u-blox Conference Call Notes – Gross Margin, Capitalising R&D, Value Chain, Chip Cost Increase, High Price Setting Power, Shortages in Component Market, Redesigning Products, Supply Chain, Guidance Problems

The following transcript was compiled based on the first part of the u-blox conf call on 20.08.2021.

Pricing Power, Gross Margin, Chip Manufacturing

Q: The first question I had is on the gross margin that is quite strong in the first half of the year. […] We see a lot of shortages and more and more pricing increases in terms of manufacturing of chips and more recently the foundries players seemed to increase. And the last one TSMC, at the last earnings calls that they said that they will increase their pricing in the second half of the year. So I just wanted to understand with you, is it something that will impact or how should we think about the gross margin in the second half of the year if TSMC and and other foundries are increasing the pricing. So just basically the sustainability of this gross martin would be great.

CEO: So about impact of costs from the supply side on our gross margin. First of all, fortunately we have a long value chain. So an increase on a chip cost is of course rippling through the value chain. But finally we are selling a module in so far that of course dilutes the increase. That's the first good effect. And the other is we will of course increase prices, with these customers. And in this environment we have quite a high price setting power. We believe that is accreditiv in our sense.

R&D Cost Capitalisation

Q: And the second question is on the capitalising R&D. To understand you, we should expect lower capitalization going forward. Can you give us some sense around the absolute number we should expect from now. I mean is it going to decrease from H1 or is it going to be stable? Just to get direction there would be helpful. Thank you very much.

CEO: The capitalized R&D as we have explained is mainly impacted by a change in how we run processes. So we have started to do it more agile. Agile means you try to bring a product quicker to the market in the sense of what is called minimum viable products and then you increase thereafter via software upgrade to higher functionality levels. But that means of course that upgrades are made as an expense and no longer as a capitalised effort. This is the reason why the ratios will change. But of course there's also a singular event and I hope it remains more singular event: We had to redesign quite a number of products to cope with the shortages in the component market. So we have selected different suppliers and that means of course redesigning and re qualification. Such efforts should go away, no longer create extra expense. So in so far two effects, so from the changing processes rather decreasing rate. On the other hand, you must take out the special effect of this component shortages.

Q: Thank you so much. And if I may I have a follow up on on these answers. When you talk about the gross margins enough for the um, the moving parts, Your guidance for FY 21, did you include some price increase from the foundries or it’s something that you as you see or you didn’t see any price or cost increase on your side.

CEO: Yeah, of course we see cost increase, but not only from foundries from potentially any supplier because of course the shortages always the seller the power for price setting. And in so far we must expect price increases across the board. It's not dramatic. But of course we follow closely and make sure they protect the margin.

Booking Increased Seven Fold

Q: On the booking side you increased booking seven fold. Can you indicate where the book to bill ratio was and how long this booking skate or the revenue progression going forward? And also […] what could you have basically generated, the level of revenues if the constraints were not here? That’s the first question.

CEO: So just to clarify we give a number that our order book has increased seven times, we have not actually given a booking number but I mean from that of course you can derive that the bookings have been very very strong and our order book of course lasts very much into next year and is of course in so far something that gives us a very strong basis for going forward. And you asked also if you have no component constraints, how much more billings we would have been able to make. I mean you can't take any number you want. For sure we would have been able to double the output or triple I mean it is such a difference between bookings and billings.

Supply Chain Normalisation May Take Two Years

Q: And the second question is, when do you expect to supply chain to normalize. Have you seen here the worst or do you foresee same problems going going forward. And and can you give a bit more color on the measures you try to mitigate these things? One was redesigning but I was wondering also with the redesigning, can you use that to increase your own chips at content with this redesigning in the modules? Thank you.

CEO: Now the critical question, the difficult question is about when will supply normalise. This is in fact very hard to say. When we listen to our semiconductor fabs then they say it takes at least two years because they cannot more quickly build out capacity. Buying machines and manufacturing these machines takes a lot of time and also there is limited capacity but of course the question is when is overall the involved changing. You also need to imagine a lot came from consumer goods. A lot came from people that had to sit at home that could not spend money elsewhere. Of course, one of the better equipment for communicating through the internet and so on. And the old industrial demand has suddenly strongly increased. But all that we know, I mean such cycles are someone turning the difficulties to find out at that point of time is is turning to downturn in this situation.
CEO: So the methodology to manage supply is to indeed diversify components. These are more the standard components, making sure we are not dependent on one supplier. The other is that with our fabs, where we make our own components our own integrated circuits we of course look for long term commitments, for very good support. We are fortunately together with these partners for very long time, 15 years or so and have very good also personal connections that help to negotiate that we are well served and that we can at least deliver about to our customers that keep them to production running.

Conf Call (1/x)

Supply Chain: Production Constraints, Inventory, Components Short

Question 1: Companies like Logitech have purchased components in reserve in order to not face production constraints, which will most likely increase as delta variant spreads. (For example hamstering) Did you also try this?

CEO: Yes, interesting questions around the supply chain. Of course we have inventory and they're quite strong inventory before of the crisis. But of course there's a limitation to the inventory. It is cash and also you have uncertainty, you cannot precisely know what a component amounts you'll need in the future. So this is of course where you have to find a balance. And also every inventory has somewhere an end, this has happened now overall with the supply chain, nobody has inventory today anymore and most suppliers live from hand to mouth. And this is unfortunately no longer the solution.

Question 2: Related to that, can you give more specific examples of components that cannot be purchased at the moment? For example, I know USB3.0 hub chipsets are not available according to one of my chinese sources and this since weeks and for weeks, with no end in sight. Many thanks.

CEO: And the question about what type of components are short, I can only say all components are short to a more or less extent. Every component can create huge disturbances. You can imagine if you assemble a product then if one component is missing, you cannot go into production because you need all the components at once. And that makes it so difficult that one disturbing fact is creating quite high impact and unfortunately it's not only production capacity you must imagine. Also transportation is affected by capacity but also by sheer availability. You know that ports have been closed, that flights are canceled and all these create these supply disruptions.

Guidance Problems

Then we have three questions on the guidance. I will ask them at the same time. Q1: You had a successful first half year but still had a very negative stock price reaction because the very high expectations after the increased outlook were not met. Now you increase the revenue guidance again, why not be a little more conservative in the outlook? Q2: Why were these factors impacting the guidance not known 2.5 months ago and Q3: Why does u blox disappoint investors. Was it necessary to raise guidance in tune, which must be lowered just two months later.

CEO: Yes, thank you for all these questions around guidance. I think I made a statement before. It's very hard to predict the future in these times. We have almost no reliable information from what we can make revenue in the next future. And also we have made quite some adaptations in this regard to cope with the situation. Again, it's hard to make prevision and in the sense of transparency, give updates as much as we can. It's also why has given a third update on the guidance. [...] everybody should reduce expectations about accuracy. Also you see the guidance is quite a span because the visibility into the future is highly, highly limited. And finally I think what is overarching here is we have been successful in creating top line growth, in expanding gross margin and especially we have delivered very positive, positive free cash flow.

u-blox Revenue by Market

u-blox Revenue by Product Type

u-blox Revenue by Region

Using Python to transcribe Conf Calls, Webcasts

The above audio was uploaded to an S3 Amazon Bucket, then was fed via a Python script to Amazon Transcribe service which resulted in a raw transcript. That raw transcript was then used for the quotes above. By default Amazon Transcribe does not seperate speakers, has difficulty with abbreviations or names.

For more on transcription see this article: Link

Questions or feedback?

Feel free to write me at contact@zuberbuehler-associates.ch or add a comment.

Similar Posts:

Be the first to comment on "u-blox Conference Call Notes – Gross Margin, Capitalising R&D, Value Chain, Chip Cost Increase, High Price Setting Power, Shortages in Component Market, Redesigning Products, Supply Chain, Guidance Problems"

Leave a comment

Your email address will not be published.