Q3 2020 NXP Semiconductors NV Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the N.X.P. Q3, 2020 <unk> earnings call.
At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you wouldn't be surprised star one on your telephone. Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to your Speaker today, Jeff Palmer. Thank you. Please go ahead Sir.
Thank you Carlos Good morning, everyone with me on the call today is Kurt Shavers, and next piece, President and CEO, Peter Kelly our CFO.
Walter is being recorded and will be available for replay from our corporate website. Today's call will include forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations.
These risks and uncertainties include but are not limited to statements regarding the continued impact of the code that 19 pandemic our business the macroeconomic impact on specific end markets in which we operate sales new and existing products and our expectations for the financial results for the fourth quarter of 2020.
Please be reminded that NXP undertakes no obligation to revise or update publicly any forward looking statements for a full disclosure on forward looking statements. Please refer to our press release. Today. 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 energy piece.
Underlying core operating performance pursuant to regulation G. NXP has provided reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures in our third quarter 2020 earnings press release, which will be furnished to the FCC. Our form 8-K and is available on the next piece website in the Investor Relations section.
P. Dot com.
Now I would like to turn the call over to Kurt.
Thanks, very much and so a very good morning, and a very good afternoon everyone.
I really appreciate you joining our call today.
It's most everybody RB did preannounce over quarters, we saw its formal told repeat.
Oh revenue growth significantly stronger than the midpoint of our guidance.
Across all of our end markets.
Particularly in automotive and mobile.
From a channel perspective, we began to see a return to more normal contribution between our direct and distribution sales, especially in the automotive end markets.
You know auto business predominantly the U.S. and European car Oems.
Tier one suppliers are biased direct fulfillment.
Its restart production on a broad basis.
Resulting in strong sales into European and American regions.
As well as continued momentum in China.
Only the Japan automotive, reaching appears to be slightly later to rebound bitches.
Which is primarily fulfilled through our distribution partners.
In our mobile business, a combination of new product ramps and markets trends anticipated by specific customers ahead of their new platform launches contributed.
Contributed to better than anticipated recites.
Taken together NXP delivered total revenue of 2.27 billion.
Which is 267 billion above the midpoint of our original guidance range.
Our non-GAAP operating margin was 25.8%.
<unk> 360 basis points above the midpoint of our guidance.
We experienced good flow through.
Significantly higher revenue.
Gross margin also better than guidance.
In a minute Peter will provide more insights into our gross much in his commentary.
We also continued to tightly controlled operating expenses.
So we did increase expenses relative to nonexecutive incentive compensation.
Now, let me turn to the specific trends you know our focus and markets.
No the motive revenue was $964 billion.
8% versus the year ago period.
And showing a 43% sequential increase.
This was greater than twice the sequential growth, we had contemplated in our guidance.
In industrial in Iowa, Ti revenue was 514 million.
21% versus the year ago period.
Up 18% sequentially.
And it was slightly better than our original guidance.
In mobile revenue was 337 million.
Up 5% versus the year ago period.
Oh, 32% sequentially.
And I would also note that we did not experience any pull forwards in mobile because of the shipment then associate with Willie.
And lastly, communication infrastructure and other revenue was 452 million.
Down 4% year on year and flat sequentially.
It's worth about 35 million better than our guidance.
And of that outperformance relative to our guidance about half was due to accelerated shipments well wait a head off the bat.
Before we turn to the specifics on our Q4 guidance.
I'd like to provide you a quick update on our very reasons NXP equal next developers conference.
In todays completely virtual customer support environments.
These are extremely encouraged by the truly high level customer and partner engagement and participation.
We had over 15000 participants from around the world take part in this first ever completely books will you then.
Now, let me discuss a few of the customer related highlights during that event.
First of all our joint announcement with some two mobile underpinning the adoption of our secure neutral white sands and latest enhanced mobile wallet solutions.
Costs, both the Galaxy note 20 would trough and the new Galaxy folds platforms marching the first ever use of wood for White said it'd be androids world.
Bye.
So functional food for a license.
Do we expect over the intermediate term to see solid growth also beyond mobile ads.
That's the technology permeates into the automotive and I would tee markets.
Additionally, we continue to drive innovation and our latest mobile wallet solutions.
With the introduction of you I see see functionality.
This allows the mobile wallets.
Some of the network provisioning and profile management.
While simultaneously and aping secure payments and excess.
Oh in the automotive steels Bieber very very excited to officially co amounts our battery management efforts with the flex one.
And its peace Vms solutions are being adopted across the entire MDB platform to flex Walker group, including the Flex Lucky brand its 83 and 84 models.
And also in the luxury and performance models Audi.
Poor she tyco.
Early market acceptance of these cars has been very positive.
And we are very proud to be a partner in flux blogs success.
Now I will be turning to the specifics of our quarter four expectations.
Our forward revenue guidance range is again slightly wider than normal as there continues to be uncertainty held to rebound to sales into phase of continued COVID-19 concerns.
However, as we mentioned in our last earnings calls before Q4 would be stronger than Q3.
And that is what our guidance reflects.
See the improvement in demand, which began in Q3 continuing into Q4, both from a broad perspective.
Also from the increased traction of our company specific opportunities.
These include automotive growth opportunities piece like radar digital clusters.
And battery management.
The industrial end markets opportunities include growth of our cross over processes and connectivity solutions.
Why Didnt mobile momentum continues to build for our secure would try why spend and secure mobile wallets solutions.
We believe the robust second half 2020 recites.
Find with our strong product portfolio and customer engagements.
We will continue to yield positive results.
That's gives us significant confidence in our growth in.
2021.
From a channel perspective, we will continue our stringent discipline of our.
Channel inventory.
And be able to maintain our target channel inventory its 2.4 months of supply.
What's that preamble, we are guiding Q4 revenue, it's two docks for 5 billion.
Up about 6% versus Q4 nine cheap.
And from a sequential perspective. This represents an increase of about 8% at the midpoint versus the prior quarter.
At the midpoint, we anticipate the following trends.
Our business.
Automotive is expected to be up in the high single digit range versus Q4 19.
Oh in the low 20% range versus Q3 20.
As we see a continued and substantial rebound from our automotive customers.
Industrial and Aiotv is expected to be up in the low 20% range was Q4 19.
[laughter] flattish versus Q3 20.
With strength continued in China and across the end market as a whole.
Well, while it's expected to be up about 10% versus the year ago period.
An obstacle essentially in the high single digit percentage range was Q3.
But its trends in our key customer and despite the ban on.
Communication infrastructure and other is expected to be down in the low single digit range was Q4, my team and versus Q3 20.
The sequential decline is largely due to the restrictions on shipments to walk away.
And additionally, it just as an update very early in Q4.
We announced the opening of all read Novitas gallium nitride factory in Chandler, Arizona.
We'll begin revenue shipments later in this quarter, but with no material impact on the business during this quarter.
We do have significant confidence in our growth in 2021 multi.
Notwithstanding the ban on <unk>.
That's bad is it clear disappointment as we had strong design win momentum across the product portfolio.
We had originally anticipated hallway.
Grow to be a strong high single digit revenue customer in train 21.
What has been a material increase.
Current levels.
Let me conclude.
In summary, we are laser focused on what we can control in order to optimally navigate the improving trends we are currently experiencing.
Our first priority is to.
Sure the health and safety.
All of our NXP team members and being a continued challenging time given the pandemic.
I want to thank them deeply full that determination and hard work.
So it allows us to successfully navigate the rebound we are experiencing.
Collectively as a team we.
We are striving to facilitate the best possible business continuity with a customer focus on supply chain and R&D execution.
And with that I would like to pass the call to Peter for a review of our financial performance before you will turn to your questions Peter.
Thank you Chris good morning to everyone on today's call.
As kids already covered the drivers of the revenue during the quarter.
Provided on revenue outlook for the full quarter I'll move to the financial highlights.
In summary.
<unk> revenue performance was significantly better than planned.
Relative to our guidance, we experienced material improvements across all of our end markets.
We're pleased that the third quarter. It was also a return to improved year on year revenue performance.
Regarding a solid position to build from going into 2021.
Now moving to the details of the third quarter total revenue was $2.27 billion.
Flat year on year.
$267 million.
The midpoint of guidance.
We generated $1.14 billion in non-GAAP gross profit.
Reported a non-GAAP gross margin of 50.1%.
And about 360 basis points year on year, I don't know, if 110 basis points above the midpoint of guidance.
Gross margin was better than expected because of the high revenue.
Though below where we'd like to see it in a more normal environment given the impact of running all fabs at low utilization levels.
Slightly unfavorable mix.
Total non-GAAP operating expenses were $550 million.
$19 million year on year.
By $54 million from Q2.
This was $15 million higher than the midpoint of our guidance.
Yes, we increased expenses associated with non executive variable compensation.
From a total operating profit perspective, non-GAAP operating profit was $596 million a non-GAAP operating margin was 25.8% down.
Down about 450 basis points year on year, but 360 basis points higher than the guidance due to the increased fall through on higher revenue.
Non-GAAP financial expense was $100 million essentially in line with guidance.
Cash taxes for ongoing operations were $29 million I.
Non controlling interest was $4 million.
Slightly better on a combined basis than a guidance.
Stock based compensation, which is not included in non-GAAP earnings.
$83 million.
Now I'd like to turn to the changes in our cash and debt.
That's at the end of the third quarter was $9.36 billion flat sequentially.
Ending cash position was $3.57 billion.
So $300 million due to solid cash generation during the quarter.
No that was better at 5.79 billion and we exited the quarter with a trailing 12 month adjusted EBITDA.
$2.71 billion.
Our ratio of net debt to trailing will trailing 12 month adjusted EBITDA at the end of Q3 was 2.1 times and on non-GAAP trailing 12 month adjusted EBITDA <unk>.
Net interest.
Sure.
2.2, 0.1 times on non-GAAP trailing 12 month adjusted EBITDA.
Net interest coverage was 7.8 times and as previously discovered.
After the close this close enough to the close of Q3, we redeemed the 1.35 billion for them on Ace notes due 2021.
The $400 million.
Four and five eights notes due in 2022 for a total consideration of $1.3 billion, including the principal interest make whole calls.
During the third quarter, we paid $105 million in quarterly cash dividends and we continue to have a strong balance sheet and excellent liquidity.
Turning to working capital metrics days of inventory was 84 days a decline of 36 days sequentially, which is well below our long term target of 95 days, that's revenue rebounded much faster than anticipated and we.
Fulfill the increased demand for mone hundred inventories on hand inventory.
We continue to closely manage our distribution channel with inventory in the channel at 2.4 months, which is within our long term targets.
Days receivable with a few days up six days sequentially days payable were 55, a decrease of 16 days versus the prior quarter because of the interest because the increased sales were primarily fulfilled from hone hundred imagery.
Taken together, our cash conversion cycle improved to 59 days, an improvement of 14 days versus the prior quarter.
Cash flow from operations was $527 million net Capex was 68 million, resulting.
Resulting in non-GAAP free cash flow of $459 million, a testament to the strong cash flow generation capabilities of the business.
Turning to our expectations for the fourth quarter as Kim mentioned, we anticipate Q4 revenues to be about $2.45 billion, plus or minus about $75 million.
Okay, and I wanted to know wider than normal range, considering the uncertain environment, we continue to navigate.
At the midpoint this is up 6% year on year.
Sequentially.
We.
Non-GAAP gross margin to be about 52.7% plus or minus 30 basis points.
Operating expenses are expected to be about $563 million, plus or minus about 10 million and taken together, we see non-GAAP operating margin should be about 29.7% plus or minus about 60 basis points.
We estimate non-GAAP financial expense to be about $84 million I don't anticipate cash tax related to ongoing operations to be about $36 million.
Non controlling interest will be about $9 million and for non-GAAP modeling purposes, we would advise using about 286 million shares.
Finally, I have a few closing comments I'd like to make.
Our gross margin guidance for the fourth quarter reflects a continued improvement versus the prior quarter.
However, the midpoint is not commensurate with all go over 55% gross margin on a 2.4 billion dollar revenue run rate.
Relative to our Q4 guidance there is about 150 basis point headwind. That's a result of the third quarter carry forward.
Wait for 500 utilization.
There's also about 100 basis points headwind for product mix.
Which is a combination of lower communication infrastructure revenue.
At a high percentage of automotive business to large Oems through our tier one customers.
With a couple of exceptions, Oh factories will come up to a more normal level of utilization in the current quarter.
You will see our internal inventories move up progressively to a more normal level of 90 to 95 days over the next several quarters.
Ah, but we will make an inventory at distribution of the 2.4 months level.
The past quarter, it's been more than a little surprising our automotive business came back much more quickly than we thought it would do and we've seen real strength in the industrial and mobile end markets.
And as Ken mentioned and for obvious reasons relating to the current political environment, we've seen significant opportunities in the comm infrastructure end market disappear.
Notwithstanding.
Funding the channel the challenge in communications infrastructure, Oh fourth quarter guidance still reflects a robust faster than anticipated rebound in demand.
This combined with some of the operating margin expansion under commencement improvements in cash flow will in turn result in no net debt to trailing 12 months, even de leverage ratio.
Being told below two times by the end of the quarter.
Well I'm pleased to announce we will likely resume our share repurchase program during the fourth quarter.
We continue to have sufficient capacity on our existing authorization to do this.
Finally, these very difficult times kits and I would like to thank all of our colleagues around the world for their commitment to NXP doing the right thing for all customers.
The current period is unprecedented and is extremely difficult, but over the long run NXP is the right strategy isn't the right markets.
The right products to continue to win.
Now, we'd like to to open up to questions operator.
Well operator.
And.
If you would like to ask questions. At this time simply press Star then the number one on your telephone keypad.
And our first question comes from the line of Ross Seymore from Deutsche Bank.
Hi, guys. Thanks for let me ask a couple of questions and congrats on the strong results first thing I wanted to talk about the automotive side of things, obviously very strong rebound for you and everyone else I guess, if I look at it as a longer term basis inclusive of your fourth quarter guidance and beyond can you just talk about the delta versus Saar. It looks like you guys are going to do the better part of 10.
Better than sorry, this year, you're talking about robust growth next year can you just specify down what specifically to NXP is occurring in that to allow that outperformance.
Yeah. Thanks, Ross, let me take that one.
Yeah, clearly automotive did.
Disappeared quickly in the second quarter and came back no very hubs in the third and continuing into the fourth quarter.
Looking at it from the perspective of comparison against SAR is exactly what we do for.
For this year I do agree with you Ross a it looks like we probably come out with maybe a I don't know nine to seven nine to 10 percentage points decline on the full year.
The SAR according to I address it probably declines by 18 percentage points, so be there'll be about eight percentage points at least better than the SAR now that's not totally out of the barrel because we continue to see our long term growth in the auto business.
To follow the algorithm or I'm sorry.
Sorry last three to five percentage points of semi content growth.
And then do you want to outgrow that.
And if you if you compare that to how it's going this year. We are on the high end of steps, but I think that works and we definitely believe with the content increases there.
He also strongly participate with our growth businesses.
For example, the radar <unk> coffee business or the the battery management business. We are participating in this so the algorithm on the long term sense SAR plus three to five percentage points content increases what do you think the auto semi market is doing and that's what we want to outgrow biotech durrell they want.
Five.
Thanks for that color. So I guess my follow up just moving over to Peter ended the gross margin side are very helpful color with a couple of headwinds you had in the fourth quarter, even though you've hit the 2.4 billion side of things how do we see those rolling off going forward under utilization charges seemed like they disappear I know mix can change.
On a quarterly basis, but what's the trajectory look like between now and even if revenue stayed flat at 2.4 and change billion and getting to that 55% marker that you're targeting going forward.
Yeah sure.
You know in Q.
Q4.
It's a 52.7 or so let's say we have exactly the same mix going going forward in the same level of revenue you would expect that to improve by 150 basis points.
Pretty much off the bat.
We're bringing the fabs they don't quite back to normal in fourth quarter, but that that pretty close.
Getting up to the 85% level, so that would take us to the say the 54.
354, or five level the issue I think we have a.
Probably the first half of next year.
Is that the drop off in coming from.
And how quickly.
Auto directors has come up.
So it feels like that's about 100 hundred basis points of a mix impact. So I think there's two things Ross one is.
Utilization I think we can we can pretty much forgotten about from Q1 on which I think will suffer in the first off.
From the shifting mix of Oh, if that mix doesn't change and of course, you know we have to hit a.
If those revenue numbers you do have it you do have a few things that move around in any one quarter.
I remind you that you know Q1, we usually have a.
Price annual price reductions, particularly in the auto space.
No I can pieces by about 40 basis points, but I would say.
From an underlying perspective.
I still feel very confident that we should be running 55% to $2.4 billion of revenue.
I've been shocked to versus where we were three months ago.
The.
The speed at which also came back and the the reduction that we've seen in our you know our overall potential foot coming from.
But.
Certainly utilization shouldn't be an issue.
Through the end of this year.
Thank you.
And your next question comes from the line of C.J. Muse of Evercore.
Evercore.
Yes. Good morning. Good afternoon. Thank you for taking the question.
I guess first question I was hoping you could elaborate a bit more on hallway, what what a percent customer where are they.
Into Q3, and then as part of that question can you discuss how how the embargo there is impacted if at all your your breath of your new gas facility.
AC tape yeah, I think that's a that is an important event for us so well wait.
Just to clarify that this very a very stringent be she go away is not anymore in our guidance for Q4. So the Q4 guidance, which we just gave is completely excluding any revenue to to go away.
Historically, these said who always has been and I mean, that's never been seen in any given quarter, but say a low single digit customer for the company.
Well next year.
We had actually a very clear you to get to.
Who always being a high single digit customer and that is actually there.
It relates to two them option and mix impacts, which Peter just spoke about in the answer to the question of Ross before.
Now the Metropcs effect is of course that we have applied.
For licenses with the with the U.S. government.
And we have to see.
[noise] walks they'll be and when grom, that's relative to these license request what different different products. We are we would be shipping into a into away.
And just to follow up on that.
Does this impact how you think about ramping your new Gan facility and as part of that is there a margin headwind associated with simply under utilization of that factory.
It Oh, let me, let me say no.
Yeah, but if you look at all to five if you look at all utilization for next year.
Two fabs that are not running it.
85% totally on one is kill and the other is a oh chancellor fab, but.
In terms of what we'd plan because we talked about on the last call about a.
How we would be kind of a bit behind where we expect it to be.
As Ken just said, we don't expect to see any additional impact from the ramp of the fund.
Great. Thank you.
And your next question comes from the line of John Pitzer from Credit Suisse.
Yeah. Good morning, guys. Congratulations on a really solid resolved Peter My first question is just on the op axis has been anything but.
Typical year and clearly some of the calendar Q3 upside.
Did you tend to raise opex for sort of the non exactly I'm just kind of curious as you look at the calendar fourth quarter run rate I'm struck by the fact that revenues well above seasonal and if there is an opex seasonal opex to cadence opex.
Opex is actually slightly below so are we now looking at the right opex level and as we go into calendar year 21, how should we think about the puts and takes.
You know up cobot related expenses, both on the plus and the minus.
I think.
You know you can never really pick one quota.
Because we always have a bunch of mosques either moving in all moving now for 2021, I guess I'd go back to our comments from last quarter John.
We think 575, plus or minus 10 million in any one particular quarter is probably pretty close I mean, clearly you know of all revenues to grow very substantially we might be talking about a different number but.
From what we can see at the moment.
Sales 575, plus or minus 10.
That's very helpful. And then as my follow up I heard you were very clear in your prepared comments, but despite the wild way headwind you still there feel very good about growth for calendar year 21, I'm wondering if you could just help us understand kind of an order of strength, what gives you that confidence level and specifically with with walkaway business that.
I would now can't ship to is there are other opportunities shipped to other combo, Oems or where that where those very specific hallway programs.
Yeah, John So certainly the confidence into next year.
Is a carry forward from the Companys specific strengths and the rebound we are experiencing right now.
So clearly with the with the high impact on the total company from a revenue perspective from automotive we continue to be very confident into next year that our growth pockets. They have you have sales leadership positions in radar equally good and BMS. The continued to play out the way we have talked about them in the past.
So there is you have to design wins on the books, we see actually the end consumer demand for these specific systems be it in eight out be it in electrification, we see that absolutely coming through so I think the automotive side of things, Doug said very firm.
Talk off the rebounds, bitches, certainly being forecasted for the fourth of SAR. So I mean, I talked about the negative side of things earlier, that's the SAR royalty is gonna be don't like 18% this year.
I address is currently broke nosing something like 14% on a bus our next year and on top of that we have said that the content increase and our market share gains in those leadership positions.
Second be suddenly mobile.
And SB as we started to experience now in the third quarter and continues into the fourth quarter or we see continued very strong traction with or secure mobile wallet, which is also a function of the off the pandemic ironically, because the the use of contactless.
Payments, it's something which even in countries, which have been a bit shy. So far is now getting much more traction.
And secondly.
With the with the kick off with Samsung, which I mentioned the other secure it would try white fence certainly in the mobile space is though is also seeing a lot of traction.
Now if you if you speak about.
Industry and I would see I think we are seeing this year already amazingly strong year in industry and I would teach which is also a function of China, because we have a large a large exposure to China and actually kobin.
<unk> 19 impact in China. If you will was history already in the second quarter. So we'd be see their continued growth and that said momentum.
Mitch Mitch rights on all crossovers together with our new connectivity portfolio built continue well into next year. So all of these growth elements.
Sean do you really see fully intact or into the next year.
Such that we of course, Miss that revenue to walk away.
But we don't see we don't really think this is a this is a big negative to know how much of that could be compensated by other mobile customers.
I don't I really don't have to say specifically since some part of it.
In the in the infrastructure side of things, but there is much less competitive.
Perfect. Thanks, guys.
And your next question comes from the line of Craig Hettenbach from Morgan Stanley.
Yes. Thank you you guys continue to do a good job of controlling inventory in the channel and internally. So can you just maybe talk about any signals you're getting just from a sell through perspective and your ability to keep on inventory at equilibrium. Despite what is a pretty volatile supply chain.
Hey, Greg I mean on the.
On the distributor side.
As you have seen and as we I think both Peter and I reiterated again, we we are absolutely disciplined to the target up to 2.4 months.
Now if you ask from a lead time perspective.
Then I would tell you that clearly the current demand the strong demand, which we which we started to experience in say a middle or stop it started middle of Q3.
Has extended lead times, a little from say typically 16 weeks to know maybe 20 weeks with a few exceptions above that.
But no I think we feel our sales in the good position and we also believe given the environment. It is exactly the right policy to stick to the 2.4 months Oh distribution channel inventory.
Oh, I'm, sorry can I, just thought of commencing on channel inventory, clearly, we which came down pretty dramatically in.
In Q3 to 84 days.
Given will be kinda shipping everything was like in Q4 will probably stay at the you know the low eightys and.
In Q4, and Oh, It will take two is a couple of quarters to get lots of tonnage upon.
And we think 95 is about the right level.
So internally.
Got it. Thanks, Thanks for that and then just a follow up on the growth drivers hurt any update I know you mentioned cross over and he is but just curious kind of what type of traction you're seeing for that product. How broad based is it and just anything you're doing versus other competitors that they can stand out for that product.
Well, I'm, I'm, saying, though with a with a cautious smile.
Really stands out is that you have set product category, Craig because I continued to not really see.
Any any competitive solution, which is said which is coming close.
So by the sheer power of having it and by the ship horrible petting. It now in conjunction with the with the wife I portfolio, especially now on the on the wife I six standex.
Mitch and I think we talked about that earlier, which we have no software integrated so the software development environment for all customers is actually one no for the cross overs together with the with the wife I, We do definitely see a continued strong traction.
Hi, This is on a design win level at this perspective, Craig So I I should also be clear that the I mean, the revenue from this is I don't know half a year out a year old one and a half years all depending on both both sports specific industrial segments. We are deciding it into so my my measurement point at this stage.
Clearly the design win traction, which we are seeing a and that is really good.
I thought maybe you also mentioned that the strong performance of industrial I would see.
As also being carried in the past quarter by or a general purpose EMS use.
And by Standalone connectivity products I mean, we got that Marvell on.
Activity portfolio in <unk>.
Of course, we also sell it as a standalone solution and also that is seeing good traction.
Got it thank you.
And your next question comes from the line of William Stein of Trust.
Okay.
Hi, Thanks for taking my question guidance.
Really impressive quarter and end guidance those ahead of expectations. There's this cyclical rebound that you're seeing and I understand.
The.
Yeah, the practice of guiding one quarter at a time, but.
During these times when we see these sorts of strong recoveries.
Sometimes they can be driven by customers.
Interest in.
Building, a little bit of inventory and I guess the point, you're trying to make it sometimes we over shipped to the upside notwithstanding your comments about confidence in 2021 generally should we be thinking about Q1, as a sort of normal seasonal quarter or do you think because of the dynamics. We're seeing in Q3 Q4, maybe.
We should tap that down a little.
Hey, Bill I mean, maybe Peter also wants to say a few words. So first of all I mean, you know we don't guide Q1 at this stage I mean, this is clearly a Q4 guidance.
Secondly.
I think the language of normal seasonal in the current environment. It's just not applicable I mean, I I wish it was but I don't think there is anything like a moment seasonality into car into in the current environment. So I think that doesn't that doesn't really help for Q1.
Yeah, we would talk in in kind of preparation for this will.
We thought one of the questions. We get is kind of how much is inventory restocking versus.
The market overall, I mean, clearly Q3 after I've had some impact from Oh inventory restocking and you know maybe there's even a little in Q4, but we wouldn't say.
You know what our expectation for 2021 assumes that continues to.
To be the case.
I mean Q1 is typically a lighter quarter, but.
It's really really hard to say what seasonality.
Matt you know or may not be she pointed out it's situated market.
Were low to.
I was just trying to speculate on what Oh.
The four quarters of next year might be sitting where we are but it definitely feels a lot better than it did three months ago.
That's fair enough and what they can do that.
Yes.
Sorry, let me maybe Ed on the on the question on restocking I.
I mean of course with with rents and re rent rebound off the industry. There is almost always a certain level of re priming the supply chain. So that's perfect you know what.
But given the fact that we have the largest exposure to distribution business I think our continued discipline on the 2.4 months that should be but we had just discussed.
Gifts you also a strong handle that in that area at least I mean, we don't we don't overdo it should be stick to this and that makes it a very.
That makes it very clean I think.
On the on the direct the cone sites.
Of course in the end for us hobbled to measure bought the stock positions could be.
But if we look at the at the end demand or at the content increase of our product speed in mobile or be it in a in automotive.
We think we have a we have a pretty good view on bids that that business is not really about restocking, but its true demand victory I see.
Yes indeed.
Yes in cradic, rather than cyclical or maybe more than say cool one follow up if I can.
You have talked about a mobile wallet adoption getting to 50% I think from the last analyst day through the end of a three or four year period, you know.
It seems to me that that might be tracking well ahead of expectations. If you can provide any update on that and then now that we have ultra wideband shipping into handsets, maybe you can comment on the pace of adoption youre expecting there as Nick said.
Similar to get to 50% over some number of years or is it a different view.
[noise] Yeah, that's that's fair so on the on the mobile wallet in detail I'd.
I think the guidance, we gave was 50% adoption rate by the end of next year, So calendar year a 21.
And and Yeah, we are right on track I mean, let's let's leave it here with saying. This this is beville deliver on this on this from it.
On the secure ultra wideband clearly early days, but I think with some zone, which is very.
I mean, they are very strong and very they are very detailed mines in building the ecosystem together with us.
I think we have a great kick off in the Android space now.
And certainly we want to see that they will not be the only Android OEM, a and that spreads are much more broadly quickly.
I don't think we are yet in a position to talk about specific adoption percentages by specific times.
Because it's not all not only mobile.
You know what the adoption is going to stop also in automotive next year.
And we all know booking with a lot of focus also into Aiotv rich, which is adding another wave of volume, but again, it's too early days to put a percentage not just behind that.
[laughter] Congrats again.
And your next question comes from the line of Wayne Curtis from Barclays.
Hey, guys. This is Tom O'malley on for Blayne Curtis Congrats on the nice results. My first one is about the buyback you indicated that.
But since the trailing 12 months debt to EBITDA metric, which was now a lunch or you guys are going to start buying back can you talk about what your mindset is around the framework. There are you going to continue buying back where you kind of left off before the pandemic or just any sort of framework going forward would be helpful. Given you're restarting that.
Yes.
Oh really straight forward, we'll we'll buy back the level, which keeps us.
Probably I feel just below two times net debt to trailing 12 month free with Ya.
Simple enough I, just wanted to walk through a bit more complicated ones and that I guess, but you you mentioned a couple of moving parts into March on the gross margin. You said same mix same revenue of 150 bips off the bat.
Benefit, but you also pointed to 100 basis points.
Potential mix impact and then some annual price reductions in the auto I guess I understand that you're never gone in Q1, and totally understandable, but could you describe a scenario in which you saw revenue down in Q1 and gross margins still improved the reason I ask is just a bit unique given your history can you walk through if there's any other.
Moving parts on the gross margin, we should be aware of.
Okay. So I think there's I think there's a you.
You have to shut two slightly different questions.
So my comment was really about.
Can we hit 55% to 2.4.
Okay, and I basically said in the first off a 2.4 level of revenue, where the current mix, we'd probably be more like 54%.
Because of the mix okay. So that that's one question.
A different questions, okay going forward from Q4.
What's likely to move so you know we do 52.7 in Q4, I'll get 150 basis points straight.
Straight up or just because I want to take the other utilization, which it's like me to to.
The 50 to 54.2.
But I would assume the the same mix that the comments I'm not even I think the thing you have to watch out for is.
Q1, typically as old annual price reduction.
Which can be you know 30 40 basis points.
So I'll go to answer your question.
Yes, even with.
If revenue was slightly down in.
In.
Q1 over Q4.
Probably still see a slightly better margin because we get rid of the utilization headwind and in Q4 of 20.
Okay, but that's sort of.
It's a pretty unusual situation where at the moment with this really heavy on the utilization.
And I think Thats really helpful. Thanks, a lot yep.
And your next question comes from the line of Chris case, though from Raymond James.
Yes. Thank you. Good morning first question is related to auto market and some of what you said in Japan. It sounds like Japan's recovery is lagging a bit how much of a headwind has has that Japanese part of the business Dan.
And you know, presumably if it that normalizes like like the rest of auto next year, how much of a benefit we would.
That provide.
[noise], Yeah, Hi, Chris Yeah, My comment was really related to Q3, we see we.
We see Japan already catching up in the fourth quarter actually so I'd say when you. When you then think about the flu next year.
Oh I can only look at what are your Jess is a is predicting for the SAR.
And then actually Japan is is on the same pace and is quite normalized with the with the other regions. It was more that's this year.
The in the third quarter babies on all this very sharp return, especially in.
US and Europe. It started a little later in Japan, such that it's it's more on the fourth quarter than it was already sitting in the third quarter, but I I I don't think that there is any reason to extrapolate that into a into next year.
Got it thank you and as a follow up I just wanted to dig into the commentary about the potential for some inventory restocking and where that need to be and I guess is it safe to say if if if that were happening.
The industrial market, what would be the most likely area and obviously, that's an area that's hard to get visibility.
And I guess following from that is it.
Do you suspect that there was any restocking in the automotive area and I presume there that they were coming off of some pretty low inventory levels earlier in the year when when the factory shutdown, but again, they're on hubs. So I suppose there's probably better better visibility there.
[noise] Yeah I.
Let me start with auto.
Indeed, we have made sure that inventory levels wouldn't be too big because b b.
You really had a lot of attention this time in the second quarter when things they're falling down.
Tumult over ship Ah so even with all the direct accounts, we had a lot of one one discussions to.
To make sure that their order patterns would be would be somewhat compliance with the a b C and demand.
So I I step I guess I'd agree with you there probably wasn't too much of your inventories sitting there.
Which is exactly why I said earlier.
Restocking, though is just normal to prime the supply chains for significantly higher production rates I mean, they have to do this there is nothing that nothing strange about it.
The industrial side of things he is a little harder to tell because the modem business goes through distribution for us.
There, we do control as explains that distribution inventory.
In a very transparent way, we have all the systems and all that discipline in place to do this.
But be off course, do not have to visibility into all of the thousands of end customers behind distribution. So it's it's less easy to say, what they possibly a restocking or not restocking. My early take at this stage is eat isn't that much because most of it is anyway in China.
Indeed in China, it's not like no suddenly a Q3 or Q4 effect, we have seen growth in China industrial starting with the second quarter. So Q4 is now the third quarter in a row ever it's growing.
Thank you.
Your next question comes from the line of Gary Mobley from Wells Fargo Securities.
If it went thanks for sneaking My question was the questions have been asked but I did want to ask one about your battery management system now your win.
With Volkswagen sounds very impressive.
Obviously, there is the largest OEM in the world.
Had the most aggressive de platform in terms of rollout schedule.
So I'm just curious to know where you stand today with BNS sales if not mistaken it's somewhere in the tens of millions you may have.
Maybe 10%, 20% market share. So I'm just wondering if you can give us a.
Assessment of where this business maybe you know in 12 months to 24 months just given this Volkswagen win thank you.
Yeah, Yeah, So Gary I'd say, the best way to think about it is is.
Think about a 50 million run rate this year roughly.
And what we what we did say is that we really grow this was twice the summer. So we want to we want to grow twice as fast as the markets.
Which which would translate in something like 60% CAGR over the next couple of years. So 50 million. This year are.
Growing with 60% CAGR over the next couple of years.
And we think the associated market is growing at about 30%.
Hello.
Just as a rule of thumb or this flick slogging when.
Of course, there is a high variation or how big it's going to be depending on their success and how quickly they bring to the next models and models and models out.
But that's maybe half of it.
Right so.
That's why we are super proud of this I think it's a great Testament to the scalability of our system solution to the functional safety off the solution.
But this is only.
50% of that business going forward. So I mean, it's just a thought.
Thank you that's it for me.
All right operator, we'll take one more question today.
Yes, Sir your final question comes from the line of Ravi Gill from Needham and company.
Yes. Thank you for taking my questions I appreciate it congratulations on the on the auto recovery.
On the communication infrastructure side.
I guess I'm wondering how you're thinking about that next year, given given the issue with while away, but also kind of your traction and again, you're a little bit late in Ghana products.
It seems to me you're kind of catching up on the in Arizona. How do you think about your Gan portfolio a relative to the competition in adoption in calendar 21, and how that would positively affect your common infrastructure business next year. Thank you.
[noise], Yeah, we feel very good about our Gan competitiveness.
It's only the starting issue as you rightfully pointed out that we that we are coming all the little late.
That that's actually a consequence of.
Oh.
We'd be fault and people are aligned with our customers that that would only be needed next year and that's also what we are delivering up then they put it in the requirement or the competitiveness of the product in terms of power efficiency looks very very good.
We did announce a few weeks ago, that's a both the secretary as well as the product is being released as we speak we stopped shipping small volumes a in the later part of this fourth quarter.
And bill really ramp up in the first quarter of next year.
I am quite optimistic on this for next year because if.
If you if you think about the.
Main customizable this think about Ericsson think about some so think about Nokia CTG we.
With all of them, we have had historically already a very leading positions with our product be it with l. demos.
Or be it with massive mimo.
So I think we are in a great position actually once we start shipping.
To wrap it up with gallium nitride, so yes, a little late but now coming in strong.
And just for my follow up question on the ultra wide band kind of moving to other markets outside of mobile wanting to see what your thoughts were in terms of what do you think that the next kind of biggest market for for U.W.B. will be and why do you think that.
Yeah, we have good visibility into the automotive side, because the design wins cycles are pretty lengthy so b b b are working and have been working this for quite a while already very you see mid second half of next year.
The trust Oems coming out with that.
Whites and secure access solutions based on that based on that next week.
The <unk> T Bill obviously.
Obviously, it's it is much more complicated because its more smaller customers a lot of opportunities.
But I also assume that it is fair to say that through the through the next year be billed seat the first applications being pick up in the a and B T space and think about smart locks for example, a indoor navigation et cetera, et cetera, So automotive a lot of visibility.
He bought it goes.
Goes the typical automotive space, starting middle of next year, I would see somewhat more complicated because of the multitude of opportunities, but also their belief next year is.
We see the first organs.
Great. Congrats again excellent momentum thank you.
[noise]. Thank you.
Thank you everyone for your eye tends to the call today, and we'll look forward to speaking to you next quarter. Thank you very much says crudes our call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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