恩智浦 (NXPI) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the third quarter NXP Semiconductors' earnings conference call.

My name is Stephanie and I'm your coordinator today.

(Operator Instructions).

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, Stephanie.

Good morning.

Welcome to the NXP Semiconductors third quarter 2013 earnings call.

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

If you've not obtained a copy of our third quarter 2013 earnings press release, it can be found on our Company website under the Investor Relations section at NXP.com.

Additionally, we have posted on our Investor Relations website 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.

This call will include forward-looking statements that involve risks and uncertainties that 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 fourth quarter 2013.

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

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

Additionally, during our call today, we will make reference to certain non-GAAP financial measures which exclude the impact of purchase price accounting, restructuring, stock-based compensation, 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 second -- third quarter 2013 press release which will be furnished to the SEC on Form 6K and is available on NXP's website in the Investor Relations section of NXP.com.

Before we begin the call today, I'd like to highlight our attendance at the following upcoming investor conferences during the fourth quarter; the Credit Suisse TNT conference on December 4, in Scottsdale, Arizona.

The BofA Merrill Lynch High Yield Conference on December 4, in Boca Raton, Florida.

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

Thanks, Jeff.

And welcome, everyone to our earnings call today.

Overall, we are very pleased with our performance in Q3.

Revenue was slightly below the midpoint of our guidance, as a result of some slight weakness in the mobile market.

We achieved historic record revenue levels in nearly all of our HPMS business units with 15% year-on-year growth, a continued reflection of design-win momentum we have previously highlighted.

We delivered earnings at the high end of our guidance with incrementally better profitability in both our HPMS and standard products segments.

We continued to control our expenses in line with our intermediate targets.

Taken together, the improvement in profitability and expense control directly translated into very robust cash flow during the quarter.

In terms of overall demand, our performance by the end market materialized very much as we had originally projected other than the slight weakness in the mobile market.

Moving to the details for Q3.

We delivered product revenue of $1.21b, a 5% sequential increase and an 8% increase from the comparable year-ago period as standard products revenue decline year on year slightly impacted the strong HPMS growth.

Total NXP revenue in Q3 was $1.25b, a 5% sequential increase, and nearly a 7% increase from the comparable year-ago period.

On a segment basis, total HPMS revenue was $922m, up 5% sequentially but up nearly 15% versus the year-ago period.

Overall, our HPMS segment delivered excellent results and we achieved record revenue levels in three out of four of our focused end markets, with ID continuing to perform at close to the record levels delivered in the previous quarter.

Turning to the performance of our HPMS end market, revenue in our ID business was in line with guidance at $329m, down 3% sequentially, but still up nearly 20% versus the year-ago period.

Our core ID business was flat sequentially and continues to represent over 80% of overall ID revenue.

This was in line with our expectations due to good demand for secure government ID products.

Design momentum for our core ID products continues to be very strong across all verticals.

Our emerging ID business declined in the quarter as the expected result of lower mobile transaction revenue.

We continue to see encouraging design win momentum at all our customers but do not anticipate our mobile transaction business to meaningfully reaccelerate until sometime in mid 2014.

Turning to our automotive business, revenue was above guidance at $261m, up 3% sequentially and up 9% versus the year-ago period.

The business delivered much better than seasonal growth as demand was positive across all product categories.

We continued to experience the ramp of the new entertainment and keyless entry programs.

We experienced a particular strength in our in-vehicle networking products.

I'm also pleased to announce that during the quarter, we sampled the first device in our so-called RoadLINK family of software-defined radio platforms enabling car-to-car and car-to-infrastructure communications.

Our RoadLINK products have been successfully tested in multiple, real-world field trials within Europe, US and Asia, with initial production anticipated in late 2015.

This is an exciting new market opportunity for NXP which some researchers believe could be one of the most impactful safety features since the widespread deployment of safety belts.

Within our portable and computing business, revenue was $130m, up 23% sequentially and up 9% versus the same period a year ago.

Both our high-speed interface and microcontroller businesses were both up more than 20% during the quarter.

While we saw strong growth from the new and existing program ramps in the mobile market, growth was slightly less than what we'd originally projected.

Within the broad-based non-mobile business, growth was actually better than our original expectation.

Looking at our industrial and infrastructure business, revenue was $202m, up 12% sequentially and up 18% versus the year-ago period.

This was essentially in line with our expectations.

Performance in the quarter was very good across the majority of the portfolio.

Our performance in RF and small signal RF devices for base station applications experienced a combined growth in excess of 20% sequentially and up more than 15% year on year as new programs we have highlighted in the past continue to ramp.

Our power and lighting business was up nearly 15% in the quarter and up more than 20% versus the year-ago period, primarily as a result of the strong solid-state lighting product growth.

A significant highlight in the quarter was very strong growth within our emerging products group, which includes the Maximus smart mobile audio amplifier.

The Group posted growth of better than 35% during the quarter, primarily as a result of ramps with several leading smartphone manufacturers.

Turning to the standard products segment, revenue was $291m, up 4% sequentially but down 8% versus the same period a year ago which was slightly weaker than expected as a result of weaker than projected demand for mobile OEMs.

We're very pleased to confirm the gross and operating margin improvements, as we had projected, with the team making good progress towards operating the business within our long-term target objectives.

Moving onto the channel performance.

Absolute inventory dollars in distribution increased versus the prior quarter.

On a dollar basis, sales into distribution were slightly higher than sales out which was up 6%.

The total months of supply within our distribution channel was, again, at 2.2 months, flat sequentially and below our longer-term metric of 2.4 to 2.6 months.

In summary, our performance in Q3 was very good.

We're delivering strong broad-based revenue growth.

We continue to realize the benefits of solid design-win traction and share gains across multiple end markets.

From an operational perspective, we're tightly controlling our expenses in support of our long-term EBIT targets.

Our model is delivering very positive operating leverage as a result of excellent margin in our HPMS segment and the initial improvements in our standard products segment.

We continue to take active measures to optimize our capital structure and reduce our quarterly interest expense.

We believe we will continue to deliver top-line growth better than the industry peers, improving operating profitability, thus driving solid bottom-line earnings growth.

Now I'll turn the call over to Peter to review the financials in more detail.

Thank you, Rick.

And good morning to everyone on today's call.

Overall, we delivered a very good quarter with the main highlights being increased revenues, improved gross margins in both HPMS and standard products segments, reduced interest expense, the continued improvement of our capital structure as we completed a debt transaction which converted highest-cost secured debt to lower-cost fixed-rate unsecured debt, stronger than expected non-GAAP earnings, and, as a result, extremely robust free cash flow.

Moving onto the specifics of the quarter, top-line revenue was $1.249b, up 5.1% versus the second quarter and just below the midpoint of our guidance.

We generated $585m in non-GAAP gross profit, or 46.8% non-GAAP gross margin, which was $45m better sequentially.

Total non-GAAP operating expense was $300m, or 24% of revenue, and in line with our plan.

We're operating solidly within our expense model, reflecting the positive efforts of all of our business unit managers.

And we continue to invest in R&D as a priority.

All in all, this resulted in non-GAAP operating profit of $285m, or 22.8%, about 80 basis points better than our guidance and 130 basis points higher versus Q2, demonstrating positive operating leverage.

Let me now turn to the segment performance.

Within our HPMS segment, revenue was $922m, up 5% versus the prior period, a result of weaker-than-expected demand from our mobile customers.

HPMS non-GAAP gross profit was $499m or 54.1%, a 30 basis point improvement.

And HPMS non-GAAP operating profit was $251m, up about $13m from the prior quarter or 27.2% operating margin, again, solidly within our long-range model.

In our standard products segment, revenue was $291m, up 3.6% sequentially and, again, a little weaker than expected in revenues from our mobile customers.

Standard products segment non-GAAP gross profits improved to $85m or 29.2% gross margin.

And this was a 540 basis points sequential improvement successfully flowing through the P&L.

Standard products segment non-GAAP operating profit was $43m, or 14.8% operating margin.

Interest expense was $44m, in line with our expectations.

And non-controlling interest was $17m, with cash taxes at $5m.

Taken together, our non-GAAP earnings per share was $0.85, about $0.03 better than the midpoint of our guidance, primarily through the result of improved gross profit and slightly lower operating expenses, even with the slightly weaker revenue.

Stock-based compensation, which is not included in our non-GAAP earnings, was $20m in the quarter.

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

Our total debt at the end of the third quarter was $3.7b, up $316m from the second quarter.

During the quarter, we completed a $500m unsecured note transaction and the new bond carries a fixed interest of 3.5% and is due in 2016.

The sequential increase of our gross debt is a result of the timing between the issuance of the new bond and subsequent payoff of the $422m 2018 9.75% senior secured note which has since occurred on October 15.

Cash at the end of the quarter was $941m, up $372m sequentially, a result of the previously mentioned debt payoff timing.

We exited the quarter with net debt of $2.76b, a reduction of $56m and a trailing 12-month adjusted EBITDA of approximately $1.3b, resulting in a net debt to trailing 12-month adjusted EBITDA leverage ratio of 2.15 times.

I'm confident we'll be below our 2 times leverage ratio during the fourth quarter which is a significant milestone for the Company.

We bought back 4.3m shares at a cost of approximately $159m, or a weighted cost of about $37.26 per share.

Consistent with our prior comments, we believe our shares offer a compelling value and we'll continue to be opportunistically active in our repurchase program.

Turning to working capital metrics, total days of inventory on the balance sheet were 101, a decrease of 3 days.

Excluding pre-bills for the restructure of our fabs in Europe, our effective DIO was 88 days.

Receivable days were 39, up 1 day, while payable days were 73, consistent with the prior quarter, resulting in a cash-conversion cycle of 67 days, a 2-day improvement from the second quarter.

Cash flow from operations was $298m and net CapEx was $54m, resulting in a very robust $244m in free cash flow or approximately 20% free cash flow margin, a new historic level for the Company.

Now I'd like to provide our outlook for the fourth quarter.

Influencing our outlook again this quarter is our continued success with customers, resulting in strong demand for our HPMS products across multiple end markets.

We currently anticipate product revenue to be in a range of down 2% to up 4% sequentially, reflecting better than historic seasonal trends.

At the midpoint of this range, up 1% sequentially, we anticipate the following trends, all on a percentage-point basis.

Within our HPMS segment, we expect identification revenue to be flattish.

Within our auto business, we expect revenue to be up in the low single-digit range, similar to last quarter and relatively strong given normal seasonality.

Within infrastructure and industrial business, we expect revenue to be flattish.

And within our portable and computing business, we expect revenue to be up in the mid teens percent as our new mobile programs continue to ramp.

And finally, within our standard products segment, we anticipate revenue will be flat to slightly down.

We anticipate the combination of manufacturing and corporate and others to be about $34m.

And taken together, total NXP revenues should be in the range of approximately $1.22b to $1.29b or $1.27b at the midpoint, up about 1% sequentially.

We expect non-GAAP gross profits to be in a range of 48.6% to 50%, or just over 49% at the midpoint and operating expenses to be about $312m.

At the midpoint of our guidance, we anticipate about 100 basis points negative impact from a one-off crisis tax that the Dutch government is expected to institute on Dutch employee compensation.

This translates in a non-GAAP operating profit in the range of $288m to $332m, or about 25% operating margin at the midpoint, 24% at the low end and 26% at the high end.

Our progress to improving our margin profile has been quite good and consistent with the planned actions we've highlighted over the recent quarters.

Interest expense on our debt should be approximately $40m, cash taxes roughly $13m and non-controlling interest expense should be about $17m.

Stock-based compensation should be about $27m, which is excluded from our guidance.

And diluted share count should be about 256m shares, depending on share price fluctuations.

Taken together, this translates into non-GAAP earnings per share in a range of $0.85 to $1.02, or $0.95 per share at the midpoint of our guidance.

In summary, a strong set of third-quarter results, coupled with a better-than-seasonal outlook for the fourth quarter.

Our revenue growth continues to outpace the broader market, and we continue to generate significant cash and expect to be below our debt to 2 times EBITDA leverage target during the fourth quarter.

Before I open up for questions, Jeff has just passed me a note.

And I may have read out the midpoint of our revenue guidance incorrectly.

The midpoint of the guide is $1.265b.

So with that, I'd now like to turn it back to the operator for your questions.

John Pitzer, Credit Suisse.

Yes.

Good morning, Rick, Peter.

Congratulations on the strong results.

I think this is either the fifth or sixth consecutive quarter of outperforming the industry.

So congrats on that.

I guess, Rick, can you drill in a little bit on the mobility side of the business because clearly there's parts of that business that I'm assuming saw pretty decent growth in the calendar third quarter but you also talked about the weakness in that space being the reason why you were a little bit shy of the midpoint.

I'm just curious if you can just remind us how big mobile is within the total mix and the pieces within that?

And, more importantly, when you look at the strong sequential guide you're giving for the portable and computing space, have you taken into account continued further weakness in the legacy mobile?

How does that play out?

So thanks, John.

So first up, I think it's important to realize that for mobile, for us, is growing with the design wins we've had in smartphones.

So it was a year or so ago, it was high single-digit.

Now it's up to in the low teens, I would say.

And -- but that's across all of our business segments, including standard products and logic, transistors and diodes, which changes quite a bit as they change their designs.

So at one point in time they had up to 20 ESD diodes in some of the smart -- or 25 ESD diodes in some of the smartphones and, as they do their redesigns, that comes down.

So that's a changing factor.

What we did see was a healthy growth across all of our customers in the smartphone space, but just not quite as healthy as what we'd originally anticipated.

The one benefit we had was the ramp-up of design wins that we talked about, specifically in the sensor hub and continued success in the interface part of the smartphone market that we talked about.

So those are really the key basis for us.

And, yes, obviously we've taken into account the best estimates that we can of our customer expectations although, as we all know, in the mobile business that bounces around quite a bit.

But we've reflected what we believe to be the best projections associated with that.

And I think it's just a good testament to the continued design win success that we've had at the leading smartphone customers.

Rick, that's really helpful.

Maybe a follow-up for Peter.

Peter, when you think about gross margins and incremental gross margins, the fall through has been pretty impressive over the last five or six quarters.

From current levels, how should I think about fall through on the incremental -- on the gross margin line?

And I'll use your words of extremely robust free cash flow, especially given where your valuation is relative to your peers, how do we think about uses of all of that cash you're generating?

Well let me, I guess, go backwards with that.

Yes, we -- we've been saying for a while that we think we'll generate very significant amounts of cash.

And we've also said that once we get below our target of 2 times trailing-12 months EBITDA, we would decide exactly what was the best use of cash for our shareholders, whether it be to go out and buy other companies, buy back stock or institute a dividend.

I think right now we would love to acquire and grow the business but that's -- wanting to do that and being able to do that and having companies available is not always -- it's not always at the same time.

So right now, I think what we're doing is, and you saw it in the third quarter with our stock price trading the way it is, we'll go out and buy back stock.

We bought back quite a few shares in the third quarter, 4.3m.

And, as I've said, with the stock price trading the way it is, I would expect to continue to do that.

In terms of margin fall through, we think it's very, very important to continue to invest in the business.

So I'm pleased that where our profitability is, or is projected to be, in Q4 and, obviously, we've had this one-off impact of the Dutch crisis tax.

But I'd expect to continue to invest in R&D with the incremental margin.

Right.

Thanks, guys.

Thanks, John.

Your next question comes from the line of Vivek Arya with BofA Merrill Lynch.

Please proceed.

Thanks for taking my question.

Rick, my first question is your ID business has been a solid grower and differentiator.

The challenge I have, and I believe a lot of investors have, is we don't know how to model growth in that business because there are very few macro or competitive indicators.

So my question is, as we look forward, should we expect ID to grow at a historical rate?

Is it a 10% grower?

Is it a 15% grower?

How should we just conceptually think about modeling growth in this very important business of yours?

I think -- it's one of our key priorities.

And with that, we're very, as we talked about this year, we were very convinced of double-digit growth.

If you look at Q3 with, basically, 20% growth year over year, demonstrates the robust strength we have in that business across a broad array of portfolios, everything from transit ticketing to eGov with passports and ID cards and mobile transactions.

And so the strength we have associated with that is the weakness as far as projections associated with it from your perspective because it does go into transit ticketing.

It does go into RF ID tags.

It does go into passports which are very project orientated and up and down associated with it.

The one area that grows significantly is certainly on the mobile transactions with the design wins we had.

So I guess the best way to say is we feel very comfortable that we'll grow at least 50% faster than the market in that space.

And it'll be double-digit growth.

But as far as giving you some indices to really be able to model off of, I don't think we can really to that because, frankly, it's just not that easy a business to do the projections associated with.

I think that there's no reason to believe it will be significantly different than what we've been able to accomplish although, clearly, on a project-orientation basis, it'll have some ups and downs associated with it.

But we continue to feel extremely good about our ID business and the success we will have with new handset models going forward on mobile transactions.

Although, to be fair, it'll be mid to next -- mid next year to next fall before we see a significant ramp up in additional design wins in the mobile transaction space.

Right.

And on the standard products business, very good improvement and profitability.

I think in the past you have said it is not core to the business.

But it does provide tax and scale benefits, and it's obviously quite accretive.

What strategic or financial are available to reduce all the drag on growth from the standard products segment?

And what would be the decision criteria as you look at those options?

Well, the drag on growth, it's -- we're more focused on profitability in standard products than we are growth.

We've always said that we'll try to grow in line with the market in standard products and not outgrow the market.

That our HPMS growth of growing at least 50% faster than the market because of the significant share of our total business that HPMS is.

Standard products is a fifth or so of our total business.

So it's not a significant factor relative to the growth.

And we want to really focus on ensuring we deliver -- continue to deliver industry-leading profit margins in standard products [for] the standard products business competitors, as opposed to driving growth.

So it'll continue to be a factor in our overall growth.

I think it was particularly impactful in Q3 because it was negative and took our 15% year-over-year growth in HPMS down to single digit in total, when you combine it with standard products.

But our plan is that we want to continue to grow at least 50% faster than the market.

But our standard products business basically grows in line with the market as we really continued to focus on profitability of that business as opposed to top line revenue.

And standard products is clearly probably the best standard products business in the world.

So there's a lot of good in that business.

Got it.

And just one last one, as a clarification Peter maybe, how should we model interest expense for next year?

And if I could just include one more on IP monetization.

I think in the past you have mentioned that as an objective.

How should we model that going forward?

Any progress on that?

Thanks a lot.

I think a couple of things.

One is interest, probably $145m to $150m next year.

And IP monetization we've spoken about it being about 100 basis points of our profitability.

For next year?

Well, just generally.

We said that after we got to that level we would continue to expect it on an annual basis to contribute around 100 basis points of profitability although it will be somewhat different on a quarter-by-quarter basis depending on the projects and relationships that are signed up on an individual quarter basis.

But then on the full year basis we would expect about 100 basis points.

Thanks guys.

Good luck.

Thanks a lot.

Ross Seymore, Deutsche Bank.

Hi guys, congratulations on the strong results.

When I look at what we've heard from the semi industry quarter to date almost everybody else is guiding about 5 points below what the Street had expected and it seems to imply something has changed over the last month or so.

So the question I'm asking for you guys, it's obviously not affecting you but, Rick, when you look at the overall state of the industry, what have you seen from either a bookings perspective or just a general demand perspective that can give us a little bit of clue on what's going on because clearly you're seeing something that's slightly different than most of your peers?

Yes, Ross, I think -- again I think the key factor for us is the ramp-up of the design wins that we've talked about previously and the ability to support the customer engagements that we've been able to drive associated with that.

I think that's really the key factor for us that allows us to be better than seasonal in Q4.

Typically Q4 would be down a little bit so this gives us the ability to really be better than seasonal.

I think that overall general demand we don't still see a robust recovery.

We've talked about -- we don't think our book to bill is a very effective way to measure the status of the business but it's certainly not anything to write home about.

The general environment continues to be spotty.

But it's based on the design wins we have and the ramp-up of those design wins and the customer engagements that give us the comfort relative to being able to do the projected revenues for Q4.

So I think it really does confirm once again that the success we've had with the design wins and the differentiated basis that that allows us relative to the rest of our analog MEG signal peers.

Great and then as my follow-up question one for Peter.

You guys did a great job on the operating margin side so -- and one clarification on near term and then one slightly longer-term aspect to the question.

The 25% at the midpoint, you said that included about a 1 point tax, a crisis tax.

Any information on that would be helpful.

The clarification is does this quarter include IP revenues that you had expected to hit?

And then the longer-term question is what should we expect from an operating margin target perspective now that you've attained more or less the guidance that you had hoped to hit in the fourth quarter this year?

Thank you.

Okay so Q4 does include the Dutch crisis tax.

So the Dutch -- it has to pass the first House of Parliament in the Netherlands and we won't know about that until December.

But the Dutch government have decided to levy a one-off tax on the compensation of any employee that makes more than EUR150,000 year and that includes compensation from option grants, bonuses, salaries, etc.

And I think you'll have seen that ASML and a bunch of other Dutch companies also put it into their guidance.

So it's not absolutely certain yet.

We think it's likely but there is a possibility it won't pass and then if it doesn't that'll obviously not be an issue.

Q4 does include some IP so we're pretty much on track where we said we would be.

And then I have to confess I'd really like to enjoy Q4 before I start to kind of get into trying to guide 2014.

Thank you, Ross.

Next question please.

Chris Caso, Susquehanna Financial Group.

Yes, thank you.

I wonder if you could comment a little bit on the INI Group.

Obviously it's been running at pretty strong year-over-year growth rates and I guess specifically within the wireless infrastructure business; we've heard some mixed commentary from some of your peers on that.

What's your expectations for that business and I guess maybe if you could help us to understand a little bit of the lumpiness of that business?

Well, I think we have tire tracks on our back from trying to project the growth associated with the high performance RF business so we've been a little more cautious than some other semiconductor suppliers into that space.

Clearly we saw growth in Q3.

We think that that'll roll off a little bit in Q4 just with normal seasonality.

But one of the key factors for us has really been the increased design wins in HPRF as well.

So if you look at where we've gone from 2G where we were 20%, 25% market share to 3G where we were just under 50% and with 4G or LTE where the design wins we believe that we've won are more than half the market, maybe as much as 60% of the market with the engagements with new customers that we haven't had in the past at the same level.

So that's really what drives our fundamental growth in HPRF.

But it's still a lumpy business; it's just not easy to do projections.

What we've tried to do is streamline our process flows to be sure that we have some raw material inventory in place so that we can handle the flex up but yet if the orders don't materialize not have quite as much financial impact on the downside.

But it'll continue to be a lumpy business.

We feel good about our position and where we are but it's certainly not a smooth business that is what most of you guys would like to see on just a smooth upward trend.

Okay, thank you.

And just as a follow-up, and obviously as you say it's really too early for you guys to be providing any commentary on 2014, but given that we're coming off of a better-than-seasonal Q4 already is there anything that you see now that would influence you -- that we should take into consideration when we're doing our -- obviously we'll have to do our estimates for Q1?

Anything we should take into consideration as we look into Q1 that may cause it to be a little better or a little worse than normal seasonality, realizing that Q1 is typically one of your stronger quarters?

Actually that's not correct.

Our Q1 is usually down kind of mid-single-digit and on a seasonal basis and we would expect that to be -- we wouldn't see anything that would change that perspective associated with it.

We're not giving you any projections for Q1.

We've talked about we still want to at least outgrow the market by 50% for the full year but typically on a seasonal basis our Q1 is down mid-single digit, then we see a little bit of an uptick in Q2, the strongest quarter being Q3 and typically Q4 is down slightly, although this year we don't see the same downward pressure that we typically do.

But clearly Q1 is typically a down quarter for us on a seasonal basis and we'll give you more guidance on that when we do the Q1 outlook in 90 days.

All right, that's helpful.

Thank you.

Thanks Chris.

Jim Covello, Goldman Sachs.

Good morning, guys.

Thanks so much for taking the question.

Congratulations on the continued outperformance fundamentally; it's just extraordinary.

I haven't seen anything like it in a long time in this industry.

I guess the first question is sort of on your longer-term portfolio mix.

You guys have been so consistent in your message that you would continue to take higher growth potential even if it's slightly lower gross margin business and you'll take as much of it as you can get and you'll balance out the margin and the revenue.

Is there a limit to how much of that you would take in terms of what you think a healthy long-term mix for your portfolio is or will you continue to take all of that that you can get?

Jim, we have a conviction to really move forward in a basis where we want to confirm that we can outgrow the market and the key for us is if the business at a bottom line EBIT level is still on a positive basis, around that 25% basis where it's creating shareholder value, we're going to do everything we can to do that.

So we have a very strong position that we want to be as focused as we can on driving the top-line growth so long as it's a profitable business for us.

We're not going to get into businesses that are in mid-teens or upper teens from an operating income basis but on an ongoing basis if it delivers to the bottom line results, which most of those do because of the significant volume nature associated with it, then we want to be very focused on taking as much of it as we can.

(multiple speakers) the gross margin but focused on the EBIT margin.

Right.

So I guess I'll just stick on that topic for my follow-up which is just that there's no concern there about getting too much exposure to one segment, you'll just -- you feel like you can manage that over time?

Jim, there's always the concern that you have to be somewhat balanced and I think one of the strengths of our portfolio is the different businesses that we play in so that we can have different segments that contribute at different times.

And so I actually believe that the portfolio we have gives us more of a strength to weather through some of the typical semiconductor cyclicality better than some of our peers that are much more focused.

Congratulations again.

Thanks a lot.

Thanks.

Steve Smigie, Raymond James.

Thanks a lot and I'll add my congratulations on a good performance in an otherwise awful earnings period.

I was hoping you could comment on your emerging ID business and specifically I was hoping you could talk about NFC in context of the fact that it seems like in certain ways you're doing better than expected, maybe Broadcom can't do an integrated chip and the performance doesn't seem that good on some stuff they've put out there which is on the positive versus on the negative side.

It seems like Apple maybe is going more the path of low energy Bluetooth.

So something you could talk in terms of context around that and also just any update on the opportunity for cyber security and anti-counterfeit for 2014.

Thanks.

Yes.

So I think we're just as convinced on the opportunity associated with NFC across the board as we ever have been.

We see the strength associated with that, we see that as that takes place the ease of use, which is really what it's about, and the security that it offers in protecting the mobile wallet as being key contributing factors.

So I think we still feel just as good about NFC as we did when we invented it a decade ago.

And clearly the basis that it's taken longer to materialize has been a cost to us but I think that if you look at the design wins we have across the board we feel very comfortable about the continued movement.

And as we look at financial transactions, we think that ease of use and the security that comes from having the secure element as well that makes the banks and the credit card companies feel much better about supporting the mobile transactions is really the key associated with the growth.

But I think we think the growth -- the fundamental growth associated with it is just as strong as we've seen.

Most of the industry is still projecting that a half of the smartphones by the year 2015 will been NFC-enabled and we certainly concur with that and believe that the design win momentum we have would support that.

And Steve, I'll just add.

We actually view Bluetooth low energy as more of a complementary technology to NFC, not a competitive technology, and we could probably take it offline and go into more detail but we don't see that as an immediate threat to NFC.

It's a different type of technology.

And then Rick on his commentary on cyber security and authentication?

Thanks.

I'm sorry, I forgot.

So I think we actually feel just as good as we have about the cyber security opportunity.

Clearly it's an area that's in its infancy.

The one good thing is that Google actually at a conference announced that we're the supplier of their -- gosh I forgot what they call it now -- [nibby] product that will actually store everyone's individual passwords and give -- it will actually do authentication of the access to the cloud that they've (inaudible) down on the enterprise side.

So they talked about our product being the key component that supports that.

We hadn't been able to talk about that previously but since they've talked about it at their conference we can talk about the design win we had there.

So I think we're still in the infancy phase associated with that but we're quite excited about the unique security capability that we have in being able to provide a very compelling value proposition in providing a secure access to the cloud and being able to fight cyber security.

So as far as next year, it's not going to be huge and moving the bottom line but it's really about seeding the market and being able to provide the foundation for the significant opportunity that exists in the intermediate term future.

Okay, great.

Thanks.

Did you have a follow-up by any chance?

Yes sure.

Just a question for Peter on use of cash, it seems like Q4 you're likely going to hit your target there on 2x trailing EBITDA.

And when you gave the list of stuff you talked about a bunch of stuff, possible acquisitions, buying back stock, but I didn't really hear you comment on more debt pay-down and I'm just wondering if that's just assumed and so that's why you didn't mention it?

But is that still the plan, to also keep paying down debt?

Well, I think if the stock price is where it is I'd buy back stock.

I think that would be a better use of funds for the shareholders.

If the stock price goes to $100 maybe -- which I guess is arguably where it should be, it'd be a different discussion.

But when we're trading $37 I'm going to be buying back stock.

With a significant discount to our peer trading, clearly our focus would be on repurchasing shares as frankly you saw in Q3 with the strong repurchase that we did.

But that will be balanced off with the opportunity to continue to pay down debt if that's a good return for our shareholders or looking at growth through acquisitions that we really haven't put much effort and attention on previously.

So obviously there would be boundary conditions around anything we would do which would have to be significantly accretive; we wouldn't want it to be huge so we'd want to be able to be back to within our 2 times annualized EBITDA basis within three to five quarters or so.

So we're not talking about huge acquisitions but if they can drive significant shareholder value appreciation then clearly we'll put more attention and focus on that than we have previously when we've been maniacally focused on driving down our debt to the 2 times annualized EBITDA up to now.

Our valuation is very frustrating.

We're growing like crazy which you'd expect to drive a premium PE but instead we have a PE that's not a small discount, a huge discount to everyone else's.

It's just unbelievably frustrating really.

But I guess it is a great buying opportunity.

And now with private equity being below 24% of our shareholding, some of the excuses associated with private equity ownership at least gets minimized associated with it.

Thanks Steve.

Operator, we'll take the next question.

Blayne Curtis, Barclays.

Thanks and I'll echo the congratulations on a great quarter.

Peter, I apologize if this is obvious but I just wanted to clarify.

The crisis tax, you said 100 basis point impact.

Is that a non-GAAP margin and if you could just talk about -- you actually were able to guide higher even despite OpEx creeping up.

Can you just talk about why that's moving up?

Thanks.

The OpEx is moving up because of the crisis tax.

Easy enough.

I just wanted to confirm.

So does that come back down if it's a one-time charge?

Well, I guess the way to look at it, if we didn't have that one-time charge OpEx would not be going up.

But I think as we move forward and you look at your models I'd look at our OpEx more as a percent of revenue than a flat dollar base.

We're going to continue to invest in R&D to drive growth in the business.

Okay, thanks.

But just -- it's a one-time -- I'm not familiar with the Netherlands rules, right.

Is it a one-time charge?

It's absolutely one-time, yes.

Well, that's what the Dutch Government have told us.

Perfect.

And then just you said on (multiple speakers) --

-- same thing next year.

It's something that they've chosen to do relative to trying to address their tax -- their deficit issues in the Netherlands.

And it's extremely frustrating and all my peers at the other Dutch companies are just as equally frustrated with both the timing and the magnitude of this.

I can imagine.

Second question just on the NFC radio and the handsets, I think that's been pretty much written out of your story given the well-known share loss.

It actually seems like you've gained a little content back, Note 3 with your new part.

I'm just kind of curious how you view the handset opportunity.

I think the expectations are very low.

Do you see any opportunities, particularly as maybe some of the share shifts on the connectivity side, for you to do a little bit better there?

Thanks.

Well, we've talked about this.

First off I think we should be clear.

We have over 200 SKUs that we've won design wins associated with while maybe our competition's won maybe 10 to 15 or something.

So we still continue to be in a very strong leadership position associated with NFC solutions on a broad-based customer.

The well-known Galaxy 4 design win loss that we had clearly has been a significant factor on our revenue but we're in very aggressively on Galaxy 5 in support of any other design wins that are required to be able to drive this.

So we plan to continue to be a leader in the mobile payment space and feel very confident with the next generation of technology that's being deployed with our customers now that we're getting extremely good feedback about the performance associated with it and our ability to be successful and continuing to drive that leadership basis.

So I wouldn't say that we've backed off of that or anything.

Clearly we have the well-known design win loss that had an impact now but it continues to be a focus area for us.

But again it'll have some nominal impact on our total revenue because it's only about 5% of total revenue.

But it's very important for us to be able to maintain the momentum in the security aspects of our ID business because our real focus is on the secure element and ensuring that we can drive the success there where we have a unique technology lead and a unique technology position.

While the NFC radio itself is frankly just another radio although we have some good technology there as well.

But our real focus is on the security side and how we can drive the secure element on a broad basis to be able to meet the requirements of the credit card companies and the banks as they plan to continue to focus on rolling out mobile payments.

Thanks, Rick, and congrats again.

Thanks a lot.

William Stein, Sun Trust.

Thanks, good morning.

I'm hoping we can talk about the margin ramp in standard products, a very big improvement this quarter and we know from earlier in the year there were some quality issues there and some mix issues.

Are those all addressed or are there still -- is there still meaningful upside in that segment to margins?

Well, we've talked about that we had those -- we made most of the operational improvements back a quarter or so ago and it just takes a quarter to flow through the inventory valuation on our P&L.

So I think we're performing fairly well associated with the operational performance in standard products.

I think we have to continue to be very focused on which parts of the market we engage in to be sure that we can drive the improvement in bottom line results that we're focused on.

Clearly even with the improvements that we had this quarter there's some significant improvements to get back into the operating range that we would like to operate that business.

So we would expect to continue to see improvements as we go forward associated with the more focus on the product mix and ability to drive the scale of that business.

But the operational performance that we talk about, the quality issues, which were roughly a third of the decline we had earlier in the year, we think those are pretty well behind us.

That's not to say that something couldn't happen again but clearly the ones that we talked about at that point in time are pretty much behind us now.

That's very helpful.

And as a follow-up, regarding the use of cash, it sounds like it's certainly not a change in your comments but M&A is maybe a little bit more prominent in the discussion.

And I'm wondering if you can talk about the characterization of the kinds of transactions you might want to look at in terms of sizing, margin accretion, growth, those sorts of things?

So I think we have to be real careful associated with that.

We're going to do what's in the best interests of our shareholders; that's our focus.

And we've said that we believe getting to below 2 times annualized EBITDA where we were at least at a metric of investment grade, not that we'll be investment grade without the ratings agencies going through a cycle or two associated with it, but we felt like that it was imperative that we had a focus on driving our debt down to be below two times annualized EBITDA.

As we achieve that then we have more flexibility to focus on other alternatives to be able to drive shareholder value that includes M&A but not limited M&A.

And in fact at the current stock prices share repurchases are clearly a very meaningful part of that overall strategy in how we continue to focus on driving shareholder value.

As far as M&A itself, clearly it would have to be something that would fit within our product portfolio, that would either strengthen our portfolio or be a close adjacency associated with it, that would have to drive significant accretion and would have to be within the boundary conditions that I talked about.

We wouldn't want to go out and take our net debt position where we would be significantly above the two times for more than three to five quarters.

So I think that's kind of as much as we're willing to say about what we would consider.

But our focus is on driving shareholder value which M&A would only be a piece of that, not the predominant piece associated with it.

That's helpful.

Thank you.

Thanks Will.

Thanks.

Vijay Rakesh, Sterne Agee.

Hi, guys.

Good work here again.

I'm just wondering as you look at 2013 exiting what's your foundry mix and what do you see it exiting 2014?

And on your gross margin line, obviously it's picked up nicely but as you look at 2014 with the fab multi-sourcing, etc., what's the level -- what are the puts and takes on the gross margin line there?

I'd have to check the numbers but I think in 2013 we're running about 35% foundry and it probably goes up to like 40%, 45% in 2014.

I'm not sure I quite caught your -- I'm not sure I quite understood the second part of your question on the puts and takes of our external (multiple speakers).

The impact on gross margin I think is what --

I'm not sure I want to define it that specifically.

I think overall we don't see any big disadvantage or any big advantage.

I think it's more around the -- our margins are driven more by the products we build than the manufacturing cost.

Clearly the product mix will be much more significant than what share of our business we do with foundry partners versus our joint venture versus our internal manufacturing facility.

So that would be clearly a much more significant factor on our gross margin.

It's not just a -- when you look at the portfolio of products we have, a little bit of a mix change in any individual quarter can have a pretty significant swing on our overall gross margin as we change that mix.

So it's not just a continued straight-line basis of trying to do that.

So I think we still feel good about the improvements and we still feel good about the targets that we've established but it really won't be as much a factor relative to how much of our manufacturing is sourced from foundry partners versus internally manufactured.

Thanks for the clarification there.

On the ID side, identification side, obviously it looks like the EMV card should be a pretty decent opportunity for you.

Can you talk about that a little bit?

Thanks.

Well, we -- I think Visa has made a proclamation that by -- is it third quarter of 2015?

Yes.

Third quarter of 2015 they'll change the rate significantly if that's not implemented.

So I think that's really kind of at least a line that appears to be drawn in the sand at this point in time.

If you look at the implementation in Canada, it's already in works and accelerating associated with it.

And really the rest of the world besides North America which has this propensity towards mag stripe as being the transaction standard associated with it, if we actually look at some of the movements outside of -- in Asia, in the developing countries where we see contactless being a very significant factor associated with it, has more of an impact than EMV card deployment in North America itself or in US itself.

Great, thanks guys.

Thanks Vijay.

Craig Hettenbach, Morgan Stanley.

Yes, thank you.

Just on the strength in portable and computing, any early insight into next year in terms of how you think about the new product pipeline and design activity in that segment?

No, we're continuing (inaudible).

I think as it was a significant factor in changing our business we felt like we had to be more specific with some of the design win targets that we had.

I think it's more just run a course of the business, continuing to win those design wins, the follow-on generation of products and it's part of more a normal standard business.

So the success that we've had on the interface side and then moving into the sensor hub we plan on continuing to focus on driving that on a broad basis across the board to customers including those smartphone customers in China.

But not any specific design wins that we want to talk about as far as growth for 2015.

But still feel very comfortable that we can outgrow the industry by at least 50%.

Craig, did you have a follow-up?

I do, thanks.

On the capital allocation front you mentioned M&A.

Can you just talk through maybe some of the parameters in terms of things you'd look for and then also margin profile that we should keep in mind if M&A does come up?

I think, Craig, Rick highlighted that before that we're probably not going to go into a lot of detail about that.

As long as it creates significant shareholder value we'd be interested in looking but I don't think we're going to rehash that question again.

Do you have another question you'd like to ask?

No, that was it, thanks.

I guess the only thing I would add to that is that we would not anticipate anything that would reduce our margin targets associated with it.

So it would have to be something that with the implementation would fall within the business profile that we've established.

Operator, we'll take one last call.

Mark Lipacis, Jefferies.

Thanks for taking my question.

Rick, I believe that sell-in was slightly higher than sell-out.

Do you think -- what would you attribute that to?

Is that attributed to seasonal patterns?

Is that what normally happens at this time of the year or is this a cyclical driven dynamic?

So Mark, I don't think that we saw anything that is really an indicator as far as our distribution business.

I would say that it was more of a continued very tight control over inventories and I don't think that you should read too much into the increase in sell-in in the mix.

The key factor -- the key metric in trying to continue to evaluate our distribution business is that the inventory levels remain below what we would expect to be the standard levels and our distribution partners continue to be very tight, focused on turns and earns and trying to keep their inventory levels to a minimum to be sure that they deliver the returns that they can.

So I don't think you should take anything other than the factor that the inventory levels continue to be at lower than what we would expect on a historic basis and we haven't seen any real uptick associated with that which I think is really the key message we're trying to communicate, Mark.

Thank you.

That's very helpful.

Last question for Peter.

If Q1 is normally a seasonally weaker quarter, can you give us any indication about what you would expect your own utilization rates to be and would we expect inventories to be a source of cash in Q4?

I'm just trying to think.

From a cash flow perspective historically Q4 is a good cash flow quarter and Q1 is a weaker cash flow quarter.

Going pretty much beyond that I'm not sure I could really say much.

And we don't forecast utilization.

Fair enough.

Thank you.

Great, thank you, Mark.

Thanks a lot, Mark.

Well, everyone, thank you very much for your time today.

Rick, do you have any final words?

Yes, I think thanks for all of your favorable comments relative to our results in third quarter and the projections for Q4.

I think it continues to be a strong testament to the results of what the team's been able to put in place and deliver and our focus is continued on how we focus on driving shareholder value increase, which again we're not trying to signal M&A as being the primary basis but only one factor in the toolkit to be able to drive increased shareholder value.

So, with the increase in earnings that we've been able to generate and actually as we look forward with a very strong continued earnings-per-share growth, we feel very comfortable with the position and pleased with the performance.

And thanks to all the NXPers that may be listening to the call as well for their good progress and their contributions relative to our results.

So thanks a lot.

Thank you, everyone, and we'll speak with you shortly.

Thank you.

Bye now.

Thank you for your participation in today's conference.

This concludes the presentation.

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