IDEX Biometrics ASA (IDEX) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the first quarter presentation for IDEX Biometrics. Thank you all for joining. I'm Vincent Graziani, CEO of IDEX Biometrics. Joining me once again today is Catharina Eklof, our Chief Commercial Officer. She will be reviewing all of the commercial and market activities for us again, once today. Let's get going. Before we start, it's always a good idea to acknowledge the normal disclaimers. This presentation will contain some forward-looking statements. Again, none of these are to be construed as guidance and everything is subject to change. With that normal disclaimer, let's move on. So before we start on the overall, I think it's good to review where we were at the end of last quarter when we talked about our strategy. IDEX is addressing a large market opportunity, multibillion dollars, for biometric smart cards worldwide. The company has a complete solution strategy, driving market adoption, and this is a pivot for the company where we started out originally like others in the space as just a fingerprint sensor component company. Now as we've talked about in the past, we have complete solutions starting with the fingerprint sensor, full solutions for the entire card hardware. But then also solutions for enrollment, card operating system and applets to address various markets. So that's a core differentiation for IDEX. And that actually is what allows us to compete more aggressively in the market and go where the business is. And with this total solution now, we are opening up markets region-by-region and segment-by-segment. So our commercial team is able to identify the regions that are most ready in their digital journey to adopt biometric smart cards. And then we market there directly and open up with, in many cases, the regulators and then the issuers and banks and access control companies and lay the groundwork so that our card manufacturer partners can then sell biometric smart cards into these markets. And again, as part of our strategy, we continue to grow into new markets and new use cases. And again, the flexibility of our software platform allows us to develop new applets and new applications and new use cases for the biometric smart card. So why is there a huge demand growing for biometric adoption? I think we all recognize that there is a big threat from cyber criminals out there. And whether you're a large enterprise, or a user on your smartphone, we are all threatened by the alarming increase in identity theft and the compromise of personal credentials, personal credential compromise is how hackers are able to get into large enterprises, but also simple things like your banking app or your social media apps on your phone. So this is really the biggest issue and biometrics solves this problem because it's a secure method for identifying who we actually are. In the case of biometrics card, it's something you are, your fingerprint and something you have, so it's automatically 2-factor authentication. So when you think about the biometric cards, we take advantage of the advantages of biometrics, but also we provide convenience, security and data privacy, all built in by design into the card. The card -- with the biometric card, the consumer controls all of their own biometric data. When you get this card at home, you enroll your fingerprint in the privacy of your own home, either via your smartphone or via an enrollment sleeve. And when you're doing that, the biometric card captures an image of your fingerprint, immediately converts that to a digital template. And then that template is fully encrypted and stored only on the cloud -- I mean only on the card and never in the cloud. So your data is protected. The consumer has the right to revoke that consent anytime because you physically have the card in your hand, it contains your biometric authentication, but that information is fully encrypted and cannot be reverse engineered. And you can just destroy that card anytime and therefore, opt out from whatever services you're enabling with the biometric smart card. So the biometric card has great advantages. It's automatically 2-factor authentication. And because of the way it's built, it's GDPR-compliant by design. So significant advantages for the biometric card approach. And why IDEX Biometrics versus other biometric -- fingerprint biometric cards out in the marketplace? So we differentiate by enabling the best user experience, the best security and the best total solution that's offered out in the market. Our solution has the largest area capacitive sensor in the industry. So it enables to capture more of your fingerprint with every touch, therefore, a better user experience, better acceptance rates. Our technology has fast processing built into the ASIC or the semiconductor device on our sensor, which enables the fastest transaction times, excuse me, in the industry with the lowest power design for free -- battery-free operation. We designed the IDEX solution from day 1 with the biometric smart card in mind. And therefore, we have built in all of the circuitry and technology for harvesting energy from near field communications and optimize for that architecture so no battery required. We have patented enrollment solutions that will enable people to enroll seamlessly and simply and most significantly is the recently deployed enrollment solution on your smartphone. Our devices also have end-to-end encryption and security. So not only is data encrypted and stored on the secure element on the chip but all the communication channels between our fingerprint sensor and the Secure Element device are also encrypted. So there's no chance for somebody to take a card and somehow hack and get your data that's not encrypted. We have industry-leading biometric algorithms. Therefore, we get the best acceptance rates and the fastest matching. And then we have flexible end-to-end solution offerings that enable our card manufacturing partners in the industry. So now let's look at achievements and milestones for the first quarter of 2024. During the first quarter, we had several bank launches with IDEX Pay in Asia and Europe. First was DenizBank in Turkey. And we have a second bank launch in Bangladesh, Mutual Trust Bank. We have growing interest in that marketplace for biometric smart cards. And then we did issue with a U.K. issuer, the first biometric smart card solution for the visually impaired. And we believe that these government-regulated solutions will be gravitating more and more for financial inclusion towards the biometric smart cards. We are opening a new market in South Asia, another country there that is ready for biometric smart cards. And this is going to be opened with the first bank, they're launching with a challenger bank, so a digital challenger bank in Asia, and that was just announced recently. During the quarter, we did launch our mobile enrollment SDK solution to the market. I have used that myself. It's quite convenient and easy to use on your smartphone. Market expansion with IDEX Access, this is our full solution for access, including our card operating system and then partners can build applications for access and digital authentication on top of that application card operating system. We've expanded with AuthenTrend, a Taiwanese authentication company, and our partner in the U.S. Sentry Enterprises. We've also announced a large South Asian card manufacturing partner for IDEX Pay and IDEX Access. This is 1 of the largest card manufacturers in Southern Asia, and it will be helping to supply for us not only in the region in South Asia, where we're getting traction, but also this manufacturer can help supply globally. And then we also, during the quarter, have biometric cards coming out with our partner, CompoSecure, the industry leader in metal contactless payment cards. We'll be very soon launching with IDEX Biometrics on a metal card with biometric -- fingerprint biometrics built in. Upcoming for 2024 later in the year, we'll have continued bank launches in Asia and Europe. We'll continue to expand for access with our partners in the access market space. And then our card manufacturers will be out there completing their LOAs with Mastercard, their letters of approval. This is what allows them to go out and start marketing to banks saying that Mastercard has fully certified their solution. And just as a reminder, the IDEX Pay solution is fully certified with Mastercard for all the software and applets. What the card manufacturers then need to complete is the physical card structural integrity piece of that certification. And this testing is pretty rigorous, very rigorous with Mastercard. So once this is fully complete, the card manufacturing partners can go out in market into their customer base with full peace of mind in the backing of Mastercard. We're also working on our certification for IDEX Pay together with Visa, our partner for the Visa certification. Again, a reminder there, for Visa, we will be 1 of the first companies, I think we might be the first company to use the Visa-developed applet for payment on biometrics. So we're working together with Visa to get through that certification process. It's good to remind people that these certification processes do not have a defined timeline. The certification process is designed to make sure the card works flawlessly when it's out in the market at scale. So together, we work with Visa to get these cards through certification through third-party compliance testing. And when issues come up in that third-party testing that might identify a corner case, that would be something detrimental to the user experience. We're working together with Visa to solve those issues. And then get through that certification process. So that when this card comes out at scale, we can go to scale with peace of mind and a good user experience for all of our customers. So we are working together with Visa to get through this certification process just as quickly as possible. We will launch also this year our crypto cold wallet platform built on our same IDEX platform and card operating system that will be coming to market very shortly with partners. And we're also working with ST Microelectronics to have another solution offering for issuers and partners that would prefer to have choice when it comes to secure element partners. We should have that platform launched also during 2024. And we are also working on constantly improving our operational efficiencies, and you'll see that coming into effect as we go through the year as our operating expenses will continue to decrease throughout the year. Okay. Now let's switch over and review the financial summary for the first quarter. So revenues in the quarter continue to reflect the transition from our component business to solution sales. And by that, I mean, we had almost zero revenue in the quarter from our legacy customers that were just buying components. And we'd rather have revenue increasing from our new customers, more than 20, who we've had design wins over the last year, who are using the IDEX full solution, and you see that mix has changed. We're also increasing revenue in our new regions, in APAC and in the U.S., the U.S. in particular, for Access. Gross margins in the quarter were 36%. Those margins also reflect the changeover to more of a solution sale as we anticipate to have better margins on our full solution than that on the component sales going forward. Operating expenses in the quarter were $6.1 million. This is compared to $7.7 million in the same quarter last year. This is up slightly from the fourth quarter of 2023. That is due primarily to the seasonal change that we get every fourth quarter. We get a full credit for all our research and development tax credits and initiatives from various countries. But overall, we have implemented our changes to reduce OpEx. And you will see that, as we've discussed, by the end of the second quarter of '24, we should be exiting well below $4 million a quarter of OpEx run rate, and we will continue further reductions and exit the third quarter at a number well below $3 million in quarterly operating expenses. We're continuing on the execution side, our focus on commercial activities and cost optimization issues while we continue to execute on the software and technology solutions. We need to address this market opportunity. We also just completed a private placement of shares in the company. We sold -- we placed just over 28 million shares at a price of NOK 1.65 with net proceeds to the company of about NOK 55 million or USD 5.1 million. At the same time, subscribers in this placement will also receive warrants with the equivalent of 1 warrant per every share in the subscription and those warrants will have the same price as the shares, NOK 1.65. The warrants have a duration of 12 months and can be exercised quarterly after the publication of the interim report each quarter. So that's a summary for where we are in our financials for the first quarter. And now let's turn it over to Catharina, as she moves on into the commercial update. Cath?

Thank you, Vince, and very nice to meet you all again. I want to share our first quarter of 2024. So we have been laying the foundation for actually bringing biometric smart cards at scale to market and want to take the time to actually share what we have done. So first of all, as you all know, we used to have a fingerprint sensor system, meaning starting with the biometric sensor together with biometric algorithm. This is how we brought to market. We have since shifted over the years, '22, '23, we have brought on a full biometric card solution. So starting with our patented high-performance sensing system, which is essential for driving high performance. With this, we have integrated a modular card software platform, which actually gives us 2 solutions. We can bring out payment solutions across multiple payment technologies, and we can build access and authentication solutions on the Access solution platform, which means that we have 2 dimensions, 2 modular approaches that allows us flexibility and reach. The other key thing that Vince mentioned was around fingerprint registration solutions. We have learned working with banks that there is not 1 solution that fits a bank, depending on geography, depending on customer segment, banks are looking for choice. Some of them are looking for mobile enrollment, like Vince also said, other want to do in-branch enrollment, other want to just use the biometric card directly. So today, we're offering a suite of solutions, which are proving to be successful and where the banks are actually deploying multiple solutions in order to meet the different customer needs. The other key area is manufacturing support. So IDEX has built a streamlined implementation support structure around the manufacturers to actually support and getting as soon as possible through the process of the letter of approval and actually to optimize the production and facilitate so the yields all the results for the manufacturers is as efficient as possible. We're also -- we've shared with you previously, our market entry strategy where we go in and assess the market context. We work with the ecosystem partners before we launch. And most important of all is our issuer implementation programs, which actually covers dimensions such as compliance, technology and IT, card management systems, all the way back to -- all the way out to the consumer experience. So with these 6 elements or modules, the banks are taking this on in a [ faster ]. So it helps accelerate the process to onboard banks. So in summary, we also, of course, focus on removing market entry barriers. Vince has spoken about the mobile enrollment and so it's 1 of the most important critical elements to actually create mass adoption. Cost optimization is critical for both manufacturers and banks and a segmented approach in certain markets where the metal card that we're bringing out together with 3 manufacturers, and it resonates well with banks in across geographies. Once the metal card is introduced, following plastic and PVC cards is seen as a natural evolution by the banks we're working with. And moving over to IDEX Biometric card platform actually enables both payment and enterprise authentication solutions. So with the platform based on the 2 softwares we have, we have 1 software that operates across payments, which enables us to take this out across Visa and Mastercard. And on the Access side, we enable applications such as crypto wallet, passwordless multifactor authentication and digital ID. And with this, we have our solution partners such as AuthenTrend from Taiwan, Sentry Enterprises from America and [ mnovate ] in America, all are coming with new access solutions for both physical and digital and are being introduced across the world, especially relevant in markets such as Japan, America, Taiwan, Korea. And the use of multifactor authentication continues to accelerate among enterprises worldwide, and governments are promoting the adoption and have even instituted that FIDO should be in certain countries such as Japan, governing standard. It's actually becoming the de facto standard for passwordless multifactor indication. A new dimension of FIDO is something called CTAP2. It's a completely pin free, meaning that fingerprint biometrics can be enforced without an automatic fallback to pin. And therefore, this solution is expected to propel the adaptation of fingerprint biometrics. And if we look at the enablement, the distribution. So IDEX is now in commercialization with more than 20 manufacturers and partners globally, and we have a healthy growth. We came out of '23 with 26 new partners and manufacturers, well spread across the world, and we are very pleased to have these manufacturing trusting our new software. And I will say it's an unprecedented acceptance. It's a market recognition and a manufacturer uptake. It's in a very trust-centric and very regulated and institutional ecosystem that IDEX has actually placed its solution. And many of these manufacturers actually work in exclusivity on IDEX Pay and IDEX Access. And as an end, CompoSecure now is bringing out their solution and it's being showcased in the Middle East in Dubai this week. Sentry is also in the Middle East and showcasing both in the Middle East and America. And Vince mentioned DenizBank, which is -- claims more than 20 million customers. So it's a big bank in Turkey that is coming out here with the biometric card. And then we have Eastern Bank Limited, which is 1 of the most innovative banks in Bangladesh, which will be coming out with the biometric metal card for their affluent. And then just now also in Bangladesh, the second bank, which is called Mutual Trust Bank, we'll be bringing this out across their full portfolio. As a last touch point here on the markets, the market opportunity for biometric cards in Bangladesh is significant. It's a large population of more than 170 million people. Smart Bangladesh is the biometric or I would say, the initiative to actually focus on digital payments, and it's growing at 20%. And the banks in the country see the step of using biometrics as the first step of consumers becoming digital, combining the use of a biometric card with communication in their mobile gives a reassurance and an assertiveness that when they use their cards, they will not be stolen, they cannot be misused. And this country is showing strong interest across multiple banks. The other segment that the banks are aiming for is the 60 million on bank, and where women are overrepresented. Today, in the Bangladeshi banks, only 30% of the customer base are women. So there is a big opportunity for women to actually come on to the financial system. And there is also a huge need for the digital ID solution. So here, both private and public sectors are collaborating to bring both ID and payment cards. And IDEX has the benefit of being part of this ecosystem approach. Lastly, we can say that payment card is a well-known dimension to drive financial inclusion, and IDEX is supporting the mission of moving from cash to cards because we know that by building your own financial history, you come into the system and it enables you to build up your wealth and your financial stability. Biometric cards is, of course, part of this journey, why? Because it brings enhance security and a seamless experience. It also removes the barriers of entry and actually facilitates the usage of contactless cards. And regulators and governments are actually requesting social responsibility from banks and financial institutions. And today, as an overall, why IDEX is focusing on Asia here is because today, it represents more than 75% of all payment transactions and has a significant compounded aggregate growth rate at 21%. And we take a step forward and look at the market outlook. So IDEX is a biometric card solution. We have since inception of the company had the vision of making a card that can have multiple functionalities and service multiple purposes and needs in society. Payment cards, as Vince mentioned, is, of course, the largest and most important opportunity, but quickly coming into, and as Vince mentioned, the cybersecurity and the need for protection is now a significant issue globally. So the cybersecurity and digital access is coming up fast as enterprises and governments underpinning new solutions. Digital currency wallets have been introduced in Asia Pacific and are now being introduced in Europe. Public transportation in Asia, IDEX is participating in a problem -- in a project for retired people, health care ID, multiple countries are struggling with the multiple people using the same cards, too many cards and a lack of proof of life. Here, again, biometric cards are seen as a good, strong solution to verify that the right person is actually carrying out the right health benefits. And then lastly, government security, governments today are under strong pressure from cyber crimes so ensuring that physical and digital access are combined is something that's already being implemented in countries such as Taiwan, Japan and Korea. As it comes to consumer devices is something that we want to come back and talk to in a future session. So altogether, when these different factors can be combined on to 1 card, this card will drive top-of-wallet behavior and also a safe experience for consumers. So as a last point, we at IDEX are focusing on flawless execution and looking to drive the market with a profitable growth for IDEX. We do see that there is a clear exponential market growth that is enabled by the 20-plus manufacturers that are now getting ready to scale IDEX Pay and IDEX Access on to their customers. So we're looking to drive complete solutions because that's driving market adoption. We are taking the very cautious approach that we assess each markets and decide the markets that have the need and where the biometric solution fits into the strategic government agenda as well as bank's agendas. And we are just starting on expanding into new markets and bringing out use cases. And these 3 dimensions would actually help accelerate into mass adoption of biometric cards. So with that, I want to say thank you from IDEX. And Vince, closing words.

Thank you, Catharina, for the very good presentation of the markets and our commercial progress, and thank you all for tuning into the IDEX Biometrics Q4 report. I hope it's clear to you now that IDEX is uniquely positioned to drive market expansion and take advantage of this large market opportunity for biometric smart cards. We look forward to talking to you again next quarter. Thank you very much.