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Good day, and thank you for standing by. Welcome to today's second quarter results call. [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 presenter today, Stefan Pettersson. Please go ahead, sir.
Thank you. Good morning, and welcome to Fingerprint Cards' earnings call following the release of our Q2 report this morning. We'll begin today's call with a presentation of the report by our CEO, Christian Fredrikson; and thereafter, by our CFO, Per Sundqvist. And as mentioned, we'll have a Q&A session after this. We'll begin by questions from the phone line and then move to web questions. And with that, I'll now hand over to our CEO, Christian Fredrikson.
Yes. Thank you, Stefan, and good afternoon every -- to everyone, and welcome to the call, which, as said, will focus on Fingerprint's progress and performance in the second quarter. I do realize, and I'm sorry about the short notice we gave for this call. But as you know, the Board decided to release the report earlier than previously communicated since the work to complete the report could be finalized earlier than planned. Let me start with some comments on our revenue. As previously communicated, we expect that part of the revenue in Q2 to be delayed due to the COVID-19 related shutdown of an industrial complex in Vietnam, where one of our suppliers has production facilities. This is reflected in our Q2 revenue figure which came in at SEK 290 million, some 12% below the low end of the range of our previously communicated revenue forecast for the quarter, which we withdrew due to the COVID-19-related situation and outbreak in Vietnam. These results still represents a constant currency increase of 18% on the corresponding period last year, which I think is good given the challenges we faced in Vietnam during the quarter. We expect that we will make up the lost sales in Q2 in the coming quarters. A gradual restart of the production facility in Vietnam could also begin in June, in line with our previously communicated expectations. And we expect that the facility will be back to full capacity during the third quarter and actually by the end of July. We have also secured additional capacity with other supplier this quarter. And we will continue the important work of further broadening our supplier base which we have ongoing for a while now. Our gross margin improved by some 6 percentage points compared to last year as the share of new higher-margin products in the mix continued to increase.Looking ahead to the second half, we see a positive development of our underlying product in our markets. If we consider the global smartphone market, external analysts expect to see growth of around 6 -- between 6% and 9% this year. At the same time, the penetration rate of fingerprint sensor is still increasing. And as we all know, in capacitive sensors, Fingerprint Cards is the world leader and the most popular technology by far. So we expect demand for our products to continue to be solid in the coming quarters. As I have said before, the limiting factor for us is access to sufficient production capacity. There's a lot of work being done in that all across the globe, and it is going to improve, but it takes some time. The PC market is a very interesting growth area for us. The new biometric solution for PCs that we launched last year have done very well in the market. And we now count 2 out of the world's top 3 PC manufacturers as our customers. The consensus view among industry observers seems to be that the PC market will establish itself at a significantly higher level than before the pandemic, and we also hope so. So we expect to see continued growth in the demand for PCs while the attach rate of fingerprint sensors is also rising. Next slide, please. We are continuing to make good progress against our strategic priorities. Our unique FPC1542 sensor is the new benchmark in the market for fingerprint sensors for mobile phones, and it is continuing to sell very well. As you may know, we are continuously updating our ticker on our website, and we also regularly send out tweets with the information on new phones with our sensors. Increased sales of our new products is also having a positive impact on our gross margin. We will also keep investing in driving new innovation in the mobile area. As I just mentioned, the PC market is growing at a good pace, and fingerprint touch sensors are becoming increasingly common. Fingerprint is very well positioned, thanks to our recently launched biometric solution for the PC segment. In fact, 2 out of the world's top 3 PC players as well as 3 out of the 5 -- top 5 players use Fingerprint's technology. I am very pleased with our performance in the PC market, and I believe that, that will be a great new leg for us. In the Access segment, we received a volume order for several hundred thousand T-Shape sensor modules from Sentry Enterprises, to be used in a SentryCard converged biometric credential for physical and logical access. This order is a good testimony to the strength of our offering and the demand for biometric solutions also in access control market. We see a continued growth in this segment, providing a smart way to add secure, convenient and hygienic authentication to physical as well as logical access. Biometrics by Fingerprints has achieved the FIDO biometric component certification, which is mandatory for FIDO certified authenticator Level 3 and higher. Our solution is certified as part of the Feitian and biometric FIDO security key, the first FIDO hardware authenticator integrating biometrics to achieve this approval. This demonstrates the quality, security and performance of Fingerprint sensor and our algorithms which are used to authenticate logical accessing products that has been certified at this high level. Next slide, please. If we look at payments, Credit Agricole France now offers their Gold and World Elite customers biometric payment cards with biometrics by Fingerprints. Also, BBVA is launching biometric payment cards in Mexico with, once again, biometrics by Fingerprints. To date, we have seen 4 commercial launches in the world, and our technology is used in all of them. Just recently, we secured an additional volume order from approximately 250,000 T-Shape sensor modules from one of the world's top 3 car manufacturers. I believe that this new order indicates that the market rollout will continue and accelerate. The pandemic has led to a sharp increase in consumers' use of contactless payments. Biometric payment cards are emerging as the next innovation in this area, enabling a touch-free and seamless payment experience regardless of the amount. Together with our partners, we are enabling banks to remove the payment cap and bring consumers the trust and experience needed for contactless payment. We expect to see further commercial rollouts in the coming quarters, and we expect the market take-up to accelerate in the coming years. We actually expect a handful of rollouts still, and we hope that happens with the launches of the banks this year. Fingerprint sensors for payment devices, including smart cards, wearables and USB tokens, represent a very large potential for biometrics. As we have stated before, we see a potential TAM, total accessible market, amounting to around 3 billion units per year for biometric sensor modules and software in the payments area. And as we have said, our aspiration is to lead this market with a share -- market share of around 50%. Next slide, please. I am very pleased with the performance of our newest solutions for the mobile and PC segments. The thin FPC1540 sensor is an innovation made possible by our unique capacity and technology combined with our advanced matching algorithm. This product has moved into mass production extremely fast and has really set the new benchmark for excellence in the market. The same can be said about our solution for the PC market, which is now used by 2 of the top 3 PC makers, as I just said, in the world as well as 3 out of 5 top 5 players. I am very proud of this achievement and the strong position we have already taken in this new growth segment. We expect that PCs equipped with fingerprint sensors will become increasingly common, and we aim to continue to drive and lead this market as it goes into biometric. Next slide, please. During the quarter, we also announced some notable progress in our cooperation with STMicroelectronics. As a second step of this partnership, we have entered in a commercial agreement with STMicroelectronics to bring to market an advanced biometric system on card platform, STPayBio.The platform enables efficiency of the key features of a biometric system on card, demonstrating simple user enrollment, very high end-to-end banking transaction and matching performances. STPayBio integrates ST's payment security technologies, the ST31 Secure Element and STM32 microcontroller with Fingerprint's T-shaped, too, sensor module and software platform for payments, which was recently approved by Mastercard. The 2 companies have been working tightly together to optimize all parts of the platform in one solution. The platform eases integration of biometrics into existing card manufacturing processes, enables global volume deployments and reduces the total production cost. Fingerprint is proud to continue its collaboration with STMicroelectronics to reduce cost and remove complexity from the integration process. This is breaking down major barriers of smaller Tier 2 card manufacturers to add biometric cards to their portfolio, and in turn, bring fast, frictionless and hygienic in-store payments to even more consumers. Next slide, please. So in summary, I am pleased that the positive growth trend continued, with an 18% constant currency growth on last year despite the production challenges we have had in Vietnam in the quarter. We assess that the sales loss in the second quarter due to these changes will be recouped in the coming quarters. Demand for Fingerprint products and solution is healthy, and we anticipate the production capacity at our Vietnam supplier will be fully restored during the third quarter, actually, already by end of July, while we have also secured additional capacity with other suppliers. The important work of broadening our supply base continues with undiminished effort. We see good growth in our underlying product markets, also in the global smartphone market. And there are always changes in the customer base, and I'm interested to see that our largest customer, Xiaomi, have, according to analyst reports, now become the #2 mobile OEMs provider by market share in the brand volumes in the world. And that is great to be their biggest -- they are -- we are the biggest player when it comes to capacity fingerprint sensors with Xiaomi. Capacity fingerprint sensors, where we are the world leader, remain, by far, the most common biometric modality in smartphones, and our strong positions and continued high innovation and product quality with security in biometric performance is important for us, and we will continue to invest into that. We are continuously advancing the development of our product portfolio and the most recent generations of the thin side mounted sensor from [ Fingerprint ] have established a new higher standard in the market. PC industry had an unusually strong year in 2020. And there is a lot -- and of course, that is because of the changes of working remotely due to the pandemic. This industry has continued to expand in 2021. And the consensus is that the PC market will establish itself on a significantly higher level than before the pandemic. On computers, equipped with Fingerprint sensors are becoming increasingly commonplace with our new biometric solutions for PCs. And we are going to take leading position in this market as well. During the second quarter, we announced that we have gained another customer, which means that 2 of the world's 3 largest PC manufacturers are now using our technology. Fingerprints has also and is the world leader in biometrics for payments. And we saw another commercial launch of biometric payment cards in Q2, this time, by BBVA in Mexico, using Fingerprint's technology. Our technology is now used in also the 3 previous -- so in all 4 commercial launches in the payment industry: in Switzerland, France by Corner Bank -- sorry, Switzerland; and in France by BNB Paribas and Credit Agricole. And do remember, BNP Paribas is the #1 bank in Europe and Credit Agricole is the #3 bank in Europe. These are significant launches in this business. Our position is very strong, and I look forward to seeing this new mass market for biometrics now taking off. And with that, thank you very much on my behalf. And let me hand over to Per Sundqvist. Go ahead, Per.
Thank you, Christian, and good afternoon to you all. So let's move to the first slide in the financial results section. Starting with our revenue, we're reporting a 3% increase compared to the corresponding quarter last year and an 18% increase in constant currency terms. That is despite our previously communicated production challenges in Vietnam during the quarter. A successive restart of the production plant in Vietnam could, however, already begin during the second half of June. But nonetheless, the loss of production has had a negative impact on our quarterly sales. However, as Christian has mentioned, we assess that this sales loss will be recouped in the coming quarters as demand still is healthy and we expect the production capacity at our Vietnamese supplier to be fully restored during this time period. In addition, new additional production capacity will also come online during the same time period, which will further increase our overall production capacity as well as stabilize current output levels. The product mix continued to improve this quarter with a higher proportion of new higher-margin products. This, of course, have had a positive impact on our gross margin, which came in at 28% in the quarter, 6% point increase compared to the same period last year. Next slide, please. Looking at the development of revenue and gross margin on a 12-month rolling basis. The trend in profitability is clearly positive. This is due to the favorable product mix trend mentioned earlier. We are also continuing our efforts to improve profitability by driving more product innovation as well as continuously increase the diversification of our business into new customer segments and application areas.Considering the revenue in particular, we can see the impact on this slide of the supply chain limitations over the last few quarters as well as the recent shutdown effect in Vietnam this quarter. And as we've said before, I reiterate; before, the semiconductor shortage is the limiting factor for us at the moment since market demand for our products and solutions continues to be very strong. Next slide, please. Operating expenses in Q2 were SEK 104 million versus SEK 77 million in the same period last year. Development costs of SEK 17 million were capitalized during the quarter compared to SEK 26 million in the corresponding time period for 2020. This corresponds to 32% of total development costs, which is to be compared to 48% in the corresponding quarter of 2020. Our development expense has increased compared to last year as we are driving a higher number of R&D and operational projects. In other words, the expenses and the costs relating to the broadening and investment of an improved supplier base are the main cause behind the increased year-on-year OpEx numbers. It is therefore a very important growth step for us and the future platform investment that will act as a growth driver for us going forward. However, we will, as always, maintain a strong focus on cost and efficiency improvements going forward while making these necessary investments to drive future growth. Next slide, please. Then moving into our core working capital situation. That is, in this case, accounts receivable, plus the inventory, less the accounts payable. It emanated and resulted at SEK 191 million at the end of the quarter, which is compared to SEK 108 million in the same quarter last year and SEK 147 million last quarter. As you all can see, we continue to work towards a very active management of our working capital in a very efficient manner. Next slide, please. As the further positive effects of the efficient working capital management, our cash flow from operating activities was a positive SEK 50 million compared to SEK 81 million in Q2 last year. Subsequently, our cash position stood at SEK 193 million versus SEK 429 million in the same quarter last year and SEK 340 million at the end of Q1 2021. This in turn has enabled us to buy back own shares at the level of SEK 140 million in Q2 2021, which is a proof of the positive results enabled by the continued focus on working capital and efficient cost control during the quarter and the previous ones as well. So cash flow from investing activities, in other words, the capitalized development expenditures was SEK 19 million compared to SEK 27 million last year at the same time period. Okay, then. Thank you, everyone. And we are now ready to take questions.
[Operator Instructions] So your first question comes from the line of Francois Bouvignies from UBS.
The first one is on the -- your results in Q2. So when I look at your previous guidance, I mean, it was at the midpoint, SEK 250 million. And when I see what you delivered, this SEK 290 million in Q2, which is 17%, 1-7, below the midpoint. And what I'm trying to understand is why -- I mean, how come one supplier with one month's shutdown in the quarter could have 17% impact on revenues? Just to understand how it can have such an impact or maybe is there anything else than one supplier? Just trying to understand the impact here would be very helpful.
Yes. Francois, well, we don't give exactly what the impact was, but I suppose in the ballpark, you can say, right? And it was -- we never really gave our guide into how long it was, but it started slightly, actually, before June. So it was a bit longer. And that's why if you look at the percentage, it was more than what it was in June. And we said that it will be up in -- by the end of July, and we are in Q3, we are already, as we see it, on -- in a normal situation for that. Plus, we have now secured other partners for this area as well. And it was actually, of course, more than one factory that was impacted. It was -- it is such a huge region that was there.
Okay. And I mean, can you give maybe the percentage of exposure of the supplier, the percentage of output or anything like that then?
No. No, we don't give anything per supplier, but that impact or output is not there anymore at Q3. That level of impact cannot be there.
Okay. So even in July, you -- it's fixed? It's full speed from July?
Yes. End of -- from July, it's full speed, yes. Plus, that we have other suppliers as well, right? So.
Okay. So on your Q3 guidance, there is no negative impact embedded into that?
No, we haven't. We are kind of in -- and then we need to kind of catch up on the sales that was pushed out, right?
Okay. Okay. And then -- and maybe my next question is on the card, the follow-up order that you've got. Can you give a bit more background on what kind of customer -- I mean what -- not the customer, but the end user. What do you know about this follow-up orders? What is it -- is it because they are seeing demand? Or was it because in the contract, they had the second wave order? Anything you can give around this particular big order?
Well, not really given on the particular order. I think it's -- of course, it's very good and it was an expected step and it has to do, right, with the fact that there are more -- there is more consumer demand there so that needs to be -- which is going in a way as the projects are going in, going into live, right? So it just adds on, right? I think it's more of that, that the process goes on. And the more banks that you get out there, the more, of course -- and days goes on. And we expect a handful of more commercial launches. And all we hope, I would say, expect and hope and believe, I would say the right word, because we are not, of course, the one who is launching. It is the banks and the card issuers who are launching that with -- in the relaunches, right?
Okay. All right. And maybe last question, it's on the strategic review. I don't know how much you can say about the strategic review. But can you give us maybe an idea of the time line? I mean when this review? How long it's going to last? I mean, anything you can give around, yes, how should we think about that going forward?
Well, I think it's really -- the strategic review is really done by and started and shared by the Board. And the only person who will give comments on that one is the Chairman of the Board. And it's done from a position of strength like where they are now looking at the strategic review. And I can't really comment. I know the question, and it's coming Francois, right, but I'm obviously not the right person to comment anything on that or neither the schedule or what to expect, right?
[Operator Instructions]
Maybe we can take -- we have a couple of questions from the web which we may take at this point. One is on commercial releases. It seems like all commercial releases so far as well as the most recent orders are based on T-shape 1. Are customers preferring that first-generation or is T-shaped 2 delayed? And when do you expect commercial rollouts based on T2?
Now I suppose everybody always wants the newest version, but it needs to go through all the processes when it comes to our partners and the certifications. And then it kind of goes into the rollout. We expect that to happen still this year, and that's the plan, it has been. There are no there are no delays from that perspective in that plan. And then it just rolls into the T2, right? That's how it goes. And of course, that's not going to be the last version either. That's the way it goes as well. We're happy to continue developing and driving cost down and performance up on -- in the payment industry.
Okay. Is there anything you can say on touchless or iris recognition in terms of development or growth going forward?
Yes. We don't give any specifics on the different areas. We have been adding customers in hospitals. It is, of course, still a lot of work going on in the automotive industry. We are bringing also -- have brought the combined iris and face recognition. We have brought that and bringing that more into the market. And we're looking at different form factors in payment systems, for example, in India, where there is good demand for iris as well. So all of that continues and is adding up, and there's a lot of interest in the Access segment as well. So that's a few areas where we are looking at it. And then in -- as I said, there's a lot of work going on in the different form factors as well to get that into different hardware solutions.
Okay. And anything about fingerprint sensors in cars or vehicles? Anything you can say about the development?
There is -- I'm sure that biometry, as an overall, will be a very interesting and very good play in the automotive industry, in different form factors inside the car, in different places, whether it is fingerprint sensors, iris or face. And more and more of that will come with more and more automation, more and more payments happening in the car. So I think that's a very interesting area, and it just takes time. So you -- so there will be many different kind of trials and pilots going on and launches as well with different car manufacturers launching it in different cars, in different form factors to learn more about it and to get it there and to see what the consumers prefer. So I think that there is going to happen a lot. And you'll see a different launches happening in different cards. It takes a while. I see this highly test -- it takes a long time to certify and test in that industry. That's maybe how we'd see, but it will be a good industry for biometry as well, I'm sure.
Okay. I think that's it for the questions from the web. I got a message here that someone on the phone line is trying to ask a question. I don't -- maybe the operator can repeat the instructions.
[Operator Instructions] And your first question comes from the line from Farzad Limki from Millennium Capital.
Can I start with the first one, which is on BBVA Mexico? Do you have any idea of what sort of cards or what sort of accounts your finger -- so the biometric cards are being rolled out in?
Well, they are launching in -- it is a smaller -- the way it has gone in the other launch, if I've got France as well, they start smaller in a branch. They get to test enrollment. You get the consumer feedback. And you position yourself, your marketing. And then -- and if I look at the French play, how it has gone, it doesn't mean that it's going to be exactly the same in Mexico, but that's how they've started now with the rollout in Mexico, right? And it starts in smaller. That's all we know at this stage, right? And then they will take it from there. And they decide then on the marketing activities, on how do they want to do the enrollment in the beginning and going forward. And if and what segments they will go for. And for example, BNB Paribas has started with one branch, and then they've gone out and they will go into all branches in France.
And are your customers who you're talking to, so not the ones who are already signed up with you, but are the others waiting for gen 2 of the FPC T-Shape sensor because it's cheaper, quicker, has less components, et cetera, et cetera? Or is it just a matter of banks trying to get their priorities in what they want to roll out.
Yes. I think it's more of the banks getting their rollouts going. We have the cards ready. When you go for a smaller, starting with one branch, if it's T1 or T2, it's not such a critical issue, right? If -- when you go for bigger volumes, then, of course, immediately, the cost issue comes in. And we need to -- and we will continue working on that to make it make it a good case for the banks also to roll it out, right? But it's only when you get the volumes, right? So it doesn't hinder the launches and the commercial launches and so forth, right? That's -- it would -- anyhow, they always start with smaller volumes.
Then just coming up on the guidance that you've given for Q3 and what you printed for Q2 in terms of turnover. You mentioned that you'll make this up in the balance of the quarters for this year. If I take what your previous guidance was for Q2 and what you've guided for Q3 and the sort of normal seasonality and the fact that you are actually now fully up and running in Q3, based on your guidance, I don't see any catch-up, actually, occurring in Q3. Is that fair? Or do you think that what was lost in Q2, some of it is being recuperated and most of it will come in Q4? How do you see that?
Actually, Farzad, first, we don't really -- we're not going to distinguish that how it is. But we didn't say that it is going to happen this year. We say that it will be taken -- we will recoup the sales over the coming quarters, right? So we need to do that. So we didn't say that it's going to happen all in the second half, right? And then we need to kind of get now the factories going. And then we need to do the -- get the wafers in and do the packaging and kind of get back into then selling them in what form factor they go out, right? So I think it's -- it becomes a normal process for us now.
Okay. And last question for me is on access. You always used to disclose different segments. This time, in your presentation, you have one section on access. So clearly, it seems to be an attractive vertical for Fingerprint Cards. Is there any plan that you think is applicable to your products? And what sort of market share are you aiming to have in the coming years?
I think in access, we have said that it's going to be in the hundreds of millions of units so far. Then it's a big question, how will the access card business go, right? Because it is quite a big business in the access cards. But if you could, the door locks, that's in the tens of millions now, 15 million units last year. So in the access, which is about -- that business is about 10% of -- we have said that's about 10% of our revenues. And the Access business is in the hundreds of millions of units, if you look at the market going forward, we have talked about 2026 and beyond, and it's going to that. And we expect to have -- be the market leader, which is in all the segments where we go in there, right? That's what we have said, which is kind of assuming over 40% market share in the segments where we go into it, right? It's a fairly -- we will go for the larger parts of the Access segment, not all of the segments. It's quite scattered. There are many different form factors and subsegments in that, right? That maybe gives you a little bit of view of where we are aiming at.
Yes. And I'm just guessing that Access also has a lot of software in terms of the iris and face recognition. Margins, on a steady-state basis, would be much higher in access compared to in a biometric or, most certainly, mobile.
I think that you can make that assumption, yes, that access. And of course, whenever you have pure software, it's, of course -- it's basically always better margins. And when you -- even in the hardware, in access cities, smaller volumes, but of course, typically higher prices and better margins there, and of course, different expectations and very different form factors in the whole access market. So yes, you can expect -- you would -- I think it's a good assumption.
[Operator Instructions] There are no more further questions on the audio lines at this moment. Please continue.
All right. With that, we are concluded for this second quarter. Thank you for joining. Thank you for listening, and thank you for all the good questions again. And I look forward to talking to you in this format after our third quarter. And thank you for joining once again, and stay safe. Have a good day, everybody. Talk to you soon. Thank you, and bye for now.
This concludes today's conference call. Thank you for participating. You may now disconnect.