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

Ladies and gentlemen, welcome to the u-blox 9 Months 2023 Revenues Conference Call and Live Webcast. I am Alice, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Rafael Duarte, Head of Investor Relations at u-blox. Please go ahead, sir.

Thank you, Alice and welcome, everybody, also from my side. We don't typically hold conference calls for result releases but we thought it would be a good idea this time. On Slide 2, you see our usual disclaimer, which I'm not going to read aloud but please take the time to read it by yourselves later. I hand over now to Stephan Zizala, our CEO and look forward to your questions at the end of this brief presentation. Thank you.

Ladies and gentlemen, good afternoon, good morning. As Rafael mentioned, we have prepared a brief presentation in line with the content you already saw in today's press release. Let's start on Slide #3. Revenues for the first 9 months reached CHF 436 million, down from CHF 475 million 1 year earlier. In the third quarter, revenues were CHF 104 million, down from CHF 181 million in Q3 2022. The weaker Q3 was expected, as I mentioned during our last conference call in August, mainly the general overstocking at customers caused this decline in Q3. All regions and all markets without an exception saw a similar trend. This supports our view of an industry-wide overstocking following a phase of severe semiconductor shortage in 2022. I consider this as a typical pattern in our industry, an overheated business followed by an overstocking and thereafter, a correction. Our view for the full year 2023, including the current guidance, remains unchanged. Please go to Slide #4. Beyond the short term, we continue shaping our future with innovative products. I'm really very happy to announce u-safe, our comprehensive solution for Level 3 and above autonomous driving. u-blox is the only supplier to offer functional safety, combining proprietary hardware with a customized software and a correction service. This end-to-end solution saves our customers' development time, development costs and reduces risks. With u-safe, we take u-blox's already established strong position in automotive one step forward towards autonomous driving. Let's go to Slide #5. On Industrial, I'm happy to announce a double-digit million U.S. dollar design win and first orders for our brand new IoT module combining cellular and satellite connectivity. This is an area where I'm particularly excited about as it creates solutions which are completely new to the market. For example, for fleet management, transportation and smart agricultural applications. In August, we just announced that we entered this market. Therefore, it's great to see commercial success so early. We have also launched a very small cellular module, which adapts perfectly to small-sized demanding designs in industrial IoT. For example, for asset tracking and aftermarket telematics. This is it from my side and I would use now the remainder of the time to jointly with Roland Jud, our CFO, to answer your questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Harry Blaiklock with UBS.

The first one is just on the confidence you have in the Q4 recovery. Obviously, quite a big step up in growth even to hit the low end of full year guidance. So I was wondering what are the main factors that are giving you confidence in that sharp recovery in Q4?

So we see the following things happening in Q4. So first of all, we see a significant volume increase, Q3 versus Q4. So it's a volume-driven increase. And it's coming from broader segments of our business. And the other effect, what we also clearly have there is, as mentioned, we did last year quite a number of very beneficial long-term agreements. And of course, there are still some long-term agreements valid, which come in place in Q4.

Okay. Got it. And then in terms of the 40-or-so percent decline in Q3, is that all volume driven? Or is there any pricing within that as well?

Sorry, I'm not sure if I understood the first part of your questions. You mean is the decline in Q2, Q3 mainly volume driven or price driven, is this correct?

Yes, correct. Yes, the year-on-year decline in Q3.

Yes. Very clearly, volume driven due to overstocking.

Got it. And then I mean, clearly, within that decline, there have been some kind of pushouts of orders. Is it largely pushouts or some cancellations as well?

Well, it's, honestly speaking, very difficult to differentiate if it's a pure pushout or if it's a cancellation. So as mentioned before, we see the main effect, an overstocking effect, nothing related directly to our -- to the long-term growth path of the markets we are in. However, of course, there's one or the other customer, which has so much overstocking, so they just canceled instead of doing a pushout. But it's mainly overstocking related effect on the volume side.

The next question comes from the line of Emrah Basic with Helvea.

I have 2, 3 questions. But maybe the first one, really a clarification one. When you say for Q3 that all markets and regions have a similar trend, are you -- do you mean that all markets and regions are -- have declined by the same or more or less the same year-over-year percentage?

Yes. Because we mentioned before that the main effect is an overstocking effect and this result on a pretty light scope.

Okay. Okay. Perfect. That clarifies a little bit more. So there's not more granularity that you could give whether this market is experiencing more due to some specific reason or not?

Not in this specific case. Because, as mentioned, this was mainly overstocking. So not to the basic markets beneath.

Could you update us a little bit if you have better visibility in terms of your net working capital and cash flow for -- by the end of the year? What are your expectations?

Yes. I think it's best is Roland takes this.

Okay. Guess what, the expectation is, it's rather difficult to now predict what cash flow really does at the end because with that, I have to forecast how the revenue will come in, is it more end or more at the beginning of Q4, as well all the inventory movements and payable movements. So net working capital will here play quite a big role in this regard. But overall, yes, we would, for sure, work on that we get into the positive free cash flow side for the full year.

And I assume -- so I mean, sorry to press on that one again. But looking at the net working capital it's probably mostly going to be a accounts receivable driven, I guess?

Its accounts receivable and inventory driven, let's say, are playing the highest role now. How does the inventory develop and how discounts receivable, of course, is then when does the revenue come. We can do it all in the last month, of course, your accounts receivable will go much more up and go up in case you have it more spread over the months, it stays lower due to the payment terms we have, usually it is 30 days.

Okay. And then the last one is also a more clarification one for your design win in Industrial segment. Is this design win referring to your hybrid model? Or is this a separate one? I mean because you said, you mentioned also the new -- the orders that were coming in for the hybrid module.

Yes, that's -- the specific one we mentioned here is this hybrid model for satellite and cellular communication. This is what makes...

The design win refers to that.

Yes, yes, yes. Because that's the big news here because that's a very quick turn, I would say.

Next question comes from the line of Torsten Sauter with Kepler Cheuvreux.

I also have -- yes, perfect. Sorry. I also have a couple of questions. First and foremost, what's your view of the channel? No. I mean, have we seen really the end of destocking as the guidance implies? Or does it come in waves? I'm just looking at this chart with the quarterly sales performance. And I mean, questions, of course, could there be even more excess inventory in the chain? And how does your market intelligence work here? And what does it tell you?

So first of all, what you can see in this chart is a clear sign of an overheating market if we look backwards. That's the unpleasant thing that you see this very clearly from hindsight but usually not in the other direction. So that's clear. On the other hand, I also can confirm our long-term growth trends are absolutely in place. So there's 0 doubt that applications like the Industrial Internet of Things or automated driving will come. And I hope we could make this very clear with our announcements of the design wins. We have -- if you look in the Q4, we have pretty good visibility. Therefore, we told you exactly the development we see now and this is mainly driven by a volume uptick combined with our long-term agreements. What we don't see very clear is how 2024 will develop. There is no change to 20 -- to our last call in August.

Okay. Understood. So we cannot take the implied Q4 quarterly sales performance as a indication for where the new run rate is for, going into '24.

As mentioned, I cannot comment on '24 at this point in time. So there is no change versus the August point in time. I just can reaffirm the long-term growth drivers, the secular growth drivers. They are absolutely in place and we see design wins coming in as we need them.

Okay. Can I ask one more question maybe? Have you taken any measures to prepare the company for, say, rough rides, I mean, hiring freezes or some sort of OpEx measures? And can you specify a little maybe?

So yes, of course, we took measures because, indeed, that's the thing we should do. And we significantly reduced hiring. At the moment, we are very selective where we do replacements and even more selective, I would even call it, punctual where we do additions. And those we do only in areas where we see really a strong growth upcoming with a very clear business case. But yes, as this is one of our main levers, we are acting restrictive in this area. So yes, we have taken measures. On OpEx, of course, in addition to.

Gentlemen, this was the last question. Back to you for closing remarks.

Thank you very much for everybody who participated in this call. As a reminder, next month, November 21, we will have our Capital Markets Day. So invitations will be sent soon and we look forward to either seeing you personally or for your participation online to the event. Thank you.

Thank you for participating and especially for the questions.

Goodbye.

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