NXP Semiconductors N.V. (NXPI) Q3 2025 Earnings Report, Transcript and Summary

Hello, and thank you for standing by. Welcome to NXP's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Jeff Palmer, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, Towanda, and good morning, everyone. Welcome to our third quarter earnings call today. With me on the call today is Rafael Sotomayor, NXP's President and CEO; and Bill Betz, our CFO. Also on the call with us is Kurt Sievers, who will act as a special adviser to Rafael through the end of 2025. 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 financial results for the fourth quarter of 2025. 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 2025 earnings press release, which will be furnished to the SEC on Form 8-K and is available on NXP's website in the Investor Relations section. Now I'd like to turn the call over to Rafael.

Thank you, Jeff, and good morning. We appreciate you joining our call today. Our overall performance during the third quarter was solid. Our revenue exceeded guidance by $23 million. We experienced sequential growth driven by broad-based improvements across all regions and end markets. We maintained good profitability and controlled operating expenses, resulting in healthy fall-through. Turning to the specifics. NXP delivered third quarter revenue of $3.17 billion, a decline of 2% year-on-year and up 8% sequentially. Non-GAAP operating margin in the third quarter was about 34%, 170 basis points below the same period a year ago and 10 basis points above the midpoint of our guidance. The lower operating margin versus the same period last year was due to lower revenue and gross profit, partially helped by flat operating expenses. Taken together, we drove non-GAAP earnings per share of $3.11, $0.01 better than guidance. Distribution inventory was flat at 9 weeks, consistent with our guidance, while still below our long-term target of 11 weeks. From a direct sales perspective, we believe our shipments into the Tier 1 automotive supply chain has approached end demand. We estimate that aggregate inventory levels of NXP-specific products at our major Tier 1 partners are below NXP's manufacturing cycle time. We believe this reflects a continued cautious approach in the automotive supply chain due to the uncertain macro environment. Overall, during the quarter, we did not experience any material customer order pull-ins or pushouts. Now I will turn to our expectations for the fourth quarter. Our outlook reflects the continued strength of our company-specific growth drivers and signs of a steady cyclical recovery in our automotive and industrial markets. We do not yet anticipate direct customer inventory restocking as one might expect off the bottom of a cyclical trough. From a channel perspective, our guidance assumes distribution inventory may fluctuate between 9 and 10 weeks as we are selectively staging additional products in the channel to be competitive. We are guiding fourth quarter revenue to $3.3 billion, up 6% versus the fourth quarter of 2024 and up 4% sequentially. At the midpoint, we expect the following trends in our business during Q4. Automotive is expected to be up mid-single digits versus Q4 2024 and up in the low single-digit percent range versus Q3 2025. Industrial and IoT is expected to be up in the mid-20% range year-on-year and up 10% versus Q3 2025. Mobile is expected to be up in the mid-teens percent range year-on-year and up in the mid-single-digit range on a sequential basis. And finally, Communication Infrastructure and Other is expected to be down in the 20% range versus Q4 2024 and flat versus Q3 2025. In summary, NXP third quarter results and guidance for the fourth quarter reflect a growing confidence in the company-specific growth drivers and that our new up cycle is beginning to materialize. This is based on the several signals we track regularly. These include continually growing customer backlog placed with our distribution partners, improved order signals from our direct customers, increased short-cycle orders and a growing number of product shortages leading to customer escalations. At the same time, we do not yet see material customer restocking due to the uncertain macro environment. Now an update on our pending acquisitions of Kinara and Aviva Links. We have received all regulatory approvals. We have closed both Aviva Links and Kinara. We are extremely excited about the long-term benefits these acquisitions will bring to our customer engagements and market position. As we have previously shared, in the short term, these acquisitions will have an immaterial impact on the revenue and financial model of NXP. We do believe the revenue impact will be material in 2028 and beyond. The 3 recent acquisitions, TTTech Auto, Kinara and Aviva Links will enable NXP's vision to be the leader in intelligent edge systems in the automotive, industrial and IoT markets. As this is my first earnings call, I would like to assure you that the strategy we laid out during our November 2024 Investor Day stays firmly in place. This includes our product innovation focus in our financial and capital return model. For the last 6 months, I've traveled globally, engaging with our customers, suppliers and development teams. My key takeaway is that NXP's strategy is compelling. We are focused on the most important customers and thought leaders. Our highly differentiated product road maps position us well to achieve our long-term goals. I will continue to work closely with the cross-functional leaders throughout NXP to accelerate our innovation and time-to-market efforts. Overall, we remain focused on disciplined investment and portfolio enhancements to drive profitable growth while maintaining control over the factors we can influence. And now I would like to pass the call to Bill for a review of our financial performance.

Thank you, Rafael, and good morning to everyone on today's call. As Rafael has already covered the drivers of the revenue during Q3 and provide the revenue outlook for Q4, I would like to move to the financial highlights. Overall, Q3 financial performance was solid with revenue, gross profit and operating profit all above the midpoint of our guidance range, while operating expenses were a touch above the midpoint of our guidance due to slightly higher variable compensation. Taken together, we delivered non-GAAP earnings per share of $3.11 or $0.01 better than the midpoint of our guidance. Now moving to the details of Q3. Total revenue was $3.17 billion, down 2% year-on-year and $23 million above the midpoint of our guidance range. We generated $1.81 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 57%, down 120 basis points year-on-year and in line with the midpoint of our guidance range. Total non-GAAP operating expenses were $738 million or 23.3% of revenue, flat year-on-year. From a total operating profit perspective, non-GAAP operating profit was $1.07 billion, and non-GAAP operating margin was 33.8%, down 170 basis points year-on-year and 10 basis points above the midpoint of our guidance range. Non-GAAP interest expense was $91 million, while taxes for ongoing operations were $173 million or a 17.7% non-GAAP effective tax rate. Noncontrolling interest was $15 million and results from equity accounted investees related to our joint venture manufacturing partnerships was a $2 million loss. Taken together, the below-the-line items were $6 million unfavorable versus our guidance, primarily due to a slightly higher tax rate driven by improved profitability. Stock-based compensation, which is not included in our non-GAAP earnings, was $118 million. Now I'd like to turn to the changes in our cash and debt. Our total debt at the end of Q3 was $12.24 billion, up $757 million sequentially. We issued 3 new tranches of debt totaling $1.5 billion with a combined weighted cost of debt of 4.853%. During the quarter, we reduced our net commercial paper outstanding by $735 million. Additionally, we plan to retire 2 tranches of debt due in March and June of 2026, totaling $1.25 billion with a weighted cost of debt of 4.465%. Our ending cash balance was $3.95 billion, up $784 million sequentially due to the cumulative effect of commercial paper reduction, capital returns, equity and CapEx investments offset against the new debt and cash generated during the quarter. Resulting net debt was $8.28 billion with a trailing 12-month adjusted EBITDA of $4.65 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q3 was 1.8x, and our 12-month adjusted EBITDA interest coverage ratio was 15.9x. During Q3, we paid $256 million in cash dividends and repurchased $54 million of our shares, representing a 12-month total shareholder return of $2.05 billion or 106% of non-GAAP free cash flow. After the end of the quarter and through October 24, we bought an additional $100 million of our shares under a 10b5-1 program. Now turning to working capital metrics. Days of inventory was 161 days, an increase of 3 days versus the prior quarter, with inventory dollars up modestly due to prebuilds and wafer receipts from our foundry partners. Days receivables were 31 days, down 2 days sequentially and days payable were 58 days, down 2 days sequentially as well. Taken together, our cash conversion cycle was 134 days. Cash flow from operations was $585 million, and net CapEx was $76 million or about 2% of revenue, resulting in non-GAAP free cash flow of $509 million or 16% of revenue. During Q3, we paid $225 million towards the capacity access fees related to VSMC, which is included in our cash flow from operations. Additionally, we paid $139 million into VSMC and $15 million into ESMC, our 2 equity accounted foundry joint ventures under construction with the payments reflected in our cash flow from investing activities. Now turning to our expectations for the fourth quarter. As Rafael mentioned, we anticipate Q4 revenue to be $3.3 billion, plus or minus $100 million. At the midpoint, this is up about 6% year-on-year and up 4% sequentially, better than our view 90 days ago. We expect non-GAAP gross margin to be 57.5%, plus or minus 50 basis points. Operating expenses are expected to be about $757 million, plus or minus $10 million or about 23% of revenue, consistent with our long-term financial model. Taken together, we see non-GAAP operating margin to be 34.6% at the midpoint, bringing NXP back into our long-term financial model. In addition, our guidance includes about 2 months of operating expenses for the close of Aviva Links and Kinara acquisitions. Now turning to the below line items. We estimate non-GAAP financial expense to be about $103 million. We expect the non-GAAP tax rate to be 18% of profit before tax. Noncontrolling interest expense will be about $14 million and start-up expenses related to our equity account investees will be about $3 million loss. For Q4, we suggest for modeling purposes, you use an average share count of 254.3 million shares. We expect stock-based compensation, which is not included in our non-GAAP guidance to be $118 million. Taken together at the midpoint, this implies a non-GAAP earnings per share of $3.28. Turning to the uses of cash. We expect capital expenditures to be around 3% of revenue below our 5% target as we execute our hybrid manufacturing strategy. This includes consolidating our 200-millimeter front-end manufacturing factories, investing in our 300-millimeter joint ventures with VSMC and ESMC. These investments will result in margin expansion, supply resilience and access to a competitive manufacturing cost structure. As shared at our Investor Day, we will continue to substantially invest in VSMC in Singapore during Q4, including a $250 million capacity access fee payment and a $350 million equity investment. When VSMC is fully loaded in 2028, it will drive a 200 basis point improvement in NXP's total gross margin. Additionally, we will make a $45 million equity investment into ESMC in Germany, enabling additional 300-millimeter supply resilience. Lastly, we will pay approximately $500 million for the closed acquisitions of both Aviva Links and Kinara. And furthermore, we have restarted our buybacks at the beginning of September, and we will continue to buy back stock consistent with our capital allocation strategy. And finally, I would like to extend my personal thanks to Kurt as he transitions to a new and exciting chapter of his life. He's been in an inspiration to all NXP team members and a personal mentor and valued partner to me as a CFO. We will miss his infectious humor, timely counsel and thoughtful insights. With that, I would like to now turn it back to the operator for questions.

[Operator Instructions] Our first question comes from the line of Ross Seymore with Deutsche Bank.

Congrats to both Kurt and Rafael. I guess my first question, a big picture one. Bill, you just mentioned that the guidance for the fourth quarter was better than you expected 90 days ago. But the details Rafael gave, while positive, didn't seem like much had really changed. So what specifically got better over the last 90 days, either by end market, inventory, region, et cetera?

Yes. Let me take that one, Ross. So we -- the way we think about Q4 is we're guiding Q4 sequentially 4% up. And so what we said last time, we said we're going to -- I mean, we did provide a soft guide of Q4 that we said we're going to be flat to slightly up. So I think what I would say is the things that we expected to go, maybe potentially the risk that we have, they didn't materialize. And the signals -- the signals with respect to a soft recovery continue to get -- continue to be there, right? And our order book continues to be strong. The end customer backlog our distribution partners continues to be healthy. And so if you look at the quarter-to-quarter guide, what is driving a slight improvement, I would say, over seasonality, pre-COVID seasonality, is Industrial and IoT, where I think we see signs now of slight demand improvement.

Great. I guess on that front, you mentioned about the inventory staying in the 9- to 10-week level, not quite getting to the 11 that's your target. If you go from 9 to 11, any sort of rough dollar amount that, that contributes that we should think about? And is there any specific trigger that you're looking at to let that inventory get back to its normal level, whether it be in the fourth quarter, which it doesn't sound like or in, say, the first half of next year?

Yes, Ross, so I understand in the past, I mean, we apply a math that it was -- that we said it's about 1 week of inventory equals to $100 million. And I understand the math. But what I would like to kind of for now, think of -- I think it's more useful to look at how we are managing the channel strategically and so kind of shift a little bit of how you look at our channel inventory. If you look at today, given the current environment that we have, where visibility is limited, orders come late, the one thing I want to leave you with is important to have the right product mix in the channel to be competitive, especially when you think about our competition that has significantly higher inventory in the channel than us. And so -- and as you know, we're not a catalog company. So getting the right product mix is really important for us. Now today, right now, we're being selective. We stage in additional products that have -- that we have high conviction of sell-through. And so that one, that's the reason I state that the inventory may fluctuate between 9 and 10 because what I want to leave you with is, in today's environment, weeks of inventory is not static, right? Orders are coming late. Now I would say that your question with respect to when 11 weeks, I would say that as our visibility and confidence continues to improve, and I will confirm your point, we still see the optimal level moving towards 11 weeks. And that may or may not happen in Q1 as we see improvements in the business conditions.

Our next question comes from the line of Francois Bouvignies with UBS.

My first question is on maybe your comment, Rafael, you said that you think inventories are, I mean, low in automotive, for example, and things are getting better broad-based, but you do not expect to increase inventories in the channel, I mean -- or even -- sorry, not in channel, but in the direct channel. So I was wondering if we look at Q1 in terms of seasonality, I think you are down high single-digit percentage quarter-on-quarter for Q1. Should I read this comment as today, with your visibility, you are comfortable with seasonality, assuming there is no stockpiling and demand is stabilizing. Is that the right way to look at it?

So you're asking about Q1?

Yes, Q1 like in a way, directionally based on what you just said, like are you comfortable with the seasonal trend?

Yes. Well, let me just kind of -- before I get into -- I give you a slight answer on that one, I would say that if you look into what we feel good about is the setup into 2026. If you look at how we finished Q4, I think that we are now entering a phase of inventory normalization in auto, and we've seen signals of, I would say, demand improvement in Industrial and IoT. I think we like the setup. I'm not going to guide Q1 for you, Francois, but I think if you're going to model -- I think modeling seasonality, and I would say, using pre-COVID seasonality, which is high single digits decline would be reasonable.

I appreciate the color. Maybe the second question is for Bill. I mean, gross margin is going up in the next quarter. I assume it could be because of mix, but I would be happy to have your view here. But more generally, I mean, your inventories is still fairly high, days a bit higher, dollars a bit higher. So I assume your loading is still -- you keep loading quite high. So how should we think about the gross margin direction after this Q4? Are you going to decrease the loading at the expense of gross margin? Or do you think you can manage this level of gross margin or even increase from here? Just some moving parts would be very helpful.

Sure, Francois. As you could see, as you mentioned, we are guiding gross margins up approximately 50 basis points into Q4. And this is driven by the higher revenues, Francois, improved operational costs and also, yes, higher utilizations, which is actually offset with unfavorable product mix. And then, of course, we have the normal plus or minus 50 basis points on what that mix tends to ultimately be in the quarter. For Q1 2026 and the full year of 2026, we are not guiding; however, please consider our normal seasonality that Rafael just talked about in revenues for Q1, along with our annual low single-digit price negotiations that typically impact us in the first quarter, and we always work to offset those throughout the year through cost reductions and operational efficiencies. So for full year 2026, I would say we expect to be in our long-term model of 57% to 63%, driven by a function of revenue levels, improved utilization, cost reductions offsetting the price gives and the normal product mix fluctuations in any given quarter. I would say, as stated before, please continue to use that rule of thumb for every $1 billion of revenue on a full year basis drives approximately 100 basis point improvement to gross margin. For example, I shared in the past, at $15 billion, we should be at 60%. And then remember, as I mentioned in my prepared remarks, beyond 2027, we also see another lift to our gross margins by approximately 200 basis points driven by our hybrid manufacturing strategy. And again, overall, I think we're very pleased with the trajectory of our gross margins and how we manage this. Related to your inventory question, you're right. In Q3, we finished inventory at 161 days. That was up 3 days. And we're staging inventory to support our growth into Q4. Proactively, we are holding more inventory to support the continued increase of late orders that Rafael talked about, which are coming in below lead times. And of course, the customer escalations have grown quarter-over-quarter, as Rafael shared in his prepared remarks. And as I mentioned last quarter, we started our prebuilds for the 200-millimeter consolidation plans, which by the end of the year will be worth about 6 to 7 days of our total NXP days of inventory. Also remember, we're holding approximately 14 days of inventory on our balance sheet versus our distribution partners, again, that assumes 9 weeks. And with the positive signals we are seeing and from lessons learned from the past, I'm quite comfortable and pleased with the internal inventory positioning. As we mentioned many times, we have long-lived inventory in die form, preventing obsolescence risk. So if you had me to call inventory into Q4, I would say similar levels from a days perspective, plus or minus 5 days is the best view I can give you at the moment into Q4.

Our next question comes from the line of Joe Moore with Morgan Stanley.

I also wanted to touch on automotive customers' kind of view on inventories. And I guess, can you just talk to us a little bit about what those conversations are like? Understanding there's not much overlap between you and Nexperia at this point, I would think stuff like that is a reason to want to hold more inventory and kind of buffer yourself from these geopolitics issues. Just are you seeing any indications that, that is happening or will happen?

Yes. Joe, I mean, that's a great question. And I think it really -- I think the issue with Nexperia really shows that the current level of inventory at the end customer is not sufficient to have any ripple of business continuity. We don't see restocking with our direct customers. And now I would say, I mean, the good thing, right, if you look at the business dynamics of auto highly related to inventory, the normalization and also already a very nice -- already -- we consider a very nice tailwind. And you would expect the next phase to actually be a restocking of inventory, but we have not seen it happen. And so the conversations are pretty much about how they are being very conservative with respect to how they manage their working capital. So no restocking so far.

Yes. Maybe I'll add, Nexperia itself, just to add to it because I think your question, does it impact NXP in any way from a direct standpoint, the answer is no. And as Rafael said, we're still in the early phase and seeing customer escalations, the signals improved. The restocking has not happened nor has price increases that happened, which you typically see during a supply crisis. But those are other signals that we wait to see.

Okay. And is there any impact potentially on automotive production from all of that on the negative side that you could see if they have shortages of other components that it slows production?

Joe, we don't anticipate that. I think the products that are associated right now with Nexperia, these are products that could be second source. I think the qualification process is -- it could be relatively benign for OEMs. But so far, our orders will not indicate any impacts into the production of auto.

Our next question comes from the line of Stacy Rasgon with Bernstein Research.

My first one, I wanted to drill into gross margins a little more. So you are guiding it up sequentially, but it's flat year-over-year even on a pretty decent revenue increase. I guess that's mix, but I'm struggling to see where the mix issue is. It looks like your industrial mix is higher, auto looks about the same. Like what is going on with gross margin? It sounds like utilization, I'm not even sure they don't sound like they're lower year-over-year. Like why aren't we getting more gross margin leverage like on a year-over-year basis?

Yes, Stacy, I think the factor that we see going into Q4, again, what we talked about is from an end segment, our gross margins tend to be much closer to each other to the corporate average. But you can see the -- not the industrial, the comm and infra is down quite a bit year-over-year. And then the other one is you could see we're having record quarters in our mobile space, which, again, you kind of slightly below our margin corporate mix. So those 2 end markets are kind of impacting our mix. From a utilization standpoint, we are in the high 70s or plan to be in the high 70s into Q4 related to it. And so we do have kind of inventory at the high end internally. So of course, that also has an impact of how we run total -- our material throughout the line, just not in the front end, but also in the back end and so forth. So -- but really, those are help offsetting that unfavorable mix that we see at the moment.

Got it. I guess the inventory also helps the depreciate -- the distribution stuff is higher margin as well.

Yes, there's 2 sets of it. So remember, the distribution and what you'll see is actually our distribution sales will be up quarter-over-quarter, but let me remind you that a portion of that or a large portion of it is driven by our mobile business where we drive and use the distribution partners in that mobile end market. And so that's what's driving the increase from a quarter-over-quarter perspective.

Got it. For my follow-up, I just wanted to level set. So it sounds like there is some disty fill into Q4. So if I say half a week, I guess, is that -- do I just like roughly think of that as $50 million of income on the -- impact into the Q4 guide? And I know you said Q1, you were comfortable with seasonal, but does that incremental channel fill in Q4 influence how we might think about Q1 seasonality? Are you sort of implicitly assuming that you are going to be putting more into the channel in Q1 for a seasonal guide?

Okay. There were several questions on that one, Stacy. Let me grab that one. So you made a comment again on the -- on trying to kind of equate where we're going to end up in the channel. And I mean you mentioned $50 million. And again, I mean, I wouldn't see it that way. I mean we gave a guidance of $3.3 billion. The demand -- again, the visibility that we have right now is low. Orders are coming late. And so where the weeks of inventory end up in the channel, like I said, it may fluctuate between 9 and 10. It's not going to be more than 10, it may be 9. And so to put a formulaic kind of way of looking at how much revenue is going to come from weeks of inventory staying in the channel, I don't know if I can really kind of go there given how fluid the demand is. Again, we're putting products that we have high conviction of sell-through, right? And so I don't see it...

But you must have a scenario that's baked into the guidance for Q4, right?

Yes. And the scenario says that it depends -- the inventory may fluctuate between 9 and 10 weeks. The scenario is what material we put in the channel.

Our next question comes from the line of Tom O'Malley with Barclays.

The Industrial and IoT business seems very strong to close the year, kind of particularly versus where expectations were. You guys have been helpful in the past about kind of laying out where you're seeing that strength, whether it's the core industrial side or more on that IoT side. Could you give us a little bit of a feel of what's moving into your Q4?

Yes, Tom, let me just step back. I mean, if you look at our Industrial and IoT business, at a high level, 60% is core industrial, 40% is consumer. And even within that, 80% of the revenue flows through distribution. So it just kind of gives you kind of step up. Now what we've seen in IoT, the end customer backlog through the channel continues to improve. So we see really strong signs of demand improvement. On the consumer side, this is where we continue to benefit from company-specific drivers. And this, for instance, I'll give you an example that there's a new category of wearables. There's smart glasses that have high demand. They require high-performance, low-power processing. And this is an area where our portfolio is strong. So we're seeing some tailwinds on that side. And the core industrial, we're seeing broad-based improvements across regions and products. And for us, if you were to drill into a little bit of the application specific, it will be driven by -- for us, it is driven by energy storage systems and building automation. Now let me put a caveat here. I don't think we will be -- the first one to tell you, we don't see ourselves as bellwethers for Industrial and IoT. And so what we see, it may be that this is very company specific.

Helpful. And then a similar question just on the automotive side because it's useful to kind of see what's moving here is just on the S32 portfolio, like you've seen some really strong growth trends. And like part of the reason many think that you guys have handled this a lot better is just the growing portion of your business that is levered to processors. So maybe again, what happened in the quarter, maybe the processor business versus the rest of auto? And then into the fourth quarter, any kind of color on if there's a divergence there, how we should be thinking about just the entire auto business with those 2 pieces?

No. I think, Tom, I mean, we were encouraged about the direction that auto is taking, right? I mean if you were to take just Q3, in Q3, we were only 3% below our prior peak. And so I think that's encouraging. Now with respect to what is driving the performance in the business, I mean, it continues to be what we deem -- what we term calling accelerate growth drivers. And these are in the software-defined vehicle, which is the 32 franchise that you mentioned, is radar, is connectivity. And so if you were to ask me what is driving this, that is exactly what is -- I mean the secular shift to software-defined vehicles is driving the performance of auto.

And Tom, if I could add, we'll provide a full year kind of update on where we're at with our accelerated growth drivers on our Q4 call. But directionally, I'd say we feel very good about how the accelerated growth drivers are playing out intra-quarter.

Our next question comes from the line of Vivek Arya with Bank of America Securities.

Best wishes to both Rafael and Kurt. So Rafael, let's say, if '26 plays out the way '25 did with China OEMs and EVs growing, but the rest of the world not growing or flattish, what does it mean for NXP? So in an overall flattish auto production environment, what kind of lift can content provide net of any pricing movements? Like can your autos be conceptually within your long-term model for next year?

So Vivek, I think the one thing I want to maybe reframe the way we -- the drivers of our business, right? Car production is not the driver of our business. We're not SAAR related. I mean if you were to look at the production, the production has been stable for years. I mean it varies 1% here and there, but it stays pretty flat at [ 90-ish ] million a year. Content growth dwarfs SAAR growth. And so -- and then what you have in auto is the production is quite stable. But you have a very complex supply chain. And that complex supply chain is the one that creates either bubbles in inventory, but or vacuums that create shortages. And that -- the supply chain is the one that creates the cyclical aspect of our business. If I just say -- the way I see it is we see normalization in inventory. If you already get behind the content growth of auto, normalization of inventory is something that we see as very, very positive for the direction of auto. And so I just want to kind of basically reframe the way I think you posed the question a little bit and the way we see it. Content growth and normalization of inventory provides for us an optimistic view of our business in auto in 2026.

And for my follow-up, Bill, on gross margins, is it just volume that takes you from the kind of the lower end of the 57% to 63% range right towards the middle of the range? Or are there any new products, any new kind of mixing up of your portfolio that can provide benefits on top of any volume benefit?

Absolutely. As we said in the past, our new product ramps are accretive to the company, and they go through their normal growing pain, of course, as they ramp and other parts of our products roll off. I mean, mix is really the one that what orders we get, what orders we serve. We serve over 10,000 SKUs or products every quarter. And so we have to adjust and either accommodate for it and offset those or vice versa, let them fall through, and that's why gross margin improves as another factor related to it. But really also our hybrid manufacturing strategy as we move more to 300-millimeter and as we're making all these investments, that will start to yield benefits beyond 2027, as I talked about. But short-term levers, again, it's -- I think we're doing a really good job offsetting any price gives that we give through our cost efficiencies and productivity internally on test time reductions and so forth. So those -- that's really what we're supposed to go do day in and day out. And I think the team is doing a good job. And you can see this by just our variability in our gross margins through this last cycle. So I think as we become less fixed cost, that will just improve with that variability going forward. As I mentioned today, we're 30% fixed. And my guess is in about a couple of years from now, once we finish our consolidation efforts, so I think 5 years and so we'll probably below 20%, which will reduce that variability.

Our next question comes from the line of Chris Caso with Wolfe Research.

I wanted to go back to some of what you said with inventory levels, particularly at your direct automotive customers. Where do those inventory levels stand now? And you quantified a bit on what the impact would be as the distribution channel -- increased inventory. Is there any -- I mean, help us with the magnitude of what would happen if those direct auto customers finally decided that they didn't need to restock.

So Chris, what we see right now that we are starting to shift to end demand. And I think that normalization and we can see it in our orders. And we did say indeed that we don't see the restocking. Now the specific question of what the levels are, I think we don't have visibility at a granular level per customer per Tier 1, that will be a complex. But it's very clear to us that is way below our manufacturing cycle. And that's what I mean by is I think that is just eventually not a healthy level to be able to manage sustainable business. I can't comment whether this will happen or not in the next few quarters or in even 2026. But that is a potential scenario of restocking is indeed a tailwind for our business that is something that will provide benefit for us.

Maybe I could add a little bit, Rafael. Chris, as you know, for about the last 8 quarters, we've been undershipping into the Tier 1 supply chain and actual end production. So it's actually been a headwind to us. I'd say over the last 2 quarters and in our guidance into Q4, we started to see that headwind subside. And so we think the inventory levels at the Tier 1 are where they, the Tier 1 players, believe are normalized for the current environment. They are still very cautious on the macroeconomic outlook. And so as Rafael said, we've not seen that next lever of restocking occurring. But when you go from a headwind of undershipping to at least shipping to end demand, that's the new growth in the short term. Did you have a follow-up, Chris?

I do. I wanted to come to your comment on buybacks that you mentioned in your prepared remarks. Could you give us a little more detail on what the intention is going forward and what we should expect now that you're resuming the buybacks?

Yes. No change to our capital allocation strategy, Chris. As shared in our prepared remarks, we restarted our buybacks. As I mentioned, we have a lot of cash going out. And so we just wanted to make sure we had all the cash to continue to return and make all the investments we want to make inside NXP, but also balance that with healthy returns to our owners. And so if you look at the last 12 months, we returned 106% back to our owners, and we're going to continue to go do that.

Our next question comes from the line of Blayne Curtis with Jefferies.

I just want to ask on the kind of cyclical tailwinds versus seasonality. I mean, I guess if you look at December, it's really just industrial that maybe you could argue is above typical seasonality. And then I think you said just soft guidance for March, normal. I think a lot of people have talked about just the slowing down of cyclical recovery. I mean your comments were pretty positive, Rafael. So I'm just kind of curious if you can just kind of assess -- if you're just looking at seasonality, I guess, is there -- is the cyclical tailwind slowing? And I guess maybe you can look at the different markets and if you feel differently about them.

Yes. I think if you look at the Q4 numbers, you clearly stated industrial and IoT was above robust seasonality. I would say that automotive was slightly better than seasonality, right, pre-COVID levels. And the drivers are -- they have one common driver that is, I think, is inventory digestion is almost done. I think that is one normalization is a big deal. And we're starting to shift to true end demand in automotive, and we're starting to see some company-specific drivers in industrial and IoT that are helping us. With respect to whether seasonality is going to change, are we calling an up cycle, I think we're careful with that because, one, we do have the inventory digestion done as a factor for an up cycle. We do see some specific areas of growth in industrial, and we see an encouraging signs of true demand in industrial and IoT. And so we do see the elements of a soft up cycle. And that's the reason why I would say that like that if you were to ask me today, are you more optimistic than you were last quarter? I would say that we are slightly more optimistic than last quarter.

And then I wanted to ask you on mobile. I mean, if I have the numbers right, it might be a record. I'm just kind of curious the drivers behind that.

Blayne, in mobile, we're a specialty player there, mostly driven by the wallet and a little bit of custom analog that we do for a Tier 1 customer there. I see the moves of Q2 to Q3 and Q4. And I think you got to take Q3 and Q4 together, is purely, in my opinion, it's just a seasonal move and some strength in some of our customers.

Our next question comes from the line of Joshua Buchalter with TD Cowen.

Congrats to both Rafael and Kurt and good luck. I know it's still early in earnings season, but your comments and outlook on the Industrial & IoT segment, were certainly better than your peers who have mainly talked about decelerating trends. We've kind of touched on it a little bit, and I realize you're not going to comment on peers. But would you say the difference in what you're seeing versus peers is because of inventory management or more product cycle driven? And what gives you confidence in the sustainability of sort of the up cycle that you're starting to see signs of with orders still coming in late and with the lead time?

Yes, Josh, so I can speak -- speak of NXP's situation with respect to Industrial and IoT because for us, Industrial and IoT has indeed been one of the more challenging end markets since 2022. And as of Q3, our business is still 20% below our peak, right? And again, I do remind you that we're not the bellwether for Industrial and IoT, so the comparisons to other, you can say, peers may not be, I guess, relevant. But I would have to say that we did manage inventory in a different way. We were very disciplined in the way we manage our business in the down cycle. And I think I would say that we will be similarly disciplined managing what we see, and I would say as a soft up cycle. And again, I mean, we are having some company-specific drivers there that are driving demand that is true new demand. And we have exposure to a few company-specific design wins in the core industrial that is driving some of the improvement. But I don't know how you will take that as a bellwether for the industry.

Understood. Helpful color. And I was maybe also hoping that you could provide some color on the China auto market, what you saw there intra-quarter and your expectations into 4Q. I believe a good amount of that is actually served by the disty. So our inventory levels there lean as well?

Yes, China -- I mean, listen, I was in China a few months ago with Kurt, and we did a customer visit to both China, Taiwan and actually Japan. China specifically, China continues to be strong. It continues to be a very dynamic market, themselves, the auto industry there is very competitive, and they continue to actually push for innovation, push for product. Our -- I would say our inventory situation there is also lean -- is also, but it's a business that is driven, that is driving is strong. We have good customer traction. So we feel very optimistic about our position in China.

And Josh, if I could just add as a reminder, in the Asia market, specifically in China auto, we service the majority of that through our distribution channel. And it is in the Western markets in North America and Europe, where we do it on a direct basis. So our approach to channel management, which I'd say is probably best-in-class, we take a heavy hand there even in Asia with the channel.

Our next question comes from the line of William Stein with Truist Securities.

First, I'm hoping you can remind us about the strategic purpose of the recent acquisitions? I think TTTech closed recently, but then you have the 2 new ones as well. Can you just frame that as it relates to the rest of the autos business? And then I have a follow-up.

Yes. William, these acquisitions are actually directly aligned with the strategic direction of bringing intelligent systems at the edge of industrial and automotive. If you look at TTTech is a company that is a software company that is going to help us accelerate our move of the system-defined vehicle and around S-32s and around a system approach. And so quite excited to have them. It's a capability that would have been very difficult to obtain organically. And it's a company that brings IP-specific also in functional safety at a system level. Aviva Links is a company that has a really, really, I would say, innovative technology on a SerDes technology that is a standard. So it's a standard SerDes. And that is critical to standardize sensors think of our radar, think of cameras, think of LiDAR around a core processor, which, in this case, will be our S32. So we're quite bullish on Aviva Links. And Kinara brings AI capabilities, especially GenAI capabilities, high performance, low power that is going to also accelerate our portfolio of intelligent into the edge.

And then as a follow-up, there's been some discussion about some elevated competitive dynamics in the infotainment part of your autos business. Can you remind us how big that is in your autos business and maybe update us on that competitive situation?

Will, I'll take that one. So if you think about IVI in vehicle infotainment, there's kind of 2 parts. There's the visualization what you see on the dashboards and there's the what you hear the audio portion. I'd say on IVI auto, we continue to be a dominant player there. On the visualization, our performance is maybe a little below some of our peers, but I think that's very well known at this time. And I think with that, Towanda, I think we're going to need to move back to Rafael for closing remarks, if we can.

Well, thank you, everyone, for joining us today and your thoughtful questions. This quarter marks both a leadership transition and a reaffirmation of NXP's consistent strategy, focus on profitable growth, disciplined execution and predictable returns. We are encouraged by the gradually increasing signs of a cyclical recovery across our automotive and Industrial and IoT end markets and by the continued strength of our company-specific growth drivers. Our priorities remain clear: deliver on our commitments and manage what is in our control and position NXP to continue to grow profitably. I want to express my gratitude to Kurt for his outstanding leadership and for the partnership we have built over many years. In his 30-year career at NXP, he has left a lasting legacy, navigating us through various challenges and positioning NXP as a leader in the markets we serve. I am truly humbled to follow his footsteps. It is a privilege to lead this company and this team. I am excited about what we will achieve together. Thank you.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.