NXP Semiconductors - Earnings Call - Q1 2025

Executive Summary

• Revenue of $2.835B was in-line with guidance midpoint and essentially in-line with Wall Street consensus; non-GAAP EPS of $2.64 modestly beat consensus by ~$0.04 and exceeded management’s guidance midpoint by $0.05. Consensus: Revenue $2,830.5M*, EPS $2.6038*.
• Margins compressed year over year on product/channel mix: non-GAAP gross margin 56.1% (-210bps YoY), non-GAAP operating margin 31.9% (-260bps YoY), while cash generation remained solid with $565M CFO and $427M FCF.
• Q2 2025 guidance implies sequential improvement: revenue midpoint $2.9B (+2% q/q), non-GAAP EPS ~$2.66, gross margin ~56.3%, with OpEx ~$710M; management is cautiously optimistic amid “immaterial” direct tariff impact but unknown indirect effects.
• CEO transition announced: Kurt Sievers to retire end-2025; Rafael Sotomayor named President (effective Apr 28) and CEO (effective Oct 28), a potential narrative catalyst alongside AI/SDV acquisitions (Kinara, TTTech Auto, Aviva).

What Went Well and What Went Wrong

• What Went Well

  • Execution vs guidance: revenue “$10 million better than the midpoint” and non-GAAP EPS $2.64 was $0.05 above guidance midpoint; distribution inventory held at 9 weeks with improving backlog signals and short-cycle order uptick.
  • Cash and returns: CFO delivered $565M cash from operations and $427M non-GAAP free cash flow; capital return totaled $561M (buybacks $303M, dividends $258M) with additional $90M repurchases post-quarter.
  • Strategic positioning: Continued build-out in AI and SDV—Kinara acquisition ($307M) to enhance edge AI NPUs and software; launch of S32K5 16nm MRAM MCUs; new imaging radar processors for L2+/L4 autonomy.

• What Went Wrong

  • Topline/margins down YoY: revenue -9% YoY; non-GAAP gross margin fell to 56.1% (-210bps YoY); non-GAAP operating margin 31.9% (-260bps YoY), driven by mix and auto/industrial softness.
  • Segment pressure: Automotive -7% YoY and -6% q/q; Industrial & IoT -11% YoY; Mobile -3% YoY; Comm. Infra. & Other -21% YoY, reflecting broader macro headwinds.
  • Inventory levels elevated: DIO increased to 169 days; CCC lengthened to 141 days as NXP continues supporting Tier-1 auto inventory digestion; channel inventory at 9 weeks (below 11-week target).

Transcript

Operator (participant)

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 speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star one one again. 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.

Jeff Palmer (Senior VP of Investor Relations)

Thank you, Tanya. Good morning, everyone. Welcome to NXP Semiconductors 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.

NXP undertakes no obligation to revise or update publicly any forward-looking statements. For 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 8K and available on NXP's website in the Investor Relations section. Now, I'd like to pass the call to Kurt.

Kurt Sievers (President and CEO)

Thank you, Jeff, and good morning, everyone. We appreciate you joining our call today. I will read you 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 was 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 basis 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 nine 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 impact of current tariffs related to future end demand and supply chain remains unknown. As of now, we are not seeing any abnormal customer order pullings or push-outs, which could be associated with the tariffs.

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 a year-on-year and a sequential basis. Finally, communication infrastructure and other is expected to be down in the high 20% range versus Quarter Two 2024, flat versus Quarter One 2025.

Our outlook assumes that we will continue to undership end demand in automotive, and we expect channel inventory to be flat at nine 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 a cautious optimism that NXP continues to effectively navigate through 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 seven years as President and five 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.

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. Rafael will work very closely together 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 and IoT end markets. With that, I would like to pass the call over to you, Bill, for a review of our financial performance.

Bill Betz (CFO)

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 5 cents better than the midpoint of our guidance. We continue to manage sales into the distribution channel consistent with our guidance of nine 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 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 was $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 invest fees associated with our joint venture manufacturing partnerships was $1 million. Taken together, below-the-line items were $3 million unfavorable versus 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 1.6 times, and our 12-month adjusted EBITDA interest coverage ratio was 19.2 times. 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 25, 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 flattish 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-accounted foundry joint venture under construction in Germany, and $20 million into VSMC, our equity-accounted foundry joint venture under construction in Singapore, 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 our 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 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 invest fees 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 revenue. We will pay a $35 million capacity access fee to VSMC. Additionally, we will make a $16 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 is 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. 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 questions.

Operator (participant)

Certainly. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please limit yourself to one question and one follow-up. Please stand by while we compile our Q&A roster. Our first question will be coming from Christopher Muse of Canter Fitzgerald. Your line is open, Christopher.

Christopher Muse (Senior Managing Director)

Yeah, good morning, good afternoon. Thank you for taking the question. Kurt, you will clearly be very missed. Thank you for everything that you've 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've 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?

Kurt Sievers (President and CEO)

Many thanks and good morning, CJ. Yeah, indeed, we have had three acquisitions now: Kinara, Aviva Links, and TTTech Auto. Kinara is the AI edge compute, which I just discussed briefly on the call. Aviva Links 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. TTTech Auto is indeed a very strong software complement to our CoreRide platform. 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 is not just the compute portfolio, because especially Aviva Links and TTTech Auto is the whole offering with our CoreRide platform for the software-defined vehicle. 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.

Chris Caso (Managing Director and Senior Equity Analyst)

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 undershipping and demand. I guess, when do you now expect excess inventory to be digested? How are you thinking from a geographic perspective? I think three months ago, you talked about China strong, America's kind of slowly recovering, and Europe weak. Is that kind of consistent with where we are again today? Thanks so much.

Kurt Sievers (President and CEO)

Yeah, 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 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. The turning point of auto in the second quarter is actually, in my view, that second quarter, we are flat year-on-year.. That is the first time after five quarters. We look now back to five quarters of year-on-year declines in automotive. 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 ones.

I say somewhat slower because some of them are done, and we still have a few left which are still absorbing over inventory. This is still undershipping to their end demands. At the same time, we see a pretty nice pickup in order pace, especially from Asia for the second quarter automotive. Asia here is a combination of China and Japan. 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. 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 resettle pricing for the full year by January 1st

For Japan, that is by April 1st. Natural customer behavior is that they hesitate to buy before they have the new price. Japan was waiting, and that is why we see now an uptick in Japan into the second quarter. Since it will be one of the next questions, for sure, I 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. No change to what we said last year. It is just that now the confidence is fully in place since we also closed and operate and execute in Japan.

Christopher Muse (Senior Managing Director)

Thanks so much.

Operator (participant)

Thank you. One moment for our next question. Our next question will be coming from Ross Seymore of Deutsche Bank. Ross, your line is open.

Ross Seymore (Managing Director)

Hi guys. Thanks for letting me ask a couple of questions. 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. 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 US company to China? Are you a China for China play? Does the US consider you a European company? Just trying to talk through the manufacturing footprints you have and the flexibility that might provide.

Kurt Sievers (President and CEO)

Yeah, 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. 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. That keeps changing, and we don't see a consistent pattern. 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. There is neither pull-in nor push-out effects at this point in time.

also don't—we did not really foresee anything for the second quarter from an indirect perspective. That is 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. 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. That makes us, I would 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. It is not just how we are seen, Ross, but it is also factually such that I think more than a third of our China for China business today is already manufactured in China. We already have made a lot of progress in leveraging this advantage. You also asked how are we seen in the U.S.

Of course, 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. 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.

Ross Seymore (Managing Director)

Thanks for that. 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, etc., and automotive channel versus direct, etc. We've heard from other companies that they're seeing some of the green shoots. 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.

Kurt Sievers (President and CEO)

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 to the second quarter, which is up mid-single digit, it is more left by the consumer IoT part than the core industrial part. The ratio is still about the same as we discussed earlier, Ross, which is that 60/40 between core industrial and consumer IoT. Directionally, both in Q1, but also now into Q2, it is the consumer IoT part which is stronger 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. Again, they are specifically in China, which are now playing out nicely in the first half of this year. I don't know. We can take this as a proxy for the industry. It is probably pretty specific to NXP.

Ross Seymore (Managing Director)

Thank you.

Operator (participant)

Our next question. Our next question will be coming from Chris Caso of Wolfe Research. Your line is open, Chris.

Chris Caso (Managing Director and Senior Equity Analyst)

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. I guess how far that progresses. I guess ultimately, within China, how much of your China revenue do you expect to be able to supply domestically and under which time? Maybe you could speak a little bit to the U.S., obviously, because that's something we're awaiting the regulations and how much of the U.S. you'd be able to satisfy from a U.S. fab?

Kurt Sievers (President and CEO)

Yeah, so good morning, Chris. First of all, the China for China strategy has two legs. One is the manufacturing leg, which I will expand on in a second. The other one, I think structurally or strategically even more important, is the roadmapping and product generation dedicated for Chinese customers with the consideration of them as lead customers, given that they are really setting the pace now in the automotive and industrial sector when it comes to innovation. I might have talked last fall about the fact that I even changed the management team of NXP to the extent that I have a leader now directly reporting to me who runs the China business to make sure we have full visibility on the highest level in the company on the specific product needs. The product roadmapping is a very important strategic element.

Now, back to your question on the manufacturing side. We have currently about—by the way, everything I say now is wafer manufacturing. There are different considerations when you think about back-end test and assembly versus front-end wafer manufacturing. I speak now about wafer manufacturing, where we have about 30% capability at the moment to supply not only capability. It's actually what we do to supply for our China for China business. So from the revenues which we currently ship, China for China, 30% are actually sourced in China. Of course, we work hard to expand this. Now, don't assume that the rest is in the U.S. You know that we have 60% of our overall wafers coming from foundries, which are typically not in the U.S. We have a much higher number, which is non-U.S. sourced, which is then from Europe and other places in Asia serving China.

It's a much higher number than the 30%, which is already in China. Again, we want to work this as high as possible, as soon as possible, to have maximum independence here relative to possible tariffs. To that end, I would actually say, Chris, the tariffs, of course, are now adding uncertainty and complexity, but the China for China strategy, which I can speak about here, is not something we now suddenly did because of the tariffs. We've had that actually in place for probably more than two years, given the revenue opportunity which we see for our core markets, automotive and industrial in China, where we just see that the industry in China is leading the pack now from a global perspective, which is why we've been leaning into this already for a longer time.

Chris Caso (Managing Director and Senior Equity Analyst)

Thank you. As a follow-up, a question for Bill. I think you made a comment that you would get to your 23% expenses percentage of revenue target in the second half of the year after accounting for the acquisitions. Could you go into a little more detail on that and what assumptions you're making to get to those numbers?

Bill Betz (CFO)

Yeah, sure. On operating expenses, right, we're not guiding the second half. You could see in Q1 we were favorable against our guidance. That means we're ahead of the plan of the restructuring activities. We're going to continue that into Q2 and Q3 because it's time phased. Think about at the end of June 30, we will have probably 1,250 extra employees joining us for a full quarter effect starting Q3 and Q4. 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. We feel pretty confident we'll land sometime in the second half of 2025 at the model.

Chris Caso (Managing Director and Senior Equity Analyst)

Got it. Thank you.

Kurt Sievers (President and CEO)

Tonia, we'll take the next caller.

Operator (participant)

Thank you. Our next question will be coming from François Bouvignies of UBS. Your line is open, François.

François Bouvignies (Equity Research Executive Director)

Thank you very much. Kurt, thank you very much for your help. You will be missed. Sad to see you leaving, but well-deserved, I have to say as well. The two questions I had is firstly, you said, Kurt, that you don't see much pull-in so far and not much impact there in terms of order behavior. Obviously, you managed very well during COVID the inventories in the channel. 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?

Kurt Sievers (President and CEO)

Yeah, thanks. Good afternoon, François. By the way, I'm still around for a full half year. This is not a good time for. That's it. On the pull-ins, yes, I first of all reconfirmed 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, François continues to be we don't want this. We don't like that. Now, there could be specific reasons in specific cases with specific customers where they can explain to us why it makes sense, and we might want to do it.

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 nine-weeks inventory into the second quarter, where again, we would not want to allow it. 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. For that same reason, we don't have a hell of a lot of appetite to consider pull-ins. I'd say with possible exceptions always in the range of the normal, we don't want that. We would not want to support it.

François Bouvignies (Equity Research Executive Director)

All right. Thank you, Kurt. 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 history. You said you think you will be flat. I mean, 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. 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.

Can you help us or reassure us 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? Maybe you can remind us the mix effect.

Bill Betz (CFO)

Sure. Absolutely. Very fair question. Let me just repeat. In Q1, we had a slight mix driven by our product and channel mix. If we hold everything equally and go into Q2, we're just saying, "Okay, right now our order book's pretty full. We actually see the mix, and it says similar mix as Q1, and we'll get in the fall through on the higher revenues over fixed costs." That is 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. For example, at a $13 billion revenue annual number level, we will feel very confident at 58%, plus or minus. $12 billion, 57%, $11 billion, 56%. Again, that's that plus or minus 50 basis points.

We have demonstrated those levels in the past. Now, from an upside perspective, we obviously have these additional levers to drive gross margin much higher. They include increasing our internal utilization, again, that is at 70%. It is staying at 70% because our inventory, as you said, is at the higher bounds. The consolidation of our 200-millimeter factories, we will be talking more about that in the second half. We are increasing our industrial and IoT go-to-market through our channel. We want to focus on addressing that mass market. We also have, and by the way, our company-specific accelerate growth drivers are tracking to our growth plans versus investor day. I know we are 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. Those two offset each other.

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. We feel pretty good about that. Overall, stepping back with the revenue numbers I just gave you, we feel very confident to deliver our long-term gross margin range of 57-63%. It really is where revenue comes from is the influence as a starting point. Then you have these levers on top of it. On inventory, again, you're right. 169 days is probably the upper bound in my liking for sure related to it. 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.

Going into Q2 and also Q3, again, 169 because we have a backlog that we see actually is okay so far for Q3. We have to make sure we take that into account to make sure we build the proper product. 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 are starting to read about, we believe holding a bit more inventory is important from the lessons learned from the past. Again, I agree with you, the 169 is the upper balance, and we are going to probably adjust this once we learn a little bit more about second half and the confidence of second half revenue.

François Bouvignies (Equity Research Executive Director)

Very clear. Thank you for your answers.

Operator (participant)

Thank you. One moment for our next question, which is coming from Stacy Rasgon of Bernstein Research. Your line is open, Stacy.

Stacy Rasgon (Analyst)

Hi guys. Thanks for taking my question. Bill, first, a question for you. I know you said you were not guiding the second half. That being said, the OPEX targets, I mean, you are 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. I mean, $750 million 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? How do we think about that in the context of everything else that is going on?

Bill Betz (CFO)

Let me remind you about the Q2 OPEX number. There is a one-time payment from a recurring license that occurs each year. That's about $16 million to one of our peers, and I 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. We feel pretty confident under the different types of revenue scenarios that we can model because we have other levers to make sure. Remember what I said and what our whole message is, we are redoubling our efforts on the areas that we can control.

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.

Stacy Rasgon (Analyst)

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

Kurt Sievers (President and CEO)

Yeah. Good morning, Stacy. This is Kurt. Look, last year, we did this. And you know that we were wrong. We called a cycle, which did not happen. 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 is 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 cannot. It would be really irresponsible to do it. We stick to quarter two.

Stacy Rasgon (Analyst)

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

Kurt Sievers (President and CEO)

Oh, we can clearly see that because I gave you a couple of elements. One of them was that the backlog of our distribution and customers, which we see by product, is starting to grow after a long, long period of absolutely no growth or even decline. That is different customers, new customers, new products. That is totally different to a pull-in. It's absolutely not pull-in. I also talked about a nicely stabilized order pattern from our direct customers, which has been in decline for a long, long, long period and has now stabilized across the board, which is not a pull-in because it's far too even to be a pull-in. We think we can clearly differentiate between those because, as I said earlier too, I think François, we want to avoid entertaining pull-ins and increasing inventories again. Stacy, that's for us a pretty focal point.

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. Stacy, 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 the second half should look like. So how should we make it up?

Stacy Rasgon (Analyst)

Yeah. No, I get it. That's helpful. Thank you so much. Appreciate it.

Operator (participant)

One moment for our next question. Our next question will be coming from Vivek Arya of Bank of America Securities. Your line is open.

Vivek Arya (Managing Director)

Thanks for taking my question. Kurt, I just wanted to go back to 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. Q2, you're largely guiding to kind of seasonal trends. If there are green shoots, is it fair to say they have not yet shown up in the 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?

Kurt Sievers (President and CEO)

Vivek, you don't know what we thought it was earlier because you pressed us already if you want to do a soft cut for Q2, where I don't know. I think I said it is maybe flat or very, very slightly up. No, I think there was something very relevant in your question, which is in Q1, indeed, auto and industrial and IoT were a touch light against guidance, while the other two segments were a touch richer. That has a reason, and it is actually Japan and China. It is the seasonal weakness of China automotive, which was a little bit stronger than what we had anticipated. Again, we know that that was to happen, so it was forecasted, but not to the full extent it came.

In Japan, I think I talked about this earlier, it is the price change, which is leading customers to finally, and mind you, that for several years, we have either increased prices or kept them flat. Now, it was the first time that we offered a low single-digit price decline for customers also in Japan. They were eagerly waiting and held actually back to purchase until they could enjoy the quarter two prices. It is a bit of a, it is kind of specific. For quarter two, we see things coming up. What you don't see, Vivek, is, of course, what underneath is still at work from an inventory digestion perspective with the tier one automotive customers, which is kind of fogging some of the nice uptake which we are seeing.

Again, you did not hear me calling the cycle, Vivek. I said we see now trends which are or have been in the past, and I would say also now indicative of early innings of a cycle recovery. It is certainly not at the stage that we would say with bells and whistles, everything is jumping up. That alone would not be given, simply given the uncertainty which our customers face from Paris.

Vivek Arya (Managing Director)

Got it. 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. Let's assume that that is the case, right, including all the effects of tariffs and whatnot. 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? Thank you.

Kurt Sievers (President and CEO)

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. It has degraded, which maybe or maybe not is a consequence of the tariff fears. It could be. The matter of the fact is indeed it is now a 2% decline in the forecast versus a 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 it 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. We are on track on those. I think it is those content increases which should continue to make us very optimistic about automotive, not that much the SAR.

Vivek Arya (Managing Director)

Does that suggest they can offset the SAAR decline, or are we not willing to say that yet?

Kurt Sievers (President and CEO)

Hey, Vivek, 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. You also have to remember, our revenue does not synchronize to global production quarter per 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 and is counted and so. We really do want to respectfully not address revenue targets or potentials in the second half.

Vivek Arya (Managing Director)

Understood. Thank you. Good luck.

Kurt Sievers (President and CEO)

Here. Tanya, this will probably be our last panelist question, if you would.

Operator (participant)

Certainly. Our last question will come from Mark Lipacis of Evercore ISI. Mark, your line is open.

Mark Lipacis (Senior Managing Director)

Great. Thanks for taking my question. 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 a new theory on inventory stocking that gets proposed. Before COVID, it was just in time, and during COVID, it became just in case, and now it's just in time. I think our own checks are consistent with your own, that some of the tier ones are well below normal for their inventory stocking on semis, at least. My question is about 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 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 it is all driven by lead times, and when lead times stretch, everybody is just going to restock again?

Kurt Sievers (President and CEO)

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 mixed issue. What has got better in several cases is the communication and the alignment between customers and us on understanding the future, on understanding where could be bottlenecks. Of course, given the whole geopolitical turmoil, there is also a more sophisticated, diversified supply chain in place now across the world, which eventually helps going forward.

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.

Bill Betz (CFO)

With that, I guess, Jeff, that was the last question. Let me, Mark, have a follow-up?

Kurt Sievers (President and CEO)

Yeah. Oh, yeah. Sure.

Mark Lipacis (Senior Managing Director)

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

Kurt Sievers (President and CEO)

Thank you. Thanks very much, Mark. Let me go to make just a couple of closing comments.

We have now a very interesting crosshair situation between what I would call a significant macro uncertainty offered by the tariffs with the current tariffs, more the indirect impact of them rather than the direct, which is immaterial for us, standing against the clear early innings of a cycle recovery. Mind you that, for example, automotive turns to a flat year-on-year. already now in the second quarter. Those two are competing forces which are not easy to forecast into the rest of the year. With that, we continue to, I hope, show pretty strong resilience through the trust cycle and at the same time offer excellent exposure to the secular growth drivers, especially in the automotive and industrial sectors.

When we zoom out from this, we see us nicely on track to doubling our EPS by 2030 plus as we had laid out in our Investor Day last year in November. Of course, a lot of turmoil short term, but seeing the cycle coming back now, of course, overshadowed by that uncertainty in the macro from tariffs, but fundamentally seeing the cycle coming back, we consider as a pretty nice positive. Thanks for your attention today and see you soon. Thank you.

Operator (participant)

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