Nordic Semiconductor Ord

Thank you, Patrick. And good morning, everyone.

As Patrick said, this presentation is being recorded and will be accessible on our Nordic website in the IR section. You also will find our earning press release, quarterly report, and the presentation on the same page, IR page. Joining me today are our CEO Vegard Volland and CFO Paul Elstad. They will be exploring our latest financial results and provide insights into recent business activities. Following the presentation, we will commence the Q&A session. During this session, we will be accepting live questions through the Q&A dial-in function. For the dial-in information, we are kindly referring to the earnings call invitation available on our IR.

Morning, everyone, and welcome to this Nordic Semiconductor conference call. Today's call is being recorded. For the first part of this call, all participants will be in a listen-only mode. Afterwards, there will be a question-and-answer session. To ask a question, please press 5-star on your telephone keyboard. I would now like to hand the word over to Stil from IR. Stil, please go ahead.

Thank you, Patrick, and good morning, everyone. As Patrick said, this presentation is being recorded and will be accessible on our Nordic website in the IR section. You also will find our earning press release, quarterly report and the presentation on the same page, IR page. Joining me today are our CEO, Vegard Volland, and CFO, Paul Elstad. They will be exploring our latest financial results and provide insights into recent business activities. Following the presentation, we will commence the Q&A session. During this session, we will be accepting live questions through the Q&A dial-in function. For the dial-in information, we are kindly referring to the earnings call invitation available on our IR website under Stock Exchange Notice. The dial-in information is relevant only if you wish to ask questions. As always, the presentation includes forward-looking statements that carry inherent risk and uncertainties. The actual outcomes may vary significantly from statements made or implied. We urge you to refer to our comprehensive Q2 quarterly report and the 23 annual report for deeper understanding of risk and uncertainties that could impact our operations. Without further delay, I will pass the microphone to our CEO, Vegard Wolland.

Thank you, Stil. My name is Vegard Wolland, and I'm the CEO of Nordic. And with me, I have our CFO, Paul Elstad. Let's dive straight into the numbers and the main takeaways from our second quarter. Revenue amounted to $128 million in the second quarter, which was within the guiding range, and an increase of $54 million, or more than 70%, from our Q1. It's good to see volumes and revenues increasing after a tough start to the year, and the improvement reflects both increased underlying demand and normal seasonal effects. Compared to the first quarter, we also had less negative revenue effect of inventory changes in our distribution network. Turning to the results, we have charged the P&L with a $10 million write-down of long-range components. Paul will get back to more details, but this both reflects that the volume development has been weaker than expected over the past years, and that we are now in the process of transitioning some customers from the existing NRF 9160 to the new, smaller, and more powerful, more energy-efficient 91.51. Including this right down, we report a gross margin of 42% for the second quarter, whereas the adjusted gross margin was 50% and in line with our guidance for the quarter. Including the write-down, we also report an EBITDA loss of $7 million, whereas the adjusted EBITDA marked a return to positive territory with a small EBITDA of $3 million. Looking ahead, we are guiding for revenue of $150 to $170 million for the third quarter, reflecting continued improved underlying demand, but also that Q3 typically is the seasonally strongest quarter of the year. Gross margin is expected at around 50% or in line with the underlying gross margin for the second quarter. The guiding for the third quarter means that we expect to see a return to year-on-year growth in Q3 for the first time since 2022. This reflects a stabilizing market situation and I believe we overall have managed the downturn with the key workforce and momentum intact. We have managed to maintain and develop strong portfolio and partnerships with key customers and now also see more broad market customers returning. And it's good to see that the design activity is picking up across the customer base for their future and product launches. As we talked about last time, we are in the process of reorganizing with four new business areas in short range, long range, Wi-Fi and PMIC. We are also making strategic changes to sharpen our strategic focus and priorities, further enhance our engineering execution and strengthen our monitoring and accountability. We are progressing to plan with these efforts and we look forward to share more about our strategy and longer-term ambitions on the planned capital markets day in September. As I just mentioned, we have been able to maintain and further develop strong relationships with our key customers, even though we have seen sales to our top 10 customers decline through 2023 and into 2024. However, we are also working to regain traction in the broad market and are glad to see that more of the broad market customers are beginning to buy products again. Both key customer and broad market customers are important for us to grow going forward. Paul will share more data on the revenue development for the different technologies and the customer segments. We also continue to see a sustaining high market share for Bluetooth Low Energy and product certifications amongst our end customers. Even though we dipped below 40% for the second quarter isolated, our market share for the last 12 months has increased slightly from 41% to 42%. As you can see, we have consistently earned a market share of around 40% for many years. And this has been a valuable proof point to our technological and commercial position in this market. These data have been compiled by D&B Markets based on data from the FCC in the United States and from the Bluetooth SIG organization. Due to potential external restrictions for distribution of these data from Bluetooth SIG, I'm sorry to say that we might have to discontinue or modify the reporting of these data with effect from Q3 2024. As always, our overview of customer product launches show a wide variety of products, this time ranging from smart rings via pressure monitors to healthcare emergency alarms. It's great to see customers buying into different parts of our product offering. With the sensory multi-sensor module as an example with both our high-end 52840 SoC and the NPM 1100 power management IC. I'm very pleased to say that we do see a clear increasing trend in that customers are selecting multiple products from Nordic in their solutions, which is a testament to our product cross-selling strategy. Looking forward, we are approaching the commercial launches of the NRF54 series. More than 200 customers have been sampled each of the two NRF54 variants and we are receiving excellent feedback on the feature sets and the performance of these products. As you remember, the NRF Age is a high-end quad CPU system on chip for advanced high-performance IoT products and will be based on Global Foundry's 22nm technology. The NRF54L is a high-performance dual CPU system on chip based on TSMC's 22 nanometer technology and a logical successor to the NRF52 series, which is our bestseller product family today. From a low power and performance perspective, the 252 series product families are both designed to be the best choices in the market for their target applications. Finally, and before leaving the microphone to Paul, I would like to highlight the work we are doing on developing our business in a sustainable manner. This ranges from our work to reduce energy consumption and to use renewable energy sources where that is available, to using recyclable materials where that's possible, to our efforts to adhere to internationally recognized standards for work practices, and to our frameworks to secure best practice corporate governance. As one recent example, I'm very pleased that Nordic is becoming one of the first semiconductor companies to use component reels made from recycled plastic. We are obviously glad to see our efforts in this area being recognized. Last year, we found ourselves high on a list of the 500 European climate leaders in the Financial Times. This year, we find ourselves on a top 500 list of the world's most sustainable companies as ranked by Time Magazine and Statista. On that note, I would like to leave the word to Paul to go take you through the financials.

Thank you, Vegard. I'll now go to financials for Q2 and the first half of 2024. Looking at the revenue for the second quarter, we overall see a 17% year-over-year decline from $154 million in Q2 2023 to $127.9 million in Q2 2024. However, as Vegard already mentioned, the sequential increase was a strong 72% from Q1. The sequential improvement reflects the demand recovery among both key customers and the broad market, in line with historical seasonal patterns. The adverse effect of inventory adjustments at the distributor level was also significantly lower than in the first quarter. The year-on-year decline reflect lower Bluetooth revenue, which declined by 22%. And although the absolute levels are not high in historical context, we saw higher revenue for both proprietary products and cellular IoT compared to the second quarter last year. Turning to the end customer markets, we see that consumers down only a marginal 2% year on year, showing the strength of our key customers in this market. The consumer market represents 65% of Nordic's total revenue, which is up from 56% a year ago. The largest year-on-year decline is seen in the healthcare market, where we saw a decline of 57%. This is despite a very strong sequential growth. As we commented last quarter, this is a market dependent on a relatively small number of customers and prone to wide variations from quarter to quarter. Revenue from industrial customers also improved from the previous quarter, but were not quite back up to last year levels. Demand from this sector shows healthy growth in the US and Asia, but remains slow in Europe. Moving on to the gross margin, we see the underlying gross margin in line with our guidance of around 50%, whereas the reported gross margin reflects the write down of long range components of $10 million that Vegard mentioned, and ended at 42% for the quarter. Underlying sequential improvement due to changes in customer and product mix, and also higher revenue on which to allocate overhead costs. Over the past few years, or post-COVID, we have carried relatively high inventories of our NRF 9160 system and package, or module as we call it. This inventory was manufactured in 2022 based on a strong first half of 2022 revenue and forecast for the second half of 2022. However, we've been viewed in this context of a sharp demand decline throughout 2023, which continued with the modest demand into 2024. The inventories are on the high side, especially given that they have a two-year shelf life. Going forward, some customers are expected to transition to the new 9151 system and package, and this increases the risk of obsolescence for the older products. The 9151 is lower in cost, smaller in size, but most importantly, tariff-free in main key markets for Nordic. In line with the cautious accounting policy, we have therefore decided to take an inventory write-down of $10 million, or about one-third of the total long-range inventory. We expect around 50% gross margins for the third quarter and maintain our long-term ambition to keep margins above that level. Now going to the operating model performance for the second quarter. As I said last time around, our organization and operating model is obviously geared towards a significantly higher revenue level than what we saw in the first quarter. This time we're back at somewhat higher levels, but are still only just breaking even on an adjusted basis. with the revenue decline of 17% and a decline in the adjusted gross margins of some three percentage points. Our gross profit declined by 22% to $64 million. Our R&D overall increased by close to $6 million, mainly due to a lower capitalization rate, where we saw selling and general and administrative cost increased by around $2 million. Overall, this generated an adjusted EBITDA of $2.8 million in the quarter, down from $28.5 million in Q2 last year. Due to the write-down, the reported EBITDA is a loss of $7.2 million. Looking at costs from a cash perspective, adjusted for capitalization equity compensation, the year-on-year increase is a more moderate 3% increase. We have cut the workforce by around 9% compared to last year. So we've gone from 1,520 employees to just below 1,400 employees over the last year. However, this cost reduction or this reduction in cost is partly offset by higher salary and higher accruals for variable pay in the second quarter. Compared to last quarter, cash salary cost is mainly down, and this is an effect of the holidays in June, but also offset by higher salary costs. Other costs are relatively stable, reflecting that we have managed cost savings in the inflationary environment. We will continue to focus on adjusting our spending level to support margins also going forward. Turning to CapEx, we saw continued low spending also in the second quarter, and CapEx was only $2.5 million. Low CapEx continues most as we have in cautious approach due to the revenue levels, but also the fact that we invested heavily in testing capacity during the COVID period. So we have sufficient capacity at today's revenue levels. Finally, we return to a positive operating cash flow in the second quarter. This is supported by changes in net working capital in the period, although net working capital to revenue remains relatively high if you look at the historical context, with around 44%. As I mentioned, we also have low CapEx spending currently and can continue with a sharp focus on cash spending. We ended the second quarter with a cash balance of $258 million. We have also extended an undrawn revolving credit facility of $200 million for two years, so until June 2026, meaning that available cash stood at $455 million. With that, I'll leave the mic back to Vegard for his closing remarks. Thank you.

Thank you, Paul. We have said we remain confident in the long-term market for our products and technologies, and we are glad that we can now outline a return to year-on-year revenue growth for the first time in a couple of years. We are guiding for a revenue of between $150 million to $170 million for the third quarter, corresponding to a year-on-year increase of between 11 and 26% and a sequential increase of between 17 to 33% from the second quarter to the third. Please note that the sequential improvement also reflects normal seasonality, where the third quarter typically is the strongest quarter of the year. And to repeat once more, we expect gross margins of around 50% on par with the underlying level in Q2. With that, I would like to thank you for your attention and welcome you all back to our Capital Markets Day in Oslo on September the 26th for a presentation of our long-term strategic ambitions. Thank you, and I'll hand over to Steele to start the Q&A session. Thank you.

Thank you, Vegard. We are now inviting questions through the Q&A dial-in function to ensure we address as many inquiries as possible before the market opens. We kindly request that each participant ask one question and only one follow-up question. Please refer to the earnings call invitation available on our investor relation website under the stock exchange notice for dial in details. I will now turn it over to our operator to initiate the Q&A session.

Patrick. Thank you, Steele. We will now start the question and answer session. If you do wish to ask a question, please press five star on your telephone keypad. If you wish to redraw it, you may do so by pressing five star again. The first question will be from the line of Christopher Watkins from BNP. Please go ahead. Your line will be unmuted.

Yeah, good morning, guys. Thanks for taking my question. This is Christopher from BNP Markets. So the first question is on your commentary that there are still some pockets of customers who do have excess inventory. Would you say that this kind of inventory implies that the current revenue level you're guiding for Q3 is still reflecting sell-in being lower than sell-through, and such revenue in Q3 is still artificially lower or below underlying demand. If you can, any commentary on the significance of this headwind from still high inventories at key customers?

Yes, we are. Thanks. It's a great question, Kristoffer. Thank you. We are obviously talking about three inventories as a combination. So I'll not talk about the Nordic inventory at this point, but we do have distribution inventory and we do have end customer inventory. What we have seen now during the first half of 2024 is that the distribution inventory of Nordic components has decreased and is now at a balanced and normal level. And we currently see that our higher volume demand from a broadening customer base, obviously including our key customers, indicate that the inventory adjustment at the distributors are behind us. for Nordic, I have to add to that. However, the end customer inventory is still a bit of a mixed bag. So we see more and more customers coming online and have balance and take products, taking manufacturing, buying products again. However, We do also see individual customers that still have excess inventory lasting probably quite a bit into 2025. To quantify this, that's a very, very hard exercise. I'm not going to take that path here and now.

The QC revenue guidance is still below sell-through.

To be fully precise on that, the sell-through, then we talk about distributors again, Christoffer. As I said, we believe we are in balance there, but there are end customers still in a situation where they have higher inventories. I wouldn't say that this is a massive problem as we see it, but there are clearly customers in that category.

Okay, great. And then the second question is on the cellular IoT business. If I go correct, it seems like cash optics in the cellular IoT business is growing both sequentially and year on year. And how should we kind of interpret this? Is this an indication that you're seeing some possible data points there in the interest from customers and as such is confident in kind of slightly ramping your investments in that area or... Any caller would be appreciated. Thank you.

I can answer first on OPEX. I don't believe the number of employees is pretty flat compared to last quarter. I think it's more an effect of capitalization and maybe vacations, etc. So in overall, OPEX in that business is pretty stable compared to last quarter.

Yes. And I would just say generally that we are confident in that business and these technologies. We are seeing the strong design activity. We are even seeing strong design activity with industrial players, which is a bit of a different type of category. Customers which are coming to Nordic at the moment. So we are positive on that.

Thank you. I'll jump in the back of the queue.

Thank you, Christopher. The next question will be from the line of Harry Clayclough from UBS. Please go ahead, Julian, and I'll be unmuted.

Good morning. Thanks for taking my question. The first is on industrial market, and you're seeing a pretty solid sequential improvement in that market. And that kind of Pretty in contrast to what we're seeing across the industry where the industrial down cycle is a bit more protracted than they were expecting. And I was wondering whether you could give some color on what you think is driving that. Is it purely just different product exposures or is there something else you would like to call out?

I don't think we are going to speculate too much about the market driving factors at that level. But I think overall, we do see, as we comment, underlying demand improving and the market stabilizing. Having said that, we also see that even the market is wearing and there is a bit of a mixed picture here. And industrial is probably still growing. one of the slower areas as you can see from from the overall numbers and and also geographically it remains slower in in europe for us compared to the us and asia at the moment got it and then maybe just one follow-up on that that comment on asia um

I know kind of in the past few years, you've kind of deprioritized some customers in China slightly, given the supply constraints that you had. And I'm wondering whether you could just comment on that region specifically, whether you've seen demand coming back at all or whether it's still stuff there.

Right, right. Yes, we actually have quite a positive revenue increase in China in Q4. And that is compared to a flat development during 2023. So it's probably early to draw conclusions based on this, but it's a positive in China for us at the moment.

Great, thank you. Thank you, Harry. The next question will be from the line of Olivia Honeychurch from Jefferies. Your line will now be unmuted.

Hi, thank you for taking the question. My first is on the inventory write-down that you recorded in the quarter. So you wrote down $10 million of obsolete inventory and you've said that's about a third of the existing inventories that you have. Is there a risk that you have to pit through further write-downs in future quarters particularly if you are going to start selling more of that cheaper N151 product?

This is our best estimate based on the current forecasts we have, the mix of the NRF60, the existing one, and the NRF51, how we see that ramping. So we believe this is a good estimate based on the shelf life of the products we have.

We can add that we are following a cautious policy in this area. And what we do on the long-range inventories should not be compared to what we have on inventories on short-range, which has a much higher turnover at the moment.

Okay, that makes sense. Thank you. And then my second is on the market share, which you showed in your presentation, Dick, slightly in Q3. I think Q2, sorry. Can you talk about why that was? I know previously there were concerns that you're losing share at one of your large healthcare customers, which I think you did a good job of disproving in your Q1 presentation. But also there was concerns around losing at one of your proprietary customers. So I just want to get a feel for what led that slight dip in Q2 and how you expect that number to trend in the next few quarters.

Thank you. Right, right. Thank you. No, it's a good point to bring up. I think we have seen these numbers as obviously we are following them on a month-to-month basis. We have been presenting them on a quarterly basis. We're typically seeing these numbers ranging between The mid 30 percentage levels to the mid high 40 percentage levels. So I think this is absolutely extremely strong as we assess it and in line with our expectations and And even as you see, if you look at the last 12 months and smoothen out the curves a bit, it's an increase. And we are quite assured that we are growing and actually winning at least our fair share of the market at the moment.

Of the science, of course.

Yeah, of the science. We are now talking number of designs and number of certifications.

Fantastic. Thank you.

Thank you, Olivia. The next question will be from the line of Rob Sanders from Deutsche Bank. Your line will be unmuted.

Yeah. Hi. Good morning. My first question would just be on the ASP uplift that you expect from the 54L versus the 52. I was under the impression that 52 is your your biggest high volume runner today. So I'm interested sort of what is your anticipated sort of pricing uplift from that new product? Thanks.

Yes, thank you. It's a good question. And clearly we don't want to disclose and discuss our pricing policies and strategies here. But I think what we can say is that the 54 series presents a combined and overall a wider range much much much wider range of applications compared to what we have had overall with the 52 series such that we are covering actually even even lower cost products compared to what we currently have as well as much much more complex much more advanced and much more powerful and highly integrated products with the high-end 54 which is covering a wider range ASP wise.

Got it. And just a question for Paul. Could you just remind us, when you say Q4 seasonality, it sounds like that's going to be down sequentially from Q3. Should we look at the sort of average from 2015 to 2019 when you talk about typical seasonality? Because obviously the last few years have been atypical. So I'm just interested to understand what we should use as a kind of rough guide for Q4 on Q3. Thanks.

So first of all, we don't want a guide on Q4, so I don't want to give that number. But I think it's good to look at historical numbers pre-COVID, because as you said, during the COVID period, it was not typical. So go back to pre-COVID. 2021 and look at the numbers. And also remember, we have a strong consumer base. PC peripherals is a very strong market for us now. So I'll go back and look at the previous numbers.

Great. Thanks.

Thank you, Rob. The next question will be from the line of Stein from ABG. Please go ahead. Your line will be unmuted.

Good morning. It's a logo from ABG. I had a question on cellular. You say that you're seeing increased design activity and traction within cellular IT. If you could say something about what type of product applications this is and Previously, you've announced at least more kind of startup or smaller companies adopting this technology. Are you now seeing also that larger companies are looking at this technology? Thank you.

Yeah, thank you. It's a good question. Obviously, a bit limited what we can and would share on the area. I would say that we are seeing a lot of, we're continuing to see a lot of trackers and positioning type systems designing with our products. We are seeing increased activity within metering, which typically would be water, electricity, gas meters. And we do see some industrial players in that space designing with us.

Interesting, thank you. And one follow-up to that, is that then on the new 51, 9151, or is that most of the design is coming on still on the 9160?

I would say that And that's one of the reasons why we also do the write-down on a lot of the new designs and the current design activity we are talking about is coming on the 9151, where it's a smaller product, it's more energy efficient, it's a bit lower cost. So it is a product that quite a few of our customers have been aware of and designing towards for some time. And we are getting very encouraging feedback on the 9151 at the moment.

Thank you very much.

Thank you. The next question will be from the line of Christian from Arctic Securities. Your line will now be unmuted.

Thank you and good morning. I just want to dig in a bit to you mentioned improved or higher demand, in which I think that external data points are a bit more ambiguous. Just to be clear, are you referring to demand for existing products or does it include new assignments ramping as well? Or do you give any more color or clarification of these comments, please?

Yeah, I think it's always a combination. So it's always a combination between existing customers having increased demand with their existing products, existing customers with new designs, and new customers with new designs. So that is a mixed picture where it's really hard to specify that overall. We have a very high loyalty and loyal customer base, I would say, within Nordic, which is great. They are continuing to design with us. But we also see that we are onboarding new customers and particularly with our new and most recent technologies. We have a lot of excitement also with new customers.

Okay, thanks. So just to follow up on clarification, so you're mostly referring to the general demand from your customers, excluding the change in the sort of corrections?

Yes, that's correct. I think we can answer that very clearly. Thank you.

Yeah, thanks a lot.

Thank you, Christian. The next question will be from the line of Stefanovic from Kepler Chevrolet. Please go ahead. Your line will be unmuted.

Yes, hello everyone, and thanks for taking my question. On the healthcare business, the business has increased substantially on a sequential basis, but was still largely done on a year-on-year basis. How do you see the dynamic moving into the third quarter? And have you seen any change in the market share at your main customer in the healthcare business? That would be my first question. Thank you.

Yeah, I think, as we've said previously, we do not comment specifically on customer projects and potentially also what other semiconductors or commentary around other companies. I think it's very clear for us that we have a very strong, good, long-term partnership with our largest and key customers also around in this case, as you related to the healthcare market. And we do, though, see that For Nordic, having so many customers as we have in this area, it is dependent on a relatively small number, still a number of customers in this segment. And that is making it varying a bit more quarter to quarter compared to other and larger areas like our consumer segment, which we report on.

Okay, thank you. And my follow-up is on the ASP trends currently on your main market. Have you seen any kind of acceleration in the price competition today? And how do you see the fund re-cost moving those days? How do you see prices and fund re-cost? Thank you.

Yes, I think as we see that we now are back in a much more balanced situation between demand and supply in the market. Semiconductors overall and generally is a very competitive market. So we do see normal price discussions and price pressure overall. You can also refer to our... our underlying gross margins and what is our targets for the time being and coming time, which relates that we are obviously also working on our cost basis and competitiveness and cost basis are two areas we are focusing at all the time, obviously. Thank you.

Thank you. Thank you. As a reminder, please press five star to ask a question. The next question will be a follow-up from the line of Christopher from BNP. Your line will now be unmuted. Christopher, are you here?

Yeah, I'm here. Can you hear me?

Yeah, we can hear you. Go ahead, please.

Cool. So just having a look at your balance sheet, I think it was in Q423 that you moved around $5 million of the prepayment to global foundries to current assets. That level seems to be unchanged at this point. Is it fair to assume that like ballpark, that indicates that the initial revenue you're expecting this year is around $10 million contribution or is there anything wrong with that way of looking at it?

We do every quarter. Yeah, I understand. So every quarter we do evaluation expected and looking at how we are going to utilize the prepayments over the next 12 months. We've done an updated evaluation and it's pretty unchanged since last quarter. So meaning that our expectations are unchanged for the next 12 months compared to last time. I think it's difficult for you to exactly calculate what our plans are for the revenue. So I think you'll have to come back and see when we start recognizing revenue there, how it turns out.

Sure. Okay. Thank you. That's all. Thank you, Christopher. As no one else has lined up for questions, I'll now hand it over to Stil for any concluding remarks.

Thank you. Thank you, Patrick. We are now concluding today's Q&A session, and we appreciate that you were actively participating. Thank you.

This now concludes the conference call. You may now disconnect your lines.