are fundamentally seeing a recovery cycle, which is a positive sign. Thank you for your attention today, and I look forward to seeing you soon.

And ladies and gentlemen that concludes today's conference call. Thank you for participating. You may now disconnect.