NXP Semiconductors N.V. (NXPI) Q3 2026 Earnings Call Transcript

standing by, welcome to the NXP third quarter 2026 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. If you would like to ask a question please press star one one on your telephone. If you would like to remove this stuff from the queue, press star one one again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Mike Luccarella, Senior Vice President, Vice, excuse me, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Lisa, and good afternoon, everyone. Welcome to NXP's third quarter earnings call. We will be on the call today are Rafael Sotomayor, NXP's President and CEO, and Bill Betts, 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 uncertainty that could cause NXP's results to differ materially from management's current expectations. These risks and uncertainties include, but not limited to, statements regarding the macroeconomic impact on the Pacific end markets in which we operate, the sale of new and existing products, and our expectations for the financial results for the fourth quarter of 2026. NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure of forward-looking statements, please refer to our press release. Additionally, we will refer to certain non-GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance. Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our third quarter 2026 earnings release, which will be furnished to the SEC on Form 8K and is available on NXP's website in the Investor Relations section at nxp.com. I'll now turn the call over to Rafael.

Thank you, Mike, and good afternoon. In Q3, we exceeded our outlook across all end markets, and every region grew double digits year on year. Growth was led by our company-specific growth drivers in automotive and industrial, which grew 30% year over year and represent roughly a third of our total revenue, as well as continuous strength in data center infrastructure revenue was 3.79 billion dollars up 19% year-over-year or up 22% excluding the mem sensor business non-gap operating margin was 37% up 330 basis points and non-gap PPS was $4.20, up 35% year-over-year. These results are translating into strong free cash flow generation, enabling us to invest in the business and return cash to shareholders. To that end, our board has authorized an incremental $5 billion for share repurchases, bringing total authorization to around $6.3 billion. dollars. Now, turning to end market performance. Automotive revenue crossed two billion dollars for the first time, up 17 percent excluding sensors. This growth is driven by content gains led by our SDV portfolio in a flattish unit production environment. SDV revenue in Q3 is running above 1.5 billion dollars annualized and remains well on track to reach our two billion dollar 2027 target we view the transition from domain-based architectures to sonal and centralized compute as a multi-year upgrade cycle that will enable physical AI in autonomous capability capabilities in the vehicle these new architectures create a need for system solutions that drive higher content across NXP's portfolio including additional processing egg nodes connectivity and power management this results in two to three times higher content per vehicle compared to today's architecture. This evolution is still in its early stages. In 2027, we will begin shipping our next generation SDV processors, including the S32K5 Sono and S32N central compute platforms. We are starting to see material proof points of the SDV transition. RV Tech, the joint venture of Volkswagen and announced yesterday he has standardized its own platform on nxp s32k5 across both companies this is a clear signal of the leadership of nxp sdb portfolio and where the industry is heading engagements with our new platform continue to expand globally and we now expect our first s32k5 shipments in China as early as the first quarter of 2027 software-defined vehicles are one of the first deployments of physical AI and the opportunity to reach as well beyond the car the same building blocks of central compute sensing networking and secure control are moving into robotics and other intelligence systems at the edge this quarter we secure our first s32 k5 design win in human or robotics with a leading U.S. global technology company. Now, moving to industry and IoT, revenue was $802 million, up 39% year-over-year. The industrial portion of this end market grew nearly 50%, led by data center, factory automation, and healthcare, and now represents about 70% of industrial and IoT. As we mentioned in our Q2 call, AI-enabled processors will represent approximately 15% of industrial and IoT processor revenue in 2026, more than doubling from last year. Given market adoption of intelligent systems, we expect growth to continue in 2027. Aura, our discrete NPU, is a key component of our AI portfolio. It continues to gain traction across industrial automation and automotive AI applications, and we expect to be in volume production in 2028. Now, let me give you an update on our data center business. Given the strength we're seeing year-to-date, we now expect our revenue to exceed the $500 million outlook provided earlier this year. Given the new products we're developing, combined with expanding customer engagements, we now expect this business to be to be over a billion dollars in a couple of years going to communication infrastructure and other revenue was 503 million dollars up 54% year over year driven by data center and secure cars and lastly mobile revenue was 400 411 billion dollars down 4% year over year turning to our q4 outlook we're guiding revenue to 3.85 billion dollars up 2% sequentially and up 15% year over year or 18% excluding sensors this would represent our fourth consecutive quarter of double-digit annual growth at the midpoint we expect the following trends in our business or in q4 Automotive is expected to be up in the low double-digit percent range year-over-year and up low single-digit sequentially. Adjusted for the sale of the MEMSensor business, our guidance implies a high team's percentage growth year-over-year. Industrial and IoT is expected to be up in high 20% range year-over-year and up in the low single-digit range sequentially. mobile exit is expected to be down in the mid teens percent range year-over-year and up slightly on a sequential basis and finally communication infrastructure and other is expected to be up over 50 percent range year-over-year and up low single digits sequentially and now the call to bill for a review of our financial performance Thank you, Raphael, and good afternoon to everyone on today's call.

As Raphael has already covered the revenue drivers, I will turn to the financial highlights. Q3 was another strong quarter with record revenue, operating margin, and non-GAAP EPS. Revenue grew 19% year-over-year and 8% sequentially to $3.79 billion. The growth was led by our company-specific growth drivers across software-defined vehicles, electrification, connectivity, radar, and industrial edge processing, as well as continued momentum in our emerging data center business. Non-GAAP gross margin was 58.6%, up 160 basis points year-on-year. Our gross margin performance reflects improved factory utilization and solid fall-through on higher revenues. Non-GAAP operating expenses were $810 million, or 21.4% of revenue, reflecting strong operating leverage. This led to a non-GAAP operating margin of 37.1%, up 330 basis points year-on-year. Below the line, non-GAAP interest expense was $85 million. Tax rate was steady at 18%. Non-controlling interest was $15 million. And results from our joint venture equity accountant investees were a $4 million loss. This resulted in non-GAAP earnings per share of $4.20, increasing 35% year-over-year, or about two times our revenue growth rate. Turning now to the balance sheet, cash flow, and capital returns. Our balance sheet remains strong, providing flexibility to invest in our strategic growth priorities, advance our hybrid manufacturing model, and return capital to shareholders. We ended Q3 with $3.94 billion of cash and $10.98 billion of debt, resulting in a net leverage ratio of 1.3 times. Days of inventory declined to 148 days from 156 days in Q2, including approximately 13 days of pre-built inventory related to our planned front-end factory consolidations. We expect to have approximately 15 days of pre-built inventory at the end of 2026. For the quarter, operating cash flow was strong at $1.26 billion, and net CapEx was $50 million, resulting in free cash flow of $1.21 billion, or approximately 32% of revenue. During Q3, we invested $218 million between equity and access fees in VSMC and ESMC. A detailed breakdown of our joint venture investments is available in our historical financial model on our investor relations website. We expect to be over 75% complete with our JV investments by year end. On a trailing 12-month basis, free cash flow was approximately $3.5 billion, or 25% of revenue, in line with our long-term target. Over that same period, we returned $1.7 billion to shareholders through dividends and share repurchases. Most recently, shareholder returns have been below our long-term target as we prioritize the leveraging, strategic acquisitions, and investments in our manufacturing joint ventures to support future growth and gross margin expansion. Moving forward, we plan to accelerate our buyback activity in Q4 and 2027. Consistent with that commitment, the board authorized a new $5 billion share repurchase program, bringing total authorization to $6.3 billion, representing around 10% of our current market capitalization. overall we remain committed to returning 100 of our excess free cash flow to shareholders over the long term now turning to our expectations for q4 we expect revenue of 3.85 billion plus or minus 100 million which is up 15 year on year or up 18 adjusted for the sale of our centers business and up 2% sequentially. We expect non-GAAP gross margin of 59% plus or minus 50 basis points driven by higher revenue and manufacturing utilizations. We expect operating expenses of $830 million plus or minus $10 million. The increase sequentially is primarily driven by our new product tape outs to support our trusted physical AI strategy. At the midpoint, the results in a non-GAAP operating margin of 37.5%. Below the line, we expect non-GAAP financial expense to be $79 million, and our non-GAAP tax rate to be approximately 17.5%. We expect non-controlling interest to be $14 million and $5 million of losses in our joint venture equity account at invest fees. This implies Q4 non-GAAP earnings per share of $4.36 at the midpoint, an increase of 30% year-over-year, demonstrating continued earnings power. Turning to Q4 uses of cash, we expect capital expenditures to be approximately 3% of revenue and equity payments to VSMC of $86 million and ESMC of $60 million. Looking ahead into 2027 and for your modeling considerations, we will continue to drive double-digit growth in revenue. We plan to expand our gross margins to 60% during 2027. We expect operating expenses for the first half to be around 23% of revenue, driven by new product introductions, and second half be below 23%. Assuming non-GAAP annual effective tax rate of 17.5%, We now expect joint venture investee losses to be around about $80 million for the full year and suggest using about a $10 million loss for Q1 and a $20 million loss for Q2. 2. Capital expenditures to be around 5% as we plan to bring on more back-end capacity online in 2027 and build out our new assembly and test facility in Malaysia to be ready for production in 2028. Lastly, we will continue to generate healthy levels of cash and we plan to accelerate capital returns to our owners. Next, to better understand our business, we plan to realign our end market revenues beginning in 2027. In addition, we plan to host our investor day on March 3rd in Boston, where we will update our strategic and long-term financial model. And finally, I'd like to thank Jeff Palmer, who has served us as the Head of Investor Relations for the past 16 years, and thank him for his many contributions to NXP. I would like to now turn the call back to the operator for your questions.

Thank you. If you would like to ask a question, please press star 11 on your telephone. You'll hear that automated message advising you that your hand has been raised. If you would like to remove yourself from the queue, please press star and win the game. We also ask that you please wait for your name and company to be announced before proceeding with your question. And please keep your questions to one question and one follow-up. One moment while we compile the Q&A roster. Our first question will be coming from the line of Jim Schneider of Goldman Sachs. Please go ahead.

Good afternoon. Thanks for taking my question. I was wondering if you'd maybe talk a little bit about the customer behavior you're seeing across your OEM customers specifically, are you seeing signs of them restocking at all in a more aggressive way than they had in past quarters? And maybe give us a sense of, you know, the customer commentary in terms of what's happening with lead times and how they're responding to that.

Yeah. So, Jim, thank you for the question. I assume this is an auto question. So in the context of auto, no, we're not seeing anything noticeable that would suggest a broad-based restocking. Now, from a visibility perspective, I think visibility has greatly improved, and so lead times have extended, but also has resulted in better visibility. The other kind of, I would say, the other trend in the market in automotive is OEMs are getting more involved in providing that guidance directly to companies like us and so there's a lot more intimacy from a customer relationship perspective with respect to their needs throughout the year so i feel like we have good visibility and what what that uh supply is going to be requiring the type of products we're going to we're going to need to deploy thank you yeah yes and then as a follow-up i just wanted to sort of ask it's it's very helpful to see the solid guidance for 2027, can you maybe give us a sense about, you know, buy and market, some of the places where you have greatest underlying confidence in sort of outperforming

that overall double-digit outlook you provided and other areas where you see there's a little bit more uncertainty? Thank you.

Sure. Well, I think what is working in 2026, that will continue in 2027. I mean, what your question is, what's driving our confidence and the growth in double digits in 2027 and continues to be the areas that we'll focus on. SDV adoption continues. As a matter of fact, it's just barely starting, and we see several ramps, especially the second half of 2027. We have very important ramps in our SDV portfolio. The same thing goes with industrial and IoT. The adoption of AI continues to add content gains in industrial and IoT, and it's quite strong. And the deployment that we're barely starting on the control plane and data center continues to play out for us.

Thank you. Thank you, Jim. Thank you. One moment for the next question. Our next question will be coming from the line of Thomas O'Malley of Barkay's. Your line is open.

Hey, guys. Thanks for taking my question. Maybe this is for Bill. When I look at December guidance, I think you guys are guiding to 59% gross margins. It's a pretty big step up in incrementals from September. I think it's 85% quarter over quarter, close to 70% year over year. Obviously, volume is some component of that, but maybe walk through some other things that are driving that. Just that's a big step up from what you've seen over the last three, four quarters.

Absolutely, Thomas. A couple points on gross margin. First, they're performing to our expectations. And as we shared, they continue to expand into Q4. And I would say our gross margin improvements are very structural in nature. They're driven by a combination of the higher revenues, the higher utilizations. As I mentioned, we're running last, I gave guidance, running in the mid-80s. They are running in the mid-80s now. We expect them to continue in Q4 in the mid-80s. And we're actually, in 2027, expect them to run in the high 80s. Clearly, product mix plays a role. and then all obviously improved operational efficiencies. I would also say our gross margins have nothing to do with the price increases that we're seeing at the moment because all we're doing with the price increases is offsetting the higher inflationary costs that we're passing on to our customers. And then, you know, I think overall we expect gross margins to continue to expand, achieving that 60% during 2027. And furthermore, I think they'll expand above 60% in 2028 with the ramp over our VSMC joint venture that we shared about in the past. Do you have a follow-up?

I do. Thanks, Mike. Just on seasonality, so I'm sure everyone will have slightly different numbers, but by my numbers, auto was a little ahead of seasonal in September, and then your guide is kind of low single digits sequentially. My December traditional seasonality is close to like mid to high single digits. Any reason why the Delta there, is it because of some of the stronger quarters that you've got in June, September? Are you calling out anything in particular that's worth noting? Thank you.

Hey Tom, I think you're talking about auto specifically. Is that correct? If that's so. Auto specifically into December. So you're right. Auto's been quite strong this year and above seasonal, I would say, almost every quarter this year. Looking at 4Q, I'm not sure. There's a lot of range on seasonality a lot of different years people use three five seven ten years but i think it's seasonal auto is probably a flat to up slightly so i think that two percent growth is above seasonal that's how i would view that so i would say strong trends continue in auto um so that's a straightforward answer on the automotive market specifically go to the next question please one moment and our next question is going to be coming from the line of Joshua Buke-Alder of TD Cowan.

Please go ahead.

Hey, guys. Thank you for taking my question. Maybe following up on Tom's one, any help you can give us on what you're seeing in the overall pricing environment now? And then as we look into 2027, I know in some prior years there's been sort of a step down in gross margins due to annual pricing resetting. Should we be expecting a step down in 1Q again looking into 2027 this year? Thank you.

Yeah, let me let me start off with the pricing. You know, going into 2026, we expected a low single digit price decline. Now, as we plan to exit 2026, we expect pricing to be neutral for the year for 26. um clearly for 2027 we continue to see higher input costs in many areas and unfortunately we will pass those to our customers to ensure our gross margins are not impacted um i think we expect revenue to also be supported by the mix of our products as rafael shared especially in the sdv portfolio with our new solutions to drive higher average selling prices in 2027 because of the portfolio where SDBs carry two or three times more value than our traditional portfolio. But in the short term, I would say pricing is doing what we expected. We're passing them along. Neutral, I'd say Q3 maybe plus 1%. You know, 1% was pricing in Q3, another 1% in Q4. So it keeps it neutral for the whole year for 2026.

Josh, let me add a high-level perspective here and and put aside the the variable of input cost for a second here with the way we see this is we see a structural shift in the industry in respect to pricing I like the the past decade where I do with annual price erosion was common today I think semiconductors account for a larger share of the value in the in the innovation and the systems and I think that creates opportunities for much better value capture, right? This has nothing to do with input costs, right? It's just a shift in value with respect to semiconductors and ultimately on the systems. Sure, competitive pressures would always remain, but I think what we expect is the historical pattern of annual price erosion to actually moderate over time. And I think it's going to, over time, I think it's going to make pricing less of a headwind year over year.

Thank you for all the color there. And to follow up, you mentioned that you're not seeing any signs of widespread restocking? You know, it seems like there's been pretty mixed commentary from the industry over the last couple quarters about whether restocking is going on or not. How much of, I guess, what you're seeing is proactive conservatism on your part, similar to how you handled, you know, the previous cycle?

Or is there anything different about your portfolio or products that would, or exposure that would, you know, give you a different cadence of restocking than some of your peers that are saying that they're seeing it already thank you josh we're not seeing it right i can only tell you what we see we're just not seeing it and and the fact that our core that our core products are at the core of the software defined vehicle um i don't i don't see how we if there was restocking we would see it right What it has has been conversations by some OEMs to be able to actually have some safety stock put in place, given the tightness in the supply right now. But it has yet to occur. So, I mean, I acknowledge some of the headlines by some tier one OEMs, but we have not seen the restocking. And given the fact that our products are core to the core function of the vehicle, if there were any restocking, we would see it.

Yeah, maybe just to add, remember for automotive distribution, we service that by about 40%, and we have a really good control on that. Thank you both. Appreciate it.

Next question, please. One moment for the next question, please. And the next question is coming from the line of Blaine Curtis of Jeffries. Your line is open. Hey, guys. Thanks for having me at questions.

I just want to start on the auto segment. Obviously, you have a lot of structural drivers with SDV. I was curious on the electrification side. What are you seeing? I think Texans saw an uptick. Curious with gas prices. Maybe start with that.

Yeah, this is Bill. Hey, Belaine. We are seeing strength across all our company-specific growth drivers and automotive. And last year, electrification was going through inventory digestion, and our new products were delayed a bit. But those are performing quite well this year and catching up, and I would say growing above that growth rate that we provided during Investor Day, specifically in electrification. If I step back and look at total SAR, total SAR is slightly down, but the penetration of XEVs, including hybrids, combine that, that's actually growing. I mean, I think total production this year's forecast would be about 47.5% roughly of XEVs. And next year, it's expected to be across the 50% mark to about 55%. So the 47% this year compared to last year was 41% growing 12%. The forecast is to grow another 15% of that penetration rate. So from a macro standpoint, we do see XEVs continuing to grow globally. And as you know, it carries two to three times more semi-content in the industry compared to a regular ICE vehicle.

Thanks. And then, Bill, don't kill me for this, but I wanted to ask you any early thoughts on March, either, you know, kind of by segment or overall.

Early segment for March? Oh, for the first quarter, you're saying? Yeah.

Sure.

Yeah. So I knew someone asked the question, Blaine. I thought we were back, but it was you, Blaine. You were ahead of the queue. So, again, this is not guidance. There's a wide range on these expectations. I'll give my normal caveats there. But typically, 1Q for us is down about mid-single digits. What drives that mid-single-digit sequential decline is mobile is down mid-teens sequentially. Then automotive, industrial IoT, and comms infra is down kind of low to mid-single digits, call it 3%, 4%, 5% sequentially. Again, this is not guidance. This is just overall trends over the past five, ten years in our business. Thanks, Mike.

Thank you. One moment for the next question. Our next question is coming from the line of Harlan Slur of J.P. Morgan. Please go ahead.

Good afternoon. Thanks for taking my question. And thanks for the near-term trends you're seeing in your auto franchise. Obviously, you guys have many other company-specific drivers in your other segments that are firing edge AI, physical AI, data center, to name a few. So if you look across your overall business, was book-to-bill greater than one in Q3? And if so, did backlog grow across all your segments? And did overall customer escalations continue to rise just given the tight supply environment?

Yeah, let me take that question. I would just say all signals continue to improve from 90 days ago. So the book-to-bill remains well above one across all end markets and regions. Our backlog continues to grow in dollars and extend further into 2027. Lead times, I would say, continue to extend just to give you a feel. I would say 80% of our lead times are above the 16 weeks compared to a year ago when it was only 25%. Uh, and customer escalations continue to increase, uh, and they're up sizable, uh, quarter over quarter.

Do you want to follow up Harlan?

I appreciate it. Yeah, on the, um, on the supply side, on the 300 millimeter expansion initiatives, primarily driven to your ESMC and VSMC 200 millimeter JVs, I believe VSMC, I think that's targeted for analog power, mixed signal products. I think VSMC just started with production slash qualification with production shipments targeted for the first half of next year. And if I recall, ESMC for your MCU and embedded products, those were targeted for production sort of end of next year. Can you guys just give us an update on these initiatives? In a tight supply environment, it seems like the 300 millimeter programs are layering in just like right at the perfect time.

Yeah, absolutely. As you all know, it's happening both in the front end and the back end. So front end, recently we just celebrate the opening of VSMC, and that is ahead of schedule. And the first thing that's going to ramp is actually our partner side, which is ramping the interposers. And our side, we're in the process of qualifying our first set of technologies, which we will start that material in the first half and expect outs in the second half. So we do see, you know, some outs coming ahead of schedule, but really the big bulk where we see a lot of volume pick up is in 2028 for us, obviously also helping to expand our gross margins. As you know, you get the two benefits from that. You get the benefit for moving two millimeters to 300, but you also get a benefit of not paying that margin stacking like you buy from an outside foundry partner. Relate to the back end, as I mentioned in my prepared remarks, we are increasing our CapEx to about 5% versus I would say we've been spending around 2% this year. And there's two factors there. There's one is we are adding capacity into Q1 and Q2 to support our revenue in the back end as we have a little space and we're doing that. And so that will help drive the double-digit growth. But more importantly, we're building out and getting production ready of a whole new facility in KL that we broke ground in August. And that will be up and running in the beginning of 2028. and that will also service a lot of revenue and also help support in our gross margin expansion as well.

Great color. Thanks Bill.

Thank you. One moment for the next question. Our next question is coming from the line of Matthew Prisco of Canter. Please go ahead.

Hey guys, thanks for taking the questions. I guess first on the SDV side, with these with these increased engagements, can you kind of give more color on what's driving those wins today? And how do we think about the ramp timing and potential inflection given those wins? Is that more of a 27, 28 story than any ancillary opportunities you're seeing that Volkswagen partnership seems centered on the MCU side, but obviously you're selling these systems with other components as well. So any opportunities beyond that core. Thanks.

Yes, and so what is driving some of the design win is the massive adoption that we've been discussing about software-defined vehicle, right? And the whole concept is just revolutionary. It's transforming the way a vehicle is made. And the two architectures is the sonal architecture and the central computer architecture. And I'm simplifying it a little bit. The Volkswagen press announcement was surrounded about their sonal architecture, which uses our high-performance S32K5. Having said that, we also have plenty of engagements in our S32N central computer architecture as well. I would say that we already have design wins in North America. We have a recently designed win in South Pacific and Asia, and we have several POCs in China and in Europe. The early ramps of the central computer S32N are likely to happen at late 2027. And the full volume ramps for both the K5 and the S32N, we should expect that in 2028. So we're quite bullish of what is happening there because it's not only content gain that has happened through SDV, but this design wins. And as we provide more and more transparency between now and the next year, it will show that the compounds, this content-based compounds with share gain.

And you have a follow-up? Oh, yeah. And then maybe just on physical AI quick, last time, last call, I think you started talking about a pipeline you were seeing there and talking about your system-level approach. So maybe update on how you're thinking about that physical AI opportunity, kind of sizing that into the future, maybe a percentage of process or revenues as you think about 27 and beyond, like how quickly this market can grow. Thanks.

Well, that is the core of what we're discussing, the physical AI. AI is the main driver for content gain in industry and IoT. I think we provided a last call that AI-enabled processors without the discrete NPU was approximating 15% of total processor revenue. And we expect that to, from doubling from a year ago, right? So, we expect that to continue to go very strongly into 2027. The NPU, the discrete NPU, we're now getting significant traction with different POCs, both in industrial and IoT and automotive. And we now expect early production in 2028.

Thank you, Matt. Next caller, please.

Thank you. One moment, please. And our next question is coming from the line of Vika Ara of Bank of America Securities. Please go ahead.

Thanks for taking my question. Rafael, one of the pushbacks against NXP has been that the company doesn't have enough exposure to the data center. And I think you mentioned this year's target of $500 million plus. That's like low single digit. Even the billion dollars would be less than 10 percent versus many of your peers that have anywhere between 10 to 20 percent. data center exposure. So the question is, is data center not an imperative for NXP? And if it is, then do you think you can, you know, go after it organically or, you know, because you're suggesting that the use of cash will be more towards buybacks rather than something else? So just strategically, how do you think about the data center business and how important is it and how big of an exposure should NXP have for that end market?

Yeah, maybe, Vivek, thanks for the question. Maybe summarize it a little bit, right? So today we provided an outlook that said data center was going to be about $500 million. And we just said that it's going to, you know, we're going to probably close a year exceeding that number. And now with the new products that we're developing and the engagements that we have, we now expect that revenue to go to a billion in 2028. now the thesis and the answer to the question the thesis of our playbook and data plane is that it's sorry in the control plane is if the data plane is going up in performance and therefore the control plane needs also more performance and that means not just performance and processing but more networking more security more safety and that's where the core competency of nxp is and so because there's zero tolerance for downtime right reliable industrial grade control process are required so the way you got to look at is a portfolio is top of rack switches right and that's that started to actually kind of you know roll and then controllers and processors for board management where there are secure elements there are processors in in in microcontrollers and and and also interfaces and so we're developing right now more and more products to be able to expand the sound we are using the core components of NXP to address the control plane and data center. And I think that the growth that we're going to see between 500 and a billion dollars in the next two years with actually new ramps and products is quite impressive.

Yeah, and Vivek, I want to read into the buyback of saying we're not investing in data centers. We're generating, as you can see, a lot of cash, and we are going to to invest in the data center, and you'll probably hear more about that during our investor day in March.

In fact, I'll add one thing. I think you should look at it, and I think it's a very negative question you asked, in my opinion. If you look at it, I think data is going to become another leg of the stool of our growth story. We have auto as a core franchise. We've talked about SDV. That's winning. That's fantastic. We have data centers, a new opportunity, emerging opportunity. Raphael outlined some things there that we're doing to drive that growth faster in the future. Then you have the industrial and IoT market, and physical AI is another opportunity. So we really have three legs to this growth stool for NXP, we're not hooked on one thing. We have multiple growth drivers. There's a net positive for the company.

And for my follow-up, on your comms infrastructure and other, what is the right way to think about growth there as we look into next year? Because this year, it was, I think, the fastest growing segment or has been the fastest growing segment after declining for the last two years. So what are kind of the puts and takes, Rafael, as we look at that specific segment for next year. Thank you.

Yeah, let me take you and just remind you how that segment is broken up. And clearly, as I mentioned in my prepared remarks, we are going to realign the segment starting in 2027. So we are more transparent in how to understand this business and the right components. At 2025, exiting 2025, roughly 50% was secure card business, 25% was DN, digital networking, and 25% was RF power. As we look at the end of 2026, obviously, and we shared this, is that the data center or half of it is coming from DN. So expect the comms and infra for DN to be above 30%. And then we've exited next generation RP power type of business and expect that to be below 20% as we exit 2026. And I think what you'll see, that, you know, continued trend along with nice growth continuing in our secure card business. But we're going to break that out and make it much more transparent in the future in our Q4 earnings when we release. Thank you, Rebecca. Can we go to our last question, please?

Thank you. One moment, please. And the next question will be coming from the line of Francois Boguevegan of UBS. Please go ahead.

Thank you very much. So I have two quick questions, maybe a follow-up of the data center part. I mean, you mentioned $1 billion for 2028 from the $500 million this year. I mean, if we look at your peers, and I mean, most of them are looking at doubling their revenues into next year already. When you look at the gigawatt additions in different data, you can see that it's going to double in 27, maybe potentially versus 26. So all the data suggests that the data center market should double almost next year already. So I was just wondering for your $1 billion on 28, that would suggest a slower growth in 27. Is it you being conservative here, or can you reach $1 billion as early as next year, or should we be aware about any drag into next year?

Francois, I think the first thing we look at our data center business is the type of products that we are deploying. We're not indiscreet. We're not power. We are in the control plane. anything that is an MCU, a microprocessor in the rack, we consider that our market. We started this business almost this year. And so right now, the growth relies on product ramps. The growth relies on acceptance and design ones. And also relies on customers deploying software into our products. And so it's a different type of portfolio. I believe that it's even more sticky than some of the products and some of the companies that you were mentioning. So we feel quite excited about the ramp of our business and data centers because these are processors, these are core companies that NXP has, and networking on security and in processors. And I think this is going to be something that NXP is going to do quite well.

Great. Thank you, Rafael. And maybe my follow-up would be on the pricing. I mean, you mentioned build input cost, the driver of pricing. Rafael, you mentioned the mix as well, impact that will impact pricing into next year. One other area of pricing could be the supply domain environment. And many people are starting to talk about the, you know, tightness and that could lead to a COVID-like environment. Now, when I look at, you know, the utilization rate of your peers, I mean, Renesas at 60%, TI has new fabs jumping up. I mean, Infineon has a new fab ramping up, you have a new fab ramping up, and you didn't mention the tightness pricing. Is it fair to say that it's not as tight as people think? Maybe, you know, you have a lot of capacity coming, maybe it's a timing issue, it's a lead, you know, lead times issue, but it's temporary, not really fundamental like COVID was. Is that fair to say?

Yeah, let me take that question, Francois. all, obviously, it's very well known that the back end capacity today is very, very tight. We do see into the future that the front end gets tight. And the folks that are having capacity come online, like ourselves, like some of the others, will help that, obviously. But we do see capacity, and that's the next phase of any supply and demand imbalance. We see that happening sometime next year. But we're very fortunate of the investments that we have placed, both in the back and the front end, that we'll be able to service it. Right now, the pricing is only related to inflationary costs. Could there be pricing related to demand and supply imbalances? We're unlike COVID like we saw? Absolutely. But we'll wait and see how that plays out.

And first of all, the demand environment is very different, right? So you mentioned COVID, But the demand environment that is happening now is real. It's driven by transformation. SDVs, transformation. Physical AI, transformation. Data, CapEx investment, transformation. And so it's a much different environment. And I think that the demand is going to fuel value creation, value capture, and potentially pricing power.

Great. Thank you very much.

Thank you. And that does conclude today's Q&A session. I would like to turn the call over to Raphael for closing remarks. Please go ahead.

Thank you, everyone. I want to leave you with three takeaways. First, our growth is structural. Software-defined vehicles, the intelligent industrial edge and data center are multi-year drivers, and wins like RV Tech show we're positioned for the next leg of growth. Second, this growth is broad-based with every region growing. And automotive, industrial and IoT, and comps and infrastructure all grow in double digits year over year. And last, our growth results in robust free cash flow, enabling us to invest in the business and return cash to shareholders. As disclosed today, we have a new $5 billion repurchase authorization positioning us to accelerate our buybacks beginning in Q4. Thank you all for joining us today.

Thank you for joining us today. You may now disconnect. This concludes today's program.