I got the honor of opening up the presentation for the quarterly presentation for Q1. I'm going to do a small introduction of myself. I'm the new Director Investor Relations in Nordic Semiconductor. I'm new in this position, but I've been working in Nordic for 18 years. Been responsible for sales in Asia Pacific. The last 15 years, since 2004, I've been stationed in Hong Kong and been working from there. My job has been to build up the sales channel. I had to find new distributors or find distributors, sign them up, figure out which market segments we should sell in which country. I needed to find out where should we set up new offices in Asia, which country should we have them in. Today, we have more than 23 distributors. Every day there are several hundred people out selling Nordic in Asia Pacific.
We have seven offices in Asia, where we have 42 people. We had to figure out, should we have only salespeople? Do we need engineers to do support to customers? What type of support do they need? That's another thing. Do they actually need support in China? Do they need support in Japan? That's what we have been figuring out, setting in the right person in the right spot. Today, with these 42 people in Asia, seven offices, we are handling, I will say, handling 80% of the revenue in Nordic. It's not because all the design is done in Asia. It's also, of course, design done in U.S., in Europe, but production comes to Asia, in Greater China. Greater China is being China and Taiwan. Now I'm facing in on IR. I'm going to work very closely with Larsen, the CEO, Pål and Tina.
Really looking forward to that. I will work closely and have good contact with the existing investors. New investors, we are going to focus on that also, and of course, the analysts. I will not do any more presentation. I will be here on the Q&A. If you have questions, please ask questions for me. I will introduce Svenn-Tore Larsen, the CEO. Please take the stage.
Thank you, Ståle. As usually, I do the business update and Pål do the finances, and I come back when we see forward on how things looks for Nordic in the near and little bit longer future. Q1 highlight. We are continuing to build a very strong position in Bluetooth Low Energy. Come back to that when I go through the analysis of the numbers. Our design certification grew by 33%. It was actually 102 new designs in Q1 2018. Now it was 136 last quarter. We continue to be close to the 40% market share of total reported design wins. We are going to keep that position going forward. That's why we are spending a lot of money in developing, continue developing Bluetooth beside the LTE products. We have a record high backlog. It was driven by tier 1 customers.
It's not our traditional backlog with medium-sized small customers in Asia. This is added on with Tier 1 customers are contributing to this backlog. Finally, we see some result of all the work we've been doing on Tier 1 customers. We are continuing focusing on gross margins and keep them above 50%. This quarter it was actually 51%. We are getting certification in all target markets for our cellular LTE. CE approval is received. FCC approval is also received. We still see that the semiconductor industry are impacted by channel inventory adjustment. If you look around us in the industry, there are some voices that said that it seems to be maybe correcting a bit, and let's hope that's correct and we're going to see impact of that in the second half. Our total revenue was very much in line with guidance.
We ended up at $52.6 million. As I said earlier, gross margin of 51%. It's obviously a decrease of 12.6%. Important thing is that Bluetooth didn't decline that much. It was 2.7% year-on-year. Revenue is impacted by channel rebalancing. Important thing for us is that we maintain our market share. A lot of you will have already discovered that proprietary was quite a bit down. If you recall from Q4 in 2018, it was surprisingly up. I think this is basically adjustment between quarters. We shipped sample of cellular IoT, about $100K, $129K actually, and that is samples to customers. Our backlog at $89 million is 10% up year-on-year, is a record backlog. Comparing the margins to last year is up 2.1 points.
If you recall what we've been saying before, we expect that the 52 series will raise the margin, and this is what we see result of today. EBITDA at -$0.7 million is not what we are striving at, but we have the conditions around us as it is, and it's really linked only to lack of revenue. When revenue will be back where we guide for Q2, things will look totally different. We go very quickly through market. Consumer electronics down 10.6% year-on-year. Wearables, traditional Chinese low-cost wearables down 25.1%. Building retail, if you recall that we had a huge design in building retail segment this time last year, and this is reflected in the number. Healthcare down 9.2%. Others is up 15.6% year-on-year. Huge contribution to third-party modules.
Our third-party module makers are now starting to get design wins around the world on their modules, which are contributing to growth in other segment. Now I hand over to Pål, we go through the numbers.
Thank you, Svenn-Tore. I will start going through the operating model performance for Q1 2019. Just a reminder, this is the reported numbers, we have not adjusted for capitalized development expenses and also the implementation of IFRS 16 that has a positive effect of $1 million in Q1, which will be an ongoing rate for every quarter going forward. More details on IFRS 16 in the financial report for Q1. With the exception of gross margin, due to the 12.6 percentage point reduction in revenue, all our KPIs have a negative trend year-over-year. You all know that we are investing to capture future growth opportunities, and our cost base is more or less fixed. In a quarter where revenue goes down as much as in Q1, it will have an impact on our KPIs.
However, looking at the underlying numbers, you will see that the rate increase in OpEx is less than what you've seen previously. We've been able to keep down the spending in the tough quarter for the company. As Svenn-Tore mentioned, gross margins at 51%, 2.1 percentage points increase. Last year, we sort of fixed most of the yield issues on the nRF52, this improvement comes mainly as a result of cost improvements and the customer product mix that we discussed last quarter. Overall, we spent 34.1% on R&D this quarter, compared to 26.3% a year ago. Included in the numbers is NOK 2.5 million of capitalization, down from 3.3% a year ago. Also, cellular IoT is reducing the amount of capitalization, we've only capitalized NOK 1.8 million related to that business.
The reason it is going down is that we're now moving from finalizing the hardware to working more on software and certifications, which is not a capitalizable amount. Total short range investment at $12.7 million, up from $11.1 million last year. We are continuing to invest in short range, especially to capture a lot of the T1 designs that Svenn-Tore just mentioned. We see effect of that here. R&D cellular IoT, NOK 5.2 up from NOK 4.7 last quarter. A lot of the spending is now related to software and certifications and less tape-out related expenses. SG&A NOK 9.6 up from NOK 9.2 a year ago, which is an increase of 4.3%. Most of the IFRS 16, sorry, adjustment of $1 million is included in SG&A as it relates to the buildings and other fixed assets.
Adjusted for the IFRS 16, SG&A is up 15%. EBITDA, as Tore mentioned, impacted by low revenue, -1.4%. However, if we adjust for the cellular IoT business, the EBITDA margin is 8.5% in the quarter. Gross margins, we've during Q1 seen continuous strong gross margin expansion compared to last year, expansion of 2.1 percentage points. Nordic has communicated that we have a long-term target for the short-range business of a gross margin of 50%. When we start seeing more material revenue on cellular IoT, the impact of the module production will of course go into the average corporate gross margin. Please remember that. During the last three quarters, we've been able to maintain this gross margin above 50%. This comes, as I mentioned, as a result of improved yield on established products.
I see a few new products being introduced right now and cost savings on our raw material purchases. Compared to last quarter, we're at the same level as in Q4. We're happy with that because the lower revenue will normally result in less gross margin because then adjustments to inventory, et cetera, will have a higher negative impact, but we've been able to keep up the gross margins. The reason for this is more continued efforts on cost savings, but also a change in product mix in this quarter. Remember also that in Q4, we had positive impacts of volume bonuses. Quarter-over-quarter fluctuations will be expected going forward, but we are still doing a lot of hard work on improvements to our margin. Cash operating expenses. This time, we've adjusted for capitalization and share-based compensation. We are able to keep a cost discipline during the quarter.
This is obvious because we've reduced cash operating expenses by 6.3% quarter-over-quarter. If we adjust for IFRS 16 effect, the reduction is 3.2 percentage points. We have slightly more employees in Q1 compared to last quarter. However, we do have a positive effect of FX, and in general, Q1 has less activity than in Q4. Compared to last year, OpEx is up 6.5%, or adjusted for IFRS 16, 8.6%. This increase is driven by new product releases and a headcount growth of 13.5% to just below 700 employees at the end of the quarter. We are continuing to invest to capture future growth, as we mentioned before. Finally, despite negative results, we are maintaining a strong financial position. We had a cash outflow of $6 million in the quarter. Operationally, it's actually positive by $1.6 million.
Normally in Q1, you will see a positive operational cash flow because accounts receivable do go down in Q1 versus Q4, which also is the effect this quarter, where AR balances was reduced by $3.4 million. In addition, we are focusing a lot on reducing our net working capital. Main focus is, of course, on accounts receivable and on inventory. We are having a very tight inventory management, which is actually a very good achievement because we are building inventory-
Corner. Intellium is what I call smart add-ons, but important thing here is you see a combination of short and long range. The only semiconductor company globally that has solution for short and long range is Nordic. Here we have the first proof that some customer are going to use that combination. This is a device you can hook onto anything. Here it shows a shoe. If you're out in the woods or, worse, if you're up in the mountains and you unfortunately fell, this LTE chip will send your position to anyone you trusted. That's good. If you go then to the left helmet sensor here, it's basically Specialized, which is a leading company in biking accessories. They make a smart helmet.
If you're out there and someone, for example, hit you and you get thrown out in a ditch, you can call up someone that you trust. Automatically, as soon as you get any behavior that's not normal, it will call and send messages. Nice design. We also see this is public. We can see that some of the tier 1 customer in China, Xiaomi, has used the 52 for the door lock. Then we come to where our main investment be going the last couple of years, long range. In Finland, there is a company called Anicare that made a small sensor, which they can use on livestock. There is quite a few of reindeer in Finland, but there's even more sheep in New Zealand. These are products that can have a huge market. In the middle, you see what they call a smart alarm.
It's a company called Minut. Basically, if there is any disturbance unexpected in your home, it will call up your neighbor or maybe somebody else that you have close by that can just run by your house. It will send a message to your phone. These are application that we are, I think, are cool, and they have some volume behind them. The most cool thing, as I said here, is that you have a product that using both technologies and that we can show two announced designs with the LTE products. We have had a leading and broad position in Bluetooth for quite some time. It's always difficult to maintain such a position. We've been able to do so despite that there is quite a bit of small Asian companies that eats into the lower end of the market.
It proves that the strategy of having advanced parts, offering things like security, is important. Nordic does have these features in our products. We grew 33% in design registration from the same quarter last year. You haven't seen this slide. We haven't discussed lighting before. This is a new segment that Bluetooth has been focusing on for a long time. You heard me talking about Nordic proprietary mesh. Nordic was first out offering mesh solution to Bluetooth customers. Why did we do it? We got early engagement into the lighting segment. If you go to this page, bluetooth.org and look, you will find a page there, subpage, where it discuss lighting. Look at those customers and try to get some background on these customers and you will be relatively happy.
See, here, basically, you just hook them up, pairing, and with Nordic, it's easy pair because we have NFC. Easy pair, no wires, save installation cost on top of energy. bluetooth.org expect to be around 10 billion-15 billion products per year and expect that there'll be 2%-5% of these light sources will be connected. Connected means connected with Bluetooth mesh in 2020. That's an opportunity which is important for Nordic, and we need to add these new segments to continue to grow to meet our goals. We've been investing in this early. Unfortunately, things take some time, now we see that it starts. Go to bluetooth.org and have a look at lighting section. Our strategy when we do this is to find which segments do we believe will grow in years to come.
What we've been seeing is that if you do integrate early, you obviously need a good connectivity. You need to have today security, because a lot of application you put Bluetooth in is transferring value information. Whether it's information about your health or money transactions, it's information you want to keep secure. Security is important. It has to have embedded processing because you do get a lot of information that you calculate and send on to the cloud. By doing this, Nordic has been making a platform where we can incorporate different protocol. Remember our nRF52840 support Bluetooth, Thread, Zigbee, ANT, and proprietary. We here have five different protocols supported in one platform. If we should have built five different products, it would be five different R&D ramps.
Obviously, we see that such a platform is not ideal for all applications, but this give us the maximum footprint in the beginning when we release a product. What we do later is that we do see some customer want even more memory, want even more security, want even more MCU capacity. Obviously, if this segment is large enough, customer is large enough, we do that. We see that the customer don't need all the features, and then we make a solution that is more optimized for that scenario. It means, we have scalability across the series. We make the platform first and then scale according to the market. It's a strategy that we can prove has worked. If you look at our design win ratio, lot of this is on the 52 family. Why shouldn't we do the same on the LTE?
Obviously, there was no good argument for not doing the same, we did exactly the same. Connectivity is important. Reliable connectivity is maybe the most important thing. It should work in all conditions. Security, again, you're going to send the same kind of sensitive data over LTE. You need to process a lot of data, so you have to have embedded processing. What this is telling you over here is lot of common on these platforms, and that's why it's so good for Nordic at the position now where we have two different products we're making. We can still share very much of the same platform. We can share the cost on two platforms. We did worldwide cellular band coverage.
The first product, we have substantial amount of own memory to gain low power operation and enable a mass scale adoption by integrating and certifying functionality needed for most applications. We don't want to lose out on an application. We are focused obviously on system cost, but remember, we are making the IC only. The rest is outsourced to our partner, Qorvo, which are doing the module. Importantly for us going forward, is how are we going to meet the total market because high-end, low-end. We have shown this production status previously. We had the launch in December. We said we were public sampling hardware and LTE-M software. The important thing here is that the hardware is the same, but it's the software that configure the product. The nRF9160 is what we call the full-blown LTE chip. It has LTE-M, Narrowband IoT, and GPS.
We see some of our early customers have used competitors where they have LTE, where I have to have one product with LTE-M for a certain region, and I have to make another product with LTE Narrowband IoT for a second area. U.S. is basically doing LTE-M and Asia is basically Narrowband IoT. If they also want to have and grab the position, they need to have an external GPS component. We put all into one product. This full-blown product will basically be in production in June. We've been sampling since December, but now it's going to be in full production in June. The 9160, which we call SIBA, is a LTE-M only, and basically now in May, we do have production of hardware and sampling product, and we'll be basically in full production going forward.
The SIA is a Narrowband IoT, is publicly sampling and will be in production in June. We are shipping variants, samples to all customers, but June, we basically can do production shipment. It's maybe 28 days behind our original schedule, but it's on schedule if you think that we've been doing it for four years. Do we have any interest from customers on this product? Yes. Q4, we had obviously some few customers calls or support calls because we had pre-sampled quite a bit of customers. In Q1, 12% of the engagement from our support team means assisting on design wins were spent on LTE customers, 12%.
If you go back to 2010, 2011, when we went out with the BLE product for the first time, it would have been unheard of 12% after a quarter of release. We have much less customer calls and support. This is far ahead of any introduction we've seen. We also spend a lot of efforts to train local support in the different markets, and today we have an organization that can support customer globally on LTE products. Obviously, we need to have that because cellular IoT is Nordic's next growth driver. I showed this slide last quarter but still is an important slide. This market is growing. Analysts around the globe believe so. We see so. Keep in mind, this is our next growth driver. The guidance. For Q2, we expect the revenue to be in the range from $69 million-$74 million.
There is continued uncertainty related to trade tensions, it results in reduced growth rates the quarter ahead of us or we're in. The important thing here is that we have a solid backlog, and the backlog is basically very heavily impacted by tier 1 new customers. We are continue to optimize production and expect to keep the 50% gross margin target. As Pål said, we've been delaying some of the new equipment to build up our labs, but that will come in next quarter. We expect a CapEx of around $5 million-$6 million in Q2. The cool thing now is that our FA, failure analyst lab up in Trondheim is very soon running.
The test equipment we have bought in Oulu is working and functional. We are in a much better stage now to support our customers and go to certifications because of all the equipment we bought. That ends the presentation. Any questions? Yeah, we have one. Ståle and Pål, could you please come up?
Thanks. Christoffer here from DNB Markets. Just starting on the gross margin target, you stated obviously the gross margin target for the short-range business. It would be great if you could also just remind us of your gross margin target for the cellular IoT business as well. It's supposed to be a bit lower, how much lower are you expecting that to be?
We expect it to be lower, that's correct, because it's a module where we have third-party components onto the module. Obviously there is a stacked margin challenge. The important thing for us is that the mixed margin will be targeted around 50%, and it will be below 50% on the LTE market.
It will still be above 40%?
Absolutely. It depends from application to application, from customer to customer.
Great. Continuing on LTE, there are obviously a lot of different price points out there in the market and in some simple applications in the LTE space. For example, in China, you could get chips for or modules for NOK 3. If you could just elaborate on the pricing on your NB-IoT-only offering and the LTE-M-only offering.
I can. Consider a car. If you're going to make a Volvo run as fast as a Porsche, you need to do modification. This is exactly the same with modules. It's the bill of material, the total cost of the PCB that counts for our customers. If you want to make a huge PCB, lot of efforts, you can go for a low-cost module and make all the surrounding support electronics yourself, or actually spend hours in the garage with the Volvo, or you can go straight into the Porsche and drive fast. We make the development time shorter, and we make the product more reliable. It adds value. Obviously with value comes some cost adders, because we have to use this cost to get able to bring this value to customer.
I can appreciate that strategy. To be more direct, could you just elaborate on how much lower ASP will be on these LTE-M and NB-IoT-only products if-
No
the top one is NOK 15, how much lower is-
First of all, we never do price negotiation or price information unless we have a project. Important thing is this is up to the customer's volume, up to the customer application, and what could the customer actually carry of cost to be successful. This is evaluation we do with customers. Obviously it will be a lower cost on the simplest modules
Okay. Only two more from me. Thank you. You guide on Q2, but for the remainder quarters of the year, is there anything that's suggesting we should not expect just regular seasonality sequentially going forward?
No, I think that's the correct estimation.
Finally, on LTE-M, you previously stated that in your current sampling program with lead customers, you have multiple customers that if they choose your product, they will single-handedly take the business to break even. Can you give an update on those customers? Are they still in the mix? Have some of them decided to use your product? Anything there to give some confidence to shareholders?
We like to give as much confidence and share it as much as possible. Yes, besides those we sampled before Q1, we did sample a total value of $129,000 in Q1, and these are mix of new and existing customers. Yes, some of our customers were even on the chart here today that basically just were a sample customer last quarter.
Andreas, Sorry. We are seeing Huawei in China among the leaders on the NB-IoT. I think they say that they're targeting 100 million modules shipped in 2019 versus 15 this year, and obviously at a Volvo price tag versus the Porsche. Do you expect there to be a significantly large market for the high end? Are you expecting to sort of do the long-tail, high-end segment effort?
I understand your question, but I'm going to answer a little different. I think the important thing here is that we are optimizing the development cost and the bill of material by offering a complete module. If you go to those customers that basically think they get a lower cost product with a lower cost module, it's our job to educate them of time to market, ease of design, and total bill of material. When you do this exercise, and remember, most of our customers are really intelligent, smart people that can do these calculations. We are bringing a value, we're not adding cost to the solution. When it comes to, you mentioned Huawei. Huawei is an operator. The customers that is our target customer is Huawei's customer that have a product that hook up to their base stations. That's where you're going to see the volume.
It's not really with the operators. Even though the operators today are sort of announcing different modules on the webpage, that's not where the high volume will come. It will come from customers that are going to use the different operators network.
Final question from me. How worried are you about the second, third generation competitors from Sequans, Qualcomm?
I'm always worried about competition, and that's what makes Nordic good. We should always expect a better product from our competitor next quarter. That's why we also are doing even better in our next generation. There will be a race. Maybe someone have seen the value of what we're doing and might come up with a product. We are not sitting still. We are developing the next generation of products.
Thanks.
Henriette Trondsen, Arctic. On competitors, Dialog recently announced a more advanced Bluetooth Smart chip with a stronger processor than your Bluetooth Smart chip, M33, as you are using in your cellular nRF91. Do you see a change from Dialog here, or do you expect this to have an impact?
I think Dialog, like all other competitors in this market, have understood what we've been talking here about having advanced feature because that's what the market require. More computational power, more security, more support. The same applies to BLE. We also make new BLE parts. It will always be a window where you might not have all the technical specification on the top end, but the total solution from Nordic is still undoubtable the ultimate solution.
Yeah, Dialog's new chip has an even stronger processor than yours.
Yeah
and
It all comes to the total solution with software support, with all the features that we do have. Yes, for a moment it might be, but it's not on the market. When it come to the market, maybe we can show something that is even a leap ahead of what they have. That's a race you see in all semiconductor companies in the different segments.
Thank you. On your Q2 guiding, can you give any more color on the split, what you expect on the split between proprietary or Bluetooth Smart going into next quarter?
We saw a relatively large drop in proprietary in Q1. That was related to a high shipment in Q4. I think this is going to equal out, and we're going to see a normalized relationship between BLE and proprietary.
Thank you.
Thanks. Eirik from SEB. Just a quick question on the CapEx and that you moved that. Are you further away then on cellular, than you were at the Q4 presentation, since the reason was that you want to invest in lab equipment, et cetera?
No, the lab equipment we're investing on is more long-term. Svenn-Tore mentioned that the reliability lab is up and running, and the test facilities in Finland are up and running. This CapEx is more long-term, won't have impacts on this period.
Okay, great. Thank you. Just another quick one. We touched a bit upon it, and I understand that you probably want some more mileage out of the nRF52 chip, but how far are you guys away from a new type of flagship chip? Is that something that we could expect within the near or medium term?
We have not announced that we are going to do more flagship IC out of the nRF52 family. If we're going to keep your wording, flagship will be a different family.
We haven't come out with any timelines for that.
Thanks.
Yes. Axel from ABG. Firstly, I just want to follow up on Henriette's question regarding the Q2 guidance. Svenn-Tore, you said that you expect proprietary to normalize in Q2, and that means that Bluetooth then should be fairly flattish than year-over-year basis in Q2 as well. That again implies that you don't expect to see any meaningful improvement in Bluetooth in Q2 versus Q1 now on a year-over-year basis. Given that you have easier comparables with the design wins in ride sharing in Q3, that seems a little bit conservative.
We have stated in the last sentence in the presentation that we still believe there could be impact from the trade tensions. We are not taking any bets either or what direction it takes. We have to use existing, I would say, situation and judge from that. Things can change, that's not what we should put in our guidance.
Yes. Given that you have lower revenue contribution from the ride sharing designs in Q3, shouldn't we expect to see a little bit improvement in the Bluetooth growth in Q2?
It very much depends. As I said here, first, this backlog is reflecting new tier one customers' orders to Nordic. If it does that, it also reflect that the old, sort of the previous customers are not still placing orders according to what they did last year.
Okay. To the customer engagement slides, you said 12% of the engagements from cellular. I assume that is on a, say, absolute basis. If we were to convert that to a dollar base slide, would it then be higher than 12% or lower? I know that's difficult to answer.
That's one of the measurements we are not currently working on in Nordic to see what support rate is converting into dollars. Obviously as this part is around 10x over BLE, we assume that it will increase potential revenue from each support case.
Yeah. Okay. Finally, you said production in June. You mentioned that in production volume, in volumes in June. Does that equal to production shipments in Q3 in volume?
Basically, we are able to do volume shipments in Q2.
Q2.
As after customers, we have earlier said that we expect to see some pickup of LTE end of this year. It doesn't change, it's just that we are ready to ship end of this year.
In Q2.
In Q2. Yep.
Yeah. All right. Thank you.
Yes, one more.
Just two quick follow-ups. The first one is on customer concentration. Could you share some color on what was the customer concentration, for example, your top five customers in the quarter? How much is the biggest customer at this point in time, and also in the backlog, how much of that record backlog is among kind of one or two top tier one customers?
Shall I do it?
Yeah.
Actually some of the ones in the backlog are not on the top five customers this quarter.
What is your biggest customer in terms of share of revenues at the moment in total?
In proprietary, if you focus on Bluetooth, I don't think the top 10. We don't come up with that number, but it's not very different from the top 10 list that we gave the previous quarters. Was it 30%-40% in total?
It's much less delta between the top customers now than it ever been. Before we used to have some significant higher than number two. Now we see that we have a concentration more or less on the same, I would say, range, four to five customers.
Last one is more of a maintenance question is, I guess it's difficult to say anything about revenues for the full year, but in terms of OpEx for the full year, that's in your control. How much do you expect OpEx to be up over year? How many more employees do you expect to be going out of 2019 compared to last year, for example?
We haven't guided on that exact number. If you just look at quarter-over-quarter, of course, we added quite a few people last year. When you look into 2019 versus 2018, you need to take account more people towards the end of 2018. As I also mentioned, we are closely monitoring revenue and OpEx spend so that we are within the KPIs that we've always talked about.
We also need to have another view on this situation. We are moving into a tier 1 customer base, that might require even more from Nordic, and opportunities is also higher. This is something we have to evaluate from opportunity to opportunity. It would be very wrong of us to stick to a guidance and not grab onto opportunities that take us to the next level. We are more focused on getting to the next level than focusing on OpEx expenses.
Great. Thank you.
Okay.
Okay.
Have we answered all the questions?
Yes.
You guys have a good day. We continue with our assembly.
Thank you.