恩智浦 (NXPI) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to NXP Semiconductors third quarter 2011 earnings 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 presentation over to your host for today, Mr.

Jeff Palmer, Vice President of Investor Relations.

Please proceed, sir.

Thank you, Charlotte and good afternoon everyone.

Welcome to the NXP Semiconductors third-quarter 2011 earnings call.

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

If you've not obtained a copy of our third 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 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 fourth quarter of 2011.

Please be reminded that NXP undertakes no obligation to revise or undertake 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 include -- excuse me -- 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 reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our third quarter 2011 earnings press release, which has been furnished to the SEC on Form 6-K and is available on NXP's website in the Investor Relations section at nxp.com.

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

Thanks, Jeff, and welcome everyone to our earnings call today.

Our results for the third quarter reflect the market dynamics we highlighted on our last earnings call and in recent investor conferences.

Specifically, as we discussed, when we entered the quarter we began to experience order rates which were well below previous periods.

Order rates during the quarter have reflected our customers' cautious views on an uncertain macro economic environment combined with their desire to minimize inventory exposure as well as shorter lead times industry wide.

Our customers, especially those in China, continue to highlight to us their concern with the sovereign debt crisis in Europe and the deficit situation in the US as major region -- reasons, excuse me, for taking a more cautious stance at this period in the economic cycle.

At this point, we believe the inventory drawdown in the channel is the focus of our customers.

They anticipate a period of continued moderation before inventory levels are commensurate with true in-demand.

Before turning to the review of our quarterly results, I would like to provide an update on the impact of the flooding in Bangkok, Thailand where NXP has a major backend facility.

But first, let me pass on our thoughts in support to all of the NXP team in Bangkok and their families during this period of extreme challenge.

So far into the crisis, NXP has been extremely fortunate and I want to personally thank our team in Bangkok, our global operations and risk mitigation teams and all involved for all of their hard work.

They have taken the necessary action to safeguard our personnel, which in a time of crisis is always our first concern.

Furthermore, the facility continues to be operational, albeit at a lower overall output level as we have experienced an understandable increased level of operator absenteeism.

Actions have been taken to safeguard the integrity of the facility and installed equipments.

We have secured alternative sources for key parts which were normally procured locally and we have put in place actions to maximize the production at alternative NXP backend facilities.

While the situation continues to be quite dynamic, the status of a major dyke in the north of the city continuing to hold is key.

At this stage, it is very difficult to fully gauge what the total impact to our business will be.

But to date, we have already seen some reduced output due to actions taken to protect our equipment.

Let me just pause for a second and give you a real time update.

I guess about an hour ago or two I received an update that our facility is now surrounded by water.

So it's presenting significant problems for the buses to be able to take workers home as well as return.

So we would anticipate that we will probably move to more of a skeleton operation for the next few days as we experience the current situation.

All of our customers will be updated on the current status within the next 24 hours associated with it.

Our plant is still dry.

We still continue to have resources in place to be sure that we protect our equipment and assets, but the roadways around the facility now are such that buses are not able to safely pass into the property.

Now, let me turn back to the prepared remarks.

Now, I'd like to turn to review of our quarterly results.

For the third quarter of 2011 NXP delivered revenue which was essentially in line with the lower end of our original guidance.

Product revenue was $970 million, a 5% decline on a sequential basis.

Total NXP revenue was $1.06 billion, also about a 5% decline sequentially.

Our overall profitability increased as non-GAAP gross margin was 48.3%, a 50 basis point improvement sequentially and a 470 basis point improvement versus the year-ago period.

We delivered non-GAAP operating profit of $210 million or 19.8%, a 60 basis point decline sequentially but a 330 basis point improvement versus the year-ago period.

Looking at our revenue by channel; distribution, which represents over half of our product revenue, does continue to operate within the long-term trends we have historically experienced.

Product resales out of distribution were down 6% and matched our sales into distribution.

Months of supply on hand in distribution was 2.7 months exiting the quarter and is within our long-term range of 2 to 3 months, but slightly above the top of our partner's desired range.

Looking at the revenue managed through [BMI] programs primarily for our Automotive business, we feel comfortable with the inventory situation.

And lastly, the remainder of our business is executed on a direct basis which has actually helped fairly well overall.

Turning to the performance of the business segments, within our HPMS segment revenue was $726 million, a decline of 6.8% sequentially, but up 1.5% year-over-year.

HPMS' non-GAAP gross margin was 56.5% on a sequential improvement of 90 basis points.

Looking at the drivers of performance during the quarter within the HPMS segment, our wireless infrastructure, lighting and industrial business was the relative out-performer during the quarter.

Revenue was $159 million up, 5.3% sequentially and up 11.2% year-over-year.

Growth was driven by high performance RF power amplifiers for cellular base station applications, an area which has seen particular strength especially with Asian OEMs.

Revenue from our 32-bit ARM-based microcontrollers was flat and revenue from Lighting Solutions declined modestly in the quarter.

Within our Mobile Consumer and Computing business revenue was $184 million, essentially flat on a sequential basis and up 5% from the year ago period.

We experienced seasonally strong demand for our GreenChip technology for notebook/PC power adaptors and a modest rebound in demand for TV front-end tuner products, both of which were in line with our original expectations.

Both high-speed interface and logic businesses were weaker than anticipated during the quarter.

Within our Automotive business revenue was $223 million, a 11.2% decline sequentially and a 3% decline versus the year ago period.

Originally, we anticipate that sequential slowdown in our third quarter Automotive business would be localized to the Japan market with more normal seasonality in the remaining markets.

As a point of reference normal Q3 seasonality in the Automotive market is a decline of between 3% to 5%.

However, the decline in Japan was somewhat more serious than anticipated.

And the other regions came in somewhat softer than normal seasonality.

From a product perspective both car entertainment systems and in-vehicle networking was slightly worse than the overall Group decline.

Sales of auto access solutions were in line with the overall performance of the Group and sensors and other products performed slightly better.

Turning to our identification business.

Revenue was $160 million at 17.5% sequential decline while up 8.1% year-on-year.

We experienced a significant decline in revenue from e-government, banking and tax and labels all of which performed below the overall Group performance.

Revenue from automatic fare collection and infrastructure products was relatively better than the overall Group performance but both still decline on a sequential basis.

Revenue from mobile transactions was up very strongly in the quarter as we continue to see positive traction from our NFC solutions.

We are currently designed in to over 90 unique devices.

And this is a significant increase from the last quarter.

Identification business results are due to the combination of delays in rollouts of several e-gov and banking contracts primarily in Asia.

This combined with the digestion process occurring in our transportation business after our strong first half shipments has resulted in what we believe to be a short-term pause in the long-term fundamental growth of our identification business.

Lastly, within our Standard Product segment revenue was $244 million essentially flat on a sequential basis and up 10.4% year-on-year.

Standard Products non-GAAP gross margin was 36.9%, a sequential decline of 90 basis point, but up 120 basis points versus the year-ago period.

Segment operating margin was 22.5%, a 310 basis point decline sequentially and up 260 basis points from the year-ago period.

In summary, despite the challenging macro environment which continued to worsen during the third quarter, we are able to deliver results essentially within the range of our original guidance.

As our fourth-quarter guidance reflects, we anticipate a longer period of volatility.

And do not expect a reacceleration of orders to occur in the short-term.

We believe that until our customers have improved confidence in the stability of end market demand and have worked down on hand inventory NXP's growth rate will be less than in previous periods.

Now, I'd like to pass the call over to Karl for more in-depth presentation of our financial.

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

As Rick has already covered the overall revenue performance of the Company and in order to give you more time for questions I'll move right to the P&L.

During the third quarter we generated $512 million in non-GAAP gross profits for a gross margin of 48.3%, a 70 basis point sequential improvement and a 470 basis point improvement versus the year-ago period.

Revenue was down $61 million sequentially and gross profit down only $24 million.

We realized $8 million positive impact due to the redesign program primarily in our HPMS segment.

Secondly, we successfully sold a small portfolio of patents for a net consolidation of appropriately $10 million providing a positive impact of both revenue and gross profits in our HPMS segment.

Third, excluding the sale of the small portfolio of patents, revenue was down sequentially $71 million, resulting in a $36 million lower gross profit.

The last item is the effects of the lower factory utilization on under-absorption of fixed costs.

In the quarter, we experienced an $8 million impact due to under absorption related to lower factory utilization.

A key point to note, in our cost accounting system the effects of under or over absorptions are recognized essentially one quarter later, which is our average manufacturing cycle time.

Therefore, the $8 million impact in the third quarter relates largely to the Q2 utilization which was 94%, 3% points lower than the prior quarter.

To help you in your modeling, in our current cost structure you can assume that a 5% point change in utilization results in roughly $10 million to $15 million impact on fixed costs absorption in the next sequential quarter.

These numbers vary depending on many manufacturing variables but a $10 million to $15 million impact for a 5 percentage point change can be used as a rough rule of thumb.

Turning to the HPMS segments.

We delivered non-GAAP gross profit of $410 million at a profit margin of 56.5%, a 90 basis points improvement versus the prior quarter, primarily due to the items previously discussed.

Within our Standard Products segment non-GAAP gross profit was $90 million with 36.9% of revenue.

A 90 basis points sequentially decline mainly driven by pricing dynamics in the market.

But still, above the mid point of our target grow margin for Standard Products.

From an operating profit perspective, total NXP non-GAAP operating profit was $210 million or 19.8%, a 60 basis point decline from the prior quarter but a 330 basis point improvement from the year-ago period.

This performance was in line with the lower end of our original guidance.

Our total operating expenses was $305 million, down $6 million on a sequential basis, primarily reflecting benefit from the redesign savings within SG&A.

Taken together, our non-GAAP earnings per share was $0.50 compared to $0.51 cents in the prior quarter.

Now, I would like to turn to the changes in our cash and debt position.

As we noted in our prior earnings call we successfully closed the sale of Sound Solutions business in July 4th and received $855 million in gross proceeds.

Cash at the end of the quarter was $865 million, a sequential increase of $6 million.

Total debt at the end of the third quarter was $3.82 billion, a sequential decline of $885 million and a decline of $828 million versus the same period a year ago.

During the third quarter we repaid $600 million of our revolving credit facility.

With that the total amount still available to us for future action.

Additionally, we repurched $230 million of our long-term debt across our debt maturity profile.

This amount includes about $9 million of coal premium expense.

Taken together, our total net debt at the end of the third quarter was $2.95 billion, a sequential decline of $891 million, and a decline of $746 million versus the year-ago period.

We exited the quarter with a trailing 12-month adjusted EBITDA of $1.17 billion.

This is a 35% improvement versus the year-ago period.

Taken together, our ratio on net debt to trailing 12-months adjusted EBITDA was 2.5 times.

Please note, subsequent to the close of the third quarter we entered into a private transaction whereby we will repurchase approximately $251 million of our 2013 US dollar denominated floating rate notes; in addition to approximately $388 million of our 2013 euro denominated floating rate notes.

We will then issue new US dollar denominated senior secured floating rate notes due 2016.

This transaction will enable us to substantially improve our debt maturity profile.

We continue to believe that cash generation capabilities of our business will enable us to pay down our debt in a very orderly pattern.

Turning to the balance sheet, days on inventory increased by 10 days to 97 days as the decline in revenue occurred some what faster than our ability to scale back production; 97 days is above our target of 75 days to 85 days, but it's not a level that concerns us.

And it actually gives us more flexibility in serving our customers.

Days receivables was 36 days, up 1 day sequentially and below our target of 40 days to 45 days.

Days payable were 85 days, down 1 day sequentially and stable compared to our target of 70 days to 80 days.

Taken together, our cash conversion cycle pushed up to 48 days from 36 days in the prior quarter; primarily, as a result of increased inventory, but still within our target of 40 days to 50 days.

Cash flow from operations was $131 million, an increase of $50 million, compared to the prior quarter.

Net CapEx investment during the quarter was $44 million resulting in free cash flow of $87 million.

Please note that on our cash flow statement, consistent with the guidance provided by FASC in the ASC topic 810, dividend paid to non-controlling interests has been moved from operating activities to financing.

Now I would like to provide an outlook for Q4.

As Rick mentioned, we expect a period of continued moderation in demand as our customers take a more cautious stance due to the macro economic environment.

We believe our customers are more focused on reducing inventories in the channel.

Additionally, at this stage it is difficult to estimate the total impact of the flooding in Thailand on our business.

With these views as a backdrop, we currently anticipate product revenue will be in a range down minus 8% to down 14% sequentially.

Based on the mid-point of our product revenue guidance range, the expected trends in the business during Q4 are as follows.

Automotive is expected to be up in the low single-digit percentage point range.

Identification is expected to be down in the high single-digit percentage point range.

Wireless infrastructure, Lighting and Industrial is expected to be down in the high-teens percentage point range.

Mobile, Consumer and Computing are expected to be down in the mid-teens percentage point range.

Standard Products is expected to be down in the high-teens percentage point range.

We anticipate revenue from the combination of our Manufacturing Corporate and Other segments to be approximately $70 million.

Additional input to help you tune your models are as follows.

We anticipate gross profit to be in the range of approximately $397 million to $426 million.

Let me walk you through how the bridge -- the change in the gross profit for the period -- prior quarter.

As I mentioned in my earliest prepared remarks, in our cost accounting system the effects of under or over absorption due to factory utilization are offset by about one quarter.

During the third quarter utilization was 79%, 15 points lower than in the second quarter.

This will have about a $38 million adverse effect on gross profits in the fourth quarter relative to the third quarter due to under absorption of fixed costs.

The remaining difference in gross profit is due to lower anticipated revenue.

Based on the remaining benefits from the redesign program in SG&A and additional other saving programs we kicked off in the third quarter we anticipate operating expenses to be in the range of $268 million to $274 million.

This should translate into a non-GAAP operating profit in the range of $129 million to $152 million.

We believe net interest expenses should be approximately $71 million, plus or minus $1 million; slightly lower than the third quarter, primarily due to reduction of debt in the third quarter and partly offset by the effects of the private transaction discussed previously.

We anticipate our cash taxes expense to be approximately $5 million and we believe income from non-controlling interests will be approximately $2 million.

Average diluted share count should be approximately 251 million shares.

Taken together, our guidance implies non-GAAP EPS in the range of $0.20 to $0.30 per share.

Now, we would like to turn to your questions.

Yes.

Yes.

Charlotte, could you poll for questions please.

(Operator Instructions) John Pitzer, Credit Suisse.

I guess Rick and Karl, you took some utilization actions in the September quarter to lower production levels.

I'm kind of curious, as you think about utilization in the calendar fourth quarter are we going to stay at stable levels with Q3, or will we take another dip down?

We will go down, John.

Can you help quantify Rick, by approximately how much.

It's -- the Thailand facility obviously sets a little bit different slant on it as well, and I don't think we want to get in the business of really projecting the next quarter's utilization, but it's definitely going to go down based on the revenue guidance that we put in place as well as the inventory levels that we have.

And then Rick, understanding that trying to quantify Thailand is extremely difficult, but given the guidance that you gave for the December quarter what's embedded relative to Thailand and is that mainly coming in the Standard Products bucket and the compute bucket, or how do I think about what you produce in Thailand as far as that market exposure?

Well, first off, I would tell you that our guidance reflected our best update on Bangkok prior to two hours ago.

So, it's still extremely fluid, so to speak and, we it --- there is a great variability relative to the potential impact associated with it.

But it clearly has worsened since we pulled it together.

I think that we're probably maybe still within the low end of the economic environment and we can offset in other factories, some of the loadings, but it's really too early to say, John, associated with the range and whether it's absolutely comprehended or not, to be quite candid.

Relative to our production it's not really much Standard Products; it's more Automotive and I'd, as well as some of our High Performance Mixed Signal products.

We actually have taken our facility and moved most of the equipment that was on the ground floor up above the ground floor.

And some of the equipment is on the ground floor like mold presses that are just too large to physically move, we have protected accordingly.

And we're kind of trying to stay focused on that over the next probably 48 hours, as we think that certainly the most serious situation assuming the dyke north of the city holds, should pass over the next four or five days associated with it.

But it will have some impact on our Automotive business as well as our ID business and as well as High Performance Mixed Signal.

And we're -- the absolute level of impact is still very difficult to actually gauge at this point in time John.

And then Rick, you mentioned inventory in the channel, I believe you said 2.7 months.

What's your expectation as far as the work down in the December quarter.

And then my last question; just any update on NFC product cycles tend to have the ability to kind of supersede the overall semi-cycle, or the economic cycle.

I'm just kind of curious about any update on the NFC ramp?

Well, on NFC specifically, we talked about the fact that we're now designed in to over 90 handsets and tablets.

So we continue at something like a 50% -- not quite a 50% increase, but close to a 50% increase from a quarter ago.

So the progress there continues to be very positively received.

And clearly, our Q4 projections assumes continued ramp up associated with NFC, a significant ramp up of NFC.

So we're trying to get out of the actual business of actually doing forecast projections for ourselves as well as the industry which you could extrapolate based on our numbers.

But it will increase substantially in Q4 based on the orders that we have from our customers and run rates associated with it.

And John, I'm sorry, I forgot the first question.

Inventory in the channel.

The inventory in the channel, sorry, so the inventory in the channel was up to 2.7 months, and as you heard from our comments we basically saw the same level of decrease on our shipments into the channel as we did the sell through out of the channel.

But because of the reduced volume that meant that months of inventory went up from roughly 2.5 months to 2.7 months.

So it wasn't an absolute -- as much an absolute dollar or unit increase as it was the metric by some of the reduced run rate.

So I think there's a real attention, a real focus by our customers on continuing to reduce that.

Frankly, we want to be sure that we keep that at a reasonable level to be sure that we can support our customers as the ramp up in the market does take place.

And we've seen some indications, a few spot indications of some increased demand over the last few weeks that had given us some signs of encouragement associated with it.

But it still continues to be a very tough environment and most of our distribution partners are clearly focused on how they can reduce their inventory so that they can focus on turns and earns.

But we would like to see the inventory kind of ease down a little bit, but frankly, not a lot in terms of volume as we'd like to see the sell through increase so that that actually reduces the months of inventory, John.

Vivek Arya, Bank of America, Merrill Lynch.

The question is on operating expenses.

So you've done a good job in managing OpEx and you're expecting that to decline 10% to 11% sequentially in Q4.

Is that the new base and how will the trajectory look like over the next several quarters as you get towards the end of your redesign program?

So that OpEx level is really as a result of some of the actions we took as we saw the weaker sales outlook earlier in third quarter, combined frankly with some reduced bonus levels as well from the performance.

As we get out a couple quarters, if we can return to the levels of business performance that we would like then at least the bonus portion of that will return.

So there will be some impact bonus coming back into that effect.

So it would not be absolutely a steady state run rate based on the level that we're talking about.

But we have significantly reduced some of our expenditures.

We've focused on a number of areas where we chose to ensure that we were making enough investments in areas that we really wanted to focus on and actually reduced the investments that we had planned to make in other areas based on the market environment and the affordability levels that we have.

And one follow-up, do you expect to be cash flow positive in the next few quarters and then how should we look at modeling interest expenses?

So, yes, I expect to be cash flow positive in the next coming quarters.

We do always a little bit depending on how we see Q1, which I don't want to guide into right now but I believe we're going to be cash flow positive in Q4.

When it comes to interest expenses I gave you guidance for this quarter of $72 million -- no, no, $72 million for the prior quarter, $72 million, I came in at $73 million.

I am now guided at -- to around $71 million and that is also including the new over $600 million extension that begun by moving $600 million of 2013 maturity to 2016 so that's included.

So I have not forecasted any additional debt repurchase in this quarter, which we might on an opportunistic basis do, depending on (inaudible) right now.

Okay, is deleveraging still a major priority for NXP.

I understand end markets, the visibility is not there but is it fair to assume that deleveraging is still a high priority.

Absolutely.

Okay, perfect.

Thank you.

James Covello, Goldman Sachs.

I guess, first question, understanding it's very difficult to predict more than a couple quarters out how long would the current environment need to stay very weak before you guys would consider additional restructuring actions including maybe even additional fab closures?

Well, James, I think that we are always looking at what we can do relative to our manufacturing footprint.

To be sure this is competitive as possible to the extent there's some period of reduced demand then it gives us some flexibility to go evaluate what alternatives we can do to ensure that we take advantage of that environment to try to do that.

So it's kind of whenever you see a period of softening demand its top of our priority list with our operations team in trying to understand how we can continue to improve our footprint.

I mean, the fact is going from 13 facilities down to 6 over a period of three or four years and -- or two or three years actually I guess as we look at that -- and we want to be sure that we can continue to have what we believe to be benchmarked at least cash cost basis.

So it's clearly a high priority for us.

I wouldn't tell you that we're ready to talk about anything specifically but it's definitely an area that we have at the top of our list and continue to work, Jim.

Okay.

And if I could ask some more follow-up.

Obviously, the guidance across the whole analog complex has been very, very weak, especially the bottom end of your range is a little weaker than some of the others.

If I just think about reconciling your guidance to others do you think it's more end market exposure, product exposure, maybe lead time differences or maybe some of the issues in Thailand that crept in even before the incremental news this morning that caused your -- maybe even the bottom end of your range to be a little worse than -- not all but most of the others.

Thank you.

Jim, it's really hard to say specifically what it is.

I think the bottom end of our range was really more driven by some of the order rates that we'd seen and ensuring that we encapsulated that within the overall guidance of our range.

We continue to see a wide range of potential outcomes and we're trying to be sure that we're -- just like we did last quarter, we're, I think, at the time that we set our guidance we were a little bit of an outlier.

And then a number of semiconductor companies had to preannounce, et cetera.

We're trying to reflect that associated with it; it clearly has some implications associated with Thailand and we'll continue to try to update the situation in Thailand to understand if it makes it worse than that.

But I would say that it was really driven more by order rates that we see from customers and frankly probably as much as anything else the strong move by our distribution partners to want to seriously reduce their inventory and focus on turns and earns.

I think that's probably as significant as anything else, Jim.

Christopher Muse, Barclays Capital.

I guess first question was hoping you could discuss how you think about prioritizing capital structure and issues there in terms of free cash flow generation given that times have certainly changed in the last three to six months.

I know an important part of the story has been deleveraging and reducing the interest expense.

So curious how we should think about that given your potential change in priorities on debt repurchases and how we should think about interest expense going forward, can we still get to that $200 million, $240 million for calendar '12 or has that been removed from the table given what's going on macro.

Karl-Henrik Sundstrom So we have always said that we wanted to have a balanced view between a maturity profile and debt -- or interest expense or earnings per share improvement due to the deleverage.

We will continue to do that, we might slow down a little bit depending on the economic and environment.

And the range we gave was somewhere between $200 million and $240 million, and if we talked about last time being in the middle of the range I think we are now more towards the high end.

Because we didn't -- we did reduce debt this quarter of $221 million in the -- of the [15] and all the other ones and we moved out the $620 million of 2013.

And we will continue to do that.

But instead we might slow down a little bit.

We were, to be fair with Karl's point, we were a little more methodical and not as aggressively reducing the 2015 during this quarter based on the economic environment.

But clearly the action we've just taken where we've moved out $600 million or so of the 2013 to 2016 gives us quite a bit of flexibility to go back and continue to ensure that we stay on the program that we have of trying to maximize the reduction of interest cost.

And as I said in my prepared remarks we still have a $600 million of the revolver untouched.

Got you, that's helpful.

And then I guess second question on the OpEx side.

And you spoke to it briefly earlier but I guess a more pointed question is in terms of the savings that you showed in September and particularly in your December guide, how much of that is kind of one-time bonus accrual reversals and how much of that should we be thinking about as your steady state OpEx at the current top line run rate?

It's hard to say specifically but it's probably half and half, something like that.

Roughly half of it being systemic overall reductions of spending and half of it coming from adjustments and bonus that will come back as our performance improves.

And remember with OpEx you can always save a bit.

You can always improve your efficiency.

Well, I guess, the question is how much of it is a reversal of what you've already accrued given what has now transpired in the second half of your calendar year.

So the question is, if revenues are tracking flat in March can OpEx stay sustainable at the $270 million plus level or because the reversals impacted Q4, the number's actually higher?

You heard what Rick said, half and half.

Half and half.

And as long as the business doesn't improve the performance significantly then that bonus accrual will not come back in.

So it will be really when we see a significant improvement in the business where we would see the portion of it that would be related to the bonus being required.

That's helpful.

And then last question from me on the auto side.

Given some of the turbulence that we've seen this year particularly related to Japan.

How should we think about seasonality there?

And how should we think about your visibility there?

So in Automotive usually the Q3, on a steady state basis if you just have one which we clearly don't, but would be down 3% to 5% in Q3 but then back up above Q2 levels in Q4.

We won't see that this quarter based on the current situation with Bangkok and as well as some of the little bit of softness or worse than seasonal demand in Europe and North America that we've seen in the automotive market.

But overall, I would say the automotive market continues to remain fairly healthy.

Clearly, better than most of the rest of the semiconductor market.

And we continue to be in a very solid position.

Excellent.

Thank you.

Vijay Rakesh, Sterne, Agee & Leach, Inc.

Just on the Thailand, on the Automotive side.

I know you guys guided down high-single digits.

How much of that is demand versus the Thailand floods?

Well, as I said, typically demand would be up in Q4 on a seasonal basis.

In this Q4 it wouldn't be up as strongly because of some of the softness that we talked about in North America and European demand.

But specifically, it would be a big chunk of it would be related to Thailand, our assessments of Thailand which frankly could worsen with the latest update that we just have now.

Got it, okay.

And the second question is, I know a lot of balls you're juggling here and even the last two years -- last two three years you've successfully divested a lot of non-core major business like the Sounds business here.

I mean, is the Standard Products business, obviously, it's much lower margin than your High Performance side, is that something that you would look at kind of divesting and improving the balance sheet also?

I would tell you that our Standard Products business is a significant contributor in our portfolio.

The return on capital of our Standard Products business runs roughly at the same level as our High Performance Mixed Signal business.

So it has a good solid return on capital even though the gross margins are clearly below those of the HPMS business.

And the operating income is slightly below that of the HPMS business if you look at it on more of a model basis.

But the one -- there are couple of things that really are significant for us in Standard Products (inaudible) that it brings to backend operations where if you look at the combination of our Standard Products which is 70 billion units a year it gives us the ability to ensure that we've got the volume to have world class leading costs for the backend in serving our HPMS backend assembly just as well.

It also gives us the benefit for some specific applications to be able to use more of a low-cost discrete packaging for some of the applications than a typical IC manufacturer would have.

So that's a significant factor.

The other thing is that the when you look at our Standard Products and HPMS business combined it makes us the second largest semiconductor company through the distribution channel.

It allows us to have an influence on where they do the resource assignment that we wouldn't have if we didn't have the Standard Products business.

So we have no plans to do anything specific about it now.

If someone came in and was willing to give us absolute fair value then we would obviously have to consider that at the appropriate time.

But don't see that happening any time soon and certainly not a strategy that we have been trying to pursue.

Got it.

Last question here, on the guide for Q4, how much is the [turns] business and how much is -- how much turns business do you need?

Vijay, I don't think we've got that at our fingertips right now.

Let me follow up with you at another time.

Thanks.

Harlan Sur, JP Morgan.

Given the gross margin performance in the Standard Products business in Q3 it looks like ASPs held up fairly well.

Just wanted to know what you're seeing here in the fourth quarter?

Well, the pricing environment is not as responsive in Q4 as it has been, in Standard Products specifically.

I think the pricing environment clearly has deteriorated somewhat.

I don't know if that's a short-term blizzard or more of a change in the actual tide.

It bounces around as you very well know but we would anticipate, as we had said getting back on more of a normal basis in our Standard Products business which would be kind of mid to high single digit annual decline associated with it.

And I think we're back on track associated with that Harlan, which is clearly different than what we've seen through the middle of the year.

And we're beginning to see -- to be fair, we're beginning to see some of that in portions of third quarter as well.

Okay, got it.

And then Rick, I know it's hard to quantify any of the potential effects in your backend facility in Thailand.

But can you just help us understand maybe how much of your total revenues actually flows through that backend facility?

Yes, it's somewhere between 20% and 22% of our -- or maybe 23% of our total sales that go through the Bangkok facility.

Obviously, we have some of the production that was already done.

We've relocated some of the physical equipment, we've moved things around so it would not be that absolute level of revenue that would be at risk even if it were to go under water, which it's not, and knock on wood, will continue to stay dry.

The thing that we have to do is to get back in a situation where the roads are in better -- are more passable situation where we can get our employees to and from the facility.

We actually have a large number of employees that are held on the -- on-site during this current crisis situation.

And we'll continue to have that associated with it.

But -- so it's not like all of that 20% or so of revenue would be at risk.

But clearly, you will have some impact associated with our production in Q4 timeframe.

Yes, absolutely.

Okay, good luck with your efforts there.

And thanks for answering my questions.

Thanks a lot, Harlan.

Thank you, Mr.

Palmer, there are no further questions.

Please continue with any points you would like to raise?

Okay Charlotte, thank you.

I'd like to thank everyone for their being today.

A few housekeeping items before we end the call.

We will be attending several investor conferences over the course of the fourth quarter, including the UBS TMT Conference in New York City on November 15th, the Credit-Suisse Conference in Phoenix, Arizona on November 29th, and the Barclay's Capital Conference in San Francisco on December 7th.

We will look forward to meeting with you at these conferences.

And please do not hesitate to contact us if you have any questions.

Rick, do you have any last comments.

Yes.

Thanks a lot, Jeff.

So I thank all of you for your support.

We realize that this is not only a precarious time from an economic environment on a macro basis which clearly has implications associated with our revenue projections and our expectations, but also then the complicating factor associated with the floods in Thailand.

And again, once again, our hearts go out to the people in Thailand and all of the challenges that they're experiencing associated with this.

But we also do appreciate your understanding and support as we go through this period of uncertainty.

So thank you a lot.

We'll see you next time.

Thank you, Charlotte, Thank you everyone.

This concludes NXP Semiconductor third quarter 2011 earnings conference call on Tuesday, 1st of November, 2011.

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

Please visit the website on www.nxp.com/investors.

Thank you for participating.

You may now disconnect.