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

Ladies and gentlemen, welcome to the u-blox Announced Strategic Decision to Increase Focus and Locate Business and Phaseout Cellular conference call and live webcast. I am Sandra, the Chorus Call operator. The conference is being recorded. [Operator Instructions] The conference may 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.

Hi, everybody. Thank you for joining us today. I'm here together with our CEO, Stephan Zizala; and our CFO, Camila Japur. You have all seen the announcement this morning. So this session is to give you the chance to ask any potential questions you may have. But before, I hand over to Stephan. Go ahead, sir.

So good morning, good afternoon, everybody. Before we take your questions, let me say a few words to a straightforward story. You might remember the Capital Markets Day in 2023. We revealed that our Cellular business was loss-making. We plan to turn it around, and I ask you to give us a few quarters to see results. The progress did not meet our expectations. Therefore, we are taking action now. After over a decade of investments in our Cellular business. We decided to phase it out now. If you have been following u-blox, you are probably not surprised. Let me do a quick recap. In 2023, we revealed for the first time that the Cellular business was loss-making, even in 2022, our record year. A turnaround plan followed with the intention of bringing the business to profitability. In 2024, 1 year later, it became clear that these plans were not panning out as expected. Therefore, we put the Cellular business under strategic review as announced in August. In the review, we explore different alternatives, including a sale and a discontinuation of the Cellular business. We worked very hard to find a solution that maximizes value to all stakeholders. Today, we announced our decision to phaseout our Cellular business. What does phaseout mean? It means we will continue to serve our customers with existing products to generate cash, and we reduce all related OpEx to the minimum. This means especially that we stopped our R&D activities. Talking about financials. The decision to phaseout Cellular means that we are eliminating at least CHF 30 million in annual losses on an EBIT level. That much money we lose in Cellular now. It doesn't come for free, of course. Looking at the expected cash impact of the one-offs, we are talking about CHF 25 million to CHF 30 million. This means we spent CHF 25 million to CHF 30 million now to eliminate CHF 30 million in losses per year. An important point here, this does not include the potential inflow from selling our current inventory. This comes as an upside that we haven't yet quantified. We gave more indications on the financial impact in our press release, and Camila will answer questions on that. I feel sorry that this change will affect many u-blox colleagues and customers. For many of them, this change of strategy after such a long time will be perceived as tough. And it was a tough decision, but it was a necessary one. Looking now in the future, u-blox becomes a much more focused business. We have the opportunity to put even more energy in our Locate business and continue to improve the performance of our Short-Range business. The future of automated driving, mobile robotics, asset tracking will not be possible without an accurate and reliable position from u-blox, of course. Therefore, this is a very important moment for u-blox and I can't wait to share with you the progress of our journey, but one thing at the time. Exactly 2 years ago, I took over the CEO position. And since then, we announced a number of changes and probably more important, executed them. focus, innovate, execute was the theme of our Capital Market Day in 2023. We will continue on this path. That was it from my intro remarks, maybe a bit longer than intended, but now we are ready for questions you might have.

[Operator Instructions]. Our first question comes from Torsten Sauter from Kepler Chevreux.

I hope you can hear me. I have two questions on the phaseout. Can you give us maybe a little bit of a feel for the timing here on the phaseout? How long will u-blox continue selling cellular products and how fast should we model the respective phaseout, I mean, in terms of percentage declines maybe in the years ahead? And also combined to that, tying into that, you highlighted that you will adjust certain condition for the product that you are phasing out. Can you give us a feel for how this works in real life? And could this be detrimental to, for example, cross-selling activities that you engage with?

Thank you, Torsten. So let me start with your question number one, timing of the phaseout. So we announced this decision today. And already today, we are in contact with our customers to discuss their needs and their demands of this phaseout. What I would like to emphasize here, our existing products are technically working very well. We just need to produce them. And therefore, we are in a good position to negotiate with our customers, their demand and make sure we maximize the value for u-blox in this exercise. If you refer more to the cost saving part of this phaseout, we expect and target the majority to happen in the second half of 2025. Your second part of the question was adjusting the terms and conditions. Well, as usually, in a phaseout phase of a business you discuss with your customers, how long they want to have certain products and under which conditions and we can supply this for a certain duration of time. And what it also means is that we will make sure we create value out of this in -- during this phaseout phase. And this is meant we discussed with our customers the terms and conditions. And there was a question 2b, what this means for cross-selling? There are very few cases where we sold a positioning product due to a cellular product. So in this aspect, the effect of the cross-selling will be limited.

The next question comes from Felix Remmers from zCapital.

I actually have two questions. Can you give an indication how big the inventory write-down has been? And has it been written down to 0? And everything you sell is upside from here? And then secondly, in 2024, you executed on a CHF 20 million cost savings program. Now you talk about CHF 30 million losses being eliminated in Cellular. Can that be added up or have been cost savings being achieved out of the CHF 20 million in cellular? And maybe a final question, if I may. Do you have any visibility on the cost base ending 2025, if the ramp-up has been done. So what is the OpEx you assume exiting maybe 2025, if you have any indication.

Hey Felix, it's Camila. So just to clarify, what we reported was in Q4, we will have an impairment of the R&D capitalization of CHF 31 million. So this does not include inventory write-off. So just to be clear, that was -- that will be the impact of the inventory. Then for 2025 in Q1, we reported that the noncash impact -- total impact of CHF 65 million and around 60% to noncash. So inside this amount, it's estimated inventory impact that comes with the decision of the phaseout Cellular. And this is something that we will work together with the commercial team to try to optimize and see if we can convert that in cash as much as possible. So this is top of priority and already being discussed with the commercial team. So together with our previous answer from Stephan, that how will be our strategy here to address the pricing and how to sell the remaining. We will also combine this with what we have in the inventory and how to ensure that we optimize this and converting cash. So this is what we are doing now. So I don't have a number to you now, but I can tell you that it's inside this CHF 65 million communicated of -- in Q1, the impact. Then your second question was about the cost saving initiative, CHF 20 million. And then these additional losses reducing CHF 30 million. So more than CHF 30 million is the losses of Cellular. So during 2024, we have had made corrections in the cost base. So part of the CHF 20 million is inside this CHF 30 million. But it's not a fully on top, but to be the total impact of CHF 34 million, the Cellular specifically or more than CHF 30 million. And your third question about the cost base for 2025. We don't have the -- we will not share the number today. So we're still working the Q4 closing, and we will come back to that in -- when we report the full year 2024.

The next question comes from Juergen Wagner from Stifel.

And you gave a number for the first half for your Cellular, should we just take then around CHF 60 million sales and CHF 30 million losses for '24. As you confirm your full year guidance to get to your positioning business in terms of sales and EBIT? Is that the number we should look at for positioning?

So we are still working the second half closing, right? So we don't -- we will not disclose any new figure today. This will come -- we will share more when we report the Q4 figures. We'll give a bit more taste on the Cellular numbers. But you can maybe extrapolate a bit what you saw in the first quarter -- first half.

Okay. And on capitalization -- and will you continue to do that for your positioning post now or the write-offs?

The focus of today is the communication of Cellular. So I prefer to address those questions as we talk about Q4. But what I can tell you is the Cellular, of course, we'll not do anything else right as we reduce R&D and we impair now. But we will come back to that.

Next question comes from Harry Blaiklock from UBS.

First is just around your longer-term kind of through-the-cycle growth targets that you gave at the Capital Markets Day. I know kind of historically, the GNSS or positioning market, has been lower growth than Cellular and connectivity generally and most market forecasts have that continuing going forward. I wondered whether this decision is going to have any impact on your 10% through-the-cycle growth rate and then also similarly, obviously, Cellular lower margin business. Is there likely to be any change to the 14% adjusted EBIT margin as well.

So valid question, we will not provide an exact answer today to those questions. What I can say, however, is that positioning is a very attractive growth market there, especially if you think of the applications like automated driving or mobile robotics. So we will stay in this growing structural growing market space also in future, where we have our leading position with our Locate business. And on the other hand, you are absolutely right. The margin profile will go up, but we have not disclosed or we do not disclose a new midterm model today.

Got it. Very helpful. I have a few follow-ups as well, if that's okay. One is just on the strategic review, my understanding was that it was the whole of the Connect business that was under review, but then you've obviously decided to keep Short-Range within the business, but wind down Cellular. I'm not sure whether that's the right interpretation, but it would be great to get a bit more color on the reasoning behind kind of keeping Short-Range within the business?

So first of all, the understanding is correct. So we phaseout Cellular, and we improve the performance of our Short-Range, meaning we will bring it to profitability in the second half of 2025. And the important thing for us is it's our job and our task to maximize the value. And this was the guiding principle during the strategic review, which we announced in August timeframe. And the conclusion we came up with is exactly the decision of today. We phased out Cellular big and we improved the performance of Short-Range with a breakeven in the second half.

Are you able to give a kind of once you've turned the Short-Range over -- the Short-Range business to profitability. Are you able to get a rough estimate to kind of what you expected gross margins to be in that business?

Sorry, just to make sure that I understood. So what you are saying -- your question is about gross margin of Short-Range? Or can you...

Yes. That's right.

Sorry. Yes, we don't disclose gross margin, right? So what we disclosed in the Capital Market Day in 2022 was negative Connect business, right? So we are removing the loss business Cellular, and we are confident to reach breakeven in 2025. We will still come back to how we report the numbers next year given this new reality. But for now, we don't disclose the gross margin of this business.

Okay. Got it. And one last one, if I may, just if you exclude Cellular, are you able to give kind of a rough revenue set in terms of end market, but also industrial and consumer? Or is it just similar to what it was with consumer with Cellular, sorry.

[ Cost ] has a higher exposure to automotive. So the share towards auto will increase, as we can say. Yes.

The next question comes from [ Tobias Schulte ] from UBS.

A few questions from my side. One, maybe related to the Locate positioning businesses. Now looking at the disclosure you gave at the sales level, also the position in our Locate business is probably loss-making. I was just wondering if you can confirm that or I'm missing something. And the second question is, I remember at the Capital Market Day, you were mentioning that the Locate business has a margin -- an EBIT margin of around 30%, but it was probably at a completely different sales level. I was wondering that if you recoup these kind of sales, is that kind of margin maybe today still possible? Or is there something happened in a market like pricing, which is not available. And maybe the third one, I know that you are not disclosing a lot, but I was wondering if you can give us any indication how the split in R&D is divided between the Locate and the Cellular businesses. And on this topic, you are spending [Audio Gap] I was wondering a little bit what can we expect going forward? Do you need this kind of level of R&D spending for the projects you have? And yes, we hope that the sales level will be normalizing as well at a higher level? Or are you also be able to reduce the kind of R&D spend you have?

Okay. So let's take one after the other. Sorry, your first question related to profitability. I want to repeat, 2024 was a year which was highly distorted by overstocking. And this was the major effect what we have seen over the year. And I cannot give you numbers for the full year as Camila indicated, but you can extrapolate that from our guidance and our reporting that all of our businesses were not profit making. Now to your second question, the margin profile. So if I understood your question right, did anything change in the market dynamics to come to a similar margin profile, what we indicated in the Capital Market Day in 2023. And it remains the same, positioning, especially is a highly differentiated business and a highly differentiated market space. We are leading there, and we have unique technology to be there. So I do not see any change in the market environment, which would disturb this dynamic. Of course, we suffer from the loss of operating leverage due to the lower revenue base, especially in 2024. On the third question, R&D spending between Cellular and positioning, we cannot provide details at this point in time. And so we have to leave the information where it is.

Okay. But you will disclose more details with the numbers 2024? Or is this something which you don't want to share?

No, no. Let me clarify here. So we are fully aware that it's difficult to understand with all these data points. And we understand also that we need to be more clear about it. So we will try to do something already for the Q4 reporting to give a bit more transparency.

Okay. And maybe the last question is still related to that I had is about the absolute number of R&D spending. Related to the actual sales level, it's very, very, very high, but I hope and assume that you are thinking about a higher number of sales in a more normalized phase. But I was wondering do you need to keep this high level of sales? Is it, let's say, productive enough? Or is there an intention at some point in time that you probably can go ahead with less?

So maybe the best way to answer this question before we share more details that we expect to do in Q4 results. earnings call is to say that a breakeven level in the past. In Q2, when we report the numbers, was around -- we need CHF 70 million to CHF 80 million top line to breakeven. So we are taking actions now to drop significantly that number. So we believe that we'll be more towards around CHF 50 million to CHF 60 million. So it would be much lower because we address the cost base. So you know that we made these costs out of CHF 20 million that was fully executed already. So we start to see more of the impact in the first half of 2025. And then on top of that, with the cellular actions when we have a normalized quarter then you see the impact. But it would take a few quarters or at least first half, as Stephan mention for us to address the cost base.

Okay. Just that I get it right. The CHF 70 million to CHF 80 million quarterly sales breakeven levels, these are how the business is actually run?

No, that was when we reported in the first half of 2024, right? So we...

So with Cellular and short range and position or Location business, right? Okay. Good.

The whole company, yes. The whole company. And so now we drop -- we are addressing the cost base, right? So CHF 20 million was [indiscernible] together with other initiatives, and then we will expect a much lower revenue to reach breakeven.

The next question comes from Michael Inauen from ZKB.

I just have a strategic question, actually. I mean, I assume that -- or when we were discussing last year often. I understood you want to find a solution for the whole Connect business, which hasn't happened now, so you get rid of the Cellular business, Short-Range remains. I'm just trying to understand what happens in the process that you decided to keep the Short-Range business? Second, is it a strategic basis for you going forward or sorry for being a bit blunt, but are you just turning it around and then trying to sell it again. And third would be is it a risk that now clients of yours in the Cellular business see what happens with basically your Cellular business phaseout that some of your Short-Range clients would potentially look for other suppliers down the road? So I mean, in other words, I don't see a chance this business is going to stay with you for much longer.

So let me, again, also this one -- take step by step. So what happened in the process. So we said very clearly, we evaluate all options. We did not just evaluate one possible option. And we choose the one which maximizes the value for all stakeholders. So that -- this is what happened in the process. The second one is on the strategic relevance of this product -- of the short-range product line. Now first of all, I think we made it very clear in the announcement, u-blox will become an even more Locate focused company. And there, we put a lot of energy, and this is the core of our activities. So there is no doubt, and this is where we are leading the market, and this is where we are going after. Now independent of any long-term question, you could always ask who is the best owner of a business. We came to the conclusion. It's best if we further improve the performance of this business because it creates value for us. Number three, is this a risk for the strategy? I don't see this because phasing out businesses and doing portfolio management is something very common in the semiconductor industry. We are not the first and we will not be the last company doing this. U-blox has been a very reliable partner. We communicate transparently with our customers, and we walk our talk, and our customers can also feel this. So I'm not concerned about question number 3.

And just maybe one additional here. Is there any reason that the Short-Range business and the positioning business would need to stay together in terms of products, synergies, any I mean, I know you have combined products with partners of yours, but does it need? Does the Short-Range business needs to be a part of positioning? Or is there any advantage of it? Or the Locate business can obviously run alone, technically?

Yes, these are three questions. So let me answer again -- let me start with the third one. Yes, the Locate business can run on its own. It has sufficient size and obviously, this is a straightforward answer. Your question number one, does it need to be together? No, not necessarily. Question number two is, are there advantages? Yes, there are areas in indoor positioning where it can be interesting to have both in our hands. So indoor positioning is based on short-range technology. So there is an application advantage to have this together.

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

So thank you very much for the questions and for attending this short call. So we see from the call that we have a lot of questions on figures and models. So we try to provide as much as we could. As of now, there is a number of data points there. And once we report full year results in about a month, we will do what we can to provide a bit more visibility on how it goes forward. Thanks a lot, and talk to you soon.

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