Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

NXP Semiconductors (NASDAQ:NXPI)

JPMorgan 41st Annual Global Technology, Media and Telecom Call

May 14, 2013 08:40 AM ET

Executives

Peter Kelly - CFO

Kurt Sievers - EVP and General Manager

Analyst

[Abrupt Start]

…at JPMorgan and we’re pleased to have the team from NXP here with us. This morning we have Peter Kelly, Chief Financial Officer and Jeff Palmer, Vice President of Investor Relations but we also have a treat here, we have Kurt Sievers who is EVP and General Manager of NXP’s automotive business.

So, I’ve asked Peter to give a brief overview of NXP, I’ve also asked Kurt to give a brief overview of his automotive business. I’ll follow that up with a few questions and I’m sure we’ll have more than enough time for Q&A from the audience.

So with that gentlemen, thank you very much for joining us today. Why don't I turn it over to you?

Peter Kelly

Thanks a lot. I’m Peter Kelly, Chief Financial Officer of NXP. I’m sure lots of you know us quite well but for those of you who don’t, we used to be the semiconductor division of Philips, we separated from Philips in 2006, we were taken private by group of private equity companies including KKR, Bain Sell, Apax. And just over two years ago we became a public company and listed on NASDAQ.

We have two main segments, our high performance mix signal segment and our standard product segment. Our high performance mix signal segment is made up of four businesses, industrial infrastructure, which includes our HPRF business TV front end, PLS and our emerging business.

Our portable and computing business which primarily focuses on interface and MCUs but also as a general purpose logic business which is reported in our public segment and our identification business which is essentially a security business.

Over the – the core reason that we are what we are is we thinking the high performance mix signal that we have very, very strong market positions. Analog based businesses very sticky customer relationship, terrific profitability and businesses we think typically we can grow faster than the market and we have a goal of having a significant relative market share.

In terms of growing faster in the market, our target is to grow 150% of the market we’ve achieved over the last three years. Last year our profit revenue grew by 7%, our high performance mix signal business grew by 12% and our strongest business was our identification business which grew by 41%.

Obviously there is lot of focus on NFC, we’d like to point out that NFC only represents about 5% of our overall revenue and a natural pathway of very, very strong positions across our identification business.

We’re currently at the mid point to expect to turn about 21% non-GAAP EBIT in Q2 and our guidance for the quarter was revenue increase of 6% to 12% or 9% at the midpoint with non-GAAP EPS of $0.62 to $0.70. So, very, very solid business. we’ve grown our profitability very substantially over the past few years.

We’ve outgrown in the market in terms of revenue, when we have the plan to continue to outgrow the market and to continue improve our operating income and expect the years at the 26% level.

So, I’ll hold off for a second and I have the pleasure of introducing Kurt, who’ll talk for few minutes on our automotive business. Kurt?

Kurt Sievers

Peter, many thanks. Good morning ladies and gentlemen. Let me actually kickoff with a brief question just to make sure we all realize did you know that actually electronics manifest no more than 90% of the innovation in automotive rather than mechanics or steel engineers which use to be case in the past.

That’s actually what sets the tone, what makes the pace and what makes the attractiveness of the automotive business to us.

Now, our life in automotive in NXP is also focused on high performance mix signal, just like Peter said earlier and in that we do have one very clear vision connecting the car. The car is as you probably know still one of the last places which is not really connected and our mission is connect the car to other cars, let the cars talk to each other, let them listen to each other connect the car much better to infrastructure this is all about avoiding traffic jams and concrescence and stuff all the stuff you hate about cars. And maybe most importantly connect the car much better to you as consumers through portable devices through car keys or any other information gateways which let you talk to the car more seamlessly than in the past.

And last but not least connect the car inside we have a somewhat hidden business which is a nice tool which is what we call in-vehicle networks which is actually about connecting the electronic control units in the car there is 80 to 100 control units per car and they need to share more and more data with each other and there is specific standardized systems bus systems in the car and we are a market leader for it. Now the overall automotive semiconductor market is a huge diversified market it is 23 billion bucks we do have a very sharp focus, we focus on a sum of about $3 billion. In that sum we hold very strong leadership position and actually more than 90% of our revenues are made up by number one positions.

And those are in-car entertainment which used to be the simple car radio now moving and increasing a lot of value by going to digital radio and connectivity. Secondly car access and mobilization where we hold a very strong number one position globally we are actually almost in all OEMs globally with electronic e-mobilization that used to be a security focused business Peter talked about our security capability in the company. we leverage that into automotive but it is enriched now by convenience features think about passive keyless entry systems you approach the car and the car would actually identify you, and recognize you and open up automatically version wise setting car finder applications car sharing applications that is all part of this.

And thirdly I mentioned it before the in-vehicle networks. Be aware that every car which is currently being built globally host, about eight NX chips for in-vehicle networks. I talked about the number one position in car entertainment there is more or less 20 Tier 1 suppliers building car radios globally most of them actually are Japan based. We are designed in 19 all of those 20.

Now from a regional perspective the attractiveness is all about China, China is by far the fastest growing region in automotive. And I can probably share with you that strategy analytics just published a report for last year’s automotive semiconductor markets naming us as the number one automotive semiconductor supplier in China in 2012 so we made it from a number three in the years earlier to number one in China automotive semiconductors according to strategy analytics.

Now our strategy going forward we drive half the share in our core segments I mentioned them, secondly we do grow the sum in those specific segments by allowing more value meaning more silicon to our applications that means analog radio to digital radio that means a security only mobilize the system to a full passive keyless entry system that means a simple network in the car going to a fully deterministic time trigger protocol. All of this is more value per function per car.

And thirdly we are selectively and sharply adding new business segments in automotive. Two examples, one is LED lighting. You know that a lot of front-end back loading in the car is being replaced from conventional to iPods over to solid state lighting. and secondly car to car and car to infrastructure communication which is at the half of the connected car and you might have seen earlier in the year we announced together with Cisco our investments in Cohda Wireless which is a leader for car to car communications.

Characteristics of automotives business very much like Peter said before but maybe to an extreme very high barriers-to-entry very long product lifecycles and extremely sticky customer relationships. This is because of the very high demand for quality and global robust supply chains. And that also forms the value proposition which we bring to our customers which is about being a very trusted partner secondly being an innovation power house and that comes all the way down to process and technology leadership in mixed signal and our CMOS integration as much as systems and applications knowhow. Yes, and this is actually how I briefly wanted to position and frame our business to you, very sustainable competitive advantage in a very sticky industry, helping us to achieve great margins in a business which is up to grow for the future significantly.

Unidentified Analyst

Thanks Curt, so since it became a public company the team has executed extremely well on all metrics deleveraging margin improvement, gaining share in the markets that you are focused on and of course topline growth. You’ve consistently grown your peers in the end markets by a considerable amount. Last year for example you grew your topline 4% in a total semiconductor industry market that declined for within HPMS, I mean your segments grew 12% last year, and you certainly outgrew your competitors by at least 50% which has been your target. As you look again to outgrow the markets this year, what are the end market, I am not thinking about the product specific trends but what are the end market trends that you have exposure to that is going to help to drive the outperformance in NXP’s topline growth this year and then we’ll get into the products in a bit.

Kurt Sievers

I think there is a few things Collin (ph). still the security market and from all perspective there are things like pass codes, ID cards, licenses, automatic fare collection; they all still represent very-very strong growth and obviously from perspective of multiple transactions that continues to represent a strong opportunity for us. Within the industrial infrastructure business, I guess we would say 40 relay stations is an opportunity for us in the communication sector. And of course mobile in general, I guess the issue that we all face at the moment is just the kind of weak economic outlook and in particular the computing business. Fortunately for us, we only have about 10% exposure to the computing market. But it is impacting our standard product business in particular.

Unidentified Analyst

Curt, what about some of the trends in automotive, that are going to be responsible for driving your overall business this year. I know you talked about some of that in your prepared remarks, you know electronics driving 90% of the innovation in automotive, what are some of the more near term kind of 2013 focus drivers of your businesses.

Kurt Sievers

Practically on a short term volume, what drives our growth is the fact that and I said it before we are number one in China, the China car production this year is again forecasted to be between 5% and 10% growth where other geographies are actually lagging behind. So our strong exposure to China is helping us here significantly.

Secondly a big factor is and we talked about this in the past two years and you know the automotive products, I guess some of it is kicking in. We did win two significant Japanese car radio companies with a fluid chip set for all of their car radios and they are increasingly kicking in their business this year. So that’s actually two companies which did not use our silicon at all in the past. So that goes from zero to over time a hundred percent, and we see first significant revenue addition of this year which is going to be again in Asia, and that’s the biggest short term contribution I will say for this year.

Unidentified Analyst

So the question that always comes up with NXP is trying to figure out and you know there is a value chain associated with automotive and so trying t to figure out end market perspective, how does your segment revenue kind of break out, I mean obviously you have done well in China. China seems to be a big market for you, but can you kind of just give us a rough sense of automotive and looking at it from an end market perspective, China versus rest of Asia versus North America versus Europe kind of what you think your broad exposure as to these different markets?

Kurt Sievers

We do actually have a quite balanced exposure towards three of them. The big three in the meantime are actually indeed Europe, U.S. and China. It used to be, five years ago it was more or less just Europe and U.S., so China has come from nowhere to becoming the third leg we are strongly standing on. I would definitely not forget Korea, South Korea. So Hyundai and a couple of other customers are driving a lot of additional growth also out of Korea. At the same time we should not forget that this automotive business is a very global business, so a lot of business which might end up in a European car. We ship into China and then the European car is still again sold in China. So it’s really, it travels around, so sometimes it’s a bit hard to trace from where we ship to; we're actually; it ends up in a car. At the same time, I would still continue to say the strongest growth is coming out of Asia. Also this year, we see the perspective that really continues to be Asia. Europe is very soft; continuous to be soft after last year and the US are actually standing flat across. There is an interesting point there on geographies; it's very-very difficult for us to know where our colleagues end up but I guess maybe the best proxy is what we built in euros. And we only build about 25% of our product in euro. So, the majority of our exposure is actually in Asia.

Unidentified Analyst

Great do we have any questions from the audience?

Question-and-Answer Session

Unidentified Analyst

[Question Inaudible]

Unidentified company representative

Question was what's the profitability of our products? What's the profitability of our region? The profitability of our region doesn't really make sense because we shipped all of our products into a global market, we priced globally. So, whether we ship to someone in China or Europe, they basically at the same price so it really doesn’t matter and we manufacture in central locations.

In terms of products, we don’t really break our profitability out by products but I guess what I could say is ultimate to this certainly are highest profitability product. I mentioned before we are targeting 26%; the standard products business, we would expect to run when it's running well round about 20%.

We would expect automotive to be in excessive of the 26% and the other four businesses to be kind of around that number from an operating profit perspective. The gross margins defer a bit and part of the issue; those we have different levels of R&D any particular time so we tend to be more focused on driving operating margin.

Unidentified Analyst

As we think about 2013 and we will get to your sort of target profitability profile near the end of this year but it is predicated on 5-6% growth of this year and this question is specifically for Kurt how do you think your automotive business will do within that framework of contributing to the team's ability to hit their profitability targets at the end of this year. Obviously automotive production globally is sort of anticipated to be flat, plus and minus a couple; clearly seems like you are set up to outgrow the market; what' number one is the KC expect to grow the automotive market and what are going to be kind of the near term product cycles, customer wins that are going to help you to drive that outperformance this year?

Unidentified company representative

Peter said it all on the profitability; automotive does significantly contribute to the company's profitability. so I think enough said; you rant, Peter rant. Now, the other questions of course growth very clearly woven on the growth side, you rightfully said I think it is fair to expect the car production growth this year to be flat, maybe a little bit plus but not significantly.

I try to frame in my brief intro earlier that the gross of our business must come out of the penetration of electronics into the car, you should not trust, rely on the car production to grow but actually it must be the penetration. And this is there, I mentioned earlier by winning and actually ramping this year two significant new car radio customers is going to help driving our penetration. even if the market was flat that's just a simple thing to alter on the market.

And secondly I reiterate the China opportunity because if there is any place this year, the car production is set to grow, it is China. And our high exposure to China should clearly make us out grow to market this year in automotive.

Unidentified Analyst

So when the team talks about sort of more forward looking technologies in vehicle, car networking, car-to-car communications. What time frame are we talking about as it relates to the broader adoption of these technologies in the market is it 2014, is it 2015?

Unidentified company representative

Of course it is a number of state new technologies, I talked about the LED lightening, it's one of the new investment themes. That one is going to kick in late 2014 or early ’15. The market is here today in a very small emerging and innocuous way. We started early enough to be fully part of it when it unfolds ’14 and ’15.

And the next stage from planning prospective is certainly the connectivity between the cars, car to car communication. It’s actually currently in the stage of large field trials. Even in the U.S. actually in the Michigan area, there was this or still is this lot DOT driven 2900 cars or something with our technology, the same happens in Asia, the same happens in Europe. We do have a memorandum of understanding in Europe, explicitly which talks about introduction of the technology in the field in 2015 that is actually about the number of European OEMs, namely 12 of them actually so it’s a lot of France, have signed up to do. In the U.S. we do expect this possibly to become significant things to regulation. There is a lot of safety advantages when cars could (inaudible) or anything coming up and there is a way that this could be mandated at some point in the future and then we could see for automotive terms at least very fast penetration rates.

Unidentified Analyst

Peter back to you, so part of the team’s target of reaching 26% operating margin exiting this year is predicated on delivering 5% to 6% top line growth, we obviously just heard from Kurt about some of the growth drivers in his business looking out may be potentially into the second half of this year, help us particularly some of the other segments, what are going to be the key product drivers that help you get to that kind of 5% to 6% growth target as we move into the second half of the year.

Unidentified Company Representative

Well I think it will be taken by business and may be first of all INI, I mentioned before that our base station business should show some reasonable growth in the second half of the year. certainly I think people think it’s probably going to grow faster than we do but we do tend to be a bit conservative but even if it grows around our conservative level, that would give us that level of growth in, ID is going to grow across the board actually but the single biggest growth driver in ID in 2013 is contact list finding in China. So we are seeing very-very substantial growth than sort Q1, it’s seen on our guidance for Q2 and even our mobile transactions business, we will grow year on year. And then in PNC we previously talked about a number of mobile design wins and in most of them are ramp now but the one that we are still expecting to ramp in the second half of the year is the sensor hub so they are probably the big things in the second half of the year and on top of the 6% to 12% growth regarding with Q2, I am reasonably confident at this point that we should be okay for at least 5% to 6% growth.

Unidentified Company Representative

Do we have any more questions from the audience, yes?

Unidentified Analyst

[Question Inaudible]

Peter Kelly

Well I'll let Kurt talk a little bit about automotive but what it really comes down during the end is that the quality of your designers and your IP and your technology. In ID which has been driving a very significant part of our growth, which is kind of a huge market share already. in PMC again it was specific technology that we developed over the past years and I think one of the issues and one of the let’s say the diamonds that private equity guide, the one they took as private was, we just have masses of really great technology and we have over 6000 patent groups and the issue for the company was really just how quickly we bring these products to market and I think we demonstrated over the last three years that, we can bring them to a market but it’s really based on technology and on existing term.

Kurt Sievers

I think indeed the existing precision thing which relates to the signals you mean is exactly the trick. So let me give you an example of the car mobilizer that used to be a business which we stopped back in 95 driven by insurance companies, a five dollar business, so there's some silicon in the key and there's some silicon in the car, they talk to each other and then you unlock or lock the entry management. Now that used to be five dollars, we enriching that by a lot more functionality, passless keyless entry or even now have a key which has an NFC interface such that a key can talk to the Smartphone etc. So we use, leverage our existing precision of leadership and drive the bond value, so we put more silicon into a given application by allowing more use cases and more value to consumers and that in the end drives the fare. And the same holds true in car radio again, we've see all tons of hybrid radios, so you all have an AM/FM receiver in your car, now increasingly you have next to the AM/FM receiver not instead of but next to it, you have an (inaudible) or a HD radio receiver, and that sits next to each other. So the silicon value is actually staggering up, it's not that one thing replaces the old one but is actually building on the old one and that drives our share, building and leveraging our sticky precisions which we've built earlier driven by innovation. In the end it's of course all about innovation.

Unidentified Analyst

[Question Inaudible]

Unidentified company representative

Yes, the question was how quickly can we get standard products back on track and if we don't get it on track would we be willing to sell it. We believe we can get it back on track in the second half of the year. I don’t think it’s appropriate for me to say yes or no, we'd sell it, but the reality is you know if you look at our history, we sold, we sold the baseline business to a subsidy, we sold sound solutions, we with any of our businesses not just standard products to the extent that they don't drive a value for the shareholders, we'd eliminate them from the portfolio.

Unidentified Analyst

[Question Inaudible]

Unidentified company representative

So the question is disty inventories and would disties be willing to take more inventory in the second half. Our disty inventory runs about 2.4 months, its run that way for about three years, except for one quarter, we think, holding a healthy level of inventory in the distribution is good and we think that level is 2.4, so we have no intention to increase that. We manage it very carefully. Its 2.4 overall for the company, does move a little bit by business unit but we think inventory levels are okay.

Unidentified analyst

Setting aside the backend issues that the team has had in Standard Products your ST business is a proxy for the overall industry. I guess the question there, are you starting to pick, are you starting to see the level of demand in orders for your products starting to pick up as we're closer to the seasonal second half up tick and second question has the level of price competitiveness within that segment started to abate.

Unidentified company representative

I don't believe we've seen anything significant above the normal seasonal pattern that you would see, so I think we're still to some extent bouncing along the bottom, pricing is again not particularly good, not particularly bad. Unfortunately I don't have any good news to give anymore.

Unidentified analyst

Okay and then my last question. You recently completed a 500 million unsecured note transaction, does the refinancing action change your expense outlook, or do you still expect roughly about a 195 million in expenses this year.

Unidentified company representative

Yes, we just refinanced 750 million, three and three quarters which were unsecured debt which we're very pleased with. Yes it is I previously guided a 195 million and probably a closer number for the full year would be a 185. And that compares with 307 in 2011 and 265 in 2012 so our interest costs have come down pretty substantially and we will continue all the time to come down.

Unidentified Analyst

Solid job by the team, well Peter, Kurt, I want to thank you very much for joining us this morning.

Unidentified company representative

Thanks Alan.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: NXP Semiconductors Management Hosts JPMorgan 41st Annual Global Technology, Media and Telecom (Transcript)
This Transcript
All Transcripts