恩智浦 (NXPI) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2014 NXP Semiconductors earnings conference call.

My name is Ian and I'm your operator for today.

(Operator instructions)

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

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

Please proceed, sir.

Thank you, Ian.

Good morning, everyone.

Welcome to the NXP Semiconductors fourth-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 fourth-quarter 2014's earnings release, it can be found out our company website under the Investor Relations section at NXP.com.

Additionally, we have posted on our Investor Relations website, a supplemental earnings presentation and a document of our historic 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 different materially from Management's current expectations.

The risks and uncertainties include but are not limited to statements regarding the macroeconomic on specific end markets in which we operate, the sale of new and existing products, and our expectations for financial results for the first quarter of 2015.

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 discreet events that Management does not consider to be directly related to NXP's underlying core operating performance.

Pursuant to Regulation G, NXP has provide a reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our fourth-quarter 2014 earning press release, which will be furnished to the FCC on Form 6-K and is available on NXP's website in the Investor Relations section at NXP.com.

Before we start the call today, I'd like to highlight several investor events we'll attend.

On February 11 we will attend the Goldman Sachs TMT Conference in San Francisco.

On February 24 we will attend the Susquehanna Corporate Access Day in New York.

On March 3 we will attend the Morgan Stanley TMT Conference in San Francisco.

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

Thanks, Jeff.

Welcome all to our earnings call today.

As this is our fourth-quarter and full-year report, I will spend a few moments highlighting key aspects of our full-year results before moving to the details of Q4.

Overall, 2014 was another very strong year of growth for NXP, and I'd like to personally thank all of the NXP team for their hard work in helping to deliver a record set of results.

As I look back over the past four years, since we became a public company, I cannot think of a moment when I've been more proud of the team and the results that we have delivered.

2014 has been a pivotal year in demonstrating the potential of NXP, and we look forward to further building on our success.

There are three key achievements I'd like to highlight for the full-year 2014.

First, we delivered extremely strong revenue growth.

Product revenue was $5.5 billion, up 17% from 2013, and greater than 2X the growth of the addressable market.

Overall, the HPMS segment revenue was $4.2 billion, up 19% versus the 2013 results.

All businesses achieved new historic levels as we continued to realize positive customer action with our unique HPMS solutions.

Turning to an annual review of the individual HPMS end markets.

Within IDE, our identification or security, revenue was approximately $1.5 billion, up 13% year on year.

We continue to build upon our world-class security capability, which we have extended in recent years, from the digitization of government documents to delivering secure payment cards and have now been able to ramp in the very exciting mobile transactions market.

In automotive, revenue was $1.1 billion, up 12% versus the prior year, with every product line turning in double-digit year-on-year growth as we continue to monetize design wins awarded in prior periods.

In infrastructure and industrial, revenue was $883 million, up 21%.

I'd like to particularly highlight the 69% year-on-year growth and resulting market share gains in the base station market from sales of our HPRF power amplifiers and the 129% growth in our mobile audio business, both driven by the invasion that is the core of NXP.

Our portable and computing group had a tremendous year with revenue of $712 million, a 46% increase versus the previous year.

This was driven in large part by company specific design wins in the high-end, smartphone and tablet market, but the broad-based portion of the business also continues to deliver very strong growth relative to the overall market.

Finally, in our standard products segment, revenue was $1.3 billion, up 11% versus 2013 with real growth in our GA discrete sales and our power MOS business.

The second highlight that we continue to improve our overall profitability.

Our overall non-GAAP operating profit, which we believe is a key performance metric for NXP, was $1.4 billion, or 25% of revenue, an improvement of 26% year on year.

In 2014 we have executed extremely well on a number of high-volume product brands, and we now expect to use the base to drive our HPMS business towards consistent delivery of 29% EBIT margins.

The third highlight is cash flow generation and capital allocation.

In 2014 we generated $1.1 billion of free cash flow, or 20% of total revenue, an increase of 68% versus the prior year.

In addition to allowing us to reduce our net debt to EBITDA ratio to 1.7, also allowed us to return $1.4 billion to shareholders in the forms of stock repurchases.

Now I'd like to review the specific results for the most recent quarter Q4.

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

Product revenue was $1.5 billion, a 2% sequential improvement and up nearly 20% versus the prior year period.

This was $22 million above the midpoint of our guidance, reflecting better than historic seasonality.

Total NXP revenue was approximately $1.54 billion, nearly a 1.54% sequential increase and about a 19% increase from the same period a year ago.

Turning now to the segment performance.

HPMS revenue was approximately $1.2 billion, an all-time record.

HPMS revenue was up 3% sequentially and up 22% from the year-ago period.

Three of the four business lines achieved record quarterly revenues.

Before turning to the specific results for our various HPMS businesses, I'd like to remind investors that this quarter will be the last quarter we refer to the businesses under the old structure naming convention.

Going forward we'll only discuss the business under the new structure naming convention.

In ID revenue was $411 million, up 4% from the prior quarter, a new record high with demand just ahead of our expectations, and up over 25% year on year.

Order trends within the core ID business were in line with our expectations, declining 11% sequentially and down about the same level versus the year ago.

Within the merging ID business revenue was up 40% sequentially and it's up over 200% versus the same period in the prior year, as a result of the strategic mobile transaction design wins.

Auto revenue was $292 million, a new record for the business.

Revenue was up 1%, slightly better than our original expectations, and up 6% versus the fourth quarter of 2013.

From a product perspective we experienced strong sequential demand for car entertainment mostly offset by anticipated seasonal declines in keyless entry and in-vehicle networking.

Within infrastructure and industrial, revenue was in line with our original expectations at $253 million, up 6% sequentially, while revenue was up about 30% versus the year-ago period.

In the fourth quarter, the primary driver was strong demand of the high-performance RF power amps for base station applications with growth increasing strongly in both the sequential and year-on-year basis.

In portable and computing end market, revenue was $213 million, down about 2% sequentially, better than our original expectations, with revenues up 34% from the year-ago period.

During the quarter both MCUs and interface products were down about the same amount, slightly better than a typical seasonal decline.

From and end-market perspective, both off-base and key strategic mobile designs were both down modestly in the quarter.

Again, better than the typical seasonal decline.

Finally, turning to our standard products segment, revenue was $331 million, essentially flat versus the prior quarter, slightly better than our expectations and up about 13% versus the year-ago period.

The standard product team has done an excellent job in refocusing its efforts away from commodity sectors of the market and has effectively managed pricing, cost and expenses, resulting in a consistent operating profit, which is much better than any of our competitors.

Turning now to our distribution channel performance.

Total sales into distribution were up 1%, with sales out of distribution up 10%.

The total month of inventory in the distribution channel were 2.3 months, which is below our long-term objectives and is down from the 2.6 months in Q4.

Absolute dollars of inventory in the channel declined about 2% on a sequential basis.

In summary, our results in Q4 were very good, near the high end of guidance and better than our normal historic seasonality decline.

We achieved record revenue levels in ID, auto, and infrastructure and industrial end market.

Looking at the full year, we again clearly outgrew the markets we operate within and believe this has resulted in positive share gains for NXP.

We are entering 2015 with a solidly improved financial profile.

Our operating profits are up.

Our leverage is down.

And we are generating significant free cash flow.

We believe NXP is ideally positioned with the right mix of products, intellectual property, unique systems and application expertise, which will enable us to help address our customers' challenges.

Our ongoing priority will be to continue to grow revenue well in excess of the market and improve our operating margin towards the high end of our goals and continue to create superior shareholder value.

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

Thank you, Rick.

Good morning to everyone on today's call.

As Rick has already covered the full-year highlights as well as the drivers of the revenue during the quarter, I'll move directly to the financial highlights of the quarter.

In summary, Q4 was a good quarter and generally at the high end of our expectations in what is normally a seasonably weaker quarter.

Non-GAAP earnings per share at $1.35 was towards the very high end of our guidance and cash flow generation was truly outstanding.

Focusing on the details of the fourth quarter, revenue was $1.54 billion, which was $22 million above the midpoint of our guidance.

We generated $716 million in non-GAAP gross profits, up $4 million below the midpoint guidance, and reported a non-GAAP gross margin of 46%.

Turning to the operating segments, within the HPMS segment, revenue was $1.17 billion, up 3% over the previous quarter and about $16 million better than the midpoint of our guidance.

Non-GAAP gross margin was 51.1%, 220 basis points below the third quarter driven by price mix and new product introduction costs.

Non-GAAP operating margin was 27.5%, a decline of 90 basis points, as lower OpEx helped offset some of the decline in gross margin.

Within our standard products segment, revenue was $331 million, essentially flat versus the third quarter.

Non-GAAP gross margin was 34.1%, a 50 basis point improvement versus the third quarter, primarily as a result of better product mix and the fall through on the incremental revenue.

Non-GAAP operating margin was 20.8%, a 10 basis points improvement as a result of the noted items, as operating expenses were essentially flat quarter on quarter.

Total non-GAAP operating expenses were $330 million, which was down $5 million on a sequential basis and a few million dollars below the midpoint of our guidance.

From a total operating profit perspective, non-GAAP operating profit was $389 million and represents a 25.3% operating margin.

Interest expense was $37 million, non-controlling interest was $18 million, and cash taxes were $7 million.

This resulted in total NXP non-GAAP earnings per share of $1.35, about $0.04 better than the midpoint of our guidance and flat sequentially.

Stock-based compensation was not included in our non-GAAP earnings was $34 million.

I would now like to show some changes in our cash of debt.

Our total debt at the end of Q4 was $3.99 billion, an increase of $191 million sequentially.

During the quarter we issued a $1.15 billion cash convertible note, which carries an interest rate of 1% and is due in 2019.

Additionally during the quarter we repaid $750 million drawn down on our revolving credit facility.

Total cash increased by $591 million to $1.19 billion and taken together our net debt declined by $400 million to $2.81 billion.

We exited the quarter with a trailing 12-month adjusted EBITDA of approximately $1.65 billion and our ratio of net debt to trailing 12-month adjust EBITDA at the end of the fourth quarter with 1.7 times.

For the further metric of the improving capital structure of the Company, we've increased our non-GAAP interest coverage to 9.7 times from 8.3 times in the same period a year ago.

During the quarter we bought back 2.4 million shares at a cost of approximately $180 million for a weighted to cost of about $74.22 per share.

As Rick mentioned, it brings our total repurchases during 2014 to 23.2 million shares for a total cost of just over $1.4 billion or an average cost of $61.73 per share.

Turning to working capital metrics, days of inventory were 83 days, a decrease of 2 days.

Days receivables were 32 days, an improvement of 10 days sequentially.

Days payable were 80 days, an improvement of 4 days sequentially.

Taken together our cash conversion cycle was 35 days versus the 51 days in the prior quarter due to the better collections and higher sales.

Cash flow from operations was $556 million.

Net CapEx was $105 million, resulting in non-GAAP free cash flow of $451 million or 29% free cash flow margin.

A truly outstanding achievement.

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

Historically, as you know, our fourth and first quarters are our seasonably weakest quarters.

With this as background, we currently anticipate product revenue will be in the range of down 2% to down 6% sequentially.

At the midpoint, we expect product revenue to be down about 4% in Q1, reflecting the following trends in the business.

Within our HPMS segment, auto is expected to be up in the low single digit range.

Secure identification solutions is expected to be flat to slightly down in the low single digit range.

Secure connected devices is expected to be down in the mid to upper teens range as expected seasonality in the high-end smartphone and tablet market influences our outlook.

Secure interface and power is expected to be flat to slightly down in the low single digit range.

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

We anticipate revenue from the combination of manufacturing and corporate to be approximately $35 million.

Taken together, total NXP revenue should be in the range of $1.45 billion to $1.51 billion or around $1.47 billion at the midpoint.

We expect non-GAAP gross profits to be about 48%, driven by a more favorable mix, despite the impact of our annual price adjustments.

Operating expenses are expected to be about flat at $330 million plus or minus a few million.

This translates into a non-GAAP operating profit in the range of $361 million to $385 million, or about 25% operating margin at the midpoint.

Interest expense will be approximately $36 million.

Cash taxes are expected to be roughly $6 million.

Non-controlling interest expense should be about $16 million.

Our stock-based compensation should be about $36 million, if you exclude it from our guidance.

The diluted share count is assumed to be 243 million shares.

It could be different depending on share price fluctuations and stock buyback.

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

As we look back at 2014, I'd like to observe the following.

It was a strong year for revenue growth, and I think we clearly demonstrated we have a number of growth drivers which will benefit the Company for a number of years.

It was clearly a very good year for cash generation as we began to demonstrate the cash generation capability of the Company.

Our EBIT profit improved dramatically and our focus is on continuing to improve our EBIT margin as we grow revenue well in excess of the market.

With that I'd like to now turn it back to the operator, and we'll answer your questions.

(Operator instructions)

John Pitzer, Credit Suisse.

Good morning, guys.

Thanks for letting me ask a question.

Congratulations on the strong results.

Peter, I guess my first question is around gross margins.

HPMS gross margins in the calendar fourth quarter were kind of below the long-term target of the 53% to 56%.

In contrast, standard products is actually above now the long-term target.

I'm just curious if you can help me understand better what happened in mix within HPMS that drove gross margins below?

How you see that coming back?

As you think about the new revenue categories within in HPMS, how do we think about the margin profile in each relative to the target for HPMS?

I think a couple of things, John.

First of all, for the standard products team, I just think they've done an absolute outstanding job in the last year.

I think they learned a lot from their first-quarter blip they had.

Their focus on how they managed their pricing has really been pretty impressive, actually.

On top of that, they've managed to move their business away from some of the more commodity products to some of the more stickier and better margin business.

I think a lot of kudos to the standard products team.

In terms of HPMS, yes, it was annoying where we ended up.

It was really three things.

One is pricing, the big part of our pricing issues in Q1, it was about 1% pricing hit.

Not pricing hit, but what we agreed with customers in Q4.

Then most of the rest of the decline versus Q3 was about 50% of it was mix and about 50% of it was new product introduction costs.

Clearly, it was around our very high ramping products.

What we want to make absolutely sure, and I think we've said this before, is we really want to support those products to the best level we can.

We want to make sure we deliver absolute quality to our customers and that we end up being one of their stickiest of customers.

We're probably a bit conservative in terms of how much cost we'll put in place to make sure these things work.

I have a lot of confidence this will improve over the coming quarters.

Clearly from a mix perspective, you see some of it popping back in Q1.

I think the targets we set out for our HPMS business are very achievable.

I'm looking for them to be up, not in Q1, but I want them back at 29% EBIT pretty quickly.

I think, John, that's really the important thing to remember.

Our focus is on delivering EBIT results and cash flow, which we think is really what's important for shareholders.

Our gross margin may bounce around based on mix and portfolio and ramping new products with specific customers, but really the key focus for us is on delivering the EBIT bottom-line results.

That's helpful, Rick.

Maybe as my follow up, I want to touch a little bit on -- and I'll use the new revenue segment, the secure identifications solutions business.

It acted as expected in Q4.

And I do believe Q4 of last year, Q1 of this year are the most difficult year-over-year compares for that business and that business tends to be lumpy.

I've been curious, given that we haven't seen a lot of sequential growth there in a couple quarters, year-over-year growth has been negative, what's the outlook there for 2015 in that segment of the business especially as we go to the back half of the year?

Do you think any of the lack of revenue growth there is a share issue?

No, I think it's a couple of things, John.

I don't really want to give full-year guidance, but I would say -- we said at analyst day that we think this can grow 10% compound annually over the next three years and we feel very confident that it will.

It is a lumpy business, especially the Eco part of it, so you do see some interesting moves per quarter.

I think in terms of share, I guess you're alluding to the banking business, in particular.

No, we don't see any share loss.

We've seen the US EMV markets start to ramp in Q4.

To be honest, as we've said previously, the US EMV market won't be a big revenue mover in 2015.

So no, we feel confident in our share.

We think the long-term growth prospects for this business are absolutely solid.

The Eco business tends to be a little bit lumpy, but nothing's changed really.

Our leadership position there is just as strong as it's been, John.

There's no weakness whatsoever.

In fact if anything, continue to be in a really solid position.

Appreciate it, guys.

Thanks again.

Thanks, John.

Vivek Arya, Bank of America.

Thank you for taking my question.

Maybe the first one, Peter, really strong year of buyback activity last year, over $1.4 billion.

How should we think about buybacks this year, especially when you look at the leverage that's come down to about 1.6 times?

How do you think about buybacks?

Would you be willing to take on debt to support buybacks or would that only be used for any strategic M&A?

What we said on the earnings call is we'd use all of our excess free cash flow to buy back stock.

We would return all of our excess free cash flow to our investors.

The way to do that at the moment is through share buybacks.

We've not changed our view on that.

I guess the real answer is, Vivek, I can buy back a significant amount of our stock in the next year without adding any debt.

Got it.

Then as a follow up, Rick, how do you see the traction on the mobile side outside of your large North American customers?

For example, how do you see NFC trends at your Korean customer and then with your Chinese customers?

Thank you.

Our product position in smartphones and tablets is pretty broad based at this point in time.

In the mobile wallet, specifically, we continue to be excited about the market growth as a leader, clearly with the market now seeing some momentum in North America and with the rollout that Apple has on Apple Pay.

When we look at China, we see a lot of interest and a lot of excitement associated with that.

Clearly, a lot of the volumes will be driven in China.

Whether it's sourced from a US or a Korean smartphone company, we think that the opportunity in China will be significant and will represent a very significant growth feature.

We will focus, as we have, on high volume platforms, because each one of those platforms takes quite a few number of resources to be able to afford the software and ensure that it operates within the ecosystem.

We'll try to be sure that we focus our resources on the high-volume markets and the high-volume models to be able to really drive top-line growth and continue to maintain our leadership.

I think that's really the best way to summarize it.

Thank you.

Craig Hettenbach, Morgan Stanley.

Thank you.

I had a question on the MCU business for broad-based markets, in particular some of the traction you've seen in the 32-bit.

Can you talk about the growth you expect in that market?

Our 32-bit ARM-based strategy, or our microcontroller strategy is really based on our 32-bit ARM-based platform as we've really driven a focus there, both in vertical basis, focused on the sensor hub space, where we've seen significant growth, but also in the general purpose market with the specific verticals on a broad-based industrial end.

I think our growth there, we feel very comfortable with.

We think we can continue to be a significant player, and we're driving that.

The growth of the microcontroller market, overall, has a little bit more ups and downs than some of the rest of the semiconductor market.

I think we expect to continue to see strong growth in the 32-bit ARM microcontroller market, and we'll participate in that on a broad basis as well as a vertical basis.

If I could just add to that, Rick.

Craig, as you know, the microcontroller business is underneath our naming convention of secure connected devices, which we think can grow over a three-year CAGR by 20%.

That microcontroller business is one of the contributing factors of that long-term growth.

Appreciate that.

Thanks, Jeff.

As a follow up, in autos, I know it's early stages but can you talk about the opportunities in vehicle-to-vehicle communications and also interest you're seeing in the integrated RFC MOS chip for ADAS?

If you can frame what that means for your intermediate-term growth in autos?

That's not going to have a near-term impact.

The first vehicle-to-vehicle design win that we've won that we referenced a couple quarters ago is for the 2017 model year, which will begin to ship in late 2016, but that will be relatively small volumes.

There is a lot more interest from broad-based automotive companies now in the vehicle-to-vehicle side.

There's a German company that has an RFQ out now that is in a broader base of models associated with it.

We're very focused on ensuring we can be a participant in that.

On the radar side, clearly there's a market there for radar, and really it's about maturing our technology and ensuring that we can deliver on the performance to be able to drive that.

Again, I think the growth is out beyond the next couple of years, but we think it's a significant market opportunity for us that we can, believe, develop a true leadership position.

Got it.

Thank you.

CJ Muse, Evercore ISI.

Good morning.

Good afternoon.

Thank you for taking my question.

First question on the SIS business, curious if you could dig a little bit deeper in to the EMV opportunity in China?

Clearly a very lumpy business.

The question here is, as you look beyond Chinese new year, what's your visibility like in terms of a ramp and confidence that you can see growth there year over year in 2015?

I think when you look at the deployment of the dual interface cards in China, which is really the key aspect for us, it still has a long ways to go before it's fully penetrated.

Then as we've talked about, even after it's fully deployed, there is a replacement market that takes place for roughly a fourth to a third of that total market on an annual basis as those cards get replaced.

I think the key is going from now the large banks to more of the mid-tier banks and smaller banks.

But we're also excited about some of the new applications in that space relative to transits ticketing and being able to drive that.

I think the key is the combination of the transportation opportunity that we see, where we announced a product a couple months ago working with OPO and actually a Chinese government where it will be rolled out in 26 cities across China on the transportation side.

The combination of the eGovernment opportunities as well as the transportation beyond just the credit card opportunity or dual interface is really what gives us the confidence in the growth for the full year.

That's very helpful.

Thank you.

I guess a financial question, Peter.

You've done a great job of really cleaning up the balance sheet to the point where leverage is no longer a concern.

I've got you doing roughly $1.5 billion free cash give or take this year.

If you use all of that to buy back stock, you're reducing share count by about 8%.

Is that the way to think about it?

As a follow up to that, at what point do you start to think about returning cash in other vehicles, i.e.

dividends?

Clearly, I'm not going to go in to the full year, but it's not rocket science to get to the map that you've got.

I think what we've said about returning cash to shareholders is that given where the stock is at the moment, our inclination would be to buy back stock rather than a dividend.

If the stock ever got to the point where it was fully valued or over valued, I guess we clearly would use a dividend.

Before that happens, we'd probably introduce a mix of a dividend and a stock buyback.

It's difficult to say when that will happen because it requires people like yourself to help get the stock to a point where it's more reasonably valued.

(laughter) Sounds good.

Thanks so much.

Blayne Curtis, Barclays.

Good morning, guys.

I also offer my congrats on some great results.

Just wanted to go back to the NFC business.

You said a couple years ago that the radio would be more competitive and that's not really where you competed.

You've actually done much better than that.

As you look out this year, probably see radios from more suppliers, just curious on the -- you said you focused on the high volume.

Obviously, when you bring in mobile payments, that's to your advantage.

Just curious competitive landscape on the radio side?

How effectively can you compete?

Do you still think this business can grow for you?

First off, thanks for the thanks, the first.

I think the real advantage that we have is bringing the overall complete solution.

Where we really perform well is when there's a secure element involved for a true secure mobile payment.

Somebody that wants to use an NFC radio just for another communication vehicle without the security associated with a secure element is really not where we're focused.

There's a lot of people that talk about applications that they don't believe require security, part of that driven by the carriers in the US, who have really refused to let anyone other than Apple implement a wallet with a secure element.

Again, our focus will be in those areas where we believe there's an opportunity to bring our unique expertise from an ecosystem viewpoint, whether we can leverage the banking relationships we have to be able to drive the mobile transactions.

We think that beyond what's taking place in North America today, the China opportunity will continue to be significant.

When we deal with our customers, we'll be more focused on that China segment than focused on other regions of the world, where they're still in the early phases of really thinking about what to do with the mobile wallet itself.

You'll see us continue to focus on that with our customers and be sure that we don't try to focus on a broad basis on an NFC.

Because again, where we bring a unique basis is with our solution know-how and the secure element that can make that much more unique.

I just wanted to ask on the high-performance RF, you've seen that end market moderate some seasonality.

How is the supply chain lead times there?

Are you finally caught up in that market?

I would say we're pretty caught up associated with it.

The shortages that we had roughly a year ago, have -- I think it's been tempered somewhat.

The advantage for us is that because of the requirements from the marketplace, we were able to enter into some long-term arrangements with a number of our customers, which should bode well for the next few quarters in being able to continue to drive growth.

The one thing for us is we haven't been quite as focused on the China ramp in LTE, but have been really focused on a broader basis associated with it.

I think that's really the key is our focus on really the rest of the world, Europe and Middle East and Africa, as it turns out with the design wins we've had, and less focus on the China rollout itself.

Thanks.

William Stein, SunTrust.

Thank you for taking my question, and I'll add my congratulations on the very strong revenue results.

First, I'd like to address utilization, and I apologize if this has been asked.

I had to drop for a minute there.

I think utilization you highlighted was at 99% in the quarter.

Does that relate to the standard products in addition to HPMS?

Would it suggest upward margin pressure in standard products as you can get more selective on mix?

I wouldn't worry too much about that, Will.

It was 99%.

Our IC PAPs have been running pretty full for a while.

To be honest, yes, standard products has improved in the front end, but the majority of their cost is actually in the back end and in packaging.

Yes, it's probably giving them a little bit of a benefit but not much.

They'd have to drop the utilization very, very significantly for it to have an impact on the profit.

Great.

I'm wondering if you can talk a bit about some emerging applications you have in RF power amplifiers?

There's some non-communication demand that we're aware of.

Also, in V2X, obviously this is something that's probably not going to hit meaningfully this year, but I'm wondering if you could talk about new designs or new design wins in either of those areas, please?

Will, are you alluding to some of the HPRF applications for things like lighting and solid state ignition and things like that?

Or heating.

Yes.

They're very interesting and as you know, we've discussed this directly with you, but we don't see them as being real catalysts of growth in the intermediate term.

In 2015 they won't represent a significant factor in growth associated with it.

You talked about vehicle-to-vehicle, which we may discuss while you dropped off there, Will.

The first design win we've seen is for the 2017 model year with shipments beginning in late 2016.

The one thing that we have seen is, is one of the German automotive companies is actually looking at a much more broad-based rollout associated with that.

That's actually in the RFQ process at the current timeframe.

There is some traction in the ramp-up associated with it, but it's still out in late 2016 and 2017, not really going to have any material impact on the next year or so.

Great.

Thanks for taking my question.

Thanks, Will.

Ambrish Srivastava, BMO Capital Markets.

I just wanted to get back to SIS business, folks.

When do we start to see a return to year-over-year growth for this business?

Then, I had a quick follow up as well, please.

SIS we've said compounds annually.

We expect it to grow by 10% over the next three years.

We don't guide beyond the current quarter.

I think there's a lot of discussion about it, but frankly, it's a very solid business with a broad ray of a portfolio that we feel good about and, as Peter talked, about driving significant growth over the next three-year period of time.

I think that's one of the advantages of NXP is the broad base of our product portfolios, so that not all segments have to be fairing perfectly at any one time for us to be able to still significantly outgrow the market, and gives us a real advantage in being able to drive the top-line revenue growth.

Ambrish, do you have a follow up?

Ian?

Ambrish still appears to be there, but there appears to be no response from his line.

Would you like to take next question?

Yes, we will, Ian.

Thank you.

Chris Caso, Susquehanna.

Thank you.

Good morning.

My first question is on the EBIT margins.

I recall at the analyst day you were talking about 26% EBIT margins for 2015 and looks like by the guidance you're already achieving that.

If you were, Peter, as you said earlier, to improve the HPMS margins but yet maintain where you are in standard products, does that provide a path to upside, potentially, for those targets?

Yes, in the analyst day we said we think HPMS could run at the 29% level.

If you trend that out, it would take, just by natural growth, it would take the Company to something more like the 27% level.

I think as you go out in time there is the opportunity to go to 27%.

We are pretty focused, though, at the moment on we want to significantly outgrow the market.

We've moved the profitability of the Company up to 25%.

The focus on this year is to get to 26%.

But yes, I think there's opportunity.

Okay.

Just moving forward, a question on FX and given the currency moves we've seen, is there any impact to your business either on the revenue side or the cost side from the currency moves we've seen?

First of all, from an EBIT perspective, there's really no impact.

We have a natural hedge, so about just over 20% of our revenue is euro denominated.

I don't have the exact number, but I think about 60% of our OpEx and some of our manufacturing cost is euro based.

Overall, they offset each other.

Yes, from a revenue perspective, it puts a little bit of pressure on revenue and margin, which is then offset by OpEx.

We really don't like to use currency as an excuse, because overall it does not have a big impact on us at the bottom line.

But the key is, is our revenue would have been better in the current quarter if we wouldn't have seen the pressure on the euro.

It does have an impact on our top line, which we really haven't talked about, though, because I think it's important that we basically reflect the overall growth of the Company.

As Peter said, we have it -- kind of a natural hedge in place on the bottom-line results.

Great.

Thank you.

Thanks, Chris.

Ross Seymore, Deutsche Bank.

Hi, guys.

Echo the congratulations as well.

Lots of great detailed questions have been asked and answered, so I'm going to start with a bigger picture one for Rick.

A quarter ago there was a lot of consternation about what was going on in the industry, downturn pending, et cetera, obviously that didn't impact you.

Could you give us a view of what you're seeing as far as the health of the industry and the broader-based markets that you're addressing?

Any sort of linearity of bookings, lead times, those sorts of metrics would be helpful?

Thank you.

Thanks, Ross.

I think the market is still where it's been for the last few years.

As I talk to our customers and certainly our distribution partners, no one sees a robust uptick, but no one really sees a decline that's not just more of a typical seasonal basis.

I think where we're at is for the general health of the industry, we see a mid-single digit growth, which is kind of where it's been.

Not really something that's significantly up or down from that.

Clearly the questions on the overall economy in China come in to bear associated with it, concern over the European economy, positives relative to the US economy.

When you wash all of it out, it's steady as she goes, mid-single digit growth fundamentally.

Really the key is, is really being able to have the design wins to be able to differentiate yourselves versus the overall market, which we've been very fortunate in accomplishing over the last few years and think we can continue to do that.

As my follow up, this is one for Peter and admittedly a little bit down in the weeds.

What was on the cash flow statement the note hedged derivatives for $208 million?

It's just to do with the way you account for the convert, Ross.

It's an embedded derivative.

Got you.

Thank you.

Thanks, Ross.

Steve Smigie, Raymond James.

Thanks a lot, guys.

I was hoping you could comment or follow up a little bit more with color on the in-vehicle networking?

I think you indicated it was down a little bit.

Is that just a fluctuation?

Overall, could you talk a little bit about the color?

It sounds like there should be a lot more in vehicle network going forward.

That seems like a more immediate opportunity than some of the ADAS stuff.

I think that's a really good point.

As more and more electronics are added to the car, obviously, you have got to communicate from those electronics to the individual end notes, so the transceiver requirements associated with the in-vehicle networking are key.

What we saw in Q4 was just a normal seasonal basis.

It wasn't really any indication of any strength or weakness.

It was just more of a normal seasonal basis.

But we are -- we do believe that we can continue to maintain our leadership in in-vehicle networking, and clearly, with the ever increasing electronics content in the car driving that overall market faster than just the automotive industry itself.

I'd say it was like a rounding rather than a real drop.

When you step back and look at the automotive industry, you have to look at it more on a year-on-year basis, Steve.

In-vehicle networking was up quite nicely year on year, mid teens versus same quarter a year ago.

Nothing to be worried about there.

Okay, cool.

If we could just follow up on the key fobs as well.

It seems like -- at CES I saw some pretty sophisticated key fobs.

It even had like video screens on them and stuff like that.

Can you talk a little bit more about the opportunity there and your market share position going forward on that?

We've talked about that basically every major car that's manufactured in the world, with the exception of Toyota and Japan and frankly a few models in Europe, but basically all of the rest of the car manufacturing uses our technology associated with a remote keyless entry.

The key for us is continuing to add intelligence associated with it and seeing the inherent growth that's driven from that.

As Kurt went through at our investor day, the opportunity to go from the original implementation, which was under a dollar per key to several dollars to in the most advanced cars being double-digit dollars associated with our content, really representing a significant opportunity for us.

Great.

Thank you.

Tore Svanberg, Stifel.

Thank you.

Congratulations on the results.

My first question is on distribution inventory in the channel.

I think you said it was 2.3 months, which is quite a bit below what it is normally.

What is the normal range and are you expecting it to return there or could it potentially 2.3 months be the new norm?

We would certainly hope that 2.3 months is not the new norm.

Clearly in Q4, -- in the previous quarter we had shipped into the channel to be prepared for the ramp in Q4 in manufacturing.

With that then being shipped out in Q4, we saw a decline in the inventory from the 2.6 months that we were in Q3 down to the 2.3 months in Q4.

We clearly would like for it to be closer to the 2.6 level.

In some of our standard products, we'd like for it to be closer to 3. One of the key advantages of the distribution partners is being able to maintain that inventory to be able to serve the market in a much more rigorous basis.

With the margins that they get, we'd like for them to be in a position to carry that inventory, and in standard products, closer to 3 months.

But overall, in the 2.5, 2.6 month level, maybe a little bit above that is where we'd like to be.

I don't think it's a new norm.

There's always a pull from the largest US-based distributors for their terms and earns, which will try to keep inventory low.

We'll be trying to make it more reasonable so that they earn the profits that they're getting associated with it.

That's natural, but I would not anticipate the 2.3 months of inventory to be the new norm.

I think it will continue to fluctuate around.

It's been fairly consistent at 2.5 to 2.6 months for most periods over the last couple years, except for I guess a couple of quarters.

We would anticipate that it would go back up to the 2.5 to 2.6 months.

Sounds good.

As a follow up, could you just update a little bit on your capacity plans for this year?

Do you have a CapEx estimate for calendar 2015?

Thank you.

CapEx we guide to 5% of revenue.

Most of our additional revenue is supported through foundries.

The money we spend on CapEx is typically a maintenance-type CapEx and CapEx for test in the back end.

Great.

Thank you, guys.

Thanks a lot.

Ian, we'll take one more call.

Matt Ramsay, Canaccord Genuity.

Good morning.

Thanks for squeezing me in.

A lot of questions have already been asked, so I'll just do a bigger picture one on the mobile payments side.

Maybe, Rick, if you could give a little bit of an update at what you're seeing on the point-of-sale side?

Obviously, your primary customer there is influencing the industry quite a lot and changing things from a mobile payment acceptance point at the point of sale.

How are seeing that transition happen by market and how that might influence what secure element or hardware is chosen by other OEMs as they roll out mobile payments later on?

I think from a pure point of sale basis, which, by the way, we happen to have a very significant market share.

We're roughly 80% of the market associated with that segment.

We do see a growth in the contactless terminal side.

I think in the US, we do see that from a customer base.

Clearly, as that's been rolled out, there's a broader acceptance.

We'll see more of that taking place in the US.

I think one of the areas that we continue to be very excited about is China, where we see contactless really being very significant, where we want to participate, not only on the mobile wallet side in the high-end smartphones but also in the contactless side from a banking basis.

As we've talked about bank cards being dual interface in China, representing that convenience that comes with the contactless use.

Our point-of-sale terminals, just as a reference, was up 18% year over year, so a very healthy growth.

We believe that that continues to be a contributor as we go forward to the opportunity and our ability to outgrow the market.

Thank you very much.

Congrats again on the results.

Thanks a lot.

Appreciate it.

Operator, if I could just make a few closing comments.

Certainly.

Please proceed, sir.

Thanks a lot for your continued interest and support of NXP.

In closing, we believe our results in 2014 continue to demonstrate measurable and consistent execution of our long-term strategy.

The key messages today were growth.

Our growth in 2014, growing revenue by 17% to $5.5 billion, clearly being driven by our HPMS business, which delivered significant growth of 19% year over year.

Our profitability, which improved operating profit margin dollars to $1.4 billion up 26% year on year.

Overall, we continue to make good progress toward our long-term HPMS profitability goals.

Cash generation, 2014 was a key year for NXP, generating free cash flow of $1.1 billion, up 68% year on year.

And the ability to facilitate our capital returns, where we returned $1.4 billion to our shareholders through share repurchases.

In total, we believe we are well positioned to deliver our long-term strategy and really want to thank all of our shareholders for your continued support.

Thanks a lot.

Thank you very much, everyone.

This ends our call.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.