NXP (NXPI.US) Q3 Conference Call: Raising the Data Center Target to $1 Billion, Expected to Achieve Double-Digit Growth and 60% Gross Profit Margin in 2027

The Zhitong Finance App learned that NXP (NXPI.US) announced financial results for the third quarter of 2026 after the US stock market on October 27 (early morning of October 28, Beijing time). Revenue for the quarter was US$3.786 billion, up 19% year on year, higher than the market's agreed expectations; non-GAAP diluted earnings per share of US$4.20, up 35% year over year, also exceeded expectations.

Non-GAAP gross margin of 58.6%, operating margin of 37.1%; free cash flow for the quarter was US$1.21 billion, accounting for 31.9% of revenue.

By business, the automotive business revenue was US$2.07 billion, up 13% year on year; industry and the Internet of Things were US$802 million, up 39% year on year; communication infrastructure and others were US$503 million, up 54% year on year. The company said data center infrastructure momentum continued; and the mobile business was US$411 million, down 4% year on year.

The company expects fourth-quarter revenue of US$3.75 billion to US$3.95 billion, with a median value of US$3.85 billion (up about 15% year over year), lower than analysts' expectations of US$3.87 billion; median non-GAAP operating profit of US$1.44 billion is also slightly lower than expected.

CEO Rafael Sotomayor said that the unique growth momentum of companies in the automotive and industrial sector is contributing to the acceleration, opening up long-term space for software-defined automobiles and trusted physical AI. The company also announced an additional $5 billion share repurchase authorization.

Notably, NXP's biggest competitor, Texas Instruments released a strong revenue forecast last week, saying “the industrial, automotive, and data center sectors will see widespread growth.” Texas Instruments said it plans to expand production capacity to meet the demand for increased orders and is likely to reach a higher level in the 2026 budget for new plants and equipment.

Below is the full text of the NXP results conference call (AI tool assisted translation):

I. Executive speeches

Rafael Sotomayor, President and CEO

Thank you, Mike, and good afternoon everyone. In the third quarter, we surpassed expectations in all terminal markets, with double-digit year-on-year growth in every region. The growth was led by our company-specific growth engines in the automotive and industrial sectors, which grew 30% year over year, and together accounted for about one-third of the company's total revenue; at the same time, the data center infrastructure continued to be strong. Revenue was $3.79 billion, up 19% year over year. Excluding the MEMS sensor business, the increase was 22%. Non-GAAP operating margin was 37%, up 330 basis points year over year; non-GAAP earnings per share were $4.20, up 35% year over year.

These results are translating into strong free cash flow, enabling us to invest in the business and return cash to shareholders. To this end, the board of directors has approved an additional $5 billion for share repurchases, bringing the total authorized repurchase amount to approximately $6.3 billion. Now it's time to end market performance. The automotive business's revenue surpassed $2 billion for the first time, and increased 17% after excluding the sensor business. This increase was due to increased bicycle content led by the software-defined vehicle (SDV) product portfolio, while the vehicle production environment remained largely flat. SDV's revenue for the third quarter has exceeded US$1.5 billion in annualized terms and is steadily moving towards the 2027 target of US$2 billion.

We believe that the transition from domain control architectures to regionalized architectures and central computing is a multi-year upgrade cycle that will enable physical AI and autonomous driving capabilities in automobiles. These new architectures have created a need for system-level solutions to increase the bike content of the NXP product portfolio, including additional processing end nodes, connectivity, and power management. Compared to the current architecture, this has increased the bike content by 2 to 3 times.

This evolution is still in its early stages. In 2027, we will begin shipping the next generation of SDV processors, including the S32K5 regionalization platform and the S32N central computing platform. We are beginning to see substantial evidence of SDV's transformation. RV Tech (a joint venture between Volkswagen and Rivian) announced yesterday that its regionalization platform has uniformly adopted NXP's S32K5 across the two companies. This clearly shows the leadership of NXP's SDV product portfolio and where the industry is headed. Cooperation on our new platform continues to expand globally, and it is now expected that the S32K5 will be shipped for the first time in China as early as the first quarter of 2027.

Software-defined cars are one of the first deployments of physical AI, and the opportunities far surpass cars themselves. The basic modules of central computing, sensing, network connectivity and security control are being extended to robots and other edge intelligence systems. This quarter, we won the first bid for the S32K5 design in the field of humanoid robots from a leading American global technology company.

Now it's time to move to Industrial & IoT (Industrial & IoT). The business's revenue was $802 million, up 39% year over year. The industrial portion of this end market has grown by nearly 50%, led by data centers, factory automation, and healthcare, and now accounts for around 70% of the industrial and IoT business. As we mentioned in the second quarter conference call, AI-enabled processors will account for about 15% of industrial and IoT processor revenue in 2026, more than double last year.

Given the market adoption of intelligent systems, we expect continued growth in 2027. Ara (our discrete NPU, neural network processor) is a key component of the AI product portfolio. It continues to be popular in industrial automation and automotive AI applications, and we expect mass production in 2028.

Now let's take a look at the latest developments in data center business. Given the strong performance year to date, we now expect the business's revenue to exceed the $500 million guideline given earlier this year. Given the new products we are developing and our growing customer partnerships, we now expect the business to surpass $1 billion over a few years. Move to communication infrastructure and other (Communication Infrastructure and Other). The business's revenue was $503 million, up 54% year over year, and was driven by data centers and security cards. Finally, mobile business revenue was $411 million, down 4% year over year.

Shifting to the fourth quarter outlook. We are targeting revenue of $3.85 billion, up 2% month-on-month, 15% year-on-year, and 18% if the sensor business is excluded. This will be the fourth consecutive quarter of double-digit annual growth. Under the guideline median value, we expect the fourth quarter business to show the following trends: the automotive business is expected to achieve low double-digit year-on-year growth and low-single-digit growth over the previous year. Excluding the impact of the sale of the MEMS sensor business, our guidance meant higher double-digit year-over-year growth.

Industry and the Internet of Things are expected to achieve growth in the 20% high range (high 20% range) year over year, and low single-digit growth compared to the previous month. The mobile business is expected to decline by double digits year over year, with a slight increase from month to month. Finally, communications infrastructure and others are expected to increase by more than 50% year over year, which is a low single-digit increase from month to month. Now I'd like to leave the meeting to Bill and ask him to review his financial performance.

Bill Bates, Executive Vice President and Chief Financial Officer

Thank you, Rafael, and thank you to everyone who participated in the conference call today. Rafael has introduced the revenue drivers, and I'll turn to the financial highlights. The third quarter was another strong quarter, with record revenue, operating margins, and non-GAAP earnings per share. Revenue increased 19% year over year and 8% month over month to reach $3.79 billion. Growth is being led by our company-specific growth engines in software-defined automotive, electrification, connectivity, radar, and industrial edge processing, while the emerging data center business continues to gain momentum.

Non-GAAP gross margin was 58.6%, up 160 basis points year over year. The gross margin performance reflects improved plant utilization and good profit conversion (fall-through) brought about by higher revenue. Non-GAAP operating expenses were $810 million, or 21.4% of revenue, reflecting strong operating leverage. This brought the non-GAAP operating margin to 37.1%, an increase of 330 basis points over the previous year. For offline subjects, non-GAAP interest charges are $85 million. The tax rate stabilized at 18%. The non-controlling interest was US$15 million, and the investors' performance according to the Joint Venture Equity Act was a loss of US$4 million. As a result, non-GAAP earnings per share were $4.20, up 35% year over year, or about twice the revenue growth rate.

Now it's time to balance sheets, cash flow, and return on capital. The balance sheet remains solid, providing flexibility to invest in strategic growth priorities, advance hybrid manufacturing models, and return capital to shareholders. At the end of the third quarter, the company held $3.94 billion in cash and $10.98 billion in debt, with a net leverage ratio of 1.3 times. Inventory days fell from 156 days in the second quarter to 148 days, including approximately 13 days of pre-built inventory associated with planned front-end fab consolidation. We expect around 15 days of pre-built inventory by the end of 2026.

Operating cash flow for the quarter was strong, reaching US$1.26 billion, net capital expenditure of US$50 million, and free cash flow of US$1.21 billion, accounting for about 32% of revenue. In the third quarter, we invested $218 million in VSMC and ESMC in the form of equity and entry fees. Detailed details of joint venture investments can be found in the historical financial models on the Investor Relations website. We expect the joint venture investment to be over 75% complete by the end of the year.

Based on the past 12 months, free cash flow is approximately $3.5 billion, or 25% of revenue, which is in line with long-term goals. Over the same period, we returned $1.7 billion to shareholders through dividends and share repurchases. Recently, shareholder returns have been falling short of long-term goals as we prioritize deleveraging, strategic acquisitions, and investment in manufacturing joint ventures to support future growth and gross margin expansion.

Looking ahead, we plan to accelerate buyback activities in the fourth quarter and 2027. In line with this commitment, the board approved a new $5 billion share repurchase plan, bringing the total authorized amount to $6.3 billion, or about 10% of the current market value. Overall, we remain committed to returning 100% of excess free cash flow to shareholders over the long term.

Now on to fourth-quarter expectations. We expect revenue to be US$3.85 billion, fluctuating up and down to US$100 million, up 15% year over year. Excluding the impact of sensor business sales, it will increase 18%, or 2% month-on-month. We expect a non-GAAP gross margin of 59%, fluctuating 50 basis points up and down, driven by higher revenue and manufacturing utilization. We expect operating expenses to be $830 million, fluctuating up and down by $10 million. The month-on-month growth was mainly driven by new product streams (tape-outs) supporting trusted physical AI strategies.

On a median basis, the corresponding non-GAAP operating margin was 37.5%. For offline subjects, we expect non-GAAP financial expenses to be $79 million, and the non-GAAP tax rate is approximately 17.5%. The non-controlling interest is estimated at US$14 million, and the loss of the investee is US$5 million according to the Joint Venture Equity Act. This meant that fourth-quarter non-GAAP earnings per share were a median of $4.36, up 30% year over year, showing continued profitability.

Shift to cash usage in the fourth quarter. We expect capital expenditure to account for approximately 3% of revenue, with equity payments of US$86 million to VSMC and US$60 million to ESMC. Looking ahead to 2027 and for your modelling reference, we will continue to achieve double-digit revenue growth and plan to increase gross margin to 60% in 2027. We expect operating expenses to account for about 23% of revenue in the first half of the year, driven by new product launches, and less than 23% in the second half of the year. Assuming a non-GAAP annual effective tax rate of 17.5%, we now expect the joint venture to lose about $80 million for the full year, and suggest modeling losses of about $10 million in the first quarter and $20 million in the second quarter.

The capital expenditure is approximately 5% as we plan to launch more back-end production capacity in 2027 and build a new package testing plant in Malaysia to prepare for production in 2028. Finally, we will continue to generate healthy cash flow and plan to accelerate the return of capital to shareholders. Next, in order to better understand our business, we plan to redivide terminal market revenue starting in 2027. Additionally, we are planning to host an Investor Day in Boston on March 3, where we will update our strategy and long-term financial model.

II. Q&A session

Goldman Sachs Analyst James Schneider: Customer Inventory Replenishment Signs and Delivery Cycles

Q: Pay attention to whether OEM customers are showing more aggressive signs of inventory replenishment compared to previous quarters, as well as changes in lead times (lead times) and customer responses.

Rafael Sotomayor: As far as the automotive business is concerned, the company has not observed any clear signs indicating extensive inventory replenishment. Visibility has improved significantly, and while delivery times have been extended, it has also brought better visibility. Another trend in the automotive market is that OEMs are increasingly providing direct guidance to suppliers, closer customer relationships, and companies have good visibility into the scale of supply required throughout the year and the types of products to be deployed.

Goldman Sachs Analyst James Schneider: 2027 Guidance Sources of Confidence

Q: As far as each terminal market is concerned, the company is most confident of surpassing the overall double-digit growth guidelines, as well as areas where uncertainty is relatively high.

Rafael Sotomayor: What worked in 2026 will continue in 2027. What drives confidence in double-digit growth in 2027 is the area the company continues to focus on. SDV adoption continues to advance and has just begun. Many releases will be introduced in the second half of 2027, and there is an important volume in the SDV product portfolio. The same is true of industry and the Internet of Things. AI adoption continues to increase content and is quite strong; the deployment of data center control planes has just begun and continues to unfold.

Barclays analyst Thomas O'Malley: Drivers of Q4 gross margin increase

Q: As far as the December guidance is concerned, the gross margin guideline is 59%, which is a significant increase from September's incremental profit margin (close to 85% month-on-month and 70% year-on-year). In addition to sales factors, what other factors are driving this growth, as it is a big jump compared to the past three or four quarters.

Bill Bates: The gross margin performance was in line with expectations and continued to expand in the fourth quarter. The improvement in gross margin is inherently very structural, driven by higher revenue and higher utilization. The utilization rate is currently operating in the 80% mid-range. It will remain in this range in the fourth quarter, and is expected to operate in the 80% high range in 2027.

The product structure also plays a role, in addition to improving operational efficiency. Gross margin is unrelated to current price increases; price increases are only used to offset higher inflationary costs passed on to customers. The gross margin is expected to continue to expand, reaching 60% in 2027; with the expansion of VSMC joint ventures, it will further expand to more than 60% in 2028.

Barclays analyst Thomas O'Malley: The automotive business is seasonal in the fourth quarter

Q: Regarding seasonality, according to market estimates, the automobile business in September was slightly higher than the seasonal level, while the guideline was low single-digit month-on-month growth, which is different from the medium to high single digit of traditional seasonality in December. Whether this difference is due to strong performance in June and September, or there are other factors worth paying attention to.

Michael Lucarelli: The issue was confirmed for the fourth quarter of the automotive business. The automotive business has been quite strong this year, being more than seasonal almost every quarter. Looking ahead to the fourth quarter, the seasonal trend in the automobile business is generally flat to slightly rising, so 2% growth is higher than seasonal, and the strong trend in the automobile market continues.

TD Cowen Analyst Joshua Bukhart: Pricing Environment and Price Reset

Q: As for the current overall pricing environment; looking ahead to 2027, gross margin declined in stages in the past few years due to annual price resets, and will there be another month-on-month decline in the first quarter of 2027.

Bill Bates: Entering 2026, the company expects a low single-digit decline in prices; towards the end of 2026, prices are expected to remain flat throughout the year. Looking ahead to 2027, investment costs in various fields will continue to rise, and these costs will be passed on to customers to ensure that gross margins are not affected. Revenue is also supported by the product structure. In particular, in the SDV product portfolio, the new solution will drive a higher average selling price, as the SDV product portfolio is 2 to 3 times the value of the traditional product portfolio. In the short term, pricing is in line with expectations: the third quarter was roughly flat (about +1%), the third quarter price contributed 1%, the fourth quarter contributed another 1%, and remained flat throughout 2026.

Rafael Sotomayor: Adding from a higher level, leaving aside variable investment costs, the industry is undergoing a structural shift in pricing. Unlike annual price erosion, which has become the norm in the past decade, semiconductors now account for a larger share of system innovation value, creating better opportunities to capture value. This has nothing to do with investment costs, but rather a shift in value at the semiconductor and even the final system level. Competitive pressure is always present, but the historical pattern of annual price erosion is expected to ease over time, making pricing less of a drag on revenue year by year.

TD Cowen Analyst Joshua Buchardt: An Industry Watch for Inventory Replenishment

Q: Despite the statement that no signs of widespread inventory replenishment have been observed, opinions in the industry about whether inventory replenishment is taking place have been quite divided over the past few quarters. The current judgment is to what extent it is based on a proactive conservative attitude (similar to how to deal with the previous cycle), or differences in product combinations, products, or exposures, making the pace of inventory replenishment different from peers who say they have seen inventory replenishment.

Rafael Sotomayor: The company did not observe restocking. The core product is at the core of software-defined vehicles, and should be seen if there is a replacement inventory. Currently, some OEMs have discussed establishing safety inventory due to tight supply, but this has not happened; despite relevant remarks from first-line OEMs, the company has yet to see inventory replenishment. Since the product is at the core of the vehicle's core functionality, any restocking will be observed.

Bill Bates: Added that automobile distribution accounts for about 40%, and the company has good control over this channel.

Jefferies Analyst Brian Curtis: Automotive Electrification Trends

Q: Let's start with the automotive sector. In addition to the structural drive brought about by SDV, what is the electrification situation; Texas Instruments are picking up, and oil prices are also a factor to consider.

Bill Bates: The growth engines unique to all companies in the automotive sector are strong. Last year, electrification was in the inventory digestion phase, and new products were slightly delayed. This year, they performed well and caught up. The growth rate was higher than the growth rate given by Investor Day, especially in terms of electrification.

Overall SAAR (seasonally adjusted annualized sales) declined slightly, but xEV (electrified models, including hybrids) penetration increased. About 47.5% of production this year is xEVs, and it is expected to cross the 50% mark to about 55% next year. This year's 47% increase compared to 41% last year, an increase of 12%, and the penetration rate is expected to increase by another 15%. xEVs continue to grow globally, and their semiconductor content for bicycles is 2 to 3 times that of traditional fuel vehicles.

Jefferies analyst Brian Curtis: Trends for the first quarter of next year

Q: The preliminary outlook for the first quarter of next year (March) is broken down by sector or as a whole.

Bill Bates: It needs to be clarified that this unofficial guidance is expected to have a large range, and regular disclaimers are retained. Generally speaking, the first quarter fell by about a single digit month-on-month: mobile services fell by double digits month-on-month; automotive, industrial and Internet of Things, and communication infrastructure fell to the middle single digits (about 3%, 4%, 5%) month-on-month. This is an overall trend over the past 5 to 10 years, an unofficial guide.

J.P. Morgan Analyst Harlan Suhl: Order Shipment Ratio and Backlog

Q: In addition to the automotive business, the company also has driving factors in edge AI, physical AI, and data centers. Whether the order shipment ratio (book-to-bill) for the third quarter was greater than 1, whether the backlog of orders in all terminal markets and regions increased, and whether customer demand continued to rise in an environment of tight supply.

Bill Bates: All signals continue to improve compared to 90 days ago. The order shipment ratio was well above 1 in all terminal markets and regions. The backlog of orders continued to grow in value and extend further into 2027. Delivery times continue to lengthen, with approximately 80% of deliveries taking longer than 16 weeks, compared to just 25% a year ago. Expedited customer demand continued to increase, with a sharp increase from month to month.

J.P. Morgan Analyst Harlan Suhl: Progress in 300mm Wafer Production Expansion

Q: On the supply side, the expansion of 300mm wafer production mainly comes from ESMC and VSMC joint ventures. VSMC mainly targets analog power supplies and mixed-signal products. It has just begun risk trial production/qualification certification, and targets mass production and shipment in the first half of next year; ESMC targets MCU and embedded products, and targets mass production by the end of next year. Please describe the progress of the project, and the 300mm project comes at the right time in an environment of tight supply.

Bill Bates: Production expansion is happening at the front end and back end at the same time. On the front-end side, VSMC has been completed and is progressing ahead of schedule. The partner side is taking the lead in deploying the intermediary layer; the company side is certifying the first batch of technology, and delivery is expected in the second half of the year.

Some output is progressing ahead of schedule, but the actual volume will be increased in 2028, which will help expand the gross profit margin. The move has a double benefit: a shift from 200 mm to 300 mm, and no longer need to pay additional gross profit to external foundry partners.

On the back-end side, capital expenditure increased to about 5% (about 2% this year). First, back-end production capacity was increased in the first and second quarters to support revenue; second, more importantly, the new plant in Kuala Lumpur, which began construction in August, will be put into operation in early 2028, serving large amounts of revenue and supporting gross margin expansion.

Cantor Fitzgerald Analyst Matthew Prisco: SDV Design Wins Bid and Volume Rhythm

Q: As for the development of SDV, as cooperation increases, what are the factors driving the current design bid, what is the pace and potential inflection point, and whether it is more a story of 2027 and 2028; popular cooperation seems to focus on the MCU side, and what other system component opportunities are there outside of the core.

Rafael Sotomayor: The drive design won the bid for large-scale adoption of software-defined vehicles. This concept is revolutionary and is changing the way cars are manufactured. The two major architectures are regionalized architecture and central computing architecture (briefly explained here).

The VW press release revolves around its regionalized architecture and uses the high-performance S32K5. The company also has extensive cooperation on the S32N central computing architecture: North America has won the design bid, the South Pacific and Asia recently won a design bid, and China and Europe have multiple proof of concept (POC). The early release of the Central Computing S32N is expected at the end of 2027, and the full release of K5 and S32N is expected in 2028. The adoption of SDV will not only bring about an increase in content, but as transparency increases in the coming year, the increase in content will have a compounding effect with the increase in share.

Cantor Fitzgerald Analyst Matthew Prisco: Quantifying Physical AI Opportunities

Q: Regarding the development of physical AI, the last conference call discussed project pipelines and system-level methods, how to quantify physical AI opportunities in the future, as a percentage of processor revenue in 2027 and beyond, and how fast this market is growing.

Rafael Sotomayor: Physical AI is the core of the discussion, and AI is the main driving force behind the increase in the content of industry and the Internet of Things. As mentioned in the last conference call, AI-enabled processors (excluding discrete NPUs) account for about 15% of total processor revenue, which is expected to double from a year ago, and will continue to be strong in 2027. In terms of the discrete NPU Ara, significant progress is being made in the industrial and IoT and automotive fields through multiple proof of concepts, and early mass production is expected in 2028.

Bank of America Securities Analyst Vivek Alia: Data Center Strategic Positioning

Q: One of the questions about NXP is the lack of data center exposure. This year's target of $500 million or more is in the low single digit range. Even $1 billion accounts for less than 10%, while many peers have data center exposure of 10% to 20%. Whether the data center is a strategic focus for NXP, can it be promoted through endogenous growth, whether more cash is used for repurchases, and what is the strategic positioning and target exposure of the data center business.

Rafael Sotomayor: Previously, the data center was guided by about 500 million US dollars, which is likely to be exceeded this year; with the development of new products and existing collaborations, the revenue is expected to reach 1 billion US dollars in 2028.

The strategy logic is: the data plane performance continues to improve, and the control plane also needs more performance. This involves not only performance and processing, but also more network connectivity, security, and reliability, which is NXP's core competency.

Since there is zero tolerance for downtime, a reliable industrial-grade control processor is required. The product portfolio includes top-of-rack (top-of-rack) switches (beginning to be launched) and processors for board management (board management), including safety elements, processors, microcontrollers, and interfaces. The company is developing more products to expand the Serviceable Market (SAM) and use core competencies to address data center control planes. The growth from 500 million US dollars to 1 billion US dollars in the next two years, combined with new releases and products, is quite impressive.

Bill Bates: Buybacks shouldn't be interpreted as not investing in data centers. The company is generating large amounts of cash and will invest in data centers. More information will be revealed on Investor Day in March.

Michael Lucarelli: The data center will be another pillar in the company's growth story. The company has automotive core business, SDV, emerging opportunities in data centers, industrial and IoT, and physical AI. Growth has three pillars. It does not rely on a single thing. Multiple growth engines are net positive for the company.

Bank of America Securities Analyst Vivek Alia: Communications Infrastructure Business Outlook

Q: Communications infrastructure and other businesses are the fastest-growing sector this year (or growing the fastest after two consecutive years of decline). Looking forward to the driving and dragging factors of this sector next year.

Bill Bates: The division will be re-divided from 2027 to make the composition of the business more transparent. Composition at the end of 2025: approximately 50% security card, 25% digital network (DN), 25% radio frequency power (RF power). Looking ahead to the end of 2026, about half of the data center business comes from DN. DN is expected to account for more than 30% of the communication infrastructure; it has withdrawn from the next-generation RF power business, and is expected to account for less than 20% by the end of 2026. The security card business continues to grow well. The business will be split when the fourth quarter earnings report is released, making the composition more transparent.

UBS analyst François Xavier Bouvigné: Data center target pace of 1 billion

Q: As for the data center target of 1 billion US dollars, from 500 million US dollars this year to 1 billion US dollars in 2028, most peers expect revenue to double next year. The new gigawatt-class installed capacity of each data center indicates that it may double in 2027. Whether the $1 billion target means slower growth in 2027 is a conservative estimate, or can it reach $1 billion as early as next year, or there are drag factors next year.

Rafael Sotomayor: Data center considerations must be combined with the type of product deployed: the company does not use discrete devices or power supplies, and focuses on control planes. Any MCU or microprocessor in the rack belongs to its market. The business only started almost this year. Currently, growth depends on product release, acceptance, design bid, and customer deployment of software on related products.

This product portfolio is more sticky. The volume of data center business is worth looking forward to, because these are processors, which are NXP's core competencies in networking, security, and processors, and will be a business the company will do quite well.

UBS Analyst François Xavier Bouvigné: Pricing and the Supply and Demand Environment

Q: Let's start with pricing. Both input costs and product structure will affect next year's pricing. Another factor is the supply and demand environment. The market is concerned about whether tight supply evolves into a COVID-like environment. Referring to peer utilization rates — Renesas (Renesas) 60%, Texas Instruments new fab climbing, Infineon (Infineon) new fab climbing, NXP's new fab climbing — management did not mention pricing due to tight supply and demand. Can you think that supply is not as tight as the market thought. Large production capacity is on the way. It is a matter of time and delivery cycle, and is temporary rather than as fundamental as COVID.

Bill Bates: If future production capacity is very tight, front-end production capacity will also be tightened in the future, and companies that are launching production capacity will help ease it. The tight production capacity is the next phase of the imbalance between supply and demand, which is expected to occur sometime next year. The company's investments in the front-end and back-end enable it to serve this demand. Currently, pricing is only related to inflationary costs; it is entirely possible to see if pricing driven by an imbalance between supply and demand (similar to COVID) occurs, and we will wait and see.

Rafael Sotomayor: The current demand environment is very different from the COVID era. It is real, driven by SDV transformation, physical AI transformation, and data center capital expenditure investment transformation. Demand will drive value creation, value capture, and potential pricing capabilities.

III. Summary

Rafael Sotomayor: Thank you all. I'd like to leave you with three main points. First, our growth is structural — software-defined cars, intelligent industrial edges, and data centers have been driving forces for years, and winning bids such as RV Tech shows that we are ready for the next round of growth. Second, this growth is widespread — every region is growing, with automotive, industrial and Internet of Things, and communications infrastructure all achieving double-digit year-over-year growth. Finally, our growth has led to strong free cash flow, enabling us to invest in our business and return cash to shareholders. As revealed today, we have a new $5 billion repurchase authorization, which will enable us to accelerate repurchases beginning in the fourth quarter.