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Edited Transcript of NOD.OL earnings conference call or presentation 22-Oct-19 10:00am GMT

Q3 2019 Nordic Semiconductor ASA Earnings Call

Oslo Oct 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Nordic Semiconductor ASA earnings conference call or presentation Tuesday, October 22, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Geir Langeland

Nordic Semiconductor ASA - Sales & Marketing Director

* Kjetil Holstad

* Pål Elstad

Nordic Semiconductor ASA - CFO

* Svein-Egil Nielsen

Nordic Semiconductor ASA - CTO

* Svenn-Tore Larsen

Nordic Semiconductor ASA - CEO

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Conference Call Participants

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* Aksel Øverland Engebakken

ABG Sundal Collier Holding ASA, Research Division - Lead Analyst

* Christoffer Wang Bjørnsen

DNB Markets, Research Division - Analyst

* Hans Rettedal Christiansen

Carnegie Investment Bank AB, Research Division - Junior Analyst

* Henriette Trondsen

Arctic Securities AS, Research Division - Research Analyst

* Ole-Petter Skaaksrud

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Presentation

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Svenn-Tore Larsen, Nordic Semiconductor ASA - CEO [1]

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Good afternoon, everyone. Welcome to our combined event today. We're going to have a Capital Markets Day, and we're going to release our Q3 numbers in the same moment. And it's nice to see so many here. And also, welcome to everybody on webcast. Market leader in IoT is Nordic. We've been into IoT before it really existed, acronym say IoT. We started with doing heart rates, and send it to mobile phones and to the cloud before anyone mentions IoT.

We've been capitalizing on this early start, but today, let's check out agenda very quickly. I'll do some financial highlights for Q3. Talk a little bit about the pillar and the fact that we are a market leader within IoT. Geir, our Sales Director, will do go-to-market strategy, and we have our honorable guest from FedEx, talking about delivering the future. FedEx do deliver, and it's going to be exciting to see how they're going to deliver in the future. Then we're going to have a short break. And Kjetil, Director of Product Management, will do a short-range update. For you guys that are unfamiliar with short-range, is BLE and products for BLE. Svein-Egil, our CTO, will do a speech on Cellular IoT. And finally, Pål will do financials. And then we have some minutes set off to summary and outlook and Q&A by end of the day.

We hope as many as possible will stay and get the whole event. It is great news, even at the end.

So let's look at the Q3 highlights. We guided a strong Q3, and we deliver according to guidance. We also continue to guide a strong outlook for Q4. We came in at USD 82.2 million, it's 16.5% growth compared to last quarter. We guided margins around 50%. We came in around 50%. So Q3 was all in line with what we guided.

Q4 guidance, we see

(technical difficulty)

in the sweet spots, around 25% growth year-on-year. And we also see we're going to keep the margins around the same level, why? Because Tier 1 customers are starting to place orders.

And if you look here, you see that it was 45% up compared to Q3 '19. I think that the most important thing is to see Nordic going out of Q2 with a record high backlog of $112 million going into seasonal peak quarter, which is Q3, is some logic -- is pure logic, should be strong backlog going into peak quarter.

Exiting Q3, we go into Q4 and Q1, which basically is not seasonally, the strongest quarter for us. Despite, we managed to increase the backlog to $113 million to $114 million almost. And this is because we see volume orders coming in from our new Tier 1 customers.

I said we are a market leader in IoT and I'm going to explain why we do it. I will take the overall picture. And the other guys after me will deep dive into each of these points. Most of you in the room know Nordic, maybe somebody on the webcast doesn't do it. So I have to bore you that know that we are a fabless semiconductor company, specialized in low power wireless connectivity and embedded processing. That's important. We are market leader in Bluetooth low energy, we have expanded into 802.15.4/Thread and Zigbee. And we are now starting to get into low power Cellular IoT with LTE-M and Narrowband IoT technologies. Actually, we had a revenue of $500,000 in Q3 on Cellular. We are approximately 750 people. We have been growing because the new customer base have pretty tough demands on us, both on timing and on products we have to deliver. This is, while some guys internally described as a perfect storm. We're getting through this. We are managing to do a lot of new work now, and we are able to get engineers to perform all the tasks that are put on Nordic. But this has been a long-lasting growth journey, and it has just begun. We started back in 2002 with a slogan that we called, cut the buyer. We want to sort of free the gamers from the TV and the set -- and the boxes.

We did that with a 2.4 gigahertz proprietary solution. In 2006, we started to think, if we should get this curve up here to grow, we need to enter into a standard, and then we started working with other companies and formed something we call Wibree Alliance. This Wibree turned into be a lead due to low energy and was officially ratified by Bluetooth

(technical difficulty)

looked at where can we benefit from having the first Bluetooth low energy parts on the market and Wearables, the first application that we call IoT Wearables where they took your heart rate, move it to the cloud. Also obvious choice, and we got a great position in Wearables. I will say since 2016, we have seen the diverse of IoT, and today, we have segments -- multiple segments that are in production, and we have some new disruptive segments, which we will talk about a little bit later in the presentation that will take these revenue levels to new levels.

We are the clear market leader in Bluetooth low energy. I mean we have more than doubled the numbers of the size than #2. And we are 7x, 8x times as many as the 3 to 6 guys in the list. We are proud to be the leader. In Q3, we had 44% market share. And there is -- we've been just going through some numbers. It's 2,100 Bluetooth low energy product certified since 2014. 2,100 products out there using Nordic BLE.

If you look at last 12 months, the accumulated market share is 42% design wins. We are proud to call it our success and it's built on 6 strategic pillars. As a connectivity company, is always we have the lead on connectivity. As a relatively small player, we have to excite the developers we meet. We need to show customer engagement. We need to understand every time we meet a customer, we need to perform, and we do. There has to be scalability within the company. And most of all, we need to invest early to ensure that we have products out in time to take the wave that comes. We have been pretty good with 2.4 gigahertz proprietary. We got a HID market, wireless keyboard, wireless mouse. We had a time where we had up to 70% market share. We've been pretty good with the Bluetooth low energy. We have had a high market share, years back behind us. And we are going to be good in LTE. We have great products, which Svein-Egil will talk about later on. And obviously, with all this investment we are doing, we have to have high financial ambitions, which we have.

Lead on connectivity. Most important, low power, high performance, you have to be feature-rich, some of the applications we're in today, demand more than just connectivity. And with all these products spread around the globe, you have to have a robust protocol so you can connect to any device that is there with Bluetooth. It's no point having the lowest cost Bluetooth chip if it does not connect, that's what we see. Sometimes our competitors have been used as certain customers, then they come back to us because it didn't really connect. As we get into more advanced products, it could be basically serious if it doesn't connect. When it comes to heart rate monitor it's not that better -- much matter because you didn't get your heart rate on your phone. Or if you don't get your insulin when it's required, it could matter a little bit more. So lead on connectivity. And we have a strong connectivity and applications software. I mean we have shipped more than 2 billion ICs. We made our Bluetooth chip into a broad platform. We can cover advanced features and less advanced. And most of all, as I have spoken about, as my team's spoken for a long time, there won't be only one protocol when it comes to IoT, we think there will be multiple protocols.

Nordic has flash memory, why? Because we want to offer this multi-protocol solutions. And I think when you see 2, 3 years ahead, you will see more than just the Bluetooth that's going to take market share in IoT.

Embedded software. We need to ensure that our customer can do his software onto our radio chip. So we start, maybe, going a little bit away from calling a radio chip, it's a microcontroller with radio. We make System-in-Package. And obviously, you can't have all the good ICs chips in the world unless you have development tools, that's important. And the feedback to Nordic is that we have excellent tech support, and we see the activity on development front, which is increasing week by week. So it's in use and it's a good addition to our standard technical support. We are winning prizes, it's great. I think it is cool to see that -- if you look here, nRF96 (sic) [nRF9160] Cellular IoT, shortlisted for best connectivity solution in China. We are getting recognition, which I think, my team certainly needs. So to everyone listening within Nordic, thanks for your great job to be able to win these awards.

Excite developers. Who doesn't want to be excited, sometimes in different occasions. But when you sit on your desk 10 hours every day doing design work, if someone come in and excite you, it drive engagement. And the important thing is, we do have ICs. We do have stacks. We have SDK. We have Developer Zone. We have software, and it's going to be easy to design your product from an idea to getting the product out there. From production, it's important that you have less hurdles as possible. Our site -- website had more than 2.4 million hits over the last 12 months. We've seen 80,000 independent developers. We are having, what we call Nordic Tech Tours, where qualified engineers from Nordic travel the globe at locations where we think there is enough design community that they deserve a trip and it works. We have blogs, we have guides, we have Wireless Quarter, tutorials and web seminars. Basically, we are trying to drive this company as, I would say, technology-wise, as possible with all tutorials and webinars to reach larger crowd, and we are reaching out.

We -- as a result, we see strong growth in our development kits. And if you look at this last bar, 10% of this is related to the Cellular in 91. 10% of kits shipped over the last 12 months has been related to Cellular.

Engagement with customer. Geir will talk a lot about this in his presentation, but we have to be able to combine the broad market and the Tier-1 customers and engage with both of them. Why is that important? If you see on the under part of my presentation here, you see some companies that are providing hubs. These are the guy where IoT [captures] will use its hubs. It's important to penetrate these customers. As important it is to ensure that all new good ideas within consumer, within Wearables, building retail, health care have a hub to connect to. So we need to ensure to work on both segments, and we have to make sales, optimized for both. And Geir is going to show how we do that.

And lately, we have had increased focus on platforms and the growing ecosystems.

Scalability. We need to scale across technology, market and customers is important. I mean we are all started off as connectivity, power, performance features are features that are important and reliability. We understand that a customer's need now is more embedded processing. So we need to have performance, we have the have memory, we have to have I/Os, in/out. The software has to be easy to use and it is going to bring value for the customer. So it's easy for the customer to write his own application software. Security, more and more important. Nordic were very early adopting security algorithms. And our R&Ds are using the latest IPs on security to protect customers, software and/or end customers' use of end product.

Over some time, quite a bit of people have told me that Bluetooth low energy is going to be a commodity. ASP is squeezed from everywhere. What we see is the opposite. Since 2016, our ASP had grown with 14%. It's -- basically, features that Nordic is introducing into other chips. And as we get more and more complex application, it's important for us to understand and pick out the right feature to put into our platforms, which up till now has been -- maybe, if you look back 4, 5 years, it was difficult. Lately, the last years, we've been talking to the Tier-1 customers. Remember, the ones that are going to make the hubs, the platform guys. They tell us what they require and amazingly, we manage to do it. It's important to have good dialogue with customers and that's what we have done for years.

Invest early and identify high-growth markets, extremely important, because from we start deciding, we want to build a new product until it's in the market is years. We take, sometimes, decisions ahead of -- ahead of what we expect to be in the -- when it is going to be in the market. And we have to take the right choices. And it's much easier for us to do that, when we do have good intelligence from end customers. And if you look at discussions around the globe on Cellular IoT, even on paper, you usually read, I think, The Economist, a couple of weeks ago, said this is chips for -- with everything and for everything. If you look at all the forecasts that are out there regarding IoT market, it's billions and -- Business Insider talks of billions. I'm talking about trillions, I can say there is at least one common factor here, it's a large number. And we are positioned to take parts of these numbers. We do have short range, long range, we are the only company that can cover the total footprint. If you look at external analysts, I talk from IHS, I talk about the Bluetooth market. This is the outlook that I see from now till 2023 of million of units. Strong growth, and this is the growth in what I call the established verticals. What we are going to talk today -- talk about today is potentially disruptive growth in several areas, which is not all covered in these outlooks. Smart home, a lot of you heard about Smart home, Smart lightning, Medical devices, and we are not talking too much about logistics/asset tracking today, because we have a representative from FedEx who will do that. Get a third-party look on how they expect to see logistics panning out the years to come? And what kind of technology do they need to realize the plans? We are confident in the long-term Cellular IoT outlook. Unfortunately, volumes and revenue has been pushed out in time by some factor and carrier and industry ecosystem hasn't been as early mature as we had hoped. And there has been more challenges with software development as we have added functions. There have been some delay in certification process. And we see that customer development cycle are relatively long. But despite, we are more confident in our long-term Cellular outlook -- IoT outlook than we have ever been. We start seeing these activities that we like. We recognize the pattern from what happened when we start getting momentum in Bluetooth low energy. The -- but it made us change the timing when we would become breakeven. So it's not, unfortunately, going to be in 2020. It's disappointing for us, but it's a realistic thing, and we have to accept that we live in a real world where we don't control all parameters ourself. There was a famous American that had a dream, we have an aspiration. We're going to build a $1 billion company within 5 years. We expect a growth between 20% to 30% for Bluetooth and multi-protocol products. We are gradually building up the Cellular IoT business to be a similar size as the short-range business in 5 years. It's nice to have aspiration and it's good when you can put it into a spreadsheet and see it works out.

So now I will hand podium to Geir who is going to go through our go-to-market strategy.

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Geir Langeland, Nordic Semiconductor ASA - Sales & Marketing Director [2]

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All right. Thank you, Svenn-Tore. My name is Geir Langeland. I'm the Director of Sales and Marketing in Nordic Semiconductor. I will take you through our go-to-market strategy.

So first of all, I'd like to start by very quickly going through our DNA, what governs and roots our decisions and how we behave. In Nordic, the customer has been in the center of everything we do for more than 2 decades. We've also believed in product leadership with quality, low power, being our #1 factors. We've also chosen to be very agile and tried to be very disruptive in what we've put on to the market, as you've seen in 2012, when we launched the first series of our Bluetooth Low energies with flash and then 2016 and then the Cellular products. We also pride ourselves in outstanding tech support and that's what's reported back to us through our annual customer surveys.

Next, ease of use has been extremely important over these last -- almost 20 years. We've always put the customer first and made our tools available. We've modernized, we've made the -- we have become an app company, we have mobile apps that's consistently receiving very high downloads. We have desktop tools running on different platforms. A very scalable, Svenn-Tore mentioned, that we ship development kits across the globe. And also very importantly, DevZone. I think with the growth of customers we've had over the last 2 decades, there is no way we could put enough application engineers in place in the globe. We need sort of scalable support. We like to think of ourselves as open, it's a very controversial topic, do you want to open source? We have nothing to hide, so we open sourced a lot of the new software we make. Our engineers comments are available to our customers' engineers. So they see what we've thought and stuff, when we made the products, and they're very familiar with the ideas. We also believe it should be easy to get data sheets and documentation, so a few years ago, we removed the login needed to access that on our web page. And we also engage in education. We're active in university programs across the globe. We've also contributed to the BBC micro:bit program that's rolled out with millions of school children across the globe. So there's a lot of activity going on. And then finally, as Svenn-Tore mentioned, engagement. So we engage with our customers. Back in 2012, we started an initiative in the Nordic Tech Tour, all the other guys in the industry were doing Webex seminars. And we think, okay, let's be different. Let's put people on the road and train the engineers. So the first time we did this, we had sort of 1,000 engineers, globally, attend our seminars. They get to engage and meet our people, and they get to feed back stuff directly into the source. So all of this is then constituting our DNA. It's what we believe in, it's what we practice every day, and we like to think that it sets us apart from other companies with huge follower on LinkedIn, Facebook, and we actually get responses back. So people are interested in what we are doing.

So I'd like to take you on a customer journey. So this DNA has given us a strong position in the broad market era. But how does it actually work? How do customers find our information? How do they get engaged with Nordic? So in our situation, word-of-mouth from engineers to engineers is actually the #1 referral factor, it's more important than Google search ability. It's -- please customers relating to others, okay? This is a good company, you should work with them. People will also read our wireless quarter that is distributed on your desks. It's actually a magazine we make as a company with high editorial value, it's online. They will search for our information, we're searchable on Google, Facebook, LinkedIn, Twitter and Instagram. And they figure out, okay, the next Tech Tour in my region, it could be in the U.S. or APAC or Europe, it's coming up very soon. They will then attend the Tech Tour and get the information from our engineers.

And then the next issue is how do you get hold of development tools? 10 years ago, you had to find a distributor on the web page and set up an account and stuff. Now people would go online, Digi-Key, Mouser or any of the other leading retailers and they ship it and it arrives from the U.S. or any other warehouse to your desk in less than 48 hours. And then, of course, you go online, you download the -- use the manuals or look at the videos, the go-to guides and start developing. You hook up the kit, and as we're driving thousands of customers, a lot of these broad market customers get their information from the DevZone, where engineers support engineers. And some of them get supported from the Nordic team. And then in the time frame of, it could be 6 months, more likely 18 months, you have a product ready to go to the market. And this has taken us from nothing to a broad market leader in 5 years. We didn't even know what a catalog sales company was a little more than 5 years ago. And now we have it confirmed for this survey, we've actually done a survey with Digi-Key, Mouser and Nordic is now the #1 company globally in the shipment of short-range wireless development kits. They are extremely important to us. But we're also important to them. Because you remember, we are creating engagement. Our engineers are active on their forums. They're using their video streams. And it's not only Digi-Key and Mouser, it's all these other reputable companies.

We need some other types of distributors as well. We can't just lean back and say, okay, we're going to support everything through a forum and ship from catalog sales companies. That's not going to cut it. So we have some large distribution partners. We've termed them Broadliners.

There's Rutronik in Germany, there's Arrow and Avnet in North America, which are our global distributors, they're public companies, they're the giants. They typically carry tens or even hundreds of product lines that they support globally or in several regions. We engage with them. We are very interesting to them as well. We actually have value and interesting products. So we train their application engineers, we train their sales people, and they, in turn, support our customers to create scalability. They also perform some very important fulfillment and logistics functions for Nordic. We can't ship directly to thousands of customers. So these guys would actually carry the logistics and make sure stuff is arriving at the right time, setting up logistics arrangements with customers. Also on a very wide scale, we do joint seminars and workshops with them to address a wider range of customers. And they're also then promoting and selling both the long- and short-range portfolio from Nordic. So this is sort of a generic distribution setup. We actually complement this with a huge amount of what we call value-add distributors. Some of these are extremely important partners to Nordic. We actually signed the first of them up in 2001. So they've been with us since the beginning. They have a small product -- a small number of product lines, some of them just sell Nordic. So we share the blood in a way. And they're typically providing design services for our end customers. So they have design engineers employed in the company. They would work on proof-of-concepts and engage deeply with the customer. In the case of Nordic, they have a deep engagement with our FAEs and sales people, and we do very small seminars. Some of them are even at the customer site, where we have one-on-one sort of relationships with customers. And they are, of course, now all selling our long-range Cellular portfolio as well. So all in all, this has taken us to a #1 in the Bluetooth broad market. Our claim to be the undisputed leader here is hard to refute as we see consistently 40% share of new design. And as I mentioned, up until recently, our distributors have had their focus on short-range products. But what we've done on Bluetooth low energy, we're now in the process of repeating on Cellular. If you look at the breadth of products we have launched in Q3, there's media remotes, Luggage Tags, electric skateboards, Smart pillboxes, Smart Watch, Cellular Emergency button. So we're everywhere, and we have all kinds of application. And the universe is expanding. And for us, this is very important. And this expansion of the technology into new areas has made us less dependent on single clients, products or verticals. And you basically see here a reduced dependency on sort of top 10 customers in Bluetooth low energy, moving from 60% in 2012 to 30% in 2019. And that's not because the large customer have become smaller, it's because we've added a lot of small to medium customers carrying revenue. But that again, doesn't mean we've taken the focus away from the major players in the key verticals, on the contrary. These customers, they need to be engaged in an entirely different manner. Whereas the keyword for the broad market may be ecosystem partnerships, engineering communities and catalog sales, the larger players need a much, much tighter follow-up. So we have targeted business development teams working on the Tier 1 customers and key account managers. We have key account support teams set up in Nordic to service them. We engaged early with them to establish proof-of-concepts, I mentioned this earlier. It's very important for us to have hardware, very quickly up and running that can be used to create prototypes to sell-in to management. We spend a lot of time, and Kjetil will talk about this later, aligning our product road map to their requirements. We need to have leading products that fit their purpose. And you see a few names here on the left-hand side of this slide, I've included Colgate, which we actually released just this morning so it's a new entry into our slide there. For this presentation, I'll look more on Tile, which is a clear market leader in the short-range asset tracking market. They've sold more than 20 million tracker units over the past 2 years. I just dived into them to show how we typically work. So Tile recently launched a new lineup with Nordic, and you may think of this as a pure component supplier customer relationship, it's not. It's actually a lot of engagement at management level, at a higher level. And we've also integrating Tile finding technology into our new Nordic software development kit. And if you think back to earlier, where I said we're scalable, we drive thousands of customers. We want our customers to have access to the Tile capability, and they could then compile it into their products. So there is a symbiotic relationship as partners.

And that brings me to the next level of customers in this market, the platforms. As I'm sure you're aware of, more and more things are connecting through platforms and the cloud instead of point-to-point from a mobile phone and the device. Like you -- and you should all know these household names on the bottom of this slide, and we obviously see a large market opportunity in servicing these platforms and their ecosystems. Given our strong background in the broad market space, we are actually bringing in hundreds and thousands of customers that could potentially connect to their device. We also have multi-protocol devices. We've demonstrated over time that the interoperability we have is #1. So there is a relationship there between the platform makers and Nordic in that we could offer a lot of customers to connect to their platforms. And we have to see that -- Smart Home here is a good example of how this could be done. So there's a battle going on for the connected Smart Home with all the major players fighting to become the control center. Through smart hubs or speakers. In order to dominate the market and become the #1 control center, you do need to connect as many things as possible. You do need to have an ecosystem around you not to become attractive. And it's got to work, right? So interoperability, again, is the key. And we have that capability with our devices, and our devices are already inside many of these things. I'll take one example, the Chinese giant Xiaomi, which is not all that well-known in here, but it's one of the leading companies. We've actually announced, if you tally up the releases, we have 5 releases, ranges from Virtual Reality systems, door locks, watches, tire pressure monitoring system and some educational robots. But that's not the only thing you gain by starting to work with these ecosystems. If you look at a company like Xiaomi, we're looking at hundreds. That company alone has acquired several hundred companies that they folded into their portfolio. And then as a supplier, you get the vendor registration, and you're suddenly part of that ecosystems. So all of these customers are now potential clients for both our Bluetooth low energy, Zigbee or Thread products and the long-range Cellular IoT products. And not only that, we're basically getting third-party access for our customers in there as well because Xiaomi has an outspoken strategy to actually connect up third parties into their system.

Moving on, so this is what Svenn-Tore mentioned, I think there's a strong market outlook for Bluetooth low energy with 26% CAGR growth to 2023, provided by IHS. If you dig deeper into the composition of this market, we see some segments are flattening a little bit out like Mobile or PC HID whereas a lot of others are still growing and very solid like Smart Home, Wearables, retail, gaming, PC-based gaming and Virtual Reality, et cetera. And our belief is that there are several verticals that could drive even higher growth and -- but not necessarily in consumer. So what we see as a company, sort of a shift in our base. Consumer sales are still going to be very strong. But a lot of the new applications we see, may not necessarily be within consumer. And it's sort of moving over to nonconsumer. So you could ask, so why isn't this happening tomorrow? Well, nonconsumer is a market, it takes a little bit time to move over. So some of these will have 2-year, 3-year, 5-year cycle, but it's going to be there. And the good thing is, when you win this application, you're also very sticky. They have a long lifetime when they come.

So let's start looking at some major opportunities in disruptive verticals. We think that we may be underestimating the potential in some of the verticals and some standout for us in Smart Home, Smart lighting, drug delivery and disease monitoring and in logistics and asset tracking. And each of these may grow into several hundred million units over the next 5 years. We're spending a lot of time and resources into product and services, road maps development to target and unlock the true potential in these areas.

So today, like Svenn-Tore mentioned, we're so lucky to have Ole-Petter Skaaksrud here. So he's going to handle the logistics part. I've already covered portions of the Smart Homes. So today, I'm going to focus on the lighting and the medical part of this business.

So let's dive into Smart lighting. Why would you have Smart lighting anyway? I mean is it to switch on and off the light or dim it or change color? Not necessarily, and I think you -- take the time, we've distributed a copy of the Wireless Quarter with 10 or 11 pages as a background around the lighting market. It's a large untapped market. Today, only a small fraction of the light fixtures are connected. There is light everywhere, in offices, meeting rooms, bathrooms, everywhere. That's about to change. There's some significant growth factors out there. There's new EU regulations that enforces lower energy consumption and sustainability. There are large government-backed initiatives on smart cities and programs with the same goals. We see a lot of really strong use cases in both enterprise and consumer markets. As a company, we are more focused on the enterprise side of things because of the interesting things it does for us.

So I mentioned to you, I mean, lights aren't necessarily connected to switch them on and off, so what do they actually do? It's because lighting is becoming the building backbone with mesh networks, enabling light control, monitoring and automation on actual, real-time big data. There's been a lot of focus in the media lately on compromise the networks and servers, et cetera. So that the lighting backbone represents something which is safer, securer and independent from the IT department in the company. And the light must be there, and it's everywhere. So a chip in the network can make a light into so much more. I will give you some examples.

Nordic, we're partnering with the lighting IoT leaders. We partnered in Gooee with 2016, it's a U.K.-based company. And just this summer, Gooee announced an agreement with a Dutch real estate company to connect 5,000 buildings to Gooee's IoT platform. And these connected lighting systems will, of course, need wireless connectivity, and connectivity from Nordic is a key ingredient in this setup. So we are now not just looking at managing a room or a building, it's actually a portfolio of buildings controlled by lighting. So what could it mean for the real-estate owner? Here is an example of an office building, where we actually have heat maps of people moving around. So where are people? How many people are there? Where are they? Are the desks occupied? Or does the heat -- HVAC need adjusting or restrooms need cleaning? So you get real-time information across multiple buildings, all floors, et cetera. Similar could be used in gyms, where gym equipment is idling in one corner, and if you move it, certainly you get usage on it. You free up area.

In the retail space, what's the most valuable space? Where are most people moving? Where are they stopping? And can we improve space utilization? Who's moving where? And can we influence consumers? And I think, on an aggregated basis, this really opens up for big data analysis, offering potential for both new revenue streams and lower energy costs. Then moving on to the medical verticals, drug delivery and disease monitoring. I just want to quickly remind you of the obvious use cases for connected devices for large disease areas. So you -- with diabetes, you basically monitor insulin injections and glucose metering. You could then have asthma or allergies that you want to control with injections or inhalations. Respiratory diseases, growth hormone, blood pressures and others. Some examples here are diabetes pumps or constant glucose monitoring, you have metered inhalers and self-injection pens. The market will require continued time and effort on our part to develop products and solutions meeting the technical requirements and also competitive price points for the solution. And of course, given the large potential, these are challenges we're willing to take on. Kjetil will address that in the -- more in the road map presentation. One important part here is to notice that there are some strong regulatory regimes that will influence the rollout and there's processes going on to streamline that as this becomes more and more mature, but it's sort of an external factor that is not controllable by Nordic. So if you look at a very simplified case, then you could have a drug delivery, so that could be the injector by Aterica Health, which is a Nordic customer or a CGM from Dexcom. Typically, they will connect through Bluetooth low energy into the phone. The phone would then record it to the cloud. It could then be part of medication management in an automated medication diary, I mean, what type of medicine did you take? And how much did you inject? And also notification and usage statistics could be sent to family or relatives or doctors, physicians. And I think one of the very exciting things here in Nordic is that we do see a potential to sort of circumvent the connection to the smartphone by using our LTM and Narrowband IoT lineup. Remember we have small size, we have low power and ease of use. So a lot of these companies are basically looking to cellular connectivity now because you want to get rid of the hurdle of the pairing to the phone, et cetera. So this represents a very exciting opportunity for us, where cellular could complement the traditional Bluetooth low energy powered equipment.

So in order to summarize, we have an excellent position in the growing Bluetooth market as the broad market leader and with very strong ties to the vertical market leaders. We're strengthening our focus on the platform ecosystems, and we are beginning to see the effect of this in our backlog and sales figures. Going forward, we will seek to fortify our strong position in the established verticals, and go hard after these new disruptive verticals that are coming out. And I think, very explicitly, we're extending and leveraging 2 decades worth of sales experience and distributor networks and everything to Bluetooth. So we're going to repeat in Bluetooth, what we've done for Bluetooth low energy.

So with that, I thank you for your attention. And I think I'd like to leave the floor to Ole-Petter Skaaksrud from FedEx, which we're so lucky to have here today. Glad to have you here.

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Ole-Petter Skaaksrud, [3]

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Thank you, Geir, for that introduction. And also, thank you to the rest of the Nordic leadership team for the invite to speak here today. The -- it's always great to be back in Norway. The -- I left 30 years ago and never came back. It's one of those things that happen. The -- I have been part of the advanced technology teams within FedEx, ever since I joined. And through the years, I brought to life some of the more advanced and valuable innovations in recent memory for FedEx.

Today, we're going to focus mostly on IoT and a journey that has taken us to kind of the next generation of IoT that we are about to be developing.

I'll give you a quick overview of FedEx, just to make sure everybody understands and familiar with all the facts of FedEx, and how many pieces we have in motion every day. We operate across the world in more than 220 countries and territories. The -- we are in -- multiple operating companies -- here in Europe, you mostly see FedEx Express. The -- in the U.S., you have ground freight, going after different segments of the market. The -- we're delivering about 15 million shipments every day. The -- and it's all done by a huge team of people, more than 450,000 team members. The -- so there's a lot of pieces in motion every day. All of these pieces are linked together through an information technology platform that fuels the value to our customers, and also ensures that we drive and optimize the operations side of FedEx.

This all started through the vision of Founder, Fred Smith. The -- Smith is very much a visionary leader to this day within the company, and he set the bar pretty high, all the way back in 1978, when he stated that the information about the package is as important as the package itself. Now to recognize that value, that early, I think, is quite mind-boggling. And it is that division that continues to drive a lot of the innovations within FedEx, again to this day. They started back in 1979, where FedEx, for the first time introduced, barcode scanning for all shipments. Today, that's just common place, right? If you shift a package and you weren't able to track it, you'd think something was wrong. The -- that was -- that didn't happen before 1979. 1980, FedEx stood up its own private wireless network all across the U.S., recognizing that having -- to have valuable information at the edge, where it couldn't be connected to the business, didn't make any sense. So we had to make sure that the information that was captured could be brought to where it had the most business value. And again, FedEx will invest where we drive business value and differentiate our business.

And it was at this intersection between connectivity and capture that FedEx kept innovating for years and years as new capture technologies came online, we kept investing. As new connectivity solutions came online, we kept investing. And kept reinventing what it meant to deliver to our customers.

Now we have been -- and this was early 2000s, and we've been looking at how do we take the next leap forward. How do you go from capturing information about the package to also introduce more information about the environment. So we get into IoT, as a general broad offering for FedEx.

They -- and the challenge was, there wasn't really any solutions out there that had a combination of enough compute power and also energy-efficient enough to meet our use cases.

They -- because at the base of our use case is we have to be able to operate within an aircraft. The

-- from the intro slide, you may have seen that we had a number of aircrafts. We actually had the

Largest cargo airline in the world. And then in 2008, we're able to put all those pieces together and launch what was called SenseAware. To this day, it's still called SenseAware that how that combination of fairly low power enough compute to be able to detect if that device was an aircraft taking off or an aircraft landing. So much of IoT is driven through regulatory requirements and operating within airline is no exception.

They -- so we had to develop that technology, and then have the platform that it could run on.

We spun that out of my team, and it went into production. Then we took it back in again about a year ago, and we did that because technology is moving so quickly in the IoT space that they needed to take a little bit back from production to really go more towards the innovation, R&D space, to make sure that they can capitalize on the enablers that are being brought to life through companies like Nordic.

So in 2019, we launched our latest sensor device, the SenseAware 3000, and now we've gone from originally being a U.S. only solution to now being a global solution.

The -- and it has a number of capabilities, kind of a Swiss Army knife of sensing for FedEx.

They -- it does humidity pressure shock occasional course. It's a highly accurate temperature sensor in it, and so you can detect and go after pharma shipments. The security is another big area that we're within.

So we had light sensors and detect when packages opened when outside of an area that should not be open.

And again, the FAA approval is key because you have to be able to run within the airline. And what we're providing to our customers is this end-to-end visibility that starts before FedEx has shown up and continues after we have left.

And so much of that, again, is driven through location with location being both SAT driven, satellite driven, cellular location, BLE location, Wi-Fi location, everything to drive location visibility.

The -- and then link it so it becomes actionable on the business side, in this case through geofences. Geofence is basically geofence location and the business actions triggered from that geofence.

The temperature pharma is the primary area that you see a lot of regulatory requirements coming online that is driving customer demand for more pharma monitoring with highly accurate temperature sensors.

Now this just -- that's where we have been, right?

The -- now we look at what is possible today, and we are continuously investing in the next-generation of capabilities.

This is really where it gets interesting. When you look at the capabilities are being brought to life through low-power, wide area network technology. That's where you have the NB-IoT, you have LTE Cat M1. You'll change the game completely when it comes to IoT. Because now your battery life has suddenly gone through the roof. You're -- and that means that your cost of ownership of that visibility has gone down.

Today, it's no longer so much about the cost of the devices. It's all about the cost of ownership as a complete package.

The -- how many times, really, will an operator has to touch that package to retrieve the device to recharge it? How long can the device stay out in the field without any interaction again to drive down the cost to ownership, drive up the value to our customers?

And then also low-power, short range. Bluetooth Low Energy is very powerful. And it opens up for this ability that is similar to SenseAware within our network.

SenseAware being a cellular solution can go anywhere. BLE-enabled solutions are great within ecosystems, where you can leverage very low-cost devices, again, with broad range of sensing capabilities.

And what's also different today is you have new ways that information is been captured, is being consumed.

It's no longer just a question of putting thoughts on the map. When we started down this road, the -- even earlier in 2000, the -- it was all about making sure that the user experience was right, make sure that people can engage with the data.

Well, now it's all about making sure that the data is right for algorithms.

If you're not getting the data in the right density at the right quality, that it can be consumed by algorithms, you're falling behind.

They -- and you're also, at the same time, seeing embedded machine learning advancing with more and more computing available within these embedded devices opening up for more compute at the Edge network, which is really important when you look at a highly congested our environments. We have thousands of nodes working together in a very tight small space.

The -- I have to talk about Blockchain because it just increases my value incredibly.

The Blockchain, as technology, it's something that we have been investing in also for several years now. And we are going after Blockchain both on the IoT space and beyond to unlock new ways for systems and people and organizations to work together.

There's is -- it's a great article. And in Forbes a couple of months back, there's a link. I can share with you all. It talks about how we are heading down the path towards leveraging Blockchain, specifically in areas of customs -- custom clearance where the open letter methodology is quite powerful.

And we look at the combination of Bluetooth Low Energy plus the low-power, a wide area network type of capabilities and compute at the Edge.

You run into scenarios like this one where at the package level, you can have a node that is Bluetooth enabled, that you can have whatever sensors that use case requires.

They -- and then now the package is being managed by the Van higher level device. The higher level device can compute all the information coming from the package level device, so that you're reducing the load on the back-end systems.

It's great that we have an endless scalable cloud available to us. But when it comes down to it, if you have billions of devices out there as Geir had on his slide, if you're depending on all of that information going to the cloud, people will run into a scaling problem at some point. So you have to bring compute to the Edge, and you have to find a way to manage compute at the Edge.

Because ultimately, it is about making thousands and thousands of connections across the world and making that part of what we are offering to our customers. When we look at the 15 million shipments that go every day through our network, where do we add value through IoT on top of all those shipments?

This one is from that same Forbes article I mentioned earlier today, because it's all coming from knowing what has happened to a package, going back to the tracking information, the tracking through barcode gives you a historic view of what has happened to your shipment.

With IoT, you're opening up for what will happen, what has, what is currently happening to your shipment.

And with the combination of IoT plus AI, you're moving to predictive and be able tell what will be happening to your shipment.

That's it, guys. Thank you all.

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Svenn-Tore Larsen, Nordic Semiconductor ASA - CEO [4]

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Thank you O.P.

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Ole-Petter Skaaksrud, [5]

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Thanks Svenn-Tore.

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Svenn-Tore Larsen, Nordic Semiconductor ASA - CEO [6]

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Very, very good. I hope it opens up the audience view of what we can do with IoT. This is a very practical example. So thanks for flying out from the state and sharing this with us.

So we soon have a break. I would like everyone to go out, so you can get some more fresh air in the room. And there will also be some snacks out there.

But before we go there, some of you might remember, some might even invest a little bit in April last year for us to build up our lab capacity.

We've done that. And I would just like to show you a video of our world leading FA lab.

(presentation)

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Svenn-Tore Larsen, Nordic Semiconductor ASA - CEO [7]

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Thank you for listening to our nice video. But we're also having one more comment before we have the break. I mean, already, this installment has saved us time to market. And time to market is return of investment.

So I think in 2, 3 years, this will all be returned. So break.

[Break]

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Kjetil Holstad, [8]

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All right. Welcome back, everybody. My name is Kjetil Holstad, and I'm the Director of Product

Management at Nordic Semiconductor.

And I'm going to give a little bit of update on the short-range side of things.

So Svenn-Tore talked about the waves of revenue growth we've been going through over the past couple of decades.

And behind that growth, there is pioneership on connectivity and lead on connectivity, it's a strategic pillar for Nordic.

And we've done so by introducing more and more capable products, supporting more and more technology protocols over the years. And you will see that this pretty much overlap with some of the growth that's Svenn-Tore have talked about.

And important one was, obviously, the introduction of Bluetooth Low Energy in 2011 timeframe.

And -- but on top of that, we've built more and more advanced multi-protocol capabilities with the recent addition of 802.15.4. That is the standard that is the basis for protocols like Thread and Zigbee.

By doing this, we're also leading on integration, adding more and more value for our customers. And I'm going to talk about how this advanced multi-protocol landscapes pace out when we go to our customers and try to solve their problems.

So I'm not going to draw a lot about this, both Geir and Svenn-Tore has mentioned this, that even though we're in the landscape where we're supporting more than 5 different protocols and in the short-range landscapes, the Bluetooth Low Energy is driving pretty much all the growth going forward.

So already now, Bluetooth Low Energy has surpassed all over low-power short-range technologies, and it continues to grow.

And me as someone who's looking at products for the next 5 years, looking into this and are seeing the same trends that Geir and others are seeing where there's a continuous growth in the consumer segments. But there's also an accelerated uptake in nonconsumer. And that has changed a little bit on how we look at our products, and how we are defining the products for years to come.

There's a healthy CAGR here that's supporting us. And even though the graph here shows the very smooth, smooth growth, I do think the waves that we're seeing will continue to be a present.

Geir talked about the medical market where there are some regulatory approvals and things that need to happen before the market takes off, so we have come on these kind of stages.

So even though Bluetooth Low Energy is driving the growth, we see an expansion with what we call 802.15.4. 802.15.4 is, like I said, basis for the Thread and Zigbee protocols that are starting to see finally it's home and Smart home and more industrial and enterprise automation applications.

And this is market where we'll be today on technologies where we today have a very modest share.

But going forward, we see that importance of being multi-protocol capable and the importance of Bluetooth Low Energy also for this application is spearheading our introduction into these markets. It falls very nicely with the higher end SoCs that we have developed over the last couple of years.

And as soon as you start to talk multi-protocol, there's additional innovation that can happen in the software we're on.

So we're spending a lot of resources, making sure that our solution, not only on the ICs and the things that we sell, but also on the software that our customer's using tackle this problem.

And then the next, kind of, very fragmented and large ecosystem out there, and this is showing a Smart home example. Geir talked about Smart home being one of the growth. And here, you can see how this is a very complicated picture.

There are platform providers out there who are making the hubs, the voice assistant hubs for the home and the gateways. They are depending on ecosystem around them to deliver thousands of various devices, sensors, security systems, et cetera.

And these large ecosystem providers have chosen different networking protocols to communicate in between them. There's Google, who are basing their ecosystem on Thread. Amazon on Zigbee, Apple HomeKit is using Bluetooth Low Energy and Wi-Fi.

So when customers are going to make sensors that talk our part of this ecosystem, they either have to make deliberate choices or work with a company like Nordic that has multi-protocol capability to design product that can be part of larger ecosystems.

You can see here illustrated with the phone on the left that for some of these ecosystems, the importance of phone connectivity, either directly into the sensors or the gateway, either for reading status or for setting up networks and with pairing

So very benefit -- very powerful to have a Bluetooth connectivity into these ones.

On the backhaul, there are gateways that are Internet connected. So we got 24 access to your Smart home system.

But what we're seeing now is also emergence of people having security system and door locks on back-ends that might be cellular.

So if your Internet provider goes down or there's power shortage, there are batteries and cellular connections that allow this system to operate even under shortage.

So combining the Nordic technology, we can help these customers to navigate these ecosystems to build the right solutions. So that's just kind of one example.

And this wouldn't happen, if there is not things like in proper ability, core systems and robustness in place.

So when Geir talked about our position in this space and our market share, and you have a proven solution that allow customers to build products to this.

So breaking down the short-range market units in a shipment map.

As a product developer and making strategy for products, we continue to be monitoring the landscape, and we will try to look for complementary requirements within this space.

So markets that are growing and overlapping in some of the requirements are extremely important to Nordic.

So we're also looking for new high-growth markets. And we have, of course, have this picture also for the next 5 years. And I can tell you, the biggest box in 5 years are not the same that are the biggest today.

So we will build up our portfolio. We are looking for the healthy mix of these existing large margins -- markets that will continue to grow in these new markets.

But this is also showing us extremely fragmented space where there are certain markets where Nordic don't have an interest to go after.

We don't do extra additional effort to go after. So some of these markets, we might have a position with our devices, but we don't do targeted investments for those.

So what we're looking for is an opportunity to bring value to our customers and to differentiate from our competitors. And a large thing of what we're doing right now is around investment in platform.

It is about maximizing the R&D value, so we spend quite a lot of money on R&D and investments to bring up platforms that scales on the IC side, where the nRF51 used to be a single chip with, kind of, small life duration.

We're now building up families of devices introducing new technologies, et cetera.

So we have platforms that scale internally, we also have platform that scales at customers. We see more and more customers, they use high-end devices from Nordic, and they use low-end devices. One device in the hub and one device in the sensors.

So that scalability that we do on the IC levels is very, very important.

Platforms also allow us to do rapid and targeted expansion. So you've seen that, and I will give some example in nRF52 series, how we can go out and deliberately target certain requirements or certain applications.

The scalability also comes across software where we're building up equally important platforms. These are framework that our customer depend on when they develop their products.

It's a framework that has to cover all the Nordic ICs from the very low end to the high end, from Bluetooth to Cellular.

And we will do all this to bring this value to customers that Svein-Egil Nielsen, Svenn-Tore and Geir has talked about, truly building a scalable solution across technology markets and customers.

And when we look at this in the -- for the nRF52 series that hopefully all of you are familiar with, there's a couple of things I want to point out. So it was introduced in 2015. And over the year has built up a market share that is averaging 40% of design wins every quarter. So it's really, really market proven.

A lot of the applications and customers we go after, the idea behind the product is not necessarily the connectivity. They have a greater idea and the value of their products is not necessarily related to connectivity, but it needs connectivity to talk through your phone or talk through a hub or whatever. And this is something on that is market proven.

It's an easy choice for this one. But this graph to the left shows a different way of looking at the 40% market share.

We have previously all talked about a big other category. This is now breaking down to a very competitive landscape. This year, we've seen 39 different competitors in the short-range landscape.

A lot of companies out there trying to come after our customers and our base.

Let me now share, we have something that is very unique to Nordic. We have a funnel of insights in terms of what the customer requirements are, in terms of the market requirements, and where business is going forward.

And we built up the 52 series that allow us to tactically move into the right direction when and where we see needed.

We also build up a huge amount of software that allows us to expand when and where we see it naturally.

And because of this, we think that the 52 series is a platform that will continue to grow for the next years.

So this shows the introduction of nRF51 from year 0 compared to the introduction of nRF52 from year 0 and the revenue share.

Initially, the 52 series was one device, and you can see trail to 51 fairly, fairly accurately. But as we started to introduce more members of the 52 series, you can see that the growth of the 52 decoupled from the 51. And it is this low end to high end and still expanding through the customer engagement that we do that allow us to capture this growth.

The recent additions to the 52 series has also allowed us to strengthen the ASP for our Bluetooth Low Energy offering. And this is in a market where the ASP has dropped.

So yesterday, we introduced the fifth member of the 52 series, the 52833, but we are not done there. With the growth that we have in front of us, with the insight we get from markets and the insight we get from customers, we are still looking to further expand the 52 series.

There are some capture new high-growth markets that we're looking at that needs dedicated chipsets going forward, and the 52 series as the platform is the best choice for us tackling those.

And Geir alluded to some of the markets that we're going after. And we're doing so aggressively in this space.

And the other thing that is changing now is when we introduced the 52 in 2015, it was to a large degree, replacing a lot of the 51s. What we're seeing now is a lineup that is expanding. And when -- they soon will introduce the nRF53, it will be very complementary to the 52.

So they will -- to continue to grow, and they will continue to be releases in both this families going forward to even have a wider net and wider coverage of low-end to high-end to mid-end and different requirements as we're going forward.

So we're doing strategic investments in the 52 series for high growth, and we're pushing the boundaries of to what the technology can do upwards with introducing new devices.

Yesterday, we introduced 52833. It sits there in the higher end of the series. Not going to draw into the block diagram on the left, that is a snapshot of the capabilities. And anyone who has touched on an nRF52 so far will find a lot of familiar building blocks, and that is intentional.

We want something that has the same architecture, the same software that allows customers that are already familiar with the 53 series to have a rapid time to market.

But there are some important things that we have done here, introduced extended temperature range up to 105 degrees. So Geir talked about -- at length about the lighting markets. And there are certain portion of that market that require temperatures above and beyond what we have supported so far. So by extending this temperature range for the 52 series, they're better tackled for some of the requirements. These requirements we'll also see in the industrial space when they go after consumer. All of a sudden, there are much, much harsher environments and supporting extended temperature ranges help us tackle those.

And of course, multi-protocol is de facto in the 52 series now, having capabilities to tackle things like the smart home ecosystem landscape is really, really important for us. We are soon introducing the nRF 53. It builds on top of the 52 series and everything that is good with this one and where the 52 is the benchmark, the 53 is pushing the boundaries upwards, significantly reducing the power consumption, significantly improving and adding the performance capabilities, advancements in security. We talked about the importance of security in the IoT landscape. This one has the latest and greatest in terms of security, and we're aligning it even further with nRF 91 than what the 52 series can do from an architecture and a software platform capability.

This is because since -- and we'd like to go a little bit more into this, there's a large overlapping customer base between a short-range and a long-range business. This increases our scalability both at the customers and internally. And there are aspects of nRF 53 that is also tailored to tackle some of this shift from consumer to non-consumer applications.

There is a significant ongoing software investments in Nordic. With nRF 91, we introduced the nRF Connect SDK, and this has the ambition to unifying all Nordic ICs and all Nordic technologies into a common platform. And there are some supporting components here that we also bring into the picture. So they have something that is complete from board level all the way up to the cloud.

There's a new generation of engineers out there. So -- that are behaving differently from when I wrote software 10 years ago. They depend on real-time operating system on their devices, open source, modern development environment and distribution models. So this pushing the software for the new generation of engineers. And we talked about scalability from low to high complex applications, single core to multicore SoCs from Nordic, but the idea is to allow customers to focus on their application and their program and Nordic to help them with everything else.

So the 52 is made stronger through partnership. And we've shown some of the partnership already, and this is because the technology landscape is going in many different directions. You've been following Bluetooth low energy, it added higher throughput capabilities, long-range capabilities, location capabilities. And through partnership, that are excellent in some domains, we can further our customer reach on some of these verticals. And this is just some example of the partnerships we've done recently.

There's one particular I wanted to dwell on and that's the partnership that we're doing on audio with Cirrus Logic. So this is a strong, established partnership that really combines the excellence of 2 companies. So Nordic is a world leader in low power and Bluetooth and same here as Cirrus Logic have a similar position when it comes to audio and voice processing ICs.

So what we build together is a demonstration vehicle, showing the capabilities of combining the technologies from these 2 companies for a full end-to-end audio application over Bluetooth Low Energy. And by combining these technologies, you will have the industry-leading, ultra-low power consumption in wireless audio. So this is something we now have under active customer relation to see what this technology could bring forward.

So wrapping up. We see significant opportunities in the short-range wireless landscape and significant opportunities for growth, and we're continuing to invest in nRF52 and the 53 series with accompanying software to accelerate this growth. And we're expanding our reach through some of the strategic partnerships we have shown here today. Thank you.

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Svein-Egil Nielsen, Nordic Semiconductor ASA - CTO [9]

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Good afternoon. My name is Svein-Egil Nielsen. I am CTO at Nordic Semiconductor, which makes me responsible for all our development activities. Today, I get to speak to you about cellular IoT. So cellular IoT for us is a way that we thought about the company and how we can accelerate growth. How could we maximize the value of what we do in R&D. How can we become a bigger and more competitive company in the overall ecosystem where we are. How could we eventually also improve profitability of what we do.

So when we look at these objectives we had, I think, we come a long way in cellular IoT. We've developed products and ICs that are very complementary to short range. We have leveraging our ease of use, which we talk a lot about and which you heard about at length today. We look at the market and how it overlaps. We talk about existing customer relationship, how important those things are. The broad marketing model that Geir described is perfect for this market. A market that's never seen any broad market at all. I mean, cellular IoT has typically been a very niche business where very few companies actually able to make any product.

And finally, I think that's something that we rarely talk about, but it's very important for us is that our ability to manufacture. We produce more than a million device per day and we're manufacturing powerhouse. We've grinded our production facilities and our quality systems for the last 20 years. We become a company who can make high-volume, highly advanced devices with a high level of quality. And that's important for us. So if you look at our perspective, I think cellular IoT adds a very natural expansion to our business.

We've invested around $100 million into our cellular IoT products. We've built a capable organization with cellular expertise that came into our organization that has contributed significantly to our products. As you know, we have large facilities in Finland. A lot of these engineers that we hired there has cellular expertise that stretches back 15, 20 years from the Nokia, the Renesas, the Broadcom and Ericsson. This is things we've done before and of course, it's been a really great opportunity for us to scale that organization. So I think we started this in -- the idea came about in 2014. We started developing in '15. And today, I think we can -- well, I would like to say that we actually made a great product, which is super low power, great cellular IoT product, and we'll talk a little bit more about that today.

So the nRF9160 is our product. That's the product you can order today, and this is the most advanced products, most sophisticated product we, Nordic Semiconductor, has ever made. If you look at the block diagram of the whole system and package, as we call it, it contains the nRF91 SoC, the chip itself, and it contains our front faced power management package. You can see in the 91 SoC, we typically divided that in two. One part is the modem part of it, which performs the radio and the product calls itself. And on the left side, we'll see the application MCU. The application MCU is what gives customers the ability to develop their application to do their edge processing, to integrate with sensors, to make something meaningful, not just transfer data.

And in a way, the system and package itself, it's what we believe is a self-contained as it can probably be because all the thing you need to put on externally is battery. You need some sensors maybe. And you need the sim card and antenna. And there you go, you have a cellular product. So highly integrated.

And I'd like to think that this is the leading product in the world. From an ultra-low power perspective, we're better than any of our competitors on all power modes, different ways of measuring power consumption. We're better. We use techniques we've learned in short-range of integrated memories, low-leakage process technologies. The way we do power domains, there's an enormous amount of different things that could be on and off at any given time, and all these add to power consumption that no one else has.

Integration, important. Small size is good. That makes you available to make small products. And I think we've been pushing the boundaries on this device about how small we can make it right now. Ease of use, again, important. This product should be able to something you can take, design, make a product and get-to-market. I think we're leveraging what we have from the Bluetooth world and we're investing more into the space of ease-of-use.

The modem or the radio part of it itself supports both LTM and NB-IoT. The reason for that is because it gives us the opportunity, of course, to compete in both markets that has either an NB-IoT or LTM. And if you look at the few hardware elements of it, it's not that big of a deal if you do both or just the one of them. It made sense for us to do both, and it gives us a great opportunity when we go into market, while there still is territories that choose 1 over the other.

We also have the GPS port to our modem or radio, which as you heard about location and these kind of applications is a great thing. Tightly integrated between MCU and modem gives the developers a good solution. And finally, this is also up until now, the most secure product that we make. There's multiple secure end clients on this device. The customer partition is designed to be normal security secure. We have had this device certified for something called Platform Security Architecture level 1. It's the first step of an industry-wide standard of -- architectural standard that defines the layers of security. So this is the most secure device we've ever made as well.

We believe that the cellular market is ripe for innovation and a little bit more than just the devices. One thing we want to make sure is that cellular products can be made by more than just cellular experts. If you actually take someone could make a product and to enable that kind of cellular IoT ecosystem of getting something out there, we decided to make what we call Thingy:91. The main thing comes from a brainstorming where no one could come up with a better name than thingy and it sticks with us. But it is a proof-of-concept tool, a tool that contains enough functionality for any customers or developers to go out and try out this idea. It has some sensors. It has batteries. It connects to the cloud. You can easily test out your ideas. Of course, as with everything else we do, the Thingy:91, the hardware descriptions, all the software we put into it, we make it freely available to our customers. So they can -- happy to see customers copy the design and get going. And we launched this in August. We shipped around 2,500. And so far, it looks pretty good.

In fact, we're so excited about this thing that we actually made a video about it. And we would like to show that video to you now.

(presentation)

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Svein-Egil Nielsen, Nordic Semiconductor ASA - CTO [10]

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If it is up to me, we would be just showing videos here today, but I was told to do some slide. So I want to go back to -- as we talk a little bit about tools but I want to go back and look a little bit about competitive positioning when it comes to our nRF9160 and there's really -- what we like to compare the competitiveness in 4 axis. One being power consumption and one of the benchmarks we look at is something called an eDRX type power consumption. What actually means that you're pinging the base station towers, in this scenario, once every 82 seconds. So it's a long interval, nothing happens. You're pinging the towers and that's the number. And it's a very relevant use case for a lot of things where you don't want to be sending data too often. You could argue that if the pizza guy (inaudible) want to be doing a little bit more. But in some cases, once every 1.5 minute is a good interval.

The other thing we look at is size. And size is more than just x by y. It's also x by y by c. So when we look at size, we think about it as cubic millimeters, not just square millimeters. That's an important element. Imagine you want to put something in a small form factor, the height becomes very important. The third one is the fact that you can actually do meaningful things on our device. You can actually have an application MCU that you can do your edge processing or you compute and interface to sensors. And it might sign -- maybe when you know Nordic, you think about that as an obvious thing, but it isn't. It's something that we're very good at and the other guys not so good.

And finally, what about our software development kit? So we have extensive software development kits, and I think we shine when it comes to this element as well. So of course, we think we compare better on all these 4 axis. We do not operate with competitor names. We never do that. But in all axis, we think we're definitely better than everyone else. But I think one of the important things to think about is also the sum of it. You can be better on some things, but we think we're better on the sum of everything, which is good. Please be note that there's some preliminary marketing numbers. My experience that means that, that number is going to go up later. So we know where that's going. But yes, we think we compare very favorably and that seems to be the market acceptance as well.

When it comes to our developers, we try to make it simple for them to take their device and get their data to the cloud and do something meaningful with it. Because eventually, all data here is going to go to some kind of cloud somewhere. With our developer tools, the development kit, the Thingy:91, together with nRF cloud, you can provide a solution here that gives you a secure connection between the device and cloud. That means that all the data is encrypted all the way from the device to the cloud. It's safe and we can add services to our customers so they can add more Thingy. They can add more things as well. What you did see on the previous -- on the video is the way we can visualize data to nRF cloud as well. You can write -- make a website and some of you may have done that many years ago, but you can make a website with API and you can pull data straight from sensors. And that might seem obvious too, but it's not something that you can always do, not that easy. But from manner of cloud, you can easily use an API, pull data and see your sensor data and present things like we saw on the nRF Thingy video.

Finally, of course, we're going to -- with cloud, you can manage devices. We upgrade the firm, we can manage SIM and so forth. It's part of us trying to deliver more solutions to the customers than anyone else does. And by that, also try to speed up the delivery with our customers' development time and get things to production faster.

I was asked to talk about 5G. And the story about 5G is pretty simple. First of all, our LTM and NB-IoT is part of 4G. And we support that, 4G LTE. The good news is also this, LTM and NB-IoT, as it is today, forms the basis for machine-type communication with 5G. So that means that our nRF9160 is ready for 5G as well as 4G. So long story short, don't worry about 5G. We work on 4G networks. We work on 5G networks, and we're not depending on having a 5G network for us to be successful. Very simple, right? I don't have to get that question anymore. That's good.

I'll talk a little bit about readiness. And Svenn- Tore started off -- or ended up his slide deck talking about some of where we're. And I started off with what we showed earlier today, we're confident in the IoT long-term cellular. I'll talk more about where we are in a few slides. But we have seen that volumes and revenues have been coming in later than expected. We've seen research and analyst expectations moving some of that out. Svenn-Tore talked about some of these elements that has delayed or pushed some of that out in things like ecosystem maturity, our software development, certification processes, customer development cycles and so forth.

I'd like to address, first of all, some of the things that, I think, have caused some of the delays and I'll talk about why I think these are things (inaudible) as we go forward.

So very simplistically speaking, so why do I think it's taking more time than ideally we want that to happen? Well, I think there's something about network rollout. Although there's been a lot of roll out, there's been a lot of press about it, there's been many countries that has LTM and NB-IoT. It has taken longer time in many territories for it to be globally available. So if you're seeing some carrier announcement, they technically talk about pilot, they turn on the city, they turn on some territories. But if you're making products, you're not really ready until you have total coverage. You can't really sell your products and say that this only works in this part of the country. So in terms of network, the carriers really roll out in the 2 countries. I think there's been some hesitation from customers and device maker to make it going. And that's part of it.

One thing that I also think maybe slows it down or something to get some grief about often is that what about the cellular carrier (inaudible). So the short story is, it's so expensive to do it. Why in the world's name do I need x amount of money for this per month. That doesn't make sense kind of way. And I think the many carriers has, in some way, been struggling to find what is the right business model for cellular IoT. They come from a world where everything was phones or most of is phones, some 2G. Now they're going to come up with business model that attracts developers that has pricing flexibility that goes from is it a monthly? Is it a fixed year? What is it? And that has taken some time.

Some carriers have been successful, have been doing smart things and others are still lagging in the space or coming up with solution that works for product makers and developers. So that the ecosystem has taken more time than we expected. We've been delayed with some of our software development, and I'll come back a little bit to that topic, but we would have loved to be a little earlier with more deliverable than we've been able to get out and that has delayed some of our customers. The ease-of-use, as we talk about, is not where it is as Bluetooth yet. It's not as easy to do cellular over Nordic yet as it is to do Bluetooth. Well, the bar is pretty high to do Bluetooth as easy as we do, but it's something that we will improve and will continue to improve.

Certification has also been a complicated matter not only for us, but I think for the industry at all. And I thought a lot about what about certification? Why is that process that takes a longer time? One of the things is I want to highlight is, I call it, process maturity. It means that -- in practice, it meant that every time we've gone to a carrier and asked, how is your cellular IoT core certification process? Where is the document? They never had a document for us. It was always an early version, previous years or something. It wasn't really clear for them on how they're going to certify these products. So while we've been doing a lot of certifications, and we're still doing it, some of these requirements from carriers being in flux for a long time here. And that makes things a little harder. Do you actually need it in future? Or is it optional? Is it volunteer? Is it not? Do we need to measure all networks, you have to do these things. I think that carriers have been struggling to simplify a certification scheme that is appropriate for devices like that, (inaudible).

And finally, for some of our certification efforts, that's also been delayed because we had firmware -- software that hasn't been ready at the time we needed to be. That's some of the delay reasons I think. There might be more.

Now why do be optimistic that this is going to go forward? I like -- I wanted to show this map and some of you may have seen this map already. This is the map of LTM and NB-IoT deployments on carriers worldwide. It's data collected by GSMA, and it shows the world. If you count up all the networks deployed is in the order of 130, last time I counted. It could be a few more. But as you see, apart from large parts of Africa and some places in the Middle East, coverage is getting pretty good now. If you've been following this space for a while, you might also must see that more and more of these slides went from being maybe yellow, meaning LTM only to this color, which is purple maybe, which shows that they've chosen to deploy both kind of networks and that we see in many places. So this map is getting plugged all the time, more and more carriers or more and more territories are doing both type of protocol.

I think there's 2 reasons for choosing both. One is that you can actually address slightly different scenarios, but also because the investment of network upgrades. If you do one or the other products may not be that significant. But this is good news. So -- although it's come maybe later than expected, it is -- there is no question anymore, in my mind, that the carriers are embracing cellular IoT.

The good news about our product is that we have made a worldwide product. Our product supports more LTE band than any other products in the market, meaning it fits in more markets, as it's in all markets worldwide. That matters for you as a company. When you make a product, you can make a product in a single SKU. Piece of hardware, you can sell worldwide. Maybe there's software configurations you put in your product but it will work in all the territories in the same piece of hardware. You don't need to do 2 different versions of your product or 3 different version product. That's very important for many customers to make sort of medium-sized quantities. Or they want to address some 10,000 in each market, you really don't want to have to go out and make different products. And we made a product that allows customers to operate with a single SKU. This nRF9160 has also been through a significant amount of tele regulatory certifications, which is the FCC, NFC all these other abbreviations from different countries. We've obviously done a number of them, and we're ramping up a few more to make this map look pretty similar to the previous map. Of course, in addition to that, we've done a global -- the GCF, which is a standard for cellular protocol compliance similar like to Bluetooth SIG is for Bluetooth. And PTCRB, which is another organization that do similar. So very, very good shape when it comes to tele regulatory worldwide SKU and I haven't seen -- this is in really, really good shape.

We do also need to do, in some territories, carrier certifications. Those -- that's kind of certification that goes beyond the tele regulatory and beyond things like GCF. Worth noting, and I want to emphasize there are a lot of carriers do not require us to do this, but some do. And you may have seen that we certified the Verizon in August. That was something we're very happy with. It was -- it's a big carrier. They're very stringent on how they test, and we passed that. But also, right now, we're in active certification process with 9 carriers globally. That's 2 in the U.S., 2 in Europe and 4 in Asia. So this is going very well as well. And will, again, allow customers to deploy in more markets.

I wanted to highlight something when I said business models, we're not really there. Some carriers are really trying hard and there are these nice, one of those carriers, I think, that have been doing a lot to make sure that developers find their portals and can actually make products. And this is an example, of course, we're very happy to see nRF9160 on the Verizon website. It shows as part of the things (inaudible) ecosystem and good thing is there's also some software solutions that Verizon offers. And by having this in place, you can go on all the SIM cards, you can start doing your development, you can start going through certification process as well because it's part of the system. So business models are improving. Carriers are putting up these websites. They're doing much more to promote this market. And this is one of the benefits we get as well, when we engage with carrier and carrier certification is that we become part of their marketing machinery as well.

Software deliverables. So we launched our first production release of our cellular software in early July. So this is what we call modem firmware 1.00 an SNF SDK -- Nordic Connect SDK version 1.00. That was launched in early July, as we planned. But I think one of the things that we've seen is that some of the functionality that some customers want didn't make those releases.

(inaudible) will talk a little bit about nRF Connect SDK and how that is a big lift for us in terms of software platform. And I think, well, honestly speaking, it's been hard, a lot of effort for us to move to a new platform, which this is on. At the same time, supporting existing customer base with soft device and nRF SDK and having a lot of Tier 1 customers asking for special software. It's been a tough last year, software development. But I think the software development -- the platform lift phase is getting to the point where the steep hill is starting to flatten out. And I feel much more confident right now that with the development efforts coming onboard and the new features releasing continuously, Q3 and Q4, we'll see significantly wider customer to be able to go to production in the software we provide. We have production releases scheduled for Q4, which will significantly add more functionality. Now we're not going to stop making functionality because this is an ongoing thing. But with the November releases and the interim release up to November, there'll be significant amount of software coming out of it. So I feel like we're -- the hardest part is over, I hope, in terms of getting everything in place for this big lift.

Market opportunity. So I was told that this slide is too busy, but I wanted to show it anyway. And this slide is an example of all the projects where we engage with nRF91. It's a long list and I'm not going to going to get into details about the list. But the long list itself is an interesting thing. It just shows the breadth of all these different verticals we're currently seeing devices being designed into. As everything from agriculture monitoring, parking systems, street lights, logistics, it's all over the map. And that's sort of what we thought and we believe all the time that, yes, this is not just a market for smart meters. It is for a lot of different use cases, a lot of different (inaudible). And this is straight out of our project databases, our tracking of projects, and that's pretty cool.

There's a lot of different verticals. And again, I think that serves Nordic very well with our business model on how we go to market. Those are highly complementary with short range. I think that's been mentioned before today maybe, but one thing I may not know is that 61% of our customers who's now ordered our nRF91 set has already ordered Bluetooth before. That's a nice overlap. It's 2/3 is existing customer base, some is not, and it really shows that our ambition of tapping into existing customer base is working. There's 2 ways of looking at that and has already been mentioned here. But there's, of course, these product that has both a cellular and a short range device in it. And those are the ones where different applications in the ecosystem using different kind of protocols. But it's highly complementary and it's a great benefit for us moving forward.

The asset tracking. So when you think about -- what I think about asset tracking, I think about asset tracking as you want to know where everything is at any given time regardless of where it is? And you can really expand that to think about? Yes, you want to know where your kid is. You want to know where you put your mobile phone. You want to know where your book is. You want to know everything. You want to find your remote control. The guys at McDonald's want to know where you're sitting, so they can put the burger in front of you. Everything about -- everything you want to know where thing is. And it's somewhat pervasive if you think about the whole concept. Everything means you don't need to know the location and the state of that device at any given time whatever it is. Some of you might be scared about that as I said before in the previous slide, we've got people who want to monitor where your kids. That'd be great, I would love to know where my son has gone. But this is, I think, a mega trend. Everything is going to be tracked. Everyone's going to be having a location. Everything is going to know the status. And everything being digitized, you'll see that everything gets put into massive databases. And I guess, to (inaudible), it's in a way, you got to be able to figure out how to use that data and make something meaningful out of it. But this is a big mega trend. And we really think that our 9160 is really, really good for this space. It's low-power and small so it mean, you can make smaller thing, less batteries last longer. We provide GPS for 4 locations. You can integrate your sensors with the MCU we put on board, so you can do like the guys did on the Thingy:91, the temperature, the flip, you can do some other nice sensors to make sure that the product is in the shape you want it to be. And finally, I think the product -- with a global product, you can track things globally as well. We think it's a very strong product for asset tracking.

So how are we doing? I think we believe we're getting significant traction in 9160. Here's some numbers on this slide. Well, we moved the nRF91 system and package into full volume production. And it produces good yield. I'm very satisfied with what we're seeing in production. That's good. Not a concern at all. We shipped more than 4,000 development bunch, of these bunch, we shipped around 2,500 (inaudible). We have more than 200 customers who's doing -- the other devices, building their own PCBs. And it's a big step when you go from using a dev kit to making your own PCB and making your own product. That's an investment from the customer side, which is pretty significant. When we track dev (inaudible) Which is our support portal. This is the #3 device, meaning, and it keeps growing. So this means it's the third most popular in our portfolio, competing against the likes of some of our massive 52 sales devices.

And we had revenues around $500,000 in Q3, on prototypes and development boards, which is pretty good. The traction is good. I believe we're poised for greatness and great growth as we move forward. We've made a product that we think is very, very competitive. We believe that the carriers are fully on board with LTM and NB-IoT in pretty much all markets. Certification of term (inaudible) is gaining a lot of pace. It's no longer such a -- I have to say, a concern for me as the shape of development as it was a few months ago.

Considerable design activity, as I showed with more than 220 customers making boards. And you know that we're highly complementary to Bluetooth, exactly as we want to do. So we hope that the graphs keep growing, probably will. Showing good shape on cellular IoT.

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Pål Elstad, Nordic Semiconductor ASA - CFO [11]

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Okay. Thank you, Svein-Egil. My name is Paul Elstad. I'm the CFO of Nordic. I'm going to do the last part of the presentation. I'm going to go through the financials. I'll start with a Q3 wrap up, and then I'm going to give some more forward-looking views on the business.

So first on revenue. So revenue -- very strong revenue in Q3, $82.2 million, first time as well, $80 million in revenue and also on the high end of the guiding that we provided in the Q2 presentation of $78 million to $83 million. So that's a great achievement. The growth came as mix mainly from Bluetooth, where we have 15% growth. Now we're going through all the segments or markets in detail. However, due to the strong nature of Q3, which is always the strongest quarter of the year, I'm just going to take a few of the specific areas.

Start with Consumer Electronics, a 6.6% growth from last year. It's actually very strong since proprietary, which is dominating this part of the business, had a 19% reduction. Showing that there's quite a few new design wins and design activity happening in the consumer electronics business.

Then Wearables. Wearables was in '18, early '19, very slow, but now we've had 2 consecutive quarters with strong numbers, so a 12% increase. A lot driven by the designs and the strong design activity we have in the Chinese ODM markets. So a very strong market there. Finally, health care, both Geir and Svenn-Tore has talked at all about health care. So it's, of course, short term, disappointing that there's a decline of close to 30%. However, as Geir said, this is a market that's taking pace and it's a growth market going forward. The reduction this quarter is mainly driven by some of the customers in the mid of a product life cycles.

I'm going to jump to gross margins. So Nordic has continuously showed a great improvement in gross margins during -- since 2016, really. And then it peaked at 51% last quarter. So had reduction of 1.14 percentage points quarter-over-quarter. The reason for this reduction is twofold. First of all, as Svenn-Tore and (inaudible) talked about, for the first time, a quite large impact of Tier 1 customers, which inherently have a lower gross margin. In addition, there's some mix in products. In Q2, we had a lot of the high, high-end products sold in Q3. There's more mix towards the mid and lower end products. This mix, as you've seen in the last few years has changed from quarter-to-quarter. That's why there will be fluctuations in the gross margins going forward.

Going to the operating model performance. I've already talked about the 4.4 percentage point increase in revenue. Part of that increase is not by lower gross margins, still a strong gross margin. On R&D, split between short range and long-range of cellular IoT. The short range business, we've invested $12.4 million this quarter, which is around 15% of revenue. That's pretty stable compared to what we've seen in previous quarters.

This money is used to invest, to capture growth opportunities that we see out there and especially, working on the high-value customers. But of course, it's also spending to capture growth opportunities with new products, et cetera, in the future.

Cellular IoT is in heavy wrap phase with high activity on certification and development software, that's why spending has gone from $3.9 million to $6.7 million over the year. However, a little part of this is capitalization because in 2018 we capitalized significantly higher amount, we'll come back to that in cash expenses part.

We've been able to keep SG&A costs relatively stable at just around $10 million and shows the scale of the operating model, and how we're able to leverage the strength of our distribution setup.

Finally, EBITDA of $11.5 million or 14.1 percentage points, down from 14.3 a year ago. However, as we always do, I think it's important to look at the split between short range and long range because the -- only the short-range business is generating revenue. So if you exclude the investments we do in cellular with exception of the dip we had in Q4 last year and Q1 this year with exceptionally low revenue. We've seen that the short-range business have been giving EBITDA margins at around 20%. And then actually, in Q3, even well below -- above 20%. Also given the guided range for Q4, we estimate that the full year EBITDA for the short-range business will be up compared to last year.

And then from -- on cash operating expenses. In this quarter, we've capitalized $1.8 million. The corresponding total amounts last year was $3.1 million. The reduction is really driven by the Cellular IoT project now going more into final phase. It's also -- more of the spending is done on finalizing the project and then working on new products. So the Cellular IoT projects from Q4, we will start depreciation of that project, adding depreciation of around $700,000 for those who dig into the models.

If you look at the total number from Q3 last year to this year, it's gone up by 9.3 percentage points. Adjusted for the IFRS 16 implementation that we did earlier this year, the increase is around 13%. The growth comes as a result of increasing from 663 employees a year ago to 750 now, so a 13% increase.

If you look at sort of the bottom line to do -- there, which is the other operating expenses, also all other things done by employees. You see that we have sort of come up to scale. So we're able to utilize the base investment we already have and add-on people on top of that without increasing the other part of the cost. Compared to last quarter, it's pretty stable. We do have a very positive effect of FX, the weakening of the Norwegian krone is very positive for Nordic as we have a very strong base in Norway.

Review on our cash flow. We started the quarter with $87.9 million, so a small reduction of $1.2 million for -- ending at $86.7 million. And normally in Q3, which is the growth quarter, we will see a negative cash flow, which we also did last year, where we actually had $12 million in negative. So we are able to reduce the negative effects of seasonally weak cash flow quarter. We've done that by really working on cash conversion. So if you look at the net working capital, it's sits around 27%, which is a significant reduction of 5.4 percentage points compared to last year.

Also in Q3, we spent $6.5 million in CapEx. A lot of this CapEx is related to the video you saw earlier today, the lab equipment, which is being finalized in this space.

Overall, I think we're satisfied with the Q3 results. We're back to growth in Bluetooth. We've maintained a quite strong gross margin. We're able to keep the cost development under control.

Now I'm going to go through a more out year review of the cost basis going forward. First of all, on gross margins. As discussed earlier, Nordic has been able to stabilize and exceed the 50% target. We've been able to do this sort of a mix of operational things. But also, as Nordic is growing, we get more favorable pricing from our vendors. Also we're able to forecast better with getting -- when we get larger customers on board, it is much more easy to get visibility in our deliveries and thereby, we can significantly reduce costs. And then -- and that's something we're going to continue to work on. However, of course, the product mix going forward and at least, the customer mix going forward, we estimate that gross margins would go slightly down to the 48% to 50% levels. We only provide outlook on medium term for gross margin, as both ASP and then cost levels is a little bit unsure in further terms.

When we launched Bluetooth in 2011, our aim was to provide our customers with a very easy to use, out of the box experience to supply all the software, et cetera. We are doing the same on the Cellular IoT, where we're partnering with Qorvo to make a module. So when we deliver a module, you have to give away some of the gross margins to the external vendors. That's why for the long-range business, we indicate a gross margin of 35% to 40%. It's very difficult to give an exact point there because revenue has been limited and we're still ramping the production, so it's not exact -- to know the exact points of cost. So for the time being, we have a medium-term guiding on 35% to 40%. Effect on the group margin of the cellular business, of course, depends on the cellular ramp. So it's too early to say anything there.

On R&D, Nordic spent or will spend approximately $74 million in R&D this year. This is based on the midpoint of our guiding, and this will represent about 26% of our revenue. Of course, you see a steady increase. The reason we have a significant increase also in 2019 is, of course, that we had lower revenue in the earlier part of the year. How much does this relate to the short-range business? Well, we spent around 17% of our revenue in R&D. In order to be -- have staggering 40% design wins, we need to be a leading vendor of Bluetooth products. So 17% is a adequate number to be there and is something we should expect.

On the cellular business, it doesn't really make sense to compare R&D to revenue, since there's no revenue yet, but it adds up. So that we get 26% in revenue on the top.

R&D intensity is expected to decline. We believe that this number is on the peak in 2019. But of course, the absolute number of spending in R&D will increase, although the KPI will be reduced. Also I think Svenn-Tore -- Svein-Egil talked a lot about the synergies between short range and long range. So in the long range, we're working a lot on projects together between the 2 businesses.

On SG&A, we are going in the organization to capture growth opportunities, both between short range and long range. That's why we're spending around 14% of our revenue on SG&A. We believe we're soon meeting the peak point there also. So that in absolute numbers, the cost level will, of course, grow but that will build or ramp the cellular business. The overall KPI will go down towards around 10%. This we believe is a reasonable level for a company like Nordic.

Being a fabulous semiconductor company, CapEx is limited. So our main investments relates to test equipment that we use in our production in Asia. We invest in large facilities to support customers. And we also spent quite a lot on software that we use in the design of our products.

And finally, we buy some licenses for our soft -- IT, for our products. We have been investing quite a lot in the new lab facilities in Tromelin and also in Asia. That's why you see that CapEx for 2020 will be around $20 million, which represents about 7% of our revenue. Of course, this KPI of 7% is too high going forward. So when volume ramps, we will see a decline in this KPI to around 5%. But sales in absolute terms for 2020, you should see around the same CapEx levels.

Two slides. Final slides on cash position. When we did the capital raise in April 2018, we highlighted 3 items that we're going to use the $100 million for. First was to support working capital for the growth, secondly was to build the lab and thirdly, we were going to show our big new customers that we have sufficient funding to do R&D investment and deliver on the road map.

If you look back to the amount of cash we had a year ago, we've spent the $100 million on debt repayments. We've bought treasury shares that we're going to use through the option program, that's for all employees in the company. We've also done the lab investment of around $20 million. Then we've used the gross profits, the strong gross profits that we've had during the last 12 months on R&D spending and of course, SG&A.

Working capital. We've been able to keep pretty stable, meaning that the cash balance adjusted for the debt repayments and treasury shares is more or less the same as we had a year ago.

Now the current cash position and available credit line provides a good foundation heading into the next year, which is a large ramped year for Cellular IoT, and we continue to invest in short range. And we believe we have the ability to continue driving the technology road maps that we have set out on. However, if you see on the left side there, one of the KPIs we measure ourselves on, that is the R&D cash coverage that we have, and the reason this is important is that our main customers are evaluating us when they do due diligence processes on procurement, on how much ability we had to fund the roadmap we've set for them. We are asked in 2019 at around one, meaning that we have cash available for 1 year's investments. When we look at comparable analog semiconductor companies, most of them are in the range of between 0.8 to 1.5. So we believe this is a reasonable level. The growth we are outlining will require some working capital, which I mentioned, we haven't increased the cellular working capital yet, so we will need more working capital. And the medium-term outlook we're providing for the cost items, imply that we will take some time before cash flow materializes. Therefore, we anticipate no dividend payments in 2020 and 2021. However, we see that with the expected volume ramp of our new products, we should see significant improvements in cash flows from 2022 and onwards.

I think that's all I have on finance. I'll hand over to Svenn-Tore, who has a few final comments before we open up for the Q&A.

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Svenn-Tore Larsen, Nordic Semiconductor ASA - CEO [12]

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Thanks, Pål. So back to our aspiration. Building a U.S. dollar -- $1 billion company in 5 years, the growth of 20% to 30% in Bluetooth, buildup of a cellular business to similar size within 5 years. It's possible, don't you believe it after getting through this day. We're on a good way to reach it. We also have ambition for our EBITDA margin, and we have ambition to reach around 20%. That's really the key goals that the company is working for today, and we're going to continue to be very open with our progress. So I think we're going to see some exciting times ahead of us. And I would like my team to come up here. And we have some answers if you have some questions.

Yes, come on guys. So do -- we have a microphone, so the webcast does. We have over here.

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Questions and Answers

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [1]

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So Christoffer from DNB Markets. So I have a lot of questions, but I'll try to contain myself. So just -- first on the cellular business, you seem quite confident. And it's also helpful to see, obviously, that there are independent analysts that are confident as well. And you list like 20 different kind of use cases. But could you give us some more color on kind of what they're telling you in terms of timing and volume just to kind of understand where the most important source of volume will be, say, Asset Tracking and agriculture. What is some of the tangible feedback at the moment?

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Svenn-Tore Larsen, Nordic Semiconductor ASA - CEO [2]

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Would you take that?

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Unidentified Company Representative, [3]

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Sure. So I think a lot of our customer cases are taking advantage of the GPS there in the solution. So there's a lot of combined sort of tracking valuable items. Even street lamps, where you use GPS because you put the street lamps out and then you need to know where they are, and -- as you're rolling out the network. So I'd say, first and foremost is anything that involves GPS, where you take more value of the complete solution.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [4]

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You're saying that there will be a significant ramp or have you said, there's a significant ramp in free cash flow from 2022. Is that kind of based on then -- these applications, they are now have been decided to use your product and they're kind of indicating to you what kind of volumes they will need in that time frame? Or is that more based on you're seeing around in the numbers from third party analysts.

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Unidentified Company Representative, [5]

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It's both. I mean it's literally 2 decades of sales experience, where you sort of -- you look at the metrics, you look at the project milestones. You look at the significant movers. It was mentioned that we had 200 customers that had taken parts for pilots and preproduction. So you sort of aggregate all the different variables and then you make up an educated guess. At the end of the day, the networks have to be rolled out. The operator certified and all the firmware in place. So it's a combination of analyst figures and our own intelligence.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [6]

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Great. And then just moving on to the -- kind of the R&D product road map. You mentioned nRF53 and that you're planning to kind of piggyback on the investments that you've made in the nRF91. Probably, could you just elaborate a bit on that? Does that mean that we should expect that to continue to stay on kind of the 55-nanometer process node and not move further down? Do you expect to kind of include a similar MCU that is in the nRF91 with a persona, everything and it's not...

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Unidentified Company Representative, [7]

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I think we will review much more of that when we actually launched the device. Right now we're keeping a little bit tight seal on the inner working of the nRF91. And we don't want to allude to more than what we put into the slide deck. But I think there are enough themes there to you -- for you to figure out, a lot of the functions of them. Christoffer, you're a clever guy.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [8]

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Sure. Okay. Two more now. I'll try to give -- come back later if there's time. So just one late last question on the proprietary business, which you didn't talk too much about. You say, growth in the medium term for Bluetooth, so it's 20% to 30%. Could you just remind what kind of growth you're expecting from proprietary? When we think about how long kind of the mix of about $1 billion within 5 years. And yes, I'll start with that one.

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Svenn-Tore Larsen, Nordic Semiconductor ASA - CEO [9]

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Maybe I should do that. We don't have a wide spread of customers on proprietary. And it's hard to answer your question without exposing our customer. So we rather don't want to comment on that. But it's not the fastest-growing segment within Nordic, and is going to be less and have less significance on the impact of the company. I think that's the best answer I can give you.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [10]

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Sure. Okay. And then the last one for me is more towards the guy from Fedex, if he's still here?

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Svenn-Tore Larsen, Nordic Semiconductor ASA - CEO [11]

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I'm sorry. I don't think we should ask Fedex, this is a Nordic event. And I think I've told him that he's not going to get any questions from the audience.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [12]

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Okay. Sure. (inaudible). Can you just be more -- a bit more specific on -- because the presentation was a bit, including the information that was already out there in the market. So if you could kind of elaborate on where you see yourself positioned in that value chain? Obviously, there is cellular and Bluetooth in there. But it doesn't mean that you are a natural fit for all the different process that you're planning to launch. So do you see yourself both in cellular and Bluetooth? And what parts of their product set do you kind of position yourself?

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Svenn-Tore Larsen, Nordic Semiconductor ASA - CEO [13]

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We have not confirmed any of the signs with the customer you're talking about. But obviously, it's a typical target customer for Nordic. And it's important for us to work with Tier 1 customers as we have always done. When we started into the HID, human interface devices, we identified the largest providers of HID and worked hard towards these guys. We're not doing anything different this time with cellular.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [14]

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And one last one, on Cirrus Logic, the partnership on audio there. Can you just give some more color on why you think this is such a kind of powerful combination of your capabilities. There are really kind of huge significant players in this market, like Qualcomm and Chinese players licensing IP. Why should this value prop be so much different than why should you're going to get significant position in that market. Is it power consumption or -- yes.

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Unidentified Company Representative, [15]

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Yes. So that's what we're showing the customers that are under active evaluation right now is putting some proof in front of combining the Cirrus technology and the Bluetooth Low Energy, benchmarking it with kind of state-of-the-art wireless audio solutions today. And we're showing a promise. That being said, just some color on this. This is a prototype on Bluetooth Low Energy and audio experience. We don't know yet how fast or even if this will be adopted by kind of major players and developed into something. So at this stage, we're showing the capabilities and the promises of the technology and the combined solution from the companies. And that's what we're showing our customers. So -- yes.

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Henriette Trondsen, Arctic Securities AS, Research Division - Research Analyst [16]

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Henriette Trondsen, Arctic. First on your backlog. Can you give any more color on how much of your backlog is from Tier 1 customers or your top 5 customers, for instance?

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Svenn-Tore Larsen, Nordic Semiconductor ASA - CEO [17]

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We could. I mean basically, what we see is a Tier 1 customer have a much more production logistics in place, so that orders will have longer lead time. And that means that over quarters it will accumulate unless you ship more into this quarter than is expected from next quarter. Obviously, there was expectation of growth for the next quarter since the backlog went up. And if you come to ratio, how much new business there is in this $114 million is back. You can look at the backlog exiting Q3. Last year it was $85 million, if I recall right.

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Unidentified Company Representative, [18]

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Yes.

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Svenn-Tore Larsen, Nordic Semiconductor ASA - CEO [19]

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So a significant part with new business, plus, obviously some of the mid-sized customers that are all main stream customer, but it's a significant amount.

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Henriette Trondsen, Arctic Securities AS, Research Division - Research Analyst [20]

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Yes. And just a follow up from Christoffer's question. Your seller segment approximately, what is your aspiration for when you expect to break even for this segment? Is it 2021?

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Svenn-Tore Larsen, Nordic Semiconductor ASA - CEO [21]

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If you look at what we've done lately in Nordic has just been guiding quarter-by-quarter. And we will continue doing that going forward. And we have not given them a long-term guidance. And if we should have done, we would have done it earlier today.

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Henriette Trondsen, Arctic Securities AS, Research Division - Research Analyst [22]

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Just short questions. The Q4 guidance on revenues, can you give any color on this based on Bluetooth really proper carrier seller?

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Svenn-Tore Larsen, Nordic Semiconductor ASA - CEO [23]

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Have you analyzed it, Paul? In this...

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Pål Elstad, Nordic Semiconductor ASA - CFO [24]

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No. We haven't.

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Svenn-Tore Larsen, Nordic Semiconductor ASA - CEO [25]

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Well, basically, I will say, it's close to 75% to 80% is Bluetooth, for sure.

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Henriette Trondsen, Arctic Securities AS, Research Division - Research Analyst [26]

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Okay. And one last for me. Healthcare was somewhat weak this quarter, any comment on this? And also you e-cigarette, is that reported in the consumer-wise segment? Or the -- will it be reported in the Healthcare segment? Just for reporting.

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Unidentified Company Representative, [27]

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I can start. Yes. So the Q3 numbers is -- as you know from history, we've had 3 customers driving the healthcare business for some years. And then these customers have product cycles. That's why it's a little bit lower in this quarter. And for the other customer, you talked about that's on Healthcare. We have some applications there already and they're reported in consumer electronics.

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Aksel Øverland Engebakken, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [28]

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Aksel from ABG. So I have a follow-up question on the audio over Bluetooth Low Energy. Can you just say something about, how long you have been working with Cirrus Logic? And also you're saying today that you are achieving industry-leading power consumption on this audio Bluetooth solution. Can you be more specific on what you're achieving with this new solution?

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Unidentified Company Representative, [29]

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So the partnership with Cirrus Logic stretches a little bit back in time. I won't go into how long. For those of you who follow the industry, there has been talks of audio or Bluetooth Low Energy for some time. And during this period, we have had active engagements with Cirrus Logic. And when we say industry-leading performance, I don't want to give out any numbers, obviously, but we're measuring up against state-of-the-art equipment already available in the market today, and also benching -- marking this about what we see out there from competitors' promises of their next generations. And it's a merit of -- one aspect is the Bluetooth Low Energy itself that promises Bluetooth Low Energy over classic Bluetooth. And then there's merit of the technology that Nordic brings to the table and that Cirrus Logic brings to the table that brings this even further down. So kind of that's the -- to the -- how far I want to answer that question.

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Aksel Øverland Engebakken, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [30]

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Yes. It was a good answer. And following up on that. There has been discussion about the Bluetooth SIG coming out with a new standard. They have been working on that for audio solutions. Do you expect that to be ready sometime in 2020?

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Unidentified Company Representative, [31]

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I don't want to comment on that. We're not allowed to disclose the roadmap for Bluetooth SIG.

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Aksel Øverland Engebakken, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [32]

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Fair enough. Moving on to cellular. So you have gotten the Verizon certification in place. And then you highlighted that you're working with 9 other carriers. Can you say something about how far along you are in the process? And when you expect to have these other 9 certifications in place?

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Unidentified Company Representative, [33]

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So all of these 9 we're working with is actively sort of in lab right now. So they are actively working with them right now. It's not only reading papers, but actually doing measurements and doing paperwork and measuring on all 9. When will they be done? It varies a little bit on the different carriers. But I think we'll see things in the end of Q4, maybe in Q1.

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Aksel Øverland Engebakken, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [34]

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Q4, Q1. Okay. And you highlighted this new cash R&D coverage ratio. And you also mentioned that peers are at 0.8 to 1.5. And we know that you lately have gotten many new Tire 1 customers with stricter demands. Do you have any sort of covenants on -- maintenance covenants on how much cash you must have at hand?

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Unidentified Company Representative, [35]

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We -- it's -- you can do it.

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Unidentified Company Representative, [36]

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No. So no covenants, I would say. But that -- I will also say that Svenn-Tore will have annual meeting with -- the high-end purchasing departments of these companies, and they will set up their expectations and review just like all other customers, supplier relationships. So no written covenants but we have expectations.

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Unidentified Company Representative, [37]

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We have active dialogue. Geir and myself are in active dialogue with these customers. We know what they need. And we took action here in April last year, and we are fully covered on the compliance.

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Aksel Øverland Engebakken, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [38]

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Yes. And you expect to continue to be sort of in compliance going forward with this?

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Unidentified Company Representative, [39]

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Yes.

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Aksel Øverland Engebakken, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [40]

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Yes. Yes. And just with regards to cellular, I know, of course, you're somewhat in the dark, but you now revoke this target for 2020 breakeven, which was -- seems like it was largely expected by analysts. But can you quantify somewhat when you expect to see an inflection point and see commercial deliveries of cellular solutions? Will that happen in Q4, Q1, Q2?

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Svenn-Tore Larsen, Nordic Semiconductor ASA - CEO [41]

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Actually we saw that in Q2 this year, we had a $200,000 revenue samples. In Q3, we just reported $500,000 of early production samples. And we are not guiding outside next quarter. So we come back to that as quarters progress.

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Hans Rettedal Christiansen, Carnegie Investment Bank AB, Research Division - Junior Analyst [42]

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Hans Rettedal, Carnegie. Just a quick follow up on your R&D -- on the R&D question, and tied in with your $1 billion revenue aspiration. If you sort of plan out to be significantly under-invested compared to peers, it would maybe imply that you're going to have an R&D spend of sort of $100 million to $150 million. Could you give a -- maybe an indication on how the sort of -- is it back-end loaded or front-end loaded? Where you see -- it's almost doubling from the current level? And how -- will the revenues come first? Or will they sort of come after?

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Unidentified Company Representative, [43]

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Maybe I should start and you can continue. The most important thing for a semiconductor company is that all investment and work happens ahead of revenue. We've been working 4 years -- investing 4 years on cellular. A lot of the investment is taken. When it comes to Bluetooth, the same. We have been investing, as you see here, in the high 20s, 26% for this year. And we have done great investment, and we're going to keep more maintenance now. And as our revenue is growing, obviously, the percentage will turn down. Lot of things are done already. That's really the answer.

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Unidentified Company Representative, [44]

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Yes. So the 26%, we are using today will, of course, the intensity will go down compared to that level. But in order to be a market leader and actually tracking 45%, 50% or 48% to 50% gross margins, you need to invest and have the best products out in the market.

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Unidentified Analyst, [45]

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So lately we have seen Apple, which seems to be coming to the market with their new tag using ultra broadband technology. And we also saw Amazon had an event where they announced that they plan to launch a tracker with a new proprietary low-power technology seems to be very similar to the LoRa technology. I would love to hear your thoughts on this global behemoth come into market with, say, new and established low-power wireless technologies. And what you think about that?

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Svenn-Tore Larsen, Nordic Semiconductor ASA - CEO [46]

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I think before you start, Kjetil, I will answer. It's not unestablished. We provide branding for long time. We've been working with a company that is commercial -- have commercial available ultra broadband parts today, [deckerwave]. So we know this technology pretty well.

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Unidentified Company Representative, [47]

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Yes. So both of these companies, like, that you mentioned, Amazon and Apple, they have very little actual facts out there. We are obviously monitoring this very, very closely. But speculation -- our speculation is this -- it's not something we can do. For ultra broadband, I do think what Svenn-Tore mentioned, the partnerships that we have with a company like (inaudible) we are supplying it for broadband. Established BLE is a very complementary technology for broadband at least. For sidewalk, I don't have any further comments.

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Svenn-Tore Larsen, Nordic Semiconductor ASA - CEO [48]

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Okay. Christoffer?

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [49]

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Yes. Christoffer from DNB Markets again. Just 2 more questions. And the first one is regarding the $1 billion sales target, with kind of -- lot of prices you announced in that target. But one thing that I think was -- a bit surprised me, you didn't really have to do was to commit to that 5-year time frame. So why did you choose 5 years? What are kind of the pillars that you're seeing that makes you so certain that, that will happen in the 5 years and makes you say that is interesting, we will reach it sometime.

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Svenn-Tore Larsen, Nordic Semiconductor ASA - CEO [50]

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You are very good with models because that's what analysts do use models. We also put things into models. And what we see, what's happening around us, it seemed to be within that time range. Based on new customer, based on standard growth in BLE, that was sort of the time frame that we thought was correct.

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Christoffer Wang Bjørnsen, DNB Markets, Research Division - Analyst [51]

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Great. And then on -- back to the efforts within audio. Again, there was a slide earlier on in the presentation, where you talk about all the different platform companies. I think it was in Geir's slide set. And then on top, you had some examples on -- of products that you're in. And on the left-hand side, there was -- what seemed like wireless-type ear buds which you now then announced that you're in. It was a bad picture. Could you just kind of explain what kind of product that is and what vendor it's from? So I'll have to spend hours trying to kind of...

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Unidentified Company Representative, [52]

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Well, that's not the question I expected coming into this. It's just a few out of hundreds and thousands of products. Coming to them all is they would connect through platforms now as opposed to the actual phone in the past. So these are for illustrative purposes, only not necessarily actual candidates for deployment to any of the partners on the bottom. Just to be clear.

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Svenn-Tore Larsen, Nordic Semiconductor ASA - CEO [53]

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Good. There's no more questions. And we would like to thank you guys for coming and attending today. We also have a few -- we also have some gifts to those who took almost all of your day to come here. So maybe, Paul, you can give out when people are leaving. And we are happy to sort of talk to individuals later on. But unfortunately, we are all going on our own trip now. So it won't be much availability there the next few weeks.