NXP Semiconductors NV (NXPI) — Q2 2019 Earnings Call Transcript

Thanks, Sonya. And good morning, everyone. Welcome to the NXP Semiconductors second 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 the financial results for the third 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 today. 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 of the company. Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our second quarter 2019 earnings press release, which will be furnished to the SEC on a Form 6-K and is available on NXP's website in the Investor Relations section at nxp.com. And now, I'd like to turn the call over to Rick.

Thanks, Jeff. And welcome everyone to our conference call today. Today, I'll start and provide some mid- and long-term strategic commentary. Then Kurt Sievers, our president, will review the end market revenue details of Q2 and provide revenue guidance for Q3. And finally, Peter Kelly will review the financial details of the quarter and expectations for third quarter. As most of you remember, last quarter, we discussed company-specific design wins in our focused end markets of automotive, industrial, and IoT. Today, I'd like to provide additional details and share some exciting new engagements which reflect the momentum we have in our target markets. Within our automotive market, we discussed that one of our key focus areas is radar solutions for level 2 and level 3 ADAS vehicles. Initially, radar will facilitate automatic emergency braking which is being mandated by multiple regulatory groups, like NCAP in Europe. Eventually, new use cases will be adaptive cruise control, lane change assistance, cross traffic alerts, and blind spot detection. These features are all dependent on radar as the key enabling function and, ultimately, radar solutions will become standard equipment regardless of the car, tier, or OEM brand, making all of our driving safer. For NXP, we have emerged as the number one supplier for the complete radar subsystem, with radar representing almost 10% of our auto revenues in 2018. To date, our success on the processor side has been broad-based, while the transceiver shipments have been largely driven by a single large European tier 1, who represents about 30% of the overall radar market and services several major OEMs globally. We're excited that shipments from our design win momentum will expand based on the initial ramp up of one of the most innovative North American tier 1 suppliers who we ultimately expect to have about 20% of the overall radar market. We are now aligned with the tier 1 market leaders which service a dozen of the largest global auto OEMs. Our success in the ecosystem is due to the market-leading performance, product integration, and complete end-to-end solutions supported by the industry's broadest portfolio and roadmap of multi-generation processors and transceivers, both 77 GHz SiGe and RFCMOS. We have additional tier 1 design wins and engagements ongoing and we'll continue to invest in the area to expand our market and thought leadership. These engagements continue to underpin our confidence that NXP will outgrow the overall auto radar market with our planned growth of 25% to 30% compounded annually over the next two years. Now, I'd like to turn to a very exciting new solution, ultra-wideband or UWB. UWB is a technology that enables secure relative location and distance measurement with a very high degree of precision and low latency. This is an area we have been investing for several years in stealth mode and believe NXP has a unique first mover advantage, which yields category leadership. We see clear interest from participants in the automotive, industrial, IoT, smart home, smart retail, and mobile markets. One of the first use case applications will be to revolutionize the next generation of secure car access solutions. We have a system-level solution that leverages foundation IP at the intersection of two existing NXP application areas – automotive secure car access and secure mobile payments, both areas where NXP is the undisputed true market leader with relative market shares of 2.9 times and 7.9 times the number two player respectively. The overall solution leverages NXP's market leadership in connectivity, embedded secure elements, and digital credential management technology. As announced by the leading German newspaper and mentioned by Forbes, UWB today adds a new level of security to car key fobs that can prevent relay station attacks by distinguishing the authentic signal from the related or spook signal. UWB is the most precise, secure, and real-time ranging technology that allows coexistence with existing radio technologies. This will give various applications the ability to process contextual information such as the position of a UWB anchor, its movements, and the distance to other devices with an unprecedented precision to within a few centimeters, enabling decision-making and management of these devices to occur with high granularity. A consumer could remotely share secure access to a home or building from their phone where the door lock identifies the new person through localization and secure credentials before opening the door. In addition to secure door access, our customers have envisioned applications such as indoor location-based services, highly immersive virtual gaming systems, and many more use cases. This is clearly not a science project looking for a problem to solve. We've developed products and are very actively engaged with leading customers in various target segments in a complete ecosystem. We have won key designs with several customers across the mobile and automotive end markets with volume production set to start in 2020. We see the market opportunity developing to approximately $900 million by 2024. We believe our market share will be equivalent, with our first mover advantage, unique IP, system knowledge, and high RMS foundational positions. This is an exciting new and incremental opportunity for NXP. Now turning to the industrial and IoT market. On May 29, we announced the intent to acquire Marvell's connectivity assets. We expect the business to add about $600 million of incremental revenue by 2022, roughly two times its current run rate. This was not an acquisition we executed in the spur of the moment. We spent nearly a year looking at all the connectivity assets in the market. Our conclusion was that the Marvell team provides NXP with an industry-leading connectivity engineering team, a strong complementary product portfolio, and a successful history of fundamental IP development. The product set and especially the disruptive Wi-Fi 6 portfolio will immediately complement our key processing, security, and connectivity offerings in our strategic end markets of industrial and IoT as well as automotive. Looking at the recent history of all applications in crossover processor design wins, we have been awarded in the industrial and IOT market; nearly two-thirds have included a connectivity solution which had to be sourced from other vendors. Connectivity is clearly becoming a must-have functional capability for IOT solutions. We believe our leading processor product offering, our broad go-to-market channel, and the market inflection by Wi-Fi 6 will all directly underpin the strong growth we have highlighted. We are very excited about the transaction and look forward to welcoming the team to NXP. Lastly, a quick comment on our efforts in the mobile market. Our focus on the mobile markets is primarily aimed at the evolution and adoption of the mobile wallet and associated services like transit ticketing. We said our growth in the mobile market would be a function of increased attach rate, not fundamental handset unit growth. We believe the mobile wallet attach rate in 2018 was about 30% of all phones and we are targeting this to expand to about 50% by 2021. A large Chinese handset OEM has aggressively deployed our mobile wallet solution across its entire portfolio, whereas in the past, the adoption had only been deployed on limited premium models. This customer is strategically focused on increasing its market share in both the domestic China and global handset market, resulting in significantly increased 2019 launch and build plans. NXP experienced a significant ramp in demand during Q2, and this is a great example of how customers perceive the value of NXP's mobile wallet, especially in the domestic Chinese market for mass transit access. Kurt will review the specific details in a moment. In summary, our strategy continues to yield positive results. We will continue to drive focus in our strategic end markets, engaging with customers to deliver superior, highly differentiated products regardless of the short-term fluctuations in demand. I'd like to now pass the call over to Kurt to discuss the results of the current quarter.

Thanks, Rich. And good morning, everyone. I'm really glad to be able to speak with you all today. Overall, our Q2 results were about the midpoint of our guidance, with the contribution from the mobile markets somewhat stronger than planned, while the demand in the auto markets was slightly weaker. Taken together, NXP delivered revenue of $2.22 billion, which combined with good expense control enabled us to successfully deliver operating profitability above the higher end of our guidance range. Let me turn to the specific trends in Q2 in our focused end markets. Automotive revenue was $1.03 billion, down 10% year-on-year, in line with our guidance. Based on the most recently available IHS data, year-on-year global car production trends continue to be revised down, especially in China and Europe, the two largest auto manufacturing markets, while the North American market slowed modestly. This had the effect of slightly weaker-than-anticipated shipments in Q2 for NXP. Revenue in all our major product categories declined versus the year-ago period as anticipated, except for revenue from ADAS, especially radar, which was up double-digits—a continued reflection of NXP's differentiated product offerings and our strong customer traction, very much in line with how Rick laid it out just a minute ago. In industrial and IoT, revenue was $390 million, down 14% year-on-year, in line with our expectations as the demand for general purpose MCU products in the broad-based China market continues to be very weak. However, we saw the expected double-digit year-on-year growth of our crossover processor products, albeit from a small overall base today. Remember, our industrial and IoT business is primarily serviced through our global distribution partners and relies on tens of thousands of smaller customers, which appear to be particularly affected by the continued US-China trade tension. Let me turn to mobile. Revenue was $297 million, up 25% year-on-year, better than our expectations. As Rick just mentioned, we continue to see the attach rate of our mobile transaction solutions grow with a broader set of customers moving from premium to volume and all the way to feature phones. In Q2, we saw a large Chinese handset customer who was focused on increasing his market share globally and locally and ramped orders on us a touch more than what we had anticipated. Lastly, our communication and infrastructure segment, revenue was $499 million, up 19% year-on-year, in line with our guidance. All associated product lines grew during Q2 with RF power solutions continuing to drive strong double-digit growth versus the year-ago period. We experienced strong annual growth in our shipments for both massive MIMO and high-powered single-channel RF power amplifiers, with the increased demand spread across nearly all the global base station OEMs. Now, turning to our expectations for quarter three. In the auto and industrial and IoT markets, our guidance reflects ongoing subdued ordering trends due to macro uncertainty, combined with the anticipated pause in the communications infrastructure market after the blistering pace of growth over the last quarters. Better than our Q3 mobile guidance is what we would consider normal sequential order rates from our largest premium handset customer offset by a sequential step down from the Chinese handset customer we previously discussed. Taken together, this suggests what some analysts would consider seasonality of our mobile business into Q3 of this year. We currently anticipate total revenue will be in a range of flat to up 2% sequentially. At the midpoint of our range, this is an increase of 1% sequentially or $2.24 billion. From a year-over-year perspective, this represents a decline of about 8% versus the same period a year ago, which 120 basis points is the elimination of the MSA versus the year-ago period. At the midpoint, we do anticipate the following sequential trends in our business: Automotive is expected to be up low-single digits versus Q2; Industrial and IoT is expected to be up in the upper single-digit range on a percentage basis; Mobile is expected to be down in the low-single digits on a percentage basis; and finally, Communications Infrastructure and Other is expected to be down in the low-single digits on a percentage basis. We believe the short-term demand environment continues to be challenging and has incrementally weakened versus our prior view. Yet, we do still anticipate the second half of the year to be greater than the first half, but at a lesser rate than assumed earlier this year. In summary, our new product introductions, customer engagement levels, and design win momentum in our strategic focus areas continue to be very positive. We continue to be very optimistic about the long-term potential of NXP. And with that, I would like to pass the call to Peter for a review of our financial performance.

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 Q3, I'll move to the financial highlights. In summary, our Q2 revenue performance was just above the midpoint of guidance, which combined with good expense control resulted in a very strong non-GAAP operating profit. Focusing on the detail for Q3, total revenue was $2.22 billion, down 3% year-on-year, of which 160 basis points was the elimination of the MSA versus the year-ago period. We generated $1.2 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 53.3%, up 50 basis points year-on-year and in line with the midpoint of our guidance. Total non-GAAP operating expenses were $541 million, down $50 million year-on-year and down $6 million from Q1. This was $12 million better than the midpoint of our guidance. From a total operating profit perspective, non-GAAP operating profit was $640 million and non-GAAP operating margin was 28.9%, up 190 basis points year-on-year despite a $73 million drop in revenue over the same period. Interest expense was $61 million. Cash taxes for ongoing operations were $30 million. Non-controlling interests were $5 million, all modestly better than the midpoint of our guidance. Stock-based compensation, which is not included in our non-GAAP earnings, was $87 million. Now, I'd like to turn to the changes in cash and debt. Our total debt at the end of Q2 was $8.54 billion, up $1.2 billion sequentially as we issued $1.75 billion of new debt and retired $600 million of existing debt. Cash was $3.03 billion. Net debt was $5.51 billion, slightly up on Q1. We exited the quarter with a trailing 12-month adjusted EBITDA of $3.15 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q2 was 1.75 times. Our non-GAAP interest coverage was 10.5 times. Our liquidity is excellent and our balance sheet continues to be very strong. During Q2, we returned $716 million to shareholders as we bought about 6.6 million shares for $645 million and paid $71 million in cash dividends. Turning to working capital metrics, days of inventory was 100 days, a decrease of 13 days sequentially and a quarter-on-quarter decline of $97 million. We continue to aggressively manage our distribution channel, and inventory in the channel was very healthy at 2.4 months within our long-term targets. Days receivable were 32 days, a decrease of 3 days sequentially. Days payable was 67, a decrease of 7 days versus the prior quarter. Taken together, our conversion cycle was 65 days, an improvement of nine days versus the prior quarter. Cash flow from operations was $517 million and net CapEx was $106 million, resulting in free cash flow of $411 million. Turning to our expectations for the third quarter, as Kurt mentioned, we anticipate third-quarter revenue to be about $2.24 billion, plus or minus $30 million. At the midpoint, this is up 1% sequentially. We expect non-GAAP gross margin to be about 53.7%, plus or minus 30 basis points. Operating expenses are expected to be about $536 million, plus or minus about $10 million. Taken together, we see non-GAAP operating margin to be about 29.7%, plus or minus about 20 basis points. We estimate interest expense to be about $69 million and anticipate cash tax related to ongoing operations to be about $41 million. Non-controlling interest will be about $10 million, reflecting improved loadings at SSMC. I'd like to provide an update on our share repurchase program. In Q2, we bought back approximately 6.6 million shares at a cost of $645 million. Since the beginning of Q3 2018, we have repurchased just over 69 million shares for a total of $6.33 billion. Combined with our quarterly cash dividend, we've returned $6.55 billion to our owners over this period. Our capital strategy continues to be to return all excess cash to our owners while maintaining a target leverage ratio of 2 times net debt to trailing 12-month adjusted EBITDA. During Q2, we announced the acquisition of Marvell connectivity assets for $1.76 billion. As we build cash to pay for this asset, we will likely pause our share repurchase program for the balance of 2019. For the third quarter, we suggest that, for modeling purposes, you use an average share count of 284 million shares. Finally, I have some closing comments. Firstly, as previously noted, the NXP board of directors has decided that NXP will become a US domestic filer as of August 2019, but will continue to be a Dutch domicile company. In October, we will submit our first quarterly 10-Q financial statements and our annual 10-K in February of 2020. We believe this will ultimately lead to NXP being included in various broad-based US equity indexes. Secondly, as Rick highlighted, we're very positive about the acquisition of the Marvell connectivity assets and we've submitted all the required regulatory pre-merger notifications. We've received early termination clearance from the US Federal Trade Commission on July 11 and continue to expect that all regulatory approvals will be complete by the first quarter of 2020, with a possibility that some approvals could be obtained earlier. As Kurt pointed out, we are pleased with our performance in Q2. Our revenue was slightly better than guidance and with the contribution from mobile markets being stronger-than-expected, while the automotive market was slightly weaker. Our expectations are that revenue in the second half of the year will be greater than in the first half of the year. However, the absolute performance is likely to be weaker than we originally anticipated at the beginning of the year or at the end of last quarter. Our non-GAAP margin improved again in Q2 and we anticipate further improvements in Q3 as we continue to work towards our intermediate target of 55% exiting Q4 2019 on flat year-on-year revenue. I continue to have confidence in our ability to deliver the improvements under our control, particularly regarding cost control. However, given the current environment, it's difficult to predict what the final revenue for the fourth quarter and its impact on gross margin might be. So, with that, I'd now like to turn the call back over to the operator for your questions.

Sonya, we'll now poll for questions please.

Great. Thank you. First question. Just, Rick, talk about the current environment. Like you said, things have still gotten a bit worse here from a macro perspective. But, just curious to see how you're seeing distributors act during this period of time. I think last quarter you mentioned you could've shipped 40 more into distribution than you did and you kind of held back. So, how you managed it this quarter and as you look into Q3?

Yeah, thanks. I think the market environment hasn't changed significantly. We had anticipated that we would see some improvements in the second half of the year. Clearly, that has been pushed out. We do see a little bit of improvement in China, I would say. I think that comes down to just the fact that their inventory levels are down – where now when they have orders, they have to order products to be able to supply those. However, at the same time, we've seen Europe weaken and we've seen the US weaken. When you look at our distributor partners, they are clearly not having the same performance levels they were as you look at their announcement of their results, with even one of them doing a preannouncement associated with it. So, I think the environment continues to stay quite uncertain. The improvements that we had anticipated have definitely been moved out, although we still are improving slightly as we show from the base. Clearly, automotive is improving. We've been fortunate that we had the strength of our infrastructure and 5G deployment over the last couple of quarters. The large mobile customer deployed on more broadly based in Q2. It then requires a little bit of adjustment in Q3 after they filled up their supply chain. So, all of that comes together to kind of create a little bit of an uncertain environment, I would say, on a continuous basis and not the uptick that we had anticipated for Q3 and going forward at this point yet.

Okay. Appreciate the context there, Rick. And just a follow-up for Kurt on the automotive side, particularly for BMS, just kind of how you're feeling about from a design perspective, what you're seeing in the market for new designs around BMS?

Yeah. Thanks, Craig. Now, clearly, we do see continued strong traction on the design side since BMS is 100% function of the traction and penetration of all levels of electric vehicles, all the way from mild hybrids over hybrids to fully electric vehicles. Our traction on the design win side is good. We see now in the second half of this year, the first more significant shipments going. A large European OEM is going into full production in the second half of this year with a fully-electric vehicle, which we serve 100%. From that perspective, we are very much on track, Craig, with what we have expected on the BMS side. I might want to give you a little bit more detail on the different levels and the silicon levels – content silicon levels in the different sorts of vehicles. We are focused and have a very high success rate in low and mid-voltage electric vehicles including mild hybrid and full-hybrid vehicles. In those vehicles, we do see silicon content from NXP in the range of $50 to $90 per car. That includes the microcontroller and it contains all the analog front-end chips on each of the battery cells. The larger the batteries, the more cells, the more analog front-ends and thus a higher silicon content. That’s why I give you this range of $50 to $90. For those vehicles, our design win rates continue to be in the range of, I would say, 80% hit rate. From all the visibility we have into open design win funnels, we continue to win about 80%, which is truly high. This is next to the fully electric vehicles. With this large European OEM, we're going into production as we speak. These cars, we call high-voltage BMS systems. They typically go all the way up to 800 volts. They have a somewhat higher silicon content. Here we can cover between $80 and $160 per vehicle. Also, there, our traction is good, but not as high as the 80% I quoted for the low-to-mid voltage cars. So, Craig, I know that went deeper than you might have expected, but since this is an area of high interest, I felt it was appropriate to give you a bit more granularity here.

Appreciate that. Thank you.

Operator, we'll take the next caller please.

Yes. Good morning, guys. Congratulations on the solid results. My first question, just on inventory management, you guys did a really good job in the June quarter both with channel inventory and inventory on your own balance sheet. Peter, I'm kind of curious if you can give us some sort of guidance looking into September of how you think your own inventory days will trend? And I guess, importantly, as part of your gross margin target of 55%, were there any utilization actions that you've taken that were a headwind that started to become a tailwind as you thought about managing inventory?

As always, really good questions, John. First of all, on distribution, we talked in the past that we just managed the distribution inventory very tightly and don't ship in until they're more or less proven they've shipped out. In terms of internal inventory, it's been a challenge the last 3 or 4 quarters to show improvement in inventory as the revenues kind of suffered from the lighter demand in the marketplace, but we finally caught up this quarter. My internal target is 95 days. I'm not sure I can kind of get there in this coming quarter, but I would not expect our inventory to go up in terms of days. It should be somewhere between 98 and 100 days. We have been hit by some utilization issues as you were suggesting in Q1, Q2, and Q3, and we’ll see some relief from that in Q4. So, yes, there you go.

I think it's probably particularly worthwhile to point out, John, as you can tell from our inventory, we've been very cautious with our manufacturing operation. Therefore, we would not try to load them up to put product in inventory as we understand some of our competitors have.

That's helpful. And, Rick, maybe as my follow-up, I wonder if you can just comment a little about the US-China trade issues and whether or not either directly or indirectly the Huawei ban impacted either your June quarter or September quarter either on the mobile or the infrastructure side?

Yeah. The trade issues between the US and China continue to be quite unclear. We are not the most knowledgeable source of information. Relative to Huawei specifically, we continue to follow the US guidelines and trade policies. We have been shipping and will ship again in Q3. There are some limited product areas where we have US-sourced technology that we've not been able to ship to Huawei at the current time, but it's a pretty minimal impact, not really a significant financial impact for NXP.

Thanks, guys. Appreciate it.

Thanks, John.

Great, thanks for taking my questions. First, I'm hoping you can comment on margins or, said another way, OpEx. I think you've provided sort of goal posts to get to 23.5% of revenues spent on OpEx by Q4. I assume that's pushed out a little bit owing to the slightly slower demand you highlighted, but any update there would be helpful. Thank you.

We continue to manage OpEx pretty tightly. We're going full out to get to 16% on R&D and 7.5% for SG&A. You've seen in – both on our Q2 actual and our Q3 guidance, we do have some flexibility on what we can do. We've not been replacing attrition as we go forward and any hiring we do for new positions is very, very limited, which has helped us. We do have some flexibility with our incentive compensation. Reflecting the lack of growth in the businesses has had an impact on our incentive compensation. On the other hand, we continue to invest aggressively in the programs that we think will drive the future success of our company. So, you see mask charges in particular usually a big item and can move cost around from quarter to quarter. Absolutely, we've not given up on the 16% and 7.5%, Will, and we'll either get there or get very close this year and talk about that for future years as well.

Yeah. Will, it's probably worthwhile to add that we've also taken out low performers, several hundred low performers as we tried to manage our cost base in addition to the attrition non-replacement that Peter had talked about. We continue to be very tight relative to our investments and go through a lot of reviews of the strategic investments we are making to ensure that the timing is absolutely required, but yet we are ensuring that we're not putting any of the growth plans in any of our customer relationships in any kind of risk or jeopardy.

That's great. Very helpful. I appreciate it. If I can follow up on the handset growth and subsequent sort of fall off in the coming quarter, I thought that, either last quarter or inter-quarter, you had highlighted at least one other region where there were strengths outside of China. Are you seeing a broader than anticipated adoption of mobile wallet and did you see that in the quarter? Am I correct that there are more than just this one vendor of China you referred to?

There definitely is. We've been very successful in India, as we mentioned, where the mobile wallet has actually been deployed on phones as low as $25. Now, in the current quarters, they've already built up their supply chain and they're kind of trying to absorb that and achieve their deployment to the market. So, it's not nearly as significant an impact in Q2 or even the Q3 outlook as it has been earlier, but it definitely represents another significant proof point. But this customer in China, the encouraging thing was, we've been very successful with him on their high-end smartphone deployments. They made their decision to go across the entire portfolio and they are very aggressive in their intent and goals of increasing their position in the mobile market, and so we're encouraged about being able to support them. But in Q2 specifically, they ramped up. As they made their decision to go across the entire portfolio, we had to ramp up their supply chain and then we go through a normalization process in future quarters. So, Q2 did have a ramp associated with that, but didn’t fall off in Q3 for that specific customer in China.

It's very helpful. Thank you.

Hi, guys. Thanks for taking my question. I wanted to ask a little about the three-year model. That model was, I guess, starting in 2019 and going forward for a few years. But 2019 obviously is going to be weaker than anticipated. How does the weakness in 2019 affect that through your model at all? And where does that, I guess, additional growth have to come in the last two years to make up for the weakness in the first two? Where does that growth come from?

So, Stacy, it was actually 2018 through 2021. So, the base year was 2018. Really, we don't see that being a material impact. What we could see is some of the categories and the areas that we have changing somewhat, but we believe that, in total, we're still on track. The key for this is the design wins and the company-specific ramp in revenue that we have associated with that where we continue to be very encouraged in the growth areas of automotive that we talked about, specifically in radar in the near term for level 2 and 3. The crossover processors that continue to be strong contributors will continue to add more and more revenue with increased revenue associated with them. Clearly, 5G represents an opportunity above what we actually had in the growth guidelines at that time. We're still in the ballpark associated with it, but we clearly have to do some work and understand how long it takes us to get through this industry slowdown to actually confirm that.

Got it. Thanks. And I guess, to follow-up on that around auto, the auto business for the first three quarters of the year with the guidance down, call it like mid to high single digits and with the strength in radar and BMS and some of the others that are growing quite a bit, it implies that the more traditional part of the portfolio is even worse than that. Obviously, SAAR is down this year, but it's not down as much as that. Is this just an inventory correction? And if that's the case, is it reasonable to expect that to rebound as the inventories flush out as we drive into next year? Would it be reasonable to assume that we could do better than normal next year coming off of this?

Stacy, this is Kurt. Let me try and answer that. First of all, yes, the latest SAAR forecast—and you know that we typically use IHS—has deteriorated unfortunately again. A quarter ago, we talked about a 3% SAAR decline this year. The latest IHS forecast we got just 10 days ago was minus 4%. If you look through the reports from the big tier 1s like Continental, Aptiv, Bosch, and others, they estimate more like 5%. Our model still sits on IHS, which is a third-party source, but indeed it has deteriorated. This inventory effect we’ve seen through the past cycles, which means that the auto semi market declines stronger going into this and bounces back stronger coming out of it. The question is when is the moment of change of direction, which I don't dare to forecast. The only thing I would tell you is that if you look at the annual growth basis into our quarters, then in Q2, we did a report of a minus 10% decline in automotive. The Q3 guide we just gave you is now minus 7%. We see at least from Q2—against Q2 comparisons annually—that it's getting slightly better. If this is an indication of things really moving out, I don't know, but at least also the SAAR is reported by IHS in the second half to get slightly better, led by China because China seasonally always has a much better second half than the first half. IHS is expecting about a 14% production growth in China in the second half over the first half. I don't know if that is true, but directionally it should be right that this is changing for the second half.

Got it. Thank you.

Thanks, Stacy.

Hi, guys. Thanks for letting me ask you a question. I want to focus on the industrial and IoT side of things. I know the crossover processors are a great source of growth and you guys have been in line with your guidance in the last quarter and seem to be accelerating seasonally in the third quarter. But overall, it's still down about 15% year-on-year. Can you talk a little bit about what's weighing on that? Is it just the inventory burn in the channel or is there anything else? And how do you expect that growth to resume? Similarly to the last question, once that inventory burn is done, is there kind of a super-sized reacceleration as the channel starts to refill?

So, Ross, I think you're absolutely right. Our industrial and IoT for the last couple of quarters have been down around 14% year-on-year. Our guidance, while up 8% in Q3, would still be down around that same level year-on-year. We can't be specific on the inventory levels. Remember that in industrial and IoT, approximately 80% of that goes to the distribution channel. We're really kind of at the mercy of our distribution partners to understand what's happening with the customers. There's not any perception of ongoing inventory. It's really this quagmire. The market is kind of frozen, specifically in China, with the fear about what's going to happen in the trade tensions; we don't see a significant improvement overall. At the same point, as you look at the new design wins we have in the crossover areas, as those begin to ramp, we should see a revenue contribution from that. It will be at a slow rate and it’ll be a positive contribution, but it won't move the needle significantly on any individual quarter. It’s more of the cumulative impact of those design wins and how they get deployed in the market, which should put us in a better position as we go out a few quarters.

That's helpful. And for my follow-up, I just want to switch over to the com infrastructure and other segment. You talked about the 5G side pausing a bit. Can you just walk through how you see that rolling out for the different stages of 5G? Also, can you remind us what percentage roughly of that kind of 21%, 22% of your total revenues in that segment the com infrastructure side truly represents?

On a percentage of that, it's probably two-thirds between the RF power and digital networking business.

Yeah. If you include digital networking associated, it was two-thirds. It's probably about a half for the RF power or just slightly under half based on the growth we've seen. The growth that we've seen, Ross, has been in the massive MIMO deployment where they're expanding the capacity associated with their installed infrastructure. In the future, when they move to 5G deployments, they can upgrade that with a software deployment to facilitate 5G. What we're seeing that's creating a significant increase in revenue has been the massive MIMO deployment and not 5G per se. We've seen some 5G impact, but it's really been much more significantly weighted towards massive MIMO. We have a pause, as we've been saying, that we anticipate a pause after our customers are ramping up their supply chain. We still see a very positive scenario and continue deployment through the rest of this year and next year in massive MIMO, and we believe our success in that area is quite positive. Then we anticipate seeing the 5G ramp itself happening much more strongly in 2020. It depends on when it gets rolled out in China. We've seen some pull in of the rollout of 5G base stations in China as they seem to want to accelerate their 5G deployment.

Thank you.

Thanks, Ross.

Thanks for taking my question. I had two as well. First on gross margins, I believe, Peter, you mentioned that you're still kind of targeting 55% exiting Q4. So, that would be about 130 basis points or so of sequential improvement. I'm curious, what are the puts and takes around that? What kind of revenue or mix assumptions underlie that? Because usually your Q4 has been up. Some years, it's been down. Some years – if I assume it's flat, that would signal some year-on-year sales decline. So, I'm just curious to understand what is the sensitivity of gross margins to that kind of revenue profile.

Well, I've talked about in the past, I've said based on flat revenue from Q4 2018 to Q4 2019, we would move up from 53% to 55%. I talked about— we saw some normal headwinds from price, so ASP, and they would be offset by mix. We had about 230 basis points of self-help, and I think just over half of that was in supply pricing or maybe just less than half. At the moment, I really don’t know where we'll end up on revenue. As we said in our comments, although the situation hasn't gotten worse, if it hasn’t strengthened, then we feel a little bit more uncomfortable than we did then. So, flat revenue, I would say 55% is in the bag. If revenue is not flat in Q4, we've said a very rough guideline: a 5% drop in revenue is about 100 basis points of impact to gross margin. It really depends on what the mix of the change is and is it internal or external. So, it's not an absolute serving. I guess in terms of things I have under our control, I'm very, very confident, incrementally more confident than I was three months ago, but we'll need to wait to see how the revenue plays out for Q4. Definitely, I think we've done the right thing structurally and it will put us in good shape for when things come back.

Thanks. And for my follow-up, I'm curious about the 30% of your business in automotive tied to ADAS and electrification where you set targets at 25% to 30% growth. How did that do in Q2 and what are the trends in the second half? Do you think the macro environment is impacting that growth part of the auto business, or is there a secular aspect to it and that is still continuing for your original targets? Thank you.

I'll make a couple of comments and I'll let Kurt talk. The fact that we see clearly a softness in auto demand does have some impact on those growth areas as well. They're not ramping up quite as fast. They still are growing very significantly, but not quite as fast as we would have anticipated originally. We do see strong growth associated with those areas and specifically radar.

Yeah, Rick. So, we do confirm double-digit growth, which we achieved in Q2 as expected. With the SAAR being more in the minus 5% area versus zero or plus 2%, there's some impact, but this is nothing of relevance for the mid to longer term. The growth is still very much dependent on the penetration of the functionality, as Rick had laid out for radar in his prepared remarks. Over and above, we are very confident to continue to expect 25% to 30% revenue growth over the next three years in that portion of the auto business—ADAS radar, digital clusters, and somewhat later, because it comes today from a smaller base, the battery management business.

Thank you.

Hey, guys. Thanks for taking my questions. I have two. Just one on the OpEx side, I noticed you moved about $80 million to assets held for sale. I know it's fairly small. Just wondering if you could comment on that. Or if you can't, just maybe—just strategically, any comments on that kind of initiative. And then, you mentioned UWB—maybe sounds like that'll get some adoption on the mobile side this year in the market. I'm just curious for you, when you see that ramping. Any way you can kind of size that market?

So, the asset held for sale, we can't tell you specifically what it is, but we're doing due diligence to dispose of a very small part of our business at the moment, and hopefully we will wrap that up before the end of the year. This sale is non-strategic in a business that we felt like was better off being in somebody else's hands than ours. On ultra-wideband, it really won't start shipping till 2020—not this year—and we’re extremely excited about that opportunity. In fact, I’ll let Kurt make some comments on that as well.

Yeah, it’s really an ecosystem play which leverages, in an excellent way, our strong foothold from a technology perspective in secure cars as well as in mobile transactions and security. Revenue impact, we will start to see by the middle of next year ramping. We believe this will develop into a market of almost a billion in 2024. With our first mover advantage, strong foothold, and creation of the ecosystem itself, we believe we will have a leading market share in that field.

Thanks, guys.

Thank you very much. Good morning. I just wanted to follow-up on that last question on UWB. Kurt, maybe you could talk a little bit about what other standards are out there that are competing with UWB. On the flip side, are there other ecosystem partners and potentially other chipmakers that are involved, such that this could be an industry-wide standard as it rolls out? Thanks.

Yeah. On the standard side, there is an IEEE initiative underway for a very first standardization of the physical layer hardware protocol to ensure different vendors can ship compatible products. That has been underway for a while and is supported by all the key companies through the whole value chain. The only other one that directionally comes somewhat in the proximity but really doesn't get there is Bluetooth low energy, which has some ranging capability but lacks the precision of ultra-wideband. So, I want to reiterate, the key feature of ultra-wideband is it measures time of flight and can detect exactly where the communicating objects are relative to each other. It’s all about precision in distance measurement. Bluetooth low energy can do a little bit of that, but it falls short compared to UWB. That’s why our key partners along the value chain have clearly decided on ultra-wideband. It’s a definitive choice in that field. This also has to do with security. We play in door access or car access applications alongside our secure element. The combination of the secure element and UWB connectivity is what makes this use case possible, and that combination is pretty unique.

Got you. Thanks for that color. Just as a quick follow-up, I continue to get the question from investors, so I'll just bring it up again: the visibility towards doubling the Marvel revenue run rate of the business you're acquiring. If you have any more color on design win pipeline visibility, or I guess a focus on Wi-Fi 6? It’s a question that keeps coming up, so I'm just relaying it along. Thanks very much.

Sure. I think our confidence comes from the combination of the portfolio. They lead technology in Wi-Fi 6 and our broad-based distribution channel, which is much broader than Marvel—while Marvel has a fine distribution channel. Our position in distribution puts us in a better basis. Two-thirds of our design wins have had Wi-Fi connectivity associated with them, and being able to supply a Wi-Fi 6 solution in combination with our processing puts us in a unique position for growth. Those things collectively give us the ability to project that doubling in a relatively short period of time. The acquisition is critical for us to meet our customers' requirements, and we’re fortunate to have the funds available from the Qualcomm breakup fee to be able to put connectivity in place. We’re looking forward to closing the transaction so we can offer a complete solution for our customers.

Let me just add that now we are in some way into this process and are working with customers. The customer reactions are very positive and reconfirming the fit of the portfolio's complementary nature of Wi-Fi 6 with our overall strategy, which we’re seeing in both industrial and automotive applications.

Sonya, we'll take one last question this morning please.

Hey, guys. Thanks very much for squeezing me in. I just had one on capital allocation. After the Marvell acquisition, assuming it closed in line with schedule, how should we think about the balance between M&A and dividends and buybacks? Would it be fair to assume that you feel like your technology and IP portfolio is somewhat complete post Marvell, or would M&A continue to play a critical role in your strategy? Thank you.

Yeah, thanks. I think we have most of the critical components that we feel we need going forward. I'm sure there will always be some tuck-in acquisitions we need to do to either strengthen a technical position or add some other pieces, but the Marvell acquisition on the connectivity side is significant, and we've had a lot of demand from our customers. That really builds out most of our requirements. As we look at analog attach, we are trying to see how we can improve that, and that is a focus area for us. We have a lot of internal capability associated with it, specifically in the areas we ship alongside our processing capability. Regarding cash return post the Marvell transaction, we will focus on share repurchase and dividends moving forward. We've talked about anticipating or planning to increase our dividend on an annual basis to be more in line with our semiconductor industry peers. So thanks everyone for joining us this morning. We felt that we had good performance in Q2. We see improvements from the Q2 base continuing, but not at the same rate we had anticipated 90 days ago given the continued trade friction and the uncertainty starting to impact other regions of the world as well. We're encouraged about our design wins, the portfolio we have, and continuing to be in a position to outgrow the market going forward and generate significant shareholder value. Thank you very much.

Thank you, everyone. Appreciate your attendance today. Have a good day.