Q2 2018 Earnings Call

July 26, 2018

Today Ladies and gentlemen and thank you for standing by welcome to the NXP semiconductor second quarter 2018 at earnings conference a the time. All participants are in a listen oning mode as a prevent background noise if anyone needs a distance during the conference. The first are in.

Operator: Good day, ladies and gentlemen, and thank you for standing by. Welcome to the NXP Semiconductors Q2 2018 Earnings Conference. At this time, all participants are in a listen-only mode to prevent background noise. If anyone needs assistance during the conference, just press star and zero. We will have a question-and-answer session later, and the instructions will be given at that time. As a reminder, this conference may be recorded. Now, it's my pleasure to turn the call to Mr. Jeff Palmer, VP of Investor Relations. You may begin.

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Dp of inves Relations. You may begin.

hry carman with ever morning. Everyone welcome the NP semiconductor second quarter 2000 earnings call. We appreciate these joining this on such court noticeed today, listing on the conferen todays: ick, kmer as Q's presents P and Peter calinourc, aboveas it spends 21 months since our last earnings conference call, we will spend the Q? Ning seessction today to accommodate as many of the analysts questions as possible. If you do obtain the copy of our second quarter 2000 and eighteen earnings press release, that can be found on our company website under the Investor relation section at nxtp com. Additionally, we posted on our innexture Relations website a supplemental earnings summary representations and a document of our historical financials to persist ING your remodeling efforts.

Jeff Palmer: Thank you, Carmen. Good morning, everyone. Welcome to the NXP Semiconductors Q2 2018 earnings call. We appreciate you joining us on such short notice today. With me on the call today is Rick Clemmer, NXP's President and CEO, and Peter Kelly, our CFO. As it's been 21 months since our last earnings conference call, we will extend the Q&A session today to accommodate as many of the panel's questions as possible. If you've not obtained a copy of our Q2 2018 earnings press release, it can be found at our company website under the Investor Relations section at NXP.com. Additionally, we have posted on our Investor Relations website a supplemental earnings summary presentation and a document of our historical financials to assist in your modeling efforts. This call is being recorded and will be available for replay from our corporate website.

As it's been 21 months since our last earnings conference call, we will extend the Q&A session today to accommodate as many of the panel's questions as possible. If you've not obtained a copy of our Q2 2018 earnings press release, it can be found at our company website under the Investor Relations section at NXP.com.

Additionally, we have posted on our Investor Relations website a supplemental earnings summary presentation and a document of our historical financials to assist in your modeling efforts. This call is being recorded and will be available for replay from our corporate website.

This count is corded and will be available to replay from our corporate website. Are coning include forward-looking statements that involve risks and uncertainties that could cause NP's results to differ materially from management's current expectations.

Jeff Palmer: Our call today will include forward-looking statements that 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 macroeconomic impact on the specific markets in which we operate, the sale of new and existing products, and our expectations for financial results for Q3 2018. Please be reminded that NXP undertakes no obligation to revise, update publicly any forward-looking statements. For full disclosure on forward-looking statements, please refer to our press release. Additionally, during our call today, we will make reference to certain non-GAAP financial measures which exclude the impact of purchase price accounting, restructuring, stock-based compensation, impairment, merger-related costs, and other charges that are driven primarily by discrete events that the management does not consider to be directly related to NXP's underlying core operating performance.

Our call today will include forward-looking statements that 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 macroeconomic impact on the specific markets in which we operate, the sale of new and existing products, and our expectations for financial results for Q3 2018.

These risks and mcertainieses include, that are not limited to, the statements regarding the macroeconomic impact on the specifific and markets in which we operatethis fir view existing coms and our expectations for financial results for the third quarter of 2018. Please be reminded that any pmundertakes no obligation reved updates publicly any forward-looking statements for fllther disclosed. On forward-looking statements, Please refer to our press rele. Additionally, during our call today, we will make referenface to certain non-GAAP financial measures which exclu the impact of purchase marks: accounting restructuring, sto-based compensation detiment, merger related cause and other charges that driven primarily by discrete events that the management is not consideed to be directly related to nsp's underlying core operating performance.

Please be reminded that NXP undertakes no obligation to revise, update publicly any forward-looking statements. For full disclosure on forward-looking statements, please refer to our press release.

Additionally, during our call today, we will make reference to certain non-GAAP financial measures which exclude the impact of purchase price accounting, restructuring, stock-based compensation, impairment, merger-related costs, and other charges that are driven primarily by discrete events that the management does not consider to be directly related to NXP's underlying core operating performance.

referturning to regulations June : nsp's proregvided reconciliations of the non-GAAP financial measures to the most directly comparable job measures in our second quarter 2018 press release, which will be furned to the fsec on Z sixteenk and is addressil NP's website in the Investor Relations section. I'd like to turn the call over to CT. thanks jeap, and welcome everyone to our conference callver today.

Jeff Palmer: Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our Q2 2018 press release, which will be furnished to the SEC on Form 6K and is available on NXP's website in the Investor Relations section. I'd like to turn the call over to Rick.

Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our Q2 2018 press release, which will be furnished to the SEC on Form 6K and is available on NXP's website in the Investor Relations section. I'd like to turn the call over to Rick.

Rick Clemmer: Thanks, Jeff, and welcome, everyone, to our conference call today. Hopefully, you have all seen the announcement that Qualcomm has decided not to extend the purchase agreement and to not move forward with the proposed acquisition of NXP. It is an understatement to say we are all disappointed in the outcome of the regulatory approval process in China. Before we start today, I'd like to acknowledge the Qualcomm team and, in particular, Steve Mollenkopf and all of his executive team, in addition to the employees involved in the planned integration process. The combination of the two companies would have represented the true semiconductor industry powerhouse. The product portfolios were highly complementary, including the market-leading NXP Auto portfolio and the Snapdragon processors, and the strong NXP MCU portfolio and Qualcomm connectivity portfolios.

Richard Clemmer: Thanks, Jeff, and welcome, everyone, to our conference call today. Hopefully, you have all seen the announcement that Qualcomm has decided not to extend the purchase agreement and to not move forward with the proposed ac

Hopefully you have all seen the an house N crawcom society not to extend the purchase agreement.

And in our Q quarter, with the proposed acquisition of NXP.

quisition of NXP. It is an understatement to say we are all disappointed in the outcome of the regulatory approval process in China. Before we start today, I'd like to acknowledge the Qualcomm team and, in particular, Steve Mollenkopf and all of his executive team, in addition to the employees involved in the planned integration process.

It is members statefer to say we are also disappointed in the outcome of the regulatory approval process in China.

Before three we starts today. I'd like to acknowledge the Qu, the qual comm team and is particularly seeing moff in all of his executive team. In addition, employees involves in the planned integration process.

The combination of the two companies would have represented the true semiconductor industry powerhouse. The product portfolios were highly complementary, including the market-leading NXP Auto portfolio and the Snapdragon processors, and the strong NXP MCU portfolio and Qualcomm connectivity portfolios.

The combination of the two custoings who have represented deep-true semiconductor industry tohouse. The product portfolios were highly complementary, including the market leading andxpauto portfolio and the snack Dragon processors and the strong nxcmceu portfolio and qucomm connectivity portfolio.

However we do not believe there is any value to do well on what could have been our spend any time discussing the events for the last two yearsinstead we are going to look forward and continue to execute to our strategy and focus on what we can do to accelerate and expand our leadership.

Rick Clemmer: However, we do not believe there is any value to dwell on what could have been or spend any time discussing the events of the last two years. Instead, we are going to look forward and continue to execute to our strategy and focus on what we can do to accelerate and expand our leadership. We realize that it's been 21 months since we were last able to actively communicate with our shareholders and that over the period, the visibility in our operations has been limited. Therefore, before we turn to the review of our Q2 performance, we would like to share four key messages which we've gotten questions over the last two years. First, I understand we've been asked about the level of commitment of the NXP executive management team.

However, we do not believe there is any value to dwell on what could have been or spend any time discussing the events of the last two years. Instead, we are going to look forward and continue to execute to our strategy and focus on what we can do to accelerate and expand our leadership.

We realize that it's been 21 months since we were last able to actively communicate with our shareholders and that over the period, the visibility in our operations has been limited. Therefore, before we turn to the review of our Q2 performance, we would like to share four key messages which we've gotten questions over the last two years. First, I understand we've been asked about the level of commitment of the NXP executive management team.

We realize that it's been 21 months since we were lastly able to actively team day with our shareholders and that over the periods of visibility in our operating have been elimited. Therefore, before we turn as a review of our second quarter per performance, we would like to treat four executes which we've gotten questions over the last two years.

First I understand we've been asked about the level of commitment of exing executive management change over the course of the last 21 months of the entire executives team, including both Peter mself, have been fully engaged in actively running the business.

Rick Clemmer: Over the course of the last 21 months, the entire executive team, including both Peter and myself, have been fully engaged in actively running the business. This also includes the general managers of all of our strategic businesses further down in the organization. While the organization has experienced the level of deal fatigue, the core basics of the business have actually strengthened, and our position in auto and IoT is now stronger than when we announced the transaction 21 months ago. With the decision announced overnight and our recent decisions with the board, the management team, including Peter and myself, are fully committed to continue to drive the future success of NXP. Secondly, during the transaction, we have not provided any insights into the potential future performance of the company.

Over the course of the last 21 months, the entire executive team, including both Peter and myself, have been fully engaged in actively running the business. This also includes the general managers of all of our strategic businesses further down in the organization.

This also includes the general managers of all of our strategic businesses further down the organizations.

While the organization has experienced the level of deal fatigue, the core basics of the business have actually strengthened, and our position in auto and IoT is now stronger than when we announced the transaction 21 months ago.

While the organization has experienced the level of deals the team, the core basics of the business- have actually strengthen to paying. ourk position in auto noot is now stronger than when we announced the transaction cle one months ago.

When ipdecision announced overnight. In our recent decisions with the Board, the manageurement team, including Peter and right self, are forward committed to continuue to draft the Peter's success or BX stateed.

With the decision announced overnight and our recent decisions with the board, the management team, including Peter and myself, are fully committed to continue to drive the future success of NXP. Secondly, during the transaction, we have not provided any insights into the potential future performance of the company.

Secondly, during the transaction, we have not provided any insight into the potential future performance of the company.

I would like to quickly review the model we have been operating toward, in which we believe shareholders should judge our future success.

Rick Clemmer: I would like to quickly review the model we have been operating towards and which we believe shareholders should judge our future success. Consistent with our prior approach, we will provide guidance on a one-quarter basis and reference our three-year model targets for longer-term discussions. During Peter's remarks, he will provide specific guidance for the third quarter. Our long-term model is consistent with what we presented prior to the Qualcomm transaction announcement in October 2016. Specifically, from a revenue perspective, we believe NXP can achieve a three-year compounded growth rate of approximately 5% to 7%, which is 50% greater than the growth of our focused addressable market. In other words, our focused TAM, which is WTS with memory, opto, and discretes removed.

I would like to quickly review the model we have been operating towards and which we believe shareholders should judge our future success. Consistent with our prior approach, we will provide guidance on a one-quarter basis and reference our three-year model targets for longer-term discussions.

Consistent with our prior approach, we will provide guidance on a link-quarter basis.

And rapds: our three -year model targets for longer-term discussions.

During Peter's remarks he will provide specific guatance for the third quarter.

During Peter's remarks, he will provide specific guidance for the third quarter. Our long-term model is consistent with what we presented prior to the Qualcomm transaction announcement in October 2016. Specifically, from a revenue perspective, we believe NXP can achieve a three-year compounded growth rate of approximately 5% to 7%, which is 50% greater than the growth of our focused addressable market. In other words, our focused TAM, which is WTS with memory, opto, and discretes removed.

Our long-term model is consistent with what we presented prior to the welcomm transaction announcement in October 2016. Specifically.

From a revenue perspective, we believe in exceeding asie a three -year time ounded growth rate of approximately 5% to 7%, which is 50% greater than the growth of our focused addressable market.

In other words our focused fam, which is their wcthat with memory offgoing cre relived.

We will continue to target our nongaap growth margin from the range of 53 centto fifty-sevenfour percent and we will continue to make focused investments which will drive our non-GAAP operating margin in a range of 31% to ty-four percent, which is based on an rmv investment level of 14% to 16% of revenue and the fgna target of 6- 8%.

Rick Clemmer: We will continue to target our non-GAAP gross margins in the range of 53% to 57%, and we will continue to make focused investments which will drive our non-GAAP operating margin in a range of 31% to 34%, which is based on an R&D investment level of 14% to 16% of revenue and an SG&A target of 6% to 8%. At our analyst day on September 11th, which we are now announcing, we will present a deep dive into how we will achieve our goals, including a strategic update on our focused businesses and the unusually strong opportunity we have in those specific markets. Thirdly, since the Qualcomm transaction was announced in October 2016, we have suspended our capital return program. Going forward, our capital return policy will be consistent with prior periods and is aimed at returning all excess free cash flow to shareholders.

We will continue to target our non-GAAP gross margins in the range of 53% to 57%, and we will continue to make focused investments which will drive our non-GAAP operating margin in a range of 31% to 34%, which is based on an R&D investment level of 14% to 16% of revenue and an SG&A target of 6% to 8%.

At our Analyst Day on September eleventh, which we are now announcing, we will present a de dive into how we will achieve our goals, including the strategic update on our focused businesses and the ourunusually strong opportunity we have in those specific markets.

At our analyst day on September 11th, which we are now announcing, we will present a deep dive into how we will achieve our goals, including a strategic update on our focused businesses and the unusually strong opportunity we have in those specific markets.

Thirdly, since the Qualcomm transaction was announced in October 2016, we have suspended our capital return program. Going forward, our capital return policy will be consistent with prior periods and is aimed at returning all excess free cash flow to shareholders.

Third specific faall-time transaction was announced. In October 2016, we suspended our capital return program.

Going forward. Our capital return policy will be consistent with turn periods and in aims, and returning our excess free cash flow to shareholders.

We just yesterday obtained operpriations from our Board to aditiate a $5 billion share repurchase programs. Our current cash position is very strong, with nearly $3 billion accumulated on the balance sheet.

Rick Clemmer: We just yesterday obtained authorization from our board to initiate a $5 billion share repurchase program. Our current cash position is very strong, with nearly $3 billion accumulated on the balance sheet. The amount is even after we retired $1.25 billion of gross debt in Q2, and does not include the termination fee due from Qualcomm. Our leverage is below our long-term target, and quarterly free cash flow generation continues to be very strong. In a few moments, Peter will discuss the funding of the program as well as our target leverage, which remains consistent with our prior plans. Lastly, I would like to reflect on the business trends over the last 21 months. If I look at the results for 2017, it was very good. We grew our HPMS revenue to $8.75 billion, growing solidly in our focused markets.

We just yesterday obtained authorization from our board to initiate a $5 billion share repurchase program. Our current cash position is very strong, with nearly $3 billion accumulated on the balance sheet.

The amount is even after we retired $1.25 billion of gross debt in Q2, and does not include the termination fee due from Qualcomm. Our leverage is below our long-term target, and quarterly free cash flow generation continues to be very strong. In a few moments, Peter will discuss the funding of the program as well as our target leverage, which remains consistent with our prior plans.

The ount is even accur retired: one pointar 2, $5 billion a gross debt in Q2 and does not include determinations FE due from weadcom.

Our leverage is grow, our long-ter target and quarterly free cash flow generation is continues to be very strong.

In a few momthents, Peter will discuss the funding of the program as well as our target-leds briach, which remains consistent with our prior plan.

lastlyk, I would like to reflect on the business trends over the last 21 months.

Lastly, I would like to reflect on the business trends over the last 21 months. If I look at the results for 2017, it was very good. We grew our HPMS revenue to $8.75 billion, growing solidly in our focused markets.

By looking is the results for 2017 that were very good. We grew EMS revenues eight point sevenvent-five billion dollars, growing solborly in our foused markets.

We successfully completed the prescale integration and began to see the anticipated revenue synergies.

Rick Clemmer: We successfully completed the Freescale integration and began to see the anticipated revenue synergies. We began to see solution synergies in our automotive business. Our general-purpose microcontroller business performed very well due to the strong adoption of both the i.MX apps processor, high-performance apps processor, as well as continued adoption in the mass market for the Kinetis and LPC MCU products. In terms of challenges, our power business has recently seen issues of slow growth in the base station market, which we began to see, weakness also in the digital networking business in 2017, and the bottoming of our bank card business came into clearer focus. We are at the halfway mark in 2018. We continue to see some of the same trends. Our auto and microcontroller business continued the positive trajectory seen in 2017.

We successfully completed the Freescale integration and began to see the anticipated revenue synergies. We began to see solution synergies in our automotive business. Our general-purpose microcontroller business performed very well due to the strong adoption of both the i.MX apps processor, high-performance apps processor, as well as continued adoption in the mass market for the Kinetis and LPC MCU products.

We began see solutution synergies in our automotive business.

Our general purpose macro controller business performed very well through a strong adoption of both our isonymics- processor, high-performance processor- as well as continued adoption in the match market for the kinetics and LC fromcu products.

In terms of challenges, far as power business has been been seen. That has recently seen issues of slow growth in the base station markets, which we G see weakness also in the digital networking business in 2017 and the bottoming of our bankcarard business came into clearer focus.

In terms of challenges, our power business has recently seen issues of slow growth in the base station market, which we began to see, weakness also in the digital networking business in 2017, and the bottoming of our bank card business came into clearer focus. We are at the halfway mark in 2018. We continue to see some of the same trends. Our auto and microcontroller business continued the positive trajectory seen in 2017.

We are at the halfway market in 2018. we can continue to see some of the same trends.

Our auto and rcord controller business.

Continued depart trajectory seen in two thousand and seventeen and.

The severyity of transmissions within the digital networking became even more apparent, and the AB? toppposed of the base facation market in China continue to challenge the growth of our F power business.

Rick Clemmer: The severity of the transitions within the digital networking became even more apparent, and the ebbs and flows of the base station market in China continued to challenge the growth of our power business. After 21 months, we did begin to see some deal-related impacts to the business, including some of our strategic mobile customers disengaging on new expanded opportunities. However, on balance, we see far more opportunities to excel and lead in our target markets than hurdles in which we need to overcome. Based on direct input from customers, we have the right products, the right go-to-market strategies, and the best talented employees who are held in very high regard by our customers. Quite a winning combination.

The severity of the transitions within the digital networking became even more apparent, and the ebbs and flows of the base station market in China continued to challenge the growth of our power business

. After 21 months, we did begin to see some deal-related impacts to the business, including some of our strategic mobile customers disengaging on new expanded opportunities. However, on balance, we see far more opportunities to excel and lead in our target markets than hurdles in which we need to overcome.

And after 21 months we did begin to see some deal-related impacts to the business, including some of our strategic mobile customers dpingenging on new, expanded opportunities.

However our balance. We seek far and more opportunities to Excel and lead in our target markets than verticals in which we need to overcome.

Thanks of direct inseering customers. You have to wr products.

Based on direct input from customers, we have the right products, the right go-to-market strategies, and the best talented employees who are held in very high regard by our customers. Quite a winning combination.

The wes of the market strategies.

And the best talented employees, who are held in very high regard to our customers.

Price of winning perbation.

Our auto business continues to strengthen our unique position where we can lead with a technology to provide safer driving through level three or 4, on our way to actually moving to aauttime of driving.

Rick Clemmer: Our auto business continues to strengthen our unique position, where we can lead with a technology to provide safer driving through level 3 or 4 on our way to actually moving to autonomous driving. We now hear from our auto customers we have a unique portfolio to also address the electric vehicle market growth, which is an incremental growth driver from what we had talked about previously. Our smarter world, or as we like to refer to the IoT, is in a good position as we increasingly work through the cloud providers to allow the smart edge processing to facilitate and expand full use of the capabilities of the cloud and to facilitate the connection of everything to make all of our world a more productive and better place to live. Now turning to an overview of our performance in Q2.

Our auto business continues to strengthen our unique position, where we can lead with a technology to provide safer driving through level 3 or 4 on our way to actually moving to autonomous driving. We now hear from our auto customers we have a unique portfolio to also address the electric vehicle market growth, which is an incremental growth driver from what we had talked about previously.

We now hehere from our auto customers. We have a unique portfolio to also address the reic vehicle market growth, which is an incremental growth driver from what we had talked about. thirty-four.

Our smart world are we like to refer to now TE?

Our smarter world, or as we like to refer to the IoT, is in a good position as we increasingly work through the cloud providers to allow the smart edge processing to facilitate and expand full use of the capabilities of the cloud and to facilitate the connection of everything to make all of our world a more productive and better place to live. Now turning to an overview of our performance in Q2.

And then as good position, as we increasingly work through the spou providers around the smartage processing to facilitate and expand full use of the capabilities are cliled and to facilitate the connection of everything to make whole our world a more productive and better PR for list.

Now turning to an overview of our performance in second quarter.

Since we did not give guidance for Q2, my comments: we reler to our performance in prior peri and not what Analyst's have assumed.

Rick Clemmer: Since we did not get guidance for Q2, my comments would be relative to our performance in prior periods and not what analysts have assumed. Overall, our revenue in the quarter was good, albeit with a few items which were out of our control, creating somewhat modest headwinds. The banned shipments to ZTE caused a short-term disruption to our RF Power business and, to a lesser degree, our digital networking and other businesses. In automotive, industry shortages of discrete components caused a modest pause in demand for automotive MCU products. In addition, we continue to have capacity issues in our Kinetis family of microcontrollers as their upside design wins have cut us behind in ramping our manufacturing capacity to support our upside customer requirements.

Since we did not get guidance for Q2, my comments would be relative to our performance in prior periods and not what analysts have assumed. Overall, our revenue in the quarter was good, albeit with a few items which were out of our control, creating somewhat modest headwinds.

Overall our revenue in the quarter was good, albeit with a few items which were out of our control, creating somewhat modest headwind.

The banned shipments to ZTE caused a short-term disruption to our RF Power business and, to a lesser degree, our digital networking and other businesses. In automotive, industry shortages of discrete components caused a modest pause in demand for automotive MCU products. In addition, we continue to have capacity issues in our Kinetis family of microcontrollers as their upside design wins have cut us behind in ramping our manufacturing capacity to support our upside customer requirements.

The banel shipments to Z caused short-term disruptions to our rfpower business into a record degree, our digital networking and other businesses.

In automotive industry. Shortages of discrete components caused moest power and demand broadtomotive MCU products.

In addition, we continue to have capacity issues in our kinetic family microcontrollers, as their upside design wins has cut us be hnind in ramping our manufacturing capacity to support our upside customer requirements.

Looking at the specifific total revenue in Q2 was two clo two $9 billion, an increase for 4% year-on-year.

Rick Clemmer: Looking at the specifics, total revenue in Q2 was $2.29 billion, an increase of 4% year on year, and our HPMS segment, which really is our focused revenue, was $2.19 billion, up 5% year on year. From an operating segment perspective, within automotive, revenue was a record high at just over $1 billion, up 7% year on year, with all product categories growing nicely. One of the most encouraging trends we have seen in our auto business has been the increase in cross-selling of the entire portfolio. Our engagement with customers has elevated broadly to more consultative level in which we propose complete solutions that leverage products from across our entire portfolio. NXP is viewed by our automotive customers as having the most complete system solutions with a clear expertise in high-performance processing, analog, security, and functional safety.

Looking at the specifics, total revenue in Q2 was $2.29 billion, an increase of 4% year on year, and our HPMS segment, which really is our focused revenue, was $2.19 billion, up 5% year on year. From an operating segment perspective, within automotive, revenue was a record high at just over $1 billion, up 7% year on year, with all product categories growing nicely.

And our hpm rth segment, which really is our focused revenues was two from one $9 billion up 5% year-on-yearter from an operating frgment perspective.

Within automotive revenue was a record high, exjust over $1 billion, up 7% year-on-year, with all product car categories growing nicely.

one of the most encouraging trends we have seen in our auto business has been the increase in cross-sell of the entire portfolio.

One of the most encouraging trends we have seen in our auto business has been the increase in cross-selling of the entire portfolio. Our engagement with customers has elevated broadly to more consultative level in which we propose complete solutions that leverage products from across our entire portfolio. NXP is viewed by our automotive customers as having the most complete system solutions with a clear expertise in high-performance processing, analog, security, and functional safety.

Our engagement with customers have elevated broadly to more consulted and grl, in which we propose to complete soluions that leveragage products from across our entire portfolio.

nhp is viewed by our automotive customers as having the most complete circum solutions.

With a clear expertise in high performance processing.

Analog security and functional phrasing.

The view, provide for opportunity for exfe to be a true partner in the automotive market.

Rick Clemmer: The view provides the opportunity for NXP to be a true partner in the automotive market as auto OEMs have made the journey towards safer driving and ultimately providing the building blocks for autonomous driving. Within Secure Connected Devices, or SCD, revenue was $644 million, up 10% versus Q1 2017. The core growth areas of general-purpose microcontrollers and mobile transactions were both up year-on-year. Micros continued to experience long lead times in our Kinetis family due to the tightness of wafer supply. Our mobile transaction business continued to benefit from expanding customer adoption, with shipments beginning to accelerate to a large OEM in India. Within Secure Interface and Infrastructure, or SI&I, revenue was $398 million, down 9% versus the year-ago period. While interface products were up high single-digit %, with both RF power and digital networking down over 20%.

The view provides the opportunity for NXP to be a true partner in the automotive market as auto OEMs have made the journey towards safer driving and ultimately providing the building blocks for autonomous driving.

As Al OEMs have made the journey toward fvper driving and ultimately providing the building bloatforg commerce driving.

Within secured connectctor devices for fsed revenue, with $644 million up 10% versus the first quarter of 2017. the court growth areas of general purpose controllers and mobile transactions, for both up year-on-year microth, continued to experience lo lead times in our kinetic family due to the tightness of wafer supplyour mobile transaction business continued to benefit from exping customer adoption, with shipments beginning to curl rate to a large OEM in indu.

Within Secure Connected Devices, or SCD, revenue was $644 million, up 10% versus Q1 2017. The core growth areas of general-purpose microcontrollers and mobile transactions were both up year-on-year. Micros continued to experience long lead times in our Kinetis family due to the tightness of wafer supply.

Our mobile transaction business continued to benefit from expanding customer adoption, with shipments beginning to accelerate to a large OEM in India. Within Secure Interface and Infrastructure, or SI&I, revenue was $398 million, down 9% versus the year-ago period. While interface products were up high single-digit %, with both RF power and digital networking down over 20%.

Within securure interprb infrastructure. Our sini revenue was 300 or ninety-age million dollars, down 9% versus a year ago period.

While interface product were up high single digit percent, with both rfpower and digital networking down over 20%.

The quarterly performance of the segment was impacted due to the us commerce department sping in on material shipments to ZP.

Rick Clemmer: The quarterly performance of the segment was impacted due to the US Commerce Department's ban on material shipments to ZTE. The high-performance RF power business was materially impacted to a lesser extent than digital networking. Taken together, the ZTE ban cost us about $31 million in the quarter. Lastly, within secure identification solutions, or SIS, revenue was $143 million, up 7% versus the year-ago period, with the growth driven by strong trends in mobility and retail market due to good demand for both our UHF tagging and MIFARE access solutions. Both e-government and banking revenue were down versus Q2 2017, reflecting the continued lumpier project-oriented nature of these markets. Turning to our distribution channel, the total months of inventory in the distribution channel held steady at 2.4.

The quarterly performance of the segment was impacted due to the US Commerce Department's ban on material shipments to ZTE. The high-performance RF power business was materially impacted to a lesser extent than digital networking.

The high performance our ENT business was materially impacted into a record stent the new store networkings.

Taken together, the CTU ban accomplished about $31 million.

Taken together, the ZTE ban cost us about $31 million in the quarter. Lastly, within secure identification solutions, or SIS, revenue was $143 million, up 7% versus the year-ago period, with the growth driven by strong trends in mobility and retail market due to good demand for both our UHF tagging and MIFARE access solutions.

In the quarter. Lastly, within secure dmonstration solutions, our FIS revenue was 143 illion dollars, up 7% per severgo periods, with the growth driven by strong TMS of mobility and retail market due to good demand for both our U's tagging and myfair excess solutions.

Both e-government and banking revenue were down versus Q2 2017, reflecting the continued lumpier project-oriented nature of these markets. Turning to our distribution channel, the total months of inventory in the distribution channel held steady at 2.4.

Both the government and banking revenue were down versus the second quarter of 2017, reflecting the continued marting project ordin-a -day cring markets.

Turning to distribution generanl the total months of inventorying and distribution channel health study at 2.4. we consistently parget to maintain to an at mocle' supply closer amminus from at month of our channel.

Rick Clemmer: We consistently target to maintain two and a half months of supply, plus or minus the half month in the channel, a range we have stayed within for 34 quarters. Distribution as a percentage of total revenue is just over 50%. We use this channel to address the mass market for products like general-purpose MCUs, which are sold to thousands of end customers. The channel is also leveraged by our strategic customers, which require NXP to position material prior to the seasonal peaks. Overall, as our business grows, the percentage of business through distribution has also increased at a rate higher than that. Our channel inventory is in good shape, and we will continue to target supply at two and a half months, plus or minus a half month.

We consistently target to maintain two and a half months of supply, plus or minus the half month in the channel, a range we have stayed within for 34 quarters. Distribution as a percentage of total revenue is just over 50%.

A range we have stayed with in for 34 quarters.

Distribution is a percentage of total revenue in swis over 50 percents.

We use this channel to address the mass market for products like general-purpose MCUs, which are sold to thousands of end customers. The channel is also leveraged by our strategic customers, which require NXP to position material prior to the seasonal peaks.

We used this channel to address the that market for products by general purpos to use, which are sowld to thousands of end customers.

The channel was not the reverage by our strategic customers which, requiring edtaposition material prior to the seasonal feess.

Overall, as our business grows, the percentage of business through distribution has also increased at a rate higher than that. Our channel inventory is in good shape, and we will continue to target supply at two and a half months, plus or minus a half month.

eoverall, as our business grow, the percentiure business through distribution has also increased at a rate higher than that. Our channel inventory is in good shape and we will continue to target suppli to an last month less amount of last month.

Before I turn this call over to Peter, I want to thank all of our employees for their dedication, hard work and the waaser both to's of sales over the last several years as we completed this retail integration and prepared for the qualon integration.

Rick Clemmer: Before I turn the call over to Peter, I want to thank all of our employees for their dedication, hard work, and the laser focus they have shown over the last several years as we completed the Freescale integration and prepared for the Qualcomm integration. We ask a lot of all of our employees, and we ask it often. We know that deal fatigue has been an issue for the last few quarters, though now is the time to focus on our journey and move forward to drive our future strategy, which will result in the industry leadership in our focused markets. I am genuinely impressed and grateful in how our employees rose to the task presented to them. I thank all of them, and I'm proud of the organization and each person who has contributed to our success.

Before I turn the call over to Peter, I want to thank all of our employees for their dedication, hard work, and the laser focus they have shown over the last several years as we completed the Freescale integration and prepared for the Qualcomm integration.

We ask a lot of all of our employees, and we ask it often. We know that deal fatigue has been an issue for the last few quarters, though now is the time to focus on our journey and move forward to drive our future strategy, which will result in the industry leadership in our focused markets.

We are ask a lot of o employees and we have it often.

We American still strateigue piter issued for last few quarters. But now is the time to focus from our short jouring.

And look forward to driver's future strategy.

Which will result in the industry leadership in our focused markets.

I am genuinely impressed and grateful in how our employees wrote to the test presented to them.

I am genuinely impressed and grateful in how our employees rose to the task presented to them. I thank all of them, and I'm proud of the organization and each person who has contributed to our success. Now I'd like to pass the call over to Peter for a review of our financial performance.

I think all of them- and I'm proud of the organization and each person- has contributed to our six successand I'd like to that' all of the for a review of our financial performance. Thank you. Good morning to everyone. On today's call I'd like to say it's it's great to be able to speak to you all again today. I'm really looking for to to meettain most of you in the personress. You ure.

Rick Clemmer: Now I'd like to pass the call over to Peter for a review of our financial performance.

Jeff Palmer: Thank you, Rick. Good morning to everyone on today's call. I'd like to say it's great to be able to speak to you all again today, and I'm really looking forward to meeting most of you in person in the near future. As Rick has already covered the drivers of the revenue during the quarter, I'll move to the financial highlights. In summary, revenue and profit in the quarter was adversely impacted by the ZTE ban and auto customers managing their shortages and other components. Non-GAAP operating profit was 29%, and cash flow continues to be strong. Our balance sheet is in excellent condition with a leverage ratio of 0.74 times, which is substantially below our long-term target. Focusing on the details of Q2, total revenue was $2.29 billion, up 4% year-over-year.

Peter Kelly: Thank you, Rick. Good morning to everyone on today's call. I'd like to say it's great to be able to speak to you all again today, and I'm really looking forward to meeting most of you in person in the near future.

As Rick has already coilvoted the drivers of the revenue beyuring the quarter, I'll move to the financial highlights.

As Rick has already covered the drivers of the revenue during the quarter, I'll move to the financial highlights. In summary, revenue and profit in the quarter was adversely impacted by the ZTE ban and auto customers managing their shortages and other components. Non-GAAP operating profit was 29%, and cash flow continues to be strong.

In summary, revenue and profits in the quarter was adversely impacted by the ZTE band and authto customers managing those shortages and other cononents.

longon-gaap operating profit was 29% and cash flow continues continues to be strong. Our balance shecrees in excellent condions, with a leverage ratio of Zero 7- four times, which is substantially below a long-term target.

Our balance sheet is in excellent condition with a leverage ratio of 0.74 times, which is substantially below our long-term target. Focusing on the details of Q2, total revenue was $2.29 billion, up 4% year-over-year.

Focusing on the detail of Q2, total revenue was two point two point nine billion of 4% year-on-year. We generated one point 2, one billion dollars in non-GAAP gross profit and reported a non-GAAP gross margin of 53%, down 20 basis points year-on-year.

Jeff Palmer: We generated $1.21 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 52.8%, down 20 basis points year on year. Total non-GAAP operating expenses were $591 million, up $50 million year on year, reflecting the impact of a stronger dollar and investments we've made in the business. From a total operating profit perspective, non-GAAP operating profit was $618 million, and non-GAAP operating margin was 27%, down 140 basis points year on year, reflecting the above-mentioned items. Interest expense was $31 million. Non-controlling interest was $12 million, and cash taxes were $56 million. Stock-based compensation, which is not included in our non-GAAP earnings, was $69 million. Now I'd like to turn to the changes in our cash and debt. Our total debt at the end of Q2 was $5.34 billion. Cash was $2.98 billion, and net debt was $2.36 billion.

We generated $1.21 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 52.8%, down 20 basis points year on year. Total non-GAAP operating expenses were $591 million, up $50 million year on year, reflecting the impact of a stronger dollar and investments we've made in the business.

Total non-GAAP operating expenses were a 591 million of $5 million year-on-year, reflecting the impact of a stronger dollar and investors investments we've made in the business.

From a tetal operating profit perspective, non-GAAP operating profit was $618 million and non-GAAP operating margin with 27% down, 140 basers points year-on- year reflecting the approvementioned items.

From a total operating profit perspective, non-GAAP operating profit was $618 million, and non-GAAP operating margin was 27%, down 140 basis points year on year, reflecting the above-mentioned items. Interest expense was $31 million. Non-controlling interest was $12 million, and cash taxes were $56 million.

And I think that expense with $31 million, noncontrolling interest was $12 million and cash taxes were $56 million. Stop basate compensation, which is not included in our non-GAAP earnings, who was $59 million.

Stock-based compensation, which is not included in our non-GAAP earnings, was $69 million. Now I'd like to turn to the changes in our cash and debt. Our total debt at the end of Q2 was $5.34 billion. Cash was $2.98 billion, and net debt was $2.36 billion.

But now I'd like to turn to the changes in our cash and debt.

In our interontal debt at the end of Q2 was $5.34 billion, cash was two point nine, eight billion dollars and next debt was two point three, six billion dollars.

We exquited the quarter with a twom 12 month adjusted EBITDA of approximately three point one peri.

Jeff Palmer: We exited the quarter with a trailing 12-month adjusted EBITDA of approximately $3.18 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q2 was 0.74 times, as I said earlier, and our non-GAAP interest coverage was nearly 20 times. Turning to working capital metrics, days of inventory was 111 days. Days receivable was 31 days, an increase of 1 day sequentially, and days payable were 90 days, up 7 days versus the prior quarter. Taken together, our cash conversion cycle was 52 days, an improvement of 3 days versus the prior quarter. Cash from operations was $403 million, and net capex was $129 million, resulting in non-GAAP free cash flow of $274 million. Turning to our expectations for the third quarter, we currently anticipate total revenue will be up in a range of 3% to 9% sequentially.

We exited the quarter with a trailing 12-month adjusted EBITDA of approximately $3.18 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q2 was 0.74 times, as I said earlier, and our non-GAAP interest coverage was nearly 20 times.

A ratio of net debt to fail, and 12 month is just that. Ebitda at the end of Q2 was 27- four times as I saidvealia and our N gaping festcal was nearly 20 times.

Turning to working capital metrics, days of inventory was 111 days. Days receivable was 31 days, an increase of 1 day sequentially, and days payable were 90 days, up 7 days versus the prior quarter. Taken together, our cash conversion cycle was 52 days, an improvement of 3 days versus the prior quarter.

Turning to working capital metrics, Dave of inventory was 111 days. Days receivable was 31 days and increased this one days equentally. And Dave pable when ninety's days of seven days versus the prior quarter taken together, our cash conversion cycle: almost 52 days and improvements of three days versus the prior quarter.

Capital of rate earnings were four than $3 million and net CapEx was 12 million, resulting in non-GAAP free cash flow of $274 million.

Cash from operations was $403 million, and net capex was $129 million, resulting in non-GAAP free cash flow of $274 million. Turning to our expectations for the third quarter, we currently anticipate total revenue will be up in a range of 3% to 9% sequentially.

Now turning to our expectations for the third quarter now we currently anticipate total revenue will be up in a range of 3% to 9% sequentially and at a midpoint of a range. We anticipate the following trends in the business.

Jeff Palmer: And at the midpoint of our range, we anticipate the following trends in the business: auto is expected to be flat sequentially, Secure Connected Devices is expected to be up low double digits, Secure Interface and Infrastructure is expected to be up about 20%, and Secure Identification Solutions is expected to be down high single digits sequentially. We anticipate revenue from corporate and other to be approximately $95 million. We expect non-GAAP gross margin to be about 53.3 ± 50 basis points. Operating expenses are expected to be about $588 million ± $10 million. Taken together, we see non-GAAP operating margin to be about 29.1% ± 60 basis points. We anticipate cash tax to be about $37 million, and estimated interest expense at about $32 million, with non-controlling interest at $13 million.

And at the midpoint of our range, we anticipate the following trends in the business: auto is expected to be flat sequentially, Secure Connected Devices is expected to be up low double digits, Secure Interface and Infrastructure is expected to be up about 20%, and Secure Identification Solutions is expected to be down high single digits sequentially.

auor is expected to be class sequentially. Secure connected devices is expected to be uplolow the visits.

Secure ination infrastructure is expected to be up our 20%.

And secure identification solutions is expected to be down high single-digit sequentally.

We anticipate revenue from corporate and other to be approximately $95 million. We expect non-GAAP gross margin to be about 53.3 ± 50 basis points. Operating expenses are expected to be about $588 million ± $10 million. Taken together, we see non-GAAP operating margin to be about 29.1% ± 60 basis points. We anticipate cash tax to be about $37 million, and estimated interest expense at about $32 million, with non-controlling interest at $13 million.

We anticipate revenue from corporate another to be approximately $95 million.

We expect long traffic growth, while ield to be about 50 group on three plus a minus 50 basis points.

Operating expenses are expecting to be about farer come than 8, eight million dollars to us, or minus about $1 million.

Taken together, we see non-GAAP operating margin to be about twentent year aroundper 4% plus the minus 60 basis points.

We anticipate cash tax about 37 million, estimated interest expense about 30 tun, with not cont ralling interest at spareteen million.

I'd like to comment on our capital structure and we announced share repurchase program prior to the year Affirm transaction. andxperi consistquently turns on to excess capashute ourers. Now, we continue to believe this and are supported in this view by our Bo the Directors.

Jeff Palmer: I'd like to comment on our capital structure and the announced share repurchase program. Prior to the failed transaction, NXP had consistently returned all of its excess cash to its owners. We continue to believe this and are supported in this view by our board of directors. Given our short-term cash requirements, our current leverage, and the fact that we believe the current market price significantly undervalues the company, we believe a buyback is an appropriate method to return excess cash to shareholders. To this end, our board has authorized a $5 billion repurchase program, and we'll fund this with a combination of existing cash on the balance sheet, the after-tax proceeds from the termination fee, as well as cash flow from operations with a balance from debt. If executed before the end of the year, we'd see our leverage at the end of 2018 be about 1.5x.

I'd like to comment on our capital structure and the announced share repurchase program. Prior to the failed transaction, NXP had consistently returned all of its excess cash to its owners. We continue to believe this and are supported in this view by our board of directors.

Given our short-term cash requirements, our current leverage, and the fact that we believe the current market price significantly undervalues the company, we believe a buyback is an appropriate method to return excess cash to shareholders.

Given our school term cash requirements, our current leverage and the fact that we believe the current market price significantly undervalu of the company, we believe the buyback gives an appropriate method to re turn excess cest growvers. To this end, our Board has authorized the five billion borllment reversus program.

To this end, our board has authorized a $5 billion repurchase program, and we'll fund this with a combination of existing cash on the balance sheet, the after-tax proceeds from the termination fee, as well as cash flow from operations with a balance from debt. If executed before the end of the year, we'd see our leverage at the end of 2018 be about 1.5x.

I fundit with a combination of rebigicing cash from danceante. They have the tax proceeds from the termination tree as well as cash wecome operations over balance from debt.

It've executed before the end of the year. We see our leverage at the end of 2018, the amaboutt one point five X as the specifics of the new deest in our complete our vercal interest expenses and estimate.

Jeff Palmer: As specific to the new debt and not complete, our Q3 interest expenses and estimates. Please note that any purchase of quantities of stock above approximately 10 million shares will be subject to a deemed dividend payable by the company of about 11%. So I'd like now to turn back to the operator for your questions. And I think, Jeff, you mentioned we're going to have an extended Q&A session.

As specific to the new debt and not complete, our Q3 interest expenses and estimates. Please note that any purchase of quantities of stock above approximately 10 million shares will be subject to a deemed dividend payable by the company of about 11%. So I'd like now to turn back to the operator for your questions. And I think, Jeff, you mentioned we're going to have an extended Q&A session.

Please note that any purpose of qualities of scrrop that build aapproximately one million shares will be subject to a beingal dividend table by the company of about 11%.

So I'd like to will turn back to the operator for your questions and I think, test you mentioned, we're going to have an extended Q a DS, that's an next one year on Q say opering.

Rick Clemmer: That's correct. We're going to get everyone's Q&A today. I'll bring you.

Jeff Palmer: That's correct. We're going to get everyone's Q&A today. I'll bring you.

Operator: Thank you. Ladies and gentlemen, if you have a question at this time, just press star and the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question is from William Stein with SunTrust. Your line is open.

And ladies and gentlemen, if you have a question at this time, just breakstar and the number one he also took some telephone. If your question has been answered, where you wish to remove yourself from the queue for the parency.

Could there prevent any background noise? Ask that you PLE things here lear mute once your question has been stated. And her first question is from williamstein. With sometrust, your unhusb.

Great thanks them much for taking my questions. makekes to continu with you all. Again, two questions if I can. First, I'm wondering if we can get further discussion of capital location beyond to buy back. In the past you've discussed, when you were still pretty prequal comm discussion, there was a sense that you'd start a dividend when, when you got to the right leverage level, I think, and there was also a discusion of incremental emanate from the update us on on that aspect. Yes, So on the dividend, but actively discussed now certainimply we've in the we can afford it. Leverage of the end of the year would only be, as we do, execute the whole buy back before the end of the year. Then would be one point for and the end of the next year ex ly be back to the one for.

William Stein: Great. Thanks so much for taking my questions. Nice to engage with you all again. Two questions, if I can. First, I'm wondering if we can get a further discussion of capital allocation beyond a buyback. In the past, you've discussed when you were still pre-Qualcomm discussion. There was a sense that you'd start a dividend when you got to the right leverage level, I think. And there was also discussion of incremental M&A. Can you update us on that aspect?

In the past, you've discussed when you were still pre-Qualcomm discussion. There was a sense that you'd start a dividend when you got to the right leverage level, I think. And there was also discussion of incremental M&A. Can you update us on that aspect?

Jeff Palmer: Yeah, sure. On a dividend, we're actively discussing that now. Certainly, we can afford it. Our leverage at the end of the year would only be if we do execute the whole buyback before the end of the year, would only be 1.5. And at the end of next year, it'd be back below 1. So we're in discussions with our board, and I guess we'll update you on the analyst day as to what we've decided.

We just desscript with our Board and kind, I guess, a little bit dature on the Analyst Day to what we've decided.

No that's So. You on the dividend in terms of increment, lemoniz.

William Stein: Thanks.

Jeff Palmer: So that's on the dividend. In terms of incremental M&A, I think it's a bit early to say we're going to go out and buy that.

Yes we would going to to vol, but I think the bottom line is is with the what we conried to be quite unfair process that we just went through with chinai, don't you'll see us be trying to do any big merger or big co kind of transactions right, what we did with threeherecal, I mean. Clearly, the regulatory process is proven to be quite a challenge. I think that's not something that we proceed as being a priority now in creating value. So clearly, small acquisitions that provide some unique product technology here allow us to provide a more complete solution to our customers or within reason. But I don't think that you'll see us trying to do with any huge transact.

Rick Clemmer: Well, I think the bottom line is with what we consider to be quite an unfair process that we just went through with China, I don't think you'll see us be trying to do any big merger or vehicle kind of transactions like what we did with Freescale. I mean, clearly, the regulatory process has proven to be quite a challenge, and I think that's not something that we perceive as being a priority now in creating value. So clearly, small acquisitions that provide some unique product technology or allow us to provide a more complete solution to our customers are within reason, but I don't think that you'll see us trying to do any huge transactions like merger or vehicles.

Richard Clemmer: Well, I think the bottom line is with what we consider to be quite an unfair process that we just went through with China, I don't think you'll see us be trying to do any big merger or vehicle kind of transactions like what we did with Freescale.

I mean, clearly, the regulatory process has proven to be quite a challenge, and I think that's not something that we perceive as being a priority now in creating value. So clearly, small acquisitions that provide some unique product technology or allow us to provide a more complete solution to our customers are within reason, but I don't think that you'll see us trying to do any huge transactions like merger or vehicles.

A merger of cool.

fing. Thanks for that update. And then one more, if I can. The progest of imperment growth is more or less the same target that you had prior.

William Stein: I appreciate that. Thanks for that update. And then one more, if I can. The 5% to 7% growth is more or less the same target that you had prior to this Qualcomm transaction. It looks relative to a somewhat weaker SI&I and SIS SecureID markets. I'm wondering if we should read that 5% to 7% to suggest that those two markets will stage a recovery, or should we read it as those will be the relatively weaker ones and we should see more outside growth, for example, in automotive and the MCU part of secure connected devices? Thank you.

To the Qualcomm transactions.

It looks relative to somewhat weaker as I and I and and as I asked security markets. I'm wondering if we should read that five to 7% to suggest that those two markets will stage a recovery or should. We read it as does will be the relatively weaker ones and we should be more outsidez growth for example in automotive and the EM seening part of se connected devices. Thank I fully we will definitely. Our plan of the growth rate is balanced with stronger growth in our tomotive than what we would have had a we to that years ago move through as well as in life growth. Our portgoo continuue to grow a lot of growth in those areas. So.

I'm wondering if we should read that 5% to 7% to suggest that those two markets will stage a recovery, or should we read it as those will be the relatively weaker ones and we should see more outside growth, for example, in automotive and the MCU part of secure connected devices? Thank you.

Rick Clemmer: Absolutely. Our plan of the growth rate is balanced with stronger growth in automotive than what we would have had a couple of 2.5 years ago when we went through this, as well as in micros. Our portfolio continues to drive a lot of growth in those areas. So the continued weakness in SIS, which is a relatively small portion of our total business at this point in time, and certainly, we're working through some of the issues in our RF Power and digital networking business. So I think when you look at it on the growth rate, even though it's the same number, it's a much more rich, fuller growth rate that plays to our strengths than what we would have had 2.5, 3 years ago when we set those targets before.

Richard Clemmer: Absolutely. Our plan of the growth rate is balanced with stronger growth in automotive than what we would have had a couple of 2.5 years ago when we went through this, as well as in micros. Our portfolio continues to drive a lot of growth in those areas.

So the continued weakness in SIS, which is a relatively small portion of our total business at this point in time, and certainly, we're working through some of the issues in our RF Power and digital networking business.

The continued weakness and FIS, which is a grower, complete small portion of our total business at this important time and certainly we're working through some of the issues: our power and digital networking business. So I think when you work at it on the growth rate, even though it's a strpr number, its a much more rich pullar growth rate that plkes to our strength than what we would have had to half three years ago when we said those partject pport: yes, going AR IC grow will.

So I think when you look at it on the growth rate, even though it's the same number, it's a much more rich, fuller growth rate that plays to our strengths than what we would have had 2.5, 3 years ago when we set those targets before.

Jeff Palmer: Yeah. The way I think about it, Will, is versus where we were two years ago. Coincidentally, this is a similar number. All of our businesses are doing well except for, as Rick mentioned, DN, and we started to talk about that. RF tends to be. It's a relatively small business for us, but it tends to be cyclical. So that is.

Versus where we were two years ingoour own co D. is that a similar number if all of all of our businesses are doing well, except for, as Rick mentioned, DN and when we started to. Growth by the RF tends to be strict. It's a relatively small business growth 10 we cyclical, So that's real profable. Is is probably booughttom down now. We definitely went through some ofacus ING' 16 and' seventeen.

Rick Clemmer: But very profitable.

Richard Clemmer: But very profitable.

Jeff Palmer: SIS is probably bottomed out now. We definitely went through some issues in 2016 and 2017. It's certainly a different mix than we had two years ago. The things that we're really investing in and was at the core of our company are actually doing, from our perspective, very well.

So it's certainimply different vits than we had two years ago for the things that we were really investing in them with have to of our company and actually doing from our perspective bal.

Think Thanks a lot a year before well.

William Stein: Great. Thanks. I'll give the floor.

Rick Clemmer: Thanks, Will.

Richard Clemmer: Thanks, Will.

We Inter next question: con from be the area with Bank of America range.

Operator: Thank you. And our next question comes from Vivek Arya with Bank of America Merrill Lynch.

I think we think my question and because to capacity coun again brick my first 1, your o pex, we to N percent in the first time on here I think, areaas and Ed where investments are perhaps lawed. I need to be he target now that you have to go on your own often a different when. When do you think you can get to your target? Modern growth and operating margins? Yes, I think those we kind of dmetrically I think the growth rate you talking about, I don't think anything. We're PA. we were focused on the opportunities and, as you saw in our are, indeed we've actually invested in some areas. What we saw was critical to invest in that technology to continue to drive our leadership with the expanded opportunities we saw. And there's a lot of factors. They come into the coun associated with currency as well as trto, mer funding in grants, etceus. But the bottom line is there's not anything that we need to reaccelerate. We have been making good revel investment. I think one of the things that we will consider own CapEx is perhaps strengthening that a little bit for the next couple of years to be sure that we can drive our cost reduction opportunities by exp expanding some of our internal capacity, perhaps ING a little bit of a break up the to really reinvest in the cost statements for the company. But on the OpEx side, I think think we do donnott have to read not saying fact. We're making those investments for the future to continue to drive strength.

Vivek Arya: Thanks for taking my question, and good to talk with you guys again. Rick, for my first one, your OpEx was up 8% to 9% in the first half year-over-year. Are there areas in NXP where investments were perhaps paused and need to be restarted now that you have to go on your own or ask in a different way? When do you think you can get to your target model for growth and operating margins?

Rick Clemmer: Yeah. I think those are kind of diametrically opposed. I think the growth rate that you're talking about, I don't think anything was paused. We were focused on the opportunities. And as you saw in our R&D, we've actually invested in some areas where we thought it was critical to invest in that technology to continue to drive our leadership with the expanded opportunities we saw. And there's a lot of factors that come into account associated with currency as well as customer funding and grants, etc. But the bottom line is there's not anything that we need to reaccelerate. We have been making a good level of investment.

Richard Clemmer: Yeah. I think those are kind of diametrically opposed. I think the growth rate that you're talking about, I don't think anything was paused. We were focused on the opportunities. And as you saw in our R&D, we've actually invested in some areas where we thought it was critical to invest in that technology to continue to drive our leadership with the expanded opportunities we saw.

And there's a lot of factors that come into account associated with currency as well as customer funding and grants, etc. But the bottom line is there's not anything that we need to reaccelerate. We have been making a good level of investment.

Rick Clemmer: I think one of the things that we will consider on CapEx is perhaps strengthening that a little bit for the next couple of years to be sure that we can drive our cost reduction opportunities by expanding some of our internal capacity and perhaps using a little bit of a breakup fee to really reinvest in the cost savings for the company. But on the OpEx side, I think we do not have to reignite anything. In fact, we're making those investments for the future to continue to drive our strength.

I think one of the things that we will consider on CapEx is perhaps strengthening that a little bit for the next couple of years to be sure that we can drive our cost reduction opportunities by expanding some of our internal capacity and perhaps using a little bit of a breakup fee to really reinvest in the cost savings for the company. But on the OpEx side, I think we do not have to reignite anything. In fact, we're making those investments for the future to continue to drive our strength.

And then for my follow, - just in terms of clarification, I assuming gpe gets back in from qp onwards and on the dyback, is it a time frame and which you plan to compete them? Thank you. So I'd like to buy you. You could start to, can have self the againme. So I would be in Q3 and hopefully continue with as a normal company going forward as regards the buyback.

Vivek Arya: All right. Then for my follow-up, just in terms of clarification, are you assuming ZTE gets back in from Q3 onwards? And on the buyback, Peter, is there a timeframe in which you plan to complete them? Thank you.

Jeff Palmer: So let me do the buyback. ZTE has started again. So that would be in Q3, and hopefully continue as a normal company going forward. As regards to buyback, I think you know from our kind of historical activity, we don't announce buybacks and don't do them. But we'll look at the markets on a daily basis. And to the extent that the opportunity is there, we'll go out, and we would expect to complete the buyback in a timely fashion.

Peter Kelly: So let me do the buyback. ZTE has started again. So that would be in Q3, and hopefully continue as a normal company going forward. As regards to buyback, I think you know from our kind of historical activity, we don't announce buybacks and don't do them. But we'll look at the markets on a daily basis. And to the extent that the opportunity is there, we'll go out, and we would expect to complete the buyback in a timely fashion.

We.

Tell we.

I think you know from our kind of historical activity, we've don't announced buybacks and don't do the. But we ll look at the markets on our databbasis Sen to the extent that the opportunity there will go out and we would expect to complete the DAT buyback in a timely fashion.

Was interesting. It's pretty interesting because it's clearly important for us from a revenue Viewpoint. It would consider to be one of the factors in the discussions with the Chinese relative to the regulatory approval process, and so it's quite surprising that the Chinese major the decision range and did not to actually approved the transaction, given that the team was was brought back to life by the U's administration in Congress.

Vivek Arya: Thank you.

Rick Clemmer: ZTE was an interesting. It's very interesting because it's clearly important for us from a revenue viewpoint. It was considered to be one of the factors in the discussions with the Chinese relative to the regulatory approval process. So it's quite surprising that the Chinese made the decision they did not to actually approve the transaction given that ZTE was brought back to life by the US administration and Congress.

Richard Clemmer: ZTE was an interesting. It's very interesting because it's clearly important for us from a revenue viewpoint. It was considered to be one of the factors in the discussions with the Chinese relative to the regulatory approval process. So it's quite surprising that the Chinese made the decision they did not to actually approve the transaction given that ZTE was brought back to life by the US administration and Congress.

Thank you.

William Stein: Thank you.

Vivek Arya: Thank you.

And you. Our next expquestion comes from AC RAP: gone with earnesting research.

Operator: Thank you. Our next question comes from Stacy Rasgon with Bernstein Research.

I think you takes my questions, makes the speak with you again. My first question is on gross margin leverage. So it's obviously stopped a bit and I get Y. that was a function of mix is, like said, of a higher margin. Businesses kind of had a bit of the headwind but is like you really going forward, is revenues growaring and the securance is business is going. So what's there? So we're still not see anygross margin leverage. So what's going on there? I guess what you to do, get the margins back up for because you're run belowyour model and I guess, like structally, how do we think about the drivers gross margin going forward? Do you thinkyou you get back into, kind of more than normalized, a range of your target home?

Stacy Rasgon: Hi, guys. Thanks for taking my questions. Nice to speak with you again. My first question's on gross margin leverage. So it's obviously stopped a little bit, and I get it. Part of that was a function of mixes, like some of the higher-margin businesses kind of had a bit of a headwind. But I'm a little surprised. Apparently, going forward, as revenue's growing and particularly as the secure interfaces business is growing so much next year, we're still not seeing any gross margin leverage. So what's going on there? I guess, what do you need to do to get the margins back up because you're running below your model? And I guess, structurally, how do we think about the drivers of gross margin going forward? When do you think you get back into kind of more of the normalized range of your target model?

Apparently, going forward, as revenue's growing and particularly as the secure interfaces business is growing so much next year, we're still not seeing any gross margin leverage. So what's going on there? I guess, what do you need to do to get the margins back up because you're running below your model?

And I guess, structurally, how do we think about the drivers of gross margin going forward? When do you think you get back into kind of more of the normalized range of your target model?

What the high say, more than a normalized thing. I mean what I mean. You right range like 54 to fif 7, whateverit Li en see, or you're ready, 50 threeade and next Qu the's th here to 20 per, which is of the really high margin stuff. You got across margins, kind of furnish to down on revenues going, not pschcho. Just I don't quite understand. It is utilization. You know your inventories are higher or less's what you know. First of all, we look at the. The phone gets from a anomnial basis. But I'm going to stess over the going.

Jeff Palmer: When you say more than a normalized range? I mean.

Stacy Rasgon: Well, what's the range? It's like 54 to 57 or whatever it was. And so you're running 53. And next quarter, you got secure interfaces up 20%, which is some of the really high-margin stuff. And yet, you've got gross margins kind of flattish to down on revenues going up. So I don't quite understand. Is there something going on with utilizations because your inventories are high or what?

Jeff Palmer: No, absolutely not. First of all, we've looked at the targets on an annual basis. We're not going to obsess over the current quarter. And there's all sorts of things that go on in any single quarter that move the gross margin around. Having said that, our gross margin right now is not where we'd like it to be, and it needs to improve. Probably the biggest single thing that's hit us this year is just about 80 basis points of kind of price increases. I think you've heard a bunch of people say raw wafers have gone up, freight's gone up. That's certainly caused us a headwind. We would expect to quickly get back into our range. And it clearly depends on the mix of products and a whole bunch of other things. But I don't like the current quarter.

That is, all sorts of things that go on in any single quarter. That moved the gross margin around. Having said that, that gross margin.

Right now is not where we'd like it produ and I need to improve probably the bigger single thing that hit.lers this year this is about 80 basis points serve.

Probably the biggest single thing that's hit us this year is just about 80 basis points of kind of price increases. I think you've heard a bunch of people say raw wafers have gone up, freight's gone up. That's certainly caused us a headwind.

Current price increases, the MAR. I think you better eventually will say, as your raw wapers have, go freates are up, but that certainly causes a headwind. We would expect to it quickly get back into our rangeand it clearly depends on the mix of rights. And then it all ment of other things. Further, I don't like the current quarter. I think we need to do better, but it's not instruictally, struictally on.

We would expect to quickly get back into our range. And it clearly depends on the mix of products and a whole bunch of other things. But I don't like the current quarter. I think we need to do better, but it's nothing structurally wrong.

Jeff Palmer: I think we need to do better, but it's nothing structurally wrong.

Got it. Thank you, that's helpful from my follow-up I guess to that point. You talked about kind of the cost increases and you've talked about revenue missing, obviously because capacity tight in microcontrolll. So can you heard a view of how much revenue you're actually missing because of the lower weterms and type capacity? When you see those supply constrrnts you and I guess just there is not really howkeeping question- tax rates for this year and next year they still the same. That wouldn't give on your prior whole.

Stacy Rasgon: Got it. Thank you. That's helpful. For my follow-up, I guess to that point, you talked about kind of the cost increases, and you've talked about revenue missing, obviously, because capacity's tight in microcontrollers. So can you give us a view of how much revenue you're actually missing because of those long lead times and tight capacity, and when you see those supply concerns easing? And I guess just as an unrelated housekeeping question, tax rates for this year and next year, are they still the same as what you gave on your prior model?

So can you give us a view of how much revenue you're actually missing because of those long lead times and tight capacity, and when you see those supply concerns easing? And I guess just as an unrelated housekeeping question, tax rates for this year and next year, are they still the same as what you gave on your prior model?

We let me do that- So we usuallyto give cash taxes quarter-by quarter and we've given you that and we've previously said to 2019 will be 12%, and I think that's a good number.

Jeff Palmer: Well, let me do tax. So we used to give cash taxes quarter by quarter, and we've given you that. And we've previously said 2019 would be 12%, and I think that's a good number. The impact of tightness in capacity, I don't know. It's a few tens of $ millions a quarter. I don't think it's huge.

The impact of CY capxity, few C ions of all of the quo, I don't think it's few. Yes, and I guess ST, when you look at it, our next family. Until maybe, and month ago we were 26 week lead time, which is clearly not where we won be. And when we have those design wins, have customers, to be sure you don't think, been lineind down even where those communed lead time. So if we get our manufacturing capacity back in timethink, back in line, it should allow us to be in a position where we can drive growth faster than what we've been able to achieve. We with capacity limitations- and we'll see that as we approached the end of the year, some of that begin to come a line. And clearly the thing that re very excited about is that design ins we have and the ability to drive that and've been able to keep customers where they haven't going lineind down, even though we've then limitation, s- an extremely unacceptable long lead time bas, but we had had to laay T. we've actually reduced those srightly in the last few weeks and we think we will continue to get under more of a reasonable basis going forward.

Rick Clemmer: Yeah. And I guess, Stacy, when you look at it, our Kinetis family, up until maybe a month ago, we were at 26-week lead time, which is clearly not where we want to be. But when you have those design wins, you have to work with customers to be sure you don't take them lying down even with those extended lead times. So if we get our manufacturing capacity back in line, it should allow us to be in a position where we can drive growth faster than what we've been able to achieve with the capacity limitations. And we'll see that as we approach the end of the year, some of that begin to come online. And clearly, the thing that we're excited about is the design wins we have and the ability to drive that.

Richard Clemmer: Yeah. And I guess, Stacy, when you look at it, our Kinetis family, up until maybe a month ago, we were at 26-week lead time, which is clearly not where we want to be. But when you have those design wins, you have to work with customers to be sure you don't take them lying down even with those extended lead times.

So if we get our manufacturing capacity back in line, it should allow us to be in a position where we can drive growth faster than what we've been able to achieve with the capacity limitations. And we'll see that as we approach the end of the year, some of that begin to come online. And clearly, the thing that we're excited about is the design wins we have and the ability to drive that.

Rick Clemmer: We've been able to keep customers where they haven't gone lying down, even though we've had limitations and extremely unacceptable long lead times based on what we had to lay out. We've actually reduced those slightly in the last few weeks, and we think we'll continue to get those under more of a reasonable basis going forward.

We've been able to keep customers where they haven't gone lying down, even though we've had limitations and extremely unacceptable long lead times based on what we had to lay out. We've actually reduced those slightly in the last few weeks, and we think we'll continue to get those under more of a reasonable basis going forward.

And' slightly, with serving more than 20 weeks, So probably.

Stacy Rasgon: Got it. Slightly would still be more than 20 weeks, though, probably?

We I M say you, it's hard to say we're brain passed always quickly as we can and I think over a period of time, certainly twentwin weeks- design reasonable lead times associated with microth. So we would anticipate hosted, we will get them into. Support reasonable rates, that kind of. In M keen for the code to even 20 as we get into early next year.

Rick Clemmer: Stacy, it's hard to say. We're bringing the capacity on as quickly as we can. And I think over a period of time, certainly, 20 weeks is not even reasonable lead times associated with micros. So we would anticipate and hope that we'll get down into more of a reasonable range that's kind of in the teens as opposed to even 20 as we get into early next year.

Richard Clemmer: Stacy, it's hard to say. We're bringing the capacity on as quickly as we can. And I think over a period of time, certainly, 20 weeks is not even reasonable lead times associated with micros. So we would anticipate and hope that we'll get down into more of a reasonable range that's kind of in the teens as opposed to even 20 as we get into early next year.

Got it. Thank you guys, Thank.

Stacy Rasgon: Got it. Thank you, guys.

Rick Clemmer: Thanks.

Richard Clemmer: Thanks.

Thank you. Our expression comees from Craig has embarveded with Morgan Stanley .

Operator: Thank you. Our next question comes from Craig Hettenbach with Morgan Stanley.

Yes thanks. First question is on the disting inventories that are remarkably consistent at two point three.

William Stein: Yes. Thanks. First question just on the DISTI inventory. It's been remarkably consistent at 2.3, 2.4 months. So just anything, particularly because things are pretty tight now in the channel, anything you're doing differently versus prior cycles just to manage the inventories for distribution?

Craig Hettenbach: Yes. Thanks. First question just on the DISTI inventory. It's been remarkably consistent at 2.3, 2.4 months. So just anything, particularly because things are pretty tight now in the channel, anything you're doing differently versus prior cycles just to manage the inventories for distribution?

two point four months So just anything critically because.

Are pretty tight now.

In cattling and you're doing different.

lversus pror cycles just.

Age the inventories which.

So I D seen the biggest year three years ago we had that problem in one quarter and which should we done pretty rapid and at that time we completely revamped our.

Jeff Palmer: I'd say the biggest three years ago, we had a problem in one quarter, which shook us up pretty badly. At that time, we completely revamped our commodity control systems, but if you like, our ability to look into what the districts have, what they're shipping out, and what's on the shelves. We just continue to do that and manage it really tightly. But we do manage it to that number, Craig. It's not a coincidence. We make sure it doesn't go ± above 2.4 months.

Our call our conrol systems, whetheras you write, are our ability to look into what the exings have and what the shippp oun whats on the shelves, and we just continue to do that and manage it really practically. But we do manage it to that number trate. It's not.

It's not a coincidence where we make sure it doesn't go put the minus above two point six performance.

This the truth is is this is always to type of work with the big disty houses our focus from their turns and hers and want to be sure they have less inventory and we'd like to be sure we actually have a little more inventory in the channel to be able to support our customer bank from drive the growth that we're trying to achieve. So that's always a little bit of harm rental the people where it ENT. We're still in that range of two point four during the quarter. It may go slightly below that but we're at that range and frankly I prefer to be more closer to two the half than the two fourth fourard ex me on the foodield. So other soils and who going But?

Rick Clemmer: The truth is this is always a tug-of-war with the big DISTI houses. They're focused on their turns and earns and want to be sure they have less inventory. We'd like to be sure we actually have a little more inventory in the channel to be able to support our customer base and drive the growth that we're trying to achieve. That's always a little bit of an arm wrestle to see where it is. We're still in that range of 2.4. During the quarter, it may go slightly below that, but we're at that range. Frankly, I'd prefer it to be more closer to 2.5 than the 2.4.

Richard Clemmer: The truth is this is always a tug-of-war with the big DISTI houses. They're focused on their turns and earns and want to be sure they have less inventory. We'd like to be sure we actually have a little more inventory in the channel to be able to support our customer base and drive the growth that we're trying to achieve.

That's always a little bit of an arm wrestle to see where it is. We're still in that range of 2.4. During the quarter, it may go slightly below that, but we're at that range. Frankly, I'd prefer it to be more closer to 2.5 than the 2.4.

Jeff Palmer: Yeah. And Steve Owen, who are head of sales in Exhaust Guy, they've worked substantially on the mix of products, especially on the shelves. So one of the big challenges is how good is the imagery? And I think our imagery in DISTI now is as good as it's ever been in terms of the quality of the product that's there. And.

They work substantially on the norongmal mix of products. But that's with all the selveses. So one of the talendies is: how good is you o and I think are in ving out is as good that it have been in terms of the quality, the all of products that there.

Does how you give goodbye.

wease appreciate the callld there. And then just re per werees, who has been some time ex us on the progress around kind of radar and be ad and any kind of anecdotes from a design perspect of houseous are playing out FE or her MAR.

William Stein: Appreciate the call there. And then just as a follow-up for Rick, just because it's been some time, can you update us on the progress around kind of Radar and ADAS and any kind of anecdotes from a design perspective or how things are playing out for you in that market?

Craig Hettenbach: Appreciate the call there. And then just as a follow-up for Rick, just because it's been some time, can you update us on the progress around kind of Radar and ADAS and any kind of anecdotes from a design perspective or how things are playing out for you in that market?

Absolutely So. We have the strongest portfolio in radar products and working broadly with all of the major car customers and so our very acceptance of our technology is has been really overwhelming and we're very pleased with that. The ramping- the capacity to be able to support their requirements has been more of a challenance than the design insside, but with the portfolio we have an ability to bring tural solutions together. We continue to grow and give strength and driving more of a complete solution with our automotive customers and clearly our radar success has been in contributing factor to that. But as we look at safer driving and economous driving, radar is only more factors associated with it. Also our vehicle to vehicle communications platform, our entire microcontroller family. Supporting that as well as the security to be able to drive safer solutions, is really some of the key technology that we're talking more about. Our Analyst Day that we think will really allow us to continue to drive growth well above the marketplace.

Rick Clemmer: Absolutely. So we have the strongest portfolio in Radar products and working broadly with all of the major car customers. And so their acceptance of our technology has been really overwhelming, and we're very pleased with that. Ramping the capacity to be able to support their requirements has been more of a challenge than the design win side. But with the portfolio we have and the ability to bring total solutions together, we continue to grow and get strength in driving more of a complete solution with our automotive customers. And clearly, our Radar success has been a contributing factor to that. But as we look at safer driving and autonomous driving, Radar is only one factor associated with it.

Richard Clemmer: Absolutely. So we have the strongest portfolio in Radar products and working broadly with all of the major car customers. And so their acceptance of our technology has been really overwhelming, and we're very pleased with that. Ramping the capacity to be able to support their requirements has been more of a challenge than the design win side.

But with the portfolio we have and the ability to bring total solutions together, we continue to grow and get strength in driving more of a complete solution with our automotive customers. And clearly, our Radar success has been a contributing factor to that. But as we look at safer driving and autonomous driving, Radar is only one factor associated with it.

Rick Clemmer: Also, our Vehicle-to-Vehicle communications platform, our entire microcontroller family supporting that, as well as the security to be able to drive safer solutions, is really some of the key technology that we'll talk more about in our analyst day that we think will really allow us to continue to drive growth well above the marketplace.

Also, our Vehicle-to-Vehicle communications platform, our entire microcontroller family supporting that, as well as the security to be able to drive safer solutions, is really some of the key technology that we'll talk more about in our analyst day that we think will really allow us to continue to drive growth well above the marketplace.

William Stein: Got it. Thank you.

Craig Hettenbach: Got it. Thank you.

Thank you Thank, Thank you. Our next question comes from to standandbirard with people.

Rick Clemmer: Thanks, Craig.

Richard Clemmer: Thanks, Craig.

Operator: Thank you. Our next question comes from Tore Svanberg with Stifel.

Yes I think you the first question, I another. There's a bit longer term, but I think the appearing part about the quarter and XP murder was here. The position inautomotive: how should we think about anx use long-term strategy in auto, motive? And I'm thinking more in terms of the nx- that was an expertise quo, probably more of the digital propering side. So just strategically, how how should we think about N? Pe going forward in automotive, especially more of the digital C ofthings?

Tore Svanberg: Yes. Hi. Thank you. First question, and I know this is a bit longer term, but I think the appealing part about the Qualcomm NXP merger was really the positioning in automotive. How should we think about NXP's long-term strategy in automotive? And I'm thinking more in terms of obviously, NXP has a lot of analog and sensor expertise. Qualcomm probably also more on the digital processing side. So just strategically, how should we think about NXP going forward in automotive, especially more on the digital side of things?

And I'm thinking more in terms of obviously, NXP has a lot of analog and sensor expertise. Qualcomm probably also more on the digital processing side. So just strategically, how should we think about NXP going forward in automotive, especially more on the digital side of things?

So when you think about automotive and especially moving to the time is driving, the centerfusion- we will not have that high performance process and capability that we would have had with the combination with Qualcomm. Clearly that's something that we have to figure out: how we work with our customers and those companies to really be able to partner, to provide solutions, to be able to fulfill it. But we really think about the after the. The regarding process takes place with our artoffificial encourlligence. It's really more about the microcontrollers and capability is drive that on a consistent basis and have an aufordable basis for a broader array of cars is really what drive the improved safety and frankly, XP is extremely well position to take advantage of that and provide solutions that we really continue to drive strong growth. So I think we're in a very solid physit. The interesting thing that that we really make a progress over the last couple of years on the airog site is we think our portfolio in even more well suited towards for lectcordic vehicle portion of automotive market that what we product to that years ago. So we think that our portfolio will talk more about that. danalyst ST will serve roughly 40% of the TAM associated electric vehicles and really put this in a great position. But we'll continue to see the safer driving moving towards the time is driving, or XP will be a key leader in driving that technology to to facilitate safer for driving across the industry.

Rick Clemmer: So when you think about automotive and especially moving to autonomous driving, the situation, we will not have that high-performance processing capability that we would have had with the combination with Qualcomm. So clearly, that's something that we'll have to figure out how we work with our customers and those companies to really be able to partner to provide solutions to be able to fulfill it. So when you really think about after the learning process takes place with artificial intelligence, it's really more about the microcontrollers and the capability to drive that on a consistent basis at an affordable basis for a broader array of cars is really what drives the improved safety. And frankly, NXP is extremely well-positioned to take advantage of that and provide solutions that will really continue to drive strong growth. So I think we're in a very solid position.

Richard Clemmer: So when you think about automotive and especially moving to autonomous driving, the situation, we will not have that high-performance processing capability that we would have had with the combination with Qualcomm.

So clearly, that's something that we'll have to figure out how we work with our customers and those companies to really be able to partner to provide solutions to be able to fulfill it. So when you really think about after the learning process takes place with artificial intelligence, it's really more about the microcontrollers and the capability to drive that on a consistent

basis at an affordable basis for a broader array of cars is really what drives the improved safety. And frankly, NXP is extremely well-positioned to take advantage of that and provide solutions that will really continue to drive strong growth. So I think we're in a very solid position.

Rick Clemmer: The interesting thing that we've really made some progress over the last couple of years on the analog side is we think our portfolio is even more well-suited towards the electric vehicle portion of the automotive market than what we thought two and a half years ago. So we think that our portfolio, and we'll talk more about that the analyst day, will serve roughly 40% of the TAM associated with electric vehicles and really puts us in a great position. But we'll continue to see the safer driving moving towards autonomous driving where NXP will be a key leader in driving that technology to facilitate safer driving across the industry.

The interesting thing that we've really made some progress over the last couple of years on the analog side is we think our portfolio is even more well-suited towards the electric vehicle portion of the automotive market than what we thought two and a half years ago.

So we think that our portfolio, and we'll talk more about that the analyst day, will serve roughly 40% of the TAM associated with electric vehicles and really puts us in a great position. But we'll continue to see the safer driving moving towards autonomous driving where NXP will be a key leader in driving that technology to facilitate safer driving across the industry.

It's very helpful, and just as a housekeeping for comer ER, what were you for? Capex ort procamme R? We come the M eighty.

Tore Svanberg: That's very helpful. Just as housekeeping for Peter, Peter, what should we use for CapEx both for calendar 2018 and calendar 2019, please?

We.

We was hundred kind, I think of the best way to. To describe is normally the past. We've spoke about 5% CapEx, I think we're running year, the date of about six point a half and, as Rick Mason before, probably in.

Jeff Palmer: I'm just trying to think of the best way to describe this. Normally, in the past, we've spoke about 5% CapEx. I think we're running year to date about 6.5%. And as Rick mentioned before, probably in, and I'm saying this on the fly, in 2019 and 2020, we might let it go up to as high as 7% if we can see a very significant gross margin return given we got the funding of the breakup fee. So we'd reinvest some of the breakup fee back in gross margin. So I'd say, Steve, we'll maybe use 7% next year and the year after. This year, I think it's about. I think it's going to be about 6.5%, but I'd have to check exactly.

Peter Kelly: I'm just trying to think of the best way to describe this. Normally, in the past, we've spoke about 5% CapEx. I think we're running year to date about 6.5%. And as Rick mentioned before, probably in, and I'm saying this on the fly, in 2019 and 2020, we might let it go up to as high as 7% if we can see a very significant gross margin return given we got the funding of the breakup fee.

And I'm saying this on the fly in' 19 per and' 20 we like let it go up to as high as seven if we can see a very significant gross margin return, given we got the, the funding of the break fleet, So we reinvest some of the break feedback in gross marginso I'd MA a level revenues 7% next year and the year after this year. I think it's about, I think it's going to be a about, but that's the check exactly.

So we'd reinvest some of the breakup fee back in gross margin. So I'd say, Steve, we'll maybe use 7% next year and the year after. This year, I think it's about. I think it's going to be about 6.5%, but I'd have to check exactly.

Does compplementure.

Tore Svanberg: That's helpful. Thank you.

thanki expect 10 com down. John , speak there with credit swings. Good morning, gu. We come back. Thanks, my question, Peter. we'were kind enough to tell us what the V to impact was for the June quarter. Does the September quarter, guys and that all of that revenue come back, coming back, or I going to take a couple of quarters to come backs?

Operator: Thank you. Our next question comes from John Pitzer with Credit Suisse.

John Pitzer: Good morning, guys, and welcome back. Thanks for taking my question. Peter, I think you were kind enough to tell us what the ZTE impact was to the June quarter. Does the September quarter guide embed all of that revenue coming back, or is that going to take a couple of quarters to come back?

I'm not sure to think exactactually 31 million. That comes back. But then MAR, we would expect most of it to come back in. Thank you 3, but we do think we've lost.

Jeff Palmer: I'm not sure if it's exactly 31 million that comes back, but we would expect most of it to come back in Q3. But we do think we've lost at least a quarter of our revenue in the year. It's not like, let's say, for example, we were literally $30 million a quarter. It's not like Q3 would be 60 if just the 30 million seems to have disappeared into the ESO world.

Peter Kelly: I'm not sure if it's exactly 31 million that comes back, but we would expect most of it to come back in Q3. But we do think we've lost at least a quarter of our revenue in the year. It's not like, let's say, for example, we were literally $30 million a quarter. It's not like Q3 would be 60 if just the 30 million seems to have disappeared into the ESO world.

At least the courses of a revenue in the year. It's not like you know let's, for example, we would pect go the clo. It's not like 2, three would be fixed you the POS food, the V and we probably want even be completely back at that full run rate beyonding Q3. But we're getting closes and working to do that and you know, working with the new maining teen V T to be in a position that support them as they really look at how they go address from the market point's help and the just Turning to be auto business, which is kind of the one courre businesses that you have your over year growth of about seven a half percent, which is still really solid. It is the low kind of sort of your concert appears out there. I'm just kind of wondering where you do you think you were more justdisproportionately hurt by these discrete shortages? Is there something going along with the? Your exposure? Is this key fo that that are under growinglater? Help understand how of your growth rate relative appears, how you're looking at that. You have our growth rate across the Board was still very strong in automotive. The one area that we had a little have when in the quarter was in auto microcontrollers were some of the, the lack of some of the discrete reduced the polled by our customers. I mean it was a little bit surprising because they really do have us much indication of that early in the quarter and if you know, we have just in time warehouses that all of those key customers but if they with you poll process towards then into the quarter was that lower levels than what we would have anticipated, backed some some of their inability to have sufficition discrete products in place but direct to the portfolio continueuue to perform very well and and we continue to be very excited about the growth of our own motive business going forward and probably at a higher rate than we were thinking about three years here.

Rick Clemmer: Yeah. We probably won't even be completely back at that full revenue rate, John, in Q3, but we're getting close and working to do that and working with the new management team at ZTE to be in a position to support them as they really look at how they go address this in the marketplace.

Richard Clemmer: Yeah. We probably won't even be completely back at that full revenue rate, John, in Q3, but we're getting close and working to do that and working with the new management team at ZTE to be in a position to support them as they really look at how they go address this in the marketplace.

John Pitzer: That's helpful. Then, Rick, just turning to the auto business, which is kind of one of the core businesses that you have, year-over-year growth was about 7.5%, which is still really solid. But it is below kind of some of your comps or peers out there. I'm just kind of wondering, do you think you were more disproportionately hurt by these discrete shortages? Is there something going on within your exposure? Is this key fobs that are undergrowing? Or help me understand kind of your growth rate relative to peers and how you're looking at that.

I'm just kind of wondering, do you think you were more disproportionately hurt by these discrete shortages? Is there something going on within your exposure? Is this key fobs that are undergrowing? Or help me understand kind of your growth rate relative to peers and how you're looking at that.

Rick Clemmer: Yeah. John, our growth rate across the board was still very strong in automotive. The one area that we had a little headwind in the quarter was in auto microcontrollers where the lack of some of the discretes reduced the pull by our customers. I mean, it was a little bit surprising because they really didn't give us much indication of that early in the quarter. And as you know, we have just-in-time warehouses at all of those key customers. But as they went through their pull process towards the end of the quarter, it was at lower levels than what we would have anticipated based on some of their inability to have sufficient discrete products in place.

Richard Clemmer: Yeah. John, our growth rate across the board was still very strong in automotive. The one area that we had a little headwind in the quarter was in auto microcontrollers where the lack of some of the discretes reduced the pull by our customers.

I mean, it was a little bit surprising because they really didn't give us much indication of that early in the quarter. And as you know, we have just-in-time warehouses at all of those key customers. But as they went through their pull process towards the end of the quarter, it was at lower levels than what we would have anticipated based on some of their inability to have sufficient discrete products in place.

Rick Clemmer: But the rest of the portfolio continues to perform very well, and we continue to be very excited about the growth of our automotive business going forward and probably at a higher rate than we were thinking about three years ago.

But the rest of the portfolio continues to perform very well, and we continue to be very excited about the growth of our automotive business going forward and probably at a higher rate than we were thinking about three years ago.

It's that you can se put house, you can periure a 606. I think you talked about it on the, the press release. From the impact on the balance sheet I think I get a better sing you fully through that transition. What was the impact in revenue and I guess even why I have this one make sure is we at year over-year growth rates that we're sort of taling apen to happen. My favorite topic? that. I just think that' like I, I would line the that for a second. I think it's one the most other. It's the most ridiculular things that i'mmost implement is just a crazy amount of work but not much news. I think it's think tr- TR have an impact of formingillion dollars.

John Pitzer: That's helpful. And if I could take just a quick housekeeping, Peter, ASC 606, I think you talked about it in the press release and the impact on the balance sheet. I just want to get a better understanding. Are you fully through that transition? What was the impact to revenue? And I guess the reason why I ask is I just want to make sure as we look at year-over-year growth rates that we're sort of comping apples to apples.

Jeff Palmer: Yeah. Yeah. Yeah. My favorite topic. I just think that's, if I can have a minor rant for a second, I think it's one of the most, for us, one of the most ridiculous things ever implemented, just a crazy amount of work for not much news. I think it's in Q2. It had an impact of $4 million. From memory, I think there's a $4 million benefit. But I mean, it's noise level, John.

Peter Kelly: Yeah. Yeah. Yeah. My favorite topic. I just think that's, if I can have a minor rant for a second, I think it's one of the most, for us, one of the most ridiculous things ever implemented, just a crazy amount of work for not much news. I think it's in Q2. It had an impact of $4 million. From memory, I think there's a $4 million benefit. But I mean, it's noise level, John.

And from memory, acting to the $4 million benefit butase, I mean, it's the always leveled joh.

Helpful Thank ER.

John Pitzer: Helpful. Thanks, guys.

Yeah.

Jeff Palmer: Thanks, John.

Thank you. Our next question: confirrenmcy venues with everpoor.

Operator: Thank you. Our next question comes from C.J. Muse with Evercore.

Yes morning. Thank you for taking question. Good being here and call your voices again. First question: on an LM basis you guys generated nicing exp, free cash flow margin. Ding your income as you start getting close here through your tarding model. What kind of, what kind of percentage are you tainking there?

C.J. Muse: Yeah. Good morning. Thank you for taking my question, and good to hear all your voices again. First question, on an LTM basis, you guys generated a 19% free cash flow margin. Curious, as you start getting closer to your target model, what kind of percentage are you thinking there?

So were timeand that's not a think about that. Really pretly. stra film and number two guys you passed, but I think here, I think that there's approximate in the end, our EBIT margins.

Jeff Palmer: Oh. I'd have to have a think about that, really, literally trying to get up to all the numbers you guys asked. But I think it's approximating the end, our EBIT margins. But maybe just give me time to think about that. But I think the EBIT margin would be a good proxy.

But maybe just give MA Sen to think about that. But I think the eage margin has been a good profit.

Okay that's helpful. And then I guess, any question on the buyback you talked about completing in the family fashion: how should we think about annual share grants as a partial offset future?

C.J. Muse: Okay. That's helpful. And then I guess a question on the buyback. You talked about completing in a timely fashion. How should we think about annual share grants as a partial offset each year?

Well we've normally been. We've been grting lesson.

Jeff Palmer: Well, we've normally been granting less than 1%. So I think that's on a regular basis, I think that's the way I'd look at our share grants. Our normal annual grants would be that. Certainly, at the moment, we're kind of looking at some things at what we should do in terms of how do we retain our employees, and should we provide them with some additional handcuffs to keep them in the company? So I think our normal grants would be what we go forward with generally.

Well let them 1%.

So what you're? I think that's.

On a regular basis. I think that's the way I'd looking at our sh grants, our normal annual grants I would be would be that.

certainmly. At the moment we're kind of looking at some things that what we should do in terms of how do we retain our employees and should we?

Provides them the term of additional.

Thank to give another company PP, our norbal drugsues would be what we gorove forward with gener. I CAn't really look that goingin in handcast. We want to keep our our employees in centvy sales and understand. I do think that if we go through a reset in a re we would see a little bit of additional equity. Probably is our Board gest Y that and give be some more specifics going to go through the orday here in September .

Rick Clemmer: I can't really leave that going as handcuffs, but we want to keep our employees incentivized.

Richard Clemmer: I can't really leave that going as handcuffs, but we want to keep our employees incentivized.

Jeff Palmer: Spoken like a CFO.

Rick Clemmer: And I do think that as we go through a reset and a reboot, we'll see a little bit of additional equity probably as our board goes through that. And we'll give you some more specifics when we go through the analyst day here in September.

Richard Clemmer: And I do think that as we go through a reset and a reboot, we'll see a little bit of additional equity probably as our board goes through that. And we'll give you some more specifics when we go through the analyst day here in September.

I can speak. The last one is you talk about some of the other other segments. Speak, saw process under growth trajectory for F C D over the next, you know four to six quarters put case for that that line, what we should kind of be for we haven't the use for, So they. So you know the three year basis we feel very good about F CD, I think you know we, you know the blind share of that business is really on a micro sideite and our growth there is extremely good and it's actually been limited by capacity. That with the bring lineines. So our customer perspective and perception which is you on the microth, which is, I don't know, for just 60%. So the V FC D, you know we see extremely strong growth and continuing to being in a solid position and I think you know that been continue for the next few years. In C, connected to buice, you know we continue to being in a very strong position there. We have a large OEM in the India. The ramping that's clearly factor in the near term associated with it. But you know we continue to being in a very strong position. On the on the mobile walllet basis, we continue to board very basket.

C.J. Muse: Excellent. And if I could sneak one last one in, you talked about some of the other segments. Could you speak to your thought process on the growth trajectory for SCD over the next four to six quarters, what the puts and takes for that line item, and what we should kind of be aware of given we haven't spoken to you for so long? Thank you.

Rick Clemmer: So on the three-year basis, we feel very good about SCD. I think the blind share of that business is really on the micro side, and our growth there is extremely good. And it's actually been limited by capacity that we could bring online. So our customer perspective and perception, which is on the micros, which is, I don't know, split just 60% or so of SCD, we see extremely strong growth and continuing to be in a solid position. And I think that's going to continue for the next few years. In secure connected devices, we continue to be in a very strong position there. We have a large OEM in India that's ramping. That's clearly a factor in the near term associated with it. But we continue to be in a very strong position on the mobile wallet basis and continue to move forward very positively.

Richard Clemmer: So on the three-year basis, we feel very good about SCD. I think the blind share of that business is really on the micro side, and our growth there is extremely good. And it's actually been limited by capacity that we could bring online.

So our customer perspective and perception, which is on the micros, which is, I don't know, split just 60% or so of SCD, we see extremely strong growth and continuing to be in a solid position. And I think that's going to continue for the next few years. In secure connected devices, we continue to be in a very strong position there.

We have a large OEM in India that's ramping. That's clearly a factor in the near term associated with it. But we continue to be in a very strong position on the mobile wallet basis and continue to move forward very positively.

But I think think future we'll provide for you guys kind of individual offerating prment growth targets of the Analyst Day. But I think support risx comments, this is been where of the real bright spot of the business. The micro, microcontroller business has been very strong and mobile transactions been very strong. Well, and if we look at it here over the three year banks, the ability to really take that business things drive the processing to the edge, as well as the security to be able to to provide to ensure that they're not hacking as we go. The world of the Internet of things. This is really a they for us and one that we think will contribute significantly to the growth and we're well positioned with the product portfolio basis to really support customers and solutions and really be able to facferilitate, realizing the full value of the cloud and big capability that it offers to har the users.

Jeff Palmer: Yeah. I think, C.J., we'll provide for you guys kind of individual operating segment growth targets at the analyst day. But I think to support Rick's comments, this has been one of the real bright spots of the business. The micros and microcontroller business has been very strong, and the mobile transactions have been very strong as well.

Rick Clemmer: If we look at it over the three-year basis, the ability to really take that business and drive the processing to the edge, as well as the security to be able to ensure that there's not hacking as we go to the world of the internet of things, this is really a key area for us and one that we think will contribute significantly to the growth. We're well-positioned with a product portfolio basis to really support customers and solutions and really be able to facilitate realizing the full value of the cloud and the capabilities that it offers to all of the users.

Richard Clemmer: If we look at it over the three-year basis, the ability to really take that business and drive the processing to the edge, as well as the security to be able to ensure that there's not hacking as we go to the world of the internet of things, this is really a key area for us and one that we think will contribute significantly to the growth.

We're well-positioned with a product portfolio basis to really support customers and solutions and really be able to facilitate realizing the full value of the cloud and the capabilities that it offers to all of the users.

Thank you.

C.J. Muse: Thank you.

Thank you. An expression comes from tous, IA hary with gman'ssaack.

Operator: Thank you. Our next question comes from Toshiya Hari with Goldman Sachs.

Great I thank very much for taking the question. I wanted to follow up on your market share in automotive sems broadly. According to guys like gner, I think you guys lo a little bit of share in 2000 and seeightventeen, given what you delivered so far in in 2000, and eighteen I think you might. You might lose some of this year. Well Rick, just given what you're seeing from a design perspective today at one point, should we expect your positioning to improve and revert to the upside?

John Pitzer: Great. Thanks so much for taking the question. I wanted to follow up on your market share in automotive semis broadly. According to guys like Gartner, I think you guys lost a little bit of share in 2017. Given what you've delivered so far in 2018, I think you might lose some this year as well. Rick, just given what you're seeing from a design perspective today, at what point should we expect your positioning to improve and revert to the upside?

Toshiya Hari: Great. Thanks so much for taking the question. I wanted to follow up on your market share in automotive semis broadly. According to guys like Gartner, I think you guys lost a little bit of share in 2017. Given what you've delivered so far in 2018, I think you might lose some this year as well. Rick, just given what you're seeing from a design perspective today, at what point should we expect your positioning to improve and revert to the upside?

In our position is very good and very far, I think, as we seen, vehicles begin to grow, contribute to overall automotive growth and our portfolio on airog, which is well positioned to specifically drive growth in that area, particularly in China where we see a lot of vehicle growth. I think we'll see that the growth of some of those design wins that we've been able to achieve over the last few quarters and years- I really begin to kick here- associated with it. But I think, if anything, when you look at it on a customer facing basis in position, our shares gain and we continue to have design wins growing at a much more rapid growth in our overall revenue which, put in a great positioned pering of automotive business is 1, where you win design 3, two to four years before actually begin to shaif. So I look at the design wins where we continue to gain market share and we well position for growth going forward.

Rick Clemmer: In our position, it's very good and very solid. I think, as we've seen EV vehicles begin to grow, contribute to the overall automotive growth, and our portfolio on analog, which is well-positioned to specifically drive growth in that area, particularly in China where we see a lot of EV vehicle growth, I think we'll see the growth of some of those design wins that we've been able to achieve over the last few quarters and years really begin to kick in associated with it. But I think, if anything, when you look at it on a customer-facing basis and position, our share is gaining.

Richard Clemmer: In our position, it's very good and very solid. I think, as we've seen EV vehicles begin to grow, contribute to the overall automotive growth, and our portfolio on analog, which is well-positioned to specifically drive growth in that area, particularly in China where we see a lot of EV vehicle growth,

I think we'll see the growth of some of those design wins that we've been able to achieve over the last few quarters and years really begin to kick in associated with it. But I think, if anything, when you look at it on a customer-facing basis and position, our share is gaining.

Rick Clemmer: We continue to have design wins growing at a much more rapid rate than our overall revenue, which puts us in a great position, as you know. The automotive business is one where you win designs 2 to 3 2 to 4 years before you actually begin to shift. If I look at the design wins, we continue to gain market share and be well-positioned for growth going forward.

We continue to have design wins growing at a much more rapid rate than our overall revenue, which puts us in a great position, as you know. The automotive business is one where you win designs 2 to 3 2 to 4 years before you actually begin to shift. If I look at the design wins, we continue to gain market share and be well-positioned for growth going forward.

Great and historically you've been very disciplined from a portfolio management perspective and you you enshared your views on things like grow the market share. Are there any businesses or product groups within experi today that would consider emphasizing or potentially selling, or are you pretty comfortable with what, with what you have todaythankyouwhen you for a two year Paul and our portfolio? I think there's always businesses that you want to step up investment then and try to acquire some technology and businesses that don't that areready critical or strategic for a portfolio going forward. So I would always say that's the take for us and we clearly with through a couple year pause if we weren throughue waiting for the integration associated with the qualcom. So I do think that there's some things that will think about you. It would be pretymature for us to discuss, but I think we will continue be in the advices of driving the best portfolio going forward that we hand import, the market opportunities that we perceive this strategic and how we can be best positioned to addressrive solutions for customers in those areas.

John Pitzer: Okay. Great. And Rick, historically, you've been very disciplined from a portfolio management perspective, and you've shared your views on things like relative market share. Are there any businesses or product groups within NXPI today that you would consider de-emphasizing or potentially selling, or are you pretty comfortable with what you have today? Thank you.

Rick Clemmer: Well, after a two-year pause at our portfolio, I think there's always businesses that you want to step up investments in and try to acquire some technology and businesses that aren't as critical or strategic to the portfolio going forward. So I would always say that's the case for us. We clearly went through a couple-year pause as we went through waiting for the integration associated with Qualcomm. So I do think that there's some things that we'll think about. It would be premature for us to discuss those, but I think we'll continue to be in the basis of driving the best portfolio going forward that we can to support the market opportunities that we perceive as strategic and how we can be best positioned to drive solutions for customers in those areas.

Richard Clemmer: Well, after a two-year pause at our portfolio, I think there's always businesses that you want to step up investments in and try to acquire some technology and businesses that aren't as critical or strategic to the portfolio going forward. So I would always say that's the case for us. We clearly went through a couple-year pause as we went through waiting for the integration associated with Qualcomm.

So I do think that there's some things that we'll think about. It would be premature for us to discuss those, but I think we'll continue to be in the basis of driving the best portfolio going forward that we can to support the market opportunities that we perceive as strategic and how we can be best positioned to drive solutions for customers in those areas.

rightthank you. internext question is from Ring DR air whitneneedham and company.

Jeff Palmer: Operator? We'll take that.

John Pitzer: Thank you.

Toshiya Hari: Thank you.

Jeff Palmer: Thanks, Toshiya.

Operator: Thank you. And our next question is from Rajvindra Gill with Needham & Company.

Yes Thank, appreciated just the follow. Again on the auto, more color there would be helpful. The growth rate: if you take the average year of year growth rated to G 17, I believe it was around 11 percentand as not decelerated to seven percentand you said a lot. A lot of that is due to shortages of the distre components. Wondering if you give us kind of what the specific dynamic that going on with the shortages, what did have happened when you think you can get resolved? Is that affecting other competitors in your view? Any clear? There would be helpful. I think it's affecting all the competitors in automotive micros. So I don't anticipspace that we are unusual at all but we clearly are one of the leaders in that space. So as they have discrete shortages, that impact there. All overall basis it has more of an impact ill this because of our position in auto micros. The revolution of that I CAn't really address that. I think we don't see that is being an areaas's going to be a pro long basis. We think the companies are going to be back to more of a normalized basis. On mrosis, move forward yes, I think. I think the num ERS earli sold two trueboth grew.

Rajvindra Gill: Yes. Thanks. I appreciate it. Just to follow up again on the auto, any more color there would be helpful. The growth rate, if you take the average year-over-year growth rate in 2017, I believe it was around 11%, and it has decelerated to 7%. And as you said, a lot of that is due to shortages of the discrete components. Wondering if you could give us kind of what's the specific dynamic that were going on with the shortages? Why did that happen? When do you think it can get resolved? Is that affecting other competitors, in your view? Any clarity there would be helpful.

Wondering if you could give us kind of what's the specific dynamic that were going on with the shortages? Why did that happen? When do you think it can get resolved? Is that affecting other competitors, in your view? Any clarity there would be helpful.

Rick Clemmer: I think it's affecting all the competitors in automotive micros. So I don't anticipate that we are unusual at all, but we clearly are one of the leaders in that space. So as they have discrete shortages that impact their overall basis, it has more of an impact on us because of our position in auto micros. The resolution of that, I can't really address that. I think we don't see that as being an area that's going to be a prolonged basis. We think the auto companies are going to get back to more of a normalized basis on micros as we move forward.

Richard Clemmer: I think it's affecting all the competitors in automotive micros. So I don't anticipate that we are unusual at all, but we clearly are one of the leaders in that space. So as they have discrete shortages that impact their overall basis, it has more of an impact on us because of our position in auto micros.

The resolution of that, I can't really address that. I think we don't see that as being an area that's going to be a prolonged basis. We think the auto companies are going to get back to more of a normalized basis on micros as we move forward.

Jeff Palmer: Yeah. I think we have to be careful about passing the numbers early. I mean, if I look at trailing 12 months Q2, auto grew 10%. If I look at trailing 12 months Q3, at the midpoint, it's probably about 8.5, 9. If I look at year to date, it's probably about 8.5%. Auto's running 8, 9%, especially when it's a $4 billion business a year. It's pretty cool.

Peter Kelly: Yeah. I think we have to be careful about passing the numbers early. I mean, if I look at trailing 12 months Q2, auto grew 10%. If I look at trailing 12 months Q3, at the midpoint, it's probably about 8.5, 9. If I look at year to date, it's probably about 8.5%. Auto's running 8, 9%, especially when it's a $4 billion business a year. It's pretty cool.

1000 percents of other of two 12 months Q3 or some midpoin probab about 8, last nine that I would go at few years of day's probab about 8, half of the B also. It was running 8, 9% respecting one of the $4 billion business for units. It's pretty, pretty cool and we out over next few years I think it would- didn't see nothing that maybe increased growth associated with based on environment: 8, some tenes.

Rick Clemmer: If we look out over the next few years, I think we're going to see nothing but maybe increased growth associated with, based on, the design wins that we've been able to achieve.

Richard Clemmer: If we look out over the next few years, I think we're going to see nothing but maybe increased growth associated with, based on, the design wins that we've been able to achieve.

Jeff Palmer: Yeah. Yeah. Kurt's done a fantastic job at all kinds of things.

Peter Kelly: Yeah. Yeah. Kurt's done a fantastic job at all kinds of things.

So I think we're in a great position and automotive. But you really CAn't look at it on a quarter-by quarter basis, is Peter just said? Get a look at it on a little bit of a annual basis to really reflect what's going on in automotive market. Pre Su.

Rick Clemmer: So I think we're in great position in automotive. And you really can't look at it on a quarter-by-quarter basis, as Peter just said. You got to look at it on a little bit of an annual basis to really reflect what's going on in the automotive market per se.

Richard Clemmer: So I think we're in great position in automotive. And you really can't look at it on a quarter-by-quarter basis, as Peter just said. You got to look at it on a little bit of an annual basis to really reflect what's going on in the automotive market per se.

That', S. That's helpful and my fun of a significant amount of growth and general purpose microcontrollers. Can you maybe did a little bit deeper in terms of with driving that? With freescale you became a the largest microcontllers suppliers of the world or or the second largest microcontrollers supp. You're see the significant demand from IoT devices. Iot now is a market has developed over the last couple of years when you maybe talking about that as well. Thank you, I think singing it broad basase. So I think we're in a leadership position. I think that our portfolio played well. I think when you really look at it in the marketprplace, we have this toric portfolio, the ability to go from the core microth to hiring in micros to ask processors and from products that we've just announced the kind of across over between micros and as processor. They really put us in a unique position. The drive solutions for customers that they really don't have the opportunity to have that kind of grap the portfolio and then we can even go to the high end associated with our network processor. So I think the portfolio process and capability that we have really played low in the overall market. All it's not the.

Rajvindra Gill: Yeah. That's helpful. For my follow-up, a significant amount of growth in general-purpose microcontrollers. Can you maybe dig a little bit deeper in terms of what's driving that? With Freescale, you became one of the largest microcontroller suppliers in the world or the second-largest microcontroller supplier in the world. Are you seeing a significant demand from IoT devices? IoT now as a market has developed over the last couple of years. Can you maybe talk about that as well? Thank you.

Rick Clemmer: I think we're seeing it broad-based. So I think we're in a leadership position. I think that our portfolio plays well. I think when you really look at it in the marketplace, we have the strongest portfolio, the ability to go from the core micros to higher-end micros to apps processors, and some products that we've just announced that kind of cross over between micros and apps processor. They really put us in a unique position to drive solutions for customers that they really don't have the opportunity to have that kind of breadth of portfolio. And then we can even go to the high-end associated with our network processors. So I think the portfolio of processing capability that we have really plays well in the overall market.

Richard Clemmer: I think we're seeing it broad-based. So I think we're in a leadership position. I think that our portfolio plays well. I think when you really look at it in the marketplace, we have the strongest portfolio, the ability to go from the core micros to higher-end micros to apps processors, and some products that we've just announced that kind of cross over between micros and apps processor.

They really put us in a unique position to drive solutions for customers that they really don't have the opportunity to have that kind of breadth of portfolio. And then we can even go to the high-end associated with our network processors. So I think the portfolio of processing capability that we have really plays well in the overall market.

Rick Clemmer: While it's not the sensor fusion capability at the real high end, I think when you look at the applications that drive the high volumes and the capability, we're really well-positioned to take advantage of that. Our portfolio plays extremely well. The team there, Jeff Lease and the team there, are doing a great job of positioning that business to move forward and continue to win market share.

While it's not the sensor fusion capability at the real high end, I think when you look at the applications that drive the high volumes and the capability, we're really well-positioned to take advantage of that. Our portfolio plays extremely well. The team there, Jeff Lease and the team there, are doing a great job of positioning that business to move forward and continue to win market share.

The exrifusion capability has a real high end. I think when you look at the applications that drive the high volumes and the capability, we're really well positioned to take advantage of that and our portfolio placed extremely well. The team agship leas, the team there doing a great job of positioning that business to move forward and continue end market share.

St spece.

Rajvindra Gill: Sure. Thank you.

Thank you. Our next question is from matramsey with coen.

Operator: Thank you. Our next question is from Matt Ramsey with Cowen.

Thank you very much.

Matt Ramsey: Thank you very much. Rick, I wanted to ask a little bit of a strategic question, and I sort of echoed your sentiments that it's a shame that the powers that be didn't let the transaction with Qualcomm go through. But given the amount of, I guess, cross-company diligence both of you guys have done against each other's businesses during this period of time, is there an opportunity, you think, for your company and for Qualcomm to work together in partnership around some solutions for customers that might be sort of accretive to the long-term business? And how should we think about that potential if there is any? Thank you.

Matthew Ramsey: Thank you very much. Rick, I wanted to ask a little bit of a strategic question, and I sort of echoed your sentiments that it's a shame that the powers that be didn't let the transaction with Qualcomm go through.

Rick I wanted to ask a little bit of a strategic question and I echo your Senator So if there.

Assume that the powers of being didn't let the transactional paallcom go through. But given the amount of, I guess, CST company diligence both of you guys have done against each other businesses during this period of time, is there an opportunity you think for your company and corpall homes to work together in partnership around some solutions for customers that might be sort of accretive for the long-term business, and how should we think about that potential, if there is any?

But given the amount of, I guess, cross-company diligence both of you guys have done against each other's businesses during this period of time, is there an opportunity, you think, for your company and for Qualcomm to work together in partnership around some solutions for customers that might be sort of accretive to the long-term business? And how should we think about that potential if there is any? Thank you.

Yes I think I think here clearly is some potential like in and it see where we actually been working with Qualcomm for last few years associated with it. And I think yes, because it's a little bit of a time to get through the overhang. Know, I think we and Qualcomm we're both working diligently through midnight last night to be able to close the transaction, but I think have have to give us a little time to think about it to' reallying the opportunities for us to work the together going forward. That would rule it out. I think that it we think about the high-end processing associated with automotive market, we clearly re going to have to work atsome partnerships to be able to drive a more complete solution for our customers, since we don't have the capability be combined we Qualcomm, but I think it's pretymaturure to really talk about that specifically. I think we're really excited about the growth opportunities we have. We would, we would have brought to have had the leadership connectivity combined with our leadership process and security that would have, would have been combined to what happ believe to be the industry power out. But you, since the regulator I take place, we think we're well positioned and really can drive significantly have above market growth and continue to create significant shareholder value going forward.

Rick Clemmer: Yeah. I think there clearly is some potential. Like in NXP, where we actually have been working with Qualcomm for the last few years associated with it, I think you have to give us a little bit of time to get through the overhang. I think we and Qualcomm were both working diligently through midnight last night to be able to close the transaction. So I think you have to give us a little time to think about if there's really any opportunities for us to work together going forward. I wouldn't rule it out. I think that as we think about the high-end processing associated with the automotive market, we clearly are going to have to look at some partnerships to be able to drive a more complete solution for our customers since we don't have the capability to combine with Qualcomm.

Richard Clemmer: Yeah. I think there clearly is some potential. Like in NXP, where we actually have been working with Qualcomm for the last few years associated with it, I think you have to give us a little bit of time to get through the overhang. I think we and Qualcomm were both working diligently through midnight last night to be able to close the transaction.

So I think you have to give us a little time to think about if there's really any opportunities for us to work together going forward. I wouldn't rule it out. I think that as we think about the high-end processing associated with the automotive market, we clearly are going to have to look at some partnerships to be able to drive a more complete solution for our customers since we don't have the capability to combine with Qualcomm.

Rick Clemmer: But I think it's premature to really talk about that specifically. I think we're really excited about the growth opportunities we have. We would have loved to have had the leadership connectivity combined with our leadership processing and security that would have been combined into what I believe to be the industry powerhouse. But since the regulators didn't let that take place, we think we're well-positioned and really can drive significantly above-market growth and continue to create significant shareholder value going forward.

But I think it's premature to really talk about that specifically. I think we're really excited about the growth opportunities we have. We would have loved to have had the leadership connectivity combined with our leadership processing and security that would have been combined into what I believe to be the industry powerhouse.

But since the regulators didn't let that take place, we think we're well-positioned and really can drive significantly above-market growth and continue to create significant shareholder value going forward.

You know they realiz having quick here and things to last night officially, So appreciate the call. Just a follow our our to be G a little bus to the I OT, T M C? U business. How do gu been in that's being different area or based technology and the I and the like, the Qu of portfolio, a big one day that you might have relied on frommers taking place just one our how the investment level have been in the purple communications technology around the UN business. Thank you yes no, that's great, a great question. I think when you look at that, the broad I C business and really moving into the edge, we're really getting well position with the coud providers and really providing a unique capability associated with it. To be fair, we had actually put a pause on some of our wi by development capabities with the planning for the merger with qualcom. So we're back considering thosees and how we get andin the position really have the connectivity platforms to be able to drive complete solutions for our customers and we have some technology in our network processing area in the wi space, the clearly we're going tolook at how we some position and drive your broader array of customers through the industrial space. But you we're getting really posit feedback from the big cloud guys about the unique capability we have to really protect the edge facilitate, take the smart age processing and then be able to move those transactions to the cloud to be able to facilitate that, which is when we really feel know I one of the critical factors to be able to drive that fact. You know, with couple of a couple of my our six weeks ago maybe they came out with companyies with themachine learning in our artificial intelligence and frankly, we were the fourth cour mission in the cimiconductor space which prior a little bit as we went sure, but then when we pro brning ERS sure what they were taking into a cannot relative are our processing capability.

Matt Ramsey: No, thank you for that. And yeah, I realize things are happening quick here, and things just happened at midnight last night officially. So I appreciate the color. Just as a follow-up, shifting gears a little bit to the sort of IoT MCU business, how have you guys been investing in different areas: interface technologies, NB-IoT, and the like? Obviously, Qualcomm had a portfolio, a big one there, that you might have relied on if the merger had taken place. And just wanted an update on how the investment levels have been in the peripheral communications technologies around the IoT business. Thank you.

Matthew Ramsey: No, thank you for that. And yeah, I realize things are happening quick here, and things just happened at midnight last night officially. So I appreciate the color. Just as a follow-up, shifting gears a little bit to the sort of IoT MCU business, how have you guys been investing in different areas: interface technologies, NB-IoT, and the like?

Obviously, Qualcomm had a portfolio, a big one there, that you might have relied on if the merger had taken place. And just wanted an update on how the investment levels have been in the peripheral communications technologies around the IoT business. Thank you.

Rick Clemmer: Yeah. Yeah. No. That's a great question. I think when you look at the so-called IoT business and really moving to the edge, we're really getting well-positioned with the cloud providers and really providing a unique capability associated with it. To be fair, we had actually put a pause on some of our Wi-Fi development capabilities with the planning for the merger with Qualcomm. So we're back considering those and how we get in a position to really have the connectivity platforms to be able to drive complete solutions for our customers. And we have some technology in our network processing area in the Wi-Fi space that clearly we're going to look at how we can position and drive to a broader array of customers through the industrial space.

Richard Clemmer: Yeah. Yeah. No. That's a great question. I think when you look at the so-called IoT business and really moving to the edge, we're really getting well-positioned with the cloud providers and really providing a unique capability associated with it.

To be fair, we had actually put a pause on some of our Wi-Fi development capabilities with the planning for the merger with Qualcomm. So we're back considering those and how we get in a position to really have the connectivity platforms to be able to drive complete solutions for our customers.

And we have some technology in our network processing area in the Wi-Fi space that clearly we're going to look at how we can position and drive to a broader array of customers through the industrial space.

Rick Clemmer: But we're getting really positive feedback from the big cloud guys about the unique capability we have to really protect the edge and facilitate the smart edge processing and then be able to move those transactions to the cloud to be able to facilitate that, which is, when you really peel the onion on IoT, one of the critical factors to be able to drive that. In fact, it was a couple of months or six weeks ago, maybe, they came out with companies with machine learning and artificial intelligence. And frankly, we were the fourth one mentioned in the semiconductor space, which surprised me a little bit as we went through it.

But we're getting really positive feedback from the big cloud guys about the unique capability we have to really protect the edge and facilitate the smart edge processing and then be able to move those transactions to the cloud to be able to facilitate that, which is, when you really peel the onion on IoT, one of the critical factors to be able to drive that.

In fact, it was a couple of months or six weeks ago, maybe, they came out with companies with machine learning and artificial intelligence. And frankly, we were the fourth one mentioned in the semiconductor space, which surprised me a little bit as we went through it.

Rick Clemmer: But then, when we peeled the onion and understood what they were taking into account relative to our edge processing capability and working with the cloud providers, really confirmed the architecture and the opportunity space that we've been focused on and where we see some significant growth, not this year, but out over the next few years, and where we think we're well-positioned with our technology to really provide a leadership capability.

Richard Clemmer: But then, when we peeled the onion and understood what they were taking into account relative to our edge processing capability and working with the cloud providers, really confirmed the architecture and the opportunity space that we've been focused on and where we see some significant growth, not this year, but out over the next few years, and where we think we're well-positioned with our technology to really provide a leadership capability.

In working with the cloud providers really confirmed the architecture and the opportunity space that we've been focused on and where we see from significant growth, not this year but out over the next few years and more. We think we're well positioned with our technology to really provide leadership capability.

Thanks very much.

Matt Ramsey: Thanks very much.

Matthew Ramsey: Thanks very much.

Play craft.

Rick Clemmer: Thanks.

Richard Clemmer: Thanks.

Thank you. An next expquestion comes from ramit chararp with namora.

Operator: Thank you. Our next question comes from Romit Shah with Nomura.

Yes Thank you, Rick. I guess if, listening to the conference call, my general takeaway is that after a two-year C panix drive, basically this needs to reinvest in the portfolio and in manufacturing in order to really grow the business. But that sort of puts you at ours risk.

Romit Shah: Yes. Thank you. Rick, I guess just listening to the conference call, my general takeaway is that after a two-year pause, NXPI basically just needs to reinvest in the portfolio and manufacturing in order to really grow the business. But that sort of puts you at odds with the profitability targets. And so we should just be conservative in our assumptions around when you get to your target model. Do you think that's a fair way to look at it?

But that sort of puts you at odds with the profitability targets. And so we should just be conservative in our assumptions around when you get to your target model. Do you think that's a fair way to look at it?

The profitability targets, and so we should just be conservative in our assumptions around when you get to your target model. Do you think that's a fair way to look at ityes?

Jeff Palmer: No. I think what's happened is over the last two years, we've been continuing to run full-out. Our core businesses and the areas we're really excited to continue to do well. Yeah. Gross margin's a little bit below where we want to be at the moment, but that would happen whatever happened. The manufacturing capability we have is a really good capability. But we see some, let's say, marginal investments to make. We're not talking about building new fabs or anything like that. We're talking about marginal increases to capacity that could drive an outsized return to us in terms of profitability. I guess I'm not going to get into when are we going to hit the midpoint of the range. I think you'll find the analyst day very, very helpful. But we'll be pushing very, very hard to move forward as quickly as we can.

Peter Kelly: No. I think what's happened is over the last two years, we've been continuing to run full-out. Our core businesses and the areas we're really excited to continue to do well. Yeah. Gross margin's a little bit below where we want to be at the moment, but that would happen whatever happened.

I think whatar is. Over the last three years we've been continuing to run full out our core businesses.

And the areas we're really excited to continue to do well. Yes gross market is a little bit below. We nings want to be at the moment but.

That would happen whatever happened the manufacturing capability. We have is.

The manufacturing capability we have is a really good capability. But we see some, let's say, marginal investments to make. We're not talking about building new fabs or anything like that. We're talking about marginal increases to capacity that could drive an outsized return to us in terms of profitability.

A rel good capability but we see from, let's say, marginal investments to make.

When I'm talking about building new plans or anything like that. Going about margin increases, the capacity that could drive an outsized return to us in terms of in terms of profitability. Again, I'm not going to get into what we we going to get the mid point of the of the range. I think you'll find the Analyst sting very, very helpful, but we'll be questionitioning very, very hard- can move forward as quickly as you can, and I think Rick mentioned earlier on that, if anything, over the last two years, the. The only thing that's been a little bit of challenge for us is at the margin. You have a slightly different view of the portfolio when you're going to be part of this, this huge.

I guess I'm not going to get into when are we going to hit the midpoint of the range. I think you'll find the analyst day very, very helpful. But we'll be pushing very, very hard to move forward as quickly as we can.

Jeff Palmer: I think Rick mentioned earlier on that if anything, over the last two years, the only thing that's been a little bit of a challenge for us is at the margin, you have a slightly different view of the portfolio when you're going to be part of this huge juggernaut powerhouse company than you do as a pretty sizable $10 billion company. But I definitely would not characterize things as being poor or weak. I think we've been running full-out, and things are only going to get better.

I think Rick mentioned earlier on that if anything, over the last two years, the only thing that's been a little bit of a challenge for us is at the margin, you have a slightly different view of the portfolio when you're going to be part of this huge juggernaut powerhouse company than you do as a pretty sizable $10 billion company. But I definitely would not characterize things as being poor or weak. I think we've been running full-out, and things are only going to get better.

juven auth powerhouse for company than you do as a preexsizable can billion dollar company.

By right.

definly with not charteriz things as' been.

Sop ly. We're doing a little for to we going to go, but I guess we talk about manufacturing capacity and really investing in internal capacity to drive our growth margins. What I think this even included in our CapEx narrow. We are doing a significant expansion in our system. Some season joint venture in Singapore where we have to joint venture, we see us some big a more significantly increasing the capacity and necessifacility in next, conprehated in the CapEx where we are. What we're talking about is the potential to continue to expand that and be able to drive some the unique solutions in unique profit and capxiability that we have to be able to meet our customer requirements and taking a little bit of our breakups being and driving that investment to really ensure expansion of our growth margins and aborility to drive that key priority for us and then think a good return vers shareholders put some additional company hold of those.

Rick Clemmer: I guess we talk about manufacturing capacity and really investing in internal capacity to drive our gross margins. One of the things that's even included in our CapEx now is we're doing a significant expansion in our SSMC joint venture in Singapore, where we have a joint venture with TSMC. And we're significantly increasing the capacity in that facility. And that's comprehended in the CapEx where we are. What we're talking about is the potential to continue to expand that and be able to drive some of the unique solutions and unique processing capability that we have to be able to meet our customer requirements. And taking a little bit of our breakup fee and driving that investment to really ensure expansion of our gross margins and ability to drive, that's a key priority for us and one that we think's a good return for our shareholders.

Richard Clemmer: I guess we talk about manufacturing capacity and really investing in internal capacity to drive our gross margins. One of the things that's even included in our CapEx now is we're doing a significant expansion in our SSMC joint venture in Singapore, where we have a joint venture with TSMC. And we're significantly increasing the capacity in that facility.

And that's comprehended in the CapEx where we are. What we're talking about is the potential to continue to expand that and be able to drive some of the unique solutions and unique processing capability that we have to be able to meet our customer requirements.

And taking a little bit of our breakup fee and driving that investment to really ensure expansion of our gross margins and ability to drive, that's a key priority for us and one that we think's a good return for our shareholders.

Jeff Palmer: Yeah. Yeah. 1% additional CapEx is, what, $100 million, which is not a big deal, really.

That doing.

umpet: ER de just know. one thing that stands out from these numbers is: is it OpEx? Opex is up.

Romit Shah: Peter, though, just one thing that stands out from these numbers is OpEx. OpEx is up high single digits on basically similar revenues from a year ago. How do we think about the outlook for OpEx and specifically R&D, which for several quarters was running at about $350 million ± and now is creeping closer to $400 million? Do you expect R&D start to come down, or do you sort of maintain these levels and generate leverage by growing the top line?

High single digits.

On basically similar revenues from a year ago. How do we think about the outlook for OpEx and?

You know specifically R D which.

It's just for double quarters, with money at about 35 million plus of minus and and now is creeping closer to to 400. do do you, do you expect, does R and D start to come down, or you know, do you for to be hay these levels and generate leverage by growing the top 1? I think, two things that worth about 50, 50 million dollars. Worth about 50 million dollars. fives of year only year car that is curren CY and half of that is been.

Jeff Palmer: I think there's two things. If you do it in dollars, we're up about $50 million, 50, year-on-year. Half of that is currency, and half of that is in kind of investments. Again, you can get a bit hung up on the quarters. But if you look at it on an annual basis, what you say is true. R&D has crept up. And it's really a reflection of kind of how we reviewing the portfolio as being part of Qualcomm. But we intend to absolutely get back to within our range and stay within that strategic range. And we think we can drive quite a lot of value by doing that. And some years we'll be closer to the top of the range. And other years we'll be maybe more closer to the bottom of the range.

Peter Kelly: I think there's two things. If you do it in dollars, we're up about $50 million, 50, year-on-year. Half of that is currency, and half of that is in kind of investments. Again, you can get a bit hung up on the quarters. But if you look at it on an annual basis, what you say is true. R&D has crept up.

Kind of investment. Even again, you can get thehunger up on the quar, But if you look at on an annual basis, what you say is true. Our RD has corrept up and it's really a replacement of kind of how we will be on. The portfolio was being part ofcore on, but we intend to absolutely get back to within our range and and stay within that strategic range and we think we candrive color of.

And it's really a reflection of kind of how we reviewing the portfolio as being part of Qualcomm. But we intend to absolutely get back to within our range and stay within that strategic range. And we think we can drive quite a lot of value by doing that. And some years we'll be closer to the top of the range. And other years we'll be maybe more closer to the bottom of the range.

By by doing I M So we'll be SER to of the range of years we'will be closer to the BU of the. I guess, if we should, we're not make your statement go without at least responding to that he said on. Flat revenue actually does revenue and xpmx is up 5% year-over-year So our RG has grown a little factor in revenue with some of the strategic investments we're making. It's not like all of that. Opex is based on flat revenue. We are at 5% And if we look out in the future we think we'll continue to growth market. So So I don't we- we'll go through within the septemberam- say a lot more detail on our target models is where we are but but we're not backing offer total target relative rn G but we are making the strategic investment to be able to ensure that we solidify that stronger growth going forward in the near term.

Rick Clemmer: Yeah. But I guess we should not let your statement go without at least responding to that. You said on flat revenue. Actually, the revenue in HPMS is up 5% year-over-year. So while our R&D has grown a little faster than revenue with some of the strategic investments we're making, it's not like all of that OpEx is based on flat revenue. We are up 5%. And if we look out in the future, we think we'll continue to outgrow the market. So we'll go through in the September analyst day a lot more detail on our target models and where we are. But we're not backing off our total target relative to R&D. But we are making the strategic investments to be able to ensure that we solidify the stronger growth going forward in the near term.

Richard Clemmer: Yeah. But I guess we should not let your statement go without at least responding to that. You said on flat revenue. Actually, the revenue in HPMS is up 5% year-over-year. So while our R&D has grown a little faster than revenue with some of the strategic investments we're making, it's not like all of that OpEx is based on flat revenue.

We are up 5%. And if we look out in the future, we think we'll continue to outgrow the market. So we'll go through in the September analyst day a lot more detail on our target models and where we are. But we're not backing off our total target relative to R&D. But we are making the strategic investments to be able to ensure that we solidify the stronger growth going forward in the near term.

Great thanks for the television. Thank you, our next questioningation day: ratish with me soon.

Romit Shah: All right. Thanks for the color. I appreciate it.

Jeff Palmer: No problem.

Operator: Thank you. Our next question is from Vijay Rakesh with Mizuho.

Sor guys, you G the Phoenix. You're back first.

Vijay Rakesh: Yeah. Hi, guys. You guys are like the phoenix. You're back. Just a couple of questions.

Think of the Act Act side and you talk about SIM's ING. You Don you a portfolio if you that, you that yes. So you know, when you think about light are we are the processing capability for a number of the lightar solutions that are in the market place, So we priv a significant role in providing their the specific right AR technology. When you think about paper driving, it's not about any individual solution. You need to really have a complete solution that includes radar, includes B AR potentially, depending on how advance radar yes, and i'all have- that includes vision and all of those will provide that. We don't have the centensor capability for our ability Tim making the investments because of the sires of those in the uncertainty, and some of those technologies will provide the processing capability to be able to proferitate that. And when you look at our solution to really be able to drive stper driving, you know we provide the backbone for the bulk of that in the ability to really be a significant participant in driving the solutions as we are forard.

Rick Clemmer: We're not rising from the ashes.

Richard Clemmer: We're not rising from the ashes.

Vijay Rakesh: That's right. On the automotive side, as you talked about sensor fusion, just wondering, are you guys looking at LiDAR also? Do you already have it in your portfolio? How do you see that building that out?

Rick Clemmer: Yeah. So when you think about LiDAR, we are the processing capability for a number of the LiDAR solutions that are in the marketplace. So we play a significant role in providing the specific LiDAR technology. When you think about safer driving, it's not about any individual solution. You need to really have a complete solution that includes radar, includes LiDAR potentially, depending on how advanced radar gets. It also has to include vision. And all of those will provide that we don't have the sensor capability for our built-in where we're making the investments because of the size of those and the uncertainty in some of those technologies. We'll provide the processing capability to be able to facilitate that.

Richard Clemmer: Yeah. So when you think about LiDAR, we are the processing capability for a number of the LiDAR solutions that are in the marketplace. So we play a significant role in providing the specific LiDAR technology.

When you think about safer driving, it's not about any individual solution. You need to really have a complete solution that includes radar, includes LiDAR potentially, depending on how advanced radar gets. It also has to include vision.

And all of those will provide that we don't have the sensor capability for our built-in where we're making the investments because of the size of those and the uncertainty in some of those technologies. We'll provide the processing capability to be able to facilitate that.

Rick Clemmer: When you look at a solution to really be able to drive safer driving, we provide the backbone for the bulk of that and the ability to really be a significant participant in driving those solutions as we go forward.

When you look at a solution to really be able to drive safer driving, we provide the backbone for the bulk of that and the ability to really be a significant participant in driving those solutions as we go forward.

And just on the automotive side, I think you guys mentioned definitely how much content you have on the evv side and also sii has been lumpy. But as you go to five G, what's the step up content you get from in spite G versus fourg Tan?

Vijay Rakesh: Got it. And just on the automotive side, I think you guys mentioned EV. Just wondering how much content you have on the EV side. And also, SI&I has been lumpy. But as you go to 5G, what's the step-up in content you get in 5G versus 4G? Thanks.

So the.

Rick Clemmer: So I got distracted. You talked about SI&I. Could you just repeat the question just before that again? Because I was focused on that until you started talking about 5G. Sorry?

Richard Clemmer: So I got distracted. You talked about SI&I. Could you just repeat the question just before that again? Because I was focused on that until you started talking about 5G. Sorry?

The VIE. I got trctve. You talk about that. If you could repeat the question just before that, again with focus on that bio sorry yes, sure I our for the EAs. Yes, So I guess over the last couple of years we spent a lot of time really looking at the opportunities that we saw in the we think you look at our analoged portfolio where we have really a very strong position. We think that will reap about 40% of the electric vehicle, So Tal camers, our herb market, and so I think we're in a really strong position to be able to expand that. That's much broer, much harder ceings than we're planning them to an average three years ago. As we've talked about that, and specifically, as you look at the growth in vehicles, electric vehicles, inchance- I think we're really in a good position to be able to support that and take advantage of that marketplace growth. On F I, five G, you we're not in the best position to talk about the five G roll out. I do think that when we look at our portfolio and some of the massive myimo capability that we have- the myimo, this kind of the interim stepff that you're moving to five g- we have some solutions that will be contributing factor to growth. The question is when that will be deployed. You, whetherit is months for quarters and just our like a growall impfact, will have, but I think it will be a contributing factor to be able to drive the growth going forward.

Vijay Rakesh: Yeah. Sure. I was also asking on the EV side, the electric vehicle side. Just wondering if you had content there.

Rick Clemmer: Yeah. So I guess over the last couple of years, we've spent a lot of time really looking at the opportunities that we saw in EV. If you look at our analog portfolio, where we have really a very strong position, we think that we'll address about 40% of the electric vehicle total TAM or addressable market. And so I think we're in a really strong position to be able to expand that. That's much broader, much higher percentage than we were planning on two and a half or three years ago as we talked about that. And specifically, as you look at the growth in electric vehicles in China, I think we're really in a good position to be able to support that and take advantage of that marketplace growth. On the SI&I, 5G, we're not in the best position to talk about the 5G rollout.

Richard Clemmer: Yeah. So I guess over the last couple of years, we've spent a lot of time really looking at the opportunities that we saw in EV. If you look at our analog portfolio, where we have really a very strong position, we think that we'll address about 40% of the electric vehicle total TAM or addressable market.

And so I think we're in a really strong position to be able to expand that. That's much broader, much higher percentage than we were planning on two and a half or three years ago as we talked about that.

And specifically, as you look at the growth in electric vehicles in China, I think we're really in a good position to be able to support that and take advantage of that marketplace growth. On the SI&I, 5G, we're not in the best position to talk about the 5G rollout.

Rick Clemmer: I do think that when we look at our portfolio and some of the Massive MIMO capability that we have, the MIMO, that's kind of an interim step as you're moving to 5G. We have some solutions that will be a contributing factor to growth. The question is when those will be deployed, whether it's months or quarters, and just how much overall impact it'll have. But I think it will be a contributing factor to be able to drive the growth going forwards.

I do think that when we look at our portfolio and some of the Massive MIMO capability that we have, the MIMO, that's kind of an interim step as you're moving to 5G. We have some solutions that will be a contributing factor to growth.

The question is when those will be deployed, whether it's months or quarters, and just how much overall impact it'll have. But I think it will be a contributing factor to be able to drive the growth going forwards.

Ok thanks R.

Vijay Rakesh: Great. Thanks a lot.

Thank you. Our next questions confrom parlland: who we take you morgagain.

Operator: Thank you. Our next question comes from Harlan Sur with JP Morgan.

Good morning and great to hear from the teamjust a follow-up on the five G question. You've guys, obviously have a great position with your our power portfolio. Part of the digital networking portfolio startck up or the industry moves the five G. it's stillil a pretty big part of the makex. Is this faigor it more sort of cash trial, kind of harmest mode, or does the team has some traction here for the five G very interface transition?

Harlan Sur: Good morning. Great to hear from the team. Just to follow up on the 5G question, you guys obviously have a great position with your RF Power portfolio. How does the digital networking portfolio stack up as the industry moves to 5G? It's still a pretty big part of the mix. Is this segment more sort of in cash cow kind of harvest mode, or does the team have some traction here for the 5G interface transition?

So I think if you, what is D? D is is we've seen a pretty significant shift, except especially in the network processing areaas a lot of those customers have moved that fundamental process and cap capabority. Internally we still are our driving multi-core ARM solutions with fir limited portion of the portfolio over those customers but it's not the broad basase that it was fivev six years ago. So that's where the reasons that we're spending quite a bit of time looking our network processing, a processing area and D and frankly, looking at cap.ability, we are seeing some significant opportunities in automotive. We're basically taking our network architecture in applying that to the car. In terms of the technology we have their really positions us well to be able to provide leadership technology in providing that communications but, if you will, in the car, which is real opportunity to use our fundamental technology. On five G per site on the D, I don't think that it's really going to do a significant facure in driving huge growth for us. But we will be a particip. We do have some technology the around us from software up greatade in the network process. The really inimputs up market opportunities for us but we have to prove the size of those in a significant in how significant that will be in our growth in that specific areaas before.

Rick Clemmer: So I think if you look at DIN, DIN is we've seen a pretty significant shift, especially in the network processing areas. A lot of those customers have moved that fundamental processing capability internally. We still are driving multi-core ARM solutions with some limited portion of the portfolio for those customers. But it's not as broad-based as it was five or six years ago. So that's one of the reasons that we're spending quite a bit of time looking at our network processing area in DIN and, frankly, looking at the capability. We are seeing some significant opportunities in automotive where they're basically taking a network architecture and applying that to the car.

Richard Clemmer: So I think if you look at DIN, DIN is we've seen a pretty significant shift, especially in the network processing areas. A lot of those customers have moved that fundamental processing capability internally. We still are driving multi-core ARM solutions with some limited portion of the portfolio for those customers.

But it's not as broad-based as it was five or six years ago. So that's one of the reasons that we're spending quite a bit of time looking at our network processing area in DIN and, frankly, looking at the capability. We are seeing some significant opportunities in automotive where they're basically taking a network architecture and applying that to the car.

Rick Clemmer: And some of the technology we have there really positions us well to be able to provide leadership technology in providing that communications hub, if you will, in the car, which is a real opportunity to use our fundamental technology. On 5G per se, on the DIN, I don't think that it's really going to be a significant factor in driving huge growth for us. But we will be a participant. We do have some technology that allows us some software upgrades in the network processor that really opens up market opportunities for us. But we have to prove the size of those and what are significant and how significant that will be in our growth in that specific area and perform.

And some of the technology we have there really positions us well to be able to provide leadership technology in providing that communications hub, if you will, in the car, which is a real opportunity to use our fundamental technology. On 5G per se, on the DIN, I don't think that it's really going to be a significant factor in driving huge growth for us. But we will be a participant.

We do have some technology that allows us some software upgrades in the network processor that really opens up market opportunities for us. But we have to prove the size of those and what are significant and how significant that will be in our growth in that specific area and perform.

Think for the insights there. And then macro demand trends appear quite healthy. In the industrial trends, especially industrial production appears to be quite strong, consumer demand appears really healthy. Can we just talk about the breadth of the demand geographically? I know, I know you track with two trends, but I think even that would be heful. You re trying to get a sense of how diversified the demand profilethis.

Harlan Sur: Thanks for the insights there, Rick. Then macro demand trends appear quite healthy. I mean, industrial trends especially. Industrial production appears to be quite strong. Consumer demand appears fairly healthy. Can we just talk about the breadth of the demand geographically? I know you track ship-to trends. I think even that would be helpful, just trying to get a sense of how diversified the demand profile is.

Demand is broad basase the industrial across the Board China represent half of our shipments are going to China and the continuue strength in China continues to be very solid that ourthe broad base of our product applications really covers all the areas from consumer goods to through to industri applications associated with it. andwe see strengthenth in all of those areas and for example our micro area where doubleency growth has been very consistent andprobably would have been even stronger if we would have the manufacturing capacity in place cha.

Rick Clemmer: Demand is broad-based, industrial, across the board. China represents half of our shipments are going to China. And the continued strength in China continues to be very solid. But the broad base of our product applications really covers all the areas from consumer goods through to industrial applications associated with it. And we see strength in all of those areas. And, for example, our micro area where double-digit growth has been very consistent and probably would have been even stronger if we would have had the manufacturing capacity in place to be able to support it.

Richard Clemmer: Demand is broad-based, industrial, across the board. China represents half of our shipments are going to China. And the continued strength in China continues to be very solid. But the broad base of our product applications really covers all the areas from consumer goods through to industrial applications associated with it.

And we see strength in all of those areas. And, for example, our micro area where double-digit growth has been very consistent and probably would have been even stronger if we would have had the manufacturing capacity in place to be able to support it.

Thanks R.

Harlan Sur: Thanks, Rick.

Thank you.

Rick Clemmer: No problem. Thank you.

Richard Clemmer: No problem. Thank you.

Thank you and, Ladies and gentlemen, as a reminder to ask the question, just for Star in one.

Operator: Thank you. Ladies and gentlemen, as a reminder, to ask the question just press star one. Our next question is from Mark Lipacis with Jefferies.

And ear expections from more for the passices with your free.

Right I thanks to think my question is Rick, on the kinetics business, a difficult bad asperts that. Can the that was that- really seem to be a growth engine for you and've been been in Thelast last couple of quar of the supply challenges. You say you're trying to bring some supplier homeline. Can you give us some more color on that that? I'm trying chance to what extent that in your control. Are your kind of looking? Your, you know, found suppliers to ramp up there or alleviate the the pressure? Any color there would be helpful.

Mark Lipacis: Hi. Thanks for taking my questions. Rick, on the Kinetis business, just to go back to that for a second, that really seemed to be a growth engine for you. You've been bitten the last couple of quarters with the supply challenges. You say you're trying to bring some supply online. Could you give us some more color on that? I'm trying to understand to what extent that's in your control. Are you kind of looking to your foundry suppliers to ramp up there or alleviate the pressure? Any color there would be helpful. Thanks.

I'm trying to understand to what extent that's in your control. Are you kind of looking to your foundry suppliers to ramp up there or alleviate the pressure? Any color there would be helpful. Thanks.

Yes if N ety anometer, special process, propriorary process that we have out forced to a boundry partner that has not been able to bring on capacity of the same rate that our customer Ord have come in, they've actually stepped up their capacity now, where we think late this year is going into early next year, will be in a position to basically refurnish our inventories that we've drained in that area. So it's been a limiting facctor to our growth but we still had strong growth in microth even with that and so our growth would have been even stronger if we've had that manufacturing capacity with our boundry partner to prevince, stable support, all of our customer demands, the design means we have in that area and the capability to continue to drive that we feel very positive about.

Rick Clemmer: Yeah. It's a 90-nanometer special process, proprietary process that we have outsourced to a foundry partner that has not been able to bring on capacity at the same rate that our customer orders have come in. They've actually stepped up their capacity now, where we think late this year, going into early next year, we'll be in a position to basically replenish our inventories that we've drained in that area. So it's been a limiting factor to our growth. But we still have strong growth in micros even with that. And so our growth would have just been even stronger if we would have had that manufacturing capacity with our foundry partner to have been able to support all of our customer demands. The design wins we have in that area and the capability to continue to drive that, we feel very positive about.

Richard Clemmer: Yeah. It's a 90-nanometer special process, proprietary process that we have outsourced to a foundry partner that has not been able to bring on capacity at the same rate that our customer orders have come in. They've actually stepped up their capacity now, where we think late this year, going into early next year, we'll be in a position to basically replenish our inventories that we've drained in that area.

So it's been a limiting factor to our growth. But we still have strong growth in micros even with that. And so our growth would have just been even stronger if we would have had that manufacturing capacity with our foundry partner to have been able to support all of our customer demands. The design wins we have in that area and the capability to continue to drive that, we feel very positive about.

Thank you, that's that helpful. And Peter, a couple of hardkeeping things you mention. I in cash it, but I think you mentioned your expected leverage ratio. If you could repeat that and then the net cash you're going to get after when you wouldrevie the breakup, the go that I say So it'll be subjected to this full tax R to 25%, So be a one point five billion at the tax with normally we think the fundishfrom call from. So they to this mor leverage at the end of the year, assuming we buy back the four re going to be one point five and we be back to below one at the end of 2019 or pretty.

Mark Lipacis: Thank you. That's helpful. And Peter, a couple of housekeeping things. I didn't catch it. But I think you mentioned your expected leverage ratio. If you could repeat that. And then the net cash you're going to get after when you receive the breakup fee. I didn't catch that. Thank you.

Peter Kelly: Yeah. Yeah. So it'll be subject to a full Dutch tax rate of 25%. So it'll be about $1.5 billion after tax. We've already received the funds from Qualcomm. So they wired that to us this morning. Leverage at the end of the year, assuming we buy back the full $5 billion, it'll be 1.5. And we'd be back below 1 at the end of 2019 pretty easily.

Thank you.

Operator: Thank you.

Mark Lipacis: Thank you.

Any far Mark.

Jeff Palmer: Any follow-up, Mark?

Peter Kelly: Any follow-up, Mark?

So thank you very much.

Mark Lipacis: No. Thank you very much.

Operator: Okay.

Peter Kelly: Okay.

Thank you and I'm not showing any further questions in the que. I'm sorry, there is danni Farber from huudom ay. Your line is open.

Operator: Thank you. I'm not showing any further questions in the queue. I'm sorry. There is Danny Farber from Hudson Bay. Your line is open.

thehigh. It's actually heren less mog, just a PRET for up to that most ation question. I believe your slid references that two times leverage target and I assume you to talk about this more. It's Analyst Day with your precise court. But you know, can you give this sense when you think about into 19 or one time levered with a longerlong term, forget to have ENT, how are you thinking about? You know your T verssure but you being incur more debt, would you do additional? Buy that age through 19 quickly? Do you want to get to that two timesse like Thank, I think what say is we have a a really dont see kind on the ST we.

Aaron Rakers: Hi. It's actually Aaron Rakers from Hudson Bay. Thanks. Just a quick follow-up to that most recent question. I believe your slideshow references a 2x leverage target. I assume you'll talk about this more at your analyst day, which we're excited for. But can you give us a sense when you think about end of 2019 at 1x levered with a longer-term target of 2? How are you thinking about your cap structure? Are you able to incur more debt? Would you do additional buybacks through 2019? How quickly do you want to get to that 2x levered? Thanks.

But can you give us a sense when you think about end of 2019 at 1x levered with a longer-term target of 2? How are you thinking about your cap structure? Are you able to incur more debt? Would you do additional buybacks through 2019? How quickly do you want to get to that 2x levered? Thanks.

Peter Kelly: It depends on what the opportunities are. I think what it says is we have a really flexible balance sheet. And depending on the circumstances, we could first of all, any excess cash, we will return to shareholders. So that would either be a buyback or a dividend or whatever. But it gives us a lot of flexibility for M&A should that prove to be a valid opportunity given the comments Rick's made before.

firstd call any expect tax. We will be turnend to shareholders for that would need even be buyback or a dividend or whatever. But githere's a lot of flexibility for emana, should that prove to be a lot of opportunity. Given the comments, rks may before.

What do you think about minimum cash balces when you to the excess cash?

Aaron Rakers: What do you think about minimum cash balances when you think about excess cash?

Peter Kelly: Billion dollars.

wonly ifty is that Bing is actually in the efficiency or a your venture with tiarfromcy.

Aaron Rakers: One billion?

Peter Kelly: $1 billion. Yeah. $250 million of that billion is actually in SSMC, our joint venture with TSMC out in Singapore. That's included in the $1 billion. Yeah.

I don't see in Singapore.

That's incl in the longm.

May it does SER look forward to a phone number.

Aaron Rakers: Very good. Thanks. All right. We'll look forward to September.

F and grow price.

Peter Kelly: Great. Yeah. Great. Thanks.

Thank you all. This conclude ty name for today. I will turn the call back to Rick rmer for his final remarks.

Operator: Thank you. And this concludes our Q&A for today. I will turn the call back to Rick Clemmer for his final remarks.

Thank your operator. So thanks for opportjoining us today. It', S frankly, good to be back. We look at the opportunityities we've got going forward and we are very excited about the opportunity continuing to out grow the market and drive significant shareholder value. So we'll look forward to seeing you all on September eleventh in New York City for our Analyst Day and be happy to going into more detail at that point in time about the significant market opportunities and where our solutions really make a difference for our customers and being able to drive growth. Thanks what.

Rick Clemmer: Thank you, operator. So thanks a lot for joining us today. It's, frankly, good to be back. We look at the opportunities we've got going forward. And we are very excited about the opportunity to continue to outgrow the market and drive significant shareholder value. So we'll look forward to seeing you all on 11 September in New York City for our analyst day. And be happy to go into more detail at that point in time about the significant market opportunities and where our solutions really make a difference for our customers in being able to drive growth. Thanks a lot.

Richard Clemmer: Thank you, operator. So thanks a lot for joining us today. It's, frankly, good to be back. We look at the opportunities we've got going forward. And we are very excited about the opportunity to continue to outgrow the market and drive significant shareholder value.

So we'll look forward to seeing you all on 11 September in New York City for our analyst day. And be happy to go into more detail at that point in time about the significant market opportunities and where our solutions really make a difference for our customers in being able to drive growth. Thanks a lot.

Thank your operator. Thanks you ever for joining the call today. Thank you.

Jeff Palmer: Thank you, operator. Thank you, everyone, for joining the call today. Take care.

Thank you everyone for participating in today's conference. This concludes the programming. remay disconnect.

Operator: Thank you, everyone, for participating in today's conference. This concludes the program. You may all disconnect.

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