NXP Semiconductors Q1 2026 Earnings Call Transcript

NXP Semiconductors (NASDAQ: NXPI) Q1 2026 Earnings Call dated Apr. 28, 2026

Presentation

Operator

Good day and thank you for standing by. Welcome to the NXP first quarter 2026 earnings conference call. At this time all participants are on a listen only mode. After the speaker’s presentation, there will be a question and answer session. To ask a question during the session, you’ll need to press star 11 on your telephone. You will then hear an automated message Advisory hand is raised to restore a question. Please press star 11 again. Please be advised that today’s conference is being recorded.

I would now like to turn the conference over to Jeff Palmer, Senior Vice President of Investor Relations. Please go ahead.

Jeff Palmer — Senior Vice President of Investor Relations

Thank you Lisa. Good afternoon everyone. Welcome to NXP Semiconductor’s first quarter earnings call. With me on the call today is Rafael Sotomayor, NXP’s President and CEO, and Bill Betts, 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 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 second quarter of 2026.

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 performance. Pursuant to Regulation G, NXP has provided reconciliations of the non GAAP financial measures to the most directly comparable GAAP measures in our first quarter 2026 earnings press release which will be furnished to the SEC on Form 8K and is available on NXP’s website in the Investor Relations section. Now I’d like to turn the call over to Rafael.

Rafael Sotomayor — CEO, President & Executive Director

Thank you Jeff and good afternoon. We appreciate you joining us today. Our first quarter performance exceeded expectations with broad based improvements across all our focus end markets led by our company specific growth drivers and importantly with momentum now visibly broadening into the core of our business. What we’re seeing today is the compounding result of sustained investment, disciplined execution and deepening customer adoption across our differentiated portfolio that is increasingly well positioned for the most durable secular Trends in semiconductors, sub 45 vehicles, physical AI and now with greater visibility than before data center infrastructure, the remainder of 2026 is set up to be stronger than we anticipated just 90 days ago.

Now I want to walk you through the key drivers behind that improvement. Turning to the quarter, we delivered revenue of $3.18 billion up 12% year over year and seasonally down 5% sequentially, oil and markets grew year over year and in aggregate we outperformed by $31 million above the midpoint of our guidance. Our company specific strategic growth drivers across the auto and industrial and IoT end markets grew 18% year over year and represented roughly 1/3 of first quarter revenue. Our core businesses encompassing all end markets increased 10% year over year.

Underscoring that momentum is broadening beyond the strategic drivers. Non GAAP operating margin was about 33%, 120 basis points above last year and 40 basis points above the midpoint of our guidance. Taken together, we delivered non GAAP earnings per share of $3.05 $0.08 above the midpoint of our guidance. Now turning to end market performance in Automotive revenue was $1.78 billion up 6% year over year and in line with expectations. Adjusted for the sales of the MEM sensor business, Automotive growth was 10% year over year during the quarter.

The growth was driven primarily by accelerating customer software defined vehicle programs, improved electrification trends and continued momentum in radar and connectivity. Together the auto accelerated growth drivers contributed nearly 90% of the year over year growth. From a customer adoption perspective, we’re seeing strong design win traction for our S32N and S32K5 products platforms that will serve as the backbone of our automotive processing franchise for years to come. We also secured new radar awards for imaging radar solutions along with wins for our 10 gigabit automotive ethernet products.

These are multi year platform commitments that expand NXP content per vehicle and deepen the structural relationship with our customers. The automotive opportunity is a long duration compounding story and our progress reinforces that trajectory in industrial and IoT revenue was $628 million up 24% year over year and near the high end of our guidance. Growth was driven by our newer industrial processing solutions including IMX, RT and MCX. Together these products grew about 75% year over year and contributed nearly half the end market growth versus Q1 2025.

Within the end market industry was strong with notable strength in factory automation, data centers and energy storage. Looking ahead, the industrial IoT market is entering a transformative phase as physical AI moves intelligence into real world systems and robotics. This is creating significant content growth opportunities for nxp, particularly in processing, connectivity and security. As AI is deployed at the edge. Customers need greater processing headroom to future proof their platforms. As a result, we’re seeing customers making deeper multi generational commitments to NXP because of the strength of our AI enabled product portfolio.

Now I want to take a moment to speak directly about our data center exposure because this is an area that we haven’t previously emphasized. In 2025, revenue related to data center applications was about $200 million and it was reflected evenly in both Our industrial and IoT and communication infrastructure end markets. Based on our water programs now ramping, we believe this business will be north of $500 million this year. With a similar end market split, we have established meaningful positions in system cooling, power supply board management and control plane switching applications.

Across these subsystems, customers choose NXP for processing depth and security capabilities based on customer engagements. We are reinforcing our IMX application processor family for this opportunity, creating a durable and expanding revenue presence in data centers with communications infrastructure. Revenue was $380 million up 21% year on year and at the high end of our guidance. Growth was driven by digital networking, exposure to data center and continued ramps of our U code RFID products. And lastly, mobile revenue was $391 million up 16% year over year and in line with guidance reflecting continuous strength in our secure mobile transactions franchise.

Now turning to the second quarter, our outlook is better than we anticipated nine days ago. We are guiding second quarter revenue to $3.45 billion up 18% year over year and up 8% sequentially. This sequential growth represents an acceleration of our company specific drivers. We expect all regions and all end markets to be up year on year, a reflection of expanded customer adoption of our differentiated portfolio. At the midpoint, we expect the following trends in our business during Q2 Automotive is expected to be up in the low double digit percent range year on year and up in the high single digit range sequentially.

Adjusted for the sales of the MEM sensor business, our guidance implies a high teens percentage growth year over year and 10% sequentially. Industrial and IoT is expected to be up in the high 30% range year over year and up in the high teens range sequentially continuing the acceleration we saw in Q1. Mobile is expected to be up in the low single digit percent range year over year and down in the low double digit percent range on a sequential basis. And finally, Communications infrastructure and other is expected to be up in the mid 30% range versus Q2 2025 and up in the mid teens percent range versus Q1 2026.

In summary, our second quarter outlook and our growth trajectory in 2026 reflect the story of breadth, depth and acceleration. Our company specific growth drivers are performing as designed, our core business is inflecting and today we have made the growth of our data center revenue transparent to support your understanding of our exposure to this important market. Data center revenue is ramping now and it will more than double in 2026 from a year ago. We remain disciplined in how we invest, how we allocate capital and how we manage the factors we can control.

Our framework is unchanged. Invest for growth, pursue targeted M and A to strengthen the portfolio and return excess cash to dividends and buybacks consistent with our long term model. And now I would like to pass the call to Bill for a review of our financial performance.

Bill Betz — Executive VP & CFO

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. Overall our Q1 results were solid which were led by our company specific growth drivers across our focus end markets, reinforcing the strength of our strategic priorities. We continue to ramp our new products and see strong customer adoption and design win momentum across our latest products and solutions. This momentum reinforces the value of our long term R and D investments and the strength of our product roadmap.

In summary, revenue, gross profit and operating profit were all better than the midpoint of Guidance and we delivered non GAAP earnings per share of $3.05 or $0.08 better than the midpoint. Non GAAP gross profit was 1.82 billion with a 57.1% non GAAP gross margin modestly above guidance driven by solid fall through on higher revenues. Non GAAP operating expenses were 758 million or 23.8% of revenue favorable to guidance driven by efficiency gains. Non GAAP operating profit was 1.05 billion and non GAAP operating margin was 33.1% 40 basis points above guidance.

Below the line non GAAP interest expense was 90 million and taxes were 173 million. Non controlling interest expense was 11 million and results from equity accounted investees were a 4 million loss. Taken together below the line items were 3 million unfavorable to guidance during the quarter. Stock based compensation was 109 million and it is excluded from our non GAAP earnings. Turning to changes in cash yet in capital returns our balance sheet remains strong and provides flexibility to invest in our strategic priorities and hybrid manufacturing plans.

We ended Q1 with $11.7 billion in total debt and $3.7 billion in cash cash usage during the quarter reflected debt repayments, joint venture investments, capital returns and capex partially offset by cash generation including 878 million of proceeds from the sale of the Men’s center business. Net debt was 8 billion or 1.7 times adjusted EBITDA and our adjusted EBITDA interest coverage ratio was 14.5 times. During Q1 we retired the 500 million 5.35% tranche due in March and after the end of the quarter we retired the 750 million 3.875% tranche due in June.

In Q1 we returned 358 million to our owners comprised of 256 million in dividends and 102 million in share repurchases. After quarter end we repurchased another 32 million under our 10B5.1 program. We remain committed to our long term capital allocation strategy, balancing returns to shareholders with disciplined investments in the business to support long term profitable growth. Turning to working capital, days of inventory were 165 days including 7 days of pre bills. Receivables were 34 days and payables were 59 days resulting in a cash conversion cycle of 140 days.

Inventory levels remain aligned to support our future growth and our planned front end factory consolidation plans. Cash flow from operations was 793 million and net capex was 79 million resulting in non GAAP free cash flow of 714 million or 22% of revenue. From a cash deployment perspective during Q1 we continue to advance our manufacturing strategy which supports our long term supply resiliency. Over time this is expected to contribute approximately 200 basis points of structural gross margin expansion once the facility is fully operational.

In 2028 in the quarter we invested 385 million in VSMC, our manufacturing joint venture in Singapore. This is comprised of 189 million in long term capacity access fees and 196 million in equity contributions. Overall we are about 67% through the investment cycle for BSMC and about 30% for ESMC. For DSMC we expect an additional 425 million in 2026. For ESMC we expect the 2026 investments to be about 50 million. Now turning to our expectations for Q2 we expect Q2 revenue of 3.45 billion plus or minus 100 million.

This is up 18% year on year and 8% sequentially. The expected first half results support our view that NXP’s growth is increasingly company specific and reinforces our confidence in achieving our long term revenue growth targets. We expect non GAAP gross margin of 58% plus or minus 50 basis points, up 150 basis points year on year and up 90 basis points sequentially. This is driven by higher revenue product mix and front end utilization improvements. We expect operating expenses of 800 million plus or minus 10 million.

This reflects the 17 million annual RFID licensing fee and normal annual merit increases at the midpoint. This results into a non GAAP operating margin of 34.7% below the line. We expect non GAAP financial expense to be approximately 92 million and our non GAAP tax rate to be 18%. We expect non controlling interest to be 14 million and including 4 million losses in our equity accounted investees. Stock based compensation is expected to be approximately 107 million and is excluded from our non GAAP guidance.

This implies Q2 non GAAP earnings per share of $3.50 at the midpoint. Turning to Q2 uses of cash, we expect capital expenditures to be approximately 3% of revenue with a capacity access fee payment to VSMC of 55 million and equity investments into VSMC of 125 million and for ESMC 10 million. Overall, our first half performance and expectations reinforce the durability of of our financial model driven by our company specific growth drivers finally shining through gross margin back to expansion mode and improved efficiency in our operating expenses.

In closing, we remain confident in delivering our 2027 financial commitments which implies double digit revenue growth in both 2026 and and 2027, gross margin expanding toward 60 plus percent and continued discipline in our operating expenses. I would like to now turn the call back to the operator for your questions.

Question & Answers

Operator

Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. If you would like to remove yourself from the queue, press star 11 again. We also ask that you wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q and A roster. First question will be coming from the line of Vic Arya of Bank of America securities. Your line is open.

Vivek Arya

Thanks for taking my question Rafael. I was hoping that you could give us a sense for what is driving the growth in your automotive business both kind of within China and outside of China. And then how much of a pricing benefit are you seeing? Because everything appears to be in kind of short supply right now and I was wondering if NXP is seeing any benefit from the pricing side of the equation or you think this is more just kind of company specific and these are more unit rather than pricing driven growth upside that you’re seeing right now in autos.

Rafael Sotomayor — CEO, President & Executive Director

Yeah, thank you, Vivek, for the question. I think. Let me tackle the question in auto because I think, I think that we have right now is a backdrop of constant news of SAR being down and maybe people getting confused about what does it mean for us in auto business. And I’ll say out of the bat, like SAR gives you how many vehicles are produced. It says nothing about semiconductor company per vehicle. Now in this environment, our auto business, NXP is performing well. You can see from the print in Q1 it grew 10% after you account for the sensor business.

And Q2 guide implies a high teens year over year growth on the same basis. So you can see that clearly the momentum is improving. And so that tells you already that this is not necessarily a story about unit growth. This is a story about the transformation, the architecture transformation that is done in content group. So my answer to you is architecture led. And that’s a real story, right? For us it’s a compass story that’s starting to show in our numbers. The one thing I want to leave you as well is this growth is increasingly structural.

What does that mean? Well, our accelerated growth drivers have been growing double digits since Q4, and that also happened in Q1 is going to continue in Q2 and they’re contributing to 90% or 90 plus percent of the growth of the segment. And that kind of tells you that our growth is increasingly structural. You talk about China, you talk about some of the events, it says production is down, but every segment, I’m sorry, every region in automotive is up year over year despite the sequential decline a quarter year on year.

We’re actually growing year on year in every segment and that continues into Q2.

Vivek Arya

And for my follow up perhaps on the comms infrastructure segment, I think the last call you kind of broke it out right half, I think in your tagging products and then digital networking and RF power. And back at your analyst day, you had set essentially kind of a flattish outlook from 24 to 27. What is the right way to think about this business? How much of this do you still plan to exit? How much of this are you reinvesting in? So what is kind of the true growth rate of your comms infrastructure business in 26 and 27 that we should be looking forward to versus what you thought of at analyst day? Thank you.

Rafael Sotomayor — CEO, President & Executive Director

So let me answer just by stating that we’re not going to change the long term model of comps and infra, but I think your question is very valid with Respect to a composition of what’s in and comps and infra and if you remember what I said is that this end market is going to be flat CAGR basically flat for the next three years between 24 and 27 and we experienced a decline close to 25% last year. Now we closed the year on this segment with about 50% of this revenue being tied to secure cards. About quarter of that was digital networking and a quarter of that was arc power.

Now now you can see that the market, the comps and infra in market is recovering primarily on the back of the strength of secure cards. RFID is actually going up and our exposure to data centers through our digital networking products is actually rebounding. And so I think the composition of this segment is going to shift a little bit more into from RF power which we actually deemphasizing and is going to probably start decelerating in 2027. The revenue composition is going to change from RF power more towards digital network and secure cars is likely to stay around 50% and that’s the way you should think about it.

Vivek Arya

Thank you.

Operator

Thank you. One moment for the next question. And our next question will be coming from the line of Ross Seymour of Deutsche Bank. Your line is open.

Ross Seymore — Analyst, Deutsche Bank

Hi guys, thanks for letting me ask a question. One of the lines you said in your preamble, Rafael, as well as in your press release was about this. The momentum accelerating throughout the rest of the year. Can you just talk about what that is? I’m not trying to get you to guide for the back half of the year, but just is your visibility improving? What gives you the confidence in that? How much is cyclical versus secular? Those sorts of things

Rafael Sotomayor — CEO, President & Executive Director

I think is a fair question. First of all, I will kind of resonate with you. I’m not going to guide second half today, but I would say the setup is clearly improved. And if you take the Q2 guide, you can probably estimate at 50% growth in the first half of 2026 versus second half. First, sorry, first half of this year versus first half last year and actually it’s 18% if you adjust for sensors. So actually you can see that we’re starting the year strongly. What has changed? Visibility has improved.

I think what has changed? Direct order book continues to strengthen. The distribution backlog continues to improve. So I think we believe the momentum continues and so we’re going to stay disciplined the way we guide. But the signals that we try gives us confidence. The momentum of our company specific growth drivers will continue throughout the year and it’s going to drive the what we believe is going to be growth in the second half,

Ross Seymore — Analyst, Deutsche Bank

I guess for my follow up, thanks for breaking out the data center side. Talk a little bit about that 200 more than doubling this year. You went through a few of the drivers there. But are these new products, is this just the rising tide of that Capex lifting all the boats, you included, or is this a strategic area that you’re targeting? Just talk a little bit about what gives you the confidence in that and how NXP is differentiated.

Rafael Sotomayor — CEO, President & Executive Director

Yeah, maybe Ross, I’ll start by maybe explaining what is our exposure to data center because that could be confusing. So off the bat, right, I would say we’re not claiming exposure to the data plane. So no GPUs, no accelerators, no high speed AI connectivity. So our domain is in the control plane. So the way to think about it as you know, as data center scales, the constraints are not just computed memory, they’re also power, cooling, uptime, secure controls. And I think this is where NXP plays.

Where are our products? Our products are layer scale, networking, processing for control plane networking. We have our IMX products for board management, we have our MCUs doing root of trust or being part of the cooling system. So the way to think about it is we play in the part of the system where you need high reliability and long life cycle applications. And I think this is where NXP’s industrial strength portfolio is differentiated. And so the growth that we anticipated from last year to this year is underpinned.

I mean these are products that they’re not only designing but they’re ramping. And I think this is just about just making sure the momentum continues into the second half.

Ross Seymore — Analyst, Deutsche Bank

Thank you.

Operator

Thank you. One moment for the next question. And the next question will be coming from the line of Thomas o’ Malley of Barclays. Your line is open Right now.

Thomas O’Malley

Hey guys, thanks for taking my question. Just on the channel, you guys went from 9 weeks to 10 weeks. Now it looks like 10 weeks to 11 weeks. Clearly the demand profile for the rest of the year is stronger. I was curious if you guys had any additional views on the channel. Do you think that you would expand it just given the stronger demand profile or are you comfortable with it at that 11 weeks mark that you guys have kind of described in the past?

Rafael Sotomayor — CEO, President & Executive Director

Yes. So in this quarter, right? In Q1 we went to 11 weeks. And if you remember, our guide of Q1 last quarter already reflected the one week increase in our inventory. And it was primarily to actually service what it was. A much stronger Demand environment. And if you look at our growth in industriality in Q1 it grew over 20% and 80% of that business is service to distribution. So you can see that we already had an idea where the strength is going to come. And then our Q2 guide in industrial IT, remember 80% of that comes from the channel is guiding towards high 30%.

So we’re clearly servicing the channel. Now Q2 guide is based on inventory channels, staying flat, staying at 11 weeks. So we intend to stay in our long term target which is 11 weeks.

Thomas O’Malley

And then just as a follow up on the data center side, you guys are obviously seeing gross margin benefit from volume. And you also talked about mix as well. You guys don’t give specific gross margin targets on your segments, but could you maybe give us a flavor of are these new products beneficial to corporate gross margins? And as that scales, should you see a tailwind from the data center business as well on the gross margin line? Thank you.

Bill Betz — Executive VP & CFO

Hey Tom, how are you? This is Bill. Thanks for your question. Let me address the gross margin in general specifically, specifically your question. You know, our gross margins continue to expand driven by the higher revenue, the product mix and the utilization levels. Our utilization on our front end. Think about the first half to be in the low 80s and think about the second half to be in the mid 80s. So we will get benefit from that from the utilization levels for our gross margin. Again, all the investments we’re making is all about and servicing is all about focus on being accretive to our corporate gross margins.

So in these areas and when we make investments or provide our broad portfolio into different applications, it’s extremely important that we extract value and also create value for our customers. So the way to think about that to your question is yes, they are very favorable to the corporate gross margins. But we’ll continue to drive and focus there.

Jeff Palmer — Senior Vice President of Investor Relations

Lisa, we’ll take the next caller.

Operator

Thank you. And the next question will come from the line of Francois Bouvigny of ubs. Please go ahead.

Francois-Xavier Bouvignies — Analyst, Ubs

Thank you very much. I wanted to follow up on the maybe on the pricing dynamics. I mean we have seen pricing increase in the industry so far since the beginning of the year. And also we have seen some reports that NXP is also involved in these pricing dynamics. You don’t talk much about pricing. So I think that maybe it’s not that big impact yet. But should we impact the pricing moves for the rest of the year as an upside potential if it’s getting tighter? And Bill, you mentioned 85, you know, in the second half of the year. So maybe you are reaching a level where maybe, you know, you could increase the pricing over time. Is that a scenario possible?

Rafael Sotomayor — CEO, President & Executive Director

Francois, let me answer the question here with the way we see, I mean I think your question relates to inflationary costs and the impact into pricing and pressure in terms of cost is always a challenge and this is something that we do, we, that we were paid to actually handle and so we must tackle it. So our first reaction to cost increase is always to mitigate it to operational efficiency. And that for us is our preferred approach. That said, in selected areas we are seeing high input cost pressure and so we are taking selectively smart pricing adjustments to protect the economics of the business.

The reason we haven’t talked about it is because the Q2 impact is immaterial now. We will continue to be disciplined and protect gross margins when cost inflation requires a response. And so we’ll keep you updated if things change

Francois-Xavier Bouvignies — Analyst, Ubs

Makes sense. Thank you, Rafael. And maybe the second question is on this broad based recovery across all products and China, when you said China is also growing and of course when we look at Q1, the China Auto car sales at least for the domestic part is actually down meaningfully. I mean mid teens percentage year on year. So do you see as well China still strong year on year in Q2 and for the remainder of the year or do you see as well some impact from that data we see for the sales of cars in China or the content is higher and offsetting any color on this China specifically would be great.

Rafael Sotomayor — CEO, President & Executive Director

Francois, I acknowledge the headlines of China, right? I think it’s been very public that the production in China was weak, primarily driven by the weakness on the internal consumption. And some of the headlines of the Chinese OEMs are focusing more on export to overcome some of the challenges that are happening with the domestic market. But I think the contradiction is that, and I continue to say it is that production volatility is very small compared to content growth and China is no different than the rest of the world.

I tell you, for us China grew year on year in Q1. I mean it was, it wasn’t necessarily massive, but it grew and it continues to grow into Q2. And so I think that is the story. And if the story doesn’t change, content growth overcomes unit volatility.

Francois-Xavier Bouvignies — Analyst, Ubs

Makes sense. Thank you very much.

Operator

Thank you. One moment for the next question. And our next question is coming from the line of Jim Schneider of Goldman Sachs. Line is open.

James Schneider

Good afternoon. Thanks for taking my question. Given the commentary you made and the idiosyncratic growth drivers you’re seeing relative to 26 and 27. Just wanted to clarify that you still on track to deliver to your analyst day targets from 2024 out into 2027 and maybe you can confirm both the revenue and gross margin side of that. Thank you.

Rafael Sotomayor — CEO, President & Executive Director

Yes, I think the question on 2027, we were specific both in our script, both Bill and I, in our preferred remarks that we are confident and we have a conviction on the trajectory that we have with our secular growth drivers that 2027 is achievable. And so I think the answer is yes, we stay put with our 2027 targets.

Bill Betz — Executive VP & CFO

Yes. And just to add the secular drivers, they continue to perform very, very well. We expect for the auto ones to be above our high end in Q2 and also for industrial IoT the growth rates be above the high end of what we said for industrial IoT growth drivers that are company specific.

James Schneider

That’s helpful. Thank you. Then relative to the data center disclosure you provided that by all accounts appears to be at least at or potentially above the rate of data center growth for many of your analog peers. Can you maybe talk about whether there’s any specific areas that are growing, sort of outgrowing the overall envelope there and whether you plan to deliver or introduce any new products to further apply towards that opportunity?

Rafael Sotomayor — CEO, President & Executive Director

Yeah, the data center. So the way to think about data center is that we are just ramping, right. So the growth. And again we’re going to be focusing the control plane of the data center, the growth of that exposure to that segment is just beginning because we’re just ramping. And our sam, if you look at our SAM on the control plane, it’s probably growing about 10 to 11% per year. We are going to outgrow the SAM because we’re just ramping and we continue to expect that to continue to happen in 26 and 27.

We are doubling down on some of the products to actually seize kind of the opportunity that we have in the current engagements. We are talking to our customers what the next generation of products is going to be. And I tell you, the exposure in the data centers has about 20 to 25 products. Obviously some of the higher ASP products are in the networking side and the IMX products for management control. And so we’re speaking to our customers what the next generation needs are going to be. And we’re developing those products.

James Schneider

Thank you.

Operator

Thank you. One moment for the next question. And our next question is coming from the line of Matthew Prisco of Kantor. Your line is Open.

Matthew Prisco — Analyst, Kantor

Hey guys, thank you for taking the question. Maybe to kick it off, can you start with a little more color on the customer ordering patterns that you’ve seen? What’s changed over the past 90 days and have you seen any impact from memory dynamics out there or Middle east conflict either in the order patterns today or in customer conversations?

Rafael Sotomayor — CEO, President & Executive Director

Well, the visibility on our backlog and the distributor’s backlog has improved significantly and that’s what gives us the confidence that we have going into the second half of the year that the demand is strong. Memory is always a topic and our customers are doing everything possible to actually secure supply. This is more of a supply issue versus a price issue. We all know what the prices are in the memory. We are, if you look at our customers on the consumer side, they are very well funded customers that they have the ability to actually go get the supply they need.

So we haven’t seen any impact in our orders yet in industrial, IOT and automotive due to memory, even though memory is still a big conversation in every customer meeting that we have.

Matthew Prisco — Analyst, Kantor

Helpful. And then maybe talking about the supply backdrop a bit, are you seeing any tightness out there impacting the business as we kind of see those tier 2 wafer pricing increases and kind of what we’re talking about supply. An update on V.S.M.C. Or E.S.M.C. Timing? Thanks.

Bill Betz — Executive VP & CFO

Oh sure, let me take that. Let me take your last question first on the timing of VSMC and esmc. Both are on schedule. BSMC maybe. I know the tools are installed, they’re gonna start ramping soon and hopefully we get up and running in 2028 where we get the expand our structural gross margins by another 200 basis points related to other supply factor. Yes, different parts of the supply chain are tight and we do see these inflationary costs that Rafael referred to. And if we can’t offset them internally from operational efficiency or productivity, we then unfortunately have to pass them along onto our customers.

And so we are starting to do that in selective areas, but trying to do that in a controlled way. If things get really tight, we’ll do what we did during COVID to do to make sure that we protect our gross margins related to it. But we are seeing bottlenecks, slight bottlenecks in certain parts of the supply chain.

Operator

Thank you. One moment for the next question. And the next question will be coming from the line of Joe Moore, Morgan Stanley. Your line is open.

Joseph Moore

Great, thank you. I wonder if you could talk about the growth drivers in the auto space. And you know, you sort of talked about seeing your business get Better from that, you know, is that kind of an indication of 2027 model year or. I sort of think of these as five year rolling programs. Just anything you can do to help us. You know, what’s giving you the confidence to sort of call that an inflection rather than something cyclical.

Rafael Sotomayor — CEO, President & Executive Director

Yeah. So let me talk about the auto growth drivers. They become a very important part of the business now and it’s really changing the composition of the revenue and auto. The growth drivers. Now, just to give you a sense, the growth drivers in Q1, they were north of 45% of the revenue now composition. And so we continue to see growth. And just to give you a sense, this is now coming from a 39 composition. I think we’re going to end up the year in 2026, closer to the 50 range as opposed to the mid-40s.

And because they are growing strongly. Right. And they are growing double digits. And it’s driven by the software defined vehicle portfolio that we have. That is the strength of NXP and automotive is we have products in the processing portfolio that today don’t have equivalents in the market and they’re really well positioned for sonal architectures and central compute architectures. So we expect this transition into SDV to really be a very, very strong tailwind and position XP as the leadership in automotive. But it’s all driven by our SDV platform.

Joseph Moore

Great. And is there anything different about that in the China market? I’m sort of thinking, you know, when you build the car architecture from scratch, it’s probably easier to build around software defined vehicles than it is if you’re sort of in an entrenched architecture. On the other hand, there’s local suppliers and things like that. Just. Is the China market any different in terms of those growth drivers?

Rafael Sotomayor — CEO, President & Executive Director

It is not necessarily different in terms of the adoption of the growth drivers. I think what is different is in the speed in which they adopt the products. And for instance, I would say that. Let me just take an example, the S32K5, which is our 60 nanometer latest 60 nanometer zone product, a product with a lot of performance. We expect the K5 to go to production in China despite the fact that this product has been sampled to Western customers first. So the speed in which they adopt the next generation architectures is what is different.

Now you made a comment with respect to local competitors. I think that the shift in architecture is also benefiting us because at the end of the day you will see local competitors emerge in the automotive market and they are likely to emerge in the low end. But this architectural shift to Sonal central compute, it favors higher processing capabilities, it favors higher redundancy. The other thing that you have to take into account, China is moving fast to automation, to level three, level four ADAs.

So that also requires more redundancy, better security, better safety. And so this is where I think innovation in MCUs and MPUs is going to be key to actually winning the market. So we’re quite excited about the transformative move that Chinese are making in architectures and the speed in which we’re doing it because we have the right roadmap for them.

Joseph Moore

Thanks so much.

Operator

Thank you. One moment for the next question. And the next question will be coming from the line of Chris Casco of Wolf Research. Please go ahead.

Christopher Caso — Analyst, Wolf Research

Yes, thank you. Good evening. The first question is coming back to some of the comments you made about input costs rising. And if you could talk to us about what you’re seeing with regard to foundry wafer pricing now and how that gets affected as VSMC starts to ramp next year. What impact is that on you and perhaps does that provide you with some sort of an advantage if pricing does go up as VSMC ramps?

Bill Betz — Executive VP & CFO

Yeah, let me take that one. The way to think about the supply, VSMC services, one sort of supply which we kind of have a little bit more control over and why we’re paying additional capacity access fees to get additional supply. But that’s probably more linked to some of our technologies that are mostly in house from part of our consolidation rationalization project that we’re doing. The other capacity, what we’re seeing is when you want additional. So if you have surprises above what you, you know, the agreements that you kind of entered in the beginning of the year, we’re seeing additional charges because they may need to obviously capacity get tight.

So they also may need to add new tools and so forth to help you supply. But we’re not, you know, from the current agreement it’s probably more upside that they charge and then can we offset that internally? If we can’t, then we pass it along to our customers.

Christopher Caso — Analyst, Wolf Research

Right, understood. As a follow up, you mentioned in your opening remarks that I guess you were confident still in the analyst day targets and that implied double digit growth for 26 and 27. Obviously 27 is far away. I’m not sure what we should read into that. Is there any particular visibility that you have or is this just some confidence that perhaps we finally turn the corner and if that’s the case, we get a good growth year next year? Not sure how much we should read into those comments?

Rafael Sotomayor — CEO, President & Executive Director

Well, let me address that because I think it’s a question on the model and why we’re doubling down on basically our commitments in 2027, which will imply, just doing the math, a particular growth rate in 2026 and 2027. And that conviction of revenue targets emanates from, from the traction that we have in our accelerated growth drivers and the traction that we have now with data center and the traction that we show you in both industrial and iot. And I think we you can get there through different contributions by the different end markets.

And some segments are going to be in the low end of the range, some segments are going to be in the higher end of the range. But our targets for us in 2027, they seem to be within reach. Now just be Honest, internally in NXP, we don’t see 2027 as a destination, of course, just a milestone. And if you were to look into 2027, getting what’s important, obviously you know, from you from a revenue perspective is why we have the conviction. But for us internally is how we close the year and enter 2028 with momentum in our focus markets, the progress we make in our portfolio, the traction that we have on becoming mission critical to our customers and I think the conviction that we have is the progress we’re making right now in 2026 and last year with the adoption of our customers and our new products, I think makes our view in this path towards 2027 very, very constructive.

Bill Betz — Executive VP & CFO

Yeah, maybe I’d just add just on the secular growth drivers, you know, obviously we have visibility next quarter, the quarter after and the following quarter and the order intake on those, you know, secular growth drivers for the company specific are all at high end or above of what we said during investor day. So really a lot of company specific growth that’s given us confidence behind it because again, it’s a content, it’s a ramp of product design wins that one. And they’re ramping now. And so since they’re tracking to at the high end or above the high end of the model that we provided, we feel very confident that this will continue because of the adoption of our solutions.

Joseph Moore

Thank you.

Operator

Thank you. One moment for the next question. And our next question is coming from the line of Gary Mobley of Loop Capital. Your line is open.

Gary Mobley — Analyst, Loop Capital

Hi guys, thanks for taking my question. I was hoping that you can give us an update on the integration of Kinera Aviva, TT Tech, how that’s progressing, whether it relate to, you know, enhancements to existing roadmaps or you know, full commercialization on an independent basis. Any update there would be helpful.

Rafael Sotomayor — CEO, President & Executive Director

Yes, I’ll give you an update this Rafael. So I think let’s start with TT Tech as a great engineering organization. They have been redeploying now to our internal efforts to do S32CO write. This is a very important kind of initiative that we have. We expect to sample with customers in Q3 this Sonal reference design, the K5 reference design that involves not only the K5 but other MCUs and our 48 volt architecture. And we’re doing it both in the east and the West. I think we have high single digit number of customers engaged in poc.

So it’s quite exciting and we do expect that this effort is going to accelerate the K5 adoption into 2027. Aviva links I think is a great platform that we got in Serdes platform. This is an open standard, very important for SDVs given the fact that sensors and displays are multiplying in next generation vehicles and all these are connected to Serdes. And I think companies are looking for an open platform versus the proprietary solutions they have today. We have customer awards now and we expect to be in production with them in 2028.

So this is a new sound for us. This is a new market that we haven’t entered. And the passes there were two very entrenched obviously competitors there. But now with this open standard allows NSP to come and compete and compete with great technology. And the last one on Kinara. Kinara, what a great acquisition directly in the middle of our North Star which is becoming intelligent systems at the edge. And Kinara has been a perfect combination for our AMX platform, that is our application processor.

It allows us to really engage with customer in ways that we couldn’t have done in the past just because we didn’t have the capability. We didn’t even have the credibility on it. And so today sales funnel is quite large and literally over a billion dollars in sales funnel. So obviously a lot of things to go and go and chase. Our customer reaction is really good. We have, you know, I think we have like more than 30 POCs going on and we expect again we are on track to have some revenue of combination of the Kinara asset with IMX in the second half of 2027 and 2028.

The other important thing is that we’re starting to integrate the Kinara IP already into our industrial processors and our auto processors. This is monolithic integration of eip. So this is also going to be Part of our next generation processing for our auto and industrial products.

Gary Mobley — Analyst, Loop Capital

Appreciate it. Rafael, I want to ask really more of a direct question on your comfort to the 2027 targets. We all know what the revenue would materialize to at 15.8 billion if you hit the the growth targets is laid out November 2024. But we’ve had of course the divestiture of the MEMS sensor business. So should we think about the end point or. I guess the milestone for 2027 is about 15.4 billion in revenue.

Jeff Palmer — Senior Vice President of Investor Relations

So. Hey Gary, let me take that modeling question. So first in your calculation, remember you’ve got to back off the sale of the MEMS business. That’s just a housekeeping item. But I think of what you’ve heard from both Rafael and Bill today is we are standing solidly behind our long term growth rates at the total company level. That means we’re going to hit 6 to 10% total company. And I know you guys know how to do modeling better than anybody. You can kind of back into what that means for 26 and 27 and we’re going to leave that exercise to you.

But we are not backing away from those targets. And I would say the thing to take away from maybe some of the comments from both Bill and Rafael is the design wins we have and they’re starting to go into production. So our clarity and our belief in achieving those targets is increasing daily.

Gary Mobley — Analyst, Loop Capital

Thanks, Jeff.

Jeff Palmer — Senior Vice President of Investor Relations

Yep, sure.

Operator

One moment for the next question. And the next question will be coming from the line of Quinn Bolton of Needham and Company. Your line is open.

Quinn Bolton — Analyst, Needham And Company

Hey guys, thanks for taking my question. I guess I wanted to come back to the IIoT business and if I’ve got my numbers right, it looks like that business will hit a record revenue level in the second quarter. How much of that is just broad based industrial and market recovery versus your company specific growth drivers? And then I’ve got a quick follow up for Bill.

Rafael Sotomayor — CEO, President & Executive Director

Yeah, let me jump on that one. I think you’re right. I think the strength IoT industrial and IoT for us started showing strength in Q3 last year. We started to grow year over year and that growth continued in Q4, continue in Q1 with a 20 plus percent range and that will be guided to the high 30s. So we said it clearly the strength is broad based. It’s all geographical regions in all markets. We have certain products right now. They’re driving the growth. As we said that half of that growth came from new industrial processing portfolio.

That is accelerated secular growth drivers. What is also very Encouraging is that we’re seeing the core part of industrial IoT also growing. This is a part of the revenue the last year decline now is back into growth. In Q1, it grew 15% year on year. And so you can see that the rest of the portfolio is also recovering. So it’s very broad based now. It’s also not only the accelerated growth drivers performing, but the core part of our business in industrial IoT is coming back. And so that kind of tells you hopefully a little bit of flavor of the strength of the momentum that we have going into Q2 and likely carrying the second half of the year.

Bill Betz — Executive VP & CFO

Yeah, maybe I’ll just put a number there. The way to think about industrial IoT, the secular growth drivers are representing about 37% and they’re growing north of 40, 50% kind of range. Just to give you a feel.

Quinn Bolton — Analyst, Needham And Company

Great, thank you. And for Bill, you’ve talked about the 200 basis points that you get from the ramp of ESMC and insourcing or moving production from 200 millimeter to 300 millimeter. Can you give us a sense as that facility comes online, how quickly do you get that benefit? Can you see it all in one year or does it take several years to achieve the full 200 basis points?

Bill Betz — Executive VP & CFO

Yeah, it’s a great question. Typically we should start to see it when the factory is fully utilized, which is probably a good utilization number for that type of factory runs 90, 95%. And so it will take several quarters to get that full benefit, depending on the ramp, of course. So my guess is you probably get a partial of it for sure in 2028. Will you get the full amount? Not sure. It all depends on the timing of the ramp. But we’re pushing strong and we want to get it as well and drive it.

Thomas O’Malley

Excellent. Thank you. Thank you,

Jeff Palmer — Senior Vice President of Investor Relations

Elisa. I think that’ll be our last question and I think we’ll pass it back to Rafael to conclude the call today.

Rafael Sotomayor — CEO, President & Executive Director

Thank you everyone for joining us today and for your thoughtful questions. In closing, I would like to leave you with three takeaways. First, NSP growth is driven by leadership in SDD in physical AI and industrial IoT. Second, our company specific growth drivers are performing as designed. Lastly, we’re reaffirming our analyst day commitments, which implies double digit growth in both 2026, in 2027. This quarter reaffirms the strength of the execution to our strategy. We remain committed to disciplined investment margin expansion and portfolio optimizations to deliver sustainable long term value for our shareholders. Thank you.

Operator

Thank you. This does conclude today’s program. Thank you all for joining. You may now disconnect.