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NXP Semiconductors NV (NASDAQ:NXPI)

Q3 2013 Earnings Call

October 24, 2013 8:00 am ET

Executives

Jeff Palmer - Vice President of Investor Relations

Richard L. Clemmer - Chief Executive Officer, President and Executive Director

Peter Kelly - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

John W. Pitzer - Crédit Suisse AG, Research Division

Vivek Arya - BofA Merrill Lynch, Research Division

Ross Seymore - Deutsche Bank AG, Research Division

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

James Covello - Goldman Sachs Group Inc., Research Division

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Blayne Curtis - Barclays Capital, Research Division

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

Craig Hettenbach - Morgan Stanley, Research Division

Mark Lipacis - Jefferies LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter NXP's Semiconductors NV Earnings Conference Call. My name is Stephanie and I'll be coordinator today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Mr. Jeff Palmer, Vice President of Investor Relations. Please go ahead, sir.

Jeff Palmer

Thank you, Stephanie. Good morning, everyone. Welcome to the NXP Semiconductors third quarter 2013 earnings call. With me on the call today is Rick Clemmer, NXP's President and CEO; as well as Peter Kelly, our CFO. If you've not obtained a copy of our third quarter 2013 earnings press release, it can be found in our company website under the Investor Relations section at nxp.com. Additionally, we have posted on our Investors Relations website 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.

This call will include forward-looking statements that involve risks and uncertainties that 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 of 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, stock-based compensation, 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 second -- third quarter 2013 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 following upcoming investor conferences during the fourth quarter: The Crédit Suisse TMT conference on December 4 in Scottsdale, Arizona; The Bank of America Merrill Lynch High Yield Conference on December 4, in Boca Raton, Florida.

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

Richard L. Clemmer

Thanks Jeff, and welcome everyone to our earnings call today. Overall, we are very pleased with our performance in Q3. Revenue was slightly below the midpoint of our guidance as a result of some slight weakness in the mobile market. We achieved historic record revenue levels in nearly all of our HPMS business units, with 15% year-on-year growth, a continued reflection of design win momentum we have previously highlighted. We delivered earnings at the high-end of our guidance with incrementally better profitability in both our HPMS and Standard Products segment. We continue to control our expenses in line with our intermediate targets. Taken together, the improvement in profitability and expense control directly translated into very robust cash flow during the quarter.

In terms of overall demand, our performance by the end market materialized very much as we had originally projected other than the slight weakness in the mobile market.

Moving to the details for Q3. We delivered product revenue of $1.21 billion, a 5% sequential increase and an 8% increase from the comparable year ago period, as Standard Products revenue declines year-on-year slightly impacted the strong HPMS growth. Total NXP revenue in Q3 was $1.25 billion a 5% sequential increase and nearly a 7% increase from the comparable year ago period. On a segment basis, total HPMS revenue was $922 million, up 5% sequentially, but up nearly 15% versus the year-ago period. Overall, our HPMS segment delivered excellent results and we achieved record revenue levels in 3 out of 4 of our focused end markets, with ID continuing to perform at close to the record levels delivered in the previous quarter.

Turning to the performance by HPMS end market, revenue in our ID business was in line with guidance at $329 million, down 3% sequentially, but still up nearly 20% versus the year-ago period. Our core ID business was flat sequentially and continues to represent over 80% of overall ID revenue. This was in line with our expectations due to good demand for secured government ID products. Design momentum for our core ID products continues to be very strong across all verticals. Our emerging ID business declined in the quarter as the expected result of lower mobile transaction revenue. We continue to see encouraging design win momentum at all our customers, but do not anticipate our mobile transaction business to meaningfully re-accelerate until sometime in mid-2014.

Turning to our Automotive business, revenue was above guidance at $261 million, up 3% sequentially and up 9% versus the year-ago period. The business delivered much better than seasonal growth as demand was positive across all product categories, and continued to experience the ramp of the new entertainment and keyless entry programs, we experienced a particular strength in our in-vehicle networking products.

I'm also pleased to announce that during the quarter, we sampled the first device in our so-called road link family of software-defined radio platforms, enabling car-to-car and car-to-infrastructure communications. Our road link products had been successfully tested in multiple real-world field trials, within Europe, the U.S. and Asia, with initial production anticipated in late 2015. This is an exciting new market opportunity for NXP, which some researchers believe could be one of the most impactful safety features since the widespread deployment of safety belts.

Within our Portable & Computing business, revenue was $130 million, up 23% sequentially, and up 9% versus the same period a year ago. Both our High-speed Interface and Microcontroller businesses were both up more than 20% during the quarter. While we saw strong growth from the new and existing program ramps in the mobile market, growth was slightly less than what we had originally projected. Within the broad-based non mobile business, growth was actually better than our original expectation.

Looking at our Industrial & Infrastructure business, revenue was $202 million, up 12% sequentially, and up 18% versus the year-ago period. This was essentially in line with our expectations. Performance in the quarter was very good across the majority of the portfolio. Our performance RF and small signal RF devices for base station applications experienced a compound growth in excess of 20% sequentially, and up more than 15% year-on-year as new programs we have highlighted in the past continue to ramp.

Our Power and Lighting business was up nearly 15% in the quarter, and up more than 20% versus the year-ago period, primarily as a result of strong solid-state lighting product growth. A significant highlight in the quarter was very strong growth within our emerging products group, which includes the Maximus smart mobile audio amplifier. The group posted growth of better than 35% during the quarter, primarily as the result of ramps with several leading smartphone manufacturers.

Turning to the Standard Products segment, revenue was $291 million, up 4% sequentially, but down 8% versus the same period a year ago, which was slightly weaker than expected as a result of weaker than projected demand for mobile OEMs. We are very pleased to confirm the growth in operating margin improvements, as we had projected, with the team making good progress towards operating the business within our long-term target objectives.

Moving on to the channel performance. Absolute inventory dollars and distribution increased versus the prior quarter. On a dollar basis, sales into distribution were slightly higher than sales out, which was up 6%. The total months of supply with our distribution channel was again at 2.2 months, flat sequentially and below our longer-term metric of 2.4 to 2.6 months.

In summary, our performance in Q3 was very good. We're delivering strong broad-based revenue growth. We continue to realize the benefits of solid design win traction and share gains across multiple end markets. From an operational perspective, we're tightly controlling our expenses in support of our long-term EBIT targets. Our model is delivering very positive operating leverage as a result of excellent margin in our HPMS segment and the initial improvements in our Standard Products segment. We continue to take active measures to optimize our capital structure and reduce our quarterly interest expense. We believe we will continue to deliver top line growth better than the industry peers, improving the operating profitability that's driving solid bottom line earnings growth.

And I'll turn the call over to Peter to review the financials in more detail.

Peter Kelly

Thank you, Rick, and good morning, to everyone on today's call. Overall, we delivered a very good quarter with the main highlights being increased revenues, improved gross margins in both HPMS and Standard Products segments, reduced interest expense, the continued improvement of our capital structure as we completed a debt transaction which converted highest cost, secure debt to lower-cost fixed-rate unsecured debt, stronger-than-expected non-GAAP earnings, and as a result, extremely robust free cash flow.

Moving on to the specifics of the quarter, top line revenue was $1.249 billion, up 5.1% versus the second quarter and just below the midpoint of our guidance. We generated $585 million in non-GAAP gross profit or 46.8% non-GAAP gross margin, which was $45 million better sequentially. Total non-GAAP operating expense was $300 million or 24% of revenue, and in line with our plan. We are operating solidly within our expense model, reflecting the positive efforts of all of our business unit managers. And we continue to invest in R&D as a priority. All in all, this resulted in non-GAAP operating profits of $285 million, or 22.8%, about 80 basis points better than our guidance, and 130 basis points higher versus Q2, demonstrating positive operating leverage.

Let me now turn to the segment performance. Within our HPMS segment revenue was $922 million, up 5% versus the prior period. A result of weaker-than-expected demand from our mobile customers. HPMS non-GAAP gross profit was $499 million or 54.1%, a 30 basis-point improvement. And HPMS non-GAAP operating profit was $251 million, up about $13 million from the prior quarter or 27.2% operating margin, again, solidly within our long-range model.

In our Standard Products segment, revenue was $291 million, up 3.6% sequentially, and again a little weaker than expected in revenues from our mobile customers. Standard Products segment non-GAAP gross profit improved to $85 million or 29.2% gross margin, and this was a 540 basis point sequential improvement successfully flowing through the P&L. Standard Products segment non-GAAP operating profit was $43 million, or 14.8% operating margin. Interest expense was $44 million, in line with our expectations, and noncontrolling interest was $17 million with cash taxes at $5 million.

Taken together, our non-GAAP earnings per share was $0.85, about $0.03 better than the midpoint of our guidance, primarily through the result of improved gross profit and slightly lower operating expenses, even with a slightly weaker revenue. Stock-based compensation, which is not included in our non-GAAP earnings, was $20 million in the quarter.

Now I'd like to turn to the changes in our cash and debt. Our total debt at the end of the third quarter was $3.7 billion, up $360 million from the second quarter. During the quarter, we completed a $500 million unsecured note transaction. And the new bond carries a fixed interest of 3.5% and is due in 2016. The sequential increase of our gross debt is a result of the timing between the issuance of the new bond and subsequent payoff of the $422 million 2018, 9.75% senior secured note, which has since occurred on October 15. Cash at the end of the quarter was $941 million, up $372 million sequentially, a result of the previously mentioned debt payoff timing.

We exited the quarter with net debt of the $2.76 billion, a reduction of $56 million, and a trailing 12-month adjusted EBITDA of approximately $1.3 billion, resulting in a net debt of trailing 12-month adjusted EBITDA leverage ratio of 2.15x. I'm confident we'll be below our 2x leverage ratio during the fourth quarter, which is a significant milestone for the company. We bought back 4.3 million shares at a cost of approximately $159 million, or a weighted cost of about $37.26 per share. Consistent with our prior comments, we believe our shares offer a compelling value and we'll continue to be opportunistically active in our repurchase program.

Turning to working capital metrics. Total days of inventory on the balance sheet were 101, a decrease of 3 days. Excluding pre-bills for the restructure of our fabs in Europe, our effective DIO was 88 days. Receivable days were 39, up 1 day, while payable days were 73, consistent with the prior quarter, resulting in a cash conversion cycle of 67 days, a 2-day improvement from the second quarter.

Cash flow from operations was $298 million, and net CapEx $54 million, resulting in the very robust $244 million in free cash flow, or approximately 20% free cash flow margin, a new historic level for the company. Now I'd like to provide our outlook for the fourth quarter. Influencing our outlook again this quarter is our continued success with customers, resulting in strong demand for our HPMS products across multiple end markets. We currently anticipate product revenue to be in the range of down 2% to up 4% sequentially, reflecting better than historic seasonal trends.

At the midpoint of this range, up 1% sequentially, we anticipate the following trends, all on a percentage point basis: Within our HPMS segments, we expect identification revenue to be flat-ish. Within our Auto business, we expect revenue to be up in the low single-digit range, similar to last quarter, and relatively strong given normal seasonality. Within Infrastructure & Industrial business, we expect revenue to be flat-ish, and within our Portable & Computing business, we expect revenue to be up in the mid-teens percent as our new mobile programs continue to ramp.

And finally, within our Standard Products segment, we anticipate revenue will be flat to slightly down. We anticipate the combination of manufacturing and corporate and others to be about $34 million. And taken together, total NXP revenue should be in the range of approximately $1.22 billion $1.29 billion, or $1.27 billion (sic) [$1.265 billion] at the midpoint, up about 1% sequentially. We expect non-GAAP gross profit to be in a range of 48.6% to 50%, or just over 49% at the midpoint, and operating expenses to be about $312 million.

At the midpoint of our guidance, we anticipate about 100 basis points negative impact from a one-off crisis tax that the Dutch government is expected to institute on Dutch employee compensation. This translates in a non-GAAP operating profit in the range of $288 million to $332 million, or about 25% operating margin at the midpoint, 24% at the low end and 26% at the high end. Our progress to improving our margin profile has been quite good and consistent with the planned actions we've highlighted over the recent quarters.

Interest expense on our debt should be approximately $40 million. Cash taxes roughly $30 million. And noncontrolling interest expense should be about $17 million. Stock-based compensation should be about $27 million, which is excluded from our guidance. And diluted share count should be about 256 million shares depending on share price fluctuations. Taken together, this translates into non-GAAP earnings per share in a range of $0.85 to $1.02 or $0.95 per share at the midpoint of our guidance.

In summary, a strong set of third quarter results coupled with a better than seasonal outlook for the fourth quarter. Our revenue growth continues to outpace the broader market, and we continue to generate significant cash and expect to be below our debt to 2x EBITDA leverage target during the fourth quarter.

Before I open it up for questions, Jeff has just passed me a note and I may have read out the midpoint of our revenue guidance incorrectly. The midpoint of the guidance is $1.265 billion. So with that, I'd now like to turn it back to the operator for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of John Pitzer with Crédit Suisse.

John W. Pitzer - Crédit Suisse AG, Research Division

I think this is either the fifth or sixth consecutive quarter of outperforming the industry, so congrats on that. I guess, Rick, can you drill in a little bit on the mobility side of the business? Because, clearly, there's parts of that business that I'm assuming saw a pretty decent growth in the calendar third quarter, but you also talked about the weakness in that space being the reason why you were a little bit shy of the midpoint. I'm just kind of curious if you can just remind us how big mobile is within the total mix and kind of the pieces within that. And more importantly, when you look at the strong sequential guide you're giving for the Portable & Computing space, have you taken into account continued further weakness kind of in the legacy mobile? Or how does that play out?

Richard L. Clemmer

So -- thanks, John. So first off, I think it's important to realize that for -- mobile for us is growing with the design wins we've had in smartphones. So it was a year or so ago, it was kind of high single-digit, now it's up to kind of in the low-teens, I would say. But that's across all of our business segments including Standard Products and logic, transistors and diodes, which changes quite a bit as they changed their design. So at one point in time they had up to 20 ESD diodes in some of the -- or 25 ESD diodes in some of smartphones. And as they do the redesigns, that comes down. So that's a changing factor. What we did see was healthy growth across all of our customers in the smartphone space, but just not quite as healthy as what we originally anticipated. The one benefit we had was the ramp up of design wins that we talked about, specifically in the sister [ph] hub and continued success in the interface part of the smartphone market that we talked about. So those are really the key bases for us and, yes, obviously we've taken into account the best estimates that we can of our customer expectations although, as we all know, in the Mobile business, that bounces around a quite a bit. But we've reflected what we believe to be the best projections associated with that. And I think it's just a good testament to the continued design win success that we've had at the leading smartphone customers.

John W. Pitzer - Crédit Suisse AG, Research Division

Rick, that's really helpful. Then maybe a follow-up for Peter. Peter, when you think about gross margins and incremental gross margins, the fall-through has been pretty impressive over the last 5 or 6 quarters. From current levels, how should I think about fall-through on the incremental gross margin line? And then I'll use your words of "extremely robust free cash flow." Especially given where your valuation is relative to your peers, how do we think about uses of all that cash you're generating?

Peter Kelly

Well, let me, I guess, go back with that. Yes, I guess, we've been saying for a while that we think we'll generate very significant amounts of cash. And we've also said that once we get below our targeted 2x trailing 12 months EBITDA, we would decide exactly what was the best use of cash for our shareholders, whether it would be to go out and buy the company's -- buy back stock or institute a dividend. I think right now, we would love to acquire and grow the business, but that's one thing to do that and being able to do that, and having companies available is not always -- it's not always at the same time. So right now, I think what we're doing is -- and you saw it in the third quarter, with our stock price trading the way it is, we'll go out and buy back stock, we bought back quite a few shares in the third quarter, 4.3 million. And as I said, with the stock price trading the way it is, I would expect to continue to do that. In terms of margin fall-through, we think it's very, very important to continue to invest in the business. So I'm kind of pleased at where our profitability is in -- or where it's projected to be in Q4, and obviously, we've had this kind of one-off impact of the Dutch crisis tax. But I'll expect to continue to invest in R&D with the incremental margin.

Operator

Your next question comes from the line Vivek Arya with Bank of America Merrill Lynch.

Vivek Arya - BofA Merrill Lynch, Research Division

My first question is, your ID business has been a solid grower and a differentiator, the challenge I have, and I believe a lot of investors have, is we don't know how to model growth in that business because there are very few macro or competitive indicators. So my question is, as we look forward, should we expect ID to grow at its historical rates, is this a 10% grower, or is this a 15% grower? How should we just conceptually think about modeling growth in this very important business of yours?

Richard L. Clemmer

I think it's one of our key priorities and with that, we're very -- as we talked about this year, we were very convinced of double-digit growth, if you look at Q3 with basically 20% growth year-over-year, kind of demonstrates the robust strength that we have in that business across a broad array of portfolios, everything from transit ticketing to eGov with passports and ID cards and mobile transactions. And so the strength we have associated with that is the weakness as far as projections associated with it from your perspective, because it does go into transit ticketing. It does go into RF ID tags. It does go into passports, which are very project-oriented [ph], and up-and-down associated with it. The one area that kind of grows significantly is certainly on the mobile transactions with the design wins we have. So I guess the best way to say is we feel very comfortable that we'll grow at least 50% faster than the market in that space, and it will be double-digit growth. But as far as giving you some indices to really be able to model off of, I don't think we can really to that because, frankly, it's just not that easy a business to do the projections associated with. I think that there's no reason to believe that it'll be significantly different than what we've been able to accomplish. Although clearly, on a project orientation basis, it'll have some ups and downs associated with it. But we continue to feel extremely good about our ID business and the success we will have with new handset models going forward on mobile transactions. Although to be fair, it'll kind of be mid to next -- mid-next year to next fall before we see a significant ramp up in additional design wins in the mobile transaction space.

Vivek Arya - BofA Merrill Lynch, Research Division

And on the Standard Products business, very good improvement in profitability, it think in the past you have said that it is not core to the business. But it does provide tax and scale benefits and it's obviously quite accretive. What strategic or financial options are available to reduce sort of the drag on growth from the Standard Products segment? And what will be the decision criteria as you look at those options?

Richard L. Clemmer

Well, the drag on growth, it's -- we're more focused on profitability in Standard Products than we are growth. We've always said that we'll try to grow in line with the market in Standard Products and not outgrow the market. That our HPMS growth of growing at least 50% faster than the market because of the significant share of our total business that HPMS is. Standard Products is 1/5 or so of our total business. So it's not a significant factor relative to the growth, but -- and we want to really focus on ensuring we deliver -- continue to deliver industry-leading profit margins in Standard Products as far as [ph] the Standard Products business competitors as opposed to driving growth. So it'll continue to be a factor in our overall growth. I think it was particularly impactful in Q3 because it was negative and took our 15% year-over-year growth in HPMS down to single digit in total when you combine it with Standard Products. But our plan is, is that we want to continue to grow at least 50% faster than the market, but our Standard Products business basically grow in line with the market as we really continue to focus on profitability of that business as opposed to top line revenue.

Peter Kelly

And Standard Products is clearly, probably the best Standard Products business in the world. So there's a lot of good in that business.

Vivek Arya - BofA Merrill Lynch, Research Division

Okay. Got it. And just one last one. As a clarification, Peter, maybe how should we model interest expense for next year? And if I could just include on one IP monetization, I think in the past you have mentioned that as an objective. How should we model that going forward? Any progress on that?

Peter Kelly

I think a couple of things, one is interest probably $145 million to $150 million next year. And IP monetization, we've spoken about, they've been about 100 basis points of our profitability.

Vivek Arya - BofA Merrill Lynch, Research Division

For next year?

Richard L. Clemmer

We've said that after we got to that level, we would continue to expect it, on an annual basis, to contribute around 100 basis points of profitability, although it will be somewhat different on a quarter-by-quarter basis depending on the project and relationships that are signed up on an individual quarter basis. But then on the full-year basis, we would expect about 100 basis points.

Operator

Your next question comes from the line of Ross Seymore with Deutsche Bank.

Ross Seymore - Deutsche Bank AG, Research Division

When I look at what we've heard from the semi industry quarter-to-date, almost everybody else is guiding about 5 points below what the Street had expected, and it seems to imply something had changed over the last month or so. So the question I'm asking for you guys, it's obviously not affecting you, but, Rick, when you look at the overall state of the industry, what have you seen from either a booking's perspective, or just a general demand perspective that can give us a little bit of clue on what's going on? Because clearly, you're seeing something that's slightly different than most of your peers.

Richard L. Clemmer

Yes, Ross, I think -- again, I think the key factor for us is the ramp up of the design wins that we've talked about previously and the ability to support the customer engagements that we've been able to drive associated with that. I think that's really the key factor for us that allows us to be better than seasonal in Q4. Typically, Q4 would be down a little bit. So this gives us the ability to really be better than seasonal. I think that, overall, general demand, we don't still see a robust recovery.

We've talked about -- we don't think our book-to-bill is very effective way to measure the status of the business, but it's certainly not anything to write home about. The general environment continues to be spotty, but it's based on the design wins that we have and the ramp-up of those design wins and the customer engagements that give us the comfort relative to being able to do the projected revenues for Q4. So I think it really does confirm, once again, the success we've had with the design wins and the differentiated basis that allows us relative to the rest of our analog mixed-signal peers.

Ross Seymore - Deutsche Bank AG, Research Division

Great. And then, as my follow-up question, one for Peter. You guys did a great job in the operating margin side, so -- and one clarification in the near term and then one slightly longer-term aspect to the question. The 25% at the midpoint, you said that includes about 1 point tax -- crisis tax. Any sort of information on that would be helpful. The clarification is, does this quarter include IP revenues that you had expected to hit? And then, the longer-term question is, what should we expect from an operating margin target perspective now that you have attained more or less the guidance that you had hoped to hit in the fourth quarter of this year?

Peter Kelly

Okay. So Q4 does include the Dutch crisis tax. So the Dutch -- it has to pass the first house of parliament in the Netherlands, and we won't know about that till December. But the Dutch government have decided to levy a one-off tax on the compensation of any employees that make more than EUR 150,000 a year, and that includes compensation from option grants, bonuses, salaries, et cetera. And you -- I think you will have seen that ASML and a bunch of other Dutch companies also have put it into their guidance. So it's not absolutely certain yet. We think it's likely, but there is a possibility it won't pass. And then, if it doesn't, it'll obviously not be an issue. Q4 did include some IP. So we're pretty much on track where we said we would be. And then, I have to confess, I'd really like to enjoy Q4 before I start to kind of get into trying to guide 2014.

Operator

Your next question comes from the line of Chris Caso with Susquehanna Financial Group.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

I wondered if you could comment a little bit on the I&I group. Obviously, it's been running at pretty strong year-over-year growth rates. And I guess, specifically, within the wireless infrastructure business, we've heard some mixed commentary from some of your peers on that. What's your expectations for that business? And I guess, maybe you could help us to understand a little bit of the lumpiness of that business.

Richard L. Clemmer

I think we have tire tracks on our back from trying to project the growth associated with the High Performance RF business. So we have been a little more cautious than some other semiconductor suppliers into that space. Clearly, we saw growth in Q3. We think that, that will roll off a little bit in Q4 just with kind of normal seasonality. But one of the key factors for us has really been the increased design wins in HPRF as well. So if you look at where we've gone on 2G, where we're 20%, 25% market share to 3G where we were just under 50% and at -- with 4G or LTE where the design wins we believe that we've won are more than half the market, maybe as much as 60% of the market, with the engagements with the new customers that we haven't had in the past at the same level. So that's really what drives our fundamental growth in HPRF. But it's still a lumpy business. It's just not easy to do projections. What we've tried to do is streamline our process flows to be sure that we have some raw material inventory in place so that we can handle the flex up. But yet if the orders don't materialize not have quite as much financial impact on the downside. But it will continue to be a lumpy business. We feel good about our position and where we are, but it's certainly not a smooth business that is what most of you guys would like to see on just a smooth upward trend.

Christopher Caso - Susquehanna Financial Group, LLLP, Research Division

Okay. And just as a follow-up -- and obviously, as you say, it's really too early for you guys to be providing any commentary on 2014. But given that we're coming off of a better-than-seasonal Q4 already, is there anything that you see now that would influence you to -- that we should take into consideration when we are doing our -- obviously, we'll have to do our estimates for Q1. Anything we should take into consideration as we look into Q1 that may cause it to be a little better, a little worse than normal seasonality, realizing that the Q1 is typically one of your stronger quarters?

Richard L. Clemmer

Actually, that's not correct. Our Q1 is usually down kind of mid-single digit and on a seasonal basis, and we would expect that to kind of be -- we wouldn't see anything that would change that perspective associated with it. We're not giving you any projections for Q1. We talked about we still want to, at least, grow -- outgrow the market by 50% for the full year. But typically, on a seasonal basis, our Q1 is down kind of mid-single digit, and then we see a little bit of an uptick in Q2, the strongest quarter being Q3. And typically, Q4 is down slightly. Although, this year, we don't see the same downward pressure that we typically do. But clearly, Q1 is typically a down quarter for us on a seasonal basis. And we'll give you more guidance on that when we do the Q1 outlook in 90 days.

Operator

Your next question comes from the line of James Covello with Goldman Sachs.

James Covello - Goldman Sachs Group Inc., Research Division

Congratulations on the continued outperformance, fundamentally it's just extraordinary. Haven't seen anything like it in a long time in this industry. I guess the first question is sort of on your longer-term portfolio mix. You guys have been so consistent in your message that you would continue to take higher growth potential even if it's slightly lower gross margin business and you'll take as much of it as you can get and you'll balance out the margin and the revenue. Is there a limit to how much of that you would take in terms of what you think a healthy long-term mix for your portfolio is? Or will you continue to take all of that, that you can get?

Richard L. Clemmer

So, Jim, we have a conviction to really move forward in a basis where we want to confirm that we can outgrow the market. And the key for us is that the business at a bottom line EBIT level is still on a positive basis around that 25% basis where it's creating significant shareholder value, we're going to do everything we can to do that. So we have a very strong position that we want to be as focused as we can on driving the top line growth so long as it's a profitable business for us. We're not going to get in businesses that are in mid-teens or upper-teens from an operating income basis. But on an ongoing basis, if it delivers to the bottom line results, which most of those do because of the significant volume nature associated with it, then we want to be very focused on taking as much of it as we can. [indiscernible] about the gross margin, but focused on the EBIT margin.

James Covello - Goldman Sachs Group Inc., Research Division

Right. And so, I guess, I'll just stick with -- on that topic for my follow-up, which is just that there is no concern there about getting too much exposure to one segment, you'll just -- you feel like you can manage that over time?

Richard L. Clemmer

Jim, there's always a concern that you have to be somewhat balanced. I think one of the strengths of our portfolio is the different businesses that we play in, so that we can have different segments that contribute at different times. And so, I actually believe that the portfolio we have gives us more of a strength to weather through some of the typical semiconductor cyclicality better than some of our peers that are much more focused.

Operator

The next question comes from the line of Steve Smigie with Raymond James.

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

I was hoping you could comment on your emerging ID business. And specifically, I was hoping you could talk about NFC in context of the fact that it seems like in certain ways you're doing better than expected. Maybe Broadcom can't do an integrated chip and the performance doesn't seem that good on some stuff they put out there, which is on the positive versus on the negative side. It seems like Apple maybe is going more of the path of low-energy Bluetooth. And so, I was hoping you could talk in terms of context around that. And also just any update on the opportunity for cyber security and anti-counterfeit for 2014.

Richard L. Clemmer

Yes. So I think we're just as convinced on the opportunity associated with NFC across the board as we ever have been. We see the strength associated with that. We see that, as that takes place, the ease-of-use, which is really what it's about, and the security that it offers in protecting the mobile wallet as being key contributing factors. So I think we still feel just as good about NFC as we did when we invented it a decade ago. And clearly, the basis that it's taken longer to materialize has been a cost to us. But I think that if you look at the design wins we have across the board, we feel very comfortable about the continued movement. And as we look at financial transactions, we think that ease-of-use and the security that comes from having the secure element as well that makes the banks and the credit card companies feel much better about supporting the mobile transactions is really the key associated with the growth. But I think -- we think that the growth -- the fundamental growth associated with it is just as strong as we've seen. Most of the industry is still projecting that 1/2 of the smartphones by the year 2015 will have -- be NFC-enabled and we certainly concur with that and believe that the design win momentum we have would support that.

Jeff Palmer

And, Steve, I'll just add too -- we actually view Bluetooth low-energy as more of a complementary technology to NFC, not a competitive technology and we could probably take it offline and go in more detail. But we don't see that as an immediate threat to NFC. It's a different type of technology. And then, Rick, on his commentary on cyber security authentication efforts?

Richard L. Clemmer

Thanks. I'm sorry, I forgot. So I think we actually feel just as good as we have about the cyber security opportunity. Clearly, it's an area that's in its infancy. The one good thing is that Google actually at a conference announced that we're the supplier of their -- gosh, I forgot what they call it.

Jeff Palmer

Nivi [ph].

Richard L. Clemmer

Nivi [ph]. A product that will actually store everyone's individual passwords and give -- it will actually do authentication of the access to the cloud that they've rolled out on the enterprise side. So they talked about our product being the key component that supports that. We hadn't been able to talk about that previously. But since they've talked about it at their conference, we can talk about the design win we have there. So I think we're still in the infancy phase associated with that, but we're quite excited about the unique security capability that we have in being able to provide a very compelling value proposition and providing a secure access to the cloud and being able to fight cyber security. So as far as next year, it's not going to be huge in moving the bottom line, but it's really about seeding the market and being able to provide the foundation for the significant opportunity that exists in the intermediate-term future.

Jeff Palmer

Do you have a follow-up, by any chance?

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Yes, sure. And just a question for Peter on use of cash. It seems that Q4, you're likely going to hit your target there on 2x trailing EBITDA. And when you gave the list of stuff -- you talked about a bunch of stuff, possible acquisitions, buying back stock, but I didn't really hear you comment on more debt pay-down. I'm just wondering if that's just assumed and so that's why you didn't mention it. But is that still the plan -- also keep paying down debt?

Peter Kelly

Well, I think if the stock price is where it is, I'll buy back stock. I think that will be a better use of funds for the shareholders. I mean if the stock price goes to $100, maybe -- which I guess is arguably where it should be, it would be a different discussion. But when we're trading $37, I'm going to be buying back stock.

Richard L. Clemmer

Yes. With a significant discount to our peer trading, clearly, our focus will be on repurchasing shares as frankly you saw in Q3 with the strong repurchase that we did and -- but that will be balanced off with the opportunity to continue to pay down debt if that's a good return for our shareholders or looking at growth through acquisitions that we really haven't put much effort and attention on previously. So obviously, there would be boundary conditions around anything we would do, which would have to be significantly accretive. We wouldn't want it to be huge, so we'd want to be able to be back to within our 2x annualized EBITDA basis within 3 to 5 quarters or so. So we're not talking about huge acquisitions. But if they can drive significant shareholder value appreciation then, clearly, we'll put more attention and focus on that than we have previously when we've been maniacally focused on driving down our debt to the 2x annualized EBITDA up to now.

Peter Kelly

Yes. I mean, our valuation is very frustrating. I mean, we're growing like crazy, which you'd expect to drive a premium fee. But instead, we have a fee that's not a small discount, a huge discount to everyone else's. It's unbelievably frustrating, really. But I guess it is a great buying opportunity, so...

Richard L. Clemmer

And now, with private equity being below 24% of our shareholding, some of the excuses associated with private equity ownership at least gets minimized associated with it.

Operator

Your next question comes from the line of Blayne Curtis with Barclays.

Blayne Curtis - Barclays Capital, Research Division

Peter, I apologize if this is obvious. But I just wanted to clarify. The crisis tax, you said 100 basis point impact, is that to non-GAAP margin? And if you could just talk about -- you actually were able to guide higher even despite OpEx creeping up. Could you just talk about why that's moving up?

Peter Kelly

Yes, OpEx is moving up because of the crisis tax.

Blayne Curtis - Barclays Capital, Research Division

Easy enough, but I just wanted to confirm. So does that come back down, the one-time charge?

Peter Kelly

Well, I guess, the way to look at it, we don't -- if we didn't have that one-time charge, OpEx would not be going up. I think, as we move forward and you look at your models, I'd look at our OpEx more as a percent of revenue than a flat dollar base. We're going to continue to invest in R&D to drive growth in the business.

Blayne Curtis - Barclays Capital, Research Division

Okay. But just -- it's a one-time -- I mean, I'm not familiar with the Netherlands rules, right? It's a one-time charge?

Peter Kelly

It's absolutely one-time, yes. Well, that's what the Dutch government have told us to do.

Blayne Curtis - Barclays Capital, Research Division

Perfect. And then, this was hit on a bit before...

Richard L. Clemmer

[indiscernible] we could do the same thing next year. It's something that they've chosen to do relative to trying to address their tax -- their deficit issues in the Netherlands.

Peter Kelly

And it's extremely frustrating. And all my peers at the other Dutch companies are just as equally frustrated with both the timing and the magnitude of this.

Blayne Curtis - Barclays Capital, Research Division

I can imagine. The second question just on the NFC radio and the handsets. I think that's been pretty much written out of your story given the well-known share loss. It actually seems like you've gained a little content back on Note 3 [ph] with your new part. I'm just kind of curious how you view the handset opportunity. I think the expectations are very low. Do you see any opportunities particularly as maybe some of the share shifts on the connectivity side for you to do a little bit better there?

Richard L. Clemmer

Well, we've talked about this. First off, I think we should be clear. We have over 200 SKUs that we've won design wins associated with, while maybe our competition's won maybe 10 to 15 or something. So we still continue to be in a very strong leadership position associated with NFC solutions on a broad-based customer. The well-known Galaxy IV design win loss that we had clearly has been a significant factor on our revenue, but we're in very aggressively on Galaxy V and in support of any other design wins that are required to able to drive this. So we plan to continue to be a leader in the mobile payment space and feel very confident with the next generation of technology that's being deployed with our customers now that we're getting extremely good feedback about the performance associated with it and our ability to be successful in continuing to drive that leadership basis. So I wouldn't say that we backed off of that or anything, it clearly -- we have the well-known design win loss that had an impact now, but it continues to be focus area for us. But again, it will have some nominal impact on our total revenue because it's only about 5% of total revenue. But it's very important for us to be able to maintain the momentum in our -- the security aspects of ID business because our real focus is on the secure element and ensuring that we can drive the success there, where we have a unique technology lead and a unique technology position. While the NFC radio itself is frankly just another radio, although we have some good technology there as well. But our real focus is on the security side and how we can drive the secure element on a broad basis to be able to meet the requirements of the credit card companies and the banks, as they plan to continue to focus on rolling out mobile payments.

Operator

Your next question comes from the line of William Stein with SunTrust.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

I'm hoping we can talk about the margin ramp in Standard Products. It's a very big improvement this quarter. And we know from earlier in the year there were some quality issues there and some mix issues. Are those all addressed, or are there still -- is there still a meaningful upside in that segment to margins?

Richard L. Clemmer

Well, we've talked about that we had those -- we've made most of the operational improvements back a quarter or so ago, and it just takes a quarter to flow through the inventory valuation on our P&L. So I think we're performing fairly well associated with the operational performance in Standard Products. I think we have to continue to be very focused on which parts of the markets we engage in to be sure that we can drive the improvement in bottom line results that we're focused on. Clearly, even with the improvements that we had this quarter, there's some significant improvements to get back into the operating range that we would like to operate that business. So we would expect to continue to see improvements as we go forward associated with being more focused on the product mix and ability to drive the scale of that business. But the operational performance that we talked about -- the quality issues, which were roughly 1/3 of the decline we had earlier in the year, we think those are pretty well behind us. That's not to say that something couldn't happen again. But clearly, the ones that we talked about at that point in time are pretty much behind us now.

William Stein - SunTrust Robinson Humphrey, Inc., Research Division

That's very helpful. And as a follow-up, regarding the use of cash, it sounds like certainly not a change in your comments, but M&A is maybe a little bit more prominent in the discussion. And I'm wondering if you can talk about the characterization of the kinds of transactions you might want to look at in terms of sizing, margin, accretion, growth, those sorts of things?

Richard L. Clemmer

So I think we have to be real careful associated with that. I mean, we're going to do what's in the best interest of our shareholders. That's our focus. And we've said that we believe getting below 2x annualized EBITDA, where we were at least at a metric of investment grade, not that we'll be investment grade without the ratings agencies going through a cycle or 2 associated with it, but we felt like that it was imperative that we had to focus on driving our debt down to be below 2x annualized EBITDA. As we achieve that, then we'd have more flexibility to focus on other alternatives to be able to drive shareholder value that includes M&A, but not limited to M&A. And in fact, at the current stock prices, share repurchases are clearly a very meaningful part of that overall strategy in how we continue to focus on driving shareholder value. As far as M&A itself, clearly, it would have to be something that would fit within our product portfolio, that would either strengthen our portfolio or be a close adjacency associated with it, that would have to drive significant accretion and would have to be within the boundary conditions that I talked about. We wouldn't want to go out and take our net debt position where we will be significantly above the 2x for more than 3 to 5 quarters. So I think that's kind of as much as we're willing to say about kind of what we would consider. But our focus is on driving shareholder value, which M&A would only be a piece of that, not the predominant piece associated with it.

Operator

Your next question comes from the line of Vijay Rakesh with Sterne Agee.

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

On the -- I'm just wondering, as you look at 2013 exiting, what is your foundry mix and what do you see it exiting 2014? And on gross margin line, obviously, it's picked up nicely. But as you look at 2014 with the fab multi-sourcing, et cetera, what's the -- what are the puts and takes in the gross margin line there?

Peter Kelly

I would have to check the numbers, but I think we -- in 2013 we're in about 35% foundry, and it probably goes up to like 40%, 45% in 2014. I'm not sure I quite caught your -- I'm not sure I quite understood you at the second part of your question on the puts and takes of our...

Jeff Palmer

The impact on gross margin, I think, is what...

Peter Kelly

I'm not sure I kind of want to define it that specifically. I think, overall, we don't see any big disadvantage or any big advantage. I think it's more around the -- our margins are driven more by the products we build than the manufacturing costs.

Richard L. Clemmer

Clearly, the product mix will be much more significant than what share of our business we do with the foundry partners versus our joint venture versus our internal manufacturing facility. So that would be clearly a much more significant factor on our gross margin. It's not just -- when you look at the portfolio of products we have, a little bit of a mix change in any individual quarter can have a pretty significant swing on our overall gross margin as we change that mix. So it's not just a continued straight line basis of trying to do that. So I think we still feel good about the improvements, and we still feel good about the targets that we've established. But it really won't be as much a factor relative to how much of our manufacturing is sourced from foundry partners versus internally manufactured.

Vijay R. Rakesh - Sterne Agee & Leach Inc., Research Division

On the ID side, identification side, it obviously looks like the EMV card should be a pretty decent opportunity for you. Can you talk about that a little bit?

Richard L. Clemmer

We -- I think Visa has made a proclamation that by -- is it third quarter of 2015?

Jeff Palmer

Yes...

Richard L. Clemmer

Third quarter of 2015, they'll change the rates significantly if that's not implemented. So I think that's really kind of, at least, a line that appears to be drawn in the sand at this point in time. If you look at the implementation in Canada, it's already in works and accelerating associated with it. And really, the rest of the world, besides North America, which has this propensity towards mag stripe as being the transaction standard associated with it. If we actually look at some of the movements outside of -- in Asia and the developing countries, where we see contactless being a very significant factor associated with it -- has more of an impact than EMV card deployment in North America itself -- or in U.S. itself.

Operator

Your next question comes from the line of Craig Hettenbach with Morgan Stanley.

Craig Hettenbach - Morgan Stanley, Research Division

Just following on the strength in Portable in Computing, any early insight into next year in terms of how you think about the new product pipeline and design activity in that segment?

Richard L. Clemmer

We're continuing on -- I think we're -- as it was a significant factor in changing our business, we felt like we had to be more specific with some of the design win targets that we had. I think it's more just run a course of the business, continuing to win those design wins, the [indiscernible] generation of products and it's part of more a normal standard business. So the success that we've had with -- on the interface side and then moving into the sensor hub, we plan on continuing to focus on driving that on a broad basis across the board to customers including those smartphone customers in China. But not any specific design wins that we want to talk about as far as growth for 2015. But we still feel very comfortable that we can outgrow the industry by at least 50%.

Jeff Palmer

Craig, do you have a follow-up?

Craig Hettenbach - Morgan Stanley, Research Division

I do. On the capital allocation front, you mentioned M&A. Can you just talk through maybe some of the parameters in terms of things you'd look for and then also margin profile that we should keep in mind if M&A does come up?

Jeff Palmer

I think, Craig, Rick highlighted that before that we're probably not going to go into a lot of detail about that. As long as it creates significant shareholder value, we'd be interested in looking. But I think -- I don't think we're going to rehash that question again. Do you have another question you'd like to ask?

Craig Hettenbach - Morgan Stanley, Research Division

No, that was it.

Jeff Palmer

Great.

Richard L. Clemmer

I guess the only thing I would add to that is we would not anticipate anything that will reduce our margin targets associated with it. So it would have to be something that, with the implementation, would fall within the business profile that we've established.

Operator

The final questions will come from the line of Mark Lipacis with Jefferies.

Mark Lipacis - Jefferies LLC, Research Division

Rick, I believe you said that sell in was slightly higher than sell out. Do you think -- what would you attribute that to? Is that attributed to seasonal patterns? Is that what normally happens at this time of the year? Or is there -- is this a cyclical-driven dynamic?

Richard L. Clemmer

So, Mark, I don't think that we saw anything that was -- that is really an indicator as far as our distribution business. I would say that it was more of a continued very tight control over inventories, and I don't think that you should read too much into the increase in sell-in in the mix. I mean, the key factor -- the key metric in trying to continue to evaluate our distribution business is that the inventory levels remain below what we would expect to be the standard levels and the -- and our distribution partners continue to be very tight, focused on turns and earns in trying to keep their inventory levels to a minimum to be sure that they deliver the returns that they can. So I don't think you should take anything other than the factor that the inventory levels continue to be at lower than what we would expect on a historic basis, and we haven't seen any real uptick associated with that, which I think is really the key message we're trying to communicate, Mark.

Mark Lipacis - Jefferies LLC, Research Division

That's very helpful. Last question for Peter. If Q1 is normally a seasonally weaker quarter, can you give us any indication about what would you expect your own utilization rates to be? And would we expect inventories to be a source of cash in Q4?

Peter Kelly

I'm just trying to think -- from a cash flow perspective, historically, Q4 is a good cash flow quarter and Q1 is a weaker cash flow quarter. But I cannot -- pretty much beyond that, I'm not sure I could really say much and we don't forecast utilization.

Jeff Palmer

Well, everyone, thank you very much for your time today. Rick, do you have any final words?

Richard L. Clemmer

Yes. I think -- thanks for all of your favorable comments relative to our results in third quarter and the projections for Q4. I think it continues to be a strong testament to the results of what the team's been able to put in place and deliver. And our focus is continued on how we focus on driving shareholder value increase, which -- again, we're not trying to signal M&A as being the primary basis, but only one factor in the toolkit to be able to drive increased shareholder value. So with the increase in earnings that we've been able to generate and actually as we look forward with a very strong continued earnings per share growth, we feel very comfortable with the position and pleased with the performance. And thanks to all of the NXPeers [ph] that may be listening to the call as well for their good progress and their contributions relative to our results. So thanks a lot.

Jeff Palmer

Thank you, everyone, and we'll speak with you shortly. Thank you. Bye now.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.

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