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

Hi and welcome to Penser Bank and our interview with the temporary CEO of Fingerprint, Ted Hansson. Hi, Ted?

Thanks for having me.

Thanks very much for coming and talk to us. So that's been about 10 days now, beginning of November, you said that press release where you take over as a temporary CEO. So with the background of that, maybe we can start with -- if you could tell us a little bit about your background, what are your experiences? You're based in China? How long have you been in China?

Sure. Yes, definitely. Yes. So it's been 10 hectic days, I have to say. And you're right, I'm based in Shanghai in China. I have been in Fingerprint Cards since 2013. I was actually the first employee in Mainland China of Fingerprint Cards. So this means I've been in the company since the very initial promotion of our first area sensor or touch sensors as we call them now. So that one led to the very successful launch of the Huawei Mate7 in 2014. And after that, as I'm sure you know, and many people that follow us, after that, we have a very strong growth. And I was involved in building up the sales team, the customer support team, the development team, we managed quality, supply chain and so on from China. In 2017, I was appointed as Senior Vice President for the Business Line Mobile and became a member of the management team of Fingerprint Cards. And early this year, I was appointed President of the same area basically, which meant that also the R&D and operations came under my responsibility. And this area actually took 98% of the company revenue in 2021. So I believe I have a pretty good understanding of the majority of the business in this company. Of course, I have to be open and say that I still have some work to do to get into all the details of the exciting activities that is happening in the other leg of the company, the Payments & Access Tax. So as you said, I was recently appointed acting CEO. And actually, I will move back to Sweden with my family during next month after 19 years in Asia. So during this 19 years here, I actually have always been working for Swedish tech companies that are selling to the smartphone ecosystem. I started 2003 in Ericsson mobile platforms in Shanghai and then I went to Taipei in Taiwan and after that I went to Seoul in Korea. And here, I took stepwise more and more responsibility. I would like to say in 2010, I decided to leave at that time, it was called ST-Ericsson. I moved back to Shanghai. And I joined a Swedish company called Nanoradio, which was doing a very small and very power-efficient WiFi solution. So I was driving the Nanoradio business in Asia. And in 2012, we were acquired by Samsung Electronics. So I merged with Samsung, and I had a very interesting year there, but in 2013, I decided to leave and I joined Fingerprint Cards. And more about me, I have roots in Helsingborg or I'm from Helsingborg. I've got a Masters Degree in Electrical Engineering. That's my background.

So you've been -- you said 19 years in Asia, right?

Correct.

And the majority of that has been in China itself, in Mainland China?

Yes. I would say that I have lived 15 years in Mainland China, and I stayed in Taiwan for a bit more than a year and I was in Korea for a bit more than 3 years. But during that time, I was constantly traveling, especially in the beginning. So I also spent a lot of time working with mobile phone customers in Japan and so on. So I had to handle the whole Asia region basically. But you're right, I mainly, we're living in Mainland China.

And I would assume then as Head of these businesses and being based there, you've also handled -- you've also dealt a lot with manufacturers, suppliers, the entire value chain, so to speak, in a direct basis.

Sure. That's true.

And we talked a little bit about it, but is it how have your thought about building the Chinese business been? That is, are you using -- if we think about factors such as do you use local people, international people, et cetera. So is it built and how have you been thinking about building that business?

Yes. So as I explained, I've done this a few times before. So when we set up Fingerprint Cards in Asia, it was actually my fifth time involved in that. And I like to believe that it's got better and better for every trial, so to say. And for me, some of the key success factors are to establish the right company culture. So there is a huge difference in typical Scandinavian culture and the typical Chinese company culture. And in order to make these two teams work together, you have to make sure that they understand each other, that you can speak openly, you can challenge like we do in Scandinavia and so on, to make sure that we have efficient and wide communication between the teams in Asia and Scandinavia. So that is essential for success. Another point is that you really need to create clarity of what are the roles and responsibilities of the different offices and the different departments. I strongly believe that individuals and teams perform better when they have clear expectations and clear ownership of something. So my previous experience in the other companies actually help me to create this culture from the very beginning in Fingerprint Cards. And when I started, we had a project model with a certain number of engineers to support one customer, but as you know, very quickly, the number of customers increased almost logarithmically and the number of projects as well. So in order to scale with that increased business, we have to come up with new ways of working and more efficient ways of working. And we managed actually -- so far, we have managed to launch more than 600 mobile phone models with more than 30 different brands without scaling the team linearly with a number of customers. And that is something that I'm really, really proud of, actually. So today, half of the Fingerprint Cards team is in Asia. So we have a significant presence in Asia. We have around 100 people in Mainland China. So we have offices in Shanghai, where I'm based, is the biggest office by far. We have office in Shenzhen. There's a lot of OEMs in South China Shenzen. We also have office in Beijing. We have a office in Xi’'an in West China. We have 2 offices in Taiwan, Taipei and Hsinchu. We're also doing PC and ASIC development in Taiwan. So Taiwan is a very strong base for PC manufacturers. And then in addition to that, we also have smaller sales and support offices in Japan, Korea, India and in the U.S. So for me, the clarity, the culture is really, really important to make sure you get an organization that can deliver. And probably a lot of the people that we have hired in Asia joined Fingerprint Cards, not only because of the interesting technology, but also because they wanted to be in a company with this open culture and collaborative environment. So I think that's something that really pays back, so to say, a good investment.

And I mean you now had a mobile and PC, and you said here before that in last year, you had 98% of sales was in China. So -- and I mean, I understood you've been kind of in lockdown for some time. So you spent a long period of time in China itself. So tell us a little bit where the market is now that talks about lockdown standing, are you seeing any of that, how are the consumers acting, et cetera? What are you seeing on the ground?

Yes. So let me first, if it's okay, give you a little bit -- a brief history of this COVID. So actually, in the very beginning in 2020 when COVID appeared, it just took like 1 or 2 months and then life was almost back to normal for us in China. So our office was closed for, I think it was 4 or 5 weeks. But then people came back to the office and everything was running as normal. I didn't wear a face mask for over a year. I didn't do a single COVID test, the first 2 years of COVID in China. So at that time, when the Western world was facing all the challenges with COVID and a lot of people getting seriously sick and so on, we actually did quite well in China. And that, I think, is also one of the reason why we managed to keep our business plan in the growing plan in 2021 because we could run the Chinese business as we planned, right? But something happened in 2022 with the new variants of COVID-19. And I think that combination was, of course, the lockdown. So Shanghai was locked down for 3 months. Me and my family, we were not allowed to leave our apartment for 72 days straight. And during every day, you need to do the PCR test, you have this constant stress that you will be taken away if you turn positive. In the beginning, they separated children from their parents, which was, of course, a big something scary as a parent that you don't want that to happen and so on. So after the lockdown finished, the situation has not really been able to go back to the way it was before the lockdown basically. And right now, there are an increasing number of cases in China. So yesterday, it was reported 18,000 cases in China, which is a really, really high number for China, actually. And it's in every province. It's in many, many cities. However, despite that, I start to see some quite positive development on COVID in China. There has been no death reported for a few months now. And last week, several of the COVID restrictions actually were relaxed by the central government. So as an example, that they have allowed more international flights. It's still a low number, but it's actually increasing for the first time in 3 years. They also removed what they call the circuit breaker that international flights will be suspended if there are too many cases, and they have reduced the quarantine, and they have stopped doing this mass testing and mass lockdowns unless the transmission path is unclear. So I start to see that there is now a different balance between avoiding the spread, avoiding COVID, and considering the economy of the country. And I start to see some positive signs and more optimism among Chinese people in general, but also among our customers. So I believe that now China is going to change the balance in a bit, and it is going to gradually be less and less restrictions. So I'm actually -- I really hope, and I believe personally that we are through the worst part. And from now on, it will actually turn better.

And what do you see on the consumer side? I mean, how are consumers acting in all this? Because I mean, of course, when you are -- when you see a lockdown, you are at risk of being moved to detention center, et cetera, and you fear about what are you going to eat tomorrow, what -- et cetera. You don't really care about things like changing your mobile phone and things like that. But how are consumers acting now -- and do you see difference?

Yes. So this year, the global mobile phone market is down some 8% to 10%, but the Chinese domestic mobile phone market is down with 23%, the first 7 months. So clearly, there is a much bigger setback in China than the rest of the world. And that is triggered by exactly what you said. People have different priorities. We can see the unemployment rate is increasing and people want to conserve cash, basically. Consumption is not the priority. However, mobile phones are essential part of everyone's life. I'm sure you know in China, like in every other place, you use the mobile phone when you commute to work, you use it for gaming, use it for social networking, you use it for payment. And I think that when there are positive signs, the Chinese market will come back strongly. That's my strong belief that we will see a strong rebound when the restrictions are relaxed. And even though 98% of our sales last year was in Mainland China, the majority of our Chinese mobile phone manufacturers volume is outside China. And that has, of course, a smaller impact than the domestic market. So some 30% to 40% of our customers, of course, it's different for different OEM, but around 30% to 40% of their business is within Mainland China and the rest is in other countries basically. And it's, of course, less than where there is a lower impact of the COVID restrictions.

And I guess that's also why the -- so if we talk about the -- you move on talking to inventories, because this has been one of the key issues that the inventories of the OEMs are, from what I understand at historical lows. So they went into this period with higher-than-average inventories and then they drew them down and they're now at historical lows. Have they started to increase at all or do they keep them at this low? That was basically the first question. The second question, if you can talk a little bit about the rest of the value chain where we are there, that is the module house of distributors, et cetera, so we move up the value chain or supply chain?

Sure. So as you say, there is a long chain that we are sitting in the front of. So when the demand drop happened with the lockdowns, we saw an immediate impact on the whole supply chain. So the OEM customers, they slow down the production and they started destocking. So they were sitting on complete phones that's normal for OEMs. It's different for different OEMs. But in my view, a normal value is 60 to 90 days of inventory that is typical, I would say, for our mobile phone OEM today. So they start to try to free up cash and selling that one, right? And then, of course, that led to that they stopped taking modules from the module houses. Then that, of course, meant that the module houses were sitting on their inventory and they stopped taking deliveries from the distributors. And the distributor is our direct customer, typically, right? So the whole chain came to us stop. And now we see that -- we see signs that this starts to move. So we have previously said that we expect an impact in Q4 and also in Q1 next year. But it is moving, and we start to see that the whole chain is moving again basically. So that is a very positive and a good thing to see. So step-by-step, gradually, it will get better and better. And over time, we will get back to a more normal situation. Of course, it will be a bit lower run rate than previously because the market is down 8% to 10% globally. However, it will grow in 2023, according to most of the external analysts -- analytics and also it will continue growing in '24. So by 2024, I think the industry consensus is that we will be back to the 2021 levels basically.

And I would assume then, if you talk about how the business works here that what we had now was inventory drawdowns and you drew them from higher than average to lower than average. If you were right that the consumer comes back and you see quite strong purchases and growth when they come back and you see a strong rebound, would you also expect for this to be accentuated up in the same way as it was accentuated on the downside that is you will have some inventory buildup, which will make the movement even stronger? Is that a fair assumption to make? And how does it look like that historically?

I mean, of course, I cannot -- I cannot say how the OEMs will act. But typically, one of the main strengths of the Chinese smartphone ecosystem is speed. And when there is an opportunity, typically, Chinese OEMs are very fast to capture or to try to capitalize on that opportunity. So I believe that the scenario that you just presented is a likely scenario to happen. But of course, it is not for me to decide how the OEMs will manage their inventory. But I think that is a likely scenario, because definitely, I mean, there is no doubt, mobile phone market is here to stay. And these OEMs, they want to fight in that they want to gain market share. So they need to be fast and they need to grab the market once it starts to move. So I hope you're right, and there is a good chance that you are right. Actually, I want to say one more thing. So during this destocking that has been going on, I just want to point out that this is not something that only happened to Fingerprint Cards. We can see in quarterly reports from our competitors that they built significant inventories, many of them more than us, so to say. And from our perspective, we don't see that we have lost market share with our existing customers. So this is something that the industry is experiencing is a temporary thing due to the COVID lockdowns and the destocking and the uncertainties. But we have a strong belief that the market will bounce back and that we will see good movement and gradually better and better speed in the supply chain going forward.

And you mentioned that you think there will be a couple of quarters. So you will see these troubles continue in Q4 and also in Q1. And then assuming that you will -- that the other scenario will kind of play out, where will you be, so to speak, when we get out of this?

Well, I think when we get out of this, over time, there will be a better balance between supply and demand. And also temporarily now, there is a strong price pressure, especially on the mobile capacity business, because everyone has been sitting, has been building inventory, and the market is smaller right now. So of course, many of our competitors are struggling to survive, and they are doing everything they can to get business, which leads to a lot of margin pressure on the commoditized products in mobile capacity. But over time, I expect that -- the market will correct itself. We will have a better balance between cost and the selling price, and it will go back to more normal levels over time. That's my expectation. And when we are out of this one, I think we will be very nimble and very strong as a company.

So do you think you will come out of this stronger than you were before? And do you hope to gain some market share in this process? Or do you think it will be basically the same?

We are every day fighting for market share. I mean, we are a leading company in this industry, and we want to have a significant market share. We want to be able to have scale of economy and so on. So we are definitely in this to continue taking market share. That's our clear goal.

Let's move -- let's talk a little bit about on the display. So you have a large Asian OEM, who signed a contract for -- which is the first on display sensor that you have. Maybe talk a little bit about that and what usually happens after this in your experience, that is this was the first customer, the first large order, the first design win. Are there any more on the horizon? Do you expect to kind of -- now that you have one foot in the door, so to speak, that they will kind of be snowball? Or how do you expect this to evolve?

Sure. So you're right, we have communicated a design win with a large Asian OEM. And this is still relevant. This is still there, the situation we are in. And we still expect to get the first volume shipment during this quarter as we already communicated. And for us, entering the optical under display segment is, of course, a really good way, a great way of growing our business. Volume-wise, the optical segment is around half of the volume of capacity. But if you look at the value of that segment, it is comparable to the capacitive segment. So this means that we have a good area to grow in when entering the optical business. And we have a really long and deep relationship with many of the top OEMs in the world, and they welcome us to be a supplier also in this segment. So once we have launched with good performance and good quality, we need to prove that. Nothing is for free. We need to prove ourselves. We have competitive performance. We have good quality. Just like we do in capacity. I don't see any reason why we should not be able to win more customers over time. I think all our capacitive Fingerprint sensor customers in the smartphone segment are addressable customers also for optical. And of course, that is our ambition to win those over time, definitely.

Maybe a couple of finishing questions, times running. But maybe talk a little bit about PC. You also had a PC, house PC progressing. And then finishing off with a larger kind of question, how do you see the short and the long term kind of like a more broader picture?

Sure. So we have today running business with 4 out of the world's top 6 players. Of course, I'm very happy about that. PC manufacturers, they are more conservative than mobile players. It takes more time to enter. And once you're in, you'll typically start in one model or one segment with a low market share. And then over time, after proving yourself in quality, in delivery and support, and so on, you can grow your market share and you can move to the different segments within that OEM, laptop OEM. So now we are in a stage where we are shipping, but we have a lot of work to do. There is a lot of room to improve our market share within the existing customers. So that is something that we're pursuing now. In addition to that, we are working on adding more customers, of course. And I hope I will be able to communicate more around that when we make progress on that. There is also an ambition in the company to climb in the value chain for PC. So in the PC, the biometric solution consists of a fingerprint sensor and an MCU. So that is a small CPU. And we are aiming now to have an in-house MCU, which means we will provide a full solution, the sensor and MCU. This will give us an advantage to make system level optimizations. We can combine the know-how of the algo to make sure that the MCU system is optimized for that, both in terms of processing speed, memories, peripherals and so on. So it will be a good way for us to provide better performance and a better system optimization. Of course, it will also remove margin stacking in the solution, and we will get better control of the supply chain. So this is something interesting that we are working with right now in the PC side. And then if you talk about the short and the long term, I think short term, the next 6 to 12 months, I think we will see continuously that the effect of this destocking is being reduced step-by-step. This means that we will stepwise be able to release our inventory that we have built up during this time, right? And of course, that will have a positive effect on working capital and cash flow for us. I also believe that we will see a gradual increase in demand. Of course, this is dependent on the COVID situation and the global economy, but I believe that there is a room that the demand will go back to more normal levels. And also, we have been executing a cost-saving program that we have previously announced, roughly 20% of our OpEx. This one, we will expect a full effect from in Q4. So that is within the next 6 to 12 months. If you look a little bit longer, I think the mobile market is going to go back to growth. Definitely, our new areas, which are PC Access & Payments, they are all areas where there is a really strong growth potential. And we expect next year that these new areas, including the optical under display will take around 45% of our total revenue. So this year's -- this year -- sorry, in 2022, roughly 30% of our revenue will be from these new areas, but we see that it will increase to around 45% in 2023. Also, these new segments have longer project lead times and longer sales times, that will help us to get better predictability and visibility of the business. And of course, the more legs you have to stand on, the more stable you will stand, when there is something external that is shaking around in the world. So I'm very excited about the future. We have a lot of work to do, clearly, but we are in a situation where we have many growing areas. We are entering the optical under display for the mobile phone. And we expect -- I expect to see that the mobile phone market will step wise get back to growth. So I'm very excited about the future, I have to say.

I think we'll probably round-off there. It was super, super interesting to talk to you, and we'll have a reason to come back to many of these topics in the future. But for now, thank you very much, and I'll speak to you soon.

Thank you very much. Have a good day.