NXP Semiconductors NV (NXPI) — Q3 2019 Earnings Call Transcript

Thank you, Daniel, and good morning, everyone. Welcome to the NXP Semiconductors 2019 earnings call. With me on the call today is Rick Clemmer, NXP's CEO; Kurt Sievers, NXP's President; Peter Kelly, our CFO. If you've not obtained a copy of our earnings press release, it can be found at our company website under the Investor Relations section. This call is being recorded and will be available for a 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 impacts on specific end markets in which we operate, the sale of new and existing products and our expectations for the financial results for the fourth 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 third quarter 2019 press release, which will be furnished to the SEC on Form 8-K and is available on NXP's website at the Investor Relations section. I'd now like to turn the call over to Rick.

Thank you, Jeff, for the detailed information. Welcome everyone to our conference call today. NXP reported revenue of $2.3 billion for the third quarter, with sales close to the upper end of our guidance. We maintained good expense control and achieved improved operating profitability that exceeded our high guidance. This performance resulted in $631 million of free cash flow. Kurt and Peter will share specific insights later. Looking ahead, we remain optimistic that our product portfolio investments will meet our customers' long-term needs. There are early signs that customer demand appears to have stabilized somewhat. We believe the most significant year-on-year declines in our strategic automotive and industrial markets are behind us. Specifically, our Q4 guidance for automotive indicates a low single-digit decline year-on-year, compared to the high single-digit decline we have seen this year. Additionally, our guidance for industrial business suggests a mid-single-digit decline versus the mid-teens decline year to date. While we are pleased by the recent stabilization and in some cases, improved demand, the timing and extent of any significant market rebound remain uncertain. We continue to manage our costs and expenses, and we believe we are well-prepared for a return to consistent demand. Despite the current demand environment, we are focused on delivering unique and differentiated solutions that empower our customers to succeed in their target markets. We gauge our success by achieving high relative market share positions in our target markets to establish true leadership, leading to long-term franchises based on innovative and competitive solutions. Our achievements in this area foster lasting customer relationships and provide us with valuable insights into long-term needs, which help us optimize our R&D investments. This creates a cycle of product and customer alignment that will enable us to consistently deliver solid results to our shareholders. Over the past year, we have discussed several new product initiatives that support our strategic investment process. For instance, in automotive, we have set goals for our level 2 and level 3 ADAS business. In RADAR, we have observed rising order rates and increased customer engagement, supporting our forecast of 25% to 30% compounded annual growth over the next few years. Furthermore, in Q4, we will begin ramping our RFCMOS 77 gigahertz front-end transceiver for a leading North American solution provider, along with our RADAR processors, connectivity, and software in a comprehensive system solution. This validates the investments and commitments we have made over the years. The success of our multichip RADAR solution paves the way for integrating the RADAR transceiver and processor into a single-chip solution, which we have already initiated. Additionally, a few years ago, we invested in secure V2X solutions based on DSRC WiFi technology, another addition to our ADAS portfolio. Although it has taken longer than expected to see significant transactions for this technology and its use case, we are pleased that Volkswagen announced that their 2020 Golf, their top-selling vehicle in Europe, will come equipped with NXP RoadLINK secure V2X solutions. European roads are currently being outfitted with DSRC-based V2X technology, with 5,000 kilometers planned through the end of 2019. While V2X has yet to generate substantial revenue, it clearly demonstrates that our automotive customers recognize NXP as a thought leader making the right long-term investments to support their success and reduce accidents, ultimately saving lives. Besides RADAR and V2X, we have shared other new automotive product initiatives, including BMS, which has seen success with the Volkswagen MEB platform, as well as digital clusters and ultra-wideband, all progressing as expected. This reinforces our belief that our automotive growth segment can achieve a compounded growth rate of 25% to 30%, even amid a challenging global production environment. In the industrial and IoT market, our crossover processors continue to perform well, with a revenue run rate nearing $60 million annually. This is an impressive start for an innovative new product, and we are in the early stages of revenue generation with multiple customers, which should lead to doubling our crossover business in 2020 and several years thereafter. In the mobile end market, there is strong interest in our new ultra-wideband products that bridge the mobile and automotive access markets. Both BMW and Volkswagen announced support for NXP-based solutions in the last quarter for secure access, theft protection, and other use cases. The increasing adoption of our secure mobile solutions continues as our customer base expands. One area we haven't covered much is our efforts in the communication infrastructure market, particularly regarding the transition to 5G networks. We see several opportunities in the 5G buildout. The first is in radio frequency power solutions, which are subsystems installed in remote radio heads on cellular towers. Our products amplify analog signals in the radio frequency domain, facilitating communication between cell towers and mobile phones. In the 4G generation, we provided high-power LDMOS amplifiers for 1 to 4 transmitter radio systems. To enhance bandwidth in fixed frequencies, we have developed a wide range of low-power, highly integrated products for massive MIMO RF Power systems, functioning as arrays of amplifiers in a compact form factor comparable to 4G systems, but with up to 32 or 64 distinct transmit pathways and providing data rates up to 10 times higher than 4G systems. As the industry shifts towards 5G standards using higher frequency bands, we have created solutions across the entire sub-6 gigahertz spectrum, leveraging our leading LDMOS or GaN-based massive MIMO solutions. Notably, we have innovated our LDMOS technology to operate at frequencies up to 3.5 gigahertz, about 30% higher than the 4G generation, while maintaining necessary output power and efficiency. Additionally, utilizing our proprietary SiGe process technology, we have developed millimeter wave solutions that operate at frequencies above 24 gigahertz, addressing dense urban environments, although we don't anticipate widespread global millimeter wave deployments until late 2020 or early 2021. Overall, NXP possesses the broadest and most innovative array of RF Power amplifiers for base station applications across the entire 5G frequency spectrum. Our analysis suggests that the serviceable market for RF Power systems in cellular base stations will grow to approximately $2.5 billion by 2024, reflecting a 13% five-year compounded annual growth rate, with NXP leading this market with a relative share of 1.8 times that of the second player. Furthermore, NXP has additional prospects in the 5G expansion. Our Digital Networking team has secured designs with several OEMs to deploy CPE and repeater equipment, which will support the last-mile buildout in dense urban areas. These configurations utilize our advanced 64-bit ARM multicore Layerscape processors, incorporating our unique Vespa programmable baseband engines. We bring distinctive programmable hardware and software capabilities to this market, developed over many years focused on the service provider segment. These are purpose-built solutions optimized for high performance and low power consumption. It is also a market with few competitors, providing NXP a solid differentiation. The deployments are tied to the development of 5G macro base stations for last-mile solutions, which we project will begin broad-scale global production in late 2020 or early 2021. Our analysis anticipates a serviceable market for these last-mile solutions growing at a compounded annual growth rate of 30% to 35%. We believe NXP is well-positioned to leverage the rollout of these last-mile solutions, further demonstrating our customers' trust in our core IP and product development. In conclusion, our strategy is producing positive outcomes, and we will maintain our focus on strategic end markets while working closely with customers to deliver superior, highly differentiated products, despite short-term demand fluctuations. I will now turn the call over to Kurt to discuss the results of the current quarter.

Thanks very much, Rick, and good morning, everyone. We appreciate you joining our call this morning. Overall, our Q3 results were above the midpoint of our guidance. With the contribution from the mobile and the industrial IoT markets stronger than planned, while demand in the communication infrastructure markets was slightly weaker and our automotive business performed just as anticipated. Taken together, NXP delivered revenue of $2.3 billion, which combined with gross margin improvements and good expense control, enabled us to successfully deliver operating profitability above the higher end of our guidance range. Let me turn to the specific trends in Q3 in our focus end markets. Starting with automotive. Revenue was $1.05 billion, down 7% year-on-year, in line with our guidance. During the quarter, our automotive revenue declined 7% versus the year ago period, as anticipated, at a lesser rate of decline than in the previous quarter and showing 2% sequential growth. Our core automotive product lines declined year-on-year, reflecting lower auto production and the appreciated supply chain rationalization. However, revenue from the subset of our automotive growth product lines grew in the high single-digit range year-on-year during the quarter. Moving to industrial and IoT. Revenue was $426 million, down 14% year-on-year and up 9% sequentially, slightly better than our expectations. During the quarter, the primary source of weakness in industrial and IoT continued to be our general-purpose microcontroller products. Our industrial and IoT business is primarily serviced through our global distribution partners, and it is heavily indexed to customers in the Asian markets, which appear to be particularly affected by the continued U.S.-China trade tensions. Turning to mobile. Revenue was $321 million, up 2% year-on-year, and up 8% sequentially above the high end of our guidance. During Q3, despite reduced order rates at the largest Chinese handset customers, we did see robust seasonal ordering patterns from both other Chinese handset OEMs as well as our premium handset customer. Both trends taken together underpin our view that growth in our mobile business will continue to be driven by increasing attach rates of our secure mobile technology associated with new use cases like transit ticketing, among others. Lastly, communication infrastructure and other, revenue was $470 million, down 2% year-on-year, and down 6% sequentially below our guidance. From a product line trend perspective, we continued to see robust year-on-year growth trends associated with our RF Power solutions. So just a little than our plans. The Digital Networking business came in line with expectations, while the secure card business was a little below our expectations. Let me highlight here several notable trends in the communications infrastructure market, which we do believe are truly benefiting NXP. These include the continued shift towards massive MIMO solutions, leveraging both LDMOS as well as gallium nitride-based products. We also see early traction with our millimeter wave engagements for dense urban areas. The positive tailwinds for our communication infrastructure business are robust. Now let me turn to our expectations for quarter 4. Our guidance reflects the ongoing stabilization in demand, mentioned earlier in our prepared remarks by Rick. We do believe the outlook appears to have stopped getting worse on a seasonal basis. So it is still not reflective of a return to growth. We are guiding quarter 4 revenue at $2.27 billion, flat sequentially on the third quarter, within the range of down 1% to up 2%. From a year-over-year perspective, this represents a decline of about 6% versus the same period a year ago, of which about 120 basis points is the elimination of the MSA versus the year ago period. At the midpoint, we are anticipating the following sequential trends in our 4 businesses. Automotive is expected to be up mid-single digits versus Q3. Industrial and IoT is expected to be down in the mid-single-digit range on a percentage basis. Mobile is expected to be slightly down in the low single digits on a percentage basis. And finally, communication infrastructure and other is expected to be down in the low single digits on a percentage basis. In summary, our new product introductions, customer engagement levels and design win momentum in our strategic focus areas continue to be very, very positive. And we do continue to be very optimistic about the mid- to long-term potential of NXP. Now I would like to pass the call to Peter for a review of our financial performance. Peter, over to you.

Thank you, Kurt, and good morning to everyone on today's call. As Kurt has already covered the drivers of the revenue during the quarter and provided our revenue outlook for the fourth quarter, I'll move to the financial highlights. In summary, our third quarter revenue performance was near the high end of our guidance range, which, combined with good expense control, resulted in very strong non-GAAP operating profit. But focusing on the details of the third quarter, total revenue was $2.27 billion, down 7% year-on-year, of which 120 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 53.7%, up 70 basis points year-on-year and in line with the midpoint of our guidance. Total non-GAAP operating expenses were $531 million, down $32 million year-on-year and down $10 million from Q2. This was $5 million better than the midpoint of our guidance. From a total operating profit perspective, non-GAAP operating profit was $687 million and non-GAAP operating margin was 30.3%, up 30 basis points year-on-year, despite a $180 million drop in revenue over the same period. Non-GAAP interest expense was $66 million, cash tax for ongoing operations were $39 million and noncontrolling interest was $10 million, with cash tax and interest expense modestly better than the midpoint of guidance. Stock-based compensation, which is not included in our non-GAAP earnings, was $84 million. Now I'd like to turn to the changes in our cash and debt. Our total debt at the end of Q3 was $8.51 billion, down $33 million sequentially as we retired the remaining portion of our June 2021 debt. Cash was $3.54 billion, a net debt of $4.97 billion, a decline sequentially because of solid cash generation during the third quarter. We exited the quarter with a trailing 12-month adjusted EBITDA of $3.13 billion, and our ratio of net debt to trailing 12-month adjusted EBITDA at the end of the third quarter was 1.59 times. Our non-GAAP interest coverage was 10.4 times. Our liquidity is excellent, and our balance sheet continues to be very strong. During the third quarter, we paid $70 million in cash dividends and announced a 50% increase in the annual dividend rate. Our capital return policy continues to be to return all excess cash to shareholders. I would remind you that since July 2018, we have returned $6.6 billion to our shareholders, including buying back 18% of the diluted share count. Turning to working capital metrics. Days of inventory was 98 days, a decrease of 2 days sequentially, a quarter-on-quarter decline of $10 million. We continue to aggressively manage our distribution channel, and inventory in the channel is very healthy, 2.3 months; and within our long-term targets, though, slightly below the 2.4 months we normally expect to run. Days receivable were 32 days, flat sequentially, and days payable were 74 days, an increase of 7 days versus the prior quarter. Taken together, our cash conversion cycle was 56 days, an improvement of 9 days versus the prior quarter. Cash flow from operations was $746 million. Our net CapEx was $115 million, resulting in free cash flow of $631 million. Turning to our expectations for the fourth quarter. As Kurt mentioned, we anticipate fourth quarter revenue to be about $2.27 billion, plus or minus $30 million; and at the midpoint, this is flat sequentially. We expect non-GAAP gross margins to be about 54.2%, plus or minus 30 basis points. Operating expenses are expected to be about $545 million, plus or minus about $7 million. And taken together, we see non-GAAP operating margin to be about 30.2%, plus or minus about 30 basis points. We estimate non-GAAP interest expense to be around $69 million, and anticipate cash tax related to ongoing operations to be about $39 million. Noncontrolling interest will be about $9 million. And for the fourth quarter, we suggest that for modeling purposes, we use an average share count of about 285 million shares. Finally, I have a few closing comments that I'd like to make. One, we currently have $3.5 billion of cash on our balance sheet. On December 1, we plan to use $1.1 billion of this cash to pay down our convertible debt. We anticipate using $1.76 billion to close our transaction for the Marvell asset, although we're still waiting for the final regulatory approval from Taiwan. As Kurt pointed out, we're pleased with our performance in the third quarter. Our revenue was slightly better than guidance with the contribution from the mobile and industrial IoT markets, both a bit stronger than expected, while the automotive market was in line with our expectations and the communications infrastructure market was slightly weaker. The challenge at this stage is to predict when a positive inflection in demand will occur. Until we see a decidedly improved demand environment, we'll continue to keep a tight control on those items which are under our control, including gross margin, operating expenses and working capital, aiming to maximize the performance of the company. Our non-GAAP gross margin has steadily improved over the last year, even as we navigate to the challenging top line demand environment. Our non-GAAP gross margin improved again in the third quarter, and we anticipate further improvements into the fourth quarter. However, as our guidance reflects, given our top line visibility, we do not believe we will achieve the 55% goal in Q4. This is a significant disappointment driven by a lack of volume and the resulting under-recovery it drives to our costs. However, I continue to have confidence in our ability to manage the costs which are under our control. So further, I would like to reiterate Kurt and Rick's comments: the market continues to be uncertain, and although we've certainly seen some positive signs, we're not ready yet to declare victory. In fact, after 5 quarters of year-on-year declines, achieving flat year-on-year revenue for the first quarter of 2020 would feel like a positive move in an uncertain market environment. Equally, I would remind you all that our operating expenses generally increase from Q4 to Q1 as we feel the impact of the annual bonuses and fringe benefit resets.

This is Kurt. Let me take that question. Let me maybe start with saying what our latest market insights are. So IHS just published their latest SAAR numbers for this year and the forecast for next year, where they are saying they see a 6% decline for the SAAR for 2019 annually over '18. They estimate about flat for next year. That's the latest impact we have. So unfortunately, that indeed indicates that it has further deteriorated this year. We had earlier in the year, minus 4%, minus 5%, and now they end up at minus 6% decline for '19. We have always said that on a quarterly basis, you cannot really benchmark our revenue performance against the SAAR, given all the supply chain effects in-between. At the same time, we do continue to clearly say that we have all reason to believe that our business is outgrowing the SAAR synced to the electronic content increase per car. I think we are now at a point going into Q4 where it appears that the supply chain should become more or less clean. So our growth, which you see in our business, becomes more reflective of the true automotive demand from the OEMs. That is indeed then leading to a annual growth rate in Q4, which is only minus 2% versus much higher declines in the earlier quarters, like minus 7% and minus 10% in Q3 and Q2. We don't really guide for next year, Ross. And yet, I would say that once the supply chain is clear, we should expect that our growth by content should be reflected again in our numbers, against the SAAR. So there is some optimism here that with a more clean supply chain going forward, we should return to growth based on a flat SAAR.

Yes, the single biggest item is actually a positive thing. We have a really significant number, I think it's actually just a bit over $10 million of tape-outs in excess of what we saw in the third quarter. And that's the single biggest item, Ross.

So it's a good thing.

We're getting some of our MPIs out and shipping those to customers. And so there's a cost, obviously, as we take those and move those towards engagement with customers, Ross.

Great. Just to follow up on that a bit, Peter, can you help us understand our expectations for margins in Q1? We anticipate some deterioration due to price adjustments for automotive customers and additional operational expenses. Can you provide any quantification that would assist us in modeling sequentially as we look ahead to Q1? Also, how might these effects lessen as the year progresses?

I don't want to provide guidance for Q1 at this point. You are correct, Will, that from a gross margin standpoint, the most significant factor is the annual price increases. On the operating expense side, there will be a reset on bonuses. For instance, this year we did not meet our targets, so the bonus accrual is relatively small, likely averaging around $10 million per quarter. In contrast, if we assume a full bonus for 2020, which we haven't fully set targets for yet, you would be looking at something closer to $35 million per quarter. There should also be an approximate $8 million increase for fringe benefits. However, I believe costs will not be as high in Q1 as they were in Q4.

The units are derived from the content, so they are closely connected. It’s important to note that in Q2, our largest Chinese OEM experienced significant growth as they expanded the mobile wallet across more of their offerings. In Q3, we saw a wider customer base with our Tier 1 customer increasing volumes as well. Additionally, other Chinese customers also demonstrated strength in Q3. Overall, it was a very solid quarter in Q3, and this trend is promising for the ongoing deployment of the mobile wallet and its adoption, which we anticipate will reach 50% of all smartphones in the next few years.

Rick, I wanted to ask you about your perspective on the China-U.S. trade issues and how they are affecting your business. There are concerns among investors that Chinese customers might be pulling forward inventory, while other indicators suggest they are trying to maintain lean inventory levels. Although you are not facing any bans, I am interested in whether you think there could be indirect effects of these bans on your revenue, and how you anticipate business will trend if a trade resolution occurs?

Well, I think if there's trade resolution, it would be very positive. So I don't think there is any doubt about that. I think though that we don't see a lot of inventory being put in place. In Q2, as we talked about, the largest Chinese handset, they clearly were ramping their supply chain as they broaden the portfolio associated with it. But we didn't see a lot of inventory, it was really associated with their supply chain. There have been comments that I've heard about other technologies like FPGAs where some of the Chinese guys were concerned about having adequate supply and put inventory in place. But we don't see really a lot of that in the areas that we serve at all, John. And we think it continues to bode well. Clearly, I think our relationship with the Chinese customers has been positive and will continue to be positive for us going forward.

That's helpful. And then Rick, just to follow up on some of your prepared comments about 5G and the communication infrastructure space. You guys have kind of put out a 3-year CAGR target for revenue in that space of somewhere between 0% to up 2%. Is it fair to say that what you talked about today on the RF Power side and sub-6 is contemplated in that? But as we go to millimeter wave, it's not? And if that's the case, how might millimeter wave and your opportunity there impact that kind of CAGR that you have out there as a target?

Well, so John, when we set those targets, we were coming out of a period of several years of declines in both the RF Power and Digital Networking business. Clearly, with the Digital Networking business going from around $800 million at the time we did the merger with Freescale down to more like the $500 million range. So we did set those conservatively. I think what we're talking about, clearly, with the 5G opportunity should increase that growth rate. But we don't think it'll change the total because it really just gives us room to cover the downturn that we've been through in automotive and industrial and still have the confidence in achieving our 5% to 7% compounded growth rate going forward. I do think that there is a real opportunity, as we talked about, for low teens growth rate in the RF Power business with 5G deployment over the next few years, and with our leadership position, puts us in a good position. And we're just making some early investments in the last mile with some of the customer engagements that could bode very well as well and end up with a couple hundred million dollars a year of revenue in the not too distant future. So all of that’s positive, but we're just kind of leaving our growth rates that we set a year and a half or so ago intact and not really changing those by piece at this point, John.

I wanted to revisit the auto segment. You mentioned that the growth rate is in the teens, and I am curious about the stabilization you've noted. With the improving SAAR next year and the better-than-seasonal performance in December, are you observing any restocking of the core components, or is the strong performance primarily driven by growth areas?

Blayne, this is Kurt. First of all, I want to correct what you mentioned. I didn't indicate that IHS expects an improvement in SAAR next year; they anticipate a flat SAAR at the low level achieved at the end of this year. This is a minor but potentially significant detail. Regarding our situation, I believe that the improvements we're seeing are probably not due to restocking, but rather that consumption now reflects true end demand. Previously, in our business with smaller accounts and through distribution, inventory levels were being reduced. It seems that trend may be coming to an end, and we are starting to see actual demand return. I would be cautious about labeling this as restocking, as it likely isn’t.

Yes. If I could just add something, I think one of the things if you look at it, Blayne, and look at IHS projections, the first half of '20 will be slightly up from the second half of '19. So that says we've kind of gotten to a minimum run rate based on their projections now. And then they'll see a resumption of growth in the second half of '20. But I do think that when you look at some of our customers in China and other places that we serve through distribution, we are beginning to see a little more of an uptick, which I think means that they've kind of worked their way through their inventory basis and we're beginning to see a little more of a positive perspective associated with it. Nothing is in the guidance.

Nothing is in the guidance.

Nothing is in the guidance, and we would anticipate closing it sooner than first quarter. But given the fact that there is a process in Taiwan that we really don't have clear insight into how long it will take, it would be inappropriate for us to really second-guess the actual timing.

I wanted to talk about, first, just the language in the release, it is a little bit improved. This is the first time I heard you talk about short-term demand environment stabilizing...

So I think what we're seeing is some stabilization and certain areas of improvement or increased orders. If you look at our industrial and IoT segment, we experienced a mid-teens year-over-year decline through the first three quarters of this year. However, at the midpoint of our projection, we expect a mid-single digit decline, which is a significant improvement. In the automotive sector, we've been seeing a high single-digit decline year-over-year through the first three quarters, but at the midpoint, we anticipate a 2% decline. This underlines the improvement we're observing, as indicated by the run rates from our customers and their demands. We also need to consider our mobile, communications, and infrastructure segments for the overall picture. Adjusting for the changes in our accounting methods, we've been in the mid-single digits, except for Q2 where we were slightly below that. We expect a couple of points of improvement overall, even with a slight decrease in communications and mobile in Q4. Overall, we have clearly seen stabilization and some improvement in demand, but it doesn't suggest a strong recovery is underway at this point.

And maybe to follow up on that on the longer term. Are you still holding to your longer-term growth, what was it, 5% to 7%...

We lost you again, Stacy.

So, Stacy, I think what we're committed to is the 5% to 7% growth rate. We said the categories may be different than what we talked about 1.5 years ago, as we look at that. We may not be able to quite achieve what we had laid out at the high end of automotive or the high end of industrial based on the fact that we've gone through this downturn. The positive thing is, mobile is growing quite nicely with the increased mobile wallet deployment as well as now ultra-wideband beginning to be shipping next year and in 2021. And clearly, the 5G deployment gives us some upside. I mean that could drive that 0% to 2% to kind of high single-digit growth potentially. But in total, we still are committed to the 5% to 7% growth rate. And I think the key is, is that we have different knobs to turn to ensure that we can achieve that and accomplish that.

Just a question, Kurt. Any update on BMS and in particular, things that you would highlight versus some of the incumbents that you think you're doing just from a future set perspective?

Yes, thank you, Craig. The update is that we are on track, which is definitely good news. In Q3, we saw a major announcement from a large European OEM regarding their commitments to new electric vehicles. As we've indicated before, we are significantly involved in this across multiple models, not just one. This is clear evidence of our success compared to incumbents, with one of the most optimistic commitments from a car manufacturer to build electric vehicles, and these are starting to ship now. This means we are on schedule for our BMS rollout, which we've discussed previously, with a strong growth rate expected in the coming years. While we've been focusing on this particular OEM due to the public announcement, it's worth noting that we have a much broader base of design wins. Our advantages over incumbents continue to be our ASIL-D functional safety performance at a system level and our scalability, thanks to our approach with microcontrollers and high-precision analog front ends.

And I guess the only thing I would add to that, Craig, is I follow, personally, the announcement by some of the incumbents and always track that. And every time we go back and look at it, we still think that we have a superior performance and a better product than some of the announcements that they're making.

Yes, I believe they are essentially the same. Over the next few years, our mix will definitely benefit us. Although we won’t see a sudden jump in MPIs, we can expect gradual improvements in gross margin over the long term. In the short term, our focus is on ensuring that our partners provide the right pricing and that we effectively manage yields and test times. Honestly, my concern right now is our long-term model of 55% to 57%. I really hope to reach 55% for the full year of 2020, but given the current market environment and the limited visibility we have, it's challenging to see how we can achieve that. This was evident in Q4. I must admit that I need an increase in volume to reach the 55% target. I'm surprised no one asked about this, as we were expecting questions regarding why gross margin didn’t improve slightly beyond the 53.7% guidance, especially since revenue was at the higher end of the guidance in Q3. The reason is that our internal assembly and test utilization was weaker than anticipated in Q3. To be fair, 30 basis points is $6 million, which isn’t a huge figure, but in the current environment, maintaining revenue levels makes it difficult to increase revenue. However, I am confident that once the aftermarket recovers, we will reach our goals.

I guess first question, one of the more encouraging, I guess, data points coming out of your 10-Q, is that your OEM sales were flat year-on-year, while distie sales down 10%. So I guess 2-part question there. One, are you comfortable with where we are from a distie inventory perspective? And then two, as you see a recovery at least standing here today, do you think it'll be distie or OEM-led?

I believe your observation is spot on that much of our weakness arises from distribution. We have significantly reduced distribution inventory over the past few quarters to maintain 2.4 months, and we even dropped to 2.3 months in Q3. We expect that to return to 2.4 months in Q4. Some late shipments in POS during the quarter contributed to the reduction to 2.3 months. I anticipate we will see an increase in distribution. As you noted, it has been more volatile compared to the OEM side and may show more relevance to the upcoming increase. Regarding inventories, I feel confident we are in a good position with no issues, and I expect that to be an early sign of real improvement in total revenue.

We are confident that the increase in attach rate, which is driving our mobile growth, particularly for mobile wallets and other applications, will continue. While there may be quarterly fluctuations due to the seasonality of mobile, from a year-over-year perspective, we are well on track with our previous statements. We expect the attach rate to grow from around 30% to 50% over the next three years. A recent check indicates that we are making strong progress on this journey, suggesting that growth should continue reasonably.

I believe that one of the most interesting developments in the second half of next year will be the launch of ultra-wideband. This will strengthen our position in mobile and enhance our presence in the mobile wallet space. I anticipate that this will be a key factor for us and will further demonstrate our leadership while reinforcing our overall standing.

I have a follow-up question about the gross margin. Peter, last quarter, you mentioned the potential to reach a 55% quarterly run rate with revenue remaining flat year-on-year, which suggests around the $2.4 billion level. Is that still the correct way to approach it going forward? Once we reach that revenue level, will we achieve that on a quarterly basis, even though the full year may decline?

Yes, yes.

That's all right. Quick answer. Just...

It was kind of a rhetorical question, really. Yes.

Yes, seriously, I believe that in our discussions with customers, they recognize the challenges of managing various sourced technologies. They are actively considering shifting some of their production to us as well as to other non-U.S. sourced IP providers. We see this as a potentially positive development. Of course, these changes won't happen immediately; they require time to implement.

Thank you very much, operator. So thanks for joining us today. Obviously, we feel better than we did in previous quarters with the stability we see and are encouraged about the fact that year-over-year decline is significantly reduced with our guidance in Q4 and puts us in a solid position to get ready to move into 2020 with a ramp up of new products that will continue to differentiate NXP and show our leadership in deploying technology to be able to drive solutions for our customers. So thank you very much for your support, and have a good day.

Great. Thank you, everyone. Thank you, Daniel.