Freescale to Merge with NXP at Top of Game 2015-07-28

Freescale CEO calls M&A Prep with NXP ‘As good as I’ve ever seen’

MADISON, Wis. – In what might become the last quarterly financial call for the company awaiting acquisition by NXP Semiconductors, Freescale Semiconductor delivered strong second-quarter financial results, backed by record-breaking gross margins, operating profits and design wins.

 

During the financial call, Freescale reported strong growth in microcontroller revenues, coming from increased sales of its 32-bit ARM-based microcontroller products into distribution and higher sales of i.MX applications processors. Microcontroller net sales were $291 million in the second quarter, 23% growth compared to the first quarter of this year, and up 18% from the second quarter of 2014.

Describing MCUs as “the most fragmented market,” Lowe explained that they’re used in myriad applications ranging from e-readers to door locks. He attributed the double-digit growth in MCUs over the last few years to “the explosion of smart, connected devices on the market, with our strong product portfolio hitting the ground.” He said, “Geoff Lees [senior vice president and general manager of microcontrollers at Freescale] and his team have done a fantastic job.” Freescale’s two global distributors [Arrow and Avnet] have also played a critical role in bringing in design wins, he added.

Freescale’s RF net sales, which include sales of power amplifiers to the wireless infrastructure market, were $177 million, up 48% compared to the second quarter of 2014, but sequentially down from $184 million in the first quarter of 2015.

Meanwhile, Freescale’s automotive MCU net sales were $305 million, compared to $307 million in the first quarter of 2015 and $308 million in the second quarter of last year. He said the company was hit by declines in worldwide automotive production, particularly in emerging markets. However, the increased use of semiconductors in cars – generated by infotainment systems and larger dashboards, in addition to Advanced Driver Assistance Systems (ADAS) -- has contributed to growth in automotive MCUs, Lowe said.

The company’s analog and sensors net sales grew to $223 million, due to increased vehicle semiconductor content along with sales of analog and sensors sold into distribution and OEM accounts.

Freescale’s net sales declined in the digital networking segment. Its net sales were $184 million, compared to $214 million in the first quarter of 2015 and $291 million in the second quarter of last year.

Looking at the financial results of the first half of 2015, Lowe said that four out of five business segments at Freescale are performing as expected. The company as a whole is growing faster than the average of the semiconductor industry. In the digital networking segment, he expects it to resume growth as its legacy business has leveled off.

China factor
During the financial call, Lowe mentioned China’s economic slowdown, which is affecting parts of Freescale’s business.

As China’s GDP growth forecast goes down from 7.2% in 2015 to 6.25% in 2017, fewer Chinese are buying cars. However, he downplayed the long-term impact, by noting that China’s automotive sales – now around 20 million cars a year – is forecast at 30 to 35 million units a year in the next decade.

Meanwhile, the slowdown of the Freescale’s RF business in China is happening due to an entirely different reason, Lowe said. As the Chinese government clamps down on corruption associated with LTE build-out in China, Freescale is seeing “a pause” in China’s wireless capital expenditure.

Noting that the demand for bandwidth won’t stop, Lowe expects China to resume spending in LTE wireless networks.

Gregg Lowe
Gregg Lowe

 

“The strong execution on gross margins and disciplined operating expense led us to generate record operating cash flow and record free cash flow in the quarter,” said Freescale CEO Gregg Lowe during the financial call.

The merger of NXP and Freescale is expected to close before the year’s end, with regulatory approval currently “on track,” according to Lowe. “It is rare” to see companies merge when both are at the top of their game, he observed during an interview with EE Times. He said, “NXP and Freescale are both performing well, increasing margin and market share.”

Freescale this week got the Marketing Team of the Year of the ACE Awards, sponsored by EE Times and EDN. NXP was named Ace Awards’ Company of the Year; Lowe said these honors “highlight the power of the two companies.”

Freescale’s net sales for the second quarter of 2015 were $1.20 billion, compared to $1.17 billion in the first quarter of 2015 and $1.19 billion in the second quarter of 2014.

The company’s operating earnings for the period were $226 million, compared to $179 million in the first quarter of 2015 and $180 million in the second quarter of 2014.

The Freescale CEO pointed out, in particular, that the company’s Q2 gross margin, 48.1%, is a new record, marking a sequential increase for 10 consecutive quarters. Freescale will have reduced its debt by approximately $1.4 billion since January 2014, he added.

Since Lowe joined Freescale in June 2012, the company set two key goals: to grow revenue to gain shares and to increase gross margins.

Asked what contributed most to Freescale’s transformation, Lowe said, “When the employees are motivated and believe in their mission – top line revenue growth and margin expansion, they make discretionary efforts.”  No matter how little each effort might be, cumulative efforts by each of 17,000 employees at Freescale “could go a long way,” he said. “It’s a big deal.”

Lowe paused a moment and added, “This may all sound a little too fluffy, but I believe in this sort of thing, wholeheartedly.”    

Natural language
Lowe isn’t new to big mergers. When he was at Texas Instruments, he gained first-hand experience with the merger of TI and National Semiconductor. Asked how preparation for the integration of NXP and Freescale teams has been going, Lowe said, “This is as good as I’ve ever seen.”

 

Merging at the top of their game
Merging at the top of their game

 

Acknowledging that any merger causes distractions for employees while uncertainty breeds fear among them, Lowe credited the relatively painless progress to NXP’s decisive actions and the two companies moving quickly. Two leaders from NXP and one from Freescale initially elected to manage the integration process. Each company formed a team of 30 to 35 people dedicated to managing the merger. The companies have already decided who will lead sales and run operations in different regions.  

Lowe added, “In fact, we are having NXP teams in town here in Austin today, holding leadership meetings.” Besides working out mechanical processes, the teams are socializing. “We see these soft things as also very important,” said Lowe.

While Freescale employees don’t speak Dutch, the two companies share “the natural language” of getting things done, said Lowe. The cultures of NXP and Freescale are remarkably compatible as they are both “technology-oriented” and “results-oriented,” he added. 

In early June, both Lowe and NXP CEO Rick Clemmer, along with their automotive teams, visited their largest customers in the auto industry. “Those meetings have gone extremely well,” said Lowe. The future of combining Freescale’s strength in MCUs with NXP’s expertise in identification and security is deemed extremely critical by carmakers, especially to prevent hackers from penetrating vehicles.