Svenn-

Tore Larsen: Welcome to Nordic Semiconductor's quarterly presentation for first quarter of 2021. Pleasure to have you all listening in today. So we see a continued strong growth in revenue during very challenging times. And the important thing is that we see solid demand in all of our end-user markets. Our revenue came in at $143.2 million, it's up 104% year-on-year, and it's up 13% quarter-on-quarter, even though it's been, as we usually say, Chinese New Year in Q1 is usually a weaker quarter, but I think it's been going full steam all over Asia in production during this quarter.

Our gross margin ended at 50.2%, which was in the guided area we did earlier on. And for the first time, Bluetooth revenue passed $100 million. It actually came in at $119.8 million, it's up 134%. Our proprietary revenue keep running at a stable rate around $20.9 million, indicates a growth of 36% year-on-year. On the cellular IoT, it grew only 10%, and it was really heavily influenced by supply issues.

Pål Elstad: Thank you, Svenn-Tore. Before I start with the financials, a reminder, if you have questions to the Q&A after the presentation, you can go -- there's a link on the Nordic pages to the webcast, and you can answer questions. I'll start with revenue. The accelerating growth rates we saw during last year and also compared to last quarters continued also in 2021. The growth of 104% comes, of course, as a result of a very low Q1 last year, where Q1 was impacted both of Chinese New Year and the pandemic that started in March.

So we actually had only 2 months of revenue in Q1 2021 -- 2020. This was not the case in 2021. We have very little impact of Chinese New Year. And we also, due to constraints also in Q4 in the supply chain, we had an increased demand in Q1. Also, the seasonal effects that we normally see, normally in Q1 is lower than the high Q2 and Q3.

The shift in customer mix, the shift in product mix is more or less reducing this seasonal impact that we have seen historically. Bluetooth revenue increased, as Svenn-Tore mentioned, 134% to $119.8 million. This is actually the first quarter we're above $100 million in Bluetooth revenue. Proprietary continues the strong demand that we saw last quarter. Of course, this is an effect of the high demand for home office products now in the pandemic.

Going forward, there will be a transition to Bluetooth on the proprietary products. So we do see a pretty stable, slight decline on proprietary going forward. Cellular IoT, plus 10% to $1.2 million, slightly lower or lower than expected due to supply issues, as Svenn-Tore mentioned. I'll now go to the main markets. We report on as overall revenue shows a very strong growth both compared to last year, but also last quarter.

The underlying markets will, of course, show a strong growth. I'll highlight a few of the key observations we have. First of all, Consumer Electronics, up more than 100% compared to last year. Of course, Consumer Electronics is the area where we have most of the home office products and the proprietary business. But there's also other interesting designs there.

Amongst others, gaming is showing really good demand in this period. Svenn-

Tore Larsen: Thank you. So this slide, we also showed previously, but I think it's important to look at the end of this slide and see the steep growth we have the last 12 months. It's really due to the fact that we have this widespread IoT adoption. Finally, we see that all the products we've been working and all the customers we're working on are now putting products into the market, and we're going to see more new products entering the market throughout the next few quarters.

And it's representative -- represented in our backlog. So it's a long-lasting journey at Nordic, and we are still at the early times when it comes to IoT implementation. We saw accelerated growth in Bluetooth. And short range, if you look at the last 12 months, 5 -- you see Nordic has grown 64%. But if you look at the 5-year CAGR for Bluetooth has been 28%, proprietary has been positive despite that we thought that proprietary might sort of be less to come.

But now we see that there still is new products coming out with proprietary solution. If you look at the total group, we have been having a total CAGR of 20% over the last 5 years. And if you look at external analysts, I mean, ABI says that I think that Bluetooth IoT market will quadruple by 2024. And I believe that smart home which something Nordic been working extremely much in, will exceed 800 million devices. So obviously, some of the bets or calculated bets that Nordic take seems to play out just as we speak.

And if you look at cellular IoT, this is a slide from Ericsson white paper. It shows the cellular network. And if you look into the shaded area in the middle, that's really narrowband IoT, LTE-M. These are the numbers representative the 2 standards that Nordic is supporting in our products, our cellular products. So this is expected to grow strong according to Ericsson.

And that's just 1 reference we found. You will find more references that represent more or less the same trend, maybe not always the same number. But the trend is a heavy growing, fast and rapid growing segment and Nordic are in the middle of this growth. Also last quarter, if you remember, I presented Sigma's and Ericsson Ardesco reference design. And obviously, that reference design is using Nordic cellular products due to the fact that we have lowest power, ease of use and are very, very solid protocols.

I also think that IoT will play an important role to reach UN sustainability goals. If you look at each box here, you see Nordic ticks -- use of Nordic into products ticks basically every box. And we see that now huge activity to reach the sustainability goals accelerated the signs with Nordic products. Also, we did in Capital Markets Day, soon, 2 years ago, the backlog really supports the $1 billion goal that we set. We are in a solid position.

We are a market leader in Bluetooth. We are taking more and more design in cellular IoT, and we are complementing portfolio of Wi-Fi products. So we really see that due to the great work we are doing, call valuation with TSMC and other wafer suppliers, we work every day to try to minimize the damage for our customers due to supply chain problems, but also to optimize throughput from our suppliers. And we have to empty that backlog. And as we said in the report, it is stretching into '22.

But still there is plenty of revenue to be shipped within '21. And that's really the reason with tight cooperation with TSMC that made us able to pull in wafers for Q2 delivery. The important thing is that it's pulled in, it's not additional wafers yet. But we obviously hope to see continuous pulling and some ease in supply chain as we go further throughout the year and into next year. Because it is supply that limit our revenue at the moment, we have still a support or minimum 25% in production volumes.

And when I speak to TSMC, I'm very pleased to see their eagerness to correct the situation and their plans of CapEx spending over the next years to ensure capacity growth for all nodes and also going to do additional volumes on mature nodes, which over of our 52 family is running on. So this is a matter of a temporary situation where we have to work and laser focus together with our customers to create, as I said, minimum impact for them and come back much stronger when capacity eases. We have guidance for Q2 in the range of $140 million to $150 million revenue, although gross margin will be the same as this quarter. And we just need to keep on focus on all of our customers to ensure that we are making this shortage as little impact as possible for that production. That's really the challenge for Q2.

Any questions? You can send it in. Stale will read them out. A -

Ståle Ytterdal: Yes. We have got some questions, and we will split them up in different topics. So let's start with the backlog.

Christoffer from DNB, While the backlog is increasing in duration, are you still able to confirm that this is a real demand which will materialize in revenues going forward? Or can it be some elements of double booking from customers trying to get you to give them supply?
Svenn-

Tore Larsen: I mean we've been speaking about new customers. We've been speaking of new projects entering into production. We've been talking about higher value per design. And this backlog is representing those 3 pillars. Higher volumes, and that's really a real backlog, which we will be able to ship.

We don't just now know the exact timing. But we have to balance, so the customers get the products in the market.

Ståle Ytterdal: Christoffer is continuing on backlog. Furthermore, can you help us understand what segments and type of applications are driving the backlog growth? And what's the customer -- what is the customer concentration in the backlog now?
Svenn-

Tore Larsen: I think as the next few quarters, progress, you will see new products in the market and understand where the backlog comes from. We can't comment on the backlog yet.

It has to be product in the market, and you need to know what's inside the product.

Ståle Ytterdal: Thank you. Then we have a question from Petter Kongslie from Sparebank 1 Markets, Very strong backlog. How should we view this with regards to length on the backlog?
Svenn-

Tore Larsen: It's stretching into 2022, and I think I responded to most of it in Christoffer's question.

Ståle Ytterdal: Then we have a question from Johannes Ries, Given the exploding backlog, do you expect to reach the USD 1 billion target earlier?
Svenn-

Tore Larsen: I would say, if there was no supply chain issues, we will say, yes.

And I also think that due to the fact that we are going to get additional capacity from our vendors sooner. So yes is the answer.

Ståle Ytterdal: Thank you. Then we have a question from Rob Sanders, Deutsche Bank. Can you break out the backlog between working from home categories and those that are unrelated to that theme?
Svenn-

Tore Larsen: We don't split on that parameter.

But obviously, working from home is mainly on proprietary. So most of the backlog is for new products, and it's not related to working from home.

Ståle Ytterdal: And Rob Sanders has a follow-up question related to the orders. In the -- is there a binding commitment on these orders with penalties? Or can customer easily cancel if they can find products elsewhere?
Svenn-

Tore Larsen: First, you can't find product elsewhere because there is a lot of software on top of each of these radio designs. And secondly, there is a generic shortage in the market.

So it's not that you can go to vendor C, D, E, F and acquire radios that can replace the Nordic radio. So the work is on Nordic to ensure that these customer get the minimum of what they need to continue on entering the market.

Ståle Ytterdal: Thank you. We have a question from Christoffer, D&B, regarding revenue. When it comes to the current growth rate, is that still being driven by new design wins with new Tier 1 customers? Or is there an element of tailwind from COVID-19 effects, such as work from home?
Svenn-

Tore Larsen: New customers, new projects and larger volume behind each customer.

Ståle Ytterdal: Thank you. Then we go over to the topic cellular. Petter Kongslie, Sparebank 1 Markets. What is -- what issues in specific did you see in cellular?
Svenn-

Tore Larsen: Lack of wafers. So we didn't manage to turn wafers into modules during Q1.

Ståle Ytterdal: Thank you. Johannes Ries, Will mobile IoT accelerate in second half?
Svenn-

Tore Larsen: Yes. We will see meaningful revenue on LTE models in the second half of this year.

Ståle Ytterdal: Then we have a question regarding cellular from Petter Kongslie. Previously -- this is for you, Pål.

Previously, you have talked about 40% gross margin for cellular. Today, you talked about 35% to 40%. What has changed? And how does it impact the economics on EBITDA margins?

Pål Elstad: I think it's changed. So the long-term targets on cellular IoT is still gross margins of 40%. But in the ramp period, just like with most Bluetooth products, gross margins are lower in the beginning.

So the long-term target for cellular IoT is still 40% gross margins.

Ståle Ytterdal: Thank you. Then we have a question regarding Wi-Fi from Christoffer DNB. On the Wi-Fi business, can you please help us understand what are your priorities for the next 12 months? And what kind of milestones you are aiming to achieve in this frame -- time frame? What kind of operational steps do you go through when you integrate a technology team like this?
Svenn-

Tore Larsen: I think there has been 2 plans from Nordic. One is to go straight to a leading Wi-Fi product, by Wi-Fi 6 product.

We've been discussing a lot with existing Bluetooth customer base to see what they need. And based on this discussion, we're actually going to accelerate time to market with a product. And we are not going to disclose the strategy today. I would like to disclose the strategy when we have a Capital Markets Day a little bit later this year. But we are in some accelerated time to market with a product.

Ståle Ytterdal: Thank you. Then we have a question from Petter Kongslie regarding OpEx. Can you break down the OpEx increase from fourth quarter '20? How much is FX? How much is the M&A cost? And how much is recurring OpEx?

Pål Elstad: Yes. So compared to last quarter, the FX isn't as large as compared to Q1 last year, but around $1.23 million is the effect of FX compared to last quarter. And then the top spending on the Wi-Fi business, the acquired business, was $2.1 million.

Then we had some effects related to bonuses, et cetera, that didn't happen last year. So -- but the rest is recurring business going forward. And then remember, we've always commented, that R&D needs to be at least 20% of revenue, and that's where we are now.

Ståle Ytterdal: Thank you. Then we have a question from Øystein Lodgaard from ABG on wafers.

Could you give some flavor on how you think the wafer situation is going to develop into 2022?
Svenn-

Tore Larsen: I think I keep that imposing that look at what TSMC is communicating to the market. We are totally dependent on TSMC putting new capacity in place. We're working closely with them. And we will update you on each quarter on the progress.

Ståle Ytterdal: Thank you.

Then we have. Svenn-

Tore Larsen: I don't -- as you saw though from our guidance, we do expect some pull-ins in Q2. So it's better today than we stood here at last quarter's presentation. So they are clever and brilliant, and we just have to hope that they're also going to expand capacity sooner than what's been communicated.

Ståle Ytterdal: Thank you very much.

Then I think we should -- we have a question from Lars Kjellberg. Should we expect lower revenue in Q3 or Q4 compared to Q2 since you shifted some wafer volumes forward? Does it affect gross margin?
Svenn-

Tore Larsen: It should not affect gross margin. And logically, we will see that first half and second half will, according to the policy we have now with TSMC, pull-in policy, be affected.

Ståle Ytterdal: Then we have a question to Pål here from Petter Kongslie. Cash to R&D at 1.9x, which is below the threshold of 2x.

Why did accounts receivables increase? And can you provide any color on how we should think about working capital?

Pål Elstad: Yes. So first, the CapEx or the cash to R&D of 2 is just a target. So 1.9 is more or less that target. Accounts receivable increased, as I mentioned, partly because timing of exactly when shipping is done in the quarter. But more importantly, one of our big customers has year-end closing just in the shift of the March to April.

End of Q4, net working capital was 19.4%, it's now 27%. I have been talking about a long-term, not a target, but a long-term number of around 30%, mainly because we do see longer payment terms, and we also see the need to have higher inventory to sort of be ready for situations like this, but also to build up inventory for cellular revenue when that will materialize more. So I think that's -- yes.

Ståle Ytterdal: Then we have a question from . Margin development is indicating low pricing power on Nordic products.

Does this represent a risk balance of year?
Svenn-

Tore Larsen: It does not represent weakness at all. It represents that we are going into high-volume customers. And the higher the volume is to more attractive margin the customer gets. And as we now see, the revenue contains more Tier 1 customers with higher volume. It is just happening what we have said, the margin will stabilize around 50%.

Ståle Ytterdal: Thank you very much. And then we have the 2 last questions. The first one here now comes from Rob Sanders, Deutsche Bank. There appear to be emerging low-cost competitors in China like Tailing and Expressive. Do you see them as becoming relevant in China?
Svenn-

Tore Larsen: What we see in China is actually 2 things.

Yes, there is a growing base of customer doing very, very simple Bluetooth-connected products. Nordic is not competing in this arena. But we also see more advanced product where feature-rich products and that's where we see we get a stronger foothold. So yes, it will impact the low-end market, but we are not making products for ultra-low connectivity only applications.

Ståle Ytterdal: Thank you.

Then we have the last question from Petter Kongslie. Last quarter, you gave some comments on revenue on second half versus first half. Has this changed with the newest information you have on the component shortage situation?
Svenn-

Tore Larsen: I think we answered that on our previous question. So obviously, as we get pulled in from coming quarters and not get any additional wafers, it will sort of even out the quarters.

Ståle Ytterdal: Thank you very much.

That was all the questions for today. Svenn-

Tore Larsen: Thank you. Thank you for listening in. I'm looking forward to talking to each of you that we have individual calls with later on during the next two weeks. Thanks.

Pål Elstad: Thank you.