恩智浦 (NXPI) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to NXP Semiconductors' first quarter 2012 earnings call.

My name is Karis and I will 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, Karis, and good afternoon, everyone.

Welcome to the NXP Semiconductors first quarter 2012 earnings call.

With me on the call today is Rick Clemmer, NXP's President and CEO; Kalle Sundstrom, our CFO; and Peter Kelly, our Head of Operations and our newly appointed CFO, who will take over from Kalle upon his departure.

If you've not obtained a copy of our first quarter 2012 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 Excel document of our historical financials to assist 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 expectations.

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 sale of new and existing products, and our expectations for financial results for the second quarter of 2012.

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 measure 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 first quarter 2012 earnings press release, which will be furnished to the SEC on Form 6-K and is available on NXP's website in the Investor Relations section at nxp.com.

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

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

Before I review the results for the first quarter, I'd like to highlight several changes to the NXP management team which we announced since our last earnings call.

First, it is unfortunate we have to announce the departure of Kalle, who is returning to Sweden.

I want to personally thank Kalle for his focus and dedication these last four years in helping revitalize and help put NXP on the path to long-term success.

Without his tireless efforts, valued insight, financial skills, and camaraderie, we may not have gotten the Company to where it is today.

Moving into the CFO role is Peter Kelly, who has been a member of the NXP management team, helping guide the success of our operations organization for over a year.

Peter brings over 25 years of relevant financial, operational, and technology expertise to the role of CFO.

We believe that given the close working relationship between Kalle and Peter, as well as my extended experience with Peter, we anticipate little to no disruption in executing and achieving our financial goals.

Additionally, Kalle will continue through the end of July and will assist Peter in the orderly transition.

Secondly, we were pleased to announce Dave French has joined NXP in the role as the Executive Vice President and General Manager for the newly created Portable and Computing business unit.

Dave brings over 30 years of semiconductor experience.

He is a well-respected industry veteran who we believe will drive the new business unit and help to continue to refine our customer focus, especially with technology companies which are geographically based in North America.

Now I'd like to turn to our results for the first quarter.

As is our practice, I will address revenue trends in our various markets and channels, with Kalle providing more color on profitability and the other financial metrics.

We are very pleased with our performance in the first quarter as we delivered product revenue of $912 million, up over 6% sequentially, and at the high end of our guidance.

Total NXP revenue was $978 million, up 5% sequentially, and near the upper end of our original guidance range, as well.

We believe that NXP is in the early stages of a positive cyclical rebound, but, more importantly, we are beginning to see tangible acceleration of company-specific design wins, driven by the material adoption of NXP technology.

This has resulted in a rebound in order rates, with many of our customers and across nearly all our product lines.

From a segment perspective, HPMS revenue was $702 million, $17 million above the midpoint of our guidance.

Within nearly every one of our focus end markets, we experienced growth either in line or above our original expectations.

Within our Automotive business, revenue was $229 million, up about 5%, as we expected.

From a product perspective, the quarter for our Automotive group played out in line with our expectations.

We experienced strong sequential demand for in-vehicle networking and keyless door entry products, with in line demand for entertainment products and a slight rolloff in sensor demand, sequentially.

Within our ID business, revenue was $187 million, up 21% sequentially, about 9% better than our original expectation.

We experienced robust order trends across the entire portfolio, with strong growth in our core markets of e-government, automatic fare collection, and banking due to a combination of new program launches and the resumption of demand.

Taken together, our core ID business grew roughly 20% on a sequential basis.

As many of you learned at our recent ID seminar, we continue to believe that there is a long and robust tail of growth to play out in our core ID business due to the secular market trends driving demand across the entire core product portfolio.

While many investors are excited about mobile transactions, we would hope investors do not overlook our strong position with our core markets, which continues to represent over 80% of the ID revenue.

The core ID business has very high barriers to entry, with customers who value our long track record of leading investment in security solutions.

Within our Emerging Markets business, driven by mobile transaction products, revenue increased by over 30% sequentially and represented the fifth straight quarter of sequential growth.

Our NFC design-win momentum continues to build in well over 130 unique handset and tablet design wins, with roughly a third of these entering into production in the next couple of quarters.

Moving to our Wireless Lighting and Industrial business, revenue was $121 million, essentially flat on a sequential basis, about 7% below our original expectation.

The biggest shortfall was worse-than-expected demand for our high-performance RF product for the cellular base station market.

We view this as a temporary pause consistent with other participants in the wireless infrastructure market.

We did experience a positive rebound in demand for our MCU products, though slightly below our original expectations.

Lastly, demand for our lighting driver products was better than our expectation, but is relatively a small influence on the Group's revenue.

Turning to our Mobile, Consumer, and Computing business, revenue was $173 million, up 5%, and about 7% better than we had originally planned.

We experienced very robust improvement in demand for our interface and logic products as several key programs are preparing to enter into production.

Additionally, we experienced improved demand for our GreenChip products as the global PC supply chain recovered from the disruptions due to the Thai flooding.

Sales of silicon tuners returned to more normal levels after the seasonal strength experienced in the fourth quarter.

Finally, turning to our Standard Products business, revenue was $202 million, up 2%, and about 3% better than anticipated.

From a channel perspective, we experienced better-than-anticipated demand in the distribution channel, primarily due to demand for logic and interface products.

This is due to the previously mentioned key programs, which are getting ready to launch into production and will be serviced through our worldwide distribution channel.

We saw sales into distribution increase by approximately 9% as our distribution partners got prepared for an anticipated Q2 increased demand, while resales out of distribution were up roughly 2% from the prior quarter.

Total months of supply on hand at our distribution partners was flat at about 2.4 months, although there remained the typical mix across the portfolio, with inventory levels lower in some businesses and higher in others.

Absolute dollars of inventory in the channel were essentially flat on a sequential basis.

Overall, we do not believe the distribution partners have fully replenished their inventory levels, outside of the key programs I previously mentioned.

Looking forward, we are encouraged that our efforts over the last few years are delivering tangible results, as demonstrated by a combination of our first quarter results and our outlook for the second quarter.

We continue to believe the combination of our unique product portfolio, applications knowledge, and laser focus on customer requirements should enable NXP to grow in excess of the overall semiconductor industry.

Now, I'd like to turn the call over to Kalle to discuss the financial details of the quarter.

Thank you, Rick, and good afternoon to everyone on today's call.

As Rick has already covered the drivers of the revenue during the quarter, I will move directly to the highlights of the P&L.

During Q1, revenue was $978 million, near the upper end of our original guidance.

We generated $433 million in non-GAAP gross profit, $11 million higher sequentially, and slightly above the midpoint of our guidance.

This resulted in a non-GAAP gross margin of 44.3%, 110 basis points sequential decline from Q4, which we think represents the worst of the margin compression we should experience.

Let me help bridge the changes to gross profit versus the prior quarter.

First, we realized a positive impact to gross profit of approximately $24 million due to higher sales on a sequential basis.

Secondly, we experienced about $18 million negative impact due to lower factory utilization.

As we have said on past calls, in our cost accounting system, the effect of the under- or over-absorption of fixed costs are recognized essentially one quarter later, which is our average manufacturing cycle time.

The impact of the over- or under-absorption equals to $10 million to $15 million for every 5-point change in utilization.

During Q4, our average utilization was 71%, 8 points lower than in Q3.

Lastly, the remaining $4 million in sequential positive impact to gross profit in Q1 is due to the reconciliation of non-recurring items from Q4.

The discrete items or non-repeatable items which we recognized in Q4 and will need to be removed in the calculation to correctly bridge the quarter-to-quarter change in gross profit.

Turning to the operating segments, within the HPMS segment, non-GAAP gross profit of $366 million, a gross margin of 51.5%, a 90 basis point decline versus the prior quarter due to the items previously discussed.

Within our Standard Products segment, non-GAAP gross profit was $59 million or 29.2% of revenue, a 720 basis point sequential decline.

Three items contributed to the decline in Standard Product gross profit.

First, competitive pricing pressure and a worse-than-anticipated product mix.

Second, a package issue, which limited production of certain products during the quarter.

Lastly, the impact of lower factory utilization, as described previously, during the quarter.

Total operating expenses were $293 million, up $16 million on a sequential basis.

This was about $4 million above our original guidance, as we made a decision to increase investments to take advantage of new customer programs we have ramping in our Identification business.

From an operating profit perspective, total NXP non-GAAP operating profit was $141 million or 14.4%, slightly above the midpoint of our guidance.

Interest expense was $76 million, in line with our expectation, and non-controlling interest was $13 million, a result of improving utilization rates at SFMC.

Taken together, total NXP non-GAAP earnings per share were $0.19.

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

Cash at the end of Q1 was $782 million, a sequential increase of $39 million.

Total debt was $3.83 billion, a sequential increase of $30 million.

During the quarter, we completed a $475 million term loan due 2019.

We used a combination of the proceeds from the new term loan, plus $330 million of our revolving credit facility to redeem all of our outstanding 2015 debt, enabling us to continue to de-risk our debt maturity profile.

The increase in the total debt at the end of Q1 was due to the combination of exchange effects on our euro-denominated debt and financing costs associated with the new term loan and the repayment of the 2015 debt.

Our total net debt at the end of Q1 was $3.05 billion, a decline of $707 million from the year-ago period.

We exited the quarter with a trailing 12-month adjusted EBITDA of $1.01 billion, an 8% decline versus the year-ago period, reflecting the impact of the downturn in the second half of 2011.

Taken together, our ratio of net debt to trailing 12-month adjusted EBITDA was 3 times.

Turning to working capital metrics, days of inventory totaled 102 days, down 2 days, with inventory on a dollar basis essentially flat sequentially.

Days receivables was 38 days, down 5 days sequentially as we improved collections on improving sales trends throughout the quarter.

Days payable was 76, down 1 day sequentially.

Taken together, our cash conversion cycle improved to 64 days from 71 days in prior quarters.

Cash flow from operations of $97 million, a result of improving sales, positive working capital metrics, and offset by the impact of currency fluctuation on our euro-denominated debt.

Net CapEx investment during the quarter was $39 million, resulting in a positive free cash flow of $58 million.

Now I would like to provide our outlook for Q2.

As Rick mentioned, we believe we are on the cusp of a solid recovery, due to both improving macro trends, but, more importantly, a result of company-specific design wins that are beginning to play out in our favor.

Furthermore, we have experienced very good booking trends since the beginning of the year, which gives us the confidence that we are in the beginning phases of a positive upswing in our business.

With this view as a backdrop, we currently anticipate product revenue to be in the range of 7% to up 11% sequentially.

At the midpoint, we expect product revenue to be up about 9% sequentially in Q2, reflecting the following trends in the business.

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

Identification is expected to be up in the high teens percentage point range.

Wireless, Lighting, and Industrial is expected to be up in the high single digit percentage point range.

Mobile, Consumer, and Computing are expected to be up in the mid single digit percentage point range.

Standard Products is expected to be up in the high single digit percentage point.

We anticipate revenue from the combination of our manufacturing, corporate, and other segments to be approximately $59 million.

Taken together, total NXP revenue should be in the range of 6% to 10%.

Additional inputs to help tune your models are as follows.

We anticipate non-GAAP gross profit to be in the range of approximately $490 million to $509 million, driven by both higher revenue and improved factory utilization.

We anticipate operating expenses in Q2 to be in the range of approximately $300 million to $308 million.

The sequential increase is due to a combination of investment in new programs, planned annual merit increases, and the re-accrual of certain expenses, including bonuses.

About half of the sequential increase is due to investment in new programs.

In addition, we plan to continue to make strategic investments in new customer programs which will help fuel continued growth.

Taken together, this should translate into a non-GAAP operating profit of about $191 million to $202 million.

Net interest expenses should be around $71 million.

Cash tax expense should be approximately $10 million at the low end of our guidance and about $8 million at the high end and non-controlling interest should be about $14 million, just minus $1 million, as utilization of SFMC improves.

Average diluted share count should be around 254 million shares.

Taken together, our guidance implies non-GAAP EPS in the range of $0.38 to $0.43 per share, with approximately $0.40 per share at the midpoint of our guidance range.

Now, I would like to turn to your questions.

Jeff?

Operator, could you poll for questions?

(Operator Instructions).

I want to make sure that the EBIT in our guidance is $191 million to $202 million.

Some people might have heard $199 million.

It's $191 million to $202 million.

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

Please proceed.

Yes, good afternoon, guys, and congratulations.

And, Kalle, I just want to say thank you and good luck in your future endeavors.

But a quick question, guys.

When you look at the $50 million of incremental revenue in the March quarter, Rick, can you help me understand how you would characterize as sort of what percent came from the cyclical recovery, sort of versus new products?

And then when you look out into the June quarter and the sequential revenue growth, again, help us kind of gauge what's new product growth versus kind of the cycle coming back?

Yes.

So, I wouldn't say that a lot of our growth in Q1 was really from an improved cyclicality associated with.

If you look at the growth in Q1 revenue, clearly the strength in our ID business was associated with, as we said, some new design wins, as well as the return of orders in some of the other areas.

So, our ID business clearly had a strong growth associated with that.

Our Automotive business, which was up kind of 5%, mid single digits, was really partially driven by the flood impacts in Q4 that gave us a low compare relative to the growth.

So, the growth that we had was not really a lot cyclical.

There's probably some contribution associated with the improved market environment.

It's hard to call out specifics, but maybe a third of it or so, but it was really associated with the new projects, as well as the return of some of the designs associated with our ID business and then the weak compare that we had in our Automotive business, as well as the return of some of the business in our microcontroller space, as well.

When we look at Q2, John, clearly there's a contribution, an early contribution, from some of the new design wins, but that's relatively small.

This is really driven by the same kind of things that we talked about in Q1.

Our ID business clearly being double-digit growth associated with Q2 continuing to see more of a robust environment in the Automotive space, as well, and then in the combination of our WILI and MCC seeing a combination of return of orders from distribution, as we talked about, expected deliveries associated with distribution, as well as some of the early design wins that we've talked about.

So, while there's some rebound in the basic general semiconductor environment, driven by the economic cycle, most of it is driven to company-specific programs that really drive the robust growth that we've seen in Q1 and really project for Q2.

And then, Rick, I know you guys have taken great pains to convince us there's more to the ID business than NFC, but I'm kind of curious, as you think about the NFC ramp, you talked about sort of a third of your unique design wins potentially ramping over the next couple of quarters.

Can you size where that is as a percent of business today and is that a contributor to the June quarter or do you think it's more of a second half story?

It's clearly a contributor to the growth that we see, but not the only thing that's driving the growth in our ID business.

In fact, as we said in Q1, while the -- I think we talked about electronic payments basically being up around 30% and our overall ID business still being around 20% in Q1.

So, that kind of gives you the perspective.

So, I think our -- and that's -- and the payments is clearly driven by our NFC participation at the current time, combined with the secure element that goes with that.

So, if you look at it, the growth in the NFC solution, including the secure element and the radio, is -- in Q1 was about 50% faster than the core ID business and I think that's not a bad assumption going forward for the next quarter or so, either, John.

And then, guys, my last question, just around Standard Products, for most of your public life, pricing in that environment was better than you guys expected.

You called out pricing as being more of an issue in the March quarter.

I'm just kind of curious, is this specific to where we are in the cycle, or do you think this is now the new norm in the business?

And, as we think about target margins, gross margins, for that business, do we need to recalibrate that or not?

Not all, John.

I think we feel like this is kind of a one-quarter anomaly.

If we look at the pricing environment associated with it, we saw as much quarterly price reduction in Q1 as we would typically see on an annual basis, roughly.

So clearly that, combined with some of the manufacturing issues that we had in the back end, et cetera, drove the gross margin deterioration.

But we would not expect that to be a new norm and this really to be an anomaly for the one quarter basis.

So, John, we believe that we will go into the model, the financial model, within a quarter or two.

Perfect.

Thanks, guys.

I appreciate it.

Thanks a lot, John.

Thanks, John.

Operator, we'll take the next question, please?

And your next question comes from the Jim Covello with Goldman Sachs.

Please proceed.

Great, guys, thanks so much.

I really appreciate the chance to ask a question.

I guess the June quarter margins are really reflecting terrific leverage in the model.

Could you give us some sort of idea about where margins could go, based on utilization rates?

And, I mean, is that the right assumption, that utilization rates, plus mix, are the two main drivers of margins going forward?

And then, assuming a constant mix, how much of an increase in utilization would drive how much of an increase in margin?

As we have said all the time, it is like it worked down, especially in Q4 and Q1, so, based on 5 percentage points shift in utilization, we will get a $10 million to $15 million benefit in the following quarter.

And that's what you see.

That's what's driving up the margin in the guidance that we have provided today.

And we don't give a forecast of the margins going forward into Q2, but as you've seen, it's driving up right now.

And if I could add --

And --

Jim, if I could just add to Kalle's point, as he said before, there's nothing structurally different in our business that wouldn't allow us to get utilization back up where we were in the first half of last year.

So, given the algorithm that Kalle's given you, you can kind of do the calculation where gross profit could get to.

And then, Kalle, I think you -- I believe you had said average utilization in the March quarter was 71%.

Any estimate, how would we -- how would you think about modeling that from where we are to back where it was?

Is that a pretty linear relationship?

So, we had 71% in Q4, which is moving to -- moved to 84% in Q1 2012.

But, Jim, remember the 71% was really what was reflected in the financials with a one quarter delay --

Sure.

-- associated with the impact.

So, clearly that transition from 71% to 84% is going to have a significant improvement in our gross margins that will be reflected in the Q2 quarter, as we said in the projection.

Right.

Right.

And then, final question for me, as your utilization rates go up from the 71% to 84%, are you experiencing lead-time changes in any of the key product areas?

Hi, Jim.

It's Peter Kelly.

Yes, our lead times have increased a little, but they're pretty manageable at the moment.

Certainly a lot less than they were a year ago.

Terrific.

Guys, thanks so much.

I want to also congratulate Kalle on his great success and wish you luck going forward.

Thank you.

Thank you.

And your next question comes from the line of C.J.

Muse with Barclays.

Please proceed.

Yes, good afternoon.

Thank you for taking my question.

If I could follow up on Jim's gross margin question, you're guiding roughly 100 bps below your prior peak in 2011, yet a utilization that is, arguably, 15 points below where you were then.

So, I'm curious, where can we go here in the coming quarters as utilization rises?

I know you've talked about the 5 point shift, $10 million to $15 million.

Can that continue, so roughly $45 million if we get back up to the high 90s utilization?

Yes, if we -- sorry, it's Peter Kelly.

If we get back up to the high 90s utilization, we think we have a fairly robust model and certainly better utilization gives us better margin.

Yes, going from the floor or the trough at 71%, so if you got up to the high 90s, that's more like a -- probably a 25% or so.

So, for every 5, $10 million or $15 million and that roughly approximates 1% to 1.5% of gross margin.

Okay.

That's helpful.

And as a follow up, I know you guys refinanced your debt in the last month or so and my understanding was roughly $25 million annual savings.

So I'm curious when we see that reflect into the model.

Can you provide a little help there?

Sure.

Part of it is already reflected in my guidance, because we had $76 million in interest expenses in Q1 and the guidance I have is $71 million in Q2, which is basically the $280 annualized.

And we believe we're going to be between $270 million and $280 million leaving this year, in run rate.

Okay, thank you.

Thank you, C.J.

Operator, we'll take the next question, please?

And your next question comes from the line of Vivek Arya with Bank of America Merrill Lynch.

Please proceed.

Thanks for taking my question and thanks and good luck to Kalle from my side, also.

Thank you.

Again, you -- not to beat this horse on the gross margins, but I think you addressed the utilization aspects.

I wanted to understand the mix aspects, also, within the different segments of HPMS.

How should we think about the roadmap and HPMS gross margins from here to, I think, your longer term targets are closer to 60%?

What role does mix play when we look at some of the higher-growth segments of HPMS, like Identification and Automotive?

So, I think when you look at it, clearly we still believe that our model that we've had in place for 58%, 60% or so gross margin is still intact for HPMS products.

And so we think as we get our factory utilization back up where the factories are truly humming, then we see the opportunity to begin to move into that level.

I think that when you look at some of the new design wins that are focused in areas of high volume smart phones, et cetera, we may not be at the absolute 60%-plus gross margin.

So, we might see a slight trailing off of those margins, but with the significant growth opportunity that it drives on the top line, we'll still be very generously rewarded in our financial results.

But so, it's really not a mix issue as much as it is just the performance issue associated with our manufacturing operations and ensuring that the factory utilization levels get back up to the same levels that we were able to demonstrate in the Q1 and Q2 timeframe for 2011.

Got it.

And then, Rick, one on the Automotive segment.

You've clearly seen some pickup, but when I look at end-market demand that continues to do extremely well, do you think you are catching up to end-market demand?

Should we expect a better second half on the Automotive side?

I think that we had -- if you look at Automotive, there hasn't been anything normal in the last four or five quarters.

First off, we started with the tsunami and didn't really have an impact at the time that it incurred and we really saw the impact on revenue in the Q3 timeframe as they aligned their supply chain, which drove the Automotive business down slightly.

And then, following on to that, with the Thai floods in Q4 having a tempering effect associated with the revenue, as well.

So, we saw the improvement in Q1 and then we expect to see the growth again in Q2 associated with that.

So, I think we feel very good about our Automotive business.

We continue to win significant new design wins, although those clearly are out a couple of years.

They aren't going to generate revenue in the near term in the Automotive space and we think that we'll clearly be in a position where we'll grow faster than the Automotive semiconductor market.

Got it.

And just one last one.

I know that the last few quarters have not exactly been seasonal because of various disruptions in the market.

But how should we think about Q3, Q4, just seasonal trends, depending on your different segments?

Our Q3 is usually a pretty good quarter for us.

We usually trail off a little bit in Q4 and I don't know why we wouldn't expect some kind of seasonality that would follow in a similar pattern to that this year.

Okay, great.

Thank you very much.

Thanks, Vivek.

Thanks.

And your next question comes from the line of Mark Lipacis with Jefferies.

Please proceed.

Thanks for taking my question and, Kalle, thanks a lot and good luck.

Thank you.

Manufacturing lead times to customers, did -- I may have missed this, Peter, but did you say that there was any change as -- in those lead times to your own customers as you've gone from 71% to 84% utilization?

And I was wondering at what level of utilization do your own lead times start to stretch out a little bit?

Well, I guess I'd answer it in a couple of ways.

One, lead times have increased a little.

As I said, though, they're still well below what they were a year ago.

In terms of our utilization, we have a tiered manufacturing model, so we use three sources of supply -- our internal supply, external supply, and our JVs.

So, we can support significantly higher revenues with that model than if we just owned our own manufacturing.

So, I wouldn't focus totally on just what we build internally.

And, Mark, you have to be a little careful with lead times, as well, because if we take into account our capacity, we actually have some capacity constraints in some specific areas.

So, we clearly have seen a little bit of movement associated with that.

But we're trying to keep those more in a normal range, but it also depends on what we can commit to customers, relative to the capacity constraints we have, as well.

Understand.

That's helpful.

And then, I didn't -- I don't know if I heard this.

Did you quantify the channel inventories and where they -- or, if you can't quantify them, if you could just give a sense of where they are within the normal historical range?

Have they completely --?

Yes, we said that in distribution it's about 2.4 months, which is consistent with where it was last quarter and we actually had -- we shipped in a little bit higher than they shipped out, as they prepared for some of their expected improved deliveries in the Q2 timeframe.

Thanks.

But the actual dollar level of inventories was approximately the same.

Fair enough.

Last question.

OpEx growth going forward, I guess we were modeling a slight increase going forward on a dollar basis.

They came up a little bit more, I guess, than we expected.

Is -- does that mean that we continue to model off of the higher base or should we take some of that back?

No.

So, in the guidance, I gave that we're going to be between $300 million and $308 million for Q2.

Part of that, around half of that increase, from the $293 million is actually customer-specific programs that we invest in to fuel our growth and half of it is, basically, annual merit increases and re-accrual of bonuses.

And the reason is that we're very -- as I said in my remarks, the reason why we came up approximately $4 million higher than the guidance was basically that we invested in some special programs in the Identification area and -- because we wanted to fuel the growth.

Because Identification came in a lot higher in sales than we anticipated.

They grew 21% sequentially.

I understand and I guess I was referring to the back half of the year.

Is that -- do we still continue to think about OpEx growing steadily through the back half of the year?

Yes, it will grow, but it will grow slower than sales and that's the way we work now and it will be growth and I said, 3 to 6 or something like that per quarter, but then you have to take into consideration what we think the sales is going to be.

So, we will guide carefully quarter by quarter, going forward.

And we have to be a little careful that, as we have sales upsides, obviously there's sales bonuses and bonuses that go along with that, which has a very good return associated with it, Mark.

If I could add one thing, Mark -- this is Jeff -- is a subtle message, also, is if you compare our view of the future versus last quarter, we have a better view in terms of a richer design pipe.

We see better opportunities ahead of us, even than we saw a short 90 days ago, Mark, and so we're going to continue to invest to take advantage of those design opportunities.

And, as I've said we manage our OpEx very carefully and you saw that during the second half of last year when we didn't have sales.

We took our OpEx and now we see sales coming back and we will invest when we find it appropriate.

Excellent.

Thank you very much.

Thanks, Mark.

And your next question comes from the line of Sanjay Devgan with Morgan Stanley.

Please proceed.

Hey, guys.

A good job on the quarter and thanks so much for taking my question.

I just had a question specific to the wireless infrastructure business.

A lot of chatter around this business being particularly weak.

A few folks have commented that it's coming back.

I was wondering if you could give us some more color or more granularity as to what you're seeing by geography?

And also anything you can give us by interface would be really appreciated and also how you kind of project that business going forward into the back half of the year?

Well, it clearly was weaker than we had planned, as we said in the script.

In Q2 it's certainly not coming back as strongly as we would originally have anticipated or liked to.

We -- I guess we perceive that the increase associated with it will be pushed out to kind of the second half of the year with, maybe -- maybe -- some of the LTE increase happening a little earlier than the other 3G increase is taking place.

But it's clearly not the strongest segment in the -- in our portfolio and the increased environment or improved environment, we think, has kind of been pushed back to the second half of the year.

Okay, great.

Thanks so much.

That's all I had.

Great, Sanjay.

Operator, can you poll for any additional questions?

(Operator Instructions).

Well, operator, if there is no additional questions at this time, I suppose we'll bring the call to a close.

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

Yes, thanks, Jeff.

So, thanks a lot for your interest and attention on NXP.

We think that the growth of over 6% in Q1 with the opportunity to see product revenue growth of 7% to 11% in Q2 clearly begins to demonstrate what we've been talking about for some time on the design wins and the fact that it will drive our top-line growth at a faster rate than the overall semiconductor industry.

And then that, combined with the improved factory utilization that we see taking our gross margins up and being able to drive a significant bottom-line improvement.

And look forward to your continued participation and thank you very much for joining us today.

Great.

Thank you, everyone, and we'll speak to you on our next call.

Thank you.

And, ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a wonderful day.