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Good day, and thank you for standing by. Welcome to the Fingerprints Q1 Results Presentation. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Stefan Pettersson. Please go ahead.
Thank you, Sandra, and Good morning, everyone, and welcome to Fingerprint Cards' earnings call following the release of our Q1 report this morning. We'll start with a presentation by our CEO, Christian Fredrikson; and then by our CFO, Per Sundqvist. And we'll also have a Q&A session. And if you're following the conference call on the web, you can post questions throughout the call. And for those of you participating in the phone conference, instructions on how to ask questions will be given by the operator before we get into the session. And with that, I now hand over to our CEO, Christian Fredrikson.
Yes. Thank you, and good morning, everyone, and welcome to the call focusing on Fingerprint's progress and performance in the first quarter of 2022. Our revenues came in at SEK 300 million, which is 15% lower than Q1 last year and 16% lower than the last quarter. This drop in relation to Q4 has been a normal seasonal effect for us as well as for many other suppliers and component suppliers in the mobile industry. We did not see the usual seasonal effect in Q1 last year and that was partially because of the economic recovery in the first quarter that was dominated by the coronavirus pandemic. Nevertheless, this means that we had a bit higher comparative figures versus the corresponding quarter in 2021. Now our access to production capacity was adequate during the quarter, but we had a dampening effect on sales as a result of logistics challenges in Asia due to the Omicron related lockdowns in China towards the end of the quarter. This led to delays in goods transportation during a time when our activity level tends to be high, at the end of the quarter, that is. Demand in China for consumer electronics has also been affected by these lockdowns, and it is unclear for how long the restrictions will be in place. However, this is a temporary situation in China, and we foresee a generally positive trend in demand for our biometric solutions, as we have said earlier, which is reflected in our previously published forecast of between SEK 1.6 billion and SEK 2 billion in revenue for 2022. The weaker gross margin in the quarter is due to a temporary less favorable product mix as we are going through a shift towards new higher-margin products. Our assessment is that the mix will improve steadily during the year, which is also reflected in our previously disclosed profitability forecast for the fourth quarter of 2022 of an EBITDA between 14% and 18%. We continue to make progress in terms of strengthening our market position in mobile, as well as in PC, payment and access areas in spite of the previously mentioned challenges going on now because of the lockdown in China. Next slide, please. We passed another milestone during the quarter when we announced that 600 mobile phone models with Fingerprints' sensors have been launched to date. At the end of 2019, we passed the 400 mark, and the 500 mark was reached at the beginning of last year. We have built a strong market position in the smartphone industry through continuous product innovation. The milestone also reflects the general growth of capacitive fingerprint sensors in mobile telephony. If we look at the first quarter, 69% of announced phones by top 10 Android brands were equipped with a capacitive fingerprint sensor. This figure is 5 percentage points higher than what we saw in 2021 and 7 percentage points higher than in 2020. So we are actually seeing an increase in the popularity of the capacitive sensor. I would attribute this to its reliability, performance and cost efficiency, combined with continued product innovation, which is so crucial for us as we can see also on the gross margin for -- coming for the new products. Next slide, please. Fingerprint is a leader in capacitive sensors and our curved, side mount and ultrathin sensors have really set the new highest standard on the market. At the end of last year, we implemented our first volume deliveries of FPC1552, an upgraded version. And in February '22, we were able to announce that the first smartphone that integrated this new product has been launched, Redmi K50 from Xiaomi. The FPC1552 will be a very important part of our capacitive sensor portfolio in 2022. And we will continue to focus on innovation and product development to defend our strong position. Next slide, please. As you know, in parallel, we have also been working hard to develop our offering in optical under-display sensors. As you also know, we have an ambition to take a position in this market as well. Clearly, it has taken longer than expected for us to execute on these plans, so I am now very pleased, very pleased that our product has now passed qualification tests at the major Asian smartphone OEM. We expect the first commercial projects this year, which will mark an entry for us into a completely new market segment. We expect the market for under-display fingerprint sensors to continue growing in parallel with capacitive sensors and flatten out at an annual total accessible market of approximately 600 million units in 2026. Under-display is an attractive new market for us to be in, and it creates new growth opportunities for us also in mobile going forward. Next slide, please. I am very pleased also at Lenovo, the world's largest PC OEM launched its first 2 models, integrating our biometric solution in the quarter. The fingerprint sensor is integrated in the power button on the ThinkBook 14 and ThinkBook 15 G4 models. And now in April, 6 additional Lenovo laptop models were launched with our solution. This means that our technology is now integrated into Windows PC computers from Dell, Honor, Huawei, Lenovo and Xiaomi. The fact that our Match-on-Chip solution was added to Microsoft's approved vendor list for Windows Hello Enhanced Sign-in Security at the beginning of 2022 is important for us. What this means is that we can now effectively address the entire PC market, both business computers and PCs for private use. Match-on-Chip solutions for business computers have a higher average selling price, ASP, and currently account for about half of our addressable market in the PC segment. The proportion of computers equipped with fingerprint sensors continues to increase, and we are continuing to focus on the development of innovative products in this area. Next slide, please. Let me also mention that the continue -- that we continue to see commercial launches of biometric payment cards in the different parts of the world. This week, we announced that Fingerprints is supporting 2 additional launches in the Middle East and North Africa region. We will update you with details once these launches in Morocco are live. As I mentioned already at last quarter's results presentation, the latest T-Shape T2 has achieved compliance with Mastercard's updated security requirements. This product will be an important part of the next step in the evolution of biometric payment parts being smaller, faster and more cost efficient than its predecessor, while also enhancing our already market-leading convenience and security. This sensor has made it possible to execute biometric authentication entirely within the secure element. Basically, what we have done is to enable full on-card fingerprint authentication without having to add an extra microcontroller. We have achieved this while maintaining biometric performance and actually increasing the level of security. We believe we have the strongest offering on the market, and we are continuing to drive innovation together with the ecosystem partners. Next slide, please. So to summarize, we continue to strengthen our market position despite logistical chain challenges in China towards the end of the quarter due to the lockdowns. Demand and deal flow is solid for our capacitive sensors, although we have seen a temporary decrease in smartphone sales in China due to the lockdowns. It is unclear for how long these restrictions would be in place. But as I have said, this is a temporary situation, and we foresee and see a generally positive trend all across our business in demand for our biometric solutions, which is reflected in our previously communicated SEK 1.6 billion to SEK 2 billion revenue forecast for 2022 as well as our EBIT forecast for the fourth quarter of 2022. We celebrated 600 mobile device models launched to date with our technology and saw the first smartphone launch with FPC1552, our latest generation ultrathin, curved sensor. In the PC area, Lenovo, the world's largest PC OEM has now launched their 8 first models integrating our biometric PC solution. We expect good growth in PCs in the quarters and years ahead, and our market position was further enhanced by the fact that our Match-on-Chip biometric PC solution has now been added to Microsoft's approved vendor list for Windows Hello Enhanced Sign-In Security. I realized that's a mouthful. This means that we can now effectively address the entire market, both the enterprise and the consumer segments. Let me also reiterate a wonderful news that our under-display solution has now passed qualification test at the major Asian OEM and that we expect the first commercial projects this year. Finally, we are also continuing to make progress in payments with 2 additional upcoming commercial launches of biometric payment cards in the Middle East and North Africa region in Morocco using our T-Shape sensor module. During the quarter, as previously announced, our second generation T-Shape achieved compliance with Mastercard's new fingerprint sensor evaluation process. I'm also very pleased with that. Thank you. And with that, let me hand over to our CFO, Per Sundqvist.
Okay. Thank you, Christian, and good morning, everyone. Now let's move to the first slide of the financial results section. As previously mentioned by Christian, our revenue declined by 15% in relation to Q1 last year and by 24% in constant currency terms. Compared to Q4 2021, revenue was down by 16%, which is in line with or actually a bit less than the seasonality effect we usually experience. However, Q1 2021 was unusual in this respect, and that was in the fact that we did not really see this seasonality effect that usually occurs. It was, in other words, stronger last year than expected. The underlying reason can only perhaps be attributed to the global economic recovery in the first quarter after a tough 2020 that was so dominated by the coronavirus pandemic. The conclusion is tough comparative figures in this quarter, though which might be worth keeping in mind when looking at the long-term revenue trends. The COVID-19 related effects in the world is still present and has created major lockdowns in China at the end of the quarter, which in turn, has had a dampening effect on our quarterly sales due to logistic chain challenges. We have been working very hard to secure an enough supply chain capacity, and we have had adequate access to production capacity in the quarter, but the problems have emanated and transformed the transportation of goods in a way that was not favorable. That has affected -- it's been affected highly by the restrictions imposed by the lockdowns, which in turn has led to some delays in deliveries. Demand for our products was healthy in Q1, even as we saw decreasing sales of smartphones in China, which also can be attributed to the effect of the lockdowns. At this time, it is, as mentioned earlier as well, is very unclear for how long these restrictions will remain in place. But in general, we expect a positive trend in the development and the demand for our products this year, which of course, has been reflected in our previously communicated forecast of SEK 1.6 billion to SEK 2 billion revenue forecast for 2022. The decline in gross margin in the individual quarter is entirely due to a temporary less favorable product mix. We expect sales of higher-margin products and product categories to gradually increase during the year. This also is reflected in our previously communicated EBITDA margin forecast for Q4 2022. Next slide, please. Then looking at the long-term 12-month trend. We see this short impact of the factors I just mentioned in the previous slide. However, the long-term trend is still prevailing and developing positively. Again, let us reiterate that we expect both our revenue as well as our gross margins would show a positive trend in the coming quarters, primarily driven by the increased product and product category sales mix improvements within the mobile and PC segments. Next slide, please. Now going over the operating expenses in Q1, they were SEK 95.9 million versus SEK 96.3 million in Q1 last year and SEK 107.5 million last quarter. Development cost of SEK 27 million were capitalized during the quarter, which is to be compared with SEK 19 million in the same period last year. This corresponds to 49% of total development costs and to be compared with 33% in the corresponding quarter of 2021. We are continuing to invest in growth, both by driving product innovation and by broadening our supplier base. We are, as usual, pairing the above efforts with maintaining a strong focus on cash, cost and efficiency improvements going forward. Next slide, please. And how has that been affecting our working capital situation then? Well, our core working capital, that is accounts receivable plus the inventory, less accounts payables, was SEK 279 million at the end of the quarter, which is to be compared to SEK 147 million in the same quarter last year and SEK 217 million in the last quarter. If we look at the development of the core capital and its components and put that in relation to our rolling 12 months revenue, it increased to 21% from 11% in Q1 last year and 16% last quarter. The increase in the working capital is a planned action and the result of weighing several factors necessary to support, secure and serve our growth in today's complex market environment with, for example, inventory buildups to meet the expected sales growth as well as to mitigate and minimize any potential supply chain disruptions. As always, we want continue to work very diligently and actively to manage our working capital in the best and most efficient manner available to us. Next slide, please. As mentioned in the previous slide, this growth driven increase in working capital, mainly receivables and inventory, is the main reason our cash flow from operating activities was negative SEK 90 million in the quarter compared to the positive SEK 36 million in Q1 last year. At the end of the quarter, our cash position still stood at SEK 255 million versus SEK 314 million last year and SEK 374 million at the end of Q4 2021. Cash flow from investing activities, that is capitalized development expenditures, was SEK 28 million to be compared with SEK 23 million last year. Thank you, and we are now ready to take questions.
[Operator Instructions] First question comes from the line of Markus Almerud from Penser Bank.
Markus Almerud from Penser Bank. I would like to start asking about the gross margin and the seasonality effect, because it's a bit difficult because Q1 was affected by COVID, as you said. But if you were to kind of compare and index kind of where demand is this quarter compared to where it normally is and how it's impacted in the normalized environment, how would you describe it, just to get the feeling?
I think in the Q1, the demand was good. Now we couldn't do everything we wanted, obviously, because of the lockdowns that started at the end of the quarter. So the demand was good. We knew, of course, that the mix in Q1 is going to be unfavorable if you look at the gross margins, right? But we see that trend -- that improved gross margin will come because of the mix changes.
Yes. And if you continue on that track, because I was asking my second question. Maybe if we could get a little bit more color on that mix shift, because -- I mean, you say that -- it's going to come back, and there were more lower-margin products being installed in this quarter compared to normally. Is it both on the mobile side, so that there's more volume type products, which have been sold? And what are the PC volumes and access volumes, for instance, looking like? So little bit more color around the mix in this particular quarter would be helpful.
Yes. I think that is -- that's a fair question, Markus. And it is so that we had just basic of our mobile volumes in the quarter, so basically very low off of the other product mix that was delivered in Q4. That's how it went, right? So it swings quite a lot between the quarters for us depending on how the new business. And now, of course, we expect and -- we expect and we can see that the growth of the other areas is coming in -- is sipping in and that was typical for us in the first quarter.
But you would say that it's more on mix within mobile that you have more low -- I mean, lower quality products or volume type products on the mobile side rather than we see weakness in PC or we see weakness in access, is that the correct?
Yes, there is no weakness -- there is no weakness in PC or weakness in access, absolutely no. Yes, that's exactly the case, right. Now of course, nobody knows how long the lockdowns will last in China. And I am sure you have also read about it and considered it is quite dramatic actions that the government is taking over there. And it is causing really logistics challenges and demand challenges, but that is still all temporary, I'm sure. We have seen that really corona as well that there is, of course, an impact and then there is a bounce back up. Of course, it cannot go on forever. But we will see now how long they try to contain the Omicron virus there.
And then just a question on the clarification. I missed kind of -- we're talking about half of the addressable market on the PC side, was that enterprise computers, which you were talking about?
Yes, we added that. We were earlier in the consumer market, which is half of the market roughly. And now with the Match-on-Chip we actually are able and have our launching also then into the enterprise market, which is, of course, a very good market to get into the PC as well. And you can see, of course, with a lot of new PC launches coming from us on that.
And then maybe a little bit on the PC market. Are you feeling -- because we know that volumes on the PC side were very strong during -- I mean, during the pandemic and then there was a lot of purchases for PC, working from home, et cetera. Do you have an update for us on how PC volumes in general are going? Then I would assume that -- I mean, on the other side, you had the penetration rates, which are increasing at the same time. And as you're also saying that you can now address the enterprise market as well. But if you look at the market per se, what are you seeing there?
I think what we see is that it's flat. It looks very flattish in terms of the PC market. So in the same volume, 350 million units, roughly in that same volume is the expectation for this year as it was last year. So it's kind of came up from the 300 million to 350 million because of the COVID and now it's -- at the moment, at least, it seems to be staying on that level. The overall PC segment.
And then one final question, if I can, which is more of a technical side. But if we look at development costs and the capitalization of development costs, is it possible at all to say kind of where you should be on a long-term normalized level, because it's very volatile during the quarters and the years? What's reasonable to assume?
Yes. Normally, in our case, we capitalize, and that's been fairly stable over the last couple of years. It's -- around 50% is normally expensed in the P&L and the rest is capitalized.
So that's a good level to put in going forward…
Yes. That's been stable for the last…
And in terms of the absolute level, so it came up from -- been around SEK 200 million, say, over the past couple of years. And then it went up slightly last year, and you've been talking about SEK 200 million as a strategic level. Should we expect a little bit higher now that you go into the payment area, so more like SEK 200 million plus 10%? Or is SEK 200 million market of a level that we should be looking for?
Yes. We're going to be on the same level. And of course, with the growth in numbers it eases out, right? But the investment level should be about the same level.
There are no more questions at this time. Please continue.
So we have a few questions from the web. First one on growth and innovation. Will you continue to focus on growth and innovation in the near future? Or do you consider pivoting towards a more cost-focused approach?
We will do both. What I mean with that is that we will continue, and that's why we have been building up a little inventory as well now because of the demand that we see. So we will focus on growth for sure. And I realize that Q1 was not a growth quarter, but we have -- are continuing with our sales forecast for the year, which is growth forecast.
And what I mean with the cost component is that, for example, in mobile capacity, we have to drive innovation in terms of new cost. So for example, the new curved sensor that we just launched, that came out in the first quarter, these are essentials. I think it's on -- almost on a yearly basis, we have to launch a new cost competitive products in the mobile industry to not have declining margins. And you can see how fast -- of course, in the basic mobile, how the margins go, if you don't launch new products, which we did as well now. We have launched, and we need to continue with that. So you have to do both in this kind of business.
And how much do higher costs affect your gross margin? And are you raising prices towards customers?
We haven't given percentages, but yes, of course, there has been cost increases and inflation. And the foundries, when it comes to semiconductor industry, it's -- I think it's well documented that there has been quite a lot of cost increases in there. And yes, we have also increased prices. And we will continue, of course. The best way for us is to bring these new products as we are bringing now with the 1552 in the first quarter, which is bringing new products, which are then -- gives a possibility and has been increasing the ASP and improving the cost efficiency. That's how you, of course, need to do it as well.
And do you expect a global shortage of semiconductors to improve in the short term? And if not, how do you think this will affect the growth potential if the shortage continues?
I think it's getting more -- a little bit better, I would say, and there's a lot of capacity coming online. So I think in '22, in second half, you will see on -- maybe mobile business, you will see in mobile business an improved -- more -- getting more towards a balanced situation. I realized that in the card business, it is going to be in the 2023 before there is balance and the automotive industry seems to have also maybe -- goes into 2023 before there is balance. So it's a bit on industries now, but it is improving. And we have now for, if we look at the growth targets that we have, we have the capacity that we need to do that.
And can you detail a bit more on the growth of payment cards?
Yes. I suppose that payment cards is so that we -- it is very clear that the whole ecosystem is more and more behind it. We see more and more banks launching as we just launched now with Morocco coming on the field. We are also working on product development together with the industry. It is very difficult for us to tell, because we are not the bank. So we are not finally making the launches. The consumer feedback is extremely good. We believe and see that there is more and more pull from the banks as well. There is more interest. We have tens of bank discussion going on. But of course, it does take time to see them launch and to see them go into volume. And that's, of course, the painful part for us, because we all wanted to go faster. But it is very clear that this industry will happen, and it will be a big, enormously good industry for us. But the road to that is taking time to -- bank by bank to launch. So we haven't given any volumes, but we build strongly in this going, so that half of the whole market will be biometric sensors in the payment cards. And we see, of course, now growth. Every quarter we see growth in that business as well. But it is, of course, starting from small volumes compared to our overall volume in the company.
And which business line do you expect most of the growth to come from in the next few years?
Well, of course, now we will see -- clearly, we have a great opportunity to grow very fast in optical as we are getting into a market where we have had 0 volumes. So of course, from a percentage points that will be -- that's an existing market where we are able now as the qualification to get into.
PC market, we have said earlier, was going to be absolutely a very strong area for us year-on-year. We'll grow to #2. Optical will, of course, have a great chance now it's become very fast growth business for us. And then payment, which is growing, but of course, from very small numbers when it comes to it, and a new market as well. The others are existing opportunities, so to say. So maybe in that -- in those orders, right? Percentage-wise optical will be, of course, when it gets going a quite a fast-growing month for us, I'm sure, as it is such a big volume market already. We have said PC will be our second biggest leg in 12 months.
And finally then, do you have any comments on -- well, do you have any activity in Russia or Ukraine that might be affected by the war or sanctions?
I think that the -- of course, the horrors of the war and attack of Russia and the Ukraine is in front of all our eyes, and it is horrible to see, of course, as any person. I think that from the business point of view, it has really no impact for us, because we didn't -- we don't have business directly in Russia or Ukraine. So there's no direct impact. There's not really either any material or such impact for us when it comes to any material needed in our parts of the productions. Of course, the implications of that, when it comes to sector, whatever it has to do with the other logistical challenges in the world or so forth, that's been for everybody to see how that develops, right? But there is no direct impact for us when it comes to it. Of course, on a global scale, those countries are not much of the total GDP of the world, if you look at that.
Thank you very much. And do you have any closing remarks, Christian, before we close the call?
I think that thank you for joining. And we had a weaker quarter, as we had said earlier. And of course, it became even a little bit now dampened by the lockdown effects in China. We are very positive about the development and growth in our new businesses, which are coming, and we are looking forward to that. And we will talk to you again very soon in our next quarter. And on this forum, thank you very much for joining, and take care of yourselves. All the best. Bye for now.
That does conclude our conference for today. Thank you for participating. You may all disconnect.