Fingerprint Cards AB (publ) (FINGB) Earnings Call Transcript & Summary

Welcome to Penser Bank. My name is Markus Almerud. I'm an analyst here at the bank. Today, I have with me Christian Fredrikson, who is CEO at Fingerprint Cards. Welcome, Christian. Thanks for being with us today.

Yes. Hi, Markus, thank you. Nice to be here.

So it's interesting times, lots of volatility on the market, lots of discussions about Ukraine and Russia, and this is on everybody's minds, of course. I know you have very small direct exposure to the region. But there's also the secondary effects. So let's talk a little bit about those. I mean, you've had some challenges from the supply chain problems in the past. Do you expect more of this on the back of the crisis?

Yes, I suppose it's been horrible times, right? And I'm sure we're all shocked and horrified by the attack on Ukraine, right? And I think that when you look at from our business point of view, you are very right, Markus, that it doesn't have an impact on us, because we have no direct business in that area, right, with the Russians. So I suppose from us, it is the same supply challenges that we have been having in the last 2 years, right? I still see the supply chain challenges continuing this year when it comes to semiconductor and chip industries, right? So I think that will continue. And there is always a lot of logistical challenges that has been through the last 2 years. I'm sure everybody is well read into it actually, nowadays. I think despite all that, we have done well. So we grew 16% last year on constant currency terms. So that means that we were still able to manage through. But of course, we have had -- as we have said when we met every quarter that we continue this. It's a lot of hard work to keep on getting volumes.

So in summary, you could say that maybe no direct impact on the business, but more of the same, so to speak. And you have been working with these challenges for a while. Is that kind of the right conclusion?

Yes, exactly. I think it will continue through '22 for sure. But there's a lot of capacity being built up around the world. But of course, the demand is huge as well for more kind of different industries in the whole digitalization that, that continues. I see the challenge continue and that's something that we will just have to work for the foreseeable future. But we are managing it. We are managing and I'm quite pleased with that.

And continuing on that note, kind of the managing part, and move to your profitability, which has been improving a lot in the past years, I would say. You have a target now 14% to 18% on EBITDA and gross margins have been improving quite dramatically and impressively. What are the drivers behind the improvement that you've seen? And if you look below the gross profit, can you talk a little bit about the other cost base, if that's going to be flat, or what we should expect?

Yes. Well, I think on the gross margin, we have improved, as you said, very well. I'm very pleased with that improvement. It has to do -- of course, we're in high tech. So the base is just -- for us, it's 2 main things, right? One is keep on innovating. We launched site sensor, curbside sensors in fingerprint sensors that have come into foldable phones that are coming into many of the beautiful models that are out there in the phone market. That is helping us. So we need to continue that. There's still a lot to innovate in the mobile in the capacitive sensors, as well as the other sensors, right. So that innovation is key for us, and we have to continue on that one, to improve and continue to work on the margins, right? And I think the second is just a mix change for us in terms of that we are starting to get the new growth areas coming in, which are with better margins than the mobile industry, which has always been a very competitive market, right? So I think those 2 things are very important for us to continue doing. Then when you look down below, right, as you said, more in the engine, I think we will continue to work on improving. I think that our business is very scalable. So with growth in revenue, we don't have to grow the cost base in the same way at all, right? So I think that that's why, of course, the more we grow, the more we are going to get the benefits of scale in our operations. So we should grow, of course, in some of our cost base and investing in new R&D and innovation, but it's going to be much less than what we can do with sales growth when you get this machine going.

If I look at R&D specifically, I mean, you're very R&D heavy. And you're entering into new areas where mobile now is about 90% of sales, give and take. And how the ramp-up of R&D, is it done? Or should we expect more? Will you accelerate further?

Yes. I think the big ramp-up has been done. We invested heavily in payment, in access, and in the PC markets, right? So we will continue adding, but it's not in the same way, that we have had to run quite a lot in new areas. We had to run a lot of R&D without actually having any sales yet, right? So that's, of course, always burning on high-tech, but that's what high-tech is about, right? It's about investing and doing that risk taking. And that's now starting to pay off instead of getting these new areas to grow for us. But they will not grow in cost in a way they can grow in their revenues at all in the same space.

Okay. So pretty stable cost base, and then you have, as you said, the leverage as sales come and then you will get the profitability. Let's talk a little bit about the different segments, maybe starting with mobile, which is your largest. You have about 30% market share today. You have a target to get to 40%. Let's talk a little bit about that. It's quite big market share gains. How do you expect to achieve this? What kind of timelines do you see, et cetera, et cetera?

Well, of course, it takes time, and we said, it's a few years ahead for us to do that step by step. I think 2 things, again. One is, of course, innovation. You have to innovate. You have to bring new products, and that's what we need to do. And we have plans do that every year. We will bring new platforms and new products also into the mobile space. It's very important for us to continue doing that. And the second thing is, of course, that there is a lot more now in biometric taking a bigger position all the time and the payments, more and more payments are being used as well, and there's more security. You have more things in your phone, and when you start to use biometrics, there's more and more expectations on security as well. And so there's more and more standards coming in, more and more testing coming in for security of the biometric solutions. And I think that, that typically plays very well for us, where we are focused higher on high security. So I think that one thing that helps you is, of course, to gain market share when the solution with higher security is more in demand, and that's going to happen in biometric all the time. We see that the kind of expectation level for security is rising from all the players in the industry.

And would you say that are we in this situation -- I mean, we've often seen in many industries where you have the large players continuously gaining share from the smaller players as the technology becomes more and more complicated. Is this the case? Are we at that time here in this industry as well, would you say?

Yes. In a way, you can see -- in the mobile industry, you can see that all the time, the big players are getting more share, and the smaller are getting harder. So I think the same game, that's a good point, Markus, is probably the third reason that helps out, that the big volume players, the ones who can run massive volumes and are able to sustain it and make it in the industry. It's harder and harder to play with smaller volumes, right? So the same happens with the mobile phone OEMs, that the bigger are getting bigger and this kind of 10% share in the mobile phone industry is also shrinking all the time, where all the others are, right? And I think that that's probably also happening then over time is happening also, with the suppliers. Typically, there's a little bit of consolidation happening there all the time, but it takes time, of course. I'm not saying mobile phone industry will always be competitive, no doubt, like they're running.

And I mean the 2 main technologies. You have the optical sensor and then you had the capacitive sensor, where you're big. And you also want to take a large part of the under display technology in the optical sensor. And I think you spoke about 20% market share over time is where you want to get. Can you give us an update on where you are? What's needed for you to get there? And are there any breaking points that we should look for, for you to be able to ramp up and start approaching your targets?

Yes. It's taken a while for us, but now we have the technology. We have a good product now in optical as well. So I'm very happy about that. So now, it's about -- actually, the only mark that you have left for us now is, of course, to win, right, to the design wins and getting into phones. So that's what we plan on doing this year, right? And that's been the target for us. And that, of course, is the only way to measure the actually successes that you get in. But now, we can say that we have the technology, so it's really about ourselves kind of doing the last step now in winning. I think that's for it, right. There is also a new technology coming in with new displays, but that's a bit ahead, right? So that's going to be a fun new addition into the mobile phone industry, right, which will be something different from the optical. So the under display market will also change it, right? There will be another version coming into that. So that's a great new game again also in that sense. So that's a change coming also. So that gives an opportunity, of course, for innovative companies to play also in kind of a third segment coming into the mobile phone industry.

All right. We talked a little bit about profitability and you mentioned mix, right? The areas where you have high profitability is growing faster than the mobile phones. So let's talk a little bit about the other 10% and where you see the growth. Starting with PC. I mean, you released -- you launched -- you had a press release this morning that Lenovo, the largest PC manufacturer in the world, is launching the first 2 models with your technology in them. Talk a little bit about that segment as a whole. I mean, that's very encouraging. Talk about the pipeline, the interest or the technology, the level of the discussions you're having with the customers, who is driving it, et cetera?

Yes. Yes. Thanks, Markus. Well, first of all, fantastic to have won with Lenovo, I have to say, the biggest OEM PC manufacturer in the world, and we launched 2 models with them now. We're very happy with that. And now, we have gone with 3 out of the top 5 and 4 out of the top 6, so to say. So we will continue on working ourselves into playing with all the big players in the industry. And Lenovo is just a fantastic step for us again in that. I think PC is today 20% penetration when it comes to biometry, especially also the fingerprint sensors in the PC industry. PC industry is about 350 million units per year and we expect it to come from biometric point of view to get over 80% of the PCs will have biometric. Some of it will be phased, but we believe about 66% will be roughly in that range. Two-thirds, so to say, will be with the fingerprint sensors. And it's very logical. And the reasons for that are that the OEMs want it now. So all the manufacturers actually themselves, they see that it's very good and they like the product and you can position in different places of the PC service. The consumers want it because they certainly don't want to keep on pushing the long passwords every time that you log in. People are fed up with it. I am personally absolutely fed up with it. So I think it's always wonderful to see that the consumer market, they really want it. And I think that the third one big shift has been that Microsoft is now pushing very hard to get rid of passwords and they are promoting very strongly fingerprint sensors and the whole biometry into it now. And we are now a proved vendor with Microsoft, both for the natural host, which is a consumer market, as well as match-on-chip, which is for the enterprise market now, which is about half of the PC market. So I think that this is where it's a fantastic place to be. And then I think the requirements on security are rising also. So I think all these reasons, 4 reasons, basically, make it so why the PC is now moving so, so rapidly into fingerprint sensors and biometry. And that's, of course, a fantastic opportunity for us, low market segment in terms of having penetration and then starting to move as strongly for us now. So we expect a lot of new launches from us in the coming months over new PCs coming out. And it's a fantastic market. Like all these new segments for us are clearly higher gross margins and they are also clearly higher ASP. So average selling parts, both of them are higher in these new markets versus the mobile market. So a fantastic place to be. We see a lot of pull for this and a lot of interest and a lot of new models coming out. So I am extremely pleased. I'm very happy with the PC performance. And I think that's how biometry is coming in there. So I think that that's going to be a great market. And it will be our -- you go a little bit over a year from here and it will be our second biggest business, absolutely.

And let me tag on to one of the things you said, but let's talk about Microsoft because, I mean, we all work in the Microsoft environment. So that they have added your match-on chip solution to -- I mean, for their enhanced signing security, how important is that?

Yes, that's very important for us, because now -- earlier, we only had match-on host, and that means that you could sell to the -- the difference here is match-on host is you are doing the security check and the biometric check on an existing chip, right, that you have, the existing memory chip on a PC. Match-on chip is a separate own, more secure chip where it's line, the matches down on that one, it's all within the same kind of module. And that has been more for the enterprise market, very important. And to be there, added on the list, one of the few get into that, that opens up the whole enterprise market for us now. And of course, which is half the market, the match-on chip market. And it's, of course, even better margins and even better ASPs, more secure requirements, much more demanding product to make. So kind of everything that plays in our corner and that we love so much to be in.

Let's talk a little bit about the next item, the big growth there, where we haven't seen the sales yet, the payment cards, which is also very, very exciting. So I think you talked about 3 billion units by 2025, '26. Talk us through a little bit about where you are. You have some pilots out. You have some banks which are testing it live. Talk a little bit about that, how many banks are trying it? What kind of conversations you're having? What the pipeline looks like? And how you see this evolving over the next few years?

Yes. So we have said that 3 billion -- there's about 6 billion cards produced per year in the banking industry, payment industry, smart cards. And we said that about half of them, we believe, will have biometry, which is about 3 billion, which is, of course, a massive market from 2026 and beyond. That's what we said. Now, we believe this will happen, and it's not only -- I think first, I can say to your comment on what's happening in the payment market is that it's not, of course, only us now, believing it, right? There is a huge, the whole industry is doing this. So whether it's the schemes like Mastercard and Visa, where we are certified, they are pushing for biometry. You have all the big banks. We have a few now launched, I'd get to those, right. Then you have the big players like Thales and G&D and DME that are the ones who are actually delivering the cards into the banks, they are doing it. And then, of course, the secure element suppliers like STMicro and Infineon, which, for example, those 2, both of them, we are working with very tightly in terms of building biometry together with the secure element. So kind of the whole, these are extremely large companies. And they have made those transformations in this industry from going into contactless, that has come out, and now moving into biometry. So I think that, that is a big machine and industry that is moving in now, finally. And the most important thing that we had waiting for to happen in last year, I said, was the year when biometry became live in the payment industry was the banks and the launches. So far, 6 banks -- we have had 25 pilots, but we have now 6 banks live that have launched their cards, biometric cards in their markets. And with all of those 6, we are delivering the fingerprint sensor or the biometric solution, right? And it is -- just to mention the 2 of them, right, the big ones, BNP Paribas, the #1 biggest -- largest bank in Europe and Crédit Agricole also in France and the third largest bank in Europe. They have all gone from starting with the high end in 1 branch and then launching to all of the couple of thousand branches in their own country, so that you can get biometry there. So step by step, as it went with contactless, as well this time it's moving ahead. So it's very hard for us to judge the exact timing of this, of course, because we are not the bank. It is not us who are finally launching the product. But with this ecosystem behind it, we know we are in the -- we have already come out with purchase orders for hundreds of thousands of these cards. So it's kind of -- last year was the starting of this industry. And I think that every year, you will see very strong growth now going forward. Of course, it's more numbers in the beginning as it was last year. But of course, that's the root then to the 3 billion cards per year. And I think finally, I have to say on, is the consumer feedback, because at the end of it, that is so important, right? So it is overwhelmingly positive, overwhelmingly fantastic. So people love it. You have no more pin. You don't -- it takes less than a second to pay any amount, no caps, and I even paid with it now, and it's fantastic to see that salespeople, when they are in the clubs, when you pay with it and they wonder, wait a minute what happened. There was a big amount and no pin code, right. And it's just a good moment to see. I believe this will be a fantastic industry. And even if that's taking a long time, but it's turning. But that's the way it is. It's good growth over many years to come.

But if we talk about -- I mean, I fully appreciate that the timing is very difficult, right? But if we try to tackle it from another way. If we look at contactless, I mean, I remember when contactless came and what kind of time it took for it to reach the masses. How long did it take? How long was that time from kind of launch until it reached kind of critical levels? And should -- do you think that we should expect the same kind of time here? Or should it be faster?

Yes, I think that's a very good question, Markus. And I think you could say that when you took the mag stripe, it took about 15 years for the mag stripe to go roughly -- to go from nothing to billions of cards per year. And for a contactless, to go from nothing to billions of cards produced per year, it took 8 years. So I think that it's going to -- once it gets moving, so in a way, the trajectory is clear and the amounts are -- this is a big machinery. But we believe that it will go faster than the contactless then. And then that's up to the -- there's a lot of banks that need to launch this. So that's all the process that needs to happen. That's why it takes time. It's not like PC or mobile industry where 5 players can basically decide to launch massive amounts. But here it takes thousands of banks right to get going. But of course, step by step it's happening. It's fantastic to see. A little bit of comparison, right? So it takes years to get those billions of cards, of course, that's why you can see for sure. But huge growth, of course, as you move into it now.

And in terms of profitability, I mean, this also plays into the thing we're talking about for profitability. Gross margins will be better here than they were in mobile. And I would also assume that pricing will be much more stable over time as well. Is that the correct assumption?

Yes, exactly. It's kind of good growth over the year. Our ASPs are clearly higher than in mobile, margins are clearly higher than in mobile. And that's, of course, why all these new areas where it's access, payments or PC, are so fantastic new areas for us to have 3 new legs to grow on and not only, even if mobile continues to grow. But of course, those 3 units are fantastic to see growing now.

Well, time is running out. So maybe, one final question. So there's one area we haven't touched, access. So I think access today is mainly, smart locks in China, if I understand things correctly, but you've also said that access cards, for instance, is starting to accelerate. What are the big drivers here in the access business?

Yes, the access business is very fragmented. It's many different subsegments, right? And you're right, most of our business has been on the China door locks. And now we see USB sticks, we see electrical scooters where you start bringing biometry into, and we see that automotive industry, what is starting now to happen, and you have many, many other different subsegments coming. So it's almost like an IoT. It's an IoT segment where biometry will come into all kind of devices where you can either in iris or in fingerprint sensors or in face, right? You can see that it's coming in many form factors and many ways now to help out. And then one of those segments is the access card, which is a huge -- there's a huge amount of access cards and I think there's a very simple reason why access cards are now getting much more scrutiny as well. It's just security, right? I mean, your access card is, anybody can walk in with it anyway, right? It doesn't matter. And now, with the zero trust in cybersecurity world. We use this word, zero trust, which is that you don't trust any access, anybody who's coming in, but that means you check it all the time. You check it constantly, right? So very clearly, you need to add also the access card is being added now that this -- it cannot be so at the password needs to go away and the access card needs to be much more fortified and one is to bring fingerprint sensors into the card, whereas then only you can use your card. And then we know that it is you who accessed that situation and that facility or that office and so forth or used this machine and so forth, right? So that is happening now. I mean, it's raising just a huge -- keep rising in cybersecurity hacks and attacks, and just trying to fortify much more, right? So now you can see that the access cards are just -- they're just wide open. It's like, it doesn't matter. The weakest link is always the weakest link, right? So if the password and the access card is just ridiculously easy to hack and go through, it doesn't matter how much you fortify everything else, right? So now, the eyes are moving also here. So I think that's one of the big shifts that is happening now with the zero trust and all of that thinking that you need to fortify all of the parts and lift everything up to a certain new level in security as well. So now, we see a lot of interest also in the access cards and access methods, right, which needs to get much, much better. And I agree, actually, it's ridiculous. It's horrifying how easy it is to hack those. It's too easy. So you need to tap those as well. So...

I think time is unfortunately up. But thank you very much for being with us today. Super, super interesting. Lots of reasons to come back to you. But thank you for today.

Yes. Thank you very much, Markus. Very good to be here on, and talk to you soon again.

Thank you.

Thank you.