NXP Semiconductors N.V. (NXPI) Q3 2026 Earnings Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the NXP Third Quarter 26 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question-and-answer session. If you would like to ask a question, please press 1, 1 on your telephone. If you would like to remove yourself from the queue, please be advised that today's conference is being recorded. I would now like to turn the conference over to Michael C. Lucarelli, Senior Vice President-- Excuse me, Senior vice president, investor relations. Please go ahead.

Michael C. Lucarelli: Thank you, Lisa, and good afternoon, everyone. Welcome to NXP's third quarter earnings call. With me on the call today are Rafael Sotomayor, NXP's President and CEO and Bill Betts, our CFO. 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 not limited to, statements regarding the macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products, and our expectations for the financial results for the fourth quarter of 26. 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 26 earnings release. Which will be furnished to the SEC on Form 8-K and is available on NXP's website in the Investor Relations section at nxp.com. I will now turn the call over to Rafael.

Rafael Sotomayor: Thank you, Mike, and good afternoon. In Q3, we exceeded our outlook across all end markets and every region grew double digits year on year. Growth was led by our company specific growth drivers in automotive and industrial which grew 30% year over year and represent roughly a third of our total revenue. As well as continuous strength in data center infrastructure. Revenue was $3.79 billion up 19% year-over-year or up 22% excluding the MEMS sensor business. Non GAAP operating margin was 37%, up 33 basis points and non GAAP EPS was $4.20 up 35% year over year. These results are translating into strong free cash flow generation. Enabling us to invest in the business and return cash to shareholders. To that end, our Board has authorized an incremental $5 billion for share repurchases bringing total authorization to around $6.3 billion Now turning to end market performance. Automotive revenue crossed $2 billion for the first time. Up 17% excluding sensors. This growth is driven by content gains led by our SDV portfolio in a flattish unit production environment. SDV revenue in Q3 is running above $1.5 billion annualized and remains well on track to reach our $2 billion 2027 target. We view the transition from domain based architectures to zonal and centralized compute as a multi year upgrade cycle that will enable physical AI and autonomous capabilities in the vehicle. These new architectures create a need for system solutions that drive higher content across NXP's portfolio including additional processing end nodes, connectivity, and power management. This results in 2x to 3x higher content per vehicle compared to today's architecture. This evolution is still in its early stages. In 2027, we will begin shipping our next generation SDV processors including the S32K5 zonal and S32N central-compute platforms. We are starting to see material proof points of the SDV transition. TTTech Auto, the joint venture of Volkswagen and Rivian, announced yesterday it has standardized its zonal platform NXP S32K5 across both companies. This is a clear signal for the leadership of NXP's SDV portfolio and where the industry is heading. Engagements with our new platform continue to expand globally, and we now expect our first S32K5 shipments in China as early as the first quarter of 27. Software defined vehicles are 1 of the first deployments of physical AI. The opportunity to reach us well beyond the car. The same building blocks of central compute sensing, networking, and secure control are moving into robotics and other intelligent systems at the edge. This quarter, we secure our first S32K5 design win in humanoid robotics with a leading U. S. Global technology company. Now moving to industrial and IoT. Revenue was $820 million, up 39% year over year. The industrial portion of this end market grew nearly 50%, led by data center, factory automation and healthcare. It now represents about 70% of Industrial and IoT. As we mentioned in our Q2 call, AI enabled processors will represent approximately 15% of Industrial and IoT processor revenue in 2026. More than doubling from last year. With market adoption of intelligent systems, we expect growth to continue in 2027. eIQ, our discrete NPU is a key component of our AI portfolio. It continues to gain traction across industrial automation and automotive AI applications. And we expect to be in volume production in 2028. Now, let me give you an update on our data center business. Given the strength we are seeing year to date, we now expect the revenue to exceed the $500 million outlook provided earlier this year. Given the new products we are developing, combined with expanding customer engagements, we now expect this business to be over $1 billion in a couple of years. Moving to communication infrastructure and other, Revenue was $503 million, up 54% year over year driven by data center and secure cards. And lastly, mobile revenue was $411 million, down 4% year over year. Turning to our Q4 outlook. Guiding revenue to $3.85 billion, up 2% sequentially and up 15% year-over-year, or 18% excluding sensors. This would represent our fourth consecutive quarter of double digit annual growth. At the midpoint, we expect the following trends in our business during Q4. Automotive is expected to be up in the low double digit percent range year over year. And up low single digit sequentially. Adjusted for the sale of the MEMS sensor business, our guidance implies a high teens percentage growth year over year. Industrial and IoT is expected to be up in the high 20% range year-over-year and up in the low-single-digit range sequentially. Mobile is expected to be down in the mid-teens percent range year-over-year and up slightly on a sequential basis. And finally, communication infrastructure and other is expected to be up over 50% year-over-year, and up low-single-digits single digits sequentially. And now, I will hand the call to Bill for a review of our financial performance.

William J. Betz: Thank you, Rafael and good afternoon to everyone on today's call. As Rafael has already covered the revenue drivers I will turn to the financial highlights. Q3 was another strong quarter. With record revenue, operating margin and non GAAP EPS. Revenue grew 19% year over year, and 8% sequentially to $3.79 billion The growth was led by our company specific growth drivers, across software defined vehicles, electrification, connectivity, radar, and industrial edge processing, as well as continued momentum in our emerging data center business. Non GAAP gross margin was 58.6%, up 160 basis points year-on-year. Our gross margin performance reflects improved factory utilization, and solid fall-through on higher revenues. Non GAAP operating expenses were $810 million, or 21.4% of revenue reflecting strong operating leverage. This led to a non GAAP operating margin of 37.1% up 33 basis points year-over-year. Below the line, non GAAP interest expense was $85 million Tax rate was steady at 18%, Noncontrolling interest was $15 million And results from our joint venture equity accounted investees were a $4 million loss. This resulted in non GAAP earnings per share of $4.20 increasing 35% year over year or about 2x our revenue growth rate. Turning now to the balance sheet cash flow, and capital returns. Our balance sheet remains strong. Providing flexibility to invest in our strategic growth priorities advance our hybrid manufacturing model, and return capital to shareholders. We ended Q3 with $3.94 billion of cash and $10.98 billion of debt, resulting in a net leverage ratio of 1.3x. Days of inventory declined to 148 days from 156 days in Q2. Including approximately 13 days of prebuilt inventory related to our planned front end factory consolidations. We expect to have approximately 15 days of prebuilt inventory at the end of 2026. For the quarter, operating cash flow was strong at $1.26 billion and net CapEx was $50 million, resulting in free cash flow of $1.21 billion, or approximately 32% of revenue. During Q3, we invested $218 million between equity and access fees in VSMC and ESMC. A detailed breakdown of our joint venture investments is available in our historical financial model on our Investor Relations website. We expect to be over 75% complete with our JV investments by year end. On a trailing 12 month basis, free cash flow was approximately $3.5 billion, or 25% of revenue in line with our long term target. Over that same period, we returned $1.7 billion to shareholders, through dividends and share repurchases. Most recently, shareholder returns have been below our long term target. As we prioritize deleveraging, strategic acquisitions, and investments in our manufacturing joint ventures to support future growth and gross margin expansion. Moving forward, we plan to accelerate our buyback activity in Q4 and 2027. Consistent with that commitment, the Board authorized a new $5 billion share repurchase program bringing total authorization to $6.3 billion, representing around 10% of our current market capitalization. Overall, we remain committed to returning 100% of our excess free cash flow to shareholders over the long term. Now turning to our expectations for Q4. We expect revenue of $3.85 billion, plus or minus $100 million, which is up 15% year-on-year or up 18% adjusted for the sale of our Sensors business. And up 2% sequentially. We expect non GAAP gross margin of 59% plus or minus 50 basis points, driven by higher revenue and manufacturing utilizations. We expect operating expenses of $830 million, plus or minus $10 million. The increase sequentially is primarily driven by our new product tape outs to support our trusted physical AI strategy. At the midpoint, the results in a non GAAP operating margin of 37.5%, Below the line, we expect non GAAP financial expense to be $79 million, and our non GAAP tax rate to be approximately 17.5%. We expect noncontrolling interest to be $14 million, and $5 million of losses in our joint venture equity accounted investees. This implies Q4 non GAAP earnings per share of $4.36 at the midpoint, an increase of 30% year over year demonstrating continued earnings power. Turning to Q4 uses of cash. We expect capital expenditures to be approximately 3% of revenue and equity payments to VSMC of $86 million and ESMC of $60 million Looking ahead into 2027, and for your modeling considerations, We will continue to drive double digit growth in revenue. We plan to expand our gross margins to 60% during 2027. We expect operating expenses for the first half to be around 23% of revenue driven by new product introductions and second half be below 23%. Assuming non GAAP annual effective tax rate of 17.5%, We now expect joint venture investee losses to be around about $80 million for the full year and suggest using about a $10 million loss for Q1 and a $20 million loss for Q2. Capital expenditures to be around 5% as we plan to bring on more back end capacity online in 2027. And build out our new assembly and test facility in Malaysia to be ready for production in 2028. Lastly, we will continue to generate healthy levels of cash and we plan to accelerate capital returns to our owners. Next, to better understand our business, we plan to realign our end market revenues beginning in 2027, In addition, we plan to host our Investor Day on March 3rd in Boston where we will update our strategic and long term financial model. And finally, I would like to thank Jeff Palmer who has served us as the Head of Investor Relations for the past 16 years and thank him for his many contributions to NXP. I would like to now turn the call back to the operator for your questions.

Operator: Thank you. To ask a question, press star, then 1 on your telephone. You will hear that automated message advising you that your hand has been raised. If you would like to remove yourself from the queue, please press 1, again. We also ask that you please wait for your name and company to be announced before proceed with your question. And please keep your questions to 1 question and 1 follow-up. 1 moment while we compile the Q&A roster. Our first question will be coming from the line of Jim Schneider of Goldman Sachs. Please go ahead.

James Schneider: Good afternoon. Thanks for taking my question. I was wondering if you can maybe talk a little bit about the customer behavior you are seeing across your OEM customers specifically. Are you seeing signs of them restocking at all in a more aggressive way than they had in past quarters? And maybe give us a sense of, you know, the customer commentary in terms of what is happening with lead times and how they are responding to that.

Rafael Sotomayor: Yeah. So Jim, thank you for the question. I assume this is an auto question. So in the context of auto, no, we are not seeing anything noticeable that would suggest a broad based restocking. Now from a visibility perspective, I think visibility has greatly improved. And so lead times have extended, but also has resulted in better visibility. The other kind of, I would say the other trend in the market in automotive is OEMs are getting more involved in providing that guidance directly to companies like us. And so there is a lot more intimacy from a customer relationship perspective. With respect to their needs throughout the year. So I feel like we have good visibility on what that supply is going to be required and the type of puzzle we are going to need to the deploy. Yeah. Yes.

James Schneider: And then as a follow-up, I just wanted to sort of ask it is very helpful to see the solid guidance for 2027. Can you maybe give us a sense about by end market some of the places where you have greatest underlying confidence in sort of outperforming that overall double digit outlook you provided and other areas where you see there is a little bit uncertainty? Thank you.

Rafael Sotomayor: Sure. Well, I think what is working in 2020 what is working in 2026, that is. That will continue in 2027. I mean, what your question is what is driving our confidence in the growth in double digits in 2027 and continues to be the areas that we are focused on. SDV adoption continues. As a matter of fact, it is just barely starting and we see several ramps, especially in the second half of 2027. We have very important ramps in our SDV portfolio. The same thing goes with industrial and IoT. The adoption of AI continues to add content gains in industrial and IoT and it is quite strong. And the deployment that we are barely starting on the control plane and data center continues to play out for us. Thank you. Thank you, Jim. Thank you.

Operator: 1 moment for the next question. Our next question will be coming from the line of Thomas O'Malley of Barclays. Your line is open.

Thomas O'Malley: Maybe this is for Bill. When I look at December guidance, I think you guys are guiding to 59% gross margins. it is a pretty big step up in incrementals from September. I think it is 85% quarter over quarter, close to 70% year over year. Obviously, volume is some component of that, but maybe walk through some other things that are driving that just as that is a big step up from what you have seen over the last 3, 4 quarters.

William J. Betz: Absolutely, Thomas. A couple of points on gross margin. First, they are performing to our expectations. And as we shared, they continue to expand into Q4. And I would say our gross margin improvements are very structural in nature. They are driven by a combination of the higher revenues, the higher utilizations. As I mentioned, we are running last, I gave guidance running in the mid-80s. They are running in the mid-80s now. We expect them to continue in Q4 in the mid-80s. And we are actually in 2027, expect them to run in the high 80s. Clearly, product mix plays a role. And then all obviously, improved operational efficiencies. I would also say our gross margins have nothing to do with the price increases that we are seeing at the moment. Because all we are doing with the price increases is offsetting the higher inflationary costs that we are passing on to our customers. And then I think overall, we expect gross margins to continue to expand, achieving that 60% during 2027. And furthermore, I think they will expand above 60% in 2028 with the ramp over our VSMC joint venture that we shared about in the past.

Thomas O'Malley: Do you have a on that? I do. I do. Thanks. Just on seasonality. So, sure, everyone will have slightly different numbers. But by my numbers, auto was a little ahead of seasonal in September. And then your guide is kind of low-single-digits sequentially. My December traditional seasonality is close to, like, mid to high single digits. Any reason why the delta there, is it because of some of the stronger quarters that you have got in June, September? Or are you calling out anything in particular that is worth noting? Thank you.

William J. Betz: I think you are talking about auto specifically. Is that correct? If that is so, auto specifically into December. Yeah. So you are right. Auto's been quite strong this year and above seasonal, I would say, almost every quarter this year. Looking at 4 q, I am not sure there is a lot of range on seasonality, a lot of different years people use, 3, 5, 7, 10 years. I think it is seasonal in auto. it is probably a flat to up slightly. I think that 2% growth is above seasonal. that is how I would view that. So I would say strong trends continue in auto. that is a straightforward answer on the automotive market specifically.

Operator: Go to next question, please. 1 moment. And our next question is gonna be coming from the line of Joshua Buchalter of TD Cowen. Please go ahead.

Joshua Buchalter: Maybe following up on Tom's question. Any help you can give us on what you are seeing in the overall pricing environment now? And then as we look into 2027, I know in some prior years, there is been sort of a step down in gross margins. Due to the annual pricing resetting. Should we be expecting a step down in 1Q again looking into 2027? Thank you.

William J. Betz: Yeah, let me start off with the pricing. Going into 2026, we expected a low single digit price decline. Now as we plan to exit 2026, we expect pricing to be neutral for the year for 2026. Clearly, For 2027, we continue to see higher input costs in many areas. And unfortunately, we will pass those to our customers to ensure our gross margins are not impacted. I think we expect revenue to also be supported by the mix of our products, as Rafael shared, especially in the SDV portfolio. With our new solutions that drive higher average selling prices in 2027. Because of the portfolio where SDVs carry 2x or 3x more value than our traditional portfolio. But in the short term, I would say pricing is doing what we expected. We are along neutral. I would say, Q3 maybe plus 1%. 1% was pricing in Q3, another 1% in Q4. So it keeps it neutral for the whole year, for 2026.

Rafael Sotomayor: Joshua, maybe let me add a-- this is Rafael. Let me add a high level perspective here. And put aside the variable input cost for a second here. We. The way we see this is we see a structural shift in the industry in with respect to pricing. Right? Unlike the past decade where I do with annual price erosion was common, Today, I think semiconductors account for a larger share of the value in the innovation and the systems. And I think that creates opportunities for much better value capture. Right? This has nothing to do with input costs. Right? it is just a shift in value respect to semiconductors and ultimately on the systems. Sure, competitive pressures will always remain. But I think what we expect is the historical pattern of annual price erosion to actually moderate over time. And I think it is going to, over time, I think it is going to make pricing less of a headwind year over year.

Joshua Buchalter: Got it. Thank you for all the color there. And to follow-up, you mentioned that you are not seeing any signs of widespread restocking. It seems like it is been pretty mixed commentary from the industry over the last couple of quarters about whether restocking is going on or not. How much of I guess, what you are seeing is proactive conservatism on your part similar to how you handled the previous cycle. Or is there anything different about your portfolio or products that would. Or exposure that would, you know, give you a different cadence of restocking than some of your peers who are saying that they are seeing it already. Thank you.

Rafael Sotomayor: Joshua, we are not seeing it. Right? We can only tell you what we have seen. We are just not seeing it. And the fact that our core products are at the core of the software defined vehicle I do not see how we-- If there was restocking, we would see it. Right? What it has been conversations by some OEMs. Right? To be able to actually have some safety stock put in place given the tightness in the supply right now. But it is yet to occur. Right? So I mean, I acknowledge some of the headlines by some Tier 1 OEMs, but we have not seen the restocking And given the fact that our products are core, to the core function of the vehicle, If there were any restocking, we would see it. Yeah.

William J. Betz: Maybe just to add, remember for automotive, through distribution, we service that by about 40%, and we have a really good control on that. Thank you, both. Appreciate it.

Operator: Go to next question, please. 1 moment for the next question, please. And the next question is coming from the line of Blayne Curtis. Of Jefferies. Your line is open.

Blayne Curtis: Hey, guys. Thanks for taking my questions. I just want to start on the auto segment. Obviously, you have a lot of structural drivers with SDV. I was curious on the electrification side, what are you seeing? I think Texas saw an uptick. Curious with gas prices. Maybe start with that.

William J. Betz: Yeah. This is Bill. Hey, Blayne. We are seeing strength across all our company specific growth drivers in automotive. And last year, electrification was going through inventory digestion and our new products were delayed a bit. But those are performing quite well this year and catching up, and I would say growing above that growth rate that we provided during Analyst Day, specifically electrification. If I step back and look at total SAAR, total SAAR is slightly down. But the penetration of XEVs, including hybrids, you combine that, that is actually growing. I mean, I think total production this year is forecasted to be about 47.5% roughly of xEVs. And that share is expected to be to cross the 50% mark to about 55%. So the 47% this year, compared to last year was 41%, so around 12%. The forecast is to grow another 15%. Of that penetration rate. So from a macro standpoint, we do see xEVs continuing to grow globally. And as you know, it carries 2x to 3x more semiconductor content in there compared to a regular ICE vehicle. Thanks.

Blayne Curtis: And then, Bill, do not kill me for this, but I wanted to ask you any early thoughts on March, either, kind of by segment or overall?

William J. Betz: For. Oh, for the first quarter, you are saying? I think my first question. Sure. Yeah. So I knew someone asked the question, Blayne. I thought it would be you. But it was you, Blayne. You were ahead of the queue. So again, this is not guidance. there is a wide range on these expectations. I will give my normal caveats there. But, typically, Q1 for us is down about mid single digits. What drives that mid single digit sequential decline is mobile down mid teens, sequentially. Then automotive, industrial IoT, and comms infra is down kind of low- to mid-single-digits, call it 3%, 4%, 5% sequentially. Again, this is not guidance. This is just overall trends over the past 5, 10 years in our business. Thanks, Mike. Anytime.

Operator: Thank you. 1 moment for the next question. Our next question is coming from the line of Harlan Sur of JPMorgan. Please go ahead.

Analyst: And thanks for the near term trends you are seeing in your auto franchise. Obviously, you guys have many other company specific drivers. In your other segments that are firing edge AI, physical AI, data centers, to name a few. So if you look across your overall business, was book to bill greater than 1 in Q3? And if so, did backlog grow across all your segments? And did overall customer escalations continue to rise just given the tight supply environment?

William J. Betz: Yeah. Let me take that question. I would just say all signals continue to improve from 90 days ago. So the book to bill remains well above 1 across all end markets and regions. Our backlog continues to grow in dollars and extend further into 2027. Lead times, I would say, continue to just to give you a feel. I would say 80% of our lead times are above the 16 weeks compared to a year ago when it was only 25%. And customer escalations continued to increase and they are up sizable quarter over quarter. Your follow-up, Harlan? I appreciate it. Yeah. On the supply side, on the 300 millimeter expansion initiatives, primarily driven to your ESMC and VSMC 300 millimeter JVs, I believe VSMC, that is targeted for analog power. Mixed signal products. I think I think VSMC just started with production slash qualification. With production shipments targeted for the first half of next year and if I recall, ESMC for your MCU and embedded products those are targeted for production. Sort of end of next year. Can you guys just give us an update on these initiatives? In a tight supply environment, it seems like the 300 millimeter programs are layering in just, like, right at the perfect time. Yeah. Absolutely. As you all know, it. it is happening both in the front end and the back end. So front end. Mhmm. Recently, we just celebrated the opening of, VSMC. And that is ahead of schedule. And the first thing that is gonna ramp is actually our partner side which is ramping the interposers. In our side, we are in the process of qualifying our first set of technologies, which we will start that material in the first half and expect out in the second half. So we do see some outs coming ahead of schedule. But really, the big bulk where we see a lot of volume pickup is in 2028 for us. Obviously, also helping to expand our gross margins. As you know, you get the 2 benefits from that. You get the benefit from moving from 200 millimeter to 300, you also get a benefit of not paying that margin stack. like you buy from an outside foundry partner. Related to the back end, as I mentioned in my prepared remarks, we are increasing our CapEx to about 5% versus, I would say, we have been spending around 2% this year. And there is 2 factors there. there is 1 is we are adding capacity into Q1 and Q2 to support our revenue. In the back end as we have a little space, and we are doing that. And so that will help drive the double digit growth But more importantly, we are building out and getting production ready of a whole new facility in KL that we broke ground in August, and that will be up and running. In the beginning of 28. And, that will also service a lot of revenue and also help support our gross margin expansion as well. Great color. Thanks, Bill. Thank you.

Operator: 1 moment for the next question. Our next question is coming from the line of Matthew of Cantor Fitzgerald. Please go ahead.

Matthew: Hey, guys. Thanks for taking the questions. I guess, first, on the SDV side. With these increased engagements, can you kind of give more color on what is driving those wins today? And how do we think about ramp timing and potential inflection given those wins? Is that more of a 2027-2028 story? Then any ancillary opportunities you are seeing that Volkswagen partnership seems centered on the MCU side, but, obviously, you are selling these systems with other components as well. So any opportunities beyond that core? Thanks.

Rafael Sotomayor: Yes. And so what is driving the what is driving some of the design wins is the is the massive adoption that we have been discussing about software defined vehicle. Right? And the whole concept is just revolutionary. Transforming the way a vehicle is made. And the 2 architectures are the zonal architecture and the central-compute architecture. And I am simplifying it a little bit. The Volkswagen press announcement was surrounding their zonal architecture, which uses our high-performance S32K5. Having said that, we also have plenty of engagements in our S32N central-compute architecture as well. I would say that we already have design wins in North America. We have a recent design win in Asia Pacific. And we have several POCs in China and in Europe. The early ramps of the central-compute S32N are likely to happen in late 2027. And the full volume ramps for both the S32K5 and the S32N should. You should expect. We should expect that in 2028. So we are quite bullish on what is happening there because not only content gain that has happened through SDV, but this design wins, and as we provide more and more transparency between now and the next year, you will show that this content gets compounded for share gain. And you have a follow-up?

Matthew: Oh, cool. Yeah. And then maybe just on physical AI quick. Last time, on the last call, I think you started talking about a pipeline you were seeing there and talked about your system level approach. So, maybe update on how you are thinking about that physical AI opportunity, of sizing that into the future? Maybe a percentage of process or revenues as you think about 2027 and beyond, like how quickly this market can grow? Thanks.

Rafael Sotomayor: Well, that is the core what we what we are discussing in physical AI. AI is the main driver for content gain in industrial and IoT. I think we provided last think, the last call that AI enabled processors without the discrete MPU was approximating 15% of total processor revenue And we expect that to. From doubling from a from a year ago. Right? So we expect that to continue to go very strongly into 2027. The discrete MPU, we are now getting significant traction with different POCs in IoT and automotive. And we now expect early production in 2028. Thank you, Matthew.

Operator: Go to next caller, please. Thank you. 1 moment, please. And our next question is coming from the line of, Vivek Arya of Bank of America Securities. Please go ahead.

Vivek Arya: Thanks for taking my question. Rafael, 1 of the pushbacks against NXP has been that the company does not have enough exposure to the data center. And I think you mentioned this year's target of $500 million plus. that is, like, low single-digits. Even the billion dollars would be less than 10%. Versus many of your peers that have anywhere between 10% to 20% data center exposure. The question is, is data center not an imperative for NXP? And if it is, then do you think you can, you know, go after it organically? Or, you know, because you are suggesting that the use of cash will be more towards buybacks rather than something else. So just strategically, how do you think about the data center business, and how important is it, and how big of an exposure should NXP have? For that end market?

Rafael Sotomayor: Yeah. Maybe, Vivek, thanks for the question. Maybe summarize it a little bit. Right? So today, we provide an outlook that said data center. Was gonna be about $500 million. And we just said that it is going to-- we are going to probably close a year exceeding that number. And now with the new products that we are developing, and the engagements that we have, we now expect that revenue to be $1 billion in 2020. Now the thesis and the answer to the question, the thesis of our playbook and data plane is that. Sorry, and the control plane is if the data plane is going up in performance. And therefore the control plane needs also more performance. And that means not just performance and processing, more networking, security, more safety. And that is where the core competency of NXP is. And so because there is zero tolerance for downtime, Reliable industrial-grade control processors are required. So then we got to look at our portfolio. it is top-of-rack switches, Right? And that is that is starting to actually kind of, you know, roll. And then controllers and processors for board management. Whether our secure elements, they are processors and microcontrollers, And also interfaces. And so we are developing right now more and more products to be able to expand this TAM. We are using the core competencies of NXP to address the control plane and data center. And I think that the growth that we are going to see $500 million and $1 billion in the next 2 years with actually new ramps and products is quite is quite is quite impressive.

William J. Betz: Yeah. And, Vivek, I would not read into the buyback if we are not investing in data centers. We are generating, as you could see, a lot of cash And we are going to invest in the data center. And you will probably hear more about that during our Investor Day in March.

Michael C. Lucarelli: Vivek, I will add 1 thing. I think you should look at it, and I think it is a very negative question you asked, in my opinion. If you look at it, I think data center has become another leg of the stool of our growth story. We have auto as a core franchise. We sell SDV and that is winning. that is fantastic. We have data centers, a new opportunity, emerging opportunity. Rafael outlined some things there that we are doing to drive that growth faster in the future. Then you have industrial and IoT market, and physical AI is another opportunity. So we really have 3 legs of our growth stool. for NXP. We are not hooked on 1 thing. We have multiple growth drivers, which are net positive for the company.

Vivek Arya: And for my follow-up, on your comms infrastructure and other, what is the right way to think about growth there as we look into next year? You know, because you know, this year, it was, I think, the fastest growing segment or has been the fastest growing segment after declining for the last 2 years. So what are kind of the puts and takes, Rafael, as we look at specific segment for next year? Thank you.

William J. Betz: Yeah. Let me take that and just remind you how that segment is broken up. And clearly, as I mentioned in my prepared remarks, we are going to realign the segments starting in 2027 so we are more transparent in how to understand this business and the right components. At the end of 2025, exiting 2025, roughly 50% was our secure card business. 25% was our D-PHY and 25% was RF power. As we look at the end of 2026, obviously and we shared this is that the data center, where half of it is coming from D-PHY. So expect the comms and infra for D-PHY to be above 30%. And then we have exited next-generation RF power type of business and expect that to be below 20% as we exit 2026. And I think what you will see, that continued trend along with, nice growth continuing in our secured card business. But we are going to break that out and make it much more transparent in the future in our Q4 earnings when we release.

Operator: Thank you, Vivek. Can we go to our last question, please? Thank you. 1 moment, please. And the next question will be coming from the line of Francois-Xavier Bouvignies of UBS. Please go ahead.

Francois-Xavier Bouvignies: Thank you very much. And so 2 quick questions. Maybe a follow-up of the data center part. I mean, you mentioned $1 billion for 2028 from the $500 million this year. I mean if we look at your peers, I mean, most of them are looking at doubling their revenues in next year already. You look at the gigawatt additions in different data centers, can see that it is going to double in 2027, maybe potentially versus 2026. So all the data you see that the data center market should, you know, double almost next year already. So I was just wondering for your $1 billion target in 2028 that would suggest a slower growth in 2027. Is it you being conservative here? Or can you reach $1 billion as early as next year? Or should we be aware about, you know, any drag, into next year?

Rafael Sotomayor: Francois-Xavier, I think the first thing to look at for our data center business is the type of products that we are deploying. We are not in discrete. We are not power. We are in the control plane. Anything that is an MCU, a micro processor in the rack, we consider that our market. Right? We started this business almost this year. And so right now, the growth relies on product ramps. The growth relies on acceptance and design wins. And also relies on customers deploying software into our products. And so it is a different type of portfolio. I believe that it is even more stickier than some of the products or some of the companies that you are mentioning. So we feel quite excited about the ramp of our business in data centers because these are processors, these are core competencies NXP has in networking, on security and in processors. And I think this is going to be something that NXP is going to do quite well.

Francois-Xavier Bouvignies: Great. Thank you, Rafael. And maybe my follow-up would be on the pricing. I mean, you mentioned that input cost is the driver of pricing. Rafael, you mentioned the mix as well, and that will impact pricing into next year. 1 other area of pricing could be the supply demand environment, and many people are starting to talk about the, you know, tightness, and that could lead to a COVID like environment. Now when I look at, you know, the utilization rate of your peers, I mean, Renaissance, at 60%. TI has new fabs ramping up. I mean, Infineon has new fab ramping up. You have a new fab ramping up and you did not mention the tightness pricing. So is it fair to say that it is not as tight as people think? Maybe, you know, you have a lot of capacity coming online. Maybe it is a timing issue. it is a lead time issue, but temporary, not really fundamental like COVID was. Is that fair to say?

William J. Betz: Yeah. Let me take that question, Francois-Xavier. Obviously, it is very well known that the back end capacity today is very, very tight. We do see into the future that the front end gets tight. And the folks that are having capacity come online like ourselves, like some of the others, will help that, obviously. But we do see capacity, and that is the next phase of any supply and demand imbalance. We see that happening sometime next year. But we are very fortunate of the investments that we have placed both in the back end and the front end that will be able to service it.

Rafael Sotomayor: Right now, the pricing is only related to inflationary cost. Could there be pricing related to demand and supply imbalances, like COVID, like we saw. Absolutely. But we will wait and see how that plays out. And first of all, the demand environment is very different. Right? So you mentioned COVID, but the demand environment that is happening now is real. it is driven by transformation. SDV transformation, physical AI transformation, data CapEx investment transformation. And so it is a much different environment. I think that the demand is going to fuel value creation, creation, value capture and potentially pricing power.

Francois-Xavier Bouvignies: Right. Thank you very much.

Operator: Thank you. And that does conclude today's Q&A session. I would like to turn the call over to Rafael for closing remarks. Please go ahead.

Rafael Sotomayor: Thank you, everyone. I want to leave you with 3 takeaways. First, our growth is structural. Software defined vehicles, the intelligent industrial edge and data center are multiyear drivers, and wins like TTTech Auto show we are positioned for the next leg of growth. Second, this growth is broad based with every region growing. In automotive, industrial and IoT and comms and infrastructure all growing double digits year over year. And last, our growth results in robust free cash flow enabling us to invest in the business and return cash to shareholders. As disclosed today, we have a new $5 billion repurchase authorization positioning us to accelerate our buybacks beginning in Q4. Thank you all for joining us today.

Operator: Thank you for joining us today. You may now disconnect. This concludes today's program.