Jeff Palmer - Vice President of Investor Relations Rick Clemmer - Chief Executive Officer, President and Executive Director Peter Kelly - Chief Financial Officer, Principal Accounting Officer and Executive Vice President.

Will Stein - SunTrust Chris Caso - Susquehanna Financial Vivek Arya - Bank of America C.J. Muse - Evercore Blayne Curtis - Barclays Ross Seymore - Deutsche Bank Steve Smigie - Raymond James Vijay Rakesh - Mizuho Tore Svanberg - Stifel Stacy Rasgon - Bernstein Research Ambrish Srivastava - BMO Mark Lipacis - Jefferies John Pitzer - Credit Suisse.

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

Thank you, Kaylie, and good morning, everyone. Welcome to the NXP Semiconductors Second 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 second quarter 2015 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 you in your modeling efforts. This call is being recorded 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 financial results for the third quarter 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 second quarter 2015 earnings press release, which will be furnished to the SEC on Form 6-K and is available on NXP's website in the Investor Relations section at nxp.com.

Before we start the call today, I'd like to highlight the investor events we'll be attending during the third quarter. On August 11, we'll attend the Pacific Crest TMT Conference in Vale. On August 25, we'll attend the Jefferies Corporate Access Day in Chicago. On September 16, we'll attend the Deutsche Bank Technology Conference in Las Vegas.

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

Thanks, Jeff, and welcome, everyone, to our earnings call today. Our second-quarter results were quite good, with product mix essentially in line with our expectations, combined with solid cost control driving better operating profitability. Results in earnings-per-share above the high end of our guidance range.

Specifically NXP delivered total revenues of $1.51 billion, up about 12% from a year ago period and up about 3% sequentially in line with our guidance range. While we're pleased with the results of the second quarter and our view of continued share gains in our target markets, we have witnessed a clear change in market demand.

Conversations with both customers and channel partners reflect an increased sense of caution. To be clear of the uncertainty that our customers are highlighting is the realization of the slower growth macro environment but not a material downturn.

It is this backdrop combined with the inventory connection that is taking place in RF power market that is coloring our view into the third quarter, which Peter will provide more details on later in the call. Now turning to our segment performance; HPMS segment revenue was $1.15 billion up 16% on a year-over-year basis and up about 4% sequentially.

The second quarter marks the 12th consecutive quarter of double-digit year-on-year growth for the HPMS segment. The HPMS segment is our key focus area of growth and our track record demonstrates clear outperformance in net share gains relative to our peer group, which we believe is a sustainable long-term advantage.

Moving on to the end market details of the quarter; Automotive revenue was $310 million, a new all-time high for the group. Additionally we are on an annual run rate to achieve record revenue levels in Japan, a geographic region of strategic focus. During the quarter, revenue grew about 8% from the same period a year ago and up nearly 3% sequentially.

We experienced solid and continued demand for entertainment, keyless entry and in-vehicle networking products, offset by slight headwinds in our auto sensor business. In the Secure Interfaces and Power group, revenue was $303 million up 29% from the same period in the prior year and up about 4% sequentially and slightly better than our expectations.

During the quarter we continued to see very good demand for enterprise products as well as accelerating traction for our RF small signal or smart antenna solutions. This was largely offset by anticipated sequential declines of RF power products used in the base station markets, those still up strongly versus the prior year period.

As you recall we have been in a significant supply shortage during 2014 and began to see an equilibrium of demand and supply emerge late 2014 and Q1 of 2015. Entering Q2 we had anticipated and saw a more moderate demand environment.

What has occurred and what is impacting our third-quarter outlook is, our customers are continuing to reduce orders in light of un-served demand reporting as a result of -- reportedly as a result of the ongoing government bribery investigations taking place within the China telecom industry.

In Secured Connected Devices revenue was $276 million up 39% from the same period in the prior year, and down 4% sequentially.

This was slightly below our expectations driven by declines for mobile transactions and a less than robust rebound in demand for our point-of-sale in mobile audio products designed into Android smartphones for the emerging markets.

Revenue in Secure Identification Solutions revenue was $257 million, down 4% from the same period in the prior year and up 60% sequentially. During the quarter we expected and we saw strong improvement in demand for bankcard products, primarily for dual interface products in China, as well as continued traction for contact solutions in the U.S.

market. We also experienced ramps of new e-government programs. Finally turning to the Standard Products segment, revenue was $322 million up 2% compared to the year ago period and flat versus the prior quarter. Turning now to our distribution channel performance. Total sales in distribution were up 8% with sales out of distribution also up 7%.

The total months of inventory in the distribution channel were 2.3 months, at the low end of our long term targets. Absolute dollars of inventory in the channel declined about 1% 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.

During the quarter we saw or we achieved two significant milestones. First we announced the sale of NXP's RF Power business to JAC Capital, a fundamental requirement we anticipated to attain regulatory approval of the merger.

Secondly, we achieved very strong shareholder approval for the proposed merger at our recent extraordinary shareholders meeting. The remainder of the regulatory approval process is progressing as we had originally anticipated and we believe we are on track to close the transaction in the fourth quarter of 2015.

We continue to make very good progress on the integration planning of the two companies. We are excited about creating a true industry leader focused on delivering differentiated product solutions, which we believe will create significant value for our customers and shareholders. In summary, our Q2 results were quite good.

We continued to deliver improving operating profitability and very strong earnings growth, while at the same time continuing to invest in the business to fuel future growth. While the current environment does pose short term challenges, we view this as more of a pause than the significant downturn in demand.

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

Thanks, Rick, and good morning to everyone on today's call. I apologize because as I will have to stop and cough during my remarks as I have had a little bit of a cold recently. As Rick has already covered the drivers of the revenue during the quarter, I'll move to the financial highlights. In summary, Q2 was a very good quarter.

We delivered record non-GAAP operating profit margins and earnings per share. Non-GAAP operating profit was 28% and non-GAAP EPS was $1.44, both of which were above the high end of our guidance.

Cash flow is very strong and our leverage ratio at 1.43x continues to be substantially below our long term target as we prepare to finance the Freescale merger. Focusing on the details of Q2; total revenue was $1.51 billion, up nearly 12% year-on-year and in line with our expectations.

We generated $734 million in non-GAAP gross profit and reported a non-GAAP gross margin of 48.7%. Turning to our reportable segments. Within the HPMS segment, revenue was $1.15 billion, up 16% year-on-year, and about 4% over the previous quarter.

Non-GAAP gross margin was 53.7%, 60 basis points below Q1, and non-GAAP operating margin improved by 140 basis points to 30.3%, as a result of improving expense management. Within our Standard Products segment, revenue was $322 million, up about 3% year-on-year, and essentially flat versus the first quarter.

Non-GAAP gross margin at 35.1%, was essentially flat on the prior quarter. And non-GAAP operating margin was 23.3%, a 40 basis points increase sequentially. Total non-GAAP operating expenses were $317 million, down $9 million on a sequential basis.

From a total operating profit perspective, non-GAAP operating profit was $418 million and non-GAAP operating margin was 27.8%, up a 160 basis points sequentially. Interest expense was $36 million, $2 million higher than guidance as we had issued $1 billion of new debt during the quarter to fund the announced Freescale merger.

Noncontrolling interest was $21 million and cash taxes were $10 million. This resulted in total NXP non-GAAP earnings per share of $1.44 above the high end of our guidance. This is up 32% year-on-year and 7% on the first quarter. Stock-based compensation, which is not included in our non-GAAP earnings, was $36 million.

I'd now like to turn to the changes in our cash and debt. Our total debt at the end of Q2 was $5 billion and as previously announced we raised $1 billion in new debt issuing two unsecure bonds during the quarter. As a result cash at the end of Q2 was $2.4 billion and net debt was $2.6 billion.

We exited the quarter with a trailing 12-month adjusted EBITDA of approximately $1.83 billion, and our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q2 was 1.43x and our non-GAAP interest coverage increased to 11.6x. Turning to working capital metrics; days of inventory were 95 days.

Please note that the days of inventory calculation includes $55 million of inventory mainly relating to our RF power and Bipolar Power business, which is excluded from the inventory figure in the balance sheet. As we have classified these products as assets held for sale.

Days receivable were 32 days, a decline of 2 days sequentially, and days payable were 86 days, a decline of 4 days. Taken together, our cash conversion cycle was 41 days versus the 36 days in the prior quarter. Cash flow from operations was $351 million and net CapEx was $89 million, resulting in non-GAAP free cash flow of $262 million.

We repurchased approximately 1.7 million shares for a total cost of about $162 million or an average of $95.26 per share. Now I would pause for a second and just talk to our expectations on net debt for trailing 12 months adjusted EBITDA leverage.

At the time of the merger announcement we mentioned we thought we would have a leverage ratio of about 3x when we close the transaction and that it would take us approximately six quarters post close to get back to a ratio of 2x net debt.

Given the announced sale of our RF power business and assuming a fourth quarter close, we now have a leverage ratio of around 2.5x at the time of the close and we should hit our 2x target by the summer of 2016. Now I'd like to provide our outlook for Q3. We currently anticipate total revenue will be in the range of up 1% to up 5% sequentially.

At the midpoint, we expect total revenue to be up about 3% in Q3, reflecting the following trends in the business.

Auto is expected to be essentially flat; Secure Identification Solutions is expected to be up in the mid-single digit range; Secure Connected Devices is expected to be up about 20% sequentially, a little weaker than previously expected as we see some weakness in the China and the Android market.

Secure Interface and Power is expected to be down in the high single-digit range, much lower than originally expected as we see a nearly full 40% reset in RF power business as the base station OEMs try to manage their supply chain.

Standard Products is expected to be up in the low single digit range sequentially; and we anticipate revenue from the combination of manufacturing and Corporate & Other to be approximately $33 million.

Taken together, total NXP revenue should be in the range of $1.52 to $1.57 or about - sorry, should be in the range of $1.52 billion to $1.57 billion or about $1.55 billion at the midpoint. We expect non-GAAP gross profit to be about 48.8%.

Operating expenses are expected to be up about $400 million to $321 million and this translates into a non-GAAP operating profit in the range of $424 million to $448 million or about 28% operating margin at the midpoint.

Interest expense will increase quarter-on-quarter by about $10 million, approximately $45 million as a result of the new debt taken on to refinance the merger. Cash taxes are expected to be roughly $8 million, noncontrolling interest should be around $18 million.

Stock-based compensation should be about $37 million, which is excluded from our guidance. Diluted share count is assumed to be the same as the second quarter of 243.3 million shares.

Taken together, this translates into non-GAAP earnings per share range of $1.45 to $1.55 or $1.50 per share at the midpoint of our guidance and this $1.50 includes the additional $0.04 of interest costs we have put in place to help fund the merger.

So I'd like to turn the call back to the operator and Rick and I will be happy to answer your questions..

Thank you. [Operator Instructions]. Our first question comes from the line of William Stein with SunTrust. Your line is now open..

Good morning. Thank you for taking my question and congrats on the very good results. I think Peter last quarter u gave us both - well a sort of preview on both Q3 and Q4 revenue growth, not sure I heard any update on the Q4 outlook.

Acknowledging that you cited a weaker macro environment, I am wondering, if you can update that Q4 view, please?.

Yes. We didn’t Will. And to be honest the real reason is it's really difficult to say what Q4 is now, because clearly we will be excluding RF power and we will be including Freescale. So, kind of giving out the full year revenue really doesn’t make any sense anymore.

What I would say though is, if you look at kind of what we said three months ago and what we said now, with the exception of RF power clearly this one's sort of inventory reset going on.

I am not sure I'd change our view substantially, I think people have been a little bit more conservative in their view of the market and there does appear to be a little bit of nervousness. But we are not - as Rick said in his prepared remarks, we have not really seen any kind of fundamental change.

So we are pretty comfortable given what we said now and given what we said three months ago, [excluding] RF power..

That's very helpful. If I can have one follow-up. There has been quite a bit of news about hacking in the Automotive end market with one big auto OEM particular. It would seem NXP has a portfolio that's well-suited to Security there. Can you comment on any current or near-term revenue opportunity for - to address that issue in the market? Thank you..

Thanks, Will. So when you think about the challenges associated with hacking in Automotive, I think it's a significant opportunity for NXP as we talk about bringing security to the car. We've had ongoing discussions with automotive manufacturers for some time but as you might imagine those discussions are clearly accelerating in the near term.

We presented both some virtually immediate solutions on the gateway to the car and some interesting innovative solutions to be able to bring security to our in-vehicle networking and then frankly with the transaction associated with Freescale the ability to bring security on the automotive microcontroller side as well.

So we see some significant opportunities and are deeply engaged in discussions with how we can help the car companies to be able to provide a safer more secure car and you one of the things that we want to be sure is that we moved aggressively in this area so that we can truly be able to facilitate the opportunity and help all of our customers make their cars safer relative to the public..

Thanks, Rick..

We will start this August - I missed something I should have said. I guess on the one hand you hand you say the market is incrementally more nervous or maybe even incrementally a little bit weaker. But I think the other thing that's maybe different from three months ago is our margins are incrementally more positive.

So I am very, very pleased with the way our margins trend together..

There's a question there, but I will let someone else take it. Thank you..

Thanks, Will..

Thank you. And our next question comes from the line of Chris Caso with Susquehanna Financial. Your line is now open..

Chris can you hear us..

If your phone is on mute please un-mute..

Sorry about that. Just wondered, if you could expand a bit on the comments of the leverage ratio on achieving that ratio by summer 2016? Once you get to that ratio, I guess what you said in the past is you take a look at which is [more great] use of cash, buyback or reducing debt further.

Should we assume by that once - assuming the stock is around current levels that you would switch the use of cash from paying down debt to resuming your buyback once you achieve those ratios?.

Well I think given the high levels we would be buying back stock. What we have said in the past is that we had return all excess cash to the shareholders.

So I mean really the point about being at 2x net debt by summer of next year, what we are trying to say there is, summer of next year basically all of our cash flow will go back into being returned to shareholders either by buybacks or possibly we had introduce a dividend at some stage..

I have felt very comfortable buying our stock at $96 through the quarter. I think I have said in the past I don’t really look at what we are from the perspective of a multiple while there is a discount of cash flow. And I am really, really comfortable buying our stock at the moment..

I think the real key is, the proceeds from the sale of our RF power business clearly changes the original guidance that we gave at the time of the announcement of the transaction.

So that with the continued strong performance of NXP, puts us in a great position to really be back below our long-term objective of 2x annualized EBITDA by the middle of next year or by the spring of next year..

As a follow-up, with regard to the Freescale transaction you had talked at the time of a certain amount of cost synergies and what you expected to get out of the deal. Given that we have had a couple months pass, you have obviously seen Freescale's results and actually your own OpEx is a bit lower than what we had expected.

Is there any change with regard to what your expectations are with regarding the accretion or the cost synergies post the transaction?.

No. We had say what you want to do is you should take your view of Freescale, your view of NXP, add them together and add $500 million of profit. So we are doing lots and lots of [indiscernible]. At the moment we can only plan. So we are doing lots and lots of planning.

There is nothing that indicates to us that we can't do the $500 million and we would expect $200 million of that next year..

I think the one thing that we have not talked about and we continue to feel better about all the time with the discussions, is the opportunities on the revenue synergy and as we look at the feedback from our customers and the opportunities they talk to, we actually believe that that could be even more significant than what we had thought originally.

But since that doesn't really happen in the first year, so we just did not commit that at the time of the announcement of the transaction.

But we continue to be very excited about the combination of the two product portfolios and the opportunity it creates for our customers to really have an advantage with the more complete solutions that we can bring to the marketplace..

Great. Thank you..

Thank you. Our next question comes from the line of Vivek Arya with Bank of America. Your line is now open..

Thank you for taking my question. Rick, first one for you. Very encouraging to see these kind of results, while most of your peers are missing and guiding down substantially and I understand there are a lot of companies, specific products like [indiscernible].

But was hoping you could share your views, give us some more color on end market or geographies so far in Q3? What you are seeing and what sort of gives you the confidence this is going to be a short lived downtime?.

So I think the thing that we see as we talked to your distribution partners and our customers, there are some areas that clearly we don’t see the same strength. The smartphone market outside of the leader in smartphones, basically they are now even in China beginning to struggle a little bit in terms of their volume.

And clearly Samsung as you saw with - what they have announced is not performing at the level you would expect. So clearly there are areas where we are not seeing as robust demand as people would have planned. The RF power adjustments is clearly having an impact on our overall growth as well as that of the marketplace for the base stations.

With the uncertainty created about everyone afraid to place orders because of concern on the investigations going on in China relative to the anti-bribery. But what I have been told by a number of people in China is that that can't continue long because of the demand for capacity is going to bring that back up.

So what I think we see across the board is a more cautious attitude, but clearly no significant decline at this point other than in the exception of the RF power area. But it's clearly more cautious area and one more people are a little more cautious about placing orders and putting orders on the books.

But the fundamental demand and the health of the world economy, which has been tailored slightly as you know. The world economic growth has been reduced by two or three percent of a point this year and clearly the uncertainty over China.

Although the Chinese government has had a significant track record of being able to charge their way through these forces.

So I think all of these things considered plus clearly more uncertainty associated with it, but not anything that we see a true weakness or precipitous decline associated with and again it gets down to your engagement with customers and being able to deliver solutions that make a difference for them and in the marketplace..

Got it. As a follow-up, these are very good cost control both HPMS and Standard Products margins, a little close to the high-end of the long-term targets, perhaps even exceeding them.

Could you give us some sense of what's helping this cost control? What are the other drivers to extract more leverage besides once you get to the Freescale transaction?.

Yes. I think you are right and actually we were talking a little bit about it before the call. I think we talked previously about SG&A being around 10% of revenue. I think we are demonstrating right now we can run it at 9%. To be honest some of that is simply because we are not hiring ahead of the Freescale integration.

So there's a few things that are a driver really. One is we are managing headcount much more tightly than we were earlier in the year. And usual lots of small things, keep an eye on your travel, making sure you manage your variable cost. I think we got some benefit from R&D last quarter in terms of just the way masks fell.

But I wouldn't point to any one single thing, I think it's across the board the team are doing a terrific job on managing off that. And we are seeing leverage on our OpEx as our revenue grows..

Last quick one, if I could squeeze one. On the regulatory, any regulatory issues on the Freescale? I think you have mentioned confidence about closing it in Q4, any regulatory issues at all that you might have seen so far? Thank you..

Well we continue to work our way through the process. We have had good exchange and good discussion with MOFCOM in China. We continue to make good progress with the EU and we are having a good interface and dialog in the U.S. So I think things are on track associated with it.

We obviously are not through the process, so until you are through the process you can't say for sure. But I think we continue to make good progress on it and it clearly is an area of focus for us to be able to get through that as soon as we can..

Thank you..

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

Apologies for my voice. I think I got a little bit of virus [indiscernible]. Question on SCD.

Can you talk about the 20% up, how we should be taking back units versus rising content there?.

Hey, C.J. I think your voice sounds even worse than mine. I mean but, if I could just repeat your question.

So it's really about in Connected Devices, how is it - is the 20% just additional volume or do we have more content, is that it?.

Yes. That's it..

I think what we say about Secure Connected Devices is that it's going pretty much as we expected. I will guess that we are kind of go here and it's a difficult question for us to answer for obvious reasons.

But where we are seeing some weakness is really in the Android side of the business and the rest of the business is going pretty much as you would expect and its fully driven around volume rather than additional content..

Yes. I think the one thing you have seen, we have seen a push out of some of the acceleration that we had planned in China because the leader in mobile wireless is not moving quite as rapidly for implementation, so that all of the other smartphone guys in China had to had fundamental capabilities.

So we are engaged with all of those and they are all aggressively reviewing it, but kind of waiting for the right time to be able to drive the implementation, because clearly it has incremental cost on their bill of materials. That they want to be sure that they can provide the solution associated with it.

So we are still just as positive about the general outlook associated with it but the actual timing of the ramp clearly has moved down slightly associated with it..

I guess a little quick on RF, have you guided in Q3 a full quarter of RF revenues and expenses or are you assuming only partial?.

Full quarter. They are down 40% on Q2..

So we guided a full quarter and we would anticipate that we would not close before the full quarter. Clearly if we were to do that we would have to make adjustments but we would assume that we will close that in Q4, C.J..

Our next question comes from the line of Blayne Curtis with Barclays. Your line is now open..

Hey, guys. A great job on the quarter. A couple of questions. On ID you mentioned a pickup in contactless in the U.S. but also e-gov driving that business. Just curious, what are you seeing in terms of when U.S. could convert over and what was the bigger driver in June-September, is it still e-gov? You also mentioned China.

Is there some [indiscernible] in ID would be helpful..

So the most significant improvement was continuing to be and do 100% in China where we continue to see strength associated with the deployment in the market. Clearly there were some increase in the U.S. from the contact side as well as we are beginning to make some improvements now and dual interface in the U.S. albeit quite small.

So I don't think anything has changed relative to our anticipation of when the U.S. market will really be implemented with [A&B]. It will be a slow progress, as we have talked about.

We think that it's a matter of several years and depending on how it's implemented there could be even more opportunity for initial implementation with contact and then if they realize the advantages for the user interface on the interface actually then moving to dual interface.

So I think that everything is pretty much as we have said over the last two quarters, no real changes associated with it. The near term was just driven by some incremental demand, primarily with China and dual interface, so the other two areas just were positive factors as well..

Excellent. Just the auto market, obviously a constant and share gainer and you mentioned Japan. Seasonally - that market seasonally soft run in the back half and you guided flat. So I think I know the answer here, but just curious to your thoughts on the end market, the health of the market. Obviously there has been some concerns in China and such.

Outside of your content story what are seeing just in terms of end market trends in auto?.

So, I think, we see - we believe that we still see it pretty healthy, general automotive market. We don't see any real significant uncertainty associated with it. Clearly one month of decline in automotive sales in China, with the uncertainty that the stock market declines brings is a factor.

But we don't see any significant adjustment in the overall automotive consumption.

We are still very positive about the general environment and continue to believe that it is a significant opportunity for us, especially as we begin to think about some of the emerging areas that will not contribute significantly to near-term revenue but will have a very significant in the long-term and specifically in the area of ADAS.

With the combination with Freescale once we get the regulatory approval we see a significant opportunity to bring the portfolios together and really have a positive impact on our customers. And having met with customers a lot over the last quarter or so in combination with Greg at Freescale.

Just as introductory meetings we've heard nothing but positive feedback from our customers associated with the opportunity that the combination of the portfolios bring..

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

Hi, guys. Congrats from me as well, great execution. Just a quick question on the SIP business. I know you have the 40% drop baked in for the HPRF side of thing, but it seems like the resulting NAV for the remainder of that segment sounds like it has to be up pretty strongly in the September quarter, kind of up single digits maybe even double digits.

What's going on in that sequentially?.

Well that business has a portion of the activity that we have some of the smartphone and tablet players is positive and we continue to be pretty successful in the market with the some of the new introductions of technology as well.

So what is the technology, Jeff?.

Smart antennas technology side of the cyber security is doing well into the next quarter..

Right. As well as the next generation of the Interface Products..

It's USB Type-C..

Right. So the USB Type-C we are beginning to see the initial activity associated with that as well, Ross..

Great. I guess my follow-up on the SCD side of things. You mentioned a couple of different dynamics that Android was weak in China, we are all aware of that. And then a little bit of a slowdown in the mobile wallet adoption.

I notice in your press release and in the presentation that you didn’t do anything to change the longer-term yearly growth rates of SCD and I appreciate one month or one quarter doesn’t cause you to really revisit that.

But how do you see those markets actually re-accelerating? Do you think that Android weakness is something that will be pervasive for a while or just kind of more of a clause that you use to describe the entire industry earlier?.

So Ross, I think that it gets down to features, I think when you look at it clearly wallet has been very successful vis-a-vis Android and the features and with the high-end user appetite associated with it.

When you think about the opportunity in China, I think with the current delayed deployment associated with that it pushes out some of the implementations of the mobile wallet in the Android platforms that are waiting to be in a position to drive that. So I think that's really more of a temporary pause.

I don’t think that you see any fundamental significant changes associated with it. I think there is still the appetite by the users but it's all about the applications and the capability that different companies are able to bring.

I think we have seen that clearly play out with what's happened with the announcement associated with some of the results of the latest products that have been released, such as the new Samsung platform. But I don't think it really changes the long-term outlook at all.

I think it's more of just a near-term blip associated with it, more than any fundamental changes in the long-term growth of it..

Great. Thank you..

Thanks, Ross..

Our next question comes from the line of Steve Smigie with Raymond James. Your line is now open..

Great. Just wanted to follow-up a little bit on the auto business. Rick you have kind of addressed it already in terms of its one month of weakness in China.

But just in terms of if you see that kind of weakness, is that something if it were going to impact you that would have likely already occurred and so you sort of passed that or is that something that causes the customers to sort of back off in the future? So just curious about the timing of when that impact might typically hit you?.

I think the one month reduction of auto demand in China clearly is probably played into the pool process because remember most of our customers we have, have remaining inventory and so we actually see that pretty real time from the demand levels associated with it. But I don't think it was overwhelming factor in the health of automotive industry.

Based on what we see we think it was more of just a short term blip. We think that the overall demand for automotives is still quite positive in our product portfolio and the increases in market share we have continues to play out well..

Okay. And then just my follow-up is on your e-gov business showing some strength here. In the past you have provided some color on certain governments or organizations that are implementing programs.

So maybe you might be able to give us some color there that could give us some sense as to the sustainability in that growth? And one quick housekeeping, I think AMS mentioned that they have purchased a small business from you.

Was there any meaningful revenue impact for that in the Q3 guide?.

So first off on the e-gov side, we have always said that it's a lumpy business and we had talked about a specific program a couple of years ago because of the significant size associated with it. We don't see any individual government that's at the same scale model associated with it. It's going to continue to be lumpy.

A lot of growth taking place in the Middle East and Africa on the government side but we wouldn't want to comment on any specific country, I don’t think.

Relative to the housekeeping on AMS that was really a development project that we've had that wasn't as successful as we thought it could have been and we had to make some decisions about what we did.

We have had a pretty good track record of investing in some development programs and if we don't feel that will meet our long-term objective then we will either shut them down or sell those businesses and in this case we sold that sensor business to AMS, which they believe with their margin structure and their company objectives, they can be successful with that business and we wish them well..

Normally we wouldn't mention it, but I know AMS was in the press release. It's about $1 million a quarter of costs that we will go with it..

And no real revenue..

No revenue..

Thanks, guys, appreciate it..

Our next question comes from the line of Vijay Rakesh with Mizuho. Your line is now open..

Good quarter and sorry to guide in this very bad macro backdrop, I guess. There is two questions. One on the automotive side, if you look at the next six, 12 months what is on the big ramps you see there? And also on the ID side you mentioned in China you are seeing a dual interface ramp.

How far are we into that ramp, are we 20% done of the beginning? Can you give us some color to both, thanks?.

So on the dual interface we have talked about we are towards the tail end of that ramp associated with China. By the end of this year they have indicated that specifically that you cannot use a card that is not dual interface. So I would say if you put it in baseball terms, we are probably in the seventh or eighth inning associated with that.

It's not like we are early on in the ramp associated with it..

But then also remember, we do see replacement orders afterwards, over time..

Right. But it's not a one end down type of a marketplace..

Yes. But the ramp is kind of a….

And I forgot your second question, I apologize..

It is an Automotive, as you look at the next six, 12 months, you know what are the ramps you are seeing there?.

We continue to see the ramp of some of our new engagements that we started several years ago. In automotive terms that's a new ramp associated within on the remote keyless entry.

And then we see the growth towards the end of 2017 in the first vehicle-to-vehicle design win that we had associated with design win that will be rolled out in the 2017 model year.

We think there are some opportunities out, in four to six quarters on some of the security products associated with it, but we have to be able to actually confirm those and be in a position to deliver that.

But it clearly - when you think about the relationship we have with automotive customers and the strength we have with our security portfolio the opportunity is there for us to really be a significant participant in securing of the car..

Vijay if I could just add. We are not changing any of our long term growth rates that we have provided last year at our analyst day and we have said in the past we thought our auto group to kind of grow high single digits over three year CAGR. So it's really - it's not about individual design sockets in the auto businesses.

It's more about a multigenerational trend of the revenue growth..

Got it. And one last question if I may. On the foundry side where are you guys now? Is it like 40% outsourced, do you intend to increase it, keep it at the same level? Thanks, that's it..

We are about 50% outsourced on our IC business and it will continue to grow over time because effectively all of our revenue growth is sourced externally. So as we grow, next year to being $10 billion revenue company and ultimately but then to $20 billion, you are going to see more and more of our - as a percent of our supply being external..

Thanks..

Our next question comes from the line of Tore Svanberg with Stifel. Your line is now open..

Thank you. Nice quarter. First question, some of your peers have talked about bookings being weak earlier in the quarter, but now early in this quarter actually starting to see some stabilization. I don’t know if that's a comment you share..

I think we are not going to get into that. The truth is bookings bounce around on a week by week basis and I think it's hard to draw any real conclusion based on any near-term basis. I think we try to give you the best outlook that we had within everything that we see taking into consideration.

But you know the trends on a week by week basis are so much influenced by other factors that I think it's hard to draw a real trend based on kind of the near term weekly impact..

That's very fair and as my follow-up you mentioned USB Type-C. I was just wondering, where NXP participates there, is it on the interface side, is it on the cable or both? If you could just add some color to that, that would be great. Thanks..

Actually I think Tore, we think we can participate in just about all parts of the USB Type-C marketplace, both in handsets and in PCs. You probably won't see us on the real low end, aftermarket dongle, where there just could be some really low end products. We see that market being maybe $1.4 billion and TAM's size on 2017.

We think we can get our arms on their share of market share there. Guiding principle always been high R&S..

The real key is the fundamental capability is not just about the silicon per se, but it's the ability to bring power and data and the real universal basis associated with it and we are working with all the leading customers on the implementation associated with that and think that our demonstration of our capability and leadership in that area will be well put, well served here..

That's really helpful. Thank you guys..

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

Hi, guys thanks for taking my questions. First on the OpEx I just wanted to verify, you have said you have delayed some hiring because of Freescale.

But the OpEx control we have seen at this point, I just wonder really if this does not have anything to do with the synergies or the synergies that you are looking for are still in front of us and they can layer in on top of the current OpEx certainly?.

The way we have said you should look at your synergies is you take your forecast for NXP, your forecast for Freescale, add them together and add $500 million of profit. So it's all intact. But we are not guiding synergies of this quarter's OpEx level. That's kind of irrelevant..

So Stacy I think the key message we are trying to get across is we've been really very thoughtful of having people additions in the near term because of the fact, with a combination of both organizations we know that in driving those synergies there's going to be a number of people that are going to be affected.

So we want to be sure that we have then minimized the disruption by not significantly adding people in the current period, that then might take jobs that we would have the ability to place people with the right skills associated with the integration.

So it's really trying to be very thoughtful about the combination and how we can be in the best position moving forward associated with it and it gives us some advantages in the near term because we are not ramping people additions as we would have originally planned associated with it/ So that's really what we're trying to communicate Stacy..

Thank you very much that's helpful. I could ask - well go ahead….

There's one thing on that. The other thing I would say is there is as you would expect as we go into a merger kind of some noise around our results. But I have just two things I would like to pick out really. One is the fact that kind of now on a standalone basis I think I can run 9% SG&A.

So I think that's a 100 basis point improvement over what we said previously. And the other thing is and I am not sure if I have picked what the total is, we are carrying $10 million more interest cost per quarter because of the merger than you otherwise would have seen.

So everything else being equal, our guidance for Q3 would have been $1.54, if I haven't kind of put that definitely. So you are all going to see some noise in the next quarter or two, but I think all the signals are very positive at the moment..

Got it. It's very helpful. Thank you. If I could do one quick follow-up on gross margins. You had a little bit of upside this quarter and you have got a little bit of upside in guidance for next quarter.

Can you give us some feeling on the drivers of that, is it mix pricing efficiency or something else? And if FX has had any impact on any of the numbers in the quarter?.

Okay. So I guess a couple of things. On gross margin no one big thing. You see lots of moving parts. We have our regular ASP changes, continuing cost reduction and mix probably in those orders. But it's slowly creeping up, which I think is really good news.

FX as we said earlier, although FX impacts are revenue, because this is about 14% of our revenue is denominated in Euros. We also have costs in OpEx that are denominated in Euros. So they kind of offset each other, so there is no real impact at the EBIT level.

I guess going from Q1 to Q2, revenue is on an about $7 million headwind, which was kind of pretty much expected in our guidance..

Thank you guys..

Thanks a lot..

Our next question comes from the line of Ambrish Srivastava with BMO. Your line is now open..

Thank you. Rick, you have been pretty good about articulating and then acting on that and I am referring to businesses that you don’t deem to be core to NXP portfolio and strategy. So if I think about wireless infrastructure, now that you have sold the NXPPs, so you would in effect be competing with the Chinese entities.

And AT&T recently was asked about what does 5G do to CapEx and they said well SDN will have an impact of lowering capital intensity. So is wireless infra something and not just because I'm negative on the volatility, semis and volatility go together. Is this an area that you see as something that fits into the NXP portfolio longer term? Thank you..

Yes. I think that the one thing that we have to consider is with the transition with NXP's RF power business being sold to JAC and with us then acquiring the Freescale business. The Freescale business is the true industry leader associated with it. The margin performance of that business is clearly in line with kind of our HPMS business.

But as we have talked about before we don't like the fundamental volatility of that business, not when it's going up as rapidly as it did beginning kind of late 2013 and throughout early 2014 and certainly not with the inventory correction that's taking place by the industry in Q3.

But when you think about our strategy as far as really focusing on being able to drive secure connections for the smarter world, one of the key things associated with that is being able to provide the infrastructure to accomplish those secure connections.

And both the network processor at Freescale as well as the RF power business clearly play a role in being able to facilitate that. So you know I think we are very focused on those businesses and how any of our businesses can be a true industry leader and drive the kind of profit performance that we think is in the best interest of our shareholders.

And clearly we think that business has that. The downside is that you have clearly a more inherent volatility from a historic basis than what it has.

I think we haven't had the opportunity to spend a lot of time with the Freescale team associated with it, but you know, clearly there are some emerging applications in RF power business that we think could be beneficial for the fundamental business stretching beyond just the base station market itself.

So it definitely is a business that falls into the characteristics of our HPMS business from a profit performance viewpoint and a true industry leader where it's at least more than 50% larger than the number two player. And so I think we feel pretty good about it..

Okay. Thank you..

Our next question comes from the line of Mark Lipacis with Jefferies. Your line is now open..

Thanks for taking my question. Rick you mentioned integration planning on the Freescale and I was hoping you could provide some more color on that.

To what extent when you close the deal will you have your sales and systems integrated? So if sales force is hitting the ground day one going after those revenue synergistic opportunities?.

Mark, we are making a very significant investment and the fact is Freescale talked about on their earnings call. We have joint teams across the company. I think we have 35 or 40 teams across with a person - at least one person from each company working on these.

And so I think in total we have maybe a couple hundred people that are actually working on the integration planning with a significant portion of their time being focused on that. So I think the synergies in the opportunity to work together on the planning for the integration for day one we are making good progress on.

As I mentioned earlier, we continue to be more excited talking with customers about the opportunity to bring the two product portfolios together. So the key for us is to get through the regulatory process, so we can be in at this position to move forward quickly.

But our objective is to be in a strong position for day one where we can hit the ground running and be sure that we don’t miss a beat with any of our customers on support and being able to drive the business opportunities to be able to drive solutions that have a favorable impact on our customers as they try to address some of the specific areas combining security and the computing capability to really be able to address the expanding connected device market going forward..

Thanks. That's helpful. Rick, a follow-up for you if I may. I was hoping you would share your view on where the semiconductor industry is in the consolidation cycle and how does that affect your view on sort of participating? That's all I have thanks..

Thanks, Mark. I think the industry is clearly - we've been talking about this for a long time. I mean the industry has - the industry is maturing. We don't have the double-digit growth that we had on a historic basis.

And so with the slowing great growth you see a need for companies to be able to actually view transactions to consolidate the industry, so that it can meet the requirements associated with shareholders. I think that you are going to continue to see more and more of that.

I think when you think about it there's a large number of subscale semiconductor companies that cannot afford the long-term R&D investment, the intellectual property. The competitive manufacturing cost base is not having sufficient scale to be able to drive volumes with the foundries and the channeled market to be able to address that.

So I think you'll continue to see a significant opportunities. For us the opportunity with Freescale is really not about scope or scale.

It's really about addressing the Secure Connected Device market and being able to bring the combination of the strength that Freescale brings from the computing side with the strength that we have, NXP has, on the security side as well as the connectivity side to be able to drive a more complete solution as we think about the Connected Device market going forward.

So ours is really clearly driven by a strategic combination that we think creates significant value associated with that for our customers. I think that going forward from a NXP viewpoint on the new NXP, we will continue to be focused on that.

With the opportunities, as Peter said, by the summer of next year we will be back down below our 2x annualized EBITDA objective. So we will clearly have the opportunity to think about other alternatives that will bring a more complete solution for our customers as well as the opportunity to return capital to our shareholders.

So I think we are early on and there is going to be continued activity associated with the consolidation of the industry..

Thanks for those comments. Rick, they were very helpful..

Thanks. Operator we will take one more question and then we will end the call today..

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

Yes, good morning guys. Thanks for letting me sneak in and congratulations on the strong results given the industry backdrop.

Rick I was wondering, if I could talk a little bit about kind of your view of the industry backdrop and specifically I know it's not a focus of the company, but the Standard Products division tends to correlate most highly with the broad semiconductor market.

You are guiding up sequentially in the September quarter which kind of implies that business is flat year over year. That's versus a lot of kind of the broad base peers that are guiding anywhere from down mid single digits to actually down high single digits year over year.

So I was just kind of curious, as to why that business seems to be doing better? And in general you have a more positive backdrop I think than some of your peers about kind of the current market environment and while we externally look at the one or two drivers of sort of outperformance in revenue, I know internally you guys look at 56 different business lines.

I am kind of curious, if you guys have sort of a breadth index that you look at that helps you kind of monitor where you think we are in the cycle and what that might be telling you?.

So breadth index sounds like it is something you need to take into account after you have been out and had a long night of drinking. But talking about our product portfolio, I think John specifically in Standard Products, I think we try to be specific associated with this.

I think we see a cautious environment from our customers and distribution partners with some uncertainty. And part of that's driven from a macro basis as the GDP growth continues to get trimmed, if you will. So not significantly reduced, but more of a trimming associated with the overall economic outlook.

And so that ends up having an impact on seeing from a semiconductor growth viewpoint. I think for our Standard Products business I think there's a couple of things coming into account. Q3 is usually our strongest quarter from a seasonal basis. So that's clearly one factor associated with it.

We talked about our distribution inventory being beyond 2.3 months which is really kind of below or at the low end of the range that we would like to have.

So clearly we need to be in a position where we increase our distribution inventories from where it is because we pay these guys a good margin and we want to be sure that they carry the inventory to be able to meet our customer requirements.

So I clearly would like to see that distribution inventory level at a higher level than it was at the end of Q2. So I think all of that kind of comes into account with the outlook that we have, but from a general business environment viewpoint, I think we would say that it is clearly cautiously or more cautious than it was 90 days ago.

But we do not see a precipitous decline associated with the overall demand. I think you see a lot of noise in the market from different companies with their outlook associated with it. Clearly that has to do a lot with individual company's performance as well as the overall marketplace itself.

And I think it's hard to draw any conclusion about any individual company or any conclusion about the overall market from any individual company, including us.

But on Standard Products itself, clearly I think the fact that seasonally Q3 is usually a pretty strong quarter and the fact that our distribution inventory levels are unreasonably low at the end of Q2 is clearly a factor relative to our guidance in the Standard Products business for Q3..

That's really helpful. And then maybe a couple of quick ones for Peter. Peter, just relative to the high performance RF sale, should we assume a 1.5 point or so of headwind as we think about modeling December quarter growth or revenue? And then just I want to get some clarity around your comments today on operating margin and SG&A.

Historically the narrative has sort of been we are going to target sort of off margin range and it would drift above that for any reason we are likely to reinvest the extra back into R&D to drive growth.

I am just kind of curious and I know that standalone company targets are becoming less relevant given where you are in the merger, but should we start to think maybe that your historic off margin targets are wrong and too old because you are just seeing better scale availability?.

Yes. I mean, let's take that one first. We have said historically 26% and we are running 28% at the moment. I put that down to two things. I mean as a standalone company, where 28% is actually okay and it's two things. One is, I am convinced now we can run SG&A at 9% instead of 10%.

And then the one that's kind of interesting is Standard Products they just performed absolutely brilliantly and with depending on how you look at that our guidance has been more around the fact that maybe they should run high teens rather than 23% EBIT. So we took them back to kind of high teens, that's another 1%.

So my 26% going to 28% is strictly a better performance in SG&A and Standard Products are performing better than they expected. And what we are not sure about at the moment is that a temporary thing or is that something they can continue to run with.

And to be honest it just looks like the guys are doing a brilliant job and that's what they can run with. So I am very pleased that we are up for good to kind of 28%. And neither those two things I talked about kind of impact our investment in the company at the R&D level. In terms of RF power it's kind of hard to kind of give guidance.

I mean what we have said historically is it's - I think it's a very - well about $450 million business a year and it runs at kind of HPMS margin levels. So, yes, it just depends what you think it might be in Q4. We certainly give it up trying to predict what the base station OEMs are doing with their inventory level..

That's helpful, thanks guys..

Thanks John..

Thank you. I would now like to turn the call back to Rick Clemmer for closing remarks..

Thank you operator. So just to summarize once again for the quarter. The revenue of $1.51 billion up 12% year on year we believe continues to outperform our peer group average in Q2 by roughly 2x, continuing the trend that we've been able to establish over the last few years.

We grew operating profit 25% year-on-year to 27.8%, actually setting a record for the company and earnings-per-share growth of 32%, again setting a record for the company. So we continue to feel very good about the financial performance of the company and what we've been able to deliver.

In addition we generated $262 million of free cash flow up 71% year on year, setting a good strategic position to be able to support the financial requirements associated with the merger with Freescale. So again we believe we are well-positioned to deliver on our long-term strategy and thank all of our shareholders for the continued support.

I guess I would like to also be sure that we thank all of the NXP and Freescale employees for all of their hard work on delivering the results as we prepare for the pending merger once we get the regulatory approval. Thank you very much and have a great day..

Thank you everyone..

Ladies and gentlemen thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day..