IDEX Biometrics ASA (IDEX) Earnings Call Transcript & Summary

Hello, and welcome to Nordnet. Today, we are joined by Vince Graziani, CEO of IDEX Biometrics. IDEX Biometrics is a leading provider of fingerprint identification technologies offering simple, secure and personal authentication solutions. My name is Roger Berntsen. Before we move on, it's important for you to know that this session shall not be considered investment advice. Our goal is to learn more about IDEX, the company and its underlying industry. So Vincent, first of all, thank you for joining us today for this Q&A session.

Thank you, Roger. Very much appreciate the opportunity.

So let's head straight into the first half of 2021. While you while your revenue remains modest, your order backlog is expanding. Can you give us a brief summary of the first 6 months of 2021. Have there been any major setbacks related either to the COVID-19 situation or something else? And what are your greatest achievements in this period?

Yes. I just flipped over to a slide that talks about some of the achievements so far in 2021, and it really has been a pivotal year for the company. IDEX has been working on technology to enable fingerprint biometrics to replace a pin in the Chip and PIN credit card, as you know, our payment cards, credit, debit. And so this has been a big year. We've launched our TrustedBio Max, which is our now third-generation technology, which is very highly differentiated. And it reaches the point where it hits the user experience that is seamless compared to a standard contactless transaction users of a biometrically enabled payment card with the IDEX technology, latest gen, will be able to walk up to a terminal and tap that terminal and have your fingerprint biometric verified in the full transaction end-to-end concluded in about 1/2 of a second. So the user experience will be basically seamless, but infinitely more secure. And we really think this is the tipping point that is really enabling this market to take off in a big way. So for a big year, the first customer to launch with our TrustedBio product is IDEMIA, they're one of the top 3 card makers in the world. They're now actively marketing their card based on IDEX Biometrics. We anticipate many banks to start announcing that they are running initial programs, soft launches. And several banks in the Nordics, et cetera, will be launching well-known banks to many of your investors, and that will be coming in -- just in the coming weeks. So that will be all based on our TrustedBio solution together with IDEMIA. Our partner Zwipe also announced many banks out there that they have signed up for initial trials and runs. So there's many proof points that the market is really starting to take off. Beyond that, in this year, we've been working with our partner, Infineon for over a year on a complete turnkey reference platform that leverages our TrustedBio solution with the latest secure element from Infineon. And the Secure Element chip is the chip in a standard Chip and PIN card. Infineon has been a leader in that space for more than 2 decades. It was my prior employer. In fact, when I was at Infineon, that was how I came to know IDEX Biometrics, as we were already working on this partnership. So this partnership together with Infineon is a full reference platform that integrates their latest generation secure element, the full TrustedBio Max. And we're now able to prove to customers and card makers and demonstrate this half of the second or 0.5 seconds transaction time for the -- for a full biometric transaction with a contactless payment card. So this partnership is not only commercial validation of our technology, but it really, again, puts out there a technology platform the card makers can use to very quickly get to market. So another big proof point and another big achievement for us in 2021. And then we're -- The other thing that became big news in 2021 is we've traditionally talked at IDEX about targeting the traditional payment card market, so EMV type payment cards, debit and credit cards that we're all used to hear in the West. Beyond that, there's an entirely new opportunity that by itself is over a $1 billion opportunity. And that's the opportunity for central bank digital currencies. And as many people know, China is now openly talking about this, they want to be the leading major economic power to go to an all-digital currency and be the first to go there. And part of that initiative means that -- they need to have a method to include all the population into the banking system. If you go all digital currency, today, many of those digital currencies are controlled on your personal level by an app on your smartphone. The app on the smartphone is fine, but if you want to have everybody in the population using digital currency, you need some alternatives, many people don't always want to use their smartphone for payments. There needs to be a method for payments when you don't have connectivity, and you need to have a method for payments for those that just simply don't have a smartphone. And in China, that means there's 400 million people that would prefer some other method than the smartphone payment. And there they're using what they call a digital hardware wallet that looks very much like a standard payment card today. And because there have been heavy NDAs, we haven't been able to talk about this until 2021, but IDEX has been working with all of the top major players in this space, including the top 6 regional banks that are part of this initiative. And we've been working with all the major players that are building cards for this initiative in China. And now the Winter Olympics are coming up in Beijing in the winter of this year. And that is going to be the first major trial where the government is going to mandate that all transactions have happened at the Winter Olympics are with digital currency transactions, and therefore, cards based on IDEX Biometrics through several of our partners will be featured during the Winter Olympic games. So a big year for the company.

So when it comes to the COVID-19 situation, we have heard from many companies in different industries having some sort of problems. Have you experienced some troubles during this pandemic?

So COVID-19 has been a little bit of a double-edged sword for us in the -- at IDEX. So on the one hand, there were many bank trials that had started in 2019 and 2020 that were paused or slowed down or put on hold because of COVID-19, it's hard to run a trial and learn what you want to learn about your biometric payment transactions when no one's out shopping. So that slowed things down a little bit. On the flip side, and which I think far outweighs the traction from COVID-19, everybody became aware of contactless payment. And even in the U.S. where people were slow to adopt contactless payment card usage, it accelerated dramatically. In March of 2020, only about 10% of U.S. users were using the contactless feature of their cards. Now it's well over 75% and most people I talk to constantly use the tap-and-go contactless feature of their card. And then adding the fingerprint biometrics enables you to have larger-sized transactions with contactless payment and still have those be infinitely more secure than if you use the PIN, for example. So in many ways, COVID-19 maybe slowed us down a little in 2020, but we'll actually really accelerate the adoption going forward.

Okay. So I'd like to touch up on the addressable market of yours and talk a little bit more market share and growth potential. So what -- can you tell us what's the size of your addressable market? And what market share can you realistically capture long term, and at the same time, be profitable. Furthermore, is the market growing or not? And what pace? Can you give us some rough numbers?

Yes. So first of all, the -- one of the things that attracted me to this CEO role here at IDEX was just the size of the opportunity. I'm a serial entrepreneur. If you look at my bio, I had done 3 start-up companies, had several stints at major -- larger companies as well, but I've always gravitated back to the entrepreneurial attraction of smaller companies with big growth opportunities. And when I started looking at IDEX, I was just amazed at the size of the market space here. And if you think about it, there's 5 billion new smart cards issued every year in total globally. There's 22 billion payment cards in circulation and they have a built-in refresh cycle every 2 to 3 years. So just the size of the overall card opportunity is massive. When you further whittle that down to contactless payment cards, that market is growing very rapidly. And by 2026, there will be 3 billion new smart cards just for contactless alone. So our addressable market is very huge. And when we look at how much we'll adopt into biometric cards, the analysts range all over the place on how fast the uptake will be, but we're seeing that the uptake is actually accelerating and banks that are running trials are -- the demand is exceeding expectations. So we have predicted that about 400 million biometric cards will be manufactured in the year 2024. That's still below 10% of the total market -- for payment cards. So it's still a very realistic number. And if there's 400 million cards, we predict that we'll have at least 50% of the market share because today there are really only 2 players that are making solutions for biometric cards. FPC is a big incumbent. They've done very well in the mobile phone space. They've come up with a solution, adopting their use of experience to come up with a solution for payment cards. And IDEX, we've actually been the first company to build a solution from ground 0 targeting the payment card, and we have quite some differentiation there with our technology. So we're very confident we'll have at least 50% market share. So if we think about where we are today, last year, we did about $1 million in total revenue. If we are doing in the range of 200 million cards by 2024, you can see that our growth rate is very substantial and the market will just continue to grow. As I said, if there's a 3 billion contactless cards by 2026, we're just going to continue to grow exponentially. And that does not even include the market for digital currency in China and other locations that I discussed earlier, which will just drive growth even on top of that.

Yes, you have briefly touched up on my next question, that's about the competitive landscape. So we all know you have an aggressive strategy trying to displace your competitors in important applications. So as you just said, basically, there is only 1 competitor of yours. But what's the size of your competitor? That's one question. And how closely do you monitor each other? And are you increasing your share of design wins or program price? Can you give us some example?

So let's see. Let's talk a little bit about the competitive landscape and what we do differently. So there are -- for biometric payment cards today, really, FPC is the only other player that is targeting that space, but there are many other competitors who make fingerprint sensors. And theoretically, those sensors could also be adopted into a payment card type application. What we do at IDEX really is the core differentiation. If you think about the typical manufacturer of a payment card, the top-tier major companies have big engineering teams to do their card operating systems and software, but for the most part, the manufacturers of payment cards are fairly low tech companies, their expertise is manufacturing large volume cards at a very low cost. So when you add fingerprint biometrics, you've actually turned the payment card into a fairly complex electronic device. So the payment card -- the standard payment cards today will have the secure element chip. And that is a contactless secure element chip. And then an antenna for energy harvesting from the POS terminal, and that is pretty much the entire system, the card operating system for communicating with the POS terminal and approving transactions. Once you add the biometric subsystem, you add the fingerprint sensor, you add another processor to the system, that processor is not only capturing the image of your fingerprint, but then running a sophisticated algorithm to make that fingerprint match happen and approve and move on to the transaction and then further approve the whole transaction. And all of this has to happen very quickly in a seamless way. And IDEX is the only company that is solving their [ solution ] end-to-end. We do a very low-cost fingerprint sensor. We add on the backside of that TrustedBio ASIC, which includes a 200 megahertz ARM processor, additional memory and specialized hardware that accelerates our matching algorithm. So we make a total end-to-end solution, including the overall inlay for the circuitry and the recipes for manufacturing a biometric card, as these -- manufacturing a card like this is very different than manufacturing a standard card. And beyond that, we also do the software and system technology for enrolling your fingerprint at home, et cetera. So we solved the problem end-to-end compared to our competitors. And then the other biggest differentiation is we just take a disruptive approach to the basic sensor itself. So until IDEX, all other fingerprint sensors in the industry are based on semiconductor silicon, so basically a CMOS image capture device. So when you put your fingerprint on fingerprint sensor from any of our competitors, you're actually touching the semiconductor itself. IDEX looked at this paradigm and said, really, the only way to reduce the cost of a card and improve the performance in a card environment is to break that paradigm. One thing you look at is, say, if you think about semiconductor industry, many of your investors are probably invested in other semiconductor companies. In semiconductor industry, each generation, you shrink the transistor size, therefore, you get more transistors onto a chip, you get a smaller die size, so lower cost, or you increase the compute power for every device. I'd like to look at fingerprint sensing and say, well, this is the only industry where you can't take advantage of that phenomenon called Moore's Law, because it doesn't matter how much you shrink the transistor, the human finger is what dictates the size of the silicon if you make a silicon sensor. So at IDEX, we broke that paradigm. We make our sensor out of a very low-cost printed circuit board approach with a wire mesh on top of that printed circuit board that yields a capacitive sensor that can capture very crisp images, but at a very low cost. And because it's much lower cost, we can make the sensor as large as we want. That means we capture more of your fingerprint data with each touch. Therefore, we get a better transaction, better comparison and less false rejects. That also frees us up to use a more advanced semiconductor node for the expensive part of the system. So we use a 40-nanometer TSMC ASIC node, and we integrate in that, as I mentioned earlier, the ARM Core processor running at 200 megahertz, a biometric hardware accelerator that accelerates our algorithm. We also integrate the full power management unit. And all of that is still done now because we're using an advanced semiconductor technology on a tiny 9 square millimeter die. So to really drive the point home, we get about 7,000 die per wafer when we manufacture this die. If we took the traditional approach and made our entire sensor out of semiconductor, we would only get in the range of 600 or 650 die per wafer. So we've got some real scale with our approach. That's why we call it a disruptive approach. And what that means at the end of the day, for the card is it dramatically simplifies the card architecture. If you look at the cards on the left here, this is a card with a typical silicon sensor. It has to have additional componentry for a microprocessor to do the biometric matching for power management and then a complex overall inlay for manufacturing. This makes it more expensive, and it also drives down manufacturing yields. With our approach, we have a very simple system. We have the secure element contact play, the biometric module from IDEX that includes our ASIC and everything else is just passive wires. So it really simplifies the card manufacturing and drove -- drives the cost of the overall card down where it could be sold to a bank at large volume scale in the range of $5.

I see. So two more questions before we conclude this session. I'd like to talk about a little bit about management, R&D, internal and external relationships and also your financial position. So superior management and an effective R&D division is of great importance for every company, but especially for those who operate within the technology space like yourself, you invent, you engineer and commercialize your own products or solutions. But to stay ahead, you have to be an attractive employer. I think this is of great importance. So why are you an attractive employer? And what about your financial position? Do you have sufficient cash to fund your business, both short term and long term?

So first of all, the company, and we'll talk about the management team, the first part of your question. It's been amazingly but not surprisingly easy to attract talent to the company because when we talk to people and they understand the industry, as soon as they understand the magnitude of the opportunity here and the differentiation in the technology, people want to be part of the team. And Stan Swearingen, who was the prior CEO, stepped down as CEO because he was at a stage in his life where he didn't want to travel. And when the company was ready to go commercial, he had agreed with the Board that he was happy to stay on and continue to run the technology team, but he didn't want to be a fully active commercial company CEO. That was the time when I was recruited in. Stan joined in late 2017 and that was when the company did the pivot to go all in on new technology, focusing on the card opportunity. Stan was able to attract a very deep bench of senior managers and technical folks from the ASIC background, from systems background and with prior experience in fingerprint sensing. And Stan himself was at Synaptics and Atmel, running the touchscreen semiconductor business there, and also at Synaptics, the fingerprint sensor business there as well. So he attracted a very deep bench of technical people, and we continue to be able to mostly retain our team there who all believe in the big vision. And then at senior management level, I joined in March of 2020. I was at Infineon, as I mentioned earlier, and when the exec recruiter asked me about this opportunity, I already knew IDEX quite well. And I just looked at this as an opportunity I couldn't pass up. So I worked out a very graceful transition, kept my relationships with Infineon and joined as CEO in March of 2020. Last year, we added 2 new members to our senior management Jamie Simms, who has joined us as our CFO. Jamie was CFO of a company called Vicor in the Boston area. Vicor is a semiconductor company, very similar, publicly listed. And the reason I was attracted to Jamie, is he joined Vicor in 2008, and the shares there were about USD 5 in -- When I met Jamie, he was just about to retire from Vicor and I talked to him about the IDEX opportunity, and we pulled him out of retirement to join us when he saw this opportunity. When he was at Vicor, as I mentioned, the shares were $5. By the time he retired, they're at about $100. So he has a lot of public company experience with a semiconductor company through a very rapid growth phase. And he saw an opportunity to join IDEX and take that same ride all over again. So Jamie joined us in May or April of this year. And then another senior executive, Catharina Eklof. When I met Cat, I was actually interviewing her for a Board position to join the IDEX Board of Directors. And at that time, she was at Securitas and running their digital security business. She had prior experience, 12 years at Mastercard of running their commercial co-branded card business here in the U.S. out of New York. When she started learning more about the opportunity at IDEX, it was a great match for her background, the intersection of payment technology and security. And also, she just was a huge believer in the size and magnitude of the opportunity and where we could take this company. So she joined us as Chief Commercial Officer in May of this year. And she's already recruited and brought on a deep bench of more commercial senior executives out of the payments industry. So now we're aggressively marketing and educating directly to banks and payment issuers and payment processors in addition to marketing directly to card manufacturers, which is more the traditional sales and marketing approach. So we have a very highly experienced senior management team and below that attracting and retaining a very solid team at the company.

So if you -- can you touch up on the financial position. So do you have sufficient cash, both short term and long term?

So we have sufficient cash, certainly in the short term and long term. When you have an opportunity the size of IDEX, we have no worries about having access to capital. We are constantly talking with strategic partners and other potential investors. So there's -- we're not worried at all and the least on the long-term access to capital. And when you look at the size of the markets and some of the commercial proof points that have been announced and several of those commercial proof points that will be announced just in the coming weeks, we're not worried at all about long-term access to capital.

So my final question, Vince, is what type of news can investors expect short term. And are there anything you want to add before we conclude, for example, what -- in your view, what makes IDEX unique?

So what I think really makes IDEX unique is that the -- from day 1, when we decided to target this payment opportunity, we really understood the opportunity and came up with a solution that was optimized for that opportunity. So I think we definitely have an edge in that market space, and we're addressing just as we talked about earlier, just a very huge market opportunity. So I think from an investor point of view, there's very few times where a company comes along where you really do have these massive growth opportunities in an existing marketplace, right? So that's a really unique opportunity. And I think there's a lot of discovery value there because IDEX is a company that made an attempt to be successful in the mobile phone space. I was a little late to the party there and has now pivoted all in on this payment card opportunity. And I think once people really discover that the growth is happening and the opportunity is real, it's a really unique investment opportunity. Then what was your -- the other part of your question?

Yes. Yes. The other part concerning short-term news.

Oh yes. There will be some proof points. Well, what you'll start to see in just the coming weeks is some of the major payment networks will be certifying cards from our big customers with our very latest generation technology. We'll see then banks starting to announce that they're launching programs together using cards that are powered by IDEX. So you'll start to see these more and more proof points of momentum. And you'll also see, in general, in the payment card market space, more and more larger banks will be announcing that they are ramping up payment cards. So far, BNP Paribas is the first major bank that announced that they were offering biometric cards to all of their customers. There's been some press very recently from them that as they rolled this out, the demand has actually exceeded their expectations, so they're accelerating the ramp. And we anticipate that this is going to be a similar experience for all banks. So there'll be -- I think many announcements in market trends, then will show that the market is really starting to take off.

Yes. Okay. Vince, thank you for your time and your insights. We'll keep in touch, hopefully, most likely in 6 months' time. So yes, until then, goodbye.

Yes. And thank you very much, Roger. Just if I could just say one comment in closing that often people ask me, why did you join IDEX at this stage of your life? And coming back to being an entrepreneur, most of us that are entrepreneurial don't do it for the money. We just -- we want to have an impact on the world. We want to be part of a company that really has an impact. And here at IDEX, I believe this is a big opportunity for me personally to be part of something that changes the world. So 5 years from now, if people say, what did you do with your career, I can tell them, "Oh, pull out your wallet, see that fingerprint sensor on your payment card, Yes, I was part of that." And I do think that this is going to become a ubiquitous technology, and that's why I'm so excited to be part of it.

Yes. And within the Nordnet community, there are -- we have 4,000 clients who own shares in your company. So yes.

Yes. And again, thank you for the opportunity and for all of you out there that are invested in IDEX. Thank you very much. We definitely appreciate the support of our investors.

Yes. Okay. So then we conclude the session.

Thank you, Roger.