Q4 2018 Earnings Call

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Good day, Ladies and gentlemen, and welcome to the fourth quarter 2018 and exp And my conduct your earnings conference call at the formm. All participants are with ear remode Ladies. We will conduct the quest-and answer session and instruions of call at that time. Thank anyone you require assistance D the conference with start ear zero on your teouon telephone and, as a reminder, this conference being recorded, I will now retohand the call over to the suggest former by President of Investor ations. You may begin.

Thank you, management. Good morning everyone. Welcome to the nxtp sey conductors. Fourth quarter and full year 2018 earnings call. With me on the call today's reclever at PCE Curt stevers and XP President and Peter Charlie, our CFO . If you now obtain a copy of our earnings press release, it can be found on our company website under the Investor Relations section at NXP com. The call is being recorded. It will be available for replay from our corporate website.

produon call today will include forward-looking statements that involve risks and uncertainties that could cause med's 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 specific end markets in which we operate, the sales of new and existing products and our expectations for financial results for the first quarter of 2019. Please be reminded that NXP underta no obligation to revise or update otherly any forward-looking statements for arefocus disferur. On forward-looking statements, Please refer to our press release.

Additionally, during polictoday, will make reference to certain non-GAAP financial measures, which include: exclinclude the impact of purchase pric charging restructuring, stock-based compensation inpairment, merger-related costs and other charges that are driven primarily by discrete events that management does not necessary to be directly related to NPS underwing or operating performance.

Since Regulation G and P provide reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our fourth quarter earnings press release, which will be furnished the SEC on Form six gains available and pleie website in the Investor Relations section. Before we begin the call today, I'd like to remind you the beginning January first. We have shifted our revenue reporting to end market view from an operating segment approach. We believe this change over time we will enhance the insight into the drivers of our business relative to the market in which we operate. The current and historical end market information is available from our Investor Relations website in the historical financial model which we clo every quarter. And now I'd like to turn the call over to rrest.

Thanks Jeff, and welcomecteveryone to our conference call. On today's call, I would like to cover three major themames.

Our full year financial performance, our view of the market environment in which we operate, and then the specific roundand our fourth quarter performance.

Overall looking at 2018, a revenue was $9.4 billion, an increase of 2% year-on-year. The drivers of the full year growth were the automotive and industrial end markets, with flattish creens in mobile following a strong two thousand and seventeen, offset by weaker transrends in communication infrastructure in other end marke relating to a decline in our digital networking business.

Turning to the details of the full year.

Automotive revenue was $4.51 billion, up 6% year-on-year.

Highlights include double-digit growth of both our radar transceivers and processing solutions for aod applications, and the growth of buy-log immix processors use in auto display cluster applications.

For the full year, ad-os products were just under 10% of overall automotive revenues and the expectation is for continued strong growth as automatic breaking and other safety features become more widely deployed and mandated.

Industrial not revenue, was $1.81 billion, up 6% year-on-year, including high single digit growth in general proate ension use.

Within the portfolio. Growth of our 32 -bid ARM NC products were us in the high teensdriven by the breadth of our power, optimized portfolio and 25 thousand -plus customer base served through our distribution partners. Call industrial and ioot applications.

We also continue to see the acceleration of design wins for our RT CRO? ver process for families announced last year.

Mobile revenue in total worth $1.16 billion, essentially flat year-on-year, with sales the mobile transaction products up mid-single digits in two thousand and eighteen and.

In mobile transactions. We continue to be focused on moving the tax rate at mobile wallets down into the future phone market in adding new useth cases, including transit and access solutions.

Communication infrastructure and other revenue was $1.79 billion, down 4% year-on-year, with increases from early five C trials during the second half of 2018, more than offset by the continued declines in digital networking.

Before we review Q4, we would like to offer our views on the current demand environment.

As we communicated on our third quarter call, we believe the demand environment was cloudy andinvest.

As we progressed into the llater part of Q4 we began to see accelerating deterioration in the chman market, in industrial, the counaautomotive and industrial markets.

With respect to automotive, we see weakening domestic demand in China, cleoroughly impacting the demand from level OEMs and interur, an suppliers.

Within the broad China industrial market service by our distribution partners. We saw an increased reereluctant to price orders due to weak demands from their endended customers, which we believe is due to the uncertainty created by the ongoing trade dispute.

In this brooud market it is extremely difficult to point to one specific set of customers or stru markets that is causing the reduced demand.

In the European automotive market. The wppp emissions testing bottlenecks we highlighted last quarter continues to create headwind to demand. We do not SPE the tecting bottlenecks clearing before the end of Q1.

In addition, the lack of progress of how the U take or excessy U has created additional levels of uncertainties in the auto market.

Within the mobile market. We anticipate worse than seasonal trends into the fourth quarter, primarily due to weaker trends in the premium smartphone market.

And the continued absorption of shipments after the strong launch in India by reliance in the second half of two thousand and seventeen.

Overall we do not read the historical leading indicators of an overheated supply chain, including unusual backlog cancellations, our outled program cancellations.

Our distribution channel continues to be in good rate, with channel inventory consistently at two point four months, in line with our long-term targets.

Unfortunately, we do not have any unique insights to foreast the duration, our depth of the slowdown. However, our order rates would indicate that Q2 revenue will be higher than Q1.

And with most third-party economists continuing to forecast global CDP at a range just under 3%, you would have to believe the second half of 2019 will be stronger than the first half of the semiconductor market.

Now I'd like to turn to the specifics for Q4.

Total revenue was $2.4 billion, a decline of 2% year-over-year. Our results were modestly better than our guidance for the quarter.

From an end market perspective, automotive Q4 revenue was $1.11 billion, up 1% year-on-year with eighto and auto I a MA.

With it.

I industal and I would see revenue with more than $35 million down 7% year-on-year, primarily reflecting the weaker distribution trends in China, as previously mentioned.

In mobile revenue was $344 million down papercent in year-on-year, primarily due to the trust comparison with a ramp-up reliance in the second half of two thousand and seventeen and.

However we did see seasonally strong sequential demand for remobile transaction products in the premium smartphone market.

Finally communications infrastructure and other revenue were fourign. Our negative remain hours up 3% year-on-year with RF power solutions up a very strong double digit, offset by declines in difficult networking.

Now I'd like to pass the call to Peter for a review of our financial performance.

Thank you Rick, and good morning to everyone on today's call. The break has already coillvers the drivers of the revenue dwuring the quarter. I'll look to the financial highlights.

That in summary, our Q4 overall revenue performance was modly bettered in the midpoint of guidance.

And at timeong year-end I ll review the full year financial trends and then we ve want some results for the fourth quarter.

For the full year revenue was $9.41 billion, o 2%. year-on-yearnon-gaap gross profit was four point nine eight billion, or 53% of revenue.

non-GAAP operating income was $2.7 million, over 29% of revenue, especiially fl year-on-year on a dollar basis, as we stepped up our de investments D the course of the year, while we managed ex net expenses down.

We generated $3.76 million in creased cash flow, which includes the onetime termination fee. quu on.

And we returned five point zo- $8 billion to our owners through a combdation of surere buybacks and coash dividends.

And we due to our diluted trdown by 15% versus the same period a year ago.

Focusing on the details of fourth quarter. Total revenue of $2.4 million down 2% year-on-year, though modestly have gotved above the midpoint of guidance.

We generated $1.28 million in non-GAAP growross profit and reported the non-GAAP gross margin of 53%, down 110 basis points year-on-year.

tooued non-GAAP operating expense. Expenses were 500 and for $3 million, down $25 million year-on-year, and if we get of $2 million from the third quarter, this was $8 million better, better than the midpoint of our guidance.

From a total operating profit perspective, non-GAAP operating profit was 700 day able million and non-GAAP operating margin was 30% down 70 basis points year-on-year, reflecting the previously mentioned items.

Interest expense was six million, noncontrolling interest was $13 million and cash taxes to ongoing operations was contin $9 million.

profate compensation which is not included in our non-ga, AP ends with $93 million.

But now I'd like to return the Chang, our capash de.

Our troued that the in the fourth quarter with $7.35 billion, an increase of $1 billion toquentally, as we assued $2 billion of our first investment growth bonds and simultaneously replaced the $1 billion bridge one facility.

Cash with $2.79 billion and that debt was 4.5: 17. we ex the court over the tomintal for a month ggjustedthat ebitpa of approximately three point one five billion.

Our retaio of net debt controlling 12 months. Adjusted EDA the end the fourth quarter was one point four five X and our non-GAAP interest recoveries was 12 times our liquidity of excellence on our balance sheet to gross strong.

During the month of October , we returned approximately $5 million shareholders, as we bought five rethese shares- about $424 million- and paid 74 illion dollars in tax dividends.

During the quarter we paid a de dividend tax of $142 million and, as a reminder, this payment does not go to clean out.

Turning to working capital, metrics D of inventory with 102 days- an increase of two days sequentially- were slightly down on an absolute dollar basis.

Days with fevorable of 30 days- increase of two days sequentially- and days payable over 80- an increase of six days versus the prior quarter. Taken together, our cash condo cycle was 52 days, an improvement of six days versus the prior quarter.

Cash flow from operations with sevenver hundred and 31 illion dollars. A net CapEx was 17 million, resulting in free cash flow of $561 million.

Turning our other expectations for the first quarter. We currently anticipate total revenue will decline in a range of 16 percentto 10%, sequentiallyreflecting the weaker demand environment we ve discussed.

At the rest point of our range, thisition decline of approximately 13% sequentially, an eight percenten versus to the same period of a year ago of $2.09 billion.

As a reminder, beginning January first we may discusris award reporting our total revenue on an end market approach. We have posted the historically on our website and our guidance today will follow the new end market definitions.

At the midpoint we anticipate the following twenttal trains in the business.

But mosttihavely than expected, to be down about in the middle in the mid-single-digit range.

Industrial and ilc is expected to be down in the low double-digit range on a per centive basis.

A model is expected to be down in the low 30% range.

The finally communication difference pro ntheless, is expected to be down in NE first single-digit R.

We expect non-GAAP prross margin to be about 52% PL, some minus from ty basis points.

Operating expenses are expected to be about $55 million to us, some minus 12 million or so and taking together we see longon-gas operating margin to be about spty 6% plus some minus or 100 basis points.

We have antplipating tax related to ongoing operations will be about $24 million and we estimate lessset expense to be about $62 million because of the additional debt we had of last quarter.

Noncontrolling inact will be about $7 million, down about $6 million.

Below our usual number. The reflecting ourcertain two prenses to invent their partners, reduce roings and efficicy.

I would like to provide a date on our here. We took the program, as previously mentioned, in October of 2018. we brought back five on insurers, or cost of four hundred and twenty-four million.

Since December thirly. First as farly in 2019, we have replacted an additional five point nine minillionsurres, a cost of about $48 million under a 10- 10 B by program.

We suggest that the modern purpos is: you use an average share count for the first quarter of 219 million shares.

Finally I have several keeping comments I'd like to address.

one given our new end marketts reporting, I would accimentily all we view the data we processed.

But going forward with the beginning Q1, we will not include revenue from our manufacturing services agreements which is related to its divestment of access, such is standard products and RF power. A couple of years ago, and as an example of the NSA revenue in the third quarter of' 18, which 30 around million dollars and what you will now see in Q1 guidance is zero, which creates obviously about one hundred and sixty basis points of headwind to our product revenue growth.

As we pointed out, but the conduct continue to predict global GDP growing 3% in 2019. to this point, we would see no reason to not believe our marketcan't grow we-aker MAR percent compound annually over the next three years and that our business, reflecting this growth, would grow five percentto 7% compound over the of the same period.

Clearly on those loggins town in Q1 but we still plan to what exits for our fourll quarter 2000 and nineen and 55%.

Our interestact costs for 2019 are anticipated to be about two as an certain million brollars when that reflects the just new guk.

We continue to believe what tax rate be related. Stronger operations for 2019 should be about 4% and we expect trafpefic for 2019 to be rer six cent to 7%.

I'd like to have to turn back to the operator for questions. Ear ri, our straf foreter.

Thank you, Ladies and gentlemen, at this time, if you do have a question, please start the startar in the number one key on your touch on telephone. And if your question has been answered, are you sure move yourself from the queue. Please ESS the con you.

My first question on: at John , it's there, that's credit FE your is open. Yes, this want to guys. Thank, So let me ask the question. I guess my first question is: can you talk a little bit about the expected inventory trends as you go through the March quarter, both on your own balance sheet but I guess more importantly in distribution, when you look at your rev guide for Q1, do you think is that representents kind of undershifppting and demand in a very meaningful difference on what's going on with inventory by GE?

Well know, I think H we've talked about. We look at our automotive business. The bulk of that side of China is actually on the vendor mainangeed invent, ory So we actually only shifted to the customer and they're actually using it in production. In the case of China it's not quite as refined yet. So most of the shipments we have the automotive marketin China do go through our distribution partners. As we've talked about, our total distribution inventories that two point four months and our target is some maintain around to that month, pltofromiz a have. So clearly the guidance we have with the dependent am oury anticipation of what we believe the P? O's to be for Q1, with the reduced inventories that would go associated with that. I think we're in a very unusual environment where the? U's is is OK, Europe is basically OK, maybe not quite as robust that it was in Q3, But China just kind of lockdown in the wagbuire that our- our distribution partners, customers are not taking orders and not taking invento.

The because there're uncertainty about what's going to happen in the trade war. As long as we see this uncertainty in the trade war will continue to be relluctance by them to play orders and take inventory. Now if you believe that they full years G D P growth is going to be the three percentnergies under, then you clearly that continue. So so get that' the case and we'll see a significant rebound in the second half year and, as we said, our orders right now would indicate the Q2 will be higher than Q1. So how would trade that? You know we see an improved environment but we're still going through the shipments in Q1 and we have the distribution inventory reduce associated with those reduce shipments in Q1. But no long B was come because I want go down the 95 days. We've put a lot of pressure on the, the organizations who to do the. Clearly we want the difficult couro to do because severe a low couro I have not lot of confidence will will get doesn't going to allow invenries who grow on the own ES.

That help is my follow-up just on the auto trend in Q1 and then throughout taling year' 19. clearly auto is outperforming the midpoint of the overall guidance. Does that, in your view, reflects your kind of you keep be up with the market or the company specific drivers that you see mean in Q1 or helping you outperforming the overall market? And how does the company specific tough trend throughout calendty year' 19?

Well I think the tractting specically curd plan. The second, but I think we believe made specifically in radar. That will continue the ramp through the year. That Q1 is we've been interesting in 10, 10% amount of other revenue for full year' 18 and that we will continue to see that more orbad in re noted market in that will continue to ramp throughuring the year. Specifically D absolute from the as we that this cus reallyli, the madeid up being now just below 10% of the total water revenue is a strong content story and the current environment we, we growth see that been serving that reng. So we clearly see that the say veryified the particical cent growth rate of that part of the business fully in fact also in the current environment, why other parts of the business obviously are much low. The typ to the our which is been most suffering from the from the Q1 environment level of really we was was big about the earli which does clearly outgrowth from a content perspective is our eyes of the next applications process, the business which goes into the digital clcess. So there is a continue strong frrent of the productction of this is the TR the solutions where we have a very broad leading solution with our eyes of the nextx applications process. So those two I would say clearly our content dven also Fu weaker market environment.

Thank you.

Thank your. An expression comes from line Stacey restaurant brren. Recent hererein is event.

I guys think to take for my questions. I wanted to ask about the gross margin gu. Mr, still holding the 65% to the end of the year revenue level is required to hit back med. Ate experm idea of the gross margin drivers that drive your trajectory from the Q1 point through its Q4 is going to be here to get.

Yes you restpect it, I I.

Good you obviously wer a piece of general questions around this. That ING we got from Q4' 18 for Q4' 19, So we fl flat revenue.

To get from 53.1 to 55, several things all. We have our annual price reductions, So I give, as a about an 18 basis poin aheadwindmix, a little bit of a benefit in what we're planning by now, or of our 60 basis points.

Operationally I've got about 200 basis points of performance lock in to get to the 55, So that's about 130 basis points in income pricing which we've got identified, then about 60 bas 60 basis points in factory efficiency which we've got identified. Now have to be honest on those, on that last 1, in particular the factory efficienes. I'd like to see that improve actuallyme.

But I I said in last time I don't think we need. The volumeor revenue increase of our Q4' 18 number to gets a 55% and I think we go pretty well identified. nowand I can do that and I'll do better but there's always thing. But as the.

The potential to offset some of the some of the potential goods. We you've seen hind still in pretty control, thatstill.

Kind Thank you for my followup. I wanted to ask about buyback and you've been been buying back on more incremental amounts slightly. I think you were sitting. You need to hold a shareholder meeting to authize like a Sur further, like a large repurchase anamounce right. Have we not seeing that shareholder meeting? Is it going to happen soon and how much of the existing authorization of the buyback reate?

But in still here this a kind of technical finking in the Netherlands where basically you do.

You get not. I big and took, buy back up to 20% of your stuff and typically people don't, you know, don't buy back twentwice to this docku, but where we're getting close, close to it, the reason not ask that maetking yet is that I can still buy back about certain for that 14 million sharesyou know, which is one and a le- a lot of truth prices- one a half billion dollars I Stu. So as soon as I, as soon as I use all that, I'll go and reclquest the meeting but being the way on next time general meeting news and get probably to that me in legor June and and we've played topped up to oney percent of that. But but it's simple answer: I have the capacity to still buy and of this RO one half billion, I don't. I don't need the approval right now.

Got it. Thank you so much.

Second.

Thank your and expression one of the oum sign is been great than for taking my question. Just one more one on the buyback Peter, you said, I think you've said either at the Analyst there of the last call that you anticipated spending approximately three billion from Q4' 18 through full year' 19 or that still plan.

And yes, we exsaidpect we would return some weexsaid for many years, all excess cash to to shareholders. So we do the math hviously, year for now in resu dividend. But we have be roughly that number.

Okay and then I guess I'd like to turn to fiveide G Rick. Last quarter I think you express from skept to Ho them about the near-term strength in that market owing to your customers' sort of design approach and expressed an expectation that there might become changing in that that would accelerate demand. Can you update us on your view in that market in the quarter and as we progress through? '. nineteenthank?

Yes So I think we. I think five G is still pretty fluid right now. I think one of the major U's carriers actually announced that they were going to delay some of their deployment on cte for the last mile because they didn't believe architecture was ready for prime time, a little bit like we talked about on our last earnings call. But I think you kind of confirm our view associated with that.

We anticipate that there's not really going the the five G availability, a reasonable cost architecture that you driven by F P G a until late in 19, So we not see curious ramp that you know, C P your last mile for five G intoil late 19 I think. In the meantime, in preparation for five G mobility, the infrastructure investments are ongoing and we see very solid demand of very solid increasing demand that frankly, we're struggling a little bit to get position to be able to fulfill all the requirement. So So it is, you know, kind of the careil of two pieces. When you look at the infrastructure side we do see that really beginning ramp now, But when we see the deployment more the last mile, we think that that would be later in the your support really the architecture will be cost effective to be able to support to care ramp in the last time. You're talking about massive myimmo in your and your, your current to the business. Yes, I think you. That's what we see, the today as we see for the infrastructure deployment, massive my o as well as the deployment, the base stations to get prepared for the five G last actually beginning to be. We see orders for today.

Thank you.

Thanks well, it's very justfic important. I expect nine for to correct something: state the I time generally insurres capacity like not not 15 BU AB ility buyback, But by more more, more $2 million. Before I I have to go back to the.

Shareholders. But guar' it, I don't think vestination it, it's an easy thing to do- to be needed.

Thank you, Thank you, and next expquestionion comes in the line of the bestest aw. Thank you America, marand you and is of it.

Thank my question, ick. From a high-level perspective, do you think any ex me more exposed to China versus your appear? For you are perhaps seeing more of this downturn and as there is a trig resolution, perhaps you also see somewhat better recovery and as part of that I think you mentioned some optimism around to being better- was hoping you could give us some color on which end markets are broughting to stabilize and returning a high o for the early end data limited.

No.

So I guess that you know, relative to China, you know, I think were' we, China represents a significant portion of our, our business. If you look at So we see, we see that you the ear marketing in China from a distribution viewpointts of industrial price is contributing to being somewhat own. The hold are in the gray area. I think what we talked about to gives us the confidence for Q2 is the order road than we see pro last three weeks coming in actually really gives us the confidence that Q2 will be in excess, the larger than Q1. I do think that China is somewhat contributor, but you know, I think obviously there was a hard shift, the hard reset by a number of our customers, specifically in automotive, but also with our industrial key customers in China.

As we see that, taking life, as long as the world' GDP continues to be relatively healthy- and I think we're very confident we'll work our way out of that- but the increased orders that we've think over the last few weeks really, if that ability to have the confidence for be able to say that on this call and then relative to the second half of the year, it all gets down to what your belief is on the world's GDP, why you believe it's going to be closed to 3%, then we clearly believe that the second half of 2019 will be better than the first half, I think. But our exposure, the somem them is.

comumplicate things was slightly in the sense. I mean, know what we ship in and the supply chain in China isves certainly more of a pace than the money you see in Western euro for on the U's. So it feels to live like we do get moved, the move about in terms of what's going on and the appointing under there.

But once we took in- you don't know to the concern in our look which you hold the prcts in netq.

Some of it will be for domestic, some of the clear global, our industrial products, the assaid to.

andto devices. C get shipped all over the world. It work for rates. Actually it even some of the bcri in Europe , in the U's and up in the end market of China. So we we don't have one 1% radeability. Which shipments are really down to the market is selfth in China. Grow outside of China. Shipments could add up in China. Some of the ininterest China shipments could be high to end market of outside of China. But that P it's really a bit half to state what is cuit exposurer. Yes, we here about two frly see shiting. The is twenty.

Just N 20 to time up persecond to chck it 20 place ele.

No SER.

gre was 27%, 20 King two 7, 20 sembly M GE gener distribution into two thousand and nineteen.

Got it and summar, follow up back on the automotive business that grew about 6% mentionions for the full year. If you're going that, probably higher based until Q3, how would you characterize the market SP environment in your traditional market? And let's say if this year we in the situation the automotive industry has negative units in or down to 4%, do you still think your automotive business can grow in that environment from? Of the new initiatives that you mentioned in maassking management systems and rad- another area, as- can they grow enough to from a content perspectves to help you do better than the unit environmentthankyou.

So let's let me disclos, we let me try and caure the pieces of your question So frly from the STAR environments for 2019. we we will did so. Sources forecasting somewhere between plus one and minus 1%, So a big DAT point which particularly look at it. Actually highaddress, which talked about plus 1% Star growth for four and 19, but also some people are more negative, like minus 1%, So we think it's going to be some in that range. Put us 18. however, what actually a negative Star we all has minus 2%.

So in that environment we did. Growth takes thepersen, as you said. So obviously the content growth stori, this play out the way we were speaking about earlier and is that regard. Yet we do think that also for two thousand' 19, that seeam is impact. I talked earlier about ad as a large contributor being pretty independent of the STAR, but also the idle, the next lar applications having in that respect. So in a to environment which is, which is mainly around the Zero unit growth in' 19, we do think in being that our content growth stories does have us throughout grow the STAR continuously.

heav, ex bff. I just like to clarify of look at the wrong number. Our statsu for China is 30 high, 30% range ologies.

That's time very hard.

Thank you. My next question lineines rossw seymour. So I you Thank you in the open.

Ok guess I want to go back to the disty side of things and maybe the revenue visibility in a different way. Can you just talk about what you're seeing on the disty side versus the O EM side and maybe specifically in your first quarter gued of the down 13% sequentially how the OEM versus 50 side differs, either in aggregate or if the disty side is worse, given your commentary in China, is that really localized to the industrial market or any of the veryar end markets that your new segments are definine?

Well as clearly rel when we talk about the market internal on the industrial a significant trunk of that somewhere around three four or 80% of that it start served and distribution choural and that's really the area of signific against weakness that we see combined with automotive. So in the case automotive it's probably somewhere between fourth and a third of our total business go through the channel primarily far riven into China. The rest of it is pull from vendor ban here in the Tory where we have seen declines. We talked about in Q4 I mean in our Q4 call for Q3 resuwell that we've seen the decline in the heart of production in Europe for the co two trusting and we see that continued through Q1. So there's continues to be a impact of that and then there's also the served of Brexit and.

dond industry has a lot of parts moving from Europe to the? U kag and Brad versa, and so that's created that firm concern with the lack of clarification of what's going to happen on Brexit as well. But I think, think really the key area that we see that we've doing is really China. Nothing, I think, mostth original you've done for China. Just be versus direct community. That weakness in China expresses itself in the distriure from China for us, and that's both for industrial as well of automotive.

yesthanks as my follow-up question. Peter, you did an example, walcking it through, on your expectations for the full year and the gross margin side with a lot of helpful detail. I want to fit over to the operating margmargin side, specifically the OpEx. Given that revenues are weaker than expected, what's your plan as far as how OpEx spend that might twind directionally throughout the year? You tightening things down given the revenue level, or you reinvesting more for growth? Any sort of changes in your strategy from the last time we spoke? Well, these you- I mean you say few for usctionions, you one gu was definitelyway- keep a little things to the moment, put it.

You know we're not picking out any programs well.

manag travel not not replacing all the trition straightawaytrying to push out. The various expensse that kind of things is normally it on a more long-term basis. So.

Into' 19 and' 20. I'll go back to our percent of revenue. So we want to run.

That R? D about 16% of revenue. We'd like to run spa about seven and a half, and so going forward, we see over the next three years R D.

Around about 16% and also to get next few E down to that Sun.

But it's important to pray roough. We are definitely taking actions in the near term to significantly control our comp. We're adjusting people levels relative to that. As peersership we're not really here stopping in programs but we clearly are not replacing attrition in some cases and formmance improvements. So we work directly, use this to move local perform actually out of the company to strengthen of the organization. But all of this has be other across those.

So view I think you've seen fronically promotte and I think was a clear indication in Q3, Q4 and q1- that we will monagetor our OpEx and we now have to do that.

I thank you.

Brock.

Thank AR. The corressction confrom line that mount ransing of the Colonial line is a bit.

Thank you very much. Wanted to ask about, I guess, two of the the smaller segments of the business.

I think one growing really strongly in your.

one on decline of.

May I've mentioned that it's a 32 day.

And few programs and aggregates were up on the order of high teens.

To give us sort of update about how they daddted in the overall mix and.

ter to see there.

Relative to demand and sort of district.

Levels and then, on the flip side, you've been very clear about how you're going to manage.

The the declines are directionally.

Of the digital networking business.

Let mebe to just talk to about where that business.

This is one rating. Now if we can throw.

I guess calibrate models going forwardthank.

Yes sure, own the 32 bit ARM. We don't talk about the specific associated with it, but it's the biggest surk of our industrial and I to business and so that really gives us the the benefits of looking at that from the growth. The one area that we're seeing really strong design was if our new cross over products that we announce really about a year ago- the So called R G family, which takes the process and capability of our next family down to across the microth on specific applications like like visual or air detection, our audio- So that's really a significant back partcts and driving that growth and we continue to see that accelerate with design. So that versus in a really unique composonive position for the 2019 outlook and we're kind of uniquely position where there's not a lot of competition in that space. Both of our competitors and I X participate in microth and Mike first of the same thing with the microth. So we're kind of in a sweet spot where he gives us ability to really drive that in proularipstateate in it to do and networking business. That business is kind of stabilize- you know we've declineed through 2018- and kind of stabilize it just still around hundred hundred million dollars a quarter. So there's some opportunities for growth with designments we've won over the life year. So as we see those finally begin to ramp, we the power P C legacy business grow. Continuing to decline is much that has in the past. So I think we've we've got more of a stabil level there and with some of the application that we see you know there are some opportunities for growth. You know later in the year in 2, 2020 that we'll see how they materialize.

Thank very much.

Thanks for.

Thank you and expression line of plainen curod of bararkclay. Your line is OK.

Hey guys, Thank through my questionre to see one all started. That understand the friends are. You have to see called out to.

segmentcing double-digit growth. The curious, obviously auto are slower.

It kind of curious with any segments or providing headwinds above and beyond over.

From the, the overall retiarment, and then it decfive. You want to understand that was a big boo.

The kind't surprised people. The end of 18 and it seems like you're saying thingsms going, they take a little bit of a pause, but I just want to understand.

Of what your expectations are for our business and have the first half the year.

Yes case. Our F is personnel and occur coming in automotive. So our app- we are seeing the May and ramp for the mass mymo and five G infrastructure and we're frankly struggling here on a on a near-term basis and being able to meet our requirements from our customers. So we are seeing a ramp in a that's being a significant contributor, but's positive contributor versus the overall environmental issues where we see any the other businesses. So we think we're in a unique position with our mass mer product in have gotten really very positive feedback from customers and and requirements to be able to actually see we can build more for them that what they had recently anticipated as we go into the near term ING occurt and talk about. Yes, I think AU treed.

Differentiated between what is the content growth story vers what very tightly associated through the SAR growth, So those product or applification segments where we are holding a high playir but the penetration itself isn't growing anymore. We are obviously more swing with the, the AR, quarter by quarter. So you could call this, especially with the China environment and the wlcps in Europe , headwind. There again, that the same timeme the content growth- and I mentioned eight right down before- is' largely independent of. So it's the mix of those two which drives our overall growth number and we roughly deepen with think that about 70 percentage of our total business- it's pretty close associated with the farar, where another 30% are really benefited from strong content growth and in that 30% of larger piece obviously, data which which is just on the 10% of total valge.

X price blla from worth F that talked about in the case of automotive know, in our last quarter's call we talk about in Q3, we ve really seen weakness in the co Q testing in Europe and we actually didn't see a lot of weakness in China in automotive at that time. It was really not untto kind of mid de late Q4 where we begin to see some weakness in the automotive market in China has all of that basically served through the distribution channel partners. So we saw that weakness really began to materialize at that point. It So, while many of the P one company talks about this already, we didn't see it in our, our August nor alrvenio, but I think was like late Q4 kind of rate November , early December that the olders saw that's hitting up. But again that only relates to a, that truct, which which is in the 1: one relation with the co production.

How BLE that?

Thank you play.

Thank you. My next question and want is C J years of the evercort. I sorry, liis a bit.

Hey guys, this is me personal.

So outside of the Judy P forecast, fer any customer conversations or other factors that are giving you confidence in the second half of conference and, regarding the recent order uptoick, keeping any of ents related to poors ahead of the triines. New year tariff eln.

Now there was none that it FE like it was for associated the Chinese. The year care, you know. Once again, you know the U's is OK. we really don't see a lot of concern about demand from our customers in the U's. You know the generoural economy, even though it's down somewhat, is still performing quite well in Europe . I would say we see things pretty reasonable. But we do see, you know, I believe pockets again driven primarily by automotive and we believe the biggest type of that is C o two testing and we'll see down the demand terms out and we get more through that you know it was come for record and in the effects associated with Brex that we talked about. So in the case of China, you know that's much more flouity, much more murky. As far as determining what's acting in seven and half year, I think you just pin some kind of resolution, our confidence and what's going to happen out of the current trade issues that are being discussed. So if, if you believe that the trade issues we're going to continue, you know than the world's G D P is not going to be close to 3% for the, and then that's a different factor. But long as you believe that the world's G D B is going to be just under 3%, says there probably have to be a tradeight resolution with China to be able to accomplish that, and with that than we think we'll see very strong growth in the second half the year.

Fair no. And then, as a follow-up of the housekeeping item, CL your internal cash: taash forecast increase.

Of 2019 and different 2020. you you give some additional quter.

Right covered on the taxes for.

Our businesses, like we young.

Like next period and where we sold up and also the taacks on the clo on the clo on transaction now you might ly have to look at the Q4 as So we will saying.

Previously that we spent sort of 95 million in Q4 and we only spent 32 because that we went into for a long winded negotiation with the bestk tractsure authorities and were re able to negotiate that particular contraction in the clocom bal went through the innovation. Box So.

We we managed to reduce our leve though, I guess.

Because of the time, we want to go Tito' first from Q4 in the Q1.

So the big move is really just the backdack. We move the payments on the talk on breakup three from the end of December 2, early January I think. If you actually do them, do the backac on Q4 actual and what it guidance for two thousand and nineteen and 20, the amount is actually lower.

And to us a very specific tax wes- And so that's why we we pull that one out separately.

operat with big I col Please.

Next question come from line at theiccraig edtenburg of Morgan Jeremy jo in of it.

Yes Thank you. Just question prep on the bmssi. Just curious get kind of what type of feedback you're hand from customers, given you're taking more of a kind of complete system approach versus some of the existing tires and you're how do you feel about the pipeline of opportunities and DMS?

Thanks fr. Yes we you actually increasingly stronger because in the whole environment the one subsegment which really pushed with electric cars for is really cre from right to and really be on pri from a car company perspective to BR launches which we have L for' 19. So if you think about the short term the design level which starts to turn into.

A couple of kinds of various revenue in 19 is on track that it also ly devided. It depends really on the on the timeliness of the car launches and I alsoly cannot tell you which those are, But once there I ll people will tell you when it's really prominent nice cars. On the more strategic side yet the solution playate, which we talked about earlier, is absolutely hing in the mail as much as the enld capability. So I really want to say it, to think that it's the solution projects in microth and the animual front end and the enld capability of the whole resolution which continues to better the PL compeility.

Got it and then you's start in the internalignment. On the campaan issue, do you think once that passes there should be kind of a catch-up? Or because the overall automon market is lo right now, you wouldn't see any kind of rebound. If will in Europe .

Really have to take right. I'm very careful with that because of course this also somehow related to the overall demand devironment in the endand I'm hearing- but we don't have the latest visie- that there is a second rate of wlsep planned though another type of hasest planed for cotwo emissionthere. i'am hearing that the OEMs now start to figure out how the they can again though iahad the. That oneso I can say at this point is that the current one is not going to herear before the end of Q1.

If there is a strong resuse from this- I'm a bit careful to say that this is going to happen- that future assuort.

Okay Thank you.

Thank you. My next questionions and the line of the mark, the pocast of jeplease line, is open.

Thank to think my question once: one repeter and one per ICT competer, that just accounting mechanics on the being dividend, that embedded in the cash flow statement under shares, a reperchsure. And then for Rick a number of microcontroller compies and analog companies have have kind of talked about a theenign pricing environment and PE just want through the variance for gress margin as we took through this year. I think there's a no of 80, that headwind on the pricing prize. So I was wondering if you can shaar about your CL on kind of like for a bigger picture what's going on industry with consolidation and how that seems to be hoping some of the other microcontroller andalog companies but it doesn't seem to be benefiting you guys. Have you have any prosts car and that that ll be a greatly precisure Thank youi. It's the thing is to go through tax flow not through. But you know if you work on for like the on office, show the taxf because or show forward to mic for both some of the the tax flow. So that's that's pretty specific thing. viously on small proicing that. But onnual proion it's not like to to of anything, anything that going on the long.

Yeah I would say that the general environmental priceing is OK. I don't think that we would say that it it's cle us at all. I think if anything we're trying to was T down. You know, when you get go through the annual price negotiations with the eem and and the your one you know it's an AR rightling that takes place and we try to get down finly and may. It's under contract and we try to use it slightly and they try to get a little more, but I don't think there's a significant change in the environment that we see associated with that and must of the industrial I T. you know you said that price with the design when and then you have a built in reduction that takes place associated with those that we honor contract one for. Yeah, and I is also important to note that the lot, the reduction, you ll see there is a one of the year element. I mean that happens the Q1 and that it's come for the year. So it's not like this three repeful of the time. But it's because of our emnual contract and I I clearly a support Rick work thing. I think the actually playated is a big top of this year, meaneting that.

That actually we cameave first, by the way, than on the average of the budget.

Yeah every depends on the product family and in the So it's has different characteristics, But on the customer and product family and everything. So it's really hard to drawing conclusion. But I wouldn't say that the pricing environment is problematic, it's. It's very healthy right now.

Thank you.

Thank you ond that question and answer her hand. I'd like to turn the conference over to MR depp formmer.

Great Thank you very much, everyone. Before we got to think, P call with lot of comments we'd like to make. Yes, Thank you for joining us. You know, I guess the thing that we have to point in palace is is that we remain in somewhat of the cloudity environment, but the encouraging timelim we see with increased orders over the last few weeks really improve our confidence for the Q2 outlookad and and that being larger than Q1, and again then for the second half year, and can down you believeef on the GDP and whether the trade issues will be resolved So that we will return to healthy growth around the just for 3% - and both of the conomists are projecting or not. But with that, I think it's important to point out that we are taking appropriate cost actions to be sure that our costs are under control and we can deliver on our financial performance to ensure that we continue to focus on improve shareholdover value as we go forward. So thank you very much for your support. We appreciate it. Thank you everyone for F the call.

Ladies and gentlemen, Thank you for your participation in today's conference. This does conclude the program. You may now disconnect everyone. Have a great day.