NXP Semiconductors NV

NASDAQ:NXPI

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the NXP Semiconductors First Quarter 2020 Earnings Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

I would now like to turn the conference over to your speaker today, Rick Clemmer, CEO. Thank you and please go ahead, sir.

[Jeff Palmer, Vice President, Investor Relations]

Yeah, thank you, Chris, and good morning, everyone. Welcome to the NXP Semiconductors first quarter 2020 earnings call.

With me on the call today from the far corners of the world is Rick Clemmer, NXP’s CEO; Kurt Sievers, NXP’s President; Peter Kelly, our CFO. We’re all in remote locations today. So if there is any delay in responding to questions, please bear with us. The call today is being recorded and will be available for replay from our corporate website.

Today’s call will include forward-looking statements that involve risks and uncertainties that 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 continued impact of the COVID-19 pandemic on our business, the macroeconomic impact on the specific end-markets in which we operate, the sale of new and existing products, and our expectations for the financial results for the second quarter of 2020.

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, we will refer to certain non-GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to NXP’s underlying core operating performance. Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our first quarter 2020 earnings press release, which will be furnished to the SEC on Form 8-K and is available on NXP’s website in the Investor Relations section at nxp.com.

Now, I’d like to pass it over to Rick Clemmer.

[Kurt Sievers, Chief Executive Officer Elect, President]

Rick, are you on mute? So there might be a problem with Rick’s connection. So this is Kurt, Kurt Sievers. I will take over from Rick, such that we can get started swiftly. So once again, thanks, Jeff, and good day everybody on the call. The last several months has been one of the most disruptive periods in the semiconductor industry. But throughout this current period of widespread and unprecedented disruption due to the COVID-19 virus, we’ve never been as proud as now as of our entire NXP team.

They are collectively demonstrating and living our core values during this challenging time as we continue to work supply our customers and continue to focus on the development of our key programs. We have put a dedicated team in place to focus on the safety of our employees and the management, and how our employees can work effectively, remotely and safely on site when necessary.

[Rick Clemmer, Chief Executive Officer]

Kurt, I’m back on.

[Kurt Sievers, Chief Executive Officer Elect, President]

All right. So, Rick, will you take over?

[Rick Clemmer, Chief Executive Officer]

Yeah, yes, please.

[Kurt Sievers, Chief Executive Officer Elect, President]

All right, thanks, Rick.

[Rick Clemmer, Chief Executive Officer]

Thank you. While NXP has long been geographically diverse, we now have over 12,000 of our worldwide team including 90% plus of our indirect employees that are not in manufacturing, working from home or just recently returned from working from home in China and Korea. Daily our employees are taking initiatives, intentionally collaborating and focusing on delighting our customers.

I am heartened to see the genuine engaged curiosity, their desire to solve problems and everyone looking to drive positive outcomes in the respective areas of expertise, and through this all displaying a sense of confidence that we will all successfully get through this. NXP is structured to adapt, to respond to unknown challenges and to support its people.

As an example, our team members are ensuring that our customers in the healthcare and medical areas have critical MCU and center products to enable the increased production of respirators and other related medical equipment, though this is not a sufficient amount of revenue.

Globally, we are donating PPE material, where it is needed and providing laptops to students, NGOs and nursing home patients. Our team members are also independently raising funds and donating back in their local communities to help the less privileged.

For an operational perspective, all of our manufacturing facilities are up and running. Although, we did previously have some limited government ordered closures. Our manufacturing plant in China has continued to operate through the entire period. We have not experienced any major virus related supply issues.

We have been extremely fortunate that the virus has not materially impacted our broad employee base. We will continue to closely monitor all government orders and take a cautious approach to allowing the employees to return from working from home. The safety of our employees remains our top priority. Therefore, we will not rush to return to the opening, so that we can limit the number of employees on site, allowing for continued social distancing, especially where we have manufacturing and other operations combined on a single site.

Turning to how we view the current business environment. This crisis is unlike anything previously experienced by the semiconductor industry with rapid changing characteristics, making it hard to identify true demand indicators. We will continue, as we have always done in the past, to share information openly to enable all of our stakeholders to understand the conditions that we are operating.

We currently find ourselves attempting to make accurate projections of true OEM customer demand. This is especially true in global automotive markets, where we have gone to our customers and worked with them to reduce their demand signals to more accurately reflect true auto-OEM requirements.

In North America and Europe, automotive OEM and tier 1 suppliers currently have full or partial factory shutdowns and extended supply chains, although, they are beginning to identify plans for reopening. It is easy to completely focus on dramatic and negative impacts of the virus. However, we must also be aware of and [Technical Difficulty].

[Kurt Sievers, Chief Executive Officer Elect, President]

It seems that Rick’s line is broken again. I will pick up here. It’s easy to completely focus on the dramatic and negative impacts of the virus. However, we must also be aware and ensure that we do not miss possible opportunities. And as a good example, it’s good to see that in the last 2 weeks, data for car sales in China show they are above the same period last year.

We also hear reports of people buying their first vehicle, as they do not want to go back to mass transit with the fear overhang from the virus. However, the reopening of the tier 1 and OEM manufacturing plants continues to be uncertain. And it is this significant uncertainty that is making our planning so difficult right now.

At the same time, the demand environment in China has clearly improved in the industrial and mobile end-markets. We are encouraged with the increase in distribution sell-through in the recent weeks and we will continue to closely monitor the sustainability of these trends. A big question though is the impact from the economic weakness throughout the rest of the world on consumption, and hence the ultimate impact it may have on demand in China.

Considering all of these indicators thus create conflicting signals, we are attempting to maximize our flexibility to ensure that we adequately support our customers’ true demand, while at the same time reducing our manufacturing supply risk and ultimately avoiding excess inventory.

Now, more than ever, maintaining close constant communications with our customers is really critical through the balance of our supply chain. We are cautiously optimistic as we see early Q3 demand trends, which indicate a slightly sequential improvement, combined with the benefits from the planned ramp of NXP specific programs.

During any economic downturn, investor attention always turns to the sustainability or robustness of the company’s financial performance. For those of you who have followed NXP for some time now, we view one of our inherent stills as keeping as steady hands on the financial and operational levers we can control.

We are not unemotional, but in challenging times like this we are the cultural bias towards cost consciousness. We are not making knee-jerk decisions by taking an active review of all areas of discretionary spending, while simultaneously maintaining critical investments in areas that will assure NXP’s long-term success. Our business model is solid, and we continue to have ample financial liquidity and strength to weather the current unpredictable environment.

In closing, we are extremely proud of the adaptability of all our teams during this challenging period. And we will continue to succeed and our focus on driving positive results for all of our stakeholders.

And at this point, I move on actually to what is my original script here, so that was Rick’s part. And I will start to review the specifics of our quarter 1 results, and at the same time, provide an outlook for quarter 2. We find ourselves navigating a really, really fluid and challenging period due to the COVID-19 virus.

As the year began, we had an incrementally positive outlook for 2020, as customer reactions and engagement with our NXP portfolio and product roadmap continue to be really positive. However, as the breadth of COVID-19 virus impact evolved in mid-February, we did find shifting from dealing with what we assumed were temporary supply chain disruptions post Chinese Lunar New Year.

And we had to adapt to a much wider, more disruptive broad-base of shutdowns of our customers manufacturing facilities increasingly also outside China. This has had a direct ripple effect throughout supply chains we are exposed to, while this is making our short-term outlook more uncertain. We do continue to execute consistently to our long-term strategy, deeply engaged with the sharp focus on enabling our customer success albeit from a virtual distance.

Let me turn to our results. Q1 revenue came in below our original guidance. Many of the automotive OEMs initiated factory shutdowns, combined with order push outs from both industrial and mobile customers. Taken together, NXP delivered revenue of $2.02 billion, about $204 million dollars below the midpoint of our original guidance range. Our non-GAAP operating margin was 24.8%, about 280 basis points below guidance, as a result of lower operating profit flow through on the reduced revenue levels.

Let me turn to the specific trends in our focus end markets. Starting with automotive. Revenue in automotive was $994 million, down 4% versus the year ago and showing 9% sequential decline. In industrial & IoT, our revenue was $376 million, up 2% versus the year ago period, and down 9% sequentially. In mobile, revenue was $247 million, up 2% versus the year ago period and down 26% sequentially. And lastly, communication infrastructure and other, our revenue was $404 million, down 10% year-on-year and 12% sequentially.

Now before I’m turning to the specifics of our quarter 2 expectations, I’d like to make a few comments. Our revenue guidance range for Q2 is wider than normal, which is a reflection of what we view as an uncertain and highly fluid demand environment. We will provide as much transparency as possible, while we are cognizant that our ability to accurately predict the future is limited.

As I said before, many of the ultimate end customers of our products like the automotive OEMs in Europe and North America are still partially closed, but just coming gradually back to work. Therefore, the customer demand signals which we rely on throughout the supply chain need to be recalibrated to true end market demand. We are anticipating this recalibration should occur over the next few months.

From a positive viewpoint, the supply chain inventory rationalization trends, we witnessed through 2019 have essentially played out, both with our direct customers and also those served through global distribution. And therefore, once we begin to see demand signals recalibrated to our end customers, we are assuming there should not be a significant lag effect due to any excess supply chain inventory.

And we have continued to apply the highest discipline to our distributor channel inventory, as we held back about $150 million of shipments to distributors during the first quarter. And this is in order to maintain our target channel inventory metric of 2.4 months of supply. With that preamble, we are guiding quarter 2 revenue at $1.8 billion, down about 19% versus quarter 2, 2019, within the range of down 14% to 23% year-on-year.

From a sequential perspective, this represents a decline of about 11% at the midpoint versus the prior quarter. At the midpoint, we are anticipating the following year-on-year trends in our business. Automotive is expected to be down about 30% versus quarter 2, 2019 and down in the high-20% range versus quarter 1, 2020.

Industrial & IoT is expected to be up low-single-digits versus quarter 2, 2019, and up mid-single-digits versus quarter 1, 2020. Mobile is expected to be down at the mid-teens range versus quarter 2, 2019, and up low-single-digits versus quarter 1, 2020. And finally, communication, infrastructure and other is expected to be down in the mid-teens range versus quarter 2, 2019, and up mid-single-digits versus quarter 1, 2020.

In summary, this is an unprecedented period of society for our industry, for our customers, and for NXP. Our number 1 priority is to assure the health and the safety of all our NXP team members, while facilitating the best possible business continuity with the customer focus on supply chain and R&D execution.

We are extremely proud of the huge engagement and flexibility of all NXP employees. And as I previously mentioned, we do not have any unique insights as to when this challenging period will subside, but we do continue to have ample financial liquidity and strength to weather the current environment. While we are actively reviewing all areas of discretionary spending, we do continue to maintain critical investments in the areas that will assure NXP’s long-term success in our chosen strategy.

Our focused investments in leading-edge new products and customer engagements in fast growing segments such as ADAS and automotive electrification, in secure connected edge processing for the IoT, in the secure ultra-wideband, are all very durable and enjoy significant design interaction. Once this pandemic is under control, NXP will emerge strongly and will resume its growth within it strategic focus areas, consistent with our prior long-term expectations. We execute consistently and we are committed to our long-term strategy. And we continue to be deeply engaged with and sharply focused on enabling our customers’ success.

And at this point, I would like to pass the call to Peter for review of our financial performance. Peter?

[Peter Kelly, Chief Financial Officer]

Thank you, Kurt, and good morning to everyone on today’s call. As Kurt already covered the drivers of the revenue during the quarter and provided our revenue outlook for the second quarter. I’ll move to the financial highlights. In summary, our Q1 revenue performance was well below what we planned as a result of the COVID virus. As the world struggled to cope with a significant disruption the virus caused, we saw approximately $200 million of our revenue disappear from the quarter. This significant reduction to revenue fell through to non-GAAP gross profit and non-GAAP operating profit with the fall through on gross margin slightly offset with the operating profit level by reduction in OpEx, a truly stunning turn of events.

Now moving to the details of the first quarter, total revenue was $2.02 billion, down 3% year-on-year, and $204 million below the midpoint of our original guidance. We generated $1.05 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 51.8%, down about 90 basis points year-on-year and 140 basis points below the midpoint of our guidance.

Total non-GAAP operating expenses were $545 million, essentially flat year-on-year and better by $18 million from the fourth quarter. This was $28 million below the midpoint of our guidance. From a total operating profit perspective, non-GAAP operating profit was $502 million and non-GAAP operating margin was 24.8%, down about 190 basis points year-on-year, as a result of the lower revenue.

Non-GAAP financial expense was $75 million, cash taxes from ongoing operations were $28 million, and non-controlling interest were $8 million, all slightly better than our guidance. Stock based compensation, which is not included in our non-GAAP earnings, was $107 million.

Now I’d like to turn to the changes in our cash and debt. Our total debt at the end of the first quarter was $7.37 billion, flat sequentially and our ending cash position was $1.08 billion, up $34 million. The resulting net debt was $6.29 billion, and we exited the quarter with a trailing 12-month adjusted EBITDA of $3.05 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q1 was 2.1 times, and our non-GAAP trailing 12-month adjusted EBITDA net interest coverage was 9.6 times.

As you all know, I typically say that our balance sheet is very strong and our liquidity is excellent. We are proud to the fact that we’re an investment-grade company. We achieved this by having a business that generates significant cash by having a very large revenue stream and by having strong financial discipline, including not extending ourselves when things look rosy.

I’m really pleased to say that this exactly the environment, when having a strong business model and financial discipline pays off. So we continue to have a strong balance sheet and we have excellent liquidity and access the markets that a strong investment-grade company has.

During the first quarter, we paid $105 million in cash dividends and repurchased $355 million of our shares. You’ll have noted a small increase in our leverage in Q1 over Q4. This is driven by reduction of trailing 12-month adjusted EBITDA, and our leverage will increase again in Q2 to 2.2 times driven by our latest guidance for the quarter. As such, we’ll temporarily suspend our buyback until our trailing 12-month adjusted EBITDA ratio improved to the level, where we can once again be at the 2 times leverage ratio. We will in the meantime continue to pay our quarterly dividend.

Turning to working capital metrics, days of inventory was 113 days, an increase of 11 days sequentially as revenue levels declined. We continue to closely monitor our distribution channel with inventory in the channel of 2.4 months, definitely within our long-term target.

As Kurt noted, we held back about $150 million of orders into distribution to ensure our channel inventory metrics remained within our target range. Days receivable were 28 days, up 2 days sequentially. And days payable were 83 days, an increase of 2 days versus the prior quarter. Taken together, our cash conversion cycle was 58 days, an increase of 11 days versus the prior quarter.

Cash flow from operations was $512 million and net CapEx was $143 million, resulting in non-GAAP free cash flow of $369 million. Turning to our expectations for the second quarter, as Kurt mentioned, we anticipate second quarter revenue to be about $1.8 billion, plus or minus about $100 million.

A wider than normal range considering the uncertain environment we are navigating. At the midpoint, this is down 19% year-on-year and down 11% sequentially. We expect non-GAAP gross margin to be about 48%, plus or minus 100 basis points. Operating expenses are expected to be about $523 million, plus or minus about $5 million, and taken together, we see non-GAAP operating margin to be about 19%, plus or minus about 240 basis points.

We estimate non-GAAP financial expense to be about $82 million and anticipate cash tax related to ongoing operations to be about $17 million. Non-controlling interest will be about $6 million.

Finally, I have a few closing comments I’d like to make. Firstly, our gross margin looks weak for the second quarter. About half of the drop is explained by the reduction in revenue and the other half is a result of the fact that we’ll be running our internal fabs at utilization of approximately 50%.

At this level of utilization, we take additional fixed cost charges in quarter, rather than carry them through in inventory to the third quarter. As the global economy starts to correct itself and our revenue reaccelerates, we see no reason why we cannot hit our 55% gross margin target at the $2.4 billion level of quarterly revenue. Secondly, we are closely managing our cash and feel comfortable.

We will continue to generate cash even in this extremely low revenue level. As part of this, we’ve taken down the utilization of our internal factories and are working with our external partners to manage our purchases with them. In fact, the bigger part of the reduction in wafers for this quarter has fallen on our internal fabs.

Thirdly, we will continue – carefully manage OpEx levels and minimize any variable costs, and in particular incentive payments.

Finally, these are very difficult times. And along with Rick and Kurt, I’d like to thank all my colleagues around the world for the commitment to NXP and doing the right thing for our customers. The current period is unprecedented and is extremely difficult. But for the long run, NXP has the right strategy, is in the right markets and has the right products to win.

Before we turn to your questions, I’d like to pass the call back to Kurt for a moment.

[Kurt Sievers, Chief Executive Officer Elect, President]

Yeah, thanks much, Peter. And I can just also notify everybody that Rick is back on the call now. Before we are moving on to Q&A, I still would like to take the opportunity to express my deep gratitude to Rick. And that is both on behalf of NXP, but also very much personally.

Rick, this appears to be your last NXP earnings call in your capacity as CEO of the company. You have successfully led NXP since being appointed President and CEO back in 2009. And under your leadership, NXP has transformed into a profitable high-performance mixed-signal leader, definitely with the NXP/Freescale merger as a very remarkable milestone.

And I want to thank you for your many years of hard work, and much more importantly, for your personal dedication and commitment building NXP into the industry leader we are today. And since I personally served for the last 10 years as a member of your NXP executive management team, I especially like to thank you for your deep trust and for everything I’ve been privileged to learn from you.

In my eyes, in my view, you personally embody the NXP culture of a customer-focused passion to win, and that along with great business acumen and very thoughtful leadership.

Given all of that, I am particularly glad and thankful that NXP and I can count on your continued support as a strong and close strategy advisor for the time to come. Thank you once again.

And with that, operator, we open the call for questions please.

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Stacy Rasgon with Bernstein Research. Your line is now open.

[Stacy Rasgon, Sanford C. Bernstein & Co.]

About the $150 million that you didn’t ship in the quarter, can you give us some feeling for how that splits up by end-market? What you’re expecting to do with channel inventories into Q2? And if you can give us some color maybe on what the sell-in versus sell-out was in the quarter into the channel, that’d be really helpful.

[Rick Clemmer, Chief Executive Officer]

Thanks, Stacy. So the $150 million that we had orders for from our DiSTI partners that we chose not to ship to be sure that we maintained our distribution inventory at the 2.4 months was probably a higher concentration of industrial, but it was across the board in all areas, so I can’t really give you the details. But I would tell you it has a concentration more on the industrial side and probably less on the other areas.

Our intent is, is to continue to maintain the 2.4 months of inventory. We learned our lesson several years ago associated with this. And we’re trying to be sure that we maintain that position and control our inventory commitment into the channel. So we’re actively, as we talked about in the script, working with our customers to be sure that they adjust their demand signals, to be sure that we do not increase just the inventory or the work-in-process inventory with our OEM customers either.

[Stacy Rasgon, Sanford C. Bernstein & Co.]

Got it. Thank you. And for my follow-up, I understand the auto decline obvious in the Q2, but what’s driving the sequential increases in the rest of those businesses. It sounds like it’s not – it sounds like you don’t think it’s pull forward, just given your commentary on the channel inventory just now.

Let me know if that is correct and if you could give us any color on what’s driving that sequential demand in the other segments that would be super helpful.

[Rick Clemmer, Chief Executive Officer]

Sure. So it clearly is not any pull-forward that we see. It’s based on orders from our customers. On the sequential basis, in Q2, we’re up – or sorry, down 11% in total, but actually down 27% in automotive, while we’re up 6% in industrial & IoT, and 5% in comms and infra, and slightly up in mobile.

The industrial is we – as we said in the script, we’ve actually seen some strength in China in the sell-through. Clearly, Europe continues to be fairly weak and the U.S. is also pretty weak, although maybe a little bit of glimmers of improvement in the U.S. But clearly the key indicator on the industrial side for Q2 is in our China sell-through and really what gives us confidence in being able to achieve the 6% sequential growth in the industrial & IoT. And some of that includes some of our new product deployments as well, Stacy.

[Stacy Rasgon, Sanford C. Bernstein & Co.]

Got it. Thank you very much. Good luck, guys.

[Rick Clemmer, Chief Executive Officer]

Thanks. Thank you.

[Operator]

Thank you. And our next question comes from the line of Vivek Arya with Bank of America Securities. Your line is now open.

[Vivek Arya, Bank of America Merrill Lynch]

Thank you for taking my question, and congrats to Kurt on the new role, and best wishes to Rick on his next adventure. Plus, it has been great to work with you. For my first question, I wanted to just dig into the automotive market. I think for Q2 you mentioned automotive sales potentially down about 30%. That is obviously much better than some of the unit trends over – down over 40% year-on-year.

Could you give us some sense of how you are seeing the unit and the content parts of your business played throughout Q2? And importantly, do you think Q2 can mark the trough in your autos business? Because I recall Kurt you saying that Q3 could be up slightly sequentially, so does that imply that Q2 is perhaps the trough in your autos business. So just some more color in auto customer engagements would be very helpful.

[Rick Clemmer, Chief Executive Officer]

Thanks, Vivek. This is Rick. Kurt, I’ll let you take that.

[Kurt Sievers, Chief Executive Officer Elect, President]

Yes, thanks, Vivek. So, yes, we have a careful view that Q3 should be slightly up over Q2. Now, if you think about automotives specifically, mind you that you can never really track the SAR on the quarterly basis back to our business. There is too much going on in the supply chains and especially these days. So it doesn’t really work that you take the quarter 2 prospective car production, if anybody knows it at all, and hold that back to our revenue.

So, our revenue for cars in automotive for the second quarter is really just the result of a very careful alignment with our main customers on mostly very application-specific products. So it’s really just the backlog alignment more than anything else. It’s not really tied to the SAR in that sense. But still what is important in this period of uncertainty, we do absolutely believe that the content increase story holds, so that continues also through this period.

Secondly, what we have seen in the reports from IHS is that the premium cars are actually going down a little bit less than the average car, which is possibly good for the mix, given the fact that there is obviously more semiconductors in premium cars. This is a very broad statement. We cannot tie it back to any specific model or any specific product of ours. But that probably is a trend as long as we can see it now. Finally, of the SAR itself, we continue to use IHS as the guideline. They just came out actually on April 27, so very fresh with the latest forecast, which is a 22% decline for the year, where indeed they sharply see the biggest year-on-year decline in the second quarter. So for the car production, I would support what you are saying, but again, you cannot one on one connect this to our revenue.

[Vivek Arya, Bank of America Merrill Lynch]

Got it. And then, for my follow-up, maybe, Peter, one on gross margins, so clearly, I think you explained the drivers for Q2, for gross margins to get towards 48% or so. So, sort of a similar question to the first one, do you think if, let’s say all else being equal, if you start to see some revenue rebound in Q3, that have we kind of seen the trough in gross margins? What’s on your dashboard to kind of look at the trajectory of gross margins over the next handful of quarters? Thank you.

[Peter Kelly, Chief Financial Officer]

To be honest, right now when you saw it from the range we gave of revenue, plus or minus $100 million on Q2. It’s difficult to really speculate on where we might be in Q3, Q4. As Rick mentioned in this speech, we think we’ll be up slightly. I would hope this would be the trough on gross margin, but it really depends on how we – right now at these levels, how we load off our fabs.

So I think it’s going to be a tough couple of quarters from a gross margin perspective. I think the main thing for me is – and maybe this is where you’re really going is, as we move up more strongly and we get back to the $2.4 billion level, I don’t think anything is changed in terms of the structural part of our business. And I still have great confidence we can get to the 55% level in a more normal market. So as our revenue comes back, yeah, our gross margin will go up.

[Vivek Arya, Bank of America Merrill Lynch]

Thank you.

[Rick Clemmer, Chief Executive Officer]

Thanks, Vivek.

[Operator]

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

[John Pitzer, Credit Suisse Group AG]

Yeah, good morning, guys. Thanks for let me ask the question. First, Rick, I just want to thank you for all the help you’ve given me personally over the last decade. I really appreciate that. Now it’s been an interesting 10 years. But relative to my kind of first question, I’m just kind of curious, you used the term recalibrating of demand signals a couple of times when talking about the June guidance. I’m just kind of curious to what extent is the June guide kind of a top-down view of the world from you versus a bottoms-up view, i.e., are your customer bookings actually still coming in the stronger than you would have expected given the demand destruction that’s likely. And if so, how are you able to kind of undership to what customers want to prevent inventory?

[Rick Clemmer, Chief Executive Officer]

Well, John, first off, thanks for your comment. It’s been fun for the last decade. So on the demand signals, I think, what we’re really trying to communicate is as we look at the Tier 1s, and obviously the car factory is actually being shut down as well as a lot of the Tier 1. The demand signals haven’t been adjusted as much as they should have been. And so we kind of took the lead from the industry viewpoint and going back to our customers, and aggressively working with them to modify their demand signals to really more accurately reflect the production levels that were taking place. So our intent is to be sure that we’ve tried to minimize any inventory or work-in-process inventory builds throughout the process on the OEM side.

We’re doing the same thing with our distribution partners. Everyone is struggling to get their hands on what the real demand is with the highly fluid levels of inputs and how things move. But we’ve aggressively worked with our customers, both OEM as well as even with our distribution partners to really modify their demand signals. We talked about we could have shipped another $150 million or more to distribution partners in Q1 based on the orders we had, and we chose not to do that. So we didn’t increase our inventory levels in the distribution channel.

So our focus is really ensuring that we maintain the right kind of work-in-process inventory levels as we go through this process, not to build up the historic semiconductor industry levels that has happened frequently in the past in the industry.

[John Pitzer, Credit Suisse Group AG]

That’s helpful, guys. And just my follow-up, Kurt, I know you guys are only officially guiding 90 days out, but you’re cautiously optimistic commentary around Q3 potentially being up modestly sequentially. Is that mostly an automotive view? Or is that happening across all of your end markets? And in your prepared comments, you talked about kind of company specific drivers behind that in addition to just sort of general industry recovery. Wondering if you could elaborate on those company specific drivers?

[Kurt Sievers, Chief Executive Officer Elect, President]

Yes, John, I’m happy to do so. So first of all, let me just clarify, indeed, the comment about the Q3 slightly up over Q2 is a comment for the entire company, so integrally for the company. I’d say the main reason, which gives us some confidence to make the statement is product customer combination specific drivers, where we have design wins, which are either starting to ramp or starting to quickly go up, when they had started to ramp a little bit earlier already. So I’d say that’s the main element, which is then across the known applications, which you’re aware of.

So clearly in automotive, I continue to emphasize radar and battery management being in here. Clearly, in IoT, industrial, I would say our crossover processes now more and more along with the connectivity. You remember the assets, which we bought from Marvell is playing out nicely together.

And in mobile, we have an unbroken continuation of the attach rate or the growth in the attach rates of our mobile wallet. So these are the elements, which actually are behind my comments about the Q3 positively slightly up over quarter 2.

[John Pitzer, Credit Suisse Group AG]

Perfect. Thanks, guys.

[Rick Clemmer, Chief Executive Officer]

Thanks, John.

[Operator]

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

[Ross Seymore, Deutsche Bank AG]

Thanks, guys. We want to also congratulate, Rick, and thank you for all your help over the many years. So I guess, my first question is in the second quarter itself, the non-automotive side being up. I think, Rick, you mentioned that you’re excited about what was happening initially in China for your industrial and IoT segment. But the other kind of 35% – potentially in that quarter, 45% or 40% of the business in mobile and comm., infrastructure. Can you just talk a little bit about what’s going on in those 2 segments to drive the increase sequentially?

[Rick Clemmer, Chief Executive Officer]

Sure. The – in Q2, our comm. and infra is projected to be up about 5% sequentially, but down 15% year-over-year. So I think, we are still in the process of seeing a little bit of improvement in the 5G deployment associated with primarily in China on base stations. And the thing that’s really fluid with that is, is there are still working the specifications and the requirements associated with it. So it really is evolving rapidly. But we see clearly the combination of the businesses that are there, including a little bit of improvement in our network processor area that contributes to that 5% in Q2.

In mobile, remember, Q2 a year ago, we had a very strong quarter as Huawei really took the mobile wallet down across their product portfolio. But even with that, we’ll be up slightly in Q2 in the mobile business. So I think, all of that comes back to the fact that, we see some real improvement in China in POS that’s encouraging. And we just have to see how that continues, Ross, as we go forward.

[Ross Seymore, Deutsche Bank AG]

Thanks for that. And then, I guess as my follow-up either for you or Kurt, on the automotive side of things, and maybe aligning to, Kurt, what you said for the third quarter maybe being up a bit sequentially for the entire company? I just wanted to dive into the kind of the symmetry of how the automotive plants are shut down around the world? And then when they turn back on, obviously, true end demand at the end of the day is going to drive how your business grows in there? But I just want to see how aligned do you think you are to those factories being turned on and off, especially given the fact that the data points early as they maybe out of China for automotive, as you mentioned, we are positive.

Is the third quarter going to improve sequentially in automotive just because of the factories? Hopefully will all be turned on globally at that point? Or does that have to wait until true end demand gives us a sign of just how turned on, they actually are?

[Kurt Sievers, Chief Executive Officer Elect, President]

Yeah, Ross. It is clearly face shifted, because, obviously, the biggest auto impact in Q1 was in China, while the European and U.S. factory shutdowns literally only started in the second half of March, so at the very, very end of Q1, and now hitting in Q2. So while, I think, it is fair to have some optimism about the industrial automotive activity in quarter 2 in China. It is really, really hard to say how this is going to play out in Europe and the U.S. I mean, just as an example, we all saw in the press that just this Monday. So yesterday, Volkswagen started to manufacture again. I mean, they just in Germany, they just went back to work.

To my understanding, not at full capacity, but this is a gradual increase. And I think, nobody really knows exactly what’s the pace of those reopening and to what capacity level they go under which timeframe during the second quarter. But clearly, it looks like the most significant car production impact in the Western world fits them in the beginning of the second quarter, and you have to see how long it takes into the second quarter. And that gets me back to what I think, I quoted earlier about IHS. Clearly, the second quarter is according to IHS then seeing the biggest decline in car production with quite some improvement in quarter 3 from a car production perspective.

Now, what Rick said earlier to one of the questions about us being very careful with understanding the end demand, this is exactly coming to this point, Ross, we try to make sure that what we are shipping to our Tier 1 customers in automotive aligns nicely to the real end demand such that we don’t overship, because we learned that lesson 10 years ago.

And with that, we should – if we do that right, and we work hard on it, we should then actually not see a long delay when the car production comes up, because we shouldn’t have overship the supply chain.

[Ross Seymore, Deutsche Bank AG]

Thank you.

[Rick Clemmer, Chief Executive Officer]

Thanks, Ross.

[Operator]

Thank you. Our next question comes from the line of William Stein with SunTrust. Your line is now open.

[William Stein, SunTrust Robinson Humphrey, Inc.]

Thank you very much for taking my questions. First, I’m hoping you can linger a little bit on the comment about aligning customers’ forecast or going them to ensure their forecast for up to date. Can you help us understand what portion of customers you deal with to get forecast, whether those are the Tier 1s or the OEMs? What portion of those are open, and having these engagements with – over these largely engagements where you work with customers and have a dialogue today? Or is it more a situation or there’s a big chunk of demand is really much more question, because perhaps they’re not even available to take the call.

[Rick Clemmer, Chief Executive Officer]

So Will, I’ll take a shot at it, and then I’ll let Kurt to add. What we found this is sometimes, it’s a little more difficult to communicate with our customers at the Tier 1 level, but I think everyone is working from home. So ultimately, you have the ability to communicate. I think, what we’re really trying to emphasize is that the demand signals they had not been modified for the plant closings, either at their level are at – as they look at their manufacturing facilities are at the actual automotive company leveled itself.

And so, obviously, we’ve been trying to push back and actually told them that we were not going to ship parts, and went out pretty aggressively with some unique requirements on orders to be sure that we got as thorough assessment of demand as possible, because we just felt like it was critical not to be shipping orders as they were indicating and building factory that was ultimately not going to be used. So we’ve been very aggressive about that and worked with them and had good response.

And I think the key is, as we go through this period of uncertainty and fluidity. We must really have good communications with customers to really know what’s going on, and I think that’s the key as being sure. And we’re able to do that as they work from home. Kurt, please add anything you’d like.

[Kurt Sievers, Chief Executive Officer Elect, President]

Yeah. I completely second what you were saying, I would just add, Will, indeed, we have worked this very, very closely with the Tier 1 customers. All our large customers there, we have been sitting together over a number of weeks, virtually sitting together. And work this very hard to come to what we jointly believe is a reasonable forecast, which was not their first input. So it is the Tier 1 switch we’ve done it with. They are operational at this point in time. And I think in the end that was a very positive process, because it also helps them in the way forward.

[William Stein, SunTrust Robinson Humphrey, Inc.]

Thanks, Kurt. One follow-up, if I can. I’m wondering if you could comment on your ability to continue the pace of innovation when some of the employees are remote and the same relates to your customers, their ability to sort of engaging in new technology evaluations as it relates to your products in this environment? And before I stop, let me just add, my congrats to both of you in your new roles [with that] [ph].

[Kurt Sievers, Chief Executive Officer Elect, President]

Yeah, Will, I think, that’s actually working amazingly well. And I say that because I had you asked me 8 weeks ago, would that be possible, I probably, would have been much more cautious. But the matter of the fact is that with all of these key customers for us, we have very longstanding and deep relationships, which actually made it relatively easy now to do this perfectly on the remote virtual basis. So a lot of video conference work, but also internally, Rick spoke about this in the beginning, a lot of our engineers are in a work from home situation. We have almost no drops in productivity, which we could measure so far. So things really work and the same way it also works with our customers.

But again, I think, it’s a result of the fact that, this is not a new relationship, which has to be built, but we’ve had these relationships for many years in most cases.

[Operator]

Thank you.

[Rick Clemmer, Chief Executive Officer]

Operator, we’ll take one more question here this morning. Thank you very much.

[Operator]

Sure. And our last question comes from the line of C.J. Muse with Evercore. Your line is now open.

[C.J. Muse, Evercore ISI]

Yeah, good morning. Thank you for squeezing me in. I guess, another question back on auto. Can you speak to, I guess, how you’re seeing trends geographically? It sounds like production positive territory for China, but down double-digits in U.S. and Europe. And we’d love to hear kind of how that plays a role into thinking for your auto business growth or decline in calendar 2020? And, I guess, as part of that, how are you thinking about potential for cash for clunker plans into Q3, Q4? And within that, how are you planning perhaps for what the magnitude of recovery could look like if we do indeed get that type of plan?

[Kurt Sievers, Chief Executive Officer Elect, President]

Let me take a shot at this. So on the cash for clunker programs, I mean, I know as little or as much as you do. So there is a lot of discussion about this, which we are witnessing, I think both in the U.S. as well as in several countries in Europe. I’m not aware of a specific one which is agreed yet. And at least judging from how it did work in 2009, 2010, then it had indeed a pretty significant positive impact. But again, I don’t know more of anyone that would be agreed yet.

What I do know is that China has renewed some of the similar programs for battery electric vehicles, which seems to be working. So there is clearly, as we said, not only the car sales and production in China is moving up, but also the trend for electric vehicle specifically seems to look pretty good in China.

From a – I mean, we don’t give a full-year guidance and it’s really hard to say what Europe and the U.S. will do. But I think it is indeed fair to say that China seems to be on a positive path at this point, which we have to follow obviously into Q3 and Q4 if it holds. But the beginning of Q2 looks promising I would say.

[C.J. Muse, Evercore ISI]

Very helpful. If I could sneak a last one in, can you provide an update on where we are in terms of UWB deployment? Thank you.

[Rick Clemmer, Chief Executive Officer]

Yeah, Kurt, go ahead and…

[Kurt Sievers, Chief Executive Officer Elect, President]

Ultra-Wide – oh, sorry – yeah, Ultra-Wideband deployment is on track to what we spoken about earlier. So we have the small amount of revenue already running in the automotive space for a keyless entry solution, which is based on Ultra-Wideband. And we continue to work very hard on seeing a mobile deployment in the second half of the year, which would deliver more significant volumes.

Traction overall, both in mobile and automotive and further IoT applications is absolutely on track to our earlier expectations. So Ultra-Wideband I would say continues to be really hot. And NXP continues to be in a great leadership position.

[C.J. Muse, Evercore ISI]

Very helpful. Thank you.

[Rick Clemmer, Chief Executive Officer]

Thanks, C.J.

[Operator]

Thank you. And this concludes today’s question-and-answer session. I would now like to turn the call back to Rick Clemmer, CEO, for closing remarks.

[Rick Clemmer, Chief Executive Officer]

Thank you very much. So it’s with mixed emotions that I am talking to you guys today after 11.5 years with the opportunity to work with team at NXP, and what I believe to be a true industry transformation, where we’re really focused on shareholder value and a customer-focused passion to win, to drive through product leadership.

And, Kurt, I wish you the best of luck and really look forward over the next few quarters to support you in continuing to move forward from an NXP viewpoint, as we move out of the current environment, we’re in.

Obviously, the current environment is very fluid and very dynamic and clearly creates a lot of mixed signals. We’re currently focused on the challenges that we see, that we want to make sure that we don’t lose sight of the opportunities and the positive trends, specifically those recent trends that we talked about related to China.

We know that NXP’s long-term strategy is correct, as we have a very strong portfolio and we’re focused on what we believe are the best markets for auto, industrial, as well as being able to support the mobile wallet, and comms, and infra. We will keep maniacally focused on key development programs and stay highly engaged with our customers, and ensuring that we drive true product leadership and then focus on taking that forward to solutions levels and driving thought leadership with our customers to be able to deploy more efficient solutions.

So with that, my final remarks, I appreciate all your support over the years. And I since I know there is a number of NXP team that are on the call as well, I really appreciate all of your support. And it’s been a real honor to work with you over the last 11.5 years. And we’ll continue to look forward to supporting Kurt and the team as we move forward for the next few quarters. Thank you very much.

[Kurt Sievers, Chief Executive Officer Elect, President]

Thank you…

[Operator]

Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating and you may now disconnect.