Nordic Semiconductor ASA (NOD) Earnings Call Transcript & Summary

Well, good morning, and good afternoon, everyone. My name is Bill Frauenhofer. I run the global semiconductor investment banking team here at Morgan Stanley, and we are pleased to be joined by Nordic Semiconductor today. And we've got Svenn-Tore Larsen, CEO; and Pål Elstad, the CFO, with us. And I've had the pleasure of knowing Nordic for many years now and watching them grow. And so it's going to be great to be able to talk about the progression of the company over the years. And as some of you may know, Nordic has won the Global Semiconductor Association (sic) [Global Semiconductor Alliance] award for the Most Respected Emerging Public Semiconductor Company, with $100 million to $500 million in sales for 3 of the last 5 years. So it's been a great growth story. The company's evolving, and we'll talk through that today with Svenn-Tore and Pål.

And Svenn-Tore, maybe we'll start with you. And can you talk about the progression that I just mentioned for Nordic over the last 10 years, from this transition from a proprietary ultra-low power chip into the BLE solutions that you're providing today globally and where the company stands?

Sure. I mean, I also think it's a comment on this $100 million to $500 million in sales, I would like to achieve same price in $ 500 million to $1 billion next year. And obviously, we can have those aspiration because, Nordic, we were on the first one to come out with ultra-low power 2.4 gigahertz radios for proprietary back in 2003, '04. And we started off with heart rate monitors connecting to the [ wireless ] sports watches. But we saw that if we should really become a huge volume, we need to have a standard. And therefore, we started to contribute to the -- developed BLE standard together with Nokia. It was actually an initiative between Nokia, Nordic and a couple other semiconductor vendors. And we started doing BLE from scratch. Some of our competitors basically downgraded the existing Bluetooth classic and tried to achieve a BLE product. And I think that was the really reason why we got market share so quickly because our BLE parts is pure BLE, from -- I would say, from raw specification. And we basically managed to have a power-leading radio. We have feature-rich options. And we have continued to build upon this platform, added more and more features. We have, basically, I'm a true believer in Flash, and we have had Flash memory all the time. And today, we really benefit from the fact that we have Flash because we can have multi-protocol, so embedded in our products. So I think the last 5 years, we've been hovering around 40% market share, and we will continue to grow that market share as time goes on because we're working hard with Tier 1 customer, the leading global consumer customers. Our revenue now, basically, has been constituted by medium-sized, smaller companies. But going forward, we're also going to get contribution from our new Tier 1 customers, as you might have seen represented in the backlog when we exited Q4.

And you've been investing, Svenn-Tore, in the cellular IoT market over the last number of years.

Yes.

And market seems to be beginning to ramp. And when it ramps, I assume it's going to ramp pretty quickly and be a relatively big market. Can you talk about that business and the investments you've made and what you expect for that market?

Certainly. Nordic has, for a long time, had a goal of being a leader in connectivity. And obviously, connectivity has quite a few standards. It has short range, long range and medium range. And we were -- we've been leading on short range. We've been investigating how to get started with long range for at least 7, 8 years. And 5 years ago, there was a lot of closing down north in Finland, and there was available engineers that have been doing the cellular modems for Nokia and also in temporary for Ericsson for decades. So we were -- we took an initiative to assemble some management for a team up in Oulu, north of Finland. And we got now around 170 very experienced cellular modem guys working for Nordic and making the next-generation of LTE-M and narrowband-IoT cellular modems. And we continue to grow the manpower up there because there is tremendous experience. And if you look to the complexity of these products, there is very few team globally that can make such a product. And I think we take advantage of this, and we can see that when we compare our specification with our products and get feedback from our first customers that have been starting to put these on the PCBs, that it's a great product.

Can you talk about some of the applications for the cellular IoT product, Svenn-Tore?

Yes. We started off thinking that asset tracking, asset management will be a huge segment, and it has become some exciting design wins there. And especially now when we see this horrible situation with COVID, we see that tracking assets could be more and more important. So that's still high up on the segment we sell into. But also, we see all the meter, gas meter, water meter, electricity meters, are starting to use the Nordic chipset. And it's -- we are not the lowest cost of chips out there, but we have features and extreme low-power consumption. There's some applications that we didn't think, in some verticals, we will win. We are starting to see a great interest. And obviously, we've been a leader in all these equipment, sports equipment. And we also see that, that market is starting to look at cellular solutions.

And can you talk about the carrier certifications globally? It does seem like they are ramping and -- with some of the largest carriers overall. But can you provide some commentary around that?

Yes. Obviously, one of the biggest challenge for Nordic over the last year has been to send our certification team around the globe because of the COVID and travel restrictions. So we've been -- we had to train our local field application engineers to perform the certification, but we have managed so. So currently, I mean, we started off in the regions where we expected there to be most potential for revenue. So we started in the U.S. with Verizon, we've been certified, and also with AT&T. And we continue to grow in Asia. So I will say, today, the footprint of carriers, and where Nordic can connect to, is global.

Yes. Yes. And Nordic's transition, I mean, a big part of Nordic, historically, was consumer applications.

Yes.

For Svenn-Tore, now, the company has diversified over the years, and you've got a number of nonconsumer applications and business trends ramping. Can you provide some commentary around that as well, please?

What we see is that consumers application usually ramp fastest. So we've been very keen on getting a significant revenue growth and been looking for high-volume consumer application, as you say, Bill. But also, we know that when we come into industrial application, it's very long lasting. So we have been working on segments like, as you say, asset tracking, which is, again, is more industrial. But we've also been looking into professional lighting. We're looking in, and are starting to sell into, sensors for controlling large fabs, and it's gaining absolute traction.

Yes. And you can see it in your results, right? You've revised guidance a couple of times recently, upward in 2020. Your backlog, as you reported, is ramping very significantly. So can you talk a little bit more specifically around the backlog and the applications and why that's been ramping so much recently?

Yes, we can. If you go back 3, 4 quarters, we've been talking about Tier 1 customers. And we've been doing a lot of design activity with these customers for years. And we also have been working with these customers on their own defined protocols. 6 years ago, we started an activity in Krakow, Poland. And the aim was to make these multi-protocols to support the newer infrastructure from Tier 1 customers. And I think now, we, as consumers, going to see that will become product on the market from the leading customers containing these protocols. And the backlog is certainly driven by the fact that these hubs are starting to get into consumers. And there will be accessory connecting to these hubs, using the -- have to use the same protocols. And obviously, they very often have to use the same chips for the same radios. So that's what we've seen, adding on top of our growth in our long-tail existing customer base.

So you're playing in these markets, I mean, do you have 2 fronts for growth where the markets you're playing in are just growing? And then are you taking share as well? Do you feel, from a competitive landscape position, that you're just well positioned and that's helping drive the top line revenue growth?

Obviously, if you look at Bluetooth Special Interest Group, they release a number of design wins that are registered and approved as Bluetooth designs. We have had a steady market share there, around 40% to 45%. But what have happened in the last 2, 3 years is that the size of each of these design have grown because we have got into this leading customers. They have started to use Nordic chips. So the value of each design is growing. So I think if you look at the absolute market share in case of dollars, it's going to increase in the quarters and years to come.

And it seemed with you, it depends upon a Tier 1 customer, but the volumes could be quite significant depending upon who that customer is and what that design win is ultimately for you.

There were talks about millions or maybe tens of millions of units.

Yes. And you recently acquired the low-power Wi-Fi assets, right, from Imagination. Interesting transaction. Can you talk a little bit about the rationale for that and what the road map is and what you're going to do with that asset?

Yes. I mean, as I said, I mean, we had long range, and we have short range. The only connectivity technology that we basically missed was medium range. We've been looking at Wi-Fi for quite some time, but there is no point starting by employing just few engineers and building up Wi-Fi activity. We were looking to see what kind of acquisitions we can do. And a lot of the team from Imagination were actually located in Stockholm, very close to Oslo. So we had a close cooperation with these guys for some years. And then we understood that there could be an opportunity there. We were lucky enough to get in touch with Imagination, and it was a fact that they're going to focus more on AI and agreed to sell that division. And why we've been looking to get Wi-Fi is that the Tier 1 customers and other customers are very interested in combo connectivity parts. Maybe they would like to have a Wi-Fi and IoT, would like to have a Wi-Fi or Bluetooth or actually some customers could have interest of getting all 3 technologies on one platform. So our intention is obviously with Wi-Fi 6 and Bluetooth, we will be ultra-low power on both technologies. And I think, when you look at -- in the products, at the PCBs, where we're standing, we very often find Wi-Fi on the same PCB as over Bluetooth. So if we can combine these, basically, we will save power and space and also increase quality. So is the plug-and-play with all 3 technologies, that's really interesting for Nordic.

So it seems like it was really an acquisition of technology to provide a full -- you've got the full range of connectivity asset, short range, medium range, long-range at this point and be able to go to customers with that full opportunity -- full set, technology set of portfolios. Is that the way to think about it, Svenn-Tore?

Yes. And also the fact that this was an IP, so we didn't have any hardware that we should sort of maintain or we are not getting any revenue from this acquisition. We just get IP and technology and a great set of people.

And what would be the timing to roll out some of the combo chips overall? What would be the opportunity there?

When we did the acquisition and announced it, we said that it will take us 3 years to make a product. After being sort of marketing these two customers, we have got some requests that maybe we could come out with just a Wi-Fi chip, not a combo. And if we find that this makes sense, we might do it, and then it could take about 2 years.

2 years. Right. Okay. So can you talk about the competitive landscape? There's not many pure-play connectivity assets in the semiconductor market. Can you talk about the landscape of competitors, both large and small, that you're facing?

Yes, we do. We do face competition, which is great, because that's the only way to become even better is to invest more. And obviously, what Nordic has done is that we've been building up competency, knowledge of Bluetooth Low Energy from scratch. And we have the biggest knowledge base globally. Despite that we have competitors that is much larger companies in Nordic, there is no competitor that has more people working on Bluetooth everyday. Today, we are around 1,000 employees waking up every morning. We want to be best on Bluetooth, on Wi-Fi and LTE. And what we see in the Bluetooth is that there is quite a bit of small Chinese, Asian competitors. And they -- if you look at the market share, they have a struggle to get above 1% market share. And it's just a matter of how long they're going to be there. We see one that is doing pretty good, which is called Telink. But again, it's less feature-rich products. And we see that the leading consumer customers that need more memory, more CPU power because they're making more and more complex end products, and that's where our parts really fit in. And we have been sort of competing with TI and Silicon Labs and these guys for years. And I think we are -- or we see that we are offering a more complete solution to our end customers when it comes to software support, protocols and hardware features.

Can you talk about on that, on the software, how important is the software stack in this market? And what a competitive differentiation it is for Nordic?

Most of the -- I mean if you look at the microcontroller used today, Arm is basically leading. Most engineers know how to program Arm. Nordic is using the latest Arm microcontroller always. And for a designer that opens the Nordic design kit, this is a familiar environment straightaway. This is straight into the Arm environment. And obviously, out-of-the-box experience when it comes to designers are extremely important. I used to be engineer, and I worked with a company called Xilinx. And we spent a huge amount of time on out-of-the-box experience. We do the same at Nordic. When you install, it's not no-boxes anymore because you download it. But when you install your software and opens it, it should be ease of use. And certainly, that's where we're putting a lot of effort.

You talked about -- we talked about you winning that award for a company less than $500 million. But I know you've got ambitions, right, to get to $1 billion in revenue and business. Can you talk about that ambition and how you see that unfolding for the company?

Yes. I mean, it's a very realistic ambition. When we set this ambition, it was back in 2019 on the Capital Markets Day. We said that we have aimed to become $1 billion company in 5 years. We calculated based upon analyst expectations of growth for Bluetooth Low Energy. Bluetooth -- and they had a 25% growth estimate for the coming 5 years. Based on current revenue at that time, it would take Nordic to $750 million in 5 years, which means we need another additional revenue of $250 million from our cellular -- new cellular products. And we went through our design wins over opportunities, and we calculate that we could do so. It wouldn't be an extremely difficult task. So that's why we set the $1 billion. We took Bluetooth growth and added on the cellular. But in fact, since 2019, Nordic growth in Bluetooth has not been according to analysts. It's been around 30% to 40% growth. So I think if you add that up and also maybe add a little bit of Wi-Fi in the tail end here, I think we are ahead of our timing and might reach it earlier. But as you all know, I mean, there is some constraints now on semiconductor availability. So without any constraints, I would be 100% sure that we will reach that goal ahead of the 5-year plan.

And can you -- on the constraints, can you talk a little bit about your experience and how you're managing through the supply constraints and how that plays out in '21 for you?

Yes. Obviously, as you see from our fast-growing backlog, we've been knowing that we will get a new Tier 1 customers in production throughout '21. So very early in '20, actually, early June, we put in forecast and -- to TSMC that was going to cover us for the growth that we expected to have for '21. And when this situation occurred that it looked like TSMC are allocating more towards automotive industry, and existing vendors or customers of TSMC were allocated and shortened, we were sort of cut from a relatively high forecast down with -- down to a level where we are promised to get delivery of 25% additional wafers than we had in '20. So obviously, we have this opportunity to still grow around 25% to 30%.

Right. And you've been growing, Svenn-Tore and Pål, over the last number of years with pretty consistent 50%-plus gross margins, right, at least in the last several quarters. Can you talk about the progression of that going forward on the gross margin front?

Yes, I mean, we have been hovering plus/minus 50% for long, long time. And what we foresee going forward is that we will be normalizing around 50% to 48%. Because when we start getting the cellular modems in there, that's a module where we get stacked margin because we buy in SAW filters, we buy in amplifiers, and we make a module. So that will reduce our total margin for the company because the contribution from the cellular will be less than the 51% to 52% we have had on the component level for Bluetooth.

Right. But even at that lower contribution, though, the earnings should be ramping pretty significantly as your revenues ramp, and you capture these opportunities that you've discussed. Is that the way that you think about it?

Yes. It really shows that we are a scalable company. We are not able to scale cost as fast as we are growing revenue.

Right. And on the -- you also have a partnership with Qorvo, correct?

Correct.

Can you talk about that partnership and how that works?

Yes. Actually, Qorvo will start -- partner as manufacturer of our cellular modems so -- because Qorvo has a tremendous experience and our high-quality company, and we want to ensure that cellular modems that we brought to the market was at the highest quality. And we managed together with Qorvo to build us world's smaller cellular modem, supporting both narrowband-IoT and LTM and having the ultra-low power consumption compared to any of our competitors. So that's where we started with Qorvo. Later on, Qorvo also bought a company called Decawave, which do you -- which do ultra-wideband parts. And the company that brought Decawave has been a partner of Nordic for many years. So we have basically been accompanying all Decawave designs with Bluetooth, 1:1. When there was a ultra-wideband part, there was also a Bluetooth part to control the wideband. So obviously, when Decawave was bought by Qorvo, it was easy for us to continue this relationship with Qorvo, also on the ultra-wideband support. So we have 2 sort of cooperation there, both on the LTE and on the ultra-wideband.

Just going back -- last couple of minutes, Svenn-Tore. We talked about the competitive landscape, right? And as we all know, there's been massive consolidation in the semiconductor sector over the last number of years. And we obviously saw another European company, Dialog, get acquired by Renesas. Can you talk about the competitive landscape and how maybe consolidation is impacting it overall?

If you have some experience, previous experience, and we've seen large companies buying smaller company. Qualcomm bought CSR, and for us, we basically saw less aggressive competition in the market when this happened. And we also believe that this acquisition you referred to here, Renesas is a huge company, lots of product lines. And I think that the focus on competing on the BLE vertical will be less in such a large company than it was when it was Dialog only. So for us, and there's a lot of investor fees, but still, I will say it. I think is a good thing for Nordic.

Great. Well, Svenn-Tore, I know we're running out of time, but thank you to you and Pål for joining us today. Congratulations on the significant success that you had to date, and obviously, with the market position that Nordic is in. I do have to read one last disclosure that for important disclosures, please see the Morgan Stanley research disclosure website. If you have any questions, please reach out to your Morgan Stanley sales representatives. So thank you to all for joining us today. Thank you, Svenn-Tore. Thank you, Pål. And that concludes our session for the day.

And thank you all for listening into Nordic. Exciting company. Try to follow us with the research you can find on the Web.

Great. Thank you.

Thanks.