恩智浦 (NXPI) 2010 Q2 法說會逐字稿

Welcome to NXP Semiconductors second-quarter 2010 results, investors, and analysts conference call on Tuesday, August 17, 2010.

During the introduction by Mr. Richard Clemmer, CEO, and Karl-Henrik Sundstrom, CFO of NXP, all participants will be in a listen-only mode. After the introduction there will be an opportunity to ask questions. (Operator Instructions) Please note that this call will be recorded.

I will now hand the conference over to Mr. Richard Clemmer. Please go ahead, sir.

Thank you very much, operator. Welcome to NXP's second-quarter earnings conference call which is our first as a listed company. If you have not received a copy of our earnings release, you can obtain it at the NXP website. Also on the website you will see our updated investor presentation.

Before we begin I would like to call your attention to the comments regarding forward-looking statements on page two of that presentation. As in the past, the numbers referenced in our releases and on today's call are in US dollars unless otherwise specified. All figures we quote exclude the effects of purchase price accounting and incidental items and they are provided on a comparable basis unless stated otherwise.

One other note, since we just recently completed our initial public offering, today we are operating under some additional limitations regarding what we will be able to discuss on the call. Roadshow for NASDAQ -- for the NASDAQ listing that [Kali] and I completed earlier this month was an excellent opportunity to meet and share the exciting NXP story with investors and analysts around the world. I hope that many of you are on the call today and I want to personally thank you for your support.

As you recall, we issued preliminary Q2 numbers in preparation for the bond issuance and the initial public offering. Results contain in today's release are at the upper end of the ranges we have provided and it was indeed on another strong quarter for NXP thanks to a lot of hard work from the NXP team around the world as they continue to focus on meeting the needs of our customers.

I will give you a brief business overview and then turn the call over to Kali who will provide you more detail on our financial performance. Following that there will be an opportunity for questions and answers.

Let me now turn to our second-quarter financial performance. As the results indicate, we saw significant improvement in revenues across all of our business areas with an overall year-on-year comparable growth of 44% and some areas of the business reaching 80% annual growth. Adjusted gross profit improved from 30.7% in second quarter 2009 to 40.1% in second quarter 2010.

In the year-ago quarter we had a $24 million loss on adjusted operating profit. In the just completed quarter we achieved 15.4% adjusted operating margins as we continue to make very good progress towards our target of adjusted operating margins in the 21% to 26% range.

While the market rebound was a contributing factor that was clearly aided our growth, we are also seeing the results of refocusing the Company on high performance mixed signals solutions. Another major factor in our improved performance is the Redesign Program. Launched in September 2008 we have now reduced our cost base by an annualized $685 million through the end of second quarter of 2010.

We are now aligned with two major business segments -- High Performance Mixed Signal, or HPMS, and Standard Products -- and we are focused on four key macro high growth trends in electronics which includes energy efficiency, mobility and connected mobile devices, security, and healthcare. We believe that our focus on differentiated high performance mixed signal technologies and a world-class cost structure will allow NXP to achieve a growth rate about 40% faster than our served market of high performance mixed signal.

Our recent acceleration in design wins, which also includes new areas in India and China, increases our confidence as does the faster-than-expected process in executing on our Redesign Program. High performance mixed signal products combine analog and digital solutions. They are application optimized and allow our customers to truly differentiate their products giving them advantages in cost, features, and our time to market. For this reason they command higher margins.

Sales in high performance mixed signal in the second quarter were $719 million compared to $454 million in the second quarter of 2009, representing a comparable growth of 62%. Clearly, our increased focus on high performance mixed signal solutions is helping us gain market share.

Our automotive business was number one in iSuppli's automotive infotainment rating and it also achieved important new design wins with multiple customers, such as Audi that adopted our FlexRay technology for its new Audi A8 luxury saloon. And we won a complete DSP-based car audio platform in a major Korean car OEM.

In identification NFC continues to gain further traction, in particularly working with Lenovo to integrate the NFC into its notebooks. Separately NXP has agreed to ship 2 million MIFARE Plus chips a year for Turkey's national road toll scheme.

In terms of RFID, we have opened a second RFID application and system center to serve as a center for technical support in China and Asia to help further grow the RFID market beyond that being seen from areas such as North American retail implementation. We have expanded our ARM microcontroller footprint both with a global industrial client and with specialized market leaders in power supplies and automation.

We have penetrated the Japanese game console market with interface products and had major design wins for our JESD204A compliant high-speed data converters at one of our Tier 1 base station customers. Very encouraging design win. We also have increased NXP logic share with major US and Asian mobile phone and base station manufacturers.

Although not in Q2 specifically, another important milestone has been the acquisition of Jennic, a leading developer of low-power RF solutions for wireless applications in smart energy, environment, logistics, and consumer markets, which we announced on July 26. The acquisition will see Jennic's state-of-the-art portfolio of 802.15.4 and ZigBee low-power RF solutions integrated across a wide range of NXP's high performance mixed signal solution products.

Together this provides NXP with a comprehensive wireless semiconductor platform for emerging technologies including e-metering, smart lighting, building automation, asset tracking, and device remote controls. We continue to expect significant growth in demand for high performance mixed signal products and their deep technology expertise in applications, knowledge, track record, and increased investment will help us continue to win in this area.

We also grew revenues in our Standard Products business this quarter. Sales in the second quarter of 2010 were $289 million compared to $207 million in the second quarter of 2009 representing a comparable increase of 42%. NXP Standard Products team continues to provide solutions that differentiate our customers' designs in the areas of energy efficiency, integration, packaging, and protection.

Second-quarter highlights in this segment included the release of a new best-in-class 600 W transient voltage suppressor, the ramp up of our IP4284 protection device for USB 3.0 at major computing customers and the ramp up of the first 0201 protection diodes especially for portable applications. The combination of our high performance mixed signal technology supported by our broad Standard Products portfolio and our insight into specific applications will enable us to uniquely offer our customers the solutions they need to be successful.

Let me now turn to the outlook. We continued to experience healthy demand from our broad base of customers, although with a few isolated customers we are receiving recent mixed signals that indicate some slowing. Our overall demand bolstered by our increased design wins is still greater than our current capacity. Additional capacity to meet the demand is under way; however, this will have only limited impact in the third quarter.

Therefore, our expectation is that total comparable sales will be relatively flat on a sequential basis but will show an increase of 20% to 25% on a year-over-year basis. Primarily as a result of the continuing strong progress in our Redesign Program we expect adjusted income from operations to increase some 7% to 13% sequentially.

In looking further out in time, regardless of what the underlying market growth rate assumptions used, we believe that our emphasis on differentiated high performance mixed signal technology gives NXP the opportunity to grow revenues at significantly above the industry growth rates. And the significant improvements we have made in our capital structure over the last year give our customers and suppliers added confidence and give us additional flexibility to expand.

Thanks and now I would like to turn the call over to Kali to take you through some of the operational highlights and the financial details of our performance in the second quarter.

Thank you, Rick, and welcome again to all our investors, old and new. This is our first earnings announcement after our IPO and we encourage you to give us feedback on our process. Please provide your input to me, Alberta, or Larry through our general e-mail address, investor.relations@NXP.com.

To recap the IPO, on August 6 we successfully listed on the NASDAQ Global Select Market under the ticker symbol NXPI. The offering was 34 million shares and priced at $14. With gross proceeds of $476 million, it was one of the largest US IPOs this year.

The 34 million shares, which exclude the greenshoe, represent 14% of our total 249 million shares outstanding. The original private equity consortium retains its share which is now 69% of total, as did Philips whose share is now 17%. The IPO proceeds are being used to reduce debt and improve our capital structure. We currently have used some $100 million to purchase our outstanding bonds.

Additionally, you will recall that we reduced our debt by approximately $1.3 billion in various bond transactions in 2009 and in July of this year we completed a transaction to extend maturities of approximately $1 billion of debt to 2018. So overall we have made a lot of progress to strengthen our capital structure.

Let me now quickly summarize again how we reorganized our businesses and our reporting as of the first of January 2010 into four segments. We have two market-oriented business segments, high performance mixed signal and standard products, and two other segments, manufacturing operations and corporate and other, and I will run through each of them.

Please note all the figures I quote exclude the effects of purchase price accounting and incidental items and are provided on a comparable basis unless stated otherwise.

Firstly, let us look at the overall picture. Sales were $1.201 billion in the second quarter of 2010 compared to $903 million in the second quarter of 2009, a comparable increase of 43.6%. This represents a sequential 6.5% growth in comparable terms. At the same time we improved our adjusted income from operations over $200 million between Q2 of 2009 and 2010 and sequentially.

Our adjusted income from operations has increased over 28%. This achievement results primarily from the market recovery in our very successful Redesign Program. The sales increase, primarily driven by the economy recovery, was partly offset by divestments on a major portion of our former home segment to Trident on February 8, 2010. The sales of these divested home activities amounted to $109 million in the second quarter of 2009.

Sales in the second quarter 2010 were also affected unfavorably by currency movements of some $20 million compared to the second quarter of 2009.

Our adjusted income from operations improved to a profit of $185 million compared to a loss of $24 million in the corresponding period last year and a profit of $144 million in the first quarter of 2010. Adjusted gross margin improved considerably rising from 30.7% in Q2 2009 to 38.2% in Q1 2010 and 40.1% in this quarter, mainly a result of the increased sales and in particular the increased sales in high performance mixed signal, our highest margin segment. This gives us a gross profit of $482 million compared to $277 million in the second quarter of 2009.

Moving to OpEx, selling and general administrative expenses were $159 million or 13.2% of our sales in the second quarter of 2010 compared to $152 million, 13% of sales in the first quarter of 2010 and compared to $127 million or 14.1% of our sales in the second quarter of 2009. The increase in our selling expenses results from our strategy to better serve our customers with high performance mixed signal solutions whereby we have created application marketing tapes that focus on delivering solutions and system reference designs that leverage our broad product portfolio.

Our research and development expenses amounted to $140 million or 11.7% of our sales compared to $151 million or 13% of sales in the first quarter of 2010 and $174 million or 19.3% of our sales in the second quarter of 2009. The reduction of our research and development expenses was largely due to the impact of redesign, the divestiture of the DTV and set-top box business, and favorable currency effects compared to the second quarter of 2009. These reductions were partly offset by higher R&D investment in high performance mixed signal applications.

Net CapEx amounted to $53 million compared to $48 million the first quarter of 2010 and only $3 million in the second quarter of 2009. Cash at the end of the quarter stood at $842 million, slightly down from $870 million at the end of the first quarter where we were able to keep this amount more or less stable despite interest payments in the second quarter amounting to $110 million and unfavorable translation effects on liquid assets of approximately $50 million.

Cash flow from operating activities came in at $81 million positive in the second quarter of 2010 compared to minus $349 million in the year-ago quarter and minus $15 million in the first quarter of 2010.

Let us now turn to an update on our Redesign Program. We now estimate that $685 million in annualized cost savings has been achieved by the end of the second quarter 2010 and further savings are expected to be realized as a consequence of our ongoing projects. We estimate that the total cost of the accelerated and expanded Redesign Program to be no greater than $750 million by the end of 2011. Since the beginning of the Redesign Program in September 2008 and through the end of the second quarter 2010 $554 million of restructuring costs related to the Redesign Program have been paid, of which $35 million relates to the second quarter of 2010.

Now I will turn to the performance of the individual business segments. Our biggest segment, High Performance Mixed Signal, sales were $790 million compared to $454 million in the second quarter of 2009, a nominal increase of 58.4% and a comparable increase of 61.6%. The year-on-year nominal sales growth in automotive was 78%, in identification 89%, wireless infrastructure, lighting, and industrial applications 66%, and 23% in mobile, consumer, and computing business.

In the investor presentation that we have posted on our website you will find six quarters of revenue trends and data for these four areas.

The increase in sales compared to the second quarter of 2009 was mainly due to the economic as well as the market share gains driven by various design wins over the past quarters across a wide range of our business lines. This was supported by the fast ramp up of our production. The increase in sales was partly offset by unfavorable currency effects of $14 million compared to the second quarter of 2009.

We had an adjusted income from operations of $150 million in the second quarter of 2010 compared to $80 million in the second quarter of 2009. Sales in Standard Products were $289 million compared to $207 million in the second quarter of 2009, a nominal increase of 39.6% and a comparable increase of 42%. The increase in sales was due primarily to market recovery partly offset by unfavorable currency effects of $5 million compared to the second quarter of 2009.

We had an adjusted income from operations of $49 million in the second quarter 2010 compared to $9 million in the second quarter of 2009.

Sales in our manufacturing operations segment were $154 million compared to $91 million in the second quarter of 2009. The increase in sales was mainly due to the sales to Trident, which amounted to $80 million in the second quarter of 2010, compared to zero in the second quarter of 2009. Factory utilization rate based on wafer starts improved from 62% in the second quarter of 2009 to 96% in the second quarter of 2010.

Our corporate and other segment includes our new (inaudible) joint venture, NXP software, IP management, corporate R&D, and corporate overhead. Sales in the quarter of 2010 -- in the second quarter of 2010 were $39 million, which primarily relates to new (inaudible) software compared to $42 million in the second quarter of 2009.

We believe that NXP is well-positioned to generate value for our shareholders as we continue to execute on our high performance mixed signal growth strategy coupled with an operating leverage resulting from our Redesign Program and our long-term benchmarked tax rate of 12% to 14%.

Thank you and we would like now to open up to your questions.

Thank you, Kali. This is Albert Hollema; I will facilitate this Q&A session addressing the questions to Rick or Kali. Would you please limit yourself to one question? This will give more people the possibility to ask questions.

Any further questions can be asked us after a possible second call, second Q&A poll by the operator or may be addressed directly to me after the end of this call. With that I would like the operator to start the Q&A session.

(Operator Instructions) Jim Covello, Goldman Sachs.

Good morning, guys. Thanks so much for taking the question. I guess if I could just get a little bit more color, Rick, on the comment you made about --

Excuse me, Mr. Covello, your line is open.

Hello? Can you hear me?

Thank you, I will go with the next question. [Michael Baum], [BlueBay Asset Management].

In terms of your sort of buying back of debts going forward, obviously a lot of your securities are now trading very close to par. Are you more likely to focus on smoothing out your maturity schedule as opposed to looking to take out higher coupon debt or how should we think about that going forward?

Hi, Michael. Thank you for the question. This is Kali speaking. The way I would like to phrase it is that we are right now going through and we have been working with it where we are trying to maximize what we think is the most beneficial for the Company, which means that I don't really want to talk about what kind of tranches I am going to go after.

Okay. And then if I could just have one follow-up in terms of an admin question, can you just tell me what assets (inaudible) in EBITDA for the quarter, please?

$44 million.

Thank you very much.

Jim Covello, Goldman Sachs.

Can you guys hear me now?

We can, thank you.

Terrific, thank you. Rick, could you just give us a little more color on the comment you made about a couple of customers that had some mixed indications during the quarter, when that happened, what segment? And then just a little more color on the fact that you still can't meet all the demand even with some of those perturbations? Thanks.

Thanks, Jim. First off, I think it's important to point out that as we have talked about the success we have had with design wins and driving increased demand from the customer base is really a positive thing and one that we are very proud of the success in being able to accomplish that. Although it has caught us a little bit by surprise the level of some of those demands and so we have been able to at least authorize additional capital expansion to put that in place to be able to support those customers.

We have some of that that will be coming on late Q3, early Q4 with additional incremental capacity coming on through the first couple or three quarters of next year when we will have basically that investment in place. Clearly, we have stepped up our investment.

As you heard from the numbers that Kali talked about, we will spend roughly three times in 2010 what we spent in 2009 based on a desire to put in place sufficient capacity to be able to support our customers in the design wins that we have been successful at driving. So I think that is the key.

Relative to some of these recent events -- and, Jim, this is all really fresh news. We have heard some things out of some of our customer base in China, specifically in the area of PC, where there is some question about potentially a few orders being pushed around, etc. So that is kind of the first indication we have seen at all.

We continue to confirm that there is no inventory in the system, either with distribution or any of our key customers, but we have now seen a few selected customers that have pushed out a few orders primarily in the PC area. In fact, to try to better understand this after we finish the call tomorrow I am actually going to China to spend some time directly face to face with some of these customers just to have a better feel and understanding of their perception of what is going on.

I know back a couple of weeks ago when Mike Noonan, who runs sales and marketing for us, was in China he got very positive vibes on our customers based on the demand that they saw within China. But they were concerned about the demand from Europe and the US as they don't really understand what to expect from an overall economic viewpoint, just like we are not sure what to expect in the US and Europe from an overall economic viewpoint.

So I think what we see is clearly some of those initial signs that are an indication of caution that we are trying to better understand. But it really doesn't have any significant impact on our outlook for the next few quarters because again we haven't had sufficient capacity to be able to meet all of our customer requirements. So we will continue to work this and try to better understand it but as far as the outlook from an NXP viewpoint for Q3, it really doesn't have any significant impact at all, Jim.

Thanks, Rick. If I could just ask one follow-up on that, is your sense that some of what we have seen is some of this tablet market encroaching on some of the notebook market and that driving some of the noisiness in the notebook supply chain this quarter? Is your sense that that is what we could be seeing with those orders?

I think it could be that. I just don't really have enough of a baseline to say. I know that we have seen some of our customers, for example in the greenship for the power supply for notebook computers, actually push a few orders out which would be a clear indication of what you just said.

Great. Thank you so much.

Arun Seshadri, Credit Suisse.

Thanks for taking my questions. First, I just wanted to ask you a little bit more detail on your Q3 guidance. (multiple speakers) So I just wanted to understand on Q3 guidance, if you could give us a little bit more color by end market. What leads you to expect flattish Q3? Thanks.

Well, clearly the outlook relative to a flattish Q3 is driven by our capacity limitations and not really any specifics of markets. We continue to have more demand in a number of areas that we are able to satisfy from a customer viewpoint, balanced off by individual process flows of our manufacturing capacity.

We continue to work that and we will ramp up that capacity as soon as we can possibly bring it online. We are doing everything we can to maximize that. The NXP team around the world is ensuring that we get out every last single wafer and unit out of production to maximize our support for customers, but clearly the success of the design wins that we have seen in the ramp up has put us in a position where we can't supply all of the requirements associated with it.

But as we also talked about we do plan for a fairly significant improvement in our operating income even with that flat sequential revenue. So as we actually said, we would expect that our income from operations would improve by 7% to 13% for Q3 with a flat sequential revenue. But it's also important to understand that that annual growth in revenue still is 20% to 25%, which is a very healthy growth environment for the overall semiconductor industry.

Appreciate those comments. Just want to ask it maybe a little bit differently then. In which of your end markets would you think the demand is sort of more in line with your revenue growth? So meaning where are you most capacity constrained, which end markets? We have heard some comments from other guys that automotive is specifically relatively heavily capacity constrained.

But some more color on sort of capacity constraints by end markets is kind of what I was looking for.

Sure. So in the case of automotive we have been able to balance our supply and ensure that we haven't created any line shutdowns. We have clearly seen demand expectations and demand requirements that are higher than what we would have anticipated and that is driven by the results. If you look at our website in automotive, our sales for Q2 are actually up 78% from 2009 so a significant increase.

And so clearly from an industry of viewpoint continue to be somewhat constrained but at this point in time we have not created any major line shutdowns associated with it. Our ID business, for example, is up 88% in sales from Q2 of 2009 and we continue to have some constraints and have to continue to work our capacity to ensure that we can maximize the support for customers to the maximum extent possible.

Our wireless infrastructure, lighting, and industrial applications is up 66% from Q2 2009 and a very strong growth. Although we do have a few areas in this space where we have seen a couple of orders being pushed out, because this is where our greenship falls within that space as well as some of our power amplifier base station business. And then our mobile computer and consuming business grew 24%.

So when you look at it, clearly, we have areas where we don't have sufficient process capacity in place from a wafer fab viewpoint to be able to support all of the requirements of our customers. And it's about how we maximize the support for our customers through the prioritization and working that efficiently with our logistics team.

Appreciate the color there. And then finally just on capital expenditure, so the $240 million number that you have talked about as a total CapEx spend for 2010 is that a net CapEx or total CapEx number?

That is a net CapEx number.

Okay, great. Thank you, I will skip down the line.

[Jordan Torano], Brigade Capital.

Thanks, guys. Can you talk about the $170 million use of working capital in the quarter? What the major drivers are there, and if/when any of that is going to reverse or what your expectations are for sources or uses of cash from working capital going forward?

So when you refer to the use of working capital -- so it is -- when you have been building it up so it -- the working capital is basically all the usage in the growth phase up. And it's coming from payables, receivables, and inventories. We believe that with a flattening Q3 we will be able to release some. Historically, we usually release working capital that we have built up in the first two quarters in the third and the fourth quarter.

Thanks.

[Stephanie Sun], Credit Suisse.

It's John Pitzer. Rick, Kali, how are you doing this morning? Just real quickly, what can you do around mix and pricing to perhaps help sequential revenue growth?

If memory serves me correct, you were originally expecting the June quarter to be flat with the March quarter. And you actually got a little bit of sequential growth out of that so I am kind of curious about what you can do on the mix and the pricing front.

John, that is a fine line that you are walking. Obviously, we are trying to do everything we can to maximize revenue and profitability, but the same time we are trying to be sure that we maintain strong customer commitments and relationships.

One of the things that we have done is we have tried to balance off capacity where some of our customers had shortfalls from some of our competitors, where they had potential threats of line downs, is we have worked with them to be able to fulfill those requirements. And under that agreement we have entered into some multi-year agreements that have flat pricing, which is clearly better than what you would have on a historic basis.

So, clearly, we are trying to take those opportunities when we can but we are also trying to balance that off increasing our support of customers and clearly the designed win momentum we have had which puts us in an excellent position to drive our business increase going forward.

John, another thing here, a lot in the area of our high performance mixed signal are design wins where we are the sole supplier. We have agreed when we took the design win on certain prices and it's not that easy contractually to change it since that is the nature of the business. It's more in the standard product area where we can tactically move with pricing.

I guess the only other thing I would like to add, John, clearly Q3 is a vacation period for at least most of the European factories. And so we are actually encouraged that our team has been able to work through that and keep most of our factories running at full capacity through this period of time, this crunch period to be sure that we can maximize the support for customers.

So I think we are doing everything we can. Again, as I said earlier, every last wafer out and every last unit shipped through the process. But until we have had some of the additional capacity coming online from the capital investments that are currently in process it will be difficult to see a sequential increase in revenue, although it's still reflecting a 20% to 25% increase in revenue year over year.

And then, Rick, as my follow-up can you talk a little bit about the book-to-bill trend you saw in the June quarter? I think in prior quarters you have given us some color around that.

I am just kind of curious given the capacity ramp do you expect bookings to trend to a level where you can fill capacity as it comes on? And then how flexible is that capacity ramp? If for any reason you were to see bookings slow, how quick could you be to adjust your CapEx plans?

Clearly, just like we have been fairly quickly changing our CapEx plans we could continue to do that. So I think that we are clearly very cautious about that, but we are probably as cautious about adding additional resources as we are in the actual capital investment because of the flexibility that we have and the strong customer demand that we have from the increase in design wins we see.

Relative to the book to bill, I am going to let Kali give you the specific numbers. But I guess the point in book to bill is with the stretching out of lead times that took place earlier this year and now beginning to try to bring lead times back more in line with where we like those to be, clearly the book to bill from an ongoing step-by-step or quarter-by-quarter basis is much more difficult to interpret to draw any true conclusions from.

So the book to bill in Q2 was 1.26.

And that is from what --

And, Kali, that was up from the March quarter --

And in Q1 it was 1.34.

Great. Thanks, guys.

And keep in mind what Rick said with the lead times.

Thanks a lot.

Jeff Harlib, Barclays Capital.

Good morning. Can you just -- you said you were at $685 million of savings at the end of 2Q. Can you just bridge us to your target and just the actions in terms of additional plant closings and other actions underlying that?

Then my follow-up would just be an update on your CapEx estimate given the capacity constraints. I know before you had talked about 5% of sales or so. I am just wondering what it should be in a dollar amount and as a percentage of sales for the rest of the year.

So the target -- when we announced the Q1 and we had savings of annualized cost savings of $650 million, we said there was another $250 million to $300 million to come until the end of 2011. We are now going through the same process and we are at $685 million, which means that we have got some additional savings in this quarter.

At the beginning or the end of this year we will have closed down the ICN5 factory in Holland and in the middle of next year we are closing down the ICN6, also in Holland. And these are the big-ticket items to drive this part of the redesign.

Okay.

And on the CapEx though the specific number -- we spent $82 million in 2009. And we will spend $240 million to $250 million this year to be able to support the increased customer demand from the ramp up of design wins that we have been able to achieve.

Thank you.

And the CapEx is coming out of -- we believe that we need to -- so to fuel this growth that we see in NXP going forward we believe that we have to over a cycle invest on 5% of our net sales in CapEx.

Thanks.

Thank you.

[Elizabeth Foscoe], Cairn Capital.

Thank you. Good afternoon. Can you please clarify how much additional capacity you will be putting in place through you said end of third quarter into fourth quarter and then into the first half of 2011? Thank you.

So it's hard to put it in perspective relative to dollar terms. What we will do is we will have some of the initial investment, so what we have done through the first few months of this year has really been focused on test equipment as well as some selected assembly equipment for some specific packages where we have a proprietary basis driven by customer requirements.

The additional capacity requirements now that we are trying to bring on is wafer fab capacity, specifically with our (inaudible) and 8-inch facility where we will do a balancing investment that will allow us to expand that capacity. And that will be over the next couple of quarters with a ramp up of some 10% to 12% increased capacity associated with that.

And then in SSMC, our joint venture with TSMC in Singapore, we will be expanding that capacity and actually reducing the line width or the technology capability from 120 nm down to 110 nm. Due to the nature of that technology improvement as well as the capacity expansion, that will take place over a little bit longer period of time and the specific equipment that is coming in there has clearly longer lead time. So that will actually take place over the next four or five quarters with the ramp up of capacity associated with that facility.

Okay, thank you. So if you have had this capacity in place today how would your outlook for the third quarter be different?

Well, what we have said is in Q2 we probably could have shipped something around $75 million to $100 million, $75 million to $90 million more revenue if we would have had the capacity in place. Clearly that number increments up a little bit in Q3.

So if we had the capacity in place we would be able to have those shipments, but unfortunately we don't have that flexibility.

Okay. So the reason why it's a bit higher now than what you had said in the second quarter is because of increased demand, design wins?

It's just the increased design wins and the new products ramping. For example, our CFL drivers that we think is going to have a significant opportunity will begin shipments in Q3 and so that drives some additional capacity requirements. The design win we won earlier this year we talked about that with some of the product capability on our roadshow, but those CFL drivers with the reception, broad reception we are getting across all CFL lighting companies and aggressive discussions is just an indication.

Okay. And one small follow-up if I may. Thank you very much for putting in the six quarters of sales for the different segments of HPMS. The automotive segment looks flattish for the last three segments, so as we look forward are there more design wins that we would likely then be seeing in the third and fourth quarter or --? It just looks quite flattish compared to the other segments that you have detailed for us.

Yes, so the automotive segment you got to be a little careful when you look at that because clearly what happened was in early 2009 the automotive companies and their supply chain clearly took inventory out of the supply chain. So our sales into the automotive market in early 2009 were clearly below what they would be on a normal consumption viewpoint as they reduce their inventories and drove their supply down.

As they have replenished that through this period of time, clearly there was some that early shipments this year that was more of aligning that supply chain with more of a normal, ongoing basis. So it's clearly -- if you normalize the growth rate it would be more on a normal basis, but going forward we are very encouraged by the success that we have had.

As we have talked, iSuppli now talks about us having the largest infotainment business and we are able to take some of the significant design wins that we have had where we have now expanded our car radio DSP for the mid- and high-end car radio to all of the major customers in that segment. And now able to take that success that we have had and drive it into Class D amplifier design wins going forward as well.

In addition to that we will have the last large US automotive manufacturer that will begin to use our door locking systems that we will then say that we will have every car company in the world using our end mobilizers with the exception of the largest car company in Japan. And that will begin to ramp in the middle of next year.

In addition to that we have a project underway that we just taped out in I guess a couple of weeks ago that will begin to see shipments towards the end of 2011 for LED drivers for the automotive space. We are able to take our unique automotive -- sorry, our unique LED driver technology that we have to serve the broad industrial market and actually apply that for an automotive-specific product that we are very excited about the opportunity to expand with the significant increase in LED usage in the automotive market.

So when we look at things in general we feel very good about the health of our automotive business and the design wins and ability to see that continue to improve. When you look at it on a quarter-by-quarter basis it's pretty hard to look at that and wash out the supply chain adjustments associated with it. But we feel very good about the increased design wins we have in the automotive space and the ability to continue to take share, which we feel comparable that we have been able to achieve.

Okay, great. Thank you.

Sundar Varadarajan, Citadel Securities.

Thanks, guys. Just a quick question, I believe when you guys were on the road for the equity roadshow you talked about some long-term gross margins as well as operating income targets. Could you quickly provide us bondholders who may not have had the opportunity to listen to that a quick update on what you are targeting in terms of gross margins?

And given that you did about 40% gross margin this quarter and you are at 96% capacity utilization, could you also kind of explain where the further improvements will come from as you get to whatever your target gross margin rates are? Thanks.

So as Rick mentioned in his speech, he talked about a targeted operating margin of 21% to 26% for the Company. That translates into some sort of a long-term goal of 50% to 55% in gross margin for the total company, and that is depending of the higher mix of high performance mixed signal going forward.

But the big driver is, as I mentioned, is coming out the redesign. As I said when we passed Q1, we had annualized savings of $650 million where we estimated there is another $250 million to $300 million to come. And that is coming out of -- the lion's part there is coming out of the closure of ICN5 at the end of this year and the closure of ICN6 in the middle of next year.

On top of that gross margin will also come because of the shared higher growth in high performance mixed signal where you have a mix effect with the design ins where we are ramping up with the higher gross margin.

So is it fair to say that most of the operating income growth from this point going forward is going to come at the gross margin line or are you expecting any further improvements in the operating expense line as well?

Minor improvement in the operating expenses but a lot is going to come out of the gross margin.

[It's just that] our expenses don't grow in line with revenue until we are within those target operating expense ranges. And then as we get to that level we will continue to increase our investments basically in line with the revenue growth.

Thank you. Just in terms of the remaining $150 million of cash payments you have towards your Redesign Program, is it fair to then assume that it would be, the bulk of it would be spent in conjunction with these two factory closures? Probably one set towards the end of this year and the other remaining portion, middle of next year.

I think that is fair but probably with a slight delay because we pay out that when they leave.

Okay.

And some of it will come in Q4 and then I believe some of it will come into Q1, because it has to do with the agreements that we have made with the Workers Council.

Clearly, that is a not to exceed number. Clearly, as we have increased demand on certain things we are doing everything we can to protect those employees to be sure that they have opportunities to move into other rows.

Great, thank you.

Guy Baron, Deutsche Bank.

Just a follow-up on the capacity addition detail that you gave. Can you comment on where you would be after you had spent the CapEx in terms of front end and back end? How much is in-house, how much is outsourced?

And then along the same lines, is there any associated impact with that CapEx that offsets any part of your footprint reduction or cost-saving plans?

No, not at all. So our whole focus on the Redesign Program is to ensure that we have a world-class competitive manufacturing cost structure, which we are able to drive through our SSMC joint venture with TSMC and then ensure that at least on a cash cost basis our [IMEG and fab] can be competitive as well.

So none of the actions that we are taking to extend or expand our capacity has any impact on that Redesign Program. We clearly are very focused on ensuring that we achieve those cost savings completely.

And regarding how much is in-house and how much is outsourced, so both for wafer as well as for back end it's about 10% historically what we are seeing lately that we have outsourced. It might increase a bit over time because we are trying to make sure that we can get some additional capacity.

It's probably worthwhile to point out that when we talk about that we really have three tiers of capacity when we talk about wafer fab capacity. We have our internal-owned facilities where we are trying to ensure that we maximize our proprietary technology so that we give our designers and our design people the ability to take the combination of the advantages they can get from the process flow combined with the design capability to be able to drive a solution based on the applications insight we have that makes a difference for our customers.

While our competition, to the extent that they have used a foundry, have to use a standard process flow that is available to many different customers and thus can't have that competitive advantage. So we believe strongly in that competitive advantage, but we can protect that proprietary technology in a combination of our own facilities as well as our joint venture facilities. So we have both of those that we deal with.

Then the foundry capacity, which is what Kali referenced when we talked about 10%, 12% of our manufacturing capacity being externally sourced, that is products where we are doing designs that are based on standard process flows, such as our car radio DSP product that uses 65 nm. And some future generations of ID technology that will be pushing more leading-edge capability.

But, again, our real intent is how we provide a unique position for our customers by maximizing our proprietary process capability from a wafer fab viewpoint to actually give them a unique total solution.

And then just to clarify, so the 10%, 12% outsourced is that -- that includes the closures as well as the CapEx spend, is that right?

It does, it does. Over a period of time it might be that that will grow. Based on the continued success we are having with design wins, we may have to do a little more balancing associated with that but it's not going to become 40% or 50% of our total capacity. What we are talking about is it might edge up a few points as opposed to tens of points.

Okay, great. And then just a quick follow-up, is -- would you expect to see continued margin improvement into Q4 as well even if you were to have a top line that was flat?

So we don't guide but I think I was pretty clear when I said there was additional savings coming out of the redesign. So we are going to take out costs.

And you know that -- Kali talked about that savings, additional savings of $250 million to $300 million --

Which is based on the $650 million.

Which we actually achieved $32 million or so --

$35 million.

$35 million, sorry, in Q2 actuals so you will continue to see the implementation of that Redesign Program. It will be a little bit bouncy as we go through that process where it won't be completely linear, but that gives you a good example associated with it.

So the $35 million is additional annualized savings.

Right. Understood, thank you.

David Phipps, Citigroup.

Thank you. Congratulations on the good quarter. My question has been asked and answered.

Thanks a lot, appreciate it.

Tim Lash, Third Point.

Thanks for taking my call. I apologize if this has already been asked and answered, but you are devoting a fair amount of your manufacturing capacity to the Trident wafer agreement. Could you talk about what timeframe that rolls off over and whether or not you can backfill that supply or take those wafers and reallocate those to higher-margin product lines like HPMS going forward as that contract rolls off?

Yes, so actually our supply agreement that we have with Trident is not actually on the wafer side. It's more on the assembly test side. There is a few nominal wafers but the bulk of that is actually on assembly test. And to the extent we can support that capacity going forward and give them a cost advantage versus what they can get commercially available then we would like to do that since we have 60% of the economic ownership of the value created associated with it.

But if you look at our actual wafer fab sourcing in our total operations for Q2 it's like $150 million for the quarter. We have some of those contractual agreements -- all of that is in relationship with contractual agreements where we have sold businesses. So we have a relationship with DSP Group, which I think comes to an end in a few quarters and will go to zero.

The bulk of the wafer fab capacity is actually in support of ST Ericsson and that will be shipped through the end of life of those individual products. That probably will go out through the next four, five, six quarters or so through the end of those lives. And as they do then that equivalent of the wafer fab portion of the $150 million will clearly be capacity that is available for us to ship high performance mixed signal products that will be at roughly 60% gross margin as opposed to 3% gross margin for the breakeven business that we have in the manufacturing services.

So I think that is a key factor. But also the incremental capacity we will bring from the balancing of our manufacturing facilities and also ramping up our SSMC ownership where we have the ability to get to our full 61% -- percentage of the total manufacturing capacity. All will give us incremental capacity as we move forward.

Great, thank you.

Guenther Hollfelder, UniCredit.

I just had a follow-up concerning the MOSFET business for the power supplies in the computing area where you saw some pushouts. Did you specifically mention netbooks or laptops here in this context?

Yes, what I said was just recently we had had a little bit of adjustment in our greenchip -- not specifically on MOSFETs but on our greenchip associated with the notebook power supply. And that is associated with the notebook PC business.

Okay, very helpful. Thanks.

(Operator Instructions) Tim Lash.

Sorry, one quick follow-up. With respect to the computing segment where you were getting some mixed signals in terms of end demand, how quickly can you reallocate your production to those segments of your business that perhaps -- or you can't meet demand in to sort of absorb any shifts or weakness in the PC space? Can you talk about your ability to readjust your supply toward markets where you are undersupplied?

Sure. So the cycle time of the wafer fab is roughly four to five, depending on the number of levels four, five, six weeks. So basically as you get those adjustments you can make those changes, but you are going to take a minimum of that period of time where you can actually rebalance your starts where you move that capacity from one product to the another.

It's not clearly interchangeable as well, just to be quite frank about it. We can't take something, for example our greenchip, if we were to reduce that it's not necessarily that we can increase our embedded nonvolatile manufacturing capacity associated with it. So there is some balancing that has to be done associated with it.

But in total we still feel very comfortable that we are sold out from a capacity viewpoint in the near term. The critical element for us is ensuring that we can maximize our output out of our manufacturing facilities to the fullest extent that we can.

Excellent. Thank you.

Thanks a lot.

Mr. Clemmer, Mr. Sundstrom, there are no further questions. Please continue with any points you wish -- you would like to raise.

Thank you, operator. We appreciate your interest and support. I think it's also important to point out that we are encouraged by the continued acceleration of design wins that we have been able to achieve and the significant market opportunity that exists for that so that we can ensure that we expand our capacity to be able to meet our customer requirements.

But just as important, and frankly probably more important from an earnings improvement going forward, is the conflation of our Redesign Programs, which as Kali talked about, will be executed between now and the end of 2011. Those additional savings coming from that will give us a strong earnings momentum and ability to continue to make progress associated with our earnings improvement. So thanks a lot for your interest.

This concludes the NXP Semiconductors second-quarter 2010 results, investors, and analysts conference call on Tuesday, August 17, 2010. For any further questions you may contact NXP's Investor Relations Department. Please visit their website, www.NXP.com/investor.

Thank you for participating. You may now all disconnect.