u-blox Holding AG (UBXN.SW) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Half Year Results 2021 Conference Call and Live Webcast. I am Paul, the Chorus Call operator. [Operator Instructions]. And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Thomas Seiler, CEO. Please go ahead, sir.

Ladies and gentlemen, welcome to our presentation about the half year results of 2021. I'm glad to see many attending today. We make this presentation with the usual disclaimer about forward-looking statements. So in the first round, I will provide a short overview, then our CFO, Roland Jud, will explain you in detail all the numbers. And later, I will talk about our strategy and outlook before we then come to questions and answers. The first half year 2021 was successful, especially we had a very good growth of revenue in the amount of almost 17% before impact of foreign exchange, including this, we had 11% growth. That is an important progress over the first half year 2020. That was a strong one still before the COVID crisis really then took place. At the same time, this first half year, very successful also at the level of gross profit. The profit grew even more by 13%. This is all a result of various effects mostly by product mix. Also because our gross margin is naturally hedged against foreign exchange variations. And also, we were able to manage price. Then what is a strong number is the EBITDA that has made progress by 20%. In conjunction also, we can reach the cash flow numbers for operating cash flow that achieved CHF 43 million, and free cash flow was positive with CHF 28 million, both a strong increase over first half year 2020. Now why have you been so much better? First of all, of course, the top line has delivered more and especially the gross profit. But also, you remember in 2020, we have exercised a cost reduction program that, of course, has now taken effect and has helped to provide such strong numbers on the profits and especially on the cash flow side. With that, I hand over to our CFO, Roland Jud, to explain you the details.

Mr. Jud, we cannot hear you. Maybe your line is on mute.

Okay. Welcome. Now you hear me, I hope. Welcome also from my side. Thomas mentioned it, a strong first half year 2021, with total revenues of CHF 192.7 million. We had growth in all areas in Asia, in Europe and in the Americas. The biggest growth in the Americas with 22.4%, but also 15% in Europe and 5.4% in Asia. Gross contribution adjusted was nearly CHF 90 million, a growth of 13.3%. And as I said, free cash flow, CHF 27.7 million in the first half year 2021. The growth of revenue has to suffered a little bit on the negative currency impact on dollars where the average rate was lower in 2021 than in 2020. Without this effect, we would have had growth of 16.5% over the first half year 2020. The EBITDA adjusted margin, 14.9%, CHF 28.7 million in June 2021. Geographically, 5.4% in Asia, revenue increased to CHF 73.9 million, which represents 38.3% of our revenues, 30.6% goes to Europe and CHF 59.9 million is the share of the Americas, which grew with 22.4%. The growth is in Americas and also in Europe was driven from the automotive and market, telematics, medical and wearable application had very good growth in the first half year 2021. About the market trends. The split -- revenue split over the market remains as it was. Industrial markets were stable here. Tracking and telematics belongs to and also automation, 57.4% of our revenues come from this market, roughly CHF 110 million revenue. On the consumer side, where we had quite a big growth, 90% growth, which represents now 12.6% of our revenues. And also, the automotive market was strong with 25.1% growth. It represents now 26.8% of our revenues. The growth is also visible on the volume side. The module business strongly increased, although the average sales price declined. We sold roughly 20 million modules in the first half year 2020, which is a plus of 29.1% over the half year 2020. Average sales price for modules is CHF 7.33. On the chipset side, even more growth. We sold nearly CHF 32 million chipsets in the first half year, which is 43.4% more than in the first half year 2021. The revenue split between chips and modules now moved again a little bit towards modules. 23% of our revenue comes from chipset and 76%, it belongs to 2 modules compared to 79% and 20%, respectively, in the first half year 2020. Thomas mentioned it, gross profit adjusted, we were able to increase our gross margin to 46.7%. This reflects the positive impact from the product mix and the revenue growth. With that, we have CHF 89.9 million, gross profit reached in the first half year 2021. On the cost side, the distribution and marketing expenses amounted to CHF 18.1 million, which represents 9.4%. This increase is mainly due to the effects of the growing revenues and contributions. With that, this has also an effect on the bonus of our salespeople, but this one is a good sign from our point of view. R&D expenses went up to CHF 52.3 million in the first half year 2021, which is 27.1% of revenues. This increase is on one hand due to -- that we brought products earlier into amortization or earlier to the market so that amortization starts earlier, which increased the amortization amount, which goes to R&D expense. And also the capitalization was lower than before, on one hand, because more R&D effort are carried in agile processes, which is results in more expense and less capitalization. And we have also some strong efforts put into redesigning modules with better available components. Due to the component shortage, we were not that able to provide the market with product instead of where we get the components and not the ones where we don't have them. On this slide, you see now the complete income statement. In the first column, you have the IFRS figures. The second one is then the adjustments we made. The adjustments are mainly the same as in the years before share-based payments, which amounts to CHF 1.8 million. There is a pension impact of IAS19 valuation of CHF 700,000. The amortization of assets, intangible assets acquired, amounts to CHF 1.6 million in the first half year. And there we also have nonrecurring expenses of CHF 800,000, which are taken out. With that, we get to an operating profit adjusted of CHF 10.5 million, which represents 5.5% of revenue. The R&D expense increased, as I mentioned, due to the lower capitalization. We capitalized in the first half year, CHF 15.2 million and the higher amortization of capitalized R&D, which was CHF 11.8 million in the first half year of 2021. And also something, which is in this number is the fact that we bought the rest of Sapcorda shares, which leads to -- from equity accounting to full consolidation. And with full consolidation, the costs move up from finance income or expense to R&D expenses, which increased the R&D expense as well. In the financial costs, they consist primarily on foreign exchange losses we had to carry. Then there is in the interest of the bonds, and it's also the result of a technical result of the reversal of equity consolidation of Sapcorda GmbH. In the financial income of CHF 5 million, this is mainly driven by the unrealized foreign exchange gains due to the fact that the U.S. dollar was, overall, the period lower than in the comparing period of June 2020. But at the end of this period in June 2021, the dollar increased, and therefore, there are some unrealized current exchange gains on the balance sheet. For all these adjustments, we applied the group tax rate of 18.1%. With that, we had a net profit adjusted of CHF 6.3 million and after minority interest of CHF 6,270,000. The EPS under IFRS is CHF 0.32 and on the adjusted, it's CHF 0.89. Now let's go and have a look on the financial position on the balance sheet. We have still a strong financial position with a liquidity of CHF 85.6 million. And that in December, it was CHF 94.4 million. The movement is on one hand, due to the free cash flow of CHF 27 million, which increases the liquidity, but we repaid the first bond on 27th of April 2021 with a net CHF 35 million. So with that, end up in this liquidity of CHF 85.6 million. Inventory decreased due to the high demand to CHF 23.8 million. Trade receivables were CHF 41.3 million and capitalized R&D are now CHF 166 million on the balance sheet at 30th of June 2021. In the current liabilities, you find on amongst other trade payers, CHF 18.6 million and also a bridge loan from the repayment of the bond of CHF 25 million. And in the noncurrent side, there is the second bond we have, which is repayable in 2023 in April, it's valued with CHF 60.8 million. Then amongst others, there is a tax -- deferred tax liabilities of CHF 1,800,000 and IAS-19 employee benefits of CHF 21.3 million, provisions of CHF 7.8 million. And the leasing liabilities based on the IFRS 16 calculations amount end of June, CHF 29.2 million. We were able in -- again in 2021 to increase our customer base. We are serving a worldwide 10,300 customers compared to the 9,000 customers in 2020. We have still a low customer dependency. 74 customers are responsible for 80% of revenue, and our largest customer is only 5.6% of total revenue in H1 2021. Employee-wide, u-blox engaged, end of June, 1,123 FTEs. The split over the functions remains as usual. 2/3 are engaged in R&D, 756 FTEs. 16% are engaged in logistics and administration and also 16% in sales and marketing, which represents 189 FTEs. Most of our employees are based outside of Switzerland, spread across 18 countries, 76% is -- of the employees are outside of Switzerland. As an average number we had in the first half year, 1,136 FTEs engaged. As I said, we had a strong equity base. We could maintain that. Our equity ratio is still 58.1% compared to the 54.6%. We have in the equity. Also the treasury shares for the option program still with CHF 32 million. Without these treasury shares, the equity will have been even -- a ratio would have been even higher, 60.6% of total assets. And for completeness, only the equity ratio, without IFRS 16 valuations, that would be 62.3% compared to 58.2% end of December 2020. On the segment information. On -- no big change to prior years. The biggest segment, still positioning in wireless products is CHF 192.7 million revenue and an operating EBIT of CHF 6.7 million. These numbers are all IFRS numbers. Wireless service is still dominated by intergroup revenue, has total revenues of CHF 17 million. Its, at the moment, operating profit negative, but it's mainly driven by internal calculations. And last but not least, the cash flow statement. We managed to have cash flow from operating activities of CHF 43 million compared to the CHF 13.9 million in June 2020, driven -- there is a positive impact of net working capital of CHF 8.9 million but also from income taxes, which were repaid in 2021 of CHF 5.7 million. But also, there is a big impact to the good revenues and good contributions we made in the first half year, which also generates cash. And leads us to this good net operating cash flow. On the investing side, we invested CHF 15.5 million into intangibles, mainly capitalized R&D. As I mentioned, CHF 1.9 million goes into property, plant and equipment. So our total cash used in investing activities was CHF 15.3 million. You see here as well an acquisition of subsidiaries, net of cash, cash inflow of CHF 1.8 million. This is due to the Sapcorda consolidation where now, the cash of this entity also show up here under this number. With that, we reached free cash flow after acquisition of CHF 27.7 million. So we were capable to turn that into a positive number -- into to a positive number, again after the period before where we have negative CHF 21.9 million free cash flow, we are now again positive -- back to positive figure. On the net cash used in financing activity, CHF 39.8 million are used here. The main number here is the CHF 35 million, which is net used for the repayment of the first bond in April 2021. With that, we -- and we come from CHF 93.9 million, beginning of the year, to CHF 85.1 million cash. And with that, I give back the word to Thomas for the business review.

Thank you, Roland. So the result is driven, as mentioned, by a very good expansion in all markets, in all applications. And we had a very, very strong order intake. And unfortunately, we're not able to really exploit this great potential. We are highly limited by component constraints that we are able to manage where we have taken many measures to remain a good supplier to our customers. But it is a fact, our current order book is 7x the amount it was a year ago and also what it was normally in the past. So this tells you how strong our bookings are. And of course, in the part, we have an excellent visibility into the future. Only it is hard to predict in what time frame we can finally manufacture because our suppliers do not give precise indications, and we have more or less constantly replan manufacturing to optimize output. In turn, we also made strategic progress. We acquired full ownership of the Sapcorda joint venture. This is the leading provider of advanced GNSS augmentation services. This is a data service that makes such a positioning receiver, delivering very precise information, so down to centimeters. And it is made to serve a mass market. This is an important step to align all the offer and solution capability for our customer to make it the solution out of one hand. And the outlook for such solutions. These high precision is excellent because of the intention to make more and more vehicles automated, especially the cars, but also in the industrial domain, there is a lot of activity to make such vehicles that are driving more or less automatically. So this complements our services offer. We have made continuous expansion and both is available via our Thingstream platform and the service of Sapcorda is just another addition to this platform. On the side of hardware products, we have also launched many of them, more than 20 new product types scaled to the market. This is all a result of earlier efforts to create new platforms and finally also make products. Most importantly, we brought out the ALEX-R5. This is a cellular module in a very, very small form factor that is -- where we are capable to make because we are owner of the chipset, and we can very densely integrate into such a package and make this available mainly for applications where space is of importance. You can imagine, this could be, for example, any wearable device. For short radio communication, we have also continually expanded our offer following latest trends with standardization. But also to make sure we can really solve any problem a customer has to connect wirelessly device on the short range. note, either with WiFi or with Bluetooth, what we show here is just 1 example, a module called [ M9 ] for Wi-Fi connectivity. In positioning, we launched more products that are based on the number 9 platform. You remember, we also have already a 10th platform in the market. But the number 9 is mainly made for high performance and high precision. And this is also the case for timing, so for providing precise time information made for network components and other frequency-critical applications. So this is especially a good way forward to more an interesting business for 5G because the 5G base stations have higher requirements with regard to precision in the time domain. And finally, I mentioned already our Thingstream platform. We have added auto services. Cloud Locate is a service that computes position out of information we gather from the cellular stations from the mobile phone antennas. And they are -- such a service is very helpful to diversify, positioning information to make it more robust or to run it even without a GNSS receiver, and make it available at a very low power budget for such applications that went from battery over many years. So all these initiatives, of course, develop new business, create new interest and finally are propelling us forward. That we have a strong growth of bookings is not that customers just double and triple order. No, it is mainly driven from our new products that we launched a time ago and, of course, are launching now, to create new applications, a new project and the new business with our customers. And from that, we have intense demand, and we have a large number of customers ramping up their products, of course, in a market that is buoyant and where every such customer likes to participate [indiscernible]. And here are 2 examples of how we realize new applications. This is with our tenth generation of GNSS receiver that was created to run at a very, very low power budget. It's about 3x less than the previous or the eighth generation. And it's, of course, an excellent solution whenever the product is just running from a battery like the cycling computer. And it's not only that it is a low power device. It is also a long that has excellent capabilities, especially for such wearables that are either of the bicycle or are on a person, for example, for jogging. You need a good receiver capability. Otherwise, you lose track and consumer would be disappointed. So all comes together very nicely. This is a very strong product, and we have high expectations here for volume growth. Another example comes from the automotive space. We have told you many times that electronics content is increasing in the car. And the major driver is that cars become automated, that there are assistance, driving assistance integrated in the car. Here, our ninth generation high-precision receiver is the basis that such automation can happen. And the car is, in fact, ready to follow a route, can change lanes, can also select optimal routes while driving. And this, of course, increases the comfort and is in all the newer platforms of the car becomes more or less the standard. So what are we doing to -- going forward? We have, of course, look for expanding via our organic growth and investing into technology and finally to platforms and products. But also we are accelerating with inorganic growth and acquisitions. And insofar, we have, again, made a step with the quarter, and before the previous year, it was Thingstream, I have spoken about this. So we are, of course, continuing to make sure we do both the organic and inorganic growth. They sort of both help us to expand and especially increase the capability to solve problems for our customers. Now I come to the outlook. We are updating our guidance here slightly to what we have provided in June already. Based, of course, on the current results, but also on what we see as a going-forward business. Mainly that we still continued very strong growth in automotive and the industrial IoT. I mentioned the very high order intake we continually have and the steep ramp-up based on our new products. We have implemented cost improvement measures last year that are fully being exploited this year. And the only problem at the moment is it's relatively hard to give a relatively narrow band of outlook because the availability of components is hard to predict and, of course, is not endless. Also in this guidance, we have, of course, taken account that we have Sapcorda acquired that at the moment has an effect on OpEx mainly, not so much on top line yet. And also, we have explained that the R&D accounting has some impact this year. Two things do come together, some lower capitalization, but also decreased amortization from changed processes, but also from launched products. So this provides all these results in these numbers as you have probably already seen. So next communication. We will again run an Analyst Day on 23rd of November this year. Our full annual results are then available in the beginning of March, and our Annual General Meeting is again programmed for April. With this, I thank you for your attention, and I invite you for your questions.

[Operator Instructions] The first question comes from Francois Bouvignies from UBS.

The first question I had is on the gross margin that is quite strong in the first half of the year. So -- and we see a lot of shortages and more and more pricing increase in terms of manufacturing of chips. And more recently, the foundries players are -- seem to increase. And the last one is TSMC at the last earning calls that they said that they will increase their pricing in the second half of the year. So I just wanted to understand with you, is it something that will impact? Or how should we think about the gross margin in the second half of the year, if TSMC and other foundries are increasing the pricing? So just basically the sustainability of this gross margin would be great. And the second question is on the capitalized R&D. So I understand you -- we should expect lower capitalization going forward. Can you give us some sense around the absolute number we should expect from now? I mean is it going to decrease from H1? Or is it going to be stable? Just to get a direction there would be helpful.

Thank you, Francois, for these questions. So about the impact of costs from the supplier side on our gross margin. First of all, for we have a long value chain. So an increase on a chip cost is, of course, rippling through the value chain. But finally, we are selling a module in so far that, of course, dilutes the increase. That's the first good effect. And the other is, we will, of course, increase prices vis-a-vis customers. And in this environment, we have quite a high price in power, and we believe that is accretive in our sense. The capitalized R&D, as we have explained was mainly impacted by a change in how we run processes. So we have started to be more agile. Agile mean you try to make a product quicker to the market in the sense of what is called a minimum viable product. And then you increase thereafter via software upgrade to higher functionality levels. But that means, of course, such upgrades are then made as an expense and no longer as a capitalized effort. This is the reason why the ratios will change. But of course, there's also a singular event, and I hope it remains a more singular event. We had to redesign quite a number of products to cope with the shortages in the component market. So we have select different suppliers. And that need, of course, redesign and requalification. Such efforts should go away and no longer create extra expense. So insofar, 2 effects. So from the changes in processes, rather decreasing rate. On the other hand, you must take out the special effect of this component shortages assets.

And if I may, I have a follow-up on these answers. When you talk about the gross margins going for the year and the moving parts, your guidance for full year '21. Did you include some price increase from the foundries? Or is it something that you see or you didn't see any price or cost increase on your side?

Of course, we see cost increase but not only from foundries, from potentially any supplier because, of course, the shortage is always -- has the seller the power for price setting and -- [indiscernible] for we must expect price increases across the board. It's not dramatic. But of course, we follow closely and make sure we protect the margin.

The next question comes from the line of Andreas Müller from ZKB.

I've got also 2. On the bookings side, I mean, you increased bookings sevenfold. Can you indicate where the book-to-bill ratio was and how long these bookings cater the revenue progression going forward? And also probably what could you have basically generate the level of revenues, if the constraints were not here? That's the first question. And the second question is when do you expect the supply chain to normalize? Is that -- have we seen here the worst? Or do you foresee same problems going forward? And can you give a bit more color on the measures you try to mitigate these things. One was redesigning. But I was wondering also with the redesigning, can you use that to increase your own chipset content with this redesigning in the modules?

Sure. Thank you, Mr. Müller. So just to clarify, our -- we give a number that our order book has increased 7x. We have not actually given a bookings number. But I mean, from that, of course, you can derive that the bookings have been very, very strong, and our order book, of course, last very much into next year and is, of course, insofar, something that gives us a very strong basis for going forward. And you asked also if you had no component constraints, how much more billings we would have been able to make. I mean you can't take any number you want. For sure, we would have been able to double the output or triple. I mean, it is such a difference between bookings and billings. Now the critical question, the difficult question is about when will supply normalize. This is, in fact, very hard to say when we listen to our semiconductor fabs, then they say it takes at least 2 years because they cannot more quickly build out capacity. Buying machines and manufacturing these machines takes a lot of time. And also there is limited capacity. But of course, the other question is when is overall demand changing. You also need to imagine, a lot came from consumer goods a lot came from people that had to sit at home that could not spend money elsewhere, of course, wanted better equipment for communicating through the Internet and so on. And the old industrial demand has suddenly strongly increased. But all -- but we know, I mean, such cycles are somewhat turning. The difficulty is to find out at what point of time is this turning to downturn in this situation. So the methodology to manage supply is to indeed diversify components. These are more of the standard components and making sure we are not dependent on 1 supplier. The order is that with our fabs, where we make our own components, our own integrated circuits, we, of course, look for long-term commitments for very good support. We are fortunately together with these partners for very long times, 15 years or so and have very good also personal connections that help to negotiate that we are well-served and that we can at least deliver an amount to our customers that keep them the production running.

The next question comes from the line of David Sachs from Hocky Capital.

Thomas, I have a couple of questions. So based on those stock markets response to today's results, there's clearly a difference of understanding and what you're talking about in the financial results and the analyst understanding of them. If you could walk us through the R&D spending, the budgeting process for that, how we determine the vitality of the investment we're making, if we're getting a return on the money we're spending. The dollar amount this quarter for this half, CHF 52 million is an alarmingly high number. I just wanted to understand why the number jumped as much as it did, especially given the robustness of sales, the percentage is 27%. Was expecting that number to be declining given some revenue leverage to R&D spend. Can you just explain the R&D process, how we allocate money in that category and how we determine whether the money is being wisely spent or unwisely spent?

Yes, David, thanks. That's a crucial question and often misunderstood. I mean when we say R&D spending, then we have to clearly distinguish between what is the cash spent and what is showing up in the account. We explained for many, many times and many, many years that we are driving R&D only with a cash view. So finally, it is about how much cash can we spend for R&D for fulfilling our overarching goal to create positive free cash flow. And indeed, also, this has been well-managed. We -- at a cash basis, and together with cost improvement measures we have made, our cash spend on R&D has constantly decreased since 2018. And has, of course, helped that we make a strong positive cash flow for this first half year. What you see in the accounts in the income statement is, of course, all driven finely by IFRS accounting rules, especially about amortizations and capitalization and in these are for -- is often misleading. This is so, I mean, IFRS tries to make cost numbers coincided with income numbers, with revenue numbers. But this is, I mean, a methodology that sometimes is a little old. It's not really delivering the result or an indication of what is the financial performance. So we have not spent 27% in R&D. This is just what it is as accounting does. On the cash basis, you can backwards compute it's just above 20%.

And that's reducing the reported number by the amortization amount that you're running through as a noncash charge?

Yes, indeed.

And then what are we directing that 20% number to over the next couple of years? Are we looking to manage that down to 15% or below based on growing revenues? How do we determine whether that -- even 20% is a very high number. How do we determine we're getting an adequate return on those R&D dollars being spent?

Yes. Look, the -- of course, we cannot squeeze the lemon without putting us into danger. I think a 20% number is what our business needs to remain competitive. We are highly research-intensive, the wireless technology is not a simple thing. But also, we have to return from the market. I mean we have almost [ 50% ] gross margin -- and this is what comes -- you need to coincide. And again, the gross margin and the cash from that gross margin is telling us how much we can finally spend on R&D with the goal to generate free cash flow. And this is what we constantly manage, what we try to balance in the medium term. I mean, we had, of course, years where then we had headwinds on the top line that made it difficult to keep the balance but it's equally important to not go away from an intention, from a plan, from a long-term view of how we make the next step in our product offering, solution capability. And I think we did very well. We have so much gained in the possibility to help our customers. And it's precisely -- this is the reason why we have such a strong booking number over the last 12 months.

So if I take this -- the summation of those 2 comments together, the 27%, which is obfuscated by the amortization, you're suggesting it would be approximately 20%. We will be generating, hopefully, higher revenue from that R&D spend. When will we see the R&D on the income statement. Maybe I'll address this to Roland, getting to a 20% reported number where the amortization expense equals the spend?

Yes. Of course, the click also is when our capitalization amount is the same as amortizations but it's a little difficult to predict because our R&D projects have sometimes a very long run time, 3 years or even 4 years. It means over a long time, you do capitalize and therefore, you have distortions between capitalization and amortization. This is, unfortunately, not avoidable. It would be easy if throughput times would be short, like the year, then of course, the difference is much more easy to sort of manage.

Okay. And lastly, the Sapcorda consolidation. How much did that increase reported expenses in the quarter -- or the half, excuse me.

Roland, you must give the answer here.

Yes. I cannot give you -- it's a right in detailed numbers because we cannot disclose that, but you find on the -- in our half year report, you find a figure what Sapcorda costs or what the loss is. So overall, I could say that Sapcorda costs will increase over in the highs in the first year, roughly CHF 3.5 million cost coming to the -- to addition in the balance sheet -- in the income statement.

Okay. And that was for the full year or for the half?

No. Only for the half.

And was that contemplated in your updated guidance from June? Or is that just something we recognized we needed to increase and could have led to a decrease in the reported EBITDA and EBIT margins?

It is partially in the -- already June guidance, but of course, in the -- now in the August guidance, we get the real figures and this is, of course, reflected in the new guidance we give.

The next question comes from the line of Rolf Renders from Helvea.

Two questions. One is you made good progress on the cost savings. And I'm going to -- have completed everything or by doing this assessment, you're seeing that there are other possibilities that may be [ lethally ] increase it. And maybe I'll start with that question.

Sure, Rolf, thanks for the question. So cost savings have all been implemented already last year. So our improved effect this year. And as I said, this is, of course, one of the reasons why we were able to generate strong positive free cash flow.

But in doing that process, we've seen -- discussed more potential for that? Or if you would go further, would kind of cut into the bone of your R&D or what...

No, no, it's not that it eats into the bone. Of course, we have lowered the cost path, so to say. And again, we manage constantly our OpEx in line with what is the top line expectation.

Great. And then other question, maybe in these times with shortage of supply, it's difficult to say, but it would be great -- your view on the market share developments and especially how you're making focus with cellular.

Right. [indiscernible] affecting older participants in the market. I think we have quite an advantageous position, especially as when we talk against the module competitors because, to a large extent, we make our own chipset. And we have a much better supply situation than probably our competitors that have to share the output of fabs with many other module makers. And that counts also for our cellular module. We have very good progress with our R5. We are the leader for Category M in the market. And indeed, that we do the own chipset also has positive effect when you talk market share.

The next question comes from the line of Serge Rotzer from Credit Suisse.

I would have about 4 questions. I would ask one by one. So the first one is a little bit about guidance, which have narrowed. That's fine. But the question for me is what has to happen that you can grow by 19% of the margin of 20%? And what would keep you back that you would grow only by 15% with margin at 16% that you -- could you please help us to understand what are the factors? How many exogen factors you have and also factors you can manage?

Yes. Thank you. The question points to our business model and of course, what mechanisms we have. So I mean, any growth we make will create additional gross margin that goes more or less directly to the bottom line. And the reason is because we are a public company, we have no cost for expanding the capacity and the output. So insofar, of course, the density for the top line, the more we have additional growth, the better is the bottom line.

Okay. That sounds simple, given your backlog you have then.

Yes.

Okay. Probably the next one. You made -- you said that you have broad products earlier to the market than expected and also probably with some technologies. And so I'm wondering, you made quite a substantial impairment last year. Does this have an impact on these developments you have impaired? And what does this mean technically going forward?

Of course, these 2 events are independent of each other, launching products, and I mentioned impairments. The impairment is the past. I'm not quite sure what you mean technically going forward.

The point is if you have impaired now a product development, a research and development, and now you can use the product. You have a stream out of this development? And how does this work?

Yes. Of course, there are certain products that are still being sold and these so far generate margin without that there is amortization that is correct, but the impact is not that large on the numbers.

But so what you have impaired there is nothing at the horizon that you can use it now or in the near future?

Yes. I said, we have certain products that we are still selling without that we have to amortize, but revenue from these products is not so large. It's not really determining [indiscernible].

Okay. This is okay. I always understood that this is for future product, but then this is for old products, this is correct?

Impairment, yes.

Yes. Okay, then this was misunderstood. Then I have a question for the CFO. I was surprised about the financial results of the high interest income. Could you explain it to us? And what does this mean for the second half? And probably the same is true for the interest expense. As you have now repaid bond, on the other hand, you have a bridge loan -- if you could give us some guidance here.

So yes, you are talking not about interest expense, but about financial expense and financial income. Because the financial income is not interest, it's just currency gains -- unrealized currency gains on the dollar. The fact that the U.S. dollar increased quite a lot in June. So towards the end of June, we have 92 roughly. And this gives us some unrealized foreign exchange gains on the income side. It's mainly that. So to the second half, if you can tell me how the dollar is end of December. I can tell you what this number is. But this, we don't know. And on the finance cost side. In there, you have some realized foreign exchange losses as well. But the bigger part here is accounting technical losses from the deconsolidation of Sapcorda and then full consolidation of Sapcorda, which are put into this number. So for, let's say, from the -- for the second half, this should be it. So there is not to be expected that you get a lot more here, at least not from the consolidation or deconsolidation of legal entities. So then there remains just the interest of the bond and the interest of bond at the end, which comes in the second half.

Okay. Got it. And can you tell me what you're bridging actually? Or is it bridge to cash or bridge to new loans? A loan to a new bond? Sorry, bridge to the new bond.

At the end, we just have a bridge loan of CHF 25 million. And now in the books or short term, there has to be taken a decision, if it's needed at the moment or if we pay it back then this decision is not taken yet, but will be taken soon. And then, it's either a bridge to cash. So we pay back or a bridge to then maybe a new bond. But this is for sure then...

You use it operationally or strategically, this money?

And then we would -- if we issue a new bond, we would use it operationally and to get some operational certainty if we need the money, yes. But...

So at the moment, sorry?

The strategic pipeline is empty, so that's it. [indiscernible] or the larger acquisitions... [indiscernible]. Pipeline, it's never ending [indiscernible].

No, but you told me that you would use the money for operational issues and..

Yes. Today, we don't use it. At the moment, we don't use it for operational issues. So we could pay it paid back. Depending on the strategic pipeline and depending on these decisions, we will decide what we do with the trend with the bridge loan. Either to guide it, put it into another bond or pay it back.

Your next question comes from the line of Emmanuel [indiscernible] from [ Rotor Partner ].

I'm a little bit surprised to see this guidance, which has been changed. In June, not so long ago. And now to this much lower level. How is that possible? All what you have explained makes a lot of sense to me. The R&D question, the purchase, but is that you knew also in June, I'm really surprised that is coming now on the EBIT margin.

Yes, of course, you can read it this way, that you should have known perhaps it is true. But finally, you only know the numbers when you have closed the books. Things are very dynamic at this time and especially also what efforts we have to spend in R&D. What type of efforts and what changes we made. That, of course, makes predictability then very hard. So insofar, we have probably not everything understood already in June, how much change is happening with regard to how costs are finally showing up in the accounting.

Yes. But I think that's the main reason why the market is reacting today like that.

Yes. But again, I mean it's all just accounting. I can openly emphasize at the cash level. We have been very good in controlling OpEx and in expanding our gross margin. Insofar, this is a misunderstanding in the market because it's all driven by accounting regulations, not so much by the operational results we have created.

Yes, but no, you have created a view of again, not really -- not really be transparent with this upgrade and now downgrades. I mean that's -- it's very disturbing. Put it this way, yes?

You talk about transparency, I think that we do updates is precisely to provide transparency. And of course, foreseeing the future, especially at these times, is extremely difficult.

That was the last question from the phone. Thank you. Good. Then we continue with the chat questions. We have Mr. [ Sauter ] that asked, "Given your lower CapEx ratios, will block generate cash in the second half year and next year?"

Yes. Thank you for this question. Mr. Sauter. I mean we are not delivering guidance or such numbers. But obviously, you know why we have the reasons given for the ratios or the CapEx numbers. So insofar, I think that gives also an indication for the future.

Then also Mr. Sauter, "Can you provide some indication of the financial performance of Sapcorda in the first half year? And in your guidance, sales, EBITDA, EBIT, when is Sapcorda set to break even on EBIT line?"

Yes. We have already provided an indication on how much OpEx is at the moment creating, but we are not guiding on the business numbers, business success here, of course, obviously, is not available.

Then we have 3 questions on the guidance. I will ask them at the same time. Mrs. [indiscernible] from the media finance [indiscernible]. "You had successful first half year, but still had a very negative stock price reaction because the very high expectations after the increased outlook were not met. Now you increased the revenue guidance again. Why not be a little more conservative in the outlook?" Mr. [indiscernible] from LLB Asset Management. "Why were these factors impacting the guidance, not known 2.5 months ago?" And Mr. [ Fuller Bel Valor ], "Why does u-blox disappoint investors? Was it necessary to raise guidance in June, which must be lowered just 2 months later?"

Yes. Thank you for all these questions around guidance. I think I made a statement before. It's very hard to predict the future in these times. We have almost no reliable information from what we can make revenue in the next future. And also, we have made quite some adaptations in this regard to cope with the situation. Again, it's hard to make provisions. And in the sense of transparency, we give updates as much as we can. This is also why we have given a third update on the guidance. Insofar, I mean everybody should reduce expectations about accuracy. Also, you see the guidance has quite a span because visibility into the future is highly limited. And finally, I think what is overarching here is we have been successful in creating top line growth in expanded gross margin, and especially we have delivered a very positive free cash flow.

Then Mr. [indiscernible] Associates. Question one, "Companies like Logitech have purchased components in reserve in order to not face production constraints, which will most likely increase as delta variant spreads. For example, hamstring. Did you also try this?" Second question related to that, "Can you give more specific examples of components that cannot be purchased at the moment? For example, I know [ USB3 ] up chipsets are not available according to one of my Chinese sources. And this since weeks and 4 weeks with no end in sight."

Yes, interesting questions around the supply chain. Of course, we have inventory and we had quite a strong inventory in front of the crisis. But of course, there's a limitation to inventory. I mean it is cash and also we have uncertainty. I cannot precisely know what component amounts you need in the future. So this is, of course, where you have to find the balance. And also, every inventory has somewhere in an end. This has happened now overall with supply chain. Nobody has inventory today anymore. And most suppliers live from hand-to-mouth. And this is unfortunately no longer the solution. And the question about what type of components are short. I can only say all components are short to a more or less extent, and every component can create huge disturbances. You can imagine, if you assemble a product, then if one component is missing, you cannot go into production because you need all the components advance. And that makes it so difficult that around [ disturbing ] fact is creating quite a high effect. And unfortunately, it's not only production capacity. You must imagine also transportation is affected by capacity, but also by sheer availability that ports have been closed, that flights are canceled and all these create these supply disruptions.

Mr. Schultz from JMS Invest. "what is your view on working capital change for second half, given your very low level of inventories and strong demand at the same time?"

Yes. Again, supply chain, you have indeed seen that our inventory went down once more, but we can probably say it can go down much more because this is what is the inventory -- we need to run the production cycle. And on the other hand, working capital is tied to top line with regard to accounts receivable. And of course, equal to accounts payable. But this is a fixed ratio and insofar, no surprises that must be expected.

Then Laurent Stöckli, by Quaero Capital. "Could you give us more color and explanation on the order book X7 versus half -- first half 2018 and first half 2019? And second question, did we hear right that sales in second half 2021 could have been multiplied by 2 or 3 if you had components?

Yes. So in the sales cycle, indeed, -- the order book is as 7x higher than last year, but it's equally the same number for comparison again 2018 and '19. We had always about a similar order book in these years, relatively smaller for covering a few months because customers were used to order on short notice. And this has completely changed, of course. And this is what we mentioned is the 7x higher level of order book because we had such strong bookings. And indeed, it is correct what you hear if we had unlimited supply, it would have been easy to double the output.

Mr. Sauter from Kepler Chevreux. "Can you give a rough split between positioning, cellular and short-range revenues? Can you rank these by gross margin?" And second question, "You are winning more and more customers, but the revenue per customer is declining. How can you scale the business and deal with complexity?"

Okay. So the split between the 3 product types is relatively the same forever. So we do more than half in positioning. We do about 30% in cellular and 20% in short-end radio. And -- but these are not different types of businesses. I like to remind you, we mostly sell several products together to our customers as a solution package. With regard to size and number of customers, it is important to increase our food in the market. This is also a reason for our growth with more customers. We have gained a lot more traction. And of course, by such a strong increase of customers, the average is decreasing. This is unavoidable, so to state. But this is all potential. The smaller customers today are probably either in an early stage with that product or our future potentials for expansion because there could be start-ups or just new ideas. And this is very important with the broadcaster space to capture all the new developments. Of course, we are not handling all the customers ourselves. We have a sales channel structure. We focus on the large accounts, what we call the A and B customers that have sizable amounts of businesses that are strategically important that cover the important application areas where we focus on. What is below in size, we cover with distributors that are demand-creating, that are also handling relatively larger accounts, that's just below where we cut off from our own activities. And then for the very small ones, we have what we call catalog distributors. They do supply the very small quantities to a very large customer base but are equally important because they are the feeders, they create the interest and often are the basis for a new idea.

Then Jonathan Art from company, Kaufman. "You sound very bullish, yet the analyst consensus revenues appear to be over CHF 210 million for the half. Can you address whether the expectations were too high and then analysts weren't managed or was a realistic target and you missed internal plan? Can you address how much supply issues, restricted revenues in the first half? Did you receive all the wafers you expected? Are your wafers allocations in second half up or down compared with first half? Lastly, what is the appropriate -- approximate mix of your wafers by foundry and process type?"

Yes. Thanks for these questions. Of course, when we talk reaching targets, again, it's very hard to make predictions. We have a broad span of what we think is feasible. And finally, the overall indecisive factor is how much components are supplied and how many disturbing events are finally making the output difficult. So the more details here is that you see we have strong increased volumes, 4 modules and 4 chipsets. That gives you an indication. So we were able to manage supply, we were able to source components in quite a strong manner. Of course, the comparisons against the first half year 2020, that was already hampered by COVID. But also without this effect, of course, it tells you we were well-supplied. In general, for the future, we need to take into account that inventories along the supply chain are empty. So it's harder to get parts. It's all entirely depending on output from factories. Insofar, again, difficult to say what is the future. And also, there was a question about wafers and technology. You can -- I mean, you can know that we use a range of technologies in our chipset going from 28 nanometers to 65 nanometers.

Mr. Art as well. "Can you please describe the results between GNSS and cellular as that is more relevant than chips versus modules."

Yes, we hear this question often. But again, we are not business centers by technology. We are making different types of solution components that are belonging to the technology, of course. But only overarching view we have is on the customer how much profit we make with each customer.

Then we have a critical question by Mr. [ P. Manning ] from Gutenberg Finance. "The strategy of the company is failing since 2017 and still no recovery in sight. Don't you think that something should change in the management at some levels at some moment?"

Yes. Thank you for such a question. I think the strong bookings we have is the best proof that our strategy works. It's unfortunate that we are in a phase of supply shortage that we cannot bring it to bottom line, so to say, to cash. But this probably solved by itself, it's a matter of time. Important is the success we have with customers that they give us preference over the competitors. And the strong increase again of bookings is a result of the successful strategy to provide solutions that are attractive to our customers and that help them to bring their products into the cloud.

Then the last question from Mr. David Sachs from Hocky Capital. "Can you quantify the financial costs, higher R&D that was expected in your component work around efforts. You indicated that quarter was a CHF 3.5 million operating expense headwind in the first half year results. Is it fair to double that for the next the year so? CHF 7 million headwind for Sapcorda now embedded in your full year disclosed forecast. Is this all in R&D? Given it was a joint venture, in theory, you would have had insight into their accounting prior to consolidation. So I'm puzzled how this was not properly factored."

Yes. I think we explained quite a few things around Sapcorda. Of course, the half year, you see it half, in the full year is CHF 7 million. We have not intent to take this company completely different. And any acquisition has risks, especially with the top line. So we have seen that certain businesses take longer to materialize. And this is, of course, the major probably we have more patience, but it's on a very good track. It makes -- we have seen excellent response from the market with this acquisition.

Good. One very last question from Mr. Kühne, LLB Asset Management. "Any progress on the China IPR team?"

I wonder what they are relating to. Probably to the news that we have won an IPR court case against the Chinese competitor. Of course, that is, first of all, a proof of how we protect our IP, but also that we do well manage such issues that we have a performing feed that can also handle such difficult issues in such a place of business.

Thank you.

Very good. Then I thank you for your attendance, for all the many questions that I have covered, many of our -- of the aspects of our business. If you do have a need for more information, please let us know. And I look forward to meeting you sooner or later, hopefully, in person. Thank you very much, and goodbye.

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