NXP Semiconductors Turns More Optimistic as Auto Demand and Data Center Sales Improve

Key Points

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• NXP Semiconductors said demand is improving, especially in automotive, and the company is now “more optimistic” than it was 90 to 180 days ago. Management cited a solid book-to-bill ratio, rising backlog, more late orders and longer lead times as signs of healthier orders.

• Automotive remains NXP’s biggest business, and the company expects it to grow this year as inventory headwinds ease in North America and Europe and China stays involved in the outlook. NXP also raised prices and may do so again in the second half to offset inflation in energy, transportation, precious metals and substrates.

• Beyond autos, NXP sees growth in software-defined vehicles and data centers, with data center revenue projected to rise from $200 million last year to $500 million this year. Management also said the company plans to keep returning excess free cash flow to shareholders through dividends and buybacks.

NXP Semiconductors (NASDAQ:NXPI) is seeing a more constructive demand environment than it did several months ago, particularly in automotive, Executive Vice President of Investor Relations Jeff Palmer said at TD Cowen’s Technology, Media & Telecom Conference.

Speaking with TD Cowen semiconductor analyst Joshua Buchalter, Palmer said NXP is “more optimistic than we have been in a while” compared with 90 to 180 days ago. Automotive accounts for 58% of the company, and Palmer said improvement in that market tends to lift the company’s broader outlook.

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Palmer pointed to several indicators suggesting improving demand, including a book-to-bill ratio “solidly above one,” building end-customer backlog through distribution, more late orders and expedites, and lengthening lead times.

He also said NXP raised some prices in the first quarter due to inflationary input costs and expects additional increases in the second half. The cost pressure is coming primarily from energy, transportation, precious metals and substrates, rather than wafers, he said.

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“Customers never like price increases,” Palmer said. He added that NXP is not trying to expand margins through pricing, but to maintain gross margins when the company cannot offset input cost inflation operationally.

Automotive Demand Improves as Inventory Headwinds Ease

Palmer said NXP expects the automotive business to grow this year, including in China. He noted that global auto production has been relatively flat for years at roughly the high-80-million to 90-million-vehicle range, while NXP’s automotive business has grown at a 9% compound annual growth rate over the past three years and 13% over the past five years.

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That performance, Palmer said, reflects the company’s focus on semiconductor content per vehicle rather than total industry unit growth.

In China, Palmer said the automotive market has its own seasonal pattern, with strong fourth-quarter activity, a pause in the first quarter and then resumed activity. He said NXP had anticipated some China softness in its first-quarter guidance. However, he added that China automotive revenue for NXP was up in the first quarter, though “not up great,” and that China is participating in the company’s second-quarter automotive growth outlook.

In North America and Europe, Palmer said a prolonged inventory correction among some Tier 1 suppliers is “finally behind us.” He said some Tier 1 customers are now buying to end demand, while others remain under-inventoried and are running leaner working capital metrics than in the past.

Palmer warned that customers that do not provide adequate forecasts could face delays because NXP’s cycle times from fabrication to finished product are three to six months.

Software-Defined Vehicles Remain a Major Growth Driver

Palmer outlined four accelerated growth drivers in NXP’s automotive business: software-defined vehicles, 77 GHz radar, electric vehicle products and connectivity.

The largest is software-defined vehicles, centered on NXP’s S32 MPU family, K1 series zonal processors, automotive Ethernet and software. Palmer said that business was $1 billion in 2024, more than $1 billion in 2025 and is expected to reach about $2 billion by the end of 2027. He said the growth expected over that period is based on existing design wins, not future wins the company still needs to secure.

Palmer said NXP made a strategic decision about seven years ago to invest in high-performance automotive MPUs rather than simply another microcontroller family. The company believed automakers were moving away from flat point-to-point vehicle architectures toward more hierarchical computing systems.

He said Western automakers’ software-defined vehicle models are likely to begin going on sale around the 2028 model year, in late 2027. Current NXP business in the area has been driven primarily by Chinese and Korean automakers, he said.

Palmer also discussed NXP’s acquisitions of TTTech Auto and Aviva Links. TTTech Auto brought the MotionWise middleware operating system and roughly 1,200 automotive software and security specialists, he said. Aviva Links provides multi-gigabit asymmetric SerDes technology suited for applications such as ADAS cameras, radar, lidar and in-cabin displays. Palmer said revenue from Aviva Links is not expected until next year at the earliest.

Data Center Revenue Expected to Rise

NXP recently highlighted a data center business that Palmer said generated $200 million last year and is expected to reach $500 million this year. He emphasized that NXP participates in the control plane, not the data plane, and does not compete with accelerator companies.

The business includes Layerscape-based products used in top-of-rack switches and network interface cards, as well as board management control products used for functions such as cooling, power management, security and inter-card communication.

Palmer said the Layerscape products have benefited from hyperscalers building proprietary AI racks. Design wins had been awarded several years ago, but revenue did not begin accelerating until late last year, he said.

NXP estimates its serviceable available market in the data center area at about $4 billion, growing at roughly a 10% CAGR, Palmer said. He added that the company aims to grow its $500 million data center revenue base at a multiple of that market growth rate.

Industrial Edge AI and Manufacturing Outlook

In industrial and IoT, Palmer said more customers want to run distilled AI models locally rather than in the cloud. NXP’s i.MX processor families include variants with embedded neural processing units under the eIQ brand, and the company’s acquisition of Kinara added higher-performance Ara NPUs that can be paired with i.MX processors.

On manufacturing, Palmer said NXP produces about 40% of its wafers internally and 60% externally. Internal utilization is expected to be in the low-80% range in the first half and mid-80% range in the second half, he said, with some bridge stock being built ahead of the planned decommissioning of one factory.

Palmer said NXP’s gross margin target remains 57% to 63%. As a rule of thumb, the company expects each $1 billion of incremental revenue to contribute about 100 basis points of gross margin expansion, though mix can affect quarterly results. He said NXP believes it can grow revenue in the low double digits this year and next year, and that reaching $15 billion to $15.5 billion in revenue would imply about 60% gross margin under that framework.

He added that NXP’s VSMC joint venture in Singapore is expected to begin contributing benefits in 2028, with a full load adding about 200 basis points of corporate gross margin.

Capital Return Policy Remains in Place

Palmer said NXP’s capital allocation policy is to return all excess free cash flow to shareholders through dividends or buybacks, after investments in the business. Recent cash needs included acquisitions and the Singapore joint venture fab, but Palmer said those demands should begin to taper in 2026 and 2027.

Over the past 10 years, Palmer said NXP has returned almost $23 billion to shareholders, representing roughly 95% to 96% of free cash flow generated.

About NXP Semiconductors (NASDAQ:NXPI)

NXP Semiconductors N.V. is a global semiconductor company headquartered in Eindhoven, the Netherlands, that designs and supplies mixed-signal and standard product solutions for a broad range of end markets. The company focuses on enabling secure connections and infrastructure for embedded applications, developing technologies used across automotive, industrial and Internet of Things (IoT), mobile, and communication infrastructure segments. NXP’s offerings target customers that require reliable, secure, and high-performance semiconductor components for connected devices and systems.

Product lines include microcontrollers and application processors, secure elements and authentication technologies, RF and high-power analog components, connectivity solutions, and vehicle networking and infotainment systems.

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