Q2 2020 NXP Semiconductors NV Earnings Call
Ladies and gentlemen, we see by your Q2 2020, NXP Semiconductors earnings Conference call will begin momentarily again, please be advised your conference we'll get it one minute. Thank you.
[music].
Good morning, ladies and gentlemen, and welcome to the Q2 2020, NXP Semiconductors earnings Conference call. At this time, all participants are even listen only mode. Later, we will conduct a question answer session.
Structuring flu follow at this time, if anyone should require assistance during the conference. Please press Star then zero on your touched on college towns. As a reminder, this conference call is being recorded I would now like to turn to conference over to Mr. Jeff.
Hallmark. Thank you. Please go ahead.
Thank you drum and good morning, good afternoon, everyone, we hope you're all safe and healthy.
Welcome to the NXP semiconductors second quarter 2020 earnings call with you on the call. Thanks, Curt Cbres, NXP, CEO and President and Peter Kelly, Our CFO. The call today is being recorded it won't be available for replay for more corporate website.
The call will include forward looking statements that involve risks and uncertainties actually caused nx piece results to differ materially from management's current expectations. These risks and certainties include but are not limited to statements regarding cutting you didn't talk to the Coca 19 pandemic on our business the macro economic impact on the specific end markets, which we operate.
The sale of new and existing products and our expectations for the financial results for the third quarter of 2020, please be reminded that NXP undertakes no obligation to revise or update publicly any forward looking statements for full disclosure on forward looking statements. Please refer to our press release. Additionally, we will refer to non-GAAP.
GAAP financial measures, which are driven primarily by discrete events that management is not considered to be directly related to an excuse underlying core operating performance pursuant to regulation G and excuse provided reconciliations of the non-GAAP financial measures for the most directly comparable GAAP measures and our second quarter 2020 earnings press release.
Which will be furnished to the FCC on form 8-K and is available annex piece web sites in the Investor Relations section I'd NXP Dot com.
Now, let's turn the call over to Kirk.
<unk>.
Thanks, very much trips and good morning, or good afternoon, everyone. We really appreciate you joining the call today.
Now, let me turn to all recites over Q2 revenue was modestly better.
Then the midpoint of our original guidance.
Our automotive business was significantly impacted by the Colby 19 cost factory shutdowns for customers.
So we did experience better than anticipated trends and sequential growth in all four of the end markets.
We are encouraged by the positive trends, we experienced in China.
And to sales out of our distribution channel did improve sequentially.
Taken together NXP delivered revenue of $1.82 billion.
17 million Bucks, the midpoint of our original guidance range.
Non-GAAP operating margin was 20.7%.
About 170 basis points above the midpoint of guidance.
We experienced slightly higher revenue with a higher proportion of distribution channel sales.
We did deliver better gross margin because of a positive product sales mix.
And all of this combined with tight control over operating expenses.
We saw the did better than expected operating profitability.
Now turning to the specific trends in our focus and markets.
In automotive revenue was $674 million.
The only 35 cents versus the year ago periods.
And showing up 32% sequential decline.
In industry late night with Ti revenue was 435 million.
12% wasn't the you ever go periods and up 16% sequentially.
In mobile revenue was 255 million.
Down 14% versus a year ago periods.
Oh, 3% sequentially and please note the year on year comparison in mobile most impacted by the sale of the voice and audio business.
And lastly, communication infrastructure and although revenue was 453 million down 9% year on year end up 12% sequentially.
Now before and tuning to the specifics so for Q3 expectations I'd like to make a few important Commons.
Our revenue guidance range for Q3 is again wider than mall.
However, we believe the set up is gradually more positive heading into the second comp figure.
This is things to customer traction with NXP specific drivers, including automotive radar.
Wireless connectivity all across over processes.
Our secure entre wipe them just to name a few.
Furthermore, we do see an ongoing stabilization or end markets.
However, at the same time people to bell and our enthusiasm as we continue to view the broader tomorrow wirebond as fluids, given the corporate 19 pandemic.
It is too early to make a broad statements regarding a complete we turn to mobilize two month well the specifics off the shape of the recovery.
As an example, several of the ultimate end customers of all our products.
Especially the automotive OEM customers in Europe, North America and Japan.
Still running production at below pre pandemic levels.
Therefore, we view the best calls affection is to continue to focus on those aspects of our business, which we can directly control.
This certainly includes stringent discipline of our distributor channel inventory to maintain or talk a gentleman bench, we got 2.4 months of supply.
And exactly that lives, we helps basketball to $145 million shipments to distributors during the past quarter.
Additionally, we continue to run our internal secretaries significantly below normal overwriting levels avoiding building excess inventory.
And with that preamble be our guiding Q3 revenue at 2 billion.
Well in about 12% versus Q3 19.
And from a sequential perspective. This represents an increase of about 10% at the midpoint versus the prior quarter.
At the midpoint, we anticipate the following trends in our businesses.
Automotive is expected to be down in the low 20% range versus Q3 mine team and up about 20% versus Q2 20.
Industry and I would key is expected to be up in the mid teens range, whereas excuse me 19.
And is expected to be up in the mid teens range versus Q2 20.
Mobile is expected to be down in the low teens range, whereas excuse me 19.
Again, the you don't get trends are being impacted by the sale of the voice and audio business.
On a sequential basis mobile is expected to be up about 10% versus Q2 20.
And finally communication infrastructure and other.
He is expected to be down in the low teens range was excuse me 19 and down in the upper single digits range versus Q2 20.
Now, let me summarize the they'll be laser focused on what became control and be will continue to navigate an uncertain demand environment.
Clearly our number one priority is to assure the health and safety of all of our NXP team members.
While at the same time, facilitating the best positive with business continuity with a customer focus on supply chain and R&D execution.
We don't have any unique insights as to when this challenging period will subside.
But we continue to have ample financial liquidity and strength to better if the current environment.
And we maintain all the critical investments in areas that will assure NXP is long term success, it's chosen strategy.
Why do we actively continuously review all areas of discretionary spending.
Our focused investments in leading edge few products and deep customer engagements in fast growing segments, such as automotive eight us into an actress occasion.
Secure connected Acs processing for the <unk>.
And our secure neutral white them are all very very durable.
And we do continue to enjoy significant design win traction.
We are committed to the consistent execution of all long term strategy and continue to be deeply engaged.
And sharply focused on enabling our customers success.
And now I would like to pasta pull to Peter for a review of our financial performance before we turn to all of your questions. So Peter.
Thanks, Chris Good morning to everyone on today's tool.
As Curt has already covered the drivers of the revenue during the quarter provided on revenue outlook for the third quarter well move to the financial highlights.
In summary, Oh second quarter revenue performance in total was a little better than planned our industrial and I O T on market.
Along with common infrastructure showed significant strength.
While shipments into the mobile them all different about where we plan on our automotive revenue was significantly weaker than planned zillions in tier one suppliers in Europe.
North American Japan plumes that factory for extended periods.
You'll note a proportion of sales through distribution business direct was significantly higher reaching a record 58% given the strength in China on the weakness in automotive.
Which is more of a direct more of a direct business I'm okay.
So moving to the details of the second quarter.
Revenue was $1.2 billion down 18% year on year, and 17 million above the midpoint of all guidance.
We generated $892 million in non-GAAP gross profit and reported a non-GAAP gross margin 49.1%.
420 basis points year on year, I'm 110 basis points above the midpoint of guidance.
Gross margins were better than expected because of the mix swing towards distribution on an overall richer product mix.
Total non-GAAP operating expenses were $516 million.
$25 million year on year unfettered by 29 million from the first quarter.
This was $7 million better than the midpoint of guidance because of lower payroll expense.
From a total operating profit perspective, non-GAAP operating profit was 376 million a non-GAAP operating margin was 20.7% down about 820 basis points here. When you put 170 basis points higher than guidance due to better gross margin I know we're operating expense.
Non-GAAP financial expense was $92 million, which was $10 million higher than guidance because of the new 2 billion dollar debt issuance, we undertook during the quarter.
Cash taxes for ongoing operations were $16 million.
Non controlling interests were $5 million slightly better on a combined basis going on guidance.
Stock based compensation, which is not included in our non-GAAP earnings was $105 million.
Now I'd like to turn for the changes in all cash and debt.
Well total debt to the end of the second quarter was $9.35 billion up about $2 billion sequentially I know ending cash position was $3.27 billion of $2.2 billion because of the debt issuance and cash generation during the quarter.
Net debt was slightly better at $6.9 billion, and we exited the quarter with a trailing 12 month adjusted EBITDA of $2.8 billion a ratio of net debt to trailing 12 month adjusted EBIT <unk> at the end of the second quarter was 2.2 times.
Non-GAAP trailing 12 month adjusted EBIT da net interest coverage was 8.5 times.
We continue to have a strong balance sheet an excellent liquidity.
The response to the recent debt issuance was truly phenomenal the offering restricted in three trenches of 500 million dollar five you know a 500 million dollar Sevena note on a 1 billion dollar 10 year Green bond. The offering was 11 times oversubscribed and we were very excited that we won't have a very small.
But the tech companies to successfully made the green offerings.
During the second quarter, we paid $105 million in cash dividends.
As we noted law school to until all leverage returns to about two times target, we have temporarily suspended or buybacks. So we will maintain a quarterly dividend.
Turning to working capital metrics days of inventory was 120 days, an increase of seven days sequentially as revenue levels declined.
So on a dollar basis inventory was flat sequentially.
We continue to closely manage our distribution channel with inventory in the channel a 2.4 months well within our long term targets and we held back about $145 million of old is into distribution to assure all channel inventory metrics remained within our target range.
I'm very proud that proud of how the team as manage both owned and channel inventory.
Thanks receivable were 24 days down four days sequentially days payable was 71 days a decrease of 12 days versus the prior quarter and taken together all cash conversion cycle was 73 days, an increase of 15 days versus the prior quarter.
Cash flow from operations was $414 million <unk> Capex was 74 million, resulting in non-GAAP free cash flow from 340 million a testament to the strong cash flow generating capability of the business even in a challenging period.
Turning to our expectations for the third quarter as Kent mentioned, we anticipate Q3 revenue to be about 2 billion plus or minus about 100 million.
Again, a wider range the normal considering the uncertain environment, we're navigating.
At the midpoint this is down about 12% year on year, well up 10% sequentially.
Expects non-GAAP gross margin to be about 49% plus or minus 100 basis points.
Operating expenses are expected to be about $535 million, plus or minus about 10 million and taken together, we see non-GAAP operating margin to be about 22% plus or minus about 190 basis points.
We estimate known got financial expense to be about 98 million I don't anticipate cash tax related to ongoing operations to be about $34 million.
Non controlling interest will be about $3 million.
Finally, I have a few closing comments I'd like to make and gross margin guidance with Q3 remains flat from Q2.
With a good revenue of 10% sequentially, we see some benefit from the additional volume, but this is offset by a product mix, which will be less robust than in Q3 as compared to Q2 and secondly, the continues effect of a very low factory utilization as we manage our inventory levels.
That's the global economy starts the correct itself no revenue it shouldn't be accelerates we see no reason why we can know hits all 55% gross margin target at the 2.4 billion dollar quarterly revenue level.
And effective hiring freeze, including replacements as well as salary cuts for executives.
Clearly, although these are the right things to do in the short term then not sustainable in the medium term.
And you should assume a more normal level of opex in 2021 to be about $575 million a quarter, depending on seasonal influences.
And our revenue returns to a more normal level, we would expect our operating expenses to reflect our long term model of 16% R&D and 7% DNA.
Lastly, we are proactively driving down our internal inventory levels are long term targets is 95 days and aim to achieve about 100 day level exiting the third quarter. This will clearly impacted our factory utilization.
Finally, these very difficult times, Kurt and I would like to thank all of our colleagues around the world for their commitment to NXP and for doing the right thing for our customers.
The current period. This unprecedented is extremely difficult, but over the long run NXP has the right strategy is in the right markets and has the right products to continue to win.
Now I'd like to turn to all questions operator.
Hello.
Great.
Ladies and gentlemen, if your question spine. Please press star and the number one key on your tax downtown. If your question is being answered or you're going starting move yourself from the Q3's Trust account key please wait for college skew further question.
Your first question comes from the line of John a pizza with Credit Suisse. You know ask your question.
Hi, guys. Thanks, but let me ask questions congratulations on a solid results given the challenging environment.
I guess is when we look at the company that as you mentioned in your preamble. There's a lot of company specific drivers and I guess I want to try to get a better understanding.
When you look at the auto growth you expected the calendar third quarter to what extent is that coming from the growth areas of the business versus the more mature part to be auto business in a similar question on the industrial Aiotv, great sequential growth in the June quarter, you're guiding for that to sustain into the September quarter, I'm just kind of.
Curious to what extent is this the benefits you're getting of taking that marvell asset and running it through kind of your stronger distribution channel.
Yes, Thanks, John Good morning addressable.
A lot of good question, let me, maybe start with saying because it really hold it for both for auto and industrial I would see.
That indeed, it all looks like that Q2 was the trough and now we are moving up from here.
And the moving up is indeed, a mix of the company specific growth.
In both segments by the way in auto and industrial Aiotv, and obviously also recovery off the market.
In industrial it Aiotv very very clearly.
The and I think we did also press release on this the.
The wildfire.
Portfolio from Marvell, which we launched in April is actually helping.
We have also now.
Thats fully integrated.
The wife, I portfolio into our microcontroller and applications processor software development kit, which makes it really easy for customers. So yes, we do see early traction from that combination. So it is a factor in the.
In the continued very nice growth in industrial priority.
Really industrial I will teach on has another strong sector, which is China. So the good growth in Q2 in industrial Iot. He has been carrier largely from a Chinese footprint perspective, and that also continues into into Q3.
Now in auto thing.
Our a little bit different in auto clearly Q2 was completely up normal.
Since we have these factory shutdowns, specifically from the Oems in Europe and the U.S.
And as we explained in the last call. We really wanted to make sure that we wouldn't creates too much excess inventory at our customers not only at distribution, but also at the direct customers and Thats actually the reason why the business has has decreased more than we would have anticipated, but we just didnt ball bonder follow any excess inventory building.
Now this is did nicely returning so we see pretty good momentum in auto actually into into Q3 and it is indeed a mix between.
Oems and tier ones getting back to production Soviet assumed that by the end of Q3 production levels across the world and automotive should be back to 80% of the brief pandemic periods. So that's a pretty pretty solid return.
Through Q3, but it's also that radar.
And our our cluster business just to get steam again with with new design wins, which are taking traction.
That's helpful. Then as a quick follow up.
For Peter just on the gross margin line, you're guiding for good sequential growth in the calendar third quarter, but you also mentioned that you're trying to keep a cap on inventory build I'm kind of curious as to what that means.
For utilization Q2, and in Q3, and then just remind us.
Most of what you make are shipped this quarter you make last quarter. So as the utilization impact if you get a benefit in Q3 is that really going to show up in Q3 gross margin or how do we think about Q4 gross margin okay. Several questions.
So first of all utilization in Q3 is about on average about 400 basis points lower than Q2.
Clearly clearly the as an impact and I'm trying to take about it to go from 100 2200 days I think it's about.
70.
<unk> million dollars of inventory out of the.
Out of the the system. So one of the reasons utilization is down is.
We're shipping from shipping from inventory to keep under control.
We do have this so you get this route for utilization is running about having about 50% maybe a little less.
We do have this rule accounting rule that when and it's a little bit complicated because we do it by factory and on its six months trailing.
Utilization, but when utilization is below 70%, we accelerate the fixed cost right now so both Q2 in Q3.
So from a an accelerated or fixed cost write down.
You don't carrier forward through inventory.
On the other hand, yes.
Assuming Q4 is okay, and and utilization starts to come up a little bit even if it doesn't get to the 70% level, which we probably won't.
We'd expect to see some small benefit.
And and as time goes on we'll we'll be able to to put more and more of the fixed costs into a into inventory. So typically utilization in the current quarter impacts the next quarter, but in the current environmental utilization is so low you take a hit it not all of it we take most of it in the current quarter.
Your next question comes from the line at the back are you.
South American Securities you May ask your question.
Thanks for taking my question card just one follow up on the auto segment I think you mentioned at the end of Q3.
Production levels at the back to 80% I believe you said off of that.
You know norm.
Brent, but when I look at your automotive says that the 800 million guidance I think I'll be up to 70% off its prior peak and I understand these things are not always coincident, but I'm curious how do you look at the unit and the content the company from here.
Because this year, we all understand its stuff you know when I look at someone a this is forecast for next year.
They are looking at auto units, you know, perhaps being up double digit then and I know you know the visibility is low but if they are up double digits. You know how what does come back conceptually say about your orders business given the trend that you have seen so far play out this year.
Yes, hi back.
Let me, let me first or comments to to the current quarter. So I would say so the past two quarters in the next quarter.
That is actually all pretty much in check.
So the according to I address the car production in Q1.
Most down year on year, 22%, our business was only down 4%.
In Q2 car production. According to I address was down year on year, 45% Veeva Adonis just announced 35%. So we've been doing really a lot better in these first two quarters.
Now I don't blame this is all market share gains or something but part of this is indeed, some inventory they've been building in the first off like always which will come down in the second part, but actually not too much which is why.
I think later mid through in Q3, we should be totally in balance again, such that the 80%.
Carbon reduction at the end of Q3 is I think that has a reasonable fit with our revenues. If you. If you think about the fact that in Q1 in Q2, we've actually grown very well ahead of the of the carbon action.
Now a little bit more bigger picture music.
So first of all yes, I definitely believe the algorithm, which we've spoken about that the the semiconductor auto market should be like 3% to 4% ahead of SAR. We think that absolutely holds also through the pending through this pandemic an out of the pandemic.
And our targets to outgrow that by one and a half times also stance.
Now I don't know what's the car production next year is exactly going to do I adjust actually I think that's something like I think 13 or 14% growth.
Yes, with the EYEGUARD B that you should be then nicely growing ahead of this in our business. So it doesn't work by the quarter.
But over a year or two it absolutely stem and.
I mean, I also heaven I haven't really seen a lot or massive platform delays or something so I believe the new wins, which we have in our growth areas.
Our all in talks and also come on time so.
I have.
They are relatively solid portion of optimism and I think about automotive for the second topic this year than certainly going into next year.
Hi, My Hassle and then got for my follow up.
Arms infrastructure is interestingly now your second largest business after autos and I I imagine one of your more profitable or perhaps the most profitable business, which is why I think you are I.
I think Peter you mentioned about that makes effect and going into Q3 I'm curious how do you think about the gross prospects and leveraged to fiveg because when I recall back to the analyst day I think this was supposed to be a segment, that's kind of more modest growth prospects versus others.
So how do you think about the leverage to Fiveg when will you start to see those.
Benefits because we are seeing I'm very strong global deployment of Fiveg. So just talk to us about comms infrastructure, just because it's not such a large segment for you and and you know obviously an important contributor dealer gross margins. Thank you.
So it certainly.
A large an important segment, but I mean, the relative size to be others. Obviously in this abnormal periods.
It's really shifting every quarter, so I mean, it's kind of.
You too certainly wasn't the longer quarter from a revenues the perspective.
But anyhow going forward clearly the Fiveg deployment is a key factor.
But most everything is shiny vic to be fair.
So the one thing is that clearly you know there is one large Chinese company, which is which is the big carrier offer of the Chinese deployment.
And.
Nobody really knows what the export control regulations bill to relative to this customer. So I mean, that's at least one structure on the horizon wherever you always have to be a bit say cautious in instead of being overly overly optimistic.
And the other one is that more recently the we are working on our gallium nitride product as you know, which has higher output power switches actually very very attractive across the customer base.
The only issue is that we are late relative to the demand. So I wished we had we had to foster a expansion of our of our capacity. So we have a little bit of the delay here against the demand, which which causes of I'd say some delay against against the opportunity, but overall I am I'm absolutely with you we have.
That's a very very strong position here across Ldmos all the way.
Through gallium nitride two to silicon germanium in that space.
But the market Islam. It has always been bumpy that remains bumpy for the factors I just a I've just quoted.
Your next question comes from the line of Stacy Rasgon with Bernstein Research you May ask a question.
Hi, guys. Thanks for taking my question.
I wanted to ask about the commentary in your release with said improve its expectations improved sales trends.
Through the second half the year I wanted to clarify this did actually imply.
We do see Q4 growing sequentially off of Q3, and if so can you give us some feeling for what end markets might be driving that.
[noise] well typically surgical Bonnie.
Clearly the be only guide for next quarter and that next quarter is a 10% sequential growth.
And yes, I made that statement.
So what I would say is the visit we see no reason why Q4 should not be growing over Q3.
And the one I would call outs, which is broadly pulling this the most is gonna be automotive.
Yeah.
Thank you for my follow up I wanted to ask about industrial strength in a lot of consultancy.
Relatively strong traction in this market in the wake of the condemning but there's also been some concerns around potential gum God customer overbuilt in portfolio and I know you've been.
Trying to be cautious not just what you're getting channel, but also with some of your customers. When that was born out of maybe also industrial to try to produce those forecasts to try to control that I guess, what do you doing along those lines on how confident argue that the industrial upside it would seem like last year sustainable versus just being pulled forward.
[noise] yeah. Thanks, Stacy that that that's a good question indeed, because I believe especially in the current environment. This is a is a very very important part of the controllers, which we can execute on our business [noise].
And.
The distribution inventory is indeed, the most relevant factor in our industrial Aiotv business, because a large portion of that business is actually going through distribution.
And as we've spoken about a lot of times, a b b remain super disciplined on the year on the two and a half months actually we are the score again of 2.4 months of inventory, but last quarter.
And I think I said in my prepared remarks that we could have shipped 145 million more in this in this last quarter.
And a solid part of that would probably have been in industrial and identity.
And.
This is our way to make sure that we don't over ship into this market. So my two anything we can see which I know I say through the distribution controls on the on the battery, which we have enhanced we have a pretty good handle on this.
The isn't that much direct business in industrial for us.
Your next question comes from the line ask Craig Hayden that wed Morgan Stanley you know ask your question.
Yes. Thank you questions occurred just on ultra wide band can you talk about the breadth of design activity and how you see kind of your exposure to the next couple of quarters in autos versus smartphones.
Yes, Thanks, Craig that's a I'm I'm glad you are asking.
I definitely believe we are very very much on track with building the ecosystem in order to wipe them across mobile and auto.
And I think we had kind of signpost that now for a year already.
That this year in 2020, we would get started.
In in the more material way in mobile and that is indeed, one of the factors, which is driving our sequential growth in mobile in into Q3.
And I mean, let me say that much.
Flagship product in a in an Android space.
Company.
Which bridges ramping.
With our ultra wide band so from a.
From our revenue and a unit perspective, clearly mobile is no outpacing automotive to start with but it's been plant that way because the first half two rollout the mobile ecosystem and then the secure car access mobile secure keryxs application is going to follow in the next.
Here, we are shipping already a very small amounts of will provide spend into automotive today, but it's still coming in the more conventional or traditional form factor off of a key for so it's a more secure way of doing correct says.
With Android now going out in the in the larger scale immobile beville half and we'll see this also with auto Oems next year in encourages us.
Got it thanks, and just as a follow up on industrial I know the Marvell connectivity business had a lot of industrial Ics exposure. So can you just talked to some of the shrank you're seeing in industrial how much of that is perhaps that.
Legacy NXP business versus the impact of just marvell, starting to kind of ramp up here.
[noise], Peter or check you I think you can dissect the.
At least on in a in a very rough way.
The the Marbella from our original industrial business, but let me first of all day Craig.
It is read the combination, which which makes the difference.
Of course, we do leverage our leading position in EPS processes in EMS use.
Pull through the connectivity so it becomes more and more difficult actually to talk about the two things in a separate so in a separate way because they are just getting more and more combined going forward.
Yes, correct, I guess I'll take that.
So Craig as you know, we're not going to break up marvell individually every quarter, but I will say in Q2, the marvell Lazard business was a.
Not quite double digit percentage.
Overall industrial business, but it was very high.
'cause single low double digit percentage of the overall industrial and I are tea business just within that one end market, but we're not going to break out marvellous aggregate.
Your next question comes from Blind have Ross Seymore weight TV you may ask a question.
Thanks, guys. So let me ask the question wanted to ask the first one on the inventory side of things and this might go into the spirit of leaving no. Good deed and punished, but just wanted to think about how you look at inventory strategically and how your customers are considering it and the real question is some of your competitors or are seemingly going the exact opposite way of yours.
I think much higher inventory, making sure channel inventory is ready for a rebound et cetera.
So I guess what are we gonna have to see to get you to let that either 150 million in the first quarter 145 million in the second quarter in bookings actually flow through.
And I guess related to that internally once you at that 100 days is that when the utilization will start to creep up in your inventory burn internally will stop.
Hi, Ross Good morning, let me take the the more strategic perspective first.
I think compared to those who you are quoting who would tell you. The exact opposite has a different business model did this is more about catalog products companies. There. The majority of our product is really application and or.
Customer deal specific.
Which means in our case.
I just don't needs to hold more inventory because we have a fairly good visibility into into the specific applications that our customers and the associated run rates. So we continue to believes that the two and a half months of inventory in distribution is about the right number for us and B. We are very very shortly will not miss a beat or not miss.
Any uptick.
By following that strategy now Peter maybe over to you relative to the to the hundreds or better.
It is in future.
And just to add a little bit to that Ross will ship 100, and you know the other than 50, when the distributors start shipping product to that end customers.
The moment the reason we don't should 150 is the.
They are they all the more than they can ship and Oh, no willing to let them have moved into an off ones because we have pretty sophisticated mobile response.
By just the body my time to promote.
In terms of the internal inventory.
Our goal is to go down to 95 days, a utilization will start to increase when revenue.
Starts to increase so on flat flat revenue flat utilized.
Revenue flat inventory you'd see utilization be relatively flat a flat inventory increasing revenue a you'd see utilization style to start to increase I'm. So it's a it's pretty pretty straightforward. It's all about.
The more we shipped the better the as long as they should get.
Great. Thanks for that and I guess as my follow up on the Opex side.
I know there specific math, we can do and the 575 and what percentage of revenues that would be but to the extent you have that framework Peter about the gross margin being 55 at 2.4 billion. Your commentary about the opex getting up to kind of a 575 level on a quarterly basis any sort of framework about the relationship and that to your visibility.
On revenues your assumptions et cetera, and how much you might turn that up or down relative to how the revenue trajectory improves or doesn't at that time.
Yeah. That's a that's a great question Ross. So you know what one of the things that occur we're saying before is should we think it in Q2 is.
The weakest revenue number for 2020.
You know, we think the second half will be stronger than the first off and we think 21 will be better than Oh, 2020, so with within that context.
We think we have the right products were making the right investments.
You know, we're going to win in our market. So we have no plans to.
Reduce our investment.
And.
This year, we've you know we've taken some short term actions that I mentioned like reducing Oh, sorry, basically eliminating.
Ah pay rises and incentive payments and.
I couldn't executive salaries I know you know at least the first two of those are no maintainable as you go into two next year. So it will onto on cost, but all our assumption is you know maybe maybe not completely in the first and second quarter, but we cannot fall.
Its level of Opex because of what we think the revenue will do now Weve you know there was a huge second wave or something then.
Maybe we change our view on that but you know, although we didn't see a V shaped recovery from Q2 into Q3.
You know, we don't think 2021 is a complete write off.
That's helpful, but given the context.
Your next question comes from the line epic.
Yeah.
From the line of C.J. Muse with Evercore.
Ask your question.
Yes. Good morning. Good afternoon. Thank you for taking my question.
I guess a follow up question on a gross margin side. So.
You're effectively telling us that you know between 2 billion 2.4 billion, you should see 85% incremental gross margin. So curious.
Should that be ratable as you progress.
We don't we don't say that what we do what we said is you have a model.
We think is reasonable.
Or.
5% in change in revenue gives you about 200 basis points of margin.
Sorry gives you 100 basis points of margin for that to the you know the kind of.
Plus or minus the 2.3 billion dollar level. There's a couple of other things that go on a fixed costs at that level or about 35%. So you do the math, that's about 400, maybe a little bit more million dollars.
A quarter so.
At a much lower level of revenue your fixed costs are higher so you do get some higher for crews are very very low levels both directions.
But you have to be able to do the the calculation, it's certainly not repeatable.
Okay and would you expect it to be concurrent with utilization increase or where would it be one quarter delayed well it.
Great question, Okay, so up to 70% we'd expect.
Until utilization is 70% any improvements in utilization will kind of benefits is in the current.
Wont benefits isn't really in the current quarter you see a big benefit once you go over 70% because you start to carry some of the fixed costs food.
It's you know its them by factory. So, it's it's kind of hard to.
To give you a a real.
A real line a when we're operating the way we all the moment.
Okay. That's helpful and then as my follow up.
You know in your prepared remarks, you talked about being encouraged by some of your wins radar wireless crossover processors security WB.
If you had to really highlight.
What is driving your conviction on on growth in the back half.
What would it be within that bad construct.
Clearly with the addition of macro improvements as well.
[noise] [noise], Yeah, I'd say, if I had to pick two for the second half than its probably the automotive radar and the wireless connectivity.
Great. Thank you.
Your next question comes from the line of William Stein wed.
Franchise, you may now after question.
Great. Thanks for taking my questions and good morning, everyone.
First.
Kurt there's a couple areas in automotive that you havent highlighted that.
One of which I think is already ramping.
Another one is more of a future, but I think we'd love to hear an update on the battery management systems progress and also the S. 30, TG network processor any design win traction to talk of there and then I give a follow up if I can.
Yeah, Thanks, Bill absolutely I and by the way by hope mentioning that doesn't mean that they they don't do what they should do so the battery management is actually.
Very very nicely on trekking, especially this year.
Since it in the meantime, I think it's fair to say it all looks like that the pandemic.
As unfortunate as it is but it seems to further push the the share off of electrification.
So just from a run rate perspective or from a new model launched perspective.
It all looks like that electric drive trains are benefiting from the from the pandemic over the next period of time.
And given our.
Very very strong position with the with the leading European OEM as you know.
And so I.
I would say very nicely growing position in a with a lot of different customers in the especially in China.
The are enjoying that very much so I'd say very much on track.
I was actually surprised you Didnt ask one question in that context, which is the combination of 80 million Maxime.
As a a as a competitor.
But let me just mentioned it here because it all looks like that our superior value proposition of a system approach, including the micro.
Is again, something which is matched by by the deal as it as it looks to us.
So very nicely on track.
The other one you mentioned, it's the 32 GB. So that's the the 16 Finfet based gateway processor.
On track launching and.
Ramping in production next year.
Just have to hold your horses, a little bit be very likely in the Mac.
Maybe three or four month, we gonna come out with a press release with a pretty prominent customer.
Which is going to give you then further evidence there and in which model and with which volume.
Solution, that's gonna is going to ramp I mean, it's a much broader bases, but there was one very prominent one which I hope, we can actually announced in the coming periods.
Great appreciate that and if I can get a follow up perhaps a peter.
A lot of companies.
[noise] raised capital to improve liquidity you know in sort of the March April timeframe craps as has NXP did some of them have since sort of reverted back and.
Repaid.
Some debt to.
Perhaps consider that.
Maybe that level liquidity is no longer needed is NXP contemplating. This are you planning to run at the elevated liquidity level for a while thank you.
Yeah, I would still be honest I irrespective of the.
The Kobin crisis, I've I wouldn't go announcing and taking that that anyway, because it's to pay down the the 2021.
The there's about $1.4 billion a note.
So and you know in the in the in the coming months. When we think it's the right time will pay it down but it was a it was always plan to use it for that and a little bit of the 2022. So.
So that's what we've usable yeah.
Got it thank you.
Your next question comes from the line after she a hearty wed Goldman Sachs can we don't ask your question.
Good morning, and thanks very much for taking the question I wanted to ask on the mobile business. Obviously, you guys are operating in a fairly.
Environment with smartphone units are declining strong double digits, you do seem to be outperforming the market.
I guess, if you can speak to what you're seeing from a mobile wallet adoption perspective.
That will be very helpful. If he can speak to your your opportunity set as it relates to ultra wide band going into the second half and more importantly at the 2021 that'd be helpful as well and I've got a quick quick follow up thank you.
Yes. Thanks for the question Great question. Indeed, the we also.
C and believe we be are outgrowing and indeed this is very much about content and attachment rates rather than a mobile unit run rates.
The two key drivers for for growth going into the third quarter and the second half.
In mobile is so is indeed ultra wide band as I briefly mentioned before.
But it's also inside the mobile wallet with one of our very leading customers in that space.
We have actually change all the of the of the system architecture.
And that change impact the the silicon.
Dollar content, which we are shifting into the solution I was actually nicely growing with a change so the growth the sequential growth, which which you are seeing is the new additional which are wide band and it is a higher content of silicon in the mobile wallets and certainly it is the attach rate or more gallons per.
C, which is going up.
That was the other part of your question so the.
The mobile wallets attach rates are on track to the 50% Mark in the next year.
And.
Maybe a little bit more anecdotally at this point, but it feels to us that the pandemic is giving also a boost to contactless payments in those countries on the globe bear there has been a much lower attachment rate so far because people haven't really accepted it yet so it is actually another one.
Which seems to be in its a bit early to make that coal to firm, but they seem they seem to be also helped by the by the pandemic. So three drivers in mobile a higher silicon content in the India solution for the mobile wallets the attach rate of the bullet going up and thirdly will try thanks.
Great and then as my follow up I wanted to ask on the competitive landscape.
Kurt I think you guys that have a in the past talked about NXP potentially being a beneficiary of the U.S. China trade tensions.
I realize you know share gains take a long time, probably take years in your business, but.
From a from a customer engagement perspective are you seeing any change.
For the better poor NXP. Thank you.
Yeah, I'd keep it keeps being a door opener very clearly so we.
We are seen as the European company, our European company, and I am doing business with China.
ER and debt that is definitely a positive lever into into engagements.
So as you said I mean, even in fast moving market design wins takes time, but but it is clearly a positive for us yes.
Your next question comes from the line Blayne Curtis with Barclays. You know ask your question.
Hey, guys. This is Tom O'malley for Blayne Curtis I, just wanted to ask quickly on competition in new WB Apple has their own in Android do you see anyone entering the market or or any increasing competition. There or is this really just a discussion of attach rates going forward.
Hi, Tom Great question, I think ultra wide spans across ecosystem is very very much of a deep system play. So it is not about this one RF I see it is actually about the combination of the RF I see a secure element. So in all the applications, which we are starting to ship Maui.
Always comes together with a javier secure element and the associated software.
So that triangle combination or software hardware secure elements and RF I see that is actually what gives us the differentiation and which I believe is also a pretty high hurdle for competitors. So if you only look at it from an RF I see perspective, it's probably not such a big deal over many years too.
To make a competitive products, but for the whole solution to be shipped its a big deal and that's where we have to lead.
Okay. That's helpful and then just a broader one.
Following up on John's question really really in your prepared remarks, you called out China specifically.
Obviously, I assume a portion of that as the automotive coming back on some industrials well, but could you kind of size where that benefit came in within more on the auto side or more on the industrial aiotv.
Well from a from acute are you asking for Q2 or for the guidance into Q3, both would be helpful. But you made the comment I think on Q2 and going into Q3. So whatever you can give on both [laughter], okay I'll take that can get right onto too.
Yeah Yeah.
Clearly on Q2, China was the big factor across the board and that's simply because the pandemic I mean, it has had like a phase shift so China has seen the biggest impact from the pandemic in Q1 already.
And then a pretty good recovery in Q2, while Europe in the U.S. have been essentially shut down for the for the earlier part of Q2 now if you go into Q3.
It is actually more more broad based so the although recovery for example to 20% quarter on quarter. That's not just trying to I mean this is really across the board. So we do see although recovering, especially I would say from a sequential perspective in the U.S. in Europe and also starting in Japan, because those are the places where the shutdown.
During Q2.
Thanks, a lot.
Operator, we have time for probably one more question today.
Hi, Karen last question comes from the line ask Chris Caso with Raymond James Simoneaux ask your question.
Yes. Thank you. Good morning question is with regard to the buyback, perhaps you could talk about what the plans are there and what would be the criteria for doing some resumption.
She wants I read or I guess that for you yeah.
It will will restart the buyback when we get to a ratio two times net debt to trailing 12 months EBITDA.
So we run 2.2.
In Q2 will be on a two three to four in a in Q3 so.
It's it's gonna be awhile before we see the buyback scary stuff again, but it's run off on that that levels of return to two times.
Got it that's clear. Thank you I'm just a follow up with regard to some of the comment you made about production and ER and getting new utilization backup and getting to your inventory target do you have a a timeframe in mind. When are you know and obviously this is dependent on on demand but absent.
Hey, inflection in demand how long does it take at these utilization rate to get to your inventory targets internally.
Well, well, we get down to 100 in.
[noise] a in Q3 and we're trying to get to 95. So it's these utilization levels. It's you know I assume and revenue is okay. It's pretty easy so at this point to get down to 95.
So it's absurd by the end of year for sure.
Yeah, I would think so.
That's helpful. Thank you.
Yes, I would now like to turn the conference back for the company.
Great.
Thank you Gerard Thank you everyone for your your interestingly time today not sure current if you having last moment remarks she'd like to make before we leave we sign off to.
Yes, Thanks, Jeff So let me let me thank everybody for for your attention today I think its indeed, it's a good moment and I'll be called it all looks like Q2 was the trust.
We do see growth going forward across our businesses.
Across the regions.
And I feel good about this because it is clearly a mix of a recovery of the markets, but at the same time, a playing out of our company specific drivers, which is most important for us to win two in market share going forward.
At the same time, we be still treat this very cautiously which means from a from opex spend perspective.
From an inventory perspective from all the factors between which are under our direct control, we gonna stay very very vigilant.
As we've done over the past periods.
And with that I. Thank you all anthem speak to next time. Thank you.
Thank you all.
Well, ladies and gentlemen, this concludes todays conference. Thank you for your participation and have a wonderful day you may all disconnect.
[music].