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spk00: Good morning, ladies and gentlemen, and welcome to the Q4 2020 NXP Semiconductors Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero, on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Jeff Palmer. Please go ahead, sir.
spk11: Great. Thank you, Tiffany. Good morning, everyone. Welcome to the NXP Semiconductor's fourth quarter 2020 earnings call. With me on the call today is Kurt Seavers, NXP's president and CEO, and Peter Kelly, our CFO. As Tiffany said, the call is being recorded today and will be available for replay from our corporate websites. 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 financial results for the first quarter of 2021. Please be reminded that NSP undertakes no obligation to revise or update publicly any forward-looking statements. For full disclosure on forward-looking statements, please refer to our press release. Additionally, we will refer to certain non-GAAP financial measures today, which are driven primarily by discrete events that management does not consider to be directly related to NSP's underlying core operating performance. Pursuant to Regulation G, NSP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our fourth quarter 2020 earnings press release, which will be furnished to the SEC on form 8K and is available on the NXP website in the investor relations section at nxp.com. Now I'd like to turn the call over to Kurt.
spk07: Yeah, thanks very much, Jeff, and good morning, everyone. We really appreciate you all joining the call this morning. Today I will review our Q4 and our full year 2020 performance. I will provide insights on how we view the current supply-demand environment, and I will certainly discuss our guidance for quarter one. Now, let me begin with quarter four. Our results were near the high end of our guidance, with the contribution from the automotive and mobile markets both meaningfully stronger than planned. And with trends in the industrial and IoT, and communication infrastructure markets in line with our expectations. Taken together, NXP delivered quarter four revenue of $2.5 billion, an increase of 9% year over year, and $57 million above the midpoint of our guidance range. Our non-GAAP operating margin in quarter four was a strong 30.5%. That is 60 basis points better than the year-ago period, and about 80 basis points above the midpoint of our guidance. Our outperformance was thanks to good fall-through on strength revenue growth, thanks to early benefits of our improved factory utilization, and solid operating expenses control. For the full year, revenue was 8.6 billion, a decline of 3% year over year. And as 2020 progressed and the initial impacts from the pandemic earlier in the year subsided, our customers began to accelerate orders at a very robust rate, which we do anticipate will continue throughout 2021. Our full year non-GAAP operating margin was 25.9%, a 310 basis points decline because of lower revenue, reduced factory loadings, combined with slightly reduced operating expenses. It is important to note, though, that throughout the year, we shifted more of our OPEX spend from SG&A towards R&D, as we do continue to invest in new and differentiated products, which are definitely the lifeblood of our long-term growth ambitions. Now let me turn to the specific trends in our focus and markets, starting with automotive. Full year revenue was 3.83 billion, down 9% year on year, materially better than overall auto production, and the reflection of strong new product traction and content gains in ADAS, in digital clusters, and in electrification, which we have all spoken about in the past. For quarter four, automotive revenue was 1.2 billion, up 9% versus the year-ago period, and 20 million better than our guidance. Now moving to industrial and IoT. Full-year revenue was 1.84 billion, 15% year-on-year up, with both the wireless connectivity and our crossover processes supporting the growth. For quarter four, industrial and IoT revenue was 511 million, 23% versus the year-ago period. And with that, in line with our guidance. Now moving to mobile. Our full-year revenue in mobile was 1.25 billion, up 5% year-on-year. Now, if we are reconciling this for the sale of our voice and audio business during quarter one last year, the underlying mobile end market growth was up a robust 19% year on year. And during the year, we experienced continued strong adoption of our secure mobile wallet and the early ramps of our ultra-wideband solutions, offset by the anticipated discontinuation of some parts of our semi-costume mobile analog interface business. We do estimate the full year attach rate of mobile wallets increased to about 40%, which is in line with our expectations, and which is also supportive of our 50% attach rate target exiting 2021. For quarter four, mobile revenue was 409 million, up 23% versus the year ago period. and with that 40 million better than our guidance. And last but not least, communication infrastructure and other full year revenue was 1.7 billion, down 9% year over year. The year on year decline was due to reduced sales of RF power products into the cellular base station market relative to the positive trends which we had experienced in the first half of 2019. For quarter four, revenue was 394 million, down 14% year on year, and in line with our guidance. Now, before turning to our guidance and expectations for the first quarter, I would like to offer my view on the current demand and supply environment as it pertains to NXP. When our customers began to reopen after the shutdowns in the second quarter, we did see order rates through Q3 and Q4 accelerate at a very rapid rate. This trend has continued and it will likely be the case over several quarters to come. The increased demand has been broad-based across most of our focus end markets most of our product portfolio and all of our geographies as well as across our direct and our distribution fulfillment channels. We actually believe that the working from home trends because of the pandemic, which emerged in full force beginning in the first half of the year led to an explosion in demand for high volume consumer compute and mobile type products in the industry. And then, as the auto and industrial markets began to rebound in the second half of the year, the available foundry capacity was largely sold out. As a result, we and others are experiencing significant increases in lead times, and in certain cases, increased costs from suppliers. Taking that all together, the setup indicates a really robust demand environment combined with a very challenging supply situation, which we anticipate may continue for several more quarters. And we are working very diligently with both our external suppliers, our internal operations team, and our customers to adequately align supply with demand. Against this backdrop, now let me come to the quarter one guidance. We are guiding quarter one revenue at 2.55 billion, up about 26% versus the first quarter of 2020, within the range of up 22 to up 30% year over year. From a sequential basis, this represents growth of about 2% at the midpoint versus the prior quarter. At the midpoint, we anticipate the following trends in our business. First automotive is expected to be up in the mid 20% range versus quarter one 2020 and up in the mid single digits versus quarter four 2020. Industrial and IOT is expected to be up nearly 50% year over year and up high single digits versus quarter four 2020. Mobile, is expected to be up 40% year over year, and down in the mid teens versus quarter 420. And finally, communication infrastructure and other is expected to be flat versus the same period a year ago, and up in the low single digit range on a sequential basis. Now, while we are really encouraged by the rapid rebound in demand, it is important to remember we are still challenged by the impact of the global pandemic. And we will carefully navigate the improving demand environment, focused on meeting our customers' requirements, while simultaneously assuring at all times the safety and health of all of our employees. And I am extremely proud of their adaptability, their dedication, and their hard work in the face of continued adversity. So in summary, customer engagement levels, our design bin momentum, and our strategic focus areas continue to be all very positive. And hence, we continue to be very optimistic about the future potential of NXP. And with that, I would like to pass the call to you, Peter, for a review of our financial performance.
spk05: Thank you, Kurt. Good morning to everyone on today's call. As Kurt's already covered the drivers of the revenue during the fourth quarter and provided our revenue outlook for Q1, I'll move on to the financial highlights. Overall, our fourth quarter financial performance was very good. Revenue was near the high end of our guidance range with an improvement of both non-GAAP gross profit and non-GAAP operating profit. I'll first provide full-year highlights and then move on to the fourth quarter results. Full-year revenue for 2020 was $8.61 billion, down 3% year-on-year. We generated $4.4 billion in non-GAAP gross profit and reported a non-GAAP gross profit margin of 51.1%, down 240 basis points year-on-year because of the significant deceleration of revenue and the associated lower factory utilization during the year. Total non-GAAP operating expenses were $2.17 billion, down $8 million year on year. Total non-GAAP operating profit was $2.23 billion, and non-GAAP operating margin was 25.9%, down 310 basis points year on year. Non-GAAP interest expense was $357 million. Cash taxes for ongoing operations were $103 million, and incidental taxes were $45 million, with non-controlling interests of $28 million. Stock-based compensation, which is not included in our non-GAAP innings, was $384 million. Full-year cash flow highlights include $2.48 billion in cash flow from operations and $388 million in net CapEx investments, resulting in $2.09 billion of non-GAAP free cash flow, or a very healthy 24% of revenues. During 2020, we repurchased $627 million of shares and paid cash dividends of $420 million. In total, we returned $1.05 billion to our owners, which was 50% of the total non-GAAP free cash flow generated during the year. Now moving to the details of the fourth quarter, total revenue was $2.51 billion, up 9% year-on-year, at the high end of our guidance rate. We generated $1.3 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 52.9%, down 130 basis points year on year and modestly above the midpoint of guidance. Total non-GAAP operating expenses were $563 million flat year on year and up 13 million from Q3 in line with the midpoint of our guidance. From a total operating profit perspective, non-GAAP operating profit was $764 million and non-GAAP operating margin was 30.5%, up 60 basis points year on year, and well above the high end of our guidance. Non-GAAP interest expense was $90 million, cash taxes for ongoing operations were $30 million, and non-controlling interest was $11 million. Stock-based compensation, which is not included in our non-GAAP earnings, was $89 million. So turning to the changes in our cash and debt. Our total debt at the end of Q4 was $7.61 billion, down $1.75 billion sequentially, as we retired early the 2021 $1.35 billion 4.8s and the 2022 $400 million 4.58 notes. We did this on September the 28th, which was the first day of our fourth quarter. Our ending cash position was $2.28 billion and was down $1.29 billion sequentially, mainly due to the previously noted debt repayments offset by cash generation during the fourth quarter. The resulting net debt was $5.33 billion, and we exited the quarter with a trailing 12-month adjusted EBITDA of $2.79 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q4 was 1.9 times, and our 12-month adjusted EBITDA interest coverage was 8 times. Our liquidity is excellent and our balance sheet continues to be very strong. During the fourth quarter, we paid $105 million in cash dividends and repurchased $257 million of our shares. Turning to working capital metrics, days of inventory was 78 days, a decrease of six days sequentially, significantly below our long-term target. We continue to closely manage our distribution channel with inventory in the channel at 1.6 months, also below our long-term targets. Both metrics reflect customer orders accelerating faster than we'd anticipated, and we find ourselves in a supply-constrained position. It'll take a number of quarters to rebuild on-hand inventory and channel inventories to our long-term target levels. Days receivables were 28 days, down two sequentially, and days payable were 75, an increase of 20 days, versus the prior quarter, as we rapidly increased material orders with our suppliers. Taken together, our cash conversion cycle was 31 days, an improvement of 28 days versus the prior quarter, reflecting strong customer demand, solid receivables collections, and positioning for customer deliveries in future periods. Cash flow from operations was $1.03 billion in the quarter, and net capex was $103 million. resulting in a non-GAAP free cash flow of $926 million. Turning to our expectations for the first quarter, as Kurt mentioned, we anticipate Q1 revenue to be about $2.55 billion, plus or minus about $75 million. At the midpoint, this is up 26% year-on-year and 2% sequentially. We expect non-GAAP gross margin to be about 53.5%, plus or minus 30 basis points. Operating expenses are expected to be about $590 million, plus or minus about 10 million. Taken together, we see non-GAAP operating margin to be about 30.4% at the midpoint. We estimate non-GAAP financial expense to be about 85 million and anticipate cash tax related to ongoing operations to be about $56 million. Non-controlling interest will be about 10 million. And for the first quarter, we suggest that for modeling purposes, you use an average share count of 284 million shares. Finally, I have a few closing comments I'd like to make. One, clearly demand has come back more rapidly than we could have expected. Our current focus is to look after our customers and ensure we ship as much product to them as possible. It's unfortunate that some of our suppliers are attempting to use the current tight supply environment as a short-term opportunity to raise prices, which we will clearly have to pass on. To be clear, though, we do not see this as an opportunity to improve our margin by sacrificing long-term relationships. Additionally, given the tightness in supply and the level of orders, we anticipate shipping for production during Q1 It's unlikely we'll be able to increase our months of supply at distributors or move our DIO target upward towards our long-term targets during the first quarter. Between January 4 and February 1, we bought back an additional $354 million worth of stock and plan to continue to buy back in line with our capital allocation policy of returning all excess cash to shareholders. Clearly, our operating margin reflects the significant fall through benefit of the additional revenue. Although the current environment creates a new set of challenges, we believe we can still deliver on our margin improvement plan in 2021. In terms of the pandemic, our team continues to perform in a truly outstanding way. And the safety of our team members, as Kurt mentioned, continues to be our primary concern. If anyone experiences any symptoms or are in any way exposed to the virus, we ask them to self-highlight, self-isolate for a period. Unfortunately, in Q4, we've seen a few more people than expected in our FAB operations requiring to self-isolate, and as a result of this shortage of labour, a small impact in our internal FAB output. Although this causes a short-term issue, it's clearly best for our overall performance in both the short and medium term. We estimate this is impacting us to the tune of 80 basis points of profit in Q1 and 40 basis and will impact us 40 basis points in Q2. While this is a short-term headwind, the safety of our employees remains our key consideration and we believe our COVID protocols are appropriate and correct. Finally, I'd like to thank all my colleagues at NXP for a truly amazing 2020. You've done an incredible job in a truly unbelievable environment. and set us up for a very bright future. So with that, I'd send it back to the operator for your questions.
spk00: Ladies and gentlemen, at this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Again, that is star one. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of CJ Muse. with Evercore.
spk08: Yeah, good morning, good afternoon. Thank you for taking the question. I guess first question on gross margins, Peter, you talked about the 55%, you know, still clearly in play. Curious if you can speak to, you know, how utilization will play a role in that, how mix, assuming comps recovers through the year. And then I guess probably most importantly, how to think about rising input costs and your ability to pass on and whether there's a timing difference there.
spk05: So great questions. Yeah, let's talk about Q4 to Q1 first of all. So Q1 we go from 52.9 to 53.5. I think I said last quarter that utilization, underutilization rather, would impact us about 150 basis points in Q4. So we'd have that level of benefit in Q1. As it turns out, because of the need to self-isolate, instead of getting 150 basis points of improvement from Q4 into Q1, we've only got about 70 basis points. So that 52.9 to 53.5, the 60 basis points, is really made up of three big things, CJ. So we pick up 70 basis points from improved factory performance, 20 basis points from improved factory performance above and beyond what we were expecting. And there's about 30 basis points of headwind because of our annual price reductions. So that's from Q4 to Q1. Then if you say, okay, well, in Q4 you did 53.5. Why aren't you running, sorry, from 52.9 to 53.5? Why aren't you running 55%? That 150 basis points is really made up from two things. There's about, in period, there's about 50 basis points of underutilization, very roughly. And about 100 basis points of mix. And the issue in mix really is one of our common for business. So our common for business in the first half is relatively weak. And auto and mobile are relatively strong. And we think as we move through the year, And as kind of 5G progresses, we'd see an improvement in our mix over time. Did I – oh, and – right, your other question was about pricing, right? So pricing is really mixed. Okay, so we're seeing some suppliers trying to put up the prices to us. But in the same way that we have long-term contracts with our customers, we have similar contracts with many of our suppliers. So it's a bit of a mixed bag, really. Having said that, we are seeing price increases. And where we have them, we'll endeavor to pass those on to our customers. You made an interesting comment, actually, about how quickly you can do it. So I think what we'll actually see is hopefully we'd be able to pass them on pretty quickly, but you could always have a month or two when, or I guess even a quarter when you can't really pass them on that quickly. So it's a disturbance rather than a fundamental issue. We would like to say that we don't see the current environment as an opportunity to structurally improve our margins. You know, we're not a commodity business. You know, we don't increase our prices when times are tight and reduce them when times are good. But did I manage to cover everything there? I know there was other questions.
spk08: Yeah, no, that was great. And I guess, Kurt, if I could just follow up with a quick question. You know, considering the supply constraints on the auto side and considering You know, you're and NXP's focus are really providing complete solutions. Curious about what impact kind of the current supply-constrained environment is having on your level of engagement with your automotive customers. Yeah, hey, TJ.
spk07: So I think actually, and that might sound ironic, but that's not what I mean, it actually improves the engagement because, again, I've probably never spent so much time with our customers as of today. And you know, while certainly this is a challenging moment for everybody in the chain, there is a lot we speak about the future in terms of how do we best deal with this on a go-forward basis? Because everybody recognizes the enormous relevance of semiconductors in building cars. So thinking about trends, thinking about aligning forecasts on a longer-term basis is definitely a positive result out of this. So I don't think this is a negative. I think it is actually something we as an industry all together are learning from how to avoid these things from happening in the future. And the way to do this is just a much closer collaboration than we've had along the chain. And what I mean is really not only with our Tier 1 customers, but also with the OEMs directly. And that is obviously great for innovation at the same time. Very helpful. Thank you.
spk00: Your next question comes from the line of Stacy Raskin with Bernstein Research.
spk10: Hi, guys. Thanks for taking my questions. For my first question, I wanted to ask about the trajectory for the year. I mean, normally Q1 is the trough for the year, usually down, oh, I don't know, 7% or 8% sequentially from Q4 to Q1. You're obviously up a little bit this time. Given your commentary on sort of like sustained demand through the year, do you still see Q1 potentially as the trough?
spk07: Hi, Stacey. First of all, you are hinting to seasonality in a way. I think in the current environment, none of the historic seasonality patterns is really applicable. So certainly this is a very strong Q1 if you did hold it against historic patterns. But let's not forget that we are coming off actually two kind of disturbed and weak years. I mean, everybody talks about the impact of the pandemic on 2020, but also 2019 was not a strong year in semiconductors. So from that perspective, I think we are just really coming out of a longer-term down, which indeed hints to what I said in the prepared remarks earlier. We do see a pretty robust demand environment all through the year, also beyond Q1.
spk10: Got it. Thank you. For my follow-up, I want to follow up a little bit on a comment that Peter said. He said, do you still feel confident in delivering on your margin improvement plan in 2021. I just wanted to clarify exactly what is that margin improvement plan. Is that the 55% gross margin target or like specifically, what do you mean by delivering on margin on your margin improvement plan in 2021?
spk05: Okay.
spk10: Are there any, like, is that it's still at that 2.4 sort of threshold revenue level or do you just basically see yourself maintaining it?
spk05: No, I think of the levels of business we are at the moment, we, you know, we should be running about 55%. I mean, I think we get a little bit carried away, because it's not many dollars, you know, that moves at 50 basis points either way.
spk10: Yeah, no, I get that. Do you have any idea when in the year you might hit it, though? Is that like a second half kind of target?
spk05: Oh, I think it's definitely second half, Stacey. And one of the single biggest items is our common front. being a bigger percentage of our overall business than it is today.
spk10: Okay. Got it. But without the COVID impact, you'd be running over 54 right now in Q1, correct?
spk05: Yeah, yeah. I think so, yeah. Got it.
spk10: Okay.
spk05: Thank you, guys. Appreciate it. Yeah, it'd be like 54.2 or something like that.
spk10: Yeah. Got it. Got it. Thank you, guys.
spk00: Your next question comes from the line of Vivek Ira with Bank of America Securities.
spk04: Thank you for taking my question, and congratulations on the strong growth and execution. Kurt, I'm curious, what's your baseline view of automotive unit growth in 2021, as you see it at the start of the year? And also last year, when I look at your auto semiconductor sales, which are down nine, they were like five, six, seven points ahead of auto units, so that was very impressive content data. And how should we think about that similar content delta for this year? And I ask those questions because it seems like the industry is off to a very strong start, but can this kind of strength be maintained? Which is why, you know, just kind of help us align our morals on what unit and content market expectation should be this year.
spk07: Yeah, sure, Vivek. So let me start with... what IHS is telling us for this year in units for auto, and that would be around 85 million units, which if that comes, is like 14% year-on-year growth in units. This is the IHS number. We've always used it internally. I would tell you from my very, very frequent discussions over the past couple of weeks and also at the ending of last year, I think the sentiment in the auto industry is possibly even above that. So maybe more 85 to 90 million units in what the car companies think to achieve. But a lot of that is obviously based on the assumption of, say, the second half of the year being fully vaccinated, society coming back to more normal lives. and that actually being another push for auto production and auto sales. Again, the formal number is 85 million units, which would be a 14% growth. But you were hinting to the other half of this discussion, which is actually content, because clearly the fact that we've been seven points faster than the SAR last year is thanks to content growth. and thanks to our specific play in our high-growth areas like radar and electrification, BMS, digital clusters, which actually did not decline. So our growth businesses, and you know that's about a quarter of our auto business, those parts of our auto business did not decline last year. They actually had growth, even in a year where the SAR was, I think, last year down by something like 16%. And we see the content growth certainly going at the same rate going forward. One really strong element is the CO2 targets, which translates then often in electrification. But this is not just about, say, the electric engines. There's a lot of other applications which are coming in tune with electrification, which is overall driving the semi-content in the car massively. So all in all, Vivek, I would say I think it is safe to assume the 85 million units for this year, which is a 14% growth for SAR. And definitely our algorithm of outgrowing the SAR, as we spoke about it before, does stand strong also in this year. Now one last element on this, which everybody tries to understand currently, is about inventory levels. I think at the moment from anything we can see, the supply chains through the auto world are empty. And I say that because I know that every single product we are shipping is immediately built into a car. So there is just nothing going on a sideline. It all goes through into production immediately. That's why we also clearly set the ER supply constraint for the first quarter. And As a reaction to this, I hear quite a few people in the industry speaking about the desire to actually ask for more inventory along the chain in automotive going forward. There is one large US OEM which actually made even a public statement about how much chip inventory they would like to see at their first-tier customers. So if you model this on top of the content gains and SAR growth, which we just spoke about, then I think there is a good reason to believe there is a multiple quarter growth pattern ahead of us.
spk04: Got it. Very helpful. And for my follow-up, maybe one for you, you mentioned that the plan is to return all excess free cash flow to investors. Last year, you generated over $2 billion or so in free cash flow, and I think The dividend only takes a quarter of that. How should we think about buybacks this year? I know you gave a number for the start of the year. Should we assume that based on the expectation of stronger free cash flow that most of it will be devoted to buybacks so we could be back in some of the strength we have seen in some prior years or do you still expect to use some of that to deliver the balance sheet further. Thank you.
spk05: Okay. Vivek, we've been amazingly predictable. Okay. So, our stated capital allocation policy is we will return all excess cash to shareholders up to a level of two times net debt to 12 and 12 months EBITDA. The reason we didn't return even more in 2020 is because for most of the year we were above two times net debt to EBITDA with the weak performance in Q2. So depending on what your model is, you should assume that all excess cash up to a level of two times net debt gets returned to shareholders. So yeah, it'll be substantially higher in than it was in 2020, same way 2019 was substantially higher than 2020. And we definitely would not be using it to delever the balance sheet.
spk04: Got it. And you're already at 1.9, so you're below that range right now.
spk05: Well, you know, the difference between 1.9 and 2 is not a big number. I understand. But the issue is the EBITDA. So you need to look at how Q2 and Q1 fall off and Q3 and Q4, which is better, come on. which gives us more capacity to buy back stock.
spk04: I understand. Thanks very much.
spk00: The next question comes from the line of John Patzer with Credit Suisse.
spk12: Yeah, good morning, Kurt. Good morning, Peter. Congratulations on the solid results. Kurt, my first question is on the comms infrastructure business. Given how important it is to mix and gross margin leverage as we go throughout the year, What's the visibility in that business? Why do you think it recovers in the back half of the year? Is this a view that the U.S. government stance on Huawei changes, or do you see other design wins with other OEMs that will drive that business throughout the year?
spk07: Yeah, thanks, John. Let me take away the Huawei thing, first of all. We are here conservative, and we don't assume anything. any moves on the licensing, et cetera, with Huawei, so that's not part of the plan anyway. What makes us actually optimistic for the second half is mainly our portfolio. I think we talked about our gallium nitride, both product as well as production capability, getting online at the end of last quarter. And I can actually proudly say that in the meantime, All the products are qualified, and more importantly, they are qualified at this handful of important customers. And since this is new for us, because we haven't had this gallium nitride capability really in the first place, we absolutely see that we will gain share on that basis with the further rollout of the infrastructure in this coming year. And, yeah, we believe this is kind of backloaded more towards the second half of the year versus the first half. But the driver is really the gallium nitride penetration, which we are foreseeing.
spk12: That's helpful. Then as my follow-up, just in your prepared comments, you pointed out that if you pro forma for the sale of the auto business, the mobile business last year was up significantly. I'm kind of curious, as you think about You know, the mobile wallet, the ultra-wideband penetration. Are you preparing calendar year 21 to be another growth year in mobile? And is there any rule of thumb you can give us on how we should think about your content from 4G to 5G?
spk07: Well, I mean, we only guide the first quarter here, John. So I will not provide guidance for the full year in mobile. but certainly our focus on further driving penetration with the mobile wallet, where I think I spoke about hitting the 40% attachment rate at the end of last year, and we think we are perfectly on track to get this to a 50% rate through this year. And secondly, we have the emerging ultra-wideband, and you've probably followed the most recent announcements of Samsung who actually brought now another couple of phones out, which, which, which are carrying ultra wide bands. And that is now also spreading into, into associated ecosystems, which I think makes it even more attractive. I think Samsung spoke about digital car keys for, for a couple of car companies. And they, they also spoke about actually their first moves now into the, into the IOT world, which is a product, which they, which they call the smart tech plus, which is like a, a small finder device, which you, which you can attach to something and then you, you will find it with your phone. Now, all of that is going to help, uh, with Samsung, but of course also with the other OEMs drive, uh, further and, and speedy ultra wide band, uh, adoption in line with what we did in the investor teaching some time ago. Uh, so those two pillars are standing firm. Uh, and I'd say certainly some of the, of the big OEM customers also have good run rates, John, but I would say, uh, For us, it continues to be a content growth story. Secure mobile wallets, secure ultra-wide bands, and then we also had the EU ICC, which is coming in. So there is a number of very specific content drivers, which make us actually quite optimistic in mobile on a continued basis beyond the unit rates.
spk12: And Kurt, do you have enough data yet to think about how your content trends from 4G to 5G? I'm assuming that these new applications are more broadly adopted in 5G phones.
spk07: Yeah, sorry, I didn't respond to this in the first place. I think actually, in principle, this is not dependent or required as an association with 4G or 5G specifically. Clearly, 5G will be about high-end phones in the first place where the early adoption of these features might be a first, but it is not necessarily something which is dependent on 4G or 5G, which is good, actually. So we are kind of agnostic to that.
spk12: Perfect. Thank you.
spk00: Your next question comes from the line of Ross Seymour with Deutsche Bank.
spk03: Hi, guys. Thanks for letting me ask the question. First, Peter, congratulations on your retirement announcement. I know you're going to be with us for another year or so, but congrats nonetheless. I guess as my first question, overall, everybody knows that there's supply shortages, but I hope to get a little more color on it from a somewhat higher level. Could you size in any way, shape, or form the impact on what you couldn't ship, so what your revenue impact of the supply constraint was, In the fourth quarter, the first quarter, you know, any color about which end market is more acutely hit as you split your business. And timing-wise, when do you think you'll be able to catch up?
spk05: Kurt, I think you're on mute.
spk08: Peter?
spk05: Oh, Jimmy, okay. Right. I guess I'd say – a couple of things really, Ross. You know, you can look to really big numbers in the fourth quarter and the first quarter, you know, just to do some chainsaw math on our months of supply and, sorry, months of inventory and distribution, but I'm not sure how relevant it is really. So, you know, in theory, we could have shipped hundreds of millions of dollars or more. But then I don't know to what extent you'd be then pulling that out of Q3 and Q4. We're seeing strength across our businesses. Obviously, there's a lot more reporting in the automotive sector because... they're having real supply issues and having to maybe close down factories in certain cases. And you talk about people not being able to work for weeks at a time, which is maybe different than you see in some of the smaller customers who don't have the same megaphone. But even in those areas, they're seeing problems. So I would say it's pretty general. And I would go back to one of Kurt's comments, which was, you know, 2019, the supply chain really got, you know, really got emptied. You know, demand was very weak. You know, we really forget about 19 in the context of COVID. And then, you know, in the first half of 20, we had absolutely the same issue. So, you know, we're looking at pretty empty supply chains across the board. To some extent, it's exacerbated by maybe people moving into the big Taiwanese and other foundries outside of China by the fact that people thought maybe they would not be able to buy product out of China. But I think trying to pass it to really individual situations is actually very difficult. I would say in theory, yeah, we could have shipped a lot more and effectively were sold out for Q1. And we're just spending huge amounts of time at the moment with customers making sure that they keep their factories going, which is why Kurt made the comment that we don't think anything we're shipping at the moment is going into inventory. We think it's all going into to building products. And we think it's going to be quite some time, and we wouldn't speculate exactly when, to when we get to a point that that becomes more balanced and everyone can start to breathe normally.
spk03: Thanks for that color, Peter. I guess switching gears somewhat completely over to the OPEC side, you gave a lot of details on the gross margin side and the profitability, why that's where it is and how it can improve. How are you approaching the OPEX side of the equation. Obviously, the revenue sounds like it's going to be very strong throughout the year. Will you be spending to that? How should we think about that 590 level and 1Q trending for the rest of the year?
spk05: We want to run 16% of revenue for R&D and 7% for STNA. In actual fact, the increase in dollars from Q4 to Q1 is essentially, in fact, it's nearly all non-exec variable comp. So it's just incentives. So we're keeping a tight hand on OpEx. We won't spend ahead of revenue, really. But we would like to run 16% of R&D and 7% of STNA. And in the very short term for For Q1, the increase is all increases in compensation in variable comfort rules. Thank you.
spk00: Your next question comes from the line of William Stein with Truist Securities.
spk02: Great. Thanks for taking my question. I'm wondering if you can discuss the competitive landscape today a little bit, in particular as it relates to pending M&A. You have ADI buying Maxim that consolidates the analog market a little bit. You have NVIDIA buying Arm, which is an important supplier of yours. I'm wondering if you can comment as to whether either one of these or any other transaction might have any influence on your competitive positioning and perhaps your own plans from the perspective of consolidations.
spk07: Hey, Will. So, I mean, you know, we just don't comment on M&A in these calls. But what is relevant is that as it relates to our strategic focus and our, say, belief in our power of differentiation, we continue to be really super confident that with the portfolio, which we have actually largely achieved or to a good extent also through M&A achieved, is in a very good position. I mean, let's not forget that this trends in secure edge processing solutions, which we have, is a result of the Freescale acquisition a couple of years back and then further complemented by the wireless acquisition from Marvell about one year back. We are proud that we've been able to successfully integrate all of this and actually are now in a position to come out with solutions, with products, which are building on the IPs from these different former deals. And from anything I've seen relative to the deals you mentioned, we don't see this as a threat to that competitive decision which we have. So while I don't want to comment in general on M&A, I would say it doesn't touch our trust and our confidence with the strategic focus which we have, I continue to believe that full steam execution on what we have is a very, very high value endeavor.
spk02: Great, I appreciate that. And maybe if I can follow up with another question about the supply-demand imbalance. Typically when this happens, you have this behavior of overordering by some customers that stimulates capacity additions and sort of there goes the cycles. You know, this behavior is typically what sort of paints the peak of the cycle. I've argued that, you know, I think the lean inventory through the supply chain and really the breadth of demand, what perhaps will make the cycle extend a little bit longer. But I wonder if there's anything else that relates to the insight that you've all shared with us already, suggesting that we continue to see this imbalance favoring growth as we go through the year.
spk07: Yeah, I mean, indeed, we've all seen that movie before. I couldn't agree more. There is this element which is creating a bubble eventually. But I would really highlight, and I say that from very hands-on practical experience currently, everything we ship goes into production. It isn't piling any inventory at any place. And I can also, again, emphasize it is broad. I mean, you read and see a lot about automotive, as Peter said, because that is very prominent when it comes to publications. But it is much broader. We have the same surge in demand in our other markets. So that makes me believe that at least at this point in time, this is not about inventory building anymore. Now, certainly we will continue to watch this very carefully because, again, we've seen this before. We have our controls. We know what to look after. But now is not the time to be worried about that. So we clearly see this demand continuing for a couple of quarters without building unnecessary inventory. The only – I wouldn't say exception, but the one thing specific which I believe could become a growth trend, which is then – nothing wrong, but something to be conscious about, is possibly the fact that the auto industry will want to have, along the supply chain, higher inventory levels than they used to have. Just learning from the current experience and trying to mitigate any future disruptions. That would be then building inventory, but it wouldn't be a bubble, but it would be a very conscious and very, say, targeted building of inventory. But again, from anything we can see with our product, we are far from this at this point in time. But it could become something which happens maybe later in the year.
spk11: Great. Thank you.
spk00: Your next question comes from the line of Blaine Curtis with Barclays.
spk09: Thanks for taking my question. I just want to ask on the industrial IoT business, you know, we obviously talked about the auto segment in depth. Obviously, that business, Seasonality is typically down. You got it up. I think you have an easy year-over-year compare, but it still seems up pretty robustly. So maybe you just talk about the drivers within that segment.
spk07: Blaine, did I hear you right? Industrial and IoT? Is that what you asked?
spk09: Yeah.
spk07: Yeah. Yeah. No, absolutely. I mean, we are actually quite proud about our performance in industrial since even last year, which clearly was a very difficult year for the industry. our industrial business on a full year basis did grow by 15% year on year. And as you've seen from the guide, we have the confidence we continue this. It's really carried by the solution capability made up by the crossover processes. I mean, it's the whole processing portfolio, but specifically the crossovers are delivering on the promise coupled with our Wi-Fi capabilities. And you might have seen just in Q4, we launched our first and what I think is really an industry-leading 2x2 Wi-Fi 6 solution, which is a result of the Marvell acquisition. But getting this all together into solutions is actually doing what we wanted to see. Now, there is one other element with this, which I think is a driver for the growth for NXP, particularly in that segment, and that is our exposure to China. That's also, I think, the background for last year's strong performance because China left the pandemic from an industrial performance perspective behind them already in the second quarter. So if you will, China had three strong quarters last year, and our industrial business has a quite big exposure to China. So we've been benefiting from this, and we see this continuing into this year.
spk09: Maybe as a follow-up to that, you just talked about the supply side. Is this a segment that you're also being impacted by tightness and any kind of view on kind of lead times within that segment?
spk07: It's across the board, Blaine. So, yes, we are also impacted by the tightness of supply in our industrial business. I can't really talk about lead times because it really differs. I mean, we have a number of products with very normal lead times, but we also have a couple of products with 52 weeks lead time. So there is not one answer to this question. The only thing I can say is that, yes, industrial is also impacted by the tightness of supply.
spk09: Thank you.
spk00: Thank you for the question.
spk11: Tiffany, I think that would be our last call. Maybe pass it over to Kurt.
spk00: Thank you. And I would now like to turn the call back over to Mr. Sievers. Please go ahead.
spk07: Yeah, thanks very much, operator. Yeah, I think in summary, it is fair to say that if we just for a minute look back to last year, last year has really been a year with two phases. a very grim and very difficult year in the first half, and then a definitely faster than anticipated recovery in the second half. And given all the discussions which we've had about supply and demand, it is fair to say that we believe it's only the start of the recovery. This will continue through the calendar year 2021. And we see that our specific and market focus of NXP with a lot of strength in automotive, with a lot of very specific strength in the mobile and in industrial and IoT, gives us actually a very good opportunity to benefit from this continuing recovery into this calendar year. The one segment we've certainly been less happy with is the comms infra segment, as we discussed. But also there, given the new product introductions in gallium nitride, we are optimistic on the second half of the year, which is a strong driver for our mix when you think about our margin targets. And with that, I thank you all for dialing into the call. And most of all, please all stay safe and stay healthy. Thank you very much.
spk00: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may now disconnect.
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