NXP Semiconductors NV said on Monday it forecast third-quarter revenue below analysts' estimates as it faces sluggish demand from auto customers and rising geopolitical risks, sending its shares down about 8% in after-hours trading. The company posted its biggest drop in second-quarter revenue in four years and its biggest drop in automotive sales in more than three years, according to London Stock Exchange data.

01 Company reports from NXP

The company reported earnings of $3.20 per share before certain costs such as stock compensation, while revenue for the quarter ended June 30 fell 5% from a year earlier to $3.13 billion. Wall Street analysts had expected earnings of $3.20 on sales just under $3.12 billion.

Despite the strong performance, the Dutch chipmaker's guidance for the current quarter failed to excite investors. Looking ahead to the third quarter, the company said it expects earnings per share between $3.21 and $3.63, with the midpoint below Wall Street's target of $3.56.

Likewise, NXP said it expects third-quarter revenue of between $3.15 billion and $3.35 billion, below the Wall Street consensus of $3.35 billion.

02 NXP CEO says

NXP shares had been on a tear ahead of the earnings report, rising more than 5% in the regular session. However, those gains were quickly dissipated, with shares down more than 8% in early after-hours trading.

NXP President and CEO Kurt Sievers said the company's guidance showed it had successfully navigated a "cyclical trough" in its business. "We expect to return to sequential growth," he insisted. "We will continue to manage the things we can control to position NXP to deliver strong profitability and earnings in a challenging demand environment."

NXP, unlike most other chipmakers, has not benefited much from booming demand for artificial intelligence computer chips. The company sells a variety of processors to customers in a variety of industries, but its largest segment is the automotive industry, where its chips power everything from car infotainment systems to tire pressure monitoring systems and car-to-car communications. Its other major business segments include chips for identification, wired and wireless infrastructure, lighting, consumer, mobile, and computing applications.

The automotive segment had revenue of $1.73 billion, down 7% from the previous quarter and down 4% from the previous quarter. On the other hand, the industrial and IoT segment had sales of $616 million, up 7% year-on-year and up 7% from the previous quarter. The mobile segment achieved sales of $345 million, up 21% from the same period last year and up 1% from the previous quarter; the communications, infrastructure and other segments achieved revenue of $438 million, down 10% from the same period last year and down 23% from the previous quarter.

03 Future inspections

Seeking Alpha analyst Stephen Simpson recently expressed concerns about the health of NXP's major end markets for the remainder of fiscal 2024.

"Automotive demand is clearly slowing, with the S&P 500 recently lowering its auto production forecast to negative 1%, and electric vehicle penetration is lower than expected," he said last month. "NXP can make up for this with content and platform advantages and well-managed inventory, but it is an area of concern."

Meanwhile, chipmakers are also assessing the impact of China's tense trade relations with the United States and the European Union.

As export restrictions tighten, Chinese companies have been investing heavily to expand production of older chips, known as legacy chips, Reuters reported in early July. Increased market competition could hurt NXP's sales to China - the largest contributor to its revenue in 2023, accounting for about 33% of the annual total.

NXP has invested heavily to diversify its manufacturing base outside of China, pouring $1.6 billion into a 40% stake in a joint venture with TSMC to make chips in Singapore.

"We will continue to manage the things we can control to position NXP to deliver strong profitability and earnings in a challenging demand environment," NXP CEO Kurt Sievers said in the statement.

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