恩智浦 (NXPI) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NXP Semiconductors Second Quarter 2011 Earnings Conference Call.

I'll be your coordinator for today.

(Operator Instructions).

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

I would now like to turn the conference over to our host for today, Mr.

Jeff Palmer, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Alicia, and good afternoon, everyone.

Welcome to the NXP Semiconductors Second Quarter 2011 Earnings Call.

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

If you've not obtained a copy of our second quarter 2011 earnings press release, it can be found on our Company website under the Investor Relations section at nxp.com.

Additionally, we have posted a supplemental earnings summary presentation and an Excel document of our historical financials to assist you in your modeling efforts.

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

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

The risks and uncertainties include, but are not limited to, statements regarding the macroeconomic impact on the 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 third quarter of 2011.

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

For a full disclosure of our 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.

Pursuant to Regulation G, NXP has provided a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures in our second quarter 2011 earnings press release, which has been furnished to the SEC on Form 6-K and is available at NXP's website in the Investor Relations section at nxp.com.

I'd now like to turn the call over to Rick.

Rick?

Thanks, Jeff, and thank you for joining us today for our earnings call.

The second quarter of 2011 was a good quarter as NXP delivered revenue growth at the high end of our original guidance.

Product revenue was $1.025 billion, a 5% sequential increase, as all of our business lines delivered sequential revenue growth.

Total NXP revenue was $1.121 billion, representing a 4% sequential improvement.

Our overall profitability remained flat during the quarter as non-GAAP gross margin was nearly 48%, a 700 basis point improvement versus the year-ago period.

We once again delivered improved operating profit during the quarter and non-GAAP operating margin was just over 20%, a 570 basis point improvement versus the year-ago period, and in line with our original guidance.

However, looking forward we do face some headwinds over the next quarter or so.

Today, in order to provide some clarity, we will also provide more color than normal on how the various business lines are currently performing relative to our original expectations.

As most investors are aware, our long-term strategy is well defined and we continue to believe in the earnings expansion opportunity to deliver overall revenue growth better than our immediate peer group across the semiconductor cycle, provide robust margin expansion through a combination of improved product mix and operational efficiency and lastly, to significantly de-lever our balance sheet, which will augment our organic earnings growth.

We believe that investors should judge our success against these three key metrics.

Now, I'd like to get into the details of the various business segments.

Within our HPMS business segment, revenue was $779 million, an increase of 5% sequentially and up 8% year on year.

Our results were at the high end of our prior expectations, with Automotive, Identification and Wireless Infrastructure, Lighting and Industrial business lines all achieving record revenue levels.

However, HPMS gross margin was 55.6%, a sequential decline of 140 basis points, as we experienced a combination of less favorable product mix trends and higher input costs, primarily associated with increased cost of metals, Asian currency fluctuations and also a cost ramp to support our capacity increase in embedded flash capacity.

Turning to the drivers of performance during the quarter, within the HPMS segment, our Wireless Infrastructure, Lighting and Industrial businesses had healthy growth during the quarter, although some customer-specific inventory issues a couple quarters ago lowers the year-on-year growth.

Revenue was $161 million, up 12% sequentially and 3% year-on-year growth, was driven by high-performance RF power amplifiers, 32-bit ARM-based MCUs and Lighting solutions.

Profitability improved sequentially within the business and is stable.

Design win activity in both high-performance RF and MCUs continues to be very good and we have a rich portfolio of new designs that we anticipate will ramp into volume in the coming quarters.

However, within our Lighting Solutions business, we have not experienced the volume ramp of CFL IC drivers, as originally planned by our key customers.

The customer interest in our IC drivers continues to be very strong and the OEMs are eager to introduce premium SKUs and leverage our technology, but a challenge to the CFL OEMs is the cost of rare earth materials, a key bill of material component of CFL light bulbs, which has risen exponentially throughout the year.

The cost of rare earth metals has gone from a few percentage points of the total BOM cost to approximately 30% of the BOM.

This is clearly pressuring the business models of the CFL lighting manufacturers and their ability to ramp new premium product SKUs.

And while the benefits to consumers of CFL bulbs, based on our IC driver solutions, are apparent, the timeframe and rate of growth of the opportunity is not as clear today with the new factors on rare earth metals.

Moving to the performance of our Automotive business, revenue was $251 million, a 6% increase sequentially and a 9% improvement versus the year-ago period.

We experienced very solid growth in both car entertainment systems and auto access solutions, which comprise about two-thirds of our overall Automotive business.

However, demand for our in-vehicle networking solutions and auto sensors were both down slightly on a sequential basis, but were both above the year-ago period.

We believe the disaster in Japan has created a short-term air pocket within the global automotive supply chain, as well as impacting demand directly from our Japanese customers.

We see the fundamentals of the Automotive end market as healthy and that the disruptions in the supply chain are being worked out and should be behind the industry by the fourth quarter of this year.

From a profitability perspective, we have not seen any significant variation in the profit profile of our Automotive business, although the near-term reduction in demand from customers in Japan may have a short-term effect.

Customer interest and acceptance of our products continues to be very strong and we believe we will continue to gain market share over the longer term, as we expand our portfolio with a number of innovative areas where we have demonstrated technology.

As an example of the customer recognition, NXP was recently awarded the Bosch Supplier Award from the Bosch Group, the auto industry's largest electronic supplier.

The award was due to demonstrated excellence in the areas of manufacturing quality, technology and continuous improvement and product supply.

We are very proud of the recognition bestowed on NXP and believe it is a reflection of the value that our customers place on our technology and our unique manufacturing capabilities.

Turning to our Identification business, revenue was $194 million, a 3% sequential increase and up 34% year on year, resulting in NXP having the third number one position as the leading supplier of silicon-based solutions for the security market.

We experienced very strong growth in both e-government and banking, with particularly strong unit growth in banking, where we were ranked number two in units for calendar year 2010.

In both the infrastructure and mobile transactions market, we experienced a more moderate growth.

Taken together, these businesses comprise about 70% of our total Identification business.

Revenue from the automatic fare collection and tags were down on a sequential basis, consistent with the project nature of many of these customers.

It's important to highlight that during Q1 we were able to catch up on a pent-up demand in both our automatic fare collection and tags businesses, as well as other product areas of ID.

Consequently, the decline was not unexpected.

Although profitability of the Group continued to perform at model levels, we did experience a mix-related negative margin impact on the overall Identification business due to the significant growth we experienced in our high-volume banking solutions in the emerging markets.

As we've mentioned on previous calls, we view our success in mobile payments due to the fact that NXP is the only company in the semiconductor space which can deliver a complete mobile transaction solution, which we define as an NFC radio, a secure element and the software to integrate the silicon into the client device.

We are also the market leader in solutions for the infrastructure side of the solution, working with all the major point of sale terminal OEMs.

As proof points, during the quarter, Google announced the Google Wallet solution based on NXP technology, with launch partners including Citibank, MasterCard and First Data on the payments side and with VeriFone, Hypercom, Ingenico and ViVOTech on the point of sale side and supported by a very broad range of consumer retailers.

Additionally, Sony Ericsson mobile platforms has announced during the quarter the integration of NXP's mobile transaction solution into its Android-based smart phone portfolio.

These are but only two examples of the positive customer reaction with which we can discuss from the many we are seeing in this area and there are many, many more.

In total, we are currently designed into over 60 unique NFC-based handset designs across a spectrum of major handset OEMs.

While we are pleased with the adoption and design win momentum, we see the clear next step to the mobile network operator adoption.

Previously, we have provided a range of between 40 million to 100 million NFC-based handset being shipped in 2011.

However, we currently see the ramp is likely to be towards the lower end or, perhaps, even slightly below our initial range for 2011, as the mobile operators implement their deployment strategies.

We still believe and hear repeated confirmation in our long-term view of the penetration into the smart phone market from our discussions with partners throughout the mobile transaction ecosystem.

It is not if the ramp of mobile transactions occurs, but only a question of when it will take place.

We believe the shortfall is due to a combination of formulation and agreement on the specific business models to support the ecosystem, as well as business challenges some handset OEMs are experiencing in the marketplace.

We will continue to provide more color as the product ramp occurs, but need to reiterate that mobile transactions only comprise a small portion of our total Identification business today.

A longer-term driver of growth for the Identification business is the growing need for security in contactless solutions, an area where NXP is the clear market and thought leader across all form factors, key applications and full hardware and software system solutions.

As examples, the government market continues to represent a growth opportunity as different documents and credentials move to chip-based security.

A need for electronic passport rollout -- governments across the world are in the middle of a strong issuance wave for national electronic ID documents and electronic resident permits.

We perceive this trend continuing and expanding as many identity and travel documents leverage secure contactless chips, providing services beneficial to both governments and their citizens.

In the area of banking, institutions desire to offer more robust security, not only for themselves but also for their customers.

On a global basis, chip-based technology is the dominant method of fraud protection.

NXP offers a fraud portfolio of security and contactless products serving both the high-volume and multi-applications markets and has gained significant share in the banking card market, which is forecasted to grow from 1.8 billion units in 2010 to 5.5 billion units in 2016.

Lastly, the growing need for security extends to a wide range of consumer devices and industrial applications, with the aim to protect against product counterfeiting.

Product fraud has become a pervasive concern, to which a combination of software and hardware-based security can provide answers.

NXP has realized the initial authentication design wins in the consumer electronics, industrial and computing verticals based on our secure element technology.

We believe and our partners confirm that NXP is viewed as a partner of choice to provide the leadership technology required here.

Moving on to the performance of Mobile Consumer and Computing business, revenue was $183 million, a 2% increase sequentially and off 8% on a year-on-year basis.

As we had anticipated, we experienced a positive rebound in our green chip technology for notebook PC power adapters, albeit somewhat below our earlier expectations.

The remaining product lines, including high-speed interface and TV front-end tuners, saw weakness in the second quarter.

Profitability was a bit challenged during the quarter.

In the area of high-speed interface devices, we're working on some very exciting technology with major handset OEMs, which should enable positive growth in 2012.

This includes display port and high-speed multiplexer design wins in the PC and handset market and bridging products in the broad industrial market.

Within the logic market, we have some very interesting opportunities where our switch translator devices and micro-pack devices are seeing strong design win adoption.

We believe we are gaining share in both of these markets as our penetration within the Wireless Industrial and Automotive segments accelerates.

Separately, within our Standard Products segment, revenue was $245 million, up 4% sequentially and up 19% year on year.

Segment operating margins were over 25%, a 490 basis point improvement sequentially.

Overall, our Standard Product segment continues to perform extremely well, with an improved portfolio, which has led to our ninth quarter of sequential growth, gains in market share and delivering solid returns on invested capital.

In summary, our overall growth was good during the second quarter, with nearly all areas of businesses performing well.

However, we are clearly not pleased with the profitability picture in HPMS and we have more work to do.

We are actively reviewing our options, including investment levels, in areas that have fallen short of our expectations.

Now I'd like to pass the call over to Kallie for a more in-depth presentation of our financials.

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

As is our customary approach, I will focus primarily on the financial highlights of our quarterly results to leave more time for Q&A.

During the second quarter, product revenue was $1.025 billion, up 4.7% on a sequential basis, at the high end of our original guidance.

This is a record level for since NXP since the beginning of 2009 and is the ninth straight quarter of sequential improvement.

As Rick mentioned, all our core business lines performed better than our original expectations on a revenue basis, but we fell short on HPMS gross margin.

The combined revenue of our Manufacturing, Corporate and Other segment was $98 million.

Taken together, total NXP revenue increased 3.6% sequentially to $1.121 billion.

Within the HPMS segment, revenue was $779 million, up 5% sequentially.

This was at the high end of our expectation.

Non-GAAP gross profit for the segment was $433 million, a 2.4% sequential improvement.

This translates into a non-GAAP gross margin of 55.6%, 140 basis point decline versus the prior quarter due to less favorable product mix, higher input costs and Asian currency fluctuations.

Within our Standard Product segment, revenue was $246 million, a 3.8% sequential increase and higher than our original expectations.

Non-GAAP gross profit was $93 million, an increase of 6.9%.

This translates into a non-GAAP gross margin for Standard Products segment of 37.8%, 110 basis point sequential improvement.

Taken together, total NXP non-GAAP gross profit was $536 million, a 3.7% sequential improvement in gross profits resulting in non-GAAP gross margin of 47.8%.

For the quarter, we realized $17 million in annualized cost savings from our redesign.

The majority of these savings occurred in the HPMS segment, but were more than offset by the factors previously mentioned.

In the case of Standard Products margin, a small portion of the sequential improvement was due to redesign savings.

From an operating profit perspective, total NXP non-GAAP operating profit was $229 million, a 2.7% sequential improvement.

This resulted in a non-GAAP operating margin of 20.4%, essentially in line with our prior guidance.

Our total operating expenses was $311 million, up $9 million on a sequential basis, primarily reflecting the annual salary increase effective April 1st that we discussed on our last earnings call.

Non-GAAP earnings per share was $0.51, an 11% sequential improvement on a 3.6% increase in revenue, a reflection of the leverage our model can deliver.

Before I go on to the changes in the balance sheet and cash position, I would like to note that we successfully closed the sale of our Sound Solution business on July 4th.

We received $855 million in gross proceeds.

Consequently, our results today do not reflect the positive impact of the sale, but in the presentation posted on our Investor Relations website, we have provided a profile of our debt profile as of the beginning of July.

Cash at the end of the quarter was $859 million, a sequential decline of $20 million, reflecting the previously announced $66 million dividend payment to TSMC from our joint venture fab SSMC.

This cash balance does not reflect the $855 million in gross proceeds from the closure of the Sound Solution sale.

Days on inventory increased 2 days to 87 days, just slightly above our target of 75 to 85 days.

We intentionally built inventory over the two last quarters to improve our customer service levels and to be prepared for the lower staffing levels in our factories due to the normal vacation period in Q3.

Inventory held by our distribution partners and not reflected in our balance sheet was 2.3 months of supply on hand, representing just over 5 turns, in line with our model.

Resale out of distribution were about -- up about 4% in Q2, the same level as in Q1.

As a reminder, approximately 50% of our product revenues is transacted through our distribution partners.

Days receivables were 34 days, down 2 days sequentially, below our target of 40 to 45 days.

Days payable were essentially flat at 85 and favorably compared to our target of 70 to 80 days.

Taken together, our cash conversion cycle held stable at 36 days, below our target of 40 to 50 days.

Total debt at the end of the second quarter was $4.706 billion.

This is a decline of $350 million versus the same period a year ago.

On a sequential basis, our debt increased by $73 million due to a combination of currency fluctuation, which impacts our euro-based debt and by financing fees associated with our previously announced $500 million term loan and other debt retirements.

Our total net debt at the end of the second quarter was $3.847 billion, a decline of $383 million versus the year-ago period.

We exited the quarter with a trailing 12 months adjusted EBITDA of $1.2 billion.

This is a 62% improvement versus the year-ago period.

Taken together, at the second -- at the end of the second quarter our ratio to net debt to 12 months adjusted EBITDA was 3.3 times.

However, if you factor in the receipt of $855 million from the closure of the Sound Solution transaction, combined with the actions we have taken since the beginning of third quarter, our ratio of net debt to 12 month adjusted EBITDA would be about 2.5 times.

Additionally, I would like to highlight that Standard & Poor's has raised our corporate credit ratings to B-plus from B-minus.

As Rick mentioned, one of our key strategic goals is to aggressively de-leverage our balance sheet.

I believe we are clearly delivering on this objective.

Our ultimate goal is to get our credit rating to investment grade.

We will accomplish this by applying organic cash generated in the business to pay down our debt load.

We believe we can make significant progress on this effort in the coming quarters.

Cash flow from operations was $14 million, but please remember, this also reflects the dividend payment of $66 million to TSMC.

Otherwise, cash flow from operations would have been $80 million.

As we have indicated in the past, the bulk of our cash generation occurs in the second half of the year.

We made net investments of $69 million in CapEx during the quarter.

Before I provide guidance, I would like to reiterate the comments Rick made in his prepared remarks.

Our top-line results in the second quarter were good but we are not pleased with the gross margin performance of our HPMS segment.

Looking forward into Q3, there are clearly a high degree of uncertainty in our near-term demand from several of our end markets.

As a consequence, we have begun to re-focus our spending and investment level in this areas where long-term growth appears to be below our original expectations.

As a management team, we want to reiterate that we need to do better.

Now I would like to provide our outlook for Q3.

We currently anticipate product revenue will be in the range of down 5% to up 1%, sequentially, following the strong growth in both Q1 and Q2.

Based on the mid point of our product revenue guidance, the expected trends in the businesses during the second quarter and during the third quarter are as follows.

Automotive is expected to be down approximately mid single digits due to the impact of Japan, as Rick mentioned previously.

Identification is expected to be down high single digits, with banking and tags down, infrastructure and automatic fare collection flattish, e-government and mobile transactions up sequentially.

Wireless Infrastructure, Lighting and Industrial is expected to be up in the high single digits, driven primarily by high-performance RF, with MCU up slightly and lighting flat.

Mobile Consumer and Computing and Standard Products are expected to be down slightly.

We anticipate revenue from the combination of our Manufacturing, Corporate and Other segment to be roughly flat.

Additional input to help tune your models are as follows.

We anticipate NXP non-GAAP operating profit to be in the range of $210 million to $232 million.

We believe net interest expenses should be approximately $72 million.

We anticipate our cash taxes to be approximately $5 million and we believe income from non-controlling interests will be approximately $12 million.

Average diluted share count should be approximately 257 million shares.

Taken together, our guidance implies non-GAAP EPS in the range of $0.47 to $0.56 per share.

Now I would like to turn over to your questions.

Jeff?

Alicia, will you please poll for questions?

Yes, thank you, sir.

(Operator Instructions).

Our first question comes from the line of John Pitzer with Credit Suisse.

Please go ahead.

Yes, good afternoon, guys.

Guys, I wanted to talk a little bit on the gross margin.

This is the second quarter in a row where you've missed Street expectations.

You've got sort of a long-term target of 52% to 56% and I guess I understand some of the mix issues that are going on, but at 47%, 48% gross margin I was hoping that there'd be other factors at play than just mix to help move gross margins higher from here.

So can you talk a little bit about what you need to do to get to that longer-term target range?

And Kallie, maybe you can help us relative to the September guide.

What do you think gross margins will range in that guide?

Thank you.

Thanks, John.

Our gross margin, as you know, has been a specific program where we've had a lot of effort going on associated with it, but clearly, the headwinds that we've seen with the currency changes in Asia, the precious metal increases and specifically the cost increases that we put in place to support our embedded flash capacity expansion have created a little bit of headwind in the near term.

We expect, as the -- specifically the NFC ramp out a quarter or two to begin to take place and we see a more full utilization of that wafer fab capacity that we've put in place and the expenses that we've been investing to be able to ramp that capacity takes place that we'll be able to get back on track.

It hasn't changed our perspective about the opportunity.

We still have the programs working on it.

The headwinds associated with the currency and some of the precious metal increases clearly are making it more of a challenge, but it hasn't changed our overall perspective at all.

Kallie?

And we don't specifically guide on gross margin.

However, we are convinced that we will get into the targets of 58% to 63% for HPMS.

Rick, is there any way to quantify the impact of the investment?

Was it 50 bps, 100 bps of gross margin?

John, I think the investment was actually started late last year when we started to build new fab capacity at SSMC and our original anticipation, expectations that then that NFC would ramp in the third quarter and we would be building those products in the second quarter and that clearly did not happen, as Rick mentioned in his prepared remarks.

So it's really a matter of having fab capacity that we had planned to use here.

It didn't get used, combined with input costs that are not under our control and then also mix, an unfavorable mix on the product level.

It's probably in that, I would say, close to 100 bps range associated with the input costs associated with that.

A combination of that, plus we had a little bit of product mix associated with some of the contactless banking expansion in some of the developing countries where we don't have quite the same margin that we do in the developed countries.

And then, Rick, maybe as a quick follow on, can you talk a little bit about where you think distribution inventory sits today?

And I guess several companies out there have been talking about a pause in growth this quarter with kind of a re-acceleration in growth in the December quarter.

Is that kind of how you see the current environment, or do you think it's still too touch and go to make that call?

So, there are two questions.

First off, let me talk about what we see from an order rate.

Clearly, one of the factors for us in the guidance in Q3 is the impact of the tsunami and earthquake in Japan.

As we talked about that, we talked about Japan was only about 5% of our revenue and Automotive was about 50% or so of that.

And if you look at that, that's, in fact, correct on an annual basis.

It just so happens that we're getting the bulk of -- we had a little bit of impact in Q2.

Our actual revenue would have been a little higher if we wouldn't have had that impact in Q2 associated with Japan and clearly we have a 1.5 points to 2 points or so of impact associated with Japan in Q3.

So it's definitely a factor associated with it, but I guess what we see is this being more of a pause than a decline associated with the market.

I think one of the other factors that we've seen in recent weeks is a reluctance by our customers in China to place orders, which clearly has a perspective associated with our guidance.

The -- our customers in China, the bulk of their end products actually get shipped into the US and with the uncertainty in the US economic environment associated with this debt ceiling and what's actually going to happen in the US economy, we have seen a number of our customers in China be a little more diligent in not placing their orders on the supply chain or the parts they need from us until they have confirmation of the orders from their customers in the US.

So, we've seen that as a little bit of a pause factor that is a near-term impact associated with it and that, combined with the impact in Japan, plus NFC.

NFC we had expected to begin to have some initial ramp in Q3 and ramp strong in Q4 and we clearly have seen that pushed out a quarter or two.

All indications we have is the opportunity is still just as significant as we had said and an opportunity to drive just as many -- just as much growth as we had talked about associated with it, but clearly, if you look at it on a near-term basis, it hasn't materialized at the rates that we had planned for and the rate that we put capacity in place for.

On the distribution inventory, we talked about the fact that it's about 2.3 months of supply on hand and represents just over 5 turns, which is basically in line with our model.

So, disty inventories continue to be in good shape and what we've actually seen is some of the disties actually a little reluctant to place near-term orders for the same reasons that I talked about, associated with the uncertainty in the US economic environment.

Great.

Thanks, guys.

Thanks, John.

Thanks, John.

Thank you.

The next question is from the line of Vivek Arya with Bank of America Merrill Lynch.

Please go ahead.

Thanks for taking my question.

Rick, are you starting to see any pickup with the Japanese customers?

We hear some mixed reports of some auto production restarting at some of the Japanese auto makers.

So, are you starting to see any of that pickup or do you think it's more likely a fourth quarter event when that happens?

We don't see any pickup in orders for Q3.

What we really see is that, I think when you look at it, there were a number of our customers that continued to take product immediately following the earthquake and tsunami as they were trying to assess, really, the full implications on the total supply chain.

And as they now have had to balance those off, they've found that they need to reduce their supply chain.

And so we don't see any opportunity for an expansion in Q3 associated with that.

In fact, that'll be roughly 1.5 points or so of negative growth for us in Q3, which is clearly one of the factors that changed for us from our original expectations associated with it.

However, all indications from those customers are we'll be completely back on track in Q4 with a very solid growth rate and so it's just a short-term air pocket, as Jeff calls it, or a bubble in the market where we don't see it as a significant issue for the long term, but clearly creates some issues relative to just the near-term revenue shipments.

Okay.

And for the third quarter you are guiding to a slight drop in interest expense.

I think from $79 million to $72 million.

How should we think about interest expense going forward as you utilize, I assume, most of the proceeds that you have from the Sound Solutions divestiture?

Yes, so this is Kallie speaking, so you'll see that we have a drop and that drop is basically in Q3 coming from that we pay down the revolver and we are now going through the options that we have and -- of taking down additional debt.

You can see that on the slide that we have on the IR website and there is -- it's the 2015 coming due in October and taking that out, that represents $85 million, $86 million in interest reductions.

So, I would say for next year we will be somewhere between $200 million and $240 million, depending on how much cash flow we generate, but that's what we believe the interest expense is going to be for next year.

And, Kallie, does that include any further debt repayments?

I think you expect cash flow to be better in the second half.

Yes.

Are you expecting the de-leveraging process to go on as you go on?

So, to be very clear, just taking out a big part like the 2015s, that, by itself, is $85 million, $86 million, and the, as I said, $200 million to $240 million, more to -- and we will pay down debt with whatever extra cash we generate.

So it's probably going to be, probably closer to $200 million than to $240 million.

Thank you very much.

And our priority will continue to be on de-leveraging the balance sheet, based on earnings and the strong cash flow capability that we have as a business.

Great.

Thank you.

Thank you.

Alicia, let's take the next call.

Okay, thank you.

The next question is from the line of Jim Covello with Goldman Sachs.

Please go ahead.

Hi, guys.

Good evening.

Thanks for letting me ask a question.

A couple of things.

I guess first on the revenue outlook, there's been varying degrees of revenue outlooks from the various HPMS suppliers, with some folks kind of suggesting flattish outlook into the third quarter and others suggesting down, like yourself.

What do you -- how do you attribute the differences in the various outlooks?

Is it lead time differences?

Is it visibility into the supply chain?

Is it simply a function of mix?

How would you guys help us to think about that?

Well, Jim, I think a couple of factors for us that I think you have to think about on the revenue expectations for Q3.

So, those companies that have already experienced the auto Japan crisis or Japan impact on automotive sales for whatever portion of their business they have wouldn't have the same implications we do.

For us, the Japan automotive business is roughly 1.5 points of that decline that we've talked about relative to Q3.

Clearly, one of the other factors for us was that we planned and put the capacity in place associated with an increase in NFC and that hasn't materialized as much as what we had originally would have anticipated.

Our green chip business that goes into the notebook power adapters, we don't have great growth expected for that because of the pressure that we continue to see on the notebook business from the tablet consumption associated with it.

So, I think it really depends on your product portfolio and where you're positioned associated with that.

I think it's probably worthwhile to point out that in Q1 we were above most of our peers and in Q2 we were at the top end of our guidance and at the top end of our peer group associated with it.

So it changes a little bit, quarter by quarter, associated with it, but we still are very confident that we'll outgrow our peers on a four-quarter basis and be able to continue to move forward.

That's helpful, thank you.

If I could ask a followup on the cost savings from the redesign, I understand you had $17 million in cost savings from the redesign this quarter.

What can we expect over the next several quarters, understanding that the margins will be softer versus other issues.

I'm just trying to isolate the issues on the cost saving redesign.

The cost savings are no change compared to what we said in the previous quarter.

We did say in Q1 that it's going to be more towards the second half and especially Q4 and that remains.

There's no change there.

However, with the headwinds, we get -- we lose, partly, some of the benefits.

So would that mean that if the headwinds stay as they are today, say they don't get any worse -- obviously, they could get worse -- but if they don't get any worse, would the cost savings from the redesign potentially drive a gross margin positive inflection point in the fourth quarter?

Yes.

Okay, helpful.

Thank you.

Hey, Jim, one way to think about this, also, you got to remember, so on an annualized basis, through Q2, we've saved $831 million and at the target midpoint it should be about $925 million.

So you kind of take the delta between those two numbers and that's kind of the bogey left to go.

Of that, about 60% of that benefit flows into the HPMS gross margin line.

The other 40% flows into OpEx, but we'll probably reinvesting that in R&D and other go-to-market programs.

So you kind of -- you do that math, you'll kind of see roughly that's 1 point, 1.5 point, 180 basis points of annualized gross margin improvement in HPMS.

So, assuming input costs don't get any worse for us, you will see gross margins expand for HPMS as we exit the year, as we had originally anticipated.

Do you have a follow-up question, Jim?

Alicia, we'll take the next questioner, please.

Thank you.

The next question is from the line of Tal Simon with Monness, Crespi, Hardt & Company.

Please go ahead.

Hi.

Thanks for taking the questions.

First of all, on the NFC units, I know you talked about 40 million or below that.

Previous you had talked doubling next year, so should we think about doubling off of the 40 million level or is it just going to be a bigger ramp next year?

How should we think about that?

This is a loaded question, given the clear uncertainty associated with it.

I think we think the market potential is just as strong there.

So from the -- with it being pushed out a quarter, we would expect that it would be slightly lower for next year than what we would originally have anticipated, but just with the math associated with that, we would expect it to more than double next year, based on the sheer volume associated with it.

But there's still a wide range of outcomes associated with it.

It depends on how successful Google is in pushing the Google Wallet through a broad array of platforms.

It depends on, of the 60 handsets that currently we're working on with NFC associated with it, how fast they ramp up and actually some of the suppliers actually pushing out new models due to other factors that have nothing with NFC whatsoever.

So we still feel very strongly that NFC represents just as much opportunity as it was, maybe a quarter or two later.

So maybe not quite the absolute number that we had talked about with the doubling off that basis in 2012, but clearly more than doubling, based on the reduced expectations for the market in 2011.

Okay, great.

Thanks.

Then the second question -- the next question I had was on your IP.

Obviously, there's a lot of interest in the IP market currently.

Are you guys doing anything to try to monetize some of your 14,000 patents?

How should we think about your efforts there?

Yes, but it would be premature for us to talk about the specific details.

Okay, great.

Thank you.

Thanks, Tal.

Thank you.

The next question is from the line of Harlan Sur with JPMorgan.

Please go ahead.

Hey, guys.

Thanks for taking my questions.

Utilizations were 94% in the second quarter.

Where do you expect that to trend in the third quarter?

We don't have specific guidance that we do on that, Harlan, but I would expect it to trail off some associated with it.

Clearly, with the earlier comments that I made associated with demand, we would expect that to trail off a little bit in Q3.

Okay.

Would you expect that utilizations to go below the 90% level or still too early to tell?

Probably too early to tell, Harlan.

And if things play out as we anticipate, it should be see some (inaudible) back in certain areas of our business into the back half of the year and so it shouldn't go too much below a few points or so.

Okay, got it.

And then, Rick, within your Identification business, I think you had mentioned you expected tag segment to be down.

I'm assuming you're referring to the RFID tag segment of your business.

This was another segment, I thought, that was ramping, especially given all the retail programs that are going on out there with some of your customers.

Can you just give us a sense of what's happening there?

Sure, absolutely.

And so, to be fair, it's a combination of the RFID tags for retail, as well as My Fare tags for transportation.

Okay.

But you've got to remember that we had allocation -- we were on allocation through Q1 where we couldn't deliver as much as our customers requested associated with those products.

As we got caught up towards the end of Q1 and Q2, then, all of a sudden, the customers end up with their supply chain replenished and fully stocked, so that then they take a pause associated with that.

So, I don't think it says anything, Harlan, about the opportunities in the in demand, but really more of just a catch up, if you will, associated with the supply chain and then getting that back to operating more on a normalized path associated with it.

So, we're still seeing very strong demand.

We still have 1.2 billion travelers a day that basically use our My Fare systems in traveling around the 650 cities around the world that use My Fare transit systems.

The RFID tags continue to be deployed on a broad basis with our value-added partners that are deploying that.

And so we don't perceive that as any kind of detrimental effect, but more of a kind of a supply chain correction associated with the pent-up demand that we got back to more of a normalized state in the current quarter with reduced lead times that always changes the demand profile.

Yes, got it.

Okay.

Thank you for the insights there.

And just one final question.

One of the bright spots in the business has been your RF PA business.

Can you just maybe talk about some of the end market drivers?

Is it -- I know most of that is Wireless Infrastructure.

Is it 3G?

Is it 4G?

What are some of the geographies that you see that are continuing to build out their wireless networks?

So our participation is really in 3G and beyond.

So we don't really participate in the older generation technology.

The demand that we're seeing is -- a significant share of it is being driven by the developing countries and specifically in China, which is associated with our customers that may be impacting Europe, as well as in China, but a strong demand with the end equipments in the developing countries.

And also some demand now being presented associated with the rebuild of the infrastructure associated with Japan.

And some of the opportunities that are created there.

But we continue to have a very strong position in 3G and beyond and continue to feel comfortable about the growth of that and, frankly, have struggled a little bit just to meet some of our customer upside requirements as they've come in, associated with it, although it doesn't become totally obvious in our total financial numbers on the revenue results.

Okay, very good.

Thank you very much.

Thanks, Harlan.

Thank you.

The next question is from the line of Mark Lipacis with Jefferies & Company.

Please go ahead.

Thanks for taking my questions.

First, a clarification.

On the roughly $100 million left in the savings for the redesign program, did you say that that -- you expect to achieve that by the end of this year?

Yes, on a run-rate basis.

On a run-rate basis.

Annualized run-rate basis, yes.

Understand.

Understand.

Okay, thank you.

And then, Kallie, you said that you expect to achieve the HPMS gross margin target of 58% to 63%.

Is that achieved with a certain revenue level or a certain timing?

How shall we think about that?

We have said previously that we will enter the low end of the range in Q4 2011 and we have a bit of a setback with input costs, but if you do that math that Jeff helped you with, we are right at the border line right now, depending if it's going to happen something more with input costs, especially the metals and energy prices.

Okay, that's helpful.

And then on the -- you talked about excess cash being put to paying down the debt.

What is -- I think you said this before, so I apologize, I'm asking, but is excess cash like anything above $500 million on the balance sheet?

We have said the following.

It's between $500 million and $800 million, depending on how much cash is sitting in SSMC.

And SSMC cash has gone down significantly.

And when I said $800 million, SSMC cash was about $300 million, it was in the $336 million level.

And now I think it is about $169 million.

So cash at hand demand is less than it was previously.

Okay, thank you.

Last question, if I may.

You talk about 60 handsets that you're working on, on the NFC solution.

Do you have a sense of what your market share is?

That's the last question, thank you.

Yes, thanks.

It's very high.

We only know of one handset provider that we have not been successful at winning and they probably have, maybe, three or four handset models.

So that would imply that, to the best of our knowledge, we would have 60 or 62 out of the 66, to put it in perspective.

But, obviously, volumes will be different based on different handset models.

So that would not be on a volume basis.

But based on our knowledge, the best knowledge we have about handset deployment, that would be kind of our perspective associated with the market position, Mark.

Thank you very much.

Thank you.

Thank you.

(Operator Instructions).

One moment, please.

There are no further questions at this time.

I will turn it back over to Mr.

Palmer for any closing remarks.

Okay.

Thank you, Alicia.

Rick, would you like to make any closing remarks today?

Thanks, a lot, Jeff.

So, again, we'd like to reiterate once again that we think our Q2 results demonstrated a good result for the Company.

Clearly, with our revenue growth at the high end of the expectations, we delivered -- been able to deliver earnings per share within the target associated with it, even with some of the headwinds that we had on gross margin associated with it.

So we think we had good, solid results in Q2, even with the HPMS margin issues that we had, which, clearly, we'll take actions to be in a position to deliver the operating profits that we've committed to you and will move forward associated with.

The near-term revenue associated with it is clearly just a pause associated with it.

We don't see anything that damages the long-term potential we have and the continued opportunity to perform better than our peers in revenue growth, with the operating earnings leverage and the capital restructuring capability to continue to drive strong earnings per share growth, going forward.

So thanks for your interest.

We'll look forward to talking with you.

Yes, Alicia, I just had one last comment, a couple of housekeeping comments for those still on the line.

In August, August 24th, we will be attending the Morgan Stanley Technology Access Day in Chicago.

On September 9th, we will be attending the Citibank Technology Conference here in New York City.

And then on September 13th we'll be attending the Deutsche Bank TMT Conference in Las Vegas.

We look forward to seeing you there and on our future marketing trips in the third quarter.

Thank you very much for your support of NXP.

Have a good day.

Thank you.

Ladies and gentlemen, this concludes the NXP Semiconductors Second Quarter 2011 Earnings Conference Call on Thursday, July 28th, 2011.

For any further questions you may have, contact NXP's Investor Relations Department.

Please visit their website at www.nxp.com/investor.

Thank you for your participation.

You may now disconnect.