NXP Semiconductors N.V. (NXPI) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the NXP Semiconductors' Second Quarter 2018 Earnings Conference. At this time, all participants are in a listen-only mode to prevent background noise. [Operator Instructions] We will have a question-and-answer session later, and the instructions will be given at that time. And as a reminder, this conference may be recorded. Now it's my pleasure to turn the call to Mr. Jeff Palmer, VP of Investor Relations. You may begin.

Thank you, Carmen, and good morning everyone. Welcome to the NXP Semiconductors' second quarter 2018 earnings call. We appreciate you joining us on such short notice today. With me on the call today is Rick Clemmer, NXP's President and CEO; and Peter Kelly, our CFO. As it’s been 21 months since our last earnings call, we will extend the Q&A session today to accommodate as many of the analysts questions as possible. If you've not obtained a copy of our second quarter 2018 earnings press release, it can be found on 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. Our call today will include forward-looking statements that involve risks and uncertainties that could cause NXP's results to differ materially from management's current expectations. These risks and uncertainties include but are not limited to statements regarding the macroeconomic impact on the specific and markets in which we operate, the sale of new and existing products and our expectations for financial results for the third quarter of 2018. Please be reminded that NXP undertakes no obligation to revise or update publicly any forward-looking statements. For full disclosure on forward-looking statements, please refer to our press release. Additionally, during our call today, we will make reference to certain non-GAAP financial measures which exclude the impact of purchase price accounting, restructuring, stock based compensation and impairment merger related cost and other charges that are driven primarily by discrete events that the management does not consider to be directly related to NXP's underlying core operating performance. Pursuant to Regulation G, NXP has provided reconciliation to non-GAAP financial measures to the most directly comparable GAAP measures in our second quarter 2018 press release which will be furnished to the SEE on Form 6-K and is available on NSP's website in the Investor Relations section. I'd like to turn the call over to Rick.

Thanks Jeff, and welcome everyone to our conference call today. Hopefully, you've all seen announcement that Qualcomm has decided not to extend the purchase agreement and did not move forward with the proposed acquisition of NXP. It is an understatement to say we are all disappointed in the outcome of the regulatory approval process in China. Before we start today, I'd like to acknowledge the Qualcomm team and in particularly, Steve Mollenkopf and all of his executive team in addition to the employees involved in the plan to integration process. The combination of the two companies would have represented the true semiconductor industry powerhouse. The product portfolios for highly complementary including the market leading NXP auto portfolio and the Snapdragon processors and the strong NXP EMC portfolio in Qualcomm connectivity portfolios. However, we do not believe there is any need value to dwell on what could have been. I'll spend any time discussing the events of the last two years. Instead, we're going to look forward and continue to execute to our strategy and focus on what we can do to accelerate and expand our leadership. We realized that it's been 21 months since we were last able to actively communicate with our shareholders and that over the period of visibility in our operations has been limited. Therefore before we turn to the review of our second quarter performance, we would like to share four key messages which we've gotten questions over the last two years. First, I understand we've been asked about the level of commitment of the NXP executive management team. Over the course of the last 21 months, the entire executive team including both Peter and myself have been fully engaged in actively running the business. This also includes the general managers of our security businesses further down in the organization. While the organization has experienced a level of deal fatigue, the core basics of the business have actually strengthened by position in auto and IoT is now stronger than when we announced the transaction 21 months ago. With the decision announced overnight in our recent decisions with the board, the management team including Peter and myself are fully committed to continue to drive the future success of NXP. Secondly, during the transaction we have not provided any insights into the potential future performance of the company. I would like to quickly review the model we have been operating towards in which we believe shareholders should judge our future success. Consistent with our prior approach, we will provide guidance on one quarter basis and reference our three year model targets for longer term discussion. During Peter's remarks, he will provide specific guidance for the third quarter. Our long term model is consistent with what we presented prior to the Qualcomm transaction announcement in October 2016. Specifically, from a revenue perspective, we believe NXP can achieve a three year compounded growth rate of approximately 5% to 7%, which is 50% greater than the growth of our focused addressable market. In other words, our focus TAM, which WTS with memory optimal discrete [ph] removed. We will continue to target our non-GAAP gross margins in the range of 53% to 57% and we will continue to make focused investments which will drive our non-GAAP operating margin in the range of 31% to 34% which is based on an R&D investment level of 14% to 16% of revenue and an SG&A target of 6% to 8%. At our an Analyst Day on September 11, which we are now announcing, we will present a deep dive into how we will achieve our goals including a strategic update on our focused businesses in the unusually strong opportunity we have in those specific markets. Thirdly, since the Qualcomm transaction was announced in October 2016, where we suspended our capital return program. Going forward, our capillary procurement policy will be consistent with prior periods and is aimed at returning all excess free cash flow for shareholders. We just yesterday obtained authorization from our board to initiate a $5 billion share repurchase program. Our current tax position is very strong with nearly $3 billion accumulated on the balance sheet. The amount is even after we retire, $1.25 billion of gross debt in Q2 and does not include the determination fee due from Qualcomm. Our leverage is below our long term target and quarterly free cash flow generation is continues to be very strong. In a few moments, Peter will discuss the funding of the program as well as our target leg breach which remains consistent with our prior plans. Lastly, I would like to reflect on the business trends over the last 21 months. Now look at the result for 2017 that were very good. We grew our each HPMS revenue to $8.75 billion, growing solidly in our focus markets. We successfully completed the Freescale integration and began to see the anticipated revenue synergies. We be and see solution synergies in our automotive business, our general purpose microcontroller business performed very well, did the strong adoption of both i.MX apps processor, high performance apps processor as well as continued adoption in the mass market for the kinetics and LPC MCU products. In terms of challenges, RF power business has recently seen issues of slow growth in the base station market which we again see weakness also in the digital networking business in 2017 and the bottoming of our bank card business came into clearer focus. We are at the halfway mark in 2018. We continue to see some of the same trends. Our auto and microcontroller business continue the positive trajectory seen in 2017. The severity of the transitions within the digital networking became even more apparent in the ebbs and flows of the base station market in China continue to challenge the growth of our RF power business. And after 21 months, we did begin to see some deal related impacts to the business including some of our strategic mobile customers disengaging our new expanded opportunities. However, on balance, we see far more opportunities to excel and lead in our target markets than hurdles in which we need to overcome. Based on direct impact from customers, we have the right products, the right go-to-market strategies and the best talented employees who are held in very high regard of our customers. Quite a winning combination. Our auto business continues to strengthen our unique position where we can lead with the technology to provide safer driving through level three or four on our way to actually moving to timeless driving. We now hear from our auto customers, we have a unique portfolio to also address the electric vehicle market growth, which is an incremental growth driver from what we had talked about previously. Our smarter world are as we like to refer to the LoT is in a good position as we increasingly work through the cloud providers to allow the smart edge processing to facilitate and explain full use of the capabilities of the cloud and to facilitate the connection of everything to make all of our world a more productive and better place to live. Now turning to an overview of our performance in the second quarter. Since we did not give guidance for Q2, my comments be relative to our performance in prior periods in not what analysts have assumed. Overall, our revenue in the quarter was good albeit with a few items which were out of our control creating somewhat modest headwinds. The ban on shipments to ZTE caused a short term disruption to our RF power business and to a lesser degree our digital networking and other businesses. In automotive industry shortages of discrete components caused a modest pause in demand for automotive MCU products. In addition, we continue to have capacity issues in our kinetic family of microcontrollers as their upside design wins has put us behind in ramping our manufacturing capacity to support our upside customer requirements. Looking at the specifics, total revenue in Q2 was $2.29 billion dollars, an increase of 4% year-on-year and our HPMS segment, which really is our focused revenue was $2.19 billion up 5% year-on-year. From an operating segment perspective, within automotive, revenue was a record high at just over $1 billion, up 7% year-on-year with all product categories growing nicely. One of the most encouraging trends we have seen in our auto business has been the increasing cross selling of the entire portfolio. Our engagement with customers have elevated probably to more consultative level in which we propose complete solutions that leverage products from across our entire portfolio. NXP's view by our automotive customers is having the most complete system solutions with a clear expertise and high performance processing, analog, security and functional safety. The view provides opportunity for NXP to be a true partner in the automotive market. As auto OEMs have made the journey towards safer driving and ultimately providing the building blocks for a timeless driving. Within Secure Connected Devices or SCD, revenue with $644 million, up 10% versus the first quarter of 2017. The core growth areas of general purpose microcontrollers and mobile transactions were both up year-on-year. Micros continued to experience long lead times in our kinetic family due to the tightness of wafer supply. Our mobile transaction business continue to benefit from expanding customer adoption with shipments beginning to accelerate to a large OEM in India. Within Secure Interface and Infrastructure or SI&I, revenue was $398 million dollars, down 9% versus the year ago period. While interface products were up high single digit percent with both RF power and digital networking down over 20%. The quarterly performance of the segment was impacted do the U.S. Commerce Department's ban a material shipments to ZTE. The high performance RF power business was materially impacted into a lesser extent the digital networking. Taken together the ZTE ban that cost us about $31 million in the quarter. Lastly within Secure Identification Solutions or SIS, revenue was $143 million, up 7% versus a year ago period with a growth driven by strong trends in mobility and retail market due to good demand for both our UHF tagging and MIFARE access solutions. Both the government and banking revenue were down versus the second quarter of 2017, reflecting the continued lumping project nature of this market. Turning to our distribution channel. The total months of inventory in the distribution channel held steady at 2.4. We consistently target to maintain 2.5 months of supply plus or minus half month in the channel. A range we had stayed within for 34 quarters. Distribution as a percentage of total revenue is just over 50%. We use this channel to address the mass market for products like general purpose MCU which are sold to thousands of end customers. The channel is also leveraged by our strategic customers which require NXP to position material prior to the seasonal peaks. Overall as our business grows, the percentage of business through distribution has also increased at a rate higher than that. Our channel inventory is in good shape and we will continue to target supply 2.5 months plus or minus half month. Before I turn the call over to Peter, I want to thank all of our employees for their dedication, hard work and the laser focus they have shown over the last several years as we completed the Freescale integration and preparing for the Qualcomm integration. We ask a lot of all of our employees and we ask it often. We know the deal fatigue has been an issue for the last few quarters, but now is the time to focus on our short journey and move forward to driver our future strategy which will result in the industry leadership in our focus markets. I am genuinely impressed and grateful and how our employees rose to the task presented to them. I think all of them and I'm proud of the organization and each person has contributed towards success. Now I'd like to pass the call over to Peter for a review of our financial performance.

Thank you, Rick. Good morning, everyone. On today’s call, I like to say it’s a great to be able to speak to you all again today and I’m really looking forward to meeting most of you in person in the near future. As Rick as already covered the drivers of the revenue during the quarter, I’ll move to the financial highlights. In summary, revenue and profit in the quarter was adversely impacted by the ZTE ban and auto customers managing their shortages and other components. Non-GAAP operating profit was 29% and cash flow continues to be strong. Our balance sheet is in excellent condition with a leverage ratio of 0.74 times, which is substantially below our long term target. Focusing on the details of Q2, total revenue was $2.9 billion, up 4% year-on-year. We generated $1.21 billion in non-GAAP gross profits and reported a non-GAAP gross margin of 52.8%, down 20 basis points year-on-year. Total non-GAAP operating expenses were $591 million, up $50 million year-on-year, reflecting the impact of a strong dollar and investments we’ve made in the business. From a total operating profit perspective, non-GAAP operating profit was $618 million and non-GAAP operating margin was 27%, down 140 basis points year-on-year, reflecting above mentioned items. Interest expense was $31 million, non-controlling interest was $12 million and cash taxes were $56 million. Stock based compensation which is not included in our non-GAAP earnings was $69 million. Now I’d like to turn to the changes in our cash and debt. Total debt at the end of Q2 was $5.34 billion, cash was $2.98 billion, and net debt was $2.36 billion. We exited the quarter with a trailing 12 month EBITDA of approximately $3.18 billion. Our ratio of net debt to trailing 12 month adjusted EBITDA at the end of Q2 was 0.74 times, as I said earlier and our non-GAAP interest coverage was nearly 20 times. Turning to working capital metrics. Days of inventory was 111 days, days receivable was 31 days, an increase of 1 day sequentially. And days payable was 90 days, up 7 days versus the prior quarter. Taken together, our cash conversion cycle was 52 days and improvements of 3 days versus the prior quarter. Cash from operations was $403 million and net CapEx was $129 million resulting in non-GAAP free cash flow of $274 million. Turning to our expectations for the third quarter. We currently anticipate total revenue will be up in a range of 3% to 9% sequentially. And at the midpoint of our range, we anticipate the following trends in the business. Also is expected to be flat sequentially. Secure Connected Devices is expected to be up low double digits. Secure Interface and Infrastructure is expected to be up about 20%. And Secure Identification Solutions is expected to be down high-single digits sequentially. We anticipate revenue from corporate and other to be approximately $95 million. We expect non-GAAP gross margin to be about 53.3, plus or minus 50 basis points. Operating expenses are expected to be about $588 million, plus or minus about $10 million. Taking together we see non-GAAP operating margin to be about 29.1%, a plus or minus 60 basis point. We anticipate cash tax to be about $37 million, estimated interest expense of about $32 million with non-controlling interest at $13 million. I’m about to comment on our capital structure and announced share repurchase program. Prior to the final transaction, NXP consistently returned all of its excess cash to its owners. We continue to believe this and are supported in this view by our Board of Directors. Given our short term cash requirements, our current leverage and the fact that we believe the current market price significantly in the value of the company, we believe the buyback is an appropriate method to return excess cash to shareholders. To this end, our board authorized a $5 billion repurchase program. And we’ll fund this with a combination of existing cash on the balance sheet, the after tax proceeds from the terminations free, as well as cash flow from operations with the balance from debt. We’ve executed it before the end of the year, we’ll see our leverage at the end of 2018 be about 1.5 times. As a specifics of the new debt in our complete third quarter interest expenses and estimate, please note that any purchase of quantities of stock above approximately 10 million shares will be subject to a deem dividend payable by the company of about 11%. So I’d like now to turn back to the operator for your questions. I think Jeff you mentioned we’re going to have an extended Q&A session.

That’s correct. We get everyone to Q&A today. Operator?

Thank you. [Operator Instructions] And our first question from William Stein with SunTrust. Your line is open.

Great. Thanks so much for taking my questions. Nice to engage with you all again. Two questions if I can. First, I am wondering if we can get a further discussion of capital allocation beyond a buyback. In the past you’ve discussed when you were still pre- Qualcomm discussion, there was a sense that you’d start a dividend when you got to the right leverage level I think and there’s also discussion of incremental M&A. Can you update us on that aspect?

Yeah. Sure. On the dividend, we’re actively discussing, certainly we can afford it, our leverage of the end of the year would only be – if we do execute the whole buyback before the end of the year will only to be 1.5 and at the end of next year we will be back to below one. So we’re in discussions with our board and I guess we’ll update you on the Analyst Day so what we’ve decided.

Thanks.

There on the dividend. In terms of incremental M&A…

Well, I think the bottom line is with the, what we consider to be quite unfair process that we just went through with China. I don’t think you’ll see us trying to do any big merger or equal kind of transactions like what we did with Freescale. I mean clearly the regulatory process has proven to be quite a challenge and I think that’s not something that we perceive as being a priority now in creating value. So clearly small acquisitions that provide some unique product technology or allow us to provide a more complete solution to our customers are within reason but I don’t think that you will see us trying to do any huge transactions like merger of equals.

I appreciate that. Thanks for that update. And then one more if I can. The 5% to 7% growth is the more or less the same target that you had prior to the Qualcomm transaction. It looks relative to somewhat weaker SI&I and SIS security markets. I’m wondering if we should read that 5% to 7% to suggest that those two markets will stage a recovery or should we read it as those will be the relatively weaker ones and we should see more outsized growth for example in automotive and the MCU part of Secure Connected Devices? Thank you.

Absolutely. We will definitely. Our plan of the growth rate is balanced with stronger growth in automotive than what we would have had a couple 2.5 years ago with through this as well as in micros. Our portfolio continues to drive a lot of growth in those areas, so the continued weakness in SIS which is a relatively small portion of our total business at this point and certainly we’re working through some of the issues at RF power and digital network business. So I think when you look at it on the growth rate even though it’s the same number, it’s a much more rich fuller growth rate that plays to our strength than what we would have had two and half, three years ago when we set those targets before.

The way I figure out Will is versus where we were two years ago. And coming to that it is a similar numbers. There's all of all of our businesses are doing well except for as Rick mentioned, and we started to talk about that. RF tends to be – it's a relatively small business for but tends to be cyclical. So that...

Very profitable. SIS is probably bottomed down, we definitely went through some issues in '16 and '17. So it's certainly different links than we had two years ago. But the thing is that we were really investing you know most of the core of our companies are actually doing from our perspective very well.

Great, thanks. I'll leave the floor.

Thank you. And our next question comes from Vivek Arya with Bank of America Merrill Lynch.

Thanks for taking my question and good to talk with you guys again. Rick for my first one, your OpEx was up 8% to 9% in the first half year-on-year. Are there areas in NXP where estimates were perhaps paused and need to be restarted now that you have to go you know on your own or asked in a different way, when do you think you can get to your target model for growth and operating margins?

Yeah, I think those are going to diametrically opposed. I think the growth rate that you are talking about I don't think anything was paused. We were focused on the opportunities and as you saw in our R&D, we've actually invested in some areas where we thought it was critical to invest in that technology to do to continue to drive our leadership with the expanded opportunities we saw. And there's a lot of factors that come into account associated with currency as well as customer funding and grants et cetera. But the bottom line is there's not anything that we need to re-accelerate, we have been making a good level of investment. I think one of the things that we will consider on CapEx is perhaps strengthening that a little bit for the next couple of years to be sure that we can drive our cost reduction opportunities expanding some of our internal capacity and perhaps using a little bit of a break-up to really reinvest in the cost savings for the company. But on the OpEx side I think we do not have to reignite anything, in fact we're making those investments for the future to continue to drive our strength.

Alright. And then for my follow-up, just in terms of clarification, are you assuming ZTE gets back in from Q3 onwards? And on the buyback, Peter is there a timeframe in which you plan to complete them? Thank you.

So let me do the part. ZTE has started again. So that would be in Q3 and hopefully continue as a normal company going forward. As regards to the buyback, I think you know from our kind of historical activity, we don't announce buybacks and don't them. But we look at the markets on daily basis and to the extent that you know the opportunities that will go out and we would expect to complete the other buyback you know in a timely fashion.

Thanks and good luck.

It was an interesting, you know it's pretty interesting because it is clearly important for us from a revenue viewpoint, it was considered to be one of the factors in the discussions with the Chinese relative to the regulatory approval process. And so it's quite surprising that the Chinese made the decision they did not to actually approve the transaction given that ZTE was brought back to life by the U.S. Administration in Congress.

Thank you.

Thank you. Our next question comes from Stacy Rasgon with Bernstein Research.

Hi guys. Thanks for taking my questions. Nice to speak with you again. My first question is on gross margin leverage. So it's obviously stopped a little bit and I get to play that was a function of mixes like some of the higher margin businesses kind of had a bit of a headwind. But I am also surprising that you really going forward is revenue is growing and Secure Interfaces Business is growing so much that's where we're still not seeing any gross margin leverage, so what's going on there? I guess what do you need to do to get the margins back up because you're running below your model? And I guess structurally how do we think about the drivers of gross margin going forward? When do you think you get back into kind of more than normalized range of your target model?

When you say more than a normalized range…

What’s the ranges like 54 to 57 whatever it was and so you are running 53 and next 40 you got Secure Interface was up 20% which is some of the really high margin stuff and yet got gross margins kind of flattish to down and revenues going up. So I don't quite understand, is there something wrong with utilization because if you know you your inventories are high or what?

First of all we look at the targets on a on an annual basis, we're not going to obsess over the current quarter. And there is all sort of things on and any single quarter that move the gross margin around. Having said that our gross margin right now is not where we'd like it to be and it needs to improve. Probably the biggest single thing that's hitting this year is there's about 80 basis points of kind of pricing increases.

You've had a bunch of people say role length has gone up, frights gone up, but that's certainly causes headwind. We would expect to quickly get into a range. And you know clearly depends on the mix of products and a whole bunch of other things. But I don't like the current quarter, I think we need to do better, but there's nothing structurally no.

Got it. Thank you. That's helpful. For my follow-up, I guess to that point you talked about some of the cost increases and you've talked about revenue missing you know obviously because capacity is tight and microcontroller. So can you give us a view of how much revenue you're actually missing because of those long lead times and tight capacity when you see those supply constraints even? And I guess just not only the housekeeping question, tax rates for this year and next year, are they still the same as what you gave on your prior model?

So let me do tax, so tax we are using cash taxes quarter-by-quarter and we've given you that. We've previously said 2019 would be 12% and I think that's a good one. The impact of tightness in capacity it's a few tens of millions of dollars a quarter. I don't think it's huge.

Yeah, and I guess you know Stacy, when you look at it you know our kinetics family up until maybe a month ago, we were at 26 weekly lead time which is clearly not where we want to be. And when you have those design wins, you have to work with customers to be sure you don't take them lying down even with those extended lead time. So as we get our manufacturing capacity back in time, back in line it should allow us to be in a position where we can drive growth faster than what we've been able to achieve with the capacity limitations. And we'll see that as we approach the end of the year some of that begin to come on line. And you know clearly the thing that we're excited about is the design wins we have and the ability to drive that and we've been able to keep customers where they haven't gone lying down even though we've had limitations and extremely unacceptable long lead times based on what we have to lay out. We've actually reduced those slightly in the last few weeks and we think we'll continue to get those under more of a reasonable basis going forward.

That it's likely would still be more than 20 weeks so probably?

You know Stacy, it's hard to say, we're bringing the past as quickly as we can. And I think over a period of time certainly 20 weeks is not even reasonable lead times associated with micros. So we would anticipate and hope that we'll get down into more of a reasonable range that you know kind of in the teens as opposed to even 20 as we getting into early next year.

Got it. Thank you, guys.

Thanks.

Thank you. Our next question comes from Craig Hettenbach with Morgan Stanley.

Yes, thanks. First question just on the inventories been remarkably consistent at 2.3, 2.4 months, so just anything particularly because things are pretty tight now in the channel, anything you are doing differently versus price cycles just to manage the inventories for distribution?

I'd say the biggest you know three years ago, we had a problem in one quarter which shook us up pretty badly. And at that time we completely revamped our control systems. But if you like our ability to look into what this have and what shipping out, what's on the shelves. And we just continue to do that manage it really tightly, but we do manage it to that number Craig, it's not coincidence, we make sure it doesn’t go plus or minus about 2.4 months.

The truth is, this is always a tug of war with a big dusty houses, they are focus on their turns and nerds and want to be sure they have less inventory and we’d like to be sure we actually have a little more inventory in the channel to be able to support our customer base and drive the growth that we’re trying to achieve. So that’s always a little bit of arm wrestle to see where it is. We’re still in that range of 2.4 during the quarter, it may go slightly below that but we’re at that range. And frankly I’d prefer it to be more closer to 2.5 than the 2.4.

Yeah. I’m Steve, I am Head of Sales. They work substantially on the mix of products that’s actually on the shelves. So one of the challenges is how good is the inventory and I think our inventory in this distribution now is as good as it’s ever been in terms of the quality of the product.

I appreciate the call there. And then just a follow-up for Rick, just has been some time. Can you update us on the progress around kind of radar and ADAS, any kind of anecdotes from a design perspective or how things are playing out for you in that market?

Absolutely. So we have the strongest portfolio in radar products and working broadly with all of the major car customers. And so their exceptions of our technology has been really overwhelming and we’re very pleased with that. The ramping the capacity to be able to support the requirement has been more of a challenge in the design win side. But with the portfolio we have and the ability to bring total solutions together, we continue to grow and get strength in driving more of a complete solution with our automotive customers. And clearly our radar success has been a contributing factor to that. But as we look at safer driving and autonomous driving, radar is only one factor associated with it. Also our vehicle to vehicle communications platform, our entire microcontroller family supporting that as well as the security to be able to drive safer solutions is really some of the key technology that we’re talk more about in our Analyst Day that we think will really allow us to continue to drive growth well above the marketplace.

Got it. Thank you.

Thanks Craig.

Thank you. Our next question comes from Tore Svanberg with Stifel.

Yes. Hi, thank you. First question I know there’s a bit longer term, but I think the appealing part about the Qualcomm NXP merger was really the positioning in automotive. How should we think about NXP’s long term strategy in automotive? And I’m thinking more in terms obviously NXP has a lot of mix in expertise, Qualcomm probably also more on the digital processing side, so just strategically how should we think about NXP going forward in automotive especially more on the digital side things?

So when you think about automotive and especially moving to autonomous driving, the center fusion you know we will not have that high performance processing capability that we would have had with the combination with Qualcomm. So clearly that something that we have to figure out how we work with our customers and those companies to really be able to partner to provide solutions to be able to fill it. But when you really think about the after the learning process takes place with artificial intelligence, it’s really more about the microcontrollers and the capability to drive that on a consistent basis at an affordable basis for a broader array of cars, is really what drives the improved safety. And frankly, NXP is extremely well positioned to take advantage of that and provide solutions that will really get continue to drive strong growth. So I think we’re in a very solid position. The interesting thing that we’ve really made some progress over the last couple of years on the analog side is we think our portfolio is even more well through the towards the electric vehicle portion of the automotive market that what we bought in 2.5 years ago. So we think that our portfolio will talk more about that in the Analyst Day, will serve roughly 40% of the TAM associated with electric vehicles and really process in a great position. But we’ll continue to see the safer driving moving towards autonomous driving or NXP will be a key leader in driving that technology to facilitate saver driving across the industry.

It’s very helpful. And just as a housekeeping for Peter. Peter, what’s your use for CapEx both for calendar ’18 and calendar ’19 please?

We would – I’m just trying to think in the best way to describe this. Normally in the past we’ve talked about 5% CapEx. I think we run in years to take about 6.5. And as Rick mentioned before, probably in and I’m saying this on the fly, in 2019 and 2020, we might let it go up to as high as 7 and we can see a very significant gross margin return given we got the funding of the breakup fee. So we reinvest some of the breakup fee back in the gross margin. So I’d say your model maybe use 7% next year and the year after, this year I think it’s about I think it’s going to be about 6.5 right of the check exactly.

That’s helpful. Thank you.

Thank you. Our next question comes from John Pitzer with Credit Suisse.

Good morning, guys and welcome back. Thanks for taking my question. Peter, I think you are kind enough to tell us what the ZTE impact was to the June quarter. Does the September quarter guide embed all that revenue coming back or is that going to take a couple quarters to come back?

I’m not sure it’s exactly $31 million that comes back, but the most – we would expect most of it’s a comeback in Q3. But we do think we’ve lost at least a quarter of our revenue in the year. It’s not like let’s say for example we were literally $30 million a quarter. It’s not like Q3 would be $60 million, this is the $30 million seems to disappear into that.

Yeah and we probably wanting to be completely back it at full run rate John in Q3 but we’re getting close and working to do that and working with the new management team at ZTE to be in a position to support them as they really look at how they go addresses this in the market place.

That’s helpful. And then just turning to the auto business which is kind of the one of the core businesses that you have. Year-over-year growth was about 7.5% which is still really solid but it is below kind of some of your comps are peers out there. I’m just kind of wondering where you – do you think you’re more disproportionately hurt by these discrete shortages? Is there something going on within your exposure? Is this key fobs that they’re under growing? Or help me understand kind of your growth rate relative to peers and how you’re looking at that?

John, our growth rate across the board with still very strong in automotive. The one area that we had a little headwind in the quarter was in auto microcontrollers for some of that is the lack of some of discrete reduce the pool by our customers. I mean it was a little bit surprising because they really didn’t give us as much indication of that early in the quarter. And as you know we have just in time warehouses and all those key customers. But if they went through the pull process towards the end of the quarter, it was a lower levels than what we would have anticipated based on some of their inability to have sufficient discrete products in place. But the rest of the portfolio continues to perform very well and we continue to be very excited about the growth of our automotive business going forward and probably at a higher rate than we were thinking about three years ago.

That’s helpful. And I am thinking cyclicality Peter, as success, I think you talked about it on the – in the press release an impact on the balance sheet. I just wonder I get a better understanding, are you fully through that transition, what was the impact to revenue and I guess the reason why I asked, I just want to make sure as we look at year-over-year growth rates that we’re sort of counting apples-to-apples?

Yeah. My favorite topic, I just think that I can have a mind to run for a second I think it’s one of the most for us one of the most ridiculous things even implementing just like crazy amount of work for not much news. I think this is, in Q2 have an impact of $4 million and from memory I think is a $4 million benefit. But I mean it’s noise level, John.

Helpful. Thanks, guys.

Thanks, John.

Thank you. Our next question comes from C.J. Muse with Evercore.

Hey, good morning. Thank you for taking my question and good to hear and all your voices again. First question on an LTM basis you guys generated 19% free cash flow margin, curious as you start getting closer to your target model, what kind of percentage are you thinking there?

That’s about think about that really. Really trying to get a fill numbers you guys asked. But I think it is approximates in the end our EBIT margins. But maybe just give me time to think about that but I think the EBIT margin a very good proxy.

Okay. That’s helpful. And then I guess a question on the buyback, you talked about completing in a timely fashion. How should we think about annual share grants as a partial offset each year?

What we’ve not only been, we’ve been granting less than well less than 1%. So I think that’s – on a regular basis, I think that’s the way I’d look at all our share grants. On normal annual grants would be – certainly at the moment we kind of looking at some things of what we should do in terms of how do retrain our employees should we provide them with some of additional handcuffs to keep them in the company. I think our normal grant is would be what we go forward with generally.

Actually, I really need going into handcuffs you know we want to keep our employees in survive and I do think that as we go through a reset in a reboot, we’ll see a little bit of additional equity probably as our board gets through that and will you give some more specifics when you get through the Analyst Day here in September.

Excellent. If I could speak one last one. And you talked about some of the other segments. Could you speak to your thought process on the growth trajectory for SCD over the next 4 to 6 quarters puts and takes for that line item and what we should kind of be aware of given we haven’t spoken to you for so long? Thank you.

So on the three year bases we feel very good about this SCD. I think we the – the lion share of that business is really on the micro side and our growth there is extremely good and it’s actually been limited by capacity that we could bring online. So our customer perspective and perception which is on the micros which is I don’t know 60% or so of SCD, we see extremely strong growth and continuing to be in a solid position. And I think that’s going to continue for the next few years. In Secure Connected Devices, we continue to be in a very strong position there. We have a large OEM in India, that’s ramping, it’s clearly a factor in the near term associated with it. But we continue to be in a very strong position on the mobile wallet basis and continue to move toward very positively.

And I think C.J. will provide for you guys kind of individual operating segment growth targets at the Analyst Day. But I think there to support Rick’s comments, this has been one of the real bright spots of the business, the micros and microcontroller business has been very strong and the mobile transactions has been very strong as well.

And if we look at it over the three year basis, the ability to really take that business in drive the processing to the edge as well as the security to be able to provide to ensure that there is not hacking as we go to the world of the Internet of Things, this is really a key area for us and one we think we will contribute significantly to the growth and we’re well positioned with the product portfolio basis to really support customers and solutions and really be able to facilitate realizing the pull value of the cloud and the capability that it offers to all of the users.

Thank you.

Thank you. Our next question comes from Toshiya Hari with Goldman Sachs.

Great. Thanks so much for taking the question. I wanted to follow-up on your market share in automotive semis broadly. According to guys like Gartner, I think you guys lost a little bit of share in 2017 given what you delivered so far in 2018. I think you might look – you might lose some this year as well. Rick, just given what you’re seeing from a design perspective today at one point should we expect your positioning to improve and revert to the upside?

You our position is very good and very solid. I think as we’ve seen e-vehicles begin to grow contribute to the overall automotive growth. And our portfolio on analog which is well positioned to specifically drive growth in that area particularly in China where we see a lot of e-vehicle growth. I think we’ll see that the growth of those some of those design wins that we’ve been able to achieve over the last few quarters in years, I really begin to kick in associated with it. But I think if anything when you look at it on a customer facing basis in position our share is gaining and we continue to have design wins growing at a much more rapid right than our overall revenues which but in a great position. The automotive business is one where you win designs two to four years before you actually begin to ship. So by look at the design wins, we continue to gain market share and we well positioned for growth going forward.

Okay. Great. And Rick, historically you’ve been very disciplined from a portfolio management perspective and you’ve you shared your views on things like relative market share. Are there any businesses or product groups within NXPI today that you would consider deemphasizing or potentially selling or are you pretty comfortable with what you have today? Thank you.

Well after the two year pause at our portfolio, I think there’s always businesses that you want to step up investments in and try to acquire some technology and businesses that don’t – that are critical or strategic to the portfolio going forward. So I would always say that the case for us and we clearly went through a couple year pause as we went through waiting for the integration associated with Qualcomm. So I do think that there are some things they will think about. It would be premature for us to discuss those. But I think we’ll continue to be in the basis of driving the best portfolio going forward that we can and do support the market opportunities that we perceive a strategic and how we can be best positioned to drive solutions for customers in those areas. Operator?

Thank you.

Thanks, Toshiya.

Thank you. And our next question is from Rajvindra Gill with Needham & Company.

Yes, thanks. I appreciate it. Just a follow-up again on the auto, anymore color there would be helpful. The growth rate if we take the average year-over-year growth rate in 2017, I believe it was around 11% and it has decelerated to 7% and as you said a lot of that is due to shortages of the discrete components. Wondering if you give us kind of what the specific dynamics that were going on with the shortages? Why did that happen? When you think you can get resolved? Is that affecting other competitors in your view, any clarity there would be helpful?

I think it’s affecting all the competitors in automotive micros. So I don’t anticipate that we are unusual at all. But we clearly are one of the leaders in that space. So as they have discrete shortages that impact their overall basis, it has more of an impact on us because of our position in auto micros. The resolution of that I can’t really address that I think we don’t see that as being an area that’s going to be a prolonged basis. We think the auto companies are going to get back to more of a normalized basis on micros as we move forward.

I think we have to be careful about parsing the numbers really. I mean if I look at trailing 12 months Q2, auto grew 10%. If I look at trailing 12 months Q3 at the midpoint it’s probably about of 8.5, 9. If I look at years-to-date, it’s probably about 8.5%. I’ve – you know auto is running 8%-9% especially when to $4 billion business a year is pretty, pretty cool.

And if we look at over the next few years, I think we’re going to see nothing but maybe increased growth associated with based on the designed wins being able to achieve.

So I think we’re in great position in automotive. And you really can’t look at in on quarter-by-quarter as Peter just said you get a look at in a little bit of an annual basis to really reflect what’s going on in the automotive market per se.

Yeah. That’s helpful. And for my follow-up, significant amount of growth in general purpose microcontrollers, can you maybe drill a bit deeper in terms of what’s driving that. With Freescale you became a one of the largest microcontroller suppliers in the world or the second largest market controlled supplier in the world. Are you seeing the significant demand from IoT devices, IoT now as a market has developed over the last couple of years, can you maybe talk about that as well? Thank you.

I think we are seeing it broad base. So I think we’re in a leadership position. I think that our portfolio plays well. I think when you really look at it in the marketplace, we have the strongest portfolio, the ability to go from the core micros to higher in micros to apps processors and some products that we just announce the kind of crossover between micros and apps processor. There really but it’s in the unique position to drive solution for customers that they really don’t have the opportunity to have that kind of breath of portfolio. And then we can even go to the high end associated with our network processors. So I think the portfolio of processing capability that we have really plays well in the overall market, well it’s not the center fusion capability as a real high end, I think when you look at the applications that drive the high volumes and the capability, we’re really well positioned to take advantage of that. And our portfolio plays extremely well and the team there they are doing a great job of positioning that business to move forward and continue to win market share.

Got it. Thank you.

Thank you. Our next question is from Matt Ramsey with Cowen.

Thank you very much. Rick and I wanted to ask a little bit of a strategic question and I sort of echo your sentiments that I assume that the powers that didn’t let the transaction with Qualcomm go through, but given the amount of I guess cross company diligence both of you guys have done against each other’s businesses during this period of time, is there an opportunity you think for your company and for Qualcomm to work together in partnership around some solutions for customers that might be sort of accretive to the long term business and how should we think about that potential if there is any? Thank you.

Yeah. I think that think there clearly is some potential like in NFC where we actually have been working with Qualcomm for the last few years associated with it. I think you have to give us a little bit of time to get through the overhang. I think we and Qualcomm were both working diligently through midnight last night to be able to close the transaction. So I think you have to give us a little time to think about if there’s really any opportunity for us to work together going forward. I wouldn’t rule it out. I think that as we think about the high end processing associated with the automotive market, we clearly are going to have to look at some partnerships to be able to drive a more complete solution for our customers, since we don’t have the capability if you combine with Qualcomm. But I think it’s premature to really talk about that specifically. I think we’re really excited about the growth opportunities we have. We would have loved to have had that leadership connectivity combined with our leadership processing and security that would have been combined into what I believe to be the industry power out, but since the regulators didn’t that take place. We think we’re well positioned in really can drive significantly above market growth and continue to create significant shareholder value going forward.

Thank you for that. Yeah I realize things are happening quick here and things just happened to midnight last night officially, so I appreciate the color. Just as a follow-up, shifting gears a little bit to the sort of IoT, MCU business, how you guys been investing in different air interface technology in the IoT and the like, obviously Qualcomm had a portfolio a big one there that you might have relied on if the merger had taken place and just wondering an update on to how the investment levels have been in the peripheral communications technologies around the IoT business? Thank you.

Yeah. No that’s great question. I think when you look at the IoT business and really moving to the edge, we’re really getting well positioned with the cloud providers and really providing a unique capability associated with it. To be fair, we have actually put a pause on some of our Wi-Fi development capabilities with the planning for the merger with Qualcomm. So we’re back considering those and how we get in a position to really have the connectivity platforms to be able to drive complete solutions for our customers. And we have some technology in our network processing area in the Wi-Fi space. Clearly we’re going to look at how we can position and drive to a broader array of customers through the industrial space. But we’re getting really positive feedback from the big cloud guys about the unique capability we have to really protect the edge and facilitate take the smart edge processing and then be able to move those transactions to the cloud to be able to facilitate that which is when you really build IoT, one of the critical factors to be able to drive that in fact it was a couple a month or six weeks ago maybe they came out with companies with machine learning and artificial intelligence and frankly we were the fourth one mentioned in the semiconductor space which surprised me a little bit as we went through it but then when we peel the onion and understood what they were taking into account relative to our edge processing capability and working with the cloud providers really confirmed the architecture in the opportunity space that we’ve been focused on and where we see some significant growth, but this year, but out over the next few years and where we think we’re well positioned with our technology to really provide a leadership capability.

Thanks very much.

Thanks, Matt.

Thank you. Our next question comes from Romit Shah with Nomura.

Yes. Thank you. Rick I guess just listening to the conference call, my general takeaway is that after two year pause NXPI basically just needs to reinvest in the portfolio and manufacturing in order to really grow the business, but that sort of puts you at odd with the profitability targets and so we should just be conservative in our assumptions around when you get to your target miles. Do you think that’s a fair way to look at it?

No. I think what’s happened is over the last two years, we’ve been continuing to run full out our core businesses and the areas we’re really excited to continue to do well. Yeah, our gross margin is little bit below where we want to be at the moment that would happen whatever happened. The manufacturing capability we have is it’s a really good capability, but we see some let’s say you marginal investments to make. We’re not talking about building new fabs or anything like that it’s all about marginal increases to capacity that could drive an outsized return to was in terms of profitability. I guess I’m not going to get into when are we going to hit the midpoint of the range. I think you’ll find the Analyst Day very, very helpful. But we’ll be pushing very, very hard to move forward as quickly as we can. And I think Rick mentioned earlier on that if any think over the last two years, the only thing that’s been a little bit of a challenge for us is at the margin, you have a slightly different view of the portfolio when you’re going to be part of this huge terminal to powerhouse company than you do as a pretty sizable $10 billion company. But I certainly would not characterize things has been poor or weak, I think we’ve been running full out and things only going to get better.

You know I guess – we talk about manufacturing capacity and really investing in internal capacity to drive our gross margins, one other things that’s even included in our CapEx now is we’re doing a significant expansion in our SSMC joint venture in Singapore where we have a joint venture with theism TSMC and we’re significantly increasing the capacity in that facility and that’s comprehended in the CapEx where we are. What we’re talking about is the potential to continue to expand that and be able to drive some of the unique solutions and unique profits and get the ability that we have to be able to meet our customer requirements. And taking a little bit of our breakup fee driving that investment to really ensure expansion of our gross margins and ability to drive. That’s a key priority for us and one that we think a good return for our shareholders.

Yeah, 1% additional CapEx is for $100 million.

Peter though just one thing that stands out from the numbers in the OpEx. OpEx is up high single digits on basically similar revenues from a year ago. How do we think about the outlook for OpEx and specifically R&D which it’s been several quarters that’s running at about $350 million plus or minus and now it’s creeping closer to $400 million, do you do you expect does R&D start to come down or do you sort of maintain these levels and generate leverage by growing the top line?

I things it’s two things, we’re up about $350 million, we’re up about $50 million year-on-year, half of that is currency and half of that is in kind of investment. You can get – again you can get a bit of hung up on the quarters, but if you look at it on an annual basis, what you say is true, our R&D has crept up and it’s really reflects that kind of how we were viewing the portfolio was being part of Qualcomm. But we intend to absolutely get back to within a range and stay within that strategic range and we’ve think we can drive quite a lot of value by doing that. And some years will be close of the top of the range and other years will be maybe more closer to the bottom of the range.

Yeah, I guess it’s we should not let your statement go without at least responding to that you said on flat revenues. Actually the revenue in HPMS is up 5% year-over-year. So our R&D has grown a little faster than revenue with some of the strategic investments we’re making. It’s not like all of that OpEx is based on product revenue. We are up 5% and if we look out in the future we think we’ll continue to outgrow the market. So I don’t – we’ll go through it in the September Analyst Day a lot more detail on our target models and where we are, but we’re not backing off our total target relative to R&D. But we are making the strategic investments to be able to ensure that we solidify the stronger growth going forward in the near term.

All right. Thanks for the color. Appreciate it.

Thanks, Romit.

Thank you. Our next question is from Vijay Rakesh with Mizuho.

Hi, guys. You guys are look like phoenix you are back. Just a couple of questions…

Hopefully we are not raising from the ashes.

That’s right. On the automotive side, as you talked about some sort of fusion, just wondering are you guys looking at LiDAR also, do you already have in your portfolio, how do you see that building that out?

Yeah. When you think about LiDAR, we are the processing capability for a number of the LiDAR solutions that are in the marketplace. So we play a significant role in providing them the specific LiDAR technology. When you think about safer driving, it’s not about any individual solution, you need to really have a complete solution that includes radar, includes LiDAR potentially depending on how advance LiDAR gets. All have – so has include vision and all of those will provide that we don’t have the sensor capability far built in, we’re making the investments because of the size of those in the uncertainty and some of those technologies will provide the processing capability to be able to facilitate that. And when you look at the solution to really be able to drive safer driving, we provide the backbone for the bulk of that and ability to really be a significant participant in driving those solutions as we go forward.

Got it. And just on the automotive side, I think you guys mentioned EV, just wondering how much content do you have on the EV side? And also SII has been lumpy, but as you go to 5G what’s the step up in content do you get in 5G versus 4G? Thanks.

So you – I got distracted as you talk about SI&I. Could you just repeat the question just before that again, because I was focused on that to sort time on that 5G, sorry.

Yeah. Sure. I was also asking on the EV side, electric vehicle side, just wondering if you had content there.

Yeah. So I guess over the last couple of years, we spent a lot of time really looking at the opportunities that we saw in EV. We – if you look at our analog portfolio, we have really a very strong position. We think that we’ll address about 40% of electric vehicle total tamers are served market. And so I think we’re in a really strong position to be able to expand that. That’s much broader much higher percentage than we’re planning on 2.5 to 3 years ago as we talked about that. And specifically, as you look at the growth in e-vehicle, electric vehicles in China, I think we’re really in a good position to be able to support that in and take advantage of that marketplace growth. On the SI&I, 5G, we’re not in the best position to talk about the 5G rollout. I do think that when we look at our portfolio and some of the massive MIMO capability that we have the MIMO it’s kind of an interim step as you’re moving to 5G. We have some solutions that will be a contributing factor to growth. The question is when that will be deployed, whether it’s months or quarters and just how much overall impact it will have, but I think it will be a contributing factor to be able to drive the growth going forward.

Great. Thanks a lot.

Thank you. Our next question comes from Harlan Sur with J.P. Morgan.

Good morning and great to hear from the team. Just the follow-up on the 5G question, you guys obviously have a great position with RF power portfolio. How does digital networking portfolio stuck up there as the industry moves to 5G, it’s still a pretty big part of the mix. Is this segment more sort of in cash kind of harvest mode or does the team have some suction here for the 5G interface transition?

So, I think if you look at the DN, DN is we have seeing a pretty significant shift except it especially in the network processing areas. A lot of those customers have moved their fundamental processing capability internally. We still are driving multi-core arm solutions with some limited portion of the portfolio for those customers, but it’s not in the broad base that it was five or six years ago. So that’s one of the reasons that we’re spending quite a bit of time looking our network processing area in DN. And frankly looking at the capability, we are seeing some significant opportunities in automotive for basically taking a network architecture and applying that to the car and some of the technology we have there are really positions to this well to be able to provide a leadership technology in providing that communications hub if you will in the car which is a real opportunity to use our fundamental technology. On 5G per se on the DN, I don’t think that it’s really going to be a significant factor in driving huge growth parts, but we will be a participant. We do have technology that allows us some software upgrades in the network processor that really opens the market opportunities for us but we have to prove the size of those and what is significant – and how significant that will be in our growth in that specific area before.

Thanks for the insights there Rick. And then macro dimensions appear quite healthy I mean industrial trends especially industrial production appears to be quite strong, consumer demand appears fairly healthy. Can you guys just talk about the breath of the demand geographically, I know you track ship to trends, but I think even that would be helpful, just trying to get a sense of how diversified the demand profile is?

The demand is broad based industrial across the board. China represents half of our shipments are going to China and the continued strength in China continues to be very solid. But the broad base of our product applications really covers all the areas from consumer goods to through to industrial applications associated with it. And we see strength in all of those areas in for example or micro area where double-digit growth has been very consistent probably would have been even stronger if we would have the manufacturing capacity in place to able to prove it.

Thanks, Rick.

Thank you.

Thank you. [Operator Instructions] And our next question is from Mark Lipacis with Jefferies.

Hi. Thanks for taking my questions. Rick, on the kinetics business just to go back that for a second. That really should be a growth engine for you and you’ve been in the last couple quarters of the supply challenges, you said you’re trying to bring some supply on like. Could you give us some more color on that, I’m trying to understand to what extent that’s in your control or are you’re kind of looking to your foundry suppliers to ramp up there or alleviate the pressure? Any color there would be helpful? Thanks.

Yeah, it’s 90 nanometer special process proprietary process that we have outsourced to a foundry partner that has not been able to bring own capacity of the same right to our customer orders have come in. They’ve actually stepped up their capacity now where we think late this year going into early next year will be in a position to basically replenish our inventories that we’ve drained in that area. So it’s been a limiting factor to growth but we still had strong growth in micros even with that. And so our growth would have just been even stronger if we would have that manufacturing capacity with our foundry partner have been able to support all or customer demands. The design wins we have in that area and the capability to continue to drive that we build very positive about.

Thank you. That’s helpful. And Peter a couple of housekeeping things. You mentioned –I think you mentioned your expected leverage ratio on, if you could repeat that and then the net cash you’re going to get after when you receive the breakup fees? Thank you.

So, that will be subject to the full that’s tax rates are 25% so be about $1.5 billion after tax. We’ve already received the funds from Qualcomm, so they’ve wired that to us this morning. Leverage at the end of the year assuming we buy back the $4 billion, $5 billion to be 1.5 and will be back below one at the end of 2019 pretty easily.

Thank you.

Any follow-up, Mark?

No. Thank you very much.

Thank you. And I’m not showing any further questions in the queue. Sorry, there is Dani Farber from Hudson Bay. Your line is open.

Hi, it’s actually Aron [ph] from Hudson Bay. Thanks. Just two quickly follow-up to that most recent question. I believe your slides your references it two times leverage target and assume you talk about this morning at your Analyst Day we turn it side for but can you give us a sense when you think about end of 2019, one times levered with a longer term target is to how are you thinking about your cash structure, are able to incur more debt, would you do additional buybacks through 2019, how quickly do you want to get to the two times leverage? Thanks.

It depends upon the opportunities on. I think what it says is we have a really flexible balance sheet the depending on the circumstances, we could – first of all any excess cash, we will return to shareholders, so that we would be buybacks or dividend whatever. But it gives us a lot of flexibility for M&A should that prove to be a lot of opportunity given the comments Rick made before.

What do you think about minimum cash balances when you think about excess cash?

Billion dollars.

One billion?

250 is of that billion is actually in SSMC, our joint venture with TSMC out there in Singapore. I think one billion.

Very good. Thanks. I will look forward to September.

Yeah. Great. Thanks.

Thank you. And this concludes our Q&A for today. I will turn the call back to Rick Clemmer for his final remarks.

Thank you, operator. So thanks a lot for joining us today. It’s frankly good to be back. We look at the opportunities we’ve got going forward and we’re very excited about the opportunity to continue to outgrow the market and drive significant shareholder value. So we look forward to seeing you all on September 11 in New York City for our Analyst Day and be happy to go into more detail of that point time about the significant market opportunities and where our solutions really make a difference for customers and being able to drive growth. Thanks a lot.

Thank you, operator. Thank you everyone for joining the call today. Thank care.

Thank you everyone for participating in today’s conference. This concludes the program and you may now disconnect.