Jeff Palmer - Vice President-Investor Relations Richard Lynn Clemmer - President, CEO & Executive Director Peter Kelly - Chief Financial Officer & Executive Vice President.

John William Pitzer - Credit Suisse Securities (USA) LLC (Broker) Ross C. Seymore - Deutsche Bank Securities, Inc. Blayne Curtis - Barclays Capital, Inc. William Stein - SunTrust Robinson Humphrey, Inc. Christopher Caso - Susquehanna Financial Group LLLP Stacy A. Rasgon - Sanford C. Bernstein & Co.

LLC Ambrish Srivastava - BMO Capital Markets (United States).

Good day, ladies and gentlemen, and welcome to the Third Quarter 2015 NXP Semiconductors Earnings Conference Call. My name is Candice and I'm your operator for today. As a reminder, this call is being recorded for replay purposes. Now, I would like to hand it over to Mr. Jeff Palmer, Vice President of Investor Relations. Please proceed, sir..

Thank you, Candice, and good morning, everyone. Welcome to the NXP Semiconductors Third 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 third quarter 2015 earnings 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, 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 fourth 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 will make reference to certain non-GAAP financial measures which exclude the impact of purchase price accounting, restructuring, stock-based compensation, impairment and other charges that are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance.

Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our third 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.

I would now like to turn the call over to Rick..

Thanks, Jeff, and thank each of you for joining us on our earnings call today. Our profitability in third quarter was very strong with non-GAAP operating margin of nearly 30% and we delivered total revenues of $1.52 billion.

Revenue was approximately flat versus the same period in the prior year and increased about 1% sequentially from the prior quarter and disappointingly, below the lower-end of our guidance.

In spite of weaker revenue trends, non-GAAP diluted earnings per share were $1.57 above the high-end of guidance, as a result of better growth margin and expense control resulting in improved profit follow-through.

As we noted on our last earnings call, we were seeing weakened demand from customers given their concerns with the uncertain economic environment. This trend accelerated from late August downwards across multiple end-markets.

This has resulted in lower-than-planned sell-through and an increase of channel inventory as a result our guidance for the fourth quarter reflects a much more reduced view of sales for the quarter.

Before I turn to the details of our quarterly performance, I would like to highlight that we are only providing limited guidance this quarter due to the expected merger close with Freescale. Our view is that when we actually report fourth quarter results, certain line items will materially change.

This includes, but is not unlimited to, the overall interest cost on our debt and the fully-diluted share count at the end of the fourth quarter. As this approach to guidance is different than past periods, I will personally include the revenue guidance expectations for the fourth quarter later in my remarks.

Turning to our segment performance, HPMS segment revenue was $1.16 billion, up about 2% both on a year-basis and a sequential-basis. This was slightly weaker than our original expectations. We do not believe that we've lost any market share or key designs. Rather, we believe our customers are taking a much more restrained approach to end demand.

Clearly, the growth our customers expected and communicated to us early in the year has been significantly reduced. Moving on to the end-market details of the quarter. Within Automotive, revenue was $308 million and in line with our expectations. During the quarter, revenue grew about 7% from the same period a year ago.

And while down 1% sequentially, we did experience better-than-planned demand for keyless entry and in-vehicle networking products, but the sale of entertainment products was weaker than expected, though still strong on a year-over-year basis.

We see the fourth quarter as being negatively impacted by the continued falloff in demand for the entertainment products within the automotive aftermarket segment both in Japan and China. Normally, we would've expected a seasonal uptick in demand within the auto entertainment area.

As a result of the weaker demand, channel inventories have grown, and we are lowering our expectations until we see substantially improved sell-through.

Clearly in the second half, demand for automotive products has been impacted by the fact that global auto unit production for the full year has been reduced from what had been anticipated earlier in the year, and we believe will settle in at about 1% unit growth versus the original 3% expectation as we enter the year.

As we look to the fourth quarter, our expectation is for sales to be down in the high-single to low-double-digit range. In Secure Connected Devices, revenue was $317 million, up 5% from the same period in the prior year and up 15% sequentially.

This was below our expectations, driven by lower-than-anticipated sales of broad-based MCUs in the market in China. Over the short term, our growth in connected device revenue will likely be below our longer term growth target due to a number of factors.

First, the mobile transaction market continues to develop at a slower-than-expected pace, though our sales in the area has grown about 30% year-over-year. We do not expect significant new customer acceleration until we see that China handset OEMs add more transaction solutions to their platforms.

There are encouraging signs, and our engagement level is very high, especially due to our ecosystem knowledge and ability to enable transit solutions in multiple large cities in China. However, growth related to these engagements will likely not materialize until sometime in 2016.

Secondly, we have a number of new general-purpose MCU products where we are seeing good design win traction, especially in China. But the transition to revenue contribution is happening at a slower-than-originally-expected rate.

Lastly, our mobile audio product growth is expected to slow as we've seen several of the Chinese handset OEMs reduce volumes while others have postponed the release of new handset platforms using our product due to the uncertain economic environment.

Taken together, we expect secure connected devices revenue in the fourth quarter to be down in the high-single to low-double digit range. In the Secure Interface & Power group, revenue was $270 million, down 9% from the same period in the prior year and down 11% sequentially.

This was below our expectations, primarily as a result of the weak demand in the base station market and to a lesser extent, the continued weakness in power lighting. Looking forward, we believe the RF power business will continue to struggle in the very short term as new base station build-outs continue to be delayed; particularly in China.

Although we believe it could be an overcorrection as it was with the significant requested upsides last year, which could again result in shortages at some point in the coming quarters.

Within our high-speed Interface business, we also expect to see significantly moderate in the fourth quarter as certain mobile customers reset run rates and rationalize inventory throughout their contract manufacturing supply chain – an unexpected change and a clear disappointment.

Taking these factors together, we believe Secure Interface & Power group revenue will be down in the high 20%s to low 30% range in fourth quarter. Revenue in Secure Identification Solutions was $269 million, up 7% from the same period in the prior year and up about 5% sequentially, in line with our expectations.

During the quarter, we saw demand for bank card products above our original expectations, primarily for dual interface products in China. Sales of mobility and transit products increased sequentially, though slightly below plan. We experienced a very modest ramp of new eGov programs, but at a lower level than originally expected.

The challenge we are facing in the eGov market is delayed tender awards as the market continues to be exceptionally lumpy and influenced by macroeconomic conditions. We also do not see a significant positive impact on our banking business from the EMV upgrade cycle in the U.S.

Demand continues to be predominantly for contact solutions currently, but we have multiple engagements for dual interface programs which should help growth in 2016.

Looking to the fourth quarter, we expect SIS revenue to be down in the low-double digit to mid-teens range, primarily due to the expected seasonal declines in banking revenue and lower-than-expected sales in the eGov and transit products.

Finally, turning to the Standard Products segment, revenue was $325 million, down 2% compared to the year-ago period and up 1% versus the prior quarter. We have always said our Standard Products business was the best litmus test of the overall health of the end market.

We are seeing trends that support this view with sell-through at our Asian distributors particularly weak. As with our Auto business, we will reduce our shipping to distributors during the fourth quarter until the view of end-demand becomes clearer.

Consequentially, looking into the fourth quarter, we expect standard product revenue to be down in the low-double digit to mid-teens range. Taken together, this leads to – leads us to believe total NXP revenue in the fourth quarter will be down in the mid-teens range inclusive of about $25 million of sales in the Corporate and other segment.

Peter will discuss expectations for margin and operating expenses in a few moments. Turning to our distribution channel performance, we are seeing the biggest disruption in sell-through. Total sales in the distribution were up 8% to support expected sales.

However, reflecting the reduced demand environment, we actually saw sales out of distribution channel down 5%. The total months of inventory in the distribution channel were three months at the high end of our long-term target. Absolute dollars of inventory in the channel increased 25% on a sequential basis.

In summary, our Q3 results were good from a profitability perspective but clearly a disappointment in terms of delivering revenue growth. However, even comprehending this, our HPMS business growth year-to-date is 12% versus the same period in 2014.

The current demand environment is – in our target markets has clearly deteriorated and will continue to pose short-term challenges. Our guidance is a reflection of this uncertainty. We believe we continue to have market-leading product offerings, and our engagements with customers continue to be robust.

We view the current environment more as a pause and would anticipate demand to improve in the coming quarters. Notwithstanding the current business trends, we continue to be very positive on the intermediate and long-term benefits of the merger between NXP and Freescale, both from a financial, customer and product solution perspective.

As you know, the new company will have a combined revenue base of over $10 billion and will be the fourth largest non-memory semiconductor supplier with number one position in automotive, general purpose microcontrollers and network processors.

In the short-term, we see a clear path to achieve $200 million in annual cost synergies in 2016 and ability to deliver $500 million in synergies in subsequent periods. Despite the current environment, our focus will be to drive the strategic benefit of the merger with Freescale, delivering a substantial increase in earnings.

Aside from the financial benefits, the customer feedback has been very favorable. Early in the process, they clearly saw the benefits from the combined company. Several have requested that we engage on new product developments that neither NXP nor Freescale could have supported independently.

This is especially true in the automotive market, where the combined portfolio is ideally positioned to deliver the broadest range of ADAS capabilities in all of the key areas including radar, vision systems and long-range vehicle-to-vehicle solutions.

These engagements are clearly a significant opportunity but will take some time to translate into material revenue. Additionally, automotive customers are very excited about the potential to combine NXP's security capability with Freescale's broad microcontroller and the connectivity expertise of both companies.

The combination of which is viewed as delivering, on the cornerstone of the Internet of Things are secure connections for the smarter world. Lastly, the overall regulatory approval process is progressing as anticipated, and we believe we are on track to close the transaction in the current quarter.

We continue to make very good progress on the integration planning of the two companies. And the employees of both companies are anxious to proceed with the combination.

We would like to thank the teams from both NXP and Freescale for all of the tireless efforts on additional activities planning for day one and their understanding for the regulatory process.

We believe the merger of the two companies will drive a transformation in the market reach, product capability and will provide a significant catalyst for customer and shareholder value creation. Now, I'd like to turn the call over to Peter, to discuss the financial details of the quarter..

Thank you, Rick. And good morning to everyone on today's call. As Rick has already covered the drivers of the revenue during the quarter, I'll move to the financial highlights. In summary, Q3 was a good quarter from a profit perspective as we delivered record non-GAAP operating profit, operating profit margin and earnings per share.

Non-GAAP operating profit was 29.5% and non-GAAP EPS was $1.57, both of which were above the high-end of our guidance. Cash flow was strong and our leverage ratio at 1.35 times continues to be substantially below our long-term target as we prepare to finance the Freescale merger.

Focusing on the details of Q3, total revenue was $1.52 billion, up nearly 1% year-on-year but below our expectations and, clearly, a disappointed. We generated $748 million in non-GAAP gross profit and reported a non-GAAP gross margin of 49.1%. So, turning to our reportable segments.

Within the HPMS segment, revenue was $1.16 billion, up about 2% year-on-year and up by about the same amount sequentially. Our Non-GAAP gross margin was 54%, 30 basis points better than the second quarter. Non-GAAP operating margin improved to 31.9% as a result of better gross profit and improving expense management.

Within our Standard Products segment, revenue was $325 million, down 2.4% year-on-year and essentially flat versus the second quarter. Non-GAAP gross margin was 35.4%, 30 basis points better than the second quarter. Our non-GAAP operating margin was 24.6%, a 132-basis-point increase sequentially.

Total non-GAAP operating expenses were $303 million, down $14 million on a sequential basis. From a total operating profit perspective, non-GAAP operating profit was $449 million, and non-GAAP operating margin was 29.5%, up 170 basis points sequentially. Our Interest expense was $44 million.

Non-controlling interests were $18 million with cash taxes at $7 million. This resulted in total NXP non-GAAP earnings per share of $1.57, above the high end of our guidance, up 16% year-on-year and up 9% as compared to the second quarter. Stock-based compensation, which is not included in our non-GAAP earnings, was $34 million.

Now, I'd like to turn to the changes in our cash and debt. Our total debts at the end of Q3 was $5 billion cash at the end of Q3 was $2.4 billion, and net debt was $2.6 billion. We exited the quarter with a trailing 12-month adjusted EBITDA of approximately $1.89 billion.

The ratio of net debt to trailing 12-month adjusted EBITDA at the end of the second quarter was 1.35 times, and our non-GAAP interest coverage was 10.2. Turning to working capital metrics, days of inventory remained at 95 days.

And please note that days of inventory calculation includes $66 million of inventory mainly relating to our RF Power and Bipolar Power businesses, which is excluded from the inventory figure on the balance sheet as we have classified these product lines as assets held for sale.

Days receivable were 37 days, an increase of 5 days sequentially, and days payable were 86, flat versus the prior quarter. Taken together, our cash conversion cycle was 46 days versus 41 days in the prior quarter. Cash flow from operations was $340 million and net CapEx was $74 million, resulting in non-GAAP free cash flow of $266 million.

We repurchased approximately 1.8 million shares for a total cost of about $158 million or an average of $89.12 per share.

As Rick has already provided details on our expectations for the fourth quarter, I will only provide a summary, but would like to reiterate that when we report our fourth quarter actuals, the actual report will be materially different due to a number of factors including interest expense and non-GAAP diluted share count, all of which are difficult to quantify at this point in time.

We currently anticipate total revenue will be down in the low- to upper-teens range sequentially, reflecting the following trends in the business. Auto is expected to be down in the high single to the low double-digit range. Secure Identification Solutions is expected to be down in the low double to mid-teens range.

Secure Connected Devices is expected to be down in the high single to low double-digit range. Secure Interface & Power is expected to be down in the high 20% to low 30% range. And Standard Products is expected to be down in the low double to mid-teens range.

We anticipate revenue from the combination of manufacturing and corporate and other to be approximately $25 million. We expect non-GAAP gross profit to be about 49%, plus or minus 50 basis points. Operating expenses are expected to be about $310 million, plus or minus $5 million.

So lastly, before I turn to your questions, consistent with our historical capital allocation strategy of returning all excess cash to our owners, we expanded our stock repurchase program and increased our buyback authorization by up to 20 million shares. I'd like now to turn it back to the operator for your questions..

Thank you. And our first question comes from John Pitzer of Credit Suisse. Your line is now open..

sell-in, up 8%; sell-through, down 5%, three months of inventory. I'm kind of curious.

Embedded in the Q4 guidance of down 15% for the total company, what's the view sort of in sell-in versus sell-through for distribution and where do you think distribution inventories will be at the end of the quarter?.

Yes, that's a really good point, John.

And as you realize, with all the distributors we have and the broad range of product portfolios, it's hard to call that specifically, but clearly, when you look at our decreased revenue for the quarter at something in the mid-teens, our sell-in to distribution will be at least at that level, if not even maybe a little bit more of a decrease than the overall total.

Based on everything we see from the distributors, Q3 clearly did not materialize with the growth that they had originally anticipated, that they put the orders in place for. And so, what we see today is – is their expectations to be a slight decline. Not a precipitous decline.

The reason that we have the projected 15% decline is as we begin to correct those inventory levels that were increased in Q3.

It's interesting, because at around three or slightly above three months of inventory, those aren't really so far out of the range of perspective of where we had really liked to be, but we would've liked to have gotten there over a number of quarters across a broad range of our product lines as opposed to a one-quarter increase based on a reduction of sellout.

So, we clearly are going through a significant transition, and that's the reason we've adjusted our revenue projections for Q4, is to be able to take some significant actions to ensure that our inventory at our distribution partners are in line with their reduced expectations associated with the demand versus where they originally were back 90 or 120 days ago..

Rick, I know it's hard to forecast this, but is the assumption that most of the inventory correction through distribution will be done in the December quarter?.

John, I think it's really hard to completely pinpoint that. I think a big chunk of it will be – there could be some product areas where we still have a little bit. The – basically, if you look at the China car radio market, basically there were no orders in Q3. Sell through went away.

And now the question becomes, do those orders come back? Because obviously, orders have to come back for us to be able to reduce that inventory. So, I think we'll make significant progress in correcting our inventory levels in Q3, but will we be absolutely where we want to be in all product lines? I don't think that I can actually say that for Q4..

That's helpful. Then, guys, maybe as my follow-up. Peter, you guys have done a good job on the gross margin line. I think you gave us the utilization rates for Q3.

Given sort of the revenue guide for Q4, where would you expect utilization rates to go? And it might be a moot point with the merger, but help me understand again, for every drop in utilization what the impact might be to gross margins a quarter out..

I think there's a couple of things, John. One is if you look at our kind of manufacturing profile now, it's quite different from when we used to give that out, I think it was three or four years ago. So, we're able to kind of manage our overall wafer supply on a much more variable base now than we've done in the past.

Now, we have two big internal fabs. So, we have ICNH (27:00), which to be honest, will continue to be largely full in Q4. And then in SSMC, which is our joint-venture fab in Singapore, we're able to keep – we own just about 60% of that fab. We're able to keep our side of that.

Pretty full, but our joint venture partner is lowering its utilization of it at its 40% bit. So, utilization will be down in the fourth quarter, but financially, it's not a big impact to us actually.

And you can see that in the – our guided gross margins pretty flat quarter-on-quarter, so, certainly, one of the good things we've done in the last few years..

Okay. Thanks, guys..

Apologize for the background noise. I mean, it sounds like maybe someone's coming to arrest us or something. I don't know..

Thanks a lot..

And our next question comes from Ross Seymore of Deutsche Bank. Your line is now open..

Hi, guys. Thanks for letting me ask a question. I want to follow up John's first question, maybe ask it a different way. If you did not have the inventory burn, because we know you're a sell-and-revenue recognizer in the channel, from your answer, Rick, it sounds like your guidance would still be down at the same range.

So, maybe the way to summarize it is down 15%.

Is that what the guidance would be even if you weren't burning channel inventory, and if it would be different than that number, where do you think that the revenue guidance would in fact have been?.

So, I guess what I'll say, that's not what I intended to say. So, let me try to clarify. I think the decrease in our outlook for Q4 clearly comprehend some of the realignment in our distribution inventory with our partners. So, if we did not have that correction in the distribution inventory, our decline would not be 15% in the Q4 timeframe.

I think, based on what we hear from our disti partners, on basic demand, I think it would be kind of low- to mid-single-digit decline in Q4 associated with it.

So, clearly there's a significant chunk of our reduced outlook for Q4 that has to do with the realignment of the disti inventory, and there's a portion of it that's just associated with the reduced demand from our customers on an ongoing basis.

And I don't know how to be too specific with that, but it's probably somewhat close to kind of half on both.

But I think clearly, if we looked at the – just the demand from our customers, it would've been more like kind of low to mid-single digit decline with the remainder of our decline projected being really the realignment associated with our distribution inventory..

So, if that's – whether it's half 7% or 10% from what you just said of the 15% as coming from the channel inventory burn, I know it's hard to talk about the duration of that inventory burn.

But whether it's 1Q or 2Q, is it your estimation that in all likelihood, you'll return to shipping in line and so the negative that you're facing in the fourth quarter will turn to kind of a mathematical positive at some point, and do you think that's kind of first quarter or it's going to be longer than that?.

Ross, I think it's hard for us to do a projection about absolutely specifics. I think it's going to take a while. I don't know that we'll be back at an absolute ship-through level on an equivalent basis by Q1 where there still won't be a little bit of inventory adjustment in Q1. I think it's really hard for us to see that.

But clearly, I think we're taking a very direct and specific action in Q4 trying to realign as quickly as we can. I think it's important for us to get this cleaned up before we go into the combination.

I think as we proceed with the combination, we want to be sure that our inventory levels are approaching in-line levels and where we would like to be to operate on more of a normal basis point forward..

Great. And I guess as my follow up, you mentioned about the combination of things. Peter, given the lower base of revenues that you have, I know Rick said that the target for cost synergies remains unchanged at the $200 million and then eventually $500 million.

What's the – is there any change to the leverage target that you have, given the different base of revenues for both companies?.

No. We kind of looked to that. So, I still think we'll be down in to – back to 2 by the summer of next year..

Great. Thank you..

Thanks, Ross..

Thanks. Thank you. And our next question comes from Blayne Curtis of Barclays Capital. Your line is now open..

OpEx came in much better for September.

Were those planned moves ahead of the merger or were you able to react to this weakening demand?.

No. I think we should be specific about kind of our OpEx levels. We've talked about that we were really being very cautious relative to any additions in people in the current environment until we get into the merger.

The fact is, is that we know we're going to have some people that are going to end up with their rows going away, and we want to be sure that we take advantage of placing as many of those people in the ongoing value-added growth as possible. So, we've been very specific in not adding resources in the current timeframe.

But that's more associated with trying to do the best thing for the combination of the pre-scaling NXP employees as opposed to any specific action associated with what we saw on the near term with the demand reductions. When you think about this – this is product that ships through the channel.

We're building it based on the expectations from our customers, as the expectations don't materialize, we'd still have the product that we built and shipping to our customers. It's better for it to be in the channel, where it can be shipped to the customers, than sitting on our docks after we finish building it.

But clearly, that's the reason why we're taking aggressive actions to try to adjust that as quickly as possible. The demand, there are some areas, like in the after-market radio market in China where, it's still pretty flat. We don't see a lot of the increase in demand yet.

The real question is, is when that will come back? And I think it's hard for us to identify specifically when that would come back for the after-market. That's a relatively small portion of the total car radio market.

But it's a factor that has an impact on our revenue and one that we're trying to do the correction for associated with the distribution inventory levels. So, it's really hard to talk about specific run rates and where it is.

For example, on our secure mobile transactions, on the mobile payment side, we saw most of that delayed with our partners from China, Inc., where we've worked on designs and have that ready to go, really delaying until they see a requirement where they have to offer that to be competitive with the leading smartphone providers.

So, that clearly is a factor associated with it. And on the RF power side, clearly the supply chain is in a major transition. I know we talked about it specifically but it continues to be a hard reset by all of our customers associated with that – with them significantly reducing their inventory levels.

And potentially, overcorrecting, and if we really do see the LTE rollout in China kick back in, we could actually be back in the shortage we were a year ago. So, this is a market segment that continues to be very difficult to call as we've said before and continue to believe that it will be.

So, it's really – Blayne, when you think about it by every different product segment associated with it, but we felt like it was really important that we take an aggressive action here in Q4 to set up the distribution inventory levels at the right level in the NXP side before we get into the combination with Freescale, so that we can start with the right position moving forward..

Excellent. And just a clarification for you, Peter. I just want to make sure I understand the mechanics. You said lower utilization but then pointed to the December guidance.

Would you take the unrealization in the current quarter? Is that something you recognize when the product sells through, i.e., first half of next year?.

Yes. Yes. On ICNH (36:12), which is the internal fab, it would move out three months, but that's completely full. On SSMC, the numbers are a lot lower than three months. But the reality is the underutilization we're talking about in Q4 is maybe a couple of points. I mean, we're talking about really low-90%s. Underutilization is not an issue for us..

Right..

But the major implications of that since it's really not our products were the miss is – it's probably more – it's reflected more on the real-time, Blayne, as opposed to being more when we ship it..

Yes. But it's – it doesn't have any impact from a timing perspective. And it's absolutely negligible, so I wouldn't worry about that..

Appreciate that. Thanks..

Thanks. Operator, we'll take the next question, please..

And our next question comes from William Stein of SunTrust. Your line is now open..

Great. Thank you for taking my question.

Gentlemen, you're characterizing the shortfall in Q4 as – it sounds more like a short-term demand in inventory issue and less of a problem with positioning with your customers, can you confirm that? And then also, relative to that, you've had a 10% top line revenue growth target for some time, you've been doing very well on top line growth until this quarter in recent years and I'm wondering if you can comment on that longer-term growth outlook, please?.

Yes. Well, thanks a lot. We still believe that the fundamentals of our business support the double-digit growth that we've talked about over a three-year compounded growth rate basis. So, it's really important to reflect that as we've talked about that, that's always been on a three-year compounded growth rate basis.

And we still see the same opportunity, Secure Connected Devices, we still think we're growing the high teens to low 20%s. Our Secure Interface & Power business which has – clearly has some disruption from the major adjustments in the RF power supply chain. We think over long term, we'll still grow in the low-double digit to mid-teen basis.

And our Secure Identification Solutions, even though we continue to see the lumpiness that we've talked about on the eGov side being a detriment, we expect to see high-single to low-double digit growth.

And then clearly, in automotive, with the strength and especially when we begin to look at the combined portfolio, on our current portfolio, we expect to see high-single digit growth. So, we feel very comfortable with the consistent growth over the three-year compounded growth rate basis that we've talked about were not reflective.

The current expectations in alignment that we're talking about for Q4 doesn't really change that at all. But clearly, is aggravated by the significant adjustment that we have to do associated with the distribution inventory basis.

If you look at our Q3 year-to-date, as we talked about, it's kind of high-single digit, and for our high-performance mixed-signal business is actually a 12% growth. So, we think that's still quite significantly above where we see the market growing through year-to-date through September..

Thanks for that thorough answer, Rick. Maybe just one follow-up if I can. Many semiconductor companies saw weakness earlier in the year. In NXP's case, it sort of came upon us suddenly in Q4, or maybe from a bookings perspective during Q3, but we're seeing it in Q4.

Is there something different about either the way you use distribution, the number of partners, something else that would sort of explain the difference, or how can you help us reconcile that, please?.

Yes. I think clearly our product mix is different than most of our peers when you think about it, with our ID business and our security business associated with it. So, I don't think you can draw a direct correlation with ours versus our peer group. Clearly, the growth that we saw early in the year, or through Q3, puts us in a good position.

About 60% of our total revenue goes through the distribution channel business. And the fact is with the significant increase in the channel inventory, a 25% increase in inventory, as the orders that they had placed on us we were able to ship to, but the sell-through that they were originally planning didn't materialize to increase sell through.

So, it's not like they've seen a significant decline in demand in most cases. There are some cases like the car radio aftermarket. But in most areas, it's not like they've seen a significant decline in demand. It's just they haven't seen the increase that they had originally planned that we were shipping inventory into the channel to be able to meet.

So, since that increase did not materialize, we clearly are taking actions to reduce the inventory in Q4 associated with it..

Thanks, Rick..

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

Yes. Thank you. Just wondering if there's been any, I guess, changes in lead times or availability or products again, something that may have encouraged the distribution channel to build up some of that inventory and how that may have changed as you go into the back of the year.

In addition, was there anything – we talked a lot about inventory and the distribution channel. What do you think has been the case with inventory at your customers as well? Has that similarly risen? And I guess that would also be something that would need to be burned off if that were the case..

Well, Chris, the one area that we did see something specific was in our Secure Interface where a number of the supply chain with the custom manufacturers actually had built significant inventory for some of our key smartphone OEM partners.

And we're seeing a correction that's taking place for that that was really disappointing, that kind of came up as we really peeled the onion and understood the inventory levels at some of the custom manufacturers associated with it. But that's probably the only thing that's really unique versus an ongoing basis.

I think the other area that continues to be a major swing is in the RF power business where there's been very significant adjustments in the demand rates from our customers and inventory levels associated with that, where they're trying to go through a significant correction.

So, I think those are some of the areas that are different than just the normal ongoing distribution levels..

Okay. Thank you. As a follow-up, can you talk about the financing for the upcoming transaction? The commitments are in place.

Have the terms been fixed right now and are there any changes to the terms that you've either seen or may foresee as the deal gets to closure?.

No, no. We still -- the commitments are the commitments. So, that's not an issue. I think, as you know, we put $1 billion of bonds in place a quarter ago and we intend to go out pretty shortly with some term loans such that we won't need the commitments..

Okay.

And the terms of the term loans? Do you have information with regard to what should we expect from that?.

No, until I do them, I won't know..

Okay. Thank you..

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

Hi, guys. Thanks for taking my questions. On gross margins, I just wanted to just be very specific.

So, I wonder, are you basically saying – let me ask you this, if revenues in Q1 were flat to down, are you basically saying there would be limited to no-impact on gross margin from that? Would all the gross margin impacts at that point only be around product mix and the like? There would be no measurable issues from utilization if Q1 revenues were flat to down on Q1 gross margins?.

Yes. I think, Stacy, this is Jeff. Just one comment. The percentage of our external foundry business has gone up substantially over the number of the years..

Yes. So, basically, in our COGS, we have a lot more variable cost than we have historically..

Got it. That's helpful..

So, there are outer limits. We do have some fixed costs still. So, if my revenue doubles or halves, in the end, you do have some limit. But kind of where we are today, it's much more impacted by the mix of the products we're selling than the actual manufacturing structure. Yes..

Got it. That's helpful. For my follow up, I just want to dig into the overall demand environment. It sounds like you're suggesting that this is a short pause. It's more inventory-driven. You're saying your customers aren't really seeing demand slowdowns necessarily, but they're not seeing the pickup.

It sounds like a lot of the issues that are across many of your businesses were from China. Given we've been seeing some weakness there for a while, I'm just wondering why your customers would've been expecting to see a pretty big demand pickup into the end of the year and have to place the kind of orders that they did.

What were they seeing, I guess, exiting Q2 and into the beginning of Q3? Why didn't they see issues earlier and kind of what changed? I find that dynamic very surprising..

Well, Stacy, I think you've got to really address that on a product by product basis. I don't think you can draw an overarching view with one brushstroke. I think you really have to talk about it on an individual basis.

I think on the car radio aftermarket, I think that began to change on them significantly, but it was clearly aggravated by the overall economic environment in China and the rest of the developing countries where the amount of funds that individuals want to spend on a high-end car radio have been reduced.

So, we see a significant adjustment associated with that. Another area that's a good example is in the mobile wallet. We would have anticipated that there would've been a rollout in the mobile wallet late this year, associated with being able to meet the requirements to be competitive on the mobile wallet.

As that delayed in China, we saw most of the China, Inc. handset. People would delay the implementation of the mobile wallet because there's an incremental cost there and if they don't need that to be competitive on the end product for their marketplace, then they're not going to add that cost basis associated with it.

So, it's really different product by product associated with it. When we entered in Q3, we had orders from our disti partners that were based on the orders that they had from their customers. And as that growth in expected demand then materialize, and we did ship increased product into the channel, obviously it went into inventory.

And so, now we're going through specific actions, product line by product line, to be sure that we address that. The car radio aftermarket is one that clearly is at too-high level, and we need to do a correction associated with it. If you think about our total inventory levels, at 3 or slightly over, that's not a totally out-of-the-realm level.

The problem is, is we got to bearing one quarter by reduced sell-through as opposed to being able to build that up over a reasonable period of time a number of quarters.

So, I don't think the absolute level is as alarming as the details when we peeled the onion below that which really has driven us to try to do a pretty significant reset in Q4 to take the revenue growth fluctuations down to reflect the lack of growth that's happening in the marketplace in most areas. Clearly not the case in RF power.

But in most areas where there's just not the growth that we had originally planned. If we look at areas like the mobile wallet, we still are very confident in that over the long term and think that that will come back next year as they have to have a mobile wallet to be competitive with the leading smartphone supplier.

So, our confidence in that is still there. It's just a matter of timing if when that gets deployed..

So, do you think you're taking a bigger correction than you ordinarily would if you weren't closing the deal?.

I don't think we can say that, Stacy. I think what we're trying to do is be sure that we manage our inventories appropriately, but we also are trying to be sure that our inventories are in good shape as we do the combination and move forward..

Okay. Thank you, guys..

Thanks a lot..

Thank you. And our next question comes from Ambrish Srivastava of BMO. Your line is now open..

Hi. Thank you. A few clarifications for me as well, Rick. Just going back to the Auto segment, most of the other chip guys actually have called out for not such a big decline in Auto. So, maybe you could help us understand your exposure by geos. And is China disproportionally higher for you? That was my first question.

Second, also a clarification, I just want to make sure I got it correct. You are not seeing a pickup in EMV in the U.S. And if not, why not? Because the EMV card rollout seems to be accelerating as we're entering the year. Thank you..

Yes. So, let's talk about Auto first. I think it's not as much on a geo basis, although it does – it is based on where it's built. But it's more about the aftermarket car radio market.

And what we've seen is the amount of money that consumers are willing to spend in the developing countries, in China on aftermarket car radio products where they're looking to upgrade their audio systems has kind of completely collapsed in the near term because of the economic environment that we're in.

Now, that happens to be primarily built in China but it's basically to serve the market in China as well as the overall aftermarket.

So, we still see healthy demand in our overall Automotive business and if you look at the growth rate that we've been able to drive this year, and as we get through this inventory correction going forward, we feel very comfortable with the growth rate in our overall Automotive business.

But the particular concentration that we see in Automotives has a lot to do with the car radio aftermarket where the demand has basically gone away for a period of time. It won't stay at zero forever, but we're doing a hard correction to be sure that we get the inventory levels in line with that.

But the growth rate in the rest of the business, we certainly feel comfortable about it, as you and I both know, you don't win or lose market share on design wins on a quarter-by-quarter basis in Automotive. So, the market position we have in Automotive is still quite secure.

It just happens to be the concentration that we have in the car radio aftermarket. On the (52:22)..

I'm sorry, Rick.

How big is the aftermarket?.

Well, our car infotainment in total is about half of our Automotive business. We haven't broken out the aftermarket specifically but it's probably something like a third maybe of that. We'd have to get the specifics for you.

But it's not the dominant share of the car infotainment business but it's a big chunk of the total still and certainly one as it goes to zero that has an impact on overall demand..

Got it..

On the U.S. EMV market, I think the thing that's really important to put into perspective, the U.S. EMV market, as it's implemented would contact EMV, the dollar size of that market is a much smaller market than where we are focused in other areas where we have dual interface that adds a lot more value for the users and a lot more content.

We're beginning to see some opportunities on design wins in the U.S., on dual interface where people will have multiple wallets on the same card and have loyalty programs and other factors associated with it where we offer the contact expand that can be used, for example, for children to be able to use payments that can be replenished online, associated with it.

So, we see some emerging opportunities in the U.S. so-called EMV market. Although it's dual interface as opposed to contact EMV the ones that we see from a growth basis. But if you look at the actual U.S.

EMV market, because of the pricing point associated with the contact level and the actual volume, we don't see a significant uptick in the dollar size of that marketplace. And it's certainly dwarfed by the size of the other markets associated with it..

Okay. Thank you..

Thanks, Ambrish..

Thank you..

Operator, do we have any other callers waiting to ask questions at this point?.

I'm showing no further questions at this time..

Okay. So again, thanks a lot for joining us today. Clearly when we look at the expectations for Q4, we're disappointed with revenue results. Although frankly, we're encouraged with ability to maintain our gross margins in a much more difficult environment with top-line revenue. So, we do have the positive aspects of that.

The small range growth opportunity that we see for the current NXP portfolio is still intact..

Ladies and Gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect..