恩智浦 (NXPI) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by.

Welcome to the NXP Semiconductors Second Quarter 2018 Earnings Conference.

(Operator Instructions) And as a reminder, this conference may be recorded.

Now it's my pleasure to turn the call to Mr. Jeff Palmer, VP of Investor Relations.

You may begin.

Thank you, Carmen, and good morning, everyone.

Welcome to NXP Semiconductors Second Quarter 2000 (sic) [2018] Earnings Call.

We appreciate you joining us on such short notice today.

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

As it's been 21 months since our last earnings conference call, we will extend the Q&A session today to accommodate as many of the analyst questions as possible.

If you've not obtained a copy of our second quarter 2018 earnings press release, it can be found on our company website under the Investor Relations section at nxp.com.

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

This call is being recorded and will be available for replay from our corporate website.

Our call today will include forward-looking statements that involve 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 on the specific end markets in which we operate, the sale of new and existing products and our expectations for financial results for the third quarter of 2018.

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 the management does not consider to be directly related to NXP's underlying core operating performance.

Pursuant to Regulation G, NXP has provided reconciliations of our non-GAAP financial measures to the most directly comparable GAAP measures in our second quarter 2018 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.

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

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

Hopefully, you've all seen the announcement that Qualcomm has decided not to extend the purchase agreement and did not move forward with the proposed acquisition of NXP.

It is an understatement to say we are all disappointed in the outcome of the regulatory approval process in China.

Before we start today, I'd like to acknowledge the Qualcomm team and, in particularly, Steve Mollenkopf and all of his executive team, in addition to the employees involved in the planned integration process.

The combination of the 2 companies would have represented the true semiconductor industry powerhouse.

The product portfolios were highly complementary, including the market-leading NXP auto portfolio and the Snapdragon processors and the strong NXP MCU portfolio and Qualcomm connectivity portfolios.

However, we do not believe there is any value to dwell on what could have been or spend any time discussing the events of the last 2 years.

Instead, we are going to look forward and continue to execute to our strategy and focus on what we can do to accelerate and expand our leadership.

We realize that it's been 21 months since we were last able to actively communicate with our shareholders and that over the period the visibility in our operations has been limited.

Therefore, before we turn to the review of our second quarter performance, we would like to share 4 key messages, which we've gotten questions over the last 2 years.

First, I understand we've been asked about the level of commitment of the NXP executive management team.

Over the course of the last 21 months, the entire executive team, including both Peter and myself, have been fully engaged in actively running the business.

This also includes the general managers of all of our strategic businesses further down in the organization.

While the organization has experienced a level of deal fatigue, the core basics of the business have actually strengthened, and our position in Auto and IOT is now stronger than when we announced the transaction 21 months ago.

With the decision announced overnight and our recent decisions with the board, the management team, including Peter and myself, are fully committed to continue to drive the future success of NXP.

Secondly, during the transaction, we have not provided any insights into the potential future performance of the company.

I would like to quickly review the model we have been operating towards, in which we believe shareholders should judge our future success.

Consistent with our prior approach, we will provide guidance on 1-quarter basis and reference our 3-year model targets for longer-term discussions.

During Peter's remarks, he will provide specific guidance for the third quarter.

Our long-term model is consistent with what we presented prior to the Qualcomm transaction announcement in October 2016.

Specifically, from a revenue perspective, we believe NXP can achieve a 3-year compounded growth rate of approximately 5% to 7%, which is 50% greater than the growth of our focused addressable market.

In other words, our focus TAM, which is WTS has -- with memory OPPO and discretes removed.

We will continue to target our non-GAAP gross margins in the range of 53% to 57%, and we will continue to make focus investments, which will drive our non-GAAP operating margin in the range of 31% to 34%, which is based on an R&D investment level of 14% to 16% of revenue and a SG&A target of 6% to 8%.

At our Analyst Day on September 11, which we are now announcing, we will present a deep dive into how we will achieve our goals, including a strategic update on our focused businesses and the unusually strong opportunity we have in those specific markets.

Thirdly, since the Qualcomm transaction was announced in October 2016, we suspended our capital return program.

Going forward, our capital procurement policy will be consistent with prior periods and is aimed at returning all excess free cash flow to shareholders.

We, just yesterday, obtained authorization from our board to initiate a $5 billion share repurchase program.

Our current cash position is very strong, with nearly $3 billion accumulated on the balance sheet.

The amount is even after we retire $1.25 billion of gross debt in Q2 and does not include the termination fee due from Qualcomm.

Our leverage is below our long-term target, and quarterly free cash flow generation is -- continues to be very strong.

In a few moments, Peter will discuss the funding of the program as well as our target leg breach, which remains consistent with our prior plans.

Lastly, I would like to reflect on the business trends over the last 21 months.

If I look at the results for 2017 that were very good.

We grew our HPMS revenue to $8.75 billion, growing solidly in our focus markets.

We successfully completed the Freescale integration and began to see the anticipated revenue synergies.

We began to see solution synergies in our automotive business.

Our general purpose microcontroller business performed very well, due to the strong adoption of both i.MX apps processors, high-performance apps processor as well as continued adoption in the mass market for the Kinetis and LPC MCU products.

In terms of challenges, RF Power business has been seen -- has recently seen issues of slow growth in the base station market, which we began seeing weakness also in the Digital Networking business in 2017, and the bottoming of our bank card business came into clearer focus.

We're at the halfway mark in 2018.

We continue to see some of the same trends.

Our auto and microcontroller business continue the positive trajectory seen in 2017.

The severity of the transitions within the digital networking became even more apparent, and the ebbs and flows of the base station market in China continue to challenge the growth of our RF Power business.

And after 21 months, we did begin to see some deal-related impacts to the business, including some of our strategic mobile customers disengaging on new expanded opportunities.

However, on balance, we see far more opportunities to excel and lead in our target markets than hurdles in which we need to overcome.

Based on direct impact from customers, we have the right products, the right go-to-market strategies and the best talented employees who are held in very high regard by our customers.

Quite a winning combination.

Our auto business continues to strengthen our unique position where we can lead with the technology to provide safer driving through level 3 or 4, on our way to actually moving to autonomous driving.

We now hear from our auto customers, we have a unique portfolio to also address the electric vehicle market growth, which is an incremental growth driver from what we had talked about previously.

Our smarter world, or as we like to refer to, the IoT, is in a good position as we increasingly work through the cloud providers to allow the smart edge processing to facilitate and expand full use of the capabilities of the cloud and to facilitate the connection of everything to make all of our world a more productive and better place to live.

Now turning to an overview of our performance in the second quarter.

Since we did not give guidance for Q2, my comments will be relative to our performance in prior periods and not what analysts have assumed.

Overall, our revenue in the quarter was good, albeit with a few items which were out of our control, creating somewhat modest headwinds.

The ban on shipments to ZTE caused a short-term disruption to our RF Power business and, to a lesser degree, our Digital Networking and other businesses.

In Automotive, industry shortages of discrete components caused a modest pause in demand for automotive MCU products.

In addition, we continue to have capacity issues in our Kinetis family of microcontrollers as their upside design wins has put us behind in ramping our manufacturing capacity to support our upside customer requirements.

Looking at the specifics, total revenue in Q2 was $2.29 billion, an increase of 4% year-on-year.

And our HPMS segment, which really is our focused revenue, was $2.19 billion, up 5% year-on-year.

From an operating segment perspective, within automotive, revenue was a record high at just over $1 billion, up 7% year-on-year, with all product categories growing nicely.

One of the most encouraging trends we have seen in our Auto business has been the increasing cross-selling of the entire portfolio.

Our engagement with customers have elevated broadly to more consultative levels in which we propose complete solutions that leverage products from across our entire portfolio.

NXP is viewed by our automotive customers as having the most complete system solutions, with a clear expertise in high-performance processing, analog, security and functional safety.

The view provides opportunity for NXP to be a true partner in the automotive market, as auto OEMs have made the journey towards safer driving and ultimately providing the building blocks for autonomous driving.

Within Secure Connected Devices, or SCD, revenue was $644 million, up 10% versus the first quarter of 2017.

The core growth areas of general purpose microcontrollers and mobile transactions were both up year-on-year.

Macros continue to experience long lead times in our Kinetis family due to the tightness of wafer supply.

Our mobile transaction business continue to benefit from expanding customer adoption, with shipments beginning to accelerate to a large OEM in India.

Within Secure Interface & Infrastructure, or SI&I, revenue was $398 million, down 9% versus the year-ago period.

While interface products were up high-single-digits percent, with both RF Power and Digital Networking down over 20%.

The quarterly performance of this segment was impacted due to the U.S. Commerce Department's ban on material shipments to ZTE.

The high-performance RF Power business was materially impacted and to a lesser extent, the Digital Networking.

Taken together, the ZTE ban cost us about $31 million in the quarter.

Lastly, within Secure Identification Solutions, or SIS, revenue was $143 million, up 7% versus a year ago period, with a growth driven by strong trends in mobility and retail market due to good demand for both our UHF tagging and MIFARE access solutions.

Both eGovernment and banking revenue were down versus the second quarter of 2017, reflecting the continued lumping project-oriented nature of these markets.

Turning to our distribution channel.

The total months of inventory in the distribution channel held steady at 2.4.

We consistently target to maintain 2.5 months of supply plus or minus some half month in the channel, a range we had stayed within for 34 quarters.

Distribution as a percentage of total revenue is just over 50%.

We use this channel to address the mass market for products like general purpose MCUs, which are sold to thousands of the end customers.

The channel is also leveraged by our strategic customers, which require NXP to position material prior to the seasonal peaks.

Overall, as our business grows, the percentage of business through distribution has also increased at a rate higher than that.

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

Before I turn the call over to Peter, I want to thank all of our employees for their dedication, hard work and the laser focus they have shown over the last several years as we completed the Freescale integration and prepared for the Qualcomm integration.

We've asked a lot all of our employees and we ask it often.

We know the deal fatigue has been an issue for the last few quarters, but now is the time to focus on our short journey and move forward to drive our future strategy, which will result in the industry leadership in our focus markets.

I am genuinely impressed and grateful in how our employees rose to the task presented to them.

I thank all of them and I'm proud of the organization and each person who has contributed towards success.

Now I'd like to pass the call over to Peter for a review of our financial performance.

Thank you, Rick.

Good morning to everyone on today's call.

I'd like to say it's great to be able to speak to you all again today, and I'm really looking forward to meeting most of you in person in the near future.

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

In summary, revenue and profit in the quarter was adversely impacted by the ZTE ban and auto customers managing their shortages and other components.

Non-GAAP operating profit was 29%, and cash flow continues to be strong.

Our balance sheet is in excellent condition with a leverage ratio of 0.74x, which is substantially below our long-term target.

Focusing on the details of Q2.

Total revenue was $2.2.9 billion (sic) [$2.29 billion], up 4% year-on-year.

We generated $1.21 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 52.8%, down 20 basis points year-on-year.

Total non-GAAP operating expenses were $591 million, up $50 million year-on-year, reflecting the impact of a stronger dollar and investments we've made in the business.

From a total operating profit perspective, non-GAAP operating profit was $618 million, and non-GAAP operating margin was 27%, down 140 basis points year-on-year, reflecting the above-mentioned items.

Interest expense was $31 million, noncontrolling interest was $12 million and cash taxes were $56 million.

Stock-based compensation, which is not included in our non-GAAP earnings, was $69 million.

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

Our total debt at the end of Q2 was $5.34 billion, cash was $2.98 billion and net debt was $2.36 billion.

We exited the quarter with a trailing 12-month adjusted EBITDA of approximately $3.18 billion.

Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q2 was 0.74x, as I said earlier, and our non-GAAP interest coverage was nearly 20x.

Turning to working capital metrics.

Days of inventory was 111 days.

Days receivable was 31 days, an increase of 1 day sequentially.

And days payable were 90 days, up 7 days versus the prior quarter.

Taken together, our cash conversion cycle was 52 days, an improvement of 3 days versus the prior quarter.

Cash from operations was $403 million, and net CapEx was $129 million, resulting in non-GAAP free cash flow of $274 million.

Turning to our expectations for the third quarter.

We currently anticipate total revenue will be up in a range of 3% to 9% sequentially.

And at the midpoint of our range, we anticipate the following trends in the business: Auto is expected to be flat sequentially; Secure Connected Devices is expected to be up low double digits; Secure Interface & Infrastructure is expected to be up about 20%; and Secure Identification Solutions is expected to be down high single digits sequentially.

We anticipate revenue from corporate and other to be approximately $95 million.

We expect non-GAAP gross margin to be about 53.3%, plus or minus 50 basis points.

Operating expenses are expected to be about $588 million, plus or minus about $10 million.

Taken together, we see non-GAAP operating margin to be about 29.1%, plus or minus 60 basis points.

We anticipate cash tax to be about $37 million and estimated interest expense of about $32 million, with noncontrolling interest at $13 million.

I'd like to comment on our capital structure and the announced share repurchase program.

Prior to the failed transaction, NXP consistently returned all of its excess cash to its owners.

Now we continue to believe this and are supported in this view by our Board of Directors.

Given our short-term cash requirements, our current leverage and the fact that we believe the current market price significantly undervalues the company, we believe a buyback is an appropriate method to return excess cash to shareholders.

To this end, our board has authorized a $5 billion repurchase program, and we'll fund this with a combination of existing cash on balance sheet, the after-tax proceeds from the termination fee as well as cash flow from operations with the balance from debt.

If executed before the end of the year, we'll see our leverage at the end of 2018 to be about 1.5x.

As the specifics of the new debt and our complete third quarter interest expenses and estimates, please note that any purchase of quantities of stock above approximately 10 million shares will be subject to a deemed dividend payable by the company of about 11%.

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

And I think Jeff you mentioned we're going to have an extended Q&A session.

That's correct, so we get everyone's Q&A today.

Operator?

(Operator Instructions) And our first question is from William Stein with SunTrust.

Two questions, if I can.

First, I'm wondering if we can get a further discussion of capital allocation beyond a buyback.

In the past, you've discussed, when you were still -- pre-Qualcomm discussion, there was a sense that you'd start a dividend when you got to the right leverage level, I think.

And there is also a discussion of incremental M&A.

Can you update us on that aspect?

Yes.

Sure.

On the dividend, we're actively discussing that now.

Certainly, we can afford it.

Our leverage at the end of the year would only be -- if we do execute the whole buyback before the end of the year, would only be 1.5.

And at the end of next year, we'll be back below 1. So we're in discussions with our board, and I guess, we'll update you on the Analyst Day as to what we've decided.

That's on the dividend.

In terms of incremental M&A, I think it's a bit early to say we're going to go and buy them.

Well, I think the bottom line is with the what we consider to be quite unfair process that we just went through with China.

I don't think you'll see us be trying to do any big merger or equal kind of transactions like what we did with Freescale.

I mean, clearly, the regulatory process has proven to be quite a challenge, and I think that's not something that we perceive as being a priority now in creating value.

So clearly, small acquisitions that provide some unique product technology or allow us to provide a more complete solution to our customers are within reason, but I don't think that you'll see us trying to do any huge transactions like merger of equals.

I appreciate that.

And then one more if I can.

The 5% to 7% growth is the -- more or less the same target that you had prior to the -- to this Qualcomm transaction.

It looks relative to somewhat weaker SI&I and SIS security markets.

I'm wondering if we should read that 5% to 7% to suggest that those 2 markets will stage a recovery or should we read it as those will be the relatively weaker ones, and we should see more outsized growth, for example, in Automotive and the MCU part of Secure Connected Devices?

Absolutely.

We will definitely -- our plan of the growth rate is balanced with stronger growth in Automotive than what we would have had a couple -- 2.5 years ago when we went through this as well as in micros.

Our portfolio continues to drive a lot of growth in those areas.

So the continued weakness in SIS, which is a relatively small portion of our total business at this point in time.

And certainly, we're working through some of the issues in our RF Power and Digital Networking business.

So I think when you look at it on the growth rate, even though it's the same number, it's a much more rich, fuller growth rate that plays to our strength than what we would have had 2.5, 3 years ago when we set those targets before.

Yes.

The way I figure out, Will, is versus where we were 2 years ago.

And coincidentally, it is a similar number.

There is all -- all of our businesses are doing well except for, as Rick mentioned, DN, and we started to talk about that.

RF tends to be -- it's a relatively small business for us, but it tends to be cyclical.

So that...

Very profitable.

SIS has probably bottomed out now.

We definitely went through some issues in '16 and '17.

So it's a certainly different mix than we have 2 years ago.

But the thing is that we were really investing in that are at the core of our company are actually doing, from our perspective, very well.

And our next question comes from Vivek Arya with Bank of America Merrill Lynch.

Rick, for my first one, your OpEx was up 8% to 9% in the first half year-on-year.

Are there areas in NXP where estimates were perhaps paused and need to be restarted now that you have to go on your own?

Or asked in a different way, when do you think you can get to your target model for gross and operating margins?

Yes.

I think those are kind of diametrically opposed.

I think the growth rate that you're talking about, I don't think anything was paused.

We were focused on the opportunities.

And as you saw in our R&D, we've actually invested in some areas where we thought it was critical to invest in that technology to continue to drive our leadership with the expanded opportunities we saw.

And there is a lot of factors that come into account associated with currency as well as customer funding and grants, et cetera.

But the bottom line is, there is not anything that we need to reaccelerate.

We have been making good level of investments.

I think one of the things that we will consider on CapEx is perhaps strengthening that a little bit for the next couple of years to be sure that we can drive our cost reduction opportunities by expanding some of our internal capacity and perhaps using a little bit of a breakup fee to really reinvest in the cost savings for the company.

But on the OpEx side, I think we do not have to reignite anything.

In fact, we're making those investments for the future to continue to drive our strength.

Got it.

And then for my follow-up, just in terms of clarification, are you assuming ZTE gets back in from Q3 onwards?

And on the buyback, Peter, is there a time frame in which you plan to complete them?

So let me do the part.

ZTE has started again.

So that would be in Q3 and hopefully, continue as a normal company going forward.

As regards to buyback, we -- I think you know from our kind of historical activity, we don't announce buybacks and don't do them.

But we'll look at the market on a daily basis and to the extent that the opportunities there will go out.

And we would expect to complete the buyback in a timely fashion.

It was an interesting -- it's very interesting because it's clearly important for us from a revenue viewpoint.

It was considered to be one of the factors in the discussions with the Chinese relative to the regulatory approval process.

And so it's quite surprising that the Chinese made the decision they did not do actually approve the transaction given that ZTE was brought back to life by the U.S. Administration in Congress.

Our next question comes from Stacy Rasgon with Bernstein Research.

My first question is on gross margin leverage.

So it's obviously stopped a little bit.

And I get that part of it was a function of mixes like some of the higher margin businesses kind of had a bit of a headwind.

But I'm also surprised like if you're going forward as revenue is growing and particularly the Secure Interface's business is growing so much next quarter where we're still not seeing any gross margin leverage.

So what's going on there.

I guess, what do you need to do to get the margins back up because you're running below your model?

And I guess, structurally, how do we think about the drivers of gross margin going forward?

When do you think you get back into kind of more than normalized range of your target model?

What -- when you say more than a normalized range, I mean...

It's your -- what's the ranges, like 54% to 57%, whatever it was.

And so you're running 53%.

And next quarter, you got Secure Interface is up 20%, which is some of the really high-margin stuff and yet you got gross margins kind of flattish to down and revenues going up.

So I just -- I don't quite understand, is there something going on with utilizations because if you know your inventories are high or what?

No.

Absolutely not.

First of all, we look at the targets on an annual basis.

We're not going to obsess over the current quarter.

And there is all sort of things that go on in any single quarter that move the gross margin around.

Having said that, our gross margin, right now, is not where we'd like it to be and it needs to improve.

Probably, the biggest single thing that's hitting us this year is there is about 80 basis points of kind of price increases.

I think you heard a bunch of people say raw wafers have gone up, freights gone up, but that's certainly causes the headwind.

We would expect to quickly get back into our range.

And clearly, depends on the mix of products and a whole bunch of other things, but I don't like the current quarter.

I think we need to do better, but there's nothing structurally wrong.

Got it.

That's helpful.

And for my follow-up, I guess, to the point, you talked about some of the cost increases and you've talked about revenue missing, obviously, because capacity is tight in microcontroller.

So can you give us a view of how much revenue you're actually missing because of those long lead times and tight capacity?

And when you see those supply constraints even?

And I guess, just as an unrelated housekeeping question, tax rates for this year and next year, are they still the same as what you gave on your prior model?

Well, let me do tax.

So tax, we usually give cash taxes quarter-by-quarter and we've given you that.

And we've previously said 2019 would be 12%, and I think that's a good number.

The impact of tightness in capacity, it's a few tens of millions of dollars a quarter.

I don't think it's huge.

Yes.

And I guess, Stacy, when you look at it our Kinetis family up until maybe a month ago, we were at 26-week lead time, which is clearly not where we want to be.

And -- but when you have those design wins, you have to work with customers to be sure you don't take them lying down even with those extended lead times.

So as we get our manufacturing capacity back in time -- back in line, it should allow us to be in a position where we can drive growth faster than what we've been able to achieve with the capacity limitations.

And we'll see that as we approach the end of the year.

Some of that begin to come online.

And clearly, the thing that we're excited about is the design wins we have and the ability to drive that.

And we've been able to keep customers where they haven't gone lying down even though we've had limitations and extremely unacceptable long lead times based on what we have to -- had to layout.

We've actually reduced those slightly in the last few weeks, and we think we'll continue to get those under more of a reasonable basis going forward.

Got it.

It's likely would still be more than 20 weeks so probably?

Stacy, it's hard to say.

We're bringing the past as quickly as we can.

And I think over a period of time, certainly 20 weeks is not even reasonable lead times associated with micros.

So we would anticipate and hope that we'll get down into more of a reasonable range that kind of in the teens as opposed to even 20 as we're getting into early next year.

Our next question comes from Craig Hettenbach with Morgan Stanley.

Yes.

First question, just on the disti inventory has been a remarkably consistent at 2.3, 2.4 months.

So just anything -- particularly because things are pretty tight now in the channel, anything you're doing differently versus prior cycles just to manage the inventories for distribution?

I'd say, the biggest -- 3 years ago, we had a problem in 1 quarter, which shook us up pretty badly.

And at that time, we completely revamped our -- I'll call them our control systems.

But if you like our ability to look into what the disties have and what we're shipping out, what's on the shelves.

And we just continue to do that and manage it really tightly, but we do manage it to that number, Craig.

It's not a coincidence.

We make sure it doesn't go plus or minus above 2.4 months.

The truth is, this is always a tug-of-war with the big disti houses.

They are focused on their turns and earns and want to be sure they have less inventory, and we'd like to be sure we actually have a little more inventory in the channel to be able to support our customer base and drive the growth that we're trying to achieve.

So that's always a little bit of an arm wrestle to see where it is.

We're still in that range of 2.4 during the quarter, it may go slightly below that, but we're at that range.

And frankly, I'd prefer it to be more closer to 2.5 than the 2.4.

Yes.

I'm Steve and [Mattias] who are our Heads of Sales and Ops guy.

They work substantially on the mix of products that's actually on the shelves.

So one of the big challenges is how good is the inventory.

And I think our inventory in disti now is as good as it's ever been in terms of the quality of the product that's there.

I appreciate the color there.

And then just as a follow-up for Rick, just because it's been some time, can you update us on the progress around kind of radar and ADAS and any kind of anecdotes from a design perspective?

Or how things are playing out for you in that market?

Absolutely.

So we have the strongest portfolio in radar products and working broadly with all of the major car customers.

And so their acceptance of our technology is -- has been really overwhelming, and we're very pleased with that.

The ramping, the capacity to be able to support the requirement has been more of a challenge than the design win side.

But with the portfolio we have and the ability to bring total solutions together, we continue to grow and get strength in driving more of a complete solution with our automotive customers.

And clearly, our radar success has been a contributing factor to that.

But as we look at safer driving and autonomous driving, radar is only 1 factor associated with it.

Also our vehicle-to-vehicle communications platform, our entire microcontroller family supporting that as well as the security to be able to drive safer solutions is really some of the key technology that we'll talk more about in our Analyst Day that we think will really allow us to continue to drive growth well above the marketplace.

Our next question comes from Tore Svanberg with Stifel.

First question I know this is a bit longer term, but I think the appealing part about the Qualcomm NXP merger was really the positioning in automotive.

How should we think about NXP's long-term strategy in automotive?

And I'm thinking more in terms of, obviously, NXP has a lot of analytical mixed signal expertise, Qualcomm probably also more on the digital processing side.

So just strategically, how should we think about NXP going forward in automotive, especially more on the digital side of things?

So when you think about the automotive and especially moving to autonomous driving, the sensor fusion, we will not have that high performance processing capability that we would have had with a combination with Qualcomm.

So clearly, that's something that we'll have to figure out how we work with our customers and those companies to really be able to partner to provide solutions to be able to fulfill it.

But when you really think about the -- after the learning process takes place with artificial intelligence, it's really more about the microcontrollers and the capability to drive that on a consistent basis at an affordable basis for a broader array of cars.

It's really what drives the improved safety.

And frankly, NXP is extremely well positioned to take advantage of that and provide solutions that will really continue to drive strong growth.

So I think we're in a very solid position.

The interesting thing that we've really made some progress over the last couple of years on the analog side is we think our portfolio is even more well suited towards the electric vehicle portion of the automotive market than what we thought at 2.5 years ago.

So we think that our portfolio, and we'll talk more about that in the Analyst Day, will serve roughly 40% of the TAM associated with electric vehicles and really puts us in a great position.

But we'll continue to see the safer driving moving towards autonomous driving, where NXP will be a key leader in driving that technology to facilitate safer driving across the industry.

That's very helpful.

And just as a housekeeping for Peter.

Peter, what should we use for our CapEx both for calendar '18 and calendar '19 please?

We would -- I'm just trying to think of the best way to describe this.

Normally, in the past, we've spoke about 5% CapEx.

I think we're running year-to-date about 6.5%.

And as Rick mentioned before, probably in -- and I'm saying this on the fly.

In '19 and '20, we might let it go up to as high as 7% if we can see a very significant gross margin return, given we got the funding of the breakup fee.

So we'd reinvest some of the breakup fee back in gross margin.

So I'd say for your model, maybe use 7% next year and the year after.

This year, I think it's about -- I think it's going to be about 6.5%, but I'd have to check exactly.

Our next question comes from John Pitzer with Crédit Suisse.

Peter, I think you were kind enough to tell us what the ZTE impact was to the June quarter.

Does the September quarter guide embed all of that revenue come back -- coming back?

Or is that going to take a couple of quarters to come back?

It's -- I'm not sure it's exactly $31 million that comes back, but most -- we would expect most of it to come back in Q3.

But we do think we've lost at least a quarter of our revenue in the year.

It's not like -- let's say, for example, we were literally $30 million a quarter.

It's not like Q3 would be $60 million.

It's just the $30 million seems to disappear into the ether.

Yes, and we probably won't even be completely back at that full run rate, John, in Q3, but we're getting close and working to do that and working with the new management team at ZTE to be in the position to support them as they really look at how they go address this in the marketplace.

That's helpful.

And then, Rick, just turning to the auto business, which is kind of the one of the core businesses that you have.

Year-over-year growth was about 7.5%, which is still really solid, but it is below kind of some of your comps or peers out there.

I'm just kind of wondering, were you -- do think you are more dispassionately hurt by these discrete shortages?

Is there something going on within your exposure?

Is this key fobs that are under growing?

Or help me understand kind of your growth rate relative to peers and how you're looking at that.

John, our growth rate across the board was still very strong in automotive.

The one area that we had a little headwind in the quarter was in auto microcontrollers, where some of the lack of some of the discretes reduced the pool by our customers.

I mean, it was a little bit surprising because they really didn't give us much indication of that early in the quarter.

And as you know, we have just in time warehouses at all of those key customers.

But as they went through their pool process towards the end of the quarter, it was at lower levels than what we would have anticipated based on some of their inability to have sufficient discrete products in place.

But the rest of the portfolio continues to perform very well, and we continue to be very excited about the growth of our automotive business going forward and probably at a higher rate than we were thinking about 3 years ago.

That's helpful.

And guys, If I sneak in just a quick housekeeping -- Peter, ASC 606, I think you talked about it on the -- in the press release and the impact on the balance sheet.

I just want to get a better understanding here.

Are you fully through that transition?

What was the impact to revenue?

And I guess, the reason why I asked because I just want to make sure as we look at year-over-year growth rates that we're sort of comping apples-to-apples.

Yes, yes.

My favorite topic.

I just think that's -- if I can have a mind to rant for a second, I think it's one of the most -- for us, one of the most ridiculous things ever implemented, just like crazy amount of work for not much news.

I think this, in Q2, would have an impact of $4 million.

And for memory, I think it was a $4 million benefit.

But I mean, it's noise level, John.

Our next question comes from C.J. Muse with Evercore.

First question, on a LTM basis, you guys generated 19% free cash flow margin.

Curious, as you start getting closer to your target model, what kind of percentage are you thinking there?

That's what I think about that really.

Really trying to get a feel of the numbers you guys -- you asked.

But I think it approximates in the end, our EBIT margins.

But maybe just give me time to think about that, but I think the EBIT margin would be a good proxy.

Okay.

That's helpful.

And then I guess a question on the buyback.

You talked about completing it in a timely fashion.

How should we think about annual share grants as a partial offset each year?

What we've normally been -- we've been granting less than, well, less than 1%.

So I think that's -- on a regular basis, I think that's the way I'd look at our share grants.

Our normal annual grants would be that.

Certainly at the moment, we're kind of looking at some things of what we should do in terms of how do we retain our employees and should we provide them with some additional handcuffs to keep them in the company.

But I think our normal grant is -- would be what we go forward with generally.

I can't really leave that going with handcuffs, but we want to keep our employees incentivized.

And I do think that as we go through a reset and a reboot, we'll see a little bit of additional equity, probably as our board goes through that, and we'll give you some more specifics when we go through the Analyst Day here in September.

Excellent.

If I could sneak one last one.

And you talked about some of the other segments.

Could you speak to your thought process on the growth trajectory for SCD over the next 4 to 6 quarters?

What puts and takes for that line item?

And what we should kind of be aware of given we haven't spoken to you for so long?

So on the 3-year basis, we feel very good about SCD.

I think we -- the lion's share of that business is really on the micro side, and our growth there is extremely good, and it's actually been limited by capacity that we could bring online.

So our customer perspective and perception, which is -- on the micros, which is, I don't know, what, Jeff, 60% or so of the -- of SCD.

We see extremely strong growth and continuing to be in a solid position, and I think that's going to continue for the next few years.

In Secure Connected Devices, we continue to be in a very strong position there.

We have a large OEM in India.

That's ramping.

It's clearly a factor in the near term associated with it, but we continue to be in a very strong position on the mobile wallet basis and continue to move forward very positively.

I think, C.J., we'll provide for you guys kind of individual operating segment growth targets at the Analyst Day.

But I think to support Rick's comments, this has been one of the real bright spots of the business.

The micros and the microcontroller business has been very strong, and the mobile transactions has been very strong as well.

And if we look at it over the 3-year basis, the ability to really take that business and drive the processing to the edge as well as the security to be able to provide to ensure that there's not hacking as we go to the world of the Internet of Things, this is really a key area for us and one that we think will contribute significantly to the growth.

And we're well positioned with the product portfolio basis to really support customers and solutions and really be able to facilitate, realizing the full value of the cloud and the capability that it offers to all of the users.

Our next question comes from Toshiya Hari with Goldman Sachs.

Great.

I wanted to follow up on your market share in automotive semis broadly.

According to guys like Gartner, I think you guys lost a little bit of share in 2017.

Given what you delivered so far in 2018, I think you might lose some this year as well.

Rick, just given what you're seeing from a design perspective today, at what point should we expect your positioning to improve and revert to the upside?

Our position is very good and very solid.

I think as we've seen e-vehicles begin to grow, contribute to the overall automotive growth, and our portfolio on analog, which is well positioned to specifically drive growth in that area, particularly in China, where we see a lot of e-vehicle growth.

I think we'll see that the growth of those -- some of those design wins that we've been able to achieve over the last few quarters and years really begin to kick in associated with it.

But I think if anything, when you look at it on a customer-facing basis and position, our share is gaining.

And we continue to have design wins growing at a much more rapid rate than our overall revenue, which puts us in a great position.

As you know, the automotive business is one where you win designs 2 to 3 -- 2 to 4 years before you actually begin to ship.

So if I look at the design wins, we continue to gain market share and be well positioned for growth going forward.

Okay.

Great.

And Rick, historically, you've been very disciplined from a portfolio or management perspective, and you've shared your views on things like relative market share.

Are there any businesses or product groups within NXPI today that you would consider deemphasizing or potentially selling?

Or are pretty comfortable with what you have today?

Well, after the 2-year pause at our portfolio, I think there's always businesses that you want to step up investments in and try to acquire some technology and businesses that don't -- that aren't as critical or strategic to the portfolio going forward.

So I would always say that's the case for us -- and we clearly went through a couple of year pause, as we went through waiting for the integration associated with Qualcomm.

So I do think that there are some things that we'll think about.

It would be premature for us to discuss those, but I think we'll continue to be in the basis of driving the best portfolio going forward that we can to support the market opportunities that we perceive as strategic and how we can best positioned to drive solutions for customers in those areas.

And our next question is from Rajvindra Gill with Needham & Company.

Just to follow up again on the auto.

Any more color there would be helpful.

The growth rate -- if you take the average year-over-year growth rate in 2017, I believe it was around 11%, and it has decelerated to 7%.

And as you said, a lot of that is due to shortages of the discrete components.

Wondering if you'd give us kind of what the specific dynamics that were going on with the shortages.

Why did that happen?

When do you think you can get resolved?

Is that affecting other competitors in your view?

Any clarity there would be helpful.

I think it's affecting all the competitors in automotive micros, so I don't anticipate that we are unusual at all.

But we, clearly, are one of the leaders in that space.

So as they have discrete shortages that impact their overall basis, it has more of an impact on us because of our position in auto micros.

I -- the resolution of that, I -- you -- I can't really address that.

I think we don't see that as being an area that's going to be a prolonged basis.

We think the auto companies are going to get back to more of a normalized basis on micros as we move forward.

Yes.

And I think we have to be careful about parsing the numbers, really.

I mean, if I look at trailing 12 months Q2, auto grew 10%.

If I look at trailing 12 months Q3 at the midpoint, it's probably about 8.5%, 9%.

If I look at year-to-date, it's probably about 8.5%.

I -- auto is running 8%, 9%, especially when it's a $4 billion business a year.

It's pretty cool.

And if we look out over the next few years, I think we're going to see nothing but maybe increased growth associated with -- based on the design wins that we've been able to achieve.

Kurt has done a fantastic job -- well Kurt and his team.

So I think we're in great position in automotive.

And you really can't look at it on a quarter-by-quarter basis, as Peter just said.

You got a look at it on a little bit of an annual basis to really reflect what's going on in the automotive market per se.

Yes.

That's helpful.

And for my follow-up, a significant amount of growth in general purpose microcontrollers.

Can you maybe dig a little bit deeper in terms of what's driving that?

With Freescale, you became a -- one of the largest microcontroller suppliers in the world -- or the second largest microcontroller supplier in the world.

Are you seeing a significant demand from IoT devices?

IoT now as a market has developed over the last couple of years.

Can you maybe talk about that as well?

I think we're seeing it broad-based, so I think we're in a leadership position.

I think that our portfolio plays well.

I think when you really look at it in the marketplace, we have the strongest portfolio, the ability to go from the core micros to higher end micros to apps processors and some products that we just announced that kind of cross over between micros and apps processor.

They really put us in a unique position to drive solutions for customers that they really don't have the opportunity to have that kind of breadth of portfolio.

And then we can even go to the high end associated with our network processors.

So I think the portfolio of processing capability that we have really plays well in the overall market.

While it's not the sensor fusion capability at the real high end, I think when you look at the applications that drive the high volumes and the capability, we're really well positioned to take advantage of that.

And our portfolio plays extremely well.

And the team there, Jeff, Lisa and the team there are doing a great job of positioning that business to move forward and continue to win market share.

Our next question is from Matt Ramsay with Cowen.

Rick, I wanted to ask a little bit of a strategic question, and I sort of echo your sentiments that it's a shame that the powers that be didn't let the transaction with Qualcomm go through.

But given the amount of, I guess, cross company diligence, both of you guys have gone against each other's businesses during this period of time.

Is there an opportunity you think for your company and for Qualcomm to work together in partnership around some solutions for customers that might be sort of accretive to the long-term business?

And how should we think about that potential, if there is any?

Yes.

I think there clearly is some potential like in NFC, where we actually have been working with Qualcomm for the last few years associated with it.

I think you have to give us a little bit of time to get through the overhang.

I think we and Qualcomm were both working diligently through midnight last night to be able to close the transaction.

So I think you have to give us a little time to think about if there's really any opportunity for us to work together going forward.

I wouldn't rule it out.

I think that as we think about the high end processing associated with the automotive market, we clearly are going to have to look at some partnerships to able to drive a more complete solution for our customers since we don't have the capability that you can find with Qualcomm.

But I think it's premature to really talk about that specifically.

I think we're really excited about the growth opportunities we have.

We would have loved to have had the leadership connectivity combined with our leadership processing and security that would have been combined into what I believe to be the industry powerhouse.

But since the regulators didn't let that take place, we think we're well positioned and really can drive significantly above-market growth and continue to create significant shareholder value going forward.

And yes, I realize things are happening quick here, and things just happened to midnight last night officially.

So I appreciate the color.

Just as a follow-up, shifting gears a little bit to the sort of IoT-MCU business.

How have you guys been investing in different area interface technologies in the IoT and the like?

Obviously, Qualcomm had a portfolio, a big one there that you might have relied on if the merger had taken place.

And just wanted an update onto how the investment levels have been in the peripheral communications technologies around the IoT business?

Yes, yes.

No, that's great, a great question.

I think when you look at the so-called IoT business and really moving to the edge, we're really getting well positioned with the cloud providers and really providing a unique capability associated with it.

To be fair, we had actually put a pause on some of our Wi-Fi development capabilities with the planning for the merger with Qualcomm.

So we're back considering those and how we get in a position really have the connectivity platforms to be able to draw complete solutions for our customers, and we have some technology in our network processing area in the Wi-Fi space.

Clearly, we're going to look at how we can position and drive to a broader array of customers through the industrial space.

But we're getting really positive feedback from the big cloud guys about the unique capability we have to really protect the edge and facilitate, take the smart edge processing and then be able to move those transactions to the cloud to be able to facilitate that, which is when you really peel the onion on IoT, one of the critical factors to be able to drive that.

In fact, it was a couple of months -- or 6 weeks ago maybe, they came out with companies -- with machine learning and artificial intelligence.

And frankly, we were the fourth one mentioned in the semiconductor space, which surprised me a little bit as we went through it.

But then when we peeled the onion and understood what they were taking into account relative to our edge processing capability and working with the cloud providers really confirmed the architecture and the opportunity space that we've been focused on and where we see some significant growth.

But this year, but out over the next few years and where we think we're well positioned with our technology to really provide a leadership capability.

Our next question comes from Romit Shah with Nomura.

Rick, I guess just listening to the conference call, my general takeaway is that after a 2-year pause, NXPI basically just needs to reinvest in the portfolio and manufacturing in order to really grow the business.

But that sort of puts you at odds with the profitability targets, and so we should just be conservative in our assumptions around when you get to your target model.

Do you think that's a fair way to look at it?

No.

I think what's happened is over the last 2 years, we've been continuing to run full out our core businesses and the areas we're really excited to continue to do well.

Yes, our gross margins are a little bit below where we want it to be at the moment.

That would happen whatever happened.

The manufacturing capability we have is a really good capability.

But we see some, let's say, marginal investments to make.

We're not talking about building new fabs or anything like that.

It's all about marginal increases to capacity that could drive an outsized return to us in terms of profitability.

I guess I'm not going to get into when are we going to hit the midpoint of the range.

I think you'll find the Analyst Day very, very helpful.

But we'll be pushing very, very hard to move forward as quickly as we can.

And I think, Rick mentioned earlier on that if anything over the last 2 years, the only thing that's been a little bit of a challenge for us is, at the margin, you have a slightly different view of the portfolio when you're going to be part of this huge juggernaut powerhouse company than you do as a pretty sizable $10 billion company.

But I certainly would not characterize things as being poor or weaker.

I think we've been running full out, and things are only going to get better.

I guess, we talk about the manufacturing capacity and really investing in internal capacity to drive our gross margins.

One of the things that's even included in our CapEx now is we're doing a significant expansion in our SSMC joint venture in Singapore, where we have a joint venture with TSMC.

And we're significantly increasing the capacity in that facility, and that's comprehended in the CapEx where we are.

What we're talking about is the potential to continue to expand that and be able to drive some of the unique solutions and unique processing capabilities that we have to be able to meet our customer requirements and taking a little bit of our breakup fee and driving that investment to really ensure expansion of our gross margins and ability to drive that.

That's a key priority for us and one that we think a good return for our shareholders.

Yes, 1% of additional CapEx is for $100 million.

Peter, though, just one thing that stands out from these numbers is OpEx.

OpEx is up high single digits on basically similar revenues from a year ago.

How do we think about the outlook for OpEx?

And specifically R&D, which, for several quarters, was running at about $350 million plus or minus and now is creeping closer to $400 million.

Do you expect -- does R&D start to come down?

Or do you sort of maintain these levels and generate leverage by growing the top line?

I think it's 2 things.

We're up about -- if you do it in dollars, we're up about $50 million, 5-0, year-on-year.

Half of that is currency, and half of that is in kind of investment.

You can get -- again, you can get a bit hung up on the quarters.

But if you look at it on an annual basis, what you say is true.

Our R&D has crept up, and it's really a reflection of kind of how we were viewing the portfolio as being part of Qualcomm.

But we intend to absolutely get back to within our range and stay within that strategic range.

And we think we can drive quite lot of value by doing that.

And on some years, we'll be closer to the top of the range.

On other years, we'll be maybe more closer to the bottom of the range.

Yes, but I guess it's -- we should -- do not let your statement go without at least responding to that.

You said on flat revenue.

Actually, the revenue in HPMS is up 5% year-over-year.

So while our R&D has grown a little faster than revenue with some of the strategic investments we're making, it's not like all of that OpEx is based on flat revenue.

We are up 5%.

And if you look out in the future, we think we'll continue to outgrow the market.

So I don't -- we will go through in the September Analyst Day a lot more detail on our target models and where we are, but we're not backing off our total target relative to R&D.

But we are making the strategic investments to be able to ensure that we solidify the stronger growth going forward in the near term.

Our next question is from Vijay Rakesh with Mizuho.

You guys look like the Phoenix.

You're back.

Just a couple of quick questions...

Hopefully, not rising from the ashes.

That's right.

On the automotive side, as you talked about sensor fusion, just wondering, are you guys looking at LiDAR also?

Do you already have it in your portfolio?

How do you see that -- building that out?

Yes.

So when you think about LiDAR, we are the processing capability for a number of the LiDAR solutions that are in the marketplace.

So we play a significant role in providing the specific LiDAR technology.

When you think about safer driving, it's not about any individual solution.

You need to really have a complete solution that includes RADAR, includes LiDAR potentially, depending on how advanced RADAR gets.

All have -- so it has to include vision.

And all of those will provide -- we don't have the sensor capability far built in.

We're making the investments.

Because of the size of those and the uncertainty in some of those technologies, we'll provide the processing capability to be able to facilitate that.

And when you look at solution to really be able to drive safer driving, we provide the backbone for the bulk of that and the ability to really be a significant participant in driving those solutions as we go forward.

Got it.

And just on the automotive side, I think you guys mentioned EV.

Just wondering how much content you have on the EV side.

And also, SII has been lumpy.

But as you go to 5G, what's the step-up in content you get from -- in 5G versus 4G?

So the -- I got distracted.

Did you talk about SII?

Could you just repeat the question just before that again?

Because I was focused on that until you started talking about 5G.

Sorry.

Yes, sure.

I was also asking on the EV side, the electric vehicle side.

Just wondering if you had content there.

Yes.

So I guess over the last couple of years, we spent a lot of time really looking at the opportunities that we saw in EV.

We -- if you look at our analog portfolio, where we have really a very strong position, we think that we'll address about 40% of the electric vehicle total TAM our served market.

And so I think we're in a really strong position to be able to expand that.

That's much broader, much higher percentage than what we're planning on 2.5 or 3 years ago as we talked about.

And specifically, as you look at the growth in e-vehicle -- electric vehicles in China, I think we're really in a good position to be able to support that and take advantage of that marketplace growth.

On the SII, 5G, we're not in the best position to talk about the 5G rollout.

I do think that when we look at our portfolio and some of the massive MIMO capability that we have, the MIMO that's kind of an interim step as you're moving to 5G, we have some solutions that will be a contributing factor to growth.

The question is when that will be deployed, whether it's months or quarters, and just how much overall impact it will have.

But I think it will be a contributing factor to be able to drive the growth going forward.

Our next question comes from Harlan Sur with JPMorgan.

Just a follow-up on the 5G question.

You guys obviously have a great position with your RF Power portfolio.

How does the Digital Networking portfolio stack up as the industry moves to 5G?

It's still a pretty big part of the mix.

Is this segment more sort of in cash, call it, kind of harvest mode?

Or does the team have some traction here for the 5G interface transition?

So I think if you look at DN, DN is -- we've seen a pretty significant shift, except especially in the network processing areas.

A lot of those customers have moved that fundamental processing capability internally.

We still are driving multi-core arm solutions with some limited portion of the portfolio for those customers, but it's not broad base that it was 5 or 6 years ago.

So that's one of the reasons that we're spending quite a bit of time looking at our network processing area and DN, and frankly, looking at the capability.

We are seeing some significant opportunities in automotive, where they're basically taking a network architecture and applying that to the car.

And some of the technology we have there really positions us well to be able to provide a leadership technology in providing that communications hub, if you will, in the car, which is a real opportunity to use our fundamental technology.

On 5G per se, on the DN, I don't think that it's really going to be a significant factor in driving huge growth for us, but we will be a participant.

We do have some technology that allows us some software upgrades in the network processor that really opens up market opportunities for us.

But we have to prove the size of those and what a significant -- and how significant that will be in our growth in the specific area before.

Rick, and then macro dimensions appear quite healthy, I mean, industrial trends especially.

Industrial production appears to be quite strong.

Consumer demand appears fairly healthy.

Can you guys just talk about the breadth of the demands geographically?

I know you track ship to trends, but I think even that would be helpful.

Just trying to get a sense of how diversified the demand profile is.

The demand is broad-based industrial across the board.

China represents -- half of our shipments are going to China, and the continued strength in China continues to be very solid.

But our -- the broad base of our product applications really covers all the areas from consumer goods through to industrial applications associated with it, and we see strength in all of those areas.

And for example, our micro area, where double-digit growth has been very consistent, probably would have been even stronger if we would have the manufacturing capacity in place to be able to prove it.

(Operator Instructions) And our next question is from Mark Lipacis with Jefferies.

Rick, on the Kinetis business, just to go back to that for a second, the -- that was -- that really seemed to be a growth engine for you, and you've been bit in the last couple of quarters with the supply challenges.

You say you're trying to bring some supply online.

Could you give us some more color on that?

I'm trying to understand to what extent that's in your control.

Or are you kind of looking to your foundry suppliers to ramp up there or alleviate the pressure?

Any color there would be helpful.

Yes.

It's a 90-nanometer special process -- proprietary process that we have outsourced to our foundry partner that has not been able to bring on capacity at the same rate that our customer orders have come in.

They've actually stepped up their capacity now, where we think late this year going into early next year, we'll be in a position to basically replenish our inventories that we've drained in that area.

So it's been a limiting factor to our growth, but we still have strong growth in micros even with that.

And so our growth would have just been even stronger if we would have that manufacturing capacity with our foundry partner to have been able to support all of our customer demands.

The design wins we have in that area and the capability to continue to drive that, we feel very positive about.

That's helpful.

And Peter, a couple of housekeeping things.

You mentioned -- I didn't catch it, but I think you mentioned your expected leverage ratio.

If you could repeat that.

And then the net cash you're going to get after -- when you receive the breakup fee, I didn't catch that.

Yes, yes.

So it will be subject to that's -- full Dutch tax rate of 25%, so it will be about $1.5 billion after tax.

We've already received the funds from Qualcomm, so they wired that to us this morning.

Leverage at the end of the year, assuming we buy back the $4 billion, $5 billion, it would be $1.5 billion, and we'd be back below $1 billion at the end of 2019 pretty easily.

And I'm not showing any further questions in the queue -- I'm sorry, there is [Danny Farber] from Hudson Bay.

It's actually Aaron Rickles from Hudson Bay.

Just a quick follow-up to that most recent question.

I believe your slide show references at 2x leverage target.

And I assume you'll talk about this more at your Analyst Day, which we're excited for.

But can you give us a sense when you think about end of '19 at onetime levered with a longer-term target of 2?

How are you thinking about your cap structure?

Are you able to incur more debt?

Would you do additional buybacks through '19?

How quickly do want to get to that 2x levered?

It depends on what the opportunities are.

I think what it says is we have a really flexible balance sheet.

And depending on the circumstances, we could -- first of all, any excess cash, we will return to shareholders, so that would either be through buyback or a dividend or whatever.

But it gives us a lot of flexibility for M&A should that prove to be a valid opportunity given the comments Rick made before.

What do you think about minimum cash balances when you think about excess cash?

$1 billion.

$1 billion?

$1 billion, assuming $250 million is -- of that billion is actually in SSMC or joint venture with TSMC out in Singapore, so I think in the $1 billion, yes.

And this concludes our Q&A for today.

I will turn the call back to Rick Clemmer for his final remarks.

Thank you, operator.

So thanks a lot for joining us today.

It's frankly good to be back.

We look at the opportunities we've got going forward, and we are very excited about the opportunity to continue to outgrow the market and drive significant shareholder value.

So we look forward to seeing you all on September 11 in New York City for our Analyst Day and be happy to go into more detail at that point in time about the significant market opportunities and where our solutions really make a difference for our customers in being able to drive growth.

Thanks a lot.

Thank you, operator.

Thank you, everyone, for joining the call today.

Take care.

Thank you, everyone, for participating in today's conference.

This concludes the program, and you may all disconnect.