François-Xavier Bouvigney from UBS. I'm the head of the European Tech Hardware and Semiconductor team at UBS. So thank you all for joining. So we are very happy to have NXP and, of course, Rafael, the CEO of NXP, joining just on time. Perfect. Thanks, Rafael. Bill, CFO, and Jeff, head of IR. So just a reminder, NXP is a top three semiconductor auto semis in the world. So that's very, you know, good to have your insight, especially on the automotive side, but you have a lot of opportunities in industrial that we will discuss, of course, as well. But in any way, a leading global semiconductor analog company in the world. So thank you for being with us.
So let me start maybe, Rafael, with the first question, or Bill, actually, one of you. On the short term, so if you look at the next quarter, which is something that you just guided, you guide it for revenues up 4% quarter-on-quarter in Q4. Seasonality is flat to up, so you are above seasonal, which is kind of better than most of your peers that are more in line, and some are even below. I won't name anybody. But, can you explain maybe the drivers of this outperformance?
Yeah.
You know, why you are standing out here?
Yeah. Let me take that one. And, so yeah, indeed, we're, we're guiding 4% sequential growth, which is above seasonality, typical seasonality. And, if you look at the drivers, they're mostly, company-specific drivers. Mobile is growing, put that one aside. We're guiding industrial 10% up sequentially, and that is, driven by the tailwinds that we had early on energy storage and building automation. These are starting to ship. We also have early contributions now of Edge AI with wearables and some smart devices actually starting to ship as well. So these are kind of company-specific drivers in industrial, strong kind of industrial recovery there. In auto, I think auto, you can see resilience in auto, despite all the noise that we hear in the market.
The company-specific growth drivers in SDV and radar and electrification continues to perform. And so the content growth for NXP continues to kind of be there in auto. And at least, I guess, normalization of inventory, right? I mean, we're starting to ship now finally to end demand. So all these three things are contributing to a better, you know, Q4 guide.
Mm-hmm. Maybe Bill, where do you see the inventories now in the channel, you know, and on the direct one as well? So on both sides, you know, in other words, what I'm asking you is like, where do you think we are in the cycle right now?
Related to the cycle, I would say it's very early innings. We've been consistent there. The signals that we see quarter in, quarter out, continue to improve regarding our distributions backlog, our backlog improvements. I think the sell-through is very healthy. As Rafael mentioned during the earnings call, we targeted to be either 9 or 10, and that's a function of what sell-through does. And, I think sometime in 2026, related directly to the channel itself, we should be back to that 11 weeks. And the way we look at that is consistent year-over-year growth. And I think what we guided, we turned back into the model, plus 6%, for NXP in Q4. We signaled Q1 of growth year-over-year, again, back into our financial model.
So we're feeling pretty good to make sure that we have the inventory in place to service our customers, especially in those fast-turning parts, from a channel perspective. I'll let Rafael comment on the direct side.
Mm-hmm. And I think what is standing out when you speak to many of your peers in the industry, that there is still a lack of visibility still. I mean, we all sit on the companies that sit on a lot of inventories on their balance sheet. Your customers, they know that. So I guess the lead times are quite short still, but still, you are still very com- optimistic versus your peers. So it's why I'm challenging you a little bit as to where is it coming from, if, you know, we have no visibility. So it's very interesting to hear from you.
Yeah. I mean, the short-term cycle orders continue to improve quarter in, quarter out. Since Q1, we see customer escalations increase across the portfolio, and we see short-term orders improve across, specifically, with our growth drivers, our company-specific growth drivers. They are all intact, to that, you know, I think we said 15%-25% across the board, depending on one of the five. They're all intact, and we'll share what those results are in, at the end of, the year, like we usually do. But it. We're seeing, you know, with the inventory digestion behind us, as Rafael said in his opening remarks, we feel pretty confident at this point in time based on the signals and the data trends we see across the board, and they continue to improve.
So sorry, you just take back, right? And the reason we are optimistic, right, is if you look at the dynamics behind our business. We mentioned channel inventory right now.
Mm-hmm.
We manage channel inventory. We managed it differently in the downturn, and we're managing it very carefully right now. So we believe that we have a nice setup right now and from a channel inventory perspective, at 9 weeks, growing to 10, potentially to finally 11, right? So we have control of that channel inventory. Second piece is our growth drivers. You know, these are company-specific growth drivers, whether it's SDV, whether it's radar, whether it's some of the edge compute and the industrial, they're actually quite performing and performing well. And the last one is, we talked a little bit about normalization of inventory and that in the direct customers in auto. That normalization is happening, right? That digestion of inventory, I think, is behind us. And what's gonna happen now is that we're gonna start shipping to end demand.
We're gonna start having visibility now, and shipping to end demand is already very good for the industry. It's very good for NXP and auto. And so when you look at these three things combined, that provides a really robust momentum towards the end of the year and going into 2026. And so that, that's what it really captures, the optimism that we have in NXP oving into next year.
Makes sense. Maybe if I move, it's a good transition for my question on 2026 as a whole, you know. We talked about, you know, more short-term Q1, but you mentioned that content as an important driver. If you look at 2026 right now, what are the main content drivers for NXP that you think will help? You know, you can maybe some design wins, you know, ADAS components, infotainment, electrification, BMS. I mean, you can name a few drivers, key drivers that you see for 2026, for NXP.
Yes, the really important design wins, both in auto and industrial, those design wins have been captured already, right? So now we're entering this phase in 2026 and 2027 with these products now starting to launch. I mean, the move to SDV in auto is undeniable. It's the better way to make a car. It's just the future of the vehicle. And so the way we are positioned at NXP with our portfolio, both for zonal and central compute, is quite unique and probably unparalleled in the industry. ADAS adoption, driving a lot of radar or radar sensors for us, and that, you know, NXP being the leader in radar, we get benefit from not only more nodes per car, but also more complexity of radar nodes per car.
Then I guess the cognification of everything industrial is driving a high performance compute. We see low-end MCUs now transitioning into, you know, heterogeneous compute architectures, which drive our i.MX, you know, portfolio, which is industry leader in industrial processors. And so we get benefit from that cognification of the industrial space, which brings connectivity, we bring security, and so we also have an attach rate story that is very compelling.
Yeah, maybe if I can just add some colors of the size of the buckets that Rafael just talked about. The SDV, our company-specific group, system solution, you know, that business was only $500 million in 2021. It doubled to $1 billion in 2024, and we're gonna double it again in 2027 to $2 billion. The radar business, again, was just shy of $900 million in 2024, and that's expected to be over $1.3 billion in 2027. Related to electrification, that surpassed the $500 million mark in 2024, and will probably be just shy of $900 million. And again, as I mentioned, these are all intact four quarters in to our twelve-quarter journey. And then lastly, which is our newest one, is connectivity. And connectivity was only about $100 million in 2021.
It went to $400 million in 2024, and we're expected to be above $700 million in 2027 on the company-specific growth drivers, specifically for auto. Industrial IoT relate to processing, connectivity, security. I'd say that the growth drivers there were about $600 million in 2024, and we're on track with the design wins and the ramps that Rafael just talked about, to double that to $1.2 billion in 2027. So we feel very confident on the company-specific drivers, which will drive the growth of the company and deliver to our financial targets as we go ahead.
Very clear. Thank you for all these, details. Gross margin, Bill, I guess it's for you, this one, because obviously top line is an important driver, but gross margin is, is also key. And I have to say again, you have been standing out on the gross margin side in this down cycle. Of course, you are, you're much less volatility, very steady gross margin. As we come out of this down cycle, as you seems to, allude to, how should we think about, your gross margin? Do you think you have a lot of operating leverage, you know, in line, with this, you know, top line, story, and what are the drivers?
Thank you, François. I think if you think about 57, 63% is our model. We got into model in Q3 after a first, you know, slow start on the top line in the first half of 2025. We guided Q4 at 57.5. We expect 2026 to be back into model for the full year. The short-term drivers, the way to think about it, is our internal utilizations, as you know, they were in the mid-70s. They're now going to the high 70s. There is leverage when we bring them into the mid-80s, so that's a, that will be a benefit, just from... And as well as with their $200 million consolidation, we just started that. Phase one, we announced, will carry about 6 or 7 extra days at the end of the year. But we'll have...
That, that's a journey, right? That's probably a 6-9-year journey on our consolidation efforts, which will trigger benefits into the gross margin for NXP. Other areas is, you know, typically Q1, we have the low single-digit price gives, but we offset those through productivity improvements throughout the year. So those two kind of wash. I would say, and then you have more of the company-specific growth drivers, and typically the mix can play a role in any given color. But we feel very comfortable of delivering that 60% mark at $15 billion. Again, the rule of thumb for modeling purposes that we provided, think about every $1 billion worth of revenue at 100 basis points, and that incorporates all these puts and takes that we manage quarter in and quarter out.
Thanks, Leo. Rafael, on the China side, I wanted to ask you, obviously, it's a very important topic in the industry. We all see China trying to localize as much as possible. It's a threat potentially to share, but also pricing, you know, the economics in that region. Can you remind us, you know, first, what is your percentage of China business right now? How much was the growth maybe, or is the growth in 2025 or in China? And, what do you see for the China business in the short term and medium term for you?
So China, I do confirm China is an important market for NXP. We, I think Q4, sorry, Q3, our ship to revenue in China was, you know, mid-30, like I say, high 30s, so 38 or so. And the way you think about that revenue, about half of that is for Chinese OEMs, Chinese indigenous companies, you know, headquarter companies, and half of them is for, you know, multinational for re-export. So about half of that revenue is China, for China. And China is a competitive market in all aspects, right? It is in auto, they're extremely competitive among, you know, among each other. I think in industrial, they're very competitive. And then when you look at indigenous Chinese semiconductor companies, we see emergence now, companies doing IVI, infotainment products, ADAS.
We see catalog analog low cost showing up. We see low-end MCUs coming into either auto or industrial in some places. And these are areas where NXP has either little exposure or we decide to compete in highly differentiated segments of those categories. Our positioning in China is very specific to the vehicle core architecture of the car. That's where, you know, kind of, where we decided that we are going to create our differentiation through innovation, through time to market, is making sure the OEMs in China have a safety anchor with processing from NXP. And so that's our differentiation, right? The vehicle core architecture that requires, you know, a lot of IP and functional safety. Requires a lot of IP and security, isolation, redundancy, and so these products are quite unique.
The way we address China right now, we don't fight for sockets. We fight for architectures, 'cause that's the way we actually add end-to-end value with our, you know, central compute architectures and products and our zonal architectures. That's our playbook in China, innovation and speed. In many ways, I think the way we see China, we embrace the competition in China in many ways, because, you know, for us, it's more of a fitness center right now, especially in EVs, that's a fitness center. So if you're able to deliver innovation to win in China, you know, that kind of really strengthens your ability to compete everywhere else.
Mm-hmm. Is EV very important for you in China?
Well, what is important for us is SDV. It just happens that EV is the lion's share of the production in China. But SDV, this is where we tie our kind of strategy in automotive, is independent of the powertrain.
Mm-hmm.
Right? It could be EV, it could be hybrids, it could be ICE, and SDV is the secular trend that we really tie most of our innovation and most of our products that we ship in auto.
Mm-hmm. So, what was your growth in China in 2025, or what is your current, you know, performance there?
You're talking about profitability, gross margin?
More, more on the top line, actually.
In the top line, it's in the-
About a third, it's about a third of the business, François.
Growing this year?
Yes, it has been growing, yes.
Yeah, yeah.
Yeah.
You expect to grow as well in 2026, I would imagine.
Absolutely.
Indeed. I think, China has actually been one of the bright spots for NXP. Right?
Yep. Maybe moving to more long term. I mean, NXP targets $16 billion in 2027. You mentioned a bit the building blocks, build, so that's a 6%-10% revenue CAGR. But based on 2025 numbers, if I take the consensus and your guidance, actually, midpoint
Yeah
it implies a 14% CAGR 2025-2027. So you have actually, it's a guidance that is more hockey stick for the reason that we know. Are you still very confident? I mean, is there any risk to this, to this guidance? You know, because obviously it's a, it's a bit of a hockey stick right now, so just want to check with you on that.
So, I acknowledge, François, the math, especially, you know, when you start with, with, you know, kind of a slow 2025. But the reason we, I mean, I'll say we remain committed to what we said in our analyst day in 2024. And the reason we remain confident, even though I'm not gonna comment, I'm not gonna guide 2026, so I'm not gonna comment on the linearity between now and the 2027. The reason we remain confident is because the growth drivers are intact. They're not only intact, I think they're getting strength. The move to SDV is getting strength. The move to more autonomous driving and the pull for more sensors is getting stronger.
I think the push for AI at the edge, whether it's auto or industrial, it's continuous, right? And more connectivity, more security. And so I think the drivers on our S32 platform, on our radar, on our i.MX, our connectivity and auto continues to be intact. And not only that, they're performing today, they're performing very well. And I think you heard from Bill, the trajectory we have on those growth drivers. We're also operating in 2025 for most of the year in a trough period. So now we are kind of going back into normalization, and so we're gonna enter, at a minimum, a period of normalization inventory, where we're gonna start shipping to end demand, and that already is gonna be very good, and not even counting restocking for that.
And so I think when you put it together, I think we remain committed, normalization, the growth drivers that we have with the for the company, that is what keeps us confident that we remain committed to actually achieving the targets that we set forth.
Makes sense. Thank you, Rafael. Bill, on the gross margin side, I forgot to ask you about the China business. We talked about the top line drivers, but is it, you know, accretive, the, the China business or group average? I mean, how is the profitability in China?
Yeah, we don't break out the profitability of the gross margin, but as we said, generally, with our end segments, the gross margins are all kind of similar in the same zip code. We've improved that over the years through our disciplined approach of getting out of low margin business or through the R&D investments we make through the hurdle rates to drive future gross margin for the company as we go forward.
Thank you. Rafael, I mean, you did not recently join NXP, but as CEO, it's recently new. So maybe can you tell us about your experience? What's your strategy as a CEO? Now, you have been few months, you know, into the job. Do you want to do something differently, you know, anything you could bring to the company as a fresh ideas?
I've been at the company since 2014, and so I was intimately involved in crafting the strategy for NXP with Kurt and with the rest of the management team, with Bill. And so you should not expect kind of a hard turn left on the strategy, right? What you should expect is an acceleration of the execution of it. I think we have one of the things that probably is kind of lost is we have a massive opportunity, you know, with these complex devices and systems at the edge, to move from component to more of a system architect and co-creation of systems with our customers. And so we have this massive opportunity to actually become much more intimate with our customers. And my goal is to actually go and accelerate that.
I mean, if you look at the products that we have in processing and connectivity and AI and some of the acquisitions that we've done on to actually fill the gaps that we have to complete the system, look at TTTech Auto for middleware for SDV, the gaps that we fill with Aviva Links to kind of create high-speed links for both industrial and auto. And then Kinara on AI, we're starting to fill the gaps that complete the system from a technical perspective. So I'm quite excited to just go and accelerate our vision of bringing intelligent systems to the edge in auto and industrial, and that's what we're focused on.
Okay. And when you say accelerating, you have been through, you did two M&As recently.
Mm-hmm.
Is it what you mean by accelerating, or is there anything concretely that you mean by accelerating, like R&D, you know, CapEx or more M&A coming, just to get more ideas on that?
Well, I mean, there, there's a lot of layers. Let's just go into the M&A that we just completed. Three acquisitions happened. We're not only integrating these teams, we're also integrating their technology. We've been integrating the portfolio. We're bringing them into the rest of the NXP portfolio, validating, integrating, and then delivering these to either auto customers or to the long tail and the channel for industrial. So we are going to really augment the portfolio with the acquisition of these companies, and we just need to make sure they're seamless for our customers. Culturally, you know, internally, we are focusing on agility. I mean, we talk about being competitive in China.
I believe that speed is going to be a new parameter, a new variable in industrial and auto, and it's not just going to be a China factor. And so I think adopting a, a more agile culture is gonna be also part of, part of, of what I'm focused on.
Mm-hmm. And maybe moving more to the longer term on the gross margin side, Bill, I mean, 57%-63% target for 2027, which is a very nice target to have. Now, if you think about more longer term for the company, can you go into this, you know, high 60s, mid-60s, you know, at some point? And what would be the, I mean-
We're not stopping at 60% because, again, if you think about our longer term play in the gross margin, there's two fundamental foundational shifts that we focus on. One is the portfolio and how we manage our R&D and continue to move up the stack, the value we provide to our customers, and that's a hurdle rate. So today's hurdle rate is around 60%, and so all new R&D has to produce products 3 or 4 years from now at those type of rates or above, and so that gets layered on. The other shift is the hybrid manufacturing strategy. We've talked about this for the last couple of years. We're super excited with our joint venture of VSMC coming on board in 2027.
We believe it'll be fully ramped in 2028, which will add an incremental 200 basis points to our gross margin, wherever our gross margin is in 2027. So we're excited about those levers. Obviously, there's much more, and we'll probably share more about that in our 2027 Investor Day, François. But I feel very comfortable with gross margins hitting 60 at that $15 billion mark, and then going beyond 60, as we continue to grow the business and execute to it.
It's a good teaser. For your divestments, you know, strategies, I mean, obviously, you have been very agile as well in the way you run the business in terms of divesting, so business that you believe are not, you know, fitting anymore, your targets. So is this still the case today? You feel like you have some portfolios that you might adjust?
Yes, I mean, this is nothing new. I think NXP has a track record of reviewing the portfolio on an annual basis. We kind of do it on a quarterly, on a performance standpoint, but annually, we go through our strategic reviews. We're not shy of stopping or getting out of certain businesses. We've demonstrated that in the past, and as you know, François, over the summer, we announced the divestment of our sensor business to one of our peers. And that works out very well for us. It also works out very well for our peer. The main purpose of selling this business is the fact that it was, you know, slightly below the corporate margins. It only grew 2% or 3% for us.
And we saw a gross margin headwind challenge with this business, because guess who manufactures those front-end wafers for us? It's that peer. And so it made sense at this time, where it's better off in somebody else's hands, and they can do more with that business. So it was a win-win, I would say. But we constantly look at the portfolio. If there's opportunities to prune, we will, or to divest other parts of the business, absolutely. But really think about that divestment of $950 million helped fund the higher profitability businesses that we just acquired for about $1.1-$1.2 billion of TTTech Auto, Aviva Links and Kinara. So we like that trade-off.
Mm-hmm. And, you know, you mentioned about accelerating the business, Rafael mentioned it. Is there any impact on the capital allocation, you know, that, NXP might have? Maybe you can remind the capital allocation policy and how you think about that.
I think, you know, the capital allocation strategy inside NXP is very sound. For the last 10 years, I think we returned close to above $20 billion in the form of dividends and buybacks to our owners. We're gonna continue to do that. I think we share that from now until 2027, we'll add another $8 billion or $9 billion to that level of returns. The way to think about it is, we'll return all excess free cash flow, so think about 100% of free cash flow back to the owners. Clearly, we still have some investments that will go out in 2026, linked to our joint venture with Vanguard, called VSMC.
But once we get past that, I hope to be able to even get more money back to our owners through the form of both dividends and buybacks. But the way to think about, very simple, we manage this through our net debt leverage ratio. As long as this is at two or below, we are actively buying back the stock.
Thank you. Rafael, maybe a very important topic is AI. Many of your peers start talking about data centers, AI traction. You know, can you maybe lay out the opportunities there, there, you know, for NXP, data centers, AI more specifically, and how do you intend to capture some growth there?
Yeah. First of all, I wanna be specific in the way we address AI, because I think NXP, we see, you know, we play in systems. Oh, what's happening in the market right now is everything is getting software defined. So let's start with that. So our play is at the edge, both in auto and industrial. So everything is getting software defined, and that creates the foundation of what comes next with the next frontier, which everything is AI defined.
Mm-hmm.
This next phase, you see all the investments that are happening on AI at the cloud. The true transformation is when all this phenomenal IP, these great models, move to the edge, and they really transform our everyday devices, and they will transform, really impact the way we work and we play. That playbook of bringing AI to the edge has not been written yet, and so this is where we intend to play. And our roadmap is focused on bringing that intelligence to the edge, because AI at the edge is application specific, resource constrained, fit for purpose, and that's where NXP actually does very well, bringing complex technology and deploying it to the masses and in the channel. You will see a portfolio that is going to be unique and unparalleled with the competition.
Great. Thank you. We're running out of time. And thank you all for listening, and thank you for being with us today.
Thank you, François.