Good day, and welcome to the Q1 2021 NXP Semiconductors Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. Q1. I would now like to turn the conference over to your host, Mr.
Jeff Palmer from NXP.
Thank you, Renz, and good morning, everyone. Welcome to the NXP Semiconductors' Q1 2021 earnings call. With me on the call today is Curt Sievers, NXP's President and CEO and Peter Kelly, 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 include and 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 continued impact of the COVID-nineteen pandemic on our business, 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 Q2 2021. Please be reminded that NXP undertakes no obligation to revise or update publicly any forward looking statements. Events and 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 and our Q1 2021 earnings press release, which will be furnished to the SEC on Form 8 ks and is available on NXP's website in the Investor Relations nxp.com.
Now I'd like
to turn the call over to Kurt. Kurt, it's your call.
Yes. Thanks very, very much, Jeff, and good morning, everyone. We really appreciate you joining our call today. Today, I will review our quarter one results and discuss our guidance for Q2. Furthermore, I will provide an updated perspective on how we view the current supply demand environment, including the recovery of our 2 Austin based facilities, which were hit by the severe winter storm in February.
And additionally, I will discuss our efforts for sustainability. Now let me get started with quarter Our results were better than the midpoint of our guidance with the contribution from the industrial infrastructure end markets both stronger than planned. At the same time, trends in the mobile and auto markets were generally in line with our expectations, with automotive being just slightly impacted by the severe winter storms in Texas. Taken together, NXP delivered quarter 1 revenue of $2,570,000,000 an increase of 27% year over year and $17,000,000 above the midpoint of our guidance range. Non GAAP operating margin in Q1 was a strong 30.9%, 600 basis points better than the year ago period and about 50 basis points above the midpoint of guidance, driven both by improved mix and additional revenue.
Now let me turn to the specific trends in our Focus end markets. In automotive, quarter 1 revenue was $1,230,000,000 up 24% versus the year ago period and about $13,000,000 below our guidance. In Industrial and IoT, our quarter 1 revenue was 571,000,000 2% versus the year ago period and about $13,000,000 better than our guidance. In mobile, 46% year over year. And lastly, in Communication Infrastructure and Other, Quarter 1 revenue was $421,000,000 up 4% year on year and about $17,000,000 better than our guidance.
Now let me move to our outlook. We are guiding quarter 2 revenue at $2,570,000,000 up about 40% versus the Q2 of 2020, within a range of up 38% to up 45% year over year. And from a sequential perspective, this is about flat at the midpoint versus the prior quarter. At the midpoint, we anticipate the following trends in our business. Automotive is expected to be up in the upper 80% range versus quarter 2 2020 and up in the low single digits versus quarter 1 2020 Industrial and IoT is expected to be up in the low 30% range year over year and flat versus quarter 2021.
Mobile is expected to be up in the mid-thirty percent range and flat versus quarter 1 2021. Finally, communication infrastructure and other is expected to be down in the low teens percent range versus the same period a year ago and down in the mid single digit range on a As I had shared with you on our last earnings call, as many of our customers started to resume full production during Q3 of 20 20. We were faced with the challenge to balance a very accelerated rate of customer orders versus a very tight, if not sold out, wafer supply situation. While our foundry We will continue through quarter 2, and our current expectation is we will face a tight supply environment for at least the remainder of 2021. We would also note that in the medium term, we have seen a significant increase in demand for our products, which is very consistent with our anticipated content gains and our design wins.
In that very context, it is really insightful to compare to the pre pandemic levels of 2019. When we look at total current revenue levels in 2019. We actually plan to ship nearly 20% more in the first half of twenty twenty one versus first And more specifically, in automotive, We plan to ship at least 20% more in the first half of twenty twenty one versus the first half And this is why IHS suggests a drop of 10% in Against these trends, we continue to have low channel and low on hand inventory, which we do not anticipate rebuilding this year. Our customers are responding by placing long lived, non cancelable and non returnable order requests. And we are making long term strategic supply commitments to our partners in order to assure fuel supply.
Against this challenging supply environment, we also had the very unfortunate unexpected winter storms in Austin. And I am today that our 2 wafer facilities in Austin are now fully back on And I would like to commend our manufacturing, our operations and our facility teams for their superb effort and dedication to getting these two facilities back online in record time. Truly a job Very well done. Notwithstanding the managing supply environment or the natural disasters we faced, our guidance clearly validate the underlying long term growth and profitability of our business. We acknowledge it has been a long process to deliver on our committed gross margin target.
The next objective will be to demonstrate full year performance at the 55% gross margin target. And furthermore, on a positive note of submission. NXP was added to the S and P 500 index, which is a strong validation of a lot of hard work show. Now before I pass the call over to Peter, I would like to take a minute and discuss our sustainability efforts, an area to which NXP has a long demonstrated history of commitment. At a more personal level, I do believe sustainability is a very important journey we all need to embrace and stake.
And it's not just the finite destination. At NXP, we are dedicated to our long term sustainability goals, which Our employees, our customers, our suppliers and investors all believe are of the utmost importance. All our stakeholders are paying and to how we attempt to lessen the impact our company has on our environment. And hence, we just recently published Our annual corporate sustainability report and our annual proxy statement, both of which set forth the progress we have highlight, starting with social responsibility. We have made clear Our commitment to workplace diversity, equality and inclusion.
In order to ensure our working environment provides Equal Access and Opportunity. We appointed a Head of Diversity, Equality and Inclusion reporting directly to me and to our Executive Vice President of Human Resources. We are dedicated to creating an inclusive and diverse work environment where NXP appropriately mirrors the Society and Communities in which we operate. We have an ongoing commitment to improve and refine our corporate governance. In 2020, we have enhanced our human capital management disclosures, which expanded and detailed workforce demographics.
We are committed to improving gender diversity throughout the organization, but especially within the company's leadership teams. Now turning to environmental impact. In 2020, we met our 7% water recycling rate and we purchased 27% of our electricity from renewable led by our factory in Nijmegen, which is running 100% on renewable energy. Finally and certainly not least, our employees. We definitely believe our Employees are the lifeblood of innovation and to spirit at NXP.
We are dedicated to building a highly engaged workforce who will continuously push We measure this annually through a global employee survey called the winning culture survey. That survey looks at multiple early indicators of long term employee engagement. It includes factors as employee views on company strategy, innovation, execution and leadership as well as culture, collaboration and a supportive work environment. And I'm proud to say that in 2020, we had a 90 plus percent global Based on our customer conversations and order rates, it appears NXP is in the early stages of a longer term company specific growth cycle. Our employees are highly engaged to drive our success.
We have a robust pipeline of new Innovative Products and Customer Response Engagement Design win Momentum all underpin our optimism about the future NXP. I'm extremely proud of all our employees, but today I would like to especially comment our manufacturing, Our operations and customer facing teams for their relentless focus and energy on assuring our customer success. Their dedication and hard work in the face of a very challenging supply environment truly make a big difference. And now I would like to pass the call to Peter for a review of our financial performance. Peter?
Thank you, Kurt, and good morning to everyone on today's call. As Kurt has already covered the drivers of the revenue Performance was very good. Revenue was above the midpoint of our guidance range and we drove an improvement of both non GAAP Moving to the details of the Q1. Total revenue was $2,570,000,000 40 basis points year on year and above the high end of our guidance. Total non GAAP operating expenses were $600,000,000 of $55,000,000 year on year and up $37,000,000 from the 4th quarter.
This was $10,000,000 above the midpoint of guidance due to increased variable compensation driven by an improved first half performance. From a total operating profit perspective, non GAAP operating profit was $792,000,000 Our non GAAP operating margin was 30.9 percent, up 600 basis points year on year and was at the Ongoing operations were $40,000,000 and non controlling interest was $11,000,000 Taken together, dollars 13,000,000 Now I'd like to turn to the changes in our cash and debt. Our total debt at the end of the 4th quarter was 7.6 1,000,000,000 essentially flat versus the 4th quarter. Our ending cash position was $1,840,000,000 The resulting net debt was $5,770,000,000 and we exited the quarter with a trailing 12 month adjusted EBITDA of 3 €900,000,000 Our ratio of net debt to trailing 12 month adjusted EBITDA was at the end of quarter 1 was 1 point And our 12 month adjusted EBITDA interest coverage was 8.6x. Our liquidity is excellent, and our balance sheet continues to be very strong.
During the Q1, we paid $105,000,000 in cash dividends And repurchased $905,000,000 of our shares for a total of $1,000,000,000 of capital return to and continues to be significantly below our long term target of 95 days. We continue to closely distribution channel with inventory in the channel at 1.6 months, flat sequentially and below our long term target. Both metrics reflect the continuation of strong customer order rates and we continue to be in a supply constrained position. It will take several quarters before we are able to rebuild on hand and channel inventories to our long term target levels. Days receivable were 30 days, up 2 days sequentially, and days payable was 79 days, an increase of 4 days versus the prior quarter as we continue to increase material orders to our suppliers.
Taken together, our cash conversion cycle was collections and positioning for customer deliveries in future periods. Cash flow from operations was $732,000,000 and net CapEx was Turning to our expectations for the Q2. As Kurt mentioned, we anticipate Q2 revenue to be about 2.57 dollars plus or minus about $70,000,000 At the midpoint, this is up 41% year on year and flat sequentially. We expect non GAAP gross profit to be about 55.5 percent, plus or minus 30 basis points. Operating expenses are expected to be about 6 $23,000,000 plus or minus about $10,000,000 And taken together, we see non GAAP operating margin to be about 31.3 cash tax related to ongoing operations to be about $55,000,000 Non controlling interest will be about $9,000,000 And for the Q2, we suggest For modeling purposes, we use an average share count of 283,000,000 shares.
Finally, I have a few closing comments I'd like to make. Firstly, demand trends continue to be strong across our targeted markets and customer interest in Our newest products continues to be robust. We are diligently working with our customers and our suppliers to address order Our second quarter guidance reflects the clear potential of our business model, both in terms of revenue growth as well as the significant fall through, which will enable us to drive our non GAAP gross margin target to the 55% level. With the new United States administration in place, the potential increase for sorry, thirdly, with the new U. S.
Administration in place, the will likely be 9% versus the previously indicated 10%. Fourthly, as we've said in the past, Our capital return policy is to return all excess free cash flow to our owners. During the Q1, the Board approved a $2,000,000,000 buyback authorization as well as a 50% increase in our quarterly cash dividend. During the quarter, we returned $1,000,000,000 to shareholders, and we will continue to execute And notwithstanding the supply constraints, we believe the second half of twenty twenty one will Turn it back to the operator for any questions you might have.
Thank you, sir.
We'll poll for questions.
Thank you, Our first question is from the line of C. J. Muse. Your line is now open.
Yeah, Good morning, good afternoon. Thank you for taking the question. I guess, Kurt, intrigued by your commentary around being in the early stages of long term growth cycle For NXP and I think we all all of us on the call understand the growth drivers behind the story, but would love to hear What's changed in your view, say, in the last 3 months? And if
you could walk through that, that would be great. Yes, many thanks, C. J. Yes, absolutely. So we do see us just being at the beginning of a longer term growth I think in that respect, I also tried to clarify that we do see the second half of the year growing again over the first half of this year.
What has changed over the last 3 months is that the demand environment has not only continued to be strong, but I would say we started to understand better and better some of the sustainable drivers of the demand environment. Now with us being 50% exposed to the automotive end market, this is clearly one place where We do understand now how content increases are contributing significantly to this very, very robust demand environment, where we absolutely see no reason why that should ease off or should go away. So What I try to say here is that our understanding of the demand environment has become better and deeper. And with that, We better believe in it. Also totally ruling out double ordering and any of these possible fears of piling inventories at any place.
So in our key segments, And I can say that very explicitly for automotive, for industrial, but also for mobile. We do know and we do see that what we ship out is immediately being built into product and no inventory is being built at any place.
It's very helpful. If I could follow-up, Peter, Obviously, reaching 55 plus percent is The great thing, but the next question is always what have you done for me lately. So curious, does the model hold true going forward Every 5% increase in revenues, you get 100 bps uptick in gross margins or how should we be thinking about the trajectory from here?
No, I wouldn't think of it that way. In 2019 In 2020, we were continually struggling on utilization, and we were trying to use that kind I will have to explain what might happen as we go to full utilization. The good news now is we always said around 2.4%, we could run 55%. So we're a little bit above that 2 55.5 percent. We're pretty much now internally Kind of at the high end of our utilization.
So I feel pretty good about the gross margin numbers where we are. You'll see in our CapEx number. And for the full year, we'll probably do about 7% CapEx this year. We need to start adding We are adding capacity, particularly in the back ends, to cope with the Revenue we're seeing. And also over the last year or 2, we've seen the amount of product we buy externally move up from the kind Low 50s to the high 50s percent.
So I think from a gross margin perspective, I'd say, clearly, the challenge at the moment is to demonstrate that we can consistently run a 55%, which We feel very, very comfortable about. And then over the next few years, the things that will move us up to 57 and not so much Not so much revenue. They're more about the new product introductions and improving the cost performance of our
Very helpful. Thank you.
Thank you. Our next question is from the line of Ross Seymore. Your line is now open.
Good morning, guys. Thanks for letting me ask a question and congrats on the strong results. Peter, I want to dive into the gross margin a little bit more tactically in the near term. You just discuss what drove the upside in the Q1 and the Q2? 2nd quarter is especially impressive considering It appears that the mix between segments isn't really contributing significantly.
So just a little bit of color on how you beat since then raised in the quarter and guide.
Yes. So in the Q1, the biggest move, Ross, was mix. We shipped proportionally less Auto and more coming for an IoT. And to be honest, dollars 10,000,000 gives you 40 basis points or 50 basis points of margin. So we're not talking about huge numbers.
And As you're going from Q1 to Q2, it's really all about utilization. So We're not only able to run, obviously, not Austin, but our other fabs full out. But Also, we're getting really great utilization now in our back end. So there's always a few small things moving in different directions. I'd say Q1, it was about utilization that helped us beat sorry, Q1 was about mix, which helped us beat the guidance.
But Q1 to Q2 is really about utilization. And that's now that we've been able to optimize is maybe the wrong word, but certainly utilize things a Better. That's what gives me confidence on our gross margin going forward really.
I guess as my follow-up one for Kurt, you talked about the confidence in the demand, the lack of double ordering second half over first half. I guess if I narrowed it down to your automotive business, historically we've had a typical delta of content above SAAR. And it sounds like you're confident That delta is actually expanding. So I guess really what's changed there? You have pretty long design cycles in that sort of business.
And so it's a little surprising to me that you would have something that would arise that in the short term that would increase your ability to outgrow SAAR as rapidly as you appear to do right now. So I guess just a little more color on what gives you that confidence would be helpful.
Yes. Thanks, Ross. It is actually not that much all of a sudden, as you would portray it Because we've seen this already building through the last year, but obviously, it's been all snowed under by the especially in the first half in the factories. But if you think about content increases, and that's why I made the comparison 2019, which was more of a normal year, if you will. Then actually, over that period of time, It doesn't look that crazy at all.
So that's one statement. But there is 2 more so it's not all But it's really been gradually building already over the period of the last 4 to 6 quarters, but very much disrupted By COVID. Now there is 2 more things which are really important here. The one is, yes, I do believe That especially the electric vehicle production rates are increasing faster than anticipated, which I believe makes it a content richer story than probably the initial forecast would have suggested. So The penetration of electric drivetrains is going faster, especially now this year than it was forecasted.
Thirdly, and I think actually most Importantly, we are now bearing fruit from all of the design wins in the focus areas we've been working So what I'm saying is, Ross, that some of this is clearly company specific. If I look at our growth rates in Our focus businesses like radar, ADAS, battery management, the digital clusters, then it becomes very obvious that those are Really pulling ahead the growth. So there is an underlying stronger momentum on content gains, but I I think a good part of this is also company specific, meaning share gains for NXP.
Thank you.
Thank you. Our next question is from the line of Vivek Arya. Please go ahead.
Thanks for taking my question. I had 2 as well. Just one more on gross margin. I'm curious, Peter, what role is pricing playing, if any, in your gross margin? And if let's say your Q3 and Q4 sales are above your Q2 sales, of your Q2 sales.
Then all else being equal, can gross margins also exceed 55% in each of those two quarters?
In terms The pricing is having no impact whatsoever, Vivek. We said on our last call that although some suppliers We're being very tactical and trying to take advantage of the situation. That was not our strategy. We said we We'll definitely pass on any cost increases that we have, and we're able to do that. But we have no intention of Trying to improve our profitability through gouging our customers.
And there's certainly no Anything even remotely like that in Q1 or Q2. In terms of the second half, as I said before to Ross, Gross margin from here is not really driven by additional Revenue, yes, could there be some small impacts? Yes, sure. I think I'd say 2 things. One is I have a strong confidence that The level of profitability the level of gross margin we are at the moment.
So I think that's a good thing. And I think as we go forward, our focus has to be on how we bring out our new products New versions of our existing products to improve our profitability. But I think after all of the debate over the past few years of whether we could really run it at 55, I think that's most definitely behind us.
Got it. And for my Follow-up, Kurt. I'm curious how much of the unfulfilled demand that you are seeing this year can To extend on the cycle into 2022, so for example, when I look at your automotive And I think you have mentioned that given what the auto industry went through in this cycle, right, they might do things differently. So I was hoping you could Talk about what they can do differently that helps to extend your demand cycle and visibility. And then outside of autos, when When I look at your deficit on the distribution side, right, that's still close to, I think, 0.8 months, right, so usually 2.4 months, It's 1.6 months right now.
So when can that be addressed? And is it possible that it doesn't get addressed till next year? So overall, Just how do you conceptually think about the cycle extending into next year? Thank you.
Yes. That's a great question. Let me answer to both elements, Birak. Let me take the latter one, the disty one first. So yes, we indeed stayed At the record low 1.6 months in the Q1, just like we did in Q4.
And yes, I mean, If you would just do some chainsaw math, just bring that back to a more normal level of 2.4 months, which we historically have, It's probably like $400,000,000 But no, I don't anticipate this that we reach that level I just think the sell through is so strong that we don't get it up from a supply perspective to back to that level. And that also gives you an indication for the very strong pull here, which is really a which is sell through. I mean, if we shipped more into distribution now, inventory wouldn't go up, but it would be actually selling through right away. On the automotive side, Yes. That's I think this is indeed a significant discussion, but also exploration which we are having across the industry.
First of all, I'd say most of our products, if not all in automotive, are non commodity product. So it is indeed a matter of fact that The demand, it just doesn't go away. I mean, if anything, then it shifted because possibly a car here or there cannot be built. And with that, it moves then into the next quarter or eventually into next year, as you say. At the same time, we are working Very, very diligently, both with our customers, which is the Tier 1s, but also directly with the car companies On very prudently understanding the future demand patterns.
I think one of the biggest learnings out of this current situation is to build much more transparency about the content increases, which are often application and module specific and how they map out over not just the 2 quarters, which is far too short for us knowing that we have a manufacturing cycle time of 1 to 2 quarters, but actually more over the 8 to 16 quarters in order to understand how that's going to map out. So that work is underway and I can Certainly say we do this with all of the top 10 car OEMs in the world. At the same time, we also work, of course, very hard with our suppliers, with our mainly wafer suppliers, but also back end extensions as Peter has mentioned, In order to quickly ramp up our supply capability at the same time, and I mean, part of this is the reason why I said earlier That already in the second half of this year, we will ship at higher revenue levels than we are doing in the first half. So some of that demand obviously It doesn't have to move into next year, but we are satisfying it already in the second half of this year.
But yes, it's a long term it's really a long term Sorry, a lot of learning out of this situation. But at the bottom of it, and I think that's most important, a more and more diligent understanding of a very robust demand environment.
Thank you.
Our next question is from the line of Stacy Rasgon. Please go ahead.
Hi, guys. Thanks for taking my questions. So my first question, I wanted to ask you about the channel inventory situation I wanted to drill in. I know you said that you're confident that nothing you're shipping across your core markets, auto, but also industrial and mobile, you think nothing is going on the shelf, Everything's
going into an end product.
Especially in industrial and mobile, how do you know that it's not going on the shelf And going into an end product instead. What gives you that level of confidence? I think in auto, I kind of get it, but in industrial and mobile, How would you know that your customers are not sticking the stuff on the shelf?
It's really the direct customer exposure, which we have there. You would probably say, yes, But how can you have that through distribution? I mean in mobile, you know that the number of mobile end customers Isn't that big. So I mean there is a very direct and very specific contact. So we exactly know how much they need our product Because they would love to have more, I can tell you.
I mean, this is a direct chain. In the industrial space, It is arguably a much larger customer base, which is behind distribution. But also there, there are Some big customers, who are in very direct and very frequent contact also with me personally, And I know about their demand and build situation. So it's really based on a very personal exposure, I would almost say. What gives me and the team, it's not just about me, but all of our leaders here in NXP, that direct exposure to know that the product is directly flashing through.
Got it. Thank you. For my follow-up, I wanted to drill into a little bit your comment on, I guess, the auto trajectory. You said it's up like 20% in the first half of twenty twenty one versus the first half 2019 even with units down, with end units down. Can you give us some view for how much of that 20% increase is actually content versus just an increase like like for like in
That's actually hard to say. So what I was saying is indeed that we will have at least 20%. If you look at the guidance in the Q1 results, you will find it's at least 20% growth over the first half of twenty nineteen. But if you think about the content, be sure to include that this is 2 years of content increase. I mean, last year, clearly, the car production was very much down, but that doesn't mean that the content was coming to a stop Because the content was driven by models which were to be introduced anyway, maybe at lower build rates.
So if you compare the 2019 to 2021, it is 2 years stack up from a content increase perspective. And I'd say a 10% content increase per year It's maybe realistic before price adjustments and that gives you already a 20% difference over those 2 years.
Got it. So I guess it's fair to say like for like, like you don't think it's a good thing. It sounds like it's mostly from content. Is that the
right way to characterize it? I would certainly say that because the car reduction itself is down by 10%, if I believe IHS. And if you look at Q1 numbers then, the build rates in the first half of this year are probably almost 10% lower than they were in the first half of twenty nineteen. So it must be content and share gains.
Got it. Thank you.
Thank you. Our next question is from the line of John Pitzer. Please go ahead.
Good morning, guys. Thanks for letting me ask the questions. Congratulations on the strong result. Kurt, my first set of questions is just around kind of get a little bit more detail around the Austin shutdown and reopening. You talked last quarter about it being about $100,000,000 impact to Q2.
Is that exactly what you saw? And I'd be more curious at the Time had happened, it was hard to figure out if there were incremental costs that bled into the model because of Austin. Were there any? And do you expect to recoup them visavisbusiness insurance as the year unfolds.
Yes, so let me speak about let me take the revenue side first, Tom. So, 1st of all, I really have to say clearly that was an extremely unfortunate An unexpected event, both for NXP, of course, in the first place, but in consequence also for our customers because the supply interruption as Consequence of this in that current environment is clearly not something anybody would have wished to have. Now to frame it, All of this did happen on February 15, so mid of February. I think we released our press release on March 11 that we had resumed initial operations. And I can tell you that about 8 to 9 weeks after the fact, so after Feb 15, We have been fully up and running in both facilities again.
So by now, both factories are 100% running again at the pre which is great news and a great achievement in a very, very challenging and difficult situation. Yes, we had talked about $100,000,000 impact on the revenues in Q2. I would still say, John, this is the impact which we have on Q2. Now you see that we guided sequentially flat. So obviously, we found other ways and means in other areas with other products to make up for that loss from the factory shutdown.
Furthermore, we had a tiny little bit of impact already at the very end of the Q1 in automotive. I said this earlier that a little bit it's really more like maybe in the $10,000,000 range was already impacting the very end of Q1 from a shipment perspective in automotive. I would further say that we are absolutely confident that the $100,000,000 will be made up in the second So again, while we made it up in the second while we will make it up in the second quarter with other products, we will make up those 100,000,000 which we lost in the first place in the second half of the year because the factories are running again and will be shipping full out. Now Peter, maybe you pick up the part of the question which was related to the cost impact.
So the good news, John, is our ops team had started closing down the factories before The Texas authorities just with almost no notice shut off the power. So we did not have any fundamental damage to the factory. So obviously, burst water pipes and that kind of thing with a cold. We have insurance to essentially cover everything. So the only real impact to our cost was the deductible, Which is 1,000,000 of dollars rather than tens of 1,000,000 of dollars.
So from a cost perspective, Doesn't really have any measurable impact.
That's really helpful. And then Kurt, as my follow-up, I really liked the way that you Compared first half of this year to first half of twenty nineteen because it helps to kind of take out some of the variability around sort of the cycle and especially for us that are trying to figure out how much of your growth is coming from cycle versus product specific, It's a good comp. But I guess to that point, when I look at sort of your long term growth rate target that you have out there Of 5% to 7%. That 2019% to 2021% compare would sort of argue a 12% growth rate trend line at At least over that 2 year period. And I don't want to steal thunder from your next Analyst Day.
But when you look at the breadth of company specific drivers out there. How do you think about that 5% to 7% growth rate historically or in the target model versus the 12
That you've seen since 2019.
Well, John, as you rightfully said, I mean, we're going to update that model with our next Capital Markets Day. So at this point, we cannot and will not give a new long term guidance and the only one which we The 5% to 7%. However, I clearly said earlier that some of the content drivers are in good shape. Certainly, in automotive with the stronger rate of electric vehicles, with some of the trends which we have in mobile, We spoke a lot about ultra wideband kicking in earlier. Things seem to look robust.
But let's also not forget, John, that if you think about 2018, 2019, 2020, all three years were really not great years from a market So it's always a bit tempting to take just 2 years, which looked in very good. So we will have to look at this from a more longer term perspective again. But clearly, I do agree with you. What matters for NXP should be increasingly the company specific drivers from those focus areas where our really strong portfolio, which we've been building over years with organically and inorganically, which is now playing out very nicely. Thank you.
Thank you. Our next question is from the line of William Stine. Please go ahead.
Great. Thanks for taking my questions. First, Kurt or Peter, I wonder if there's product area or end market in which your ability to deliver lags the greatest versus demand? It sounds like It's in the channel. I assume that's IoT and industrial and certainly automotive as well.
Is it concentrated in those 2, is it specific products or sub end markets within those or is it more broad? Any color there would be helpful. And then I could
do a follow-up. Yes, Bill. I would actually say it's quite broad. So because it is in technology or capacity buckets, Which also in some cases touched several markets. So no, we couldn't say it's specific to automotive or specific to distribution end markets.
I would just say that certainly automotive is For maybe good reasons, catching a lot of headlines, given the big impact it has on from a value leverage to complete cars, which might be impacted. But I said earlier that in large industrial applications, There is also shortages across the industry. So no, it is not something which is sharply only in automotive or only in distribution markets.
Thanks for that. And maybe I'd like
to hit on the capacity additions. So second half revenue greater than first half, part of I wonder if that's sort of incremental yields across the board or if there's anything more sort of step function from a capacity perspective that we should sensitize ourselves to coming online later this year?
Yes. Well, it's really 3 elements. The first one you mentioned, of course, we have the €100,000,000 catch up from the factory closures, which we had earlier in Q1. It is also front end and back end capacity. On the front end side, our foundry partners, and I mean they've been Quite loud about this publicly that they are increasing either allocations for fundamental capacity and yields, Which also benefits NXP.
So we are seeing increases here from a foundry supply perspective To NXP. And at the same time also within NXP, and Peter talked about the 7% this year on We are expanding our balance capacity as hard as we can. I mean, whatever we can do in the short time is being done. And so these moves, so the 100,000,000 From the close factories, the better wafer supply from the batteries and higher throughput through our own back end and assembly It is all helping to increase the Q3 and Q4 revenue levels.
Great. Thank you. Thank you. Our next question is from the line of Blayne Curtis. Your line is now open.
Hey, thanks for taking my question.
Kurt, two questions. The $100,000,000 just to John's question, if the initial impact in March was in auto, is that Where you primarily saw the OEM you missed was in the auto channel. And then just in terms of the oil change, you talked about catching up on your supply would take Throughout the year and it sounds like your own inventory is probably well into next year. Just some comments on the auto OEMs. When do you think that market We'll catch up.
Yes. So first on the $100,000,000 Blaine, We will not decompose. The auto impact was earliest because the supply chain was dry already Why it happened? I mean, that's more of the reasoning why it hit auto first. There is one other area which is also being Which is our comms infra business.
And that's also the reason why our and you saw this in the guidance, Our Q2 in the Comms infra world is sequentially down. Just the direct impact from their dependence on the oil sector. That's a temporary thing, which we'll leave behind us after Q2. The auto OEMs, I really can't answer that question, Blaine, because We still don't have that long term transparency I talked about earlier on the demand side. I can absolutely tell you that the supply is increasing.
It does increase already in the second quarter, but it also increases Further in the 3rd Q4, but it's always a function of what does the demand. I would carefully say, I don't think it is completely year and it will still continue somewhat into next year. How long, I don't know. But I don't see this being totally eased off by the end
of this year. Thanks, Kurt.
Thank you. Our next question is from the line of Chris Caso. Please go ahead.
Yes, thank you. Good morning. I guess, the question is getting a little more clarity on the capacity additions. I mean, it sounds like certainly there's some capacity coming on both internally at the foundries in the second half of this year. There's more come on in the beginning of next year as well.
And the follow on to that, You talked about the fact that you didn't think your customers would be able to replenish inventory until we can say that By the end of the year, you think you will be fully meeting your customer demand with the capacity additions in place, perhaps a little more capacity comes next year, which allows you to catch up on inventories. Is that way to think about
it. Yes, Chris. So this is I mean, this is constantly on the work, on the very hard work. So since this whole situation started, say, towards the end of last year, we are working super hard on all levers to increase capacity. And I just mentioned a few of them earlier.
So yes, it is going to continue into next year from a capacity increase perspective, absolutely. Peter talked about just give you one other number. We by now, we saw a lot of firm commitments with long term supply from our suppliers. So as I said, we are Collecting and getting requests for non cancelable and non returnable orders, long term orders from our customers. And we enter into the same commitments in order fuel supply for next year with our suppliers.
And there is already more than $1,000,000,000 out there, firmly committed. And that is going to help indeed increase supplies into and over next year. But it doesn't stop there, Chris. I mean, It's not like a one time thing. It's constant work, and we keep moving it up.
With that, I think from a timing perspective, Jeff, we probably have to get to the end of this session, right?
Correct, Kurt. That was probably our last question. Would you like to provide some closing remarks, Kurt.
Yes. Thanks much. So thank you all for Being on the call today, so I trust we could paint a clear perspective on how we see this very continued and very rapid rebound in Across all of our end markets. We are glad that we brought our Austin factories back online and are Clear that half two revenue is going to be above half 1, and this is not just a factor of the $100,000,000 catch up from the closed factories. Actually, the smallest part in this.
And we are very confident that we can continue to drive consistent growth with improved profitability levels and with that enhance our free cash flow going forward. I thank you very much for your attention And speak to you next time. Thank you.
Thank you everybody for your interest and that will be the
end of the call today.