Precise Biometrics AB (publ) (FINGB) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining today's conference call to present Precise Biometrics results for the second quarter of 2022. I'm Patrick Hoijer, recently appointed CEO of Precise. With me today, I have our CFO, Annika Freij. Before we switch slide, let me start by reflecting on my first month as CEO of Precise. I can conclude that I'm proud to run a company that is performing well in a turbulent environment. Both our Digital Identity and our Algo business segment showed a strong Q2 and are growing compared to the same period last year. We also achieved a turn to a positive EBITDA for the quarter and for the first 6 months of 2022. Therefore, I feel privileged to guide you through the second quarter reporting today. With that, please turn to Slide #2. During Q2, we saw a decrease globally in the demand for smartphones. However, the early reported confidence shortage have improved in Q2, and we have continued to secure new projects with existing parties during the last 12 months, while we see a good revenue development. Algo revenue in total grow to SEK 19.1 million compared to SEK 17.5 million last year. We have seen a good demand for visitor management system in the quarter. In fact, during the quarter, we issued the best SaaS sales in East Coast so far. This is a result of more employees returning to the office, which drives the demand for convenient solutions for visitor management. In total, we grew revenue within Digital Identity to SEK 5.5 million compared to SEK 1.2 million last year. This means that we're continuing to grow our recurring revenues in line with our ambition. In total, our revenue grew to SEK 24.6 million with a positive EBITDA of SEK 0.9 million versus last year where we had a negative EBITDA of SEK 0.8 million. As we communicated this Wednesday, our commercial partner, Egis Technology has decided to make a strategic investment in Precise. In connection with this investment, we are also enabling for existing shareholders to partake in a right issue subject to the AGM approval, of course. This is truly exciting, I have to say, as it gives us a significantly strengthened financial position, which together with Egis as a long-term industrial owner will strengthen our ability to deliver on our strategic growth agenda. Please turn to Slide #3. But before we head to the segment update, I think it's important as new CEO, to remind us all of the core vision of Precise. And this vision applies to both of our product segments. We focus our business around identification. Identification for the use in a support to be done in a secure way, but to make sure that the solution is used by all parts of the trust chain, especially the end users. It must also be easy and convenient to use. This is why we have developed our Identification Solutions with a strong foundation in biometrics, all the way with the end user mind. After my first month as CEO of Precise, it is clear to me that the company has built up a global excellence in biometrics over a very long time, and a good ability to apply it to multiple biometric applications. Taking this together, this provides a strong platform to continue to commercialize in line with our communicated strategy. Using our solution, she or he should know that, no matter who you are, where you are and what you do, you are the key. Please turn to the next slide. Our Algo business is truly demonstrating a robust business model in Q2. As stated earlier that our overall in the industry, a reduced demand for mobile phones due to the macroeconomic situation. However, the availability of components, which has been flagged early quarters have improved. In total, including new won projects during the last 12 months, it has contributed to our Algo revenues increasing despite these turbulent in the market. In Algo, we see growth in revenues for the second quarter to SEK 19.1 million from SEK 17.5 million last year with good margins. Furthermore, we maintained market share by continuing to win new projects with our strategic partners. I think some good example is on this slide illustrated by the 2 projects we won with our partner Qualcomm, the Vivo X80 Pro and the iQOO 10 Pro. Please turn to Slide #5. In the Digital Identity segment, we are focusing on growing our recurring revenue. As we touched upon earlier, we continue to grow our recurring revenue from our SaaS business in Q2. As stated, the return of many businesses to working from the office has driven demand for visitor management systems, with East Coast achieving its best ever single quarter in terms of new sales and sales. As communicated before, our focus within Digital Identity is biometric physical access solutions. We are seeing increased adoption of biometric access solutions, especially in verticals such as gym and construction site, which I believe is a clear proof point that the customer -- that our solution is solving a clear customer demand. And this quarter, we have completed new unique installation for customers like Algeco and Iver just to mention two. Revenues grew to SEK 5.5 million in Q2 from SEK 1.2 million in 2021. This is primarily driven by EastCoast now being part of our family. On the commercial side, we continue to have close dialogues with customers and partners, not least regarding further integration between our unique and our EastCoast solutions. Please now turn to Slide #6, and over to you, Annika for a financial walk-through.

Thank you, Patrick. We are happy to present another quarter with growth in both our product segments despite the turbulent world. In the Digital Identity segment, we continue to integrate EastCoast and YOUNiQ, both from a product perspective and from an organizational perspective. Our strategy continues where the profitable Algo segment is funding the development of the Digital Identity segment. Please turn to Page #7. Net sales during the quarter were SEK 24.6 million versus SEK 18.7 million previous year. Net sales were split between royalty revenues of SEK 7.1 million versus SEK 7.0 million previous year. License fees, including support and maintenance of SEK 15.7 million versus SEK 9.2 million previous year and other of SEK 1.9 million versus SEK 2.4 million previous year. The Digital Identity segment has increased with the acquisition of EastCoast that was down the 30th of November last year. Net sales for segment Digital Identity were SEK 5.5 million versus SEK 1.2 million last year. The increase depends mainly on EastCoast, which contributed with a net sales of SEK 4.5 million. Gross margin for the segment was 43.4%. The margin for Digital Identity is lower than the Algo segment due to margin from hardware is a lot lower than of software. The Algo segment is healthy and profitable, delivering a strong cash flow. Net sales for segment Algo was SEK 19.1 million versus SEK 17.5 million previous year. Last year's component shortage in Q2 was replaced by declining demand for mobile phones during Q2 this year, which has resulted in low production volumes in the mobile market. License fees increased compared with the second quarter of 2021, driven primarily by new customers in the automotive industry and increase in customers in the mobile industry. The gross margin during the quarter totaled 87.9%. Total gross margin during the quarter was 78% versus 73.3% previous year. The improvement in gross margin is due to higher sales, while costs are only increasing marginally. Total amortization of capitalized development expenses was SEK 3.5 million compared to SEK 2.9 million previous year. The increase in amortization of development expenses relate primarily to EastCoast. Amortization of acquired intangible assets was SEK 0.3 million compared to SEK 0.2 million previous year. Please turn to Page 8. The profit at EBITDA level was SEK 0.9 million in Q2 versus minus SEK 0.8 million previous year. Operating expenses for the quarter increased to SEK 23.3 million versus SEK 18.3 million previous year. The increase in operating expenses is explained primarily by the added cost for EastCoast. Earnings per share for the quarter was minus SEK 0.11 versus minus SEK 0.13 in quarter 2 last year. The operating loss for the quarter was minus SEK 4.1 million versus minus SEK 4.6 million previous year. The slightly improved operating profit can be explained by higher net sales, although these are offset by the higher cost level. Please turn to Page 9. The cash flow for the quarter from current operation was SEK 3 million versus minus SEK 1.6 million last year. Of this, SEK 2.4 million is due to changes in working capital. The group invested SEK 0.3 million in property, plant and equipment during the quarter versus SEK 2 million last year. Total cash flow for the period was minus SEK 3.3 million versus minus SEK 7.9 million previous year. Capitalization and amortization of development work. Development expenses of SEK 5.6 million were capitalized during the quarter compared to SEK 4.2 million in Q2 last year. Amortization of capitalized development expenses was SEK 3.5 million during the quarter versus SEK 2.9 million previous year. Capitalized expenses are amortized over a 3-year period for Algo as well as for Digital Identity. Cash and cash equivalents at the end of the period totaled in SEK 54.6 million compared to SEK 62.5 million last year. The cash position will strengthen during the second half of the year after Egis strategic investments in Precise and the rights issue. Back to you, Patrick.

Thank you, Annika. As already stated, we have continued the year in a strong manner where we have grown our recurring SaaS revenues and our license revenues despite the challenging macroeconomic development. But before I summarize the key takeaways from this quarter, I would like to go through the overall strategic of Precise, which we announced already in December last year. And I would also like to further emphasize the positive implication of the investments by Egis Technology and the proposed share issue to existing shareholders. So please turn to Slide #11. Let's start by looking at the DI segment. Our progress and growth within DI is not a coincidence. We have and will continue to work according to the strategy agenda presented in December, where we continue to expand our customer base organically by securing that our products are integrated with existing platforms and security companies in the market we operate in. We continue to integrate our 2 product families, YOUNiQ and EastCoast, both from a technical as well as from a sales perspective. Further, we are continuously evaluating strategic partnerships to address new geographies and new market verticals when opportunities arise. We are also open to look at further potential acquisitions when opportunities present themselves, as we have proven that we can work fast to integrate new acquisitions such as the recent addition of EastCoast to the Precise family. Please turn to the next slide. Our Algo business provides a balanced and resilient product portfolio, which is clearly demonstrated by our performance in Q2. Our strategy includes focus on strategic partnerships in the mobile vertical and expanding our position in new verticals. Overall, the market for sensor vendors is consolidating. And given the turbulence around the earlier component shortage now being replaced by oversupply, the mobile OEMs are selective in qualifying new vendors. This means that it is critical to continue to win new projects with established partners. And of course, this underlines the strategic upside of deepening our cooperation with players such as Egis. We are also aiming to broaden our position in Algo to all sensor types. Today, we have strong position in optical and ultrasound. However, the strength of our software in Algo is that it is generic and can be adapted to other sensor types. We can also see that closer cooperation with our sensor partners lead to better end customer insights, and we believe that close cooperation with, for example, Egis, can substantially improve the quality and the solution that we deliver to these OEMs. Precise has built a stable and global Algo business in the mobile vertical for many years, providing strong margins and good cash flow. This has enabled us to explore expansion into new Algo verticals. In the end of '21, we entered into a new vertical, the automotive sector. This vertical has significantly longer product life cycle than our main vertical, the mobile. In addition, we expect the market to grow in the coming years as it will become more mature and biometric solutions would become more widely available in future vehicles for various use cases. We see a commercial opportunity in strengthening the relationship with partners such as system integrated in the automotive vertical to increase chances to joint win new car models. As we see biometric being used in other verticals than mobile, we are continuing to explore possibilities to extend our product offering where we see commercial opportunities in the same way as we have done within the automotive industry. With that, please turn to Slide #13. And as announced this Wednesday, Egis has committed to make a strategic investment in Precise. In connection with this investment, I'm really happy that we have proposed to our existing shareholders to take part of the journey by partaking in a potential rights issue. And I would like to spend a minute or so on the positive implication this investment will have on Precise. By Egis' investment, we get a long-term industrial owner with a significant sector experience, studying commercial partner of Precise since 2019. Egis knows our annual products, which is a clear proof point of Precise global strength in biometric solutions. In addition, Egis has a strong position in the important Asian consumer electronics market. As we are deepening our operation, we are then getting a strong partnership in that geographic area. I'm also very happy about Egis' long-term commitment to Precise as they have signed a lockup agreement for 24 months. Further, the proceeds of up to SEK 83 million strengthened our cash position substantially and our ability to deliver on our strategic growth agenda. As we are operating in the same industry, close cooperation between us will improve our joint commercial capabilities. This investment enables closer cooperation within product development, which we believe will improve our joint offering to current and to new customers. In addition, Egis has a strong experience and expertise within hardware, which we believe can potentially -- can over time benefit both our Algo and Digital Identity segment. Please turn to next slide, #14. And finally, summarizing our strategic growth agenda. We see significant potential, both commercially and in terms of market potential for physical access and visitor management. With our business model within DI, we focus on achieving the recurring revenue with strong margins over time. Part of our strategy is also to explore M&A activities that will add competence to our Digital Identity offering. We have recently expanded our Algo business into automotive as earlier stated. We will, going forward, continue to serve our customers in existing segments but also explore possible commercial opportunities in additional segments to grow our business. Please turn to the next slide. To conclude, as I said earlier in this presentation, we are continuing to grow in a turbulent macro environment. Digital Identity continues to grow in Q2 primarily as a result from a growing demand for visitor management system. As stated, we see an index decline in demand for smartphone as a result of the macroeconomic uncertainties. Despite this, our revenues are growing, which demonstrates the robustness within our Algo business model. As we announced this Wednesday, the strategic investment from Egis and the share issue, subject to the AGM's approval, of course, are contributing with up to SEK 83 million, which will provide us with the financial strength and commercial support should deliver on our strategic growth agenda. With that, thank you for listening in, and a big thank you to the full Precise team. And remember, in a state of innovation, you are the key. With that, please turn to Slide #15, and we conclude our presentation and hand over for potential questions...

[Operator Instructions] There are no questions from the phone.

Okay. We have got some questions by e-mail. Then I'll start with some of these. One question we have is, are you present in any new mobile phones? And I stated also in the presentation, we continue to win new generations of phone with partners, such as the one described in the presentation, the Vivo's new, for example, the 80 Pro and the IQOO 10 Pro. However, as also stated earlier, we are not always able to communicate which models we are including due to the fact that we don't -- in some cases, don't know and in some cases, we are bound to NDA. But when we get to know major wins that has significant financial impact will, of course, be press released in line with our communication policy. Another question -- we have quite a few questions around the automotive area and automotive. One question is automotive is an interesting vertical, but we are lacking information. So please share which cars you will be in. In the same way as in the mobile Algo state, for commercial reason and for security reasons our 2 customers that we announced in December has chosen not to go public, which car model that is. But we are working closely together with our partner, Infineon to deliver on them. We see that the automotive industry is an attractive industry where we will continue to look to score opportunities together with them and other strategic partners. We also expect that the royalty from the deals signed last year will gradually start coming in by the second half of this year. Another question by e-mail is how does the dura cooperation progress as you have communicated earlier about? We see a strong market for biometric solutions in the public sector. And there are interesting use case, for example, in the elderly care area. However, working with public sectors, the process are generally quite heavy and takes a very long time. And we will, of course, when we achieve major milestones ensure that we communicate those swiftly to the market. What kind of M&A activity can we expect in terms of company and size? We have said that our M&A activities are mainly focused on the digital identity area. Right now, we are focusing on physical access, but we are also continuously exploring as stated M&A-driven growth opportunities to acquire competence in this space in areas such as, for example, EID, among other things. Right. I also have one question. How do you see the geopolitical tensions that are in Taiwan? And is there a risk that it will be able to affect your business? And do you see any risk with having a Taiwanese major owner in the current situation? I think it's clear that Precise has built up a global leading position in biometric solutions. So we operate in a global market where Asia and Taiwan are a large part of the global market, both on the demand and the technical know-how side. I therefore see this from another point of view, rather in the sense that this is a real strength to Precise to have a strong partner in this geography in the world. Right. Any other questions from the audience?

There are no questions on the phone.

All right. I think we have -- I think there are questions similar to the ones we already got or answered there. So I think with that, we will conclude from our side.