Ladies and gentlemen, thank you for standing by. Welcome to NXP Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you would need to press star 11 on your telephone. You will then hear an automated message of five and your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to turn your conference over to Jeff Palmer, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Michelle. Good morning, everyone. Welcome to NXP Semiconductor's Earning Call today. With me on the call today is Rafael Sotomayor, NXP's President and CEO, and Bill Betts, or CFO. up the call today is being recorded will be available for replay from our corporate website the call will include forward-looking statements that involve risks and uncertainties that cause NSP'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 existing products and our expectations for the financial results for the first quarter of 2026 and XP undertakes no obligation to revise or update publicly any forward-looking statements or a full disclosure of forward-looking statements please refer to our press release additionally we will refer to certain non-gap financial measures which are driven primarily by discrete events that management does not consider to be directly related to NSP's underlying core operating performance pursuant to regulation G and SP has provided reconciliations of the non-gap financial measures to the most directly comparable gap measures and our fourth quarter 2025 earnings press release which will be furnished to the SEC on a form 8k and available from NSP's website in the investor relations section now I'd like to pass the call to Rafael thank you Jeff and good morning we appreciate you joining our call today our overall performance

during the fourth quarter was solid with all in markets performing either in line or better than expected all regions were up on a year-on-year basis turning to the specifics NXP deliver fourth quarter revenue of 3.34 billion dollars an increase of seven percent year-on-year and up five percent sequentially this was thirty five million dollars better than the main point of our guidance non non-gap operating margin in the fourth quarter was about 35 percent 40 basis points above the same period a year ago and in line with the midpoint of our guidance taken together we drove non-gap earnings per share of three dollars and thirty-five cents seven cents better than guidance this revision inventory was ten weeks consistent with our guidance we remain disciplined of channel health prioritizing sell-through of high demand products rather than broad-based restocking now I would like to reflect on our performance in 2025 the year was a tale of two halves with the first half of the year exhibiting weaker demand trends while in the second half of the year demand began to accelerate in support of our long-term revenue growth models looking at the specifics automotive revenue was seven point one billion dollars flat year-on-year due to floor inventory digestion at direct customers in the first half of 2025 with the inventory that jets and behind us the second half performance aligns with our route our 8 to 12 long-term growth outlook reflecting the underlying strength of our auto portfolio a few examples which underpin our optimism include our efforts and self redefined vehicles where we have seen strong global adoption of NXP products. These include the sign-win rates for S32M family of 5-nanometer vehicle compute processors, the newly introduced S32K family of 60-nanometer SONO processors, and continued adoption of automotive Ethernet products. These efforts are now material and global in nature, with most auto OEMs undertaking SDV platform initiatives additionally the early conversations with customers from the recently acquired technologies from TT Tech Auto and Aviva links are accelerating interest in NXP's SDV portfolio the potential revenue contributions from these engagements should materialize beyond 2027 this multi-year SDV platforms deepen customer commitment and support makes improvement over time turning to the industrial and iot and market revenue was 2.3 billion dollars flat year on year the second half growth was materially above our 8 to 12 percent long-term growth outlook across both core industrial and consumer and iot supporting our ambition to lead an intelligent systems at the edge we continue to see strong customer engagements in the emerging market for physical AI by combining the industry leading IMX family of industrial application processors with the recently acquired Kinara MPU we can deliver complete and scalable AI platforms that accelerate deployment at the edge a few examples of applications include medical imaging systems camera-based workplace safety system in the industrial market logistic automation systems and robotics customer interest has been exceptionally strong and these engagements reinforce our vision of physical AI and the power of the NXP platform these opportunities expand our addressable market support sustainable growth and validate the unique competitive nature of our complete system portfolio look at our mobile business revenue in 2025 was solid at 1.6 billion dollars up 6% year-on-year we saw stronger demand in content gains in the premium mobile market overall NXP remains especially supplier in the mobile market with a unique indefensible franchise center on secure mobile transactions finally the revenue in the communications infrastructure market was 1.3 billion dollars down 24% year-on-year as we've said in the past we anticipate flat growth over the longer term of the digital networking and RF power business decelerate which will be upset by growth in our secure car business which includes our new code RFID tagging solutions now I will turn to our expectations for the first quarter our forecast for the first quarter is better than we anticipated 90 days ago we expect all regions and all the markets to be up year-on-year we're guiding first quarter revenue to 3.15 billion dollars up 11 percent versus the year ago period and seasonally down six percent sequentially compared to 90 days ago the improvements reflect steady inventory normalization and auto tier ones broadening order strength across the both core industrial and consumer at IOT and program ramps in the premium mobile market consistent with seasonal patterns our guide does not assume broad-based restocking at the midpoint we expect the following trends in our business during q1 automotive is expected to be up in the mid single digit versus q1 2025 and down in the mid single digit percent range versus q4 2025 I would like to highlight that our first quarter revenue guidance only includes about $25 million or one month of revenue contribution from the MEMS sensor business. Industrial and IoT is expected to be up in the low 20% range year-on-year and down in the mid-single-digit range versus Q4 2025. mobile is expected to be up in the mid-teen percent range year-on-year and down in the 20% range in a sequential basis and finally communication infrastructure and other is expected to be up in the mid-teen percent range versus Q1 2025 and up 10% versus Q4 2025 in summary our first quarter outlook reflects early validation of the company specific growth drivers we've been investing in and we expect these trends to continue throughout 2026 we believe the NSP specific secular drivers for our business are now outweighing the broader industry cyclical headwinds which we have experienced over the last few years overall we expect product mix and discipline cost execution to continue to support a gross and operating margin framework we're focused on discipline investment and portfolio enhancements to drive profitable growth while maintaining control over the factors we can influence our capital allocation framework is unchanged invest for growth pursue targeted M&A to strengthen portfolio and return excess cash through

dividends and buybacks within our long-term model and now I would like to practical to bail for a review of financial performance thank you Raphael and good morning to everyone on today's call as Raphael has already covered the drivers of the revenue I will move to the financial highlights overall our results reflect the strength of our strategic priorities in our end markets our discipline investment in manufacturing and product leadership and our consistent commitment to generating long-term shareholder value. Q4 was solid, with strong execution and results above the midpoint of guidance. Revenue, gross profit, and operating profit were all backed into our long-term financial model. We delivered non-GAAP earnings per share of $3.35 or $0.07 better than the midpoint of guidance. Non-GAAP gross profit was $1.91 billion with a 57.4% non-GAAP gross margin, a slight miss versus guidance driven by stronger than expected mobile revenue. Non-GAAP operating expenses were $756 million or 22.7% of revenue revenue. The primary increase sequentially is driven by our two new acquisitions where we continue to make space for strategic investments offset by restructuring actions. Non-GAAP operating profit was $1.15 billion and non-GAAP operating margin was 34.6 percent, up 80 basis points sequentially. Below the line, non-GAAP interest expense was $99 million, and taxes were $190 million. Non-controlling interest was a $13 million expense, and results from equity account to invest fees was a $1 million loss. Taken together, the below-the-line items were $4 million better than our guidance. While stock-based compensation, which is not in our non-GAAP earnings was $100 million, $18 million lower than guidance, driven by the retirement of several executives. Turning to changes in cash, debt, and capital returns, our balance sheet remains strong, giving us the flexibility to invest in our strategic priorities and hybrid manufacturing plans. We ended Q4 with a $12.2 billion in total debt and $3.3 billion in cash, reflecting uses of cash for capital returns, acquisitions, joint venture investments, and CapEx, offset by cash generation during the quarter. Net debt was $8.96 billion, and net debt to adjusted EBITDA was 1.9 times, with adjusted EBITDA interest coverage ratio of 14.7 times. In Q4, we returned $338 million through buybacks and $254 million in dividends. Over the last 10 years, we have returned over $23 billion to our shareholders for 95% of free cash flow and reduced our diluted share count by 27 percent. After Q4, we repurchased another $36 million under our 10B 5-1 program, and on January 5th, we redeemed the $500 million March 2026 notes with our cash on hand. Now turning to working capital metrics, days of inventory was 154 days, which included 7 days of pre-build. Receivables were 29 days. Payables were 60 days. Taken together, our cash conversion cycle was 123 days. As revenue growth accelerates, we expect working capital efficiency, particularly days of inventory, including pre-builds, to meaningfully improve throughout the year. From a cash usage perspective, we continue to advance our long-term manufacturing strategy, including contributions to both BSMC and ESMC. This will lead to a long-term supply resiliency and strong gross margin expansion. Cash flow from operations was $891 million and net capex with $98 million, resulting in non-GAAP free cash flow of $793 million, or 24% of revenue. We invested $195 million in long-term capacity access fees, made a $282 million equity payment to BSMC, and a $44 million equity payment to ESMC. Taken together, we are about 50% through the investment cycle for both VSMC and ESMC, having invested about $1.7 billion of the $3.4 billion planned investments. We expect the majority of remaining investments will occur in 2026. Now, turning to our expectations for Q1, we expect revenue of $3.15 billion, plus or minus $100 million, up 11% year-on-year, and down 6% sequentially, which is better than our view 90 days ago. We expect non-GAAP gross margin of 57%, plus or minus 50 basis points. operating expenses are expected to be 765 million plus or minus 10 million reflecting normal seasonal increases at the start of the year we are committed to our long-term operating expense model of 23% of revenue though there are seasonal variations with the first half of the year normally higher than the second half, resulting in non-GAAP operating margin of 32.7% at the midpoint. Below the line, we expect non-GAAP financial expense to be about $92 million, and our non-GAAP tax rate to be 18%. Non-controlling interest expense will be $11 million, with our joint venture startup losses of about $3 million. Stock-based compensation should be about $108 million, which is not included in our non-GAAP guidance. This implies Q1 non-GAAP earnings per share of $2.97 at the midpoint. Turning to the uses of cash in Q1, we expect capital expenditures to be approximately 3% of revenue, our capacity access fee payment of $190 million, and an equity investment into VSMC of $210 million. Before turning to your questions, I have a few housekeeping items to highlight. After thoughtful consideration, we have decided that our RF power business no longer aligns with our long-term strategic direction. Consequently, we will stop new product development and have taken an approximately $90 million restructuring charge, which is reflected in our fourth quarter gap results. We will redirect and focus our R&D resources to accelerate and enhance our strategic priorities toward software-defined vehicles and physical AI. Yesterday, after the market closed, ST Microelectronics announced the closure of NXP's MEMS sensor business acquisitions. This is a positive transaction for both parties. NXP received $900 million in gross proceeds, with another $50 million to be received upon completion of certain closing conditions. We will recognize a one-time gain of approximately $630 million from the sale of the business which is reflected in our first quarters gap guidance next we have made the decision to shift our geographic revenue reporting to headquarter based region as opposed to a ship to basis we believe reporting headquarter based region better reflect how we manage the business internally and where customer engagements and design win awards occur. The 2025 change can be found in the post-it IR presentation. And finally, based on the positive trends, including current order rates and business signals we track, we are confident NXP will operate within its long-term financial model for the full year of 2026. In closing, we are well positioned to benefit from the powerful secular trends in our focus and markets. We are confident about the strategic priorities and investments we are making across our entire portfolio and manufacturing footprint. With a strong balance sheet and a disciplined capital return philosophy, we are exceptionally well positioned to drive long-term value for our shareholders. Now I would like to turn it back to the operator for your questions.

Please press star 1-1 on your telephone and wait for your name to be announced. And to withdraw your question, please press star 1-1 again. And we do ask that you please limit to one question and one follow-up. And the first question will come from Tom O'Malley with Barclays. Your line is open.

Hey, guys. Thanks for taking my question. I wanted to ask about the channel restock. So it looks like you guys went from 9 to 10 weeks. um in your guidance you're saying no additional restock kind of baked in could you talk about where you are with the channel today uh what you saw in the last quarter and is it the decision to just not go to 11 weeks overall or is it just we're going to wait a little bit until we take it to the 11 weeks that we talked about previously thank you thank you tom let me take that one it's rafael and clearly i mean i would say that our channel strategy has shifted from you know what before we consider type control to ensure that we stage the right product the right product to satisfy demand we are moving to our long-term target of 11 weeks and the reason we're doing

that is because it is a reflection of an improving demand environment for us we finished q4 with about 10 10 weeks we will move into our long-term plan and long-term target of 11 weeks into 2026. And that's how we are going to manage our business in a steady state.

Gotcha. And then as a follow-up, just on the comms business, so you're deciding to move away from RF, but you had already kind of moved away from digital networking. You're guiding that business up 10. Could you maybe walk through the moving pieces? Obviously, with digital networking coming down, you needed to see some strength from maybe the SIS business. Just walk through what's contributing to that Q1 strength.

Yeah, indeed, we did guide CNI about 10% sequentially in Q1, and if you remember, CNI includes three distinct businesses, secure cars, digital networks, and our power, and all of these three businesses can move differently quarter to quarter, and CNI, I think, right now is benefiting from the fact that, one, there's normalization in the digital networking business, But there's growth coming from the secure card, and that strength really will benefit C&I throughout 2026.

Thank you. Thank you. And the next question will come from Matthew Prisco with Canter. Your line's open.

Hey, guys. Thanks for taking the questions. I guess starting with the statistical side, can you maybe offer some more color on customer ordering trends over the past few months and maybe what type of linearity you saw through the quarter and into 1Q?

Matt, you asked me about kind of the trends that we track internally, is that what you're We couldn't quite hear your question. We apologize.

Oh, yes, that's exactly it. The trends that you track internally when you look at just customer ordering trends over those past few months and then linearity through the quarter and into 1Q.

Yeah, linearity we don't disclose, but I think Bill will take some of the other metrics Yeah, no, no. Obviously, over the quarter and the last 90 days ago, all our internal signals that we talked about in the past have improved. So think about our backlog, our distribution backlog, our customer escalations have increased. The short-term orders continue to increase as well, and we try to service as much as possible related to that. So across the board, we haven't seen anything like this in quite a while. And so we feel very confident about being in a long-term business model for 2026.

And maybe I'll just add one thing, Bill. If you kind of step back, Matt, and look at kind of the trends in the second half of 25, they've truly started to accelerate. And we're close to our growth rates that we presented on our analyst day. We believe that will continue as we progress through 26.

So we're feeling pretty optimistic that we are off the trough of the did you have a follow-up yes please um i guess on the auto side uh we'd love if you can offer some detail on the demand dynamics within your core auto business versus your accelerated growth drivers and and have you seen any impact today from component price increases potentially pressuring unit demand there thanks yeah so we've i think there are a few questions there in auto um if you look at what happens if you look at auto and the reason why we remain quite optimistic in auto and Q4 our business returned to growth year on year and the guy that we

provided continues you know year-on-year the Q1 guide gives you growth as well year-on-year and so and what we see is that these is remains unchanged with respect to content gain you asked me about pricing second question was the pricing VPAs for most part are are done right with in the pricing that that that That is already reflected in our Q1 guide, and we are modeling low single-digit price declines, and that's what we see not only on auto but across the business.

Thank you. And our next question will come from Ross Seymour with Dolce Bank. Your line is open.

Hi, guys. Thanks for asking the question. Just sticking on the auto side of things, it's been pretty much flat for a couple, two, three years in a row, And I know there's been a bunch of puts and takes on inventory and demand, et cetera. But I really wanted to dive into what you've seen over that period of time in your accelerated growth drivers. Is anything changing your thesis there? Are you more optimistic, less optimistic? Any sort of clarifications there, especially as we move forward? Hopefully the headwinds are done. And so I just wanted to judge the growth rate from those drivers going forward.

Yeah, thanks, Ross. But so I think what I said on the prepared remarks, right, auto and our business in general in 2025 was the story of two halves, and the first half was all about inventory digestion, and it really masked the true dynamics of our business. for the full year the auto accelerated drivers were slightly below model remember model we said that we were going to grow 8 to 12 percent but they were still growing in a in a in a year where auto was flat and there were about 10% and it was all led by our SBB efforts our radar in our productivity what you see right now in auto is our auto is shifting our auto exposure shifting to more and more structural and less cyclical and it's written by you know tying our roadmap towards circular trends are really transforming the architectures of all so we feel quite optimistic The answer to the question on the core drivers, the whole story, the thesis is completely intact, and we feel stronger than ever that our roadmap is really addressing the needs of the market.

Great. Thanks for that. And I guess you've had the MEMS divestiture and now the exit of the RF side of things. Can you aggregate how much of a headwind those exits are going to be for this year? And I obviously know where the RF sits, but is the MEMS headwind in the auto side? I just want to kind of make sure to level set on that.

The way to think about – oh, this is Bill Ross. Good morning. The way to think about the sensors divestment, it runs around $300 million per year. And Raphael shared we recognize $25 million in the first quarter. And I think you guys can do the math of the impact that has from a year-over-year compare in our auto and market. Relate to the RF business, the RF business is probably going to track similar to what DN did. If you recall, our digital networking business, when we walked away from it, I don't know, eight years ago, it lives quite long. And so what we're actually doing is stop investing next generation products. So that will probably stay with us for at least the next two years is what we're projecting at the current rate. And I think, Jeff, if we had to break out 2025 as a percentage of comms infrapieces, I don't have that on my fingertips, so we usually share that, but maybe you can share how the three businesses fared in 2025 to get the size of it.

Well, so the secure cards business was just over 50%, and both the digital network and RF power businesses were each about 25%. Thank you. Thanks, Ross.

Thank you. And our next question will come from Joe Moore with Morgan Stanley. Your line's open.

In the auto business, there's been a number of sort of these supply disruptions. We had an Xperia a few months ago causing issues.

DDR4 now is causing some shortages.

You know, is that impacting you guys in any way? Are you seeing either weaker demand because they're bottlenecked by those things? or is there any desire for tier ones to start building inventory to react to any of those things?

Yeah, I'm going to take that to a while. So, the next period is not a conversation, it's not been a non-issue for NXP. The discussions on memory, there's always, the chatter on memory is not just in auto, it's across in markets. We have not seen memory impact the orders of our customers, but clearly it's a conversation that our customers discuss with us as an area of concerns for the second half of the year, but nothing has been reflected in our orders.

Great, thank you for that. And then in your auto business, any difference by region? I guess there's been some concern about China Demand, just anything you're seeing regionally in your auto business?

No, we don't see anything particular to comment on. I think the auto business, we believe it's going to be it's going to be within model for 2026 for us. It's strong that the accelerated road drivers are executing, so we expect our thesis to continue towards 2026.

Great, thank you.

Thank you, and our next question will come from Joshua Buckelter with TD Cohen. Your line's open.

Hey guys, thank you for taking my question. I apologize for a bit of a nitpicky semantic one, but it's one I've gotten a couple times. So, you know, in your prepared remarks, you said for 2026, you expect to operate within your target model this year. You know, I think you're given where we ended 2025 to hit your 6 to 10% long-term CAGR, you know, 26 and 2027 would have to be higher than that. You know, Are you guys suggesting that this year is within the 6% to 10% or are you saying that, you know, you should track towards the 6% to 10% over a three-year period in 26 and 27?

I think, Josh, what we're saying is the long-term model is intact. I think it's not to be nitpicky back, but I think you know how to do math and you can probably do the chainsaw on that. But we feel very strongly that after the inventory digestion, the first half of 25, things are starting to re-accelerate. So we'll leave it there. Did you have a follow-up?

Yeah. You may provide some more puts and takes on gross margin for the first quarter in particular. How are you thinking about utilization rates as we sort of enter a better cyclical period? I know there were some Dibank builds that boosted utilization rates at the end of the year. You know, as I was done, how should we think about utilization rates from here? Yeah, let me take that one.

So I would say gross margins are performing to our expectations into Q1, and this is primarily driven by our annual low single-digit price concessions that Raphael shared, and that is offset only partially from our normal operational efficiencies that we regain back throughout the year. Again, I think for modeling purposes, the best way to think about our gross margins, And due to that rule of thumb, I've provided in the past for every $1 billion of revenue. We're entitled to approximately 100 basis points expansion gain to our gross margin on a full-year basis. And, of course, that's the plus or minus normal mix changes that we share on a quarterly basis. Now, as shared in the past, we will continue to work on mixing up our portfolio through our new product introductions. Also, we're focused on our go-to market for that long tail, which tends to be a richer mix. We also have the ability to improve our internal front-end utilizations. The front-end utilizations in Q4 were in the high 70s, and in Q1 they will remain in the high 70s. Obviously, if we get any inflationary costs that we can't offset internally, we will protect our gross margins and pass those on to our customers. And as you know, we always do the normal blocking tackling on improving our yields and test time reductions. Now, longer term, we're quite excited on our hybrid manufacturing strategy, especially when BSMC is fully loaded in 2028. It is on track and beyond. We expect our gross margins to be lifted by another 200 basis points at the company level. So I would say in general, we are very committed to improving our gross margins over the long Related to inventory question, again, our pre-builds were seven days at the end of 2025. As you all know, our consolidation efforts and our manufacturing footprint are underway. I would expect the pre-builds by the end of 2026 to be about 15 to 20 days related to that. But including those pre-builds, we also expect to take our net inventory days down throughout the year as we continue to focus on what's in our control and do the right thing operationally to give you some more color on where we plan to take internal inventory. I appreciate all the detail there, Bill.

Thank you. And our next question will come from the Vic Aria with Bank of America Securities. Your line's open.

Thanks for taking my question. On the industrial and IoT segment, Rafael, I was hoping you could help segment how much of that is industrial, how much of that is IoT, and off of easier compares, the growth rate is very high at the start of the year, but should we expect that this segment will also be in model for 2026? just how are you looking at the you know potential growth scenarios for industrial and IOT this year yeah thank you Vivek so yeah very strong growth that we've seen right now in industrial right and they and the growth you saw the investors began recovering in Q3 and continue into into Q4 I think you for

was 20% year-on-year a growth the growth is fairly broad based and it's not a single segment that is driving the growth just to give you an answer on the on the question specific you know we have about 60 60 percent of our business there is core industrial 40 percent is in the consumer side but the growth is is broad-based but we saw I mean if I would give you we have some no notable traction on few sockets and healthcare and smart glasses we seen strength and factor automation and energy storage and so very very strong design wins very differentiated product that we have in industrial and IOT and that strength of closing 2025 continues in 2026 and you see the Q1 guy was also growing year-on-year 20% and and we feel very good about 2026 for industrial IOT and for my follow-up I would be remiss not to ask the seasonality question as we look at Q2 and Q3.

And I ask that just because of, you know, all the kind of the exits and things that you're considering this year. So based on, you know, historical patterns and normalizing for all your business divestitures, what would you consider a normal seasonal trends in Q2, Q3, and are there any other things this year that we should take into account as we model your quarterly cadence this year?

I mean we're not gonna we're not gonna give you guidance beyond Q1 but one of the things that you you should take away things have gotten better since 90 days ago and and and they'll refer to the order patterns that we have visibility into Q1 improved as well we have the conversations with our customers that we're having it gives us optimism for a second half of the year so we we like the momentum we like the strength that we that we close in 2025 I mean Q4 the growth with broad base and and we like that momentum we enter in 2026 because that momentum is also carrying also broad broad base and so and the way you should think about it both in auto and industrial the strength is increasingly structural rather than purely cyclical and we feel good about the trajectory we carry in here towards the second half of the year thank you thank you and our next question is gonna come from Joe Quattrochi with Wells Fargo your lines open yeah thanks for taking the question you talked about the the acquisitions accelerating interest in your software-defined vehicle portfolio wondering if you could just kind of expand upon that or just you know what are the particulars that the customers are excited about yes so there are the three acquisitions there look that we discussed only on the other side TT Tech Auto has been really an injection of horsepower to accelerate a software-defined vehicle story one of the deliverables that we have they're very important for us and for some of our customers is the delivery of software-defined architecture that would be delivering a system around Sonos towards the end of the year. And so TT Tech Auto and the injection of the TT Tech Auto has really accelerated our path into delivering a Sonos architecture and Sonos systems by the end of the year. They also come in with a middleware, and now we're a different middleware called Motion wise and that engagement right now is something take we're taking I think the interest of our customers is quite high now that they move into SDVs on the on the on the industrial and IOT in my preferred remarks we talked about the the the interest level that our customers are not showing for physical AI and the capabilities that that we have in our NXP platform and I just want to double down on that. The interest in the combination of the Kinara NPU and the IMX family of products that we have is really, really strong. And the level of the conversations right now that we're having with our customers has changed significantly. The traction that we get has changed significantly. So we're excited right now in that engagement. I think that is going to result in strong design wins in 2026.

Thanks for that. And then as a follow-up, on the automotive side, is there any color you can share just geographically on the demand you're seeing, you know, in the fourth quarter and then kind of what's embedded in 1Q?

Yeah, on the auto side, I mean, so I think this is an important question. It just gives you a perspective. And let's look at the data closely in auto, right? The inventory correction, what we said, is largely behind us. Q4 we return year-on-year growth Q4 auto finished within 1% of its prior peak in 2023 and we're guiding automotive to grow in Q1 year-over-year and and our guide in Q1 only includes one month of the sensor business so the sequential decline I think it would have been very close to normal seasonality. So regionally, not a whole lot of differences. Usually in Q1, you have a normal seasonality because now the weight that China has in the market. But fundamentally, our thesis hasn't changed. The shift to SDBs, the advanced data, these are multi-year platform transitions. And they're going to drive content growth. And this is where we at NXP are very stronger portfolio.

Thank you.

Thank you. And our next question will come from Chris Casso with Wolf Research. Your line's open.

Yes, thank you. Good morning.

If I could follow up on auto again and specifically the areas of accelerated growth drivers, you know, what you said last year is that those accelerated growth drivers were a bit below plan and it sounds like the message is that is now likely to improve as you go into this year. What's the reason for that? You know, what was the reason you believe it was below plan last year? And I guess the question is because going forward, it doesn't sound like you're assuming that SAR improves. So what's driving the change that get those accelerated growth drivers back in contract?

So 2025, Chris, I mean, if you remember, the first half of the year was a tough year with a lot of inventory digestion. That period put a pause in some of the accelerator drivers because, for instance, some of the business like radar got caught up into inventory digestion. Electrification got caught up into inventory digestion. It slowed down the ramp of new models that basically address some of the slightly less growth i would say in the sdb piece but we saw that second half accelerate once the inventory digestion all the our thesis became true right there the the accelerated growth drivers started to grow by the way the teller grow that still grew in 2025 just didn't grow at target because of the challenges that we have in the first half of the year and now that thesis continues in 2026 We see our accelerated road drivers now being within model or even better, and so we see that traction being in 2020 SACs taking hold. Thank you.

As a follow-up, if I could follow up on operating margin expectations and what you said for the year, returning to the long-term model, I assume that involves operating margins as well. I guess you've given some indication with regard to gross margins, But what does that mean for OPEX and operating leverage as you go forward through the year?

Yeah, sure. As I mentioned in my prepared remarks, related to OPEX, you know, typically as expense as a percentage of revenue for the first half are typically higher than the second half, driven by our seasonal revenue profile. The timing effect of our U.S. benefits at the start of the new year, that's why you see our guide up in Q1. Q2, I'll remind you, we have our Q2 annual merits and promotions. And then we also have, at the moment, that one-time IP license impact in Q2 that we previously shared that occurs every year. So we're typically out of model in the first half, but then we expect to get below that 23% model in the second half, leading to a full year of about 23% or below. Obviously, we'll always have leverage on the SG&A side of the house, but the investments that are required for SDVs and physical AI and where we want to take the company, we want to keep that at that 16% level, I would say, to make sure that we can capture that growth, that long-term growth that we're after. So for your modeling purposes, I gave you the gross margin. We gave you the revenue. Here's the op-ex. I think you can get to the answer. Thank you.

Thank you. And our next question will come from Gary. Mobley with Loop Capital. Your line's open.

Hey, guys. Thanks for taking my question. I know I'm going to make Jeff cringe here, but I did want to ask a follow-up question with respect to your statement on long-term operating model. When you laid out in November 2024 that long-term operating model, you know, the base off which you were guiding from was 2024, obviously. And so, you know, that would indicate, you know, $15.8 billion in revenue in fiscal year 27, based on that 60% to 10% revenue growth rate minus the sales of them since their business and whatever other adjustments since then.

So for the fiscal year 26 commentary about being on target, is that with respect to 60% to 10% growth or that 2027 destination for revenue? it's the model as we wait out the analyst day we I think Gary you we know we both agree with you on the end point where we want to get to we both know what we have to do to get there we're going to leave it to you and the community analyst community to figure out how that march is but we feel very good that after coming out of the first half of 25 inventory digestion we can accelerate through the next two years. I think that's the best we can do. I appreciate what you gave there, Jeff.

As a follow-up, I want to ask about the impact on the expense side from the sale of the men's sensor business. We know the revenue impact of $300 million, but what's the impact of gross margin in OPEX?

Yeah, this is Bill. I mean, think about with the sales, about 100 people. on gross margin as we said I think are shared in the past is it was below our corporate margins so I mean not much maybe 10 20 basis points improvement related to that one model but it's it's you know those are those are the colors I can give you on it and remember Gary that we did go through some corporate restructuring along with this to make room for the new headcount from Aviva Lynx, TT Tech, and Canara.

So I'd still like to say we made room for the additional headcounts.

Yeah, and I also remind you, the other reason for divesting this business is we did see headwinds. As we know, the current acquirer, the buyer, actually manufactures the front end, and so we saw this as a great opportunity to prevent headwinds to our gross margin in the future as well appreciate it guys thank you thank you and our next question will come from Jim Schneider with Goldman Sachs your lines open good morning thanks for taking my question you know relative to everything you said about this year's cadence and being within model and obviously kind of the the inventory situation out there.

Is there any reason to believe that, you know, if you exclude the investitures that automotive and industrial IoT would not be operating sort of at the upper end of your long-term target model for the year?

Hey, Jim, it's Jeff again. We're not going to guide 2020 since. Let me be very clear about that. We've given you guys as much as we're willing to do, but we're not guiding for 26.

Fair enough. And then maybe just on the capital allocation side of things, at this point, I mean, you've made, you know, a decent amount of investments in, you know, the fab relationships, et cetera. I mean, do you think that, you know, you're going to get into a place where you could, or you see your way clear to sort of increasing the buyback component of that at some point this year?

Yeah, I mean, our capital allocation policy strategy has not changed one bit. We are very comfortable buying back the stock as long as we're below our net leverage ratio of two times. And I think in Q4, we were at 1.9 times. So there's lots of opportunity with our investments in the long-term of the business, along with buybacks. And I hope into the future, as we expand, we also increase our dividend as the company performs better. So, again, we are doing multiple things. We're very flexible, and we demonstrate that, and we're committed to returning 100% of our excess free cash flow back to our owners.

Thank you.

Thank you. And our next question comes from Taurus Sandberg with Steve, will your lines open?

Yes, thank you. Rafael, could you talk a little bit more about changing the way you report on geography, what some of the main reasons are behind that? I mean, I assume it's because, you know, things are changing so much as far as, you know, where your customers are taking design wins. But, yeah, if you could elaborate on that, that would be really great.

Yeah, let me start with that one. The question of why do it now, there's no way of reporting really reflects how we manage the company internally, how we direct our resources, how we direct our sales organization. I mean, think about the way we report today, a major handset maker will receive products in Asia, in the U.S., but in reality, most of the decisions are being in one place and would be here in the U.S. And that gives you an example there that kind of gives you the ability to really think about how we internally were organizing our sales force and our marketing is to go after design wins and address customers. So this is how we manage internally, and I think it's better to reflect our business that way.

Yeah, that's very helpful. And as a follow-up for you, Bill, I think you mentioned And you'll get your $3.4 billion capacity expansion investment in 2026. Just curious, between VSMC and ESMC, what's the split going to be when the year is complete?

Oh, yeah. I would say majority of the investments, you know, VSMC is ahead of schedule, just purely timing, right? I think it's expected to start ramping in 27 and then be in full load in 2028. And so majority of our investments will be out in 2026. Now, maybe a little bit into Q1 2027. I don't know. We'll see on the timing of that on the equity side. But I think majority will be out in 26. ESMC, since that ramp occurs later, think about some payments going out this year. but then there's a still string of payments that go out from 27 to 29 which is much smaller in the aggregate but majority of most of the payments hopefully we will be done at the end of 2026 very helpful thank you thank you and our next question will come from Vijay Rakesh with Mizzouho your lines open yeah hi just a quick question on the other side just wondering as you look at the software-defined vehicles, and you mentioned the structural pickup there in autos.

How are you looking at that auto segment revenue growth versus LVP? Should it grow like high single digit above LVP, or how should we look at it?

Yeah. Hi, Vijay. It's Jeff. I think for next year, the way our algorithm works is we assumed over a multi-year period that SAR would grow in the low single digits you know the long-term math for auto is nine to twelve percent eight to twelve percent excuse me and so if you were to say flat as star you kind of back that out of that total rate and you know take you down but we still see content for vehicle as the real accelerator of automotive growth got it you know just maybe just kind of give you the one piece that we You know, we use S&P as our kind of Bible for SAR, and they're looking at 26 at just a little, almost, you know, 93 million, 92.6 million cars in 26, which is kind of flattish year-on-year for 25. But when you kind of peel that back, you still see good acceleration of EVs and good market share gains of the Chinese OEMs. So you can kind of use that with the CPD content.

Got it. And then as you look at 2025, I think you guys mentioned autos were $7 billion, $7.1 billion-ish. And I think you put out a long-term, I think 2027, $9.5 billion. I know there's been a lot of puts and takes with acquisitions and diversities, but just wondering how you're looking at that $9.5 billion by 27 number.

So the only change that we would make to the model is in 2024, to be honest, So you probably have to back out the $300 million in sale of sensors off that baseline in 2024 and then apply the 8% to 12% growth rate off of that.

Got it.

Thanks, Jay.

Thank you. And our next question will come from William Stein with Truist Securities. Your line's open.

Great. Thanks for taking my questions. First, I'd like to ask another one on automotive. A couple of other suppliers have discussed this EV incentive expiry in China as damaging their Q1 outlook somewhat. And I wonder if you're seeing that dynamic as well, and your guidance is certainly net of any of those effects. But can you discuss whether that's influencing your outlook either in Q1 or for the rest of the year? And then I have a follow-up.

No, we don't see, we don't have the same perspective. As a matter of fact, one of the changes, well, that we see in China, a couple of changes, you mentioned incentives, which tells the incentive towards more of a high end of the vehicles. The other change that China has made is that they increase certain regulations to improve the quality and resilience of the vehicles. and I think the both attempts is to reduce the involution in the market I think we see both of those initiatives to be good for us the the resilient area or quality requirements are putting in place right now I think it's really going to be a tailwind for us and design wins for 2026 so we see some of the changes actually are good for us for NXP and the auto and our auto business as well.

Great. Thank you. And as a follow-up, there's a rapid growth area in SEMI, as we all know, not just endpoint physical AI, but data center AI. And I think historically, you haven't talked about any exposure there, but my best guess is that you have something in that market. Can you discuss any ongoing development or any exposure to that market? Thank you.

Yes, well, so today our data center revenue sits within the industrial segment, and our exposure is, indeed, you mentioned, through processors to support the data center infrastructure. I think there will be things like power supplies, net cars, cooling systems, but we also have our high-performance products there for control functions and things that they need, probably security, like PQC. we don't break this revenue out separately but it is growing nicely and it will contribute to industrial momentum of 2026 thank you thank you I would now like to turn the call back over to Rafael for closing remarks thank you everyone for joining us today and your thoughtful questions this quarter reaffirms the continuity of our strategy and the durability of our model focus on profitable growth, discipline execution, and predictable returns. With clear visibility into our company-specific growth drivers, we're confident in our ability to compound value through 2026 and beyond. Thank you.

This concludes today's conference call. Thank you for participating, and you may now disconnect.