In their Q1 earnings call, Nordic Semiconductor ASA (ticker: OL:NOD) reported revenues of $74.5 million, aligning with their forecasted range of $70 million to $80 million, despite a revenue decline attributed to distribution channel inventory adjustments. The company anticipates a demand uptick in Q2. They announced a company restructure into four product-oriented business units and introduced new executive team members. Nordic Semiconductor is committed to innovation, maintaining a significant market share in Bluetooth Low Energy, and expanding their cellular IoT offerings. The quarter ended with a negative EBITDA of $23 million and a gross margin of 48%, which is expected to rise to around 50% in Q2. The company concluded Q1 with a strong cash balance of $235 million and an available $200 million credit facility.
Key Takeaways
- Q1 revenue reported at $74.5 million, within guidance range.
- Negative EBITDA of $23 million and gross margin below expectation at 48%.
- Company reorganization into four product-focused business units.
- New executive management team members introduced.
- Strong position in Bluetooth Low Energy market; expansion in cellular IoT.
- Collaboration with Google (NASDAQ:GOOGL) on the Find My Device network.
- Anticipated recovery of gross margin to around 50% in Q2.
- Cost reduction plans in place despite increased R&D and SG&A percentages.
- Q1 cash balance at $235 million, with an undrawn $200 million credit facility.
- Q2 revenue forecast between $115 million and $135 million.
Company Outlook
- Expectation of revenue increase to between $115 million and $135 million in Q2.
- Gross margins anticipated to recover to around 50% in Q2, aiming for long-term maintenance above 50%.
- Focus on cost consciousness and inventory reduction in Q2.
- Confidence in long-term market prospects, particularly in cellular division.
- Initial revenues from nRF54 products expected by the end of 2024.
Bearish Highlights
- Decline in Q1 revenue due to inventory adjustments in the distribution channel.
- Negative EBITDA reported for the quarter.
- Gross margin fell below guidance, attributed to customer mix changes and cost allocations.
Bullish Highlights
- Strong cash balance and undrawn credit facility provide financial stability.
- High market share in Bluetooth Low Energy and expansion in cellular IoT offerings.
- Improved demand from Tier 1 customers and the broad market anticipated.
- Ongoing organizational improvements to enhance development program execution.
Misses
- Revenue and gross margin in Q1 did not meet company expectations.
- Increased R&D costs to around 50% of revenue, exceeding previous guidance.
- SG&A costs rose as a percentage of revenue, though reduced in absolute terms.
Q&A Highlights
- Vegard Wollan expects Q3 shipments to increase towards the end of the year.
- Anticipates a return to traditional seasonality patterns, with Q3 stronger than Q2.
- Recovery expected in healthcare revenue in Q2 after Q1's Tier 1 customer inventory adjustment.
- Nordic remains the leader in Bluetooth Low Energy market design wins, with market dynamics similar to pre-pandemic levels.
- Ambitions to return to a growth track and restore profitability, with potential portfolio focus changes.
InvestingPro Insights
In light of the Q1 earnings call of Nordic Semiconductor ASA, a closer look at the company's financial health and market performance through InvestingPro's real-time data and analytics may offer additional insights.
InvestingPro Data metrics show that Nordic Semiconductor ASA has a market capitalization of approximately $2.1 billion. Despite the challenges highlighted in their earnings call, the company trades at a high earnings multiple with a P/E ratio of 273.91, which adjusts to 203.95 when looking at the last twelve months as of Q4 2023. This could indicate that investors have high expectations for the company's future earnings growth. Additionally, the company's revenue has seen a significant decline of over 30% in the last twelve months as of Q4 2023, which aligns with the reported revenue decline in the article.
An InvestingPro Tip suggests that Nordic Semiconductor is currently holding more cash than debt on its balance sheet, which is a positive sign of financial stability and may be reassuring to investors concerned about the company's recent revenue and EBITDA performance. Another InvestingPro Tip indicates that analysts have revised their earnings downwards for the upcoming period, which could be a point of concern for investors looking at the long-term profitability of the company.
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Full transcript - Nordic Vlsi As (NDCVF) Q1 2024:
Operator: Morning all and welcome to this Nordic Semiconductor Q1 Presentation. This call is being recorded. [Operator Instructions] I would now like to turn the call over to Stale. Please go ahead.
Stale Ytterdal: Thank you, Patrick, and good morning, everyone. This presentation is being recorded and will be accessible on our Nordic website in the IR section. You can also find our earnings press release, quarterly report, and the presentation on the IR web page. Joining me today, we have CEO, Vegard Wollan; and CFO, Pal Elstad. They will be exploring our latest financial results and providing 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 functions. For dial-in information, kindly refer to the earnings call invitation available on our Investor Relations website. The dial-in information is relevant only if you wish to ask questions. As always, the presentation includes forward-looking statements that carry inherent risks and uncertainties. The actual outcomes may vary significantly from statements made or implied. We urge you to refer to our comprehensive Q1 quarterly report and the 2023 Annual Report for a deeper understanding of the risks and uncertainties that could impact our operations. Without further delay, I pass the floor over to our CEO, Vegard Wollan.
Vegard Wollan: Thank you, Stale. My name is Vegard Wollan and I'm the CEO of Nordic. And with me today I have a more familiar face to many of you, our CFO, Pal Elstad. As you know, I took over as the CEO at the beginning of the year, and it has been an eventful few months where I've had the pleasure to getting to know the Nordic organization, but also many of our investors, shareholders, and research analysts. So thanks a lot for many insightful conversations and I'm sure there are going to be many more. At the Q4 presentation, we guided for revenue of $70 million to $80 million with revenue of $74.5 million. We are delivering pretty much in the middle of that guiding range. The low revenue reflects that we have actively adjusted inventory in the distribution channel. Sell-through from distributors have been significantly higher in the quarter. The planned and needed distributor inventory adjustment are now predominantly behind us. Gross margin came in somewhat below guidance at 48% and Pal will give -- get back to the details there. But this relates to both mix -- customer mix, inventory adjustments, and the fact that we have a low revenue base in the quarter. OpEx was reduced around $4.5 million compared to the first quarter last year. But with lower revenue and gross margin, we report a negative EBITDA of $23 million for the quarter. The inventory adjustment are predominantly behind us. We do see improving demand now for our end -- from our end customers, both in the Tier 1 segment and in the broad market. At the same time, Q1 is a seasonally stronger quarter than Q2 -- Q2 is a seasonally stronger quarter than Q1. Thus, we are guiding for revenues in Q2 to come in between $115 million and $135 million for second quarter. We also expect our gross margins to recover back to around 50%, which is also the long-term target we have and are presenting. Before moving on to the details of the quarter, I would like to give you a little bit more flavor on the announcement we made earlier in April on the organization. On the Q4 presentation in February, I said that we have to have the best and winning products and roadmaps, and we need to deliver and improve our engineering execution to continue bring even more innovative products to the market. I also said that we have world-class engineers in Nordic, we have great employees overall, and we have a great innovation culture, but that we have potential for improved execution. We have now started a change process to organize the company into 4 product-oriented business units under new leadership, and I'm very excited to be welcoming the new members joining the Executive Management team. Oyvind Strom and Oyvind Birkenes, both bring extensive semiconductor industry experience on the business side, and have technology and strategic experience adding competencies to our team. They will take the responsibility for the new Short-Range and Long-Range business units, respectively. I'm also very pleased to promote Joakim Ferm internally as a long-term Nordicer, and Joakim will be taking responsibility for the Wi-Fi business area. The fourth business area is Power Management, or PMIC, where we will have Kjetil Holstad in charge, and Kjetil is another long-term Nordicer who already is responsible for our Strategy and Product Management on the Group level. As we are moving forward in a new direction, we are continuing to review and assess our portfolio roadmaps across all product families with the aim to sharpen the strategy in the product focus area to further develop our customer-oriented culture. We'll optimize our roadmaps and innovation and work to yield the best possible products for our customers, both for the Tier 1s and for the broad market. This might also lead to changes in our resource and investment allocation going forward as some of our most important project roadmaps might require more resources to shorten the time to market. That means that we'll have to prioritize our resources carefully to maximize return from our significant R&D investments, and more changes will naturally follow from the organizational changes we are now implementing. These are early days for the new organization and I will stop here and not comment further on the details and other changes at this point in the process. But I'm certain that the new steps we are now taking are starting our journey towards our overarching goal to return to growth and restore profitability for Nordic. Turning back to the first quarter, the low revenue in the first quarter obviously means that Bluetooth revenue for the last 12 months declined. And as you can see, the split between the top 10 and the broad market customers stabilized in the quarter. As I said last time around, we have a strong relationship with our Tier 1 customers but needed to continue regaining traction in the broad market. Moving into the second quarter, we are seeing exactly that. Continued good momentum and positive developments with the Tier 1s, and some more customers in the broad market are reaching inventory balance and coming back placing new orders. We want to continue with a balanced approach, serving both our largest customers and the many small players in the market with Nordics' innovative and leading technology and products. We also see -- continue to see sustaining high market share within Bluetooth Low Energy. So on the end product certification amongst our end customers. So these are product certifications, the end customer products are performing. We had a 42% of Bluetooth Low Energy and product certifications in the first quarter of '24, and 43% of the design certification if we look at the last 12 months. And with these numbers, we are, at Nordic, outpacing the total market growth. Moving on to customer product launches in the quarter. We see, as always, a wide variety of product -- different products across different types of applications, and also products combining Bluetooth and cellular IoT or Bluetooth and Wi-Fi. And on the very right side, you see the Saga Card, which is an asset tracker from the company Controlant, which I would like to just spend a minute extra on. The Saga Card is an asset-tracking device designed to bring end-to-end tracking and visibility across the entire pharmaceutical supply chain from production to patient, hospital, or destination delivery. This tracker can ensure that medication and vaccines reach patients or professionals at the right time and place, and even with the right quality. The Saga Card has been developed in collaboration with Controlant, Deutsche Telekom (OTC:DTEGY), Nordic Semiconductor, and other partners, and it was announced at the Mobile World Congress in Barcelona in February this year, and this is a true example of highly valuable innovations made possible by our leading low power cellular IoT technology. We are expanding our cellular IoT offering further and are strengthening our end-to-end solution with a new and recently announced nRF9151 system-in-a-package solution. Compared to the 9160, the new 9151 reduces both power consumption and size, and it is specifically designed for cellular IoT and DECT New Radio products and applications. This puts further distance between us and the competition and confirm our position as the cutting edge of low power and system innovation in the long-range area. Finally, and before turning over to Pal, I would like to draw your attention to the recent announcement of our collaboration with Google. We now have built-in support for Google's Find My Device into our nRF Connect software development kit, the NCS. We are among the first to enable third-party device makers to build products using the Find My Device network for the Android ecosystem, and this adds to our already established support for Apple (NASDAQ:AAPL) Find My. We are working with some of the largest ecosystems in the tech industry and are excited to see customers such as Chipolo and Pebblebee using our technology in the recently launched trackers. And with that, I'll let Pal take you through the financials before I return to a brief summary and outlook.
Pal Elstad: Thank you, Vegard. And I'll go to revenue financials for Q1 2024. As Vegard mentioned, revenue declined across all our revenue-generating technologies in the first quarter compared to both the first quarter last year and the previous quarter. Compared to the first quarter last year, the revenue obviously reflects weaker end customer demand, as Vegard alluded to. Low revenue in the quarter also reflects that we took action to reduce the inventory levels in the distributor channel. This affected both Bluetooth and proprietary revenue in the first quarter. For both Bluetooth Low Energy and proprietary, sell-through from distributors was significantly higher than the reported figures in the quarter. Cellular revenue remains lumpy and volatile, and amounted to USD 3.8 million in Q1, a decrease of 20% year-over-year and down 37% from the previous quarter. The revenue decline and inventory adjustments have hit all end customer markets. However, the decline was maybe most pronounced in the health care market, where inventory adjustments at the Tier 1 customer explains the drop from the previous quarter. We expect to see an equivalent recovery in revenue in this market in the second quarter and still regard the health care market as an important future growth engine for the company. Industrial has a large drop from last year, mainly due to the fact that industrial customers purchased more in Q1 2023 as these customers were hardest hit during the supply-constrained period in 2022, and they increased inventories a year ago. Depleting this inventory has taken time and finally, we see a close-to-flat sequential quarter. The gross margin was a bit of a disappointment in the quarter, coming in 2 percentage points below the 50% we guided for. Given the low revenue, the miss corresponds to approximately USD 1.5 million in the quarter. The change from the previous quarter mainly reflects changes in customer mix and effects of inventory adjustments, but also that the normal scrapping and writedowns, and overhead costs were being allocated to a low revenue base compared to previous periods. Looking ahead, we expect to see gross margins back to around 50% in Q2 2024 and we also reiterate our long-term ambition to maintain gross margins above 50%. Our organization and operating model is obviously geared towards a significantly higher revenue level than what we achieved in the first quarter. Total R&D costs were reduced by $4 million compared to the first quarter last year, but R&D as a percent of revenue nevertheless increased from around 30% to around 50% this quarter. This is, of course, significantly higher than the 20% to 25% that we've guided for previously. This reduction is partly explained by higher capitalizations in 2024. Similarly, SG&A as a percent of revenue increased from 14% to 26%, even though we actually cut SG&A cost by USD 0.5 million to USD 19.3 million in the quarter. These cost percentages are obviously unsustainable, but as Vegard has already told you, we expect increasing revenue in the next quarter so the KPI will improve. As I touched upon on the previous slide, we have been able to reduce costs over the past year, and if we look at cash OpEx, this declined by USD 3 million from Q1 2023. Compared to Q4 2023, OpEx is down USD 7 million. This is partly due to the $5 million restructuring that was booked in Q4 2023. However, as you recall, when the Q4 2023 presentation highlighted that in Q4, there were several one-offs, including the accrual for the reduction in force process we did, and therefore, it's more relevant to compare Q1 over Q1. We ended the quarter with 1,407 employees. This is down from 1,530 in Q3 2023 when we announced approximately 7% workforce reduction. Going forward, we will continue to be very cost-conscious. We have no plans to increase headcounts more than for key resources. At the same time, we need to have competitive compensation, so Q2 will include higher salary cost due to a salary increase effectuated in Q2. [Technical Difficulty] Okay, sorry, I'm back again. CapEx was very low at only $1 million in the first quarter. We've had a focus on reducing and deferring CapEx in the period with low revenue. We expect normalization in the coming quarters and -- as the underlying CapEx intensity remains low. Rounding off, we saw the cash balance being reduced by $56 million from the end of 2023 to USD 235 million at the end of the first quarter 2024. The reduction mainly reflects the losses in the period, but also a somewhat negative working capital development, including a strategic buildup of inventories. Inventories ended at USD 197 million. We have plans to reduce these inventories during the second quarter of this year. Net working capital in percent of revenue increased to a high 50%, driven by working capital buildup and lower revenue. Higher revenue and normalized inventories should reduce this KPI during the next quarter. In addition to cash on the balance sheet, we have an undrawn credit facility of $200 million, leaving us with a comfortable liquidity situation. With that, I'll give the microphone back to Vegard to round off the session.
Vegard Wollan: Thank you, Pal. As we said the last time that we remain confident in the long-term market for our products and technologies. The design activity with our customer base is strong, and I'm happy to see and report that we are now improving demand from both our Tier 1s and the broad market customers. As mentioned, we are also seeing seasonally higher demand supporting revenue in the second quarter and overall, this allows us to guide for revenues between $115 million and $135 million in the second quarter. Although this remains below the second quarter last year, we are moving in the right direction with second quarter revenue expected up around 54% to 81% from the first quarter. As Pal mentioned, we are also expected to see gross margin back at 50%. So with that, I would like to thank you for your attention, and I'm handing over to Steel to start the Q&A session. Thank you.
Stale Ytterdal: 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 asks 1 question and 1 follow-up question only. Please refer to the earnings call invitation available on our Investor Relations IR site under stock exchange notes for the dial-in details. I will now turn it over to our operator to initiate the Q&A session.
Operator: [Operator Instructions] The first question will be from the line of Harry Blaiklock from UBS.
Harry Blaiklock: I was just wondering, in terms of the Q2 guide, is there any granularity you can give around that expected performance? So both in terms of kind of how you expect Tier 1s versus broader market customers to perform? And then also in terms of end markets as well, even if it's just some qualitative comments, that would be very useful.
Vegard Wollan: It's very hard to hear the question.
Pal Elstad: Yes. It was, any more granularity on the growth we're seeing in the second quarter type of customers?
Vegard Wollan: Yes, we -- so I think it's fair to say that we do see the Tier 1s coming back to inventory balance slightly before the broad market. So there is a little bit of a mechanism there which is influencing what we see. And perhaps, also we do see some of the consumer markets being slightly stronger. And although, as Pal mentioned, we also see improvement in -- overall in the markets we participate.
Harry Blaiklock: Okay, perfect. And then one quick follow-up. So, on gross margin, it was obviously a bit lower than expected. I know you mentioned customer mix and then impact of inventory management. And in the past kind of few quarters, you said that pricing has been relatively stable, but I'm wondering if you've seen any pressure at all which impacted gross margin this quarter or whether that's still stable.
Vegard Wollan: I think as the market is becoming more normalized and there is a balance – more balance in demand/supply, there is a natural competitive forces – there are natural competitive forces which are present. We are very confident that we have a very competitive product lineup and our prices are competitive, as well as Nordic also being always selling on features and performance and the innovation side of our products.
Operator: The next question will be from the line of Olivia Honychurch from Jefferies.
Olivia Honychurch: My first one is on your visibility going forward and how much that's improved in the last few months? And similarly, how we should think about the trajectory of growth for the business over the remaining quarters of the year?
Vegard Wollan: Yes. I think we can clearly see that it's the last half of the Q1 where we have seen some change in the market, where we see some more pull, which is clear. And the main purpose with the inventory adjustments, which we did in Q1, was to increase our visibility. That obviously now combined with improved demand is giving us better visibility. That is clearly what we see happen at the moment. Having said that, we have also said that we don't guide beyond the current quarter.
Olivia Honychurch: Okay. That makes sense. My follow-up is just around the cellular division. You've talked about some early product launches using that technology. Can you give any more color around the timing of when we should expect to see a material inflection in revenues here? I'm really talking about commercial volumes of sales, and obviously, that's been pushed out quite a few times in the last couple of years.
Vegard Wollan: Yes. We do see the – so like on the cellular side, we do see that the revenue still remains lumpy and volatile and – but on the other hand, we do see, looking at the project and customer activity, we see clear growth opportunities going forward. So the traction with our customers and engagement is very solid. These projects are complex and have taken longer time to develop, as I think we have talked about earlier. But our offering is now fully complete and very solid, and we do see a lot of positive traction in that market. And that is particularly on the tracking and metering side.
Operator: The next question will be from the line of Christoffer Bjørnsen from DNB.
Christoffer Bjørnsen: Christoffer from DNB Markets here. So I was wanting to ask about the nRF54 products coming out. So there has been some speculations about delays there. But then you had a module vendor coming out saying that they will have samples based on both 54H and L already in Q3 this year. Does that mean that you guys will already see revenues from shipping to them and other customers towards the end of Q2 and early Q3? Is that the timeline to think about? That's the indication from that press release, I guess.
Vegard Wollan: Yes. On the nRF54 products, which we are extremely excited about and have a very, very strong traction with our customer base around these products, that is obviously a larger family and a larger range of products. I would say, in overall, Christoffer, we are in a good shape here and developing and delivering with our -- particularly with our Tier 1 customer base in the cases of the 54. We have by far the largest engineering resources behind these programs. They are extremely important for us, and we have shifted priorities to make sure and assure and continue deliver on these programs. Having said that, parts of the 54 family are also extremely innovative, really taking the next levels of compute performance to the market are extremely complex products. So there are always -- as long as they are not released yet, there are always some risks related to that. But I think it's fair to say that our expectations still are pretty much the same, that we are on track and expecting initial revenues towards the end of 2024. And I can also add to that, that we have now more -- over 300 customer samples combined in the nRF54 products. Lots of good activity there.
Christoffer Bjørnsen: Sure, sure. Yes. It was just so clear from that press release that they expected to get shipments from you in Q3, but okay, towards the end of the year. That's great. And then just a quick follow-up on some of the other questions and your comments. So I think Pal said you're expecting sequential growth in the quarters to come. You said on Q4 that you're expecting normal seasonality. Is normal seasonality the best guess from here on from kind of the Q2 base that you guide for?
Vegard Wollan: Yes. I think, as you know, we don’t guide beyond the current quarter, but we are also seeing that we are moving back to, let’s say, more traditional seasonality patterns. And if we go back to pre-COVID and pre-pandemic times, that seasonal patterns, we typically saw Q3 being somewhat stronger again than Q2. But again, we don’t guide beyond the current quarter. So let’s not get ahead of ourselves here.
Operator: The next question will be from the line of Sebastien Sztabowicz from Kepler Cheuvreux.
Sébastien Sztabowicz: Yes. On health care, the business has collapsed in Q1 with this inventory correction. What kind of visibility do you have on the recovery for Q2? Do you assume returning to the level of revenues that you had in Q4 in the health care market? Is it a fair assumption?
Vegard Wollan: Yes. I think, as for the low health care revenue in Q1, as we mentioned in our report, the decline is primarily reflecting an inventory adjustment at a Tier 1 customer of Nordic. And the company expects an equivalent recovery in the delivered volumes and revenue in the second quarter for this customer.
Sébastien Sztabowicz: And 1 general question on the Bluetooth Low Energy market. You had very strong shipments, I would say, during the pandemic in many end markets, smart home, consumer IoT, whatever it is. Have you seen any kind of change in the market dynamic for the coming years in the Bluetooth Low Energy market? Or should we assume the same kind of traction that you had before the pandemic?
Vegard Wollan: I would say overall, Nordic has been and still is, as you see from the design wins and the design certification track we have, we are still by far the market leader on BLE connectivity in regards to design wins. And on the wireless connectivity for the BLE, I would say, obviously there are new products, new applications as well, but it’s also the same type of applications prior – and customers prior to the pandemic. So it’s hard to answer that other than being generic on that.
Operator: The next question will be from the line of Simon Coles from Barclays.
Simon Coles: It's Simon from Barclays. You've been in the company 5 months now. Last time, we spoke to you, you'd only been here a month. We've seen you make some changes around the organizational structure, and you say you're still reviewing some of the portfolio and product roadmaps, but just would be great to hear sort of your updated vision for the company.
Vegard Wollan: Can you repeat your last sentence? We haven't...
Pal Elstad: The updated vision.
Vegard Wollan: Yes, updated vision. Yes. So we are -- we obviously have strong ambitions to move back into a growth track. So our growth ambitions are absolutely substantial, obviously, to return to and restore our profitability. And what I've said previously, I do think predominantly we are in the right market segments. We are doing a lot of portfolio reviewing and potentially sharpening our focus in certain areas, which likely will lead to some additional changes coming without commenting on that specifically at the moment, we may invest a bit more in certain areas, a bit less in other areas, but predominantly our wireless connectivity technologies are strategically the right ones for us to be in at the moment. We have world-class engineers, a great innovation culture here at Nordic, which I'm really excited to experience. There are room for organizational improvements that are again leading to our excellent engineers being able to execute innovative development programs with our customer base in an even better way. And that is part of the project which we have started and are moving ahead into at the moment.
Operator: Unfortunately, as we are running out of time, I will have to hand it back to Stale for any closing remarks.
Stale Ytterdal: Thank you, Patrick. We are now concluding today's Q&A session. We appreciate your active participation. Thank you very much.
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