NXP Semiconductors' CEO Discusses Q4 2012 Results - Earnings Call Transcript

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 |  About: NXP Semiconductors (NXPI)
by: SA Transcripts

NXP Semiconductors NV. (NASDAQ:NXPI)

Q4 2012 Results Earnings Call

January 31, 2013 8:00 AM ET

Executives

Jeff Palmer - Vice President, IR

Rick Clemmer - President and CEO

Peter Kelly - Chief Financial Officer

Analysts

John Pitzer - Credit Suisse

C. J. Muse - Barclays Capital

Vivek Arya - Bank of America

Jim Covello - Goldman Sachs

Joe Moore - Morgan Stanley

Chris Caso - Susquehanna Financial Group

William Stein - SunTrust

Ross Seymore - Deutsche Bank

Vijay Rakesh - Sterne Agee

Nitin Kumar - BNP Paribas

Philip Scholte - Rabobank

Operator

Good day, ladies and gentlemen, and welcome to Fourth Quarter 2012 NXP Semiconductors NV Earnings Conference Call. My name is Alex, and I will be your coordinator today. I would now like to turn the representation over to your host for today's call, Mr. Jeff Palmer, Vice President of Investor Relations. Please proceed, sir.

Jeff Palmer

Thank you, Alex and good morning, everyone. Welcome to the NXP Semiconductors' fourth quarter and full year 2012 Earnings Call.

With me on the call today is Rick Clemmer, NXP's President and CEO; Peter Kelly, our CFO will be available during the Q&A portion of the call today. If you've not obtained a copy of our fourth quarter 2012 earnings press release, it can be found at our company website under the Investor Relations section at nxp.com.

Additionally, we have posted a supplemental earnings summary presentation and a document of our historical financials to assist in your modeling efforts. This call is being recorded, and will be available for replay from our corporate website.

Please be reminded that 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 the specific end-markets in which we operate, the sale of new and existing products and our expectations for financial results for the fourth quarter of 2013.

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 will make reference to certain non-GAAP financial measures, which exclude the impact of purchase price accounting, restructuring, impairment and other charges that 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 fourth quarter 2012 earnings press release, which will be furnished to the SEC on Form 6-K, and is available on NXP's website in the Investor Relations section at nxp.com.

Before we begin the call today, I'd like to highlight our attendance at the upcoming Goldman Sachs TMT Investor Conference on February 12th, in San Francisco.

Now I'd like to turn the call over to Rick.

Rick Clemmer

Thanks, Jeff, and welcome everyone to our earnings call today. As this is our fourth quarter and full year report I would like to first spend a few moments highlighting our full year results. Overall, we're quite proud of our results, despite a difficult environment. We focused on delivering on our commitments while also acknowledging we have areas we can further improve.

On the positive side, the highlights include; first, we delivered strong revenue growth, product revenue at $4.1 billion was up 7% year-on-year, against an overall semiconductor market which most analysts have projected to decline by several points. Our product revenue performance was due to continued traction within our High Performance Mixed Signal segment which actually grew a strong 13% to $3.28 billion versus 2011. Within HPMS, we saw robust growth within our ID business, which was up 41% year-on-year to $986 million.

To help put this in context as of the end of 2012, ID business is on a run rate of over $1.1 billion a year, as compared to the time of the IPO, when it was a run rate of about $600 million, during two short years the team has nearly doubled this uniquely focused business on industry leading security competence. Also in our High Performance Mixed Signal segment, our Portable & Computing business grew 14% year-on-year to $753 million as a result of specific design wins in the mobility market.

Second, we improved our profitability, from a non-gap profitability perspective HPMS gross margin - gross profit improved over 6% year-on-year, while HPMS operating profit improved 17% versus 2011. Third, we generate nearly half of billion in free cash flow, which we define as operating cash flow less net CapEx. For the full year free cash flow was $473 million or approximately 11% of total revenue. Lastly we reduced our gross debt and associated interest expenses.

For the full year our gross debt declined 8% year-on-year, and we took actions throughout the year to further de-risk our very reasonable maturity profile. The combination of these actions resulted in a reduction of over interest expense, by over $40 million versus 2011. While we are proud of the positive highlights during 2012, we did face challenges as well. The most significant challenge in 2012 was an uncertain economic and demand environment.

It was particularly true in our most - more economically sensitive businesses, and particularly we experienced real headwinds in our automotive, industrial, infrastructure and Standard Products business. While our automotive business grew 1% versus 2011, to $939 million with weakness in the European area offset by very favorable results in North America and Asia.

In our industrial and infrastructure business, revenue declined 2% to $604 million versus the prior year primarily as a result of weak demand throughout most of the year for high performance RF devices primarily aimed at the base station market even though design win momentum continues to be strong. And within our Standard Products segment revenue declined to $832 million a decline of 10% year-on-year reflective of the weak demand trends throughout the year.

Second, we still have work to do on our longer term overall margin targets. While Peter provided a roadmap of actions at our Analyst Day in September to improve margin by the end of 2013, our full year gross margin for 2012 was down a 160 basis points and operating margin declined to 130 basis points. This was primarily as a result of weaker industry demand, a poor pricing environment and lower factory utilization within our Standard Products segment, but clearly we are focused on improving this.

As a result of both our successes and the challenges we experienced during 2012, NXP management team is determined that we need to improve our expense structure in certain areas of our business. Result is an emphasis on continuing to improve our support processes, a de-emphasis of certain investments and the reduction of the associated expenses. But we will accelerate investments in other areas of the business, which have a higher probability of success; Peter will provide additional details during his prepared remarks.

Now I'd like to review the specific results for the most recent quarter. Overall the results for the 4th quarter came in the higher end of our guidance. Product revenue was $1.07 billion a decline of 4% sequentially, just above the midpoint of our expectations. In that 24% from the year ago period total NXP revenue was $1.12 billion of 5% sequentially decline and up 20% from the year ago period.

Turning now to our segment performance, High Performance Mixed Signal revenue was $868 million a 4% sequential decline and up 32% from the year ago period. Within our ID business revenue was $290 million up over 5% sequentially above our flat expectations. This was 87% growth from the fourth quarter 2011. Order trends within core ID were above our original expectations, up 1% sequentially and representing about three fourths of the total ID revenue.

Within core ID the Banking and Tags & Label product lines were up in the quarter while eGov, Automatic Fare Collection and infrastructure declined sequentially. I should highlight that our core ID product line showed very strong 56% year-on-year growth in fourth quarter, a reflection of our continued leadership in this strategic area.

Within our emerging ID business, which includes mobile transactions and authentication revenue was up 20% sequentially and represented about 25% of the overall ID group revenue during the quarter. As compared to 2011, our emerging ID has increased by over 3x during the quarter nearly all of the emerging ID growth was due to a combination of NFC and secure elements from mobile transaction solutions, which as of the - in the fourth quarter is on an annualized run rate of over $280 million per year.

Moving now to our Portable & Computing business revenue was $195 million down 12% sequentially slightly worse than our original expectations but still up 42% from the year ago period. During the quarter, we experienced weak demand across the whole P&C portfolio with about half of sequential revenue decline seen in logic about the quarter of the decline in the MCUs and the remainder within interface products.

About 40% of the revenue decline was due to key designs in the mobility space. We view this as a combination of natural seasonal trends after a strong ramp in Q3 ahead of the holiday shopping season, combined with normal effects post the launch of new products.

We see these trends in the mobility space continuing into the first quarter. In spite of the weaker trends in the mobility market we are very encouraged by the design opportunities, we are pursuing with both current as well as new customers.

Turning to infrastructure and industrial revenue was $156 million down about 5% sequentially better than our original expectations and revenue was actually up 5% versus the year ago period. During the fourth quarter about two thirds of the revenue decline was due to seasonal weakness in the front end tuner business and the remainder due to anticipated weakness in our notebook power supply business.

We did however, experienced some encouraging initial shipments of our [MacSmith] audio amplifier product into smartphone applications and we're seeing positive performance feedback and interest from other handset OEMs. Within our Auto business revenue was $227 million down 5% in line with our original expectations but up 4% versus the fourth quarter of 2011.

From a product perspective we experience weak sequential demand for entertainment and in-vehicle networking products while keyless door entry and censor products were both up modestly in the quarter.

Finally, turning to our standard product business revenue was $198 million down 7% in line with our original expectations and flat versus the year ago period. As we've mentioned in the past given the broad market exposure for our Standard Products business it is reflective of the underlying economic trends in the markets we serve. Until, such time as our customers have improved clarity about end market demand, we would expect our standard product business to place continued headwinds.

Turning, now to our distribution channel performance total sales and the distribution channel declined 6% with sales out of distribution down only about 1%. Total distribution sales represented slightly less than 50% of the total product sales fairly consistent with our long-term trends.

We continue to manage distribution inventory within our targeted range with total months remaining at 2.4 flat versus both the prior quarter and the year ago period, absolute dollars of inventory in a channel declined by about 1% on a sequential basis. From a geographic shipment perspective, Europe, Middle East and Africa were incrementally better than in the prior quarter while sales into Japan were flat sequentially.

Sales into the other major markets especially in China and Americas were down but generally in line with overall trends and businesses previously highlighted. All geographies except for Japan demonstrated show a strong year-on-year growth but our business in China was up nearly 50% versus the fourth quarter of 2011.

In summary, the results for the fourth quarter were incrementally better than we had originally anticipated especially in our HPMS business segment. We believe the attraction we have gained with numerous major customers' position us well into 2013 and beyond. Specific, many of the customers who helped to fuel our growth in 2011 have awarded NXP [follow-on] programs which should enable the company to deliver continued share gains.

We do need to increase our execution focus specifically in areas of cost and expense management, but we believe we have programs and actions in place, which should enable NXP to deliver continued positive results. We believe if we are successful our actions will result in a very good bottom line earnings growth.

I would like to turn the call over to Peter to discuss the financials in more detail of the quarter.

Peter Kelly

Thank you, Rick and good morning to everyone on today's call. As Rick has already covered the full year highlights as well as the drivers of the revenue during the quarter, I will move directly to the highlights of the P&L.

Overall, despite the tough economic environment it was a good quarter and better than our original expectations. Total revenue, non-GAAP gross profit, operating profit and net income were all slightly better than the midpoint of our guidance resulting in non-GAAP earnings per share or $0.50.

As we've discussed previously it's our strategic intent to exit 2013 on an operating margin of 25%. We've also said that in order to achieve this goal we need to improve our gross margin performance and reduce our SG&A as a percent of revenue.

Before I turn to the operating results for the fourth quarter I'd like to highlight three actions we are undertaking to position the Company to achieve this goal. As highlighted in the press release we are implementing a number of programs that will reduce our SG&A to a level of 12% of revenue by the end of 2013. These programs are primarily focused in the area of G&A support functions.

Secondly, we took steps to make our R&D more effective by reducing support costs and refocusing our resources towards more high value programs, while still maintaining our R&D at the 14% of revenue level.

Lastly, we continue to manage our internal manufacturing costs. We plan to consolidate our MOS process technologies into our Dutch 8-inch fab and out of our German fab. In total, as a result of this overall plan, we booked $98 million provision in the fourth quarter of which $55 million is in SG&A, $23 million is in R&D and $20 million is in cost of goods sold. We expect the $98 million charge will result in a cash outflow of $64 million in 2013 with the balance in 2014 and '15.

To be clear we did not take this action lightly well because of the current economic environment, but rather we took these actions to strategically position NXP for long-term growth, especially in those areas where we continue to see strong traction with major customers.

Now turning to the quarterly results; fourth quarter revenues were $1.12 billion, $23 million above the midpoint of our guidance. We generated $514 million in non-GAAP gross profit slightly above the midpoint of our guidance and reported a non-GAAP gross margin of 46.1%, 20 basis points below our results in the previous quarter.

Now, let me turn to the operating segments. Within the HPMS segment revenue was $868 million down about 4% over the previous quarter with non-GAAP gross margin of 52.4% 80 basis points above the third quarter. Non-GAAP operating margin was 22.6% of revenue, a decline of 50 basis points primarily as a result of lower seasonal revenue.

Within our standard product segment revenue was $198 million down 7% sequentially with non-GAAP gross margin of 28.3%, a 600 basis point decline versus the third quarter. About half of the decline is attributable to lower sales and the associated under utilization impacts. Of the remainder the largest part was due to a quality issue in our assembly and test sites, which has since been addressed and should be non-recurring into the first quarter.

Non-GAAP operating margin was 10.1% a 540 basis point decline as a result of the previous items as operating expenses were essentially flat quarter-on-quarter. Total operating expenses were $308 million, down $3 million on a sequential basis and just above of the midpoint of our guidance range. From a total operating profit perspective, non-GAAP operating profit was $209 million and represents an 18.7% operating margin.

Interest expense was $55 million, at the higher end of our expectations as a result of the timing of refinancing actions taken during the quarter. These actions include the successful tender and retirement of $500 million of our 2018, 9.75% Senior Secured Notes.

Additionally, during the quarter, we put in place $500 million term loan due 2020, non-controlling interests was $18 million and our cash taxes were $10 million. Taken together this was essentially in line with our expectations. This resulted in total NXP non-GAAP earnings per share of $0.50, $0.03 better than the midpoint of our guidance and was over the double the $0.24 from the same period a year ago. Included in our non-GAAP net income was $16 million of stock based compensation or about $0.06 per share.

Now I would like to turn to the changes in our cash and debt. Our total net debt at the end of Q3 was $2.88 billion flat versus the previous quarter as we executed the refinancing of the $500 million of the 2018 debt. Cash at the end of the fourth quarter was $617 million, a sequential decline of $85 million as a result of debt reduction activities.

We exited the quarter with a trailing 12 months adjusted EBITDA of approximately $1.04 billion and our ratio of net debt to trailing 12 months adjusted EBITDA at the end of Q4 was 2.8 times.

Turning to working capital metrics; days of inventory was 104 days an increase of 7 days and most of this increase related to a service level agreements for major customers and to the continuing pre-build of inventory for the factories that we'll close at the end of the year. Days receivable was 38 days, an increase of one day sequentially, while days payable were 82 days, an increase of three. Taken together our cash conversion cycle was 60 days versus the 54 days in the prior quarter.

Cash flow from operations was $164 million, as a result of good operating performance. Net CapEx investment during the quarter was $45 million, resulting in a positive free cash flow of $119 million or 11% of revenue.

Now I would like to provide our outlook for Q1. Historically, our first quarter is seasonally our weakest period. This trend combined by what we view as a continued weak business climate is influencing our outlook. We currently anticipate product revenue will be in a range of down 1% to down 4% sequentially. At the midpoint we expect product revenue to be down about 2% in Q1 reflecting the following trends in the business.

On a percentage point basis, Automotive is expected to experience seasonal declines and should be down in a low single-digit range sequentially. In identification, after five straight quarters of significant growth, we expect a modest sequential reduction into the first quarter. This should translate to a decline in the low single-digit range.

Portable & Computing is expected to be down about 10% primarily due to the typical seasonal weakness of shipments. You would expect this macro weakness impacting the broad-based general purpose logic and microcontroller business.

Infrastructure and Industrial is expected to perform better than historical seasonal norms, but will still decline in the low single-digit range. Standard Products is expected to improve incrementally into the first quarter and is expected to be up in the low single-digit range.

We anticipate revenue from the combination of our Manufacturing segment and the corporate and other to be approximately $24 million. Normally, I do not discuss our Manufacturing segment much, but thought of quick comment in light of the guidance will be helpful.

We remind everyone on this segment; it primarily represents the combination of revenue, which our joint-venture fab in Singapore SSMC sells to TSMC. In addition, to Manufacturing services revenue for our divested entities. The service revenue portion has declined as anticipated to a level where it only contribute of few million dollars a quarter, and may at some point go to zero, however the SSMC portion will never go to zero but it will fluctuate depending on the loading by TSMC and the number of work days in a quarter.

During Q1 the quarter-on-quarter fluctuation is a result of SSMC implementing its tri-annual maintenance program. We would anticipate this segment would run at about a normalized run rate of $30 million to $35 million per quarter with essentially no impact on our overall operating margins. Taken together, total NXP revenue should be in the range of $1.051 billion to $1.082 billion or about $1.067 billion at the midpoint.

Additional inputs to will help you tune your models are as follows; Net debt is expected to reduce from $2.9 billion to $2.8 billion. We anticipate non-GAAP gross profit to be in the range of approximately $497 million to $511 million, we anticipate operating expense in Q1 to be in a range of approximately $305 million to $310 million taken together this should translate into a non-GAAP operating profit in the range about $193 million to $202 million.

Net interest expense should be about $50 million. Cash tax expense should be approximately $9 million and non-controlling interests should be about $13 million. Stock-based compensation is expected to be about $18 million, or about $0.07 per share, and I would remind you that is included in our non-GAAP results.

Average diluted share count should be about 255 million shares and taken together, our guidance implies non-GAAP earnings per share in a range of $0.47 to $0.51 per share, or approximately $0.49 per share at the midpoint of our guidance range.

Finally, earlier today we announced plans to issue an unsecured bond for $500 million. We're very excited about this as it representing into the step and our desire to become investment grade and reduce our overall long-term cost of capital.

I'd now like to turn to your questions. Jeff?

Jeff Palmer

Thanks, Peter. Alex, could we poll for Q&A?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from John Pitzer from Credit Suisse.

John Pitzer - Credit Suisse

Yeah, good morning guys or afternoon I guess your time. And I appreciate all the detail in the press release always very helpful. But my first question just had to do with the Q1 guide can you talk a little bit about in ID of the trends in emerging versus core. You also seemed to be guiding overall about in line with normal seasonal with no sort of impact from potentially a cyclical uplift in the semi industry. I was wondering if you could comment on the cyclical side of things?

And then lastly, on the Standard Products side is the up Q1 a reflection of catch up from some of the quality issues you had in Q4 or should I think about that as being in the lead indicator that [orders] growth in HPMS given that most of Standard Products is distribution and selling?

Peter Kelly

Let me do the Standard Products question first, I guess the move from Q4 to Q1, it's a relatively small jump from a revenue perspective, we're just talking about a few million dollars there really. I don't think that indicates anything in terms of a major change in the economic downturn.

Rick Clemmer

So, John, your question about ID specifically, the interesting thing about our ID business, and you know, from a security perspective it's interesting portfolio of number of different businesses with different things happening at any one time, as we've talked about on the government side and even some of the banking side it's much more project oriented than economic oriented.

And so, the strength that we've had with in Q4 where we saw such strong strength from a year ago we're assuming that that will taper off somewhat in Q1 and frankly there are some parts of the portfolio that we have a problem just filling all of the requirements associated with it. So that's reflected and what we talk about with our guidance for Q1 for the ID business as well.

So, I think as far as the general economic environment we're still a little bit conscious about the general economy. Clearly, there's some indications of improvement that are taking place, but not sufficient for us to feel like that we want to count on a robust economic improvement in our projections or guidance associated with it. And we clearly don't see orders on a strong uptick, we see clearly a slight improvement associated with it, but not something that would give us a strong enough position to feel like that Q1 will be significantly stronger.

I think that we do still feel pretty good about the general environment and we think that clearly Q1 will be the bottom and we'll be moving up from there. So I think that is a positive associated with it, but still with somewhat anemic economic environment. Even though with the recent results on the U.S. economy but even that having a significant share of that that's focused on housing market which really doesn't have a lot to do with our business in itself.

John Pitzer - Credit Suisse

Rick, and then as my follow-up just thinking about gross for the balance of '13, I mean clearly last year you guys outperformed the industry as emerging ID, accelerated in product cycle wins and PMC also accelerated.

As you think about the components about growth this year I know you've got the sensor hub expected sometime mid-year to begin to ramp. But what other areas should we be looking at either by product cycle or by end market where you feel the highest level of confidence about growth?

Rick Clemmer

I think we feel very comfortable that we'll outgrow the market by at least another 50% in 2013. I think, we want to get out of talking about specific programs as much as we can and talk about general indications associated with it. But as we talk about LTE and base stations it clearly will contribute to our growth in 2013 by some of the strong design wins we have. Our automotive business, we expect to continue to see an improvement associated with the general environment. So there's a lot of areas that are going to contribute to the double-digit growth that we're expecting our ID business for 2013.

So, all of that added together is what give us the comfort to be pretty specific about being able to outgrow the industry by at least 50% in 2013.

John Pitzer - Credit Suisse

Great, thanks guys. Congratulations.

Rick Clemmer

Thanks a lot, John.

Peter Kelly

Thanks, John.

Operator

Our next question is coming from C. J. Muse from Barclays.

C. J. Muse - Barclays Capital

Good after noon. Thank you for taking my question. I guess first question on gross margin, your guide for Q1 despite seasonal down tick is a gross margin level that surpasses any number that you printed in 2012. So curious what's driving that is that mix is that a pickup in utilization on the Standard Products. How should we think about that and how should we think about the trajectory through the remainder of the year?

Peter Kelly

We'd like to say - I would say two things. One is in Q4 specifically our Standard Products business was hit by some one-off costs. So, that will help the Standard Products business in Q1. Mix is certainly a factor, we've also talked about some of the issues that we've had in 2012 as we ramp some of these big designs. And I think in terms of the trajectory, what we talked about is we really would like to exit 2013 at the 25% operating level and in order to do that we need to move our gross margins up to about the 50% level by the time we exit the year.

Rick Clemmer

But, CJ as we've talked about that's a clear priority and focus for us is how we continue to improve our margins and where we're spending a reasonable amount of time from a management team perspective. We feel very comfortable with our growth opportunities and now we've got to be sure that we drive the kind of margin growth and the right kind of operating income improvements that we think exist.

C. J. Muse - Barclays Capital

That's helpful. And as my follow up, you talked about headwind from auto, infrastructure and Standard Products in 2012 at lease relative to the other two businesses that really shined. I am curious today, where do you expect the most improvement, the most growth, where are the green shoots that are cyclically or led by a design win momentum that you know you have in your back pocket today, that could really drive that 50% of performance or greater in 2013?

Rick Clemmer

Well, clearly our ID business we had said we expect double digit growth again in 2013, so it will it will continue to contribute to a strong growth position. Our INI business from the ramp up the base stations for LTE and China we think it represents a significant opportunity while it varies a lot quarter-by-quarter we see those design wins materializing with the shipments of base stations so that we feel comfortable on the year-on-year basis.

And in general automotive terms we had record shipments in North America and China in our automotive shipments for last couple of quarters. So continue to see that what's kind of a stabilization of some of the other regions of the world clearly presents an opportunity to being more in line with overall semiconductor growth then it certainly represented in 2012. And then Standard Products, we expect that to continue to be fairly link to what's happening in the general economic environment, although we do expect that there's the opportunity for some growth in China.

You know as we talked about near on the strong growth that we had in our shipments in China represent a significant opportunity and clearly that's an area for us in 2013 in Standard Products that we would be helpful, we'll demonstrate some growth.

Peter Kelly

We shouldn't also forget, Rick, that the design wins and new opportunities we have in PMC will continue to ramp up from midyear onwards.

Rick Clemmer

They will

C. J. Muse - Barclays Capital

Very helpful, guys, thank you.

Rick Clemmer

Thanks, C. J.

Operator

Our next question comes from Vivek Arya from Bank of America.

Vivek Arya - Bank of America

Thanks for taking my question. I think you just mentioned mix as one of the factors that impacted HPMS gross margins in 2012. But as we look at 2013 it appears as if mix is not really likely to change, because ID and your Portable & Computing business are expected to be the faster growers in your business. So is that an accurate understanding and appears, can you help us understand how you will improve gross margins and HPMS.

Peter Kelly

Yeah, I think what I actually said Vivek, was the growth of the mobile designs wins has affected our margin there's a number - I guess I was referencing some discussions on earlier calls, but what's happened is we were forced to ramp some of these products very very quickly. So we didn't necessarily get the best pricing from our foundry partners. We ended up in putting in PE structures and manufacturing structures that were not optimal. And we've been working pretty diligently on clearing those up.

So it's from that perspective, we really had some headwinds in 2012, that have not helped us, clearly we have some other product ramps that are going to help us in 2013, as well. But from a mix perspective this is not going to be a huge switch in our mix a way towards very higher margin products that will just make this all easy to look.

Vivek Arya - BofA Merrill Lynch

Thanks, Peter, that's very helpful. And one question on NFC, I understand it's not a big product of business, but nevertheless it's still a very prominent part of your business. So Broadcom on their call spoke about gaining double digit share I think Qualcomm was also a little bit vocal about their NFC potential. So how are you seeing that competitive situation develop this year as you look at your pipeline of design wins and engagements? Thank you.

Rick Clemmer

Yeah, so it's interesting because in some ways it actually helps the NFC market to have more suppliers in the market. You know clearly we want to continue to maintain our leadership position, but with the growth of the opportunity in the significant increase of smartphones that will have NFC included with those we think it still represents a good growth opportunity for us.

As far competition, we've always known we'd have competition, we always knew that ultimately when you've got to be, NFC got to be a significant share of the market at we had see some risk of integration into the overall connectivity chip and as that takes place then we want to be sure we're focused on the secure element to be able to provide the bulletproof security that's really required associated with having NFC implemented in a fashion where the consumer feels comfortable associated with it.

So, yeah we know we're going to have more competition, yeah it doesn't surprise me at all that some of our competitors are talking about strong market share growth because the market is growing, so rapidly it still represents a opportunities for growth for us even if some of our competitors do actually gain share associated with it.

Vivek Arya - Bank of America

Okay. Thank you, Rick.

Rick Clemmer

Thanks.

Operator

Our next question comes from Jim Covello, Goldman Sachs. Go ahead please.

Jim Covello - Goldman Sachs

Great, thank you so much for taking my question I appreciate it. Rick you mentioned that your sell in to distribution was down 6% and the sell out there was minus 1%. What does your guidance assume about that dynamic going forward? Do you assume balance or do assume continued just the liquidation or draw down?

Rick Clemmer

It's an arm wrestling that goes on with each distributor, each quarter, and we're planning on it being fairly normalized, Jim. We want to be sure that we maintain our inventory levels around 2.4, some of the big guys would like to take that down closer to two months of inventory, as they are focused on their turns and earns, but our view is the margins that they get is based on not only the customer service but maintaining some of that inventory in place. So we would like to keep it in the 2.4, 2.5 months of inventory. But our plan really for our guidance for Q1 is predicated or based on that continuing it roughly at the same level associated with it.

Jim Covello - Goldman Sachs

Okay, great that's helpful. And then for my follow-up you mentioned you saw some improvement in orders. When did that improvement start and has it continued through the January?

Rick Clemmer

Well I think the, as we tried to say Jim and I just want to be very clear about it. We don't think it's like momentous improvement in orders.

Jim Covello - Goldman Sachs

Right.

Rick Clemmer

I know some of our peers are talking about you know they have seen improvement in orders and clearly we've seen you know order improve where, as we track it on a weekly basis we've seen more weeks that are better than worse. So but as far as being able to draw a trend from it I think we still are not counting on a huge uptick in orders associated with the outlook. We still see a rather anemic economic environment and we are not counting on clearly through the Q1 timeframe seeing a robust improvement associated with it.

I think that we do see enough indicators that we feel comfortable that Q1 is truly the bottom and we feel pretty good about some of the opportunities for growth coming out of the Q1 timeframe. But, it's not like we see a definite robust turnaround in order rates that gives us a great deal of confidence it's just more of the general indicators and what we see from customers specifically associated with the design wins we have in place and being able to support those.

Jim Covello - Goldman Sachs

That's really helpful. Thanks so much I appreciate it.

Rick Clemmer

Thanks Jim.

Peter Kelly

Great, thanks, Jim.

Operator

Our next question comes from Joe Moore from Morgan Stanley. Go ahead please.

Joe Moore - Morgan Stanley

Great, thank you. I wonder if you could talk about your inventory level, where you think that goes and where the factory utilization goes in the next couple of quarters.

Peter Kelly

So, factory utilization in the current quarter was 85, in Q4 it was 85%. We don't guide going forward but a little bit of color. We've seen in the - and this is a trend that we've seen over the past six months or so. Our IC factories are running pretty full and we're underutilized in our Standard Products factories and I guess I don't see any big change in that in the very, very short term. Inventory, we have seen inventory pickup over the past few quarters, so we're now at 107 days. One of the big items in there I have about $50 million of inventory which is I related to the closure of our ICN4 and ICN6, so that's to facilitate the closure and transfer of products into ICN8.

And given we've been limited in terms of our 0.14 capacity over the past couple of quarters we've not really been able to build the buffer inventory that some of our larger customers would like us. So we're continuing to focus on that. I don't think you're going to see much of a change in terms of the number of days, but I'm pretty confident in our working capital control. I think, we understand what we did in inventory, our receivables are just excellent and our payables are extremely well managed.

Rick Clemmer

And you really have to take into account the factory shutdown and the inventory built to support that when you think about our inventory levels.

Peter Kelly

Yes, the $50 million.

Joe Moore - Morgan Stanley

That's very helpful, thank you very much.

Operator

Next question comes from the line of Chris Caso, from Susquehanna Financial Group.

Chris Caso - Susquehanna Financial Group

Hi, thank you. I'm just following on to some of your earlier comments with respect to Q1 potentially bottoming here. What do you guys typically think about seasonality going forward as you look into Q2, Q3 obviously, it's early days now, but what are the puts and takes and what would you guys consider normal?

Rick Clemmer

You know the interesting thing is when you look at it historically, Q1 is usually our worst seasonal quarter. What we usually see is a little bit of down tick from Q4 and Q1, then we see a pretty robust growth in Q2, growth in Q3 and then see a little of roll off in Q4 and then further roll off again in Q1. So, it follows with those typical seasonal patterns that we see, although to be fair seasonal patterns are hard to determine by some of the economic environment we've seen over the last couple of years. But I think based on what we see from our customers and the indications associated with it, it gives us really confidence that we will in fact see the pickup in Q2 that we would expect on a seasonal basis and so we feel good about that.

Chris Caso - Susquehanna Financial Group

All right, great. And just following up on gross margins as well and with respect to your goals of improving that as we go through the year, could you work on it, talk about the timing of that obviously, part of that would be improving some of the factory loadings in Standard Products, I assume, could you give us, perhaps quantify some metrics on as the revenues grows, what we should expect with regard to gross margins as we model that through the year, how much falls through as the revenue improves?

Rick Clemmer

We're not really going to get into those kind of forward looking statements, I guess as far as we want to go as we're expecting by the time we exit the year, we want to get to about 50% on gross margin.

Chris Caso - Susquehanna Financial Group

All right, great. Thanks.

Operator

Our next question comes from William Stein from Sun Trust. Go ahead please.

William Stein - SunTrust

Great, thanks for taking my question. If we take a step back and look at the capital structure and the use of cash, clearly, you've been primarily focused on paying down the debt and spending a bit to realign the cost structure, but if you get close to your margin targets as we exit the year and if see just a little bit of growth, it seems like you're going to hit your two times net lever target that you've discussed in the past, can you remind us about how the change in cash use priority will, what might unfold there?

William Stein - SunTrust

Well what we've said specifically as we're very focused on continuing to reduce our debt until we get down to the metrics of investment grade and at the time we get down to the metrics of investment grade, we'll look at it from a shareholder perspective and depending on where our stock price is, the equity value and opportunities that may exist in the market what creates the most shareholder value associated with it. If our interest rates continue where they are than there is clearly an opportunity to continue to pay down our debt and drive pretty significant leverage associated with that, but we'll continue to act in the best interests of shareholders about what would drive the most value after we get to metric associated with investment grade.

Peter Kelly

Yeah and our stock was still at $30 I guess we'd be big time buyers of our stock as well.

William Stein - SunTrust

That's helpful and as a follow-up if I can, you spoke about a refocus of the R&D afford and part of the expenditure or the expense recognized in the quarter was to realign R&D a bit, can you elaborate a little bit on the changes there please?

Peter Kelly

Yeah, yeah sure, we expect to run about 14% of our revenue in R&D. We think R&D is absolutely the critical part of the company, you know if we don't have the right products as there is no way to go. Having said that, these things with our R&D which we can improve, so we can be more effective in our support of R&D and our IT cost for example and some of the back office support, but also we have different types of resource that we're constantly looking at some of it seems like moving away from say some hardware engineers in the west towards software engineers in India, other parts of it are looking at, you know we are constantly look at our portfolio and term various projects so that we can create more investment for our more successful product lines. So it is that kind of thing, there is no, you know, there is nothing really, really big.

Rick Clemmer

Clearly we'll be increasing our R&D investment in areas where we think it drives a much higher level of probability. So it's more about tuning than anything else in R&D. The primary focus of the investments we'll be doing are improving our back office processes to be sure we've world class you know kind of non-customer phrasing expenses where we want to be sure that we're driving industry leading levels associated with it and this is really just taking that step to be able to facilitate them.

Operator

Your next question comes from Ross Seymore from Deutsche Bank.

Ross Seymore - Deutsche Bank

Hi guys, congrats on the solid results. First question is on the OpEx side of the things. With the new restructuring plan that you are putting into place Peter, I know you gave the percentages, but can you talk a little bit about that 305 to 310 range that you are guiding for the first quarter and how we should expect OpEx to trend on an absolute dollar basis through the year given this restructuring?

Peter Kelly

Well, I guess first I am going to say I am not going to give guidance for the rest of the year other than the fact that I want to get to 12% of revenue for SG&A by the time we exit 2013. So I am not really going to go into any more detail than that. I think what I would say though is we know how to manage OpEx and the plan that we do have is again really around support costs. So it's not planned to impact our customer facing teams, it's really expected to impact the support groups throughout the organization and obviously I understand its painful for them individually. But, you know we have come down to I'd rather spend less on finance and more on sales, I would rather spend less in IT and more on sales, and I would rather spend less on either support functions and that's really what we're doing Ross. I mean, again no big significant items. I guess the one thing that is difficult in Western Europe it just takes more time to work with the various works councils and unions and come up with an appropriate solution, so that is a bit more challenging then what we would normally expect to do in the U.S. or maybe out in Asia.

Ross Seymore - Deutsche Bank

Thanks, then I guess my second question changing over to the interest expense side of the things. Given what you did in the fourth quarter and paying down some debt and today's announcement with another $500 million coming. How should we think about that 210 interest expense guidance that was the midpoint of your 2013 guidance before. It seems like you are already running below the midpoint of that range obviously any shot that you can update that for us?

Peter Kelly

Gosh, you're so tough, Ross. Yes, I will - probably $195 million to $200 million will be for the full year.

Ross Seymore - Deutsche Bank

Great, thank you.

Peter Kelly

Thank you.

Rick Clemmer

Thanks, Ross.

Operator

Our next question comes from Vijay Rakesh, from Sterne Agee. Go ahead please.

Vijay Rakesh - Sterne Agee

Hi guys, looks like you guys brought your interest expense down to $50 million a quarter and I saw you guys put up this press release on a debt offering. Just wanted to get some more thoughts around what you are going to do with it, how do you see that for the rest of the year of interest expense etcetera?

Peter Kelly

Well, interest expense we'd expect for the full year to be about $195 million to $200 million. We think we have a very, very solid balance sheet, but we will be opportunistic and to the extent that there is opportunities to address our debt we will do it.

Vijay Rakesh - Sterne Agee

Go it. And on the auto side, obviously 2012 was pretty good how do you see 2013 in terms of new products new customers that you're adding how do you see that growth above market in 2013.

Rick Clemmer

I am sorry. Ask the question again, Vijay?

Vijay Rakesh - Sterne Agee

On the automotive side how do you see 2013 in terms of new markets and new products, where do you expect to get the traction on automotive side in 2013?

Rick Clemmer

So if you look at our automotive business we still have some ramp up taking place with the second largest north America automotive manufacture on the remote keyless entry, but primarily growth that will take place associated with our automotive business will be in the care infotainment side in the development countries associated with the more in Asia and China in 2013.

We expect with the overall car production to be flat 2% growth with actually Asia representing fairly healthy growth and may be Europe slightly down. So obviously the participation in automotive comes from additional platforms that were designed into in infotainment that's ramping now and we will continue ramp through of remainder of this year and then the growth that takes place in those developing countries in automotive.

Vijay Rakesh - Sterne Agee

Great. And last question on the fab side, obviously you're doing some good actions consolidating the fabs, there, how many fabs are down to now as you look at 2013 and how do if you were to take a stab at how do you see that going forward in 2014?

Rick Clemmer

The way to think about it really is in the Netherlands that we have 3 fabs in 2013 and 2014 that will be one fab. That will go from 4 to 6 and 8 into an 8" fab. And other than that we don't have any plans to eliminate any fabs the consolidation of MOS Technologies from the German fab to the Dutch fab is more of a these is a profit opportunity really and allows us to optimize both the German fab and on the Dutch fab.

Vijay Rakesh - Sterne Agee

Got it, thanks. Good job guys.

Rick Clemmer

Thanks.

Operator

Our next question comes from Nitin Kumar from BNP Paribas. Go ahead, please.

Nitin Kumar - BNP Paribas

Good morning, guys. And congratulations, solid quarter. Quick question, you've been a little bit more retrospect in your macro outlook than some of the other guys in the industry but you're still looking at a pretty decent growth especially, thinking about your long-term margin goals can you help us understand like how much of that is coming from revenue growth and how much from just your cost reduction that you're talking about?

Peter Kelly

What I've said in the past is that the model that we have looked at I guess most recently is that industry might, our (inaudible) in the industry might grow about 2-3% in 2013 and we would think maybe we'd grow up to double that. So we achieve then, that gives me more enough revenue growth to hit the right number by the end of the year. And after that its focusing on the various cost reductions and margin improvements that we have in the plan.

Rick Clemmer

In addition to that, by the end of the year we would expect to have some monetization from our IP portfolio that would contribute towards to 25% operating income as well. Especially in areas of technology that are emerging where we have a very strong patent portfolio position.

Nitin Kumar - BNP Paribas

Okay great. And just a housekeeping question on Automotive. Can you give a geographic breakdown between the different regions in terms of your sales?

Rick Clemmer

It's impossible for us to do that, we can tell where we ship the product to but, Continental or Bosch may ship - product that we ship into - Europe into china Asia and all over the world and product that we ship into China and they may ship into Japan and other regions, so it really -- that is not so meaningful about our shipment and it's very difficult for us to track associated with it.

Nitin Kumar - BNP Paribas

Great, fair. Thank you.

Rick Clemmer

Thanks, Nitin.

Operator

Our next question comes from Philip Scholte from Rabobank. Go ahead, please.

Philip Scholte - Rabobank

Yes, good morning, or afternoon. Regarding the IP licensing you just mentioned, can you quantify that little bit more and also in terms of timing when that will impact your margins. And my second question will be on your reiteration of the 25% EBIT margin target, does that include any significant recovery in the Standard Products because I mean you're obviously quite cautious on the economy so I would expect that in terms of utilization you wouldn't expect any improvement there, so does that assumes a flat environment for Standard Products?

Rick Clemmer

No. Our Standard Products business we'll have to improve the margins from the performance in Q4, we did have some one-shot items et cetera, but we fully expects Standard Products' margins to improve even without a robust economic environment improvement. So, the 25% definitely counts on Standard Products getting back into the operating model of 18% to 23% operating income margins that we have for that business.

Philip Scholte - Rabobank

(Inaudible)

Rick Clemmer

On the intellectual property income, we've been involved in this process for some time as you monetize our intellectual property, I've done this in previous companies before it takes a long time you have to go, search patents you have to actually follow law suits, go through that process. We're actually in process with at least - law suits with at least one other company at this point in time. And we'll see how that develops, but we would like to see something that would be contributing maybe as much as a 100 basis points to operating income by the end of the year associated with IP, and we actually have some IP income that takes place to today.

Philip Scholte - Rabobank

Right. All right. Thank you.

Peter Kelly

Thank you.

Rick Clemmer

Thank you.

Jeff Palmer

Alex we'll take one last caller if there's any more questions in the queue?

Operator

We have no further questions in the queue at this time.

Jeff Palmer

Great. Well with that I think we'll end the call today. Thank you very much for all your time, Rick, did you want to make some closing remarks.

Rick Clemmer

Sure, thanks a lot for your support as well as you continued interest in NXP. In summary, we feel very good about our results in 2012 and believe that they demonstrate measurable success in executing our long-term strategy. The full year product revenue growth of over 7% despite an anemic economic environment, clearly indicates the share gains that we have specially in our HPMS market were we saw revenue growth of 13%, combined with 17% increase in our High Performance Mixed Signal operating income.

Clearly, we believe that with the current economic environment as well as the seasonal patterns Q1 represents the bottom of the semiconductor cycle for us. And we expect to see good growth beyond Q1. And will help us continue to have strong cash flow generation over and above the $0.5 billion or so of pre-operating cash flow that we were able to generate in 2012.

With all of that we think that we'll continue to be able to drive bottom line results that will continue to demonstrate strong improved performance. Thank you very much.

Peter Kelly

Thank you very much for your interest.

Operator

Thank you for joining today's conference call. This concludes your presentation. You may now disconnect good day.

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