NXP Semiconductors NV (NXPI) — Q1 2020 Earnings Call Transcript

Thank you, Operator. Good morning, everyone, and welcome to the NXP Semiconductors first quarter 2020 earnings call. With me on the call today from various locations around the world are Kurt Sievers, NXP's President, and Peter Kelly, our CFO. We’re all remote today, so if there’s any delay in responding to questions, please bear with us. The call today will include forward-looking statements that involve risks and uncertainties that could cause NXP's results to differ materially from management's current expectations. These risks include, but are not limited to, statements regarding the continued impact of the COVID-19 pandemic on our business, the macroeconomic impact on the specific end-markets in which we operate, the sale of new and existing products, and our expectations for the financial results for the second quarter of 2020. Please note 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 primarily driven by discrete events that management does not consider 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 2020 earnings press release, which will be furnished to the SEC and is available on NXP’s website in the Investor Relations section at nxp.com.

Rick, are you on mute? So there might be a problem with Rick’s connection. This is Kurt, Kurt Sievers. I will take over from Rick, so we can get started swiftly. Thanks, Jeff, and good day everybody on the call. The last several months have been one of the most disruptive periods in the semiconductor industry. Throughout this current period of widespread and unprecedented disruption due to the COVID-19 virus, we’ve never been prouder of our entire NXP team. They are collectively demonstrating and living our core values during this challenging time as we continue to supply our customers and focus on our key programs. We have put a dedicated team in place to focus on the safety of our employees and on how they can work effectively, both remotely and safely on site when necessary.

While NXP has long been geographically diverse, we now have over 12,000 of our worldwide team, including more than 90% of our indirect employees not in manufacturing, working from home or just recently returned from working from home in China and Korea. Each day, our employees take initiatives, intentionally collaborate, and focus on delighting our customers. I am heartened to see the genuine engaged curiosity, their desire to solve problems, and everyone looking to drive positive outcomes in their respective areas of expertise, all displaying a sense of confidence that we will get through this successfully. NXP is structured to adapt to respond to unknown challenges and support its people. For example, our team members are ensuring that our customers in the healthcare and medical areas have critical MCU and center products to enable the increased production of respirators and other medical equipment, though this may not account for a significant amount of revenue. Globally, we are donating PPE materials where needed and providing laptops to students, NGOs, and nursing home patients. Our team members are also raising funds and donating back in their local communities to help the less privileged. From an operational perspective, all of our manufacturing facilities are running, although we did previously have some limited government-ordered closures. Our plant in China has operated throughout this entire period. So far, we have not experienced any major virus-related supply issues. We will continue to monitor all government orders and take a cautious approach to allowing employees to return from working at home. The safety of our employees remains our top priority. Therefore, we will not rush to return to work, in order to limit the number of employees on site and allow for continued social distancing, particularly where we have combined manufacturing and other operations on a single site.

Now moving on to the current business environment, it’s clear this crisis is unlike anything previously experienced by the semiconductor industry, with rapidly changing characteristics, making it hard to identify true demand indicators. We will continue to share information openly to enable all of our stakeholders to understand the conditions we are operating under. We currently find ourselves attempting to make accurate projections of true OEM customer demand, especially in global automotive markets where we’ve worked with our customers to reduce their demand signals in order to better reflect true auto-OEM requirements. In North America and Europe, automotive OEMs and tier 1 suppliers currently have full or partial factory shutdowns and extended supply chains, although they are beginning to identify plans for reopening. It’s easy to focus only on the dramatic and negative impacts of the virus. However, we must also be aware and ensure we do not miss potential opportunities. Data for car sales in China over the last two weeks indicates they are above the same period last year. We also hear reports of people purchasing their first vehicle as they want to avoid mass transit due to fears stemming from the virus. However, the reopening of tier 1 and OEM manufacturing plants remains uncertain, and this significant uncertainty impacts our planning. At the same time, the demand environment in China has improved within industrial and mobile end-markets, prompting us to closely monitor the sustainability of these trends. A major concern is the economic weakness throughout the rest of the world and its potential impact on demand in China. We are attempting to maximize our flexibility to support our customers’ true demand while minimizing manufacturing supply risks and limiting excess inventory.

As we see early Q3 demand trends, we are cautiously optimistic about indicators suggesting a slight improvement, along with the benefits from the scheduled ramp of NXP-specific programs. In economic downturns, investor focus typically shifts to the sustainability of a company’s financial performance. For those familiar with NXP, our inherent strength lies in maintaining steady control over financial and operational levers within our control. We are not unemotional, but during challenging times, there is a cultural bias towards cost consciousness, and we are conducting a thorough review of discretionary spending while ensuring we maintain critical investments in areas crucial for NXP’s long-term success.

Turning to our Q1 results, we find ourselves navigating a very fluid and challenging environment due to COVID-19. As the year commenced, we had a positive outlook for 2020, primarily due to customer reactions to our NXP portfolio and product roadmaps. However, as the impact of COVID-19 evolved in mid-February, we transitioned from managing what seemed like temporary supply chain disruptions following the Chinese Lunar New Year to adapting to a broader array of customer factory shutdowns globally beyond China. This has had a cascading effect throughout our supply chains, heightening uncertainty in our short-term outlook.

In summary, while our revenue performance in Q1 was below our guidance due to factory shutdowns and order push-outs, we delivered revenue of $2.02 billion, which is roughly $204 million below the midpoint of our original guidance range. Automotive revenue was $994 million, down 4% compared to the previous year and showing a 9% sequential decline. Revenue in Industrial & IoT was $376 million, up 2% year-over-year but down 9% sequentially. Revenue in mobile was $247 million, also up 2% year-on-year but down 26% sequentially. Finally, communication infrastructure and other reported revenue of $404 million, down 10% year-on-year and 12% sequentially.

Thank you, Kurt, and good morning to everyone on today’s call. As Kurt has already discussed the drivers of revenue during the quarter and our outlook for Q2, I'll share some financial highlights. Our Q1 revenue performance fell well below our forecast mainly due to COVID-19 impact. Total revenue was $2.02 billion, down 3% year-on-year and $204 million below the midpoint of our guidance. Our non-GAAP gross profit was $1.05 billion, and the non-GAAP gross margin was 51.8%, with operating expenses reaching $545 million, which was flat year-on-year. Non-GAAP operating profit was $502 million, yielding a non-GAAP operating margin of 24.8%. Total debt at the end of Q1 was $7.37 billion, with an ending cash position of $1.08 billion, resulting in a net debt of $6.29 billion.

Regarding our Q2 revenue outlook, we are guiding revenue at $1.8 billion, which is down about 19% year-on-year. This is a wider than normal range reflecting the uncertainty in demand. We anticipate non-GAAP gross margin to be about 48% and operating expenses around $523 million, resulting in a non-GAAP operating margin of approximately 19%. Our gross margin may be under pressure in the short-term due to reduced revenue and the utilization of our internal fabs.

Can you speak to how you’re seeing trends geographically? It sounds like production is positive in China, but down double-digits in the U.S. and Europe. How does that factor into your automotive business growth for calendar 2020? And what is your view on cash for clunker plans?

As for the cash for clunker programs, there’s been a lot of discussion, and I know that China has renewed some programs for battery electric vehicles, which seems to be working well. The trends indicate that while automotive production in China looks to be on a positive trajectory, the outlook for Europe and the U.S. remains uncertain. Meanwhile, in Q2, we’re cautiously optimistic that trends in China will hold moving into Q3 and Q4.

Thank you for your support over these years. It’s with mixed emotions that I conclude my time as CEO of NXP. I am incredibly proud of what we've achieved together, navigating through these challenging times while maintaining our commitment to customer-focused value and product leadership. Our long-term strategy is sound, and I look forward to supporting Kurt and the team as they continue to move forward. Thank you.

Thank you, Rick. And with that, operator, we open the call for questions, please.