Next Biometrics Group ASA
OSE:NEXT
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Next Biometrics Group ASA
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All right. So welcome, everyone, to this webcast for quarter 1, 2023. I think I'm going to just hold because I see there are more people coming and -- or arriving into the meeting as I just about to start here. So I will just hold for a couple of seconds. And then we will get going. It's fantastic to see that we have so many participants even with this kind of report. But hopefully, we will guide you through it, so we get it into a good context. All right. I think we are past 8:30 as announced. So once again, welcome to this quarter 1 webcast for 2023. I think, as many of you know, I am Peter Heuman. I'm the CEO. And with me in the meeting, I have our CFO, Eirik Underthun.
We will guide you through today's presentation. The material we are demonstrating here today is also available on nextbiometrics.com under Investor Relations. And if you have questions, you're more than welcome to put them straight here into the Q&A chat in the Teams meeting. Today, we might have a little bit of a shorter Q&A, and that's not because we don't want to be available and take your questions seriously, but we also have -- and I know Eirik is a little bit stressed because we have an upcoming AGM just after this meeting. But if you -- if we wouldn't manage to handle your questions during this meeting, feel free to just send them to me or Eirik, and we will accommodate to respond as quickly as possible.
So with that, no further ado, I think we can go to the agenda slides, Leif. Okay. Like I said, we will run the quarter 1 report and summary. We'll do this fairly quickly. You have seen the report today, many of you. And of course, I'm not satisfied with that. But there is a lot going on and a lot of activities during quarter 1 and after quarter 1, and I will spend some time to let you know more about that. And I'm excited about that. We'll also spend a little bit more time today on the outlook. And then, of course, we end as normal with the Q&A session. But with that, why don't we start with the quarter 1. So Leif, next slide, please.
Okay. Let me start before I even run through the bullet points here. Of course, we're not satisfied. It's a weak quarter 1 from a revenue perspective. And that, of course, affects the rest of the P&L. There are positive signs. But overall, I have to admit that I am not satisfied with the report. It's a rather disappointing revenue. On the other hand and without doing any too much explanations or something, I can't decide when our customers, our design wins asks for shipment. And during quarter 1, there is a handful of customers who have asked for shipments. But I will come back to that.
So quarter 1. Design wins, we managed to bring 2 new design wins during quarter 1. We are now up to 38 in total. We are still focusing on reaching the year-end target. And as I have communicated before, we should, on average, be on 3 design wins per quarter, but that's on average. Some quarters like this one, it might be 2. Hopefully, next quarter, we have 4 or 5. But on average, we should have a pace of 3 per quarter. And that will bring us for the total of 2023, we should be just below 50 design wins. But 2 more added in quarter 1 and in total, 38.
Okay. Revenues, yes, as you can see in the report, they are low. Why are they low? Yes, we have a temporary low quarter 1 Notebook shipment, and that's because of a customer inventory adjustment. Difficult for us to influence, but that's what it is. Further, the India migrating from the former biometric certification into the new one. So the transition from L0 to L1 has been delayed as we have said many times, but I will come back to that when I talk to you about what happened after the quarter. But of course, that's where we could potentially then ship a lot more volumes of our FAP20. And since that has not launched during quarter 1, it's been difficult for our partners to bring more goods into their warehouses.
And in general, low shipment volumes to our smaller and medium-sized OEM and design wins during this period. That has influenced and brought us into a low quarter revenue. I think in general, you can say we are still too dependent on a single segment in our business, and that's the Notebook segment. We need more pillars to stand on so we can have a more recurring, forecasted and more even-spread revenue. And that's what we're working on, and I will come back related to that.
The gross margin, 21%. Of course, a little bit lower due to the lower revenue and the product mix, where we have a low mix of FAP20, which can drive higher gross margins. So we end around there. I think Eirik will talk a little bit more about that. Continued cost control, we have even lower OpEx in the quarter. You will, however, also see, and you can read these 2 ways, that we have increased our inventory. Meaning, we have also influenced the cash position a little bit. And you can at first glance find -- be a bit worried about it. But if you understand the background to it and what has started to happen after the quarter, it's because we are ramping up for our customers in India, for example.
So I think with that, in general, and to summarize, it's a weak quarter 1. But there's a lot of activity going on behind here, and I will come back to that after Eirik have summarized. So with that, I'll leave it to Eirik.
I think you have 1 more slide, Peter.
Okay. Yes, then I'll take that first. So after the quarter, leaning back to what I said here earlier. There are positive signals coming from India. Now first of all, we announced lately that we have signed a memorandum of understanding with an additional partner in India, who will take our sensor and build their own certified biometric products. They -- we have an MoU with a lot of the important dimensions already agreed. And it's now under negotiation of all the details to get to a final agreement. And they have also agreed in this MoU that when we sign the final agreement, they will place a purchase order of approximately $1.4 million.
This new partner, compared to some of the other India partners we have, are an OEM, you can say, of different products. One of their best-selling products is a locally produced and point-of-sales terminal, a so-called POS device. And with the volumes they are doing, they're going to put that -- our sensor, meaning that L1 product, into their own point-of-sales terminal. And the volumes corresponds to between $1.4 million and $2.8 million per year. In addition, they can now sell their biometric certified product also to others and utilize in more -- to more local OEMs, et cetera. Meaning, that we can drive those volumes. So I think this is promising, and I hope we're going to see that we -- latest quarter 3 here can have a final agreement with them. That's a positive news related to India.
And the reason for that is it's better for us with the updated market -- go-to-market strategy that we established a while back that we have more partners to work with that can drive volumes for NEXT. And the reason for that is that finally, you can say, after more than 2 years delay, the authorities have now launched the new certification in India, the so-called L1. And the first tenders are now open. So the first tender that our partners and their competitors can bid on is now open in India. It's a public bid, and it's of 100,000 units, and the bid end date is May 24. That means from the 24th, 25th of May, we should know who won this tender and most, probably like it normally works in India in these tenders, the units will be divided between 2 or 3 parties.
So hopefully, here, we have one of our partners being part of winning at least part of this deal. But the best sign is just that India is launching, and that the first bids are already out. The smaller one, like I said, will be awarded around May 24. But you should be -- remember, we are talking about India. I am not promising you anything that it's going to be exactly the 24th of May because in India, you never really know. But I would say that it's likely that we know if one of our partners want something out of this tender towards the end of May, then there might be some disputes going on in India related to the tenders. That's normal practice, I would say.
And then finally, maybe a couple of weeks later or a month or so. So let's say, before end of June, we should know how much potentially our partners want. And then the same thing is going to happen. But with a much -- because the signals we get, this is not officially out yet, but the signals we have get, that our partners have told us and showed us is that there is a tender coming by end of June, and that's around 600,000 units. So you can start to realize that this is just the beginning on L1. And like we have communicated before, towards the second half of 2023, that's when we believe that there's going to -- the activity is going to increase in India and then become on a more regular recurring level.
But it's very positive that the market is finally launching. Our customers and partners will start to be part of these bids will start most probably and to ask us to stock up a little bit because if they start to see that they can win in these bids, then we need to -- they need to have products and build products. So I think we take this as a very positive sign, and that can also be related to what Eirik would tell you about the inventory.
And second point, after quarter 1, but actually also during quarter 1, it's what I told you about -- or I informed you about when we had the quarter 4 report for 2022. In that outlook, I told you that I have put a target on myself, on my sales staff, on the company that we need to find a volume customer, a customer with large quantifiable either historic volumes where we know we replace someone or with committed volumes to NEXT Biometrics. We have worked very hard on this. That's also why I brought WISER Group in as a partner to us who have committed to us. That's not a guarantee that they're going to succeed, but they have incentives to succeed.
And so what my own staff and WISER Group and the 2 together are doing is looking at and are now in dialogue with at least when I -- if I compare to, let's say, 18, 24 months back when we only had a handful of customers. Now we have more references, et cetera. Now we are in those dialogues with some of these large volume potential customers. And I think I'm going to talk a little bit more about that in the outlook, but I think it looks better than it has done before, at least. So finally, the L1 market has launched. I think that's something we have been waiting for, for way too long with the pandemic and everything, and we are currently in dialogue with large customers, volume customers.
And I think with that combination of a summary and a little bit what has happened after the closing, I will hand over to Eirik, who will provide you the details of the quarter 1.
Thank you, Peter. This is Eirik Underthun, I'm the CFO of NEXT Biometrics. So quarter 1 revenues were down to NOK 6.8 million compared to NOK 10.2 million in the quarter 1 2022. And I think Peter explained the reason for the decrease in revenues. So I turn to gross margin. And gross margin was 21% during this quarter, the same as quarter 1 last year. So I think we explained earlier -- in earlier quarters about the gross margin fluctuations that -- and that the gross margin is highly dependent on the product mix in every quarter. In this quarter, we had a very low volume of FAP20 sensors that were shipped compared to PC sensors. Accordingly, we had a high PC sensor's share, which explains the, let's say, lower margin level than in previous quarters.
On operating expenses, we continued our efforts to keep cost under control and delivered NOK 13.2 million operating expenses, excluding option cost. On adjusted EBITDA, we had a negative NOK 11.7 million, which is an improvement of NOK 0.1 million relative to quarter 1 last year. So you can see the decrease in revenues and the corresponding gross margin was, let's say, outweighed by the reduction of costs. So the actually adjusted EBITDA increased -- improved slightly. On cash flow, Peter mentioned the efforts we are putting into preparing for the India launch and our plan to increase inventory in advance of the ramp-up in India. So the cash was reduced during this quarter because of this, and we ended the quarter with NOK 53 million in cash.
So to summarize, we had a quarter with continued low quarterly OpEx, and the cash position was affected by the inventory buildup in preparation for the India ramp-up. With this, I turn back to Peter.
All right. Yes. I think I'm back there. So we're going to go to the outlook. And before -- I think I have only 2 slides here, but I'll try to do it a little bit differently to put -- to provide you an insight into how we are trying to secure that we provide NEXT Biometrics with volume.
But Leif, if you go to the next slide. So just to put it in perspective and try to provide you this insight. What I wanted to start off is when I started here as the CEO early 2020 you can say, there were a few things that was very important to get going. It was, of course, to understand that we have a valid product and a competitive product, and I think I can say check on that one. We have a wonderful product, which is in a perfect place in the market, where we can be clear who we are not competing with and who we are competing with.
We define the customer segments. And today, it's great to see we have 4 customer segments. We have the office and Notebook. We have the payment and fintech. We have the access control, and we have public security. We -- today, we have customers in all 4 of those segments. So I would say that we have a competitive product. We have, for sure, found the right customer segments. And do we also have financial margins, it's important when you have a product company. And I think we have a wonderful opportunity here and we have demonstrated in some historic quarters where we, for example, have had a great portion of the volume of FAP20s. We have demonstrated for you that the product is competitive in the market for our customers, but it also has the potential to bring great margins, well within the reach of the communicated target. And cost control, I don't think I need.
So a lot of these boxes, and we have talked about this before. But I feel very confident about these boxes. They are kind of building the foundation for the company. But yes, I fundamentally agree there is 1 piece missing. And that's why I said in quarter 4, we need to stand -- we have like a one-legged pony today, where the Notebook is the main revenue driver, the recurring revenue driver, and we need to have more. And now I will go to the next slide and try to explain for you how we are thinking and what we have in line of sight and why we still have a big belief for the company.
So how are we building up this revenue? If you look at it on a historic basis and what our -- and the relationship we have and the way we are working now, there is 1 main segment that provides us with recurring revenue, and that's our segment Office and Notebook. We get forecast. Of course, the volumes can differ a little bit depending on market changes, et cetera, but it's a good dialogue with the customer. We have line of sight of the volumes. They can go a little bit up and down, but that's not really something our customer can influence a lot, and that drives us with a stable recurring revenue.
That's the 1 leg. But we need more legs. And we believe now, with what's going on and finally is launching in India, that the second important leg for NEXT, revenue buildup, will be India. And now it's launching. Now it's happening. Now we are building up inventory to be able to deliver. The good thing here with India is that it's FAP20, so we will have better gross margins and higher revenues compared to some of the other and more Notebook-related sensors. So if we can get our partners to win some of these tenders, initial tenders and then the recurring ongoing tenders, as we have communicated earlier, there is a big installed base from the historic biometric certification of products that has to be replaced over time. And there is a lot of new products that will have to -- all of them have to go on the new certified products that our partners provide. So I think this has the potential.
If I listen to and if you look at the purchase orders that I have, for example, received, that we have received from the -- what we have called the India OEM, this initial purchase order was $2.2 million. The MoU discussion we are in right now, where we are negotiating the final agreement, the customer already tells from the beginning what kind of volumes they can drive themselves. If I just look at these volumes and then we have the tech giant as well, but they have a historic small market share. But if you -- even if I only look at the OEM, who has had a 20% market share in the historic market. If I look at the volumes they are telling us that they are going to try to get, I put in that here under B. So you can see that our office and notebook segment it provides approximately $3 million a year.
I think I'm very conservative when I say that the India market can drive up to $3 million for NEXT. I believe it's actually going to be higher. But when I listen to the customers, if I try to have a conservative approach, I put in around $3 million, as an example. And as you can understand, I can't guarantee the figures. But I want to show you how we see that we can do a buildup. And even if we try to do it in a rather conservative way, what would it look like.
Then number 3, and that's why I talked about that earlier today. I don't think there is a way that only our notebook -- office and notebook segment, plus the L India partners, that's probably not going to be enough. We need 1, 2 -- or I mean we can take as many as possible, but we need quickly to get to a large-volume customer. And that's why we engaged, for example, the WISER Group, where we are now -- they are present in China. We all know China is a big market. The authorities there also have certification requirements. And we are now sitting in dialogues with much larger customers than I have ever seen in this company before at least. So what we are working very hard on is to try to as quick as possible now to bring in a large volume customer or customers. We do that through WISER Group, and we do that with my own sales force. It's a top priority for us.
And when I say large-volume customer, what we are looking at are customers who can do at least $3 million, $4 million, $5 million on a yearly basis, where we can either get a commitment, financial commitment from the customer, or where we can see that there is a historic proof of the products where we will be implementing it, so that we can communicate with you and that we, in NEXT, can feel comfortable that this will be a volume driver. A volume driver could be 1 or several, but a large-volume customers should for us and how we define it, drive at least $3 million, $4 million, $5 million recurring a year. If I put in $3 million, $4 million there in box number C, you start to see that the notebook, the India and then a large or a few larger customers, who can drive $3 million, $4 million, we start to add up to the $10 million.
On top of that, we have more than 30 design wins that are growing with it, on average, 1 design win every month. So I think then we are going to get very close to the breakeven or may even go higher. And I think that's the first important milestone that we are working day and night on securing for NEXT Biometrics. So having that said, we would end up with, at this point, to be standing not being a 1-legged pony so dependent on office and notebook. We would be depending on a great segment, office and notebook, a growing and recurring business from India and then a recurring business from a large-volume customer, where we are. I can't guarantee you, but we are today in long-gone dialogues with multiple of those through WISER and on our own.
And then on top of that, we have many of these smaller and medium-sized design wins that we got and are adding every month. And the fourth process we have is that out of that box #D, we should also -- if we are lucky, then we should see that some of these are going to start to be growing products. We have an example of a product in our Box D here. That's what we have communicated before, it's NGRAVE, the crypto wallet. That's a start-up in Belgium. They live on venture capital. And I can't guarantee you that they are going to succeed. But what I know today is much more than we did when we started with them, and we can see how they are progressing. And we have actually helped them. So I know they are right now in 1 country in Asia for a potential deal where they would sell more than hundreds of thousands of their product, of their digital wallet.
They have a similar dialogue in U.S. If they win, either one of them or both of them, that means they're going to need to start to order hundreds of thousands of sensors from NEXT Biometrics. That means that you can get out of that box #D and maybe we can create a separate box for a growing recurring one. So I think it's wonderful if we can start to have more pillars to stand up outside the notebook business, and then hopefully, it's just good that we bring more and more design wins. It becomes like the ice on the cake. So I think this is how we are thinking. This is what we are working stead first in pursuit to secure the last piece of the puzzle.
And I think I will end there. And this was the summary of quarter 1. And maybe to summarize, as you can hear, I'm the first one to admit we are not happy with the revenue for quarter 1. But I'm rather excited about what's cooking behind and what has happened during -- in the market during quarter 1 and up to this report. And hopefully, we can -- with the help from our new partners in China and WISER and my sales team, present something interesting to you in not too far future. So I think that summarizes it. But Eirik, should we go to the Q&A then maybe, Leif and Eirik?
Yes. So we've got some questions here, both from the e-mail NEXT events and also in the Q&As of this webcast. So there is a question here, Peter. NEXT flexible sensor is very suitable for biometric smart cards. Can you tell me a little bit about the activities on smart card?
Yes. Absolutely. Just looking so I see that I'm live. Yes, it is. But it's like we have communicated before, to do smart cards, we are -- to start with, we are not interested in payment cards, and that's where you have the large volume. But I don't believe that's going to drive the margins, et cetera. We have already discussed this. For type of access cards, et cetera, that product could be very, very suitable. However, I think that's more in our long-term perspective because it's a very fragmented market. You have all kinds of different smart cards, and you have them in a very fragmented -- in all the different countries. I don't see that as a solution to bring us a clear recurring large-volume, decent-margin business in the short run. In the long run, that might be something.
Right. And then one more question here. So thank you, Peter, for the presentation. It seems everything looks great except for the revenues. Are you sure that NEXT has the right strategy to grow the company?
That's a good question. Thank you. You know what, I will be humble. We don't do everything correct in this company. I'm sure you can easily find that something that we are not doing 100% correct to whoever's opinion. I do feel comfortable with that. If you take again a big step back, when I started here, this company was 90% geared towards payment cards. I think we have done a great turn from that and into something. And like I said, I feel comfortable that we have a valid competitive product that can drive the right kind of margins. We have also established these 4 customer segments. And if you look at 38 design wins, I have multiple design wins in all 4 of those market segments. This is helping us tremendously more today than it did 24 months back. Because now when we see it, for example, with large-volume potential customers, I can provide them proof points from all these segments.
So -- but having that said, and like I tried to finish off there in the outlook, but we can't rely on only 1 leg, if I may call that. The main revenue driver today is the office and notebook segment. I am confident that India has the potential to become a very important second pillar to stand on for NEXT. And that's our FAP20 product. And then it's obvious and why I started to communicate this, I mean, half a year back even more that we need another large-volume customer. It's not -- I will tell you as it is, it's not been very easy in the beginning where I had basically 1 customer as a reference. But now with much more references, we are much more valid in those conversations, and they have gone much further and with some external support adding in there. I'm not sure that we are doing 100% correct. But I think in this direction, I feel confident that we are at least on the righter path. And I feel a commitment from my sales organization and from my technical sales support teams, from my operations team that we believe in what we are doing. Having that said, if it's 100% correct, now that someone else can judge and we believe in it, and we run in that direction.
Very good. So based on what you're telling us about large customers, is that with the WISER Group? And could you please elaborate about the timing and the probability of any such deals?
Okay. I tried to tell you a little bit what's going on, I'm going to have to be very careful here. But yes, I can tell you, yes, because we have communicated that as well. I mean WISER Group has a commitment to drive FAP20, large volumes. They have a committed number, I think we communicated that number as well. And that's why we now are in these kind of dialogues through them. But we are also, since I have had this and put this as a target on myself, on my sales head and on the whole sales organization, we are also -- we have identified and are therefore talking with multiple large-volume customers. The criteria for us has been -- that I can tell you, without telling all the details, but it should be on the FAP20 because that drives a higher revenue and better margins, but it also provides the customer with normally a cost benefit to -- compared to other competing solutions. So it should be our FAP20.
So I believe that out of these multiple large-volume customers, let's say, at least an 80-20 rule of the dialogues we're in, we are talking around FAP20. We are focusing on preferred -- another preferred definition we work for is where we can see a history of products because that would tell us that we can have a guidance on what are the -- what volumes can we expect. That's another criteria we are using. A third criteria without telling you all of them is that it should be in large biometric market, I think you can then understand where we are. You know there are 3 countries with large penetration where authorities are involved in certifications, et cetera, in the world that are -- some of the largest markets are China, India and Brazil. So if we could find large-volume customers within those criterias, that's what we have identified, and that's what we are working on. I should be careful with the timing, et cetera. But as I have stated, it's a top priority for us, and I'm excited to see if we can introduce some of these customers here going forward.
Okay. A quick question. Next question here. NGRAVE, are they using FAP20? Or are they seeing another NEXT product?
No, they use one of the standard sensors, the same as we are using in the office and notebook segment. So that's -- then we are in dialogue with NGRAVE that since they are very focused on extremely good security within the crypto industry, that they should preferably go to the FAP20. But let's see if they can get their volumes up and running, then I have at least hope that we might be able to get there. But at the end of the day, if they start to drive volume and we get recurring business, we are not going to push them into something. They should feel that, that will be a better choice, if that's what they want.
And there's one another quick question here. Previously, NEXT has communicated some challenges with supply chain. Are there any supply chain issues anymore?
No. I would say -- I don't know, Eirik, if you would like to say something. You are helping me a lot in this area. But as far as I know, it has become a much better situation. I'll leave it to you, Eirik, if there's anything you would like to add.
I think we are comfortable with the supply chain on the NEXT side of things. We are ready to deliver, as we communicated earlier with the inventory we have prepared for the India launch and also for other types of products we are ready to supply. When it comes to our customers, it's more difficult to -- let's say, we haven't done an exact survey on the different customers. But yes, there could be some customers that still have some supply chain issues.
Yes. Okay.
Yes. And there's one more question, actually.
Okay.
In the quarterly report, in the outlook section, you mentioned identified high-volume markets where FAP20 is ideally positioned to replace existing solutions. Could you explain a little bit more about this?
But I think that's what I have tried to elaborate on here with our internal target of bringing a large-volume customer. And so I think that's exactly what I told. And like I explained here just a little bit earlier with those criterias, it's FAP20. It's in large biometric market, et cetera. So I think we almost answered that one. And I'm not sure I can say -- I think what everyone wants to know is when can you win, will you win? And as you can understand, it takes 2 to tango. And I can't tell you exactly if we are 100% sure that we will win and exactly what date that will be. I'm just excited about the way things are progressing with the strategy we are using right now.
Thank you, Peter.
Okay. So I think I should almost let you go, Eirik, so you can run into the administrative parts and secure that we run a professional AGM. But with that said, if there are further questions, feel free to send those to me or Eirik, and we will try to accommodate them as quick as possible. Thank you very much for attending, and we look forward to improve our revenues and execute on our strategy here going forward. Thank you very much for joining. Bye-bye.