Good day, ladies and gentlemen, and welcome to the Q1 2019 NXP Semiconductors earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Jeff Palmer, Vice President of Investor Relations. Sir, you may begin.
Thanks, Demetrius. Good morning, everyone. Welcome to the NXP Semiconductors first quarter 2019 earnings call. With me on the call today is Rick Clemmer, NXP's CEO, Kurt Sievers, NXP's President, and 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 at nxp.com. 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 financial results for the second quarter of 2019.
Please be reminded, NXP 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 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 first quarter 2019 earnings press release, which will be furnished to the SEC on Form 6-K and is available on NXP's website to the investor relations section at nxp.com. I'd like to turn the call over to Rick.
Thanks, Jeff, for that enlightening opening. Welcome everyone to our conference call today. Today, we're going to take a new approach to our prepared remarks. I'll start off and provide some longer-term strategic commentary. Kurt Sievers, who is the President of the company, will review the end-market revenue details of Q1 and provide some revenue guidance for Q2. Finally, Peter Kelly will review the financial details of the quarter and expectations for Q2. For all of those of you that have followed the company for a while know we spend a lot of our efforts assuring that our product portfolio is aligned to the long-term customer needs in our chosen application segments.
We believe if we consistently make the right product development decisions, this will result in very sticky, high relative market share positions and true leadership, which should allow us to outgrow the market by one and a half times. If we look at a few of the major themes from our September 2018 Analyst Day and the progress we've achieved, they clearly reflect the positive traction. First, our automotive sales was just over $4.5 billion in 2018, and we continue to be the number 1 ranked global automotive semiconductor supplier. We have gained share in the strategic areas of auto processing, ADAS radar solutions, and digital clusters. According to Strategy Analytics, NXP is the leading supplier of both automotive processing and infotainment applications processors.
30% of our auto business is focused on high growth sectors like ADAS and electrification, which has grown at nearly 40% compounded growth rate since 2015, and which we expect to continue to grow at 25%-30% compounded growth rate as the businesses becomes more material in size. The other 70% of our automotive business represents a very large and entrenched core business with high barriers to entry. We anticipate our core business will grow at a modest premium to the overall auto semiconductor market. Our deep customer relationships with both tier 1 suppliers as well as the OEMs enable us to gain long-term insights into the requirements. It is these relationships combined with our world-class IP, which has allowed us to expand in new high growth application solutions.
As an example, our ADAS business, which currently represents about 10% of our total automotive revenue, has grown at over 50% compounded annual growth rate since 2015. In a few short years, we have emerged as the number 1 supplier for the complete radar subsystem, including the 77 gigahertz front-end transceivers, the ASIL D compliant back-end processing engine, power management, and the high-speed interconnect, all tied together with our software. Based on design wins that we are currently shipping and designs we have been awarded with major OEMs, we see the business continuing to grow in the high 20% range through 2021 and beyond.
We believe this growth rate is about 1.4 times faster than the overall ADAS radar market, which is still in its relative infancy. Another new auto business we're very excited about is our Battery Management System, our BMS products for electric powertrains, which we have learned from customers, particularly the actual battery manufacturers, is the need to increase the efficiency and resulting range of the battery subsystem. To be able to achieve that requires the ability to monitor and take real-time action on the health of the battery on a cell-by-cell basis. What is required is the combination of precision analogue capability, ASIL D functional safety expertise, and deep automotive processor know-how. Our team has developed a truly unique solution which combines these capabilities. While the business is relatively small today at about $50 million on an annualized run rate basis, it has doubled over the last year.
As more global auto OEMs expand their electric vehicle offerings, we are actively engaged winning designs and anticipate emerging in a leadership position versus current existing suppliers. We think the BMS market is a subset of the overall power control market will expand to about $800 million in 2021 at about a 30% compounded growth rate. If we expand the designs we have been awarded and are beginning to ship, we think this business could easily be several hundred million dollars of revenue in 2021. Looking at our industrial and IoT business, which is about $1.8 billion in 2018, it is primarily made up of our broad microcontrollers and application processor portfolios, along with some analogue attach. This is a business which is levered to the secular trends of the increased processing and security requirements of the edge and IoT market.
NXP is in a unique position to address the market demands for higher performance microcontrollers, which are combined with functional audiovisual capabilities and features normally found in applications processors. We term this the crossover processing market. We see the addressable market for crossover processors growing from about $270 million in 2018 to just under $1.5 billion by 2023, or a 40% five-year compounded growth rate. We are already seeing great traction for this class of products, which range from our RT, ULP, and mScale LP families of processors. End applications span from the secure AI-powered factory automation and building control in the industrial space to home audio solutions enabling full Dolby Atmos support, down to high volume, smart home, and ultra-low power wearable type devices.
To be specific, we just received our Dolby 1.6 Atmos certification last week based on a multi-core crossover processor as opposed to the previous solutions based on multi-DSPs. We're seeing very good early traction on these families of processors and anticipate our crossover business will grow into a multi-hundred million dollar business by 2022. These are just three exciting product areas that we believe will differentiate NXP in the coming years. Our strategy is yielding positive results, enabled us to aggressively return capital. Since the termination of the Qualcomm transaction through our report today, we've aggressively reduced the total number of shares outstanding by approximately 65 million shares, or about 19% of the float, and returned over $6 billion to our shareholders, a testament to the strong free cash flow that our business creates based on our long-term strategic decisions.
I'd like to pass the call over to Kurt to discuss the results of the current quarter.
Thanks, Rick Clemmer, I am glad to be able to talk to all of you today. Overall, Q1 results were just above the midpoint of our guidance, as NXP delivered revenue of $2.1 billion. However, due to a richer sales mix combined with good expense control, we successfully delivered profitability toward the higher end of our guidance range. Looking forward, our second quarter guidance reflects the successful design win momentum and traction which we have achieved with our customers. While we continue to believe the demand environment in the second half of 2019 should improve versus the first half, the macroeconomic environment is still uncertain, especially in China. Let me turn to the Q1 trends in the end markets. Automotive. Revenue was $1.04 billion, down 8% year-on-year, in line with our guidance. It was a challenging quarter given the macro environment, especially in China.
All major product categories declined as expected, except for revenue from our ADAS solutions, which were up double digits versus the same period from a year ago, a continued reflection of the strong customer traction of our solutions in that space. In industrial and IoT, revenue was $368 million, down 14% year-on-year. This was below our expectations as the demand for general purpose microcontroller products in the broad-based China market continues to be very weak. Remember, this portion of our business is very dependent on thousands of smaller customers serviced through distribution, who appear to be particularly affected by the U.S.-China trade tensions. Let me turn to mobile. Revenue was $241 million, down 9% year-on-year, better than our expectations. Overall, we experienced normal seasonality in this market.
As we predicted at our Analyst Day in September 2018, we are beginning to see the attach rate of mobile transaction solutions with a broader set of customers accelerate. In the premium smartphone market, we did see reduced demand for custom interface products. Communications infrastructure and other revenue was $449 million, up 10% year-on-year, with RF power solutions up a strong double digit versus the year-ago period. We are currently seeing strong order rates for both our massive MIMO and high-power single-channel RF power amplifiers. That demand is broad-based across the spectrum of global base station OEMs. Based on our customer conversations, most believe 2020 will be the big year for the 5G base station infrastructure build-outs, especially in China.
From a product perspective, we think this translates into a phased build-out approach with sub-six gigahertz products driving the early portion of the 5G cycle. Then in 2021 and 2022, we will see carriers begin to deploy high-frequency millimetre wave products. In Digital Networking, we continue to see stabilization and design win traction for the Layerscape family of multi-core Arm processors, which is positive, though revenue contribution is just beginning. Now, turning to our expectations for Quarter 2. We currently do anticipate total revenue will increase in a range of up 3%-7% sequentially, reflecting improved order rates associated with company-specific drivers. At the midpoint of our range, this is an increase of 5% sequentially, or $2.2 billion. From a year-over-year perspective, this represents a decline of 4% versus the same period a year ago, of which 2% is the elimination of the MSA versus the year-ago period.
At the midpoint, we anticipate the following sequential trends in our businesses. Automotive is expected to be essentially flat. Industrial and IoT is expected to be up in the mid-single digit range on a percentage basis. Mobile is expected to be up in the low teens range on a percentage basis. Lastly, communication infrastructure and other is expected to be up about 10%. I would like to pass the call to Peter for a review of our financial performance. Peter?
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 Q2, I'll move to the financial highlights. In summary, our first quarter revenue performance was just above the midpoint of guidance and combined with richer sales mix and good expense control, we delivered better than anticipated non-GAAP operating profit. Focusing on the details of Q1, total revenue was $2.09 billion, down 8% year-on-year, of which 2% was the elimination of the MSA versus the year-ago period. We generated $1.1 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 52.7%, down 20 basis points year-on-year, but 40 basis points above the midpoint of guidance given the better mix.
Total non-GAAP operating expenses were $547 million, down $37 million year-on-year, and up $4 million from the fourth quarter due to bonus expenses. This was $3 million below the midpoint of our guidance. From a total operating profit perspective, non-GAAP operating profit was $559 million and non-GAAP operating margin was 26.7%, down 50 basis points year-on-year despite a $175 million drop in revenue over the same period. Our interest expense was $61 million. Non-controlling interest was $5 million and taxes for ongoing operations were $17 million, all modestly better than the midpoint of guidance. Stock-based compensation, which is not included in our non-GAAP earnings, was $86 million. I'd like to turn to the changes in our cash and debt. Our total debt at the end of Q1 was $7.34 billion, essentially flat sequentially.
Cash was $2.19 billion, and net debt was $5.15 billion. We exited the quarter with a trailing 12-month adjusted EBITDA of $3.11 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q1 was 1.65 times, and our non-GAAP interest coverage was nine times. Our liquidity is excellent, and our balance sheet continues to be very strong. During the first quarter, we returned $788 million to shareholders as we bought about 8.5 million shares for $715 million and paid $73 million in cash dividends. Turning to working capital metrics, days of inventory was 113 days, an increase of 11 days sequentially, though inventory on a dollar basis declined $38 million. We continued to aggressively manage our distribution channel, and inventory in the channel continues to be a very healthy 2.4 months, in line with our long-term targets.
Days receivable were 35 days, an increase of five days sequentially, and days payable was 74, a decrease of six days versus the prior quarter. Taken together, our cash conversion cycle was 74 days, a deterioration of 22 days versus the prior quarter due to lower sales. Cash flow from operations was $296 million, and net CapEx was $144 million, resulting in free cash flow of $152 million. Turning to our expectations for the second quarter, as Kurt mentioned, we anticipate Q2 revenue to be about $2.2 billion ±$50 million. At the midpoint, this is up 5% sequentially, we expect non-GAAP gross margin to be about 53.3% ±50 basis points. Operating expenses are expected to be about $553 million ±$10 million.
Taken together, we see non-GAAP operating margin to be about 28% ±60 basis points. We estimate interest expense to be about $64 million and anticipate cash tax related to ongoing operations to be about $38 million. Non-controlling interest will be about $6 million, a reflection of our reduced loadings in SSMC. I would like to provide an update on our share repurchase program. As previously mentioned, during the first quarter, we bought back approximately 8.5 million shares at a cost of $715 million. Since March 31st, we have repurchased an additional 2.5 million shares out of a cost of about $252 million under a 10b5-1 program. We suggest that for modelling purposes, you use an average share count for Q2 of 287 million. Finally, I have some closing comments I'd like to make.
As Rick highlighted, NXP has multiple unique drivers of growth, which will play out over the coming years. We see our product portfolio as ideally positioned to address multiple secular market trends, from the evolution of next generation automobiles all the way to securely connected edge and IoT devices. As Kurt pointed out, our revenue for the first quarter was slightly better than guidance, with a richer sales mix combined with good expense control, taken together, resulted in a better than guided non-GAAP operating margin. While our gross margin improved in Q1, and we anticipate an improvement in Q2, we still have work to do to achieve our long-term targets, but we continue to anticipate achieving our intermediate target of 55% exiting the fourth quarter of 2019. We continue to believe our cash tax rate related to ongoing operations for 2019 should be about 5%.
We continue to be committed to returning all excess free cash flow to our owners, and we currently have approximately 3.7 million shares remaining under the current authorization. With that, I'd like now to turn it back to the operator for any questions you might have.
Thank you. Ladies and gentlemen, if you'd like to ask a question at this time, please press the star and then the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. As a reminder, we respectfully ask that you limit yourself to one question and one follow-up. One moment for questions. Our first question comes from John Pitzer with Credit Suisse. You may proceed.
Yeah, guys. Thanks. Let me ask the question. I appreciate all the detail. I wanted to ask a little bit about the industrial IoT segment and the expectation for the calendar second quarter. You're coming off a Q1 where you modestly missed your expectations, but you are guiding it up sort of mid-single digits. I'm wondering if you can help us understand from a bottoms-up perspective, just given all the macro uncertainty, why the confidence level of sequential growth? As you answer that question, can you just remind us what normal seasonality is for that business in Q2?
We're not really going to guide the second half of the year, John. First of all, in terms of Q2, as always, our revenue is based on our backlog and what we believe we'll book. Certainly, the industrial market, particularly in China, has been difficult in Q1 and Q2. I guess your third question hidden in there was what's normal seasonality? I'd say 2019, you throw normal seasonality out the window, really. It's really hard to say what might happen. Certainly, as we thought, Q2 is stronger than Q1, and the second half, we think, will likely be stronger than the first half. Beyond that, I don't know, Rick, would you say much more beyond that?
I think the key, John, is the specific design wins we have that will drive our revenue increase. It's not about an expectation of a rebound in the marketplace, but more of kind of a stabilization. Frankly, China continues to be, which is clearly a large market for us from an industrial perspective, continues to be somewhat frozen. Our distributors or partners are becoming somewhat more encouraged, but the end customers are still quite reticent based on the trade uncertainty and the general environment about what's going to take place. What's really giving us the confidence in the outlook that we have is the specific customer design wins with the ramp-up of those new designs that will allow us to outperform the general market.
One thing that was interesting, John, is just going to Rick's comment there on what our distribution partners are thinking. We probably could have shipped about another $42 million worth of product at the end of the quarter in terms of what the distribution was asking for. We were not seeing them ship it out to their end customers, so we've not allowed them to take that product yet. It is interesting that we see a little bit of strength in POA, but we haven't seen the additional, or more importantly, the strength in POS yet.
That's helpful. Then maybe for my follow-on, a lot of conversation about China-U.S. trade relations. I'm wondering, relative to autos, if you can talk a little bit about U.S.-Europe and what's going on around potential tariffs around emissions. As you look at your guidance for Q2 of kind of flat revenue growth Q on Q, how are you thinking about sort of overall industry production versus company specific drivers for NXP, like the radar subsystems?
John, let me take this. When we think about the car production, we really look at the forecasts of IHS mainly, which has deteriorated a little bit since our last call, where I think we talked about -0.4% for the global production in 2019 over 2018. By now, the IHS forecast is -0.9%, so almost -1%, which clearly did not have a great start in China. The China Q1 production number in 2019 was actually -13%. If you look at the forecast for the full year being -0.9%, only in quotes, that means IHS obviously does project a rebound in both Europe and China in the second half of the year. That's largely what we take as the basis for our forecast.
With that, we also believe our business is going to be stronger in the second half of the year relative to the first half of the year. Yes, you were rightfully pointing to that part of our business, which is largely independent of that. Most prominent factor is certainly the radar business. We did say it in the prepared notes earlier. We are on track here in Q1, and we see this also for Q2 and the rest of the year, to be in the high 20% range in year-over-year growth. 25%-30% growth in radar, which is a perfect continuation of the trend which we've also seen over the past years already.
Thanks, guys.
Thanks, John.
Our next question comes from William Stein with SunTrust. You may proceed.
Great. Thanks for taking my questions. Also, too, on the demand side, I think with regard to your Q2 guidance, I think both your infrastructure and handset business look like they're being guided above seasonality. Can you dig a little bit into the trends, especially in, well, in each of them, really? Thank you.
I think the key on the communication side is really some of the early deployment of 5G, which we clearly being a near-term acceleration. Then we think that we'll go through a little bit of a lull for a period where we won't see that continued growth. Clearly very positive for us in Q2 and a positive contribution. In mobile, it really comes down to the continued deployment of the mobile wallet and the applications that we've been referring to in the past. We're beginning to see that come to fruition with developing countries and new customers really offering opportunities to drive the growth rates that we're talking about for Q2.
Yeah. Let me add here. This really falls in line with the longer-term trends which we quoted earlier. From an attach rate of about 30% last year, we see the mobile wallet attach rate going to 50% in 2021. That's well on track, and that's actually behind the growth forecast for Q2 in mobile.
If I could just dig into one of those for a sec, Rick, I think you mentioned something about DN getting new design wins. That business has been challenged for some time. Is this sort of a turnaround we should expect here with growth going forward and sort of a re-acceleration of the business?
Will, we didn't try to say that. What we did say was that the decline we think is under control. I think we have been getting design wins, to be fair, through this period of time. It's just that the revenue ramp associated with those had been delayed. What we are now beginning to see is some of the revenue increases from those new design wins growing faster than the declines of the older legacy business, which had created so much pressure over the last few years, as you're well aware. We are encouraged about our DN business and the design wins we have, though, and the full engagement and the opportunity to participate in a number of new areas, where we really offer a differentiated technology with some of our software-defined radio technology that gives our customers the ability to expand into different innovative networking applications.
Great. Thanks for the detail.
Thanks, Will.
Our next question comes from Stacy Rasgon with Bernstein Research. You may proceed.
Hi, guys. Thanks for taking my questions. For the first one, I wanted to hit on margins. I know you said you're still holding to the exit rate of 55%. Can you just talk a little bit about gross margin drivers, I guess, in Q2 and then through the rest of the year that's going to get you there, as well as your thoughts on the OpEx and operating margins as we go through the rest of the year?
Okay. Well, on gross margin, I'd just go back to exactly what I said to last quarter, because I think that best illustrates where we are on flat volume from a flat revenue from Q4 2018 to Q4 2019. It's basically 200 basis points of self-help, and it's not any one single individual item. We've got a bunch of things going on in test times and yields, and there's a bunch. In fact, I guess the largest part of it is savings that we have tied up with supplier pricing. That really hasn't changed at all. In terms of OpEx, what we said to you should think whatever your number is for the full year, take 16% of that for an annual R&D number and 7.5% for an SG&A number.
I guess given now that we've given you the Q2 number, a portion, a difference over Q3 and Q4 based on how you think revenue is happening. Within OpEx, the big changes you see from quarter to quarter are typically more around what we're doing from a mask perspective than anything else. Right now, we're not really hiring. Clearly, there are some critical replacements we put in place, but we're trying to keep a cap on our costs. I think what you saw in Q2 is we're able to manage our expense pretty well, actually.
I think that's really important, Stacy. As we look at it, with the current environment we see, we're keeping our expenses completely under control and keeping them fairly constrained. We clearly will have investments that we need to ramp up when we see a robust return to the marketplace, but clearly that's not something that's in the line of sight that we have today. As we talked about the ramp-up we see in revenue is more customer specific and design win specific than the general market improvement.
Got it. Thank you. For my follow-up, I want to ask about the district channel. I'm glad to see that you guys are monitoring it tightly. I don't understand, you said that this channel could have taken an additional $42 million in revenue that you chose not to ship, but how do I reconcile that with your comments on the general uncertainty and caution in the market? Why would the channel be looking to take additional inventory if the environment is so uncertain, unless that has some implications for how they're truly viewing the outlook through the second half?
Stacy, I don't think you should read too much into that. I think the point is we had the orders from district, that they have the confidence that they'll need the requirements that would have driven a $40 million additional revenue for us, but without seeing the pickup in actual shipments out from the distributors, we chose not to ship that in because that would have obviously increased our months of inventory, and we're very focused on maintaining that around the 2.4 range. I think the distributors are more encouraged than I've seen them in a few months, but it's not really materializing into shipments out to their customers in a significant fashion. I think it's more of a general indicator, but it clearly hasn't resulted in improved business yet.
I guess what I'm asking is what do you think is driving that sort of improved outlook from them or that improved confidence from them? You don't seem to be seeing it and most other players don't seem to be seeing it just yet. Is it just a hope in general like that this second half's better or what?
I think it's just their business planning. As they go through it and look at what their plans are, they placed orders that would have driven a further increase in our shipments into distribution, which obviously we chose not to do based on the impact it would have had on inventory levels.
To be clear, it wasn't one order from one distributor.
Right.
It was across the distribution.
Got it. Okay. Thank you guys, appreciate it.
Thanks, Stacy.
Our next question comes from Vivek Arya with Bank of America Merrill Lynch. You may proceed.
Thanks for taking my question. The first one for Rick or Kurt. The Q2 sales outlook is among the best that we have seen in your peer group, who were all complaining about China weakness, which is kind of surprising because my sense is that NXP is perhaps relatively more exposed to that market. Maybe, Rick, could you give us some sense of trends you're seeing? I think you mentioned China is kind of frozen. The trends you're seeing in Q2, is that a measure of your own company specific design win activity, or are you just seeing better trends outside of China? Can you just give us some quantification of what you're seeing in and outside of China?
Yeah. I think it's really important to understand that our guidance is based on company specific design wins that we have with customers that give us the confidence about our Q2 revenue outlook. If you look at the market, the market in China continues to be pretty frozen, and we don't see a robust recovery coming yet. There's still a great deal of concern relative to the trade activities and the uncertainty associated with it. I think if you look at Europe has been kind of okay, but it's actually maybe even softened a little bit recently. It's not clearly a robust improvement, and the U.S. continues to operate quite fine.
I think all of that comes together, but clearly our revenue increase is based on company specific design wins, which we've been working on for a long period of time, and we're now beginning to see the results of that design activity that we've had.
All right. For my follow-up on the automotive business, the revenues on a quarterly basis have been in this $1 billion - $1.1 billion range for the last two years now. I'm curious, at what point do you think all the new activities you mentioned, whether it's in ADAS or radar or BMS, can help your overall automotive business get back into a target growth rate, which I think you had at a 7% to 10% CAGR on a longer-term perspective? Thank you.
I would say they do help already now, because it's about 30% of the total revenue, which is way above average in terms of growth. Once the other 70%, based on the SAAR, comes back to a normal growth rate, you will see this striking through for the total. Obviously, with these above-average growth engines like radar or BMS or the digital clusters, of course, gaining share against the total, this will become more and more material over time. This is today a 30% period. Since it grows far above average, the 30%, of course, will take a higher share in the coming years.
I think the real clear thing is the reason you haven't seen our total grow is because of the general automotive market and the declines in production. The fact is we've been able to hold that level on our shipments based on those new product areas. As the general automotive market production levels come back to more of a normal basis, clearly it will kick in and drive revenue growth for us as a company.
Thank you.
Our next question comes from Ross Seymore with Deutsche Bank. You may proceed.
Hey, guys. Thanks for letting me ask a question. I wanted to stick on the automotive side of things. Between the first quarter report and your second quarter guide, it looks like you're down in auto 8%-10% year-over-year. I understand it's a tough market for all the reasons you've given in answering prior questions. If we think about that relative to SAAR, the last couple of years, you guys have outperformed SAAR. You have the 30% driver, et cetera , then you outgrow it even in the 70%. It doesn't seem like that's happening in the first half of the year. Can you just talk about some of those drivers? Is it simply the inventory burn in the first half?
Is your expectation still to be able to outgrow the SAAR side of things and even the automotive semi peers as we get through 2019 and beyond?
Yes, clearly, the expectation is to continue to outgrow the auto SAAR. It just doesn't work on a quarter-by-quarter basis. You have to look at a little bit longer time. We've studied this also historically. It's just swinging, and one single quarter doesn't really work. Yes, clearly, we will continue to outgrow the overall auto SAAR by, say, 5%-7%. That has been the basis and continues to be the basis for our mid and long-term forecast, which is like 7%-10%, which was based on a 2% SAAR. If the SAAR in a couple of quarters returns to more normal rates like 0%-2%, we are also back to that growth rate. Relative to peers, I don't know what peers will print over time.
Clearly in our chosen fields of focus, which we also mentioned at the beginning of the call very clearly, be it the battery management for the electric powertrain or be it radar within the ADAS space, we have outgrown and we will continue to outgrow also our peers very clearly.
Thanks for that, Kurt. My follow-up is one on the cash returns, probably for Peter. I know you have a couple million shares left to buy in the currently approved authorization. Can you just talk about the logistics to expand that and how you're planning to return cash and the balance between share repurchase and the dividend as we think going forward beyond this share repurchase program that's about to expire?
Actually, we can buy back about another 3.7 million shares between now and our annual general meeting, which is in June. In June, we'll-
Request authorization.
Request authorization from our shareholders to have a general buyback capability of, I think it's 20%. That doesn't mean we're, at that point, saying we're going to buy back 20% of the stock, but normally, a Dutch company runs with this 20% allowance in its back pocket, but no one ever spends it. As Rick mentioned before, we basically just spent it in the last six months, which is kind of unusual. In June, we'll get that topped up. More generally, our commitment is to return all excess cash flow to our shareholders. We have a history of living to that commitment, and we'll continue to do it.
Thank you.
We continue to have a dividend, we'll get the chance as we go forward to possibly and potentially increase that dividend.
Thanks, Peter.
Our next question comes from Blayne Curtis with Barclays. You may proceed.
Hey, guys. Thanks for taking my question. Just wanted to revisit the RF segment. It looks like it's re-accelerating in June. Just kind of curious, your perspective on that trajectory this year into next. There's been some talk about maybe customers positioning ahead of Chinese tenders, so maybe you get a little front-loading. Just kind of curious your view there, and then any perspective on your GaN product would be helpful. Thanks.
Yeah. I don't think we see a lot of pre-ordering associated with that. What we really are seeing is a ramp-up of deployment of our massive MIMO solutions, which we've had quite a success in the marketplace. Frankly, we're limited by our manufacturing capability right now. I think that's really kind of the contributing factor for us. It's not about, I think the term you used was pre-orders associated with Chinese. We don't see that as being a significant factor in our Q2 guidance at all. Instead, the massive MIMO results. Our GaN solutions continue to be well-received in the market, and we continue to win design wins. Frankly, it's a challenge to be able to supply all the customer requirements associated with it. We do have our internal manufacturing facility to be ramping later this year associated with GaN.
I think we're in, we believe, quite reasonable shape in GaN, and I think we can continue to take our leadership position in the base station RF market, even as the market converts more to GaN. The timing of the transition to GaN has clearly changed over the last few years. Frankly, the massive MIMO opportunity represents a much more significant growth, we believe, in the next number of quarters, a year and a half or so, than really the opportunity specifically associated with GaN. The LDMOS technology has clearly moved up and been able to move into higher performance than what people would've anticipated several years ago.
Thanks. I just want to follow up on the comments you had on BMS. You talked about several hundred million dollars potential in 2021. Can you wrap any color in terms of geographic and any sort of between now and 2021, is there anything else that has to happen in terms of that design progress? Thanks.
The focus from a partner perspective is really the battery companies. We do work not that much with the classic automotive tier one companies, but with the battery companies. They tend to be, by definition, more in Asia than in Europe or in the U.S. I would say from a geographic design-in perspective, think about China, Korea, even Japan. That doesn't mean that has to do with the local consumption there. It's just that they are the leaders globally in battery technology, in lithium-ion battery technology. They do ship, and we do have some transparency into this, in which vehicle programs are ramping. That's absolutely global. I wouldn't make any differentiation there between European, U.S., or Asian car programs.
The initial production is a quite exciting platform.
Yeah. I'm still a bit shy to say it because it's just about to launch. Actually, it's a very, very large German car OEM, which has its entire electric powertrain battery platform based on our solution. The first cars, which are very nice high-end sports cars, which I think we will all love to have, but they are sold out, by the way, for the next two years, as far as I know. They will launch in late summer this year. Again, that's a platform win, which is then going to actually go and spread out into all of the electric vehicles of that car company. Again, that happens to be a German company, but that doesn't mean that the battery work has been done with a German battery company, which doesn't exist, but actually all in Asia. It's a very global business.
I think we stand very strong based on the combination of our analogue precision, of our ASIL-D functional safety know-how, and the microcontrollers which we have. That system approach continues to give us a unique position in that market.
Helpful. Thanks.
Our next question comes from Craig Hettenbach with Morgan Stanley. You may proceed.
Yes. Thank you. I have a question on industrial IoT. If you can just talk about attach rate with connectivity, with core microcontrollers, any update on some of the trends you're seeing along those lines.
Yeah. I think we've talked about the connectivity requirements for low-power Wi-Fi associated with the industrial and IoT market. We announced some partnerships in the most recent quarter. One of those specifically was an announcement with Murata and Cypress associated with a solution that we're offering. We continue to see a high demand from our customers looking for a complete solution with the connectivity to go with our processing capability to be able to facilitate their solutions and what they're trying to accomplish.
Got it. Then just a follow-up, appreciate the color on the channel and inventory. Any updates on just how lead times are? Then just the comments around kind of overall the market's stable, just how things were through the quarter. Is it still kind of choppy intra-quarter or anything along those lines on the order front?
I guess on the order front, as we talked a little bit about, we've actually seen an improvement in orders, but we don't see the sell-through from our distribution partners picking up, specifically in China. I think while we've seen that increased order activity, we're a little bit reluctant to expect that to really fall through to the customers in the near term or in the Q2 timeframe. Thus, we're relying on the specific design wins that we have to be able to achieve the revenue increase that we have. I'm sorry, I forgot your first comment.
We basically maintain our lead times. We don't
Oh, yeah.
move our lead times around like maybe some of the guys do.
Yeah, we're pretty religious about our lead times. If someone wants to place an order within the lead times, we actually have a tendency to charge them a premium associated with being able to meet those requirements.
Got it. Thanks.
Thanks.
Our next question comes from C.J. Muse with Evercore. You may proceed.
Yeah, good morning, good afternoon. Thank you for taking my question. I guess first question, NXPI specific design win momentum has been clearly a key theme on this call. Curious, as you look at your second half outlook for continued recovery, is that NXPI specific again, or is that something cyclically, structurally, where you see improvements?
We're not talking about the second half as far as projections associated with it beyond what we said that Q2, I mean, second half will be above the first half. The confidence we have is clearly associated with the design wins we have and that being able to facilitate that. There should be some nominal pickup in market, even if there's not a robust recovery in the second half.
Helpful. Then I guess as a follow-up, the mobile up low teens in June is, I guess, a bit surprising seasonally. Curious how we should interpret that in terms of impact and what the run rate will look like into the second half of 2019.
That's the design wins that we talked about and the improved acceptance of our mobile wallet. It kind of continues down that same path, and we expect that to continue, as Kurt talked about. From
30%
30%-50% by 2021. We're kind of on course to be able to maintain that and see a wider acceptance with more customers in different applications to continue to increase our confidence in it. We're a niche player in the mobile market. We're not a mainline player in the mobile market and don't ever plan to be a mainline player, but instead can take unique technology to drive applications for customers that just happen to be deployed in the mobile market.
Thanks, Rick.
Thanks.
Our next question comes from Matthew Ramsay with Cowen. You may proceed.
Thank you very much. Kurt, I wanted to ask a question just on the automotive semis macro, just as more of a clarification than anything. The ADAS business that you have, 30% of your business obviously has really strong growth. The other 70% that's been commented a few times is tied to SAAR. I wanted to make sure we made the distinction between SAAR growth and semiconductor growth within the SAAR. Maybe you could sort of remind us what you guys are forecasting for market growth for the semiconductor macro within the SAAR. Thanks.
Well, let me first try and clarify. When we say the 70% are tied to the SAAR, we still outgrow the SAAR. There is still content growth, obviously, which should be at least 5% ahead of the SAAR, also in that 70% portion of our business. When we say tied to SAAR, what that really means is since it is closer to the SAAR, it swings more with the SAAR, wherein radar, when we grow, say, 30% year-on-year, I mean, the SAAR with a 2% - 3% change actually doesn't matter. That was the commentary we made about association or non-association with the SAAR.
That's why I would say the semi-auto market should continue, thanks to the content increase across the board, should continue to be, I don't know, 4% - 5% ahead of SAAR through the cycle and through the year. The more crucial question is actually what the SAAR is going to be. I mentioned earlier on the call that the Q1 wasn't a particularly great start. IHS was reporting Europe - 8% year-on-year in Q1 in car production, China minus 13%, those are two pretty significant sectors. IHS still forecasts for the year that this gets better in the second half, which results in - 1% for the full year, which should indicate a positive auto semiconductor market for the full year.
Yeah, it's really important to think about the mix of that SAAR as well. If you look at it, China's double the size of the U.S. market, Europe is larger than the U.S. market. In fact, the two largest regions for SAAR production were quite weak in the first quarter.
Got it. Thank you very much for the clarification. Just one quick follow-up on BMS because it's been brought up a few times. I was just curious as to your focus or strategy for the charging side of the battery equation, whether that's supercharger, charger infrastructure, et cetera, and if you're doing any work there. Thank you.
No, we don't. We are not in that.
On the automotive side. We do have charging-
For mobile
for mobile devices.
Not in automotive.
Got it. Thank you.
Thanks.
Our next question comes from Toshiya Hari with Goldman Sachs. You may proceed.
Yeah, thanks very much for squeezing me in. Peter, I had a follow-up question on gross margins. You talked about richer product mix driving your profitability in Q2. Can you talk to some of the product areas that drove the upside there? Related to that, Rick, you talked extensively about ADAS and BMS as long-term drivers. Can you speak to profitability for those two segments as they continue to grow as a percentage of sales going forward?
We don't disclose profitability by segments, either at the gross margin or the operating margin level. There's just lots of moving parts. As I've said previously, the big groups do have slightly different margin profiles, but within the groups, you have different product sets which have different margin profiles as well, and it turned out pretty nicely for us this quarter. Maybe we're a little bit conservative going into the guide.
Yeah, the mix comment was really more focused on Q1, helping facilitate that.
Yes.
I guess the only thing that we could say is ADAS and BMS margins are quite nice.
Okay, that's helpful. Then as a quick follow-up, the comms in for another segment, I believe the long-term growth rate from your analyst day is flat to up 2%. Given the recent developments there and given your commentary on the call, is that a pretty conservative kind of guide at this point, and could there be potential upside, or do you think the near-term strength could be one-off in nature, if you will? Thank you.
There's always gives and takes associated with it. I don't think we're going back and changing our long-term guidance at all. Clearly, in the near term, it's a positive contributor and helps us kind of offset the general market weakness that we see. Clearly, we were pretty conservative on that segment, and we said that at the time that we set the growth guidance. There could be opportunity for upside, but it's always going to be gives and takes, and we're not really changing any of our long-term guidance at all.
Thank you.
Thanks.
Operator, we'll take one more caller today.
Our next question comes from Harlan Sur with JP Morgan. You may proceed.
Morning. Thanks for taking my question. On the industrial and IoT segment in the June quarter, you talked about company-specific design wins. This is a pretty broad-based segment. You've got Kinetis, you've got i.MX, high-performance analogue, wireless connectivity. Can you just help us understand, given the strong design win pipeline, what are the specific applications or products or platforms that are driving the sequential growth? Is it biased more towards things like building automation or factory automation or connected home? Any insights would be helpful.
It's more on the crossover segment is, I think, the key. Where we anticipate seeing the significant growth contribution is the crossover segment, where we're kind of uniquely positioned. As far as driving the growth, it's a lot more on the fitness track, the
Wearables
Wearable segment than anything else. I think over the intermediate term, there's a lot like the immersive sound solutions that we have to be able to differentiate on the Dolby Atmos capability. A lot of factory automation that are spread among many thousands of customers.
Maybe adding voice assist. It's really four areas. The wearables, which you mentioned, Rick. Industrial automation, which is anomaly detection and that kind of stuff. Voice assist into a lot of home solutions.
Industrial.
Industrial, exactly. Finally, the sound bars, where I think, Rick, you also spoke about the Dolby Atmos, for example, where we just got the certification. I'd say it's those four very different segments, but they all use our crossover technology.
Yeah, no, thanks for the insights there and the insights into the RT Crossover platform.
Let's be specific, Harlan. It's not just the RT. Our Crossover family of processors is a combination of RT.
ULP
ULP-
mScale
The mScale. It's a combination of those, not just RT
It's actually a broadening category, which is very good, which I would almost say we are creating between the micros and the application processors. While that started really with a sharp focus on the RT, I think we are broadening this because we have so much traction that we can pull more into it.
I appreciate.
Basically bringing some of the specific functionality that you could normally only get in a very costly apps processor down to a more reasonable cost point for a broader array of implementations.
Yeah. No, that's a good segue into my next question, which is that when we think about your full-blown processor family, the i.MX family, which we typically associate with auto, the i.MX actually continues to have, actually, I think, strong traction in the industrial and IoT edge markets, for example, like your i.MX8 family, that's actually 14 nanometer technology. Can you guys just help us understand the contribution and design win traction of the i.MX in industrial and IoT edge markets?
It's significant. Kurt talked about the specific applications that we see and the broad base associated with that, and we continue to have good traction, but it's a broad array of customers and not any individual, single solution.
Great. Thanks for the insights.
Thanks, Harlan.
Thank you. Ladies and gentlemen, this now concludes our Q&A portion of today's conference. I would now like to turn the call back over to Jeff Palmer for any closing remarks.
Great. Well, maybe I'll make a few closing remarks as opposed to Jeff. I think we were very pleased with our quarterly results in Q1 and encouraged about the customer acceptance that we have that allows us to have the guidance for Q2. That opportunity to continue to gain traction with the design wins and make a difference for our customers is really about our long-term strategy and how we're focused on customer focus passion to win, to be able to drive our solutions, to be able to make a difference with our customers. We're encouraged about being able to demonstrate the comprehensive results associated with that. Thanks a lot for your support, and we appreciate it.
Thank you.
Ladies and gentlemen, thank you for attending today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.