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

Today to present, as I stated, the financial report for the third quarter for Precise Biometrics. And as stated, my name is Patrick Hoijer. I'm the fairly new CEO of Precise in June this year. And by my side here is Annika Freij, our CFO. Once again, before starting the presentation and running through the results and the operational progress, I think it's important to emphasize that we are growing. And this is a result of our focus on building up recurring revenue in both our business units. This growth is achieved in a market where the global demand for mobile phones have weakened during the second half of the year. Let's turn to the next page. The agenda today is looking like this. [ Did is ] to walk through the quarterly highlights and then give you an operational and financial update. And finally, explaining our clear strategic direction going forward. But let's start. So let's go to the next page. As we communicated in report, it has been a very eventful quarter for us. The revenue has increased to around SEK 19 million. It is driven by the acquisition of EastCoast last year and a stable development in our licensing fees in both of our business units. For the Algo business unit, where we focus on fingerprint recognition, the revenues were negatively impacted due to the volume-dependent royalty fees. And this is explained by an overall weaker demand for mobile phones in the world. In the Digital Identity business unit, where we focus on access and visitor management, the revenues are mainly up due to the EastCoast acquisition, -- and this has, of course, significantly increased our recurring revenue base. Also, as we announced in August, we have carried out a directed share issue to our important customer and partner Egis Technology. This issue was carried out during September, and we got proceeds of around SEK 41 million. This, however, has been booked after the quarter. So you can't see it in this quarterly report, but you will see it in the fourth quarter report. As stated, we're now acting in an increasingly uncertain macroeconomic environment and precise has for this quarter, shown a stable, strong revenue development despite this. And because of this – this is mainly due to development in our Digital Identity business unit. -- and a stable trend in our licensing fees in both of our business units. But to best meet these uncertainties, we have increased our cost control, and we have already taken some initiatives during the quarter to reduce our operating costs. And this has been done in the way of reducing consultants and optimizing our R&D efforts. And we can see that this effect will take greater -- this will be more broadly shown in 2023. This is also in line with our strategy, where we focus now more on commercialization of our solutions. During Q3, we also announced that we have adapted our organization to better reflect our business focus and our strategy. By doing this, in this, we appointed Fredrik Sjoholm to become the Executive Vice President and also the Chief Commercial Officer of our Algo business unit, while I assume the role as CCO or Chief Commercial Officer for the Digital Identity business unit, besides my current role as a CEO, of course. This, we believe, will create much more focus on the different business opportunities in both of our areas -- but let's go to the next slide. But before going through the development from the business areas, and I would like to start by explaining precise a little bit more and also the trends that are underlying which is helping our development. The size has, of course, been around for many years, and that's a strength that has helped establish a strong global footprint across the world. We have offices and people in Europe, North America and Asia. We organized today into 2 business units, which -- through which we provide our solutions. In the Algo business unit, we offer software for fingerprint recognition and anti-sposolutions, which is used in various applications such as mobile phones and laptops and door keys and so on. Within Algo, we have global customers and generate revenues from [ annual license ] fees and from volume-driven royalties. In the Digital Identity business units, we offer access solutions based on facial recognition, a solution called YOUNIQ and visitor management solutions, which we call EastCoast. In this area, we have our customers mainly in Sweden and in U.S., and we create recurring revenue by selling these solutions as Software service, so a recurring revenue fee. If we then – jump to the – next page -- if we look at the underlying trends in the market, -- our offering and strategic focus is a result of global trends that we're seeing for biometric applications. Biometrics is basically about measuring each person's unique physical characteristics, which can then be used to identify this individual. Fingerprint reading and facial recognition are for example different types of biometric technologies. And if we look at the trends that our Algo business unit, our fingerprint business is benefiting from, we can, first of all, see that biometrics are entering new segments and use-cases. We can, for example, see new authentication requirements in automotive and in laptops. Additionally, as the security increases, we see more use-cases also for valuable personal assets such as the payments, ID cards, driver license, et cetera. which decreased the demand for our solutions. For the Digital Identity area, namely our access and visitor management area, there's a broad increase in demand for secure identification solutions. Traditional access control has been based on object-based access, such as keys, id cards, tags [indiscernible] or it has been based on information-based access, such as pins or passwords. Common for both of these are that they can be stolen or they can be shared. Therefore, we see a global trend of increased security, which can be met by biometric-based access control. So by using fingerprint or facial recognition to grant access. Biometric access is also very interesting. If you combine it with the traditional object-based access, when you buy a card and a facial recognition as it creates a strong multifactor authentication. These solutions are based on biometrics, brings higher security, convenience and less cost for the customer in the end. So to summarize, there are strong global trends that Precise is well placed to capitalize on over time. Let's go to the next page -- so let's start looking at the segments. Within our Algo business unit, the revenue decreased to SEK 13 million in Q3 from just below SEK 70 million last year. As I already mentioned, the explanation for this is lower royalty fees arising from a high inventory environment among the mobile manufacturer, the so-called OEMs and a lower market demand for mobile phones. Looking at our license fees, however, they develop at a stable level with a slight increase compared to the same period last year. We are also continuing to see good product launches, which includes our software during the quarter, such as smartphones from Vivo and other launches like smart doorlocks by Aqara and TP-Link. This is an effect of precise continuing to support key partners in Asia and in U.S., which is also part of the strategy within Algo going forward. In Algo, we have spent many years building up world-leading expertise in the development of algorithms for fingerprint recognition. This is technology based on advanced expertise in image analysis. And the customer feedback of our recently deployed software shows that we have world-leading performance of a biometric match and latency. We have also been able to improve our anti-sposolution, which shows very promising initial performance improvements. And this part is also very important that there is an increasing requirement in security standard in our industry. So precise continuously shows that we are really in the forefront of delivering solutions in this environment. Please turn to the next slide. For Digital Identity in Q3, we continued to grow the underlying recurring revenue by the recent acquisition of EastCoast. Revenue grows to nearly SEK 6 million, increasing from SEK 300,000 last year. It is reassuring also that the demand for our visitor management solutions continues to be at the high level. Year-to-date, the sales order value for our visitor management solutions was 50% higher than for this corresponding period last year. Our focus in this area is especially to sell our future proof cloud-based visitor management solution. This has also shown to be successful during the year as the sales order value have almost doubled in value versus last year. Some examples of wins for the quarter is Smurfit Kappa and ATEA. For YOUNIQ, our biometric access solution, we signed deals with, for example, Paras Bygg and new projects with Algeco during the quarter. If we then look at the operational part, -- we are operationally focusing on building commercial and technical partnership with access and key installation partners in Sweden. This is very important as is strengthening the go-to-market channels for the solutions -- for our solutions in the Swedish market. So that's our main focus right now. And on this topic, we have changed our R&D focus, where we now focusing on scalability and simplicity to support the commercialization of our solution. And then looking a little bit further ahead, we see opportunities in the U.S. market. U.S. is a really large market and combined with a more maturity when it comes to biometric solutions, it holds a great opportunity for us. It is, therefore, pleasing that we have unit landed a win with St. Lawrence Health Hospital in New York State, where we provide a secure access solution for the hospital and also for the pharmacist area. And with these words, I think I hand over to you, Annika to go through the financials.

Yes. Thank you and please go to Slide #8. Thank you. We are happy to present another quarter with growth despite the turbulent world and a very challenging mobile phone industry affecting our royalty revenues in the Algo segment. In the Digital Identity segment, we can report a strong third quarter with increasing demand for our visitor management solution EastCoast. We continue working on building up our sales channels for YOUNIQ both in Sweden and in the U.S. Please go to Slide #9. Net sales during the quarter were SEK 18.8 million versus SEK 16.9 million in Q3 previous year. Net sales were split between volume-dependent royalty revenues of SEK 1.9 million versus SEK 6.8 million, license fees of SEK 14.8 million versus SEK 9.7 million. This includes, for example, fixed annual fees for Algo and recurring revenue, what we call System as a Service revenue in Digital Identity and also SEK 2.1 million versus SEK 0.3 million of other. The decline in royalty revenue is due to a sharp decline in demand in the mobile sector. but the increase in license fee is primarily due to the acquisition of EastCoast, which was completed in November last year, and this contributed of a revenue of SEK 4.5 million in sales during the quarter. The gross margin in the quarter was 63.2% versus 76.4% previous year. The downturn is due to changes in the product mix as the Algo products segment has a higher margin than Digital Identity Products segment. Amortization of capitalized development expenses increased to SEK 3.9 million compared to SEK 3 million last year, relating primarily due to Digital Identity, including EastCoast. Net sales for Algo was SEK 13 million versus SEK 16.6 million and are reported under royalties in SEK 1.9 million versus SEK 6.8 million licenses at SEK 9.9 million versus SEK 9.5 million and other at SEK 1.2 million versus [ SEK 0.3 million]. Last year's component shortage was replaced by declining demand for mobile phones, and this resulted in the low production volumes. But license fees increased marginally compared to the third quarter last year. Gross margin in the quarter was 82.1% for Algo. Net sales for Digital Identity was SEK 5.8 million versus SEK 0.3 million last Q3 -- and this is reported under licenses of SEK 4.8 million versus SEK 0.2 million and other of SEK 1 million versus [ SEK 0 million ] last Q3. The increase in revenue in Digital Identity is due primarily to EastCoast and EastCoast contributed with a net sales of SEK 4.5 million during the quarter. The gross margin during the quarter was 20.8%. The gross margin in Digital Identity is lower than Algo. And this is because it's partly [ hardware ], but it's also affected by amortization of intangible assets relating to the acquisition of EastCoast. Please turn to Page #10. The profit at EBITDA level was minus SEK 1.8 million in Q3 versus SEK 1 million previous year. The decline in EBITDA can be explained by lower royalty revenues in Algo with higher margins and also a higher cost level. Operating expenses for the quarter increased to SEK 19.2 million versus SEK 15.9 million previous Q3. The increase in operating expenses is explained primarily by the added cost for EastCoast of SEK 3.6 million and a provision for bad debt of SEK 1.5 million. The underlying costs without acquisition and bad debt is lower than Q3 last year, and we are currently working on a cost reduction plan and how to streamline the organization, and we will see a bigger effect of that in the next year. Earnings per share for the quarter was minus SEK 0.2 million versus minus 0.1 million in quarter 3 last year. And the operating loss for the quarter was minus SEK 7.3 million versus minus SEK 3 million previous year. Please turn to Page #11. The cash flows from the quarter from operating activities was minus SEK 7 million compared to minus SEK 2.4 million last Q3. Of this minus SEK 5.2 million compared to minus SEK 3.4 million last Q3, depend on changes in working capital, meaning reduced current receivables and increased current liabilities. It's worth to highlight that quarter 3 is normally a quarter with less invoicing of, for example, annual license fees to customers, and this is affecting our working capital negatively in the quarter. The group invested SEK 0 million in property, plant and equipment during the quarter compared to 0.5% last Q3. Total cash flow for the period was minus SEK 13.4 million versus minus SEK 6.8 million previous year, partly due to cost for emission of new shares of SEK 1.3 million and also due to higher investments in intangible assets. Development expenses of SEK 4.8 million were capitalized during the quarter compared to $3.6 million in Q3 last year. Amortization of capitalized development expenses was SEK 3.9 million versus SEK 3 million previous Q3. The increase is mainly due to EastCoast. -- capitalized expenses are amortized over 3 years, both for Algo and Digital Identity. Cash and cash equivalents at the end of the period was SEK 41.3 million compared to SEK 55.7 million last Q3. This excludes the share issues of SEK 41 million, which will affect the cash and cash equivalents during the fourth quarter. Please continue to Slide #12. So the summary of the period quarter 1, 2, quarter 3 2022. The net sales was SEK 71.7 million compared to SEK 55.9 million last period. Net sales were split between royalty revenues of SEK 19.2 million compared to SEK 24.8 million and license fees of SEK 45.9 million versus SEK 27.7 million and other of SEK 6.6 million compared to SEK 3.4 million. Last year's component shortage was replaced by lower demand for mobile phones, which resulted in lower production volumes in the mobile market and therefore, lower royalty revenues. The increase in license fees is primarily due to the acquisition of EastCoast, and this contributes with a net sales of SEK 13 million. But we also have the 2 new customers in the automotive industry that have also contributed with the higher license fees. Gross margin during the interim period was 73.6% versus 75.7% last year, and the decrease depends mainly on the shift to higher proportion of Digital Identity, which have lower margins than Algo. The operating expenses for the period was SEK 65.7 million compared to SEK 53.7 million. And this is primarily due to the added expenses of EastCoast, which was SEK 10.5 million for the period. And we also have this provision of bad debt of SEK 1.5 million. The profit at EBITDA level for the whole period was SEK 3.1 million compared to SEK 0.2 million last year. And the cash flow for the interim period from operating activities was SEK 3.7 million versus minus SEK 4.6 million last year. So back to you Patrick and I think we will go to Slide #13.

Thank you, Annika. As Annika stated, we have shown growth in our recurring revenue, the so-called Software as a Service revenues and our license revenues despite the challenging market for mobile phones. And I think that's a strength that we're showing clearly during this quarter. But before I summarize the key takeaways from the quarter, I would also like to walk you through the priorities and the growth strategies for Precise. So let's turn to the next page. We see solid opportunities across the market for our Digital Identity area, which we intend to capture. This will do by focusing on building sales channels through commercial and technical integration with strategic access and installation partners in Sweden. This will really help us to build up strong go-to-market channels in the Swedish market. This is a work that's already ongoing, but where we emphasize more efforts into. Secondly, we will explore new geographies through local presence and partnership and especially here, the focus is on the U.S. market where we see good signs such as the recent deal with St. Lawrence Health Hospital in New York State. And thirdly, we will continue to develop and integrate solutions based on existing products to manage people flow. But as we combine our visitor management and our Access Solutions service to build on the product strength we have in the different areas. Then on the Algo side, we intend to leverage our strong world-leading position in this area by focusing our strategy on strategic partners within the mobile segment to win new projects, which means that we will be included in new generations of smartphones. But we are also continuing to broaden our business to new verticals such as automotive, laptop, et cetera, and to new [ sensor types ]. And as we are world-leading in image analysis, we are also exploring for the future more use-cases, even outside of fingerprint biometrics to broaden the addressable market and use our world-leading expertise in this area. Overall, the focus for both areas is on commercialization of the different opportunities that we see in these areas. Good. Let's turn to the next slide. So the key takeaways. I am, as I started with, pleased to say that Precise is growing in Digital Identity according to the strategy, which in Q3 compensate for the decline in the demand for mobile phones in the world. We have also increased our cost control to meet the uncertain macroeconomic environment, and we are putting more efforts into commercialization of our products that we have going forward. We are also showing a strong proof of concept with increased order value sales of our visitor management solution during this year. And I also think it's worth mentioning that I truly welcome our customer Egis as a strategic investor in Precise, and I'm happy for the business opportunity and strategic support it will mean for Precise going forward. And finally, I'm also eager to deliver on our clear long-term growth strategy for our business units that I used went through with you. With that, let's turn to the next slide. To finalize the presentation, let me start standing with what precise is all about. We focus our business around identification and education of the user must, of course, be done in a secure way, but to make sure that the solution is used by the parties by the end user of the trust chain, it must also be easy and convenient to use. This is why we develop our identification solution with a strong foundation in biometrics always with the end user in mind. And after my first full quarter as the CEO Precise, it's clear to me that this company has built up a global excellence in biometrics over a very long time and a good ability to apply it in customer use-cases. So taken together, I think this provides a strong platform to continue to commercialize in line with the strategy we presented. 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. And with these words, I would like to thank you all for listening into the presentation, and let's conclude with that and go over to the Q&A session and let's also go [ to ] our slide.

So we have a question also about our high operating expenses. And if we are going to do something about that. And as we said before, we are looking into streamlining the organization, reorganization. And we do have a quite high proportion of consultants, and we are working on that at this point. And as we said before as well, we will see a result of this next year.

I think it's also worth mentioning there, Annika, that we are focusing in our R&D resources, especially in the unique area more and more into commercialization, which will help us to optimize the costs in that area. Very good. That is, of course, a focus area for us going into -- for the end of this year and going into next year. Another question I had was around how should we look at M&A opportunities in the near future? We have earlier stated that we are in -- especially that we have been open for this kind of discussions and still are in the Digital Identity area. However, our focus is right now on physical access and visitor management in this area, and we are opportunistically of course, open for M&A opportunities, but the main focus right now is on commercialization of the services that we have.