Next Biometrics Group ASA
OSE:NEXT
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Next Biometrics Group ASA
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All right. Hi, and welcome, everyone, to this quarter 1 NEXT Biometrics scheduled conference call. My name is Peter Heuman, I'm the CEO of NEXT Biometrics. And alongside me, I have our CFO, Eirik Underthun, and we will guide you through today's presentation. And you will find -- if you don't have it in front of you, you can find from this morning the quarter 1 presentation. You find it on the nextbiometrics.com and then under Investor Relations. We have a fairly short outlined agenda. So we're going to give you a quick summary and financials from the quarter 1. We are also going to look a little bit into the outlook. And then we're going to end with a Q&A session. And with that, I think we should get started. And if you then, I will guide you to what slide you can go. And maybe before I start, I will tell you that running it like this phone service is probably not optimal, neither for me and Eirik nor for you as audience. So we are aiming at from reporting of quarter 2, which will happen during quarter 3 that we're going to have a better live session, maybe even including a video over Teams or similar service. But for this quarter 1, we will stick to the landlines, so to speak. All right. If we then go to Slide #4, I think it is. Its header saying, key quarter 1 2021 takeaways. So as you probably have seen in the report today, there were some main bullets in there that we, during the quarter 1, announced a new partnership deal with a global tech giant. We also received the largest purchase order in history for NEXT Biometrics our FAP20 sensor, a very important sensor. The revenues were NOK 14.1 million. Gross margin is heading upwards, and we got in on 27%. And I think the takeaways I want to bring to you as shareholder and investors would be that with considering everything going on in the world, COVID, for example, and if you say pre-COVID, which was quarter 1 2020 that many now will probably compare with, I want you to know that in the internal and in our expectations in the company, we are in line with the quarter 1 expectations that we had in our plan towards our ambitions. You can also see something that we talked historically about how important the FAP20 will be. We have a portion of the NOK 14.1 million revenue that is produced from a FAP20. And that already starts to demonstrate how the gross margin is heading up towards the communicated target levels, around the 35% to 40%, and we have a very small portion. I think Eirik will talk more about this of FAP20 versus the NOK 14 million revenue. But I think that looks very promising in according to what we have guided you around our ambitions previously. The quarterly OpEx is in line with our communicated targets. And I think we have now a stronger balance sheet and together with a lean OpEx operation, I think we have a stronger balance sheet, which is very good both for our customers and also for our employees. And this provides us the possibility to run towards our ambition. But reflecting over it a little bit further, I would say that -- I think at this stage, I can say that our business fundamentals are established. It is obvious for us that our top priority is our updated and defined growth strategy. We have a defined key product that can help us succeed, that's the FAP20. We have defined main customer segments: they are in payment and fintech, they are public security, access control and office and notebooks. I think we have demonstrated during the last 12 months at least and into this quarter that this is the product and the segments where we are highly focused to do design wins. And that is the how, in our updated growth strategy, how do we succeed? And that's with winning design wins, meaning products that integrates NEXT Biometrics' FAP20 sensor. We have demonstrated that in quarter 1 through the tech giant and also with the FAP20 fairly large deal with Credence ID from U.S. So with a strong balance sheet, a slim operation, we are now very focused on our defined growth strategy. The main current headwinds, to be transparent with you, is that there are still areas around the world, which have quite severe impact from COVID-19. And we also have, which I think many of you are aware of, a global supply chain challenge to tackle that has started to rise maybe half a year back and there are components, both for us in our technology, but be aware that there are also customers from us that are in this supply chain challenge. It might not be us at every stage, but it might also be our customers. And that's something to take into consideration. But I think these are the most important takeaways from me at least from quarter 1 of 2021. And with that, I would like to hand over to Eirik. And Eirik, if you take the next slide and run through the numbers from quarter 1?
Yes. Thank you, Peter. This is Eirik Underthun, I'm the CFO of NEXT Biometrics. We're now on Slide 5. So revenue was NOK 14.1 million in the Q1 period. The gross margin was 27% compared to 17% in Q1 2020. The improvement in gross margin is coming from the improved product mix and particularly, the FAP20 volume, as Peter alluded to, is contributing to this. And FAP20 revenues represent approximately 23% of the revenues in Q1, and our gross margin went up mainly due to this increased FAP20 share. And as Peter mentioned, we are working on increasing the FAP20 share of revenues. And as you may also know, FAP20 is our highest-margin product. So the gross margin in the long term will be highly correlated to the FAP20 share of revenues. OpEx, excluding options, was NOK 14.8 million compared to NOK 37 million in the quarter 1 year ago. The cost reduction program has been completed, and we are now running at the targeted cost levels. EBITDA, excluding options, improved by NOK 23 million compared to quarter 1 2020. And that's coming both from the improvement in the gross margin, but also most importantly, the reduction in the operating expenses. We have a cash position of NOK 130 million compared to NOK 54 million 1 year ago. So in summary, revenues and OpEx and gross margins are improving in line with our expectations. Then I turn back to you, Peter.
Okay. Yes, Eirik, thank you very much. So I think we should go to Slide #6. It has a header, defined growth strategy. I think this might be the most important slide for the company at this stage. And like Eirik and I have alluded to now, with a strong balance sheet, a low-cost operation and a strong focus on driving our updated growth strategy where we have the what, the who and the how in terms of the key products is defined, the customer segment is defined and then we, in a structured way, believe that the more products we're going to be integrated into and especially if it's FAP20, the more likely we will have a long-term recurring revenues and sustainable revenues with good gross margins. During the first quarter of 2021, we have done 4 new design wins. We -- the total number of design wins is now up to 16. And like we have communicated earlier, this is what we believe is establishing a foundation for the long-term recurring revenue growth. Part of the design wins here is, of course, the tech giant where we are in dialogues. And -- but as we have also communicated earlier, it might take 6 to 12 months before these product manufacturers really launched their products, including our FAP20 or other sensors. But I think all in all, the number of design wins is heading in the right direction. It clearly demonstrates that we are gaining more and more design wins. And I'm sure not all of these design wins will bring huge revenue numbers, but I'm pretty sure it's more likely if we have some larger and a mix of medium and smaller design wins, the more products we are in, the more verified we are and our technology is confirmed as valid and the more and easier it's going to be for us to gain even more design wins. But I think design win is the key metric that we are following internally, and I'm not saying versus revenue. We do everything we can to squeeze out every quarter's revenue, but I think design wins is, for the long term, the most important for the company. And I think we have done fairly well during the first quarter there. Okay, and with that slide, I think we can go to the outlook of the quarter 1 report, that's Slide #7. It's called outlook. And we just wanted to mention a few things. I think part of this would be repetition and I think many of you have heard us talk about this before. But like I said earlier here, main focus, the updated growth strategy. It's structured increase of design wins, like I talked -- just talked about. 16 design wins since quarter 4 2019 so far. Remember, we were more or less in 1 customer, 1 product when we started the reset of NEXT Biometrics and we are now up to 16 and counting. And you should expect we are going to announce more design wins during 2021. You also -- I think most of you are fully aware, FAP20 is the most important product due to its considerable market potential and higher gross margin. And our NEXT Active Thermal sensor technology we believe we have the potential with this TFT technology to grow the -- to grow in the FAP20 large area sensor market. If I should say something about the laptop sensors, which is the most important recurring revenue design win customer and product that we have in the company to date, is that we are currently in process for a potential design win with an additional laptop manufacturer. And I hope that we, during 2021, should be able to come back to you and announce. But I'm not promising you anything, but we are quite far in the process with the new potential PC manufacturer. What is also pleasing to see is that we have an increased volume of purchase orders already in quarter 2 from our existing PC customer. It has actually grown quite significantly relative to quarter 1. And if I compare over -- year-over-year, we have got off to a very good start. Now be aware that there are limiting factors for us to recognize all these purchase orders as revenues potentially during quarter 2, and we mentioned something about this in the report. And this has mainly to do with the global challenge of semiconductor component shortage. We are working with our customers and with our suppliers to secure additional components. But this might influence what we can recognize as revenue during quarter 2. But bottom line is we have a customer who's increasing the volume of purchase order and sensor -- the number of sensors they are buying, and I think that's the great news. And I don't see a risk that we are losing them, but we might not be able to recognize all revenue during quarter 2 for that order. But we're going to try to report so you can have a good insight in how we are progressing. So I think it's fairly good news mainly. India fingerprint sensor market for quarter 2 and beyond. I think many of you might have heard, and if you haven't, there's quite some turbulence related to COVID-19 in India. We have also had employees who are affected by this in India and their families. And we try to support them as good as we can, but this has also delayed tenders and contract awards. Still, I think our team, during 2021, especially in the point of sales terminal market, have done a fantastic job. We are, of course, aiming for additional design wins in the payment and fintech area and serving our existing customers in India. For you who are aware, more details of the biometrics in India, there is a delay of the transformation from the current certification that all suppliers, like NEXT Biometrics, and everyone needs to follow in India called L0. And there was supposed to be an implementation of a new certification earlier -- late summer 2021 and that is now postponed and actually no firm date has been put in by the authorities in India. And this has mainly to do with the COVID situation in India, and we're going to come back to that to be able to tell you more as soon as we have that information. And the OpEx, you should expect us to stay on the communicated target levels until we see our revenues and gross margins really heading towards our ambition levels then that might change, but that's not going to change before we inform you why and how we're going to change it, if so. Okay. Eirik, I think this was it. And I know we have received some questions over e-mail, and if anyone else would like to send more questions during this Q&A, there is time for that. [Operator Instructions] But I know we have some, Eirik. So please go ahead.
Yes. The first question is related to COVID-19. How is NEXT approaching the issue with COVID-19 and fingerprint sensors? What challenges have you had with that -- in that respect?
No. It's a good question and also very valid, I think. But you can say -- if I try to say something short about it, there has been dialogues about this in certain countries. I mean what I just talked about in India has, of course, influenced now -- the virus has influenced what's happening with the certifications, et cetera, of how they run biometrics. But I think we should remember that there are different biometric modalities and they all fit different use cases, and I think that's going to continue. We should also remember that fingerprint is the most established with the longest history and one of the most secure biometric solutions out there. And we don't believe that this challenge of a -- if I -- without -- I don't -- we don't think long term that is going to affect and we see that there is still such a demand for fingerprint sensor technologies. I actually find it more interesting and perhaps there might be technology aspects that can be implemented throughout the fingerprint modality that can further enhance fingerprint sensors, considering, for example, also touch and virus, et cetera. And I think we might see things there into the future in general. Okay, Eirik.
Another question here. You announced the cooperation with the global tech giant, is there going to be any cooperation with this tech giant in relation to R&D development?
Yes. But that's also a great question. And as stated earlier, we are working with this customer on several projects. Now it is a large company. They might perhaps not be as fast-moving as our new and updated NEXT Biometrics. But at this stage, before orders have arrived, we should see it as great proof points that our technology is validated, it's vested by one of the largest biometric companies globally. And we are in dialogue with them and all our customers, and they provide us with great input so that we can actively develop our sensor technology further. So I think that's what I should -- yes.
Okay. Next question here. This last private placement, is that going to -- the placement completed. Is that going to make it easier to -- for NEXT to continue with R&D?
Yes. The short answer is, of course, yes. But I think the longer answer follows our updated strategy of, in general, working much closer to customers. And the more design wins and customers and products that we are designed into, the more likely that we will also receive important technology input from our customers valid to our road maps. I think a good example is that our largest PC customer, I think they're a great example of this where the customer even funded part of our secure bio-solution. So the more of these kind of customers we have, we can partner with them and we can develop our and their solutions together in a much better way.
I have another question here. Are you happy with the progress that NEXT has had in India? Or do you think you can improve?
That's another good question. Okay, to start then. We will never be completely satisfied. As a company, we can always do more. We have had quite a tough ride since we made a reset of this company. But -- and for us, the near-term focus is to secure that we, as quick as possible, reach breakeven. But having that said, we have taken market share in India during the last year, that's for sure. And I'm especially proud of the work done by our local team during these times and what they have done in the payment and fintech space. And we start to gain more and more traction with the point-of-sales manufacturers for the India market, but we do that both in India and in China. And I think that, there, the team has done a great job.
Okay. Another question this time about FAP20. Is there any news on the expected FAP20 purchase order from the tech giant?
I was almost expecting that question. Yes, and since I mentioned this at the announcement of the customer, we -- that's where I think I stated that we expect the first order from them around the end of quarter 2. And what I can say today is that, yes, first of all, just so everyone knows, we have already received the first orders. They have -- so that's already done. But I don't think that was the orders I was referring to because I was referring for, hopefully, a little bit more sizable orders. The orders we have already received is smaller quantities for our partner to start building their solutions. And there might be risks that my estimates around the end of quarter 2 will be delayed. For example, like we mentioned, some of our customers struggle with global supply chain challenge currently and this might affect the timing and the capability to them to exactly when they place their orders. But I think we should all remember that we, as NEXT, we have passed the validation and the testing and this partner has selected our technology, and they have already placed smaller orders for building their customer samples of their solutions. So I think that's the most accurate guidance I can provide on that specific customer.
Right. Another question. In mid-February, in the Q4 report, you stated that the Q1 sales or the purchase orders was already NOK 13 million. Why was there almost no additional sales during the second half of quarter 1?
Yes. This is also a great question. And let me say like this, yes, probably because we were very busy trying to sign what I believe is one of the most promising design wins ever for NEXT Biometrics. And I cannot make sure that, that provides revenue instantly. So this is the balance that we always need to keep of doing the important versus the urgent. We try to squeeze urgently out as much revenue as possible, but we do that in a balance of also securing what we believe will be the most promising design wins for the company and for the shareholders. So I think that's the mix of securing, here and now in the specific quarter, a certain design win versus also bringing the revenue. So I think that's the mix of the work that we have to do during the quarters for the short term versus the long term towards our ambition.
Okay. We've got a few questions related to the outlook in the quarter 1 report. The challenges in the semiconductor supply chain, does this apply only to NEXT standard notebook sensor or does it also apply to the FAP20?
Yes. And I don't think I should mention any specific -- on a specific product category here. But I mean, I think for everyone, it's loud and clear out in the market, and we can talk about all kinds of different industries. We can look at many of -- also within the biometric industry if you look at some of our friends and companies in our industry, you can see in their reports how they are communicating about it. And like I said, there are challenges, I think, for many industries depending on certain components. And let us come back and report on this perhaps during or when we report our quarter 2. Like I said, there will be an influence on the -- of what revenue we can recognize, for example, from the PC market. But the good news is we have larger purchase orders than normal.
Okay. When do you expect to get revenue traction on FAP20 orders?
Yes. I don't want to say too much on specific timing, et cetera, because then we get back to like -- because there are so many external aspects that we cannot control. The most important job we can do is to gain more design wins, work close with our customers. Whether we then have natural external challenges like now with supply chain, COVID-19, I mean many of our customers also have that and that might influence when they can place their orders. It is very important that we work close to our customers and that we bring these design wins. And we need those customers to ensure that we reach our financial ambitions towards 2022, that's for sure.
Okay. I don't have any additional questions on my side. Did you receive any more questions, Peter?
No. I will check. No, I have not. So with that, Eirik, I think we say thank you to everyone who have listened to this quarter 1 result. If there's anything, you can always reach out to me or Eirik and we will try to accommodate your questions, et cetera. But with that, I think we say thank you for today.