NXP Semiconductors NV

NASDAQ:NXPI

Earnings Call Transcript 2020-Q3

[Operator]

[00:00:05] Ladies and gentlemen, thank you for standing by and welcome to the NXP Q3 twenty twenty earnings call. At this time all participants are in listen only mode. After the speaker presentation, there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today. Jeff Palmer, thank you. Please go ahead, sir.

[Jeff Palmer, Investor Relations]

[00:00:41] Thank you, Commander. Good morning, everyone. With me on the call today is Kurt Sievers and he's president and CEO. On the call today is Kurt Sièvers and he's president and CEO Peter Kelly. Our CFO. Paul, today is being recorded. It will be available for replay from our corporate website. Today's call will include forward looking statements that involve risks and uncertainties that could cause results to differ materially from management's current expectations. These risks and uncertainties include, but are not limited to statements regarding the continued impact of the covid-19 pandemic on our business, 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 of twenty twenty. Please be reminded that NSP undertakes no obligation to revise or update publicly any forward looking statements for full disclosure on forward looking statements. Please refer to our press release today. Additionally, we will refer to certain non-cash financial measures which are driven primarily by discrete events that management does not consider to be directly related to address these underlying core operating performance pursuant to Regulation G and provided reconciliations of the non GAAP financial measures to the most directly comparable gap measures in our third quarter. Twenty twenty earnings press release, which will be furnished to the SEC on Form 8-K and is available on our website in the Investor Relations Section and EXPE Dotcom now would like to turn the call over to Kurt.

[Kurt Sievers, President and Chief Executive Officer]

[00:02:11] Thanks very much. And a very good morning and a very good afternoon, everyone. The we really appreciate you joining our call today. As most are aware, we did preannounce our quarter three results on October eight, with our revenue growth significantly stronger than the midpoint of our guidance across all of our end markets, but particularly in automotive and mobile. From a channel perspective, we began to see a return to more normal contribution between our direct and distribution sales, especially in the automotive markets. In our auto business, predominantly the US and European car OEMs, which Tier one suppliers are biased towards direct fulfilment, that we stopped production on the broad basis. Resulting in strong sales in the European and American regions. As well as continuous momentum in China. Only the Japan automotive region appears to be slightly later to rebound, which is primarily built through our distribution partners. And our mobile business, a combination of new product ramps and market strengths anticipated by specific customers ahead of their new platform launches contributed to better than anticipated results. Taken together and delivered total revenue of two point two seven billion, which is two hundred sixty seven billion above the midpoint of our original guidance range.

[00:03:56] Our operating margin was twenty five point eight percent, about three hundred sixty basis points above the midpoint of our guidance. He experienced good follow through on the significantly higher revenue with our gross margin also better than guidance. In the minutes, Peter will provide more insights into all across much in his commentary. We also continued to tightly controlled operating expenses, so we did increase expenses relative to non-executive incentive compensation. Now, let me turn to the specific trends in our focus and markets. Automotive revenue was nine hundred sixty four million dollars, down eight percent versus the year ago period, and showing a 43 percent sequential increase. This was greater than twice the sequential growth we had contemplated in our guidance. In industrial and annuity revenue was five hundred fourteen million, up 21 percent versus the year ago period and up 18 percent sequentially, and it was slightly better than our original guidance. In mobile revenue was three hundred thirty seven million, up five percent versus the year ago period. Up 32 percent sequentially. And I would also note that we did not experience any pull forward in mobile because of the shipment associated with Huawei.

[00:05:41] And lastly, communication infrastructure and other revenue was four hundred fifty two million down four percent year on year and sequentially it was about thirty five million better than our guidance. And they'll that outperformance relative to our guidance, about half was due to accelerated shipments to who are way ahead of the Ben. Before we turn to the specifics on our Q4 guidance, I'd like to provide you a quick update on our very recent and it Connects Developers Conference. In today's completely virtual customer support environments, we were extremely encouraged by the truly high level of customer and partner engagement and participation. We had over 15000 participants from around the world take part in this first ever completely virtual event. Well, let me discuss a few of the customer related highlights during event. First of all, our joint announcement with some mobile underpinning the adoption of our secure, ultra wide sense and latest enhanced mobile wallet solutions across both the Galaxy Note 20 Ultra and the new Galaxy phones platforms marking the first ever use of ultra wipe them in the Android world. While we are in the early days of adoption of wood for life, then we do expect over the intermediate term to see solid growth also beyond mobile as the technology permeates into the automotive and Iot markets. Additionally, we continue to drive innovation in our latest mobile wallet solutions with the introduction of EU I.C.C. functionality. This allows the mobile wallets to provide similar network provisioning and profile management while simultaneously enabling secure payments and access.

[00:07:50] Now, in the automotive field, we were very, very excited to officially announce our battery management efforts with the Volkswagen group. And BM's solutions are being adopted across the entire amoebae platform of the Volkswagen Group, including the Volkswagen brand, its ideas, three and four models, and also in the luxury and performance models, Audi, Itron and Porsche Taichung. The flea market acceptance of these cars has been very positive and we are very proud to be a partner in Volkswagen's success. Now, I will be turning to the specifics of our quota for expectation's. Our forward revenue guidance range is again, slightly lighter than normal as there continues to be uncertainty, how the rebound will play out in the face of continuous covid-19 concerns. However, as we mentioned in our last earnings call, we thought Q4 would be stronger than two or three. And that is what our guidance reflects. See the improvement in demand which began in Q3 continuing into Q4, both from a demand perspective and also from the increased traction of our company, specific opportunities. These include the modest growth opportunities like radar, digital pluses and battery management in the industrial end, markets opportunities includes growth of our cross over processes and connectivity solutions. One in mobile momentum continues to build for our secure OTRO license and secure mobile wallet solutions. We believe the robust second half twenty results combined with our strong product portfolio and customer engagements, will continue to yield positive results, that gives us significant confidence in our growth in 2021.

[00:10:03] From a federal perspective to continue our stringent discipline of our distributor channel inventory, and we will maintain our targeted channel inventory, its two point four months of supply. What's that preamble we are guiding to for revenue? It's two dollars, four or five billion. About six percent versus Q4 nineteen. And from a sequential perspective, this represents an increase of about eight percent at the midpoint versus the prior quarter. At the midpoint, we anticipate the following trends in our business. Automotive is expected to be up in the high single digit range versus CUTH for 19 and up in the low 20 percent range versus Q3 20. And as we see a continued and substantial rebound from our automotive customers. Industrial and Iot is expected to be up in the low 20 percent range was Kufor 19 and sluttish versus Q3 20 with strength continued in China and across the market as a whole. Mobile is expected to be up about 10 percent versus the year ago period and up sequentially in the high single digit percentage range was two three. But strength in our key customers and despite the ban on Huawei. Communication infrastructure and other is expected to be down in the low single digit range was two for 19 and versus two or three 20. The sequential decline is largely due to the restrictions on shipments to Huawei.

[00:11:59] And additionally, just as an update, very early in Q4, we announced the opening of our innovative gallium nitride factory in Chandler, Arizona. And you will begin revenue shipments later in this quarter, but with no material impact on the business during this quarter. We do have significant confidence in our growth in 2021, notwithstanding the ban on Huawei. That's been a clear disappointment as we had strong design build momentum across the product portfolio. We had originally anticipated Huawei would grow to be a strong, high single digit revenue customer in Taiwan. Twenty one, which would have seen a material increase from the current levels. Let me conclude. In sorry, we are laser focused on what we can control in order to optimally navigate the improving trends we are currently experiencing. Our first priority is to assure the health and safety of all of our team members coming to continue challenging time given the pandemic. And I want to thank them deeply for their determination and hard work, which allows us to successfully navigate the rebound we are experiencing collectively as a team. We are striving to facilitate the best possible business continuity with a customer focused on supply chain and R&D execution. And with that, I would like to pass the call to Peter for a review of our financial performance before we will turn to your questions.

[Peter Kelly, Chief Financial Officer]

[00:13:48] Thank you. Good morning to everyone on today's call. As kids already covered, the drivers of the revenue during the quarter provided our revenue outlook for the fourth quarter, I'll move to the financial highlights. In summary, our third quarter revenue performance was significantly better than planned. Relative to our guidance, we experienced material improvements across all of our end markets. We're pleased that the third quarter was also a return to improved year on year revenue performance, providing a solid position to build from going into 2021. Now, moving to the details of the third quarter, total revenue was two point two seven billion dollars flat year on year and 267 million dollars above the midpoint of our guidance. We generated one point one four billion dollars in gross profit and reported an uncapped gross margin of fifty point one percent, down about 360 basis points year on year and off 110 basis points above the midpoint of our guidance. Gross margin was better than expected because of the higher revenue, more normal environment, given the impact of running our farms at low utilization levels and a slightly unfavorable mix.

[00:15:11] Total operating costs were for. Hundred and fifty million dollars of 19 million dollars a year on year and by 34 million dollars from Q2, this was 15 million dollars higher than the midpoint of our guidance as we increase the expenses associated with nonexecutive variable compensation.

[00:15:32] From a total operating profit perspective, no longer operating profit was five hundred eighty six million dollars, an operating margin was twenty five point eight percent, down about 450 basis points year on year, but 360 basis points higher than the guidance due to the increased fall through on higher revenues.

[00:15:53] No financial expense was one hundred million dollars, essentially in line with guidance, cash taxes for ongoing operations with 29 million dollars and non-controlling interest was four million dollars, slightly better on a combined basis than a guidance stock based compensation, which is not included in a known gap. Earnings was eighty three million dollars. Now, I'd like to turn to the changes in our cash and debt, our total debt at the end of the third quarter was nine point thirty six dollars billion sequentially and ending cash position was three point five seven dollars billion, up 300 million dollars due to solid cash generation during the quarter. Net debt was better at five point seventy nine billion, and we exited the quarter with a trailing 12 month adjusted EBITDA of two point seventy one dollars billion. Our ratio of net debt to normal trailing 12 month adjusted EBITDA at the end of Q3 was two point one times and on longer trailing 12 month adjusted EBITDA net interest. So two point two point one times on longer term and twelvemonth adjusted EBITDA net interest coverage was seven point eight times.

[00:17:10] And as previously discovered and after the quote disclosed and after the close of Q3, we redeem the one point thirty five billion for the month notes to 2021 and the 400 million dollar four five eighths note due in 2022 for a total consideration of one point eighty three dollars billion, including the principal interest and medical costs. During the third quarter, we paid 105 million dollars in quarterly cash dividends and we continue to have a strong balance sheet and excellent liquidity. Turning to working capital metrics, days of inventory was 84 days, a decline of 36 days sequentially, which is well below our long term target of 95 days as revenue rebounded much faster than anticipated. And we fulfil the increased demand from our inventory on hand inventory. We continue to closely monitor our distribution channel with inventory in the channel at two point four months, which is within our long term targets, these receivable with 30 days of six days sequentially, days payable with 55, a decrease of 16 days versus the prior quarter because of the increase, because the increased sales were primarily fulfilled from on-hand inventory taken together, our cash conversion cycle improved to 59 days, an improvement of 14 days versus the prior quarter. Cash flow from operations was five hundred and twenty seven dollars million and net CapEx was 68 million, resulting in Nunga free cash flow of four hundred and fifty nine million dollars, a testament to the strong cash flow generating capability of the business. Turning to our expectations for the fourth quarter, as Curt mentioned, we anticipate Q4 revenues to be about two point forty five dollars billion, plus or minus about 75 million dollars again and wider, no wider than normal range considering the uncertain environment we continue to navigate at the midpoint. This is up six percent year on year, eight percent sequentially. We expect gross margin to be about fifty two point seven percent plus or minus 30 basis points.

[00:19:27] Operating expenses are expected to be about five hundred sixty three dollars million plus or minus about a million, and taken together, we see no gap operating margin to be about twenty nine point seven percent, plus or minus about 60 basis points.

[00:19:44] We estimate Non GAAP financial expense to be about 84 million dollars, unanticipated tax related to ongoing operations, to be about 36 million dollars, non-controlling interest will be about nine million dollars. And for non gambling purposes, we would advise using about two hundred and eighty six million shares. Finally, I have a few closing comments I'd like to make our gross margin guidance for the fourth quarter reflects a continued improvement versus the prior quarter. However, the midpoint is not commensurate with our goal of 55 percent gross margin and a two point four dollars billion revenue run rate. Relative to our Q4 guidance, there is about 150 basis points headwind as a result of the third quarter carry-forward away for five underutilisation. There's also about 100 basis points. Headwind for product mix. Which is a combination of lower communication, infrastructure revenue and a high percentage of automotive business to large volumes through our Tier one customers.

[00:20:49] With a couple of exceptions, our factories will come up to a more normal level of utilization in the current quarter and you'll see our internal inventories move up progressively to a more normal level of 90, 95 days over the next several quarters. But we will make an inventory at distribution of the two point four month level.

[00:21:11] The past quarter has been more than a little surprising. Our automotive business came back much more quickly than we thought it would do, and we've seen real strength in the industrial and mobile and markets. On the other hand, as I mentioned, for obvious reasons relating to the current political environment. We've seen significant opportunities in the infrastructure and market disappear. Notwithstanding the channel, the challenge and communications infrastructure of fourth quarter guidance still reflects a robust and faster than anticipated rebound in demand. This, combined with solid operating margin expansion and the commensurate improvements in cash flow, will in turn result in a net trailing 12 months EBITDA leverage ratio being at or below two times by the end of the quarter.

[00:22:00] Therefore, I am pleased to announce we will likely resume our share repurchase program during the fourth quarter and we continue to have sufficient capacity on our existing authorization to do this. Finally, these very difficult times, Kerson, I would like to thank all of our colleagues around the world for their commitment to end up doing the right thing for our customers. The current period is unprecedented and is extremely difficult. But over the long run and as the right strategy is in the right markets and as the right products to continue to win, now, we'd like to open up to your questions. Operator. Hello, operator.

[Operator]

[00:22:56] If you would like to ask questions at this time, simply pass aside the number one on your telephone keypad. And our first question comes from the line of Ross Seymore from Deutsche Bank.

[Ross Seymore, Deutsche Bank]

[00:23:11] Hi, guys, thanks for the ask a couple questions and congrats on the strong results. First thing I want to talk about with the automotive side of things, obviously very strong rebound for you and everyone else. But I guess if I look at it as a longer term basis, inclusive of your fourth quarter guidance and beyond, can you just talk about that Delta versus SA? It looks like you guys are going to do the better part of 10 points better than sorry for this year. You talked about robust growth next year. Can you just specify down what specifically to an XP is occurring in that to allow that outperformance?

[Kurt Sievers, President and Chief Executive Officer]

[00:23:45] Thanks, Ross, let me take that one. Yeah, clearly automotive disappeared quickly in the second quarter and came back not very hot in the third and continuing in the fourth quarter. Looking at it from the perspective of comparison against Gonzales is exactly what we do for this year. I'd agree with you, Ross. It looks like we probably come out with maybe a, I don't know, nine to seven, nine to 10 percentage points decline on the full year. Why the Assad, according to IHS, probably declines by 18 percentage points. So we will be about eight percentage points, at least better than the are. Now, that's not totally out of the world because we continue to see our long term growth in the auto business to follow the algorithm of SA plus three to five percentage points of semi constant growth. And then we want to outgrow this. And if you if you compare that to how it's going this year, we are on the high end of that. But I think that works. And we definitely believe with the content increases there, we also strongly participate with our growth businesses, for example, radar or the E cockpit business or the battery management business. We are participating in this. So algorithm on the long term stent's SA plus three to five percentage points content increases what we think the auto Semin market is doing, and that's what we want to outgrow by a factor of, say, one point five.

[Ross Seymore, Deutsche Bank]

[00:25:27] Thanks for that color. I guess my follow up, just moving over to Peter to the gross margin side, very helpful color with the couple headwinds you have in the fourth quarter, even though you've hit the two point four billion side of things, how do we see those leveling off going forward? Underutilization charges seem like they disappear. I know mixed in change on a quarterly basis. But what's the trajectory look like between now and even if revenue stayed for change billion and getting to that 55 percent marker that you're targeting going forward?

[Peter Kelly, Chief Financial Officer]

[00:26:02] Yeah, sure. You know, in Q2, Q4, we're going to fifty two point seven. So let's say we have exactly the same mix going forward in the same level of revenue. You would expect that to improve by 150 basis points, pretty much off the bat. We're bringing the fabs. They're not quite back to normal in the fourth quarter, but they're pretty close to the 85 percent level. So that would take us to the say, the fifty four, three fifty four, five level. The issue I think we have probably the first half of next year is the drop off encomium from and how quickly auto direct has come up. So it feels like that's about 100, 100 basis points of mix impact. So I think there's two things wrong. One is utilization. I think we can we can pretty much forget about from Q1 onwards, I think will suffer in the first half from this year to make sort of if the mix doesn't change. And of course, you know, we have to hit those revenue numbers. You do have it. You do have a few things that move around in any one quarter. Remind you that, you know, Q1, we usually have our price annual price reductions, you know, particularly in the auto space. And that continues by about 40 basis points. But I would say from an underlying perspective. I still feel very confident that we should be running 55 percent to two point four dollars billion of revenue. I've been shocked. This is where we were three months ago about the. The speed at which auto came back and the reduction that we've seen in our, you know, our overall potential for comment, but certainly utilization shouldn't be an issue after the end of this year.

[Operator]

[00:28:29] And your next question comes from the line of C.J. Muse of Evercore.

[C.J. Muse, Evercore ISI]

[00:28:35] Yeah, good morning, good afternoon and thank you for taking the question. I guess first question, I was hoping you could elaborate a bit more on what percent customer were they into Q3? And then as part of that question, can you discuss how the embargo there is impacted, if at all, your ramp of your new facility?

[Kurt Sievers, President and Chief Executive Officer]

[00:29:03] Yeah, I think that that is an important event for us, so who are we just to clarify this this very, very stringently, Huawei is not anymore in our guidance for Q4. So the Q4 guidance, which we just gave, is completely excluding any revenue to go. Historically, we said Huawei has been I mean, that's never been the same in any given quarter, but, say, a low single digit customer for the company for next year. We had actually a very clear view to get to Huawei being a high single digit customer. And that is actually where it relates to the margin and mix impact, which Peter just spoke about in the to the question of Ross before. Now, the MetroPCS effect is, of course, that we have applied for licenses with the with the US government and we have to see what will be and when granted relative to these license requests for different products. We are we would be shipping into away.

[C.J. Muse, Evercore ISI]

[00:30:26] And just to follow up on that, does this impact how you think about wrapping your new facility and as part of that, is there a margin headwind associated with simply underutilization of that factory?

[Peter Kelly, Chief Financial Officer]

[00:30:41] And let me let me know. Yeah, but if you look at all too far, if you look at all utilization for next year, we have to stop not running at 85 percent. Only on one is Oakhill and the other is our channel. But in terms of what we planned, because we talked on the last call about how we would kind of a bit behind where we expect it to be, as Curtis said, we don't expect to see any additional impact from the ramp of the.

[C.J. Muse, Evercore ISI]

[00:31:17] Great. Thank you.

[Operator]

[00:31:21] And your next question comes from the line of John Pitzer from Credit Suisse.

[John Pitzer, Credit Suisse]

[00:31:28] Good morning, guys. Congratulations on a really solid result. Peter, my first question is just on OpEx. This has been anything but a typical year. And clearly some of the calendar, Q3 upside allowed you to raise OpEx for sort of the non-exempt. So I'm just kind of curious, as you look at the calendar, fourth quarter run rate, I'm struck by the fact that revenue is well above seasonal. And if there is an OpEx, seasonal OpEx to Caden's OpEx is actually slightly below. So are we now looking at the right OpEx level? And as we go into calendar year 2001, how should we think about the puts and takes, you know, of covid related expenses, both on the plus and the minus? I think.

[Peter Kelly, Chief Financial Officer]

[00:32:07] You know, you can never really pick one quarter because we always have a bunch of masks either moving in or moving out for 2021. I'd go back to all comments from last quarter, Jonas, we think 575 plus or minus 10 million in any one particular quarter is probably pretty close. I mean, clearly, you know, our revenue was to grow very substantially. We might be talking about a different number. But from what we can see at the moment, we'd say 575 plus or minus 10.

[John Pitzer, Credit Suisse]

[00:32:40] That's very helpful. And then just my follow up heard you were very clear in your prepared comments that despite the walkway headwind, you still very feel very good about growth for calendar year 21. I'm wondering if you could just help us understand kind of an order of strength, what gives you that confidence level and specifically with Longway business that you now can't ship to is there are other opportunities to ship to other OEMs or those very specific pathway programs?

[Kurt Sievers, President and Chief Executive Officer]

[00:33:10] Yeah, Tom, so certainly the confidence into next year is a carry forward from the company's specific strengths and the rebound we are experiencing right now. So clearly with the with the high impact on the total company from a revenue perspective, from automotive, we continue to be very confident into next year that our growth forecasts, where we have those leadership positions in radar, corporate and BM's will continue to play out the way we have talked about them in the past. So there is we have to design wins on the books. We see actually the consumer demand for these specific systems, be it in us, be it in electrification. We see that absolutely coming true. So I think the automotive side of things does stand very firm on top of the rebalance, which is certainly being forecasted for the fourth of SA. So, I mean, I talked about the negative side of things earlier that the SA probably is going to be down like 18 percent this year. IHS is currently proposing something like 14 percent up with SA next year. And on top of that, we have the content increase in our market share gains in those leadership positions. Secondly, certainly mobile. And as we as we started to experience now in the third quarter and what continues into the fourth quarter, we see continued very strong traction with our secure mobile wallet, which is also a function of the of the pandemic, ironically, because the use of contactless payment is something which even in countries which have been a bit shy so far, is now getting much more traction.

[00:34:59] And secondly, with the with the kick off with Samsung, which I mentioned to the security license, certainly in the mobile space, is also seeing a lot of traction. Now, if you if you speak about industrial Iot, I think we are seeing this year already amazingly strong year in industrial Iot, which is also a function of China because we have a large a large exposure to China. And actually covid-19 impact in China, if you will, was history already in the second quarter.

[00:35:35] So we see their continued growth. And that said, momentum, which bits, rights and crossovers, together with our new connectivity portfolio, will continue well into next year. So all of these growth elements should be really fully intact into the next year, such that we, of course, miss that revenue to Huawei. But we don't we don't really think this is a this is a big negative. Now, how much of that could be compensated by other mobile customers? I don't I really don't dare to say specifically, since some part of it also would be in the infrastructure side of things where there is much less competitive.

[John Pitzer, Credit Suisse]

[00:36:20] Thanks, guys.

[Operator]

[00:36:25] And your next question comes from the line of Craig Hettenbach from Morgan Stanley.

[Craig Hettenbach, Morgan Stanley]

[00:36:32] Yes, thank you. You guys continue to do a good job of controlling inventory in the channel and internally. So you just maybe talk about any signals you're getting just from a sell through perspective and your ability to keep inventory at equilibrium, despite what's a pretty volatile supply chain.

[Kurt Sievers, President and Chief Executive Officer]

[00:36:53] Hey, Greg, I mean, on the on the distributor site, as you have seen and as we I think both Peter and I reiterated again, we are absolutely disciplined to the target of the two point four months. Now, if you ask from a time perspective, then I would tell you that clearly the current demand, the strong demand which we which we started to experience and in, say, a middle of started middle of Q3 has extended lead times, a little from, say, typically 16 weeks to now, maybe 20 weeks, with a few exceptions above that. But no, I think we see ourselves in the good position. And we also believe, given the environment, it is exactly the right policy to stick to the two point four months of distribution channel inventory.

[Peter Kelly, Chief Financial Officer]

[00:37:47] And can I can I just follow comments and internal inventory? You know, clearly we came down dramatically in Q3 to eighty four days given will be kind of shipping everything we think in Q4 will probably stay in the low 80s and in Q4 and it will take us a couple of quarters to get back up to 90 percent. And we think 95 is about the right level for internally.

[Craig Hettenbach, Morgan Stanley]

[00:38:17] Thank thanks for that. And then just a follow up on the growth drivers. Kurt, any update I know you mentioned crossover is, but just curious kind of the type of traction you're seeing for that product, how broad based is it? And just anything you are doing versus other competitors that that you stand out for that product?

[Kurt Sievers, President and Chief Executive Officer]

[00:38:39] Well, I'm saying, though, with a with a cautious smile, my all this that we have that product category Crake because I continue to not really see any competitive solution, which is which is coming close. So by the sheer power of having it and by the sheer power of having it now in conjunction with the with the Wi-Fi portfolio, especially now on the on the Wi-Fi six standard, which I think we talked about that earlier, which we have now software integrated. So the software development environment for our customers is actually one of the crossovers together with the with the Wi-Fi. We do definitely see continued strong connection. Now, this is all a design build level at this perspective. So I should also be clear that, I mean, the revenue from this is, I don't know, half a year out, a year old, one and a half years old, depending on what specific industrial segments we are designing it into. So my measurement point at this stage is clearly the design win traction, which we are seeing.

[00:39:49] And that is really good, except maybe also mentioned that the strong performance of industrial Iot has also been carried in the past quarter by our general purpose excuse and by standalone connectivity products. I mean, we got that Morrel connectivity portfolio in and of course we also sell it as a standalone solution and also that this is seen good traction.

[Craig Hettenbach, Morgan Stanley]

[00:40:16] Thank you.

[Operator]

[00:40:21] And your next question comes from the line of William Stein of Truist Securities.

[William Stein, Truist Securities]

[00:40:28] But thanks for taking my question, guys, really impressive quarter and end guidance, both ahead of expectations. There's this cyclical rebound that you're seeing and I understand the, you know, the practice of guiding one quarter at a time. But during these times when we see these sorts of strong recoveries, sometimes they can be driven by customers interest in building a little bit of inventory. And I guess the point I'm trying to make is sometimes we overshoot to the upside. Notwithstanding your comments about confidence in twenty twenty one, generally, should we be thinking about Q1 as sort of normal seasonal quarter, or do you think because of the dynamics we're seeing in Q3 and Q4 that maybe we should tap that down a little?

[Kurt Sievers, President and Chief Executive Officer]

[00:41:21] Bill, I mean, maybe Peter also wants to say a few words. So first of all, I mean, you know, we don't got to one at this stage. I mean, this is clearly a cue for guidance. Secondly, I think the language of normal season, though, in the current environment is just not applicable. I mean, I, I wish it was, but I don't think there is anything like a normal seasonality in the current in the current environment. So I think that doesn't that doesn't really help Q1. Yeah, we were talking in kind of preparation for this will, and we thought one of the questions we got is kind of how much is inventory restocking versus the market overall? I mean, clearly, Q3 has to have had some impact from inventory restocking and, you know, maybe there's even a little in Q4, but we wouldn't say, you know what, our expectation for 2021 assumes that continues to be the case. I mean, Q1 is typically a lighter quarter, but it's really, really hard to say what seasonality may or may not be, which, as you pointed out, it's such a weird market.

[00:42:39] And we're loathe to, you know, to try and speculate on what the fourth quarters of next year might be sitting where we are today. But it definitely feels a lot better than it did three months ago. Fair enough. And helpful. Not only that.

[Peter Kelly, Chief Financial Officer]

[00:42:57] Sorry, let me maybe get the on the question of restocking, I mean, of course, with ramps and rerum rebound of the industry, there is always a certain level of re priming the supply chain. That's perfectly normal. But given the fact that we have the large exposure to distribution business, I think our continued discipline on the two point four months, which we have just discussed, gives you also a strong handle that's in that area at least. I mean, we don't we don't overdo it. We stick to this. And that makes it a very that makes it very clean. I think on the on the direct account side, it's of course, in the end for us to measure what the stock positions could be. But if we look at the at the end demand, at the constant increase of our product, speed in mobile or be in in automotive, we think we have a we have a pretty good view of this, that this is not really about restocking, but it's true demand that we are seeing idiosyncratic rather than cyclical or maybe more than one follow up, if I can.

[William Stein, Truist Securities]

[00:44:09] You have talked about mobile wallet, adoption, getting to 50 percent, I think, from the last analyst day through the end of a three or four year period. It seems to me that that might be tracking well ahead of expectations, if you can provide any update on that. And now that we have ultra wideband shipping into handsets, maybe you can comment on the pace of adoption you're expecting there. Is that similar to get to 50 percent over some number of years, or is it a different view?

[Kurt Sievers, President and Chief Executive Officer]

[00:44:43] Yeah, that's fair. So on the on the mobile wallet, indeed, I think the guidance we gave was 50 percent adoption rates by the end of next year. So calendar year 21. And yeah, we are we are on track. I mean, let's leave it here with saying this. This is we will deliver on this on this promise on the secure ultrahigh fence, clearly early days. But I think with some zoom, which is very I mean, they are very strong and very they are very decent lines in building the ecosystem together with us. I think we have a great kick off in the Android space now.

[00:45:28] And certainly we want to see that they will not be the only Android OEM and that spreads much more broadly quickly. I don't think we are yet in a position to talk about specific adoption percentages by specific times, because it is not also not only mobile. You know, the adoption is going to start also in automotive next year. And we are now working with a lot of focus also into Iot, which is adding another way for volume. But again, it's too early days to put some percentage numbers behind that.

[Operator]

[00:46:15] And your next question comes from the line of Blayne Curtis from Barclays.

[Tom O'Malley]

[00:46:21] Hey, guys, this is Tom O'Neil, home for Blakers. Congrats on the nice. It's my first one is about the buyback. You indicated that since the trailing 12 months that metric was now hello to you guys are going to start buying back. Can you talk about what your mindset is around the framework there? Are you going to continue buying back where you kind of left off before the pandemic or just any sort of framework going forward would be helpful given your restarting that?

[Kurt Sievers, President and Chief Executive Officer]

[00:46:47] Yeah, that's a really straightforward will. We'll buy back at the level which keeps us probably at or just below two times. And that that's a trailing 12 months with the.

[Tom O'Malley]

[00:47:01] Simple enough. I just wanted to walk through a bit more complicated than that, I guess, but you mentioned a couple of moving parts into March on the gross margin. You said same the same revenue. One hundred and fifty bps off of that benefit. But you also pointed to 100 basis points, potential mix impact and then some annual price reductions and auto, I guess. I understand that you're not going in Q1 and totally understandable. But could you describe a scenario in which you saw revenue down in Q1 and gross margin still improved? The reason I ask is just a bit unique, given your history. Can you walk through if there's any other moving parts on the gross margin we should be aware of?

[Kurt Sievers, President and Chief Executive Officer]

[00:47:40] Ok, so I think there's I think there's a you have to shift to slightly different questions. So my comment was really about. Can we hear 55 percent to two point four? OK, and I basically said in the first half, a two point four level of revenue with the current mix will probably be more like fifty four percent because of the mix. OK, so that's one question that is a different question is OK, going forward from Q4, what's likely to move. So, you know, we do fifty two point seven in Q4. I'll get 150 basis points straight off just because I don't think the utilization which would take me to fifty to fifty four point two percent that assume the same mix that the comments I made. And I think the thing you have to watch out for is Q1 typically as our annual price prediction, which can be, you know, 30, 40 basis points. So to answer your question, you know, even with if revenue is slightly down in in Q1 over Q4, we probably still see a slightly better margin because we get rid of the unit utilization headwind in Q4 of twenty. Okay, but that's you know, that's a pretty unusual situation we're in at the moment with this really heavy on the utilization.

[Tom O'Malley]

[00:49:15] Extremely helpful, thanks a lot. Yep.

[Operator]

[00:49:21] And your next question comes from the line of Chris Caso from Raymond James.

[Chris Caso, Raymond James]

[00:49:27] Yes, thank you. Good morning. First question is related to auto market and some of what you said in Japan, it sounds like Japan's recovery is lagging a bit. How much of a headwind has that Japanese part of the business been? And, you know, presumably if that normalizes like the rest of auto next year, how much of a benefit would that provide? Yeah, hi, Chris.

[Kurt Sievers, President and Chief Executive Officer]

[00:49:55] Yeah, my comment was really related to Q3, we see we see Japan already catching up in the fourth quarter, actually. So I'd say when you when you then think about the pool next year and I can only look at IHSS is predicting for the summer, then actually Japan is on the same page and is quite normalized with the with the other regions. It was more that this year in the in the third quarter. But you saw all this very sharply too, and especially in the US and Europe. It started a little later in Japan, such that it sits more on the fourth quarter than it was already sitting in the in the third quarter. But I don't think that there is any reason to extrapolate this into next year.

[Chris Caso, Raymond James]

[00:50:47] Thank you. As a follow up. I just wanted to dig into the commentary about the potential for some inventory restocking and where that may be. And I guess is it safe to say if that were happening, the industrial market would be the most likely area? And obviously that's harder to get visibility and I guess follow us than that, is it? Do you suspect that there was any restocking in the automotive area? And I presume there that they were coming off of some pretty low inventory levels earlier in the year when the factories shut down? But again, they're on hubs, so I suppose there's probably better visibility there.

[Kurt Sievers, President and Chief Executive Officer]

[00:51:35] Yeah, I mean, let me start with auto beats, we have made sure that inventory levels wouldn't be too big because we really had a lot of attention this time in the in the second quarter when things were falling down to not over ship. So even with our direct accounts, we had a lot of one on one discussions to make sure that they're all the people would be it would be somehow compliant with the with the sentiment. So I, I, I guess I'd agree with you there. There probably wasn't too much of inventory sitting there, which is exactly why I said earlier. Some restocking now is just normal to prime the supply chains for significantly higher production rates. I mean, they have to do this. There is nothing and nothing strange about the industrial side of things is a little harder to tell because a lot of the business goes through distribution for us where we do control as explains the distribution inventory in a very transparent way. We have all the systems and all the discipline in place to do this. But we, of course, do not have the visibility into all of the thousands of end customers behind to distribution. So it's less easy to say what they possibly are restocking or not restocking might really take at this stage is it isn't that much because most of it is anyway in China and in China. It's not like now suddenly a two or three or four effect. We have seen growth in China industrial, starting with the second quarter. So Q4 is now the third quarter in a row there is growing.

[Chris Caso, Raymond James]

[00:53:18] Thank you.

[Operator]

[00:53:23] Here, that question comes from the line of Gary Mobley from Wells Fargo Securities.

[Gary Mobley, Wells Fargo]

[00:53:29] Everyone, thanks for sticking the question and the questions have been asked, but I do want to ask one about your battery management system. Now, your win with Volkswagen sounds very impressive. Obviously, the largest OEM in the world and seem to have the most aggressive platform in terms of rollout schedule. So I'm just curious to know where you stand today with BMW sales. If I'm not mistaken, it's somewhere in the tens of millions you may have, you know, maybe 10 percent, 20 percent market share. Some wonder if you can give us a sense of where this business may be in 12 months, 24 months. Just getting this Volkswagen win. Thank you.

[Kurt Sievers, President and Chief Executive Officer]

[00:54:09] Yeah. Yeah. So Garrity's the best way to think about it is, is think about the 50 million run rate this year roughly. And what we what we did say is that we would grow this with twice the sum. So we want to we want to grow twice as fast as the markets, which would translate in something like 60 percent Kager over the next couple of years. So 50 million this year growing with 60 percent figure over the next couple of years. And we think the associated market is growing at about 30 percent. Just as a rule of thumb, this Volkswagen win there, of course, there is a high variation of how big it's going to be depending on their success and how quickly they bring the next models and models and models out.

[00:55:01] But that's maybe half of it. Right. So that's why we are super proud of this. I think it's a great testament to the scalability of our system, solution to the functional safety of the solution. But this is only 50 percent of that business going forward. So, I mean, it's just about.

[Gary Mobley, Wells Fargo]

[00:55:24] Thank you. That's it for me.

[Jeff Palmer, Investor Relations]

[00:55:28] Operator, we'll take one more question today.

[Operator]

[00:55:32] Yes, sir. And your final question comes from the line of Rajvi Gail from Needham and Company.

[Rajvindra Gill, Needham & Company]

[00:55:39] Yes, thank you for taking my questions. I appreciate regulations on the on the auto recovery, on the communication infrastructure side, wondering how you're thinking about that next year, given the issue with Longway, but also kind of your traction. And again, you're a little bit late in organic products. Seems to me you're kind of catching up on the in Arizona. How do you think about your gas portfolio relative to the competition and adoption in Canada 21 and how that would positively affect your comment for your business next year? Thank you.

[Kurt Sievers, President and Chief Executive Officer]

[00:56:22] Yeah, we feel very good about our competitiveness. It's only the starting issue, as you rightly pointed out, that we that we are coming out a little late. And that's actually a consequence of some we thought and we were aligned with our customers that that would only be needed next year. And that's also what we are delivering. Then they put in the requirements, the competitiveness of the product in terms of our efficiency looks very, very good. We did announce a few weeks ago that both the secretary as well as the product is being released as we speak. We stopped shipping small volumes in the later part of this fourth quarter and really ramp up in the first quarter of next year. I am quite optimistic on this for next year, because if you if you think about the main customers for this, think about Arison, think about something. Think about Nokia with all of them. We have historically already very leading positions with our product, be it with VMOs or be it with massive Memmel. So I think we are in a great position actually once we start shipping to wrap it up with much. Right. So yes, a little late, but now coming in from.

[Rajvindra Gill, Needham & Company]

[00:57:51] And just my follow up question on the ultra wide band kind of moving to other markets outside of mobile, wanted to see what your thoughts were in terms of what do you think the next kind of biggest market for UW B will be? And what do you think that.

[Kurt Sievers, President and Chief Executive Officer]

[00:58:09] We have good visibility into the automotive site because the design wins cycles are pretty lengthy. So we are working and have been working on this for quite a while already where we see the second half of next year, the first OEM coming out with provides them secure access solutions. Based on that, based on the next Beattyville, obviously is much more complicated because it's more smaller customers, a lot of opportunities. But I also assume that it is fair to say that through the through the next year, we will see the first applications being pick up in the in the Iot space and think about smart locks, for example, indoor navigation, etcetera, etcetera. So automotive, a lot of visibility, but it goes the typical automotive space. Starting next year, I would see somewhat more complicated because of the multitude of opportunities. But also there we believe next year we see the first audience.

[Rajvindra Gill, Needham & Company]

[00:59:18] Great. Congrats again and excellent momentum. Thank you.

[Kurt Sievers, President and Chief Executive Officer]

[00:59:24] Thank you.

[Jeff Palmer, Investor Relations]

[00:59:27] Thank you, everyone, for your attention to the call today, and we'll look forward to speaking to you next quarter. Thank you very much. This concludes our call.

[Operator]

[00:59:36] Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.