恩智浦 (NXPI) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NXP Semiconductors' first-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder to our audience, this conference is being recorded for replay purposes.

Now, I will hand the floor over to Jeff Palmer.

Sir, please proceed.

Great.

Thank you, Brian, and good morning, everyone.

Welcome to the NXP Semiconductors' first-quarter 2016 earnings call.

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

If you have not obtained a copy of our first-quarter 2016 earnings press release, it can be found at our Company website under the Investor Relations' section at nxp.com.

Additionally, we have posted on our Investor Relations' website a supplemental earnings summary presentation and a document of our historical financials to assist in your modeling efforts.

Included in the supplemental presentation and the historical financial model is additional information providing insight into the combined adjusted revenue for NXP and Freescale.

This unaudited non-GAAP information has been prepared for preparative purposes only, provides historical revenue for each Company adjusted for investors.

Please be aware of the disclosures associated and details of both documents.

This call this morning is being recorded and will be available for replay from our Corporate website.

Our call today will include forward-looking statements that include risks and uncertainties that could cause NXP's results to differ materially from management's current expectations.

These risks and uncertainties include but are not limited to statements regarding the macroeconomic impact of the specific end-markets in which we operate, the sale of new and existing products, and our expectations for financial results for the second quarter of 2016.

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, merger-related costs, and other charges that are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying or operating performance.

Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our first-quarter 2016 earnings press release, which will be furnished to the SEC on Form 6-K and is available on NXP's website in the Investor Relations' section at nxp.com.

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

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

NXP finished Q1 with strong performance and the merger is continuing to proceed smoothly.

We are pleased that we achieved our planned objectives in the first 90 days and we are on track to achieve our cost-synergy targets as laid out at the time of the merger announcement.

The key accomplishments include the integration of our customer facing teams, clearer alignment with our internal product development groups, and very positive progress on the integration of our operations and supply organization.

Customer response to the merger continues to be outstanding.

We continue to make very good progress on the product integration and are making progress in the product areas we need to refine our strategy to more closely fit our product leadership objectives.

Before I turn to Q1 results, I would just like to highlight that my comments today will refer to NXP's as-reported revenue.

As Jeff mentioned, we have included in our quarterly release an investor presentation, additional historic information on the comparable non-GAAP adjusted revenue of NXP and Freescale, net of the effects of product line divestments.

We believe this will allow investors to fully understand and model the underlying revenue performance.

Now, turning to the specifics, revenue in Q1 was $2.2 billion, an increase of 52% year on year and an increase of 39% versus the prior quarter.

This was better than the midpoint of our guidance as the auto, SCD, SI&I groups all delivered better than anticipated results.

Looking at the HPMS segment, revenue was $1.9 billion, an increase of 73% year on year and an increase of 46% from the prior quarter.

From an operating segment perspective, within automotive, revenue was $805 million, about $5 million above the midpoint of guidance.

Growth in the quarter was primarily driven by strong demand for auto NCU products as well as our advanced automotive analog products, which for clarity, includes our in-vehicle networking and secure car access products, both of which saw good trends in the quarter.

We view the market outlook and the global production rates to continue to be stable with demand strength in the quarter coming from European and North American Tier 1 customers.

We anticipate global auto unit production will trend towards 3% in 2016 with the real driver of growth for NXP being Company-specific content gains in our core and in ADAS areas like radar.

Recently, Semicast, an auto industry research group, published its market share tables for 2015.

Market for global semiconductors was $28.2 billion in 2015, down about 2% versus 2014.

We are pleased to confirm NXP is the number one auto semi supplier globally with a 14.5% share, up nearly a full point year on year, further distancing ourselves from the number two player and expanding our leadership position, a true testament to the attractiveness of our automotive portfolio.

Turning to SCD, revenue was $471 million, up roughly $10 million above the midpoint of our guidance.

Within our mobile transactions group, we saw seasonal declines, exaggerated by continued weakness at our largest smartphone customer.

This was modestly offset by ramps of new smartphone platforms addressing both the China and the US markets.

Demand for our secure contact list POS reader products was slightly better than planned as OEMs continue to deploy readers in support of contactless rollouts in China, Latin America, and to a lesser degree in the US, which is still predominantly a contact DMV card market.

In our i.MX Application Processor and General Purpose MCU families, we experienced good demand, generally in line with our expectations.

This included positive demand for i.MX products in the point-of-sale reader market, an area we see the opportunity to create our cross-selling efforts as NXP can now address a larger portion of the bill of materials post the merger.

Additionally, we saw momentum for the i.MX family within automotive and head-in infotainment units for visual processing.

This is also a good example to highlight the complimentary nature of the NXP and Freescale product portfolios.

As most investors are aware, NXP is the true global market leader in automotive audio processing products.

In the i.MX family of visual processors, we can complement our offering addressing both the audio and visual processing requirements of the audio-infotainment market.

Within SI&I, our interface and communications infrastructure group, revenue was $423 million, up roughly $10 million above the midpoint of our guidance.

In the RF power market, we experienced a rebound in the base station market, particularly in China, supporting China Mobile Phase IV deployments.

We also believe most customers have worked through their inventory corrections, which caused significant declines in the second half of 2015.

We are encouraged by the improvement in Q1, although the market continues to be great dynamic.

In the digital networking market, we saw modestly better-than-anticipated demand for value products, while demand in the service provider, enterprise and smart home were mixed.

We anticipate further declines in the legacy portion of the portfolio before such time as the new arm-based multi-core products begin to become a more meaningful portion of the portfolio.

In interface, demand was essentially in line with our expectations due to the normal seasonality in the high-end handset and tablet market.

Within SIS, demand trends continue to be mixed, with revenue coming in at $212 million, slightly below the low end of our range.

In the rest of the world banking market, much of the unit growth opportunity continues to be for low-end contact products in the area where our participation has been more selective given the significant ASP in margin pressures.

In China, our leadership position in contactless dual interface base continues to be very strong, though we are nearing the peak of the ledger bank grow outs.

Much of the increase market demand is now driven by Tier 2 and Tier 3 banking institutions, combined with the replacement cycles.

In EGA, we saw several tenders which had been on hold finally begin early rollouts.

These programs include the new EID in Jordan and the new social security card in Italy.

While a positive change, the EGA market continues to be extremely lumpy and hard to predict with any accuracy.

While some of the markets for SIS products have become more challenging, we see our security technology as a cornerstone to our long-term vision and continue to maintain leadership in the market, especially for high-end contactless solutions.

We are investing in next generation IP and have new products coming online in 2016 which will strengthen our leadership position.

More importantly, we are leveraging this leadership in security IP into other product lines throughout NXP.

Now, the Standard Products segment revenue was $274 million, slightly below the midpoint of guidance, a decline of 15% year on year and an increase of 1% from the prior quarter.

Turning to our distribution channel performance, total sales into distribution were down 4%, with sales out of distribution down 3%.

The total amounts of inventory in the distribution channel were 2.5 months, with absolute dollars of inventory declining $49 million on a sequential basis.

Our channel inventory is in good shape and we will continue to target supply at 2.5 months plus or minus a half month.

In summary, while the overall year-on-year revenue trends tend to mirror the generally subdued environment, we have begun to see incrementally positive trends in a number of our businesses.

I am very pleased with the significant progress we have made.

The integration of the two Companies is on track to achieve our stated goals and provide our customers with more complete leadership solutions.

We are even more excited about the long-term potential of the new NXP.

I continue to be extremely proud of all of our employees and want to thank them for the intense focus, unrelenting hard work and positive mindset.

We are creating a Company which is superbly positioned in our target markets.

Now I would like to pass the call to Dan for a review of our financial performance.

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

We delivered solid performance in Q1, as both revenue and gross margin were above the midpoint and EPS was at the higher end of our guidance.

We generated excellent free cash flow during the quarter and deployed about $0.5 billion in share repurchases and gross debt reduction.

Before I begin with the specifics of our Q1 financial performance, please remember, the sequential comparisons are impacted by the closing of the Freescale merger in December 2015.

Revenue for Q1 was $2.22 billion, up nearly 39% sequentially.

We generated $1.11 billion in non-GAAP gross profit and non-GAAP gross margin was 50%, at the high end of our guidance.

Within our HPMS segment, revenue was $1.91 billion, up 46% over the previous quarter.

Non-GAAP gross margin was 53.3%, and non-GAAP operating margin was 24.4%.

Within our Standard Products segment, revenue was $274 million, up 1.1% versus Q4.

Non-GAAP gross margin was 32.5% and non-GAAP operating margin was 21.5%.

Total non-GAAP operating profit in Q1 was $519 million and represented a 23.3% non-GAAP operating margin, slightly better than our guidance.

Interest expense was $93 million with cash taxes of $14 million and non-controlling interest of $11 million.

Taken together, this resulted in total non-GAAP net income of $401 million.

Non-GAAP earnings per share were $1.14.

Stock-based compensation, which is not included in our non-GAAP earnings, was $99 million.

Now, turning to the balance sheet.

Total debt at the end of Q1 was $9 billion with a cash balance of $1.5 billion resulting in net debt of $7.5 billion.

During the quarter, we made a payment of $200 million on our 2016, 3.5% senior unsecured notes.

We exited the quarter with a trailing 12-month adjusted EBITDA of approximately $2.1 billion.

Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q1 was 3.5 times and our non-GAAP interest coverage was 5.6 times.

Please note, both of these ratios reflect only partial contribution of Freescale's adjusted EBITDA.

During the quarter, we repurchased 4.1 million shares at a cost of approximately $298 million or a weighted average cost of $71.86 per share.

Turning to working capital, our days of inventory were 117, receivable days were at 43, payable days were at 77.

Taken together, our cash conversion cycle was 83 days.

These non-GAAP measures take into account the effect of purchase price accounting related to the merger on both GAAP COGS and inventory, with the differences detailed in our GAAP to non-GAAP reconciliation.

If you exclude the purchase price accounting associated with the merger in Q4, inventory days in Q1 of 117 were up 4 days from Q4, and inventory dollars grew by $20 million.

We made significant progress over the last several months to align our distribution channel, with months of supply now at 2.5 months.

Our efforts in this area focused on organizational leadership, management processes, as well as aligning channel inventory to what we view as the current demand environment.

Cash flow from operations was $414 million and net CapEx was $88 million, resulting in non-GAAP free cash flow of $326 million.

Now looking ahead into the second quarter.

As Rick noted in his prepared remarks, the current demand environment continues to be somewhat subdued.

Our customers, however, continue be excited about the potential of the new NXP.

They recognize the power of the combined portfolio.

We are focused on cross-selling efforts in the intermediate term and working with customers on new products based on the combined capability over the longer term.

With this as a background, we currently anticipate Q2 revenue will be in the range of $2.3 billion to $2.4 billion.

At the midpoint, we expect revenue to be about $2.35 billion in Q2.

Auto is expected to be up in the range of mid- to high-single digits.

Secure Identification Solutions is expected to be down in the range of low- to mid-single digits.

Secure Connected Devices is expected to be up in the range of mid-single to low-double digits.

Secure Interface and Infrastructure is expected to be in the range of flat to up mid-single digits.

Standard Products is expected to be up in the range of mid- to high-single digits.

Lastly, we anticipate revenue for manufacturing, corporate and other to be approximately $48 million.

At the midpoint, we expect non-GAAP gross margin to be 50% plus or minus 50 basis points and non-GAAP operating margin be 25.3% plus or minus 30 basis points.

Interest expense will be approximately $88 million, cash taxes are expected to be roughly $18 million and non-controlling interest should be about $14 million.

Stock-based compensation should be about $85 million, which is excluded from our guidance.

Diluted share count is assumed to be 351 million shares, but could be different depending on share-price fluctuations and stock buybacks.

Taken together, this translates into non-GAAP earnings per share in the range of $1.30 to $1.40, or $1.35 per share at the midpoint of our guidance.

So in summary, we delivered strong execution in Q1, indicative of how quickly the combined teams are aligning and executing.

We delivered better revenue, excellent gross margins, and earnings per share ahead of guidance.

Looking at the mark in execution in a bit more detail, we achieved 50% gross margin in a challenging environment, which represented excellent execution on the part of our operations and supply chain organizations.

Over time, we believe we can drive gross margins in the 51% to 55% range and will provide more detail during our upcoming Analyst Day on Thursday.

Operating margins are expected to increase 200 basis points sequentially, which is evidence of the execution on our planned cost synergies.

Over time, we expect to achieve operating margins above 30% and will provide more clarity on Thursday.

Importantly, we continued generating strong free cash flow, which will be a hallmark of the new NXP.

The robust cash flow allowed us to find a well-balanced capital allocation strategy, deploying nearly $500 million in share repurchase in gross debt reduction alone in Q1.

We will discuss our capital allocation strategy in more detail during the Analyst Day.

So, strong execution in our first quarter as a new Company, but the team recognizes there is significantly more work to do ahead.

We look forward to seeing many of you on Thursday.

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

Operator?

Thank you.

(Operator Instructions)

John Pitzer, Credit Suisse.

Congratulations.

My first question is around OpEx.

And I know that you guys wanted to kind of avoid talking about sort of the quarterly progress to your synergy targets.

But when I look at OpEx in the March quarter of about $593 million and compare that to kind of a pro forma number back in September of around $610 million to $615 million, it just seems you've divested businesses and revenues down a lot.

OpEx is good, but I'm just trying to get a sense of -- you've always said the cost synergies are really more back-end loaded.

Is that still the case, and if that is the case, why are the cost synergies this year more back-end loaded?

A couple comments on this, John.

If we take a look at Q1 of 2015 as a baseline that pre-dates merger announcement and we combine the as-reported numbers for the Company, we get a operating margin on a combined basis of about 23.5%.

When you net out the divested businesses, RF Power and Bi-Polar, we know that the RF Power is significantly margin accretive on a blended basis -- rough order of magnitude, take about $150 million of revenue out, and it improves operating margin by about 100 basis points.

So, when you -- I'm sorry, it takes operating margins down by about 100 basis points.

So the baseline against which we think we should be measured is Q1 adjusted 2015 with an OpEx level that's roughly about $629 million and an operating margin of 22.6%.

As we think about the 200-basis-point sequential improvement into Q2, you'll see about another 250-basis-point improvement into the back half of the year and we think we will exit 2016 close to 28% operating margin.

Then, when you think about the transition into 2017, we think we will exit 2017 above 30% operating margin.

I think it gives you a pretty clear roadmap of what we expect from a synergy capture standpoint on a go-forward basis.

That's really helpful.

And then, maybe for my follow-up, to Rick, just wanted to get a little bit more insight into the SIS business.

If you look at sort of the implied guidance for the June quarter, it's a pretty hefty year-on-year decline.

That's historically been a lumpy business.

In your prepared comments, you talked about parts of that market becoming less attractive.

It's a significantly smaller piece of the combined entity than it was NXP standalone, but how should we -- and how do you -- think about long-term growth in that business, and when do we start to return to a year-over-year growth curve in the SIS?

I think that's an area that we will spend quite a bit of time on, on Thursday, John.

I think the key for us is that if you look at the contact banking, if the pricing pressures and the margins pressures are pretty intense.

And so we are pretty selective, just like we were, for example in sim cards a number of years ago, where we didn't participate in that, even though it was kind of the core technology.

But when we think about our SIS business, we are really focused on the core security technology that it gives us to really be able to play in all the other markets, to be able to drive a complete hardware solution platform that can give us a competitive advantage on a complete solutions portfolio.

But in this business itself, we expected to regain growth.

Our leadership position in high-end contactless banking in China is still just as strong as it has been.

But, again, we've been a little more selective on the contact banking side and not trying to maintain all the business if some of our competitors choose to give it away with no profit margins associated with it.

I think as we get through, it's going to continue to be a lumpy business.

We did talk about, we have seen some tenders that are now beginning to ramp and eek up, which is a positive sign.

And we clearly would anticipate that, as we roll out some new product later in this year, we would return to a growth rate associated with that business.

Thanks, guys.

Ross Seymore, Deutsche Bank.

Thanks for letting me ask a question.

One on your biggest business, Rick, your automotive business, you mentioned that the end market was stable, and without front-running Thursday's meeting too much, can you talk a little bit about the content side of the equation and any sort of magnitude that you think that can drive the growth of NXP above and beyond that kind of 2% to 3% unit growth for the market that you discussed?

John, as you know, we're going to cover in a lot more detail on Thursday.

But I guess when we think about that business, going forward, even with the combined portfolios, we see SAR growing at -- roughly approaching 3% for the year.

We see the semiconductor content that goes along with SAR being kind of 50% faster than that, kind of in the 4% or 5% range.

And with the design wins we have, we see the opportunity to participate at a higher rate, high-single digits.

And so I guess we haven't officially come out for the three-year growth rate again to update that, which we will do on Thursday, but you can anticipate that we will be at a high-single-digit level in automotive and continue to solidify our leadership position there.

Really changing some of our focus from some of the areas that have been invested in previously, moving more towards ADAS and areas where we have a true leadership position and can have a significant impact on saving lives and reducing the number of accidents in the auto industry.

And I guess as my follow-up, Dan, one for you on the gross margin side of things.

You gave a great answer as to how you guys are working on OpEx to John's question.

On the gross margin side of things, you're guiding at relatively flat in the second quarter.

Can you just walk through some of the puts and takes that leave that flat?

Yes.

So when we take a look at operation of the business, recall that we're about 45% externally sourced, 55% internally sourced.

And, as we grow in various parts of the business, mix obviously affects that equation and doesn't necessarily lead to an overall improvement from a utilization standpoint of the overall Company.

The second thing is, is we're positioning ourselves to long-term margin progression on the gross margin line over time.

And so we want to make sure that the early pieces that we put in place are done in a very measured way so that we drive well into the mid-50%s, from a gross margin standpoint over time.

And then, lastly, as we think about pickup going forward, in terms of the various end markets we serve, we're incrementally seeing more strength in the mobile market than we have seen over the last couple of quarters, and it's margin dilutive on a mix basis.

Great.

Thank you.

William Stein, SunTrust.

Congratulations on the good quarter and outlook.

I'm hoping you can address the path to delevering from here.

I think the buyback that you did during the quarter was clearly very well timed, given the dislocation in the stock price.

But, I think there was some expectation that investors had that the focus would be on debt reduction.

Maybe you can talk, without front-running the analyst day too much, about the trade-offs you consider in capital allocation between those two and maybe any other priorities.

Thanks, Will.

As we think about capital allocation and we think about leverage, I think, first, we want to start off by saying there's no change to the target leverage of this Company.

It's going to be 2 times net leverage or below.

And, at the time of the merger, we said we would get to 2 times leverage within six quarters.

So the target is to -- by the end of Q2 2017, to be a 2-times levered company or below.

In the interim, like we said, we're going to take a balanced approach to capital allocation.

The dislocation that we see from an equity market value standpoint relative to the intrinsic model we have means that we're going to be as aggressive as possible within that boundary condition of 2 times leverage by the end of Q2 2017 to buy as much shares as we can in the open market.

Yes.

So, Will, you made the comment that you thought our investors were looking for big leverage.

I will tell you, based on a wide survey of our largest investors, we have basically a split vote between deleveraging and buying back stock.

And so what we're going to try to do is balance that off in the best interest of shareholders moving forward.

That's very helpful.

Thanks.

If I can have one follow-up.

And it's about the broader portfolio.

Rick, maybe appropriate for you.

There has been some incremental speculation about what you might do with the Standard Products business.

It's clear to those of us who have been following you for some time that you have stated in the past, this is not core, not strategic, but sort of not demanding a sale either.

It's a very good margin, very good cash flow sort of business.

So I'm wondering if you can give us any updated consideration on thinking about the portfolio more broadly, both potential sales or potential acquisitions.

We're not going to comment on any rumors or speculation.

I think we can reconfirm, as we've said, that Standard Products is really not in our strategic portfolio, not a requirement to be able to meet our strategic requirements.

But that being said, it is the best performing business in the Standard Products market and generates a significant amount of cash and a very positive business.

So, if someone would come along and offer us what we would deem to be fair value, if it's higher value for them than it is for us, then we clearly would consider our alternatives associated with it.

Relative to the overall portfolio, I think it is a work in process in a couple of areas.

When we look at it, there's been a changing market environment in some of the markets we participate in.

And we're taking a really hard look at a couple of areas to decide how much R&D investment we want to move forward with to really be sure that we can drive our RMS objectives that we have, as a company, to really be a true industry leader in the businesses where we're investing.

So we'll be making some adjustments over the next few quarters associated with that.

And we will talk a little bit about that on Thursday, but primarily come back to you after we have that in place over the next few quarters.

Thanks, and congrats again.

Thanks.

Vivek Arya, Bank of America.

Thank you for taking my question.

You mentioned distribution inventory as around 2.5 months.

It's definitely an improvement versus a few quarters ago.

My question is, is this the right number?

Is it too high?

Is it too low?

Is it exactly the right number?

How are you making that determination, Rick?

And, if you were to divest Standard Products, do you think that helps improve the visibility in the distribution channel?

Well, we'll leave any comments for Standard Products until that time that it might actually happen.

I think when you look at inventories in distribution channels, it is always an arm wrestle basically with our distribution channel partners.

We'd like for it to be, frankly, as high is it can be because the more product that's theirs available for sale associated with it.

They would like for it to be as low as it can be to be able to improve their terms and earns.

So it's an arm wrestling.

I think 2.5 months is about the right level, plus or minus the half.

If we saw an increase in demand, then we might want to be approaching more like the 2.9 months or 3 months of inventory getting prepared for that increase in demand.

What we wouldn't want to do is see a decrease in demand and see inventory increasing to the 3-month level.

I think we're kind of okay with where the inventory levels are at 2.5 months.

We don't want them to get a lot lower than that, frankly.

But with where the general economic environment is, which is certainly not off to the races, I think we'd like to maintain the inventory levels roughly around where they are.

Now they'll bounce around a little bit on a quarterly basis depending on which disty takes which shipments or whatever.

But I think it's in the right ballpark of where it should be, the right zip code, and we want to continue to maintain it there unless we see a pick up in demand and then we want to be sure that we've got adequate supply in the channel to be able to meet our customer requirements.

Got it.

Thank you.

And as a follow-up, Rick, is it possible that if there is a fostered adoption of NFC in smartphones, that your SCD segment helps to offset the slowdown in maturity that you're seeing in the bank card segment, because it appears that people are more comfortable using a mobile wallet in the phone rather than using a lot more credit cards.

And, if that is the case, what are the puts and takes?

I assume your content in a phone is much higher than what it is in a bank card.

Yes.

Seriously, I think you are absolutely dead on.

When we look at the opportunity -- we've been talking about it for some time.

Clearly, it's taken more time to materialize for mobile transactions in emerging countries than what we would have hoped for.

Part of that is dependent upon when the fundamental core technology -- once Apple had kind of delayed their implementation of Apple Pay in China, it pushed out the timing associated with it.

Now, on an interim basis, we've really gone off and tried to work on the transit side in China.

And we some real momentum with our partners in trying to be able to bring a mobile wallet to the transit experience in China.

And we think that, that may be as much, if not more, of a stimulus than absolutely Apple Pay's rollout on a worldwide basis where all of the smartphone companies have to have an equivalent product to be sure that they can be competitive with Apple.

But it's absolutely more value associated with it and an opportunity -- with the leadership position we have from a technical viewpoint, as well as from an overall ecosystem and solutions viewpoint, an opportunity for us to be able to participate in that accelerated growth.

Thank you.

Doug Freedman, Sterne Agee CRT.

Thanks for taking my questions, guys, and congratulations on the strong beat and [raised] results.

If I could, Rick, if we look at the revenue level that the combined companies were operating at for the first three quarters of 2015, it really approximates $2.5 billion, plus or minus $50 million.

Is there anything that's happening in the portfolio at the present time that makes a compare to that level, going forward, an unfair comparison once we get the inventory levels straightened out?

If you could comment on where you think we are in sort of that overall inventory, and a recovery to that sort of a level of revenue, it would be helpful.

First off, you have to consider the RF Power business, which if you just do a simple add-up, with (technical difficulty) associated with it.

So that is one factor.

I do think that, with the RF Power, we have seen -- we continue to see a supply chain that is up and down, and creates a lot of spikes and uncertainty associated with it.

And if you look at some of the pressure that we have seen in the marketplace in digital networking, we see some pressure associated with the top line from where Freescale was operating a year ago in digital networking.

It is quite well known some of the pressures of some of the high-end smartphone companies and the impact that, that has that we have seen in the second half of the year and have to be able to work through and move through that.

And then as we talked about, SIS has not been at the level that we would've liked based on some of the pressure that we have seen, the competitive pressure on the contact banking situation.

So I think as we talk about it Thursday, we'll give you more specific comments on the growth going forward.

I think when you look at it, we have the right portfolio, focused on the right markets that will give us the opportunity to outgrow the market going forward.

We will try to go through that in more detail on Thursday to be able to share with you guys why we feel as comfortable as we do with the ability to continue to outgrow the market.

But we don't -- our confidence in being able to outgrow the market is still just as solid as it has been in the past.

Although, clearly, we're going through some pressures in the near term that I talked about that makes it more difficult on a near-term basis.

I guess as my follow-up, if you could maybe give us some insights into what you are presently seeing in the RF market, whether you think that, that is a market that will recover or come out of its present down cycle.

I think that, that market is going to continue to be up and down.

I don't think that we will see a consistent basis on it at all.

I think what we have seen, in Q1, is a very positive environment where China Mobile, with their next-generation rollout, has actually accelerated things.

As we look at that market, we actually, over the long term, want to try to be sure that we can participate in other segments associated with it.

But I think the improvement that we've seen in Q1, and the better outlook associated with it, is based on the strong leadership position that we have in RF Power and then the opportunity to be able to leverage that into other applications.

As we look at some of the emergence of post-4G rollouts, an opportunity for us to be able to participate in some of the architecture decisions there, we think that we're quite excited about some of the opportunities that can give us some growth over and above what you might expect on just a normal base station deployment.

Terrific.

Thanks for all the color.

Stacy Rasgon, Bernstein Research.

Thanks for taking my questions.

It sounds like, with the higher-margin targets and you talking about strong free cash flow, that the story here maybe becomes a little more geared toward a polar return in capital allocation.

In that environment, free cash flow probably becomes more important than it has been in the past.

I know some of your competitors with a similar type of story or model actually have fairly well-defined free cash flow targets.

I guess along with the margin targets you've given, are you going to be giving free cash flow targets, maybe as a percentage of revenue or something like that out as well?

And what sort of free cash flow generation prospects do you see from the combined Company over time?

Thanks, Stacy.

We definitely will be giving guideposts in terms of how to think about free cash flow going forward.

Capital return strategy, I think, will be an important part of the story going forward.

And if you think about a company that's, say, against a 3% to 4% target growth rate, greater than 1.5 times growth, you are thinking maybe a 6%, 7% [grower] going forward out into the 2019 time frame.

At this margin profile, you start getting in the zip code of about $4 billion of EBITDA.

You're thinking about CapEx at about a 5% run rate going forward.

So EBITDA minus CapEx is mid-$3 billion a year type number at the far end of that guidance window.

I think it gives you a sense of what we will be saying on Thursday and dimensionalizing the strength of the combined model on a go-forward basis.

And I think you can look at our track record, Stacy.

We've been very balanced in using our cash that we generate, where we've had strong cash generation, in the best interest of shareholders.

I mean, if you look at it, before we actually did the merger, we had bought back like $1.6 billion over like a four- or five-quarter period of time.

So that's a good indicator relative to our position and our desire to be able to be sure that we act in the best interest of shareholders.

Got it.

Thank you, guys.

That's helpful.

For my follow-up, then again I guess maybe we'll hear more about this on Thursday, but do you think that your long-term gross margin targets are going to be revenue dependent?

Like what kind of revenue levels do you think it would take to hit the low end versus the high end of that gross margin guidance?

Rather than tying a specific revenue level to the low end or high end, because there's going to be -- part of it is scale, part of it is time based.

But, as you think about revenue, not heroic levels off of where we sit today and what we posted in 2015.

But maybe an $11 billion zip code, give or take, is the type of scale that will facilitate progression well into the gross margin range.

Got it.

Thank you, guys.

It's probably as much about mix as it is absolute revenue dollars.

So I think there are factors associated with it, but I think we'll go through -- Dan will go through more details on Thursday associated with our targets and how comfortable -- and the reasons we feel as comfortable as we do associated with it, Stacy.

Got it.

Thank you, guys.

Toshiya Hari, Goldman Sachs.

Thank you for taking my question.

Rick, you talked a little bit about how you're seeing incremental positive trends in the number of your businesses.

Maybe you can elaborate on that and provide a couple of examples -- which businesses, which regions?

That would be helpful.

Thank you.

Well, I think when you look at it over the last few months, our automotive business has continued to rebound nicely and is in a very positive environment.

So, clearly, we feel very good about the improvements in the automotive business and being able to continue to see that.

While there has been some discussion about car inventories, et cetera, we don't see any weakness on a world -- on a global basis at all in automotive and continue to see very positive.

I think one of the things that we are seeing is when we look at what we call our crawl charts on a weekly sales basis, we see some uptick associated with it, which is encouraging.

Our book to bills are improving, and although we don't think book to bills are necessarily as good a representation of what's going on in the semiconductor market as they were a decade ago or so, they are a factor and we do see positive indications associated with that.

So I think, overall, when we look at it, the market in China seems to be pretty stable.

Other than a few exceptions in Europe, which is primarily industrial and automotive, it is looking pretty good.

The US market is somewhat anemic, based on the environment associated with the political uncertainty and the concern that, that puts relative to everyone's investment strategy.

But clearly, we're seeing indications in different businesses and different sectors of improving, which gives us the confidence to be able to talk about some indications of an improving economic environment.

Okay.

Thank you.

That's very helpful.

And, as a quick follow-up, I have a question regarding your guide for Q2.

I'm trying to better understand how your guide for the individual segments compare relative to your history.

If you can provide ranges for normal seasonality for the combined business, for each of the segments, that would be helpful.

Thank you.

Toshiya, it's Jeff.

When we get asked about seasonality, what we do is we tend to look backward about three years and take an average and a median.

So it's really not -- we're not trying to give you any kind of a nod, nod, wink, wink into the future when we're giving you our thoughts on seasonality.

So this is all mathematical and you could probably go through it yourself.

But if you think about autos, in aggregate, on a comparable basis, three-year seasonality into Q2 might be low-single digits, low- to mid-single digits, if you will.

If you think about SCD, upper-single digits, the 7% kind of range, into Q2.

SIS is just such a lumpy business; this analysis really doesn't work because it kind of is different every year depending on what tenders are happening.

So I'm going to kind of avoid making a comment on that.

And then, on the Secure Interface and Infrastructure, you usually do see kind of a mid-single digit up into Q2.

And these are all just on a comparable basis and this takes a kind of backward three-year look at our trends.

But I would tell you, the one thing that is really difficult as you put the businesses together, is the seasonal basis is much more difficult to try to draw any real conclusions associated with.

We will cover more of the general environment on Thursday as we go through it business by business.

And I think you would get a better feel for what we see with the outlook.

Yes, and then, Toshiya, just for completeness sake, on Standard Products, it's a great business in an odd market, but it's up about 2%, low-single digit, into the second quarter approximately.

Very helpful.

Thank you so much.

Thank you, Toshiya, for your question.

C.J. Muse, Evercore.

Thank you for taking my question.

First question, going back to your commentary around autos in high-single-digit growth, curious what kind of assumptions you're making there in terms of radar entering the fold, as well as with Cogniview integration and what kind of uplift from vision you're anticipating this year?

Or, is that greater uplift from those two elements into 2017 and beyond?

I would tell you, radar we see as a positive contributor late this year.

It's a foundation of the business today.

It's not like it's coming from ground zero.

But we see our leadership position in radar continuing to strengthen as we move forward and it will be a contributor.

Don't forget, we have our initial shipments of vehicle to vehicle, that will start with the -- that we're doing with Delphi for high internal motors, which will start for the 2017 model year, which will start shipping later this year, although it won't be material in the overall numbers from an impact viewpoint.

On the vision side, I think that's beyond the near term.

So as we look at it, our focus on investments is moving towards the ADAS side.

But remember, that's really more further out in time than automotive.

That's not something that's going to impact the next few quarters.

The next few quarters are going to be driven by the design wins that we've already won as we begin to ramp those or continue to ramp those in having a positive impact relative to the overall revenue.

And, C.J., if I could just add, I think it's overlooked sometimes, the significant market share the new NXP has in radar.

I mean, we are clearly the market leader in that space.

We're considered not only the market leader, but we're the thought leader.

Some of the ideas received from some of the more cutting-edge automakers of building kind of radar cocoons around their cars, they're coming to us to help them with those solutions.

That not only pulls forward radar front ends, but also pulls forward the processing back end.

And then, it's also driving us to supply in-vehicle networking and higher data rates, like in-vehicle ethernet.

There is really kind of an add-on effect in this market, and it goes to show you the complementary nature of this merger and the power we can bring to our automotive customers.

And we're going to cover that in a lot more detail on Thursday.

But, clearly, our focus in automotive is -- on the investment side, is moving more towards data side and how we can continue to drive leadership associated with those new opportunities.

That's very helpful.

I guess as a follow-up, I wanted to go back to distribution.

And curious if you could share what percentage of your combined revenues flow through distribution.

If you can confirm that all of that is recognized on a sell-end basis.

And then I guess, Rick, given your comments around green shoots in parts of your business, do you anticipate into Q2, Q3 time frame perhaps a re-acceleration of demand as inventory there has gotten cleaned up and you start to see a resumption of at least normalized demand patterns?

We've given you specific guidance for what we think about Q2.

So that is probably as far out as we want to go, C.J., on a quarter-by-quarter basis.

I do think that we clearly have gone through a pretty significant supply chain adjustment associated with a number of the smartphone -- or at least some of the key smartphone manufacturers.

I think as we work our way through that, we will see a return to more of a normalcy associated with it.

On disty itself, we always said it was around half of the NXP business in the past.

I think Freescale had said it was a third or a little bit above.

I think in total, we're kind of in the 40%, 45% range.

And it bounces around a little bit based on fulfillment and what customers are doing what at any individual quarter.

But we're in that just slightly below half, I would say, and think that, that's kind of an optimal place to be in.

But relative to the impact that has on a quarterly basis going forward, that's all reflected in what we gave you relative to our Q2 guidance.

And then we will talk about the three-year compounded growth rates in more detail on our session on Thursday.

And, C.J., just to your other question, we recognize all of our revenue into distribution on a sell-end basis.

Great.

Thanks so much.

Craig Hettenbach, Morgan Stanley.

Just following up on the mobile wallet, and it's a high-profile win.

It looks like we're starting to see early signs of, finally, the Android community for traction.

So can you add any anecdotes around that in terms of your design initiatives and how you see that ecosystem evolving as we go through this year?

The key we talked about and we've been trying to update was really on the Android side, the Android Pay, really being driven by transit as much as anything else.

We actually announced our relationship with [Chao Mei].

And that is a significant contributing factor.

But basically, most of the so-called China Inc smartphone guys are looking at how they move a mobile wallet into their offering.

But not as much for the mobile wallet sake is really focused on the transit site and being able to make boarding of the mass transit systems in China in a much more speedy and efficient manner associated with it.

So, we're really focused on how we deploy that now and drive some of the adoption of mobile wallet through the transit side, although I still think there's some momentum as Apple begins to roll out Apple Pay in China, all of the high-end smartphone guys have to have something equivalent.

When somebody is, for instance, using Apple Pay at a terminal and they've got a brick that doesn't do that, they're going to want to move to something that is equivalent.

Got it.

Thanks.

And as my follow-up, on the broad-based MTU business, based on recent market share data that was released, it looks like you guys gained share in 2015 for the fourth straight year.

So, are there any segments or products from a momentum perspective that you would highlight in terms of that's helping to drive the share gains in MTUs?

I think it is really our 32-bit arm leadership, both on, frankly, the kinetics platform that Geoff Lees has been driving at Freescale and now combined with the LPC platform from NXP gives us the broadest platform to be able to participate in the market.

When you talk about end segments, I think it's pretty ubiquitous across the board.

We did make note of one of the strengths in the current quarter was actually on point-of-sale terminals where we had the ability to drive some of that.

But I think it's more about just the strength of our portfolio with the growth of 32-bit arm-base positioning.

And we think we're in an excellent position to continue to move that forward on a broad array of applications and functions, and with a combination of the product portfolio from both companies being able to deliver a more complete bill of materials for a solution.

Got it.

Thanks for the color there.

Operator, we'll take one more caller.

Blayne Curtis, Barclays.

Just, Rick, I think you've answered this.

I just wanted to clarify.

You talked about channel inventories being lean.

Were you undershipping any in Q1 and then, as you look to the guidance in Q2, do you expect those inventory levels to change?

And if you could just talk about, on SCD, the wide range of the guide, what are the drivers there?

Well, first off on distribution, yes, we reduced our inventory by $49 million.

So we undershipped into distribution in the most recent quarter.

I think, for Q2, we don't give guidance specifically associated with that.

Our intent will be -- is to put the right amount of our product in the distribution channel for what we see for Q3 and being able to meet the customer demand requirements for that.

But I would anticipate that we're in the right zip code and where we would want to be.

So I would say it would probably be pretty balanced going into the quarter, but again, we don't give specific guidance associated with that.

And, I'm sorry, I forgot what your other question was.

I was asking the drivers into June on SCD.

There's a wide range there.

What are the puts and takes?

Okay.

So, Blayne, maybe I'll take that.

One of the beauties of the microcontroller on the MPU market is its broad-based nature.

It's a much more diverse type of business.

It's a great business, as you guys -- one of the earlier questions asked or commented on our market share gains.

So the concentration in SCD is not what it was at one time.

While we're still very pleased and proud of our exposure to the high-end smartphone market, we're much less dependent on the smartphone market today.

We're seeing very positive trends in mobile transactions, as Rick commented on.

But, nowadays, the business I think has a much more diverse nature in SCD.

Thanks, guys.

Thank you.

This is all the time we have for questions today.

I'll now turn the call back to Rick Clemmer for closing comments.

Thank you very much.

First off, thank you for joining us today.

In closing, I would like to just highlight a few key points.

We delivered a very strong performance in Q1 with revenue, gross margin, and EPS all above the midpoint of guidance.

We generated excellent cash flow and effectively deployed about $0.5 billion in buybacks and debt reduction.

Finally, I'm extremely pleased with the significant progress we've made in the last few months relative to integration.

We continue to execute associated with that and things are going very smoothly, especially on the product synergies in bringing the portfolios together.

We look forward to hopefully speaking to all of you at the analyst day on Thursday, and hopefully we can share as much information as possible with you to make you as knowledgeable about NXP as possible.

Thank you so much.

Thank you, everyone.

That concludes our call today.

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

You may all disconnect.

Everybody, have a wonderful day.