Good morning, ladies and gentlemen, and welcome to the Q4 2020 NXP Semiconductors Earnings Conference As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Jeff Palmer. Please go ahead, sir.
Great. Thank you, Tiffany, and
good morning, everyone. Welcome to the NXP Semiconductor's Fourth Quarter 2020 Earnings Call. With me on the call today is Curt Sievers, NXP's President and CEO Peter Kelly, our CFO. As Tiffany said, the call is being recorded today and will be available for replay from our corporate Web 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-nineteen pandemic on our business, the macroeconomic impact of the specific end markets in which we operate, the sale of new and existing products and our expectations for financial for the Q1 of 2021.
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, we will refer to certain non GAAP measures today, 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 measures to the most directly comparable GAAP measures in our Q4 2020 earnings press release, which will be furnished to the SEC on Form 8 ks is available on the NXP website in the Investor Relations section at nxp.com. Now I'd like to turn the call over to Kurt.
Yes. Thanks very much, Jeff, and good morning, everyone. We really appreciate you all joining the call this morning. Today, I will review our Q4 and our full year 2020 performance. I will provide insights on how we view the current supply demand environment, and I will certainly discuss our guidance for quarter 1.
Now let me begin with quarter 4. Our results were near the high end of our guidance with the contribution from the automotive and mobile markets both meaningfully stronger than planned. And with trends in the industrial and IoT and communication infrastructure markets in line with our expectations. Taken together, NXP delivered quarter 4 revenue of 2,500,000,000 Our non GAAP operating margin in quarter 4 was a strong 30.5%. That is 60 basis points better than the year ago period and about 80 basis points above the midpoint of our guidance.
Our Our outperformance was thanks to good fall through on strength revenue growth, thanks to early benefits of improved factory utilization and solid operating expenses control. For the full year, Revenue was $8,600,000,000 a decline of 3% year over year. And as 2020 progressed And the initial impacts from the pandemic earlier in the year subsided, our customers began to accelerate orders at a very robust rate, which we do anticipate will continue throughout 2020 Our full year non GAAP operating margin was 25.9%,
a
operating expenses. It is important to note though that throughout the year, we shifted more of our OpEx spend from SG and A towards R and D as we do continue to invest in new and differentiated products, which are definitely the lifeblood of our term growth ambitions. Now let me turn to the specific trends in our focus end markets, starting with Automotive. Full year revenue was $3,830,000,000 down 9% year on year, materially better than overall auto production and the reflection of strong new product traction and content gains in ADAS, in digital clusters and in electrification, which we have all spoken about in the past. For quarter 4, automotive revenue was $1,200,000,000 up 9% versus the year ago period and $20,000,000 better than our Now moving to industrial and IoT.
Full year revenue was 1,840,000,000 15% year on year up with both the wireless connectivity and our crossover processes supporting the For quarter 4, industrial and IoT revenue was $511,000,000 23 percent versus the year ago period and with that in line with our guidance. Now moving to mobile. Our full year revenue in mobile was $1,250,000,000 up 5% year on Now if we are reconciling this for the sale of our voice and audio business during quarter 1 last year, the underlying Mobile end market growth was up a robust 19% year on year. And during the year, we experienced continued strong adoption of our secure mobile wallet and the early ramps of our ultra wideband solutions offset by the anticipated Full year attach rate of mobile wallets increased to about 40%, which is in line with our expectations and which is also supportive of our 50% attach rate target exiting 2021. For quarter 4, mobile revenue was 409 $1,000,000 up 23% versus the year ago period and with that $40,000,000 better than our guidance.
And last but not least, Communication Infrastructure and Other full year revenue was 1 RF Power products into the cellular base station market relative to the positive trends, which we had experienced in the first half of 2019. For quarter 4, revenue was $394,000,000 down 14% year on year and in line with our guidance. Now before turning to our guidance and expectations for the Q1, I would like to offer my view on the current demand and supply environment as it pertains to NXP. When our customers began to reopen after the shutdowns in the second quarter, we did see order rates through Q3 and Q4 accelerate at a very rate. This trend has continued and it will likely be the case over several quarters to The increased demand has been broad based across most of our focus markets, most of our product portfolio and all of our geographies, as well as across our direct and our We actually believe that the working from home trend because of the pandemic, which emerged in full force beginning in the first half of the year, led to an explosion in demand for high volume consumer, compute and mobile type products in the industry.
And then as the auto and industrial It began to rebound in the second half of the year. The available foundry capacity was largely sold out. As a result, We and others are experiencing significant increases in lead times and in certain cases increased costs from Taking that all together, the setup indicates a really robust demand environment combined with a very challenging supply situation, which we anticipate may continue for several more And we are working very diligently with both our external suppliers, our internal operations team and our customers to align supply with demand. Against this backdrop now, let me come to the Guiding quarter 1 revenue at $2,550,000,000 up about 26% versus the Q1 of 20 20, within the range of up 22% to up 30% year over year. From a sequential basis, this represents growth of about 2% at the midpoint versus the prior At the midpoint, we anticipate the following trends in our business.
First Automotive is expected to be up in the mid-twenty percent range versus quarter 1 2020 and up in the mid single digits versus quarter 4 2020. Industrial and IoT is expected to be up nearly 50% year over year and up high single digits year over year and down in the mid teens versus quarter 4 2020. And finally, Communication Infrastructure and Other is expected to be flat versus the same period a year ago and up in the low single digit range on a sequential basis. Now while we are really encouraged by the rapid rebound demand, it is important to remember we are still challenged by the impact of the global pandemic. And we will carefully navigate the improving demand environment focused on meeting our customers' requirements, while simultaneously assuring at all times the safety and health of all of our employees.
And I am extremely of their adaptability, their dedication and their hard work in the face of continued So in summary, customer engagement levels, our design win momentum in our strategic focus areas continue to be all very positive. And hence, we continue to be very optimistic about the future potential of NXP. And with that, I would like to pass the call to you, Peter, for a review of our financial performance.
Thank you, Kurt. Good morning to everyone on today's call. As Kurt already covered the drivers of the revenue during the Q4 and was very good. Revenue was near the high end of our guidance range with an improvement of both and non GAAP operating profit. I'll first provide full year highlights and then move on to the 4th quarter results.
Full year revenue for 2020 was $8,610,000,000 down 3% year on year. We generated 4 point $4,000,000,000 in non GAAP gross profit and reported a non GAAP gross profit margin of 51.1 percent, down 2 40 basis points year on year because of the significant deceleration of revenue and the associated lower factory utilization during the year. Total non GAAP operating expenses were $3,170,000,000 year on year. Total non GAAP operating profit was $2,230,000,000 and non GAAP operating margin was 25 point percent down 3 10 basis points year on year. Non GAAP interest expense was $357,000,000 Cash taxes for for ongoing operations were $103,000,000 and incidental taxes were $45,000,000 with non controlling interests of $8,000,000 Stock based compensation, which is not included in our non GAAP earnings, was 384 Full year cash flow highlights include $2,480,000,000 in cash flow from operations and 3 $88,000,000 in net CapEx investments resulting in $2,090,000,000 of non GAAP free cash flow or a very healthy 4% of revenue.
During 2020, we repurchased $627,000,000 of shares paid cash dividends of $420,000,000 In total, we returned $1,050,000,000 to our owners, which was 50% of the non GAAP free cash flow generated during the year. Now moving to the details of the 4th quarter. Total revenue was $511,000,000 up 9% year on year at the high end of our guidance range. We generated $1,300,000,000 in non GAAP gross profit and reported a non GAAP gross margin of 52.9 percent, down 130 basis points year on year and modestly above the midpoint of guidance. Total non GAAP operating expenses were $563,000,000 flat year on year and up $13,000,000 from Q3, in line with the midpoint of our guidance.
From a total operating profit perspective, non GAAP operating profit was $764,000,000 and the non GAAP operating margin was 30.5 up 60 basis points year on year and well above the high end of our guidance. Non GAAP interest expense was $90,000,000 cash taxes for ongoing operations were $30,000,000 and non controlling interest was $11,000,000 Stock based compensation, which is not included in our non GAAP earnings, was $89,000,000 So turning to the changes in our cash and debt. Our total debt at the end of Q4 was $7,610,000,000 down 1.75 $1,000,000,000 sequentially as we retired early the 2021, dollars 1,350,000,000 $4,850,000,000 and the $22,400,000,000 4.58 notes. We did this on September 28, which was the 1st day of our 4th quarter. Our cash position was $2,280,000,000 and was down $1,290,000,000 sequentially, mainly due to the previously debt repayments offset by cash generation during the Q4.
The resulting net debt was $5,330,000,000 and we exited the quarter with a trailing 12 month adjusted EBITDA of 2.7 $9,000,000,000 Our ratio of net debt to trailing 12 month adjusted EBITDA at the end of Q4 was 1.9 and our 12 month adjusted EBITDA interest coverage was 8 times. Our liquidity is excellent and our balance continues to be very strong. During the Q4, we paid $105,000,000 in cash dividends and repurchased 2 $57,000,000 of our shares. Turning to working capital metrics, days of inventory was distribution channel with inventory in the channel of 1.6 months also below our long term targets. Both reflect customer orders accelerating faster than we'd anticipated and we find ourselves in a supply constrained position.
It will take a number of quarters to on hand inventory and channel inventories to our long term target levels. Days receivables were 20 days down 2 sequentially and days payable was 75, an increase of 20 days versus the prior quarter as we rapidly increase material orders with our suppliers. Taken together, our cash conversion cycle was 31 days, an for customer deliveries in future periods. Cash flow from operations was $1,030,000,000 the quarter and net CapEx was $103,000,000 resulting in a non GAAP free cash flow of 926,000,000 Turning to our expectations for the Q1. As Kev mentioned, we anticipate Q1 revenue to be about $2,550,000,000 plus or minus about $75,000,000 At the midpoint, this is up 26 year on year and 2% sequentially.
We expect non GAAP gross margin to be about 53.5 percent plus or minus basis points. Operating expenses are expected to be about $590,000,000 plus or minus $10,000,000 Taken together, we see non GAAP operating margin to be about 30.4% at the midpoint. We estimate non GAAP financial expense to be about $85,000,000 and anticipate cash tax related to ongoing operations to be about 56 $1,000,000 Non controlling interest will be about $10,000,000 And for the Q1, we suggest For modeling purposes, you use an average share count of 284,000,000 shares. Finally, I have a few closing comments I'd like to make. 1, clearly demand has come back more than we could have expected.
Our current focus is to look after our customers and ensure we ship as much product to them as possible. It's unfortunate that some of our suppliers are attempting to use the current tight supply environment as a short term opportunity to raise prices, which we will clearly have to pass on. To be clear though, we do not see this as an opportunity to improve our margin by sacrificing long term relationships. Additionally, given the tightness in supply and the level of orders, we anticipate shipping during Q1, it's unlikely we'll be able to increase our months of supply at distributors or move our DIO target upward towards our long term during the Q1. Between January 4th February 1st, we bought back an additional $354,000,000 worth of stock and plan to continue to buy back in line with our capital allocation policy all excess cash to shareholders.
Clearly, our operating margin reflects the significant fall through benefit of the additional revenue. Although the current environment creates a new set of challenges, we believe we can still deliver on margin improvement plan in 2021. In terms of the pandemic, our team continues to perform in a truly outstanding way. And the safety of our team members, as Curt mentioned, continues to be our primary concern. If anyone experiences any symptoms or are in any way exposed to the virus, we ask them to self isolate for Unfortunately, in Q4, we've seen a few more people than expected in our fab operations requiring to isolate.
And as a result of this shortage of labor, a small impact in our internal fab output. Although this is a short term issue, it's clearly best for our overall performance in both the short and medium term. We estimate this is impacting us to the tune of 80 basis points of profit in Q1 and 40 basis and will impact us 40 basis points in Q2. While this is a short term headwind, the safety of our employees remains our key consideration and we believe our COVID protocols are appropriate and correct. Finally, I'd like to thank all my colleagues at XP for a truly amazing 2020.
You've done an incredible job in a truly unbelievable environment and for a very bright future. So with that, I'll turn it back to the operator for your questions.
Your first question comes from the line of C. J. Muse with Evercore.
Yes, good morning, good afternoon. Thank you for taking the question. I guess first question on gross margins. Peter, you talked about the 55% still clearly in Curious if you can speak to how utilization will play a role in that? How mix assuming comps recovers through the year?
And then I guess probably most importantly, how to think about rising input costs and your ability to pass and whether there's a timing difference there?
So great questions. Yes, let's talk about Q4 to Q1, first of all. So Q1, we go from 52.9 to 53.5. I think I said last quarter that utilization underutilization rather with impact is about 150 basis points in Q4. So we'd have that level of in Q1.
As it turns out, because of these the need to self isolate, instead again 150 basis points of improvement from Q4 into Q1, we've only got about 70 basis points. So that 52.9% to 53.5%, the 60 basis points is really made up of 3 big things, CJ. So we pick up 70 basis points from improved factory performance sorry, from underutilization, 20 basis points from improved factory performance above and beyond what we were expecting. And there's about 30 basis points of headwind because of our annual price reductions. So that's from Q4 to Q1.
Then if you say, okay, well in Q4 you did 53.5 Why aren't you running sorry, from 52.9% to 53.5%, why aren't you running 55%? That 150 is really made up from 2 things. There's about in period, there's about 50 basis points of underutilization, very roughly, and about 100 basis points of mix. And the issue in mix really is one of our Cominfra business. So our Cominfra business in the first is relatively weak and auto and mobile are relatively strong.
And we think as we move through the year and as kind of 5 gs progresses, we'd see an improvement on mix over time. Did I Owen, Right, your early question was about pricing, right? So pricing is really mixed, okay? So we're seeing Some suppliers trying to put up the prices to us. But we in the same way that we long term contracts with our customers.
We have similar contracts with many of our supply. So it's a bit of a mixed bag really. Having said that, we are seeing price increases. And where we have them, we'll endeavor to pass those on to our customers. You made an interesting actually about how quickly you can do it.
So I think what we'll actually see is hopefully we'd be able to pass them on pretty But you could always have a month or 2 when I guess even a quarter when you can't really pass them on that quickly. So it's a disturbance rather than a fundamental issue. We would like to say that don't see the current environment as an opportunity to structurally improve our margins. We're not a commodity business. We don't increase our prices when times are tight and reduce them when times are good.
Did I manage to cover everything there? I know there
was a lot of questions.
Yes, Peter. Yes, no, that was great. And I guess, Kurt, if I could just follow-up with a quick question. Considering the supply constraints on the auto side and considering your and NXP's focus of really providing complete solutions, curious about what impact the current supply constraint environment is having on your level of engagement with your automotive customers?
Yes. Hi, T. J. So I think actually and that might sound ironic, but that's not what I mean. It actually improved the because I probably never spent so much time with our customers as of today.
And while certainly this is a challenging moment for everybody in the chain, there is a lot we speak about the future in terms of how do we best deal with this on a go forward basis, because everybody recognizes the enormous relevance semiconductors in building cars. So thinking about trends, thinking about aligning forecasts a longer term basis is definitely a positive result out of this. So I don't think this is a negative. I think it is actually something We as an industry altogether are learning from how to avoid these things from happening in the future. And the way to do this just a much closer collaboration than we've had along the chain.
And what I mean is really not only with our Tier 1 customers, but also with the OEMs directly. And that is obviously great for innovation at the same time.
Very helpful. Thank you.
Your next question comes from the line of Stacy Rasgon with Research.
Hi, guys. Thanks for taking my questions. For my first question, I wanted ask about the trajectory for the year. I mean, like normally Q1 is the trough for the year, usually down, oh, I don't know, 7% or 8% sequentially from Q4 to Q1. You're obviously A little bit this time.
Given your commentary on sort of like sustained demand through the year, do you still see Q1 potentially as the trough?
Hi, Stacy. First of all, you are hinting to seasonality in a way. I think in the current environment, none of the historic seasonality patterns is really applicable. So certainly, this is a very strong Q1 if you did hold it against historic patterns. But let's not forget that we are coming off actually to kind of disturbed and weak years.
I mean everybody talks about the impact of the on 2020, but also 2019 was not a strong year in semiconductors. So from that perspective, I think we are just really coming out of a longer term down, which indeed hints to what I said on the in the prepared remarks earlier. We do see a pretty robust demand environment all through the year, also beyond Q1.
Got it. Thank you. For my follow-up, I want to follow-up a little bit on the comment that Peter said. He said, do you still feel confident delivering on your margin improvement plan in 2021. I just wanted to clarify exactly what is that margin improvement plan?
Is that the 55% gross margin target? Or Specifically, what do you mean by delivering on margin on your margin improvement plan in 2021?
55%.
Okay. Are there any like is that it's still at that 2.4% sort of threshold revenue level or you just basically see yourself maintaining it?
I think at the levels of business we are at the moment, We should be running about 55%. I mean, I think we get a little bit carried away in because it's not many dollars that moves it 50 basis points either way.
Yes. No, I get that. Do you have any idea when in the year you might hit it though? Is that like a second half kind of target or?
I think It's definitely second half, Stacy. And one of the single biggest items is are coming for being a bigger percentage of our overall business than it is today.
Okay. Got it.
But without the COVID impact, you'd be running over 54
right now in Q1, correct?
Yes, yes. I think so, yes. Got
Okay.
Thank you, guys. Appreciate it.
Yes, it'd be like 54.2 or something like that.
Yes. Got it. Got it. Thank you, guys.
Your next question comes from the line of Vivek Ira with Bank of America Securities.
Thank you for taking my question and on the strong growth and execution. Kurt, I'm curious, what's your baseline view of automotive unit growth in 2021 as you see that at the start of the year. And also last year, when I look at your auto semiconductor sales, which were down 9%, they were like 5%, 6%, 7 points ahead of order units. So that was a very impressive content delta for this year. And I ask those questions because it seems like the industry is off to a very Strong start, but can this kind of strength be maintained, which is why just some just kind of help us align our models on what and content market expectation should be this year?
Yes, sure, Vivek. So let me start with what IHS is telling us for this year in units for auto and that would be around 85,000,000 units, which if that comes is like 14 percent year on year growth in units. This is the IHS number. We've always used it internally. I would tell you from my very, very frequent discussions over the past couple of weeks and also at the ending of last year, I think the sentiment in the auto industry is possibly even above that.
So maybe more 85,000,000 to 90,000,000 in what the car companies think to achieve. But a lot of that is obviously based on the assumption of, Say the second half of the year, being fully vaccinated, society coming back to more normal lives and that actually being another push for auto production and auto sales. Again, the formal number is 85,000,000 units, which would be a 14% growth. But you were hinting to the other of this discussion, which is actually content. Because clearly, the fact that we've been 7 points faster than the SAAR last year is thanks to content growth.
And thanks to our specific play in our high growth areas like radar and electrification, BMS, digital clusters, which actually did not decline. So our growth business, Chris, and you know that's about quarter of our auto business. Those parts of our auto business did not decline last year. They actually had growth even in a year where the SAAR was, I think, last year down by something like 16%. And we see the content growth Certainly going at the same rate going forward.
One really strong element is the CO2 targets, which translates then often in electrification. But this is not Just about the, say, the electric engines, there's a lot of other applications which are coming in tune with electrification, which is overall driving the semi content in the car massively. So all in all, Vivek, I would say, I think it is safe to assume the 85,000,000 units for this year, which is a 14% growth for SAAR. And definitely, our algorithm of outgrowing the SAAR, as we spoke about it before, does stand strong also in this year. Now one last element on this, Which everybody tries to understand currently is about inventory levels.
I think at the moment from Anything we can see, the supply chains through the auto world are empty. And I say that because I know that every single product we are shipping is immediately built into a car. So there is just nothing going on the sideline. It all goes through into production immediately. That's why we also clearly set the ER supply constraint for the Q1.
And as a reaction to this, I hear quite a few people in the industry speaking about the dire to actually ask for more inventory along the chain in automotive going forward. There is one large U. S. OEM, which actually made even a public statement about how much chip inventory they would like to see at their tier customers. So if you model this on top of the content gains and SAAR growth, which we just spoke about, then I think there is a good reason to believe there is a multiple quarter growth pattern ahead of us.
Got it. Very helpful. And for my follow-up, maybe one for you. You mentioned that the plan is to return All excess free cash flow to investors. Last year, you generated over $2,000,000,000 or so in free cash flow.
And I think The dividend only takes a quarter of that. How should we think about buybacks this year? I know you gave number for the start of the year, should we assume that based on the expectation of stronger free cash flow that most of it will be devoted to buybacks, so we could be back in some of the strength we have seen in some prior years? Or do you still to use some of that to deliver the balance sheet further? Thank you.
Okay. Vivek, we've been amazingly Predictable, okay. So our stated capital allocation policy is we will return all excess cash to shareholders up to a level of 2 times net debt to 12 12 months EBITDA. The reason we didn't return even more in 2020 is because for most of the year we were above 2x. Net debt to EBITDA with the weak performance in Q2.
So depending on what Your model is you should assume that all excess cash up to a level of 2 times net that gets returned to shareholders. So yes, it will be substantially higher in 2021 than it was in 20. Same way 2019 was substantially higher than 2020. And we definitely would not be use it to delever the
Got it. And you're already at 1.9, so you're below that range right now?
The difference between 1.9 and 2 is not a big number. The issue is the EBITDA. So you need to look at how Q2 and Q1 fall off and Q3 and Q4, which is better come on, which gives us more capacity to buy back stock.
Your next question comes from the line of Jon Pitzer with Credit Suisse.
Yes. Good morning, Kurt. Good morning, Peter. Congratulations on the solid results. Kurt, my first Just on the comms infrastructure business, given how important it is to mix and gross margin leverage as we go throughout the year, what's the visibility in that business?
Why do you think it recovers in the back half of the year? Is this a view that the U. S. Government stance on Huawei changes? Or do you see other design wins with other OEMs that will drive that business throughout the year.
Thanks, John. Let me take away the Huawei thing first We are here conservative, and we don't assume any moves on the licensing, etcetera, with Huawei. So that's not part of the plan anyway. What makes us actually optimistic for the second half is mainly our portfolio. I think we talked about our gallium nitride, both Product as well as production capability getting online at the end of last quarter.
And I can actually proudly say that in the meantime, all the products are qualified. And more importantly, they are qualified at handful of important customers. And since this is new for us because we haven't had this gallium nitride capability really in the first place. We absolutely see that we will gain share on that basis with the further rollout of the infrastructure in this coming year. And yes, we believe this kind of back loaded more towards the second half of the year versus the first half.
But the driver is really the gallium nitride penetration, which we are foreseeing.
That's helpful. Then as my follow-up, just in your prepared comments, you pointed out that if you pro form a for The sale of the auto business, the mobile business last year was up significantly. I'm kind of curious as you think about the mobile wallet, the ultra wideband penetration, are you preparing calendar year 2021 to be another growth year in mobile? And is there any rule of thumb you can give us on how we should think about your content from 4 gs to 5 gs?
Well, I mean, we only guide the 1st quarter So I will not provide guidance for the full year in mobile. But certainly, our focus on further driving penetration with the mobile wallet, where I think I spoke about the hitting the 40% attachment rate at the end of last year and we think we are perfectly on track to get this to a 50% rate through this year. And secondly, we have the emerging ultra wideband. And you've probably followed the most recent announcements of Samsung, who actually brought now another couple of phones out, which are carrying ultra wideband. And that is now also spreading into associated ecosystems, which I think makes it even more attractive.
I think Samsung spoke about digital car keys for a couple of car companies. And they also spoke about actually their first moves now into the IoT world, which is a product which they call the SmartPak Plus, which is like a small finder device, which you can attach to something and then you will find it with your phone. Now all of that is going to help with Samsung, but of course also with the other OEMs, drive further and speedy ultra wideband adoption in line with what we did in the Investor T Gen some time ago. So those two pillars are standing firm. And I'd say, certainly some of the big OEM customers also have good run rates, John.
But I would say, for us, continues to be a content growth story. Secure mobile wallet, secure ultra wideband and then you know we also had EU ICC, which is coming in. So there is a number of very specific content drivers, which make us actually Quite optimistic in mobile on a continued basis beyond the unit rates.
And Kurt, do you have enough data yet to think about how your trends from 4 gs to 5 gs, I'm assuming that these new applications are more broadly adopted in 5 gs phones?
Yes, sorry, I didn't respond to this in the first place. I think actually in principle, this is not dependent or required As an association with 4 gs or 5 gs specifically. Clearly, 5 gs will be about high end phones the first place where the early adoption of these features might be a first, but it is not necessarily something which is dependent on 4 gs or 5 So which is good actually. So we are kind of agnostic to that.
Perfect. Thank you.
Your next comes from the line of Ross Seymore with Deutsche Bank.
Hi, guys. Thanks for letting me ask the question. First, Peter, congratulations on your retirement announcement. I know you're going to be with us for another year or so, but congrats nonetheless. I guess, as my first question overall, everybody knows that there's supply shortages, but I hope to get a little more color on it from A somewhat higher level.
Could you size in any way, shape or form the impact on what you couldn't ship? So what your revenue impact to the supply constraint was in the Q4, the Q1, any color about which end market is more acutely hit as you split your business? And timing wise, when do you think you'll be able to
catch up.
I guess I'd say a couple of things really, Ross. You can look to really big numbers in the Q4 and the Q1 just if you do some chainsaw math on our months of supply in sorry, months of inventory and distribution, but I'm not sure how relevant it is really. So in theory, we could have shipped 100 of 1,000,000 of dollars of more. But then I don't know to what extent you'd be then pulling that out of Q3 and Q4. We're seeing strength across our businesses.
Obviously, there's a lot more reporting in the automotive Because they're having real supply issues and having to maybe close down factories in certain cases and you talk about people not being able to work for weeks at a time, which is maybe different than you see in some of the smaller customers who don't have the same megaphone. But even in those areas, they're seeing problem. So I would say it's pretty general. And I would go back to one of Kurt's comments, which was 20 2019, the supply chain really got emptied. Demand was very weak.
We really forget about 2019 in the context of COVID. And then in the first half of 2020, we had absolutely the same issue. So we're looking at pretty empty supply chains across the board. To some extent, it's exacerbated by maybe people moving into the big Taiwanese and other foundries outside of China by the fact people thought maybe they would not be able to buy product out of China. But I think trying to pass it to really individual situations is actually very difficult.
I would say, in theory, yes, we could have shipped a lot and effectively were sold out for Q1. And we're just spending huge amounts of time with the customers making sure that They keep their factories going, which is why Kurt made the comment that we don't think anything we're shipping at the moment is going inventory. We think it's all going into building products. And we think it's going to quite some time and we wouldn't speculate exactly when to when we get to a point that, that becomes more balanced and everyone can start to breathe normally.
Thanks for that color, Peter. I guess switching gears somewhat completely over to the OpEx side, you gave a lot of details on the gross margin side and the profitability, why that's where it is and how it can improve. How are you approaching the OpEx side of the equation. Obviously, the revenue sounds like it's going to be very strong throughout the year. Will you be spending to that?
How should we think about that 5.90 level in 1Q trending for the rest of the year?
We want to run 16% of R and D and 16% of revenue for R and D and 7% for SG In actual fact, the increase in dollars from Q4 to Q1 is essentially, in fact, it's all non exec variable comp. So it's just incentives. So we're keeping a tight hand on OpEx. We won't spend ahead of revenue really. But we would like to run 16% of R and D and 7% of SG and A.
And In the very short term for Q1, the increase is all increases in compensation Variable comp accruals.
Your
next question comes from the line of William Stein with Chrous Securities.
Great. Thanks for taking my question. I'm wondering if you can discuss the competitive landscape today a little bit in particular as it relates to pending M and A. You have ADI buying Maxim that consolidates the analog market a little bit. You have NVIDIA buying ARM, which is an important supplier of yours.
I'm wondering if you can comment as to whether either one of these or any other transaction might have any influence on your competitive positioning and perhaps your own plans from the perspective of consolidation?
Hey, Will. So I mean, we just don't comment on M and A in these calls. But what is relevant is that As it relates to our strategic focus and our, say, belief in our power of differentiation, we continue to be super really super confident that with the portfolio, which we have actually largely achieved or to a good extent also through M and A achieved, is in a very good position. I mean, let's not forget that this trends in secure edge processing solutions, which we have is a result of the Freescale acquisition a couple of years back and then further complemented by the wireless acquisition from Marvell about 1 year back. We are proud that we've been able to successfully integrate all of this and actually are now in a position to come out with solutions, with products, which are building on the from these different former deals.
And from anything I've seen Relative to the deals you mentioned, we don't see this as a threat to that competitive decision which we have. So while I don't want to comment in general, on M and A, I would say it doesn't touch our trust and our confidence with the strategic focus which we have. I continue to believe That full steam execution on what we have is a very, very high value endeavor.
Great. I appreciate that. And maybe if I can follow-up with question about the supply demand imbalance. Typically when this happens, you have this behavior of over ordering by some customers that stimulates capacity additions and sort of there goes the cycle. This behavior is typically what sort of the peak of the cycle.
I've argued that I think that the lean inventory through the supply chain and really the breadth of demand, What perhaps will make the cycle extend a little bit longer, but I wonder if there's anything else that relates to the insight that Yuval shared with us already suggesting that we continue to see this imbalance favoring growth as we go through the year?
Yes. I mean, indeed, Will. We've all seen that movie before. I couldn't agree more. There is this element which is creating a bubble eventually.
But I would really highlight and I say that from very hands on practical experience currently, Everything we ship goes into production. It isn't piling any inventory at any place. And I can also again emphasize it is broad. I mean, you read and see a lot about automotive, Peter said, because that is very prominent when it comes to publications, but it is much broader. We have that same surge in demand in our other markets.
So that makes me believe that at least at this point in time, this is not about inventory building. Now certainly, we will continue to watch this very carefully because again, we've seen this We have our controls. We know what to look after, but now is not the time to be worried about that. So we clearly see this demand continuing for a couple of quarters without building unnecessary inventory. The only, I wouldn't say exception, But the one thing specific, which I believe could become a growth trend, which is then nothing wrong, but something to be conscious about, It's possibly the fact that the auto industry will want to have along the supply chain higher inventory levels than they used to have.
Just learning from the current experience and trying to mitigate any future disruptions. That would be building inventory, but it wouldn't be a bubble, but it would be a very conscious and very, say, targeted building of inventory. But again, from anything we can see with our product, this is we are far from this at this point in time, but it could become something which happens maybe later in Great.
Thank you.
Your next question comes from the line of Blayne Curtis with
I just want to
ask on the industrial IoT business. We obviously talked about the auto segment in-depth, obviously, that business seasonality is typically down. You guided it up. I think you have an easy year over year compare, but it still seems up pretty robustly. So maybe you just talk about the drivers within that segment?
Blaine, did I hear you right? Industrial and IoT, is that you asked? Yes. Yes. No, absolutely.
I mean, we are actually quite proud about our performance in Industrial Since even last year, which clearly was a very difficult year for the industry, our industrial business on full year basis did grow by 15% year on year. And as you've seen from the guide, we have the confidence we we continue this. It's really carried by the solution capability made up By the crossover processes, I mean, it's the whole processing portfolio, but specifically, the crossovers are delivering on the promise coupled with our Wi Fi capabilities. And you might have seen just in Q4, we launched Our first and what I think is really an industry leading 2 by 2 Wi Fi 6 solution, which is a result of the Marvell acquisition, but getting this all together into solutions is actually doing what we wanted to see. Now there is one other element with this, which I think is a driver for the growth for NXP, particularly in that segment and that is our exposure to because China left the pandemic from an industrial performance perspective behind them already in the second quarter.
So if you will, China had 3 strong quarters last year, and our industrial business has a quite big exposure to So we've been benefiting from this, and we see this continuing into this year.
Thanks. And maybe as a follow-up to that, could you just talk around the supply side? Is this a segment that you're also being impacted by tightness? And any kind of view on kind of lead times within that segment?
It's across the board, Blaine. So yes, we are also impacted by the tightness of supply in our industrial business. I can't really talk about lead times because it really differs. I mean, we have a number of products with very normal lead times, but we have a couple of products with 52 weeks lead time. So there is not one answer to this question.
The only thing I can say is that, yes, industrial is also impacted by the tightness of supply.
Thank you.
Thank you I think that
would be our last call. Maybe pass it over to Kurt.
Thank you. And I would now like to turn the call back over to Receivers, please go ahead.
Yes, thanks very much, operator. Yes, I think in summary, it is fair say that if we just for a minute look back to last year, last year has really been a year with 2 phases, a very grim and very difficult year in the first half and then a definitely faster than anticipated recovery in the second half. It is fair to say that we believe it's only the start of the recovery. This will continue through the calendar year 2021. And We see that our specific end market focus of NXP with a lot of strength in automotive, with a lot of very specific strength in the mobile and in industrial and IoT gives us actually a very good opportunity to benefit from this continuing recovery into this calendar year.
The one segment we've certainly been less happy with is the Comms Intra segment as we discussed. But also there, given the new product introduction in Gallium Nitride, we are optimistic on the second half of the year, which is a strong driver for our mix when you think about our margin targets. And with that, I thank you all for dialing into the call. And most of all, please all stay safe and stay healthy. Thank you very much.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation