Next Biometrics Group ASA
OSE:NEXT
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Next Biometrics Group ASA
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Good morning. I'd like to welcome all of you to the Q1 Earnings Announcement for NEXT Biometrics. My name is Ritu Favre, and I would like to thank all of you for the weather this time. Last time I complained pretty heavily about the weather in Oslo, and so the weather this time is beautiful. So if anybody had anything to do with that, I thank you.So what I want to start with today, the NEXT Biometrics management team had given a pretty extensive Capital Markets update back in the March time frame, and I would invite anybody that hasn't seen that to go to our website to look at that complete presentation as well as the live comments. What I'm going to do today in our earnings presentation is summarize key points from the Capital Markets Day and also build on what we did during the course of the first quarter.What we talked about in the Capital Markets Day is the winning strategy for NEXT Biometrics, the foundational technology that we have that enables us to make large, cost-efficient, flexible, rigid, large sensors that have very, very high security. We then went into the growth markets that we will be able to address with this technology, and then we also shared our product road map with some timing. So again, I would really encourage you to take a look at that because a lot of what I'll be talking about today references back to the Capital Markets Day.So NEXT Biometrics was founded in 2004. We IPO-ed in 2014. We have now surpassed 4 million sensors shipped as a company. We are a proven biometric fingerprint provider into the today Tier 1 stringent notebook space. We have also, for the first time in the history of the company, achieved a full quarter of positive gross margin, which we're very excited about.As I mentioned, our key differentiation is being able to produce cost-efficient, large size, rigid and flexible sensors. We believe that the next wave of biometric markets that are going to be emerging will require a higher level of security than what has been seen in the past. The smart card and government ID spaces have certifications, specifications and bodies that require a large size sensor for the security that this enables. The market today is about 1 billion sensors per year for fingerprint sensors, primarily in the smartphone, notebook and tablet space. As we look forward into the interesting markets that are coming that NEXT will be playing in, we will need this larger security in smart card and government ID. And I'll be talking more about that.So let me dive into the Q1 2018 highlights. We posted a revenue of NOK 23.3 million in the first quarter versus a NOK 24.7 million in Q4 of 2017. We had a 25-point swing in gross margin from the Q4 time frame to Q1. We posted 19% positive gross margin relative to a negative 4% gross margin in Q4. We also successfully raised a NOK 120 million in gross proceeds to fund our growth activities in product development for the smart card and the government ID space.As I mentioned, we've surpassed 4 million sensors shipped now into our primarily Tier 1 notebook customers. We also streamlined our management team that I'll be talking about a little bit further to strengthen our manufacturing operations and scalability. At the -- after the end of first quarter, we also announced that we've successfully tested a contactless solution based on the NEXT technology that shows a proof of technology of our product family in the contactless space. And then in May, we also announced that we are shipping first samples of our contact-based smart card module into our customers.So diving a little bit deeper into the gross margin. This is a key highlight for the quarter. Again, we had a 25-point swing in gross margin and then more than almost 30-point swing relative to last year. It's the company's first positive gross margin in the history of the company for a full quarter. This was primarily driven by what we've mentioned in the past, our new ASIC design. We started to see the benefit of that through the quarter, and we also had the improved deals and scaling impact that give us a better cost structure.As we go forward, and we talked about this in the Capital Markets Day as well, we're expecting the long-term gross margin for the company to cross 30%. As we look forward, we expect to see a continuing improving gross margin trend which will be enabled by shipments into Access Control, Government ID, and smart card over time.So with that I'm going to turn it over to Knut to walk you through the financials.
Thank you. Revenues for Q1 were NOK 23.3 million. It's only a small change from recent quarters. This is still mainly driven by revenues from our Tier 1 U.S. notebook customer. NEXT is gradually also delivering volumes to other customer and segments, but these initial volumes are not large enough to do any significant impact on our numbers -- on the revenue numbers.We have then -- as Ritu said, we have significant positive impact from the shipment of the new ASIC module, and we are reporting positive gross margin of 19% in Q1. We passed positive in January. We're above 20% in the month of February and ended on 19% for the quarter. The EBITDA loss, ex option expenses, was NOK 37.8 million versus NOK 36.7 million in Q4. In the fourth quarter, we had a few one-offs, and one of them were a government grant contribution, SkatteFUNN, of NOK 5 million. And if you adjust for this one-off, we have an improvement from Q4 to Q1 of NOK 4.1 million in the EBITDA ex option expenses, going from -- adjusting this number to NOK 41.9 million to NOK 37.8 million.Other operating expenses. We see that the increase in the employee cost from Q1 '17 to Q1 '18, and that is mainly driven by the additional R&D staff that we have employed during the period. The payroll expenses are expected to flatten out, but it will be impacted on [ implementations ] on option expenses that is a non-cash expense. Total option expenses in the quarter was NOK 1 million compared to NOK 4.9 million in Q4 '17. The other operating expenses are increasing, and we continue to shift towards smart cards and government ID project, as previously announced.Going into the cash flow. Cash in the bank beginning of the period was NOK 80 million. We spent NOK 37 million in cash from operations. During -- as Ritu said, we raised NOK 120 million in net proceeds. And during the first quarter, we received the first tranche, NOK 66 million of net proceeds, ending on NOK 109 million as a cash balance end of quarter. We received the remaining NOK 51 million in net proceeds in April. And if we adjust for that, we are on the level of NOK 160 million after this increase in equity. Thank you.
So moving on to -- again, a little bit of a summary from what we had done in the Capital Markets Day. As we look at the transformation of NEXT Biometrics from being a core technology, R&D, very specific technology development company into sort of where we're looking to transform ourselves, if you look at kind of the 2015 and 2016 time frame, the company really developed the large sensor solution that is sort of the foundation of what we do in the company. We also spent a lot of time developing biometric expertise which enabled us to be able to ship into these stringent Tier 1 notebook customers. During that time frame, we also achieved our first commercialization of the technology. And I would say that, that really helped us to start to lay the foundation for the growth that we are expecting to have for the company.As you look at kind of the current time frame that we're in, we spend a lot of time strengthening our organization in operations, product development and in R&D. The other decision that we made was to start leveraging our existing technology away from the notebook segment and into other adjacent markets that we could also create value from the technology that we have developed. And then, as I've talked about in the past, we've really pivoted the company away from a notebook focus into high-growth markets that are the government ID and the smart card space, and I'll talk a little bit more about that.As we look forward, we're really looking to monetize the developments that we're doing in this time frame in the smart card and the government ID space. We're looking to ramp our smart card chipsets and modules. We're looking to leverage the certifications that we're undertaking now that I'll talk a little bit more about and start to see an increase in sales of our module and reader business in government ID projects and then really drive revenue and profitability for the company.So one of the areas that I had mentioned as part of the highlights is that we had really been restructuring and reorganizing the company as we get ready for a phase of growth in our products. So Dan Cronin was our EVP of Engineering. He's recently been appointed the Chief Operating Officer for NEXT. The goal for this particular team and this particular change was to drive a much more cohesive technology into product development, into -- ramp into manufacturing and getting to the right cost and yield levels for our products. So really having a seamless end-to-end organization that can take technology and ramp it into manufacturing in a seamless way, in a rapid way, is the reason that we look to make this change. Dan has a lot of experience in engineering and product development at companies like IBM, Motorola and Freescale and NXP.We also recently hired Ravi Jagannath as the Senior Vice President of Operations reporting in to Dan. He's had a lot of experience in program management, product validation, product engineering and really ramping products from a product development phase into mass production at good yield and cost points. He also has a very broad background from large companies IBM, Motorola, Freescale and NXP. And in addition to that Zehira Dadon-Sitbon has recently picked up responsibility as well for Sales & Operations Planning and she also has a very solid background in program management and product development from Philips, NXP, Motorola and Synaptics. So what you'll see here is that we've really been strengthening our bench in the area of product development, scaling, operations, getting products into manufacturing at the right yield and cost points.I've talked about this slide probably I think in every single quarterly presentation that I've done, so I'll walk through this again just briefly. So what we're looking to do as a company, if you take the bottom part of this chart, we're going to be monetizing all of the product development that we've already done in markets that we can play in today. So NEXT has been playing in the notebook space. We've already previously announced that we have a North American Tier 1 that we maintain, and we announced Fujitsu previously. And our goal is to take the products that we have today and continue to look at commercial, enterprise, rugged, high security kinds of applications to sell our products into. This is not a focus area for the company from an R&D development perspective, this is a sales and marketing of the existing portfolio.We've also previously talked about Access Control, where we can take the products that we have today and sell into applications like door locks and point-of-sale terminals. And what we're looking to do is leverage the existing portfolio through the distribution channel. I've previously talked about agreements with Arrow and MTRIX. And the way that we characterize this particular market is fragmented. We will see opportunities of tens of thousands of units per individual socket, and we've talked in the past that we would expect to see some level of revenue starting to come in the second half of 2018, and that is still on track.If we pivot over to the top part of this chart. This is where all of our product development and R&D focus is as a company. If you look at the smart card space, our large flexible sensor is ideally suited in this space. From a ISO standpoint, we have the only ISO -- the only solution that meets all of the ISO standards in the world. And so we believe having the large sensor will give us a unique advantage from a user experience standpoint.And then the other space that we're heavily investing in is in the government ID space. We're certifying our existing products today, and I'll talk about that in just a minute, and then we're also looking to expand our sensor portfolio. And we talked quite a bit about this as well in the Capital Markets Day. I'll give a brief summary in a couple of slides.So relative to what we have talked about in the past, I wanted to give a brief update on where we are with Tactilis. Tactilis actually was with us here at Capital Markets Day. I was able to attend their opening in Penang in April of their factory, which was an amazing experience, very exciting moment for them and for us. They talked about in our Capital Markets Day that they are projecting a capacity of 5 million cards annually in that particular factory. They also talked about having additional capacity expansions coming that they will be announcing as that happens for them. They are currently involved in multiple projects with their end customers using the NEXT chipset. And we are very excited for them to succeed, because as they succeed, we would start to see some orders coming from them.And then from an India certification progress, what we had talked in Capital Markets Day is that we have already gone through the rigid FAR, FRR testing which is a security measure. We've also undergone the PIV testing and we've talked about passing that. We are currently in the hardware testing portion of this certification and as we have further news, we will share that with the market.We also recently announced that we've begun early shipments of our smart card module for contact applications. So we've begun to ship early samples to selected customers during this quarter. We had committed that we would be shipping these samples at Q2, and we have met that commitment. So we have really been executing to the road map that we have presented, and we have begun early shipments to our customers. We've been working with these 7 customers around the world for some time during the course of this year. So we've been doing software and early hardware integration work, and we expect to announce more information about that through the course of this year. We also have a lot of interest in this particular module, and we have 20 customers that we are working with worldwide on sales and marketing activities.And in April, we also had released a press release about our contactless solution progress. So one of the key attributes in the smart card space, especially in the retail payment card space, is going to be the ability to run biometric transactions using only the power from an ISO compliant contactless reader. So we were able to, with our technology, show that we can do biometric authentication using only the power from this terminal. So this is a really good proof point of our technology that we will be able to meet the requirements of contactless market as that market begins to develop.We shared a version of this particular slide in the Capital Markets Day. We are in development of a FAP20 government grade sensor. And so a little bit about this particular market. If you look at the markets around the world, they -- all of the governments have a particular standard or a specification that vendors must meet to be able to ship into these markets. For instance, in the India market, they're open to the size of the sensor. However, it has to meet the image quality and the user security that is needed for that particular market. So as we've talked about, we are going through that certification in India today.As we look to expand our footprint in the government ID space, we were looking to see where is the bulk of the market in this space. And what we found is that many of the governments around the world are looking for a FAP20 size sensor. And what you will see here is the FAP10 is 209, FAP20 is 309 square millimeters, FAP30 is 516 square millimeters. So we are now in development of the FAP20 309 square millimeter, and we expect to start sampling that in Q4. So our objective is to continue to go through the certification process with the sensor we have today and then also develop a larger sensor to start to expand our footprint in this space.So to kind of wrap up all of what we talked about today. In terms of Q1, we've achieved our first positive gross margin in the history of the company, a very exciting achievement for us. We've secured the funding to establish financial runaway to breakeven, to fund our activities in smart card and government ID. We are now a proven supplier, having shipped 4 million sensors into the market, primarily into stringent Tier 1 customers, and we are delivering on the committed smart card product road map that we had talked about in the Capital Markets Day.As we look forward a little bit. We expect to continue to provide updates on our India certification process, and you should be looking for that in the market as that happens. We will be doing a lot of now sales and marketing activities to integrate our smart card product portfolio into multiple customer engagements for smart cards. And then we will be sampling our FAP20 government grade sensor in the Q4 time frame.So with that, I would like to wrap up and open up to any questions that anybody might have.
Yes.
I look at your revenue and when you look at that first quarter last year, it was NOK 24.1 million, and then it's even all the time. How come it's so even? Nothing happens?
So we're primarily today shipping into the notebook space, as we've talked about. So there hasn't been -- we have not seen the revenue ramp yet from the smart card, government ID and the Access Control spaces. So primarily, the revenue today is reflecting the notebook business that we've had in the past. We're doing a lot of this work to do product development in these other areas, but we'll see that revenue start to phase in step-by-step.
A question from the internet, how does the IDEX remote enrollment patent effects -- affect NEXT and what are your plans for remote enrollment?
So the one thing that I always say on this particular topic, we don't talk about the competition. We don't really want to compare ourselves to the competition. We believe that our solution with the large sensor size inherently has a much easier enrollment, so we are able to provide one-touch enrollment. Our objective is to work with our card-making partners to come up with the most seamless enrollment solution, and we'll continue to be talking about that. That's a key advantage that our technology provides that will allow us to do self-enrollment and one-touch enrollment. Yes?
[ Alistair Ferguson ] with [ Roderick Securities ]. You briefly mentioned the progress on the India's certification on the Aadhaar program. Could you give some additional color on how the potential ramp and what the time line for that certification of the program would look like?
So we are not publicly committing timing. What we are saying is that there's a number of steps that we have to get through to go through the certification. There's also a software part of all of this that embeds on top of the hardware portion of it. So there's a Level 0 and a Level 1 software certification that we have to go through. So what I would say is that we will continue to alert the market as we progress in that certification, but we're not really giving timing on when we would start to see that come in.
And how about the ramp in volumes, how would that typically look like?
So what we've publicly announced is that we see the India market today as being about 5 million units per year for point-of-sale kinds of terminals. And we would expect to be -- as we get through the entire certification process, which we -- which is an uncertain piece today, we would expect to start to take portions of that 5 million as we get through that certification. And then the goal would be additionally that as we create the FAP20 sensor to start taking part in the kind of more 10 million unit worldwide market. So again, what I would be thinking about is, the first step is get through certification, start to go through the sales and marketing activities and start to penetrate that 5 million unit market in India.
And lastly from me on the notebook space, how should we look on potential new orders or developments in the existing orders?
I guess -- what would we say publicly about that?
So I think what we can say about the notebook space is that we are still selling to our notebook customers, and we are going to do that for the -- as long as we have the agreements, and we don't see that there is any issues with that as of now.
We're not doing a lot of aggressive sales and marketing in that particular space. So there, I would say, you should kind of think about it as it is. We're not spending a lot of time. If we're able to get some business in commercial, rugged, enterprise kinds of solutions, we'll definitely take it, but that's not a focus for the company today. Anything else from the Web?Okay. Then that will conclude our Q1 earnings presentation. Thank you very much for your attention, and we'll talk again soon.