Good morning, and welcome to Nordic Semiconductor's 2nd quarter presentation for 2019. So it's like every quarterly presentation. I do a quick business update. Paul, our CFO, go through the numbers, and then we got I come back and do business outlook. So put together some highlights.
What we will see when you look through the report is that we had a very strong backlog. And that's basically increased because of Tier 1 contribution and it also impacted our revenue this quarter. And Nordic Bluetooth Design Wins Certification this quarter grew by 21% from in Q2 2018 to 151 this quarter. And Nordic, this high wind Market share was again at 40 3 percent. Strong market share.
We have reported quite a few major design wins report during this quarter. The record high backlog was driven by new decided with Tier 1 customers and its globally. We had a strong margin this quarter. It's a result of the investment with them in supply chain. As you might recall, we got $100,000,000 we raised in April last year.
We bought test equipment to be faster to market with the optimal yield, and that really shows all of the margins today. We promised to release software for the cellular IoT products. Last quarter, We did so now in June. And also, there has been some market uncertainty and that's been impacting the distance willingness to keep inventory. And we have basically manage this adoption to current situation throughout this quarter.
So our revenue was in line with the guidance was $70,500,000 is a decrease of 0.9%. The important thing is that Bluetooth had an increase of 7.1% year on year. If you look at the quarter, it was an increase of 50% quarter on quarter. But we still are impacted by this market uncertainty. But we keep our market share, which is very important.
We had a down of 25.6 in preparatory, and that was basically due to inventory adjustment. And I will say not PC, which is a biggest chunk of our business, PC accessories, but non PC accessories contributed to this revenue decline. We sampled cellular IoT products for $200 k. It's not bad doing sampling. And back to the backlog, $112,000,000 is a close to 40% growth year on year.
Our gross margin, 51.2 is an expansion of 2.2 year on year. We really get payback for the investment. We give on supply chain, on test equipment. This is the best margin we have had in 4 years. We see that the design wins that are contributing to revenue growth is the higher end 52 family.
It really shows that our new customer base, more or less the tier 1 customers, They want advanced Bluetooth ships. EBITDA was at 9,800,000 If we adjust that for short range only, we had an EBITDA margin of 15.3 which is 21.8%. So that's basically EBITDA on short range business from Nordic. So Paul, I hand over to you and you do the numbers.
Thank you, Santura. I'll go through the financials now. So it's good to be back on higher revenue. Last quarter, all our operational KPIs saw very negative variances compared to what we've historically shown, but when we're back to 70,000,000 in revenue, we see that the operational leverage gets our KPIs back to what we've seen as the historical trailing numbers. I'm going to go to this this model now, as as always, just remember that the costs items here are the reported numbers, so we haven't adjusted for non cash items.
1st of all, as Santoshi said, revenue down 0.9%, a good growth in Bluetooth, offset by the negative proprietary variance. Gross margins, up 2.2 percentage points compared to last year. Positive contribution for cost improvements and also a favorable customer and product mix compared to last year. If you look at our total cost for the quarter, it was 37.3 percent of revenue, or $26,300,000. That's a 5% or 5.6% increase from the $24,900,000 last year.
It's actually down compared to last quarter, but that's the effect on salary pay, that we always have in this in Q2. Total R and D $23,800,000, up from 20.1 last year. Included in this number is a capitalization of R and D of $3,800,000, slightly higher than last quarters, but more or less the same number as last year. The difference in capitalization this quarter versus last quarters is that it's less cellular in this number now. This this month it's this quarter, it's it's only 2,000,000.
So 1,800,000 relates to the short range business, which is then development of new products and new variants that we're coming with. So total cost for the cellular operation in the quarter was $5,600,000 versus $3,400,000 reported last year. However, the underlying cash cost is an increase from 6.8to7.5 or about 10%. We're close to 200 people in Finland now, the 200 people is is not only working on on long range. Some of it is also, short range people, but in total, 200 people.
Finally, SG and A, 9,500,000 versus 10.6 last year. Actually if you adjust for the IFRS 16 effect of $1,000,000, SG and A is more or less the same. So in the challenging market, we are actually conserving costs while we at the same time are ramping business to to sell the cellular business. In next, next years. Santulio mentioned, EBITDA margin of close to 14%, same as last year, above 20% for the first time, adjusted for the cellular business.
I'm not going to jump to revenue per market, Nordic after two quarters with negative growth. We have the first quarter where we have flat numbers. And that will of course be seen in the in the change in per market. So you see all of them are more or less flat compared to last year and have a significant growth compared to last quarter. That's both the market improvement and all but also the seasonal effect Q2 versus Q1.
And I'm going to highlight the main items in each of the markets. If we start with consumer electronics down 3.4% compared to last year, You remember, proprietary is down 25% and proprietary is to a large extent in consumer electronics. That means that the Bluetooth business in consumer electronics is pretty strong and showing a good growth. That growth is sort of a mix between the transition from from proprietary to Bluetooth on some of the piece accessory products, but also some good designs that Suntory has mentioned previously. Most of them actually come in in Consumer Electronics.
Wearables, up 7.3%, 12,700,000 is actually the strongest number we've had in wearables since Q4 2015 when our previous big customer in wearables was at its peak. So so we had a rebound in in wearables. There's there's really 2 two reasons for this increase or this good number. First of all, wearables was very weak in Q1, because wearables is is the market that was hit most of the the issues the ODMs have, earlier this year due to the the the the trade issue. Secondly, we do have quite a few of very good new design wins, both in in Italy and in China domestic markets within the wearable markets.
So a good number. Building in retail, more or less flat compared to last year, Really, the only big difference between last year is this RFID customer that we've had for ages, have had low numbers in this year compared to last year. Compared to last quarter, a 60% increase. There's some really good smart home applications. And also we can act asset trackers in that number.
Healthcare has been more or less flat for the last quarters, also this quarter, up 1.5% versus last last year. This, is the market, we're investing a lot and then coming up with new products and new variants. So we hope to gain attraction in this market because it's an important market in Bluetooth. Finally, others, good contribution from all our module partners. Talk about, gross margin, in 2016, when we experienced significant yield problems, on the in connection with introduction of the 52, we had margin far down on the 50s.
We started guiding on targets for 50% on gross margin. Since that date, we've been able to more or less constantly increase our gross margin. And for the 4th consecutive quarter, we're above our 50% targets. We've talked about this improvement many times. It comes a result of strong operational performance.
We now don't have all the waste when we introduce new products. We've had good wafer savings and also we now have a much broader portfolio. So we're able to to sell the right product to the right price. Also, as Santula mentioned, we've done investments in test equipment So when we ramp new products, scrap is much less than it was back in 2016, 2017. If you look at, what it was last quarter, it's more or less flat, a little bit unfavorable customer mix, but with a favorable product mix as there's still a pull for the more high value Bluetooth products.
We do anticipate quarter to quarter fluctuations. And then also when cellular IoT starts ramping, you need to look at the total gross margin for the group. Cash station, as reported previously, we are continuing to ramp to capture future growth opportunities. So we are increasing the number of employees. If you look at Q1 versus Q2, there's there's a small increase of 0.2 percent in in cash cost.
There's a reduction in salaries due to, Salary pay, holiday pay, there's an increase in other OpEx. That's mainly costs related to all the certification work. We're doing now with our cellular. Product. Compared to last year, there's a OpEx increase at around 5% or 8.8% if you adjust for IFRS 16.
This increase is mainly driven by 14 cent increase in Greece. We're now 7 17 employees, compared to 6 29 a year ago. The reason OpEx goes, up less than the revenue. No, the the employee increases that we do have a continued favorable FX effect in the counts with the weakening of the mark compared to last year. Final slide, on cash flow, since Q2 represents the quarter where we back to growth.
So we've had two quarters with decline in revenue. You will, in Q2, always have a cash, outflow due to the buildup of working capital. We've also seen this in Q2, so so a negative cash of 10,000,000 in the quarter. This was compared to a negative cash of 4, the same quarter a year ago. However, if you look at the the reduction in accounts receivable or other increase in accounts receivable of 10,000,000.
This is actually less than the 70,000,000 in increase in revenue. So it shows that we're able to keep the payment terms and the DSO with our customers even in a challenging market. So I think that's that's good. If you look at the CapEx, 4,100,000, slightly below the guided amounts, we are it's taking time to build the lab equipment and then ramping the facilities we've talked about. So this is more or less a delay into the next quarters.
And since we will mention that, but on the guiding slide. Finally, we are continuing our disciplined cash strategy and we do have a very tight cash management and we're trying to optimize our cash generating ability. Okay, Santura. I'll hand over to you again.
So every quarter, we show some new Nordic power products. This time we put a selection of products, I think very much representative of what we've been doing of the sign in activity and where we do the sign in activity. We have Locek have just released a G703. It's a new gaming mouse and logic are doing very well on gaming, if you look at the numbers, and Nordic is part of this gaming wave. We are continuing to winning the Briele products at Logitech.
So we are proud of that. CCOM is a Sigby thermostat. We've been talking about Sigby for many years. This is the 1st pure Sigve application with Nordic Insight. Who did we compete with we compete with So our multiple platform product won against a optimized Sigby product.
We proud of this design. We also see that energy measurement, this is basically, product, you can put on to your power core and measure your electricity flow. Again, with the 52 series. Another meter is a water meter reader using Nordic again. We see that these meterings are getting more and more smart.
They have to use either Sigby or Bluetooth or maybe even some of them use trend. And remember, we have solution for all those 3 protocols. It's a target market for Nordic. At the right end corner, you see, beverage, which is a Japanese company using Nordic for asset tracking, both for short and long range. That's the first product we see We combined the cellular long range product with the 52 family.
We spoke about that some years ago when we started doing the cellular, but we might see combinations in the same end product. If you look straight ahead, you see it. It's great. Every half year, we show this slide. How many design kit did we ship into the market?
We shipped close to 48,000 product into the market in the first half. It's a new record. Is a 33% growth from first half twenty nineteen. And what we see is that there's a significant contribution of the 52840. And to remind you, the 52840 is the most complex bleship from Nordic.
We believe that the applications we see now is getting more and more complex. You need CPU power. This is what we took the bet on 4 years back, and it was correct. Also, if you go under the numbers, you see that we shipped 2700 91, the long range kit first
half of
this year. So we still believe this is a leading indicator of the market growth. And what we also see is there is a continuous strong diversification of application where we get in. So this is a leading indicator of our position And we have an attractive and also a competitive solutions. If I go back one slide, If you look at CCOM, we compete against the guys that are doing Sigve, We work with our combined platform, the 840.
It was our record quarter for over certifications. End product certification ended at 151 It's the largest number we ever seen. It's a 21% growth year on year and it's up 11% from last quarter. And you see again that this red bar at the right hand side, which is others, are contracting. We see that there is Coming new combos into the market, every half year or every quarter.
But still, you cannot have a sustainable place in this market with 1 or 2 or 10 design wins a quarter. Because investment to be able to give value to customers is not supported by companies during 1 to 5 design wins a quarter. This will consolidate. So last quarter, I spoke about a segment called lighting. We believe that professional lighting will be smart This quarter, we're talking about commercial asset tracking.
And you all see in tags to make assets smarter. You see all the sensors out there. Nordic is reading those designs. And obviously, it makes easier for doing safety, inventory and security. And usually, this is a relatively simple application where our low end part, the 52810 fits in.
And then we will have more advanced parts where you do tracking and gateways. And these gateways do indoor location, they support mesh protocols, And some of is what Nordic support. So basically one product that 840 support all these 3 protocols and we can enable these gateways to be built. And if you want your data up to cloud, You can add on a 91 module and basically have a complete system built around our technology. So this is a segment that's going to grow over the next years to come.
Obviously, we have what we are familiar with. The standalone asset tracking application, the 52,810 can be used on low cost consumer application. And then we have the 9 to 160, which is a GPS tracker And what we have showed you is pets, livestock is application that's already out there. And, we see again asset tracking really fits the Nordic technology. And our customer tells us too, Tyre, one of the leading companies within trackers and CJ.
He has into he has actually had a press release and toured around the world saying how important it is for Thyle to get part of the Nordic infrastructure. We are building an infrastructure that these partners want to hook up with. That's our, I would say, secondary strength. The 1st strength is obviously the parts itself. But when you do have your infrastructure build out there and most customers are using the Nordic then basically others want to hook on to the same infrastructure.
Consumer is tied On industrial, it's a company called Coupa, which some of you might know of, which is doing the same, but more for industrial applications. And we have a company called H And D wireless, which are basically using a combined solution again. So it just proves that the combination of short and long range makes new segments open for Nordic. We have no qualified MSL free RTOs. For NRF 52840.
So it's available now. So basically you can go to ABS and use the software and use the Nordic ships. We are not the first, but we're there. And, it's a new opportunity for all of everybody using the ABS. A quarter ago, we talked about production status for 91 And we said they're going to be, delivered in June.
We did so. 9160 Seqal Seabuddl SII is all now in production. We are finally getting certification in place both for LTE M and narrowband IoT. It has taken some time a little bit longer than we had anticipated, but now it's coming and obviously it is impacting the time to revenue for us, but we are there at the moment. And we support all LTE bands, both LTE M, all the bands, narrowband IoT, all the bands, We certified by, GCF, PTCRB, CE, I said, and we are very close to get the Verizon certification out.
And we expect that to happen now in July. Guys, if you have a project in your room at home, you can start buying modules from Nordic. If you're working a large corporation and you want to have a secure and good LTE connection, again, you can contact us and we'll deliver. And I have to say there is a lot of good and smart engineers in Norway also. When this is a product, which a company called Talesport is doing.
I call it a radio viola, for you that listening on the webcast and there's no narration. It's a product that you stick around the neck for ships. It's out there in the market today. I mean, these ships are walking around with this orange Raulieu Biena today in the West Coast of Norway. It reports GPS position at different intools.
You can define what you want. Tagging is a two way device you can set alarms. For example, when there is no movement, you think that the sheep doesn't move for a day must be something wrong. And if you know, currently there's a lot of legal requirement for livestock and this helped the farmers to fulfill a legal responsibility. And if you see here on the left side, in the bottom, this is the actual size So this is a product that we see, we have shown you one more similar product, was livestock in Finland at Rain Deer, now we see ships.
And we all know that there is a couple of ships, for example, in New Zealand. So this market is relatively significant So if you look at our guidance now for 2019, Q3, We have a range between 78.83. We have a strong backlog And we're certainly back to growth in Bluetooth. And we think that within 78 to 83 is good range to expect. When it comes to gross margin, we're going to have a continued strong gross margin.
If you look at our backlog, it's strong was $112,000,000. Then we said that there is Tier 1 customers that contribute to this backlog. That's why we want to set the expectations that it's not going to be another 2.2% growth in margin, but we're going to keep it around 50%. We know that we will use around $4,000,000 to $5,000,000 in CapEx. To continue expand and accelerate the 9160 product to the market.
And also, we need to ensure test capacity to ship out this $112,000,000 that's going to be increasing over time. And just a brief foil at the end. We want to have a Capital Markets Day. It's going to be following the Q3 presentation on October 22nd. We're going to deep dive into sales model, go to market strategy for both short and long range.
We will have an update on the progress with long range certification and design wins. We're going to be more open with our technology and R And D road map. And we will send a detailed information to you guys in September. This concludes the presentation. Any Q and A.
And then we have some questions here. Can you get the microphone, please?
Thank you. Doctor Johnson Artage. Good to see that you are now back to lose the smart growth this quarter. First, your order backlog was quite solid this quarter. And you're right in your presentation that they have increased Tier 1 contribution in your backlog.
So I'm first then, could you give some more color on the customer concentration and the backlog? How much your backlog is from tier 1 customer or your top 5 customers, for instance,
we are not commenting on whether it's Tier 1 or each customer, but obviously to have this jump of 40% It must be some larger companies in the backlog. And we are going to see a shift in our current top 10 customers as a result of invoicing backlog in this coming quarter.
But the top 10 been around 10% 30%, 35%. It's probably gonna increase, but it's not gonna increase. It's it's not acute increase. It's gradually gonna increase.
It will gradually increase as more than one product from each customer starts. Going to production.
And there are Q3 guidance. Could you give some more color on the split between Bluetooth Smart and proprietary? Because, Bluetooth Smart, you're now back to growth and you have Easter year over year comps and also may be supported by Okay. And last one, on solar, you mentioned that we expect solar to peak growth to pick up in the second half of 'nineteen, could you quantify this somewhat more? And also for 2020, do you still expect the solar segment to breakeven during next week and if you could remind us and I know next year maybe and if you could quantify what implies in revenues for 2020?
Yes. Let's take each question. I mean, if you look at cellular, we have had some great progress lately. We're starting to get, certified, globally. So a lot of good things have happened.
It's been a slower certification process than we expected. So this will be a stretched goal to reach, the breakeven, but we still believe that it's absolutely possible. And it's another 18 months before we end 2020. So we are positive, optimistic, and believe that the goal is still achievable. So You wanted to know more about Bluetooth contribution in Q3.
That's going to be strong. And the other part of your question, Mahindra?
Then wrote that, seller revenue will pick up during the second half. If you could quantify
No, we cannot quantify. We are not guiding on each product line, but we see that we have been shipping around 2 on the K samples in Q2. And there will be some of this customer that will go to production in in end of 2022, 2019, as we have said, but we are not going to split it out.
Thank you.
Christopher here from DNB Markets. Just to clarify on the guidance, for proprietary, you did some commentary on it in the in the Q3 report and said they were going to be down single digit. If I remember correctly, was that incorrect or do you expect be down single digit year over year in Q3? [SPEAKER UNIDENTIFIED
COMPANY REPRESENTATIVE:]
More than single digit, I think. Are you talking about this report? Said more than a single digit.
Okay. In Q3 report, in Q2 report, we announced that we have strong comparables in Q3, and we expect to be more than single digit in Q3. 2nd half is different answer, but we come back to that in the markets, Capital Markets Day.
Sure. And is that based on you wrote that you had some issues like you still like you said with the smaller customers in the proprietary business? When you have the guidance for more than single digit decline, is that assuming that these guys will still be out of the picture? And
Or the yes. You can, easy, easy. Yes.
Yes. Great. And then, just as kind of a follow-up on Henley at this question on the cellular business in the in half, do you just give some more color on what recent events give you confidence that you will see revenues ramp?
Because we've been shipping, samples already from Q1 this year, and it takes some time to build the end product, but when it's built, when we've been certified, the whole infrastructure is ready to go. So it really depends on our customers' initial production rate. But we will get some customers into production this year.
Yeah. Okay. And then, final one for me is on headcount. Could you say anything about how much is the headcount to increase year over year in 2019?
No, we haven't exactly said that. It's you look at what I've said in previous quarters is that the growth will be more or less at the same pace at least not more. So around the average will have the last, last quarters.
Okay. Thank
you. I think we have to turn that question a little bit around. We have to look at opportunities we have and the means to be able to fulfill those opportunities. And as we are getting more into new segments and I would say a new customer base. We have larger opportunities and we have to deliver faster, and we are not restricting headcount.
Sorry. I just remembered another one. There was news out, I think it was yesterday or the day before that, that's keyboards from Logitech and mice and presenters have been found to be exposed to some security vulnerabilities. And these are products where you supply the only chips at the end there. I'm not asking you to comment on logic particular because you can't do that, but in general, how do you usually handle these kind of situations?
How does it
kind of progress the system that
we could lose your customer, or will you just do a further update, or how does it work?
First of all, we never comment on individual customers. Secondly, any MCU or any radio can be hacked. So but obviously, if such a situation occur, we will work with our customer and ensure that I get the optimal security. So it's a case that will happen in the future also, and we are working tight with all customers to ensure not to reacquire.
Thanks.
Yes. Good morning, Axel from from ABG. So first question on back look, no guidance methodology. So you say that the uncertainty in the market that, endured in Q2 will also prevail in Q3. Now how does that impact your guidance range?
Is it such that you put in a safety margin and lower the guidance range, or do you make why their guidance range? How do you approach market uncertainty in the guidance range?
If you look at the percentage, it's not increased. So we don't increased, range. If you look at the general conditions, I mean, there is parameters outside the Nordic control. So I think based on the company's history, it's better to be very realistic when you do guiding.
And also the backlog is, is there's some more impact of bigger customers. It is the way or the, the timeline is increasing. It's it's sort of going into 2020 also. Okay. It's a mix from quarter to quarter.
But, better safe than sorry, is that correct interpretation?
I think any company that are guiding Today is, more conservative than aggressive when you know what current state you are in.
All right. One more question on the proprietary sales. So you mentioned the channel effect. And you mentioned weak PC. No.
No.
We did not. We said there were weakness outside PC.
Weakness outside PC? Yes. Is it possible to sort of split those 2 effects?
It is. And we basically did. We say that the PC peripheral business has not been as affected as medium sized smaller customers that are in a lot of other applications.
And non PC weakness. I think that it's more or less a double dip because there's if there's weak in other, will also be inventory adjustments because it's a weak weak market. So I would say that these 2 are are linked and probably similar.
Alright. Alright.
Or we can be even more specific. What we see is that our distributors channel are basically limited inventory, holding of inventory, and it's an effect that have been on all semiconductor companies, as we are growing relatively strong on Bluetooth low energy. Most of the inventory we are shipping to our district partners has to reflect what's going to be the fast growing product.
Okay. And just a final one following up on previous questions on cellular revenue towards the end of the year. What would make you pleased, being able to ship out? What kind of volume in, in, say, Q4 would make you very happy as we stand now.
I think we are not looking at seller, proprietary or BLE separately only to make us happy. What we are making us happy is that we achieve one of the goals we set, and we've been working for many years now to be the leader of BLE We want to ensure that we get those tier 1 customer contribute to the revenue growth that Nordic has a company need We know we've been doing a lot of good things and things are starting to happen on long range, the solar, and we will be disappointed if we don't see revenue end of this year, but we haven't put a range of where we are going to disappoint or where we're going to be happy. We know that we have a goal is to try to get breakeven in 2020, and that's the first milestone where we're going to be happy or not happy.
And just remind me that implied revenue to breakeven in 2020, what kind of run rate revenue would that be?
It depends on margin, but, currently, We look around 65.
Alright. Thank you.
Andreas And Kepler Cheuvreux. 2 quick ones, if I may. So you reported revenue growth in Bluetooth, better than expected, I guess, can you help us get comfortable that the 7% increase in year on year on Bluetooth was driven by actual new growth in Bluetooth and not sort of a cannibalization of the proprietary business, which was again then weaker than expected?
Yeah. Quick answer is yes. This is new application using Bluetooth and not really taking over for prepared. Changed the way you
do this? Okay. Thanks. And second question, there is of course now becoming a mismatch between the backlog and the for Q3 in terms of size. Can you help us understand what your customers are telling you when they place decent big orders.
Of course, it's, as you say, out in 2020, but, what are they feeling right now? Are they seeing that, yes, we will we are hopeful for 2020 or we will buy this in 2020, but we, of course, won't buy now because things are uncertain.
Obviously, we have customers that have production plants and plants, and we also go in and replace existing or other products in existing end product that is keep running. So this is a more stable production. So we know exactly when to ship, and we have days on all backlog So this is not a hope, full orders. This is real orders that are going to be effected on real dates. Thanks.
Cool. Thanks a lot for your questions. You guys have a good day. And