Good day, ladies and gentlemen, and welcome to NXP Semiconductors First Quarter 2012 Earnings Call. My name is Caris, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Mr. Jeff Palmer, Vice President of Investor Relations. Please proceed, sir.

Thank you, Caris, and good afternoon, everyone. Welcome to the NXP Semiconductors First Quarter 2012 Earnings Call. With me on the call today is Rick Clemmer, NXP's President and CEO; Karlie Sundström, our CFO; and Peter Kelly, our Head of Operations and our newly-appointed CFO who will over from Karlie upon his departure. If you've not obtained the copy of our first quarter 2012 earnings press release, it can be found at our company website under the Investor Relation section at nxp.com. Additionally, we have posted a supplemental earnings summary presentation and an Excel 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. Please be reminded that this call will include forward-looking statements that involve risks and uncertainties that could cause NXP's results to differ materially from management's current expectations. 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 second quarter of 2012. Please be reminded that NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure on forward-looking statements, please refer to our press release. Additionally, during our call today, we will make reference to certain non-GAAP financial measures, which exclude the impact of purchase price accounting, restructuring, 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 first quarter 2012 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. Now I'd like to turn the call over to Rick.

Thanks, Jeff, and welcome, everyone, to our earnings call today. Before I review the results for the first quarter, I'd like to highlight several changes to NXP management team which we announced since our last earnings call. First, it is unfortunate we had to announce the departure of Karlie, who is returning to Sweden. I want to personally thank Karlie for his focus and dedication these last 4 years in helping revitalize and help put NXP on the path to long-term success. Without his tireless efforts, valued insights, financial skills and camaraderie, we may not have gotten the company to where it is today. Moving into the CFO role is Peter Kelly, who has been a member of NXP management team, helping guide the success of our operations organization for over a year. Peter brings over 25 years of relevant financial, operational and technology expertise to the role of CFO. We believe that given the close working relationship between Karlie and Peter, as well as my extended experience with Peter, we anticipate little to no disruption in executing and achieving our financial goals. Additionally, Karlie will continue through the end of July and will assist Peter in the orderly transition. Secondly, we were pleased to announce Dave French has joined NXP in the role of Executive Vice President and General Manager for the newly-created Portable and Computing business unit. Dave brings over 30 years of semiconductor experience. He is well-respected industry veteran who we believe will drive the new business unit and help to continue to refine our customer focus, especially with technology companies which are geographically based in North America. Now I'd like to turn to our results for the first quarter. As is our practice, I will address revenue trends in our various markets and channels, with Karlie…

Operator, could you poll for questions?

[Operator Instructions] Karl-Henrik Sundström: Unless you want to make sure that the EBIT in our guidance is $191 million to $202 million. Some people might have wrote $199 million. It's $191 million to $202 million.

And your first question comes from the line of John Pitzer of Crédit Suisse.

Quick question guys. When you look at the $50 million of incremental revenue in the March quarter, Rick, can you help me understand how would you characterize as sort of what percent came from the cyclical recovery sort of versus new products? And then when you look out to the June quarter and the sequential revenue growth, again, help us kind of gauge what's new product growth versus kind of the cycle coming back?

Yes, so I wouldn't say that a lot of our growth in Q1 was really from an improved cyclicality associated with it. If you look at the growth in Q1 revenue, clearly, the strength in our ID business was associated with this. We said some new design wins, as well as the return of orders in some of the other areas. So our ID business clearly had a strong growth associated with that. Our Automotive business, which was up kind of 5% mid-single digit was really partially driven by the flood impacts in Q4 that gave us a low compare relative to the growth. So the growth that we had was not really a lot cyclical. There's probably some contribution associated with improved market environment. It's hard to call out specifics, but maybe 1/3 of it or so. But it was really associated with the new projects, as well as the return of some of the designs associated with our ID business, and then we compare that we had in our Automotive business, as well as the return of some of the business in our microcontroller space as well. When we look at Q2, John, clearly, there's a contribution -- an early contribution from some of the new design wins, but that's relatively small. This is really driven by the same kind of things that we talked about in Q1. Our ID business, clearly, being double-digit growth, associated with Q2 continuing to see more of a robust environment in the Automotive space as well. And then in a combination of our WILI and MCC seeing a combination of return of orders from distribution as we talked about, expected deliveries associated with distribution, as well as some of the early design wins that we've talked about. So while there's some rebound in the basic general semiconductor environment driven by the economic cycle, most of it is driven to company-specific programs that really drive the robust growth that we've seen in Q1 and really project for Q2.

And then, Rick, I know you guys have taking great pains to convince us that there's more to the ID business than NFC, but I'm kind of curious, as you think about the NFC ramp, you talked about sort of the 1/3 of your unique design wins potentially ramping over the next couple of quarters. Can you size where that is it a percent of business today and is that a contributor to the June quarter, or do you think it's more for a second half story?

It's clearly a contributor to the growth that we see but not the only thing that's driving the growth in our ID business. In fact, as we said in Q1, while the -- I think we talked about electronic payments basically being up around 30% and our overall ID business still being around 20% in Q1, so that kind of gives you the perspective. So I think our -- and the payments is clearly driven by our NFC participation at the current time, combined with the secure element that goes with that. So if you look at it, the growth in the NFC solution, including the secure element and the radio in Q1 was about 50% faster than the core ID business. And I think that's not a bad assumption going forward for the next quarter or so either, John.

I think as my last question, just around Standard Products. For most of your public life, pricing in that environment was better than you guys expected. You called out pricing as being more of an issue in the March quarter. I'm just kind of curious, is this specific to where we are in the cycle or do you think this is now the new norm in the business? And as we think about target margins, gross margins for that business, do we need to recalibrate that or not?

Not at all, John. I think we feel like this is kind of a one quarter anomaly. If we look at the pricing environment associated with it, we saw as much quarterly price reduction in Q1 as we would typically see on an annual basis roughly. So clearly, that combined with some of the manufacturing issues that we had in the back end, et cetera, drove the gross margin deterioration, but we would not expect it to be a new norm and it's really to be anomaly for the one quarter basis. Karl-Henrik Sundström: So John, we believe that we will go in to the model, the financial model within a quarter or 2.

And your next question comes from the line of Jim Covello of Goldman Sachs.

I guess the June quarter margins are really reflecting terrific leverage in the model. Could you give us some sort of idea about where margins could go based on utilization rates, and I mean, is the right assumption that utilization rates plus mix are the 2 main drivers of margins going forward? And then assuming a constant mix, how much of an increase in utilization would drive how much of an increase in margins? Karl-Henrik Sundström: As we have said all the time, it is like it worked down especially in Q4 and Q1. So based on 5 percentage points shift in utilization, we will get a $10 million to $15 million benefit in the following quarter. And that's what you see, that's what's driving up the margin in the guidance that we have provided today. And we don't give a forecast of the margins going forward into Q2, but as you see, it's driving up right now.

If I could just add to Karlie's point, as we said before, there's nothing structurally different in our business that wouldn't allow us to get to utilization back up where we were in the first half of last year. So given the algorithm that Karlie has given you, you can kind of do the calculation where gross profit can get to.

And then Karlie, I think you -- I believe you have said average utilization in the March quarter was 71%. Any estimate -- how would we -- how would you think about modeling that from where we are to back where it was? Is that a pretty linear relationship? Karl-Henrik Sundström: So we had 71% in Q4 which is moving to -- moved to 84% in Q1 2012.

But, Jim, remember the 71% was really what was reflected in the financials with the one quarter delay associated with the impact. So clearly, that transition from 71% to 84% is going to have a significant improvement in our gross margins that will be reflected in the Q2 quarter, as we said in the projection.

Right, right. And then final question for me, as your utilization rates go from the 71% to the 84%, you're experiencing lead time changes in any of the key product areas?

Jim, it's Peter Kelly. Yes, lead times have increased a little, but they're pretty manageable at the moment. Certainly, a lot less than they were a year ago.

And your next question comes from the line of C.J. Muse with Barclays.

If I could follow up on Jim's gross margin question. You're guiding roughly 100 bps below your prior peak in 2011, yet utilization rate, that is arguably 15 points below where you were then. So curious, where can we go here in the coming quarters as utilization rises? I know you've talked about the 5-point shift $10 million to $15 million. Can that continue, so roughly $45 million if we get back up to the high 90s utilization?

Yes, we did. Sorry, it's Peter Kelly. If we get back up to the high 90s utilization, we think we have a fairly robust model and certainly, that utilization gives us better margin.

Yes, going from the floor or the trough at 71%, so if you add up to the high 90s, that's more like at probably a 25% or so. So for every 5, $10 million to $15 million, that roughly approximate 1% to 1.5% sort of gross margin.

Okay, that's helpful. And as a follow-up, I know you guys refinanced your debt in the last month or so, and my understanding is roughly $25 million annual savings. So curious when we see that reflecting into the model? Can you provide a little help there? Karl-Henrik Sundström: Part of it is already reflected in my guidance because we have $76 million in interest expenses in Q1 and the guidance I having, it's $71 million in Q2, which is basically the $280 million annualized and we believe we're going to be between $270 million and $280 million leaving this year in run rate.

And your next question comes from the line of Vivek Arya with Bank of America Merrill Lynch.

Again, you do -- not to beat this horse on gross margin, but I think you've addressed the utilization aspect. I wanted to understand the mix aspects also within the different segments of HPMS. How should we think about the roadmap? And HPMS gross margins from here to, I think, longer-term targets are closer to 60%. What role does mix play when we look at some of the higher growth segments of HPMS, like Identification and Automotive?

So I think when you look at it, clearly, we still believe that our model that we've set in place for 58%, 60% or so gross margin is still intact for HPMS products. And so, we think as we get our factory utilization back up where the factories who are truly humming, then we see the opportunity to begin to move into that level. I think that when you look at some of the new design wins that are focused when areas of high-volume smartphones, et cetera, we may not be at the absolute 60%-plus gross margin. So we might see a slight trailing off of those margins, but with the significant growth opportunity that it drives on the top line we'll still be very generously rewarded in our financial results. So it's really not a mix issue as much as it is, just the performance issue associated with our manufacturing operations and ensuring that the factory utilization levels get back up to the same levels that we were able to demonstrate in the Q1 and Q2 time frame for 2011.

Got it. And then, Rick, one on the Automotive segment, you've clearly seen some pickup. But when I look at end market demand, that continues to do extremely well. You think you are catching up to end market demand? Should we expect a better second half on the Automotive side?

I think that we had -- if you look at Automotive, there hasn't been anything normal in the last 4 or 5 quarters. First off, we started with the tsunami and didn't really have an impact at the time that it occurred and we really saw the impact on revenue in the Q3 time frame as they aligned their supply chain which drove the Automotive business down slightly. And then following on to that were the Thai floods in Q4 having a tempering effect associated with the revenue as well. So we saw the improvement in Q1 and then we expect to see the growth again in Q2 associated with that. So yes, I think we feel very good about our Automotive business. We continue to win significant new design wins, although those clearly are out a couple of years, they aren't going to generate revenue in the near term in Automotive space. And we think that we'll clearly be in a position where we'll go faster than the automotive semiconductor market.

Got it. And just one last one. I know that the last few quarters are not exactly been seasonal because of various disruption in the market, but how should we think about Q3, Q4 just seasonal trends depending on your different segments?

Our Q3 is usually a pretty good quarter for us. We usually trail off a little bit in Q4 and I don't know why we wouldn't expect some kind of seasonality that would follow in a similar pattern to this year.

And your next question comes from the line of Mark Lipacis with Jefferies.

Manufacturing lead times to customers did -- I may have missed this, Peter, but did you say that there was any change as in those lead times to your own customers as you've gone from 71% to 84% utilization? And I was wondering at what level of utilization do your own lead times start to stretch out a little bit?

Well, I guess I'd answer it in a couple of ways. One, the lead times have increased a little less than I said though, they're still well below what they were a year ago. In terms of our utilization, we have a tiered manufacturing model, so we use 3 sources of supply, our internal supply, external supply and our JVs, so we can support significantly higher revenues with that model than if we just owned our manufacturing. So I wouldn't focus totally on just what we build internally.

And, Mark, you had to be a little careful with lead times as well because we take into account our capacity. We actually have some capacity constraint in some specific areas. So we clearly have seen a little bit of movement associated with that, but we're trying to keep those more in a normal range, but it also depends on what we can commit to customers relative to the capacity constraints we have as well.

I understand. That's helpful. I don't know if I heard this, did you quantify the channel inventories and where they -- or if you can't quantify them, could you just give a sense of where they are within the normal historical range? Have they completely...

Yes, we said that in distribution, it's about 2.4 months, which is consistent with where it was last quarter. And we actually had -- we shipped in a little bit higher than they shipped out as they prepared for some of their expected improved deliveries in the Q2 time frame. But the actual dollar level of inventories was approximately the same.

Fair enough. Last question, OpEx growth, going forward, I guess we were modeling a slight increase going forward on a dollar basis. They came up a little bit more, I guess, than we expected. Does that mean that we continue to model off of the higher base or should we take some of that back? Karl-Henrik Sundström: No. So in the guidance, I gave that we're going to between $300 million and $308 million for Q2. Part of that, around half of that increase from the $293 million is actually customer-specific programs that we invest to achieve our growth, and half of it is basically an annual merit increases and their re-accrual bonuses. And the reason is that we we're very -- as I've said in my remarks that the reason why we came up approximately $4 million higher end of guidance was basically that we invested in some special programs in the Identification area and because we wanted the fuel the grow. Because Identification came in a lot higher in sales than we anticipated. They grow 21% sequentially.

I understand. I guess I was referring to the back half of the year. Is that -- do we still continue to think about OpEx growing steadily through the back half of the year? Karl-Henrik Sundström: Yes, it will grow but it will grow slower than sales, and that's the way we work now. And it will be growth and I said like 3 to 6 or something like that per quarter, but then you have to take into consideration what we think the sales is going to be, so we will guide carefully quarter-by-quarter going forward.

And we have to be a little careful that as we have sell upsides, obviously, there's sales bonuses and bonuses that go along with that, which has a very good return associated with it, Mark.

If I could add one thing, Mark, this is Jeff, is there's settlement is also [ph] if you compare our view of the future today versus last quarter, we have a better view in terms of a richer design pipe. We see better opportunities ahead of us even when we saw a short 90 days ago, Mark. And so we're going to continue to invest to take advantage of those design opportunities. Karl-Henrik Sundström: And as I've said, we manage our OpEx very carefully, and you saw that during the second half of last year when we didn't have sales, we took out OpEx. And now we see sales coming back and we will invest when we find it appropriate.

And your next question comes from the line of Sanjay Devgan with Morgan Stanley.

I just had a question specific to the Wireless Infrastructure business. A lot of chatter are that business being particularly weak. A few folks have commented that it's coming back. I was wondering if you could give us some color or more granularity as to what you're seeing by geography? And also anything you can give us by area interface would be really appreciated. And also how you kind of project that business going forward into the back half of the year?

It clearly was weaker than we had planned. As we said in the script in Q2 is certainly not coming back as strongly as we would originally have anticipated or like to. We, I guess, we perceive the increase associated with it will be pushed out to kind of the second half of the year, with maybe some of the LTE increase happening a little earlier than the other 3G increases taking place. But it's clearly not the strongest segment in our portfolio, and the increased environment or improved environment we think is kind of being pushed back to the second half of the year.

[Operator Instructions]

Well, operator, if there is no additional questions at this time, I supposed we'll bring the call to a close. Rick, would you like to make any closing remarks today?

Yes. Thanks, Jeff. So thanks a lot for your interest and attention on NXP. We think that the growth of over 6% in Q1, with the opportunity to see product revenue growth of 7% to 11% in Q2 clearly begins to demonstrate what we've been talking about for some time on the design wins and the fact that it will drive our top line growth at a faster rate than overall semiconductor industry. And then that combined with the improved factory utilization that we see taking our gross margins up and being able to drive significant bottom line improvement. And we look forward to your continued participation, and thank you very much for joining us today.

Great. Thank you, everyone, and we'll speak to you on our next call. Thank you.

And ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.