NXP Semiconductor Is In The Chips With Key Markets

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If the products made byNXP Semiconductor ( NXPI ) were tossed in a salad bowl, it might look like scrap from an electronics factory.

In that bowl would be computer chips known as diodes and transistors, rectifiers, thyristors, mosfets, microcontrollers, radio frequency transceivers, mixed signal converters and more.

As mundane as the products by NXP Semiconductor may seem, they are likely in your smartphone and car, your laptop and wallet, and in cell towers and factories all over the place. In 2012, NXP was listed as the 14th largest semiconductor company by sales, up from 16th place the year before, according to IHS iSuppli Research.

The company, based in Eindhoven, Netherlands, was spun off in 2006 from Philips Electronics and began a significant restructuring. In August 2010, it became a publicly traded company. Since its initial public offering on the Nasdaq 31 months ago, shares of NXP are up about 146%, and up about 25% in the past year.

Last year, NXP posted sales of $4.4 billion and net income of $429 million, or $1.70 a share. In the fourth quarter, revenue rose 20% to $1.1 billion as earnings per share, minus items, rose 108%.

Mixed-Signal Chips

About 75% of company revenue last year came from its High Performance Mixed Signal unit. These chips and systems are installed by customers into automotive electronic systems, mobile devices, consumer electronics and computers, lighting, wireless infrastructure, security products and other industrial applications. In terms of growth markets, NXP focuses mainly on the fields of security, mobility, energy efficiency and health care.

The fastest-growing segment of NXP is its Identification business unit. It designs and makes chips used for electronic identification, financial transactions, product tagging and counterfeit prevention. The ID unit had revenue of $986 million in 2012, up 41% from the year before and up from $600 million at the time of its IPO.

NXP expects double-digit growth in its ID unit this year. Among its biggest opportunities is the emerging field of mobile payments. In this arena, NXP supports a technology standard called Near Field Communications, of which NXP is a co-inventor and holder of many patents.

NFC chips enable the close-range exchange of data via wireless technology. Its biggest market potential is seen with smartphones equipped with NFC chips, turning them into electronic wallets that can be used by consumers to buy products at specially equipped point-of-sale terminals.

Google ( GOOG ) and its Android mobile platform are key supporters of NFC technology with their Google Wallet endeavor. Android is now the dominant smartphone operating-system platform, led by Samsung, the world's largest smartphone provider.

On Feb. 25, Samsung announced it would incorporateVisa 's ( V ) payment software, called payWave, on all new Samsung NFC-equipped phones. These new phones, primarily the Galaxy 4, are expected to be introduced this month. The Visa/Samsung agreement is expected to bring more financial institutions onboard the NFC platform.

"It's a significant agreement that could give NFC a much-needed boost," wrote Eden Zoller, analyst at research firm Ovum, in a report.

MasterCard ( MA ) has also thrown its support behind NFC technology with its MasterPass program, an extension of its PayPass Wallet Services.

NFC's position as the leading industry standard in mobile payment systems is not yet a slam dunk.Apple ( AAPL ) has not included NFC chips in its iPhone, nor has it announced any plan to do so. The position of major retailers, likeWal-Mart (WMT) andTarget (TGT), is also not yet clear. But should NFC use continue to grow, as expected, NXP is seen as a major beneficiary.

The growth of NFC has drawn in new competitors such asBroadcom (BCOM) andQualcomm (QCOM). Richard Clemmer, NXP president and CEO, was asked about these competitive threats after the company posted fourth-quarter results Jan. 31.

"It's interesting," said Clemmer in the call, "because in some ways it actually helps the NFC market to have more suppliers." NXP wants to maintain its leadership position, he said, "but with the growth of the opportunity and the significant increase of smartphones that will have NFC included, we think it still represents a good growth opportunity for us."

Whatever the case, NXP already has a dominant position in some key markets. In addition to being the lead chip provider in NFC, it also claims the top position in radio frequency transceivers for RFID applications, in the auto market for car radios, in-vehicle networking and electronic key entry, and in select infrastructure markets.

In 2012, 24% of revenue came from its ID unit. Another 23% came from the automotive market, 14% in portable and computing, and 20% in standard products.

Vijay Rakesh, research analyst at Sterne Agee, in a report last month, put a spotlight on NXP's strong position in China.

"NXP is the No. 3 automotive supplier to China, now the largest automotive market in the world," he wrote. He said NXP derives 36% of revenue from its business with China, with 25% coming from the automotive field.

40 OEM Customers

In its latest quarterly filing with the SEC, NXP listed 40 "key OEM customers -- companies that use its chips in their products. The list of customers include Apple,Cisco (CSCO), Samsung andMotorola (MSI), in addition to Bosch, Delphi, Hyundai andSony (SNE).

Its competitors includeAnalog Devices (ADI),International Rectifier (IRF),Linear Technology (LLTC) andTexas Instruments (TXN).

The most significant challenge in 2012, according to CEO Clemmer in the conference call on Jan. 31, was an uncertain economic and demand environment, especially in automotive, industrial and infrastructure products.

"We do need to increase our execution focus, specifically in the areas of cost and expense management," he said, "but we believe we have the programs and actions in place which should enable NXP to deliver continued positive results. We believe if we are successful, our actions will result in very good bottom-line earnings growth."

For the first quarter, consensus estimates of analysts polled by Thomson Reuters is for revenue of $1.1 billion, up 12.5% from the same quarter a year ago. EPS, minus special items, is projected to be 49 cents a share, up 158%.

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

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

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