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spk06: Ladies and gentlemen, thank you for standing by and welcome to the NXP Q3 2020 earnings call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. To ask a question during this session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Jeff Palmer. Thank you. Please go ahead, sir.
spk04: Thank you, Kalandra, and good morning, everyone. With me on the call today is Kurt Sievers, NXP's president. With me on the call today is Kurt Sievers, NXP's president and CEO, and Peter Kelly, our CFO. The call today is being recorded and will be available for replay from our corporate website. Today's call will include forward-looking statements that involve risks and uncertainties, that could cause NXP's results to differ materially from management's current expectations. These risks and uncertainties include but are not limited to statements regarding the continued impact of the COVID-19 pandemic on our business, the macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products, and our expectations for the financial results for the fourth quarter of 2020. Please be reminded that NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure on forward-looking statements, please refer to our press release today. Additionally, we will refer to certain non-GAAP financial measures which are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance. Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our third quarter 2020 earnings press release. which will be furnished to the SEC on form 8K and is available on NXP's website in the investor relations section at nxp.com. Now I'd like to turn the call over to Kurt.
spk05: Thanks very much, Shep. And a very good morning and a very good afternoon, everyone. We really appreciate you joining our call today. As most are aware, we did pre-announce our quarter three results on October 8th. Our revenue grows significantly stronger than the midpoint of our guidance across all of our end markets, but particularly in automotive and mobile. From a channel perspective, we began to see a return to more normal contribution between our direct and distribution sales, especially in the automotive end market. In our auto business, predominantly the U.S. and European car OEMs which tier one suppliers are biased towards direct fulfillment, did restart production on a broad basis, resulting in strong sales in the European and American regions, as well as continued momentum in China. Only the Japan automotive region appears to be slightly later to rebound, which is primarily fulfilled through our distribution partners. In our mobile business, a combination of new product ramps and market strength anticipated by specific customers ahead of their new platform launches contributed to better than anticipated results. Taken together, NXP delivered total revenue of $2.27 billion, which is $267 million above the midpoint of our original guidance range. Our non-GAAP operating margin was 25.8%, about 360 basis points above the midpoint of our guidance. We experienced good fall through on the significantly higher revenue with our gross margin also better than guidance. In a minute, Peter will provide more insights into our gross margin in his commentary. We also continued to tightly control operating expenses So we did increase expenses relative to non-executive incentive compensation. Now, let me turn to the specific trends in our focus and markets. In automotive, revenue was $964 million, down 8% versus the year-ago period, and showing a 43% sequential increase. This was greater than twice the sequential growth we had contemplated in our guidance. In industrial and IoT, revenue was 514 million, up 21% versus the year-ago period, and up 18% sequentially. And it was slightly better than our original guidance. In mobile, revenue was 337 million, up 5% versus the year-ago period, up 32% sequentially. And I would also note that we did not experience any pull-forwards in mobile because of the shipment ban associated with Huawei. And lastly, communication infrastructure and other, revenue was $452 million, down 4% year-on-year, and flat sequentially. This was about 35 million better than our guidance. And of that outperformance relative to our guidance, about half was due to accelerated shipments to Huawei ahead of the ban. Before we turn to the specifics on our Q4 guidance, I'd like to provide you a quick update on our very recent NXP Connect developers conference. In today's completely virtual customer support environment, we were extremely encouraged by the truly high level of customer and partner engagement and participation. We had over 15,000 participants from around the world take part in this first ever completely virtual event. Now let me discuss a few of the customer related highlights during that event. First of all, our joint announcement with Samsung Mobile, underpinning the adoption of our secure Ultra Wideband and latest enhanced mobile wallet solutions across both the Galaxy Note20 Ultra and the new Galaxy Fold platforms, marking the first-ever use of Ultra Wideband in the Android world. While we are in the early days of adoption of Ultra Wideband, we do expect over the intermediate term to see solid growth also beyond mobile as the technology permeates into the automotive and IoT markets. Additionally, we continue to drive innovation in our latest mobile wallet solutions with the introduction of EU ICC functionality. This allows the mobile wallet to provide cellular network provisioning and profile management while simultaneously enabling secure payments and access. Now in the automotive field, we were very, very excited to officially co-announce our battery management efforts with the Volkswagen Group. NXP's BMS solutions are being adopted across the entire MEB platform of the Volkswagen Group. including the Volkswagen-branded ID.3 and ID.4 models, and also in the luxury and performance models Audi e-tron and Porsche Taycan. The early market acceptance of these cars has been very positive, and we are very proud to be a partner in Volkswagen's success. Now I will be turning to the specifics of our quarter four expectations. Our forward revenue guidance range is again slightly wider than normal as there continues to be uncertainty how the rebound will play out in the face of continued COVID-19 concerns. However, as we mentioned in our last earnings call, we thought Q4 would be stronger than Q3 and that is what our guidance reflects. We see the improvement in demand which began in Q3 continuing into Q4 both from a broad demand perspective and also from the increased traction of our company-specific opportunities. These include automotive growth opportunities like radar, digital clusters, and battery management. In the industrial and market, opportunities include growth of our crossover processes and connectivity solutions. While in mobile, Momentum continues to build for our secure ultra-wideband and secure mobile wallet solutions. We believe the robust second half 2020 results, combined with our strong product portfolio and customer engagements, will continue to yield positive results. And that gives us significant confidence in our growth in 2021. From a channel perspective, we will continue our stringent discipline of our distributor channel inventory, and we will maintain our target channel inventory at 2.4 months of supply. With that preamble, we are guiding Q4 revenue at $2.45 billion, up about 6% versus Q4 2019. And from a sequential perspective, this represents an increase of about 8% at the midpoint versus the prior quarter. At the midpoint, we anticipate the following trends in our business. Automotive is expected to be up in the high single-digit range versus Q419 and up in the low 20% range versus Q320. as we see a continued and substantial rebound from our automotive customers. Industrial and IoT is expected to be up in the low 20% range versus Q4 2019 and sleddish versus Q3 2020 with strength continued in China and across the end market as a whole. Mobile is expected to be up about 10% versus the year ago period and up sequentially in the high single-digit percentage range versus Q3, with strength in our key customers and despite the ban on Huawei. Communication infrastructure and other is expected to be down in the low single-digit range versus Q4-19 and versus Q3-20. The sequential decline is largely due to the restrictions on shipments to Huawei. And additionally, just as an update, very early in Q4, we announced the opening of our innovative gallium nitride factory in Chandler, Arizona. And we will begin revenue shipments later in this quarter, but with no material impact on the business during this quarter. We do have significant confidence in our growth in 2021, notwithstanding the ban on Huawei. That ban is a clear disappointment as we had strong design bin momentum across the product portfolio. We had originally anticipated Huawei would grow to be a strong high single digit revenue customer in 2021, which would have been a material increase on the current levels. Let me conclude. In theory, we are later focused on what we can control in order to optimally navigate the improving trends we are currently experiencing. Our first priority is to assure the health and safety of all of our NXP team members during a continued challenging time given the pandemic. And I want to thank them deeply for their determination and hard work which allows us to successfully navigate the rebounds we are experiencing. Collectively, as a team, we are striving to facilitate the best possible business continuity with a customer focus on supply chain and R&D execution. And with that, I would like to pass the call to Peter for a review of our financial performance before we will turn to your questions. Peter?
spk07: Thank you, Kurt. Good morning to everyone on today's call. As Kurt's already covered the drivers of the revenue during the quarter and provided our revenue outlook for the fourth quarter, I'll move to the financial highlights. In summary, our third quarter revenue performance was significantly better than planned. Relative to our guidance, we experienced material improvements across all of our end markets. We are pleased that the third quarter was also a return to improved year-on-year revenue performance, providing a solid position to build from going into 2021. Now moving to the details of the third quarter, total revenue was $2.27 billion flat year-on-year and $267 million above the midpoint of our guidance. We generated $1.14 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 50.1%, down about 360 basis points year on year, and up 110 basis points above the midpoint of our guidance. Gross margin was better than expected because of the higher revenue in a more normal environment, given the impact of running our fabs at low utilization levels, and a slightly unfavorable mix. Total non-GAAP operating costs were $550 million, up $19 million year-on-year, and up by $34 million from Q2. This was $15 million higher than the midpoint of our guidance as we increased expenses associated with non-executive variable compensation. From a total operating profit perspective, non-GAAP operating profit was $586 million, and non-GAAP operating margin was 25.8%. down about 450 basis points year on year, but 360 basis points higher than the guidance due to the increased fall through on higher revenues. Non-GAAP financial expense was $100 million, essentially in line with guidance. Cash taxes for ongoing operations were $29 million, and non-controlling interest was $4 million. Slightly better on a combined basis than a guidance. Stock-based compensation, which is not included in our non-GAAP earnings, was $83 million. Now I'd like to turn to the changes in our cash and debt. Our total debt at the end of the third quarter was $9.36 billion sequentially, and our ending cash position was $3.57 billion, up $300 million due to solid cash generation during the quarter. Net debt was better at $5.79 billion, and we exited the quarter with a trailing 12-month adjusted EBITDA of $2.71 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q3 was 2.1 times, and our non-GAAP trailing 12-month adjusted EBITDA net interest, sorry, was 2.1 times our non-GAAP trailing 12-month adjusted EBITDA. Net interest coverage was 7.8 times, And as previously discovered, and after the close of Q3, we redeemed the $1.35 billion 4-1-8 notes due 2021 and the $400 million 4-5-8 notes due in 2022 for a total consideration of $1.83 billion, including the principal, interest, and make-hold costs. During the third quarter, we paid $105 million in quarterly cash dividends and we continue to have a strong balance sheet and excellent liquidity. Turning to working capital metrics, days of inventory was 84 days, a decline of 36 days sequentially, which is well below our long-term target of 95 days, as revenue rebounded much faster than anticipated, and we fulfilled the increased demand from on-hand inventory. We continue to closely manage our distribution channel, with inventory in the channel at 2.4 months, which is within our long-term targets. Days receivable were 30 days, up six days sequentially. Days payable were 55, a decrease of 16 days versus the prior quarter because the increased sales were primarily fulfilled from on-hand inventory. Taken together, our cash conversion cycle improved to 59 days, an improvement of 14 days versus the prior quarter. Cash flow from operations was $527 million, and net capex was $68 million, resulting in non-GAAP free cash flow of $459 million, a testament to the strong cash flow generating capability of the business. Turning to our expectations for the fourth quarter, as Kurt mentioned, we anticipate Q4 revenues to be about $2.45 billion, plus or minus about $75 million. Again, a wider than normal range considering the uncertain environment we continue to navigate. At the midpoint, this is up 6% year-on-year and up 8% sequentially. We expect non-GAAP gross margin to be about 52.7% plus or minus 30 basis points. Operating expenses are expected to be about $563 million plus or minus about $10 million. And taken together, we see non-GAAP operating margin to be about 29.7% plus or minus about 60 basis points. We estimate non-GAAP financial expense to be about $84 million and anticipate cash tax related to ongoing operations to be about $36 million. Non-controlling interest will be about $9 million. And for non-GAAP modeling purposes, we would advise using about 286 million shares. Finally, I have a few closing comments I'd like to make. Our gross margin guidance for the fourth quarter reflects a continued improvement versus the prior quarter. However, the midpoint is not commensurate with our goal of 55% gross margin at a $2.4 billion revenue run rate. Relative to our Q4 guidance, there is about 150 basis points headwind as a result of the third quarter carry forward of wafer fab underutilizations. There's also about 100 basis points headwind for product mix, which is a combination of lower communication and infrastructure revenue and a higher percentage of automotive business to large OEMs through our Tier 1 customers. With a couple of exceptions, our factories will come up to a more normal level of utilization in the current quarter, and you'll see our internal inventories move up progressively to a more normal level of 95 days over the next several quarters, but we will main inventory at distribution at the 2.4-month level. The past quarter has been more than a little surprising. Our automotive business came back much more quickly than we thought it would do, and we've seen real strength in the industrial and mobile end markets. On the other hand, as Kurt mentioned, and for obvious reasons relating to the current political environment, we've seen significant opportunities in the comm infrastructure end market disappear. Notwithstanding the challenge in communications infrastructure, our fourth quarter guidance still reflects a robust and faster than anticipated rebound in demand. This, combined with solid operating margin expansion and the commensurate improvement in cash flow, will in turn result in our net debt to 12 months EBITDA leverage ratio being at or below two times by the end of the quarter. Therefore, I am pleased to announce we will likely resume our share repurchase program during the fourth quarter, and we continue to have sufficient capacity on our existing authorization to do this. Finally, these are very difficult times. Kurt and I would like to thank all of our colleagues around the world for their commitment to NXP and doing the right thing for our customers. The current period is unprecedented and is extremely difficult, but over the long run, NXP has the right strategy, is in the right markets, and has the right products to continue to win. Now we'd like to open it up to your questions, operator.
spk04: Hello, operator.
spk06: If you would like to ask questions at this time, simply press thoughts and the number one on your telephone keypad. And our first question comes from the line of Ross Seymour from Dorsha Bank.
spk11: Hi, guys. Thanks for letting me ask a couple questions, and congrats on the strong results. First thing I wanted to talk about was the automotive side of things. Obviously, very strong rebound for you and everyone else. But I guess if I look at it as a longer-term basis, inclusive of your fourth quarter guidance and beyond, can you just talk about that Delta versus SAR? It looks like you guys are going to do the better part of 10 points better than SAR for this year, and you talked about robust growth. Can you just specify down what specifically to NXP is occurring in that to allow that outperformance?
spk05: Yeah, thanks, Ross. Let me take that one. Yeah, clearly automotive disappeared quickly in the second quarter and came back now very hard in the third and continuing in the fourth quarter. Looking at it from the perspective of comparison against SAR is exactly the what we do. For this year, I'd agree with you, Ross. It looks like we probably come out with maybe a, I don't know, 9 to 7, 9 to 10 percentage points decline on the full year, while the SAR, according to IHS, probably declines by 18 percentage points. So we will be about 8 percentage points at least better than the SAR. Now, that's not totally out of the world because we continue to see our long-term growth in the auto business to follow the algorithm of SAR plus three to five percentage points of semi-content growth, and then we want to outgrow that. And if you compare that to how it's going this year, we are on the high end of that, but I think that works. And we definitely believe with the content increases where we also strongly participate with our growth businesses. Take, for example, radar or the e-cockpit business or the battery management business. We are participating in this. So the algorithm on the long-term stands SAR plus three to five percentage points. Content increase is what we think the auto semi-market is doing, and that's what we want to outgrow by a factor of, say, 1.5.
spk11: Thanks for that, Collar. I guess my follow-up, just moving over to Peter and to the gross margin side, very helpful, Collar, with the couple headwinds you have in the fourth quarter, even though you've hit the $2.4 billion side of things. How do we see those rolling off going forward? Underutilization charges seem like they'd disappear. I know mixed and change on a quarterly basis. But what's the trajectory look like between now and even if revenue stayed flat? for in-change billion and getting to that 55 percent marker that you're targeting going forward?
spk07: David Morgan Yeah, sure. You know, in Q4, we're going to 52.7. So, let's say we had exactly the same mix going forward in the same level of revenue. You would expect that to improve by 150 basis points. pretty much off the bat. We're bringing the fabs. They're not quite back to normal in fourth quarter, but they're pretty close, getting up to the 85% level. So that would take us to, say, the 54.3, 54.5 level. The issue I think we have for probably the first half of next year is the drop-off in ComInfra. and how quickly auto direct has come up. It feels like that's about 100 basis points of mix impact. So I think there's two things, Ross. One is utilization I think we can pretty much forget about from Q1 onwards. I think we'll suffer in the first half from this hit to mix of if the mix doesn't change. And, of course, you know, we have to hit those revenue numbers. You do have a few things that move around in any one quarter. I'd remind you that, you know, Q1, we usually have our annual price reductions, you know, particularly in the auto space, and that can hit us by about 40 basis points. But I would say, from an underlying perspective... I still feel very confident that we should be running 55% to $2.4 billion of revenue. I've been shocked versus where we were three months ago about the speed at which auto came back and the reduction that we've seen in our overall potential for ComInfra. But certainly utilization shouldn't be an issue after the end of this year.
spk11: Thank you.
spk06: And your next question comes from the line of CJ Muse of Evercore.
spk03: Yeah, good morning, good afternoon. Thank you for taking the question. I guess first question was hoping you could elaborate a bit more on Huawei. What percent customer were they in the Q3? And then as part of that question, Can you discuss how the embargo there has impacted, if at all, your ramp of your new Gantt facility?
spk05: AC tape. Yeah, I think that that is an important event for us. So Huawei, just to clarify this very stringently, Huawei is not anymore in our guidance for Q4. So the Q4 guidance, which we just gave, is completely excluding any revenue to Huawei. Historically, we've said Huawei has been, and I mean that's never been the same in any given quarter, but say a low single-digit customer for the company. For next year, we had actually a very clear view to get to Huawei being a high single-digit customer, and that is actually where it relates to the margin and mix impact, which Peter just spoke about to the question of Ross before. Now, the matter of the fact is, of course, that we have applied for licenses with the US government, and we have to see what will be and when granted relative to these license requests for different products we would be shipping into Huawei.
spk03: And just to follow up on that, does this impact how you think about ramping your new GAN facility? And as part of that, is there a margin headwind associated with simply underutilization of that factory?
spk07: Let me take that one. But if you look at our utilisation for next year, we have two fabs that are not running at 85% early on. One is O'Kill and the other is our Chandler fab. But in terms of what we'd planned, because we talked on the last call about how we were kind of a bit behind where we expected to be. As Curtis said, we don't expect to see any additional impact from the ramp of the fund.
spk03: Great. Thank you.
spk06: And your next question comes from the line of John Pitzer from Credit Suisse.
spk09: Yeah. Good morning, guys. Congratulations on the really solid results. Peter, my first question is just on OPEX. This has been anything but a typical year, and clearly some of the calendar Q3 upside has allowed you to raise OPEX for sort of the non-exacts. I'm just kind of curious, as you look at the calendar fourth quarter run rate, I'm struck by the fact that revenue is well above seasonal. And if there is an OPEX, seasonal OPEX to cadence, OPEX is actually slightly below. So are we now looking at the right OPEX level? And as we go into calendar year 21, how should we think about the puts and takes, you know, of COVID-related expenses, both on the plus and the minus?
spk07: I think... You know, you can never really pick one quarter because we always have a bunch of masks either moving in or moving out. For 2021, I'd go back to our comments from last quarter, John. We think 575 plus or minus 10 million in any one particular quarter is probably pretty close. I mean, clearly, you know, if our revenue was to grow very substantially, we might be talking about a different number. But from what we can see at the moment, we'd say 575 plus or minus 10.
spk09: That's very helpful. And then as my follow-up, Kurt, you were very clear in your prepared comments that despite the Huawei headwind, you still feel very good about growth for calendar year 21. I'm wondering if you could just help us understand kind of in order of strength, what gives you that confidence level? And specifically with Huawei business that you now can't ship to, Is there other opportunities shipped to other comm OEMs or were those very specific Huawei programs?
spk05: Yeah, John. So certainly the confidence into next year is a carry forward from the company's specific strengths and the rebound we are experiencing right now. So clearly with the high impact on the total company from a revenue perspective from automotive, we continue to be very confident into next year that our growth pockets, where we have those leadership positions in radar, e-cockpit, and BMS, will continue to play out the way we have talked about them in the past. So we have the design wins on the books. We see actually the end consumer demand for these specific systems, be it in ADAS, be it in electrification. We see that absolutely coming true. So I think the automotive side of things does stand very firm on top of the rebound, which is certainly being forecasted for the SAR. So I mean, I talked about the negative side of things earlier, that the SAR probably is going to be down like 18% this year. IHS is currently prognosing something like 14% up with SAR next year. And on top of that, we have the content increase in our market share gains in those leadership positions. Secondly, certainly mobile. As we started to experience now in the third quarter and what continues into the fourth quarter, we see continued very strong traction with our secure mobile wallet, which is also a function of the pandemic, ironically, because the use of contactless payment is something which even in countries which have been a bit shy so far is now getting much more traction. And secondly, with the kickoff with Samsung, which I mentioned, the secure ultra-wideband, certainly in the mobile space is now also seeing a lot of traction. Now, if you speak about industrial IoT, I think we are seeing this year already an amazingly strong year in industrial IoT, which is also a function of China, because we have a large exposure to China. And actually, COVID-19 impact in China, if you will, was history already in the second quarter. So we see their continued growth. And that momentum, which rides on our crossovers together with our new connectivity portfolio, will continue well into next year. So all of these growth elements shall be really fully intact into the next year, such that we, of course, miss that revenue to Huawei. but we don't really think this is a big negative. Now, how much of that could be compensated by other mobile customers, I really don't dare to say, specifically since some part of it was in the infrastructure side of things where there is much less competitors.
spk09: Perfect. Thanks, guys.
spk06: And your next question comes from the line of Craig Hittenbach from Morgan Stanley.
spk01: Yes, thank you. You guys continue to do a good job of controlling inventory in the channel and internally. So can you just maybe talk about any signals you're getting just from a sell-through perspective and your ability to kind of keep inventory at equilibrium despite what's a pretty volatile supply chain?
spk05: Hey, Craig. I mean, on the On the distributor side, as you have seen, and as I think both Peter and I reiterated again, we are absolutely disciplined to the target of the 2.4 months. Now, if you ask from a lead time perspective, then I would tell you that clearly the current demand, the strong demand, which we started to experience in, say, the middle of Q3, has extended lead times a little from, say, typically 16 weeks to now maybe 20 weeks, with a few exceptions above that. But no, I think we feel ourselves in a good position, and we also believe, given the environment, it is exactly the right policy to stick to the 2.4 months of distribution channel inventory.
spk07: And can I just add a comment on our internal inventory? Clearly, we came down pretty dramatically in Q3 to 84 days. Given we'll be kind of shipping everything we make in Q4, we'll probably stay at the low 80s in Q4, and it will take us a couple of quarters to get back up to 95. And we think 95 is about the right level for internal inventory.
spk01: Got it. Thanks for that. And then just to follow up on the growth drivers, Kurt, any update? I know you mentioned crossover MCUs, but just curious kind of the type of traction you're seeing for that product, you know, how broad-based is it, and just anything you're doing versus other competitors that you stand out for that product?
spk05: Well, I'm saying now with a cautious smile, what really stands out is that we have that product category, Craig. because I continue to not really see any competitive solution which is coming close. So by the sheer power of having it, and by the sheer power of having it now in conjunction with the Wi-Fi portfolio, especially now on the Wi-Fi 6 standard, which I think we talked about it earlier, which we have now software integrated, so the software integrated, development environment for our customers is actually one now for the crossovers together with the Wi-Fi, we do definitely see continued strong traction. Now, this is on a design win level at this perspective, Craig. So I should also be clear that the revenue from this is, I don't know, a half a year out, a year out, one and a half years out, depending on what specific industrial segments we are deciding it into. So my My measurement point at this stage is clearly the design wind traction, which we are seeing, and that is really good. I should maybe also mention that the strong performance of industrial IoT has also been carried in the past quarter by our general purpose MCUs and by standalone connectivity products. I mean, we got that Marrell connectivity portfolio in, and, of course, we also sell it as a standalone solution, and also that is seeing good traction.
spk01: Got it. Thank you.
spk06: And your next question comes from the line of William Stein of Trust Securities.
spk13: Thanks for taking my question. Guys, really impressive quarter and guidance, both ahead of expectations. There's this cyclical rebound that you're seeing, and I understand the – the practice of guiding one quarter at a time. But during these times when we see these sorts of strong recoveries, sometimes they can be driven by a customer's interest in building a little bit of inventory. And I guess the point I'm trying to make is sometimes we overshoot to the upside. Notwithstanding your comments about confidence in 2021 generally, should we be thinking about Q1 as sort of normal seasonal quarter or do you think because of the dynamics we're seeing in Q3 and Q4 that maybe we should tap that down a little?
spk05: Maybe Peter also wants to say a few words to this. So first of all, I mean, you know we don't guide Q1 at this stage. I mean, this is clearly a Q4 guidance. Secondly, I think the language of normal seasonal in the current environment is just not applicable. I mean, I I wish it was, but I don't think there is anything like a normal seasonality in the current environment. So I think that doesn't really help for Q1.
spk07: Yeah, we were talking in kind of preparation for this, Will, and we thought one of the questions we'd get is kind of how much is inventory restocking versus the market overall. I mean, clearly Q3 has to have had some impact from Q1. inventory restocking and you know and maybe there's even a little in Q4 but we wouldn't say you know what our expectation for 2021 assumes that continues to be the case. I mean Q1 is typically a lighter quarter but it's really really hard to say what seasonality may or may not be. It's just such, as you pointed out, it's such a weird market. And we're loathe to try and speculate on what the four quarters of next year might be sitting where we are today. But it definitely feels a lot better than it did three months ago.
spk13: Fair enough and helpful. Thanks for that.
spk05: Sorry, let me maybe add on the question of restocking. I mean, Of course, with ramps and rebound of the industry, there is always a certain level of repriming the supply chains. That's perfectly normal. But given the fact that we have a large exposure to distribution business, I think our continued discipline on the 2.4 months, which we had just discussed, It gives you also a strong handle that in that area, at least, I mean, we don't overdo. We stick to this, and that makes it very clean, I think. On the direct account side, it's, of course, in the end for us harder to measure what the stock positions could be. But if we look at the end demand, at the content increase of our products, be it in mobile or be it in automotive, We think we have a pretty good view on this, that this is not really about restocking, but it's true demand that we are seeing.
spk13: Yep, idiosyncratic rather than cyclical, or maybe more than cyclical. One follow-up, if I can. You have talked about mobile wallet adoption getting to 50%, I think, from the last analyst day through the end of a three- or four-year period. It seems to me that that might be tracking well ahead of expectations. If you can provide any update on that, and now that we have ultra-wideband shipping into handsets, maybe you can comment on the pace of adoption you're expecting there. Is it similar to get to 50% over some number of years, or is it a different view?
spk05: Yeah, that's fair. So on the mobile wallet, indeed, I think the guidance we gave was 50% adoption rate by the end of next year, so calendar year 2021. And yeah, we are well on track. I mean, let's leave it here with saying we will deliver on this promise. On the secure ultra-wideband, clearly early days, but I think with Samsung, which is very, I mean, they are very strong and they are very determined in building the ecosystem together with us. I think we have a great kickoff in the Android space now, and certainly we want to see that they will not be the only Android OEM, and that spreads much more broadly quickly. I don't think we are yet in a position to talk about specific adoption percentages by specific times, because it's also not only mobile applications. You know, the adoption is going to start also in automotive next year, and we are now working with a lot of focus also into IoT, which is adding another wave of volume. But again, it's too early days to put firm percentage numbers behind it. Thanks.
spk06: Congrats again. And your next question comes from the line of Lane Curtis from Barclays.
spk08: Hey guys, this is Tom O'Malley. I'm for blankers. Uh, congrats on the nice results. My first one is about the buyback. You indicated, uh, that since the, the trailing 12 months that, uh, you've done metric was, was now below two. You guys are going to start buying back. Can you talk about what your mindset is around the framework there? Are you going to continue buying back where you kind of left off before the pandemic or just any sort of framework going forward would be helpful given, uh, you're restarting that.
spk07: Yeah, it's, um, uh, really straightforward. We'll, uh, we'll buy back the level which keeps us probably at or just below two times net debt to trailing 12 months EBITDA.
spk08: Simple enough. I just wanted to walk through a bit more complicated one than that, I guess, but you mentioned a couple moving parts into March on the gross margin. You said same mix, same revenue, 150 bps off the bat benefit, but you also pointed to 100 basis points, potential mix impact, and then some annual price reductions in auto. I guess I understand that you're not guiding Q1 and totally understandable, but could you describe a scenario in which you saw revenue down in Q1 and gross margin still improved? The reason I ask is just that's a bit unique given your history. Can you walk through if there's any other moving parts on the gross margin we should be aware of?
spk07: Okay. So I think there's a – you have two slightly different questions. So my comment was really about – can we get 55% to 2.4? Okay, and I basically said in the first half, at 2.4 level of revenue with the current mix, we'd probably be more like 54% because of the mix. Okay, so that's one question. There's a different question is, okay, going forward from Q4, what's likely to move? So, you know, if we do 52.7 in Q4, I'll get 150 basis points straight off just because I won't take the utilization, which would take me to 54.2. But that would assume the same mix. The comment I made, and I think the thing you have to watch out for, is Q1 typically has our annual price reduction, which can be 30, 40 basis points. So to answer your question, even with If revenue was slightly down in Q1 over Q4, we'd probably still see a slightly better margin because we'd get rid of the underutilization headwind in Q4 of 20. But that's a pretty unusual situation we're in at the moment with this really heavy underutilization. Does that make sense?
spk08: It's really helpful. Thanks a lot.
spk06: And your next question comes from the line of Chris Caso from Raymond Shane.
spk02: Yes, thank you. Good morning. The first question is related to auto market and some of what you said in Japan. It sounds like Japan's recovery is lagging a bit. How much of a headwind has that Japanese part of the business been? And, you know, presumably if that normalizes like the rest of auto next year, how much of a benefit would that provide?
spk05: Yeah, hi, Chris. Yeah, my comment was really related to Q3. We see Japan already catching up in the fourth quarter, actually. So I'd say when you then think about the pool next year, and now I can only look at what IHS is predicting for the SAR, then actually Japan is on the same pace and is quite normalized with the other regions. It was more that this year in the third quarter where we saw now this very sharp return, especially in U.S. and Europe. It started a little later in Japan such that it sits more on the fourth quarter than it was already sitting in the third quarter. But I don't think that there is any reason to extrapolate this into next year.
spk02: Got it. Thank you. As a follow-up, I just wanted to dig into the commentary about the potential for some inventory restocking and where that may be. And I guess it's safe to say if that were happening, the industrial market would be the most likely area, and obviously that's the area that's hard to get visibility. And I guess following from that is, do you suspect that there was any restocking in the automotive area? And I presume there that they were coming off of some pretty low inventory levels earlier in the year when the factory shut down. But again, they're on hubs, so I suppose there's probably better visibility there.
spk05: Yeah, I mean, let me start with auto. Indeed, we have made sure that inventory levels wouldn't be too big because we really had a lot of attention this time in the second quarter when things were falling down to not overship. So even with our direct accounts, we had a lot of one-one discussions to make sure that their order pattern would be somehow compliant with the end demand. So I guess I'd agree with you there probably wasn't too much of inventory sitting there, which is exactly why I said earlier some restocking now is just normal to prime the supply chains for significantly higher production rates. I mean, they have to do this. There is nothing strange about it. The industrial side of things is a little harder to tell because a lot of the business goes through distribution for us. where we do control, as explained, the distribution inventory in a very transparent way. We have all the systems and all the discipline in place to do this, but we of course do not have the visibility into all of the thousands of end customers behind distribution. So it's less easy to say what they possibly are restocking or not restocking. My early take at this stage is, it isn't that much because most of it is anyway in China. And in China, it's not like now suddenly a Q3 or Q4 effect. We have seen growth in China industrial starting with the second quarter. So Q4 is now the third quarter in a row where it's growing. Got it. Thank you.
spk06: Your next question comes from the line of Gary Mobley from Wells Fargo Securities.
spk12: Hey, everyone. Thanks for sneaking my question in. Most of the questions have been asked, but I did want to ask one about your battery management system. Now, your win with Volkswagen sounds very impressive. Obviously, they're the largest OEM in the world and seem to have the most aggressive EV platform in terms of rollout schedule. So I'm just curious to know where you stand today with BMS sales, if I'm not mistaken. It's somewhere in the tens of millions. You may have you know, maybe 10%, 20% market share. So I'm just wondering if you can give us an assessment of where this business may be, you know, in 12 months, 24 months, just given this Volkswagen win. Thank you.
spk05: Yeah, yeah. So, Gary, the best way to think about it is think about a 50 million run rate this year, roughly, and what we – What we did say is that we will grow this with twice the sum. So we want to grow twice as fast as the market, which would translate in something like 60% CAGR over the next couple of years. So 50 million this year, growing with 60% CAGR over the next couple of years. And we think the associated market is growing at about 30%. just as a rule of thumb, uh, this Volkswagen, um, when, uh, there, of course there is a high variation of how big it's going to be depending on their success and how quickly they bring the next models and models and models out. Uh, but that's maybe half of it, right? So that's why we are super proud of this. Uh, I think it's, it's a great testament, uh, to the scalability of our system solution to the functional safety of the solution. Uh, but this is only 50% of that business growing forward. So, I mean, it's just a part. Thank you. That's it for me.
spk04: All right. Operator, we'll take one more question today.
spk06: Yes, sir. And your final question comes from the line of Raji Gill from Needham & Company.
spk10: Yes, thank you for taking my questions. I appreciate it. Congratulations on the auto recovery. On the communication infrastructure side, wondering how you're thinking about that next year given the issue with Huawei, but also kind of your traction in GAN. You're a little bit late in GAN products. It seems to me you're kind of catching up in Arizona. How do you think about your GAN portfolio relative to the competition and adoption in calendar 21 and how that would positively affect your comm infrastructure business next year? Thank you.
spk05: Yeah, we feel very good about our GAN competitiveness. It's only the starting issue, as you rightfully pointed out, that we are coming out a little late, and that's actually a consequence of We thought and we were aligned with our customers that that would only be needed next year and that's also what we are delivering. But then they put in the requirement. The competitiveness of the product in terms of power efficiency looks very, very good. We did announce a few weeks ago that both the factory as well as the product is being released as we speak. we start shipping small volumes in the later part of this fourth quarter and will really ramp up in the first quarter of next year. I am quite optimistic on this for next year because if you think about the main customers for this, think about Ericsson, think about Samsung, think about Nokia, CTE, With all of them, we have had historically already very leading positions with our product, be it with LDMOS or be it with Massive MIMO. So I think we are in a great position, actually, once we start shipping to wrap it up with gallium nitride. So, yes, a little late, but now coming in strong.
spk10: And just for my follow-up question on the ultra-wideband kind of moving to other markets outside of mobile, I wanted to see what your thoughts were in terms of what do you think the next kind of biggest market for UWB will be, and why do you think that?
spk05: We have good visibility into the automotive side because the design wind cycles are pretty lengthy, so we are working and have been working this for quite a while already, where we see mid-second half of next year the first OEMs coming out with ultra-wideband secure access solutions based on NXP. The IoT world, obviously, is much more complicated because it's more smaller customers, a lot of opportunities. But I also assume that it is fair to say that through the next year, we will see the first applications being picked up in the IoT space. And think about smart locks, for example, indoor navigation, et cetera, et cetera. So automotive, a lot of visibility, but it goes the typical automotive case starting middle of next year. IoT, somewhat more complicated because of the multitude of opportunities, but also there we believe next year we see the first volumes.
spk10: Great. Congrats again and excellent momentum. Thank you. Thank you.
spk04: Thank you, everyone, for your attendance to the call today, and we'll look forward to speaking to you next quarter. Thank you very much. This concludes our call.
spk06: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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