Precise Biometrics AB (publ) (FINGB) Earnings Call Transcript & Summary

Thank you. Good morning and warm welcome to Precise Q4 and Year-End 2020 presentation. I will, together with our CFO, Ulrik Nilsson, present the financial results and also give you some highlights on how we see the next coming quarters. Next slide, please. Once again, I'm happy to present another quarter with a positive EBITDA. The sales is in line with our early communication, and we had a total sales of SEK 22.5 million in this fourth quarter. We have a very good cost control, and we've been able to continue our investment in the YOUNiQ with clear focus in the Access area. We have also positive cash flow, and by that, been able to strengthen the cash situation for the company during 2020. We continued to roll out the YOUNiQ with focus on building the platform and ecosystems around the product offering with different collaboration such as recently announced the Sehlhall cooperation. And they have installed a system at their headquarters to be able to show it to customers. We continued to open up for integration and different cooperation. This is the key area for us in the go-to-market strategy to be able to accelerate the rollout of YOUNiQ-Access product. We have also launched a new marketing profile with focus on You Are The Key, which means a very clear message to the end customer and partners. Easy to remember and easy to understand. Simplicity in all aspects. In our Mobile area, we have now introduced our next-generation algo to some of our partners. This means we, together with these partners, now have the possibility to win even more contracts. In general, a very tough environment with a lot of players involved, so it's tricky to estimate and forecast the 2021 revenue. Even if the industry had been hit by the corona situation, we have been able to continue to deliver our software to our partners, and we have today a very stable way of working with strong teams in Asia, Europe and U.S. And due to that, we have been able to deliver Q4 as early communicated, which means we ended 2020 with a small growth and with a strong cash situation, so our investment in YOUNiQ continue as planned. Next slide, please. The vision. We continue to communicate our strategy and vision in all forms. No matter who you are and where you are and what you do, you'll always have access to a digital identity owned and controlled by you in a safe way. And we have now started to communicate even more about the benefit of that. You Are The Key: one identity verified by your biometrics and used in different applications and resources, a digital end-to-end solution controlled and owned by the user. Next slide, please, the Digital Identity. 2021 will be the year we focus on larger account in YOUNiQ area. 2020, we sold indirectly to end customer to get enough reference and installations for the future. Now the focus will be on installation partners and distribution partners. We have 6 main verticals we address: constructions, apartment blocks, commercial building, gym, industrial buildings and public. Due to the corona situation, we see a slowdown in the gym and commercial building/offices. Gym market suffers a lot, and more people are working from home, which means less opportunity in the commercial buildings right now. But the construction and industrial buildings is still open, very interesting in upgrade and of new installation of YOUNiQ. Today, we have integration with RCO, Telcred, Axis and S2, and there will be more coming around the corner. We need to have a light integration with all access system and then deep integration with the major larger player, also to make sure we have an open platform so other players can integrate with us. We recently launched our affiliated program together with direct sales and via distributors and integrators and platform companies so we will address the whole market. We have today 50 installations and more to come. Next step now is more installation with Algeco, for instance, previous Temp Space company, but there are also other accounts ongoing. The plan now is in our homepage present all installations going forward so you can follow the progress in real time. We just signed our first contract in U.S., which is a very important milestone. Our focus is still Nordic and especially Swedish market. But via our sales office in U.S., we can see an opportunity in U.S. also. We will start in a very controlled way now with the integration with S2 in U.S. We entered the market last year, 2020, and it will take some time to get that large volume. But the market is there, and we have just started a very interesting journey for Precise in this area. Next slide, please, Mobile. We just launched our new generation of algo, which we have delivered to our customer and to some of the OEM partners. As always, it's very tricky to predict the volume, and -- so far for 2021 but much better situation compared to some years ago. The new algo helped our customer with preprocessing capability so we can get better total quality for the OEMs. We continue to deliver according to our brand high quality and high security. We can also see an increased interest in the liveness part. A clear trend now more and more of people interact is via the mobile phone, such as payment, et cetera, and therefore, high security is a must. [ Multi-tapping ] and continuously authentication will come, but maybe also multi-modality, where you combine different type of biometrics. We strongly believe in fingerprint for the personal devices such as mobile and computer, but face for public environment. A stable Mobile business in combination with acceleration in YOUNiQ give us a very interesting future. The next slide, please, Smart Card. The pandemic situation increased the need for contactless payment. It's actually more relevant than ever, but we don't foresee any volume this year in the card area. Precise is not depending on this segment. We see it as a bonus if it will happen. The ease of use and reliability to work in all environment is a must. Then we also need to see a clear cost-out for mass production and volume. As earlier communicated, our prediction together with our partners is that 2021 will be very limited volume in this area. There are more technology and optimization in the industry needed before launch. We can also see a strong increase of other digital payments such as via mobile phones or direct via face is gaining more and more attraction. So Precise don't need volumes in the Smart Card area for future success, and it will be a bonus if and when it happens. The important part is that you are the key for future payment, independent of carrier, toll, card with just your biometrics. By that, I hand over to our CFO, Ulrik.

Thank you, Stefan. Execution of our strategy continue, and our algo business is healthy, profitable. And our work towards expanding our role with taking responsibility for larger parts of the delivery shows success. Precise YOUNiQ has received very good reception in the market, and we continued to add customers and do up-sells to the existing customer base. Please turn to Page 8. Net sales in the quarter totaled SEK 22.5 million versus SEK 38.8 million last year. Net sales was split between royalty revenues of SEK 10.9 million versus SEK 20 million; license fees, including support and maintenance, of SEK 10.7 million versus SEK 17.8 million; and other, SEK 0.9 million versus SEK 1.0 million previous year. The decrease in royalty in the isolated quarter comes from a more even royalty distribution in 2020. We then have a negative impact from the appreciation of the SEK versus the U.S. dollar of 12%, which is approximately SEK 1.5 million on the royalty revenue. This is in accordance with the sensitivity analysis that we gave in the annual report for 2019. Additionally, quarter 4 in 2019 was fairly high. Fall in license fees is a result of previously communicated strategy in which we focused on deeper collaboration with fewer customers. We have in this change as well successfully implemented an increase in the base license fee. Annual license fee as well as support and maintenance are sold as a license to the customer, which is paid in advance, 3 to 12 months, whereas royalty is a usage-based license, invoiced based upon usage and consequently paid in arrears. Based on the way we sell, the combination of annual license fee and support and maintenance, they should be analyzed together, which is the rationale behind that we now combine the 2 lines. Gross margin during the quarter totaled 84.7% versus 91.9% previous year. Change primarily related to the change in the product mix. Total amortization and write-downs of capitalized development expenses was SEK 2.6 million versus SEK 2.8 million previous year. And the amortization of acquired intangible assets totaled SEK 0.2 million versus SEK 0.2 million previous year. Please turn to next page. We continue executing the strategy, and the work in deeper collaboration with key customers is allowing us full leverage on the scalability. We are then developing our capabilities within Digital Identity and improving our ways of working. Overall operating expenses for the quarter decreased by SEK 1.4 million and totaled SEK 21.7 million versus SEK 23.1 million previous year. We continue to improve the ways of working, driving both the efficiency and effectiveness, and we're leveraging on the digitalization tool. Digital Identity, we see that the potential is further confirmed, and our strategy is investing in the capabilities. We see that in R&D as well as in developing our sales channel capabilities. Operating profit and loss for the quarter totaled minus SEK 2.6 million versus SEK 12.5 million previous year. Decrease in the operating profit/loss is explained primarily by the lower net sales and the lower gross margin. EBITDA is positive for the sixth consecutive quarter and totaled SEK 0.7 million versus SEK 16 million previous year. Please turn to next page, financial position and liquidity. Well, cash and cash equivalents increased at the end of the period and totaled SEK 76.3 million versus SEK 73.7 million end of last year. Our business model shows efficiency, allowing growth with minimal need for incremental working capital. The cash flow for the quarter from current operations totaled SEK 12.2 million versus SEK 14.3 million previous year, of which SEK 10.6 million is attributable to reduced capital tied up. The group invested SEK 0.6 million in property, plant and equipment during the quarter. Back to you, Stefan.

Thank you, Ulrik. And then back to slide -- next slide, the summary. So the summary, a growth year-on-year and the strengthened financial position, which means we continue our journey according to our strategy. We have a very solid position within Mobile and a very competitive market. And we have successfully developed a new generation of fingerprint technology available for the market this year. Due to the success in 2020, we have invested a lot in YOUNiQ and in Digital Identity for the future growth. This is key for our future success, and we will continue to this -- to invest in this area during 2021. We have, as you know, identified an addressable market potential of SEK 1 billion by 2025 just alone in Sweden for our YOUNiQ-Access product. And we continue to secure the future with strategic collaboration for YOUNiQ, and the sales activities will be our main focus with 2021. So a stable Mobile business in combination with acceleration in YOUNiQ gives us a very interesting future. Next slide, please. So thanks a lot for listening in, and now we open up for questions.

[Operator Instructions] We have a question from the line of Jesper Birch-Jensen from ABG.

I have a couple of questions here. First off, Stefan, you talked a little bit, but do you expect to see top line growth in 2021? I know you said it's hard to forecast here, but any input on that would be great. And also, what kind of contribution do you see from Egis Technology during 2021 seeing that it's been a strong driver in 2020 and Q4 '19?

Yes. So thanks for the question. Now when it comes to the top line there, it's very tricky to do any forecast for 2021. It's a very challenging market in the Mobile, and the Mobile will be the major driver also for 2025 -- 2021 until we have accelerated the YOUNiQ and evened out the sales for the 2 different business units there. As you said, Egis is the major contributor to the top line, and Egis is our main customer in the Mobile area. And we can't do any forecast when it comes to the Egis sales, and they have not done it themselves. So we have a deep collaboration with them. We have supplied our latest algo to them, so we have a high expectation that we will follow them. But to forecast their success is absolutely impossible.

I understand. And also, moving on to the Digital Identity segment, you mentioned now the inflation's up to around 50 versus 40 in Q3. Is this the sort of pace which you should expect during 2021? Or is it just ramping up here on a quarter-to-quarter basis?

So last year, we had a lot of installation with smaller account where we were focusing on getting out the product, being able to communicate about the product to the different customers who test the product. And so far, we just have very good feedback when it comes to all our customers. Our ambition is, of course, to increase the sales this year. We increase it via our distribution channels, installation partners and also via our own sales. And the plan is to address a larger account this year. Of course, the process internally for larger account is a little bit more complex, but the ambition is to have much more installations end of this year than we had end of the 2020.

Got you. And on the same topic there, would it be possible to get any type of revenue split for Digital Identity as of right now on a -- I mean, compared to overall revenues?

Right now, we have not communicated a split there. We were looking into how to handle that in the future. We should remember that we started 2020 with 0, so this -- so the installation there was 0. And there will be a continuous growth. The ambition is, of course, that down the road here, the YOUNiQ-Access and YOUNiQ will be the majority of this company. But that will take some time before we reach that level. So right now, very important to continue the stabilization with the Mobile. And then, over time, acceleration of the YOUNiQ will help us to stabilize the company and grow the company. What we have decided now also is that we will, on a regular basis, update our homepage when it comes to all installations so you can see that and follow the progress there with our customers.

Got you. Last question, on the Smart Card segment. I mean I know you mentioned in the past that, I mean, you stand ready to kind of deliver your solution here. But these other players, the value chain is not really ready for a larger rollout. Have you seen further -- I mean has it changed during Q4? And the second wave of COVID, has this kind of driven all the other players in the value chain to move forward and prepare for a larger rollout?

A very good question. So no, we have not seen that. And as I said earlier, we are not dependent on any success in that area. It's just a bonus if it will happen. It's still a very tricky market. The ease of use, the stability in the quality and the cost structure need to be there before we see any large volume. And when we discuss with our partners and potential customers, they don't see any large volume during 2021.

[Operator Instructions] We have one more question from the line of from [ Jan Karlsson ] from [ Slättö ].

Stefan, I have a couple of questions, if that's okay. I'll start with one question about Qualcomm. You often tell and write about your cooperation with Qualcomm. And I wonder if you can tell us anything about your cooperation with Qualcomm. What are you working with Qualcomm?

So when it comes to Qualcomm, we have, as earlier communicated, deep collaboration with Qualcomm, and that continues. And when there will be any interesting new news in that partnership, we will communicate that. So nothing has changed. We have delivered our new algo to Qualcomm, and they are satisfied with what they have seen. It's a huge improvement compared to our earlier algo, which was good already at that time. So we have, of course, continuously interesting discussion with Qualcomm about the possibility to win royalty now in the future together.

Does that mean that you are not involved in Qualcomm's latest ultrasonic fingerprint sensor?

So I can't comment anything about that. It's that we have a collaboration with these guys, and we're working together to get the best experience for our customers together. And when there will be more information about that, I will announce that to the market.

Okay. Yes. And I'm also wondering about your progress about extending your shareholder value chain in terms of software for fingerprint sensors like preprocessing and liveness detection and stuff like that. Have you managed to sell that to any new customers?

Yes. So when it comes to -- actually, I received a similar question from another person, yes, main -- here. And that -- so the total algo is, we can say, divided into 3 area: preprocessing and the algo as such and the liveness detection. And it's impossible to sell only the preprocessing part, ISP part; you sell that together with algo. But you can buy only the algo or you can buy only the liveness detection. So different customer are using different parts of algo. Some are only using the algo, some are only using the liveness detection and some are actually using both the ISP, algo and the liveness. So that we have the possibility to do right now. And we have been able to ship all 3 parts to customers right now. And hopefully, we will see some volumes in this area. So that is something new. We invested a lot of time and effort into that last year. And as I said, now during this year, we have started to ship to our customer that have presented for the mobile phone manufacturers.