NXP moves to uncancellable chip contracts

April 28, 2021 // By Nick Flaherty
NXP moves to uncancellable chip contracts
NXP is looking to avoid future supply problems with long term, uncancellable chip supply contracts

NXP has bounced back from the Covid-19 pandemic and snow closures of two fabs in Texas with long term contracts from customers that can’t be cancelled. This is a key step in avoiding the peaks and troughs of the semiconductor cycle.

The latest results Q1 saw a 27 percent boost over this time last year at the start of the pandemic, and the recent fab closures were all covered by insurance says the company.   

“Our results were better than the midpoint of our guidance, with the contribution from the industrial and the communication infrastructure end markets, both stronger than planned,” said Kurt Sievers, CEO.

“At the same time, trends in the Mobile and Auto markets were generally in line with our expectations, with Automotive being just slightly impacted by the severe winter storms in Texas. Taken together, NXP delivered quarter one revenue of $2.57 billion, an increase of 27 percent year-over-year and $17m above the midpoint of our guidance.”

This comes after the automotive slowdown hit NXP's full year figures for 2020 and led to a shortage of key automotive chips.

“We were faced with the challenge to balance a very accelerated rate of customer orders versus a very tight, if not sold out wafer supply situation,” he said. “While our foundry partners have attempted to address our needs, it really has not been enough, and we were supply constrained in quarter one. This supply trend will continue through quarter two. And our current expectation is we will face a tight supply environment for at least the remainder of 2021.”

“Going forward, we see our overall revenue in the second half of 2021 being stronger than the first half of this year. And against these trends, we continue to have low channel and low on-hand inventory, which we do not anticipate rebuilding this year. Our customers are responding by placing long-dated, non-cancellable and non-returnable order requests. And we are making long-term strategic supply commitments to our partners in order to assure future supply,” he said.

“Also, totally ruling out double ordering and any of these possible fears of piling inventories at any place. So, in our key segments and I can say that very explicitly for automotive, for industrial, but also for mobile, we do know and we do see that what we ship out is immediately being built into product and no inventory is being built in any place,” he said.

It emerged that the fab closures in Texas are covered by insurance.

“Our operations team had started closing down the factories before the Texas authorities almost no notice cut the power. So we didn’t have any fundamental damage to the factory but obviously [there were issues with] various water pipes and that kind of thing with the cold,” said Peter Kelly, CFO. “We have insurance to essentially cover everything. So the only real impact to our cost was the deductible, which is millions of dollars rather than tens of millions of dollars. So from a cost perspective, it hasn't really have any measurable impact.”

This leaves Sievers bullish on the prospects for NXP for the rest of the year.

“We are guiding quarter two revenue at $2.57bn, up about 40  percent versus the second quarter of 2020,” he said. “What has changed over the last three months is that the demand environment has, not only continued to be strong, but I would say we started to understand better and better some of the sustainable drivers of the demand environment”.

“Now, with us being 50  percent exposed to the automotive end market, this is clearly one place where we do understand now how content increases are contributing significantly to this very, very robust demand environment where we absolutely see no reason why that should ease off or should go away.

“I do believe that especially the electric vehicle production rates are increasing faster than anticipated, which I believe makes it a content richer story than probably the initial forecast would have suggested. So the penetration of electric drivetrains is going faster, especially now, this year, than it was forecasted," he said.

“If I look at our growth rates in our focused businesses like radar, ADAS, battery management, the digital clusters, then it becomes very obvious that those are really pulling ahead the growth.”

www.nxp.com

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