恩智浦 (NXPI) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2019 NXP Semiconductors Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Jeff Palmer.

Sir, you may begin.

Thank you, Crystal, and good morning, everyone.

Welcome to NXP Semiconductor's Fourth Quarter 2019 Earnings Call.

With me on the call today is Rick Clemmer, NXP's CEO; Kurt Sievers, NXP's President; and Peter Kelly, our CFO.

If you've not obtained a copy of our earnings press release, it can be found at our company website under the Investor Relations section at nxp.com.

This call is being recorded and will be available for replay from our corporate website.

Our call today will include forward-looking statements that involve risks and uncertainties that could cause NXP's results to differ materially from management's current expectations.

These risks and uncertainties include, but are not limited to, statements regarding the macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products and our expectations for the financial results for the first quarter of 2020.

Please be reminded that NXP undertakes no obligation to revise or update publicly any forward-looking statements.

For a full disclosure on forward-looking statements, please refer to our press release today.

Additionally, during our call today, we will make reference to certain non-GAAP financial measures, which exclude the impact of purchase price accounting, restructuring, stock-based compensation, impairment, merger-related costs and other charges that are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance.

Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our fourth quarter 2019 earnings press release, which will be furnished to the SEC on Form 8-K and is available on NXP's website in the Investor Relations section at nxp.com.

Now I'd like to turn the call over to Rick.

Thanks, Jeff, and welcome, everyone, to our conference call today.

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 though lower sales volume, we successfully improved our non-GAAP gross margin by 60 basis points and our non-GAAP operating margin by 30 basis points.

Clearly, better operating performance than in previous market downturns.

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 or $1.8 billion to our owners.

As a reminder, we have returned $6.8 billion to our shareholders by share buybacks and cash dividends over the last 2 years.

And have 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 and execute our strategy within our target markets.

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 at 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.MX processors, which enable new multidisplay digital clusters, and our innovative battery management solutions for hybrid and full electric vehicles.

We also demonstrated our latest ultra-wideband solutions for secure access and localization with a mobile device for automotive, smart home and smart building solutions.

Additionally, we showcased multiple new processor families, including the i.MX 8Mplus.

The first i.MX family to integrate neuro net processing, offering higher performance per dollar than GPU solutions, the RT crossover family for the secure edge computing market, the quad core i.MX 8 for industrial and high-end home automation applications and the high performance, fully ASIL-D compliant S32G for automotive network domain control.

Taken together, the wave of new product introductions across the company and associated customer engagements 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 it's just beginning to fully reflect the synergy we envision when NXP and Freescale merged in 2016.

We are confident that as new products ramp into volume product production they will underpin both our top line 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 Kurt to discuss the results of the full year and 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 quarter 4 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 IoT markets, all stronger-than-planned, while demand in the comms infrastructure market performed as anticipated.

Taken together, NXP delivered revenue of $2.3 billion, 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 4 results.

Non-GAAP operating margin was a strong 29.9%, about 30 basis points below guidance as a result of closing the Marvell transaction in early December.

Now let me turn to the specific trends in our focus-end markets.

Starting with automotive.

Full year revenue was $4.2 billion, down 7% year-over-year as a result of 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 system solutions.

During quarter 4, our automotive revenue was $1.09 billion, down 1% versus the year ago period at a lesser rate of decline than in the previous quarters, and showing 5% sequential growth and better than our guidance by $9 million.

Included in our quarter 4 results in automotive was about $1 million associated with the newly acquired Marvell wireless assets.

Turning to our Industrial and IoT segments.

Full year revenue was $1.59 billion, down 12% year-on-year, as global trade concerns impacted demand for broad-based general purpose MCU products.

The demand trends for our industrial i.MX application processes were flattish on a year-on-year basis.

During quarter 4, industrial IoT revenue was $415 million, down 5% versus the year ago period, down 3% sequentially and $5 million better than our guidance.

Included in our quarter 4 results for Industrial and IoT were $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 of our secure mobile wallet and transit 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 line with our expectations and very supportive of our 50% attach rate targets exiting 2021.

During quarter 4, mobile revenue was $332 million, down 3% versus the year ago period, 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's RF Power products.

Due to the adoption of the company's massive MIMO solutions for the cellular base station markets, as mobile carriers began to increase network densification efforts ahead of future 5G cellular deployments.

The strength in the cellular base station market was complemented by a stabilization in the company's communication processor business.

However, these positive trends were offset by year-on-year declines in the company's secured bank cards and e-government businesses.

During quarter 4, revenue was $457 million, down 5% year-over-year, down 3% sequentially and in line with our guidance.

Now let me turn to our expectations for quarter 1. 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 '19 have essentially played out, both with our direct customers and those served through global distribution.

We are guiding quarter 1 revenue at $2.23 billion, up 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 1. Automotive is expected to be up mid-single digits versus Q1 '19 and down low single digits versus Q4.

Industrial and IoT is expected to be up in the 20% range versus quarter 1 '19 and up high single digits versus quarter 4 '19.

Mobile is expected to be up in the low double-digit percent range versus the period a year ago.

And down in the high teens versus Q4 '19.

Please remember, in 2019, the mobile VAS, 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 1 guidance does include about $60 million contribution from the acquired Marvell assets.

And at the same time, it excludes the mobile VAS business, of which we did close the divestiture yesterday.

For your reference, the mobile VAS business contributed $150 million in 2019.

In summary, our new product introductions, customer engagement levels and design win momentum in our strategic focus areas continue 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 call to Peter for a review of our financial performance.

Thank you, Kurt.

Good morning to everyone on today's call.

As Kurt already covered the drivers of the revenue during the quarter and provided a revenue 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 and in line non-GAAP operating profit.

I'll first provide full year highlights and then move to the fourth quarter results.

Full year revenue for 2019 was $8.88 billion, down 6% year-on-year, of which 140 basis points was the elimination of the MSA in 2019 versus 2018.

We generated $4.75 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 53.5%, up 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 and non-GAAP operating margin was 29%, up 30 basis points year-on-year, despite a $530 million drop in revenue versus 2018.

Non-GAAP interest expense was $265 million.

Cash taxes for ongoing operations were $120 million.

And incidental taxes were $248 million with noncontrolling interest of $29 million.

Stock-based compensation, which is not included in our non-GAAP earnings was $346 million.

Full year cash flow highlight include $2.37 billion in cash flow from operations and $503 million in net CapEx investments, resulting in $1.87 billion of non-GAAP free cash flow.

During 2019, we repurchased $1.44 billion of our shares 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 the Marvell assets.

Now moving to details of the fourth quarter.

Total 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 MSA.

The quarter included $6 million of revenue associated with the acquisition of the Marvell assets, which closed in early December and which was not included in our guidance.

We generated $1.25 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 54.2%, up 110 basis points year-on-year and in line with the midpoint of our guidance, despite the small headwind created by the Marvell acquisition.

Total non-GAAP operating expenses were $563 million, up $20 million year-on-year and up $32 million from the third quarter.

This was $18 million above the midpoint of our guidance.

And about $8 million of this was due to the operating costs associated with the Marvell asset acquisition.

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 $687 million and 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 noncontrolling 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.

Our total debts at the end of 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 the Marvell asset and the previously noted debt repayment, offset by cash generation during the fourth quarter.

The resulting net debt was $6.32 billion.

And 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 2x.

And our non-GAAP interest coverage was 8.9x.

Our liquidity is excellent 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 shares.

Our capital return policy continues to be to return all excess cash to shareholders.

Turning to working capital metrics.

Days of inventory was 102 days, an increase of 4 days sequentially, which was a result 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 6 days sequentially on improved sales linearity.

And days payable were 81, an increase of 7 days versus the prior quarter.

Taken together, our cash conversion cycle was 47 days, an improvement of 9 days versus the prior quarter.

Cash flow from operations was $814 million.

And net CapEx was $138 million, resulting in non-GAAP free cash flow of $676 million.

Turning to our expectations for the first quarter.

As Kurt 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 margin to be about 53.2%, plus or minus 30 bps.

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 bps.

We estimate non-GAAP financial expense to be about $78 million and anticipate cash tax related to ongoing operations to be about $32 million.

Noncontrolling interest will be about $6 million.

And for Q1, we suggest that your modeling purposes, you use an average share count of 284.5 million shares.

Finally, I have a few closing comments I'd like to make.

As both Rick and Kurt pointed out, we see the beginning of a moderately improving demand environment across our end markets with the exception of the 5G base station market.

From a revenue perspective, we are pleased with our performance in the fourth quarter, our revenue was slightly better than guidance, with the contribution from the mobile, auto and industrial markets, all a bit stronger than expected.

Our results within the communication infrastructure market were essentially in line with our expectations.

Our non-GAAP gross margin has steadily improved over the last year, even as we've navigated a challenging top line demand environment.

Our non-GAAP gross margin improved again in the fourth quarter.

And as we've previously signaled, we expect to see modest 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 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.

And have bought 1.76 million shares at a cost of $230 million between January 2 and February 3.

So with that, I'd now like to turn it back to the operator for your questions.

(Operator Instructions)

Our first question comes from Vivek Arya from Bank of America Securities.

Great job on the free cash flow generation.

I think it's a record or so.

My first question on the China impact.

I'm curious if your Q1 outlook bakes any supply or demand impact from the ongoing coronavirus related shutdowns?

Or do you think there could be perhaps a delayed impact on the industry that affects Q2 instead?

And if you could remind us of how we think about seasonality for Q2?

So thanks, Vivek.

At this time, the situation on the coronavirus continues to be very fluid, and we are monitoring it very closely.

We're taking actions on travel, to protect our employees and in our manufacturing operations to be sure that we are -- have our employees at the forefront of our minds.

And also been trying to support the general containment of any spread.

But as of today, we've seen 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 for us to speculate on the impact and the implications associated with it.

Our guidance today does not contemplate any potential impact from the coronavirus.

All right.

And for my follow-up on gross margins.

So Peter, thanks for giving us that $2.4 billion or so level.

What will it take?

Is it just revenue that is the main driver to get to your -- the middle of your 53% to 57% target gross margin range?

Or is there anything about the products or end markets or manufacturing costs or competition that is influencing it?

Because when I look at your largest market in automotive, things like BMS that you're working on.

Most of your competitors are on the analog side, then they're making 60%, 70% gross margin.

So it seems to me, whether I look at 5G or BMS and autos, that from that mix perspective, gross margin should be trending in the right direction?

I think there is a few things.

First of all, Q1 is obviously a very low number of 53.2%.

It came off the fourth quarter of 54.2%.

And the change really is we have the annual price agreements -- that -- contractual agreements, pitches.

And that's roughly 60 basis points.

And then volume from Q4 to Q1 -- the revenue decline is probably another 60 basis points.

And that's offset by the continued improvement we have in purchasing and manufacturing performance.

So to go from 50 -- 53.2% to 55%, I think, is -- we just need to get our revenue up to a run rate of about $2.4 billion a quarter.

Now to go from 55% to 57%, which I think takes potentially a number of years.

I'll call it mix, but it really is around -- and you've highlighted some of it, Vivek, it's -- our new products that are coming into place now, particularly, in automotive.

But also in our crossover products and the like.

Like -- I don't think though we're the type of company that you -- as a traditional analog company that runs 65% gross margin with no real growth.

What we're targeting is to run well in excess of the market.

And we think our model of -- hope to up to 57%, I think we'd said what, 53% to 57% is more realistic.

But so we get to 55% based on volume.

55% to 57% is probably a couple of years out, but it's based on the mix and the introduction of our new products.

Our next question comes from Stacy Rasgon from Bernstein Research.

I wanted to follow-up again on the gross margin.

So you're still saying 55% on $2.4 billion, even with the impact of Marvell.

Can you give us, I guess, a ballpark estimate of how dilutive Marvell is by itself?

And is this maybe the additional wireless or mobile divestiture that's offsetting some of that?

Like how do we think about Marvell in the context of that gross margin target?

On a gross margin perspective, Stacy, I think it's a rounding error.

It's -- but -- what we've talked about, it's not a significant part of our revenue this year.

We've always said it runs sort of low to mid-50s.

I mean it's rounding.

I don't think that really has an impact on our ability to get to 55% at $2.4 billion.

Got it.

And the divested mobile business, was that also kind of closer to corporate average gross margins as well?

Or was that...?

That's $150 million of revenue.

From memory, it might be a little bit below our regular gross margins.

But again, it kind of ends up in the rounding really.

Got it.

That's helpful.

For my follow-up, I just wanted to talk a little bit about the demand improvements.

You said especially auto and industrial IoT are rebounding.

Do you think this is like real kind of end demand like customer pull or is this just an inventory balance?

Or would you have any way to tell?

Like just what are you seeing in the customer channel?

So what we're really seeing is, Stacy, is out of China, and it's POS.

So it's actually shipped through -- 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 taking the business so it's not just orders.

As far as replenishment of inventory, it's not possible for us to track what the orders are actually being used for, but it's based on their run rates and increased improvements.

Primarily, again, focused in micros for the industrial space as well as our automotive business.

I'm not sure what the impact or implications, as we said earlier, will be from the coronavirus.

But through -- just before the Lunar New Year, we continued to see strong POS and strong sell-through.

Our next question comes from John Pitzer from Crédit Suisse.

Congratulations on the solid results.

Rick, Kurt, it's nice to see you guys get back to year-over-year growth in the March quarter, even excluding the Marvell acquisition.

But my first question is just on the Marvell acquisition.

Rick, 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 us specific guidance for the calendar first quarter.

But I wonder if you could just level set everybody on the call as to how you feel about sort of the long-term growth of that Marvell asset?

And how we should think about the yearly sort of revenue levels to get to that $600 million sort of rev target you talked about when you first announced the deal?

Well, I think we still feel as confident about the business is as good about the business, as we've talked about, John.

It really is about the fact that 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 that we have with the channel -- broad channel base we have, we think, also positions us quite well.

If that means that it's going to be a ramp that will take place as that -- all of that comes to fruition.

So the $600 million out in time will clearly be growing at a faster rate at the end of that period than it will be this quarter and next quarter.

We feel good about the business.

And I think all of the feedback from customers had been extremely positive about how important it is.

And I'll let Kurt make some comments as well.

Yes.

Thanks, Rick, and let me just add, John.

I mean, for those of you who possibly have been at our booth at CES in Las Vegas a couple of weeks ago.

I think we have turned at light speed, the availability of the Marvell connectivity assets 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 WiFi product from the former Marvell, into our reference designs for both automotive infotainment connectivity as well as industrial and IoT applications.

And I would just tell you that the interest level and the engagement with customers on that combined solution is as big as we had anticipated.

That's helpful.

And then as my follow-up, just looking at your auto business in the calendar fourth quarter, only down slightly year-over-year, which, relative to peers, appears to be significant outperformance.

Kurt, I'm wondering if you could just comment about how the core business performed in the calendar fourth quarter versus kind of the growth segments?

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 SAARs improves from what it's historically been?

Thanks, John.

So on Q4, yes, I think our decline rate with only 1 percentage point has significantly improved over the much higher decline rates 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 BMS, mainly.

And a -- I'd say, a good improvement of the core business, which is very much in line with what we had anticipated, given a careful ending of the rationalization of the supply chain.

I mean that's what we have said all year long that we would hit that point.

And that's also what carries forward into quarter 1, which is then reflected with what Rick just said, solid POS trends, especially in China.

Where that core product is a key part of our revenue.

Going forward, John, we totally stick to our model of clearly outgrowing the SAAR based on the content gains of semis.

We gave that guidance of 7% to 10% based on a 1% to 2% SAAR.

So if the SAAR is flattish.

Well, maybe then we are at 5%, 6%, 7% or so.

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 tilt slightly towards higher growth on the toll.

But in principle, we are just seeing now what we had anticipated, which is that the core is more getting back to mobile given the SAAR 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 look at the [turns] we had in our automotive business, which was kind of mid- to high single-digit earlier in the year.

At -- our top-tier customers in automotive were actually flat.

And where we really saw the significant decline was in the mass market and our distribution partners in automotive.

So that's where we're beginning to see the rebound associated with that, where we had such a negative decline in those.

And then beginning to see the rest of the business come together.

So it really has to do with that combination.

But I thought it's important to point out that our top-tier customers in automotive didn't really see a significant decline, but we're actually flat during this period of time.

Nice [TDI] performance.

Thanks, John.

Our next question comes from William Stein from SunTrust.

Two.

First, Rick, I think at some conferences in the last quarter or so, you've talked about repurchasing $2 billion plus 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 2x and maybe any appetite on the horizon for similar tuck-in acquisitions like Marvell?

Hey Will, it's Peter.

I think, I'd describe it as follows: First of all, the Board's authorized $2 billion.

So technically, that was not forecast of how much we spend in the full year, but we just spent $230 million in the -- basically the first 6 weeks of this quarter.

So once we get started on these things.

We don't tease.

What we have said is we will return all excess cash to shareholders.

And we will manage our net debt at 2x trailing 12 months EBITDA.

So depending on your forecast, that require us to take on a little bit of extra debt to maintain the leverage.

And I won't give you an absolute number for the full year because it really depends on what you want to forecast for us.

But I think we're an exciting company.

I think once the market comes back, we'll -- you'll see significant growth from us, and 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 asked about, Will, I think the important thing to realize is we've been talking about connectivity being a critical element for us for some time.

We actually talked about it going into the Qualcomm transaction.

And when the Qualcomm transaction broke, we actually were quite open about the fact that the missing element we had would be a connectivity.

Clearly, the assets from Marvell put us in a position to have leadership connectivity, which was really the missing element for us.

So yes, I think we'll do relatively small tuck-in acquisitions for technology, but nothing in the scope and size of Marvell.

And clearly, we'll be focused on how we return cash to our shareholders during this period of time.

That's really helpful.

If I can have one follow-up?

In automotive, I'm hoping you can frame up the timing of the various -- more growthy opportunities.

For 2020, and maybe looking into 2021, should we expect the growth to be driven more by the emerging radar solutions, the battery management stuff or the new network domain controllers?

This is Kurt.

Let me try to stage this a little.

From a size perspective, it is led by radar, being about 10% of the total auto segment revenue.

And we continue to absolutely see our midterm growth here with 25% to 30% compound annual revenue growth.

So that's the biggest and fastest-growing from those.

The next one, about the similar size, digital cluster business.

So that follows the trends of multiscreen environments in the passenger cabin of the modern cars.

Where we see a growth in the mid-teens.

And then you 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 is the S32G, which we, I think, had a great show up at CES, which is our new fully ASIL-D compliance network processor for the car.

That is actually really launching into the market only in 2021.

So from a growth contribution into 2021, I'd say it's at the late end kicking in, but we are sampling now.

And we are getting traction now.

And the ultra-wideband will begin to kick in as well in the second half.

Yes.

Rick, thanks for the reminder.

Ultra-wideband is our, say, in between mobile and auto, which is why I didn't put it now fully into auto.

But indeed, we are already shipping small amounts now into auto.

Second half of this year, we're going to see the first more material lift in revenues from ultra-widebands in the mobile segment and then extending into auto through the next few years.

So again, summary is the 2 large ones, radar and digital clusters, both about 10% of the total order revenue, radar 25% to 30% growth, digital clusters, mid-teens.

Our next question comes from Craig Hettenbach from Morgan Stanley.

Just wanted to follow-up on the ultra-wideband comments, and just how you think about kind of the ecosystem?

Where NXP kind of fits in?

And the different applications as you see them ramping?

Yes.

Thanks, Craig.

I'd say we -- I continue to see us as one of the initiators and leaders of the ecosystem, which really stems from our former leadership in the security and mobile wallet applications, including software on the mobile side as well as the keyless entry applications on the auto side.

And as we talked about earlier, the first major use case, which we see coming up now is actually using ultra-wideband for mobile-based secure car access, which is a perfect, I'd say, hybrid and convergence between these 2 leadership positions, which we have had historically.

Now the competitive dynamics.

I'd say judging from the traffic around this at CES, ultra-wideband has now 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 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 IoT application use cases going into '21, '22, probably revenue range.

When it comes to, for example, property access solutions and indoor navigation.

Yes.

One of the key things that really differentiates our solution is our secure element technology, and the software that we provide and the ability to leverage that for the ultra-wideband.

So we're really in a unique position of bringing that installed base that we have in the mobile wallet and leveraging that for ultra-wideband, as Kurt talked about.

Got it.

And then just as a follow-up, I think one of the common themes for this earnings season has been the pause in 5G infrastructure.

And so, Rick, if you could 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, the 5G infrastructure, the expectations of real strong growth comes from China.

And 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 we've talked about, for a quarter or so, a pause.

We really saw the strength last year from the deployment of massive MIMO that will ultimately be used for 5G.

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 5G growth yet.

And it looks like it will still be a couple of quarters out before we'll see strong growth in 5G deployment.

We clearly see that it's coming, just don't see it in the near term.

Our next question comes from Ross Seymore from Deutsche Bank.

Congrats on turning the cyclical corner.

Just wanted to ask a question about the industrial and IoT business.

That one has been very volatile.

I know it's a very disty heavy business and in the -- has 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 think, the volatile 2019?

So Ross, 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 of the industrial and IoT 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 long ways from where we've been for the last 4 or 5 quarters and feels really good.

And again, what we see from that, it's really POS and the ship-through, primarily in China.

We don't see real strength in Europe or in the U.S. But really, it's POS and ship-through in China in the industrial and IOT.

Now the other thing, it is a key factor for us is the deployment of some of the company-specific design wins that will contribute to that and be a factor associated with it.

But basically, on a stand-alone basis, we'd probably be more like 12% than the 22%.

And probably be flat on a sequential basis versus the 9% that we are when you include Marvell.

Kurt, anything else you?

Yes.

I'd say, clearly, we see full support of our 8% to 11% growth target going forward.

So that's maybe then the perspective.

You should look at this in, hopefully, what is somewhat more normal quarters in the near and midterm future.

We -- on the specific design wins, I mean, clearly, the Marvell synergy, which we talked about earlier in the reference designs is a very helpful element.

Secondly, we have -- we see continued great traction on the crossover products.

So we think about a $60 million run rate from last year, which we have all confident that it should double this year.

So that's on track with how we talked about it earlier.

And finally, I'm personally really excited and proud about the i.MX 8M Plus product, which we showed first time in Las Vegas.

That's a 14-nanometer neuro net processor, actually the first neuro net processor, which NXP has ever launched.

We got silicon back from the factory just before Christmas.

And the team has done a superb job to get it running on a demo at CES in Vegas.

Which really gives, I would say, AI performance at the edge on a much, much higher value per dollar than you would get from what people have done so far on GPUs.

So I really think that's a breakthrough product from a performance cost combination perspective, into what I would call the secure edge and IOT.

So it's, of course, early, I mean, I cannot yet say there is -- 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, very, very exciting.

As my follow-up, I just wanted to head over onto the OpEx side.

And one for Peter.

You're really helpful on 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 OpEx intensity?

I think in the past, you've talked about targets of roughly 23% of sales as your OpEx intensity.

Can you just talk about the puts and takes, especially with the acquisition of Marvell coming in and the divestiture of that mobile business going out?

How should we should think about OpEx and/or operating margin going forward?

Yes.

I think one way to think about it.

We disclosed that in the fourth quarter, Marvell's revenue -- revenue from Marvell was about $6 million, I think the OpEx was about $8 million, which was just less than a full month.

So that gives you an idea of what the quarterly run rate would be.

And from a net income perspective, I think it -- in the fourth quarter, it was a hit of about $8 million.

So as we go forward, you would add in Marvell into the first quarter.

So that's a big chunk of additional costs.

You've got a IP.

The OpEx associated with VAS would be relatively small.

I want to say -- I don't know, maybe $6 million or $7 million.

I mean it's not a huge amount of money that pops out of the company.

I think the more important part of your question, Ross, is where we're planning to be.

And our goal is still to run a 16% R&D and 7% SG&A.

I kind of hate to admit it, but I think it has to be in a in a more normal market, and maybe we're getting back there where you see some growth in -- normal growth in revenue.

But we'll -- we're targeting it very hard and we plan to get there, it's always the question of how quickly we get there.

Our next question comes from C.J. Muse from Evercore.

I guess a follow-up to Ross' question on the OpEx side.

So it sounds like for the March quarter, you're including Marvell, excluding the divested mobile biz.

As we push forward beyond the March quarter, how should we think of the trajectory of OpEx?

Well, I think you should think about it that as we -- our revenue gets back to more of a normalized basis, we'll be still targeting for the 16% R&D and the 7% SG&A that Peter talked about.

We won't be there for the next couple of quarters because of the revenue trough that we've been in, but as we work our way through that growth, I think we clearly have the objective to be able to achieve that and 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 if we were -- in the fourth quarter at $2.3 billion, we were 16% and 16.7%, 16.5% something like that.

And just over 7.5% in SG&A.

So I think once we get to the kind of $2.4 billion level.

We're getting pretty close to the OpEx numbers we want to hit.

Excellent.

And I guess, as my follow-up, I guess, two-part here.

On the free cash flow margin side, I think you've talked about a near-term target of 25%, yet you did a great job and hit 28%, 29% in the second half of the year, though that was a little bit helped by working cap.

So curious -- thinking into '20, into '21, what is your goal there?

And then just as a quick kind of follow-up.

Any update in terms of the S&P 500 inclusion?

Well, let me talk to the S&P 5 -- S&P inclusion at the moment.

So as you know and as we said in the past, it's just an incredibly opaque process.

We believe we qualify and we believe that they're probably waiting for our K to be filed, which will be our first significant document, quickly followed by our proxy.

So to be honest, you probably know as much as we do.

We've been using our friends and family to try and help us get a better understanding and to plan to push S&P, but they're pretty -- as I say, they're pretty opaque, despite the best efforts of us and our bankers, but we believe we qualify.

So it ought to be just a question of time.

But please feel free to reach out to them and ask them directly.

Yes.

And C.J., it's Jeff.

We really don't have a free cash flow margin target stated.

What we have said is that we will pay out 25% of cash flow from operations and dividends, that's our target long term.

And then I think more holistically, what we said is we'll return all excess free cash flow to our shareholders via buybacks and dividends.

But there is no stated corporate mark -- free cash flow margin target.

And we'll take our final question from Chris Caso from Raymond James.

The question is on mobile.

First, from a short-term perspective, it looks like the guidance is roughly seasonal.

Is that how you characterize the environment there?

And then as we look out through the year, your mobile wallet was a big driver of mobile segment revenue last year, you talked about increasing attach rate.

Is that something still to be expected this year?

And with some of the growth last year, are you -- I guess is there any concern of lingering inventory issues in mobile?

Chris, let me go to the mobile attach rate first, mobile wallet.

Yes, we are on track to our earlier stated targets of an attach rate of 50% exiting '21.

I think the interim mark from last year is probably about 35%, which we consider on track.

So the answer to your question is, yes, there is continued attach rate increase.

We are in the middle of the game, and there is more to come towards '21.

And ultra-wideband...

And then beyond that, as I talked about in one of the earlier questions, ultra-widebands, which is a similar technology, but totally complementary to mobile wallet, is going to come in on top of this.

Again, very strongly driving content in mobile -- independence of run rates, actually.

Now on the inventory question.

No.

I'd say we have no visibility of anything, particularly, concerning on the mobile side.

And seasonality, I think in the current environment, I really wouldn't want to go into any discussion about seasonality because it's really hard to say when the industry goes through a cycle as it currently does.

In general, it is, however, important to note that our mobile business is not as it used to be a single customer game.

So we have broadened our business into, especially a number of Chinese players, which makes it probably different to what you would have expected from the past in terms of seasonality anyway.

And as a follow-up, maybe I can ask a little more on what you said on ultra-wideband.

And you mentioned a number of applications for that in a number of areas for which it'll have exposure.

Perhaps, we look at it in the short-term and the longer term, which areas do you think are expected to be most impactful as we look out in the next year?

Is it more on the mobile side or on the IoT side?

More on the auto side?

And where do you think the longer -- well, where is the most opportunity over longer term?

Well.

So first of all, there is a very small baseline, which is actually small in size, but it's significant from giving us evidence of the strength of the technology, which is in auto.

So we are shipping, as we speak, ultra-wideband into key fobs.

So that's all about mobile access.

It's the classic key fob form factor, but it is ultra-wideband technology, which is being pick upped and used for more secure applications against relay station attacks.

So that is running as we speak, but it's really small.

And then the first meaningful lift in the second half of 2020 is going to be in mobile.

But the use case is 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 going to have the higher volumes.

For the use case of car access.

That's what we see kicking in second half 2020.

And all these other nice applications I mentioned earlier, especially in IoT, are then layered into the coming years.

Great.

So let me just take this opportunity to thank all of our investors for their support through this depth -- 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 and 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 at, clearly generate a significant amount of cash that we plan on 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 coronavirus, which clearly, we have not reflected and don't know what that really will be yet.

But are clearly excited about the opportunities going into 2020 and returning to more of a normal semiconductor market, combined with the company-specific design wins that will be ramping for us in 2020 that will allow us to continue to grow at a significant rate.

So thank you very much.

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.