恩智浦 (NXPI) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2014 NXP Semiconductors earnings conference call.

My name is Sue, and I'll be your operator for today.

(Operator Instructions).

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

I'd now like to hand over to Mr. Jeff Palmer, Vice President of Investor Relations.

Please proceed, sir.

Thank you, Susan, and good morning, everyone.

Welcome to the NXP Semiconductors second-quarter 2014 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 second-quarter 2014 earnings press release, it can be found at 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 could cause NXP's results to differ materially from management's current expectations.

The risks and uncertainties include, but are not limited to, statements regarding the macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products and our expectations for financial results for the third quarter of 2014.

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

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

Additionally, during our call today, we will make reference to certain non-GAAP financial 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-quarter 2014 earnings press release, which will be furnished to the SEC on Form 6-K and is available on NXP's website in the Investor Relations section at nxp.com.

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

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

We are really pleased to be here, as our results and guidance today mark major milestones in the growth story that is NXP.

Many of the design opportunities we have discussed over the last several quarters and before continue to see significant and material traction.

As our third-quarter guidance reflects, we believe the momentum should continue into future periods.

Turning to our results for the second quarter, they were very good and overall above the high end of our guidance.

Our results reflect strong broad-based revenue performance, good operating profit growth, with incrementally higher operating expenses as we continue to invest for future growth.

Product revenue was approximately $1.3b, an 8% sequential improvement and up 13% versus the prior-year period.

This was a new record for NXP since the IPO, with nearly all of our business lines delivering revenue performance above our expectations.

Total NXP revenue was approximately $1.35b, also an 8% sequential increase, or up approximately 14% from the year-ago period.

Turning now to our segment performance, HPMS revenue was just under $1b at $988m, an 8% sequential increase and up nearly 13% from the year-ago period.

We believe our HPMS revenue growth continues growth in excess -- well in excess of our peer group, a clear proof point that our HPMS strategy can consistently deliver growth in excess of our industry peers.

And now I'd like to review the results for our various HPMS businesses.

Within our ID business revenue was $343m, up 8% versus the prior quarter, in line with our expectations, and 1% growth on a year-on-year basis.

Remembering the year-ago period was influenced by strong initial ramp on initial stocking of our China banking business, which as you would expect has an impact on year-to-year compares.

Order trends within core ID business were solid, with revenue up 5% sequentially.

Growth within core ID was driven by good demand across nearly all product lines, especially in banking, with slight sequential declines that we had anticipated in the e-government business.

Overall, core ID continues to represent about 85% of the total ID revenue.

Within our emerging ID business, which includes mobile transactions and authentication, revenue was up 22% sequentially, but down about 1% versus the year-ago period.

Moving now to our P&C end market revenue was $147m, a 9% sequential increase and up 39% from the year-ago period.

This was $10m better than the upper end of our expectations, primarily due to broad-based multi-market demand for both interface and MCU products.

Within our infrastructure and industrial business revenue was $210m, up 15% sequentially and up about 17% versus the year-ago period.

During the quarter, revenue was in line with our original expectations as base station OEMs drove the majority of the increase, though our emerging business and power lighting business were both up sequentially.

Within our automotive business revenue was $288m, another strong quarter though just a bit below expectations.

Revenue was up 4% quarter on quarter and up 14% versus the second quarter of 2013.

From a product perspective, we experienced strong sequential demand for entertainment products, while keyless entry and in-vehicle networking solutions were both up modestly.

Finally, turning to our standard products segment, revenue was $316m, better than anticipated, resulting in a 7% quarter-on-quarter growth and up a strong 12% versus the year-ago period.

We continue to experience better mix in the business, driven mostly by the general discrete portion of the business.

I'd like to acknowledge the hard work that the standard products team has put in over the last year.

They are gaining market share, delivering improved profitability and focusing on more defensible long-term opportunities.

Turning now to our distribution channel performance, total sales into distribution were up 9%, with sales out of distribution up 4% as we positioned material ahead of an anticipated strong Q3.

The total months of inventory in distribution channel were 2.6 months, in line with our longer-term model.

Absolute dollars of inventory in the channel increased about 8% on a sequential basis.

In summary, our overall results in Q2 were very good, with better overall product revenue, better operating profit and good free cash flow.

As can be seen in our earnings release, we are anticipating another strong quarter in the Q3.

We believe we can continue to monetize our Company specific opportunities, which should result in better than industry growth, continued improvement in profitability and robust cash flow generation.

Now I'd like to turn the call over to Peter to discuss the financial details for the quarter.

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

As Rick has already covered the drivers of revenue, I'll move directly to the highlights for the quarter.

Overall, Q2 was a very good quarter and at the high end of our expectations, as total revenue, non-GAAP gross profit, operating profit and net income were all better than the midpoint of our guidance, and non-GAAP EPS was $1.09, $0.04 above the midpoint.

Focusing on the details of Q2, revenue was $1.35b, $23m above the midpoint of our guidance and a $103m increase from Q1.

We generated $655m in non-GAAP gross profit or 48.6% non-GAAP gross margin, about $16m above the midpoint of our guidance and $38m better than Q1, due to better than expected revenue performance and an improved mix.

Let me turn to the operating segments.

Within the HPMS segment revenue was $988m, up about 8% versus the previous quarter.

HPMS non-GAAP gross margin was 55.4%, 60 basis points below Q1, while non-GAAP operating margin was 27.8%, 50 basis points above the prior quarter.

Within our standard products segment revenue was $316m, up 7% sequentially.

Standard products' non-GAAP gross margin of 33.2% was flat versus Q1 on a percentage point basis.

And non-GAAP operating margin was nearly 20%, a 190 basis improvement sequentially.

It really is pleasing to see how standard products has recovered, as we indicated it would over the last year, and is now solidly within the range of excellent profit performance.

Total non-GAAP operating expenses were $322m, up $5m on a sequential basis, as we continued investments in support of major customer programs as well as accruals for incentive compensation on better than expected market share growth and progress towards profitability goals.

From a total operating profit perspective, non-GAAP operating profit was $334m and represents a 24.8% operating margin, up about 60 basis points versus the prior quarter.

Interest expense was $34m, non-controlling interest was $19m and cash taxes were $8m, in line with guidance.

Total NXP non-GAAP earnings per share were $1.09, towards the high end of our guidance and $0.11 better on a sequential basis.

Stock-based comp, which is not included in our non-GAAP earnings, was $37m.

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

Our total debt at the end of Q2 was $3.58b, essentially flat on a sequential basis.

And cash at the end of the quarter was $661m.

We exited the quarter with a trailing 12-month adjusted EBITDA of approximately $1.49b, and our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q2 was 1.97 times, in line with our target of 2 times.

We bought back 3.8m shares at a cost of approximately $223m, for a weighted cost of about $59.40 per share.

Turning to our working capital metrics, days of inventory were 96 days, a decrease of 6 days sequentially.

And excluding pre-builds associated with the restructuring of our fabs, our effective DIO was 88 days.

Days receivable were 43 days, while days payable were 80.

Taken together, our cash conversion cycle improved to 59 days from the 66 days reported in the previous quarter.

Cash flow from operations was $242m and net CapEx was $89m, resulting in positive free cash flow of $153m or 11% free cash flow margin.

Free cash flow was a little less than previous quarters, as we paid out bonuses earned in 2013 and had slightly higher restructuring cash-out payments of about $28m.

Now I'd like to provide our outlook for Q3.

Based on our analysis, it appears we are continuing to gain market share across the product portfolio, and we anticipate NXP should continue to substantially outperform the overall market.

We continue to have a number of Company-specific programs which we see contributing to solid growth in future periods.

With this as a background, we currently anticipate product revenue will be in the range of up 10% to up 13% sequentially.

At the midpoint, we expect product revenue to be up in Q3 about 11%, reflecting the following trends in the business, all on a sequential percentage basis.

Within our HPMS segment, we expect automotive to be flat to slightly up sequentially.

Identification is expected to be up in the mid-teens range.

Portable and computing is expected to be up in the 40% range; that's four zero.

And infrastructure and industrial is expected to be up in the low teens range.

Standard products is expected to be up in the low single digit range.

We anticipate revenue from the combination of manufacturing and corporate and other to be approximately $43m.

So, taken together, total NXP revenue should be in the range of $1.47b to $1.52b, or about $1.495b at the midpoint.

We expect non-GAAP gross margin to be about 48% at the midpoint, plus or minus, and operating expenses are expected to be in a range of $330m to $340m, about $335m at the midpoint or 23% of the revenue, which is still under our target metric of 24%.

This translates into a non-GAAP operating profit in a range of $370m to $395m, or about 26% operating margin at the midpoint.

Interest expense on our debt should be approximately $35m.

Cash taxes are expected to be roughly $7m.

Non-controlling interest expense should be about $17m, and stock-based compensation should be about $34m, which is excluded from our guidance.

Diluted share count should be about 250m shares, but obviously depends on share price fluctuations and the level of buybacks we execute.

Taken together, this translates into a non-GAAP earnings per share in a range of $1.25 to $1.35, or $1.30 per share at the midpoint of our guidance.

So an excellent quarter, strong guidance.

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

Sue, we'll poll for questions now.

(Operator Instructions).

John Pitzer, Credit Suisse.

Yes.

Good morning, guys.

Thanks for letting me ask the question.

Congratulations on the strong results.

I want to focus my question and follow-up really on some of the sub-segments driving growth in the September quarter.

I guess my first question, within the ID guidance for September, can you help me better understand what's coming from core ID versus the more emerging ID?

And within the core ID bucket, are we starting to see the banking business come back, or the e-government come back?

A little bit of color there would be helpful.

So I think the key, John, is on banking.

China banking was really strong Q2 a year ago, when we really had the stocking that took place.

So, China banking even in our Q2 results has come back, but it's not as high as the year-ago basis because, again, that was more on a stocking basis.

So I would say our China banking business now is back at more of a steady state basis, slightly below where it was a year ago Q2 but very strong.

Clearly, when you look at Q3, we'll have a significant portion of our growth that will come from the emerging ID business, but we haven't broken out the details of that and just reflect the anticipated growth for the total ID business.

That's helpful, Rick.

And then, Rick, on the industrial and infrastructure, I know that you've been trying to balance the strength coming from base stations with the capacity you have.

Yesterday we got, or I guess Tuesday night we got a data point from the PLDs that maybe there is a pause going on there.

Yet you guys are guiding I&I up pretty significantly in the September quarter.

Is that again another base station driven event, or can you help us understand what's driving the growth there for September?

September, we expect strong growth in base stations.

We have been capacity limited in supporting our customers and been hand to mouth actually constraining the shipments that they could ship based on the power amplifier, which is not the position we'd like to be in.

But we've tried to base this business where we can have a nice profitable growth as opposed to a boom/bust cycle.

So we've actually frustrated some of our customers in the near term, not being able to meet all the requirements, but anticipate strong growth in Q2.

And to be fair, as we talk to our base station customers, it's much more broad than just China LTE, the customers that we have.

And if you'll think about over the last few quarters, John, one of the things that we see in the base station is the growth at some new accounts where we weren't designed in before.

So we are actually growing more than just the basic demand as we gain share in the near term, based on the design wins we have, but have clearly been limited based on our manufacturing capacity.

We bring on some additional capacity in Q3, and that will clearly give us the position to be able to support our customers in a little bit more significant fashion than we were able to do in Q2, and hopefully not have quite as many customer visits to explain their frustration with our lack of support.

John, it's Peter.

Certainly, base stations is doing quite well and Rick explained that.

But we are also seeing in that segment our PLS business is doing fine and our emerging business is also doing very well, in particular our mobile audio, so it's not just base stations.

Thanks, guys.

Congratulations again.

Thanks, John.

Blayne Curtis, Barclays.

Hey, guys.

Great results.

Maybe I can ask about the other segment, obviously, portable and computing up 40%.

To the extent that you can talk about it, maybe difficult, maybe in the context of do you have new ramps that you're adding in the sector, or is it similar products just getting more penetration?

Is there any way you can break out where that strength's coming from?

I think the key was that it was broad based.

It was across our micros; it -- sorry, Blayne.

It was broad based across our interface and micros, so it was not any ramps of key programs in Q2.

We do expect to see some of those in Q3, with the guidance that we have.

But this was really broad based, with design wins that we've won, with the acceleration of those on a very broad base, with most of that actually going through the distribution channel.

Got you.

And then maybe just following back up on your infrastructure comments, do you think now, given where you're shipping to in September, that you're going to be caught up?

And if you can just comment, I think you've done a good job managing this versus some others who have shipped ahead and now have to correct.

Are you seeing any pause in China more directly that others have mentioned?

We aren't seeing that at all, Blayne.

What we are seeing is that our customers tell us we are still not meeting their full requirements.

But I think the one thing that we are told by our base station customers, they are seeing broad-based demand.

In Q2, there was one of the issues we have struggled to be able to support the growth in Latin America, supporting the deployment associated with the World Cup.

But there is a broad-based base station demand in the Middle East and Africa and well beyond just China that we understand from our base station customers, and we are still not meeting the requirements.

Now, we are taking the opportunity in working with our customers to be sure that we secure longer-term run rates and orders with these base station customers as well.

So we've created frustration for them, but we've done as good a job as we could working through that, and now trying to be sure that we secure longer-term business on an ongoing basis with the intent again to make it a profitable growth business and not focused on a boom/bust cycle.

Thanks, guys.

Thanks, Blayne.

William Stein, SunTrust.

Hey, guys.

Thanks for taking my question, and congrats on the very strong guidance.

Maybe I'm going to go at the portable and computing guidance a bit of a different way.

Can you help us understand maybe the relative level of concentration in terms of customers and products that are driving the very strong guidance there?

Is it -- I'm sure it's not one customer or one product, but maybe give us a sense as to how concentrated or diversified that growth is going to be.

I think the key thing is not just to talk about Q3, but to talk about Q2.

As we talked about our Q2 results, which were extremely strong, we see that on a broad-based customer base.

So it's a broad number of design wins, primarily through the distribution channel.

Clearly we had some key design wins at some of the leading smartphone and tablet companies in Q3 that will be a significant factor in our Q3 growth, but it's not just in a single customer concentration.

There is a broad-based growth, with really the design wins in the smartphone and tablet area being incremental growth over and above that.

That's helpful.

Maybe shifting to another area that you didn't talk about, I believe that the Company got a design win for its V2X or this 802.11p product in the quarter, and it seems to me that's a fairly compelling product area.

I'm wondering if you can talk a little bit about what you see the medium- and longer-term opportunities there.

Thank you.

Will, this is Jeff.

We did talk about that we had been awarded the first design on our car-to-car communication program, but you know the automobile industry works at a different cadence than just about any other industry.

That design won't go into production till the 2017 model year, so probably see it late 2016, so it's still quite a ways away from being real revenue.

But we are pretty excited about that.

Discussions with other major auto OEMs are going very positively.

What was kind of interesting about the award on the car-to-car communication was also -- it was not just the communication part that we were seen as being superior to; it was the security that we brought into the system.

So it was a very, very good award for us from that perspective.

Yes.

I think we are really encouraged about the opportunity of driving a total solution base there, that providing the security as well as the overall connectivity really plays to our strength as we go forward and what we are trying to accomplish as a company.

And as Jeff said, it will be a few years before it ramps, but we clearly want to be a leader in that space and ensure that we are a thought leader in the car-to-car or vehicle-to-vehicle communications.

Great.

Thanks very much.

Thanks, Will.

C.J. Muse, ISI Group.

Yes.

Good morning.

Thank you.

Or good afternoon.

Thank you for taking my call.

I guess first question, curious if you can talk about the sustainability of the outsize growth that you're seeing in P&C and ID.

Love to hear your thoughts in terms of leverage to the breadth of customers you've talked about, as well as any individual product cycles that we should be thinking about.

I don't think we want to get back into the discussion of individual product cycles and individual product designs.

I think the thing that we see is clearly the opportunity for the mobile wallet to finally begin to emerge as the kind of expectation that we've had for quite some time, and with some of the new use cases being a significant opportunity in driving the result.

So I guess the only thing we can really say, C.J., is we are giving you pretty good guidance relative to the revenue growth.

We don't think it's a one-shot pop.

We think this is a sustainable systemic change of the fundamental core of the business where you'll see mobile wallets.

And clearly, the interface designs that we've had contributing in the microcontroller design wins contributing on the P&C side, but we see that on a sustainable basis.

We don't see that as just a near-term pop.

Yes.

C.J., it's Peter.

One of the things we've been talking about is long-term compound annual growth rates over multiple years, and we still see P&C as being mid-teens sustainable growth rates over a number of years.

Okay.

Very helpful.

And then if I could follow up, standard products, blow-out quarter, great operating margins; I guess how should we think about growth from here there, as well as is there more juice on the operating side or should we be thinking around 20% go forward?

Well, 26% on operating income is --

Is the Company.

But for standard products, a few years ago it ran well over 20%, but that was in a really, really unusual market.

So I think standard products running between 18% and 20% is super, super solid.

We'd expect it to grow in line with the semi market generally.

And of course we are very focused, as Rick says, at a total Company level at running 26%.

And I guess to follow up there, were there any particular drivers of strength there or was it just broad based?

It's broad based.

It's discrete.

And it's basically, we think, a reflection of the current strength in the semi market.

It was really in transistors and diodes where we saw the strength this quarter, and we think it's well served.

And as long as we can run, as Peter said, 18% to 20%, then that gives us the support we need to be able to run the 26% operating income for the total Company.

Perfect.

Thanks so much.

Thank you.

Thanks, C.J.

Ambrish Srivastava, Bank of Montreal.

Thank you.

A question on the more broader businesses that you serve, and we always fret about the cyclical factors.

What are you seeing in terms of lead times, orders, channel inventory in the more broader end?

And then I had a question on free cash flow.

CapEx ticked up a little bit.

For the year, should we still be thinking in the 5% range in terms of capital intensity?

Thank you.

So, on the channel inventory, we talked about it being at 2.6 months, so still well within the bounds of where we would like it to be.

It increased slightly in the quarter on a dollar basis, as we prepared for the increased revenue in Q3 to be able to meet our customer requirements.

But I think that where we are as an industry is we are now beginning to see an improvement in demand.

So I think we as an industry have been waiting to see China, and I think when you really get down to it, the demand improvements are here and it's looking fairly attractive.

So the positive thing for us is we have some incremental demand through the design wins that we have that actually position us better than just the general industry growth.

So I would say that, unlike where we've been over the last couple years, where we said we felt like the industry really wasn't seeing strong growth, but we've been able to drive design wins, now we're beginning to see growth in the industry with the incremental design wins driving growth over and above that.

And I'll let Peter talk about the CapEx.

CapEx, we typically try and run 5% through the cycle.

To be honest, this year probably will be a little bit higher.

My guess is maybe 5.8% of revenue.

Our CapEx tends mostly to actually be in the back end, and particularly in test.

The CapEx that we spend in our front-end fabs is relatively small and tends to cover how we bust particular bottlenecks as opposed to large-scale investment for capacity, as increasingly our growth is covered by external sources.

Okay.

Great.

Thank you.

Thanks, Ambrish.

Vivek Arya, Bank of America.

Thank you for taking my question.

Rick, I'm curious, in emerging ID mobile banking, are you seeing demand for just NFC controller chips, or are you seeing also a healthy attach rate for the secure element, and if there is any way to quantify what the attach rate of secure element is today and what it can be next year?

As we know and you know, different of our customers have different architectures associated with it.

I think as we go forward, what we think will be the game changer that will really prove the ease of use will have a combination of the secure element with the radio.

So we feel very comfortable with the strength of the secure element and continuing to contribute to the business, but there will be certain of our customers that will just use the radio without having the secure element.

So it's not like we can point to any single direction associated with it, but I would tell you that where we're excited about the growth going forward, the secure element will play a significant share of that mobile wallet opportunity.

Got it.

And maybe just to clarify that, and then my follow-up question, so the clarification would be that in terms of content then, is it then fair to assume that your average content in emerging ID hopefully stays similar to what you're getting today?

And then my follow-up question is just your view of industry consolidation.

You've obviously shown very good sales growth, and you have achieved your operational and debt de-levering objectives as the first milestone you had set out.

So what is the next major milestone for NXP, and do you think it will perhaps need some inorganic transaction?

Thank you.

Well, on the industry side, I guess what we've said, we started saying late last year, was now that we have our capital structure where our net debt is below 2 times annualized EBITDA, we feel very comfortable with our capital structure and like our debt structure where it is, with basically 75% of it being unsecured and locked in at 3.8%, Peter?

Yes.

Overall debt cost.

So we feel very comfortable with the debt structure where we have it.

So we think that that gives us the opportunity to think about acquisitions that we wouldn't have thought of through the end of last year.

As you can tell, though, we're not going to be running out quickly and buying something just to be able to buy something.

We'll be very patient.

What we would want to do is focus on something that would expand one of our key franchise areas, our true leadership positions, and strengthen that.

It would have to be significantly accretive, and we'd want to be in a position where we could be back at the 2 times annualized EBITDA basis within three to five quarters, so that says we're not going to do a $5b or $6b M&A deal.

But we would have a tendency to limit that to more like a couple billion dollars.

But we'll be very patient and very careful on our first transaction, as we think it's important to be able to continue to support the organic growth that we have and demonstrate to our shareholders the opportunity that really exists with the Company as it is today.

But we do have the opportunity now to think about inorganic growth being an additive to that growth that we've portrayed and talked about from the core NXP business.

Which is exactly what we've been saying, I guess, for the past nine months, right?

Right.

And content on emerging, you think that stays roughly similar to what you have right now?

Yes, I think so.

Clearly we'll continue to have some customers that will just use the radio and some that will use the radio and secure element.

We think that the real killer app will have the radio plus the secure element, which provides the security to really be able to protect individuals' wallets.

We think that if somebody's using the radio, then there is a weakness.

They're trying to use software as the security, and clearly that exposes it to additional hacking issues.

And so we think the secure element plays a very key part of a total mobile transaction solution that provides the security that we all want to have for our individual wallets.

Thank you.

Thank you.

Ross Seymore, Deutsche Bank.

Hi, guys.

Congrats on the strong quarter, guys.

Thanks for letting me ask a question.

The automotive market, a big market for you guys across a couple different segments.

Can you give us a little more color why that was a little bit weaker than expected, and any other dynamics you're seeing going forward in it?

Yes.

There wasn't really anything of significance, Ross.

I think it was just some shipments at the end of the quarter that got held up.

So I wouldn't take any indication of a weakness in the business based on the results that we had in Q2.

We continue to see really strong growth in the automotive business.

Our position, especially in the car infotainment now, having basically all of the mid and high-end car radio platforms use our technology but still ramping in a number of those as they transition, and then the true leadership position that we have in the remote keyless entry as well as the in-vehicle networking, and a very strong position.

And so really the key for us is in the emerging areas that we talked about, the design win on the vehicle-to-vehicle and being in a position where we can be a thought leader in that space, and then some of the other emerging technologies that we think can play a role in growth in automotive that we'll talk more about at our investor day in November.

Great.

I guess as my follow-up, switching gears over to the gross margin side for Peter, I know in your guidance the operating margin is improving nicely.

The slight drop in the gross margin, can you give us a little color?

Is that just mix?

Is it mix between segments, mix within segments?

Any more color would be helpful.

Thank you.

I think it's a number of things.

It's probably mix within segments, rather than between segments, and then the ramp of some new products.

So I'd say it's split pretty evenly between the two of those.

Great.

Thank you.

I'll just point out, the operating margin was pretty terrific.

Thank you.

Craig Hettenbach, Morgan Stanley.

Yes.

Thank you.

I wanted to touch on just operating margins.

With the guidance for Q3, you're right on the doorstep of 27%.

I know you've talked about also continuing to invest for growth, so can you maybe give us some of the puts and takes in terms of the leverage fall through, as well as some of the growth initiatives as you go forward?

Our intention is to run 26%, and we've been pretty clear we don't really intend to go beyond that.

So to the extent that we get additional revenue, which would give you leverage on OpEx, we'll reinvest in R&D to drive the future growth of the Company.

So you should plan above-average industry revenue growth and 26% EBIT, low tax rate, fantastic earnings growth.

And generating a lot of cash.

Yes.

So I think the key for us is we'd rather be sure that we drive incremental growth, as opposed to trying to squeeze out an extra 50 basis points on operating income.

We think that there are some areas that, clearly, if we step up or improve the investment on the R&D side will give us a better long-term growth opportunity, so we have some of those that had built up, as we committed to our investors that we'll run 26% operating income.

But our focus is on maintaining the 26% operating income and generating well above industry growth, at least 50% faster than industry growth, which we think will generate a lot of operating income and then, with the tax position, as Peter said, a very strong cash flow that can continue to be very efficient for our shareholders.

Got it.

And then, as my follow-up, speaking to that strong cash flow and the buyback activity has been robust in the first half of this year, can you update us on your thoughts in terms of return of cash and your view on buyback in the context of where the stock is?

Well, given our current stock price, it's absolutely the position where we'd continue to buy back stock.

Okay.

Thanks.

Chris Caso, Susquehanna Financial Group.

Yes.

Thank you.

Good morning.

The first question is with regard to the bank card business, and in the US that business -- the US hasn't been a big contributor yet.

Can you help us to level set the size of the opportunity there and how long you think it will take to realize that opportunity?

And then maybe the same for China.

That is contributing now, but is the quarterly run rate that you're experiencing now with the China bank card business a stable run rate going forward, or do you expect that to step up over time also?

Well, let's start about China first, since it's been such a significant contributor to our growth over the last year.

So I think what we see in China in the -- it's a little bit of the best implementation.

They had said that they will not issue any cards that are not dual interface after the end of 2014, and they will not accept any cards that don't have the protection associated with it after 2015.

So they have accelerated the growth or the implementation in China by probably cutting the overall implementation by at least half.

In the case of the US, there's not a government dictate or an organization that can drive the implementation for the US.

So it really comes down to the reduction of fraud and the ability to provide better security, and frankly part of the problem is that the entity that pays the incremental cost about implementing EMV in the US is not necessarily the same entity that gets the benefits of the fraud reduction.

So the overall ecosystem will be much slower to implement in North America, but based on some of the issues that we saw late last year and early this year with fraud, we see a definite increase in activity.

We're very confident that EMV will be rolled out in North America, but it'll be rolled out over a number of years.

It's not something that will be rolled out or implemented on an equivalent basis to what's actually happening in China today.

Okay.

Thank you.

And --

Yes, Chris.

The only thing I would add to Rick's comment is just in the US, we'd see the size of the US EMV market about 1.5b cards.

And just to cap on Rick's comment, it's probably going to be five years, seven years, to full penetration in the US, very similar to what took place in Europe.

So have to level set.

It's not going to be just a step function overnight.

And in China, I think we've said the opportunity is about 1.5b cards.

We're probably 20% penetrated there.

It'll still take a number of years till we're fully penetrated.

And even over five years, or whether it's five or seven, it won't be a linear rollout so you won't see a fifth of it in the first year.

You'll probably see a lot less than a fifth in the first year.

It'll be slow and then pick up.

It's really hard for us to project.

We provide the technology and the capability, and they're going to implement that at their own pace about the increased cost that they have to invest on a per-card basis for the reduced fraud activity.

And so it's hard for us to project.

We do see a definite increase in activity, a lot of specifications going out associated with new card implementations, but again, we think that it will transpire over a very extended period of time.

All right.

Thank you.

That's helpful.

And just move on to the NFC and secure element business, and really a question of why that business is defensible.

And when investors see growth on handset platforms, there's naturally a fear about the sustainability of that revenue.

Can you go into what about your NFC and secure element business allows you to hold onto those sockets, once you've been designed in?

Technology.

We have to continue to have the best technology on the marketplace and continue to win designs.

As we know, a couple of years ago, we lost an NFC design on a major platform.

Fortunately, we were able to win it back in the next platform.

So it's about the technology we provide continuing to be in a leadership position, and really the benefit that we have in providing the secure element.

We're one of only a few companies that can provide the secure element to really be able to provide a total solution basis and the only semiconductor company that has a software platform with our Java card operating system to be able to provide a complete, robust solution at a one-stop shop.

Great.

Thank you.

Thanks.

Vijay Rakesh, Sterne Agee.

Hi, guys.

Congratulations.

Looks like your strongest September quarter guide in five years.

I just wanted to talk a little bit on the automotive side.

In the past, you have talked about design ramps.

I just wanted to see what you were seeing in near and midterm in terms of design wins ramping either with ADAS or RoadLINK, et cetera.

Thanks.

Well, on the vehicle-to-vehicle implementation, Jeff talked about that earlier, that that will be -- the first design win that we won will not be until 2017 model year, which will be shipping in mid to fall of 2016.

So we're excited about the design win, but as always the case in automotive, you win that design win a number of years before you actually see significant revenue.

Certainly, that took place when we won the door-locking solution from the number-two US automotive manufacturer, and we're still ramping models associated with that, several years into the process.

So it's not like it's going to create any significant revenue upside, certainly not this year nor next year, but it's really important for us to establish the foundation in the thought leadership on vehicle-to-vehicle and ensure that by providing a total solution, including the security, that we're uniquely positioned to really be able to drive that.

But it's not going to be a significant revenue improvement in the next six quarters or so, or actually further than that.

And just looking at the foundry side, any change in strategy there?

Are you guys increasing your outsourcing there?

Any color there?

Thanks.

No change to our strategy, but we are increasing the number of wafers as a percent of total that we buy externally, but that's just how we're managing our growth.

Yes, but we're rapidly ramping our supply from foundries.

We'll be at 50% of our total wafer supply in the not-too-distant future, so going from a much lower basis.

Yes.

A few years ago, we were less than 15%.

I think we were 30% exiting last year, and as Rick has said, we're accelerating pretty quickly now.

Got it.

Thanks.

Great.

Steve Smigie, Raymond James.

Great.

Thanks a lot.

Just turning back to the using software as part of security within this whole secure element/NFC radio, can you talk about how you guys play in that software side of it in terms of how secure is that?

And then, what's the business model for you guys there?

How do you get paid for being involved there?

That's a very good question.

So, on the Java card operating system, it's something that we've had for well over a decade, an investment level.

So this is a key part of our solution in the security space.

We have customers that will use their own software on top of our semiconductor platform, and we have other customers that will use a solution, our semiconductors as well as our software solution.

But really the key for us is by providing the total solution gives us really the ability to add value for our key customers associated with it.

And it's a significant investment.

It's something that if a competitor wants to really come and pursue, it is a number of years before they could have something that would be equivalent to it.

So we think that it's very key in our defensible barrier associated with our security business, our ID business, and being able to position our true leadership position we have there and being able to maintain that.

So it is a critical element.

It's one that we continue to increase our investments in that area, based on the customer base and being able to provide those solutions.

But it is very important to our security business and being able to continue to be a leader.

Okay.

And then, just on the ID business, can you give us some sense of how much of ID in the June quarter was core versus emerging and, within core, roughly the buckets there?

Yes, Steve.

We said core ID was about 85% of total ID in the June quarter, so it's mostly for that.

We don't provide granularity below that on the different sizes of the sub business lines.

We have said that the banking business continues to be the largest portion of ID overall.

We have said that our mobile transactions business is the second largest overall.

But that's really the level of granularity we're going to go into.

Thank you.

Thanks, Steve.

Suji DiSilva, Topeka.

Hi, guys.

Nice job on the quarter.

Just a couple of questions on the infrastructure business.

The base station area where you have constraints, is that the only area in the business where you're seeing constraints?

And when do you expect the constraints to ease, how many quarters?

Thanks.

I think you have to be real careful about talking about the only area of the business with constraints.

Clearly, as we ramp up our revenue, we're having -- and Peter talked about the fact we're having to increase our CapEx investment.

So there are other areas where we're limited by production associated with it.

The most significant in the near term has been in the area of our HPRF business, and we continue to make investments there, trying to improve our customer support.

But again, our focus has been on making that a nice, profitable growth as opposed to a boom/bust.

And so our additions are somewhat gated, and we've done some of those additions in capacity in conjunction with some of the customer commitments.

So, as far as when we'll be caught up, I think that if we believe what our customers tell us, we're still a couple quarters out from being caught up with their overall demand.

We've been concerned back earlier in the year whether there was any double or triple ordering taking place in HPRF, and that's one of the reasons that we've been relatively thoughtful in our capacity additions.

But we're encouraged about the growth of that business.

We're encouraged about the design wins.

And frankly we're encouraged about the strengthening of some of the relationships with our customers that actually our problems have been able to facilitate associated with it.

And I have another question on the P&C business.

What's the percent disti versus direct, roughly?

And what I'm trying to get at is what's the underlying growth you're seeing in the disti part of it, which is a bit more broad-based business?

Thanks.

So, in our P&C business, I think it's about 60% or 65% now through the distribution channel.

It's a little more concentrated than our overall business in total, which is more like 50% through the distribution channel, and that really has to do with the portfolio.

Our microcontroller business is clearly more like 80%, 85% through the channel.

But I don't think there's any real significance associated with that.

Other than some of the key smartphone and tablet design wins we've won, most of our microcontroller business is broad-based general industrial applications.

Okay.

Thanks, guys.

Thanks.

Thanks, Suji.

Jim Covello, Goldman Sachs.

Hey, guys.

Thanks very much for taking the question.

Great job on the report.

There's a lot of questions on I&I that have been very good already, and you guys gave some really, really helpful color.

Just one very specific question there; have you seen any decrease in the lead times of the longest lead time components yet, or are they still where they've been over the last couple of quarters?

You mean as far as we provide lead times to our customers, or on the parts that we secure associated with it?

No, I'm sorry, your lead times that you're quoting to your customers, whatever your longest lead time, if it's a power amp -- whatever your quote on the longest lead time item to your customers.

Has that come down at all?

No, it hasn't at all, Jim.

The truth is it's not about lead times.

It's about allocation of our capacity and working with our customers to be able to meet the requirements, and we still see that for the next couple quarters with our customer base.

We don't see that changing significantly.

Very helpful.

And then just as a follow-up, the growth in the distribution channel inventory, is it -- should we take from your last question that's the majority of -- and understanding that's in preparation for customer ramps in the third quarter.

Is the majority of that growth in MCU and portable and computing consistent with the answer to the last question, or were there some other areas that contributed to that?

There were some other areas that contributed to that as well.

It's basically with the ramp up of design wins that will take place in Q3, it was kind of being in a position to provide that across the board.

Terrific.

Thank you so much.

Good luck.

Thanks a lot.

Thanks, Jim.

Operator, I'm not sure.

Do we have any other participants in the queue at this point?

At this point, there are no further questions in the queue.

Great.

So I'll just pass it back to Rick real quickly for some final comments.

Thanks, Jeff.

First off, we thank all of you for your continued interest in NXP.

I think it's important to reiterate the key points of the progress that we've had through 2014.

Our revenue growth continues to be robust, with growth significantly above our peers.

Based on the year-to-date revenue and the midpoint of our guidance, 2014 is shaping up to be a new high-water mark in terms of total revenue, with several businesses achieving record revenue levels.

It's also important that we point out an improved profit profile, with Q2 profit dollars up about 21% and operating profit dollars up 31% year on year.

Our strong cash generation; we were able to increase our cash flow 34% year on year, while spending just over $1b on share repurchases over the last 12 months.

So, once again, thanks for your support and interest in NXP, and we'll be talking to you.

Thank you very much for everyone on the call.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.