NXP Semiconductors N.V. Q2 2026 Earnings Call

Good day. Thank you for standing by. Welcome to NXP second quarter 2026 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you need to press star one one on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star one 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. Thank you, Lisa.

Good morning, everyone. Welcome to NXP's second quarter earnings call. With me on the call today is Rafael Sotomayor, NXP's President and CEO, Bill Betz, our CFO, and Mike Lucarelli, our Incoming Head of Investor Relations. 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, 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 third 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 operating performance. Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our second quarter 2026 earnings press release, which will be furnished to the SEC on Form 8-K and is available on NXP's website in the Investor Relations section at nxp.com. I'll turn the call over to Rafael.

Thank you, Jeff. Good afternoon. Our second quarter performance exceeded expectations once again as the strong momentum we saw in the first quarter continued into Q2, setting the stage for a strong second half. Demand improved across all end markets, highlighted by strength in both our company's specific growth drivers and core business. This combination of secular and cyclical growth is enabling a durable revenue stream that expands margins and drives strong earnings growth. Second quarter revenue was $3.5 billion, up 19% year-over-year, non-GAAP operating margin of 35%, and non-GAAP EPS of $3.61, all exceeding the midpoint of our guidance. All end markets and regions grew versus the prior year. Our company's specific growth drivers grew in the mid 20% range year-over-year and represented roughly one-third of second quarter revenue.

In addition, our core businesses increased in the high teens range year-over-year, proving that broad-based momentum is also contributing to our growth. Turning to end market performance. In automotive, revenue was $1.94 billion, up 12% year-over-year and slightly above expectations. Adjusted for the sales of the MEMS sensor business earlier this year, automotive growth was up 17% year-over-year. The company's specific growth drivers grew in the low 20% range year-on-year and represented 47% of the auto business. Growth was driven primarily by software-defined vehicle electrification and connectivity. SDV processor design wins continued to accelerate, including S32N and S32K series platforms. Additionally, we secure new design awards for our next-generation multi-gigabit Ethernet switches, purpose-built for SDV in-vehicle network architectures. These are multiyear platform commitments that expand NXP's content per vehicle.

In industrial and IoT, revenue was $755 million, up 38% year-over-year and in line with our guidance. The company's specific growth drivers, which include our newest processing portfolio of i.MX and RT and MCX, grew at 40% year-on-year and represented 36% of the industrial and IoT business. Communication infrastructure revenue was $452 million, up 41% year-on-year at the high end of guidance. Lastly, mobile revenue was $351 million, up 6% year-over-year and in line with guidance, reflecting normal midyear seasonal trends in our secure mobile transactions franchise. Turning to our data center exposure. 90 days ago, we quantified this exposure for the first time. To recap, 2025 revenue was approximately $200 million, and we expect to exceed $500 million in 2026.

Our position is squarely in the control plane of AI infrastructure, the same domain where NXP has built deep expertise across vehicles and factories for decades, now operating at hyperscale infrastructure, specifically in two franchises. First, top-of-rack switching and smart NIC control anchored by our Layerscape family, which is ramping across leading hyperscalers. With every new data plane switch generation, as speed increases, the control plane performance must also increase, as there's simply more to manage, monitor, and secure. Hence, we are accelerating our Layerscape roadmap to deliver the control plane performance each new generation demands. Customer engagements gives us confidence that these programs materially broaden our addressable content and extend the franchise well into the future. Second, the processors that control, monitor, cool, and secure every component within a rack.

Data center infrastructure is converging towards industrial-grade principles, where reliability, real-time monitoring control, and zero tolerance for downtime is critical. NXP is uniquely positioned as these functions thrive on key industrial processing attributes where our portfolio is differentiated. I want to address something fundamental. AI is moving from the cloud to the physical world, into vehicles, factories, and robots. It is moving directly into the markets where NXP already has leadership positions. Intelligence deployed at the edge demands real-time performance, ultra-low power, and design in safety and security. True physical intelligence also requires distributing AI workloads across multiple layers of the system on architecture we call the Neural Axis, which is the foundation for deterministic and safe operation of physical AI. These are capabilities, again, NXP has spent decades building. Our differentiated position rests in three areas.

First, NXP offers the industry broadest and most differentiated edge AI compute platform. Our portfolio places the right intelligence at the right layer, from high performance reasoning and coordination in our i.MX and S32N processors, to real-time reflexive control in our S32K and i.MX RT families, all unified under our eIQ software environment. This is already translating into measurable growth. We estimate AI-enabled processors will represent approximately 15% of industrial IoT processor revenue in 2026, more than doubling from last year. Second, physical AI is a system problem, not just a compute problem. Intelligent machines must sense, connect, and act in real time. NXP is the only company that delivers all of this in one integrated, trusted platform, something no compute-only competitor can replicate. Third, winning in physical AI requires reaching a highly fragmented market at scale.

Unlike cloud AI, the edge spans thousands of applications and customers across automotive, industrial, and IoT markets. NXP's ecosystem of distribution partners, reference designs, and field support gives us unmatched reach into this market. Taken together, compute, system, and reach, physical AI is already showing up in our revenue, and we expect it to accelerate. Turning to the third quarter. The operational metrics we track to assess business health continue to strengthen, and our outlook is better than we anticipated 90 days ago. We are guiding third quarter revenue to $3.75 billion, up 21% year-over-year adjusted for the MEMS sensor sale, and up 7% sequentially. We expect all regions and all end markets to be up sequentially, a reflection of expanded customer adoption of our differentiated portfolio. At the midpoint, we expect the following trends in our business during Q3.

Automotive is suspected to be up in the low double-digit % range year-over-year and up in the mid-single-digit range sequentially. Adjusted for the sales of the MEMS sensor business, our guidance implies a high teens % growth year-over-year. Industrial and IoT is suspected to be up in the high 30% range year-over-year and up in the mid-single-digit range sequentially, continuing the strength we saw in Q2. Mobile is suspected to be down in the mid-single-digit % range year-over-year and up in the mid-teens-digit range on a sequential basis. Finally, communications infrastructure and other is expected to be up about 50% year-over-year and up in the high-single-digit range versus Q2 2026.

What you saw this quarter, double-digit growth driven by company-specific growth drivers and a 35% operating margin, is the compounding result of staying disciplined on the right priorities. Now, I would like to pass the call to Bill for a review of our financial performance.

Thank you, Rafael, and good afternoon to everyone on today's call. Q2 was a strong quarter with record revenue of $3.5 billion, up 19% year-on-year and 10% sequentially. All end markets performed above the midpoint of guidance, led by our company-specific growth drivers in software-defined vehicles, electrification, industrial edge processing, connectivity, and increasing data center content. Non-GAAP gross profit was $2.03 billion, an increase of $376 million or 23% year-on-year. Non-GAAP gross margin was 58%, in line with guidance and expanding approximately 150 basis points year-on-year and 90 basis points sequentially. Our gross margin performance reflects better product mix, improved factory utilization, and solid fall-through on higher revenue. Non-GAAP operating expenses were $794 million or 22.7% of revenue within our long-term operating model. Non-GAAP operating profit was $1.23 billion, up 31% year-on-year.

Non-GAAP operating margin was 35.1%, expanding 310 basis points year-on-year and 40 basis points above the midpoint of guidance. Taken together, our second quarter results demonstrate that the margin expansion we are delivering is structural, driven by product mix, factory utilization discipline, and operational leverage across our fixed cost base. Below the line, non-GAAP interest expense was $87 million, taxes were $205 million, non-controlling interest was $15 million, and results from equity accounted investees were a $3 million loss, collectively in line with guidance. This resulted in non-GAAP earnings per share of $3.61, $0.11 above guidance. Turning to changes in cash, debt, and capital returns. Our balance sheet remains strong and provides flexibility to invest in our strategic priorities and hybrid manufacturing plans. We ended Q2 with $10.98 billion in total debt and $3.2 billion in cash.

Net debt was $7.7 billion, or 1.5 times adjusted EBITDA, and our adjusted EBITDA interest coverage ratio was 15 times. In Q2, we returned $360 million to our owners, made up of $256 million in dividends and $104 million in share repurchases. 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, our cash conversion cycle improved to 129 days from 140 days in Q1. Days of inventory improved to 156 from 165 days, inclusive of approximately nine days of pre-builds for our planned front-end factory consolidations. Receivables were 33 days, and payables were 60 days, slightly better than last quarter.

During the quarter, we generated $860 million in operating cash flow, which helped fund the $750 million debt retirement, $360 million of capital returns, $174 million into VSMC, $12 million into ESMC, and $69 million of net CapEx. Taken together, we generate non-GAAP free cash flow of $791 million, or approximately 23% of revenue. On a trailing 12-month basis, free cash flow was approximately $2.8 billion or 21% of revenue. Now turning to our expectations for Q3. We expect revenue of $3.75 billion ±$100 million, which is up 18% year-on-year and 7% sequentially. We expect non-GAAP gross margin of 58.5% ±50 basis points, which is up 150 basis points year-on-year and up 50 basis points sequentially, driven by the higher revenue and our manufacturing utilization. We expect operating expenses of $810 million ±$10 million.

At the midpoint, this results in a non-GAAP operating margin of 36.9%. Below the line, we expect non-GAAP financial expenses to be approximately $85 million and our non-GAAP tax rate to be 18%. We expect non-controlling interest to be $15 million, including $5 million losses in our equity accounted investees for VSMC and ESMC. This implies Q3 non-GAAP earnings per share of $4.11 at the midpoint. Turning to Q3 uses of cash, we expect capital expenditures to be approximately 3% of revenue, with VSMC capacity access fee of $70 million and equity investment of $80 million. For ESMC, we expect equity investment of $30 million. This brings our cumulative investment in VSMC and ESMC to approximately $2.4 billion, or about 70% of the total planned commitment across the two joint ventures.

At the midpoint of our Q3 guidance, the year-to-date revenue is $10.4 billion, up 17% versus the same period in 2025 and consistent with a double-digit growth trajectory. Our growth continues to be driven by the compounding effect of our company-specific growth drivers and the return to expansion of our core franchises. We remain confident that we will deliver on our financial commitments. I would like to now turn the call back to the operator for your questions.

Lisa? Thank you. If you would like to ask a question, please press star one one on your telephone.

You will then hear that automated message advising that your hand is raised. If you would like to remove yourself from the queue, please press star one one again. We also ask that you please wait for your name and company to be announced before proceeding with your question. One moment while we compile the Q&A roster. Our first question is coming from the line of Joseph Moore of Morgan Stanley. Please go ahead. Great. Thank you.

I was quite interested in the conversation about physical AI and how it's maybe changing your thinking and the products that you have aligned to that. Can you just talk to how that intercepts customer interest, areas like software-defined vehicles? Are they thinking along those lines? Just how quickly do you think that this transforms into something that's more of a physical AI-driven market?

Thanks, Joe, for the question. The whole notion of cognification of the edge, whether it's industrial and auto, the conversation is now. I don't think we will get at the same win without having a big part of a very, very strong value proposition with respect to AI. It's happening now. Everything starts, before you put AI in a system, everything starts with creating a software-defined system, right? Whether it's a vehicle or whether it's industrial. I think that's the beginning. The beginning is how do you create a software-defined system? What is the platform? What is the overlay that you do with AI? It's already happening. I think one of the prepared remarks, we said that AI-enabled products in industrial and IoT already compose, I think 50% of our revenue was around, basically AI-enabled products.

I think this is going to become even more material and bigger as we go into 2027. There is simply no actually activity with a customer today, rarely, without having a really material conversation around how AI is going to get deployed.

Okay. Thank you for that. Just on the broader, on the automotive market, can you talk about some of the dynamics there? Some of your peers have talked about maybe the beginnings of restocking from very low levels. I know you've talked about Tier 1 inventories being quite low. Are you seeing anything that's different along those lines?

Great question on the auto side. Since auto, I think this is where our secular story shows up very clearly. You saw in the Q2, we growing into the high teens. This is removing sensor. I would say that for us, we actually see no restocking, right? What we see in what's driving our revenue, if you look at it, our accelerated growth drivers grew 22% this year, as we stated. They're becoming almost close to half of the revenue. The drive there is around content. It's around content driven by an architecture transformation that SDV is doing with the vehicles. We have a line, a roadmap to lead this architecture shift towards SDV, which by the way is still in early phases of adoption. I don't think necessarily auto is about restocking or is about cycle.

I think this is compounding on content and I think we're very well-positioned with our SDV roadmap.

Great. Thank you. Thank you.

One moment for the next question. Our next question is coming from the line of Matthew Prisco of Cantor Fitzgerald. Please go ahead. Hey, guys.

Thanks for taking the question. Starting on the industrial side, can you maybe break down the trends you're seeing between the core industrial and the IoT side of the business? Also anything to highlight in the segment from a geographic demand perspective?

The industrial, I think you saw the industrial growth is quite strong and is growing on, and I think in the, what is it? The high 30s into Q2. The industrial IoT, the accelerated growth drivers were in the 40% range year-over-year for Q2, Matthew. Also what's happening in the core business is coming back. You see that our core business also grew in the high 30s. Very strong growth in industrial and IoT for a total growth for the quarter into the high 30s. By the way, I think that now is the second year and the year that grow in the high 30s. This is actually a market that's performing quite well for us.

Thanks. Then maybe the pricing side. How are you seeing that as a benefit today? Maybe how much of that is impacting the 3Q guide and how you think about pricing dynamics through the year? Thank you. Yeah. I think your question highlights something that has been on the press quite a lot, which is this issue that all of us are facing with respect to inflationary pressure.

I'll start the answer by saying our first move is always to mitigate the price pressure through operational efficiency. We did make some price adjustments to selected products. These adjustments are not across the board. Price for Q2 was essentially neutral. In Q3, our guide already incorporates an estimate, but we won't know the exact impact until much later.

One moment for the next question. Our next question is coming from the line of Francois Bouvignies of UBS. Please go ahead Thank you very much.

My first question is on SDVs. Is it possible to get an update on where you are in terms of revenues? I believe you said that it represented $1 billion revenues in 2024, and you expect it to double at $2 billion in 2027 to reach your targets. You said that SDV is doing very well with high growth. Can you maybe help us quantify it for this year or the growth rate? Anything on that would be great. That's my first question. No.

Thank you, Francois. Just to maybe recap what we said. The accelerated growth drivers in automotive, they grew 22% in Q2 year-on-year, and they become close to 50% of the total revenue of the company. SDV is the highest growing part of the accelerated growth drivers. Remember, we have radar, electrification, connectivity, and SDV, and SDV is the one that's performing the best. Obviously, that is the driver for the architecture transformation that is happening in automotive. We're very well-positioned with respect to our roadmap. What is even more encouraging to think about this is that the current outperformance in auto, and I think our auto business is doing quite well, is happening without our latest products. S32N, 5 nanometer products, the S32K5, which is our flagship SoC product in 16 nanometer, they haven't even began ramping yet. They're in the sign-win phase.

I think we're quite encouraged about the performance of our SDV portfolio because there are more to come with the next generation products.

Thank you, Rafael. My follow-up would be, again, on the automotive side. You guided Q3 mid-single digit quarter-on-quarter, if I'm not mistaken, which seems to be roughly in line with what we have seen before. If I look at your nine-year seasonality, it was even a bit higher than 5%. It doesn't translate so much, the automotive recovery, when we look at the quarter-on-quarter pattern, if that makes sense. Year-on-year, yes, because maybe you destocked last year, but we don't see a strong recovery that maybe one would expect when we hear TI, STM. Is there any drag we should be aware of that is limiting your growth, or it just to come, or it could come later?

Well, Francois, the way we look at our business, given the fact that more and more of the revenue in automotive is driven by the accelerated growth drivers, is year-over-year. Year-over-year, this is where true content growth shows up. You will always have sequentially blur product ramps. I think the better way to look at it is to look at a growth year-over-year. If you look at what we're guiding into Q3, it's a mid-teens growth year-over-year, which, ex-sensor, that is quite strong, and it's above our model.

Makes sense. Thank you, Rafael.

Thank you. One moment for the next question. Our next question is coming from the line of Vivek Arya of Bank of America Securities. Please go ahead. Thank you for taking my question.

Rafael, historically, NXP visibility has kind of been a quarter, a quarter plus or so. I'm curious, how far does your visibility extend right now? Which areas would you say you have better visibility, and where do you see lead times stretching out?

Well, lead times are stretching out, visibility has improved across all end segments. We have better visibility into Q4. We have visibility into Q1, we've seen that really happen. Basically, visibility has improved throughout the year, Vivek.

Yeah. Maybe I'd just add to what Rafael said versus 90 days ago, some of those other health signals that we measure internally, Rafael is absolutely correct. Our backlog continues to grow quarter 1, quarter +2, quarter +3. We have a signal of 18 months out. Our distribution backlogs, when we look into their books, they continue to follow similar patterns as ours. Clearly, our book-to-bill ratio is above one, it's above last quarter again. As lead times will continue to extend, we start to extend them, if you remember, maybe three or four quarters ago. Customer escalations, which we track in the quarter, have doubled since last quarter. Everything, all the signals continue to show, even the turn parts that we get, the late orders in the quarter continue to climb as well.

Everything much better or continues to improve versus 90 days ago, Vivek.

Got it. Thank you. For my follow-up, I was hoping you could remind us of how you view your typical seasonal pattern in Q4. Given this visibility, if you could care to give us some directional indication of how it might shape up. If I zoom out, I think on the last call, Rafael, you mentioned you're still comfortable with the 2027 outlook, which had a midpoint of $16 billion or so. At that time, when you had given that outlook, data center was not expected to be a big driver, now data center is a bigger driver. Is there a different way we should think about the NXP prospects for 2027, including the upside from data center? Thank you. All right. I think, Vivek, you're essentially asking me to guide Q4 in 2027.

I'm going to pick you Q4 number real quick. Listen, I think where you're asking me with Q4 is one way to ask me to guide. As you know, we guide one quarter at a time, I'll leave it with the following. I think we feel very good what's happening right now with our business, right? The signals that we track, they're all pointing in the right way. I think Bill mentioned some of these signals. Their recorders continue to strengthen, backlog continues to build, and very importantly for 2027, I think the sign win ramps are going to apply.

We like the momentum, and I think that we're not going to give you a Q4 number, but I'll give you that the momentum that we have of into Q3 continues into Q4. With respect to 2027, I think that the strength of the business and the strength that we have into 2026, it only translates to a strong 2027. Things have improved, continue to improve, and I think our confidence in our long-term growth rate has only increased, and the portfolio behind it is even better.

Thank you. Thank you. One moment for the next question.

Our next question's coming from the line of James Schneider of Goldman Sachs. Please go ahead. Good afternoon.

Thanks for taking my question. I was wondering if you could maybe, following up on the prior question, just sort of reiterate the double-digit growth outlook you expressed last quarter on the call in terms of 2027, and specifically the 60% kind of gross margin level that you expressed. Anything that kind of changes your confidence there, or is your confidence, in fact, increased on those targets for next year? Thank you. Hey, Jim, this is Bill.

There's no change of what we previously said. As you hear, we continue to see things improve on the revenue side, that's all intact. Related to gross margins, again, we feel very confident of hitting what we shared, using our rule of thumb. You can see that play out in our results from a year-over-year perspective, actually do a bit better. Everything intact linked to the higher revenues we plan for and scales very nicely into our model.

Jim, let me, with respect to 2027, I think that the right way to think about 2027 is the way we think about it, we're excited about the strength that we have in 2026, is the runway that we have ahead, the opportunity that we have ahead, and our ability to compound into it. I think I mentioned it before, one of the perspectives that we take is we have the strength in the newest products in automotive that have not even launched. Physical AI is in early stages of basically design-in, and the heavy deployments have not even started. I think 2027, right now, we're looking at a very constructive manner, and it really underpins our long-term growth rates that we have established.

Thank you. Yeah, maybe I just build on that because what Rafael said about physical AI, I know he shared about the 15% enablement, more than doubling.

There's another metric we do track, as he mentions, early innings. As you all know, we acquired an asset called Kinara, and the design win funnel that we shared with you of the engagement, the excitement, the amount of input we're getting from our customers, that grew last quarter to over $1 billion. I would say this quarter it's sitting over $1.5 billion in the funnel. Obviously, we'll have to convert those into design wins. That's a leading indicator. Again, it's an early inning stage for physical AI, and we're excited about it.

Just to add to that, Bill, that $1.5 billion pipeline represents over 200 unique and distinct customers, so it's very broad-based, Jim.

Thanks. Then as just a quick follow-up, can you maybe comment on what channel inventories did in the quarter, what you're expecting for next quarter in terms of weeks, et cetera?

Yeah, no, like we said in the past, we want to run at that target. It was 11 weeks last quarter, so we feel good about it and make sure we service our customers and get our fair share of market share.

Thank you. One moment for the next question, please.

Next question's coming from the line of Joshua Buchalter of TD Cowen. Please go ahead. Hey, guys.

Thank you for taking my question. Maybe following up on Francois's question from earlier, you've had a couple of your peers very clearly call out restocking in the auto market. You guys, during this past cycle, I think for good reason, were conservative with inventory on your books and in the channel. I guess, is there anything about your portfolio that makes it a reason why you would see restocking later? Or is there any conservatism on your part that's driving the comment about not seeing restocking? Thank you. Joshua, hey, this is Bill.

I think one of the unique things about NXP is our company-specific growth drivers, where Rafael shared in his prepared remarks that 47% is coming from this content that is typically, I would say, three times larger than our core. We are in a different area. We play in a different area of auto, and we expect that 47% to grow towards 50% next year. Related to restocking, again, we have a very good handle on distribution. We know exactly what's going in and what's going out that's serving more broader customers, and specifically in auto, majority of our Asia customers go through the channel. In the Western Tier 1s, we track on that and we triangulate it. And as you all know, the Tier 1s, the working capital needs are quite tight. We still see late orders coming in.

hand-to-mouth, and margins for them are quite not that healthy. They know we have some inventory, you see it on our balance sheet, and they are still providing late orders to us. We monitor this very carefully, but we have not seen the restocking effect specifically with our Western Tier 1s.

Okay. Thank you. Appreciate that. I just wanted to ask about gross margins in the second half. I think on a previous call you talked about utilization rates going from the low 80s to the mid 80s. Is that sort of still the right metric to think about as we continue in this up cycle? As we think about the third quarter gross margin guide, last quarter you called out some higher, I think, wafer access fees that could potentially impact you. Did those play any role in the quarter or the guide? Thank you. Sure. Let me first address.

Obviously our gross margins are doing quite well from Q1 year-over-year, they're up 150 basis points. Last year they're going up another 150 basis points, plan to bring them into the mid 80s, so I'd like to confirm that does help the second half of their gross margins to continue to improve. Related to increased costs from foundries and access fees, we haven't seen that play out yet. That's something more, I would think that comes into us maybe in Q4, but more in 2027 when we enter into a new agreement with our foundry partners.

Yeah. Josh, what we said last quarter was we did see inflationary input costs on back-end type of things, so piece parts, substrates, precious metals, things like that. In terms of wafers on the front end, we operate within kind of a boundary condition and an envelope. As long as we operate within that envelope agreed to with our partners, we don't see tactical price increases. If we go outside of that envelope, yes, we would see price increases, we would then have to pass that along to our customers.

Got it. Thank you both. Appreciate it. Thanks, Josh. Thank you.

One moment for the next question. Our next question is coming from the line of Tom O'Malley of Barclays. Please go ahead. Hey, thanks for taking my question.

Rafael, I wanted to dive back into the Kinara commentary. The funnel's expanding, going to a billion and a half. You've seen in the industry a lot of acquisitions taking place, both Synaptics and now Hailo. Do you think that these acquisitions are going after that same area that you guys have already kind of targeted? When you look at the TAM and how big that can be, maybe could you try to size what that market looks like in a couple of years, just because the funnel would indicate it's a pretty large opportunity.

Indeed. I think you point out to basically the acquisitions that I think you mentioned is just a confirmation of our strategy. The cognification of the edge is happening. I think you are not able to play without having a strong AI platform and a strong AI roadmap. Yes, I think that's exactly the case. I think we do believe that our platform that we have and the asset that we acquired now has been incorporated into NXP roadmap is best in class. We have incorporated now that IP of AI into monolithic integration into our i.MX processors in our S32N platform in automotive. We are discussing how to actually kind of engage with customers on a discrete NPU, which attaches to other platforms, even non-NXP.

Not only that, we're developing a very complex AI framework, software framework, which includes now agentic AI, which is going to be the way that the edge becomes completely autonomous. While other companies are acquiring assets and trying to integrate them, we are trying to evolve into what is going to be the next phase of AI, which we strongly believe is going to be the deployment of AI and agentic AI.

Thank you. Then on the auto side, I know that you're saying that you're not seeing Tier 1s bringing back up inventory, but I know that kind of around the last quarter, there was a great variation among your customers, where some were well below kind of the standard channel number of weeks, and then some are well above. Have you at least seen some normalization there, where there's been some standardization around that 11-week mark, both at end customer and maybe at disti? You can comment on the metrics as you will, but, or do you still see this big disparity where some people really aren't getting it? I just want to see if there's still some normalization yet to come is the genesis of the question.

Yeah. Hey, Tom. It's similar to what we've seen in the previous quarters. There is a dislocation between low and high. There's a mix, for whatever reasons, how they want to control their own working capital and so forth. No change there. We track this very carefully. We're just basically finally, I think in Q4, Q1, we were finally shipping to real end demand. Inventory digestion is behind us, but we have not seen any pull forwards or restocking efforts, specifically with our Tier 1s in the Western world.

Thank you. One moment for the next question. Our next question is coming from the line of Tore Svanberg of Stifel. Please go ahead. Yes, thank you, and congratulations on the record revenue.

Rafael, I wanted to go back to the physical AI pipeline, the $1.5 billion. How broad-based is that? Is this a few verticals? Is it many different applications? Which sort of applications should we assume you're going to ramp the earliest?

Well, the excitement is that there is actually broad-based interest on deployment of physical AI or edge AI. It's happening, whether it is, think about HMI applications, basically, where a human controls the device via voice commands and replaces, whether mechanical buttons or display buttons. The support is there's all sorts of use cases around that. There's plenty of use cases around visual and vision. There's plenty of cases of predictive maintenance. The deployment of physical AI is really broad-based. I think we see a very strong interest in industrial. We saw a strong interest also in automotive for in-cabin type of applications that were getting pulled into. I think it really is going to be such a massive opportunity, massive, I would say, transformation that is happening at the edge.

It's going to be physical AI, we've determined, is the driver for content growth in industrial, and it's also an additional content driver for automotive moving forward.

Thank you for that. As my follow-up, if we think about the current environment, it's a bit strange because you're seeing, obviously, great booking momentum, a lot of demand. On the other hand, we have these, obviously, capacity constraints with other components and so on and so forth. I'm just wondering, are you seeing any of that potentially impacting some of your customers' demand, meaning, they want to do more, but they can't because there's shortages of other components?

Well, let me answer the question with a specific. You can see our Q3 guide has mobile already down year-on-year, even though it grew sequentially and our position with respect to market share has not changed. It already seen an impact right off year-over-year, mobile is down. I would say that you're starting to see it. You saw it in mobile. Now, the concern about memory, especially in memory and the constraints that right now the market is in, literally everybody's talking about it. Everybody's trying to actually design around it, whether it's different products, different packages, different types of DDR. I think we are literally helping our customers to actually go and make sure that we help them with the constraints they have. In pockets, we see it. Lisa, we'll take the next question.

Thank you. One moment. The next question's coming from the mind of William Stein of Truist Securities. Please go ahead. Great. Thanks for taking my question.

I wanted to ask about the interplay between the backlog that keeps growing at your lead times, and your customer intentions. If your lead times were shorter, would you have been shipping more? In other words, are customers wanting more than what you can deliver now, and you're facing some constraints of your own, and that's why the backlog's growing? Or is it that customers feel emboldened given the demand signals they see in the market, and so they're just lining up to place orders with longer duration? If you could linger on that for a moment, I think it would help us understand what's going on there.

Hey, Will, this is Bill. I think what you're saying is what we see, right? We do see escalations. You see our inventory coming down. Late orders have been coming in over the last couple of quarters, and now they're realizing they have to place orders, specifically in areas where lead times are longer. It's not our whole entire portfolio, but I would say that it's greater than 16 weeks. A big chunk of our portfolio has extended versus last quarter. You've got to place your orders in line. We're seeing that play out, but we're still seeing these late orders come in. It's a combination of both, I would say, but it's going back to more of a normal type of way of how you should place orders with us in the appropriate lead times.

There are folks that are still trying to place late orders and struggle with it.

Great. One follow-up, if I can. There are some things going on in the world that are normally disruptive to the electronic supply chain, the wars in particular. Have you seen any change in the impact on your supply chain from the renewed activity in Iran or anything else, any other geopolitical developments? Are you seeing any effect of that that's different from what we've seen over the last few months?

No, I would say it's similar. Obviously, we are getting a direct impact on higher input costs, and as Rafael said, we try to offset those operationally first. If we can't, we want to protect our gross margins, and unfortunately, we have to pass those on to our customers. That's been the mode we start to work in, and we start to see this in Q2. We're in the mode of Q3 related to it.

Indirectly, of course there's probably things that'll impact us indirectly, which is more macro. If you look at the macro indications, both PMI is doing quite well. GDP has ticked up slightly. Next year's GDP, as you know, is sitting at 3.2 versus today's, I believe, 2.5 or 2.6. It's a balance, I would say. We see the macro signals, we see our own internal signals, and we just want to make sure that we're there to support our customers and provide the value for them.

Thanks. Thanks. Lisa, we'll take our last question here today.

Thank you. That last question will be coming from the line of Chris Caso of Wolfe Research. Please go ahead. Yes, thank you.

Just a follow-up question with regard to what you had said on pricing. When pricing was starting to move higher during the last cycle, you guys were very specific about it being neutral to gross margins. Is that the case today? In terms of what you're seeing with regard to pricing, could you level set us with regard to the magnitude of that? I know you said you're going to have to wait a while to see the magnitude, but you've obviously made some assumption in terms of your third quarter guidance.

Yeah, Chris, let me tackle the app. I'll let Bill tackle the gross margin piece, let me tackle the way we account for pricing because I want to be clear, right? Pricing is not necessarily what drives our model. The driver is content growth. It's architecture-led content growth persistence, that's the main driver for our revenue. In pricing, with respect to the way right now we're framing it, pricing seems to be a little bit monolithic in the way we you're framing the question with respect to just a tactical move to overcome higher input costs. In reality, pricing is very dynamic and it's a strategic lever for us, right? We use pricing sometimes to capture value, sometimes we use it to increase market share, in some cases, like in the one we discussed right now, to offset input costs.

We do price adjustments every quarter. Every quarter we provide a next quarter guide that has an estimate of that. I don't think this time is any different. Bill, do you want to- Yeah, I would just add to what Rafael said is on pricing, right?

Typically, we give an update once a year. In the beginning of this year, we said we'd be down in the low single digits. At the end of this year, we'll update that. We'll probably be a bit better, I would say, because again, with the selective pricing we're doing, because of these higher input costs. Related to gross margins, obviously, we want to make sure the value we capture, we pass that on to the owners, and obviously if there's one that we can offset and it's a higher input cost like inflation, we have to make sure that unfortunately we have to pass that to our customers, and you see that play out throughout the entire supply chain on it. I think we've been very disciplined here.

It is a bit different than COVID, which was more broad-based, it was a supply issue. This is more of an inflationary issue, I would say, at this time of where we are.

Got it. As a follow-up, if you go a little more detail, you talked a bit about the AI-enabled processors, how does that value come to NXP? Is it a form of higher content, higher ASPs for the products, does it drive unit growth? Is it market share? Perhaps a combination of all those.

I think you kind of answered the question, I'll just rephrase what you said. It starts with the products themselves. They have more content, right? Physical AI will drive content from a product perspective. They tend to be higher performance processors, more AI inference content, more software content, more enablement. The system itself becomes also more complex. You have more connectivity because of AI, you have more security, and in the case of physical AI and robotics, you must have functional safety. Then you go in the evolution of what's going to happen right now with respect to agentic AI. Now you have a little bit more of a software framework associated with that. In reality, physical AI for us is a very important driver of content growth, and we intend to actually position our roadmap to lead in this market.

Got it. Thank you. Thanks, Chris.

Thank you. That concludes the Q&A session for today. I would like to turn the call back over to Rafael, CEO, for closing remarks. Please go ahead. Thank you everyone for joining us and for your thoughtful questions.

I want to leave you with three thoughts. First, our growth is structural, driven by software-defined vehicles, physical AI at the industrial edge, and a nascent data center franchise. Second, we're entering a decade-long adoption of physical AI, which is transforming industries. Through relentless innovation and customer intimacy, NXP is best positioned to lead this transformation. Third, our financial model is scaling exactly as designed. Margin expansion is structural, capital allocation is disciplined, and we are positioned to deliver expanding profitability and growing returns for years to come. The long-term opportunity for NXP has never been clearer. Thank you. Thank you so much for joining.