恩智浦 (NXPI) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2014 NXP Semiconductors Earnings Conference Call. My name is Michelle, and I'm your operator for today. (Operator Instructions.) As a reminder, this call is being recorded for replay purposes. And now, I'd like to hand over to Mr. Jeff Palmer, VP of IR. Please proceed, sir.

Thank you, Michelle, and good morning, everyone. Welcome to the NXP Semiconductors Third 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 have not obtained a copy of our third quarter 2014 earnings release, it can be found at our Company website under the IR section at NXP.com. Additionally, we have posted on our IR 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 include 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 fourth quarter of 2014. Please be reminded that NXP undertakes no obligation to revise or update publicly any forward-looking statements. For 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 discreet 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 the third 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 IR section at NXP.com.

Before we start the call today, I'd like to highlight several investor events we will either host or attend. On November 4 and 5, we will be hosting our 2014 Analyst Day in New York City. On November 19, we will attend the Morgan Stanley TMT Conference in Barcelona. On December 2, we will attend the Credit Suisse TMT Conference in Scottsdale. On December 2, we will also attend the NASDAQ OMX 31st Investor Conference in London. On December 8, we'll attend the Raymond James TMT Conference in New York. On December 9, we'll attend the BMO TMT Conference in New York. And lastly, on December 10, we'll attend the Barclays Capital TMT Conference in New York City.

And now, I'd like to turn it over to Rick. Rick?

Thanks, Jeff, and welcome, everyone, to our earnings call today. Our performance in the third quarter was very strong, with revenue better than planned, expenses under control, and earnings above expectations. Our outlook for the fourth quarter points to a better than seasonal trend as the Company-specific product cycles continue to ramp against the backdrop of what appears to be slightly less optimism in the overall semiconductor market.

Product revenue was approximately $1.47 billion, a 13% sequential improvement, and up 21% versus the prior year period. Total NXP revenue was approximately $1.52 billion, also a 12% sequential increase, while up approximately 21% versus the year-ago period.

Turning now to our segment performance, HPMS revenue was $1.14 billion, a 15% sequential increase and up nearly 24% from the year-ago period. As noted in our earnings release, beginning January 1, we are planning to reorganize certain parts of the HPMS segment. The goal of the change is to drive our product lines in a more focused application and customer-centric approach in order to address the next phase of semiconductor growth, in particular security beyond that of SmartPhones and tablets today.

In today's call, I will keep my prepared remarks to the existing HPMS structure, although we have provided a bridge between the existing and new structure on our IR website. We will discuss this further at our upcoming Analyst Day in just under two weeks.

Now, I'd like to review the results for our various HPMS business units. Within our ID business, revenue was $396 million, up nearly 16% versus the prior quarter, above our expectations and up 20% on a year-on-year basis. In the core ID business, revenue was down about 3% quarter-on-quarter, with banking up sequentially, offset by sequential declines in the e-government and the automatic fare collection businesses, while the remaining product lines were essentially flat versus the prior quarter.

Overall, core ID represented about 70% of the total ID revenue in the third quarter. In the emerging ID business, we experienced very strong growth due to the mobile transactions. In total, emerging ID was up about 115% sequentially, and up over 160% versus the year-ago period.

Moving now to our portable and computing end market, revenue was $217 million, nearly a 48% sequential increase, and up 67% from the year-ago period. Growth in the quarter was driven by the launch of new mobile platforms, driving demand for both interface and MCU products. While new mobile platforms drove the majority of the sequential increase, we also experienced positive growth in the broad-based MCU market.

Within our infrastructure and industrial business, revenue was $238 million, up 13% sequentially, and up about 18% versus the year-ago period. During the quarter, revenue was in line with our original expectations, as base station OMs drove the majority of the increase. But, we continue to see strong demand for our Smart Audio products.

Within our automotive business, revenue was $288 million, a good quarter, in line with our expectations and reflecting normal third quarter seasonality. Revenue was flat quarter-on-quarter and up 10% versus the third quarter of 2013, continuing our double-digit growth in the automotive business over the last few quarters. From a product perspective, we experienced sequential growth in keyless entry and in-vehicle networking, though slightly offset by sequential decline for entertainment products.

Finally, turning to our standard product segment, revenue was $333 million, better than anticipated, resulting in a 5% quarter-on-quarter growth and up strong, 14% versus the year-ago period. We experienced a good mix in the business, with general purpose logic being the largest factor of the sequential increase. The general discreet portion of the business continues to perform well.

Turning now to our distribution channel performance, total sales into distribution was up 29%, with sales out of distribution up 19%, as we continue to position material ahead of ongoing mobile platform ramps anticipated for the fourth quarter. The total amounts of inventory in the distribution channel were flat at 2.6 months, in line with our longer-term model. However, absolute dollars of inventory in the channel did increase about 18% on a sequential basis, again in preparation for the ongoing ramp of new mobile platforms.

In summary, our overall results in Q3 were very good, with very good overall product revenue, better operating profits, and good free cash flow. As can be seen in our earnings release, we are anticipating a better than seasonal quarter in Q4. Over the long-term, we expect to continue to deliver growth in excess of the overall market, continued growth in earnings, and robust cash flow generation.

Now, I'd like to turn the call over to Peter to discuss the financial (inaudible).

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 of the quarter.

Overall, the third quarter was a very good quarter, with revenue up over 12% Q-on-Q. Our non-GAAP net income was up over 22%, and non-GAAP EPS up nearly 24%, demonstrating the strength of our model. 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 $1.35, which is $0.05 above our midpoint.

Focusing on the details of the third quarter, revenue was $1.52 billion, which was $20 million above the midpoint of our guidance and a $166 million increase from the second quarter. We generated $725 million in non-GAAP gross profit, or 47.9% non-GAAP gross margin. This was about $7 million above the midpoint of our guidance and $70 million better than the second quarter due to better revenue performance.

So, turning to the operating segments, within the HPMS segment, revenue was $1.14 billion, up 15% versus the previous quarter, and HPMS non-GAAP gross margin was 53.3%, 210 basis points below the second quarter, primarily due to a higher mix of newly introduced mobile transaction products. Non-GAAP operating margin was 28.4%, which is 60 basis points above the prior quarter.

Within our standard product segment, revenue was $333 million, up about 5% sequentially. Standard product non-GAAP gross margin was 33.6%, or 40 basis points versus the second quarter, and non-GAAP operating margin was 20.7%, an 80 basis point improvement sequentially.

Total non-GAAP operating expenses were $335 million, in line with our guidance, though up $13 million sequentially, primarily as we continued investments in support of major customer programs. From a total operating profit perspective, non-GAAP operating profit was $390 million, and represents a 25.7% operating margin, up about 90 basis points versus the prior quarter.

Interest expense was $34 million, and non-controlling interest was $17 million. Cash taxes of $5 million was slightly better than our guidance.

Total NXP non-GAAP EPS was $1.35, which was at the high end of our guidance, and $0.26 better on a sequential basis. Stock-based compensation, which is not included in our non-GAAP earnings, was $34 million.

So, now I'd like to turn to the changes in our cash and our debt. Our total debt at the end of the second quarter was $3.81 billion, up $228 million on a sequential basis, largely as a result of the share repurchases we made. Cash at the end of the quarter was $594 million, and we exited the quarter with a trailing 12-month adjusted EBITDA of approximately $1.59 billion, and our ratio of net debt to trailing 12-months adjusted EBITDA at the end of Q3 was 2.03 times, in line with our target of two times. We bought back in the quarter 8.7 million shares at a cost of approximately $574 million, or a weighted cost of about $65.77 a share.

Turning to our working capital metrics, days of inventory were 85 days, a decrease of 11 days sequentially. Days receivable were 42 days, while days payable were 76. Taken together, our cash conversion cycle was 51 days versus 59 days in the prior quarter. Cash flow from operations was $397 million, and net CapEx was $81 million, resulting in positive free cash flow of $316 million, or 21% free cash flow margin.

During the quarter, TSMC, our joint venture [partner], paid a dividend of $130 million. And given NXP's ownership structure of the joint venture, this resulted in a cash outflow from investing of $50 paid to TSMC.

Now, I'd like to provide our outlook for the fourth quarter. As Rick noted in his prepared remarks, and as seen in our earnings release, we are planning to change the business structure of the HPMS segment as of January 1, 2015. In an effort to help investors and analysts understand these changes in advance, we've decided to provide our fourth quarter guidance under both the existing structure and the new structure.

Based on our analysis, it appears we continue to gain market share across the product portfolio, and we anticipate NXP should continue to substantially outperform the overall market. We have a number of Company-specific programs which we see contributing to solid growth in future periods, even though we do see slightly less optimism in the overall semiconductor market.

With this as a background, and despite typical seasonal declines in the fourth quarter, we currently anticipate product revenue will be essentially flat as compared to the third, plus or minus 2%. This is clearly better than our historic seasonality into the fourth quarter.

At the (inaudible), our current business structure, we expect the following trends in the business [going] on a sequential percentage basis. Within our HPMS segment, we would expect automotive to be about flat. Identification is expected to increase in the low single-digit range. Infrastructure and industrial is expected to increase in the mid-single-digit range. Portable and computing is expected to be down in the upper single-digit range.

Under our new business structure, we expect secure identification solutions, or SIS, to be down in the low double-digit range. Secure connected devices, or SCD, is expected to increase in the mid-teens percentage range. Secure interface and power, or SI&P, is expected to be about flat. And automotive, as indicated previously, is expected to be about flat.

Standard products is expected to be down in the low single-digit range. We anticipate revenue from the combination of manufacturing and corporate [and other] to be approximately $41 million. Taken together, total NXP revenue should be in the range of $1.49 billion to $1.54 billion, or about $1.515 billion at the midpoint. We expect non-GAAP gross margin to be about 48% at the midpoint, plus or minus. Operating expenses are expected to be in a range of $328 million to $333 million, or about $332 million at the midpoint. And this translates into a non-GAAP operating profit in the range of $376 million to $401 million, or about 26% operating margin at the midpoint.

Interest expense on our debt should be approximately $37 million on slightly higher gross debt, given the share repurchases in the third quarter. And cash taxes are expected to be roughly $9 million, and non-controlling interest expense should be about $18 million. Stock-based compensation should be about $35 million, which is excluded from our guidance.

Diluted share count should be about 247 million shares, depending on share price fluctuations and buybacks. And taken together, this translates into a non-GAAP EPS in a range of $1.26 to $1.36, or $1.31 per share at the midpoint of our guidance.

I'd like now to turn the call back to the operator for your questions.

Michelle, if you'll poll for questions?

(Operator instructions.) John Pitzer, Credit Suisse.

Yes, good morning, guys, thanks for letting me ask the question. And congratulations on the strong results.

Rick, the quality of the line was a little poor. I just wanted to make sure I heard you right. You said sales into distribution was up about 29% sequentially and sales out were up 19%. If that's right, can you just confirm that? And as you look in the fourth quarter, how do you think that will look, sales-in versus sales-out?

Yes, those are the correct numbers, John. Sales in was up 29% with sales out of distribution up 19%. And again, that was as we continued to position inventory for some of the product ramps associated with the mobile platform. So, the actual dollars in the channel were up 18%.

We don't expect to see that any different. 2.6 months of inventory is clearly within the range that we would like to have. In fact, in some of the more commodity-like products, we'd have to add a little bit more than that. So, that's well in the range of what we would like to have, John.

That's helpful, Rick. And then, Rick, clearly -- kind of curious if there was any 10% customer in the quarter. And clearly, now that the mobile payments guy in Cupertino has moved forward, I'm kind of curious as to what impact you think that might have on other customers within mobile payment. So, there's sort of a direct effect of Apple Pay, and then there's an indirect effect. I'm kind of curious of how you see the indirect effect playing out over the next couple quarters relative to attach rates overall of NFC into handsets.

Well, I think, John, first off, I should reiterate that we can't talk about any specific customer design wins associated with our mobile wallet, but we continue to be the leader in mobile wallet, and plan to be there.

I think that what that drives is, is it drives the stimulus for a broader acceptance associated with it. It's people that use other phones see their friends paying very simply with their phone, and Peter Kelly was showing me how easy it was last night, and I was quite impressed with the ability to maintain your records, own your phone, ensure that you don't forget to turn in expenses because you have those receipts, you don't lose the receipts. And so, we would expect that to be more of a snowball effect and actually accelerate mobile payments deployment throughout a broad range of customers as we've been working with a broad range of customers associated with deploying it in any case.

The rate of acceleration I think will continue to be strong. And frankly, in China, one of the things that has happened with the contactless banking (inaudible) we think helps facilitate setting up the infrastructure for mobile payment implementation in a broad basis in China.

Perfect. Thanks, guys.

Thanks, John.

Blayne Curtis, Barclays.

[Hey, it was a] -- great results. Couple questions. First, can you just talk about what drove the -- I mean, you had a huge guide for portable computing, ended up beating that number. Is that MCUs or interface, or both? And then, I'm assuming it's just, given you had such a strong quarter, it's down in Q4. I'm assuming you still have some customer tailwinds into Q4, as well. Just any color there would be helpful.

Yes. I mean, clearly, we talked about P&C last year in Q2 being growth primarily from non-new mobile platforms. But, in Q3, a big chunk of new growth did come from new platforms and mobile in both MCU and interface. And we'd expect that to continue strong, but without any real new programs coming in in Q4, but better than we would have previously expected on a seasonal basis.

And Blayne, the other thing I should mention is, is in Q3, we also had strong business in the broad-based microcontroller market as well, which is a little different than some of our competitors have commented on the microcontroller market.

Great. And then, still trying to get my handle on the new segments. I'm sure you'll inform me at the Analyst Day. But, it looks like the majority of the core ID is going to be in the secure ID solutions, which you have down in December. Can you just talk about what's driving that, and I guess the outlook into next year? Are you seeing any uptick in EMV for US and such?

So, I think the key thing for Q4 is, is it's just seasonal demand in banking. So, it still has somewhat of a seasonal pattern, but we're encouraged about the opportunities for both the US, as well as continued strong performance in China contactless banking, and we also expect good growth in the [EGOT] side next year, as well as RF tagging. So, I think we're pretty optimistic about a broad-based growth in that segment for next year, although, as we've said many times before, it ends up being more project-by-project, so hard to track on a sequential basis. Much better to look at on a kind of year-over-year basis.

Perfect, (inaudible). Thanks.

Thanks, Blayne.

Vivek Arya, BofA Merrill Lynch.

Thank you for taking my question. Rick, one investor push-back is that, just near-term, a lot of your growth is coming from the SmartPhone market, and I'm wondering how you react to that. And how much of that is just macro headwinds, and how much is just the lumpiness in different programs?

Well, the fact is, is that we have a broad-based portfolio, and we actually think that that's an advantage that gives us ability for different segments to be performing better at any one time so that we have the opportunity to continue to outgrow the industry, going forward. The fact is, is that new models in SmartPhones and tablets is contributing to our growth in the near-term, and I guess the one thing I would emphasize, it's in areas where there's unique technology involved. So, it's not more of a general basis that's easy to change from one supplier to another. So, we feel very good about that business.

As we talked about on the call, one of the things we're doing with the new organization structure is really preparing for growth for the semiconductor industry beyond SmartPhones and tablets, and we see in the next few years the opportunity to see significant growth factors well outside of SmartPhones and tablets. And we want to be sure that we can take our security leadership as the foundation to be a leader in those continuing ongoing businesses, as well.

If you look at mobility, roughly speaking, it's kind of been the 20% or a little bit over as far as percent of revenue. So, we feel very comfortable with that basis, and can like -- but yes, like to experience the growth that comes with it. And when you talk about mobile wallet, I'm not sure that that's really something that you would put in a general bucket associated with mobility, even though it clearly goes into a mobility platform.

And I think you can get obsessed on quarters. And if you look at our annual growth, it's just very, very broad-based.

And maybe, Peter, as a follow-up, you have done, I believe, about $1.26 billion in buybacks year-to-date, probably a little bit above the free cash flow you will generate this year, and I'm wondering how we should think about buybacks getting into Q4.

Well, what we've said -- now, I'm not going to guide fourth quarter, but what I would say is we think we're undervalued, so we think buying back stock is an excellent way to return funds to shareholders. And my view hasn't changed on that at the moment.

Got it. (Inaudible), can you talk about the China LTE market? There is some concern about the tight supplies of RF amplifiers and base stations. And since you have leadership there, I'm wondering how you think about the supply and demand trends in that market. Thank you.

Well, I think we've talked all year about the fact that we've not been able to meet our customer commitments, and it created problems which we weren't very happy about on an ongoing basis. While we've seen our ability to increase our capacity, and obviously indicated in the numbers that we reported today, and with the guidance for Q4, but the bottom line is, is I think we still are not able to meet completely our customers' requirements. We still see a very healthy demand.

I think the one thing that's really important to emphasize is people talk about it being China LTE, and I think the factor that we get from our customers is that that's not even the majority of the growth that we see in our business focusing on China LTE. It may be that the platforms we get designed into were much broader base, but a lot of what our customers tell us, it's going into Middle East and Africa, even some expansion in the US. It was going into South America in Q2 in preparation for the World Cup.

So, what I guess is important to emphasize is, the demand that we see from our customers, and the specific feedback is, is that it's much more broad-based than just China.

All right, thank you.

Thanks a lot.

Ross Seymore, Deutsche Bank.

Hi, guys, congrats on another solid quarter and guide. Rick, first question is for you, a bigger-picture one. You mentioned that the semiconductor market I think, quote-unquote, "Is slightly less optimistic." There's a big debate on what exactly that means these days, it's cyclical, seasonal, et cetera. Can you give us a little bit of color on how you're viewing the current end demand in your broader-base markets, please?

Yes. So, Ross, it gets hard for us to really be able to call the total market based on the areas that we play in. I think we kind of view standard products as an indicator to that. And what I would tell you is, is it's probably not as strong as Q3, and so the question is, is how much of that is just seasonal, where we would typically anticipate the semiconductor business to be off a little in Q4, and how much of that's other. We see some customers where there is some weakness, and then we see other customers where there's very strong growth. So, it's clearly a mixed message out there.

But in general, like for example in microcontrollers and interface outside of the SmartPhone and tablet ramp, we saw a pretty good quarter in Q3. So, I think, in general, we see mixed signals associated with it. We don't see anything that alarms us relative to a significant decline or any significant inventory position. But, there are some mixed signals, so it's not just onward and upwards as it has been, frankly, for the last few quarters prior to this.

Great, that's perfect. Thank you. And then, my one follow-up, one for Peter quickly, on the gross margin side of things, for the fourth quarter you're guiding it flat. By the traditional end market splits, or product splits, I would have thought that mix would have been a little bit favorable. So, can you just walk us through the puts and takes in the gross margin, please?

I'm kind of not sure why you would think it would be more favorable. I mean, I'm guess we'd have -- if we'd have guided down, the argument would be maybe some of the industrial products would be flatter and some of the more seasonable products would go down. But, our mix hasn't done that, Ross, so the mix is actually pretty stable.

Yes. I guess what -- I was just looking at I&I being up solidly in your guide, and P&C being down. And to the extent the opposite caused the gross margin to come down a little bit in the third quarter, it seemed like it would revert the opposite direction back in the fourth.

Yes, okay. No, actually, when you go into the detail mix, you don't see that at all in terms of the individual products. It's relatively stable.

Great. Thank you.

Thanks, Ross.

Thanks a lot, Ross.

Jim Covello, Goldman Sachs.

Hi, guys, thanks so much for taking the question. Good morning. Congrats on the good results. Question on what used to be the (inaudible) computing business. You guys have done such a terrific job with Apple, and that's a testament to the quality of the products, because they only use the highest quality products. How important strategically, or philosophically, is it for you to broaden out your exposure in that space just to not be subject to some of the same volatility that some other suppliers who are levered to them in that space have been, over time?

Thanks, Jim. Thanks for your comments. I think that for us, our focus is really on providing the fundamental capability. So, last year, I think most of the tear-downs basically talked about the M-6, and now, moving forward, Sensor Hub actually being sourced by NXP, even though we can't comment on that. What we can say is, is that we want to be sure that we take Sensor Hub technology and the advantages that it brings in battery life, which is a critical feature for most users, to a broad base of customers. And so, with China, Inc., as well as all of the largest handset guys, we're working specifically on that.

And then, with some of the unique capability that we have on high-speed serial interface, we actually think that we have some advantages we can bring in broad-based customer support there, as well. So, we're not focused on any individual customer, per se. It's really more about (inaudible) technology and be able to drive that in a broad-based space.

And again, our intent is to focus on those areas that aren't typically caught up in the easy to design in and design out, and then design in somebody else. That can always happen, but we clearly have line of sight for some number of product trends, or product platform bases to understand what happens. But, our real focus is how we broaden our customer base and be able to drive more consistency associated with that across the general market because of the unique technology that we bring to bear.

And Jim, maybe if I could just add one thing, in the new structure, we don't have a kind of pure mobile business, though obviously we have businesses or product lines that kind of sell into those areas, and probably secure connected devices. The SCD business is the bit that most closely correlates to that.

And I think, over time, we -- and we've been doing our strat plans recently -- we don't see that really getting much -- it probably gets about 25% of our revenue, over time. You'd normally see more, maybe a little bit more in the second half, a little bit less in the first half of the year. But, we really won't have an awful lot of exposure to the mobile segment, and certainly not going to be in the position of some of the companies you see out there who have massive single device exposure to a single big customer, or at least we'd like (inaudible).

That's helpful perspective, thank you. And then, if I could just ask a follow-up, it's related to John Pitzer's good question earlier. I think John asked about kind of the mobile pay dynamic. I guess my question is, with what your largest NFC customer's doing in terms of how they're using NFC, and I guess maybe disabling it for other functionalities so that it can be -- it could be used towards Apple Pay, what kind of dynamic do you see that as impacting on NFC outside of Pay for other customers? Because I think you guys have articulated very well that NFC has a broad range of applications, not just payment at the site of purchase.

I think one of the key things that's associated with NFC Solutions is the mobile payment is kind of a foundation. But, when you begin to think about all the applications that take place associate with that, the encouraging thing is, is we can't even think about all the applications that will happen.

One of the key things that we talk to our automotive customers about in NFC is just simply pairing between your SmartPhone and your car radio system, which I don't know about you, but every time I get in a new rental car, it takes me 15 minutes before I get my (expletive) phone paired up where I can drive. So, just being able to click and have that paired is actually a real benefit as we hear from our automotive customers. So, I think we can't even think, honestly, about all the applications that NFC can facilitate, but the ability to have a real secure connection, and that's really what our focus is as we go forward, and we didn't talk about that on the call today. We'll talk about it a lot more on our Analyst Day.

But, we're trying to really think about the future and how we leverage the leadership position we have in security, and really looking then at secure connections instead of talking about the Internet of Things, which nobody really knows what that is, whether it's machine-to-machine or whatever, we just try to say secure connections for the smarter world. And really, that's what we're focused on as we look at the Company beyond SmartPhone and tablets, even though SmartPhones and tablets actually fall into that connected -- or smarter world, as well.

Really helpful. Thanks again, and congratulations.

Thanks a lot, Jim.

Craig Hettenbach, Morgan Stanley.

Yes, thank you. For EMV in North America, understanding it's going to be a multi-year rollout, can you talk about kind of near-term what you're seeing, and the momentum that you do see in that market kind of going into 2015?

We've seen a lot of activity, a lot of companies looking at technology, a lot of people talking about design wins. We've been fortunate to win a good share of those, and we want to be focused on continuing to maintain our worldwide leadership on contactless bank cards. It's in the 60% to 70% range. But, as far as significant ramp-up in volume, I think it's still in the early innings associated with it, and we would expect that not to be a significant growth factor until the 2015 timeframe.

Got it, thanks. And as a follow-up in the automotive market, there's been some concerns of some slowing growth, particularly in Europe. Can you talk about trends you're seeing within automotive by geography?

Yes. It really gets harder for us to break down the geography, because when we ship to a Bosch or Continental, they may ship it to -- if we ship it into Germany, they may ship it to China. If we ship it into China, they may ship it into Indonesia, Southeast Asia. So, it really gets hard for us to have very specific information on where the product's actually going. I would say that Q3, which is typically a weak quarter in European automotive because of the vacation schedules, was okay (inaudible) strong as some of the previous quarters, but again, seasonally, it shouldn't have been. I think one of the things that's been key for us in the automotive area that's kept our revenue growth, or kept us from having a decline that we would typically have on a seasonal basis, is some of the strong demand we've had on the car infotainment ramp of new design wins we have in Japan and China and Asia. So, I think that's one of the key factors that's allowed us to maintain double-digit growth in our automotive business on a year-over-year basis.

Got it. Thanks for the color there.

Thanks.

Vijay Rakesh, Sterne, Agee.

Hi, guys, congratulations on a solid quarter and guide year. Just as you look at 2015 here under secure connected device site, what opportunities do you see there in IOT or home automation with security? Thanks.

Well, we already see it in the early stages today, but it's still relatively small or miniscule part of the total business. I think when we start talking about that we have a Smart Lighting product where we're encouraged and working some of our partners, like Greenway, for example, to be able to take that to a much broader marketplace associated with it, one of the things that's important to point out is, even though it wasn't last quarter but a quarter ago, we won the Delphi design on the first design that's actually been issued on vehicle-to-vehicle, or ADAS, for design.

And one of the reasons why we were able to secure that, or win that design, was because of the security product that we had, the actual end automotive customer did not want to have the ability to have the communications intercepted or influenced or changed. So, that security feature represented one of the significant factors that allowed us to be the first company to actually have a significant design win in the vehicle-to-vehicle opportunity that I know you probably have seen some of the increased discussion even in the US government, but also European governments, relative to the ability to bring safety to the citizens, reduce the number of accidents, and reduce the cost of repair associated with those accidents.

I think for NXP, next year is probably tens of millions rather than hundreds of millions in that space. And I'm talking about kind of Rick's earlier comments on IOT. And hopefully it starts to pick up as you get out into '16, and then more into '17. I don't really see that as a massive revenue driver for us next year.

Got it. And just going on the EMV side, I know you said briefly, as you look at 2015, that's where the [seeds] start. But, can you bracket for us opportunities there in 2015 on EMV between US and China? Thanks.

Well, China represent -- has continued to be the strongest growth segment for us over the last few years. We had a very strong growth contribution from the China dual interface cards in 2013. In 2014, it's continued strong, although not with the most significant growth. I guess one of the things that I understand was in the press just this week was PBOC in China talked about that they now have issued over a billion cards, so that addresses the market that's being rolled out in China. And I think China is well ahead of the US and positions them well for the acceptable -- for the acceptance of mobile payments and having the infrastructure in place to be able to drive that very successfully.

But, when it comes back to the US, it's still a little bit of an issue that there's two parties involved, or three parties in some cases, and the party that pays the additional cost associate with the MV card isn't necessarily the entity that gets the benefit of the fraud reduction associated with it. But, security is clearly a high priority. In fact, you may have seen that President Obama actually put out a presidential order in the last few days specifically requiring that, over the next 18 months, that the US government ensure that all of the citizens' information is protected with a chip device to be sure that it avoids some of the cyber-security risk associated with that. And we just announced this week a rollout of our FIDO product that we've been working with Google on on the secure access to the cloud. So, clearly it's an area -- a great deal of excitement for us, although pretty nascent relative to the actual revenue trends today.

All right, great. Thanks.

Thanks, Vijay.

Chris Caso, Susquehanna Financial Group.

Thank you. Good morning. I wanted to come back to some of your earlier comments related to the market in general. And it sounds like those comments are referring more to kind of what you're seeing around you and hearing from the competitors as opposed to what you're seeing in your business. I guess my question is to what extent for some of those factors you're seeing around you are factored into your guidance. Maybe you could talk about, as you're looking forward into the fourth quarter, the level of conservatism that you're taking with approach to the guidance, or really just basic, and on the bookings levels you're seeing from your customers.

Thanks. I think it is a good point to point out. When I was making a comment (inaudible) about the general broad-based semiconductor market and not NXP, because basically our guidance sets the expectations for NXP. And clearly, the ability for us to be above what would be the typical seasonal pattern in Q4 indicates the strength of our new design wins in being able to accomplish that. What we try to do with our guidance is give you the best perspective on the range of revenue we see.

So, clearly, we think that we've done that again this quarter, to give you a perspective of what we see. We try to lay it out just as directly and straightforward as we can. The key for us is the ramp-up of design wins that we have and the mix of our business. One of the things that does give us an advantage is the portfolio of our products, and not all businesses have to be performing at the same rates all the time, as clearly indicated with our secure identification solutions in the near-term, which is a little weaker. But, it gives us the ability, with the broad-based portfolio we have, so that we can continue to outperform the industry in overall growth by having a multitude of platforms to be able to drive in the marketplace and not focused on any singular platform that's so critical to drive the growth of the Company.

Great. Thank you. And as a follow-up, if I can come back to the automotive market, and if I look on -- the quarterly, [year-over-year] growth rates have moved around a little bit this year on seasonality. But, as you look out, if we look at it on an annual basis, what's your level of confidence that that automotive segment for you guys remains as a double-digit growth?

Well, I think the right way to look at automotive is year-over-year, and so you take the seasonal patterns out, as you indicated. So, I think that is positive for us that we continue to be in double-digit growth over the last few quarters associated with automotive. And when we're looking forward, obviously we have to be aligned. Most of the inventory that we have is vendor-managed inventory, so we actually see that very real-time from a production viewpoint, but really clearly the growth that we've seen being double-digit, what we've really talked about, going forward, is something that's more like high single digits. So, we would expect that to be slightly lower than what it's been over the last few quarters.

But, we continue to see very positive environment. The continued ramp-up of the platforms that we've won over the last few years, either in the remote keyless entry -- we're the second largest US automotive manufacturer. That's probably something like, what, a fourth or a third of their rollout of their models, so there's still significant growth there.

And then, on our car infotainment, our car radio platforms with the new design wins we have with the Fujitsu 10 and Pioneer, and a lot of the new customers that we've won over the last few years where they're still changing models, bringing in the (inaudible) phone models that we were not included in and continuing to ramp the volumes associated with the new design wins that we're in is one of the things that allows us to perform at a different level than the overall automotive industry itself.

Okay, great. Thank you.

Thanks, Chris.

Tore Svanberg, Stifel.

Yes, thank you, and let me echo congratulations on the results. My first question is on your inventory days, the accumulated 86 days. I believe that's the lowest you've had them in three years. So, just hoping you could talk a little bit about do you feel that that's an ideal number at this time, or how do you intend to potentially change that number, going forward?

Well, from a dollar-based perspective, it's still a pretty significant level of dollars, and it's a constant fight in the organization. As CFO, I'd like zero inventory, because I'd love the cash. But, from a customer perspective, you really have to look at what provides the best service.

I think where we are at the moment, it's okay. It's actually, in a couple of spots, a bit low. I'd like to see a little bit more finished goods in automotive, but that's really just -- because you never know what natural disasters may occur in the world. I think our ID business has a pretty good inventory. I&I seems pretty solid. SP is -- I thought maybe in the past it was a little high, but it's come down. But no, I think inventory's okay, and it's easy to manage your inventory when you're growing quite rapidly. So, I feel pretty comfortable with inventory at the moment.

Yes. I think it probably is worthwhile to point out, we still have a few product lines where we're hand-to-mouth on being able to meet our customer requirements. And so, clearly, there's not any inventory in those areas.

Yes, base stations is up very strongly [into] that.

Right. And we actually even have some product lines, some package requirements even in standard products where we're kind of hand-to-mouth associated with it.

So, I think in general, our inventories are in really good shape, but we still have -- right at the edge of being able to maintain the support associated with our customers for the design wins that we've been successful at winning.

And that's fair, and a good problem to have. Now, as my follow-up, you're guiding your I&I business to be up in the mid-single-digits sequentially in the December quarter. Now, some of those segments tend to be down seasonally. So, I'm just wondering if there's any new programs, or any specific (inaudible) estimate at this point? Thanks.

Yes, I think that's a combination of continued -- being able to meet our customers' requirements, improving our supply and our high-performance RF, the power amplifier for base station, also maybe a little bit of new model designs in our mobile audio product that's contributing slightly, I think, in Q4.

Thank you again, and great quarter.

Thanks, Tore.

Mark Lipacis, Jeffries.

Hi, thanks for taking my question. Just to follow up on the power amp for base station products, it sounds like you're still allocating there. Is there any changes in the market from that standpoint on the demand side? We're hearing some companies talk about a little bit weaker demand in that market, and I'm wondering if you're seeing the same. That's the first question. Thanks.

Yes, we really haven't seen any significant change in demand associated with the power amps. I think, again, we talked about earlier that maybe a factor associated with that is, is it seemed like the design wins and the platforms we're in are more concentrated outside of China than inside of China, where maybe some of our competitors are more concentrated on the platforms in China as opposed to that.

But, we haven't really seen what I would consider any significant weakness, and in fact have really developed some very good relationships with customers. Sometimes the best relationships come out of problem areas, which are the -- obviously we had earlier in the year in being able to support our customer requirements. And frankly, we still have a couple of individual products where we struggle to support our customer requirements now, which is clearly significant for them achieving their revenue goals for the quarter, and we have quite ongoing discussions about how we support that.

That's helpful, thanks, and then a follow-up question on the standard products, just a clarification. You're expecting that business to be down low single digits. So, is that a seasonal? Is that a normal seasonal expectation, do you think? And you also talked about the signals you look at that typically help you understand whether or not you're going into an inventory correct or a demand inflection. What are those signals that you typically look at? Thank you.

Well, let me address the first one. On standard products, I think it's fairly typical from a seasonal basis. But again, as we said earlier, there are some customers that are down, and other customers that are up. So, it's really hard to draw a distinct conclusion associated with it, but clearly we think more of what we see would be classified as a typical seasonal basis as opposed to a real change of demand from a broad-based -- so on the semiconductor side. But, there are mixed signals associated with it.

Relative to indicators about what's going on in the market, we look broadly at many things, like book-to-bill. We try not to talk a lot about book-to-bill because we don't think it's a good, strong indicator, because there's many times when you'll be below one on a book-to-bill basis on a weekly basis that really isn't an indication of the future as it is in some other companies' cases. We look at inventory levels, but it really all comes back to just understanding our customer's demand and trying to be on top of the demand from customers as much as we can.

And the environment we see from our customers, primarily our distribution customers today, is still okay. We don't see any precipitous decline, but we don't see a robust uptick either, clearly. But, the feedback that we get from our guys that are with our customers on a daily basis is, is demand's okay.

Fair enough. Thank you.

Thanks, Mark. Operator, we'll take our last question now, please.

William Stein, SunTrust.

Thank you very much for squeezing me in here. I'd like to address inventory, and in particular distribution. So, it sounds like inventory was up on a dollars basis pretty substantially in the channel, but Rick, you alluded to some specific programs maybe in mobility. It's a little surprising. I think we tend to think about distribution as serving a very diversified kind of small and medium customer base. So, can you highlight what's going on there, please?

Yes. Thanks, Will. So, I think what we were trying to say is, is the increase, the larger increase on a dollar basis of the inventory was more specifically associated with unique mobile platforms, SmartPhones and tablets, being prepared for those ramps associated with the volume, because we still have a number of our customers that, while we serve significant volumes, we do that through distribution channels due to some of their ODM relationships and the way that the manufacture that.

I think we feel very comfortable with our distribution inventory at 2.6. We think that, in fact, our standard products, we would like to be a little higher than that on an ongoing basis. And standard products is clearly in a very healthy position. We have some of our product lines that we would like to have more inventory in place associated with than where we are on the 2.6. And as some of the inventory that's put in place for some of those product ramps associated with new products on the SmartPhone and tablet space go into production, then we would hopefully be able to put some additional inventory in some of those areas. We're -- for example, automotive, we actually don't have as much inventory in place (inaudible).

So, I think the key thing is the overall message that we see is that, at 2.6 months, we feel very comfortable with it and think it's well in line and well under control.

Great, thanks. And then, maybe I can switch gears to ask about capital allocation. The debt hasn't come up in a while. Obviously you've matured significantly in that regard. You have about a two-turn net leverage ratio and what looks like pretty stable cash flow in the last couple quarters and going forward. Would you consider that perhaps you should operate at a higher debt level, especially given that you believe the stock's undervalued? You've highlighted that a few times. Would you contemplate more leverage?

I think the big -- it's a great question, Will. And as a finance guy, and because of the fact that I really see NXP primarily as an industrial company and has all the attributes of an industrial company, yes, I think we could operate a high level of debt. I'm not sure the semiconductor industry is quite ready for it yet. I think the big question for us in the coming year is, in order to maintain our two times ratio, we would technically have to increase our gross debt. And you sorted through that this quarter.

So, we've maintained the two times ratio. We've increased our gross and net debt really just because we pulled the revolver, and we used that to buy back stock. But, I think at this point in time, we have a terrifically healthy balance sheet. Our cash flow generation is excellent. And with the stock price where it is, we'll continue to return cash to shareholders via buybacks.

Yes. I guess if I could just add something, I think what Peter did, what the team did in the current quarter by increasing our debt a little bit was more of a, if you will, little bit of a pull-in of what buyback might have happened just from the cash flow generated from the ongoing business. So, I think we feel very comfortable with our debt structure. We like it, and it gives us a lot of flexibility in the future to think about M&A transactions where we obviously might use debt to be able to facilitate that.

Great. Well, I'll look forward to digging in more on these on your Analyst Day. Thank you.

Thanks, Will. Well, maybe I'd like to pass the call back to Rick Clemmer now for some final comments before we end the call today.

So, thank you all for your continued interest in NXP. The key points to highlight is we progress into 2015, our revenue growth continues to be robust, with growth significantly above our peers. Based on the year-to-year revenue and the midpoint of our guidance, 2014 is shaping up to be a near-high watermark in terms of total revenue, with several business achieving record revenue levels already. As improved profit profile, Q3 gross profit dollars were up about 24%, and operating profit dollars up 37% on the year-on-year basis, continuing to generate the strong growth in earnings per share that we've reported.

On cash, I can't emphasize enough the strong cash generation capability we have, with increased free cash flow roughly at 105% year-on-year, representing a 21% free cash flow margin during the quarter. And clearly, we've tried to use that cash as well as we talked about pulling in a little bit of our debt to aggressively repurchase our shares over the last 12 months, returning just over $1.4 billion to shareholders.

So, thanks a lot for your support, and we look forward to seeing you at our upcoming Analyst Day on November 5 in New York City.

Thank you, everybody, appreciate your time on the call today.