NXP Semiconductors NV (NXPI) Richard L. Clemmer on Q2 2016 Results - Earnings Call Transcript

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NXP Semiconductors NV (NASDAQ:NXPI)

Q2 2016 Earnings Call

July 28, 2016 8:00 am ET

Executives

Jeff Palmer - Vice President-Investor Relations

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

Daniel Durn - Chief Financial Officer & Executive Vice President

Analysts

John William Pitzer - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Matt Diamond - Deutsche Bank Securities, Inc.

Stacy Aaron Rasgon - Sanford C. Bernstein & Co. LLC

William Stein - SunTrust Robinson Humphrey, Inc.

Toshiya Hari - Goldman Sachs & Co.

Craig M. Hettenbach - Morgan Stanley & Co. LLC

C.J. Muse - Evercore ISI

Christopher Caso - CLSA Americas LLC

Ambrish Srivastava - BMO Capital Markets (United States)

Blayne Curtis - Barclays Capital, Inc.

Matthew D. Ramsay - Canaccord Genuity, Inc.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Operator

Good day, ladies and gentlemen, and welcome to the NXP Semiconductors Second Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. Jeff Palmer, Vice President of Investor Relations. Sir, you may begin.

Jeff Palmer - Vice President-Investor Relations

Thank you, Trea, and good morning to everyone. Welcome to the NXP Semiconductors' second quarter 2016 earnings conference call. With me on the call today is Rick Clemmer, NXP's President and CEO, and Dan Durn, our CFO.

If you've not obtained a copy of our second quarter 2016 earnings press release, it can be found at our company website under the Investor Relations section at nxp.com. Additionally, we have posted on our Investor Relations website a supplemental earnings summary presentation and a document of our historical financials to assist in your modeling efforts. Included in this supplemental presentation and the historical financial model is additional information providing insight into the combined adjusted revenue for NXP and Freescale. This unaudited non-GAAP information has been prepared for comparative purposes only and provides historical revenue of each of the company's adjusted for divestitures. Please be aware of the disclosures associated and detailed in both documents.

This call is being recorded today and will be available for replay from our corporate website. Our call today will include forward-looking statements that involve risks and uncertainties that could cause NXP's results to differ materially from management's current expectations. These risks and uncertainties include, but are not limited to, statements regarding the macroeconomic impact on specific end markets in which we operate, the sale of new and existing products, and our expectations for the financial results for the third quarter of 2016.

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 today.

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, merger-related costs and other charges that are driven primarily by discreet 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 quarter 2016 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.

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

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

Thanks, Jeff. And welcome everyone to our earnings call today. NXP finished Q2 with solid performance. Revenue was up 6% sequentially and most business lines delivering better than planned results. We drove strong earnings growth as a result of positive fall through on the incrementally higher revenue and good operating expense control.

Looking at the specifics, revenue in Q2 was $2.37 billion, an increase of 57% year on year, an increase of just over 6% versus the prior quarter. This was better than the midpoint of our guidance, as the Secure Connected Devices, Secure Interface & Infrastructure and Auto groups, all delivered better than anticipated results.

Looking at the HPMS segment, revenue was $2.01 billion, an increase of 76% year on year and an increase of just over 5% from the prior quarter.

From an operating segment perspective, the results are as follows. In Automotive, revenue was $858 million, up $53 million and 7% sequentially, and slightly better than the midpoint of guidance. Growth in the quarter was driven by growth in all product lines, with particularly strong demand for Auto MCU products. During the quarter, demand was driven by a good cross-section of our major tier 1 customers with some notable acceleration in Japan as we continue to make progress with major local customers. Design win momentum in Automotive market was robust during the quarter. We were awarded a major V2X program with a top three leading global OEM. The solution pools products from all the major areas of our portfolio.

Additionally during the quarter, HELLA announced its plan to adopt NXP's next generation 77 gigahertz radar solution. We are now designed in with 9 of the top 10 tier 1 suppliers for the complete next generation radar solutions, both RF front end and the back end processing engines where we are already the market leader.

And lastly, our infotainment solutions continue to be adopted by major suppliers for next generation programs. We continue to view the global auto market and production rates as generally stable with indications that the global unit production will trend towards 3% in 2016, in line with our growth perspective of 1% to 3% compounded annually through 2019. We see auto demand is stable in all major markets. While we have heard concerns over peaking global SAAR, we reiterate that our growth is primarily a function of content growth. While we cannot ignore the unit production influences on our business, so far we have not seen any material changes.

Turning now to Secure Connected Devices. Revenue was $514 million, up $43 million or 9% sequentially, incrementally above the midpoint of our guidance range. Within our mobile transaction group, we experienced strong seasonal improvements as a result of both our largest smartphone customer as well as good traction on new models from Korean and Chinese OEMs. We are continuing to see the mobile transit unit in China gain traction. As an example, Xiaomi launched a consumer awareness program in the Shenzhen subway system referencing its Mi Pay mobile transit payment solution. OEMs are also noting positive activation rates of the mobile transit app in new phones as well as repeated top-up of mobile prepaid solutions.

Demand for contactless point of sale reader products was in line with expectations, primarily as OEMs continue to deploy readers in support of contactless rollouts in China. In the remainder of that CD business, MCU revenue was flattish as we saw good demand for 32-bit Kinetis MCU and i.MX application processors. But this was offset by the roll-off of legacy 8-bit micros in the semi-custom mobile sensor hub program. We also saw some seasonal rebound in our mobile audio business. The design win momentum for the i.MX family continues to be very robust, especially in the Automotive market for instrument and infotainment clusters.

In mobile transactions, our go-to market strategy of working jointly with Chinese handset OEMs and the transit system operators on mobile transit payment systems continues to progress well, with programs in process across all 10 major cities in China. This effort will take some time but we believe we are enabling a unique capability which is resonating with the consumers.

Now turning to SI&I, our Interface and Communications Infrastructure group. Revenue was $442 million, up $19 million or 4% sequentially, slightly above the midpoint of our guidance range, with two of the three product lines experiencing growth in the quarter. In the Interface group, demand was strong and slightly ahead of plan due to seasonal handset trends, similar to what we saw in the mobile transactions group.

The excess inventory situation in high-speed interface which impacted the company late last year has been cleaned up and we believe our revenue is well aligned with our customers' production levels. I'd like to reiterate that our largest handset customer, while still very important to NXP, only represents a mid single-digit percentage of the total company revenue.

In the RF Power market, revenue increased sequentially but was below plan due to program push-outs in base station markets in China and India. We believe, given the continued unpredictability of the base station supply chain, our visibility more than a quarter out will always be challenged.

In the Digital Networking market, we saw weaker than anticipated demand with the revenue from the service provider, enterprise and smart home end markets all declining and revenue from cloud edge and industrial markets were both flat during the quarter.

As some of you may have seen in the trade press, during the quarter we took actions to right-size the Digital Networking business to align our R&D investments to what we view as the slower growth in the served end markets. We will continue to focus our efforts on areas where our capabilities are aligned with the customer requirement. This continues to be a very good business with high return on investment, attractive profitability and high barriers to entry. We believe we have found a reasonable base from which we can drive profitable growth over the longer term, both in continuing our PowerPC and investing in our ARM-based multi-core products.

Within SIS, demand trends continue to be mixed with revenue coming in at $200 million, down 6% sequentially, in line with our guidance. In the non-China banking card market, much of the unit growth opportunity continues to be low-end contact products. This is an area where our participation has been quite selective given the aggressive pricing and margin pressure our competitor has taken who clearly has a much different profitability requirement.

In China, our leadership position in the contactless dual interface space continues to be strong that we have clearly entered the period of card replacement and incremental demand is expected to be driven by smaller tenders at tier 2 and tier 3 banking institutions.

In eGov, the tenders we highlighted last quarter provided some sequential growth and we were awarded an extension on the German electronic passport program. While a positive change, the eGovernment market continues to be extremely lumpy and hard to predict with any level of accuracy.

Now, turning to Standard Products segment, revenue was $303 million, about $10 million better than the high end of guidance, reflecting an increase of 11% from the prior quarter and a 6% year-on-year decline. We are pleased with the results, especially given our announcement to sell this business that we expect to close in early 2017.

Now, turning to our distribution channel performance. The total months of inventory in the distribution channel held steady at 2.5 months with absolute dollars of inventory increasing $43 million on a sequential basis. Our channel inventory is in good shape and we will continue to target supply at 2.5 months plus or minus a half month.

Also, I want to update you on our private equity investors who became NXP shareholders as a result of the Freescale acquisition, which have liquidated most of their positions. You may recall, when we closed the Freescale merger, the private equity investors owned approximately 65 million shares or about 18% of the NXP shares outstanding. As a result of the recent sales, the private equity investors now own less than 0.5% of the outstanding shares and we are working with them on cleaning up the remaining shares.

In summary, Q2 was a solid quarter with the strong financial performance a positive reflection on the progress towards the goals we laid out at our Analyst Day in April. Given what we view as an end market demand environment which is generally subdued, we will focus on actions we can directly influence and control, including our cost and expense structure.

To date, the merger integration continues to make good progress. The operations team are working well together, synergy capture is on track and beginning to accelerate, portfolio and roadmaps are meshing better than we originally planned. Our sales team are focused on realizing the full potential of the solutions offered from our industry-leading portfolio. We'd like to thank all of our employees for their active participation and the hard work in the progress to date. We know we have more work ahead.

We remain committed and focused to maximizing shareholder value creation. We continue to believe NXP is ideally positioned over the long term to drive profitable growth in excess of our targeted end markets.

Now, I'd like to pass the call to Dan for a review of our financial performance. Dan?

Daniel Durn - Chief Financial Officer & Executive Vice President

Thanks, Rick, and good morning to everyone on today's call.

We delivered good performance in Q2 with the key highlights being: we delivered revenue that was above the midpoint of guidance; we continued solid execution on non-GAAP gross margins; we tightly controlled our operating expenses, resulting in better fall through and stronger non-GAAP operating margin; and when taken together, drove non-GAAP EPS towards the high end of our guidance. We generated excellent cash flow in the quarter and deployed just under $0.5 billion in share repurchases and gross debt reduction.

Turning to the specifics of the quarter. We delivered revenue of $2.37 billion in Q2, up 6% sequentially, and a non-GAAP gross margin of 50%, the third consecutive quarter of 50% or greater non-GAAP gross margin. Within our HPMS segment, revenue was $2.01 billion, up 5% over the previous quarter. Non-GAAP gross margin for the segment was 53.7% and non-GAAP operating margin for the segment was 27%. Within our Standard Products segment, revenue was $303 million, up 11% versus Q1. Non-GAAP gross margin for the segment was 32.7% and non-GAAP operating margin for the segment was 22.8%.

Total NXP non-GAAP operating margin in Q2 was 25.6%, up 230 basis points sequentially and above the midpoint of our guidance. This 230-basis point improvement demonstrates strong progress in driving synergy capture. Interest expense in the quarter was $88 million. Cash paid for income taxes was $18 million and non-controlling interest was $14 million. All of this taken together resulted in total non-GAAP earnings per share of $1.39, or $0.04 better than the midpoint of our guidance. Stock-based compensation, which is not included in our non-GAAP earnings, was $80 million.

Now turning to the balance sheet. Total debt at the end of Q2 was $8.9 billion with a cash balance of $1.34 billion results in net debt of $7.6 billion. During the quarter we redeemed $100 million of our 3.5% senior unsecured notes due in September 2016. Additionally, we refinanced $1.75 billion of our existing bonds and term loans with new senior unsecured notes issued in the quarter.

We exited the quarter with a trailing 12-month adjusted EBITDA of approximately $2.38 billion. A ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q2 was 3.2 times and our non-GAAP interest coverage was 6.9 times. Please note, our net leverage ratio only reflects partial trailing 12-month contribution from Freescale. If we were to assume a full year contribution of Freescale's adjusted EBITDA, the net leverage ratio would have been 2.7 times.

During the quarter, we repurchased 4.3 million shares at a cost of approximately $365 million, or $84.39 per share. This brings our total year-to-date share repurchases to $663 million, or 8.5 million shares at an average price of $78.26.

Turning to working capital, our days of inventory were 107. Receivables were 42 days and payables were 72 days. Taken together, our cash conversion cycle was 76 days. These non-GAAP measures include the assets and liabilities held for sale, as detailed on our balance sheet.

Cash flow from operations was $434 million and net CapEx was $71 million, resulting in a non-GAAP free cash flow of $363 million. Before I turn to our expectations for the third quarter, I would like to highlight the press release we issued last night regarding a new debt financing. We are opportunistically taking advantage of an attractive debt market by adding $500 million to our existing 2021 notes. We will use a portion of the net proceeds to repay the remaining $200 million on our 3.5% senior unsecured notes due in September 2016, with the remaining proceeds to be used for general corporate purposes.

As you have noticed in our Q2 earnings release, starting with the third quarter of 2016, NXP will limit its forward guidance to the following GAAP financial information: revenue, gross profit, operating income, financial income and expense, non-controlling interest, and net cash paid for income taxes. In addition, NXP will limit the non-GAAP financial measures in its forward guidance and subsequent results to: non-GAAP gross profit, non-GAAP operating income, and non-GAAP financial income and expense. These changes are being made to be in compliance with the newly issued recommendations from the SEC concerning the presentation of non-GAAP financial measures.

We currently anticipate Q3 revenue will be in a range of $2.415 billion to $2.515 billion. At the midpoint, we expect revenue to be about $2.465 billion in Q3. We expect the following trends in the business. Auto is expected to be flat to slightly down in the low-single-digit range. Secure Connected Devices is expected to be up in the range of mid-teens to about 20%. Secure Interface & Infrastructure is expected to be up in a range of low- to high-single digits. Secure Identification Solutions is expected to be down in the range of high-single to low-double digits. Standard Products is expected to be up in the range of low- to mid-single digits. We anticipate revenue from manufacturing, corporate and other to be approximately $48 million.

At the midpoint, we expect non-GAAP gross margin to be 50.2% plus or minus 50 basis points. And non-GAAP operating margin to be 27.5% plus or minus 50 basis points. Interest expense will be flat at approximately $88 million. Cash paid for income taxes is expected to be roughly $18 million. Non-controlling interest should be about $15 million. Stock-based compensation should be flat sequentially at about $80 million, which is excluded from our non-GAAP guidance. Lastly, consistent with historical practice to assist you in your modeling efforts, please assume a flat share count.

So in summary, we delivered solid execution in Q2, indicative of how quickly the combined teams are aligning and executing. We delivered better revenue, excellent non-GAAP gross margin and non-GAAP earnings per share ahead of guidance. We continued generating strong free cash flow. Robust cash flow will allow us to continue to fund a consistent and well-balanced capital allocation strategy going forward. In the first half of 2016, we deployed nearly $1 billion in share repurchases and gross debt reduction alone. So continued strong execution in Q2, but the team recognizes there is a significant body of work ahead of us and remains focused on delivering strong execution.

With that, I'd now like to turn the call back to the operator for your questions. Operator?

Question-and-Answer Session

Operator

Certainly. Our first question comes from the line of John Pitzer of Credit Suisse. Your line is now open.

John William Pitzer - Credit Suisse Securities (USA) LLC (Broker)

Yeah, thanks for letting me ask the question. Rick, I wanted to first go to the Auto business. You talked about in your prepared comments having design wins with 9 of the top 10 OEMs for the complete radar solution. Can you help me better understand what the dollar content that would represent? And I guess more importantly, where are we in the ramp of that? And how is that going to look over the next, call it, 12 to 18 months?

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

So, John, I think the key is the design wins. It's a typical Automotive product and the actual ramp of revenue will take place over the next few years. It won't be over the next few quarters. I think the key for us is winning those design wins, ensuring that we offered the best solution. And the architecture of each one of those solutions by each one of the OEMs will be slightly different with some of those having three or four sensors or front ends to go along with the microcontroller. And some of them being as large as double-digit radar sensors to go along with the controller. So the architecture is quite different by each individual customer.

The key for us is being in a position where we can continue to lead from a technical view point and be sure that we are the leader in the design wins to be able to really be pre-eminent position as the volume really begins to ramp over the next few years as the auto companies bring this significant safety item on, to be able to drive assisted driving and improving the safety of driving.

John William Pitzer - Credit Suisse Securities (USA) LLC (Broker)

That's helpful. And then, Rick, for my follow-up, just going back to the SIS business, if you look at the guidance for the September quarter, it implies that the business will be down over 30% year over year. Do you guys feel as though this is approaching a trough? If so, why? And you've always been good about allocating capital to the right businesses in your portfolio. Have you taken cost actions as you think about maybe this TAM not being as large as you would have thought maybe 12 to 18 months ago?

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

So, John, really, I think the important thing about this is this is the security technology that is fundamental for us to be able to drive a secure connected solutions across the board. So the fundamental technology associated with this, we provide across a broad array of portfolio.

Now in addition to that, we have the SIS business itself with the bank cards and the eGovernment side. eGovernment's going to continue to be quite lumpy. We continue to do very well in the China banking card business, but you know that's at a level where it's going to be more of a replacement basis than the growth that we've seen over the last few years associated with it.

For the rest of the market, which is really focused today, they're not worried about the convenience of the consumer. They're focused on the lowest cost solution, which is a contact EMV solution, and we have the competitor there that doesn't seem to have the same profit requirements that we do. So we're being extremely selective in our participation in the market and that's having some dampening effect on our solutions.

We're, obviously, going to be sure that we align our cost with the expectations associated with that, but at the same time we will project our security capability and technology to be able to fan that out broadly across our entire portfolio as we think that's a significant leadership position that we have in being able to drive solutions on a broader basis.

John William Pitzer - Credit Suisse Securities (USA) LLC (Broker)

Thank you.

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

Thanks, John.

Operator

Thank you. Our next question comes from Ross Seymore of Deutsche Bank. Your line is now open.

Matt Diamond - Deutsche Bank Securities, Inc.

Hey, good morning, guys. This is actually Matt Diamond on Ross' behalf. Nice job on the synergies in 2Q as operating margin-wise. Could you give us an update on where we stand in terms of capturing the synergies right now and what's left to be done going forward?

Daniel Durn - Chief Financial Officer & Executive Vice President

Yeah, thanks for the question. I think what we've always said about synergies is watch the operating margin. We want to be measured on an operating margin roadmap that's reflective of synergy capture, as well as operating a disciplined business. What you noticed in the recent quarter Q2 is a 230 basis point sequential improvement in operating margin on a flat gross margin.

And if you look at the midpoint of the guide on an operating margin basis into Q3, 27.5%, you see a 420 basis point uplift in a six-month period, with very little contribution from a gross margin basis. If you roughly think this is a $10 billion business and you're looking at 400 basis points of margin improvement in a two-quarter period, I think it pretty quickly gets you to the map that shows the synergy capture is very, very strongly on track. And we're happy with the profitability uplift that this company's seeing from those efforts.

Matt Diamond - Deutsche Bank Securities, Inc.

Excellent. And on the cash return side, could you update us on the approach to cash returns between now and the Standard Product sale? And how do you plan to balance the cash returns after you hit the planned two times leverage?

Daniel Durn - Chief Financial Officer & Executive Vice President

So I think we'll start with what our capital allocation strategy is. We talked about being very balanced between debt and equity until we get to a two times net leverage position. And so if you think that the proceeds from the sale, just given other debt we have outstanding, needs to be used to primarily repay debt or acquire additional assets to increase the asset base of the company, it pretty much locks us into one side of that equation, addressing the leverage of the company.

I would say we will balance that perspective with a heavier focus in the near term on share repurchase so that by the time we are exiting Q2 next year, you'll see a more balanced approach to share repurchase and debt repurchase based on our capital allocation strategy than just the use of proceeds from the sale of the divested assets would suggest.

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

Yeah, I guess one thing if I could add to that, I think our confidence in being able to close the Standard Products transaction continues to improve with the regulators. And so that gives us a good comfort level of the cash that will be available to us early next year. And so between now and then, we want to be sure that we're opportunistic in doing what's in the best interest of shareholders.

Matt Diamond - Deutsche Bank Securities, Inc.

Excellent. Thanks so much.

Operator

Thank you. Our next question comes from Stacy Rasgon of Bernstein Research. Your line is now open.

Stacy Aaron Rasgon - Sanford C. Bernstein & Co. LLC

Hi, guys. Thanks for taking my questions. First I wanted to ask about the guide for Secure Connected Devices. It's up mid-teens almost to maybe 20%. I think more than half of this business is actually industrial microcontrollers, as well as the mobile payments and everything is in there. Can you give us some feeling for what's driving the strong guide? How much of it is coming from mobile payments versus the broader industrial microcontroller business versus like the handset audio business?

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

So the guide for Q3, Stacy, is strong across the board. It's not really in any particular area. If you look at that that also includes our mobile wallet business which is seasonally strong in Q3 with the rollout of new models associated with it, as well as the momentum that we have with China on the transit side. So that's really the most significant factor associated with the growth is in the mobile wallet side of it.

But even on the microcontroller side, we see good strong growth in Q3 as well. And then actually have seen a little bit of pick-up even in the audio side with some of the design wins that we have. So it's pretty much across the board, Stacy. But the most significant contributing factor associated with it is the mobile wallet growth that will take place, more on a seasonal basis than anything else, as well as the success that we're having in China on the transit basis.

Stacy Aaron Rasgon - Sanford C. Bernstein & Co. LLC

Got it. Thank you. That's helpful. For my follow-up, you bought back more stock in the quarter than I would have thought. Share count was down decently. You bought back even more stock – or for Q2. For going into Q3 you bought back even more stock. I just don't understand why is share count supposed to be flat in Q4; why shouldn't it come down?

Daniel Durn - Chief Financial Officer & Executive Vice President

Yeah. So that's just the standard policy the company has is with respect to guiding share count. Share count in the next quarter is going to be a function of timing of share repurchases in the prior quarter Q2, as well as stock price, dilution calculation and stock option exercising, rather than trying to predict what the share price will be, the number of options that get exercised. It's just a long-standing practice inside of the company to assume share count flat. And then it will be what it'll be based on those un-knowable items next quarter.

Stacy Aaron Rasgon - Sanford C. Bernstein & Co. LLC

Got it. Thank you. That's helpful. Thank you, guys.

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

Thanks, Stacy.

Daniel Durn - Chief Financial Officer & Executive Vice President

Thanks, Stacy.

Operator

Thank you. Our next question comes from William Stein of SunTrust. Your line is now open.

William Stein - SunTrust Robinson Humphrey, Inc.

Great. Thanks. Congratulations on the strong results and outlook. I'm hoping you can give us some update in terms of the regulatory and operational timing effects with regard to the Standard Products sale.

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

Yeah, I think, Will – I think we feel good about the progress we're making on the regulatory basis on the Standard Products transaction. And we talked about the – we actually put out a press release relative to the FTC side of that. So I think we feel good about the progress on the regulatory side. But the long pole in the tent, as we talked about at the time of the announcement, is actually being able to pull the IT systems apart. We're in the process of combining the IT systems of NXP and Freescale. And now at the same time trying to pull out Standard Products which is the most significant share of the actual quantity of units that we ship. So that's really the thing that will be the gating factor relative to the close. And we still anticipate being able to close in first quarter of 2017. But it's not going to be driven as much by the regulatory basis as it will be with our actual separation of the business.

William Stein - SunTrust Robinson Humphrey, Inc.

Helpful. If I can have one follow-up, going back to Automotive for a moment. You spoke before about the success you're having in radar. I'm wondering if the company might have any comment as to traction in Vision and other ADAS solutions.

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

So I guess the one thing that I must not have emphasized enough, Will, on the call was that we had a very significant design win on vehicle to vehicle. And we continue to be really the only company that has gotten the technology design wins in vehicle to vehicle that we believe will be a very fundamental element in a complete autonomous driving solution.

If you look at the auto industry, there's really four levels of autonomous driving with only the last levels being fully autonomous. If you actually get through level three, which is a lot of safety features that assists the driving, we get about 80% of the revenue associated with it. The significant portions of that will be vehicle to vehicle, will include radar, and will include the processing associated with it.

We will be sure that we have the processing capability associated with the Vision side, but we're not going to have the fundamental software logarithms and the capability that one of our competitors does to be able to focus on that, from a Vision side.

So we think that it's really critical that you have all of the capability to make driving safer, including the vehicle to vehicle and radar, in addition to Vision and potentially even lidar associated with it. But the real key for us is being the leader in vehicle to vehicle, the leader in radar, and the leader in the processing that brings it all together for a safer driving experience. And will drive a much more significant growth than just the inherent growth of the Automotive market itself.

William Stein - SunTrust Robinson Humphrey, Inc.

Thanks, Rick.

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

Thanks.

Operator

Thank you. Our next question comes from Toshiya Hari of Goldman Sachs. Your line is now open.

Toshiya Hari - Goldman Sachs & Co.

Hey, guys. Good morning. And congrats on the solid quarter. In your prepared remarks, Rick, you talked a little bit about your traction with the automotive OEMs in Japan. And I was hoping you could elaborate on that comment. Which product groups are you seeing momentum in? And what are some of the factors driving the success?

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

Yeah. I think the key thing is really the beginning to ramp the shipments on MCU design wins that were won several years ago. So that really represents a significant portion of the near-term traction that we see with some of our key customers in Japan. In addition to that, we've been now successful on the remote keyless entry so that we have kind of the last significant auto producer that we have the design win associated with as well, although that's not such a significant near-term revenue contributor.

So I think we continue to make good progress. On the car infotainment side we basically supply virtually all of the major mid- and high-end car radios already, making good progress on our apps processor on i.MX as well as the automotive microcontrollers.

Toshiya Hari - Goldman Sachs & Co.

Great, thank you. And my follow-up is on the inventory situation. You talked a little bit about the channel and how it's healthy. But how would you characterize your own inventory level today?

Daniel Durn - Chief Financial Officer & Executive Vice President

Yeah, so, inventory on the balance sheet is 107 days. It's down 10 days sequentially. And if you unpack the inventory change in the financials there's two components. You get $236 million that gets reclassified as assets held for sale, which will go with the Standard Products business. On a dollar basis, the other mover is a $49 million reduction on a dollar basis of our own inventory. So we're making great progress to our mid-term target of about 100 days by dropping 10 days sequentially, 117 to 107.

Toshiya Hari - Goldman Sachs & Co.

Very helpful. Thank you so much.

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

Thanks.

Operator

Thank you. Our next question comes from Craig Hettenbach of Morgan Stanley. Your line is now open.

Craig M. Hettenbach - Morgan Stanley & Co. LLC

Yes. Thank you. Just wanted to follow up on the comments of the V2X at a top three OEM. Just as you think about the pipeline of potential business and discussions that you have, how that's progressing and how you see the market opportunity shaping up?

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

Well, you know I think the really key thing on V2X is the overall infrastructure requirements associated with it. We also just participated/partnered with the Department of Transportation on the Smart City award where they announced this quarter Columbus as the winner of the Smart City award where they'll get around $50 million of funding from the U.S. government and a related entity, as well as they've raised about $90 million locally. So they'll have $140 million. And one of the key things that they're trying to do is be sure that they have as much safety added to driving municipal vehicles as possible.

So V2X I think is something that will develop over the intermediate term. It's not going to be growing overnight. The key for us is to win these significant design wins and this was one that was extremely significant that had been on the docket for some time and for some various reasons had gotten delayed. And so we're very pleased that we actually were the solution of choice for all of the bidders on this key business. And as they won that it gave us a really solid position to be able to drive that over more of the intermediate term.

The key for us, obviously, is to be sure that we bring the security that's required to make driving, or the automotive, the car itself a secure and safe vehicle, as well as having the connectivity to be able to improve the driving experience itself. And we've chosen to use 802.11p as the standard associated with that because of the speed of transmission and the reduction of latency that makes it a much more safer communication vehicle than the other types of technology that are available.

Craig M. Hettenbach - Morgan Stanley & Co. LLC

Got it. And then just as my follow-up on the comments on i.MX in terms of some of the momentum you're seeing. Can you talk about that opportunity set presently and as you go into next year?

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

This is a business that Jeff and the team have done a really good job of growing. It's grown at double digit really for the last couple years. And we see the opportunity to continue to drive that growth, based on the design wins they have. We're really – they've done a great job of positioning it well on the car dashboard and cluster side. And being able to bring that in with the rest of our Automotive portfolio really puts us in a unique position to bring more of a complete solution to our customers. So the traction we have, a significant share of the traction, is in the Automotive side, although they are making good progress in a number of different areas as well that are more on the general industrial side for future ramp ups over the intermediate term also.

Craig M. Hettenbach - Morgan Stanley & Co. LLC

Got it. Thank you.

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

Thanks.

Operator

Thank you. Our next question comes from C.J. Muse of Evercore. Your line is now open.

C.J. Muse - Evercore ISI

Yeah. Good morning. Thank you for taking my question. I guess first question, trying to understand seasonality going into Q4. And I guess as part of that, Rick, trying to juxtapose your comments in the prepared press release in terms of subdued macro environment and how we should think about progression for you guys as we go through the year end.

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

So it's interesting because this is a new experience for us as well because of the combination of the two companies. It puts us in a different seasonal pattern than what we've been in, in a historic base. If you take the total business and look at it, typically Q4 would have been when you combine the two businesses would actually have been down, where historically it would have been just slightly, for an NXP viewpoint, it gets a little bit more of a decline when we combine it with Freescale. We aren't giving you guidance relative to Q4 and what we would anticipate for Q4, so I want to be very clear with that. But relative to if you look at the last three years, it's the best effect that we have of equating seasonal pattern, you'd be down mid-single digit in Q4 associated with it.

C.J. Muse - Evercore ISI

That's helpful. And then I guess quick question for Dan. I know you don't want to put out operating margin targets or anything like that. But looks like you've taken out about $200 million annualized OpEx. Great job there. Curious if it now gets harder, if you're slicing maybe into a little bit more muscle than fat. And if you can comment on whether the trajectory of cost-down efforts may slow a little bit? Where you're focused? Anything you can share there would be very helpful. Thank you.

Daniel Durn - Chief Financial Officer & Executive Vice President

Sure. So the targets we have out on an overall company basis, post the divestiture of our Standard Products business, is a 31% to 34% operating margin target. And we expect to be in that range on a full-year basis in 2018 and exiting 2017 within that range. And so nothing about what we've seen to date causes us to come off of those long-term targets.

As we think about the near-term footprints in the sand that walk us into that range and into those targets, you'll see big chunks of ground taken in Q2, as evidenced by the results. You'll see a big chunk of ground taken in Q3, as evidenced by the guide. That 420 basis point progression in those two quarters get us a lot of momentum towards the synergy capture. As you get closer to the target range, clearly you'll walk into that range a bit asymptotically. And so you'll see a bit more in the near term, a bit less on a quarterly basis, the rate of capture at the end second half of 2017 and into 2018. That's just the way these types of things progress.

If you look at what we've done, when you compare it to Q1 of 2015 as a starting point, Q2 performance, like you said, suggests about $207 million of synergy capture from an OpEx standpoint on a annualized run rate basis. In Q3, the guide suggests close to $275 million on an annualized basis. And so you can see an incremental $70-ish million being captured into Q3. So we're still taking large chunks of ground. Again, we're focused. We're disciplined. We're driving execution to deliver the synergies, and nothing changes our long-term perspective on those operating margin targets.

Jeff Palmer - Vice President-Investor Relations

Thanks, C.J.

Operator

Thank you.

Jeff Palmer - Vice President-Investor Relations

Operator, we'll take the next question.

Operator

Our next question comes from Chris Caso of CLSA. Your line is now open.

Christopher Caso - CLSA Americas LLC

Yes. Thank you. Just a follow-up question on the Secure ID segment. And I guess the question is how much of the business in that segment is single mode today? And understand that you're choosing not to participate in that segment, but how much could that be a drag on revenue going forward? And, therefore, how close are we to the bottom in that business segment?

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

Well, you kind of have to look at it by regional. You can't really talk about it in total. In China, it's all dual interface. And if you look at rest of the world, it's virtually the majority, very high percentage is contact today. We are making some progress with some of the user experience to actually implement dual interface in the rest of the world. But I think the key thing for us is you heard Dan talk about our lack of growth expectations for the current quarter. And that gives you our basis of what we believe the business is going to do. The fundamental opportunity for us is to take that key capability, the device security, the hardware security, and make that available to a broader array of applications so that we can be able to differentiate our solutions versus anybody else.

So while the business itself is – we're going to continue to be very selective to ensure that we maintain the profitability requirements that we have. While they may be different than our competitor in that market, we're going to be selective. And so we'll see how that plays out over a period of time. But we don't – we're not laying out a significant growth opportunity in that business based on the environment we see from a competitive view point. But again, the fundamental core technology is the key element for us in being able to drive that for broader applications across the total company.

Christopher Caso - CLSA Americas LLC

Okay. As a follow-up question, just if you could give some thoughts on potential for further M&A? Just what your appetite would be at the moment, once, and I guess assuming that that would be the case once you hit your net debt to EBITDA targets? And what would be the criteria that you'd be looking for if you did have that appetite?

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

Well, the thing that we've been very specific about is is we want to ensure that we complete the integration completely before we really consider anything else. I think the industry is definitely in a consolidating mode that we see. It's interesting to think about what alternatives there might be over the intermediate term. We actually like our portfolio quite well. When we get to the position that we feel comfortable with our debt level, we'll look at the alternatives that really give us the best strategic position to be able to fill out our total applications associated with it. So it's clearly premature to talk about what areas that would be because our focus is really ensuring that we drive the integration of the complete business. But our focus is on maximizing shareholder value. And in whichever form that takes place that will be the key for us is how we can maximize shareholder value.

Christopher Caso - CLSA Americas LLC

Thank you.

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

Thanks.

Operator

Thank you. Our next question comes from Ambrish Srivastava of Bank of Montreal. Your line is now open.

Ambrish Srivastava - BMO Capital Markets (United States)

Hi. Thank you, Rick, I just had one question. Back to the SIS. You've talked about the dynamics which seem to be not typical end markets or competitive environments we have been accustomed to seeing NXP operate in. So I get the current quarter guide. And this business with $1 billion business now is going to be lower than $800 million. But longer term, what's the right way to think about the growth trajectory for this segment? I think you've laid out flat- to low single digit long-term grower. Thank you.

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

We did. And so we don't anticipate significant growth in that. It'd be very low single-digit growth based on what we see in the current environment. And that really depends on the competitive environment. If it continues to be as unreasonable as it is, where we have a competitor that doesn't have the same kind of profit expectations, then we'll continue not to participate in some of that market because we don't want to take our profitability down. We feel a responsibility to deliver a reasonable shareholder return for our investors. And if our competition doesn't have that same requirement, then we'll let them do that business and we won't participate in it.

Ambrish Srivastava - BMO Capital Markets (United States)

Okay. So we should expect the same discipline that you have shown over the last several years? Thank you.

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

Absolutely.

Operator

Thank you. Our next question comes from Blayne Curtis of Barclays. Your line is now open.

Blayne Curtis - Barclays Capital, Inc.

Hey, guys. Thanks for taking my question. Rick, could you just talk about USB Type-C and your visibility into that ramp next year as a driver?

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

Yeah. So, Blayne, it's interesting because it really fits in well with our high-speed interface portfolio when you think about the power side as well as the ability to move data at very rapid rate. So we feel very good about the developments associated with it and the engagements we have with customers and the technical solutions that we can offer. It obviously has more work to be done. We're not delivering a lot of revenue today, but we would anticipate that this is a significant opportunity for us next year to be able to continue to maintain our leadership in the high-speed interface area, including Type-C.

Jeff Palmer - Vice President-Investor Relations

Yeah. And Blayne, remember from our Analyst Day that we guided the Secure Interface & Infrastructure group to be up mid to high single digits on a three-year CAGR basis. So we're not moving off of that view. And USB Type-C would be one of those tailwinds that provides some growth there.

Blayne Curtis - Barclays Capital, Inc.

Thanks. And I just want to circle back on a prior radar question. Can you just talk about – obviously, it's far out, but when it does happen can you just talk about the number of radars, as you're starting to see some early interest in even wins per cars. The content per car I know it's ranged quite a lot. When you do see the initial revenue, will it be just one or are you going to see multiple units per car?

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

There's no question we'll see multiple units in most of the architecture that's provided associated with it, whether that's one to three, which is kind of in the level one implementation where it's really low level driver assistance, or level three, which is right at the edge of autonomous driving, is making driving as safe as possible, which would have about three to six radars per vehicle, or completely autonomous driving which could have up to 20 radar sensors per vehicle. So if you look at the value per vehicle, that's anywhere from $15 to $35 on the level one implementation, to be up to $35 to $60 on the level three implementation and $100 to $200 on the full autonomous driving solution. So that's the reason we're so focused on ensuring that we have a disproportionate market share and a true leadership position in radar as this develops and can be able to maintain that overall key contributing factor to providing safer driving.

Jeff Palmer - Vice President-Investor Relations

And maybe if I could just add, Rick. If you remember back on our Analyst Day, Blayne, Kurt and Bob Conrad both also highlighted their view of ADAS as a percentage of overall Automotive revenue over the next couple of years and we said that by 2019, we think ADAS products can make up to 10% of our overall Automotive revenue. Clearly, it's going to be an area of very fast growth inside of that organization.

Blayne Curtis - Barclays Capital, Inc.

Thanks, Jeff.

Operator

Thank you. Our next question comes from Matt Ramsay of Canaccord Genuity. Your line is now open.

Matthew D. Ramsay - Canaccord Genuity, Inc.

Thank you very much. Good morning. I wanted to ask another question, I think a longer term one on the Automotive business. It occurs to me that many folks are maybe a bit more focused on the inferencing processor or the application processor in future autonomous driving deployment. And one of the things that's impressed me about the NXP BlueBox platform is both being integrated but also separating the different functions, particularly savings (56:05). Maybe, Rick, you could talk a little bit about the competitive dynamics in that key application processor versus some other areas there that you guys might have less competition and more differentiation? And then second, how is the BlueBox platform designed to integrate processors from maybe other vendors that might have share in that one socket? Thanks.

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

So, thanks. The BlueBox for us is an integrated solution to really bring our complete computing horsepower to be able to provide a platform for our Automotive customers to really be able to do the work that's required to improve their autonomous driving experience. We'll take that fundamental capability. And, obviously, as they get to volume production, they will tailor that and we'll have a more focused processing to be able to meet the requirements associated with it. The real advantage for us on the BlueBox is being able to engage with the car companies themselves, show them the fundamental capability, and work with them on driving the autonomous driving experience and continue to provide the computing leadership position that we do today across the overall car.

We're not in a position where we want to be focused on big GPU artificial intelligence processing. That's not our niche. That's not what we're going to really provide capability. We want to be focused on the high-volume computing that's really in support of allowing safer driving. Artificial intelligence systems are not what we're focused on and not where we're putting our investment associated with it. And they're a long ways away from being able to be implemented in a car today, provided or implemented in production today.

Operator

Thank you. And our last question will come from Tore Svanberg of Stifel. Your line is now open.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Yes, thank you. Dan, I was hoping you'd elaborate a little bit more on the debt that you just announced last night, the $500 million. Looks like you only need about $200 million here initially. So just wondering why you raised as much as you did, especially considering you'll get some cash from the Standard Product sale here relatively soon.

Daniel Durn - Chief Financial Officer & Executive Vice President

So it's opportunistically taking advantage of the debt markets, doing a tag on offering to an existing tranche that's out there. You're right. There's $200 million maturity in the near term. But as you think about keeping that cash on the balance sheet and general corporate purposes and how we're focused on managing equity versus debt, the company is going to take a balanced approach. And so it was just taking advantage of an attractive market opportunity and then being smart about how we manage the balance sheet going forward knowing what we know is going to happen in Q1.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

Great. And my follow-up is for Rick. Rick, as related to the RF Power business, you talk about some delays and push-outs in base station wins. So I was just hoping if you could elaborate a little bit on that, if this is a very short-term delay or is this little bit more extensive than that?

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

You tell me. I mean, the RF Power business is one that we have tire tracks on our back from trying to misjudge. We had heard feedback from our customers that there were some opportunities in China and India relative to the implementation of next-generation base stations. It looks like those have been pushed out some based on budgetary constraints or implementations, and so we've seen a slowing that's actually taken place associated with that. So we clearly don't have visibility beyond basically the next quarter in that business.

The bottom line is it's a nice profitable business but the ability to predict the growth associated with that business is non-existent. And the truth is our customers have the same issue with their base station customers. So it's not like they're doing something unique to make it worse. It's just a bad supply chain and hard to predict. But the bottom line is it does drive a nice profitability. We have a true leadership position and we want to be sure that we can continue to maintain that. We are focused on diversifying it into other areas beyond base stations and making progress in that but it's still relatively small share of the total revenue.

Tore Svanberg - Stifel, Nicolaus & Co., Inc.

That's helpful. Thank you, guys.

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

Thanks, Tore.

Operator

Thank you. And at this time, I would like to turn the call over to Mr. Rick Clemmer for any closing remarks.

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

Thank you very much, operator. Thank you for joining us today. Obviously, we want to ensure that we continue to focus on realizing the full potential of our combination. With the good progress that we've achieved to date, but still a lot more work to do as we focus on maximizing shareholder value resulting from the combination. Thank you very much for your support.

Daniel Durn - Chief Financial Officer & Executive Vice President

Thank you, everyone.

Operator

Ladies and gentlemen, thank you for your participation on today's conference. This concludes your program. You may now disconnect. Everyone, have a great day.

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