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Good day, and welcome to the Fingerprint Cards Q1 2023 Results Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stefan Pettersson. Please go ahead.
Thank you very much. Good morning, everyone, and welcome to Fingerprint Cards earnings call, following the release of our first quarter report this morning. So we'll start off with a presentation of the report by our CEO, Ted Hansson, and thereafter by our CFO, Per Sundqvist. And if you're following the conference call on the web, you can post questions throughout the call.And with that, let me now hand over to our CEO, Ted Hansson.
Good morning, everyone, and welcome to the call. Let me first summarize the key figures before moving on to discussing our performance and progress in each of our key product groups. As expected, and as previously communicated, the first quarter results were impacted by increased price pressure and lower volumes compared to last year. Smartphone and PC demand continued to be soft in the first quarter, which also tends to be the period which is seasonally weakest for us and other component suppliers.At the same time, our customers, meaning the distributors and the module houses, have been very cautious. In the face of rising interest rates and an uncertain economic outlook, they have been very reluctant to hold more inventory than absolutely necessary. As a result, our order intake was very weak at the beginning of the quarter. We saw a gradual improvement over the course of the first quarter and into the second. In fact, the value of confirmed orders for delivery in Q2 is already higher than our Q1 total sales.While we expect gradual improvement from the second quarter, both in terms of volume and gross margin, we anticipate that the combination of insufficient demand and continued destocking measures will continue to negatively affect the industry, and thus also Fingerprint sales and margins, at least during the second quarter.And let's turn to the next slide, please. This chart shows the weekly development of our order stock since the beginning of the first quarter. Now the first quarter is generally the period which is seasonally weakest in our industry, but our order intake during the first few weeks of this quarter was lower than usual.As I already mentioned, this is a reflection of the fact that our customers, that is the distributors and module houses, which supply OEMs, have been very cautious. They have significantly reduced the level of inventory they're holding compared to normal and have continued to keep inventories low due to rising interest rates and the uncertain economic outlook.However, we saw a gradual improvement in our order stock during the first quarter and into the second. Since the first week of quarter 1, the order stock has risen by over 800%, and in parallel, we have also increased our deliveries. As mentioned, the value of orders confirmed for delivery in Q2 already exceeds our total Q1 sales.We, as well as our competitors still suffer from surplus inventory built up earlier in response to the global component shortage that previously plagued our industry. During Q1, we decreased the inventory by 10% compared to the end of 2022 to SEK 274 million. This number is still too high, but the improvement in the order stock will allow us to decrease our inventory at a faster rate this quarter with a positive impact on our cash flow.While the opening in China has had a positive impact on demand, OEMs are still quite cautious about 2023 in terms of global demand. Current external forecast of global shipments of smartphones indicate a weak first half of 2023, with a return to growth in the second half of the year. Despite weak global sales of smartphones, we have actually expanded our addressable market within Mobile. This is a consequence of our entry into the under-display segment, which accounts for about 1/3 of the smartphone fingerprint sensor market volume.During Q1, we received volume order for our optical sensor from second customer. We are making progress on our goal to capture a significant share also of the under-display market, while remaining a leader in capacitive sensors.Now, please move to the next slide. At the same time, we are also continuing to execute on our diversification strategy in areas outside of Mobile. The product areas that we prioritize are PC, Payment and Access. And our R&D portfolio is strictly focused on projects that are deemed to be able to generate significant profitable growth in these areas.In order for our external reporting to better reflect this strategy and to increase transparency, we have started to report sales by product growth. As you can see, development within the new product groups is positive with a 24% growth rate since Q1 last year.We saw a good growth in PC and Payment, while sales in Access decreased in relation to the corresponding period in 2022. The demand trend is positive in all these areas, including Access. However, timing of revenue tends to be more uneven in these areas than in Mobile, which means that the development from one quarter to another can be volatile.In PC, we tripled our revenue since Q1 2022, despite the 30% drop we have seen in global PC shipments. This is an important growth area for us. And as mentioned, we are taking significant steps to strengthen our offerings, developing a microcontroller unit known as MCU, which will expand our customer offerings in biometric sensors and associated algorithms, software. This project continued to progress well in Q1, and we expect to [ struck ] customer engagement with this new solution during the second quarter of 2023.We saw good growth also in Payment, which is still an emerging application area coming from a low base. We recently announced that we have thus far shipped more than 1 million of our T-Shape sensors to customers in the biometric payment card industry. Please note the 1 million unit refers to payment cards only. Biometric access cards are not included in this 1 million.While this is a small number compared to the more than 1.5 billion sensors shipped for mobile phones, it is an important milestone for us in the industry. It is a testament to the quality, reliability and performance of our products, while it also demonstrates the strength of our collaborations with customers and partners throughout the value chain.And I'm confident in our ability to defend and further strengthen our market position in this industry as the volumes continues to grow and mature. We expect to see further commercial launches for biometric payment cards using our technology already during their present quarter.The decrease in Access compared to Q1 last year is not a reflection of lower overall demand. As I mentioned before, sales in individual quarters can vary quite significantly in these areas, including Access. Changes in the timing of large customer projects can make the sales development from one quarter to the next quite volatile.Our pipeline and leads within Access continue to grow, but that this is a new market, we are dependent on our customers' projects and their ability to sell their products to the consumer market. Revenues outside our legacy Mobile capacitive business amounted to around 35% in Q1. And as previously communicated, we expect this share to increase to around 45% by the end of 2023.Let's turn to the next slide. Our growth strategy is based on defending and building on our strong position in the Mobile segment, while continuing to diversify our business to new areas. Although the recent trend in Mobile has been very negative, as you all know, we expect a gradual improvement in sales volume and gross margin starting now in Q2, even if we are still experiencing strong price pressure as a result of continued destocking.We continue to focus on product innovation, both in capacitive and optical under-display fingerprint sensors. Our entry into under-display is a significant step for us. We received our first volume order only at the end of last year and our second customer launch in the first quarter. So we do not yet see a significant effect in terms of revenue. However, as this is a completely new market segment for us, it represent significant growth potential. Our objective is to take a significant part of this market.PCs are a very interesting growth area for us, both in the short and long-term. We actually triple our sales to this product group since Q1 last year, despite the fact that global PC sales dropped by 30% in the same period. The volumes in the PC industry are now comparable with the levels in 2019 before the COVID-19 pandemic led to an upswing in computer sales due to a strong increase in working remotely. At the same time, an increasing share of new computer models are equipped with fingerprint sensors, which means that we foresee continued growth potential.We have a very competitive product portfolio, which means that we are well positioned to continue increasing our market share. As announced earlier, we have initiated a project to develop our own microcontroller unit known as MCU, to further strengthen our market position. This will make it possible for us to offer our PC customers a complete biometric system consisting of a fingerprint sensor and an MCU. We will commence our first customer projects during the second quarter of 2023.This MCU development project is supported by our largest PC customers since we will be able to deliver better overall system performance, while optimizing cost and strengthening our control of the supply chain.During the quarter, we reported several collaborations in Access/IoT, a growing market that includes such products as access cards, door locks, cars, remote and gaming console controls, smart household appliances and authentication keys. Together with PC and under-display sensors for mobile phones, the Access area is the one we expect will grow the fastest over the short-term.At the same time, the prioritization of revenues is generally more uneven than in Mobile, which means that the development from one quarter to another can be volatile. This is also true for the PC and Payment areas.Access is a priority with regards to R&D investments over the coming year. One example which we communicated during Q1 is the collaboration we have established with Flywallet, our startup within wearables for the purpose of developing and launching wearable technology with biometrics for the European market.Flywallet's products enable, for example, secure payments, ticketing and loyalty services, password-free login to online services and building and car access control.At the beginning of April, we announced that to date, Fingerprints has delivered more than 1 million T-shape sensors modules for the biometric payment cards. Our technology plays a key role in making card payments more secure, and the fact that we have now passed this milestone reflects the strength in our collaboration with customers and partners throughout the value chain. It also clearly illustrates our position as the leading supplier of biometric solutions for payment cards.We increased sales within Payment by 160% compared to Q1 last year. This market is still in its infancy, but it's clearly a very large long-term market opportunity for us. Our technology is so far being used in 10 commercial launches of biometric payment cards around the world, and we expect to see further launches already in second quarter.And with that, let me hand over to our CFO, Per Sundqvist.
Thank you, Ted, and good morning, everyone. Let's now move over to the first slide of the financial results section. First, let me highlight and reiterate that the result in Q4 2022 was impacted by noncash write-downs of SEK 455 million, which is the main reason for the significant negative movement in the operating profit that quarter, on this slide.Now, moving into the Q1 2023, the operational-related parameters. Our revenue margins were impacted by lower volumes and strong price competition. That is the quarter which is also the weakest one from a seasonal point of view during the year for component suppliers into the Mobile industry, such as fingerprints.While our order stock has now recuperated significantly, as Ted mentioned, we started out the quarter with very low order intake. As our direct customers, the distributors and the module houses, we have taken a cautious stance in the face of rising interest rates and an uncertain economic outlook in general.Despite that, we do expect to see a gradual improvement in sales volumes and gross margins starting in the second quarter. However, having said that, ours as well as our competition has the inventory levels that are still too high compared to historical levels, and we thereby expect the continued price pressure, which is likely to put continued pressure on primary Mobile margins, at least for the next quarter until the inventory levels have stabilized.Next slide, please. This rolling 12-months trend clearly shows the impact on our revenue and margins of the demand drop due to the Chinese COVID-related lockdowns. These restrictions were removed at the end of 2022, and we do expect a gradual upturn towards the historical demand for mobile phones as well as a gradual medium to long-term growth pattern in the PC, Access and Payment segments.However, as mentioned earlier in our last earnings call, we do expect continued price pressure in the short-term, at least in Q2 as sensor supplies, inventories are still too high versus historical levels. Our expectation still is a gradual improvement in sales volumes and gross margins starting in the second quarter.Also, we do expect that the revenue from nonmobile related sales will, over time, mitigate the current strong negative effect from the current mobile situation that we by continuing to diversify, will be significantly lowering our mobile risk factors. Revenues outside of our legacy Mobile capacitive business amounted to around 35% in Q1, and we expect that this share will increase and continue to increase until it reaches around 45% already by the end of 2023.Next slide, please. Operating expenses in Q1 were SEK 96 million versus SEK 96 million in Q1 last year and SEK 111 million last quarter. Development costs of SEK 70 million were capitalized during the quarter, which is to be compared with SEK 27 million the same period last year. This corresponds to 38% of total development cost, which is to be compared to 49% in the same quarter of 2022. We have implemented a number of active measures to reduce our total cost and expense base, mainly by staff reduction. Since Q1 last year, we have reduced employees and consultants by 59 people or roughly 19%.On an annual basis in 2023, our OpEx will have decreased according to our plan, and we are also continuously working to further streamline operations to ensure that we return to profitability, whilst maintaining and developing a strong and stable R&D, well in line with our customer promises. As usual, we will keep maintaining a strong focus on cash, cost, efficiency improvements as we move forward.Next slide, please. Our core working capital, that is accounts receivables plus inventory less the accounts payable, was SEK 320 million at the end of the quarter, to be compared with SEK 279 million in the same quarter last year and SEK 358 million last quarter. If we look deeper into the development of the core working capital in relation to our rolling 12 months revenue, it increased to 47% from 21% in Q1 last year and from 42% last quarter.Whilst the above percentage increased, relatively speaking, we actually decreased our absolute inventory by SEK 30 million or 10% versus the end of 2022. Since we still judge our inventory to be too high, we're focusing hard on making further reductions in the quarters to come to further improve our cash position. We expect that we will be able to decrease our inventory at an even faster rate in Q2 due to the change in -- to uptrend on the order intake we saw in the beginning and during Q1.Next slide, please. Our cash flow from operational activities in the quarter was a negative SEK 42 million, mainly driven by the significant price and inventory effects in the Mobile business mentioned earlier. However, if you compare this outcome with a negative SEK 90 million in Q1 last year and the negative SEK 104 million last quarter, a significant improvement has been made, although not yet in positive territory, which is our strong and ultimate goal. Despite the above cash flow effect at the end of the quarter, our cash position was still SEK 211 million versus SEK 255 million 1 year ago and SEK 274 million at the end of Q4 2022.Cash flow from investing activities, that is capitalized development expenditures, was negative SEK 17 million compared to negative SEK 28 million last year.Thank you. And with that, we are now ready to answer any questions.
[Operator Instructions]. Your first question comes from Markus Almerud of Penser Bank.
So just 1 question actually at the moment and that's regarding the 45% of sales that should come from Alpha and the [ Tactile ] in Mobile. And my question is that if -- you were 35% this quarter. And then you also saw Mobile being -- still being very weak. So what assumption is behind Mobile on the 20% -- on the 45%? Because, if Mobile recovers towards the end of the year, that means that the other segments must grow even faster. So can you just explain how this work together, please?
So you are right. I mean, we are expecting, as we just said, that the Mobile business will improve in volume from this quarter and onwards. And that means that the rest of the areas will grow faster than Mobile. So the other areas include under-display for mobile. It includes Access. It includes PC and Payment. So those areas that are not Mobile capacitive, we anticipate we will reach around 45% of the revenue by the end of the year. So you are right in your assumption that they will have to grow faster than the Mobile capacitive if [indiscernible] is back.
. And then my second question is on the -- just to try to understand what is going on and where we stand right now in terms of where the module houses and distributors are. Because -- so you said that they have decreased their inventories -- decreasing the inventories during the first quarter. And we also know that you had Chinese New Year, which is also [ at least ] making a seasonally low period. But -- and you also said that the inventories are now below normal, but where are they kind of in booking new orders, in -- where are the inventory levels, et cetera? So what could we expect from this part of the value chain going forward? It feels like a key…
Yes. So let me try to answer as well as I can. When we announced the Q4 results, we said that we expect that the inventory levels will go back to normal over time. And today, we are saying that the inventory levels at the distributors and at the module houses are below normal. And at OEMs, it varies, of course, between different OEMs, but they are, I would say, at normal level. So actually, we have seen more -- or a lower inventory level than what we anticipated in the end of last year. And the reason for that is that cash is getting expensive for our distributors and also module houses. So -- and also, they see that there are a weak economic outlook globally, and they believe that it's risky to build inventory without having an order from the OEM.So we are now going to a situation where it's not exactly back-to-back, but it's approaching that kind of situation where the OEM is driving the module house, who is driving the distributor, who is then placing an order through us. So that is as low as it can get when it comes to inventory levels on module house level and distributor levels. And we can now see that this channel is moving quite well. We wish to show that picture -- a graph showing the order stock level. So that is the difference between orders in and what we ship out, right? And you can see that, that has been growing nicely since middle of the first quarter.So in the first -- almost half of the first quarter, there were very few orders coming in because all these distributors and module houses were trying to get to basically 0 inventory, and now it is moving. And I have to say that since the middle of the first quarter until today, it is moving in a very stable and -- fashion. We are getting orders on a daily basis, and we have now been seeing the same level of orders per week for the last 2 months or so. So we are, I think, at a position now where we feel that when there is a demand from the OEM, it directly translates to an order through us, and we continue to see a stable order intake, I would say.
And how far do you think this needs to go before we see any restocking with the distributors and the module houses? Or, will this be a permanent situation that your demand will also reflect end-user demand?
I think that OEMs that want to be able to grow their market share in the market, must be willing to build ahead of having the end-user demand, which means they need to have strong partners in the module houses and distributors that are willing to support this. And right now, we can see that different -- some OEMs are not doing so well. Some module houses are not doing so well. Some distributors are not doing so well and so on. And I think that we are going to go through a kind of consolidation phase now. And when we come out on the other side of the consolidation phase, I expect that we will be in a more normal scenario. But right now, some module houses are not in a healthy situation. So the distributor is quite unwilling to build inventory because they don't know how the module house will develop their business and so on.So I think we need to give it some time. And when it returns to normal, of course, it means that there will be an upside for the component suppliers such as us because the chain will be filled up again, so to say.
But in the meantime, we should just expect end-user demand to be reflected in your orders as well?
Yes. I mean, it's a little bit different for different OEMs. Some OEMs have a very strong cash position, and we can now see that they see an opportunity to capture market share by being a bit more aggressive than other OEMs. But in general, Markus, I think that's a fair comment that there is a very close connection between what the OEMs sell and what we actually get ordered for. There's a very -- there's not a lot of buffer between anymore, right now.
And then a quick question also on the inventory. So you now have inventory levels of around SEK 270 million and -- which is quite a lot lower than where you were at the peak. And I know that you have previously spoken about SEK 200 million as kind of a normalized into levels that you should be at. Is this still a fair estimate so that we should see the inventories moving back towards the SEK 200 million?
Actually, I think that we should be able to go well below SEK 200 million inventory level. That's our target. We still have a significant inventories that we are depleting as we speak. And we will continue to do that to drive it down. And I don't think I can give an exact number here, but SEK 200 million, in my view, is on the hindsight.
[Operator Instructions]. We currently have no further questions on the telephone.
I think we'll take a couple of questions from the web then. The first one on biometric cards, if you're expecting any major launches in 2023?
As we just said, we expect multiple launches this year, and we expect to see launches during this quarter. Of course, it's not in our hands on -- what the volume will be and how fast it will roll out. But we are confident in our offering. We are very confident that we have a very strong offering. We have very strong partners. We have taken the absolute majority of the commercial launches. And our firm goal is to maintain that high market share, both when it comes to volume and also when it comes to percentage of the commercial launches in the world.So we expect that we will grow as the market grows. Having said that, it's, of course, hard for us to predict how fast it will actually scale, but we are ready. And as I just said, we will see launches already in the second quarter.
And a question on OpEx. What kind of range are you expecting when all your cost-cutting activities are complete?
We have said earlier that we would reduce our OpEx base by around SEK 80 million on an annual run rate. We also said that, that would have full effect in Q4. And the main question here really is, have we delivered on this? Or, are we delivering on this? And I can say, yes, on an annual basis in 2023, our OpEx will have decreased according to our plan. But we will, of course, always -- continuously working on the fact that we are streamlining operations and then making sure that we return to profitability without in any way compromising our ability to support to our customers.We have implemented a number of measures to reduce our costs, mainly debt reductions. If you look -- compare it versus Q1 last year, we have reduced employees and consultants by roughly 60 people or around 19%. But as I said and as I keep saying is that we can keep a strong focus on the cash, and then we are working very hard on cost and then, of course, also the efficiency improvements in -- on all the factors of the cost base as we move forward.
And if the price pressure and competition gets worse, what are your plans to be able to manage this?
So let me try to address that. So we are active in 4 different categories or areas that [ we've ] just spoken about. And when we talk about the high inventory levels and the high price pressure, it is mainly related to the Mobile capacitive fingerprint sensing business. If you look at the PC, the Payment, the Access, we are experiencing a much healthier ASP in margin levels. So then when it comes to the Mobile capacitive business, I mean, as a leading technology company, it is our obligation and goal to provide the most competitive solutions in the market. So we are constantly driving size down, driving costs down. We're optimizing the supply chain. We are optimizing the foundry business. We are doing everything we can in our side to make sure that we are leading in cost structure. That is what we can control as a supplier.And I'm very confident in the work that we are doing there. We are constantly benchmarking different KPIs against competitors. And I believe that we are competitive when it comes to the cost structure. We're also running a very lean operations and a very lean development organization in the capacitive fingerprint sensing business.Having said that, the normal market conditions do not really apply when there are a lot of inventories out there from multiple vendors. So we are going to get through this situation with its high inventory levels. And we have to accept that there will be strong margin pressure during this phase. However, we are winning projects. We are winning business with our OEMs, and they are selecting us not only because we are cheapest today, but because they believe we are going to continue to be a long-term partner in fingerprint sensors for smartphones.So we are rolling out new sensors, new products with lower cost. We are winning new business. And as this excess inventory is depleted, the normal balance between purchase price and ASP is going to be restored. Fingerprint sensors is not the first component to suffer from excess inventory in the smartphone industry. This has been seen for many components before. And in this situation, we are focusing 100% on the part that we can impact, meaning the cost structure, meaning the competitiveness of our products, the customer relationships. We are making sure that we're not backing off. We are winning business and we are fighting through this. And as inventories go down, I'm very confident that we will see margins going back to more normal levels.And then the final point is, as we diversify, as we said it just before, by end of this year, we expect that 45% of the revenue will come from other areas than capacitive fingerprint sensors. Of course, they will have an overall positive impact on the company margin level as well. So that's where we are, and that's the actions that we're taking in this situation.
And 1 final question then on under-display. If you can give an update on your business in the under-display segment?
Yes. Sure. So we announced a second customer during first quarter, and we are now in a position where we will go out with the names of the first customer. So that will come out shortly on our news media. We are continuing to win new projects among our customers. We are also working on signing in with more customers. So we are comfortable and confident that we will see increased business going forward in the optical. And as I have said before, and I think that's a fair point to make, there is absolutely nothing that stops us from having the same success in optical sensors as we have in capacitive. We are a preferred supplier when it comes to biometrics to smartphones.And we are going to grow the customer base, and we are growing the customer base. And we will see, over time, more and more launches. And as I said before, by end of this year, the under-display will contribute to the 45% that is not a part of the capacitive mobile business. So we expect a significant increase in the business in optical, and we are on track of delivering that.
Okay. Thank you, everyone, for your questions. Let me now hand back to you, Ted, for some closing remarks.
I want to thank everyone for participating, and thanks for all the questions. We will be releasing our Q2 report on July 20th. And with that, I would like to say bye and thanks for now.
That concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please standby.