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Hi and welcome to Penser Bank in our interview with Fingerprint's regarding their Q3 Results that were published this morning. My name is Markus Almerud Android. I'm an analyst here at the bank, and I have Christian Fredrikson, who's CEO at Fingerprint's with me. Christian.
Markus. Thank you. I'm glad you hear.
Yes. Thank you for coming and talk to us. Let's start with the mobile phone market. It was a very dramatic report. The numbers are quite big, and the falls are dramatic. So let's try to dig into it a bit and go through the details of it and try to figure out what's going on and where we are. So if we start with -- I think the best way to do it is to go through the value chain in steps. And let's start with the consumer. So -- where is consumption at the moment? What are consumers doing? And in terms of lockdowns, mobility figures show that Q2 was the trough in terms of lockdowns. So people are now moving again. So what do you see on the consumer market and consumption, in general? I can see the focus on mobile phones, of course.
Yes. Yes. Okay. So on the market in terms of mobile phones, we see roughly as with the analysts, anything around or just below 10% decline globally from last year in the mobile phone market. And that's the global situation. But of course, because of the lockdown, which was very dramatic, as we all know, in Q2 in China and because they continue with the COVID, and they call it now the dynamic 0. It's not 0 COVID, but it's a dynamic 0 COVID policy. In China, you probably see about a 20% drop from last year in terms of the mobile phone. And of course, it's been hit pretty hard in terms of Q2 then. So it has rebounded. The lockdowns are not of the same magnitude at all as it was in Q2, but they are still very strong. They have still strong lockdowns in China and anything from 100 million to 200 million people seem to be at any given time in a lockdown. So, shorter lockdowns and it goes back and forth, but not the kind of full lockdown for 3 months as it was in Q2 really. So the biggest hit is, of course, in China and our Chinese customer base and where we are, of course, so exposed in the China market.
So basically, in terms of volumes, we are above in terms of shipments of mobile phones compared to Q2, that is to the end consumer, but we're still significantly below where we were before?
Yes, exactly. And you can see the overall year is probably minus 20% in that ballpark for the China roughly, right? We will -- that we see, which is our -- it's, of course, a dramatic drop overall with -- see any mobile phone industry as before, but still -- I mean, but it's a bigger, but it's not 50% and so, of which it was at the worst in Q2.
Okay. Okay. Because then we have the inventory effect that will come to that in a second or step by step. But if we move down the value chain then and talk about the OEMs, where are the OEMs? So is the destocking that they have gone through? Is it done? And are they hence ordering from distributors again? And that is, are there orders matching real demand now? Are we at that stage?
Yes, I think the OEMs are now there, right? So they've been declaring. And because of the supply challenges that we went -- had before, right, before the COVID lockdown, the whole world has been in terms of chips and supply, we will have been supply limited for 2.5 years, right? So basically, I think they and many parts of the ecosystem had overbuilt inventory whereever they could, right. So we had -- we went in 24 hours from a supply limited to a demand limited situation. And now they have depleted there to normal levels and actually they have gone and or continue to go below normal levels in. So there's an extra cautious is that is there. So the inventories are depleted more than what you would deplete even looking at the volumes. So yes, now, of course, they are -- and the orders have started to come again through the chain now because it is getting pretty empty in the inventory, if I look at that way.
And if I look at distributors and module houses as kind of the next step in the value chain, if I understand things right, they have just started to emptying their inventories. So I assume that, that means that they have then -- they also they're not buying anything from you basically? It's basically 0?
It's not 0, but it's been very low and Q3, well, of course, was a dramatic effect, as you can see in our numbers, it was a very tough quarter for us. And at the same time, we have been building inventory through Q2 and Q3 because we have ordered equipment 6 months ahead. So even if we stopped ordering in early April, it still comes in for 6 months for us. And you can see that for our part. But yes, I think the distributors and the module houses have been depleting their inventory in Q3, and they continue depleting that in Q4. But we have already now orders happening for us. And you can see that some of it, of course, happened for us in Q3 as well. So -- and we will start to deplete our inventory and have started deplete them now in Q4. So now our inventories are going down.
So the reason basically for Q2 being so much higher than Q3, despite the market in -- I mean, standing more or less still, is the lag effect that you're talking about that the different parts of the value chain didn't pull the brakes until maybe later when they saw all was happening, and then there is a lag effect because there are still orders in the system. And that's why we're hit so hard now. Is that the right conclusion?
Exactly. That's correct. And that's how this -- and I suppose it's the first time the whole ecosystem has been hit like this. I have never seen this before of this magnitude. And of course, so much on the Chinese ecosystem where we are, of course, so exposed. So this really hit and very hard in that ecosystem, and it's across all of our players. And we are probably the one with the least of inventory buildup, if I look at all our competitors and everybody. So -- if I look the percentage wise, clearly the one with least inventory, and we have already tied in SEK 200 million -- around SEK 200 million of excess capacity in our inventory. So of course, from our part, we are buying very little now in Q4, but we are now depleting all inventory. So of course, from a cash flow, it turns the other way around.
And I guess this means also that if -- I mean when you start, the only way for you to deplete your inventory is for the distributors and module houses starting to buy from you, so that they are able to -- I mean that you started to deplete your inventories now, mean that they are buying more than before. Is that, again, the right conclusion?
Exactly. So now that purchase orders from our point of view are moving again. And what we have done during this one is, of course, what you do is you stop buying immediately, which we did very earlier on actually earlier April already. And just a few days in, we realized that this could get pretty bad, but not even we realized how big the lockdown would be, right, and how it still continues, even if it is a smaller way. And then the 2 other things we have done is continued to be very fast and moving and keeping our market share and improving our market share in mobile. So that when it moves, we are in a good position and that we have maintained and improved on. And then some continue hard on the diversification into the new areas, right, due to limit exposure, of course, this has kind of shown clearly our exposure to the Chinese market and the mobile market.
So it's -- so if I read you right, and if I put all that together, it's still -- it seems like -- I mean, you had a big hit now in Q3. I mean, Q2 was really bad, and then you had -- or Q2 was bad and then you had even worse numbers in Q3. But now that they're starting to buy again, does that -- that it sounds like Q3 was the worst quarter, and then it should start to look better from now on?
Yes. We don't give any guidance now because there is so much uncertainty, right, but they should -- of course, I do believe that the worst is over for us in this whole depletion and the inventory buildup, yes, and then we can work out from here. I think that there's still a few couple of tough quarters when it comes to this -- all of this to kind of find the balance against in the system. And then, of course, we have to continue to improve our market share and build on a new diversifying areas, yes. So that's how we can build for us. And I think that if we have assumed, if I look at the assumptions, we assume that the dynamic 0 COVID policy will continue in China. We have assumed that for next year as well. So it's kind of positive if that will open up in some ways, but we don't assume a full lockdown like in Q2 and either here, right? So it's a bit -- it depends on what they do in China. Nobody really knows or at least we don't know here in the Western world, I assume, right?
Yes.
But we assume now that this dynamic 0 COVID policy continues where they are going into lockdowns. They are faster and they keep on testing and putting people in phasing and putting them in lockdown if there is some spreads.
But is it fair to say that -- I know you don't give details about this? So it's just a general question. But I mean, if I try to get a sense of how much -- what sales in this segment was in the quarter, it's quite a low share of the total sales, meaning that even if it would fall sequentially, the effect would not be as dramatic because it's quite a small part, isolated in this quarter?
Yes. And of course, there was and also some mobile sales, right, that we have got that going and so. But I think the big -- the good thing is for us is that we are getting all the 3 new links for us are coming in, right? And so that gives us -- even if mobile capacity with everything going on is not bouncing back to the same it was last year, for example, but we still have new businesses coming in, right? So that helps us a lot actually when we go forward here.
Okay. Okay. Moving on to PC. I'll talk a little bit about that. So there's one of the bright spots, it's growing. And you also published updated figures in the presentation. Indicating a penetration of 26% this year, going to around 33% to 34% in 2025. And that might be a bit slower than some people would expect. So if I dig into this a little bit, do you also expect market share gains here? That is, if I put the question a bit different, how much of this 26% is the kind of advanced sensors that you're in or will be the way that the split within the 26% also change, so to speak.
I think that, yes, you are right, it's growth from 26% to about 33% the biometric penetration rate within PC. And the biometric market is growing within the PC market despite the BC market, we expect around a 15% decline in the PC market versus last year. And so the PC market overall is declining. But still, the biometric market is growing, and we expect to continue to win market share and grow within that biometric market right from our numbers, right? So for us, this is a growth area, clearly because of that, right? So penetration rate growth and of course, our market share grows within that, we have gotten now out of 4 out of the 6 main PC manufacturers in the world are -- now our customers, right? And when it comes to the different products in that area, we have really had the Match-on-Host, which is about half of the market. Now we have just launched as well of the Match-on-Chip with the first PC from us, which is the other half of the market, the kind of high end the enterprise market. So now we have actually a full portfolio for the whole biometric market and PC market as well going forward in the next year.
Yes. And the figures that you have in your presentation, which talks about 26% penetration now going to over 30% in 2025. That's the whole market? Or is it just the consumer market?
That's the whole market, yes.
That's the whole market. Yes. Okay. Let's move down the P&L little bit. Let's talk about the growth in margins. So they were also down sharply on the back of the lower sales. So it's difficult to me. You have a cost base that is fixed. So it's difficult to -- I mean it's difficult that it doesn't, you don't get this kind of movement when sales fall the way it did this quarter. But can you elaborate a little bit on the drivers behind the gross margin fall?
Yes. I think it's -- one is, of course, just a big drop in sales. So then we have fixed costs. And even if we have cut costs, which is coming into effect in Q4, that cost was still there in Q3. And on top of that, we have project amortizations that we are doing, or depreciations that we are doing in every quarter. And that demand is also fixed, right? So if you look at that, you probably have just because of the depreciations of our old R&D projects, which are going as a fixed cost, it's probably about 10 percentage points, single-handle drop because of that because of the -- because of basically the volume drop. So the volume drop really -- it shows that we are very scalable business when it goes -- when we are a little bit higher versus sales volumes. But when you go to these kind of volumes, which was very tough for us, a tough quarter, then you can see how it hits the gross margin, and it gives a bit skewing actually from that perspective. So there is almost -- but just because of that the 10 percentage point growth because of the fixed cost hitting the numbers in a different way, and that affects the gross margin rate. It's, of course, a correct gross margin, the 12%. But of course, with this sales volume, it just hits you hard.
And that's one. And then the other thing is, of course, that we had a lot of -- we have had a lot of Access business that was built, especially now in the Chinese market, the Access business has been based on a lot of the door lock business, which is, for us, the construction business in China, and that has -- obviously, with the lockdown, the construction business is not doing well in China at all. And on top of that, even in many of the houses and where it is. So that it takes a little while now to get the door lock market going as well because people are not -- they're afraid to take people to their home and put the door locks into place, right? So people are so worried about the spread of the virus that there is an extra cautiousness in how they -- so they have to build new processes and ways of doing it, right? So that's why it's a bit tough as well for a while.
So it's not just the construction market per se. It is also the COVID effect and lockdown effect that you don't want people around in your house. It's a combination of those.
Exactly. And that's kind of a natural kind of fear of being cautious or having any unknown people around or even it is tough for you. And they are, of course, they are fixing this in terms of processes, how do you do it and how you protect everybody in that so that nobody has that fear. But of course, it also takes a while to fix those. I think that impacted the Access business quite strongly focus in the China market, which has been the biggest portion of the Access business. The rest of the world Access business is growing for us quite well actually, and that continues to happen. There is, of course, this impacts not seen in the Access business in the rest of the world.
Yes, yes. And now we haven't touched -- oh, before I ask that, so the -- there's also an element, you mentioned price erosion, which is natural where we are in the market we are. And I know that you don't -- you don't usually talk about levels and such. But can you give us some color on the price erosion in terms of levels or magnitude or anything that we can...
I think there is -- now we don't really want to give that, but there is, of course, a substantial win. There is a lot of excess inventory and people have bought it with -- and at the same time, the old supply chain is going to a situation where there's demand limited. So prices fall all the way into the chip side, right, which is the first time in almost 3 years when it's affecting also the chip, the wafer industry, right? And that means that basically, what you have bought in, in this whole chain is more expensive than what you can buy in now. So of course, it leads to a fact that everybody just wants that is what happens traditionally, and this is, of course, unseen the effects here now. So basically people are just cleaning inventory to get the older stuff that they have bought to get them out. So then, of course, there is a little bit of -- or not a little bit, but clearly more aggressive price movements there for -- until you clean the inventory, and you get all the new equipment going again. And I think that's kind of market economy in the way it works just right.
And then when we're out of this, will we then -- should we expect to be stay at this level? Or is it possible that it will bounce back? Or do we have to wait for new versions to come out to kind of stabilize the price level again? Or how should we think about that?
I think all the new areas for us where we are diversifying outside of mobile, this has not -- it's not at all the same impact in those areas, right, because there's not this inventory buildup in the same way at all. But in the mobile, we are, of course, coming into optical as well. I think in the mobile, we will have tougher quarters in Q4 and Q1 as well as still in the mobile when it comes to for us everybody around us empty their inventories. And I think that, of course, then the gross margins will start to improve and with new products and new -- also new supply coming in cheaper, you will actually be able to do that. And then over time, it's going to get much better gain. And I think also this is a bit of a dropout gain. That's what we have gone in, and we have gained market share in this one because, of course, there will be players dropping out as well during this process.
And then finally, maybe on the inventory levels because inventories are quite high and is part of the reason why you do a capital raise as well. So you talked about SEK 200 million of extra inventory. And it's basically the levels that we've seen that come up from, I think, SEK 160 million to SEK 170 million to over SEK 400 million from the end of last year. And you're starting to deplete those inventories now. How long do you think it will take to normalize? Are we talking 2 quarters, 4 quarters, 6 quarters?
It's not 4 quarters and 6 quarters, but it's 2-plus, maybe something like that. Q4 and Q1 and then a little bit maybe more than that. It depends a bit on the product mix as well. And I think that the -- at the same -- because at the same time, we are building inventory in the new growth areas where we are diversifying, right? So we need to do that as well. I think something in the excess of SEK 200 million is a normal. SEK 200 million is a little bit over that. This would be a normal inventory situation for us, right, and now we're over SEK 400 million. So clearly, that needs to come down to half of its, right.
And then on this, of course, led to why -- we had SEK 70 million in cash at the end of the quarter. And we had put SEK 200 million in excess capacity, right, which we need to now deplete. That's where, of course, you see the reason for all the order going to the financing market right here, which I'm very pleased that got such a strong response actually and always subscribe -- oversubscribe 2.5x actually. So I think that's a great sign confidence as well in this one.
And you said, right, that we should get to hear more about the terms, et cetera, at the end of the month just before the extra AGM?
Exactly. The Board will communicate about that one, of course. And I think the data was 31st of October is the plan the Board will come on.
Okay. Okay. All right. And now we haven't touched upon Payments at all, but it seems to be going according to plan. 2 new, you were talking about 2 new launches in Q4, or at least we should be at 12 at the end of the year. So it seems to be progressing in line with the plan?
Yes. Banking now is the first year where it's progressing according to the plan, I would say. I mean it's still low volumes from our perspective, but it is in the hundreds of thousands, rights and cards going out there, and we're going to be at 12 banks launched, and we see a lot of activity and interest now with banks in more in Middle East, in Africa, in Latin America, outside of Mexico, where we have launched, and then also in Europe now, and specifically also in France actually saw the effect is coming. So I think that, that is clearly moving now, so more banks coming. Of course, we need to get to a place where it is not an opt-in and where there's 2 things scale opt-in, where you have to choose as a consumer, do you want it, which means you have to know about it, and you have to go. And then the second point is that you have to go to the branch in most of the cases to banking branch to enroll. So we clearly need to get to home enrollment and not a opt-in, but rather that you get the card with a biometric sensor, right? And we see the first banks now specifically launching it in that way.
All right. Well, if I try to sum up a little bit. So it seems -- I mean, it was an extremely tough quarter, and there should be -- we should expect a couple of more difficult quarters ahead. But that said, this should have been, I mean, all else equal, that this should have been the trough in the most difficult quarter, and it should start to look at -- at least a little bit better progressively going forward. And that should also help the gross margins a bit and then you started to deplete the inventories now, so we should see a bit of a positive cash flow effect. But then over the next 6 to 9 months, we should see normalization of working capital basically?
Exactly. And of course, we will now -- our focus is, of course, not only depleting inventory, but one, we are going to continue to gain market share in the mobile. And then second, we're going to strong out now, diversely even in the new areas where we have built in a great channel, both in PC, in the Access also outside of China, actually, which is growing. And then, of course, Payment area. And that is actually what we're going to drive now.
Perfect. Thank you very much for coming here and talking to us.
Thank you very much, Markus, and thanks and great to be here.
Thanks. Bye.
Bye.