Good day and thank you for standing by. Welcome to NXP's 2Q '21 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's call is being recorded.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Jeff Palmer, Senior Vice President of Investor Relations. Please go ahead, sir..

Thank you, Crystal, and good morning, everyone. Welcome to the NXP Semiconductor's second quarter 2021 earnings call. With me on the call today is Kurt Sievers, NXP's President and CEO; and Peter Kelly, our CFO. The call today is being recorded and will be available for replay from our corporate website.

Today's call will include forward-looking statements that involve risks and uncertainties that can 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 continued impact of the COVID-19 pandemic on our business, the macroeconomic impact on specific end markets in which we operate, the sale of new and existing products and our expectations for the financial results for the third quarter of 2021.

Please be reminded that NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure of forward-looking statements, please refer to our press release.

Additionally, we will refer to certain non-GAAP financial measures, which 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 Q2 earnings press release, which will be furnished to the SEC on Form 8-K and available on NXP's website in the Investor Relations section at nxp.com.

Before we start the call today, I'd like to highlight our upcoming 2021 Analyst Day. At this time, we are planning on hosting an in-person event in New York City on Thursday, November 11, 2021. We will open up an online registration site over the next week, and we would suggest interested parties to pre-register as space will be limited this cycle.

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

Yes. Thank you very much, Jeff, and good morning, everyone. We really appreciate you joining our call today. I will review our quarter two results and I will discuss our guidance for quarter three. Furthermore, I will provide an updated perspective on how we view the current demand environment. Now let me start with quarter two.

Overall, our results were better than the midpoint of our guidance with the contribution from the communication infrastructure end markets stronger than planned and above the high end of our guidance. At the same time, the trends in the auto, industrial and mobile markets were all slightly above the midpoint of our guidance.

Taken together, NXP delivered quarter two revenue of $2.6 billion, an increase of 43% year-on-year and $26 million above the midpoint of our guidance range. These are very good results given the constrained supply position we knew we would face entering the quarter.

Our non-GAAP operating margin in quarter two was a strong 32%, 1,130 basis points better than the year ago period and 70 basis points above the midpoint of our guidance. Our strong operating profit performance was driven by a richer product mix. Now let me turn to the specific trends in our focused end markets.

In automotive, quarter two revenue was $1.26 billion, up 87% versus the year ago period and slightly above the midpoint of our guidance. In industrial and IoT, quarter two revenue was $571 million, up 31% versus the year ago period and slightly above the midpoint of our guidance.

In mobile, quarter two revenue was $347 million, up 36% versus the year ago period and slightly above the midpoint of our guidance. And lastly, in communication infrastructure and other, quarter two revenue was $416 million, down 8% year-on-year, however, about $21 million better than our guidance. With this, let me move to our outlook.

We are guiding the midpoint of quarter three revenue to $2.85 billion, up 26% versus the third quarter of 2020, within the range of up 22% to up 29% year-on-year. From a sequential perspective, this is up 10% at the midpoint versus the prior quarter. At the midpoint of this range, we anticipate the following trends in our business.

Automotive is expected to be up in the low-50% range versus quarter three 2020 and up in the mid-teens range versus quarter two '21. Industrial and IoT is expected to be up in the high-teens percent range year-on-year and up in the mid-single-digit range versus quarter two '21.

Mobile is expected to be down in the low-single-digit range year-on-year and down in the mid-single-digit range versus quarter two '21. And finally, communication infrastructure and other is expected to be up in the low-single-digit range versus the same period a year ago and up about 10% on a sequential basis.

At this point, let me give you an update on NXP's current demand position. As I shared with you on our last earnings call, we had anticipated product supply to be a challenge in quarter two, and this is indeed what we experienced. With the continuation of robust demand, we expect supply to be a challenge for the foreseeable future.

We do continue to work very closely with our customers on a day-to-day basis to accommodate their most pressing short-term requirements. During quarter two, based on the orders and all of the various actions we took over the last six to nine months, we began to see wafer supply from our foundry partners and internal fabs improve.

We do anticipate continued increase of wafer supply during quarter three and beyond, which will support our revenue growth in subsequent quarters.

However, with customer demand outstripping current supply, a situation that we see across all our end markets, we are working diligently to secure additional supply to achieve a healthy balance of demand versus supply.

A significant number of our customers are also taking action by placing non-cancellable and non-returnable orders for the medium term. Furthermore, based on customer discussions and also based on our own analysis, we do not believe there is excess inventory of NXP components along the extended supply chain.

Additionally, we continue to make significant investments as a direct result of the very detailed conversations and associated commitments concerning long-term demand across our customer base, especially within the automotive and industrial end markets.

These investments include long-term contractual commitments to our front end foundry partners in order to assure supply as well as making investments to expand our internal front end capacity and our internal back end test and assembly capabilities so as to avoid potential bottlenecks as wafer supply materializes.

Notwithstanding this challenging supply environment, our results and guidance clearly validate the excellent underlying long-term growth, profitability and cash-generating capability of our business. We continue to see our company-specific key revenue growth drivers in our strategic end markets unfold as we have long anticipated.

These drivers include our 77 gigahertz radar systems, our e-corporate solutions, the domain and zonal processes and the electrification products, including our battery management systems, all in the automotive market.

And within the broad-based industrial and IoT market, our significant and focused investments to enable complete secure connected edge processing solutions are being very well validated by strong customer design win awards.

And these are just a few of the opportunities we have shared with you at our Product Teach-In, all of them will continue to contribute to our future growth. While we will not provide specific guidance beyond the current quarter, we do anticipate quarter four revenue will be greater than quarter three on an absolute basis.

And we are highly confident that 2021 marks just the beginning of a longer term upside for NXP within our strategic end markets. In summary, we are very encouraged by the continued and consistent rapid rebound in demand across our end markets. Our employees are highly engaged to drive our success.

We have a robust pipeline of new and innovative products. And the customer response engagement and design win momentum all underpin our optimism about the future potential of NXP. Before concluding my prepared remarks, I would like to speak to the impact the COVID-19 pandemic continues to have on NXP.

The pandemic remains active with spikes that continue to plague multiple regions where we have operations, namely India in the second quarter and Southeast Asia most recently. We continued to remain very vigilant enforcing our safety protocols across all of our global sites.

We have initiated successful vaccination drives in several countries for our team members and their families. However, the highly contagious Delta variant has required that we reverse to a complete work from home situation in several of our locations.

I am extremely proud of all our employees for their dedication and for their resilience during this very challenging period. I would like to especially commend our manufacturing operations and customer-facing teams for their relentless focus and energy while assuring our customer success.

It is their dedication and their hard work in the face of the pandemic and the very challenging supply environment at the same time, which truly make a difference. Now I would like to pass the call over to you, Peter, for a review of our financial performance.

Peter?.

Thanks, Kurt. Good morning to everyone on today's call. As Kurt has already covered the drivers of the revenue during the second quarter and provided our revenue outlook for the third quarter, I'll move to the financial highlights.

Overall, our second quarter financial performance was very good, revenues were above the midpoint of our guidance range and we drove an improvement of non-GAAP gross profit and non-GAAP operating profit, both of which were above the high end of our guidance range.

Additionally, we have implemented long-term supply agreements with our foundry partners, which we believe will enable NXP to deliver robust growth in the coming periods. Now moving to the details of the second quarter. Total revenue was $2.6 billion, up 43% year-on-year and above the midpoint of our guidance range.

We generated $1.46 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 56.1%, up 700 basis points year-on-year and above the high end of our guidance. Total non-GAAP operating expenses were $626 million, up $110 million year-on-year and up $26 million from the second quarter.

This was $3 million above the midpoint of our guidance due to increased variable comp driven by an improved first half performance. From a total operating profit perspective, non-GAAP operating profit was $830 million and non-GAAP operating margin was 32%, up 1,130 basis points year-on-year and was above the high end of our guidance.

Non-GAAP interest expense was $91 million, $4 million above guidance as we issued $2 billion of new debt early in the quarter. Cash taxes for ongoing operations were $50 million and non-controlling interest was $9 million. Taken together, the below the line items were $1 million better than our guidance.

Stock-based compensation, which is not included in our non-GAAP earnings, was $93 million. Now I'd like to turn to the changes in our cash and debt. Our total debt at the end of the second quarter was $9.59 billion, an increase of $1.98 billion due to the previously mentioned debt issuance.

Our ending cash position was $2.91 billion, up $1.07 billion sequentially due to new debt and cash generation, offset by capital returns during the quarter. The resulting net debt was $6.68 billion, and we exited the quarter with a trailing 12-month adjusted EBITDA of $3.55 billion.

Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q2 was 1.9 times, and our 12-month adjusted EBITDA interest coverage was 10 times. Our liquidity is excellent and our balance sheet continues to be very strong.

During the second quarter, we repurchased $1.2 billion of our shares and paid $155 million in cash dividends for a total of $1.36 billion of capital return to our owners.

Subsequent to the end of the second quarter between July 5 and August 2, we repurchased an additional $1 billion of our shares via our 10b5-1 program, resulting in a total of $3.37 billion returned to our owners year-to-date. Turning to working capital metrics. Days of inventory was 88 days, an increase of 7 days sequentially.

Our DIO continues to be below our long-term target of 95 days, and a sequential increase in the quarter was due to an increase in work in process driven by wafer supplies -- wafer supply deliveries to support our Q3 revenue ramp, while finished goods continued to drain to very low levels.

We continue to closely manage our distribution channel with inventory in the channel at 1.6 months, flat sequentially and below our long-term targets. Both metrics reflect the continuation of strong customer order rates and a tight supply environment.

It will take several quarters before we're able to rebuild on-hand inventory -- on-hand and channel inventories to our long-term target levels. Days receivables were 35 days, up 5 days sequentially and days payable were 92, an increase of 13 days versus the prior quarter as we continue to increase material orders to our suppliers.

Taken together, our cash conversion cycle was 31 days, an improvement of 1 day versus the prior quarter, reflecting strong customer demand, solid receivables collections and positioning for customer deliveries in future periods.

Cash flow from operations was $636 million and net CapEx was $150 million, resulting in non-GAAP free cash flow of $486 million. Turning to our expectations for the third quarter. As Kurt mentioned, we anticipate Q3 revenue to be $2.85 billion plus or minus $75 million. At the midpoint, this is up 26% year-on-year and 10% sequentially.

We expect non-GAAP gross margin to be about 56.3% plus or minus 30 basis points. Operating expenses are expected to be about $665 million plus or minus about $10 million, consistent with our long-term model. Taken together, we see non-GAAP operating margin to be about 33% at the midpoint.

We estimate non-GAAP financial expense to be about $96 million and anticipate cash tax related to ongoing operations to be about $90 million. Please note, during the second quarter, we indicated that we anticipated full year cash taxes for 2021 to be approximately 9% and then it would be back end loaded into the second half of the year.

Non-controlling interest will be about $9 million. And for Q3, we suggest that for modeling purposes, you use an average share count of 271 million shares, which is down about 13% -- sorry, down about 13 million shares from the year ago period as a result of the consistent execution of our communicated capital return policy.

Finally, I have a few closing comments I'd like to make. One, demand trends continue to be strong across our target end markets and customer interest in our newest products continues to be robust. We are diligently working with our customers and our suppliers to address order request in a timely manner.

Secondly, our third quarter guidance reflects the clear potential of our business model, both in terms of revenue growth as well as the significant profit flow through, which will enable us to drive our non-GAAP gross margin above the midpoint of our gross margin targets. Thirdly, our business continues to generate significant free cash flow.

We continue to invest in our internal manufacturing capabilities, increasing CapEx to expand our back end capacity, but also to increase the output capacity of our existing front end wafer factories.

We are steadfastly committed to our capital return policy and will return all excess cash free -- all excess free cash flow to our owners so long as our leverage ratio remains at or below 2 times net debt to trailing 12-month adjusted EBITDA. As Kurt mentioned, we believe the demand environment is strong.

And notwithstanding the supply constraints, we continue to anticipate robust growth for the remainder of 2021 as well as into 2022. Finally, I'd like to thank all my colleagues for their outstanding work and dedication. We shouldn't forget that we are all still working on the stringent pandemic protocols.

I'd like to now turn it back to the operator for your questions..

[Operator Instructions] Your first question comes from the line of CJ Muse from Evercore. Your line is open..

Yes. Good morning. Thank you for taking the question. I guess, first question for you, Kurt. I was hoping you could speak more about the current state of the auto industry.

I think there is a fear among some investors that the current auto run rate is closer to peak than trough and would love to hear your thoughts, what gives you confidence that strength is sustainable into '22 and beyond?.

Yes, hi. Good morning, CJ. We are clearly convinced that we are far away from a peak, especially in the auto end market.

The way to look at this is clearly that while the SAR this year probably is going to grow around 10%, that's the latest data point we have from IHS, there is broad consensus that it's going to grow another around 10% next year, and only then it will actually surpass the absolute volumes levels from the pre-pandemic year of 2019.

But more importantly, CJ, as we've discussed many times in the past, our content gains, company-specific content gains, and I mentioned a few in my prepared remarks, like radar, eCockpit, zonal processes and the battery management in electrification, really, really drives specific strength and growth for NXP.

And from a market perspective, I'd say that the content gains in general maybe are accelerating a little, especially thanks to the accelerated pace to xEVs. So we do see that the number of xEVs as a portion of the total car production is growing faster than anybody had anticipated.

So the latest data we see, again, I'm quoting I think IHS here, it was like 12% of the total car production last year dedicated for xEVs. It's going to be more like a quarter next year and then growing fast from there further onwards.

Since xEVs have a significantly higher silicon content compared to traditional combustion engine vehicles, this is another strong driver for the auto market. So far away from a peak. And finally, very tactically, because I know everybody wants to speak and wants to hear about that.

I mean, trust me, I'm in daily contact with the CEOs of the both the Tier 1 customers of us, which are serving the car companies and the car companies themselves, on a daily level trying to make sure that we can fulfill their most pressing needs, really handholding shipments day in day out.

So there is not a single piece of inventory anywhere in the extended supply chain. They want to build more cars. So I have any confidence that this keeps growing..

That's very helpful. Thank you. I guess, as a follow-up, Peter, gross margins are stellar. I think reading your 10-Q, you talked about the benefit of increased loadings, but that mix was not helpful and that you had higher personnel costs.

How are you thinking about I guess COVID-related costs unwinding? What kind of impact that would have on a positive side? And from current levels, how should we be thinking about uplift from here as presumably loadings continue to move higher?.

I think the -- so first of all on the COVID test in terms -- in the context of our gross margin. To be honest, I think the costs are relatively low. We've been running our factories really much the same way we have in the past. I mean, obviously, you've got the cost of just disinfecting the factory more often.

We've been paying for lots of kind of medical support, but I'm not sure it's big enough to really influence the margin. I think in terms of the additional utilization, you're seeing the benefits of that as we go from Q2 to Q3. So our guidance, 56.3% in Q3 really shows our gross margin with our factories running full out.

So as we kind of expand our revenue and go into 2022, you won't see increased utilization because we actually have to add capacity. We're running pretty much full out in Q3. So I still think 56% is I think is a great number for us, and we've gotten there quicker than we thought we would do.

And I think the answer to your question is still, 57% is still a couple of years away and is more around new product introduction. Mix helped us from Q2 into -- sort of Q1 into Q2, and that's why we did a little bit better in Q2.

But the big impact from Q2 to Q3 is really the additional utilization and being able to run our factories, particularly the back end full out..

Very helpful. Thank you..

Your next question comes from the line of Vivek Arya from Bank of the America. Please go ahead..

Thank you for taking my questions.

On the first one, Kurt, specific to autos, when do you think supply increases enough to meet demand? And importantly, what should investors look to be reassured that the industry supply response will be disciplined? So for example, if we see headlines around any specific foundry increasing microcontroller production significantly, how should we react to that? So I appreciate that you mentioned that you are in daily touch with customers and there isn't any inventory today, but as you also mentioned, the industry is increasing supply.

So how should we be assured that the supply response is not going to overwhelm demand at some point?.

Yes. Hi, Vivek. Good morning. Of course, we are watching this as always in through every cycle very, very carefully. But again, I want to reassure you, I think we really are quite far away from this, because at this point, and I mean you can read the headlines every day, the industry is still short from a supply perspective.

And then you are referring to some foundry statements about 60% increase of microcontroller shipments, there isn't that much. I mean, our -- I think our auto supply or revenue in the first and second quarter taken together is also around 50% up over the last year, and that's also what the industry takes given the record lows of last year.

So last year is not a good comparison. I think it's more meaningful to benchmark back to 2019 or even 2018 when the industry was more at peak levels from a car production perspective. So how do we check this? I mean, I would really say most of our product is very application-specific. So we are in extremely close contact.

And that is new not only with the Tier 1 suppliers, but also directly with the OEMs where the product is going. So we have a very, very good visibility in the meantime on the true demand much more than ever before in history.

And if you think about the portion which goes through distribution, we as always, continue to be super disciplined on the months of inventory with our distributors. And as we've published, we again stayed as a -- on a really low number with 1.6 months.

I mean, that's not the same number we had the quarter before, but you know that our target model is more around 2.4, 2.5. So we watch it very carefully. Given the supply situation, I think the transparency has significantly increased, especially in what we are serving, which is very application-specific product.

I could imagine that the whole question you are asking is certainly for more commodity like products, more difficult. In our case where it is so crystal clear which product goes where into what application at which car company, we have much less of a concern on this.

And given that visibility, I'm very confident that we are still quite a bit away from the situation you're describing..

Got it. Very helpful.

And then for my follow-up, I'm curious why you're mobile sales, if I heard correctly, would be down sequentially and then also year-on-year, because isn't Q3 supposed to be a seasonally stronger quarter for shipments into that market? And are we to assume that mobile sales will stay subdued even into Q4? So just why are mobile sales not behaving kind of in line with the usual seasonal pattern we see in that industry? Thank you..

Yes. Vivek, I'd say, in general, there isn't much of a seasonal pattern this year anyway given the situation. But here specifically, yes, you're right, we are guiding sequentially and also annually a little bit down. It really has to do with the supply constraints.

So we have a supply constraint for some products in the mobile market, which we know we will address later on, so this is just of a temporary nature. But for quarter three, it just hits us that we can ship to the amount which we want to ship. The good news is, it doesn't cost us any market share, so we don't lose any socket with this.

We fully keep our momentum going, and it's of a temporary nature.

If you do the annual comparison, I also might want to remind you that last year Q3 was a bit of a special quarter in mobile because it was the last quarter before the Huawei ban, which actually benefited quarter three in our mobile business since people had a bit more in Q3 than since it stopped totally in quarter four.

So that's the simple background not more..

Got it. Thanks very much..

Thank you. Your next question comes from the line from the line of Stacy Ragson from Bernstein Research. Your line is open..

Hi, guys. Thanks for taking my questions. For my first question, I wanted to double-click once again on the content increase in auto. I mean, you've called out EVs specifically. I guess, a couple of things.

Can you tell us how much of your auto business is being driven by EV today? I guess, of those content-specific drivers, which one do you think is the biggest driver in the near-term? And how much of the lift in the next quarter do you think is being driven just by end market unit growth versus like content increase because you're selling into higher content vehicles?.

Yes. Stacy, in general, our key driver for revenue growth in xEVs is clearly the battery management solutions which have a fantastic exposure. I think in our Investor Teach-In, we told you that we would have 60% CAGR over the next couple of years.

And I can absolutely reconfirm here that we are, at least, if not more than on track with that trend in battery management solutions. Now if you take it a little bit wider, it is actually more because a lot of our microcontrollers and other products are also very strongly exposed to the increased content of xEVs.

We will actually go in a bit more detail on that particular question, Stacy, in our Investor Day, which Jeff has just highlighted, November 11 to parse it a little bit more in a more detailed way on how this shows up.

But overall, just take it for granted that the double silicon content of a xEV versus the conventional drivetrain gives a significant benefit also to NXP. So we are significantly benefiting from a higher rate of xEVs, which is a strong push for our content growth story here..

Got it. Thank you. For my follow-up, I want to ask about the cash returns. So you've bought back a lot of stock. I think as of March, you upped the buyback. You had something like $2.6 billion in authorization and you're through like $2.2 billion right now. So you're almost through the whole authorization, but you're still guiding share counts down.

So I guess, do we expect even more? Are you going to return more than 100% this year? And I guess, just given the strength of the buyback as it exists, can you talk a little bit about what that suggests? I suppose it shows that you have -- I guess, it reinforces that confidence you're talking about growth in the next year.

But I guess, long picture, why you're buying back so much stock right now? And should we expect even more cash return as we go through the rest of the year since it seems like you're mostly through the buyback to date?.

So -- maybe I'll take that, Kurt. So I guess, the answer to your second or third question there is, we have a lot of confidence in terms of where the company is going. So clearly, we think buying our stock at the moment is a good investment. In terms of how much, it is really quite simple.

We've said all along, we'll keep our net debt to trailing 12 months EBITDA at 2 times level. So we'd buy back to that level all the time, and we'll continue to do that for the foreseeable future. And if that results in us buying -- if that results in us returning more than 100% this year, that's what the result is.

But to be honest, it's pretty mathematical. We're just staying at 2 times net debt..

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

[Operator Instructions] Your next question comes from the line of Ross Seymore from Deutsche Bank. Your line is open..

Hi, guys. Thanks for letting me ask the question. I had one clarification and one question and then a follow-up, if I can be so bold. But have you guys shipped the $90 million in shortages out of Texas? Did you catch up on all of that in automotive or where have you? That's the clarification.

And then I guess the longer term question maybe for Kurt on the auto side is, are you seeing the customers change their behavior at all? The just-in-time practices that that sector has adopted seemingly have backfired on them a bit with the velocity of demand recently.

Are you -- any of the conversations you're having highlighting structural changes or is this all basically just short-term reactive movement and you don't think anything is really going to change a couple of years down the road for the industry as far as just-in-time?.

Yes. Thanks, Ross. On the first one, we talked indeed about $100 million, I think I remember which we lost for the second quarter revenue given the winter storm in our two Texas facilities, that is correct. What I can tell you is indeed that both factories are up and running completely.

So we are up to the pre-storm and higher output levels in both factories, so firing on all cylinders again. And with that, we have the output which we would have wished to have already in the first place. So that is good news, both from a revenue perspective going forward, because it is steady.

I mean, this is not a one-time effect, but it's steady output. But it's also good news from a supply perspective since old factories had a significant exposure, as we discussed earlier to automotive and the comms infrastructure market which were badly waiting for these products.

So we are glad and thankful to our employees who have restored operations in record time. On the other half of your question, Ross, I see signs of a structural change in the behavior of the auto, especially also of the auto and customers. And I think there are two pieces to this.

The one is going to be indeed realizing that a just-in-time system is not totally compatible with the three to six months manufacturing cycle time in semiconductors if you don't have some sort of a buffer in between which is dealing with it. So some more inventory in the extended supply chain I think is going to be a result of this.

Now when you ask me, is this being implemented? My answer is no, but it's just because the supply is not there. I mean, at this point in time, people are planning for this at some point, but they can't implement it yet. But I think this is going to be eventually a structural change.

The other one is actually the -- first the transparency which we get directly from the car companies. As I mentioned earlier, we've never had so much clarity about what product in which application in which model year will run at what volume.

So this is becoming much, much better than it has ever been because structurally we are just moving much closer in a collaboration with the car companies.

And I think with that also the binding forecasts, so not only providing that forecast, but also making it more binding on a mid to long-term basis is going to be a structural change, and that's a significant one because that wasn't the case in the past.

So a more binding forecast will also help to foresee and plan with the right capacities on our end..

Thanks for that color, Kurt. One quickly for you Peter. You gave great color on the gross margin side of things. Another target you guys have given historically is the OpEx intensity, and I think it ranges anywhere between 20% to 24% as of your last Analyst Meeting, and I know you might be updating that later this year.

But can you talk just a little bit about the leverage potential there? I think this year it looks like you're running kind of within that target range, but at the higher end kind of 23%, 23.5%.

Do you foresee some leverage getting to the lower end of that range or just generally how should we think of OpEx relative to revenue growth?.

Certainly for the moment, I'd think of 23% of revenue, 16% for R&D and 7% for SG&A. There's probably some leverage in the SG&A number because although we typically increased sales and marketing, G&A, we'd more likely to hold flattened dollars. But I think certainly for the moment, 23% is a good number to plan on..

Thank you..

Thank you. Your next question comes from the line of John Pitzer from Credit Suisse. Your line is open..

Yes. Good morning, guys. Thanks for letting me ask the question. Congratulations on the solid results. Kurt, I wanted to ask a little bit about your comm infrastructure business which came in much better than guide for the June quarter and it's going to grow nicely in the September quarter.

I know that pre the Huawei ban, you were very excited by some design wins you've had won there, but clearly had the kind of temper expectations with the ban, but it seems like you guys might be more levered to the 5G cycle than some of us think.

Can you just walk through kind of what you think is driving that growth, especially given how good the margin could be in that business?.

Yes. So John, indeed, we did talk last year about significant design win traction around the large Chinese customer which did fall apart. So indeed, this is still not there. I just want to be clear, the business which is now performing and which we guide for the next quarter is not related to this design win which we had talked about last year.

The outperformance in the second quarter is actually across the segment. It does include some of the 5G build-outs, but it's just across all of the product sub-segments which are in this revenue segment. So it is not only 5G, but it does include 5G. Now if you think about the nice guidance for the third quarter in comms infra, then I'd say, yes indeed.

As we had anticipated and actually I think discussed on a number of the last calls, we do see, I'd say, two trends around 5G which are letting us grow. We see the anticipated ramps for these multi-technology modules in the U.S.

So multi-technology means LDMOS and gallium nitride, our new -- from our new gallium nitride both technology products and facility in Arizona, but it's also that we are nicely included in the China tenders, which are those macro base stations for the rural areas, which are actually in the frequency range sub 2.1 gigahertz.

So somewhere between I think 700 megahertz and 2.1 gigahertz which is just perfect fit to our LDMOS capability and leadership. So it is those two, John, from a go-forward basis when you think about Q3 and beyond, which are indeed driving nicely our growth. The U.S. multi-technology modules for 5G and those CP3 tenders in China..

That's really good color, Kurt. And then, Peter, in your prepared comments you talked about the high class problem of needing to expect both front end and back end capacity.

Is that mostly being done with outsourced partners, so it's more of a working capital hit than a CapEx hit or how do we think about CapEx over the next several quarters as you continue to try to make supply catch up to demand?.

CapEx will be about 7% this year. So yes, it will step up a bit in Q3 and Q4. Mainly, there's a lot of assembly and tests going in there, but also some bottleneck busting in our actual fabs. So CapEx will be up. I don't see working capital going up any time really. I mean, it's -- we definitely like more inventory if we could get it.

But as fast as we get it, we tend to build, which is the comments I had around finished goods being at an all-time low. We do have a bit more raw material and work in progress from shipments from the foundries towards the end of the quarter that we received.

So I guess, stepping back, we're definitely investing more in internal capacity and that will have a positive impact on us next year, and we continue to work very hard with our other suppliers just to get additional supply from them. But as fast as we get it, we build it and ship it to customers.

So I don't really see our inventory levels getting anything back to anything like normal anytime soon..

Perfect. Thanks, guys, and congratulations..

Your next question comes from the line of William Stein from Truist Securities. Your line is open..

Great. Thanks for taking my questions, and I'll add my congratulations especially on the guide, very strong. I'm wondering if you can remind us as sort of a clarification, the breakout within the comm infrastructure business.

I think we tend to think about this as largely or all RF power amplifiers, but I know there is digital networking and I think there's still some ID card business in there as well.

Can you remind us of the split and maybe how you expect the three of those pieces to grow over time?.

So hi, Will. Thanks for your congrats on the guidance. The subset is indeed as you said, the RF power for infrastructure, it is about digital networking and there is some secure card business also in there. We will not break out the details between them, Will.

But what I can say, and I think I mentioned it earlier, the outperformance in the second quarter was across all of them. So it wasn't limited to one of these sub-segments, but it was actually across all of them. When you think about the guide and the growth into the third quarter, it is probably less by the 5G-related comms infra RF power..

Thanks for that. And one more if I can there, sort of product question. I forget when, one or two years ago, perhaps, you started talking about the ultra wideband products and the growth that you anticipated seeing in handsets and automotive.

And I'm wondering if you can provide some update in terms of your revenue traction in those two end markets for this product category and the outlooks for them today? Thank you..

Yes. Happy to do so, Will. This because it's really nicely on track, just to remind everybody that it's not just about product, this is a complete ecosystem play. There indeed, we offer the radio, the secure element and software for solutions across automotive, mobile and IoT.

We are very much on track, Will, with I think what we said at the Teach-In to have some $300 million to $400 million revenue across those segments in '23. So in only two years from now. As of today, I'd say, mobile is actually happening as we speak.

If you think about the Android world, I'd have to say, with all the major Android phone companies, we are working very closely. Automotive is now closely following, and that was just a function of mobile because obviously the automotive use case of using your mobile as a car key needs the phones to be in place firstly, this is now happening.

So the first cars will be out in the market in the second half of this year and next year. And there, I'd dare to say with a relatively high degree of certainty that any car company which is working in and on an ultra wideband implementation is working with NXP. So we are highly and very positively exposed here.

Finally, we also see a good traction with first IoT implementations. One of the early examples are those techs which help you to find stuff, which you might have lost. But it also -- we also see nice design wins in door locks for home properties, for example. There you would then use your mobile phone to open your front door and unlock it.

So very much on track, Will. Again, the numbers which we had given were $300 million to $400 million revenue size for NXP in two years from now, and we think the market for this is growing at some 40% over the next couple of years..

Great. Thank you..

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

Hi, good morning. Thanks so much for taking the question. I just had one for Kurt or Peter. I wanted -- I was hoping you could elaborate a little bit on the LTSAs that you've already signed with foundry partners or perhaps you're looking to sign going forward? We read about price increases from the foundries going forward.

How should we think about the balance between cost inflation for you guys versus your ability to price higher as well going forward? And my guess is the 57% number that Peter you alluded to embeds some of those dynamics, but wanted to clarify that as well? Thank you..

I'll let Peter answer, but I really want to make one upfront statement because that's -- this is -- it is important. Yes, input cost is rising. And yes, we pass on the cost increases. But this is not a tool for us to artificially increase margins. We are in a large application-specific and very trustful relationship with our customers for years to come.

So we do pass on the input cost increases, but that's more the mechanism here to structurally increase margins. Peter, you might want to give more color..

I think you just answered the question really, Kurt. Yes, it's -- we are not a commodity company, we don't raise prices when times are tight and reduce them when times are not tight. What's been very interesting about this whole change is there's really been two big factors.

One, Kurt was talking about before, which is, it's enabling us to build deeper relationships with our customers and understand their requirements and their supply chains a lot better than we have in the past.

And in terms of our suppliers, you can -- without kind of going into a lots of detail, you can actually find out who are your true partners and who will support you in the years to come and who are the guys who are a little bit more predatory.

But ours is a market and supply chain where it's really built on long-term relationships and long-term sources of supply both for our customers and for ourselves and for a predictable level of pricing and profitability..

Thank you, and congrats..

Thanks..

Your next question comes from the line of Chris Caso from Raymond James. Your line is open..

Yes, thank you. Good morning. A question on the capacity additions and the CapEx that you said was stepping up here in the second half of the year. How -- for how long do you expect that to continue? I imagine that the equipment lead times are extended also. So you have to be giving your equipment suppliers some visibility on this.

I guess the question is, how long will you -- do you need into continue adding capacity in order to get caught up with the level of demand right now?.

Well, I guess, the very simple answer is we will continue to need capacity for the foreseeable future because we believe there is a really healthy cycle going on in terms of our product.

So one thing that's really come out in the last six months is that for those people outside the semiconductor industry, they've really begun to understood -- understand that semis are a core part of everything we do. So to the extent that GDP grows over the next few years, you will see semiconductors grow at probably a faster rate.

I think the thing to remember with us, about 70% -- just 70% to 80% of our assembly and test capacity is internal. So that will continue to be a kind of healthy source of capital requirements, and I think about 57%, 58% of our wafer supply is external.

We're not likely to have built a new fab, but we're constantly updating the equipment we have there to keep them current. So I think in the past we've said, through the cycle we will spend 5% to 7% on CapEx. Last year it was below 5%. This year it will be at 7%. We'll probably update a more longer term view at the Analyst Day in November..

[Technical Difficulty].

I'm sorry, you're breaking up..

[Technical Difficulty].

I apologize. I don't know if it was me, but I couldn't hear anything there. I don't know, Kurt, you could hear what he said..

I had the same problem.

But I guess, you were asking about something of the cost of increased inventory?.

Yes, I'm sorry. I'm not sure what happened.

The question is, as the inventory -- as the automakers ask for more security supplies, more inventory, who bears the cost of that? Will that be inventory that the automakers will take possession of and pay for in advance? Will it be some combination of just more inventory on the hub? Who basically pays the cost of that?.

Well, first, let me point out again, it's not something which happens to any extent today because the capability is not there. Once it will happen, it won't be us. I mean, it needs to be part of their business model. So it will have to be somewhere between Tier 1 suppliers, auto companies and maybe some distributors in some cases, but not on our end..

Got it. Thank you..

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

Hey, guys. Thanks for squeezing me in. I just wanted to revisit on the supply side, just the cadence that you're bringing it on. So when you -- the growth you're seeing in September, will you -- will inventory -- will you have to ship out inventories or are you able to match that with supply? Just trying to understand the cadence you're bringing it in.

And then you mentioned mobile, you're kind of re-prioritizing for a quarter.

Is that just kind of a one-off or are you -- are there other segments that even with the strong guide in September that you're having to prioritize away from them?.

Well, Blayne, we continue to be constrained across the board. And of course, we need to take all the time certain priority decisions, and indeed, mobile is kind of suffering in the third quarter, but everything is relatively sought across the board. The additional supply coming online is really gradual from many different sources.

I mean, we talked about it. We have increasing traction with the mid and longer term contracts with our foundry suppliers. We have Texas fully up and running by now. We have, as Peter alluded to, invested both into our internal testing, not only capability, but also looking at some expansions of our internal front end factories.

So all of these things across the different technologies and products are happening gradually. So it's not a one-time event. But I would say with the demand being as strong as we continue to foresee it, it will remain tight for a while. But the one really suffering in Q3 is indeed mobile..

Thanks. And then just want to ask you on the auto side. One, source the content gains always new model year that typically make seasonality in auto is kind of a March heavy.

It seems like maybe you're seeing '22 model year earlier? Just kind of curious, did you think about that content portion? You're obviously benefiting now from maybe a mix shift to EV, but just kind of auto seasonality, is it different this year? Are you seeing maybe model years earlier? Just kind of walk us through -- obviously, you don't want to guide for some remarks, but just any thoughts on kind of seasonality for the auto business off to September?.

Well, Blayne, I think I said for the total business that we expect Q4 in absolute revenue terms to be above Q3. That's one. Secondly, I don't think there is really seasonality in auto at this point in time because dealer inventories are at record lows in the U.S. and in China, and they just can't build as many cars as they would wish to build.

So I think it's more a function of supply availability in terms of when they would do what. So at this point in time, it is really supply constrained for them, which I think overwrites any seasonality..

Thank you..

There are no further questions at this....

At this point, Jeff, I guess we are running against time, right?.

Yes. That's correct, Kurt..

Yes. So let me then maybe from my end conclude the call with saying, I hope we could give you a good view and transparency into the continued very strong demand which we are seeing across the board.

And at the same time, the news that we are seeing increased supply capability coming online, which drives the strong guidance into the third quarter from a revenue perspective. We also told you that quarter four is going to be yet higher than quarter three, and we continue to see this trend going into the next year.

And at the same time, we see that our gross margins are now very much hitting the mark, which we had anticipated for a long time. With that, I thank you for your attendance today. Thank you..

Thank you, all. This concludes our today's conference call. Thank you for participating. You may now disconnect..