Nordic Semiconductor ASA

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Earnings Call Transcript 2020-Q3

[Svenn-Tore Larsen]

Welcome to Nordic Semiconductor's quarterly presentation for Q3 2020. I'm Svenn-Tore Larsen, the CEO of the company, and later on -- and I will do the presentation of the situation and how we are doing today, and Pål will go through our financial just after me.We had a continued strong growth in Q3. This was driven by both Tier 1 and also a strong uptake from the broad market. We had a revenue of $119.4 million. It's up 45% from last year and 34.9% from quarter past.Our Bluetooth revenue was $97.1 million, up 56% year-on-year; proprietary revenue up to $19 million, plus 3%. And remember, when we entered this year, we expected that we should have a decline in proprietary. But despite, it's been growing 3%. Our cellular revenue amounted to $1.6 million. We start seeing more of our preproduction getting on our order backlog, and it looks certainly even better for Q4.Our gross margin ended at 54.1%. This include a $2 million recalculation from Q2 and 1. That accounts for 1.7 percentage points. So basically, still very strong gross margin. And why we have this strong gross margin is basically that we are shipping more and more of the complex, high-featured, advanced products from Nordic.Our order backlog is at a new level and is a higher level. The backlog ended at $288 million. It's 155% -- 154% year-on-year. Bluetooth account for 82% of this backlog, and we see that there is a technology shift trend. It's getting more of the previous classic use -- Bluetooth classic users and now moving over to Bluetooth Low Energy.And also, we see the customer mix. We see larger -- our larger customers are basically contributing more and more to our backlog, and these customers is placing order with longer length than our traditional customers. Top 10 of our customers account for 42% of the Bluetooth backlog. I think the most important thing about this backlog, it shows that we have got some really larger customers in, and we also see these customers are placing order for -- with longer lead times.The shift, could you see here, I mean, if you go 1 year back in Q3, our larger top 10 customers accounted 33% of the backlog. It's approximately $20 million. This quarter, they accounted 43% of our backlog, and it's basically a doubling over the year. But the important thing, despite that this is growing heavily, the existing customers also grew 34% year-over-year. It shows that there still are activity and very fast-growing activity at our traditional customer base.Why are the larger customer contributing so much to the backlog? Really because these new technology platforms are determining the future, I think, of short-range connectivity. They put specifications for the new protocols, the multiprotocols that Nordic been working on for a long, long time. So we have been leveraging on this strong relationship we have had with these customers over year, and now we start seeing this new infrastructure entering into the market.We have examples that we've been mentioning in a press release a few weeks ago when it come to Sidewalk, where we've been working with Amazon. And we also see that CHIP, which was a new multiprotocol Nordic been working with for a long time. And we also work with other larger customers that will bring out new ecosystems, which all the ODMs are going to hook up to. So we see hubs made by the big platforms, and we see accessories built by ODMs. So basically, it's a good position to be in. We earned it. We worked hard for it for many years.We continue to get high certification market share. We had 44% this quarter and average over year, we have 45% market share. What we see though is that due to the horrible COVID situation, there is quite a bit of medium-sized, smaller customers that have put projects on hold. So total number of design wins have been shrinking a bit, but Nordic has larger accounts. So the total volume of our design wins are significant higher than they were a year ago.We always show some product that we launch during the quarter. These are products that are publicly known. Taiyo Yuden is a Japanese module maker. They enter into the market now with a new module based on the brand-new chip, the 52805, to come back and discuss 52805 later on. And we also see MEZOO, which are doing ECG tag which you can wear. I mean imagine 10 years ago having a wearable ECG tag. Today, you can do it because of Bluetooth Low Energy and connectivity.AirBolt, I put up here because it's an asset tracking device using both our LTE, our 9160 module, and the 52833, our new chip that is multiprotocol-enabled. We also see consumer IoT -- cellular IoT here, LTE smartwatch from ProMOS. And the final example here is also an LTE product. It's Rohde & Schwarz, which make testers for high-volume production, and they are sending all the data they test to the cloud through a Nordic 9160 module. It's exciting to see that some of these applications that we have been aiming at finally entering into the market.I said Taiyo Yuden was using the 52805. We launched that 52805 back in June and already our customer have a product out in the market. It really shows and proves a couple of things that we've been talking about. It's ease of use and that they have a common software platform.Another Chinese module maker also have product in production already with the 805. 805 might be a cost-effective product, but it's really a strong product based on Cortex Arm M4 (sic) [ Arm Cortex-M4 ]. It's compact sized and obviously, coming from Nordic, extremely low power consumption.So as we saw, Bluetooth is growing fast. We also see great advancement in cellular IoT. We get traction with new designs, and good to see that we are also getting into higher-volume products like smartwatch and trackers. We started off with quite a bit of utility meter work, and now we see that consumer products are employing on their product.We also got the first 100,000 unit order for a single design win. This was actually in Q4. It was the second day of October, but I thought it was important to see that we get larger orders, production orders and it's comforting for Nordic to see.We keep on doing certifications with leading operators globally. In Q3, we were certified by China Telecom, AT&T and Bell in Canada. So now the map is covering the most vital areas where we need to be present.Obviously, we are continue to work on the LTE products, and we are able now to do a 30% reduction in our sleep current for the next generation of 9160. It really implies 10% to 20% longer battery lifetime for our end customers. The product has a 15% reduction in data transmit power.And we had a customer -- actually, I was having this conference call with a customer and he said, "It's impossible. The specification that you're showing us doesn't work." And now we are in a phase where customer can get the module and test out, and it really shows that it's possible. Should not -- never forget that the team we have back in Finland, which have designed these products, are maybe one of the most experienced team within LTE globally. So we cannot -- we can't do magic, but we can get really good thing to save power and make a solid product.So another case study on 9160 is asset tracker. And why using Nordic? Again, the small form factor. If you look at our 9160 module, it's tiny and small. It fits in and make the end product small, extremely low power and it include GPS. And what we see is design wins are our different, I would say, segments.We have in construction tools a lot of building places that workers are running around trying to find equipment. We put a LTE chip in, and we will identify where the tools are straightaway. Fleet management is another area where it's important to know where the fleet is. And also, when you ship high-value items globally, it's good to know where it is at any time. And I'm pretty sure that this product will find its way into a lot of these applications.So now I hand over to Pål, and he do -- go through the financials. Thank you.

[Pål Elstad, Chief Financial Officer]

Thank you. Thank you, Svenn-Tore. I will now go to financials for the third quarter.Revenues amounted to USD 119 million in the third quarter and USD 278 million for the first 9 months, corresponding to a growth of 45% and 35%, respectively, compared to last year. The Q3 revenue is actually $31 million higher than Q2, which was previous record month. This steep change comes as a result of increased revenue from our larger customers but also a strong pull from the broad market.The revenue was, as Svenn-Tore mentioned, above the guidance range provided in the financial report for the second quarter 2020 and also updated guidance given earlier in September. The higher-than-expected revenue primarily reflects sales for end-use applications in the Consumer Electronics and Wearables markets.Bluetooth revenue amounted to USD 97 million in Q3, an increase of 56% from $62 million last year. Bluetooth now constitutes 81% of our revenue.Proprietary revenue was $19 million in Q3 2020, which is an increase from -- an increase of 3% compared to last year, and Q3 last year was also the strongest proprietary revenue quarter in 2019. The demand for proprietary products reflects high sales volumes for PC accessories in connection with increased focus on building home offices. For the first 9 months, proprietary grew by 17%. This is in contrast to the expected single-digit decline that we had when we entered 2020.I will now discuss revenue per markets. As overall, revenue shows a strong growth both compared to last year and last quarter. The underlying markets also show a growth. However, I'd like to highlight a few key areas.Firstly, Consumer Electronics, which was by far our largest market, representing 50%. Actually, last quarter, this was 1/3. The market shows a strong 49% growth compared to last year mainly driven by high demand for proprietary solutions related to home office products, but also a lot of these products now use Bluetooth. So we see growth in Bluetooth also in home office equipment. Another very important area within Consumer Electronics is gaming where we see very interesting products both in PC gaming, but equally important, VR equipment.Wearables continues the strong revenue growth with a 40% increase. Just as last quarter, we see high design activity on our most advanced System-on-Chips, especially in the Chinese market. Healthcare revenue amounted to $8 million in the quarter, representing a 54% growth from a modest level in 2019. However, compared to the extremely high USD 14 million in Q2 2020, it's a 44% decrease. This was a decline from extraordinary second quarter, which was boosted by deliveries for COVID-19-related applications.In Q2, we saw a spike in current products being repurposed to solve COVID-19 challenges. Although the COVID-19 products are a large reduction in Q3, we still expect new products coming in the following quarters related to this situation. But more importantly, the COVID-19 has made a disruptive change to the entire health tech market, and Nordic remains confident in the large and long-term potential for connected medical devices both for our short-range business but more importantly, also for our long-range products and solutions.I'll now jump to gross margins. As Svenn-Tore mentioned, we did have a spike in gross margins in Q3. This does include the positive effect of 1.7 million (sic) [ 1.7 percentage points ] related to reversal of costs taken in Q2. Adjusted for this, the gross margin in -- the underlying gross margin in Q3 would have been 52.4%, so more in line with the gross margins we've seen in the previous quarters.We have thereby been able to constantly execute at margins above our 50% gross margin target. The strong underlying gross margin comes as a result of continuing high demand for high-end products as well as a favorable customer mix. In addition, high volumes and predictable outlook drives cost improvements. We expect this favorable product and customer mix to continue also in Q4. However, we reiterate medium-term gross margin targets of 48% to 50%, both change in customer mix but also the more impact of the cellular IoT products with lower gross margins.I'll now jump to the operating model performance. The numbers on this slide reflects reported numbers. The effects of capitalization of internally development -- developed R&D and equity compensation is presented on the next slide. The strength in Nordic's model can be seen in this overview with the strong revenue growth of 45.3%, results in an increased operational leverage and EBITDA margin surpassing the 20% target, also excluding the effect of the gross margin which I recently mentioned.Total R&D spending at 20.1%. This is down from 23.3% a year ago. Nordic capitalized approximately $2 million, most of this related to the short-range business. Although R&D spending is reduced compared to revenue in absolute numbers, R&D increases from $19.1 million last year to $24 million this year. The reason we continue to invest is, of course, we see high-growth opportunities within both short-range and long-range IoT.Related to SG&A, you see that the -- compared to revenue, it goes down from 12.4% to 10% this year. However, the underlying number increases by approximately $2 million. This is a mix of high costs related to equity compensation due to the share price increase, but also adding on quite a lot of resources in sales and marketing to capture future growth. On the bottom, EBITDA of $28.6 million or 24%.Now jump to cash operating expenses, which is operating expenses excluding capitalized internally developed R&D and equity compensation. The cash operating expenses increased by 20% in the quarter. Compared to last quarter, it's more or less the same increase.Although we continue to have a strong cost focus, it's important to emphasize that the Q2 numbers was positively impacted by both the weak Norwegian kroner and also a very low activity due to the COVID-19 situation. For example, there was very little traveling and no exhibitions, et cetera. We see now that the activity is picking up, so we do have an increase in costs and also increase in investments in the company.The year-over-year increase in employees was 16%. And at the end of Q3 2020, the number of employees totaled 872, up 50% in Q3. We foresee a continued growth in employees at this level going forward.Other OpEx increased by 8%, so significantly less than the growth in employees should indicate. The reason for this is that, of course, we're doing less travel, et cetera. We're more staying at home and working, although we've shifted the focus to do some activities virtually. The level of tape-outs of new products has also been very high in the quarter, however, on less costly development of new product platforms. This will, of course, vary from quarter-to-quarter.EBITDA in Q3 2020 was a strong 24%. Including the favorable impact of 1.7%, it's a very strong EBITDA compared to previous periods. In last year, the same period, we had 14.1%. This strong EBITDA shows the strong operational leverage in our business model. Especially, the short-range business shows operational strength, surpassing the 30% mark for the first time. If we look at the last 12 months' numbers, it was 17.2% for the total business and 25% for the short-range business.We had very low CapEx of $2.3 million in the quarter mainly because delivery of new manufacturing testers was moved into Q4. So they will come in now in Q4, ready for growth in the future periods. We still keep the guidance at around $5 million also for Q4. For total, the CapEx intensity for the year will decline to around 5% revenue -- 5% of revenue target that we said, down from 7% in 2019.Finally, on cash flow. We have a very strong cash position. So Nordic completed during Q3 a successful private placement, issuing approximately 8% new shares. The transaction generated gross proceeds of approximately $125 million with net proceeds to be employed to support the company's continued growth, including building working capital and increasing our supply chain capabilities.We also used the cash to ramp up new Tier 1 customers and strengthening the balance sheet. USD 40 million of the proceeds were used to repay short-term debt, which the company do during Q1. Adjusted for these 2 items, we had a starting balance, you can say, in the quarter of $206 million.Overall, in the quarter, we managed to maintain a stable cash position, which is growth -- which is strong since we had a 45% growth. We had an operating cash flow of $8.6 million as a result of strong EBITDA, only offset by increase in working capital. Increase in working capital came mainly as a result of the high growth but also the mix of customers in the model.The group's cash position at the end of the quarter was $215 million. Most of the cash is kept in the group's functional currency, which is U.S. dollars, in order to minimize the impact of currency fluctuations. Finally, cash balance is now at 2.5% (sic) [ 2.5x ] of last 12 months' R&D spend. We think this is an important KPI to show that we now have the strength and the balance sheet to deliver on the road maps Svenn-Tore talked about earlier.Now I'll let Svenn-Tore do a summary of Q3.

[Svenn-Tore Larsen]

Thank you, Pål. So Pål showed the numbers that really reflect on our operating model. It's a very resilient model. What we want to do is to lead on connectivity. We want to have low-power, high-performance and feature-rich, reliable and robust parts. Certainly, we have.It should be scalable solutions. We have to excite developers. We have to engage customers, and we have shown now the last couple of years that we can engage the world-leading customer base by adding on new protocols and engage in these customers' development of their road map. And that's really reflects why the backlog is increasing as it has done. We obviously need to attract talent to achieve all our goals, and we -- as Pål showed, we had 16% growth in employees over the past year.It's a nice place to work in Norway. And even though a lot of engineers thinks that it's costly to live here, there's also advantages. And we see that employees coming from abroad enjoy living in Norway. It's important task for Nordic to ensure that we get the right engineers and are able to drive towards the future we foresee.Sustainable business is important for us. We enable a lot of customers to be more eco-friendly. We do, obviously, what we can do to be eco-friendly as a company, but the most important thing is what our customers really enable globally.And we have to move early. We were early out with cellular IOT, and don't be surprised if we are early out with next type of standards for communication. We are going to be a leading connectivity company for a long time.We have a solid market position, and we have ambitious targets. We are a market leader in Bluetooth Low Energy and, I will say, multiprotocol solutions. We have a dominant share in broad market. You saw we grew more than 35% last quarter in the broad market. We have strong ties to large platform and vertical leaders. This is extremely important, and it comes because we have ability to deliver protocols and do optimized solutions for these customers. And we are positioned for leadership in cellular IoT. I showed you the form factor with power consumption. Nordic has a leading IoT solution.Throughout this year, we see that we have been accelerating our growth. Bluetooth revenue year-to-date is up 40%. Proprietary is up 17%, and we have had -- shown traction in cellular IOT. We ended $1.6 million revenue in Q3 on cellular. We'll be seeing a strong growth on that number end of the year and quarters to come.When you see those numbers and link them to our ambitious targets, I mean, I think we have an increased confidence in the $1 billion revenue number that we said in Capital Markets Day a year ago. If you start calculating this number, if you see our position with the global leading companies, we feel more confident today than we did even a year ago.So with this backlog, it support a strong Q4. Our Q4 guidance is USD 115 million to USD 125 million. That's a 38% to 50% year-on-year growth, and it will be flat quarter-on-quarter. Our gross margin expected to come in at 51% to 52%. I think -- looking at this backlog, I know that some will think $288 million should support maybe more than USD 115 million to USD 125 million. But keep in mind that the customers here have a longer backlog than we used to.There is obviously further upside here because we see a fast technology shift. But as with all kind of businesses, when you grow so fast, there could also be a challenge to fulfill all these requirements. But currently, we see unless things are uncertain happenings that the guiding range should be a safe area for Nordic to guide. And no company can grow at this pace without having some challenges in supply chain, but we also have invest a lot in supply chain. So we feel pretty confident about the quarters to come. So I'm looking forward to come back in February and discuss the Q4 numbers.Thank you for listening in. Now we go to the Q&A session. So to those who have opportunity, please send in questions through the web.

[Unknown Executive]

Yes. We have questions. First, we start with backlog questions. Henriette from Arctic. Congrats with, again, with the strong Q3 results and a strong order backlog. What segments are driving the order backlog? I understand that 42% of the backlog is driven by top 10 customers. Can you give further color or which segments these are in?

[Svenn-Tore Larsen]

Yes. I think we can say that is consumer segments is new product from customers that is entering into a new product category that we haven't been basically supporting previously.

[Unknown Executive]

Another question from [ Dirk Bakker ]. This is on backlog orders. First of all, congrats again with the good result. Is the increased order backlog connected to production capacity?

[Svenn-Tore Larsen]

I would say there's a lot of discussion in the market where the people are doing insurance, basically buying more product that they need at the moment. But what we see is there's new products that's going to come into the market in the coming quarters. So I would say part of it, but main part of it is new products.

[Unknown Executive]

And from [ Dirk ] again. Can the ambition of Nordic be staggered by production limits or sub-suppliers?

[Svenn-Tore Larsen]

It can. We can -- it always can, but I think we're taking all the measures as possible to prevent this happening.

[Unknown Executive]

Then we have a question regarding Bluetooth from Henriette, Arctic. In Bluetooth multiprotocol, I assume that IoT will have an even stronger position after COVID. But could you give any color or quantify if you think some of the growth is driven to COVID-19 like home office equipment, et cetera?

[Svenn-Tore Larsen]

Obviously, home office has been bursted throughout the year. So that will contribute, but it's not significant if you look at the backlog. It's driven by new products from Tier 1 customers.

[Unknown Executive]

Then we go over to cellular IOT. Again, from Henriette, Artic. Cellular IoT is getting traction within consumer application, you state. When do you expect the inflection point for this segment? Or what to happen for this inflection point?

[Svenn-Tore Larsen]

We expect to see the real pickup in the second half of '21.

[Unknown Executive]

And then following another question, what can we expect here in revenue for 2021? Can you give any color on growth expectations?

[Svenn-Tore Larsen]

We did give some colors, and I think we are not going to go away from the point that we are guiding quarter-on-quarter.

[Unknown Executive]

Then we have a question about Bluetooth from Aksel from ABG. Can you elaborate on the opportunity within gaming? It has been an important area for a long time, but do you see some positive changes in the market now that increases gaming demand? Reflect on these, please.

[Svenn-Tore Larsen]

We see more customers contributing to our gaming revenue growth. We can't comment directly on the customers because we have NDA with the customers. But obviously, everyone knows who is leading in mouse and keyboard for gaming segment. And obviously, it's been a natural sell to Nordic to go from consumer keyboard mice to gaming keyboard mice. So we put a lot of effort, and a lot of the features we build into our product is absolutely of value to gamers. Latency, for example, is the #1, and this is where Nordic is extremely strong.

[Pål Elstad, Chief Financial Officer]

But of course, gaming has been popular just like Netflix on TV. So during the last half year, we see a very strong pull for gaming products. But we saw -- we certainly see no reason that that's going to stop in the first [ time ].

[Svenn-Tore Larsen]

And also, we see more majority of artificial intelligence, AI, products.

[Unknown Executive]

Great. Aksel from ABG has a Healthcare question. Do you expect Healthcare sales to go up sequentially from the current levels?

[Svenn-Tore Larsen]

Clear answer, yes.

[Unknown Executive]

Then we have a question from Aksel, ABG. What is the approximate USD value of the 100,000 unit order on cellular IoT these days?

[Svenn-Tore Larsen]

We don't disclose pricing. But obviously, it's significant, about $1 million.

[Unknown Executive]

And Christoffer Bjørnsen from DNB. Is the cellular IoT order of 100,000 units in the order backlog?

[Svenn-Tore Larsen]

Yes.

[Pål Elstad, Chief Financial Officer]

Yes.

[Unknown Executive]

Another question from Christoffer. The year-on-year development in BLE design wins for the market has been on a negative trend following COVID-19. Is there a risk that the current revenue strength is saturated -- or saturating the markets, leading to a tough comparable for the next years?

[Svenn-Tore Larsen]

Absolutely not because if you go beyond the numbers and look at customers, we see, as we discussed in the presentation, a trend shift where the leading customers, which have the highest volume, are moving to Bluetooth Low Energy and multiprotocol products. So we are going to see a significant growth in our top 10 customer base, which obviously is contributing to the growth of the company. And I sincerely hope that the COVID will disappear, and we will get back to normal so some of these small- and medium-sized companies that have been sort of having a reduced activity now will go back to their original activity.

[Unknown Executive]

Then we have a question from Petter Kongslie, Sparebank 1. Can you give some color on the application on the 100,000 cellular IoT order?

[Svenn-Tore Larsen]

No. We don't want to do that.

[Unknown Executive]

Petter Kongslie, Sparebank 1 Markets. Can you give some color on the expected CapEx intensity in 2021 versus 2020? Guess there are few higher investment in 2021 versus 2020 and also 2019.

[Pål Elstad, Chief Financial Officer]

Yes. So the intensity in 2019, we did a large investment in lab equipment. That's now done, so now we're more into the test equipment for products. And as we indicated on Capital Markets Day, it will be around 5% of revenue, we believe, is a fair number.

[Unknown Executive]

Then we have a question from Aksel, ABG. What are the material near-term challenges for Nordic now? Is it lack of software engineers to secure delivery capacity?

[Svenn-Tore Larsen]

It's always challenging to have enough engineers when you're growing so fast. And also, when you have the activity level that we have at Nordic. So we are encouraging every software engineer listening into this which has interest in BLE or LTE to apply for a job at Nordic. But it's not any limitation of the growth for Nordic short term. No.

[Unknown Executive]

We have a question from Petter Kongslie, Sparebank 1, regarding EBITDA. How should we think about the normalized short-range EBITDA margins which now lies around 25%?

[Pål Elstad, Chief Financial Officer]

I think it's -- we've shown the strength in our operational model. So short term, we're confident that they should be within these levels because the revenue will continue to grow, and then we will add on people. But still, 25% should be achievable target for this business.

[Svenn-Tore Larsen]

When we say medium-term goal of '20 is that we will continue to develop the company. We will, for sure, bring new connectivity standards on the market and been able to move early, invest early and take a lead in these markets going forward.

[Unknown Executive]

Petter continue with more questions regarding EBITDA. Can you break down the long-term EBITDA margin of 20%? Given 25% on short range, do you expect cellular IoT to be 10% to 15% EBITDA margin?

[Pål Elstad, Chief Financial Officer]

No. It should be closer to the 20% in -- for the total. So as we say, we stick to the 20% EBITDA margin as discussed before.

[Svenn-Tore Larsen]

Good. We say thank you to all the questions on the web, and we are now going to do a virtual road show with a lot of your investors, and we look forward to talk to you one-on-one. Thank you.

[Pål Elstad, Chief Financial Officer]

Thank you.