NXP Semiconductors Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2021

There are 12 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to NXT 2Q 'twenty one Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised, today's call is being recorded.

Operator

I would now like to hand the conference over to your speaker today, Mr. Jeff Palmer, Senior Vice President of Investor Relations, please go ahead, sir.

Speaker 1

Thank you, Crystal, and good morning, everyone. Welcome to the NXP Semiconductor's 2nd quarter 2021 earnings call. With me on the call today is Curt Sievers, NXP's President and CEO and Peter Kelly, our CFO. The call today is being recorded and will be available for replay from our corporate website. Today's call will include forward looking These risks and uncertainties include, but are not limited to, statements regarding the continued impact of the COVID-nineteen pandemic On our business, the macroeconomic impact on specific end markets in which we operate, the sale of new and existing products and our expectations for the financial results for the Q3 of 2021.

Speaker 1

Please be reminded that NXP undertakes no obligation to revise or update publicly any forward looking statements. For a For a full disclosure on forward looking statements, please refer to our press release. Additionally, we will refer to certain non GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance. Pursuant to Regulation G, NXP has provided reconciliations of the non GAAP financial measures to the most directly comparable GAAP measures in our Q2 Earnings press release, which will be furnished to the SEC on Form 8 ks and available on NXP's website in the Investor Relations section at nxp.com. Before we start the call today, I'd like to highlight our upcoming 2021 Analyst Day.

Speaker 1

At this time, we are planning on hosting an in person event in New York City On Thursday, November 11, 2021, we will open up an online registration site over the next week and we would suggest Interested parties to pre register as space will be limited this cycle. I'd like to now turn the call over to Kurt.

Speaker 2

Yes. Thank you very much, Jeff, and good morning, everyone. We really appreciate you joining our call today. I will review our quarter 2 results and I will discuss our guidance for quarter 3. Furthermore, I will provide an updated perspective on how we view the current demand environment.

Speaker 2

Now let me start with quarter 2. Overall, our results We're better than the midpoint of our guidance with the contribution from the communication infrastructure end market stronger than planned And above the high end of our guidance. At the same time, the trends in the auto, industrial and mobile markets We are all slightly above the midpoint of our guidance. Taken together, NXP delivered quarter 2 revenue of $2,600,000,000 An increase of 43% year on year and $26,000,000 above the midpoint of our guidance range. These are very good results given the constrained supply position we knew we would face entering the quarter.

Speaker 2

Our non GAAP operating margin in quarter 2 was a strong 32%, 11.30 basis points better than the year ago period and 70 basis points above the midpoint of our guidance. Our strong operating profit performance was driven by a richer product mix. Now let me turn to the specific trends in our Focus end markets. In Automotive, Quarter 2 revenue was $1,260,000,000 up 87% versus the year ago period And slightly above the midpoint of our guidance. In Industrial and IoT, quarter 2 revenue was 571,000,000 up 31% versus the year ago period and slightly above the midpoint of our guidance.

Speaker 2

In mobile, quarter 2 revenue was $347,000,000 up 36% versus the year ago period And slightly above the midpoint of our guidance. And lastly, in Communication Infrastructure and Other, Quarter 2 revenue was $416,000,000 down 8% year on year. However, about $21,000,000 better than our guidance. With this, let me move to our outlook. We are guiding the midpoint of quarter 3 revenue To $2,850,000,000 up 26% versus the Q3 of 2020, Within the range of up 22% to up 29% year on year.

Speaker 2

From a sequential perspective, this is up 10% at the midpoint versus the prior quarter. At the midpoint of this range, we anticipate the following trends in our business. Automotive is expected to be up in the low 50% range versus quarter 3 2020 and up in the mid teens range versus quarter 2 'twenty one. Industrial and IoT is Mobile is expected to be down in the low single digit range year on year and down in the mid single digit range versus quarter 2 21. And finally, Communication Infrastructure and Other is expected to be up In the low single digit range versus the same period a year ago and up about 10% on a sequential basis.

Speaker 2

At this point, let me give you an update on NXP's current demand position. As I shared with you on our last earnings call, we had anticipated product supply to be a challenge in quarter 2 And this is indeed what we experienced. With the continuation of robust demand, we expect supply to be a challenge for the foreseeable future. We do continue to work very closely with our customers on a day to day basis to accommodate their most pressing short term requirements. During quarter 2, based on the orders And all of the various actions we took over the last 6 to 9 months, we began to see wafer supply from our foundry partners and internal fabs Improve.

Speaker 2

We do anticipate continued increase of wafer supply during quarter 3 and beyond, which will support our revenue growth in subsequent quarters. However, with customer demand outstripping current supply, A situation that we see across all our end markets, we are working diligently to secure additional supply to achieve a healthy balance of demand versus supply. A significant number of our customers are also taking action by placing non cancelable and non returnable orders for the medium term. Furthermore, based on customer discussions And also based on our own analysis, we do not believe there is excess inventory of NXP components along the extended supply chain. Additionally, we continue to make significant investments as a direct result of the very detailed conversations and associated These investments include long term contractual commitments to our front end foundry partners in order to assure supply As well as making investments to expand our internal front end capacity and our internal back end test and assembly capabilities So as to avoid potential bottlenecks as wafer supply materializes.

Speaker 2

Notwithstanding this challenging supply environment, our results and guidance clearly validate the excellent underlying long term growth, Profitability and cash generating capability of our business. We continue to see our company specific Key revenue growth drivers in our strategic end markets unfold as we have long anticipated. These drivers include our 77 gigahertz radar systems, our e cockpit solutions, the domain and sonar processes And electrification products including our battery management systems all in the automotive market. And within the broad based industrial and IoT market, our significant and focused investments to enable complete, Secure connected edge processing solutions are being very well validated by strong customer design win awards. And these are just a few of the opportunities we have shared with you at our product teach ins.

Speaker 2

All of them will continue to contribute to our future growth. Weibo will not provide specific guidance beyond the current quarter. We do anticipate quarter 4 revenue will be greater than quarter 3 on an absolute basis. And we are highly confident that 2021 Mark's just the beginning of a longer term upcycle for NXP within our strategic end market. In summary, we are very encouraged by the continued and consistent rapid rebound in demand across our end markets.

Speaker 2

Our employees are highly engaged to drive our success. We have a robust pipeline of new and innovative products And the customer response, engagement and design win momentum all underpin our optimism about the future potential of NXP. Before concluding my prepared remarks, I would like to speak to the impact the COVID-nineteen pandemic Continues to have on NXP. The pandemic remains active with spikes that continue to plague multiple regions Where we have operations, namely India in the Q2 and Southeast Asia most recently. We continue to remain very vigilant in forcing our safety protocols across all of our global sites.

Speaker 2

We have initiated successful vaccination drives in several countries for our team members and their families. However, the highly contagious Delta variant has required that we revert to a complete work from home situation in several of our locations. I am extremely proud of all our employees For their dedication and for their resilience during this very challenging period. I would like to especially commend our manufacturing operations and customer facing teams for their relentless focus and energy on assuring our customer success. It is their dedication and their hard work in the face of the pandemic and a very challenging supply environment at the same time, which truly make a difference.

Speaker 2

Now I would like to pass the call over to you, Peter, for a review of our financial performance. Peter?

Speaker 3

Thanks, Kurt, and good morning to everyone on today's call. As Kurt already covered the drivers of the During the Q2 and provided our revenue outlook for the Q3, I'll move to the financial highlights. Overall, our Q2 financial performance was very good. Revenues were above the midpoint of our guidance range And we drove an improvement of non GAAP gross profit and non GAAP operating profit, both of which were above the high end of our guidance Additionally, we have implemented long term supply agreements with our foundry partners, which we believe will enable NXP to deliver robust growth the coming periods. Now moving to the details of the Q2, total revenue was $2,600,000,000 And reported a non GAAP gross margin of 56.1 percent, up 700 basis points year on year and above the high end of our guidance.

Speaker 3

Total non GAAP operating expenses were $626,000,000 up $110,000,000 year on year And up $26,000,000 from the 2nd quarter. This was $3,000,000 above the midpoint of our guidance due to increased variable comp driven by an improved first half performance. From a total operating profit perspective, non GAAP operating profit was 830,000,000 Our non GAAP operating margin was 32%, up 11.30 basis points year on year and was above the high end of our guidance. Non GAAP interest expense was $91,000,000 $4,000,000 above guidance as we issued $2,000,000,000 of new debt Early in the quarter, cash taxes for ongoing operations were $50,000,000 and non controlling interest was 9,000,000 Taken together, the below the line items were $1,000,000 Stock based compensation, which is not included in our non GAAP earnings, was $93,000,000 Now I'd like to turn to the changes in our cash and debt. Our total debt at the end of the second quarter was $9,590,000,000 an increase of $1,980,000,000 due to the previously mentioned debt issuance.

Speaker 3

Our ending cash position was 2.91 $1,000,000,000 up $1,070,000,000 sequentially due to new debt and cash generation, offset by capital returns during The resulting net debt was $6,680,000,000 and we exited the quarter with a trailing 12 month adjusted EBITDA of $3,550,000,000 Our ratio of net debt to trailing 12 month adjusted EBITDA at the end of Q2 Was 1.9 times and our 12 month adjusted EBITDA interest coverage was 10 times. Our liquidity is excellent and our balance sheet continues to be very During the Q2, we repurchased $1,200,000,000 of our shares and paid $155,000,000 in cash For a total of $1,360,000,000 of capital returned to our owners. Subsequent to the end of the second quarter, between July 5 August 2, we repurchased an additional $1,000,000,000 of our shares via a 10b5-1 program resulting in a total of $3,370,000,000 returned to our owners year to date. Turning to working capital metrics, days of inventory was 88 days, an increase of 7 days Sequentially, our DIO continues to be below our long term target of 95 days and the sequential increase in the quarter was due to an increase In work in process driven by wafer supplies wafer supply deliveries to support our Q3 revenue ramp, while finished Goods continue to drain to very low levels.

Speaker 3

We continue to closely manage our distribution channel With inventory in the channel at 1.6 months, flat sequentially and below our long term targets. Both metrics reflect the continuation of strong customer order rates and a tight supply environment. It will Take several quarters before we're able to rebuild on hand inventory and on hand and channel inventories to our long term target Days receivables were 35 days and 5 days sequentially and days payable were 92, an increase of 13 days versus the prior quarter as we continue to increase material orders to our suppliers. Taken together, our Solid receivable collections and positioning for customer deliveries in future periods. Cash flow from operations was $636,000,000 and net CapEx was 150,000,000 Expectations for the Q3.

Speaker 3

As Curt mentioned, we anticipate Q3 revenue to be $2,850,000,000 plus or minus 75,000,000 At the midpoint, this is up 26% year on year and 10% sequentially. We expect non GAAP gross margin to be about 50 6.3 percent plus or minus 30 basis points. Operating expenses are expected to be about $665,000,000 plus or minus about $10,000,000 consistent with our long term model. Taken together, we see non GAAP operating We estimate non GAAP financial expense to be about $96,000,000 and anticipate cash tax related to ongoing operations to be about $90,000,000 Please note during the Q2 We indicated that we anticipated full year cash taxes for 2021 to be approximately 9% and then it would be back end loaded into the second half of the year. Non controlling interest will be about $9,000,000 And for Q3, we suggest that for modeling purposes, You use an average share count of 271,000,000 shares, which is Down about 13,000,000 shares from the year ago period as a result of the consistent execution of our communicated capital return policy.

Speaker 3

Finally, I have a few closing comments I'd like to make. 1, demand trends continue to be strong across our target end markets and customer interest in our numerous products continues to We are diligently working with our customers and our suppliers to address order requests in a timely manner. Secondly, our Q3 guidance reflects the clear potential of our business model, both in terms of revenue growth Thirdly, our business continues to generate significant free cash flow. We continue to invest in our internal manufacturing capabilities, increasing CapEx to expand our back end capacity, but also to increase the output capacity of our existing front end wafer We are steadfastly committed to our capital return policy and will return all excess cash free all Excess free cash flow to our owners so long as our leverage ratio remains at or below 2 times net debt to trailing 12 month adjusted EBITDA. As Curt mentioned, we believe the demand environment is strong and notwithstanding the supply We continue to anticipate robust growth for the remainder of 2021 as well as into 2022.

Speaker 3

Finally, I'd like to thank all my colleagues for their outstanding work and dedication. We shouldn't forget that we are all still working on the stringent pandemic I'd like to now turn it back to the operator for your questions.

Operator

Please stand by while compile the hearing roster. Your first question comes from the line of C. J. Muse from Evercore. Your line is open.

Speaker 4

J. Muse:]

Speaker 5

Yes, good morning. Thank you for taking the question. I guess first question for you, Kurt. I was hoping you could speak more about the current state of the auto industry. I think there's a fear among some investors that the current auto run rate is closer to peak than trough.

Speaker 5

And we'd love to hear your thoughts. What gives you confidence that strength is sustainable into 'twenty two and beyond?

Speaker 2

Yes. Hi, good morning, it's CJ. We are clearly convinced that we are far away from a peak, especially in the auto end market. The way to look at this is clearly that while the SAAR this year probably is going to grow around 10%, That's the latest data point we have from IHS. There is broad consensus that it's going to grow another around 10% next year And only then it will actually surpass the absolute volumes levels from the pre pandemic year of 2019.

Speaker 2

But more importantly, CJ, as we've discussed many times in the past, our Content gains and I mentioned a few in my prepared remarks like radar e cockpit, sonal processes and the battery management and electrification Really, really drive specific strength and growth for NXP. And from a market perspective, I'd say that The content gains in general maybe are accelerating a little, especially thanks to the accelerated pace to XEVs. So we do see that the number of XEVs as a portion of the total car production is growing faster than anybody had anticipated. So The latest data we see, again, I'm quoting, I think, IHS here, it was like 12% of the total car production last year Dedicated for XEVs, it's going to be more like a quarter next year and then growing fast from there further onwards. Since XEVs have a significantly higher silicon content compared to traditional combustion engine vehicles, This is another strong driver for the auto market.

Speaker 2

So far away from a peak. And finally, very tactically, because I know everybody Wants to speak and wants to hear about that. I mean, trust me, I'm in daily contact with the CEOs of the both the Tier 1 Customers of us which are serving the car companies and the car companies themselves on a daily level trying to make Sure that we can fulfill their most pressing needs, really handholding shipments day in, day out. So there is not a single piece of inventory anywhere in the extended supply chain. They want to build more cars, so I have any confidence that this keeps growing.

Speaker 5

That's very helpful. Thank you. I guess as a follow-up, Peter, Gross margins, stellar. I think reading your 10 Q, you talked about the benefit of increased loadings, but that mix It was not helpful and that you had higher personnel costs. How are you thinking about, I guess, COVID related costs Unwinding, what kind of impact that would have on a positive side?

Speaker 5

And from current levels, how should we be thinking about Uplift from here as presumably loadings continue to move higher?

Speaker 3

I think the So first of all, on the COVID test in terms in the context of our gross margin, I think, to be honest, I think the costs are relatively Hello. We've been running our factories pretty much the same way we haven't in the past. I mean, obviously, you've got the cost of just disinfecting the factory more often. We've been paying For lots of kind of medical support, but I'm not sure it's big enough to really influence the margin. I think in terms of the additional utilization, you've seen the benefit of that As we go from Q2 to Q3, so our guidance at 56.3% in Q3 It really shows our gross margin when our factories run them full out.

Speaker 3

So as we kind of Expand our revenue and go into 2022, you won't see increased utilization because we actually have to add capacity. We're running pretty much full out in Q3. So I still think 56 is, I think, is a great number for us and we've gotten there quicker than we thought we would do. And I think the unanswered question is still 57 Still a couple of years away and is more around new product introduction. Mix helped us from Q2 into In sort of Q1 into Q2, and that's why we did a little bit better in Q2.

Speaker 3

But the big impact from Q2 to Q3 Q3 is really the additional utilization and being able to run our factories, particularly the back ends for that.

Speaker 5

Very helpful. Thank you.

Operator

Your next question comes from the line of Vivek Arya from Bank of America. Please go ahead.

Speaker 6

Thank you for taking my questions. On the first one, Kurt, specific to autos, when do you think supply This is enough to meet demand. And importantly, what should investors look to be reassured that the industry supply response will be disciplined? So for example, if we see headlines around any specific foundry increasing microcontroller production significantly, how should we So I appreciate that you mentioned that you are in daily touch with customers and there isn't any inventory today. But as you also mentioned, the industry is increasing supply.

Speaker 6

So how should we be assured that the supplier response is not going to overwhelm demand at some point?

Speaker 2

Yes. Hi, Wiebe. Good morning. Of course, we are watching this as always in through every cycle very, very carefully. But again, I want to reassure you, I think we really are quite far away from this because at this point, and I mean, you can read the headlines every day, The industry is still short from a supply perspective.

Speaker 2

And when you are referring to some foundry statements about 60% increase of microcontroller shipments. That isn't that much. I mean, our I think our auto supply or revenue In the first and second quarter taken together, it's also around 50% up over the last year. And that's also what the industry takes, Given the record lows of last year, so last year is not a good comparison. I think it's more meaningful to benchmark back to 2019 or even 2018 When the industry was more at peak levels from a car production perspective.

Speaker 2

So how do we check this? I mean, I would really say most of our product is very application specific. So we are in extremely close contact. And that is new not only with the Tier 1 suppliers, but also directly with the OEMs The product is going. So we have a very, very good visibility in the meantime on the true demand, much more than ever before in history.

Speaker 2

And if you think about the portion which goes through distribution, we, as always, continue to be super disciplined On the months of inventory with our distributors and as we've published, we again stayed as a On a really low number with 1.6 months, I mean, that's not the same number we had a quarter before, but you know that our target model is more around 2.4 or 2.5. So, we watch it very carefully. Given the supply situation, I think the transparency has significantly increased, Especially in what we are serving, which is very application specific product. I could imagine the whole question you are asking is certainly for more commodity like products, More difficult. In our case, where it is so crisp and clear which product goes where, into what application, at which car company, We have much less of a concern on this.

Speaker 2

And given that visibility, I'm very confident that we are still Quite a bit away from the situation you're describing.

Speaker 6

Got it. Very helpful. And then for my follow-up, I'm curious why your mobile Sales, if I heard correctly, would be down sequentially and then also year on year because isn't Q3 supposed to be a seasonally stronger Quarter for shipments into that market and are we to assume that mobile sales will stay subdued even into Q4, so just why are mobile sales not behaving kind of in line with the usual seasonal pattern we See, in that industry? Thank you.

Speaker 2

Yes. Vivek, I'd say in general, there isn't much of a seasonal pattern this year anyway, given the situation. But Here specifically, yes, you are right. We are guiding sequentially and also annually a little bit down. It really has to do with the supply constraints.

Speaker 2

So we have a supply constraint for some products in the mobile market, Which we know we will address later on. So this is just of a temporary nature. But for Q3, it just hit us That we can ship to the amount which we want to ship. The good news is it doesn't cost us any market share. So we don't lose any socket with this.

Speaker 2

We fully Keep our momentum going, and it's of a temporary nature. If you do the annual comparison, I also might want to remind you that last Year Q3 was a bit of a special quarter in mobile because it was the last quarter before the Huawei ban, Which actually benefited quarter 3 in our mobile business since people had a bit more in Q3 than since it stopped totally in quarter 4. So that's the simple background, no more.

Speaker 6

Got it. Thanks very much.

Operator

Thank you. Your next question comes from the line of Stacy Rasgon from Bernstein Research. Your line is open.

Speaker 7

Hi, guys. Thanks for taking my questions. For my first question, I wanted to double click once again on the content increase in auto. I mean,

Speaker 4

you called out EVs specifically.

Speaker 7

I guess, Typically, I guess, a couple of things. Can you tell us how much of your auto business is being driven by EV today? I guess of those content specific drivers, which one do you think is the biggest driver in the near term? And how much of The lift in the next quarter, do you think is being driven just by end market unit growth versus like content increase, like because you're selling into higher content vehicles?

Speaker 2

Yes, Stacy. In general, our key driver for revenue growth in XEVs It's clearly the battery management solutions, which have a fantastic exposure. I think in our investor teaching, We told you that we would have a 60% CAGR over the next couple of years. And I can absolutely reconfirm here that we are At least, if not more than on track with that trend in Battery Management Solutions. Now if you take it a little bit wider, It is actually more because a lot of our microcontrollers and other products are also very strongly exposed to the Increased content of ex EVs.

Speaker 2

We will actually go in a bit more detail on that particular Stacy, in our Investor Day, which Jeff has just highlighted, November 11, to parse it a little bit more in a more detailed way on how this shows up. But overall, just take it for granted that the double silicon content of a XEV versus a conventional drivetrain gives a significant benefit also to NXP. So we are significantly benefiting from a higher rate of ex EVs, which is a strong push for our content growth story here.

Speaker 7

Got it. Thank you. For my follow-up, I want to ask about the cash returns. So you bought back a lot of stock. I think as of March, You're up the buyback, you had something like $2,600,000,000 in authorization and you're through like $2,200,000,000 of it now.

Speaker 1

So you're almost through the whole authorization.

Speaker 7

But you're still guiding share counts down. So I guess, do we expect even more? Are you going to return more than 100% this year? And I guess, Just given the strength of the buyback as it exists, can you talk a little bit about what that suggests? I suppose it Shows that you have I guess it reinforces that confidence you're talking about growth in the next year.

Speaker 7

But I guess long as Richard, why are you buying back so much Stock right now and or should we expect even more cash return as

Speaker 1

we go through the rest of the year since seems like you're mostly through the buyback as of date?

Speaker 3

So maybe I'll take that, Kurt. So I guess the answer to your second or third question there is, We have a lot of confidence in terms of where the company is going. So clearly, we think buying our stock at the moment is a good In terms of how much, it's really quite simple. We've said all along, we'll keep Our net debt to trailing 12 months EBITDA at 2 times the 2 times level. So we buy back to that level all that time and we'll continue to do that for the foreseeable future.

Speaker 3

And if that results in us buying more if that results in us returning more than 100% this year, that's what the result is. But to be honest, it's pretty We just stay at 2 times net debt.

Speaker 7

Got it. That's helpful. Thank you guys.

Operator

Your next question comes from the line of Ross Seymore from Deutsche Bank. Your line is open.

Speaker 8

Hi, guys. Thanks for letting me ask a question. I had one clarification and one question and then a follow-up if I can be

Speaker 2

So bold. But

Speaker 8

have you guys shipped the $90,000,000 in shortages out of Texas? Did you catch up on all of that in automotive or where have you? That's the clarification. And then guess the longer term question maybe for Kurt on the auto side is, are you seeing the customers change their behavior at all? The just in time Practices that that sector has adopted seemingly have backfired on them a bit with the velocity of demand recently.

Speaker 8

Are you any of the conversations you're having highlighting structural changes or is this all basically just short term reactive You don't think anything is really going to change a couple of years down the road for the industry as far as just in time?

Speaker 2

Yes. Thanks, Ross. On the first one, we talked indeed about $100,000,000 I think I remember, Which we lost for the Q2 revenue given the winter storm in our 2 Texas facilities. That is correct. What I can tell you is indeed that both factories are up and running completely.

Speaker 2

So we are up So the pre storm and higher output levels in both factories, so firing on all cylinders again. And with that, We have the output which we would have wished to have already in the first place. So that is good news, Both from a revenue perspective going forward because it is steady. I mean, this is not a one time effect, but it's steady output. But it's also good news from a supply perspective since Both factories had a significant exposure, as we discussed earlier, to automotive and the comms infrastructure market, which were badly waiting for these products.

Speaker 2

So we are glad and thankful to our employees to have restored operations in record time. On the other half of your question, Ross, I see signs of a structural change in the behavior Of the auto especially also of the auto end customers. And I think there are 2 pieces to this. The one is going to be indeed realizing that a just in time system Is not totally compatible with the 3 to 6 months manufacturing cycle time in semiconductors If you don't have some sort of a buffer in between which is dealing with it. So some more inventory in the extended supply chain, I think it's going to be a result of this.

Speaker 2

Now when you ask me is this being implemented, my answer is no. But it's just Because the supply is not there. I mean, at this point in time, people are planning for this at some point, but they can't First, the transparency which we get directly from the car companies. As I mentioned earlier, we've never had so much Clarity about what product in which application in which model gear will run at what volume. So this is becoming much, much better than it has ever been because structurally we are just moving much closer in a collaboration with the car companies.

Speaker 2

And I think with that also the binding forecast, so not only providing that forecast, but also making More binding on a mid- to long term basis is going to be a structural change, and that's a significant one because That wasn't the case in the past. So a more binding forecast will also help to foresee and plan with the right capacities on our end.

Speaker 8

Thanks for that color, Kurt. One quickly for you, Peter. You gave great color on the gross margin side of things. Another target you guys have given historically is the OpEx intensity. And I think it ranged anywhere between 20% to 24% as of your last analyst meeting.

Speaker 8

And I know you might be updating that later this year, but can you talk just a little bit about the leverage potential there? I think this year, it looks like you're running kind of within that target range, but The higher end, kind of 23%, 23.5%. Do you foresee some leverage getting to the lower end of that range? Or just generally how should we think of OpEx relative To revenue growth?

Speaker 3

I'd certainly for the moment, I think of 23% Revenue, 16% for R and D and 7% for SG and A. There's probably some leverage in the SG and A number because although we typically increase sales and marketing, G and A, we'd more likely to hold But I think certainly for the moment 23% is a good number

Speaker 8

to plan on. Thank you.

Operator

Thank you. Your next question comes from the line of John Pitzer from Credit Suisse. Your line is

Speaker 9

open. Yes. Good morning, guys. Thanks for letting me ask the question. Congratulations on all results.

Speaker 9

Kurt, I wanted to ask a little bit about your comms Infrastructure business, which came in much better than guide for the June quarter and is going to grow nicely in the September quarter. I know that Pre the Huawei band, you were very excited by some design wins you had won there, but clearly had to kind of temper expectations with the band. But it seems like You guys might be more levered to the 5 gs cycle than some of us think. Can you just walk through kind of what you think is driving that growth, especially given How good the margin can be in that business?

Speaker 2

Yes. So John, Indeed. We did talk last year about significant design win traction Around the large Chinese customer, which did fall apart. So indeed, this is still not there. I just want to be clear, The business which is now performing and which we guide for the next quarter is not related to this design win which we had talked about last year.

Speaker 2

The outperformance in the Q2 is actually across the segment. It does include some of the 5 gs build outs, But it's just across all of the product subsegments which are in this revenue segment. So it is not only 5 gs, But it does include 5 gs. Now if you think about the nice guidance for the Q3 in Comms Intra, Then I'd say yes, indeed. As we had anticipated and actually I think discussed on a number of the last calls, we do see, I'd say 2 trends around 5 gs, which are letting us grow.

Speaker 2

We see the anticipated ramps For these multi technology modules in the U. S, so multi technology means LD MODS and gallium nitride or our new From our new gallium nitride, both technology products and facility in Arizona. But it's also that we are nicely included in the China CP3 tenders, which are those macro base stations for the rural areas, Which are actually in a frequency range sub 2.1 gigahertz, so somewhere between I think 700 megahertz and 2.1 gigahertz, Which is a just perfect fit to our LD MOS capability and leadership. So it is those 2, John, From a go forward basis, when you think about Q3 and beyond, which are indeed driving nicely our growth, the U. S.

Speaker 2

Multi technology modules for 5 gs and those CP3 tenders in China.

Speaker 9

That's really good color, Kurt. And then Peter, in your prepared Comments, you talked about the high class problem of needing to expand both front end and back end capacity. Is that mostly being done with Outsource partners, so it's more of a working capital hit than a CapEx hit? Or how do we think about CapEx over the next several quarters As you continue to try to make supply catch up to demand?

Speaker 3

CapEx will be about 7% this year. So yes, it will step up a bit in Q3, Q4. Mainly, there's a lot of assembly and test going in there, but also Some bottleneck busting in our actual fabs. So CapEx will be up. I don't see working capital going up anytime really.

Speaker 3

I mean, it's we definitely like more inventory if we To get it, but as fast as we get it, we tend to build it, which is the comment I had around finished goods being at an all We do have a bit more raw material and work in progress from Shipments from the foundries towards the end of the quarter that we received. So I guess stepping back, we're definitely investing more in Internal capacity and that will that will have a positive impact on us next year. We continue to work very hard with our other suppliers just to get additional supply from them. But as fast as we get it, we build it and ship it to customers. So I don't really see our inventory levels getting anything back

Operator

Your next question comes from the line of William Stein from Trust Securities. Your line is open.

Speaker 10

Great. Thanks for taking my questions. And I'll add my congratulations, especially on the guide, very strong. I'm wondering if you can remind us as sort of A clarification. The breakout within the common infrastructure business, I think we tend to think about this as largely or All are power amplifiers, but I know there's digital networking and I think there's still some ID card business in there as well.

Speaker 10

Can you remind us of the split and Maybe how you expect the 3 of those pieces to grow over time?

Speaker 2

So hi, Will. Thanks For your congrats on the guidance. The subset is indeed, as you said, The RF power for infrastructure, it is about digital networking and there is some secure cards business also in there. We will not break out the details between them, Bill. So but what I can say, and I think I mentioned it earlier, The outperformance in the Q2 was across all of them.

Speaker 2

So it wasn't limited to one of these sub segments, but it was actually across all of them. When you think about the guides and the growth into the Q3, it is probably led By the 5 gs related comms infra RF power.

Speaker 10

Thanks for that. And one more, if I can, another Sort of product question. I forget when 1 or 2 years ago perhaps you started talking about the ultra wideband products And the growth that you anticipated seeing in handsets and automotive. And I'm wondering if you can provide some update in Your revenue traction in those two end markets for this product category and the outlooks for them today. Thank you.

Speaker 2

Yes, happy to do so, Will. This because it's really nicely on track, just to remind everybody that It's not just about product. This is a complete ecosystem play where indeed we offer The radio, the secure element and software for solutions across automotive, mobile and IoT. We are very much on track, Will, with I think what we said at the teach in to have some $300,000,000 to $400,000,000 revenue Across those segments in 'twenty three, so in only 2 years from now. As of today, I'd say mobile It's actually happening as we speak.

Speaker 2

If you think about the Android world, I dare to say, with all the Android phone companies, we are working very closely. Automotive is now closely following, And that was just a function of mobile because, obviously, the automotive use case of using your mobile as a car key Needs the phones to be in place firstly. This is now happening. So the first cars will be out in the market in the second half of this year And next year. And there, I dare to say, with a relatively high degree of certainty That any car company which is working in and on an ultra wideband implementation is working with NXP.

Speaker 2

So we are highly and very positively exposed here. Finally, we also see good traction with first IoT implementations. One of the early examples are those packs which help you to find stuff which you might have lost. But it also we also see nice design wins in door locks for home properties, for example, There you would then use your mobile phone to open your front door and unlock it. So very much on track, Will.

Speaker 2

Again, the numbers Which we had given were $300,000,000 to $400,000,000 revenue size for NXP in 2 years from now. And we think the market for this is growing at some forty Over the next couple of years.

Operator

Your next Question comes from the line of Toshiya Hai from Goldman Sachs. Your line is open.

Speaker 11

Hi, good morning. Thanks so much for taking the question. I just had One for Kurt or Peter. I wanted I was hoping you could elaborate a little bit on the LTSAs that you've already signed With foundry partners or perhaps you're looking to sign going forward, we read about price Chris, from the foundries, going forward, how should we think about the balance between cost inflation for you guys versus your ability To price higher as well going forward. And my guess is the 57% number that Peter you alluded to embeds some of those dynamics, but wanted to clarify that as well.

Speaker 11

Thank you.

Speaker 2

I'll let Peter answer, but I really want to make one upfront statement because that's It is important. Yes, input cost is rising. And yes, we pass on the cost increases. But this is not A tool for us to artificially increase margins. We are in a largely application specific And very trustful relation with our customers for years to come.

Speaker 2

So we do pass on the input cost Increases, but that's more of a mechanism here to structurally increase margins. Peter, you might want to give more color.

Speaker 3

I think you just answered the question really, Kurt. Yes, it's We are not a commodity company. We don't raise prices when time is tight and reduce them when times are not tight. What's been very interesting about this whole change is there's really been 2 big factors. One, Kurt was talking about before, which is it's enabling us to build deeper relationships with Our customers understand their requirements and their supply chains a lot better than we have in And in terms of our suppliers, you can without You can actually find out who are your true partners and who will support you in the years to come And who are the guys who were a little bit more predatory?

Speaker 3

But ours is a market and supply chain where It's really built on long term relationships and long term sources of supply, both for our customers And for ourselves and for a predictable level of pricing and profitability.

Operator

Your next question comes from the line of Chris Caso from Raymond James. Your line is open.

Speaker 10

Yes. Thank you. Good morning. A question on the capacity additions and the CapEx that you said was stepping Here, in the second half of the year, how for how long do you expect that to continue? I imagine that the equipment lead times are extended also, so you have to be giving your equipment suppliers some visibility on this.

Speaker 10

I guess the question is how long will you Do you need to continue adding capacity in order to get caught up with the level of demand right now?

Speaker 3

Well, I guess the very simple answer is we'll continue to need capacity for the foreseeable future Because we believe there's a really healthy cycle going on in terms of our products. One thing that's really come out in the last 6 months is that for those people outside the semiconductor industry, they've really begun to Understand that semis are a core part of everything we do. So to the extent that TDP grows over the next Few years, you will see semiconductors grow at probably a faster rate. I think the thing to remember with us about 70% to 80% of our assembly and test capacity is internal. So that will continue to be a kind A healthy source of capital requirements and I think it's about 50 7.58 percent of our wafer supply is external.

Speaker 3

We're not likely to ever build a new fab, but we're constantly updating the equipment we have there to keep them So I think in the past we've said through the cycle we'll spend 5% to 7% On CapEx, last year it was below 5. This year it will be at 7. We'll probably update a more longer term view at the Analyst Day in November. I'm sorry, you're breaking up.

Speaker 7

Sure. As that happens, who do

Speaker 10

you expect to bear the cost of that? That would be in the quarter being on the automakers' books, In terms of where is the cost of that?

Speaker 3

I apologize. I don't know if it was me, but I couldn't hear anything there. I don't know if you could hear what he said.

Speaker 2

I had the same problem. But I guess you were asking about Something of the cost of increased inventory?

Speaker 10

Yes. I'm sorry. I'm not sure what happened. But the question is, as the inventory as the automakers Ask for more security supplies and more inventory. Who bears the cost of that?

Speaker 10

Will that be inventory that the automakers will take possession of And pay for in advance, it would be some combination of just more inventory on the hub, who basically pays the cost of that?

Speaker 2

First, let me point out again, it's not something which happens to any extent today because the capability is not there. Once it will happen, it won't be us. I mean, it needs to be part of their business model. So it will have to be somewhere between Tier 1 suppliers, auto companies and maybe some distributors in some cases, That's more than our end. Got it.

Speaker 6

Thank you.

Operator

Your next question comes from the line of Blayne Curtis from Barclays. Your line is open.

Speaker 4

Hi, guys. Thanks for squeezing me in. I just wanted to revisit on Supply side, just the cadence that you're bringing it on. So when you the growth you're seeing in September, will you will inventory you have to ship out inventories or are you able to match that with Supply, just trying to understand the cadence you're bringing it in. And then you mentioned mobile, you kind of reprioritizing for a quarter.

Speaker 4

Is that just kind of a one off or are you There are other segments that even with this strong guidance September that you're having to prioritize away from them?

Speaker 2

Well, Blaine, we continue to be Constrained across the board. And of course, we need to take all the time certain priority decisions. And indeed, mobile is kind of suffering in the Q3. But everything is relatively short across the board. The additional supply coming online really gradual from many different sources.

Speaker 2

I mean, we talked about it. We have increasing traction with the mid and longer term contracts with our foundry suppliers. We have Texas fully up and running by now. We have, as Peter alluded to, invested both into Our internal test and assembly capability, but also looking at some expansions of our internal front end factory. So all of these things Cross the different technologies and products are happening gradually.

Speaker 2

So it's not a one time event. But I would say, with the demand being as strong as we continue to foresee it, it will remain tight for a while. But the one really suffering in Q3 is indeed mobile. Thanks. And then just want to ask

Speaker 4

you on the auto side, one Source of content gains always new model years that typically make seasonality in autos kind of have a March heavy. It seems like maybe you're seeing 22 model years I'm just kind of curious as you think about that content portion, you're obviously benefiting now from maybe a mix shift to EV, but Just kind of auto seasonality, is it different this year? Are you seeing maybe model years earlier? Just kind of walk us through, obviously, you don't want to guide for December, March, but just any thoughts kind of seasonality for that auto business after September?

Speaker 2

Well, Blaine, I think I said for the total business that We expect Q4 in absolute revenue terms to be above Q3. That's one. Secondly, I don't think there is really in auto at this point in time because dealer inventories are at record lows in the U. S. And in China, And they just can't build as many cars as they would wish to build.

Speaker 2

So I think it's more a function of supply availability in terms of when they would do what. So at this point in time, it is really supply constraint for them, which I think overrides any seasonality. Thanks, Gary.

Operator

There are no further questions

Speaker 2

at this point. At this point, Jeff, I guess We are running against time, right?

Speaker 1

Yes, that's correct.

Speaker 2

Yes. So let me then maybe from my end I hope we could give you a good view and transparency into the continued very strong demand Which we are seeing across the board. And at the same time, the news that we are seeing increased supply capability coming online, Which drives the strong guidance into the Q3 from a revenue perspective. We also told you that quarter 4 is going to be yet higher than quarter 3, And we continue to see this trend going into the next year. And at the same time, we see that our gross margins are now very much Hitting the mark which we had anticipated for a long time.

Speaker 2

With that, I thank you for your attendance today. Thank you.

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Earnings Conference Call
NXP Semiconductors Q2 2021
00:00 / 00:00