20161101-jpmorgan-qualcomm or nxp to drive scale and leadership nxp business largely seasonal with margin expansion

1、Completed27 Oct 2016 05:49 PM EDTDisseminated 27 Oct 2016 05:50 PM EDTNorth America Equity Research27 October 2016NeutralNXPI, NXPI USPrice: $99.08 Price Target: $110.00Previous: $98.00NXP SemiconductorsQualcomm/NXP to Drive Scale, Diversification, and Leadership; NXP Business Largely Seasonal with

2、Margin ExpansionThis morning before market open Qualcomm announced its intention to acquire NXP Semiconductors for a total enterprise value of $47B in an all-cash transaction, to be financed with a combination of Qualcomms offshore cash and $11B of new debt. Management expects the deal to close by t

3、he end of C17. Post-acquisition, the combined entity will drive significant scale and have a much more diversified revenue stream (mobile 48%, auto/IoT 29%, and licensing 23%). Immediately after the merger announcement and call, NXP Semiconductors held its 3Q earnings call, and the company reported

4、a solid 3Q with in-line revenues while margins (both gross and operating) came in above guidance and expectations, driving a beat on the EPS line. Overall, all business segments performed relatively in line with prior guidance and expectations in a relatively good/seasonal demand environment (channe

5、l inventory still at target levels of 2.5 months). For the Dec-Q, management guided top-line revenue to decline by 1% Q/Q (in line with consensus) and increases in both gross and operating margins ahead of expectations. The team anticipates the sale of the standard products business to complete as p

6、lanned in C1Q17 as it has received all required regulatory approvals, and expects NXP, as a stand-alone entity, to exit C17 with margins hitting the low end (GM of 53% and OPM of 31%) of the prior guidance range, largely consistent with what was said at the analyst day. We believe NXP is trending in

7、 line with seasonality and is executing to its target plan. We adjust our model based on updates in the business, inclusive of the standard products divestiture, and establish a Dec 2017 price target of $110 per merger deal terms with Qualcomm.Semiconductors,Semiconductor Cap Equipment & Tech Hardwa

8、reHarlan Sur AC(1-415) 315-6700Bloomberg JPMA SUR Bill Peterson(1-415) 315-6766Andrew K Lee(1-415) 315-6799Grace Chuang(1-415) 315-5642J.P. Morgan Securities LLCPrice Performance11010090807060$Oct-15Jan-16

9、 Apr-16 Jul-16 Oct-16NXPI share price ($) RTY (rebased)Qualcomm/NXP deal drives significant scale, diversification, and market leadership in automotive, industrial, IoT, in addition to mobile. Overall, we think the deal is attractive both financially and strategically (see note: “Qualcomm to Acquire

10、 NXPI for $110/Share at an EV of $47B,” Rod Hall, Oct 27, 2016). In addition to the conservative $500M in cost synergies outlined by Qualcomm, we believe that strategically NXP diversifies Qualcomms chipset business into attractive automotive, industrial, IoT sectors and away from the increasingly t

11、ough smartphone market. Additionally, we believe there is the potential for solid revenue synergies as wireless connectivity is or will be a critical capability in next-generation automotive, industrial, and connected home/IoT technologies. YTD1m3m12m16.8%8.1%19.5%22.4%12.2%13.2%7.9%4.0%Abs RelNXP S

12、emiconductors (NXPI;NXPI US)FYE Dec2015A2016E(Prev)2016E(Curr)2017E(Prev)2017E(Curr)Company DataPrice ($) Date Of Price52-week Range ($) Market Cap ($ mn) Fiscal Year End Shares O/S (mn)99.0827 Oct 16107.54-61.6134,119.68Dec 344110.00EPS (excl stock comp) ($) Q1 (Mar)Q2 (Jun) Q3 (Sep) Q4 (Dec) FYBlo

13、omberg EPS FY ($)1.351.381.511.205.435.371.14A1.39A1.60A1.585.72-1.14A1.39A1.65A1.655.825.751.561.832.052.067.49-1.641.561.751.756.707.37Price Target ($)Price Target End Date31-Dec-17Source: Company data, Bloomberg, J.P. Morgan estimates. NXPI changed its pro forma definition of EPS to exclude stock

14、-based compensation. As such, our EPS estimates now exclude stock-based compensation.See page 9 for analyst certification and important disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have

15、a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment This document is being provided for the exclusive use of .North America Equity Research27 Oc

16、tober 2016Harlan Sur(1-415) 315-67003Q revenue in line with expectations while strong margins drove EPS beat. NXP reported sales of $2.469B, up 4.4% Q/Q, in line with the guidance midpoint (4%) and our estimate and consensus expectations ($2.465B). Non-GAAP gross margins of 50.

17、5% (up 50bps Q/Q) and non-GAAP operating margins of 28% (up 240bps Q/Q) were above guide and expectations (50.3% and 27.5%). Given the higher margins, with in-line interest expense and cash taxes, non-GAAP EPS of $1.65 came in ahead of our/ consensus estimates of $1.60/$1.61. Net leverage reduced to

18、 below 3x driven by strong growth in EBITDA. On the call, management commented that $500M of run-rate synergies have already been achieved within three quarters post deal close (with FSL) and reaffirmed the financial model as laid out on the companys analyst day. During 3Q, NXP repurchased 6.5 milli

19、on shares for $555M.4Q guidance reflects largely normal seasonal trends in the business. NXP guided 4Q sales to decline by 1% to $2.44B, in line with consensus expectations (down 1.7% Q/Q). The team guided gross margin to increase sequentially to 50.7% at the midpoint (vs. consensus of 50.3%), while

20、 operating margin is expected to increase in a similar manner to 28.3%. Non-GAAP financial expense, cash taxes, and non-controlling interests are expected to be $86M, $21M, and $18M, respectively. Management highlighted $12M of IP licensing revenue in the guide that may be impacted by the pending ac

21、quisition by Qualcomm. Management sees the auto business performing flattish to slightly higher in 4Q, which we believe is slightly ahead of seasonal weakness. Meanwhile, the Secure Connected Device and Secure Interface and Infrastructure segments are expected to each decline in low single digits %,

22、 while the Secure Identification Solutions group is expected to decrease in mid teens %. The team does not see growth in the near term in the SIS group and anticipates roughly $150M of revenues per quarter. Standard products are expected to stay flat sequentially in 4Q.Automotive and mobile continue

23、 to be driving force while weakness persists in secure ID and wireless base station RF. The auto business declined only 1% Q/Q in 3Q and is expected to stay flat or increase slightly in 4Q, which we view as seasonal to slightly better. Auto MCUs and sensors continue to perform well while V2X adoptio

24、n will be further down the horizon. Mobile remains strong for NXP, benefitting the Secure Connected Devices business (mobile wallet at Apple, Samsung, and other Korean and Chinese handset OEMs and transit solutions in China) and part of the Secure Interface and Infrastructure group (USB type C). On

25、the other hand, growth in the Secure Identification Solutions group continues to be muted as the banking card marketing in China saturates and adoption remains slow in the U.S. Management sees weakness in the wireless base station market in the near term, impacting the RF power amplifier business in

26、 the SII group.Adjusting estimates and establishing Dec 2017 price target. We adjust our CY16 from $5.72 to $5.82 on better 3Q results and 4Q guide. We adjust our CY17 estimates from $7.49 to $6.70, taking into account the divestiture of standard products and margin guidance exiting 2017. We are est

27、ablishing a Dec 2017 price target at $110 per merger deal terms with Qualcomm.2This document is being provided for the exclusive use of .Harlan Sur(1-415) 315-6700North America Equity Research27 October 2016SummaryTable 1: NXP Semiconductors Earnings Summary$ in m

28、illions, except per share dataSource: Company reports and J.P. Morgan estimates.Balance Sheet and Cash FlowThe company generated $718M in cash from operations and free cash flow was$619M (25% of revenue). The company exited 3Q with $1.57B in cash, and net debt to trailing 12-month adjusted EBITDA wa

29、s 2.93x. Management remains focused on balancing between an appropriate debt level and share buybacks.Table 2: NXP Semiconductors Revenue Breakdown by New Business Segment$ in millionsSource: Company reports and J.P. Morgan estimates.Table 3: NXP Semiconductors Business Segment Margins%Source: Compa

30、ny reports.3This document is being provided for the exclusive use of .Non-GAAP Margins by Business Segments3Q162Q16% ChangeHPMS:Non-GAAP GM Non-GAAPOPMStandard Product: Non-GAAP GM Non-GAAPOPM53.9%29.3%34.1%24.4%53.7%27.0%32.7%22.8%20.0 bps230.0 bps140.0 bps160.0 bps%Revenue by Busines

31、s Segment3Q162Q16Change3Q Guidance4Q Guidance($ in Millions)(%)(%)Automotive853858-0.6%flat to down low singleflat to up low single Secure ID Solutions178200-11.0% down high single to low doubledown mid teens Secure Connected Devices59251415.2%up mid teens to 20down low singleSecure Interface & Infr

32、astructure4764427.7%up low to high singledown low singleTotal HPMS209920144.2%Standard Products3203035.6%up mid to high singleflatTotal Product Revenue241923174.4%up 4%down 1%NXPI3Q164Q164Q163Q16JPMEstimateDiffConsensusGuidanceConsensusRevenue ($M) Q/Q ChangeGross Margin (pro forma) Op Margin (pro f

33、orma)Net Income (pro forma) Proforma EPS (Excl. options)$2,469.0 $2,464.6 $4.4 $2,465.0 $2,440.0 $2,423.04.4%4.2%0.2%50.5%50.2%0.3%50.2%50.7%50.3%28.0%27.5%0.5%28.3%$568.0 $556.8 $11.2$1.65$1.60 $0.05 $1.61$1.61Harlan Sur(1-415) 315-6700North America Equity Research27 October 2

34、016Investment Thesis, Valuation and RisksNXP Semiconductors (Neutral; Price Target: $110.00)Investment Thesis NXPs high-performance mixed signal (HPMS) business segment is well diversified with end markets in networking, identification, and automotive. The company is a market leader in a majority of

35、 the segments it servesnotably in the identification, portable and communications, and automotive markets. Better than expected cost reductions could boost margins and earnings.ValuationWe are establishing a Dec 2017 price target at $110 (from our Dec 2016 price target of $98) per deal terms with Qu

36、alcomm.We believe upside potential from current levels is limited at 10%, and that keeps us at a Neutral rating.Risks to Rating and Price TargetHigh debt load could have adverse effects on operating results; consolidations of operations could affect availability of product and the ability to supply

37、demand; and large ownership of common stock by financial sponsors poses share price depreciation risk.Any unexpected macroeconomic headwinds could cause weakness in certain markets NXP serves or design win loss at next-gen product platforms at its customers. This weakness could result in lower reven

38、ue and earnings. Any margin compression (pricing, demand, and/or execution related) could also alter our estimates.Better than expected overall demand environment, any significant design wins, and/or continued operational execution could result in upside to our revenue and EPS estimates.While the pr

39、oposed merger between Qualcomm and NXP makes strategic and financial sense, there is a chance that the deal will not go through, if it does not receive regulatory and shareholder approvals. This can adversely affect the price of NXPI shares.4This document is being provided for the exclusive use of r

40、.Harlan Sur(1-415) 315-6700North America Equity Research27 October 2016Appendix I: Comp and Group ValuationTable 4: NXP Semiconductors Comp TableSource: Company Reports, Bloomberg, J.P. Morgan EstimatesOW = Overweight, N = Neutral, UW = Underweight, NR = Not RatedN

41、ote: EPS estimates exclude impact of stock compensation expense.Source: J.P. Morgan estimates, Bloomberg. Note: Priced as of market close 10/27/16.5This document is being provided for the exclusive use of .10/27/2016JPMMarketRatingCap10/27/16PriceNon-GAAPEPSC16EC17EP/EC16EC17ERevenueC1

42、6EC17EP/SC16E C17EEV/SalesC16E C17EConsensus Non-GAAP EPSC16EC17EConsensusSalesC16EC17EConsensusP/EC16EC17EConsensusP/SC16EC17EHarlan Sur, Lead Coverage$2.67$2.80$2.37$2.40($0.23)$0.02$0.03$1.31$2.25$2.34$0.42$0.67$1.44$2.68$12.02$13.73$3.52$4.10$1.36$1.78$5.53$6.24$4.96$5.79$0.91$1.04$3.15$3.35$3.0

43、8$3.41$5.82$6.70$3.23$3.72$1.81$2.10$2.38$2.49$1.43$1.60$0.84$1.20$2.10$2.85$0.92$1.04$0.48$0.86$2.00$2.22$6.97$7.62$5.46$5.63$2.39$2.6613.012.429.829.4NM465.7NM13.322.421.531.019.738.920.914.312.512.110.427.821.114.012.411.29.621.120.518.617.014.818.716.221.918.925.324.214.71

44、7.412.815.113.421.412.014.513.013.912.713.713.311.510.4$58,892 $60,750$6,080 $6,420$4,238 $4,469$12,756 $14,465$2,304 $2,471$2,365 $2,391$594$955$15,391 $16,296$868$990$254$319$3,262 $3,543$2,993 $3,364$854$903$13,256 $13,606$3,431 $3,664$9,498 $9,132$3,117 $3,458$2,223 $2,336$1,483 $1,531$754$784$3

45、,889 $5,050$576$668$2,329 $2,411$1,914 $2,145$11,466 $12,160$6,337 $6,845$3,217 $3,400$802$8410.01.31.03.53.06

46、.4.65.03.52.0$2.65$2.79$2.27$2.27($0.17) $0.03$0.10$1.56$2.27$2.40$0.43$0.65$1.41$2.48$11.71 $13.67$3.56$4.12$1.36$1.75$5.48$6.43$4.98$5.75$0.91$1.04$3.30$3.54$3.02$3.35$5.75$7.37$3.

47、25$3.74$1.81$2.10$2.29$2.52$1.40$1.53$0.84$1.18$2.11$2.63$0.89$1.02$0.45$0.74$1.97$2.28$6.98$7.58$5.47$5.44$2.50$2.84$58,793 $60,930$6,009$6,517$4,227$4,514$12,977 $15,475$2,305$2,451$2,383$2,404$558$853$14,717 $16,372$870$1,001$260$320$3,251$3,673$2,987$3,295$854$910$13,247 $13,715$3,409$3,622$9,47

48、9$9,942$3,118$3,503$2,223$2,319$1,481$1,572$750$784$3,831$4,850$556$650$2,337$2,432$1,919$2,126$11,417 $12,413$6,336$6,791$3,219$3,350$809$87213.112.531.131.2NMNMNM30.620.339.922.714.712.611.910.327.821.614.112.011.29.720.020.918.917.213.418.616.121.818.926.323.915.113.713.99

49、.917.313.915.713.722.714.014.712.713.812.813.713.75.14.910.01.31.01.51.4phone: 415-315-6700, email: PC SemiconductorsINTCOW$

50、169,768$34.81NVDAN$44,599$70.68AMDN$5,795$7.11MemoryMUOW$18,179$17.53Enterprise/Networking/Datacenter SemiconductorsXLNXN$13,605$50.32MRVLN$6,748$13.12 CAVMOW$3,230$56.14 AVGOOW$72,169$172.24 MLNXOW$2,103$42.50 IPHIOW$1,654$37.72Mobile DevicesSWKSN$14,811$77.26 QRVOOW$7,090$55.59 KNN$1,310$14.67Anal

51、og/MicrocontrollersTXNOW$71,932$70.73ADIN$19,649$63.27NXPIN$34,120$99.08 MCHPOW$12,938$60.36 MXIMOW$11,433$39.62LLTCN$14,777$60.14IDTIOW$2,906$21.04Diversified/Consumer/Standard Components/OtherONN$4,861MTSIOW$2,019VSHN$2,090CYN$3,527Semiconductor Capital EquipmentAMATOW$31,544LRCXOW$17,408KLACOW$11

52、,733ORBKOW$1,242$11.64$36.52$13.95$10.26$28.86$96.70$74.72$27.61Large Cap Semi Average19.519.04.94.720.718.85.04.6Small-Mid Cap Semi Average2.220.415.03.12.5Semi Group Average (ex-outliers)18.518.6SOX Index82417.617.6S&P5002,13318.016.01.81.718.016.01.81.7Harlan Sur(1-415) 315-6700North America Equity Research27 October 2016Appendix II: Financial TablesTable 6: NXP