恩智浦 (NXPI) 2011 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to NXP Semiconductors First Quarter 2011 Earnings Call.

I will be your coordinator for today.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

As a reminder, this call is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today, Mr.

Jeff Palmer, Vice President of Investor Relations.

Please proceed, sir.

Thank you, Charlotte, good afternoon everyone.

Welcome to the NXP Semiconductors first quarter 2011 earnings call.

With me on the call today is Rick Clemmer, NXP's President and CEO; and Karl Sundstrom, our CFO.

If you've not obtained a copy of our first quarter 2011 earnings press release, it can be found in our company Website under the Investor Relations section at www.nxp.com.

This call is being recorded and will be available for replay from our corporate Website.

Additionally, on our investor Website, we have provided two documents which we believe will be helpful to investors.

The first is a supplemental earnings summary presentation, which includes our updated target financial model.

Additionally, we have posted an Excel document on our historical financial model.

Please be reminded that this call will include forward-looking statements that involve risks and uncertainties that can cause NXP's results to differ materially from management's current expectations.

The risks and uncertainties include but are not limited to statements regarding the macroeconomic impact on specific end markets in which we operate, the impact of foreign exchange rates, the sale of new and existing products and our expectations for financial results for the second quarter of fiscal 2011.

Please be reminded that NXP undertakes no obligation to revise or update publicly any forward-looking statements.

For a full disclosure on forward-looking statements, please refer to our press release.

Additionally, during our call today, we will make reference to certain non-GAAP financial measures which exclude the impact of purchase price accounting, restructuring, impairment and other charges that are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance.

Pursuing to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to most directly comparable GAAP measures in our first quarter 2011 earnings press release, which has been furnished to the SEC on Form 6-K and is available on NXPs Website in the Investor Relations section.

I would now like to turn the call over to Rick.

Thank you, Jeff and welcome everyone to our earnings call today.

The first quarter of 2011 was a positive quarter for NXP, and we delivered better-than-anticipated top line revenues and nearly all of our focused application areas outperformed our original expectations.

Our performance successfully demonstrates NXP's strategy to focus on the faster growing High Performance Mixed Signal market, and to opportunistically service the broad-based Standard Products market.

The success of our strategy is especially clear when compared to the normal seasonal slowdown in the broader semiconductor industry and the seasonal performance of most of our mixed signal peers during the first quarter.

Product revenue for the first quarter was $979 million, a sequential increase of 4.4% and represent just over 90% of total NXP revenue.

This was substantially better than our original guidance by over $40 million.

As a reminder, product revenue is the accommodation of our core High Performance Mixed Signal or HPMS segment as well as our broad-based Standard Products segment, which combined as the source of all of our profits.

Let me reiterate.

Product revenue growth is where the management team focuses virtually all of our attention.

Within our breakeven manufacturing, corporate and other businesses, revenue was $103 million, down 26% sequentially, but actually slightly better than originally anticipated.

Combined, total NXP revenue was just under $1.1 billion, about flat sequentially, but better than our guidance and expectations by more than $50 million.

We experienced continued margin expansion during the quarter as non-GAAP gross margin increased to 47.8%, a 70 basis points improvement sequentially and nearly a full 9 percentage point above the year-ago period.

This is a strong demonstration of the success we have achieved through our redesigned program, our focus to improve our financial performance in the profit contributions made from these products.

Simultaneously, we held our total expenses flat, resulting in non-GAAP operating margin of 20.3%, a 130 basis points improvement versus the prior period.

On the bottom line, we delivered our non-GAAP EPS of $0.46 per share, a $0.02 above the high end of our original guidance of $0.40 to $0.44 per share.

Within our Products revenue, HPMS revenue was $742 million, a 3.5% sequential improvement, as nearly all of our focused applications areas performed better than originally planned.

Turning to the drivers of performance in HPMS segment, our identification business delivered revenue of $189 million, a 17% sequential improvement and a full 40% improvement from the year-ago period.

This was far in excess of our original expectations in both sequential and year-on-year performance, demonstrating the building momentum of this business.

The growth during the quarter was strong across nearly all ID products categories, even without any real contribution from NXP in the current quarter.

We agree strong demand for our SmartMX secure element product especially in the areas of contactless payment cards in emerging markets.

Combining with ongoing buildout of contact with point-of-sales infrastructure and the continued strength of e-government programs, the electronic passports and ID cards.

Additionally, we saw strong demands for our MIFARE devices used in transportation systems and very good growth within our tags and labels systems.

There is certain degree that performance within ID during the quarter is attributed to deceleration of our more project-oriented businesses like e-government and new banking customers, but also that excellent execution of our operations team in brining online additional capacity earlier than originally planned.

We would anticipate that subsequent quarter would be demand in these project-oriented markets tempered a bit due to these effects.

During the quarter, we had several important announcements within the identification business.

ZTE, the world's fourth largest handset supplier announced its plans to include NXP-based NXP solutions across the entire Android-based portfolio of global handsets.

ZTE handsets with NXP capability will be available in the second quarter of 2011.

G&D, the security specialist in NXP announced a joint software solution to enable NXP solutions being more easily and securely deployed in handsets based on the Android platform and other mobile operating systems.

Oberthur and NXP announced a joint licensing agreement, which enables Oberthur to integrate NXP's MIFARE solutions into SIM cards globally.

This will allow the use of NXP-enabled handsets to leverage existing MIFARE-based infrastructure for transportation access, events ticketing and access control worldwide.

While NXP sales were flat sequentially, we are very encouraged by the design win momentum at major OEMs we have experienced with our NXP solutions.

We believe there will be a significant ramp of new programs during the latter portion of the year, as NXP breaks out in the mainstream smart phone market.

NXP is the clear leader in NXP with a broadest portfolio of hardware and software solutions combined with a deepest situational knowledge to help our customers implement a complete and robust solution.

Our expertise in understanding of the complete secure transaction ecosystem is wanting more and more customers choose NXP as their partner of choice to implement mobile transaction solutions.

Within our automotive business, revenue was $238 million, a 2% decline sequentially due to shipments into Japan where we saw customers attempt to minimize year-end inventory levels and to an known degree the negative effects of the earthquake and tsunami.

The combination results in decreased demand for certain of our automotive entertainment products.

Offsetting this, we actually saw good solid demand for auto access in vehicle networking products, especially our next-generation FlexRay devices and to a lesser degree in vehicle sensors.

Moving into the performance of the wireless infrastructure, lighting and industrial businesses, revenue was $135 million, up 6% sequentially and better than we had originally anticipated.

Revenue was driven by broad market demand for our 32-bit ARM-based microcontrollers where we continue to be the leader in the market.

As an example, earlier this week, NXP received the prestigious EDN Analog Innovation of the Year Award for our EM773 energy metering device based on our low-cost ARM Cortex-M0 32-bit MCU targeted at energy management applications.

Additionally, we saw improved order transfer high-performance RF.

As we mentioned on our last call, we had one major cellular base station customer, which would require a quarter or so to burn off some excess inventory.

This process appears to be complete, and we have begun to see a strong research demand for our high-performance RF solutions.

During the quarter, we began to ship our CFL lighting drivers and volume, and order demand for future quarters looks very healthy.

We are very excited about the opportunities ahead of us in intelligent network lighting and we will be attending life fair in Philadelphia in two weeks where we plan to make several exciting announcements.

Turning now to our mobile, consumer and computing businesses, revenue was $180 million, a 2% decline sequentially.

As we anticipated, we experienced soft order trends for our green chip solutions for notebook power supplies and seasonal weakness in overall PC market especially in the notebook segment.

These headwinds were offset by very good order trends for our new Logic products, particularly we saw a strong demand for our new translator switches, which had began to ramp with significant volumes, as well as high-speed interface products, both of which posted healthy gains sequentially.

Lastly, within our standard products segment, revenue was $237 million, up a healthy 7% sequentially, marking the eight consecutive quarter of growth, demonstrating the scale and breadth of product offering continues to drive sheer gain for NXP.

Growth during the first quarter was driven by a good balance across the entire portfolio.

Now, I would like to pass the call over to Karlie for a more in-depth presentation of our financials.

Thank you, Rick and good day to everyone on the call.

I think the post-earnings call, I would like to focus on the highlights of our quarterly performance, allowing more time for interactive Q&A.

As a reminder, all figures mentioned in my prepared remarks are excluding Sound Solutions business, which is being treated as discontinued operations.

We continue to anticipate that the sale of this business to Knowles should be completed during our second quarter.

Looking at our revenue performance in our core product areas, we continue to outperform the broader semiconductor market as well as our served market in what is usually a seasonally weak quarter.

Products revenue came in at $979 million, up 4.4% on a sequential basis.

All of our business performed better than our original expectation.

The combined revenue of manufacturing, corporate and other segment was $103 million, higher than our original expectation by just over $10 million.

Taken together, total NXP revenue for the first quarter was $1.082 billion, roughly flat on a sequential basis, however, better than our original outlook by more than $50 million.

Turning to profitability, during the first quarter, total NXP non-GAAP gross profit was $517 million, resulting in a non-GAAP gross margin of 47.8% or 70 basis points sequential improvement.

As we mentioned in our last earnings call, NXP realized significant portion of the benefits from the early closing of the ICN5 wafer fab during our fourth quarter.

As expected, this limited our margin improvement potential in the first quarter.

We continue to believe that the total annualized redesigned savings will be in the range of $900 million to $950 million, with the remainder of the savings, which is substantially realized in the lesser part of this year.

The remaining savings from the redesigned program will flow mainly through the HPMS financial model, with roughly 60% of the savings flowing into the cost of goods sold.

The remaining 40% of the savings will flow through operating expenses, but will be offset by continued investment in HPMS.

In our core products segment, we believe we are making good progress to our long-term model.

Within the HPMS segment, revenue was $742 million, up 3.5% sequentially.

Non-GAAP gross profit was $423 million, a 2.4% sequential improvement.

This translates into non-GAAP gross margin of 57%.

This is 60 basis points lower than the prior quarter, primarily due to less favorable product mix in the quarter.

In our Standard Products segment, revenue was $237 million, a 7.2% sequential increase and higher than our original guidance.

Non-GAAP gross profit was $87 million, an increase of 2.4%.

This translates into non-GAAP gross margin for the Standard Products segment of 36.7%.

From an operating profit perspective, total NXP non-GAAP operating profit was $223 million, a 7.2% sequential improvement.

This resulted in a non-GAAP operating margin of 20.6%.

Our total operating expenses were flat on a sequential basis, however, it is important to note that we increased our R&D expenses sequentially, as we continue to invest in the long-term growth opportunities within the HPMS market.

Offsetting the increase in R&D were lower expenses due to reduced overhead at the benefit of the redesigned program takeover.

Operating expenses essentially flat as a percentage of total revenue, but the intention is change the mix to a higher R&D and lower risk G&A will allow NXP to continuing this investment in new products, helping to fuel our long-term growth.

I will now like to discuss the changes in our balance sheet and cash position.

Cash at the end of the quarter $879 million, based on the inventory increase about five days to [85 days], primarily due to required increases to support future growth.

Days payable declined to 85 days from the 93 days in our prior quarter, while days receivables were 36 days, down two days sequentially.

Taken together, our cash conversion cycle increased to 36 days.

Net debt at the end of the quarter was $3.75 billion.

This is a decline of $568 million versus the same period a year ago.

We exited the quarter with a trailing 12-month adjusted EBITDA of $1.1 billion.

This is a 2X improvement versus the year-ago period.

Taken together, our ratio on net debt for 12-month adjusted EBITDA is 3.4 times.

Cash flow from operations was negative $3 million.

As we indicated in the past, (inaudible) generation occurred in the second half of the year.

During the first quarter, our cash flow is impacted by costs including annual maintenance, insurances, and other seasonal contracts, in addition, to employee bonus payments.

We also made a net investment of $53 million in payback during the quarter.

Finally, we would like to provide you our planned expectation for the second quarter of 2011.

Before I do, I would like to summarize our target financial model we have been recently updated as a result of our announced sales of Sound Solutions business and the improved mix within the Standard Products business.

Our financial model is presented on a non-GAAP basis, and it included in the quarterly summary slides available on our IR Website.

We believe we can grow the top line of our HPMS business one-and-a-half times faster than the mixed signal served market, which historically has approximately 250 basis points to 300 basis points faster than the total semiconductor market.

Our long-term profitability model of the HPMS segment is gross margins to be in the range of 58% to 63%, combined with an operating expense range of 31% to 34%, which results in an operating margin in the range of 24% to 29%.

This is consistent with our prior.

Secondly, we will manage the Standard Products segment to grow basically in line with the overall semiconductor market.

Our long-term model Standard Products segment is for gross margin to be in the range of 33% to 39%.

This is 300 basis points to 400 basis points from our previous model.

Operating expenses should be in the range of 14% to 18%, which is the result in an operating margin of 18% to 23%, which is an increase of 300 basis points from our previous model.

Over time, on a mixed adjusted basis, our target financial model assumed HPMS is greater than 80% of total product revenue.

With Standard Products running below 20%, our target model also anticipates our breakeven manufacturing, corporate and other segment will continue to decline to below 10% of total NXP revenues.

The target for total NXP gross margin is in the range of 52% to 56%, operating expenses in the range of 28% to 31%, resulting in an operating margin in the range of 23% to 28%.

At the corporate level, we anticipate cash taxes in the range of $40 million to $60 million per year for the next several years, as we utilize our loss carry forwards.

Thereafter, we anticipate an effective tax rate of 12% to 14%.

From a cash flow perspective, we anticipate CapEx around about 5% of total revenue across the semiconductor cycle.

We are targeting a net working capital metrics of 40 to 45 days DSO, 75 to 85 days of ADIO, and 70 to 80 days [DPO].

We see depreciation in the 6% to 7% range over the near term, and we are targeting achieving investment grade ratings.

Lastly, I would like to highlight a few items, which could have an impact on orders.

As we have all closely monitored the disaster in Japan, it is clear to us that we cannot fully quantify the second and the third order effect on our industry, either our direct customers or others in the supply chain.

At this stage, we have not seen any substantial impact on our own business, either on the manufacturing side or on the demand side, but cannot fully anticipate potential future disruption.

Now, I would like to provide our outlook for the second quarter.

We currently anticipate product revenue will increase sequentially in the range of 2% to 5%, following the strong 4.4% growth in Q1.

As a reminder, product revenue is a combination of revenues from our HPMS and Standard Products segment and it's the source of all our products.

Based on our products revenue guidance range, we expect a trend in the businesses during the second quarter are as follows; wireless infrastructure, lighting, industrial, automotive and identification should all grow sequentially.

Continued change in 32-bit ARM-based microcontroller, high-performance RF and accelerating trends in our power and lighting business; improving trends in auto access and auto entertainment; and identification should be driven by continued strength in banking, e-government, infrastructure and mobile payment, but as Rick mentioned, the rapid growth in the first quarter will not likely be duplicated in the second quarter due to our ability in the first quarter to take advantage of the new capacity as well as acceleration of our project-oriented business.

Mobile consumer and computing of Standard Products should be relatively flat sequentially.

We anticipate revenue from the combination of manufacturing, corporate and other segment to decline approximately $10 million to $15 million sequentially due to lower revenue from our breakeven manufacturing businesses.

We anticipate NXP non-GAAP operating margin to be about 21%, despite additional cost of approximately $8 million resulting from annual merit increases that take effect at the beginning of the second quarter.

Additional inputs that have [two-year] models are as follows.

We believe net interest expenses should be approximately $78 million, plus or minus $2 million, excluding any potential debt reduction benefits as a result of the proceeds from the Sound Solutions.

We anticipate our cash taxes to approximately $8 million plus or minus $1 million.

And believe income from non-controlling interest will be an expense in the range of [$14 million], plus or minus $1 million.

Average diluted share count should be approximately 258 million shares.

Taken together, our guidance implies a non-GAAP EPS in the range of $0.49 to $0.54 per share.

Now, we would like to turn to your questions.

Yes.

Operator, could you poll for questions please.

(Operator Instructions)

Our first question comes from John Pitzer with Credit Suisse.

Please proceed with your question.

Yes, good morning guys.

I appreciate (inaudible), congratulations in the quarter.

I guess my first question, is this the strength sequentially in the March quarter in identification, can you help me understand what the gross margin in that business is?

I would have expected despite what was good gross margin improvement, perhaps you can hold a bit better margin improvement with identification up so nicely?

The gross margin in the identification business among the highest we have, 60 plus.

And what we have seen is that when it comes to the whole segment, HPMS, we are down from 60 basis points and that is basically because as Rick mentioned early on, what happened is that we need some revenue in Japan, some very high margin products, which is they call segment products.

We have had some unique changes, and we have some additional cost when it comes for gold and metal and things like that.

But John, we had some headwinds in the quarter that literally tempered some of the incremental gross margin that was generated by that e-business, but we think we are still on track for the end of the year on the gross margin improvement programs that we have laid out.

We are very comfortable that we will be able to achieve those.

Great.

And then, Rick, just on the growth sequentially on the Standards Product, can you help us understand what drove that, are you at all worried that perhaps this is a little bit of a hard reflex post the Japan earthquake?

We haven't seen that.

You obviously have to be a little worried about that.

I know that a lot of what we have heard from distributors right after the earthquake and tsunami in Japan, a lot of activity associated with it, but we haven't really seen any indications of anyone really taking, holding inventory associated with our Standard Products at this point in time.

In fact, we are still struggling in some individual products to be able to keep up with order demand.

I think the real key fundamental is that as the industry is going through this upturn in requirement in Standard Products, it will be still in a relatively limited amount of capacity expansion associated with it.

And so, the supply demand balance continues to be healthy, not as good as it was, but we think continues to be healthy.

It probably has much to do with other factors like the Intel processor issue as it does Japan tsunami issue.

So, we don't see any inventory taking place with their products.

It's clearly something we have to worry about, but all indications are that demand continues to be pretty healthy at least for the quarter and we continue to be in a kind of a favorable general environment.

And then, Rick, my last question, can you just remind us again, now that we are a quarter more into the year, what's your expectations are for the NXP market today versus let's say 90 days ago, and then more importantly, when you look at the kind of a lighting market relatively to the NXP opportunity this year, how would I try to size up the lighting opportunities and moving what's going to be I guess an important announcement coming in the next couple of years?

So, NXP trend continues to bounce around as certain of our customers push out new model introductions, then you know, the number will come down somewhat, and we talked about.

It's going to be quite a bit of their ability through the year.

Every time we talk to our friends at Google, they tell us they doubled the numbers for their Android expectations.

So, if the low-end happens where new models were pushed out, maybe it doesn't get to be greater than 40 million or 45 million units this year.

But in fact, Google a rival, we should double everything, then the number is close to 100 million.

So, we are kind of thinking with our numbers now.

We will clearly have a better deal as we get to kind of middle of the year for the actual rollout of the new implementation.

Clearly, the ZTE announcement that we made relative to their handset implementation that will be taking place in Q2 is another confirmation, and we continue to get good strong design momentum, but again, we have always talked about it being back half of the year loaded and really concentrated with the ramp in the back of the year as those new models begin to roll out and ramp rapidly, John.

On the lighting side, we talked a little bit about that in our last earnings call that we said by the year, I think it was 2015 that we thought it could be $4 billion to $4.5 billion market in total.

Now, that you kind of have to wait for our announcement to tell you completely everything that we are talking about in terms of that, but if we think about that connected network lighting opportunity, we think it's very substantial.

It won't be that material this year, because it will be design end, as we make the announcement at Lightfair, the design end will take place.

And so, the actual revenue contribution this year won't be too significant other than the ramp-up of the CFL drivers that we are making good progress.

And we now have our third customer with tens of millions of units on the backlog for shipments this year.

And so, that small portion of it will continue to ramp very rapidly, and we feel very good about the introduction associated with that, and the continued acceptance associated with that.

But on the other areas associated with this connected network lighting, it will be more design end in the second half of this year with actual revenue shipments being in early 2012 before we can really ship the significant amount of that, John.

Great, thanks guys.

Appreciate it.

Just one other thing, I should have said on the Standard Products.

One of the reasons why we feel is good about our performance is, is we think we have a premier portfolio of Standard Products.

And so, I think that helps contribute to that overall growth basis and sets us in a good solid position.

Our next question from James Covello with Goldman Sachs.

Please proceed with your question.

Good morning.

Thanks for taking my question.

Congratulations on the strong results.

I was wondering if you could address the automotive market for a second.

That market has been very strong for you for several quarters in a row now, and clearly there is some secular tailwinds for semis in the market, broadly speaking.

Could you identify maybe kind of the factors going forward that you are seeing from your customers in the supply chain?

Do you think that cyclical strength can sustain itself in addition to the secular tailwinds, or do you think that you might see a little pullback in that automotive space given the events in Japan and potential risk to production there?

I think the strength of our automotive portfolio continues to be very clear with the strength of that business.

I mean, the fact is that in mobilize store locking systems, as we ranked this year with the second largest U.S.

automotive manufacturer now.

We have every car manufacturer in the world with the exception of Toyota uses our technology.

But one of our competitors talked about of their technologies which is used in one out of every two cars, just actually our technology is used in one out of every car shipped except for Toyota.

So, I think that's a contributing factor.

Clearly, as there is more electronics in the car, you see more in-vehicle networking, our market share is there where we have 45% to 50% of the market, roughly three times the size of our nearest competitor, continue to put in very strong position there.

And then the acceleration on the car entertainment side where we talked about design wins over the last three or four quarters with additional platforms that now put us where we are the technology provider of choice on car radio DSP for mid and high-end car radios for every significant car radio manufacturer sets us in a position that gives us the confidence relative to the growth and then potentially the LED drivers that we specifically designed for automotive industry, contribute later this year.

So, we feel very good about our automotive business, we think that it will continue to grow at a very healthy rate, and we are in a very defensible position where we feel good about that.

The general automotive demand is something that we clearly watch closely based on the tsunami and earthquake effects, but to this point in time, we have not seen any weakness whatsoever.

In fact, we have seen some pockets of strength as people have had to accelerate orders to replace the other suppliers that had not been able to ship associated with products out as a result of the tsunami and earthquake.

So, we continue to feel pretty good about it.

The fundamental growth of the automotive industry, we are not counting on any astronomical increase associated with it.

We are looking at it from more of a nice, steady continued progress forward and feel pretty good about the position that we are in strategically to be able to support the revenue growth.

Thanks, that's helpful color.

And then, to follow up on John's early question, could you quantify for us what distributor inventory levels did in the quarter and what do you expect them to stay flat or go up or go down going forward?

Yes, the inventory levels edged up just slightly in terms of absolute dollars in the quarter, but in terms of turns, actually came down a little bit - sorry, the turns actually went up a little bit.

Sorry, I said that wrong.

So, we think our, just the inventory continues to be at a very healthy level.

And so, the little bit of absolute increase we have in inventory and [distribution] was planned and we continue to watch that closely but haven't seen anything materially associated with it.

So, our distribution business on shipments out of distribution this quarter were very healthy and continued to grow, and especially in areas like ARM-based microcontrollers where we saw a nice healthy growth associated with it, and continue to see that acceleration.

In fact, we just received the Supplier of the Year award from one of our major distributions earlier this week.

Great, thanks.

And then, lastly for me, on the OpEx, Karl, I think you talked about a step-up a little bit in Q2 from some merit increases.

Can you talk about the profile of what you expect in the back half of the year?

Are the benefits from the redesign going to be offset by the increased R&D investments or how should we think about that profile?

Thank you.

As I said in my presentation is that we are trying to reduce overhead and that's where we get the savings on the central overhead.

And we are trying to turn that more towards investments in HPMS mainly in R&D, but we will see some selling in selective areas, to make sure we have the right field application engineers.

We are just keeping the model that we want to have it relative to the fact that the percentage of sales to total OpEx.

So, in other words, it will grow in line with the total revenue growth.

Great, thanks very much.

Thanks a lot.

Appreciate your favorable comments earlier.

Thank you.

Our next question is coming from Vivek Arya from Bank of America/Merrill Lynch.

Please proceed with your question.

Thanks for taking my questions.

Rick, how would you assess the competitive landscape in near field communications?

What do you think is a realistic market share we should be modeling for NXP in this market?

Near-term, we think that the strength that we bring from an overall ecosystem basis, where we are driving this not only with our customers, the handsets manufacturers, but also with the software providers, also with the financial institutions, the credit card companies, the banks, the carriers, we think that we are in a leadership position to continue to drive that based on really a broad-based ecosystem approach structure.

We are hopeful that for the near term until you see an integration into - of the radio technology itself into the connectivity, we will hopeful that we will be able to maintain kind of the Intel-like market shares, if you will, for the near term associated with it.

Clearly, there is going to be competition, clearly the competition is going to win some models associated with that, and we have to be thoughtful and careful about that.

But it's also important that we think about NXP in a total sense.

So, when we talk about NXP, we talk about NXP and NXP Solutions and not an NXP radio.

Many semiconductor companies, when they talk about NXP, are only talking about NXP radio.

So, when we talk about NXP, we are talking about the secure elements to be able to provide the bullet proof security as well as the software to be able to facilitate that radio and the secure element associated with it.

So, we are uniquely positioned to be able to drive all of that, and NXP is about convenience.

All the radio does is really provide convenience, and then the critical element is how applications can be developed around that and having that security, the comfort of the absolute bullet proof security that we bring with our smart image technology, very similar to what's with electronic passport or electronic ID card with absolute bullet proof security, gives you the basis to have the comfort in the safety associated with it.

So, we think we are uniquely positioned and we certainly like to plan for expectations of Intel-like market shares until the radio gets integrated and at that point of time, we want to be sure that we can continue to participate in the secure element of NXP, as John saying, kind of market shares going forward.

Thanks.

That's very helpful.

One question on the balance sheet, how do you balance the need to deleverage versus using the very strong cash flows that you are generating to maybe make acquisitions, which is the higher priority for you over the next several quarters?

For the next several quarters, there is a better return for our shareholders to be able to deleverage the balance sheet.

When we get down to, we will have to fund that will come from the Sound Solutions transaction this quarter.

So, that will move our net debt position down to well below $3 billion.

And so, if you look at that with our last 12 months EBITDA, that set us in a position where over the free cash flow generation over the next few quarters, we should be able to move down to on a net debt to EBITDA basis, which at least gives us the right kind of (inaudible) to be at assessment rate range.

And so, as we begin to move that, clearly, we will consider what we might do relative to acquisitions.

We have some near-term small technology things that we need to do.

In the high performance RF, we have to look at the next generation of technology beyond LD models to make sure that we have that, that could be a strategic transaction where it could be a joint venture, it could be a partnership or it could be an acquisition associated with it.

And clearly, as we move forward with the comfort that we have associated with the cash generation capabilities and we will be in a position where we can take advantage of the marketplace and be in a position to bring on additional technology to grow the business even more rapidly than that going at more than 50% faster than the server market for high-performance mixed signal in any case.

Got it, and just one last one if I may.

You slightly raised your long-term profit margin targets, what kind of timeframe do you foresee for achieving that model or alternatively what kind of quarterly revenues will you need to achieve that model?

Thank you.

So, let's be clear.

All we really did was we adjusted our Standard Products business model based on the sale of the Sound Solutions business plus the improved portfolio of our Sound Solutions business.

So, we have a better portfolio as we have been able to make progress and limited the capital investments associated with that business.

And so, the combination of both of those are the only two things that really have an impact on our Standard Products model that's been, only setting the impact to total company's model.

To be very clear, we are in the model the Standard Products.

We have said also that we believe this year coming into the lower end of the gross margin products for HPMS.

And I think that answers the question.

Right, really, fourth quarter level will be at the low end of that range associated with it.

Great, thank you and good luck.

Thanks a lot.

Thank you.

Our next question comes from Harlan Sur of JPMorgan.

Please go ahead with your question.

Thank you for taking my question and nice job on the quarterly execution.

In the Standard Products segment, you have enjoyed a solid pricing environment in 2010.

I am just curious, what sort of pricing trends did you experience in the first quarter, and as we move to 2011, do you see pricing starting to move back to a more normal pace over your declines or is the demand environment still supportive of a better than trendline pricing curve?

Thanks for your comments, Harlan.

So, Standard Products, I would say wasn't as robust in Q1 as it was in 2010 from a pricing environment, but were still more healthy in a normalized run rate basis.

We had really originally anticipated that the pricing might come back to more of a normalized inventory basis by kind of midyear 2011.

With the effect of the tsunami and earthquake, we are not sure maybe that gets pushed out through the end of the year, but clearly we saw a little bit of that beginning to take place in Q1, but the pricing environment is still at a very favorable basis, more of a historic basis.

But still, when you are talking about it, you are talking about something that's 4% to 6% decline annually.

So, it's not like it's onerous as it would be in an SoC company that talks about double-digit price declines on an annual basis, but we haven't even been in that position over the last few quarters associated with it, and we began to see a little of declines, but nothing back to that normalized run rate even in Q1.

Okay, thanks for that, Rick.

In the UHF RFID segment of your ID business, it seems like we are hearing a lot more about the adoption of RFID.

I am not just talking about for warehouse and for inventory management, but more in retail store funds via item level tagging.

Can you just give us your thoughts about the adoption curve for RFID in the mass markets and what sort of growth do you expect from this segment near term and sort of looking out over the next several years?

Thanks.

So, we are very excited about the opportunity and it has broad array of applications associated with it.

One of the things, I think it was even back two or three quarters ago, Wal-Mart announced that they would deploy in all of their stores in the U.S.

RFID tagging that would not be used for tracking of devices interestingly enough as they go through the process, but just use to have more rapid stock replenishment on the show, so that they could use a wireless warranty management to be sure that they had all the sizes on the shelf so that they wouldn't have missed sales associated with it.

So, just that significant implementation by a big role like Wal-Mart obviously drives a significant amount of consumption, but we continue to see very strong consumptions associated with it.

We basically sell through our partners, the bars that are really deploying it.

We had one of the significant partners that we are working on the specific volume levels for this year and we are shooting for 1 billion units.

It only came in at I think 700 million or 800 million, so we off to 1 billion.

The bottom line is we see very healthy growth and a very strong business year, and we think that we have actually improved our product position in this area significantly and we will be in a good solid leadership position as we continue to move forward.

It's important also that we provide both readers and tag.

Very good point.

Correct.

So, on the infrastructure side, one of the things that's happened this quarter is contact with that will be used ultimately for NFC begin to see the acceleration on the infrastructure in this quarter and we will continue as we go forward for the next few quarters obviously.

Okay, thank you Rick.

Thanks Harlan.

Thank you.

Our next question comes from Jeff Harlib from Barclays Capital.

Please go ahead with your question.

Hi, just on the cost savings, I think last call you said you saw the remaining payments would be ratably realized in 2Q to 4Q.

Can you just update us on that and what the major actions area?

What I said last time, and same thing I am saying right now is that we got - we managed to close ICN5 already in Q4, and that being said, the major partners are coming out from the supply chain, overhead structure, and IC, and as you saw, we had a minor amount of [$20 million] of annualized cost savings and the bigger port will come in, in the second half mostly in Q4.

And we have a small manufacturing, a small back-end manufacturing operation that we will be moving forward with.

So, those are the things that contribute towards being able to really realize that on an going basis.

Okay.

And just with the 97% utilization, do you see that moving down a little bit as you bring on capacity, are you still seeing something strange in terms of meeting demand for certain products?

So, we still see constraints in certain areas, and actually it changes on a quarter-by-quarter basis.

Specifically as we look at most of the capacity additions we are doing are only embedded Flash type ability that we do for ID business as well as for the ARM-based microcontroller business.

So, we don't see any significant changes associated with it, but it bounces around on a quarter-by-quarter basis based on the actual customer demand on specific product lines.

We actually and just recent weeks have had one product area where customer orders have come in much stronger than we have been anticipating.

We are having to work through supply chain issues, make sure that we can meet the customers' requirements.

Okay.

And on Sound Solutions, any update on the approval process and do you expect it to close this month or next month?

It would be premature for us, everything that we said is associated with it.

We are very confident that we will close it within the quarter, but whether that takes place in May or whatever, I think remains to be same.

We are pretty optimistic, things like we have had some recent favorable trends associated with it, but it's certainly taken longer than we had originally anticipated, and I think there is some politics involved associated with it.

Okay.

Thank you.

Thank you.

Thank you.

Mr.

Clemmer, there are no further questions.

Please continue with any points you would like to raise.

Thank you investors.

This is Jeff Palmer.

We appreciate your interest in NXP today.

Let's just reiterate what we communicated today.

We had very good results, product revenue up 4.4% sequentially, above our original guidance; very strong results in identification, up 17% sequentially, good results in the rest of our business.

We are on track to expand our margins and we should fully realize our redesigned savings in the back half of this year.

We will be attending several investor conferences in the next few weeks.

Next week, we will be at the Jefferies Investor Conference in New York City.

The following week, we will be at the JPMorgan TMT Conference in Boston.

And about two weeks after that, we will be at the BofA Merrill Lynch Conference in New York City as well.

We look forward to seeing you at these conferences in the future, and if you have any questions, please let us know and we will speak to you at our next earnings call.

Thank you very much.

Thanks a lot for your interest.

This concludes the NXP Semiconductors first quarter 2011 earnings conference call on Wednesday, 4th of May, 2011.

For further questions, you may contact NXP's Investor Relations department.

Please visit their Website on www.nxp.com/investors.

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