CSR's (CSRXF) CEO Joep van Beurden on Q2 2014 Results - Earnings Call Transcript

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 |  About: CSR Plc. (CSRXF)
by: SA Transcripts

CSR plc (OTC:CSRXF) Q2 2014 Earnings Conference Call July 24, 2014 4:00 AM ET

Executives

Joep van Beurden - Chief Executive Officer

Will Gardiner - Chief Financial Officer

Analysts

Adi Metuku - Merrill Lynch

Eoin Lambe - Liberum

Dave Mulholland - UBS

Youssef Essaegh - Barclays

Joep van Beurden - Chief Executive Officer

Good morning and welcome to CSR’s Q2 2014 Results Presentation. My name is Joep van Beurden, CEO. And with me is Will Gardiner, our CFO. Will and I will be making forward-looking statements. Actual results may differ for various reasons such as listed on the slide.

Today’s agenda. First, I will give you an overview of the second quarter of 2014. Next, Will is going to review the financials, after which I will summarize. We will end with Q&A.

First, the overview. Our Q2 revenue came in at $193.7 million and Q2 Core revenue was $175.6 million, which is 14% lower than our Core revenue in Q2 2013. The lower year-over-year Core revenue was as expected and primarily due to weakness in Camera, Gaming, and non-factory-fit Auto, as well as reflecting non-recurring Voice & Music revenue in China during Q2 2013 when the Chinese government enforced hands-free driving legislation. We have record underlying gross margins of 57.5%, up 4.9 points from Q2 2013 driven by the change in revenue mix towards Core, a sharp rise in our profit on an IFRS basis following the sale of our Imaging IP, and we announced an interim dividend of $0.052 representing a 15% increase on last year.

We continue to do well with our Core platforms. We have started whole year production with the first of our Auto factory-fit SoC design wins. We had several Tier 1 design wins in the emerging home entertainment ecosystem with our Bluetooth in set-top boxes and our Bluetooth Smart in the corresponding remote control, more about this ecosystem later in the presentation.

I am particularly excited by the progress we are making with CSRmesh, where we secured multiple design wins in the markets for consumer lighting. We expect Core growth in the second half of 2014 and 2015 even though at the same time our Gaming, Camera and non-factory fit Auto products are declining. So, during the second quarter, we continued our successful migration towards a more profitable platform business, which we believe provides strong growth opportunities. As expected, revenue in our Legacy business declined by 70%.

Next, I will highlight the performance of our Core business, starting with Core Auto. Our Auto business serves two markets and they are what we call aftermarket and factory-fit. The aftermarket business includes PNDs and electronics added to cars by third-parties after they have left the factory. Most of our customers for the Auto aftermarket business are in China and the characteristics are somewhat similar to the consumer electronics supply chain. The factory-fit business provides GPS, Bluetooth and Wi-Fi communication silicon and SoCs for installation into the car at the point of production. Today, our chips are in cars produced by many of the world’s well-known Auto manufacturers. The factory-fit business has long design in cycles, is more predictable than the aftermarket, and it demands higher quality controls, which increases our scope to differentiate. Together, revenue in our Auto aftermarket and factory-fit business was $52 million in Q2, 2014, an 18% decrease relative to Q2 2013.

In the last 12 months to Q2 2014, our Auto revenue was $214.4 million, a decrease of 4%. The year-on-year quarterly and last 12 months decline has been driven by reductions in the China-centric consumer-like aftermarket business. Countering that, our factory-fit business is growing to double-digits and now constitutes the majority of our revenues within Auto. Not only do we see our communications chips doing well in factory-fit, we continue to enjoy good interest, with multiple Tier 1 factory-fit Auto customers for our upcoming generation of automotive SoCs, which we expect will drive future growth. And having talked about SoC design wins for automotive factory-fit for a while now, I am pleased to note that we have started volume production for the first of these design wins.

We also saw strong year-over-year growth of our automotive Wi-Fi product. Currently, the majority of the Wi-Fi automotive designs listed by the Wi-Fi Alliance utilize CSR products. In addition to the strength in communications chips and progress on SoCs, we are leveraging our audio strength in the auto market. First JVCKENWOOD, then Alps, and now Clarion will be integrating our aptX codec in its automotive connectivity module. This enables its OEM customers to offer CD-like audio quality for Bluetooth stereo streaming in cars. We are building an increasingly compelling Auto franchise around our short-range radios, Bluetooth and Wi-Fi, our location technology, GPS and dead reckoning, our SoC system know-how and our leadership in low latency compression.

Next, let’s look at our Consumer business. Revenue in the Consumer business in Q2 2014 was $34.2 million, a decrease of 27% over the comparable period last year. This was primarily due to a decrease in revenue derived from Cameras and Gaming. In the last 12 months to Q2 2014, our Consumer revenue was $165.8 million, a decrease of 25% compared to last 12 months to Q2 2013. As expected, revenue in Cameras declined with revenue in Q2 2014 significantly down year-on-year to $7.3 million compared to $13.3 million in Q2 2013. We have seen a high level of interest in the area of Bluetooth Smart with a growing pipeline of design wins. And while it’s a small part of our overall revenue, we saw Q2 revenues strongly increasing year-on-year. We expect that to continue. In particular, we expect to see increased use of Bluetooth Smart in devices such as remotes, keyboards, mice, together with health-and-fitness products and other applications.

Upon the introduction of CSRmesh technology earlier this year, we are seeing a high level of interest from a wide range of manufacturers, which has resulted in multiple design wins in consumer lighting. Samsung has announced the CSRmesh-enabled light bulbs. We have Bluetooth Smart design wins with Lenovo and Philips. And we won important designs with set-top boxes for both Bluetooth and Bluetooth Smart. And while on the topic of set-top boxes we expect that there will be an increasing demand in the wireless home entertainment ecosystem, where Bluetooth, Bluetooth Smart, and Wi-Fi will have a critical role to play.

This slide illustrates that ecosystem. Around the TV and set-top box, we see a fast-growing market for peripherals utilizing Bluetooth, Bluetooth Smart and Wi-Fi in combination with CSR’s differentiating technologies, such as aptX and aptX low latency, DDFA power amplification, MAPX audio signal processing, and most recently the Reciva Internet radio service. This presents us with a substantial opportunity for our Bluetooth, Bluetooth Smart and Voice & Music platforms. Think about wirelessly connecting a sound bar and a subwoofer, the CSR Bluetooth, DDFA amplifier and MAPX signal processing. Use our VibeHub and VibePlayer with both Wi-Fi and Bluetooth to stream audio wirelessly around the house. Use Bluetooth Smart to connect the remote control, the active 3D glasses and keyboard and Bluetooth to connect game controllers, adding aptX low latency for gaming headsets. And of course, we have a range of Bluetooth audio platforms to connect wireless stereo headsets. It’s also possible to control your in-house lighting utilizing CSRmesh. We see opportunities in all these areas with three Tier 1 design wins with set-top manufacturers, one of which utilizes aptX low latency and are working with a whole range of peripherals manufacturers in Europe, the U.S., and Asia.

Next, Voice & Music, revenue in the Voice & Music business in Q2 2014 was $89.4 million, a decrease of 3% on the comparable period last year. In the last 12 months to Q2 2014, our Voice & Music revenue was $295.2 million representing an increase of 8%. As we signaled before, our first half 2013 to first half 2014 revenue comparisons for Voice & Music are being negatively impacted because of non-recurring revenue in China, arising from the enforcement of hands-free driving legislation introduced at the start of 2013.

At CES, in January 2014, we launched our VibeHub platform which will allow device manufacturers to deliver multi-room networked home audio products. We expect the first revenue of the VibeHub platform in Q3 2014. We continue to expect long-term growth for streaming audio via Bluetooth as the proliferation of Bluetooth-enabled wireless audio devices increases. We anticipate growth in the soundbar market, as consumers use this speaker format to deliver audio from their flat panel TVs. For example in China, in the second quarter, Xiaomi introduced a wireless soundbar and sub-woofer powered by CSR.

Our market-leading aptX audio codec technology added 27 license agreements during the quarter for a total of around 280 licensees. And we have also seen significant end product launches featuring aptX with 48 products launched from companies including smartphones and tablets from Sony, Asus, Samsung, LG, and HTC along with Vizio and Denon for aptX decoders.

Now, let me hand over to Will.

Will Gardiner - Chief Financial Officer

Thank you, Joep and good morning everybody. Now, I would like to review the financial highlights for the second quarter. Revenue overall was $193.7 million reflecting a 70% decline in Legacy revenue, as well as ongoing declines in Camera, Gaming and non-factory-fit Auto. We delivered record underlying gross margins of 57.5%. Underlying operating expenses were lower than expected at $81.8 million resulting in underlying operating profit of $29.5 million. The successful sale of our Imaging IP helped us deliver an IFRS operating profit of $64.5 million. And finally, we ended the quarter with $236.8 million in cash as we continued to return cash to shareholders for our dividend and buybacks.

On a year-on-year basis, our revenue has declined from $262.5 million to $193.7 million reflecting a substantial decline in our Legacy business which went from $59.4 million to $18.1 million, as well as declines in Cameras, Gaming and non-factory-fit Auto. I would like to make another point on revenue. As we have pointed out previously, we have a substantial spike in Voice & Music revenue in the second quarter of 2013 which made comparables for that segment quite difficult, nevertheless, the Voice & Music business declined by only 3% in the quarter. Going forward, we expect Voice & Music to show strong growth in the second half of 2014 as the China affect falls out of the year earlier comparables. And overall, we are expecting the Core business to grow in the second half of this year and into next year.

Operating margins were good at 15.2% in the quarter and we continue to expect that we will be at the mid-teens target operating margin on a run rate basis in the second half of the year. As you know, we have an underlying gross margin target for our Core business of between 55% and 60%. And in the second quarter, we continued to be around the top end of that range at 59.2%. As Legacy has declined, our overall underlying gross margin is also strengthening, achieving a record 57.5% in the quarter. And as we move into 2015, Legacy will become increasingly immaterial and we expect that our Core and overall underlying gross margins will continue to converge. And we are not changing our targets for underlying Core gross margin at this point.

Underlying operating expense for the second quarter, as I have said was $81.8 million and for the first half, it has been $171.1 million. Going forward, we expect the operating costs or underlying operating costs I should say for the full year will be around the lower end of the $340 million to $350 million range for the full year.

Our cash flow from operations for the period was strong at $33.9 million although it was lower than the prior year as profits declined. We had unusually high working capital outflows during the quarter, largely the result of timing of payables. And we expect that situation to reverse in the second half of the year. As a result of the working capital outflow, we had neutral free cash flow during the quarter. And overall, our cash position declined by $65 million, largely as a result of the fact that we returned $60.4 million in cash to our shareholders in the form of dividends and share buybacks.

It is important to recognize that these numbers do not reflect the receipt of cash from the sale of our Imaging IP that we received in July. And as a result of that receipt and also our expectations that we will generate strong free cash flow in the second half of the year, we expect cash to grow back towards the $300 million level through the rest of the year. Over the last four years, we have been operating a progressive dividend policy. In 2012 and 2013, that translated into a 15% annual increase in our dividends per share. In respect to the 26-week period ending the 27 of June this year, the Board has approved payment of an interim dividend of $0.052, a 15% increase on the $0.045 interim dividend last year. The dividend will be paid on the 5 September, 2014 to holders of record as at 15 August, 2014. This 15% increase reflects the Board’s confidence in the organic growth prospects for the company and our commitment to delivering returns to shareholders via a progressive dividend policy. The Board expects interim dividends to be approximately one-third of the final dividend for the full year, although the decision on the final dividend will depend upon the results achieved.

And while I am on the subject of cash returns, I would like to remind everyone that in June, the Board authorized a further share of buyback of up to $20 million following the sale of our Imaging IP assets. That buyback has commenced. And in addition to the new share buyback, the Board has also decided to allocate $20 million to our employee benefit trust, and these funds will be used by the trust to purchase shares in the market, thereby reducing the dilution arising from the future issue of shares under the company’s stock option incentive programs. Just a reminder on the litigation, as we have said before litigation is common place in our industry, and CSR will continue to take steps that we believe are in the overall interests of CSR and CSR’s stockholders.

Finally, with regards to our financial metrics, as we have done in our results announcement, I would like to highlight some of our key financial metrics as you think about modeling our expected results for this year and beyond. Legacy, as we have said before is expected to decline 70% both of last year. And our Core business, on the other hand, is expected to return to year-on-year growth during the second half of this year and also in 2015. Core gross margins should continue to be around the top end of our 55% to 60% target range. And our underlying OpEx for the year is now expected to be around the lower end of the $340 million to $350 million range that we have previously announced. Finally, our effective tax rate should be around 20%.

Thank you very much. And I will turn it back over to you.

Joep van Beurden - Chief Executive Officer

Thank you, Will. So, before we go to Q&A, let me summarize. We continued our successful migration towards a more profitable platform business, which we believe provides strong growth opportunities. And we are in a target operating margin of mid-teens now and expect to remain there during the second half of 2014 on a run-rate basis. We also expect the return to growth in our Core business. I am increasingly excited about the opportunities we are pursuing such as our next-generation SoCs in Auto, Bluetooth Smart and CSRmesh in Consumer and VibeHub in Voice & Music. Traction is especially strong at CSRmesh, where we have won multiple design wins during the quarter and where we are engaged with a large number of important companies for additional opportunities in consumer lighting and home automation.

With that, I would like to go to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions)

Unidentified Analyst

A question first on the Voice & Music business, which I guess it seems that you saw reasonable underlying growth in that business in Q2 and you are guiding to quite good underlying growth in H2, it seems that should – underlying, it should be growing in the 20s in 2014. I mean, as we are looking forward into 2015 and beyond, do we think that the growth rate that you are seeing at the moment will be sustained? And I have got a follow-up.

Joep van Beurden

So, with Voice & Music, as you say, if you extract away from the one-off China effect in the first half of 2013, we absolutely saw good underlying growth in the first half. It’s difficult to quantify, because it’s hard to precisely quantify that one-off effect, but this – it will – it’s now behind us. So, as we said, we expect in H2 good growth in Voice & Music. I expect that to continue now. I normally get drawn on exactly by how much, but if you look at the trends, because you have Bluetooth streaming to battery-operated products that has fueled the growth over the past couple of years, so headsets, speaker docks predominately. We are now moving into this home ecosystem when we talked about, for instance, the sound bar design win that we have with Xiaomi in China and we see a lot of opportunity for that in that area. And then beyond that, you get into the streaming audio into the home using Wi-Fi and Bluetooth combination platform, VibeHub and VibePlayer. So, we see these markets for streaming audio, battery-operated product moving into the home and they are pretty much everywhere, as a trend that will continue and we feel we have a very strong position to make use of that.

Will Gardiner

Add one point to that, which is I think we made a couple of small acquisitions a couple of years ago. One, as you have mentioned before from aptX, very high-end digital signal processor in the Voice & Music space. And then I went to DDFA, a very high-quality amplifier technology. As we add those, effectively we are adding those to our platform, and then Voice & Music space. And so you look at a sound bar and if you can add those technologies into our sort of opportunity there, it significantly increases the market opportunity for us, right? We can go from very – potentially double or even triple the amount of silicon content you might have in a sound bar. And the reason I want to mention it, one is I think it’s a great opportunity, but also if you recall when we did our Capital Markets Day, the sort of the growth rates that people looked at for Voice & Music appeared to be sort of lower than what we had said before. I think it’s important to remind people that actually the growth rate or the opportunity is just as big as it always has been, but actually the size of the market we are going for is actually much bigger now than it was before. So, actually the growth rate sort of appears to be lower just because we have a bigger market we are going after.

Unidentified Analyst

Thanks. And how is design win traction on DDFA and MAPX?

Joep van Beurden

Now, that’s actually doing very well. And specifically around sort of the sound bars to more powerful amplifying sound systems in the home, we are seeing excellent opportunities and very good design win traction.

Unidentified Analyst

Is that kind of shipping this year or shipping next year probably?

Joep van Beurden

So, again, we are designing it now, I mean, the cycle six to nine months typically. So, we probably expect to see this as the revenue ramp of that in 2015. But I would say that’s the whole – so these trends are building on each other. So, it’s now fueled by Bluetooth into battery-operated products with sound bars, subwoofers coming after that, and then you see the streaming audio into the VibeHub platform as well.

Unidentified Analyst

Okay, that’s great. The follow-up was on auto, I guess we are all somewhat braced for the PND market to be collapsing. I guess, it seems that you are seeing some challenges in the aftermarket piece as well. And so is aftermarket becoming another of these kind of challenged product categories or are we going to see some level of recovery in that market?

Joep van Beurden

No, I would say that’s a little bit too strong. It is, as I mentioned in my prepared remarks, it is a sort of the consumer electronics-like dynamic. So, it’s a bit lumpy. You win a socket, you lose a socket. As a market, it is relatively stable. It doesn’t really grow that much. And again, on our Capital Markets Day, we broke out in Auto, the factory-fit and the aftermarket. Aftermarket is fundamentally flat and factory-fit showing very good growth, 10% or maybe even a bit more. So, PNDs is in slow decline and will probably stay that way. Aftermarket is more stable as a market, which you do see these in and outs that you see typically in consumer electronics products. The important part of Auto is the factory-fit franchise. That’s where we see the growth in the market. And that’s also if you look at our design win traction, I think it’s quite relevant as we mentioned the first SoC design win that we have talked about a couple of years ago is now beginning to get into mass production. That bodes well for the continuation of growth of that piece of our Auto business. Now, it’s already more than 50%. So, what I expect over the next couple of years as that will continue to grow in importance, that’s a predictability of the Auto segments for us is going to improve.

Unidentified Analyst

Thanks very much.

Adi Metuku - Merrill Lynch

Morning. It’s Adi Metuku from Merrill Lynch. Just couple of quick questions. Firstly, on Broadcom extended baseband market, they seem to be focusing a lot more on the IoT space providing, I think they are going to turn their investments into the connectivity business. So, how do you see competition in that space trending? I know it’s going up, but are you seeing Broadcom make any – are you seeing increasing competition from Broadcom in that space? And secondly, on margins, obviously as you said, Will, earlier and it looks like it’s been driven by the allocation of central costs, the margins in the Voice & Music business coming down. How do you see those margins trending in the medium term? And can you also talk about which – where the costs have gone from? And what the central costs are that you have reallocated to the Voice & Music business? Thank you.

Joep van Beurden

So, yes, let me start with the IoT question. And then, Will, maybe you can talk about margins. So, the IoT opportunity generically is extremely interesting with these multiple opportunities for, what we have said in the past, explosive growth. We are not the only ones that see that. So, yes, that is quite a competitive space and there is other people going after it as well.

The important point I want to make is in terms of our competitive position is when you talk about Bluetooth Smart, we are adopting as we do as we rollout this platform strategy. So, of course we are looking to develop and we are developing a very competent and excellent Bluetooth Smart radio product, but that’s not the only thing we do as that’s going to get commoditized. We know that we have seen that happen before in other markets. So, for us, it’s all about adding different shapes that are unique to CSR. And the best example that I have today is CSRmesh, which is a very innovative and a creative way where you can now connect up to 64,000 Bluetooth Smart nodes to your smartphone. So, the mesh network is self-healing, is self-configuring. And now you can talk to any of the nodes in the mesh, for instance, if all your light bulbs have been Bluetooth Smart-enabled. And through that one node, you can control the entire network. That is what we feel a unique value proposition that we bring on top of what we think is very good silicon. So, yes, it’s competitively intense. Yes, we will see and have seen people entering. I am sure, over the next couple of years, we will see more activity in that space. CSR’s position there is looking for meaningful differentiators that will allow you to utilize used cases that, without us you cannot.

Will Gardiner

And on the – couple of points to make on the overall sort of segmental profitability. First thing I would say is that the gross margins across the segments are quite consistent both across them, but also over time. So, there is no change in the Voice & Music gross margin that is driving a change in profitability. So, that’s the first point I want to emphasize there. Second thing I would say is that the – we are investing in that space. I mean, as we have been talking about, so there is more investment in Wi-Fi. We are investing more in the digital syncing, the DSDs, and in the amplifiers. But I mean, the major change here is really as you say is about allocation.

And so when we basically – we have closed down the Camera business there were some costs and what I mean for the allocations we are talking about for corporate overhead-type costs or some central R&D type allocations in that when obviously the Camera business is impaired, that some of that gets reallocated against Voice & Music. If I look at all of the segments going forward, I would absolutely – the first point to make is each one of them has the same overall target as the whole business. So we think in some way it’s more importantly we would expect the consumer and the automotive businesses to ramp up to that target over time. And we see no reason why the Voice & Music business can’t continue to be as profitable, if not more profitable, than it is today.

Adi Metuku - Merrill Lynch

I have a quick follow-up on Voice & Music margins, where do you see them trending to in the medium-term?

Will Gardiner

So to me – just a couple of points to make, one is that sort of last year they were 40%, so exceptional. This year, they are 30%, I would say also exceptional, right. I would say again we look at this on a gross margin basis. I wouldn’t say that we would expect those to change significantly over time. So we are comfortable with those levels, and we would expect to maintain them. And as the business ramps we will get some scale benefits.

Adi Metuku - Merrill Lynch

So, you are operating leverage, you mean?

Will Gardiner

Yes.

Adi Metuku - Merrill Lynch

And just a quick follow-up for Joep, ARM recently announced this new standard for IOT called Thread, and they are actually going to use something compatible with ZigBee, how do you see the competition from that standards of Bluetooth low energy?

Joep van Beurden

So again as I said, this is another example of – in the IOT space which is a vast potential market with huge opportunities. There is going to be room for various connectivity standards, ZigBee is one of them. A big plus that you have with Bluetooth Smart is that everybody has a Bluetooth Smart-enabled device in his or her pocket, i.e., a tablet or an Android phone or an iOS phone. And that, I think is such a big differentiator and such an important reason for many companies that we work with to when they have to select a connectivity technology, it’s basic, not even a choice. They have to go with Bluetooth Smart. So I am sure there are specific use cases for ZigBee like networks, but I would say, the fact that the smartphone is Bluetooth Smart-ready, and not ANT-ready or Z-Wave-ready or ZigBee-ready, I think will tip the scales firmly in favor of Bluetooth Smart.

Eoin Lambe - Liberum

Hi there. It’s Eoin from Liberum, digging in to the Automotive business a bit more, could you be more specific on when you expect the growth from factory fits to offset the decline from aftermarkets, by Q4 of this year should we start to see an inflection point?

Joep van Beurden

Well, it’s – I mean as I have said, so there is two parts and let’s call this for now, it’s a 50-50. I mean, it’s more than 50% is in our factory-fit and more is our aftermarket. I don’t want to get drawn into predicting when it’s exactly going to be offsetting, because the aftermarket as I said is lumpy. You have win a socket, lose a socket, it’s up, it’s down, so that will then cloud the overall picture in Automotive. That’s why we have now make sure – to make two points. One is it is more than 50%, which of course means it’s becoming – it’s outgrowing the other part of the Automotive business. And we see double-digit growth for that market. And we expect that, because the visibility is quite good, given the design win pipeline that we have. We expect those types of growth numbers to continue. So then you can model it out, and I have already done that and so we will see when. But over the next couple of years, of course the factory-fit business is going to be the dominant part of it, which will improve. As I said earlier, I expect that to improve the predictability and the growth profile of the Automotive sector.

Eoin Lambe - Liberum

Thanks. And then there is quite a bit of consolidation in the space where microcontroller companies like Atmel or Microchip are buying wireless assets, I was wondering what CSR’s view on that is on the overall consolidation in the space?

Joep van Beurden

Well, we noticed. We see the consolidation as well. I would say, specifically to CSR, as you know, our strategy is a platform strategy. We aspire in the segments where we invest in to have a complete product offering. I mean, we will just gave an example, for instance in Voice & Music as we saw a couple of years ago, this market moving from the battery operated Bluetooth-centric devices, where we have a platform into the more powerful products, where you need an amplifier and where you need a single processor. So we made very specific targeted acquisitions a couple of years ago to make sure that we have the full product offering for those segments as well and I think it’s beginning to show how important that has been. So our view is, we are looking at these segments, whether it’s Bluetooth Smart and IOT, whether it’s Voice & Music, whether it’s Automotive. And we will strive to offer the complete solution, which means that in some cases, we will do some M&A to make sure that we actually have that complete product offering.

Eoin Lambe - Liberum

Great. Thanks. And then finally, just on your EBIT margin guidance, you hit your target of 15% in Q2 and you previously gave that 15%, mid-teens margin guidance when you are 50% gross margin business, now you are a structurally higher 60% gross margin business, is it time to update the EBIT margin guidance, if I look at Broadcom, after they exited smartphones they are now talking about close to 25% EBIT, would 25% EBIT be achievable for CSR after your new gross margin base?

Will Gardiner

Yes, the way I would answer that question is that the – for gross margins, I think we are comfortable with that level. Clearly, there is an element, I mean the way we have always expected to drive first to the 15% is by getting some operating leverage on the top line. But frankly, what comes through first is much more the overall gross margin improvement as we sort of move out of the Legacy businesses. I mean – maybe we haven’t gotten so much of the operating leverage yet effectively because the top line, overall in the company has not been growing. So we would expect to see top line growth and get operating leverage, because as we have also said before, we are investing significantly in areas that are still either quite small, Bluetooth Smart or still not yet generating revenue sort of in their location. And as those come in, we don’t think we will have to change our investment levels over the next few years, right. So we are not – I mean, to be honest, if you look on our sort of the last four quarters, we are not at that 15% yet on a sort of full annual basis. When we get there, obviously we will continue to look at our targets as we get there. But at this point, we are not changing it.

Eoin Lambe - Liberum

One very brief follow-up on Indoor GPS, so in the Capital Markets Day, you have said you are sampling Indoor GPS with three Tier 1 OEMs, I am wondering if there are any updates on what they thought of the product?

Joep van Beurden

Progress, we are still engaged with these Tier 1s. Clearly no announcement of a commercial product, otherwise you would have heard about it. But we are certainly making progress. We continued to see that as a very interesting attractive opportunity that we haven’t included in our assessment of the market yet. But we feel that this is another example of a very innovative platform play that we are investing in that we think could yield substantial benefits in the future.

Eoin Lambe - Liberum

Thank you.

Joep van Beurden

Yes. There is – I think see there is one question on the conference call. Can I ask the caller to speak very slowly as we are in a big hall and it’s bound to be a bit echoey?

Operator

Yes. We will now go over to the line of Dave Mulholland of UBS. Please go ahead with your question. Your line is now open.

Dave Mulholland - UBS

Hi, all. It’s David from UBS. Just two questions if I may, just firstly on the factory-fit commentary around Automotive, I wonder if you could let us know how many – or just remind us how many design wins that is you have with the SoC solutions and possibly give some color on the timing and when you expect the next ramps to come through?

Joep van Beurden

Sure. On the factory-fit, so over the past I think couple of years, we have been talking about factory-fit SoC design wins. So I don’t want to be drawn into giving you a specific number, but it’s a healthy pipeline of existing design wins. It’s a healthy pipeline of companies we are working with both on the existing SoCs, but also some of the newer products that we have in our product roadmap. And we have seen this before when we were talking about this three or four years ago and we were starting to talk about Wi-Fi design wins at some point. We said we had 10, then we had 15. And this is now driving – we talked about double-digit in the factory-fit business. These design wins are now actually part of fueling that growth. So one I think there is quite significant amounts we have made today that the first of the SoC – the earliest of the SoC design wins we talked about is now in mass production. So you can expect that over the next couple of years, that pipeline is going to translate itself in more and more mass-produced SoC business which we expect will continue to fuel growth in our Automotive factory-fit business. David, do you have a second question? No?

Dave Mulholland - UBS

Hello?

Joep van Beurden

Yes. Hello?

Dave Mulholland - UBS

Yes, I do. Just one quick second question if that’s okay. Just as we think into next year and Bluetooth Smart starting to come into the mix a bit more, I wonder if you can give us some color on what gross margins whether you think they can sustain the same level of Core gross margin on those solutions as they start contributing more materially to the business? Will, you want to?

Will Gardiner

Sure, David. I will take that one. I think it’s – and maybe I will take the opportunity to make a broader point. I think as Joep has described, our strategy across the whole business is to drive platforms. And in the Bluetooth Smart space, it’s exactly the same. So, we are not intent on telling just the radio, it’s going to be radio, it’s also got purchasing power and we would expect to sort of grow that sort of – that type of business over time. So, given the nature of that platform, given the nature of things like CSRmesh sort of highly differentiated software capabilities on top, we absolutely expect to have gross margins that are consistent with our overall corporate target. And that’s where they would be now. So, I think we are very comfortable with that kind of guidance.

Dave Mulholland - UBS

Thank you very much.

Joep van Beurden

Okay. Anymore. Yes?

Youssef Essaegh - Barclays

Thank you. Youssef Essaegh from Barclays. Just a very quick one on the gross margin, could you give us a little bit of color why it came down Q-on-Q in the Core business? The revenue is more or less the same, so...

Will Gardiner

Why has it changed in the quarter?

Youssef Essaegh - Barclays

Why has it declined by about 100 basis points Q-on-Q?

Will Gardiner

Right. The answer to that is that the gross margins quarter-on-quarter as I have said before, they bounce up, they bounce down, I mean they are all effectively – that’s why we gave a relatively broad range. So, there is really no change in the underlying trends. And if you think about it, we have lots of different products, some variability in there. So, we are very comfortable with that top end of the range. And you should not sort of read anything into the fact that it’s 60 in one quarter, 59 the next, it could easily be 60 the next or 58 the next, so...

Youssef Essaegh - Barclays

A quick follow-up on the Gaming space, if you look at the numbers from Logitech, for instance, this morning they have been growing about 17% year-on-year. So, between that and the launch of the new consoles, I am just wondering why do you see a decline in revenue there?

Joep van Beurden

Yes. So, on the Gaming side, I think – so, Gaming itself as a category, I think is a good one now today dominated by a couple of large companies. It becomes then as we talked about before are you in the right console? Are you in the product that is actually a hit at that specific moment in time? Today, we are not. So, we have seen – previously, we have been so. So that, of course, affected the overall gaming revenue. But as a category, I mean, we talked about the home ecosystem. Gaming consoles, gaming headsets are absolutely key to that. So, we think that is definitely part of the overall peripheral opportunity that we talked about around TV and the set-top box. We have excellent platforms there. And we think that over time, we are going to have a good opportunity to grow our gaming revenue on the back of that trend.

Youssef Essaegh - Barclays

So, it wouldn’t be coming from regain a little bit of market share in the main consoles, but more in the opportunity of set-top boxes now being shipped with...

Joep van Beurden

Well, it’s a combination. So, for instance, we talked about design wins that we have with standard Bluetooth classic in the set-top box and then with Bluetooth Smart on the remote control side. You can expand that to sound bars, but also for instance to gaming consoles. And there is actually quite a few new companies today in the overall volume market share not that important yet, but there is quite a few new companies with very innovative ways of interacting with the television and the set-top box blends itself fantastically for gaming experiences that we think could drive good growth.

Youssef Essaegh - Barclays

Thank you.

Joep van Beurden

Okay. If there is no further question, thank you very much. And if there is any follow-ups, you know where you can find us.

Youssef Essaegh - Barclays

Thanks very much.

Joep van Beurden - Chief Executive Officer

Thank you.

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