Nordic Semiconductor ASA (NOD) Earnings Call Transcript & Summary

Welcome to the Nordic Semiconductor Q4 Conference Call. [Operator Instructions] This call is being recorded. I'll now hand it over to Stale, Head of IR. Please begin.

Thank you, Rasmus, and good morning, everyone. We are recording this presentation, and it will be available on our Nordic website, under the IR section. Also on the IR section, you will also find the earnings press release, quarterly report and the quarter presentation. Joining me today, we have the CEO, Svenn-Tore Larsen; and CFO, Pal Elstad. They will be discussing our latest financial results, as well as review recent business activities. After the presentation, we will open up for Q&A. We will do both call-in, and we will do the call-in questions first. And if anyone are writing in questions on the webcast, we will do that afterwards. As usual, the presentation contains forward-looking statements that involve risks and uncertainties. Actual results might difference materially from those expressed or implied in such statements. We encourage you to review our full quarterly report for more information on the risks and uncertainties that may affect our business. Without further ado, I hand over to our CEO, Svenn-Tore Larsen.

Good morning, and welcome to our presentation for Q4 and full year figures for 2022. I'm Svenn-Tore Larsen. With me as always, I have my CFO, Pal Elstad. We reported 12% revenue growth for Q4, which was within the guidance we provided. The development reflects a very turbulent environment with varying demand across technologies, verticals, geographics and customer segments. In terms of technology, Bluetooth revenue increased by 26% year-on-year. And obviously, then you understand that the revenue from proprietary products and cellular IoT declined in the same quarter compared to 2021. Gross margin was around 53%, and this generated a flat gross profit of $101 million for the quarter. And we maintained the EBIT margin above 20%, despite higher R&D costs, and this is because we do have a strategy. We do have projects with customers now that we are continuing to execute on. Our guiding for Q1 2023 is lower. Demand for legacy products, propriety and first generation of the 51 family is lower than expected, especially in consumer verticals, and we had a strong PC sales in previous quarters. We see that through after COVID, we basically see that this is softening. In terms of geographics, we see softer contribution from China due to both low allocation and weaker demand. At the same time, we remain in competition with the automotive industry for wafers for our 52 family, and the 53 family. And this will also continue into Q1, and that's a challenge for us. And hence, we guided pretty low in Q1. This means that we are guiding for $140 million to $160 million for the first quarter. We believe this will be the low point in terms of revenue for 2023. Gross margins for Q1 are expected to be bigger or greater than 52%. As a final note on wafer supply situation, we are making investments to secure future supply. We need to do that because we have so many projects in pipeline. And in Q1, we are making a prepayment of $100 million to -- going to be deliveries from 2024. Our largest customer continuing to grow. And they are maintaining a high demand, despite what you see in the economy because there's new projects coming out that never been basically in the market previously. And also, we see that our concentration is getting higher, but we are rewarding the commitment and prioritizing allocation to the products. The top 10 customer share of Bluetooth revenue increased from 40% in 2021 to 44% in 2022. And if we isolate Q4 only, it was more than 50% of the top 10 customers were tier-1s. As we are prioritizing some customer in a situation with scarce supply, this means that others have not been getting the volumes they wanted. The combination of overall scarce supply and lower demand in some markets means that we have seen a relatively lower sales in SMEs in the broad market and particularly in China. And next slide. Weak sales to the domestic customers in China has really been difficult for us. We saw that the share of China used to be around 20% to 25%. Currently, it's declined to less than 10% in Q4 '22. We also see the outlook for Q1 pretty weak. I mean the pace of -- and the potency of a rebound in China is extremely important for us, and is going to determine some of the outlook for the product demand going forward. As we talked about in 2022, we've been working much better to align the size of the order backlog to actually delivery capability. As you can see, we are getting [ flow in Q3 ] reflects increased order cancellation, but also normalizing of lead times to our larger tier-1 customers. We have committed volume deliveries to these customers and have, at the same time, asked them to return to normal order patterns with shorter lead times, which has reduced the order backlog. Given the supply demand imbalance through 2021 and '22, it's clear that the order backlog has not been a good indicator of neither real demand or future earnings. If you look at certification and market share, we are maintaining steady and high share of designs with around 40% share. And as you can see, the overall numbers of design has been around 1,100 to 1,400 new design. And given the increased value of the total Bluetooth market, this is an indication that value per design is increasing. And this really fits well with a trend of our own designs and sales with more high-volume application for tier-1 customers. As we stated in our third quarter presentation, we saw that a tougher economic environment is creating a more uncertainty short-term outlook. Our project base continues to expand, but we see financial in -- is actually financial support for many of these medium-sized small customers, which are start-ups has been a little bit slow, and a lot of these customers have not really get into production, but we believe they've been getting -- are going to get into production. We sell our IoT project in the second half of this year. But the outlook remains cautious also for the first quarter, but we expect to see growth return with increased sales and revenue later this year. We do show this slide every year, every quarter. New product launch in the quarter include both Bluetooth powered toys, such as Harry Potter: Magic Wand. It's a combination of the 52832 and our PMIC nPM1100. It really shows that we now are getting these adjacent components beside our radio into designs. Customers have also launched cellular IoT product. And they do -- we also here see that there is a combination of our both Bluetooth and cellular IoT. So we are pretty excited to see that the strategy that we put out in 2019 that we should combine both Bluetooth and cellular is actually working now. That gives us really good hope for the long-term strategy that we have. One market, I know many of you want to hear more about is the audio vertical. And I'm happy to report that we see good traction. We are engaging both with developers, design partners, and we have shipped more than 2,000 audio development kits, which is also -- is a huge number. We also are delivering parts today to products that are in the market, both in the hearing aid and in the headphones, microphones and speakers. I'm also happy to report that we're now shipping our Wi-Fi 6-enabled, the nRF7002 development kits in volume through our distributors. The 7002 is a low power, very robust and secure companionship designed to be used alongside our Bluetooth family of products and can also be obviously, working with our 91 cellular SiP. We showcased this in the first third-party Wi-Fi in CES in Las Vegas. And we have seen strong interest in these development kits. Actually, we got 2,000 kits in here just before Christmas, and we have already shipped them out. Next. Moving on to power management. We're continuing to expand our portfolio. We just added a new nPM1300 to the family. This is a powerful charging and a broad -- it has broader set of management features. I mean it will enable us to take on other part of the market and also will be able to increase the ASP a bit. This product will be out in volumes from mid-2023, adding to the rest of the family that's already in the market. As a final note, I'm glad to see that we are back on the road with our Nordic Tech Tours. After a couple of years, where COVID made travel extremely difficult, we were able to visit 45 cities across U.S. and Europe with more than 1,700 customers attending. And when you ask them, more than half of these are planning for a project to use Nordic. If you look -- focus on this year's Tech Tours was the new standard, the matter standard, we spend quite a bit of time on cellular IoT and Wi-Fi. And these are new product lines that adding to our Bluetooth revenue. So we are really excited and looking forward now to help our customers to be successful with new products, based on new products with new standards. So exciting times for Nordic. Then I would like to hand over to Pal.

Thank you, Svenn-Tore. I'll now run through the financials for the fourth quarter of 2022. As Svenn-Tore mentioned, revenue increased 12% year-over-year in the quarter. For the full year 2022, we received a very strong 27% growth. Revenue came in at the lower end of our guided range. These top line figures hide significant changes in the revenue composition over the course of the year, in terms of both product technologies, customers and geographies. At the back end of COVID in 2022, started a very strong in the consumer PC markets. But during the year, our focus has shifted towards industrial and health care. Bluetooth revenue increased by 26% in the quarter, and 33% for the full year. So growth is well above our previously communicated 20% to 30% rates. The growth in Q4 2022, reflected a combination of price increase and somewhat higher volumes. During 2022, we've also been able to increase the revenue and ASP from our high-end Bluetooth products. Compared to last quarter, Bluetooth revenue is down 4%, mainly as a result of lower ASP due to customer mix. As Svenn-Tore mentioned, proprietary product revenue declined by 56% in the quarter and by 10% for the full year. So the 10% full year is more or less in line with previously communicated targets for proprietary. Proprietary is now just 10% of total revenue for the year. The decline mainly reflects lower demand for PC accessories and other home office equipment after boost during COVID, as well as the technology migration to Bluetooth Low Energy. The decline started earlier in the year and revenue has relatively flat compared to last quarter. Cellular IoT revenue declined by 14% in the fourth quarter, although it increased by 49% for the full year and accounted for about 3% of total revenue in 2022. For new technologies like PMIC and Wi-Fi, we are seeing increased design in and will start reporting details when we have meaningful revenue in these technologies. Looking at sales from another perspective. In terms of end-user market, we see that growth within the consumer segment stalled in the quarter, whereas industrial and health care continue to grow at a reasonable healthy pace. However, consumers still are by far our largest market with 57% of the total. Although this is actually going down, it was 62% in last quarter. Consumer is down 5% compared to last year and 14% compared to last quarter. As discussed earlier, this is a mix of reduced proprietary, low demand in China and low demand amongst small and medium-sized customers. Industrial continues to be strong and is up 34% compared to last year, and flat compared to last quarter. Industrial, it's about 27% of our total, and we see especially strong demand in the European market. Health care with $22 million in Q4, saw strong growth both compared to last year and compared to last quarter. Turning to gross margin. We delivered a gross margin of 52.7% in Q4. This was lower than in Q4 2021. However, December or Q4 2021 was very special, as we had large price increases that and the supplier costs first came in or took effect until Q1. We do not see the same effect this year. If we compare gross margins to last quarters, the gross margin reduction is driven by mainly 3 factors. We took a write-down of some cellular inventory of $3 million impacting gross margins by almost 2%. As commented by Svenn-Tore, revenue to our largest customers are exceptionally high with above 50% in Q4, and we also have very low proprietary revenue and proprietary revenue has, over the later years, shown strong gross margins. On the positive side, we continue to sell more of our high-end Bluetooth products. Now I'm going to turn to our operating model performance for Q4. Although revenue is at the low end of our expectations, we continue to deliver EBITDA margins for the group above 20%. If we just look at the short-range business, EBITDA margins is still around 30%. Gross profits are the same as last year, but the reduction in EBITDA margins come as a result of continued high investments. Although we see a reduced growth for Q4, we see an overall strong long-term demand for our products and continue to invest to capture this future growth. So total R&D is up from $40 million last year to $45 million this year, which is from 23.3% of revenue to just below 24% of revenue. SG&A is down this quarter, mainly as a result of operational leverage and also positive FX effects. Both R&D and SG&A however, have been very favorably impacted by stronger USD compared to NOK and euro. Although we continue to invest, we are, of course, monitoring the situation closely. We are investing for growth, so total cash operating expenses amounted to $61 million in Q4, when adding back capitalized development expenses and deducting depreciation and equity-based compensation. This compares to $56 million in Q4 2021 and $55 million last quarter. The 9% increase is, of course, well below our revenue growth. USD 42 million relates to payroll expenses, only marginally higher than Q4 2021, despite the 21% increase in the number of employees. We're now about 1,450 employees in the group. This mainly reflects the favorable FX development, which have lowered the payroll measured in U.S. dollars by about 6% -- $6 million. Adjusted for the $6 million, salary expenses increased by 17% year-over-year. Other OpEx increased from $15 million in Q3 last year to $19 million this year. The increase comes partly, as Svenn-Tore, we're now much more on the road selling the products. And we're also doing several tape-outs to be ready for the future. CapEx was $8.4 million in Q4, so slightly higher than what we've seen earlier in 2022. It mainly reflects the investment in additional test capacity and IT infrastructure. CapEx intensity overall remains below the previously indicated level of around 4% of revenue. Finally, I'll go through the cash flow, cash position. We continue to see healthy cash flow and a strong cash position in the company. During Q4, we overall added $26 million to our cash balance and ended at $379 million at the end of December. Operating cash flow was $36 million in Q4, mainly driven by a strong EBITDA, only partly offset by increased working capital. We did see although an increase in net working capital of $13 million, mainly driven by higher accounts receivables and inventory. Net working capital is now around 22% of revenue. As Svenn-Tore mentioned, during the first quarter 2023, Nordic made a prepayment of $100 million related to ongoing initiatives to strengthen supply resilience and diversification. Svenn-Tore, I'll now hand over to you, so you can run through the Q1 outlook.

Thank you, Pal. As you have understood, we have had mixed near-term outlook across different segments, even though we maintain our positive view on our long-term outlook. I mentioned that our large tier-1s are taking a higher share of business, and we are continuing to see strong Bluetooth demands from these customers. However, players in the automotive industry continue to drive competition for the 55-nanometer wafers. And this has limited the shipment of our high revenue maker, the 52 family and the 53 family. We see weaker demand for our legacy products, the proprietary products and the first generation of the 51 family. We are also seeing a temporary slowdown for cellular IoT, which we expect to turn in the coming quarters. Across verticals, we see that the consumer verticals are more exposed than the industrial, and we see -- continue to see strong growth in health care applications. And obviously, being a responsible company, we are -- we have decided to ship 100% to health care applications. And as mentioned, we see generally low demand in China, where we now are rounding up the Chinese New Year's. It remains to be seen how demand will develop, and the pace of rebound in China is one of the 3 question marks for 2023. Summing up, this means that we have to guide for a lower revenue. The revenue range we guide for is $140 million to $160 million for Q1. We're going to see a higher share of revenue from tier-1 customer, and we expect the gross margin in Q1 to remain above 52%. Nordic set up for a plan to reach $1 billion in our Capital Markets Day in 2019. We have stick to that plan. We have delivered, and we also were so eager when we saw that we have more design wins than expected. So we pulled that forward 1-year. Unfortunately, we didn't manage that. But we did deliver through on the promises we gave on the Capital Markets Day back in 2019. And we have seen growth around 40% annually over the past 3 years, as you have heard today. We are now seeing a more uncertainly near-term outlook. We have a slow start to '23. We no longer can expect to meet the [ $1 billion ] already in 2023. But we expect to be back to a run rate of $1 billion revenue in the second half of this year. Our long-term growth ambition remain intact, and we will continue to invest in R&D and organizational development to make sure we take the most of our growth opportunity. This long-term ambition build on assumption of continued economic growth and continued demand growth from both customers and -- consumers and industrials. This is in line with what our larger customers also indicate to us. And obviously, if we see a persisting negative macroeconomic development or major change in customer behavior, we will obviously adapt to that situation. We haven't seen that yet. We know this is a short-term bump. We have a capital-light model with fabless production, external distributors, and this leaves us with high flexibility to adapt to changes in the business environment, if necessary. So then, I would like to leave the microphone back to Stale.

Thank you, Larsen. We will soon open up for Q&A. [Operator Instructions] We will start with the call-in first, and then we will go over to the question asked in the webcast page. I hand it over to our operator to open up the Q&A.

[Operator Instructions] The first question is from [ Harry Blalock ] from UBS.

I was wondering, could you provide a bit of detail on what visibility you have on the recovery to the end $1 billion run rate in H2? Yes, it would just be useful to know what gives you confidence in that.

What we see is that we are bringing more new products to the market, and we also have major project at tier-1 customers. So what we need to get is more wafers. And we have taken action to secure supply in '24.

Okay. And just a quick follow-up, if I could. On the wafer side, are you kind of -- if you're seeing a slowdown in some end markets or customers, how easy is it to you shift that supply over to other customers, say, if you're seeing weakness in -- among the Chinese customers shifting out to Europe where demand has been stronger?

Fortunately, we have different technologies, and the 55 nano wafers is the one that most new -- or all new applications are using, and those are the ones that we have more shortage than the older technologies. So it's just the mix of wafers available that make this additional extra difficult. It's been basically a slowdown in the older technologies.

Our next question will be from Christoffer from DNB.

I want to piggyback on the previous question in terms of the bridge from here to the $1 billion run rate in the second half, which you didn't answer Svenn-Tore. So currently, it seems that the guidance on midpoint of $150 million is -- can you give some more on the mix there because this is basically what you had in revenues on a quarterly basis for the 55-nanometer based product back in 2020, 2021. So if we kind of factor in the price hikes that you guys have had out the market, it seems you're basically getting less wafers than you booked in 2021. So how should we have any faith that you guys will get from that [indiscernible] business being?

I can give some color on the case of revenue. I mean if you recall, Q2, Q3, we said that we have been pulling in wafers from coming quarters. We have done that through the year. This was not really successful in Q4, and it's not going to be successful when we look into Q1, which we are in now. But we've also been committed higher wafer amount in -- from Q2 and onwards throughout the quarter. We can tell you we get higher volumes of wafers from Q2 and outwards. When you expect numbers, it will be easy. We didn't expect the Q4 to end like this, neither allocation for Q1 to -- and like it's turned out. So unfortunately, I can only say, we get more wafers, and it makes us pretty sure that we are in the run rate that will support the $1 billion in '24. Somebody is speaking, I can't hear anything.

Yes. In the mix for Q1? So this guidance seems like it's basically 0 -- essentially 0 revenues for proprietary and cellular and the other areas, or a significant step down in wafer allocation sequentially? So which one was it?

We don't comment on the mix. It's a different customer mix, obviously, and we are continuing to support the tier-1 customers, both loyal to our medical health support and to our largest customers.

Our next question will be from Oliver Pisani from Carnegie.

My question was on FTE investments. I think you added about 70 employees in this quarter. How do you think about further hirings and investments in the organization for '23, in light of the new economic environment?

I can answer. We grew 21%, 2022 versus 2021. Of course, we are looking at the overall environment, so we'll adapt our investments compared to what we see in the market.

[Operator Instructions] Our next question will be from Adam Angelov from Bank of America.

So just 2 for me, please. So firstly, I wanted to just confirm, if you have or have not seen any weaker demand on Bluetooth? In other words, is the demand specifically just related to legacy nodes? Or are you also seeing from SME some weaker demand on Bluetooth as well?

We have a legacy node on Bluetooth mainly used by early adopters, and also where we used to have our revenue out of -- from China. And if you saw the slide, I mean, we've been reducing revenue in China with close to 65% year-on-year. And these were legacy Bluetooth products. On the new products, we have extreme demand from new projects at tier-1 customers. And obviously, legacy products proprietary has weakened after COVID.

Yes. Okay. So just to confirm before I move on to other question then, it's basically for the lion's share of Bluetooth revenue, it's a supply issue, not a demand issue. That's what you're saying.

What I'm saying is that we are short of 52 wafers, which is 55 nano wafers.

Okay. Okay. The other question, just to confirm the one-off on write-down you had in Q4. Do you expect that to continue maybe? Or is that really something if trends goes, you're expecting, and demand picks up that that's really just a Q4 story? And it is a one-off, and it's not something we should essentially expected through 2023 to happen again.

And now that's related to the write-off of some cellular products. That was onetime in Q4 related to older products of the cellular that was in the inventory. So it's -- when demand picked up, we have and you look at our inventory in the balance sheet, you will see that we have significant amounts of inventory versus last year. A lot of that is related to cellular and proprietary, and we have a good plan to deplete these inventories.

Okay. And maybe could you just explain what the write-off was, why you had to take that?

It was a technical issue with 1 production batch with our cellular IoT products.

Our next question will be from Christoffer from DNB.

My second question is on the outlook for 2024. So you mentioned that you're doing prepayment of $100 million in the current, I think, in Q1. So can you help us a bit more in terms of understanding what that actually -- what that actually gives you, so or we're getting a return for paying at that $100 million? And when that will mean, you can start delivering significant volumes?