Good day. Thank you for standing by. Welcome to the NXP Third Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A session. [Operator Instructions]. And now I would like to turn the conference over to Mr.

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

Thank you, Dexter. And good morning, everyone. Welcome to the NXP Semiconductors Third Quarter 2021 Earnings Call. With me on the call today is Kurt Sievers, NXP's President and CEO, and Bill Betz, our CFO. 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 continued impact of the COVID-19 pandemic on our business, the macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products at our expectations for the financial results for the fourth quarter of 2021.

Please be reminded that NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure on forward-looking statements, please refer to our press release.

Additionally, we will refer to certain non-GAAP financial measures which are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance.

Pursuant to Regulation G, NXP has provided reconciliations to the non-GAAP financial measures to the most directly comparable GAAP measures in our third quarter 2021 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 at nxp.com.

Before we start the call today, I would like to remind everyone of our upcoming Analyst Day on Thursday, November 11, 2021. We are hosting a hybrid event. We will be in person in New York City, but also simulcasting the event from our website for virtual attendees. After the event concludes, we will post the slides to the Investor Relations website.

I would like to turn the call over to Kurt..

Yeah, thanks very much, Jeff. And good morning, everyone. We appreciate you joining our call this morning. I will review our Q3 results and then discuss our guidance for Q4. Overall, our Q3 results were better than the midpoint of our guidance with the mobile end markets stronger than planned as a result of improved supply.

At the same time, the trends in the Auto, Industrial IoT, and Communication Infrastructure markets, were all in line with our guidance. Taken together, NXP delivered Q3 revenue of $2.86 billion, an increase of 26% year-on-year, and $11 million above the midpoint of our guidance range.

These are very good results given the constrained supply position we knew we would face entering the quarter. And we continue to view our channel and on-hand inventory metrics below our long-term targets. We exited quarter three with our distribution channels supply metric at 1.6 months, almost a full month lower than our long-term target.

And we expect this to be the situation in quarter four again as well. Our non-GAAP operating margin in quarter three, was a strong 33.5%, which is 770 basis points better than the year-ago period. And 50 basis points above the midpoint of our guidance.

Operating profit dollars were $19 million better than guidance, driven by higher revenue and lower expense. Now let me turn to the specific trends in our focus ends markets, starting with Automotive. Q3 revenue was $1.46 billion, 51% up versus the year-ago period, and in line with our expectations.

In Industrial and IOT, Q3 revenue was $607 million, up 18% versus the year-ago period, and again, in line with our expectations. In Mobile, Q3 revenue was $345 million, up about 2% versus the year-ago period, and above our expectations.

Lastly, in communication, infrastructure and other, quarter three revenue was 454 million, about flat versus the year-ago periods. And in line with our expectations. With this, let me move straight to our outlook for quarter four.

We expect the midpoint of quarter four revenue to be 3 billion up 20% versus the fourth quarter of 2020, within a range of up 17% to up 23% year-on-year. From a sequential perspective, this is up 5% at the midpoint versus the prior quarter. And we again anticipate demand outstripping available supply in our quarter four outlook.

At the midpoint of this range, we anticipate the following trends in our business. Automotive is expected to be up in the high 20% range year-on-year and up in the mid-single-digit range versus Quarter Three '21. Industrial and IOT is expected to be up in the high 20% range year-on-year and up in the mid-single-digit range versus Quarter Three '21.

Mobile is expected to be down in the mid-teens range year-on-year and up in the low single-digit range versus Quarter Three '21. And finally, Communication, Infrastructure, and Other is expected to be up in the high-teens range versus the same period a year ago, and up in the low single-digit range versus Q3 '21.

Over the course of the last 2 quarters, investors continue to ask how to reconcile the revenue performance of NXP's Automotive business with that of the global vehicle production numbers as they are reported by IHS. Specifically, NXP's Automotive segment revenue is expected to be up over 40% in 2021.

Against this, the auto OEMs continue to struggle to match supply to strong consumer demands with the auto industry likely not able to meaningfully grow unit production versus 2020. Now let me make a few observations which may help you understand these diversions.

First, the auto supply chain is very extended and complex, with multiple points of product transformation across the globe. This extended supply chain needs to coordinate the timing and delivery of up to 30,000 props and up to 1500 different semiconductors, from hundreds of suppliers to build just one single-car.

During normal periods from the time at which NXP ships of finished components to when the final assembly is fitted into a finished car, it takes up to 6 months. And this is on top of the normal semiconductor manufacturing cycle times of 3 to 6 months.

At each step of the transformation, thousands of parts move through a complex global network of suppliers. For the process to work efficiently, it is essential that all of the components needed to complete a car are available exactly where and when they are required.

Now, we believe the extended auto supply chain significantly depleted on-hand inventory of all types of products, including semiconductors already by the beginning in the second half of 2018 and continuing through 2019 and most of 2020. That depletion was a result of global car production declining 6% in 2019 and another 16% in 2020.

While NXP 's auto business, despite content increases, declined by 7% into 2019 and by another 9% into 2020. Let me illustrate the impact by using the NXP Distribution Channel as a proxy for overall auto supply demand trends, and how we have been directly affected.

We consistently monitor and measure all component movements in inventory data at our distribution partners at the end-market level.

Throughout 2021 these metrics for Automotive have been at record low levels, with on-hand inventory being about 1 month below our long-term target of 2.5 months, with demand in the intermediate term being consistently greater than our ability to rebuild inventory back to normalized levels.

In our and my personal daily discussions with our customers throughout the auto supply chain, we hear the consistent message that they want significantly more products. And in some cases, Tier 1's are struggling to assemble fluid kits. And in other cases, the OEMs choose to build partially completed cars or hold their production lines all together.

For NXP, lead times for about 75% of our automotive products continue to be above 52 weeks. Against this backdrop, our customers are placing NCNR orders to assure long-term supply. We in turn are making long-term supply commitments to our supply partners.

In summary, we think the automotive supply demand equation, build continued to be out of balance through 2022. In addition, as a learning all of the current material shortage situation, and in order to mitigate the impacts of the Auto-AM's are experiencing today.

Our Tier 1 partner explicitly demands that more supplies and inventories will be needed in the extended supply chain, which we believe cannot be broadly achieved before 2023.

Now, with this currently dysfunctional supply chain as a backdrop, there are very clear and very positive trends that have simultaneously increased the demand for auto semiconductors industry-wide, as a consequence of content growth.

We have seen multiple OEMs prioritized to production of premium vehicles, which require uploads of twice the semiconductor content from NXP and others.

And another clear and emerging secular content driver for the auto semiconductor markets, is the fast exploration of fully electric and hybrid electric vehicles, which combines have moved from 8% of global production in 19% to about 20% of production in 2021.

This is very impactful since the average semiconductor content on xEV is above $900, which is roughly 2 times that of an equivalent ICE vehicle. These trends have resulted in industry-wide content per vehicle increasing at 10% per year, over the last three years.

And on top of all of this, NXP is consistently gaining share in our focused growth areas and increasing content. These content gains include 77 gigahertz radar safety systems, multiple electrification system opportunities, beyond just battery management, and new domain and zonal processing as well as others.

Now for NXP, it's of course not just automotive driving our performance. Within the Industrial and IoT markets, we see our ability to provide complete turnkey connected etch processing solutions, consisting of processes, connectivity, security, and analog, all leading to increased customer traction.

These are all just a few weeks samples that underpin our confidence in our Company-specific growth. As Jeff mentioned earlier, we plan to go into much greater detail at our Investor Day on November 11th, next week in New York.

In summary, we continue to execute very well in a strong demand environment, notwithstanding the industry-wide supply challenges. From a Company-specific perspective, NXP is experiencing very positive customer traction of our newest products and solutions.

Putting it all together, we are highly confident that the Company-specific drivers within our strategic end-markets, they will continue to build also beyond Q4 into Q1, as well as over the intermediate term through 2022.

Now, before we move to the financial details of the quarter, I'd like to make a few remarks in the context of our recent announcement of Bill Betz as our new CFO. I have personally worked with Bill as a business partner and one of Peter Kelly's key finance leaders for over eight years.

Bill brings both a strong track record and career in the semiconductor industry, as well as truly intimate knowledge of NXP and consistency to his new role. I personally drove the evaluation the interview process, in the viewing of wide number of external candidates, as well as Bill.

And I concluded Bill is the right person to lead our NXP finance organization, and I'm personally truly excited to work with Bill and drive NXP's profitable growth going forward. At the same time, I would like to highlight the outstanding contribution Peter Kelly has played in the strategic evolution of NXP.

Peter first came into the Company in an operations role, over a decade ago, and then quickly move into the CFO role to drive the financial discipline, our stakeholders have all come to expect. He has been a clear-thinking strategic advisor to myself, and a highly valued mentor to many on the NXP management team.

Obviously, including both Bill and Jeff. We wish Peter the very best in the next phase of his life, and hope he gets to spend more quality time with his family. And with that, I would now like to pass the call to you Bill, for a review of our financial performance. Bill..

Thank you, Kurt and good morning to everyone on today's call. As Chair has already covered the drivers of the revenue during Q3 and provide our revenue outlook for Q4, I will move to the financial highlights. Overall, our Q3 financial performance was very good. Revenue was above the midpoint of our guidance range.

And we drove an improvement of non-GAAP gross profit and non-GAAP operating profit, both of which were at the high end of our guidance range. Now, moving to the details of Q3, total revenue was $2.86 billion up 26% year-on-year and above the midpoint of our guidance range.

We generated $1.6 billion in Non-GAAP gross profit and reported a non-GAAP gross margin of 56.5% of 640 basis points year-on-year and near the high-end of our guidance. Total non-GAAP operating expenses were $657 million up a $107 million year-on-year and up $31 million from Q2.

This was 8 million below the midpoint of our guidance, due to lower material and mass spend during the quarter. From a total operating profit perspective, non-GAAP operating profit was 959 million and non-GAAP operating margin was 33.5% up 770 basis points year-on-year.

This was also at the high-end of our guidance range, as a result of better fall-through on higher revenues. Non-GAAP interest expense was 94 million with cash taxes ongoing operations of 86 million and non-controlling interest was 7 million. Taken together, the -- below-the-line items were 8 million betters than our guidance.

Stock-based compensation, which is not included in our Non-GAAP earnings was $81 million. Now, I would like to turn to the changes in our cash and debt. Our total debt at the end of Q3 was $9.59 billion flat on a sequential basis.

Our ending cash position was 2.3 billion down 607 million sequentially due to higher Capex and robust capital returns during the quarter. The resulting net debt was 7.29 billion and we exited the quarter with a trailing 12-month adjusted EBITDA of 3.92 billion. A ratio of debt to trailing 12-month adjusted EBITDA at the end of Q3 was 1.9 times.

And our 12-month adjusted EBITDA interest coverage ratio was 11 times. Our liquidity continues to be excellent and our balance sheet is very strong. During Q3, we re-purchased 1.16 billion of our shares and paid a 152 million in cash dividends for a total of 1.31 billion of capital return to our owners.

Subsequent to the end of Q3 between October and November 1st, we repurchased an additional 300 million over shares of [Indiscernible] resulting in a total of 4 billion return to our owners year-to-date. Turning to working capital metrics, days of inventory with 85 days, a decline of three days sequentially.

Our DIO continues to be below our long-term target of 95 days. We continue to closely manage our distribution channel with inventory in the channel at 1.6 months, flat sequentially and below our long-term targets. Both metrics reflect the continuation of strong customer deliver rates, in a tight supply environment.

We continue to believe it will take multiple quarters before we're able to rebuild on-hand and channel inventories to our long-term target of those. Day’s receivables were 31 days down 4 days sequentially. And days payable were 83, a decline of 9 days versus the prior quarter.

Taking together our cash conversion cycle of 33 days, an increase of two days versus strikes winner. Cash flow from operations was $924 million and net Capex was $200 million, resulting in non-GAAP free cash flow of $724 million. Turning to our expectations for Q4, as Kurt mentioned, we anticipate Q4 revenue to be $3 billion plus or minus $75 million.

At the midpoint, this is up 20% year-on-year and up 5% sequentially. We expect Non-GAAP gross margin to be about 6 to 6.5% plus or minus 50 basis points. Operating expenses are expected to be about 680 million plus or minus about 10 million, consistent with our long-term model.

Taken together, we see non-GAAP operating margin to be about 33.8% at the midpoint. We estimate non-GAAP financial expense to be about 94 million and anticipate cash tax related to ongoing operations to be about 100 million. Non-controlling interest will be about 9 million.

For Q4, we suggest for modeling purposes, you use an average share count of 270 million shares, which is down 15 million shares from a year-ago period as a result of the consistent execution of our communicate capital return policy. Finally, I have a few closing comments I'd like to make.

First, demand trends continue to be strong across our target end markets, and customer interest in our newest products continues to be very robust. At the same time, we are closely working with our customers and our suppliers to address order requests in a timely manner.

Second, our Q4 guidance reflects the clear potential of our business model, both in terms of revenue growth as well as the significant profit fall through, which will enable us to consistently drive our non-GAAP gross margin above the midpoint of our gross margin targets. Thirdly, our business continues to generate significant free cash flow.

And we are committed to our capital return policy and will return all access free cash flow to our owners, so long as our leverage ratio remains at or below 2x net debt to trailing 12-month adjusted EBITDA. I'd also like to take this opportunity to thank Peter Kelly for a significant contribution to NXP since he joined the Company in 2011.

Not only did Peter guide NXP from a financial perspective, but he truly helped lead the Company and drive the strategy that made NXP what it is today. And on a personal note, I consider Peter a great leader, a mentor and a friend, and I will always be grateful for his support.

And then finally, I'd like to thank all my colleagues across NXP for their outstanding work and dedication. We shouldn't forget that we're all still working under strict pandemic protocols. So, with that, I'd like to turn it back to the Operator for questions..

Thank you. As a reminder to answer a question -- > [Operators Instructions] Our first question comes from the line of Ross Seymore. Your line is open..

Thanks for letting me ask a question, and Bill, congratulations on the new role as CFO. My first question is for Kurt and it's one on customer behavior. You gave a great deep dive into the apparent disconnect between the auto-revs you have in production and all those explanations.

And I really want to get into -- are the customers changing their behavior? And if so, is it just with longer visibility for you, greater certainty, or the profitability that all the auto semi production companies are going to be able to garner from this sector, starting to improve as well..

Good morning, Ross. Indeed, a couple of -- a couple of changes. First of all, very tactically and I just have to highlight that because it sits on top of my agenda every day in and out, there's continues to be no change in pressure to get more products.

So, expedite, escalation calls, all sorts of weird actions to try to get products faster to their manufacturing locations has not slowed down by an inch. So, we see -- we see that continuing.

From a more strategic and say learning perspective, I would say clearly the whole auto industry has realized now -- and that's where me, a step function and the resets at the same time has realized now how big the significance and importance of semiconductors is for their future. Today, but also years-old.

I mean, that's about innovation, but obviously it's also bought for being able to build complete cars.

And that has let too much closer and better relationships between us, and directly the OEMS in terms of understanding both their innovation needs, but also the from a more technical perspective, there -- their product supply needs in the near mid-term. All of that leads them to a number of significant, I would say quite significant changes.

We are seeing longer-term orders. So, we get the so-called NCNR orders, which easily reach out for the entire next calendar year. These are coming from the Tier 1 customers so far. But of course, they do this since they get similar behavior from the OEMs.

But we also get greater visibility into the longer term, which I find very important prospective which reaches then over to innovation. Because the intimacy which we can build with the OEMs now to think about future systems is a great help for us to construct the right roadmaps..

Thank you for that color and I guess as my follow-up, just shifting gears quickly to a little bit of a nearer-term potentially question. And that's on the mobile business. It's good to see that it upside surprised in the third quarter versus your original guidance.

But I guess if I put the two quarters together, I know supply is tight and maybe you're just doing some allocation. But the mobile business is a bit weaker, seasonally than we would have expected in the combination of the quarters. And I had thought that that was supposed to snap back a little bit in the third -- or in the fourth quarter, excuse me.

So, can you just talk about what's driving the relative weakness on a year-over-year basis in that business?.

It's clearly a supply or the like there off was. So, as we -- when we went into quarter three, I think we talked about a sequential decline which we could -- which we could avoid. So, we could pull in some supply and that's the whole reason why we actually ended up in Mobile better than guidance. So, there is no difference in sockets or anything.

It was just that we had the somewhat better supply capability and be continued to forecast a similar thing into the fourth quarter. But overall, if you take the full second half of this year, we are unfortunately significantly constrained in supply.

into the mobile market. It is gradually getting better, which is why we have this performance I just quoted. But if you hold it just in total, it is pretty significantly suffering. From a year-on-year perspective for us, it's a more difficult compare.

Last year Q3, we had the ban on Huawei coming into play which officially bumped up quarter three and quarter four one of our very large mobile customers needed a lot of products which also has to do with the phasing of the quarter of last year, which was later than normal.

That's why the year-on-year comparisons, both for Q3 and Q4 need some bridging, given those two specific customer events. All in all, I just want to absolutely re-confirm, we haven't lost a single socket there, so everything is going as we had planned.

We had supply constraints, but the bigger drivers being the adoption of mobile wallets, attach rates, and also the early penetration [Indiscernible] which are vital solutions? are fully on track with earlier targets and earlier planning..

Thank you..

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

Thank you for taking my question and good luck to both, Peter and Bill.

Kurt, on the automotive industry, if one had told you that auto production would be flat this year, but your auto sales would have been up 40%, would that have been predictable? And if not, what do you think surprised NXP other than some of the bad [Indiscernible] and the [Indiscernible] shutdown effect.

Was it mixed that surprised you? Was it pricing? Was it content? What specifically was the surprise this year to create this big gap between production and sales..

Yeah, Hi, Vivek. I mean, very transparently and honestly, with some knowledge of today, of course, we could have predicted it with the knowledge at the time, no. So no, we didn't know. And now, what you call surprises is what actually happened, a few things.

One, clearly, the mix change to premium vehicles, which is an optimization to higher profit on the OEM side, clearly is something we have not foreseen, I think nobody has anticipated that. And that has a significant impact on semiconductor consumption, given that premium vehicles can easily have twice the semi content of a mass volume car.

And on the same note, again, the xEVs penetration, which I think is a result of the the big focus on the growth on CO2 targets, but also a lot of government subsidies in various countries to boost actually more electric vehicle.

Those two elements, so the mix to premium and the much stronger penetration or faster penetration of xEVs, those have significant positive impact on the content increase for semiconductors. So even if the car production is flat, the content goes up massively.

Again, think about that both of these elements, each one on its own right, are potentially bringing the semi content of a car to effectual of 2x. That's -- I mean, this is just outstripping any car production by far. The third element which I would say -- I use your language, surprised us.

I would rather say, we gained more insight, is the enormous steps and complexity of the extended automotive supply chain. which means how many stages and companies sometimes are between us after we ship a product before that product ends up in a car.

And, if that supply chain is enormously depleted, as it has been the case off to 2019 and 2020, it becomes incredibly dysfunctional. And we are still in the process of refilling that supply chain just to normalized levels. It's really important.

This is not about building any strategic inventory, is just getting back to more normalized levels which allow for appropriate operational [Indiscernible] supply chain. And that's -- that we didn't see either. I would say, we had no idea how far it has been depleted, how deep it has been depleted, nor how deep it is.

Which means how much elasticity is in there to be refilled in the first place, to make it -- to try to make it functional. Again, it is still dysfunctional at this stage..

And for my follow-up, Kurt, just to continue that line of discussion, you mentioned over the last few years that the content Delta, right between units and sales have been, for the industry, has been about 10 points, so then XP doing better.

If I look at the current IHS production forecast for next year, and I know that they keep on changing all the time, but right now it's about 10%-11% unit growth. Assuming that happens, what is the crystal ball saying in terms of that rough delta for the industry next year.

Do you think it'll be that add that 10 points or it'll be closer, right, to the much bigger number we saw this year? Thank you..

Yeah, Vivek. So first of all, you just mentioned another very important elements which is obviously our performance in all of this. I mean, what I described to your earlier question was is how we think the industry surprised us all.

The third element, clearly as CNXC's specific companies specific content gains where we grew share, which makes it even faster. Now how that all goes into all these means for the next year and the next years from both the content growth perspective as well as a NXP's specific revenue growth perspective.

I'd just ask you to wait for a week -- next, next week when we have our Investor Day in New York, we will give you the detail you're looking for. We will guide the next few years, both, how we think the semi -market and auto is going to develop, as well as our performance relative to that. So, please hold your horses until next week..

Thank you, Kurt..

We have a question from John Pitzer. Your line is open..

Good morning, guys. Thanks for letting me ask the questions and congratulations on the solid results. Kurt, I think we all appreciate all the details you gave in your opening comments about the complexity around the auto supply chain. I'm curious.

You can spend a couple of minutes just talking about your ability to grow supply from here, both internally, externally, both on the waver side, and on the back end and tests. I'm assuming that the nice sequential jump in autos means that some of the weather events in the first half of the year have reversed themselves.

But specifically, as you look over the next several quarters, would you expect your ability to grow supply to be relatively linear or is it going to be chunky? And is there a point in time where your ability to grow supply accelerates in 2022?.

Thanks, John. Let me give you a few pieces on this. The one is indeed the negative impact from the -- which we had some, I think early Q2 in Texas isn't deep behind us. I mean, just put this to file, both factories which were impacted are running very much at least on levels and we are good.

Another element I have to mention here because it has impact on the industry. You've seen that over summer, there have been quite a few factory shutdowns for back-end test and assembly sites in Malaysia.

I want to highlight that we have been in a very disciplined position to organize and manage our own factories in such a way that our shutdowns were very immaterial. So, we had a few days but by and large, we have very little negative impact from those shutdowns on our revenue.

So, when you think about what we shipped in Q3, assume there was hardly any negative impact from COVID factory shutdowns from Southeast Asia and/or specifically Malaysia. Now going forward, we will clearly see improvements on the [Indiscernible] side.

We talked about earlier that we are entering into long-term supply commitments with our supply partners. And that's largely on the wafer side, which is going to start benefiting us next year, but also the years after. And again, this is in balance against the NCNR orders which we are -- which we are collecting from our customers.

The back-end test and assembly, which largely is in-house for NXP. We are forced to put all the Capex and all the investments in place to make sure that any wafer we get our hands around will also find enough capacity in-house to be tested and assembled into finished products.

So, think about the test and assembly increase in capacity as pretty gradual because it is something which we are putting in tune with the wafers coming in. On the wafer side, it is in a way more discreet, but it's not [Indiscernible] shown because we have obviously several wafer suppliers and they don't improve all at the same time.

From that perspective, what comes out into the revenue, think about something which is gradual, which doesn't have huge shoots step functions at any specific point in time. However, the result of all of business that clearly our supply capabilities as it has done through this year, they continue to grow also through next year.

Now, finally, I should say this is clearly an over comment which is in any way or form specific to automotive business of broad comments. Because the supply shortages which we are facing is across all markets. We discussed earlier briefly mobile.

Anyway, anybody knows about automotive, but we have the same negative impact on our industrial IoT business and partially in the content for our business. All of these improvements build health and build support revenue growth across all of our end market segments..

That's really helpful color Kurt. And then maybe for my follow-on, one for Bill. First, congratulations. Looking forward to working with you in your new role. I'm just curious on the gross margin line. Another really solid gross margin quarter.

Given some of the logistic inflationary costs out there, often times it's hard to, within a quarter, to get all of that rate relative to pricing.

Was there anything holding back gross margins from a cost side in the quarter? And I guess more importantly, as you look out across these LTAs, can you help us understand either how they're being constructed relative to your gross margin goals. I would assume it's much easier to price -- to value in this sort of environment.

Does that mean we could see some ticks up -- tick up here in gross margins over the next several quarters?.

Yes, thank you for your question. Let me give a bigger picture on the margin and more color about it. So as mentioned on our previous calls, our gross margin had improved drastically versus last year driven by the higher volumes and improved internal utilizations from our factories.

For example, if I try to remember, I think Q3 utilizations last year, were in the mid-60s and today we are in the high 90s. And from a guidance standpoint, as you saw, we were slightly better from a quarter-over-quarter basis by 2030 bps, related to the improved product mix.

Now, as we move forward over the next several quarters, it's going to be really difficult to have that additional fall through on our internal factories. As basically they're running full-out. To address your question on pricing. We are only passing on the increases of our input costs from our suppliers to our customers.

And we're not having any of our margins in this process as we value our long-term relationships with our customers, I'd say. And we're really equally sharing the pain together.

As you could see in Q4, we are guiding our gross margins to be flat quarter-over-quarter, And any additional margin expansion, I'd say would come in the short-term will be driven by that continued product mix. And more longer-term will be really driven by the expansion of our new NPIs.

I'd say overall, we're very proud of achieving these levels and we look forward to continue delivering towards that higher end financial state of model 57% as we go forward..

Thanks guys..

Our next question is from Stacy Rasgon (ph), your line is open..

Hi, guys. Thanks for taking my question. I wanted to follow up on the other pricing question. I know you're not trying to extract more, but to play devil's advocate a little bit, given the shortages out there, why not? You're in a period of time right now where the supply chain is probably tighter than it ever has been and ever will be.

And there is demand for your products that's off the chart. You're locking customers in.

At this point, why is this not the time even on a selective basis to try to extract more? Especially given it seems like some of your peers actually are going down that [Indiscernible] Why not you guys?.

Yeah. Hi Stacy. There is a very clear answer to this, which is we are not in the commodity business. The very vast majority of our portfolio is application-specific. And with that portfolio, we are in very deep, longer-term relationships with our customers.

So, what we do is, as Bill said, we pass on the input cost, which is already, in some cases a pretty significant element to digest for our customers. But we want to be transparent and we want to have long-term relationships which are built on trust with our customers.

And in that context, we absolutely consider it the right thing to pass on the input costs, but not use it to pat on our margins. I would personally say from being in different markets in the past, in the commodity market that works different. But that's not the kind of market environment we are -- we are moving in.

And I'm very very sure that this will pay off positively in the long term relative to the customer relations which we need to continue to build our business. In that context, it is also important to note that the whole -- the whole environment clearly has a lot of input costs which is going out for our customers. I mean, it's not just on semis.

A lot of other things are also moving. So, it's a tough environment for all the participants where I think consistency, transparency, and trust in -- into the long-term relationships is a big value. And that's something where we do differentiate..

Thank you. I guess for my follow-up, even to follow up on that a little bit, the historical pricing practices, at least at a high level, especially in automotive, was to have long-term price downs that were built-in to the contracts, and you'd be fighting that every year.

I guess, understanding that we're maybe coming off a higher base now, at least on raising price because of the input cost increases, do you foresee like a similar type of long-term pricing behavior that'll be built into the long-term contracts? Are you still going to be fighting couple of 100 basis points of margin compression every year just off the higher base like as part of these long-term contracts? Or is the general pricing structure like long-term of these contracts different than it was in the past?.

Yeah, Stacy that's indeed the other side of this discussion. I mean, I can't discuss any customer or very segment-specific trends here. But the overall situation indeed is a reset. And that is important and positive. And with reset, what I mean is that the step function, which we have to take is something it is here to last.

And that comes with -- I think I made the comment earlier with the realization of all the industries we are serving, that's not just for automotive, of how important semiconductors are. It just represents a different value to them. And from that perspective, I think we make a step here, which is a reset, which is here to stay.

How that goes then in individual cases, on individual prices year-on-year, it’s hard to anticipate, but I don't think it will go backwards..

Got it. Thank you..

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

Great. Thanks for taking my questions.

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

Well, Bill would fill in maybe with a bit more detail, but I'd say in general, it really varies. We have some of them on the NCNR site which is the customer orders, they would typically easily cover next year. So now, getting an order which stretches all the way until the end of next year.

If you think then on the other side, which is the agreements with our foundry and supply partners, I think we actually published a new number, which if I remember right, is between $4.3 billion and $4.4 billion off agreed and signed supply commitments, which we have entered into with our supplier base. The vast majority of it is obviously in wafers.

But mind you, this is not just for 1 year, this stretches out over multiple years to come, 4.4 billion to give you a feel..

That helps. Thank you. And Bill, I want to offer some congratulations on your new role. Of course, you have some pretty big shoes to fill given Peter's very strong performance and the Company's strong performance in the last 10 years or so.

I'm hoping you might give us a preview of what you might say next week, at least in terms of your priorities as the new CFO. Thank you..

Yes, thank you for your question. First off, I'm very honored and thankful for the role. I've been in the semi-industry for about 20 years prior NXP. I've worked for Fairchild, LSI systems.

And really no change as you have to remember, I've been with NXP for about 8 years supporting the Company's financial strategy alongside with Peter, Kurt and Jeff and the entire management team. I'd say my style's a bit different than Peter, but principles are the same.

Focus on delivering like you mentioned, there's commitments and driving long-term value to our customers and employees and shareholders. Relay to Analyst Day, yes, I'll share that next week, relay to our long-term financial model. But we really like to save that for next week and not address that in this call..

We have a question from Chris Caso, your line is open..

Thank you. Good morning. First question, I wonder if I could just ask about those long-term agreements that you're signing with your customers now.

Can you tell us what what sort of commitments have your customers made to you under those agreements? And it sounds like you're using those agreements from your customers to backstop the agreements that you are making with your suppliers.

Is that for specific volume commitments over a certain amount of time? and is pricing committed to -- in those agreements as well, such that you have visibility on both volume and pricing?.

Since I really can't go into great detail on this, as you will understand, Chris. But the headline is indeed in line before you were saying those customer agreements would typically cover volume and price for say -- for example, a period of until end of next calendar year. And they even fixed it by quarter.

So, it's not just one number for the whole year. But in many cases, it even goes to binding it two quarters..

And very helpful. And if I can follow up pricing as well, and clearly, over the past couple of quarters, you've been passing along as you've said, those -- those price increases you've gotten from suppliers.

Can you give us a sense of the magnitude of the pricing benefit you've seen out of the -- this sort of 26% year-on-year increases you've seen in revenue? How substantial has price been in that calculation? And then as you go forward, are you expecting, as you go into next year, there's still going to be a pricing tailwind as the input costs rise?.

Well, generally, as we discussed before, we will continue to match the rising input costs with adjusting the prices accordingly. Such that yes, since input costs will continue to go up also next year, they will also continue to be uprising adjustments into next year in general terms.

For the rest of your question, I really cannot and don't want to go into greater detail in how much is what piece. It's really just important that the leading concept and philosophy of all of this is that the price increase is just matching the input costs increase, and that's it.

But that is something which indeed we have this year and which is going to follow up next year too..

Thank you..

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

Hey, thanks for taking my question. I'll offer my congratulations to Peter and Bill as well. Just -- going back on the audio side, I just wanted to be clear. You've heard from some other companies that they are seeing the customers started to be more selective, trying to get kids together.

Thanks for all the detail, Kurt on -- that supply chain seems very complex. I'm just curious, are you seeing that same behavior, maybe seeing offsetting strength elsewhere, or are you a bit different given the Company's specific [Indiscernible] and some of the secular growth that you're not seeing that selective behavior on certain parts? Thanks..

Blayne, I think what you tried to ask me is am I seeing a slowdown, and the clear answer is no.

We absolutely don't see a slowdown and you can imagine that especially, the car companies with the pretty significantly negative impact to their car production numbers of this year, and the ambition to grow them next year by, I don't know 10% plus over this year? They clearly need more semiconductors.

And that is not limited to one product or one technology. I think I also made the very open comment earlier that 75% of the product portfolio in our automotive business still has a lead time of above 52 weeks. I think that says it all..

Thanks. Maybe you can just [Indiscernible] to ask on the Industrial IoT. Maybe just kind of discussion about what the areas of strength are for you. And maybe you just described the supply chain as well for the back half of the year - to - year. Are you -- is it just as tight that'd be helpful? Thanks..

Yeah Blayne. It is very tight too. I would say, no different to automotive. Also, by the way, the impact of not shipping enough product is at least as significant as in automotive. It just catches less headlines in newspapers.

But if you think about the impact on industrial automation, which are huge -- which is huge machinery, which cannot be built if -- if there was more semi -- semiconductor supply or in the smart home. It's equally drastic as -- as it is in automotive, just catching less headlines.

Now, our big differentiator, more and more is our capability to offer complete solutions. Complete solutions around the processor.

We've had that leadership in the -- in a very wide range and portfolio of processing solutions into industrial, but it's not very nicely complemented by connectivity, security, and analog attach, which really differentiates us from our competitors.

I would dare to say it's a very unrivaled position and offering here, which by the way, is also going to be very much in the spotlight of our Investor Day next week to give you much more detail, what we have and why we think that makes us grow so much in the time to come.

Now from a supply chain or channel perspective, a lot of that business indeed is going through distribution, which because it goes to thousands, literally thousands of small customers. And this is exactly why that solution capability of NXP makes such a big difference.

Because many of these companies which we are serving there through distribution don't have the capability themselves to deal with the complexity of these connected etch applications. When and if --we can offer them a complete solution than -- that has a huge advantage for both time-to-market levels or from an R&D perspective for them.

That's actually what I think is really a very very significant differentiator for us. Now, another element in the equation is we do have a relatively strong exposure to China. If you think about the industrial business, a lot is going through distribution and a lot is going into China.

And just to anticipate the question, we do not see a slowdown there in China. But again, mind you, it's also that we are -- we continues to be supply kept. As I said earlier, also in industrial, we could certainly run higher revenues if only we have more supply.

Good news is also there our supply capability, as we discussed with [Indiscernible] earlier, is improving every month so that over time also there be hopefully get into a better place..

Okay..

I'll ask questions to C.J..

We'll take one last call..

Okay. And our last question is from C.J. Muse. Your line is open..

Yeah. Good morning. Thanks for squeezing me in. I guess first question for you, Kurt, in your prepared remarks, you talked about auto supply demand balanced, probably not achieved until 2023.

And so curious, as you contemplate that, what kind of assumptions are you making in terms of what kind of future inventory management will look like, both at the Tier 1 and OEMs. I imagine there's more of adjusting case as opposed to just in time.

So, we would love to hear your thoughts on kind of that evolution that is likely coming ahead for the auto industry..

Yes, C.J. Absolutely. I did indeed say that's I don't think there is broadly speaking enough supply next year. Two already stopped building those additional inventories.

Because that's exactly what you're asking for, yes, we clearly see a demand by the OEMs to the Tier 1's and other participants in the extended supply-chain, explicitly not to semi companies, but in between, between us and the OEMs, the demand and the requirements to build more inventory.

Typical, if you want to size this, a typical ask is somewhere between 3 and 6 months, sometimes longer. And it has a very simple reasoning that's the manufacturing cycle time for semiconductor product. In a very simple way, they say, " Okay, if this is the additional inventory, then that puts us maybe on the safe side for more flexibility.

" And, yes, this is something which I don't see the industry has the capability to build [Indiscernible] next year, but let's stem for '23..

Very helpful. And then I guess, my follow-up question, obviously we've seen positive mix shift on the EV side, which you spoke to earlier. I'm curious, as we're seeing more and more OEMs target full platforms, moving over to EV or hybrid as well. Curious how that has played with your full solution which I would think would fit nicely.

I would love to hear your thoughts there..

We love it C.J. We talked a lot about our capability from -- actually also from a solution perspective in battery management solutions, which is greatly benefiting from this foster and accelerated penetration.

We will open the [Indiscernible] next week a little bit more in the Investor Day and give you insight in what else we do in electrification, because we are not only with BMS exposed to this accelerated trends. It's a very good thing for NXP, and it goes beyond battery management.

By battery management itself, obviously, is benefiting very, very greatly. I guess, with this we come to the end of the call. Which may be gets me in a position just to summarize very briefly.

I mean, it's a turbulent time out there, but I'm really proud that we could deliver what I think is a very good quarter three, have a strong guidance into quarter four, but even more so, we continue to have excellent momentum also into next year, which means continued strong demand across our end markets. No inventory build out there.

And we see that our supply capability is getting better and better and better up to stop matching that demand in the future. So with that, I thank you very much for your attendance today and I hope to hear and see quite a few of you also next week when we have our much more extended Investor Day in New York. Thank you..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, you may now disconnect..