NXP Semiconductors Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2021

Key Takeaways

  • NXP delivered Q3 revenue of $2.86 billion, up 26% Y/Y and $11 million above the midpoint of guidance, with a non-GAAP operating margin of 33.5%, 50 bps above the midpoint.
  • Automotive sales reached $1.46 billion (+51% Y/Y), driven by higher semiconductor content in premium and electric vehicles despite ongoing supply constraints and channel inventory at 1.6 months, nearly a month below target.
  • For Q4, management expects revenue of $3.0 billion (+20% Y/Y, +5% sequential), with automotive and industrial/IoT up in the high-20% range Y/Y and a non-GAAP operating margin of about 33.8%.
  • NXP has secured about $4.4 billion in multi-year wafer supply commitments and is receiving non-cancelable customer orders covering much of 2022 to address demand outstripping supply.
  • Bill Betts was named CFO, succeeding Peter Kelly, and NXP will host an Analyst Day on November 11 to detail its long-term strategy and financial model.
AI Generated. May Contain Errors.
Earnings Conference Call
NXP Semiconductors Q3 2021
00:00 / 00:00

There are 11 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the NXP Third Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. And now I would like to turn the conference over to Mr.

Operator

Jeff Power, Senior Vice President of Investor Relations. Please go ahead,

Speaker 1

sir. Thank you, Dexter, and good morning, everyone. Welcome to the NXP Semiconductors' Q3 2021 earnings call. With me on the call today is Curt Sievers, NXP's President and CEO and Bill Betts, our CFO. The call today is being recorded and will be available for Today's call will include forward looking statements that involve risks and uncertainties that could cause NXP's results to differ materially for management's current expectations.

Speaker 1

These risks and uncertainties include, but are not limited to, statements regarding the continued impact 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 Q4 of 2021. Please be reminded that NXP undertakes no obligation to revise or update For a full disclosure on 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 to the non GAAP financial measures to the most directly comparable GAAP measures in our Q3 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 section at nxp.com. Before we start the call today, I'd like to remind everyone of our upcoming Analyst Day On Thursday, November 11, 2021, we are hosting a hybrid event.

Speaker 1

We will be in person in New York City, but also simulcasting

Speaker 2

Yes. Thanks very much, Jeff, and good morning, everyone. We appreciate you joining our call this morning. I will review our quarter three results and then discuss our guidance for quarter 4. Overall, our quarter three results were better than the midpoint of our guidance with the mobile end market stronger than planned as a result of improved supply.

Speaker 2

At the same time, the trends in the auto, industrial and IoT and communication infrastructure markets We are all in line with our guidance. Taken together, NXP delivered quarter 3 revenue of $2,860,000,000 an increase of 26% year on year and $11,000,000 above the midpoint of These are very good results given the constrained supply position we knew we would face entering the quarter. And we continue to view our channel and on hand inventory metrics below our long term targets. We exited quarter 3 with our distribution channel supply metric at 1.6 months, almost a full month lower than our long term target, and we expect this to be the situation in quarter 4 again as well. Our non GAAP operating margin in quarter 3 was a strong 33.5%, which is 7.70 basis points better than the year ago period and fifty basis points above the midpoint of our guidance.

Speaker 2

Operating profit dollars We're $19,000,000 better than guidance, driven by higher revenue and lower spend. Now let me turn to the specific trends in our focus end markets, starting with automotive. Quarter 3 revenue was $1,460,000,000 51% up versus the year ago period and in line with our expectations. In Industrial and IoT, quarter 3 revenue was $607,000,000 up 18% versus the year ago period and again in line with our expectations. In mobile, quarter 3 revenue was $345,000,000 up about 2% versus the year ago period and above our expectations.

Speaker 2

Lastly, in communication, infrastructure and other, Quarter 3 revenue was $454,000,000 about flat versus the year ago period and in line with our expectations. With this, let me move straight to our outlook for quarter 4. We expect the midpoint of quarter 4 revenue to be $3,000,000,000 up 20% versus the Q4 of 2020, within a range of up 17% to up 23% year on year. From a sequential perspective, this is up 5% at the midpoint versus the prior quarter. And we again anticipate demand outstripping available supply in our quarter 4 outlook.

Speaker 2

At the midpoint of this range, we anticipate the following trends in our business. Automotive is expected to be up in the high 20% range year on year and up in the mid single digit range versus quarter 3 2021. Industrial and IoT is expected to be up in the high 20% range year on year and up In the mid single digit range versus quarter 3 2021. Mobile is expected to be down in the mid teens range year on year and up in the low single digit range versus quarter 3 'twenty one. And finally, communication infrastructure and other is Over the course of the last few quarters, investors continue to ask how to reconcile The revenue performance of NXP's Automotive business with that of the global vehicle production numbers as they are reported by IHS.

Speaker 2

Specifically, NXP's Automotive segment revenue is expected to be up over 40% in 2021. Against this, the auto OEMs continue to struggle to match supply to strong consumer demand with the auto industry likely not able to Now let me make a few observations which may help you understand This divergence. 1st, the auto supply chain is very extended and complex with multiple points of product transformation across the globe. This extended supply chain needs to coordinate the timing and delivery of up to 30,000 parts and up to 1500 different semiconductors from hundreds of suppliers to build just one single car. During normal periods, from the time at which NXP ships a finished component to when the final assembly is fitted into a finished car, It takes up to 6 months.

Speaker 2

And this is on top of the normal semiconductor manufacturing cycle times of 3 to 6 months. At each step of the transformation, thousands of parts move through a complex global network of suppliers. For the process to work efficiently, it is essential that all of the components needed to complete a car are available Now we believe the extended auto supply chain significantly depleted on hand inventory Of all types of products, including semiconductors, already by the beginning in the second half of twenty eighteen And continuing through 2019 and most of 2020. Debt depletion was a result of global car production Declining 6% in 2019 and another 16% in 2020, while NXP's auto business, Despite content increases, declined by 7% into 2019 and by another 9% into 2020. Now let me illustrate the impact by using the NXP distribution channel as a proxy for overall auto supply demand trends and how we have been directly affected.

Speaker 2

We consistently monitor and measure all component movements and inventory data at our distribution partners at the end market level. Throughout 2021, these metrics for automotive have been at record low levels, With on hand inventory being about 1 month below our long term target of 2.5 months, With demand in the intermediate term being consistently greater than our ability to rebuild inventory back to normalized levels. In our and my personal daily discussions with our customers throughout the auto supply chain, We hear the consistent message that they want significantly more product. And in some cases, Tier 1s are struggling to assemble full kits And in other cases, the OEMs choose to build partially completed cars or hold their production lines altogether. For NXP, lead times for about 75% of our automotive products continue to be above 52 weeks.

Speaker 2

Against this backdrop, our customers are placing NCNR orders to assure long term supply. We in turn are making long term supply commitments to our supply partners. In summary, we think the automotive supply And in order to mitigate the impacts the auto AMs are experiencing today, Our Tier 1 partners explicitly demand that more supply and inventory will be needed in the extended supply chain, which we believe cannot be broadly achieved before 2023. Now with this currently dysfunctional supply chain As a backdrop, there are very clear and very positive trends that have simultaneously increased the demand for auto semiconductors industry wide As a consequence of content growth, we have seen multiple OEMs prioritize the production of premium vehicles, which require upwards of twice the semiconductor content from NXP and others. And another clear and emerging secular content driver the auto semiconductor market is the fast acceleration of full electric and hybrid electric vehicles, which combined have moved from 8% of global production in 2019 to about 20% of production in 2021.

Speaker 2

This is very impactful since the average semiconductor content in an XEV is about $900 which is roughly 2 times that of an equivalent ICE vehicle. These trends have resulted Industry wide content per vehicle increasing at 10% per year over the last 3 years. And on top of all of this, NXP is consistently gaining share in our focused growth areas and increasing content. These content gains include 77 gigahertz radar safety systems, multiple electrification system opportunities beyond just battery management and new domain and sonar processing as well as others. Now for NXP, it's of course not just automotive driving our performance.

Speaker 2

Within the industrial and IoT markets, Our ability to provide complete turnkey connected edge processing solutions consisting of processes, connectivity, security and analog, all leading to increased customer traction. These are all just a few examples that underpin our confidence in our company specific growth. As Jeff mentioned earlier, we plan to go into much greater detail at our Investor Day on November 11 next week in New York. In summary, we continue to execute very well in a strong demand environment, notwithstanding the industry wide supply challenges. From a company specific perspective, NXP is experiencing very positive customer traction of our newest products and solutions.

Speaker 2

Putting it all together, we are highly confident that the company's Specific drivers within our strategic end markets will continue to build also beyond Q4 into Q1 as well as over the intermediate term through 2022. Now before we move to the financial details of the quarter, I'd like to make a few remarks in the context of our recent announcement of Bill Betts as our new CFO. I have personally worked with Bill as a business partner and one of Peter Kelly's key finance leaders for over 8 years. Bill brings both a strong track record and career in the semiconductor industry as well as Truly intimate knowledge of NXP and consistency to his new role. I personally drove the evaluation Interviewing a wide number of external candidates as well as Bill.

Speaker 2

And I concluded Bill is the right person to lead Our NXP Finance organization and I'm personally truly excited to work with Bill and drive NXP's profitable growth going forward. At the same time, I'd like to highlight the outstanding contribution Peter Kelly has played in the strategic evolution of NXP. Peter first came into the company in an operations role over a decade ago and then quickly moved into the CFO role to drive the financial discipline our stakeholders have all come to expect. He has been a clear thinking strategic advisor to myself And a highly valued mentor to many on the NXP management team, obviously, including both Bill and Chap. We wish Peter the very best in the next phase of his life and hope he gets to spend more quality time with his family.

Speaker 2

And with that, I would now like to pass the call to you, Bill, for a review of our financial performance. Bill?

Speaker 3

Thank you, Kurt, and good morning to everyone on today's call. As Kurt has already covered the drivers of the revenue during Q3 To provide our revenue outlook for Q4, I will move to the financial highlights. Overall, our Q3 financial performance was very good. Revenue was above the midpoint of our guidance range and we drove an improvement of non GAAP gross profit and non GAAP operating profit, both of which were at the high end of our guidance range. Now moving to the details of Q3.

Speaker 3

Total revenue was $2,860,000,000 up 26% year on year and above the midpoint of our guidance range. We generated $1,620,000,000 in non GAAP gross profit and reported a non GAAP gross margin of 50 Total non GAAP operating expenses were $657,000,000 up $107,000,000 year on year and up 31 This was $8,000,000 below the midpoint of our guidance due to lower material and mass spend during the quarter. From a total operating profit perspective, non GAAP operating profit was 959,000,000 And non GAAP operating margin was 33.5%, up 7 70 basis points year on year. This was also at the high end of our guidance range as a result of better fall through on higher revenues. Non GAAP interest expense was $94,000,000 with cash taxes on going operations of $86,000,000 and non controlling interest was 7,000,000 Taken together, the below the line items were $8,000,000 better than our guidance.

Speaker 3

Stock based compensation, which is not included in our non GAAP earnings, was 81,000,000 Now I would like to turn to the changes in our cash and debt. Our total debt at the end of Q3 was $9,590,000,000 Flat on a sequential basis. Our ending cash position was $2,300,000,000 down $607,000,000 sequentially due to higher CapEx and robust capital returns during the quarter. The resulting net debt was $7,290,000,000 and we exited EBITDA at the end of Q3 was 1.9 times and our 12 month adjusted EBITDA interest coverage ratio was 11 times. Our liquidity continues to be excellent and our balance sheet is very strong.

Speaker 3

During Q3, we repurchased 1.1 Subsequent to the end of Q3, between October 3 November 1, we repurchased an additional $300,000,000 of our shares Turning to working capital metrics, days of inventory was 85 days, a decline of 3 days sequentially. Our DIO continues to be below our long term target of 95 days. We continue to closely manage our distribution channel With inventory in the channel at 1.6 months, flat sequentially and below our line of targets, Both metrics reflect the continuation of strong customer order rates and a tight supply environment. We continue to believe it will take multiple quarters before we were able to rebuild on hand and channel inventories to our long term target levels. Days receivable were 31 days, down 4 days sequentially And days payable were 84, a decline of 9 days versus the prior quarter.

Speaker 3

Taken together, our cash conversion cycle was 33 days, an increase of 2 days versus the prior quarter. Cash flow from operations was $924,000,000 and net CapEx Kurt mentioned, we anticipate Q4 revenue to be $3,000,000,000 plus or minus $75,000,000 At the midpoint, this is up 20% year on year and up 5% sequentially. We expect non GAAP gross margin to be about 56 point 5% plus or minus 50 basis points. Operating expenses are expected to be about $680,000,000 plus or minus About $10,000,000 consistent with our long term model. Taken together, we see non GAAP operating margin to be about 33.8 percent at the midpoint.

Speaker 3

We estimate non GAAP financial expense to be about $94,000,000 and anticipate cash tax related to ongoing operations to be about $100,000,000 Non controlling interest will be about $9,000,000 For Q4, we suggest for modeling purposes, you use an average share count of 270,000,000 shares, which is down 15,000,000 shares from a year ago period as a result of the consistent execution of our Finally, I have a few closing comments I'd like to make. First, Demand trends continue to be strong across our target end markets and customer interest in our NUVIZ products continues to be very robust. At the same time, we are closely working with our customers and our suppliers to address order requests in a timely manner. 2nd, our Q4 guidance reflects the clear potential of our business model, both in terms of revenue growth as well as profit fall through, which will enable us to consistently drive our non GAAP gross margin above the midpoint of our gross margin targets. Thirdly, our business continues to generate significant free cash flow and we are committed to our capital return policy and will return all excess free cash flow to our owners, so long as our leverage ratio remains at or below 2x net debt to trailing 12 month adjusted EBITDA.

Speaker 3

I'd also like to take this opportunity to thank Peter Kelly for his significant contributions to NXP since he joined the company in 2011. Not only did Peter guide NXP from a financial perspective, but he truly helped led the company and drive the strategy that made NXP what it is today. And on a personal note, I consider Peter a great leader, a mentor and a friend, and I will always be grateful for his support. And then finally, I'd like to thank all my colleagues across NXP for their outstanding work and dedication. We shouldn't forget that we are all still working under strict pandemic protocols.

Speaker 3

So with that, I'd like to turn it back to the operator for questions.

Operator

Thank you. Our first question comes from the line of Ross Zimmerman. Your line is open.

Speaker 4

Thanks for letting me ask a question and Bill congratulations My first question is for Kurt and it's one on customer behavior. You gave a great deep dive into the apparent disconnect between the auto Revs you have in production and all those explanations. But I really wanted to get into, are the customers changing their behavior? And if so, is it just with longer visibility for you, Greater certainty or is the profitability that all the auto semi production companies are going to be able to garner from this sector Starting to improve as well.

Speaker 2

Yes. Hey, good morning, Ross. Indeed, a couple of changes. So first of all, very tactically, and I just have to highlight that because it sits on top of my agenda every day in and out. There continues to be no change in pressure to get more products.

Speaker 2

So expedites, escalation calls, All sorts of weird actions to try to get products faster to their manufacturing locations has not slowed down by an inch. So we see that continuing. From a more strategic and say learning perspective, I would say Clearly, the whole auto industry has realized now and that's for me a step function and the reset at the same time, Has realized now how big the significance and importance of semiconductors is for their future, Today, but also years out. I mean, that's about innovation, but obviously, it's also about being able to build complete cars. And that has led to much closer and better relationships between us and directly the OEMs In terms of understanding both their innovation needs, but also the from a more tactical perspective, Their product supply needs in the near and midterm.

Speaker 2

All of that leads then to a number of Significant I would say quite significant changes. We are seeing longer term orders. So we get these so called NC and R orders, But we also get greater visibility into the longer term, which I find a very, very important perspective, Which reaches then over to innovation because the intimacy which we can build with the OEMs now, to think about

Speaker 4

Great. Thank you for that color. And I guess as my follow-up, just shifting gears quickly to a little bit of a nearer term And that's on the mobile business. It's good to see that it upside surprised in the Q3 versus your original guidance. But I guess if I put the 2 quarters together, I know supply is tight and maybe you're just doing some allocation, but the mobile business is a bit weaker seasonally than we would have expected in the combination of the quarters.

Speaker 4

And I Thought that that was supposed to snap back a little bit in the 3rd or in the 4th quarter, excuse me. So can you just talk about what's driving the relative weakness on a year over year basis in that business?

Speaker 2

Well, it's clearly supply or the lag thereof, Ross. So as we when we went into quarter 3, I think we That's the whole reason why we actually ended up in mobile better than guidance. So there is no difference in sockets or anything. It was just that we had Somewhat better supply capability and we continue to forecast now a similar thing into the 4th quarter. But overall, if you take the full second half of this year, we are unfortunately significantly constrained in supply into the mobile market.

Speaker 2

It is gradually getting better, which is why we have this performance I just quoted. But if you hold it just in total, So it is pretty significantly suffering. Now from a year on year perspective, Ross, It's a more difficult compare. Last year Q3, we had the ban on Huawei coming into play, which artificially bumped up quarter 3. And quarter 4, one of our very large mobile customers needed a lot of product, which also had to do with the phasing of the quarter of last year, which was later than normal.

Speaker 2

So that's why the year on year comparisons, Both for Q3 and Q4, need some bridging, given those 2 specific customer events. All in all, I just want We reconfirm, we haven't lost a single socket there. So everything is going as we had planned. We are supply constrained, But the bigger drivers being the adoption of mobile wallet attach rates and also the early penetration of ultra wideband

Operator

Okay. Next we have Vivek Arya. Your line is open.

Speaker 5

Thank you for taking my question and good luck to both Peter and Bill. Kurt, on the automotive industry, if one had I told you that auto production would be flat this year, but your auto sales would have been up 40%. Would that have been predictable? And if not, What do you think surprised NXP other than some of the bad weather and the fab shutdown effects? Was it mix that surprised you?

Speaker 5

Was it content? What specifically was the surprise this year to create this big gap between Production and sales.

Speaker 2

Yes. Hi, Vivek. I mean, very transparently and honestly, with the knowledge of today, of course, we could have predicted it. With the knowledge at the time, no. So no, we didn't know.

Speaker 2

And now what you call surprises is What actually happened? A few things. 1, clearly, the mix change to premium vehicles, Which is an optimization to higher profit on the OEM side, it clearly is something we had not foreseen. And I think nobody had anticipated that. And that has a significant impact on semiconductor consumption given that premium vehicles can easily have twice The semi content of a mass volume car.

Speaker 2

And on the same note, again, the XEV penetration, which I think is a result of the big focus in the world on CO2 targets, but also a lot of government in various countries to boost actually more electric vehicles. Those two elements, so the mix to premium and The much stronger penetration or faster penetration of ex EVs, those have significant positive impacts on the content increase for semiconductors. So Even if the car production is flat, the content goes up massively. Again, think about that both of these elements, each one on its own right, are potentially bringing the semi content of a car to a factor of 2x. So that's I mean, this is just outstripping any car production by far.

Speaker 2

The 3rd element, which I would say, I use your language, surprised us. I would rather say We gained more insight is the enormous depth and complexity of the extended automotive supply chain, Which means how many stages and companies sometimes are between us after we ship a product before that product ends up in a car. And if that supply chain is enormously depleted, As it has been the case after 2019 2020, it becomes incredibly dysfunctional. And we are still in the process Refilling that supply chain just to normalized levels. So really important, this is not about building any strategic inventory, It's just getting back to more normalized levels, which allow for proper operation of that supply chain.

Speaker 2

And that's That we didn't see either. I would say we had no idea how far it has been depleted, how deep it has been depleted, Nor how deep it is, which means how much elasticity is in there to be refilled in the 1st place to make it To try to make it functional, again, it is still dysfunctional at this stage.

Speaker 5

Got it. And for my follow-up, Kurt, just to kind of continue that line of discussion. So you mentioned over the last few years that the content delta right between units and sales have been for the industry been about 10 points with NXP doing better. If I look at the current IHS production forecast for next year and I know that they keep on changing all the time, but right now it's about 10% to 11 percent unit growth. So assuming that happens, what is the crystal ball thing in terms of that rough delta for the industry next Do you think it will be at that 10 points or it will be closer, right, to the much bigger number we saw this year?

Speaker 5

Thank you.

Speaker 2

Yes, Vivek. So first of all, you just mentioned another very important element, which is obviously our I mean, what I described to your earlier question was is how we think the industry surprised us all. The third element clearly is the NXP company specific content gains where we grew share, which makes it even faster. Now how that all goes into what it Means for the next year and the next years from both a content growth perspective as well as a NXP specific revenue growth perspective, I just ask you to wait for a week next week when we have our Investor Day in New York. We will give you the detail you're looking for.

Speaker 2

So we will guide the next 3 years, both how we think the semi market in auto is going to develop as well as our performance relative to that. So please hold your horses until next week.

Speaker 5

Thank

Operator

you. We have a question from John Vitzer. Your line is open.

Speaker 6

Yes, good morning guys. Thanks for letting me ask the questions and congratulations on the solid results. Kurt, I think we all appreciate all the Details you gave in your opening comments about the complexity around the auto supply chain. I'm kind of curious if you could spend a couple Just talking about your ability to grow supply from here, both internally, externally, both on the wafer side And on the back end of test, I'm assuming that the nice sequential jump in autos means that some of the weather events in the first half of the year have reversed themselves. But specifically, as Look over the next several quarters, would you expect your ability to grow supply to be relatively linear or is it going to be chunky and is there a point in time

Speaker 2

Let me give you a few pieces on this. The one is indeed the negative impact from the which we had some, I think, early Q2 in Texas is indeed behind us. So I mean, just put this to file, both factories which were impacted are running very much at 3 storm levels and we are good. Another element I have to mention here because it has impact on the industry, you've seen that over summer, there have been quite a few I just want to highlight that we have been In a very disciplined position to organize and manage our own factories in such a way that our shutdowns were very immaterial. So we had a few days, but by and large, we had very little negative impact from those shutdowns on our revenue.

Speaker 2

So when you think about We shipped in Q3, assume there was hardly any negative impact from COVID factory shutdowns From Southeast Asia and or specifically Malaysia. Now going forward, we will clearly see Improvements on the wafer side, we talked about earlier that we are entering into long term supply commitment with our supply partners And that's largely on the wafer side, which is going to start benefiting us next year, but also the years after. And again, this is in balance against the NC and R orders, which we are collecting from our customers. The back end test and assembly, which largely is in house for NXP, we of course put all the CapEx and all the investments in place to make Any wafer we get our hands around will also find enough capacity in house to be tested and assembled into finished products. So think about the test and assembly increase in capacity as pretty gradual because It is something which we are putting in tune with the wafers coming in.

Speaker 2

On the wafer side, It is in a way more discrete, but it's more chumpage on because we have obviously several wafer suppliers And they don't improve all at the same time. So from that perspective, what comes out into the revenue, think about something which is gradual, which doesn't have huge step functions at any specific point in time. However, the result of all of this is that clearly our Finally, I should say this is clearly not a comment which is in any way or form specific to automotive. This is a broad comment Because the supply shortages which we are facing is across all markets, we discussed earlier briefly mobile, anyway anybody knows about automotive, but We have the same negative impact on our industrial and IoT business and partially in the commsintra business. So all of these improvements Bill helps and Bill supports revenue growth across all of our end market segments.

Speaker 6

That's really helpful color, Kurt. And then maybe for my follow on, one Bill, first congratulations looking forward to working with you in your new role. I'm just kind of curious on the gross margin line, Another really solid gross margin quarter. Given some of the logistic inflationary costs out there, oftentimes it's hard to Within a quarter to get all of that right relative to pricing, was there anything holding back gross margins from a cost side in the quarter? And I guess more importantly, As you look out across these LTAs, can you help us understand how they're being constructed relative to Kind of your gross margin goals, I would assume it's much easier to price to value in this sort of environment.

Speaker 6

Does that We could see some tick ups here in gross margins over the next several quarters.

Speaker 3

Yes. Thank you for your question. Let me give a bigger Picture on the margin and more color about it. So as mentioned on our previous calls, our gross margin had Improved drastically versus last year, driven by the higher volumes and improved internal utilizations from our factories. For example, if I try to remember, I think Q3 utilizations last year were in the mid-60s and today we're in the high-90s.

Speaker 3

And from a guidance standpoint, as you saw, we were slightly better and from a quarter over quarter basis by 20, 30 bps related to the improved product mix. Now as we move forward over the next several quarters, it's going to be really difficult to have that additional fall through on our internal factories Basically, they're running full out, I'd say. To address your question on pricing, we are only passing on the increases of our input costs From our suppliers to our customers, and we're not padding any of our margins in this process as we value our long term relationships with our customers, I'd say, And we're really equally sharing the pain together. As you can see in Q4, we are guiding our gross margins to be flat quarter over quarter. And any additional margin expansion, I'd say, will come in the short term, will be driven by that continued product mix.

Speaker 3

And more longer term, will be really driven by the Expansion of our new NPIs. I'd say overall, we're very proud of achieving these levels, and we look forward to continue delivering toward that higher end financial

Operator

Your next question is from Stacy Raskin. Your line is open.

Speaker 7

Hi, guys. Thanks for taking my question. I wanted to follow-up on that pricing question. I know you are not trying to extract more, I mean to play devil's advocate a little bit, like given the shortages out there, why not? I mean you're in a period of time right now where At this point, like why is this not the time even on a selective basis to try to extract more, Especially given it seems like some of your peers actually are going down that path, like why not you guys?

Speaker 2

Yes. Hi, Stacy. There is a very clear answer to this, which is we are not in the commodity The very, very vast majority of our portfolio is application specific. And with that portfolio, we are in very deep Longer term relationships with our customers. So what we do is, as Bill said, we pass on the input cost, which is already in some cases a pretty significant element to digest for our customers.

Speaker 2

But we want to be transparent and we want to have long term relationships which are built on trust with our customers. And in that context, we absolutely consider it the right thing to pass on the input costs, but not use it to pad on our margins. I would personally say from being in different markets in the past, in the commodity market that works different, But that's not the kind of market environment we are moving in. And I'm very, very sure that this will pay off positively in the long term relative to the customer relations, which we need to continue to build our business. In that context, it is also important to note That the whole environment clearly has a lot of input costs, which is going up for our customers.

Speaker 2

I mean, it's not just on semis. A lot of other things are also moving. So it's a tough environment for all the participants where I think consistency, transparency and trust Into the long term relationships is a big value and that's something where we do differentiate. Got it. Thank you.

Speaker 7

I guess for my follow-up, even to follow-up on that a little bit. The historical pricing practices, at least at a high level, especially in automotive, Was to have long term price downs that were sort of built into the contracts and you'd be sort of fighting that every year. I guess understanding that we're Maybe coming off a higher base now, at least I'm raising price because of the input cost increases. Do you foresee like a similar type of long term Kind of pricing behavior that are built into the long term contracts, are we are you still going to be fighting a couple of 100 basis points of margin compression Just off the higher base like as part of these long term contracts or is the general pricing structure like long term of these contracts different than it was in the past?

Speaker 2

Yes, Stacy, that's indeed the other side of this discussion. I mean, I can't discuss any customer or very Segment specific trends here, but the overall situation indeed is a reset and that is important and positive. And with reset, what I mean is that the step function which we have to take is something which is here to last. And that comes with, I think I made a comment earlier, with the realization of all the industries we are serving, that's not just Automotive of how important semiconductors are. It just represents a different value to them.

Speaker 2

And from that perspective, I think We make a step here, which is a reset, which is here to stay. How that goes then in individual cases, on individual prices year on year It's hard to anticipate, but I don't think it will go backwards. Got it. Thank you.

Operator

Your next question is from William Stein. Your line is open.

Speaker 8

Great. Thanks for taking my questions. First, I think you just spoke about this a moment ago, but can you talk about the magnitude and duration of Your purchase commitments to foundry and your customer purchase commitments to NXP?

Speaker 2

Well, Bill will fill in maybe with a bit more detail. But I'd say in general, it really varies. I mean, we have some of them on the NC and R side, which is the customer orders. They would typically easily cover next year. So now getting an order which stretches all the way until the end of next year.

Speaker 2

If you think then on the other side, which is the agreements with our foundry and supply partners, I think we actually published a new number, which if I remember right, is between $4,300,000,000 $4,400,000,000 Of agreed and signed supply commitments, which we have entered into with our supplier base. The vast majority of that is obviously in wafers, but mind you, this is not just for 1 year. This stretches out over multiple years to come. $4,400,000,000 to give you a feel.

Speaker 8

That helps. Thank you. And Bill, I want to offer some Congratulations on your new role. Of course, you have some pretty big shoes to fill given Peter's very strong performance and The company's strong performance in the last 10 years or so, I'm hoping you might give us a preview of What you might say next week, at least in terms of your priorities as the new CFO? Thank you.

Speaker 3

Yes. Thank you for your Question. First off, I'm very honored and thankful for the role. I've been in the semi industry for about 20 years. Prior to NXP, I've worked for Fairchild, LSI, and Ear Systems.

Speaker 3

And really no change. As you have to remember, I've been with NXP for about 8 years supporting the company's financial strategy alongside Peter, Kurt and Jeff and the entire management team. I'd say my style is a bit different than Peter's, where principles are the same, focused on delivering, like you mentioned, those commitments and driving long Value to our customers and employees and shareholders. Related to Analyst Day, yes, I'll share that next week related to our long term financial model. But we really like to save that for next week and not address that in this call.

Operator

We have a question from Chris Caso. Your line is open.

Speaker 8

Yes. Thank you. Good morning. First question, I wonder if I could just ask about those long term agreements that you're signing with your customers now. Can you tell us what sort of commitments have your customers made to you under those agreements?

Speaker 8

And it sounds like you're using those agreements from your customers to backstop agreements that you're making with your suppliers, is that for specific volume commitments over a certain amount of time? And Is pricing committed to in those agreements as well such that you have visibility on both volume and pricing?

Speaker 2

So since I really can't go into great detail on this as you will understand, Chris, But the headline is indeed in line with what you are saying. Those customer agreements would typically cover volume and price For example, a period of until end of next calendar year, and they even fix it by quarter. So it's not just one number for the whole year, but in many cases, it even goes to binding it to quarters.

Speaker 8

Okay. Very helpful. And if I could follow-up pricing as well. And clearly, over the past couple of quarters, you've been passing As you said, those price increases you've gotten from suppliers. Can you give us a sense of the magnitude Of the pricing benefit you've seen out of the sort of 26% year on year increase you've seen in revenue, how substantial has price been In that calculation.

Speaker 8

And then as you go forward, are you expecting as you go into next year, there still to be

Speaker 2

Well, generally, as we discussed Before, we will continue to match the rising input cost with adjusting the prices accordingly. Such that, yes, since input costs will continue to go up also next year, there will also continue to be Rising adjustments into next year in general terms. For the rest of your question, I really cannot and don't want To go into greater detail in how much is what piece, it's really just important that the leading concept and philosophy of all of this is That the price increase is just matching the input cost increase and that's it. But that is something which indeed we have this year and which is going to follow us next year too. Got it.

Speaker 2

Thank you.

Operator

Next question is from Blayne Curtis. Your line is open.

Speaker 9

Hey, thanks for taking my question. I'll offer my congrats to Peter and Bill as well. Just going back on the auto Sai, I just wanted to be clear. So you've heard from some other companies that they are seeing their customers start to be more selective trying to get kits together. Thanks for all the detail Kurt on that supply chain.

Speaker 9

It seems very complex. So I'm just kind of curious, are you seeing that same behavior and maybe seeing Offsetting strength elsewhere or are you a bit different given the company specific, the weather in Texas, etcetera and some of the secular growth That you're not seeing the selective behavior in certain parts? Thanks.

Speaker 2

Blaine, I think what you try to ask me is, am I seeing a slowdown? And the clear answer is no, We absolutely don't see a slowdown. And you can imagine that especially the car companies with a pretty Significantly negative impact to their car production numbers of this year and the ambition to grow them next year by, I don't know, 10 plus percent Over this year, they clearly need more semiconductors, and that is not limited to one product or one technology. I think I also made the very open comment earlier that 75% of the product Portfolio in our automotive business still has a lead time of about 52 weeks. I think that says it all.

Speaker 9

This is an amazing stat. Thanks. Maybe you could just no one asked on the industrial IoT, Maybe just kind of discussion about what the areas of strength are for you and maybe you could describe Supply chain as well for the back half of the year here, are you just as tight? That would be helpful. Thanks.

Speaker 2

Yes, Blayne. It is very tight to, I would say no different to automotive. Also by the way, the impact of not shipping enough products is at least as significant as in automotive. It just catches less headlines in newspapers. But if you think about the impact on industrial automation, which is huge machinery, which cannot be built If there is not enough semiconductor supply or in the smart home, it's equally drastic As it is in automotive, just catching less headlines.

Speaker 2

Now our big differentiator more and more is our capability to offer complete solutions, Complete solutions around the processor. We've had that leadership in the very wide range and portfolio of processing solutions into industrial, but it's now very nicely complemented by connectivity, security and analog attach, which which really differentiates us from our competitors. I would dare to say it's a very unrivaled position and offering here, which by the way is also going to be very much in the spotlight of our Investor Day next week to give you much more detail What we have and why we think that makes us grow so much in the time to come. Now from a supply chain or channel perspective, A lot of that business indeed is going through distribution, which is because it goes to thousands, literally thousands of small customers. And this is exactly why that solution capability of NXP makes such a big difference because many of these companies which we are serving there through distribution Don't have the capability themselves to deal with the complexity of these connected edge applications.

Speaker 2

So when and if we can offer them a complete solution, then that has a huge advantage for both time to market, but also from an R and D perspective for them. That's actually what I think is really a very, very significant differentiator for us. Now another element in the equation is We do have a relatively strong exposure to China. So if you think about the industrial business, a lot is going through distribution And a lot is going into China. And just to anticipate the question, we do not see A slowdown there in China.

Speaker 2

But again, mind you, it's also that we are we continue to be supply kept. So As I said earlier, also in industrial, we could certainly run higher revenues if only we have more supply. Good news is also there, our Supply capability, as we discussed with Sean earlier, is improving every month So that over time also there we hopefully get into a better place.

Operator

Okay. Okay. Our last question

Speaker 6

is from

Operator

C. J. Muse. Your line is open.

Speaker 10

Yes. Good morning. Thanks for squeezing me in. I guess first question for you, Kurt. In your prepared remarks, you talked about Auto supply demand balance probably not achieved until 2023.

Speaker 10

And so curious as you contemplate that, What kind of assumptions are you making in terms of what kind of the future inventory management will look like both at the Tier 1s and OEMs? I imagine There's more of a just in case as opposed to just in time. So we'd love to hear your thoughts on kind of that evolution That is likely coming ahead for the auto industry.

Speaker 2

Yes, CJ, absolutely. I did indeed say that I don't think There is, broadly speaking, enough supply next year to already start building those additional inventories Because that's exactly what you're asking for, yes. We clearly see a demand by the OEMs to the Tier 1s And other participants in the extended supply chain, explicitly not the semi companies, but in between, between us and the OEMs, the demand and the requirements To build more inventory, a typical if you want to size this, a typical ask is Somewhere between 3 6 months, sometimes longer. And it has a very simple reasoning. That's the manufacturing cycle time for a semiconductor product.

Speaker 2

So in a very simple way, they say, okay, if this is Inventory then that puts us maybe on the safe side for more flexibility. And yes, this is something which I don't see the industry has capability to build that next year, but that's done for 423.

Speaker 10

Very helpful. And then I guess My follow-up question, obviously, we've seen positive mix shift on The EV side, which you spoke to earlier. I'm curious, as we're seeing more and more OEMs target Full platforms moving over to EV or hybrid as well. I'm curious how that has kind of played with your full solution, Which kind of I would think would fit nicely into that. I would love to hear your thoughts there.

Speaker 2

We love it, CJ. I mean, We talked a lot about our capability from actually also from a solution perspective in battery management solutions, which is greatly benefiting From this faster and accelerated penetration, we will open the Kimono next week a little bit more in the Investor Day And give you insight in what else we do in electrification because we are not only with BMS Exposed to this accelerated trend. So it's a very good thing for NXP and it goes beyond Battery management, while battery management itself obviously is benefiting very greatly. Jeff, I guess with this We come to the end of the call, which maybe gets me in a position just to summarize very briefly. I mean, it's a Turbulent time out there, but I'm really proud that we could deliver what I think is a very good quarter 3, Have a strong guidance into quarter 4, but even more so, we continue to have excellent momentum also into next year, which means continued strong demand across our end markets, no inventory build out there, And we see that our supply capability is getting better and better and better to start matching that demand in the future.

Speaker 2

So with that, I thank you very much for your attendance today, and I hope to hear and see quite a few of you

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