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

Hi. Welcome to Carnegie and our interview with Fingerprint. My name is Markus Almerud, and I'm an analyst here at the bank. I got with me Adam Philpott, who's CEO at Fingerprint. Hi, Adam.

Hi. Great to be back with you, Markus.

Good to see you. The release starting yesterday, puts and takes, but overall, it feels like it's moving in the right direction.

That's right.

If we start with top line and talk about the organic growth. I mean, you saw 10% organic growth, both sequential and year-on-year. And I guess, sequentially -- yes, you saw this sequentially is quite important. So it seems like the revenue trend has turned. Talk a little bit about demand in general. What's it like?

Yes. I mean, I would say, firstly, I see year-on-year is more consequential because for sequential, of course, Q4 is often -- for many businesses, more of a hockey stick. So I would expect Q4 to be slightly higher, and it was -- and I was pleased with how that came out since it's not always been the case. But I'm super pleased with seeing the year-on-year performance there, too. The other thing I would say is we opened the report talking about our transformation. And so as you think about the backdrop for that business performance, there's a lot going on in the machine, retooling the machines to get it to where we want it to be. So to be able to simultaneously focus on running the business while we're transforming the business is no small feat. So I was particularly pleased that we were able to continue to run and build the operation whilst making a lot of those transformational changes, which I spoke about on the report yesterday, which I spoke about also in Q3, really, really pleased to see that. If I double click a little bit on those results, there is also an element in there of the strategy and the transformation that I've put in place starting to play out. So a really good example of that, I think, is the PC business. Really nice to see us growing the share of the revenue mix that comes from PC. Really nice to see that business grow extremely well, 60%, very, very nice for us to see that because, as you know, the strategy is to diversify into higher profit areas where mobile challenges look set to continue. So seeing PC, which is much better GM for us, perform was a particular standout for me as well.

So there's a lot going on under the hood, so to speak. But if we try to digest the report a little bit. And maybe starting with mobile. I know it's not the focus for you, but it still accounts for the majority of your revenues and it is recovering from low volumes. What are your thoughts about mobile?

Yes. I mean whilst the unit and the volumes are recovering, I would say, obviously, the gross margin isn't. And so that remains a challenge for us. So as I said in the report, the outlook for mobile is -- I mean it's a China-centric business. The outlook, it looks set to endure. There is still overstocking. But beyond that, there are economic forces at play. It looked like the long-term outlook for margin is just not particularly impressive. The other thing I would say is even if you look at side of margin, there's a higher risk in that business through geopolitical uncertainty, and that's no small thing. So the strategy will continue to be to invest our dollars outside of mobile sensor hardware and therefore, look to shift our mix over to those other areas. And the other thing I would say is that the priority then becomes not so much about top line. You know that the phrase turnover is vanity, profit is sanity, right? So it's staying same and looking at the profit that we're making as a company is the primary thing and revenue is second to that. So just making sure we're shifting that revenue mix over, but we're doing so to places where we can get long-term profitability. That absolutely remains the strategy, and that's where we'll put our investment dollars.

And one of those areas is a critical area for you, at least at the moment and going forward as well as PC. So a lot of things are happening in PC, 60% growth this year. It now accounts for 14% of sales. And you had Asus announcing a product with your sensors in it.

That's right.

Talk a little bit about the PC market and what you're seeing?

Yes. I mean so the PC market, I would say, is slightly more conservative than the mobile market because the mobile market is so fast, such a true consumer good in terms of the volume of sales that those partners drive. It's a very aggressive pricing market to be in. Whereas PC, a bit more conservative. And the reason for that is the -- there's a greater rigor because these are often primarily either educational or corporate devices. There's a kind of a different mindset around PCs, and there's more of a value put upon premium players. So that stands in really good favor for us because the security of the capability, the ability to look at false accepts, false rejects, there's much more higher value put on that. And also things like time to unlock when I put my finger on a sensor, how quickly can I get access if it takes time, pretty poor user. So there's much higher value in that product than you would find in other types of faster-moving products. So that's actually quite a nice market for us because we're a premium player. We have the best technology out there, the most reliable technology out there. So it's a really nice market for us. Much better profitability, of course, as well. The other thing I would say about PC is you talked about Asus, great that we've had some fantastic announcements with Asus, not just on Microsoft hardware -- certified hardware but also on Chromebooks as well. So really nice to see us providing technology across the gamut of technology there. But also, it's a really good proof point in our strategy of expansion, moving up the value chain, getting a bigger share of the pie because as you've seen what we've done with the MCU as well, that complements the detect on the Match-on-Chip solution that we have. So when you tie those 2 things together, there's benefits for the customer in terms of technology integration. So there are fewer suppliers to work with a more integrated and better security in that technology. But then obviously, because it's from fewer suppliers, there's just less complexity, less margin stacking going on in there. And so it's a better economic outcome too. And then for us, the value we gain for that is better solution, fewer partners for them to deal with, and therefore, we get a better overall revenue and a better overall margin from that. So we absolutely see that as something that's going to move us into the future, too. So really nice to see that out there meeting with customer and success, we see a good growth path for that.

So I wanted to dig in a little bit to that particular question because the model that you were just talking about with your own MCU, I see that as an example of where you want to go. You talked a little bit about that on the call as well that you don't only want to sell the hardware, but you want to have more of a system thinking to raise the profitability. Is that the right way to look at it? And will we see more of this?

I would clarify that a little bit, actually. I would say, as you think about our -- we talk a lot about our transformation. We talk a lot about our diversification as an element of that strategy. And what I would say is that there's -- I see it in a couple of ways. Diversification is about how do we take what we have and we do more with it. But it's also how do we get into new markets also. So I would say the systems expansion strategy is very much about how we expand what we already do. We've got great strengths in there. Let's do more of that. So that's how I would tie that to the strategy. It's not better or worse or less or more important than that, other new markets diversification, it's complementary. So I would see it that way. A couple of examples. We talked about PC. We talked about the MCU expansion to that system. We've got Microsoft approved status with the Match-on-Chip solution as well, tying into Windows Hello, which is where the security market needs to go in terms of biometrics and getting rid of passwords, which is a passion of mine is to get rid of passwords and passcodes and any type of PIN. It really ties in nicely with that. There are other dimensions I think and I'll touch on that maybe a bit later that we're doing within our portfolio to drive expansion, not necessarily technically, but from a market perspective, too. And then, of course, there's the net new diversification that we're also including in our strategy to get into new modalities and new markets. So that's kind of how I see that tying in with diversification and then with a broader diversification strategy.

If we move on and we talk a little bit about Access. So Access outside Asia grew quite significantly in the quarter, even though it was down in the full year. If you look at the Access market, which products do you see growth? And then what are the trends that you're seeing?

Yes. I would see -- and I touched on this a little bit, but I'm happy to go a bit deeper on that. I think Access, firstly, it's a lumpy market. It's -- there's very large or a very lumpy project-driven business, which then kind of creates a kind of predictability dynamic that's hard to manage, honestly. And so I do see ebbs and flows seasonally in that performance. And obviously, because the physical side of Access is tied to -- broadly to the construction industry because it's less about retrofitting, then we ebb and flow as we see those market dynamics, and we saw a downturn in construction in China, which then had a negative impact on the overall Access performance for the full year. What I would also say, though, beyond that is a super fragmented market. And so one thing that I think we can do more of to mitigate that lumpiness and to mitigate the fragmentation is look at our channel strategy there. So that's really a core part of both the product and the go-to-market strategy within the functional pillars that I've now put in place in terms of our leadership structure. There's some really nice work going on, on the product side to have a product that's really easy for partners to be able to onboard and consume and adapt to their given use cases of their clients. So there's some good stuff on the product side, equally from the go-to-market side, looking at -- targeting the right channel partners as part of our new CROs plan that she's putting together for this fiscal year, of course, too. So there's a nice channel aspects I see as an opportunity for us. The other thing I would see though is, is around FIDO. We've been very focused on physical security. I think the logical access could be very interesting for us, too, the FIDO Alliance. You may have seen some recent announcements from the likes of MasterCard, doubling down on seeing biometry is a really important future for them as well. They were publicly -- and made some statements around that a month or so ago. So I think there's some really nice opportunities there for Access. And then the third thing I would say is that what I've spoken about so far with the channel piece with FIDO today, I'm really thinking about that as a Fingerprint opportunity. But when we think about Access, there's also the iris opportunity. Let's not forget that we are multi-modality. We have really good iris or we call it touchless capability. Touchless is going to become an increasingly useful word as we think about ongoing authentication versus just one-off point in time transactional authentication for identity. And so there's some really nice potential in our iris assets, too, actively engaged with driver monitoring systems providers to help them take a greater value to the automotive manufacturers as regulation comes in around DMS, driver management systems, to allow things like identity and then all manner of different use cases and opportunities that spin off that. So a really nice thing there. But even as you look to the medium and long term, as we think about what Apple are doing to build out their ecosystem around the Apple Vision Pro, they actually have iris technology for identity baits in there. Now you don't need a too long of memory to remember that one of the things that led to the boom in biometrics on mobile was Apple. They were the first to do it and then the others would rapidly call up and overtook them using our technology, and we benefited from that. We see an opportunity to do that again. It's not an overnight thing, but we see an opportunity there as people move to augmented reality in terms of -- as a replacement for the mobile phone and virtual reality is a replacement for screens, laptops, et cetera, too. So that's a big opportunity. More medium term, maybe long term, I would say, but a really interesting use case for iris and something we're starting to see market build around already.

You pick up on the word overnight. Another market that has not been successful overnight is Pay. So what's going on in Pay? I mean it just doesn't take off and I think, I and others had expected for it to take off maybe this year. And we've been having those expectations for a while. What's going on?

Yes. No, I'm with you, like I'd love to see this thing move faster. I'm not surprised, honestly, if you look at some of the other markets we're in, these markets take time to take off. I mean you look at Fingerprint on the phone, look at Biometrics more broadly, there's a pretty long cycle around that. Here's the thing, though, I'm not very patient. And so what I'm not going to do is say, it will be okay, and just wait for it to happen. What we are going to do is kind of look at how we catalyze that market. I was talking to some of our partners in this space this week and so far this year about this because it's really important that we, as a payment community, they're aligned around being honest around the pace, but also thinking about what we can do to stimulate it. That's our job, not to observe it, but to participate and articulate the value and why it should move quicker. And I think as I look back, one of the things that's happened over the last few years is it's been very thin. It's been a lot of market-making where we're out there, driving awareness, helping people understand what's the art of the possible, how would this work, how we prove it, doing pilots, doing demos, testing technology to show it's viable working across the ecosystem because it's not just here is a card that has to tie in to the schemes like MasterCard, et cetera, the whole ecosystem has to be aligned. So it's been this very thin workload of driving awareness and working across the whole ecosystem. This year, I think we need to pivot. This year, I think we need to start to go deeper and to say, okay, driven awareness, who's really interested? Who wants to move? Where are we going to take all of our time and instead of spread everywhere, focus it, focus on energy where we see people recognize that value and want to participate in that value creation. Because what I think will happen is there are some people who are going to be first movers on this. Those people will gain the greater benefits of it, and then others will either fast follow or be laggards depending on the nature of their culture and their clients. And so our focus is really on those first movers now with our partners to ensure we're working with the providers, the issuers and obviously thinking not only about who wants to get on board with this, but actually how they can be successful in adoption. It's all very well and good if we find a bank and they want to do something, we say, okay, here's 1 million cards. That doesn't make anyone successful. The other part of this is how do we ensure that their clients use those cards that's easy for their clients to get to get enrolled with those cards. So you will have seen the Smart'Nroll stuff we announced, I think, in December. There's a bunch more other things that we do with our partners around enrolling a card on either the banking app or a separate app, even on POS. There's lots of capabilities that are proven that can ride as part of these rollouts, so it makes it super easy for the bank to advertise to drive adoptions and roll out, et cetera. I think that's a really important part of it is understanding the overall consumption experience. And I think we have a role to play there. We have the technology ready to go. So I think that's an important part. I'd love to see this year also.

And maybe finally, a little bit about cost. So you're in the middle of a cost plan. You plan to cost 15% of OpEx. You've started to see a little bit but maybe talk a little bit about how it's progressing, when do you expect savings to be fully implemented, et cetera.

Yes, that's right. So I would say the -- I'm pretty pleased to announce it. I mean, I announced that 6 weeks after I joined. And it's so important to move fast on these things, not only to get the cost model in the right place, but with all respect for the great employees that we have and the work that they've done for this company. I think it's really important to move on that. We did incur as you would have seen, we incurred, I think, $37.5 million of costs related to it because when you take cost out, you have to spend money to save money, right? They are particularly around talent and other types of facilities. Beyond that, there are costs associated. So we did incur costs on that, but I think the savings are really the important part. We announced and we're on target to deliver a cost saving of about $204 million annualized, and we'll see the full effect of that in the second half. You can kind of paraphrase from me earlier or use my phrase overnight, right? You don't get these cost savings overnight. You make the strategic choice, you implement the action, but it takes time for those to feed through the system. So we'll expect that feeding through the system throughout the first half of this year, getting to a net-net run rate of about $180 million of OpEx on an annualized basis. So I feel good that it's on track, but obviously, there's some work ahead of us just to continue to execute that.

Adam, you're in the middle of transition, you are cutting 50% of cost, and there's a lot of things going on in the market and under the hood. I think we'll leave it there for now and we'll -- there will be many opportunities to come back to many of these questions. But thank you very much for coming to talk to us for now and then speak soon.

My pleasure. Thank you.

Thank you.