Good day, ladies and gentlemen, and Welcome to the fourth quarter 2018 NXP Semiconductors earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star and then zero on your touch-tone telephone. As a reminder, this conference is being recorded. I would now like to hand the call over to Mr. Jeff Palmer, Vice President of Investor Relations. You may begin.
Thank you, Amanda, and good morning, everyone. Welcome to the NXP Semiconductors fourth quarter and full year 2018 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. On our call today, we'll 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 first quarter 2019.
Please be reminded that 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 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 fourth quarter earnings press release, which will be furnished to the SEC on Form 6-K and is available on NXP's website in the investor relations section.
Before we begin the call today, I'd like to remind you that beginning January 1st, we have shifted our revenue reporting to an end-market view from an operating segment approach. We believe this change over time will enhance the insight into the drivers of our business relative to the markets in which we operate. The current and historical end market information is available from our investor relations website in the historical financial model, which we post every quarter. Now I'd like to turn the call over to Rick.
Thanks, Jeff, and welcome everyone to our conference call. On today's call, I would like to cover three major themes, our full-year financial performance, our view of the market environment in which we operate, and the specifics around our fourth quarter performance. Overall, looking at 2018, our revenue was $9.4 billion, an increase of 2% year-on-year. The drivers of the full-year growth were the automotive and industrial end markets, with flattish trends in mobile following a strong 2017, offset by weaker trends in the communication infrastructure and other end market relating to a decline in our digital networking business. Turning to the details of the full-year. Automotive revenue was $4.51 billion, up 6% year-on-year. Highlights include double-digit growth of both our radar transceivers and processing solutions for ADAS applications and the growth of i.MX processors used in auto display cluster applications.
For the full-year, ADAS products were just under 10% of overall automotive revenue, and the expectation is for continued strong growth as automatic braking and other safety features become more widely deployed and mandated. Industrial and IoT revenue was $1.81 billion, up 6% year-on-year, including high single-digit growth in general purpose MCUs. Within the portfolio, growth of our 32-bit ARM MCU products were up in the high teens, driven by the breadth of our power-optimized portfolio and 25,000+ customer base served through our distribution partners across industrial and IoT applications. We also continue to see the acceleration of design wins for our RT Crossover processor family announced last year. Mobile revenue in total was $1.16 billion, essentially flat year-on-year, with sales of mobile transaction products up mid-single digits in 2018.
In mobile transactions, we continue to be focused on moving the attach rate of mobile wallets down into the feature phone market and adding new use cases, including transit and access solutions. Communication infrastructure and other revenue was $1.79 billion, down 4% year-on-year, with increases from early 5G trials during the second half of 2018 more than offset by the continued declines in digital networking. Before we review Q4, we would like to offer our views on the current demand environment. As we communicated on our third quarter call, we believe the demand environment was cloudy at best. As we progressed into the later part of Q4, we began to see accelerating deterioration in the China automotive and industrial markets.
With respect to automotive, we see weakening domestic demand in China clearly impacting the demand from global OEMs and Tier 1 suppliers. Within the broad China industrial market serviced by our distribution partners, we saw an increased reluctance to place orders due to weak demand from their end customers, which we believe is due to the uncertainty created by the ongoing trade dispute. In this broad market, it is extremely difficult to point to one specific set of customers or submarkets that is causing the reduced demand. In the European automotive market, the WLTP emissions testing bottlenecks we highlighted last quarter continues to create headwinds to demand. We do not see the testing bottlenecks clearing before the end of Q1. In addition, the lack of progress of how the U.K. will exit the EU has created additional levels of uncertainties in the auto market.
Within the mobile market, we anticipate worse than seasonal trends into the fourth quarter, primarily due to weaker trends in the premium smartphone market and the continued absorption of shipments after the strong launch in India by Reliance in the second half of 2017. Overall, we do not see the historical leading indicators of an overheated supply chain, including unusual backlog cancellations or outright program cancellations. Our distribution channel continues to be in good shape with channel inventory consistently at 2.4 months, in line with our long-term targets. Unfortunately, we do not have any unique insights to forecast the duration or depth of the slowdown. Our order rates would indicate that Q2 revenue will be higher than Q1.
With most third-party economists continuing to forecast global GDP at a range just under 3%, you would have to believe the second half of 2019 will be stronger than the first half for the semiconductor market. Now I'd like to turn to the specifics of Q4. Total revenue was $2.4 billion, a decline of 2% year-over-year. Our results were modestly better than our guidance for the quarter. From an end market perspective, automotive Q4 revenue was $1.11 billion, up 1% year-on-year, with ADAS and auto i.MX both up double digits. In industrial and IoT, revenue was $435 million, down 7% year-on-year, primarily reflecting the weaker distribution trends in China, as previously mentioned. In mobile, revenue was $344 million, down 8% year-on-year, primarily due to a tough comparison with the ramp of Reliance in the second half of 2017.
We did see seasonally strong sequential demand for mobile transaction products in the premium smartphone market. Communications infrastructure and other revenue was $483 million, up 3% year-on-year, with RF power solutions up a very strong double digit, offset by declines in digital networking. I'd like to pass the call to Peter for a review of our financial performance.
Thank you, Rick, and good morning to everyone on today's call. As Rick has already covered the drivers of the revenue during the quarter, I'll move to the financial highlights. In summary, our Q4 overall revenue performance was modestly better than the midpoint of guidance. As it's our year-end, I'll review the full year financial trends and then move on to the results for the fourth quarter. For the full year, revenue was $9.41 billion, up 2% year-on-year. Non-GAAP gross profit was $4.98 billion or 52.9% of revenue. Non-GAAP operating income was $2.7 billion or 28.7% of revenue, essentially flat year-on-year on a dollar basis as we stepped up R&D investments over the course of the year while we manage d SG&A expenses downwards.
We generated $3.76 billion in free cash flow, which included the one-time termination fee from Qualcomm, and we returned $5.08 billion to our owners through a combination of share buybacks and cash dividends. We reduced our diluted share count by 15% versus the same period a year ago. Focusing on the details of the fourth quarter, total revenue was $2.4 billion, down 2% year-on-year, though modestly above the midpoint of guidance. We generated $1.28 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 53.1%, down 110 basis points year-on-year. Total non-GAAP operating expenses were $543 million, down $25 million year-on-year, and a reduction of $20 million from the third quarter. This was $8 million better than the midpoint of our guidance.
From a total operating profit perspective, non-GAAP operating profit was $731 million and non-GAAP operating margin was 30.4%, down 70 basis points year-on-year, reflecting the previously mentioned items. Interest expense was $60 million, non-controlling interest was $13 million, and cash taxes for ongoing operations were $29 million. Stock-based compensation, which is not included in our non-GAAP earnings, was $93 million. I'd like to turn to the changes in our cash and debt. Our total debt at the end of the fourth quarter was $7.35 billion, an increase of $1 billion sequentially, as we issued $2 billion of our first investment grade bonds and simultaneously repaid the $1 billion bridge loan facility. Cash was $2.79 billion, and net debt was $4.57 billion. We exited the quarter with a trailing 12-month adjusted EBITDA of approximately $3.15 billion.
Our ratio of net debt to trailing 12-months adjusted EBITDA at the end of the fourth quarter was 1.45x , and our non-GAAP interest coverage was 12x . Our liquidity is excellent, and our balance sheet is very strong. During the month of October, we returned approximately $500 million to shareholders, as we bought 5 million shares for $424 million and paid $74 million in cash dividends. During the quarter, we paid a deemed dividend tax of $142 million, and as a reminder, this payment does not go through the P&L. Turning to working capital metrics, days of inventory was 102 days, an increase of two days sequentially, though slightly down on an absolute dollar basis. Days receivable were 30 days, a decrease of two days sequentially, and days payable were 80, an increase of six days versus the prior quarter.
Taken together, our cash conversion cycle was 52 days, an improvement of six days versus the prior quarter. Cash flow from operations was $731 million, and net CapEx was $170 million, resulting in free cash flow of $561 million. Turning to our expectations for the first quarter. We currently anticipate total revenue will decline in a range of 16%-10% sequentially, reflecting the weaker demand environment Rick discussed. At the midpoint of our range, this is a decline of approximately 13% sequentially and 8% versus the same period a year ago, or $2.09 billion. As a reminder, beginning January 1st, we made a shift towards reporting our total revenue on an end market approach. We have posted the historic data on our website, and our guidance today will follow the new end market definitions. At the midpoint, we anticipate the following sequential trends in the business.
Automotive is expected to be down about in the mid-single-digit range. Industrial and IoT is expected to be down in the low double-digit range on a percentage basis. Mobile is expected to be down in the low 30% range. Finally, communications infrastructure and other is expected to be down in the upper single-digit range. We expect non-GAAP gross margin to be about 52.3% ±70 basis points. Operating expenses are expected to be about $550 million ±$12 million or so. Taken together, we see non-GAAP operating margin to be about 26% ±100 basis points. We anticipate cash tax related to ongoing operations to be about $24 million, and we estimate interest expense to be about $62 million because of the additional debt we added last quarter.
Non-controlling interest will be about $7 million, down about $6 million below our usual number, reflecting our joint venture partners' reduced loadings in SSMC. I would like to provide an update on our share repurchase program. As previously mentioned, in October 2018, we bought back 5 million shares at a cost of $424 million. Since December 31st, in 2019, we have repurchased an additional 5.9 million shares at a cost of about $481 million under a 10b5-1 program. We suggest that for modeling purposes, you use an average share count for the first quarter of 219 million shares. Finally, I have several housekeeping comments I'd like to address. One, g iven our new end markets reporting, I would recommend you all review the data we posted.
Going forward and beginning in Q1, we will not include revenue from our manufacturing services agreements, which is related to the divestment of assets such as standard products and RF Power a couple of years ago. As an example, the MSA revenue in the first quarter of 2018 was $39 million. What you will now see in our Q1 guidance is zero, which creates obviously about 160 basis points of headwind to our product revenue growth. As Rick pointed out, most economists continue to predict global GDP growing 3% in 2019. At this point, we would see no reason to not believe our market can't grow 3%-5% compound annually over the next three years, and that our business reflecting this growth would grow 5%-7% compound over the same period.
Clearly, our gross margins are challenged in Q1, but we still plan to exit fourth quarter 2019 at 55%. Interest costs for 2019 are anticipated to be about $270 million, and that reflects the new debt. We continue to believe our cash tax rate related to ongoing operations for 2019 should be about 5%, and we expect CapEx for 2019 to be in the range of 6%-7%. I'd like now to turn it back to the operator for questions for Rick and I, and of course, Kurt.
Thank you. Ladies and gentlemen, at this time, if you do have a question, please press the star and the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question is from the line of John Pitzer of Credit Suisse. Your line is open.
Yeah. Good morning, guys. Thanks for letting me ask the question. Rick, I guess my first question is just can you talk a little bit about the expected inventory trends as you go through the March quarter, both on your own balance sheet, but I guess more importantly in distribution. When you look at your rev guide for Q1, do you think that that represents kind of under-shipping end demand? Is there any meaningful difference on what's going on with inventory by geo?
Well, I think, John, as we've talked about, if you look at our automotive business, the bulk of that's outside of China is actually on a vendor-managed inventory. We actually only ship it to the customer when they're actually using it in production. In the case of China, it's not quite as refined yet, most of the shipments we have for the automotive market in China do go through our distribution partners. As we talked about, our total distribution inventory is at 2.4 months. Our target is to maintain that at around 2.5 months, ± 0.5. Clearly the guidance we have would be dependent upon our anticipation of what we believe the POS to be for Q1 with the reduced inventories that would go associated with that.
I think we're in a very unusual environment where the U.S. is okay. Europe is basically okay, maybe not quite as robust as it was in Q3. China is just kind of locked down. It's in a quagmire. Our distribution partners' customers are not placing orders and not taking inventory because of their uncertainty about what's going to happen in the trade war. So long as we see this uncertainty on the trade war, there'll continue to be a reluctance by them to place orders and take inventory.
If you believe that the full year's GDP growth is going to be 3% or just under, clearly that can't continue. If that's the case, we'll see a significant rebound in the second half of the year. As we said, our orders right now would indicate that Q2 will be higher than Q1. I would say that we see an improved environment, but we're still going through the shipments in Q1, and we'll have the distribution inventory reduced associated with those reduced shipments in Q1.
On our internal inventory, John, I think I said last time, I want to get it down to 95 days. We're putting a lot of pressure on the organization to do that. Clearly, Q1's a difficult quarter to do because it tends to be a low quarter. I have a lot of confidence we'll get there. We're certainly not going to allow our inventory to grow on a dollar basis.
That's helpful. As my follow-up, just on the auto trends in Q1 and then throughout calendar year 2019, clearly autos is outperforming the midpoint of the overall guidance. Does that, in your view, reflect just kind of you keeping up with the market, or are there company-specific drivers that you see kicking in in Q1 that are helping you outperform the overall market? How does the company specific stuff trend throughout calendar year 2019?
Well, I think the company specific, I'll let Kurt comment on it in just a second. I think we believe that on the ADAS, specifically in radar, that will continue to ramp through the year. Q1, we've been shipping, it's just under 10% of automotive revenue for full year 2018. We'll continue to see that more robust than the rest of the automotive market, and that will continue to ramp through the year, specifically in automotive.
Yeah, Rick. Absolutely. John, as we had discussed earlier, the ADAS being now just below 10% of the total auto revenue is a strong content story. The current environment, we don't see that disturbing that trend. We clearly see that the, say, 25%-30% growth rate of that part of the business is fully intact, also in the current environment. While other parts of the business obviously are much closer tied to the SAR, which has been more suffering from the Q1 environment.
Another one which we, and Rick was speaking about it earlier, which does clearly outgrow from a content perspective is our i.MX applications processor business, which goes into the digital clusters. There is a continued strong trend of adoption of digital cluster solutions, where we have a very broad leading solution with our i.MX applications processors. Those two, I would say, clearly are content driven also through a weaker market environment.
Thank you.
Thank you. Our next question comes from the line of Stacy Rasgon of Bernstein Research. Your line is open.
Hi, guys. Thanks for taking my questions. I wanted to ask about the gross margin guide. You're still holding the 55% up to the end of the year. What revenue level is required to hit that? Can you give us some idea of the gross margin drivers that drive your trajectory from the Q1 point through Q4 exiting the year to get there?
Yeah, sure, Stacy. Obviously anticipated that we get a lot of questions around this. I think if you go from Q4 2018 to Q4 2019, flat revenue, to get from 53.1%- 55%, there's several things. First of all, we have our annual price reductions, so that gives us about an 80 basis point headwind. Mix adds a little bit of a benefit, in what we're planning right now, probably about 60 basis points. Operationally, I've got about 200 basis points of performance locked in to get to the 55%. That's about 130 basis points in input pricing, which we've got identified, and about 60 basis points in factory efficiency, which we've got identified. To be honest, on that last one in particular, the factory efficiencies, I'd like to see that improve, actually.
I said it last time, I don't think we need a volume or a revenue increase off our Q4 2018 number, to get to 55%. I think we've got it pretty well identified now. If I can do better, I'll do better, but there's always things that have the potential to offset some of the other potential goodies we could see. I'm feeling pretty comfortable about it still.
Got it. Thank you. For my follow-up, I wanted to ask about buybacks. I know you've been buying back more incremental amounts lately. I think you had said that you needed to hold a shareholder meeting to authorize a further large repurchase amount. Why have we not seen that shareholder meeting? Is it going to happen soon, and how much of the existing authorization of the buyback remains?
Well, yeah, there's a kind of technical thing in the Netherlands where, basically, each year you get an authorization to buy back up to 20% of your stock. Typically, people don't buy back 20% of their stock. We're getting close to it. The reason we've not asked for that meeting yet is I can still buy back about, I think it's about 14 million shares, which is one, and at least well, at current price is $1.5 billion or so. As soon as I use all that, I'll go and request a meeting, but, either way, our next annual general meeting is, and Rick will probably correct me, is in May or June, and we'd get it topped up to 20% of that. The simple answer is I have the capacity to still buy an additional $1.5 billion, so I don't need the approval right now.
Got it. Thank you so much.
Thanks, Stacy.
Thank you. Our next question is from the line of William Stein of SunTrust. Your line is open.
Great. Thanks for taking my question. Just one more quick one on the buyback. Peter, I think you've said, either at the Analyst Day or the last call, that you anticipated spending approximately $3 billion from Q4 2018 through the full year 2019. Is that still the plan?
Yeah. We said we would return, and we've said this for many years, all excess cash to shareholders. If you do the math, obviously you have to now include our dividend in there. Yeah, it'd be roughly that number.
Okay. Then I guess I'd like to turn to 5G. Rick, last quarter, I think you expressed some skepticism about the near-term strength in that market, owing to your customers' sort of design approach, and expressed an expectation that there might be some change in that that would accelerate demand. Can you update us on your view in that market, in the quarter and as we progress through 2019? Thank you.
Thanks, Will. I think 5G is still pretty fluid right now. I think one of the major U.S. carriers actually announced that they were going to delay some of their deployment on the CPE for the last mile because they didn't believe the architecture was ready for prime time, a little bit like we talked about on our last earnings call. I think it kind of confirmed our view associated with that. We anticipate that there's not really going to be the 5G availability of a reasonable cost architecture that's not driven by FPGAs until late in 2019. We would not see a huge ramp-up of that CPE or last mile for 5G until late 2019.
I think in the meantime, in preparation for 5G mobility, the infrastructure investments are ongoing, and we see a very solid demand, a very solid increasing demand, that frankly, we're struggling a little bit to get in position to be able to fulfill all the requirements. It is kind of a tale of two pieces. When you look at the infrastructure side, we do see that really beginning to ramp now. When we see the deployment of more for the last mile, we think that that'll be later in the year before really the architecture will be cost-effective to be able to support a significant ramp.
In that last comment, you're talking about Massive MIMO and your power amps. Is that the business you're referring to?
Yeah.
Thank you.
That's what we see today, is we see for the infrastructure deployment, Massive MIMO, as well as the deployment for base stations, to get prepared for the 5G rollout, actually beginning to receive orders for it today.
Thank you.
Thanks, Will.
Sorry, just before the next question, I need to correct something. Stacy, I have 10 million shares capacity left, not 15. I could only buy back, what's that, $1.1, $1.2 billion before I have to go back to the shareholders. Again, I don't think that's an issue, and it's an easy thing to do should we need it.
Operator, we'll take the next.
Thank you. Our next question comes from the line of Vivek Arya of Bank of America Merrill Lynch. Your line is open.
Thanks for taking my question. Rick, from a high-level perspective, do you think NXP is more exposed to China versus your peers? You are perhaps seeing more of this downturn, and if there is a trade resolution, perhaps you also see somewhat better recovery. As part of that, I think you mentioned some optimism around Q2 being better. I was hoping you could give us some color on which end markets are starting to stabilize and which remain weaker. I know it's pretty early and data is limited.
I guess, relative to China, I think China represents a significant portion of our business. If you look at what we see, we see that the end market in China, from a distribution viewpoint for the industrial side, is kind of continuing to be somewhat on hold or in the gray area. I think what we talked about that gives us the confidence for Q2 is the order rate that we see for the last few weeks coming in actually really gives us the confidence that Q2 will be in excess or larger than Q1. I do think that China is somewhat of a contributor, but I think obviously there was a hard shift, a hard reset by a number of our customers, specifically in automotive, but also with our industrial and IoT customers in China.
As we see that taking place, so long as the world's GDP continues to be relatively healthy, then I think we're very confident we'll work our way out of that. The increased orders that we've seen over the last few weeks really gives us that ability to have the confidence to be able to say that on this call. Relative to the second half of the year, it all gets down to what your belief is on the world's GDP. Long as you believe it's going to be close to 3%, then we clearly believe that the second half of 2019 will be better than the first half.
I think, Vivek, our exposure to China complicates things for us slightly in the sense that we know what we ship in. The supply chain in China is certainly more opaque than what you'd see in Western Europe or the U.S. It feels to us like we do get moved about in terms of what's going on in the supply chain over there. Once we ship it in, you don't know where it comes out. We ship auto product in there that some of it will be for domestic, some of it for global. Our industrial products will be assembled into devices that get shipped all over the world.
It works both ways, actually. Even some of the ship to in Europe and the U.S. ends up in the end market of China.
Yeah.
We don't have 100% traceability which shipments are really down to the market itself in China. Both outside of China shipments could end up in China. Some of the into China shipments could be tied to end markets outside of China.
Yeah.
That's why it's really a bit hard to say what exactly that exposure is.
Jeff, what was our 2018 ship in number? Was it 20
Just right 20 some odd percent into China.
Yeah, high 20s, no?
No. It was 27%.
27. I think, yeah, I think it's like 27%, 28%, Vivek, in terms of ship in for 2018.
Got it. For my follow-up, back on the automotive business, it grew about 6%, you mentioned, for the full year. It was growing at obviously a higher pace until Q3. How would you characterize the market share environment in your traditional markets? Let's say if this year we are in a situation where the automotive industry has negative units, down 3%, 4%, do you still think your automotive business can grow in that environment that some of the new initiatives, Rick, that you mentioned in battery management systems and radar and other areas, can they grow enough from a content perspective to help you do better than the unit environment? Thank you.
This is Kurt. Let me try and capture the pieces of your question. Firstly, on the SAR environment for 2019, we do see external sources forecasting somewhere between +1% and -1%. A big data point which we typically look at is actually IHS, which talks about +1% SAR growth for 2019. Also some people are more negative, like -1%. We think it's going to be somewhere in that range. 2018, however, was actually a negative SAR, reported at -2%. In that environment, we did grow 6%, as you said.
Obviously the content growth story did play out the way we were speaking about it earlier. In that regard, yes, we do think that also for 2019, that theme is intact. I talked earlier about ADAS as a large contributor, being pretty independent of the SAR, but also the i.MX cluster applications helping in that respect. In a SAR environment, which is maybe around the zero unit growth in 2019, we do think indeed that our content growth story does help us to outgrow the SAR continuously.
Hey, Vivek, it's Jeff. I'd just like to also clarify, I looked at the wrong number. Our ship to for China is high 30% range. Apologies.
Okay. No worry. Thanks very much.
Thank you. Our next question is from the line of Ross Seymore of Deutsche Bank. Your line is open.
Hi, guys. I wanted to go back to the distie side of things and maybe ask the revenue visibility in a different way. Can you just talk about what you're seeing on the distie side versus the OEM side, and maybe specifically in your first quarter guide of the down 13% sequentially, how the OEM versus distie side differs either in aggregate, or if the distie side is worse, given your commentary in China, is that really localized to the industrial market or any of the various end markets that your new segments define?
Clearly, Ross, when we talk about the market in China on the industrial, a significant chunk of that, somewhere around three-fourths or 80% of that is served through the distribution channel, and that's really the area of significant weakness that we see, combined with automotive. In the case of automotive, it's probably somewhere between a fourth and a third of our total business goes through the channel, primarily for shipments into China. The rest of it is pull from vendor-managed inventory, where we have seen declines.
We talked about in our Q4 call for Q3 results, that we've seen a decline in auto production in Europe for the CO2 testing, and we see that continue through Q1. There continues to be an impact of that. There's also the uncertainty of Brexit, and the auto industry has a lot of parts moving from Europe to the U.K. and vice versa. That's created some concern with the lack of clarification of what's going to happen on Brexit as well. I do think, really the key area that we see the weakness is really China.
I think, Ross, your question was indeed then for China, distie versus direct. Clearly that weakness in China expresses itself in the distribution channel for us. That's both for industrial as well as automotive.
Got it. Thanks for that. As my follow-up question, Peter, you did a great job of walking us through on your expectations for the full year on the gross margin side with a lot of helpful detail. I wanted to switch over to the operating margin side and specifically the OpEx side. Given that revenues are weaker than expected, what's your plan as far as how OpEx spend might trend directionally throughout the year? Are you tightening things down given the revenue level? Are you investing more for growth? Any sort of changes in your strategy from the last time we spoke?
Well, you can see in our Q4 actuals and our Q1 guide, we're definitely keeping a lid on things at the moment. We're not taking out any programs. We're managing travel, not replacing all attrition straight away, trying to push out various expenses. All the kind of things you'd normally do. On a more long-term basis, into 2019 and 2020, I'd go back to our percent of revenue. We want to run R&D about 16% of revenue. We'd like to run SG&A about 7.5%. Going forward, we'd see, over the next three years, R&D around about 16% and ultimately getting SG&A down to about 7%.
Thank you.
I guess it's important to say, Ross, we are definitely taking actions in the near term to significantly control our cost. We're adjusting people levels. Relative to that, as Peter said, we're not really stopping any programs, but we clearly are not replacing attrition in some cases.
Performance improvements. We work to actually use this to move low performers eventually out of the company, to strengthen the organization. All of that helps the cost levels.
I think you've seen historically from us, and I think there's a clear indication in Q3, Q4, and Q1, that we will manage our OpEx, and we know how to do that.
Got it. Thanks, guys.
Thanks, Ross.
Thank you. Our next question comes from the line of Matt Ramsay of Cowen. Your line is open.
Thank you very much. I wanted to ask about, I guess, two of the smaller segments of the business, I think one growing really strongly and the other one on decline. I think you guys mentioned that the 32-bit MCU programs in aggregate were up on the order of high teens. Maybe you could give us sort of an update about how big that is in the overall mix and the trends you see there, relative to demand and sort of distribution levels. On the flip side, you've been very clear about how you're going to manage the decline sort of directionally of the digital networking business. Maybe you could just talk to us about where that business is run rating now so we can sort of, I guess, calibrate models going forward. Thanks, guys.
Yeah, sure. On the 32-bit ARM, we don't talk about the specifics associated with it, but it's the biggest chunk of our industrial and IoT business. That really gives us the benefits of looking at that from a growth. The one area that we're seeing really strong design wins on is our new crossover product that we announced really about a year ago, the so-called RT family, which takes the processing capability of our i.MX family down to a cost of micros on specific applications like visual or error detection or audio. That's really a significant factor for us in driving that growth, and we continue to see that accelerate with design wins. That puts us in a really unique and positive position for the 2019 outlook. We're kind of uniquely positioned where there's not a lot of competition in that space.
Most of our competitors in i.MX don't participate in micros, and vice versa, the same thing with the micros. We're kind of in this sweet spot where it gives us the ability to really drive that and participate in it. On the digital networking business, that business is kind of stabilized. It's declined through 2018 and kind of stabilized at just over $100 million a quarter or so. There are some opportunities for growth with design wins we've won over the last year or so as we see those finally begin to ramp, and the PowerPC legacy business not continuing to decline as much as it has in the past. I think we've gotten to more of a stable level there. With some of the applications that we see, there are some opportunities for growth later in the year, in 2020, that we'll see how they materialize.
Thank you very much.
Thanks, Matt.
Thank you. Our next question is from the line of Blayne Curtis of Barclays. Your line is open.
Hey, guys, thanks for taking my question. Just two. One on auto, just trying to better understand the trends there. You obviously called out two segmenting double-digit growth. Curious, obviously, autos are slower. Kind of curious, are there any segments that are providing a headwind above and beyond what we're seeing from just the overall environment? Then in just 5G, I wanted to understand, that was a big boost that kind of surprised people at the end of 2018. It seems like you're saying things may take a little bit of a pause, but I just wanted to understand what your expectations are for the RF business and kind of the first half of the year.
Let me take the RF business first, then I'll let Kurt comment on automotive. On RF, we are seeing demand ramp for the Massive MIMO and 5G infrastructure. We're frankly struggling here on a near-term basis in being able to meet all the requirements from our customers. We are seeing a ramp, and that's being a significant positive contributor versus the overall environmental issues that we see in the other businesses. We think we're in a unique position with our Massive MIMO product and have gotten really very positive feedback from customers and a requirement to be able to actually see if we can build more for them than what they had originally anticipated as we go into the near term. Let me let Kurt then talk about auto.
I think in auto, it's really differentiated between what is a content growth story versus what is very tightly associated to the SAR growth. Those product or application segments where we are holding a high share, but the penetration itself isn't growing anymore, we are obviously more swinging with the SAR quarter by quarter. You could call this, especially with the China environment and the WLTP in Europe, a headwind, where again, at the same time, the content growth, and I mentioned ADAS radar before, is largely independent of this. It's the mix of those two which drives our overall growth number. Roughly speaking, we think that about 70%-ish of our total business is pretty close associated with the SAR, where another 30% are really benefiting from strong content growth. In that 30%, the largest piece obviously is ADAS, which is just under 10% of the total run rate.
Blayne, it's probably worthwhile to talk about in the case of automotive, in our last quarter's call, we talked about in Q3, we'd really seen weakness in the CO2 testing in Europe, and we actually didn't see a lot of weakness in China in automotive at that time. It was really not until kind of mid to late Q4 where we began to see some weakness in the automotive market in China as all of that basically served through the distribution channel partners. We saw that weakness really begin to materialize at that point in time.
Indeed. Many of the Tier 1 companies talked about this already. We didn't see it in our orders nor in our revenue, I think it was late Q4, kind of late November, early December, that we also saw that hitting us. Again, that only relates to that product which is in a one-one relation with the car production.
[Hubbell], thanks.
Thank you. Blayne?
Thank you. Our next question is from the line of C.J. Muse of Evercore ISI. Your line is open.
Hey, guys. This is Matt Prisco on for C.J. Outside of GDP forecast, are there any customer conversations or other factors that are giving you confidence in the second half recovery? Regarding the recent order uptick, do you think any of that's related to pull-ins ahead of the Chinese New Year tariff deadline?
No, there was none of that that felt like it was pull-ins associated with the Chinese New Year tariffs. Once again, the U.S. is okay. We really don't see a lot of concern about demand from our customers in the U.S. The general economy, even though it's down somewhat, is still performing quite well. In Europe, I would say we see things pretty reasonable, but we do see isolated pockets, again, driven primarily by automotive, and we believe the biggest chunk of that is CO2 testing, and we'll see how the demand comes out after we get work through that.
Some of the Brexit.
The effects associated with Brexit that we talked about. In the case of China, that's much more cloudy, much more murky as far as determining what's happening in the second half of the year. I think it does depend on some kind of resolution or confidence in what's going to happen out of the current trade issues that are being discussed. If you believe that the trade issues were going to continue, then the world's GDP is not going to be close to 3% for the year, and then that's a different factor. So long as you believe that the world's GDP is going to be just under 3%, there probably has to be a trade resolution with China to be able to accomplish that. With that, then we think we'll see a very strong growth in the second half of the year.
Fair enough. Thanks. Then as a follow-up, just a housekeeping item. It looks like your incentive cash tax forecast increased for 2019 and for 2020. Can you give some additional color there?
Right. You're talking about the taxes for the businesses that we like Nexperia, where we sold off, and also the tax on the Qualcomm transaction. You actually have to look at the Q4 actual. We were saying previously that we'd spend $295 million in Q4, and we only spent $32 because we went into a kind of long-winded negotiation with the Dutch tax authorities and were able to negotiate that particular transaction. The Qualcomm deal went through the Innovation Box. We managed to reduce that a little, but I guess because of the time we were negotiating, it slipped from Q4 into Q1.
The big move is really just the fact that we moved the payment on the Qualcomm breakup fee from the end of December to early January. I think if you actually do the math on Q4 actual and what we've guided for 2019 and 2020, the amount is actually lower. It's a very specific cash flow item, that's why we pull that one out separately.
Okay. Operator, we'll take the next caller, please.
The next question comes from the line of Craig Hettenbach of Morgan Stanley. Your line is open.
Yes, thank you. Just a question for Kurt on the BMS side. Just curious to get kind of what type of feedback you're hearing from customers, given you're taking more of a kind of complete system approach versus some of the existing players, and just how you feel about the pipeline of opportunity in BMS.
Thanks, Craig. Yeah, we feel actually increasingly stronger because in the whole environment, the one sub-segment which has really pushed is electric cars. There is a pretty strong drive to really be on time from a car company perspective to do the launches, which were planned for 2019. If you think about it short term, the design win funnel, which starts to turn into a couple of tens of millions revenue in 2019, is on track. That is all firmly decided. It depends now really on the timeliness of the car launches. I unfortunately cannot tell you which cars those are, but once they are out, we will tell you, and it's pretty prominent, nice cars.
On the more strategic side, yes, the solution play, which we talked about earlier, is absolutely hitting the nail as much as the A to Z capability. I really want to say it's two things. It is the solution play between micros and the analog front ends, and the A to Z capability of the whole solution, which continues to set us apart from competition.
Got it. Just to follow up on the near-term environment, on the WLTP issue, do you think once that passes, there should be kind of a catch-up? Or because the overall automotive market is soft right now, you wouldn't see any kind of rebound, if you will, in Europe?
Really hard to say, Craig. I'm very careful with that because, of course, this is also somehow related to the overall demand environment in the end. I'm hearing, but we don't have the latest detail, that there is a second wave of WLTP planned, another tighter test limit for CO2 emissions. I'm hearing that the OEMs now start to figure out how they can again go ahead with that one. What we can say at this point is that the current one is not going to clear before the end of Q1. If there is a strong rebound from this, I'm a bit careful to say that this is going to happen then in Q2. Not sure.
Okay, thank you.
Thank you. Our next question is on the line of Mark Lipacis of Jefferies. Your line is open.
Hi. Thanks for taking my question. One for Peter and one for Rick. Peter, just accounting mechanics on the deemed dividend. Is that embedded in the cash flow statement under shares repurchased? For Rick, a number of microcontroller companies and analog companies have kind of talked about a benign pricing environment. When Peter just walked us through the variance for gross margins as we go through this year, I think there was a note of 80 basis points of headwind on the pricing side. I was wondering if you could share with us your thoughts on kind of like, just the bigger picture, what's going on in the industry with consolidation and how that seems to be helping some of the other microcontroller analog companies, but it doesn't seem to be benefiting you guys yet. If you have any thoughts or color on that would be greatly appreciated. Thank you.
Hey, it's Peter. First thing, it goes through the cash flow, not through the P&L. If you look on table three, you can see an item there, cash paid on behalf of shareholders for tax on repurchased shares, $142 million right at the bottom of the cash flow. That's pretty specific. The other thing I just see on the comments I made on gross margin on pricing, that's just our annual price reductions. It's not related to kind of anything that's going on in the market.
I would say that the general environment on pricing is okay. I don't think that we would say that it's poor for us at all. I think, if anything, we're trying to whittle down. When you go through the annual price negotiations with the OEMs and the Tier 1s, it's an arm wrestling that takes place, and we try to get it down slightly, and it's under contract, and we try to reduce it slightly, and they try to get a little more. I don't think there's a significant change in environment that we see associated with that. On most of the industrial and IoT, you set that price with the design wins, and then you have a built-in reduction that takes place associated with those that we honor contractually. Kurt?
It's also important to note that a lot of the ASP reduction you see there is a once-in-the-year element. I mean, that happens in Q1, and then it's done for the year. It's not like this repeats all the time, but it's because those are annual contracts. I clearly support what Rick was saying. I think we actually played it a bit tougher this year, meaning that directionally, we gave less price away than on the average of the past years.
Thank you. That's helpful.
It really depends on the product family, and it has different characteristics based on the customer and product family and everything. It's really hard to draw any conclusion. I wouldn't say that the pricing environment is problematic. It's very healthy right now.
Thank you.
Great.
Thank you.
Mark.
This does conclude our question and answer session. I'd like to turn the conference over to Mr. Jeff Palmer.
Great. Thank you very much, everyone. Before we go, I think I'll pass the call over to Rick. If you have any last comments you'd like to make?
Yes. Thank you for joining us. I guess the thing that we have to point out is that we remain in somewhat of a cloudy environment, but the encouraging sign that we see with increased orders over the last few weeks really improves our confidence for the Q2 outlook and that being larger than Q1. For the second half of the year, it comes down to your belief on the GDP and whether the trade issues will be resolved so that we'll return to a healthy growth around just under 3% as most of the economists are projecting or not.
With that, I think it's important to point out that we are taking the appropriate cost actions to be sure that our costs are under control and we can deliver on our financial performance to ensure that we continue to focus on improved shareholder value as we go forward. Thank you very much for your support, and we appreciate it.
Thank you, everyone. This concludes the call.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.