Good morning, welcome to Nordic Semiconductor's Q1 presentation for 2018. Today's presentation will be the same as last time. I will do the business update, Pål will do the financials, Thomas will look into the future of Nordic Semiconductor. We believe we are off to a good start in 2018. Our revenue ended at $60.1 million. This is the best quarter, or Q1, ever for Nordic. It's a 27% growth year-on-year. We had very good growth in Bluetooth, also keep in mind that last year was not a very strong Q1 for Bluetooth, the comparable was relatively low. Still, 57.6 is a strong growth in Bluetooth. Proprietary declined 7.7%, in line with what we've been predicting previously. Important thing is that if you look across our markets, the growth year-on-year in all markets. Remember the difference between technologies and markets.
Markets is what we sell into. Technology is proprietary and Bluetooth. We didn't grow in proprietary, in all the markets we were shipping into, we grew. We continue to diversify our customer base, had growth in our customer base. We are very happy with the underlying factors that we see at Nordic. We had improved profitability. EBITDA margin went up 1 point year-on-year. We always are watching out for cost savings, we have a good discipline when it comes to cost and usage of money. We basically had 6% down quarter-on-quarter on our OPEX, which is great because we didn't have less activity. We had huge activity in Q1. Our gross margin ended up at 48.9 percentage point, is basically we've been working on cost reduction for long time. We start seeing effects of this.
We had a favorable customer and product mix this quarter. We don't expect to see the same effect going forward for Q2. Our EBIT, $0.8 million versus a loss of $0.1 million last year at the same period. If you look here, as I said, revenue $60.1 million, 27% growth year-on-year. It was down 6.6 from a very strong Q4. We think this was a great number. Bluetooth revenue $38.4 million. As I said, 57.6 growth is down 13% quarter-on-quarter. Proprietary revenue ended at $19.9 million. It's a 7.7 year-on-year decline, was 9.3 quarter-on-quarter growth. Gross margin up 2.2 points since last year, is even up 1.3 points since last quarter. We really see effect of all the work we've been doing on cost reductions. EBITDA up 46.6 to $4.4 million. It's 11.2% up quarter-on-quarter.
We were pleased to present these numbers today. What generate these numbers is Bluetooth driven. If you see here, there is 2 things we've been focusing on very much, is to get the industrial up and Sorry. It's 2 things we've been focusing is to ensure that we are diversifying our customer base to get less dependent on 1 or 3 customers. We can see that really happening now. Last year we had 34% top 10. This year in Q1 is 30%. It really shows that the broad market approach that we have is paying off. Important thing here is to see how non-consumer continue to be strong. As I said, the characteristics of non-consumer is longer lifetime, this means that we have customers that keep on producing over long time, each new customer build on top of this.
The churn is much less on industrial customers. I think that's also reflected in the backlog, which Thomas is going to discuss a bit later, that industrial customer have longer backlog. Obviously, we need to continue to grow customer base. We had a 17% growth in the active customers from Q1 2017 to Q1 2018. If you look into the market, consumer electronics, 23.6. It's a 3.2% growth year-on-year. Important thing here is that despite that proprietary is slowing down a bit, consumer growing, it means that Bluetooth is taking a bigger share of consumer industry. That's what we've been preaching for a long time, that Bluetooth will replace some of the proprietary in consumer. It's exciting to see wearables back to growth. It's basically quite a bit of Chinese customers that still are making activity monitors, and obviously, they're using Nordic.
Building retail, up 42% year-on-year. Healthcare, a strong growth year-on-year, on a small number. We believe that healthcare will continue to add on revenue going forward. If you look into the last one here, the others, 19.5% growth year-on-year. The new customers we are working with today are customers that maybe are non-traditional component consume. They are basically into more industrial application where they're not known as a consumer of electronics. Nordic is working hard on generating revenue from these customers. I usually show some new products that are powered by Nordic. BEAM Smart Button is a small LCD screen you can have on your jacket and give information to anyone. For example, if you're going on a date, you can put in from your phone.
You can say, "Nice to see you." Then you can say, "Oh, so great." Anyway, this is customized LCD button. I think it's a cool application. [inaudible] Smartband is a gaming band. You wear it, and if you get sweat, you can see it in the game that you get sweat. It picks up your mood. If you get high blood pressure, you get the message. A cool product. Nofence is basically for cattle. It is as it says, you can have the cattle there, and it prevents the cattle. It doesn't need to have a fence. It tells the cattle you're outside your border or limits. I think we should stop a bit on this one. This is a first product with a customer making a sensor using Thread.
This is a company called Particle Mesh, which are making these sensors, and these are the first customer we've been announcing using Thread. When did we release Thread? Not very long ago. Now we basically have products. Did we make any new hardware for this product? No. We have a flexible hardware platform that can incorporate these kind of protocols. iSwitch is a smart switch for smart homes using the 52. Still, I want to go back to this one. I think the Thread is really good to see the first sign. We are happy, but it looks like we also start getting industry recognition now on cellular. We've basically been very much recognized for our Bluetooth product, and we continue to do that. The Nordic Thingy:52 got the award Most Competitive Development Tool in China. We proud of that. It's good. See here, Light Reading.
Currently, we are finalists in the Most Innovative IoT M2M Strategic Vendor category for our low-power cellular modems. Who are we competing with? Amazon, Huawei, Nokia, Verimatrix. These are much larger companies than us, but we are still recognized as the most leading IoT machine-to-machine vendor with our LTE products. I think the competition will be closed in a couple of weeks, so hopefully next time we speak, we're not only finalists. This was basically what I want to say. I want to hand over to Pål, which will take you through the numbers. Pål?
Thank you, Svenn-Tore. I'm going to go through the operational KPIs for the company, just like we do every quarter. Just a reminder, these are the reported number. I'm coming back to the cash OPEX, et cetera, on a later slide. Also remember that in Q1, revenues are seasonally down compared to Q4, which will, of course, impact all the metrics as we're going through. Also the activity in Q1 has been relatively high, just like in Q4 on new products. First of all, as Svenn-Tore mentioned, revenue is up 27% year-on-year, of course, driven by very strong Bluetooth growth in the quarter. Gross margins at 48.9%, up 2.2 percentage points compared to last year. Remember that last year we were really at the low due to the ramp issues with the nRF52, which has been continuously improving.
Compared to last quarter, the 1.3% point increase is both improved production but also product mix variances. On the total OPEX this quarter and percentage of revenue is 41.5%, which is just up slightly from 40.4% a year ago. Of course, revenue has increased pretty much this period. The underlying OPEX has gone up $5.9 million from $19 million-$25 million. If you look just on the R&D part of it's 26% compared to revenue, just more or less the same number as last year. However, we have made some small changes to the capitalization. The reason for that is that the cellular IoT product has gone into a commercialization phase. For the first time, we've actually capitalized $1.5 million on the LTE business, actually resulting in a downward trend on the actual KPI. However, the underlying number is $6.2 million, but we report $4.7 million.
In total, capitalized $3.3 million versus $2.2 million last year. On the R&D short range, even if it's going up, it's more or less compared to the capitalization that impacts this. Much of the R&D on the short range is now on software enhancing current products and also next generation products. SG&A 15.3%, more or less the same as last year. We are still scaling the business to manage the future growth that we're seeing. Overall, an EBITDA margin of 7.4%, up one percentage point compared to last year. We are still being impacted from low-power cellular investment where there is no year revenue currently. On the previous slide, we showed the quarterly metrics. Of course, revenue is going up and down. If you compare the OPEX to the last 12 months revenue, you see that the metrics is pretty stable at 37+%.
Out of this, 23.5% is R&D. Industry average, we've stated, is around 20% for comparable numbers. Nordic is trailing slightly above this number, mainly due to the cellular investment. This ratio will decrease when we get revenue on cellular. On SG&A, spending for comparable companies is around 12%-15%. The spending of 14% is more or less within this ratio. We are scaling sales and supply chain to meet future growth and more customer demands. Gross margin, I think Svenn-Tore mentioned quite in detail. However, I have a few more comments. First of all, as I mentioned, the bottom was back in 2016, 2017. We've now been able to draw that up to close to 49%.
This increase is a mix of improved yields, better wafer purchases, and also improved visibility that makes us able to do bigger production runs and thereby reducing costs. Compared to last quarter, margins are up 1.3%. We do see some favorable product mix effects in Q1 compared to what we commented in Q4 when we saw some negative product mix fluctuations. Going forward, we still maintain the 50% margin. This improvement will come from the same three reasons I mentioned before, but also expanding the product portfolio, being able to deliver the right product to the right customer at the right price. On cash OPEX. Cash OPEX is adjusted for capitalization of $3.3 million and equity compensation of $400,000. We had an increase year-over-year of 32%. Cash OPEX went from $21 million to $28 million. A 32% growth.
This increase came mainly from a 12% increase in the number of employees from 549 last year to 615 at the end of Q1 2018. The growth in these employees comes in most areas, but mainly within sales and R&D, and then more or less R&D focused on customer activities. However, also all of the costs related to our business, IP, infrastructure, et cetera, is included in the growth numbers. Compared to last quarter, we are keeping a continued cost discipline, so costs in total only went down 3.6%. We can see salary costs more or less the same. We did have some reductions in other OPEX. However, investments will continue in order to capture future growth. Finally, on working capital or cash flow. We did have a cash outflow of $4.5 million in the quarter.
If you compare previous years, normally in Q1, you will have a working capital reduction, so you will have a positive cash flow. However, this year, we saw much of that effect in Q4, at the end of Q4 as we reported last quarter. We also have effect of Chinese New Year, when Chinese New Year comes in the year, resulting in a higher accounts receivable balance at the end of the quarter. Overall, we increased net working capital by $2.5 million in the quarter. However, if we look at this KPI in percentage of revenue, it is a slight reduction quarter-over-quarter. CapEx, pretty low, $1.9 million in this quarter. It's below our average we've been running the last quarters. That is more or less a mix when purchases happen. We will trend at the same CapEx as previous years.
We are doing a tight cash management and optimizing our cash generating ability. We do have a financial headroom of close to $90 million at the end of the quarter, including undrawn facilities of close to $60 million. That's all I have. I'll hand over to Thomas, who will go through the business outlook. Thank you.
Thank you, Pål. I'll talk about four things in my part of this presentation. Short-term outlook, including a little bit of comments around our guidance. I'll talk about the production ramp of the 52840. We got some recent news around our efforts on expansion in short range, low power IoT, and then finally, an update on cellular IoT. As Svenn-Tore and Pål talked about, we are pretty satisfied about how this first quarter of 2018 played out. Now, one quarter into 2018, we're getting some improved visibility on the next few quarters, and we are exiting Q1 with an all-time high backlog of $81 million. That's up 76% year-over-year and 50.9% quarter-over-quarter. This backlog is stretching well into Q4 this year, and it also gives us some indications on how the full year is going to look like.
As mentioned earlier, in this quarter, we had some tailwind in terms of gross margin from a favorable customer and product mix. Looking at this backlog and looking at specifically what is in Q2, we're seeing some indications that the customer and product mix is going to be slightly less favorable for second quarter. In no way anything dramatic here. We see customer and product mix fluctuating from quarter-to-quarter, and this is just in line with what we anticipate. With this, we are maintaining our guidance for first half of 2018 with revenue between $123 million-$133 million, Bluetooth growth between 40%-50%, and a gross margin between 47%-49%. We got solid coverage for this backlog in our guidance, and we have additional confidence coming from customer forecast and the overall business momentum.
Entering Q2 2018, we will continue our investments to fuel future growth as well as scaling supply chain to meet increased capacity and also more stringent quality requirements from our customer base. During this quarter, we ran production of the 52840, and just a quick recap of this chip. It's the flagship of our 52 series lineup of ICs. It's by far the most complex short range chip we ever built. It's at the high-end spectrum in terms of memory, in terms of security features, in terms of radio performance. It's also our most advanced chip when it comes to multi-protocol capabilities. This chip supports the legacy Bluetooth Low Energy standard, the latest and greatest Bluetooth 5. It supports 802.15.4, which provides a foundation for other protocols like Thread and Zigbee, and it also supports ANT and proprietary communication.
We started sampling this chip to customer a little bit more than a year ago. Now we have a broad and solid design base across a number of different applications. With this production ramp, we expect to have revenue contribution and growth contribution coming from the 52840, starting now in Q2 2018. In terms of average sale price, the nRF52840 with its feature set, with its value proposal on multi-protocol capability, sits at the premium end compared to our other 52 series ICs. Yesterday, we also released the first production grade of our Thread software that we announced exactly a year ago. Thanks to Particle.io, that Svenn-Tore mentioned earlier today, we're pleased to announce that we're going to get revenue contribution from our Thread investment starting second half of this year.
As I talked about over a few quarterly presentations, Thread is part of our effort to expand our offering in short range IoT beyond Bluetooth Low Energy. At the Q4 presentation, we announced ambitions to do further expansion beyond what we've already done. Yesterday, we made a pretty significant announcement related to that. We launched our first Zigbee solution. It's a Zigbee 3.0 software stack for the 52840. This is essentially a software upgrade, an additional software for a chip we already have. The first engineering release was made available yesterday. With this release, we are providing a baseline feature set in terms of Zigbee, but from day one and out of the door, this software we have provides advanced multi-protocol capabilities, allowing customers to combine Thread, Bluetooth, and Zigbee into the same product.
This represents a major step forward for us with regards to our strategy for expansion in short range IoT. We now cover all the three key open standard low power short range technologies for smart home and for industrial and enterprise applications. This essentially means that with this software, we are now addressing a much bigger market opportunity, especially in smart home, where we are seeing tons of activity these days. Having support for all of these three technologies in a multi-protocol and multi-protocol capabilities is definitely also a value add proposal into this market. For Zigbee, for now, we're applying a pretty focused go-to-market strategy. We recognize the situation out there, that there is a lot of vendors that have strong positions in this market.
We're currently working on some very selected strategic opportunities, where we have a unique value proposal with the objective of establishing some strategic bridgeheads in this market over the next six to nine months. We feel very confident in our offering around Zigbee. We aim to have revenue and growth contribution from Zigbee coming in 2019. That was quite a lot about Thread and Zigbee. Now back to Bluetooth. That said, Bluetooth is core to our business, is core to our growth now, and is going to be core to our business for years to come. According to DNB, there was 102 new design certification based on our chips in Q1. That is up 7% year-on-year and down 17% quarter-on-quarter. In this quarter, our share of certification was 38%.
While the share is down compared to last quarter, we still feel that we have a leading and the most broad position in Bluetooth Low Energy, and is in a separate category compared to other players. On the cellular IoT side, I'm pleased to report that we are making steady progress. Of course, the focus for the whole company now is our lead customer sampling program. Under this program, we are working with carefully selected few customers, providing close and direct support. With these efforts, we are laying the foundation for the first design wins, then most importantly, for the production ramp and starting to get revenue contribution from cellular. During this quarter, we sampled more than 10 customers with our kit. Region-wise, these customers spans both U.S. and Europe.
In parallel to sampling and working with customers, we are working with carriers in the same regions to go ahead and certify our solution. We continue to see strong interest and demand in our solution, and the lead customer sampling program. We are working really, really hard to bring in new customers, and we're going to roll in more customers now in second quarter 2018. Just to summarize things, from our perspective, we got a good start on 2018. Outlook-wise, we feel that we are on track with our ambitions for 2018. In this first quarter, we delivered solid growth and improved profitability. Keep in mind that Q1 is the most seasonally challenging quarter for us. Revenue up 27% year-on-year and seasonally down only -6.6% quarter-on-quarter, which is low compared to the historical seasonality we have going from Q4 to Q1.
Up one percentage point on EBITDA margin and a positive EBIT of $0.8 million compared to -$0.1 million in Q1 2017. We got an all-time high backlog of $81 million that provides us solid coverage for our H1 guidance. We have a continued good business momentum. We see an underlying market with robust growth. We have a lead and unique broad position across that market. We continue to see strong diversification and growth in our customer base. We're getting revenue contribution from the investments we've done in additional software. We're pleased to announce that we're going to get revenue contribution from Thread starting now second half of 2018 with the first customers we announced earlier today, Particle.io. We continue to work on expansion in short range IoT to build a more robust position and have more growth potential.
Yesterday, we launched our Zigbee software solution for the nRF52840. We continue to see strong underlying momentum on design wins, both across the broad market, but also with tier 1 customers. Thank you. That concludes the presentation, and we will move on to Q&A.
Christoffer from DNB. I was just wondering, when you start to see revenues from Thread and Zigbee, et cetera, will you start to split that out so we can see how the various protocols are performing?
Let's get the revenue first, we decide how we report it.
Secondly, I saw, as you said, you're increasing or continuing to invest in supply chain and preparing your business for stuff like LTE-M. Can you say anything about the OPEX for Q2?
We're not guiding on OPEX. The KPIs we have been reporting, I think we will be within this KPI range as we've been reporting every quarter.
Okay, thanks.
Hi, Axel from ABG. You have a very broad-based growth across market verticals this quarter, but we see building and retail and healthcare, which has previously been very strong, have a downtick quarter-over-quarter in Q1. You say that this is partly due to some customers being in between design cycles. Do you see these new design cycles picking up pace in Q2? More specifically, can we expect that these verticals will grow sequentially from Q2 and onwards?
It's a mix. I think it's very much dependent on customer and customer production time, and also about growth. It depends especially on the building retail. It's more down to the customer's design cycle and production cycle. Healthcare is going to be basically a bit more when customer get into production. It's two different reasons for it. As I said, building and retail is very much related to one customer. When it comes to healthcare, it's more cycle.
Mm-hmm. On building and retail, do you have visibility on whether or that will pick up in Q2 now?
It was stronger in March than in the beginning of Q1.
Okay, thank you. A follow-up question on nRF91 Series. You said that you are working with certification, and you have previously said that you aim to start general sampling at the start of the second half of 2018. Are you in line with the previous schedule on getting that certification before the second half of 2018? Carrier certification.
We've said general sampling mid this year, and we need certain certifications to make that happen in those regions. We're on track with the previously communicated ambitions.
Okay. One final question on gross margin. You said that you had some benefits from a positive effect on product and customer mix this quarter, and you expect to see some negative effect next quarter. If you were to try to quantify that effect, is that half a percentage points positive this quarter and half a percentage point negative next quarter, or is it more?
As I said, it's not dramatic. Keep in mind also, we don't have full backlog coverage for Q2, we're only seeing portion of the Q2 revenue, it depends on what's coming in. We're just signaling because our gross margin for Q1 was at the very high end of our guidance range. If it were not to go slightly down or stay at the same level for next quarter, we would have to change the guidance.
We tested the guidance 47%-49%.
Yeah.
We did 48.9%.
Yeah.
Basically, it can't be much of a variation.
Oh, okay. Yeah.
Andreas Bertheussen, Kepler Cheuvreux. Two questions. Firstly, both on the 91. How has the feedback been on the sampling process? That's number one. Secondly, the incumbents in the cellular space have a strong position in certain verticals. Given the strength of the 91 offering, could you elaborate a little bit on which verticals you believe Nordic has the best chances of success in this future market?
We're getting very good feedback from our customers. As I said, we're really sampling, and we see strong interest from a diversified set of applications. In line with what I said on the briefing, a lot of that is coming from customers who are currently not using cellular. With the power consumption size and things we're bringing, we are enabling new applications for customers that have never used cellular before. I don't want to point out any sort of specific verticals as such. We have mentioned previously, that with the on-chip GPS and so on, we have an attractive solution for asset tracking, but it's really a broad and diversified set of applications we're seeing.
Okay. To follow up, are you seeing any consumer-related applications that are going to be key markets for you?
There's a mix of consumer applications in there, too.
Thanks.
Hi there. Oscar Fredriksson with Arctic Securities. For the last couple of quarters, we've seen sort of the backlog entering a quarter being 100% or less of the following quarters' revenues. Why is that not the case in this quarter? Why should we not see revenues exceeding $80 million in the second quarter this year?
If you saw our chart there about industrial customer versus consumer customers, the industrial customers are more long-sighted in their order placement. That really explains it.
That's a big change this quarter?
It's been regularly building up. We're getting more customer in industrial, and they have much longer order windows.
We have reported throughout 2017 that the backlog length has been growing quarter on quarter and year on year. This is just a continuation of this trend.
Thank you. Thanks.
Christoffer from DNB again. I was just wondering, 52840 with Thread and Zigbee and everything, could you just comment on how significantly higher the ASP is on that chip compared to the others?
It's double-digit % higher than the others.
Than which one? Than our
Well, than the middle chip, which is the nRF52832.
Okay, great. Thanks.
Remember, the most important thing for Nordic is to enable new customers to get into volume. This is not going to be a marching sort of milking cow. We really want to enable our customers to be able to get new products out in the market in volumes and be profitable. It's all because we want to ensure customers are making money.
Okay.
Okay. Thank you all. Now we have a general assembly, so if you want to join, you're welcome.