Nordic Semiconductor Ord

Welcome to Nordic Semiconductor Q3 2024 financial presentation. During the presentation, all participants are in a listen-only mode. Afterwards, there will be a question and answer session. To ask a question via the conference call, please press 5 star on your telephone keypad. To withdraw yourself from the queue, please press 5 star again. I will now hand it over to Stiel. Please begin.

Thank you, Keld. And good morning, everyone. This presentation is being recorded and will be available on our Nordic website in the investor relations section. You can also find our earnings press release, quarterly report, and presentation on the IR web page. Joining me today are our CEO, Vegard Volland, and CFO, Paul Elstad. They will be discussing our latest financial results and providing insight into recent business development. After the presentation, we will begin the Q&A session. During this time, we will accept live questions via the Q&A dial-in function. For dial-in details, please refer to the earnings call invitation available on our IR site under stock exchange notice. Please note that the dial-in information is online.

Welcome to Nordic Semiconductor Q3 2024 financial presentation. During the presentation, all participants are in a listen-only mode. Afterwards, there will be a question and answer session. To ask a question via the conference call, please press 5 star on your telephone keypad. To withdraw yourself from the queue, please press 5 star again. I will now hand it over to Stiel. Please begin.

Thank you, Keld. And good morning, everyone. This presentation is being recorded and will be available on our Nordic website in the investor relations section. You can also find our earnings press release, quarterly report and presentation on the IR web page. Joining me today are our CEO, Vegard Volland, and CFO, Paul Elstad. They will be discussing our latest financial results and providing insight into recent business development. After the presentation, we will begin the Q&A session. During this time, we will accept live questions via the Q&A dial-in function. For dial-in details, please refer to the earnings call invitation available on our IR site under stock exchange notice. Please note that the dial-in information is only necessary if you will ask questions. As always, the presentation contains forward-looking statements which involve inherent risk and uncertainties. Actual outcomes may differ materially from those statements expressed and implied. We strongly encourage you to review our detailed Q3 quarterly report and the Q23 annual report for more thorough understanding of the risks and uncertainties that could affect our operation. Without further delay, I now turn the floor over 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 get right into the main takeaways of the third quarter. Revenue amounted to $159 million in the third quarter, which was close to the midpoint of the guiding range, and an increase of 18% from the same quarter last year. The year-on-year improvement reflects generally increased demand in the consumer segment, whereas the increase from previous quarter was supported by normal seasonal effects. Gross margin came in just below 50%, and we report a positive EBITDA of $16 million. Looking ahead, we are guiding for revenue between $130 and $150 million for the fourth quarter, reflecting a typical seasonal pattern with lower shipments in fourth quarter than the third. Gross margin is expected to remain around 50%. The revenue split between the top 10 customers and the broad market has stabilized. While we are maintaining very strong relationship and positions with our key customers, we have also made it a high priority for Nordic to regain traction in the broad market. Turning to design launches, we remain the clear market leader with about 40% market share in terms of end product certifications and five times as many designs as number two. Over the past year, a total of 509 designs with Nordic inside have been certified. As we told you last time, use of data from Bluetooth SIG is being restricted and thus we have modified the way we report this data this time. As always, our overview of customer product launches show a wide selection of products, this time ranging from monitoring of coolers and freezers, Wi-Fi modules, to smart locks, audio television streaming, and to human location and fall tracking. It's good to see examples of customers buying multiple products from us, like the Matter over Wi-Fi, SOC and Wi-Fi smart lock, which deploys both a 5340 Bluetooth SOC and a 7002 Wi-Fi module. Or the Salisbury tracker using both a 9160 cellular SIP and an NPM 30 power management IC together with our NRF cloud software solutions. Looking ahead, we are now fast approaching commercial launch of the NRF54 series, with the first products being launched at the Elektronika Industry Fair in Munich in November. Most of our key customers and many broad market customers are already developing products with the 54 series. While the ramp will take some time, we see solid proof points of a strong and very competitive position for these products. We are beginning to ship both the 54L and the 54H products in first volumes now in Q4. And to repeat, the 54H is a high-end quad CPU SoC for high-performance IoT products and it's manufactured on Global Foundry's 22nm process technology. The 54L series is a high-performance dual CPU SoC based on TSMC's 22nm technology and is a logical successor to the NRF52 series. Both families are delivering complete system-on-a-chip integrations of MCU control and compute systems, integrated memories and security, and with best-in-class power consumption and, of course, radio performance, as well as being supported in Nordic's world-class development ecosystems for software and design tools. These products are going to become great growth drivers for us in the years to come, and we are really looking forward to these launches. Finally, before I leave the microphone to Paul to take you through the numbers, I just want to mention the possible acquisition of Novelda that we are currently evaluating. Novelda has built an interesting technology position in ultra-wideband, which could complement our leading offering within multi-protocol Bluetooth. This has interesting applications within presence and precision sensing, as well as ranging. We have started the due diligence process, which we plan to complete by the end of November. And until then, we are not going to go into more details about this potential possible transaction.

Thank you, Vegard. I'll now go to the financials for Q3 2024. In Q3, our revenue was the highest we have had since the peaks during 2022, and we're finally back to both year-over-year and quarter-over-quarter growth. Looking at our revenue for the third quarter, we overall see an 18% year-on-year increase from 135 million in Q3 2023 to 159 million in Q3 2024. As communicated at our Q2 presentation, the improvement comes as a result of increased underlying demand driven by strong key customer numbers as well as the effects of the continued high design win ratio that we have had during the last years. In addition, Q3 is also the seasonally strongest quarter, and revenue increased by 24% sequentially from 128 million last quarter. The year-on-year increase mainly reflect higher Bluetooth revenue, which increased by 19% to $143 million. Preparatory grew 18% to 12 million, which is the highest level since Q4 2022, driven by strong PC accessory and gaming markets. Nordic sees increased design activity and traction in cellular IoT, especially within industrial asset trackers and smart metering, as discussed at the Capital Markets Day. However, there was a reduction in distributed inventories in Q3, and reported long-range revenue was low at $2.5 million. The underlying revenue is on par with previous reporters reported. Turning to the end user markets, we see the strongest growth in the consumer with 35% increase versus last year and 31% versus last quarter. Consumer is by far the largest end user market, accounting for 69% of our total. This is up from 65% last quarter. The solid numbers reflect improvements across most of the consumer customer base, but especially with some of our key customers in this market. Revenue from industrial market was relatively stable, with an 8% increase from last year and a slight decrease of 3% versus last quarter. Industrial is the market where the inventory levels have taken the longest to normalize. While demand from the industrial sector is picking up somewhat in the US and in Asia, it still remains slow in, amongst others, Europe. Healthcare is showing strong revenue of $21 million in Q3, and although we saw a decline of 21% from the extraordinary high levels in 2023, it was 41% above the previous quarter. As commented earlier this year, we expected higher levels in Q3 compared to earlier in 2024. This market represents a key growth opportunity for Nordic going forward. But as we state in the report, this segment is dependent on a relatively small number of customers and hence prone to wide quarterly variations. Turning to gross margin, there's not much to say about this in the quarter. The gross margin was roughly in line with the guidance, although it slipped slightly below 50% in the quarter. And as always, the variations mainly reflect changes in customer and product mix. We, however, maintain a long-term ambition to keep gross margins above 50%. Now turning to the operating model performance in Q3. As communicated on our capital market stay, our operating model is set up with an ambition to move towards an EBITDA margin of around 25% over the next five years. However, our organization and operating model is obviously geared towards a significantly higher revenue level than what we've seen during the last year. Despite improving revenue, we are still spending more than 26% of revenue on R&D compared to our operating model target of 15-20%, and 13% on SG&A compared to a model target of less than 10%. Nevertheless, the EBITDA margin in Q3 is a significant improvement compared to the previous couple of quarters, but bear in mind that Q3 is still our seasonally strongest quarter. To achieve our longer-term MBTA margin targets, we're working along three axes. First, we need to definitely grow our revenue. Secondly, we need to support our gross margins. And third, and contain costs to benefit from operational leverage as our revenue grows. We are going to deliver on all of these accounts over the years to come. Now turning to cash cost development. Looking at costs from cash perspective, we saw a year-over-year increase of 7.6% in the third quarter, an increase of 5% compared to the previous quarter. Payroll increased 13% year-over-year, despite the 10% reduction in the number of employees over the past year to 1,383 at the end of Q3. This is down from 1,550 at the end of Q3 2023. The increase in salary is explained partly by high salary increase in 2024 after a salary freeze in 2023, indicating a relatively normal development over the past two years. The 2024 figures also include higher accrual for variable pay compared to 2023. And also a reminder that in 2023, we actually had a reversal of the accrual for variable pay, resulting in a double impact versus this year. Other costs are relatively stable, reflecting that we have managed cost savings in an inflationary environment. We will continue to focus on adjusting our spending level to support margins also going forward. As communicated at the CMD, we target flat OPEX also in 2025. The underlying capex remains low. We saw continued low spending level also in the third quarter of 2024 with $3 million in capex or only 2% of revenue. This was up from 2 million a year ago and compared to 2.5 million last quarter. The low capex reflects that we are still utilizing the high investments in test capacity made in 2022 when we were geared for significantly higher revenue levels. Current capex is therefore mainly IT equipment and smaller R&D investments in lab, etc. Finally, I'll turn to our cash flow. You can see that we generated a total cash flow of approximately $3 million in Q3. That's the total cash flow. The operating cash flow was $14 million during the quarter, which compares to an outflow of $14 million in the same quarter last year. The operating cash flow was generated despite the continued increase in working capital of $8 million, mainly as a result of higher inventories. Inventories increased $11 million in the quarter to $181 million, which is up $80 million versus last year. We commented earlier that we expected a decline in inventories during the year. However, we continue to strategically source materials to have capacity for future growth. The value of inventory at quarter end will fluctuate some due to lagging timeline of arrival of wafers and customer shipments. However, we still believe that the inventory levels will reduce going forward, but remain above pre-pandemic levels. Networking capital compared to revenue remains high at 45%, but we're moving towards the 25% level when we reach higher revenue. With that, I'll leave Mick back to Vegard for his closing remarks.

Thank you, Paul. At Nordic's Capital Markets Day in September, we presented our plan for driving profitable growth throughout the decade. I want to repeat some of the key messages here. In the established short-range business, we are a clear market leader and our goal is to outpace the growth of our serviceable market. which is supported by the upcoming launches of our groundbreaking 54-series technology and a very strong design activity with our key customers and our efforts to regain traction in the broad market. When we presented that ambitious long-term outlook, it was important for us at the same time to signal that we currently see modest growth in the short-range business in 2025 and accelerating growth from 2026 onward. That expression, modest growth in 2025, was used in the context of our long-term growth ambitions for the short-range business. Firstly, the 54 series will be a key growth driver, but it also takes some time for 54 products to be designed into our customer products and ramped up in production. Secondly, the markets have stabilized and we see a gradual recovery, but some segments are still slow and need more time to fully recover. Our figures show today that industrial is lagging consumer and we also see Europe lagging the US and Asia. We'll have to see how the market develops going forward, but we have no indications that we are losing market share. What we do know is that our design activity with our key customers is very solid and our Bluetooth SIG certification rate is stable at 40%. Our growth ambitions in the scale-up and early-stage businesses are even higher, with upcoming product launches and increasing design activity with our customers. So, summing up, this forms the basis of our long-term ambition to deliver average annual revenue growth above 20% on the group level through the decade, and to move towards an EBITDA margin of 25% within five years. We are very confident in our long-term strategy and our targets and we are looking forward to deliver on these over the years to come. Finally, our guiding principles remain clear. We provide guidance on revenue and gross margin for the upcoming quarter and we are not going to provide any more specific details for 2025. For the fourth quarter 2024, we expect revenue between $130 to $150 million with gross margin around 50%. That corresponds with a revenue growth of between 20% and 39% year-on-year in the fourth quarter. As we said on the Q2 results, we expect seasonally slower sale in the fourth quarter than in the third. And our guidance corresponds with a decline of between 6% and 18% from Q3 to Q4. With that, I believe it's time to open the floor for questions and over to you, Stil.

Thank you, Vegard. We are now accepting questions via the Q&A dial-in function. For dial-in details, please refer to the earnings call invitation available on our investor relations site under stock exchange notice. To maximize the number of inquiries we can address before market opens, we kindly ask that each participant limit themselves to one question and one follow-up question. I will now hand it over to our operator to begin the Q&A session.

Thank you. If you do wish to ask a question to the speakers, please press five star on your telephone keypad. If you find that your question has already been answered, you may remove yourself from the queue by pressing five star again. The first question we have is from Sebastian Stivovic from Kepler Chevaux. Please go ahead. Your line will now be unmuted.

Elaborate a bit on, yeah, can you hear me? We can hear you. Hello. Hello. Yeah, that's great. On the inventory, just to have a little bit of indication on where you are standing at your distributor on the end customers, both on, I would say, the short-range product and also on the cellular IoT because you have been affected by a kind of inventory correction in the third quarter. to where you are standing now versus historical levels. The second one is linked to the competitive landscape on Bluetooth Low Energy. You have this product transition ongoing with a gradual ramp only on the NRS-54 SOCs. How are you positioned to fight with your competitors over the next few quarters with limited volume from the NRS-54 and maybe slow interaction from the NRS-52? Thank you.

Okay, let's start on inventory. Maybe you want to start with customer inventories, and then we'll do distribution and Nordic inventories after that.

That's fine. Yeah, thank you, Paul. So, yeah, customer inventories, I think that to some degree is a mixed bag, but I think, as you can see, in our largest customers and in the consumer space, we believe that the situation has normalized, but It's still a mixed bag. We still have Europe being slower, clearly, and industrial being, clearly. And we do see individual customers having inventories as well. I think generally we see that inventories in our distribution partners are normalized on a general level.

And we had a comment that we, in the quarter, reduced inventories for the cellular products, but this is still very small in the total picture. As Vegard said, the total distribution limiter is now on what we consider normal levels. In relation to the Nordic inventory on Arno Brooks, I commented that it was on the high side at $181 million, also including the write-down of the cellular inventory. So in the cellular inventory hasn't really moved a lot since Q2, as revenue this quarter only was 2.5%. The rest of the inventory relates mainly to the Bluetooth products and are valid and normal products that we're selling every day. And the value of the inventory at quarter end will fluctuate some due to lag timeline of arrival and selling to customers. Then was the question on the competition.

On the product competitiveness, I think We feel we are in a very good position. We are confident. So if you look at the 52 and 53 series type products, those are kind of reflected in the Bluetooth SIG certification. And you see that we are very stable at the 40% level with our certification rate there. And we have read... Designs being re-certified and re-used, so to speak, with these type of products to a high degree still, I would have to say. 54 series is a very significant uplift in performance on multiple aspects. Lower power, higher radio performance. These are completely integrated product with Nordics unique memory technologies on board. So we are extremely confident on the 54 series moving forward and really looking forward to be starting the official and public launches with that in November. And it's going to be a phase where we are launching products sub-launches and major launches for a multitude of sub-families on the 54 series in the coming time.

The next question is from Christopher Watson from D&B Markets. Please go ahead. Your line will now be unmuted.

Good morning. Good morning, Christopher from D&B Markets. So, first of all, on the seasonality. So, You're going to now back to more, you know, just call it normal seasonality for Q4, but into next year, do you kind of see any reasons in terms of customer losses or anything like that, that would be there to kind of imply that Q1 should be more than type of the 10% sequentially down in Q1 than what has been normal historically?

Yeah, I think it's... Thank you. Thank you, Christoph, for a great question. I think it's clear that we see the important part of Nordic markets is stabilising and we see gradual market recovery. And as I commented on, it's still a bit of a mixed picture, but we do see consumer back to... back to a much more stable and solid situation for us where we have a very large part about two-thirds of our business is in that segment and that's also the main reason to drive the seasonality for us because you have certain aspects of of buying patents throughout the year in the consumer segment, as well as the way our customers typically launch their products. So we are not commenting any further on 2025 specifically, other than saying that we are still expecting in the current situation that we are going to see a seasonal patent launch. as has been the situation pre-COVID for Nordic Semiconductor.

That's helpful. Thanks. It's just that I kind of feel like your medical or healthcare space was holding up quite well, doing decently. In Q3, we know that there will come some headwinds from dual sourcing there in not so too distant areas. future so like into into q1 you're saying basically that you're you're only seeing normal seasonal dynamics and not really any significant uh customer losses or socket losses

Sorry, it was definitely not my purpose Christopher to forget that part of the questions. We are very confident and work closely with all of our key customers. We don't see any significant change in that picture. We don't see any losses as far as we see it. which is different. So we expect that segment to be continuing strong for us, and it's a segment which is important, and we are continuing to invest in the healthcare segment, clearly.

That's loud and clear. Thanks. I'll jump in the back of the queue.

Thank you.

Next up, we have Harry Blackhart from UBS. Please go ahead. Your line will now be unmuted.

Can you hear me?

Yes, we can hear you.

Good morning. Thank you for taking my question. So the first is on foundry pricing and specifically what level of price increases you're expecting from TSMC next year and whether you're confident in being able to pass that on to your customers.

Yes, we appreciate the question and it's an understandable question. We have clearly taken the position that our interactions and engagements with our key supply chain partners, including TSMC in this case, is not something we are sharing publicly. So we will not be going into any details on that side. What I think we can say, however, is, as we have been stating, that we are confident in our gross margin targets of 50% or above.

Got it. That's useful. And then my second is just on the design activity that you're seeing in cellular applications. for asset trackers and metering and just when you're expecting that to start translating to meaningful revenues.

Right, right. Yeah, that's a great question. We do see increased and improved design activity overall for our cellular products, which is good. And we also see a bit of a shift, as we have said, into more or less an industrial type approach. company customers engaging with us. These are extremely complex products with all the software, all the system solutions you have around these products with many times they include uh multiple multiple wireless standards like the cellular wi-fi ble etc so as you can imagine there is a bit of a design time to get these products designed in it's it does vary from customer to customer and I would say about 18 months is something I think we have been using for industrial-type products, and we are talking up in that space, maybe even a few months longer in some cases for our customers to design on their side and their end. We do see increased design activity and traction, and especially with our new NRF51 launch, which we… did release to production now in the third quarter. That's something which is really exciting for us in the market at the moment.

That's very helpful. Thank you, Vegard.

Thank you.

The next question is from Oliver Pisani from Carnegie. Please go ahead. Your line will now be unmuted.

Thank you, and good morning. My first question was on the OPEX side. Do you consider the current OPEX that we see in this quarter a run rate that we can annualize, or were there any temporary effects? I've always commented about, for example, high R&D investments ahead of Q4 product launches.

So I think it's correct. Q3 is pretty normalized. The effects comparing to last year with variable pay and salary increase is sort of out. So if you take Q3, I don't foresee a lot of changes going into Q4. So that's correct. Everything should be included in Q4 versus Q3. So correct.

All right. Thank you. And then perhaps the second question, I mean, you say that you see this inventory build up and you continue to source strategic inventory to drive growth. At the same time, you just basically downgraded the guidance, just expecting modest growth for 2025 below 17%. How do you square those two actions? Yeah.

Yeah, thanks, Oliver. It's a great question, and we can both help each other out on that a bit. So I think it falls a bit in the category, Oliver, of supply chain management and our interactions with our key suppliers. And the timeline of that may be... a bit different from the exact, let's say, output throughput from the company. And there might be reasons for that. And these are sometimes reasons we don't want to be sharing. Could be customer-related, could be supply chain-related. So I would say, in general, we don't want to share more information in our supply chain interactions. We do have... very solid relationships and interactions with our key suppliers there and are extremely happy with the picture which we now have going forward with with products from the two key leading foundry partners of the world very good thank you thank you

And the next question is from Rob Sanders from Deutsche Bank. Please go ahead. Your line will now be unmuted.

Yeah, good morning. I guess the first question is for Paul. Just given your kind of budget for next year, do you expect to break even, whether at the EBIT or net profit level? And I have a follow-up. Thanks.

We're not going to guide for next year. Rob, you know that. But as Vegard has said several times, of course, profitability is our key metrics going forward. He's going to turn the company to be profitable. I think that's what we're going to say on that point.

But are you intensifying cost reduction efforts or are you just working through the existing plans

We're currently working on the current plan to drive profitability in the company.

I think we're on that item, Rob. It's also fair to say that we are saying that we expect OPEX to be reasonably flat in the coming time.

Okay. And then just to follow up on China, you flagged a pickup in the third quarter in China, the last set of results. Has that pickup sustained itself into the fourth quarter? I'm just interested in any commentary that you can give, whether it's on the channel or the demand side. Thanks. Right.

Yes, I think we have seen new design wins, new design activity coming for Nordic in China throughout 2024 after a bit of a flat development in 2023. And we do see that that's continuing, Rob.

Yeah, so the improvement we commented on in Q2 versus what we saw in 2023 is absolutely still valid.

But still not back to here. historical level spits spits significant significant versus 23. Thank you.

The next question is from Stein Lundgaard from ABG. Please go ahead. Your line will now be unmuted.

Good morning. I was wondering, with the... commons over modest growth in 2025 and then you still expect to have over 20% growth for the next few years, you would need some sort of pickup in 2026, 2027. Can you say, do you already have now at this point some concrete design wins on the 2054 that are meaningful, that gives you some sort of visibility about this pickup in growth in 2026, 2027? Or is that

still too early at this point. we we are the sign customers the interaction between ... ... ... ... ... As I said, For products.

I would say typically actually launching in the timeframe of between one to three years out in time. So we are working on design lines for certain programs which are fairly long in the design interaction with our customer base. So we do see strong activity for 54 series products which are going to be launching throughout next year. as we have said, accelerating into 26 and onwards.

Thank you. Can you give some flavor on that? markets that you're I'm in activity at all. It's forward. for other specifically it's it's It's a wide range of applications.

It's a wide range of customers working the 54 series with us. And as I've also said, a lot of our current key customers as well as broad market customers are engaging with us on the 54 series.

Okay, thank you very much. Thank you.

The next one we have is Oliver Lawn from Bank of America. Please go ahead. Your line will now be unmuted. Good morning. So earlier you talked about normalcy.