Will Chip King NXP Semiconductors Cash In On iPhone 6?


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Forget close nip-and-tuck battles. If you're a sports fan, you know there's nothing more exciting than watching your team clobber a rival.

NXP Semiconductors ( NXPI ) is doing that in the chip business, while its stock is touching new highs. With design wins that put its solutions in high-profile tech gear such asApple 's ( AAPL ) iPhone and Samsung's Galaxy S5 smartphone, NXP has built a big lead over competitors in many of its end markets.

Its technology goes into everything from keyless entry systems to car entertainment consoles and audio amplifiers -- plus modems, smartphones, smart cards, lighting and wireless infrastructure gear.

The company provides both high-performance mixed-signal and standard solutions for radio frequency, analog, power management, interface, security, and digital processing products worldwide.

NXP shares rose 2% Friday to a record closing high of 68.52 after the Financial Times reported that Apple is working with NXP to add secure near-field communications (NFC) technology into the next iPhone. On Tuesday, NXP stock edged up to a new high of 70 intraday, before closing at 69.07.

NFC lets users quickly pay for coffee or other purchases while standing in line. It is already used in many phones that run on theGoogle ( GOOGL ) Android operating system. The iPhone 6 launch is widely anticipated to be coming up Sept. 9.

CEO: NXP Targets Its Tech

Since being spun off from Philips Electronics in 2006, NXP has tried to establish leadership positions in areas where it can dominate its competition, says CEO Rick Clemmer.

"We have tried to focus the business on real leadership -- areas where we can have at least 50% more market share than the No. 2 player," he told IBD.

Clemmer can cite several end markets where NXP has established a big lead over other chipmakers.

In security products, he says, "we are probably two times bigger than the next largest player in that space. In car radio we are probably six or seven times bigger than the next player. In keyless entry cars we have a huge market share."

That's not just idle boasting, company watchers say.

"NXP has identified fast growing opportunities and established key leadership positions in several key application areas by leveraging its technologies," Stifel analyst Tore Svanberg noted in a recent report initiating coverage on NXP with a buy rating.

That strategy has helped NXP produce steady profits the past several years despite the often volatile nature of the semiconductor industry, Svanberg said. "NXP has consistently demonstrated a highly profitable business model which generates solid cash from operations."

One advantage of building a big lead over rivals is that NXP has more financial might to develop solutions for original equipment manufacturers, Clemmer says.

"If we are three or four times bigger than the next competitor, we can put more resources into R&D to meet customer needs," he said.

Along with building leads in certain product areas, NXP also has exited areas that don't provide sufficient returns.

"Our focus has been to look at business areas where we had a true leadership position and move away from areas where we didn't see how to make a profit," Clemmer said. "We were the leader in digital TV but sold it because it is not a reasonable way to make money."

NXP doesn't divulge who its customers are. According to Yahoo Finance, they include high-profile technology, electronics and automotive companies such as Apple,Delphi ( DLPH ),Nokia ( NOK ), Panasonic, Samsung andSony (SNE).

Enabling A New iPhone?

Wall Street has shown a particular interest in the Apple connection. According to last week's Financial Times report, NXP will provide chips that let the new iPhone 6 connect with payment terminals or ticketing systems wirelessly, so users can pay by touching their phone screens.

In his interview with IBD, Clemmer refused to comment on the "Apple-related rumors and speculation." Apple is scheduled to host a special event on Sept. 9, during which the iPhone 6 and a smartwatch are expected to be unveiled.

NXP and Sony co-invented NFC technology in 2002. Since then, NXP has established itself as a market leader in secure wallet transactions. Its NFC solution has reportedly been adopted by Nokia, Google and Sony Ericsson.

NXP's existing NFC solutions include the radio chip that lets users transmit information as well as a secure element that protects that information, Clemmer says.

"You can use your smartphone to buy something and ensure it does not have a cyber risk," he said. "It is transmitted to the cloud on an encrypted basis."

One key advantage of the technology is its ease of use, Clemmer says. "You can take your smartphone within a few inches of the point-of-sale terminal. You don't have to carry credit cards or transit cards."

Financially, NXP has been on a strong run of late. It has produced eight straight quarters of double-digit or better EPS growth. Revenue has risen in double digits six times during that span.

During the second quarter, NXP logged revenue of $1.35 billion, up 14% from a year earlier and slightly above the $1.33 billion expected by a consensus of analysts polled by Thomson Reuters. Earnings gained 54% to $1.09 a share, topping views for $1.05.

NXP's GAAP gross margin improved to 47% for the quarter from 45% the previous year. Its GAAP operating margin rose to 18% from 14% a year earlier.

Analysts expect to see continued margin gains in coming quarters.

"With further improvements to the model, a sustained demand growth environment and a higher revenue run-rate, we project further margin expansion and improved profitability," Svanberg noted, adding that NXP looks to produce gross margins in the 52% to 56% range and operating margins in the 23% to 28% range.

Analysts polled by Thomson Reuters expect NXP's earnings for the full year to rise 41% to $4.65 a share. They see 2015 EPS climbing another 15% to $5.37.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas
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