NXP Semiconductors N.V. (NXPI) Earnings Call Transcript & Summary

All right. Like to get started. Thank you all for coming. I'm Toshiya Hari. I cover the U.S. semiconductor and semi-cap equipment space at Goldman Sachs. Very pleased to kick off the semiconductor portion of the conference with NXP Semiconductors. Very happy to have Jeff Palmer, Vice President from Investor Relations. Before I dive into questions, I'd like to ask Jeff for a brief overview. You guys reported results last week. What you see in the quarter? What's the outlook? That would be great.

Yes. Great. Thanks, Toshiya. I appreciate you having us, and it's great seeing all of you here today. As Toshiya said, we reported earnings last Tuesday. I think the highlights that I would point to is, after 18 months of a pretty tough environment in semi land, we feel incrementally more positive that things are starting to turn the corner. Specifically, we saw improvement in China, specifically around our automotive and industrial business. And in some way, that makes sense because if you go back to late 2018, it was the China market that kind of led us into the downturn. Europe is still a bit weak. U.S. is holding in there, let's call it that. But I think we, at least, feel comfortable that we've kind of turned the corner a little bit. If we look at our year-on-year performance, guidance for Q1, we feel pretty positive on what we're seeing, especially in the industrial area. We guided our industrial business to be up almost 22% year-on-year into Q1. Now to be upfront, about half of that year-on-year growth is due to the recent Marvell acquisition. So -- but still, even if you take that out, it's still pretty good. We're looking for automotive to be up about 5% year-on-year into Q1. Our mobile business, which is primarily our mobile wallet, is up about 12%. We expect it to be up about 12% year-on-year into Q1. And then our comm and infrastructure is probably the only group that's maybe seeing a little bit of headwind right now as we're seeing the 5G build-outs, specifically in China, take a little bit of pause kind of as they're churning through some technical challenges, if you will. We continue to feel good about the progress we've made on our margins, specifically on gross margins. Last year, with revenue down 6%, we were able to improve gross margins by 30 -- 60 basis points. And we controlled OpEx pretty well through the year. EBIT margins went up about 30 bps year-on-year. We still feel very confident. It's our bogey for ourselves that at about $2.4 billion in revenue, we'll be able to [Audio Gap] 55% gross margins. And I know that's been something we've committed to. We wanted to hit that in Q4, but the environment just didn't allow for that. And I think -- all in all, I think, the only last thing I'd say is we're generating a lot of free cash flow. We are very much running the company for the benefit of our shareholders and our owners. And our view is we return all excess free cash flow to our owners via either dividends or share buybacks. I guess, maybe with that, I'm going to hand it over to you.

Okay. No, no, that's helpful. Thank you.

Okay. Thank you.

I guess, for full year 2020, I know you're typically not in the business of providing full year guidance.

No, we're not.

But from a business planning perspective, can you speak to some of the macro assumptions that you're perhaps working with internally, whether it be just GDP or global SAAR, 5G deployment schedules, those kind of things?

Yes. I think that's a fair question. So from a long-term planning perspective, we think the auto business, which is about half of our revenue for everyone, has turned the corner. We think -- after a pretty tough global SAAR year in 2019, we think 2020, based on IHS data, could be a flattish to slightly down year. I think that's a huge improvement over last year. And if you assume that the real driver of our auto business is content, not units, that's a positive change. I think -- our industrial business, which is about 20% of our revenue is so diverse, it's tens of thousands of customers, primarily in Asia, mostly in the service through distribution. There's no one end customer or end market that makes up a significant part of that business. So really, what I would advise to track is improvement in global manufacturing PMI. Handsets have been pretty good of late. So we've been participating there. Our goal on handsets is to see the attach rate of our mobile wallet go from about 30% in 2018 to about 50% in '21. 2019, our [Audio Gap] right on track. So that's a positive. I think on 5G, the big issue that we're seeing there, we have been hoping that China would be the big driver for our 5G business in 2020. There seems to be a little bit of pause continuing there, probably more second half midyear type of improvement.

Okay. Great. In terms of the near-term outlook, I guess, sort of the tone you struck on your call and the guidance that you gave was very consistent with what your peers had sort of guided to ahead of your quarter, which is great. But at the same time, I think the end demand data points that we're picking up from, whether it be the automotive OEMs or the Tier 1s or some of the industrial companies continues to be relatively muted. So do you think this recovery that you and, collectively, the industry is pointing to is sustainable? Or could it be more of an inventory replenishment cycle that could be short-lived?

Toshiya, I think that's a little above my pay grade or my strikes to really give you -- pontificate on that. But what I'd say is what we're really seeing is an improvement in POS, point-of-sale, from our distribution channel to our distribution customers. Now what we don't know is, are those customers buying product because they've burned off inventory over the last 12 to 18 months themselves? Or is there a real end demand? It's very hard for us to parse that. And that's in that industrial piece. In automotive, I think that even if it's a muted flattish SAAR, flattish to slightly down SAAR for 2020, there's still an improved kind of re-priming of the global auto supply chain because such an extended supply chain. If you go back to late '18, when the kind of downturn started to occur, the OEMs and the Tier 1s put the brake on poles from us. So we see it first, and we see it for the longest. And we think that now we're kind of all the inventories worked off, and we believe that we're starting to at least see a re-priming of the supply chains, knock on wood let's hope the actual end demand continues to [Audio Gap]

[Audio Gap] Coronavirus. Obviously, very fluid situation. It's evolving day-to-day, perhaps hour-by-hour. I think you are one of the companies that said, "we don't know. We're not going to put any guidance. We'll give you an update when we know."

Yes.

I don't expect you to give us an update today, but what's kind of your thought process around that one?

I think that we can't give you the thought process. When we sat down and we formulated guidance, we really looked at each other and said, what do we really know? I mean, if we could quantify and put it in a box, we would have included in the guidance. The issue as you point out, it's very fluid and very dynamic, changing day-to-day. And so we decided we couldn't quantify it. We knew that anything -- assumption we would have made would have been a guess at best. So we have about 7,000 employees in China. Our #1 priority is the health and safety of our employees and our partners. During Chinese Lunar New Year, our factory -- or we have a back-end factory in Tianjin. It didn't shut down. So we were continuing to operate. That has been positive, but we really won't know the impact for some time yet, all right? So I understand that it's something that everyone's trying to understand is it -- is this going to be just a repeat of SARS 10 years ago, which is just kind of a push out of demand? Or is this a demand destructing event? We don't know. And we'll let you know as soon as we do.

Okay. And I guess, as a quick follow-up, have you been able to identify any disruptions to the supply chain or any change in demand signals from customers at this point?

I think I've given -- I've provided really what we do know. Anything else, it would be speculation and comments that we've read in the newspaper just like you. Hyundai talked about shutting down some of their facilities on Friday, I think. I've read something yesterday about Foxconn is trying to manage bringing back up their phone facilities, but that's what we know.

Okay. Okay. Got it. And then I want to spend a couple of questions on the automotive business. To your point, it's half of our business. It's an important part of your business, obviously.

Very important.

It's a business where you have [Audio Gap] some of the growth in our applications that you've been very vocal on. If you can kind of level set the audience by kind of giving the exposures for those individual products and thinking -- and talking about the respective growth profiles, that would be helpful?

Yes. So we call it core and growth. We don't really like the term legacy because we view that has kind of a little bit of a negative connotation, but that's -- these are here and there. So about 25% of our auto business is what we call the growth portions, and the other 75% is what we call the core. Let's take care of core real quick and get off the table, and we'll go into the more interesting part. So core is businesses where we have high market share, high relative market share in verticals that are continuing to be high demand, but it's going to grow more in line with automotive semiconductors. So if you look at our algorithm, we've said, auto semis grow, call it, 300 to 400 basis points on top of global SAAR. So you should -- kind of whatever your view or the investors' view of this global SAAR is, you can kind of get a sense of what that 75% of the business should grow at. The other 25% is what we call our growth areas. And it's really made up of 3 -- let's call it 3 buckets, if you will. The first being our ADAS business, safety -- safer driving business, which is primarily around RADAR, which is about 10% of automotive. We think that can grow, and this is based on design wins and real revenues we see coming at us. We believe that 10% of revenue -- automotive revenue can grow about 25% to 30% CAGR over the next several years. And as you know, in automotive, the design to revenue cycle is 2 to 3 years, product life cycle is for 5 to 7 years. So sitting here today, we have a pretty good visibility of how this should play out. The second largest piece of our automotive business is, which is also about 10%, is what we call digital clusters. So if -- I'm not sure if you were at CES, Toshiya. But if you walked around and looked at some of the car OEMs booth, the new change in the interiors of cars is this multiple screens or almost panned edge-to-edge screens, and that's requiring a step-up in performance and capability of our application processors. That's about 10% of revenue -- automotive revenue. We think that will grow kind of mid-15%, call it 15% CAGR over that [Technical Difficulty] So we feel very good about that. And then the last 5% or so is what I'd like to term long-term debt. These are smaller pieces of business and opportunity that are -- they're going to grow fast, but they're not yet at that point to really put a fixed number on. One of the most obvious is our battery management system business, where we are basically providing BMS solutions for electric vehicles. It's roughly right now about a $60 million a year run rate. We said over the next couple of years, we thought it would be several hundred million dollars. We have a kind of a two-pronged attack in that BMS business, working with battery manufacturers like CATL, LG Chem as well as certain major OEMs who are rolling out a clean sheet of EV portfolios.

Okay. Great. I guess, for the growth buckets that you called out. If you can talk a little bit about the competitive landscape in RADAR, digital clusters and BMS, that would be helpful? You mentioned that for your core business, your relative market share is really high. How do you stand in some of those newer applications?

Yes. Okay, let's go back through them. So in RADAR, from a historical perspective, if you look at the RADAR marketplace, when it was primarily a 24 gigahertz front-end, we weren't in that portion of the marketplace, but we were selling processors as a back-end processor. We decided to intersect the market transition from 24 gigahertz front-end RF to 77 gigahertz. And we did so a number of years ago. And since that time, we've been very successful winning designs for 77 gigahertz, both our silicon-germanium, but also with new RFCMOS products. So when we talk about the term RADAR, what we're talking about is the systems solution. So the RF front-end, the processor back-end, high-speed interface between those 2 devices, power management device and a software wrapper that wraps that together. We believe -- and we've got to wait for all the final score for 2019, but we believe we've emerged as the #1 RADAR system solution provider coming out of '19. There is 4 or 5 large Tier 1s that make up the majority of the RADAR market from a buyer's perspective. The current business, that 10% I talked about, is tied to one very large Tier 1 in Europe. We talked about a very large innovative U.S. Tier 1. It is just starting to ramp our RFCMOS product now. We have engagements with several of the other Tier 1s. So we feel very confident that this is a multiyear design trend that we're going to be able to defend and get up to a high RMS level, okay?

All right.

On the digital cluster area, so this is primarily around our i.MX application processor business. The [Audio Gap] free scale in 2016. Competitively -- there's not that many folks in the automotive application process or marketplace. Guys who we compete with at the very high end are people at Qualcomm. We competed with NVIDIA a bit, but they've seemed to have exited the market. And the reason for that is the OEMs want a scalable platform. They want to write software once, they want to develop the system both for their premium brands and be able to scale it all the way down to their entry level. And some of our peers who maybe have some pretty interesting technologies just don't have the ability to build a scalable platform. We can basically provide a product that goes across that whole portfolio for them. Then the other trend, the secular trend that's occurring is this move from single screen to multiscreens in the car. And we've introduced our product at CES, we demonstrated, it's called the i.MX QuadMax. And what it is, it's a quad-core arm processor that can run multiple operating systems simultaneously without a hypervisor. And you'd say, "Well, gosh, why do I need that?" Well, think about this. You could be running, let's say, Android for your infotainment screen and QNX for your driver interface screen, you would hate to have your infotainment upgrade lock up your driver interface screen, right? So we think we have a very innovative product set. We -- again like -- just like RADAR, we have a pretty good visibility of the design win pipe. And we've -- but it's probably not going to grow at the same rate as RADAR.

Okay. Great. And then how does the Marvell acquisition kind of fit in? I know it's more industrial as of today. But when you think about the growth potential of that newly acquired asset, how does that fit in with automotive?

Yes. So if you -- for those of you who've followed us since the merger with Freescale, we were pretty clear post the merger with Freescale, the one hole in the portfolio was very clear because we didn't have any connectivity. No WiFi, no Bluetooth of substantial effect. And when the Qualcomm transaction occurred from a selfish perspective, what we wanted from their portfolio was their [Audio Gap] that need to fill that hole in our portfolio was still there. So right after the deal broke last year, we started canvassing the market, looking for who had the best -- what we felt was the best technology going forward, WiFi 6 going forward. We felt Marvell had the most long -- longest duration in the marketplace in terms of a team that's been together, influencing the standards, really knew the market, had the certification for qualifications, and we felt that was the best asset for us. Now looking at that business, it's roughly on a kind of a baseline basis, about $300 million. About 2/3 of that business is in what we would turn industrial and IoT. About 10% of it is in automotive. And the remainder of it is what we would call comm and infrastructure, effectively access point business. Nothing in mobile. So kind of back to your original question about automotive. So about 10% of that Marvell business basically fills a hole in our infotainment and driver comfort environment. It's not outside the car WiFi, it's WiFi for inside the car.

Right. Okay. That's helpful. I guess it's been a couple of months since you closed the deal. Any...

About 6 weeks.

About 6 weeks. Any surprises or new findings as you have a closer look at people and what they have in IP?

Well, we have done a pretty strong and a hard due diligence on the people. So we still feel that people are great, and we're really happy as we have 500-or-so-odd people who joined the company. So we're really excited to have them on board. And so no doubts there. On -- in terms of findings, I think what was interesting. So we closed the deal on December 7. By January 7, we showed at CES 4 different reference designs for customers. So we're already engaging with customers early January with reference designs and already getting those dialogues going. Because it's -- this business, especially in industrial IoT is [Audio Gap] sell an application processor, made it up with a connectivity device, and basically, sell it to a customer as a kind of black box, but basically a connectivity processor complex, if you will, and customers have been very, very positive. So no negatives there. We just need to keep executing and doing what we need to do.

Okay. Okay. Awesome. And then on industrial, as you pointed out at the beginning, it's a very broad business, thousands, I guess, of applications.

Tens of thousands.

Tens of thousands of customers and applications. So it's probably hard to pinpoint any specific application as driving the business. But if you had to kind of specify 2 or 3 things that you think are going to drive a cyclical recovery, what would it be?

Well, I think really what it is, is first off, everything in our lives today is connected and has more intelligence than it did 10 years ago or 20 years ago. And that intelligence is brought about by embedded processing, both either microcontrollers or application processors. So the industrial business is great and that it has 10,000 customers, but there's no one end market or end thing that makes up more than a couple of points of the total revenue. So I'd say, I'd approach the problem set more from a product angle. And so if you look at our processor portfolio, it ranges from high-performance application processors down to entry-level embedded microcontrollers. What differentiates us is our application processor business as well as our new crossover product line, you've heard us talk about on our earnings calls, and we have a very broad portfolio of microcontrollers. Our focus and imperative is to not fight down in the trenches on pennies or microcontrollers. It's to go into areas where the processing capabilities and feature sets of the higher end areas of the portfolio are more embraced by our customer set. And that's really where you should see the growth coming from, crossovers and i.MX and industrial APs.

Right. You just talked about not being laser focused [Audio Gap] part of the business?

Absolutely.

How would you describe the competitive landscape there today? Obviously, the U.S.-China trade tensions has created all sorts of different dynamics. I think you're one of the few companies, if not the only company in our coverage that could potentially benefit from some of these tensions. But what are your thoughts there?