Ladies and gentlemen, welcome to the Half Year Results 2021 Conference Call and Live Webcast. I am Paul, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Webcast viewers may submit their questions or comments in writing via the related field. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Thomas Seiler, CEO. Please go ahead, sir.
Ladies and gentlemen, welcome to our presentation about the half year results of 2021. I'm glad to see many attending today. We make this presentation with the usual disclaimer about forward-looking statements. In the first round, I will provide a short overview. Our CFO, Roland Jud, will explain you in detail all the numbers, and later I will talk about our strategy and outlook before we then come to questions and answers. The first half year 2021 was successful, especially we had a very good growth of revenue, in the amount of over 17% before impact of foreign exchange, including this, we had 11% growth. That is an important progress over the first half year of 2020. That was a strong one still before the COVID crisis really then took place. At the same time, this first half year very successful also at the level of gross profit.
The profits grew even more by 13%. This is all a result of various effects, mostly by product mix, also because our gross margin is naturally hedged against the foreign exchange variations, and also we were able to manage price. What is a strong number is the EBITDA that has made progress by 20%. In conjunction also, we can read the cash flow numbers for operating cash flow that achieved $43 million, and free cash flow was positive with $28 million, both a strong increase over first half-year, 2020. Why has it been so much better? First of all, of course, the top line has delivered more and especially the gross profits.
Also, you remember in 2020, we have exercised the cost reduction program that of course, has now taken effect and has helped to provide such strong numbers on the profits and especially on the cash flow side. With that, I hand over to our CFO, Roland Jud, to explain you the details.
Mr. Jud, we cannot hear you. Maybe your line is on mute.
Okay. Welcome. Now you hear me, I hope. Welcome also from my side. Thomas mentioned it, a strong first half year 2021, with total revenues of CHF 192.7 million. We had growth in all areas in Asia, in Europe, and in the Americas. The biggest growth in the Americas with 22.4%. Also 15% in Europe and 5.4% in Asia. Gross contribution adjusted was nearly CHF 90 million, a growth of 30.3%. As said, free cash flow CHF 27.7 million in the first half year 2021. The growth of revenue has suffered a little bit on the negative currency impact on USD, where the average rate was lower in 2021 than in 2020. Without this effect, we would have had growth of 16.5% over the first half year 2020. The EBITDA adjusted margin 14.9%, CHF 28.7 million in June 2021.
Geographically, 5.4% in Asia revenue increased to CHF 73.9 million, which represents 38.3% of our revenues. 30.6% goes to Europe, and CHF 59.9 million is the share of the Americas, which grew with 22.4%. The growth in Americas and also in Europe was driven from the automotive and market telematics. Medical and wearable application had a very good growth in the first half year 2021. About the market trends, the revenue split over the markets remains as it was. Industrial markets were stable here, tracking and telematics belongs to, and also automation. 57.4% of our revenues come from this market, roughly CHF 110 million revenue. On the consumer side, where we had quite a big growth, 90% growth, which represents now 12.6% of our revenues. The automotive market was strong with 25.1% growth. It represents now 26.8% of our revenues.
The growth is also visible on the volume side. The module business strongly increased, although the average sales price declined. We sold roughly 20 million modules in the first half year 2020, which is a plus of 29.1% over the half year 2020. Average sales price for modules is CHF 7.33. On the chipset side, even more growth. We sold nearly 32 million chipsets in the first half year, which is 43.4% more than in the first half year 2021. The revenue split between chips and modules now moved again a little bit towards modules. 23% of our revenue comes from chipset and 76% belongs to modules, compared to 79% and 20%, respectively, in the first half year 2020. Thomas mentioned it, gross profit adjusted. We were able to increase our gross margin to 46.7%. This reflects the positive impact from the product mix and the revenue growth.
With that, we have CHF 89.9 million gross profit reached in the first half year 2021. On the cost side, the distribution and marketing expenses amounted to CHF 18.1 million, which represents 9.4%. This increase is mainly due to the effects of the growing revenues and contributions. With that, this has also an effect on the bonus of our salespeople, but this one is a good sign from our point of view. R&D expenses went up to CHF 52.3 million in the first half year 2021, which is 27.1% of revenues. This increase is, on one hand, due to that we brought product earlier into amortization or earlier to the market so that amortization starts earlier, which increased the amortization amount, which goes to R&D expense.
Also, the capitalization was lower than before, on one hand because more R&D effort are carried in agile processes, which results in more expense and less capitalization. We have also some strong efforts put into redesigning modules with better available components due to the component shortage. We were, with that, able to provide the market with product instead of where we get the components and not the ones where we don't have them. On this slide, you see now the complete income statement. In the first column, you have the IFRS figures. The second one is the adjustments we made. The adjustments are mainly the same as in the years before. Share-based payments, which amounts to CHF 1.8 million. There is a pension impact of IAS 19 valuation of CHF 700,000. The amortization of intangible assets acquired amounts to CHF 1.6 million in the first half year.
There we also have non-recurring expenses of CHF 800,000, which are taken out. With that, we get to an operating profit adjusted of CHF 10.5 million, which represents 5.5% of revenue. The R&D expense increased, as I mentioned, due to the lower capitalization. We capitalized in the first half year, CHF 15.2 million, and the higher amortization of capitalized R&D, which was CHF 11.8 million in the first half year of 2021. Also something which is in this number is the fact that we bought the rest of Sapcorda shares, which leads from equity accounting to full consolidation. With full consolidation, the costs move up from financial income or expense to R&D expense, it has increased the R&D expense as well. In the financial costs, they consist primarily on foreign exchange losses we had to carry.
There is in the interest of the two bonds, and it's also the technical result of the reversal of equity consolidation of Sapcorda Services GmbH. In the financial income of CHF 5 million, this is mainly driven by the unrealized foreign exchange gains due to the fact that the U.S. dollar was overall the period lower than in the comparing period June 2020. At the end of this period in June 2021, the dollar increased and therefore there are some unrealized current exchange gains on the balance sheet. For all these adjustments, we applied the group tax rate of 18.1%. With that, we had a net profit adjusted of CHF 6.3 million and after minority interest of CHF 6,270,000. The EPS on the IFRS is CHF 0.32, and under adjusted it's then CHF 0.89.
Let's go and have a look on the financial position on the balance sheet. We have still a strong financial position with a liquidity of CHF 85.6 million, in December it was CHF 94.4 million. The movement is, on one hand, due to the free cash flow of CHF 27 million, which increases the liquidity. We repaid the first bond on 27th of April 2021, with a net of CHF 35 million. With that ends up in this liquidity of CHF 85.6 million. Inventory decreased due to the high demand to CHF 23.8 million. Trade receivables were CHF 41.3 million and capitalized R&D are now CHF 166 million on the balance sheet at 30th of June 2021. In the current liabilities you find amongst others, trade payables, CHF 18.6 million, and also a bridge loan from the repayment of the bond of CHF 25 million.
In the non-current side, there is the second bond we have, which is repayable in 2023 in April, it's valued with CHF 60.8 million. Amongst others, there is our deferred tax liabilities of CHF 1.8 million and the IAS 19 employee benefits of CHF 21.3 million, provisions of CHF 7.8 million. The leasing liabilities are based on the IFRS 16 calculations amount end of June CHF 29.2 million. We were able, again in 2021, to increase our customer base. We are serving worldwide 10,300 customers compared to the 9,000 customers in 2020. We have still a low customer dependency. 74 customers are responsible for 80% of revenue, and our largest customer is only 5.6% of total revenue in H1 2021. Employee-wide, u-blox engaged end of June 1,123 FTEs. The split over the functions remains as usual.
Two-thirds are engaged in R&D, 756 FTEs, 16% are engaged in logistics and administration, and also 16% in sales and marketing, which represents 189 FTEs. Most of our employees are based outside of Switzerland, spread across 18 countries, 76% of the employees are outside of Switzerland. As an average number, we had in the first half year, 1,136 FTEs engaged. As I said, we had a strong equity base. We could maintain that. Our equity ratio is still 58.1% compared to the 54.6% we have in the equity. The treasury shares for the option program still with CHF 32 million. Without these treasury shares, the equity ratio would have been even higher, 60.6% of total assets. For completeness only, the equity ratio without IFRS 16 valuations, that would be 62.3% compared to 58.2% end of December 2020. On the segment information, no big change to prior years.
The biggest segment, still positioning and wireless products with CHF 192.7 million revenue and an operating EBIT of CHF 6.7 million. These numbers are all IFRS numbers. Wireless services, still dominated by intergroup revenue, has total revenues of CHF 17 million. It's at the moment operating profit negative, but it's mainly driven by internal calculations. Last but not least, the cash flow statement. We managed to have cash flow from operating activities of CHF 43 million compared to the CHF 13.9 million in June 2020. Driven, there is a positive impact of net working capital of CHF 8.9 million, but also from income taxes, which were repaid in 2021 of CHF 5.7 million. Also there is a big impact due to the good revenues and good contributions we made in the first half-year, which also generates cash and leads us to this good net operating cash flow.
On the investing side, we invested CHF 15.5 million into intangibles, mainly capitalized R&D. As I mentioned, CHF 1.9 million goes into property, plant, and equipment. Our total cash used in investing activities was CHF 15.3 million. You see here as well an acquisition of subsidiaries net of cash inflow of CHF 1.8 million. This is due to the Sapcorda consolidation, where now the cash of this entity also show up here under this number. With that, we reach free cash flow after acquisition of CHF 27.7 million. We were capable to turn that into a positive number. Again, after the period before where we have negative CHF 21.9 million free cash flow, we are now again back to positive figure. On the net cash used in financing activity, CHF 39.8 million are used here.
The main number here is the CHF 35 million, which is net used for the repayment of the first bond, in April 2021. With that, we come from CHF 93.9 million beginning of the year to CHF 85.1 million cash. With that, I give back the word to Thomas for the business review.
Thank you, Roland. The result is driven, as mentioned, by a very good expansion, in all markets, in all applications. We had a very strong order intake, and unfortunately we're not able to really exploit this great potential. We are highly limited by component constraints that we are able to manage, where we have taken many measures to remain a good supplier to our customers. It is a fact our current order book is seven times the amount it was a year ago, and also what it was normally in the past. This tells you how strong our bookings are. Of course, in the past, we have an excellent visibility into the future.
It is hard to predict in what time frame we can finally manufacture, because our suppliers do not give precise indications, and we have more or less constantly replan manufacturing to optimize output. In turn, we also have made strategic progress. We acquired full ownership of the Sapcorda joint venture. This is the leading provider of advanced GNSS augmentation services. This is a data service that makes such a positioning receiver delivering very precise information, so down to centimeters, and it is made to serve a mass market. This is an important step to align all the offer and solution capability for our customer to make the solution out of one hand.
The outlook for such solutions is high precision, is excellent because of the intention to make more and more vehicles automated, especially the cars, but also in the industrial domain, there is a lot of activity to make such vehicles that are driving more or less automatically. This complements our services offer. We have made continuous expansion in what is available via our Thingstream platform, and the service of Sapcorda is just another addition to this platform. On the side of hardware products, we have also launched many of them. More than 20 new product types came to the market. This is all a result of earlier efforts to create new platforms and finally also make products. Most importantly, we brought out the ALEX-R5.
This is a cellular module in a very, very small form factor that we are capable to make because we are owner of the chipset, and we can very densely integrate into such a package and make this available mainly for applications where space is of importance. You can imagine this could be, for example, any wearable device. For short-range radio communication, we have also continually expanded our offer following latest trends with standardization, but also to make sure we can really solve any problem a customer has to connect wirelessly a device on the short range node, either with Wi-Fi or with Bluetooth. What we show here is just one example. The module called MAYA for Wi-Fi connectivity. In positioning, we launched more products that are based on the u-blox M9 platform.
You remember, we also have already a u-blox M10 platform in the market, but the u-blox M9 platform is mainly made for high performance and high precision, and this is also the case for timing. For providing precise time information mainly for network components and other frequency-critical applications. This is especially a good way forward to more an interesting business for 5G because the 5G base stations have higher requirements with regard to precision in the time domain. Finally, I mentioned already our Thingstream platform. We have added auto services.
CloudLocate is a service that computes position out of information we gather from the cellular stations, from the mobile phone antennas, and such a service is very helpful to diversify positioning information to make it more robust, or to run it even without a GNSS receiver and make it available at a very low power budget for such applications that run from battery over many years. All these initiatives, of course, develop new business, create new interest, and finally are propelling us forward. That we have a strong growth of bookings is not that customers just double and triple order. No, it is mainly driven from our new products that we launched a time ago and of course are launching now to create new applications and new projects and a new business with our customer.
From that we have intense demand and we have a large number of customers ramping up their products, of course, in a market that is buoyant and where every such customer likes to participate in this move. Here are two examples of how we realize new applications. This is our 10th generation of GNSS receiver that was created to run at very, very low power budget. It's about three times less than the previous or the eighth generation. It's of course, an excellent solution whenever the product is just running from a battery like this cycling computer. It's not only that it is a low power device, it is also one that has excellent capabilities, especially for such wearables that are either here on the bicycle or are on a person, for example, for jogging.
You need a good receiver capability, otherwise you lose track and the consumer would be disappointed. It all comes together very nicely. This is a very strong product and we have high expectations here for volume growth. Another example comes from the automotive space. We have told you many times that electronics content is increasing in the car and the major driver is that cars become automated, that there are assistance driving systems integrated in the car. Here our ninth generation high precision receiver is the basis that such automation can happen and the car is in fact ready to follow a route, can change lanes, can also select optimal routes while driving. This of course increases the comfort and in all the newer platforms of the car becomes more or less the standard.
What are we doing going forward? We have, of course, look for expanding via our organic growth and investing into technology and finally to platforms and products. Also we are accelerating with inorganic growth and acquisitions. In so far, we have again made a step with Sapcorda and before, the previous year it was Thingstream. I have spoken about this. We are, of course, continuing to make sure we do both, the organic and inorganic growth. They sort of both help us to expand and especially increase the capability to solve problems for our customers.
Now I come to the outlook. We are updating our guidance here slightly to what we have provided in June already, based of course, on the current results, but also on what we see as a going forward business, mainly, that we still continued very strong growth in automotive and the industrial IoT. I mentioned the very high order intake we continually have and the steep ramp-up based on our new products. We have implemented cost improvement measures last year that are fully being exploited this year. The only problem at the moment is it's relatively hard to give relatively narrow band of outlook because the availability of components is hard to predict and of course is not endless.
In this guidance, we have, of course, taken account that we have Sapcorda acquired that at the moment has an effect on OpEx mainly, not so much on top line yet. We have explained that the R&D accounting has some impact this year. Two things to come together, some lower capitalization, but also increased amortization from changed processes, but also from launched products. This provides all these results in these numbers, as you have probably already seen. Next communication, we will again run analyst day on 23rd of November this year. Our full annual results are available in the beginning of March, and our annual general meeting is again programmed for April. With this, I thank you for your attention, and I invite you for your questions.
We will now begin the question and answer session anyone who wishes to ask a question may press star and one on the touchtone telephone you will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, if you wish to remove yourself from the question queue you may press star and two questions from the phone are requested to use only handset and turn off the volume from the webcast, webcast will ask you to submit your question or your comment in it's relative field. Anyone who has a question may press star ant then one at this time.
The first question comes from Francois Bouvignies from UBS. Please go ahead.
Hi, everyone. Thank you very much. The first question I had is on the gross margin that is quite strong in the first half of the year. We see a lot of shortages and more and more pricing increase in terms of manufacturing of chips. More recently, the foundries players seem to increase and the last one is TSMC at the last earnings calls that they said that they will increase their pricing in the second half of the year. I just wanted to understand with you, is it something that will impact or how should we think about the gross margin in the second half of the year, if TSMC and other foundries are increasing the pricing? Just basically the sustainability of this gross margin would be great. The second question is on the capitalized R&D.
I understand you, we should expect lower capitalization going forward. Can you give us some sense around the absolute number we should expect from now? I mean, is it going to decrease from H1 or is it going to be stable? Just to get a direction there would be helpful. Thank you very much.
Thank you, Francois, for these questions. About impact of costs from the supplier side on our gross margin. First of all, fortunately we have a long value chain, an increase on a chip cost is of course rippling through the value chain. Finally, we are selling a module and in so far that of course dilutes the increase. That is the first good effect. The other is we will of course increase prices with the customers. In this environment we have quite a high price setting power, and we believe that is accretive in our sense. The capitalized R&D, as we have explained, was mainly impacted by a change in how we run processes. We have started to do it more agile.
Agile mean you try to make a product quicker to the market in the sense of what is called a minimum viable product, and then you increase thereafter via software upgrades to higher functionality levels. That means, of course, such upgrades are then made as an expense and no longer as a capitalized effort. This is the reason why the ratios will change. Of course, there's also a singular event, and I hope it remains a more singular event. We had to redesign quite a number of products to cope with the shortages in the component market, so we have selected different suppliers. That needed, of course, redesign and requalification. Such efforts should go away and no longer create extra expense. In so far, two effects. From the changing of processes, rather decreasing rate.
On the other hand, you must take out the special effect of this component shortages efforts.
Thank you so much. If I may, I have a follow-up on this answer. When you talk about the gross margins for the end moving parts, your guidance for full year 2021, did you include some price increase from the foundries? Is it something that you hardly see, or you didn't see any price or cost increase on your side?
Of course, we see cost increase, but not only from foundries, from potentially any supplier. Because, of course, the shortage has the seller, the power for price setting, and therefore we must expect price increases across the board. It is not dramatic, but of course, we follow closely and make sure we protect the margin.
Thank you. That's clear.
The next question comes from the line of Andreas Müller from ZKB. Please go ahead.
Yes. Good afternoon, gentlemen. Thanks for taking my question. I've got also two. On the booking side, you increased booking sevenfold. Can you indicate where the book-to-bill ratio was, and how long these bookings cater the revenue progression going forward? Also probably, what could you have basically generated, the level of revenues, if the constraints were not here? That's the first question. The second question is, when do you expect the supply chain to normalize? Have we seen here the worst, or do you foresee same problems going forward? Can you give a bit more color on the measures you try to mitigate these things? One was redesigning, but I was wondering also with the redesigning, can you use that to increase your own chipset content with this redesigning in the modules? Thank you.
Sure. Thank you, Mr. Müller. Just to clarify, we give a number that our order book has increased seven times. We have not actually given a bookings number. From that, of course, you can derive that the bookings have been very strong and our order book, of course, last very much into next year. Is of course, in so far, something that gives us a very strong basis for going forward. You asked also if you had no component constraints, how much more billings we would have been able to make. You can take any number you want. For sure, we would have been able to double the output or triple. It is such a difference between bookings and billings. The critical question, the difficult question is about when will supply normalize.
This is in fact very hard to say when we listen to our semiconductor fabs, then they say it takes at least two years because they cannot more quickly build out capacity. Buying machines and manufacturing these machines takes a lot of time, and also there is limited capacity. Of course, the other question is, when is overall demand changing? You also need to imagine a lot came from consumer goods, a lot came from people that had to sit at home and that could not spend money elsewhere. Of course, wanted better equipment for communicating through the internet and so on. The old industrial demand has suddenly strongly increased. We know such cycles are somewhat turning. The difficulty is to find out at what point of time is this turning to a downturn in this situation.
The methodology to manage supply is to indeed diversify components. These are more the standard components, making sure we are not dependent on one supplier. The other is that with our fabs where we make our own components, our own integrated circuits, we of course look for long-term commitments for very good support. We are fortunately together with these partners for very long times, 15 years or so, and have very good also personal connections that help to negotiate that we are well-served and that we can at least deliver an amount to our customers that keep them the production running.
Okay. Thank you very much.
The next question comes from the line of David Sachs from Hocky Capital. . Please go ahead.
Hi, Thomas. I have a couple of questions. Based on those stock markets response to today's results, there's clearly a difference of understanding in what you're talking about in the financial results and the analyst understanding of them. If you could walk us through the R&D spending, the budgeting process for that, how we determine the vitality of the investment we're making, if we're getting a return on the money we're spending. The dollar amount this quarter for this half of CHF 52 million is an alarmingly high number. Just wanted to understand why the number jumped as much as it did, especially given the robustness of sales. The percentage is now 27%, was expecting that number to be declining, given some revenue leverage to R&D spend.
Can you just explain the R&D process, how we allocate money in that category, and how we determine whether the money's being wisely spent or unwisely spent?
Yes. David, thanks. That's a crucial question and often misunderstood. When we say R&D spending, we have to clearly distinguish between what is the cash spent and what is showing up in the accounts. We explained for many, many times and many, many years that we are driving R&D only with a cash view. Finally it is about how much cash can we spend for R&D, for fulfilling our overarching goal to create positive free cash flow. Indeed, also, this has been well managed. The cash basis, together with cost improvement measures we have made, our cash spend on R&D has constantly decreased since 2018. Has, of course, helped that we make a strong positive cash flow for this first half year.
What you see in the accounts, in the income statement is, of course, all driven finally by IFRS accounting rules, especially about amortizations and capitalization, and insofar is often misleading. This is so. IFRS tries to make cost numbers coincided with income numbers, with revenue numbers. This is a methodology that sometimes is a little odd. It's not really delivering the result or an indication of what is the financial performance. We have not spent 27% on R&D. This is just what it is as accounting does. On the cash basis, you can backwards compute. It's just above 20%.
That's reducing the reported number by the amortization amount that you're running through as a non-cash charge?
Yep, indeed.
What are we directing that 20% number to over the next couple of years? Are we looking to manage that down to 15% or below based on growing revenues? How do we determine whether Even 20% is a very high number. How do we determine we're getting an adequate return on those R&D dollars being spent?
Yep. Yeah, look, of course, we cannot squeeze the lemon without putting us into danger. I think a 20% number is what our business needs to remain competitive. We are highly research intensive. Wireless technology is not a simple thing. Also we have the return from the market. We have almost 50% gross margin, and this is what constantly needs to coincide. Again, the gross margin and the cash from that gross margin is telling us how much we can finally spend on R&D with the goal to generate free cash flow. This is what we constantly manage, what we try to balance in the medium term. We had, of course, years where then we had headwinds on the top line that made it difficult to keep the balance.
It's equally important to not go away from an intention, from a plan, from a long-term view of how we make the next step in our product offering, the solution capability. I think we did very well. We have so much gain in the possibility to help our customers. It's precisely this the reason why we have such a strong booking number over the last 12 months.
If I take the summation of those two comments together, the 27%, which is obfuscated by the amortization, you're suggesting it would be approximately 20%. We will be generating, hopefully, higher revenue from that R&D spend. When will we see the R&D on the income statement, maybe I'll address this to Roland, getting to a 20% reported number where the amortization expense equals the spend?
Yeah, of course, the click also is when our capitalization amount is the same as amortizations. It's a little difficult to predict because our R&D projects have sometimes a very long runtime, three years or even four years. That means over a long time you do capitalize, and therefore you have distortions between capitalization and amortization. This is unfortunately not avoidable. It would be easy if throughput times would be short, like a year, then of course the difference is much more easy to sort of manage.
Okay. Lastly, the Sapcorda consolidation. How much did that increase reported expenses in the quarter? The half, excuse me.
Roland, you must give the answer here.
Yes. I cannot give you it right in detail numbers, because we cannot disclose that. You find in our half year report, you find a figure what Sapcorda costs are or what the loss is. Overall, I could say that the Sapcorda costs will increase as in the first year, roughly CHF three and a half million costs coming to addition in the income statement.
Okay. That was for the full year or for the half?
No, only for the half.
Was that contemplated in your updated guidance from June, or is that just something we recognized we needed to increase, and could have led to a decrease in the reported EBITDA and EBIT margins?
It is partially in the already June guidance, but of course now in the August guidance, we get the real figures and this is, of course, reflected in the new guidance we give.
Thank you.
The next question comes from the line of Rolf Renders from Helvea. Please go ahead.
Hello, gentlemen. Thank you for taking my questions. I have two questions. One is, you made good progress on the cost savings, and, I wonder, have you now completed everything or by doing this assessment, you are seeing that there are other possibilities to maybe increase it? Maybe I will start with that question. Thank you.
Sure, Rolf. Thanks for the question. Cost savings have all been implemented already last year, so are in full effect this year. As I said, this is of course, one of the reasons why we were able to generate strong positive free cash flow.
Thank you, sorry. In doing that process, have you seen if there's more potential for that, or if you would go further, would that kind of cut into the bone of your R&D or what?
No, it's not that it eats into the bone. Of course, we have lowered the cost path, so to say. Again, we manage constantly our OpEx in line with what is the top-line expectation.
Great, thanks. Another question, maybe in these times with shortage of supply, it's difficult to say, but would be great your view on the market share developments, and especially how you're making progress with cellular. Thank you.
Yes. Thank you. Of course, everybody is cooking with the same water, the supply constraints are affecting all the participants in the market. I think we have quite an advantageous position, especially as when we talk against the module competitors because, to a large extent, we make our own chipset and we have a much better supply situation than for probably our competitors that have to share the output of fabs with many other module makers. That counts also for our cellular module. We have very good progress with our R5. We are the leader for category M in the market. Indeed that we do the own chipset also has positive effect, when you talk market share.
That's great. Thanks. No more questions.
Thank you.
The next question comes from the line of Serge Rotzer from Credit Suisse. Please go ahead.
Yes, good afternoon, gentlemen. I would have about four questions. I would ask one by one. The first one, it's a little bit about the guidance which has narrowed. That's fine, but the question for me is, what has to happen that you can grow by 19% of the margin to 20%? What would keep you back that you would grow only by 15% with a margin at 16%? Could you please help us to understand what are the factors, how many exogenous factors you have and also factors you can manage?
Yes. Thank you. The question points to our business model and of course, our mechanisms we have. Any growth we make will create additional gross margin that goes more or less directly to the bottom line. The reason is, because we are a fabless company, we have no cost for expanding the capacity and the output. In the far, of course, it's sensitive for the top line. The more we have additional growth, the better is the bottom line.
Okay, that sounds simple, given your backlog you have then.
Yep.
Okay. Probably the next one. You said that you have brought products earlier to the market than expected, also probably with that some technologies. I'm wondering, you made quite a substantial impairment last year. Does this have an impact on these developments you have impaired? What does this mean technically going forward?
Of course, these two events are independent of each other, launching products and I mentioned impairments. Impairment is the past. I'm not quite sure what you mean technically, going forward.
The point is if you have impaired now a product development, a research and development, and now you can use the product, and you have a stream out of this development, then how does this work?
Yeah. Of course, there are certain products that are still being sold, and these so far generate margin without that there is amortization. That is correct. The impact is not that large on the numbers.
What you have impaired, there's nothing at the horizon that you can use it now or in the near future?
Yes, I said we have certain products that we are still selling without that we have to amortize. Revenue from these products is not so large. It's not really determining.
Okay. I always understood that this is for future product, but then this is for old products. Is this correct?
Impairment? Yes.
Yes. Okay. This was misunderstood. I have a question for the CFO. I was surprised about the financial results of the high interest income. Could you explain it to us and what does this mean for the second half? Probably the same is true for the interest expense, as you have now repaid a bond. On the other hand, you have a bridge loan. If you could give us some guidance here.
Yes, you are talking not about interest expense, but about financial expense and financial income. The financial income is not interest, it's just currency gains, unrealized currency gains on the U.S. dollar, the fact that the U.S. dollar increased quite a lot in June. Towards the end of June, we have 92 roughly, and this gives us some unrealized foreign exchange gains on the income side. It's mainly that. To the second half, if you can tell me how the U.S. dollar is end of December, I can tell you what this number is. That we don't know. On the finance cost side, in there you have some realized foreign exchange losses as well. The bigger part here is accounting technical losses from the deconsolidation of Sapcorda and then full consolidation of Sapcorda, which are put into this number.
Let's say for the second half, this should be it. There is not to be expected that you get a lot more here, at least not from the consolidation or deconsolidation of legal entities. Then there remains just the interest of the bond, and the interest of one bond at the end, which comes in the second half.
Okay, got it. Can you tell me what you're bridging actually? Is it bridge to cash or bridge to new loan? A loan to a new bond, sorry. Bridge to a new bond.
Yeah, no. At the end, we just have a bridge loan of CHF 25 million now in the books, or short-term, there has to be taken a decision if it's still needed at the moment or if we pay it back, then this decision is not taken yet, but will be taken soon. It's either a bridge to cash, so we pay back or a bridge to then maybe a new bond.
You would use it operationally or strategically, this money?
If we issue a new bond, we would use it operationally and to get some operational certainty if we need the money, yes. At the moment we are.
The strategic pipeline is empty.
Sorry?
The strategic pipeline is empty, that's it.
No, the strategic pipeline-
You don't have any big or larger acquisitions on your toolbox or? No. You told me that you would use the money for operational issues and
Today we don't use it. At the moment, we don't use it for operational issues. We could pay it back. Depending on the strategic pipeline and depending on these decisions, we will decide what we do with the bridge loan. Either put it into another bond or pay it back.
Okay. Many thanks. I'm fine.
Thank you.
The next question comes from the line of Emanuel Graf von Spee from Rothorn Partners . Please go ahead.
Yes. Hello, thank you for taking my questions. I'm a little bit surprised to see these guidance which have been changed. In June, not so long ago, now to this much lower level. How is that possible? All what you have explained makes a lot of sense to me. The R&D question, the purchase, that you knew also in June. I'm really surprised that is coming now on the EBIT margin.
Yeah. Of course, you can read it this way, that you should have known. Perhaps it is true. Finally, you only know the numbers when you have closed the books. As things are very dynamic at this time, and especially also what efforts we had to spend in R&D, what type of efforts and what changes we made, that of course makes predictability then very hard. Insofar, we had probably not everything understood already in June how much change is happening with regard to how costs are finally showing up in accounting.
Yeah. I think that's the main reason why the market is reacting today like that.
Again, it's all just accounting. I can only emphasize at the cash level, we have been very good in controlling OPEX, and in expanding our gross margin. Insofar, this is a misunderstanding in the market because it's all driven by accounting regulations and not so much by the operational results we have created.
No, you have created a view of, again, not really be transparent with this upgrade and now downgrade. It's very disturbing, put it this way.
Yeah. You talk about transparency. I think that we do updates is precisely to provide transparency.
Okay.
Of course, foreseeing the future, especially at these times, is extremely difficult.
I agree. Yeah. Okay. Thank you.
That was the last question from the phone.
Thank you.
Good. We continue with the chat questions. We have Torsten Sauter that asked, "Given your lower CapEx ratios, will u-blox generate cash in the second half year and next year?
Thank you for this question, Torsten Sauter. We are not delivering guidance on such numbers, obviously you know why we have the reasons given for the ratios or the CapEx numbers. Insofar, I think that gives us an indication for the future.
Also, Torsten Sauter, can you provide some indication of the financial performance of Sapcorda in the first half year and in your guidance sales EBITDA, EBIT? When is Sapcorda set to break even on EBIT line?
Yeah. We have already provided an indication on how much OpEx is at the moment creating. We are not guiding on the business numbers, business success year. That of course obviously, is not available.
We have three questions on the guidance. I will ask them at the same time. Sylvia Walter from the Media Finanz und Wirtschaft, you had a successful first half year, but still had a very negative stock price reaction because the very high expectations after the increased outlook were not met. You increase the revenue guidance again. Why not be a little more conservative in the outlook? Mr. Kühne from LLB Asset Management, why were these factors impacting the guidance not known two and a half months ago? Mr. Vollert, Belvalor, why does u-blox disappoint investors? Was it necessary to raise guidance in June, which must be lowered just two months later?
Yes. Thank you for all these questions around guidance. I think I made a statement before. It's very hard to predict the future in these times. We have almost no reliable information from what we can make a revenue in the next future. Also, we have made quite some adaptations in this regard to cope with the situation. Again, it's hard to make provisions and, in the sense of transparency, we give updates as much as we can. This is also why we have given a third update on the guidance. Insofar, everybody should reduce expectations about accuracy. Also, you see the guidance has quite a span because the visibility into the future is highly limited. Finally, I think what is overarching here is we have been successful in creating top-line growth, in expanding gross margin, and especially we have delivered a very positive free cash flow.
Mr. Zuberbühler from Zuberbühler Associates. Good afternoon. Question 1. Companies like Logitech have purchased components in reserve in order to not face production constraints, which will most likely increase as Delta variant spreads. For example, hamstring. Did you also try this? Second question related to that, can you give more specific examples of components that cannot be purchased at the moment? For example, I know USB 3 hub chipsets are not available according to one of my Chinese sources, and this since weeks and for weeks with no end in sight. Many thanks.
Yes, interesting questions around the supply chain. Of course, we have inventory, and we had quite a strong inventory in front of the crisis. Of course, there's a limitation to inventory. It eats cash and also you have uncertainty. You cannot precisely know what component amounts you need in the future. This is, of course, where you have to find a balance. Also every inventory has somewhere an end. This has happened now overall with the supply chain. Nobody has inventory today anymore. Most suppliers live from hand to mouth, and this is unfortunately no longer the solution. The question about what type of components are short, I can only say all components are short to a more or less extent. Every component can create huge disturbances.
You can imagine if you assemble a product, then if one component is missing, you cannot go into production because you need all the components at once. That makes it so difficult that one disturbing fact is creating quite a high effect. Unfortunately, it's not only production capacity. You must imagine also transportation is affected by capacity, but also by sheer availability. You know that ports have been closed, that flights are canceled, and all these create these supply disruptions.
Mr. Schulz from JMS Invest. What is your view on working capital change for second half, given your very low level of inventories and strong demand at the same time?
Yes. Again, supply chain. You have indeed seen that our inventory went down once more, but we can probably say it cannot go down much more because this is what is the inventory we need to run the production cycle. On the other hand, working capital is tied to top line with regard to accounts receivable and of course equally to accounts payable. This is a fixed ratio. Insofar no surprises as we expected.
Laurent Stöckli by Quaero Capital. Could you give us more color and explanation on the order book Q3 versus first half 2018 and first half 2019? Second question, did we hear right that sales in the second half 2021 could have been multiplied by two or three if you had the components?
Yes. In the same cycle indeed the order book is as much seven times higher than last year, but it's equally the same number for comparison against 2018 and 2019. We had always about a similar order book in these years. Relatively smaller for covering a few months because customers were used to order on short notice. This has completely changed, of course, and this is what you mentioned, is the seven times higher level of order book because we had such strong bookings. Indeed, it is correct what you hear. If you had unlimited supply, it would have been easy to double the output.
Torsten Sauter from Kepler Cheuvreux. Can you give a rough split between positioning, cellular, and short-range revenues? Can you rank these by gross margin? Second question, you are winning more and more customers, but the revenue per customer is declining. How can you scale the business and deal with complexity?
The split between the three product types is relatively the same forever. We do more than half in positioning. We do about 30% in cellular and 20% in short-range radio. These are not three different types of businesses. I like to remind you, we mostly sell several products together to our customers as a solution package. With regard to size and number of customers, it is important to increase our foot in the market. This is also a reason for our growth. With more customers, we have gained a lot more traction. Of course, by such a strong increase of customers, the average is decreasing. This is unavoidable, so to say. This is all potential. The smaller customers today are probably either in an early stage with their products or are future potentials for expansion because they could be startups or just new ideas.
This is very important with the broad customer base to capture all the new developments. Of course, we are not handling all the customers ourselves. We have a sales channel structure. We focus on the large accounts, what we call the A and the B customers that have sizable amounts of businesses that are strategically important, that cover the important application areas that we focus on. What is below in size, we cover with distributors that are demand creating, that are also handling relatively larger accounts, but just below where we cut off from our own activities. For the very small ones, we have what we call catalog distributors. They do supply the very small quantities to a very large customer base, but are equally important because they are the feeders. They create the interest and often are the basis for a new idea.
Thank you. Jonathan Art from Kaufmann Fund. You sound very bullish, yet the analyst consensus revenues appear to be over CHF 210 million for the half. Can you address whether the expectations were too high and the analysts weren't managed, or was a realistic target and you missed internal plan? Can you address how much supply issues restricted revenues in the first half? Did you receive all the wafers you expected? Are your wafers allocations in second half up or down compared with first half? Lastly, what is the approximate mix of your wafers by foundry and process type?
Yes. Thanks for these questions. Of course, when we talk reaching targets again, it's very hard to make predictions. We have to give a broad span of what we think is feasible. Finally, the overarching decisive factor is how much components are supplied and how many disturbing events are finally making the output difficult. The more details here is that you see we have strong increased volumes for modules and for chipset. That gives you an indication. We were able to manage supply. We were able to source components in quite a strong manner. Of course, the comparison is against the first half year of 2020, that was already hampered by COVID. Also without this effect, of course, it tells you we were well supplied.
In general, for the future, we need to take into account that inventories along the supply chain are empty, so it's harder to get parts. It's all entirely depending on output from factories. In so far, again, difficult to say what is the future. Also there was a question about wafers and technology. You can know that we use a range of technologies in our chipset going from 28 nanometers to 65 nanometers.
Mr. Art as well, can you please describe results between GNSS and cellular as that is more relevant than chips versus modules?
Yeah. We hear this question often, but again, we are not business-centric by technology. We are making different types of solution components that are belonging to a technology, of course. Only overarching view we have is on the customer, how much profit we make with each customer.
We have a critical question by Ms. Paymani from Gutenberg Finance. The strategy of the company is failing since 2017 and still no recovery in sight. Don't you think that something should change in the management at some levels at some moment?
Yes. Thank you for such a question. I think the strong bookings we have is the best proof that our strategy works. It's unfortunate that we are in a phase of supply shortage, that we cannot bring it to bottom line, so to say, to cash. This problem will solve by itself. It's a matter of time. Important is the success we have with customers, that they give us preference over the competitors. The strong increase again, of bookings is a result of the successful strategy to provide solutions that are attractive to our customers and that help them to bring their products into the cloud.
The last question from Mr. David Sachs from Hocky Capital. Can you quantify the financial costs, higher R&D, that was expended in your component work around efforts? You indicated Sapcorda was a CHF 3.5 million operating expense headwind in the first half-year results. Is it fair to double that for the year so? CHF 7 million headwind for Sapcorda now embedded in your full year disclosed forecast. Is this all in R&D? Given it was a joint venture, in theory, you would have had insight into their accounting prior to consolidation. I'm puzzled how this was not properly factored.
Yes. I think we explained quite a few things around Sapcorda. Of course, the half year is three and a half, and the full year is seven. We have not intent to make this company completely different. Any acquisition has risks, especially with the top line, or we have seen that certain businesses take longer to materialize, and this is, of course, the major problem we have. We need a little more patience, but it's on a very good track. We have seen excellent response from the market with this acquisition.
Good. One very last question from Mr. Kühne, LLB Asset Management. Any progress on the China IPR theme?
I wonder what they are relating to. Probably to the news that we have won an IPR court case against the Chinese competitor. Of course, that is, first of all, a proof of how we protect our IP, but also that we do well manage such issues, that we have a performing team that can also handle such difficult issues in such a place of business.
Thank you.
Very good. I thank you for your attendance, for all the many questions that I have covered many of the aspects of our business. Should you have a need for more information, please let us know, and I look forward to meeting you sooner or later, hopefully, in person. Thank you very much, and goodbye.
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