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Edited Transcript of DLG.DE earnings conference call or presentation 6-Nov-19 7:30am GMT

Q3 2019 Dialog Semiconductor PLC Earnings Call

LONDON Nov 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Dialog Semiconductor PLC earnings conference call or presentation Wednesday, November 6, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jalal Bagherli

Dialog Semiconductor Plc - CEO & Executive Director

* Jose Cano

Dialog Semiconductor Plc - Head of IR

* Wissam Jabre

Dialog Semiconductor Plc - CFO & Senior VP of Finance

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Conference Call Participants

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* Achal Sultania

Crédit Suisse AG, Research Division - Director

* Adithya Satyanarayana Metuku

BofA Merrill Lynch, Research Division - Associate

* Christoffer Wang Bjørnsen

DNB Markets, Research Division - Analyst

* David O'Connor

Exane BNP Paribas, Research Division - Analyst of IT Hardware and Semiconductors

* Mitchell Toshiro Steves

RBC Capital Markets, Research Division - Analyst

* Sandeep Sudhir Deshpande

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, I would like to welcome you to the Dialog Semiconductor 2019 Q3 Results. My name is [Brika], and I'll be coordinating your call today. (Operator Instructions)

And I would now like to hand over to your host for today's call, Jose Cano. Sir Jose, please go ahead.

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Jose Cano, Dialog Semiconductor Plc - Head of IR [2]

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Thank you, [Brika], and good morning, everyone. Thanks for joining us today. As usual, our call is being hosted by Dr. Jalal Bagherli, CEO; and Wissam Jabre, our CFO.

First of all, I must remind everyone that today's briefing and some answers to your questions may contain forward-looking statements. These statements reflect the management's current views and the risks associated with them. You can find the full explanation of these risks on Page 2 of the investor presentation. The interim report and the press release can also be found on our website.

I would now like to introduce Jalal to run through the business review. Jalal, over to you, please.

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [3]

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Thank you, Jose. Good morning to everyone on the call.

We've delivered another excellent quarter with record Q3 revenue alongside increased operating profit and strong cash flow generation. In line with our capital allocation framework, we continue to invest in growing the business, both organically and inorganically, and return cash to shareholders through our share buyback program.

On the next few slides, I'd like to run through some of the investments and new opportunities and revenue growth we have made. But before that, let me briefly remind you of our strategic approach on Slide 4.

Our growth strategy and strong financial performance is the result of our focus on fast-growing segments of our target end market coupled with operational excellence. With over 30 years of mixed-signal expertise and world-class power-efficient IP, we are gradually expanding Dialog's product portfolio to meet a range of exciting new opportunities building on our strong heritage in IoT and mobile, and leveraging our technology leadership in growing segments of automotive, computing and storage markets.

We are expanding our product portfolio and solidifying our position in key markets through a combination of organic investment and M&A. Our advantage of opportunities in a consolidating industry that enhance -- I'm sorry, our strong balance sheet and cash flow generation allows to take advantage of opportunities in a consolidating industry that enhance our competitive positioning in our target end markets.

On Slide 5, let's cover 2 examples of investment in new product development. In IoT, we continue to increase our footprint with our Bluetooth low energy products, which delivered 51% year-on-year revenue growth in Q3. Consumer appetite for a growing range of connected devices remain healthy, and we see a number of exciting opportunities to leverage our expanding product portfolio over the long term.

Our latest product development in this area is SmartBond TINY, which aims to connect the next billion IoT devices while lowering the cost of adding Bluetooth low energy functionality base system without compromising performance.

Our Bluetooth offerings have 2 distinctive categories based on our low power credentials and the requirements of a wide range of customers and applications. One category, which offers scalable processing, expandable memory, high levels of security and a rich set of [features]; and a second category, which combines low power with the smallest footprint and a lower system cost, SmartBond TINY fits into this second category.

We also see promising opportunities in the automotive sector. To address the increasing requirement in this market, we launched our first automotive-grade, configurable, mixed-signal IC. This product provides lower project costs and accelerated time to market and brings flexibility and low latency to automotive electronic designers. This was a market grade -- this automotive-grade CMIC joins our existing automotive product portfolio, addressing customer requirements and intelligent in-vehicle entertainment and advanced driver assistance systems.

This new device is part of our strategic objective of bringing Dialog's low-power IP into the CMIC, increasing its use cases and value it brings to our customers. This product is currently being evaluated by several other customers and will contribute to the expansion of our customer base and strengthen our presence in IoT, mobile computing and automotive.

In addition to organic investment and new product development, we are also investing in organic growth opportunities. In October, we acquired Creative Chips, expanding our product portfolio into the fast-growing industrial IoT market. Let me take you through the key points of this acquisition on Slide 6.

Creative Chips is a fabless mixed-signal custom IC company focused on the European industrial and automotive market. The deal provides Dialog with a broad product portfolio of industrial Ethernet for the industrial IoT and automotive market, a talented team of 65 engineers and an impressive Tier 1 industrial customer base that has been built over 20 years. Both Dialog and Creative Chips share knowledge and expertise in the design of mixed-signal ICs, and we are excited to welcome all Creative Chips employees to Dialog.

The industrial IoT market is growing, and we expect this business to continue to our growth track -- to contribute to our growth strategy over the coming years. The transaction was closed on the 31st of October for a consideration of approximately $80 million and additional earn-out based on targets of 2020 and 2021 of approximately $23 million.

Let me cover a few additional points about Creative Chips' customer base and technology on Slide 7. This acquisition gives us an entry point into this growing segment of IoT, adding an extensive IP library of products which efficiently connects a large number of industrial IoT sensors, industrial networks. Additionally, Creative Chips has been working on an emerging line of IO Link standard products, which will be leveraged through Dialog’s global sales and distribution network to accelerate uptake of this solution.

As you can see on this slide, its customer base is made up of Tier 1 names in the industrial German ecosystem. This group of customers will bring additional opportunities for Dialog products, such as Bluetooth low energy and CMIC.

Before handing over to Wissam, let me summarize on Slide 8 why we remain well positioned to create shareholder value. The success of Dialog starts with the courses of capabilities grounded in deep mixed-signal expertise and power-efficient technologies, which has become increasingly important in today's connected world. We are building on that strong foundation while sharpening our focus on fast-growing segments of IoT, mobile, automotive and computing and storage.

The closed agreement with Apple positions Dialog for robust earnings and strong cash generation with visibility through 2022 as we continue to win new design engagements with our largest customers. And lastly, we're investing in the pursuit of our growth strategy while returning cash to shareholders. We have delivered a strong set of results, and we are busy working on opportunities to further expand the business which will generate revenue over the next 3 years, all of which gives me confidence that Dialog is well positioned to create shareholder value over the long term.

Wissam, over to you, please.

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Wissam Jabre, Dialog Semiconductor Plc - CFO & Senior VP of Finance [4]

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Thanks, Jalal. Good morning, everyone. Let me take you through the key items of our financial performance on Slide 10. We will go into more details shortly, but there are a few points I would like to make here.

First, Q3 2019 underlying revenue of $409 million was slightly above the high end of our July guidance range and up 7% year-on-year. Second, our underlying gross margin was in line with our July guidance at 49.5%. Third, we delivered underlying operating profit of $103.8 million and underlying operating margin of 25.4%, up 360 basis points from Q3 2018. And lastly, we generated strong free cash flow of $87 million during the quarter, up 10% year-on-year, while continuing to invest in our business. Free cash flow margin was 60 basis points above Q3 2018.

On the next slide, I would like to give you some additional color on our revenue performance during the quarter. On the right-hand side, you can see the breakdown of the third quarter revenue. I'd like to highlight a few key points.

First, if you look at the blue section of the chart, Q3 revenue from our largest customer, excluding main PMIC products, doubled year-on-year. Design win momentum continues in this part of the business, and we are expecting revenue from new contracts to begin over the course of the next 3 years. And second, our key growth products outside of our largest customer continue to perform well and are attracting increasing interest from customers. The combined revenue from Advanced Mixed Signal; Connectivity & Audio, excluding FCI; and the automotive products reported under Custom Mixed Signal was up 8% year-on-year. And third, at the top of the 2018 bar, you can see the contribution from FCI and the license revenue.

The star performer in the quarter was Connectivity & Audio, which was up 27% year-on-year due to improved demand for Bluetooth low energy products as a result of new product launches in fitness trackers and smart watches; the revenue contribution from the acquisition of FCI; and for the fourth consecutive quarter, strong revenue performance from new audio products targeting premium consumer headsets.

Advanced Mixed Signal was up 6% year-on-year, driven by growth in all 3 product categories, AC/DC charging products, LED drivers and configurable mixed-signal IC. The main drivers of the strong group performance in the quarter compared to the midpoint of our guidance range were the increasing volumes and content in several platforms of our largest customer as well, as the strong performance in Connectivity & Audio.

On a year-to-date basis, underlying revenue for the group was up 3% year-on-year, $1.040 billion. We are delivering on our plan to expand the business with our largest customer outside the technologies included in the licensing agreement and remain confident in the prospects of our key growth factors.

Turning to Slide 12 to cover gross margin. In Q3 '19, underlying gross margin was in line with guidance at 49.5%, up 90 basis points year-on-year. The license revenue contributed positively to our gross margin performance by approximately 80 basis points. On a year-to-date basis, underlying gross margin was up 150 basis points compared to the same period last year mainly driven by lower manufacturing costs and product mix and including contribution from license revenue of approximately 60 basis points.

Let's now turn to Slide 13 to discuss operating expenses. Q3 2019 underlying operating expenses were $103.7 million, down 1% from Q3 2018 due to the lower R&D expenses partially offset by the first time consolidation of FCI into the group. As a percentage of revenue, underlying operating expenses in the quarter were down 180 basis points year-on-year to 25.4% in Q3 2019. Underlying R&D expenses in the quarter decreased 4% year-on-year to $72.1 million. As a percentage of revenue, R&D was down 190 basis points to 17.6%.

Underlying SG&A expenses were up 6% year-on-year to $31.6 million, mainly due to the first time consolidation of FCI into the group. But as a percentage of revenue, SG&A was in line with Q3 '18 at 7.7%. On a year-to-date basis, operating expenses were down 2% year-on-year to $305.4 million. This was the result of lower R&D expenses, partially offset by the first time consolidation of FCI into the group.

Turning to Slide 14 to cover operating profit and earnings per share. In Q3 2019, underlying operating profit and margin improved year-on-year. Underlying operating profit was up 24%, and operating margin was up 360 basis points to 25.4%. The increase in operating profit reflected higher revenue, lower operating expenses and approximately $5 million of income from engineering contracts. At the bottom of this slide, you can see the breakdown by business segment. Underlying operating profit for Connectivity & Audio was broadly in line with Q3 2018 at $5.4 million. These results included the first time consolidation of FCI into the group.

During the quarter, we continued to invest in our Advanced Mixed Signal business, resulting in a lower underlying operating profit year-on-year. Underlying operating profit for Custom Mixed Signal increased significantly to $88.7 million, and the underlying operating margin improved to 31.9%. The increased operating profit was mainly due to the slightly higher revenue and lower operating expenses. And lastly, corporate delivered $3.5 million profit compared to a $3 million loss in Q3 2018. In addition to the ongoing license revenue, corporate costs decreased 8% year-on-year to $2.8 million.

On a year-to-date basis, underlying operating profit was up 31% year-on-year to $233 million, and operating margin improved by 480 basis points to 22.4%. The underlying effective tax rate in Q3 '19 was 20.5%, down 50 basis points on Q3 '18. Underlying diluted EPS in Q3 2019 was $1.13, 33% above the previous year and growing at almost 5x faster than revenue. On a year-to-date basis, underlying diluted EPS was $2.46, up 34% year-on-year.

From earnings, let's now turn to Slide 15 to take a closer look at inventory and cash. Inventory level was 20% below the previous quarter at $125 million, representing a sequential 29-day decrease in our days of inventory. During Q4 2019, we expect inventory value to remain broadly in line with Q3 '19 and days of inventory to be slightly above. Cash flow from operating activities during the third quarter was approximately $97 million, up 12% from Q3 2018. This was due to higher cash generated from operations, partially offset by higher income tax paid.

Free cash flow for Q3 2019 was $87 million, up 10% year-on-year, mostly due to the higher cash flow from operating activities. At the end of the third quarter, our cash and cash equivalents balance was $1.2 billion, a 3% increase sequentially.

During the quarter, we bought back 800,000 shares for an amount of $37 million. And since quarter end on 31 October, we purchased an additional 865,000 shares for an amount of $41 million. So far, under this tranche, we have purchased 1,665,000 shares. As a reminder, this tranche is for an amount of EUR 125 million to EUR 150 million and will run until the 5th of December.

In summary, during the third quarter, we delivered another solid set of results with revenue up 7% year-on-year, increased gross margin and operating profit. Our cash position continues to improve while we invested in growth of the business and returned cash to shareholders.

Before we open the call to questions, I would like to talk about the Q4 outlook. We anticipate a good Q4 2019 with revenue in the range of $350 million to $370 million. At the midpoint, this will result in full year 2019 IFRS revenue of $1.556 billion and underlying revenue of $1.410 billion. Full year 2019 underlying gross margin is expected to be broadly in line with that achieved in the first 9 months of the year.

With that, I'd like to open the line for questions. [Brika], please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from...

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Wissam Jabre, Dialog Semiconductor Plc - CFO & Senior VP of Finance [2]

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Sorry, [Brika], I need to make a quick correction on the guidance.

The range is $350 million to $390 million, with a midpoint of $370 million. So the guidance range for revenue is $350 million to $390 million, with a midpoint of $370 million.

Thank you. Sorry about that.

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Operator [3]

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The first question today comes from Achal Sultania from Crédit Suisse.

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Achal Sultania, Crédit Suisse AG, Research Division - Director [4]

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Just one question on the sub PMIC business. I guess how should we think about the content at your largest customer from current levels going into 2020 and 2021? You already talked about some RFQs that you're already working on. You're talking about the ramp of some new high-volume contracts from second half of 2021. Can you give us whatever color you can on what's happening with the sub PMIC or audio content with your largest customer?

And then second one, on the automotive side of things, you have been winning some incremental -- or at least you've been cooperating with Renesas and Xilinx on advanced driving systems infotainment. How big do you think this opportunity could be, like, are we talking about like tens of millions of dollars or could this actually become like $100 million business over time? And when can we actually start to see the product launches for this part of the market?

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [5]

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Thank you. So the -- I think on the first question, with sub PMIC, so we expect increasing content as we go forward. We've been saying for some time that the numbers of PMICs will grow, and the phones, and that's continued to happen. And as you saw this quarter, we've delivered 100% growth over the same sub PMIC as measured a year ago. So you can see the amount of content is increasing, is not -- is across the board in addition to phones we're seeing in other products. The contracts that I've indicated in the press release we won is not purely for sub PMIC. As we indicated, we're getting a much wider opening now to things like chargers, display and audio, and we've been winning some of those. Those contracts will kick in from second half of 2021. So that's the commentary there. But the regular sub PMIC that we work on, they continue in the current phones in the next year as we [advertise] with new sub PMICs. So that continues. But the new contracts, high-volume contracts are for -- in addition to new sub PMICs, there are also, let's say, other mixed-signal products which are high-volume for phones, and they go into production from second half of 2021.

On the second question, automotive. The -- so we have a broad segment. I pushed automotive in terms of a lot of different products being qualified to add to our portfolio. So for example, we announced a CMIC recently qualified for automotive. We are working on some backlight display drivers that have the digital dashboard in cars. So -- but your question is specifically on the PMIC which comes from our strengthening processor support using power management. So that is actually going quite well. We have now over 45 engagements on PMICs and sub PMICs in the infotainment and ADAS system. A lot of these are in Japan and in China. Some already actually in production chart. So we started to see revenue from that. It's going to be small because infotainment system isn't a huge volume driver, and it takes time to get the full volume. So we certainly see it in terms of tens of million by next year. And I think we will definitely be aiming to release new product to take us towards the $100 million, say 4, 5 years out. It's not in the short term, but we're definitely on track, particularly as we release other products that I mentioned like Bluetooth PMIC and display drivers as well as CMICs for the automotive. Hopefully, that answers your question.

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Operator [6]

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Next question today comes from [Frank Molly] from Barclays.

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Unidentified Analyst, [7]

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So I had another one on the sub PMIC side. I suppose everything related to Apple outside of the license agreement, the fact that, that revenue grew 100% in the quarter, and you're also highlighting the strength of the design in activity. Is that -- it feels from your commentary that that's going a bit better than you'd anticipated in terms of win rates and outlook. So I'm just wondering how we should be thinking about into next year and beyond, given the 30% to 35% guidance you've given us for that over the long term.

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [8]

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Right. I think we want to stick with the 30%, 35% guidance, and we just have to double our efforts to grow everything else faster. So we have -- we are doing better with the new contracts, as you indicated. They tend to -- these are contracts that we're starting to work on the chip. So it'll be 9 months to a year before the chip is out, and it takes another year of qualification. So this is why I'm being very specific about the new revenue starting in the second half of 2021 for the model that will be launched then. So -- but we've had other products under development, which really contribute to 2020 in the meantime. So -- but yes, we are very pleased with the range of contracts awarded to us or design business they awarded to us, and they contain very high-volume business for phones. And as we get more clarity, we will share more. But right now, we -- and also indicated in our press release that since the beginning of the year, we are -- we have won equivalent of -- or something approaching $1 billion worth of custom chip contracts from all customers. Obviously, a lot of it comes from our largest customer, but they want it across also other customers. So that's separate from our IoT products, separate from our power conversion and the other standard products that we ship. So we're very pleased with the amount of custom opportunities that's coming our way, and we still got another quarter to add to that deal.

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Unidentified Analyst, [9]

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Understood. If I could ask another one on gross margin, perhaps for you is another area where you guys have been doing better than anticipated. If I recall, this time last year, you were still talking sort of 47%, 48% over the long term. We're clearly now solidly in the 49% to 50% range for this year. Is there any reason why things should change as we look into 2020 and 2021, be it pricing mix, manufacturing, any reason to sort of throw you off from the current 49% to 50% range?

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Wissam Jabre, Dialog Semiconductor Plc - CFO & Senior VP of Finance [10]

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Good question, Andrew. Well, we -- as we indicated, since the beginning of the year, we were helped by some good manufacturing costs, but also the product mix has been very favorable. And so going forward, from these levels, I don't expect anything to throw us off. Obviously, we continue to focus on our manufacturing costs internally and driving costs really down and efficiencies and all these different things. And also, as the product mix continues to rotate towards the high-growth businesses that attract a slightly higher gross margin, we should see -- we should basically not see anything sort of distract us from where we are today.

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Operator [11]

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(Operator Instructions) And the next question today comes from Mitch Steves from RBC.

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Mitchell Toshiro Steves, RBC Capital Markets, Research Division - Analyst [12]

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I just have one that's kind of -- talking about the mix of the business now, as you continue to do some acquisitions here and there and also on top of that, it looks like the mix is actually going to improve in terms of the gross margin profile, from prior questions. So if I look at assets that you guys may look at in the future, is that now a criteria to get gross margin expansion if you guys are going to go into new areas? Or would you still be interested in assets that have similar margin profile to the corporate average right now?

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [13]

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So thank you for that question, Mitch. The -- I think clearly, we want to improve our gross margin with every opportunity we have. This is given, right? But in acquisition, we look at things which are accretive to our margin. But sometimes, they are not at the point of acquisition. But if we -- we only then get attractive to good acquisition if we have a clear road map, that we can see that those margins can be improved over a reasonable period of time, for example, using our cost base. So when you buy a start-up, they typically don't have the same purchasing power, so their margin may be lower than our corporate margin. But if the understanding is that the quality of the product is good, pricing is good, but the manufacturing costs would benefit from what Dialog can negotiate or can supply. Then clearly, that is something that we see as added value for us to do. So we don't reject an asset just because of a slightly lower margin than, say, our corporate average for whether we have a visibility improving it.

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Mitchell Toshiro Steves, RBC Capital Markets, Research Division - Analyst [14]

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Got it. And then just in terms of like the direction you guys have gone, you got into the CMIC business, you've gone to some other smaller subsectors as well. So I guess, broadly, what do you guys think are kind of the main verticals or end markets you guys would fit best for the company?

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [15]

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So our key components of the business, historically, it's been mobile, and that continues to be the largest part of the business. But we've taken a lot of steps, practical steps in terms of diversification to add other subsegments. Those segments we are focused -- and we talked about automotive earlier on. So that's a push internally to qualify and release products that we already have into automotive. They get better margin and better life cycle in terms of revenue. We are also doing new products for automotive. But that will take some time to bear fruit. We're already seeing some of the revenue, but it will be some time before it is noticeable in terms of revenue contribution.

The other areas we've talked about is industrial. So we have some industrial business. But with the Creative Chips acquisition, they are firmly into industrial automation, a clear IoT for industrial-type segments that we are focused on. And we think that would be a building block for further building in that part of the market, which is much more stable in terms of revenue on the long-term basis and the profitability as well. So if you look at all our products have sizes, communication or mobile, that the margins tend to be better. And as we shift the ratios, that will provide us a positive backdrop, positive tailwind to our profitability going forward.

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Operator [16]

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The next question we have comes from Sandeep Deshpande from JPMorgan.

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Sandeep Sudhir Deshpande, JP Morgan Chase & Co, Research Division - Research Analyst [17]

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I have 2 quick questions, if I may. I mean you still do have quite a lot of main PMIC revenue from your major customer. As that rolls off, I mean just in response to the earlier response on gross margin, I mean would we not expect your gross margin to rise? Because I mean historically, your gross margin from the consumer market has been much weaker than the market, the other markets that you are exposed to. So as to the next couple of years, those revenues fall off. I mean I would expect your gross margin to rise. So maybe you can make a comment on that.

Then the second question is regarding this Creative Chips acquisition. I mean can we understand, I mean, what kind of industrial chipset are you getting into and what kind of intellectual properties that company brings, as well as what do you plan to integrate in there, such as to expand that portfolio? Because this does seem like a very promising area over the next 3, 4 years as IoT -- as particularly some of your wireless technologies like Bluetooth, et cetera, whether any of them will be of use in those markets.

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [18]

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All right, Sandeep. So again, I don't want to project forward. This is really a Q3 discussion, mostly. You're right, our main PMIC revenue will be declining as we've indicated and as you guys have modeled. However, I also point out that our sub PMICs are growing very fast and they tend to have very similar margins. So although one goes down, the other one is going up. So there's like some offsetting effect, if you will. Nonetheless, as I said, as the ratio changes over the years and over the next 2, 3 years, the ratio of products with more higher gross margin relative to high-volume custom business where the margins are usually pressured changes, and that provides us with a tailwind in terms of margin improvement. And that's what we hope to see. But today, we're not going to talk about the next couple of years specifically. We'll guide next year in Q1.

On the Creative Chips, it's -- the company with over 20 years of history in the German industrial market, with industrial customers. And I think some of the customers are mentioned on the slide that we've published, very, very good names. As I said, long working history of custom mixed-signal design. They target industrial automation, PLC controllers, Ethernet to connect within the industrial machines to computers and to the cloud over time. So it's a very promising area. It's not a consumer business, so the type of cyclicality that you see there will not be here. There'll be more waterfalling effect of revenue as you harvest new projects and new revenue stream. So we're very hopeful on this, and of course, it's a small company. But as we projected in our press release, we expect 75% growth over the next few years per annum, based on designs that we already developed and designed for key customers of them. But interestingly, their expertise also is applicable to other aligned segments. For example, they have opportunities, and indeed, some business in automotive as well in Germany, but also a potential in Asia in both industrial and automotive ASICs.

The reason we are interested in this is because I think it's part of the market which is kind of neglected by a lot of semiconductor companies as they move down to much bigger type focused businesses, because industrial, by nature, is a more fragmented type of industry, and it takes time to build a nice, large or growing revenue stream. And we think we have the basis of that, and we're going to be adding to it. And people have moved down to just focusing on standard products. So there is a gap in the market for people who can provide custom mixed-signal chips of the longevity that we talked about these products, somewhere from the last 16 to 20 years in production. So very, very different to what we've been doing in mobile. It's like 18 months to 3 years’ life cycle.

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Sandeep Sudhir Deshpande, JP Morgan Chase & Co, Research Division - Research Analyst [19]

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Just one follow-up, Jalal, on that. I mean is it that you're going to do this market like Creative has been doing with ASICs or are you going to make standard products? Because historically, you have done ASICs for some particular customers, but you haven't done ASICs across the board for lots and lots of customers.

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [20]

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Right. So I mean the ASICs usually come with a return on investment analysis. So we don't do ASIC lightly, it's going to pay for itself, because, typically, you have to invest resource upfront for something to come for years later. And so it's -- but interestingly, the -- you've seen in our latest results, we're moving more and more towards prepayment by customers towards engineering efforts before we take on. So that lowers our risk because there's more skin in the game by those customers. So we tend to shift towards that model, i.e., they have to be so confident in their design that they are happy to pony up upfront some contributions to our design cost. And -- but as I say, you have to then also model a longer cycle of revenue relative to, say, consumer business. So you take into account 5, 7, 10 years, sometimes of revenue generation from a design to make up. But provided those are there, provided it's differentiated, and we get good gross margin. We are absolutely interested in expanding the business in this area, and Creative will give us the platform to build that.

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Operator [21]

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(Operator Instructions) Your next question today comes from Christoffer Wang Bjørnsen from DNB Markets.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [22]

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Yes. Can you hear me?

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [23]

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I can hear you, yes.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [24]

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Great. Super. Yes. So congrats on a great quarter and a good growth in the business there, that's quite impressive. I was just wondering if you could comment a bit on what was driving kind of the acceleration in growth from Q2 to Q3. And also, we noticed that you lost the [OTAs in the Quarter 3, one of your customers, Rapid Charge]. They've shipped 26 million units since they started, so this might be a significant volume. Will that be a headwind in Q4?

And another question on the Bluetooth business was if you could comment on how important the new Cortex-M33 based chipset has been for the revenue growth during the quarter. And also, it would be helpful if you could remind us what base that 61% growth was. I just wanted to understand your market share and how significant that business is for you. That's my first 2 questions, if we could start there.

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [25]

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So on the low energy Bluetooth, we're continuing our growth and taking market share, and you can see it in our numbers. I don't think many companies are reporting 51% growth on a year ago quarter. So clearly, you have to be taking market share in a market that's growing around 10%.

The business growth drivers that are helping us this year in general, but also Q2 to Q3, are fitness bands. And so these started in China, with our customers there. As you know, we're now in the fourth generation of Xiaomi fitness trackers, fitness bands, and that's growing really significantly, very healthy growth. But also we announced that we are inside the latest release, the press release of Samsung, fitness bands as well as they released too, and we are in both of those. Also, I think on the previous calls, I alluded to being in also accessories, things like pens for tablets and phones, and that's going really well as well. And in the -- we are in a really broad range of projects. You mentioned [time]. So we're not there in the latest version, but we are in older version. But generally, I don't think their volumes is now moving the needle for us. We have much bigger volume drivers, it's new end equipment. An example of that is what we've just released, the TINY that we announced this week, which is a really, really low-cost, low-power device designed for disposable, including disposable end equipment. So this goes into, for example, medical stuff like insulin pens that you throw away after use as well as connecting sensors and other things. We already have design wins on this brand-new product, multiple design wins, for example, in things like solar calculators to digital watches in addition to this end target market, which is the connected medical. So we're very, very happy with the progress in our low energy Bluetooth, and we'll continue to expand. We do have also a version which is qualified for automotive business, and that will help us in things like tire pressure monitors as well as key fobs that are coming in a couple of years' time. So not only we have short term, but also we have midterm and longer-term end markets that we have designed in.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [26]

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That's helpful. And then a follow-up question on -- first one, on Bluetooth business. If you could remind us how much revenue you have on this -- on the year-to-date. And then my next question is basically more -- undecided on the Q3 call, but more strategic point of view you have -- in the Bluetooth business today, you have -- expect an ASP of about $1 or below. And a lot of these customers are in relation in the future business being technologies (inaudible) and on the IoT market ramps, how are you kind of thinking about that market and how do you think about going into that market, going to get that significant opportunity of maybe $10 per unit on the same customer base?

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [27]

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Okay. I mean if somebody has got $10 opportunity per Bluetooth, that's what we'd like to invest. We don't see that in high-volume markets. We have a very clear view of the markets we're serving. So the Bluetooth, by the way, is more than $1 because ours is more sophisticated. It's got double ARM cores, one to run Bluetooth stack and the other one runs the customer applications. So they tend more to be in $1.30, $1.40 type range. The latest one is, which I talked about, the TINY. That's a single-core, very, very low-cost for disposable. That would be just released. It's not in our revenue mix yet. That will be a lot lower ASP, but it goes into massive high-volume type end equipment.

In terms of the new markets, obviously, we will create modules which are more expensive than chips, because we can pack other components, antennas and deliver a module rather than a single chip. But that's typically lower volume, and it's for people who don't have the expertise to design using the chip by themselves or the module hubs in those designs.

Also bear in mind that we added in Q1 an IoT Wi-Fi line to our business. So we'll be looking to also couple up the very, very low energy Wi-Fi and Bluetooth into similar modules or technologies and, over time, integrate into a road map. So many of our customers want to have both, because in some cases, you want Bluetooth for connectivity to watches, to -- sorry, to phones and tablets. WiFi directly connects to WiFi router, so you bypass, and intermediately, if you want to just go to the cloud. So they're both helpful for different applications. And I think we have to -- so we have little focus on those. And we look and see what other radios are becoming popular that would complement our portfolio in the future.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [28]

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Just final quick one for me, sorry. Is that there is some customers out there?

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [29]

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Just a very quick one, please. We need to allow time to...

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [30]

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Yes. There's been some effort you see from Apple brand and you've seen Amazon going into this new. Do you see any threats within these new kind of wireless technologies being now focused on buying big clients and customers of yours?

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [31]

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No. We see that as complementary because they use it for different applications and they coexist in many of the applications we'll examine. So I don't -- they're not a replacement for Bluetooth. There are -- for example, you use Bluetooth for provisioning, whereas you would use UWB for transferring data. So those are the different end applications or end-use within the same application. So the same thing, as I mentioned, between Bluetooth and Wi-Fi, you can use both in many of the end equipment for different reasons. So we see that as complementary.

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Operator [32]

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Next question today comes from David O'Connor from Exane BNP Paribas.

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David O'Connor, Exane BNP Paribas, Research Division - Analyst of IT Hardware and Semiconductors [33]

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One or 2 from my side. Maybe first, you talked about design wins ramping in the second half of 2021. But can you talk more about the visibility into 2020 to next year and what new design wins you have for next year? The first question.

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [34]

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We have a lot of designs that are going to production in 2020. So what I was referring to was specifically new contracts we won in this quarter which we start design now, and by definition, they will end up in products by customers which are released in the second half of 2021. So it was very specific set of high-volume applications that we won this quarter. This wasn't the general comment about all new contracts starting in 2021. It was very specific on 2 or 3 parts that we won in this quarter.

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David O'Connor, Exane BNP Paribas, Research Division - Analyst of IT Hardware and Semiconductors [35]

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Okay. But for instance, the second half of next year, what have we got in the pipe for this?

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [36]

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We will tell you at the beginning of the year when we guide for 2020. So we've been telling you -- not you, but all the market, for the last 12 months then we've been projects, those contracts that start in 2020. So I don't think there's anything different to what we've said. So all along, every quarter, we are working on new ICs. And depending on the start time, they come out and they target products for the customer that goes into production 18 months later. So we've been working on the 2020 products for some time. We have most of that ready, but there are new applications also being developed. But the later you get in the year, the products that you work on will fall into 2021 cycle. That's all it is.

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David O'Connor, Exane BNP Paribas, Research Division - Analyst of IT Hardware and Semiconductors [37]

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Okay. Got it. And then maybe I have one more follow-up on the -- you mentioned in the release, the $1 billion in lifetime wins. How should we think about that in terms of new incremental wins versus new versions of existing chips? I just wanted to clarify that.

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [38]

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I think it's -- I mean there are all new production on things, I don't know, it's hard to determine. Remember, they -- when somebody designs a brand-new phone, it's very hard to say we are replacing an old profitability and all parts starting from 0. So in some respects, some functionality of the old will be replaced, but there's always new functionality added. So there isn't a direct equipment that I can point to. So the context I'm talking about are, if you -- what you mean is it sub PMIC as opposed to new, I would say, probably, but -- roughly about 40% would be brand-new products which are not sub PMIC. So in other areas of mixed signal, as we indicated, we are diversifying our business in addition to power into other mixed-signal activities. So I would say about 40% are brand-new in the sense of they've got nothing to do with power management, the one other mixed-signal activities. And 60% are new power management related parts that we'll be developing. Does that answer your question?

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Operator [39]

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The final question today comes from Adithya Metuku from Bank of America.

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Adithya Satyanarayana Metuku, BofA Merrill Lynch, Research Division - Associate [40]

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Two questions. Firstly, just on fast charging. Do you see penetration today? And how do you see that developing over the next year or so? It feels like almost all of the handsets we're seeing these days are coming fixed, and the Android space are coming with fast charging. So I just wanted to get your sense there.

And secondly, I just wondered if you could give us a little bit of color on how your LED drivers business is doing and what you have in store for that business as you go forward.

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [41]

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Adithya, I didn't hear the second question. What was the question about, sorry?

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Adithya Satyanarayana Metuku, BofA Merrill Lynch, Research Division - Associate [42]

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It's just the LED drivers business.

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [43]

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Oh, LED. Okay, okay. Sorry. Yes, that's fine. So on the fast charging business, your first question, so you're right. The penetration of fast charging in smartphones have expanded. We've got a lot of midrange movements with fast charging as they come to the market. We have a pretty large share of this market, and we've shown some growth this quarter as well. But remember, the volume increase doesn't necessarily, I guess, translate linearly into revenue increase, just because of price erosion. There's a lot of competitors, even from Asia coming onto the scene as well. So we tend to try and target more complicated, more sophisticated or higher-end type products. So in the last, I would say, 6 months, we've been focusing on higher wattage. So even though we are shipping high-volume to 10 watt-, 18 watt-, 22 watt-type adapters, a lot of our activity in terms of new product development, the customer, has been shifted to more like 30 watts, 40. 40 watts is the latest that we're looking at. And even 55, 60 watt-type adapters are driving, if you like, the next wave of technology, and we have excellent controllers for those high-power devices. So that's kind of the change, if you like, that's happening for us. And that means we can maintain a reasonable margin while maintaining a large share with both existing and new products.

In the second question, LED drivers, so it's -- I want to clarify. This is LED backlight drivers, it's not LED drivers, as such. So the backlight driver is very specific is a string of LEDs which are very tightly controlled -- finely controlled, I should say. So that means that you can turn them, hosts of them, on and off with very precise accuracy of which ones are on and off. And we're talking thousands of LED driving in some applications, for example, like car headlamps.

But where we're shipping today is the TVs. These are TVs that need higher resolution or higher dynamic range, I should say. And we basically got pretty much every brand name of TV using our backlight drivers currently, that you could mention in Korea, in China, in Japan and Taiwan, which are feeding the rest of the world with TV. So we are in every single brand, from 75-inch to 65- and 55-inch TVs with big, nice screens where you want to control the zoning of the light. That's all using Dialog products. We're #1 in that market, and it continues to grow.

But I think the excitement for future is where you can take this application, and we're very confident that we can use it in automotive as one category that we are looking in the digital dashboard. We have some traction there. The headlamp is another one, which we actually got an engagement with a major headlamp automaker. And another area is more consumer tablets and related to phone activity, which we see some early traction at the moment. And we're hoping some of those will turn into much larger volume drivers for our backlight drivers, which is a unique technology.

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Operator [44]

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We have no further questions. I'll hand back over to you.

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Jose Cano, Dialog Semiconductor Plc - Head of IR [45]

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Thank you, [Brika]. Just thank you, everyone, for attending the call today, as usual. And if you have any further questions, please don't hesitate to contact us. Thank you.

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Operator [46]

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Ladies and gentlemen, that does conclude today's call. Thank you again for joining. You may now disconnect your lines.