NXP Semiconductors N.V. (NASDAQ:NXPI) Goldman Sachs 2022 Communacopia + Technology Conference September 12, 2022 2:30 PM ET
Company Participants
Bill Betz – Chief Financial Officer
Jeff Palmer – Senior Vice President-Investor Relations
Conference Call Participants
Toshiya Hari – Goldman Sachs
Toshiya Hari
All right. Great. We’d like to get started. My name is Toshiya Hari. I cover the semiconductor and semi-cap corporate space at Goldman Sachs. Thank you all for coming. Very pleased, very honored, very excited to have the team from NXP with us this morning still, I think. Bill Betz, CFO; and we have Jeff Palmer, SVP of Investor Relations. I will try to make this as interactive as possible. So to the extent you all have questions, please raise your hand.
First of all, Bill and Jeff, thank you so much for coming.
Bill Betz
Thanks.
Jeff Palmer
Thank you.
Question-and-Answer Session
Q – Toshiya Hari
Really appreciate it. Before we go into some of the longer-term questions, I was hoping to get an update on the near term. It’s been a little over a month since you reported earnings and gave guidance for Q3 and spoke to the environment. Any changes that you picked up in terms of customer activity, procurement patterns, their plans on building inventory? The macro is clearly very dynamic. We heard you guys last week, and you sounded fine. But curious if anything has changed?
Jeff Palmer
No. I would say no change since earnings. I think the only thing maybe to clarify last weekly were at a conference, and our CEO is talking about the macro environment in Europe. And some folks misheard or maybe read into it, but he was trying to make a comment about the macro environment affecting our business in Europe, and that’s not the case. So just kind of making cognizant statement there.
Toshiya Hari
Right. I did get that question from a couple of people. Really no change in terms of how you’re thinking about that geography. It’s what your customers are doing.
Jeff Palmer
Correct.
Toshiya Hari
Got it. In terms of supply constraints, you talked about your expectation to stay supply constrained for a meaningful amount of time through 2022 and perhaps into 2023. I think you’ve said you expect to address 80% of your backlog today.
Jeff Palmer
What we said on the earnings call, maybe just try to recap, Toshiya. We said that going into earnings a couple of weeks back, we basically derisked our backlog. And so we have questions from people who say, so what do you mean by derisking your backlog? And first and foremost, it’s more art than science. And so what did we do? We looked at those things where we kind of parsed between maybe over-optimism of our customers versus what we think the market can support, set that delta aside. We firmly believe that customers in tough times to supply double order. We just — we believe that.
And there are certain tells in ordering patterns that you can say, okay, this looks like a double order versus a true need, set that aside.
And then lastly, every company has stale or older line items in their backlog sit — are we really going to ship that, set that aside. And when we go through that process and turn that crank you end up with a derisked backlog. When we compare that derisked backlog to our confirmed supply from our suppliers, we do see a delta. And right now today, supply can only address about 80% of that derisked backlog.
Toshiya Hari
Got it. Okay. And I guess, the constraints on the supply side, is that purely foundry wafer supply? Or is it advanced packaging? Is it primarily foundry?
Jeff Palmer
Third-party. As you know, 60% of our revenue is sourced by third-party foundries, and our sweet spot of process technologies tends to be in that 28-, 40-, 55-, 90-nanometer in the foundry marketplace, and that’s still very, very tight for what we build.
Toshiya Hari
Right. Right. And based on the conversations you’re having with those suppliers, that 80% number, how does that progress over the next year or two? Do we get to 90%, 100% pretty soon or pretty…?
Jeff Palmer
Yes. Supply, as we said, will continue to get incrementally better every quarter, but there’s no like discontinuity moment where supply becomes flushed and we flush out all demand. We don’t see that in the intermediate term.
Toshiya Hari
Got it. Got it. Okay. In terms of NCNR orders, non-cancelable, non-rescheduled orders, just for context, what percentage of your backlog today is based on NCNRs? How has that progressed over time during the pandemic? And I think Kurt talked about the mix changing, industrial growing or something along those lines last week, maybe if you can kind of speak to that, that would be helpful.
Jeff Palmer
So maybe kind of talk about the profile of our NCNR backlog program. So it is primarily our large direct customers, so we really don’t take NCNR orders through our distribution channel. There really are no mobile customers who are in the NCNR program. It’s primarily Auto and Industrial. Industrial continues to be shorter for us versus auto right now in terms of demand versus supply. I would say that our NCNR backlog book is far in excess of our long-term commitments to our suppliers.
Bill Betz
Yes. The other thing I’ll add to Jeff to say is the way we look at NCNR is are only going out 12 months at a time. So we just kicked off in June 2023, and I think during earnings call, we said it was a similar size of this past year. Recently, it just surpassed the size. So both our Auto and Industrial NCNRs are larger in 2023 versus 2022.
Jeff Palmer
And most of the customers who participated in ’22 have come back in for the program in ’23. There’s a good consistency there.
Toshiya Hari
Okay. And despite it being called NCNRs, I think you guys have been pretty pragmatic in terms of talking about the potential response or reaction to the extent a customer were to come to you and say, hey, demand has changed. Can you kind of walk us through what that process looks like? If a customer comes to and says, our outlook for ’23 is now 10% lower. How does that go?
Bill Betz
Sure. So you have to remember about a couple of years ago, prove a couple of hundred thousand dollars’ worth of long-term purchase obligations. And so that starts to increase as we went after incremental supply with our foundry partners. And when we did that, we always made sure that they were supported by NCNR at all times. And as Jeff mentioned, the NCNRs and what we said in the past are actually greater than the amount of our long-term purchase obligations that were sitting at $3.94 billion. And you have to think about that $3.94 billion is just not one year’s worth, it’s over five, six years.
So it’s — and when you look at that, it’s not really that much. Every time we get that incremental supply, we have to make sure it supported and well supported with NCNR, and the CNRs are quite sizable compared to what that incremental supply we need.
So gradually, we continue to work it, as Jeff mentioned earlier, gradual supply each quarter. Backlog up here, we derisk to here, and we continue to go work and find how we can eventually match that. We don’t see that equilibrium point happening anytime in 2022. Don’t know if it happens in ’23 or not, all depends on the demand environment.
Toshiya Hari
And the enforceability of NCNRs?
Bill Betz
No issues whatsoever. This year, as you can imagine, we had some in mobile. But again, next year, as we look at NCNRs, they don’t want them in mobile. So we’re able to get that off the industrial. And again, like we mentioned, industrial plus auto is larger than what we did this year in NCNRs. The request, obviously, we can’t supply them all.
Toshiya Hari
Okay. Got it. On pricing, many of us who follow the semiconductor industry for an extended period of time, we’ve been trained to expect low single, mid-single-digit price declines pretty much every year, obviously, pluses and minuses depending on the cycle and depending on the macro. Pricing for your business and for the industry broadly has been very healthy the past 12 to 24 months and expect it to stay so into 2023. As you think about the sustainability of pricing, what are your thoughts? What are the customer conversations like across the different segments?
Bill Betz
Yes, I’ll take that, and maybe, Jeff, you can chime in. Across the board, as we, like most companies, have higher input costs, we’ve been passing along those higher input costs to our customers to maintain our margin levels, not to over-earn. We see our partners — external partners continue to pass higher cost to us. And so we do see this happening for the rest of 2022 as well as 2023.
If you recall, in 2021, we grew by about 28% revenue, and pricing was only in the low single digits. This year, we expect it to be larger, and we’ll reconcile it at the end of the year related to pricing. And if at some point, when equilibrium is met, we believe perhaps pricing could go back to the low single-digit reduction, but happening at a much higher base. It’s not going to reset where it went back, where it was.
Toshiya Hari
Got it. And that’s pretty consistent across different segments of your business, nothing idiosyncratic about automotive or industrial…?
Bill Betz
No, it’s pretty consistent because, again, the workhorse of our technology nodes that we are going to ramp for the next 10 years are in between 16 nanometers, all the way up to 90 nanometers. This is all from our foundry partners. It’s all variable in nature as well.
Toshiya Hari
The other question that we’re getting increasingly is sort of the capacity ramp that’s going on at TI and is likely to continue into the first half of ’23, I realize you guys don’t necessarily overlap well. But I’m asking the question since we get a ton of those, of these from investors. How concerned should we be about overall industry supply/demand going into imbalance given some of the capacity additions?
Jeff Palmer
I think fundamentally, we don’t think there’s been enough investment in the process nodes that we use and utilize, right? It’s also not just any form of, let’s say, 28-nanometer has to be maybe 28-nanometer for auto qualified, right? So TI has been an outlier of the IDMs other than Intel, making large investments in their internal capacity. We really don’t compete with TI that much, right? And so I would say it’s probably a non-event, but we’ll watch it.
And remember, our business is not a pricing-based business. I mean, we don’t win business based on who’s the cheapest part. It’s really do you have the right solution for your customer? And so the worry for sure is that TI could show up with a massive amount of supply and that, that would change the pricing dynamic in the marketplace. Well, if you’re competing on price Sure. But if you’re competing on technology and delivering a solution, it has less of an impact.
Toshiya Hari
Shifting gears a little bit. I want to ask about your growth drivers in automotive. Your Analyst Day, I forget when it was, but…
Jeff Palmer
November of last year.
Toshiya Hari
November last year. It’s all blur. You spoke to a 9% to 14% growth rate for the Automotive business through 2024. You guys talked about RADAR, you talked about EVs, you talked about zonal processors and so on and so forth. Can you remind us or break down that 9% to 14% growth rate…?
Jeff Palmer
You want to take it?
Bill Betz
Sure. So the 9% to 14% is across both Auto and Industrial, all the way our compound annual growth rate out to 2024. And a way to think about this business for the next 3 years, the business is all-ready won, right? The investments we make really make an impact post 2024. So what is embedded in that 9% to 14%. It did not assume SAAR going from 80 million units to 95 million. It only assumes low single-digit growth on units. That’s the first tailwind.
The second tailwind, it didn’t include much pricing. Pricing was very low for us last year. And to be honest with you, we’re going to project what the higher input cost would be this year. So therefore, pricing is a tailwind, but probably the largest component tailwind that’s occurring driven by more regulation, driven by higher energy prices, is the content. And the content continues to grow faster than what we thought.
Just an example, Analyst Day last year, ex-EVs, which just drives more pull, more content of our products across the board, ended at around close to 20%. And we thought last year in the month of November, we were going to end at 17%. Latest projections for 2023 is to be in the low 30s, ex-EV as total SAAR. Again, during our Analyst Day last year, we did not think that we hit the low 30% until 2024. So basically a full year of acceleration of faster content that’s pulling more NXP company-specific product into that space in the auto. So overall, we feel very comfortable with our 9% to 14% with a lot of tailwind and room to actually — and we are so far could do better.
Jeff Palmer
Maybe I could offer also, Toshiya. Just maybe to parse a little bit those drivers. So like kind of from largest to smallest right now. So RADAR, we said, was about $600 million in ’21. We expect it to be about $1.2 billion in ’24, already design wins already awarded. Secondarily, our electrification opportunities, which is battery management systems, DC-to-DC converters, inverter control and some other opportunities, were about $200 million last year. It would be about $500 million in ’24.
And then lastly, there’s the whole shift, the architectural shift in the car from a flat architecture to more hierarchical architecture to enable software-defined vehicles. So the zonal domain processing. Last year, we said that was about $300 million. It will be about $600 million in ’24, but it will really accelerate beyond ’24. We’ve been recently awarded several pretty significant design awards that don’t kick in through the ’25, ’26 period that will really accelerate that zonal processing growth.
And then there’s some other drivers that are not as large, let’s say, that we just didn’t articulate at the Analyst Day, but you put together all of our accelerated drivers, it makes up about 1/3 of our total auto business.
Toshiya Hari
Right. And Jeff, I guess on that point, on zonal domain processing, can you speak to the source of differentiation that you have vis-à-vis…?
Jeff Palmer
Sure. Not to get too propeller heavy, but for those of you who know me, I do enjoy that occasionally. Yes. If you think about the modern car today, it’s a flat point-to-point architecture, right? And there could be many, many different vendors of microcontrollers and other processing units throughout the car. The auto OEMs, one of the biggest challenges they’re facing, is the ability to enable software life cycle management. The ability to be able to send an upgrade to your car, walls parked in your garage as opposed to sending you down to the dealership.
And so how they’re going to facilitate that is by creating these kind of domains in the car, hierarchy in the car. And we’ve been able to identify five different domains with our partners. They include networking to automotive networking, body and comfort and automotive propulsion, whether that’s ICE or ex-EVs. Then there’s also e-cockpit machine human interface and then ADAS safety. When you look at those 5 different domains, we believe we can be very, very successful in three of them: networking, body and comfort, and domain propulsion. We believe we have a very good franchise already in the e-cockpit business, but we will face a little bit of competition at the very high end from our friends down in San Diego.
And then in the ADAS domain, that’s a much more complex domain. We won’t do fusion processing per se, but we’ll do complementary things like safety processors, radar processors and the like.
Toshiya Hari
Okay. And then to your point, in terms of the numbers showing up, it’s ’24,and then further acceleration into ’25 and ’26?
Jeff Palmer
Yes. Think about to use the analogy of an airplane between now and ’24, the airplane is just taxing down the runway, the business will grow from $300 million to $600 million. In ’24, it will take off of the runway and grow quite dramatically beyond that.
Toshiya Hari
Okay. Got it. I wanted to pause for a couple of seconds here and see if anyone has any questions to the team. You can raise your hand. If not, I’ll keep going. A follow-up on BMS, Jeff. It’s a nascent market. It’s growing very rapidly. Curious how, again, you’re differentiated vis-à-vis the competition there?
Jeff Palmer
So BMS right now is evolving to look like a duopoly. So NXP and ADI are the two big players. ADI clearly took the leadership position when they finished the merger with Maxim. But our solutions are very, very different. So our solution is more of a system solution consists of precision analog devices that sit on the battery cells. We connect all those precision analog devices together to a back-end processor, and we wrote load balancing software on the processor to manage the health, the charging and discharging of the battery system. That’s our approach.
ADI Solution, a great company. But as we understand it, their solution is primarily the precision analog device out on the battery cells. They leave the system design to their partners. We know there’s a lot of talk about wireless BMS evolving in the marketplace. It’s an interesting idea. We have some things we have not talked about publicly, but you have to be aware that the auto OEMs, while wireless is interesting on paper, there’s the reality of whether or not there’s an EMS-type of noise, there’s heat, there’s a lot of other things that can impact that wireless connection. So we are looking at some things right now, nothing to disclose today, but that would be our biggest difference is our solution is more of a system solution versus a point component solution.
Toshiya Hari
Got it. A question on automotive, I guess, broadly. Kurt’s talked about there being more direct CEO-to-CEO conversation with the OEMs, and not necessarily bypassing the Tier 1s, but kind of, right? I’m just curious how you expect that dynamics to evolve going forward? Is this sort of a permanent shift in how your customers interact and engage with suppliers like yourselves is this kind of a onetime thing? How does it impact your business from a supply chain standpoint, a profitability standpoint? Any implications?
Jeff Palmer
I think if you think about how the car is going to evolve over the next decade, semiconductors play a larger and more influential role in defining the value of different OEMs products, right? And so I think the OEM to semi supplier is probably a permanent more closer dialogue. It will be a three-way dialogue. We will continue to transact our business with the Tier 1s. That’s where actually our customers are. But from a design win, architectural definition, assured supply, those are conversations that are now happening between the OEM and the chip vendors directly. And I don’t think NXP is unique. I think the OEMs are not going to have these relationships with every semi vendor, but they’re going to do it with those semi vendors that have a big input — impact on their roadmaps.
Toshiya Hari
Right. And just given your breadth and depth as your OEM sort of increasingly think that way, I would expect your presence to be growing in terms of market share.
Jeff Palmer
Correct. Correct. Correct. I think, look, to the fair. It’s big rewards, but also more risk probably because the bigger vendors are going to take all. You’re going to have OEMs to say, look, I don’t need 20 different embedded microcontroller suppliers, I need maybe two, maybe three max. And that vendor needs to give me assured supply, geographic supply. I need to know they’re investing in their road map. And I think that’s how the auto business is going to evolve over the next decade.
Toshiya Hari
Make sense. Industrial & IoT, roughly 20% plus of total revenue, pretty similar growth profile as far as the way express it.
Jeff Palmer
9% to 14%.
Toshiya Hari
9% to 14%. I guess, in the near term, there is concern that you’ve got a more fragmented customer base you sell through distribution in a bigger way, risk of double order and so on and so forth. So how are you thinking about this business near term?
Jeff Palmer
So first off, the Industrial & IoT business, it can be roughly thought as a 60% pure industrial. Factory automation, big electronic-type things. The other 40% is IoT, and it is a very long-tail business. And in that long tail IoT business, there is some more consumer-oriented type products, some wearables, some home automation type things. And yes, there’s a little bit of weakness there. But the majority of the Industrial & IoT business goes through the channel through our distribution channel. And for those of you who maybe don’t remember, about 55% of our total company revenue goes through the channel.
On Industrial & IoT, it’s a much higher number. It’s probably about 80%. And so we have a real hard control over the channel. So as you all know, our historical average has been about 2.4 months of supply in the channel historically. Over the last seven to eight quarters, we’ve been stubbornly stuck at about 1.5 to 1.6 months, so under our own target. But we have control of that. And so in an environment where things may be getting a little squishy around the edges and especially on the consumer side, we have the ability to really keep a tight hand on what’s in the channel. And we think that’s the right thing to do over this intermediate period.
Toshiya Hari
Right. Right. And is there an expectation to ultimately revert to that 2.5 months, or the way you think about the channel and how you deal with the channel has permanently at…
Jeff Palmer
I mean, the reason 2.4 months was the right number is it enables good customer service. And so right now, you’re running and you’re churning the channel a little hotter. In the current environment with a lot of uncertainty, as you guys all know, that’s probably okay.
Toshiya Hari
Got it. Maybe I’ll pause here again and see if anyone has any questions. Yes, we’re good. I wanted to shift to some of the financial questions. Gross margins metric that many of us tend to focus on perhaps a little bit too much. I realize mix is the biggest driver. Pricing, to your point, is to really offset the inflationary pressures. Your gross margin profile broadly has been very stable. But how should we think about the puts and takes as we think about gross margins over the next 12 months or so?
Bill Betz
Sure. Just to recap, our gross margins, when I joined the company about 10 years ago, we’re in the mid-40s, then they move to the 50s and after with Freescale. Structurally, we always chased and got to the 55% because that’s the infrastructure that — and since then going from 55% nearing to our high end towards 58%, it was really driven by two areas. One is the improved utilization since COVID as well as the mix. Again, pricing has been somewhat neutral in that give or take any given quarter from a timing perspective.
As we go forward, the way to think about gross margins is how do you get toward the 60%, right? And the way it happens in the markets that we serve the life cycle of auto industrial 10 years, right? So if you think back, all our investments are made through a very rigor way of thinking. One, is the market attractive? Two, can we have a relative market share of 1.5? But most importantly, when it comes from a financial hurdle standpoint, it’s driving that gross margin entitlement. So again, 10 years ago, when I joined the company, anything above the corporate average was kind of good. So you invest in it in three or four years later, you get that reward. Four or five years later, it’s in the 50s, same thing. You invest, and the model, the hurdle rate continues to increase.
So everything that we make in decisions now and is really driven by focus and priority and value add to our customers is now we’re at new corporate margin. So our new investments, obviously, we’re driving those to be higher, but it takes years to get there because of the maturity and the life cycle of our revenue. So it takes some time to get to that next level, but we feel very confident that we can get there. But again, the number one thing is driving profitable growth and outgrowing our market and driving that relative market share, or RMF, 1.5x or 2x. And that’s where our focus is.
Toshiya Hari
I guess, Bill, outside of making the right decisions in terms of what you invest in and what’s accretive to the corporate model, are there any levers that you can pull in the near term that could plan gross margins to the upside or not really?
Bill Betz
No, not really. I would say we’re already internally, which is 40% on the front end running in the high 90s. So even if you had a real softness and you got into the 90s, that wouldn’t be much different because the factory running in the high 90s is sub-optimized. You’re running extra overtime, you’re running — you’re throwing money, keeping tools up and running longer. They’re not optimized at that point in time. So if you had some slowdown, if you were actually — I’d be happy if we can actually bring them down into the 90s, they just run better related to it.
I think in any given quarter, I’ve mentioned this several times, is mix. We’re not optimizing mix right now in a supply-constrained environment. So could mix change? Absolutely, in any given quarter, plus or minus that 50 basis points. But really, what grinds us higher over the long term is that new product introductions and that longer-term mix of those choices that we’re making today will change the profile of the company in the future.
Toshiya Hari
Another relatively common question that we get is, hypothetically, if revenue, not just for you guys, but for the overall industry is down x percent in 2023, A, how does the company respond? But B, how would gross margins, operating margins change over time? I wonder if you’ve sort of done that exercise internally based on your comments about the ability to cover only 80% of demand, that’s probably not your base case going into 2023, but what are your thoughts on that sort of question?
Bill Betz
No, absolutely. I mean, we run models on this. We’re not naive. We look at a likely plan, a pessimistic plan, aggressive plan. But we’re talking about the pessimistic plan, there’s different versions of that plan. And say, we’ve been getting the question a lot, what if revenue drops 10% to 15%, would you be able to stay within your model? And the answer is yes. We feel comfortable we’ll be able to stay in that 55% to 58% on the margin side, as well as on the operating side of 23% or less.
And the reason why is, let’s start with COGS. Cost of goods sold today are fixed cost, is 30%. 10 years ago, when I joined, it was 70% fixed. And what I said earlier, and Jeff alluded to, is our workhorse of our growth is being driven by that 16 to 90 nanometers, which is all variable in nature. So that’s a huge lever for us in the cost of goods sold.
And then I mentioned also when you’re running in the high 90s, it’s suboptimized. So even if you have some reduction to your factories, it’s actually a good thing from a cost standpoint and a throughput standpoint.
Now if we turn it around and look at the operating expense leverages, what are some of our levers there? Clearly, we have a variable compensation model. And it’s linked to top line and it’s linked to gross margin. Well, if we don’t grow revenue and we don’t expand our margins or maintain our margins, we don’t get a bonus. And that’s a sizable — that’s quite sizable on the operating expenses. But more importantly, with people, obviously, we have an attrition rate around 9%, which is kind of good in our industry. We would not — we would slow down hiring, clearly. We would probably not reduce or replace some of our overhead type of functions. But R&D, we will protect that all means. That is the lifeblood of this company. We’ve done a great job of prioritizing it and focusing it and winning, and that’s why we focus on these accelerated growth drivers and how we think about R&D. It’s so important for this company, and that’s the last thing we would ever touch.
But there are levers that you have inside your model that are nice to have and must have. And so we will continue to focus on the must haves versus the nice to haves. And then there’s discretionary spend and so forth, and then timing of CapEx. But the goal is to make sure we protect the free cash flow of the company in any type of downturn we may see.
Jeff Palmer
And maybe if I could just add to that. Some people say, do you have any point in time as an example. I think if you go back and look at Q2 of ’20 and a little part of Q3 of ’20 as the pandemic hit, as you can see, our utilization dropped pretty low. Our gross margins dropped down to about 49%, but we still generated 18% free cash flow margin on a much, much lower revenue level. That kind of gives you a sense. I think the company does have an inherent skill set of understanding how to navigate tighter economic environment, just some of our past.
Toshiya Hari
That’s super helpful. I guess, the only follow-up I have is the 16- to 90-nanometer part of your manufacturing that’s outsourced, how truly variable is that? Because obviously, there’s been tightness across the supply chain and customers have come to you and said, hey, we’re going to commit to whatever supply. I would assume that you’ve had to go to your foundry suppliers and commit as well. How does that dynamic work?
Bill Betz
Well, again, as Jeff mentioned earlier, is the demand is much greater than what we can supply. And we can only gradually improve the supply. And anytime when we go work with a long-term purchase obligation, it’s part of my job, along with the management team, to ensure that’s 100% more backed by NCNR so that you have that matching principle there in nature related to it.
And then again, if things slow — the lead times, you start seeing this, right? If you think about it’s three to six months before you get our product, our lead times, as we mentioned many times through during the last two years is majority of our portfolio is at 52-week lead times, 80% of it, to be honest with you. And that’s — everybody put their spots in line. And if people move their spots, that’s a leading indicator that then you can make adjustments accordingly without being on the hook for that long-term purchase obligation.
Toshiya Hari
Very helpful. As it pertains to the chips, a ton of time is spent on leading-edge logic and foundry, and I feel like the analog MCU group tends to get much less focus on retention. Based on what you know about the bill, how does it impact you, benefit you from an R&D perspective? I realize most of the upside from supply perspective is going to be at the foundries. But how should we think about that?
Bill Betz
I mean, first off, I have to say that we would never run our strategy through any chipset. That’s just not us. That’s just if we get it, we get it, that’s great. The business case has to stand on its own two feet. And to be honest with you, it gets a lot of attention now. But subsidies have always been there. All across the world, they’re still there. They just get a lot of press today. But we’ll continue to apply for them like we have in the local news in the different regions. There will be a plus if we get them, but it’s not the end of the world if we don’t, and we’ll continue to move forward.
Toshiya Hari
To Jeff’s point earlier, you guys have been super consistent from a free cash flow generation perspective. I’m just curious how you’re thinking about allocating that capital. Does M&A come up in internal debate? How important critical might it be going forward? Again, you’ve been returning a large percentage of your cash to shareholders.
Bill Betz
Yes. First off, no change to our capital allocation policy. I mean, clearly, the best use of your dollar is organic growth. And we’ll continue to focus on that. We’ll continue to protect our R&D and spend there because we believe that will drive the largest benefit to our shareholders.
On M&A side, we continue to do small tuck-ins. I mean, there’s a lot of them that are not disclosed because they’re so small in size for talent, in software, artificial intelligence and so forth. Related to larger acquisitions, I mean, longer term, we believe the industry will need to continue to consolidate. However, in this market with the geopolitical situation, it’s going to be hard to have any of that happen overall.
But no change to our capital allocation policy. We will return 100% of our free excess cash flow back to the owners on a trailing 12 months.
Toshiya Hari
Got it. I guess in the last couple of minutes, I want to give you guys the opportunity to speak to anything that we may have missed or the Street under-appreciates underestimate. I know this is your fifth or sixth conference in three weeks. You probably covered a lot of ground. But anything that we collectively might be missing or that we should be focused on as we think about your growth and margin profile, so on and so forth?
Jeff Palmer
No. I think I’ve been with the company for a long time. And I think I’ve never seen the company in as strong a product portfolio perspective as it is today. I think Kurt’s leadership is really laser-focused. I mean we are an auto industrial company. That’s who we are. We have a nice mobile business, but we’re a niche player in mobile. And what we do in mobile, very specialized. I think that’s going to continue to be who we are.
Back to your question about M&A and capital allocation. First and foremost, M&As, everybody gets excited about M&A. But unless it furthers your fundamental strategy, it’s very, very disruptive. And we know that first-hand, both by selling large pieces of businesses, as well as being involved in a large failed acquisition.
So I think Kurt really has — as the leader of the company, has a real clear view that, let’s not let the shiny new toys disrupt our view of what we need to do for you folks, right? We’ve laid a pretty good roadmap of what you should expect from us for the next three to four years. I think what we need to do is execute to that. And as Bill said earlier, the design awards to deliver that growth have already been given to us. It’s really execution from here on out.
But I would say the only other controversial topic that we get asked every single meeting is about pricing. And as Bill said earlier, all we’ve done is we’ve seen inflationary costs come in. We have to pass to our customers. It’s not an enjoyable conversation, but we’ve only done so continue to maintain our financial model, not to pat our margins.
So if you did see an environment where inflation went neutral, maybe decelerated a little bit, we don’t think you would see a huge impact to our margin structure.
Toshiya Hari
Got it. Great. On that note, thank you so much. I appreciate your time.
Jeff Palmer
Thank you. Thank you, everyone.
Bill Betz
Thank you very much.
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