Welcome to Nordic Quarterly Presentation for Q3 2015. We had a record quarter despite the challenges we had through the quarter, which is excellent. It really shows that we can handle challenges and still continue to grow. We had a strong Bluetooth Smart sales. It ended at $34.2 million. We keep on improving our production line and are able to maintain our margins above 50%, which is good. We launched a new product this summer, the nRF52 Series. We're going to see revenue this quarter. Incredible fast. Usually, I say it takes 12 months to get revenue from a new component, but here we've been working in parallel with some key customers. Revenue is expected this quarter. Continue with strong designs in Bluetooth Smart, which will drive growth the quarters to come, the years to come.
Now I would like Pål to go through the numbers and the financial highlights.
Thank you.
Uh.
As Svenn-Tore mentioned, Nordic Semiconductor had record high revenue during this quarter. This record high revenue came despite the previously announced deviation from market expectations, reported in on the 14th of September. If we look at the revenue, NOK 53.9 million, compared to NOK 49 million last year, this is a growth of 10%. If we just look at the underlying wireless components, the increase is 14%. Compared to Q2, we have a small growth of 2.4%. The low growth from Q2 comes as a result of lower than expected sales for proprietary technology, as reported earlier. As in previous quarters, the growth continues within our Bluetooth Smart technology. Year-over-year revenues from the sales of Bluetooth Smart increased from NOK 18.4 million last year to NOK 34.2 million, representing close to a doubling or 85% increase.
The increase of 13.6% from Q2 is explained by continuing design wins within all targeted market areas. In Q2, we had $30 million in revenue. Order inflow was at $43.1, compared to $43.7 last year, and $60.2 last quarter. We ended the quarter with a backlog of $30.3 million, which is approximately 10 down from Q3. This is as expected due to seasonality effects in Q4. If we look at our profitability, our gross margin was $27.1 million this quarter, compared to 24.9%, $24.9 million last year. That means 50.2% versus 50.8% last year. The increase from last year is due to both product mix, also improved manufacturing.
Sorry, the increase from last quarter is due to improved manufacturing, as Svenn-Tore mentioned, but also a product mix change, both within the proprietary and the Bluetooth Smart. Our EBIT increased to $10.9 million from $9.8 million in Q3 2014, due to higher revenues and gross margins, only partly offset by higher costs. Adjusted for capitalized R&D, expenses related to the nRF52 introduction, we have EBIT in Q3 of $8.5 million. After financial items, our net profit is $8.8 million, compared to $7 million last year. We had a positive cash flow of $6.3 million this year, compared to $13.9 million a year ago. However, a strong improvement compared to Q2 this year.
The reason we had a positive cash flow this quarter is, of course, the positive results, but also we've been able to draw down the accounts receivable slightly from NOK 54 million last quarter to NOK 52 million this quarter. The main reason for that is that we've been able to improve the DSO of our customers on average. Inventory is more than doubled since a year ago. This doubling is caused by two factors. First of all, we're building inventory for more growth in the future, and secondly, the slower than expected proprietary sales in Q3 negatively impacted the inventories, because we have a four to five months lead time on our full manufacturing. Sorry, we also have CapEx this quarter of NOK 2.6 million, which is down from NOK 3.6 million reported in last quarter.
This CapEx is almost entirely related to IP in Finland and some lab equipment in Finland. The company still has the revolving credit facility of $20 million, of which we have used the last $10 million. You go to group revenues, which are $53.9 million this quarter, overall, this represents a 10% increase from last year. Although the company reported a growth, the lower-than-expected proprietary sales reduced the growth rate from previous quarters. As in previous quarters, the growth comes from the Bluetooth Smart, where we now have $34.2 million, compared to $18.4 million a year ago. Bluetooth Smart consists of 63.4% of our total revenue. The proprietary wireless technology is rather stable over the year. Compared to last year, we see a 33% drop.
This drop is mainly explained by the very high pickup we saw in the two mid-quarters of last year. This pickup, we haven't seen this year. More importantly, we have the impressive increase in Bluetooth Smart sales. This quarter, it increased 85%. Overall, for the year, it's a 106% increase on Bluetooth Smart, from $40 million year-to-date last year to $82.1 million this year. The growth in Q3 comes really as a focus we've had over the last year to diversify our product or customer base within Bluetooth Smart. In the beginning of the year, and also last year, there was a few dominating customers.
As we've mentioned, at earlier presentations, this year, 50% of the Bluetooth Smart revenue comes from the eight biggest customers, and the rest comes from a variety of smaller mid-sized companies. We are really diversifying our customer mix within Bluetooth Smart. Order inflows was $43.1 million this year, compared to $43.7 last year and $60.2 last quarter. Order backlog is at $30.3. The decrease compared to last quarter is a result of the expected fluctuations in seasonal this, in the fourth quarter. Unannounced orders was $18.7 this quarter, slightly down from last quarter.
Nordic will reiterate the decision we've made to effective December 31, 2015, to cease to report orders and only report backlog at the end of the quarter, and focus on other information and activities happening in the company. Growth in this quarter is really driven of two areas. It's Bluetooth Smart in consumer electronics, and it's the emerging markets, which I will come more into detail later. In consumer electronics, we saw a 6% growth compared to last year. Compared to last quarter, it's a decline of 11.4%. The growth compared to last year is driven by design wins within home entertainment and mobile, offsets by the reported decline in PC peripherals.
The decline compared to last quarter is both the PC, but Q2 also includes some very high sales to the gaming sector. I think we reported NOK 6 million in gaming in Q2 to one customer. This number is then. We don't have this one big order. We have a lot of small orders, mid-size orders, but we don't have this one big order. In the wearables, we see really stable numbers. Compared to last year, we have a marginal decline. Compared to last quarter, we have a growth of 8.2%. We see it's very positive in Bluetooth Smart because the very slow Q1 and Q2 we saw this year has really picked up.
No, sorry, the very slow Q1 we saw this year has really picked up so that we're now seeing stable numbers in wearables, and a very good diversification within the customer base. Building and retail, 18.1% increase compared to Q3 2014. We're seeing the shift from the RFID to beacons and home automation. This is the same effect that we saw in the last quarter. We also have a good growth of 8.6% compared to the last quarter. As mentioned, beacons and RFID are still in early stages of adoption. This is the area we're working a lot, and Svenn-Tore will come more back to this in his presentation. Healthcare is one of our most important and interesting focus area.
We had a growth of 45.2% compared to last quarter, so we went from 1.6 to 2.4. There is a few customers here within hearing aid and glucose metering that are driving this growth, but we have a lot of new design wins within this sector, and this is the area we will see good growth in the next quarters to come. Other markets, I think this slide really shows our diversification in the customer base. Others has really increased in this quarter. It's two reasons. First of all, we have a lot of module customers, and we don't always report where these modules end up. Secondly, we have a lot of customers that don't report in what the end product is used to.
This is all the small customers we're adding in, and that can be 10,000, 100,000 units, but we don't have a detailed breakdown. Of course, in the quarter, when this product gets even bigger, it might end up into the consumer electronics bucket, but currently, it's products coming on the way. ASICs is really fading away, NOK 1.2 million this quarter, compared to NOK 2.7 million a year ago. This market will jump up and down based on when the few projects we have pick up volumes. Next, gross margins. Gross margin was 50.2% in this quarter. It was a good increase or improvement from last quarter. The improvement from last quarter is mainly driven by improved manufacturing. We have new pricing from our vendors.
We have less yield loss. We have the pretty high yield loss related to the XR3 in Q2. That's now been fixed. Secondly, a product mix between Bluetooth Smart is positive, and of course, thirdly, lower than earlier sale of proprietary solutions, where the margins are lower, will impact the margin positively. We expect this to stabilize around 50% for the rest of the year. Total operating expenses, including depreciation, were NOK 16.2 million in Q3, compared to NOK 15.1 million in Q3 2014. More important, it's to focus on the cash operating expenses, which includes capitalized R&D. That was NOK 2.4 million this quarter, compared to NOK 2.6 million last quarter, and option expenses, which was in the underlying, was a positive number due to the reduction in the share price.
Expenses increased from NOK 12 million to NOK 17 million this year. Adjusted for FX, this increase is around NOK 6 million or 61%. Of this increase, NOK 3.4 million relates to Finland operations, although this amount is below the guided number of NOK 4 million-5 million, some of it's shifted with IP licenses that we buy. We've used about $4 million year to date this year to buy licenses in Finland. The remaining OpEx increase can be explained by increased headcount in R&D and sales, and higher marketing expenses related to the increase in activity level related to the nRF52, but we're also spending a lot on the nRF51 still. In addition, we have an agreement with BBC that we announced in Q2, where Nordic Semiconductor provided BBC with nRF51 products for use for educational purposes.
This will also have impact on the cost this quarter. Nordic has, during the third quarter, capitalized $2.4 million, compared to $2.6 last quarter, mainly to the nRF52 generation of products. This number was exceptionally high, or it was high this quarter due to the final tapeouts that we did with the weathers. This number should be reduced because now we transfer the manufacturing to production, to producing commercial goods, that part is gone. We expect around $1 million going forward per quarter. Just briefly, the development in headcount. As of September 30th, Nordic Semiconductor had 430 employees, compared to 389 at the end of September, at the end of June.
Of these 430 employees, 334 work within research and development, which have increased by 32 persons during this quarter. In Finland, we are now 102 employees at the end of September, which is approximately where we planned to be. We're still working on our plans for the next year, that's unclear, we won't expect high increases in Finland. Based on high revenue, high gross margins, and capitalization of R&D expenses, partly offset by higher OpEx, the company's operating profit ended at $10.9 million this quarter, compared with $9.8 million last year. I think 2015 shows strong improvements in our EBIT. The red line here shows the average EBIT for year to date, at 12.6.
This has jumped to 17.9% this year. We've really taken a nice step up, and this is, of course, due to higher revenues. More importantly, we've added the light blue here, which shows our EBIT without Finland, because we are making relatively big investments in Finland during this year. Without Finland, we would've had a EBIT in this quarter of $26.5 million. 26.5%, sorry, which is, I think is more or less record high, which is a very good achievement for the company. Finally, Nordic had strong revenue across all targeted markets in Q3. Revenue grew to $53.4 million. The more important are Bluetooth Smart sales, going out to $34.2 million or 63.4%.
We have a very strong diversification in Bluetooth Smart, both within markets and customers. A strong EBIT of NOK 10.9 million, a positive cash flow, increased inventory buildup, reduced, of course, the cash flow, but we see that we should be able to reduce this inventory and reduce our net working capital going forward, so that we will see a positive cash flow also in the next quarters. Svenn-Tore, I'd like to hand over to you now, so you can talk about.
Thank you.
Business updates.
Pål, I talked about the numbers of Bluetooth Smart, but I would like to reiterate, we did $34.2 million this quarter. As we say, year to date, we are up to $82.1 million US dollars on Bluetooth Smart. Good growth, and we have, and I'll show you, gained new customers this quarter, faster than we have ever done. We have a definition of active customer, which is a customer that have been buying more than 10K units over a six-month period. Number have doubled this year compared to last year, and none of these customer have idea of producing small number of end products. All of them expect to sell and have the killer app.
I don't expect all of them to do so, majority of these customer will have success in the market because the new market is emerging, and if we just extrapolate this line and look forward a year or two, this is going to generate serious revenue for Nordic. We also have another parameter, which we don't show you guys. That's numbers of customer, less or just about 1K pieces. The last six months, that's been doubled of this graph. Since we don't relieve the number of customers, I can talk about the relation between proprietary customers and Bluetooth customers is sort of tenfolds numbers of customers on Bluetooth than we had on the legacy products, on the 2.4 GHz products.
Couple this growth of customers with the numbers of de sign kit we continue to sell, it just shows that we are in a fast-growing, pick-up market, and we are very confident on the years to come, even based on the 51 family and our legacy products. Remember, we also have additional new products coming out, and that's the most important thing for Nordic. We should address a bigger market. I set out to become the leader of IoT, and we are committed to that. If you look at external research, the number of Bluetooth Smart revenue that Nordic have is more than 60% of the total available market, I expect this year. Analysts also predict that this market, total Internet of Things market, will be around 28 billion units. Not all these 28 billion units will be done on the Personal Area Network segments.
There will be three main footprints, I think, in Internet of Things. It will be Personal Area Network, wearable, kid toys, charging, sports, fitness, healthcare, where we have a dominant lead, absolutely. There is no doubt. There will be Local Area Networks like smart home buildings, commercial, industrial automation, asset tracking and management. Nordic will be present. There is Wide Area Network, distance of 1 km plus, and things around us like city and countryside, like smarter cities, agriculture, environmental. Somebody heard about environmental, care for environmental? Everybody talks about it, some guys are starting doing products to back up and to gather information to be able to take right behavior. Nordic will be a player in this market. 28 billion units. What are these emerging market? I will discuss a few of them. Asset tracking, why is it happening?
There is getting so many cheap sensors out there, which can give information to the Nordic chips, which we can transfer to any hub. Inventory. You heard Pål talking about inventory. We are occupied about inventory. Lot of other guys have the same occupation. They really want inventory to be optimal. Shipments, where are my goods? If you do combine Bluetooth with GPS, GSM, you have the perfect tracker. Do you know how much time they spend on construction sites to try to find equipment, in hospitals to find equipment? We can sort that out with getting some radio onto their products. Agriculture, monitoring livestock. Do I get the food? Basically, improve all measurements that's around us. That's one market. We are cutting the last wire. Wireless charger will become a reality. It's a massive market opportunity for Nordic.
We have mobile devices, chargers, covers, battery packs, rechargeable devices. There must be some factors there that make success for us. You guys want to have a wireless charging. There must be a broad adoption of wireless charging. We see that there comes out products with wireless charging today. It's not on the recent standard. It's been released on a different competing standard. All analysts and what we see from customer base is that they believe Rezence is a better standard, is a better solution. The Rezence is using Bluetooth Smart to control the charging between the device and the plate. Nordic have the software that you can put into Bluetooth Smart parts to handle this communication. We've been out there very early, and we have to maintain this lead up.
We have to strengthen it, and this is what we do every day, and this is what Pål showed you by the growth of engineers that we have within Nordic. Growing the organization, having the challenge we had this quarter and still have the best record we ever had, and a strong EBIT, shows that we are on a base now that we can handle such challenges without getting really wounded, which is a nice thing to know. I didn't like this test. At least we passed it very well. Pål talked about financial implication of Finland. I would like to talk about the progress. There is nine months ago since we kicked off Finland. We are fully staffed, both Oulu and Turku, and we used quite a bit of these guys to accelerate the nRF51 or nRF52 tapeout earlier this year.
They've been already participating Nordic Bluetooth development. The projects we have, I said projects, there is more than one, are progressing as planned. We discuss with customers and partners. We have all the IP licenses in place, all lab and lab equipment in place, and design is well underway. We actually taped out the first chip. It's a test chip, but we did that last week. As I'm talking, a lot of people run around in Nordic with orange T-shirts celebrating that we had the first tapeout in Finland. It's incredible fast. That comes down to that we started with an extremely experienced base of people that know these segments we are designing into. We had an aggressive plan for Finland. The Finns have been more aggressive than I thought, which is great.
As I'm talking, actually, the guys in the U.S. is sleeping, but we have the tech tour for the 5200 family around the world now, and we expect more than 5,000 engineers attending this event. We are starting in the U.S., then we go to Europe, and end up in Asia in December. The fact that we get more than 5,000 engineers spending a day with us at all these locations, shows that we have value to bring to the engineering community. We're making design kits easier, making the software more optimized, and it's easy to get started with Nordic. Hopefully, it's easier to get into production, 'cause that's what it's all about, to see nRF52 revenue as soon as possible. Our growth going forward is going to be driven by Bluetooth Smart sales.
The nRF52 family will contribute in the revenue from Q4. Unheard of, but reality. Gross margin will continue around 50%. Pål showed you this other segment, basically, which didn't belong anywhere. If you see the size of that segment, and the growth in that segment, really shows that the underlying activity at leading customer worldwide is accelerating. We also see that we need to expand into mainland China. Currently, we've been driving China from Hong Kong, we see, due to the activity we have and the Internet of Things, best in China, numbers of design starts, we need to have local support in mainland, this is what we're doing now. To be up-to-date with everything that happened at Nordic, I always put this slide up, sign up for my page, we are going to give you the information.
Stock exchange notices, press release, directly to you, to Facebook, LinkedIn, Twitter. We do quite a bit of social networks. If you want to know what's going on in Nordic, I'm not available. If I'm not available, I'm, by the way, on a plane, you can go to Twitter. You will see what we do. Thank you. Any questions?
Thank you. I have a question regarding your wearables category.
Wearables.
Wearables.
Yeah.
Because we saw in Q2 that the overall fitness tracking industry grew more than 200% year-over-year in the second quarter. Obviously not all of your sales in that category are related to fitness trackers, but certainly, I suppose it's a, it's a very large component. Could you explain the dynamics in that revenue stream? Are there some components that are kind of taping off a bit, or not?
No. The reason is seasonality, basically. What we see is that we build a lot for Christmas sale, and what's happening in Q2, and still it was strong in Q3. What we have seen from previous years, that Q4 and Q1 is usually a little bit down.
Also Q3, yes, last year was exceptionally high, I would say, because it completely exploded. Probably more of the manufacturing for last year's Christmas was only in a shorter period because everything came so fast, whilst now it's more spread over the year.
Okay, thank you. You see it as an industry phenomena-?
Yeah
More than related to you?
Yeah, to us.
We have more customers, new customers. There is quite a bit of wide customer base in active tracker. We don't think all of them will have success, but more players in the race, which is good for us.
Okay. All right, thanks.
Thanks. Your order inflow indicates some NOK 10 million in smaller and unannounced orders in Q3, down from some NOK 20 million in Q2. How does this impact your gross margin in the quarter? Because I think that smaller orders probably carry some higher prices.
You mean for next quarter?
For this quarter and next.
The order backlog will impact next quarter. Yes, we see that.
On margins was the question.
Yeah, because, I mean, you had greater number of smaller orders in Q2.
Yeah
T hat I assume carried into Q3, right?
You saw the result on the margins, was 50%. It was up slightly. For Q3, I think most of the small orders are happening with ASAP delivery, and basically, we will see the same margins on those parts. These emerging customers, they don't plan their orders. They basically want them ASAP.
Can you say anything about pricing on the nRF52 so far, and since you're starting to kind of see volumes in Q4, and how that's going to impact your gross margin going forward?
52 will have a higher price because it's higher value that we bring to customers, in the beginning, and it will sort of stabilize as we get better yield, getting higher production. We will honor the customer with these price reductions because I want volume. As soon as we can get our customers to have a product that can compete in the market, can win the market, we get volume. We are pushing every day, not only for Nordic margin, but for our end customers' growth in the market.
J ust finally, can you say anything about, I mean, your, how comfortable you are with current market expectations of Q4 sales versus?
Comfortable. Comfortable. Oh, back there.
Hi, thanks. Just a few quick questions in relations to your pre-Q3 call, where you suggested that, 70% or more than 70% of your sales this quarter would come from Bluetooth Smart. You also restated, very firmly that you would be able to achieve 100% growth in your Bluetooth Smart sales year-over-year for the full year. Do you still believe that you'll be able to do 100% year-on-year for the full year?
We are decided, and we are sticking to that, but we are not guiding anything. The last guidance we've done is what we did last time. We are not guiding anything anymore.
Okay. so if you're not guiding, does that mean that you cancel your previous statement with respect to 100%, or do you stick to it?
That would be a guiding, so we are not doing either or.
All right. Okay. Thank you.
I have a question from the net or for online, from Håvard Nilsson in Carnegie. He wants some more comments on the inventory reduction and how we can do that due to the proprietary sales. The reason is that, of course, as I said, we have three, four months planning schedule for our sales. When the proprietary sales goes down relatively quick, we have the inventory online. This means also that we're not ordering and we're not producing a lot of proprietary products right now. We should have enough for Q4 and start eating on the inventory in the next quarters.