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Edited Transcript of DLG.DE earnings conference call or presentation 30-Jul-19 8:30am GMT

Q2 2019 Dialog Semiconductor PLC Earnings Call

LONDON Aug 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Dialog Semiconductor PLC earnings conference call or presentation Tuesday, July 30, 2019 at 8:30:00am 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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* Adithya Satyanarayana Metuku

BofA Merrill Lynch, Research Division - Associate

* Andrew Michael Gardiner

Barclays Bank PLC, Research Division - Director

* David O'Connor

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

* Mitchell Toshiro Steves

RBC Capital Markets, LLC, Research Division - Analyst

* Sandeep Sudhir Deshpande

JP Morgan Chase & Co, Research Division - Research Analyst

* Sébastien Sztabowicz

Kepler Cheuvreux, Research Division - Head of Tech - Equipment Research

* Stephane Houri

ODDO BHF Corporate & Markets, Research Division - Research Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Dialog Semiconductor Q2 Results 2019.

(Operator Instructions). I would now like to hand it to Jose Cano, Head of Investor Relations, to begin. Jose, please go ahead.

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

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Thank you, Megan. Thank you. Good morning. Thank you for joining us today. Our call is being hosted by Dr. Jalal Bagherli, Dialog CEO; and Wissam Jabre, our CFO.

In a moment, I will hand you over to Jalal to talk through the company's second quarter performance. First of all, as usual, I must remind everyone that today's briefing, with some of the answers to your questions may contain forward-looking statements. These statements reflect management's current views and there are risks associated with them. You can find a full explanation of these risks on Page 2 of the investor presentation, it can also be found on our website.

I would now like to introduce Jalal, who will 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, and good morning to everyone. We have continued to make very strong progress during the second quarter, posting revenue above the high end of our guidance range, improving underlying gross margin and operating margin and delivering continued strong cash flow generation.

Last week, we announced also our new organizational structure and management team. Let me outline the thinking behind those changes on Slide 4. In support of our growth strategy and the transformation of our business over the coming years, we made a number of changes to our organizational structure. These changes aligned with our focused R&D approach and pursuit of business opportunities. The key management changes to note are: Vivek Bhan, previously our Senior VP of Engineering, is now leading the new Custom Mixed Signal business group; Tom Sandoval, who previously led our sales organization, has been appointed SVP of Automotive, leading the thrust of the group's efforts into the automotive end markets; John Teegen, who previously led the Configurable Mixed Signal business unit, will now lead group's Global Sales; and finally, Alex McCann, who joined the group in May 2019 from Analog Devices, will lead our Global Operations. He brings over 20 years of semiconductor operations experience to this new role and will add enormous value to our management team.

In line with these organizational changes, we have reduced the number of reporting segments from 4 to 3, namely Custom Mixed Signal, Connectivity & Audio and Advanced Mixed Signals. Further detail on the associated reporting changes can be found in last week's announcement. We are well positioned for long-term growth, and I'm confident that the business has the right structure and leadership to execute on our strategy and create shareholder value. As you all know, we have sharpened our strategic focus on fast-growing segments of our target end market.

So let me highlight some of the key growth vectors we see across these markets on the next slide, Slide 5. As the number of connected devices continues to grow, we are focused on expanding our footprint in consumer IoT. Following the acquisition of FCI, we launched our first low power Wi-Fi device, which complements our existing portfolio of Bluetooth low energy SOCs. Venstar, one of the largest global thermostat suppliers, has adopted our low power Wi-Fi device, enabling over a year of battery life for its customers. Leading OEMs continued to launch new connected devices. The most advanced member of our Bluetooth low energy family was adopted by Samsung's Galaxy Fit fitness tracker, ensuring seamless smartphone connectivity and extended battery life. And as consumers demand higher quality audio experience, we continue to target the consumer headset market with our SmartBeat audio IC. Our new audio technology performed strongly this quarter with revenue more than doubling year-over-year. Lastly, our configurable products strongly complement our Connectivity & Audio solutions. In the last 12 months, we have won several design opportunities where we combine CMICs and Connectivity & Audio products.

In the mobile end market, we continue to see growth opportunities with our largest customer on a range of mixed signal products, not covered by the license agreement. In Q2, revenue growth from our largest customer, excluding 9 CMIC products, tripled year-on-year. Design win momentum is continuing there, and we are expecting revenues from new contracts to be realized over the course of the next few years.

In Q2, we launched a new CMIC device with an industry-leading LDO regulator. The device has the lowest noise performance and is attracting strong customer interest from camera module makers in mobile phones.

In Automotive, OEMs are increasingly focused on developing vehicles, which are connected, autonomous and electric, and this is driving an increasing need for power management and power efficient technologies. Many of these are standard technologies such as power management, LED backlight and Bluetooth's low energy, providing us opportunity to leverage our expertise into this end market. Very recently, we have started a project, developed a custom solution for a Tier 1 auto supplier based on our LED backlighting technology.

Finally, in computing and storage, there is an increasing need for custom power management solutions for gaming applications and solid state drives. Additionally, we are seeing increasing adoption of CMICs and LED technologies. This particular area, we have recently kicked off a customer project, using complex LED drivers for notebook screens.

On Slide 6, let's look at how we expect Dialog to transform over the coming years. We are building a diversified mixed signal business with an increasingly balanced end market exposure. We expect customer concentration to reduce organically from 70% to between 35% and 40% by 2022. Following the licensing agreement with Apple, revenue from the main PMIC will steadily decline over the coming years, but we are offsetting approximately 2/3 of this with 2 key initiatives: First, expanding our business into other end markets, i.e., IoT, automotive and computing and storage; and second, growing the remaining business with our largest customer with the broader range of mixed signal products. Our business model will continue to deliver sustainable underlying operating margin between 18% and 23% and strong cash flow generation. This puts us in a strong position to pursue inorganic growth opportunities and drive further upside.

So before handing over to Wissam, let me summarize on Slide 7 why we remain well positioned to create shareholder value. The success of Dialog starts with the core set of capabilities founded in deep mixed signal expertise and power efficient technologies, which has become increasingly important in today's financial 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 earning and strong cash generation with visibilities through to 2022 as we continue to win new design engagements with our largest customer.

Lastly, we are 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 over the next 3 years.

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. Before I cover the financials, I just want to briefly remind you of the changes to our reporting segments. We have reduced the number of reporting segments from 4 to 3. Custom Mixed Signal, Connectivity & Audio and Advanced Mixed Signal. The Automotive and Industrial segment no longer exist. Automotive motor controllers are now reported with all our other custom power management products and the Custom Mixed Signal segment. Audio products are now reported together with connectivity in the Connectivity & Audio segment, and standard power management and industrial lighting products are now reported in the Advanced Mixed Signal segment.

Now let's take a look at an overview of our financial performance on Slide 9. We will go into more details shortly, but there are 4 points I would like to make here. Q2 2019 underlying revenue of $336 million was slightly above the high end of our May guidance range and up 14% year-on-year. Our underlying gross margin was in line with our May guidance at 49.7%, 140 basis points above Q2 2018. We delivered underlying operating profit of $82.1 million, almost double Q2 2018, and underlying operating margin of 24.4%. And lastly, underlying diluted EPS almost doubled year-on-year to $0.86.

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 second quarter revenue. I would like to highlight 2 key points: First, if you look at the blue section of the chart, Q2 revenue from our largest customer, excluding main PMIC products, was over 3x higher than in Q2 2018. Design win momentum continues in this part of the business, and we are expecting revenue from new contracts to be realized over the course of the next 3 years. And second, our key growth products outside of our largest customer continued 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 now reported under Custom Mixed Signal was up 5% year-on-year. The star performer in the quarter was Connectivity & Audio, which was up 25% year-on-year. As anticipated in May, demand for Bluetooth low energy product improved significantly due to new product launches in fitness trackers and smart watches. We expect Bluetooth low energy to perform well during the second half of the year, particularly in Q3. And for the third consecutive quarter, revenue from new audio products performed strongly, more than doubling year-on-year as consumer demand for a better audio experience requires more complex audio solutions.

In Advanced Mixed signal, we delivered 26% sequential growth. Revenue from AC/DC charging products grew 52% sequentially as our customers increasingly adopted USBPD Type-C Rapid Charge technology. CMIC demand also increased sequentially, and we anticipate year-on-year growth to accelerate in the second half of the year.

And lastly, LED lighting products performed strongly in Q2, up 51% sequentially led by backlighting products. The main drivers of the strong 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 1% year-on-year at $631 million. We are delivering on our plan to expand the business with our largest customer outside of the technologies included in the license agreement and remain confident in the prospects of our key growth vectors for the second half of the year.

Turning to Slide 11 to cover gross margin. Q2 2019 underlying gross margin was at a record level of 49.7%, up 10 basis points sequentially and up 140 basis points year-on-year. As anticipated, the ongoing license revenue contributed positively to our gross margin performance by approximately 90 basis points. The remaining year-on-year increase was due to product mix and lower manufacturing costs. On a year-to-date basis, underlying gross margin was up 190 basis points compared to the same period last year.

Let's now turn to Slide 12 to cover operating expenses. Q2 2019 underlying operating expenses were $98 million, down 3% from Q2 2018, mainly due to lower R&D expenses partially offset by first time consolidation of FCI into the group. As a percentage of revenue, underlying operating expenses in the quarter were down 500 basis points from 34.2% of revenue in Q2 2018 to 29.2% in Q2 2019. Underlying R&D expenses in Q2 '19 decreased 5% year-on-year to $67.5 million, including the savings from the transfer of over 300 employees to Apple as part of the license agreement. Compared to Q2 '18, we had approximately $6 million of headwind from higher amortization and lower capitalization of development costs. Excluding this, underlying R&D expenses were 13% below Q2 2018. Underlying SG&A expenses were up 1% from Q2 '18 at $30.5 million, mainly due to the first time consolidation of FCI into the group. As a percentage of revenue, SG&A was 110 basis points below Q2 2018 at 9.1%, mostly due to the higher revenue. On a year-to-date basis, operating expenses were down 2% year-on-year to $201.7 million. R&D expenses were down 3% year-on-year and SG&A expenses were up less than 1%, mainly due to the first time consolidation of FCI into the group.

Turning to Slide 13 to cover operating profit and EPS. In Q2 2019, underlying operating profit and margin improved significantly year-on-year. Underlying operating profit was up 95% and operating margin was up over 10 percentage points to 24.4%. The increase in operating profit was mostly the result of the higher revenue, lower operating expenses and $12.5 million of income from engineering contracts relating to the Apple license agreement. At the bottom of the slide, you can see the breakdown by business segment. Underlying operating profit in Connectivity & Audio increased significantly to $6.8 million and underlying operating margin improved to 14.5%, while we continue to invest in growth. During the quarter, we continue to invest in our Advanced Mixed Signal business, resulting in a lower underlying operating profit year-on-year. Signal increased significantly to $66.6 million and the underlying operating margin improved to 30.4% compared to 19.3%. This improvement was mainly due to the higher revenue and lower OpEx.

Lastly, corporate delivered a $3.5 million profit compared to a $7.7 million loss in Q2 2018. In addition to the ongoing license revenue, corporate costs decreased by approximately 2/3 year-on-year to approximately $2.5 million. On a year-to-date basis, underlying operating profit was up 37% year-on-year and operating margin improved by 540 basis points. Underlying effective tax rate in Q2 2019 was 20.5%, down 50 basis points from Q2 2018. EPS in Q2 2019 was $0.86, 91% above the previous year and growing over 6x faster than revenue. On a year-to-date basis, underlying diluted EPS was $1.35, 38% up on the first half of 2018.

From earnings, let's now turn to Slide 14 to take a closer look at inventory and cash. Inventory level was broadly in line with the previous quarter at $156 million, representing an 11-day decrease in our days of inventory. This includes approximately $4 million of inventory from FCI. Excluding this, inventory balances would have been approximately 2% below the previous quarter. During Q3 '19, we expect inventory levels to increase sequentially, in line with seasonal trends, and days of inventory to decrease. Cash flow from operating activities during the second quarter was approximately $300 million, materially above Q2 2018, mainly due to the proceeds from the license agreement with Apple.

Let me drill down on this item, so you get a better understanding of its impact in the Q2 cash flow from operating activities. The 3 main components were: First, out of the $300 million from the license agreement, $28 million correspond to the asset transfer and was reported as a cash flow from investing activities; second, there was an additional outflow of approximately $8 million relating to transaction costs; and third, as you would have seen on the cash flow statement, the $300 million prepayment was recognized at its fair value of $289 million and reported as an inflow from financing activities. The below market element of $11 million was reported as cash inflow from operating activities, which means that the net impact of cash flow from operating activities for the -- from the license agreement and prepayments was approximately $275 million. Free cash flow for Q2 2019 was $290 million, materially up year-on-year. At the end of Q2 2019, our cash and cash equivalents balance was slightly over $1.1 billion, up 66% over the previous quarter. The key items behind the increase in the cash and cash equivalents were: $600 million from the closing of the license agreement, $112 million outflow for the settlement of the 2018 share buyback. This tranche started in early November and resulted in the purchase of 3.9 million shares or 5.2% of the share capital at an average price of EUR 25.37. And $45 million for closing the acquisition of FCI, Silicon Motion's mobile product line.

In line with our capital allocation framework, we continue to return cash to shareholders. On the 5th of June, we announced a new tranche of share buyback under the 2019 authorization for a minimum of EUR 125 million and a maximum of EUR 150 million and a maximum maturity date of 5th of December, 2019.

In summary, during the second quarter, we delivered another solid set of results with revenue slightly above the high end of May guidance, record gross margin and operating profit. Our earnings accelerated while we invested in growing the business and returning cash to our shareholders.

Before we open the call to questions, I would like to talk about the Q3 outlook. We anticipate revenue for Q3 2019 to be in the range of $360 million to $400 million and gross margin to be broadly in line with Q2 2019. We have narrowed down our full year guidance and we expect underlying revenue for full year 2019 to decline from 2018 by mid single-digit percentage points and to be second half weighted. Based on this expected revenue performance, we anticipate FY '19 underlying gross margin to be above FY '18.

Megan, you can open the line for questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first comes from Sandeep Deshpande of JPMorgan.

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Sandeep Sudhir Deshpande, JP Morgan Chase & Co, Research Division - Research Analyst [2]

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Can I ask a question regarding the kind of strength you're seeing at -- with Apple at the moment? I mean where is this coming from? Can we try to understand, is it that you've got new wins at multiple new products, which is causing it? Or it is because of these multiple sub-PMICs that you are selling that is causing this trend? And then secondly, in terms of your -- the business associated with charging, I mean, you've seen a big recovery in that business. Do you expect that business to continue to grow into the second half of this year sequentially?

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

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Good morning, Sandeep. So on specifically the strengths with our largest customer. I guess there's 2 pieces that we've pointed out in our slides, that's the license business and then the growth business, which I think Wissam referred to on Slide 10. So if you look at the legacy or if you like license business, the orange piece, I think that, that is -- remains pretty substantial. And that's driven by essentially the -- mostly iPhone and iPad products. We have PMICs there for generations, and these continues to sell well and that drives that segment. The blue section, which is the new sub-PMICs and other mixed signal devices we do for them, that showed a very strong growth. Over a year ago is tripled, as we said, and that is driven by accessories, multiple sub-PMICs in iPhones. But if I'll take accessories, for example, things like AirPods, you have chips in there. You have chips in Macs, things that you give out and also the sub-PMICs, multiple sub-PMICs in iPhone. So we have content expansion in a number of areas. But I will say, driven by strengths of multiple sub-PMICs and accessories. So that's the Apple strength. The charger recovery, most of our charger exposure is in Korea and in China. China was -- it was low in Q1 and partially through Q2 started to pick up, and we saw very good growth sequentially on the AC/DC part of the business. Overall, it's still kind of flat versus a year ago, but sequentially, grew really well, 50% or so and driven by fast charging or Rapid Charge as it's called. And this was driven both by Samsung and also the pickup in the China market.

Now in terms of second half, where we're sitting today with the new products going to production for the chargers, so we think that it would be higher than H1 and is continuing to pick up in H2 as people prepare new product launches with USBPD and other fast charging in anticipation or in preparation for Christmas.

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Operator [4]

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Our next question today comes from Mitch Steves of RBC Capital Markets.

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Mitchell Toshiro Steves, RBC Capital Markets, LLC, Research Division - Analyst [5]

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So first one, kind of just want to get your high-level take on what the M&A strategy is going forward, given that you guys are continuing to make some smaller acquisitions? And then secondly, this is a little bit of a tougher one, while everyone [just thinks there's a lot of] upside from like the Apple business outside of the PMICs given the fact that the Apple is trying to buy more semiconductor assets with the acquisition of Intel business. I guess what is the likelihood of additional design risk due to the products you guys are making?

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [6]

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Okay. So the first one on the M&A side, we remain open for business in terms of the appropriate M&A targets that we may find, and we are active with a number of targets at any point in time. But we'll take our time and until we're convinced something adds value to our portfolio and value to our shareholders. So -- but we are, I would say, more active than we were, say, a year ago, 2 years ago, in that sense. The market has tightened on a number of targets. So we also look at -- started to look at carve-outs and other things. So I think you've seen what we've done in Q1. I would say that, that is probably the more smaller end of things for us and we may do a number of these or -- but we -- hopefully, we'll do -- we'll find targets which are a little larger than that, but we remain very poised and active in this area and we will update as we actually manage to execute on a good acquisition. The second one, the Apple upside. I think we have a license agreement. So we have very clearly delineated the areas of what are products which are legacy and will decline and will be in-sourced versus products which are listed outside in our -- if you look at the blue color on the bar chart of Page 10. And that -- those are remain available to us. And as proof, I mean the revenue increase shows the products that we already designed and are going into production now. But as a proof point, we, in every quarter, we're gaining new buckets to work on. So I don't -- and each one of these will have revenue tail of -- first of all, it takes a year to 18 months to design and then the revenue tail of 2, 3 years when they go to production. So my expectation is that will continue because every quarter, we land new life and new agreements and new contracts. So I don't think there is that likelihood of [necessarily] design out. It's very broad based, also they're not all power. We are now working on products to do with display-related mixed signal. We are working on a signal [change] for audio in some cases. We are looking at things to do with the charging area. So there is a broad range of things in addition to sub-PMIC. So I don't think every one of these are -- become the core requirement for our customers to find in-store servicing. So that remains very highly unlikely because we are much more diversified outside the license segment.

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Operator [7]

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Our next question today comes from Andrew Gardiner of Barclays.

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Andrew Michael Gardiner, Barclays Bank PLC, Research Division - Director [8]

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I just had one on the outlook perhaps for Wissam in terms of the linearity of revenue through the year. I think the revenue guidance at face value, it seems to suggest a decline in the fourth quarter relative to third quarter sort of slightly abnormal seasonality. I think to all the points you're making, your mix particularly with Apple is changing. But I just want to make sure I'm understanding that progression into the fourth quarter correctly. And then also, again, on the gross margin outlook, you continue to do a very good job in terms of driving gross margins higher in consistently in 49% range so far this year. Yet, you're still only saying for the full year that it's going to be more than last year's 48%. So it seems to give a lot of wriggle room there in terms of fourth quarter. You're just being cautious? Or again, is there something sort of mix wise that could come up in the fourth quarter to leave slightly less upside?

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [9]

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Yes. So Andrew, let me just make a point about your first question, which is the outlook for the Q4, and then I'll ask Wissam to comment on the linearity. So the point -- a broader point for everybody on the call is just to remind you that the new phones from Apple, right, that's going to be launched do not carry the main PMIC from Dialog from this -- whenever it is that they launch, let's say, September, at some point. So that affects Q3 into Q4. What they are reporting is legacy PMICs in the orange and then the blue is all the sub-PMICs. So Q4 is the best Q4 relative to, say, a year ago where we're not carrying any core new PMICs for the phone. So with that, I just want to -- just want to highlight that before Wissam talks about the overall linearity.

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

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Thanks, Jalal. So yes, Andrew. Just to follow on Jalal's point. When you look at the provided full year guidance which is down mid-single-digit point, it does imply that Q4 will be lower than Q3 from a linearity perspective. Maybe to move on to the -- your second question, which is related to the gross margin. We did -- we've seen good tailwind on margin in the first half, as you noted. First, that was around 49.6%, and we're guiding pretty much flat to Q2 for the third quarter. There is no reason to believe there's anything specific in Q4 that's going to be different, but it is a bit early to provide any guidance for Q4 at this point. As we prepared typically our guidance for the quarter, we do take a balanced view, and this is why we're sort of comfortable with the guidance for Q3. And obviously, in November, we'll be adding more color to what Q4 would look like as well as if there is a need for us to be a little bit more specific on the year and then that would be implied in the future quarters.

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Andrew Michael Gardiner, Barclays Bank PLC, Research Division - Director [11]

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Okay. Good. But just -- and just the changing mix with Apple as the -- as you guys have said, it was pretty clear, right, that the new phones don't have anything PMIC, in terms of the gross margin mix there from between the different businesses there's limited difference to you on a product-by-product basis at this point.

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [12]

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Yes. I mean we don't expect major shift in the gross margin variation in Q2 mix. Yes, there is always little bit of variation. We don't expect massive differences if that's what you're trying to do, it depends. There is no fall off any cliffs anywhere.

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Operator [13]

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Our next question today comes from Sébastien Sztabowicz of Kepler Cheuvreux.

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Sébastien Sztabowicz, Kepler Cheuvreux, Research Division - Head of Tech - Equipment Research [14]

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I've got one on the connectivity business or do you see the competitive landscape holding in Bluetooth low energy or in connectivity, generally speaking, with Infineon working on the acquisition of Cypress? With your mission to provide a kind of integrated product in the midterm with microcontroller, connectivity, sensors and power. Do you think this is something that could bring a little bit more pressure -- competitive pressure in the market midterm? And the second one is on the CMIC business. What was the organic sales development of the CMIC business in Q2 and in H1? And what could we expect towards the back half of the year for CMIC, specifically?

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

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On the connectivity, I think the -- they performed really well in the quarter, very, very good. Actually, this year has been good. So we have 76% growth in the Bluetooth-related area in the -- year-on-year over a quarter ago. Sequentially, we had a very big growth. I think over 60% growth in terms of Q1 to Q2 for Bluetooth. So we're continuing to rapidly grow this segment for us, as we've indicated, and it has been growing from the day we've launched it 4 or 5 years ago, every year in double digits. So I think that in terms of competitiveness, it depends how you position your product in a market. We are less exposed, if you like, to the broadest market or general market. We are more targeting specific segments and work with large customers in those segments. So for example, we have specific products for variables. We have developed also products for more medical type products. And all of these are showing strong growth both now and in the future. So we recently announced the design win at Samsung, for example, for the fitness tracker. This is their very first about fitness trackers, and they're using our advanced Bluetooth technology. We don't make Bluetooth chips, but just to Bluetooth -- I mean these chips are [not] multicore, but 2 ARM cores. One running in Bluetooth stack and the another one runs on the application software. It also integrates denser interfaces, power management, all on one chip. So they are pretty differentiated. It's not that it's not a commodity Bluetooth. And hence, the higher ASPs that we can achieve. If you look at the market, I think we are outperforming both market growth and the larger players in that market. The -- our negative [tension] with what other people are doing, for example, you mentioned, I think, Cypress. So they have good products, typically their products are more for mobile markets, as opposed to IoT, and it's combo Bluetooth and Wi-Fi. So I don't think -- we're not competing in those segments. That's for what goes inside the mobile platform. We tend to connect things, the mobile using our Bluetooth. So we are differentiated in what we do.

On the CMIC side, I think the quarter depends on product launches for this business. So I wouldn't say very big growth in the first half, but we expect growth in the second half as some of the products that are designed in, don't get launched. We have a high number of design [wins] in Asia now that we -- that this business didn't have before. So for example, multiple sockets in very -- in multiple designs in Korea, in China. Alongside our Bluetooth, for example, in -- sorry, not Bluetooth, alongside our audio products in stereo headsets, in a number of places which is new. In SSDs, storage and the -- also they are in many of the notebooks. In fact, majority of, I think, notebooks that are made in Asia with Intel-based CPUs, they carry our CMICs, and that's partly actually is the reason why we expect growth in the second half because first half was -- it is low for the PC market partially due to some shortages of CPUs. So I think that's being resolved and in second half it will be stronger.

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Operator [16]

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Next question today comes from Stephane Houri of ODDO BHF.

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Stephane Houri, ODDO BHF Corporate & Markets, Research Division - Research Analyst [17]

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Just a quick question on the OpEx. To understand what's going to be the dynamic going forward because you have alluded to the fact that there was a headwind on the R&D side. So I just wanted to have a view of the more normalized level of OpEx you are expecting going forward, given the license agreement with Apple.

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Wissam Jabre, Dialog Semiconductor Plc - CFO & Senior VP of Finance [18]

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Hi, Stephane. So -- yes. So the headwind I noted for the Q2 actuals was driven by the lower capitalization and higher amortization of development cost, which is around $6 million. Now when you look at our quarterly OpEx for Q2 on an underlying basis, it's also around $98 million. That reflected the effect of the transfer of assets and employees for the vast majority of the quarter. And so if I look forward to the Q3 and Q4 time frame, I would say, we're probably going to be within plus or minus $2 million of being where we were in Q2 actual. So this is for the foreseeable future, I would say. For the next couple of quarters, this is what I see, our normalized OpEx.

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Stephane Houri, ODDO BHF Corporate & Markets, Research Division - Research Analyst [19]

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Okay. But we -- and we should not expect any downsizing -- additional downsizing of the OpEx going forward for 2020 and '21?

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Wissam Jabre, Dialog Semiconductor Plc - CFO & Senior VP of Finance [20]

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So the way to think, maybe -- if I make more comments around the second half of '19. As I said, we're going to be probably within $1 million or $2 million of where we landed in Q2 on an OpEx, on an underlying basis. While absorbing the FCI -- the FCI acquisition. So that should -- so that naturally has a bit of savings in it. I think with respect to '20 and '21, this is a little bit premature to discuss. I mean we're looking still -- we're still trying to get Q3 executed. I think when we get to Q4 and beyond, then we will be in a better position to talk about '20 and '21.

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [21]

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Maybe there are other complexities maybe also, a lot of designs we've been in have an element of NRE you're supposed to have as one of the offsets.

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Wissam Jabre, Dialog Semiconductor Plc - CFO & Senior VP of Finance [22]

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Yes. That's a great point. So to Jalal's point, as we continue to win some of the designs that have NRE attached to them, those would be acting as an offset to OpEx and so giving us a bit of a benefit to the earnings before interest and tax.

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Operator [23]

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The next question today comes from Adithya Metuku of Bank of America Merrill Lynch.

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Adithya Satyanarayana Metuku, BofA Merrill Lynch, Research Division - Associate [24]

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I had 2 questions. Firstly, just on the USBPD Type-C market. How big is this as a part of your charging business? Also, I wondered if you could comment on what your positioning is in this market? And who your main competitors are here? Secondly, just on the CMIC business, can you give us some color on how they come -- Apple as a proportion of the CMIC business now?

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

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Hi, Adi. Good morning. So the USBPD market is -- it's just sort of taking off. So it's not the largest part of our -- actually anybody's business because it's just 1 or 2 customers switching to that, but it will continue to grow in the second half and into next year. The Rapid Charge as a broader topic for us is the biggest part of our AC/DC revenue, if you like. So part of that is just the PD, but we expect that to continue. If you like, a lot of the Rapid Charge revenue will convert to a USBPD Rapid Charge. So if you want to think about it that way. So it's probably -- Rapid Charge, I would say, 70%, 80% of our AC/DC charging business. And USBPD gradually over time will become the new Rapid Charge, if you like. So that's kind of how to think about that. In terms of CMIC, we continued to have our largest customer active, I guess, which -- with that line of business. And I would assume around 50% sort of exposure there. But just bear in mind that those products are standard products in the sense that they're not designed specifically or customized specifically for the customer. So we treat them as standard products as opposed to what we talked about. When we talk about Apple revenue in the orange and blue section of our charts, those are custom specific parts that are of no use outside those equipment or to any other customer, so these are dedicated products. The CMICs, even the ones we sell to Apple, we are -- we sell to other people as well. So they are more of a standard product, [USB type probably is the only one].

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Adithya Satyanarayana Metuku, BofA Merrill Lynch, Research Division - Associate [26]

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Understood. And just a quick clarification, just on the USB type PD, who do you think will be your biggest competitor here?

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

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I think -- so on the USBPD specifically, you're asking as opposed to the Rapid Charge?

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Adithya Satyanarayana Metuku, BofA Merrill Lynch, Research Division - Associate [28]

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Yes.

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

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Okay. I think probably Power Integration is one that I know is active [competitor] in the U.S. I'm not sure whether semi also competes or not. Semi is [a competitor] in AC/DC. And in Rapid Charge, I don't know whether specifically they compete on USBPD. They probably do. So I would say on semi and [parry].

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Operator [30]

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Our next question today comes from David O'Connor of Exane.

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David O'Connor, Exane BNP Paribas, Research Division - Analyst of IT Hardware and Semiconductors [31]

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Just a couple on my side there. Going back to your display-related win, what is the technology there that you're leveraging within that display-related win? And then maybe on -- going back to Slide 10 again, where you have that orange, Apple main PMIC business. Can you talk about just maybe the costs that are associated with that today? And then maybe lastly, just on the CMIC side of things again. Can you give us an idea of what the content gain is, for instance, going from one generation of smartphone or, say, iPhone to the next? What -- how should we be thinking about the content gain there on the CMIC side?

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Wissam Jabre, Dialog Semiconductor Plc - CFO & Senior VP of Finance [32]

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On CMIC, sorry David, can you repeat the second and third question, please?

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [33]

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Let's do one at a time because we couldn't hear you very well, David, so let's just start with the first one. So you're asking about the display. What we said about backlog display drivers for [display] ?

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David O'Connor, Exane BNP Paribas, Research Division - Analyst of IT Hardware and Semiconductors [34]

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No. The display-related wins that you spoke about earlier at your main customer. Can you talk about what technology exactly you're leveraging there into that display-related win? And the second question was on Slide 10 regarding the legacy Apple main PMIC business. Can you give us an idea, maybe Wissam, what costs are associated with that? And then lastly, on the CMIC side of things. If you could give us an example of the -- for instance, the content gains you're seeing from one generation of Tier 1 smartphone to the next, that would be helpful.

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [35]

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Okay. So I don't think we mentioned -- oh, you mean on the -- okay. So I see what you mean. So I mentioned that we have a number of mixed signal products outside PMIC, I think that's what you're referring to and I mentioned that are display-related or audio-chain related, right? So the display is relating to drivers and power management for new types of displays. So that's kind of what I was referring to. The legacy PMIC, I think Wissam -- -- I think we have -- clearly, we have to sustain product. So we have product sustained cost because many of these products are already in production, but they have operational sustainment cost in terms of returns or maintaining the quality level or improving yields, that kind of stuff. So those are the type of costs, but I don't know if you want to comment more on that?

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Wissam Jabre, Dialog Semiconductor Plc - CFO & Senior VP of Finance [36]

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Yes. I mean the type of cost that's usually sustaining the business in making sure we're delivering best quality products to our customers.

The way to think -- if I understand maybe why the question, the background of the question. I mean the way to think of the -- our OpEx going forward is no different than what we've said in the past with respect to our long-term model. On an R&D perspective, we still -- we think of our underlying spend in the long-term model to be between 17% to 19% of revenue. And from an SG&A perspective, it's 8% to 10% of revenue. So the way to think of our long-term model has not changed since it's published and discussed. But over the last few quarters, we do expect in the long run to have 25% to 29% of revenue in long run. I don't know if this helps to give you a little bit more color about how to take -- obviously model looking forward.

And the CMIC, I don't think we ever said that our CMIC is in any iPhones. So it's clearly not in iPhones. The -- but in terms of content gain in the phones' configurable products, Silego products, we have designs in Asia that's on smartphones and also in headsets that gets shipped with smartphones. And also more recently, we released a product which uses our very highly efficient LDOs with very low noise performance in a Silego or a CMIC configuration. There is a new product to be released, which we are sampling to lead customers. This product is not released yet to volume production yet. It's brand new, so we expect that to start production back sort of towards the end of Q4. And that product is already -- we see activity traction with 7 different smartphone models. So all of these are -- actually, these are mostly in Asia, but also some in North America. So -- but this has not gone to production yet. They will start going to production back end of this year and in -- by first half of next year. So that's more of a camera-related activity for phones.

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Operator [37]

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(Operator Instructions) We have no further questions on the line, so I'll hand back for any further remarks.

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Jose Cano, Dialog Semiconductor Plc - Head of IR [38]

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Thank you, Megan. I think that's all from us today. Again -- once again, thank you for joining us on the call. And as usual, if you have any further questions, please don't hesitate to reach out.

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Jalal Bagherli, Dialog Semiconductor Plc - CEO & Executive Director [39]

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Thank you. Bye-bye.

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Operator [40]

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This concludes today's call. Thank you for joining. You may now disconnect your lines. Have a lovely day.