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

Hi, everybody. Welcome to u-blox's 2023 Results. Warm welcome for the ones here in the room with us. So, it's always good to see you in person. For the ones in the webcast, also welcome. A quick note for those, when it comes to the Q&A session, we're going to go as usual, with the questions from the audience, and then we go for the webcast. So, the format here, very simple, as usual. So, we'll have the presentation of the results by our CEO, Stephan Zizala and CFO, Roland Jud. And then we'll go for the Q&A. So, Stephan, now for the highlights of 2023.

Good afternoon, everybody. So, welcome to our results press conference for our fiscal year 2023. So, I need to [Technical Difficulty] Do I do it? Okay. No, it's the right slide. So when we entered 2023, we came out of a very strong year 2022. It was our record year. It was the year with the most severe shortness of semiconductors. And the first half of 2023 was very strong for us. But when we entered the second half, we saw already a decline in our revenues. So, the year itself was different. If you look overall -- and if you look at constant currencies, we saw revenue down by 2.7%. And if you compare this to the global semiconductor market, which was down by 9.4%, we performed better in this environment versus the global semiconductor market. With this result, we achieved a profitability margin of adjusted 12% EBIT and over the year, a cash flow of 10%. If you look, what else have we done in this year, we reworked our strategy and this was important for us because we set up the company for its future growth. The Board of Directors, the executive team and the whole team of u-blox embraced this strategy. And I'm really proud of this that it's not just a top-down thingy, but it's something what we see now active in the company. We embrace it, and I will come to this a bit later to recap some parts of our focus, innovate and execute strategy before we come then to the numbers again. There are 2 highlights of the strategy, which is important in 2 key areas. One innovation area, in the area of combined satellite and cellular communication, but also in autonomous driving, we already see success of this strategy in a very early stage, which confirms that we are on the right track. Let's see if -- now it works. On this chart, you see the quarterly revenue development. And here, 2023 was special, because coming out of this semiconductor supply crisis, our customers wanted to have firm orders for 2023, which we agreed on. And of course, this also put a certain obligation for our customers to consume those parts. And this effect, you see mainly in the second quarter and the fourth quarter, where our customers took more than they actually needed. Now, there is one part I'm proud of, because it shows the strong customer relationships u-blox has. So, we have an agreement with our customers and our customers executed on those agreements to a very large extent. And this is exceptional nowadays that both parties, we as u-blox, but also our customers, really live the sense of such a partner, the meaning of such a partnership. Now, obviously, if they took more than they actually needed, this means they have now a higher inventory, and this we will see in the quarter 1 and 2 of this year. Now, let me come to operative highlights. So the first one I would like to pull out is a new product innovation. We combined cellular and satellite communication in a single module. This is very relevant for applications like asset tracking. Think of a container; a container which is on a ship, most of the time has no cellular reception because only 10% of the earth's surface is covered with cellular. So you need satellite communication. However, equipment for satellite communication is very expensive, and the innovation we brought together with our partner ORBCOMM is to have satellite communication above the much cheaper hardware of a cellular module, and this will enable a complete new application range. Now, of course, we are proud of this technical innovation, but we are even more proud that already now we have orders for this product and we will see first revenue even in 2024, which is very fast for an innovation topic in the industrial domain. Typically, it rather takes 2 years until you see first revenues. Another topic is even more important for our future growth story. Automated driving is one of the 4 application fields from which we expect more than 40% of our growth in the next years. And automated driving is for sure, even on the long term, an even more important topic. Last year, we achieved a record design win of CHF 100 million, and this means we acquired projects from our customers of a value of CHF 100 million over lifetime, which will start in 2026. Now, if we look one step deeper even, we were successful at very established auto players, but also at the fast-moving newcomers which we have on the world. We were successful in a way that we see that our customer's trust in us in this innovation field. And this market for automated driving is just at the start. You see the numbers, the penetration rates 2023 to 2030, triple. So that's a very important point for us to be there very early, being the market leader, be the trustworthy partner of our customers for this innovation. Now, having said this, those highlights of the year, I would hand over to Roland to give us some more details on the numbers.

Thanks a lot, Stephan, and a warm welcome also from my side. After we heard the highlights of the year, as Stephan said, take a deep look into the financial results. On the top line, we reached CHF 577 million. It's a decline of 8% compared to the all-time record year 2022. It's not new that the exchange rates have an important impact on our revenues. U-blox is maybe one of the most exposed to U.S. dollar companies in the entire Swiss stock exchange, as we do 85% of our revenues in U.S. dollars and the other part is done in euros. So, if you measure the revenue performance by using the 2022 exchange rates, it shows a minus of 3% compared to the previous year. And if you measure it at guidance rates, the guidance we issued in August, it's a minus of 6%. It's exactly at the lower end of the guidance. On this slide, we show you a little bit how negative foreign currency can impact our business. And to give you a better feeling what it means to u-blox, table on the right-hand side shows you the impact of a 10% change on U.S. dollars or on euros, single seeing the U.S. dollars, that means that you do on the revenue 9% plus, but you do on EBITDA, will up by 14%, and EBIT will be up by 19%. As now the revenue, the U.S. dollar exchange rate declined by 5.2% and also the euro declined by 3.2%, we had a minus on top line of 4.8%. Now let's move to gross profit. Adjusted gross profit reached CHF 254 million in 2022. Although we saw a positive impact of our long-term agreements with customers, not only volume growth, but also in quite stable prices, the corresponding gross profit margin declined from 49.2% in 2022 to 44.1% in the current year. This decline in gross profit margin is mostly due to changes of the product mix towards cellular products who performed better in 2023 than the other products. On the OpEx side, R&D expenses in 2023 reached CHF 117 million and grew by 10.5%. As a percentage of revenue, we expensed 20.4% for R&D. In prior year figure, it was 17%. I will talk a little bit more about R&D on the next slide. Let's moving on the -- in the middle to the SG&A expenses, which declined by 3% and reached CHF 67 million in 2023. Due to the lower basis, SG&A expenses in percentage of revenue increased only by 40 basis points. With the lower sales bonus and a good cost discipline, we were able to at least partially mitigate the margin increase due to the lower revenue base. As a result of these items, as I described before, adjusted EBIT reached CHF 70 million in 2023 versus CHF 131 million in 2022, while adjusted EBIT margin declined to 12.1%. Now, as proposed, I'd like to give you some more color into R&D expense. Let's first start with the chart on the left-hand side. Here, we show a reconciliation from adjusted R&D expense to cash R&D. The adjustments we make are for IFRS 2. impairment charges are deducted and [ normalization ] charges for acquired technology. With that, you reach the CHF 117 million R&D expenses adjusted. Now to get a more cash view, a more reasonable view to R&D, you have to add now the capitalized development cost of CHF 41 million, but also deduct from the expenses, CHF 29 million amortization for these capitalized development costs. And with that, you end up with this orange column cash R&D expenses CHF 129 million. On the right-hand side, you now see the development chart of these cash R&D expenses historically starting in 2019 ending up with 2023. And you can see here, again, the CHF 129 million. You see here also, again, an increase of 20 -- to 22.4% of revenue of this cash R&D expenses. Also here, the increase, of course, is mainly impacted through the lower basis as revenues are lower than in 2022. With this, I'll stop at P&L review. You will see in the slide set, in the appendix, there is then a complete P&L, and if you have any questions on the lines below EBIT, I'm happy to answer and take these in the Q&A session. On cash flow in 2023, u-blox was able to generate a positive free cash flow of around CHF 11 million. I may recall that in the first half of 2023, our free cash flow was negative for minus CHF 13 million; means, in the second half, we managed to generate CHF 24 million in free cash flow. This turnaround is mostly driven due to good working capital management, and what the working capital has looked like, you see on the next slide here. Net working capital in December '23 reached CHF 150 million, 26% of revenues. In the comparison of various net working capital components year-on-year, 2023 versus 2022, you see that on one hand we did a good job on inventories by reducing them. On the other hand, we saw an increase in the receivables due to the very high sales in December 2023, and a decrease in payables, which together consumes close to CHF 50 million cash. At the end, this results in a net working capital increase of CHF 27 million compared to 2022. But now, if you look at the comparison between June 2023 and December 2023, you see how good progress we made on working capital management in the second half. Inventories were reduced by CHF 29 million, receivables by CHF 7 million, while also payables declined by CHF 14 million. All in all, working capital was reduced by CHF 22 million over this period. This ends up in a solid net cash position. Cash -- net cash means cash at hand minus debt, of CHF 86 million in 2023, CHF 8 million higher than last year despite having paid a dividend of CHF 14 million, we paid back our bond with a net impact of CHF 20 million and we paid out the high bonus due to the very good result in 2022 to our employees also in 2023. To ensure our financial stability for the next years, early this year 2024, we signed a new CHF 140 million revolving credit line over 3 years, plus 2. This credit line was led by ZKB. And due to this good financial situation, the Board also decided to pay a dividend in form of a par value reduction of CHF 1 per share so that this dividend, again, can be paid tax free for the investors. Now, last but not least, some review -- I like to give you an update with the final numbers for the impairment which we announced at our Capital Markets Day last year. The impairment booked really in December 2023 was in the amount of CHF 65.4 million. As this impairment is mostly due to cellular technology, the distribution of the capitalized R&D expense, as you can see on this slide, moved towards positioning. So post impairment, 70% of our capitalized R&D in the balance sheet are now related to our rock solid positioning business. As we also changed the project structure in R&D, this will reduce the capitalization rate in the future. And with that, we make sure that this position in the balance sheet does not just grow again in the same pace as it did last year. And with that, I conclude my part of the presentation and hand back to Stephan for further business information.

Thank you, Roland. So now, let's have a look how we prepared u-blox for the future. I would like to recap some key points of our strategy and on certain topics also provide a bit more color. U-blox has the privilege to enable and also benefit megatrends of our society. So if you take our positioning products, they will be essential to enable the autonomous car of the future. And with the autonomous car, there will be less traffic jams, and with less traffic jams, there will be less waste of energy. So we are contributing to the mega trend of being more conscious what we do with our resources. If you think of our cellular products, they are used, for example, in home health care equipment. They connect literally the patient with the doctor in remote locations. With an aging society, this will become more and more important to have a longer self-determined life. Also, if you think of the example I mentioned before the innovation example, the global asset tracking. This will allow us to optimize freight routes, save money, save energy. If you think of our short-range products, they are -- standing in the way, they are used, for example, to make charging of cars more convenient, easier. They are also used very heavily in the factory floors. They connect the sensors, the mobile equipment in the digital factories to the factory cloud. So they enable the digitalization of the factory. And if you look on our customers, many of them struggle with this more and more multipolar world. U-blox as a trustworthy Swiss supplier of positioning and connectivity solutions, plays an important role to make their life easier and to have the innovation available. Now serving megatrends, obviously, is also a benefit for our revenue development, and it always was, and this is one of the reason why over decades, u-blox was able to outperform the typical semiconductor cycle in growth. And we have the clear aim to continue on this path. And to do so, we reworked our strategy and we gave ourselves a new target financial model. Over the cycle, we aim for more than 10% growth, roughly 14% EBIT margin and 8% free cash flow margin. And therefore, we adapted our strategy. We increased the focus on our positioning business. We will turn around our loss-making connectivity business, and we will improve the operational excellence overall over the company. Now, again, let me give you a few more details on this one. In positioning, we are already leading the market with 28% market share. But there are still applications out there and customers out there, which will allow us to grow further. And for this, we need innovation, and for this innovation, we need the power of our people, bringing this to the market. And we have a track record of doing so. And therefore, we shifted R&D teams to our positioning business. And this will be also the area where our digital services will play a major role to have a more differentiated offering in the future for positioning. On the cellular side or connectivity side overall, we have a clear task to become bigger. So we need a larger size, first of all, to cover our R&D cost, but also to have more power when we buy their R&D services or material. So, here, we get a tailwind currently because the U.S. authority FCC has strong concerns about the usage of Chinese vendors in applications like automated cars, digital factories or health care. And obviously, this is a tailwind for us, and we have the clear target to benefit from this one. But we also need to do things internally. So we already did 1 major step. We stopped the development of own chips for cellular also to reduce the cost in this area. So we continue chip development for positioning because this is highly differentiated, but we don't do it for cellular anymore. And of course, we go more in a way where we really look for a design-to-cost approach in this area. There's another good example, what I also -- what I mentioned in the beginning, having applications where we can bring our knowledge together, like in this hybrid cellular, satellite and positioning module. This is very nice because there we have then a differentiated product exactly in this area. Now, in terms of operational excellence, we are convinced that we can do what we do better. We grew from a start-up to a pretty sizable company. And here is also the point, I also was hired. My background is from a larger company, as most of you know. So, of course, I try to contribute here and also lead the company, being more systematic while keeping our agility, which made us successful in the past. So the activities here fall into 2 buckets. We want to improve the effectiveness, what we are doing. So being faster to the market with agile product developments, basing our decisions on accurate, timely available data. Therefore, we invest in an ERP harmonization project. We also have a cultural aspect in there. So the topic of profitability is something we really discussed with our teams to make them aware that the value creation out of this is essential. And in terms of efficiency, we started the transformation project for our procurement activities. We also, as mentioned before, especially for cellular, we need a design-to-cost approach much more elaborated as we had so far. We optimized net working capital management. And as Roland just mentioned, you already can see progress what we are making there. And for sure, in terms of staffing, we will utilize our global footprint to hire locations where it's cost efficient. Now, I would like to give you one more step of detail on 2 selected topics, and the first one, we call integrated business planning. We are not happy with the way we plan and forecast our business, and therefore, we set up an activity to make sure that we don't have -- we have owners defined and we have the processes defined in a way that we get to consistent data quickly when it comes to our forecasting and planning activity. And for sure, this is something which is very relevant. As you can see, our net working capital, for sure, is higher than we wished it to be, and so we are not satisfied with this one and this process will help. And also, the way we give guidance and also the fact that we missed guidance several times needs improvement, and this topic will contribute to make this more systematic and more better in future. The second topic is our procurement organization. We buy material -- mainly material and production services of around CHF 300 million in 2023. We come from a structure where many decisions were taken decentrally. With such a purchasing volume, it made sense to harmonize it, to have global responsibilities for commodities and also have the right processes in place. So we did a major restructuring in the way we purchase our product, and we hired a very experienced purchasing professional to help this organization for u-blox. With those key points of our strategy, what I mentioned here, we want to make sure that we meet our ambitious new target financial model. Now, having said this, we come a bit closer to the near term and I want to speak about the near-term outlook, especially the guidance for this quarter. Let's pick up where we left it, at least for many of you at the Capital Market Day. There we said, we observe a significant overstocking and especially for the first half and the first quarter, a reduction of this overstocking at our customers and a weak revenue for us. This is happening. Though we see a very weak quarter 1, we see already a slight improvement in the second quarter before, in the second half of the year, we expect a more significant improvement in the recovery of the business. Now you might ask, "Hey Stephan, didn't you just tell us that you want to improve the way you forecast, can we believe this?" And honestly speaking, it's a good question. And let me give you 3 points where I think -- where we are convinced that this is the way we describe right now. The first point is, we started with this improved forecasting project several months ago. So, we already see good progress. We are not yet perfect. We are not yet there where we want to be, but we see the progress what we wanted to see. Second, when talking to our customers, and also here, remember in the Capital Market Day, we said 250 customers, we want to take very close and talk to them directly versus the long tail is handled via distributors. So when talking to those customers, we get the same message. So, it's not something we invented in our offices or shot out in our offices. And third, if you look around in the industry, there are many seeing the same market and, therefore, giving the same picture. So, therefore, we expect the scenario as described. Now looking into the first quarter, here we see the most heaviest impact of this stock correction, and we expect revenue between CHF 50 million and CHF 60 million. Due to this fact that we have a significantly lower revenue, we lose operating leverage in this quarter, and therefore, the EBIT is also so low that we expect minus 30% to minus 40% EBIT margin. And this is due to the lower top line, what we have and no other effect in this area. Now, for me personally, it's not the first time that I experience such a downturn in the semiconductor market. I have been around during the dot-com bubble burst in 2001. I also have been around after -- in the crisis -- after the financial crisis in 2008 and 2009. So, I personally have managed through several of such semiconductor downturns. And my clear ambition and my clear target is to be stronger after such a transition year than we ever have been before. And of course, we take measures when we see those numbers. So, of course, we gave ourself a cost reduction measures to mitigate part of the effect of what you see here. And just for example, we almost froze hiring. We also do cost saving in every aspect in our operative business, starting from simple things like saving on travel costs, but also all other topics, which are not essential to go after our strategy. We reduced the bonus floor for our employees to 0. And this has the mindset that in good years, we all should benefit from good results. But in the years where we don't meet the target, there should not be a bonus. And this we did. What we did not do, however, we did not take any short-term measures, which endanger our long-term strategy. We are convinced that the strategic direction we took is the right one and we will execute on this one. And of course, we will monitor this execution very tightly and we will take actions in case of deviations quickly. So, we will -- in this case, we see deviations, we will act for sure, not wait for years to come to better knowledge. With this, I'm absolutely convinced that we are on the right track. We go after the right markets. Sorry, I need to advance my slide. We go after the right markets. We have structural growth markets in here. And just, again, to name the 4 of them; automated driving, asset tracking, industrial digitalization, our home health care. Those are megatrends in our society. They will come. They will need technologies as we have, and u-blox has this. If you look on our positioning, we are the undisputed market leader with unique IP. This is a very strong base for us. And I'm convinced that there's a lot of value creation potential in there for us in future. And with this, I thank you for your attention. And Rafael, I think we open up for questions, right?

Exactly. Thank you, Stephan and Roland, for the presentation. We start now with the Q&A. As I said, we're opened in the room here in Zurich. Anyone who wants to break the rice, right in the front row. Easier for the people in the webcast, you say the name and institution.

Yes. Marc Possa, VV AG. A question about the last point you just mentioned, Stephan, the undisputed market leader in positioning based on unique IP. Can you show us how unique the IP really is and how long the uniqueness will last in terms of kind of patents and other potential infringements that might always happen out of China or other regions?

Thank you for asking these questions. I smile a bit because we had a slide prepared for this questions and we took it out. But it's a very valid question. And the answer is not simple that I say we have patents, and this is it; because, of course, we have patent and we defend our patents. But that's only one part of the story. The much more important part is that, first of all, what we do is not easy. I know everybody with some education in mathematics thinks what can be special about satellite positionings? You need 4 satellites and you measure the distance and then you have it. And the second thing is, "Hey, it has been around since the '80s, must be solved this problem." And this is not true. It's highly complex. Things are moving. You have buildings which create bad reception and you have new applications like automated driving. So, again, think of it, if you have a GPS system in your navigation, in your car, it doesn't matter if the system takes 10 seconds or 15 seconds to find the position. If you sit in an automated car and a leave a tunnel, this can be essential. So, there come new requirements. So it's not the same positioning anymore what we had before. We also have requirements for safety exactly in this area. So the system must prove, the chip needs to prove that it is right. So, the requirements are right, and we like this because we get to know them first, working with our customers. This is where we put in the innovation. And this is -- this innovation quite often is even implemented in our chip to have the right performance. You can't do it with software on general purpose processor. Now, having said this, even if somebody takes our latest chip, just brought to the market today; takes it, analyzes it, tries to copy it, it will take easily 3 years until somebody like this is on the market and they will not be perfect. And until they are in the market, we are already on the next one. So that's a long answer to a short question. But this innovation power what we have there, being in the forefront, being faster, getting the requirements earlier, having the solution earlier. This is the essence why we were successful in the past and why we are absolutely confident that we will extend this to the future.

Emrah Basic from Baader-Helvea. Is there a contingency plan in place in case that the geopolitical environment in the U.S. doesn't create the necessary tailwind that you would hope or expect?

Well, first of all, I even said upfront, we are monitoring this very closely. So, it's not like that we define a strategy, then wait for 5 years and then check if it work out. No, this runs in very much shorter cycle, and we will also see this earlier. And in sense of what you do in a certain business situation, of course, every well-managed company works in scenarios, but none of this is relevant for today. We believe in our strategy, we execute our strategy. This is where we put our effort on.

Great. And do you see a -- do you already have some tangible -- how should I frame that, tangible outputs or do you see already some tailwind from the situation happening, some tangible leads in the U.S. where you can -- that gives you confidence for it?

Absolutely, yes. We cannot declare victory, but we see very clearly there are tangible opportunities and we are working on this. But it's not yet the point in time to say, assumption is true or not?

Anyone else?

Michael Schulz, JMS Invest. What is the addressable market for or how big is this an opportunity for you, this hybrid positioning module? I guess you're in the market with the positioning, for example, containers and so on. But there will be some replacement, I guess, or is that some additional revenues and some replacement, I guess?

So, you see here an indication where -- what this could be. And again, that's a new topic. So the market is starting in a certain way. So currently, there are roughly 10 million such IoT satellite subscription. And that's not our assumption, but the market researcher assume until 2027, it will grow by a factor of 5.

I mean, what do you assume is your market share there in like 2027 or so? Now it's 0, right. I mean...

Now it's 0 because we just brought out the product. What you see here are -- I mean it's, again, as many innovations. It can be solved. You just buy an expensive satellite receiver and you buy an additional cellular module and you put it in a big box, then it's solved. It's just economically preventing that this market goes in this direction. So, indeed, there's a certain replacement possibility. So the market share, again, is currently exactly in this combination is 0, because we bring out this product. Market share prediction in this specific case, we don't do what we see now from the first opportunities and orders, it's a highly interesting business for us, and this is where we stand currently.

And if you would quantify the 50 million devices, what would that be in Swiss francs as a market? Basically, what's the average value of such a market?

The average value in this area is in the mid-double-digit dollar range, what we can sell in such an application.

Okay. And if I may, I have 2 other questions. You said the capitalization of development cost is going to change going forward because projects will be adapted. What does this mean exactly, and how is it going to change, and from when on?

Yes. This is maybe a -- more a question, it's more a technical question about accounting than about technology itself. It means that how we develop products, we develop them in project instead, let's say in the past, you started developing, develop 3 years. And after 3 years, you bring out the product, but not the product, a whole product family, and that is what capitalized the whole 3 years. Now the process of development itself changed that you do it more agile, more incremental. With that you end up with, let's say, products faster. This means that capitalization of these costs, according to the rules, are no more valid as it as they are. And with this change in the development process, you get bring down the capitalization range and expense the rest. So the effort you do for a product does not change. It's changed what you put on the balance sheet and what you expense. Because of the turnover of products or a smaller product releases, which has then also not a lifetime of 10 years, because you have a next release and a next release. This means from a capitalization point of view, that you do not have a longer period of harvesting of this development. And with that, you have to expense, you are not allowed to capitalize that. So, the ratio goes -- let's say, today it's 35%, 40%; it's [ expected ] over years, it's not something which happens bang now. It's something which comes gradually over time. It goes back to maybe 20%, 15% somewhere there.

Another question if I may, the normalization of inventory and net working capital what is the -- is there a -- do you have a target for say, inventory to sales level or something like that, that or what would be a normalized inventory level or a net working capital level, if you know now you have a couple of difficult quarters ahead, but then you're back to normal, maybe. So, what is your kind of targeted level where you think that is what we need?

Yes, the inventory level is not related to directly. It's related to sales, but it's not defined on sales because most of the inventory are components. So, part of products which go into certain products at the end. But the normalized level is roughly 40% lower than it is today.

But then -- if then you grow again or then you...

If we grow of course [indiscernible] you need a little bit of higher inventory level, yes, but it's more the [ inventory houses ], we call it day's inventory outstandings or the turnover -- inventory turnover should come down again. So -- but as I said, from today's business level around, it's roughly 40% less than we have.

It's Michael from ZKB. Just 2 questions on your ability to actually guide us through the year. So you're guiding now for a very weak Q1 and a recovery going forward, but based on what is it actually? Because all the presentations I've recently attended, I hear the same, but I don't really see any hard evidence that it's really going to turn in H2. So, it is based on just very low inventory at our clients. They need to build up. Is it based on, you expect better demand on the end products? So maybe you can give us an indication on that and what exactly means a recovery? I mean, from CHF 50 million to CHF 60 million, it's pretty quickly to recovery. So just to get maybe the altitude what we can expect.

Well, first of all, you're right, and in a certain way, we could -- the question you ask is very valid, what are the assumptions? If you look on the decline what we saw -- and this is visible across all market segments, it's -- the decline is larger than the end market, maybe -- which are maybe also a bit weaker but not to this order of magnitude. And that's a clear indication of a stock correction. It's not like that there are 70% less cars sold nowadays. That, no this calculation is not correct, but you know what I mean. So there is a very clear indication that this is a stock correction. And this is also what our customers tell us. So they -- I mean, of course, we are paranoid and ask, did we lose the project? Did we lose to a competitor? And the answer is clearly no. The answer is overstocking and the stock must go through. And then you do some math what this could be, and then you end up in this order of magnitude that in the second half, it must come back. So that's the first question. Nevertheless, this whole year will be a transition year as you can sense. And for good reasons, currently in such a situation where the transparency is so low, we don't provide guidance for the complete year. On the long term, our target financial model is still what we believe in, and there, we want and think we will come back.

And maybe just 2 more, but I can ask them together. One actually is, in the past, there has been a business model also somewhat based around software, services, security, correction data, all these kind of things. And I know obviously, it's connected also to the communication side of things. But what is still possible in a positioning business, software wise? And maybe just a second, probably it's a short one on your design wins in automated driving maybe. I know you've put out a number what you expect, but can you give a little more detail, maybe are these different design wins? Is it one customer? What exactly is it? Just to get a bit more better understanding?

Yes, I'll start with the second one. Several customers in several regions, we are not allowed to name them, but several customers, several regions and also different types of customers, very established players. So, if you -- would be -- you would call them the big names, but also the challengers, the newcomers in those automated electric car. And this makes us so confident that the technology we have and the approach we have works so well. The first question…

Software business.

Yes, exactly, software, sorry. The software business model. I mentioned perhaps a bit too briefly that when we look in positioning, already today, there are correction services used for getting more accurate positions. And there, of course, we have a potential looking in the future because we can, in an optimum way, we have the chip, we have the module, we have the software and we have the digital services. So we can optimize wherever the solution can be done best and most efficient. So in our current view, in our view, how this technology will establish, it will be a major part for the positioning area.

Thank you. [ Stefan Zola, Zola Capital ]. I actually, Stephan, also a bit worried about your Q1 guidance, and looking at the next 3 quarters. The last 8 quarters, on average, you had CHF 170 million top line. Now, if you guide for CHF 50 million to CHF 60 million, you need those for the remaining 3 quarters just to end up flat. Now, top line is one thing, but then obviously, you have a heavy hit on the margins. Is there any way how you could somewhat have softened the impact on the EBIT margin? I think that 30% to 40% minus is hefty, which I understand with CHF 50 million, but it's hefty.

Absolutely agree. Those 30%, 40% is something which is very low. And what I said before is we take cost-saving measures. But as you could easily imagine, if we were take cost saving measures which would compensate this, then we would need to announce a change of strategy. This would not fit together very well. We believe -- we absolutely believe that the applications we go after and the technology we'll have will be successful, and therefore, we are doing what we are doing. So, of course, we will save cost, and we have, of course, also pushed programs to make sure we get revenue in as well as possible. But this burn-down of inventory, which we go through now, this is inevitable and we will manage through it.

[ Johannes Gordon ] [indiscernible]. I have a question with respect to this continuation of the cellular development. Trying to understand what will happen? Do you just replace what you develop by your own than by buying in these cellular modules -- sorry, chips or products? Or do you lose business by you not developing your own cellular chip? That's the first question.

And the answer is, we will buy those chips from third parties. Actually, we are doing this already right now. The majority of our cellular module revenue comes from modules with third-party chips in there. So, we always had the strategy that we only do our own chips when there's nothing in the market or if there's a margin upside possible. And we came last year when we reworked the strategy to the conclusion that investing in our own cellular chipset, which is technically highly appreciated in the market but commercially does not provide the benefit of what we expected for and therefore, we use third-party chips. You could even turn this around because even if you deduct the chip developers, which don't work for cellular anymore, there are software developers developing the software for our own chips, and those can use now their time to develop software based on other chips, so we even could increase what we can have as an output, as new products.

Okay. There is no cellular sales going away for...

For that chipset topics? No.

Okay. And then this implicitly means that you had quite a pressure on the margin due to higher cellular sales. I suppose this margin profile will improve going forward or what should we expect? Similar sales split, so is that a margin upside potential just due to the fact that you can buy in, let's say, commercially better products, if I may say so.

So what happened last year was that the cellular business developed very well. We also mentioned in the annual report, we were performing quite well at an health care customer where we provided our solutions. Now, having said this, also our margin profile in cellular, our gross margin profile in cellular improved, however, on a lower level than we have in our positioning business. And therefore, despite the fact that there was improvement in the gross margin in cellular, you still have this mix effect that we have a higher share of cellular business in the 2023 P&L.

And will that change now going forward?

Forward-looking in 2024, cellular is more affected of this destocking. So there will be a change in this mix. And the other topic, of course, is also true. We continue to work on the cost and improve the margin profile of our cellular business.

[indiscernible]. In the U.S., are you already winning business due to this potential regulatory threat for the Chinese players?

So we have a significant number of opportunities, very concrete we go after. Winning business is not so easy that you go in and say, "Here is our new product, read the specification and sign the contract." Typically, it requires several months of evaluation and development efforts of our customers. So it's literally too early to say we have been there, but we make progress there in exactly out of this rationale, customers are approaching us and asking us for proposals to replace a Chinese module in exactly this area.

Anyone else? If that's not the case, we can open now for questions via the phone. So I think we have one question with our analyst from UBS. Operator, can you open his line?

The first question from the phone comes from the line of Harry Blaiklock with UBS.

I was wondering if you could give a bit of color around the contractual orders in Q4? And then it would just be useful to know what the underlying growth rate was in Q4 or kind of underlying revenue level. Yes, that's my first question.

So, just to make sure that I answer the right question, you asked how much of the business was due to those long-term contracts, and how much was underlying growth, correct?

Yes. Yes, exactly, in Q4?

Okay, understood. 2023 was a highly distorted year. So, we already had this effect in Q2 and probably without knowing it, also in Q1, probably without even our customers knowing it already in Q1. And therefore, Q3 was so weak because that was the first opportunity where they could reduce what they bought before they had to come back to their commitments, what they had before in Q4. So, it's really very difficult on a quarterly basis to say how much was really due to which effect. If you look on the overall effect and what we have and what we indicated and also that we just said, we expect this stock correction to go through the first half year with revenues, which will slightly improve in the Q2, but not be back to normal. We are in order of magnitude of 1 quarter, which needs to be corrected. I cannot give you an exact number because it's not possible to define it so precisely, but that's the order of magnitude we are talking.

Okay, perfect. And I was wondering whether we could revisit something that someone -- an earlier person asked, which was just around, what are the indicators that you're looking at that give you confidence in the improvement in revenue in the second half kind of beyond the inventory correction?

Yes. We are absolutely confident on our long-term growth driver. Nothing changed, also compared to what we told you during the Capital Market Day. I mentioned before, we ask our customers, did we lose business to competition? And the answer is no. And therefore, what we see here, of course, we do some modeling, and we talk to our customers and we watch industry calls. Therefore, we are confident that the growth trajectory will be back in the second half.

Got it. So, I mean, is it conversations with customers, like orders that you have coming through from customers? Anything that you can point to in terms of that?

Yes. Sorry, now I got your question probably right. So here, the situation changed. Lead times are down to roughly 12 weeks plus/minus on the products. So there is currently no need for a customer to place an order for the third quarter, and this situation is different compared to 1 year ago.

Okay. Got it. That's very useful. And then just one last question on free cash flow. I know you're not -- you haven't provided kind of explicit qualitative guidance, but I was wondering whether you could give kind of a rough indication, are you expecting it to be positive in 2024?

Yes, it's rather difficult, as you know, to predict free cash flow. The major point is then, if you can -- if we can reliably predict what the inventory level and how the orders will come over the year, not everything at the end or at the beginning, then you have a big impact on the free cash flow. So, to say, just to say, okay, it will be positive or negative. We have done in 2023, CHF 11 million free cash flow. So that's not close to 0. CHF 11 million is quite the number, but a change in the inventory of -- at an inventory level of CHF 100 million, if you just think of, you took out, increased the inventory by 10%, then its cash flow is gone. So, therefore, to predict today for 2024 to make a free cash flow prediction, I cannot tell you at the moment.

I think there are no further questions from the phone. In the room, I think we're also good. So if that's the case, we close here or one more.

Thomas Moody, [indiscernible]. What does change for your daily work when the big Godfather is not anymore elected for the Board. Is there a change for you? You feel more free to bring in -- to can go your own way or to develop more intensely your strategy?

Yes. First of all, I always feel free. Thomas was with the company for 22 years and he brought significant value to the company. He took it over as a start-up and look at the size of the company it is right now. And for sure, he knows a lot about this company. In the Board, we have a lot of competence available, and we have good discussions in the Board. And this is what I appreciate, and I'm looking forward to continue my good discussions with the Board. If it comes to domain knowledge, look at our leadership team. They are quite experienced. There are -- 2 of the founders are even on this call, because we have all the EC members on this call in case we get -- I get questions which I cannot answer. So far, it was good. So in the leadership team, we also have a good competence though of course, somebody experienced going, there is always a loss, but we have a strong team to go ahead.

I'm Andre Muller, I'm the Chair of u-blox. And yes, Thomas is leaving, and Thomas has been working with me for about 10 years. He has been with the company for more than 22 years. And since 2007, he was a member of the Board. And this is always a loss for the company to have a brain leaving. But I fully agree with what Stephan just said. We have the competencies in the board, we have the competencies in the company, and we are sure that -- on the personal side, this is a loss because I've had a very good relationship with Thomas over the last 10 years, almost 10 years, and that's always [Foreign Language] in French. Okay, thank you.

Great. So, if no other questions, we thank you very much for all the dynamic Q&A for the ones who are here today with us in Zurich and the ones connected in the phone. Bye.

Thank you.

Thank you.