NXP Semiconductors (NXPI) Q4 2025 Earnings Call Transcript

NXP Semiconductors (NASDAQ: NXPI) Q4 2025 Earnings Call dated Feb. 03, 2026

Corporate Participants:

Jeff Palmer — Senior Vice President, Investor Relations

Rafael Sotomayor — Executive Vice President and General Manager, Secure Connected Edge

Bill Betz — Chief Financial Officer

Analysts:

Tom O’Malley — Analyst

Matthew Prisco — Analyst

Ross Seymore — Analyst

Joseph Moore — Analyst

Joshua Buchalter — Analyst

Vivek Arya — Analyst

Joe Quattrocchi — Analyst

Chris Caso — Analyst

Gary Mobley — Analyst

Jim Schneider — Analyst

Tor Sandberg — Analyst

Vijay Rakesh — Analyst

William Stein — Analyst

Presentation:

operator

Ladies and gentlemen, thank you for standing by. Welcome to NXP fourth quarter 2025 earnings conference call. At this time, all participants are in 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 would need to press star 11 on your telephone. You will then hear an automated message advise and your hand is raised to withdraw your question. Please press star 11 again. Please be advised that today’s conference is being recorded. I would now like to turn your conference over to Jeff Palmer, Senior Vice President, Investor Relations. Please go ahead.

Jeff Palmer — Senior Vice President, Investor Relations

Thank you, Michelle and good morning everyone. Welcome to NXP Semiconductors earnings call today. With me on the call today is razi El 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. The 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 first quarter of 2026.

NSP 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 NSP’s underlying core operating performance. Pursuant to Regulation G, NSP has provided reconciliations of the non GAAP financial measures to the most directly comparable GAAP measures in our fourth quarter 2025 earnings press release which will be furnished to the SEC on a Form 8K and available from NSP’s website in the Investor Relations section. Now I’d like to pass the call to Rafael.

Rafael Sotomayor — Executive Vice President and General Manager, Secure Connected Edge

Thank you Jeff and good morning. We appreciate you joining our call today. Our overall performance during the fourth quarter was solid with all end markets performing either in line or better than expected. All regions were up on a year on year basis. Turning to the specifics, NXP delivered fourth quarter revenue of $3.34 billion, an increase of 7% year on year and up 5% sequentially. This was $35 million better than the midpoint of our guidance. Non GAAP operating margin in the fourth quarter was about 35%, 40 basis points above the same period a year ago and in line with the midpoint of our guidance.

Taken together we drove non GAAP earnings per share of $3.35 $0.07 better than guidance distribution inventory was 10 weeks consistent with our guidance. We remain disciplined on channel health prioritizing sell through of high demand products rather than broad based restocking. Now I would like to reflect on our performance in 2025. The year was a tale of two halves with the first half of the year exhibiting weaker demand trends while in the second half of the year demand began to accelerate in support of our. Long term revenue growth model.

Looking at the specifics, Automotive revenue was $7.1 billion flat year on year due to slower inventory digestion at direct customers. In the first half of 2025 with the inventory digestion behind us, the second half performance aligns with our 8 to 12 long term growth outlook reflecting the underlying strength of our auto portfolio. A few examples which underpin our optimism include our efforts in software defined vehicles where we have been where we have seen strong global adoption of NXP products. These include design win rates for S32N family of 5 nanometer vehicle compute processors, the newly introduced S32K family of 60 nanometer sono processors, and continue adoption of automotive Ethernet products.

These efforts are now material and global in nature with most auto OEMs undertaking SDV platform initiatives. Additionally, the early conversations with customers on the recently acquired technologies from TTtech Auto and Aviva Lynx are accelerating interest in NXP’s SDV portfolio. The potential revenue contributions from these engagements should materialize beyond 2027. These multi year SBB platforms deepen customer commitment and support mix improvement over time. Turning to the industrial and IoT end market revenue was $2.3 billion flat year on year. The second half growth was materially above our 8 to 12% long term growth outlook across both core industrial and and consumer and IoT supporting our ambition to lead an intelligent systems at the edge we continue to see strong customer engagements in the emerging market for physical AI.

By combining the industry leading IMX family of industrial application processors with the recently acquired Kinara npu, we can deliver complete and scalable AI platforms that accelerate deployment at the edge. A few examples of applications include medical imaging systems, camera based workplace safety system in the industrial market, logistic automation systems and robotics. Customer interest has been exceptionally strong and these engagements reinforce our vision of physical AI and the power of the NXP platform. These opportunities expand our addressable market, support sustainable growth and validate the unique competitive nature of our complete system portfolio. Looking at our mobile business, revenue in 2025 was solid at $1.6 billion, up 6% year on year.

We saw stronger demand in content gains in the premium mobile market. Overall, NXP remains a specialty supplier in the mobile market with a unique indefensible franchise center on secure mobile transactions. Finally, the revenue in the communications infrastructure market was $1.3 billion, down 24% year on year. As we have said in the past, we anticipate flat growth over the longer term as the digital networking and RF power business decelerate, which will be offset by growth in our secure car business which includes our U code RFID tagging solutions. Now I will turn to our expectations for the first quarter.

Our forecast for the first quarter is better than we anticipated 90 days ago. We expect all regions and all end markets to be up year on year. We’re guiding first quarter revenue to $3.15 billion, up 11% versus the year ago period and seasonally down 6% sequentially compared to 90 days ago. The improvements reflect steady inventory normalization and auto tier 1? S broadening order strength across both core industry and consumer at IoT and program ramps in the premium mobile market consistent with seasonal patterns. Our guide does not assume broad based restockings at the midpoint. We expect the following trends in our business during Q1 Automotive is expected to be up in the mid single digit versus Q1 2025 and down in the mid single digit percent range versus Q4 2025.

I would like to highlight that our first quarter revenue guidance only includes about $25 million or one month of revenue contribution from the MEMS sensor business. Industrial and IoT is expected to be up in the low 20% range year on year and down in the mid single digit range versus Q4 2025. Mobile is expected to be up in the mid teen percent range year on year and down in the 20% range on a sequential basis. And finally, Communication Infrastructure and other is expected to be up in the mid teen percent range versus Q1 2025 versus and up 10% versus Q4 2025.

In summary, our first quarter outlook reflects early validation of the company specific growth drivers we’ve been investing in and we expect these trends to continue throughout 2026. We believe the NSP specific secular drivers for our business are now outweighing the broader industry cyclical headwinds which we have experienced over the last few years. Overall, we expect product mix and disciplined cost execution to continue to support our gross and operating margin framework.

We’re focused on disciplined investment and portfolio enhancements to drive profitable growth while maintaining control over the factors we can influence. Our capital allocation framework is unchanged. Invest for growth, pursue targeted MA to strengthen portfolio and return excess cash through dividends and buybacks within our long term model. And now I would like to pass the call to Bill for a review of our financial performance.

Bill Betz — Chief Financial Officer

Thank you Rafael and good morning to everyone on today’s call as Rafael has already covered the drivers of the revenue. I will move to the financial highlights. Overall, our results reflect the strength of our strategic priorities in our end markets, our disciplined investment in manufacturing and product leadership and our consistent commitment to generating long term shareholder value. Q4 was solid with strong execution and results above the midpoint of Guidance revenue, gross profit and operating profit were all back into our long term financial model. We delivered non GAAP earnings per share of $3.35 or $0.07 better than the midpoint of Guidance.

Non GAAP gross profit was $1.91 billion with a 57.4% non GAAP gross margin, a slight miss versus guidance driven by stronger than expected mobile revenue. Non GAAP operating expenses were 756 million or 22.7% of revenue. The primary increase sequentially is driven by our two new acquisitions where we continue to make space for our strategic investments offset by restructuring actions. Non GAAP operating profit was 1.15 billion and non GAAP operating margin was 34.6% up 80 basis points sequentially below the line. Non GAAP interest expense was 99 million and taxes were 190 million. Non controlling interest was a 13 million expense and results from equity accounted investees was a $1 million loss.

Taken together, the below the line items were 4 million better than our guidance while stock based compensation which is not in our non GAAP earnings was 100 million 18 million lower than guidance driven by the retirement of several executives. Turning to changes in cash debt and capital returns, our balance sheet remains strong giving us the flexibility to invest in our strategic priorities and hybrid manufacturing plans. We ended Q4 with a 12.2 billion in total debt and 3.3 billion in cash reflecting uses of cash for capital returns, acquisitions, joint venture investments and capex offset by cash generation.

During the quarter, net debt was 8.96 billion and net debt to adjusted EBITDA was 1.9 times with adjusted EBITDA interest coverage ratio of 14.7 times. In Q4 we returned 338 million through buybacks and 254 million in dividends. Over the last 10 years we have returned over 23 billion to our shareholders for 95% of free cash flow and reduced our diluted share count by 27%. After Q4 we repurchased another 36 million under our 10B5.1 program and on January 5th we redeemed the 500 million March 2026 notes with our cash on hand. Now turning to working capital metrics.

Days of inventory was 154 days which included 7 days of pre bill receivables were 29 days, payables were 60 days. Taken together our cash conversion cycle was 123 days. As revenue growth accelerates, we expect working capital efficiency, particularly days of inventory including pre builds, to meaningfully improve throughout the year. From a cash usage perspective, we continue to advance our long term manufacturing strategy including contributions to both BSMC and esmc. This will lead to a long term supply resiliency and strong gross margin expansion. Cash flow from operations was 891 million and net capex was 98 million, resulting in non GAAP free cash flow of 793 million or 24% of revenue.

We invested 195 million in long term capacity access fees made a 282 million equity payment to BSMC and a 44 million equity payment to ESMC. Taken together we are about 50% through the investment cycle for both VSMC and ESMC. Having invested about 1.7 billion of the 3.4 billion planned investments, we expect the majority remaining investments will occur in 2026. Now turning to our expectations for Q1, we expect revenue of 3.15 billion plus or minus 100 million, up 11% year on year and down 6% sequentially, which is better than our view 90 days ago. We expect non GAAP gross margin of 57% plus or minus 50 basis points.

Operating expenses are expected to be 765 million plus or minus 10 million, reflecting normal seasonal increases at the start of the year. We are committed to our long term operating expense model of 23% of revenue, though there are seasonal variations with the first half of the year normally higher than the second half resulting in non GAAP operating margin of 32.7%. At the midpoint below the line we expect non GAAP financial expense to be about 92 million and our non GAAP tax rate to be 18%. Non controlling interest expense will be 11 million. With our joint venture startup losses of about 3 million.

Stock based compensation should be about 108 million which is not included in our non GAAP guidance. This implies Q1 non GAAP earnings per share of $2.97 at the midpoint. Turning to the uses of cash in Q1, we expect capital expenditures to be approximately 3% of revenue, our capacity access fee payment of $190 million and an equity investment into BSMC of 210 million. Before turning to your questions, I have a few housekeeping items to highlight. After thoughtful consideration, we have decided that our RF Power business no longer aligns with our long term strategic direction. Consequently, we will stop new product development and have taken an approximately 90 million restructuring charge which is reflected in our fourth quarter GAAP results.

We will direct our focus. We will redirect and focus our R and D resources to accelerate and enhance our strategic priorities toward software defined vehicles and physical AI. Yesterday, after the market close, STMicroelectronics announced the closure of NXP’s MEM sensor business acquisition. This is a positive transaction for both parties. NXP received $900 million in gross proceeds with another $50 million to be received upon completion of certain closing conditions. We will recognize a one time gain of approximately $630 million from the sale of the business which is reflected in our first quarter’s GAAP guidance. Next, we have made the decision to shift our geographic revenue reporting to headquarter based region as opposed to a shift to basis.

We believe reporting headquarter based region better reflects how we manage the business internally and where customer engagements and design win awards occur. The 2025 change can be found in the post IT IR presentation. And finally, based on the positive trends including current order rates and business signals we track, we are confident NXP will operate within its long term financial model for the full year of 2026. In closing, we are well positioned to benefit from the powerful secular trends in our focus end markets. We are confident about the strategic priorities and investments we are making across our entire portfolio and manufacturing footprint. With a strong balance sheet and a disciplined capital return philosophy, we are exceptionally well positioned to drive long term value for our shareholders. Now I would like to turn it back to the operator. For your questions.

Questions and Answers:

operator

Please press Star 11 on your telephone and wait for your name to be announced. And to withdraw your question please press Star one one again and we do ask that you please limit to one question and one follow up and the first question will come from Tom o’ Malley with Barclays. Your line is open.

Tom O’Malley

Hey guys, thanks for taking my question. I wanted to ask about the channel restock. So it looks like you guys went from nine to ten weeks in your guidance. You’re saying no Additional restock kind of baked in. Could you talk about where you with the channel today, what you saw in the last quarter and is it the decision to just not go to 11 weeks overall or is it just we’re going to wait a little bit until we take it to the 11 weeks that we talked about previously. Thank you.

Rafael Sotomayor

Thank you. Tom. Let me take that one. It’s Rafael. Clearly, I mean, I would say that our channel strategy has shifted from you know what before. We consider tight control to ensure that we stage the right product, the right product to satisfy demand. We are moving to our long term target of 11 weeks. And the reason we’re doing that is because it is a reflection of an improving demand environment for us. We finished Q4 with about 10 weeks. We will move into our long term plan and long term target of 11 weeks into 2026 and that’s how we are going to manage our business in a steady state.

Tom O’Malley

Got you. And then as a follow up just on the comms business. So you’re deciding to move away from rf, but you had already kind of moved away from digital networking. You’re guiding that business up 10. Could you maybe walk through the moving pieces? Obviously with digital networking coming down, you needed to see some really some strength from maybe the SIS business. Just walk through what’s contributing to that Q1 strength. Thank you.

Rafael Sotomayor

Yeah, indeed. We did guide CNI about 10% sequentially in Q1. And if you remember, CNI includes three distinct businesses. Secure Cards, Digital Networks and our tower. And all of these three business can move differently quarter to quarter. And CNI I think right now is benefiting from the fact that one, there is limitation in the digital networking business, but there’s growth coming from the secure card and that strength really will benefit CNI throughout 2026.

Tom O’Malley

Thank you.

operator

Thank you. And the next question will come from Matthew Prisco with Kan. Are your lines open?

Matthew Prisco

Hey guys, thanks for taking the questions. I guess starting with the cyclical side, can you maybe offer some more color on customer ordering trends over the past few months and maybe what type of linearity you saw through the quarter and into one? Q.

Rafael Sotomayor

Matt, are you asking about kind of the trends that we track internally? Is that what you’re asking? We couldn’t quite hear your question. We apologize.

Matthew Prisco

Oh yes, that’s exactly it. The trends that you track internally when you look at just customer ordering trends over those past few months and then linearity through the quarter and into one.

Rafael Sotomayor

Q. Yeah, linearity. We don’t disclose but I think Bill will take some of the other metrics we track.

Bill Betz

Yeah, no, no, obviously over the quarter in the last 90 days ago, all our internal signals that we talked about in the past have improved. So think about our backlog, our distributions backlog, our customer escalations have increased, the short term orders continue to increase as well. And we try to service as much as possible related to that. So across the board we haven’t seen anything like this in quite a while. And so we feel very confident about being in a long term business model for 2026.

Rafael Sotomayor

And maybe I’ll just add one thing, Bill. If you kind of step back, Matt, and look at kind of the Trends In 2H25, they’ve truly started to accelerate. And we’re in close to our growth rates that we presented at our analyst day. We believe that will continue as we progress through 26. So we’re feeling pretty optimistic that we are off the trough of the business. Did you have a follow up?

Matthew Prisco

Yes, please. I guess on the auto side, we’d love if you could offer some detail on the demand dynamics within your core auto business versus your accelerated growth drivers. And have you seen any impact to date from component price increases potentially pressuring unit demand there? Thanks.

Rafael Sotomayor

Yeah, so we, I think there are a few questions there on auto. If you look at what happened, if you look at auto and the reason why we remain quite optimistic in Auto in Q4, our business returned to growth year on year and the guide that we provided continues year on year. The Q1 guide gives you growth as well, year on year. And so what we see is that thesis remains unchanged with respect to content gains. You asked me about pricing. Second question was on pricing. VPAs for the most part are done right with the pricing that is already reflected in our Q1 guide. And we are modeling low single digit price declines. And that’s what we see not only at auto, but across the business.

operator

Thank you. And our next question will come from Ross Seymour with Deutsche Bank. Your line is open.

Ross Seymore

Hi guys. Thanks for asking the question. Just sticking on the auto side of things. It’s been pretty much flat for a couple, two, three years in a row. And I know there’s been a bunch of puts and takes on inventory and demand, etc. But I really wanted to dive into what you’ve seen over that period of time in your accelerated growth drivers. Is anything changing your thesis there? Are you more optimistic, less optimistic? Any sort of clarifications there? Especially as we move forward. Hopefully the headwinds are done. And so I just wanted to judge the growth rate from those drivers going forward. Thank you.

Rafael Sotomayor

Yeah, thanks Ross. So I think with what I said on the prepared remarks. Right. Auto and our business in general in 2025 was the story of two halves. And the first half was all about inventory digestion and it really mask the true dynamics of our business. For the full year the auto accelerated drivers were slightly below model. Remember model we said that we were going to grow 8 to 12% but they were still growing in a year where auto was flat and they were about 10%. And it was all led by our SDV efforts, our radar and our productivity.

What you see right now in Auto is our auto is shifting. Our auto exposure is shifting to more and more structural and less cyclical and it’s driven by tying our roadmap towards secular trends and really transforming the architectures of auto. So we feel quite optimistic. The answer to the question on the core drivers, the whole story, the thesis is completely intact and we feel stronger than ever that our roadmap is really addressing the needs of the market.

Ross Seymore

Great, thanks for that. And I guess you had the MEMS divestiture and now the exit of the RF side of things. Can you aggregate how much of a headwind those exits are going to be for this year? And I obviously know where the RF sits, but is the MEMS headw in the auto side? Just want to kind of make sure to level set on that.

Bill Betz

Sure. The way to think about this is Bill Ross. Good morning. The way to think about the sensors divestment. It runs around $300 million per year. In Rafael share we recognized 25 million in the first quarter. And I think you guys can do the math of the impact that has from a year over year compare in our auto end market related to the RRF business. The RF business is probably going to track similar to what DN did. If you recall our digital networking business when we walked away from it, I don’t know, eight years ago. It lives quite long.

And so what we’re actually doing is stop investing next generation products. So that will probably stay with us for at least the next two years is what we’re projecting at the current rate. And I think Jeff, if we had a breakout 2025 as a percentage, percentage of comms infra pieces, I don’t have that at my fingertips. So we usually share that. But maybe you could share how the three businesses fared in 2025 to get the size of it.

Jeff Palmer

Sure. Well, so the secure cards business was just over 50% and both the digital network and RF Power businesses were each about 25%.

Ross Seymore

Thank you.

Jeff Palmer

Thanks Ross.

operator

Thank you. And our next question will come from Joe Moore with Morgan Stanley. Your line’s open.

Joseph Moore

Great, thank you. In the auto business there’s been a number of sort of these supply disruptions. We had Nixperia a few months ago causing issues. DDR4 now is causing some shortages. You know, is that impacting you guys in any way? Are you seeing either weaker demand because they’re bottlenecked by those things or is there any desire for tier ones to start building inventory to react to any of those things?

Rafael Sotomayor

Yeah, let me take that Joy. So the next area is not a conversation. It’s not been a non issue for nxp. The discussions on memory. There’s always the chatter on memory is not just in auto, it’s across end markets. We have not seen memory impact the orders of our customers. But clearly it’s a conversation that our customers discuss with us as an area of concerns for the second half of the year. But nothing has been reflected in orders.

Joseph Moore

Great, thank you for that. And then in your auto business, any difference by region? I guess there’s been some concern about China demand. Just anything you’re seeing regionally in your auto business?

Rafael Sotomayor

No, we don’t see any, anything particular to comment on. I think the auto business, we believe it’s going to be within model for 2026. For us, it’s strong that the accelerated growth drivers are executing. So we expect our thesis to continue towards 2026.

Joseph Moore

Great, thank you,

operator

Thank you. And our next question will come from Joshua Buckletter with Tzco. And your line’s open.

Joshua Buchalter

Hey guys, thank you for taking my question. I apologize for a bit of a nitpicky semantic one, but it’s one I’ve gotten a couple times. So you know, in your prepared remarks you said for 2026 you expect to operate within your target model this year. You know, I think you’re, you’re given the. Where we ended 2025 to hit your, your 6 to 10% long term CAGR 26 and 2027 would have to be higher than that. Are you guys suggesting that this year is within the 6 to 10% or are you saying that you should track towards the 6 to 10% over a three year period in 26 and 27?

Jeff Palmer

I think, Josh, what we’re saying is the long term model is intact. I think, not to be nitpicky back, but I think you know how to do math and you can probably do the chainsaw on that. But we Feel very strongly that after the inventory digestion, the first half of 25 things are starting to reaccelerate. So we’ll leave it there. Did you have a follow up?

Joshua Buchalter

Yeah. You may provide some more puts and takes on gross margin for the first quarter. In particular, how are you thinking about utilization rates as we sort of enter a better cyclical period? I know there were some die bank builds that boosted utilization rates at the. End of the year. Are those done? How should we think about utilization rates from here? Thank you.

Bill Betz

Yeah, let me take that one. So I would say gross margins are performing to our expectations into Q1. And this is primarily driven by our annual low single digit price concessions that Rafael shared. And that is offset only partially from our normal operational efficiencies that we regained back throughout the year. Again, I think for modeling purposes, the best way to think about our gross margins use that rule of thumb I provided in the past. For every 1 billion of revenue, we’re entitled approximately 100 basis points expansion gain to our gross margin on a full year basis.

And of course that’s the plus or minus normal mix changes that we share on a quarterly basis. Now, as shared in the past, we will continue to work on mixing up our portfolio through our new product introductions. Also, we’re focused on our go to market for that long tail which tends to be a richer mix. We also have the ability to improve our internal front end utilizations. The front end utilizations in Q4 were in the high 70s and in Q1 they will remain in the high 70s. Obviously if we get any inflationary costs that we can’t offset internally, we will protect our gross margins and pass those on to our customers.

And as you know, we always do the normal blocking tackling on improving our yields and test time reductions. Now, longer term, we’re quite excited on our hybrid manufacturing strategy. Especially when BSMC is fully loaded in 2028, it is on track and beyond, we expect our gross margins to be lifted by another 200 basis points at the company level. So I would say in general we are very committed to improving our gross margins over the long term. Related to inventory question, again, our Pre builds were 7 million to think 7 days. Sorry. At the end of the 2025, as you all know, our consolidation efforts and our manufacturing footprint are underway.

I would expect the pre build by the end of 2026 be about 15 to 20 days related to that, but including those pre builds, we also expect to take our net inventory days down throughout the year. As we continue to focus on what’s in our control and do the right thing operationally to give you some more color on where we plan to take internal inventory.

Joshua Buchalter

I appreciate all the detail there, Bill. Thank you.

operator

Thank you. And our next question will come from Vivek Arya with Bank of America securities. Your line’s open.

Vivek Arya

Thanks for taking my question on the industrial and IoT segment. Rafael, I was hoping you could help. Segment how much of that is industrial? How much of that is iot? And you know, off of easier compares, the growth rate is very high at the start of the year. But should we expect that this segment will also be in model for 2026? How are you looking at the potential growth scenarios for industrial and IoT this year?

Rafael Sotomayor

Yeah, thank you, Vivek. So, yeah, very strong growth that we’re seeing right now in industrial. Right. And the growth you saw the investors begin recovering in Q3 3 and continue into Q4. I think Q4 was 20% year on year growth. The growth is fairly broad based and there’s not a single segment that is driving the growth. Just to give you an answer on the question specific, we have about 60% of our business there is core industrial. 40% is in the consumer side. But the growth is broad based. But we saw, I mean, if I would give you, we have some notable traction on fuel sockets in healthcare and smart glasses.

We’ve seen strength in factory automation, in energy storage. And so very, very strong design wins with very differentiated product that we have in industrial and IoT. And that strength of closing 2025 continues in 2026. I mean, you see the Q1 guy was old, also growing year on year 20%. And we feel very good about 2026 for industrial IoT.

Vivek Arya

And for my follow up, I would be remiss not to ask the seasonality question as we look at Q2 and Q3. And I ask that just because of all the kind of the exits and things that you’re considering this year. So based on historical patterns and normalizing for all your business divestitures, what would you consider normal seasonal trends in Q2, Q3? And are there any other things this year that we should take into account as we model your quarterly cadence this year? Thank you.

Rafael Sotomayor

Abek. We’re not going to give you guidance beyond Q1, but one of the things that you should take away, things have gotten better since 90 days ago. And Bill referred to the order patterns that we have visibility into Q1 improved as well. We have the conversations with our customers that we’re having. It gives us optimism for the second half of the year. So we like the momentum, we like the strength that we closed in 2025. I mean Q4, the growth was broad based and we like that momentum.

We enter in 2026 because that momentum is also carrying also broad based. And the way you should think about it, both in auto and industrial, the strength is increasingly structural rather than purely cyclical. And we feel good about the trajectory we’re carrying here towards the second half of the year.

Vivek Arya

Thank you.

operator

Thank you. And our next question is going to come from Joe Quattrocci with Wells Fargo. Your line’s open.

Joe Quattrocchi

Yeah, thanks for taking the question. You talked about the acquisitions accelerating interest in your software defined vehicle portfolio. Wondering if you could just kind of expand upon that or just, you know, what are the particulars that customers are excited about.

Rafael Sotomayor

Yes. So there are three acquisitions there that we discussed on the auto side. TT Tech Auto has been really an injection of horsepower to accelerate a software defined vehicle story. One of the deliverables that we have that are very important for us and for some of our customers is the deliverable of software defined architecture with delivering a system around Sonos towards the end of the year. And so TT Tech Auto and the injection of the TT Tech Auto has really accelerate our path into delivering a Sonal architecture and Sonal systems by the end of the year.

They also come in with a middleware and now we’re a different middleware called motion wise. And that engagement right now is undertake. We’re taking, I think the interest of our customers is quite high now that they move into STVs on the industrial and IoT. In my prepared remarks, we talked about the interest level that our customers are not showing for physical AI and the capabilities that we have in our NXP platform. And I just want to double down on that. The interest in the combination of the Kinara NPL and the IMX family of products that we have is really, really strong. And the level of the conversations right now that we’re having with our customers has changed significantly. The traction that we get has changed significantly. So we’re excited right now in that engagement. I think that it’s going to result in strong Design wins in 2026.

Joe Quattrocchi

Thanks for that. And as a follow up, on the automotive side, is there any color you can share just geographically on the demand you’re seeing in the fourth quarter and then kind of what’s embedded in one? Q.

Rafael Sotomayor

Yeah. On the auto side. So I think this is an important question. Just give you a perspective and let’s look at the data closely in Auto. Right. The inventory correction, what we said is largely behind us. Q4, we returned year on year growth. Q4 auto finished within 1% of its prior peak in 2023. And we’re guiding automotive to grow in Q1 year over year. And our guide in Q1 only includes one month of the sensor business.

So the sequential decline, I think it would have been very close to normal seasonality. So regionally not a whole lot of differences. Usually in Q1 you have a normal seasonality because now the weight that China has in the market. But fundamentally our thesis hasn’t changed the shift to SDVs, the advanced ADAS. These are multiyear platform transitions and they’re going to drive content growth. And this is where we at NXP are very strong in the portfolio.

Joe Quattrocchi

Thank you.

operator

Thank you. And our next question will come from Chris Casso with Wolf Research. Your lines open?

Chris Caso

Yes, thank you. Good morning. If I could follow up on auto again and specifically the areas of accelerated growth drivers, you know what you said last year is that those accelerated growth drivers were a bit below plan. And it sounds like the message is that is now likely to improve as you go into this year. What’s the reason for that? What was the reason you believe it was below plan last year? And I guess the question is because going forward it doesn’t sound like you’re assuming that SAAR improves. So what’s driving the change that get those accelerated growth drivers back on track?

Rafael Sotomayor

So 2025, Chris, I mean you remember first half of the year was a tough year with a lot of inventory digestion. That period put a pause in some of the accelerated growth drivers because for instance, some of the business like radar got caught up into inventory digestion, electrification got caught up into inventory digestion. It slowed down the ramp of new models that basically address some of the slow, the slightly less growth, I would say say and the SVD piece. But we saw that second half accelerate once the inventory digestion, all our thesis became true. Right.

The accelerated growth drivers started to grow. By the way, the accelerated growth still grew in 2025. Just didn’t grow at target because of the challenges that we have in the first half of the year. And now that thesis continues in 2026, we see our accelerate growth drivers now being within model and or even better. And so we see that traction being in 2020 taking hold.

Chris Caso

Thank you. As a follow up, if I could follow up on operating margin expectations and what you said for the year, returning to the long term model, assume that involves operating margins as well. I guess You’ve given some indication with regard to gross margins, but what does that mean for OPEX and operating leverage as you go forward through the year?

Bill Betz

Yeah, sure. As I mentioned in my prepared remarks related to opex, typically as expense as a percentage of revenue for the first half are typically higher than the second half, driven by our seasonal revenue profile, the timing effect of our US benefits at the start of the new year. That’s why you see our guide up in Q1 Q2. I’ll remind you we have our Q2 annual merits and promotions. And then we also have at the moment that one time IP license impact in Q2 that we previously shared that occurs every year. So we’re typically out of model in the first half, but then we expect to get below that 23% model in the second half leading to a full year of about 23% or below.

Obviously we’ll always have leverage on the SGA side of the house. But the investments that are required for SDVs and physical AI and where we want to take the company, we want to keep that at that 16% level, I would say to make sure that we can capture that growth, that long term growth that we’re after. So for your modeling purposes, I gave you the gross margin, we gave you the revenue. Here’s the opex. I think you can get to the answer.

Chris Caso

Thank you, that’s helpful.

operator

Thank you. And our next question will come from Gary Mobley with Loop Capital. Your line’s open.

Gary Mobley

Hey guys, thanks for taking my question. I know I’m going to make Jeff cringe here, but I did want to ask a follow up question with respect to your statement on long term operating model. We laid out in November 2024 that long term operating model. The base off which you were guiding from is 2024, obviously. And so you know, that would indicate, you know, $15.8 billion of revenue in fiscal year 27 based on that 6 to 10% revenue growth rate, minus the sale of the MEMS sensor business and whatever other adjustments since then. So for the fiscal year 26 commentary about being on target, is that with respect to 6 to 10% growth or that 2027 destination for revenue, it’s a.

Rafael Sotomayor

Model as we laid out the analyst day. I think, Gary, we both agree with you on the endpoint where we want to get to. We both know what we have to do to get there. We’re going to leave it to you and the analyst community to figure out how that March is. But we feel very good that after coming out of the first half of 25 inventory digestion we can accelerate through the next two years. I think that’s the best we can do.

Gary Mobley

I appreciate which you gave there, Jeff. As my follow up, I wanted to ask about the impact on the expense side from the sale of the MEM sensor business. We know the revenue impacted $300 million, but what’s the impact to gross margin in Opex?

Bill Betz

Yeah, this is bill. I mean think about with the sale is about 100 people on gross margin as we said, I think or shared in the past is it was below our corporate margins. So I mean not much, maybe 10, 20 basis points improvement related to that. One can model, but. Those are the. Colors I can give you on it.

Rafael Sotomayor

And remember, Jerry, that we did go through some corporate restructuring along with this to make room for the new headcount from Aviva, Lynx, TTAC and Kinara. So I still like to say we made room for the additional headcounts.

Bill Betz

Yeah. And also remind you the other reason for divesting this business is we did see headwinds. As we know the current acquirer, the buyer actually manufactures the front end. And so we saw this as a great opportunity to prevent headwinds to our gross margin in the future as well as.

Gary Mobley

Appreciate it guys. Thank you.

operator

Thank you. And our next question will come from Jim Schneider with Goldman Sachs. Your line’s open.

Jim Schneider

Good morning. Thanks for taking my question. Relative to everything you said about this year’s cadence and being within model and obviously kind of the inventory situation out there, is there any reason to believe that if you exclude the divestitures that automotive and industrial IoT would not be operating sort of at the upper end of your long term target model for the year.

Jeff Palmer

Jim, it’s Jeff again. We’re not going to guide 2026. Let me be very clear about that. We’ve given you guys as much as we’re willing to do, but we’re not guiding for 26.

Jim Schneider

Okay, fair enough. And then maybe just on the capital allocation side of things at this point you’ve made a decent amount of investments in the fab relationships, et cetera. Do you think that you’re going to get into a place where you could or you see your way clear to increasing the buyback component of that at some point?

Bill Betz

Yeah, I mean our capital allocation policy strategy has not changed one bit. We are very comfortable buying back the stock as long as we’re below our net leverage ratio of 2 times. And I think in Q4 we were at 1.9 times. So there’s lots of Opportunity with our investments in the long term of the business, along with buybacks and I hope into the future as we expand, we also increase our dividend as the company performs better. So again, we are doing multiple things. We’re very flexible and we demonstrate that. And we’re committed to returning 100% of our excess free cash flow back to our owners.

Jim Schneider

Thank you.

operator

Thank you. And our next question comes from Tor Sandberg with Steven. All your lines open?

Tor Sandberg

Yes, thank you. Rafael, could you talk a little bit more about changing the way you report on geography? What some of the main reasons are behind that? I mean, I assume it’s because things are changing so much as far as where your customers are taking design wins. But yeah, if you could elaborate on that, that’d be really great.

Rafael Sotomayor

Yeah, let me stop with that one. That question. Why do it now? This new way of reporting really reflects how we manage the company internally, how we direct our resources, how we direct our sales organization. I mean, think about the way we report today. A major handset maker will, will receive products in asia, in the U.S. but in reality most of the decisions are being in one place. It would be here in the US and so, and that gives you an example there, that kind of gives you the ability to really think about how we internally were organizing our sales force and our marketing is to go after design wins and address customers. So this is how we manage internally and I think it’s better to reflect our business that way.

Tor Sandberg

Yeah, that’s very helpful. And as a follow up for you, Bill, I think you mentioned you’ll get your 3.4 billion capacity expansion investment in 2026. Just curious, between VSMC and ESMC, what’s the split going to be when the year is complete?

Bill Betz

Oh yeah, I would say majority of the investment. You know, the SMC is ahead of schedule. Just purely timing. Right. I think it’s expected to start ramping in 27 and then be in full load in 2028. And so majority of our investments will be out in 2026. Now maybe a little bit into Q1. 2027, I don’t know, we’ll see on the timing of that on the equity side, but I think majority will be out in 26. ESMC, since that ramp occurs later, think about some payments going out this year. But then there’s still a string of payments that go out from 27 to 29, which is much smaller in the aggregate. But majority of most of the payments, hopefully we will be done at the end of 2026.

Tor Sandberg

Very helpful, thank you.

operator

Thank you. And our next question will come from Vijay. Rakesh with Mizuho. Your line’s open.

Vijay Rakesh

Yeah, Hi Rafael, just a quick question on the auto side. Just wondering, as you look at the software defined vehicles and you mentioned a structural pickup there in autos, how are you looking at that auto segment revenue growth versus lvp. Like should it grow like high single digit above LVP or how should we look at it?

Jeff Palmer

Yeah, hey Vijay, it’s Jeff. I think for next year. The way our algorithm works is we assumed over a multi year period that SAR would grow in the low single digits. The long term math for auto was 9 to 12%. 8 to 12%. Excuse me. And so if you were to say. Flattish sar, you kind of back that. Out of that total rate and you know, take you down. But we still see content per vehicle as the real accelerator of automotive growth.

Vijay Rakesh

Got it.

Jeff Palmer

Just maybe just kind of give you the one piece that we have. You know, we use S and P as our kind of viable firm for Saar. And they’re looking at 26 at just a little almost, you know, 93 million, 92.6 million cars in 26, which is kind of flattish year on year from 25. But when you kind of peel that back, you still see good acceleration of EVs and good market share gains of the Chinese OEMs. So you can kind of use that with the CPD content.

Vijay Rakesh

Got it. And then as you look at 20. 25, I think you guys mentioned autos was 7 billion, 7.1 billion ish. And the thing we put out a. Long term, I think 20, 27, 9.5 billion. I know there’s been a lot of. Puts and takes with acquisitions and diverse. Features, but just wondering how you are. Looking at that 9.5 billion by 27 number.

Jeff Palmer

So the. Yeah, the only change that we would. Make to the model is in 24. To be honest, you probably have to back out the $300 million in sale of sensors off that baseline in 24 and then apply the 8 to 12% growth rate off of that.

Vijay Rakesh

Got it. Thank you.

Jeff Palmer

Thanks Vijay.

operator

Thank you. And our next question will come from William Stein with Truwist Securities. Your line’s open.

William Stein

Great. Thanks for taking my questions. First, I’d like to ask another one on automotive. A couple of other suppliers have discussed this EV incentive expiry in China as damaging their Q1 outlook somewhat. And I wonder if you’re seeing that dynamic as well. And that’s in your guidance is certainly net of any of those effects. But can you discuss whether that’s influencing your outlook either in Q1 or for the rest of the year? And then I have a follow up. Thank you.

Rafael Sotomayor

No, we don’t see. We don’t have the same perspective. As a matter of fact, one of the changes, well that we see in China, a couple changes. You mentioned incentives which tails the incentive towards more of the high end of the vehicles. The other change that China has made is that they increase certain regulations to improve the quality and resilience of the vehicles. And I think both attempts is to reduce the involution in the market. I think we see both of those initiatives to be good for us. The resilient or quality requirements they’re putting in place right now I think is really going to be a tailwind for us and Design wins for 2026. So we see some of the changes actually good for us for NXP and the auto in our autobase as well.

William Stein

Great, thank you. And as a follow up there’s a rapid growth area in semis. We all know, not just endpoint physical AI, but data center AI. And I think historically you haven’t talked about any exposure there, but my best guess is that you have something in that market. Can you discuss any ongoing development or any exposure to that market? Thank you.

Rafael Sotomayor

Yes. Well, so today our data center revenue sits within the industrial segment and our exposure is indeed you mentioned through processors to support the data center infrastructure. There will be things like power supplies, net cars, cooling systems, but we also have our high performance products there for control functions and things that they need, probably security like bqc. We don’t break this revenue out separately but it is growing nicely and it will contribute to industrial momentum in 2026.

William Stein

Thank you.

operator

Thank you. I would now like to turn the call back over to Rafael for closing remarks.

Rafael Sotomayor

Thank you everyone for joining us today and your thoughtful questions. This quarter reaffirms the continuity of our strategy and the durability of our model. Focus on profitable growth, disciplined execution and predictable returns. With clear visibility into our company specific growth drivers. We’re confident in our ability to compound value through 2026 and beyond. Thank you.

operator

This concludes today’s conference call. Thank you for participating and you may now disconnect.