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

Welcome to the Precise Biometrics Q4 report conference call. [Operator Instructions] Now I will hand the conference over to the speaker, CEO, Patrick Hoijer; CFO, Annika Freij. Please go ahead.

Good morning, everyone, and thank you joining today's webcast, where we will run you through the Precise year-end report for 2022. I'm Patrick Hoijer, CEO, Precise. By my side, I have our CFO, Annika Freij. Before me and Annika would start running you through the results and the operational progress, let me start off by highlighting that fourth quarter was a period that we delivered operationally in line with our strategy for both our business units, Algo and Digital Identity. This gives me comfort that we are well positioned for long-term growth once the mobile market returns to normal levels. So this is the agenda for today's presentation. We will walk you through the quarterly highlights and then give you an operational and financial update. And finally, I would also like to sort of deep dive a little bit into the clear strategic direction we have going forward. But let's jump right into it. So let's start with the financial highlights. Revenue landed at SEK 19 million due to a mobile market, which is affected by oversupply at the mobile manufacturers and module houses side. This, in combination with a low-end customer demand has negatively affected our royalties during the last quarter in our business unit, Algo. This, however, was partly offset by an increase in recurring revenue from our business unit, Digital Identity. The decline can also be explained by the fact that we last year in Q4 during the comparison period had a one-off income of SEK 6 million. So as already stated then, for our Algo business unit, revenues were negatively impacted by volume-dependent royalties, while license fees developed more stable. The Digital Identity business unit showcased a strong finish to the year. The increase in revenue was heavily driven by our visitor management solutions. And for the full year, revenues were up 9% to SEK 91 million with a positive EBITDA. I think it's also worth noting that despite the current macroeconomic environment, Precise continued to generate positive cash flow from operating activities. The macroeconomic situation remains uncertain, which means that we have a strong focus on cost control. This includes that we are reducing the number of consultants in favor of employees. We have also integrated our EastCoast -- recent acquisition of EastCoast into our Precise YOUNiQ business. And we are also optimizing our R&D initiatives. These savings are expected to have a clear impact in 2023, and they are all in line with our increased focus on commercialization of our solutions. If we then jump over to our operational highlights for the quarter, as we communicated in report, the fourth quarter was characterized by the same high-level of activity as we've seen before to drive the development of the company for long-term commercial success. During the quarter, we announced a strategic reorganization in our business unit, Digital Identity. Through the reorganization, Precise is merging the sales, customer service and R&D functions of our recent acquisition, EastCoast, with the corresponding functions at Precise YOUNiQ business unit. This will improve the commercialization of both solutions and enable the entire sales force that we have to reach the market with both our products. We have also been able to present notable success in line with our strategy, including new collaborations with sensor manufacturers such as the French company, Isorg. This deal within 24 months generate a total of at least SEK 11 million, only including license and support fees and potential upside in royalty fees. We have also earlier communicated our intent to grow into new verticals for our Algo business. In Q4, it is therefore pleasing that we signed a development agreement with the Korean sensor manufacturer, CanvasBio, to jointly explore possibility to deliver fingerprint technology to laptops. Another important event is that we received SEK 41 million relating to the previously made direct issue to Egis Tech following rights issue. Egis Technology now holds a 12% ownership stake in Precise. We are also pleased to share that in February this year, Precise joined the Genetec Technology Partner Program, Genetec being a strong access management company in the US market. This is to strengthen our presence in the US market for our unique access solutions. I think this is a true proof point of us building up sales channels in the U.S. market. Before we deep dive into the different business units, I would like to go through the development of our business -- I would like to go through the different business areas and explain them and also look into a little bit trends that are driving our development. We have, of course, been around for many years and have during these years established a strong global footprint in Europe, North America and Asia. Today, we are organized into 2 business units, through which we provide our solutions. In the Algo business unit, where we offer software for fingerprint recognition and anti-spoof solutions, which can be used in various applications such as mobile phones and door locks. In this area, we have global customers, which generate revenues from annual license fees and from volume-driven royalties, where we win projects together with them. In the Digital Identity business unit, we offer access solutions based on facial recognition and this solution we call YOUNiQ. And we have a market-leading visitor management solution, which we call EastCoast. Our customers in this area is mainly in Sweden and now starting up in US. And in this area, we create recurring revenue as we're selling our services here as software-as-a-service business model. If we then look a little bit into the trends, our offering and strategic focus is a result of the global trends we're seeing for biometric applications. Biometrics, it's all about measuring each person's unique physical characteristics, which then can be used to identify individuals. Fingerprint reading and facial recognition are, of course, good example of different types of biometric technology. If we look at the trends for our Algo business to the left here, our fingerprint business, we can, first of all, see that biometrics are entering new segments and use cases. In our biggest segment, in the mobile space, under-display sensor, the market segment, which we are predominantly supporting is forecasted to grow. We can see that -- we can also see that new needs and requirements in new verticals are rising, for example, in laptops, automotive and door locks. In, for example, the laptops vertical, new requirement comes with Windows Hello, for example, to perform biometric matching on chip to support higher security when you log into a computer. We can also see that the automotive industry is looking in new user cases for in-car payments, for example, and not only convenient, which also -- where also biometrics could come into a good place to support this development. For our other business unit, Digital Identity, named the access and visitor management solutions, we see a global trend of increased security, which can be met by biometric-based access solutions by using fingerprint and facial recognitions to grant access. Biometric access is also very interesting combination with tags or cards. So you can create a strong multifactor authentication with really high security. Both biometric access as well as visitor management markets are forecasted to grow during the coming year. The market overall is forecasted to grow during the coming years. So to summarize, there are strong global trends that Precise is well placed to capitalize over time. So with that, let's look into the 2 business units. And let's start with the Algo business unit. Within Algo, revenue decreased to around SEK 13 million in Q4 from just below SEK 23 million last year. As I had mentioned, this is due to lower demand in the mobile market and high inventory levels at mobile manufacturers and module houses. Furthermore, the decline versus comparable period last year can also be explained by a one-off license fee of SEK 6 million last year to 2 customers in the automotive industry. Precise, however, I want to underline, stand strong in its strategic partnerships. And as soon as the mobile market recovers, we expect royalty revenues to normalize. In line with our strategy, at the end of the year, we started development collaboration with Korean company, CanvasBio, to deliver fingerprint technology for laptops, as I mentioned. The partnership is part of our growth strategy for Algo business unit, which includes building new partnerships with additional sensor vendors and growing into new verticals. At the year-end, as also mentioned, we signed an important deal with Isorg, a French player with a new type of sensor for mobile phones. This is to supply fingerprint software. We are pleased that this deal we -- in this deal that we're supplying more software components, not just the matching, but also the ISP and [ liveness ], which demonstrates our competitiveness and completeness in our solution in the other space. We will continue to explore new related verticals such as automotive and evaluate new types of sensors that could, over time, provide Precise with a larger market for our world-leading expertise in advanced image analysis. Yes. Let's walk over to our Digital Identity area. For Digital Identity, in Q4, we showcased a strong finish to the year. Revenue increased to nearly SEK 6 million, increasing from SEK 4.7 million last year. The increase was mainly driven by our visitor management solutions. Sales-wise, 2022 was a strong year, which has resulted in our recurring revenue, the core of the digital business unit to increase from around SEK 30 million to SEK 16.2 million by the end of the year. We're happy to have won several deals during the quarter. We won YOUNIQ deals with Iver, Bravida, among others, as well as additional projects with Algeco. We also won EastCoast deals with Mathem, Office Management, Visma, among others. Operationally then, we have a clear strategy for Digital Identity in Sweden and we are focused on building sales channels through partnerships with access system vendors and with key installations and system integrators in the market. To improve the conditions for commercialization and to strengthen our commercialization of YOUNiQ service, we decided during the fourth quarter to integrate EastCoast's and YOUNiQ's respective organizations as mentioned. Through this reorganization, to underline again, we're merging the sales, customer service and R&D functions of EastCoast with the corresponding functions in YOUNiQ. This means that the entire sales force can now sell both product lines. We're also pleased that we -- in February '23 can announce that YOUNiQ is integrated into Genetec access platform, Genetec being a very important partner in the US market. And we will continue to focus our sales efforts and sales channel efforts on the US market through a local presence and partnership. The integration is, therefore, an important step in building the sales channels in US after we won our first contract in US for YOUNiQ in the fourth quarter in 2022. With that, I would like to hand over to you, Annika.

Thank you, Patrick. So let's move into the financial performance. So looking at the revenue developments over the last 2 years, we can clearly see the trend where the beginning of 2021 was affected by the component shortage, mainly affecting royalties and low sales number in quarter 1 to 3 in 2021. In quarter 1 and 2 in 2022, the royalty increased again as the manufacturers in the mobile industry was building up inventories after the situation where the component shortage improved. But in quarter 3, in 2022, the situation rapidly changed into a sharp decline in demand and an overstock at the global mobile manufacturers, which led to a double negative effect in sales. Our royalties are directly related to sales volumes, and therefore, the royalties have been hugely reduced. The changes in revenue depend a lot on royalties as the license trend over time has been fairly stable. Adding to the trend of revenue is, of course, acquisition of EastCoast, which was finalized on the 30th of November, 2021, and also this contributing with extra revenue. The total revenue of EastCoast during 2022 is SEK 17.9 million. The gross margin development over time is directly related to royalty revenue as the royalty revenue directly impact gross margin, it basically does not add any extra cost of sales at all. Also, the increase in Digital Identity where EastCoast as one part affects the margin for parts of the sales of hardware with lower margins. So for the quarter, net sales decreased to SEK 19.3 million versus SEK 27.4 million in Q4 previous year. Net sales were split between volume-dependent royalties of SEK 1.9 million versus SEK 6.5 million, and license fees of SEK 12.1 million versus SEK 18.7 million. The license fees include, for example, fixed annual fees for Algo and recurring revenues, so-called system-as-a-service revenue for Digital Identity. And we also have the other of SEK 5.3 million versus SEK 2.2 million in Q4 2021. The royalties were impacted by the decline in demand, as I explained before, and the decrease in license fee is primarily due to high license fees in Q4 '21, which included a non-recurring license fee of SEK 6 million for sales to customers in the automotive industry. The increase in other is largely due to hardware sales. The gross margin for the quarter was 65.6% versus 77.4% previous year. We are working on OpEx reductions, which we mainly will see the effect on from quarter 2 in 2023. And the goal is that we will reach the same OpEx levels as in 2021, That means before we acquired EastCoast. So on the next slide, we're looking at the Algo. So from the beginning of 2022, we started to report 2 different segments: Algo and Digital Identity. And we report that down to gross margin level, as you can see in the report. So starting with the Algo segment. Net sales for Algo was SEK 13.4 million versus SEK 22.8 million in quarter 4, and are reported under royalty at SEK 1.9 million versus SEK 6.5 million, licenses at SEK 10.1 million versus SEK 15.7 million and other at SEK 1.3 million versus SEK 0.5 million. Last year's component shortage was replaced by a declining demand for mobile phones, which resulted in the low production volumes on the mobile market. And the license fees, as I said before, in Q4 last year, we had a license fee of SEK 6 million as a fixed fee, that can explain the higher license fee in that quarter. The gross margin during the quarter was 88.9%. And then let's move on to the Digital Identity segment, which consists of the product EastCoast and YOUNIQ. The net sales for Digital Identity was SEK 5.9 million versus SEK 4.7 million in Q4 last year. And this is reported under licenses of SEK 2 million versus SEK 3 million last Q4, and other of SEK 3.9 million versus SEK 1.7 million last Q4. The increase, of course, is primarily due to EastCoast, which contributed with SEK 4.9 million in Q4 compared to SEK 2.7 million in Q4 '21. And here, I must say that this included only December as the acquisition of EastCoast was completed on the last day of November in '21. The gross margin during the quarter was 12.5%. The gross margin in Digital Identity is lower than the Algo segment, as a high portion is hardware. But also the costs in Digital Identity's cloud platform was unusually high in the fourth quarter as a result of updating and migration of EastCoast's application to Precise's production environment. And this cost will be normalized during Q1 '23. From quarter 4, we are following up on annual recurring revenue on a more detailed level for EastCoast. The annual recurring revenue for Digital Identity is SEK 16.2 million in the end of December '22. We are very positive to the development of the recurring revenues in Digital Identity, as we are more and more moving from on-prem installation with point-in-time sales to a cloud-based solutions driving recurring revenues. This change affects the revenues negatively right now, but instead, it will give us revenues going forward. And therefore, we believe in a double-digit growth going forward. On the next slide, we're looking at the cash flow. So the cash flow for the quarter from operating activities was SEK 0.3 million versus SEK 3.2 million last year, of which SEK 2.4 million compared to SEK 2.7 million last year depend on changes in working capital. The group invested SEK 0.1 million versus SEK 0.6 million last year in property, plant and equipment during the quarter. The group also made a payment of SEK 30 million for the acquisition of EastCoast, and the proceeds of SEK 41.5 million from the share issues were completed during the third quarter was paid out during the fourth quarter. Total cash flow for the quarter was SEK 5.2 million compared to SEK 8.4 million in quarter 4 last year. So looking at the full year, the cash flow for the full-year period from operating activities totaled SEK 3.9 million versus minus SEK 1.5 million last year. And of this SEK 3.1 million versus minus SEK 2.6 million is attributable to changes in working capital. And also looking at the full year, as we said, we carried out a new share issue of SEK 41.5 million after issue costs, and we made a total payment for the EastCoast acquisition of SEK 38.3 million, as we did a payment in the beginning of the year as well. Cash and cash equivalents for December -- the 31st of December was SEK 46.4 million compared to SEK 64.1 million in the end of the year 2021. So if we look at the summary of the total year of 2022. Net sales for the full year was SEK 21 million (sic) [ SEK 91 million ] versus SEK 83.3 million, which equals to a growth of 9.2%. Net sales for segment Algo for the full year was SEK 67.8 million versus SEK 76.8 million last year, which is a reduction of 12%. And that depends mainly on royalties, which actually decreased from SEK 21.2 million from SEK 31.3 million in previous year. So this means that except for the volume depending royalties, the sales in segment Algo have increased slightly in '22. I see this as a good sign because it shows that the underlying business is stable and as soon as the volumes in the mobile industry comes back to previous levels, the company is in a good position. Net sales for segment, Digital Identity, for the full period was SEK 21.2 million (sic) [ SEK 23.2 million ] versus SEK 6.6 million last year. And this is mainly explained by the acquisition of EastCoast, and the total contribution from EastCoast was SEK 17.9 million versus SEK 2.7 million last year, which again was only December sales. The gross margin for the year was 71.9% versus 76.3% last year. And it depends mainly on higher proportion of sales with Digital Identity and the reduction of royalties from the Algo segment, which has really high margins. Operating expenses for the year increased to SEK 85.5 million compared to SEK 77.6 million, and that is primarily due to the addition of expenses for EastCoast, which was SEK 14.8 million compared to SEK 1.2 million last year, which was again only December. We are continuously working on reducing operating expenses. And as I said before, we expect to be on the same levels in 2023 as before the acquisition of EastCoast. The profit at EBITDA level was SEK 1.1 million versus SEK 1.9 million last year. And the cash flow for the year from operating activities was SEK 3.9 million versus minus SEK 1.5 million. So back to you, Patrick.

Thank you. Thank you, Annika. As stated, we've been able to present significant success in line with our strategy during the quarter and generated positive cash flow from operating activities despite the uncertain macroeconomic situation. Before I summarize the key takeaways from the quarter, I would like to go through the priorities and the growth strategy for Precise. So let's look into that. We have a clear growth strategy for both our business units in Precise. For the Algo area, our fingerprint area, we intend to leverage our strong world-leading position by focusing on strategic -- focusing on our strategic partners within the mobile phone segment so that we, together with them, can jointly win new projects, which means that we are included in new generations of smartphones. I think that we are well positioned in these partnerships today. We will also continue to broaden our business to new verticals such as automotive, laptops, et cetera, and also to new types of sensors. And we also -- as we are world-leading in image analysis, we are also exploring more use cases even outside of fingerprint biometrics to broaden the addressable market for our advanced algorithms. Our vision in this area is to become a strong software powerhouse for advanced image processing. I'm also very pleased that we, yesterday, could announce that Joakim Nydemark will join Precise as EVP and CCO, Algo, from the 1st June. Joakim is presently working at Crunchfish. I firmly believe that Joakim's background will give a strong support and boost to our strategic growth journey within the Algo area. Very welcome, Joakim. We also see solid opportunities across the market for Digital Identity, which we intend to capture. This will be made via focusing on building partnership with strategic access installation partners in Sweden. This will give us stronger go-to-market channels. We will also focus on the US market, where we see good signs such as the recent deal with St Lawrence Health Hospital in New York and recently announced Genetec partnership. And we will continue to develop an integrated solution based on existing products to manage people flow. Our vision in this area is to be a leading provider in people flow management. Overall, the focus is on commercialization of the opportunities we see in each of these business areas. Good. Let's look at the key takeaways to conclude. I'm pleased to see that Precise is growing 9% for the full year with a positive EBITDA and a positive operational cash flow despite the temporarily -- that we are temporarily affected by a very weak mobile market. During the quarter, we have improved our cost structure. These savings are expected to impact '23, as we expect operating costs to be similar as '21, as Annika explained, although we also include EastCoast cost base in the '23 figures. We are also showing solid growth within Digital Identity when it comes to recurring revenue with over 25% to SEK 16.2 million. In addition to that, we reached a significant milestone in line with our strategic -- through cooperation with CanvasBio as well as the commercial agreement with Isorg during the quarter. And finally, we will continue to focus on building sales channels in the U.S. where YOUNiQ is being integrated into the Genetec's access platform. This is seen as an important step for us. Good. And then to finalize the presentation, let's end with what Precise is all about. Using our biometric 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 in. Let's conclude now and go over to the Q&A session and turn to the next slide. So with that, over to you, financial hearing, if there are any questions.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Yes. Thank you. We have got a few written questions. So let's start with them, and then we can come back if any other question comes in on the way. So I have one question here in Swedish. I will translate it. The cooperation with Isorg is continuing until 2024 with revenues of SEK 11 million. What's your margin? And what happens when the agreement ends? And what do you expect as revenue after that? I think that it's important to see that the partnership we've done with Isorg is a strategic -- it's a partnership between us, where we're working together to improve the quality of the sensor that Isorg is taking to the market. The software part, which we are delivering is a very significant and important part of them winning future projects. The SEK 11 million that was announced is only for support fees and license fees. It's not including potential royalties if and when they win new projects. When it comes to the margins in the Algo business unit, we have 88.9%, correct me if I'm wrong, Annika, overall margin. So of course, this is software delivery. So of course, this kind of deal comes with very high margins. And yes, I think I'll stop there. Yes.

And we also have a question about the total costs for R&D during 2022 and what we estimate them to be in '23? So as you can see in the report, the R&D costs are SEK 34.9 million, actually, when you look at the functional income statement. And as we said before, the target for OpEx is to come back to the levels of 2021. And the savings that we do is a reorganization of EastCoast that affects basically sales and R&D and management. And we are also working on changing consultants to employees. And also, we are reducing the R&D costs within YOUNiQ, because we think that we have spend a lot of time to get the product up and running and now it's more just to commercialize. And we're not reducing any employees when it comes to Algo. But again, we are working on lowering the costs by having employees instead of consultants.

Good. We have another question here. How do you estimate the revenues when it comes to the cooperation with Infineon concerning fingerprint technology in automotive? The technology should use different applications, including automated adjustments of driver settings in a car. So what -- so if we look at the Infineon, if we look at the sort of cooperation we have in the automotive area, we announced that deal last year in Q4, and we have sort of -- we booked the base of license and support fees for that part. However, royalties are expected to come in later this year. We can see that in the automotive space, independent predictions is that the market will double between '23 and '24 when it comes to biometrics within cars. We can also see that user cases are extending. So initially, the user case was very much connected to convenience like user settings and so on, where you could use biometrics to ensure that you've got the right settings when you're driving. But I think the interesting part is that some car manufacturers are also exploring in-car payments as an option for biometric support, which, of course, further really strengthen user cases. In this case, also from a personal note, I think that fingerprint is a very interesting solution there as it shows clear intent when you're pushing your finger to something, and then accept a payment versus other techniques.

We also have questions about our estimations of our sales in the coming years. And as we said before, we don't give out costs regarding that, actually.

What we stated is that we believe in a double-digit growth for the recurring revenue in the Digital Identity area.

Yes.