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NXP Semiconductors N.V. (NASDAQ:NXPI)
Q2 2020 Earnings Call
Jul 28, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Q2 2020 NXP Semiconductors Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct question-and-answer session and instructions will follow at that time.

[Operator Instructions]

As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Jeff Palmer. Thank you. Please go ahead.

Jeff Palmer -- Investor Relations

Thank you, Jerome, and good morning, good afternoon, everyone. We hope you're all safe and healthy. Welcome to the NXP Semiconductors' second quarter 2020 earnings call. With me on the call today is Kurt Sievers, NXP's CEO and President, and Peter Kelly, our CFO.

The call today is being recorded and will be available for replay from our corporate website. The 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 third quarter of 2020.

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 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 the reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our second 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.

I'd now like to turn the call over to Kurt.

Kurt Sievers -- President and Chief Executive Officer

Thanks very much, Jeff, and good morning or good afternoon, everyone. We really appreciate you joining the call today.

Now, let me turn to our results. Our Q2 revenue was modestly better than the midpoint of our original guidance. Our Automotive business was significantly impacted by the COVID-19-caused factory shutdowns of our customers, though we did experience better-than-anticipated trends and sequential growth in all of our other end markets. We are encouraged by the positive trends we experienced in China and the sales out of our distribution channel did improve sequentially. Taken together, NXP delivered revenue of $1.82 billion, $17 million above the midpoint of our original guidance range.

Non-GAAP operating margin was 20.7%, about 170 basis points above the midpoint of guidance. We experienced slightly higher revenue with a higher proportion of distribution channel sales, we did deliver better gross margin because of a positive product sales mix, and all of this combined with tight control of our operating expenses resulted in better-than-expected operating profitability.

Now turning to the specific trends in our focused end markets. In automotive, revenue was $674 million, down 35% versus the year-ago period and showing a 32% sequential decline. In industrial & IoT, revenue was $435 million, up 12% versus the year-ago period and up 16% sequentially. In mobile, revenue was $255 million, down 14% versus the year-ago period, up 3% sequentially. And please note, the year-on-year comparison in mobile was impacted by the sale of the voice and audio business. And lastly, communication, infrastructure & other revenue was $453 million, down 9% year-on-year and up 12% sequentially.

Now before I'm turning to the specifics of our Q3 expectations, I'd like to make a few important comments. Our revenue guidance range for Q3 is again wider than normal. However, we believe the set up is gradually more positive, heading into the second half of the year. And this is thanks to customer traction with NXP-specific drivers, including automotive radar, wireless connectivity, our crossover processors, our secure ultrawidebands, just to name a few. And furthermore, we do see an ongoing stabilization of our end markets.

However, at the same time, we want to balance our enthusiasm as we continue to view the broader demand environment as fluid, given the COVID-19 pandemic. It is too early to make a broad statement regarding a complete return to normalized demand or the specifics of the shape of the recovery. As an example, several of the ultimate end customers of our products, especially the automotive OEM customers in Europe, North America and Japan are still running production at below pre-pandemic levels. Therefore, we view the best course of action is to continue to focus on those aspects of our business, which we can directly control. This certainly includes stringent discipline of our distributor channel inventory to maintain our target channel inventory at 2.4 months of supply. And exactly in that lives [Phonetic], we held back about $145 million of shipments to distributors during the past quarter. Additionally, we continue to run our internal factories significantly below normal operating levels, avoiding building excess inventory.

And with that preamble, we are guiding Q3 revenue at $2 billion, down about 12% versus Q3 '19. And from a sequential perspective, this represents an increase of about 10% at the midpoint versus the prior quarter. At the midpoint, we anticipate the following trends in our businesses.

Automotive is expected to be down in the low 20% range versus Q3 '19 and up about 20% versus Q2 '20. Industrial & IoT is expected to be up in the mid-teens range versus Q3 '19 and is expected to be up in the mid-teens range versus Q2 '20. Mobile is expected to be down in the low-teens range versus Q3 '19. Again, the year-on-year trends are being impacted by the sale of the voice and audio business. On a sequential basis, mobile is expected to be up about 10% versus Q2 '20. And finally, communication infrastructure & other is expected to be down in the low-teens range versus Q3 '19 and down in the upper-single-digit range versus Q2 '20.

Now, let me summarize. We will be laser focused on what we can control and we will continue to navigate an uncertain demand environment. Clearly, our number one priority is to assure the health and safety of all of our NXP team members, while at the same time facilitating the best possible business continuity with a customer focus on supply chain and R&D execution. We don't have any unique insights as to when this challenging period will subside, but we continue to have ample financial liquidity and strength to weather the current environment. And we maintain all the critical investments in areas that will assure NXP's long-term success in its chosen strategy, while we actively and continuously review all areas of discretionary spending.

Our focused investments in leading-edge new products and deep customer engagements in fast-growing segments such as automotive ADAS and electrification, secure connected edge processing for the IoT and our secure ultrawideband are all very, very durable, and we do continue to enjoy significant design win traction. We are committed to the consistent execution of our long-term strategy and continue to be deeply engaged and sharply focused on enabling our customers' success.

And now, I would like to pass the call to Peter for a review of our financial performance, before we turn to all of your questions. So, Peter?

Peter Kelly -- Executive Vice President and Chief Financial Officer

Thanks, Kurt, and good morning to everyone on today's call. As Kurt has already covered the drivers of the revenue during the quarter and provided our revenue outlook for the third quarter, I'll move to the financial highlights.

In summary, our second quarter revenue performance in total was a little better than planned. Our industrial & IoT end market along with comm and infrastructure have showed significant strength. Our shipments into the mobile end market were about where we planned, and our automotive revenue was significantly weaker than planned as OEMs and Tier 1 suppliers in Europe, North America and Japan closed their factory for extended periods. You will note our proportion of sales through distribution versus direct was significantly higher, reaching a record 58%, given the strength in China and the weakness in automotive, which is more of a direct business end market.

So, moving to the details of the second quarter. Total revenue was $1.82 billion, down 18% year-on-year and $17 million above the midpoint of our guidance. We generated $892 million in non-GAAP gross profit and reported a non-GAAP gross margin of 49.1%, down 420 basis points year-on-year and 110 basis points above the midpoint of guidance. Gross margins were better than expected because of the mix swing toward distribution and an overall richer product mix.

Total non-GAAP operating expenses were $516 million, down $25 million year-on-year and better by $29 million from the first quarter. This was $7 million better than the midpoint of our guidance because of lower payroll expense. From a total operating profit perspective, non-GAAP operating profit was $376 million and non-GAAP operating margin was 20.7%, down about 820 basis points year-on-year, but 170 basis points higher than guidance due to better gross margin and lower operating expense.

Non-GAAP financial expense was $92 million, which was $10 million higher than guidance because of the new $2 billion debt issuance we undertook during the quarter. Cash taxes for ongoing operations were $16 million and non-controlling interests were $5 million, slightly better on a combined basis than our guidance. Stock-based compensation, which is not included in our non-GAAP earnings, was $105 million.

Now, I'd like to turn to the changes in our cash and debt. Our total debt at the end of the second quarter was $9.35 billion, up about $2 billion sequentially and our ending cash position was $3.27 billion, up $2.2 billion because of the debt issuance and cash generation during the quarter. Net debt was slightly better at $6.09 billion [Phonetic] and we exited the quarter with a trailing 12-month adjusted EBITDA of $2.8 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of the second quarter was 2.2 times and our non-GAAP trailing 12-month adjusted EBITDA net interest coverage was 8.5 times. We continue to have a strong balance sheet and excellent liquidity.

The response to the recent debt issuance was truly phenomenal. The offering was structured in three tranches, a $500 million five-year note, a $500 million seven-year note, and a $1 billion 10-year green bond. The offering was 11 times oversubscribed and we were very excited that we were one of a very small number of tech companies to have successfully made a green offering. During the second quarter, we paid $105 million in cash dividends. And as we noted last quarter, until our leverage returns to our two times target, we have temporarily suspended buybacks, though we will maintain our quarterly dividend.

Turning to working capital metrics. Days of inventory was 120 days, an increase of seven days sequentially as revenue levels declined. But on a dollar basis, inventory was flat sequentially. We continue to closely manage our distribution channel with inventory in the channel at 2.4 months, well within our long-term targets. And we held back about $145 million of orders into distribution to assure our channel inventory metrics remain within our target range. I'm very proud of how the team has managed both owned and channel inventory. Days receivable were 24 days, down four days sequentially. Days payable were 71 days, a decrease of 12 days versus the prior quarter. And taken together, our cash conversion cycle was 73 days, an increase of 15 days versus the prior quarter.

Cash flow from operations was $414 million and net capex was $74 million, resulting in non-GAAP free cash flow of $340 million, a testament to the strong cash flow generating capability of the business even in a challenging period.

Turning to our expectations for the third quarter. As Kurt mentioned, we anticipate Q3 revenue to be about $2 billion, plus or minus about $100 million. Again a wider range than normal, considering the uncertain environment we are navigating. At the midpoint, this is down about 12% year-on-year, while up 10% sequentially. We expect non-GAAP gross margin to be about 49%, plus or minus 100 basis points. Operating expenses are expected to be about $535 million, plus or minus about $10 million. And taken together, we see non-GAAP operating margin to be about 22%, plus or minus about 180 basis points. We estimate non-GAAP financial expense to be about $98 million and anticipate cash tax related to ongoing operations to be about $34 million. Non-controlling interest will be about $3 million.

Finally, I have a few closing comments I'd like to make. Our gross margin guidance, with Q3 remains flat on Q2. With revenue of 10% sequentially, we see some benefit from the additional volume, but this is offset by our product mix which will be less robust than in Q3 as compared to Q2. And secondly, the continued effects of a very low factory utilization as we manage our inventory levels. As the global economy starts to correct itself and our revenue accelerates, we see no reason why we cannot hit our 55% gross margin target at the $2.4 billion quarterly revenue level.

In terms of operating expense, the guidance of $535 million is not a new normal, but is a constraint number reflecting the stringent expense controls we've imposed on the organization. The actions taken include the elimination of annual merit increases in incentives and effective hiring freeze including replacements, as well as salary cuts for executives. Clearly, although these are the right things to do in the short term, they're not sustainable in the medium term. And you should assume a more normal level of opex in 2021 to be about $575 million a quarter depending on seasonal influences. When our revenue returns to a more normal level, we would expect our operating expenses to reflect our long-term model of 16% R&D and 7% SG&A.

Lastly, we are proactively driving down our internal inventory levels. Our long-term target is 95 days and aimed to achieve about a 100-day level exiting the third quarter. This will clearly impact our factory utilization. Finally, these are very difficult times. Kurt and I would like to thank all of our colleagues around the world for their commitment to NXP and for doing the right thing for our customers. The current period is unprecedented. It is extremely difficult, but over the long run, NXP has the right strategy, is in the right markets, and has the right products to continue to win.

Now, I'd like to turn to your questions. Operator?

Questions and Answers:

Operator

[Operator Instructions]

Your first question comes from the line of John Pitzer with Credit Suisse. You may now ask your question.

John Pitzer -- Credit Suisse -- Analyst

Yeah guys, thanks for letting me ask the questions. Congratulations on the solid results, given the challenging environment. Kurt, I guess, as we look at the company, as you mentioned in your preamble, there's a lot of company-specific drivers. And I guess I want to try to get a better understanding. When you look at the auto growth that you expect in the calendar third quarter, to what extent is that coming from the growth areas of the business versus the more mature parts of the auto busines?

And a similar question on the industrial, IoT, great sequential growth in the June quarter. You're guiding for that to sustain in the September quarter. I'm just kind of curious to what extent is this the benefits you're getting of taking that Marvell asset and running it through kind of your stronger distribution channel?

Kurt Sievers -- President and Chief Executive Officer

Yeah. Thanks, John, good morning. First of all, a lot of good questions. Let me, maybe start with saying because it really holds both for auto and industrial IoT, that indeed it all looks like that Q2 was the trough and now we are moving up from here. And the moving up is indeed a mix of company-specific growth in both segments by the way, in auto and in industrial IoT. And obviously, also recovery of the markets. In industrial & IoT, very, very clearly -- and I think we did also a press release on this, the Wi-Fi 6 portfolio from Marvell, which we launched in April, is actually helping.

We have also now successfully integrated the Wi-Fi portfolio into our microcontroller and applications processor software development kits, which makes it really easy for customers. So yes, we do see early traction from that combination. So, it is a factor in the continued very nice growth in industrial & IoT. Clearly, industrial IoT driver [Phonetic] has another strong sector which is China, so that the good growth in Q2 in industrial & IoT has been carried largely from a Chinese footprint perspective and that also continues into Q3.

Now, in auto, things are a little bit different. In auto, clearly Q2 was completely abnormal, since we have these factory shutdowns specifically from the OEMs in Europe and the US. And as we explained in the last call, we really wanted to make sure that we wouldn't create too much excess inventory at our customers, not only at distribution, but also at the direct customers. And that's actually the reason why the business has decreased more than we would have anticipated, but we just didn't want to follow any excess inventory building. But now, this is nicely returning. So, we see pretty good momentum in auto actually into Q3. And it is indeed a mix between OEMs and Tier 1s getting back to production. So, we assume that by the end of Q3, production levels across the world in automotive should be back to 80% of the pre-pandemic period. So, that's a pretty solid return through Q3, but it's also that radar and our cluster business, it just gets teamed again [Phonetic] with new design wins, which are taking traction.

John Pitzer -- Credit Suisse -- Analyst

That's helpful. And then as a quick follow-up for Peter, just on the gross margin line, you're guiding for good sequential growth in the calendar third quarter, but you also mentioned that you're trying to keep a cap on inventory build. I'm kind of curious as to what that means for utilization in Q2 and in Q3. And then just remind us, most of what you make are shipped this quarter you made last quarter. So, is the utilization impact that if you get a benefit in Q3 -- is that really going to show up in Q3 gross margin or how do we think about Q4 gross margin?

Peter Kelly -- Executive Vice President and Chief Financial Officer

Okay. Several questions. So first of all, utilization in Q3 is about -- on average about 400 basis points lower than Q2. So, clearly that has an impact. And I'm trying to take about to go from 120 days to 100 days, I think it's about kind of $70 million of inventory out of the system. So, one of the reasons utilization is down is we're shipping from inventory to keep it under control. Utilization is running about, I think about 50%, maybe a little less. We do have this rule -- accounting rule that when, and it's a little bit complicated because we do it by factory and it's six months trailing utilization, but when utilization is below 70%, we accelerate the fixed cost writedown. So, both Q2 and Q3 suffer from an accelerated fixed cost writedown, in that you don't carry it forward through inventory.

But on the other hand, assuming Q4 is OK and utilization starts to come up a little bit, even if it doesn't get to the 70% level, which we probably won't, we'd expect to see some small benefit, and as time goes on, we'll be able to put more and more of the fixed cost into inventory. So, typically, utilization in the current quarter impacts the next quarter, but in the current environment, because utilization is so low, you take a hit, not all it, but you take most of it in the current quarter.

Operator

Your next question comes from the line of Vivek Arya with Bank of America Securities. You may now ask your question.

Vivek Arya -- Bank of America Securities -- Analyst

Thanks for taking my question. Kurt, just one follow-up on the auto segment. I think you mentioned at the end of Q3, production levels will be back to 80%, I believe, you said off their normal trend. But when I look at your automotive sales at the $800 million guidance, I think that will be up to 70% of its prior peak. And I understand these things are not always coincident. But I'm curious, how do you look at the unit and the content recovery from here? Because this year, we all understand it's tough. When I look at some of the IHS forecasts for next year, they are looking at auto units perhaps being up double digit, and I know the visibility is low. But if they are up double digits, what does that conceptually say about your orders business, given the trend that you have seen so far play out this year?

Kurt Sievers -- President and Chief Executive Officer

Yeah, Vivek. Let me first of all comment to the current quarter, I would say, so the past two quarters and the next quarter, that is actually all pretty much in check. So according to IHS, the car production in Q1 was down year-on-year 22%. Our business was only down 4%. In Q2, car production according to IHS was down year-on-year 45%. We were down as at just announced 35%. So we've been doing really a lot better in these first two quarters. Now I don't claim this is all market share gains or something, but part of this is indeed, some inventory they've been building in the first half, like always, which will come down in the second half. But actually not too much, which is why I think latest mid through end Q3, we should be totally in balance again, such that the 80% car production at the end of Q3 is, I think that has a reasonable hit with our revenues, if you think about the fact that in Q1 and Q2, we've actually grown well, well ahead of the car production.

Now a little bit more bigger picture, Vivek. So first of all, yes, I definitely believe the algorithm, which we've spoken about, that the semiconductor auto market should be like 3% to 4% ahead of SAR. We think that absolutely holds, also through this pandemic and out of the pandemic. And our target to outgrow that by 1.5 times also stands. Now I don't know what the car production next year is exactly going to do, IHS, actually, I think there's something like, I think, 13% or 14% growth. And yeah, with the algorithm, Vivek, we should be then nicely growing ahead of this in our business. So it doesn't work by the quarter, but over a year or year or two, it absolutely stands. And I mean I also haven't -- I haven't really seen a lot of massive platform delays or something. So I believe the new wins we have in our growth areas are all-in tax and also come on time. So I have, say, a relatively solid portion of optimism when I think about automotive for the second half of this year, but then certainly going into next year.

Vivek Arya -- Bank of America Securities -- Analyst

Got it, very helpful. And then, Kurt, for my follow-up, comms infrastructure is interestingly now your second largest business after autos. And I imagine one of your more profitable or perhaps the most profitable business, which is why I think you are -- I think, Peter, you mentioned about that mix effect going into Q3. I'm curious, how do you think about the growth prospects and leverage to 5G? Because when I recall back to the Analyst Day, I think this was supposed to be a segment with kind of more modest growth prospects versus others. So how do you think about the leverage to 5G? When will you start to see those benefits? Because we are seeing very strong global deployments of 5G. So just talk to us about comms infrastructure, just because it's now such a large segment for you and obviously an important contributor to your gross margins. Thank you.

Kurt Sievers -- President and Chief Executive Officer

So, it's certainly a large and important segment, but I mean the relative size to the others, obviously, in this abnormal period is really every quarter. So I mean it's kind of, Q2 certainly wasn't a normal quarter from a revenue split perspective. But anyhow, going forward, clearly the 5G deployment is a key factor. But not everything is shiny, Vivek, to be fair. So the one thing is that, clearly, you know there is one large Chinese company, which is a big carrier of the Chinese deployments. And nobody really knows what the export control regulations will do relative to this customer. So I mean, that's at least one factor on the horizon, where we always have to be a bit, say, cautious instead of being overly optimistic. And the other one is that, more recently, we are working on our gallium nitride product, as you know, which has higher output powers, which is actually very, very attractive across the customer base. The only issue is that we are late relative to the demand. So, I wish we had a faster expansion of our capacity, so we have a little bit of a delay here against the demand, which causes us, I'd say, some delay against the opportunity. But overall, I'm absolutely with you. We have a very, very strong position here across LDMOS all the way through gallium nitride to silicon germanium in that space. But the market bumpy. It has always been bumpy, and it remains bumpy for the factors I've just quoted.

Operator

Your next question comes from the line of Stacy Rasgon with Bernstein Research. You may now ask your question.

Stacy Rasgon -- Bernstein Research -- Analyst

Hi, guys. Thanks for taking my question. I wanted to ask about the commentary in your release where it said, improved -- expectations for improved sales trends through the second half of the year. I want to know does that actually imply that you do see Q4 growing sequentially off of Q3? And if so, can you give us some feeling for what end markets might be driving that?

Kurt Sievers -- President and Chief Executive Officer

Well typically Stacy, good morning. Clearly we only guide for next score and that next quarter is a 10% sequential growth. And yes, I made this statement. So what I would say is, we see no reason why Q4 should not be growing over Q3. And the one I would call out, which is probably pulling this the most is going to be automotive.

Stacy Rasgon -- Bernstein Research -- Analyst

Got it. Thank you. For my follow-up, I wanted to ask about the industrial strength. A lot of companies have been seeing relatively strong traction in this market in the wake of the pandemic, but there's also been some concerns around potential customer overbuilt and [Indecipherable]. I know you've been trying to be cautious, not just with your distribution [Phonetic] channel, but also with some of your customers, maybe that was more in auto, but maybe also with industrial to try to reduce their own demand forecasts, to try to control that. Just, what are you doing along those lines and how confident are you with the industrial upside that we're seeing right now actually is sustainable versus just being pulled forward?

Kurt Sievers -- President and Chief Executive Officer

Yeah, thanks, Stacy. That's a good question indeed, because I believe, especially in the current environment, this is a very, very important part of the controls, which we can execute on our business. And the distribution inventory is indeed the most relevant factor in our industry and IoT business, because a large portion of that business is actually going through distribution. And as we've spoken about a lot of times, we remain super disciplined on the two and half months, actually we had a score again of 2.4 months of inventory in the last quarter. And I think I said in my prepared remarks that we could have shipped $145 million more in this last quarter. And a solid part of that would probably have been in Industrial and IoT. And this is our way to make sure that we don't over ship into this market. So my -- to anything, we can see, which I know I say through the distribution controls on the inventory, which we have enhanced, we have a pretty good handle on this. There isn't that much direct business in industrial for us.

Operator

Your next question comes from the line of Craig Hettenbach with Morgan Stanley. You may now ask your question.

Craig Hettenbach -- Morgan Stanley -- Analyst

Yes, thank you. Question for Kurt, just on ultrawideband. Can you talk about the breadth of design activity? And how do you see kind of your exposure in the next couple of quarters in autos versus smartphones?

Kurt Sievers -- President and Chief Executive Officer

Yeah, thanks, Craig. That's -- I'm glad you are asking. I definitely believe we are very, very much on track with building the ecosystem in ultrawideband across mobile and auto. And I think we had kind of signposted now for a year already, that this year, in 2020, we would get started in a more material way in mobile, and that is indeed one of the factors which is driving our sequential growth in mobile into Q3. And I mean, let me say that much, it's a flagship product in an Android space company, which is ramping with our ultrawideband. So from a revenue and unit perspective, clearly mobile is now outpacing automotive to start with, but it's been planned that way, because we first have to roll out the mobile ecosystem and then the secure car access -- mobile secure car access application is going to follow in the next year. We are shipping already very small amounts of ultrawideband into automotive today, but it's still coming in the more conventional or traditional form factor of a key fob. So it's a more secure way of doing car access. But with Android now going out in a larger scale in mobile, we will have and we'll see this also with auto OEMs next year in car access.

Craig Hettenbach -- Morgan Stanley -- Analyst

Got it, thanks. And just as a follow-up on industrial, I know the Marvell connectivity business had a lot of industrial exposure. So can you just talk to some of the strength you're seeing in industrial, how much of that is perhaps that legacy NXP business versus the impact of just Marvell starting to kind of ramp with you?

Kurt Sievers -- President and Chief Executive Officer

Peter or Jeff, I think you can dissect at least in a very rough way the Marvell from our original industrial business. But let me first of all say, Craig, it is really the combination, which makes the difference, because we do leverage our leading position in apps processes and MCUs to pull through the connectivity. So, it becomes more and more difficult actually to talk about the two things in a separate way, because they are just getting more and more combined going forward.

Peter Kelly -- Executive Vice President and Chief Financial Officer

Yeah, Kurt, I guess, I'll take that. So, Craig, as you know, we're not going to break out Marvell individually every quarter, but I will say in Q2, the Marvell WiFi business was a not quite a double-digit percentage of the overall industrial business, but it was a very high kind of single, low double-digit percentage of the overall industrial & IoT business, just within that one end market, but we're not going to break out Marvell in aggregate.

Operator

Your next question comes from the line of Ross Seymore with DB. You may now ask your question.

Ross Seymore -- DB -- Analyst

Thanks, guys. So let me ask the question. I wanted to ask the first one on the inventory side of things, and this might go into the spirit of leaving no good deed unpunished. But I just want to think about how you look at inventory strategically and how your customers are considering it. And the real question is, some of your competitors are seemingly going the exact opposite way of you, running much higher inventory, making sure channel inventory is ready for a rebound, etc. So I guess, what are we going to have to see to get you to let that either $150 million in the first quarter or $145 million in the second quarter in bookings actually flow through, and I guess, related to that internally, once you hit that 100 days, is that when the utilization will start to creep up and your inventory burn internally will stop?

Kurt Sievers -- President and Chief Executive Officer

Hey, Ross, good morning. Let me take the more strategic perspective first. I think compared to those who you are quoting, who will tell you the exact opposite has a different business model. This is more about catalog product companies, there the majority of our product is really application and/or customer deal specifics, which means, in our case, we just don't need to hold more inventory because we have a fairly good visibility into the specific applications at our customers and the associated run rates. So we continue to believe that the two and half months of inventory and distribution is about the right number for us. And we are very, very sure we will not miss a beat or not miss any uptick by following this strategy.

Now, Peter, maybe over to you relative to the hundreds or better [Indecipherable] in Q3?

Peter Kelly -- Executive Vice President and Chief Financial Officer

And just to add a little bit to that, Ross, we will ship the $150 million, when the distributors start shipping their product to their end customers. At the moment, the reason we don't ship the $150 million is that they order more than they can ship and we're not willing to let them have more than two and half months, because we have pretty sophisticated model just by -- by type of product.

In terms of the internal inventory, our goal is to go down to 95 days. Utilization will start to increase when revenue starts to increase. So, on flat revenue, flat utilized -- flat revenue flat inventory, you'd see utilization to be relatively flat. Flat inventory increasing revenue, you'd see utilization start to increase. So, it's pretty straightforward. It's all about the more we ship, the better the utilization gets.

Ross Seymore -- DB -- Analyst

Great, thanks for that. And I guess as my follow-up on the opex side, I know there is specific math we can do on the $575 million and what percentage of revenues that would be, but to the extent you have the framework, Peter, about the gross margin being 55% that $2.4 billion, your commentary about the opex getting up to kind of a $575 million level on a quarterly basis. Any sort of framework about the relationship on that to your visibility on revenues, your assumptions, etc.? And how much you might turn that up or down relative to how the revenue trajectory improves or doesn't at that time?

Peter Kelly -- Executive Vice President and Chief Financial Officer

Yeah, that's a great question, Ross. So, what -- one of the things that Kurt was saying before is we think Q2 was the weakest revenue number of 2020. We think the second half will be stronger than the first half and we think '21 will be better than 2020. So, within that context, we think we have the right products, we're making the right investments, and we're going to win in our markets. So, we have no plans to reduce our investment, and this year, we've taken some short-term actions that I mentioned like reducing sort of basically eliminating pay rises and incentive payments and cut on executive summaries. And, at least the first two of those are not maintainable as you go into next year, so it will add to our cost. But our assumption is, maybe not completely in the first and second quarter, but we can afford this level of opex because of what we think the revenue will do. Now, we've -- if there is a huge second wave or something, then maybe we change our view on that, but although we didn't see a V-shaped recovery from Q2 into Q3, we don't think 2021 is a complete write-off. So, is that helpful? Did that give you the context?

Operator

Your next question comes from the line of C.J. Muse with Evercore. You may now ask your question.

C.J. Muse -- Evercore -- Analyst

Yeah, good morning, good afternoon, and thank you for taking my question. I guess a follow-up question on the gross margin side. So you're effectively telling us that between $2 billion and $2.4 billion, you should see 85% incremental gross margin. So curious, should that be ratable as you progress?

Peter Kelly -- Executive Vice President and Chief Financial Officer

We don't say that. What we do -- what we've said is you have a model that we think is reasonable of a 5% in change in revenue gives you about 200 basis points of margin -- sorry, gives you a 100 basis points of margin. So that's the kind of plus or minus the $2.3 billion level. There is a couple of other things that go on. Our fixed costs at that level are about 35%. So, if you do the math, that's about $400 million, maybe a little bit more million dollars a quarter. So, at a much lower level of revenue, your fixed costs are higher. So, you do get some higher pull throughs at very, very low levels, both directions, but you have to be able to do the calculation. It's certainly not ratable.

C.J. Muse -- Evercore -- Analyst

Okay. And would you expect it to be concurrent with utilization increase or would it be one quarter delayed?

Kurt Sievers -- President and Chief Executive Officer

Well, I think -- it's a great question. Okay. So up to 70%, we'd expect -- until utilization is 70%, any improvement in utilization will kind of benefit us in the current -- won't benefit us really in the current quarter. You see a big benefit once you go to 70% because you start to carry some of the fixed cost forward. But it's still by factory, so it's kind of hard to give you a real line when we're operating the way we are at the moment.

C.J. Muse -- Evercore -- Analyst

Okay, that's helpful. And then, as my follow-up, in your prepared remarks, you talked about being encouraged by some of your wins, radar, wireless, crossover processors, secure UWB. If you had to really highlight what is driving your conviction on growth in the back half, what would it be within that construct clearly with the addition of macro improvements as well?

Kurt Sievers -- President and Chief Executive Officer

Yeah, I'd say, if I had to pick two for the second half, then it's probably the automotive radar and the wireless connectivity.

C.J. Muse -- Evercore -- Analyst

Great, thank you.

Operator

Your next question comes from the line of William Stein with SunTrust. You may now ask your question.

William Stein -- SunTrust -- Analyst

Great, thanks for taking my questions, and good morning, everyone. First, Kurt, there is a couple of areas in automotive that you haven't highlighted that one of which I think is already ramping and another one is more of a future. But I think we'd love to hear an update on the battery management systems progress and also the S32G network processor, any design win traction to talk of there? And then, I do have a follow-up, if I can.

Kurt Sievers -- President and Chief Executive Officer

Yeah. Thanks, Bill. Absolutely. And by the way, I hope mentioning them doesn't mean that they don't do what they should do. So, the battery management is actually very, very nicely on track, especially this year since -- in the meantime, I think it's fair to say it all looks like that the pandemic, as unfortunate as it is, but it seems to further push the share of electrification. So just from a run rate perspective, from a new model launch perspective, it all looks like that electric drivetrains are benefiting from the pandemic over the next period of time. And given our very, very strong position with the leading European OEM as you know, and I would say very nicely growing position with a lot of different customers especially in China, we are enjoying that very much. So, I'd say very much on track.

I was actually surprised you didn't ask one question in that context, which is the combination of ADI and Maxim as a competitor, but let me just mention it here, because it all looks like that our superior value proposition of a system approach, including the micro is again something which is matched by the deal as it looks to us. So, very nicely on track.

The other one you mentioned is the S32G. So that's the 16 FinFET-based gateway processor. On track, launching and ramping in production next year. I just have to hold your horses a little bit. The very likely in the next maybe three or four months, we're going to come out with a press release with a pretty prominent customer, which is going to give you then further evidence, where and in which model and with which volume the solution is going to ramp. I mean it's a much broader basis, but there is one very prominent one, which I hope we can actually announce in the coming period.

William Stein -- SunTrust -- Analyst

Great. I appreciate that. And if I can get a follow-up perhaps with Peter. A lot of companies have raised capital to improve liquidity in sort of the March, April timeframe perhaps as NXP did. Some of them have since sort of reverted back and repaid some debt to -- perhaps consider that, maybe that level liquidity is no longer needed. Is NXP contemplating this? Are you planning to run at the elevated liquidity level for a while? Thank you.

Peter Kelly -- Executive Vice President and Chief Financial Officer

Yeah, to be honest, irrespective of the COVID crisis, I would have gone out and taken that debt anyway, because it's to pay down the 2021, it's about $1.4 billion note. So, in the coming months, when we think it's the right time, we'll pay it down. But it was always a planned to use it for that and a little bit of the 2022. So that's what we'll use it for.

William Stein -- SunTrust -- Analyst

Got it. Thank you.

Operator

Your next question comes from the line of Toshiya Hari with Goldman Sachs. You may now ask your question.

Toshiya Hari -- Goldman Sachs -- Analyst

Good morning, and thanks very much for taking the question. I wanted to ask on the mobile business. Obviously, you guys are operating in a fairly challenging environment with smartphone units declining strong double digits. You do seem to be outperforming the market. I guess, if you can speak to what you're seeing from a mobile wallet adoption perspective, that will be very helpful, and if you can speak to your opportunity set as it relates to ultrawideband going into the second half and more importantly into 2021, that will be helpful as well. And then, I've got a quick follow-up. Thank you.

Kurt Sievers -- President and Chief Executive Officer

Yeah, thanks for the question. Great question. Indeed, we also see and believe we are outgrowing and indeed this is very much about content and attachment rates rather than mobile unit run rates. The two key drivers for growth going into the third quarter and the second half in mobile is indeed ultrawidebands as I briefly mentioned before. But it's also inside the mobile wallet. With one of our very leading customers in that space, we have actually a change of the system architecture. And that change impacts the silicon dollar content, which we are shipping into the solution. It's actually nicely growing with that change. So, the growth -- the sequential growth, which you are seeing is the new addition of ultrawidebands and it is a higher content of silicon in the mobile wallet. And thirdly, it is the attached rate of mobile wallets per se, which is going up. And that was the other part of your question.

So the mobile wallet attach rates are on track to the 50% mark in the next year and maybe a little bit more anecdotally at this point. But it feels to us that the pandemic is giving also a boost to contactless payments in those countries on the globe, where there has been a much lower attachment rate so far, because people haven't really accepted it yet. So, it is actually another one, which seems to be and it's a bit early to make that call too firm. But they seem to be also helped by the pandemic. So, three drivers in mobile, higher silicon content in the solution for the mobile wallet, the attach rate of the wallet going up, and thirdly, ultrawidebands.

Toshiya Hari -- Goldman Sachs -- Analyst

Great. And then as my follow-up, I wanted to ask on the competitive landscape. Kurt, I think you guys have in the past talked about NXP potentially being a beneficiary of the US-China trade tensions. I realize share gains take a long time, probably take years in your business. But from a customer engagement perspective, are you seeing any change for the better for NXP? Thank you.

Kurt Sievers -- President and Chief Executive Officer

Yeah, it keeps being a door opener very clearly. So, we are seen as a European company. We are a European company in doing business with China and that is definitely a positive lever into engagements. So, as you said, I mean, even in fast-moving markets, design wins takes time, but it is clearly a positive for us. Yes.

Operator

Your next question comes from the line of Blayne Curtis with Barclays. You may now ask your question.

Tom O'Malley -- Barclays Capital -- Analyst

Hey, guys, this is Tom O'Malley on for Blayne Curtis. I just wanted to ask quickly on competition in UWB. Apple has their own. In Android, do you see anyone entering the market or any increasing competition there or is this really just a discussion of attach rates going forward?

Kurt Sievers -- President and Chief Executive Officer

Hi, Tom. Great question. I think, ultrawidebands across ecosystems is very, very much of a deep system play. Though it is not about this one RFIC, it is actually about the combination of the RFIC, a secure element. So in all the applications, which we are starting to ship now, it always comes together with the hardware secure elements and the associated software. So, that triangle combination of software, hardware secure elements and RFIC, that is actually what gives us the differentiation, and which I believe is also a pretty high hurdle for competitors.

So, if you only look at it from an RFIC perspective, it's probably not such a big deal over many years to make a competitive product, but for the whole solution to be shipped, it's a big deal and that's where we have to lead.

Tom O'Malley -- Barclays Capital -- Analyst

Great, that's helpful. And then just a broader one, following up on John's question earlier and early in your prepared remarks, you called out China specifically. Obviously, I assume a portion of that is the automotive coming back, I mean, some industrial as well, but could you kind of size where that benefit came in? Was it more on the auto side or more on the industrial IoT side?

Kurt Sievers -- President and Chief Executive Officer

Well, from a -- are you asking for Q2 or for the guidance into Q3?

Tom O'Malley -- Barclays Capital -- Analyst

Both would be helpful, but you made the comment, I think on Q2 and going into Q3. So, whatever you can give on both.

Kurt Sievers -- President and Chief Executive Officer

Okay. (Speech Overlap)

Clearly on Q2, China was a big factor across the board, and that's simply because the pandemic, I mean, it has had like a phased shift. So, China has seen the biggest impact from the pandemic in Q1 already and then a pretty good recovery in Q2, while Europe and the US have been essentially shut down for the earlier part of Q2. Now, if you go into Q3, it is actually more broad based. So, the auto recovery, for example, the 20% quarter-on-quarter, that's not just China. I mean, this is really across the board. So, we do see auto recovering especially, I would say, from a sequential perspective in US, in Europe, and also starting in Japan, because those are the places where the shutdowns were in Q2.

Tom O'Malley -- Barclays Capital -- Analyst

Thanks a lot.

Jeff Palmer -- Investor Relations

Operator, we have time for probably one more question today.

Operator

All right. Your last question comes from the line of Chris Caso with Raymond James. You may now ask your question.

Chris Caso -- Raymond James -- Analyst

Yes, thank you, good morning. Question is with regard to the buyback, perhaps you could talk about what the plans are there and what would be the criteria for doing some resumption?

Peter Kelly -- Executive Vice President and Chief Financial Officer

Shall I take that?

Kurt Sievers -- President and Chief Executive Officer

Peter, I guess that's for you.

Peter Kelly -- Executive Vice President and Chief Financial Officer

Yeah. We will restart the buyback when we get to a ratio of 2 times net debt to trailing 12 months EBITDA. So, we were around 2.2 in Q2, will be around 2.3, 2.4 in Q3. So, it's going to be a while before we see the buybacks restart again, but it's when our net debt levels have returned to 2 times.

Chris Caso -- Raymond James -- Analyst

Got it. That's clear. Thank you.

Just a follow-up with regard to some of the comments you made about production and getting the utilization back up and getting to your inventory target. Do you have a time frame in mind when -- and obviously this is dependent on demand, but absent a inflection in demand, how long does it take at these utilization rates to get to your inventory targets internally?

Peter Kelly -- Executive Vice President and Chief Financial Officer

Well, we get down to 100 in Q3 and we're trying to get to 95. So, these utilization levels. Assuming revenue is OK, it's pretty easy at this point to get down to 95.

Chris Caso -- Raymond James -- Analyst

Right. So by the end of the year for sure?

Peter Kelly -- Executive Vice President and Chief Financial Officer

Yeah, we think so.

Chris Caso -- Raymond James -- Analyst

Got it, that's helpful. Thank you.

Operator

And I would now like to turn the conference back to the company.

Kurt Sievers -- President and Chief Executive Officer

Great. Thank you. Jerome. Thank you everyone for your interest and your time today. I'm not sure, Kurt, if you have any last moment remarks you'd like to make before we sign off today. Yeah, thanks, Jeff. So, let me thank everybody for your attention today. I think it's indeed a good moment now because it all looks like Q2 was the trough. We do see growth going forward across our businesses, across the regions. And I feel good about this because it is clearly a mix of a recovery of the markets, but at the same time playing out of our company-specific drivers, which is most important for us to win market share going forward.

At the same time, we still treat this very cautiously, which means from an opex spend perspective, from an inventory perspective, from all the factors which are under our direct control, we're going to stay very, very vigilant as we've done over the past periods. And with that, I thank you all and speak to you next time. Thank you.

Jeff Palmer -- Investor Relations

Thank you all.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Jeff Palmer -- Investor Relations

Kurt Sievers -- President and Chief Executive Officer

Peter Kelly -- Executive Vice President and Chief Financial Officer

John Pitzer -- Credit Suisse -- Analyst

Vivek Arya -- Bank of America Securities -- Analyst

Stacy Rasgon -- Bernstein Research -- Analyst

Craig Hettenbach -- Morgan Stanley -- Analyst

Ross Seymore -- DB -- Analyst

C.J. Muse -- Evercore -- Analyst

William Stein -- SunTrust -- Analyst

Toshiya Hari -- Goldman Sachs -- Analyst

Tom O'Malley -- Barclays Capital -- Analyst

Chris Caso -- Raymond James -- Analyst

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