Ladies and gentlemen, thank you for standing by, and welcome to the NXT Semiconductors Third Quarter 2019 Conference Call. At this time, all participants' lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Palmer.
Thank you. Please go ahead, sir.
Thank you, Daniel. Good morning, everyone. Welcome to the NXP Semiconductors' Q3 2019 earnings call. With me on the call today is Rick Klemmer, NXP's CEO Kurt Sievers, NXP's President Peter Kelly, our CFO. If you've not obtained a copy of our earnings press release, it can be found at our company website under the Investor Relations section.
This call is being recorded and will be available for replay from our corporate website. Our call today 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 macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products, and our expectations for the undertakes no obligation to revise or update publicly any forward looking statements. For a full disclosure on forward looking statements, please refer to our press release. Additionally, during our call today, we will make reference to certain non GAAP financial measures, which exclude the impact of purchase price accounting, restructuring, stock based compensation, impairment, merger related costs and other charges that 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 financial measures to the most directly comparable GAAP measures in our Q3 2019 press release, which will be furnished to the SEC on a Form 8 ks and is available on NSP's website at the Investor Relations section. I'd like to now turn the call over to Rick.
Thanks, Jeff, for those informative details, and welcome everyone to our conference call today. NXP delivered revenue of $2,300,000,000 for the Q3. Our sales were near the high end of our guidance. We demonstrate good expense control and we successfully delivered improved operating profitability above the high end of our guidance range. Taken together, this resulted in $631,000,000 of free cash flow generation.
Kurt and Peter will provide specific detail later. Looking forward, we continue to be optimistic that our product portfolio investments are addressing our customers' long term requirements. We see initial signs that the demand environment from our customers appear to have somewhat stabilized. We believe the worst of the year on year declines in our strategic automotive and industrial markets are behind us. Specifically, our Q4 guidance for automotive points to a low single digit decline year on year versus the high single digit decline we've experienced year to date.
Additionally, our guidance for industrial business points to a mid single digit decline versus the mid teens decline seen year to date. While we are encouraged by the recent stabilization and in some cases improved demand, the shape and timing of any significant market reacceleration is clearly uncertain. What we continue to do is manage our cost and expenses and believe as a company, we are well positioned for a resumption and consistent demand. Regardless of the current demand environment, our focus is on delivering unique and differentiated solutions, while enabling our customers to be successful in their target markets. We measure our success by attaining high RMS or relative market share positions in our target markets to drive true leadership, which should result in defensible long term franchises based on truly innovative and competitive solutions.
As we are successful in this regard, we are rewarded with lasting customer relationships and we gain valuable insight into long term requirements, which enable us to optimize our R and D decisions and investments. Ultimately, this creates a virtuous cycle of product and customer alignment that will enable us to continue to deliver solid results to our shareholders. Over the course of the last year, we have reviewed with you several new product initiatives that reflect and underpin pin our strategic investment process. As an example, in automotive, we've discussed our goals for our level 2 and level 3 ADAS business. Specifically in radar, we continue to see our order rates rising and increasing customer engagements, which reinforce our projected 25% to 30% compounded annual growth over the next several years.
Additionally, in Q4, we will begin to ramp our RF CMOS 77 gigahertz front end transceiver to a leading North American solution supplier. Along with our market leading radar processors, connectivity and software in a complete system solution. This is a great validation of investments and customer commitments we made over the last several years. The success we have seen with our multiple chip, our multi chip radar solution sets the stage for the investments in the integration of the radar transceiver into a single chip solution, which we've already begun to undertake. Additionally, a few years ago, we invested in vehicle to everything, our secure V2X solutions based on DSRC Wi Fi technology, another offering in our ADAS portfolio.
It's taken longer than we had anticipated to see material transaction of this technology and use case. However, we are pleased that Volkswagen has announced the new 2020 Golf, their high selling vehicle in Europe, which will come standardly equipped with NXP RoadLink Secure BDX solution. Currently, European roads are being equipped with DSRC based VITA X technology with 5,000 kilometers planned through the end of 2019. While VDEX is not yet material in terms of revenue generation, it is another clear proof point that our automotive customers view NXP as a thought leader, which is making the right long term investments to enable their success and to reduce the number of accidents and save lives. In addition to radar and VIDA X, the other new automotive product initiatives we've shared with you include BMS as witnessed by our success with the Volkswagen MEP platform, digital clusters and ultra wideband are all progressing as we have anticipated.
This reinforces our belief that our automotive growth subset can grow 25% to 30% compounded growth rate in total, even in a more challenging global production environment. In the industrial and IoT market, our crossover processors are continuing to see solid traction with the revenue run rate tracking it at nearly a $60,000,000 per year run rate, very nice performance for an innovative new product and we are in the early days of the design to revenue cycle with multiple customers, which should result in the doubling of our crossover business in 2020 and several following years. Within the mobile end market, interest in our new ultra wideband products, which really enables an intersection of the mobile and auto access market continues. Both BMW and Volkswagen announced support for the NXP based solutions during the most recent quarter for the secure access, theft protection and other use cases. And the increased attach rate of our secure mobile wallet continues as the customer's base continues to broaden.
Now, the one area that we've not spent a lot of time on about our efforts in the communication infrastructure end market and specifically around the transition towards 5 gs networks. We have several opportunities in the build out of 5 gs networks. The first is in radio frequency power solutions. These are subsystems which are installed in the remote radio head unit up on the cellular towers. Our products take analog signals and amplify the signals in the radio frequency domain, enabling communication between cell towers and mobile handsets.
In the 4 gs generation of base stations, we offered high power LD MOS power amplifiers for 1 to 4 transmitter radio systems. To provide our customers with increased bandwidth in a fixed frequency spectrum, we have developed a wide range of low power, highly integrated products for massive MIMO RF power systems. This can be thought of as a raise of amplifiers in nearly the same physical footprint as 4 gs remote radio heads, but with up to 32 or 64 distinct transmit paths, providing upwards of 10 times the data rate versus the 4 gs systems. As the industry transitions towards the 5 gs standard with higher frequency bands, we have developed solutions across the complete sub 6 gigahertz spectrum, leveraging either our market leading LD MOS or GaN based massive MIMO solutions. Interestingly, we have innovated our LD MOS process technology to be able to operate up to about 3.5 gigahertz, roughly 30% higher frequency versus the 4 gs generation, while still delivering the required output power and efficiency.
Furthermore, with our proprietary SIGI process technology, we've developed that we don't anticipate broad based global millimeter that we don't anticipate broad based global millimeter wave build outs to begin in earnest until late 2020 or early 2021. Taken together, NXP has the broadest, most innovative footprint of RF power amplifiers for base station applications across the entire 5 gs frequency spectrum. From a market perspective, our analysis points to a serviceable market for RF power systems for cellular base stations growing to about $2,500,000,000 by 20.24 or a 13% 5 year compounded annual growth rate. With NXP holding the number one position in this market, with a relative market share position of 1.8x the number 2 player. Additionally, we have other opportunities in the 5 gs build out for NXP.
Our digital networking team has been awarded designs with a few OEMs to deploy CPE and also repeater equipment, which will complement and leverage the build out of last mile solutions in dense urban areas. These solutions leverage our innovative 64 bit ARM multi core layerscape processors, which embed our unique and proprietary Vespa programmable baseband engines. This is a market which we bring unique programmable hardware and software capabilities developed over many years focusing on the service provider market. These are purpose built and optimized solutions, which result in high performance and low power consumption. It's also a market with few focused competitors and we believe our solutions offer NXP solid differentiation.
From a market perspective, the deployments are tied to the build out of 5 gs macro base station for last mile solutions, which we estimate will begin broad based rollout global volume production in late 2020 or early 2021. Our analysis points to a serviceable market for these last mile solutions growing at a 30% to 35% basis on a 5 year compounded annual growth rate. We believe NXP has an opportunity to capitalize on the rollout of these last mile solutions and further highlights customer belief in our fundamental IP and product development. In summary, our strategy continues to yield positive results. We will continue to drive focus in our strategic end markets, engaging with customers to deliver superior, highly differentiated products regardless of the short term fluctuations in demand.
I'd like to now pass the call over to Kurt to discuss the results of the current quarter.
Thanks very much, Rick, and good morning, everyone. We really appreciate you joining our call this morning. Overall, our Q3 results were above the midpoint of our guidance. With the contribution from the mobile and the industrial IoT markets stronger than planned. While demand in the communication infrastructure market was slightly weaker and our automotive business performed just as anticipated.
Taken together, NXP delivered revenue of $2,300,000,000 which combined with gross margin improvement and good expense control enabled us to successfully deliver operating profitability above the higher end of our guidance range. Let me turn to the specific trends in Q3 in our focus end markets. Starting with automotive. Revenue was $1,050,000,000 down 7% year on year, in line with our guidance. During the quarter, our automotive revenue declined 7% versus the year ago period as anticipated at a lesser rate of decline than in the previous quarter and showing 2% sequential growth.
Our core automotive product lines declined year on year, a reflection of lower auto production and the associated supply chain rationalization. However, revenue from the subset of our automotive growth product lines grew in the high single digit range year on year during the quarter. Moving to Industrial and IoT. Revenue was $426,000,000 down 14% year on year and up 9% sequentially, slightly better than our expectations. During the quarter, the primary source of weakness in industrial and IoT continued to be our general purpose microcontroller products.
Remember, our industrial and IoT business is primarily serviced through our global distribution partners and it is heavily indexed to customers in the Asian markets, which appear to be particularly affected by the continued U. S.-China trade tensions. Turning to mobile. Revenue was $321,000,000 up 2% year on year and up 8% sequentially, above the high end of our guidance. During Q3, despite reduced order rates at the largest Chinese handset customer, we did see robust seasonal ordering patterns from both other Chinese handset OEMs as well as our premium handset customer.
Both trends taken together underpin our view that growth in our mobile business will continue to be driven by increasing attach rates of our secure mobile wallet technology associated with new use cases like transit ticketing amongst others. Lastly, communication infrastructure and other revenue was $470,000,000 down 2% year on year and down 6% sequentially below our guidance. From a product line trend perspective, we continue to see robust year on year growth trends associated with our RF Power solutions, so just a little less than our plans. Digital networking business came in line with expectations, while the secure card business was a little below our expectations. Let me highlight here several notable trends in the communication infrastructure market, which we do believe are truly benefiting NXP.
This includes the continued shift towards massive MIMO solutions, leveraging both LDIMO as well as Gallium Nitride based products. We also see early traction with our millimeter wave engagements for dense urban areas. The positive tailwinds for our Our guidance reflects the ongoing stabilization in demand mentioned earlier in our prepared remarks by Rick. We do believe the outlook appears to have stopped getting worse on a seasonal basis, so it is still not reflective of a return to growth. We are guiding quarter 4 revenue at $2,270,000,000 flat sequentially on the 3rd quarter within the range of down 1% to up 2%.
From a year over year perspective, this represents a decline of about 6% versus the same period a year ago, of which about 120 basis points is the elimination of the MSA versus the year ago period. At the midpoint, we are anticipating the following sequential trends in our 4 businesses. Automotive is expected to be up mid single digits versus Q3. Industrial and IoT is expected to be down in the mid single digit range on a percentage basis. Mobile is expected to be slightly down in the low single digits on a percentage basis.
And finally, communication infrastructure and other is expected to be down in the low single digits on a percentage basis. In summary, our new product introductions, customer engagement levels and design win momentum in our strategic focus areas continue to be very, very positive. And we do continue to be very optimistic about the mid to long term potential of NXP. Now I would like to pass the call to Peter for a review of our financial performance. Peter, over to you.
Thank you, 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 Q4, I'll move to the financial highlights. In summary, our 3rd quarter revenue performance was near the high end of our guidance range which combined with good expense control resulted in very strong non GAAP operating profit. Focusing on the details of the 3rd quarter revenue was $2,270,000,000 down 7% year on year of which 120 basis points was the elimination of the MSA versus the year ago period. We generated $1,200,000,000 in non GAAP gross profit and reported a non GAAP gross margin of 53 0.7%, up 70 basis points year on year and in line with the midpoint of our guidance.
Telkom non GAAP operating expenses were $531,000,000 down $32,000,000 year on year and down $10,000,000 from Q2. This was $5,000,000 better than the midpoint of our guidance. From a total operating profit perspective, non GAAP operating profit was 6 $87,000,000 and non GAAP operating margin was 30.3%, up 30 basis points year on year despite a $180,000,000 drop in revenue over the same period. Non GAAP interest expense was $66,000,000 cash tax for ongoing operations were $39,000,000 and non controlling interest was $10,000,000 with cash tax and interest expense modestly better than the midpoint of guidance. Stock based compensation, which is not included in our non GAAP earnings, was $84,000,000 Now I'd like to turn to the changes in our cash and debt.
Our total debt at the end of Q3 was $8,510,000,000 dollars down $33,000,000 sequentially as we retired the remaining portion of our June 2021 debt. Cash was $3,540,000,000 and net debt of $4,970,000,000 declined sequentially because of solid cash generation during the Q3. We exited the quarter with a trailing 12 month adjusted EBITDA of $3,130,000,000 and our ratio of net debt to trailing 12 month EBITDA at the end of the 3rd quarter was 1.59 times. And our non GAAP interest coverage was 10.4 times. Our liquidity is excellent and our balance sheet continues to be very strong.
During the Q3, we paid $70,000,000 in cash dividends and announced a 50% increase in the annual dividend rate. Our capital return policy continues to be to return all excess cash to shareholders. I would remind you that since July 2018, we have returned 6 $600,000,000 to our shareholders, including buying back 18% of the diluted share count. Turning to working capital metrics, days of inventory was 98 days, a decrease of 2 days sequentially, a quarter on quarter decline of $10,000,000 We continue to aggressively manage our distribution channel and inventory in the channel is a very healthy 2.3 months. And within our long term targets, those slightly below the 2.4 months we'd normally expect to run.
Days receivables were 32 days, flat sequentially and days payable was 74 days, an increase of 7 days versus the prior quarter. Taken together, our cash conversion cycle was 56 days, an improvement of 9 days versus the prior quarter. Cash flow from operations was $746,000,000 and net CapEx was $115,000,000 resulting in free cash flow of $631,000,000 Turning to our expectations for the Q4. As Curt mentioned, we anticipate 4th quarter revenue to be about $2,270,000,000 plus or minus $30,000,000 And at the midpoint, this is flat sequentially. We expect non GAAP gross margin to be about 54.2 percent plus or minus 30 basis points.
Operating expenses are expected to be about $545,000,000 plus or minus about $7,000,000 And taken together, we see non GAAP operating margin to be about 30.2 percent plus or minus about 30 basis points. We estimate non GAAP interest expense to be around $69,000,000 and anticipate cash tax related to ongoing operations to be about $39,000,000 Non controlling interest will be about $9,000,000 And for the Q4, we suggest that for modeling purposes,
we use
an average share count of about 285,000,000 shares. Finally, I have a few closing comments that I'd like to make. One, we currently have $3,500,000,000 of cash on our balance sheet. On December 1, we plan to use $1,100,000,000 of this cash to pay down our convertible debt and we anticipate using $1,760,000,000 to close our transaction for the Marvell asset, although we're still waiting for the final regulatory approval from Taiwan. As Kurt pointed out, we're pleased with our performance in the 3rd quarter.
Our revenue was slightly better than guidance with the contribution from the mobile and industrial IoT markets both a bit stronger than expected, while the automotive market was in line with our expectations and the com infrastructure market was slightly weaker. The challenge at this stage is to predict when a positive inflection in demand will occur. Until we see a decidedly improved demand environment, we'll continue to keep a tight control on those items which are under our control, including gross margin, operating expenses and working capital aiming to maximize the performance of the company. Our non GAAP gross margin has steadily improved over the last year even as we navigated a challenging top line demand environment. Our non GAAP gross margin improved again in the 3rd quarter and we anticipate further improvements into the 4th quarter.
However, as our guidance reflects given our top line visibility, we do not believe we will achieve the 55% goal in Q4. This is a significant disappointment driven by lack of volume and the resulting under recovery it drives to our costs. However, I continue to have confidence in our ability to manage the costs which are under our control. So further, I would like to reiterate Kurt and Rick's comments. The market continues to be uncertain and although we've certainly seen some positive signs, we're not ready yet to declare victory.
In fact, after 5 quarters of year on year declines, achieving flat year on year revenue for the Q1 of 2020 would feel like a positive move in an uncertain market environment. Equally, I would remind you all that our operating expenses generally increased from Q4 to Q1 as we feel the impact of annual bonuses and fringe benefit resets. So with that, I'd like to now turn it back to the operator and answer any questions you may have.
Our first question comes from Ross Seymore with Deutsche Bank. Your line is now open.
Hi, guys. Thanks for letting
me ask a question.
I want to focus on
the automotive side first. It's good to see that that's up sequentially in the quarter. So can you just talk about what's driving that up in the Q4? And then for the full year, you did very well getting closer to SAAR. How are you thinking about what NX fees growth rate in auto can be relative to SAAR conceptually in 2020 as you have inventory versus share gains and a bunch of potentially offsetting vectors?
Hey, good morning, Ross. This is Kurt. Let me take that question. Let me maybe start with saying what our latest market insights are. So IHS just published their latest SAR numbers for this year and the forecast for next year, where they are saying they see a 6% decline for the SAAR for 2019 annually over 2018 and they estimate about flat for next year.
That's the latest insight we have. So unfortunately that indeed indicates that it has further deteriorated this year. So we had earlier in the year minus 4%, minus 5% and now they end up at minus 6% decline for 'nineteen. We have always said that on a quarterly basis you cannot really benchmark our revenue performance against the SAAR given all the supply chain effects in between. At the same time, we do continue to clearly say that we have all reason to believe that our business is outgrowing the SAAR, thanks to the electronic content increase per car.
And I think we are now at a point going into Q4 where it appears that the supply chain should become more or less clean. So our growth which you see in our business becomes more reflective of the true automotive demand from the OEMs. And that is indeed then leading to a annual and that's how we look at it, annual growth rate in Q4 which is only minus 2 versus much higher declines in the earlier quarter like minus 7 and minus 10 in Q3 and Q2. We don't really guide for next year, Ross. And yet I would say that once the supply chain is clear, we should expect that our growth by content should be reflected again in our numbers against the SAAR.
So there is some optimism here that with a more clean supply chain going forward, we should return to growth based on a flat SAAR.
Side and you guys are doing a good job in a tough revenue comp. I was a little surprised the OpEx is going up as much as it is in the Q4, given the discretionary tightness you guys have done so well to control throughout the year. Can you just talk about a little bit about why that's going up? And the increase in the Q4 diminish the size of the increase that we otherwise would have seen in the Q1 sequentially?
Yeah, the single biggest item is actually a positive thing. We have a really significant number. I think it's just a bit over 10,000,000 of tape outs in excess of what we saw in the 3rd quarter. And that's the single biggest item, Ross.
So it's a good thing.
It's a good thing.
We're getting some of our NPIs out and shipping those to customers. And so there's a cost, obviously, as we take those and put those and move those towards engagement with customers, Ross.
Thank you. Our next question comes from William Stein with SunTrust. Your line is now open.
Great. Just following up on that a little bit. Peter, can you help us understand, I think we know or we're expecting margins to deteriorate a little bit in Q1 as you give price to customers in automotive and you have to incur some incremental accruals on the OpEx side. Any quantification that will help us modeling sequentially as we think out to Q1 and then how that might abate as we that effect might abate we go through the
year? I mean, clearly, I don't want to guide Q1 at this stage. I think you're right, Will, in the sense that from a gross margin perspective, you have the single biggest item is the annual price increases. And from OpEx, you have a reset on bonus. So as an example, this year, we didn't hit our targets.
So the bonus accrual is relatively small and you probably talking about maybe an average of $10,000,000 a quarter. Whereas in 2020, if we were to assume a full bonus, we haven't kind of set all of our targets yet for 2020, you'd be talking more like $35,000,000 a quarter. You'd see an $8,000,000 increase roughly for fringe benefits. But we should I don't think mass costs will be as high as Q1 as they were in Q4. So I'm not sure I'd forecast OpEx lower in Q1 than Q4, but I'm not really yet to give you an absolute number.
But it's still really helpful, Peter. Thanks for that. And one follow-up if I can. The mobile strength in Q3, it sounds like that was more of a units thing than a content thing relative to your expectations at the start of the quarter. Is that fair?
And is the demand it sounds like it's a bit more dispersed than concentrated. Maybe you could just provide a little color?
Right. I guess the unit comes from the content. So they're directly linked. So you can't really separate the 2. I think the good point was, if you recall in Q2, we had our largest Chinese OEM that had a strong uptake as they broaden the deployment of the mobile wallet into more of their portfolio.
And in Q3, clearly we had a broader base, as well as our Tier 1 customer increased volumes as well. But all the other Chinese customers showed strength in Q3 also. So yes, we had a really strong quarter in Q3. And I think it does continue to bode well for the continued deployment associated with the mobile wallet and the uptake associated with it, as we projected going into next couple of years where we think it can be 50% of all the smartphones.
Thank you. Our next question comes from John Pitzer with Credit Suisse. Your line is now open.
Yes, good morning guys. Thanks for letting me ask the question. Rick, I wanted to ask you a little bit, given you have sort of a unique vantage point on the whole China, U. S. Trade issues.
I'm kind of curious how you think that that's impacting your business. There's been some concern in the investment community that perhaps Chinese customers are pulling forward inventory. There's been other sort of checks that would suggest they're trying to keep inventory lean. Clearly, you're not suffering from any bans, but I'd be kind of curious to think whether or not there's a second derivative effect on bans on your revenue as well and how you might think business will trend if there is a trade resolution?
Well, I think if there's a trade resolution be very positive. So I don't think there's any doubt about that. I think though that we don't see a lot of inventory being put in place. In Q2, as we talked about it, the largest Chinese handset, they clearly were ramping their supply chain as they broaden the portfolio associated with it. But we didn't see a lot of inventory.
It was really associated with their supply chain. You know, there has been comments that I've heard about other technologies like FPGAs where you know, some of the Chinese guys were concerned about having adequate supply and put inventory in place. But we don't see really a lot of that in the areas that we serve at all, John. And we think it continues to bode well. Clearly, I think our relationship with the Chinese customers has been positive and will continue to be positive for us going forward.
That's helpful. And then, Rich, just to follow-up on some of your prepared comments about 5 gs in the comm infrastructure space. You guys have kind of put out a 3 year CAGR target for revenue in that space of somewhere between 0 to up 2. Is it fair to say that what you talked about today on the RF power side and sub-six is contemplated in that, but as we go to millimeter wave, it's not? And if that's the case, how might millimeter wave and your opportunity there impact that kind of CAGR that you have out there as a target?
Well, so John, when we set those targets, we were coming out of a period of several years of declines in both the RF power and the digital networking business clearly with a digital networking business going from around 800,000,000 at the time we did the merger with Prescale down to in more like the 500,000,000 range. So we did set those conservatively. I think what we're talking about clearly with the 5 gs opportunity should increase that growth rate. But we don't think it will change the total because it really just gives us room to cover the downturn that we've been through in automotive and industrial and still have the confidence in achieving our 5% to 7% compounded growth rate going forward. I do think that there's a real opportunity as we talked about for low teens growth rate in RF power business with 5 gs deployment over the next few years and with our leadership position puts us in a good position.
And we're just making some early investments in the last mile with some of the customer engagements. They could bode very well as well and end up with a couple $100,000,000 a year of revenue and then not too distant future. So all of that's positive, but you know, we're just kind of leaving our growth rates that we said a year and a half or so ago intact and not really changing those by piece at this point, John.
Thank you. Our next question comes from Blayne Curtis with Barclays. Your line is now open.
Hey, guys. Thanks for taking my question. I wanted to go back on the auto segment. You mentioned, I think the growth area is growing teens. Just kind of curious with the you also mentioned a stabilization with improving SAAR next year.
The growth that you're seeing are the better than seasonal, I guess, in December you're seeing. Are you seeing any restocking of kind of the core components or is the outperformance led by the growth areas?
Hi, Blayne. This is Kurt. I in principle, let me slightly correct what you just said. I think I didn't say that IHS talked about an improvement in SAR next year. They see a flat SAAR on the low level which was achieved at the end of this year.
I think it's a minor but maybe important detail. When you think about us indeed, I'd say that the improvement you are seeing is probably not restocking, but it's just that the consumption reflects more the end demand. There earlier at least in our business with smaller accounts and through distribution, it was masked by building down inventories. And that appears to possibly be over now, which means we just see the real demand coming back again. I would be careful to say that's already restocking, probably not.
Yes. If I could just add something, I think one of the things if you look at it Blaine and look at IHS projections, first half of twenty twenty will be slightly up from second half of twenty nineteen. So that says we've kind of gotten to a minimum run rate based on their projections now. And then they'll see a resumption of growth in the second half of twenty twenty. So but I do think that when you look at some of our customers in China and other places that we serve through distribution, we are beginning to see a little more of an uptick, which I think means that they've kind of worked their way through their inventory basis and we're beginning to see a little more of a positive perspective associated with it.
Thanks. And then I just want to ask on the WiFi transition or transaction you had targeted Q1 close, but thought might you could do a little earlier. It sounds like you're waiting for Taiwan. Just curious if you expect to close that in December and if anything's in the guidance from that?
Nothing's in the guidance and we would anticipate closing it sooner than the Q1. But given the fact that there's a process in Taiwan that we really don't have clear insight into how long it will take, it would be inappropriate for us to really second guess the actual timing.
Thank you. Our next question comes from Stacy Rasgon with Bernstein Research. Your line is now open.
Hi, guys. Thanks for taking my questions. I wanted to talk about, first, just the language in the release. It is a little bit improved. This is the first time I've heard you talk about short
term Stacy, Stacy, Stacy, you're kind of setting up. We can't really hear you.
I'm sorry. Can you hear me now?
Yes, perfect.
Let's try that again. So the language in the release is obviously a little bit improved this time. I haven't heard you talk about short term demand environment stabilizing for a while. At the same time, we're hearing a fair amount about sort of the disty challenges bottoming. Is this statement just purely a channel statement that things have sort of bottomed in terms of the inventory flush and we're just more representative now of end demand?
Or are you actually seeing to the extent that you have any visibility, actual improvement in customer and demand at this
point? So I think Stacy, what we're seeing is we've seen things stabilize. We've seen some pockets of improvement or increased orders. But really what we're trying to point to is the fact that if you look at it, in our industrial and IoT segment, we were mid teens year over year decline through the 1st three quarters of this year. And if you look at the midpoint of our projection, we'll be kind of mid single digit.
So that's definitely a significant improvement. And if you look at automotive, it's been kind of high single digit decline year over year through the 1st 3 quarters. And while we're at the midpoint, we're kind of at a 2% decline. So I think that's really what we're trying to talk about. That's the basic indicator that we have that things are improving is based on the run rates that we have from our customers and their demands.
We see that improving. Now, you also have to look at our mobile and communications and infrastructure to get to the total. And in total, we've been if you adjust for the MSA that we changed in the accounting, we've been kind of mid single digit with the exception of Q2 where we're a little less than that. And we'll be kind of we'll have a couple of points improvement in the total even with a little bit of downtick in the communications and mobile in Q4. But so I think we clearly have seen a stabilization in some pockets of improved demand and increased demand, but not anything that would lead us to really talk about a robust recovery underway at this point.
Got it. Thank you. And maybe to follow-up on that on the longer term. Are you still holding to your longer term growth versus 5% to 7%?
Lost it again, Stacy.
Okay. Can you hear me now? This is very strange.
Yes.
Very strange. To follow-up on that, your long term growth target is still being articulated 5% to 7%, you're holding to it. That was originally put forth as a CAGR. It was 2018 to 2021. And obviously, we've got a it's we've got a decline in 2019.
So what is the right way to think about this growth model given that the new starting point is 5% to 7% off of the base we've seen 2019? Or do you still think that we can get something closer to that 3 year CAGR off the 2018, which would imply more growth in 202020 21. And I guess if that's the case, what would be the drivers of that? Like how do we think about that long term growth model in the context
of where we're starting from?
So Stacy, I think what we're committed to is the 5% to 7% growth rate. We said the categories may be different than what we talked about a year and a half ago. As we look at that, we may not be able to quite achieve what we had laid out at the high end of automotive or the high end of industrial based on the fact that we've gone through this downturn. The positive thing is mobile is growing quite nicely with the increased mobile wallet deployment as well as now ultra wideband beginning to be shipping next year and in 2021. And clearly the 5 gs deployment gives us some upside.
I mean, that could drive that 0 to 2 to kind of high single digit growth potentially. But in total, we still are committed to the 5% to 7% growth rate. And I think the key is, is that we have different knobs to turn to be sure that we can achieve that and accomplish that.
Thank you. Our next question comes from Craig Hettenbach with Morgan Stanley. Your line is now open.
Yes, thank you. Just a question for Kurt. Any update on BMS and in particular things that you would highlight versus some of the incumbents that you think you're doing just from a feature set perspective?
Yes. Thanks, Craig. Well, the update is that we are on track, which is definitely good news. And I think we've all seen in Q3 a very large European OEM making a major announcement about their commitments relative to new electric vehicles coming out. And as we have kind of sign posted earlier, we are quite a bit involved in this, not in one model, but actually across the board.
So if you will, this is a very clear evidence on our success over incumbents with one of the most I would say bullish commitments from a car company into building electric vehicles. And that starts shipping as we speak. So I mean this is not just somewhere in the future, but actually the first models out of that whole fleet across a couple of brands of that OEM are shipping as we speak. So what that means below the line is we are on track to our BMS rollout as we had discussed earlier with pretty high growth rates into the next few years. Let me just highlight, Craig, that we while we speak a lot about this one OEM and since the public announcements that's very convenient for us to speak about it, we have a significantly broader base of design wins too.
Differentiators against incumbents remain to be ASIL D function safety performance on a system level, as well as the scalability given our approach with microcontrollers and analog high precision front ends.
And you know, I guess the only thing I would add to that Craig is we I follow-up personally the announcement by some of the incumbents and always track that And every time we go back and look at it, we still think that we have a superior performance and a better product than some of the announcements that they're making.
Got
it. Thanks for that. And then just a follow-up for Peter, understanding there's still some headwinds from revenue on the gross margin line. Can you
talk about just some of
the levers you've been pulling to improve gross margin and also maybe some benefits of mix over the next 12 to 18 months?
Yes. I mean, I think they're the same things. I think in the long term, so over the next few years, our mix definitely helps us. As we look at kind of the NPIs that are coming out, you're not going to suddenly see us jump, but you'll see gradual improvements in gross margin in the long term. In the short term, it's all about blocking and tackling, making sure our partners give us the right pricing, making sure we're managing yields, test times, all that good stuff.
To be honest, the issue I have at the moment is we have a long term model of 55 to 57. I'd really like to get to 55 for full year 2020. But with the current market environment and I'd say the lack of visibility rather than visibility we have, it's hard to see how we do that really. And you saw that in Q4. So I do need I hate to admit it, but I do need a pickup in volume to be able to get to the 55% level.
And I'm surprised you didn't ask the question. But one of the questions we were anticipating from you guys is, given revenue was towards the higher end of the guidance in Q3, why didn't gross margin improve a little bit above the guidance of 53.7%. And the answer to that is our assembly and test internal assembly and test utilization was weaker than we thought in Q3. Now to be honest, 30 basis points is $6,000,000 So it's not that big a number anyway. But in the current environment, running the levels of revenue we have, it makes it really, really tough to get the revenue up.
But I believe after market does come back, we'll be able to get there.
Craig, just
to be specific, I think our long term target is 53 to 57. We talked about 55 in the near term.
How did I say 55? You
said 55 to midpoint, yes.
But utilization will be key to that as well. And I think that's an important element of our continued gross margin improvement.
And you know, that's an impact of just revenue and managing our inventory and all that.
Thank you. Our next question comes from C. J. Muse with Evercore. Your line is now open.
Yes, good morning. Thank you for taking the question. I guess first question, one of the more encouraging, I guess, data points coming out of your 10 Q is that your OEM sales were flat year on year, while disti sales down 10 So I guess 2 part question there. 1, are you comfortable with where we are from a disty inventory perspective? And then 2, as you see a recovery at least standing here today, do you think it'll be disti or OEM led?
Well, I think your point is it's a great observation that most of the weakness that we have comes out of distribution. If you look at what we've done on the distribution inventory, we've significantly reduced the inventory over the last few quarters to be able to maintain that 2.4 months and actually down at 2.3 months in the Q3 timeframe, which we would anticipate would go back to the 2.4 months in Q4. We actually had some late shipments out on POS late in the quarter that actually allowed our inventory to go down to the 2.3 months. I think that we will see an uptick in distribution. I think it has tended, as you pointed out, to be more volatile than OEM side, and I think it will be more relevant towards the uptick associated with it.
But as far as inventories, I think we're in good shape and I don't think there's any issue associated with that, but
I would anticipate that that
will be one of the total revenue.
Very helpful. As my follow-up, and I know, don't want to guide to Q1, so not asking near term. But as you think about just generally for 2020 and you look at your mobile business and the increased tax rate of secure mobile wallet, how are you thinking about and what does your visibility look like today
I would say we are confident that the attach rate increase, which is actually what is driving our mobile growth, attach rate increase of mobile wallets and associated applications does continue. I mean there could always be quarterly fluctuations. Mobile has a lot of seasonality, but from a year over year perspective, we are very well on track with what we said in our Analyst Day last year that we see this attach rate growing from I think we said 30% to 50% over the next 3 years. And we actually did a check earlier how are we on that journey. And it looks like we can be confident that we are very well on track on the journey.
And that would indicate that the growth should reasonably continue.
I think, C. J, one of the things that will be really interesting in the second half next year is as we begin to ship ultra wideband, it just solidifies that position in mobile and solidifies our position with the mobile wallet. So I think that will be a significant contributing factor for us and continue to demonstrate our leadership as well as solidifying our overall position.
Daniel, we'll take one last question here today.
Thank you. Our final question comes from Chris Caso with Raymond James. Your line is now open.
Yes, thank you. Good morning. Just a follow-up question on the gross margins. And Peter, last quarter, you talked about getting to the potential of getting to 55% quarterly run rate on about flat year on year revenue, which suggests around the $2,400,000,000 level. Is that still the right way to think about it going forward kind of once we kind of get to that revenue level, that's when we get to that in a quarterly basis and obviously That's all right.
Quick answer.
It was a kind of rhetorical question really. Right.
Okay. The follow on from that is, there's been some talk with some of the trade tensions that some of the Chinese customers perhaps are tending to favor some of the non U. S. Solutions, giving some of the trade situations and security of supply and such. Is that something you're tending to see in your business now?
And going forward, do you think that provides you with somewhat of an advantage being domiciled outside the U. S? Yes.
No, seriously, I think with discussions with our customers, I think they appreciate the complexities of dealing with different source technology. And I think they have a lot of discussions about trying to move some of their production to us as well as other non US sourced IP providers. So we think that could be positive. Obviously, that doesn't happen overnight or immediately, but it takes a period of time associated with it.
Thank you. Ladies and gentlemen, this concludes our question and answer session. I would now like to turn the call back over to Rick Klommer for any closing remarks.
Thank you very much, operator. So thanks for joining us today. Obviously, we feel better than we did in previous quarters with the stability we see and are encouraged about the fact that the year over year decline is significantly reduced with our guidance in Q4 and puts us in a solid position to get ready to move into 2020 with the ramp up of new products that will continue to differentiate NXP and show our leadership in deploying technology to be able to drive solutions for our customers. So thank you very much for your support and have a good day.
Great. Thank you, everyone. Thank you, Danno.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.