NXP Semiconductors NV (NXPI) — Q1 2015 Earnings Call Transcript

Great. Thank you, Caroline, and good morning, everyone. Welcome to the NXP Semiconductors First Quarter 2015 Earnings Call. With me on the call today is Rick Clemmer, NXP's President and CEO, and Peter Kelly, NXP's CFO. If you've not obtained a copy of our first quarter 2015 earnings press release, it can be found on our company website under the Investor Relations section at nxp.com. Additionally, we have posted on our Investor Relations website a supplemental earnings summary presentation and a document of our historical financials to assist you in your modeling efforts. This call is being recorded and will be available for replay on our corporate website. This 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. The risks and uncertainties include, but are not limited to, statements regarding the macroeconomic impact on specific end markets in which we operate, the sale of new and existing products, and our expectations for financial results for the second quarter of 2015. 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, during our call today, we'll make reference to certain non-GAAP financial measures, which exclude the impact of purchase price accounting, restructuring, stock-based compensation, impairment, and other charges 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 first quarter 2015 press release, which will be furnished to the SEC on Form 6-K and is available on NXP's website, again, at the Investor Relations site at nxp.com. Before we start the call today, I'd like to highlight a couple of investor events we'll be attending during the quarter. On May 12, we'll attend the Jefferies TMT Conference in Miami. On May 19, we'll be attending the JP Morgan TMT Conference in Boston. And on June 2, we'll be attending the BofA Merrill Lynch TMT Conference in San Francisco. Now I'd like to turn the call over to Rick.

Thanks, Jeff, and welcome, everyone, to our earnings call today. Our first quarter results were quite strong, with improved product mix driving better profitability, which resulted in earnings per share at the high end of our guidance range. Specifically, NXP delivered total revenue of $1.47 billion, up nearly 18% from the year-ago period. We are down about 5% sequentially, in line with our guidance range despite the strengthening of the U.S. dollar during the quarter. Our product mix was better than planned, allowing us to deliver significantly better profitability. Turning to our segment performance. HPMS revenue was $1.1 billion, up 21% year-on-year and down about 6% sequentially. From a product line perspective, within Automotive, revenue was $302 million, up about 9% from the same period a year ago and up just over 3% sequentially, driven by the continued demand for entertainment and in-vehicle networking products. In Secure Connected Devices, revenue was $289 million, up 61% from the same period in the prior year, but down 17% sequentially, driven by the anticipated seasonality in the smartphone, tablet, and emerging wearables market, as weaker demand for our mobile audio products designed into Android smartphones for the emerging market. In the Secure Interfaces and Power group, revenue was $291 million, up 44% from the same period in the prior year, but down 5% sequentially. During the quarter, we continued to see accelerating traction for our RF small signal, our smart antenna solutions. This was offset by stronger-than-anticipated headwinds in our lighting business as the LED lighting market continues to rapidly commoditize. Revenue in Secure Identification Solutions was $222 million, down 13% from the same period in the prior year and flat sequentially. During the quarter, we began to see incremental improvement in the bankcard market, with positive trends in both China and the U.S. Finally, turning to the Standard Products segment. Revenue was $323 million, up 9% compared to the year-ago period and down about 2% from the prior quarter. Turning now to our distribution channel performance. Total sales into distribution were down 12%, with sales out of distribution also down 12%. The total months of inventory in the distribution channel were 2.5 months, in line with our long-term targets. Absolute dollars of inventory in the channel declined about 5% on a sequential basis. Before turning the call over to Peter, I'd like to provide you with an update on the announced merger between NXP and Freescale Semiconductor. We believe that when completed, this merger will create a true High-Performance Mixed Signal powerhouse. We are making good progress on the integration planning of the two companies and are working through the regulatory process. We continue to expect the merger closing in the second half of 2015. We are very pleased with the significant integration planning activity taking place, which should assure a successful day one execution of the merger. As we progress through the process, I want to personally thank all the NXP and Freescale employees for their continued focus, diligence, and openness to change. Overshadowed by the Freescale merger announcement, we also completed two smaller, strategic tuck-in acquisitions during the quarter. First, we completed the acquisition of Quintic Bluetooth LE - low power energy assets, helping to round out our low-power RF connectivity portfolio focused on the requirements for smarter world applications as well as helping NXP to continue to engage and more fully support our Chinese customers. Secondly, we completed the acquisition of Athena, an extremely well-respected security software vendor, which will complement our industry-leading SmartMX Java card operating system. These two technology acquisitions taken together, with the transformative Freescale merger, will help NXP continue to deliver on its vision for secure connections for a smarter world. In summary, Q1 results were very good. We continue to deliver strong earnings growth while simultaneously investing in the business to fuel future growth. We continue to expand our true industry leadership, focused on delivering differentiated product solutions that will create significant value for our customers and shareholders. We continue to improve our profitability and have confidence in our medium-term growth targets. Now I'd like to turn the call over to Peter to discuss the financial details of the quarter.

Thank you, Rick, and good morning to everyone on today's call. As Rick has already covered the drivers of revenue during the quarter, I'll move to the financial highlights. In summary, Q1 was a very strong quarter in what is generally our weakest period. We delivered just over 26% non-GAAP operating profit due to a much stronger product mix. As a result, non-GAAP EPS was $1.35, which was at the high end of our guidance. Cash flow continues to be very strong. Focusing on the details of Q1, total revenue was $1.47 billion, up nearly 18% year-on-year. This was pretty much in line with our expectations, though there were some weaknesses in mobile audio and LED lighting partially offset by small upsides in other parts of the business. We generated $711 million in non-GAAP gross profit and reported a non-GAAP gross margin of 48.5%. Turning to the operating segments. Within the HPMS segment, revenue was $1.1 billion, up 21% year-on-year, but down about 6% over the previous quarter. Non-GAAP gross margin was 54.3%, 320 basis points above the fourth quarter, driven by the expected recovery in our product mix. Non-GAAP operating margin improved to 28.9%, driven by this mix improvement. Within our Standard Products segment, revenue was $323 million, up over 9% year-on-year, though down just over 2% versus the fourth quarter. Non-GAAP gross margin was 35%, an 80 basis points improvement versus the prior quarter, again driven by better mix. Non-GAAP operating margin was 22.9%, a 210 basis points increase sequentially driven by the better mix and reduced operating expenses. Total non-GAAP operating expenses were $326 million, down $4 million on a sequential basis. From a total operating profit perspective, non-GAAP operating profit was $385 million and represents a 26.2% operating margin, a significant milestone in what is typically our weakest quarter. Interest expense was $36 million, noncontrolling interest was $17 million, and cash taxes were $4 million. This resulted in total NXP non-GAAP earnings per share of $1.35 and was at the higher end of our guidance, up nearly 38% year-on-year and flat compared to the fourth quarter. Stock-based compensation, which is not included in our non-GAAP earnings, was $35 million. Now I'd like to turn to the changes in our cash and debt. Our total debt at the end of Q1 was $4 billion. Cash generation was very strong, with total cash of $170 million to $1.4 billion, even as we invested just over $100 million in acquisitions. Net debt improved to $2.7 billion. We exited the quarter with a trailing 12-month adjusted EBITDA of approximately $1.74 billion, and our ratio of net debt to trailing 12-month adjusted EBITDA at the end of the first quarter was 1.55x. Our non-GAAP interest coverage increased to 10.7x. Turning to working capital metrics. Days of inventory were 92 days, an increase of 9 days. Days receivable were 34 days, an increase of 2 days sequentially, while days payable were 90 days, an increase of 10 days. Taken together, our cash conversion cycle was 36 days versus 35 days in the prior quarter. Cash flow from operations was $368 million. Our net CapEx was $80 million, resulting in non-GAAP free cash flow of $288 million. Now I'd like to provide our outlook for the second quarter. We currently anticipate total revenue will be in the range of up 1% to up 5% sequentially. At the midpoint, we expect total revenue to be up about 3%, reflecting the following trends in the business: Auto is expected to be up in the low single-digit range; Secure Identification Solutions is expected to be up in the mid-teens range; Secure Connected Devices is expected to be down in the low single-digit range; Secure Interface and Power is expected to be up in the low single-digit range; Standard Products is expected to be flat sequentially; and we anticipate revenue from the combination of manufacturing and Corporate & Other to be approximately $38 million. Taken together, total NXP revenue should be in the range of $1.48 billion to $1.53 billion or about $1.51 billion at the midpoint. We expect non-GAAP gross profit to be about 48.5%, and operating expenses are expected to be up $6 million to $333 million. This translates into a non-GAAP operating profit in the range of $387 million to $414 million or about 26.5% operating margin at the midpoint. Interest expense will be approximately $34 million. Cash taxes are expected to be roughly $11 million, and noncontrolling interest should be around $21 million. Stock-based compensation should be about $37 million, which is excluded from our guidance, and the diluted share count is assumed to be 243 million shares. Taken together, this translates into non-GAAP earnings per share in the range of $1.33 to $1.43 or $1.38 per share at the midpoint of our guidance. Finally, I'd like to give you some color on our full-year revenue estimate. At the Analyst Day, we spoke about our plans to grow revenue well in excess of the market on a compound annual basis. Given the upcoming merger with Freescale, we thought it's important to keep the focus on our performance as a stand-alone company. So from now through the close, we plan to give you an update on our expected revenue performance for the full year of 2015. As for our latest forecast, we expect total revenue for the company for the full year of 2015 to be in the range of $6.2 billion to $6.3 billion. We think our quarterly profile will be slightly different in 2015 compared to previous years and would expect our revenue to grow 5% to 7% sequentially in each of the third and fourth quarters. With that, I'd like to turn it back to the operator for your questions.

The first question is for Rick. Can you just talk about what you're seeing in the general market? It looks like your guidance is solid for the second quarter but slightly below normal seasonality. Can you just talk about what you're seeing from a bookings perspective, whether by end market, graphically, however you think would be most instructive for us?

Yes. So I would say that, Ross, we kind of continue to see the market in general in line with what we've talked about, okay, but not great. Certainly not booming, but we see the market okay. A little different than maybe some of our peers have talked about. I think we all are faced with some implications of currency, which clearly had a couple of points impact on us and will. So I think currency is an overall impact that, for us, we're naturally hedged at the bottom line, so it doesn't have a bottom line impact on earnings, but it does have an impact on sales. But for the general market, I think we'd see things pretty good. Clearly, if you get in the handset or the smartphone space, there are the haves and the have-nots, some doing better than others. And so it kind of depends on where you're positioned. Clearly, we talked about banking beginning to look a little stronger. So some of the areas that we're exposed to are not really in the typical semiconductor market, I would say. But the general semiconductor market we see is okay. Not great, certainly not declining. A little better than what maybe some of our peers have talked about, but we certainly have a different mix of products than most of our peers.

As a follow-up, in the SIS segment, you’re finally anticipating the recovery we’ve been expecting and getting closer to that three-year compound annual growth rate of 10% you mentioned, or at least showing sequential improvement like that. Can you elaborate on what is driving that mid-teens guidance and how sustainable it is moving forward?

Well, I think we've always talked about this whole space is somewhat lumpy. As we rolled the China contactless banking, clearly, we had a significant uptick back a couple of years ago with just filling the supply chain. We've been, as we talked about, a little more cautious on the ramp-up of U.S. banking than a lot of people have talked about. But I think we are beginning to see some positive effects. We are beginning to see some real movement in the contactless portion as well, where now some of the leading suppliers like AMEX now are focused on dual interface, the contactless card actually for their high-end users to be able to drive that ease-of-use and convenience, which is going to be the standard, basically, in China now. But all parts of it, including e-government, banking, and transit, are all up. So we're seeing a broad-based general improvement, which is, as we've talked about all along, we have confidence in. We just think the market in that space is going to continue to be somewhat lumpy. But on the general overall basis, over the 3-year period of time, we feel very comfortable with that growth rate that we've talked about.

Rick, I'm curious about the status of divesting your Auto's power amplifier business and the filing for the regulatory approval. I think in the last filing, you were planning to file for the regulatory approval on April 30, which is today. So I'm just wondering what the key milestones are from here.

Well, I think that filing that we talked about on April 30, we've actually already done, so we're a little bit ahead of schedule on that, if I'm not mistaken. So I think that's progressing quite well. Actually in dialogue with some of the governments relative to that. So I think we're making good progress on the filings. All of it is a requirement associated with giving the regulatory approval is selling our RF power business because the two combined are obviously very large. We have now received interest levels from quite a number of entities. We've actually narrowed that down and have entered a process to try to get to an agreement here over the next couple of months. So we're making good progress and on track, as I would say, to be able to support the requirements that we need to be able to get the regulatory approval associated with the merger with Freescale.

Got it. And as my follow-up, Peter, can you give us some more color on what's prompting this change in seasonality? I believe you mentioned seasonality could be different. And in general, what's the rationale for providing a full-year outlook? Do you have better visibility than before? I'm just curious why the change in the way you provide guidance.

There are a couple of important points to consider, Vivek. First, as we've discussed with you and your team over the past few months, we recognize that it's challenging to forecast our performance in any given quarter accurately. To be frank, I think describing it as seasonal is somewhat of a stretch because it really reflects the activities of 56 different business lines operating daily. While we are trying to get a clearer picture of what might unfold in 2015, it doesn't align perfectly with historical trends. I wanted to clarify our perspective based on the visibility we have into our separate businesses. Additionally, with the merger, it's crucial to remember that we have two outstanding companies here. While it's vital to consider our joint potential, we must also monitor our individual performance. I thought it was necessary to highlight this aspect. It demonstrates our confidence that we are on track with the medium-term goals we outlined during the Analyst Day back in November.

And clearly, we had more confidence associated with it just being able to talk about that. But as we talked about, the market environment is okay. It's not off to the races. But it's consistent with the background to give you the perspective that we have for our revenue.

So I'm sure our lawyers will point to the safe harbor statement, Vivek, and tell you, you can't really believe what we're saying on a forward-looking basis.

I just wanted to follow up on the prior question. I agree with your comment on seasonality. It's tough to pin down. But I guess Q3 has been historically a better quarter for you than Q4. So is the way to look at it that you're kind of stealing from September a little bit and it's helping June? And then December could be a little bit better? Or do you have some catalysts in December? Kind of what's behind the kind of the more muted September, but then December has typically been weak for you, having been down sometimes, but it looks like you're going to see some strong growth?

Well, we do say no good deal goes unpunished, right? And so I was hoping you'd see it in a more positive fashion than we were trying to do what you suggested. No, not at all. I think Q2 is a good quarter. Rick mentioned there is a bit of a headwind from exchange rates. Q3 is a really strong quarter, and Q4 is a strong quarter as well. So no, there's nothing untoward. Basically, we have a really, really strong business. We think the way you should be looking at it is how we'll perform over the next three years, which is we'll grow well in excess of the market at very strong levels of profitability. And then on top of that, you're going to add a really terrific business, which is Freescale. So we thought we'd give you a bit more visibility.

But I do think you should look at last year. Q4 was actually up last year from Q3. So I think that the point is, is things continue to evolve. I don't think you can really get too much into seasonality. It's really important that you kind of look at where the ramp-up is taking place with the end products that we're shipping to.

I gave you a compliment, actually. The full year of being pretty close to consensus, given the environment is pretty, actually impressive, also with your euro exposure. So I was just curious on the slope of it, why the change. Maybe on the interface side, you always get the question on RF, I'll ask it again. I mean, you highlighted Lighting being weak, and your actual result in March wasn't so bad. So are you still seeing decent trends in that HPRF business?

We are. I mean, it clearly is beginning to come more into balance as opposed to the shortage that we've had for an extended period of time, where we couldn't fulfill the requirements of our customers. So I would say we're coming more in line from a balance viewpoint. And we've always said that as we get to a point, we think it would flatten out for a basis, and I think that's kind of in line with what we're talking about, Blayne. We don't see a precipitous decline, but we don't see it continuing to grow as aggressively as it has over the last few quarters.

Just kind of continuing on the theme. It's very helpful to get a color on the back half of the year. Which segments could drive the better-than-historical numbers in the back half of the year?

I think at this point, Jim, we're not going to go into the individual businesses. Overall, we think each of the businesses has opportunity for strength. Probably the obvious one to pull out is the toughest quarter of all is, for Standard Products, is the fourth quarter. But I think all of our businesses will do well as we go forward.

So maybe I'll just use that as my follow-up, then. So the idea would be that each of the segments would be different than what we've seen in the past as opposed to any one segment driving outsized growth?

There might be.

Yes. I think we see a good, solid acceptance across the board, and we're confident with the improved outlook really across the board, Jim. So I don't think you can point to any specific area. Secured Connected Devices continues to grow very strongly as does the Interface and Power. So we have all the growth drivers in place that allow us to be in a position to continue to outgrow the industry significantly and plan to continue to do that.

Yes. If you look at 2014, you'll notice that all of our businesses had a profile similar to what we have just described.

Rick, I wanted to talk a little bit more about the Secure Connected Devices business. I was a little bit surprised that it was the audio that was the headwind in the calendar first quarter. I wonder if you could just talk about the trends you're seeing in the mobile payment side. And I guess, as you go into the back half of the year, at least on a year-over-year basis within that product line, you're starting to come up against some really difficult compares. Do you think that you can continue to grow that business year-over-year in the calendar third and calendar fourth quarter? And if you do, can you just help us better understand kind of what some of those bottoms-up drivers might be, given that you're anniversary-ing some pretty good content wins as you get back to the back half of the year?

We don’t want to go into too much detail about projections for the second half of the year, John. However, I can share that what we discussed regarding audio products is largely influenced by delays with the actual processor, which affected the availability of some Android platforms. This led to a temporary pause in the shipment of certain audio products. The delays in the processor and the introduction of new phones have impacted our audio product line in the short term. As for mobile payments, we expect to see continued strong growth. This growth will rely on the industry maintaining momentum, but there are many opportunities, especially with wearables that integrate mobile payments, such as the recent collaboration between American Express and Jawbone. The intersection of mobile payments and our banking business blurs the lines, but the use case is compelling, indicating potential for strong growth. An important factor will be how successful Apple Pay is in China, as it will influence the broader marketplace, pushing other smartphone companies to offer similar capabilities. These factors contribute to our confidence in revenue projections.

That's helpful, Rick. And then maybe just as a clarification follow-up. I think you mentioned in your prepared comments that currency was a 200-basis-point headwind. I guess, if you look at sort of the full year guide you're giving, it's about plus or minus 10% growth. Would it have been 12% without currency? And then maybe you can just help me understand specifically how currency kind of flows through the model. I understand the fact that it's not really an EPS hit. I'm just kind of curious where in your revenue buckets does currency have the biggest impact.

It's kind of a slippery slope, really. About 15% of our revenue is euro-denominated. If you look at last year, the currency was around $1.37 in the first half and decreased to about $1.20 something by the fourth quarter. Right now, it’s about $1.09. Doing the math, you can likely see a 200 basis point impact. It never quite works out exactly like that because different businesses operate differently at various times, and we're continuously renegotiating terms with various customers. Without going into detailed specifics, Auto and Standard Products have a larger exposure to the euro than others, but everyone has some level of exposure.

Your basic assumption's kind of in the ballpark. I mean, we're not giving into the specific details because for us, the key is we have it hedged on an earnings basis. But it is giving us some headwinds in terms of revenue. And you're in the right kind of ballpark with incremental growth we could have achieved if we wouldn't have had the headwinds from currency.

I guess, first question on margins. You did a great job there. And curious, how much of that was mix? How much of that was FX-related? Then how much in terms of improvements that we might see sustainable through the year?

Okay. So on EBIT margin, none of it was FX. We have a pretty much a complete hedge in the sense that although our revenue is impacted, we also have cost in euros as well, so it doesn't impact our operating margins. In terms of our operating margin improvement, it was mostly mixed, and most of it was forecasted in the sense of our guidance. We did a little bit better because we did have an even better mix than we thought. So that's the big movement.

And obviously, our Q2 guidance, it's sustainable.

Excellent. And then I guess as a follow-up, can you talk about, I guess, the banking card market? You spoke earlier about the lumpiness there. But curious where you stand today. Clearly, great growth into Q2. What kind of visibility do you have into the back half there?

I think we have fair visibility. I wouldn't say that we have all the orders in place, so I don't want to mislead you. But I think we have fair visibility associated with it. We clearly see an environment that is improving, as we said in the remarks, from where it's been. So I think that's encouraging. The one thing that I would like to focus on is when you look at the implementation in the U.S., as it moves from just contact EMV to contactless, to me, that's more encouraging than anything. And now, seeing some of those successes, and clearly, with the technology that's being used in like the wearables, as I mentioned earlier, the Jawbone device that's being done in conjunction with American Express, also contributing towards that. So that ease of use that comes from the contactless banking is really the key for us. And one of the reasons that we have continued to be encouraged about this over the 3-year growth rate that we've talked about is because of some of those use cases that we knew that were in the process of being developed that are now being rolled out.

The first question is about operating margins for the full year. Considering your comments on the full year revenue outlook, how should we approach the operating margins? It seems you achieved what I believe was a goal in the HPMS operating margin during the first quarter. Does this provide some potential upside compared to your earlier targets for the full year operating margins?

Well, I think we've been pretty clear that we're not going to guide full year operating margins. You're right, our goal is to hit 26%. So we did say on the last call that we think, as time goes on, we think we'll be able to do better than that. But no, I don't think it's sensible at this point in time for us to guide operating margins.

Okay, fair enough. The second question is about channel inventories. You mentioned that channel inventories decreased somewhat in dollar terms during the first quarter. To what extent does this reduction in inventory create a challenge for revenue? Additionally, based on your previous comments, you suggested that the current inventory levels in the channel seem a bit low. What are your expectations for inventory levels in the second half of the year, especially if you anticipate some seasonal strength?

We believe that the channel inventory situation is challenging because there is significant pressure from major U.S. players to reduce inventory levels. Ideally, we want to ensure there is enough inventory in the channel to meet normal demands. The decline we've observed appears to be more related to product mix rather than a significant decrease in inventory, as both our incoming and outgoing shipments were down by similar amounts. Currently, we have about 2.5 months of inventory, and while we would prefer to see that number a bit higher, it's not far off on a product-by-product basis. Overall, the inventory in the channel is quite healthy, although having a bit more would be beneficial. We do not anticipate inventory levels impacting our revenue in the second half negatively. We are actively collaborating with our strategic distribution partners to foster growth, as our distribution growth has not been as robust as in other areas.

I have a couple of questions. First, you mentioned the weakness in smart audio from Android handsets. Do you believe that is due to channel inventory and demand weakness being addressed? When do you anticipate that will stabilize? Secondly, Rick mentioned that lighting is rapidly approaching a commodity status, which doesn't seem to align with your product portfolio. Should we expect that to be divested in the future? Additionally, how significant is it to your overall business?

So a number of questions loaded in there. So clearly, on the audio case, this is about new model rollouts. It's not about channel inventory at all. So as there's been a delay in some of the processors, which has delayed some of the new model rollouts, we've seen a little bit of delay of some of the audio products, so not anything material. The design wins are still in place, but the ramp-up is not taking place because those new models have been pushed out. The second question, just to clarify, we do expect it to grow in Q2.

But we do expect it to grow in Q2.

Yes, sorry. And then your other question, sorry? Yes. So we talked about Lighting being in intensive care. So it's not something that's new. But clearly, the environment is not a positive environment associated with it. As far as percentage of revenue, it gets lost in the rounding for us in total.

I'm hoping you can talk a bit about the timing and expected financial impact from the announced JAC joint venture in China.

That's really pretty immaterial. That's just our Bipolar Power business, which is basically triax for home appliances. We probably won't close the transaction since they're more of a financial rather than a strategic entity. We're in the process of the final due diligence, and I wouldn't anticipate that the transaction would close until maybe October 1 or so.

Yes, maybe like Q3. I'm glad you added that comment. You even actually said we said I don't expect it will close.

No, I was trying to get the specifics of when it is. But it's just not a priority business for us. One of the key aspects for us is that we are exploring different ways to conduct business in China. It's important to recognize that we've formed a joint venture with Datang, and now we have another joint venture related to it. We have several other joint ventures as well. We're really focused on exploring all possible avenues to maintain our operations in China amidst the changing regulatory and demand requirements. So, it's more about the learning process than anything specific. The revenue associated with that business is relatively insignificant.

Yes. I think what stands out, Will, is that it is quite an interesting business with potential for significance. However, it currently has the wrong margin profile for us. While it has the possibility for growth, as Rick mentioned, it will be a valuable way for us to establish our presence in China alongside a very strong partner.

Just following up on NFC and Secure Element, particularly within China. Can you talk about just some of the relationships you have on the banking side and even transport? I think there's a relationship with Alipay in terms of just competitively how you feel you're positioned as mobile payment starts to be adopted in China.

So we are the leader. We plan to continue to be the leader, and we plan to continue to have Intel-like market shares in that space. It's a key priority for us and one that we will continue to make strategic moves to continue to solidify our position.

Got it. And then just a follow-up on Autos. It's tough to ask for specific updates quarter-to-quarter regarding longer-term initiatives like vehicle-to-vehicle communication and the RF projects you're working on. However, I would appreciate an update on the customer engagement and supplier activity in those areas.

Well, for vehicle-to-vehicle, we won't begin shipping our first product until the 2017 model year, so there won't be any revenue impact until that time. In terms of design activity, it's picking up. We are in discussions and working on various RFQs directly with car manufacturers, rather than just their suppliers, as well as with ODMs to meet their needs. There is certainly a rise in activity. With the merger with Freescale, we believe it strengthens our already strong position, positioning us excellently to support our customers moving forward, and we are pursuing this vigorously. However, we don't expect any significant revenue impact until 2017 at the earliest, and more material revenue likely won't come until closer to 2020.

I was hoping you guys could follow up a little bit in Secure Identification. And you talked about some strength also in, I think, the government document space and transit. And I was hoping you could talk about what are the drivers that are picking up there that give you the confidence here.

On the government side, we have always noted that this sector can be inconsistent, depending on when countries start implementing electronic passports or government documents. It will continue to show variability. There remains a considerable market that has yet to be addressed in relation to the digitization of government documents. We are optimistic about the potential in this area as we aim to maintain our leadership position. However, the inconsistency will persist. Several countries in Africa and the Middle East are starting to implement projects we have secured, but delays often occur due to government reviews. We are beginning to see some momentum now, though it’s not significantly impactful. This inconsistency is characteristic of the business and will carry on. In transit ticketing, this sector also experiences fluctuations, yet it shows robust annual growth and contributes significantly to our confidence in overall growth in the coming three years at a rate of low double digits.

Yes. Just great, long-term secular trends, which will drive both of those business lines probably for many years to come actually.

Could you discuss the Secure Interface business and identify a couple of main drivers? Additionally, please talk about any changes in the Lighting interface and whether you might benefit from the upcoming USB Type-C.

Yes. Well, I think that we've done quite well in the Interface area. We plan on continuing to do quite well as Type C evolves. We think we have a good technical position and are pretty confident in being able to play a significant role in that space. But we have to see how those design winds materialize over a period of time. But in general, we've had strong growth in that business last year, which was, I guess, 36% or something last year, and certainly in the first quarter continuing to have that strong year-over-year growth. Not necessarily on a sequential basis as smoothly, but the real key focus is being able to continue to have that strong growth on a year-over-year basis.

A question on just the general automotive industry. That segment continues to be fairly strong. Just wanted to get your feedback on kind of your expectations for this market this year. And what are your thoughts in terms of units as well as increasing semiconductor content? And with the merger with Freescale, if you could kind of discuss what Freescale adds to the table to help your overall automotive efforts.

Well, so we've talked about over the 3-year period of time a high single-digit growth in Automotive, and we continue to feel very confident in that. So I think that's in line with what we're seeing and continue to expect going forward. When you look at the combination with Freescale, they're a very complementary fit. If you really look at their strength in automotive microcontrollers, their sensor and analog business, it's very complementary to our business with very minimal overlap associated with it. And then in addition to that, their i.MX processor is very complementary with our car radio business, with our silicon tuner and DSP business, where we'll be able to even offer a more complete solution than we can with just the audio focus that we have today. So very complementary. It will clearly position us even more significantly with our customer base. All the feedback from our customers has been extremely positive about the opportunity to really be able to address their solutions on a more holistic front associated with it.

Raj, I would like to expand on your original question. During our Analyst Day, we indicated that we believe auto unit production is likely to be around 2% to 3% for the industry. Additionally, we expect total semi content to see an incremental growth of about 300 basis points on top of that. This suggests that auto semi growth could be approximately 6%, and our goal is to exceed that growth rate by 50%. This aligns with Rick's perspective on targeting high single-digit growth for NXP semiconductors.

Yes, that's great. It's very helpful. The next question is on the IoT market. With the acquisition of Freescale, you have assembled some crucial building blocks to address IoT, including embedded processing, sensors, connectivity, and security. What are your views on IoT this year? When do you think we'll experience an inflection point in terms of meaningful revenue contribution? Some competitors are beginning to highlight IoT in their numbers, so if you could discuss IoT and the trajectory of that market, it would be extremely helpful.

It sounds like the dot-com phenomena. I think we'll just deliver on top line growth and not try to give in to reporting IoT separately. I think we said all along, the combination of Freescale and NXP allows a true industry powerhouse to focus on the smarter world. We like to call it the smarter world as opposed to the Internet of Things because we think that's a little bit more descriptive than just the Internet of Things, which is still relatively undefined. When you look at the fundamental capability that's required for the Internet of Things, when you think about it, it's sensing, processing, connectivity, and security. Clearly, with our leadership position in security, we think it positions us quite well. And with the strong position that Freescale has on the processing side and then the combined connectivity strength that we have, we think it puts us in an excellent position to really drive solutions for our customers that will be much more significant than what either of us could have done on a stand-alone basis and really allows us to really think about a true leadership position and being able to serve that evolving market in the Internet of Things. Relative to material revenue, I think it's still a while before it becomes significant. Clearly, there are some indications of are there some significant ramp-ups of design wins. But it still ends up being relatively immaterial in the whole scheme of things if you look at the revenue impact itself. But really, the key for us is cobbling together a total solution to be able to address the requirements for our customers. And when you think about the Internet of Things or the smarter world, it's a much more broad-based set of customers. And clearly, in the U.S., the strength that Freescale has being able to combine our security and connectivity technology with that to be able to address the customer requirement is what we're excited about.

First question, I was hoping you could talk a little bit about the linearity of orders. Some of your competitors have talked about things not being as strong in March, but then now, actually, in April, things are starting to improve again. So just trying to get a sense directionally where business is headed.

I don't think we need to focus on that. I believe people can place orders weekly, but in the grand scheme, it's about how we achieve the results tied to it. Our business is quite different from most of our competitors, making it hard to draw any parallels or conclusions. It's more crucial to note that the market remains healthy and stable, though not booming or racing ahead. We feel confident overall, and there will always be times when orders may be slower or not as robust. However, I don't think there's much to interpret from that based on our observations.

That's fair. And as a follow-up for Peter, your inventory days decreased by about 15 days year-over-year. Should I take anything from that? Or is it just slightly higher than normal a year ago? Or is there actually a situation where inventories are a bit tight?

No, it was higher a year ago because we were prebuilding associated with the closure of our foreign ICN6 fabs in the Netherlands. So what you're seeing is the prebuild inventory we made is just starting to deplete. Therefore, I think the inventory is not in any bad shape.

So we've seen lead times increase for you guys, not only just over the last four months, but over the past couple of years here. And the extension was also pretty broad-based. We've also heard of some new capacity that you guys might be bringing online in 2Q and 3Q and finishing by the end of the year. So I guess the first question is, does this accurately describe the situation? My second is, where are your front- and back-end utilizations now? And then lastly, is it fair to say that there's a modest risk that you potentially under-ship optimum demand? I'd say your guidance would probably speak against that, but is that potentially a risk into the back half of the year?

Our wafer fabrication facility is located in Singapore, which is part of our joint venture with SSMC. We also have an 8-inch fab in the Netherlands that operates alongside it. Currently, we source approximately 45% of our products from external suppliers. I believe that lead times are stable, and I do not anticipate any significant supply challenges that would hinder our ability to meet our revenue targets.

Okay, okay. So I guess, no new capacity coming online on either front end or back end, okay.

No, we invest a small amount in capital, allowing us to continuously adjust our operations. However, most of our increased capacity is sourced externally.

Right. We have in the wafer side.

On the wafer side. And on the assembly test, we're constantly refreshing our test facilities and, to a lesser extent our assembly. But we spend about 5% of our revenue on CapEx.

As we said before, Chris, we have no intention of building another fab.

Okay. And that kind of ties into my next question here, you might've answered it. But digging into the HPRF business, just, again, you have some comments already, but we saw lead times there for both you guys and Freescale come down pretty substantially. And I'm just wondering how to interpret that. It doesn't sound like there was any capacity added there at either of your companies, so it sounds like it's purely demand-driven. How would you guys expect lead times to continue over the next couple of quarters here?

Chris, we've discussed this previously. We won't be making comments regarding your inquiries on distribution lead times. For the HPRF business, which primarily involves direct dealings with large OEMs, the standard lead time information you're referring to does not accurately represent what we are quoting to our customers.

We mentioned that the business is becoming more balanced. Last year, we expanded our capacity, as the industry did, to meet customer demand. However, we are now seeing a better alignment. A year ago, there was a significant shortage, but today, demand is more stable, and we don't view this as a major issue. We anticipated that following the spike in demand, the levels would level off for a while, and we stand by that expectation. In summary, key points today include our revenue of $1.47 billion, an 18% year-over-year increase, which is more than double the average growth of our peers, and growth in High Performance Mixed Signal at 21% year-over-year. Our operating margins have improved by 28% year-over-year, and our earnings per share increased by 38% year-over-year. We also generated $388 million in free cash flow, which is up 29% compared to last year. We believe we are well-positioned to execute our long-term strategy, and we appreciate the continued support from our shareholders. Thank you, and have a great day.

Thank you, everyone. This concludes our call today. We'll chat with you at the end of the next quarter. Thank you very much.