Q4 2020 NXP Semiconductors NV Earnings Call
Good morning, ladies and gentlemen, and welcome to the Q4, 'twenty 'twenty and ex <unk>.
Conductors earnings conference call.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
And one should require assistance during the conference. Please press Star then zero on your Touchtone telephone.
As a reminder of this conference call is being recorded I would now like to turn the conference over to Mr. Jeff Palmer. Please go ahead Sir.
Thank you Tiffany and good morning, everyone welcome to the NXP semiconductors fourth quarter 2020 earnings call.
With me out of the call today is Kurt Sievers, Nxp's, President and CEO and Peter Kelly our CFO.
And he said the call is being recorded today and will be available for replay from our corporate website.
This call will include forward looking statements and involve risks and uncertainties that could cause nxp's results to differ materially from management's current expectations.
These risks and uncertainties include but are not limited to statements regarding the continued impact of the COVID-19 pandemic on our business the macroeconomic impact on the specific end markets and which we operate the sale of new and existing products and our expectations for financial results for the first quarter of 2021. Please.
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 certain non-GAAP financial measures today, which are driven primarily by discrete events that management does not consider to be directly related to nxp's underlying core.
The operating performance pursuant to regulation G. NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures and our fourth quarter 2020 earnings press release, which will be furnished to the SEC on form 8-K and is available on the NXP website, and the Investor Relations section of NXP Dot com.
Now I'd like to turn the call over to Kurt.
Yeah, Thanks, very much Jeff and good morning, everyone. We really appreciate you all joining the call. This morning.
Today, I will review, our Q4, and our full year 'twenty and 'twenty performance.
I will provide insights on how we view of the current supply demand environment.
And I will certainly discuss of our guidance for quarter one.
Now, let me begin with quarter four.
Our results were near the high end of all of our guidance.
With the contribution from the automotive and mobile markets, both meaningfully stronger than plant.
And with trends and the industrial and Iot.
And communications infrastructure markets in line with all of our expectations.
Taken together NXP delivered the quarter four revenue of $2 5 billion.
And the increase of 9% year over year, and 57 billion above the midpoint of all the guidance range.
Our non-GAAP operating margin and quarter for both of the strong 35%.
That is 60 basis points better than the year ago period.
And about 80 basis points above the midpoint of our guidance.
Our outperformance was thanks to good flow through on the strength revenue growth.
Thanks to early benefits of our improved factory utilization and.
Solid operating expenses control.
For the full year revenue was $8 6 billion.
Line of 3% year over year.
And Thats 'twenty and 'twenty progress.
And the initial impacts from the pandemic earlier in the year of subsided.
Our customers began to accelerate orders and the <unk>.
Very robust rate.
Which we do anticipate they'll continue throughout 'twenty and 'twenty one.
Our full year non-GAAP operating margin was 25, 9%.
The 310 basis points decline because of lower revenue reduced factory loadings.
Combined with slightly and reduced operating expenses.
It is important to note, though that throughout the year, we shifted more of our opex spend from SG&A towards R&D.
As we do continue to invest in new and differentiated products.
Which are definitely the lifeblood of our long term growth ambitions.
Now, let me turn to the specific trends and our focus and markets.
Starting with automotive.
One of your revenue was 3.83 billion down 9% year on year.
T really better than overall auto production and the reflection of strong new product traction and content gains.
And Adas.
In digital clusters.
And then the electrification, which we have spoken about in the past.
For quarter, four automotive revenue was $1 2 billion.
Up 9% versus the year ago period, and 20 million better than our guidance.
Now moving to industrial and Iot.
With your revenue was $1 84 billion.
15% year on year up.
With both the wireless connectivity and our crossover processes supporting the growth.
For the for industrial and Iot revenue was $511 million.
23% versus the year ago period.
And with that in line with all the guidance.
Now moving to mobile.
Our full year revenue and mobile was <unk>, two 5 billion up.
Up 5% year on year.
Now if we are reconciling the <unk> for the sale of our voice and audio business during quarter, one last year and.
The line mobile and market growth was up the robust 19% year on year.
And during the year, we experienced continued strong adoption of our secure mobile wallets and.
And the early ramps of our ultra wideband solutions.
Offset by the anticipated discontinuation of some parts of our semi custom mobile analog interface business.
We do estimate the full year of attach rates of mobile wallets increased to about 40% interest.
Which is in line with our expectations.
And which is also supportive of our 50% of attach rate targets exiting 2021.
For quarter, four mobile revenue was $409 million.
23% versus the year ago period.
And with debt 40 billion and better than all of our guidance.
And last but not least.
Communication infrastructure and other full year revenue was $1 7 billion.
Down 9% year over year.
The year on year decline was due to reduced sales of RF power products into the some of the base station markets relative to the positive trends, which we had experienced and the first half of 2019.
For quarter four revenue was 394 billion.
Down 14% year on year and.
In line with all of the guidance.
Now before turning to our guidance and expectations for the first quarter.
I would like to offer my view on the current demand and supply environment as it pertains to NXP.
When our customers begin to reopen after the shutdowns and the second quarter.
We did see order rates through Q3, and Q4 accelerate at the very rapid rate.
This trend has continued.
And it will likely be the case over several quarters to come.
The increased demand has been broad based.
Across most of our focus and markets.
Most of all of our product portfolio and all of our geographies.
As well as across our direct and our distribution fulfillment channels.
We actually believe that the working from home trends.
Of course of the pandemic, which emerged in full force beginning in the first half of the year.
<unk>, two and explosion in demand for high volume consumer.
<unk> and mobile type product and the industry.
And then as the auto and industrial markets began to rebound and the second half of the year.
The available foundry capacity was largely sold out.
As the results, we and others are experiencing significant increases and lead times.
And in certain cases increased costs from suppliers.
Taken altogether of the setup indicates the.
Really robust demand environments.
Combined with the very challenging supply situation.
We anticipate may continue for several more quarters.
And we are working very diligently with both our external suppliers are.
Our internal operations team and our customers to adequately align supply with demand.
Against this backdrop now let me come to the quarter one guidance.
We are guiding quarter one revenue.
And that's $2 five 5 billion.
Up about 26% versus the first quarter of 2020.
And within the range of up 22, two up 30% year over year.
From a sequential basis.
This represents growth of about 2% at the midpoint versus the prior quarter.
At the midpoint the anticipate the following trends in our business.
The first automotive is.
And is expected to be up in the mid 20% range versus quarter one 2020.
And up in the mid single digits versus quarter four 2020.
Industrial and Iot is expected to be up nearly 50% year over year.
And up high single digits versus quarter for 'twenty and 'twenty.
Mobile.
And is expected to be up 40% year over year.
And down and the mid teens versus quarter for training.
And finally community.
Communication infrastructure and other is expected to be flat versus the same period a year ago.
And up in the low single digit range, one of the sequential basis.
Now why we are really encouraged by the rapid rebound and demand.
And is important to remember the.
We are still challenged by the impact of the global pandemic.
And we will carefully navigate the improving demand environment.
Focused on meeting our customers' requirements.
Simultaneously assuring at all times, the safety and health of all of our employees.
And I am extremely broad.
Of the adaptability.
The the occasion.
And their hard work and the phase of continued adversity.
So in summary customer engagement levels all of a design win momentum.
And our strategic focus areas continue.
Continue to be all very positive.
And hence we continue to be very optimistic.
About the future potential of NXP.
And with that I would like to pass the call to you Peter for a review of our financial performance.
Thank you Kara.
Good morning to everyone on today's call.
Of course already covered the drivers of the revenue during the fourth quarter.
And provided the revenue outlook for Q1.
Moving onto the financial highlights overall of our fourth quarter financial performance was very good.
Revenue was near the high end of our guidance range with an improvement of both non-GAAP gross profit and non-GAAP operating profit.
I'll first provide full year highlights and then move on to the fourth quarter of results.
Full year revenue for 2020 was $8 six 1 billion down 3% year on year.
We generated $4 4 billion and non-GAAP gross profit.
And reported and non-GAAP gross profit margin of 51 from 1%.
240 basis points year on year, because of the significant deceleration of revenue and the associated with lower factory utilization and shortly here.
Total non-GAAP operating expenses were $2, one 7 billion.
Down $8 million year on year.
Total non-GAAP operating profit was $2 billion to $3 billion and non-GAAP operating margin was 25, 9% down 310 basis points year on year.
Non-GAAP interest expense was $357 million.
Cash taxes for ongoing operations of $103 million and inks.
The dental taxes were $45 million with Noncontrolling interest of $28 million.
Stock based compensation, which is not included in non non-GAAP earnings was $384 million.
For the the cash flow of highlights include $2, four 8 billion and cash flow from operations and $388 million and net capex investments, resulting in 2.0 non Julien.
Non-GAAP free cash flow.
Healthy 24 percentage of revenue.
During 2020, we repurchased $627 million of shares and paid cash dividends of $420 million and total we returned $1 five.
Billions of dollars to our owners, which was 50% of the total non-GAAP free cash flow generated during the year.
Now moving to the details of the fourth quarter.
Total revenue was $2 five $1 billion of 9% year on year of the high end of all the contract.
We generate for the one $3 billion and non-GAAP gross profit and reported and non-GAAP gross margin of 52, 9% down 130 basis points year on year and <unk>.
Mostly above the midpoint of guidance.
Total non-GAAP operating expenses were $563 million flat year on year and of $13 million from Q3 in line with the midpoint of our guidance.
From a total of operating profit perspective, non-GAAP operating profit was $764 million.
And not the non-GAAP operating margin was 35 per cent.
Of 60 basis points year on year, and well above the high end of our guidance.
Non-GAAP interest expense was $19 million cash taxes for ongoing operations of $13 million of.
Non controlling interest was $11 million.
The base compensation, which is not included in non non-GAAP earnings was $89 million.
So turning to the changes and all cash and debt.
The death of the end of Q4 was 761 billion down $1 75 billion sequentially.
The.
The 2021, and 135 billion four and of nights from the 2000 $20 million to $400 million four and five eights notes.
And we did this on September the 28, which was the first of all fourth quarter.
Our ending cash position was $2, two 8 billion and was down $1 two $9 billion sequentially.
And due to the previously noted of debt repayments and offset by cash generation during the fourth quarter.
And the resulting net debt was $5 3 billion and $5 three $3 billion and we.
And as the quarter with the trailing 12 months adjusted EBITDA of $2 seven $9 billion.
Our ratio of net debt to trailing 12 months of adjusted EBITDA at the end of Q4 was one nine times and all 12 months of adjusted EBITDA interest coverage was <unk> eight times.
The liquidity is excellent.
Balance sheet continues to be very strong.
During the fourth quarter, and we paid $105 million and cash dividends and repurchase $257 million of our shares.
Turning to working capital metrics days of inventory was 78 days a decrease of six days sequentially.
<unk> below our long term target.
We continue to closely manage all of distribution channel with inventory and the channel of one six months also below our long term targets.
Both metrics reflect customer orders accelerating faster than we'd anticipated and.
And we find ourselves in the supply constrained position.
We'll take a number of quarters to rebuild on hand inventory and channel inventories to our long term target levels.
Receivables were 28 days down two sequentially and days payable were 75 and increase of 20 days versus the prior quarter as we rapidly increased material orders with our suppliers.
Taken together, our cash conversion conversion cycle was 31 days and.
And improvements of 28 days versus the prior quarter, reflecting strong customer demand solid receivables collections and positioning for customer deliveries and future periods.
Cash flow from operations was $1 $3 billion and the quarter and net Capex was $103 million, resulting in the non-GAAP free cash flow of $926 million.
Turning to our expectations for the first quarter.
Kent mentioned, we anticipate Q1 revenue to be about $2 $5 billion, plus or minus about 75 minutes.
At the midpoint of this is up 26% year on year and 2% sequentially. We expect non-GAAP gross margin to be about 53, 5% plus or minus 30 basis points of.
Operating expenses are expected to be about $590 million, plus or minus about $10 million.
Taken together, we see non-GAAP operating margin to be about 34 percentage of the midpoint.
We estimate and non-GAAP financial expense to be about 85 million and and.
Just to free cash tax related to oil and Gulf of hung going operations to be about $56 million.
Non controlling interest will be about $10 million off of.
For the first quarter, we suggest that for modeling purposes, you use and average share count of 284 million shares.
And finally.
I have a few closing comments I'd like to make.
Clearly the amount of just come back more rapidly than we could have expected.
Current focus is to look after our customers and and.
Sure, we ship as much product to them as possible.
It's unfortunate the some of our suppliers are attempting to use the current tight supply environment.
Short term opportunity to raise prices, which we will clearly have the puzzle.
To be clear, though we do not see this as an opportunity to improve our margin by sacrificing long term relationships and.
Additionally, given the tightness in supply and the level of orders, we anticipate shipping from production during Q1 and.
It's unlikely we will be able to increase of months of supply of distributors or move out the Io target.
Towards the long term targets during the first quarter.
Between January and the fourth of February the first we bought back an additional $354 million worth of stock and.
Plan to continue to buy back in line with our capital allocation policy of returning all excess cash to shareholders.
Clearly our operating margin reflects the significant flow through benefit of the additional revenue.
Although the current environment creates a new set of challenges.
We believe we can still deliver on our margin improvement plan in 2021.
In terms of the pandemic our team continues to perform and a truly outstanding way and.
And the safety of our team members as Kent mentioned continues to be our primary concern.
If anyone experiences any symptoms or in any way exposed to the virus, we ask them to sell finally self isolate for a period.
Unfortunately in Q4, we've seen a few more people and expected and all five of.
And for our fab operations required and to sell function of late.
And as a result of the shortage of labor of small impact and all the internal fab output.
Though this causes of short term issue, it's clearly best for our overall performance in both the short and medium term.
We estimate this isn't impacting goes to the tune of 80 basis points of profit and Q1 and.
And 40 basis and will.
The 40 basis points and Q2.
While this is of short term headwind the safety of our employees remains our key consideration and we believe our COVID-19 protocols of the appropriate interact.
Finally, I'd like to thank all my colleagues of NXP for a truly amazing 2020, you've done an incredible job and of truly unbelievable environment and so there's a sort of very bright future.
So with that I'll turn it back to the operator of your questions.
Ladies and gentlemen at this time, if you would like to ask the question. Please press star and the number one and your telephone keypad again and that is stellar and one we'll pause from Amit to compile the Q&A roster.
Your first question comes from the line of C J Muse with Evercore.
Yes. Good morning, good afternoon, and thank you for taking the question I guess first question around gross margins, Peter you talked about the 55% still.
Still clearly and play curious if you can speak to.
The high utilization will play a role and that how mix assuming comps recovery through the year and then I guess, probably most importantly, how to think about rising input costs.
And your ability to pass on and whether there's a timing difference there.
So great questions.
Yes, let's talk about Q4 to Q1 first of all so Q1, and we go from 52, 9% of 53 five.
I think I said last quarter that.
Utilization on the utilization of all the with impact of about 150 basis points and and Q4, so we thought of that level of benefit and.
In Q1.
As it turns out.
Because of these of the need to self isolate.
Instead of getting 150 basis points of improvement from Q4 into Q1.
And we've only got about 70 basis points, so that $52 nine to $53 five the 60 basis points and it's really made up of three big things C. J. So we pick up 70 basis points from.
The improved factory performance 'twenty, sorry from the utilization of 20 basis points from improved factory performance above and beyond what we were expecting.
It's about 30 basis points of headwind because of our annual price reductions and so that's from Q4 to Q1 and then if you say, okay, well and Q4, you did $53 five why aren't you running.
Sorry from 52.9 to $53 five why aren't you running 55 per cent.
The third and 50 basis points is really made up from two things there's about in periods of about 50 basis points of on the utilization very roughly.
And there's about 100 basis points of mix and the issue and mix really is one of all coming from business, So I'll come and for business and the first half is relatively weak and.
Auto and mobile and a relatively strong.
And we think as we move through the year the.
And I was kind of fall of G progresses.
The we'd see and improvements and we've seen of unimproved Mattel and mix over time.
Tonight.
All of them.
You heard the question was about pricing right. So price pricing is really mix. Okay. So we're seeing some of them.
Some suppliers trying to trying to put up the prices towards us.
But you know we and.
And the same way that we have long term contracts with all of our customers. We have a similar contracts with the many of our supply. So it's a bit of a mixed bag really.
Having said that we all see and price increases and and where we have and we will we will.
We will endeavor to pass those on to our customers.
You made an interesting come and it's actually about how quickly you can do it.
So I think what we will actually see is hopefully we'd be able to pass some of them pretty quickly, but you know you could always of a month or two and Oh guess, even a quarter when you eat.
And really pushed them on that quickly so.
It said the stebbins rather than the fundamental issue.
We would like to say that we don't see the current environment.
And that's an opportunity to structurally improve our margins you know win of commodity business. You know, we don't increase our prices when times are tight and reduce the one times of tons of goods, but.
Did I monitor COVID-19 everything to I know there was the community.
And of course, yeah, no that was great.
And I guess, Curt if I could just follow up with a quick question.
Considering that the supply constraints on the auto side and considering.
Your and Nxp's focus of really providing complete solutions curious about what what impact kind of the current supply constrained environment is having on your level of engagement with your automotive customers.
Yeah, So I think actually and that might sound ironic, but that's not what I mean, it actually improves the engagement because.
I've, probably never spent so much time.
And with with our customers as of to date.
And you know while certainly this is a challenging challenging moments for everybody and the chain. There is the lots we speak about the future in terms of how do we how do we best deal with this on the go forward basis.
And he calls everybody recognizes the enormous relevance of semiconductors in building cars, so thinking about trends and thinking about aligning forecast on the moment of a basis is definitely a positive result out of this so I don't think this is the negative I think it is actually something we as and.
Industry altogether, a learning from how to how to avoid these things from happening and the future and and the way to do this is just a much closer collaboration than we've had along the chain and what I mean, it's really not the only with our tier one customers, but also with the with the Oems directly and that is obviously great for innovation at the same time.
Very helpful. Thank you.
Your next question comes from the line of Stacy <unk> with Bernstein research.
Hi, guys. Thanks for taking my questions.
My first question.
Wanted to ask about the trajectory for the year I mean like normally Q1 is the trough of the year, you usually down a lot of and a seven or 8% sequentially from Q4 to Q and you obviously up a little of it this time.
And your commentary on sort of like sustained demand through the year do you still see Q1 potentially is the trough.
Hi, Stacy.
I first of all of you are hinting to seasonality and the way I think and the current environment.
None of the historic seasonally seasonality pattern is really applicable.
So certainly this is a very strong Q1, if you did hold it against you.
Historic patterns, but let's not forget that we are coming of actually too.
And kind of disturbed and weak years, I mean, everybody talks about the impact of the pandemic on 'twenty and 'twenty.
But also train and 19 was not the <unk>.
Strong year in semiconductors, and so from that perspective, I think the chest really coming out of the along the two of them down.
Which indeed hints to what I said on the in the prepared remarks earlier, we do see a pretty robust demand environment all through the year also beyond the Q1.
Got it thank you for my follow up.
And to follow up a little bit on the commentary and the Peter said. He said do you still feel confident of delivering on your margin improvement plan in 2021, I just wanted to clarify exactly what is that margin improvement plan is that the 55% gross margin target or like specifically, what do you mean by delivering on margin on your margin improvement plan in 2020.
<unk> 55 per cent.
Okay are there any like is that it's still of that 2.4 sort of threshold revenue level or do you guys think you can see yourself maintaining it.
And I think of the levels of business, where all of the moment.
You know, we shouldn't be run of about 55 per cent.
And you can get a little bit of carried away and because it's not many of those you know.
And that moves the 50 basis points either way.
And I get that you do you of any idea of when in the year you might hate it though is that like the second half kind of target or I think I think.
It's the it's definitely second half Stacy and the.
And one of the single biggest items is all coming from.
And being a bigger percentage of our overall business and it is today.
Okay got it but without the COVID-19 impact you'd be running over 54, right now and the Q1 correct.
Yes, yes, I think so you kind.
Okay. Thank you guys appreciate the.
That'd be like 54 to listen some of them Yeah got it got it. Thank you guys.
Your next question comes from the line of Vivek <unk> with Bank of America Securities.
Thank you for taking my question and congratulations on the strong growth and execution of course.
And I'm curious, what's your baseline view of automotive unit growth and 2021, and that's as Youll see that at the start of the year and also last year and when I look at yard and the auto semiconductor sales, which are down nine the.
They were like 567 points and of all of the units. So that's that was the very impressive content Delta and how should we think about that similar content desktop.
For the share it and I asked those questions because it seems like the industry is off to a very.
Strong start but can this kind of strength to be maintained.
Mike just some of them.
Just kind of help us a line on models and what unit and content market expectation should be this year.
Yeah sure Vivek.
So let me start with.
The IHS is telling us for this year in units and for auto and that would be around 85 million units.
Which of them if that comes is like 14% a.
Year on year growth and units.
This is the IHS number we've always used it internally I would tell you from my.
Very very.
And discussions over the past couple of weeks and also at the ending of last year.
I think the sentiment and the auto industry and possibly even the buff debt.
So maybe more 85 to 90 million units in what some of the.
The car companies things to achieve.
But the lot of debt is obviously based on the assumption of let's say the second half of the year.
Being fully vaccinated.
And <unk> coming back to more normal lives and that actually being another push for for auto production and auto sales.
Again, the form of number is 85 million units, which would be of 14% growth.
But you were hinting to the other half of this discussion which is actually content.
Because clearly.
The fact that these being seven spot than the sort of last year is thanks to content growth and thanks to our specific play in and in our high growth areas like radar and.
That could be the case from BMS digital clusters, which actually did not decline so our growth businesses and you know that's about a quarter of our auto business.
Those parts of our auto business did not decline last year, they actually hits growth even in the in a year of about the Saar.
I think last year down by something like 16%.
And we see the content growth suits and.
And <unk> going at the same rate going forward.
And one really strong elements.
Is the is the tier two targets.
Which translates then often and in electrification, but this is not just about the say the electric entrants theres a lot of other applications, which are coming.
In tune with electrification.
And is overall driving the the semi content and the car massively.
So all in all of the Vivek I would say.
I think it is safe to assume the 85 million units for this year, which is the 14% growth for SAR and definitely all of our algorithm of outgrowing the SAR as we spoke about it before the stand strong also and this year.
Now one last element on this which everybody tries to understand currently is about inventory levels.
Yeah, I think at the moment from anything we can see.
The supply chain.
Of the auto builds are empty and I say that because I know that every single product. We are shipping is immediately built into a car and so that the it's just nothing going on the sidelines. It all goes through and to production immediately.
And that's why you also clearly set the art supply constrained for the first quarter.
And as the reaction to this I hear quite of few people and the industry speaking about the desire.
Two actually.
Asked for more inventory along the chain in the automotive going forward. There is one large.
OEM, which actually made even the public statements about how much chip inventory they would like to see at their first tier customers.
So if you model this on top of the content gains and solid growth, which we just spoke about.
Then I think there is there was the good reason to believe there was the multiple quarter gross of them ahead of us.
Got it very helpful and from my follow up maybe the one for you you mentioned that the <unk>.
One is to return all excess free cash flow to the investors last year, and you generated over $2 billion, or so and and free cash flow and I think the dividend. The only takes a quarter of that how should we think about buybacks. This year and I know you gave a number of far far at the start of the year should we assume.
From that.
And based on the expectation of stronger free cash flow that you know.
Most of it will be devoted to buybacks and we could be back and some of the strength you have seen and some Friday or do you still expect to use some of that to de lever the balance sheet further thank you vivek.
Vivek, we've been amazingly.
Predictable, okay. So our stated capital allocation approach.
The policy is we will return all excess cash to shareholders of two of them.
Level of two times net debt to trailing 12 months, even today the reason we didn't.
Our return and even more in 2020 is because for the most of the year, we were above two times.
The net debt to EBITDA with the the weak performance in Q2.
So depending on what Youll muddle of he should.
Assuming that all excess cash flow to a level of two times.
The cash returns to shareholders.
And so you know yeah, it will be substantially higher in 2021 and it was in 2020 same way 2019 was sort of essentially hot and 2020, and we definitely would not be used to delever the balance sheet.
And you're already at one nine and so you're below that range right now.
You know the difference between one point and I'm going to there's no not the big number.
I just don't have the the issue and it's the EBITDA guidance. So you need to look at how Q2 and Q1 and fall off of Q3, and Q4, which is about to come all of which gives us more capacity to.
And by Blackstone.
Understood Thanks very much.
Your next question comes from the line of John Pitzer with Credit Suisse.
Yeah. Good morning, Kurt Good morning, Peter Congratulations on the solid results. My first question is from the comms infrastructure business given how important it is to mix and gross margin leverage as we go throughout the year.
What's the visibility of that business why do you think it recovers and the back half of the year is this a view that the U S government stance on Huawei changes or do you see other design wins with other Oems that will drive that business throughout the year.
Yes, Thanks, Tom.
Let me take away the Huawei thing first of all the.
We are here conservative and we don't assume.
And any moves on the on the licensing et cetera, with the with who always so that's not part of the plan anyway.
And what makes us actually optimistic for the second half.
Is mainly all of our portfolio.
I think we talked about our gallium nitride.
The product as well as production capability.
Getting online at the end of last quarter.
And I can actually probably say that in the meantime.
All of the products are qualified.
And more importantly, they are qualified at this handful of important customers.
And since this is a is the new for us because we haven't had this gallium nitride capability really and the first place.
We absolutely see that the build gain share on debt basis.
With the further rollout of the infrastructure in the and this in this coming year and we believe this is kind of back loaded more towards the second public the year versus the the first half, but the the driver is really the the gallium nitride penetration of Victoria foreseen.
That's helpful and then as my follow up just in your prepared comments you pointed out that if you pro forma.
For the sale of the auto business the mobile business last year was up significantly I'm kind of curious as you think about the.
The the mobile wallet the ultra wideband penetration are you preparing calendar year 'twenty, one to be another growth year and mobile and is there any rule of thumb you can give us on how we should think about your content from <unk> to <unk>.
Well I mean, we only guide the first quarter and get Sean So I will not provide guidance for the full year and mobile.
But certainly our focus on further driving our penetration with the mobile wallets, there I think I spoke about the.
The hitting the 40% of attachment rates at the end of last year and do you think we are perfectly on track to get this two of 50% rates through this year.
And secondly, we have the the emerging Latrobe items.
And you've probably followed the.
The most recent announcements of Samsung.
And who actually brought and all.
A couple of phone salt, which which Richard.
Carrying latrobe items.
And that is not also spreading into into an associated ecosystems, which I think makes it even more attractive I think some sort of spoke about digital the car keys for for a couple of car companies and they they also spoke about actually the first move small into the.
And to the Iot World, which is the product, which they are made.
Just take hold of smartphone PEC blocks, which is like a.
Small find the device, which you which you can attach to something and then you you will find it with your phone now all of debt is going to help.
And with some of them, but of course also with the other Oems and drive further and and speedy wood from license.
The adoption in line with what we did in the inverse of the teach and some time ago.
So those two pillars outstanding firm and I'd say.
Certainly some of the of the Big OEM customers also have good run rates from but I would say for us it continues to be of content growth story.
The cure mobile wallets secure ultra wide band and then you know we also had.
And the EU, ICC, which is which is coming in so there is the number of very specific content drivers.
And which make us actually.
And quite optimistic and mobile all of the continued basis beyond the unit rates.
And Curt do you have enough data yet to think about how your content trends from 40% to five genes and assuming that these new applications are more broadly adopted and five coupons.
Yes, sorry, I didnt respond to this and the first place I think actually in principle of this is not dependent or required.
And as an association with what she or five cheese specifically.
Clearly the <unk>.
<unk> will be it'll be about high influence and the first place we had the debt. The early adoption of these features might be.
The first but it is not necessarily something which is dependent on the fortune five cheap so which is good actually there'll be or you are kind of agnostic to that.
Perfect. Thank you.
Your next question comes from the line of Ross Seymore, what the Deutsche Bank.
Hi, guys. Thanks for letting me ask the question. The first Peter Congratulations on your retirement announcement, and I know youre going to be with us for another year or so but congrats Nonetheless, I guess, that's my first question overall.
And everybody knows that the supply shortages, but I hope to get a little more color on it from a <unk>.
Somewhat higher level could you size and any way shape or form the impact and what you couldn't ship and so what your revenue impact of the supply constraint was and the fourth quarter of the first quarter any color about which end market is more acutely hit as you split your business and and the timing wise when do you think you'll be able to catch up.
Okay.
Peter.
Okay right.
I guess.
I guess I'll say.
A couple of things really rules.
Okay.
You know you can you can look to a really big numbers and the AR and.
And the fourth quarter and the first quarter you know just if you do some chunks of masks on all months of.
Supply and <unk>, and I'll start and lots of inventory and distribution, but I'm not sure out of relevant to the Israeli.
So in theory, we could have shipped hundreds of millions of dollars of more.
But then I don't know to what extent and you'd be that and pulling that out of the of.
Of Q3 and Q4.
We're seeing strength.
Also of businesses.
Hum.
There's a lot more.
Reporting and the automotive sector because of.
The having real supply issues, and having to maybe closer of and factories and shut in certain cases and you talk about.
People not being able to work for four weeks of time.
As you know maybe different too.
And you see and some of the smaller customers.
Who don't have the same the.
Microphone, but even in those of those areas and I see and.
This does see and problems so I would say.
It's pretty general and I would go back to one of the kids comments, which was.
2019, the supply chain really go.
Really emptied the demand was very weak and we really we really forget about 19, and the and the context of Covid and then you know and the first half of <unk>.
'twenty, we've got the absolutely the same same issue so.
And now we're looking at.
Pretty empty supply chains across the board.
To some extent, if it's successful and fine.
Maybe people moving into.
And the big the Taiwanese.
Hum of the foundries outside of China by the.
The fact that the people thought and maybe they would not be able to buy it.
The product out of China.
And I think trying to parse it.
You know really individual.
The situations, it's absolutely very difficult so I would say and theory, yeah, we kind of shift a lot more.
And Ah.
Effectively.
We're sold out for Q1.
And with just spending huge amounts of time with mom with customers, making sure that.
You know they keep the factories go and which is why to make the comment that we don't think anything quite shipping of the monitors going into inventory and we think it's all going into.
The building products.
And we think it's you know it's going to be quite some time and we wouldn't speculate exactly one of.
Hum.
So when we get to a point that sort of becomes more balanced and and everyone can the salt to breathe normally.
Thanks for that color, Peter I guess switching gears somewhat completely over to the Opex side, you gave a lot of details on the gross margin side and the profitability why that's where it is and how it can improve how are you approaching the opex side of the equation. Obviously the revenue it sounds like it's going to be very strong throughout the year will you be.
Lending to that how should we think about that $5 90 level and <unk> trending for the rest of the year.
And we want to run and 16% of R&D and 16 percentage of revenue for all of the and 7% of thrusts C&I and.
The actual fact, the the increase and dollars from Q4 to Q1 is essentially.
And with nearly all of our non.
Non exec our variable comp.
So its just incentives so we're keeping a tight.
Tight tight Honda and Opex we.
And we won't.
We won't spend.
The head of revenue really.
But we would like to around 16% of R&D and seven per cent of S.
S T and I.
And in the you know the very short term for a for.
And for Q1, and the increases will and <unk>.
The increases in compensation and.
Variable comp accruals.
Okay. Thank you.
Your next question comes from the line of William Stein with true.
And this securities.
Great. Thanks for taking my question.
I'm wondering if you can discuss the competitive landscapes, and a little bit and particular as it relates to pending M&A you have.
Adi and Maxim that can consolidate the analog market and a little bit you have nvidia buying arm to that and important supplier of yours I'm wondering if you can comment as to whether either one of these or any other of transaction might have.
And any influence on your competitive positioning and perhaps your own plans from.
The perspective of consolidation.
Hey, Bill So I mean, you know the beaches don't comment on M&A and these calls.
But what is relevant is debt as it relates to our strategic focus and all of our.
Say belief and our power of differentiation, we continue to be Super really super confident that with the portfolio, which we have actually largely achieved or two of good extend also through M&A achieved.
Isn't a very good position I mean, let's not forget that the the trends.
Trends and secure edge processing solutions, which we have is the result.
Of the Freescale acquisition and a couple of years back.
And then further complemented by the wireless acquisition from Marvell about one year of BEC.
We are proud that we've been able to successfully integrate all of this and actually are now in the precision to come out with solutions with products.
Which are building on the Ips from these different former deals.
And.
From anything I've seen.
Relative to the deals you mentioned, we don't see this as the threats to that complete the competitive decision of which we have so why and I don't Wanna comment in general on M&A I would say it doesn't it doesn't touch our trust and our confidence with the strategic focus, which we have I continue to believe that.
Net full steam execution and what we have is the very very high bar you endeavor.
Great I appreciate that and maybe if I can follow up with another question about the supply demand imbalance.
And typically when this happens.
And you have this behavior of over ordering by some customers that stimulate the capacity additions and sort of there goes the cycle.
And this behavior is typically what sort of peak the peak of the cycle.
Argued the.
And I think that the.
Lean inventories through the supply chain and really the breadth of demand.
What perhaps will make the cycle extend a little bit longer, but I wonder if there's anything else that relates to the insight the eval shared with us already suggesting that.
We continue to see this imbalance favoring growth and go through the year.
Yeah, I mean, indeed will be the polls seemed that movie before I couldnt agree more that the there is this element, which is which is creating a bubble of eventually.
But I would really highlight and I say that from very very hands on practical experience currently.
Everything we ship goes into production debt.
And it isn't pilot any inventory and any place and.
And I can also again emphasize it is growing I mean, you you read and see a lot of about automotive and as Peter said because debt that is very prominent and when it comes to to publications.
But it is much broader the we have the same search and demand in our other markets.
So that makes me belief that at least at this point in time. This is not about inventory building.
Now certainly if people continue to watch this very carefully because again, we've seen this before we'd be we have our controllers, we know what to what to look after but now is not the time to be worried about debt. So we clearly see this demand continuing for a couple of quarters without building building unnecessary inventory the.
Only.
And I wouldn't say exception, but the the one thing specific which I believe could become the.
Gross trend, which is then nothing wrong, but something to be conscious of boat.
And is possibly the effect that the auto industry billable and to have along the supply chain and higher inventory levels than they used to have just looting.
From the current experience and trying to mitigate and the any future disruptions.
And that would be then building inventory, but it wouldn't be a bubble, but it would be of very conscious and very safe target of building less inventory, but again.
From anything we can see with our product business. We are far from this at this at this point in time, but it could become something which happens maybe later in the year.
Great. Thank you.
Your next question comes from the line of Blayne Curtis with Barclays.
And thanks for taking my question I, just want to ask one of the industrial Iot business.
Honestly, you talked about the auto segment and in depth obviously.
Seasonality is typically down and you got it and I think given easy year over year compare but it still seems up pretty robustly and maybe you just talk about the drivers within that segment.
Blamed it did I hear you right industrial and Iot instead of what do you want to yes, yes.
Yeah, Yeah, no absolutely I mean, the are actually quite proud about our performance in and industrial since even last year, which which clearly was the very difficult year for the industry.
Our industrial business all of the on a full year basis did grow by 15% year on year and and as you've seen from the guide we we have the confidence we continue this.
It's it's really carried by the by.
But the solution capability.
<unk> made up by the by the crossover processes I mean, it's the whole.
Processing portfolio, but specifically the crossover and are delivering on the promise.
Coupled with all of our buy side of capabilities and and you might've seen interest in and.
And Q4.
We launched our first and what I think is really and industry leading to buy two of Wifi six solution.
Which is the result of the of the Marvelle acquisition, but getting this all together into solutions is actually doing what we what we wanted to see now there is one other element with this which I think is the driver.
For the growth for NXP, particularly in that segment and that is all of our exposure to China.
Debt.
Also I think the the background for last year's strong performance, because China left the pandemic from a from an industrial performance perspective behind them already and the second quarter. So.
So if you will China had three strong quarters last year and our industrial business has a is a quite big exposure to China. So we have been benefiting from this and we see this continuing into this year.
Thanks, and just maybe as a follow up to that can you just talk about the supply side is the segment that you are also being impacted by tightened and any kind of view on kind of lead times within that segment.
It's it's across the board of blade. So yes. The the are also impacted by the tightness of supply and or in our industrial business.
I can't really talk about lead times, because it really difference I mean behalf of number of products. This was very normal lead times, but we also have a couple of products with 52 weeks lead time. So the there is not one answer to this question. The only thing I can say is that yes. Industrial is also impacted by the tightness of supply.
Thanks.
Yeah.
Thank you for the question I think that would be our last call maybe pass it over to Kurt.
Thank you and I would now like to turn the call back over to Mr. Stevens. Please go ahead.
Yeah, Thanks, very much operator.
Yeah, I think and summary, it is fair to say that if we just for a minute look back to last year last year and has really been a year with two phases.
And very grim.
And very difficult year in the first half.
And then a definitely faster than anticipated recovery in the second half.
And given all of the discussions, which we've had about a supply and demand. It is fair to say that we believe it's the only at the start of the recovery. This will continue through the calendar year 'twenty 'twenty one.
And we see that our specific.
And the market focus of NXP with a lot of strength and automotive.
With the lot of very specific strength in the and the mobile and in industrial and Iot.
Gives us actually a very good opportunity to benefit from this from this continue and recovery into into the calendar year.
The one segment.
The suddenly.
And less less happy with is the content per segment as we discussed but also there given the new product introductions and gallium nitride. The are optimistic on the second half of the year, which is the strong driver for our mix when you think about the overwatch and targets.
And with that I. Thank you all.
For the for dialing into the call and most of all the police all stay safe and stay healthy. Thank you very much.
Thank you.
Ladies and gentlemen. This concludes today's conference call. Thank you for your participation and have a wonderful day you may now disconnect.
Yeah.
[music].
Uh huh.