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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by and welcome to the NXP Semiconductors Third Quarter 2019 Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Jeff Palmer. Thank you. Please go ahead sir.
Thank you, Daniel. Good morning, everyone. Welcome to the NXP Semiconductors’ third quarter 2019 earnings call.
With me on the call today is Rick Clemmer, NXP's CEO; Kurt Sievers, NXP's President; Peter Kelly, our CFO.
If you've not obtained a copy of our earnings press release, it can be found at our Company website under the Investor Relations section. This call is being recorded and will be available for 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 fourth quarter 2019.
Please be reminded that NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure on forward-looking statements, please refer to our press release. Additionally, during our call today, we will make reference to certain non-GAAP financial measures, which exclude the impact of purchase price accounting, restructuring, stock-based compensation, impairment, merger-related costs, and other charges that are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance.
Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our third quarter 2019 press release, which will be furnished to the SEC on a Form 8-K as available on NXP's website at the Investor Relations section.
I'd like to now turn the call over to Rick.
Thanks, Jeff, for those informative details. And welcome everyone to our conference call today.
NXP delivered revenue of $2.3 billion for the third quarter. Our sales were near the high end of our guidance. We demonstrated good expense control, and we successfully delivered improved operating profitability above the high end of our guidance range. Taken together, this resulted in $631 million of free cash flow generation. Kurt and Peter will provide specific detail later.
Looking forward, we continue to be optimistic that our product portfolio investments are addressing our customers’ long-term requirements. We see initial signs of the demand environment from our customers appear to have somewhat stabilized. We believe the worst of the year-on-year declines in our strategic automotive and industrial markets are behind us.
Specifically, our Q4 guidance for automotive points to a low single digit decline year-on-year versus the high single digit decline we've experienced year-to-date. Additionally, our guidance for industrial business points to a mid single digit decline versus the mid-teens decline seen year-to-date. While we're encouraged by the recent stabilization and in some cases improved demand, the shape and timing of any significant market reacceleration is clearly uncertain.
What we continue to do is manage our costs and expenses and believe as a company, we are well-positioned for resumption in consistent demand. Regardless of the current demand environment, our focus is on delivering unique and differentiated solutions, while enabling our customers to be successful in their target markets.
We measure our success by attaining high RMS or relative market share positions in our target markets to drive true leadership, which should result in the principal long-term franchises based on truly innovative and competitive solutions. As we are successful in this regard, we are rewarded with lasting customer relationships, and we gained valuable insight into long-term requirements which enable us to optimize our R&D decisions and investments.
Ultimately, this creates a virtuous cycle of product and customer alignment that will enable us to continue to deliver solid results to our shareholders. Over the course of the last year, we've reviewed with you several new product initiatives that reflect and underpin our strategic investment process. As an example, in automotive, we've discussed our goals for level 2 and level 3 ADAS business.
Specifically in radar, we continue to see our order rates rising and increasing customer engagements, which reinforce our projected 25% to 30% compounded annual growth over the next several years.
Additionally, in Q4, we will begin to ramp our RFCMOS 77 gigahertz front-end transceiver to a leading North American solution supplier, along with our market-leading radar processors, connectivity and software in a complete system solution. This is a great validation of investments and customer commitments we made over the last several years.
The success we have seen with our multi-chip radar solution sets the stage for the investments in the integration of the radar transceiver and processor into a single chip solution, which we've already begun to undertake.
Additionally, a few years ago, we invested in vehicle-to-everything, our secure V2X solutions based on the DSRC Wi-Fi technology, another offering in our ADAS portfolio. It's taken longer than we had anticipated to see material transaction of this technology and use case. However, we're pleased that Volkswagen has announced the new 2020 Golf, their highest selling vehicle in Europe, which will come standardly equipped with NXP RoadLINK secure V2X solution.
Currently European roads are being equipped with the DSRC-based V2X technology with 5,000 kilometers planned through the end of 2019. While V2X is not yet material in terms of revenue generation, it is another clear proof point that our automotive customers new NXP as a thought leader, which is making the right long-term investments to enable their success and to reduce the number of accidents and save lives.
In addition to radar and V2X, the other new automotive product initiatives we've shared with you include BMS, as witnessed by our success with the Volkswagen MEB platform, digital clusters, and ultra-wideband are all progressing as we have anticipated. This reinforces our belief that our automotive growth subset can grow 25% to 30% compounded growth rate in total, even in a more challenging global production environment.
In the industrial & IoT market, our crossover processors are continuing to see solid traction with a revenue run rate tracking at nearly a $60 million per year run rate, very nice performance for an innovative new product, and we're in the early days of the design to revenue cycle with multiple customers, which should result in the doubling of our crossover business in 2020 and several following years.
Within the mobile end-market, interest in our new ultra-wideband products, which really enables an intersection of the mobile and auto access market, continues. Both BMW and Volkswagen announced support for the NXP-based solutions during the most recent quarter for the secure access, threat protection, and other use cases. And the increased attach rate of our secure mobile wallet continues as the customer base continues to broaden.
Now, the one area that we've not spent a lot of time on about our efforts in the communication infrastructure end market, and specifically around the transition towards 5G networks. We have several opportunities in the build out of 5G networks. The first is in radio frequency power solutions. These are subsystems which are installed in a remote radio head unit up on the cellular towers.
Our products take analog signals and amplify the signals in radio frequency domain, enabling communication between cell towers and mobile handsets. In the 4G generation of base stations, we offer high power LDMOS power amplifiers for 1 to 4 transmitter radio systems. To provide our customers with increased bandwidth in a fixed frequency spectrum, we've developed a wide range of low-power highly integrated products for massive MIMO RF power systems.
This can be thought of as arrays of amplifiers in nearly the same physical footprint, as 4G remote radio heads, but with up to 32 or 64 distinct transmit paths, providing upwards of 10 times the data rate versus some 4G systems. As the industry transitions towards the 5G standard with higher frequency bands, we've developed solutions across the complete sub-6 gigahertz spectrum, leveraging either our market leading LDMOS or GaN-based massive MIMO solutions.
Interestingly, we have innovated our LDMOS process technology to be able to operate up to about 3.5 gigahertz, roughly 30% higher frequency versus the 4G generation, while still delivering a required output power and efficiency. Furthermore, with our proprietary SiGe process technology, we have developed millimeter wave array-based solutions, reporting frequencies greater than 24 gigahertz for dense urban environments, though we don't need to stay broad-based global millimeter wave build outs to begin in earnest until late 2020 or early 2021. Taken together, NXP has the broadest, most innovative footprint of RF power amplifiers for base station applications across the entire 5G frequency spectrum.
From a market perspective, our analysis points to serviceable market for RF power systems for cellular base stations growing to about $2.5 billion by 2024 or a 13% five-year compounded annual growth rate. With NXP holding the number one position in this market with a relative market share position of 1.8x, the number two player. Additionally, we have other opportunities in the 5G build out for NXP. Our digital networking team has been awarded designs with a few OEMs to deploy CPE and also repeater equipment, which will complement and leverage the build out of last mile solutions in dense urban areas.
These solutions leverage our innovative 64-bit ARM multi-core Layerscape processors, which embed our unique and proprietary, VSPA [ph] programmable baseband engines. This is a market, which we bring unique programmable hardware and software capabilities developed over many years, focusing on the service provider market. These are purpose-built and optimized solutions, which result in high performance and low power consumption. It's also a market with few focus competitors and we believe our solutions offer NXP solid differentiation. From a market perspective, the deployments are tied to the build out of 5G macro base station for last mile solutions, which we estimate will begin broad-based rollout, global volume production in late 2020 or early 2021.
Our analysis points to a serviceable market for these last mile solutions growing at a 30% to 35% bases on a five-year compounded annual growth rate. We believe NXP has an opportunity to capitalize from the rollout of these last mile solutions and further highlights customer belief in our fundamental IP and product development.
In summary, our strategy continues to yield positive results. We will continue to drive focus in our strategic end markets, engaging with customers to deliver superior, highly differentiated products, regardless of the short-term fluctuations in demand.
I'd like to now pass the call over to Kurt to discuss the results of the current quarter.
Thanks very much, Rich, and good morning, everyone. We really appreciate you joining our call this morning.
Overall, our Q3 results were above the midpoint of our guidance, with the contribution from the mobile and the industrial IoT markets stronger than planned, while demand in the communication infrastructure markets was slightly deeper and our automotive business performed just as anticipated. Taken together, NXP delivered revenue of $2.3 billion, which combined with gross margin improvements and good expense control, enabled us to successfully deliver operating profitability above the higher end of our guidance range.
Let me turn to the specific trends in Q3 in our focus end markets. Starting with automotive. Revenue was $1.05 billion, down 7% year-on-year, in line with our guidance. During the quarter, our automotive revenue declined 7% versus the year-ago period, as anticipated, at a lesser rate of decline than in the previous quarter and showing 2% sequential growth.
Our core automotive product lines declined year-on-year, a reflection of lower auto production and the associated supply chain rationalization. However, revenue from the subset of our automotive growth product lines grew in the high single digit range year-on-year during the quarter.
Moving to industrial & IoT. Revenue was $426 million, down 14% year-on-year, and up 9% sequentially, slightly better than our expectations. During the quarter, the primary source of weakness in industrial & IoT continued to be our general purpose microcontroller products. Remember, our industrial & IoT business is primarily serviced through our global distribution partners, and it is heavily indexed to customers in the Asian markets, which appear to be particularly affected by the continued U.S. China trade tensions.
Turning to mobile. Revenue was $331 million, up 2% year-on-year and up 8% sequentially, above the high end of our guidance.
During Q3, despite reduced order rates at the largest Chinese handset customer, we did see robust seasonal ordering patterns from both, other Chinese handset OEMs, as well as our premium handset customers. Both trends taken together underpin our view that growth in our mobile business will continue to be driven by increasing attach rates of our secure mobile wallet technology associated with new use cases like transit ticketing amongst others.
Lastly, communication, infrastructure and other. Revenue was $470 million, down 2% year-on-year and down 6% sequentially below our guidance. From a product line trend perspective, we continue to see robust year-on-year growth trends associated with our RF power solutions, so, just a little less than our plans. The digital networking business came in line with expectations while the secure cars business was a little below our expectations.
Let me highlight here several notable trends in the communication infrastructure markets, which we do believe are truly benefiting NXP. This includes the continued shift towards massive MIMO solutions, leveraging both, LDMOS as well as gallium nitride-based products. We also see early traction with our millimeter wave engagements for dense urban areas. The positive tailwinds for our communication infrastructure business are robust.
Now, let me turn to our expectations for quarter four. Our guidance reflects the ongoing stabilization in demand, mentioned earlier in our prepared remarks by Rick. We do believe the outlook appears to have stopped getting worse on a seasonal basis. So, it is still not reflective of return to growth.
We are guiding quarter four revenue at $2.27 billion, flat sequentially on the third quarter within the range of down 1% to up 2%. From a year-over-year perspective, this represents the decline of about 6% versus the same period a year ago, of which about 120 basis points is the elimination of the MSA versus the year-ago period.
At the midpoint, we are anticipating the following sequential trends in our four businesses. Automotive is expected to be up mid single digits versus Q3; industrial & IoT is expected to be down in the mid-single-digit range on a percentage basis; mobile is expected to be slightly down in the low single digits on a percentage basis; and finally, communication, infrastructure and other is expected to be down in the low single digits on a percentage basis.
In summary, our new product introductions, customer engagement levels and design win momentum in our strategic focus areas continue to be very, very positive. And we do continue to be very optimistic about the mid to long-term potential for NXP.
Now, I would like to pass the call to Peter for a review of our financial performance. Peter, over to you.
Thank you, Kurt, and good morning to everyone on today's call.
Kurt has already covered the drivers of the revenue during the quarter and provided our revenue outlook for the fourth quarter, I'll move to the financial highlights.
In summary, our third quarter revenue performance was near the high end of our guidance range, which combined with good expense control, resulted in very strong non-GAAP operating profit.
Now, focusing on the details of the third quarter. Total revenue was $2.27 billion, down 7% year-on-year, of which 120 basis points was the elimination of the MSA versus the year-ago period. We generated $1.2 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 53.7%, up 70 basis points year-on-year and in line with the midpoint of our guidance.
Total non-GAAP operating expenses were $531 million, down $32 million year-on-year and down $10 million from Q2. This was $5 million better than the midpoint of our guidance.
From a total operating profit perspective, non-GAAP operating profit was $687 million and non-GAAP operating margin was 30.3%, up 30 basis points year-on-year, despite $180 million drop in revenue over the same period.
Non-GAAP interest expense was $66 million, cash tax for ongoing operations was $39 million and non-controlling interest was $10 million, with cash tax and interest expense modestly better than the midpoint of guidance. Stock-based compensation, which is not included in our non-GAAP earnings, was $84 million.
Now, I'd like to turn to the changes in our cash and debt. Our total debt at the end of Q3 was $8.51 billion, down $33 million sequentially as we retired the remaining portion of our June 2021 loan debt. Cash was $3.54 billion; a net debt of $4.97 billion, a decline sequentially because of solid cash generation during the third quarter.
We exited the quarter with the trailing 12-month adjusted EBITDA of $3.13 billion and our ratio of net debt to trailing 12-month adjusted EBITDA at the end of the third quarter was 1.59 times. And our non-GAAP interest coverage was 10.4 times. Our liquidity is excellent and our balance sheet continues to be very strong.
During the third quarter, we paid $70 million in cash dividends and announced the 50% increase in the annual dividend rate. Our capital return policy continues to be, to return all excess cash to shareholders. I would remind you that since July 2018 we returned $6.6 billion to our shareholders, including buying back 18% of the diluted share count.
Turning to working capital metrics. Days of inventory was 98 days, a decrease of two days sequentially, a quarter-on-quarter decline of $10 million. We continue to aggressively manage our distribution channel. And inventory in the channel is very healthy, 2.3 months and within our long term target, slightly below the 2.4 months we normally expect to run.
Days receivables were 32 days, flat sequentially, and days payable was 74 days, an increase of seven days versus the prior quarter. Taken together, our cash conversion cycle was 56 days, an improvement of nine days versus the prior quarter.
Cash flow from operations was $746 million. And net CapEx was $115 million, resulting in free cash flow of $631 million.
Turning to our expectations for the fourth quarter. As Kurt mentioned, we anticipate fourth quarter revenue to be about $2.27 billion, plus or minus $30 million. And at the midpoint, this is flat sequentially. We expect non-GAAP gross margin to be about 54.2%, plus or minus 30 basis points.
Operating expenses are expected to be about $545 million, plus or minus about $7 million. And taken together, we see non-GAAP operating margin to be about 30.2%, plus or minus about 30 basis points. We estimate non-GAAP interest expense to be around $69 million and anticipate cash tax related to ongoing operations to be about $39 million. Non-controlling interest will be about $9 million. And for the fourth quarter, we suggest that for modeling purposes, use an average share count of about 285 million shares.
Finally, I have a few closing comments that I'd like to make. One, we currently have $3.5 billion of cash on our balance sheet. On December 1st, we plan to use $1.1 billion of this cash to pay down our convertible debt. And we anticipate using $1.76 billion to close our transaction for the Marvell assets, although we're still waiting for the final regulatory approval from Taiwan.
As Kurt pointed out, we're pleased with our performance in the third quarter. Our revenue was slightly better than guidance with a contribution from the mobile and industrial IoT market, both a bit stronger than expected, while the automotive market was in line with our expectations, and the comm and infrastructure market was slightly weaker.
The challenge at this stage is to predict when a positive inflection in demand will occur. Until we see a decidedly improved demand environment, we’ll continue to keep a tight control on those items, which are under our control, including gross margin, operating expenses and working capital, aiming to maximize the performance of the Company.
Our non-GAAP gross margin has steadily improved over the last year, even as we navigated a challenging top-line demand environment. Our non-GAAP gross margin improved again in the third quarter, and we anticipate further improvement into the fourth quarter. However, as our guidance reflects, given our top-line visibility, we do not believe we will achieve the 55% goal in Q4. This is a significant disappointment, driven by lack of volume and the resulting under-recovery it drives to our costs. However, I continue to have confidence in our ability to manage the costs which are under our control.
So, further, I would like to reiterate Kurt and Rick's comments. The market continues to be uncertain. And although we’ve certainly seen some positive signs, we're not ready yet to declare a victory. In fact, after five quarters of year-on-year declines, achieving flat year-on-year revenue for the first quarter of 2020 would feel like a positive move in an uncertain market environment. Equally, I would remind you all that our operating expenses generally increase from Q4 to Q1 as we feel the impact of annual bonuses on fringe benefit resets.
So, with that, I'd like to now turn it back to the operator and answer any questions you may have.
[Operator Instructions] Our first question comes from Ross Seymore with Deutsche Bank. Your line is now open.
Hi, guys. Thanks for me letting ask a question. I want to focus on the automotive side first. It's good to see that that’s up sequentially in the quarter. So, can you just talk about what's driving that up in the fourth quarter? And then, for the full year, you did very well getting closer to SAAR. How are you thinking about what NXP's growth rate in auto can be relative to SAAR conceptually in 2020 as you have inventory versus share gains and a bunch of potentially offsetting vectors?
Hey. Good morning, Ross. This is Kurt. Let me take that question. Let me maybe start with saying what our latest market insights are. So, HIS just published their latest SAAR numbers for this year and the forecast for next year where they are saying they see a 6% decline for the SAAR for 2019 annually over ‘18, and they estimate about flat for next year. That's the latest impact we have. So, unfortunately, that indeed indicates that it has further deteriorated this year. So, we had earlier in the year minus 4%, minus 5%, and now they end up at minus 6% defined for ‘19.
We have always said that on a quarterly basis, you cannot really benchmark our revenue performance against the SAAR, given all the supply chain effects in between. At the same time, we do continue to clearly say that we have all reason to believe that our business is outgrowing the SAAR, thanks to the electronic content increase per car. And I think, we are now at a point going into Q4 where it appears that the supply chain should become more or less clean, so our growth, which you see in our business, becomes more reflective of the true automotive demand from the OEMs. And that is indeed then leading to annual, and that's how we look at annual growth rate in Q4, which is only minus 2 versus much higher declines in the earlier quarters, like minus 7 and minus 10 in Q3 and Q2.
We don't really guide for next year, Ross. And yes, I would say that once the supply chain is clear, we should expect that our growth by content should be reflected again in our numbers against the SAAR. So, there is some optimism here that with more clean supply chain going forward we should return to growth based on our flat SAAR.
And then, for my follow-up question, just wanted to hit on margins one for Peter. I think overall, people understand the gross margin side, you guys are doing a good job in a tough revenue comp. I was a little surprised, the OpEx is going up as much as it is in the fourth quarter, given the discretionary tightening, which you guys have done so well to control throughout the year. Can you just talk about -- a little bit about why that's going up? And does increase in the fourth quarter diminish the size of the increase that we otherwise would have seen in the first quarter sequentially?
Yes. The single biggest item is actually a positive thing. We have a really significant number. I think, it's actually just a bit over 10 million of tape-outs in excess of what we saw in the third quarter. And, that's the single biggest item, Ross.
So, it’s a good thing. But, we're getting -- some of our NPAs [ph] out and shipping those to customers. And so there's a cost obviously if we take those and put those and move those towards engagement with customers, Ross.
Our next question comes from William Stein with SunTrust. Your line is now open.
Great. Just following up on that a little bit. Peter, can you help us understand -- I think, we know, we're expecting margins to deteriorate a little bit in Q1 as you give price to customers in automotive and you have to incur some incremental accruals on the OpEx side. Any qualification that will help us modeling sequentially as we think out to Q1, and then how that might abate, as we -- that effect might abate as we go through the year?
I mean, clearly, I don't want to guide Q1 at this stage. I think, you're right in the sense that from a gross margin perspective, you have -- the single biggest item is that the annual price increases. And from OpEx you have reset on bonus. So, as an example, this year, we didn't hit our target. So, the bonus accrual is relatively small. And you're probably talking about maybe an average of $10 million a quarter. Whereas in 2020, if we were to assume a full bonus -- and we haven’t kind of set our targets for 2020, be talking more like $35 million a quarter. You’d see an $8 million increase roughly for fringe benefits. But, we should -- I don't think much cost will be as high as Q1 as they were in Q4. So, I'm not sure I’d forecast OpEx lower in the Q1 than Q4. But, I'm not ready yet to give you an absolute number.
It’s still really helpful, Peter. Thanks for that. And one follow-up if I can. The mobile strength in Q3, it sounds like that was more of a unit thing than a content thing relative to your expectations at the start of the quarter. Is that fair? And is the demand -- it sounds like it's a bit more dispersed than concentrated. Maybe you could just provide a little color?
Well, I guess, the unit comes from the content. So, they’re directly linked. So, you can't really separate the two. I think, the good point was, if you recall in Q2, we had our largest Chinese OEM that had a strong uptake is they broaden the deployment of the mobile wallet into more of their portfolio. And in Q3, clearly, we had a broader base, as well as our Tier 1 customer increased volumes as well. But, all the other Chinese customers showed the strength in Q3 also. So, yes, we had a really strong quarter in Q3. And I think it does continue to bode well for the continued deployment associated with the mobile wallet and the uptake associated with it, as we project it going into next couple years where we think it can be 50% of all the smartphones.
Our next question comes from John Pitzer with Credit Suisse. Your line is now open.
Rick, I wanted to ask you a little bit -- do you have sort of unique vantage point on the whole China, U.S. trade issues? I'm kind of curious how you think that that's impacting your business. There's been some concern in the investment community that perhaps Chinese customers are pulling forward inventory, there's been other sort of checks that would suggest they're trying to keep inventory lean. Clearly, you're not suffering from any bands. But, I’d be kind of curious to think whether or not there's a second derivative effect on bands on your revenue as well. And how you might think business will trend, if there is a trade resolution?
Well, I think, if there's a trade resolution, it’d be very positive. So, I don't think there's any doubt about that. I think though that -- we don't see a lot of inventory being put in place. In Q2, as we talked about it, the largest Chinese handset, they clearly were ramping their supply chain as they broaden the portfolio associated with it. But, we didn't see a lot of inventory; it was really associated with their supply chain. There have been comments that I've heard about other technologies like FPGAs where some of the Chinese guys were concerned about having adequate supply and put inventory in place. But, we don't see really a lot of that in the areas that we serve at all, John. And we think it continues to above well. Clearly, I think, our relationship with the Chinese customers has been positive and will continue to be positive for us, going forward.
And then, Rick, just a follow-up on some of your prepared comments about 5G and the comm and infrastructure space. You guys have kind of put out a three-year CAGR target for revenue in that space of somewhere between 0 to up 2. Is it fair to say that what you talked about today on the RF power side, and sub 6 is contemplated in that, but as we go to millimeter wave, it's not? And if that's the case, how might millimeter wave and your opportunities there impact that kind of CAGR that you have out there as a target?
Well, so John, when we set those targets, we were coming out of a period of several years of declines in both the RF power and the digital networking business. Clearly, with the digital networking business going from around $800 million at a time, we did the merger with Freescale down to in more like the $500 million range. So, we did set those conservatively. I think what we're talking about, clearly with the 5G opportunity, should increase that growth rate. But, we don't think it'll change the total because it really just gives us room to cover the downturn that we've been through in automotive and industrial and still have the confidence in achieving our 5% to 7% compounded growth rate going forward.
I do think that there's a real opportunity, as we talked about, for low-teens growth rate in the RF power business with 5G deployment, over the next few years, and with our leadership position puts us in a good position. And we're just making some early investments in the last mile with some of the customer engagements that could bode very well as well and end up with a couple hundred million dollars a year of revenue in the not too distant future.
So, all of that's positive, but, we're just kind of leaving our growth rates that we said a year and a half or so ago, intact and not really changing those by piece at this point, John.
Our next question comes from Blayne Curtis with Barclays.
I just want to go back on the auto segment. You mentioned I think the growth area is growing teens. Just kind of curious with the -- you also mentioned the stabilization, and with improving SAAR next year, the growth that you're seeing are the better than seasonal, I guess in December, you're seeing. Are you seeing any restocking of kind of the core components or is the outperformance led by the growth area?
First of all, let me slightly correct what you just said. I think, I didn't say that I just talked about an improvement in SAAR next year. They see a flat SAAR on the low level which was achieved at the end of this year. I think, it's a minor but maybe important detail. When you think about us indeed, I'd say that the improvement you're seeing is probably not restocking but it's just that the consumption reflects more the end demand. There earlier, at least in our business with smaller accounts and through distribution, it was marked by building down inventories. And that appears to possibly be over now, which means we just see the real demand coming back again. I would be careful to say that's already restocking, probably not.
Yes. If I could just add something, I think, one of the things, if you look at it Blayne and look at IHS projections, first half of ‘20 will be slightly up from second half of ‘19. So, that says, we've kind of gotten to a minimum run rate, based on their projections now. And then, they'll see a resumption of growth in the second half of ‘20, so. But, I do think that when you look at some of our customers in China and other places that we serve through distribution, we are beginning to see a little more of an uptick, which I think means that they’ve kind of worked their way through their inventory basis. And we're beginning to see a little more of a positive perspective associated with it.
And I just wanted to ask on the WiFi transition, or transaction, you’d targeted Q1 close but thought might you could do a little earlier. It sounds like you're waiting for Taiwan. Just curious, if you expect to close out in December, and if anything's in the guidance from that?
There is nothing in the guidance, nothing's in the guidance. And we would anticipate closing it sooner than the first quarter. But, given the fact that there's a process in Taiwan that we really don't have clear insight into how long it will take, it would be inappropriate for us to really second guess the actual timing.
Our next question comes from Stacy Rasgon with Bernstein Research.
I wanted to talk about first, just the language in the release. [Technical Difficulty]
Stacy, you're kind of cutting out. We can't really hear you.
I'm sorry. Can you hear me now?
Yes, perfect.
Let's try that again. So, the language in the release is obviously a little bit improved this time. I haven't heard you talk about short-term demand environment stabilizing for a while. At the same time, we're hearing a fair amount about sort of distb [ph] challenges bottoming. Is this statement just purely a channel statement that things have sort of bottomed in terms of the inventory flush? And we're just more representative now of end demand, or are you actually seeing to the extent that you have any visibility, actual improvement in customer end demand at this point?
So, I think, Stacy, what we're seeing is, is we've seen things stabilized. We've seen some pockets of improvement or increased orders. But, really, what we're trying to point to is the fact that if you look at it -- when our industrial and IoT segment, we were mid-teens year-over-year decline through the first three quarters of this year. And if you look at the midpoint of our projection, will be kind of mid-single-digit. So, that's definitely a significant improvement. And if you look at automotive, it's been kind of high-single-digit decline year-over-year through the first three quarters. And what we're -- at the midpoint, we're kind of at a 2% decline. So, I think that's really what we're trying to talk about. That's the basic indicator that we have the things are improving. It's based on the run rates that we have from our customers and their demands, we see that improving.
Now, you also have to look at our mobile and communications and infrastructure to get to the total. And in total, we've been -- if you adjust for the MSA that we changed in the counting, we've been kind of mid-single-digit with the exception of Q2 where we were a little less than that. And we'll be kind of -- we'll have a couple points improvement in the total, even with a little bit of downtick in the communications and mobile in Q4. So, I think we clearly have seen a stabilization and some pockets of improved demand and increased demand, but not anything that would lead us to really talk about a robust recovery underway at this point.
And maybe the follow-up on that on the longer term [Technical Difficulty] Okay. Can you hear me now? This is very strange.
Yes.
Very strange. To follow-up on that, your long-term growth target is still being articulated 5% to 7%, you're holding to it. Now, that was originally put forth as a CAGR, it was 2018 to 2021 and obviously we’ve got -- we've got a decline in 2019. So, what is the right way to think about this growth model, given the [Technical Difficulty] 5% to 7% off of the base we've seen in 2019, or do you still think that we can get something closer to that three-year CAGR of the 2018, which would imply more growth in 2020 and 2021? And I guess, if that's the case, what would be the drivers of that? Like, how do we think about that long-term growth model in the context of what we're starting from?
So, Stacy, I think what we're committed to is the 5% to 7% growth rate. We said the categories might be different than what we talked about a year and a half ago, as we look at that. We may not be able to quite achieve what we laid out at the high end of automotive or the high end of industrial, based on the fact that we've gone through this downturn. The positive thing is, is mobile is growing quite nicely with the increased mobile wallet deployment as well as now ultra-wideband beginning to be shipping next year and in 2021. And clearly, the 5G deployment gives us some upside. I mean, that could drive that zero to two to kind of high-single-digit growth potentially. But in total, we still are committed to the 5% to 7% growth rate. And I think, the key is, is that we have different knobs to turn to be sure that we can achieve that and accomplish that.
Our next question comes from Craig Hettenbach with Morgan Stanley.
Just a question for Kurt. Any update on BMS and in particular, things that you would highlight versus some of the incumbents that you think you’re doing just from a feature set perspective?
Well, the update is that we are on track, which is definitely good news. And I think, we’ve all seen in Q3 a very large European OEM making a major announcement about their commitments, relative to new electric vehicles coming out. And as we have kind of signposted earlier, we are quite a bit involved in this, not in one model, but actually across the board. So, if you will, this is a very clear evidence on our success over incumbents with one of the most, I would say bullish commitments from a car company into building electric vehicles. And that starts shipping as we speak. So, I mean, this is not just somewhere in the future, but actually the first models out of their whole fleet across a couple of fronts of that OEM are shipping as we speak. So, what it means below the line is we are on track to our BMS rollouts. As we have discussed earlier, it was pretty high growth rate into the next few years.
Let me just highlight Craig that while we speak a lot about this one OEM, and since the public announcement, it’s very convenient for us to speak about it, we have a significantly broader base of design wins too. Differentiated against incumbents remains to be A to B [ph] function of safety performance on the system level, as well as sustainability, given our approach with microcontrollers in analog high-precision front-ends.
And, I guess, the only thing I would add to that, Craig, is we -- I follow personally the announcement by some of the incumbents and always track that. And every time we go back and look at it, we still think that we have a superior performance and a better product than some of the announcements that they're making.
And then, just a follow-up for Peter. Understanding there is still some headwinds from revenue on the gross margin line, can you talk about just some of the levers you've been pulling to improve gross margin, and also maybe some benefits of mix over the next call the 18 months?
I mean, I think they are the same things. I think, in the long-term over the next few years, our mix definitely helps us. As we look at kind of the MPIs are coming out, you're not going to suddenly see us jump, but you'll see gradual improvements in gross margin in the long-term. In the short-term, it's all about blocking and tackling, making sure our partners give us the right pricing, making sure we're managing yields, test terms all that kind of stuff. To be honest, the issue I have at the moment is, we have a long-term model of 55 to 57. I'd really like to get to 55 for full year 2020. So, with the current market environment, I'd say the lack of visibility rather than visibility we have. It's hard to see how we do that really. And you saw that in Q4. So, I do need to -- I hate to admit it, but I do need a pickup in volume to be able to get to the 55% level.
And I'm surprised you didn’t ask the question, but one of the questions we were anticipating from you guys is, given revenue was towards the higher end of the guidance in Q3, why didn't gross margin improve a little bit above the guidance of 53.7%? And the answer to that is, our assembly and test -- internal assembly and test utilization was weaker than we thought in Q3.
Now, to be honest, 30 basis points is $6 million. So, it's not that big a number anyway. But, in the current environment, running the levels of revenue we have, it makes it really, really tough to get the revenue upfront. I believe as the market does come back, we'll be able to get there.
Craig, just to be specific, I think, our long-term target is 53% to 57%. We talked about 55% in the near term. [Multiple Speakers]. But utilization will be key to that as well. And I think that's an important element of our continued gross margin improvement.
And that's an impact of just revenue and managing our inventory and all that good stuff.
Our next question comes from C.J. Muse with Evercore.
I guess, first question, one of the more encouraging, I guess, data points coming out of your 10-Q, is that your OEM sales were flat year-on-year while distb [ph] sales down 10%. So, I guess two-part question there. One, are you comfortable with where we are from a distb inventory perspective? And then two, as you see a recovery at least standing here today, do you think it'll be distb or OEM led?
Well, I think, your point is -- it's a great observation that most of the weakness that we have comes out of distribution. If you look at what we've done on the distribution inventory, we've significantly reduced inventory over the last few quarters to be able to maintain that 2.4 months and actually down at 2.3 months in the Q3 timeframe, which we would anticipate would go back to the 2.4 months in Q4. We actually had some late shipments out on POS late in the quarter that actually allowed our inventory to go down to the 2.3 months. I think, that we’ll see -- we will see an uptick in distribution. I think, it has tended, as you pointed out, to be more volatile than OEM side. And I think it will be more relevant towards the uptick associated with it. But as far as inventories, I think we're in good shape, and I don't think there's any issue associated with that. But I would anticipate that that will be one of the early points where we’ll see a real improvement in the total revenue.
As my follow-up and I know you don’t want to guide to Q1, so not asking near-term. But, as you think about just generally for 2020 and you look at your mobile business and the increased attach rate of secure mobile wallet, how are you thinking about, and what does your visibility look like today into the growth vector into 2020?
I would say, we are confident that the attach rate increase, which is actually what is driving our mobile growth, attach rate increase of mobile wallet and associated application does continue. I mean, there could always be quarterly fluctuations, mobile has a lot of seasonality. But from a year-over-year year perspective, we are very well on track with what we said in our Analyst Day last year that we see that attach rate growing from I think we said 30% to 50% over the next three years. And we actually did a check earlier how are we on that journey. And it looks like we can be confident that we are very well on track on the journey. And that would indicate that the growth should reasonably continue.
I think, C.J., one of the things that will be really interesting in the second half next year is as we begin to ship ultra-wideband, it just solidifies our position in mobile, and solidifies our position with the mobile wallet. So, I think that'll be a significant contributing factor for us in continuing to demonstrate our leadership as well as solidifying our overall position.
We'll take one last question here today.
Thank you. Our final question comes from Chris Caso with Raymond James.
Just a follow-up question on the gross margins. And Peter, last quarter, you talked about, getting to the -- the potential of getting to 55% quarterly run rate on a about flat year-on-year revenue, which suggests around the $2.4 billion level. Is that still the right way to think about it going forward, kind of once we kind of get to that revenue level that when we get to that in a quarterly basis and obviously the full year…
Yes, yes. Sorry.
That’s all right. Quick answer.
It was kind of a rhetorical question, really.
Right. Okay. The follow-on to that is, there's been some talk with some of the trade tensions that some of the Chinese customers perhaps are tending to favor some of the non-U.S. solutions, giving some of the trade situations and security of supply and such. Is that something you're tending to see in your business now? And going forward, do you think that provides you with somewhat of an advantage being domiciled outside the U.S.?
Yes. No, seriously, I think, with discussions with our customers, I think, they appreciate the complexities of dealing with different source technology. And I think, they have a lot of discussions about trying to move some of their production to us, as well as other non-U.S. sourced IP providers. So, we think that could be positive. Obviously, that doesn't happen overnight or immediately, but it takes period of time associated with it.
Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Rick Clemmer for any closing remarks.
Thank you very much, operator. So, thanks for joining us today. Obviously, we feel better than we did in previous quarters with the stability we see and are encouraged to the fact that the year-over-year decline is significantly reduced with our guidance in Q4 and puts us in a solid position to get ready to move into 2020 with the ramp-up of new products that will continue to differentiate NXP and show our leadership in deploying technology to be able to drive solutions for our customers. So, thank you very much for your support. And have a good day.
Great. Thank you, everyone. Thank you, Daniel.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.