Good morning, welcome to Nordic Semiconductor's third quarter result in 2016. Today, I will start to introduce our new Director of Strategy and IR, Thomas Bonnerud . Thomas been working with Nordic for a long time. He knows the product in out, been product director for many years, and will be a good contribution to our IR team. I will do a business update first today, then we do the financials, and then Thomas will cover business outlook. There is a lot of things that are much more exciting than our revenue numbers for this quarter in front of us, and we would like to talk around those points. I will basically sum up what is the state out of Q3. Our revenue was $52.3 million, is down from $53.9 million the same quarter last year.
It's predominantly driven by lack of two customers that we had last year, one in wearables, and the other one was a gaming customer. Our Bluetooth revenue was $31.1 million, compared to $34 million the same quarter last year, the same root cause. Our EBIT was $3.9 million, compared to $10 million, same root cause as last year. If you take away those two customers, which was the absolutely larger customers we had last year, and look at what does the rest of the Bluetooth revenue contribute, it's been a 45% growth in other customers compared to last year, the same quarter.
We started an development for cellular two years ago. We see that the last two quarters, there have been a lot of positive announcement from carriers and infrastructure vendors, which really tells us that what we started two years ago is going to happen, which is tremendously good for Nordic. I spoke about the revenue. Unfortunately, we had late incoming supply in Q3. It amounts to around $4 million. The good and positive thing is that none of our customers were impacted because we had inventory at distribution. Obviously, we need to build up that safety stock again. Q4, we're going to ship those $4 million to rebuild the safety stock. What I would like to discuss now, and I think what is concerning a lot of people listening and are in the room, is time to market.
I would like to explain a little bit about the sales funnel. That is the process from an opportunity until volume arrives. What kind of trends will it show? If there is a lot of opportunity here, it really means that the overall market is growing. We see a lot of opportunity in the start of the funnel. If we are getting a lot of design wins, it really shows our competitive position. Most important, or second most important, is if we see it's certified, if it's approved by Bluetooth SIG, and that is approved by FCC. I come back to certification a little bit later. Obviously, the most important thing is volume. We need to get from here till here faster.
The problem I have as a semiconductor vendor is we can only impact design wins, and we believe, and we get confirmed, that we do a great job in acquiring design wins. We see that the time here has been a little bit longer than we have anticipating. We also know that customers that are paying certification get ready for pre-production will usually come out. There is very little of those certification that doesn't get into volume. How long it lasts in production, we can't comment. Most of them get to production. We don't have too much time because there are a lot of topics we're going to cover. If we want to discuss this later on, we are absolutely have time to do that.
We obviously didn't have a record high sales number, but we have very good development activity, and our kits sales are on track to do a very, very good 2016. Forty percent of those kits are 52 family, the new family. That means that 60% is still designing with the 51 family, which is great. It shows that the product has long lifetime. Nordic has what we call a Nordic Developer Zone, where customers can post their questions and get other customers to answer. We had a growth of 27% this quarter in post. The good thing is a diversified type of customers and verticals. It's not only a wearable customers, it's not only beacon customers. It's a broad range of customers and customer verticals, and I will discuss that a little bit later. We keep on winning awards for our hardware platform.
It's basically complete with software tools and support, and ease of use, and that's reflects in the number of design wins we are getting. Also, we've been discussing with some of you that the tier one customers don't appear on our customer list. We do get tier one design. In medical, there we have design in a tier one company for drug delivery. It's the nRF51 family product. Logistic, asset tracking, design with one of the largest tier one customers. Voice remote for TV design at one of the largest TV manufacturers. We have been suffering on wearables due to a loss earlier last year. I think you're going to see some exciting news today about wins in wristband, and we are winning in wearables with the nRF52 family. Watch out for any exciting press releases during the day. There's new segments, payment ID.
Leading player in payment have a product using Nordic 51. These are one, two, three, four, five verticals. It's not in wearables only. These are volume behind each customers. This slide, we were able or we asked our DNB Markets guys if we could use it, because this is the exercise we are doing, and we see that we are constantly winning design. If you go back a year, we are basically trialing around more or less the same as our main competitors. From Q3 last year, up till now, we've been winning much more design than any of our competitors. That makes us proud of the work we're doing, but we are not proud of the numbers it's producing yet, but it will generate revenue as time goes along.
You see here on the left side of the foil, some customers that it's just a selected customer list that we have got. We want to show to you guys, we want to be more open. Unfortunately, we can't put up all tier one customers by name because we have NDA agreements with these guys. These are some examples we can share with you. Star Wars Force Band, it's toys, robotics, is using the nRF52 family out there in the market. We're talking about smart home, Insteon light switch, Nordic inside. Beacons, nRF52 family from Nordic inside. Another toys, one of the largest, basically, items in toys, Nordic inside. These are products that are on the market, some of them are going to approach the market very, very soon.
What I like to show is that the growth and diversification of customer base is extremely important for us. Here, you see the growth has been it's been a little bit above 50% from Q3 2015 to Q3 2016. Numbers of customer, that's the customer growth we have had. It's impressive. We are proud of it, the customers we get. We need to get these customers into volume production and generate revenue. If you look at the distribution of our revenue, last year at the same time, 50% consisted of top 10. This quarter is down to 36. Means we got much more customers in the other part. It's an important parameter to track. When I've been discussing, it's been sort of variables been important to to our investors and wireless charging.
Basically, it's been the two sort of segments that we've been expecting to get the revenue from Nordic. If you look, it's much more than wearables and wireless charging. We have established verticals. We have toys, proximity tags, gaming, PC, remote controls, and of course, wearables. We see now more emerging in healthcare, beacons, smart homes, moving automotive, and if you look into the even long tail, there is some extremely exciting opportunity. Logistics transport, parcel tracking, quite a few parcels travel the world every day. Payment ID, there will be products with Nordic inside. Here at the very left, medical. I think I would like to talk a little bit about medical. There is a broad range of applications in medical. Over here at the left side, you have pregnancy test with Nordic inside. You have all kind of monitors for blood pressure, for glucose.
What we see, the sign activity picking up now is within drug delivery systems. A lot of people are using the pens, inhalers. In Norway, a lot of athletes spend time with inhalers, but that's a small part of the total population that are using inhalers. To control that these inhalers are empty and that the patient get the medicine required, you use Bluetooth to check that and send it up to the cloud. These are systems that have been analog before. Now they get digital, and they're going to use Bluetooth, and they're using Nordic. Some of them are reusable, but even some of them you throw away after use. This segment, we had 48% growth year-over-year. It's been a lot of hard work. It's been on product offering.
We've been engaging with customers, what we see now is that the certification is coming. This will be volume in the quarters, the years to come. We are confident on our position in this medical market segment. I would like to end my presentation to remind you that we basically regained $30 million, that we are less from last year's two customers. Adjusted for this, we have had a 45% growth in our Bluetooth products. It's not satisfying the numbers we're delivering, but it really shows that we have growth, and it shows that we have more in the sales funnel, which will generate revenue going forward. I think that's what I wanted to say. I give it over to Pål to discuss the financials.
Thank you, Svenn-Tore. I'll briefly go through the financials for this quarter. I'll focus on the four main KPIs we have. Revenue, overall year-over-year decline of 3% and the quarter-over-quarter increase of 0.8%. The reason we don't see the seasonal strong numbers in Q3 is mainly the product deliveries that Svenn-Tore talked about just recently. Backlog at NOK 22.5 million, which is down from NOK 30.3 million last year. However, with the new diversified market product allocation we have today, we do see smaller customers, more mid-sized customers, with lower visibility and lower timeline to markets. Gross margin at 46.2%, which is at the low end, as reported. Main reason for this is the yield issues that we had on nRF52 during the quarter.
EBIT of NOK 3.9 million, down from NOK 10 million last year. The main reason is, of course, lower gross margin and also less capitalized R&D expenses. We do have a seasonal strong cash flow from operations of NOK 11.2 million during the quarter. The main reason we're able to keep this positive cash flow is that we have always a strict focus on improving our cash conversion, we're able to keep the working capital down compared to last year. This slide shows the quarterly revenue development. The light blue is the Bluetooth Smart. Although a slow start of the year, we see that it's been picked up during the quarters, we are now 6.8% behind the same time last year. However, I want to focus on the dark blue, which is the proprietary business.
When we started the year, we were pretty certain that revenues would decline year-over-year, both due to ASP reductions, but also due to volume reductions. However, year to date, we have $62.9 million, which is 3% up compared to the same time last year. Adjusted for the product deliveries, issues that we talked, that Svenn-Tore Larsen talked about, we think that these numbers are pretty strong. Where did these come from? Well, they come from both, overall strong global PC sales, but also we do see new design wins within proprietary business. Gross margin of 46.2% in the quarter compared to 48.5% last year. The reason is, as we've said several times, the lower yields during the rapid volume ramp of the nRF52.
We have, as we announced on the mid-quarter update, solved these issues. However, we are depleting the nRF52 inventories that we produced during Q3, so they will impact Q4 also. Cash operating expenses increased, sorry, 8.6% year-over-year from NOK 17 million in Q3 2015 to NOK 18.5 million this year. Out of this increase, NOK 4 million relates to the Finnish operations. Although employees increased from 430 last year to 521 this year, we see that which is a 21% increase, the overall increase is only 8.6%. The main reason is that we are filling in with both employees in lower cost countries, but also lower level employees. We have in Q3 last year, we also did several tapeouts related to the nRF52 that impacted last year's revenue.
FX is unchanged compared to last year. We do see a negative effect compared to the beginning of 2016. Overall, OpEx in % of revenue, last 12 months' revenue, is now at 38.6%, up from 35.5%. The reason is we are investing for the next two to five years, Svenn-Tore said, short term, we will have impact of higher spending. Operating profits, just highlight, this year at 7.4%. If we do adjust for the costs in Finland, which is a long-term investment, our operating profit margin is at 15.1%. Our target is still to be at 20%, as we've communicated before. Cash flow at $5.7 million in the quarter.
This is seasonally strong, normally, Q3 is a seasonally strong quarter because we build up inventories during Q2 and sell it in Q3. We also see this effect this year by reducing both inventory and accounts receivables. CapEx this quarter is high at $3.5 million. It's purchase of new testers to increase capacity, especially for the nRF52 in future years. If you look at the cash flow for 2016 year to date, we're at 0 cash flow. This means that we are able to finance the rapid investments in, amongst others, the Finland operations, through our cash generation in the business. However, we have, during the quarter, increased our credit line by $240 million in order to have a buffer, a financial headroom, to secure future growth.
Although we are showing sufficient cash flows for funding this growth. Finally, I'll talk about the short-term outlook. Q4 is historically weaker than Q3. As a result of our, this diversification in the customer base, more sales to, amongst others, healthcare, but also to module manufacturers, we do see that we don't have the same effect. You also have to take into account the $4 million product delivery delays we had in Q3, which will come into Q4. Based on this, Q4 will be up compared to Q3, and we estimate or forecast a revenue between $54 million and $57 million. That gives us a second half in the range $106 million-$109 million. Gross margins, although we have solved the issue with nRF52, we will have impact also in Q4.
We estimate that gross margins will be in the range 46%-48%. We're not giving guiding for the first half of 2017 yet. However, we will provide that at the Q4 presentation that will be done in February 2017. Our plan is to give half yearly updates every half year. Okay, that's all on finance. I will now hand over to Thomas Bonnerud , who will talk about the outlook for the business.
Thanks, Pål. I have the task today to talk about how we see things moving forward. Fundamentally, two things. In a very, very competitive market space... how do we see, or what is the outlook for our competitive position in terms of market shares, but also in terms of acquiring new positions for further growth? In a growing market, how do we view the outlook for growth in revenues and profits for Nordic? I'll start with a sort of medium-term outlook on Bluetooth Low Energy, 2017 to 2018, and then wrap it up with a longer-term view on our investments in Cellular IoT that's going on in Finland. Let's start with a perspective on the market for Bluetooth Low Energy. As Svenn-Tore already talked about, this market is already incredibly diversified.
It consists of a number of verticals. You have established verticals where there are well-established product categories, well-established market, well-established business models. Then you have emerging verticals, which we believe are still in the early phase of development and also adoption of Bluetooth. We have a massive long tail, which is not only sort of a broad range of miscellaneous applications, but also we see potential in this long tail for new verticals that we believe will move over and come emerging and drive adoption of Bluetooth Smart ICs. That diversification, along with the fast-paced and innovative nature of this market, forms the foundation for future growth. We believe that these existing verticals will continue to grow. We expect faster growth in the emerging verticals. We expect long tail to produce more verticals to help drive this growth moving forward.
There is quite a lot of good third-party research on how much this grow. The growth numbers do vary. It is to be expected in a fast-paced and fast-changing market like that, like this. However, they all agree that this market will grow strongly in terms of volume over the next three years. Speed bumps are to be expected in such a market. Depending on how the verticals develops over time, how they sort of time, some may overperform, some may underperform, so we will see speed bumps. Final point about this market and how one of the biggest changes moving forward is the diversification of the type of chips that will be used in this market. Our view is that this will range from very highly integrated, advanced, complex system-on-chips to stripped-down network processor.
The price point between these kind of chips are in the 4x range. It's not sort of a single category of ICs that's being used by this market, it's a broader and broader range. While this market is hard to predict, we see some very, very real, here and now indicators for future growth. We see record number of opportunities, and they are diversified across all of these verticals. This ranges from everything from sort of formal RFQs to design evaluations, informal requests, evaluations, and early-stage design activity. When we take all of those features and the projected volume attached, and we sum that up, we can clearly see that compared to how it, you know, the trend of this one is growing bigger and bigger and bigger.
The total projected volume, short term, medium term, and long term, is pointing in one direction. We also see an exciting development where we have today, record number of 10 million+ per year opportunities that we are working on. These are outside the wearables, outside the wireless charging, and they're essentially well-spread across the verticals. Again, suggesting that it is the breadth of this market and the number of verticals that will drive this future growth. This is, and we expect it will continue to be, a very, very competitive market. No question about it. That said, we have a very positive outlook on our competitive position. 2016 market shares, once the year is sort of summed up, for sure is going to be hurt by the loss of the wearable customer in 2015.
With the current positive trajectory we are in, we expect to regain market shares in 2017. We expect to maintain our leading position in 2017 and 2018, fueled by two things. First of all, our roadmap for nRF52, where we are extending the lineup to more highly integrated, higher-value ICs, but also subsetting the existing chips and stripping them down for a lower price point. Barriers of entry in this market are getting incredibly high. If you look at what is needed in terms of IC, process, software, tools, and ecosystem around it, for someone to truly challenge our position, it's going to take massive investments, and it's not very easy to justify unless you have significant already, a lot of business already. Of course, there is risks to this picture.
We see some specific verticals where we are in a significantly stronger position than others. The main risk we see is delivering on the roadmap. Unless we can deliver continuous innovation and spanning out the roadmap, it would not be possible to keep this position. How does that roadmap look like? Actually, nothing extraordinary compared to what we've done since 2017. Our strategy when we started back in 2007, was technology leadership first. We believe that if you are to maintain a dominant and leading position in the market, you have to have technology leadership. When we do new series of IC, we always start with a flagship. This flagship is to cover a wide range of vertical and provide a scalable and cost-effective platform for creating new ICs.
We follow up with subsets or superset, where we grow in a direction, but with more vertical-specific, cost-optimized subset ICs, and we also typically do a sort of mid-cycle updated flagship. We did this with nRF24L. It was technology leadership in the PC market, and we have been able to hold that position under intense commoditization throughout the years by doing subsets and cost optimized based on that platform. We're now, of course, doing the same thing with nRF52. For 17, we're extending the nRF52 Series lineup with a higher value, more advanced chip, and with a sub-$1 lower cost subset IC. Just a reminder on cost here. Lower cost IC or lower priced IC does not necessarily mean lower cost for the customer. It all depends on what sort of application he's building.
Sometimes the highest price point is the lowest cost for the customer. What does this mean in terms of revenue and profits for Nordic? Quite frankly, it's not a very easy thing to answer. However, I can say a few things. We expect, on average, to grow with the market based on our leading and dominant position. We expect to see speed bumps, both in terms of our performance and the overall market. What is going to be more complicated moving forward is the ASP and margin picture, because now we're getting a broader range of price points on our ICs, and this price point could be up to 4x. That's significant compared to what we've had the last years.
There's gonna be a bigger span in margin, because fundamentally, there will be lower margin on simpler ICs because of competitive pressure, but there may be higher margin on the more complex ICs. Generally, if you have a very big customer taking one part independently of whether it's simple or complex, it's gonna drive down the price point and the margin. That's just how this business work. It means that the ASP and margin picture moving forward is really, really depending on how the customer mix looks like and how the mix of products looks like. Again, here, there are risk and opportunities. We see and we have some design wins, which we are optimistic that may represent an upside on the overall market growth with some exciting positions we have in new verticals. However, there are also downsides to this kind of picture.
Now, longer-term outlook on our Cellular IoT investment. The big picture on Cellular IoT is becoming, I think, more and more clear for everyone. If you ask around the industry, what you will get is that most people say, well, low-power cellular is one of the next big things for IoT. I believe no one can argue about the impact high-speed cellular had on mobile computing. It shaped or probably defined mobile computing as we know it, and it has made a major impact to our life, to us as people. It's about high speed, secure, reliable connectivity wherever you go. Thanks, Telia and Telenor, for the Roam like at Home, because it now it really feels like high-speed connectivity anywhere. Low-power cellular will shape the future of IoT in a similar way.
Cellular is unique in the sense that it provides security, reliability, and connectivity anywhere. By going down in size, going down in power, you have this technology for other devices than your mobile phones and your laptop. Industry momentum is building. Over the last three months, we've seen multiple announcements from leading players about deployments of LTE-M and Narrowband IoT networks. Before we kicked off our investment more than two years ago, there were two big debates: Is there gonna be a market? Are we gonna be competitive? We believe that right now, with this development on the carrier side, the first one is answered. Yes, there's gonna be a market for Cellular IoT, no question about it. Now, the second debate is: can we be competitive in this market? With everything we've seen from competitor so far, we believe yes.
We are making rapid advancements in product development. We are on the second prototype, integrating the full RF functionality, and that's in the lab, and it's working. We are ready to tape out the first fully integrated IC, where we combine the radio with the other circuitry, and we are pushing forward with software tools development to make it ready to provide to customers. We're continuing a strong momentum with lead partners and customers. It's been a positive reception all the way. We're working closely with infrastructure and carrier guys to prep for interoperability testing. We're working with module guys and module technology to ensure that we can deliver a solution which is easy to adopt. We're working with lead customers in some key selected verticals, including logistics, industrial, and consumer.
We are gearing up for a high-impact market entry with lead customers lined up for sampling in second half of 2017, and broad availability of the solution in 2018. Finally, some upcoming events. We recognize the fact that our communication around what we are doing in Finland has left a lot to be desired, and we are quite happy that with the recent development and the official statements around the network deployments, we believe that we are in a position now to share much more with you. We will hold, in mid-November, an investor plus analyst brief on Cellular IoT. One option is to do that in New York in conjunction with the chess game. We'll do a poll, an informal poll, and check whether that's a good idea, or whether we actually do it in Oslo or another venue.
We have a product launch event in Oslo in December that you will be invited to have a look at. We're also planning and preparing for a capital markets day, which we're gonna do for 2017, covering both Bluetooth 2017 to 2018 and cellular IoT. We're gonna hold that in February 2017. That's it. Thank you.
For questions, I'll take one question from the net first, because it's on the Cellular IoT. The question is from Apus Capital. The question is, there are a lot of, competitors or two coming with products in the IoT, during the last few months. How do we compare to these products, or how are we in the roadmap compared to them?
As I said, based on everything we've seen so far, what we have in the pipeline compares very favorably to those solutions that's launched.
Okay, good.
Hi, Horning from Carnegie. I was wondering if you could add some color to what happened from the mid-quarter updates and why you shaved NOK 11 million from the top of your guidance range going into Q4?
You can do it.
I can do it. Okay. I think the most important thing is that, as we said, there is time until things take into volume production. We have had a couple projects that now seem to run out of 2016 sort of, production. We thought, as we get more information, it's important that we narrow down to what is realistic target for the Q4 revenue.
Did you say what segment this was in? Was this a wearable related client or?
We've been talking a lot about wireless charging. It could be related to that.
I'm sorry, you got me confused. On Q2, when you first issued the guidance, you said the guidance did not include wireless charging from smartphones at all.
Yeah, well, what we did is that we still see that we are not getting the expected revenues that we would get from wireless charging. Yes, it might not been included in the number, but it was always at the back there as a revenue generation for this year.
One last one. You made what it seems like a cautionary statement on gross margins going forward, saying that you would have a wide range of ASPs and also margins. Should we interpret this as gross margins deviating significantly from the previous average of 50%?
I think, basically, this, if you talk about Q4, I think it's going to be only impacted by still preparing for the nRF52 sort of yield. Going forward, if you look long-term picture, when some of the high volume customers, that will drive down the margin, but up the revenue.
Fair enough. Thank you.
Hi, Christoffer Wang from DNB. Just a few questions. On your proprietary revenues, you say that you have about $4 million delayed this quarter, which would take you to about $24 million, the same as in Q2. You stated in Q2 that you'd expect this level to be the new normalized level for the rest of the year per quarter. Does that mean that we'll see $28 million in proprietary revenues in Q4 on this new basis that has been delayed? Could you please clarify?
Sorry, we didn't say the entire NOK 4 million related to proprietary, but part of the NOK 4 million is related to proprietary. I think also at the Q2 presentation, we said that the year-over-year levels. I don't think we said that the NOK 24 million would be the standard number. I said that the fact that we do have a growth year-over-year, compared to the decline we originally thought, was the statement in Q2. No, we don't expect NOK 28 million in proprietary in Q4.
Could you say something about when you saw this, call it, downtick with respect to sales growth, or sales overall during September? Was that after the mid-quarter update, or did you just sort of intentionally, misinform us, with respect to the range?
We saw the situation basically one week ahead of shipment and for the quarter.
With respect to the gross margin that you're now indicating will come in at 46%-48% for Q4, in part based on sort of, the inventory stock of NOK 52 that you have at a lower gross margin, any reason why you didn't point this out at the mid-quarter guidance?
I think we managed that it will be impacted also in Q4. We said that the margins would be impacted during the fourth quarter.
Thank you. Finally, with respect to the revolving credit facility, is there any specific items that you intend to spend money on, or do you just want more headroom overall?
Overall, more headroom is the main intention of that one. Absolutely.
Thank you.
Mm-hmm.
Hi. Per Braathen . I'm an investor. I was just wondering, in regards to what we've seen from Samsung Galaxy Note7, over the last month, have you seen any change in appetite of taking technological risk regards to wireless charging or other areas?
No. You know, these things happen. I think there are speed bumps, and they happen from time to time, and these companies, they need to push forward, even if they have problems like this. It doesn't change the overall picture, no. I am sure they're gonna have more stringent testing on their batteries moving forward.
Any more questions? Okay.
Thank you all.
Thank you all.
Thank you.