NXP_SEMICONDUCTORS_NXPI Earningcall Transcript Of Q2 of 2024

William J. Betz -- Chief Financial Officer

Thank you, Kurt, and good morning to everyone on today's call. As Kurt has already covered the
drivers of the revenue during Q2 and provided our revenue outlook for Q3, I will move to the
financial highlights. Overall, the Q2 financial performance was good. Revenue, non-GAAP gross
margin, operating expenses, and distribution channel inventory all came in line with our
guidance.

Turning to Q2 specifics, total revenue was $3.127 billion, down 5% year-on-year. We generated
$1.83 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 58.6%, up 20
basis points year-on-year, and 10 basis points above the midpoint of our guidance range. Total
non-GAAP operating expenses were $760 million, or 24.3% of the revenue, down $11 million
year-on-year. This was $5 million below the midpoint of our guidance due to lower than
anticipated hiring.

From a total operating profit perspective, non-GAAP operating profit was $1.07 billion, and
non-GAAP operating margin was 34.3%, down 70 basis points year-on-year, and up 30 basis
points above the midpoint of our guidance. Non-GAAP interest expense was $67 million, with
taxes for ongoing operations of $169 million, or a 16.8% non-GAAP effective tax rate.
Non-controlling interest was $6 million, and stock-based compensation, which is not included in
our non-GAAP earnings, was $114 million. Taken together, we delivered non-GAAP earnings per
share of $3.20, consistent with our guidance.

Now, I would like to turn to the changes in our cash and debt. Our total debt at the end of Q2 was
$10.18 billion, with our cash balance of $3.26 billion, down $49 million sequentially, due to the
cumulative effect of capital returns, capex investments, and cash generation during Q2. The
resulting net debt was $6.92 billion, and we exited the quarter with a trailing 12-month adjusted
EBITDA of $5.3 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of
Q2 was 1.3 times, and our 12-month adjusted EBITDA interest coverage ratio was 23.1 times.

During Q2, we paid $260 million in cash dividends and repurchased 310 million of our shares.
Taken together, we returned $570 million to shareholders, representing 99% of non-GAAP free
cash flow. After the end of Q2, and through Friday, July 19th, we repurchased an additional $69
million of our shares under an established 10b5-1 program. Turning to working capital metrics,
days of inventory was 148 days, an increase of four days sequentially, while distribution channel
inventory was 1.7 months, or just over seven weeks.

The combination of balance sheet inventory and channel inventory was about 200 days of
inventory. Days receivable were 27 days, up one day sequentially, and days payable were 64
days, a decrease of one day versus the prior quarter. Taken together, our cash conversion cycle
was 111 days, an increase of six days versus the prior quarter. Cash flow from operations was
$761 million, and net capex was $184 million, or 6% of revenue, resulting in non-GAAP free cash
flow of $577 million, or about 18% of revenue.

Turning to our expectations for the third quarter, as Kurt mentioned, we anticipate Q3 revenue to
be $3.25 billion, plus or minus about $100 million. At the midpoint, this is down 5% year-on-year
and up 4% sequentially. We expect non-GAAP gross margin to be about 58.5%, plus or minus 50
basis points. As Kurt noted in his prepared remarks, we will continue to stage inventory in the
channel to support growth in future periods.

Our guidance assumes approximately 1.8 months of distribution channel inventory exiting Q3.
Operating expenses are expected to be $760 million, plus or minus $10 million. Taken together,
we see non-GAAP operating margin to be 35.1% at the midpoint. We estimate non-GAAP
financial expense to be $67 million, with the non-gap tax rate to be 16.8% of profit before tax.

Non-controlling interest and other will be about $9 million. For Q3, we suggest for modeling
purposes, you use an average share count of 258.5 million shares. We expect stock-based
compensation, which is not included in our non-GAAP guidance, to be $116 million. For capital
expenditures, we expect to be around 6%.

Taken together, at the midpoint, this implies a non-GAAP earnings per share of $3.42. Before
going to my closing remarks, I will provide additional details of the VSMC joint venture, as
discussed by Kurt earlier. The total cost of the joint venture will be $7.8 billion. The NXP
investment into the venture is $2.8 billion, made up of $1.6 billion commitment for a 40% equity

stake in the joint venture, and an additional $1.2 billion investment for long-term capacity
access.

Vanguard will invest $3.1 billion, made up of $2.4 billion for a 60% equity stake, and an
additional $700 million for long-term capacity access. The remainder of the funding will be
provided by other sources in the form of subsidies and loan guarantees in Singapore. This joint
venture will not consolidate into NXP's financial statements, but the profits and losses will be
reflected under the equity accounting investees in our non-GAAP income statement. The
investment will be funded from cash flow from ongoing operations, with no need to raise
additional debt.

Additionally, the joint venture will provide approximately 200 basis points of gross margin
expansion to our total corporate gross margin when fully operational in 2029. The gross profit
benefit is derived from the incremental revenue, the benefits of the increase to 300 millimeter
wafer size, and the avoidance of typical margin stack-in when buying material in the commercial
foundry market. So in closing, looking through the remainder of 2024, I would like to highlight
three areas of focus. First, with the VSMC and ESMC investments, there is no change to our
capital allocation policy.

We have returned $2.4 billion, or 81% of the free cash flow generated over the last 12-months.
Furthermore, we will continue to be active in the market repurchasing NXP shares. Second, we
will continue to be disciplined to manage what is in our control and stay within our long-term
financial model. Specifically, we expect our gross margin will continue to perform at or above
the high end of the long-term model.

And then, lastly, we feel confident to resume sequential growth through the second half while we
continue to stage inventory in the channel in a targeted and controlled manner. I would like to
now turn it back to the operator for your questions.

Questions & Answers: