NXP Semiconductors N.V. (NASDAQ:NXPI) 6th Annual Wells Fargo TMT Summit November 30, 2022 1:40 PM ET
CorporateParticipants
Kurt Sievers – President and Chief Executive Officer
Jeff Palmer – Senior Vice President, Investor Relations
ConferenceCall Participants
Gary Mobley – Wells Fargo
Gary Mobley
Well, good morning, everybody or good afternoon if you’re on the East Coast. I appreciate everybody joining us this morning. My name is Gary Mobley. I’m one of the semiconductor analyst here at Wells Fargo Securities. With us today we have the CEO of NXP Semiconductor, Kurt Sievers and Bill Betz was supposed to join us, he is the CFO. In his place, we have the Head of Investor Relations, Jeff Palmer, who many of you may know a very seasoned guy has been in NXP for a number of years. So we’re certainly glad to have both of you up here today.
But to lay the foundation for our discussions that are line of questioning today, Kurt, or Jeff, I was hoping that maybe you can just give us a broad overview of the different product buckets or end market buckets to — then we just double click from there.
Kurt Sievers
Yes. Thanks, Gary. Thanks for having us. And yes, let me start about the macro. Because everybody, I mean, all our meetings, it’s always the first question is, where are you and what does it mean to your sector exposure, et cetera. We use this nice language of dichotomy in our earnings call a few weeks back, and that still really holds. So we do clearly see the weakness and softness in the Android world and in all the consumer business we have, which in our case is actually the IoT business, which is about 40% of our industrial IoT segments.
Weakness means a significant drop in demand. And you’ve also seen how we managed this. We try to avoid by all means to trim the channel. So we stick in a draconian way, I would almost say, to our 1.6 months of distribution inventory, just to be sure that we don’t ship in more than they can sell out.
At the same time and that’s the dichotomy, we do continue to see very, very resilient demands in the automotive and core industrial. Now, core industrial, industrial IoT, that’s all a bit confusing. Another way to look at it is the core industrial is really the business-to-business industrial markets. There the IoT is more than the business to consumer markets, very resilient in core industrial and automotive means, we continue to have demand, which is surpassing our supply capability, which has become better and better and better over all of the past quarters. But we are still sold out with the amount of NCNR orders in automotive and industrial, which we have on the books for next year with very select specific customers, we enter into these relationships.
We also have to face the fact that we continue to be sold out for next year. So we have about 85% supply coverage of demand for next year. And in my view, while the macro might certainly have negative impact on the SAR, we do believe that the fundamental drivers for demand in automotive should stand very strong because that demand has not been driven by the working from home through the pandemic, which I believe was really the driver for the consumer markets and PC markets and mobile markets. But it’s a much more secular trend, which comes from electrification and other content increased trends in automotive.
So what I tried to say is within the semi market, one sector is really not like the other one, because the fundamental drivers for demand were different ones. And in our view, the ones for automotive and pretty similar in core industrial, should stand strong. While of course we stay also very cautious in this environment. I mean, it’s not an environment where you push the pedal, but we just see more signs for actually pretty positive development going forward rather than a drop in automotive.
Gary Mobley
Okay. Appreciate that overview. That sounds very consistent with what you highlighted on your recent earnings call, correct me if I’m wrong, or has there been a change on the margin?
Kurt Sievers
No, no change. I mean, we really, I think this environment and this dichotomy is just the same as it was. So we also today, if you’d asked me, do you see constellations or push-offs in automotive industrial? No, we don’t. That’s the same as a few weeks ago. But at the same time, the softness in IoT and Android also persists. I mean, that hasn’t got better, while the others haven’t got worse.
Gary Mobley
Got it. I went back in preparation for this fireside chat. I went back to your Analyst Day from November of last year. And the quote that stood out to me in review was, 60% of your revenue is generated from markets in which you have a leading market position, maybe for the audience. And to further a discussion you can lay out in which end markets, do you have that leading position in which end markets are you trying to catch up to the challenger?
Kurt Sievers
Yes, Gary. So I’m glad that stick because it is part of the philosophy and the principle, how we run the company. It’s about relative market share. We are big believers in how scale comes to work for margin revenue growth. And we think if we have this relative market share leadership of one and a half or bigger, we are ultimately in a position to out innovate our competitors. I mean, in the end, we all have about the same R&D percentages. But if you have 50% more absolute dollars in revenue, you can spend 50% more R&D dollars in the same space, which should give you then a better roadmap, and that should create more traction going forward. I mean, that’s the underlying principle why we are so obsessed about that.
We have those leadership positions across our segments, I mean, famous examples are, in mobile, we have the mobile wallet, where I think we have a relative market share of eight. So here, it’s really at work, we drive the penetration, that’s an example which is on the far end here. Then you have situations like our radar business, in automotive, where I think we guided to 20% to 25% growth over three years, will be like $1.1 billion, $1.2 billion in 2024. So it’s a sizable part.
Now we are number one, but we don’t have yet a RMS of 1.5. So we are somewhere between 1.0 and 1.5. So I’d say on the expansion path. So more work to do, but I think well underway. And then you also have more embryonic businesses where we just got started. There, we don’t have that leadership yet. And the good example is probably Battery Management in automotive, which really writes the wave of the content increases from electrification. But we all know that ADI after the acquisition of Maxim is actually ahead of us. So we have an RMS, which is less than one, but I think was the dynamic and the momentum we have in design wins, we are also on the way.
So it’s not like the whole company is on 1.5. It is 60%, as you say, it also cannot be because we constantly have to invest in new businesses. And I mean, you can’t start on such a high level. So it’s a machine which is ever evolving. But we believe if we stay in the 60% to 70% level of the total portfolio we have about the right size.
Gary Mobley
Okay. This is certainly not your father’s NXP. What I mean by that is, if you go back in time, 2016 to 2019, the revenue didn’t really grow. But what is clear in the last few years is, you’ve outperformed the growth rate of the market, you laid out at your Analyst Day the idea that you can be an outperformer relative to the rest of the chip industry, what is structurally changed, or is this new paradigm a function of your high automotive end market exposure explicitly?
Kurt Sievers
Yes. Look, I mean, first of all, not my father’s NXP. I’m a proud founding member of NXP. So I was actually part of the company when we did the divestment from Philips back in 2006. And we’ve been architecting this company to have a large exposure to automotive and industrial end markets. I mean, that’s really been something which I would say since 2015, when we did the acquisition of Freescale. The focus has been on that, in the belief that those two sectors automotive and industrial would be the more fast-growing sectors in the semiconductor market. And from anything I’ve seen over the past two years, people very much agree that very likely automotive and industrial will be the two fastest growing sub segments of the semiconductor market through the next 10 years. So one answer to your question is yes, we have the right exposure, which took a while to rearchitect the portfolio and actually get us into the place.
The other one, however, is that clearly between 2016 and 2020, we’ve been just very busy with portfolio changes in M&A. I mean we had the acquisition of Freescale. We had the failed acquisition by Qualcomm. We acquired the connectivity assets from Marvell, and we did divest our standard products business. So when you look at growth over the period, I mean, it’s a bit lumpy because we sold stuff. We were busy with M&A. I think now the company for the past one and a half, two years, is really exercising its muscle, the portfolio is where we wanted it to be. There is stability. So we start to outperform. So it’s not just that we ride a wave of fast growing markets. But I dare to say, and it becomes pretty visible over the past two years, we gain market share. So that growth is not just being on the wave, but actually being ahead of the wave because we grow market share in those core markets.
And I see no reason that would change going forward. So we have this year, and we don’t publish the number but the design win size, which we have achieved this year. Also, given a lot of new customer relationships out of the supply crisis is ever than it has — is higher than it has ever been before. I mean, that’s for us the best proxy for how the growth should go over the next couple of years. So it will continue to be not our father’s NXP. It’s a different one.
Gary Mobley
Thank you.
Jeff Palmer
And I will add to that. The decisions occurred in the management team made back in that 2016-17 period with the merger of Freescale those decisions only yielded benefits in the last few years, right, our business is a long R&D design and then designed to revenue cycle business. In automotive, it takes anywhere from two to three years to go from a design award to you actually seeing revenue. So decisions you made in ’16 and then the revenue associated with it, you’re just starting to get the fruition of that today.
Gary Mobley
Got it. And to be clear for the audience. I believe your long-term revenue growth forecast is 8% to 12% on a blended basis. And then related to that at your Analyst Day specifically on Slide 12, you highlighted an expectation of $15 billion in revenue in fiscal year 24. Now the current consensus view hovers a more modest $14 billion. I know you don’t shape that consensus number have any input on that. But in your view, has anything changed since November of last year, or has the market softness that we’re currently seeing changed that view.
Jeff Palmer
And I think to that specific slide now that I clear, puts into it. Here’s another key point, which is back in 2018. Our accelerated growth drivers were roughly $1.5 billion of the total company. We expect by 2021 that accelerated growth drivers should double to about $3 billion. And from the Analyst Day, we expect that $3 billion to double again, to about $6 billion in 24. And I think we can’t say today that trajectory of the really unique differentiated growth drivers are intact, if not ahead of plan. And that all sits on top of a base of business where we have a high core RMS, Kurt talked about, and those high RMS positions are what allow us to fund some of these newer areas.
Gary Mobley
Okay. Thank you for that guys. Related to the same topic 2022 has unfolded to be a better than expected year. And what has surprised you to the upside relative to when you started the year? Is it ASP tailwinds? Or is it the strength of the automotive end market?
Kurt Sievers
Yes. I think the speed of conversion to electric drive trains in automotive is a surprise. Had you asked me a year ago at the Analyst Day, I would not have forecasted that electric and hybrid electric cars would be I think it’s now 27% of the [indiscernible] this year, it’s going to be 34% next year. So as I say a solid third of the car production is electric. I would not have forecasted that. So that speed is a positive surprise is a big, big tailwind for NXP because we are over indexed to electric cars, which is not just the drive train. I mean, we shouldn’t forget that electric cars have a higher electronic feature content across the board. So it’s not just the drive train, which was more semi. But they also tend to have more ADAS features and more convenience features because the classic — the buyer of an electric car expects more tech in a way.
So that tailwind in the mix of cars is certainly something we have not expected. The second one is indeed pricing. Given that strong demand, we see a more persistent imbalance between supply and demand. By the way, also going into next year, which has led to obviously more pricing power. Unfortunately also more need to exercise pricing power, because cost went up for this year, and I am now very, very busy, we are now negotiating and writing contracts with customers for more price increases next year. So this is going to continue all through next year, because our input cost, unfortunately also continues to go up next year.
So the philosophy which we had applied for the past six, eight quarters of passing on the higher input cost to protect our gross profit percentage, we have to stick to that we will stick to that. I mean, we are not padding margins, but we are fully passing it on. And given the environment given the continuous strong demand and kind of limited supply this — they’ll see a third year. I mean, it’s then the third year in a row of price increases. And that’s a surprise. So admittedly, and, Jeff, you were humble and polite, when you answered the question about the 15 billion forecast for 24. I would actually say when we made that forecast a year ago, it did not really comprehend price increases. We didn’t know I mean, that was really the surprise. We didn’t know that. So in a way that is a tailwind in place, which continues into next year, which is on top of the 8% to 12%, which we have given in the Analyst Day.
Gary Mobley
That’s some great color. Appreciate that. Have you guys gone through the exercise of looking at all your design wins? How many of them are signal sourced? How many of them are you the lead supplier, in an effort to evaluate the stickiness of pricing? So there will be a time in the future when supply and demand in balance? And maybe even supply exceeds demand? And then, maybe you’re seeing that now? So how do you feel about the stickiness broadly across your product portfolio?
Kurt Sievers
Very high. It’s just like, how our portfolio is built. And you saw that through the supply crisis? I mean, I had so many questions, why not? Customers would just walk to a competitor and take a product which is available from somebody else. They couldn’t, because these designs are unique. So I don’t have a percentage for you. But it’s a very high number of our product, which is in signal sourced positions at customers. I think going forward for two reasons, it’s even going to get more sticky. The one is, we tried to build more core industrial business, which I have to learn I mean, that’s I’m not an expert from history in industrial is actually more sticky than automotive has more longevity. So these industrial applications are incredible. I mean, once you’re in, it takes ages to get in. But once you’re in it’s like cemented into the socket. That is something as we forecasted, which will grow 9% to 14%. So on a relative basis for the company, we will have more industrial business, so that makes it more sticky.
Secondly, software. We clearly see that the biggest headache for our customers is actually the cost for software, the lifecycle management of software in a car. The reuse of code, when they go from one model to the next model. And what that in the end means is they are very much locked up to a certain process of choice. So once they have a certain process from say, NXP in that case, and put their code in our system, then it’s very hard to walk away. And it’s not the cost of the hardware, but it’s the software cost which they would face for switching. And since we have significant traction with our process of businesses, I dare to say that that stickiness actually should continue to move up.
Gary Mobley
Got it. Jeff feels like you wanted to add something.
Jeff Palmer
No. I was just going to say that everything Kurt said is correct. I think what maybe investors forget occasionally is the size of our processor business across the whole company. I mean, in automotive processes is the largest part of automotive franchise. It’s the largest part of our industrial and IoT franchise. So I think most people don’t really comprehend that. And we sell many products that are been called other things, but effectively, they’re processors with DSPs and things like that.
Gary Mobley
And that’s a good segue into my next question, which is something from Gartner, they show that 45% of your automotive revenue comes from microcontrollers. No, you’re not going to confirm or deny that but how should we think about your positioning as automotive design wins move away from a common architecture of ECUs and more towards domain and zonal controls. How is this shift a net benefit for you?
Kurt Sievers
So I don’t know exactly which shot you looked at from Gartner, but it’s probably a combination of microcontrollers and microprocessors. And I emphasize that because it’s really important because this is a continuum between technologies which are needed in the future in the car. So it’s about processing. If it’s then strictly speaking, a microcontroller or microprocessor is fading. But it’s important to look at the two together. And indeed, we are the number one player in this — in automotive. It is very decisive for the future, Gary, because all of this concept of the software defined vehicle, which is about these domain structures and zonal structures, stops, and comes and goes with the choice of the microprocessors in the car.
So you are the first to sit on the table for future design decisions. And especially now where the world is really transforming into a world where we do this directly with the car companies with the OEs. This I think becomes decisive. If you only have a portfolio, which is kind of peripheral might be nice products, I mean, we have them too analog mixed signal products. You are the second in row to — they speak to because it’s the architecture choice is made on the processors. And that’s where we have indeed a very strong foothold. We win a lot of business now directly for these rearchitected cars from a structural perspective.
And I mean, I’m very glad about the acquisition we did with Freescale years ago, because that actually propelled us into this position. Now, what we did, however, is we moved it away from power train, I mean, Freescale portfolio was PowerPC based, or classic combustion engine power trains. And now we totally morphed this into leadership for domain computing.
Gary Mobley
And that includes I believe, variants of the S32.
Jeff Palmer
That’s the family name.
Kurt Sievers
That’s the core of it. Correct.
Gary Mobley
And related to that, there’s this perception or perhaps a misperception that you are kind of mid-tier and lower in terms of processing capability. And so from an architectural standpoint, can you address some of the new evolving applications like SL2 Plus Functional Safety domain controllers, with the existing products that you have today?
Kurt Sievers
So the answer is yes. I mean, we are actually for everything, which is vehicle infrastructure, which is not multimedia. We are by far the most advanced, I mean, we ship big volume now in 16 nanometer chips, which is pretty advanced. And the biggest — single biggest design win we made this year is in five nanometers, which is a monster design within automotive, which is about a vehicle computer, it’s one central computer for all of the vehicle infrastructure applications in the car. So it’s actually the most advanced thing I can think of. And by the way, it’s not going to be a one chip thing, it’s actually one board, which holds several of those five nanometer chips. So it’s a pretty massive ASP impact.
But you still need to hold continuum, because cars at the same time continue to have also say more mid performance processes. But the triggers to offer the customers and this is this S32 platform, software compatibility between them. Because customers want to be flexible, they want to be able to scale up and down in performance and horizontally between different applications.
So I think the fact that we have this very leading-edge stuff and 16, 28 and 40 nanometer solutions, that is actually what makes us most successful, if you only have the flagship, it’s not good enough, because it’s like a point solution in the car, you need the complete set. I have to say, however, there are elements which we don’t do. So we have no ambition at this stage to do level four or level five, self-drive computers. First of all, honestly, I believe this is far out from being on the road. Secondly, there is other people who have more matching computers to do this. I mean, that’s just not our cup of tea.
And the same holds for the very high-end multimedia in the e-cockpit. There is also other companies who do this, but everything which is the vehicle infrastructure, which is the lion’s share of processing dollars in the car, I think we are really in the lead. So if the perception you started with does exist, then we have to work hard just to get over it because it’s just wrong.
Jeff Palmer
Well, I think I’d add to that, Kurt. The perception from some of those folks who maybe can do very high and fusion processing or come from the smartphone marketplace. They would like you to believe that the car the future is an iPhone on wheels or a mobile phone on wheels. There is no partner that we work with who has that vision. The cars are much more complicated multi-dimensional. There’s a lot more infrastructure there that goes on. And yes, there is multimedia parts that are interesting. There are the fusion processor that will fuse radar processing signals and camera processing signals. But there’s no one we know who’s going to build a mobile phone on wheels.
Gary Mobley
Appreciate that. For the other half of your automotive revenue that isn’t processor, what are you most excited about? Is it radar evolving into imaging radar? Is it in car networking? Is the battery management systems? Is it ultra-wideband or all the above?
Kurt Sievers
They are all exciting, but from the most material one is clearly radar. I think I said earlier, it’s growing from 600 million to 1.1 billion. I dare to say we are ahead of the curve. I mean momentum is fantastic. And it still feels like it’s the early days of the penetration. It’s this 3-leg penetration, there is more cars which will have radar per se, more radar nodes per car. And as you say, features like imaging radar, which is pushing the envelope from a performance perspective up means a higher silicon value per node. So we have actually three levers for higher value, which is very valid work. By the way, this is another child of — you talked about fathers before I talk about children now, it’s another child of the combination of Freescale NXP. NXP used to have spearheading the industry, the CMOS capability to integrate 77 gigahertz high frequency radar in CMOS. There, Freescale had the leadership in radar processing, so that the baseband, if you will. And we put this quickly together, which gave us actually this massive leadership position we have now.
So I think this is the one outside of the microcomputers having the biggest impact into the revenue growth of NXP and automotive. Now if you probably take the years after 24, I think BMS there’ll be no short of this. Because also massive momentum it just today, it’s still a little smaller, but I mean over a few years, it’s going to come into the same — into the same size. And there was more which we have in the kitchen, which we will talk about when time is ripe.
So I think in electrification, I started to talk about inverter control, and there is more to come. So I mean, our electrification footprint in the end is going to be much bigger than only BMS. So lots of things to be excited ultra-wideband is typical automotive it’s kind of slow, not slower than we thought, but it just takes time because firstly, it needed the mobile phone. So it needed the Android and iOS adoption of ultra-wideband because you don’t want to have a car where then you have to find a mobile phone to open it.
I mean, the idea is the mobile phone you have should just work with your car. So now the penetration of ultra-wideband in mobile is actually — it starts to be in a good place. All of the automotive engagements using ultra-wideband, which I am aware of are NXP exclusively 100% There is two cars which are out in the streets which use that feature already, which I think I can also speak about one is the BMW IX, which is this flagship electric SUV from BMW. And the other one is a Hyundai Genesis SUV — electric SUV, which have fully enabled ultra-wideband access and other features which you can do with ultra-wideband. It goes beyond access.
Many, many more in the pipeline. But as always in automotive, it’s going to take a few years until all of these models will come out. So I’m excited. But I think I will be more excited in the few years down the road because then then I can speak about all of these cars.
Gary Mobley
Thanks. And in the last few minutes. I want to ask about your commitment to the mobile market. Clearly you have a well-established market position in NFC and the secure element attached to that. And then, you have some other I guess, custom solutions. So I realize it’s a big market, but it’s not a growth market. And so from an R&D perspective, what is your commitment level to this?
Kurt Sievers
Well, we clearly are not and don’t want to be a mobile company. We have a focus on where through extreme relative market share leadership, we can push content, but I’m not that dependent on units. The mobile wallet is probably the best example. We still have miles to go from a tax rate perspective. I think it was end of last year 50%. We hit the 50% Admittedly Gary over the past six quarters, the supply constraints actually lead to de-featuring of mobile wallet because we simply couldn’t ship. We didn’t have the product. So mobile phone companies had to de-feature, which is a massive step.
Now that’s going to come back once supply works out again. And there is a next wave of ultra-wideband. So we are going to build on that same concept of a secure element and middleware, but with a different radio, which has an ultra-wideband. So this is complementary to NFC. So it’s not replacing it, but comes on top of it for essentially, the idea is you will likely move your credit card into the phone. We want to move your keys into the phone. So wherever you use today, mechanical keys, we want to enable mobile phones to do the job in a more secure and more convenient way. That is probably the main focus in mobile. So it’s a very, it’s a laser sharp focus, not abroad mobile play.
Question-and-Answer Session
Q – Gary Mobley
Gary Mobley
Okay. I wish we had more time, but we don’t. So Jeff and Kurt and everybody in the room, and online, I appreciate you joining us today. Thank you all.
Kurt Sievers
Great. Thanks, Gary.
Jeff Palmer
Thank you, Gary.
Kurt Sievers
Thank you, everyone.
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