Nordic Semiconductor — Investor Presentation 2019

Oct 22, 2019

Pål Elstad, CFO

Revenue development – Group and markets

Group			Consumer Electronics	Wearables
USDm			USDm	USDm
82.2			37.2	13.9
+4.4%	+16.5%	+6.6%	+36.4%	+12.0%	+9.1%
y-o-y	q-o-q	y-o-y	q-o-q	y-o-y	q-o-q
Building/ Retail		Others		Healthcare
USDm		USDm		USDm
14.0		10.6		5.1

Excluding ASIC's, consulting and other revenue for individual markets

Solid gross margin

Gross margin 49.8% -1.4pp Q-o-Q

• Continued positive contribution from cost improvements and stable yield on nRF52 Series
• Adverse margin impact due to high volumes from new tier 1 customers
• Adverse impact from new product introductions and less revenue from high-end products
• Quarter to quarter fluctuations to be anticipated due to change in product and customer mix

Operating model performance Q3 2019

		Q3 2019*	Q3 2018
	Revenue change y-o-y	4.4% (USD 82.2m)	+19.9% (USD 78.7m)	Revenue in upper end of guidance
	Gross margin	49.8%	50.2%	(-0.5pp) Continued positive contribution from cost improvements offset by higher tier 1 volumes
	R&D short-range	15.1% (USD 12.4m)	15.3% (USD 12.0m)	(-0.2pp) Continued investments to capture growth opportunities
	R&D cellular IoT	8.2% (USD 6.7m)	4.9% (USD 3.9m)	(+3.2pp) Increased spending during commercialization stage
	SG&A	12.4% (USD 10.2m)	11.9% (USD 9.4m)	(+0.5pp) Maintaining cost focus
	EBITDA margin	14.1%	18.2%	(-4.1pp) Profitable growth

EBITDA improvement over last two quarters

• EBITDA margin back above 20% excluding cellular
• Bluetooth back to historical profit levels after weak in early 2019

Cash operating expenses*

• Number of employees increased by 13.3% from 663 in Q3 2018 to 751 in Q3 2019
• Continued investments to capture growth opportunities
• Growth in customer facing teams, both within R&D and Sales
• Overall cash cost increase of 9.3% shows cost discipline 9.7 9.8 9.2

Cash Opex USDm

* Operating expenses, excl. capitalized R&D, depreciation and amort. and option expenses

Maintaining cash

Cash flow Q3 2019 Maintaining cash in growth quarter

• USD 1m in cash outflow during Q3 2019
• Driven by strong EBITDA and focus on cash conversion
• NWC/LTM at 26.7% (25.6% in Q2 2019), down 5.4 p.p. y-o-y
• Capex of USD 6.5m Final build of new R&D Lab

Continued disciplined cash strategy

Tight cash management and optimized cash generating ability

Financial outlook

Gross Margin Considerations

• Medium-term gross margin range of 48%-50% for the short-range business
• High volume customers entering the market
• Continued cost focus and contribution from higher volumes
• Inherently lower gross margins of 35%-40% for long-range modules for broad market adoption
• Effect on group margin depending on pace of volume ramp

R&D Outlook

USDm and % of revenue

• Will continue to grow in absolute terms in both short- and long-range
• R&D intensity expected to decline from peak level in 2019
• Synergies between short- and long-range

SG&A leverage set to improve

• Growing organization to capture growth opportunities both within short-range and long-rang
• Spending in absolute numbers to grow as we build long-range organization
  • Direct customer support and distribution network
• Operational leverage set to drive long-term SG&A below 10%

Stable capex requirements

Capex, USDm

• Built a base to deliver on future growth opportunities
• Expect capex to remain on current levels in absolute terms for next years
• Long-term target for fabless business model below 5%

Funding: Sources and uses of cash

• USD 100m equity issuance in April 2018 supported debt repayment, share repurchases, lab investment and stronger cash position
• Gross profit generated since equity issuance has covered growth investment in R&D and SG&A
• Strong current cash position allowing continued focus on growth opportunities and strategic priorities

Adequate cash position

• Cash position provides ability to continue driving technology and product roadmap
• Solid R&D cash coverage needed to pass tier-1 customer procurement due diligence
• No dividend payment expected in 2020/2021
• Increasing free cash flow from 2022 with volume ramp 0.0

0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 2014 2015 2016 2017 2018 2019e

R&D coverage multiple (Cash/R&D spending)

Summary & Q&A Svenn-Tore Larsen, CEO

Our aspiration: Building a USD 1bn company within 5 years

• Growth of 20%-30% for Bluetooth and multi-protocol products
• Gradual build-up of the cellular IoT business to a similar size as the short-range business in 5 years
  • Long-term EBITDA margin ambition of 20%