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NXP Semiconductors N.V. (NASDAQ:NXPI)
Q3 2019 Earnings Call
Oct 29, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the NXP Semiconductor's Third Quarter 2019 Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Jeff Palmer. Thank you. Please go ahead, sir.

Jeff Palmer -- Vice President, Investor Relations

Thank you, Daniel, and 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 of 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 our NXP's website at the Investor Relations section.

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

Rick Clemmer -- Chief Executive Officer

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 demonstrate 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 that the demand environment from our customers appear to it, 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 are 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 cost and expenses and believe as a company, we are well-positioned for a 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, our relative market share positions in our target markets to drive true leadership, which should result into 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 in the long-term requirements, which enable us to optimize our R&D decisions and investments. Ultimately, this creates a virtuous cycle, a product in customer alignment, that will enable us to continue to deliver solid results to our shareholders.

Over the course of the last year, we have reviewed with you, several new product initiatives they reflect and underpin our strategic investment process. As an example, in automotive, we've discussed our goals for our level two and level three 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 in software in a complete system solution. This is a great validation of investments in customer commitments we made over the last several years. The success we have seen with our multiple chip -- 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 DSRC Wi-Fi technology, another offering in our ADAS portfolio. This taken longer than we had anticipated to see material transaction of this technology and use case. However, we are pleased that Volkswagen has announced the new 2020 Golf, their high selling vehicle in Europe, which will come standardly equipped with NXP RoadLINK secure V2X solution. Currently, European roads are being equipped with DSRC based V2X technology with 5,000 kilometers plan 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 view 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-Wide Band are all progressing as we had 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 and IoT market, our crossover processors are continuing to see solid traction with revenue run rate tracking at nearly a $60 million per year run rate. Very nice performance for an innovative new product and we are 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-Wide Band products, which really enables an intersection of the mobile in auto access market continues. Both BMW and Volkswagen announced support for the NXP-based solutions during the most recent quarter for the secure access step production in other used cases. And the increased attach rate of our secure mobile wallet continues as the customers base continues to broad.

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 toward 5G networks. We had several opportunities in the build-out of 5G networks. The first is in radio frequency power solutions. These are sub-systems, which are installed in the remote radio head unit up on the cellular towers. Our products take analog signals and amplify the signals in the radio frequency domain, enabling communication between cell towers and mobile handsets.

In the 4G generation of base stations we offered 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 have developed a wide range of low power, highly integrated products for massive MIMO RF power systems. This can be thought of as a raise of amplifiers and 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 the 4G systems.

As the industry transitions toward the 5G standard with higher frequency bands, we have 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 the required output power inefficiency.

Furthermore, with our proprietary SiGe process technology, we've developed millimeter wave, array-based solutions supporting frequencies greater than 24-gigahertz for dense urban environments that we don't anticipate 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 per base station applications across the entire 5G frequency spectrum.

From a market perspective, our analysis points to a serviceable market 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 the relative market share position of 1.8 times 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 best 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 is 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 roll-out, 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% basis on a five-year compounded annual growth rate. We believe NXP has an opportunity to capitalize on the roll-out 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.

Kurt Sievers -- President

Thanks very much, Rick, 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 were slightly weaker and our automotive business performed just as anticipated. Taken together, NXP delivered revenue of $2.3 billion, which combined with gross margin improvement 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 focused 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 and 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 and IoT continue to be our general purpose microcontroller products. Remember, our industrial and 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 US-China trade tensions.

Turning to mobile. Revenue was $321 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 customer. 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 among 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 toward 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 a 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 a 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 and 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 of NXP.

Now I would like to pass the call to Peter for a review of our financial performance. Peter, over to you.

Peter Kelly -- Executive Vice President and Chief Financial Officer

Thank you, Kurt, and good morning to everyone on today's call. As 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. But 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 a $118 million drop in revenue over the same period. Non-GAAP interest expense was $66 million, cash tax for ongoing operations were $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 strip portion of our June 2021 debt. Cash was $3.54 billion, a net debt to $4.97 billion, a decline sequentially because of solid cash generation during the third quarter. We exited the quarter with a 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 a 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 have 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 targets, though slightly below the 2.4 months we've 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 you 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 asset, although we are still waiting for the final regulatory approval from Taiwan.

As Kurt pointed out, we are pleased with our performance in the third quarter. Our revenue was slightly better than guidance with the 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 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 keep -- 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 is steadily improved over the last year, even as we navigated the challenging top line demand environment. Our non-GAAP gross margin improved the gain in the third quarter, and we anticipate further improvements 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. When market continues to be uncertain and although we've certainly seen some positive signs, we not ready yet to declare victory. In fact, after five quarters of year-on-year declines, achieving a 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 and fringe benefit research.

So with that, I'd like to now turn it back to the operator answer any questions you may have.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Ross Seymore with Deutsche Bank. Your line is now open.

Ross Seymore -- Deutsche Bank -- Analyst

Hi, guys. Thanks. Certainly, I have some questions. 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, is you have inventory versus share gains and a bunch of potentially offsetting vectors?

Kurt Sievers -- President

Hey, good morning, Ross. This is Kurt. So let me -- let me take that question. Let me maybe start with saying what, what our latest market insights are. So, IHS 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% decline for '19.

We have always sets 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 things to the electronic content increase per car. And I think, we are now at the point going into Q4, where it's appears that the supply chain should become more or less clean, so our growth, which you see in our business, it becomes more reflective of the true automotive demand from the OEMs. And that is indeed then leading to a annual and that's how we look at it. Our 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 yet, 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 a flat SAAR.

Ross Seymore -- Deutsche Bank -- Analyst

Great. Thanks for that. And then for my follow-up question, just want 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 tightness 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 that the increase in the fourth quarter diminish the size of the increase that we otherwise would have seen in the first quarter sequentially?

Peter Kelly -- Executive Vice President and Chief Financial Officer

Yeah, the single biggest item. It's 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. We have --

Rick Clemmer -- Chief Executive Officer

So, it's a good thing.

Kurt Sievers -- President

Well, it's a good thing, but --

Rick Clemmer -- Chief Executive Officer

We're giving some of our MPIs (ph) out and shipping those to customers. And so there's a cost obviously as we take those and put those, move those toward engagement with customers, Ross.

Operator

Thank you. Our next question comes from William Stein with SunTrust. Your line is now open.

William Stein -- SunTrust -- Analyst

So I 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 and automotive and you have to incur some incremental accruals. On the opex side, any quantification 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?

Peter Kelly -- Executive Vice President and Chief Financial Officer

I mean, clearly, I don't want to guide Q1 at this stage. I think, I think you're right, Will, in the sense that from a gross margin perspective, you have -- the single biggest item is that the annual price increases. From opex you have a reset on bonus. So as an example, this year, we didn't raise our targets. So, the bonus accrual is relatively small. And you're probably talking about maybe an average of around $10 million a quarter. Whereas in 2020, if we were to assume a full bonus, we haven't kind of sell of our target you have for 2020. We'll 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 it were in Q4. So, I'm not sure I'd forecast opex lower in Q1 than in Q4, but I'm not ready yet to give you an absolute number.

William Stein -- SunTrust -- Analyst

But 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 units 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 then concentrated, maybe you can just provide a little color?

Peter Kelly -- Executive Vice President and Chief Financial Officer

I guess the units 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 as they broaden them -- 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 had showed 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 in the uptake associated with it as we projected going into next couple of years, where we think it can be 50% of all the smartphones.

Operator

Thank you. Our next question comes from John Pitzer with Credit Suisse. Your line is now open.

John Pitzer -- Credit Suisse -- Analyst

Yeah. Good morning, guys. Thanks for, let me ask the question. Rick, I wanted to ask you a little bit, given, do you have sort of a unique vantage point on the whole China-US trade issues. I'm kind of curious, how you think that, that's impacting your business? There has been some concern in the investment community that perhaps Chinese customers are pulling forward inventory, there has been other sort of chips that would suggest they're trying to keep inventory lean. Clearly you're not suffering from any bands, but we kind of curious to think whether or not there is 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?

Kurt Sievers -- President

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 has 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 bode well. Clearly, I think our relationship with the Chinese customers has been positive and will continue to be positive for us going forward.

John Pitzer -- Credit Suisse -- Analyst

That's helpful. And then Rick is to follow up on some of your prepared comments about 5G and the comm 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 opportunity there impact that kind of a CAGR that you have out there as a target?

Rick Clemmer -- Chief Executive Officer

Well, so, John, when we set those targets, we were coming out of the period of a 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 the 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 will 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 is 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. They could bode very well as well and end up with a couple of $100 million 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.

Operator

Thank you. Our next question comes from Blayne Curtis with Barclays. Your line is now open.

Blayne Curtis -- Barclays -- Analyst

Hey, guys, thanks for taking my question. I just wanted to go back in the Auto segment. You mentioned, I think the growth there, it's growing teens. Just kind of curious with the -- you also mentioned a stabilization. With improving SAAR next year, the growth that you're seeing or 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 -- the outperformance led by the growth areas?

Kurt Sievers -- President

Hi, Blayne. This is Kurt. First of all, let me slightly correct what you just said. I think, I didn't say that, I had just talked about an improvement into our 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 may be important detail. When you think about us indeed, I'd say that the improvement you are seeing is probably not restocking, but it's just that the consumption reflects more the end demand where earlier, at least in our business with smaller accounts and through distribution, it was masked by building down inventories. And that appears to possibly be overhaul, which means, we just see the real demand coming back again. I would be careful to say that's already restocking, probably not.

Rick Clemmer -- Chief Executive Officer

Yeah. 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 kind of gotten to a minimum run rate based on their projections now, and then though 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 work their way through their inventory basis and we're beginning to see a little more of a positive perspective associated with it.

Blayne Curtis -- Barclays -- Analyst

Thanks. And I just wanted to ask on the Wi-Fi transition -- our transaction you had 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 that in December, and if anything is in the guidance from that?

Rick Clemmer -- Chief Executive Officer

Nothing is in the guidance. Nothing is in the guidance. And we would anticipate closing it sooner than the first quarter, but given the fact that there is 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.

Operator

Thank you. Our next question comes from Stacy Rasgon with Bernstein Research. Your line is now open.

Stacy Rasgon -- Bernstein Research -- Analyst

Hi, guys. Thanks for taking my questions. I wanted to talk about, first, just the language in the release, it has a little bit improved, this is the first time. I heard you talk about short term.

Rick Clemmer -- Chief Executive Officer

Hey, Stacy, Stacy, you're kind of cutting out. We can't really hear you.

Stacy Rasgon -- Bernstein Research -- Analyst

I'm sorry. Can you hear me now?

Rick Clemmer -- Chief Executive Officer

Yeah. Perfect.

Stacy Rasgon -- Bernstein Research -- Analyst

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 about sort of the distie 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 [Indecipherable], or you actually seeing to the extent that you have any visibility actual improvement in customer and demand at this point?

Rick Clemmer -- Chief Executive Officer

So, I think, Stacy, what we're seeing is, is we've seen things stabilized. So we're seeing some pockets of improvement, our increased orders, but really what we're trying to point to is the fact that if you look at it, you know, in 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 is 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 is an infrastructure to get to the total. And you know, in total, we've been, if you adjust for the MSA that we changed in the accounting, you know, we've been kind of mid-single digit with the exception of Q2, we were little less than that. And will be kind of -- and we'll have a couple of points improvement in the total even with a little bit of a downtick in the communications in mobile in Q4., But so I think, we clearly have seen a stabilization in some pockets of improved demand and increased demand, but not anything that would lead us to really talk about robust recovery under way at this point.

Stacy Rasgon -- Bernstein Research -- Analyst

Thank you. And maybe to follow-up on that, on the longer term, can you still holding to your longer term growth, this is 5% to 7% [Technical Issues]

Rick Clemmer -- Chief Executive Officer

Lost it, again, Stacy.

Stacy Rasgon -- Bernstein Research -- Analyst

Okay. Can you hear me now. This is very strange.

Rick Clemmer -- Chief Executive Officer

Yeah.

Stacy Rasgon -- Bernstein Research -- Analyst

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 a decline in 2019. So what is the right way to think about this growth model given that the new starting point is in 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 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 where we're starting from?

Rick Clemmer -- Chief Executive Officer

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 had 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-Wide Band beginning to be shipping next year and in 2021. And clearly the 5G deployment gives us some upside. I mean, that could drive that 0% to 2% to kind of that 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.

Operator

Thank you. Our next question comes from Craig Hettenbach with Morgan Stanley. Your line is now open.

Craig Hettenbach -- Morgan Stanley -- Analyst

Yes, thank you. 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?

Kurt Sievers -- President

Yeah. Thanks, Craig. 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 roll-outs. As we have discussed earlier, it was pretty high growth rate into the next few years. Let me just highlight Craig that we -- while we speak a lot about this one OEM, and since the public announcements, that's very convenient for us to speak about it, we have a significantly broader base of design wins too. Differentiated against incumbents remain to be to be ASIL-D functional safety performance on a system level, as well as sustainability, given our approach with microcontrollers in analog high-precision front-ends.

Peter Kelly -- Executive Vice President and Chief Financial Officer

And you know I guess the only thing I would add to, say Craig is, I follow up, 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.

Craig Hettenbach -- Morgan Stanley -- Analyst

Got it. Thanks for that. And then just a follow-up for Peter, understanding 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 12 months to 18 months?

Peter Kelly -- Executive Vice President and Chief Financial Officer

Yeah, I mean, I think those are the same things. I think in the long-term, so over the next few years, our mix definitely helps us. As we look at kind of the MPIs started 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 good 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. But with the current market environment, I'd say the lack of visibility, in all the visibility we have. It's hard to see how we do that really.

And then you know, when you saw that in Q4, so I do need -- I hate to admit it, but I do need to pick up in volume to be able to get to the 55% level. And I'm surprised didn't ask the question, one of the questions we were anticipating from you guys is given revenue was toward the higher end of the guidance in Q3, why -- 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 to $6 million. So it's not that bigger number, anyway. But in the current environment, from the levels of revenue we have, it makes it really, really tough to get the revenue. But I believe, after market does come back. We'll be able to get that.

Rick Clemmer -- Chief Executive Officer

Craig, just to be specific, I think our long-term target is 53% to 57%. We talked about 55% in the near term, but [Speech Overlap]

Craig Hettenbach -- Morgan Stanley -- Analyst

Yes, 55%, the mid point, yeah.

Rick Clemmer -- Chief Executive Officer

But utilization will be key to that as well. And I think that's an important element of our continued gross margin improvement.

Kurt Sievers -- President

And that's an impact of just revenue and managing our inventory and all that good stuff.

Operator

Thank you. Our next question comes from C.J. Muse with Evercore. Your line is now open.

C.J. Muse -- Evercore -- Analyst

Yeah, good morning. Thank you for taking the question. 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 distie sales down 10%. So I guess two part question there. One, are you comfortable with where we are from a distie inventory perspective? And then two, as you see a recovery at least standing here today, do you think it will be distie or OEM led?

Rick Clemmer -- Chief Executive Officer

Well, I think -- I think your point, 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 significantly reduced the inventory over the last few quarters to be able to maintain that 2.4 months and actually down a 2.3 months in the Q3 time frame, 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 in 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 the OEM side. And I think it will be more relevant toward the uptick associated with it. But as far as inventories, I think we're in good shape in -- and I don't think there is any issue associated with that. But I would anticipate that, that will be one of the early points where we will see a real improvement in the total revenue.

C.J. Muse -- Evercore -- Analyst

Very helpful. As my follow-up. And I know, I 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 secured mobile wallet. How are you thinking about and what is your visibility looks like today Into the growth vector into 2020?

Rick Clemmer -- Chief Executive Officer

Kurt, can you take that?

Kurt Sievers -- President

I would say we are confident that the attach rate increase, which is actually what is driving our mobile growth. Attach rate increase of -- of mobile wallet and associated applications, thus continue. I mean, there could always be quarterly fluctuations. Mobile has a lot of seasonality. But from a year-over-year perspective, we are very well on track with what we said in our Analyst Day last year that we see this 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.

Rick Clemmer -- Chief Executive Officer

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-Wide Band, it just solidifies that position in mobile and solidifies our position with the mobile wallet. So, I think that'll be a significant contributing factor for us and continue to demonstrate our leadership as well as solidifying our overall position. We'll take one last question here today.

Operator

Thank you. Our final question comes from Chris Caso with Raymond James. Your line is now open.

Chris Caso -- Raymond James -- Analyst

Yes, thank you. Good morning. Just a follow-up question on the gross margins. And Peter, last quarter, you talked about getting to the potential of getting to 55% quarterly run rate on about flat year-on-year revenue would suggest 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's when you get to that in a quarterly basis than obviously the full year?

Peter Kelly -- Executive Vice President and Chief Financial Officer

Yeah, yeah.

Chris Caso -- Raymond James -- Analyst

Okay.

Peter Kelly -- Executive Vice President and Chief Financial Officer

Sorry [Speech Overlap]

Chris Caso -- Raymond James -- Analyst

That's all right. Quick answer. Just...

Peter Kelly -- Executive Vice President and Chief Financial Officer

It was kind of rhetorical question really.

Chris Caso -- Raymond James -- Analyst

Right, OK. The follow on from 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-US 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 provide you with somewhat of an advantage being domiciled outside the US?

Rick Clemmer -- Chief Executive Officer

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-US sourced IP providers. So we think that could be positive, obviously that doesn't happen overnight, or immediately, but it takes a period of time associated with it.

Operator

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.

Rick Clemmer -- Chief Executive Officer

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 about 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.

Jeff Palmer -- Vice President, Investor Relations

Great. Thank you, everyone. Thank you, Daniel.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Jeff Palmer -- Vice President, Investor Relations

Rick Clemmer -- Chief Executive Officer

Kurt Sievers -- President

Peter Kelly -- Executive Vice President and Chief Financial Officer

Ross Seymore -- Deutsche Bank -- Analyst

William Stein -- SunTrust -- Analyst

John Pitzer -- Credit Suisse -- Analyst

Blayne Curtis -- Barclays -- Analyst

Stacy Rasgon -- Bernstein Research -- Analyst

Craig Hettenbach -- Morgan Stanley -- Analyst

C.J. Muse -- Evercore -- Analyst

Chris Caso -- Raymond James -- Analyst

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