Q4 2023 Summary
Published Jan 10, 2025, 5:10 PM UTC- NXP has managed inventory effectively, maintaining tight control over distribution channels since mid-2022, which has allowed the company to avoid overstock issues faced by peers and positions it to capitalize on cyclical improvements as they materialize.
- NXP's consumer-oriented segments, including Industrial & IoT and Mobile, have already experienced their trough in Q1 2023 and are expected to continue growing throughout 2024, contributing positively to overall revenue.
- Despite industry headwinds, NXP expects to maintain strong gross margins (~58%), driven by effective cost management, favorable product mix, and the potential for increased utilization, underpinning strong profitability.
- NXP expects revenue in the first half of 2024 to decline versus the first half of 2023, due to longer-than-anticipated inventory digestion at direct automotive customers and a deteriorating macro environment.
- The Automotive and Core Industrial segments are undergoing a multi-quarter inventory correction, which will continue through the first half of 2024, affecting revenues in key markets.
- Revenue from the Communication Infrastructure & Other business is expected to decline in 2024 compared to 2023, indicating ongoing weakness in this segment.
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Inventory Normalization Plans
Q: What's the plan for excess inventory normalization?
A: NXP intends to maintain channel inventory levels at 1.5 to 1.6 months in Q1 2024, with no plans to increase general inventory. Replenishment will begin only when market momentum justifies it, and there's no guarantee of reaching the 2.5 months long-term target by year-end. Excess inventory at direct customers, mainly in Automotive, is expected to normalize by mid-2024, transitioning from under-shipping to shipping to end demand in the second half of the year. -
2024 Growth Outlook
Q: How do you see growth shaping up for 2024?
A: NXP anticipates flat to slightly positive revenue growth for 2024. Consumer-oriented businesses, such as IoT and Mobile, have moved past their trough and are expected to grow throughout the year. However, the Comms Infrastructure & Other segment is projected to decline year-over-year. The turning point for Automotive and Core Industrial is expected around mid-2024, after excess inventory is digested, leading to stronger performance in the second half. -
Automotive Under-shipping
Q: Can you quantify your under-shipping in Automotive?
A: In 2023, NXP's Automotive revenue grew by 9%, with pricing increasing by 8%, implying nearly 0% supply growth in units. This contrasts with a 9% increase in global car production and a 45% year-over-year growth in electric vehicles. This significant under-shipment reflects efforts to control oversupply, and NXP expects to normalize inventory levels by mid-2024. -
Gross Margin Resilience
Q: How are you maintaining gross margins despite headwinds?
A: NXP expects a gross margin of 58% for fiscal 2024, down only 50 basis points from the prior year. This resilience is due to managing distribution mix, maintaining utilization rates in the low 70% range, and focusing on productivity gains. Potential tailwinds include higher revenues, improved utilization, and expanding distribution reach, which are expected to offset headwinds like lower pricing and underutilization. -
Industrial Trends vs. Peers
Q: Why are your industrial trends outperforming peers?
A: The contrast stems from NXP's early action in controlling channel inventory starting in Q2 2022, maintaining levels at 1.5 to 1.6 months. While peers are now correcting overshipment and experiencing significant declines, NXP's disciplined approach has led to a gradual improvement and steadier performance in its Industrial & IoT segment. -
Pricing and Input Costs
Q: How are input costs affecting pricing trends?
A: Pricing for 2024 is expected to remain flat, primarily driven by stable input costs. While some input costs like electricity and silicon wafers are decreasing, Tier 1 foundries, which supply the majority of NXP's inputs for Automotive and Core Industrial, have not significantly reduced costs. Over the mid to long term, NXP anticipates a return to low single-digit annual ASP erosion, but does not expect prices to regress to pre-COVID levels. -
Demand vs. Inventory Impact
Q: Is weakening demand or excess inventory a bigger issue?
A: Both factors contribute, but the more significant impact is from better understanding the remaining excess inventory with Tier 1 Automotive customers. End demand in Automotive has weakened slightly, with SAAR down almost 1% year-over-year and slowing growth in electric vehicle penetration. NXP is working to reduce excess inventory through the first half of 2024. -
Recovery in IoT and Industrial
Q: How are IoT and Core Industrial segments recovering?
A: The IoT segment, about 40% of Industrial & IoT, has gradually improved since bottoming out in Q1 2023, particularly in China. It is still below peak levels but continues to recover. Core Industrial, however, is facing over-inventory and end market weakness, making its recovery more akin to the Automotive segment. -
Lead Times and Pricing Relationship
Q: Have normalized lead times impacted pricing?
A: Lead times have returned to pre-COVID norms, enhancing visibility and reducing the need for measures like non-cancelable, non-returnable orders. However, there's no direct correlation between normalized lead times and pricing. Flat pricing for 2024 is mainly a result of stable input costs rather than changes in lead times. -
Capital Allocation Strategy
Q: Will share repurchases increase after debt repayment?
A: NXP's capital allocation policy remains unchanged, focusing on returning 100% of free cash flow to shareholders over time. The company has returned $8.8 billion or 113% over the past three years. While recent repurchases have been below 100%, funds have been allocated to debt reduction to deleverage the company, which is considered a good use of cash. NXP will continue to balance dividends, buybacks, debt repayment, and small acquisitions.