• NXP’s Q3 2022 revenues were $20 million more than the midpoint of the company’s previous guidance. The automotive, mobile and communication infrastructure segments performed better than expected. But the consumer-exposed IoT and Android mobile segments experienced weakness.
• NCNR order book continued to surpass NXP’s 2023 supply capabilities.
• For Q4, the company expects revenue of about $3.3 billion (± $100 million). This would mean an increment of 9% YoY with 4% downside sequentially. Non-GAAP gross margins are expected to be 57.8% (± 50 bp) and operating expenses are expected to be near $720 million (± $10 million).

NXP reported revenues of $3.45 billion in Q3 2022, an increase of 20.4% YoY and 4% QoQ, and $20 million more than the midpoint of the company’s previous guidance. NXP’s automotive, mobile and communication infrastructure segments performed well compared to Q2, while the industrial and IoT segment struggled. Specifically, the consumer-exposed IoT business, accounting for almost 40% of revenue, experienced weaker sell-through in the channel. However, demand from automotive and core industrial customers remained resilient supported by accelerated growth drivers. Due to higher factory utilization and sales volume, the non-GAAP gross profit was almost $2 billion and the margin was 58%, up 150 basis points YoY.

Sources: Company, Counterpoint 

Automotive

• NXP’s strong suit, the automotive segment accounted for 52.4% of the total revenue in Q3 and stood at $1.8 billion. This was a 24% YoY and 5% QoQ growth. Auto demand for silicon content continues to be robust with rising EV penetration and increased autonomy efforts. Strong growth for advanced analog, automotive processing and radar solutions was visible in Q3. However, due to supply constraints, there was a shortage of microcontrollers and analog products in automotive. The NCNR order book in this segment continued to outstrip the company’s supply capacity, which will remain “sold out” next year too.
• The company also announced collaborations and a product launch in the third quarter. NXP’s S32 family of domain and zonal automotive processors is gaining traction among automakers as a preferred scalable platform for software-defined vehicles. A leading global automaker has selected the S32 MCUs/processors for its upcoming fleet of vehicles, starting 2025. NXP released the second-generation RFCMOS radar transceiver, TEF82xx, which supersedes the market-proven TEF810xx. This high-performance, single-chip solution supports short-, medium- and long-range radar applications including cascaded high-resolution imaging radar. Besides, NXP has collaborated with ChargePoint of the US for charging solutions and has also included its proprietary payment solutions to allow a seamless process for the customers.
• For Q4 revenues, NXP is estimating this segment to be in the high teens and flattish on a YoY and QoQ basis respectively.

Industrial & IoT

• The industrial and IoT segment’s revenue was $713 million, an increase of 17.5% YoY with no QoQ change and $32 million below the company’s guidance. The YoY increase was driven by the demand for crossover processors, 32-bit AMR MCUs, point-of-sale security solutions and more. As mentioned earlier, the consumer-exposed IoT business was much impacted. Since August, there was a global softening visible in the consumer IoT market with China getting affected strongly. Since NXP has a sizeable channel exposure in China and serves thousands of customers via distribution partners, the revenues in that domain took a hit.
• Going forward, NXP could ship more into the channel but instead decided to limit channel inventory to 1.6 months (as opposed to the long-term target of 2.5 months) to prevent losses due to uncertain macro conditions. The company will closely gauge and adhere to market requirements depending on the developing demand and, if required, redirect it to other customers. With respect to on-hand inventory, the DIO increased five days sequentially to 99 days with more increments expected in the future.
• For Q4, the industrial and IoT segment is expected to be in the negative territory in both YoY (low double-digit) and QoQ (high teens) terms.

Mobile

• The mobile segment had revenues of $410 million, up 19% YoY and $30 million more than what was expected. Despite seeing weakness in the Android mobile market, NXP attained better than estimated revenues due to being exposed to the higher-end (which seems to be doing better) rather than the lower-end mobile phone market, increased attach rate for its secure mobile wallet, advanced analog high-speed interfaces, eSIM connectivity and more.
• As Ultra-Wideband (UWB) penetration starts picking up in different verticals like mobile, IoT and cars, the company will be able to accrue more revenues in the future, from its UWB technology along with mobile wallet solutions. UWB use cases are already visible in China as UWB functionality in phones (flagship models) such as those from Apple, Samsung and Xiaomi. These smartphone players have collaborated with automakers to implement UWB-based solutions in cars to offer consumers secure car access. NXP expects four Chinese OEMs to offer this technology by the end of this year with a minimum of three more to follow in 2023. Kostal is using NXP’s UWB technology for its digital key system, which is being adopted by local company Nio.
• For Q4, the company is expecting this segment to be up in the low single-digit range YoY and down in the upper single-digit range QoQ.

Communication Infrastructure & Other

• The communication infrastructure and “other” segment’s revenue was $518 million, slightly above the guidance. Annual and quarterly growth rates were 14% and 4% respectively. The growth can be attributed to the demand for network edge equipment, RFID tagging solutions, cellular base stations and more.
• NXP launched its new higher-power BTS7202 RX front-end modules (FEM) and BTS6403/6305 pre-drivers for 5G massive multiple-input multiple-output (MIMO) going up to 20 W per channel. These solutions complement its 32T32R active antenna systems and are developed using the company’s silicon germanium (SiGe) process. As 5G network coverage expands, there is a need for higher-power solutions to ensure consistent network quality along with reduced operational costs for MNOs. The newly announced devices can cater to these requirements with higher power per channel and modest consumption.
• For Q4, the guidance seems positive and stands in the low-teens range YoY and flattish QoQ.

Capex Overview and Inventory

• Cash flow generation continues to be excellent according to the company. In Q3, cash flow from operations stood at $1.14 billion compared to $819 in Q2. Net capex accounted for 8.2% of the revenue or $281 million. Due to supply constraints and strong demand (especially in the auto sector), internal utilization remained in the high 90s. More than 65% of the capacity was focused on IP proprietary mixed-signal, auto-centric capacity internally.
• Capex for this year has decreased from 10% to 8% due to delays in equipment deliveries. For 2023, it will range between 6% and 8%.
• From the demand perspective, there is weakness in the consumer IoT and Android mobile market, whereas the automotive and core industrial markets are witnessing resilient demand. On the supply side, the situation is reversed with the latter markets facing supply crunches and not being able to cater to the true demand. On the other hand, in the former markets, excessive shipping in channels is being prevented because of uncertain macro conditions.

Conclusion 

NXP’s supply capabilities have improved over time but major end markets like auto and core industrial continue to face shortages. Prevalent weak macro conditions and extended China lockdowns will cause further hindrances to the revenue recovery of consumer-oriented markets. However, the company is being cautious and trying to mitigate costs by reducing its discretionary spending, lowering incentive compensations, and focusing on a strict approach to managing distribution channel inventory.