Q2 2021 NXP Semiconductors NV Earnings Call
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<unk> 21 earnings conference call.
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I would now like to hand, the conflicts of I guess do you think of day, Mr. Jeff Palmer Senior Vice President of.
The Investor Relations. Please go ahead Sir.
Thank you Crystal and good morning, everyone welcome to the analyst to semiconductors second quarter 2021 earnings call.
With me all of the call today is Kurt Sievers, Nxp's, President and CEO and Peter Kelly our CFO.
Call today 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 the 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 specific end markets of which.
We operate the sale of new and existing product and our expectations for the financial results for the third quarter of 2021. Please be reminded of 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. Additionally, we will refer to certain non.
Non-GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to nxp's underlying core operating performance pursuant to regulation G. NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our Q2 earnings press release.
Which we furnished to the SEC on form 8-K and available on Nxp's website in the Investor Relations section at NXP Dot com.
Before we start the call today I'd like to highlight our upcoming 2021 analyst day at this time, we are planning on hosting an in person event in New York City on Thursday November 11th 'twenty 'twenty..1 we will we will open up an online registration site over the next week and we Wouldnt suggest interested parties to pre register of space.
I'll be limited the cycle.
And now I'll turn the call over to Kurt.
Yeah. Thank you very much Jeff and good morning, everyone. We really appreciate you joining our call today.
I will review our quarter 2 results and I will discuss all of our guidance for quarter 3.
Furthermore, I would provide an updated perspective.
On how we view of the current demand environment.
Well, let me start with quarter 2.
Overall, our results were better than the midpoint of our guidance.
With the contribution from the communications infrastructure end market stronger than planned.
And the bus the high end of our guidance.
At the same time the trends in the auto industrial and mobile markets the old slightly above the midpoint of our guidance.
Taken together NXP delivered quarter, 2 revenue of $2.6 billion.
An increase of 43% year on year, and 26 million of Buck the midpoint of all of our guidance range.
These are very good result, given the constrained supply position, we knew we would face entering the quarter.
Our non-GAAP operating margin in quarter 2 most.
Both of the strong 32%.
1100, 30 basis points better than the year ago period.
And 70 basis points above the midpoint of our guidance.
Our strong operating profit performance.
It was driven by a richer product mix.
Now, let me turn to the specific trends in our focus and markets.
In automotive quarter, 2 revenue was 1 point of 2.6 billion.
87% versus the year ago period.
The slightly above the midpoint of our guidance.
In industrial and Iot quarter, 2 revenue was $571 million.
31% versus the year ago period.
And slightly above the midpoint of our guidance.
In mobile quarter, 2 revenue was $347 million.
Up 36% versus the year ago period.
And slightly above the midpoint of our guidance.
And lastly in communication infrastructure and other.
1 of the tool revenue was $416 million.
On the 8% year on year however.
However, about 21 million better than the old guidance.
With this let me move to our outlook.
We are guiding the midpoint of quarter 3 revenue to $2.85 billion of.
Up 26% versus the third quarter of trade 'twenty.
Within the range of up 22, 2 up 29% year on year.
From a sequential perspective, this is up 10% at the midpoint versus the prior quarter.
At the midpoint of this range, we anticipate the following trends in our business.
Automotive is expected to be up in the low 50% range versus quarter 3 trade 'twenty.
And up in the mid teens range versus quarter $2.21.
Industrial and Iot is expected to be up in the high teens percentage range year on year.
And up in the mid single digit range versus quarter $2.21.
Mobile is expected to be down in the low single digit range year on year and down in the mid single digit range versus quarter 221.
And finally communication infrastructure and other.
Is expected to be up in the low single digit range versus the same period a year ago.
And up about 10% of sequential basis.
At this point, let me give you an update on Nxp's current demand position.
As I shared with you on our last earnings call, we had anticipated product supply to be a challenge in quarter 2.
And this is indeed, what we experienced.
With the continuation of robust demand, we expect supply to be a challenge for the foreseeable future.
We do continue to work very closely with our customers on the day to day basis to accommodate their most pressing short term requirements.
During quarter 2 based on the orders and all of the various actions we took over the last 6 to 9 months.
We began to see wafer supply from our foundry promise and in total perhaps improve.
We do anticipate continued increase of wafer supply during quarter 3 and beyond.
Which will support our revenue growth in subsequent quarters.
However, with customer demand outstripping current supply.
The situation that we see across all of our end markets.
We are working diligently to secure additional supply to achieve a healthy balance of demand versus supply.
The significant number of our customers are also taking action.
Placing non comparable and non returnable orders for the medium term.
Furthermore, based on customer discussions and also based on our own analysis.
We do not believe there was excess inventory of NXP components, along the extended supply chain.
Additionally, we continue to make significant investments as the direct result of the very detailed conversations and associated commitments concerning long term demands across our customer base, especially within the automotive and industrial end markets.
These investments include long term contractual commitments to our front end foundry partners in order to assure supply.
As well as making investments to expand our internal front end capacity.
Our in total back end test and assembly capabilities.
So as to avoid potential bottlenecks at the wafer supply materializes.
Notwithstanding the challenging supply environment, our results and guidance clearly validates the excellent underlying long term growth.
Profitability and cash generating capability of our business.
We continue to see our company specific key revenue growth drivers in our strategic end markets unfold as we have long anticipated.
These drivers include our 77 gigahertz radar systems are.
Our corporate solutions.
The domain in total processes.
In the electrification products, including our battery management systems, all in the automotive market.
And within the broad based industrial and Iot market.
Our significant and focused investments to enable complete secure connected edge processing solutions.
Are being very well validated by strong customer design win awards.
And these are just a few of the opportunities we have shared with you at our productivity gains.
All of the emblem continued to contribute to our future growth.
By the will not provide specific guidance beyond the current quarter.
We do anticipate quarter, 4 revenue will be greater than quarter, 3 on an absolute basis.
And we are highly confident the trained 21.
Marks just the beginning of the longer term upcycle for NXP with in our strategic end markets.
In summary, we are very encouraged by the continued and consistent rapid rebound in demand across our end markets.
Our employees are highly engaged to drive our success.
We have a robust pipeline of new and innovative product.
And the customer response engagement and design win momentum.
All underpin our optimism about the future potential of NXP.
Before concluding my prepared remarks, I would like to speak to the impact the COVID-19 pandemic continues.
<unk> continues to have on NXP.
The pandemic remains active with spikes that continue to plague multiple regions.
Bevy of operations, namely, India in the second quarter in Southeast Asia. Most recently.
We continue to remain very vigilant enforcing our safety protocols across all of our global sites.
We have initiated successful vaccination drives in several countries for our team members and their families.
However, the highly contagious delta of variance.
Has required that we revert to a complete work from home situations in several of our locations.
I am extremely proud of all our employees.
Well, the the dedication and for the resilience during this very challenging period.
I would like to the specialty comment our manufacturing operations and customer facing teams for their relentless focus and energy while assuring our customers success.
It is their dedication and their hard work.
In the face of the pandemic and the very challenging supply environment at the same time.
Which truly make a difference.
Now I would like to pass the call over to Peter for a review of our financial performance Peter.
Thanks, Ken and good morning to everyone on today's call.
Of course already covered the drivers of the revenue during the second quarter and provided our revenue outlook for the third quarter I'll move to the financial highlights.
Overall, our second quarter financial performance was very good.
Revenues were above the midpoint of our guidance range and we drove an improvement of non-GAAP gross profit of non-GAAP operating product.
Of which were above the high end of our guidance range.
Additionally, we have implemented the long term supply agreements with the foundry partners, which we believe will enable NXP to deliver robust growth in the coming periods.
Now moving to the details of the second quarter total revenue was $2.6 billion.
43% year on year on above the midpoint of our guidance range.
We generated $1.46 billion of non-GAAP gross profit from reported of non-GAAP gross margin of 56, 1% of 700 basis points year on year on above the high end of our guidance.
Total non-GAAP operating income operating expenses was $626 million of.
$110 million year on year on a $26 million from the second quarter.
This was $3 million above the midpoint of volatile items due to increased variable comp driven by an improved first half performance.
From a total operating profit perspective, non-GAAP operating profit was 830 million of non-GAAP operating margin was 32% of.
130 basis points year on year and was above the high end of our guidance.
Non-GAAP interest expense was 19.
The $91 million.
$4 million above guidance as we issued $2 billion of new debt billions of the quarter.
Cash taxes for ongoing operations were 50 million of.
Non controlling interest was $9 million.
Taken together the below the line items were $1 million of vessels in our guidance.
Stock based compensation, which is not included in Illinois earnings was $93 million.
Now I'd like to tenants of the changes in our cash and debt.
Our total debt at the end of the second quarter was $9.5 billion, an increase of $1.$9.8 billion Q2 of the previously mentioned debt issuance.
Ending cash position was $2.$9.1 billion of.
The 1 points over $7 billion sequentially church of new debt and cash generation offset by capital returns during the quarter.
The resulting net debt was $6.68 billion and we ex.
Most of the quarter over the trailing 12 months of adjusted EBITDA of $3.5 billion.
Our ratio of net debt to trailing 12 months of adjusted EBITDA at the end of Q2 was 1.9 times on a 12 months of adjusted EBITDA interest coverage was 10 times.
Our liquidity is excellent and our balance sheet continues to be very strong.
During the second quarter, we repurchased $1.2 billion of our shares and paid $155 million in cash dividends for the <unk>.
<unk> of $1.36 billion of capital return to our owners.
Subsequent to the end of the second quarter between July 5th in August 2nd we repurchased an additional $1 billion of our shares.
<unk> hundred 1 program, resulting in a total of $3.37 billion returned to our owners year to date.
Turning to working capital metrics the ease of inventory was 88 days, an increase of 7 day sequentially.
<unk> continues to be below our long term targets of 95 days of the <unk>.
Sequential increase from the quarter was due to an increase in work in process driven by wafer supplies wafer supply deliveries to support our Q3 revenue ramp while finished goods continued to train to very low levels.
We continue to closely manage our distribution channel with inventory in the channel at $1.6 months flat sequentially and below our long term targets.
Both metrics reflect the continuation of strong system of order rates on a tight supply environment.
It will take several quarters before we're able to rebuild on hand inventory in 1 hand and channel inventories to our long term target levels.
Days receivables were 35 days of 5 days sequentially and days payable of 92, an increase of 13 days versus the product quarter as we continued to increase material orders to our suppliers.
Taken together, our cash conversion cycle was 31 days, an improvement of 1 day versus the prior quarter, reflecting strong customer demand solid receivable collections and positioning for the customer deliveries from future periods.
Cash flow from operations was $636 million of net Capex was $150 million, resulting in non-GAAP free cash flow of $496 million.
Turning to our expectations for the third quarter as Kent mentioned, we anticipate Q3 revenue to be $285 billion.
Plus or minus $75 million.
At the midpoint this is up 26% year on year and 10% sequentially.
We expect non-GAAP gross margin to be about 56, 3% push of -30 basis points.
Operating expenses are expected to be about $665 million, plus or minus about $10 million consistent with our long term mobile.
Taken together, we see non-GAAP operating margin to be about 33% of the midpoint.
We estimate non-GAAP financial expense to be about $96 million non.
Just a free cash tax related to ongoing operations to be about $90 million.
Please note during the second quarter.
Yeah.
We indicated that we anticipated full year cash taxes for 2021 to be approximately 9% and then it would be backend loaded into the second half of the year.
Non controlling interest will be about $9 million.
For Q3, we suggest that for modeling purposes, you use an average share count of 271 million shares which is down about 13% of sorts.
Down about 13 million shares from the year ago period.
As a result of the consistent execution of all communicated capital return policy.
Okay.
Finally, I have a few closing comments I'd like to make.
Once demand trends continued to be strong across all of targeted markets and system of interest in our newest products continues to be robust.
Diligently working with our customers and our suppliers to address all of the request in a timely manner.
Secondly, our third quarter guidance reflects the clear potential of our business model.
Both in terms of revenue growth as well as the significant profit flow through which will enable us to drive non-GAAP gross margin above the mid points of our gross margin targets.
Thirdly, our business continues to generate significant free cash flow, we continue to invest in our internal manufacturing capabilities, increasing capex to expand to expand the packing capacity, but also to increase the output capacity of our existing front on the wafer factories.
We are steadfastly committed to our capital return policy and we will return all excess cash flow.
Excess free cash flow to our owners, so long as our leverage ratio where millions of that's still below 2 times net debt to trailing 12 months adjusted EBITDA.
As Kent mentioned, we believe the demand environment is strong notwithstanding the supply constraints, we continue to anticipate robust growth for the remainder of 2020 volume as well as into 2022.
Finally, I'd like to thank all of my colleagues for the outstanding work and dedication we shouldn't forget that we are all still working of the stringent pandemic protocols.
I'd like now I'd like to now turn it back to the operator for your questions.
Ladies and gentlemen.
Question, you wanted the press Taiwan from Richard.
Question from the farms.
The sunbelt will come from the Ken Zaslow.
Your first question comes from the line of C. J Muse from Evercore. Your line is there from.
Yes. Good morning. Thank you for taking the question I guess first question for you Kurt I was hoping you could speak more about the current state of the auto industry. I think there is a fear amongst some investors that the current auto of run rate is closer to peak and trough and.
And we'd love to hear your thoughts what gives you confidence that the strength of sustainable into 'twenty 2 and beyond.
Yes, hi, good morning.
We are clearly convinced.
We are far away from the peak, especially in the in the auto end market.
The the way to look at this as clearly that.
The while the SAR this year, probably is going to grow around 10%. That's the latest data point, we have we have from IHS.
There is broad consensus that it's going to grow another around 10% next year and only then it will actually surpass the absolute volume levels from the pre pandemic year of of 2019, but more importantly C. J as we've discussed many times in the past our content gains.
And the specific content gains and I mentioned, a few in my prepared remarks like radar E corporate total processes.
And the the battery may of 'twenty in electrification.
Really really drive specific strengths and growth for NXP and.
And from a market perspective, I'd say that the the content gains in general maybe are accelerating a little especially thanks to the accelerated pace 2 <unk>. So we do see that the number of <unk> as a portion of the total car production.
It is growing faster than anybody had anticipated. So the latest data we see again I'm quoting I think of IHS here.
It was like 12% of the total car production last year dedicated for 4 <unk>.
Going to be more like a quarter next year, and then growing fast from there for the onward since ex Cvs half of significantly higher silicon content compared to traditional combustion engine vehicles. This is another strong driver for the for the auto market so far away from our peak.
And finally, very tactically because I know everybody everybody wants to wants to speak and once the here about that.
Trust me I'm in daily contact with the Ceos of the both the tier 1.
Customers of us, which are serving the car companies and the car companies themselves on a daily level trying to make sure that they can fulfill their most pressing needs really handholding shipments day in day out. So there is not a single piece of inventory anywhere in the extended supply chain. They want to build more card. So I have any confidence.
But this keeps growing.
That's very helpful. Thank you I guess as a follow up Peter gross margins stellar.
I think reading your 10-Q, you talked about the benefit of increased loadings, but the mix was not helpful. In that you had higher personnel costs.
How are you thinking about I guess COVID-19 related costs unwinding, what kind of impact that would have.
On the positive side.
From current levels, how should we be thinking about upper.
Couple of from year, as presumably loadings continued to move higher.
I think the so.
So first of all of the Covid test in terms in the context of our gross margin.
I think so.
So I think the cost of relatively low you know we've been running.
Putting all of factories pretty much the same way.
We haven't.
From the past I mean, obviously, you've got the cost of.
Just just subtracting the factory more often we've been paying for.
Lots of kind of medical support, but I'm not I'm not sure it's picking up the really influence the.
Influence of the margin.
I think in terms of the additional utilization.
You're seeing the benefits of that as we go from Q2 to Q3, so our guidance of $56.3 in Q3 really.
So really shows our gross margin with all factories running full out.
So last week as we can.
Kind of expand our revenue and go into.
2022.
You won't see increased utilization because we actually after the added capacity.
Pretty much full out in in Q3, so I still think.
56 is nothing is a great number of Florida, and we've gotten the quicker than.
We thought we would do.
Hum.
The answer the question. There's still 57 is still a couple of years away and there is more around the <unk>.
New product introduction.
Mix helped us from.
Q2 into sort of Q1 into Q2.
And that's why we did a little bit better in Q2.
But the big impact from Q2 to Q3 is really the the.
Additional utilization of being able to run all the factories, particularly the backend flow.
Very helpful. Thank you.
Your next question comes from the line of Vivek Arya from Bank of America. Please go ahead.
Thank you for taking my questions on the first 1 Curt and specific to autos. When do you think supply increases enough to meet demand and importantly, what should investors look to the reassured that the industry supply response is the disciplined so for example, FCC headlines around.
Any specific foundry, increasing microcontroller production significantly how should we react to that so I. Appreciate that you mentioned that you had in daily touch the customers and there isn't any inventory today.
But as you also mentioned the industry is increasing supply sort of how should we be assured that the supply of the swans is not going to over then demand at some point.
Yes, hi, good morning.
Of course, we are watching this as always.
And through every cycle very very carefully.
But again I want to reassure you. We I think we really are quite far away from the because at this point and I mean, you can read the headlines every day.
The industry is still the fourth from a supply perspective, and then you are referring to some foundry statements about 60% increase of microcontroller shipments.
There isn't that much I mean, the our I think our auto of supply or revenue in the.
In the in the first and second quarter taken together is also of around 50% up.
Over the last year and that's also of what the industry takes given the record lows of last year. So last year is not the good comparison I think it's more meaningful to the benchmark back to 2019 or even 2018 when the industry was more of at peak levels from a production perspective.
How do we how do we check this I mean, I would really say most of our product is very application specific. So we are in extremely close context and that is new not only with the tier 1 suppliers, but also directly with the Oems who are of the product is going so we have a very very good visibility in the meantime on the true demand much more than ever before.
The history.
And if you think about the portion of which goes through distribution.
The as always continue to be Super disciplined on the months of inventory with our distributors and as we've as we've published we again state as a.
On the really low number with $1.6 months I mean, the smell the same number we had the quarter before but you know that our target model, it's more of around $2.4 of $2.5.
We watch it very carefully.
Given the.
The supply situation I think the transparency has significantly increased especially in both Dr. Surfing, which is very application specific product I could you mentioned the whole question youre asking of certainty for more commodity like product more difficult.
In our case, where it is so crystal clear of which product goes there into what application of at which car company.
We have lots of.
Much less of the concern on this and given that visibility I am very confident that we are still quite a bit away from from the situation you're describing.
Got it very helpful.
And then from my follow up Im curious why your mobile sales.
If I heard correctly would be down sequentially and then also year on year because in Q3 is supposed to be seasonally stronger quarter for shipments into that market and a right to assume that most of the sales of it stay subdued even.
Into Q4, so just why.
Why our mobile sales not behaving kind of in line with the usual seasonal pattern, we see in that industry. Thank you.
Yeah Vivek.
I'd say in general that there isn't much of the seasonal pattern. This year any way given the situation, but here specifically, yes, youre right. We are guiding sequentially and also annually.
A little bit down.
It really has to do with the supply constraints, so it'll be half of the half of supply constraints for for some product in the in the mobile market.
Which we know we will address later on so this is just off of temporary of nature.
But for quarter 3 it just hits us that we can ship to the amount of which we of achieve ownership. The good news is it doesn't cost us any market share. So the we don't lose any socket with this we fully.
Keep our momentum going.
And it's of a temporary nature, if you do the annual comparison.
Also might want to remind you that last year Q3 was a bit of a special quarter in mobile because it was the last quarter before the Huawei ban.
Which actually benefited the quarter, 3 and our mobile business.
Since people had a bit more in Q3, then since it stopped totally in the in quarter 4 so thats the simple background of Baltimore.
Got it thanks very much.
Thank you. Your next question comes from the line of from the line of Stacy The Watson from Bernstein Research. Your line is our volume.
Hey, guys. Thanks for taking my questions from my first question I wanted the Doubleclick once again on the.
Content increase in auto I mean, you've called out the eds specifically.
Yes, a couple of things can you tell us how much of your auto business is being driven by EV today.
I guess of those content specific drivers, which 1 do you think is the biggest driver in the near term and how much of the.
The lift in the next quarter do you think is being driven just by end market unit growth versus like current increase because you're selling into higher content vehicles.
Yes Stacy.
In general our key driver for revenue growth in ex Evs is clearly the battery management solutions.
Which have a fantastic exposure.
In our invest the teaching.
We told you that we would have of 60% CAGR over the next couple of years.
And I can absolutely confirm here that we are.
At least if not more than on track with that.
The trends in battery management solutions.
Now if you take it a little bit wider.
It is actually more because of lot of all of our Microcontrollers and other products. The also very strongly exposed to the increased content of of ex Evs Beeville actually go in a bit more detail on that particular question Stacy in our Investor day, which of which Jeff has just highlight the November 11.2.
Part of the little bit more in a more detailed way on how all of this shows up.
But overall just just take it for granted that the double silicon content of.
A <unk> versus the conventional drivetrain gifts.
The significant benefit also to NXP. So we are significantly benefiting from a higher rate of <unk>, which is the strong push for our content growth story here.
Got it thank you.
From my follow up I wanted to ask about the cash return. So you bought back a lot of stock I think as of March up the.
Buyback, yes, something like $2.6 billion, an authorization and youre sort of like $2..2 of it now is here youre almost through the whole authorization.
But you're still guiding share count's down so I guess do we expect even more or are you going to return more than 100%. This year and I guess, just given the strength of the buyback as it exists can you talked a little bit about what that suggests I suppose it yet.
That you have.
I guess it reinforces the confidence you're talking about growth in the next year.
But I guess long series of why are you buying back so much stock right now or should we expect even more cash returns as we go through the rest of the year since it seems like you're mostly through the buyback of the days.
So maybe I'll take that kit.
So I guess the answer to your second or third question that is.
We have a lot of we have a lot of confidence in terms of.
1 of the companies going so.
Clearly, we think buying our stock at the moment because of good investment.
In terms of of how much of it really quite simple we've said all along we will keep all net.
Debt to trailing 12 months EBITDA of 2 times.
The 2 times level. So we so we buy back to that level all of that.
Time, and and we will continue to do that for the foreseeable future.
And if that results in as volume.
Most of the results of those return of more than 100% of the shares that that's what the result of his butt.
To be honest, it's pretty mathematical we just we just stay at 2 times net debt.
Got it that's helpful. Thank you guys.
Again, ladies and gentlemen, if you want to ask the question Keith Grass Taiwan. The next question comes from the line of Ross Seymore from Deutsche Bank. Your line is open.
Hi, guys. Thanks for letting me ask the question I had 1 clarification of 1 question and then a follow up the site can be.
So bold, but have you guys ship, the $90 million and shortages of other taxes did you catch up on all of that and automotive or where have you. That's the clarification and then I guess the longer term question maybe for Kurt on the auto side are you seeing the customers change their behavior at all the just in time practices that the that sector has adopted the seemingly have.
Backfired on them a bit with the velocity of demand recently.
Any of the conversations you are having highly.
Highlighting structural changes or is this all basically just short term reactive movement and you don't think anything is really going to change a couple of years down the road.
For the industry as far as just in time.
Yes, Thanks Ross on the.
The first 1.
Talking to you about the $100 million I think I remember victory.
We lost 4 of the second quarter revenue.
Given the the <unk>.
Winter storm in our 2 Texas facilities that is correct.
I can tell you is indeed that both factories.
<unk> up and running completely so we are up to the pre storm and higher output levels in both factories, so firing on all cylinders again.
With that we have the also the tree.
We would have wished to have already in the first place so.
That is good news both from a revenue perspective going forward because of its steady I mean, this is not the onetime effect, but it's steady output.
But it's also good news from the supply perspective since.
Both factories had a significant exposure as we discussed earlier 2 of them to automotive and the comms infrastructure market, which were badly waiting for these product. So we are glad and thankful to our employees who.
We have restored the operations in the in record time.
On the other half of your question Ross.
I see signs of the structural change in the behavior.
Of the of the auto, especially also of the auto end customers.
And I think there are 2 pieces to this the 1 is gonna be indeed, realizing that.
Just in time system.
Is not totally compatible with the 3 to 6 months manufacturing cycle time and semiconductors.
You don't have some sort of a buffer of in between which is dealing with it so some more inventory.
In the extended supply chain I think is going to be a result of this now when you ask me is this being implemented my answer is no, but it's just because the supply is not there I mean at this point in time people are planning for this at some point, but they can't they can't implemented yet, but I think this is going to be eventually of structural change.
The other 1.
Is actually the.
Hi.
First of the 2.
Transparency, which we get directly from the car companies as I mentioned earlier, we've never had so much clarity.
<unk>.
<unk> product in which application in which model year Bill of run at what volume.
So this is becoming much much better than it has ever been because structurally the up just moving much closer in the collaboration with the with the car companies.
And I think with that also the binding forecast so not only providing that forecast, but also making the more binding on the on the mid to long term basis is going to be of structural change and that's the significant 1 because the that wasn't the case in the past so of more binding forecast.
It will also help to to foresee and plan with the right with the right capacities on our end.
Thanks for that color Kurt 1 quickly for you. Peter you gave great color on the gross margin side of things. Another target you guys of given historically is the opex intensity and I think it range anywhere between 20% to 24 percentage or as of your last analyst meeting and I know you might be updating that later this year, but can you talk just a little bit about the <unk>.
Leverage potential there I think this year it looks like Youre running kind of the within that target range, but at the higher end kind of $23.23, 5%.
You foresee some leverage getting to the lower end of that range or just generally how should we think of opex for the relative to revenue growth.
Hi.
Certainly for the moment of time think of the 23%.
Revenue of 16% for R&D.
7% of SG&A.
There's probably some leverage on the SG&A number because although we.
We typically increase sales and marketing G&A.
We would more likely to hold flat in dollars, but I think certainly for the moment of 23%.
This is a good number to flow.
Thank you.
Thank you. Your next question comes from the line of John Pitzer.
From credit Suisse. Your line is open.
Yes. Good morning, guys. Thanks for let me ask the questions. Congratulations on the solid results kind of I wanted to ask you a little bit about your comm infrastructure business, which came in much better.
And then guide from the June quarter, and it's going to grow nicely in the September quarter I know the pre the Huawei ban you were very excited by some design wins <unk> had 1 there, but clearly had the kind of temper expectations with the band, but it seems like you guys might be more levered to the <unk> cycle than some of the.
Can you just walk through kind of what you think is driving that growth, especially given how good the margin can be in that business.
Yeah, So John.
Indeed, we did talk last year about significant design win traction.
Around the large Chinese customer, which of them, which did fall of pumps.
So indeed this is still not there I just want to be clear the business, which is non performing in between which we guide for the next quarter.
Is not related to this design win which we had talked about last year.
The outperformance in the second quarter.
It's actually across the segments.
It does include some of the <unk> build outs, but it's it's just across all of the product sub segments, which are in this in this revenue segment. So it is not only the <unk>.
But it does include <unk>.
How we should think about the the nice guidance for the third quarter in the incomes in from.
And then I'd say, yes indeed.
As we had anticipated and actually I think discussed on the number of the last calls.
We do see.
I'd say 2.2 trends around 5 key which are which are letting us growth.
The C. The anticipated ramp for these multi technology modules.
In the U S. So multi technology means the LD Moss and gallium nitride or new from our UK of nitride, both take note of technology product and facility.
In the in Arizona.
But it's also that we are nicely included in the China <unk> Tempus Bitch, all of those macro base stations for the for the rural areas.
Which are actually in the frequency range sub 2.1 gigahertz, so somewhere between I think 700 megahertz in 2.1 gigahertz.
Which is the perfect fit to our LD Moss capability and leadership. So it's those 2 children from a go forward basis. When you think about Q3 and beyond which are indeed, indeed driving nicely all the growth the U S.
The technology modules for <unk> and the CPC tenders in the in China.
That's really good color and then Peter in your prepared comments you talked about the high class problem of needing to expect from both front end and back end capacity is that mostly being done with outsourced partners. So it's more of a working capital hit the net capex in it or how do we think about capex over the next several quarters.
As you continue to try to make supply of catch up the demand.
The capex will be about 7% this year, so yeah, it'll step of it.
In Q3 Q4, mainly of.
There's a lot of assembly of Tesco in the but also.
Some bottleneck posting you know.
The hubs.
So capex will be up.
I don't see working capital going off anytime really I mean, it's.
We definitely like more of inventory, if we could get it but.
As fast as we get it we tend to build it which is the sort of comments on how the round.
Finished goods being on the whole time low.
All of a.
A bit more raw material in.
Work in progress from shipments from the foundries towards the.
At the end of the quarter that we received.
So so I guess stepping back, but definitely investing more in internal capacity.
And that of.
The positive impact on those next year.
We continue to work very hard with all of the suppliers just to get.
Additional supply from them.
Yeah.
As fast as we get it we build it and ship it to customers. So.
I don't really see a.
Inventory levels getting everything back to anything like normal anytime soon.
Perfect, Thanks, guys and congratulations.
Yeah.
Your next question comes from the line of million sprang from concept to service. Your line is open.
Great. Thanks for taking my questions and I'll add my congratulations, especially on the guide very strong.
Wondering if you can remind us sort of the.
A clarification the breakout within the comm infrastructure business I think we tend to think about this as largely or all of RF power amplifiers, but I know there is digital.
Networking and I think there's still some I'd card business in there as well can you remind us of the split and maybe how you expect the.
3 of those pieces to grow overtime.
So hi, Bill Thanks for your for your congrats on the on the guidance.
The the the subset is indeed as you said.
The.
<unk> power for infrastructure. It is about digital networking and there is some secured cards business also in there the will not break all of the.
Details between them Bill so, but what I can say I think I mentioned it earlier the.
The outperformance in the second quarter was across all of them. So it wasn't it wasn't limited to 1 of the sub segments, but it was actually across all of them. When you think about the the guides and the growth into the third quarter. It has probably led by the by the 5 <unk> related.
The comes in from RF power.
Thanks for that and 1 more if I can the other sort of product question.
I forget when 1 or 2 years ago, perhaps you started talking about the ultra wideband products and the growth that you're anticipating seeing in handsets.
And automotive.
And I'm wondering if you can provide some update in terms of your revenue traction.
In the 2 end markets for this product category and the outlooks for them today. Thank you.
Yeah happy to do so well.
Because it's really nicely on track.
Just to remind everybody that.
It's not just about the product. This is a complete ecosystem play very indeed the.
Offer the radio the secure element and software.
For solutions across the automotive mobile and Iot.
We are very much on track Bill with I think what the.
What we said at the teach them to have some 300 to 400 million revenue across those segments in the in 'twenty 3 so in only 2 years from now.
As of today.
Say mobile is actually.
Happening as we speak.
If you think about the Android growth.
Sales to say with all of the major Android phone companies.
We are working very closely.
Automotive is now closely following.
That was just the function of mobile because obviously the automotive use case of using your mobile as a as the car key niche.
Needs of the phones to be in place firstly.
This is now happening so the first car spill there'll be out in the market in the second half of this year and next year and there I E.
The air to say.
With the relatively high degree of certainty that any car company, which is booking in.
And all of the Ultra wideband implementation is working with NXP.
So we are highly and very positively exposed here. Finally, we also see a good traction with first Iot implementations.
1 of the early examples are the those tax bitch Bitch help you to find stuff, which you, which you might have lost.
But it also.
We also see nice design wins in door locks for home properties for example.
There you would then use your mobile phone 2 of them to open the your front door and unlock it.
<unk> very much on track bill against the numbers, which we which we had given the growth 3 to 400 million revenue size of for NXP in 2 years from now.
We think the market for this is growing at some 40% over the next couple of years.
Great. Thank you.
Thank you. Your next question comes from the line of tissue.
From Goldman Sachs. Your line is open.
Hi, good morning, Thanks, so much for taking the question.
Just had 1 for them.
Curt or Peter I wanted I was hoping you could elaborate a little bit on the <unk> that you've already signed with with foundry partners or perhaps youre looking to sign going forward.
We read about.
Price increases from from the foundries going forward, how should we think of about the balance between.
Cost inflation for you guys versus your ability to price higher as well going forward and my guess is the 57% number that Peter you alluded to Embeds some of those dynamics, but I wanted to clarify that as well. Thank you.
I'll, let I'll, let Peter answer, but I really want to make 1 upfront statement because that's the.
It is important yes input cost is rising.
And yes, the Pos on the cost increases, but this is not.
The tool for us to artificially increase margins the or in a largely application specific and very trustful relation with our customers for years to come.
So we do pass on the input cost increases.
But that's not the mechanism to get to to structurally increase margins Peter you might want to give more color.
I think you just answered the question really kiss.
Yes.
We are not of a commodity company, we don't raise prices when times time and reduce them when the.
Thompson the whole time.
Hum.
What's been very interesting about this whole total change.
As the there's really been true 2 big factors 1.
I was talking about before which is.
It's enabling us to build.
Deeper relationships with all of our customers and understand.
The requirements from the supply chains.
2 of them, we have in the past.
And in terms of our suppliers.
You can you can.
Without without kind of going into lots of detail you can actually.
Kind of 2 of your true partners, who will who will support you in the years to come in and who of the guys are of a little bit more.
Predatory.
But all of us.
Our markets and supply chain.
It's really built on long term relationships.
And long term.
Sources of supply both for our customers and for ourselves and the.
Hum.
No of predictable level of pricing and profitability.
Thank you.
Congrats.
Thanks.
Your next question comes from the line of Chris Thompson from Raymond James Your line is open.
Yes. Thank you good morning.
On the capacity additions.
And the Capex that you said the stepping up here in the second half of the year how for how long do you expect that to continue and I imagine that the equipment lead times are extended also you have to be giving.
Your equipment supplier of some visibility on this.
I guess the question is how long will you.
The meeting to continue adding capacity in order to get caught up with the with the level of demand right now.
Well.
I guess the.
The very simple answers will continue to need capacity.
For the foreseeable future because we believe this.
A really healthy cycle going on in terms of.
The product so 1 thing thats really come out on the left.
6 months as the.
For those people outside of the semiconductor industries I've really begun to understood understand but some of these are a core part of everything we do.
So to the extent the GDP grows over the next.
A few of your issue we will see the.
Semiconductors grow probably.
A faster rate I think the thing to remember with us about 70.
The 70% to 80% of all.
Assembly and test capacity isn't channel so.
And of that wont continue to be.
The kind of the healthy.
A source of capital requirements.
The thinks about 50.758.
The center of our wafer supply is external.
We're not likely to of a build of new of new fab, but where.
We're constantly.
Update on the equipment, we have the keeps them.
Came.
Came from currency.
So.
I think of the past, we've said through the cycle, we will spend 5% to 7%.
On Capex last year it was.
Below 5.
This year of the 7.
We'll probably update of more longer term view at the analyst day and the.
In November.
Okay.
As of.
Great.
<unk>.
I'm, sorry, you're breaking up.
The contract.
And all of them.
Sure.
And where we're going.
Alright.
As that happens who of you expect.
Okay.
The <unk> on the automakers books.
Each of Sydney.
Of course.
So I guess 1 of the net sensible in terms of.
Bears the cost of that.
I apologize I don't know if it was me.
Anything as of I don't want it.
You could hear what he says.
I had the same problem, but I guess you were asking about something of the cost of increased inventory.
Yes, I'm sorry.
Im not sure of what happened, but the question is as the inventory as the automakers.
Asked for more security supply is more inventory, who bears the cost of that will not be inventory that the automakers will take possession of and pay for in advance of B.
Some combination of just more inventory on the hub, who basically pays the cost of that.
Well first let me, let me point out again, it's not something which which happens to any extent today because of the capability is not there.
1 it will happen.
It won't be up I mean, it needs to be part of their business model. So it will have to be somewhere between.
The tier 1 suppliers all the companies and maybe some some distributors in some cases.
But most of our end.
Got it thank you.
Your next question comes from the line of Blayne Curtis from Barclays. Your line is open.
Hey, guys. Thanks for squeezing me in I, just wanted to revisit on the supply side, just the cadence that you are bringing it on so when you.
The growth Youre seeing in September we will you will inventory you have to ship out of inventories. The are you able to match that with supply just trying to understand the cadence of bringing it in and then you mentioned mobile you've kind of re prioritizing for a quarter or is that just kind of a 1 off or are.
Or are there other segment the even with the stronger in September that you are having to prioritize the away from them.
Well the Blaine, we continue to be constrained across the board and of course, we need to take all the time certain priority of decisions and indeed mobile is is kind of suffering in the third quarter.
But everything is relatively short across the board.
The additional supply coming online is really gradual from many different sources I mean, we talked about it we have increasing traction with the with the mid and longer term contracts with all of our foundry suppliers, we have texts of fully up and running by now.
We have.
As Peter alluded to in west of both into.
Our internal tests of that simply kit capability, but also looking at some expansion of our in total from the factory. So all of these things across the different technologies and product are happening.
Gradually so it's not it's not the 1 time event.
But I would say with the demand being as strong as we continue to foresee it.
It will remain tight for a while but but the the 1 really suffering in Q3 is indeed mobile.
Thanks, and then just wanted to ask you on the auto side, 1 source of content gains, though as new model years that typically make seasonality in autos kind of have a.
March heavy.
It seems like maybe Youre seeing 22 model years earlier I'm, just kind of curious as you think about that content portion, you're obviously benefiting now from maybe a mix shift to EV, but just kind of auto the seasonality is different this year or are you seeing maybe model years earlier, just kind of walk us through obviously don't want to guide for some remarks, but just any thoughts on kind of seasonality to that.
Auto business after September.
Well the plane.
I think I said for the total business that we we expect Q4 in absolute revenue terms to be above Q3.
That's 1 secondly.
Secondly, I don't think there was really seasonality in auto at this point in time, because dealer inventories are at record lows in the U S and in China.
And they just can't build as many cars as they would wish to build so I think it's more a function of supply availability in terms of when when they will do so at this point in time. It is really supply constrained for them, which I think overrides in the.
And the seasonality.
Thank you Sir.
Sure.
There are no quite all right.
At this point, Jeff I guess, we are we are running against time right.
Yes, that's correct.
Yes, So let me let me then maybe from my and conclude the call was saying.
I hope he could give you a good view and transparency into the continued very strong demand, which we are seeing across the board.
And at the same time.
The news that we are seeing increased supply of capability coming on line, which drives the strong guidance into the third quarter from a revenue perspective. We also told you that quarter 4 is going to be yet higher than quarter, 3 and the continued to see this trend going into the next year and at the same time, we see that all of our gross margin.
<unk> are now very much hitting the mark, which we are which we had anticipated for a long time.
With that I. Thank you for your attendance today. Thank you.
Thank you all.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
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