Good morning. Welcome. It's 8:00, it's the 24th of April, and it's time for Nordic to present the quarter result for Q1 2017. Thank you all for coming. Today's presentation, I will do a quick business update, then Paul Finn- Pål Elstad , our CFO, will do the numbers, and then our investor relation and strategy director, Thomas, will do the outlook. Revenue-wise, we did $47.3 million in the first quarter, 2017. That's 18% up year-on-year. This is basically a result of a strong product line, which we have been talking about through the last couple of years, and a strong momentum with new customers, which I come back to a little bit later. Our Bluetooth revenue in the quarter was up 34% compared to last year. It's a good growth. It's in line with what we've been guiding.
We have been guiding 30%-40% growth throughout the year. Our revenue for proprietary were up 12%. It's basically not something we're going to see, I think, through the rest of the year. It's going to be, as we've been previously guided, around flat, a little bit up-ish. Gross margin was up 0.5 percentage point. We are seeing a turn in our margins, and it's upwards for the first time for a couple of quarters. We've been basically break even, which is good in the first quarter, as we all know that it's around four weeks that goes to Chinese New Year, and very few production facilities are running. What we've been working on, and heavily working on for a couple of years now, is to diversify our customer base, and we continue to do that.
We had a strong number of our active customers, 36% year-on-year growth on seeing our customers. That results in that we had a mix between top 10 customers and the rest. The top 10 only constitute 34% of our revenue. Last year at this time, it was 40%. It shows at least that we are very successful on broadening our customer base. Usually, I have this slide here where we show new products, and now we do new products show using nRF52 family. I don't know if you know this customer, but Fibaro is an exciting customer within Smart Home using Nordic nRF52 family. You might have seen other that have lamps that are run from your handset. We have a couple of these. We show one here, the Purelume lamp.
Fleet management is a different segment. We haven't been that strong in long, for a long time. This is in the industrial segment using Nordic. We have been strong in the VR segment. We continue to have value propositions to VR customers. We want a new one that we released the last quarter. As you will see later on, we are doing well in wearables and winning new smartwatch opportunities. We have said that we want to become market leader in Bluetooth. We've shown that now with our product lineup and product diversification. We've been basically broadening our product roadmap. If you look into Q1, there was 95 certified design wins. That's a growth for Nordic with 58% year-on-year. It's down 11% compared to Q4. Again, Q1 is a pretty short quarter.
The important thing is to see how is the market in general doing. The market in general grew 28% year-on-year. You remember our number was 58% year-on-year. We are gaining and strengthening our position within the Bluetooth Low Energy market. It's been a steady growth since 2014, when we brought the nRF51 family into our customer base. These parameters here is really a function of all new enhancement we've done on our products.... We are winning more than ever, and we are winning at the right places. I think I hand over to Pål to do the financials.
Thank you, Svein-Egil . I'll start with going by revenue per market. Revenue growth this year was 18.1%. The revenue growth comes as a result of our broad expansion into many markets. As you see here, all markets except one do actually show growth from last year. First of all, I'll start with consumer electronics. Consumer electronics is still our most important market. Products in this market ranges from PC peripherals to gaming, toys, VR, et cetera. Everything, all the gadgets you would buy personally are in there. Growth, 14% from last year, mainly driven by PC accessory market. If you look at the quarter-over-quarter reduction of 10% is slightly above what we normally would have expected for Q1. Last year, the same number was 7.2%.
The reason for the higher reduction is due to the delivery delays we had in Q3, impacting Q4 last year. Good thing with wearables, wearables is now back to growth, with 15% compared to last year, after we had a disappointing 2016 related to the loss of one design win. We've mentioned, and we've talked about in several quarterly presentation, the attractiveness of our nRF52 in the wearables market, and we are seeing a lot of new designs in wearables with the 52. Quarter-over-quarter, down 18%, which is a normal seasonal adjustment for wearables. Building and retail is, for the first quarter, our second biggest market, with a strong growth of 75%. This growth is effect of our diversification strategy and the whole long-tail segment that we've talked so much about.
This, the, it includes several different verticals and industries, and no real market is driving this number. Healthcare used to be a very strong driver. It is still an important market for Nordic. 16% down, although from small numbers. We have several new, very interesting designs in the healthcare market, although these are not yet big enough, and the volumes aren't strong enough to offset the life cycle changes we have in some of our existing products within this market. Finally, others, 48% growth from last year. Others, as you remember, consists of all products, all markets we don't have defined, we don't know what is, and also module manufacturers. We have more than 120 modules using Nordic chips, and a large part of these use nRF52 chips. Gross margin at 46.7%.
That's down 2.4 percentage point compared to last year. This is at the lower end of our target, which is around 50%. The, the lower low end comes as a result of the yield delays we have on introduction of new products. However, as Svein-Egil mentioned, the good thing in Q1 is that we're actually seeing a small uptick with 0.5 percentage points in the quarter, mainly due to the yield improvements I'm just talked about. Yield issues with nRF52 are more or less solved, but these will also impact Q2, as we mentioned in last quarterly presentation. However, what we're seeing is that increased customer diversification.
With customer diversification, I mean more products into the long-tail, and smaller customers, but also not so much share to the launch customers of the 52 will improve margins going forward. Cash operating expenses increased 14.1% from total of $18.5 million last year to $21.1 million this year. This increase came as a effect of more people in both SG&A selling, and also the short-range Bluetooth R&D. We increased number of employees by 15.1% from 477 last year- 559 this year. Out of this increase, from 114 - 135 relates to the Finland or the cellular operations. Compared to last quarter, number of employees is up 17 people, and costs are up 2.3%.
For the first time, actually, our revenue increased by 18%, and cost increased by 14%, so we should see some operational leverage, leverage going forward. This quarter, we capitalized $2.2 million, which is slightly above the or is above the average of during the last quarters. The reason for this is that we had some large tapeouts related to the nRF52840, which was the new version of the nRF52 that we released just before Christmas. Going into 2017, during our policy, we'd capitalize when the product comes into commercial, feasible stage. We are evaluating when the cellular project comes into this phase. Capitalization related to the Cellular IoT may start coming during 2017, or should start coming during 2017. Q1 is normally a weak quarter.
However, even though, even though we do have a weak quarter, we managed to get a EBIT around zero, or breakeven point. Of course, the reason it's weak is because of consumer electronics and Chinese New Year. The good thing of the quarter is that our EBITDA was at $3 million, since we have depreciation of about $3 million per quarter. As 25% of our OpEx, around 25% of our OpEx, is related to the cellular investment, where we will have revenues in earliest 2018, we also adjust for the cellular business. Adjusted for the cellular business, our EBIT was $4.4 million this quarter, up 37.5% compared to last year. Finally, on cash flow, we had a seasonally good positive cash flow of $6.7 million during this quarter.
The cash flow is mainly driven of a reduction in working capital items, which was reduced by $11.7 million during the quarter, or from 38.7% of last 12 months' revenue to 32% of the same number. The reduction came partly as a reduction in accounts receivable. The reduction is, of course, seasonal, because we have lower revenues and thereby lower accounts receivable at the end of the quarter, but also, we have improved our days outstanding with our customers. Also, inventory was down $4 million. The reason for the inventory reduction is the depletion of the nRF52 inventory that we talked about in the Q4 presentation. CapEx at $4 million, this is slightly above our historical or quarterly average of around $2.5 million.
The high number comes partly as large investments in lab equipment for the cellular to do testing on the tapeouts we get back, but also IP for future generations of our short-range products. Our strategy is to keep a tight cash management and optimize cash generation, generating ability. However, to increase financial headroom to accommodate growth, we have increased our draft- overdraft facility by EUR 10 million during the quarter. We now have EUR 30 million available. Okay, Thomas, I'll hand over to you now.
Thanks, Pål. Today, I'll talk mainly about the Bluetooth market and our momentum in that market. As always, I'll provide an update on cellular. First of all, guidance. We are maintaining our guidance for the first half of 2017. That means total revenue between $100 million-$107 million. Bluetooth growth from 30%-40%, and the gross margins to be at 46%-47%. Market outlook for Bluetooth. We're tracking this market. It's. We believe that the market is moving in a very positive direction. We see healthy and good diversification, but we also see new applications with bigger customers driving more and more volume. We believe that over the next two years, this market will grow between 30%-45% on a yearly basis.
We see growth in existing verticals. We also see new verticals and applications coming in and generating growth. This is still a fast-paced and very innovative market. We see a major trend now with the emergence of non-consumer. Early days, Bluetooth was, was very, very consumer-focused. Now we're seeing Smart Home and industrial applications really picking up and generating and helping out to grow this market. We see diversification in terms of ICs. There's a number of applications here that uses higher-end, higher-value type of ICs, and there are applications here that is using simpler, lower-value ICs. One of the interesting things about Bluetooth Low Energy compared to Bluetooth Classic is that we've seen a significant value play on integration and also on connectivity.
We see continued strong market pull for further integration, for chips that have more value on board, and we see a continued strong for more and more and, and more advanced connectivity. This is actually across the spectrum. If you look at the simple applications, that is today using relatively simple chips today, they are asking for high level of integration, and they're asking for more advanced connectivity. Up here on the upper right side, for example, wearables and remote controls that are today already relatively advanced, they're asking for more flash, more compute power, and more integration onto the chips. This is why, and this has been going on for a while, this is why we've seen continued average selling price in the market.
This is why the unit price of the chips hasn't fallen as the volume has taken up, because more and more of the Bill of Materials is being integrated onto the chips. The other effect, compared to the classic Bluetooth market, is that we see a much more diversification across multiple customers that helps to keep the average selling price up. This market, as of today, has very low level of commoditization. We have this value play on integration and connectivity. There is a significant value play on performance and power, and we see a value play on maturity, robustness, and quality of the solutions. One example of value play and connectivity is Bluetooth 5. Nordic has a clear market leadership with Bluetooth 5 on our 52 series solution.
We have software out with support for the new, new features, not just the errata, that some of our competitors do. We have the first software production release for the nRF52832, scheduled for mid-2017. It means that from that point, we- customers can go volume production with Bluetooth 5. We clearly see that Bluetooth 5 is generating new and different opportunities for us. We have new customers with new applications and use cases for Bluetooth, especially related to the long-range capabilities of Bluetooth 5, but also for the 2 Mbps mode. Bluetooth 5 has proven to be a door opener into customers using competing solution. This has been a way for us to get in, in front of them, and the, the fact is that some of these customers, they cannot ignore Bluetooth 5.
We are ahead of everyone else, and that's why we are now sitting at the table. We're seeing a very, very nice and strong design win momentum with nRF52. Here are just three examples of the type of applications we are winning. The first one is a connected watch. This is more, not the type of sports watch, but more traditional type of watch, with connectivity to the mobile phone using nRF52. We have a power tool using the nRF52 in an industrial type of application. We have a drug delivery systems using nRF52. We have a, a lighting system, and we have a stylus for tablets and mobile phones using the nRF52. This quarter, we released a Thread solution, which is actually a different protocol than Bluetooth Low Energy, and for the nRF52840.
We believe that Bluetooth 5, Thread, and Zigbee, these are the three most important short-range, low-power wireless technologies for the Smart Home. With this announcement, we are now supporting two out of three low-power technologies for the Smart Home. This is strengthening our competitive position and increasing our addressable market with our nRF52 Series ICs. The solution we provided is based on something called OpenThread, which is an open-source implementation of Thread that has been released by Nest, which is now a part of Google. Thread is a native IPv6 protocol using proven mesh technology from Zigbee, and it's running over the same physical transport as Zigbee. Thread is, in many ways, the equivalent of HomeKit from Google and Nest. That's their ploy to build a Smart Home ecosystem, and we believe that Thread is an ideal complement to Bluetooth connectivity for the Smart Home.
Cellular IoT, we passed a major milestone. We now have working samples of the fully integrated chipset in our lab. If you look carefully at the picture, you will see that I've actually shown a photo here of one of those prototypes ICs that is in our lab on the board and actually communicating. This is a significant de-risk of our cellular investment. We have steady progress on functional and performance testing of this solution, and we remain on track for lead customer sampling second half of this year. We're now getting ready to start certification in the second half of 2017, starting with interoperability testing with infrastructure partners. That's the companies that does base stations. Certification with carrier partners, that's the companies that builds the networks. All in all, Q1, steady progress. The growth rates are increasing.
We see 34% year-on-year on Bluetooth, +18% year-on-year overall revenue. We see now that the yield improvements are reversing the negative gross margin trend. Looking into Q2, we have a Bluetooth-dominated backlog of $45.9 million. That's 135% up year-on-year. We expect to see continued positive contribution on gross margin from our yield improvements, and we are, with that, maintaining our guidance for first half of 2017. Thank you.
Now we are opening for questions. We have one over there. Can we get a mic?
Hi, Paul Harrison for Carnegie. In light of your guidance for the first half, you now have completed one quarter. Can you give us some color on, on how the outlook has changed for you, given the still wide range for, for Q2?
First, I don't think it's a wide range, and it's just that we are on track, and that is explaining why we keep the guidance as we gave going into the quarter.
Christopher Johnson from DNB. You previously shared the underlying growth in Bluetooth sales. Is there a reason you're not sharing it now?
Yes. The reason is that there we now are basically washed out most of the revenue we had with that particular customers, and we go back to just showing the numbers raw as they are.
What's the underlying growth?
What?
Is it in line, then, the underlying growth?
We don't even care about underlying growth. We care about existing growth. That's what we are showing.
The question was, are there any inventory adjustments in the numbers this quarter?
Basically, inventory is based on customers' demand going forward, and obviously, we are now seeing more designs on the nRF52 family, and we are not in any particular and have that need to do any particular sort of changes on the inventory profile. Going forward, you will see that we will produce more 52.
Wait, sorry. You previously said that the lower growth margin was due to the yield issues. Now you say that it's also because of lower or it was lower diversification in the customer base.
No, we say that because of more diversification of our customer base, we will get a higher ASP, because the first ones that got the nRF52 family are very close partners to Nordic, which have a relative high volume and a lower ASP. When you get wider customer base, you have a different price structure, and when you have a different price structure, you will have different margins.
You, you mentioned an overdraft facility in the quarterly report of EUR 10 million. Also, you have, I think, $20 million left in your revolving credit facility.
That's right.
About $28 million in cash. Sort of, at hand, an opportunity to spend almost $60 million in terms of growth. Could you, could you give us an explanation in terms of how you intend to use this money, given the need for the additional overdraft facility, please? Thank you.
We're not intending to use the money. The intention is to use free cash flow from operations to fund the business. However, as you know, there will be ups and downs in the working capital requirements. When we grow, there might be one quarter that we will need more working capital. For example, when we start selling our cellular products, et cetera. This is more as a basic basis for the future growth of the company.
Just to piggyback on, on Chris's question, Fredrik Thorsson with SEB. You, you mentioned that you will start to capitalize more on, on the Cellular IoT efforts during 2017. Also, this quarter, we saw quite a significant hike in CapEx related to the Finnish development center. Can you give us some, some color on, on what type of investments, both on, on capitalization and also further lab equipment, et cetera, that will be needed through 2017?
I think we said that the CapEx for the year will be slightly above last year, but not we're not seeing $4 million as the run rate for the rest of the year, but slightly above the $10 million we had last year. That's on the CapEx. On the capitalization, it will go. For the rest of the year, we don't have that many tape outs on the short-range products, but what I stated was that when we start getting the cellular product into a commercial phase, it will increase. If that's in the end of the year or if it's in 2018, we're not completely sure about yet. We're following the same policy as we has done with the short-range business.
Okay. Then there's a lot of focus in your presentation material on the successful broadening of your customer base and a number of design wins . I mean, you also mentioned that you have some expectations about Bluetooth Smart industry growth, and I assume that that's revenue growth. Can you say something about your revenue market share development in Bluetooth Smart? I mean, the broadening of the customer base has thus far not been a very good, a good metric to follow in terms of Nordic's Bluetooth Smart revenue development.
Yes, I can say, for 2016, obviously, with the loss of one big wearable customer, our market share is down compared to 2015. But we expect now to be on track and grow with the market, which means that we should be able to either maintain the share we have today or strengthen it.
Okay. In order to, to do that, I mean, do you, do you foresee just a, a continued broadening of, of the base? Do you expect that, I mean, the big shifts in these product, large volume product categories, that thus far has been, where one or two players have basically controlled 80% of, of the product category? Or do, do you, do you believe that, I mean, we will have, 20 Fitbit with the equal size of the market?
We believe that in order to grow with the market, we need to have a good mix of diversified customer base, but also some significant bigger player. So that's the expectation.
We, as you see here, we see other segment growing very rapid. We might not be wearables is the one that are going to be the biggest. We are pretty sure that wearable is not going to be the largest contributor to revenue in the years to come. That was, as Thomas said, the first customer base we went to was consumer base. Now we are seeing more high-volume customers outside consumer. More questions? Good. Yeah, Christian, one.
In terms of the year as a whole, can you say something about how your expectations are for seasonal variations? Do you expect that 2017 will be a year that has the sort of normal, seasonal fluctuations for you guys? Or are there sort of anything else impacting the growth pattern with respect to challenging or easier year-on-year comps, for you guys?
I think I, I take this question. What we see is that it's very much dependent on customer going to market. We have pretty large customers that will enter the market, that will offset any seasonal, traditional effect. It's a good position to know that, yes, there will be seasonalities, but there will also be new customer coming out with Nordic products. We're going to show that every quarter, samples of new application that we're winning. Thank you.
Thank you.
Thanks.