NEXT Biometrics Group ASA (NEXT) Earnings Call Transcript & Summary

Hello, everyone, and welcome to this conference call. I'm just going to do a quick sound check before we get started. Eirik, can you hear me?

Yes, I can hear you.

Very good. All right. Welcome to this conference call covering the latest positive announcement from NEXT Biometrics. I'm Peter Heuman, the CEO of the company. And with me today, I also have our CFO, Eirik Underthun. I would like you to be -- put attention to that if you have any questions during this presentation, please make sure you send them to [email protected] or you can find, in particular, Eirik's e-mail address also in the press release because Eirik will gather all the questions and ask them to me at the end of this presentation and of the conference call, and we will try to cover as many as possible of them. Let's get started. Let's get started. So today, we will outline 2 main topics during this session. First of all, the new 5-year agreement that we announced this morning with the European tech giant. But secondly, I will just briefly talk about the FAP20 market since we believe that many shareholders might not be aware of the potential of this market that we at NEXT are very focused on disrupting. But as I said, starting with the important news of today, the announcement of the partnership agreement. Before I go there, I just would like to try to put this in context. So we started in NEXT a transition of the company and the program approximately 14 months ago. That included 3 main dimensions. Number one, an increased commercial focus, establishing a tangible growth and for near-term sales and, in particular, design wins with new customers, OEMs and biometric device manufacturers to be able to scale up the revenue of NEXT. Secondly, we aggressively implemented cost reduction and efficiency measures, and that was completed ahead of time, and we have actually lowered the cost with more than 70%. And thirdly, we have also changed the culture of the company. We are now a much more customer-focused tech company. And aligned with this implementation of that new strategic direction, we are, therefore, very pleased to announce today this new major NEXT Biometrics partnership with the European tech giant. The partner is a giant player in the global biometric market with a sizable market share. It is a European-headquartered company. It operates globally and has almost EUR 20 billion in revenue. The revenue potential through this new partnership combined with our new low-cost operating model should be -- provide the potential to drive improved financials and earnings for NEXT Biometrics. And due to its significance in the biometric industry and the planned use of our FAP20 in the partner's product stack, we believe that the European tech giant will become a key long-term contributor, building a commercially successful and growing NEXT. So what are the main takeaways that you could see in the press release today and out of this agreement? Yes, from our perspective, first of all, we do believe it's groundbreaking agreement, and it's a very important milestone in our set strategy and for our new NEXT Biometrics. It is a 5-year global contract, providing us with a great potential. Secondly, it is mainly focused on our prime product, the FAP20 size sensor. Our FAP20 sensor is expected to be designed into certain of the partner's products with launch during 2021. We do believe that the initial orders will most probably start arriving at the end of the first half of 2021. I believe the contract affirms that our Active Thermal technology has potential to disrupt the biometric market when the technology is now selected by a global major company. I would also like to say that this customer is probably the single most important NEXT customer that we have signed up within almost NEXT's history and, for sure, since we set up the new strategic direction. And accordingly, the annual volume potential from this customer is considerable. We have signed the agreement with them, and we have established all the commercial frameworks. We are working right now together with them and have been doing for quite some time with this partner and their team to enable them to start to place their initial purchase orders from NEXT Biometrics. And maybe finally of summarizing the agreement, and among the most important aspects, we see the collaboration with the European tech giant as an important step moving NEXT to the next level from both a business and technology perspective. I do believe the combination of NEXT technology with the global marketing, sales and distribution power of our new partner is what's going to provide true value to NEXT Biometrics shareholders. Now some of you might also wonder, so why did this European tech giant decide to work with NEXT Biometrics? Yes, we believe that NEXT-patented Active Thermal technology provides a competitive edge within the large area fingerprint sensor market. I think you heard my predecessors talked about it. I think you heard me talk about it. On the basis of our communication with our new customer, we have understood that there are 3 main reasons for our new partner to team up with NEXT and embracing this technology. Number one, our NEXT sensor is highly competitive in terms of costs compared to existing sensor technologies in the FAP20 size market, and this because we can increase the size of our sensors with low or little effect on our production cost. Number two, the Active Thermal disruptive fingerprint sensor technology that we provide, it provides a slim form factor, and that enables the partner to integrate large-sized sensors into slim and smart modern both stationary and portable devices. And thirdly, the sensor technology provides a high level of security, and it has been certified by several government authorities, for example, FBI in the U.S. And we do believe that this sums up why the tech giant decided to select NEXT Biometrics. Now to the second point of today's agenda, I want to touch upon the market for the FAP20 size fingerprint sensors and why we believe that has such a potential for NEXT and why is this important for you as stakeholders, shareholders or customers for that matter. It's because I don't believe that we, as NEXT, historically has articulated well enough about the actual market potential for NEXT and this particular product. So the disruptive NEXT FAP20 sensor competes mainly with the sizes of sensors that are categorized within FAP10 sizes, FAP20 sizes and FAP30 sizes. And these are today mainly provided by incumbent technologies. Only the FAP20 market potential market is estimated by external parties to be around, currently, around USD 1.5 billion with a CAGR of around 14%. And that the average selling price in the market today, if you want to buy a certified FAP20 size sensor from a renovated supplier, the market price is currently somewhere between USD 20 and USD 35 per sensor for competing products. Now that NEXT can build FAP20 and large-sized sensors with low production costs compared to both optical and capacitive sensors technologies, this enable us to offer competitive prices to our customers while still providing great margins to our shareholders. And that our Active Thermal sensor technology with the slim form factor, high security, certifications from government authorities, we believe is therefore disruptive to current market and competitors and for customers. And this together provides us with a great possibility to outperform our competitors with our technology in a USD 1.5 billion market. The incumbent technologies, I would say, have no incentives to lower current market prices. While we, at NEXT Biometrics, we now both have the technology and we have the financial reason to do it. So how are we going to disrupt and reach a great market share? We have talked about this earlier in our quarterly earnings calls, et cetera. I have 2 main points. We are scaling our company through increasing the number of devices with NEXT FAP20 sensors. This through an increased number of design wins, we have already increased from 1 to 16, and the company we announced today might become the most important design win to date. Our new partner has officially not launched a device, including our FAP20 in the market yet, but we expected this to happen relatively soon. And when it happens, it will potentially become one of the most important design wins since we launched our new strategy, and then it becomes a major cornerstone in our implementation of the stated growth agenda. So to sum up today's call of the agreement and also a little bit about the FAP20 market, the European tech giant market share in this area is sizable. The partner has a strong presence in many local biometric markets around the world. For NEXT to piggyback on this attractive market presence will open up significant revenue potential for NEXT. It is likely that the European tech giant market share might even increase, utilizing our Active Thermal technology. And the market should increase further if we can lower and be competitive on price, et cetera, with our technology. So with that, I hope this is fairly brief, but hopefully, it provided you with some insights around the press release that we set out today of the new partnership of a long-term contract and long-term partnership with the European tech giant. And with that, I would like to hand over to Eirik and that we start the Q&A session. So for everyone, if you haven't and if you have some questions that has arisen, you can send them either to [email protected] or you can send them to Eirik, and his e-mail is in the press release. But I know that we already have received some questions, Eirik. So perhaps you can read them for me, and I will try to answer to the best of my knowledge.

Yes. Can you hear me, Peter?

Yes.

Very good. What kind of products are you designed into?

Yes. Since we have actively been working for a substantial amount of time with this new partner and they have not officially launched yet, I am not in a mandate to disclose exact products. But we are in intense work together with this customer who has several different of their own products and partner OEMs. And we are -- some of them, we are quite far in dialogue around.

When can we expect the first order from the European tech giant?

Yes. I think like I stated here earlier, Eirik, we do anticipate with what we know that the first orders will start to arrive around late of the first half year, so that would be late quarter 2. I think that's what I said and what I should stick to.

Right. And the -- well, an e-mail here that says, your partner is -- has -- you're saying that they have revenues of EUR 20 billion per year. There aren't that many tech companies in the biometrics space that has this kind of revenues. Is the partner the French Thales?

Yes. Eirik, as probably everyone will understand, since we have used -- not used the actual name with respect and honoring the contract that we have signed, I cannot comment on which is the potential partner specifically. I think also what I can say is that I do believe that honoring what we have agreed is something very positive, and we do both believe that we can do something fantastic with this technology for both of us. So I believe both they and we would like to stay rather low with exactly who it is and potentially until the first products arrive in the market.

All right. I've got another question here. So how do you anticipate this agreement to impact your earnings during 2021?

Yes, that's a good question. But I'm not going to -- normally, we don't guide on revenues more than we have done through the funding activities, and I'm not going to do it on a specific customer case. So I can only refer to what we have stated in the press release and also during this call. It is a long-term potential. It's a 5-year contract with one of the largest tech giants in the market with a sizable market share. And I think that is what we should communicate at this stage rather than a short-term side. It is -- for anyone who remembers or have listened to us since the transition started already last spring, we mentioned that we were in dialogue with a dominant digital identity provider regarding a potential FAP20 project. Yes, here we are. This is the partner.

Good. Another question just came in here. Congratulation on the great achievement. There is no research from brokers on your company that I have found. There is a good article on the Seeking Alpha on your company and its prospect. Do you have any comments on the article? Have you seen it?

I don't know specific -- what I know -- I have heard and -- but I haven't read the full article from Seeking Alpha. I have heard that there is one out there. What I do hear in the question is something I agree to, and maybe we are a little bit -- there is not many brokers that are following NEXT Biometrics. But I think maybe due to all the whole transition that we have made of the company, I think news like this today will wake up some of these brokers to make more analysis, et cetera, of NEXT Biometrics. And that's something for Eirik and myself to be in contact with, of course, but I think the most important is that we provide these kind of news. So it becomes also more interesting to follow NEXT Biometrics.

Yes, don't have any additional questions. Maybe we should wait for a minute or 2 to see if there are any other ones. So what do you think, Peter?

Yes, we can hold on for a little while. We've only been here for 20 minutes, but I hope that has been good, short, informative and crisp. So if there are no more questions coming in there, Eirik, and please check both your own e-mail address as well as the events address, but otherwise, I think we hold on just for a little bit longer and then we will round off here. Of course, both me and Eirik will be available, and you can find our e-mail addresses in the press release, both on our website or in other places. So feel free to send your questions, and we will do our best to accommodate them. If you don't have any...

I have one more question here. So I've been looking at the UBS update on the biometrics sector, and they're saying the market is very promising. You're saying that the market potential for FAP20 sensors is $1.5 billion. What -- do you have any specific or how much of this market that you could get in terms of the FAP -- NEXT's FAP20 sensor?

Yes, Eirik, I -- we have also reports that goes around that UBS report of the promising biometrics in general. Of the $1.5 million (sic) [ $1.5 billion ], I think I would -- at this stage, where we are with the company, we are taking step by step in the right direction, I believe, with more design wins. We have articulated some financial ambitions and plans that we are working against. And I mean it would be wrong for me to state any certain percentage, but we have the tool and the means to try to disrupt the market. The market is sizable. But from the size where we are today, we can probably take small steps in that direction, and it's going to be wonderful for this company at this stage. When we have become a little bit larger, I think that's when we can talk more general market shares.

Yes, there is a new question now. Has the contract actually been signed? Or is this just under process?

No, it has been signed by both parties. And -- absolutely. Absolutely. There is a lot of work that has been going on before the contract has been signed, a lot of preparations, projects, et cetera, but the contract is signed, and we have it in our hands. And it's a 5-year contract.

Yes, I think this is the final question. We just got it in there. Do you have any plans for other FAP sizes, such as FAP30?

That's a good question. And around the lines for how we communicate nowadays over the potential for, for example, the FAP30 market and the large size market, I think that could be a candidate. But I'm not prepared to publicly like this discussion on specifics around our potential next steps of our internal road map. But the large size area market is the one we are focused at with our technology, and I think our technology seems to fit very well for the market and for our shareholders.

Thank you, Peter. I have no additional questions here.

All right. Then I think we should say thank you to everyone who listened in. And like I said, if you have further questions, feel free to send them to me or Eirik, and we will try to accommodate them as quick as we can. So thank you very much for joining. And we say that this call is now closed.