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

Ladies and gentlemen, welcome to the u-blox Q1 2024 Trading Update Conference Call and Live Webcast. [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.

Hi, everybody. I'm Rafael Duarte, Head of IR at u-blox. Here together with our CEO, Stephan Zizala; and our CFO, Roland Jud. I'm sure you have all seen our Q1 trading update. So the idea for this Q&A session is to give you the chance to address any potential questions on the results. So we'll have no slides. It was a brief announcement. It's really just the Q&A session. [Operator Instructions] And with that, operator, if we already have a question on the queue, we can get started.

Our first question comes from Harry Blaiklock with UBS.

The first is just on Q2. Really I think people will be surprised how weak the guidance is for Q2 on top line. And it seems to be kind of significantly weaker than most are expecting for some of your auto and industrial exposure here. So I was just wondering whether you could give some color around what exactly that's driving that weakness? Is it just the inventory divestment taking longer than expected? Or is there kind of anything else that you've called out?

So thank you, Harry. Let me take this one. So first of all, the first quarter turned out as weak as we guided and also expected. And we also indicated that we expect a slight improvement for the second quarter, and this is how we guided. If you now remember and compare this, we entered in this phase of corrections -- inventory correction very late. And this was due to the agreements we have with our customers and significant overstocking, which happened in the second half of 2023, especially also in the fourth quarter. So this might be an explanation why the second quarter is, in terms of guidance, slightly higher than the first quarter as expected, but not significantly higher. This effect we expect rather for the second half of the year.

Got it. And then just one follow-up around what gives you confidence in that H2 recovery, especially I think in the release, you mentioned the order level is still relatively low? So yes, it would be great to get some color on what gives you confidence there.

Well, there are several factors which go into the statement. So we remain confident on the second half of the year, where we expect a more substantial increase of our revenues. And the reason for this is, first of all, we estimated a certain overstocking level at our customers, which will burn through. Second, don't forget the underlying applications didn't disappear. So the basic auto market is there. Yes, it's a bit weaker right now, but not to the extent what we see in revenue decline. We did not lose any sockets in this timeframe. So therefore, there's a structural reason why it will come back once the inventory is consumed. And third, also looking to our customers, when we talk to them, that's exactly the message we also get from them. So by and large, we are also in line with several other players in the market, which we expect more significant improvement in the second half of the year, which is complemented by our own view on the second half.

Got it. And then is that kind of runs through across all end markets? I mean it sounds like maybe auto kind of maybe a little bit less of a bounce back than industrial? But yes, that statement saw the H2 recovery is centric to all end markets?

I would rather say it's customer-specific. So I couldn't say it's auto or its industrial mainly because it was where individual customer decisions, how much inventory and how much they really ordered and build up this level.

Okay. Makes sense. And one last quick one, if I may. Have you seen any -- I mean, yes, you've spoken over the last few quarters and peers seem to be talking about kind of a return to low to mid-single-digit pricing decline. I was wondering whether you've seen any change to that? Is that kind of what you're expecting for this year and beyond?

No change, so it will normalize in this level.

Our next question comes from Michael Inauen with Zurcher KB.

I just have a question now in hindsight, Q4 last year, which was around CHF 140 million, CHF 141 million in revenues compared to just CHF 100 million in Q3. What do you think how much was probably over-ordered because of these agreements or contracts you had with your clients? I'm just trying to understand what would have been a normal revenue level in Q4? And what has been overcompensated in Q4 that you are not seeing now in orders in Q1 and Q4 -- Q1 and Q2, sorry? So this would be interesting to understand also from your discussion with clients. And generally, just a financial question, where would you see now your breakeven level on quarterly revenue? And the third one, one of your peers -- I mean, today, some of your peers have reported that for example, Nordic Semiconductor has given a really strong revenue guidance for Q2, really reshaped recovery. Is that a kind of recovery that you would also expect from, let's say, Q2 into Q3 that it's really [ reshape ]? Because if not, it will be tricky to reach what the consensus estimates, I would say. Those will be my questions.

So let's first start with your first question on the inventory. I cannot specifically now distinguish between the different quarters. But what I can say is that over the year 2023 we roughly estimate that we have around 25% overstocking in the market. If it exactly happened now in the Q4 or if it was in the previous quarter, that's maybe even less relevant in this aspect. But overall, that's roughly the order of magnitude what we see. Then on your third question, the comparison in Nordic. So I cannot comment on their numbers. However, what I can say is we have a very low consumer exposure. And overall, if companies have a different exposure to end markets, that makes a difference. So it's not one-to-one comparable in this sense. We -- again, I can only repeat myself. We talk to customers a lot. We have no signals that we lost any projects which would affect our running business in the second half of the year. The underlying markets did not -- end markets did not decline in a similar magnitude. And therefore, we remain confident on a more robust increase in the second half of the year.

Okay. Thanks for your question, it's Roland Jud speaking. About profitability level reached, so that we reach breakeven in the quarter, yes, that's difficult to say what -- because it depends a lot on the mix of the top line and therefore, the conclusion -- but overall, we could say if we are somewhere in revenues between CHF 80 million and CHF 90 million, we are also, again, on EBIT than par or breakeven, so to say.

Okay. Yes, I understand, of course, the mix effects, but just to get a feeling. Maybe just one add-on. I mean I understand, Stephan, you cannot compare yourself to Nordic and that was not my intention, of course. But just trying to understand, I mean if you have a huge drop of 65% in revenue quarter -- year-over-year and then again, 65% in Q2 year-over-year, I mean is there a chance that you can also really quick -- just from the characteristics of the business, is there even a possibility that you could say, I don't know, 50%, 60% up, for example, from 60% to 90%? Just as an example. I wouldn't obviously put it as a number. But just to understand, is that even a possibility?

Well, I understand where you are coming from. And again, what we see is that if we look at the end markets, we look what our customers consume and what they currently buy from us, it's by far less to even keep them flat on their end markets. So it's in a way, what we expect is really a more substantial increase. However, what I cannot say if it will be exactly as reshaped as for example, Nordic, what you mentioned before. Again, it's not that we need a growth in the end market. The end markets are there, and they didn't change so much, it's just this overstocking effect. And therefore, to our best knowledge and to what we get as feedback from a customer -- from customers, we see a more substantial upswing in the second half.

Our last question comes from Juergen Wagner, Stifel.

Question on cash flow. How was it in Q1? And looking at Q2, what would it be if we take constant currency?

Yes. On the cash flow side, Q1 was, on free cash flow side positive, at least. And in Q2, we expect it to be in this range as well, assuming constant currency, the currencies, but not the big impact, the bigger impact is the net working capital development due to the overstocking. Also to the high stock levels we have at the moment, depending on revenues than in Q2 and what happens there, and the mix of these revenues, how much this inventory goes down? We had, again, positive free cash flow or if the free cash flow comes down or is even better than expected. So to predict this is rather difficult. The currency, of course, plays a role. If we have now a dollar drop by 10%, then of course, this has an impact, but this is not expected at the moment. So to say, the constant currency is not the really trigger point. The trigger point is what net working capital loss.

Yes, I meant the Q2 guidance what that would be on constant currency compared to Q1? If you take out the dollar impact, I think it would be rather flat, right?

It's a small growth.

It's a small growth still. It's still a small growth if you take out of the guidance -- dollar effect. Not a big dollar effect to put it in.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back to Mr. Zizala for any closing remarks.

Okay. So thank you very much for everybody for the questions. If there is anything else, you know how to find us. Happy to continue the dialogue. Thank you very much.

Thank you.