Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2019, NXP Semiconductors earnings Conference call. At this time, all participants' lines are in listen only mode.
After the speakers presentations will be a question [laughter] session. The asking question. During this session you need to press Star then one of your telephone.
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Oh, no what they hand the conference over to your Speaker today Mr., Jeff Palmer, Sir you may begin.
Thank you Crystal and good morning, everyone welcome to the NXP semiconductors fourth quarter 2019 earnings call with me on the call today's Rick Clemmer, NXP CEO, Kurt Sievers, NXP is president and Peter Kelly, our CFO [noise].
If you've not obtained a copy of our earnings press release. It can be found in our company website under the Investor Relations section at NXP Dot com.
This call is being recorded and will be available for replay from our corporate website. Our call. Today will include forward looking statements involve risks and uncertainties that could cause NXP is results to differ materially from management's current expectations. These risks and uncertainties include but are not limited to statements regarding the macro economic 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 first quarter 2020.
Please be reminded the NXP undertakes no obligation to revise or update publicly any forward looking statements for full disclosure on forward looking statements. Please refer to our press release today. Additionally, during our call today, we will make reference certain non-GAAP financial measures, which exclude the impact of purchase price accounting restructuring stock based compensation impaired.
<unk> merger related costs and other charges that have driven primarily by discrete events that management does not consider to be directly related to NXP is underlying core operating performance.
Pursuant to regulation G. At Sps provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our fourth quarter 2019 earnings press release, which will be furnished to the C. C. On form 8-K and is available on Espy's website in the Investor Relations section at NXP Dot Com now I'd like to turn.
In the call over correct.
Thanks, Jeff and welcome everyone to our conference call today.
[noise] NXP delivered full revenue full year revenue of $8.9 billion, a decline of 6% year on year against a very challenging semiconductor industry backdrop throughout the year.
Even on lower sales volume.
We improved our non-GAAP gross margin by 60 basis points in our non-GAAP operating margin by 30 basis points.
Clearly better operating poor performance than in previous market downturn.
Our free cash flow conversion was solid at $1.9 billion.
And we continue to follow through on our capital return strategy, returning nearly 95% of free cash flow generated EUR $1.8 billion to our owners.
As a reminder, we have returned $6.8 billion to our shareholders by fear buybacks and cash dividends over the last two years and theyve reduced the diluted share count by 60 million shares.
Kurt will provide more details on the quarterly trends in a few moments.
Notwithstanding the semiconductor market environment. During 2019, we continue to invest in and they execute our strategy within our target market.
We have introduced many new products, we've been actively engaged with customers on adopting these solutions, which we believe will support our long term growth targets.
If you happen to attend our Investor Open House. The CES trade show you saw a glimpse of how some of these products will be used in real world applications.
These included automotive radar solutions, providing improved driver safety.
Our family of Quad core I doubt amex processors, which enable new multi display digital clusters.
And our innovative battery management solutions for hybrid in full electric vehicles.
We also demonstrated our latest ultra wide band solutions for secure access and localization with a mobile device for automotive smart home and Smart building solutions.
Additionally, we showcased multiple new process or families, including the I'd Amex eight m. plus.
First I doubt amex family to integrate neural net processing offering higher performance per dollar the GPU solutions.
The RT crossover family for the secure edge computing market.
The quad core I doubt MX eight for industrial and high in home automation applications.
And the hyper from performance fully I sold the compliant.
32, G. for automotive network domain controller.
Taken together the wave of new product introductions across the company and associated customer engagement is truly impressive.
And there is more to come over the coming periods.
The NXP product portfolio is in its most competitive and innovative position in many years and he's just beginning to fully reflect the synergy we envision when NXP and Freescale merged in 2016.
We're confident that there's new products ramp into volume product production. They will underpin both our topline growth our longer term gross margin targets.
And will yield significant cash flow.
Then as the end markets begin to rebound, which we are beginning to initially see especially in our automotive and industrial end markets. We anticipate a healthy improvement in our core business, which will also provide positive tailwinds to growth.
In summary, as we begin a new year. The team is invigorated and fully engaged our strategy continues to yield positive results and the customer response to new products is very encouraging.
We will continue to be laser focused on our strategic end markets engaging with customers to deliver superior and highly differentiated solutions.
I'd like now to pass the call over to occur to discuss the results of the full year in the current quarter and provide an outlook for Q1.
Thanks, very much Rick and good morning, everyone.
We appreciate you joining the call today.
Today I want to review, both our quota for as well as our full year 2019 results.
Overall, our Q4 results were above the midpoint of our guidance.
With the contribution from the mobile automotive and the industrial I would t. markets all stronger than plan.
While demand in the comms infrastructure markets performed as anticipated.
Taken together NXP delivered revenue of 2.3 billion told us about 30 million above the midpoint of our guidance range.
We did close the acquisition of the Marvell connectivity assets in early December.
Which was not included in our guidance.
The connectivity assets contributed about 6 million of revenue to our quarter four sites.
Non-GAAP operating margin was a strong 29.9%.
About 30 basis points below guidance as a result of closing them ARVO transaction in early December.
[noise] now, let me turn to the specific trends in our focus and markets.
Starting with automotive.
Full year revenue was 4.2 billion brought us down 7% year over year.
As of recycled lower industry wide auto production and rationalization of the global auto supply chain.
Our growth automotive products grew year on year, primarily due to the ramp of radar and battery management systems solutions.
During quarter, four or automotive revenue was 1.09 billion down 1% versus a year ago period.
At the lesser rate of decline then in the previous quarters.
I'm showing 5% sequential growth.
Better than our guidance by 9 billion.
Included in our quota for response and automotive was about 1 million associated with the newly acquired Marvell wireless assets.
Turning to our industrial I would see segment.
Full year revenue was 1.59 billion gold was down 12% year on year as global trade concerns impacted demand for broad based general purpose MCR products.
The demand trends for our industrial idled Amex application processes were flattish on a year on year basis.
[noise] during quarter, four industrial Iot EUV revenue was $450 million.
Down 5% versus a year ago period.
On 3% sequentially.
And $5 million better than our guidance.
Included in our quota for resource for industry, and I would ti for about 5 million associated with the newly acquired Marvell wireless assets.
Turning to mobile.
Full year revenue was $1.19 billion up 2% year on year.
During the year, we experienced continued strong adoption offer or secure mobile wallets and troms at solutions.
Which was partially offset by anticipated declines in our semi custom mobile analog interface business.
We do estimate the attach rate of mobile wallets increased to about 35% in.
Inline with our expectations and very supportive of our 50% attach rate target exiting 2021.
During quarter four mobile revenue was 332 million.
Down 3% versus a year ago periods.
Up 3% sequentially, and 15 million better than our guidance.
Lastly, turning to our comms infrastructure and other business.
Full year revenue was 1.87 billion up 5% year over year.
During the year, we experienced robust growth associated with NXP is RF power products.
Due to the adoption of the company's massive mimo solutions for the settled up based Asian markets.
As mobile carriers began to increase network densification efforts, a half of future five T cell that deployments.
The strength in the selling a base station market was complemented by a stabilization in the company's communication process of business.
However, these positive trends were offset.
By year on year declines in the company's secure bank cough and E government businesses.
During quarter four revenue was 457 million down 5% year over year down 3% sequentially.
Inline with our guidance.
Now, let me turn to our expectations for quarter one.
Our guidance.
Reflects what we view as an improved demand environment that is moderately better than we've seen over the last number of quarters.
It does appear that the channel rationalization trends, we witnessed throughout my team have essentially played out both with our direct customers.
And those sift through global distribution.
We are guiding quarter, one revenue at 2.2 or 3 billion.
About 6% versus the first quarter of 2019 within the range of up 5% to 8% year on year.
From a sequential perspective this represents a decline of about 3% at the midpoint versus the prior quarter.
At the midpoint, we anticipate the following year over year trends in our business for quarter one.
Automotive is expected to be up mid single digits versus Q1 19.
And down low single digits versus Q4.
Industrial Aiotv is expected to be up in the 20% range, whereas this quarter 119.
And up high single digits versus quarter for our team.
Mobile is expected to be up in the low double digit percentage range versus the pure with a year ago.
And down in the high teens versus Q4 nine team.
Please remember in 2019, the mobile V S voice and audio solutions business was 150 million.
And finally communication infrastructure and other is expected to be down in the high single digit range on a percentage basis, both on a year on year as well as on a sequential basis.
Lastly, our aggregate quarter. One guidance does include about 60 million contribution from the acquired Marvell assets.
And at the same time it excludes the mobile Ivy I asked business.
All of which we did close the divestiture yesterday.
For your reference the mobile of U.S. business contributed $150 million in 2019.
In summary, our new product introductions customer engagement levels and design win momentum in our strategic focus areas.
Continued to be very positive.
And we continue to be very optimistic about the mid to long term potential of NXP.
And now I'd like to pass the cold Peter for a review of our financial performance.
Thanks.
Good morning to everyone on today's call.
As caps already covered the drawing as the revenue during the quarter and provided a remedy outlook for Q1 I'll move to the financial highlights.
In summary, our fourth quarter revenue performance was above the high end of our guidance range.
With improved non-GAAP gross profit I.
And in line non-GAAP operating profit.
I'll first provide full year highlights and then moved to the fourth quarter results.
Full year revenue for 2019 was $8.88 billion down 6% year on year, or which 140 basis points was the elimination of the M.S.A. in 2019 versus 2018.
We generated $4.75 billion, a non-GAAP gross profit.
Reported non-GAAP gross margin of 53.5%.
60 basis points year on year.
Total non-GAAP operating expenses were 2.18 billion down 99 million year on year.
Total non-GAAP operating profit was 2.57 billion a non-GAAP operating margin was 29% books 30 basis points year on year, despite the $530 million drop in revenue versus 2018.
Non-GAAP interest expense was $265 million.
Cash taxes for ongoing operations were $120 million incidental taxes were $248 million.
With non controlling interest of 29 million.
Stock based compensation, which is not included in our non-GAAP earnings was 346 million.
[music].
Full year cash flow highlights included $2.37 billion in cash flow from operations on $503 million. The net capex investments, resulting in 1.87 billion of non-GAAP Creek free cash flow.
During 2019, we repurchased $1.44 billion of our shows and paid cash dividends of $319 million in total we returned $1.76 billion to our owners, which was 94% of the total non-GAAP free cash flow generated during the year.
We also spent a similar amount on the acquisition of them over lessors.
Now moving to details of the fourth quarter.
Revenue was $2.3 billion down 4% year on year at the high end of our guidance range of which 110 basis points of the decline was the elimination of the I must say.
The quarter included $6 million of revenue associated with the acquisition of the mob assets, which closed in early December and which was not included in our guidance.
We generated $1.25 billion in non-GAAP gross profit some reported non-GAAP gross margin of 54.2%.
107 basis points year on year.
In line with the midpoint of all guidance. Despite this more headwinds created by the Marbella position.
Total non-GAAP operating expenses were 563 million.
$20 million year on year on up $32 million from the third quarter fish was $18 million above the midpoint of our guidance.
About $8 million. If this was due to the operating cost associated with them over the last acquisitions and the majority of the remainder to greater than anticipated new product introduction expenses.
From a total operating profit perspective, non-GAAP operating profit was $697 million a non-GAAP operating margin was 29.9% down 50 basis points year on year, driven by lower revenue.
Non-GAAP interest expense was $77 million cash taxes for ongoing operations were 34 million and non controlling interest was $9 million stock based comp which is not included in our non-GAAP earnings was 89 million.
Now I'd like to turn to the changes in our cash and debt.
Total debt to the ended the fourth quarter was 7.37 billion down 1.14 billion sequentially. As we retired the 1.15 billion convertible note at maturity in early December.
Our ending cash position was 1.05 billion down 2.49 billion due to a combination of the closure of them the marvell asset and the previously noted debt repayment.
Offset by cash generation during the fourth quarter.
The resulting that that was 6.32 billion.
We exited the quarter with a trailing 12 month adjusted EBITDA of 3.1 billion our ratio of net debt to trailing 12 month adjusted EBITDA at the end of the fourth quarter was two times and our non-GAAP interest coverage was 8.9 times liquidity is excellence and our balance sheet continues to be very strong.
During the fourth quarter, we paid $105 million in cash dividends and repurchased $74 million of our shows our capital return policy continues to be to return or excess cash to shareholders.
Turning to working capital metrics days of inventory was 102 days, an increase of four days sequentially, which was the results of the Marvell acquisition.
We continue to closely manage our distribution channel with inventory in the channel at 2.3 months within our long term targets, but slightly below the 2.4 months, we normally expect to run.
Days receivables were 26 days down six days sequentially on improved sales linearity and days payable were 81, an increase of seven days versus the prior quarter.
Taken together, our cash conversion cycle was 47 days, an improvement of nine days versus prior quarter.
Cash flow from operation was $814 million, a net capex was $138 million, resulting in non-GAAP free cash flow of $676 million.
Okay.
Turning to our expectations for the first quarter.
Mentioned, we anticipate Q1 revenue to be about $2.23 billion, plus or minus about $30 million.
At the midpoint this is up 6% year on year down 3% sequentially.
We expect non-GAAP gross margins to be about 53.2% plus or minus 30 bips.
Operating expenses are expected to be about $573 million, plus or minus about 9 million and taken together, we see non-GAAP operating margin to be about 27.6% plus or minus about 20 rich.
We estimate non-GAAP financial expense to be about $78 million and anticipate cash tax related to ongoing operations to be about $32 million.
Non controlling interest in stressful way about 6 million.
Q1, we suggest something you're modeling purposes, you use an average share count of 284.5 million shares.
Finally, I have a closing comments I'd like to make.
Both Rick and care pointed out we see the beginning of a moderately improving demand environment across our markets.
Exception of the Fiveg Playstation market.
From a revenue perspective, we're pleased with our performance in the fourth quarter, our revenue was slightly better than guidance with the contribution from the mobile photo and industrial markets all of that stronger than expected.
Our results within the communication infrastructure market were essentially in line with our expectation.
Our non-GAAP gross margin is steadily improved over the last year, even as weve navigated a challenging topline demand environment. Our non-GAAP gross margin improved again in fourth quarter and as we've previously signal we expect to see modest gross margin gross margin compression in the first quarter based on annual price.
Agreements and lower revenue.
We continue to be laser focused on achieving our intermediate non-GAAP gross margin target of 55% and we continue to believe this can be achieved with a revenue level in the 2.4 billion dollar range.
As previously noted our board of Directors has approved an additional share repurchase and with the closure of the Marvell deal in December we began to repurchase shares again in early January accounted for 1.76 million shares at a cost of $230 million between January the second on February good.
So with that I'd now like to turn it back to the operator field questions.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press the star followed by the number one key on your Touchtone telephone. If your question has been answered or are you wish to remove yourself from the Q. Please press the pound key and then the answer is the time, we do ask could you. Please ask one question and one brief follow up.
Our first question comes from that area from Bank of America Securities. Your line is open.
Thanks for taking my question and they're great job on the free cash flow generation I think it's a record myself and my first question on the China impact I'm curious if youre, a Q1 outlook baked any supply or demand impact from the ongoing Corona light Inseminated shutdowns.
Or you think there could be perhaps that delayed impact on the industry that defects Q2.
Instead, and if you could remind us of how we think about seasonality for Q2.
So thanks for that.
No at this time the situation on the krona virus continues to be very fluid and we're monitoring it very closely we've taken actions on travel to protect our employees in our manufacturing operations to be sure that we have our employees at the forefront of our minds.
And also then trying to support the general containment of any spread.
But as of today, we see no impact on orders, although we're just coming out of the lunar new year holiday.
Clearly the forced closures by some of the additional provinces in China add more to the uncertainty.
And to be clear, it's just impossible race to speculate on the impact in the implications associated with it our guidance today does not contemplate any potential impact from the Corona buyers.
All right and so my follow up on gross margins. So Peter thanks for giving us that that 2.4 billion or someone level. What really take is it just revenue that is the main driver to get to Youre, the middle of your 50% to 57%.
Target gross margin range on is there anything about product to an end markets or.
Turning cost the competition that is influencing it because when I look at your largest market in automotive I'm, you know things like BMS that that you're working on most of your competitors are on the analog side and they're making 60, 70% gross margins, but it seems to me.
But then I look at five D oar, BMS and autos that.
From that mix perspective, it gross margin should be trending in into right direction.
I.
I think there's a few things first of all Q1 is.
There's obviously, a very low number 53.2.
It came off the fourth quarter of 54.7, that's on a change really as we have the annual price agreements.
Contractual agreements pictures and not steps roughly 60 basis points from that.
Volume from.
Q4 to Q1.
We'll go revenue decline, which probably another 60 basis points analysts you know that's offset.
By the continuing improvement we have in.
Purchasing and manufacturing performance. So to go from 50 53 today 55, I think is we just need to get our revenue up to our run rate of about $2.4 billion a quarter.
Now to go from 55 to 57, which I think checks potentially a number of years.
Yeah, I'll call it mix, but it really is around and you highlighted some of it back ditch or new new products not coming into place now pitching particularly in automotive, but also in all our crossover products in the likes.
I think though where the type of company that you.
You know, it's a traditional analog company that runs 65% gross margin with no real growth what were targeting is.
You know to run well in excess of the market and we think all model.
Hooked up to 57 I think we've said were 53 to to 57 is this more realistic book. So we get to 55 based on volume 55 to 57 is there's probably a couple of years out, but it's based on the mix and the introduction of all on it on the approach.
Thank you.
Thank you. Our next question comes from Stacy Rasgon from Bernstein Research. Your line is open.
Hi, guys. Thanks for taking my question I wanted to follow up again on the gross margin. So you still saying 50 fibers on 2.4, even with the impact of Marvell can you give us some I guess, a a ballpark estimate of how dilutive marvell is by itself and it is this maybe the additional wireless to for mobile divestiture that's offsetting.
With that like how do we think about mortgage in the context of that gross margin target.
Gross margin perspective, Stacy I think surrounding area.
You know its a.
But you know the [laughter] now what we talked about its not a significant part of our revenue just just yet we've always said a run so to a low to mid fiftys slipped I mean, it's.
Hey surrounding I don't think that clearly has an impact on AUR.
Our ability to get to $55 billion to $2.4 billion.
Got it and and the divested a mobile business was that also clinicals through the corporate average gross margins as well it was up.
That's a $150 million revenue.
From memory, it might be a little bit below.
Our gross margins, but.
You know again accounted for.
Since I've been a rounding really.
Got it. Thank you that's helpful. My follow up I, just wanted to talk a little bit about the demand for open season, especially auto and industrial Io tier rebounding do you think this is a real kind of end demand the customer pull or is this just an inventory balance or would you have any weighted to tell like just just what do you. What are you seeing in though the customer channel.
So what we're really seeing is Stacy is out of China, ER and its Pos so it's actually shipped through the the majority of our business in China is shipped through the distribution partner through our distribution partners, but this is Pos where customers have requested business and taken the business. So it's.
Not just orders you know as far as replacement of inventory, it's not possible for us to track you know what the orders are actually being used for but you know it's based on their run rates in a in the increased improvements.
Primarily again focused in micros for the industrial space as well as our automotive business.
You know I'm not sure what the impact or implications as we said earlier will be from the grown of ours.
But you know through just before the lunar new year, we continued to see strong Pos and a strong sell through.
Got it thank you very much.
Thank you.
Next question comes from John Pitzer from Credit Suisse. Your line is open.
Good morning, guys. Congratulations on solid results like this it's nice to see you guys get back to year over year growth in the March quarter, even excluding the Marbella acquisition, but my first question is just on the Marvell acquisition.
When you guys announced the deal you put out some pretty I wouldn't say aggressive targets, but targets for significant growth of that asset through your distribution business I know you've given a specific guidance for the calendar first quarter, but I wonder if you could just level said everybody on the call as to how you feel about sort of the long term growth of that Marbella.
I said on how we should think about.
Do you really sort of revenue levels to get to that 600 million dollar sort of red target you talked about when you first announced the deal.
Well I think we still feel as confident about the business is good it's about the businesses we've talked about John.
It really is about the fact that you know 60% of our apps processors.
Have connectivity associated with it so as we make those reference designs in place. We can obviously provide our own connectivity solutions, which puts us in a good position the additional distribution feet on the street than we have would the channel broad channel based we have a we think also positions is quite well.
That means that it's going to be a ramp that will take place is that all of that comes to fruition. So the you know the 600 million out in time will clearly be growing at a faster rate at the end of that period. Then it will be you know this quarter and next quarter.
We feel good about the business in the and thank all of the feedback from customers had been extremely positive about how important it is and I'll, let curt and make some comments yep. Thanks Reagan, let me just that Sean I mean for those of you possibly have been at our booth in CF in Las Vegas couple of weeks ago.
I think we have turned that lightspeed the availability of the marvell conductivity as it into reference design. So we were able at CES just a couple of weeks actually after closing the deal to show a number of reference designs, which did include already the or the wildfire product from from the former Marvell in.
Through our reference designs for both automotive infotainment connectivity as well as industrial and Aiotv applications.
And I would just tell you that the the interest level and the engagement with customers on debt combined solution is as big as we had anticipated.
That's helpful. Then as my follow up just looking at your auto business and the calendar fourth quarter, only down slightly year over year, which relative to peers appears to be significant outperformance Kurt I Wonder if you could just comment about how the core business performed in the calendar fourth quarter versus kind of the growth.
Segment and as you look out over the next couple of years with some of the product specific drivers you have do you think your growth rate is a multiple of Sars improves from what has historically been.
Thanks, John So on Q4, yes, I think our decline rate with only a percentage point has significantly improved over the a much higher decline rates in the in the earlier quarters last year, So absolutely yes.
And clearly that is a function of what I would say a continued growth of our growth elements being radar B M. S. A mainly and a I'd say a a good improvements of the core business, which is very much inline with what we had anticipated.
Given a careful ending off the rationalization of the supply chain I mean, that's what we have set or you along that we would hit that point.
And Thats also what carries forward into quarter, one because it's been reflected with what Rick just said solid Pos trends, especially in China. We have that core product is a is is a key part of our overall revenue.
Going forward, so we totally sticks to our model of clearly outgrowing the Saar of based on the content gains of seven days a.
We gave that guidance of 7% to 10% based on a on a 1% to 2% Saar. So if the salaries flattish.
Maybe then BRL 5656, 7% also and I'd say the ratio between core and growth initially stays the same over time when the growth portion is getting bigger from a relative perspective, it might it might still slightly towards.
It's higher growth on the on the toll.
But in principle, we are just seeing now what we had anticipated which is the core it's more getting back to mobile.
Given the SAR coming from a minus 6% environment last year into a probably flattish environment. This year.
John One thing if I could just add to that if you go back and looked at the mines, we hadn't our automotive business, which was kind of mid to high single digit our earlier in the year at our top tier customers in automotive were actually flat and where we really saw the significant decline within the mass market in our distribution partners in automotive so that's where we're big.
Turning to see the rebound associated with that where we had such a negative decline in those and and then beginning to see the rest of the business come together. So so it really has to do with that combination battle. That's important point out that are our top tier customers and automotive didn't really see a significant decline, but we're actually flat during this period.
Uh huh.
Thanks, guys nice to see the outperformance.
Thanks, John.
Thank you. Our next question comes from William Stein from Suntrust. Your line is open.
Great. Thanks for taking my questions to first Rick I think at some conferences in last quarter. So you've talked about repurchasing two plus billion dollars of shares in the coming year.
Can you maybe frame that up relative to your expectations for free cash flow in the coming year your appetite for.
Raising additional debt in order to keep the net leverage at two times and maybe any appetite.
On the horizon for similar tuck in acquisitions like Marvell.
Well its pizza.
Yes.
I think I'd describe it as follows you know first of all the Bulls authorized $2 billion. So.
No actually got wasn't a forecast to.
How much which you know we spend in the full here, but we just spent $230 million in the.
Basically the first six weeks of this quarter. So you know once we get started on these things.
You know, we don't we don't change.
What we have said is we will return all excess cash to shareholders.
We will manage on net debt.
Two times trailing 12 months EBIT da.
So depending on your forecast.
Finally as to take on a little bit of extra debt.
To maintain the the leverage.
And.
Hi.
I won't give you an absolute number for the full year because it really depends on what you want to afford forecast for us but.
You know I think we're an exciting company I think most of all comes back. We'll you will see significant growth from us that will drive a very very significant cash flow generation, which will return to our shareholders. So.
And relative to the other M&A that you ask about will you know I think the important thing to realize is we've been talking that connectivity being in critical element for us for some time, we actually talk about it going into the Qualcomm transaction and when the Qualcomm transaction growth. We actually were quite open about the fact that the missing element we had would.
Be connectivity clearly the assets for marvell, but as I said in a position to add leadership connectivity, which was really the missing element for us. So yeah. I think we'll do relatively small tuck in acquisitions per for technology, but nothing at the scope and size of Marvell and clearly will be folks.
Just on how we returned cash to our shareholders. During this period of time.
That's really helpful.
Thank you if I can have one follow up.
In automotive I'm, hoping you can frame up the timing of the varies.
More growth opportunities for 2020 and may be looking into 2021 should we expect the growth trip to be driven more by the emerging radar solutions, the battery management stuff or the new network domain controllers. Thanks, so much.
I just got let me, let me try to stage, there's a little.
From a size perspective, it is left by radar.
Being about 10%.
Of the total auto segment revenue.
And we continue to absolutely see our mid term growth here with 25% to 30% compound annual revenue growth.
So that's the the biggest and fastest growing from those the next one about the similar size a digital plus the business. So that follows the trends off a multi screen.
Environments in the in the independents are coming off the of the modern cars.
There, we see a growth.
In the mid teens.
And then you will have a number of smaller ones and they are smaller because they are much earlier in the growth cycle, you did mention battery management solutions.
This is high growth, but significantly smaller than the others.
But it does contribute already into the 2020 and 2021 growth.
And what you also mentioned Sds 30 to achieve a tree victory I think had a great show up at CES, which is our new fully it'll be compliance network.
Processor for the car.
That is actually really launching into the market only and train 21.
So from a growth contribution Intertrade 21.
I'd say, it's at the late and kicking in but we are sampling now and we are we are getting traction now.
Thanks, Brent need to kick in as well in the second half.
Yes.
Rick Thanks for the reminder, I Wouldnt wideband is our say in between mobile and auto which is why I didnt put it now fully into Autobots. Indeed, we are already shipping a small amounts now into auto second half of this year, we got to see the first more material lift in revenues from that from Luttrell wide band.
In the mobile segment, and then extending into a into auto through the the next few years. So again summary is the two large funds radar and digital clusters, both above 10% of the total order revenue radar, 25% to 30% growth a digital customers mid teens.
Thanks for it as reminders congrats again.
Thank you will.
Thank you. Our next question comes from Craig Hettenbach from Morgan Stanley. Your line is open.
Yes. Thank you just want to follow up on that ultra wide band comments and just how you think about kind of the eco system, you know where NXP kind of fits and then you know the different applications as you see them ramping.
Yes, Thanks, Greg I'd say, we leave I continue to to see us as a one off the initiate us and leaders of the ecosystem, which really stems from our formal leadership in the security and mobile wallets applications, including software on the mobile site as well as the key.
Lets entry applications on the auto side and as we talked about earlier the first major use case, which we see coming up now it's actually using ultralife and for a mobile based secure car access which is a proof perfect a I'd say hybrid and conversions.
Between these two leadership positions, which we have had historically.
Now that the competitive dynamics or I'd say judging from the traffic around this at CES ultralight Ben has not really.
Hit everybody's attention.
Relative to a very precise localization technology, a technology, which allows mobile access secure mobile access ahead of any other possible technology. So it's really in the in the spotlight now.
We continue to see very very good traction with our solution portfolio actually in this conversion space initially between mobile and auto but now we also start to see more traction I would say for further I would see application use cases are going in the 20 122 property revenue range.
When it comes to for example property excess solutions, a an indoor navigation.
Yes, well it exists.
What are the key things that were really differentiates our solution is our secure element technology in the software that we provide and the ability to leverage that production for wide band. So we're really in a unique position at bringing that installed base that we have in the mobile wallet and leveraging that broad for wide band is heard talked about.
Got it thanks to that and then just as a follow up I think one of the common themes, who this earning season has been the pause and fiveg infrastructure and so Rick if you could you just get a sense in terms of what you're seeing kind of what you're hearing out there and if there's any different trends by geography.
Well you know the Fiveg a infrastructure the the expectations.
The real strong growth comes from China, and that clearly, there's a churn going on in China right now not only with the suppliers, but also with the different standards and the different combination of carriers and their technology. So yeah, we've talked about per quarter or so a pause we really saw the strength last year from the deployment of massive.
Demo the will ultimately be used for fiveg, but we actually got through a lot of that so that it was in the pipeline. If you will and then we haven't seen a resumption of the fiveg growth yet and it looks like it'll still be a couple of quarters out before we'll see strong growth in fiveg.
Deployment, we clearly see that it's coming just don't see it in the near term.
Got it thank you.
Thank you. Our next question comes from Ross Seymore from Deutsche Bank. Your line is open.
Hi, guys. Congrats on turning the cyclical corner just wanted to ask a question about the industrial Nio tea business that one has been very volatile I know, it's a very disti heavy business.
As its own share of China exposure, but can you just talk about the return to 20% growth how much of that is organic are you putting marvell in there as well in the quarter and from a cycle to cycle perspective, how do you think that business is shaping up heading into 2020 versus I can see the volatile 2019.
So we're off the one thing that you should be clear, we talked about that marvell will be about $60 million in Q1. So it's nearly half of the growth that the industrial an LTV in that 22% year over year, we'd probably be more like 12% or so without marvell in but.
That being said, 12% year on year growth is a war on waste from where we've been for the last four or five quarters and feels really good and again, what we see from that it's really Pos in the ship through primarily in China, We don't see real strength in Europe or in the U.S., but really its Pos and shipped through in China.
And in industrial an LTV now the other thing it is a key factor for US is the deployment of some of this company specific design wins that will contribute to that and be a factor associated with it but basically on a standalone basis would probably be more like 12 than the 22% and probably be.
But on a sequential basis versus the 9% that we are when you include barbell third anything else you, yes, I would say.
Clearly, we see full support of our 8% to 11% growth target going forward.
So that's maybe than the perspective, you should look at this.
In in hopefully what is what is somewhat more and more mcwaters or in the in the near and mid term future.
Are we on the on the specific design wins, I mean, clearly the the marvell synergy, which we talked about earlier in the reference designs is a very helpful element.
Secondly.
We have we see continued great direction on the crossover product. So we think about a 60 million run rate from last year, which.
We have we're confident that it should should double this year. So that's on track with how we talked about earlier.
And finally I'm personally it really excited and proud about the IODEX eight m. class a product, which we at which we showed first time in in Las Vegas, That's a 14 nanometer neural nets process I actually the first euronet processor, which which NXP has ever launched.
We got silicon back from the factory just before Christmas and the team has done a superb trop two two guided running on a demo at some at CES and wait us.
Which really give I would say a high performance at the edge on a much much higher value per dollar than you would get from what people have gone so far on Gpus. So I really think thats a breakthrough product from a performance cost combination perspective into what I will.
Call to secure etch and loyalty.
So it's of course early I mean, I cannot yet say there is a that number of design wins, because we just showed the product now but from the interested gains and from the promise it delivers for secure edge processing, a very very exciting.
Thanks for all those details as my follow up I, just wanted to hit over into the Opex side and one for Peter you're really helpful. On the the gross margin side with the revenue levels and the levers to get to the 55 and eventually the 57 I wanted to see if you could put some sort of framework around the operating margin or maybe the capex intensity I think yeah in the past you've talked about.
Targets of roughly 23% of sale does your Opex intensity can you just talk about the puts and takes especially with the acquisition of Marvell coming in and the Divesture of that mobile business going out how should we should think about opex and our operating margin going forward.
Yes.
[laughter] I think one way to think about it we well we disclose the so.
[noise] a in the fourth quarter.
Of wells revenue revenue from all goes about six I think the Opex was about eight.
Which was just less than a full month.
You know that gives you an idea of what quarterly run rate would be.
And from a net income perspective, I think it.
In the fourth quarter, it was a bit of about $8 million.
So as we go forward you know you would add in involve go into into the first quarter. So that's a big chunk of.
Additional cost should go.
Okay.
The opex associated with.
Maybe I should be to be relatively small.
No I want to say Oh.
I don't know might be six or $7 million I mean, it's Phil snow is huge amounts of money that pops out for the company.
I think the Morricone Party question Ross is.
Where do we place a piano our goal is still around 16% R&D and and 7% SGN I of you know kind of hate to admit it but I think it.
Has to be in a in a more normal market, maybe we're getting back there where you know you see some growth in a normal growth in revenue.
But will you know.
Well, we're targeting it very hard and we we plan to get the told question of how quickly we get that.
Thank you.
Thank you. Our next question comes from C.J. Muse from Evercore. Your line is open.
Yeah. Good morning. Thank you for taking my question I guess.
Follow up to Ross's question on the Opex side.
You know so it sounds like for the March quarter, you're including Marvell, excluding the divested mobile bears.
As we push forward beyond the March quarter, how should we think are the trajectory of opex.
Well you know I think you know you should think about it that you know as we are revenue gets back to more of a normalized basis will be still targeting for the 16% R&D in the 7% SGN aid Ed that Peter talked about we won't be there for the for the next couple of quarters because of the revenue trough that.
We've been in that a as we work our way through that growth I think we clearly have the objective to be able to achieve that they feel comfortable about the actions we have in place to be sure we can achieve it.
Yes, I mean, I don't want to say, it's totally linked to revenue, but you know if we were.
In the full quota.
2.3, we were.
Our 16 and 16 Sevensixty in house into like that.
And just over seven Hoffman is too high so I think once we get to become a 2.4 billion dollar level.
We're getting pretty close to the Oh, the opex numbers, we want to it.
Excellent.
I guess as my follow up or I guess, I guess two part here on the free cash flow margin side, I think you've talked about a near term targeted 25% you did a great job in hit 20, 829% in the second half for the year, though that was a little bit helped by working cap. So so curious thinking into 20 to 21, you know what is your.
Goal there and then you just says as a quick kind of follow up any update in terms of the S&P 500 inclusion. Thank you.
I will let me talk to the S&P five include S&P.
Inclusion alone so.
As you know plastics is an incredibly opaque.
Process.
We believe we qualified ER and we believe that are probably waiting for our case to be fall, which should be off first a significant a.
Document quickly followed by our proxy.
So to be honest you probably know is as much as we do we have been using Oh friends and.
A family to trying to help was Oh, I get a better understanding and so that's a push us okay, but.
Yeah.
Yeah, I was actually pretty opaque. Despite the best efforts are those in our bankers, but we believe we qualify so it'll be just a question on top.
Please feel free to reach out to them and asked them directly [laughter].
Yeah, and CJ, it's Jeff.
We really don't have a a free cash flow margin target stated what we've said is that we'll pay out 25% or cash flow from operations and dividends. That's our target long term and then I think more holistically. What he says we'll return all excess free cash flow to our shareholders via buybacks and dividends, but there's no.
Stated corporate Mark free cash flow margin target.
Thanks.
Yep.
Thanks.
One last question here today please.
Is there and we'll take our final question from Chris Caso from Raymond James Your line is open.
Yes. Thank you. Good morning. The question is on on mobile first from a short term perspective, it looks like the guidance is roughly seasonal or is that how you characterize the environment. There and then as we look out through the year.
Your mobile wallet was a or was it was a big driver mobile segment revenue last year, you talked about increasing attach rate is that something still to be expected. This year and you know with some of the growth last year. It I guess is there any concern of lingering inventory issues in mobile.
Thank you.
Chris Let me, let me go to the mobile attach rate first mobile wallet.
Yes, we are we are on track to our earliest stated target.
On the attach rate of 50% exiting a 21.
I think the entry Mark from last year is probably about 35%, which we consider on track. So the answer to your question is yes. There is continue with attach rate increase.
Our in the middle of the game and there is more to come to its tourettes 21.
And Ultralife and ER and then beyond that as I as I talked about in one of the earlier questions Ultra wide band, which is a similar technology, but totally complimentary to onto mobile wallets is gonna come in on top of this again very strongly driving content and mobile independence of run rates.
Actually.
Now on the on the inventory question no I I'd say, we have we have no visibility if anything particularly concerning on the mobile site.
And seasonality I think in the current environment I really wouldn't want to go into any discussion about seasonality plays really it's really hard to say a window of in the industry go through a cycle as it's a as it currently does.
In general it is however important to note that our mobile business.
He is not as it used to be a single customer game.
So we have broadened our our business into the especially a number of Chinese players.
Which makes its probably different to what you would have expected from the past in terms of seasonality anyway.
Thank you and as a follow up you.
Maybe can ask a little more on what you said on ultra wide band and you mentioned a number of applications for that at a number of areas.
Which will have exposure.
Perhaps we look at it and in the short term in the longer term, which areas do you think are expected to be your most impactful as we look out in the next year is it more on the mobile side or the Io Teesside more the auto side and what do you have to longer.
You know where where's the most opportunity over the longer term.
Well so first of all the is a very small baseline, which is actually small in size, but it's significant from a from a giving as evidence of the strength of the technology, which is an auto. So we are shipping as we speak ultra wide spend into key false. So if that's all about mobile access it's the classic key for Formfactor, but it is will provide some technology.
A vicious being pick up and used for more secure applications against relay station attack. So that is running as we speak but it is really small.
And then the first meaningful lift in the second public 2020.
It's going to be in mobile, but the use case is it's very strongly focused on mobile car access. So the revenue goes into mobile and of course on the counter side in auto, but mobile is gonna have to higher volumes for the use case of car access that's what we see kicking in second to second half 20 to 20.
And all the other nice applications I mentioned earlier, especially in Aiotv I'll, then lay up into the coming years.
Great. Thank you.
Great. So let me just to take this opportunity do you think all of our investors further support through this debt difficult semiconductor cycle. We've been through in 2019, we're encouraged that we see some of the initial near term improvements specifically in China.
In sell through and more of a stabilization in some of the other regions, which puts us in a good position to get back on strong growth going forward from the company specific design wins in the portfolio that we've been able to put in place.
We think that that will bode well for us and give us the opportunity to significantly outgrow the market and as we get to the kind of margin level that we'd like to be yet clearly generate a significant amount of cash that we plan on the focusing on returning to our shareholders. So we're excited about the future and the opportunity associated with it.
Albeit somewhat.
Concerned about the impact of the krona bars, which clearly we have not reflected in don't know what that really will be yet a better clearly are excited about the opportunities going into 2020 in returning to more of a normal semiconductor market combined with the company specific design wins that will be right.
Ramping for us in 2020 that will allow us to continue to grow at a significant rate. So thank you very much. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program you may all disconnect everyone have a wonderful day.
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