NXP Semiconductors N.V. 2026 Q3 Earnings Call

Please go ahead. Thank you, Lisa, and good afternoon, everyone.

Welcome to NXP's third quarter earnings call. Leading the call today are Rafael Sotomayor, NXP's President and CEO, and Bill Betz, 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 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 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 fourth quarter of 2026. NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure of forward-looking statements, please refer to our press release.

Additionally, we will refer to certain non-GAAP financial measures, which are driven primarily by discrete events 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 in our third quarter 2026 earnings release, which will be furnished to the SEC on Form 8-K and is available on NXP's website in the investor relations section at nxp.com. I will now turn the call over to Rafael.

Thank you, Mike, and good afternoon. In Q3, we exceeded our outlook across all end markets and every region grew double digits year-over-year. Growth was led by our company-specific growth drivers in automotive and industrial, which grew 30% year-over-year and represent roughly a third of our total revenue, as well as continued strength in data center infrastructure. Revenue was $3.79 billion, up 19% year-over-year, or up 22% excluding the MEMS sensor business. Non-GAAP operating margin was 37%, up 330 basis points, and non-GAAP EPS was $4.20, up 35% year-over-year. These results are translating into strong free cash flow generation, enabling us to invest in the business and return cash to shareholders. To that end, our board has authorized an incremental $5 billion for share repurchases, bringing total authorization to around $6.3 billion. Now, turning to end market performance.

Automotive revenue crossed $2 billion for the first time, up 17% excluding sensors. This growth is driven by content gains led by our SDV portfolio in a flattish unit production environment. SDV revenue in Q3 is running above $1.5 billion annualized and remains well on track to reach our $2 billion 2027 target. We view the transition from domain-based architectures to zonal and centralized compute as a multi-year upgrade cycle that will enable physical AI and autonomous capabilities in the vehicle. These new architectures create a need for system solutions that drive higher content across NXP's portfolio, including additional processing end nodes, connectivity, and power management. This results in 2 to 3 times higher content per vehicle compared to today's architecture. This evolution is still in its early stages. In 2027, we will begin shipping our next generation SDV processors, including the S32K5 zonal and S32N central compute platforms.

We are starting to see material proof points of the SDV transition. RV Tech, the joint venture of Volkswagen and Rivian, announced yesterday it has standardized its zonal platform on NXP S32K5 across both companies. This is a clear signal of the leadership of NXP's SDV portfolio and where the industry is heading. Engagements with our new platform continue to expand globally, and we now expect our first S32K5 shipments in China as early as the first quarter of 2027. Software-defined vehicles are one of the first deployments of physical AI, and the opportunity reaches well beyond the car. The same building blocks of central compute, sensing, networking, and secure control are moving into robotics and other intelligent systems at the edge. This quarter, we secure our first S32K5 design win in humanoid robotics with a leading U.S. global technology company. Now, moving to industrial IoT.

Revenue was $802 million, up 39% year over year. The industrial portion of this end market grew nearly 50%, led by data center, factory automation, and healthcare, and now represents about 70% of industrial IoT. As we mentioned in our Q2 call, AI-enabled processors will represent approximately 15% of industrial IoT processor revenue in 2026, more than doubling from last year. Given market adoption of intelligent systems, we expect growth to continue in 2027. Ara, our discrete NPU, is a key component of our AI portfolio. It continues to gain traction across industrial automation and automotive AI applications, and we expect to be in volume production in 2028. Now, let me give you an update on our data center business. Given the strength we're seeing year to date, we now expect our revenue to exceed the $500 million outlook provided earlier this year.

Given the new products we're developing, combined with expanding customer engagements, we now expect this business to be over a billion dollars in a couple of years. Going to communication infrastructure and other, revenue was $503 million, up 54% year over year, driven by data center and secure cars. Lastly, mobile revenue was $411 million, down 4% year over year. Turning to our Q4 outlook. We're guiding revenue to $3.85 billion, up 2% sequentially, and up 15% year over year, or 18% excluding sensors. This would represent our fourth consecutive quarter of double-digit annual growth. At the midpoint, we expect the following trends in our business during Q4. Automotive is expected to be up in the low double-digit percent range year over year, and up low double-digit sequentially. Adjusted for the sale of the MEMS sensor business, our guidance implies a high teens percentage growth year over year.

Industrial and IoT is expected to be up in high 20% range year-over-year, and up in the low single-digit range sequentially. Mobile is expected to be down in the mid-teens percent range year-over-year, and up slightly on a sequential basis. Finally, communication infrastructure and other is expected to be up over 50% range year-over-year, and up low single digits sequentially. Now, I'd like to pass the call to Bill for a review of our financial performance.

Thank you, Rafael, and good afternoon to everyone on today's call. As Rafael has already covered the revenue drivers, I will turn to the financial highlights. Q3 was another strong quarter with record revenue, operating margin, and non-GAAP EPS. Revenue grew 19% year-over-year, and 8% sequentially to $3.79 billion. The growth was led by our company specific growth drivers across software-defined vehicles, electrification, connectivity, radar, and industrial edge processing, as well as continued momentum in our emerging data center business. Non-GAAP gross margin was 58.6%, up 160 basis points year-on-year. Our gross margin performance reflects improved factory utilization and solid fall-through on higher revenues. Non-GAAP operating expenses were $810 million or 21.4% of revenue, reflecting strong operating leverage. This led to a non-GAAP operating margin of 37.1%, up 330 basis points year-on-year. Below the line, non-GAAP interest expense was $85 million.

Tax rate was steady at 18%. Non-controlling interest was $15 million, and results from our joint venture equity accounted investees were a $4 million loss. This resulted in non-GAAP earnings per share of $4.20, increasing 35% year-over-year, or about two times our revenue growth rate. Turning now to the balance sheet, cash flow, and capital returns. Our balance sheet remains strong, providing flexibility to invest in our strategic growth priorities, advance our hybrid manufacturing model, and return capital to shareholders. We ended Q3 with $3.94 billion of cash and $10.98 billion of debt, resulting in a net leverage ratio of 1.3 times. Days of inventory declined to 148 days from 156 days in Q2, including approximately 13 days of pre-built inventory related to our planned front-end factory consolidations. We expect to have approximately 15 days of pre-built inventory at the end of 2026.

For the quarter, operating cash flow was strong at $1.26 billion, and net CapEx was $50 million, resulting in free cash flow of $1.21 billion or approximately 32% of revenue. During Q3, we invested $218 million between equity and access fees in VSMC and ESMC. A detailed breakdown of our joint venture investments is available in our historical financial model on our investor relations website. We expect to be over 75% complete with our JV investments by year-end. On a trailing 12-month basis, free cash flow was approximately $3.5 billion, or 25% of revenue, in line with our long-term target. Over that same period, we returned $1.7 billion to shareholders through dividends and share repurchases. Most recently, shareholder returns have been below our long-term target as we prioritize deleveraging, strategic acquisitions, and investments in our manufacturing joint ventures to support future growth and gross margin expansion.

Moving forward, we plan to accelerate our buyback activity in Q4 and 2027. Consistent with that commitment, the board authorized a new $5 billion share repurchase program, bringing total authorization to $6.3 billion, representing around 10% of our current market capitalization. Overall, we remain committed to returning 100% of our excess free cash flow to shareholders over the long term. Turning to our expectations for Q4, we expect revenue of $3.85 billion, plus or minus $100 million, which is up 15% year-on-year or up 18% adjusted for the sale of our MEMS sensor business, and up 2% sequentially. We expect non-GAAP gross margin of 59%, plus or minus 50 basis points, driven by higher revenue and manufacturing utilizations. We expect operating expenses of $830 million, plus or minus $10 million. The increase sequentially is primarily driven by our new product tapeouts to support our trusted physical AI strategy.