© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and thank you for standing by. Welcome to the Q2 2023 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session. [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, Sharon, and good morning, everyone, and welcome to Fingerprint Cards' earnings call following the release of our second quarter report this morning. So we'll start with a presentation of the report by our CEO, Ted Hansson, and thereafter by our CFO, Per Sundqvist. And also, if you're following the 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. And let's start by looking at some key figures in the second quarter. We increased our revenue by 74%, compared to last quarter. The growth was primarily driven by Mobile, but we also saw good growth in the PC area. At the same time, sales in the Payment and Access areas came in weak this quarter. As margins are higher in these areas, this affected our gross margin negatively, as did continued intensive price pressure in the Mobile product group. However, our view of the demand trend in Payment and Access going forward remains positive.
During the quarter, we announced that we have received our largest order to-date from an Access customer outside Asia, valued above $1 million. This order illustrates the positive development we see in this market. At the same time, revenue development in both Access and Payments tends to be more uneven and sensitive to economic fluctuations since these industries are fragmented and more immature in terms of the use of biometric solutions.
We reduced inventory at a faster pace during the second quarter with a positive effect on our cash flow. Our inventory amounted to SEK203 million at the end of June, which represents a 26% decrease, compared to last quarter. We expect to come down to more normal levels in the fourth quarter, but it may take a bit longer for the entire industry as some of our competitors still hold too much inventory. This means we expect continued price pressure in the Mobile segment for at least another couple of quarters.
Please turn to the next slide. This chart shows the weaker development of our order stock since the beginning of the first quarter. Our order stock continued to improve during the second quarter from very low levels at the beginning of this year. Since the end of Q1, order stock is up by around 20%. This means that we will continue decreasing our inventory with a positive impact on cash flow.
Next slide, please. Looking at the sales development since last quarter in the product groups outside of Mobile, we saw growth in PC, while revenue and Access came in almost 50% lower than in Q1. While we are disappointed in the Q2 result, our positive view of the demand trend in Access going forward has not changed, and it remains positive. If we consider the Payment area, revenue declined somewhat since Q1, but we saw Payment revenue increase threefold since Q2 last year. So far, we have delivered over 1 million T-Shape modules for biometric payment cards, which reflects the strength of our position in this market. And it means that we are well positioned for future biometric card launches. Our view of the long-term potential of biometric card remains positive.
Let's turn to the next slide. In the Mobile area, we reported good growth versus last year, and in particular, compared to Q1, sales more than doubled from Q1 to Q2, while we increased revenue by 9%, compared to the same period last year. We have managed to defend our market share in Mobile. Our fingerprint sensors have so far been integrated into over 700 Mobile phone models. This figure includes, among others, the Google Pixel Fold and the first Mobile phone, the Xiaomi Redmi K60 launched with our optical under display solution.
The activity level is high in the under display area, and we are currently running several projects together with our largest customers. Our entry into the under display segment entails a significant expansion of our addressable market. And our goal is to take a significant share, while also continuing to be a world-leading player in capacitive sensors.
In the short-term, however, we continue to face tough price competition as inventory levels with us and other sensor suppliers are still too high. We expect to come down to more normal levels in the fourth quarter, but it may take a little longer for the entire industry to reach balance. At the same time, we note that the number of suppliers participating in large procurements has decreased recently, which may be a sign of increased consolidation in the industry.
Next slide, please. I would also like to give you some more flavor on how we view the current situation and the outlook in each of our product groups. If we start with the largest one, Mobile, current market conditions are tough, due to high inventories built up during a time when input costs were significantly higher. Fingerprints and our competitors have been focusing on decreasing the inventory to release cash. This has led to intense price pressure. We expect this to ease once inventory levels are back to normal. We see a positive demand trend, and we are well positioned to gain market share as there are signs of market consolidation, as I just mentioned earlier.
If we look at our input costs, we have seen a significant decrease. The products that we buy from our suppliers today are priced at a completely different level. So when the share of sensors we sell at these lower input costs gradually increases, we will see a positive effect on margins, especially also since we expect the price pressure on our market to decrease over time.
Now let's turn to the next slide. In the PC area, we are continuing to grow at a healthy pace. In this industry, it usually takes a bit longer to win business and grow together with customers. The ramp-up in volumes is gradual and subject to a process whereby different suppliers, such as us are ranked.
On the other hand, the business is usually more stable and allows better margin levels than the mobile industry. We are well positioned to continue growing, not least thanks to the fact that we will soon be able to offer our customers a complete biometric system consisting of an MCU and a fingerprint sensor. This is something that PCOMs are increasingly demanding from their suppliers. We expect average selling prices for such a system to reach around 5 times the price we see in Mobile. Even though our global piece demand has been subdued after the pandemic, we see good growth as the penetration of fingerprint sensors continue to rise, and we are gaining market share in this area.
Next slide, please. In the Payment area, we have seen increasing investments in the ecosystem, getting ready to support large-scale rollouts. As we have talked about, we have agreements with several large suppliers to the car producers, co-developing solutions that will reduce the cost for biometric cards and make them easy to manufacture using existing production equipment.
At the same time, commercial rollouts have been slower than we and many others expected. We expect demand to increase, and we have a very strong offering, having sold more than 1 million of our T-Shape modules for biometric payment cards. And we will, of course, make sure that we defend this position going forward.
Our Access area has historically been dependent on biometric door locks mostly in Asia. However, we are now seeing a significant increase in the adaptation of biometric access systems in Europe and in the U.S. as evidenced by our first $1 million plus order from an Access customer outside Asia. We have secured projects with several leading companies active in various industries that we will talk more about in the coming quarters.
Next slide, please. The diversification of revenue streams to areas outside of Mobile is a key pillar of our growth strategy. And as you know, PC has emerged as a very interesting growth area with higher margins in addition to Access and Payment. When it comes to broadening our business to generate profitable growth and control our risk, we are stepping up our efforts by establishing a new unit called New Business under the leadership of Thomas Rex. This unit is responsible for developing new businesses and driving revenue growth with a particular focus on new partners, M&A, automotive and monetizing IP.
In terms of new partners, we will explore opportunities to expand into adjacent markets by entering into agreements with technology companies that can benefit from our technical expertise and sales channels in their go-to-market strategy. We have ongoing discussions with several high potential partners, for example, in the field of human sensors. In case where we see the potential for realizing major synergies with a partner company, we may evaluate carrying out smaller acquisitions to complement our portfolio.
Forthcoming legal requirements in automotive industry for driver monitoring system, also known as DMS, using infrared cameras to detect the status of the driver creates a strong case for integrating iris recognition technology in cars. The same infrared camera that is used in the DMS can be used by our iris authentication software without adding any additional hardware. We see an increasing interest from automotive companies in the benefits of biometrics. For example, in authenticating in-car payment system transactions and enabling other advanced features such as driver personalization and preventing the vehicle from starting unless the driver has been successfully authenticated.
And finally, we see an increased potential for monetizing our intellectual property rights, and we are working with leading patent law firms on this topic. We have around 600 registered patents in different areas.
Next slide, please. On July 16, we announced that Fingerprint Cards in a challenging financing market has secured new financing through convertible loans and a fully guaranteed rights issue. The funding and repayment of our outstanding bond loan improves the company's balance sheet and financial position, which improves our ability to execute on our growth plans. As the company now proactively choose to carry out an early redemption of the bond loan, the loan's restrictive covenants will no longer apply. This will enable increased investments in the higher-margin growth segments.
This transaction will also allow us to significantly lower our interest cost to a fixed rate of 6% per annum. It is up to the company to choose whether we paid the installments in cash at 100% of the applicable installment amount or in B shares at 90% of the market price. The final terms of the rights issue will be determined by the Board of Directors no later than August 16, provided that the rights issue is approved by the AGM timed for August 18, the record date is expected to be August 24, and the subscription period is expected to run between August 28 and September 11.
And with that, let me hand over to our CFO, Per Sundqvist.
Thank you, Ted, and good morning, everyone.
So let's now move over to the first slide in the financial results section. As mentioned earlier, our revenue increased by 74%, compared to Q1, which was primarily driven by higher volumes in the Mobile segment, where we also continued to face intense price pressure.
At the same time, revenue in our Access area came in weaker, which also put an additional pressure on the gross margins, given that the average selling price is higher in those segments than in the Mobile segment, which Ted also pointed out earlier and also something we have described in previous reports.
Sales development can be lumpy in the Access area and the timing is unpredictable. However, our view of the positive trend in this area is unchanged, and we also see positive revenue development in the PC area.
Next slide, please. This rolling 12-month trend shows the impact on our revenue and margins of the demand drop due to the Chinese COVID-related lockdowns last year. The decline in 12-months revenue trend did not reverse this quarter, but it did stabilize somewhat. And we expect to see a gradual upturn towards the historical demand for mobile phones, as well as gradual medium to long-term growth patterns in the PC Access and Payment segments, which, of course, will have positive effects on the margins to follow.
However, in the short-term, we are seeing continued price pressure in the Mobile segment as sensor suppliers' inventories are still too high, and we're still holding in our inventory products that come from that time line. And since we use reported higher prices during that period and that was characterized by component shortages. Current market prices for silicon wafers are now significantly lower, however. Again, as Ted mentioned, we are focusing hard on diversifying our revenue streams in order to generate better profitability and also to lower our risk and exposure to the Mobile segment.
Next slide, please. Operating expenses, including capitalized R&D expenses in Q2 were SEK115 million versus SEK107 million in Q2 last year and SEK113 million last quarter. Development costs of SEK12.5 million were capitalized during the quarter, which is to be compared with SEK23.4 million in the same period last year. This corresponds to 33% of total development costs, compared to 41% in the same quarter in 2022.
We have implemented and are ongoing working on several measures to reduce our total cost and expenses, mainly by staff reductions. Since Q2 last year, we have reduced employees and consultants by 62 people or about 20% of the current total staff. At the same time, we have had one-off costs connected to restructuring and corporate projects such as, for example, the bond refinancing that could be considered as one-off costs.
On an annual basis, in 2023, our operational OpEx will have decreased according to our plan, and we are also continuously working to further maintaining and developing a strong and stable R&D, well in line with our customers' promises. As usual, we will keep maintaining a strong focus on cash flow, cost, and efficiency improvements as we move forward.
Next slide, please. Our core working capital, that is accounts receivables plus inventory less accounts payable, was SEK226 million at the end of the quarter to be, compared with SEK251 million in the same quarter last year and the SEK320 million last quarter. If we look at the development of core working capital in relation to our rolling 12-months revenue, it increased to 35% from 20% in Q2 last year but decreased from 47% last quarter, significant improvement quarter-to-quarter.
Whilst the above percentages increased versus last year, relatively speaking, we actually decreased our absolute inventory by over SEK70 million or 26% versus the end of last quarter. Despite the improvement, we still judge our inventory to be too high and are focusing hard on making further reductions in the quarters to come to further improve and stabilize our cash position further.
Next slide, please. Our cash flow from operating activities in the quarter was positive SEK52 million. The positive cash flow was mainly attributable to the reduction in working capital, primarily to the continued improvement of our inventory situation. This means that our cash position at the end of the quarter was at SEK252 million versus SEK213 million last year and SEK211 million at the end of Q1 2023.
Thank you. And with that, back to Ted for closing remarks and questions.
Yes, let's maybe first get into some questions, if there are any questions.
Thank you. [Operator Instructions] And your first question comes from the line of Markus Almerud from Penser Bank. Please go ahead.
Hi, gentlemen. Markus here at Penser Bank. I got a couple of questions. Maybe the first one is, if you could describe a little bit where we are now in the value chain on the Mobile side in China. So how has it moved in the recent quarter? And maybe tied into that describe a little bit on what you're seeing on the demand side for mobile phones in China.
Okay. Thanks for the question, Markus. I think the whole second quarter was running at stable phase in Mobile. We kept getting orders every day during the whole quarter. So they have been coming in at a regular pace. And we have managed to defend our market share. So as you can see in the graph that I showed, we actually have a net increase in the order book during the second quarter, despite that we grow so much in revenue. So we are happy to see that the demand is there and the demand is -- of course, everything is relative, right? But it appears to be stable now. We have been running getting orders, as I said, on a daily basis throughout the second quarter.
We also see that we are decreasing our inventory. I think this is one of the strengths of the second quarter is how much of the inventory we released, which then generated a positive cash flow, compared to the negative we had in the first quarter. So now we are in a stage where we will -- in the third quarter, we will still, to a large extent, be shipping inventory, but the rate or the percentage of new silicon, new products that is being entered or going out to customers is going to increase. And with the current prediction that we see now, we see that in Q4, we will be mainly relying on new products that we have acquired with a significantly lower input price, compared to the inventory. So that will, of course, have a positive effect on the gross margin.
And when you look at the mobile phone market at large, I mean, it is a very challenging situation. We are a major supplier to most of the global top 10 OEMs in the mobile phone segment. So there are some key players that are doing quite okay. There are some players that are struggling. But because of our strong overall position in this industry, I believe that we will continue to see a good demand also for the second half of this year.
And if you maybe talk a little bit about end user demand, because there's a lot of press about, for instance, high -- there's quite a high unemployment rate, for instance, among young people in China, et cetera. So what is the kind of mood over there? And what are you hearing? And how is the end consumer acting?
Yes. Actually, if you read the latest report from CAICT, which is the government body that is monitoring the mobile phone sales in China. There was a significant increase in selling phones for the second quarter. But of course, you are right that in general, there are -- as in most of the places around the world, there are concerns about the financial status. The unemployment rate, at least in the major cities, I saw is actually going down compared to the peak we saw last year after the lockdowns, but it's still at a relatively high level compared to historical levels. So definitely, there are still challenges in the economy, also in China.
I think that my view is that people's perception has been turning more and more positive after lockdowns. There are more and more policies focusing on economic growth rather than on curbing COVID and managing that, so to say. So I believe that we will see the market coming back in Asia faster than probably other parts of the world. But yes, it is still not -- how to say. It's maybe still not as good as we hope it would be. But I believe there is a positive momentum coming here also in China for the market.
And then on Access. Can you elaborate a little bit on what was behind the sharp fall in sales in the quarter? And I know you mentioned that sales are lumpy and it's I mean, this could be difficult to predict, but still numbers and growth rates are pretty big. So can you give us a little bit of color on that, please?
Yes. I think you need to divide the Access into two parts. Let's first look at the part, which is outside China. And that part is actually growing even with the lower number we reported in the second quarter, compared to last year. However, we are disappointed that it didn't grow faster. We have been working hard last year and the first half of this year to increase the pipeline. We have many projects that we are very excited about for Access applications outside Asia. And we can see that some of them have been delayed, partly due to the financial situation.
And also, when a new customer started to use biometrics, of course, the predictability of that business is lower than when you have a business that has been running for some time. But still, we were hoping that we would see a better growth in the second quarter outside China. But I'm very positive about the outlook for Access outside China. We have a strong pipeline, and we will be able to announce more projects, more customers in the coming quarters.
If you look at China specifically, there are a couple of things here. I would say that a big part of the revenue drop is the fact that there has been a shift in sensor generation when it comes to the main door lock customers in China. So last year, we were still selling large sensors to the main customers in China. So large silicon with a high ASP. And also, we did a good job in increasing the ASPs when we were in the supply-limited situation. And after the lockdowns, customers are now using a more powerful MCU system in general, which allows to have a smaller sensor. So the physical size is smaller, which means that the cost structure is significantly lower.
And then in addition to that, you have the inventory situation that is also adding up to drive down the price and increase the cost pressure. And then the final part is that people also in the door lock market in China, were building inventories because of the supply constraints that we had and still, it took quite some time before construction works resumed and there was a lot of market that was lost last year in the door lock market.
So looking at the major brands in China, I don't think we have lost market share with our main customers in China when it comes to the door locks, but they are still chewing off, to a large extent, all the inventories and to a higher extent, they are then also using smaller sensors this year where there is a higher price pressure.
Having said that, we are working hard in Access also in China to climb the value chain to go into selling biometric systems, which will not only consist of the fingerprint sensor silicon, but it will also entail the package. It will include MCU, and it will be a complete biometric solution, very similar to what we are now promoting and selling in the PC area. So I believe that you will see a nice strong growth also in the Access business in China going forward.
And I assume at the moment, I would assume that most of the sensors go into the construction industry in China is newbuild. Newbuild market, as everyone knows, is not doing too well? Is that correct?
Yes. I think now at least it has resumed, it was totally stopped, right, for quite some time, but now it's resuming. And we see that the door lock customers are picking up goods from warehouses. They are producing. So the channel is moving again. But it took quite some time before it got going after the lockdowns.
Okay, excellent. And then my final question is on the inventories. I mean, now we're down to around the SEK200 million that has been mentioned as, kind of, a number where we were before the pressure in the value chain and the mobile phone collapse on the back of COVID. But you're also talking about drawing down the inventories further. How much further do you think you can? What's kind of a normalized level that we should expect?
It depends a bit on the product mix, of course. I mean, if we have more active products, we need a larger inventory. We see now that many of our mobile phone OEMs are focusing many models and also different tiers on one fingerprint sensors to simplify their supply chain. I think that will allow us to run with a lower inventory level compared to what we have been used to.
So I think that we are shooting for removing roughly half of the remaining inventory in value. But of course, it depends on exactly what the product mix will be with the customers. But I think there is a significant part that can still be sold off, and we will be able to run with a lower inventory level now than what we did a couple of years ago. That's possible.
Perfect. Excellent. Thank you very much. That’s all for me for now.
Thank you.
Thank you. [Operator Instructions] I will now hand the call back to Stefan for web questions.
Yes. Thank you, Sharon. Let's take a few questions from the web. First, on our OpEx. Can we expect to see further effects on the OpEx during Q3 and Q4?
Do you want to answer, Per or?
Yes. Yes, I can take that one, if you like. Yes, the answer to that one is that on an annual basis for 2023, we anticipate that our operational OpEx would have decreased according to our plan. And of course, we're continuously working even further to streamline the operations to a higher level going forward, as well to improve profitability and, of course, cash generation. We are on an ongoing basis running various savings programs internally. That's where we are.
Okay. Thank you. And what is your view on average selling prices in Mobile? Will it be possible for you to raise prices?
Let me say like this. Fingerprint sensors are extremely successful in mobile phones. Roughly 90% of all smartphones today comes with a fingerprint sensor, optical or capacitive. And I don't think that, that is going to change in the next several years. And we are not the first component that is facing a situation where there are many, many suppliers or too many suppliers. And I'm sure that the lockdowns and the lack of demand that we saw last year is triggering the consolidation, which needs to happen, which should happen in this industry.
And once you are through that consolidation, just like other components that went through this consolidation phase, the players that are delivering high quality that have strong customer relationships that are taking a more long-term view on the business and customer relationships, they will survive the consolidation phase, and they will be able to make decent margins when we come out of this consolidation phase.
So I'm very positive that the margins will go back to more normal levels once the consolidation phase has happened. Of course, very few are willing to give up until their inventory is depleted. So we will have to see exactly when the inventories are depleted. As I said in the presentation, we do see now that when there are procurement biddings or RFQs, the fewer players are actually invited now to some of these procurement rounds, which is a strong sign that the consolidation start to happen.
Some guys are basically fading out now. So once this has gone through, and once again, I'm sure that we will get back to having more normal margins, there will be a better balance between the purchasing price of silicon and the selling price of our biometric solutions. And that probably means that the prices in sense will increase at that point in time.
All right. Thanks very much. And on iris and with a focus on automotive, can you comment on any progress in this area?
Yes. We try to talk a bit about that as well in the presentation. I think it's very exciting to see now that the driver monitoring system that is becoming legal requirement, both in North America and the European Union, and that will consist of an infrared camera that will monitor the driver's awareness and sleepiness and so on. And with the recent improvements in our iris development, we are very confident that we can use the same hardware set up to add the iris authentication, which means that you could add authentication with an extremely high security level without adding any hardware.
And this kind of camera needs to be in the car because of the DMS requirement. So we are very excited about this opportunity, and we see strong interest from the automotive industry. And I'm sure we will get back relatively soon about updates how this is progressing. But it's very interesting time now for iris definitely in the automotive industry.
Okay. Thank you. And let me now hand over to Ted for any closing remarks.
Okay. Thank you, everyone, for your attendance and your interest and questions. And we will release the Q3 report on October 19. So with that, I thank everyone, and bye for now.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.