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

Ladies and gentlemen, welcome to the u-blox Half Year 2024 Update Conference Call and Live Webcast. I am Maria, the Chorus Call operator. [Operator Instructions] 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 Rafael Duarte, Head of Investor Relations at u-blox. Please go ahead, sir.

Hello, everyone, I'm Rafael Duarte, Head of IR at u-blox, here together with our CEO, Stephan Zizala, and our recently joined CFO, Camila Japur. Happy to have you on board, Camila. Our agenda for today, we will present the main aspects of the results, provide you an outlook to the business, and close it with a Q&A session. As always, in order to make a question, please follow the instructions in the webcast platform. Stephan, I hand over to you.

Welcome, everybody. And thank you, Rafael. Welcome from our headquarters at Lake Zurich in Switzerland. Let's move directly to Page 5 for the highlights of the period. We reported half-year results, which came in at the higher end of our guidance. It turns out that we were right in our predictions last year during the Capital Market Day in November. We reached the lowest point of the cycle in the first quarter and saw a slight improvement in the second quarter. EBIT was quite negative as a consequence of lower revenue. Our cost optimization program started at the beginning of the year and already generated CHF 5 million in savings. Despite the negative EBIT, we managed to maintain a resilient, positive free cash flow mainly from our efforts in reducing working capital. At this stage, if you follow other semiconductor companies, you will not be surprised to hear that we now expect a more gradual improvement in the third quarter. Because of that, we take action and expand the scope of our cost optimization plan. This new broader plan targets savings of over CHF 20 million. After this summary, I would like to go through some of the business achievements of the first half. Slide 6. First, on the robotic lawnmower market. We have won businesses that will sum up to over CHF 100 million (sic) [ $100 million ] in revenue from 2024 onwards. I must be honest on this one; when the team came with this number, my first thought was, is this market that big? How many lawnmowers are we talking about here? Then I learned that over 2.5 million lawnmowers are expected to be sold just this year with an estimated growth of close to 20% per year. High-precision technology is expected to be more and more present in those lawnmowers. To me, this is a good example of applications that will emerge in the next year using precise, reliable, and affordable positioning technology provided by u-blox. Precision agriculture, automated construction machines, autonomous cars, and many more applications one did not even consider as possible a few years ago, need to know their exact position. And this is exactly what makes us and foremost me so excited about the future of u-blox and especially positioning. The future holds innumerous applications for our technologies, which will continue to evolve and shape our lives. Slide #7. I want to speak about a very important partnership with NVIDIA. NVIDIA is the leader in artificial intelligence technologies, providing solutions that power a wide array of industries. Their AI platforms are crucial for advancing innovations, particularly in areas requiring real-time processing and decision making. Artificial intelligence relies heavily on accurate and timely data inputs, including GNSS. Our high-precision GNSS solutions ensure that AI systems receive the reliable and precise position information they need to operate effectively in diverse environments. This collaboration will help to make it simpler for engineers to develop autonomous vehicles and mobile robots based on u-blox positioning solutions. On one hand, u-blox has joined the NVIDIA Jetson Partner Ecosystem, which delivers the power of modern AI for industrial autonomous machines and other edge AI applications across all industrial markets. On the other hand, u-blox is listed as a reference for positioning sensors in NVIDIA's developer's kit for autonomous cars. Engineers in the ecosystem can quickly develop and deploy leading-edge AI-powered devices for a wide variety of use cases. Now back to our results on Slide #8, where we look into our revenue for the first half, which dropped to CHF 121 million, at the higher end of our guidance. The negative performance is mainly associated with the inventories held by our customers. In Q2, revenue grew by 16% versus the previous quarter, which confirms our prediction of bottoming out in Q1. In the next slide, you will see the breakdown of this revenue development. Slide #9. Few important messages here as we look into those details. First, the performance was weak across the board. There are some differences here and there, but the general picture is similar, mainly due to the common effect of overstocking. Second, the only difference I would point out here is the better performance in positioning compared to connectivity. Third, a common question from investors and, in my opinion, a very important one is about market share. I can confirm that we win in our target applications. If I take automotive, for example, we have achieved more design wins in this half year than 1 year ago, a double-digit increase. Now I would like to welcome Camila Japur, our new CFO. She will guide you through the financials. Camila.

Thank you, Stephan. Before I start, let me say a few words. I promise not to be long here. I'm very happy to be here today. I joined at u-blox in June and took over the CFO position in July. There are many reasons that make me excited to be here. Let me mention 3. The first one is that u-blox addresses key megatrends that create a positive impact in the world. Second, u-blox has a solid financial model in a high growth industry with high gross margins and a light asset model, which leads to a high cash generation. And the third one is that I believe there are many opportunities to accelerate value creation, some of which I could already confirm during these 2 months. I look forward to adding value to the company and to collaborate in the capital market. Now to the financials on Slide 10. So if we start from the left side, we see adjusted gross profit reached CHF 53 million in the first half this year compared with CHF 156 million last year. The corresponding gross profit margin declined from 46.8% to 43.7% in the current year. As Stephan mentioned before, Locate performed better than Connect in this first half, which generates a positive mix in the gross margin as Locate has a higher contribution margin than Connect. However, this positive effect was offset by a flattish fixed cost of operations and logistic with a lower revenue base. Looking forward, with the same product mix and higher sales, we expect a higher gross margin. Let's move now to OpEx and EBIT on Page 11. Starting with cash R&D expenses on the left side. R&D is CHF 64 million in the first half of 2024 compared with CHF 65 million in the first half of 2023. The cost optimization program initiated this year delivered CHF 2.7 million savings in R&D. This was partially offset by new hires made in 2023 that happened before the cost optimization program started. We are talking about cash R&D in this slide just to be clear. As a reminder, our IFRS-based P&L includes the impact of R&D capitalization. R&D capitalization is a topic that I want to dive deeper in the near future. If you go to SG&A, we see a decline by 8%, reaching CHF 31 million. From the CHF 3 million reduction year-over-year, CHF 2.2 million are attributed to the cost optimization program mentioned before. As you can see, OpEx's percentage have an increased despite our cost optimization program due to a lower revenue base. As a result, adjusted EBIT reached minus CHF 36 million in the first half of 2024 versus CHF 62 million last year. The respective adjusted EBIT margin declined from minus 30% from 19% in the first half of 2023. We are taking actions and expanding the scope of our cost optimization plan with incremental target savings of over CHF 20 million, with first savings expected to be visible in the second half of 2024. This is a necessary adjustment for our cost base, to improve profitability. I'll stop here with the P&L review. For completeness, we have included the full P&L in the appendix. Now we move to our cash flow on Slide 12. We had a strong free cash flow in the first half of CHF 15.7 million, despite the negative EBIT. The improvement was mainly due to working capital, which added CHF 39 million to our cash generation. This was driven by a reduction in trade receivables. More details on working capital in the next slide, at Page #13. Here you can see on the left-hand side, we see the evolution of our working capital in absolute values and as a percentage of revenue. Working capital as percentage of revenue remains at similar levels compared to December last year, despite a significant drop in the top line. This improvement was mainly due to a reduction in trade receivables, down by CHF 57 million. Working capital improvement is a top priority and something I will continue to focus in the second half, especially inventory management. Then, to conclude, on the right side is our net cash position, which remains very solid at approximately CHF 100 million, despite dividend payments early this year. And it's relevant to highlight that we had no gross debt. Stephan, back to you.

Thank you, Camila. Now to our outlook on Page 15. At this point, you have already seen the outlook of other companies that operate in our space. The significant recovery expected towards the middle of the year seems to happen more gradually. Let's talk about some facts. Based on the orders already placed by our customers, we expect a sequential improvement in the second half of the year. As a matter of fact, orders for our positioning business in the third quarter 2024 are higher than in the third quarter of 2023. Additionally, our assessment, based on our knowledge of the industry and relationship with our customers, is that the digestion of the overstock is taking slightly longer than expected, also driven by a slower demand in end markets, namely industrial. Let's go to Slide #16. For the third quarter, we are expecting improved revenue in the range of CHF 75 million to CHF 85 million, which translates into a quarter-on-quarter growth between 15% and 30%. As for EBIT, we expect an adjusted EBIT margin ranging from minus 10% to minus 5%. This does not include the one-offs from the cost optimization program that are expected in the P&L starting in the third quarter. Slide #17. Due to the more gradual recovery expected for the next quarters, we are increasing the scope of existing cost optimization plans that already started at the beginning of the year. The implementation of this broader plan will start now, and we expect annual savings of over CHF 20 million, with its first results already in the second half of 2024. Of course, we will continue to protect our activities, which are core to our strategy. The one-off costs related to the plan are expected to be below CHF 20 million. Slide 18. Before we finish, let me give you an update on the turnaround of our Connectivity business. In our Capital Market Day last year, we announced the turnaround with 3 assumptions. #1, stopped the future cellular chip development. This is implemented already. #2, win market share, leveraging our trustworthiness as a Swiss supplier in a multi-polar world. #3, use scale to become western cost leader. Last year, I made it very clear that we will see, if we are successful with this, in a matter of quarters, not years. Many of you asked me for a concrete date for an assessment and decision. We will continue to track the execution of this plan closely, and we will review strategic options for the business by end of the year 2024. To conclude, on Slide 19, I'm convinced that we go after the right growth markets, like automated driving. Yes, the current business situation is challenging, but we are taking action, and we will manage it through. We are the undisputed market leader in positioning, based on our unique IP, and we will further expand this. And we have the potential to create sustainable value with our focus, innovate, and execute strategy. There's a lot to improve and gain. We are a great and committed team, and we are on it. Thank you.

Okay. So thank you both for the presentation. Operator, we are now ready for the Q&A session. Do we have any questions?

[Operator Instructions] The first question comes from Harry Blaiklock from UBS.

The first is on automotives, and it seems like it's down quite a bit more than what peers are reporting. And I know the GNSS market and the inventory dynamics there are slightly different from other product categories. But in your mind, what are the drivers of that weakness, and have you seen any loss of market share at all that you're aware of?

Hello, Harry. So let me come back on this point. Indeed, it's a very important question. So first of all, we suffer heavily from overstocking. That's the main effect of this heavy revenue drop. In terms of market share, I only can repeat, in the first half of 2024, we won more projects in automotive than the year before. The dollar value was double-digit percentage higher than in the same time frame the year before. So again, to answer your question, overstocking is the main effect.

And then maybe a follow-up to that. You mentioned in the release that automotive, you see it getting better, but then that again seems to be kind of the opposite of what we're seeing at peers and industry data as well. I mean, we've seen auto production numbers and forecasts get adjusted down to 2024. So I was wondering whether you can provide some color on those comments as well?

So actually, it's 2 topics. First of all, again, the effect of overstocking might be much stronger for us than at some of the peers you're looking at. And second, of course, we also see a content growth in autonomous driving, which has a higher take rate. And this might explain the difference here.

And then in terms of the cost optimization plan, it would be great to get a bit more color on kind of where that's going to be focused within the business. And then in particular, what are the incremental areas that you're focusing on beyond what was announced last year? And then maybe a follow-up, are you comfortable that those cutbacks aren't going to affect future growth plans?

So first of all, we will protect our core focus growth areas. That's of utmost importance, and you can be 100% sure that we are acting according to this. But of course, a lower revenue base, a lower business also has some implications of what we manage for this business to give you, whatever, what resources we need to manage a lower business. And there's a certain way, a natural way to reduce costs and complexity at this point in time. And this we are going after. And second, of course, we look even more closely where we can optimize and which functions we can optimize to broaden this. And just coming back to what we announced at the beginning of the year. At the beginning of the year, we announced, let's say, soft cost-cutting measures because we had the assumption there is a more significant recovery in the second half. As we don't see this, we act and expand the program to other activities across the function while, for sure, protecting our core activities.

And then a quick follow-up. The CHF 20 million of savings, are you expecting that full effect in next calendar year? So it's still CHF 20 million of savings in 2025? Or is it going to take longer to ramp?

I can take that one, Stephan. So yes, we should see the first savings already in the second half. Of course, we want to timely execute in a way that we can see the full effect already in 2025. This is in our plan. But this, of course, depends -- we are talking about several markets, depends also in the local legislation, so.

Would it be okay to squeeze one last question in? Sorry, I'm hogging slightly. If not, I can jump back in the queue.

Fine for me. Go ahead.

Yes. Go ahead.

On the lawnmower example that you mentioned in the presentation, are you able to provide a rough kind of average selling price figure for u-blox content in a product like that?

So the range is pretty wide here, I must say, because there are, again, a lot of different scenarios. But to give you an order of magnitude, lower double-digit is a good magnitude.

The next question comes from Michael Inauen, ZKB.

Also a couple of questions. First of all, also on the cost savings program, maybe you can give a little bit more detail what -- or maybe I just forgot, sorry for that, but what was your initial plan actually on the cost savings program? And how much cost do you have planned for that before you now increase it basically? So what was your base assumption before today?

So originally, we targeted double-digit cost savings. And we achieved around CHF 5 million already in the first half of the year. So we are executing on this one. And now in looking at the situation in the market, where we see is expected a significant improvement in the second half will come more gradually. It's still coming, but not as quickly as we expected. Therefore, we introduced a wider cost saving program than that.

But is it fair to say that if Q3 is recovering gradually in Q4 again versus Q3 that what you could do on the EBIT line potentially is eaten up by the cost for your cost savings program or let's call it, restructuring costs? Is that fair to say?

Maybe I can start, Stephan, here. So we guide for Q3, right? And then [ we already had completion ] for Q3. We will come in October with a better view about Q4. What we can tell you is that we have a detailed plan behind this CHF 20 million additional savings that we communicated. And we are fully committed to deliver that on a timely basis to make sure that we see this first savings already in the second half of the year. It's very hard to be very precise when exactly you start. But we see a benefit to do this quicker as possible to see the impact in the P&L.

Maybe just 2 more, if I may, on the cash flow. So you have had a pretty positive free cash flow, thanks to net working capital improvements. But of course, net working capital compared to sales is still pretty high. I mean that's due to the situation. I understand that. But can we expect to get back to the levels we have seen in the past is 14%, 15%? Or what would be a target there that we could kind of plan with for the next couple of years or, let's say, next 2 years?

Yes. So the next item that we are targeting is inventory, right? And as I mentioned, this is top of margin for now the coming months, right? So we have, as you mentioned, first half was quite strong in working capital, and this was mainly driven by accounts receivable. We will not guide for the second half. We'll come back to that. But I'll give you some colors. We need to have in mind that we have the impact of a one-off impact restructuring costs. Our first estimation is something below CHF 20 million, impacting the second half cash. But we also see a gradual improvement in having in the second half that should lead to a low negative cash flow from the business in Q3 that we should be able to partially offset by working capital actions like inventory reduction. I think this is the main lever for us to improve working capital. Yes. The good news is that with a lower cost base also, we accelerate profitability.

And maybe just the last one on strategic question, particularly for Stephan. I mean, we've discussed it before, also the optionality that you have, you call it the bipolar world, which I think is pretty well said. But can you see there already positive effects for u-blox coming from that, let's say, political geopolitical uncertainties. I mean, are you winning business, for example, in the U.S. against your biggest Chinese competitor? Or how do we have to think about that?

I mean, we address these topics and in our turnaround assumptions for our Connectivity business. And it's not just possible to say one trick will do everything. So for sure, we see more opportunities in this area. And for sure, we also see that we are winning in this area. So it's not something theoretical out there, but it's something what we absolutely see, to draw a line and say this will be the key part for a successful turnaround. We always indicated it will be a matter of a few quarters. And today, I committed that we will come to a clear assessment by the end of the year. And there, we are very well on track.

The next question comes from Torsten Sauter, Kepler Cheuvreux.

Actually, I have a couple of questions, if I may. First one would be on the cost section and the -- yes, basically cost cuts. I may have overlooked the figure. Can you disclose the number of full-time employees at the end of Q2? And maybe how should we feel about the development of head count going forward?

First of all, the rough number of employees is slightly below 1,400. And we did not put out a concrete number there. So what we target for is this above CHF 20 million savings, and it's also clear that a reduction of personnel cost is an -- is an included measure to achieve this.

I think it would be helpful to have that number on a recurring basis, if I missed that. Then if I may, on Slide 15, where you provide an illustrative quarterly revenue development. Now I put basically a ruler on and have the feel that you may want to imply an exit rate of Q4 revenues in the tune of say USD 100 million or something. Would that quarterly level of a run rate, I assume a restocking effect after destocking? Or is that something that could also help us as a first assessment of where the business could go next year?

Well, so first of all, the chart is illustrative. So we didn't want to provide a guidance for the fourth quarter. We are guiding for the third quarter. If we do have our forecast, of course, we try to extrapolate the real demand, we don't focus on the restocking topics. So if I don't have -- it's already difficult enough right now to predict how the overstock really is consumed. So predicting now a restocking, which we will see here or there. [indiscernible] absolutely convinced, that's impossible, this I don't do.

I actually have a couple more questions. Maybe if I may, just a clarification question. When you talk about these USD 100 million in expected revenue on the lawnmower market, is it correctly understood that this would come on top of orders that were disclosed in automotive business in the similar magnitude earlier in 2024?

Yes, it has basically even 2 different market segments. Lawnmowers would be rather the industrial market segment and automotive is obviously automotive. So no overlap or no double accounting in there.

Perfect. And then allow me maybe one final question, strategic question maybe. Unfortunately, we are witnessing the advent of drone warfare in the Ukraine battlefield. And now I know that u-blox is deliberately not active in defense applications. However, do you see a risk that resource for new competition is entering the market for unmanned aerial vehicles now.

Well, first of all, we are not in the market of unmanned autonomous vehicles. So we are delivering positioning components, which are used in commercial or consumer drones. And I think, and I'm convinced based also on our track record in positioning, it's not so easy that with a lot of money, you just can copy 2 decades of expert knowledge to achieve positioning accuracy and reliability. And there's another factor you need to keep in mind. Already 20 years ago, it was possible to have a pretty accurate position. The problem just lost to us very bulky and very, very expensive. So we talk about thousands of dollars. Our strength in addition to the accuracy and the reliability is that we make it affordable for a wide range of applications. So I'm not -- I'm not concerned at all of potential government-backed companies who try to enter this market. They will stay in their niche.

The next question comes from Juergen Wagner from Stifel.

Can you now give us the revenue split between your businesses, so Positioning and Connectivity. What would it look like on EBIT level? And yes, the capitalization you did in the first half, also how was that split between positioning and connectivity. And my last question would be amortization was still high when it will go down more significantly as we rolled down a lot, I think, last year?

So we don't disclose profitability for those business Connect and Locate. What I -- if I can give a bit of color is our expectation is that Locate is slightly positive EBIT in the second half of the year. So this is what I could share at this point. And talking about amortization and capitalization. So this is a topic that is top of my agenda. It's one of my top 3 priority, and it's something that we work now with the team in Q3 and come back. So most probably, I can give a better answer next time we have this call.

There are no more questions.

Okay. Perfect. So thank you very much for everybody that joined the call. And if you have any further questions, you can get back to us. Thank you.

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