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Welcome to the Nordic Semiconductor Q1 Conference Call. [Operator Instructions] I'll now hand it over to Stale from IR, please begin.
[Audio Gap] website, the IR section. On the IR webpage, you will also find our earnings press release, quarterly report, and presentation. Joining me today, we have CEO, Svenn-Tore Larsen; and CFO, Pal Elstad. They will be discussing our latest financial results, as well as review recent business activities. After the presentation, we will open up for Q&A, both as call-in and written question via our webcast. We will start with the call-in questions and then follow up with the questions from the webcast page. As usual, the presentation contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those expressed or implied in such statements. We encourage you to review our full Q1 quarterly report, and also annual report for 2022 for more information on risks and uncertainties that may affect our business. Without further ado, I hand over to our CEO, Svenn-Tore Larsen.
Good morning, and welcome to our presentation of Q1. I'm Svenn-Tore Larsen, and I have with me, as Stale said, my CFO, Pal Elstad. After 3 years of strong growth, we now see a tougher market and declining revenue. Total revenue was down 21% year-on-year and Bluetooth revenue was down 13%. This reflects both weak demand in general, with also inventory reductions across the whole value chain. We had gross margin of 53% and somewhat increased costs, we ended up with an EBITDA of $15 million for the quarter. We expect a more or less flat development from Q1 to Q2, with revenue in the range of $140 million to $160 million, like we expected for Q1 and with gross margins above 53%. Looking further ahead, we're aiming for a return to revenue growth towards the end of the year, when customers are finished drawing on the inventories and step up purchases to meet end-user demand. As you know, wafer supply has been a major challenge for us for a long time, but with this current demand forecast, we don't believe there will be any constraints in the short term. Finally, on this slide, I will say that we continue to see a great long-term market opportunity, and we have to continue to invest. However, we also need to see and adjust our cost base to restore margin in this market and the amount of saving depend on the depth and the length of the slowdown in the market. As we have touched upon several times over the past couple of years, we see that our Tier-1 customers are getting bigger in our market. These have been great accounts to build up over time, and the success we have had with this customer is the main reason we've been able to grow, as we have done over the past years. As you can see, the top 10 customers continue to grow, although at a slower pace, and it is also slower pace than we have expected. As already mentioned, some of these customers are drawing down on inventories rather than buying new products, and with increasing concentration, we are obviously more vulnerable to individual customers. As we talked about throughout 2022, we have been working to align the size of the order backlog to actually delivering capabilities. As you can see, we have been getting closer in a weaker market, and order cancellation sort of doing the job for us. And we have also reduced the lead time now to all customers to more normal levels. The order backlog fell below last 12 months' revenue for the first time since late 2020. Given the supply-demand imbalance through '21 and '22, it's clear that the order backlog has not been a good indicator or neither a real demand or future revenue. And with the ongoing inventory adjustments throughout the value chain, this remains an issue also in 2023. We believe that information value here is limited, and we have therefore decided to discontinue reporting of the backlog from next quarter, and we also see that most of our competitors don't share that kind of information, so we are aligned with the industry. Even though our revenue and order backlog has declined in Q1, we are very confident that our strong market position remains intact and that we are maintaining our growth and continue to grow our market share. This is evidently clear when we look at the certification market share, which was high 46% in Q1 and 41% if you take the past 12 months. So we continue to win designs. Unfortunately, we see that the production and delivery to end-consumer is significantly less than what our customers forecast. If you look at consumer-customer product launch, we continue to see a wide variety of both Bluetooth products, cellular IoT products and products combining both Bluetooth and cellular, which we think is exciting. Turning to cellular; we have said on the past 2 quarter presentation, that a tougher economic environment has created a more uncertainty short-term outlook. As you can see in the graph, we are seeing relatively flat annualized revenue over the past year. However, our project base continues to expand and several of these projects are starting to go into commercial traction. So while the current economic climate poses some challenges, we remain positive regarding the outlook for this segment going forward. Especially if you look into the verticals, we are winning designs today. Another positive is that we have started on our journey to commercialize our Wi-Fi business. The first product is nRF7002 is now generally available, and we are working to build out the module partner ecosystem. We already have a strong pipeline of projects with Wi-Fi, in applications like Smart Home, Matter projects, building automation, and asset tracking, and other verticals. And finally, we have now announced the 54 family, our fourth generation low-power wireless system-on-the-chip. It's taking connectivity to the next level. This is more than a worthy successor to the 51, 52 and 53 Series, and we have really raised the bar once again. Actually, here you can see a very happy COO (sic) [CTO], Svein-Egil, with the very first samples of our -- no, CTO, our first samples of our 54H20 preview kit. Based on GlobalFoundries, it's a leading 22-nanometer process node. This product will improve our offering on all main parameters, and we are excited to have shipped our first development kits to a handful of customers now in April. Together with our clients, we expect to lay the foundation for a new wave of revolutionary IoT end-products based on these chips. We are going to enable innovative application that have not been feasible until now. The nRF54 offer unique combination of next-level performance and is provided by superior MCU processing power. It has the best-in-class radio, it has state-of-the-art security and this is a key in many IoT application. High efficiency, and obviously, ultra-low power consumption. Much lower than any other exciting products and all in the highly integrated and very compact form factor is based on 22 [indiscernible]. This is a product that will enable our customers to make new products that haven't been possible before and to do it in a cost efficiency. Since we are saving a lot on the total bill of material by integrating more functionality on much smaller real estate, this is important for customer bill of material, it's more important than cost of individual components. This is the future in our industry. And with that, I will leave the microphone to Pal, who should take you through the financials.
Thank you, Svenn-Tore. As Svenn-Tore already mentioned, revenue decreased 21% year-over-year in the quarter, compared to last quarter, revenue declined 24%. Revenue came in within the guided range of $140 million to $160 million that was given during the Q4 2022 presentation. As commented on the Q4 presentation, the decline in revenue can mainly be explained by a general demand slowdown in proprietary and consumer products. Bluetooth revenue amounted to $131 million in the first quarter '23, a decrease of $13 million from $150.5 million in the first quarter last year. As I mentioned, the main reason for the decline is weaker demand in the broad market, as well as lower deliveries to some Tier-1 customers due to inventory adjustments. Bluetooth share of total revenue was 90% in Q1. This is by far the highest number recorded for Nordic. Proprietary revenue was $8 million in Q1, which was a decrease of 70% year-over-year and down 34% from the previous quarter. The decline mainly reflects lower demand for PC accessories and other home office equipment, after boost during COVID, as well as the technology migration to Bluetooth low energy. Cellular IoT reported revenue of $4.7 million in the quarter, which was a decrease of 28% from last year, and 6% lower than the previous quarter. As Svenn-Tore mentioned, we have a lot of new exciting technologies like PMIC and Wi-Fi. We are seeing increased design-in and will start reporting details when we have meaningful revenue in these technologies. Looking at sales from another perspective, in terms of end-user market, we see that the overall decline in revenue mainly occurred in the consumer market, whereas industrial and healthcare continued to grow at a reasonable healthy pace. Consumer is still our largest market with 48% of total, but this is a sharp decline from previous quarters. Last quarter it was 57%, and even higher earlier in 2022. Consumer is down 43% compared to last year and 36% compared to last quarter. As discussed earlier, this is a mix of reduced proprietary, slowdown in certain Tier-1 customers, and low demand amongst the broad market. These are customers that were very negatively impacted during the wafer constraint situation. Industrial continues to be strong and is up 14% compared to last year, and only slightly down compared to last quarter. Healthcare with $24 million showed strong growth both compared to last year and last quarter, and is reflected in the ramp-up of key products from our customers. Turning to gross margin, we delivered a gross margin of 53.3% in Q1, sorry, this year, slightly above the guided range, which was 52%. This was lower than Q1 last year. However, Q1 last year was very special with price increases ahead of supplier pricing, which did not take effect until later in 2022. We do not see the same effect this year. Compared to last quarter, the gross margin increased by -- we had a small increase in the gross margin. This increase is a mix of the fact that in Q4 last year, we took a write-down of $3 million, which impacted gross margins in Q4 by 1.6%. This is offset by higher sales to Tier-1 customers, and very low proprietary revenue in Q1 this year. We are expecting gross margins to be above 52% also for Q2 2023. At the end, we are reiterating our long-term ambition to maintain gross margins above 50%. As communicated earlier, our operating model is very sensitive to revenue and how revenue develops. Last year, we saw EBITDA margins close to 30%, driven by high revenue growth, and abnormally strong gross margins. A combination of lower revenue and gross margins shows how sensitive the model is, and we, in Q1, reported an EBITDA margin of 10%. Total R&D is up from $37.4 million a year ago to $43.2 million this year. So up from 20% to close to 30%. Absolute numbers increased in all technologies, as we're in the final phase of commercializing new exciting products. SG&A up to almost $20 million from $17 million a year ago. The increase is mainly explained by very low travel and exhibition activity at the end of COVID last year. Both R&D and SG&A have already been favorably impacted by stronger U.S. dollar, as a significant part of these costs are in NOK and Euro. Although we continue to invest, we are, of course, monitoring the situation closely. Total cash operating expenses amounted to $64 million in Q1 '23 when adding back capitalized development expenses and deducting depreciation and equity-based compensation. This compares to $55 million a year ago, and $61 million last quarter. Compared to last quarter, the increase is 18%. $45 million of cash operating expenses relates to payroll. This is 13% higher than last year. This is directly linked to the 20% increase in employees, so we have now 1,513 employees. Underlying, we have a positive FX effect of around $4 million. So adjusted for this, salaries would have increased by 22%. Although we already in late 2022 started the reduction in hiring, part of the increase in number of employees from last year and last quarter, is a result of the acquired businesses that happened late in '22 and late -- and early in '23. Other OpEx increased from $15 (sic) [$15 million] in Q1 last year to $20 million this year. The year-over-year increase mainly reflects more travels at the back end of COVID and higher tape-out activities due to many new products in the pipeline. The Company will continue to invest in future growth opportunities. However, in view of the challenging short-term revenue outlook, targeted cost initiatives, expect to impact financials from the second half are currently being assessed. The impact is still being evaluated. However, we are amongst others looking at the current run rate and mitigating the effects of inflation in the economy. CapEx was $5.5 million in Q1 with investments mainly related to equipment, related to new product introductions that Svenn-Tore mentioned earlier. CapEx intensity overall remains below the previously indicated level of around 4% of revenue. Finally, I'll give some highlights on cash. During Q1, we decreased our cash balance by $146 million and ended up with a cash balance of $233 million at the end of March. Operating cash flow was a negative $30 million in Q1, mainly driven by increased net working capital. This negative $30 million is, of course, not including the $100 million prepayment that we did, related to ongoing initiatives to strengthen supply resilience and diversification. We saw an increase in net working capital of $40 million, mainly driven by higher accounts receivables and inventory, offset by reduced short-term liabilities related to employees. Net working capital in percent of revenue increased to 28%, compared to 22% last quarter. In addition, we spent $6 million in the quarter on the acquisition we announced in 2022. In addition to cash on the balance sheet, we still have an undrawn credit facility of $150 million. Svenn-Tore, I'll now turn back to you, so you can discuss the outlook for Q2.
Thank you, Pal. Just to round off quickly, let me repeat a few points. We remain firm believers in the long-term growth opportunities in this market. We continue to command very high market share in terms of design wins, and I'm very excited about announcing our 54 family, and this is really the next level of connectivity platform. Despite this, we are in a weak market right now. It's a weaker demand and customers are reducing their inventory, and we see it all through the supply chain. This means that we have to guide for revenue of $140 million to $160 million for Q2 2023, which is more or less flat from Q1, and we also expect a quite stable gross margin higher than 52%. However, we expect the revenue to pick up and look forward to return to year-on-year revenue growth towards end of this year. I think with this, I will hand over to Stale and start Q&A. Thank you.
Thank you, Larsen. We will soon open up for Q&A. To accommodate as many as possible before the market opens, I recommend that everyone only ask 1 question with 1 follow-up question. We will start with the call-ins, and then do questions that has been asked via our webcast page. I hand over to our operator to open up the Q&A.
[Operator Instructions] The first question will be from the line of Adam Angelov from Bank of America.
So firstly, just wanted to touch on what gives you confidence in your H2 recovery assumptions? Just given previously, you were looking at $1 billion for revenue in 2023, then a $1 billion run rate in H2, and now, pick up to positive year-on-year growth by Q4. So what's giving you confidence that -- in that? That's my first question.
I mean, we saw during Q1 increased uncertainty in the economic environment and product demand. Looking at our updated forecast of our customer feedback, we nevertheless see that Q2 revenue will be flat in Q1, and we also expect that the inventory ahead of production facility will come to an end, and the customers will continue to produce and need new parts from Nordic.
Okay. I mean, one quick follow-up to the...
Our customers' forecast is not reflecting the number of our -- customers' revenue doesn't reflect the numbers that we -- of component that we are shipping.
Okay. Okay. I see. I'm a little bit surprised on the inventory comments, because I thought proprietary and legacy Bluetooth was quite high inventory and kind of newer BLE was lower inventory. So surprised to see that you're calling out higher inventory there as well. Is that just reflecting the weaker demand that you've seen, so inventory has piled up faster than expected?
We're talking about inventory in the total value chain. So just -- so it's not just our end distributions, it's the entire value chain all the way through the retailers...
I think we see, if we go to retailers, they have significant inventory. So that's the challenge by not producing new products or significantly less.
Okay. Okay. I see. And just a quick -- sorry, just one quick follow-up to my first question. The H2 pick-up, is there certain products coming out that are supporting your H2 revenue, or is it more of just higher units of your customers' products that they're currently using?
I think the inventory challenges that our end customers have today apply to all verticals. So I think it's going to be a -- sort of raise the bar in all verticals.
Thank you, Adam. The next question will be from the line of [indiscernible] from UBS.
First one is just on pricing, and -- kind of around with the slowdown in demand that you're seeing, and has that changed the tone of the pricing conversations you're having at all, that you've been having with customers to start the year?
Could you repeat the question, please?
It's just around whether the slowdown in demand that you're saying has changed the tone of the pricing conversations that you've been having with customers to start the year?
So the question is the slowdown in the market, is that impacting pricing and how we can pass on the TSMC price increase to our customers?
I think, basically, we have implemented the increase to our customers already now in March.
Okay. Got it. And then a follow-up is just on China, and you obviously saw quite a big decline at the back end of last year and into Q1, looks like they're going to be low in Q2, is that something that you're expecting to come back in H2 or -- you're expecting that -- coming back to that level?
I think it's a bit early to say. However, Q1 was slightly stronger than Q4 '22.
The next question will be from the line of Christoffer from UBS (sic) [ DNB ].
This is Christoffer from DNB. Just wondering if you could give a couple of comments on the backlog and what duration -- what the duration is at the moment? Is it fair to assume it's only for the current year?
I mean, I think the important thing here is that we are not guiding on our backlog going forward. I mean, we are focused on winning new designs, but if you analyze the backlog today, I think you're going to see that we are adjusting our inventory due to weaker demand. We are accepting push out and also cancellation. And we expect this gradual normalization of lead times to end in a situation where we have 2 to 2.5 quarter of backlog, which is normalized. Most of the orders you see in the backlog today are for '23, but we will most probably pull some of them out in '24.
[Operator Instructions] The next question will be from the line of Oliver Pisani from Carnegie.
We touched upon this previously, but is it possible to give any additional color on -- to what extent this demand weakness is driven by inventory correction versus a structurally lower end market demand due to, for example, COVID-19 normalization? That would be my first question.
I think the inventory [indiscernible] inventory of the end demand. So basically, there is less consumer spending in consumer market, and that has not been sort of forecasted from our end customers, and now they see that it's piling up in front of their production facilities. And also, whatever been produced has not been taken out by us, consumers.
And then how do you think -- or how should we think about new hirings going forward? I think you've been running at sort of 40, 50 new FTEs per quarter in the last couple of quarters. How do you view that in light of this new environment?
What you see in the numbers is basically companies we have acquired throughout the second half of '22, which now are coming into a spreadsheet. And we have done freezing of hiring already now in Q4, we started that Pal?
Yes, and into Q1.
And obviously, we are -- continue to investing in our core business, but we will see that throughout the year, we will normalize this investment and try to do some cost savings, absolutely. And that will obviously also affect a number of employees.
Makes sense. And perhaps as the last one, just have to ask you, you will stop reporting order backlog, but shouldn't that begin to become more representative again as we -- as it normalizes going forward, I think that's the metric that many analysts and investors follow?
Yes, I think your logic is right. What we see is that, there has been extreme flexibility in our backlog, with push out and push pull-ins. And I think that as we see all these dynamics, it will confuse more than give you a good information. And on top of that, we see that none of our major competitors disclose similar information. So we think this -- the best will be to discuss this with analysts and have maybe another parameter.
The next question is a follow-up from the line of Adam from Bank of America.
Hopefully, that's okay to ask 2 quick follow-ups. Firstly on gross margins, so despite the weakness I guess holding up above that 52%, is there -- you had the price increases from TSMC now, and you said you've sort of passed them on. So is there any reason that would just kind of decline in the second half of the year?
Yes. So, we are increasing our prices, of course, offsetting the price increase from TSMC. We're looking into the second half of the year. The growth should also come from the broad market with significantly different gross margins than the large share of Tier-1 customers in Q1. So these 3 factors combined should make it possible to upkeep the gross margins we have today.
Okay. And the broad market growth, I thought it was more you're looking for Tier-1s to bounce back in H2. So is that just the same point, basically, inventories are too high across the supply chain, small customers, large customers, and so as that runs its course, basically all customers rebound in H2, is that what you're saying?
Yes, that's correct.
Okay. And then last one, so I know you're not really giving a quantification of the cost cuttings in OpEx, but just curious, I mean, directionally, would you say Q1 is kind of the high point of the year or how should we think about that?
No, I'm not saying that Q1 is the high point. I think it's very important that we have inflation going on. We see that from TSMC and those passing on and there will, of course, be adjustments in our salary costs also due to inflation. What I said in the presentation is that, we are trying to mitigate the effects of inflation on the run rate we currently have.
The important thing is to understand how we scale with revenue.
Yes.
All right. As there are no further question on this call, I will hand it back to Stale for any written questions.
Thank you, Patrick. Yes, we have gotten some questions on the web. We can start with Øystein Lodgaard from ABG, it's regarding revenue. When you say return to growth year-on-year towards the end of the year, does that mean in Q4 as a whole, or the run rate going into '23?
We expect to see revenue pick up already in Q3.
Then we have a question from Johannes Ries regarding revenue. How much your target of reaching the $1 billion growing around 25% annually has changed?
I think basically what we see is a situation that globally has -- global economy has contracted. We believe that the long-term projection still in place, we have to go through these difficult times we have just now.
Thank you. We have also a question from [indiscernible] regarding revenue. Can you elaborate on your strategy to drive demand from Tier-1 customers in second half of 2023? And how will this contribute to the Company's goal of returning to positive annual growth?
We obviously are dependent on our end-customers' customer. And we for sure know that volumes that been shipping from the factories today are at a low point, and it's important to see when it's going to pick up on consumer spending again. But we also know that there is something getting out of the fabs, and out of our end customers' inventories, and they have to continue to build and we think that in the second half, there isn't a huge amount in the inventory in front of the factories, that will contribute to growth.
Thank you. Another question from Øystein Lodgaard from ABG on revenue. Do you think the Q1 sales for proprietary is depressed due to weak demand inventory reduction? Or is this the new level we should expect post-COVID, as customers shift to Bluetooth low energy?
I think a good question. Because it is a mix, but we also see that there will be higher proprietary revenue going forward, but it depends on when the inventory correction is done at our customers.
I think it's clear that our revenue does not reflect the guiding from our key customers in this year, it's not the link between these 2 numbers.
It's a big mismatch between the revenue reported on the different verticals, and what we are showing here in revenue.
Thank you. Then we have a question from Petter Kongslie from SpareBank Markets regarding demand. What do you mean when you say that you do not expect short-term supply constraints? Have you been allocated more, but demand is not there or how should we interpret this?
Well, I think the fact that we already last quarter said, we will get more wafers in '23 than we got in '22, combined with the fact that we are shipping less in Q1 '23 versus Q1 '22. We are going to build up a die bank, which can support higher growth coming quarters and as we are guiding for the same, flat in Q2, it means that we're going to have more wafers available in Q3 and Q4.
Thank you. Then we have a question from Kristoffer Pedersen. In the consumer segment, do you see demand declining in all end markets, or are there some bright spots?
Basically, we see, I think down in all of the consumer, the bright spots are in industry, and industrial and in healthcare.
Thank you. Then we go over to backlog questions; Petter Kongslie from SpareBank 1 Markets. If you were to report order backlog in Q2 '23, is it fair to expect similar trends in Q2 '23? So if you were...
Yes, but we don't guide for backlog.
We never guide for backlog.
Okay. Thank you. And then Markus Heiberg from SEB. Why are you removing backlog as KPI considering supply should no longer be a constraint?
Basically, I guess, we answered earlier, given the current situation with large inventory adjustment, it means also both pull in and push out throughout the whole value chain, the order backlog does not reflect and give a good picture of the underlying demand. And again, as we also said earlier, we also see that none of our major competitors disclose similar information.
Thank you. And we have one question regarding supply capacity. Petter Kongslie from SpareBank 1 Markets. With a prepayment and increased wafer capacity, what is the revenue capacity in 2024?
We are not guiding for 2024. We are guiding quarter-by-quarter. But this is making us very resilient towards any other sort of changes that might happen in the wafer fab.
Thank you. Then we have a question regarding cellular from Rob Sanders, Deutsche Bank. At what point would you reconsider the wisdom of investing in cellular IoT? Can your DECT NR business potentially become a more fruitful sales driver of growth?
Based on current design wins, and I will say opportunities, we obviously believe that cellular IoT will be the first to show meaningful revenue despite, I think we have a 12-month rolling revenue of $24 million. It will take some time for us to get DECT, but we also have some exciting projects on DECT. But for the time being, we are going to see revenue on LTE before DECT.
Thank you. And then Petter Kongslie from SpareBank 1 Markets has a question regarding price increases. Whether there any price increases in Q1 '23, and have you factored in any price increase in the Q2 guidance?
Yes.
Thank you. Gross margin. Rob Sanders from Deutsche Bank. Can you discuss the impact of Tier-1 customers becoming much larger in the mix as we move into 2024? Will the ramp-up of nRF54 start in first half '24, and can it help to offset gross margin pressure from higher customer concentration?
So we'll start on Tier-1, absolutely. Tier-1s also have a mix of gross margins, some are higher, some are lower going into 2Q, second half of the year, of course, increase in Tier-1s will have a negative effect but on the other hand, as I mentioned, the broad market should also pick up in the second half of the year. Absolutely, going into next year, we will see effects of the nRF54. But I think it's too early to exactly give sort of indication on gross margins on the 54 products, as we are just starting to sample our customers on this project. That's why we said that we have underlying targets to have gross margins above 50% in the long run for the business.
Thank you. And then we have another question regarding gross margin. [indiscernible] from Arctic. How was the ASP development in Q1? And do you see any price pressure following the lower demand?
We've answered that question before. Yes.
Let me have -- and I think we are finished for Q1 and the Q&A.
Okay. Thank you.
Thank you very much. Then I conclude our Q&A session for today, and hand over to Svenn-Tore Larsen for closing remarks.
Thank you everyone for joining and listening in. And this concludes today's call. And I will see some of you today and speak to a lot of you during the next 2 weeks. Thank you.
Thank you.