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spk07: Good day, and thank you for standing by. Welcome to NXP 2Q21 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. If you would like to be advised of these calls being recorded, to ask questions during the session, you will have to press star 1 on your telephone. If you require any further assistance, please press star 0. I would like to hand the conference over to speaking today, Mr. Jeff Palmer, Senior Vice President of Investor Relations. Please go ahead, sir.
spk13: Thank you, Crystal, and good morning, everyone. Welcome to the NSP Semiconductor Second Quarter 2021 Earnings Call. With me on the call today is Kurt Sievers, NSP'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 can cause NXP's results to differ materially from management's current expectations. These risks and uncertainties include but are not limited to statements regarding the continued impact of the COVID-19 pandemic on our business, the macroeconomic impact on specific end markets in which we operate, the sale of new and existing products, and our expectations for the financial results for the third quarter of 2021. 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. 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 Q2 earnings press release, which will be furnished to the SEC on Form 8K and available on NXP's website in the investor relations section at nxp.com. Before we start the call today, I'd like to highlight our upcoming 2021 Analyst Day. At this time, we are planning on hosting an in-person event in New York City on Thursday, November 11, 2021. We will open up an online registration site over the next week, and we would suggest interested parties to pre-register as space will be limited this cycle. I would like to now turn the call over to Kurt.
spk09: Yeah, thank you very much, Jeff, and good morning, everyone. We really appreciate you joining our call today. I will review our quarter two results, and I will discuss our guidance for quarter three. Furthermore, I will provide an updated perspective on how we view the current demand environment. Let me start with quarter two. Overall, our results were better than the midpoint of our guidance with the contribution from the communication infrastructure and market stronger than planned and above the high end of our guidance. At the same time, the trends in the auto Industrial and mobile markets were all slightly above the midpoint of our guidance. Taken together, NXP delivered quarter two revenue of $2.6 billion, an increase of 43% year-on-year, and $26 million above the midpoint of our guidance range. These are very good results given the constrained supply position we knew we would face entering the quarter. Our non-GAAP operating margin in quarter two was a strong 32%, 1130 basis points better than the year ago period and 70 basis points above the midpoint of our guidance. Our stronger operating profit performance was driven by a richer product mix. Now, let me turn to the specific trends in our focus and markets. In automotive, quarter two revenue was 1.26 billion up 87% versus the year ago periods and slightly above the midpoint of our guidance in industrial and IOT quarter two revenue was 571 million up 31% versus the year ago periods and slightly above the midpoint of our guidance in mobile. Quarter 2 revenue was $347 million, up 36% versus the year-ago period, and slightly above the midpoint of our guidance. And lastly, in communication infrastructure and other, Quarter 2 revenue was $416 million, down 8% year-on-year, however, about $21 million better than our guidance. With this, let me move to our outlook. We are guiding the midpoint of quarter three revenue to $2.85 billion, up 26% versus the third quarter of 2020, within a range of up 22% to up 29% year on year. From a sequential perspective, this is up 10% at the midpoint versus the prior quarter. At the midpoint of this range, we anticipate the following trends in our business. Automotive is expected to be up in the low 50% range versus quarter three 2020, and up in the mid teens range versus quarter two 21. Industrial and IoT is expected to be up in the high teens percent range year on year, and up in the mid single digit range versus quarter two 21. Mobile is expected to be down in the low single-digit range year-on-year and down in the mid-single-digit range versus quarter to 21. And finally, communication infrastructure and other is expected to be up in the low single-digit range versus the same period a year ago and up about 10% on a sequential basis. At this point, let me give you an update on NXP's current demand position. As I shared with you on our last earnings call, we had anticipated product supply to be a challenge in quarter two, and this is indeed what we experienced. With the continuation of robust demand, we expect supply to be a challenge for the foreseeable future. We do continue to work very closely with our customers on a day-to-day basis to accommodate their most pressing short-term requirements. During quarter two, based on the orders and all of the various actions we took over the last six to nine months, we began to see wafer supply from our foundry partners and internal fabs improve. We do anticipate continued increase of wafer supply during quarter three and beyond, which will support our revenue growth in subsequent course. However, with customer demand outstripping current supply, a situation that we see across all our end markets, we are working diligently to secure additional supply to achieve a healthy balance of demand versus supply. A significant number of our customers are also taking action by placing non-cancelable and non-returnable orders for the medium term. Furthermore, based on customer discussions and also based on our own analysis, we do not believe there is excess inventory of NXP components along the extended supply chain. Additionally, we continue to make significant investments as a direct result of the very detailed conversations and associated commitments concerning long-term demand across our customer base, especially within the automotive and industrial end markets. These investments include long-term contractual commitments to our front-end foundry partners in order to assure supply, as well as making investments to expand our internal front-end capacity and our internal back-end test and assembly capabilities so as to avoid potential bottlenecks as wafer supply materializes. Notwithstanding this challenging supply environment, our results and guidance clearly validate the excellent underlying long-term growth, profitability, and cash generating capability of our business. We continue to see our company-specific key revenue growth drivers in our strategic end markets unfold as we have long anticipated. These drivers include our 77 gigahertz radar systems, our e-cockpit solutions, the domain and zonal processes, and electrification products, including our battery management systems, all in the automotive market. And within the broad-based industrial and IoT market, our significant and focused investments to enable complete, secure, connected edge processing solutions are being very well validated by strong customer design win awards. And these are just a few of the opportunities we have shared with you at our product teach-ins. All of them will continue to contribute to our future growth. Viber will not provide specific guidance beyond the current quarter. We do anticipate quarter four revenue will be greater than quarter three on an absolute basis. And we are highly confident that 2021 marks just the beginning of a longer-term upcycle for NXP within our strategic end markets. In summary, we are very encouraged by the continued and consistent rapid rebound in demand across our end markets. Our employees are highly engaged to drive our success. We have a robust pipeline of new and innovative products. And the customer response, engagement, and design win momentum all underpin our optimism about the future potential of NXP. Before concluding my prepared remarks, I would like to speak to the impact the COVID-19 pandemic continues to have on NXP. The pandemic remains active with spikes that continue to plague multiple regions where we have operations, namely India in the second quarter and Southeast Asia most recently. We continue to remain very vigilant in forcing our safety protocols across all of our global sites. We have initiated successful vaccination drives in several countries for our team members and their families. However, the highly contagious Delta variant has required that we revert to a complete work from home situation in several of our locations. I am extremely proud of all our employees for their dedication, and for their resilience during this very challenging period. I would like to especially commend our manufacturing operations and customer-facing teams for their relentless focus and energy on assuring our customer success. It is their dedication and their hard work in the face of the pandemic and the very challenging supply environment at the same time which truly make a difference. Now I would like to pass the call over to you, Peter, for a review of our financial performance. Peter.
spk00: Thanks, Kurt, and good morning to everyone on today's call. As Kurt already covered the drivers of the revenue during the second quarter and provided our revenue outlook for the third quarter, I'll move to the financial highlights. Overall, our second quarter financial performance was very good. Revenues were above the midpoint of our guidance range and we drove an improvement of non-GAAP gross profit and non-GAAP operating profit, both of which were above the high end of our guidance range. Additionally, we have implemented long-term supply agreements with our foundry partners, which we believe will enable NXP to deliver robust growth in the coming periods. Now moving to the details of the second quarter, total revenue was $2.6 billion, up 43% year-on-year, and above the midpoint of our guidance range. We generated $1.46 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 56.1% of 700 basis points year-on-year and above the high end of our guidance. Total non-GAAP operating expenses were $626 million, up $110 million year-on-year, and up $26 million from the second quarter. This was $3 million above the midpoint of our guidance due to increased variable comp driven by an improved first half performance. From a total operating profit perspective, non-GAAP operating profit was $830 million and non-GAAP operating margin was 32% up 1130 basis points year on year and was above the high end of our guidance. Non-GAAP interest expense was $91 million $4 million above guidance as we issued $2 billion of new debt early in the quarter. Cash taxes for ongoing operations were $50 million and non-controlling interest was $9 million. Taken together, the below-the-line items were $1 million better than our guidance. Stock-based compensation, which is not included in our non-GAAP earnings, was $93 million. Now I'd like to turn to the changes in our cash and debt. Our total debt at the end of the second quarter was $9.59 billion, an increase of $1.98 billion due to the previously mentioned debt issuance. Our ending cash position was $2.91 billion, up $1.07 billion sequentially due to new debt and cash generation offset by capital returns during the quarter. The resulting net debt was $6.68 billion, and we exited the quarter with a trailing 12-month adjusted EBITDA of $3.55 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q2 was 1.9 times, and our 12-month adjusted EBITDA interest coverage was 10 times. Our liquidity is excellent, and our balance sheet continues to be very strong. During the second quarter, we repurchased $1.2 billion of our shares, and paid $155 million in cash dividends, for a total of $1.36 billion of capital return to our owners. Subsequent to the end of the second quarter, between July 5th and August 2nd, we repurchased an additional $1 billion of our shares via a 10B51 program, resulting in a total of $3.37 billion return to our owners year-to-date. Turning to working capital metrics, days of inventory was 88 days, an increase of seven days sequentially. Our DIO continues to be below our long-term target of 95 days, and the sequential increase in the quarter was due to an increase in work in process driven by wafer supply deliveries to support our Q3 revenue ramp, while finished goods continued to drain to very low levels. We continue to closely manage our distribution channel with inventory in the channel at 1.6 months flat sequentially and below our long-term targets. Both metrics reflect the continuation of strong customer order rates and a tight supply environment. It will take several quarters before we're able to rebuild on-hand and channel inventories to our long-term target levels. Days receivables were 35 days of 5 days sequentially and days payable were 92, an increase of 13 days versus the prior quarter as we continue to increase material orders to our suppliers. Taken together, our cash conversion cycle was 31 days, an improvement of 1 day versus the prior quarter, reflecting strong customer demand, solid receivable collections and positioning for customer deliveries in future periods. Cash flow from operations was $636 million, and net capex was $150 million, resulting in non-GAAP free cash flow of $486 million. Turning to our expectations for the third quarter, as Kurt mentioned, we anticipate Q3 revenue to be $2.85 billion, plus or minus $75 million. At the midpoint, this is up 26% year-on-year and 10% sequentially. We expect non-GAAP gross margin to be about 56.3%, plus or minus 30 basis points. Operating expenses are expected to be about $665 million, plus or minus about 10 million, consistent with our long-term model. Taken together, we see non-GAAP operating margin to be about 33% at the midpoint. We estimate non-GAAP financial expense to be about $96 million, and anticipate cash tax related to ongoing operations to be about $90 million. Please note, during the second quarter, we indicated that we anticipated full-year cash taxes for 2021 to be approximately 9%, and that it would be back-end loaded into the second half of the year. Non-controlling interest will be about $9 million, and for Q3, we suggest that for modeling purposes, you use an average share count of 271 million shares, which is down about 13% – sorry, down about 13 million shares from the year-ago period as a result of the consistent execution of our communicated capital return policy. Finally, I have a few closing comments I'd like to make. One, demand trends continue to be strong across our target end markets. and customer interest in our newest products continues to be robust. We are diligently working with our customers and our suppliers to address order requests in a timely manner. Secondly, our third quarter guidance reflects the clear potential of our business model, both in terms of revenue growth as well as the significant profit fall-through which will enable us to drive our non-GAAP gross margin above the midpoints of our gross margin targets. Thirdly, our business continues to generate significant free cash flow. We continue to invest in our internal manufacturing capabilities, increasing capex to expand our back-end capacity, but also to increase the output capacity of our existing front-end wafer factories. We are steadfastly committed to our capital return policy and will return all excess free cash flow to our owners so long as our leverage ratio remains at or below two times net debt to trailing 12-month adjusted EBITDA. As Kurt mentioned, we believe the demand environment is strong and notwithstanding the supply constraints, we continue to anticipate robust growth for the remainder of 2021 as well as into 2022. Finally, I'd like to thank all my colleagues for their outstanding work and dedication. we shouldn't forget that we are all still working under stringent pandemic protocols. I'd like to now turn it back to the operator for your questions.
spk07: Ladies and gentlemen, as a reminder to ask questions, you will need to press star 1 on your telephone. To read your questions, press the pound key. Please stand by while compiled the caring roster. Your first question comes from the line of CJ News from Evercore. Your line is open.
spk10: Yeah, good morning. Thank you for taking the question. I guess first question for you, Kurt. I was hoping you could speak more about the current state of the auto industry. I think there's a fear amongst some investors that the current auto run rate is closer to peak than trough. And we'd love to hear your thoughts. What gives you confidence that strength is sustainable into 22 and beyond? Yeah, hi, good morning, CJ.
spk09: We are clearly convinced that we are far away from a peak, especially in the auto end market. The way to look at this is clearly that while the SAR this year probably is going to grow around 10%, that's the latest data point we have from IHS, there is broad consensus that it's going to grow another around 10% next year. and only then it will actually surpass the absolute volume levels from the pre-pandemic year of 2019. But more importantly, CJ, as we've discussed many times in the past, our content gains, company-specific content gains, and I mentioned a few in my prepared remarks, like radar, e-cockpit, sonal processes, and the battery management and electrification, really, really drive specific strengths and growth for NXP. And from a market perspective, I'd say that the content gains in general maybe are accelerating a little, especially thanks to the accelerated pace to XCVs. So we do see that the number of XCVs as a portion of the total car production is growing faster than anybody had anticipated. So the latest data we see, again, I'm quoting, I think, IHS here, It was like 12% of the total car production last year dedicated for XEVs. It's going to be more like a quarter next year and then growing fast from there further onwards. Since XEVs have a significantly higher silicon content compared to traditional combustion engine vehicles, this is another strong driver for the auto market. So far away from a peak. And finally, very tactically, because I know everybody wants to speak and wants to hear about that. I mean, trust me, I'm in daily contact with the CEOs of both the tier one customers of us, which are serving the car companies and the car companies themselves on a daily level, trying to make sure that we can fulfill their most pressing needs, really hand-holding shipments day in, day out. So there is not a single piece of inventory anywhere in the extended supply chain. They want to build more cars. So I have any confidence that this keeps growing.
spk10: That's very helpful. Thank you. I guess as a follow-up, Peter, gross margins stellar. You know, I think reading your 10Q, you talked about the benefit of increased loadings, but that mix was not helpful in that you had higher personnel costs. How are you thinking about, I guess – you know, COVID-related costs unwinding? What kind of impact that would have on a positive side? And from current levels, how should we be thinking about uplift from here as presumably loadings continue to move higher?
spk00: I think the... So, first of all, on the COVID test in terms... in the context of our gross margin, I think, you know, to be honest, I think the costs are relatively low. You know, we've been running our factories... pretty much the same way we have in the past. I mean, obviously, you've got the cost of disinfecting the factory more often. We've been paying for lots of medical support. But I'm not sure it's big enough to really influence the margin. I think in terms of the additional utilization You've seen the benefit of that as we go from Q2 to Q3. So our guidance at 56.3 in Q3 really shows our gross margin when our factory is running full out. So as we kind of expand our revenue and go into 2022, you won't see increased utilization because we actually have to add capacity. We're running pretty much full out in Q3. in Q3. So I still think, you know, 56 is a great number for us and we've gotten there quicker than we thought we would do. And I think the unanswered question is still, you know, 57 is still a couple of years away and is more around new product introduction. Mix helped us from Q1 into Q2 and that's why we did a little bit better in Q2. But the big impact from Q2 to Q3 is really the additional utilization and being able to run our factories, particularly the back ends, full out.
spk05: Very helpful. Thank you.
spk07: Your next question comes from the line of Vivek Arya from Bank of America. Please go ahead.
spk06: Thank you for doing my questions. On the first one, Kurt, specific to autos, when do you think supply increases enough to meet demand? And importantly, what should investors look to be reassured that the industry's supply response will be disciplined? So, for example, if we see headlines around, you know, any specific foundry increasing microcontroller production significantly, how should we react to that? So I appreciate that you mentioned that you're in daily touch. with customers, and there isn't any inventory today. But as you also mentioned, the industry is increasing supply. So how should we be assured that the supply response is not going to overwhelm demand at some point?
spk09: Yeah. Hi, Vivek. Good morning. Of course, we are watching this, as always, through every cycle very, very carefully. But again, I want to reassure you, I think we really are quite far away from this because at this point, and I mean, you can read the headlines every day, the industry is still short from a supply perspective. And when you are referring to some foundry statements about 60% increase of microcontroller shipments, that isn't that much. I mean, I think our order supply or revenue in the market in the first and second quarter taken together is also around 50% up over the last year. And that's also what the industry takes given the record lows of last year. So last year is not a good comparison. I think it's more meaningful to benchmark back to 2019 or even 2018 when the industry was more at peak levels from a car production perspective. So how do we check this? I mean, I would really say most of our product is very application specific. So we are in extremely close contact And that is new not only with the Tier 1 suppliers, but also directly with the OEMs where the product is going. So we have a very, very good visibility in the meantime on the true demand, much more than ever before in history. And if you think about the portion which goes through distribution, we, as always, continue to be super disciplined on the months of inventory with our distributors. And as we've published, we again state as a on a really low number with 1.6 months. I mean, that's not the same number we had a quarter before, but you know that our target model is more around 2.4 or 2.5. So we watch it very carefully. Given the supply situation, I think the transparency has significantly increased, especially in what we are serving, which is very application-specific product. I could imagine the whole question you're asking is certainly for more commodity-like products more difficult. In our case, where it is so crystal clear which product goes where, into what application, at which car company, we have much less of a concern on this. And given that visibility, I'm very confident that we are still quite a bit away from the situation you're describing.
spk06: Got it. Very helpful. And then for my follow-up, I'm curious why your mobile sales, if I heard correctly, would be down sequentially and then also year on year, because isn't Q3 supposed to be a seasonally stronger quarter for shipments into that market? And are we to assume that mobile sales will stay subdued even into Q4? So just why are mobile sales not behaving kind of in line with the usual seasonal pattern we see in that industry? Thank you.
spk09: Yeah, Vivek, I'd say in general there isn't much of a seasonal pattern this year anyway given the situation, but Here specifically, yes, you're right. We are guarding sequentially and also annually a little bit down. It really has to do with the supply constraints. So we have a supply constraint for some products in the mobile market, which we know we will address later on. So this is just of a temporary nature. But for quarter three, it just hits us that we can't ship to the amount which we want to ship. The good news is it doesn't cost us any market share, so we don't lose any socket with this. We fully keep our momentum going, and it's of a temporary nature. If you do the annual comparison, I also might want to remind you that last year Q3 was a bit of a special quarter in mobile because it was the last quarter before the Huawei ban, which actually benefited Q3 in our mobile business. since people had a bit more in Q3 than since it stopped totally in quarter four. So that's the simple background, not more.
spk06: Got it. Thanks very much.
spk07: Thank you. Your next question comes from the line of Stacy Ruskin from Bernstein Research. Your line is open.
spk03: Hi, guys. Thanks for taking my questions. For my first question, I wanted to double-click once again on the content increase in auto. I mean, you called out EVs specifically. I guess a couple of things. Can you tell us how much of your auto business is being driven by EV today? I guess of those content-specific drivers, which one do you think is the biggest driver in the near term, and how much of the list in the next quarter do you think is being driven just by end market unit growth versus, like, content increase, like, because you're selling into higher content vehicles?
spk09: Yeah, Stacey, in general, our key driver for revenue growth in XCVs is clearly the battery management solutions, which have a fantastic exporter. I think in our investor teaching, we told you that we would have a 60% CAGR over the next couple of years. And I can absolutely reconfirm here that we are at least, if not more than on track with that trend in battery management solutions. Now, if you take it a little bit wider, it is actually more because a lot of our microcontrollers and other products are also very strongly exposed to the increased content of XEVs. We will actually go in a bit more detail on that particular question, Stacey, in our Investor Day, which Jeff has just highlighted, November 11, to parse it a little bit more in a more detailed way on how this shows up. But overall, just take it for granted that the double silicon content of a XEV versus a conventional drivetrain gives a significant benefit also to NXP. So we are significantly benefiting from a higher rate of XEVs, which is a strong push for our content growth story here.
spk03: Got it. Thank you. For my follow-up, I want to ask about the cash return. So you've bought back a lot of stock. I think as of March, you upped the buyback. You had something like $2.6 billion in authorization, and you're through like 2.2 of it now this year. You're almost through the whole authorization. But you're still guiding share counts down. So I guess do we expect even more? Are you going to return more than 100% this year? And I guess just given the strength of the buyback as it exists, can you talk a little bit about – what that suggests. I suppose it shows that you have, I guess it reinforces that confidence you're talking about growth in the next year. But I guess long story short, why are you buying back so much stock right now and should we expect even more cash return as we go through the rest of the year since it seems like you're mostly through the buyback at the base?
spk00: So maybe I'll take that, Kit. So I guess the answer to your second or third question there is, yeah, we have a lot of confidence in terms of where the company's going. So clearly we think buying our stock at the moment is a good investment. In terms of how much, it's really quite simple. We've said all along we'll keep our net debt to 12 months EBITDA at the two times level. So we buy back to that level all that time and we'll continue to do that for the foreseeable future. And if that results in us buying, You know, if that results in us returning more than 100% this year, that's what the result is. But, you know, to be honest, it's pretty mathematical. We just stay at two times net debt.
spk03: Got it. That's helpful. Thank you, guys.
spk07: Again, ladies and gentlemen, if you want to ask questions, please press star 1. Your next question comes from the line of Ross Seymour from Deutsche Bank. Your line is open.
spk11: Hi, guys. Thanks for letting me ask a question. I had one clarification and one question, and then a follow-up if I can be so bold. But have you guys shipped the $90 million in shortages out of Texas? Did you catch up on all of that in automotive or where have you? That's the clarification. And then I guess the longer-term question maybe for Kurt on the auto side is, are you seeing the customers change their behavior at all, the just-in-time changes? practices that that sector has adopted seemingly have backfired on them a bit with the velocity of demand recently. Are any of the conversations you're having highlighting structural changes, or is this all basically just short-term reactive movement and you don't think anything's really going to change a couple years down the road for the industry as far as just-in-time?
spk09: Yeah, thanks, Ross. On the first one, we talked indeed about $100 million, I think I remember, which we lost for the second quarter revenue given the winter storm in our two Texas facilities. That is correct. What I can tell you is indeed that both factories are up and running completely. So we are up to the pre-storm and higher output levels in both factories, so firing on all cylinders again. And with that, we have the output which we would have wished to have already in the first place. So that is good news, both from a revenue perspective going forward, because it is steady. I mean, this is not a one-time effect, but it's steady output. But it's also good news from a supply perspective, since... Both factories had a significant exposure, as we discussed earlier, to automotive and the comms infrastructure market, which were badly waiting for these products. So we are glad and thankful to our employees to have restored operations in record time. On the other half of your question, Ross, I see signs of a structural change in the behavior of the auto, especially also of the auto and customers. And I think there are two pieces to this. The one is going to be indeed realizing that a just-in-time system is not totally compatible with a three to six months manufacturing cycle time in semiconductors if you don't have some sort of a buffer in between which is dealing with it. So some more inventory in the extended supply chain I think is going to be a result of this. Now When you ask me, is this being implemented, my answer is no, but it's just because the supply is not there. I mean, at this point in time, people are planning for this at some point, but they can't implement it yet. But I think this is going to be eventually a structural change. The other one is actually first the transparency which we get directly from the car companies. As I mentioned earlier, we've never had so much clarity about what product in which application in which model gear will run at what volume so this this is becoming much much better than it has ever been because structurally we are just moving much closer in a collaboration with the with the car companies and i think with that also the binding forecast so not only providing that forecast but also making it more binding on a on a mid to long term basis is going to be a structural change. And that's a significant one because that wasn't the case in the past. So a more binding forecast will also help to foresee and plan with the right capacities on our end.
spk11: Thanks for that color, Kurt. One quickly for you, Peter, you gave great color on the gross margin side of things. Another target you guys have given historically is the OPEX intensity, and I think it ranged anywhere between 20% to 24% as of your last analyst meeting, and I know you might be updating that later this year, but can you talk just a little bit about the leverage potential there? I think this year it looks like you're running kind of within that target range, but at the higher end, kind of 23%, 23.5%. Do you foresee some leverage getting to the lower end of that range, or just generally how should we think of OPEX relative to revenue growth?
spk00: I'm Certainly for the moment, I'd think of 23% of revenue, 16% for R&D, and 7% for SG&A. There's probably some leverage in the SG&A number because although we typically increase sales and marketing, you know, G&A, we're more likely to hold flat on dollars. But I think certainly for the moment, 23% is a good number to plan on.
spk11: Thank you.
spk07: Thank you. Your next question comes from the line of John Pitzer from Credit Suisse. Your line is open.
spk02: Yeah, good morning, guys. Thanks for letting me ask the question. Congratulations. It's all resolved. Kurt, I wanted to ask you a little bit about your comms infrastructure business, which came in much better than guide for the June quarter and is going to grow nicely in the September quarter. I know that pre the Huawei ban, you were very excited by some design wins. You had one there. but clearly had the kind of temper expectations with the BAM. But it seems like you guys might be more levered to the 5G cycle than some of us think. Can you just walk through kind of what you think is driving that growth, especially given how good the margin can be in that business?
spk09: Yeah. So, John, indeed, we did talk last year about significant design wind traction issues. around the large Chinese customer, which did fall apart. So indeed, this is still not there. I just want to be clear, the business which is now performing and which we guide for the next quarter is not related to this design win which we had talked about last year. The outperformance in the second quarter is actually across the segment. It does include some of the 5G build-outs, but it's just across all of the product sub-segments which are in this revenue segment. So it is not only 5G, but it does include 5G. Now, if you think about the nice guidance for the third quarter in Coms Infra, then I'd say yes, indeed. As we had anticipated and actually, I think, discussed on a number of the last calls, we do see – I'd say two trends around 5G which are letting us grow. We see the anticipated ramps for these multi-technology modules in the U.S. So multi-technology means LDMOS and gallium nitride from our new gallium nitride both technology product and facility in Arizona. But it's also that we are nicely included in the China CP3 tenders, which are those macro base stations for the rural areas, which are actually in a frequency range sub 2.1 gigahertz, so somewhere between, I think, 700 megahertz and 2.1 gigahertz, which is just a perfect fit to our LDMOS capability and leadership. So it is those two, John, from a go-forward basis, when you think about Q3 and beyond, which are indeed driving nicely our growth. The U.S. multi-technology modules for 5G and those CP3 tenders in China.
spk02: That's really good color, Kurt. And then, Peter, in your prepared comment, you talked about the high-class problem of needing to expand both front-end and back-end capacity. Is that mostly being done with outsource partners, so it's more of a working capital hit than a CapEx hit? Or how do we think about CapEx over the next several quarters as you continue to try to make supply catch up to demand?
spk00: CapEx will be about 7% this year. So yeah, it'll step up a bit in Q3, Q4. Mainly, there's a lot of assembly and tests going in there, but also some bottleneck busting in our actual fabs. So CapEx will be up. I don't see working capital going up anytime, really. I mean, we'd definitely like more inventory if we could get it, but as fast as we get it, we tend to build it, which is the comment I had around finished goods being at an all-time low. We do have a bit more raw material and work in progress from shipments from the foundries towards the end of the quarter that we received So I guess stepping back, we're definitely investing more in internal capacity. And that will have a positive impact on us next year. And we continue to work very hard with our other suppliers just to get additional supply from them. But as fast as we get it, we build it and ship it to customers. So I don't really see our...
spk04: um inventory levels getting anything back to anything like normal anytime soon perfect thanks gabby congratulations your next question comes from the line of williams pine from trust securities your line is open great thanks for taking my questions and i'll add my congratulations especially on the guide a very strong I'm wondering if you can remind us as sort of a clarification, the breakout within the common infrastructure business. I think we tend to think about this as largely or all RF power amplifiers, but I know there's digital networking and I think there's still some ID card business in there as well. Can you remind us of the split and maybe how you expect the three of those pieces to grow over time?
spk09: So, hi, Will. Thanks for your congrats on the guidance. The subset is indeed, as you said, the RF power for infrastructure. It is about digital networking, and there is some secure card business also in there. We will not break out the details between them, Will. But what I can say, and I think I mentioned it earlier, the outperformance in the second quarter was across all of them. So it wasn't limited to one of these subsegments, but it was actually across all of them. When you think about the guides and the growth into the third quarter, it is probably led by the 5G-related comms infra RF power.
spk04: Thanks for that. And one more, if I can, another sort of product question. I forget when, one or two years ago perhaps, you started talking about the ultra-wideband products and the growth that you anticipated seeing in handsets and automotive. And I'm wondering if you can provide some update in terms of your revenue traction in those two end markets for this product category and the outlooks for them today. Thank you.
spk09: Yeah, happy to do so, Bill. Because it's really nicely on track, just to remind everybody that it's not just about product. This is a complete ecosystem play where, indeed, we offer the radio, the secure element, and software for solutions across automotive, mobile, and IoT. We are very much on track, Will, with I think what we said at the teach-in, to have some 300 to 400 million revenue across those segments in 2023, so in only two years from now. As of today, I'd say mobile is actually happening as we speak. If you think about the Android world, I dare to say with all the major Android phone companies, We are working very closely. Automotive is now closely following, and that was just a function of mobile because obviously the automotive use case of using your mobile as a car key needs the phones to be in place firstly. This is now happening, so the first cars will be out in the market in the second half of this year and next year. And there I... I dare to say with a relatively high degree of certainty that any car company which is working in and on an ultra-wideband implementation is working with NXP. So we are highly and very positively exposed here. Finally, we also see good traction with first IoT implementations. One of the early examples are those tags which help you to find stuff which you might have lost. But we also see nice design wins in door locks for home properties, for example, where you would then use your mobile phone to open your front door and unlock it. So very much on track, Will. Again, the numbers which we had given were $300 million to $400 million revenue size for NXP in two years from now. And we think the market for this is growing at some 40% over the next couple of years. Great.
spk03: Thank you.
spk07: Thank you. Your next question comes from the line of Tashia Hai from Goldman Sachs, your line is open.
spk08: Hi, good morning. Thanks so much for taking the question. I just had one for Kurt or Peter. I was hoping you could elaborate a little bit on the LTSAs that you've already signed with foundry partners or perhaps you're looking to sign going forward. We read about price increases from the foundries going forward. How should we think about the balance between cost inflation for you guys versus your ability to price higher as well going forward? And my guess is the 57% number that Peter, you alluded to embeds some of those dynamics, but I wanted to clarify that as well. Thank you.
spk09: I'll let Peter answer, but I really want to make one upfront statement because it is important. Yes, input cost is rising, and yes, we pass on the cost increases, but this is not a tool for us to artificially increase margins. We are in a largely application-specific and very trustful relation with our customers for years to come. So we do pass on the input cost increases, but that's not a mechanism here to structurally increase margins. Peter, you might want to give more color.
spk00: I think you just answered the question really good. Yeah, it's... You know, we're not a commodity company. We don't raise prices when times are tight and reduce them when times are not tight. What's been very interesting about this whole change is there's really been two big factors. One, Kurt was talking about before, which is it's enabling us to build deeper relationships with our customers and understand their requirements and their supply chains a lot better than we have in the past and in terms of our suppliers you know you can without kind of going into a lot of detail you can actually find out who are your true partners and who will support you in the years to come and who are the guys who are a little bit more predatory But, you know, ours is a market and supply chain where it's really built on, you know, long-term relationships and long-term sources of supply both for our customers and for ourselves and for a, you know, a predictable level of pricing and profitability.
spk08: Thank you, and congrats.
spk00: Thanks.
spk07: Your next question comes from the line of Chris Castle from Raymond James. Your line is open.
spk05: Yes, thank you. Good morning. A question on the capacity additions and the CapEx that you said was stepping up here in the second half of the year. For how long do you expect that to continue? You know, imagine that the equipment lead times are extended also, so you have to be giving your equipment suppliers some visibility on this. I guess the question is how long will you be needing to continue adding capacity in order to get caught up with the level of demand right now?
spk00: Well, I guess the very simple answer is we'll continue to need capacity for the foreseeable future because we believe there's a really healthy cycle going on in terms of our products. One thing that's really come out in the last six months is that For those people outside the semiconductor industry, they've really begun to understand that semis are a core part of everything we do. So to the extent that GDP grows over the next few years, you will see semiconductors grow at probably a faster rate. I think the thing to remember with us, about 70 to 80% of our assembly and test capacity is internal. So, you know, that will continue to be a kind of healthy source of capital requirements. And I think it's about 57%, 58% of our wafer supply is external. You know, we're not likely to ever build a new fab, but we're, you know, we're constantly updating the equipment we have there to keep them, you know, keep them current. So, I think in the past, we've said through the cycle, we'll spend 5 to 7 percent on CapEx. Last year, it was below 5. This year, it will be at 7. We'll probably update a more longer-term view at the end of the stay in November. Male Speaker 1
spk05: I'm sorry, you're breaking up. I'm sorry. As that happens, who do you expect to bear the cost of that? That'd be inventory on the automaker's books, or will it have to be the inventory kind of sitting on I guess what are the in terms of the cost of that?
spk00: I apologize. I don't know if it was me, but I couldn't hear anything there. I don't know if you could hear what he said.
spk09: I had the same problem, but I guess you were asking about something of the cost of increased inventory.
spk05: Yeah, I'm sorry. I'm not sure what happened. But the question is, as the automakers ask for more security supplies, more inventory, who bears the cost of that? Will that be inventory that the automakers will take possession of and pay for in advance? Will it be some combination of just more inventory on the hub? Who basically pays the cost of that?
spk09: First, let me point out again, it's not something which happens to any extent today because the capability is not there. Once it will happen, it won't be us. I mean, it needs to be part of their business model, so it will have to be somewhere between tier one suppliers, auto companies, and maybe some distributors in some cases, but not on our end. Got it. Thank you.
spk07: Your next question comes from the line of Blaine Curtis from Barclays. Your line is open.
spk12: Hi, guys. Thanks for squeezing me in. I just wanted to revisit on the supply side just the cadence that you're bringing it on. The growth you're seeing in September, will you have to ship out inventories, or are you able to match that with supply? Just trying to understand the cadence you're bringing it in. Then you mentioned mobile, you're kind of reprioritizing for a quarter. Is that just kind of a one-off, or are you doing Are there other segments that even with this strong grind in September that you're having to prioritize away from them?
spk09: Well, Blaine, we continue to be constrained across the board. And, of course, we need to take all the time certain priority decisions. And, indeed, mobile is kind of suffering in the third quarter. But everything is relatively short across the board. The additional supply coming online is really gradual from many different sources. I mean, we talked about it. We have increasing traction with the mid and longer term contracts with our foundry suppliers. We have Texas fully up and running by now. We have, as Peter alluded to, invested both into our internal test and assembly capability, but also looking at some expansions of our internal front end factories. All of these things across the different technologies and products are happening gradually. So it's not the one time we went, but I would say with the demand being as strong as we continue to foresee it, it will remain tight for a while. But the one really suffering in Q3 is indeed mobile. Thanks.
spk12: And then I just want to ask you on the auto side, one source of content gain is always new model years that typically – make seasonality and autos kind of have a March heavy. It seems like maybe you're seeing 22 model years earlier. I'm just kind of curious as you think about that content portion. You're obviously benefiting now from maybe a mix shift to EV, but just kind of auto seasonality, is it different this year? Are you seeing maybe model years earlier? Just kind of walk us through. Obviously, you don't want to guide for December-March, but just any thoughts on kind of seasonality for that auto business off to September.
spk09: Well, Blaine, I think I said for the total business that we expect Q4 in absolute revenue terms to be above Q3. That's one. Secondly, I don't think there is really seasonality in auto at this point in time because dealer inventories are at record lows in the U.S. and in China, and they just can't build as many cars as they would wish to build. So I think it's more a function of supply availability in terms of when when they would do what. So at this point in time, it is really supply constraint for them, which I think overrides any seasonality. At this point, Jeff, I guess we are running against time, right?
spk13: Yes, that's correct.
spk09: Yeah, so let me then maybe from my end conclude the call with saying I hope it could give you a good view and transparency into the continued very strong demand, which we are seeing across the board. And at the same time, the news that we are seeing increased supply capability coming online, which drives the strong guidance into the third quarter from a revenue perspective. We also told you that quarter four is going to be yet higher than quarter three. And we continue to see this trend going into the next year. And at the same time, we see that our gross margins are now very much hitting the mark, which we had anticipated for a long time. With that, I thank you for your attendance today. Thank you. Thank you all.
spk07: This concludes today's conference call. Thank you for participating. You may now disconnect.
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