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NXP Semiconductors (NASDAQ:NXPI) Q4 2018 Earnings Conference CallFeb. 7, 2019 8:00 a.m. ET
Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to the fourth-quarter 2018 NXP Semiconductors earnings conference call. [Operator instructions] And as a reminder, this conference is being recorded. I would now like to hand the call over to Mr. Jeff Palmer, vice president of investor relations.
You may begin.
Jeff Palmer -- Vice President of Investor Relations
Thank you, Amanda, and good morning, everyone. Welcome to the NXP Semiconductors fourth-quarter and full-year 2018 earnings call. With me on the call today is: Rick Clemmer, NXP's CEO; Kurt Sievers, NXP's president; and Peter Kelly, our CFO. If you've not obtained a copy of our earnings press release, it can be found at our company website under the Investor Relations section at nxp.com.
This call is being recorded and will be available for replay from our corporate website. On our call today, we'll include forward-looking statements that involve risks and uncertainties that can 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 financial results for the first 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 will include -- exclude the impact of purchase price accounting, restructuring, stock-based compensation, impairment, merger-related costs and other charges that are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance. Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our fourth-quarter earnings press release, which will be furnished to the SEC on Form 6-K and is available on NXP's website in the Investor Relations section. Before we begin the call today, I'd like to remind you that beginning January 1, we've shifted our revenue reporting to an end-market view from an operating segment approach.
We believe this change over time will enhance the insight into the drivers of our business relative to the markets in which we operate. The current and historical end market information is available from our Investor Relations website in the historical financial model, which we post every quarter. And now I'd like to turn the call over to Rick.
Rick Clemmer -- Chief Executive Officer
Thanks, Jeff, and welcome, everyone, to our conference call. On today's call, I would like to cover three major themes: our full-year financial performance, our view of the market environment in which we operate and then the specifics around our fourth-quarter performance. Overall, looking at 2018, our revenue was $9.4 billion, an increase of 2% year on year. The drivers of the full-year growth were the automotive and industrial end markets, with flattish trends in mobile following a strong 2017, offset by weaker trends in the communication infrastructure and other end market relating to a decline in our digital networking business.
Turning to the details of the full year. Automotive revenue was $4.51 billion, up 6% year on year. Highlights include double-digit growth of both our RADAR transceivers and processing solutions for ADAS applications and the growth of i.MX processors used in auto display cluster applications. For the full year, ADAS products were just under 10% of overall automotive revenue, and the expectation is for continued strong growth as automatic braking and other safety features become more widely deployed and mandated.
Industrial and IoT revenue was $1.81 billion, up 6% year on year, including high single-digit growth in general purpose MCUs. Within the portfolio, growth of our 32-bit ARM MCU products were up in the high-teens, driven by the breadth of our power-optimized portfolio and 25,000-plus customer base served through our distribution partners across Industrial and IoT applications. We also continue to see the acceleration of design wins for our RT crossover processor family announced last year. Mobile revenue in total was $1.16 billion, essentially flat year on year, with sales of mobile transaction products up mid-single digits in 2018.
In mobile transactions, we continued to be focused on moving the attached rate of mobile wallets down into the future phone market and adding new use cases, including transit and access solutions. Communication infrastructure and other revenue was $1.79 billion, down 4% year on year, with increases from early 5G trials during the second half of 2018 more than offset by the continued declines in digital networking. Before we review Q4, we would like to offer our views on the current demand environment. As we communicated on our third quarter call, we believe the demand environment was cloudy at best.
As we progressed into the later part of Q4, we began to see accelerating deterioration in the China market in industrial -- in the China automotive and industrial markets. With respect to automotive, we see weakening domestic demand in China clearly impacting the demand from global OEMs and Tier 1 suppliers. Within the broad China industrial market, serviced by our distribution partners, we saw an increased reluctance to place orders due to weak demand from their end customers, which we believe is due to the uncertainty created by the ongoing trade dispute. In this broad market, it is extremely difficult to point to one specific set of customers or submarket that is causing the reduced demand.
In the European automotive market, the WLTP emissions testing bottlenecks we highlighted last quarter continues to create headwinds to demand. We do not see the testing bottlenecks clearing before the end of Q1. In addition, the lack of progress of how the U.K. will exit the EU has created additional levels of uncertainties in the auto market.
Within the mobile market, we anticipate worsening seasonal trends into the fourth quarter, primarily due to weaker trends in the premium smartphone market and the continued absorption of shipments after the strong launch in India by Reliance in the second half of 2017. Overall, we do not see the historical leading indicators of an overheated supply chain, including unusual backlog cancellations or outright program cancellations. Our distribution channel continues to be in good shape, with channel inventory consistently at 2.4 months, in line with our long-term targets. Unfortunately, we do not have any unique insights to forecast the duration or depth of the slowdown.
However, our order rates would indicate that Q2 revenue will be higher than Q1. And with most third-party economists continuing to forecast global GDP at a range just under 3%, you would have to believe the second half of 2019 will be stronger than the first half for the semiconductor market. Now I'd like to turn to the specifics of Q4. Total revenue was $2.4 billion, a decline of 2% year over year.
Our results were modestly better than our guidance for the quarter. From an end-market perspective, automotive Q4 revenue was $1.11 billion, up 1% year on year with ADAS and i.MX, both up double digits. In industrial and IoT, revenue was $435 million, down 7% year on year, primarily reflecting the weaker distribution trends in China, as previously mentioned. In mobile, revenue was $344 million, down 8% year on year, primarily due to a tough comparison with the ramp-up of Reliance in the second half of 2017.
However, we did see seasonally strong sequential demand for mobile transaction products in the premium smartphone market. Finally, communications, infrastructure and other revenue was $483 million, up 3% year on year, with RF Power solutions up a very strong double-digit, offset by declines in digital networking. Now I'd like to pass the call to Peter for a review of our financial performance.
Peter Kelly -- Chief Financial Officer
Thank you, Rick, and good morning to everyone on today's call. As Rick has already covered the drivers of the revenue during the quarter, I'll move to the financial highlights. In summary, our Q4 overall revenue performance was modestly better than the midpoint of guidance. And as it's our year-end, I'll review the full-year financial trends and then move on to the results for the fourth quarter.
For the full-year, revenue was $9.41 billion, up 2% year on year. Non-GAAP gross profit was $4.98 billion or 52.9% of revenue. Non-GAAP operating income was $2.7 billion or 28.7% of revenue, essentially flat year on year on a dollar basis as we stepped up R&D investments over the course of the year, while we managed SG&A expenses downwards. We generated $3.76 billion in free cash flow, which included the one-time termination fee from Qualcomm, and we returned $5.08 billion to our owners through a combination of share buybacks and cash dividends, and we reduced our diluted share count by 15% versus the same period a year ago.
Focusing on the details of fourth quarter. Total revenue was $2.4 billion, down 2% year on year, but modestly above the midpoint of guidance. We generated $1.28 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 53.1%, down 110 basis points year on year. Total non-GAAP operating expenses were $543 million, down $25 million year on year and a reduction of $20 million from the third quarter.
This was $8 million better than the midpoint of our guidance. From a total operating-profit perspective, non-GAAP operating profit was $731 million and non-GAAP operating margin was 30.4%, down 70 basis points year on year, reflecting the previously mentioned items. Interest expense was $60 million, noncontrolling interest was $13 million and cash taxes for ongoing operations were $29 million. Stock-based compensation, which is not included in our non-GAAP earnings, was $93 million.
Now I'd like to turn to the changes in our cash and debt. Our total debt at the end of the fourth quarter was $7.35 billion, an increase of $1 billion sequentially, as we issued $2 billion of our first investment-grade bonds and simultaneously repaid the $1 billion bridge loan facility. Cash was $2.79 billion, and net debt was $4.57 billion. We exited the quarter with a trailing 12-month adjusted EBITDA of approximately $3.15 billion.
Our ratio of net debt to trailing 12 months adjusted EBITDA at the end of fourth quarter was 1.45 times, and our non-GAAP interest coverage was 12 times. Our liquidity is excellent, and our balance sheet is very strong. During the month of October, we returned approximately $500 million to shareholders, as we bought five million shares for $424 million and paid $74 million in cash dividends. During the quarter, we paid a deemed dividend tax of $142 million.
And as a reminder, this payment does not go through the P&L. Turning to working capital metrics. Days of inventory was 102 days, an increase of two days sequentially, was slightly down on an absolute dollar basis. Days receivable were 30 days, a decrease of two days sequentially and days payable were 80, an increase of six days versus the prior quarter.
Taken together, our cash conversion cycle was 52 days, an improvement of 6 days versus the prior quarter. Cash flow from operations was $731 million and net CAPEX was $170 million, resulting in free cash flow of $561 million. Turning now to our expectations for the first quarter. We currently anticipate total revenue will decline in a range of 16% to 10% sequentially, reflecting the weaker demand environment we've discussed.
At the midpoint of our range, this is a decline of approximately 13% sequentially and 8% versus the same period a year ago of $2.09 billion. As a reminder, beginning January 1, we made a shift toward reporting our total revenue on an end market approach. We have posted the historic data on our website and in our guidance today, we'll follow the new end market definitions. At the midpoint, we anticipate the following sequential trends in the business.
Automotive is expected to be down about in the middle -- in the mid-single digit range. Industrial and IoT is expected to be down in the low double-digit range on a percentage basis. And mobile is expected to be down in the low 30% range. And finally, communications infrastructure and other is expected to be down in the upper single-digit range.
We expect non-GAAP gross margins to be about 52.3%, plus or minus 70 basis points. Operating expenses are expected to be about $550 million plus or minus $12 million or so. Taken together, we see non-GAAP operating margin to be about 26% plus or minus 100 basis points. We anticipate cash tax related to ongoing operations to be about $24 million, and we estimate interest expense to be about $62 million because of the additional debt we added last quarter.
Noncontrolling interest will be about $7 million, down about $6 million below our usual number, reflecting our joint ventures -- joint venture partners reduced loadings in SSMC. I would like to provide an update on our share repurchase program. As previously mentioned, in October of 2018, we bought back 5 million shares at a cost of $424 million. Since December 31 -- so in 2019, we've repurchased an additional 5.9 million shares at a cost of about $481 million under a 10b-5 program.
We suggest that for modeling purposes, you use an average share count for the first quarter of 290 million shares. Finally, I have several housekeeping comments I'd like to address: one, given our new end market reporting, I would recommend you all review the data we posted. But going forward and beginning in Q1, we will not include revenue from our manufacturing services agreements, which is related to the divestment of assets, such as Standard Products and RF Power a couple of years ago. And as an example, the MSA revenue in the first quarter of '18 was $39 million.
And what you'll now see in Q1 guidance is 0, which creates, obviously, about 160 basis points of headwind to our product revenue growth. As Rick pointed out, most economists continue to predict global GDP growing 3% in 2019. So at this point, we would see no reason to not believe our market can't grow 3% to 5% compound annually over the next three years and our business reflecting this growth would grow 5% to 7% compound over the same period. Clearly, our gross margins have challenged us in Q1, but we still plan to exit fourth-quarter 2019 at 55%.
Interest costs for 2019 are anticipated to be about $270 million and that reflects the new debt. We continue to believe our cash tax rate related to ongoing operations for 2019 should be about 5%, and we expect CAPEX for 2019 to be in the range of 6% to 7%. I'd like now to turn it back to the operator for questions for Rick and I and, of course, Kurt.
Questions and Answers:
Operator
Thank you. [Operator instructions] Our first question is from the line of John Pitzer of Credit Suisse. Your line is open.
John Pitzer -- Credit Suisse -- Analyst
Yes. Good morning, guys. Thanks for letting me ask a question. Rick, I guess, my first question is just can you talk a little bit about the expected inventory trends as you go through the March quarter, both on your own balance sheet but I guess, more importantly, in distribution.
When you look at your rev guide for Q1, do you think that, that represents kind of undershipping end demand? And is there any meaningful difference on what's going on with inventory by geo?
Rick Clemmer -- Chief Executive Officer
Well, I think, John, as we talked about, if you look at our automotive business, the bulk of that, that's outside of China is actually on a vendor-managed inventory. So we actually only ship it to the customer when they're actually using it in production. In the case of China, it's not quite as refined yet, so most of the shipments we have for the automotive market in China do go through our distribution partners. As we talked about, our total distribution inventory is at 2.4 months.
And our target is to maintain that at around 2.5 months plus or minus a half. So clearly, the guidance we have would be dependent upon our anticipation of what we believe the POS to be for Q1 with the reduced inventories that would go associated with that. I think we're in a very unusual environment where the U.S. is OK.
Europe is basically OK and maybe not quite as robust as it was in Q3, but China is just kind of locked down. It's in the quagmire. Our distribution partners' customers are not placing orders and not taking inventory because of their uncertainty about what's going to happen in the trade war. And as long as we see this uncertainty on the trade war, there'll continue to be at reluctance by them to place orders and take inventory.
Now if you believe that the full year's GDP growth is going to be 3% or just under, then clearly that can't continue. So if that's the case, then we'll see a significant rebound in the second half of the year. And as we said, our orders right now would indicate that Q2 will be higher than Q1. So I would say that we see an improved environment, but we're still going through the shipments in Q1, and we'll have the distribution inventory reduced associated with those reduced shipments in Q1.
Peter Kelly -- Chief Financial Officer
And on our internal inventory, John, I think I said last time, I want to get it down to 95 days. And we're putting a lot of pressure on the organization to do that. Clearly, Q1 is a difficult quarter to do because it tends to be a low quarter. But I have a lot of confidence we'll get there, and we're certainly not going to allow our inventory to grow on a dollar basis.
John Pitzer -- Credit Suisse -- Analyst
That's helpful. And as my follow-up. Just on the auto trends in Q1 and then throughout calendar year '19, clearly, auto is outperforming the midpoint of the overall guidance. Does that, in your view, reflect just kind of you keeping up with the market or there are company specific drivers that you see kicking in in Q1 that are helping you outperform the overall market? And how does the company's specific stuff trend throughout calendar year '19?
Rick Clemmer -- Chief Executive Officer
Well, I think on the company's specific, I'll let Kurt comment on it in just a second, but I think we believe that on the ADAS, specifically in RADAR, that will continue to ramp through the year. But Q1, it's -- we've been shipping it. It's just under 10% of automotive revenue for full-year '18. And so that will be -- we'll continue to see that more robust than the rest of the automotive market and that will continue to ramp through the years, specifically in automotive.
Kurt Sievers -- President -- Analyst
Yes, Rick, so I -- absolutely, it's on the -- as we had discussed earlier, the ADAS being now just below 10% of the total order revenue is a strong content story. In the current environment, we don't see that disturbing the trend. So we clearly see that the, say, 25% to 30% growth rate of that part of the business is fully intact, also, in the current environment. While other parts of the business, obviously, are much closer tied to the SAAR, which has been more suffering from the Q1 environment.
Another one, which we -- and Rick was speaking about it earlier, which does clearly outgrow from a content perspective is our i.MX application processor business, which goes into the digital clusters. So there is a continued strong trend of adoption of digital-to-cluster solutions where we have a very strong leading solution with our i.MX applications processors. So those two, I'd say, clearly, are content driven also through a weaker market environment.
John Pitzer -- Credit Suisse -- Analyst
Thank you.
Operator
Thank you. Our next question comes from the line of Stacy Rasgon of Bernstein Research. Your line is open.
Stacy Rasgon -- Bernstein Research -- Analyst
Hi, guys. Thanks for taking my questions. I wanted to ask about the gross margin guide. You're still holding the 55% at the end of the year.
What revenue level is required to hit that? And can you give us some idea of the gross margin drivers that drive your trajectory from the Q1 point through Q4 exiting the year to get there?
Rick Clemmer -- Chief Executive Officer
Yes. Sure, Stacy. I, obviously, anticipated that we'd get a lot of questions around this. I think if you go from Q4 '18 to Q4 '19, so flat revenue.
To get from 53.1% to 55%, several things. First of all, we have annual price reductions. So that gives us about an 80 basis point headwind. Mix has a little bit of a benefit in what we're planning right now, probably about 60 basis points.
Operationally, I've got about 200 basis points of performance locked in to get to the 55%. So that's about 130 basis points in input pricing, which we've got identified and about 60 basis points in factory efficiency, which we've got identified. Now to be honest, on those -- on that last one in particular, the factory efficiencies, I'd like to see that improve actually. But I said it last time, I don't think we need volume or revenue increase of our Q4 '18 number to get to 55%.
And I think we've got it pretty well-identified now. And that can do better, I'll do better, but there is always things that have the potential to offset some of the other potential goodies we could see. I'm feeling pretty comfortable about it still.
Stacy Rasgon -- Bernstein Research -- Analyst
Got it. Thank you. For my follow-up, I wanted to ask about buybacks. I know you've been buying back more incremental amounts lately.
I think you had said that you needed to hold a shareholder meeting to authorize like a -- further like large repurchase amounts. Why have we not seen that shareholder meeting? Is it going to happen soon? And how much of the existing authorization of the buyback remains?
Peter Kelly -- Chief Financial Officer
Well, I can still -- yes, there is a kind of technical thing in the Netherlands where, basically, you get an authorization to buy back up to 20% of your stock. And typically, people don't buy back 20% of their stock, but we're getting close to it. The reason we've not asked for that meeting yet is that I can still buy back about -- I think about 14 million shares, which is one -- at least of our current prices, $1.5 billion or so. So as soon as I use all that, I'll go and request the meeting, but either way, our next annual general meeting is on -- Rick will probably correct me, is in May or June.
And we'd get it topped up to 20% on that. But the simple answer is, I have the capacity to still buy an additional $1.5 billion. So I don't need the approval right now.
Stacy Rasgon -- Bernstein Research -- Analyst
Got it. Thank you so much.
Peter Kelly -- Chief Financial Officer
Thanks, Stacy.
Operator
Thank you. Our next question is from the line of William Stein of SunTrust. Your line is open.
William Stein -- SunTrust Robinson Humphrey -- Analyst
Great. Thanks for taking my question. Just one more quick one on the buyback. Peter, you said -- I think you've said either at the analyst day or the last call that you anticipated spending approximately $3 billion from Q4 '18 through the full-year '19, is that still the plan?
Peter Kelly -- Chief Financial Officer
Yes. We said we would return, and I said this for many years, all excess cash to shareholders. So if we do the math, obviously, yes, we now include our dividend and -- but yes, it'd be roughly that number.
Stacy Rasgon -- Bernstein Research -- Analyst
OK. And then, I guess, I'd like to turn to 5G. Rick, last quarter, I think you expressed some skepticism about the near-term strength in that market owing to your customer's sort of design approach and expressed an expectation that there might be some change in that, that would accelerate demand. Can you update us on your view in that market in the quarter and as we progress through '19? Thank you.
Rick Clemmer -- Chief Executive Officer
Yes. So thanks, Will. So I think 5G is still pretty fluid right now. I think one of the major U.S.
carriers actually announced that they were going to delay some of their deployments on the CPE with the last mile because they didn't believe the architecture was ready for prime time, a little bit like we talked about on our last earnings call. So I think it kind of confirmed our view associated with that. We anticipate that there is not really going to be the 5G availability by reasonable cost architecture that's not driven by FPGAs until late in '19. So we would not see a huge ramp-up of that CPE or last mile for 5G into late '19.
I think in the meantime, in preparation for 5G mobility, the infrastructure investments are ongoing, and we see a very solid demand, a very solid increasing demand that, frankly, we're struggling a little bit to get in position to be able to fulfill all the requirements. So it is kind of the tale of two pieces. When you look at the infrastructure side, we do see that really beginning to ramp now, but when we see the deployment of more for the last mile, we think that, that will be later in the year before really the architecture will be cost-effective to be able to support a significant ramp.
William Stein -- SunTrust Robinson Humphrey -- Analyst
In that last comment, you're talking about massive MIMO and your power amps, is that the business you're referring to? Thank you.
Rick Clemmer -- Chief Executive Officer
Yes. That's what we see today, is we see for the infrastructure deployment, massive MIMO as well as the deployment for base stations to get prepared for the 5G rollout actually beginning to be -- receive orders for it today.
William Stein -- SunTrust Robinson Humphrey -- Analyst
Thank you.
Jeff Palmer -- Vice President of Investor Relations
Thanks, Will. Sorry. Just before the next question, I'll need to correct something. Stacy, I have 10 million shares capacity left, not 15 million.
So I could only buyback $1.1 billion, $1.2 billion before I have to go back to the shareholders. But again, I don't think that's an issue and it's an easy thing to do should we need it.
Operator
Thank you. Our next question comes from the line of Vivek Arya of Bank of America Merrill Lynch. Your line is open.
Vivek Arya -- Bank of America Merrill Lynch -- Analyst
Thanks for taking my question. Rick, from a high-level perspective, do you think NXP is more exposed to China versus your peers? Or you are perhaps seeing more of this downturn? And if there is a trade resolution, perhaps you also see a somewhat better recovery. And as part of that, I think you mentioned some optimism around Q2 being better. Was hoping you could give us some color on which end markets are starting to stabilize and which remain weaker? I know it's pretty early, and data is limited.
Rick Clemmer -- Chief Executive Officer
So I guess, relative to China, I think we're -- China represents a significant portion of our business. If you look at what we see, we see that the end market in China from a distribution viewpoint for the industrial side is kind of continuing to be somewhat on hold or in a gray area. I think what we talked about that gives us confidence for Q2 is the order rate that we see for the last few weeks coming in actually really gives us the confidence that Q2 will be in excess or larger than Q1. I do think that China is somewhat of a contributor.
But I think, obviously, there was a hard shift, a hard reset by a number of our customers, specifically in automotive, but also with our industrial and IoT customers in China. As we see that taking place, as long as the world's GDP continues to be relatively healthy, then I think we're very confident we'll work our way out of that. But the increased orders that we're seeing over the last few weeks really gives us that ability to have the confidence to be able to say that on this call. And then relative to the second half of the year, it all gets down to what your belief is on the world's GDP.
So as long as you believe it's going to be close to 3%, then we clearly believe that the second half of 2019 will be better than the first half.
Peter Kelly -- Chief Financial Officer
I think, Vivek, our exposure to China is -- complicates things for us slightly in the sense that we know what we ship in. And the supply chain in China is, certainly, more opaque than what you'd see in Western Europe or the U.S. So it feels to us like we do get moved about in terms of what's going on in the supply chain over there, but once we ship it in, you don't know when it comes out. Our -- we ship auto product in there that some of it will be for domestic, some of it will be for global.
Our industrial products we assembled into devices that get shipped all over the world.
Rick Clemmer -- Chief Executive Officer
And it works both ways actually. It's -- even some of the shift to in Europe and the U.S. ends up in the end market of China. So we don't have 100% traceability, which shipments are really down to the market itself in China.
Both outside of China shipments could end up in China. Some of the into-China shipments could be tied to end markets outside of China. So that's why it's really a bit hard to say what exactly that exposure is.
Jeff, what was our -- do you have our 2018 shipping number? Was it 20?
Jeff Palmer -- Vice President of Investor Relations
Just about 20-some-odd percent into China.
Rick Clemmer -- Chief Executive Officer
Yes. 20, high 20.
Peter Kelly -- Chief Financial Officer
No, 30%.
Jeff Palmer -- Vice President of Investor Relations
It was 27%.
Rick Clemmer -- Chief Executive Officer
27%. I think it seems like 27%, 28% in terms of shipping for 2018.
Vivek Arya -- Bank of America Merrill Lynch -- Analyst
Got it. And for my-follow up back on the automotive business, so it grew about 6% you mentioned for the full year. It was growing at, obviously, a higher base until Q3. How would you characterize the market share environment in your traditional market? And let's say, if this year, we are in a situation where the automotive industry has negative units down 3%, 4%, do you still think your automotive business can grow in that environment that some of the new initiatives, Rick, that you mentioned in Battle Management Systems and RADAR and other areas, can they grow enough to -- from a content perspective to help you do better than the unit environment? Thank you.
Kurt Sievers -- President -- Analyst
So let me -- this is Kurt. Let me try and capture the pieces of your question. So firstly, on the SAAR environment for 2019, we do see external sources forecasting somewhere between plus 1% and minus 1%. So a big data point which we typically look at is actually IHF, which talks about plus 1% SAAR growth for '19, but also some people are more negative like minus 1%.
So we think it's going to be somewhere in that range. 2018, however, was actually a negative SAAR, reported at minus 2%. So in that environment, we did grow 6%, as you said. So, obviously, the content growth story did play out the way we were speaking about it earlier.
And in that regard, yes, we do think that also for 2019, that theme is intact. I talked earlier about ADAS as a large contributor, being pretty independent of the SAAR, but also the i.MX cluster applications helping in that respect. So in the SAAR environment, which is maybe around the zero unit growth in '19, we do think indeed that our content growth story does help us to outgrow the SAAR continuously.
Jeff Palmer -- Vice President of Investor Relations
Hey, Vivek, it's Jeff. I'd just like to also clarify, I looked at the wrong number. Our ship to for China is 30 -- high 30% range. Apologies.
Vivek Arya -- Bank of America Merrill Lynch -- Analyst
Yes, OK. Thanks very much.
Operator
Thank you. Our next question is from the line of Ross Seymore of Deutsche Bank. Your line is open.
Ross Seymore -- Deutsche Bank -- Analyst
Hi, guys. I want to go back to the disty side of things and maybe ask the revenue visibility in a different way. Can you just talk about what you're seeing on the disty versus the OEM side? And maybe, specifically, in your first quarter guide is a bit down 13% sequentially, how the OEM versus disty side differs either in aggregate or if the disty side is worse given your commentary in China? Is that really localized to the Industrial market or any of the various end markets that your new segments define?
Rick Clemmer -- Chief Executive Officer
Well, clearly, Ross, when we talk about the market in China on the industrial, a significant chunk of that, somewhere around three-fourths or 80% of that, is served through the distribution channel. And that's really the area of significant weakness that we see, combined with automotive. So in the case of automotive, it's probably somewhere between a quarter and a third of our total business goes through the channel, primarily for shipments into China. The rest of it is pulled from vendor managed inventory where we have seen declines.
We talked about it in Q4, I mean, in our Q4 call for Q3 results that we've seen a decline in auto production in Europe for the CO2 testing and we see that continue through Q1. So there is -- continues to be an impact of that. And then there is also the uncertainty of Brexit and the auto industry has a lot of parts moving from Europe to the U.K. and vice versa.
And so that's created some concern with the lack of clarifications on what's going to happen on Brexit as well. But I do think, really, the key area that we see the weakness is really China.
Peter Kelly -- Chief Financial Officer
Yes, and I think, Ross, your question was indeed then for China, distil versus direct, clearly that weakness in China expresses itself in the distribution channel for us, and that's both for industrial as well as automotive.
Ross Seymore -- Deutsche Bank -- Analyst
Got it. Thanks for that. As my follow-up question, Peter, you did a great job of walking us through on your expectations for the full year on the gross margin side with a lot of helpful detail. I want to switch over to the operating margin side, and specifically, the OPEX side.
Given that revenues are weaker than expected, what's your plan as far as how OPEX spend might trend directionally throughout the year? Are you tightening things down, given the revenue level? Are you investing more for growth? Any sort of changes in your strategy from the last time we spoke?
Peter Kelly -- Chief Financial Officer
Well -- I mean, you can see in our Q4 actuals on our Q1 guide, we're definitely keeping a lid on things at the moment, so -- but it's -- we're not taking out any programs. We're managing travel, not replacing electricians straightaway, trying to push out various expenses. So all that, kind of things you'd normally do. On a more long-term basis, so into '19 and '20, I'll go back to a percent of revenue.
So we want to run R&D about 16% of revenue. We'd like to run SG&A about 7.5%. And so going forward, we'd see, over the next three years, R&D run about 16% and ultimately, getting SG&A down to about 7%.
Ross Seymore -- Deutsche Bank -- Analyst
Thank you.
Rick Clemmer -- Chief Executive Officer
It is important to say, Ross, we are definitely taking actions in the near term to significantly control our cost. We're adjusting people levels relative to that. As Peter said, we're not really stopping any programs, but we clearly are not replacing attrition in some cases.
Peter Kelly -- Chief Financial Officer
Performance improvement, so we work to actually use this to move low performers, eventually, out of the company to strengthen the organization. So all of that helps the cost levels. I think you can see -- you've seen, historically, from us, and I think it was a clear indication in Q3, Q4 and Q1 that we will manage our OPEX, and we know how to do that.
Ross Seymore -- Deutsche Bank -- Analyst
Got it. thanks, guys.
Peter Kelly -- Chief Financial Officer
Thanks, Ross.
Operator
Thank you. Our next question comes from the line of Matt Ramsey of Cowen. Your line is open.
Matt Ramsay -- Cowen and Company -- Analyst
Thank you very much, I wanted to ask about, I guess, two of the smaller segments of the business. I think one growing really strongly and the other one on decline. I think you guys mentioned that 32-bit MCU programs in aggregate were up on the order of high-teens. Maybe you could give us sort of an update about how big that is in the overall mix and the trends you see there, relative to demand and sort of distribution levels? And then on the flip side, you've been very clear about how you're going to manage the decline sort of directionally of the digital networking business, but maybe just talk to us about where that business is run rating now, so we can sort of, I guess, calibrate models going forward?
Rick Clemmer -- Chief Executive Officer
Yes, sure. On the 32-bit ARM, we don't talk about the specifics associated with it, but it's the biggest chunk of our industrial and IoT business. And so that really gives us the benefits of looking at that from a growth. The one area that we're seeing really strong design wins on is our new crossover product that we announced really about a year ago, the so-called RT family, which takes the processing capability of our i.MX family down to a cost of micros on specific applications like visual or air detection or audio.
So that's really a significant factor for us in driving that growth, and we continue to see that accelerate with design wins. So that puts us in a really unique and positive position for the 2019 outlook. And we're kind of uniquely positioned where there is not a lot of competition in that space. Most of our competitors in i.MX don't participate in micros and vice versa, the same thing with the micro.
So we're kind of in the sweet spot where it gives us the ability to really drive that and participate in it. On the digital networking business, that business is kind of stabilized. It's declined through 2018 and kind of stabilized. It's just over $100 million a quarter or so.
There are some opportunities for growth, with design wins we won over the last year or so as we see those finally begin to ramp. And the PowerPC legacy business is not continuing to decline as much as it has in the past. So I think we've gotten to more of a stable level there and with some of the applications that we see, there are some opportunities for growth later in the year an 2020 that we'll see how they materialize.
Matt Ramsay -- Cowen and Company -- Analyst
Thank you very much.
Rick Clemmer -- Chief Executive Officer
Thanks, Matt.
Operator
Thank you. Our next question is from the line of Blayne Curtis of Barclays. Your line is open.
Blayne Curtis -- Barclays Investment Bank -- Analyst
Hey, guys. Thanks for taking my question. Just one on auto. Just trying to better understand the trends there.
You obviously called out two segments in double-digit growth. Just curious, obviously, your orders are slower. Just kind of curious, are there any segments that are providing a headwind above and beyond what we're seeing from just the overall environment? And then in just 5G, I wanted to understand that was a big boost, it kind of surprised people end of '18, it seems like you're saying things may take a little bit of a pause, but I just wanted to understand what your expectations are for the RF business in kind of the first half of the year?
Rick Clemmer -- Chief Executive Officer
Yes. Let me take the RF business first and then I'll let Kurt to comment on automotive. So on RF, we are seeing demand ramp for the massive MIMO and 5G infrastructure. And we're frankly struggling here on a near-term basis in being able to meet all the requirements from our customers.
So we are seeing a ramp and that's being a significant contributor -- positive contributor versus overall environmental issues that we see in the other businesses. So we think we're in a unique position with our massive MIMO product and have gotten really very positive feedback from customers and our requirement to be able to actually see if we can build more for them than what they'd originally anticipated as we go into the near term. Let me let Kurt then talk a bit on that.
Kurt Sievers -- President -- Analyst
Yes. I think, in auto, it's really differentiated between what is the content growth story versus what is very tightly associated to the SAAR growth. So those product or application segments where we are holding our highest share, but the penetration itself isn't growing anymore, we are obviously more swinging with the SAAR quarter by quarter. So you could call this, especially with the China environment and the WLTP in Europe, a headwind.
They're, again, at the same time, the content growth, and I mentioned, ADAS RADAR before is largely independent of this. So it's the mix of those two which drives our overall growth number. And we -- roughly speaking, we think that about 70%-ish of our total business is pretty close associated with the SAAR, where another 30% are really benefiting from strong content growth. And in that 30%, the largest piece, obviously, is ADAS, which is just under 10% of total run rate.
Rick Clemmer -- Chief Executive Officer
Yes, it's -- Blayne, it's probably worthwhile to talk about in the case of automotive, in our last quarter's call, we talked about, in Q3, we'd really seen weakness in the CO2 testing in Europe. And we actually didn't see a lot of weakness in China in automotive at that time. It was really not until kind of mid-to-late Q4 where we begin to see some weakness in the automotive market in China as all of that is basically served through the distribution channel partners. So we saw that weakness really begin to materialize at that point.
Kurt Sievers -- President -- Analyst
This is Kurt, indeed. So while many of the Tier 1 companies talked about this already, we didn't see it in our orders nor in our revenue, but I think it was like late Q4, kind of late November, early December, that we also saw that hitting us. But again, that only relates to that product, which is in the one-one relation with the car production.
Blayne Curtis -- Barclays Investment Bank -- Analyst
A couple of thanks.
Kurt Sievers -- President -- Analyst
Thank you, Blayne.
Operator
Thank you. Our next question is from the line of C.J. Muse of Evercore ISI. Your line is open.
Matt Prisco -- Evercore ISI -- Analyst
Hey, guys. This is Matt Prisco on for C.J. So outside of GDP forecast, are there any customer conversations or other factors that are giving you confidence in this second half recovery? And regarding the recent order uptick, do you think any of that's related to pull-in ahead of the Chinese New Year tariff deadline?
Rick Clemmer -- Chief Executive Officer
No. There was none of that, that felt like it was pull-in associated with the Chinese New Year tariffs. Once again, the U.S. is OK.
We really don't see a lot of concern about demand from our customers in the U.S. The general economy, even though it's down somewhat, is still performing quite well. In Europe, I would say, we see things pretty reasonable, but we do see isolated pockets, again, driven primarily by automotive. And we believe that the biggest chunk of that is CO2 testing, and we'll see how the demand comes out as we get -- work through that.
Peter Kelly -- Chief Financial Officer
Some of the Brexit.
Rick Clemmer -- Chief Executive Officer
And then the effects associated with Brexit that we talked about. So in the case of China, that's much more cloudy, much more murky as far as determining what's happenin in the second half of the year. I think it does depend on some kind of resolution or confidence in what's going to happen out of the current trade issues that are being discussed. So if you believe that the trade issues were going to continue, then the world's GDP is not going to be close to 3% for the year and then that's a different factor.
But as long as you believe that the world's GDP is going to be just under 3%, so there probably has to be a trade resolution with China to be able to accomplish that. And with that, then, we think we'll see a very strong growth in the second half of the year.
Matt Prisco -- Evercore ISI -- Analyst
Fair enough. Thanks. And then as a follow-up, just a housekeeping item. Looks like your incidental cash tax forecast increased for 2019 and therefore 2020, could you give some additional color there?
Peter Kelly -- Chief Financial Officer
Right. So you're talking about the taxes for the businesses that we -- like next period where we sold off and also the tax on the Qualcomm transaction. You actually have to look at the Q4 actual. So we were saying previously that we've spent $295 million in Q4, and we only spent $32 million because we went into a kind of long-winded negotiation with the Dutch tax authorities and were able to negotiate that particular transaction, the Qualcomm deal went through the innovation box.
So we managed to reduce that a little, but I guess, because at the time we were negotiating, it's slipped from Q4 into Q1. So the big move is really just the fact that we moved the payment on the Qualcomm breakup fee from the end of December to early January. I think if you actually do the math on Q4 actual and what we've guided for 2019 and '20, the amount is actually lower, and it's a very specific cash flow item, so that's why we pulled that one out separately.
Operator
The next question comes from the line of Craig Hettenbach of Morgan Stanley. Your line is open.
Craig Hettenbach -- Morgan Stanley -- Analyst
Yes. Thank you. Just question for Kurt on the BMS side. Just curious to get kind of what type of feedback you're hearing from customers, given you're taking more of a kind of complete system approach versus some of the existing players? And just how you feel about the pipeline of opportunity in BMS?
Kurt Sievers -- President -- Analyst
Thanks, Craig. Yes, we feel actually increasing these stronger because in the whole environment, the one subsegment, which is really pushed, is electric cars. So there is a pretty strong drive to really be on time from a car-company perspective to do the launches, which we've planned for '19. So if you think about it short term, the design win funnel which starts to turn into a couple of tens of millions revenue in '19 is on track that is all firmly designed in.
It depends really on the timeliness of the car launches. I unfortunately cannot tell you which cars those are, but once they are out, we will tell you, and it's pretty prominent, nice car. On the more strategic side, yes, the solution play, which we talked about earlier is absolutely hitting the nail, as much as the ASIL-D capability. So I really want to say it's two things: it is the solution play between micros and the analog front-ends, hence the ASIL-D capability of the whole solution, which continues to set us apart from competition.
Craig Hettenbach -- Morgan Stanley -- Analyst
Got it. And then just a follow-up on the near-term environment. On the WLTP issue, do you think once that passes, there should be kind of a catch-up or because the overall automotive market is soft right now, you wouldn't see any kind of rebound, if you will, in Europe?
Kurt Sievers -- President -- Analyst
Really hard to say, Craig. I'm very careful with that because -- of course, this is also somehow related to the overall demand environment in the end. And I'm hearing, but I -- we don't have the latest detail that there is a second wave of WLTP plant. So another type of test limits for CO2 emissions where I'm hearing that the OEMs now start to figure out how they can again go ahead with that one.
So I -- what we can say, at this point, is that the current one is not going to be here before the end of Q1. If there is a strong rebound from this, I'm a bit careful to say that this is going to happen there in Q2, not sure.
Craig Hettenbach -- Morgan Stanley -- Analyst
OK. Thank you.
Operator
Thank you. Our next question is from the line of Mark Lipacis of Jefferies. Your line is open.
Mark Lipacis -- Jefferies -- Analyst
Hi. Thanks for taking my question. One for Peter and one for Rick. Peter, just accounting mechanics on the deemed dividend.
Is that embedded in the cash flow statement under shares repurchased? And then for Rick, a number of microcontroller companies and analog companies have kind of talked about a benign pricing environment. And when Peter just walked us through the variance progress marches as we go through this year, I think there was a note of 80 bps of headwind on the pricing side. So I was wondering if you can share with us your thoughts on kind of like just the bigger picture, what's going on in the industry with consolidation? And how that seems to be helping some of the other microcontroller, analog companies, but doesn't seem to be benefiting you guys yet, so if you have any thoughts or color on that, that would be greatly appreciated. Thank you.
Peter Kelly -- Chief Financial Officer
Hi, it's Peter. So first thing is, it goes through the cash flow and not through the P&L. And if you look on Table 3, you can see an item there, cash paid on behalf of shareholders for tax on repurchased shares, $142 million, right at the bottom of the cash flow, so that's pretty specific. And then the other thing, I'll just say on the comments I made on gross margin, on pricing, that's just our annual price reduction.
It's not related to kind of anything that's going on in the market.
Rick Clemmer -- Chief Executive Officer
Yes. I would say that the general environment on pricing is OK. I don't think that we would say that it's poor for us at all. I think if anything we're trying to whittle down, when you go through the annual price negotiations with the OEMs and the Tier 1s, it's an arm wrestling that takes place.
And we try to get down slightly and that's under the contract, and we try to reduce it slightly and they try to get a little more. But I don't think there is a significant change in environment that we see associated with that. And on most of the industrial and IoT, you said that price with the design wins and then you have a built-in reduction that takes place associated with those that we honor contractually. Kurt?
Kurt Sievers -- President -- Analyst
Yes. And it's also important to note that a lot of the ASP reduction you see there is a once-in-the-year element. I mean, that happens in Q1 and then it's done for the year. So it's not like this repeats all the time, but it's -- because those are annual contracts.
And I clearly support what Rick was saying, I think we actually played it a bit tougher this year. Meaning that, directionally, we gave less price away than on the average of the past years.
Rick Clemmer -- Chief Executive Officer
Yes. It really depends on the product family. And so it has different characteristics based on the customer and product family and everything. So it's really hard to draw any conclusion, but I wouldn't say that the pricing environment is problematic.
It's very healthy right now.
Mark Lipacis -- Jefferies -- Analyst
Thank you.
Operator
Thank you. And this does conclude our question-and-answer session. I'd like to turn the conference over to Mr. Jeff Palmer.
Jeff Palmer -- Vice President of Investor Relations
Great. Thank you very much, everyone. Before we go, I think I'll pass the call over to Rick and see if he has any last comments he'd like to make.
Rick Clemmer -- Chief Executive Officer
Yes. Thank you for joining us. I guess, the thing that we have to point out is that we remain in somewhat of a cloudy environment, but the encouraging sign that we see with increased orders over the last few weeks really improves our confidence for the Q2 outlook and that being larger than Q1. And again, then for the second half of the year, it comes down to your belief on the GDP and whether the trade issues will be resolved, so that we'll return to a healthy growth around just under 3% as most of the economists are projecting or not.
But with that, I think it's important to point out that we are taking the appropriate cost actions to be sure that our costs are under control and we can deliver on our financial performance to ensure that we continue to focus on improved shareholder value as we go forward. So thank you very much for your support, and we appreciate it.
Jeff Palmer -- Vice President of Investor Relations
Thank you, everyone. This concludes the call.
Operator
[Operator signoff]
Duration: 61 minutes
Call Participants:
Jeff Palmer -- Vice President of Investor Relations
Rick Clemmer -- Chief Executive Officer
Peter Kelly -- Chief Financial Officer
John Pitzer -- Credit Suisse -- Analyst
Kurt Sievers -- President -- Analyst
Stacy Rasgon -- Bernstein Research -- Analyst
William Stein -- SunTrust Robinson Humphrey -- Analyst
Vivek Arya -- Bank of America Merrill Lynch -- Analyst
Ross Seymore -- Deutsche Bank -- Analyst
Matt Ramsay -- Cowen and Company -- Analyst
Blayne Curtis -- Barclays Investment Bank -- Analyst
Matt Prisco -- Evercore ISI -- Analyst
Craig Hettenbach -- Morgan Stanley -- Analyst
Mark Lipacis -- Jefferies -- Analyst
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