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

Good morning, good afternoon, good evening, wherever you are. A warm welcome to this quarter 1 earnings call with NEXT Biometrics. We are online. And today, we have today's speakers, it's me Ulf Ritsvall, CEO of NEXT Biometrics; and we have Eirik Underthun, CFO of NEXT Biometrics. We will today share the Q1 report and the -- as well as Q1 highlights. We will go through the Q1 financial numbers. We will continuing the business and market updates. We'll share a bit of forward-looking outlook, and we will end this session with a Q&A. Important thing here is you have in your application, there's a Q&A link where you can ask questions to us already now. So then we will bring that on in the end of the session. Let's move over to the highlights of Q1. So already in early April, we announced our Q1 revenues didn't reach our targeted value. However, I'm happy to see our improved revenue pipeline over the quarter and up until now, we have added new orders, and we have added long-term revenue contracts. We are proud to have the adjusted gross margin of still high 52% even if it was down from Q1 2024, we maintain the high gross margin as we have communicated and guided on. And this will -- we see will continue throughout the next quarters. Happy to see that we have signed a new multiyear MoU valued NOK 30 million. It's a contract that will start delivering our enhanced FAP20 product during the fall and will continue for 18 months of deliveries for those NOK 30 million. It's MoU. The purchase orders will arise when -- in the fall. Happy to announce you know that we are measuring the design wins. We have normally a target of doing 3 design wins every quarter. Actually, this quarter was a good quarter when it comes to design wins. And we added 6 new design wins. We have actually what's worth to mention, maybe you remember, we added the Touchpad segment as a complement to our fingerprint sensing technology. And we actually have the first design win for the Touchpad segment. It's a keyboard that will be launched during the first half of this year. We will see more orders coming on in the Touchpad segment, which is fantastic to see. We also have a FAP20 sensor that will be used in a certification solution in a tablet for India's largest banks. That's 2 examples of our design wins. We have also design wins with our standard Oyster III USB reader. But maybe one of the major announcements came actually yesterday and after the Q1 closing, we signed an agreement and at the same time, received a purchase order at a value of NOK 55 million to NOK 107 million. And that's with ACPL in this case. I will have a more detailed slide on this deal later on. But it's a fantastic milestone for us. It's, I believe, one of the biggest purchase orders in NEXT's history actually, which is well achieved by the team in NEXT Biometrics. We can move to the next slide, and I will hand over to Eirik to do the Q1 financial summary.

Next slide, please. Thank you, Ulf. I will now run you through the Q1 financial highlights. The revenues were NOK 6.9 million versus NOK 12.8 million in Q1 2024. The revenues were impacted by the pause in the India market as well as slowness in China that has been mentioned by Ulf before. The adjusted gross margin was 52% in Q1 2025 compared to 56% in Q1 2024. We had operating expenses or adjusted operating expenses as we reported, of NOK 17.3 million compared to NOK 16.3 million in quarter 1 2024. The quarterly adjusted OpEx is increased in line with the plan to increase sales and R&D efforts. The adjusted EBITDA was negative NOK 13.7 million compared to negative NOK 9.1 million in quarter 1 2024. And the reduction in the adjusted EBITDA is mainly due to the reduced revenues we saw in this quarter. We ended up with cash of NOK 39.9 million compared to NOK 62.9 million at the end of quarter 4 2024. And the Q1 operational cash flow was negative due to the operating losses seen in the quarter triggered by the lower revenues as well as negative contribution from working capital. The main message in this quarter is that India pause and the China market slowness is still impacting quarterly revenues as we already reported to the market in the middle of April. And moreover, NEXT has increased its traction on accounts receivable collection during this quarter and cash collection [Audio Gap]. With this, I turn over to Ulf again.

Thank you, Eirik. Please move to the next slide. Okay. I will continue with the business and market updates. I have a few slides on what's going on, on the biometric market. You can move to the next slide, please. So I would say I focus on 2 different regions as we have the strongest presence in those 2 markets, and it's China and it's India. China market recovery is still pending. It's -- the domestic China market is -- we have shipped a limited number of units to during the Q1. We see somewhat recovering, and we see anticipations that they actually start to deliver. But mainly, actually, the Chinese manufacturers are looking outside China. So for the African market, they look at the Indian market, they look at the U.S. market to actually see where the electronic manufacturing will be able to deploy their products. Instead of domestic China, they are looking outside China. Luckily, it's basically the same OEMs, the same targeted customers that we are working with. But it's also so that shifting their focus from domestic China to Africa products require some tuning and tweaking. So basically, the result of the downturn in China gives them the opportunity to look outside and compete with other vendors that are already present in Africa. We actually have ongoing collaborations. We have announced a few. We have -- as we have said, we have 70 design wins. Some of them are actually the OEMs where already have designed in the fingerprint sensor into their Chinese OEM devices. But we actually expect in the near-term future that these will actually be deployed on the market. And as Eirik said, the focus is on -- also on collecting the A/R that it's in the channel, where we have the products in the channel. We are also expecting actually stimulations in the Chinese economy for the domestic market. So we believe and we see that the Chinese economy and the need for biometric fingerprint authentication is actually increasing this year compared to 2024. India, we have talked a lot about. We had a pause in the L1 program for all vendors in basically from November to during Q1. We announced in the beginning of March that our product made by -- refined by ACPL were L1 certified again in the early March. So we right now see the ramp-up again of the L1 products. So the -- and what we also communicated previously was that we will see that fewer vendors will be able to certify in the Indian Aadhaar system. And that's exactly what's the case right now. We are anticipating an increased market share in India and supported by the contract we just signed yesterday. We see that there's a strong demand of biometric upgrades in the market. However, also very important, the Aadhaar program is actually expanding. This is mid- to long term, very important for NEXT Biometrics and for the Indian population as well as the biometric authentication. We are seeing that Aadhaar system is opening up for third-party applications. So today, the L1 is closed for the banking applications and social welfare and a few others. Now the Indian government would like to double -- at least double the amount of Aadhaar interactions, and they are doing that by enabling third-party applications using the Aadhaar ecosystem. That will, of course, boost also the volumes in India. You will see new type of applications in India. You will see new hardware designs. You will see new IDs in how you can actually use the Aadhaar authentication system by verifying different identities. So that is yet to come, which is fantastic news for the biometric industry and also for NEXT Biometrics. If we move over to the next slide showing what we actually announced yesterday. We announced a longer-term strategic partnership with ACPL. And that's demonstrating the increased demand they see and their market share. It also shows their global expansion deployment of sensors. They are not only looking at India. They are also targeting Mexico, Morocco, South Africa and more, which is great for NEXT Biometric sensors to be deployed globally. We, of course, have the proven technology in this. We have the compliance in the different applications in Aadhaar L1, we have MOSIP compliant and FBI and so on. This contract is valued at NOK 55 million to NOK 107 million and many of you may think that's a big span. Yes, it is. There's 2 products in this contract. There's a standard FAP20 product that we already shipped today. And then as we announced in last year, October, we are building a product jointly with ACPL, which will increase our average selling price, maintain our gross margins on the product. And this product are soon to be launched in NEXT Biometrics and available for the public. But this product has a lot higher ASP. It's targeted for different applications such as point-of-sales terminals and more integrated products. It's a match-on-chip product, including an MCU compared to the stand-alone FAP20. So we're increasing the ASP and this product will be available for shipments during second half this year. This significant order, of course, increases the complete confidence in NEXT Biometric product and also the outlook, the revenue outlook for second half and also 2026 because these volumes, this NOK 55 million to NOK 107 million will be delivered during first deliveries in Q2 and onwards in 2025 and 2026. So it's a major milestone for NEXT Biometrics, taking this order and this agreement. We can move to the next slide, please. I would like to mention the FAP30 as well in this call. The progress is fantastic. We have samples at customers as communicated previously. It's a product that are more sophisticated than the FAP20. It serves a different market and different use cases compared to FAP20. So it's not a replacement for FAP20. So we actually see the 2 products in parallel. We maintain the communication that we will have product revenues during 2025. We are in various discussions with customers and partners. And we actually see stronger interest than we anticipated for our FAP30. As I explained in the Q4 earnings call, market is kind of smaller than the FAP20, but the ASP and our gross margins are by far higher than the FAP20. And the market as such is a high-end market for the government ID and health care voting system and others, and it's typically use cases for the FAP30. Customers are primarily in the Western market and enhancing our geographical diversification. And again, market launch of the product itself is during first half. So yes, Q2 is only remaining in first half, so during Q2. And we will get back to you on expected high-value contracts and key customers on this. Okay. You can go to the next slide. So just, of course, a question that many of you have is, of course, our cash flow. We have -- as Eirik mentioned, we have improved the receivables collecting -- collections during Q1. We are targeting significantly growth in the cash inflow in Q2, Q3. We will actually have more cash in Q2 compared to Q1. And as Eirik mentioned, we are actually enhancing our credit terms towards our customers and distributors. We are even getting some of them upfront payment, partial upfront payment of the purchase orders, which is enhancing our cash flow in the company. And then, of course, our FAP30 is positioned in a different way. It's more for the Western customers, meaning standard, more reliable payment terms. So I would say the A/R situation is definitely under control and solved. And by Q1 2026, those will be a memory and gone. So yes, we can -- as we said, we will go into a summary and outlook. You can take the next slide, please. And if there's any question, of course, please raise it. So we move to the summary and outlook. We had a very low revenue in Q1, as you saw due to the Indian pause. That, of course, shift our revenue and revenue pipeline basically 1 quarter. And therefore, we reduced the guidance of the full year. We still have -- I would say, still have an upside of this. And the revenue pipeline is well above as communicated previously. We have more than NOK 300 million per year in full swing. So that, of course, will be starting ramping -- the majority of the revenue will be done in H2. We have -- as we have explained, we have a higher ASP product in the integrated L1 product, and we have FAP30, which is selling at a higher average selling price. We are also expecting Q2, Q3 to -- for the combined revenue being between NOK 60 million and NOK 70 million with a slow ramp-up during Q2 with the Indian pause in mind. So that's how we project the revenue going forward. As I said, continue to focus on strong FAP20. It's a unique product. It has its competitive advantages. We are now transforming the 70 design wins to purchase orders and revenue. The primary growth markets are India and China, as communicated previously. And of course, our short-term goal is, of course, to achieve a breakeven quarters with the strong FAP20 sales. And then on the -- as icing on the cake, I would say, the FAP30 is expected to drive revenue growth in -- towards second half 2025 and even more in 2026. We have a strong security market out there. We have very, very good requirements in this field and meaning we have greater potentials in the FAP30 markets. And efficient scaling of this should, of course, lead to even stronger revenue growth in -- for NEXT Biometrics. And as I said, the demand of FAP30 sensors are actually much greater than the original forecast and business case we actually did. So I'm looking forward to drive this expansion further in 2025 and 2026. It will be a fantastic journey. I think with this, I'm opening up for Q&A. Do we have any questions out there?

Yes. We have a few questions. But as Ulf mentioned, it's still possible to write questions in the Q&A chat of this call. So please write a question if you have any. So it's -- one of the questions says, enhanced credit terms now in place supporting NEXT's growth strategy. So they want to know what this means. But -- so I think Ulf mentioned this. So what we are talking about is the credit terms we are setting towards our customers and distributors. And as I mentioned earlier also, we are working on working capital financing options. So we're looking into how we can finance our receivables and various kinds of other working capital financing options. But right now, we don't have anything to announce on that point. And we're not able to provide the detailed terms and conditions that we're having in our contracts. That's private information between our customers and ourselves. But we said earlier that normally, we are now having 30 to 60 days credit terms. And in some instances, we also have prepayments in our agreements and purchase orders with our customers. Then there is a question on the new order, Ulf. So first question is, have the shipments started? And this is about the contract that we announced yesterday and the contract -- the shipments haven't started. And then the question Ulf is what is the contract period? How long is this contract lasting? And what are the payment terms?

Yes. Thank you for the question. The deliveries has not yet started. It will start in Q2. So it's -- they will pick up the goods very, very soon during May and June. And the payment terms, it's -- it's under NDA. But I would say that we have actually one portion of the actual purchase order is with the distributor, and we have an upfront -- partial upfront payment on this, which enhance our cash flow in this. So -- and then, of course, we have -- yes, the cash upfront payment and then credits on sort of fixed days of that. So a lot more favorable than compared to previously. We also see that the channel is shrinking, and we will actually get paid in a faster way compared to previously when we actually built up this channel in India.

Yes. And it's some more questions relating to the same contract. One is -- I will answer that one. Next guesstimate for sales value? We have provided the interval of NOK 55 million to NOK 107 million. And this is depending on the mix of products that the customer is ordering. So it's both the existing FAP20 product, and there is this newer advanced product that's also based on the FAP20 that -- and are we able to comment on that really, Ulf? Are we -- I mean, we -- wider range and -- it will be probably a wider range because we don't know the exact mix that we're going to have here, right?

No, that's correct. We believe that towards the end of the purchase order, the majority will be the more advanced product. But in the beginning, so as the product is not in mass production yet, so for Q2, it will be FAP20 sensors only. But then it will gradually move over to this more advanced product during fall. And in 2026, we believe that the majority of the products will be based out of the more advanced product. And sorry, I forgot to answer. The contract is -- we believe that the purchase orders will be over and out in end of 2026. So all those volumes and revenues will be accounted for during 2025, the remaining in 2026.

And there's another question relating to the new product. Are we in a position to explain more about the details of this product or will that be announced later?

I can try to explain it a bit. There will be a more published announcement on the website with pictures, images and unique selling points and so on. But it's basically one more advanced product. We had a product -- you can compare it with a product that we sold to Fujitsu previously [ FCCL ]. It was a match-on-chip product. It was called NEXT Secure Bio. It's actually the sensor itself and an MCU where you actually store the biometric data into encrypted. And those 2 will then be called a match-on-chip. There's a secure communication between the MCU and the sensor itself. And in this case, we will actually have a single board type of solution, more integrated and more suitable for higher integration products like the point-of-sales terminals. They have certain size requirements. So with this product, we actually make a slimmer product compared to what's existing, and this will then be able to integrate into a point-of-sales terminal, for example. It can also go into a reader, and it can also go in other various products. But there will be public announcement on the product a bit later this quarter, and there will be more information about it at that time.

Okay. Thank you, Ulf. That concludes the Q&A session. So please -- you can call Ulf or myself, Eirik on the e-mail or a phone call. And then we can talk, and we can answer any other questions you may have. Thank you.

Thank you, and have a good day.