Nordic Semiconductor ASA

OSE:NOD

Earnings Call Transcript 2018-Q3

[Svenn-Tore Larsen]

Good morning. Welcome to Nordic Semiconductor's Q3 presentation of the financial results. As usual, I do the business update. Pål, our CFO, go through the financials; and then we look what's ahead of us.So this quarter, Nordic, with a revenue of $78.7 million. It's a new all-time high; also 19.9% year-on-year growth.We had 19% growth in Bluetooth. Year-to-date means that we are at 36.7% growth in Bluetooth. We had a very strong Proprietary growth, 35.5%, which means brings us to plus over -- year-over-year in Proprietary.I think something wrong with the microphone. It's...The lack of Bluetooth growth more -- it should have been more than 19.0%. We recognize that, but we unfortunately got very muted by one application in the Chinese market, and it will also in the Building and the Retail market, we report this product.When it comes to Proprietary, we have won new designs, and we now see that life cycle of Proprietary is significant prolonged. So very good sign for Nordic. We -- basically now we have 2 product lines in the short range that will contribute to revenue going on years to come.And maybe the most exciting thing about this quarter is that we are entering into the market with our 4-year investment in Finland. We'll spend quite a bit of time on Finland later on in the presentation.Our gross margin went to 50.2%. It's an expansion of 2.4 points year-over-year. Through the solid operational performance, for the first time in the 52 series life, it exceeded the 51 series.We had strong growth in EBITDA. We've also had USD 14.3 million. It's 71% year-on-year. It really shows that Nordic is managing to invest in future products, enhanced our company and make money, good money at these margins.So if you take away investment in Finland, we did $18.2 million in EBITDA. That means 23% EBITDA margin on the short-range Proprietary business only.If you look at annual growth rate of Bluetooth, it's down to 32%. It is slower than we forecasted for Q3. It was negatively impacted by one application, with 3 customers in the Building and the Retail market. Strong growth in Proprietary, and it's driven by new designs. And it is designs that will prolong the life cycle of proprietary. We said going into this year that we expected Proprietary to drop around high single-digit percentage. We see that's not going to happen, and we also see that it will be significant contribution for 2019.If you look at our historical Bluetooth growth, it's been in the range between 30% to 40%. And what we see is that Bluetooth -- BLE is trending above targets some quarters and below in others, and fluctuation is driven by larger customer designs.If you remember back in Q4 '16, we had a customer that disappeared. It really impacted Nordic. The customer that we now have a much [ lower ] revenue but has not disappeared, but have much lower revenue in Q3 was larger than the customer that we lost in Q4 '16. Despite, we managed to grow BLE in Q3. And we expect to be within the target because we see that Q4 will grow again. And we know that the situation with these customers will be washed out in '19. And we expect to be back on our growth trend going forward from '19. This issue will only affect second half of '18.And one important thing is that we historically, have been driven by long tail market. As the BLE market has matured, we now see large industry players has start to employ BLE. Two things are good, one is volume; second thing is basically stability. When we get into the right products, we know life cycle. We have forecasts we can trust. Some of the customers have been building up Nordic has not been that good in projecting their revenue.So we are delivering our strategy to strengthen ASP. What we see is there is a continuous strong market for system-on-a-chip integration and connectivity. If you look down where Nordic is not playing, it's in the baseline system-on-a-chip. It's a baseline connectivity where you have your selfie stick, where you're just going to connect from one point to the other. That's not Nordic playground.If you look up to the right corner, you see much more advanced product where you need MCU power. That's where Nordic is playing. And if you look on the graph on the right-hand side here, you see that the 52 series of product now represent more than 60% of our revenue. It really shows that the high end, high complexity is the part that is preferred in the market.Improved operational leverage. We are on the track to meet our objective for profitability for 2018. We had a revenue growth of 20% with gross margin up 2.4 points. We had EBITDA at $14.3 million; as I said, 71% year-on-year. And if we isolate short-range business, we have an EBITDA margin of 23.1%.While we've been building organization to be able to deliver and gain more market share in new products by which we are entering the market with today. And we are very, very proud of the LTE products and how we enter the market, and I will spend quite some time on the outlook to discuss LTE.Customer growth. We had a 28% growth in our active customers year-on-year, and we see that the split between nonconsumer and consumer is still a good split where we are entering into a nonconsumer market. And some of these new segments are very exciting because they've never been using BLE before, but there is great potential in some of them. And I'm going to show you some of them later on.And this is where we do it. If you look here, you have Xiaomi. New product, it's a tire pressure. It's something you put onto your tire and you can read on a separate screen in your car. Estimote is asset tracking. Again, the signing with Nordic 52. There was some message here that Polar is coming competitive, this competitive technology. That's partly not true. Basically, all advanced product at Polar are using Nordic. And if you look at my previous foil where I discussed, left corner, about the simple products, heart rate monitors is such a simple product that doesn't need much performance.IntSpo asset tracking is a new company here in Norway that's working with the Norwegian post. It's tracking all post containers using Nordic. We've been talking about professional light control for some time. Most of these companies we picked up around here, Acuity, are using the Nordic BLE and the Nordic mesh stack. And we believe that lighting and professional lighting is a segment that is going to contribute with revenue for Nordic over years in pretty high volumes.So if you sum up: revenue, $78.7 million; 19.5% (sic) [ 19.9% ] growth year-on-year; 10.6% quarter-on-quarter. Bluetooth, $54.3 million; 19.9% (sic) [ 19.0% ] growth. We could say it's disappointing compared to our goal. But the situation that arose was something we couldn't see. And the good thing about it is that it shows how strong the Nordic customer base is that even if you lose such a significant customer in one quarter, the rest are lifting the company by 20%. Revenue, Proprietary, $22.8 million; it's 35.5% year-on-year growth. And it's the revival of Proprietary. We got new applications on existing parts.Gross margin, we've been working on optimizing production, optimizing test, and it resulted in a gross margin of 50.2%. It's up 1.2 points from last quarter. EBITDA, and this is why we've been investing to bring the LTE product to the market, is $14.3 million.This was the summary. I hand over to Pål to do the financial update.

[Pål Elstad, Chief Financial Officer]

Thank you, Svenn-Tore. I will start with operational performance model that we always start the finance part with. As Svenn-Tore said, we had close to 20% revenue growth in the quarter driven by strong Proprietary, whilst Bluetooth was slightly below our targets.Gross margins, we reached our 50% target this quarter. I think 50% target is good achievement in the quarter with strong growth. The increase from last year is 2.4 percentage points, which comes from both cost improvements on the products and the favorable customer and product mix that I will talk more about later.Overall, when we come to the OpEx part of the slide, overall, OpEx is positively impacted by the higher revenue in the quarter. However still, the underlying OpEx numbers show less growth that we've seen in previous quarters. So even if we're growing the company, we are keeping a strict control over costs.So total costs in the quarter is 32.1%, which is down from 33.5% last year. Compared to last quarter, we actually had 35% OpEx. So we have a good reduction since Q2.Capitalization is also important. As you remember, we did a change in how we capitalized the cellular IoT project in Q1. So we increased the capitalization on cellular and decreased it on short range, which is more in the commercialization phase.So in Q1, we, in total, capitalized $3.1 million. This is $0.5 million less than we did in Q2. The main reduction relates to those less tape-outs in the third quarter versus the second quarter.Short range, we continue expansion in the short-range business, especially increasing our capabilities and functionality on the chips. R&D cellular spending of $3.9 million this quarter. If you look at the cash operating expenses, since we did capitalize $2.3 million on the cellular business, was $6.1 million. The same number in last quarter was $6.8 million.On both SG&A, we sort of keep the same target at around 12% to 13%, so 11.9 million -- 11.9%. The underlying number is $9.4 million, which is up from $7.8 million a year ago.To the bottom, as Svenn-Tore mentioned, we do have good operational leverage in this quarter with EBITDA margin of 18.2%, which is up 3.9 percentage points versus last year. Also interesting to look at the year-to-date number, this quarter -- or year-to-date September, we had an EBITDA margin of 13.7%, up from 11.3% the same period last year.On the previous slide, we showed the operating model on sort of a quarterly basis. It's also interesting to see it on a last 12-month or trailing basis. As you can see, the total cost is trailing down with the higher revenue and the strict cost control. So we are seeing leverage in the cost base with increased revenue.In total, we spent 22.8% on R&D in last 12 months. Of course, this number is above the industry averages of around 20%. However, we do have the high spending in the cellular IoT business. So if you do adjust for the cellular IoT business, the number would have been around 17%, which sort of is around the target level for the type of business. Same thing on SG&A. We're at 14.3%, around the target level for our business.I'll now jump to the revenue by market. Overall, we see positive impact or positive development in all markets, except for the Building and Retail. This is, of course, the result of the 20% overall growth in the business. If we exclude the Building and Retail market, it's maybe interesting way to do it -- see it, we would have an increase in the rest of the business of 38%.I'll now go into each of the markets. We start with Consumer Electronics, which had a 34% year-over-year growth from $26.1 million last year to close to $35 million this year. Of course, the main driver of Consumer Electronics growth is the strong Proprietary business in this quarter. Also Proprietary was slightly low in Q3 last year versus the rest of the quarters of the year. But we also see a very strong take of the Bluetooth in especially the HID, so the PC peripheral market, which also impacts the Consumer Electronics market.Wearables, up 16.6% year-over-year from $10.6 million last year. Wearables had a low a year ago. However, in Q3 2018, we see a very good take from all our western companies. We also see that we have good traction with our high-end nRF52 in the Chinese Tier 1 business and also in the Chinese ODM business. So overall, Building and Retail -- no, no, Wearables, had a strong quarter.Then we go to Building and Retail, which, as Svenn-Tore talked about, fell by close to 20% in the quarter from $15.7 million a year ago. As mentioned, Q3 2017 was exceptionally strong in one application within Building/Retail, which showed disappointing numbers this quarter. However, as we've been talking a lot about, we still see Building and Retail as a growth driver for the company. On the previous slides, Svenn-Tore showed 5 design wins. Four out of these design wins were within the Building/Retail market. So we still focus a lot on Building/Retail and see the positive momentum in this business.Healthcare, also strong quarter, 52.9% increase from $4.6 million last year. Previous quarter this year, we have talked about new designs with existing customers. These continue to take good numbers in Q3.Finally, Building and Retail -- no, sorry, Others, an 83.6% increase from $5.5 million last year. This is mainly driven by our module customers. We have a large number of module customers that take our products. The strength and the beauty of selling to module customers is that we broaden our sales force a lot versus going out and selling direct. So we're taking leverage of the sales force of the module vendors.Then I'll jump to gross margin. As I mentioned, we had a 2.4 percentage point year-over-year increase of -- in gross margin. Q3 2017 sort of saw the down in the gross margin with issues on the yield of the nRF52. However in Q3 2018, we have had solid operational performance through high yield, both on the nRF52 but also on the other projects. We have had very little scrap of inventory. We have improved purchasing. And importantly, we have good visibility on the production. So we're able to plan the production and thereby, reduce cost. We also have a very strong improvement of 1.2 percentage point from last quarter. This comes mainly as an effect of a favorable product mix, both in Proprietary and in Bluetooth.Quarter-to-quarter fluctuations are to be anticipated as we have said mainly due to change in product mix and customer mix. However, we still believe our target of 50% is what we aim for and is achievable with the current model.I'll now turn to cash operating expenses. So these numbers are, of course, adjusted for the capitalization of $3 million that we did in the quarter. In relation to revenue, cash OpEx is down 0.3 percentage points. However, the underlying cost has gone from $23.6 million last year to $28 million this year, which represents an increase of 19%. Increase is driven by new product releases, which we continuously work on and the headcount growth. So we've increased headcount year-over-year with close to 13% from 588 last year to 663 people this year. It's a mix of both people in R&D, both short-range and long-range but also focused on broadening our sales and customer-facing activities in -- both in Asia and the U.S.Compared to last quarter, cost is more or less the same in the absolute number. However, due to higher revenue, the KPI is significantly improved. Although we do have more employees in this quarter than last quarter, we do have a positive effect of FX as the NOK has been weakening in Q3 versus what it was in Q2. However, we do see investments continue in order to capture future growth for the company.One picture that has been blurred by our heavy investment in the cellular IoT is the strong margin on the short-range business. So we -- therefore, we included this slide, which sort of just shows the P&L for the short-range business. So the short-range business had, of course, $78 million in revenue in Q3; OpEx of $21 million, which means that the OpEx just related to the short range is 27.2%; with the EBITDA of over $18 million. EBITDA margin of 23%, which is above our target of 20%, which we have talked about. So the short-range business is showing a very healthy operating model.Interesting also to look at year-to-date EBITDA margin for the short-range business is 19.4%, just slightly down from the same period last year.Finally, I will talk about the cash flow. So we have a strong financial position with close to $100 million in cash. We have a consistent seasonal net cash flow. That means that in Q3, you will normally, due to higher revenue and buildup of working capital, see a negative cash flow. This also happened in Q3 of this year where we had a negative cash flow of $12 million. However, this is higher than sort of expected because due to holidays in Asia, large payments from customers sort of swept into Q4 and were paid in early October. This was $8 million.If we adjust for these $8 million that were received on October 2, the sort of net working capital and percentage of revenue is 29%, which is 3% higher than the same period -- no, a quarter ago. This is, as I said, normal due to seasonal variations.We had pretty high CapEx of $5 million in the quarter. This is mainly driven by CapEx or test equipment for production releases on the nRF52 and the nRF91. This is the start of the CapEx we talked about in connection with the capital raise in April. In addition, we have purchased some IP related to our short-range business that's required for future growth of the company.We still have a disciplined cash strategy. So overall, for the year, we've had $20 million net minus cash flow, driven by $12 million in CapEx and then the seasonal effect on the working capital.Okay Svenn-Tore, I'll hand back to you, and you can talk about the outlook.

[Svenn-Tore Larsen]

Thank you, Pål. So let's look forward.We start with the guidance for second half of this year. We have discussed this situation with the application in Building and Retail. It causes us to anticipate that the revenue will be in the lower range of our target -- or our guidance, $150 million, $160 million. And if it's in the lower range, it will represent a growth for the company for 20% year-over-year.This is a situation that basically, as I said, will be washed out in Q1 '19, but it will affect Q4. So we expect our target for Bluetooth growth to be between 20%, 25% for the second half of '18. But we would be on track on the trend line in '19 again.Gross margin will be around 50% as we were this quarter. All the work we've done will continue into Q4 and going ahead.So our backlog is $77 million, so 17.9% growth year-on-year. Strong backlog going into Q4. It's a healthy distributed over Q4 and Q1. And as Pål said, it's a good, favorable product mix, and it's going to be good for keeping up the margins.Q4, we will see growth contribution from the 52840 and Thread. And I will come back to discuss Thread. We are going to accelerate the Bluetooth growth compared to Q3, and we're going to see growth in both consumer and nonconsumer market. But maybe the most exciting thing is we're going to recognize the first cellular IoT revenue. We will recognize our first LTE revenue in Q4.We still have a leading and a broad position in Bluetooth. If you see here on the right-hand side, you see pretty high bar, almost catching up Nordic, which is a category called Others. This bar consists of around 20 small Asian companies that have few design each and is all in the left corner, connectivity corner of products, which Nordic is not competing. Remember, we are aiming at the high-end, high ASP market, and we have segments we want to win, like smart home where we need a lot of MCU capacity.You need memory. You might even need multiprotocol. And we can have different protocols into the same chip. 52840 support Thread, support ANT, support BLE. But we got 121 new designs in Q3, which is a significant number. And as you remember, we grew our customer base with 28% from Q3 last year to Q3 this year. These are the customers that come to contribute to that growth going forward.We are building momentum in Thread. The company called Particle Mesh have made the first IoT platform and modules based on the 52840, based on the Nordic mesh protocol. They claim to have 35,000 preorders and they start shipping now. Exciting development. Nordic just released new SDK, the Version 2, in September. It's full OpenThread capacity. And we see a huge uptake of this product. So what have we been talking about working on for 4 years? Cellular IoT. And now we are ready for revolution in cellular IoT. Our product silicon performance meets all expectations. We said that we had [ Stella Engineers ] in Finland. This proves that our engineering had done a great job. All the characterizations, qualifications and testing are on plan, and remember, there is 2 software stacks in our LTE chip. It can support both LTE-M and Narrowband IoT. It's the only LTE module out there which do so. And now LTE-M protocol are moving towards production release. We are sampling customers in the U.S. Narrowband IoT, we sampled a lot of European customers, and we're going to a wider of our sampling, open for general sampling, this quarter. And important thing is that all vendors, carriers are conducting field tests with Nordic, and we are ready to hook onto the networks. And very soon, within this quarter, we will be verified.All the certification is ongoing. We have strong collaboration with main infrastructure vendors. The testing is ongoing. We bought the same test vehicle that operators are using. So basically, we do all tests in house before we -- sending our products to the operators for compliance test. So we know they work. We are doing all the regulatory certification like CE, FCC. We do the global certification, the GCF. And we have done the test in Nordic, and now we are doing it out at operators.We are precertified. Most carriers through -- putting our products through their labs. We're doing field tests in several territories. And we expect to be complete all certification within this quarter. Good achievement of the team in Finland.We have device, we have development kits and is certified, ready for the market this quarter. We have planned to produce 4,000 kits during Q4. We have material in production to secure demand. We have, as we will talk a little bit later on, supported a few selected customers up till now. Now we have full support to all customers. We have very first ICs, we have the SiPs, all ready to go.We have an excellent competitive position. What is important when it comes to LTE? Low power. Most of these products will be running on batteries, and Nordic have built everything from scratch for low power. We integrated memories, and we use what we call product nodes at our vendor, which is for low-leakage process, which makes us able to achieve this low power. It should be easy to use. When you buy an LTE kit from Nordic, when you open it and put it on to your PC, it's a very familiar screen that pops up. It's the same screen as you do when you do Nordic design with BLE. So all engineers have been using with -- who used Nordic BLE are familiar with the software.And what we see is that using Arm also give us other advantages because they are really good on security. And security is key in many IoT application. We have the Arm TrustZone and the CryptoCell technology implemented in our modules.And obviously, connectivity is what it's all about. This product, you connect to any base station anywhere. We have not outsourced any protocols. We have full ownership of both the RF, the baseband and the software, and we know how to -- how ownership works. So we got very positive feedback from customers that have been in the first phase to employ our product.We have a simplified engagement module -- model. What you see out there with the products today is that when module supplier buy an LTE chip, put it on the module and ship it to customer. What Nordic do is that we make the chip, we make the module, and we send it to the customer. We are a one-stop shop for cellular IoT. And we use the same strategy like we did when we started selling our Bluetooth SDKs. We're going to reach the wide market as we discussed before. We are divided over market approach in the fast customers, the customer who want to be very fast to the market, and the big customers. We obviously are working with some large potential customers that will take longer time. But important thing now was to get the revenue fast, and we took the fast, medium-sized, small customers. And we will see, as I said earlier, revenue in Q4.It's a good feeling to take this 4-year cellular investment to the market. We expected to sell around 100, 200 lead customers in Q3. We did 120. We adjusted our objective for the full year up to 300 customers. And as I said, we recognized revenue this quarter, and we have an ambition to break even in 2020, the same as we have said before.We have secured the supply of kits and high-volume samples to meet the demand now in Q4. It's there, ready to ship.We showed one design win over the quarter that's been press released, StalkIT. The management there said it's a great pleasure to work with us. And he said low power is important; high-quality radio, also important; and high integration at the right price. So we are proud of the statement, and we're very proud to say that we won this design from another existing LTE vendor into the design.So we're on track for a strong 2018. We had stronger revenue and profitability in Q3. We're going through the numbers, but EBITDA margin was up 71%. Our gross margin, above 50%. Unfortunately, we had a situation with an application containing a few customers in China, which was out of our control. We suddenly -- we expected to be a little bit slow. We didn't expect it to fall off the cliff. And that hurt us in the growth of BLE in the second half of this year. But that will be out when we start on the '19, and we will be back on the growth trend as we've been projecting previously.There is a strong design momentum. And remember, we are adding another leg now. It's the LTE products. In addition to that, we also see a prolonged lifetime on Proprietary business due to new designs. So all our -- we will get very well set for a strong '19.That was all, and we're open for questions.Yes, Christopher?

[Christoffer Wang Bjørnsen, Analyst]

Christopher from DNB. So I was just wondering when approximately did you know about these customers in China that they would not deliver the same sales or comparable to last year. I'm just a bit disappointed because you said previously that this second half guidance, you were a bit cautious. You didn't take into the numbers any kind of optional, big customers that you were a bit uncertain on, and now suddenly, you're not 30% to 40% growth, but you're 19% growth year-over-year in Bluetooth. Can you give some color on that? Why didn't you profit more on this, for example?

[Svenn-Tore Larsen]

Why -- let's start with the second leg of your question. Why we didn't profit more on it is that basically, we feel that it is one parameter. The important thing the profit on is revenue, EBIT. So that's why. When did we know this? It was quite a bit into the quarter that we saw that it was not sort of going out from distribution as they should. And by the end of the quarter, we were aware of the situation.

[Christoffer Wang Bjørnsen, Analyst]

So -- and just I think you can't on the one hand say that you -- that revenue growth is the most important thing and then on the other hand, say that EBIT guidance is as important. I think Bluetooth growth is very important so think you should [ have profit ] on this. But move on to the next question. I was just wondering on when you raised equity earlier this year, you said that part of the use of proceeds was for increased working capital and ramp towards new Tier 1 customers. The fact that this is not seeming -- it doesn't seem like this is panning out at the moment. Does that mean that this is related to cellular and that we should expect this to come in 2019? Or -- just some color on that.

[Svenn-Tore Larsen]

It's related to both. And I think you will see that is already the BLE also going forward.

[Christoffer Wang Bjørnsen, Analyst]

Okay. And for 2019, you're saying now that you're expecting still to get back to 30% to 40% growth in Bluetooth next year. Can you give us some color on why you're confident with that remark, given that all the tracker points downwards, the backlog is up around 17%? What will kind of take that up to...

[Svenn-Tore Larsen]

When we talk about growth only, for example, we know that these customer were not contributing very strong in Q1. That's obvious answer. Second thing is that we do have 121 new design here in Q3. We had 117 designs in Q2. That's new. And as I mentioned on my foil set is that as the technology had become more mature, you will see larger customer starting to get to market with the technology.

[Aksel Øverland Engebakken, Lead Analyst]

It's Aksel from ABG. So I have a couple of follow-up questions on the Bluetooth growth. Firstly, when you say that it won't impact 2019, does that mean that it won't impact from Q1 2019? And does that imply that there is 0 revenue from these applications in Q1 2019 or that it has stabilized at a very low level? Or what does it exactly imply when you say it won't impact 2019?

[Svenn-Tore Larsen]

I say that the revenue in Q1 '18 was not very high for these customers. They will continue producing. They're still using the Nordic chip in the application, but the volume is significant constrained because of political regulations, which we did not -- we are able to control.

[Aksel Øverland Engebakken, Lead Analyst]

And can you give some -- can you be more specific on how much this did impact? How much did it drop from Q3 '18 to '19?

[Svenn-Tore Larsen]

It dropped significant. We don't want to talk specific about customer, but if you look at the market segment, if -- Pål, get back to that market segment, you can see that it was down 19%. And there was new customers in the same segment. But the new customers didn't catch up this growth from the customer, which generated 19.1% for total segment.

[Aksel Øverland Engebakken, Lead Analyst]

Okay. On the certification on the cellular side, you seem to be very confident of achieving certifications now in this quarter. Do you expect to achieve it with one operator or several operators in the quarter?

[Svenn-Tore Larsen]

Now we are working globally. So there will be -- we have initiative going on with more than one -- with the most important carriers, different areas of the globe.

[Aksel Øverland Engebakken, Lead Analyst]

And you spoke a little bit about the big companies. You split between fast and big within cellular. And within big, how long do you think it will take until you get revenue from a big customer? Is that something that you expect to achieve in 2019? Or is that designing cycle so long that we will have to wait until 2020?

[Svenn-Tore Larsen]

There -- it depends on the application. Some of the infrastructure of these customers is rather complex. Other infrastructure is relatively easy. So that will vary. But one that we've been working on for a long, long time still will use another year, 1.5 years before their total infrastructure is in place. Others will be able to place orders this quarter.

[Pål Elstad, Chief Financial Officer]

I think...

[Andreas Bertheussen, Equity Research Analyst]

Andreas Bertheussen, Kepler Cheuvreux. Just 2 follow-up questions for me. First of all, could you add a little bit of color to the prolonged life cycle in Proprietary? And is this -- does this mean that you have visibility for 2019 on the new cycle of products but not 2020 or are you talking beyond that?

[Svenn-Tore Larsen]

We didn't add any color. We got new design wins. And as my experience is that when a customer start a new design win, usually design cycle is 3 to 5 years. So this new product will revive another 5 years, maybe 3.5 to 5 years.

[Andreas Bertheussen, Equity Research Analyst]

And finally, on the gross margin side, you said you are beyond the yield issues on the 52 and that you are experiencing favorable yield or product mix. But you are still at about 50%, which is your target. But are we saying that when everything is going right, then you're reaching 50% and then that you should hover more around a 49% level? How do you see this?

[Svenn-Tore Larsen]

What we see that on short-range products, we have a 50% margin target. We also said that when we get more LTE into the product mix, we will see a lower margin. So -- but we don't see the impact of LTE on the total margin in Q4 or Q1 '19.

[Andreas Bertheussen, Equity Research Analyst]

Exactly, but on the short range isolated, you are saying that when you reach 50% as you did this quarter, this is due to both no yield issues and a favorable product mix?

[Svenn-Tore Larsen]

We don't go -- we're not going to have any yield issues on existing product family because that's already the debate. So -- when we introduce new products, there will a -- will be a period where we don't reach the theoretical yield. But on existing product, we are at theoretical yield level.

[Christoffer Wang Bjørnsen, Analyst]

Chris from DNB markets again. I was wondering if you could comment a bit around your work on audio streaming over Bluetooth. Your main competitor, Dialog Semiconductor, has been quite vocal around that and said that they are expecting to launch a new product for this on -- in January at CES in Las Vegas and that they will have volume shipments of this in the middle of 2019. Does that imply that we should expect something similar from you? Or -- trying to just to gauge where you are compared to them on the product road map.

[Svenn-Tore Larsen]

Yes, we've been estimating that Bluetooth low energy will also be able to support audio in the years to come. So we've been working very close with leading audio semiconductor company to get a solution together with them. We have not released any data on this product, and there is exhibitions around the world that this is normal to do. And we might do -- we will do it on exhibition. I can't tell which yet.

[Christoffer Wang Bjørnsen, Analyst]

Great. And then just lastly on the cellular business. There has been some talk around the potential to get some subscription-type revenues on the LTE cellular IoT business as well because you will be driving subscriptions for the normal operators with your customers there. Can you talk a bit about the opportunity to partake in that value creation in terms of getting a cut out of the sales that you drive for the Telenors and the Verizons and the AT&Ts of the world?

[Svenn-Tore Larsen]

I don't like to discuss the strategy in front of the whole world. This is something we would like to keep for ourself. But you're right, there is an opportunity for Nordic to get revenue outside hardware when we start discussing LTE. But that strategy is not communicated yet, and we want to finish our work on that before we share that.

[Christoffer Wang Bjørnsen, Analyst]

Last one for me. There has been a lot of news lately, both there's been the trade tensions between the U.S. and China, and lately, there also has been news about these spy chipsets or what you call them, coming from [ supermarket ] growth, supply chain, stuff like that. How -- can you talk a bit about how these kind of data points affect your business? How exposed are you to the potential tariffs against China? And what do you think about the security problems in the supply chains in China?

[Pål Elstad, Chief Financial Officer]

I can start on the tariffs maybe -- on the tariff part. So in relation to tariffs, nothing in the numbers today actually have impacted by the tariffs. So the customers haven't been affected as of today. So the delay in payments doesn't have anything to do with tariffs. We're all -- I'm sure, all the customers that we have. Secondly, of course, there is [ uncertainty. ] Everyone is talking about it, right. So that's not good for the business, but it's something we're monitoring very closely. Finally, of course, what we also see when there's issues in China, some of the government boards will pour liquidity into the markets to keep the ODMs running. And being a not-U.S. player, that can of course be positive for Nordic. So I think it's a very mixed signal, what's going on in China. It's not all negative.

[Christoffer Wang Bjørnsen, Analyst]

You don't expect any kind of disruptions there in 2019?

[Pål Elstad, Chief Financial Officer]

It's -- that's out of our control. So it's nothing we can really comment on. But as I said currently, the only thing we hear is a lot of talk about it. And on the spy chips, it's...

[Svenn-Tore Larsen]

On security?

[Pål Elstad, Chief Financial Officer]

Yes.

[Svenn-Tore Larsen]

The important thing is that it will more affect customers that are building a PCB. Nordic don't have a PCB. We have a die that is packaged. So for Nordic chip, there's basically no chance of putting spies inside the Nordic silicon. So it -- if it affects anyone, it could be our customers that are producing in China. But that's -- again, we haven't had any discussion with any customer regarding that. And the customer is deciding where he use his ODM. So it's basically up to our customers to take those measurements. For Nordic, it does not have any impact, very unlikely.Okay. If there is no more question, thanks for coming. And welcome you back in February for Q4.