Nordic Semiconductor ASA

OSE:NOD

Earnings Call Transcript 2018-Q2

[Svenn-Tore Larsen]

Welcome to Nordic Semiconductors' Second Quarter 2018 Numbers Presentation. Today, I'll do a quick business update; Pål Elstad, as usual, do the financials; and then I go back and do the outlook for our business for the rest of the year. This was a record quarter when it comes to revenue. We had total revenue of $71.2 million, and this is new all-time high. It is a 21.3% growth year-on-year. We grew 45.2% year-on-year in Bluetooth, strong growth in Bluetooth. And obviously, Bluetooth is what's bringing Nordic forward currently. We see a strong revenue from both consumer and nonconsumer. And we've been predominantly, if you look back a couple of years, consumer-oriented. Now we see that the nonconsumer business is picking up. When it comes to profitability, we are now seeing that we are on track to meet the improved profitability target that we had for 2018. We had $10 million EBITDA. Good. It's 25% from last year when you compare quarter-to-quarter. And our gross margin were at 49%. It is a bit higher than maybe some of our analysts expected, but we had a good mix of favorable products and customers last quarter. And the important thing is that we still keep a strong cost discipline. And in the same time, we are building up our organization to become even stronger. So it's been a good quarter to all parameters, we believe.So revenue, $71.2 million; Bluetooth revenue, $52.3 million, solid number. Proprietary, it basically are very seasonal and based on a couple of customers, so it varies quarter-to-quarter. We don't have a broad customer base that contributing to volume in Proprietary. Gross margin, at 49%, is 2.3 percent points up from last year same quarter and still up from previous quarter. And as I said, a very strong EBITDA of 25.2% growth quarter-on-quarter.So if you add up what first half did for Nordic, we ended at USD 131.3 million. It's in the high end of our guidance range. Bluetooth, we said 40% to 50%; we ended at 50.2% growth for the first half. Gross margin were also up in the higher end of what we did forecast.Obviously, Bluetooth drives the growth. And looking at this foil here, you will see that it constitute of 73% of our revenue is now originating from Bluetooth. We also have been working on diversifying our revenue, to spread over more customers. If you look to same quarter last year, we've been going from 40% on top 10 to 31% top 10. I think this picture will change a bit going forward, and we can discuss the reasons a little bit later.Customer base. We had a 25% increase in customers year-to-year, 25% growth in customers. And here you see how it's split between consumer and nonconsumer revenue. We are, as you see here, above 43% revenue from nonconsumer. This is completely different from what we see -- look -- if you look 2 years, 3 years back. And we give a lot of appraisal to nonconsumer customers because it's a more stable customer base and more predictable customer base. And thirdly but not the least significant, it is also a longer lifetime usually on products for nonconsumers.If you split it, our revenue, then into the market. Consumer Electronics, 28.2% -- $28.2 million, is up 19% (sic) [19.6%] year-on-year, and it's also up 19.6% quarter-on-quarter. This is correct numbers. It just happened to be equal. Wearables, $11.9 million, up 36.6% from year-to-year, 16.3% quarter-on-quarter. Retail and Building is down 17.8% year-on-year, but it's up 12.6% quarter-on-quarter. We had a large customer that sort of is missing compared to last year. It's a product that was seasonal. And we see that despite that it was lower year-on-year, we had a strong growth quarter-on-quarter, which is important for us. Healthcare looks strong when it's looked year-on-year, 115% up; quarter-on-quarter, 14%. But that's again a sector or a market which we're going to see getting larger as we are progressing quarter-over-quarter. And then we have a big lump of Others, which grew very strong. So there -- this is the diversification of our business is strong.I usually show some products. Here you see some new Nordic-powered products that we have announced this quarter. This is only a press release product. We have some other ones in there, which, unfortunately, we can't show you. Dexatek is a router for smart home. Shenzhen DO, Wearables. You saw Wearable is growing. We get new customers in Wearables. Smart thermostat for smart home, I think that's a segment we're going to see Nordic getting stronger in. Smart home is using different protocols. Nordic can support any protocol. This is a Bluetooth, by the way.SWISSCONNECT, they're making a smart watch platform. So if anyone here want to build a smart watch, you can basically buy the concept from SWISSCONNECT and put your own branding, your own plastic or whatever you want to do and have your own watch. And our first design that we have shown publicly here is with Samsung, a smart door lock. And anyone here heard about the IoT lab we have in the U.S.? Now we launched our product nRF Connect for cloud. Basically, we host the cloud service at Amazon, and we make our own gateways both for iOS and Android. Currently, it support all our Bluetooth business, all our Bluetooth parts and will very soon support all our LTE products. This is an early adopter of new technology, and we are proud to announce that we do have something that works straight out of the box. If you guys want one, go to website and test it. It's good. We had a private placement we expect. We are not lazy, so we sit now and putting this private placement to work. We expand our test facilities in Norway and Finland. We do characterization and product test development. And why do we do this, that's the most important theme. We will shorten time to high volume. We will shorten time to high yield. By implementing these facilities, we achieve so. We're doing a FA lab. Why do we do this? We have new Tier 1 customers that have even higher expectation from the vendors. We fulfill those expectations. And this will also help us shorten time to volume production. And the right-hand side here, we have a cellular test lab. Important thing is to accelerate compliance and certification approvals. Basically, now we can do that in our own lab as soon as we have this equipment there. It makes time-to-market faster, and it's easier with different regional rollouts because we've already done the tests. And obviously, it also ensure us a reliable and a robust cellular connectivity. So this is the first installment of this placement. So now I hand over to Pål, which will go through the financials.

[Pål Elstad, Chief Financial Officer]

Thank you. Thank you, Svenn-Tore. I will now go through the financials for the quarter. And as normal, I will start with the operating model performance. As you all know, we are continuing to invest in the company to secure growth in the future and to capture the growth opportunities we have today. But as you see on the bottom, we do see some leverage coming in due to higher revenue in the quarter. These numbers are not adjusted for capitalization, so they're not the cash costs. So I'll come back to them later. As Svenn-Tore mentioned, we had a good 21% growth in revenue over the quarter. Compared to the same period last year, it's 11 percentage point -- 10 percentage points in increase. Gross margin of 49%, which is on the higher end of our guidance, we saw a bottom around this time last year with 46.7%, so the 2.3 percentage points increase comes as yield improvements mainly on the nRF52. Back in 2007, we had very good demand for the 52. However, the yield was up and running, so we served our customers. But today, the yield is more on track. And then we have also depleted all the old wafers we had on this product, so we will see improvements there.Total OpEx for the period is 35% of revenue, which is sort of a slight increase from previous periods as we are continuing to invest. The underlying number this quarter is 34 point -- $24.9 million, up from $19.4 million last year. You will here see that there is a shift between costs per revenue in short range versus the cellular IoT. This relates more to how we capitalize the R&D, internally developed R&D on our projects. Previously, it was mainly the nRF52 high-end products that were in the commercialization phase. Now these products are up and running in mass production, so we've stopped capitalizing on them. However, on the cellular IoT, the nRF91, we are now in the end of the commercialization phase, so we've increased capitalization there. So on the nRF91, we'll capitalize $3.4 million this year versus very little a year ago. That's why you see the shift in the R&D. However, if I look at the underlying spending for the cellular IoT, it was $6.8 million compared to just over $6 million last month. We haven't added much people there, so the increase is mainly related to more costs related to tape-outs adding silicon from the wafers, and from the foundries.Finally, on SG&A., we are growing our organization to scale and manage the future growth of the company. So this quarter, we've spent 14.9% of revenue versus 13.1% last year. In pure numbers, we went from $7.7 million to $10.6 million. And as I mentioned, we have a small operational leverage, so our EBITDA margin is now 14% versus 13.6% a year ago.As we do have seasonal variations on both revenue but also on costs, we also like to show the trailing 12-month spending. So in total, this year, we've spent 37.7% out of revenue on OpEx, just a slight increase from the previous periods. Both R&D and SG&A are more on level with historical periods. Of course, SG&A -- no, R&D, as I said -- is, of course, impacted by no revenue on the cellular IoT, so you will see the R&D number going down when we get revenue from cellular.Gross margins at 49%, which is on the upper end of our guidance. As I said before, during Q2, we did see a continued expansion in our gross margins from the bottom we had a year ago. Yield is now very close to our targets, and wafer costing is coming down.We commented in Q1 that during Q1, we had very favorable customer and product mix and that we would see some variations on that in Q2. We haven't really seen that, so we have the same favorable mix. However, this will fluctuate from quarter-to-quarter. However, we are at the top end of our long-term, short-range products guiding on gross margin, which is between 48% and 50%. However, we do see good cost improvements. So during the next 2 quarters, we still expect to see 50% margin within a quarter.I'll now turn to the cash OpEx. So cash OpEx is adjusted for the capitalization we do, which was at $3.6 million this quarter. OpEx increased by 34.5% year-over-year. This is partly driven by more employees. Last year, we had 564 employees. This year, we ended the quarter at 629 employees. Of course, that's an increase of 12%. The reason there's a big difference between the underlying and the reported is, of course, that we have a negative effect on FX compared to last year. And also, it's the mix of the employees we got in this year versus last year. You also see that other OpEx has increased from $6.7 million to $9.5 million. This relates a lot to the tape-outs of the silicon I mentioned before on R&D spending.Compared to last quarter, we do see that even if we're growing the company, we are managing our costs closely, so OpEx is more or less at the same level as last quarter. We've increased people. We will also have a positive effect of salaries in -- during the summer period.Finally, I'm going to go through cash flow. So we have definitely strengthened our financial position during the quarter with the capital raise we did on 25th of April for -- at NOK 50. How -- so I've split the presentation in 2. It's first showing the effects of the business, and then the rest is the financing effects.So in total, we have a negative cash flow of $4.1 million during the quarter. Normally, you do see a negative cash flow in the second quarter due to the buildup of revenue in the 2 mid months of the year. So underlying, the net working capital is more or less at the same level as it was at previous month, which is good, which when we would have expected a small increase. However, if you compare to a year ago, net working capital as a percent of revenue was 35%. So we've managed to get it down from 35% to 26%. This is mainly due to a very tight follow-up and diligent follow-up of our customer base in Asia. So we've been able to keep our accounts receivable balances down even if we're -- even though we're growing the company a lot. So we did a capital increase in April of -- with net proceeds of NOK 790 million, close to 9 -- 8 -- $99 million. And then we did a repayment of debt of $20 million during the quarter, so we ended the quarter at $107 million. This $107 million, Svenn-Tore mentioned the basis for, and I -- we will also discuss more on the working capital buildup and the Tier 1 engagement requirements with this money. The cash is kept in U.S. dollars mainly in order to reduce the currency exposure on this company as we do mainly have our business in U.S. dollars. Okay? So Svenn-Tore, I'll hand over to you.

[Svenn-Tore Larsen]

So let's look forward. We start with the guidance straightaway. We expect revenue to come in around USD 150 million to USD 160 million for the second half of this year. If we meet midpoint, it means a growth above 20% -- 21%, to be correct, for the whole year. We expect Bluetooth still to be the driver for 2018. And we have looked at the growth rates 30% to 40% we are pretty proud to present. We've seen some other analysts out there predicting higher. We don't get that too much, but I think we take market share, and they go 30% to 40% growth. Gross margins, as Pål said, we expect to be in the upper range of the 48% to 50%. And obviously, we should hit the 50% target during 1 of the 2 remaining quarters. Backlog, solid backlog, $80.1 million, 22.7% growth year-on-year, is basically on par with quarter-on-quarter. It's a healthy distribution over Q3 and Q4 and is a good product mix and customer mix and customer mix we see in current backlog. We are going to maintain or capture more market share in Bluetooth. That's our goal. And we're going to show you a slide later on that say this is actually happening. We see strong growth from the 52840. For those of you who don't know the 52840, this is the high-end product from Nordic. It's the one that support multiple protocols. And we're going to see contribution from Thread protocol design wins in second half. And we are still going to see consumer and nonconsumer markets grow. It's not that one is taking over for the other, but we see that need for more advanced Bluetooth chips in industrial is higher than we see in consumer. And it really proves what we -- the task we set out for some years back when we said we are not going to be in the ultra-low-cost segment of Bluetooth Smart. We are going to be up in the right corner where we bring value. And most customers need these features that we have implemented in the 840 if they are going to do anything smart, for example, in smart home and other application segments. So I have to give strong recognition to the guys internally that pushed this product so hard. Every half year, we show our kit shipment.This half, my first mail regarding question about shipments for kits says around 30 million -- 30,000 -- why am I saying 30 million? I don't know. That must not -- cannot be correct. But even 30,000 kits is a great sales. And we see that is a significant contribution from our advanced parts. What does advanced part means when we talk revenue? It means higher ASP. It's a leading indicator for market growth, and it also show our position in this market. We have attractive and competitive solution. Why do I dare to state that? Because this is a third-party slide showing that Nordic get more certifications this quarter than previous quarter. We continue to win designs. It's a 30% increase year-on-year, 23% increase quarter-on-quarter, strong. We are pleased to see that. We knew it's going to look like this, but it's always nice to see it when third party put this together.So the most important thing, what are you guys invested in? I would like to show you. Here is a beautiful model from Qorvo. They've done world-class engineering, and there is a world-class radio inside this module. This is the auto ship module. Send this around. We have production silicon in house. It's feature complete. It's power and performance optimized. And all testing, characterization and certifications are in progress. Quite a few of our competitors have the impression that we were lagging behind them, and I'll show you later on, we are not lagging behind anyone. We've done our first NB-IoT trials at several networks in Europe. We are getting ready with the production silicon to lead customers, but we have got design wins on the beta module. Our beta module has had advantages over production modules from competing solutions -- customer.So I don't feel that we are trading -- trailing behind any competition anymore. The feature and readiness for deployment is there. We have an unchallenged level of integration, power and ease of use. I will show you some example later on.We delivered 30 new lead customers in Q2, 3-0. Diversified set of customers; we diversify the customers in large customers and early adopters are fast to market there. So that's why we call it a mix of big and fast. We have objective to sell -- to ship more than 100 customers these parts throughout the year. And we see now demand for the first production quantities end of this year. Now we see it. We have forecast it will happen. It's different view from forecasting to actually seeing.We have the first design win secured. It's a European customer in asset tracking. And as I said, he switched from a competing solution they have been struggling with. So we are not lagging behind any other competitors in LTE modules. We will start general availability in Q4. Our priority now is to secure our lead customers to get into volume ramp. This is #1 priority, and we're going to be successful on that.I'll talk about first IoT design win, the significant milestone. Less than 4 years after we started this project, 4 years after I went to the board and said I need to spend a lot of money in the next coming years. Now we see customers putting these beautiful modules onto their PCP. It demonstrates our ability to compete. Power, performance, integration. If you look at our integration, our customers love it, and it's easy to use. And we get trust when we do demonstration of these products now. Customers can see it. And what is the best customer for Nordic? It's a guy that's been struggling with his previous experience with LTE. "Make it easy" has always been a mantra for Nordic, and now we see it pays off. We have a strong pipeline of opportunities for more design win, and we are on track with objectives for cellular IoT. We're doing a strategic cooperation with Q-Free, a Norwegian company based in Trondheim; almost like Nordic, Norwegian company based in Trondheim. They are doing smart parking, reduced time to park in urban areas. This is basically a product that I have to dig into the ground, and I don't want to dig it out every 2 months. I want to ensure it could be there for a long time, that it has low power consumption. Agree? And this is NB-IoT. Some of you might think that Nordic has been lagging behind on narrow-band IoT, and we've been focusing too much on LTE-M. This is based on narrow-band IoT. And Q-Free selected Nordic to enhance and to accelerate this smart parking project. And ultra-low power, performance and features was really the key. We're proud of cooperating with Q-Free. We think the product idea is great, and it's a great company to work together with. And our objective is to have the first deployments end of 2019. They have ongoing pilots with license free solutions today. There's a strong interest and support for operators on the cellular solution. This just shows that existing LTE customers are understanding the value of the Nordic module, the beautiful module that's running around here. I need to get it back, by the way. So we are on track for a strong 2018. We met the provided guidance range. Revenue was up, driven by 50.2% year-on-year growth on Bluetooth. EBITDA margin went up with 31%. And our gross margin expanded 2.3 percentage points year-on-year. We have a pretty depressed a year ago when we saw and had to show you 47% margin. That's not where Nordic want to be. But also sometimes, that's the effect when you want to get that early adoption in the market. And we are very proud of that strategy because that's why we're winning a lot, and we were early out there and support the customer despite that we had some yield issues in the beginning.Full year outlook. Continued growth, and we are on track to meet our objective. That means that we should be -- grow around 20% year-on-year. We are going to -- if nothing is -- nothing really bad happens, we're on track to meet profitability. And we are expanding and expect to be shipping to 100 customers or more on the ultra project. And I think you will see that we have a continuous design win momentum, both on Bluetooth and, years' time, most of you start tracking the LTE design wins. And we're looking forward to start that exercise. I think we'll go to any questions. Pål?

[Christoffer Wang Bjørnsen, Analyst]

So Christoffer here from DNB. If you could just start with the design win with Q-Free. I understand that this was initially something that they worked with u-blox on. So does this mean that you have replaced u-blox in this project?

[Svenn-Tore Larsen]

I don't -- I can't detail answer about Q-Free, but I think you can ask them. They have a presentation later this week.

[Christoffer Wang Bjørnsen, Analyst]

And then secondly, on the design wins. This is Q-Free and an additional design win for asset tracking, so it's 2 design wins on LTE?

[Svenn-Tore Larsen]

Absolutely. This -- Q-Free is not the first design win. The first design win is the asset tracking.

[Christoffer Wang Bjørnsen, Analyst]

Okay. And previously, I understand that you said that for 2019, you expect to have multiple customers who can demand more than a few hundred thousand units per customer per year. Are these design wins those kind of customers? And can you also elaborate on what kind of asset tracking solution this is?

[Svenn-Tore Larsen]

I think these 2 are specific examples. Some of the other design wins we have might both be -- some might be in the fast, early to market; and some are obviously in the big category since we have this split of big and fast.

[Christoffer Wang Bjørnsen, Analyst]

Then rounding up for me, on the profitability improvement that you aim for year-over-year, is the profitably improvement we've seen so far this year what we should expect for the first year? Or is it a bit lower or better in terms of the margin?

[Svenn-Tore Larsen]

What we see is that when you do produce semiconductors, you do always have a wafer bank, and it depends on when you produce your wafers and when you use the wafers. So the same product will basically take advantage when you get into the new production batch with maybe lower costs and even better yield. So it will be continuous until you sort of empty out the old die bank.

[Christoffer Wang Bjørnsen, Analyst]

Is that on the EBITDA margin?

[Svenn-Tore Larsen]

That will absolutely make our gross margin better and improve EBITDA.

[Andreas Bertheussen, Equity Research Analyst]

Andreas Bertheussen, Kepler Cheuvreux. Two questions from me. I see that you're working on certifications with the European carriers. And previously, you have alluded to perhaps moving firstly to the U.S., North American market. Has this strategy changed during the last 6 months?

[Svenn-Tore Larsen]

It's not changed at all. We are working with the U.S. operators. But we have got some European customers that are accelerating, and we are working pretty heavily with to enable them to be able to roll out. But it's not changing our strategy.

[Andreas Bertheussen, Equity Research Analyst]

Okay. And then secondly, can you tell us a little bit about what sort of subscription prices we are seeing in the Nordics in terms of what the carriers are charging per year...

[Svenn-Tore Larsen]

No.

[Andreas Bertheussen, Equity Research Analyst]

Or Q3?

[Svenn-Tore Larsen]

No.

[Aksel Øverland Engebakken, Lead Analyst]

Yes, Aksel from ABG. So Svenn-Tore, you mentioned during the presentation that there were a couple of different reasons for the higher diversification in Bluetooth sales among the top 10 customers. Could you give some more color on those reasons?

[Svenn-Tore Larsen]

What you see, if you look at other market segments, that been pretty stable for a long time. And if you look to the last model Others, that's increasing heavily. And that is product that doesn't fit into any of these other segments that we define.

[Aksel Øverland Engebakken, Lead Analyst]

Yes. So you would say that it's the Other category and higher share of module sales that is...

[Svenn-Tore Larsen]

Module is part of it, but there is also other segments that are contributing to revenue, which we don't manage to fit into existing market segment.

[Aksel Øverland Engebakken, Lead Analyst]

Okay. Second question, so you cited that the uptick in gross margin is, among other, driven by yield on the 52 series. Can you -- previously, you have said that you are still shipping most of your Bluetooth chips on the 51 series. Can you give just an updated view on the split between 51 and 52?

[Svenn-Tore Larsen]

I can do. Well, it's basically 2 questions in 1 here. The first one is that is not only yield that improves margin. It's also, if you look at the consumer versus nonconsumer, as long as nonconsumer is growing, that will also contribute a bit. When it comes to the split between 51 and 52, forward looking, you will see most probably 52 will cross over and be the biggest. Maybe if I get some help from guiding here, but I would anticipate end of this year, beginning of next. He agrees with me.

[Pål Elstad, Chief Financial Officer]

Yes. We also see that on the design wins, which show it's mainly the 52 that's coming in now, although there's still some traction on the 51, especially in Healthcare.

[Aksel Øverland Engebakken, Lead Analyst]

Yes. And a follow-up question on the gross margin. Because you have said that you expect to hit the 50% threshold in at least one of the quarters in H2. And then you also say that you have a good and favorable product mix for Q3. Coupling those 2 together, it sort of implies that you expected 50% in Q3. Is that correct, the reasoning?

[Svenn-Tore Larsen]

I mean, that's your job, and I think you do a good [ reasoning ]. So we are sticking to our guidance.

[Aksel Øverland Engebakken, Lead Analyst]

And next question, on big and fast. I understood the general split, but can you give us some more detail on the parameters that puts one in the fast and one in the quick and...

[Svenn-Tore Larsen]

Yes, it's big and fast. The one that is very -- there is some very large customers that need attention, and we are following the large customers very closely despite that might not be in production end of 2018. But we also would like to get revenue end of 2018, so we put efforts on smaller opportunities that will be faster into the market.

[Aksel Øverland Engebakken, Lead Analyst]

Yes. So how slow will the large customer be in terms of time to market?

[Svenn-Tore Larsen]

It's a definition of slow. I think it depends on how complex is the infrastructure of these large companies and product. If you have a simple product that just need to be connected to the network, it doesn't need such a big infrastructure. If you have a complex customer with a relatively complex infrastructure, it can take maybe a year or 2 to get the whole -- all pieces together.

[Aksel Øverland Engebakken, Lead Analyst]

And one final one on the costs related to the cellular business. So you had a cash cost of $6.8 million in the quarter.

[Pål Elstad, Chief Financial Officer]

Yes.

[Aksel Øverland Engebakken, Lead Analyst]

So we have seen the cash cost come up. And the capitalization of the cellular costs also come up related to you being closer to commercialization.

[Pål Elstad, Chief Financial Officer]

Yes.

[Aksel Øverland Engebakken, Lead Analyst]

Is this sort of the level we should expect on cash cost related to cellular also in Q3?

[Pål Elstad, Chief Financial Officer]

I think it was -- as I mentioned, it was pretty high cost on tape-outs and then sort of getting the product ready during this quarter. And we haven't -- we've added some people, but not a large amount of people. So I guess between this and last quarter, it will vary a little bit depending on the tape-outs when they come in, in the quarter.

[Aksel Øverland Engebakken, Lead Analyst]

Yes, for a couple of next quarters.

[Pål Elstad, Chief Financial Officer]

So we're not adding on a lot of people, for example, now. This will carry based on the external, yes.

[Svenn-Tore Larsen]

Yes, I would like to add some to that comments is that we do all the cost out of Finland as LTE cost. But there is actually ongoing quite a bit of Bluetooth work in Finland. So we do work where we have resources, and we have resources and availability of resources in Finland. So we might continue to add more people in Finland. We want to employ the guys that can bring Nordic forward, and we don't care so much where they are placed.

[Fredrik Steinslien, Analyst]

Fredrik Steinslien from Pareto Securities. So solid 49% gross margin in Q2. At the Q1 presentation, you urged some caution with regards to expecting lower gross margin in Q2 versus Q1. Does this mean that you saw an increasing trend on gross margin during the quarter and maybe also even close to 50% in June coming out of the quarter?

[Svenn-Tore Larsen]

I think we stick to our guidance, but again, you're reasonable in your thinking.

[Fredrik Steinslien, Analyst]

Okay. On Proprietary, revenue was down 18% in this quarter. And I think implicit in your guidance, it's down some 20% to 25% in the second half. This is somewhat bigger decline maybe than you have indicated earlier, so can you elaborate a bit on that?

[Svenn-Tore Larsen]

It's very difficult for us because we don't have, as I said, too many customers contributing with volume in Proprietary at the moment. And what we see is that it's seasonal, and some of the customer have a good quarter, and other had average quarter, but I don't think your number is what we're going to end up at. I don't think we end up at 25% down for Proprietary.

[Pål Elstad, Chief Financial Officer]

We've said around 10% I think we said a year ago. And I think your numbers are more in -- below the 20% you indicated.

[Svenn-Tore Larsen]

Yes.

[Fredrik Steinslien, Analyst]

Okay. Just on guiding for H2, is there any cellular revenue included in that guidance?

[Svenn-Tore Larsen]

We have a goal of having some cellular revenue in H2, but it's all -- it's not at the size that it should...

[Fredrik Steinslien, Analyst]

It matters.

[Svenn-Tore Larsen]

Sort of matter. It's just that it shows that we are starting to get customers to pay for these products.

[Fredrik Steinslien, Analyst]

Last one from me, if I may. The first year after inaugural Bluetooth year, you had $20 million of revenue. You think that's a good proxy for 2019 on cellular?

[Svenn-Tore Larsen]

We haven't started budgeting for 2019 yet. We look at opportunities, and I respond to you when we have gone through the opportunities.

[Christoffer Wang Bjørnsen, Analyst]

Christoffer from DNB again. You said that you expect to see a lower -- or some more activity towards Tier 1 customers going forward. Does this mean that you will see pressure on the gross margin until 2019?

[Svenn-Tore Larsen]

Obviously, volume is an important parameter when it come down to price of semiconductors. But remember that volume sales from Nordic also mean volume purchased through other vendors, so the important thing there is to get that balanced correctly. And let me come back to you when we have done negotiations at both sides.

[Christoffer Wang Bjørnsen, Analyst]

And then also moving into 2019, could you say something more about kind of how you expect to utilize the proceeds from like at Asia in terms of how should working capital move as you start to see revenues on LTE? Are there any other things that you will spend cash on?

[Pål Elstad, Chief Financial Officer]

So with CapEx this year, yes, year-to-date, is 6 point -- or $7 million, more or less the same amount as last year. So up to now, we've mainly invested in software and in test equipment for the manufacturing. So the test equipment we added this year was a test equipment that's at our vendors in Asia. And then we invested quite a lot on that in Q2 because we're adding more complex product, we need more flexibility and capacity. Going forward, as Svenn-Tore mentioned, we'd need to include -- increase the lab equipment, et cetera, for both the customers but also to improve our yields. We haven't guided on how much that is and to give a flavor of what we're doing, but we will, of course, increase CapEx versus the historical, where we've been on the average of $1 million a month. So it will increase. So that's part of the use of the proceeds. The second part is, of course, the working capital buildup that we will get when we start manufacturing modules. The Qorvo -- the LTE business is based on modules produced by Qorvo, and that will require more working capital. When we make the budgets and when we present our guidance for the cellular business, it will be easier to see what number that ends up with. But the 26% working capital ratio will definitely increase.

[Christoffer Wang Bjørnsen, Analyst]

And then just lastly, you expect to see some revenues from Thread by the end of the year. Is this -- kind of like LTE, it's not meaningful? Or is it more meaningful than LTE? If you could kind of quantify that then somewhat.

[Svenn-Tore Larsen]

It's been in works longer than LTE, and it's come longer and will be more meaningful than LTE revenue.

[Unknown Analyst]

Just a quick question in terms of clarification. You mentioned that you had diversified your customer portfolio over the past year. But also, you mentioned that, that might change slightly going forward in terms of opportunities. Could you elaborate somewhat in terms of those large opportunities that are out there?

[Svenn-Tore Larsen]

On the large opportunities, I would love to do it. But again, we can say that asset tracking is some of the leading applications we're working on, and I stop there.

[Unknown Analyst]

Just quickly, do you see that you, next year, will see significant rise in the kind of share of revenues in -- coming from the top 10 customers? Is that what you tried to say earlier today?

[Svenn-Tore Larsen]

I think we are going to see some swing back, that we will have some larger customers that will skew the picture a bit.

[Unknown Analyst]

On Bluetooth or on LTE?

[Svenn-Tore Larsen]

Next year? Bluetooth. Great.

[Pål Elstad, Chief Financial Officer]

Okay.

[Svenn-Tore Larsen]

Thank you for coming on this beautiful day. And go back and enjoy the sun.