Nordic Semiconductor ASA (NOD) Earnings Call Transcript & Summary

Good morning, and welcome to Nordic Semiconductor's Quarterly Presentation for Q2 2020. Today, together with Pål Elstad, our CFO, I will go through the result of previous quarter. We continue to grow through Q2. Revenue and gross margin were above our guidance. We ended at $88.5 million in revenue, that's up 25.5% year-on-year and plus 26.2% quarter-on-quarter. Our Bluetooth revenue accumulated to $70.1 million, is up 25.1%, again, within our guidance of a growth in Bluetooth between 25% to 30%. Our proprietary revenue reached $16.4 million. It's up 29.8%, strong growth, and is mainly due to the coronavirus situation, where people work at home, and use time much more domestic PC equipment. Our cellular revenue reached $1.2 million. And our gross margin continued to be strong and is very much influenced by high volumes of this new advanced system ownerships. And also it's affected by all the new equipment it bought more than a year ago to increase over time to high yield. We had an increase in our backlog, a strong increase. If you look Q2 2019, it was up 80% and is up 64% compared to Q1 2020. What we see is there have been accelerated technology adoption and it's been demand across all the multiple markets. And if you start deep diving into the backlog, we see that the top 10 customers only account for 40% of the backlog. It really show that we have a wide customer base, and we also see that some of the small, medium customers are becoming more medium customers. So the smaller customers are increasing their volumes. So all over, it's a very healthy backlog, and we're proud to present $202 million in backlog. I will also point out that Nordic has shown to be a very resilient organization, and our business model is strong. If you look at how the sellers had been through this quarter, is been challenged in supply chain, we'll be managing those. We have been sort of buffering a bit on critical parts to ensure that we can deliver the $202 million we have in backlog. We see that our [ distills ] inventory is at moderate levels. So basically, the situation going into Q3 feels good. We've been very focused on avoiding any corona disease internally in Nordic. And we now see -- and we have been successful. We had no COVID-19 cases. And now we see that our employees gradually returning to a very safe and secure workplace. We will keep strict travel restriction, and we also limited physical meetings to ensure that we not get any next wave of corona into Nordic. We continue to have high certification market share. Last quarter, it was 43% market share. If you look through the year, it has been 46% accumulated market share. What we see is some of the smaller customers have not been able to get into certification with some of the new products. And I think it's due to the difficult situation we have had through the first half year. But if we analyze and look behind the design win registration, we see strong contribution from Tier 1 customers in these numbers. We have tracked our shipment of kits, and we see that we continue to have strong kit shipments. There has been more than 43,000 kits shipped during the quarter. And there has been a significant contribution from the 52840. The 52840, which is the high-end system on the ship from Nordic, the one with the highest ASP, significant about dollar contribution per ship. And it's exciting to see that the customer use our microcontroller together with the integrated radio. Cellular IoT kits accounted for 13% compared to 7% first half in '19 and 11% in second half of '19. So again, good interest for our cellular IoT products. So usually, I'll show some products that were launched -- that our customer have launched in Q2, and D-Fetch is a company actually based in Norway, doing gym management platform. It really tracks how much each of the guys in the gym are using the equipment so you can optimize your equipment into each site. Phytec and Qorvo. This is 2 examples where we see Nordic Bluetooth along -- beside the ultra-wideband chip. And you will see more of such products coming to the market in the next half year. We also have a cool application, I think it's real cool, it's Tekt Industries. It's based on the 9160, and it tracks if there is violence at, I would say, places it should not be violent. So it's really a system that could save environment going forward. It's based on trucks, for example, going into Amazonas. And if I go into areas I shouldn't be, it reported back. So protect rainforest is sort of the idea with this product. CoreKinect is a tracker and monitoring fuel and fertilizer tanks. It's again, a potential that is high. And we look forward to see how these products are going to do in the market. And I think it's going to be towards 2021 we're going to see it. We've been having healthcare high on the agenda. Nordic's been talking about connected patient for years. Now it's happening. And we have some examples here. Sixgill Sense is a tracker that are used in hospital to be ensured to find critical medical equipment when needed. We also have an Oral pH Monitoring System. It's really put onto your tooth and check how your health is and basically take action if it's needed. Cleanbox Technologies is doing mask cleaning and other hospital equipment cleaning. Sani nudge is cleaning and sensor ID to ensure that all personnel are following the routines they need to have a safe environment in the hospital. And the last one, which I'll talk a little bit more about later is CareTrac Technologies. It is a remote patient monitoring system using 9160. So throughout the quarter, we've been continuing to expand the product offering. We are -- we released the 52805, it's a part that is basically aimed at cost constraints applications. We now have the 52820 in mass production, and we are continuing to strengthen and improve across the whole 52 Series product range. We also, as software getting more and more important part of our product offering, releasing Version 1.3 with support for the whole 52 Series. We also, in the same 1.3 Version, supports Thread, Zigbee, and Bluetooth mesh. And as we are building up more and more support for different protocols, it's important for us to have a toolchain manager. And Nordic released their first updated tool manager also through this quarter. So what have we done mostly this quarter? We've been working with the new large growing ecosystems. So basically, the Tier 1 customers are now building up new protocols to be able to have offering to the broad market to connect to their platforms. And Nordic been participating in all these initiatives. We'll be building up our software teams to ensure that we have -- that we are on track, maybe ahead of our competitors offer comparability to these platforms. We released CHIP source code and it's using the 52840 as one of the reference platforms. As an important milestone for Nordic, we released our Version 8 of Apple HomeKit. And also the ZBOSS open initiative for Zigbee PRO Software were included in the last update of our software package. A lot of activity, a lot of people engaged. Cellular IoT is progressing. If you look at this slide, you will find that we have now been certified with Telstra in Australia. And we have got regulatory certification in China. So basically, now our 9160 SiP can be used in a new territory -- or 2 new territories in China and Australia based on the certifications achieved through this quarter. It's been a little bit challenging because the team that we usually do, this certification are not being allowed to travel, or we have been using our own internal field application engineers to perform the test and support regulatories in different regions to achieve this through last quarter. And we will continue doing it for Q3, and we will add new operators, when, in next quarter or this quarter. So here, a case study on cellular IoT in predictive maintenance, that's also something we talked about for some time to detect possible fault before it really happens. There's a German IoT design house, it's called InnBlue and Italian tool manufacturer called MT that had launched a system where that was Nordic LTE on top of their motors to ensure -- and a lot of sensors to ensure that they catch any misbehavior on these motors. And we are proud to see they're using the 9160 to perform these tasks. I said I'll come back to medical device, ClearTrac. I mean this is the first remote patient monitoring system for bladder dysfunction. It uses our SiP. And Dr. Brent Laing said that it's not possible to do this without the new cellular SiPs from Nordic. Again, we show that we enable new markets because of our ultra-low power DNA. So I'll now hand it over to Pål Elstad, our financial Director.

Thank you, Svenn-Tore. Just before I start, if you have questions to us after the presentation is done, please send the mail to ir@nordicsemi.mo. And we will answer them after the presentation is done. So I'll jump to financials. As Svenn-Tore mentioned, revenues about $88.5 million in the quarter and $158.7 million for the first half year, representing a 25% growth compared to last year's quarter and 28.5% compared to last half year. It's a strong revenue, and it's well within our 20% to 30% targets. Its -- revenue came in above guidance, which was $75 million to $85 million and also above the updated market numbers we gave 2 weeks ago. The reason for this is that towards the end of the quarter, we got very strong numbers in consumer electronics and mainly home PC equipment and connected health, as Svenn-Tore has been talking about. Bluetooth represents now 79% of total revenue or $70.1 million, which is up 25%. Very special this quarter is our proprietary business, that's now at $16.4 million, had a growth of 30% versus last year. If you look at last 12 months growth, it's at 2%, so still, well above the single-digit decline, we have in our guidance. But this comes as a result of the strong growth for home offices. I'll now go through each of the markets. Of course, as the overall revenue shows growth both compared to last quarter and last year, all the underlying markets are showing strong numbers. First of all, Consumer Electronics. It continues to be very strong with 8.1% growth compared to last year. Consumer Electronics is around 1/3 of our total business and will continue to be a very strong driver of the business, as discussed many times, mainly home PC equipment, both proprietary and Bluetooth solutions. Wearables continues to be one of our biggest markets with 11% growth compared to last year. The main driver of this growth is we have a very good [ design ] traction in -- on the high-end System-on-Chip's, especially in the Chinese market. Then I'd like to highlight the healthcare business, which has 157% growth versus last year and now totals $14 million. This is up compared to the $5 billion, which has been the average run rate for the last 9 quarters. Of course, some of the growth in healthcare relates directly to the COVID situation and will be a little bit lumpy. But we have seen a trend shift in healthcare, and we have very many new design wins that are also outside pure COVID products. So we will see good numbers in health care going forward. That this was also mentioned in the Capital Markets Day in October last year. Finally, in Building and Retail, the old favorite, the city bikes is included there. And the city bikes is, of course, a popular product, now that people don't want to take the buses. I'll jump to gross margins. Gross margins came in at 51.9% this quarter. We have thereby been able to consistently execute at margins above our 50% growth -- 50% margin targets. The higher-than-expected gross margin came as a result of continued high demand for high-end System-on-Chip's as well as favorable customer mix. In addition, having higher volumes and good predictability in our demand makes it possible for us to drive production costs down. We expect this favorable product and customer mix to continue also in Q3. However, we want to reiterate our medium-term gross margin range of 48% to 50% for the short-range business as new customers and products will come into the model. Also, cellular IoT will impact when cellular IoT starts getting higher revenues into the P&L. I'll now turn to operating model performance. As you can see, the 25% growth and the higher revenue results in an EBITDA of $16 million or 18.1%, significantly up from the 13.9% a year ago. Total R&D spending is now 21%. So it's pretty close to the 20% numbers we're talking about for the business, down from 23.8% a year ago. Also included in these numbers is the capitalization of intangible R&D. This was $2 million this quarter. Of this, $0.6 million relates to the cellular business. Last year, it was $3.8 million. So we are capitalizing less than we've done in historical quarters, mainly due to the fact that the cellular business is now more into the commercialization face. I'll see that activity levels are picking up, although we don't know when we will start having, for example, the quarterly presentation together with people again. Despite corona, we've been able to onboard new key talents into the company. So we've added 14.6% people and are now 822 employees, mainly a mix between R&D and customer facing sales. Other OpEx at 8.3%, down compared to last year, as I already mentioned, less travel, less activity. However, there's also a mix of less tape-outs being done in this quarter, but that's more a facing of when we face products into the market. As mentioned, strong revenue and no cost drives the 18.1% EBITDA margin. Adjusting for the cellular business, we actually have a 26% EBITDA margin in the quarter. Also very interesting to see at the last 12 months EBITDA's now at 13.9% for the consolidated group and as high as 22.5% for the business, if we exclude cellular IoT. CapEx was $5 million in the quarter. So on the high side of our guiding. The reason for this increase is that we did some investments in test capacity as we see higher demand coming. However, in percentage of revenue, it's -- we're continuing the downward trend, and it's now at 5.6%. The main reason for this is that we've done with the large lab investments that we did a year ago. Q3, we expect to be at similar levels as in Q2. Finally, I will talk about our cash position. Overall, in a very strong growth quarter, we managed to maintain a stable cash position at $125 million -- $124 million. We had operating cash flow of $5.3 million. This came as a result of the strong profits and offset by $8.6 million increase in net working capital. Although we do have a strong growth in revenue, we were able to maintain the net working capital over the last 12 months revenue at around 26%. We continue to have a tight cash management and optimized cash conversion. As a result, we have a cash balance of $124 million at the end of the quarter and total available cash of $160 million, including undrawn facilities. We still have drawn $40 million on the facility. All of this is kept in U.S. dollars so that we manage our FX. Okay. Svenn-Tore, I'll let you do the final summary and guidance.

Thank you. So the important thing for Nordic now is to maintain the long-term strategy and the targets. We stick to our strategic pillars. We are leading on connectivity, we should excite developers, we should have customer engagement. And customer engagement is an important point in these difficult times we have now where we can't travel. We have been so fortunate to build up our customer relationship throughout quite some years now, and it's easier to maintain a relationship on Zoom, on Teams, on Skype platforms than create new by fronting customers. So we are in a good situation. Also, we have less activity. As we said, we never had as much activity as now, where it's been less travel activity. Basically, we are conducting meetings on these platforms day and night, and we really have an exciting time at the moment. So we do customer engagement. We had to scale the business. We've shown that we can do that. We will continue to invest early where we see there is potential for strong business. And we obviously have high financial ambitions. We do have a solid market position. I just showed you design win ratio for the whole year was 46%, for the quarter was 43%. It really shows that we have a strong market position. We are actually market leader in Bluetooth Low Energy, and we're going to continue to be so. We have strong ties to vertical Tier 1 and platform ecosystems because this is what's going to dominate the connected world going forward. And we now see results that we are positioned for market leadership even in cellular IoT. We have ambitious targets, we have to have. We are aspiring to become a $1 billion company within the next 5 years. That was a statement we did in October last year and still as valid as it was on the Capital Markets Day in October last year. And we have a long-term ambition to be a 20% EBITDA margin. We have a solid Q2 behind us. We also see a strong backlog and it support the growth for Q3. So Q3 guidance range, we expect the revenue to come in between USD 95 million to USD 105 million. That's a growth between 16% to 28% year-on-year, 7% to 19% growth quarter-on-quarter. We expect the margin to be around 50% to 51% as some of our larger Tier 1 customer will contribute to the growth in this revenue. You should not forget that there's still a risk and uncertainty regarding COVID-19 situation, and it continues into second half. But there is also an upside in this situation. And that's that we see that there is faster technology adoption and especially in the connected area. And least -- last but not least, I mean all the longer-term drivers are in place to support our strategy. It's not only that we have a strategy, but we have all the drivers in place and we are looking forward for the second half of this year. I think that ends my presentation today. We are now open for Q&A. So Pål, can you come up and we see what we got of questions.

Okay. We have some questions. I've split it up on segments. So we can start with the backlog. Christoffer from DNB. With 80% year-on-year jump in order backlog, is it fair to assume that we are likely to see a break with the seasonality pattern in Q4? Meaning should Q4 be at least as big as Q3 in terms of revenue?

I think if you read the report, I think this is a very correct statement, we say that the backlog is evenly spread between the 2 next quarter. So the question -- answer to your question is, yes.

Okay. Then we have from...

I also want to add some more.

Okay.

It's obvious as we get a design win ratio of 43%, some of these new products will get into production, which means that we get the number of active customer will continue to grow and contribute to our revenue. So each quarter going out, as long as we maintain less churn, we should grow.

Then we have a question on the topic backlog again from Henriette, Arctic. Can you give some color on which segments are driving the strong step change in order backlog? And if order backlog includes new products from Tier 1 customers?

We've been talking about Tier 1 customers for many quarters now. And obviously, it has to get into volume production at some time, and it does -- we expect in Q -- in the second half of this year. When it comes to segments, I expect to see more or less the same mix in segments, but at a higher level on each segment.

So we mentioned that consumer electronics was the third of the business, and we believe that will continue.

We have another question from Henriette on the backlog. Can you give any color on the length of your order backlog and the customer concentration -- concentrating in your backlog?

Obviously, as we have seen now, there is uncertainties in the supply chain. So I expect that some of the larger Tier 1 customers are doing a little bit of insurance, basically placing orders ahead and I will say that that's represented in the backlog.

You also have a question regarding the backlog from Carnegie, Hans. Looking at the sequential and annual growth in your order backlog, it seems like an acceleration in momentum. However, the medium-term guidance is unchanged. Is there any extraordinary drivers in the order backlog lag effects or reason that the 2 should not follow each other over time?

I mean basically, if you look at the backlog and analyze the customer behind it, I mean, I think that we should guide a range that we are sort of feel secure with. And that's what we've done, and we stick to the guidance we've given.

Then we go over to the topic of revenue. Henriette from Arctic is asking, cellular is a new growth area. Any color on when you expect revenue to ramp? Can you give any color on which segments you now see growing?

We've been saying that we expect a pickup of revenue in 2021, and we still have this as our statement. And when it comes to segment, we have shown some here. We have shown some unpredictive maintenance. We have showed in healthcare. And still, we talk about logistics or asset tracking as another segment.