Fingerprint Cards AB
STO:FING B
Fingerprint Cards AB
STO:FING B
Price:
0.4666 SEK
-1.19%
Market Closed
Updated:
May 3, 2024
Section:
Earnings Call Analysis
Summary
Q4-2023
Q4-2023
Company Shows Progress Amidst Transformation
The company reports a 10% constant currency revenue growth, signals a full execution of its transformation plan, and reveals a stronger focus on high-margin areas like the PC segment, where it recently launched a complete biometric system. Inventory has reached acceptable levels, with a significant reduction compared to prior periods. The gross margin remains flat, yet stabilized, implying a halt in negative trends primarily in the mobile sector. Investments are channeled away from the mobile sensor hardware towards more profitable ventures like PC solutions, access projects, iris authentication technology, augmented and virtual reality, and potential forays into behavioral analytics.
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Good day, and thank you for standing by. Welcome to the Q4 2023 results webcast and 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, and good morning, everyone, and welcome to Fingerprint Cards' earnings call following the release of our fourth quarter report this morning. So we'll start off with a presentation by our CEO, Adam Philpott; and thereafter by our CFO, Per Sundqvist. And if you're following this call on the web, you can post questions throughout the call.And with that, let me now hand over to our CEO, Adam Philpott.
Thank you, Stefan. Good morning, everyone. Welcome to the call. Let's move to the first slide if we can. As always, I'm going to kick off with a brief summary of highlights and then we're going to go into a bit more detail before I then hand over to our CFO, Per.So firstly, we moved into full execution of our transformation plan during Q4. We announced it in the last earnings. That plan includes cost optimization, profitability, organizational changes and strategy evolution. And we began to see initial signs of the transformational impact in Q4.We saw a modest gross margin improvement compared to the corresponding quarter last year, and we fully expect to see improved profitability going forward as we focus our capital and investments outside of the mobile sensor business, diversifying to higher-margin existing lines of business, along with new diversification areas as well. So great we're starting to see that impact turning that corner.It's also encouraging that we're reporting 10% constant currency revenue growth, both on a year-on-year and a sequential basis. This was driven by increased volumes in mobile, PC and our access business outside of China. Let me especially, though, highlight the strong performance in the PC area where sales were up by 2/3 compared to the same period last year.The outlook on the largely China-centric biometric sensor market for smartphones shows no signs of improving. There's a significant geopolitical uncertainty in that region, of course, also. And so our key priority is to return to profitability. And therefore, we're going to be focusing on capital outside of mobile sensor hardware on those higher-margin lines of business I mentioned.Traditionally, Fingerprint has been primarily focused on selling biometric sensors. So it's not really addressed a significant portion of value more broadly in the biometrics industry, which is related to the development of system-level products. Selectively expanding the scope of our solutions to capture a bigger portion of value in the industry is a really important part of our diversification strategy. So I'm going to come back on what we're doing there with our newly launched PC system, which I believe really illustrates that transformation plan around diversified. We'll talk about that in a little while.Let's go to the next slide, Stefan, if we can, please. I'm happy about the revenue, as I mentioned a minute ago, we delivered for our mobile and PC product groups as well in the access business outside of Asia. Revenue increased by 10% on a constant currency basis. Even though sales in our payment in our Asian access business decreased, access in South Asia, primarily biometric sensor market for door locks, those were impacted by softness in the Chinese construction sector.Our primary focus in 2024 on the payment area is around focusing on targeted go-to-market activities as the market takes time to achieve widespread adoption of biometric payment cards. We're maintaining a market-leading position in payments, very high performance in terms of transaction speed, power efficiency and security as well as proven in several commercial launches of biometric payments cards.Our sales to PC customers were a record high in Q4. We expect to see continued market growth as the share of computers with fingerprint sensors is expected to continue rising. And we're really well positioned to capitalize on that trend. Our premium offers are valued. In Q4, we also launched a complete biometric system for PC makers. Customer feedback has been extremely favorable, especially in terms of the enhanced speed that our system offers, providing users with a seamless and secure means of accessing their PCs.Selectively expanding the scope of our solutions to capture a bigger portion of the value in the industry is a key part of our platform strategy, and I believe that our biometric PC system illustrates this approach very well. We're no longer just selling sensors to our PC customers, but a complete system, which integrates Fingerprints' in-house microcontroller unit, the MCU.Next slide, please. Not a huge amount of sale on this one. The chart shows continued weekly development of our stock order since Q3. Great to see. Of course, there is fluctuation based upon seasonality and customer ordering patterns, but the order book is very healthy, and the development is in line with seasonal trends.Next slide, please. And we continue to reduce our inventory. That's been a focus for us for many quarters now. We've reached an acceptable level as we enter 2024, something we committed to throughout last year. However, on the competitive or on the market side, there is still excessive stock out there at a sector level and we continue to see very aggressive destocking measures by several suppliers during Q4 with downward pressure on ASPs in mobile.Now, let's move to the next slide on gross margin. Our rolling 12-month, GM was essentially flat, but it's stabilized. I talked earlier about the transformation plan that I announced and we put in place in Q4. We started executing that plan and already we're starting to see how that's arresting some of these negative trends. It's clear that, that margin is unsustainably low due to the challenges we're facing in mobile, which is our largest product group.The outlook for mobile profitability remains weak. The geopolitical risks are high and thus increasing our non-mobile focus and diversifying into other areas remains critical as we continue to improve our profitability. As I said though, we've arrested those trends, and we fully expect improved profitability going forward as we focus our capital and investments outside of mobile sensor hardware and in our higher-margin existing lines of business, along with new diversification areas.Next slide, please. And talking of diversification, we are seeing our diversification start to bear fruits. Our PC business is showing a reliable growth and profitability profile, delivering considerably higher gross margin than mobile. This is an important new product area for us, and we expect to see continued market growth since the share of computers with fingerprints is expected to continue rising.We have an offering that is highly valued by our customers. We are expecting our market share to expand. In fact, last week, we announced, yet another top Windows laptop brand is using our solutions. Asus has launched the ExpertBook with Fingerprints' biometrics Match-on-Chip PC solution. So it means that products from 4 out of the world's top 5 Windows PC OEMs now integrate our technology.We also made significant progress in Q4 and further enhancing our competitive offering to PC OEMs by launching our newly developed complete biometric system for PC makers. As I said, customer feedback has been very favorable, especially in terms of the enhanced speeds that our biometric systems offer. This results in much quicker unlocking, provides a seamless secure means of accessing PCs.Selectively expanding the scope of our solutions to [ require ] a bigger portion of value in the industry is a key part of our platform strategy. And as I said, this expanded biometric PC system illustrates the approach very, very well, not just selling sensors, but a complete solution, including the MCU. So that's a bit on examples of where we're already beginning to expand our offer and diversify.In terms of other elements of our platform portfolio, Access was very, very, project driven. It's certainly a consistent growth trend with more opportunities to unlock particularly in the logical access, a huge new market in which we have a great value to offer as an incremental near-term opportunity.I'd also like to see our assets in touchless solutions, including iris recognition software. We see an increased interest in our iris authentication solution, both in relation to DMS, which is driver monitoring systems in automotive. This is where IR cameras will be added to most cars under EU regulation as well as iris authentication in relation to AR and VR devices. So huge opportunity in those areas on the AR, VR.Obviously, we've seen the Apple Vision Pro device where authentication is made by an iris solution called Optic ID. We see others following [ soon ], and we see Fingerprints very well placed to be able to help them with that.Regarding DMS, we announced an agreement with a Tier 1 automotive supplier in July last year, 2023, with the objective of further developing Fingerprints' iris recognition technology so that we can be seamlessly integrated into the driver management system to handle authentication. The development phase of this project is now complete, and the solution will be promoted to automotive OEMs as an add-on feature.We'll be making other [ bets ] in this year beyond these current markets too. As you look at this holistically in the portfolio, we see a really strong potential, not just in the short-term with some of the things we're doing in PC, but [ into ] the medium and long-term as we execute on these existing bets and complement them with additional technologies to expand the platform.Now let's turn to the next slide. As mentioned before, the outlook for the largely China-centric mobile biometric sensor market shows no signs of improving. We also see significant geopolitical uncertainty. And as I said, as part of the transformation plan we announced last quarter, we'll focus our capital and investments outside of mobile sensors and on our higher-margin existing lines of business, along with new diversification areas.I've already talked about our successful diversification into the PC area, but there's myriad other expansion opportunities with thoughtful allocation of our capital. We'll explore a set of potential focus areas, including, for example, new verticals, in retail and government, new use cases. I talked about logical access and FIDO earlier, they're really expanding what we offer in the access market, but also other modalities to accelerate monetization. We're looking at software licensing models and partnerships to do that.The global market for biometric sensors is large. It's growing. And I see massive opportunities to innovate by leveraging our premium capabilities and our technology assets in new areas around 3/4 of the revenue in biometrics, including software application. It's currently generated in government security, in enterprise, in health care and financial sectors.So in addition to these massive opportunities, there's a lot of growth vectors available to us, including new technologies, new channels and partnerships and new business models such as software and licensing. So some great examples of how we're already expanding, but also a lot of opportunities we can be very targeted in pursuing also.So with that, let me hand over to our CFO, Per Sundqvist, to talk a little bit more about the financial results.
Thank you, Adam, and good morning, everyone. Let's now move over to the first slide of the financial results section, please. Our revenue increased by 5% compared to the same period last year, and as Adam mentioned, by 10% in constant currency terms. This was driven by an increased sales in PC, mobile and our access business outside of Asia.Revenue in the access area as a whole came in weaker due to lower sales of biometric door locks in China, a main result of the softness in the domestic construction sector. At the same time, we have also continued to see a positive revenue development in the PC segment area as the use of biometric continues to increase in this segment.Next slide, please. We do see a modest positive rolling 12 months trend in revenue and margins since last quarter. Our focus is still squarely on getting back to profitability. And as Adam mentioned earlier, we are focusing on increasing our nonmobile business and diversifying to other high-margin areas such as, for example, the PC area.Next slide, please. This time, our OpEx in Q4 included approximately SEK 37.5 million in costs that is attributable to our ongoing restructuring measures. These are, for the most part, costs related to staff reductions. And net of these additional costs, our OpEx was SEK 97.6 million, which is about SEK 3 million lower than compared to Q3.Let me then again also emphasize that our cost optimization program is progressing according to plan, and as previously communicated, we're implementing measures to reduce our overall gross OpEx run rate by approximately 50%, which is expected to have its full effect from the second half of '24. We view this as a necessity in order to safeguard the financial health and the long-term future of the company. We will continue to maintain our strong focus on cash, cost and efficiency improvements as we move forward.Next slide, please. Our core working capital, that is our accounts receivables plus our inventory less our accounts payable, was SEK 159.6 million at the end of the quarter, which is to be compared to SEK 358.1 million in the same quarter last year and SEK 153 million last quarter. We continue to decrease our inventory, and we have now reached an acceptable inventory level and an annual turnover ratio.If we then look at our core working capital in relation to our rolling 12 months revenue, it was about the same level as last quarter, 22.6%, which is to be compared to 41.6% last year, a significant improvement.Next slide, please. Our cash flow from operating activities in the quarter was negative, minus SEK 60 million compared to negative SEK 104 million in Q4 '22. Also here a significant improvement, although not to the level we, of course, would like it to be. Our cash position at the end of the quarter was SEK 110 million, which should be compared to SEK 274 million at the end of last year.By that, thank you. And with that, we are now ready to take any questions. So back to you, Adam.
[Operator Instructions] Your first question comes from the line of -- one moment -- Markus Almerud from Carnegie.
My first question is, the products you had in inventory -- can you talk a little bit about the price levels you have of the products you have in inventory? So we talked a little bit before about the higher input that came in, and then you wanted to destock that and then you would start selling product with a lower cost. Where are you in that journey? And -- or is that out of the system now?
Thanks for the opening question. Per, let me hand to you, first of all, on the inventory and ASP/COGS question, if I can?
Yes. Well, what we can say is that, again, the inventory has decreased significantly. We still have some remaining effects of the price decreases that we had during '23. And as we mentioned earlier on the sales side, there's a continued destocking measures from the sales ecosystem, which, of course, puts pressure on margins as well. But we still think that now we have a competitive purchase price structure in our COGS,, but the selling price side is still affected by the ecosystem pressure on destocking by others in the system.
But as we go into '24, I mean, even if we have ASP and the continuous pressure, you will also -- the balance between the cost and the price is -- would you say it's balanced as we go into 2024? So the gross margin should kind of stabilize? Is that a fair assumption?
What we can see, and as Adam mentioned, we have seen a stabilization during this quarter. Going into next year, it's a forecast. And as you know, we don't give any guidance on that one. But what I can reiterate is there is still destocking measures in the market.
And on that -- on the destocking in the market, in the supply chain, the value chain, where are we on that? Where are the levels? Because I understand that demand is poor, but it's -- where are the inventory levels?
Yes. As I showed on the slide, Markus, we committed to having the right level of inventory. Our inventory is in exceptionally good shape ourselves. But to Per's previous points, our competitors and other providers in the market have been less disciplined executing the same level of inventory management. And so, for that reason, we expect to see continued price pressure, and for broader reasons. Of course, they're natural to the China market. So that's how we see inventory in terms of our performance and what we've been able to manage. We've got inventory in a very good shape, but others have not done so, and we continue to see price pressure as a result of that.
But it's impossible to say where the inventory levels across the value chain are, because we've seen this destocking now for some time. Are we kind of -- is it impossible to talk -- is it impossible to say anything about inventory levels of cost?
I mean it would be speculative to talk about other peoples' inventory. All we can see is how that's showing up in the market and what we do see from our competitive intel, but that doesn't go to a specific stock level and when those -- when that stock will be completely depleted or to a manageable level. What we are seeing though is continued price pressure around that.
And what about optical sensors? What's the latest on that?
Yes. I mean we see optical sensors continuing to pick up as a market. It continues to be more profitable because it's largely a much newer segment. But of course, it will be subject to the same type of mobile trends and geopolitical challenges, of course, that we will see in China because most of the customers are based there. So whilst that's taking off nicely and we're seeing good profitability from it, we do need to be very careful of the outlook there, because as we saw from capacitive -- the time, the pace at which the ASP arose, is pretty rapid. So something we need to keep a firm eye on.
And then on Access, in rest of the world, which is growing quite nicely, what can you say about what kind of products and regions is where you see the growth? Or is it…?
Yes. I mean we -- yes, obviously, from a regional perspective, we see strong performance outside of China, or outside of Asia, in fact, more largely. But I would say that it's rather than being a particularly geographic trend. What I would say is it's quite a lumpy business. It's a project-driven business. So we do continue to see that trend. What I would say on that is, because it's a fragmented market, a few larger deals make a bigger difference. But then what we also see is there's a lot of smaller opportunities out there.And therefore, turning our attention to a more channel-led approach from both a product capability and from a go-to-market perspective is something that we see as an opportunity. I'm, of course, talking about physical access. We also see an opportunity that we've yet to penetrate. It's an emerging market for logical access that we see some good growth potential in the future too. So a couple of different areas where I would see not geographically, honestly, apart from outside of Asia, but in terms of the nature and the dynamics in that market, Markus.
And then finally on PC, maybe the new module that you released in October, which includes the MCU. If you look at the [ Asus ] order, for instance, first of all, is that on that? And is the interest for that whole module higher than it is for just the -- or the sensor business? If you could talk a little bit about what -- where the interest is higher?
Yes. I mean I would say the outlook -- because, obviously, it takes time to productize that into new hardware with our customers, of course. But we see really strong appetite for that product, which is great. We want to expand our share of the pie, which is exactly what that does. It's actually better technology in terms of its tighter integration, of course, has a variety of benefits, not least of which is security. And so, yes, we absolutely see that as a big seller for us. It did have that solution on there on the Asus Tech that we announced recently as well, of course. So we do see a really nice growth path for that particular system.
[Operator Instructions] I will now hand over to Stefan for the webcast questions.
Yes. Thank you very much. Let's take a few questions from the web as well, starting with biometric bank cards. What is your feeling when it comes to biometric cards? Do you think this will take off? Some people think that mobile payments will take more and more of this. And what is your feeling regarding this? I think that's for Adam maybe.
Sorry, would you ask that one again, Stefan? I missed that.
Yes. What is your feeling when it comes to biometric bank cards, if it would, actually…?
Yes, that's a great question. Yes. No, it's -- because this is a new market. It's not yet a mass market product. We are in an incredibly strong position, embedded in the major manufacturers, embedded in the ecosystem. So we're -- and our technology is leading, and it will remain so. So not a huge amount of work for us necessarily to do in terms of the hardware itself, in terms of the product. You would have recently seen we did Smart'Nroll, of course, which is also a really important aspect of the industry because, it's great if you can ship a card with a biometric chip and sensor on it. But if you're unable to enroll, then you can't use it, of course. So easing the enrollment process has been a key part of removing friction from that industry, too.As I said, we would all have liked to have seen significantly more take up in this market. We've seen some actions from would be competitors in this space change [ TAC ] as it relates to the payments market, which you would have all seen. We would like to have seen it take up faster. But we all know that these markets take time to take off. We saw exactly the same with fingerprints on mobile phones. They go a very long time, 10 years plus for that to take off. We do see the same -- particularly as it relates to financial transactions, the level of conservatism is relatively high.So there's some persistence it requires, but also thoughtfulness in terms of how much we invest and how much we focus to help this market take off. We provide fingerprint sensors. But of course, there are massive players in this market, like Thales, Infineon, IDEMIA, a number of different -- SD Micro, a huge number of different players in this space that are much larger than us. That is also seeking to stimulate this market. I was actually -- I've actually had calls with most of those guys this year already just to check in and see their sentiment for the year ahead, and there's still a lot of commitment from them. Nothing's changed from them in terms of pursuing this market.What I would say though is over the last few years, our focus has been on going very wide and very shallow to establish and create awareness about the art of the possible here, the benefits to the banks, the benefits to their end customers, the benefits, obviously, to those providers. And so that's been the modus operandi to do what we would call market making. The next thing we need to do, though, is now start to pivot towards going deep and being very targeted in market taking, if you like.So creating new customers, getting more cards deployed out there, not only selling cards to customers, but ensuring that they have a robust plan for driving customer adoption. Because it's all well and good if they buy cards, but not very good if none of their customers are able to use them. So building in a customer success motion as a part of that is going to be essential, but being very targeted and focused on where we do that. So that's how we'll pivot. Particularly our go-to-market, as I said, not a huge amount required on the product side. [ This is ] more about being targeted and focused in our go-to-market this year.
And you're saying that you're focusing your investments outside of mobile. Can you give us some more flavor on the areas you will be prioritizing?
Yes, absolutely. So I mean, there's 2 pieces. One part of it is how we expand on the things that we already do. So looking -- leveraging existing skills that we have in the company and existing products we have in the company to expand. And I gave the example earlier of how we've been able to do that in the PC to move from a sensor to a system. So there's certainly more that we can do there.The other example I touched on -- I didn't really go into a huge amount of detail on this is as we think about logical access in the access space as well. So thinking about logical access cards, thinking about enterprise access, even interconnecting into the identity and access management space and cyber security for enterprise software. So some very interesting spaces there in terms of our existing capability. But then, of course, we want to expand beyond our existing capability.Sorry, actually, the third example I also touched on earlier for existing, was iris, of course. There are some very interesting things that we're actively engaged in with DMS providers, but also there's some very interesting opportunities that we are already connected with very large players in the market on augmented reality and virtual reality.Those things are maybe a little further away as we start to see a transition to have AR instead of mobile phones, et cetera, but there's some really interesting short in terms of PC, medium in terms of logical access and longer term in terms of IR capability, or rather iris capability that we have in our existing.In terms of diversification, though, we do want to look at other modalities outside of Fingerprint and iris. We certainly see face is a very interesting opportunity for us that we're looking at. And another one, I would say, and I won't be specific on this, but I will say more broadly, around behavioral analytics too. So there's some very interesting things I think we can do not only to enter new markets, but also with those modalities to complement what we already do with existing customers in existing markets to triangulate with the modalities that we already have.
And maybe a final question for Per on the cost optimization program. Is this program progressing? Cost did not really go down in Q4?
Yes. Now the -- what we can say there is this, in other words, we tried to highlight in the slides that we showed as well is that the project is running according to plan, exactly as planned, I would say. So we are -- as we try to illustrate, having the aim of reducing 50% while still being able to support profitable customer projects as we have had in the past. That's the…
Yes, I want to add to that as well, because I mean this is a really important part of our pivot as a company, how we move forward as a company and how we diversify. I'm really pleased that we moved quickly upon my joining. Thanks to the leadership team here at Fingerprints and thanks to the Board that we've been able to move quickly on both defining a transformation plan and executing it.So execution absolutely began in Q4. As I said earlier, we are arresting some of those negative trends. We will absolutely see those things turn around as well. So pleased about it. But Rome wasn't built in a day. It takes a while to turn a corner. So it's really important that we remain focused on continuing that transformation plan and that we monitor the results of it to adjust as we go. So very important. We've started it, but there's work still to do.
All right. Thank you very much. And let me hand back to you, Adam, for any final remarks that you have.
Very good. Thank you, Stefan. So we've laid out the results of the company for Q4. As you know, it was a big quarter for us in terms of implementing our transformation plan. I'm very pleased that we've been able to do that. I'm pleased with some of the early indicators we're seeing in its execution as well. Our strategy is very clear in terms of leveraging our existing technology, thinking about how -- we're smart about how we focus our existing capital, but then also look to diversify as a business into other profitable areas, including more software.So that's a great quarter for us in terms of getting that plan implemented and turning that corner. Thank you so much for all of your questions. Our next earnings call is on May 7, I believe. So look forward to -- sorry, yes, May 7. So I look forward to seeing you guys on that call as well. Thank you very much.
Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.