NXP Semiconductors - Q4 2025

Transcript

Operator (participant)

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

Jeff Palmer (VP of Investor Relations)

Thank you, Michelle, and good morning, everyone. Welcome to NXP Semiconductors earnings call today. With me on the call today is Rafael Sotomayor, 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. The 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 first 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 reconciliation to the non-GAAP financial measures to the most directly comparable GAAP measures in our fourth quarter 2025 earnings press release, which will be furnished to the SEC on a Form 8-K and available from NXP's website in the investor relations section. Now, I'd like to pass the call to Rafael.

Rafael Sotomayor (President and CEO)

Thank you, Jeff, and good morning. We appreciate you joining our call today. Our overall performance during the fourth quarter was solid, with all end markets performing either in line or better than expected. All regions were up on a year-on-year basis. Turning to the specifics, NXP delivered fourth quarter revenue of $3.34 billion, an increase of 7% year-on-year and up 5% sequentially. This was $35 million better than the midpoint of our guidance. Non-GAAP operating margin in the fourth quarter was about 35%, 40 basis points above the same period a year ago and in line with the midpoint of our guidance. Taken together, we drove non-GAAP earnings per share of $3.35, $0.07 better than guidance. Distribution inventory was 10 weeks, consistent with our guidance.

We remain disciplined on channel health, prioritizing sell-through of high-demand products rather than broad-based restocking. Now, I would like to reflect on our performance in 2025. The year was a tale of two halves, with the first half of the year exhibiting weaker demand trends, while in the second half of the year, demand began to accelerate in support of our long-term revenue growth model. Looking at the specifics, automotive revenue was $7.1 billion, flat year-on-year, due to slower inventory digestion at direct customers in the first half of 2025. With the inventory digestion behind us, the second half performance aligns with our eight to 12 long-term growth outlook, reflecting the underlying strength of our auto portfolio.

A few examples which underpin our optimism include our efforts in software-defined vehicles, where we have seen strong global adoption of NXP products. These include design win rates for our S32M family of 5-nanometer vehicle compute processors, the newly introduced S32K family of 16-nanometer zonal processors, and continued adoption of automotive Ethernet products. These efforts are now material and global in nature, with most auto OEMs undertaking SDV platform initiatives. Additionally, the early conversations with customers on the recently acquired technologies from TTTech Auto and Aviva Links are accelerating interest in NXP's SDV portfolio. The potential revenue contribution from this engagement should materialize beyond 2027. This multiyear SDV platforms deepen customer commitment and support mix improvement over time. Turning to the industrial and IoT end market, revenue was $2.3 billion, flat year-on-year.

The second half growth was materially above our 8%-12% long-term growth outlook across both core industrial and consumer and IoT. Supporting our ambition to lead in intelligent systems at the edge, we continue to see strong customer engagement in the emerging markets and physical AI. By combining the industry-leading i.MX family of industrial application processors with the recently acquired Kinara NPU, we can deliver complete and scalable AI platforms that accelerate deployment at the edge. A few examples of applications include medical imaging systems, camera-based workplace safety system in the industrial market, logistic automation systems, and robotics. Customer interest has been exceptionally strong, and these engagements reinforce our vision of physical AI and the power of the NXP platform. These opportunities expand our addressable market, support sustainable growth, and validate the unique competitive nature of our complete system portfolio.

Looking at our mobile business, revenue in 2025 was solid at $1.6 billion, up 6% year-on-year. We saw stronger demand and content gains in the premium mobile market. Overall, NXP remains a specialty supplier in the mobile market, with a unique and defensible franchise center on secure mobile transactions. Finally, the revenue in the communications infrastructure market was $1.3 billion, down 24% year-on-year. As we have said in the past, we anticipate flat growth over the longer term as the Digital Networking and RF Power business decelerate, which will be offset by growth in our Secure Car business, which includes our UCODE RFID tagging solutions. Now, I will turn to our expectations for the first quarter. Our forecast for the first quarter is better than we anticipated 90 days ago.

We expect all regions and all end markets to be up year-on-year. We're guiding first quarter revenue to $3.15 billion, up 11% versus the year-ago period, and seasonally down 6% sequentially. Compared to 90 days ago, the improvements reflect steady inventory normalization and auto tier ones, broadening order strength across both core industrial and consumer and IoT, and program ramps in the premium mobile market, consistent with seasonal patterns. Our guide does not assume broad-based restocking. At the midpoint, we expect the following trends in our business during Q1: Automotive is expected to be up in the mid-single digit versus Q1 2025, and down in the mid-single digit percent range versus Q4 2025. I would like to highlight that our first quarter revenue guidance only includes about $25 million or one month of revenue contribution from the MEMS sensor business.

Industrial and IoT is expected to be up in the low-20% range year-on-year and down in the mid-single-digit range versus Q4 2025. Mobile is expected to be up in the mid-teen percent range year-on-year and down in the 20% range on a sequential basis. Finally, communication infrastructure and other is expected to be up in the mid-teen percent range versus Q1 2025, and up 10% versus Q4 2025. In summary, our first quarter outlook reflects early validation of the company's specific growth drivers we've been investing in, and we expect these trends to continue throughout 2026. We believe the NXP-specific secular drivers for our business are now outweighing the broader industry cyclical headwinds, which we have experienced over the last few years.

Overall, we expect product mix and disciplined cost execution to continue to support a gross and operating margin framework. We're focused on disciplined investment and portfolio enhancements to drive profitable growth while maintaining control over the factors we can influence. Our capital allocation framework is unchanged. Invest for growth, pursue targeted M&A to strengthen the portfolio, and return excess cash through dividends and buybacks within our long-term model. Now, I would like to pass the call to Bill for a review of the financial performance.

Bill Betz (CFO)

Thank you, Rafael, and good morning to everyone on today's call. As Rafael has already covered the drivers of the revenue, I will move to the financial highlights. Overall, our results reflect the strength of our strategic priorities in our end markets, our disciplined investment in manufacturing and product leadership, and our consistent commitment to generating long-term shareholder value. Q4 was solid, with strong execution and results above the midpoint of guidance. Revenue, gross profit, and operating profit were all back into our long-term financial model. We delivered non-GAAP earnings per share of $3.35, or $0.07 better than the midpoint of guidance. Non-GAAP gross profit was $1.91 billion, with a 57.4% non-GAAP gross margin, a slight miss versus guidance, driven by stronger-than-expected mobile revenue.

Non-GAAP operating expenses were $756 million, or 22.7% of revenue. The primary increase sequentially is driven by our two new acquisitions, where we continue to make space for our strategic investments, offset by restructuring actions. Non-GAAP operating profit was $1.15 billion, and non-GAAP operating margin was 34.6%, up 80 basis points sequentially. Below the line, non-GAAP interest expense was $99 million, and taxes were $190 million. Non-controlling interest was a $13 million expense, and results from equity accounted investee, was a $1 million loss. Taken together, the below-the-line items were $4 million better than our guidance. While stock-based compensation, which is not in our non-GAAP earnings, was $100 million, $18 million lower than guidance, driven by the retirement of several executives.

Turning to changes in cash, debt, and capital returns, our balance sheet remains strong, giving us the flexibility to invest in our strategic priorities and hybrid manufacturing plans. We ended Q4 with $12.2 billion in total debt and $3.3 billion in cash, reflecting uses of cash for capital returns, acquisitions, joint venture investments, and CapEx, offset by cash generation during the quarter. Net debt was $8.96 billion, and net debt to Adjusted EBITDA was 1.9x, with Adjusted EBITDA interest coverage ratio of 14.7x. In Q4, we returned $338 million through buybacks and $254 million in dividends. Over the last ten years, we have returned over $23 billion to our shareholders, for 95% of free cash flow, and reduced our diluted share count by 27%.

After Q4, we repurchased another $36 million under our 10b5-1 program, and on January 5th, we redeemed the $500 million March 2026 notes with our cash on hand. Now, turning to working capital metrics. Days of inventory was 154 days, which included seven days of pre-build. Receivables were 29 days, payables were 60 days. Taken together, our cash conversion cycle was 123 days. As revenue growth accelerates, we expect working capital efficiency, particularly days of inventory, including pre-builds, to meaningfully improve throughout the year. From a cash usage perspective, we continue to advance our long-term manufacturing strategy, including contributions to both VSMC and ESMC. This will lead to a long-term supply resiliency and strong gross margin expansion.

Cash flow from operations was $891 million, and net CapEx was $98 million, resulting in non-GAAP free cash flow of $793 million, or 24% of revenue. We invested $195 million in long-term capacity access fees, made a $282 million equity payment to VSMC, and a $44 million equity payment to ESMC. Taken together, we are about 50% through the investment cycle for both VSMC and ESMC, having invested about $1.7 billion of the $3.4 billion planned investments. We expect the majority of remaining investments will occur in 2026. Now, turning to our expectations for Q1.

We expect revenue of $3.15 billion ±$100 million, up 11% year-on-year and down 6% sequentially, which is better than our view 90 days ago. We expect non-GAAP gross margin of 57% ±50 basis points. Operating expenses are expected to be $765 million ±$10 million, reflecting normal seasonal increases at the start of the year. We are committed to our long-term operating expense model of 23% of revenue, though there are seasonal variations, with the first half of the year normally higher than the second half, resulting in non-GAAP operating margin of 32.7% at the midpoint. Below the line, we expect non-GAAP financial expense to be about $92 million and our non-GAAP tax rate to be 18%.

Non-controlling interest expense will be $11 million, with our joint venture startup losses of about $3 million. Stock-based compensation should be about $108 million, which is not included in our non-GAAP guidance. This implies Q1 non-GAAP earnings per share of $2.97 at the midpoint. Turning to the uses of cash in Q1, we expect capital expenditures to be approximately 3% of revenue, our capacity access fee payment of $190 million, and an equity investment into VSMC of $210 million. Before turning to your questions, I have a few housekeeping items to highlight. After thoughtful consideration, we have decided that our RF Power business no longer aligns with our long-term strategic direction. Consequently, we will stop new product development and have taken an approximately $90 million restructuring charge, which is reflected in our fourth quarter GAAP results.

We will redirect and focus our R&D resources to accelerate and enhance our strategic priorities towards software-defined vehicles and physical AI. Yesterday, after the market closed, STMicroelectronics announced the closure of NXP's MEMS sensor business acquisition. This is a positive transaction for both parties. NXP received $900 million in gross proceeds, with another $50 million to be received upon completion of certain closing conditions. We will recognize a one-time gain of approximately $630 million from the sale of the business, which is reflected in our first quarter's GAAP guidance. Next, we have made the decision to shift our geographic revenue reporting to headquarters-based region as opposed to a ship-to basis. We believe reporting headquarters-based region better reflects how we manage the business internally and where customer engagements and design win awards occur.

The 2025 change can be found in the posted IR presentation. And finally, based on the positive trends, including current order rates and business signals we track, we are confident NXP will operate within its long-term financial model for the full year of 2026. In closing, we are well positioned to benefit from the powerful secular trends in our four focus end markets. We are confident about the strategic priorities and investments we are making across our entire portfolio and manufacturing footprint. With a strong balance sheet and a disciplined capital return philosophy, we are exceptionally well positioned to drive long-term value for our shareholders. Now, I would like to turn it back to the operator for your questions.

Operator (participant)

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

Tom O'Malley (Equity Research Director)

Hey, guys. Thanks for taking my question. I wanted to ask about the channel restock. So it looks like you guys went from nine to 10 weeks. In your guidance, you're saying no additional restock, kind of, baked in. Could you talk about where you are with the channel today, what you saw in the last quarter? And is it the decision to just not go to 11 weeks overall? Or is it just, we're gonna wait a little bit until we take it to the 11 weeks that we talked about previously? Thank you.

Rafael Sotomayor (President and CEO)

Thank you, Tom. Let me take that one. It's Rafael. Yeah, clearly, I mean, I would say that our account strategy has shifted from, you know, what before we considered tight control to ensure that we staged the right product, the right product to satisfy demand. We are moving to our long-term target of 11 weeks, and the reason we're doing that is because it is a reflection of an improving demand environment for us. We finished Q4 with about 10 weeks. We will move into our long-term plan and long-term target of 11 weeks into 2026, and that's how we are going to manage our business in a steady state.

Tom O'Malley (Equity Research Director)

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

Rafael Sotomayor (President and CEO)

Yeah, indeed, Tom. We did guide C&I about 10%, sequentially in Q1. And if you remember, C&I includes three distinct businesses: Secure Cars, Digital Networks, and RF Power. And they, they all of these three businesses can move differently quarter to quarter. And C&I, I think, right now is benefiting from the fact that, one, there's normalization in the Digital Networking business, but there's growth coming from the secure car, and, and that strength really will benefit C&I throughout 2026.

Tom O'Malley (Equity Research Director)

Thank you.

Operator (participant)

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

Matthew Prisco (Director)

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

Jeff Palmer (VP of Investor Relations)

Yeah, Matt, are you asking about the kind of trends that we track internally? Is that what you're asking? We couldn't quite hear your question. We apologize.

Matthew Prisco (Director)

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

Jeff Palmer (VP of Investor Relations)

Yeah, linearity, we don't, we don't disclose, but I think Bill will take some of the other metrics we track.

Bill Betz (CFO)

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

Jeff Palmer (VP of Investor Relations)

And maybe I'll just add one thing, Bill. If you kind of step back, Matt, and look at kind of the trends in the second half of 2025, they've truly started to accelerate, and we're in, you know, close to our growth rates that we presented at our Analyst Day. We believe that will continue as we progress through 2026. So we're feeling pretty optimistic that we are off the trough of the business.... Did you have a follow up?

Matthew Prisco (Director)

Yes, please. I guess on the auto side, would love if you can offer some detail on the demand dynamics within your core auto business versus your accelerated growth drivers. And have you seen any impact to date from component price increases, potentially pressuring unit demand there? Thanks.

Rafael Sotomayor (President and CEO)

Yeah, so we, I think there are a few questions there on auto. If you look at what happens, if you look at auto and the reason why we remain quite optimistic in auto, in Q4, our business returned to growth year-on-year. And the guide that we provided continues, you know, year-on-year, the Q1 guide gives you growth, as well, year-on-year. And so, and what we see is that business remains unchanged with respect to content gains. You asked me about pricing. Second question was on pricing. VPAs for the most part are done, right? With, in the pricing that is already reflected in our Q1 guide.

We are modeling low single digit price declines, and that's what we see not only in auto but across the business.

Operator (participant)

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

Ross Seymore (Managing Director)

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

Rafael Sotomayor (President and CEO)

Yeah, thanks, Ross. So I think what I said on the prepared remarks, right, auto in our business in general in 2025 was the story of two halves, and the first half was all about inventory digestion, and it really masked the true dynamics of our business. For the full year, the auto accelerated drivers were slightly below model. Remember model, we said that we were going to grow 8%-12%, but they were still growing in a year where auto was flat. And they were about 10%, and it was all led by our SDV efforts, our radar and our productivity. What you see right now in auto is our auto is shifting.

Our auto exposure is shifting to more and more structural and less cyclical, and it's driven by, you know, tying our roadmap to a secular trends are really transforming the architectures of auto. So we feel quite optimistic. The answer to the question on the core drivers, there's the, the whole story, the thesis is completely intact, and we feel stronger than ever that our, our roadmap is really addressing the needs of the market.

Ross Seymore (Managing Director)

Great, thanks for that. And I guess, you had the MEMS divestiture and now the exit of the RF side of things. Can you aggregate, you know, how much of a headwind those exits are gonna be for this year? And I obviously know where the RF sits, but is the MEMS headwind in the auto side? Just wanna kinda make sure to level set on that.

Bill Betz (CFO)

Sure. The way to think about... Oh, this is Bill, Ross. Good morning. The way to think about the sensors divestment, it runs around $300 million per year, and, Rafael shared, we recognized $25 million in the first quarter, and I think you guys can do the math of the impact that has from a year-over-year compare in our auto end market. Related to the RF business, the RF business is probably gonna track similar to what DN did. If you recall, our Digital Networking business, when we walked away from it, I don't know, eight years ago, it lives quite long. And so what we're actually doing is stop investing next generation products.

So that will probably stay with us for at least the next two years, is what we're projecting at the current rate. And I think, Jeff, if we had to break out 2025 as a percentage of comms infra pieces, I don't have that on my fingertips, so we can usually share that, but maybe you can share how the three businesses fared in 2025 to get the size of it.

Rafael Sotomayor (President and CEO)

Sure. Well, so the Secure Car business was just over 50%, and both the Digital Network and RF Power businesses were each about 25%.

Ross Seymore (Managing Director)

Thank you.

Rafael Sotomayor (President and CEO)

Thanks, Ross.

Operator (participant)

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

Joe Moore (Managing Director and Semiconductor Industry Analyst)

Great. Thank you. In the auto business, there's been a number of sort of these supply disruptions. We had an Nexperia a few months ago causing issues. DDR4 now is causing some shortages. You know, is that impacting you guys in any way? Are you seeing either weaker demand because they're bottlenecked by those things, or is there any desire for tier ones to start building inventory to react to any of those things?

Rafael Sotomayor (President and CEO)

Yeah, let me take that, Joe. So the Nexperia is not a conversation, it's not been a non-issue for NXP. The discussions on memory, there's always this chatter on memory is not just in autos, across our end markets. We have not seen memory impact the orders of our customers, but clearly it's a conversation that our customers discuss with us as an area of concerns for the second half of the year, but nothing has been reflected in our orders.

Joe Moore (Managing Director and Semiconductor Industry Analyst)

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

Rafael Sotomayor (President and CEO)

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

Joe Moore (Managing Director and Semiconductor Industry Analyst)

Great. Thank you.

Operator (participant)

Thank you. Our next question will come from Joshua Buchalter with TD Cowen. Your line's open.

Joshua Buchalter (Managing Director)

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

Jeff Palmer (VP of Investor Relations)

I think, Josh, what we're saying is the long-term model is intact. I think not to be nitpicky back, but I think you know how to do math, and you can probably do the, the chainsaw on that. But we, we feel very strongly that after the inventory digestion in the first half of 2025, things are starting to reaccelerate. So we'll, we'll leave there, leave it there. Did you have a follow-up?

Joshua Buchalter (Managing Director)

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

Bill Betz (CFO)

Yeah, let me take that one. So I would say gross margins are performing to our expectations into Q1, and this is primarily driven by our annual low single-digit price concessions that Rafael shared, and that is offset only partially from our normal operational efficiencies that we regained back throughout the year. Again, I think for modeling purposes, the best way to think about our gross margins, use that rule of thumb I provided in the past for every $1 billion of revenue. We're entitled to approximately 100 basis points expansion gain to our gross margin on a full-year basis, and of course, that's the plus or minus normal mix changes that we share on a quarterly basis. Now, as shared in the past, we will continue to work on mixing up our portfolio through our new product introductions.

Also, we're focused on our go-to-market for that long tail, which tends to be a richer mix. We also have the ability to improve our internal front-end utilizations. The front-end utilizations in Q4 were in the high 70s, and in Q1, they will remain in the high 70s. Obviously, if we get any inflationary costs that we can't offset internally, we will protect our gross margins and pass those on to our customers. And, and as you know, we always do the normal block and tackling on, improving our yields and test time reductions. Now, longer term, we're quite excited, on our hybrid manufacturing strategy, especially when VSMC is fully loaded in 2028, it is on track. And beyond, we expect our gross margins to be lifted by another 200 basis points at the company, level.

So I would say in general, we, we are very committed to improving our gross margins over the long term. Related to inventory question, again, our prebuilds were seven days, sorry, at the end of 2025. As you all know, our consolidation efforts and our manufacturing footprint are underway. I would expect the prebuilds, by the end of 2026, be about 15-20 days, related to that. But including those prebuilds, we also expect to take our net inventory days down throughout the year, as we continue to focus in what's in our control and do the right thing operationally, to give you some more color on where we plan to take internal inventory.

Joshua Buchalter (Managing Director)

Appreciate all the detail there, Bill. Thank you.

Operator (participant)

Thank you. Our next question will come from Vivek Arya with Bank of America Securities. Your line's open.

Vivek Arya (Managing Director)

Thanks for taking my question. On the industrial and IoT segment, Rafael, I was hoping you could help segment how much of that is industrial, how much of that is IoT? And you know, off of easier compares, the growth rate is very high at the start of the year. But should we expect that this segment will also be in model for 2026? Just how, how are you looking at the, you know, potential growth scenarios for industrial and IoT this year?

Rafael Sotomayor (President and CEO)

Yeah. Thank you, Vivek. So yeah, very strong growth we've seen right now in industrial, right? And the, and the growth, you saw the inventories begin recovering in Q3, and continue into Q4. I think Q4 was 20% year-on-year of growth. The growth is fairly broad-based, and it's not a single segment that is driving the growth. Just to give you an answer on the, on the question specific, you know, we have about 60, 60% of our business there is core industrial, 40% is in the consumer side. But the growth is broad-based. But we saw, I mean, if I would give you, we have some notable traction on fuse sockets in healthcare and smart glasses. We've seen strength in factory automation and energy storage.

And so very, very strong design wins with very differentiated product that we have in industrial and IoT. That strength of closing 2025 continues in 2026. I mean, you see the Q1 guide was also growing year-on-year 20%, and we feel very good about 2026 for industrial and IoT.

Vivek Arya (Managing Director)

All right. And for my follow-up, I would be remiss not to ask the seasonality question as we look at Q2 and Q3. And I ask that just, just because of, you know, all the kind of the exits and things that, that you're considering this year. So based on, you know, historical patterns and normalizing for all your business divestitures, what would you consider normal seasonal trends in Q2, Q3? And, and are there any other things this year that we should take into account as we model your quarterly cadence this year? Thank you.

Rafael Sotomayor (President and CEO)

Vivek, we're not gonna, we're not gonna give you guidance beyond Q1. But one of the things that you should take away, things have gotten better since 90 days ago. And they'll refer to the order patterns that we have, visibility into Q1 improved as well. We have the conversations with our customers that we're having. It gives us optimism for second half of the year. So we like the momentum. We like the strength that we go through 2025. I mean, Q4, the growth was broad-based, and we like that momentum we enter in 2026, because that momentum is also carrying, also broad-based. And so, and the way you should think about it, both in auto and industrial, the strength is increasingly structural rather than purely cyclical.

We feel good about the trajectory we're carrying here towards the second half of the year.

Vivek Arya (Managing Director)

Thank you.

Operator (participant)

Thank you. Our next question is gonna come from Joe Quatrochi with Wells Fargo. Your line's open.

Joe Quatrochi (Executive Director)

Yeah, thanks for taking the question. You talked about the acquisitions accelerating interest in your software-defined vehicle portfolio. I'm wondering if you could just kind of expand upon that or just, you know, what are the particulars that customers are excited about?

Rafael Sotomayor (President and CEO)

Yes. So, the three acquisitions there, look, that we discussed, on the auto side, TTTech Auto has been really an injection of horsepower to accelerate our software-defined vehicle story. One of the deliverables that we have that are very important for us and for some of our customers is a deliverable of the software-defined architecture that will be delivering a system around zonal towards the end of the year. And so TTTech Auto and the injection of the TTTech Auto has really accelerate our path into delivering a zonal architecture and zonal systems by the end of the year. They also come in with a middleware, and now we have a different middleware called MotionWise. And that engagement right now is on track.

We're taking, I think the interest of our customers is quite high now that they're moving to SDVs. On the industrial and IoT, in my prepared remarks, we talked about the interest level that our customers are now showing for physical AI and the capabilities that we have in our NXP platform. And I just want to double down on that. The interest in the combination of the Kinara NPU and the i.MX family of products that we have is really, really strong. And the level of the conversations right now that we're having with our customers has changed significantly. The traction that we get has changed significantly. So we're excited right now in that engagement, and I think that it's going to result in strong design wins in 2026.

Joe Quatrochi (Executive Director)

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

Rafael Sotomayor (President and CEO)

Yeah, on the auto side, I mean, so I think this is an important question, just give you our perspective. And let's look at the data closely in auto, right? The inventory correction, one we said, is largely behind us. Q4, we returned year-on-year growth. Q4 auto finished within 1% of its prior peak in 2023, and we're guiding automotive to grow, in Q1 year-over-year. And, and our guide in Q1 only includes one month of the sensor business. And so the sequentially guide, I think it would have been very close to normal seasonality. So regionally, not a whole lot of differences. Usually, in Q1, you have a normal seasonality because of, because now the weight that China has in the market, but fundamentally, our thesis hasn't changed, right?

The shift to SDVs, the advanced ADAS, these are multi-year platform transitions, and they're gonna drive content growth. And this is where we at NXP are very strong in portfolio.

Joe Quatrochi (Executive Director)

Thank you.

Operator (participant)

Thank you. Our next question will come from Chris Caso with Wolfe Research. Your line's open.

Chris Caso (Managing Director)

Yes, thank you. Good morning. If I could follow up on auto again, and specifically the areas of accelerated growth drivers.

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

Rafael Sotomayor (President and CEO)

So 2025, Chris, I mean, if you remember, first half of the year was a tough year with a lot of inventory digestion. That period put a pause in some of the accelerated growth drivers, because, for instance, some of the business, like radar, got caught up into inventory digestion. Electrification got caught up into inventory digestion. It slowed down the ramp of new models that basically address some of the slightly less growth, I would say, in the SDV piece. But we saw that second half accelerate. Once the inventory digestion, all the, our thesis became true, right? The accelerated growth drivers started to grow.

By the way, the accelerated growth still grew in 2025, just didn't grow at target because of the challenges we had in the first half of the year. And now that thesis continues in 2026. We see our accelerated growth drivers now being within model and, or even better, and so we, we see that traction being in 2026, taking hold.

Chris Caso (Managing Director)

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

Bill Betz (CFO)

Yeah, sure. As I mentioned in my prepared remarks related to OpEx, you know, typically, as expense as a percentage of revenue for the first half are typically higher than the second half, driven by our seasonal revenue profile. The timing effect of our US benefits at the start of the new year, that's why you see our guide up in Q1. Q2, remind you, we have our Q2 annual merits and promotions. And then we also have, at the moment, that one-time IP license impact in Q2 that we previously shared that occurs every year. So we're typically out of model in the first half, but then we expect to get below that 23% model in the second half, leading to a full year of about 23% or below.

Obviously, we'll always have leverage on the SG&A side of the house, but the investments that are required for SDVs and physical AI and where we want to take the company, we wanna keep that at that 16% level, I would say, to make sure that we can capture that growth, that long-term growth that we're after. So for your modeling purposes, I gave you the gross margin, we gave you the revenue, here's the OpEx. I, I think you can get to the answer.

Chris Caso (Managing Director)

Thank you. That's helpful.

Operator (participant)

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

Gary Mobley (Managing Director and Senior Equity Analyst)

Hey, guys. Thanks for taking my question. I know I'm gonna make Jeff cringe here, but I did wanna ask a follow-up question with respect to your statement on long-term operating model. When you laid out in November 2024, that long-term operating model, you know, the base off which you were guiding from was 2024, obviously. And so, you know, that would indicate, you know, $15.8 billion in revenue in fiscal year 2027, based on that 6%-10% revenue growth rate, minus the sale of the MEMS sensor business and whatever other adjustments since then. So for the fiscal year 2026 commentary about being on target, is that with respect to 6%-10% growth or that 2027 destination for revenue?

Jeff Palmer (VP of Investor Relations)

It's the model as we laid out at the Analyst Day. I think, Gary, you, we both agree with you on the endpoint where we want to get to. We both know what we have to do to get there. We're gonna leave it to you and the analyst community to figure out how that march is. But we feel very good that after coming out of the first half of 2025 inventory digestion, we can accelerate through the next two years. I think that's the best we can do.

Gary Mobley (Managing Director and Senior Equity Analyst)

I appreciate what you gave there, Jeff. As my follow-up, I wanted to ask about the impact on the expense side from the sale of the MEMS sensor business. We know the revenue impact of $300 million, but what's the impact to gross margin in OpEx?

Bill Betz (CFO)

Yeah, this is Bill. I mean, to think about with the sale is about 100 people. On gross margin, as we said, I think, or shared in the past, is it, it was, below our corporate margins. So I, I mean, not much, maybe 10, 20 basis points improvement related to that, one model. But, it's, it's, you know, those are, those are the colors I can give you on it.

Rafael Sotomayor (President and CEO)

And remember, Gary, that we did go through some corporate restructuring along with this to make room for the new headcount from the Aviva Links, TTTech, and Kinara. So I'd still like to say we made room for the additional headcounts.

Bill Betz (CFO)

Yeah, and also remind you the other reason for divesting this business is we did see headwinds, as we know, the current acquirer, the buyer, actually manufactures the front end, and so we saw this as a great opportunity to prevent headwinds to our gross margin in the future as well.

Gary Mobley (Managing Director and Senior Equity Analyst)

Appreciate it, guys. Thank you.

Rafael Sotomayor (President and CEO)

Mm-hmm.

Operator (participant)

Thank you. Our next question will come from Jim Schneider with Goldman Sachs. Your line's open.

Jim Schneider (Senior Equity Analyst)

Good morning. Thanks for taking my question. You know, relative to everything you said about this year's cadence and being within model and obviously, kind of the inventory situation out there, is there any reason to believe that, you know, if you exclude the divestitures, that automotive and industrial IoT would not be operating sort of at the upper end of your long-term target model for the year?

Jeff Palmer (VP of Investor Relations)

Hey, Jim, it's Jeff again. We're not going to guide 2026. Let me be very clear about that. We've given you guys as much as we're willing to do, but we're not guiding for 2026.

Jim Schneider (Senior Equity Analyst)

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

Bill Betz (CFO)

Yeah, I mean, our capital allocation policy strategy has not changed one bit. We are very comfortable buying back the stock as long as we're below our net leverage ratio of 2x. And I think in Q4, we were at 1.9x. So, there's lots of opportunity with our investments in the long term of the business, along with buybacks, and I hope, into the future, as we expand, we also increase our dividend, as the company performs better. So again, we are doing multiple things, we're very flexible, and we demonstrate that, and we're committed to returning 100% of our excess free cash flow back to our owners.

Jim Schneider (Senior Equity Analyst)

Thank you.

Operator (participant)

Thank you. And our next question comes from Tore Svanberg with Stifel. Your line's open.

Tore Svanberg (Managing Director and Senior Semiconductor Analyst)

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

Rafael Sotomayor (President and CEO)

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

This is how we manage internally, and I think it's better to reflect our business that way.

Tore Svanberg (Managing Director and Senior Semiconductor Analyst)

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

Bill Betz (CFO)

Oh, yeah, I would say majority of the investments, you know, VSMC is ahead of schedule, just purely timing, right? I think it's expected to start ramping in 2027 and then be in full load in 2028. And so majority of our investments will be out in 2026. Now, maybe a little bit into Q1 2027, I don't know, we'll see on the timing of that on the equity side, but I think majority will be out in 2026. ESMC, since that ramp occurs later, think about some payments going out this year, but then there's a still string of payments that go out from 2027 to 2029, which is much smaller in the aggregate. But majority of most of the payments, hopefully, we will be done at the end of 2026.

Tore Svanberg (Managing Director and Senior Semiconductor Analyst)

Very helpful. Thank you.

Operator (participant)

Thank you. And our next question will come from Vijay Rakesh with Mizuho. Your line's open.

Vijay Rakesh (Managing Director)

Yeah, hi, Rafael and Bill. Just a quick question on the auto side. Just wondering, as you look at the software-defined vehicles, and you mentioned a structural pickup there in autos, how are you looking at that auto segment revenue growth versus LVP? Like, should it grow like high single digit above LVP, or how should we look at it?

Jeff Palmer (VP of Investor Relations)

Yeah. Hey, Vijay, it's Jeff. I think for next year, you know, the way our algorithm works is we assumed over a multi-year period that, SAAR would grow in the low single digits. You know, the long-term math for auto was, nine to twelve percent, eight to twelve percent, excuse me. And so if you were to say flattish SAAR, you kind of back that out of that total rate and, you know, take you down. But we still see content per vehicle as the real accelerator of automotive growth.

Vijay Rakesh (Managing Director)

Got it. And then, you know-

Jeff Palmer (VP of Investor Relations)

If I look at LVP, and just maybe kind of give you the one piece that we have. You know, we use S&P as our kind of Bible for SAAR, and they're looking at 2026 at just a little, almost, you know, 93 million, 92.6 million cars in 2026, which is kind of flattish year-on-year from 2025. But when you kind of peel that back, you still see good acceleration of EVs, and good market share gains of the Chinese OEMs. So you kind of use that with the CPV content.

Vijay Rakesh (Managing Director)

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

Jeff Palmer (VP of Investor Relations)

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

Vijay Rakesh (Managing Director)

Got it. Thank you.

Jeff Palmer (VP of Investor Relations)

Thanks, Vijay.

Operator (participant)

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

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

Rafael Sotomayor (President and CEO)

No, we don't see. We don't have the same perspective. As a matter of fact, one of the changes, well, that we see in China, a couple of changes, you mentioned incentives, which tilts the incentive towards more of a high-end of the vehicles. The other change that China has made is that they increase certain regulations to improve the quality and resilience of the vehicles. And I think the both attempts is to reduce the pollution in the market. I think we see both of those initiatives to be good for us. The resilient or quality requirements they're putting in place right now, I think is really going to be a tailwind for us and the headwinds for 2026.

So we see some of the changes actually are good for us, for NXP and the auto and our auto biz as well.

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

Yes, well, so today, our data center rev, revenue sits within the industrial segment, and our exposure is indeed, you mentioned, through processors, to support the data center infrastructure. I think, there will be things like power supplies, net cars, cooling systems, but we also have, our high-performance, products there for control functions and things that they need, probably security, like PQC. We don't break this revenue out separately, but it, it is growing nicely, and it will contribute to industrial momentum of 2026.

Thank you.

Operator (participant)

Thank you. I would now like to turn the call back over to Rafael for closing remarks.

Rafael Sotomayor (President and CEO)

Thank you, everyone, for joining us today and your thoughtful questions. This quarter reaffirms the continuity of our strategy and the durability of our model, focused on profitable growth, disciplined execution, and predictable returns. With clear visibility into our company's specific growth drivers, we're confident in our ability to compound value through 2026 and beyond. Thank you.

Operator (participant)

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