NXP Semiconductors (NASDAQ:NXPI) reported third-quarter financial results on Tuesday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
NXP Semiconductors reported Q3 revenue of $3.79 billion, up 19% year-over-year, with growth driven by automotive and industrial sectors.
The company achieved a non-GAAP operating margin of 37% and non-GAAP EPS of $4.20, up 35% year-over-year.
An additional $5 billion share repurchase program was authorized, bringing total buyback authorization to $6.3 billion.
Automotive revenue crossed $2 billion, driven by software-defined vehicles (SDVs) and new product developments with significant future ramps expected in 2027.
Industrial and IoT revenue grew 39% year-over-year, with a strong contribution from AI-enabled processors set to continue growing in 2027.
Data center business exceeded initial expectations, with revenue projected to surpass $1 billion in the next few years.
Q4 revenue guidance is set at $3.85 billion, up 15% year-over-year, with automotive and industrial sectors expected to continue strong growth.
NXP plans to realign its end market revenues and host an Investor Day in March 2027 to update strategic and financial models.
Management noted no significant signs of restocking in the automotive market, emphasizing strong customer engagement and visibility.
Full Transcript
OPERATOR
Good day and thank you for standing by. Welcome to the NXP Semiconductors third quarter 2026 earnings conference call. At this time all participants are in listen-only mode. After the speaker’s presentation, there will be a question and answer session. If you would like to ask a question, please press star 11 on your telephone. If you would like to remove yourself from the queue, press star 11 again. Please be advised that today’s conference is being recorded.
I would now like to turn the conference over to Mike Lucarella, Senior Vice President, Investor Relations. Please go ahead.
Mike Lucarella (Senior Vice President, Investor Relations)
Thank you, Lisa, and good afternoon, everyone. Welcome to NXP Semiconductors’ third quarter earnings call. With me on the call today are Rafael Sotomayor, NXP’s president and CEO, and Bill Betz, our CFO. The call today is being recorded and will be available for replay from our corporate website. Today’s call will include forward-looking statements that involve risks and uncertainties that could cause NXP Semiconductors’ results to differ materially from NXP Semiconductors’ 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 fourth quarter of 2026.
NXP Semiconductors 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 Semiconductors has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our third quarter 2026 earnings release which will be furnished to the SEC on Form 8-K and is available on NXP Semiconductors’ website in the Investor Relations section at nxp.com.
I’ll now turn the call over to Rafael.
Rafael Sotomayor (Executive Vice President and General Manager, Connectivity & Security and Edge Processing)
Thank you, Mike, and good afternoon. In Q3 we exceeded our outlook across 10 markets and every region grew double digits year on year. Growth was led by our company-specific growth drivers in automotive and industrial, which grew 30% year over year and represent roughly a third of our total revenue, as well as continued strength in data center infrastructure. Revenue was $3.79 billion, up 19% year over year, or up 22% excluding the MEM sensor business.
Non-GAAP operating margin was 37%, up 330 basis points, and non-GAAP EPS was $4.20, up 35% year over year. The results are translating into strong free cash flow generation, enabling us to invest in the business and return cash to shareholders. To that end, our board has authorized an incremental $5 billion for share repurchases, bringing total authorization to around $6.3 billion. Now turning to end market performance, automotive revenue crossed $2 billion for the first time, up 17% excluding sensors. This growth is driven by content gains led by our SDV portfolio and in a flat edge unit production environment. SDV revenue in Q3 is running above $1.5 billion annualized and remains well on track to reach our $2 billion 2027 target. We view the transition from domain-based architectures to zonal and centralized compute as a multi-year upgrade cycle that will enable physical AI and autonomous capabilities in the vehicle.
These new architectures create a need for system solutions that drive higher content across NXP’s portfolio, including additional processing, end nodes, connectivity, and power management. This results in two to three times higher content per vehicle compared to today’s architecture. This evolution is still in its early stages. In 2027 we will begin shipping our next-generation SDD processors, including the S32K5, zonal and S32N central compute platforms. We are starting to see material points of the SDV transition. RVTech, the joint venture between Volkswagen and Rivian, announced yesterday it has standardized its platform on NXP’s S32K5 across both companies. This is a clear signal of the leadership of NXP’s SDV portfolio and where the industry is heading. Engagements with our new platform continue to expand globally and we now expect our first S32K5 shipments in China as early as the first quarter of 2027.
Software-defined vehicles are one of the first deployments of physical AI and the opportunity reaches well beyond the car. The same building blocks of central compute, sensing, networking, and secure control are moving into robots and other intelligent systems at the edge. This quarter we secured our first S32K5 design win in humanoid robotics with a leading U.S. global technology company. Now moving to industrial and IoT. Revenue was $802 million, up 39% year over year. The industrial portion of this end market grew nearly 50%, led by data center, factory automation, healthcare, and now represents about 70% of industrial and IoT. As we mentioned in our Q2 call, AI-enabled processors will represent approximately 15% of industrial and IoT processor revenue in 2026, more than doubling from last year. Given market adoption of intelligent systems, we expect growth to continue in 2027.
Ara, our discrete NPU, is a key component of our AI portfolio. It continues to gain traction across industrial automation and automotive AI applications, and we expect to be in volume production in 2028. Now let me give you an update on our data center business. Given the strength we’re seeing year to date, we now expect our revenue to exceed the $500 million outlook provided earlier this year. Given the new products we’re developing combined with expanding customer engagements, we now expect this business to be over a billion dollars in a couple years.
Going to communication infrastructure and other, revenue was $503 million, up 54% year over year, driven by data center and secure cards. And lastly, mobile revenue was $411 million, down 4% year over year. Turning to our Q4 outlook, we’re guiding revenue to $3.85 billion, up 2% sequentially and up 15% year over year, or 18% excluding sensors. This would represent our fourth consecutive quarter of double-digit annual growth. At the midpoint, we expect the following trends in our business during Q4. Automotive is expected to be up in the low double-digit percent range year over year and up low single digit sequentially. Adjusted for the sale of the MEM sensor business, our guidance implies a high-teens percentage growth year over year.
Industrial and IoT is expected to be up in the high 20% range year over year and up in the low single-digit range sequentially. Mobile is expected to be down in the mid-teens percent range year over year and up slightly on a sequential basis. And finally, Communication Infrastructure and Other is expected to be up over 50% year over year and up low single digits sequentially. And now I’d like to pass the call to Bill for a review of our financial performance.
William (Bill) Betz (Chief Financial Officer)
Thank you, Rafael, and good afternoon to everyone on today’s call. As Rafael has already covered the revenue drivers, I will turn to the financial highlights. Q3 was another strong quarter with record revenue, operating margin, and non-GAAP EPS. Revenue grew 19% year over year and 8% sequentially to 3.79 billion. The growth was led by our company-specific growth drivers across software-defined vehicles, electrification, connectivity, radar, and industrial edge processing, as well as continued momentum in our emerging data center business.
Non-GAAP gross margin was 58.6%, up 160 basis points year on year. Our gross margin performance reflects improved factory utilization and solid fall-through on higher revenues. Non-GAAP operating expenses were $810 million, or 21.4% of revenue, reflecting strong operating leverage. This led to a non-GAAP operating margin of 37.1%, up 330 basis points year on year. Below the line, non-GAAP interest expense was $85 million, tax rate was steady at 18%, non-controlling interest was $15 million, and results from our joint venture equity-accounted investees were a $4 million loss.
This resulted in non-GAAP earnings per share of $4.20, increasing 35% year over year, or about two times our revenue growth rate. Turning now to the balance sheet, cash flow, and capital returns, our balance sheet remains strong, providing flexibility to invest in our strategic growth priorities, advance our hybrid manufacturing model, and return capital to shareholders. We ended Q3 with $3.94 billion of cash and $10.98 billion of debt, resulting in a net leverage ratio of 1.3 times. Days of inventory declined to 148 days from 156 days in Q2, including approximately 13 days of pre-built inventory related to our planned front-end factory consolidation.
We expect to have approximately 15 days of pre-built inventory at the end of 2026. For the quarter, operating cash flow was strong at $1.26 billion and net CapEx was $50 million, resulting in free cash flow of $1.21 billion, or approximately 32% of revenue. During Q3, we invested $218 million between equity and access fees in VSMC and ESMC. A detailed breakdown of our joint venture investments is available in our historical financial model on our investor relations website.
We expect to be over 75% complete with JV investments by year end. On a trailing 12-month basis, free cash flow was approximately $3.5 billion, or 25% of revenue, in line with our long-term target. Over that same period, we returned $1.7 billion to shareholders through dividends and share repurchases. Most recently, shareholder returns have been below our long-term target as we prioritize deleveraging, strategic acquisitions, and investments in our manufacturing joint ventures to support future growth and gross margin expansion.
Moving forward, we plan to accelerate our buyback activity in Q4 and 2027. Consistent with that commitment, the board authorized a new $5 billion share repurchase program, bringing total authorization to $6.3 billion, representing around 10% of our current market capitalization. Overall, we remain committed to returning 100% of our excess free cash flow to shareholders over the long term. Now turning to our expectations for Q4, we expect revenue of $3.85 billion, plus or minus $100 million, which is up 15% year on year, or up 18% adjusted for the sale of our center’s business, and up 2% sequentially. We expect non-GAAP gross margin of 59%, plus or minus 50 basis points, driven by higher revenue and manufacturing utilizations. We expect operating expenses of $830 million, plus or minus $10 million. The increase sequentially is primarily driven by our new product payouts to support our trusted physical AI strategy.
At the midpoint, this results in a non-GAAP operating margin of 37.5%. Below the line, we expect non-GAAP financial expense to be $79 million and our non-GAAP tax rate to be approximately 17.5%. We expect non-controlling interest to be $14 million and $5 million of losses in our joint venture equity-accounted investees. This implies Q4 non-GAAP earnings per share of $4.36 at the midpoint, an increase of 30% year over year, demonstrating continued earnings power.
Turning to Q4 uses of cash, we expect capital expenditures to be approximately 3% of revenue and equity payments to VSMC of $86 million and SMC of $60 million. Looking ahead into 2027 and for your modeling considerations, we will continue to drive double-digit growth in revenue. We plan to expand our gross margins to 60% during 2027. We expect operating expenses for the first half to be around 23% of revenue, driven by new product introductions, and second half to be below 23%. Assume a non-GAAP annual effective tax rate of 17.5%. We now expect joint venture investee losses to be around about $80 million for the full year and suggest using about a $10 million loss for Q1 and a $20 million loss for Q2.
Capital expenditures to be around 5% as we plan to bring more back-end capacity online in 2027 and build out our new assembly and test facility in Malaysia to be ready for production in 2028. Lastly, we will continue to generate healthy levels of cash and we plan to accelerate capital returns to our owners. Next, to better understand our business, we plan to realign our end market revenues beginning in 2027. In addition, we plan to host our Investor Day on March 3rd in Boston, where we will update our strategic and long-term financial model. And finally, I’d like to thank Jeff Palmer, who has served us as the Head of Investor Relations for the past 16 years, and thank him for his many contributions to NXP. I will now turn the call back to the operator for your questions.
OPERATOR
Thank you. If you would like to ask a question, please press star 11 on your telephone. You’ll hear the automated message advising you that your hand has been raised. If you would like to remove yourself from the queue, please press star 11 again. We also ask that you please wait for your name and company to be announced before proceeding with your question. And please keep your questions to one question and one follow-up. One moment while we compile the Q&A roster.
Our first question will be coming from the line of Jim Schneider of Goldman Sachs. Please go.
Jim Schneider (Analyst)
Good afternoon. Thanks for taking my question. I was wondering if you’d maybe talk a little bit about the customer behavior you’re seeing across your OEM customers. Specifically, are you seeing signs of them restocking at all in a more aggressive way than they had in past quarters, and maybe give us a sense of the customer commentary in terms of what’s happening with lead times and how they’re responding to that.
Rafael Sotomayor (Executive Vice President and General Manager, Connectivity & Security and Edge Processing)
Yeah. So Jim, thank you for the question. I assume this is an auto question. So in the context of auto, no, we’re not seeing anything noticeable that would suggest a broad-based restocking. Now, from a visibility perspective, I think visibility has greatly improved and so lead times have extended, but also has resulted in better visibility. The other kind of, I would say, the other trend in the market in automotive is OEMs are getting more involved in providing that guidance directly to companies like us.
And so there’s a lot more intimacy from a customer relationship perspective with respect to their needs throughout the year. So I feel like we have good visibility in what that supply is going to be required and the type of products we’re going to need to deploy.
Jim Schneider (Analyst)
Then as a follow-up, I just wanted to ask, it’s very helpful to see the solid guidance for 2027. Can you maybe give us a sense about, by end market, some of your places where you have greatest underlying confidence in outperforming that overall double-digit outlook you provided and other areas where you see there’s a little bit more uncertainty? Thank you.
Rafael Sotomayor (Executive Vice President and General Manager, Connectivity & Security and Edge Processing)
Well, I think what is working in 2026 that will continue in 2027? What your question is, what’s driving our confidence in the growth in low digits in 2027, and continues to be the areas that we’re focused on. SDV adoption continues; as a matter of fact, it’s just barely starting and we see several ramps, especially the second half of 2027. We have very important ramps in our SDV portfolio. The same thing goes with industrial and IoT. The adoption of AI continues to add content gains in auto and IoT, and it’s quite strong.
And the deployment that we’re barely starting on the control plane and data center continues to play out for us.
Jim Schneider (Analyst)
Thank you.
Mike Lucarella (Senior Vice President, Investor Relations)
Thank you, Jim.
OPERATOR
Thank you. One moment for the next question. Our next question will be coming from the line of Thomas O’. Malley. Your line is open.
Thomas O’. Malley (Analyst)
Hey guys, thanks for taking my question. Maybe this is for Bill. When I look at December guidance, I think you guys are guiding to 59% gross margins. It’s a pretty big step-up in incrementals from September. I think it’s 85% quarter over quarter, close to 70% year over year. Obviously volume is some component of that, but maybe walk through some other things that are driving that. Just, that’s a big step-up from what you’ve seen over the last three, four quarters.
William (Bill) Betz (Chief Financial Officer)
Absolutely, Thomas. A couple points on gross margin. First, they’re performing to expectations and, as we shared, they continue to expand into Q4. And I would say our gross margin improvements are very structural in nature. They’re driven by a combination of the higher revenues, the higher utilizations—as I mentioned, last I gave guidance running in the mid-80s; they are running in the mid-80s now. We expect them to continue in Q4 in the mid-80s, and we’re actually, in 2027, expect them to run in the high-80s.
Clearly product mix plays a role, and then obviously improved operational efficiencies. I would also say our gross margins have nothing to do with the price increases that we’re seeing at the moment, because all we’re doing with the price increases is offsetting the higher inflationary costs that we’re passing on to our customers. And then I think overall we expect gross margins to continue to expand, achieving that 60% during 2027. And furthermore, I think they’ll expand above 60% in 2028 with the ramp of our VSMC joint venture that we shared about in the past.
Mike Lucarella (Senior Vice President, Investor Relations)
Do you have a follow-up?
Thomas O’. Malley (Analyst)
I do. Thanks, Mike. Just on seasonality, so I’m sure everyone will have slightly different numbers. But by my numbers, Auto was a little ahead of seasonal in September. And then your guide is kind of low single digits sequentially. My December traditional seasonality is close to like mid to high single digits. Any reason why the delta there? Is it because of some of the stronger quarters that you’ve got in June, September? Are you calling out anything in particular that’s worth noting?
Thank you.
Rafael Sotomayor (Executive Vice President and General Manager, Connectivity & Security and Edge Processing)
I think you’re talking about Auto specifically, is that correct? If that’s so, specifically in December, you’re right. Auto has been quite strong this year and above seasonal, I would say almost every quarter this year. Looking at 4Q, I’m not sure. There’s a lot of range on seasonality, a lot of different years. People use three, five, seven, 10 years. But I think seasonal in auto is probably flat to up slightly. So I think that 2% growth is above seasonality.
That’s how I would view that. So I would say the good, strong trends continue in auto. So that’s a straightforward answer on the automotive market specifically. Go to the next question, please.
OPERATOR
One moment. And our next question is going to be coming from the line of Joshua Buchalter of TD Cowan. Please go ahead.
Joshua Buchalter (Analyst)
Hey guys, thank you for taking my question. Maybe following up on Tom’s one, any help you can give us on what you’re seeing in the overall pricing environment now and then as we look into 2027. I know in some prior years there’s been sort of a step down in gross margins due to annual pricing resetting. Should we be expecting a step down in 1Q again, looking at 2027 this year? Thank you.
William (Bill) Betz (Chief Financial Officer)
Yeah, let me start off with the pricing. You know, going into 2026 we expected a low single-digit price decline. Now, as we plan to exit 2026, we expect pricing to be neutral for the year for ’26. Clearly for 2027 we continue to see higher input costs in many areas and unfortunately we will pass those to our customers to ensure our gross margins are not impacted. I think we expect revenue to also be supported by the mix of our products, as Rafael shared, especially in the SDV portfolio with our new solutions that drive higher average selling prices in 2027 because of the portfolio where SDVs carry two or three times more value than our traditional portfolio. But in the short term, I would say pricing is doing what we expected. We’re passing them along neutral. I’d say Q3 maybe plus 1%. 1% was pricing in Q3, another 1% in Q4.
So it keeps it neutral for the whole year for 2026.
Rafael Sotomayor (Executive Vice President and General Manager, Connectivity & Security and Edge Processing)
Josh, let me add a high/low perspective here and put aside the variable input cost for a second here. The way we see this is we see a structural shift in the industry with respect to pricing. Unlike the past decade, when annual price erosion was common, today I think semiconductors account for a larger share of the value and the innovation of the systems. And I think that creates opportunities for much better value capture. This has nothing to do with input costs.
It’s just the shift in value with respect to semiconductors and ultimately on the systems. Sure, competitive pressures will always remain, but I think what we expect is the historical pattern of annual price erosion to actually moderate over time. And I think it’s going to make pricing less of a headwind year over year.
Joshua Buchalter (Analyst)
Thank you for all the color there. As a follow-up, you mentioned that you’re not seeing any signs of widespread restocking. It seems like there’s been pretty mixed commentary from the industry over the last couple quarters about whether restocking is going on or not. How much of, I guess, what you’re seeing is proactive conservatism on your part similar to how you handled the previous cycle? Or is there anything different about your portfolio or products or exposure that would give you a different cadence of restocking than some of your peers that are saying that they’re seeing it already?
Thank you.
Rafael Sotomayor (Executive Vice President and General Manager, Connectivity & Security and Edge Processing)
Josh, we’re not seeing it, right? I can only tell you what we see. We’re just not seeing it. And the fact that our core products are at the core of the sub-… main vehicle, I don’t see how we—if it was restocking—we would see it. What it has been are conversations by some OEMs to be able to actually have some safety stock put in place given the tightness in the supply right now, but it has yet to occur. I acknowledge some of the headlines by some tier-1 OEMs, but we have not seen the restocking.
And given the fact that our products are core to the core function of the vehicle, if there were any restocking we would see it.
William (Bill) Betz (Chief Financial Officer)
Yeah, maybe just to add, remember for automotive distribution we service that by about 40% and we have a really good control on that.
Joshua Buchalter (Analyst)
Appreciate it.
Mike Lucarella (Senior Vice President, Investor Relations)
Go to the next question, please.
OPERATOR
One moment for the next question, please. And the next question is coming from the line of Blaine Curtis of Jefferies. Your line is open.
Blaine Curtis (Analyst)
Hey guys, thanks for my questions. I just want to start on the auto segment. Obviously you have a lot of structural drivers. I was curious, on the electrification side, what are you seeing? I think it’s been a bit curious with gas prices. Maybe start with that.
William (Bill) Betz (Chief Financial Officer)
Yeah, this is Bill. Hey Blaine. We are seeing strength across all our company-specific growth drivers in automotive and last year electrification was going through inventory digestion and our new products were delayed a bit. But those have performed quite well this year and are catching up, and I would say growing above that growth rate that we provided during investor day, specifically electrification. If I step back and look at total SAAR, total SAAR is slightly down, but the penetration of xEVs, including hybrids—combine that—that’s actually growing. I mean, I think total production this year is forecasted to be about 47.5% roughly of xEVs, and next year it’s expected to cross the 50% mark, about 55%. So the 47% this year compared to last year was 41%, growing 12%. The forecast is to grow another 15% of that penetration rate. So from a macro standpoint we do see xEVs continuing to grow globally and, as you know, it carries two to three times more semi content in the industry compared to a regular ICE vehicle.
Blaine Curtis (Analyst)
Thanks. And then Bill, don’t kill me for this, but I wanted to ask you any early thoughts on March, either kind of by segment or overall?
William (Bill) Betz (Chief Financial Officer)
Oh, for the first quarter you’re saying? Sure, yeah. So I knew someone would ask the question, Blaine. I thought it’d be Vivek, but it was you—Blaine, you were ahead of the queue. So again, this is not guidance. There’s a wide range on these expectations. I’ll give my normal caveats. But typically 1Q for us is down about mid-single digits. What drives that mid-single-digit sequential decline is Mobile is down mid-teens sequentially. Then Automotive, Industrial & IoT, and Communication Infrastructure & Other is down kind of low to mid-single digits—call it 3, 4, 5% sequentially.
Again, this is not guidance, this is just overall trends over the past five, ten years in our business.
Blaine Curtis (Analyst)
Thanks a lot.
OPERATOR
Thank you. One moment for the next question. Our next question is coming from the line of Harlan Sur of JPMorgan. Please go ahead.
Harlan Sur (Analyst)
Good afternoon, thanks for taking my question and thanks for the near-term trend you’re seeing in your auto franchise. Obviously you guys have many company-specific drivers in your other segments that are firing—edge AI, physical AI, data center, to name a few, software. If you look across your overall business, was book-to-bill greater than 1 in Q3? And if so, did backlog grow across all your segments and did overall customer escalations continue to rise just given the tight supply environment?
William (Bill) Betz (Chief Financial Officer)
Yeah, let me take that question. I would just say all signals continue to improve from 90 days ago. So the book-to-bill remained well above 1 across all end markets and regions. Our backlog continues to grow in dollars and extend further into 2027. Lead times, I would say, continue to extend. Just to give you a feel, I would say 80% of our lead times are above the 16 weeks compared to a year ago when it was only 25%, and customer escalations continue to increase and they’re up sizable quarter over quarter.
Mike Lucarella (Senior Vice President, Investor Relations)
Do you have a follow-up, Harlan?
Harlan Sur (Analyst)
I appreciate it. Yeah. On the supply side, on the 300 millimeter expansion initiatives primarily driven through your ESMC and VSMC 300 millimeter JVs, I believe. VSMC, I think that’s targeted for analog, power, mixed-signal products. I think VSMC just started risk production qualification with production shipments targeted for the first half of next year. And if I recall ESMC for your MCU and embedded products, those were targeted for production sort of end of next year.
Can you guys just give us an update on these initiatives in a tight supply environment? Seems like the 300 millimeter programs are layering in just like right at the perfect time.
William (Bill) Betz (Chief Financial Officer)
Yeah, absolutely. As you all know, it’s happening both in the front end and the back end. So front end, recently we just celebrated the opening of ESMC and that is ahead of schedule. And the first thing that’s going to ramp is actually our partner side, which is ramping the interposers. On our side we’re in the process of qualifying our first set of technologies, which we will start that material in the first half and expect outs in the second half.
So we do see some outs coming ahead of schedule. But really the big bulk where we see a lot of volume pick-up is in 2028 for us, obviously also helping to expand our gross margins. As you know, you get the two benefits from that. You get the benefit from moving 200 millimeters to 300, but you also get a benefit of not paying that margin stacking like you buy from an outside foundry partner. Related to the back end, as I mentioned in my prepared remarks, we are increasing our CapEx to about 5% versus, I would say, we’ve been spending percent this year. And there’s two factors there. One is we are adding capacity into Q1 and Q2 to support our revenue in the end, as we have a little space, and we’re doing that and so that will help drive the double-digit growth.
But more importantly, we’re building out and getting production-ready a whole new facility in KL that we broke ground in August and that will be up and running in the beginning of 2028 and that will also service a lot of revenue and also help support our gross margin expansion as well.
Harlan Sur (Analyst)
Great color. Thanks, Bill.
OPERATOR
Thank you. One moment for the next question. Our next question is coming from the line of Matthew Prisco of Cantor. Please go ahead.
Matthew Prisco (Analyst)
Hey guys, thanks for taking the questions. I guess first on the SDV side, with these increased engagements, can you kind of give more color on what’s driving the wins today and how do we think about the ramp timing and potential inflection given those wins? Is that more of a ’27, ’28 story? And any ancillary opportunities you’re seeing? That Volkswagen partnership seems centered on the MCU side, but obviously you’re selling these systems with other components as well.
So any opportunities beyond that core? Thanks.
Rafael Sotomayor (Executive Vice President and General Manager, Connectivity & Security and Edge Processing)
Yes. And so what is driving some of the wins is the massive adoption that we’ve been discussing about software-defined vehicle. Right. And the whole concept is just revolutionary. It’s transforming the way a vehicle is made. And the two architectures are the zonal architecture and the central compute architecture—and I’m simplifying it a little bit. The Volkswagen press announcement was centered around their zonal architecture, which uses our high-performance S32K5.
Having said that, we also have plenty of engagements on our S32N central computer architecture as well. I would say that we already have design wins in North America, we have a recently designed win in South Pacific and Asia, and we have several POCs in China and in Europe. The early ramps of the central compute S32N are likely to happen in late 2027 and the full volume ramps for both the K5 and the S32N, we should expect that in 20. Quite bullish what is happening there because it’s not only content gain that is happening through SDV, but these design wins—and as we provide more and more transparency between now and the next year—it will show that these content gains compound with share gain.
Mike Lucarella (Senior Vice President, Investor Relations)
Do you have a follow-up?
Matthew Prisco (Analyst)
And then maybe just on physical AI. Quick last call, I think you started talking about a pipeline you were seeing there and talked about your system-level approach. So maybe update on how you’re thinking about that physical AI opportunity—kind of sizing that into the future. Maybe a percentage of processor revenues as you think about ’27 and beyond, like how quickly this market can grow. Thanks.
Rafael Sotomayor (Executive Vice President and General Manager, Connectivity & Security and Edge Processing)
Well, that is the core of what we’re discussing—the physical AI. AI is the main driver for content gain in Industrial and IoT. I think we provided last call that AI-enabled processors without the discrete NPU was approximating 15% of total processor revenue and we expect that—doubling from a year ago. We expect that to continue to grow very strongly into 2027. The MPU, the discrete NPU ARA—we’re now getting significant traction with different POCs both in Industrial, IoT and Automotive.
And we now expect early production in 2028.
Mike Lucarella (Senior Vice President, Investor Relations)
Thank you, Matt. Go next caller, please.
OPERATOR
Thank you. One moment please. And our next question is coming from the line of Vivek Arya of Bank of America Securities. Please go ahead.
Vivek Arya (Analyst)
Thanks for taking my question, Rafael. One of the pushbacks against NXP has been that the company doesn’t have enough exposure to the data center. And I think you mentioned this year’s target of $500 million-plus. That’s like low single digit — even the billion dollars would be less than 10% versus many of your peers that have anywhere between 10% to 20% data center exposure. So the question is, is data center not an imperative for NXP? And if it is, then do you think you can go after it organically, or because you’re suggesting that the use of cash will be more towards buybacks rather than something else?
So just strategically, how do you think about the data center business and how important is it, and how big of an exposure should NXP have for that end market?
Rafael Sotomayor (Executive Vice President and General Manager, Connectivity & Security and Edge Processing)
Yeah, maybe, Vivek, thanks for the question. Maybe summarize it a little bit. Right. So today we provided an outlook that said data center was going to be about $500 million, and we just said that we’re going to probably close the year exceeding that number. And now with the new products that we’re developing and the engagements that we have, we now expect that revenue to go to a billion in 2028. Now, the thesis and the answer to the question — the thesis of our playbook in the control plane — is that the data plane is going up in performance and, therefore, the control plane also needs more performance. And that means not just performance in processing, but more networking, more security, more safety. And that’s where the core competency of NXP is. And so, because there’s zero tolerance for downtime, reliable, industrial-grade control processors are required.
So the way you gotta look at it as a portfolio is tackle rack switches, and that’s starting to actually kind of roll, and then controllers and processors, board management — whether our secure elements, our processors — and also interfaces. We’re developing right now more and more products to be able to expand the TAM. We are using the core competence of NXP to address the control plane in data center. I think the growth that we’re going to see between $500 million and $1 billion in the next two years with new ramps and products is quite impressive.
William (Bill) Betz (Chief Financial Officer)
And, Vivek, I wouldn’t read into the buyback saying we’re not investing in data centers. We’re generating, as you can see, a lot of cash, and we are going to invest in the data center. And you’ll probably hear more about that during our Investor Day in March.
Rafael Sotomayor (Executive Vice President and General Manager, Connectivity & Security and Edge Processing)
I’ll add one thing. I think you should look at it — and I think it’s a very negative question you asked, in my opinion. If you look at it, I think data center has become another leg of the stool of our growth story. We have auto as a core franchise. We saw SDV and that’s winning. That’s fantastic. We have data centers, a new opportunity, emerging opportunity. I outlined some things there that we’re doing to drive that growth faster in the future.
The industrial IoT market and physical AI is another opportunity. So we really have three legs to this growth stool for NXP. We’re not hooked on one thing. We have multiple growth drivers, which is a net positive for the company.
Vivek Arya (Analyst)
And for my follow-up on your comms infrastructure and other, what is the right way to think about growth there as we look into next year? Because this year it was, I think, the fastest-growing segment or has been the fastest-growing segment after declining for the last two years. So what are kind of the puts and takes, Rafael, as we look at that specific segment for next year? Thank you.
Rafael Sotomayor (Executive Vice President and General Manager, Connectivity & Security and Edge Processing)
Yeah, let me take you and just remind you how that segment is broken up. And clearly, as I mentioned in my prepared remarks, we are going to realign the segments starting in 2027 so we are more transparent in how to understand this business and the right components. Exiting 2025, roughly 50% was secure card business, 25% was digital networking (DN) and 25% was RF power. As we look at the end of 2026 — obviously, and we shared this — the data center, or half of it, is coming from DN.
So expect the comms and infra for DN to be above 30%, and then we’ve exited next-generation RF power-type of business and expect that to be below 20% as we exit 2026. And I think you’ll see that continued trend along with nice growth continuing in our secure card business. We’re going to break that out and make it much more transparent in the future in our Q4 earnings release.
OPERATOR
Thank you, Vivek. Can we go to our last question, please? Thank you. One moment, please. And the next question will be coming from the line of Francois Bouvignies of UBS. Please go ahead.
Francois Bouvignies (Analyst)
Thank you very much. So I have two quick questions. Maybe a follow-up on the data center part. I mean, you mentioned $1 billion for 2028 from the $500 million this year. I mean, if we look at your peers — and I mean most of them are looking at doubling their revenues into next year already. When you look at the gigawatt additions in different data, you can see that going to double in ’27 maybe potentially versus ’26. So all the data suggests that the data center market should double almost next year already.
So I was just wondering, for your $1 billion on ’28, that would suggest a slower growth in ’27. Is it you being conservative here, or can you reach $1 billion as early as next year, or should we be aware about any drag into next year?
Rafael Sotomayor (Executive Vice President and General Manager, Connectivity & Security and Edge Processing)
First of all, I think the first thing we look at in our data center business is that we are deploying — we’re not in discretes, we’re not power. We are in the control plane. Anything that is an MCU, a microprocessor in the rack, we consider that our market. We started this business almost this year. And so right now the growth relies on product ramps, the growth relies on acceptance and design, and also relies on customers deploying software into our products.
And so it’s a different type of portfolio. I believe that it’s even more sticky than some of the products and some of the companies that you were mentioning. So we feel quite excited about the ramp of business in data centers because these are processors — these are core competencies NXP has in networking and security and in processors. And I think this is going to be something that NXP is going to do quite well.
Francois Bouvignies (Analyst)
Great, thank you, Rafael. And maybe my follow-up would be on the pricing. I mean, you mentioned bill input cost, the driver of pricing. Rafael, you mentioned the mix as well — impact that will impact pricing into next year. One other area of pricing could be supply-demand environment. And many people are starting to talk about the tightness, and that could lead to a COVID-like environment. Now, when I look at the utilization rate of peers — I mean Renesas at 60%, TI has new fabs ramping up, Infineon has a new fab ramping up, you have a new fab ramping up — and you didn’t mention the tightness pricing.
Is it fair to say that it’s not as tight as people think? Maybe you have a lot of capacity coming. Maybe it’s a timing issue, it’s a lead-times issue, but it’s temporary, not really fundamental like COVID was. Is that fair to say?
William (Bill) Betz (Chief Financial Officer)
Yeah, let me take that question, Francois. Obviously, it’s very well known that the back-end capacity today is very, very tight. We do see into the future that the front end gets tight, and the folks that are having capacity come online — like ourselves, like some of the others — will help that, obviously. But we do see capacity, and that’s the next phase of any supply and demand imbalance. We see that happening sometime next year. But we’re very fortunate of the investments that we have placed, both in the back end and the front end, that we’ll be able to service it.
Right now, the pricing is only related to inflationary costs. Could there be pricing related to demand and supply imbalances like COVID, like we saw? Absolutely. But we’ll wait and see how that plays out.
Rafael Sotomayor (Executive Vice President and General Manager, Connectivity & Security and Edge Processing)
First of all, the demand environment is very different. Right. You mentioned COVID. But the demand environment that is happening now is real — it’s driven by transformation: SDVs’ transformation, physical AI transformation, data capex investment transformation. So it’s a much different environment. I think that the demand is going to fuel value creation, value capture, and potentially pricing power.
Francois Bouvignies (Analyst)
Great. Thank you very much.
OPERATOR
Thank you. And that does conclude today’s Q&A session. I would like to turn the call over to Rafael for closing remarks. Please go ahead.
Rafael Sotomayor (Executive Vice President and General Manager, Connectivity & Security and Edge Processing)
Thank you, everyone. I want to leave you with three takeaways. First, our growth is structural: software-defined vehicles, the intelligent industrial edge, and data center are multiyear drivers, and wins like RV tech show we’re positioned for the next leg of growth. Second, this growth is broad-based with every region growing, and Automotive, Industrial and IoT, and comms and infrastructure all growing double digits year over year. And last, our growth results in robust free cash flow, enabling us to invest in the business and return cash to shareholders. As disclosed today, we have a new $5 billion repurchase authorization, positioning us to accelerate our buybacks beginning in Q4. Thank you all for joining us today.
OPERATOR
Thank you for joining us today. You may now disconnect. This concludes today’s.
Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.
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