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.

Ross Seymore - Deutsche Bank AG, Research Division Vivek Arya - BofA Merrill Lynch, Research Division Blayne Curtis - Barclays Capital, Research Division James V. Covello - Goldman Sachs Group Inc., Research Division John William Pitzer - Crédit Suisse AG, Research Division Christopher J.

Muse - Evercore ISI, Research Division Christopher Caso - Susquehanna Financial Group, LLLP, Research Division Ambrish Srivastava - BMO Capital Markets Equity Research William Stein - SunTrust Robinson Humphrey, Inc., Research Division Craig Hettenbach - Morgan Stanley, Research Division Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division Rajvindra S.

Gill - Needham & Company, LLC, Research Division Tore Svanberg - Stifel, Nicolaus & Company, Incorporated, Research Division Christopher Rolland - FBR Capital Markets & Co., Research Division.

Good day, ladies and gentlemen, and welcome to the Q1 2015 NXP Semiconductors Earnings Conference Call. My name is Caroline, and I'm your operator for today. [Operator Instructions] Now I would like to hand over to Mr. Jeff Palmer, Vice President of Investor Relations. Please proceed, sir..

Great. Thank you, Caroline, and good morning, everyone. Welcome to the NXP Semiconductors First Quarter 2015 Earnings Call. With me on the call today is Rick Clemmer, NXP's President and CEO; and Peter Kelly, NXP's CFO.

If you've not obtained a copy of our first quarter 2015 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 Investor Relations website a supplemental earnings summary presentation and a document of our historical financials to assist you in your modeling efforts. This call is being recorded and will be available for replay on our corporate website.

This call will include forward-looking statements that involve risks and uncertainties that could cause NXP's results to differ materially from management's current expectations.

The risks and uncertainties include, but are not limited to, statements regarding the macroeconomic impact on specific end markets in which we operate, the sale of new and existing products and our expectations for financial results for the second quarter of 2015.

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'll 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 first quarter 2015 press release, which will be furnished to the SEC on Form 6-K and is available on NXP's website, again, at the Investor Relations site at nxp.com.

Before we start the call today, I'd like to highlight a couple of investor events we'll be attending during the quarter. On May 12, we'll attend the Jefferies TMT Conference in Miami. On May 19, we'll be attending the JP Morgan TMT Conference in Boston. And on June 2, we'll be attending the BofA Merrill Lynch TMT Conference in San Francisco.

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

Rick?.

Thanks, Jeff, and welcome, everyone, to our earnings call today. Our first quarter results were quite strong, with improved product mix driving better profitability, which resulted in earnings per share at the high end of our guidance range. Specifically, NXP delivered total revenue of $1.47 billion, up nearly 18% from the year-ago period.

We are down about 5% sequentially, in line with our guidance range despite the strengthening of the U.S. dollar during the quarter. Our product mix was better than planned, allowing us to deliver significantly better profitability. Turning to our segment performance. HPMS revenue was $1.1 billion, up 21% on year-on-year and down about 6% sequentially.

From a product line perspective, within Automotive, revenue was $302 million, up about 9% from the same period a year ago and up just over 3% sequentially, driven by the continued demand for entertainment and in-vehicle networking products.

In Secure Connected Devices, revenue was $289 million, up 61% from the same period in the prior year, but down 17% sequentially, driven by the anticipated seasonality in the smartphone, tablet and emerging wearables market, as weaker demand for our mobile audio products designed into Android smartphones for the emerging market.

In the Secure Interfaces and Power group, revenue was $291 million, up 44% from the same period in the prior year, but down 5% sequentially. During the quarter, we continued to see accelerating traction for our RF small signal, our smart antenna solutions.

This was offset by stronger-than-anticipated headwinds in our Lighting business as the LED lighting market continues to rapidly commoditize. Revenue in Secure Identification Solutions was $222 million, down 13% from the same period in the prior year and flat sequentially.

During the quarter, we began to see incremental improvement in the bankcard market, with positive trends in both China and the U.S. Finally, turning to the Standard Products segment. Revenue was $323 million, up 9% compared to the year-ago period and down about 2% from the prior quarter. Turning now to our distribution channel performance.

Total sales into distribution were down 12%, with sales out of distribution also down 12%. The total months of inventory in the distribution channel were 2.5 months, in line with our long-term targets. Absolute dollars of inventory in the channel declined about 5% on a sequential basis.

Before turning the call over to Peter, I'd like to provide you with an update on the announced merger between NXP and Freescale Semiconductor. We believe, when completed, this merger will create a true High Performance Mixed Signal powerhouse.

We are making good progress on the integration planning of the 2 companies and are working through the regulatory process. We continue to expect the merger closing in the second half of 2015. We are very pleased with the significant integration planning activity taking place, which should assure a successful day 1 execution of the merger.

As we progress through the process, I want to personally thank all the NXP and Freescale employees for their continued focus, diligence and openness to change. Overshadowed by the Freescale merger announcement, we also completed 2 smaller, strategic tuck-in acquisitions during the quarter.

First, we completed the acquisition of Quintic Bluetooth LE -- low power energy assets, helping to round out our low-power RF connectivity portfolio focused on the requirements for the smarter world applications as well as helping NXP to continue to engage and more fully support our Chinese customers.

Secondly, we completed the acquisition of Athena, an extremely well-respected security software vendor, which will complement our industry-leading SmartMX Java card operating system.

These 2 technology acquisitions taken, together with the transformative Freescale merger, will help NXP continue to deliver on its vision for secure connections for a smarter world. In summary, Q1 results were very good. We continue to deliver strong earnings growth and at the same time, invest in the business to fuel future growth.

We continue to expand our true industry leadership, focused on delivering differentiated product solutions, which will create significant value for our customers and shareholders. We continue to improve our profitability and have confidence in our medium-term growth targets.

Now I'd like to turn the call over to Peter to discuss the financial details of the quarter..

Auto is expected to be up in the low single-digit range; Secure Identification Solutions is expected to be up in the mid-teens range; Secure Connected Devices is expected to be down in the low single-digit range; Secure Interface and Power is expected to be up in the low single-digit range; Standard Products is expected to be flat sequentially; and we anticipate revenue from the combination of manufacturing and Corporate & Other to be approximately $38 million.

Taken together, total NXP revenue should be in the range of $1.48 billion to $1.53 billion or about $1.51 billion at the midpoint. We expect non-GAAP gross profit to be about 48.5%, and operating expenses are expected to be up $6 million to $333 million.

This translates into a non-GAAP operating profit in the range of $387 million to $414 million or about 26.5% operating margin at the midpoint. Interest expense will be approximately $34 million. Cash taxes are expected to be roughly $11 million, and noncontrolling interest should be around $21 million.

Stock-based comp should be about $37 million, which is excluded from our guidance, and the diluted share count is assumed to be 243 million shares. Taken together, this translates into non-GAAP earnings per share in the range of $1.33 to $1.43 or $1.38 per share at the midpoint of our guidance.

Finally, I'd like to give you some color on our full-year revenue estimate. At the Analyst Day, we spoke about our plans to grow revenue well in excess of the market on a compound annual basis. Given the upcoming merger with Freescale, we thought it's important to keep the focus on our performance as a stand-alone company.

So from now through the close, we plan to give you an update on our expected revenue performance for the full year of 2015. As for our latest forecast, we expect total revenue for the company for the full year of 2015 to be in the range of $6.2 billion to $6.3 billion.

We think our quarterly profile will be slightly different in 2015 compared to previous years and would expect our revenue to grow 5% to 7% sequentially in each of the third and the fourth quarters. With that, I'd like to turn it back to the operator for your questions..

[Operator Instructions] Stand by for your first question, which comes from the line of Ross Seymore..

The first question is for Rick. Can you just talk about what you're seeing in the general market? It looks like your guidance is solid for the second quarter but slightly below normal seasonality.

Can you just talk about what you're seeing from a bookings perspective, whether by end market, graphically, however you think would be most instructive for us?.

Yes. So I would say that, Ross, we kind of continue to see the market in general in line with what we've talked about, okay, but not great. Certainly not booming, but we see the market okay. A little different than maybe some of our peers have talked about.

I think we all are faced with some implications of currency, which clearly had a couple of points impact on us and will. So I think currency is an overall impact that, for us, we're naturally hedged at the bottom line, so it doesn't have a bottom line impact on earnings, but it does have an impact on sales.

But for the general market, I think we'd see things pretty good. Clearly, if you get in the handset or the smartphone space, there are the haves and the have-nots, some doing better than others. And so it kind of depends on where you're positioned. Clearly, we talked about banking beginning to look a little stronger.

So some of the areas that we're to exposed to are not really in the typical semiconductor market, I would say. But the general semiconductor market we see is okay. Not great, certainly not declining. A little better than what maybe some of our peers have talked about, but we certainly have a different mix of products than most of our peers..

I guess as my follow-up, in the SIS segment, you're finally looking for that snapback that we've been waiting for and getting closer to that 3-year CAGR of 10% you talked about -- or at least sequentially improving like that.

Can you talk a little bit about what's driving that mid-teens guidance and how sustainable that is going forward?.

Well, I think we've always talked about this whole space is somewhat lumpy. As we rolled the China contactless banking, clearly, we had a significant uptick back a couple of years ago with the -- just filling the supply chain. We've been, as we talked about, a little more cautious on the ramp-up of U.S. banking than a lot of people have talked about.

But I think we are beginning to see some positive effects.

We are beginning to see some real movement in the contactless portion as well, where now some of the leading suppliers like AMEX now is focused on dual interface, the contactless card actually for their high-end users to be able to drive that ease-of-use and convenience, which is going to be the standard, basically, in China now.

But all parts of it, including e-government, banking and transit, are all up. So we're seeing a broad-based general improvement, which is, as we've talked about all along, we have confidence in. We just think the market in that space is going to continue to be somewhat lumpy.

But on the general overall basis, over the 3-year period of time, we feel very comfortable with that growth rate that we've talked about..

The next question we have comes from the line of Vivek Arya from Bank of America Merrill Lynch..

Rick, I'm curious on the status of divesting your Auto's power amplifier business and the filing for the regulatory approval. I think in the last filing, you were planning to file for the regulatory approval on April 30, which is today. So I'm just wondering what the key milestones are from here..

Well, I think that filing that we talked about on April 30, we've actually already done, so we're a little bit ahead of schedule on that, if I'm not mistaken. So I think that's progressing quite well. Actually in dialogue with some of the governments relative to that. So I think we're making good progress on the filings.

On -- all of it is -- a requirement associated with giving the regulatory approval is selling our RF power business because the 2 combined are obviously very large. We have now received interest levels from quite a number of entities.

We've actually narrowed that down and have entered a process to try to get to an agreement here over the next couple of months. So we're making good progress and on track, as I would say, to be able to support the requirements that we need to able to get the regulatory approval associated with the merger with Freescale..

Got it. And as my follow-up, Peter, can you give us some more color on what's prompting this change in seasonality? I believe you mentioned seasonality could be different. And in general, what's the rationale for providing a full-year outlook? Do you have better visibility than before? I'm just curious why the change in the way you provide guidance..

Well, there's a couple of things, really, Vivek. One is as we talked to you and your colleagues over the last few months, we understand how difficult it is to really predict how we may do in any 1 quarter. And I have to be honest.

I think using the word term seasonality is a bit loose at best anyway because it's really the sum of 56 different BLs doing what they do on a daily basis. And just as I look at what's out there, I think you guys were looking at what's happened historically. And we're coming up with a good view of what might happen in 2015, but with the wrong profile.

So I wanted to make sure you understand -- understood what we thought we really could be, given our visibility into our individual businesses. I think the other thing as well is with the merger, I think there's a real opportunity to forget that there's 2 really fantastic businesses here.

And although it's important to be focused on what we can do together, you need to keep an eye on how we're doing as an individual company. And I thought this was a way to bring your attention to that. And I think it shows we're confident that we're in line with our medium-term goals that we set at the Analyst Day back in November..

And clearly, we had more confidence associated with it just being able to talk about that. But it's -- as we talked about, the market environment is okay. It's not off to the races. But it's consistent with the background to give you the perspective that we have for our revenue..

So I'm sure our lawyers will point to the safe harbor statement, Vivek, and tell you, you can't really believe what we're saying on a forward-looking basis..

The next question we have comes from the line of Blayne Curtis from Barclays..

I just wanted to follow up on the prior question. I agree with your comment on seasonality. It's tough to pin down. But I guess Q3 has been historically a better quarter from you -- for you than Q4.

So is the way to look at it that you're kind of stealing from September a little bit and it's helping June? And that -- then December could be a little bit better? Or do you have some catalysts in December? Kind of what's behind the kind of the more muted September, but then December is typically weak for you, have been down sometimes, but it looks like you're going to see some strong growth?.

Well, we do say no good deal goes unpunished, right? And so I was hoping you'd see it in a more positive fashion than we were trying to do what you suggested. No, not at all. I think Q2 is a good quarter. Rick mentioned there is a bit of a headwind from exchange rates. Q3 is a really strong quarter, and Q4 is a strong quarter as well.

So no, there's nothing untoward. Basically, we have a really, really strong business. We think the way you should be looking at it is how we'll perform over the next 3 years, which is we'll grow well in excess of the market at every level -- at very strong levels of profitability.

And then on top of that, you're going to add a really terrific business, which is Freescale. So we thought we'd give you a bit more visibility..

But I do think you should look at last year. Q4 was actually up in last year from Q3. So I think that the point is, is things continue to evolve. I don't think you can really get too much into seasonality. It's really important that you kind of look at where the ramp-up is taking place with the end products that we're shipping to..

I gave you a compliment, actually. The full year of being pretty close to consensus, given the environment is pretty, actually, impressive, also with your euro exposure. So I was just curious on the slope of it, why the change. Maybe on the interface side, you always get the question on RF, I'll ask it again.

I mean, you highlighted Lighting being weak, and your actual result in March wasn't so bad.

So are you still seeing decent trends in that HPRF business?.

We are. I mean, it clearly is beginning to come more into balance as opposed to the shortage that we've had for an extended period of time, where we couldn't fulfill the requirements of our customers. So I would say we're coming more in line from a balance viewpoint.

And we've always said that as we get to a point, we think it would flatten out for a basis, and I think that's kind of in line with what we're talking about, Blayne. We don't see a precipitous decline, but we don't see it continuing to grow as aggressively as it has over the last few quarters..

The next question we have comes from the line of Jim Covello from Goldman Sachs..

Just kind of continuing on the theme. It's very helpful to get a color on the back half of the year.

Which segments could drive the better-than-historical numbers in the back half of the year?.

I think at this point, Jim, we're not going to go into the individual businesses. Overall, we think each of the businesses have opportunity for strength. Probably, the obvious one to pull out is the toughest quarter of all is, for Standard Products, is the fourth quarter. But I think all of our businesses will do well as we go forward..

So maybe I'll just use that as my follow-up, then.

So the idea would be that each of the segments would be different than what we've seen in the past as opposed to any one segment driving outsized growth?.

There might be..

Yes. I think we see a good, solid acceptance across the board, and we're confident with the improved outlook really across the board, Jim. So I don't think you can point to any specific area. Secured Connected Devices continues to grow very strongly as does the Interface and Power.

So we have all the growth drivers in place that's allowed us to be in a position to continue to outgrow the industry significantly and plan to continue to do that..

Yes. I think -- I mean, if you look at '14, you can see basically all of our businesses had a profile not dissimilar to what we've just described actually..

The next question we have comes from the line of John Pitzer from Crédit Suisse..

Rick, I wanted to talk a little bit more about the Secure Connected Devices business. I was a little bit surprised that it was the audio that was the headwind in the calendar first quarter. I wonder if you could just talk about the trends you're seeing in the mobile payment side.

And I guess, as you go into the back half of the year, at least on a year-over-year basis within that product line, you're starting to come up against some really difficult compares.

Do you think that you can continue to grow that business year-over-year in the calendar third and calendar fourth quarter? And if you do, can you just help us better understand kind of what some of those bottoms-up drivers might be, given that you're anniversary-ing some pretty good content wins as you get back to the back half of the year?.

So just to put a precursor, I don't think we want to get into any level of detail on doing projections for -- by quarter for the second half of the year, John.

But I will tell you that what we talked about in the audio, it's probably driven as much as anything by some of the delays of the actual processor, where some of the Android platforms were slipped out based on that. So we saw a pause here with some of the audio products that we shipped based on that.

So it's really more associated with the delay in the processor and the new phone introductions that slipped our audio product in the near term. Relative to mobile payments, we expect to continue to see strong growth there.

I think it's going to be dependent upon the industry continuing to see that, but we see a lot of opportunities because you begin to think about wearables that have mobile payments associated with it, which there's one that's been announced now between American Express and Jawbone.

So we see those things that kind of cross over between mobile payments and our banking business. So it gets kind of hard to distinguish between the 2, but the user case is very powerful and very compelling, and you can see how a number of things would continue to drive that very strongly.

Clearly, one of the things that's going to be important is just how successful Apple Pay is in China to be able to set that overall marketplace, where all the other smartphone companies have to be in a position to offer the same capability.

So I think those are the key factors that really builds our confidence and the reason why we feel as comfortable as we do relative to the revenue..

That's helpful, Rick. And then maybe just as a clarification follow-up. I think you mentioned in your prepared comments that currency was a 200-basis-point headwind. I guess, if you look at sort of the full year guide you're giving, it's about plus or minus 10% growth.

Would it have been 12% without currency? And then maybe you can just help me understand specifically how currency kind of flows through the model. I understand the fact that it's not really an EPS hit. I'm just kind of curious where in your revenue buckets does currency have the biggest impact..

It's -- I guess, it's kind of a slippery slope, really. About 15% of our revenue is euro-denominated. And if you look at last year, last year, currency was kind of $1.37 in the first half, and I think it went down to about $1.20 something by fourth quarter. And it's -- right now, it's about $1.09.

So I think if you do the math, you can probably easily see 200 basis points there, John. I mean, it never quite works out like that because different businesses do different things at different times, and we're constantly renegotiating things with different customers.

And probably without going into real specifics, Auto and Standard Products have a bigger exposure to the euro than anyone else, but everyone has just some exposure..

Your basic assumption's kind of in the ballpark. I mean, we're not giving into the specific details because for us, the key is we have it hedged on an earnings basis. And -- but it is giving us some headwinds in terms of revenue.

And you're in the right kind of ballpark with incremental growth we could have achieved if we wouldn't have had the headwinds from currency..

[indiscernible] right. He judges on what we deliver..

The next question we have comes from the line of C.J. Muse from Evercore ISI..

I guess, first question on margins. You did a great job there.

And curious, how much of that was mix? How much of that was FX-related? Then how much in terms of improvements that we might see sustainable through the year?.

Okay. So on EBIT margin, none of it was FX. We have a pretty much a complete hedge in the sense that although our revenue is impacted, we also have cost in euros as well, so it doesn't impact our operating margins. In terms of our operating margin improvement, it was mostly mixed, and most of it was forecasted in the sense of our guidance.

We did a little bit better because we did have an even better mix than we thought. So that's the -- that was the big movement..

And obviously, our Q2 guidance, it's sustainable..

Yes, yes..

Excellent. And then I guess as a follow-up, can you talk about, I guess, the banking card market? You spoke earlier about the lumpiness there. But curious where you stand today. Clearly, great growth into Q2.

What kind of visibility do you have into the back half there?.

I think we have fair visibility. I wouldn't say that it's -- we have all the orders in place, so I don't want to mislead you. But I think we have fair visibility associated with it. We clearly see an environment that is improving, as we said in the remarks, from where it's been. So I think that's encouraging.

The one thing that I would like to focus on is when you look at the implementation in the U.S., as it moves from just contact EMV to contactless, to me, that's more encouraging than anything.

And now, seeing some of those successes, and clearly, with the technology that's being used in like the wearables, as I mentioned earlier, the Jawbone device that's being done in conjunction with American Express, also contributing towards that. So that ease of use that comes from the contactless banking is really the key for us.

And one of the reasons that we have continued to be encouraged about this over the 3-year growth rate that we've talked about is because of some of those used cases that we knew that were in the process of being developed that are now being rolled out..

The next question we have comes from the line of from Chris Caso from Susquehanna Financial Group..

First question is regarding operating margins for the full year. And given your comments on the full year revenue outlook, how should we think about operating margins? You got to -- what I think was a goal in HPS -- HPMS operating margin [indiscernible] first quarter.

Does that allow a little bit of upside versus your earlier goals for your operating margins for the full year?.

Well, I think we've been pretty clear that we're not going to guide full year operating margins. You're right, our goal is hit 26%. So we did say on the last call that we think, as time goes on, we think we're -- we'll be able to do better than that. But no, I don't think it's sensible at this point in time for it to guide operating margins..

Okay, fair enough. Second question is regard to channel inventories. And you talked about channel inventories coming down a bit in dollars in the first quarter.

I guess, first, to what extent does that provide -- as the channel reduces inventory somewhat, does that provide a headwind to revenue? And then, I guess, going forward, I think your comment last quarter indicated you sort of thought that the inventory levels we're seeing in the channel now were a bit low.

Where do you think they go in the back half of the year, particularly if you see some of the strength in the second half that you've been talking about seasonally?.

So I guess, we think the channel inventory, it gets hard because there is so much pressure that you guys put on the major U.S. guys per turns and urns that they really try to force the inventory down, where, clearly, we'd like to be sure there's more inventory in the channel to be able to fulfill the customary requirements associated with it.

I think the decline that we saw was basically just mix-oriented because if you look at it, our shipments in and shipments out in the quarter were both down about the same. So I think it was really more mixed than a true decline associated with inventory. We're still at about 2.5 months.

Frankly, we'd like to be pushing a little bit higher than that, but it's not like it's off that much on a -- and it's really different product line by product line. So I think the inventory in the channel is clearly very healthy. There could be -- we could certainly stand for there to be a little more inventory in the channel.

As far as having an implication on the second half revenue, we don't think that will be a real issue associated with it.

And we continue to work with our good, strategic partners in distribution to be in a position to try to drive the -- to drive more growth because our growth in distribution, frankly, hasn't been quite as strong as it has been in some of the other areas..

The next question we have comes from the line of Ambrish Srivastava from BMO..

A couple of questions, guys. First of all, on the -- you mentioned the weakness on the smart audio from Android handsets.

Is that -- in your opinion, is that channel inventory along with demand weakness being worked down? And when do you see that bottoming out? And the second question, Rick, you talked about Lighting being rapidly approaching commodity. So that doesn't sound like something that would fit into your product portfolio profile.

Should we be expecting that to be divested at some point? And then kind of related to that, how big is it as a mix of your total business?.

So a number of questions loaded in there. So clearly, on the audio case, this is about new model rollouts. It's not about channel inventory at all. So as there's been a delay in some of the processors, which has delayed some of the new model rollouts, we've seen a little bit of delay of some of the audio products, so not anything material.

The design wins are still in place, but the ramp-up is not taking place because those new models have been pushed out..

But we do expect it to grow in Q2..

Yes, sorry.

And then your other question, sorry?.

And we don't talk about M&A..

Oh, yes. So we talked about Lighting being in intensive care. So it's not something that's new. But clearly, the environment is not a positive environment associated with it. As far as percentage of revenue, it gets lost in the rounding for us in total..

The next question we have comes from the line of William Stein from SunTrust..

I'm hoping you can talk a bit about the timing and expected financial impact from the announced JAC joint venture in China..

So they -- the -- that's really pretty immaterial. That's just our Bipolar Power business, which is basically triax for home appliances. We probably won't close the transaction since they're more of a financial rather than a strategic entity. We're in the process of the final due diligence.

And I wouldn't anticipate that the transaction would close until sometime in maybe October 1 or....

Yes, maybe like Q3..

Yes..

Or Q4. I'm glad you added that comment. You even actually said we said I don't expect it will close..

No, I was trying to get the specifics of when it is. But -- so it's just not a priority business for us. It actually -- one of the key things for us is this is another area, where we're trying to look at different ways to do business in China. I think it's important to recognize we've done a joint venture with Datang.

We've done -- now this a joint venture associated with it. We have a number of other joint ventures. We're really trying to continue to work all different avenues to be able to continue to do business in China with the changing regulatory requirements and the changing demand requirements associated with it.

So it's more about that learning process than it is anything specific. The actual revenue that we have associated with that business is relatively immaterial..

Yes. I think the other thing that's interesting about it, Will, is it's -- I mean, to be honest, it is kind of an interesting business. And it has a profile on it that could make it something significant. But for us, it's just -- it just has the wrong margin profile. And it's something that could grow.

But as Rick says, I think it will be a great way for us to continue to find our feet in China with a really, really strong partner..

That's helpful. And maybe one other, if I can. There were a couple small acquisitions, I think, you closed them in the quarter.

Any revenue contribution in Q1 or in the Q2 guide there?.

It's relatively immaterial. I mean, the Bluetooth Low Energy is more about a capability to be able to address our smarter-world requirements or the Internet of Things going forward. So it's really more about a strategic capability than it is individual revenue.

There is revenue that comes associated with it, but it's relatively immaterial in that total scheme of things..

The next question we have comes from the line of Craig Hettenbach from Morgan Stanley..

Just following up on NFC and Secure Element, particularly within China. Can you talk about just some of the relationships you have on the banking side and even transport? I think there's a relationship with Alipay in terms of just competitively how you feel you're positioned as mobile payment starts to be adopted in China..

So we are the leader. We plan to continue to be the leader, and we plan to continue to have Intel-like market shares in that space. It's a key priority for us and one that we will continue to make strategic moves to continue to solidify our position..

Got it. And then just a follow-up on Autos. Tough to ask kind of quarter-to-quarter for some of the longer-reaching things like vehicle-to-vehicle with some of the RF stuff you're doing. But just even from a customer engagement perspective and then the suppliers, just looking for an update in terms of what the -- how the activity is on those 2 fronts..

Well, vehicle-to-vehicle, remember, we don't ship our first product until the 2017 model year, so late '16. So it won't have any revenue impact at all until that period of time. As far as activity on the design front, it's accelerating.

We have a number of discussions going on, a number of different RFQs that we're working with the car companies themselves, not just their suppliers, as well as then the ODMs to be able to supply them. So there is definitely an increase in activity.

Frankly, as we look at the combination with Freescale, we think it even strengthens our position, which was already very strong before. So we think that it puts us in an excellent position to be able to support our customers going forward, and we continue to work that aggressively.

But it's not going to have any revenue impact until -- of significance until '17, at the earliest -- not really material revenue until probably more close to the -- approaching 2020..

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

I was hoping you guys could follow up a little bit in Secure Identification. And you talked about some strength also in, I think, the government document space and transit. And I was hoping you could talk about what are the drivers that are picking up there that give you the confidence here..

On the government side, we have always talked about that being a lumpy business, so it just depends on when countries begin to roll out further implementations of electronic passports or electronic government documents. And it'll continue to be lumpy.

There's still a significant marketplace that's not being served associated with the electronification of government documents. And one of the reasons that we're just encouraged about the opportunity there is we are focused on continuing to be the leader in that space. But it'll continue to be lumpy.

A number of different countries in Africa are beginning to roll out that we had won -- or Middle East and Africa, I should say. And some of those that -- we had won, and we're beginning to roll out. And then because of government reviews, it gets delayed for a couple of quarters, and we're beginning now to see that pick up.

But not anything that's off the charts material. It's just the lumpiness of that business and how it will continue.

On the transit ticketing, that's a good business that also has some ups and downs associated with it, but a strong, solid growth going forward on an annual basis and a significant contributor to our confidence in being able to see the growth that we do in that total area over the 3-year period of time of kind of low double digits..

Yes. Just great, long-term secular trends, which will drive both of those business lines probably for many years to come actually..

And then if -- could you just get some discussion within the Secure Interface business? What you see as a couple of main drivers there? But as part of that, if you don't mind talking a little bit about are there any changes into the Lighting interface? And could you potentially benefit from the coming USB Type C?.

Yes. Well, I think that we've done quite well in the Interface area. We plan on continuing to do quite well as Type C evolves. We think we have a good technical position and are pretty confident in being able to play a significant role in that space. But we have to see how those design winds materialize over a period of time.

But in general, we -- the growth that we've had in that business last year, which was, I guess, 36% or something last year, and certainly in the first quarter continuing to have that strong year-over-year growth.

Not necessarily on a sequential basis as smoothly, but the real key focus is being able to continue to have that strong growth on a year-over-year basis..

The next call -- I mean, next question comes from the line of Rajvindra Gill from Needham & Company..

A question on just the general automotive industry. That segment continues to be fairly strong. Just wanted to get your feedback on kind of your expectations for this -- for that market this year.

And what are your thoughts in terms of units as well as increasing semiconductor content? And with the merger with Freescale, if you could kind of discuss what Freescale adds to the table to help your overall automotive efforts..

Well, so we've talked about over the 3-year period of time a high single-digit growth in Automotive, and we -- for NXP. And we continue to feel very confident in that. So I think that's in line with what we're seeing and continue to expect going forward. When you look at the combination with Freescale, they're very complementary fit.

If you really look at their strength in automotive microcontrollers, their sensor and analog business, it's very complementary to our business with very minimal overlap associated with it.

And then in addition to that, their i.MX processor is very complementary with our car radio business, with our silicon tuner and DSP business, where we'll be able to even offer a more complete solution that we can with just the audio focus that we have today. So very complementary.

It will clearly position us even more significantly with our customer base. And all the feedback from our customers has been extremely positive about the opportunity to really be able to address their solutions on a more holistic front associated with it..

And Raj, if I could just -- Raj, if I could just add to your original question. So what we said in our Analyst Day is we think auto unit production is probably 2% to 3% units for the industry. And then we think for total, semi content, we're thinking probably 300 basis points incremental growth on top of that.

So auto semi growth may be about 6%, and our stated goal is to grow 50% faster than that. So it ties up to Rick's view of a high single-digit NXP semiconductor growth target..

Yes, that's great. It's very helpful. The next question is on the IoT market. The way I see it is that with the acquisition of Freescale, you guys have assembled very -- some of the crucial building blocks to address IoT, the embedded processing, sensors, connectivity, security.

Wondering when -- what are your views on IoT this year? When do you think we'll see an inflection point in terms of meaningful revenue contribution? There are some competitors that are starting to break out IoT in their numbers. So if you could talk a little bit about IoT and kind of trajectory of that market, that would be extremely helpful..

It sounds like the dot-com phenomena. I think we'll just deliver on top line growth and not try to give in to reporting IoT separately. I think we said all along, the combination of Freescale and NXP allows a true industry powerhouse to focus on the smarter world.

We like to call it the smarter world as opposed to the Internet of Things because we think that's a little bit more descriptive than just the Internet of Things, which is still relatively undefined.

When you look at the fundamental capability that's required for the Internet of Things, when you think about it, it's sensing, processing, connectivity and security. Clearly, with our leadership position in security, we think it positions quite well.

And with the strong position that Freescale has on the processing side and then the combined connectivity strength that we have, we think it puts us in an excellent position to really drive solutions for our customers that will be much more significant than what either of us could have done on a stand-alone basis and really allows us to really think about a true leadership position and being able to serve that evolving market in the Internet of Things.

Relative to material revenue, I think it's still a while before it becomes significant. Clearly, there are some indications of are there -- some significant ramp-ups of design wins. But it still ends up being relatively immaterial in the whole scheme of things if you look at the revenue impact itself.

But really, the key for us is cobbling together a total solution to be able to address the requirements for our customers. And when you think about the Internet of Things or the smarter world, it's a much more broad-based set of customers.

And clearly, in the U.S., the strength that Freescale has being able to combine our security and connectivity technology with that to be able to address the customer requirement is what we're excited about..

The next question we have comes from the line of Tore Svanberg from Stifel..

First question, I was hoping you could talk a little bit about the linearity of orders. Some of your competitors have talked about things not being as strong in March, but then now, actually, in April, things are starting to improve again. So just trying to get a sense directionally where business is headed..

I don't think we need to -- I think people can get into orders on a weekly basis, and -- but I think in the whole scheme of things, it's about how we deliver on the results associated with it. And I think our business is so different than most of our peers out there that I don't think we could draw any similarities or conclusions associated with it.

I think it's more important that we think the market is still healthy, still good, but not booming and not off to the races. So we feel very good. And there's always periods of time where you'll see orders a little bit slower or not. But I don't think you can really read anything into that specifically based on what we see..

That's fair. And as my follow-up for Peter, your inventory days were down about 15 days year-over-year.

Should I read anything into that? Or it's just a bit higher than normal a year ago? Or is there actually an incident here where -- an instance here, sorry, where inventories are actually a little bit tight?.

No, it was higher a year ago because we were prebuilding -- we're making prebuilds associated with the closure of our ICN -- foreign ICN6 fabs in the Netherlands. So what you're seeing is the prebuild inventory that we made is just kind of burn -- starting to burn off. So no, I think the inventory is in no case in any bad shape [ph]..

Okay. The next question comes from the line of Christopher Rolland from FBR Capital Market..

So we've seen lead times increase for you guys, not only just over the last 4 months, but over the past couple of years here. And the extension was also pretty broad-based. We've also heard of some new capacity that you guys might be bringing online in 2Q and 3Q and finishing by the end of the year.

So I guess, the first question is, does this accurately describe the situation? My second is, where are your front- and back-end utilizations now? And then lastly, is it fair to say that there's a modest risk that you potentially under-ship optimum demand? I'd say your guidance would probably speak against that, but is that potentially a risk into the back half of the year?.

So, our fabs -- our wafer fab is in Singapore, which is the joint venture for our SSMC. We have a fab in the Netherlands, an 8-inch fab, a sister fab. And we buy about 45% of our product externally.

I don't think lead times have been particularly expanding, and I don't see us as having any significant supply issues in terms of being able to deliver our revenue forecast..

Okay, okay. So I guess, no new capacity coming online on either front end or back end, okay..

No. We spend this -- we spend a little bit of money on capital, so we're constantly kind of tweaking it. But most of our additional capacity comes from external sources..

Right. We have in the wafer side..

On the wafer side. And on the assembly test, we're constantly refreshing our test facilities, and to a lesser extent our assembly. But we spend about 5% of our revenue on CapEx..

As we said before, Chris, we have no intention of building another fab..

Okay. And that kind of ties into my next question here, you might've answered it. But digging into the HPRF business, just, again, you have some comments already, but we saw lead times there for both you guys and Freescale come down pretty substantially. And I'm just wondering how to interpret that.

It doesn't sound like there was any capacity added there at either of your companies, so it sounds like it's purely demand-driven.

How would you guys expect lead times to continue over the next couple of quarters here?.

Chris, I think you and I have talked about this before. We really don't -- we're not going to make a comment on your checks on distribution lead times. I think for things like the HPRF business, which is quite a bit of a direct business, we do with a lot of big OEMs.

What you're finding out from standard lead time sheets and distributions is not reflective of what we're quoting to our customers..

But we did say that, that business is becoming more in line, more in balance. We did expand capacity last year. The industry expanded capacity last year to be able to serve the customer requirement. But it is becoming more in line, more balanced now. There was a shortage that was a huge shortage at this time a year ago.

And clearly, demand is much more in line today, and we don't think that that's significant. We had talked about that we had expected after the spike in demand that it would be relatively flat for a period of time. And I don't think we're backing off of any of that.

So in closing, the key messages today are we continue to deliver on revenue, $1.47 billion, up 18% year-over-year, more than 2x our peer group average, and with growth in High Performance Mixed Signal actually being up 21% year-over-year. We grew operating margins 28% year-on-year, and earnings per share were up 38% year-over-year.

We generated $388 million of free cash flow, up 29% year-over-year. We believe we are -- continue to be well positioned to deliver on our long-term strategy and thank all of our shareholders for their continued support. Thank you, and have a good day..

Thank you, everyone. This concludes our call today. We'll chat with you at the end of the next quarter. Thank you very much..

Thank you. Ladies and gentlemen, that's -- thank you for your participation in today's conference call. That concludes the presentation. You may now disconnect. Have a good day..