Nordic Semiconductor ASA (OTCPK:NDCVF) Q3 2022 Outcomes Convention Name October 20, 2022 2:00 AM ET
Firm Individuals
Svenn-Tore Larsen – Chief Govt Officer and President
Pal Elstad – Chief Monetary Officer and Govt Vice President, Finance
Stale Ytterdal – Senior Vice President, Investor Relations
Svenn-Tore Larsen
Good morning, and welcome to our presentation of Q3 2022. My title is Svenn-Tore Larsen. And with me, as all the time, I’ve my CFO, Pal Elstad. We’re as soon as once more reporting a document lead to a really turbulent atmosphere with provide points and rising macroeconomic uncertainty. Our income elevated 36%, as much as $202 million, whereas our gross revenue elevated by 47% to USD 116 million, and our EBITDA greater than doubled to USD 60 million. As I mentioned final time round, the irritating factor is that income and outcome might have been considerably greater if our supply capability has not been severely impacted by wafer provide constraints.
Sadly, we see a secure income outlook for This fall solely resulting from continued provide challenges. And we’re guiding revenues of USD 190 million to USD 210 million once more, and we’ll proceed having a robust gross margin above 54%. Our backlog has come down from the height ranges we noticed on the finish of final yr. And our second quarter presentation, we mentioned that it is best to anticipate additional backlog adjustment till the wafer scenario is resolved. As now we have informed you earlier than, the order backlog has been considerably greater than our supply capability given the scarcity of provide. And we have been working with each end-customers and distributors to regulate order volumes and take a look at to have the ability to ship actually wanted components at wanted tasks.
Within the third quarter, we additionally see some order cancellation from smaller buyer what we principally see is that Tier 1 clients orders and quantity forecast stays very, very agency. Within the present order backlog of $1.1 billion, constantly, I might say, present a robust assist for our income progress ambitions going ahead. Our place within the broad market to stay sturdy. And our share of Bluetooth design certification final quarter was round 40%. The variety of designs are pretty secure. That actually reveals that the worth of the Bluetooth market which is rising additionally signifies that the worth Nordic had [indiscernible] is rising. And we see that each with extra superior merchandise, and that results in greater ASP gadgets from Nordic.
And if we dive beneath on these numbers, we see that out of this 40% market share, 58% of those are in non-consumer functions. And that reveals how the group have tailored to mainly the turbulence have been globally relating to client, we at the moment are specializing in nonconsumer functions and for 58% was a results of the [indiscernible] with final quarter. I am very happy with gross sales group and the technique we took early once we began seeing this improvement.
We proceed to see a gradual stream of recent merchandise being launched with us, each in Bluetooth and mobile IoT. I imply, this time, now we have highlighted just a few functions. We have now some chilly chain delivery product, now we have beacons mixed BLE and ultrawide band, as you will notice loads coming going ahead. We have now a baby tracker combining BLE and mobile, and we proceed to see new mobile merchandise launched to the market. And one in all these we present here’s a assortment of information and well being monitoring. We’re a transparent chief in Bluetooth Low Power, each relating to design wins and gross sales.
As now we have proven you on many events, this made us a pure companion for the big platform firms. And we’re looking for to strengthen the place for the hubs, equivalent to Amazon Echo, Apple HomePod or Google Nest. These platforms want connectivity in BLE and Nordic is a pure selection. What we see now could be Apple, Amazon, Google and Samsung and the big firms round 240 firms really at the moment are working collectively in what we name the Matter working group. And Nordic has a pure place in such a standard normal, and we have been leveraged to board membership of Matter recently.
And when you take a look at our merchandise, I imply, we’re actively supporting Matter 1.0, each on our 52840 or 5340 components and in addition on the 7002, the Wi-Fi chip. And clearly, will we assist components, we even have the assist in our SDK.
Following up on the Wi-Fi chip I simply talked about. We have now a [card] to have the ability to introduce our first Wi-Fi product already this September. After acquisition of the IP and Wi-Fi group from Creativeness final yr, we have been in a position to launch the product. We have now been sampling clients, and we’re very excited to see the outcomes once we now begin delivering in quantity in This fall in full manufacturing. And I may even share the pricing that now we have given. We mentioned that it will be round $2 in quantity. For those who take a look at that, it is really double the value of a median Bluetooth. This chip works is on 2 bands in twin band chip, each 2.4 and 5 gigahertz, and as all the time with Nordic is a small kind issue, 6×6 QFN. That is very thrilling information for us. We see a number of customers with our location service hubs, gateways and it will be numerous resolution enhanced by including Wi-Fi together with short-range and long-range merchandise. WiFi was lacking in our portfolio. And it was a functionality that our buyer demanded or wished from Nordic.
By introducing Wi-Fi, we now cowl many of the extensively used IoT know-how, Bluetooth Low Power, ZigBee, Thread within the brief vary, Wi-Fi within the medium vary, and each LTE-M and Narrowband IoT within the lengthy vary. Widespread benefits throughout the portfolio embody, after all, low-power frequent software program resolution and superior improvement instruments. We do what we will to permit our clients to deal with their utility. You may recall, ease of use, we proceed to have ease of use on high of our checklist. I am sure that this portfolio holds an ideal long-term progress alternatives.
And with that, I’ll go away the mic to Pal, who ought to take you thru the financials for the quarter. Welcome, Pal.
Pal Elstad
Thanks, Svenn-Tore. As Svenn-Tore talked about, we’re as soon as once more reporting document numbers regardless of the difficult provide scenario and the extra unsure macroeconomic atmosphere. Income got here in barely above the midpoint of $190 million to $210 million we guided for within the Q2 presentation. However this hides fairly massive variations between the totally different applied sciences. Total, we had a income progress of 36% in comparison with final yr. This progress was a results of a mixture of greater costs and extra provides. In comparison with final quarter, we had a 1% improve primarily barely extra wafers acquired within the quarter. Nonetheless, this might not soak up the discount in proprietary revenues that we noticed within the quarter. However anyway, Bluetooth had a 44% improve.
As I mentioned, Bluetooth income elevated by 44% year-over-year and seven% versus final quarter. The 44% in comparison with final yr, after all, displays the value improve we did on the finish of final yr, however we additionally acquired considerably extra wafers for Bluetooth. Proprietary income declined by 29% year-over-year, and the quantity this quarter was really simply half the quantity we had in Q2 this yr. Proprietary income has been very sturdy because the begin of COVID-19 with excessive demand for PC equipment and different residence workplace tools, equivalent to gaming and digital actuality.
As we mentioned at our Q2 presentation, we’re ready for decrease demand on this phase, given that individuals have returned to work and client sentiment has weakened. The decrease Q3 revenues primarily displays stock changes on the distributors and the weaker finish consumer demand from the smaller clients within the portfolio for proprietary, whereas demand from Tier 1 clients have held up firmly. As we communicated earlier than, COVID, we see a decline in proprietary as there’s a transition to extra superior merchandise at our clients. Proprietary will proceed to be essential, though solely 10% of our whole income presently and declining.
Turning to mobile IoT. The numbers are nonetheless comparatively small, however we noticed a great uptick in Q3 after a weak Q2 resulting from provide points. Assessing the mobile IoT improvement over a considerably longer timeframe, you possibly can see that income has elevated considerably over the previous yr. For the final 12 months, income amounted to $26 million, up from $14 million a yr in the past.
Nonetheless, trying forward, we see that the more durable financial atmosphere is making a extra unsure short-term outlook. We do have a really massive house of some 250 tasks that we’re engaged on. And a number of other of those have begun to realize industrial traction. Nonetheless, within the present financial atmosphere, we see that a few of these tasks is perhaps in danger, and this may have an effect on progress within the brief time period. For instance, undertaking financing may be more difficult for smaller clients or IoT startups, who’ve been engaged on mobile IoT tasks.
gross sales from one other perspective when it comes to end-user markets, we see that progress inside the client phase or markets was just a little bit muted within the quarter, the place we see industrial continued to develop at a fairly wholesome tempo. Client is, though the nonetheless our largest market by far. The market allocation partly displays underlying the demand developments but additionally our product allocations below the constrained provide regime that Svenn-Tore was discussing.
Healthcare is a vital progress marketplace for Nordic. We do noticed a dip in Q3, however that is primarily defined by when our massive buyer tasks go into manufacturing. One more technique to handle that is to have a look at the event like buyer measurement. We have now been constructing a robust relationship with a number of Tier 1 clients over time. And over the previous years, this has led to an rising order influx from these clients. Despite the fact that now we have managed to develop income additionally within the broad market and focus loads on the broad market, the present provide constraints signifies that now we have wanted to prioritize the high-volume clients, and that is exhibiting by within the income focus.
The income share of Prime 10 Bluetooth clients bottomed out just under 30% in 2018 and has since elevated to 43% during the last 12 months. Truly, in Q3, [I selected] the highest 10 clients accounted for 45%. This shift in income composition displays considerably elevated gross sales to Tier 1 clients within the U.S. and Europe and comparatively decrease gross sales to small and midsized clients in different areas.
Turning to gross margin. We proceed to see a robust gross margin additionally within the third quarter. Gross earnings elevated by 47% to $116 million from $79 million the identical interval final yr. The gross margin elevated to 57.3% from 53.1% in the identical quarter final yr. This can be a results of optimistic results of each product and buyer combine, mixed with pricing energy given the constrained provide scenario.
Turning into the working mannequin. We see optimistic developments throughout the board. As already talked about, the income elevated by 36% year-over-year and the gross margin elevated by 4.2 proportion factors. We’re, nevertheless, persevering with to spend money on our future progress. R&D elevated by $2.6 million to $38 million. However as a proportion of income, this was a decline from 24% to 19%. That is really the bottom we have had for a while. It is not reflecting decrease investments, however reflecting low elevated operational leverage. Equally, promoting, basic and administrative bills elevated by $2.6 million to $17.4 million, a decline from simply on the ten% to eight.6%. Nonetheless, it is essential to notice that each R&D and SG&A have been favorably impacted by stronger U.S. {dollars} in comparison with our important currencies NOK and euro. The FX impact on payroll alone is round $6 million this quarter in comparison with the FX charges we had a yr in the past.
Summing up, EBITDA greater than doubled to USD 60 million within the quarter. That is near 30% EBITDA margin, a ten proportion factors improve from the identical interval final yr and 5% above the long-term targets we outlined on the Capital Markets Day.
I am going to now speak just a little bit about money working bills. They amounted to $55 million in Q3 when including again capitalized improvement expense and deducting for depreciation and equity-based compensation. This compares to $50 million in the identical interval final yr and really a decline from the $58 million we had final quarter. In comparison with final yr, the ten% improve is definitely effectively beneath the income progress, subsequently, for the upper operational leverage. Payroll of $38 million is simply marginally greater than the identical quantity final yr, even when we present the 20% improve in variety of workers, we at the moment are very near 1,400 workers in Nordic. The rationale that OpEx didn’t improve extra is that, as I discussed, we had a really optimistic FX impact within the quarter in comparison with final yr of $6 million. If we alter for this $6 million, the OpEx improve shall be very shut to twenty% or the variety of workers now we have elevated.
As I discussed, the weak NOK and euro could be very favorable for Nordic once we convert our accounts to U.S. {dollars}, 50% of all our OpEx not manufacturing associated, however all different OpEx is in NOK and 20% in euro. If for instance, the NOK goes from a conversion of 8.5% to 9%, now we have roughly $1 million of favorable EBITDA impact. And now NOK is effectively above 10.5% in comparison with the greenback. However after all, this will rapidly shift each methods. So it is essential if you analyze OpEx to bear in mind the FX charges that is prevailing. Different OpEx elevated from $30 million in Q3 final yr to $17 million this yr, which continues to be decrease than the earlier quarter. The year-on-year improve primarily displays extra touring and better tape-out exercise on this quarter.
CapEx has began to extend just a little bit in comparison with earlier durations. We’re now at $7.2 million for the quarter, primarily reflecting investments in extra take a look at capability to finalize finish merchandise. And in addition, we have invested quite a bit in IT infrastructure. CapEx depth total stays beneath the beforehand indicated ranges of round 4% of income and now could be anticipated to finish beneath 3% for the total yr.
Lastly, I am going to speak just a little bit about our money move. We have now a really wholesome money move and a robust money place. In Q3 we total added $33 million to our money steadiness, and ended a money at $353 million. Working money move was near $45 million, with a robust EBITDA, solely partly offset by elevated working capital. We did see a rise in web working capital of $17 million within the quarter. And because of this, the web working capital in p.c of income is as much as 24%. However total, now we have a really sturdy money steadiness, along with the newly sustainability linked RCF that we signed in late June this quarter, final this yr. I am going to now hand again to you, Svenn-Tore, to undergo the outlook.
Svenn-Tore Larsen
Thanks, Pal. I imply, as I mentioned at first, we see a comparatively secure improvement from Q3 to This fall. Complete Bluetooth demand continues to exceed provide. Though we see some lowered demand in some verticals, the Tier 1 clients and the brand new tasks we gained within the final 2 years are demanding important greater provide than we’re in a position to ship. And we’re working day-after-day, each week to extend our provide. And we all know that the income to be acknowledged, we have to see components in early December to show it into components that we will ship out in This fall. So we’re working exhausting to see how a lot we will pull into the quarter. However as of at this time, the income steerage shall be flat $190 million to $210 million. We anticipate to maintain the gross margin at wholesome ranges, and it is pushed by a positive product and buyer combine.
Trying additional forward, we acknowledge that the market uncertainty has elevated. You’ll be able to see that round day-after-day. Over the previous months, we have seen newswires relying tales in regards to the international financial system, the cooling semiconductor gross sales, elevated commerce tensions between U.S. and China, and it is including to recession fears during the last interval. We clearly acknowledge this, however we even have the opposite facet of equation once we see new tasks coming into Nordic demanding greater quantity. However to handle the latter first. We don’t anticipate to see any important direct impression of the brand new U.S. export controls on our enterprise. The entire new rules might have an effect on a few of our clients.
Extra usually talking, we see a market outlook that differed quite a bit throughout the verticals, geographics and totally different buyer sorts. As I mentioned earlier, we see sturdy order bookings and forecast from our Tier 1 is the Bluetooth clients. And as Pal talked about, now we have seen a shift within the income composition, we considerably elevated gross sales to Tier 1 within the U.S. and Europe. And comparatively decrease gross sales to small, medium-sized clients in different areas.
Total, our income ambitions stays intact. Nonetheless, we needed to see round on what’s occurring, and now we have to have a extra cautious outlook for proprietary. And clearly, now we have had this cautious outlook for our proprietary merchandise for two, 3 years now, and it received opposed by COVID interval the place lots of people moved residence and purchased new tools. However the principle development is identical as pre-COVID. Most of our clients in proprietary are shifting to Bluetooth merchandise. And the problem for Nordic is to have the ability to ship Bluetooth merchandise in these new finish merchandise.
As extra of — I imply, I feel now we have been working flat out prior to now yr, 1.5 years to pay money for as many wafers as potential and we proceed to work to get extra. Additionally in ’23, with new merchandise with some assist from our distributors, if we will get extra wafers, excessive and fairly agency on maintaining the aim that now we have set for ’23.
The essential factor is although that Nordics proceed to speculate. We all know that the market we’re in is a market that is going to develop from now to ’23 and our ambitions of greater than double income from ’23 to ’26 stand nonetheless, continues to be there. If we do not spend money on R&D, it might be exhausting to make this occurring, however we’re persevering with to speculate. And as you perceive, we do not have order protection that far out. And these income ambitions construct on assumptions of continued financial progress and continued demand progress from each clients and shoppers and industrials.
And when you take a look at the tasks we’re engaged on, when you take a look at the forecast we get from our Tier 1 clients, it is very a lot in line. If we see a persistent unfavorable macroeconomic improvement, or main change in buyer habits, clearly Nordic will adapt to the scenario. We’re in a great place. We have now a capital-light mannequin, tablets manufacturing, exterior distributors, and this leaves us with excessive flexibility to adapt to adjustments within the enterprise atmosphere.
Summing up, now we have accomplished one other quarter with document income and outcome. We proceed to see sturdy demand and order forecast from our Tier 1 clients. This offers a strong fundament for additional progress, though we have to see greater provide of wafers to totally meet the ambitions for the following yr. We’re optimistic. I’m optimistic. And when you ought to imagine within the improvement of the whole lot we learn round, we simply work even more durable to realize extra of semiconductors coming Nordic method.
With this, I want to open for questions. Thanks for listening in. Pal?
Query-and-Reply Session
A – Stale Ytterdal
Sure, now we have gotten numerous questions. My title is Stale. I am the Head of IR. We will begin with steerage from Adam from Financial institution of America. Did you obtain much less wafer allocation in This fall than anticipated, was it not deliberate to develop sequentially all year long?
Svenn-Tore Larsen
We didn’t obtain much less wafers. We acquired wafers from totally different nodes. So on the proprietary, which is a distinct node from what we use on Bluetooth. We acquired wafers that we didn’t — we’re not in a position to ship the purchasers on Bluetooth, we acquired greater than we anticipated.
Stale Ytterdal
Provide capability from Rob Sanders, Deutsche Financial institution. Was it — what’s the preliminary indication from TSMC relating to your wafer allocation for 2023?
Svenn-Tore Larsen
I am sorry, Rob, however we’re not discussing industrial dialogue with TSMC right here. However as I mentioned, we stay to maintain the aim. And that signifies that we want extra wafers.
Stale Ytterdal
Then now we have a query from Lars Devold, Kepler. Relating to your USD 1 billion income goal, you now talked about that you’ll require extra Bluetooth wafer provides to satisfy that concentrate on. Does that imply that you just rely upon further deliveries exterior the allocation plan?
Svenn-Tore Larsen
The allocation plan, I do not know what you referred to once we did the calculations, once we had a aim, it is 2, 2 years in the past, and now we have maintained that aim. And clearly, we have to get extra wafers to catch up the — I might say, shortfall proprietary, however we additionally produce other merchandise coming into our portfolio, primarily based on totally different know-how nodes.
Pal Elstad
However I might additionally say Svenn-Tore that within the dynamic market we’re in at this time, we’re discussing with our suppliers always and dealing on pulling in wafers. So it is a part of the enterprise we’re engaged on. And also you talked about that we work always on this.
Stale Ytterdal
We have now a query relating to provide capability from Adam, Financial institution of America. Do you anticipate wafer allocation shortages for Nordic to proceed by 2023 and doubtlessly into 2024?
Svenn-Tore Larsen
I feel that is one thing that the trade struggles to provide a transparent reply on. As you understand, we’re competing with automotive trade and automotive trade continues to be catching up from COVID and there’s a sturdy demand. So it mainly is dependent upon how our rivals are doing over the following yr. However I do not see at this time that there’s a structural change in that scenario.
Stale Ytterdal
You even have a query relating to backlog, Adam from Financial institution of America. Might you clarify backlog decline when it comes to your adjustment versus weaker calls for?
Svenn-Tore Larsen
Principally, I feel it is very reasonable of us in direction of our finish buyer to point what we will ship and never all the time what the shopper needs. So we have been trimming the backlog, as we mentioned on the slide, to extra match functionality now we have of cargo presently.
Stale Ytterdal
Thanks. Then now we have just a few questions relating to gross margin. We will begin with Christoffer Bjørnsen, DNB. Gross margin stays round 54 plus p.c into This fall resulting from tight provide versus demand. Given that you just say demand stays above provide into 2020, ought to we assume that the gross margin stays at this degree, no less than for the following yr?
Pal Elstad
I guided — we have commented on 54% for This fall. In Q3, we had low proprietary. We had some favorable product combine. Going into This fall, after which the remainder of subsequent yr, we’ll see in all probability greater high 10 and possibly just a little bit extra of proprietary — and in addition just a little bit extra proprietary. So the general combine will go barely down from the 57% we had on this quarter, down in direction of the 54% we talked about within the presentation.
Stale Ytterdal
And that then we’re coming to Adam from Financial institution of America. Will improve in focus to massive Tier 1 buyer result in additional gross margin headwinds, I feel.
Svenn-Tore Larsen
I feel Pal answered that. And I feel additionally it is essential to grasp that when you take a look at these Tier 1 clients, I feel we will say that every one of — none of them are contributing greater than 15% of our income. In order that they unfold over a number of clients. And now we have a wholesome margin.
Stale Ytterdal
We have now a query relating to OpEx from Lars Devold, Kepler. Do you anticipate to extend lower R&D going ahead on account of the macro headwinds?
Pal Elstad
I feel Svenn-Tore, when you take a look at underlying spending, not adjusted for FX. We have now — we communicated on the Capital Markets Day that we have to keep round 20% as a way to develop the corporate and develop additional. And Svenn-Tore talked about that within the presentation. However after all, we do have a light-weight capital-intensive enterprise. So if we see important adjustments within the atmosphere, after all, we should adapt.
Svenn-Tore Larsen
However now we have to be trustworthy to what we see from clients and our perception. We see now the exercise now we have at Nordic on R&D, we will add extra folks even to satisfy the necessity for our clients. And that is what we’re doing. And we hope to proceed this aggressive hiring on R&D personnel as we enter into ’23. There may be extra tasks on the market that wish to use Nordic and it is a accountability to provide the most effective connectivity ships available on the market with these clients.
Stale Ytterdal
Then now we have a query relating to this China and U.S. scenario from Lars Devold, Kepler. How will the brand new U.S. export restriction to China have an effect on you?
Svenn-Tore Larsen
We spent the final 3 days with legal professionals and authorized folks to see what’s present impression of the rules. Present impression, we do not see any direct both downstream or upstream for Nordic. Nicely, we expect this could possibly be even tighter going ahead. So we’re ready to do no matter we have to do to make sure that we hold inside the rules.
However the reply, brief is we haven’t any impression on brief time period.
Stale Ytterdal
We have now a query relating to mobile from Øystein, ABG. You say the This fall steerage mirror elevated short-term uncertainty for mobile IoT. Are you able to give some taste on this?
Svenn-Tore Larsen
We will. We have now numerous clients beginning, bringing new merchandise to the market. And with this macroeconomic scenario, we’re not certain if all of those merchandise shall be accelerated or if that shall be holded So we’re cautious, as I feel, is essential to be in such a scenario.
Stale Ytterdal
We even have a query relating to Wi-Fi. How has the preliminary response for Wi-Fi launch been?
Svenn-Tore Larsen
Do not take me too optimistic. I imply I am all the time optimistic as a result of I am impressed with the suggestions we received from current clients. We have been sampling just a few clients already. We’re doing a software program replace on the 7002 the WiFi chip because it’s referred to as. In late October, we’re going to pattern a major variety of new clients as quickly because the software program is launched. So the suggestions has been good. Clearly must be good as a result of it brings the DNA of Nordic, the low energy straight into the guts of this product. So we anticipate it to be optimistic, and it has been excellent.
Stale Ytterdal
Johannes Ries, Apus Capital has a query. Relating to Wi-Fi. When will you enter into the section of excessive volumes? Any feedback on the event in your different adjoining merchandise?
Svenn-Tore Larsen
In relation to income volumes, I feel you are going to see in ’24 — finish of ’24. What you see within the manufacturing now, we’re going into quantity manufacturing in This fall this yr, really this quarter. In order that’s why we will pattern extra clients in October. However once more, it is improvement time at clients that takes 1 yr.
Stale Ytterdal
We’re getting some extra questions relating to the income goal of $1 billion. I feel we simply take yet another on that. From Christoffer Bjørnsen, DNB. On the one hand, you say that — the $1 billion backlog, $1.1 billion backlog is now aligned together with your skill to provide. Whereas within the presentation, you say extra wafer provide shall be wanted to achieve your $1 billion income goal. What are you attempting to say?
Svenn-Tore Larsen
What I am attempting to say there is a truthful probability for Nordic, and there’s a good purpose to uphold the $1 billion aim. And I may even say that now we have to calculate income primarily based on current allocations from our distributors. And clearly, we have seen that working all year long, there may be alternative to realize greater assist.
Stale Ytterdal
I feel that concludes the whole lot.
Svenn-Tore Larsen
And due to everybody, who’ve requested us questions, and now we have an enormous highway present forward of us, most likely going to talk to you immediately both on groups or face-to-face. Thanks.