恩智浦 (NXPI) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2012 NXP Semiconductors NV earnings conference call.

My name is Alex, and I will be your coordinator today.

I would now like to turn the presentation over to your host for today's call, Mr. Jeff Palmer, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Alex, and good morning, everyone.

Welcome to the NXP Semiconductors fourth-quarter and full-year 2012 earnings call.

With me on the call today is Rick Clemmer, NXP's President and CEO, and Peter Kelly, our CFO.

We will be available during the Q&A portion of the call today.

If you've not obtained a copy of our fourth-quarter 2012 earnings press release, it can be found at our Company website under the Investor Relations section at nxp.com.

Additionally we have posted a supplemental earnings summary presentation and a 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 specific end markets in which we operate, the sale of new and existing products and our expectations for the financial results for the first quarter of 2013.

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 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 reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our fourth-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.

Before we begin the call today, I'd like to highlight our attendance at the upcoming Goldman Sachs TMT Investor Conference on February 12 in San Francisco.

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

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

As this is our fourth-quarter and full-year report, I would like to first spend a few moments highlighting our full-year results.

Overall we're quite proud of our results, despite a difficult environment.

We focused on delivering on our commitments while also acknowledging we have areas we can further improve.

On the positive side, the highlights include, first, we delivered strong revenue growth.

Product revenue of $4.11 billion was up 7% year on year against an overall semiconductor market which most analysts had projected to decline by several points.

Our product revenue performance was due to continued traction within our High Performance Mixed Signal segment, which actually grew a strong 13% to $3.28 billion versus 2011.

Within HPMS, we saw robust growth within our ID business, which was up 41% year on year to $986 million.

To help put this in context, as of the end of 2012, the ID business is on a runrate of over $1.1 billion a year as compared to the time of the IPO when it was a run rate of about $600 million.

So in two short years, the team has nearly doubled this uniquely focused business on industry-leading security confidence.

Also in our High Performance Mixed Signal segment, our portable and computing business grew 14% year on year to $753 million as a result of specific design wins in the mobility market.

Second, we improved our profitability.

From a non-GAAP profitability perspective, HPMS gross margin gross profit increased over 6% year on year, while HPMS operating profit improved to 17% versus 2011.

Third, we generated nearly $0.5 billion in free cash flow, which we define as operating cash flow less net CapEx.

For the full year, free cash flow was $473 million or approximately 11% of total revenue.

Lastly, we reduced our gross debt and associated interest expenses.

For the full year, our gross debt declined 8% year on year, and we took actions throughout the year to further derisk our very reasonable maturity profile.

The combination of these actions resulted in the reduction of our interest expense by over $40 million versus 2011.

While we are proud of the positive highlights during 2012, we did face challenges as well.

The most significant challenge in 2012 was an certain economic and demand environment.

This was particularly true in our most more economically sensitive businesses.

In particular, we experienced real headwinds in our automotive, industrial and infrastructure and Standard Products business.

While our automotive business grew 1% versus 2011 to $939 million with weakness in the European area offset by very favorable results in North America and Asia, in our industrial and infrastructure business revenue declined 2% to $604 million versus the prior year, primarily as a result of weak demand throughout most of the year for high performance RF devices, primarily aimed at the base station market, even though design win momentum continues to be strong.

And within our Standard Products segment, revenue declined to $832 million, a decline of 10% year on year, reflective of the weak demand trends throughout the year.

Second, we still have work to do on our longer-term overall margin targets.

While Peter provided a roadmap of actions at our analyst day in September, to improve margin by the end of 2013 our full-year gross margin for 2012 was down 116 basis points, and operating margin declined 130 basis points.

This was primarily as a result of weaker industry demand, a poor pricing environment and lower factory utilization within our Standard Products segment.

But clearly we are focused on improving this.

As a result of both our successes and the challenges we experienced during 2012, the NXP management team is determined that we need to improve our expense structure in certain areas of our business.

The result is an emphasis on continuing to improve our support processes, the deemphasis of certain investments and the reduction of the associated expenses.

But we will accelerate investments in other areas of the business, which have a higher profitability of success.

Peter will provide additional details during his prepared remarks.

Now I'd like to review the specific results for the most recent quarter.

Overall, the results for the fourth quarter came in at the higher end of our guidance.

Product revenue was $1.07 billion, a decline of 4% sequentially just above the midpoint of our expectations and up 24% from the year ago period.

Total NXP revenue was $1.12 billion, a 5% sequential decline and up 20% from the year ago period.

Turning now to our segment performance, High Performance Mixed Signal revenue was $860 million, a 4% sequential decline, and up 32% from the year ago period.

Within our ID business, revenue was $290 million, up over 5% sequentially above our flat expectations.

This was 87% growth from the fourth quarter of 2011.

Order trends within core ID were above our original expectations, up 1% sequentially and representing about three-fourths of the total ID revenue.

Within core ID, the banking and tax and label product lines were up in the quarter, while eGov, automatic fare collection and infrastructure declined sequentially.

I should highlight that our core ID product line showed very strong 56% year-on-year growth in the fourth quarter, a reflection of our continued leadership in this strategic area.

Within our emerging ID business, which includes mobile transactions and authentication, revenue was up 20% sequentially and represented about 25% of the overall ID group revenue during the quarter.

As compared to 2011, emerging ID has increased by over 3x.

During the quarter, nearly all of the emerging ID growth was due to a combination of NSC and the secure elements for mobile transaction solutions, which, as of the end of the fourth quarter, is on an annualized run rate of over $280 million per year.

Moving now to our portable and computing business, revenue was $195 million, down 12% sequentially, slightly worse than our original expectations, but still up 42% from the year ago period.

During the quarter, we experienced weak demand across that whole P&C portfolio with about half the sequential revenue declines seen in logic, about 25% of the decline in NCUs and the remainder within interface products.

About 40% of the revenue decline was due to key designs in the mobility space.

We view this is a combination of natural seasonal trends after a strong ramp in Q3 ahead of the holiday shopping season, combined with normal effects post the launch of new products.

We see these trends in the mobility space continuing into the first quarter.

In spite of the weaker trends in the mobility market, we are very encouraged by design opportunities we are pursuing with both current as well as new customers.

Turning to infrastructure and industrial, revenue was $156 million, down about 5% sequentially, better than our original expectations, and revenue was actually up 5% versus the year ago period.

During the fourth quarter, about two-thirds of the revenue decline was due to seasonal weakness in the front end tuner business and the remainder due to anticipated weakness in our notebook power supply business.

We did, however, experience some encouraging initial shipments of our Maximus audio amplifier product into smartphone applications, and we're seeing positive performance feedback and interest from other handset OEMs.

Within our auto business, revenue was $227 million, down 5%, in line with our original expectations, but up 4% versus the fourth quarter of 2011.

From a product perspective, we experienced weak sequential demand for entertainment and in-vehicle networking products, while keyless door entry and sensor products were both up modestly in the quarter.

Finally, turning to our Standard Products business, revenue was $198 million, down 7%, in line with our original expectations, and flat versus the year ago period.

As we mentioned in the past, given the broad market exposure for our Standard Products business, it is most reflective of the underlying economic trends in the markets we serve.

Until such time as our customers have improved clarity about end market demand, we would expect our Standard Product business to face continued headwinds.

Turning now to our distribution channel performance.

Total sales into the distribution channel declined 6% with sales out of distribution down only about 1%.

Total distribution sales represented slightly less than 50% of the total product sales, barely consistent with our long-term trends.

We continue to manage distribution inventory within our targeted range with total months remaining at 2.4, flat versus both the prior quarter and the year ago period.

Absolute dollars of inventory in the channel declined by about 1% on a sequential basis.

From a geographic shipment perspective, Europe, Middle East and Africa were incrementally better than in the prior quarter, while sales into Japan were flat sequentially.

Sales into the other major markets, especially China and Americas, were down, but generally in line with overall trends in the business as previously highlighted.

All geographies, except for Japan, demonstrate strong year-on-year growth, but our business in China was up nearly 50% versus the fourth quarter of 2011.

In summary, the results for the fourth quarter were incrementally better than we had originally anticipated, especially in our HPMS business segment.

We believe the traction we've gained with numerous major customers position us well into 2013 and beyond.

Specifically many of the customers who helped to fuel our growth in 2011 have awarded NXP follow-on programs, which should enable the customer to be able to deliver continued share gains.

We do need to increase our execution focus, specifically in the areas of cost and expense management, but we believe we have programs and actions in place which should enable NXP to deliver continued positive results.

We believe if we are successful, our actions will result in a very good bottom line earnings growth.

Now I'd like to turn the call over to Peter to discuss the financials in more detail this quarter.

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

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

Overall, despite the tough economic environment, it was a good quarter and better than our original expectations.

Total revenue, non-GAAP gross, profit operating profit and net income were all slightly better than the midpoints of our guidance, resulting in non-GAAP earnings per share of $0.50.

As we've discussed previously, it is our strategic intent to exit 2013 at an operating margin of 25%.

We've also said that in order to achieve this goal we need to improve our gross margin performance and reduce our SG&A as a percent of revenue.

Before I turn to the operating results for the fourth quarter, I would like to highlight three actions we are undertaking to position the Company to achieve this goal.

As highlighted in the press release, we are implementing a number of programs that will reduce our SG&A to a level of 12% of revenue by the end of 2013.

These programs are primarily focused in the area of G&A support functions.

Secondly, we took steps to make our R&D more effective by reducing support costs and refocusing our resources towards more high-value programs, while still maintaining our R&D at the 14% of revenue level.

Lastly, we continue to manage our internal manufacturing costs.

We plan to consolidate our MOS process technologies into our Dutch 8 inch fab and out of our German fab.

In total, as a result of this overall plan, we booked a $98 million provision in the fourth quarter, of which $55 million is in SG&A, $23 million is in R&D and $20 million is in cost of goods sold.

We expect the $98 million charge will result in a cash outflow of $64 million in 2013 with a balance in 2014 and 2015.

To be clear, we did not take this action lightly or because of the current economic environment, but rather we take these actions to statistically position NXP for long-term growth, especially in those areas where we continue to see strong traction with major customers.

Now, turning to the quarterly results, fourth-quarter revenues were $1.12 billion, $23 million above the midpoint of our guidance.

We generated $514 million in non-GAAP gross profit, slightly above the midpoint of our guidance, and reported a non-GAAP gross margin of 46.1%, 20 basis points below our results in the previous quarter.

Now let me turn to the operating segments.

Within the HPMS segment, revenue was $868 million, down about 4% over the previous quarter with non-GAAP gross margin of 52.4%, 80 basis points above the third quarter.

Non-GAAP operating margin was 22.6% of revenue, a decline of 50 basis points, primarily as a result of lower seasonal revenue.

Within our Standard Products segment, revenue was $198 million, down 7% sequentially with non-GAAP gross margin of 28.3%.

A 600 basis point decline versus the third quarter.

About half of the decline is attributable to lower sales and the associated underutilization impacts.

Of the remainder, the largest part was due to a quality issue in our assembly and test sites, which has since been addressed and should be nonrecurring into the first quarter.

Non-GAAP operating margin was 10.1%, a 540 basis point decline, as a result of the previous items as operating expenses were essentially flat quarter on quarter.

Total operating expenses were $308 million, down $3 million on a sequential basis, and just above the midpoint of our guidance range.

From a total operating profit perspective, non-GAAP operating profit was $209 million and represents an 18.7% operating margin.

Interest expense was $55 million at the higher end of our expectations as a result of the timing of refinancing actions taken during the quarter.

These actions include the successful tender and retirement of $500 million of our 2018 9 3/4 senior secured notes.

Additionally, during the quarter, we put in place a $500 million term loan due 2020.

Non-controlling interests was $18 million, and our cash taxes were $10 million.

Taken together, this was essentially in line with our expectations.

This resulted in total NXP non-GAAP earnings per share of $0.50, $0.03 better than the midpoint of our guidance, and was over billable by $0.24 in the same period year ago.

Included in our non-GAAP net income was $16 million of stock-based compensation or about $0.06 per share.

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

Our total net debt at the end of Q3 was $2.88 billion, flat versus the previous quarter, as we executed the refinancing of the $500 million of the 2018 debt.

Cash at the end of the fourth quarter was $617 million, a sequential decline of $85 million as a result of debt reduction activities.

We exited the quarter with a trailing 12-month adjusted EBITDA of approximately $1.04 billion, and our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q4 was 2.8 times.

Turning to working capital metrics, days of inventory was 104 days, an increase of seven days, and most of this increase relates to service level agreements for major customers and to the continuing pre-build of inventory for the factories that were closed at the end of the year.

Days receivable was 38 days, an increase of one day sequentially, while days payable were 82 days, an increase of three.

Taken together, our cash conversion cycle was 60 days versus the 54 days in the prior quarter.

Cash flow from operations was at $164 million as a result of good operating performance.

Net CapEx investment during the quarter was $45 million, resulting in a positive free cash flow of $119 million or 11% of revenue.

Now I would like to provide our outlook for Q1.

Historically our first quarter is seasonally our weakest period.

This trend combined by what we view as a continued weak business climate is influencing our outlook.

We currently anticipate product revenue will be in a range of down 1% to down 4% sequentially.

At the midpoint, we expect product revenue to be down about 2% in Q1, reflecting the following trends in the business.

On a percentage point basis, automotive is expected to experience seasonal declines and should be down in the low single-digit range sequentially.

In identification, after five straight quarters of significant growth, we expect a modest sequential reduction into the first quarter.

This should translate to a decline in the low single-digit range.

Audible and computing is expected to be down about 10%, primarily due to the typical seasonal weakness of shipments you would expect, plus macro weakness impacting the broad-based, general-purpose logic and microcontroller business.

Infrastructure and industrial is expected to perform better than historical seasonal norms, but will still decline in the low single-digit range.

Other products is expected to improve incrementally into first quarter and is expected to be up in the low single-digit range.

We anticipate revenue from the combination of our manufacturing segments under corporate and other to be approximately $24 million.

Normally I do not discuss our manufacturing segment much, but thought a quick comment in light of the guidance would be helpful.

To remind everyone on the segment, it primarily represents the combination of revenue, which our joint venture fab in Singapore SSMC sells to TSMC, in addition to manufacturing services revenue for our divested entities.

The service revenue portion has declined as anticipated to a level where it only contributes a few million dollars a quarter.

It may at some point go to zero.

However, the SSMC portion will never go to zero, though it will fluctuate depending on the loading by TSMC and the number of workdays in a quarter.

During Q1, the quarter-on-quarter fluctuation is a result of SSMC implementing its tri-annual maintenance program.

Now we would anticipate this segment would run at about a normalized run rate of $30 million to $35 million per quarter with essentially no impact on our overall operating margin.

Taken together, total NXP revenue should be in the range of $1.051 billion to $1.082 billion or about $1.067 billion at the midpoint.

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

Net debt is expected to reduce from $2.9 billion to $2.8 billion.

We anticipate non-GAAP gross profits to be in the range of approximately $497 million to $511 million.

We anticipate operating expense in Q1 to be in a range of approximately $305 million to $310 million.

Taken together, this should translate into a non-GAAP operating profit in the range of about $193 million to $202 million.

Net interest expense should be about $50 million cash tax expense, should be approximately $9 million, and non-controlling interests should be about $13 million.

Stock-based compensation is expected to be about $18 million or about $0.07 per share, and I would remind you that this is included in our non-GAAP results.

Average diluted share count should be about 255 million shares, and taken together, our guidance implies non-GAAP earnings per share in a range of $0.47 to $0.51 per share or approximately $0.49 per share at the midpoint of our guidance range.

Finally, earlier today we announced plans to issue an unsecured bond for $500 million.

We're very excited about this as it represents another step in our desire to become investment-grade and reduce our overall long-term cost of capital.

I'd now like to turn over to your questions.

Jeff?

Thanks, Peter.

Alex, could we poll for Q&A?

(Operator Instructions).

Please be aware all questions are invited for one per person and one follow-up question.

Standby for your first question.

John Pitzer, Credit Suisse.

Good morning, guys, or afternoon, I guess your time.

I appreciate all the detail in the press release.

Always very helpful.

My first question just has to do with the Q1 guide.

Can you talk a little bit about in the ID the trends in emerging versus core.

You also seem to be guiding overall a bottom lone with normal seasonal with no sort of impact from potentially a cyclical uplift in the semi industry.

I was wondering if you could comment on the cyclical side of things.

And then lastly, on the Standard Products side, is the up Q1 a reflection of catch-up from some of the quality issues you had in Q4, or should I think about that as being a lead indicator that augers growth in HPMS given that most of the Standard Products is distribution and sell-in?

Let me do this kind of products question first.

I guess the move from Q4 to Q1 is a relatively small jump.

So, from a revenue perspective, we're just talking about a few million dollars there really.

So I don't think that indicates anything in terms of a major change in the economic outlook.

So, John, your question about ID specifically, you know, the interesting thing about our ID business, you know, from a security perspective, it's an interesting portfolio of a number of different businesses with different things happening at any one time.

As we've talked about on the government side and even some of the banking side, it's much more project oriented than economic oriented.

So the strength that we've had in Q4 where we saw such strong strength from a year ago, we are assuming that that will taper off somewhat in Q1, and frankly, there are some parts of the portfolio that we have a problem just filling all the requirements associated with it.

So that's reflected in what we talk about with our guidance for Q1 for the ID business as well.

So, you know, I think as far as a general economic environment, we're still a little bit cautious about the general economy.

Clearly there are some indications of improvement that are taking place, but not sufficient for us to feel like we want to count on a robust economic environment in our projections or guidance associated with it.

And we clearly don't see orders on a strong uptick.

We see clearly a slight improvement associated with it, but not something that would give us a strong enough position to feel like Q1 will be significantly stronger.

I think that we do still feel pretty good about the general environment, and we think that clearly Q1 will be at the bottom and we will be moving up from there.

So I think that is a positive associated with it, but still with somewhat anemic economic environment.

Even though with the recent results on the US economy, but even that having a significant share of that that's focused on the housing market, which really doesn't have a lot to do with our business in itself.

Rick, and then as my follow-up, just thinking about growth for the balance of 2013.

Clearly you guys outperformed the industry as emerging ID accelerated and product cycle wins and P&C also accelerated.

As you think about the components of outgrowth this year, I know you've got the sensor hub expected sometime midyear to begin to ramp up.

But what other areas should we be looking at either by product cycle or by end market where you feel the highest level of confidence about growth?

So, you know, I think we feel very comfortable that we'll outgrow the market by at least another 50% in 2013.

I think we want to get out of talking about specific programs as much as we can and talk about general indications associated with it.

But as we talk about LTE and base stations, it clearly will contribute to our growth in 2013 based on the strong design wins we have.

Our automotive business we expect to continue to see an improvement associated with the general environment.

So there's a lot of areas that are going to contribute to the double-digit growth that we're expecting in our ID business for 2013.

So all of that added together is what gives us the comfort to be pretty specific about being able to outgrow the industry by at least 50% in 2013.

Great.

Thanks, guys.

Congratulations.

(multiple speakers).

C.J. Muse, Barclays.

Yes, good afternoon.

Thank you for taking my question.

I guess first question on gross margin.

Your guide for Q1, despite seasonal downtick, is at a gross margin level that surpasses any number that you printed in 2012.

So, curious what's driving that?

Is that mix?

Is that a pickup in utilization on the Standard Products?

How should we think about that, and how should we think about the trajectory through the remainder of the year?

Well, I'd say, I'd say two things.

One is in Q4 specifically, our Standard Products business was hit by some one-off costs.

So that will help the Standard Products business in Q1.

Mix is certainly a factor.

We've also talked about some of the issues that we've had in 2012 as we ramp some of these big designs.

And I think in terms of a trajectory, what we talked about is we really would like to exit 2013 at the 25% operating level.

And in order to do that, we need to move our gross margins up to about the 50% level by the time we exit the year.

But, you know, as we've talked about, that is a clear priority and focus for us is how we continue to improve our margins and where we're spending a reasonable amount of time from a management team perspective.

We feel very comfortable with our growth opportunities, and now we've got to be sure that we drive the kind of margin growth and the right kind of operating income improvements that we think exist.

That's helpful.

And as my follow-up, you talked about headwind from auto infrastructure and Standard Products in 2012 at least relative to the other two businesses that really shined.

I'm curious today, where do you expect the most improvement, the most growth?

Where are the grain chutes that either cyclically or led by design win momentum that you know you have in your back pocket today that could really drive that 50% outperformance or greater in 2013?

Clearly our ID business we've said we expect double-digit growth again in 2013.

So it will contribute to -- it will continue to contribute to the strong growth position.

Our INI business from the rampup of base stations for LTE in China we think it represents a significant opportunity.

And while it varies a lot quarter by quarter, we see those design wins materializing with the shipments of base stations so that we feel comfortable on the year-on-year basis.

And, you know, in general automotive terms, we had record shipments in North America and China in our automotive shipments over the last couple of quarters.

So continuing to see that was kind of a stabilization of some of the other regions of the world clearly presents an opportunity to be more in line with the overall semiconductor growth than it certainly represented in 2012.

And in Standard Products, we expect that to continue to be fairly linked to what's happening in the general economic environment, although we do expect that there's the opportunity for some growth in China as we talked about the strong growth that we've had in our shipments in China represented a significant opportunity.

And clearly that's an area for us in 2013 in Standard Products that we would be helpful will demonstrate some growth.

We shouldn't also forget Rick that the design wins and new opportunities we have in P&C will continue to ramp up from midyear onwards.

They will.

Very helpful, guys.

Thank you.

Thanks, C.J.

Vivek Arya, Bank of America.

Thanks for taking my question.

I think you just mentioned mix as one of the factors that impacted the HPMS gross margins in 2012.

But, as we look at 2013, it appears that this mix is not really likely to change because ID and your portable and computing business are expected to be the faster growers in your business.

So is that an accurate understanding, and if yes, can you help us understand how you will improve gross margins in HPMS?

Yes, I think what I actually said was the growth of the mobile design wins has affected our margin.

And I guess I was referencing some discussions on earlier calls.

But what's happened is we were forced around some of these products very, very quickly, so we didn't necessarily get the best pricing from our foundry partners.

You know, we ended up putting in P/E structures and manufacturing structures that were not optimal, and we've been working pretty diligently on clearing those up.

So it's from that perspective we really had some headwinds in 2012 that have not helped us.

Clearly we have some of the product ramps that are going to help us in 2013 as well.

But from a mix perspective, there's not going to be a huge switch in our mix a way towards very high margin products that will just make this all easy to do.

Thanks, Peter.

That's very helpful.

And one question on NFC.

You know, I understand it's not a big part of your business, but nevertheless it's still a very prominent part of your business.

So Broadcom on their call spoke about gaining double-digit share.

I think QUALCOMM was also a little bit vocal about their NFC potential.

So how are you seeing the competitive situation develop this year as you look at your pipeline of design wins and engagements.

Thank you.

You know, it's interesting because in some ways it actually helps the NFC market to have more suppliers in the market.

Clearly we want to continue to maintain our leadership position, but with the growth of the opportunity and the significant increase of smartphones that will have NFC included with those, we think it still represents a good growth opportunity for us.

As far as competition, we've always known we would have competition.

We always knew that ultimately when it got to be -- when NFC got to be a significant share of the market, that we would see some risk of integration into the overall connectivity chip.

And as that takes place, then we want to be sure we're focused on the secure element to be able to provide the bulletproof security that's really required associated with having NFC implemented in a fashion where the consumer feels comfortable associated with it.

So yes, we know we're going to add more competition.

Yes, it doesn't surprise me at all that some of our competitors are talking about strong market share growth because the market is growing so rapidly, it still represents opportunities for growth for us, even if some of our competitors do actually gain share associated with it.

Okay.

Thank you, Rick.

Thanks.

Jim Covello, Goldman Sachs.

Great.

Thank you so much for taking my question.

I appreciate it.

Rick, you mentioned that your sell-in to distribution was down 6%, and the sellout there was minus 1%.

What does your guidance assume about that dynamic going forward?

Do you assume balance, or do you assume continued liquidation for drawdown?

You know, it's an arm wrestling that goes on with each distributor each quarter.

(laughter).

You know, we are planning on it being fairly normalized, Jim.

We want to be sure we maintain our inventory levels around 2.4.

Some of the big guys would like to take that down closer to two months of inventory as they are focused on their turns and earns.

But our view is the margins that they get is based on, you know, not only the customer service, but maintaining some of that inventory in place.

So we'd like to keep it in the 2.4, 2.5 months of inventory.

But our plan really for our guidance for Q1 is predicated or based on that kind of continuing it roughly at the same level associated with it.

Okay.

Great.

That's helpful.

And then for my follow-up, you mentioned you saw some improvement in orders.

When did that improvement start, and has it continued through the end of January?

(laughter).

You know, I think as we tried to say, Jim, and I just want to be very clear about it, we don't think it's like momentous improvement in orders.

Right.

I know some of our peers are talking about they have seen improvement in orders, and clearly we've seen orders improve where, you know, as we track it on a weekly basis, we've seen more weeks that are better than worse.

So but as far as being able to draw a trend from it, I think we still are not counting on a huge uptick in orders associated with the outlook.

We still see a rather anemic environment, and we're not counting on clearly through the Q1 timeframe seeing a robust improvement associated with it.

I think that we do see enough indicators that we feel comfortable that Q1 is truly the bottom, and we feel pretty good about some of the opportunities for growth coming out of the Q1 timeframe.

But it's not like we see a definite, robust turnaround in order rates that gives us a great deal of confidence.

It's just more of the general indicators and what we see from customers specifically associated with the design wins we have in place and being able to support those.

That's really helpful.

Thanks so much.

I appreciate it.

Thanks, Jim.

(multiple speakers)

Joe Moore, Morgan Stanley.

Great.

Thank you.

I wonder if you could talk about your inventory level, where you think that goes, and where the factory utilization goes in the next couple quarters?

So factory utilization in the current quarter was in Q4 was 85%.

We don't guide going forward, but a little bit of color.

We've seen -- and this is a trend that we've seen out of the past six months or so.

Our IC factories are running pretty full, and we are underutilized in our Standard Products factories.

And I guess I don't see any big change in that in the very, very short term.

Inventory, we've seen inventory pick up over the past few quarters, so we're now at 107 days.

One of the big items in there, I have about $50 million of inventory, which is related to the closure of our ICN 4 and ICN 6. So that's to facilitate the closure and transfer products into ICN 8.

And given we've been limited in terms of our .14 capacity over the past couple of quarters, we've not really been able to build the buffer inventory that some of our larger customers would like, so we're continuing to focus on that.

I don't think you're going to see much of a change in terms of the number of days, but I'm pretty confident on our working capital control.

I think we understand what we're doing in inventory.

Our receivables are just excellence, and our payables are extremely well-managed.

You really have to take into account the factory shutdown and inventory build to support that when we think about our inventory levels.

Yes, the $50 million, yes.

(multiple speakers)

That's very helpful.

Thank you very much.

Chris Caso, Susquehanna Financial Group.

Hi, thank you.

Just kind of following on to some of your earlier comments with respect to Q1 potentially bottoming here.

What do you guys typically think about seasonality going forward as you're looking at Q2, Q3?

Obviously it's early days now, but kind of what are the puts and takes, and what would you guys consider normal?

You know, the interesting thing is, when you look at it historically, Q1 is usually our worst seasonal quarter.

What we usually see is a little bit of downtick from Q4 and Q1.

Then we see a pretty robust growth in Q2, growth in Q3, and then see a little bit of rolloff in Q4 and then further rolloff again in Q1.

So it follows with those typical seasonal patterns that we see.

Although to be fair, seasonal patterns are hard to determine based on the general economic impairment we've seen over the last couple of years.

But I think based on what we see from our customers and the indications associated with it, it gives us really confidence that we will, in fact, see the pickup in Q2 that we would expect on a seasonal basis, and so we feel good about that.

Okay.

Great.

And just following up on gross margins as well and with respect to your goals of getting that -- of improving that as we go through the year.

Could you work on it, talk about the timing of that?

Obviously part of that would be improving some of the factory loadings in Standard Products, I assume.

Could you give us -- perhaps quantify some metrics on as the revenue grows what we should expect with regard to gross margin as we kind of model that through the year?

How much fall-through as the revenue improves?

No, we're not really going to get into those kind of forward-looking statements.

I guess as far as we want to go is we're expecting by the time we exit the year, we want to get to about 50% on gross margin.

All right.

Great.

Thanks.

William Stein, SunTrust.

Great.

Thanks for taking my question.

If we take a step back and look at the capital structure and the use of cash, clearly you have been primarily focused on paying down the debt and spending a bit to realign the cost structure.

But if you get close to your margin targets as we exit the year and if we see just a little bit of growth, it seems like you're going to hit your 2x net lever target that you've discussed in the past.

Can you remind us about how the change in cash use priority will -- what might unfold there?

You know, what we have said specifically is we're very focused on continuing to reduce our debt until we get down to the metrics of investment grade.

And at the time we get down to the investments of metric -- sorry, the metrics of invest investment grade, we'll look at it from a shareholder perspective, and depending on what our stock price is, the equity value and opportunities that may exist in the market, what creates the most shareholder value associated with it.

If our interest rates continue where they are, then there's clearly an opportunity to continue to pay down our debt and drive pretty significant leverage associated with that.

But we will continue to act in the best interest of shareholders about what will drive the most value after we get to metric associated with investment grade.

Yes, if our stock was still at $30, I guess we would be big-time buyers of our stock as well.

That's helpful.

As a follow-up, if I can, you spoke about a refocus of the R&D effort, and part of the expenditure or the expense recognized in the quarter was to realign R&D a bit.

Can you elaborate a little bit on the changes there, please?

Yes, yes, sure.

We expect to run about 14% of our revenue on R&D.

We think R&D is absolutely the critical part of the Company.

We don't have the right products.

There's nowhere to go.

Having said that, there's things within our R&D which we can improve.

So we can be more effective in our support of R&D and our IT costs, for example, and some of the back office support.

But also, you know, we have different types of resource that we're constantly looking at.

Some of it is things like moving away from, say, some hardware engineers in the West towards software engineers in India.

Other parts of it are looking at -- you know, we constantly look at our portfolio and through various projects so that we can create more investment for our more successful product lines.

So it is that kind of thing.

There's nothing really, really big.

And clearly we will be increasing our R&D investment in areas where we think it drives a much higher level of probability.

So it's more of a tuning than anything else in R&D.

The primary focus of the investments we will be doing are improving our back office processes to be sure we have world-class kind of non-customer facing expenses where we want to be sure that we're driving industry-leading levels associated with it, and this is really just taking that step to be able to facilitate that.

That's helpful.

Thank you.

[Ross Famel], Deutsche Bank.

Hey, guys.

Congrats on a solid results.

First question is on the OpEx side of things.

With the new restructuring plan that you're putting into place, Peter, I know you gave the percentages, but can you talk a little bit about that $305 million to $310 million range that you're guiding for the first quarter and how we should expect OpEx to trend on an absolute dollar basis through the year given this restructuring?

Well, I guess firstly I am going to say I am not going to give guidance for the rest of the year, other than the fact that I want to get to 12% of revenue for SG&A by the time we exit 2013.

So I'm not really going to go into any more detail than that.

I think what I would say, though, is we know how to manage OpEx, and the plan that we do have is, again, really around support casts.

So it's not planned to impact our customer-facing teams.

It is really expected to impact the support groups throughout the organization.

And obviously I understand it's painful for them individually.

But, you know, if it came down to it, I'd rather spend less on finance and more on sales.

I'd rather spend less on IT and more on sales, and I'd rather spend less on the other support functions.

And that's what we're really doing, Ross.

Again, no big significant items.

I guess the one thing that is difficult in Western Europe, it just takes more time to work with the various works councils and unions and come up with an appropriate solution.

So that is a bit more challenging than what we would normally expect to do in the US or maybe out in Asia.

Thanks for that and I guess my second question, changing over to the interest expense side of things, given what you did in the fourth quarter and paying down some debt and today's announcement with another $500 million coming, how should we think about that $210 million interest expense guidance what that was the midpoint of your 2013 guidance before?

It seems like you're already running below the midpoint of that range obviously.

Any shot that you e can update that for us?

Oh, yes, sure, Ross.

Probably $195 million to $200 million for the full year.

Thank you.

Thanks, Ross.

Vijay Rakesh, Sterne Agee.

Hi, guys.

It looks like you guys brought your interest expense down to $50 million a quarter, and I saw you guys pull out this special list on a debt offering.

Just wanted to get some more thoughts on what you're going to do with it, how do you see that for the rest of the year, interest expense, etc?

Well, just interest expense we will expect for the full year to be about $195 million to $200 million.

You know, we think we have a very, very solid balance sheet, but we will be opportunistic.

And to the extent that there's opportunities to address our debt, we will do it.

Got it.

And on the auto side, obviously, 2012 was pretty good.

How do you see 2013 in terms of new products or new customers that you are adding?

How do you see that growth above market in 2013?

I'm sorry.

Ask the question, again?

On the automotive side, how do you see 2013 in terms of new markets and new products?

Where do you expect to get traction on the automotive side in 2013?

So, if you look at our automotive business, we still have some ramp up taking place with the second largest North American automotive manufacturer on the remote keyless entry.

But the primary growth that will take place associated with our automotive business will be in the car infotainment side in the developing countries associated with more in Asia and China in 2013.

We expect with the overall car production to be flat to 2% growth with actually Asia representing fairly healthy growth and maybe Europe slightly down.

So obviously the participation in automotive comes from additional platforms that we are designed into in car infotainment that's ramping now and will continue to ramp through the remainder of this year and then the growth that takes place in those developing countries in automotive.

Great.

And last question.

On the fab side, obviously you have seen some good actions consolidating the fabs there.

How many fabs are you down to now as you look at 2013, and how many fabs are you down to now as you look at 2013, and how do you -- if you had to take a stab at it, how do you see that going forward into 2014?

The way to think about it really is, in the Netherlands, we have three fabs in 2013, and in 2014 that will be one fab.

So it will go from a 4- to 6- and 8- into an 8-inch fab.

And other than that, we don't have any plans to eliminate any fabs.

The consolidation of MOS technologies from the German fab to the Dutch fab is more of a it's just a profit opportunity really and allows us to optimize both the German fab and the Dutch fab.

Got it.

Thanks.

Good job, guys.

[Linton Kumar], BNP Paribas.

Good morning, guys.

Congratulations on a solid quarter.

A quick question.

You've been a little bit more retrospect on your macro outlook than some of the other guys in the industry, but you're still looking at pretty decent growth.

Especially thinking about your long-term margin goals, can you help us understand how much of that is coming from revenue growth and how much from just your cost reductions you were talking about?

What I've said in the past is that the model that we have looked at I guess most recently is that the industry might -- a force in the industry might grow about 2% to 3% in 2013, and we would think maybe we grow up to double that.

So if we achieved that, then that gives me more than enough revenue growth to hit the right number by the end of the year.

After that, it's focusing on the various cost reductions and margin improvements that we have in the plan.

In addition to that, by the end of the year, we would expect to have some modernization from our IT portfolio that would contribute toward the 25% operating income as well, especially in areas of technology that are emerging where we have a very strong patent portfolio position.

Yes.

Okay.

Great.

Just a housekeeping question on automotive.

Can you give geographic breakdowns between the different regions in terms of your sales?

You know, it's impossible for us to do that.

We can tell you where we shipped the product to, but Continental or Bosch may ship product that we ship into Europe into China, Asia and all of the world, and product that we ship into China, they may ship into Japan and other regions.

So it really is not some meaningful about our shipments, and it's very difficult for us to track associated with it.

Great.

Fair.

Thank you.

Thanks, David.

Philip Scholte, Rabo Securities.

Yes, good morning, good afternoon.

Regarding the operating licensing you just mentioned, can you quantify that a little bit more, and also in terms of timing, when that will impact your margins?

And my second question will be on your reiteration of the 25% EBIT margin target.

Does that include any significant recovery in the Standard Products?

Because I mean you are obviously quite cautious on the economy, so I would expect that in terms of utilization, you wouldn't expect any improvement there.

So does that assume sort of a flat environment for Standard Products?

No.

You know, our Standard Products business will have to improve their margins from the performance in Q4.

We did have some one-shot items, etc.

But we fully expect Standard Products margins to improve even without a robust economic environment improvement.

So the 25% definitely counts on Standard Products getting back into the operating model of 18% to 23% operating income margins that we had for that business.

On the intellectual property income, you know, we've been involved in this process for some time.

You know, as you monetize your intellectual property -- I've done this in previous companies before -- it takes a long time.

You know you have to go search your patents.

You have to actually file lawsuits.

Go through that process.

We're actually in process with at least -- lawsuits with at least one other company at this point in time.

And we'll see how that develops.

But we would like to see something that would be contributing maybe as much as 100 basis points to operating income by the end of the year associated with IP.

And we actually have some IP income, you know, that takes place today.

All right.

Thank you.

Alex, we will take one last caller, if there's any more questions in the queue.

We have no further questions in the queue at this time.

Great.

Well, with that, I think we will end the call today.

Thank you very much for all your time.

Rick, did you want to make some closing remarks?

Sure.

Thanks a lot for your support, as well as your continued interest in NXP.

In summary, we feel very good about our results in 2012 and believe that they demonstrate measurable success in executing our long-term strategy.

The full-year product revenue growth of over 7%, despite an anemic economic environment, clearly indicates the share gains that we have, especially in our HPMS market where we saw revenue growth of 13%, combined with a 17% increase in our High Performance Mixed Signal operating income.

Clearly we believe that with the current economic environment, as well as the seasonal patterns, Q1 represents kind of the bottom of the semiconductor cycle for us, and we expect to see good growth beyond Q1 and will help us continue to have strong cash flow generation over and above the $0.05 billion or so of free operating cash flow that we were able to generate in 2012.

With all of that, we think that we will continue to be able to drive bottom-line results that will continue to demonstrate strong improved performance.

Thank you very much.

Thank you very much for your interest.

Thank you for joining today's conference call.

This concludes your presentation.

You may now disconnect.

Good day.