NXP Semiconductors N.V. (NXPI) Q3 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q3 2014, NXP Semiconductors Earnings Conference Call. My name is Michelle and I’m your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions]. As a reminder, this call is being recorded for replay purposes. I’d now like to hand over to Mr. Jeff Palmer, Vice President of Investor Relations. Please proceed, sir.

Thank you, Michelle. Good morning, everyone. Welcome to the NXP Semiconductors Third Quarter 2014 Earnings Call. With me on the call today is Rick Clemmer, NXP’s President and CEO; as well as Peter Kelly, our CFO. If you’ve not obtained a copy of our third quarter 2014 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 in your modeling efforts. This call is being recorded and will be available for replay from our corporate website. This call will include forward-looking statements that include risks and uncertainties that could cause NXP’s results to differ materially from management’s current expectation. The risks and uncertainties include, but are not limited to, statements regarding the macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products and our expectations for financial results for the fourth quarter, 2014. Please be reminded that NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a 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, 2014 earnings press release, which will be furnished to the SEC on Form 6-K and is available on NXP’s website in the Investor Relations section at nxp.com. Before we start the call today, I’d like to highlight several investor events we will either host or attend. On November 4-5th, we will be hosting our 2014 Analyst Day, New York City. On November 19th we will attend the Morgan Stanley TMT Conference at Barcelona; on December 2nd we will attend the Credit Suisse TMT Conference in Scottsdale. On December 2nd, we will also attend the NASDAQOMX 31st Investor Conference in London. On December 8th, we will attend the Raymond James TMT Conference in New York and on December 9th we will attend the BMO TMT Conference in New York. And lastly on December 10th, we will attend the Barclays Capital TMT Conference in New York City. Now I’d like to turn it over to, Rick. Rick?

Thanks, Jeff and welcome everyone to our earnings call today. We are really pleased to be here as our results and guidance today mark major milestone in the growth story that is NXP. Performance in the third quarter was very strong with revenues better than planned, expenses under control and earnings above expectation. Our outlook for the fourth quarter moves to a better than seasonal trend as the company specific product cycles continue to ramp against the backdrop of what appears to be slightly less optimism, in overall semiconductor market. Product revenue was approximately $1.47 billion, a 13% sequential improvement and up, 21% versus the prior year period. Total NXP revenue was approximately $1.52 billion, also a 12% sequential increase while up approximately 21% versus the year ago period. Turning now to our earnings performance, HPMS revenue was $1.14 billion, up 15% sequential increase and up nearly 24% from the year ago period. As noted in our earnings release, beginning January 1st, we are planning to reorganize certain parts of the HPMS segment. The goal of the change is to drive our product lines in a more focused application and customer centric approach, in order to address the next phase of semiconductor growth, in particular security beyond that of smartphones and tablets today. In today’s call, I will keep my prepared remarks to the existing HPMS structure although we had provided a bridge between existing and new structure on our investor relations website. We will discuss this further at our upcoming Analyst Day in just under two weeks. Now I’d like to review the results for our various HPMS business units. Within our ID business, revenue was $396 million, up nearly 16% versus the prior quarter, above our expectations and up, 20% on a year-on-year basis. In the core ID business, revenue was down about 3% quarter-on-quarter with banking up sequentially offset by sequential declines in the eGovernment in the automatic fare collection businesses, while the remaining product lines were essentially flat versus the prior quarter. Overall, core ID represented about 70% of the total ID revenue in the third quarter. In the emerging ID business, we experienced very strong growth due to the mobile transactions. And total emerging ID was up about a 115% sequentially and up over 160% versus the year ago period. Moving now to our Portable & Computing end market, revenue was $217 million nearly a 48% sequential increase and up 67% from the year ago period. Growth in the quarter was driven by the launch of new mobile platforms driving demand for both interface and MCU products. While new mobile platforms drove the majority of this sequential increase, we also experienced positive growth in the broad-based MCU market. Within our infrastructure and industrial business, revenue was $238 million, up 13% sequentially and up about 18% versus the year ago period. During the quarter, revenue was in line with our original expectations as Playstations OEMs drove the majority of the increase, though we continue to see strong demand for our smart audio products. Within our automotive business, revenue was $288 million, a good quarter in line with our expectations and reflecting normal third quarter seasonality. Revenue was a flat quarter-on-quarter and up 10% versus the third quarter of 2013, continuing our double digit growth in the automotive business over the last few quarters. From a product perspective, we experienced sequential growth in keyless entry and in-vehicle networking though flatly offset by sequential decline for entertainment products. Finally, turning to our Standard Product segment, revenue was $333 million, better than anticipated, resulting in a 5% quarter-on-quarter and a strong 14% versus the year ago period. We experienced a good mix in the business with general purpose and logic being the largest factor of the sequential increase. The general discrete portion of the business continues to perform well. Turning now to our distribution channel performance, total sales-in distribution was up 29% with sales out of distribution up 19% as we continue to position the [inaudible] ahead of ongoing mobile platform ramps anticipated for the fourth quarter. The total months of inventory in the distribution channel were flat at 2.6 months, in line with our longer term model. However, absolute dollars of inventory in the channel did increase about 18% on a sequential basis, again in preparation for the ongoing ramp of new mobile platforms. In summary, our overall results in Q3 were very good, with very good overall product revenue, better operating profits and good free cash flow. As can be seen in our earnings release, we are anticipating a better than seasonal quarter in Q4. Over the long term, we expect to continue deliver growth in excess of the overall market, continued growth in earnings a robust cash flow generation. Now I’d like to turn the call over to Peter to discuss the financials.

Thank you, Rick and good morning to everyone on today’s call. As Rick has already covered the drivers of revenue, I’ll move directly to the highlights of the quarter. Overall, the third quarter was a very good quarter with revenue up over 12% Q-on-Q. Our non-GAAP net income was up over 22% and non-GAAP EPS of nearly 24% demonstrating the strength of our model. Total revenue non-GAAP gross profit, operating profits and net income were all better than the midpoint of our guidance and non-GAAP EPS was a $1.35, which is $0.05 above our midpoint. Focusing on the details of the third quarter revenue was $1.52 billion which was $20 million above the midpoint of our guidance and $166 million increase from the second quarter. We generated $725 million in non-GAAP gross profits or 47.9% non-GAAP gross margin. This was about $7 million above the midpoint of our guidance and $70 million better than the second quarter due to better revenue performance. So turning to the operating segments, within the HPMS segment, revenue was $1.14 billion, up 15% versus the previous quarter. And HPMS non-GAAP gross margin was 53.3%, 210 basis points below the second quarter, primarily due to a higher mix of newly introduced mobile transaction products. Non-GAAP operating margin was 28.4% which was 60 basis points above the prior quarter. Within our Standard Products segment, revenue was $333 million up above 5% sequentially. Standard Product non-GAAP gross margin was 33.6% or 40 basis points versus the second quarter and non-GAAP operating margin was 20.7%, an 80 basis points improvement sequentially. Total non-GAAP operating expenses were $335 million in line with our guidance they were up $13 million sequentially, primarily as we continued investments in support of major customer programs. From a total operating profit perspective, non-GAAP operating profit was $390 million and represents a 25.7% operating margin, up about 90 basis points versus the prior quarter. Interest expense was $34 million and non-controlling interest was $17 million. Cash taxes of $5 million was slightly better than the guidance. Total NXP non-GAAP earnings per share were $1.35 which is at the high end of our guidance and $0.26 better on a sequential basis. Stock based compensation which is not included in our non-GAAP earnings was $34 million. So now I’d like to turn to the changes in our cash and order. Our total debt at the end of the second quarter was $3.81 billion, up 228 million on a sequential basis, largely as a result of the share repurchases we made. Cash at the end of the quarter was $594 million and we exited the quarter with a trailing 12 month adjusted EBITDA of approximately $1.59 billion and our ratio of net debt to trailing 12 months adjusted EBITDA at the end of Q3 was 2.03 times, in line with our target of two times. We brought back in the quarter 8.7 million shares at a cost of approximately $574 million for a weighted cost of about $65.77 per share. Turning to our working capital metrics, days of inventory were 85 days, a decrease of 11 days sequentially. Days receivable were 42 days while days payable were 76. Taken together, our cash conversion cycle was 51 days versus 59 days in the prior quarter. Cash flow from operations was $397 million and net CapEx was $81 million, resulting in positive free cash flow of 316 million or 21% free cash flow margin. During the quarter, TSMC our joint venture paid a dividend of 130 million and given NXP’s only subscription of the joint venture, this resulted in a cash outflow from investment of $50 million paid to TSMC. Now I’d like to revise our outlook for the fourth quarter. As Rick noted in his prepared remarks, and as seen in our earnings release, we are planning to change the business structure of the HPMS segment of January the 1st 2015. In an effort to help investors and analysts understand these changes in events, we’ve decided to provide our fourth quarter guidance on both the existing structure and the new structure. Based on our analysis, it appears we continue to gain market share across the product portfolio and we anticipate NXP should continue to substantially outperform the overall market. We have a number of company specific programs which we see contributing to solid growth in future periods, even though we do see slightly less optimism in the overall semiconductor markets. With this as a background and despite typical seasonal declines in the third quarter, we currently anticipate product revenue to be essentially flat as compared to third quarter plus or minus 2%. This is clearly better than our historic seasonality into the fourth quarter. At the current business structure, we expect the following trends in the business on a sequential percentage basis. Within our HPMS segment, we would expect Automotive to be about flat, Identification is expected to increase in the low single digit range. Infrastructure and industrial is expected to increase in the mid-single digit range, Portable & Computing is expected to be down in the low single digit range. Under our new business structure, we expect Secure Identification Solutions or SIS to be down in the low double digit range. Secure Connected Devices or SCD is expected to increase in the mid-teens percentage range. Secure Interface & Power or SI&P is expected to be about flat, and Automotive as indicated previously is expected to be about flat. Standard Products is expected to be down in the low single digit range. We anticipate revenue from the combination of manufacturing and Corporate and Other to be approximately $41 million. Taken together, total NXP revenue should be in the range of $1.49 billion to $1.54 billion or about $1.515 billion at the midpoint. We expect non-GAAP gross margin to be about 48% at the midpoint plus or minus. Operating expenses are expected to be in the range of $328 million to $333 million or about $332 million at the midpoint. And this translates into a non-GAAP operating profit in the range of $376 million to $401 million or about 26% operating margin at the midpoint. Interest expense in our debts should be approximately $37 million on slightly higher gross debt given the share repurchases in the third quarter. And cash taxes are expected to be roughly $9 million and non-controlling interest expense of about $18 million. Stock based compensations should be about $35 million which is excluded from our guidance. Diluted share accounts should be about 247 million shares depending on share price fluctuations and buybacks. And taken together this translates into non-GAAP earnings per share in the range of $1.26 to $1.36 or $1.31 per share at the midpoint of our guidance. I’d like now to turn the call back to the operator for your questions. Michelle, if you’ll poll for questions.

[Operator Instructions]. The first question we have comes from the line of John Pitzer from Credit Suisse. Please go ahead. John Pitzer – Credit Suisse: Yeah, good morning guys. Thanks for letting me ask the question and congratulations on the strong results. Rick, the quality of the line was a little poor. I just wanted to make sure I heard you right, you said sales in to distribution was up about 29% sequentially and sales out were up 19%. If that’s right, can you just confirm that? And as you look into the fourth quarter, how do you think that will look sales in versus sales out?

Yeah, those are the correct numbers, John. Sales in was up 29% with sales out of distribution up 19% and again that was as we continue to position inventory for some of the product grants associated with the mobile platform. So the actual dollars in the channel were up 18%. We don’t expect to see that any different, 2.6 months of inventory is clearly within the range that we would like to have. In fact in some of the work do you like products we’d have to add a little bit more than that so, that’s well in the range of what we would like to have, John. John Pitzer – Credit Suisse: That’s all for, Rick. And then Rick, clearly kind of curious if there was any 10% customer in the quarter? And clearly now that the mobile payments guy in Cupertino has moved forward I’m kind of curious as to what impacts do you think that might have on other customers within mobile payment so there is sort of a direct effect on Apple Pay and there is an indirect effect. I’m kind of curious of how you see the indirect effect playing out over the couple of quarter relative to the attached rates overall of and the handsets?

Well I think John, first off I should reiterate that we can’t talk about any specific customer design wins associated with our mobile wallet, but we continue to be the leader in mobile wallet and plan to be there. I think what that drives is, it drives the stimulus for us for a broader acceptance associated with it. It’s people that use other policy their branch, paying very simply with their phone. And Peter Kelly was showing me how easy it was last night and I was quite impressed with the ability to maintain your records on your phone in true that you don’t forget to turn in expenses because you have those receipts, you don’t lose the receipts. And so we would expect that to be more of a snowball effect and actually accelerate mobile payments deployment throughout a broad range of customers had we’ve been working with a broad range of customers associated with the client in any case. The rate of acceleration I think will continue to be strong and frankly in China wanted to think it happens with the contact with [Audio Gap] we think facilitate the infrastructure of mobile payment implementation in a broad basis in China. John Pitzer – Credit Suisse: Perfect. Thanks, guys.

Thanks, John.

The next question that we have comes from the line of Blayne Curtis from Barclays. Please go ahead. Blayne Curtis – Barclays Capital: Great results, but couple of questions, first, can you say what drove that I mean you had a huge guy from Portable & Computing you ended up beating that number. Is that MCUs or interface or both? And then I’m assuming given it’s such a strong quarter it’s down in Q4 I’m assuming you still have some customer tailwinds in the Q4 as well. Any color there would be helpful.

Yeah, I mean clearly we talked about P&C last quarter in Q2 being growth primarily from non-new mobile platforms. But in Q3 big chunk of the growth did come from new platforms from mobile and both MCU and interface and we expect that to continue strong, but without any real new programs coming in, in Q4. But better than what previously we would expect on a seasonal basis. And Blayne the other thing I should mention here is in Q3 we also had strong business in the broad base micro controller market as well which is the little different than some of our competitors have commented on the micro controller market. Blayne Curtis – Barclays Capital: Great. And then still trying to get my hand on in the new segments I’m sure you’ll inform me at the Analyst Day. But it looks like the majority of the core IDs is going to be in the Secure ID solutions which you have down in December. Can you just talk about what’s driving that and I guess the outlook in the next year, are you seeing any uptick in EMV for U.S. as such?

So I think the key thing for Q4 is just seasonal demand in banking. So it still has somewhat of a seasonal pattern, but we’re encouraged about the opportunities for both the U.S. as well as continued strong performance in China contact was thinking and we also expect a good growth in the eGov side next side as well RF tagging. So, I think we’re pretty optimistic about a broad based growth in that segment for next year, although as we’ve said many times before, it ends up being more projects by projects so hard to track on a sequential basis much better to look at on a kind of the year-over-year basis. Blayne Curtis – Barclays Capital: Perfect. Thanks.

Thanks, Blayne.

The next question we have comes from Vivek Arya from Bank of America/Merrill Lynch. Please go ahead. Vivek Arya – Bank of America/Merrill Lynch: Thank you for taking my question. Rick one investor push back is that just near term a lot of your growth is coming from the smartphone market and I’m wondering how you react to that? And how much of that is just micro headwinds and how much of that is the lumpiness in different programs?

Well the fact is we have a broad base of portfolio and we actually think that that’s an advantage that gives us the ability for different segments to be performing better at any one time so that we have the opportunity to continue to outgrow the industry going forward. The fact is that new models and smartphones and tablets is contributing to our growth in the near term. And I guess the one thing I would emphasize is in areas where there is unique technology involved so it’s not more of a general basis that’s easy to change from one supplier to another. So, we feel very good about that business as we talked about on the call, one of the things that we’re doing with the new organization structure is really preparing for growth for the semiconductor industry beyond smartphones and tablets. And we see that in the next few years the opportunity to see significant growth factors well smartphones and tablets and we wanted to be sure that we can take our security leadership as the foundation to be a leader in those continuing going businesses as well. If you look at mobility roughly speaking, it’s kind of in the 20% or little bit over as far as percent of revenue. So, we feel very comfortable with that basis and I’d like to experience the growth that comes with it. And when you talk about mobile wallet, I’m not sure that’s really something that you would put in a general bucket associated with mobility even though it clearly goes into mobility platform.

I think you can get obsessed on quarters. I mean if you look at our annual growth, it’s just very, very broad based. Vivek Arya – Bank of America/Merrill Lynch: Peter, I have a follow up. You have done, I believe about 1.26 billion in buybacks year-to-date, probably a little bit above the free cash flow you will generate this year and I’m wondering how we should think about buybacks getting into Q4.

What we’ve said, I’m not going to guide the fourth quarter, but what I would say is we think we’re undervalued, so we think buybacks of stock is an excellent way to return from this to shareholders. And my view hasn’t changed on that at the moment. Vivek Arya – Bank of America/Merrill Lynch: Got it. Can you talk about the China as the LTE market, there is some concern about tight supplies of amplifies and base stations and since you have leadership there, I’m wondering how you think about the supply and demand trends in that market? Thank you.

I think we’ve talked all year about the fact that we’ve not been able to meet our customers’ commitments and created problems which we weren’t very happy about on an ongoing basis. While we’ve seen our ability to increase our capacity and obviously indicated in the numbers that we reported today and with the guidance for Q4, but the bottom line is I think we still are not able to meet completely our customers’ requirements. We still see a pretty healthy dominion. I think the one thing that’s really important to emphasize is people talk about it being China LTE, and I think the factor that we get from our customers that’s not even the majority of the growth that we see in our business focus on China LTE. It may be that the platform that we got designed into much broader base and lot of what our customers tell us it’s going into Middle East and Africa, even some expansion in the U.S. It was going into South America in Q2 in preparation for the World Cup. So I guess what’s important to emphasize is the demand that we see from our customers and the specific feedback is it’s much more broad based than just China. Vivek Arya – Bank of America/Merrill Lynch: Thank you.

Thanks a lot.

Next question we have comes from the line of Ross Seymore from Deutsche Bank. Please go ahead. Ross Seymore – Deutsche Bank: Hi, guys. Congrats on another solid quarter and guide. Rick, first question is for you a bigger picture one. You mentioned that the semiconductor market I think “it’s slightly less optimistic.” It’s a big debate on what exactly that means these days cyclicalities and all etcetera. Can you give us a little bit of color on how you’re viewing the two of the current end demand in your broader based market please?

Yeah. So Ross, it gets hard for us to really be able to call the total market based on the areas that we plan. I think we kind of use standard products as an indicator to that and what I would tell you is it’s probably not as strong as Q3 and so the question is, how much of that is seasonal or we would typically anticipate the semiconductor business to be off a little in Q4 and how much of that is other. We see some customers, where there is some weakness and we see other customers where there is very strong growth. So there is clearly a mixed message out there, but in general like for example micro controllers interface outside of the smartphone and tablet ramp, we saw a very good quarter in Q3. So I think in general, we see mixed signals associated with it. We don’t see anything that alarms us relative to significant decline or any significant inventory position, but there are some mixed signals so it’s not just onward and upwards as it has been frankly for the last few quarters prior to this. Ross Seymore – Deutsche Bank: Great. That’s perfect. Thank you. And one follow up, one for Peter quickly. On the gross margin side of things, for the fourth quarter you’re guiding it flat by the traditional end markets splits or product splits. I would have thought that mix would have been a little bit favorable. So can you just walk us through the puts and takes in the gross margins please?

I’m kind of not sure why you would think it would be more favorable. I mean I guess if we’d have guided down, the argument would be some of the industrial products would be flatter and some of the more seasonable products would go down. But the mix hasn’t done that Ross so the mix is pretty stable. Ross Seymore – Deutsche Bank: I guess what I was just looking at I&I being solidly in your guide and P&C being down into the extend the opposite cause the gross margin comes down a little bit in the third quarter, it would seem like it would revert the opposite direction back and the forth.

Actually, when you go into the detail mix we don’t see that at all. In terms of the end of what products, it’s relatively stable. Ross Seymore – Deutsche Bank: Thank you.

Thanks, Ross.

Thanks a lot, Ross.

Thank you. The next question we have comes from the line of Jim Covello from Goldman Sachs. Please go ahead. James Covello – Goldman Sachs: Hi, guys. Thanks so much for taking the questions. Good morning. Congrats on the good results. Question on what used to be the computing business you guys have done such a terrific job at that and the customer of quality the products because they only use the highest quality products. How important strategically or philosophically for you to grow out now your exposure in that space just not the subject or some of the same volatility some other suppliers who are levered to them in that space and have been over time?

Thanks, Jim. Thanks for your comments. I think for us our focus is really on providing the fundamental capability. So last year most of the tear downs basically talked about DM6 and now moving forward to sensor hub actually being sourced by NXP then we can’t comment on that. What we can say is, is that we want to be sure that we take sensor hub technology and the advantages that it brings in battery life which is a critical feature for most users to broad based customers. And so with China Inc. as well as all of the largest handset guys, we are working specifically on that. And some of the unique capability that we have on high speed interface, we actually think we have some advantages we can bring in broad based customers there as well. So we’re not focused on any individual customer per se, it’s really more about technology and being able to drive that in a broad based space and again, our intent is to focus on those areas that are typically caught up in using the design in and design out and then design in somebody else. That can always happen but we clearly have line aside for some number of product trends or product platform basis to understand what happens. But our real focus is how we’ve brought our customer base and be able to drive more consistently associated with that across the general market because of the unique technology that we bring.

And Jim may be if I could add just one thing, in the new we don’t have that kind of fuel mobile business that obviously we have businesses or product lines that have kind of sell into those areas. And probably Secure Connected Devices the SCD business is the bit that’s most closely correlates to that. And I think over time we’ve been doing all plans recently we don’t see that getting really probably gets about 25% of our revenue over time. You normally see more mix may be a little bit more in the second half, little bit less in the second half of the year but we really want to have an awful lot of exposure to mobile segments. Certainly not going to be in the position of some of the companies that you see out there where massive single device exposure to a single customer. James Covello – Goldman Sachs: That’s helpful perspective. And then, if I can just ask a follow up it’s related to John Pitzer’s question early, John asked about kind of the mobile pay. I guess my question is with what your largest NFC customers doing in terms of how they’re using NFC and I guess may be disabling for other functionalities so it could be used towards Apple Pay. What kind of dynamic do you see that is impacting on NFC outside of Pay for other customers? Because I think you guys have articulated very well that NFC has a broad range of applications not just payment at the site of purchase.

I think one of the key things associated with NFC solutions is mobile payment is kind of the foundation but when you begin to think about all of the applications that take place associated with that, the encouraging thing is we can’t even think about all of the applications that will happen. One of the things that we talk to our automotive customers about in NFC it’s just simple pairing between your smartphones and car radio system which I don’t know about you, but every time I get in a new rental car, it takes me 15 minutes before I get my damn phone paired up before I can drive. But just being able to click and have that paired is actually a real benefit as we hear from automotive customers. So I think we can’t even think honestly about all of the applications that NFC can facilitate, but the ability to have a real secure connection and that’s really what our focus is as we go forward. We’ve been talking about that on the call today, we’ll talk about it a lot more on our Analyst Day, but we’re trying to really think about the future and how we leverage the leadership position we have in security and really looking then secure connections instead of talking about the Internet of things which nobody really knows what that is whether it’s machine to machine or we just try to say secure connections for a smarter world. And really that’s what we’re focused on as we look at the company beyond smartphones and tablets even though smartphones and tablets actually fall into that connected or smarter world as well. James Covello – Goldman Sachs: Really helpful. Thanks again and congratulations.

Thanks a lot, Jim.

Thank you. The next question we have comes from Craig Hettenbach from Morgan Stanley. Please go ahead. Your line is now open. Craig Hettenbach – Morgan Stanley: Yes, thank you. For EMV, in North America, understanding it’s going to be a multi-year roll out. Can you talk about kind of near term what you’re seeing and the momentum that you do see in that marketing kind of going into 2015?

We’ve seen a lot of activity, a lot of companies looking at technology, a lot of people talking about design wins. We’ve been fortunate to win a good share of those and we want to be focused on continuing to maintain our worldwide leadership on contact between 60% to 70% range. But as far as significant ramp up and volume I think it’s still in the early innings associated with it and we would expect that not to be a significant growth factor until 2015 timeframe. Craig Hettenbach – Morgan Stanley: Got it. Thanks. And as a follow up, in the automotive market there have been some concerns of slowing growth particularly in Europe. Can you talk about the trends you’re seeing within automotive by geography?

Yeah it’s really hard for us to break down the geography because when we ship to Boston Continental they may ship it to… If we ship it in Germany, they might ship it to China, if we ship it into China, they might ship it into Indonesia, Southeast Asia. So it really gets hard for us to have very specific information as to where the products are actually going. I would say Q3 which is typically a weak quarter in European automotive because of the vacation schedules was okay. [audio gap]. As some of the previous quarters for the E&C it shouldn’t have been. I think one of the things that have been key for us in automotive area that’s kept us from having a decline that we would typically have on a seasonal basis is some of the strong demand we’ve had on the car ramp up of new design wins that we’ve had in Japan and China and Asia. So I think that’s one of the key factors that allowed us to maintain double digit growth in our automotive business on a year-over-year basis. Craig Hettenbach – Morgan Stanley: Got it. Thanks for the color there.

Thanks.

Thank you. The next question we have comes from the line of Vijay Rakesh from Sterne Agee. Please go ahead. Vijay Rakesh – Sterne Agee: Hi guys. Congrats on a solid quarter and guide here. Just to get 2015 here on the Secured Connect Device side what are the opportunities do you see there in ID or home automation with the security? Thanks.

We already see it in the early stages today, but it’s still relatively small or miniscule part of the total business. I think when we started talking about that, we have a smart lighting product we’re encouraged in working with some of our partners like Greenway for example to be able to take that to the much broader marketplace associated with it. One of the things that’s important to point out is even though it wasn’t last quarter, but a quarter ago, we won the Delphi design on the first design that’s actually been issued on Vehicle-to-Vehicle or ADAS design. And one of the reasons why we were able to secure that or win that design was because of the security product that we had that the automotive customer did not want to have the ability to have communications intercepted or influenced or changed. So that security feature represented one of the significant factors that allowed us to be the first company to actually have a significant design win in the Vehicle-to-Vehicle opportunity that I know you’ve probably may have seen some of the increased discussion even in the U.S. government but also European governments relative to the ability to bring safety to the citizen, reduce the number of accidents and reduce the cost of repair associated with those accidents.

I think for NXP, next year it’s probably 10s of millions rather than 100s of millions in that space. And I’m talking about your comments on ID and hopefully it starts to pick up as you get out into ‘16 and then more into ‘17. I don’t really see that as massive revenue drown for us next year. Vijay Rakesh – Sterne Agee: Got it. And just going on the EMV side, I know you said briefly, I should get 2015 that’s where they start. Can you bracket for us the opportunities there in 2015 on EMV between U.S. and China? Thanks.

China has continued to be the strongest growth segment for us over the last few years. We had a very strong growth contribution from the China dual interface cards in 2013. In 2014 has continued strong although not with the most significant growth. I guess one of the things that I understand was in the press just this week, was PBOC talked about that they now have issued over a billion cards so that addresses the markets that’s being rolled out in China. And I think China is well ahead of the U.S. and positions them well in acceptance of mobile payments and having the infrastructure in place to be able to drive that very successfully. When it comes back to the U.S. it is still a little bit of an issue there is two parties involved or three parties in some cases and the party that pays the additional cost associated with the EMV card isn’t necessarily gets the benefit of their fraud reduction associated with it. Security is clearly a high priority. In fact, you may have seen that President Obama actually put out a presidential order in the last few days specifically requiring that over the next 18 months that U.S. government ensures that all of the citizens’ information is protected with a chip device to be sure that, that it avoids some of the cyber security risk associated with that. We just announced this week a roll out of product that we’ve been working with Google on this secure access to cloud. So clearly it’s an area of great deal of excitement for us, although pretty nice and relative to the actual trends today. Vijay Rakesh – Sterne Agee: All right. Great. Thanks.

Thanks, Vijay.

The next question we have comes from the line of Chris Caso with Susquehanna Financial Group. Please go ahead. Chris Caso – Susquehanna Financial Group: Thank you. Good morning. Wanted to come back on some of your earlier comments related to the market in general and it sounds like those comments are referring more to kind of what you’re seeing around and inherent from those as opposed to what you’re seeing in your business. I guess my question is to what extent some of those factors you’re seeing around you are factored into your guidance, may be you could talk about as you’re looking forward into the fourth quarter the level of conservatism that you’re taking with approach to guidance or just really basic on the levels you’re seeing from your customers?

Thanks. I think it would be good point to point out when I was [inaudible] about the general broad base semiconductor market and not NXP because basically our guidance that’s the expectation for NXP and clearly the ability for us to be above what would be the typical seasonal pattern in Q4 indicates the strength of our new design wins and being able to accomplish that. What we try to do with our guidance is to give best perspective on the range of revenue we see. So clearly we think that we’ve done that this quarter to give you a perspective of what we see. We try to lay it out just as directly and straightforward as we can. The key for us is the ramp up of design wins that we have and the mix of our business one of the things that does gives an advantage is the portfolio of our product and not all business have to be performing at the same rates all the time as clearly indicated with our Secured Identification Solutions in the near term which is a little weaker. But it gives us stability when the broad based portfolio we have so that we can continue to outperform the industry and overall growth by having multitude of platforms to be able to drive in the marketplace and not focus on mainly singular platform but so critical to drive the growth of the company. Chris Caso – Susquehanna Financial Group: Great. Thank you. As a follow up, if I can come back to the automotive market and if I look at the quarterly revenue growth rates have moved around a little bit this year on seasonality. But as you look at on an annual basis what’s your level of confidence that automotive segment for you guys remain as a double digit growth.

I think the right way to look at automotive is year-over-year so you take the seasonal pattern out as you’ve indicated. So I think that is positive for us that we continue to be in double digit growth over the last few quarters associated with automotive and when we’re looking forward, we are have to align with most of the inventory that we have is managed inventory so we actually see that very real time from a production viewpoint. But really clearly the growth that we see being double digit, what we really talked about going forward is something that’s high single digit. So we’d expect that to be slightly lower than what it’s been over the last few quarters. But we continue to see very positive environment. The continued ramp up of the platforms that we’ve won over the last few years either in the remote keyless entry with the second largest U.S. automotive manufacturer that’s probably something like fourth or third of their roll out of their models. So still there is significant growth there and then in our car radio platforms with the new design wins that we have with and Pioneer and a lot of new customers that we’ve won over the last few years, there are still changing models bringing to end of life models that we’ve not included in continuing to ramp up the volume to new design wins that we’re in allows to perform at a different level than the automotive industry itself. Chris Caso – Susquehanna Financial Group: Okay, great. Thank you.

Thank you, Chris.

The next question we have comes from the line of Tore Svanberg from Stifel. Please go ahead. Your line is now open. Tore Svanberg – Stifel Nicolaus & Company: Yes. Thank you. Congratulations on the results. My first question is on your inventory dates, 86 days I think that’s the lowest you had in three years. So just hoping you could talk a little bit about you feel that that’s an ideal number at this time or how do you intend to potentially change the number going forward?

Well from a dollar base effect, it’s still a significant level of dollars. I’m comfortable fighting in the organization as CFO I’d like zero inventory because I like the cash. So from my customer perspective you really have to look at what provides the best service. I think where we are at the moment it’s okay, actually in the couple of spots a bit low. I’d like to see a little bit more finished goods in automotive but that’s really just because you never know what natural disasters might occur in the world. I think our ID business has a pretty good inventory I&I seems pretty solid. I thought may be in the past it was little high now it’s come down but no I think inventory is okay and it’s easy to manage your inventory when you’re growing quite rapidly so I feel very comfortable with the inventory at the moment.

I think probably we want to point out, we still have a few product lines where we’re handing out to see from being able to meet our customer requirements. And so clearly there is not any inventories in those areas.

Yeah Playstations are very strong of that.

And we actually even have some product lines requirement we’re kind of hand them out associated with it. So I think in general, our inventories are in really good shape but we’re still right at the edge of being able to maintain the support associated with the customers for the design wins that we’ve been successful at winning one. Tore Svanberg – Stifel Nicolaus & Company: That’s fair enough and a good problem to have. And as my follow up, you’re guiding your I&I business to be up in the mid-single digit to the December quarter some of those segments tend to be down seasonally. So I’m just wondering if there is any new programs or any specific [audio gap] at this point?

Yeah I think the combination continued being able to meet our customers’ requirements improving our supply in our high performance RF, the power amplifier for base stations and also may be little bit of new model designs in our mobile audio products that’s contributing to slightly in Q4. Tore Svanberg – Stifel Nicolaus & Company: Thank you again. And great quarter.

Thanks, Tore.

The next question we have comes from the line of Mark Lipacis from Jefferies. Please go ahead. Mark Lipacis – Jefferies: Hi. Thanks for taking my question. Just a follow up on the power amp for base station products. It sounds like you’re still allocating there. Is there any changes in the market from that standpoint on the demand side the companies talk about weaker demand I’m wondering if you’re seeing the same? That’s the first question.

Yeah, we really haven’t seen any significant change in demand associated with the power amps. I think again we talked about earlier may be a factor associated with that is, it seemed like the design wins on the platform are more concentrated outside of China than inside of China or may be some of our competitors are more concentrated on the platforms on China as opposed to that. But we haven’t really seen what I would consider any significant weakness and in fact really develop some very good relationship with customers. Sometimes the best relationship come out of the problem areas which obviously we had earlier in the in being able to support our customer requirements. And frankly we still have a couple of individual products that we struggle our customer requirements now which is clearly significant for them achieving their revenue goals and we have quite ongoing discussion how we support that. Mark Lipacis – Jefferies: That’s helpful. Thanks. And then follow up question just on Standard Products just a clarification, you’re expecting that business to be down low single digits is that seasonal or is that normal seasonal expectation do you think? You also talked about the signals you look at typically help you understand whether or not you’re going into an inventory correction or demand inflexion. What are those signals that you typically look at? Thank you.

Let me address the first one, on Standard Products, it’s fairly typical from a seasonal basis but again as we said earlier there are some questions that are down and other customers that are up. So it’s really hard to draw distinct conclusions associated with it but clearly we think more of what we see would be classified as the typical seasonal basis as opposed to real change of demand from a broad based on the semiconductor side but there are mixed signals associated with it. Relative to indicators of what’s going on in the market we look broadly at many things like book to bill. We try not to talk a lot about book to bill because we don’t it’s a very strong good indicator because there’s many times when you will be below one on a book to bill basis on a weekly basis that really isn’t the indication of the future as it is in some other company’s cases. We look at inventory levels but it really all comes back to really understanding the customers’ demands and trying to be on the top of the demand from customers as much as we can and the environment we see from our customers primarily our distribution customers we see today, it’s still okay. We don’t see any precipitous decline but we don’t see a robust uptick either clearly. But the feedback we get from our customers on a daily basis is that demand’s okay. Mark Lipacis – Jefferies: Fair enough. Thank you.

Thanks, Mark. Operator, we’ll take our last question now please.

Yes. The last question comes from the line of William Stein of SunTrust. Please go ahead. William Stein – SunTrust: Thank you very much for squeezing me in here. I’d like to address inventory and in particular distribution. So it sounds like inventory was up on a dollars basis pretty substantially in the channel. But Rick you eluded to some specific programs may be mobility a little surprising you turn to think about distribution serving very diversified kind of small and medium customer base. So can you highlight what’s going on there?

Yeah thanks, Will. So I think what we were trying to say is the larger increase on the dollar basis on the inventory was more specifically associated with unique mobile platforms smartphones and tablets being prepared for those ramps associated with the volume because we still have the number of our customers that while we serve significant volumes we do that through the distribution channels some other ODM relationships and the way that they manufacture that. I think we feel very comfortable with our distribution inventory at 2.6. We think that in fact our Standard Products we would like to be higher on that on an ongoing basis and Standard Products is clearly in a very healthy position we have some of our product lines that we’d like to have more inventory in place, very healthy position. We have some of our product lines that we’d like to have more inventory in lines associated with it than when we are on the 2.6. As some of the inventory that have been in place for some of those product, associated with new products and product grants associated with new products in the smartphone and tablet space going into production then we would hopefully be able to put some additional inventory in some of those areas where for example we actually don’t have much inventory in place [audio gap]. So I think the key thing is the overall message that we see is at 2.6 months we feel very comfortable with it and think it’s well in line and well under control. William Stein – SunTrust: Great. Thanks. And then maybe I can switch gears to ask about capital allocation the debt hasn’t come up in a while obviously you’ve matured significantly in that regard about to turn net leverage ratio about and what looks like pretty stable cash flow in the last couple of quarters, would you consider that perhaps you should operate at a higher debt level and especially given that you believe the stocks are undervalued, you’ve highlighted that a few times, would you contemplate more leverage?

It’s a great question, Will and as a finance guy because of the fact that I really see NXP as an industrial company and contribute to the industrial company, I think we could operate at a higher level of debt I’m not sure that the semiconductor industry is quite ready for it. I think the big question for us in the coming years is in order to maintain our two times ratio we would technically would have to increase our gross debt and we sort of did that in the quarter. So we’ve maintained the two times ratio we’ve increased our gross and net debt really just because we’ve got a revolver. And we use that to buy back stock but I think at this point in time we have a terrifically healthy balance sheet. Our cash flow generation is excellent and with the stock price where it is we will continue to reach cash to shareholders buybacks.

I guess if I can add something what Peter did in the current quarter by increasing our debt a little bit was more of if you will, little bit of a pull end of what buyback might have happened by the cash flow generated from the ongoing business. I think we feel very comfortable with our debt structure. We like it and it gives us a lot of flexibility as in the future when we think about M&A transactions where we obviously might use debt to be able to facilitate that. William Stein – SunTrust: Great. Well I look forward to digging in more on these on your Analyst Day.

Thanks, Will. May be I’d like to pass the call back to Rick Clemmer for some final comments now before we end the call today.

So I thank you all for your continued interest in NXP. The key points of the highlight we progress in 2015. Our revenue growth continues to be robust with growth significantly above our peers based on the year to year revenue and midpoint of our guidance 2014 is shaping to be a near to high watermark in terms of the total revenue with several businesses achieving record revenue levels already. As improved profit profiles, Q3 gross profit dollar were up about 24% and operating profit dollars up 37% on a year-on-year basis continuing to generate strong growth in earnings per share that we’ve reported. On cash I can’t emphasize enough the strong cash generation capability we have increased free cash flow roughly at about 105% representing a 21% free cash flow margin during the quarter. And clearly we tried to use that cash as well as we talked about pulling in little bit about of our debt to repurchase our shares over the last 12 months returning just over $1.34 billion to shareholders. So thanks a lot for your support and we’d look forward to seeing you in our upcoming Analyst Day on November 5th in New York City.

Thank you everybody. Appreciate your time on the call today.