Nordic Semiconductor ASA

OSE:NOD

Earnings Call Transcript 2021-Q3

[Svenn-Tore Larsen]

Welcome to Nordic's quarterly presentation for Q3 2021. It's a pleasure for me, together with Pal, our CFO, to present the numbers that we achieved through a very, very challenging quarter. And we've seen strong demand in all end user markets. There has been only 1 limitation, and that's basically a wafer supply. Our revenue ended at USD 148.5 million. It is actually on par with previous quarter. And it also reflects basically the allocation we get on wafers through Q3. Our Bluetooth revenue ended at $124.3 million is up 28% compared to the same quarter last year. Our proprietary revenue ended at $18.1 million, slightly down from last year. The good thing to see here is that our cellular IoT revenue increased 238% compared to last year, which resulted in $5.3 million revenue. This was also cut by supply, unfortunately. Our gross margin ended at 53.1% and is basically contributed by feature-rich system-on-the-chips that we are selling more from during this quarter, and we will continue actually to see dominate our revenue going forward, which has a good effect on our both top number and our gross margin. Our backlog keeps increasing. Backlog ended at $1.3 billion. That's basically 4x the backlog at the same time last year. What we see now is that our backlog is even starting to stretch into '23. And obviously, we see higher volume with longer windows, which just shows that $1.3 billion is a number that's combined with these 2 factors. The challenge we have at Nordic is to focus on the customer situation. We need to ensure we can give the Tier 1 the opportunity to grow, as same as we keep our long-tail customers happy. It's very difficult with this strained supply situation. But that's what we work on every day. Continue to have high market share when it comes to design wins. I mean, we keep hovering above 40%, and what we see that you don't see from the graph is that value per design is significantly increased. Again, keeping the market share, multiply with design value, that's higher. Again, it indicates obviously that our backlog will keep on growing. Despite that we now are not open for 2 orders outside first quarter of '23, what we try to do is to ensure that what's in our backlog is going to be shipped to customers at a time that is needed to satisfy their demands. We see, as every quarter, new products launched with Nordic product inside. As we see in healthcare like diabetes, we have a company called SiBionics that are doing this connectivity between patients and smartphone. We talk about lights for a long time. And now we start seeing customers coming out with tunable lights with Bluetooth Low Energy inside. And if you look at the tracker market, it's exciting. It's both for commercial and it's -- for asset is for pets. And what we see common here is that we use a combination of BLE and cellular IoT. Nordic has been working very much to look how can we assist the world in becoming a better place to live. UN's goals -- sustainability goals are important for Nordic, and we also see our customers are making products to monitor and give feedback. And we see a company that are doing wastewater and sewerage spill monitoring. It's cool to see our product basically making a difference. So good for us is that we see that the strategy we had, getting short communication from sensors with Bluetooth Low Energy connecting to the cloud with our cellular products is happening at the moment. We launched our first nRF cloud services. It's basically a location service, and we can do it with our parts, with our 9160 module. We can do it either with GPS or with cell. And we see customers now starting to use this service. This is just one of many to come. And our cellular IoT revenue are steadily growing. We would like to see more volume ramp, but we are held back by supply constraints. But as I earlier indicated strong presence in tracking, and we see more moving over to industrial applications and more industrial applications in cellular IoT than we do have in the Bluetooth at the moment. And what we are doing in Nordic now is to really ease the design of cellular. Anyone out there which is -- I mentioned here I've been working with communication and telecom -- knows that making a cellular IoT product is difficult. We want to make this easy for any -- anyone in a lab that doing development of these products. Due to that, we've been basically working to incorporate Visual Studios (sic) [ Visual Studio ]. it's basically a product from Microsoft, very popular product, the same with Memfault. So we have done a partnership with these companies. to help our customer to achieve a quick solution to end product, and it's working. That's the important thing. Anyone remember DECT? That was a standard many years ago. Now, ITU has released a new standard to DECT. Nordic really see around us. And if you look at all the 5G developments that's happening, it's important to take advantage of this 5G development. All operators are also the backbone. The service providers are benefiting from this 5G developments happening now. And if you look at technology in there that basically been sort of not very much alive for many years are know starting to come back. And we have been a main contributor to the physical layer and the medium access layer on this specification. These are designed for massive IoT networks for enterprises, like building automation, utility meters, manufacturing automation, smart city and logistics. We have done this very much based around the knowledge and our product from the 9160, the cellular IoT products. We've done this in partnership with Wirepas, a leading Finnish IoT wireless solution software company. And we expect to put this product on to the market next year. I think it's fantastic. It just shows that we use existing expertise to migrate into additional standards in connectivity. And if you remember back, what we've been talking about since 2002, that's what Nordic is all about, capitalizing on knowledge we are building and be early and take advantage of technology shifts. We first predict. So now I would like to hand over to Pal and he'll talk about the numbers that we achieved a little bit more in depth. Thank you.

[Pal Elstad, CFO & Executive VP of Finance]

Thank you Svenn-Tore. I'll now go through the financials for Q3 2021. As Svenn-Tore mentioned, we had a strong revenue growth of 24% this quarter from $248.5 million from $119 million last year. If you recall, we guided for a range of $130 million to $150 million in this quarter, a little bit wider range that we have historically had. And the reason for that was that there was uncertainty regarding wafer deliveries in Q3. We've actually been able to pull in additional wafers so that we end up at the higher end of this guided range. But just as Svenn-Tore mentioned, we are capped in the quarter in relation to the number of wafers we actually would have liked to have to take advantage of the demand we see in the market. Bluetooth revenue amounted to $124 million in Q3, up 28% versus last year, more or less flat versus last quarter. Bluetooth is now 83% of total revenue in Nordic. Proprietary revenue at $18 million, a slight decline compared to last year. However, this is very strong because 2020 had very big numbers related to home office applications due to COVID. For cellular, several projects are now beginning to gain commercial traction, and we now reported $5.3 million in revenue, a good growth compared to last year and also compared to last quarter. However, cellular is still impacted by supply constraints, and this market will be lumpy going forward, both related to the supplies, but also depending on when larger products -- projects come into production. Now going to revenue per market quickly. So of course, we had a 24% overall growth. So individual markets will be strong also compared to last year and pretty flat compared to last quarter. However, the variances in the different markets will really depend on the allocations we've done to this particular market in this quarter due to the supply constraints. Consumer Electronics, which is by far our largest market, with 39% of the total, slightly up from last quarter. The market shows a 5% growth year-over-year. Also, of course, very strong numbers from the home -- work-from-home segment, but also gaming is very strong here. Wearables is the market which was mostly impacted by the supply allocations with a 22% decline versus last year and a 5% decline versus last quarter. Building and Retail start -- continues the strong growth with a 72% increase versus last year. This is -- has lots of very interesting end customer products related to smart homes, lighting, smart shelf labeling, but also tracking solutions. Healthcare, strong growth versus last year, 23% decline versus last quarter. Last quarter had very strong COVID-related products. So now mainly back to the diabetes solutions and also the personal healthcare applications that's in that market. With the effect from 2022, Nordic will change the reporting structure for the end markets to better reflect the underlying verticals with 4 end-user markets in Consumer, Industrial, Healthcare and Others. This change will strengthen the focus on end customers. So by looking at the verticals, you will more understand who are the end customers in the market. The main change will be that consumer-driven products will be moved from current Wearables, Building and Retail and Healthcare categories to the consumer vertical. This will happen from 2022 onwards. Now turning to gross margins. The strong gross margin development that we experienced in Q2 continued in Q3 also. If you compare to a year ago, we had a small decline, but the strong gross margin in Q3 2020 was impacted on adjustments from previous periods. So underlying growth of 1 percentage point compared to last year. As Svenn-Tore mentioned, the strong gross margin comes as the share of higher [ CapEx ], higher margin products increases in the base. If you look at next quarter, we expect gross margins of 51% to 53%. Nordic will adjust prices in the fourth quarter to reflect increasing wafer and outsourced assembly and test pricing. These adjustments are included in the guidance. Now I'm going to jump to the operating model performance in Q3. First of all, EBITDA of $28 million or 19.1%. It is a decline versus last year where we showed 24%. Especially with last year was that in last year, we had -- due to COVID, we have done very small investments, and then suddenly in Q3, we had the strong growth. That's why you see the decline. If you look compared to last quarter, EBITDA margins are more or less at the same level. We do continue to invest a lot in the business. So R&D spending is now at around 24%, up from around 20% last year. The reason for this increase is partly that we've now actually added the WiFi business, which is 2% of revenue or $3.3 million. We are also capitalizing slightly less as our products are coming into a different phase that constitute around 1% on the bottom. SG&A hovering around 10% of total revenue. Of course, absolute numbers are increasing from $12 million last year to close to $50 million this year. I'm going to go to cash cost, cash operating expenses, which is OpEx, excluding internal development, R&D and equity compensation, increased by 35% compared to the same period last year. If you compare it to last quarter, it increased by 6%. The main reason for this increase is, of course, the salary expenses that went up 37% year-over-year as a result of Nordic adding 33% in employees. So we have now grown to 1,155 people at the end of the quarter. Of course, this has decreased, partly explained by the acquisition we did last year, but the underlying growth in especially R&D and also product and customer-related functions is continuing to increase. Other OpEx increased by 30% year-over-year. This is caused by higher activity this year, including tapeouts for new products and external consultants. Although traveling and exhibition costs are, of course, still low in Q3, but we see a good pickup, which is good for the business in Q4 when people can start traveling again. I think we've discussed EBITDA before this quarter at 19% versus 24% a year ago. If you adjust for the cellular IoT and the WiFi business, the short-range business continues to deliver EBITDA margins very close to 30%. The same thing you can see if you look at the EBITDA margin for the last 12 months, close to 20% for the short-range business and for -- if you now -- close to 20% for the entire business and close to 30% if you exclude new investment areas. Briefly on CapEx. In Q2, we had close to $10 million in CapEx. The reason for that was we did very high investments in test equipment in order to be ready for high-volume ramp happening right now. This quarter, more normalized at $4 million. It's a mix of both new testers and also lab equipment. This quarter, we spent 2.7% of revenue in CapEx. For the year as a whole, we expect around 4%. Finally, cash flow. During Q3, we had a good cash flow of -- overall cash of $19 million. The operating cash flow was in the same period $26 million. The strong operating cash flow comes as a result of a very healthy EBITDA and good management and cost conversion on the -- cash conversion on the net working capital. Net working capital continues to be low at 19%. Of course, the main reason for that is that inventories continue to be record low, actually too low. They are now close to a quarter's revenue. The group's cash position is $246 million at the end of the quarter, a strong cash balance that is sufficient to deliver on future growth and to finance the business we have right now. Svenn-Tore, I'd like to hand over to you. Svenn-Tore is going to talk about the outlook, but also key highlights from the Capital Markets Day. If you have questions, you can send them in through the -- on the web page right now.

[Svenn-Tore Larsen]

Thank you, Pal. So despite the supply challenges, we expect a solid Q4. We are guiding for a range between $150 million to $170 million. We will maintain our revenue because we are continuing to sell feature-rich system-on-the-chip parts. And obviously, our revenue is also capped, unfortunately, in Q4. I don't think this is a situation that's going to ease in, I would say, a couple of quarters. It takes time to build and extend fabs. But what I can assure you about is that semiconductor fabs are working hard to extend capacity, and it's basically a bump in the road and we will work as hard as possible to support our customers, both the broad market and the Tier 1 until capacity is in place. That's an important part of our job today, and it's going to be, I think, for the rest of '22 also. We will show later on today, when our Capital Markets Day is going to be webcasted at 3:00 Norwegian time, that we have a solid platform for strong growth. And we have to put or pull our USD 1 billion target 1 year closer to 2023. We were optimistic about connectivity and basically the sector that we're working in, but we see now that the pickup and the use cases are endless, and it's nice to be able to pull this target 1 year in. And important thing is also that we have committed wafer supply to cover this target. We have customers, as you see from our backlog, but the important thing here, in the situation right now, is to have wafer supply to cover that target which we have today. But we don't stop at $1 billion. We want to grow further. And we are aiming to more than double revenue in the time frame of '23 to '26. There will be continued strong growth in short range. Nordic is leader in short-range BLE. We should at least be able to keep the same pace as the market. We are seeing accelerated traction in IoT. We are coming out with WiFi products, adding to our revenue. And we have released power management and other adjacent products throughout this very, very difficult 1 year, 1.5 years that we have behind us. So this is added on top of existing product. So aiming for doubling revenue in a time frame of '23 to '26 is a strong [ grounded ] in Nordic, and we have done large investment up till now to ensure that we have the right products to take advantage of what's happening in the market and around us. So I'm so excited to go into depth on what we've done and what we are going to see of effects of what we've been doing the last 1.5 years. And I would like to welcome everyone to our presentation 3:30 today on the web or physical in Oslo Konserthus. It's going to be a nice concert, and we are there with all of our management team.Thank you. Any questions? Stale?

[Pal Elstad, CFO & Executive VP of Finance]

So questions now are mainly related to, of course, the Q3 financials since we have the whole section on Capital Markets Day with also a Q&A.

[Stale Ytterdal, Senior Vice President of IR & Strategic Sales]

Perfect. Thank you. We have one question from Rob Sanders, Deutsche Bank. The backlog log trend is up quarter-on-quarter, but slow down on growth. Has there been any sign of double ordering in the past that is now being moderated?

[Svenn-Tore Larsen]

No. Double ordering is a question we are getting frequently. And I think Geir will actually address this in Capital Markets Day later on today, but we have a quote system for our customers. So the forecast we get from the Tier 1 customers and other customers are identical to what we see our distribution channels are placing in orders. So there is very little backlog that could be double ordering. Secondly, I think it's meaningless to place orders for the second half of '23. We need to work on existing backlog and ensure we can deliver this existing backlog before doing too much push for orders further out. And if you look at our target is to do $1 billion in '23. I think the backlog covers that and maybe even more. It all depends on supply.

[Stale Ytterdal, Senior Vice President of IR & Strategic Sales]

Thank you. Then we have a question from Christoffer Bjørnsen DNB. Great to see you have supply to drive solid growth into '22, '23. However, can you give some color on what segment give that -- what segments give you such confidence on the demand side into 2022? Surely, there are some segments where there will be tough comparables.

[Svenn-Tore Larsen]

It's been tough comparable for Nordic since we started this voyage, and it continue. But important thing is that we've been focusing heavily on added value through our software protocols. And we will go into depth on software protocols and sort of contribution to revenue growth later on today at 3:30.

[Stale Ytterdal, Senior Vice President of IR & Strategic Sales]

Thank you. We have another question from Christoffer, DNB, on cellular. Last quarter, you said you saw a cellular IoT customer likely ramping to become a top 10 customer for the company during the current forecast period. You have now removed this. You have now removed this, it seems. And any changes in this statement?

[Svenn-Tore Larsen]

No.

[Pal Elstad, CFO & Executive VP of Finance]

No. The customer is still in the same forecast last quarter. And also having good numbers in Q3.

[Stale Ytterdal, Senior Vice President of IR & Strategic Sales]

Thank you.

[Svenn-Tore Larsen]

Remember that we said revenue was capped by supply chain challenges.

[Stale Ytterdal, Senior Vice President of IR & Strategic Sales]

Øystein Lodgaard from ABG. You now say that the backlog stretches into 2023. Does this mean that the backlog duration is similar as it was after Q2?

[Svenn-Tore Larsen]

No, we have had around another $230 million added on in Q3.

[Pal Elstad, CFO & Executive VP of Finance]

Yes. So -- but the duration is [indiscernible]

[Svenn-Tore Larsen]

It's extended.

[Pal Elstad, CFO & Executive VP of Finance]

Yes, it's extended.

[Stale Ytterdal, Senior Vice President of IR & Strategic Sales]

Thank you. I think we are finished. There is no more questions. I think people are waiting for the Capital Markets Day later today, and there will be a Q&A session there also.

[Svenn-Tore Larsen]

Yes. Actually, also, we thought of having short mingling with these guys that are physical in place in Konserthus. So we are very much looking forward to speak, obviously on webcast to everyone out there, but also nice to meet people again face-to-face after such a long period, where we just got with text messages and emails. So thank you for now, and see you later. Bye.

[Pal Elstad, CFO & Executive VP of Finance]

Thank you.

[Stale Ytterdal, Senior Vice President of IR & Strategic Sales]

Thank you.