IDEX Biometrics ASA (IDEX) Earnings Call Transcript & Summary

Hello, and welcome to the IDEX Biometrics third quarter presentation for our quarterly results. I'm Vince Graziani, CEO of IDEX. And joining me today is our Chief Commercial Officer, Catharina Eklof is joining as well for the first time. Cat, why don't you say hello to everybody.

Hi, everyone. Very nice to meet you and looking forward to this session.

And before moving on, it's important that we take a moment to acknowledge the normal disclaimers that this presentation and discussion includes some forward-looking statements, et cetera. So everyone should take a moment to read over that disclaimer briefly. And then we can move on and start the presentation. So as a starting point, I think it's important to remind people of the overall investment summary for IDEX. We, as a company, are the first company to target the multibillion dollar opportunity for biometric smart cards. And when I say we're the first. We're the first to build the solution exclusively for this opportunity. And when we talk about multibillion-dollar opportunity, there are 3 billion interface smart cards produced every year in the market. We consider that our addressable market. So even a small percentage penetration there is a multibillion-dollar opportunity for IDEX, and we anticipate that the biometric smart card will at some point become ubiquitous. So obviously, a very large opportunity. We have industry-leading technology, which gives an industry-leading customer experience. So the customer uses the smart card the same way they use any contactless card today, so you just have a tap-and-go transactions. And the biometric match happens so quickly and seamlessly that the experience for the user is the same as your contactless card today. We have a disruptive biometric platform, including hardware, software and application software, and we'll talk more about that later. But suffice to say, we have very differentiated technology, and we are capturing the market at an inflection point. So when we talk about IDEX as a company, we view our mission is to, in an increasingly digital world to provide trusted identity for all. And we do that through biometric authentication. And what we're seeing is, in a digital world, there's an increasing need to be able to verify yourself in the digital world that you are who you say you are. And biometrics is becoming more and more the way that people can do that easily and seamlessly without passwords. And when you think about most devices in the world, they are connected in some way to the Internet, and therefore, a smartphone or your tablet or your PC, all of those other devices are subject to hacking. And even if you verify yourself through facial recognition or biometrics, your device could still be hacked. The benefit of the biometric card is your biometric information is encrypted and stored only on the card. The card is never connected to the Internet. Therefore, you can really view the biometric smart card as the ultimate hack-resistant biometric authentication device. And we'll get -- talk more about that later, but we're seeing increasing awareness across the industry in many different markets that the need for this biometric authentication that is hack-resistant. We target multiple markets, banking and payment, enterprise security, cybersecurity and public services. The company is made up of primarily a large group of engineers, both hardware, software, and systems and solutions. We'll talk more about the benefits of that later, but we're not just a component semiconductor company as we were in the beginning, but we now have a team of full software and systems engineers. In fact, our software and system engineering team make up the bulk of our engineering resources. And then we have an executive team, great experience, international experience in payment and in the technology industry. We have a deep portfolio of IP, over 200 patents. And we have patents not only in the hardware but in the systems, biometric matching algorithms and software in full solutions that are ready to launch. We now, in 2023, have more than 20 customers that are committed to IDEX Biometrics and ecosystem partners that help us go to market and have a full complete solution as well. As we continue to move forward as a company, I think it's also important for us to look back at goals and milestones that we set for ourselves and see how we did against achieving those milestones. And in 2023, going into the year, we had several milestones that we outlayed in prior presentations. But one of our main goals was to have the IDEX Pay biometric platform certified by MasterCard, and we achieved that, as you probably saw in the previous announcement at the end of August. We also set out to make sure that card manufacturers could get their production lines up and running. So many card manufacturers in the smart card industry, had never built anything as sophisticated in the past as a biometric smart card. So we worked closely with equipment makers, inlay providers and other partners to ensure that we could then work together with our card manufacturing partners and help them get their production lines up and ready and qualified for full production. And we've been able to do that and the proof of that is one of our newer card manufacturing partners just got their full certification from MasterCard as well. And during the last several years, everyone knows there's been component and supply shortages. So we made it a priority to make sure we could not only provide components and technology from IDEX, but all that our partners were sufficiently allocating so that our customers could get up and get into production. That includes secure element chips, EMV modules, inlay providers, all of the other components that go into making a biometric smart card. And we've been able to do that successfully. And then we wanted to make sure that banks and issuers understood how to bring these biometric smart cards to market and get those out into the hands of real customers. So we actually put together a full end-to-end suite that we call the issuer playbook that helps issuers and banks who are launching these products, understand the steps they have to take to make sure they have all the systems in place and all their back-end systems are ready to support biometric smart cards. In addition to these priorities, we set going into the year, we actually had some major accomplishments that weren't on our radar going into 2023. We've now added to our full activation and enrollment suite to have enrollment capability on your smartphone with a very sophisticated applet for both Android and iOS Apple phones. This is really critical to have this new capability for the banking industry because in the banking industry, they really want their customers to interface to the bank through the banking apps, and they're pushing all of their information and customer interface back to their banking app. With our new activation applet, banks can then just integrate this enrollment applet into their banking app. So it's seamless for their customers, and then it allows them to activate their customers in a manner that they feel is the best fit for their marketplace. We also have a new biometric software platform for authentication. So in addition to payments, we have a full card operating system and all their appropriate interfaces so that authentication and other apps in -- or applications can be added by third-party partners. And then we did expand our Secure Element partnerships as well during the year. Everyone is probably aware that we've been partnered now for multiple years with Infineon and our full biometric platform today is based on the Infineon Secure Element solution as a core part of that. We now have announced our partnership also with STMicro, and we are working on bringing out together with them a full software platform as well to give our customers choice and variety so that they can have multiple versions of their cards out in the marketplace. Then looking forward, we have some new upcoming milestones that we need to focus on for the remainder of this year and going into 2024. We will get our first bank launches out with IDEX Pay. That's a big priority for us now that we have our certifications done. We are working on the Visa certification as we speak. So in addition to having the MasterCard full certification, Visa has their own process for certifying biometric smart cards and we're well into that process, and it's a priority for us to complete that as soon as possible. We knew -- we want to do the market introduction of our IDEX Authentication solution as well. So there, we're working with multiple partners who are going to be coming out with different varieties of authentication products based on the IDEX Authentication platform. And then we want to launch this biometric platform that I mentioned earlier together with ST Microelectronics for payment and authentication so that we can offer to the marketplace a variety and choice, and they can choose the Secure Element of their preference. And then for operational efficiency, we continue to always tighten our belts and run the business as lean as possible so that we can become profitable as soon as possible. So these are our top priorities going into 2024. So we talked about this briefly, but I think it's important to talk about the IDEX Pay certification again, which is a very major milestone for IDEX. In fact, I think it's fair to say that we are the first and only fingerprint technology company that have now completed our own certification with Mastercard, meaning we developed a full card operating system, all the software and application software for payment, went through all of the certification program and got the biometrics authentication certified, the security certification and therefore, the full letter of approval from MasterCard. So this is a big achievement for IDEX. And what it does for our customers is it provides a fast track for card manufacturers to go forward and get their own certifications. And in fact, once we completed this, our first manufacturing partner was able to get their own certification in just a matter of weeks. So this is a major milestone achievement for a company like IDEX. And compared to the competition, we are the only ones to accomplish such an achievement. Now let's talk about the financial summary for the third quarter of 2023. Third quarter revenues increased by 3% when compared to the same quarter in 2022. Revenues were impacted adversely though, by delays in our IDEX Pay full certification with Mastercard. We anticipated having our full solution in the marketplace by the end of the third quarter and for most of the fourth quarter. As we've said before, many times, it's a very sophisticated process, and we are very dependent on third-party labs to get through the certification process. We ran into many administrative issues there along the way. There were never any issues with the IDEX technology, but it is just a process to get through. And we had several delays that compounded and ended up costing us several months delay getting that solution fully certified. Now that certification is behind us and other customers, our partners are getting their certifications as well. And you'll see we will start to drive revenue from our full IDEX Pay solution in the fourth quarter, but mainly starting in early 2024. Gross margins for the quarter were at 23%. That's compared to 22% that was in the prior quarter of 2023 in Q2. We had some growth of initial orders from customers that were taking orders for the IDEX Pay full solution for pay and authentication. We did decrease operating expense by 16% in the quarter, and we should note that we did some operating expense reductions that were implemented in the quarter. 16% down is not bad, but we will have a significant cut that will not be realized until the end of the fourth quarter. By the time all of the actions we took are fully in effect, we anticipate our operating expenses to be down in the range of $5 million a quarter. So you'll see that bigger effect in the fourth quarter and in full effect starting in 2024. We also had a convertible bond issue that we've signed a term sheet for up to NOK 100 million to make sure the company is fully capitalized going into 2024. So overall, again, we did revenues just below $1 million, gross margins of 23% and trending upwards as we've committed, and operating expenses at $6.6 million, which was down from $7.3 million in the prior quarter, and those will continue to decrease as expected. When we look at the year as a whole, so far year-to-date, the first 9 months, I very much view 2023 as a transition year. This is the year where we were largely still shipping mostly our component solutions to a very small number of customers. And still, for the year, our revenues grew in the first 3 quarters, 21% over the same period in 2022. Year-on-year, our product revenue increase was 29% so far. Gross margins are improving year-to-date. And as we stated in the past, we anticipate margins to improve over time. Operating expenses were decreased. And as I mentioned earlier, we will continue to work on that, and you'll see operating expenses decrease even further going into 2024, but we were down 11% over the same 3 quarters from last year. And the total OpEx was $21 million for the first 3 quarters of the year. Again, actions have already been taken to take that down. And I think investors should really view 2023 as a transition year. Going into 2024 is when we'll first start to really start seeing revenues from the new customers that are coming on for our complete solutions. And those complete solutions drive higher ASP and capture more of the value chain. So you'll see a difference in the numbers going through 2024 and beyond. Also, earlier this week, we announced that we had signed a term sheet for up to NOK 100 million in convertible debt financing. I wanted to give a little bit more color and details behind this convertible debt and why we pursued this avenue. So the convertible debt is coming from a new investor in IDEX. It's an institutional investor who has locations in both the U.S. and Europe and has known IDEX for quite some time. In fact, the first time I met this firm was back in 2020. They also have other investments in our marketplace, so they know the market quite well. So the key highlights of this is it's a convertible bond issue up to NOK 100 million, as I said, to fund commercial ramp-up. It's key to note that the conversion price is at a premium above the share price that will be at the time of closing. So we expect the closing to be in the range of 3 weeks' timing. And at that time, the conversion price is set. And that conversion price will be 125% of the share price at that time. So it's important to note that. It's key to the structure. And also the interest rate is quite low in exchange for the other benefits that come from the convertible bond. It's amortized over 42 months, so a 3.5-year period. The other key component to this is it's important to note that it's the company's option. It's always IDEX option to make payments on these installments either in cash or shares. And it would always be our preference at the time when cash is available to make the payments in cash. So really, I wanted to summarize that for everybody to make sure people understood this. And if you look at this in the bullish case, a simple way to look at this is it's the equivalent of issuing shares at a 25% premium to the market price. And if you ask, well, why did we pursue this over other avenues? It's quite a simple answer that given the current share price and market conditions, we just wanted to find a vehicle to minimize dilution for our current shareholders, and this was the best option on the table. So with that background, now I want to turn it over to Catharina for the commercial update. Cat?

Thank you, Vince. Yes. Hello, everyone. So starting with the commercial update. Just to remind everyone, how does IDEX go to market? So everyone remembers that IDEX first started out as a component company. So we are still today bringing out our biometric sensor as a solution into large manufacturers that have their own technology capabilities. And one of IDEX's more prominent customers is IDEMIA. So that's the biometrics answer. The next solution that we bring to market is our biometric system solution. It's the combination of the sensor and the biometric algorithm and encryption solution. This solution is today deployed into markets in Asia, Korea, Japan, Taiwan, into manufacturers and partners that have their own operating systems and look to the solution to be integrated into different markets. And the new solution that you all heard Vince talk about that we have announced is our biometric card platform. It's an end-to-end solution where the manufacturer and in the end, the bank gets a full IDEX Pay solution that can be branded. And this has the highest standard of biometric performance and security and a very strong and simple biometric activation system. Fully digitally enabled. And how do we go to market? Well, first of all, our key partners are the manufacturers. They are the ones who actually work very closely with the back. So IDEX supports the manufacturers, both in going in with subject matter experts in biometrics, also go-to-market standards. As this is a new product, it warrants the banks to have education and understand the product. So IDEX supports the manufacturers. Beyond that, we work very closely with our ecosystem partners, so the STs, the Infineons and other partners around the world to bring this to market. The new partners that we are embarking our journey on is the system integrators. So this is related to our biometric authentication platform. And I will invert to that a little bit later because the system integrators, they go into enterprises and they leverage the linkage between companies like Apple, Google and Microsoft and then bring out solutions that are fully built and where IDEX platform becomes one capability. And the last group that we leverage around the world are resellers. So these are partners that deal directly with banks or manufacturers to actually take IDEX solution in markets that are more remote and where IDEX don't have sale team. And the core markets that we address are, of course, payment and banking. This is the absolute largest market in the world as it comes to card solutions. So just to remind everyone, an annual issuance on contactless cards of about 3 billion units annually and with a very stable growth of 5% to 7%. The public and private service sector is mainly being addressed with biometric authentication solution. So this addresses both physical and logical access. And then, of course, the enterprise and government sector. They're the same. So those 2 sectors are mainly addressed with authentication solutions. Now if you look at our platform, the solution is really software defined. So this enables companies to actually in a very easy and simple way to integrate to us. So if we start with the baseline of our solution, it's, of course, our sensor and card design. So simple and very high yield for the manufacturers. So they can very easily get into production mode with very small wastage. The second part is the significantly developed software, where the baseline is course to security driven by the biometric algorithm and our encryption software. And on that -- on top of that is our own card operating system and application. So the card operating system relates to the connection into payment systems such as MasterCard, Visa, domestic schemes. And with these 3 solutions, we can actually build out both payments. So today, IDEX is connected with MasterCard, Visa and China UnionPay. And the biometric authentication enables faster and more secure payments at the same speed and the same convenience as a contactless card. And secondly, authentication is a space that is really coming rapidly and increasingly becoming front and center of strategies of both banks, enterprises, governments, health care institutions with an increased cyber threats and infractions. The last section that IDEX goes to market with is our crypto and asset management. So here, it's about protecting and actually control your crypto funds in a highly setting. So using the biometric card as a second factor authentication. Now going over to what happened in the third quarter? Where did IDEX had [ lost ]. So first of all, if you look at payments, which is our major sector. So as Vince mentioned, we managed to get IDEX Pay Mastercard certified. And with a strong, I would say, confirmation from our manufacturing community. So today, we have over 20 manufacturers globally, reaching from Europe to Asia to Middle East that are actually in progress developing IDEX Pay solution and bringing that to their own certification. The other major event that we had, Bangladesh is a market that might be not so known to many people, but it's actually the country in the APAC region that has the highest BMP and the fastest growth rate of becoming a digitally enabled country. So for government and banks, they are striving to drive financial inclusion for a ground or -- a larger part of their society and here is where biometric cards fit very well into this proposition. So here, we've had good discussions and approval from the Central Bank to actually take biometric cards into market with very prominent backs, so more on that. The other markets that are advancing rapidly is Turkey, Azerbaijan and India. Here, we are working across most banks, manufacturers, processors. And we actually have our first certified manufacturer in Eastern Europe, bringing out IDEX Pay to our partners. The last news on payments is really now we have brought out together with our partners, a metal card with biometrics. Why is metal cards important? Well, metal cards have the highest growth rate on payments cost. So you remember me saying 5% to 7% on all the cards. Here, we're talking a growth rate of plus 30% in Asian markets and an overall global growth of 17%. This card brings additional revenues to the banks and issuers, but foremost, real valuable enhanced consumer value proposition to the high net worth and affluent community of the banks. So a win-win for the whole ecosystem. Very excited to see this product coming into market, and you will see that coming live late '23, early '24. The other field where IDEX has moved rapidly forward is digital authentication. It's really around bringing simpler and stronger authentication to market. Over the last quarter, we had 8 cybersecurity partners taking on IDEX biometrics, authentication platform. So what is this about? Well, the whole world is moving to 2-factor authentication. Enterprises, governments and public sector are looking for liveliness detection is critical. Authentication processes will be passwordless as been said early in our -- and every institution is looking for a house verification. It needs to be done in a simple and cost-effective fashion. For that, there is the FIDO Alliance. And FIDO Alliance is really the fast identity online, supported by Apple, Google and Microsoft. They all use these FIDO security standards, both for users and for their employees. So IDEX has worked closely with FIDO,and I'd like to bring out one of our new partners, which is AuthenTrend, which is a leading digital authentication solution partner out of Taiwan. Why have they chosen IDEX? Well, 3 key reasons. First of all, because of the biometric card and the performance. A batteryless product with high performance superior user experience and foremost an open software platform that has allowed AuthenTrend to easily and simply integrate to our platform. Another system integrator is DWA out of Korea. They've just launched their solutions, which is focusing on the public sector. So these are public transport cards for consumers and people who are entitled to subsidies. So these can be transport cards for retired people, into health cards and also the Korean government physical access cards. So the whole market is really moving towards simpler authentication. And across the markets that are most prominent, U.S., Japan, we see growth of FIDO solutions in the range of a CAGR of 18%. So a very important market that IDEX will be taking strong leadership in with the platform. Lastly, our card manufacturers, which is our core part of our [ broader ] strategy and partner strategy. We have 20 manufacturers commercializing IDEX. And as mentioned, one of the leading global ones out of Eastern Europe has just brought the first card to market with their Mastercard LoA. And what we can say is that IDEX solution platform with our LoA actually fast track that LoA process, whereas the normal LoA, letter of authorization process can take up to 5 months, this actually took less than 6 weeks to get the LoA. So we have significantly fast track process. And beyond that, we have -- we welcome into our group, KL HITECH, which is one of the leading Indian identity and payment manufacturers from India. Alongside KONA I, which is a leading one of the 4 largest manufacturers out of Korea, both deploying their solutions globally, but foremost in both Korea and India. And on top of that, in order to support its go-to-market, IDEX has thus come up with 3 main solutions. So IDEX Pay that we've discussed and then the biometric activation suite. So we want to enable and ensure that whether it's digital authentication or banking or crypto or security, the activation suite, how you register your biometric card and your own fingerprint can work in an enterprise location in branch at home with a [ sleet ] or with a mobile application as well as with directly when you get your card via IDEX activation pad. So this has proven cost-efficient solutions, which are an imperative for scale. The last pillar in our go-to-market strategy is our implementation program. So we work closely in project based with our issuers and manufacturers in order to support the issuer through the journey to actually get cards to market. So this is both optimizing the issuer investments and accelerating time to market.

Thank you, Cat, and thanks for the great overview. As you can see, we have a lot of activity in 2023 and a big base of customers going into 2024 here. So we thought we would also take a minute to just talk a little bit about our technology. They remind people of the journey that IDEX has been on. So as we discussed earlier, the company had started out primarily as a component company. We were building fingerprint sensors. And we would then market and sell those to partners who were left on their own to develop the full system around it. We then went beyond that and worked very deeply on our algorithms and our biometric matching so that we could define the best user experience. And by going that deep, we then said, okay, now let's enable the broader market. Let's enable a complete solution. So we built a full software platform, including a card operating system and then services and solutions and standard APIs, which allow customers to develop their own applications and plug them into our software platform. So the key here is that now we are a platform company with an open and versatile software architecture platform that allows people to build new devices on top of our platform and go and attack and address new markets. And we can see that visually, if we move on to the next slide here. So our overall software-defined platform, you can think of it very similarly to back when I first heard about the very first iPhone being introduced. This was the first time that a phone did not just service as a phone, but it had its own operating system and standard applications interfaces so that third parties could develop apps or applications that actually added value to the phone. When we think about the early days, I think people couldn't imagine that there would be literally thousands and thousands of applications now that all of us carry around on our phone, and we onload and offload different applications every day, depending on what we're using our phone for at that moment. In a very similar way, IDEX now looks at the biometric smart card as an authentication platform with our own software, our own card operating system and then standard interfaces that allow our partners to build new applications. So it can be an enterprise cybersecurity application that interacts with the enterprise network and supports FIDO or you can add a new application to turn your card into a crypto wallet. And I think the only limit to what this new digital authentication device will do for people in the market is really the imagination of our partners and what other applications they decide to add to this digital biometric authentication device, which is the IDEX Biometrics full solution. And now let's take a look at the overall market outlook. For that, I'm going to turn it back over to you again. Cat, walk us through this.

Yes. So what we can say when it comes to biometrics, it's clearly a year where this is going over basically from both heading into payments. Larger countries in Europe, we have large banks that are in development mode and testing. When it comes to the key markets, when we say, I see acceleration when it comes to payments is clearly the APAC region and Eastern European countries. And as said, currently, we've moved from -- we've literally doubled the number of card manufacturer from last year. I think we went out of '22 with 4 manufacturers that were coming into market to now during the year, shift and more than 20 in commercialization. The other thing that we see is that the premium segment is, of course, the segment where biometric cards will come into market first. And actually, in parallel with that, in certain key markets, like I mentioned, Bangladesh, these cards will also benefit people who are entitled to subsidies. So you actually have the proposition valuable for 2 sets and segments of the market. And secondly, as I mentioned, the cybersecurity solutions are coming on rapidly as the whole cybersecurity market needs to become more robust. And the current solutions are not optimized for an environment where people work between home and abroad -- sorry, and in the office. Many of the solutions need both a step up as it comes to security alongside more efficient vehicles. So IDEX today, we are really set up for scale global operations with a very strong both hardware platform that can be deployed and is accessible to manufacturers who do not have their own software teams. So they can take the IDEX platform alongside the new biometric authentication platform, which is really with its versatile and open architecture enables system integrators and partners to very easily and effectively to integrate their applications to our platform. So looking forward to the year ahead.

Thank you, Cat. And that's a good segue into the summary again on -- when we talk about IDEX, what should we think about? We are addressing a multibillion dollar market opportunity. To us, it's very clear, and hopefully, it is to all of you that we have industry-leading customer experience through our technology in a disruptive biometric platform, as we talked about, the only company now that has this platform approach that allows us to provide a full suite of hardware, software and the full platform solution, and we really are capturing the market at an inflection point when the need for trusted digital authentication is growing and people are becoming more aware of it than ever. So that is our story. Did you -- any last words from you, Cat, for the summary?

No. I think we are done. So looking forward to go out and get biometric cards into the market.

Thank you very much, Cat, and thanks, everybody, for tuning in.