Next Biometrics Group ASA
OSE:NEXT
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Next Biometrics Group ASA
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Good morning. My name is Ritu Favre. I'm the CEO of NEXT Biometrics. And I'd like to welcome all of you to our Second Quarter Presentation for 2018. So let me start with a brief overview of NEXT Biometrics.We offer highly secured authentication solutions for identity management. If you look at the biometrics market today, kind of fueled on the back of Apple and the integration of the fingerprint sensor into the cellphone, we are seeing this market today as about a billion unit market. The next wave of biometrics that we see emerging are for applications that require a higher level of security. So what we are seeing is a smart card and the government ID markets are beginning to really have high-growth and high-margin potential, and for these particular markets, the key factor of security is the size of the sensors. So being able to have a large sensor will dictate the level of security of the system.The key unique differentiation that NEXT Biometrics offers is the ability to cost effectively produce large size, rigid and flexible sensors; and based on our Active Thermal principle, we are able to produce this at a much, much lower cost point than many of the other technologies that are out there.We are now a proven supplier. We have actually shipped 4 million sensors into the market, and we will be continuing to update that as we continue to move forward in the business.So let me kind of dive into the Q2 2018 highlights for the company. We recorded revenue of NOK 25.6 million, up from NOK 23.3 million in the first quarter of 2018. We continue to show a lot of improvement in our financial performance, especially in the gross margin. I'm very, very excited about our gross margin performance this quarter. We recorded 26 points of gross margin, up 7 points from Q1 of 2018 and from negative 4% in Q4 of 2017. The other key milestone that we achieved that we have talked about over the course of the quarter is that we achieved Aadhaar certification. The hardware certification in India is a result of 3 years of effort by NEXT Biometrics in this particular space. As I've been kind of communicating over the past 1.5 year, we've had a cornerstone of our strategy has been to get into the government ID space. Now that we have been able to attain this certification, we will be able to move into our sales and marketing efforts in this space, and we're very excited about the compelling roadmap that we have for the India market. We will also be talking a little bit more about how we're going to expand that market into other areas, but we're very excited about this particular achievement during the quarter.Now that we're continuing to execute on our strategy of going into the smart card and the government ID market, it was time for us to really strengthen our sales and marketing operations. I think I've communicated that what we were trying to do as a company has really laid the foundation for our road map in the smart card and the government ID space. Now that we have products to sell, it was time for us to increase our sales and marketing activities, and we've actually hired a Chief Sales and Marketing Officer, Alain Faburel, and he will be talking a little bit today during the course of the presentation.After the quarter closed, we made 2 further announcements. Our key customer, Tactilis, that we have been communicating about for some time has begun their shipments now to their end customer. So if you sort of listen to some of the communications that we've made, we have talked about being very ready to support Tactilis as they ramp their products. We are very excited now that they have begun shipping to their customers, and I'll be talking a little bit more about that.In addition to that, with the India announcement, we announced that we were certified in about the June time frame. In August, we announced that we have our first orders for our readers for that program. So for us, we are very excited because we had said we would expect orders to come in and to begin shipping within the 3- to 6-month time frame, and we're completely within what we had communicated.So moving to one of the pieces that I'm really, really excited about, our continuing improvement in our financial performance as a company. So I have been very focused on ensuring that we maintain financial discipline and start to show the improvements in our financial performance as a company. What you'll see is that we recorded 26 points of gross margin in the second quarter. This is close to a 40-point swing in gross margin since the Q1 2017 time frame. So a lot of action from the team, the new ASIC came in. Part of this whole idea of being a proven supplier in the biometric space, being able to ship 4 million sensors to date, shows that we will get the learning curves that are required to be able to ship in that sort of volume. You have to think about scaling impact. You have to think about yields, quality, reliability. So the amount of work that it takes to be able to ship that many sensors at a positive gross margin shows sort of where we've reached as maturity in the company.Part of what we're really looking to do is move into high-growth, high-margin sorts of markets and areas. So you'll start to see that our strategy is paying off in the area of both gross margin, as well as the market segments that we're choosing. The 3 markets that we're really going after today, beyond the notebook that we've been in traditionally, is the Access Control market, the Smart Card market and the government ID market. Each of those markets will have higher margin than what we are able to attain in the notebook space. And so we're pretty excited that moving into these higher market segments will allow the company to reach its long-term gross margin potential of 35% to 40%, as we've previously communicated.So I'm going to spend a few slides talking about this Indian news that we have communicated. It's such a big piece of news for our company. And will really, again, be the cornerstone of our government ID business inside NEXT. So I will be spending a few slides talking about sort of what this means, what we've communicated and how this will shape the company going forward.So in terms of the actual news that we communicated in the second quarter, we have achieved the hardware certification in India. So this Aadhaar program in India is the largest biometric program in the world, 1.2 billion people in India are registered in this program. And everybody that wants to go into a certification process in India has to go through a very rigorous set of tests. There is a Far FIR set of testing. There is hardware, quality and reliability testing. There is software testing. And so again, the company has been working for 3 years, and I'm very, very proud of all of the hard work and effort that the team has put in. We were able to, after this very, very rigorous process, get through a certification. And so I really felt like there was this before-certification and after-certification time, and it's been really good now that we're on the other side of it. We've been really starting to ramp our sales and marketing activities, and I'll talk a little bit more about that.So if you think about this market, it's -- again, it's 1.2 billion people in India are registered in this particular market. What we're finding is that many other governments are actually looking to this India program to see how this ends up rolling out and sort of what sorts of use cases emerge. What we're seeing and what we have communicated in our Capital Markets Day is a leading use case for this particular program in India is point-of-sale terminal user identification within a lot of these kinds of shops and inside the villages. We estimate that this market will be about 3 million to 5 million unit for point-of-sale terminals to start with. So it's about -- it will be about 30 million unit deployment into India, but the initial use case will be about 3 million to 5 million readers within the India market. Again, the primary purpose of this particular program is to do government benefit: so welfare, pension, food rations and that will be the first way that this will get deployed. I was in India at the end of June, and what's exciting is now that everybody is registered into this database, there are other ways that this could actually be used.One thing that sounds like it's -- that's sort of percolating in India is branchless banking. So you say, okay, you have -- everybody is registered in this biometric program, you can get all of your government benefits. While you might actually be able to start doing some payment and banking kinds of applications as well for all of these people because many people in India don't have access to a physical bank or a physical way to get to any kind of money. So what I would say is, from a NEXT perspective, we are absolutely confident that there is a 3 to 4 million unit per year reader opportunity. But on top of that, there is a lot of new use cases that can begin to emerge, and we are also seeing that other governments are very interested in this particular roll out in India to see if it will make sense in other countries that would have the same sorts of characteristics.The other news that we announced during the course of the quarter is as soon as we received certification, we need to now support customers. And the great thing about our certification is we have many, many people now beginning to contact NEXT to understand what we've certified and begin that early dialogue on, can we engage with you? So this necessitated us creating a subsidiary in India, and the leader of the team in India is Ameya Bhagwat, who has actually worked at Crossmatch, he's worked at Morpho, very, very experienced in selling fingerprint solutions into the India market. We have also hired, Sanjith, who is the Head of Customer and Compliance, and he has had a long experience at the UIDAI, which is the government body that actually does the certification for the fingerprint readers. So again, we're pretty excited about being able to locally, in India, support customers with their requirements for this particular market.We also communicated that we have a road map of products that we're creating for India. So in addition to the products that we have today, which is the reader product, we also have a module product that we have certified for Level 0. So if you think about the different levels of certification in India, they basically have a certain level of security that you must achieve. And so based on our hardware certification that we went through, we have achieved that level of security and that's a software level of security. What they're calling that is the Level 0 specification. They are also looking to roll out a Level 1 specification, which adds hardware encryption as well as software security. So both solutions are highly secure. The first is a software security solution. As they roll out the next generation that will be the Level 1, that will add a hardware encryption. So we have developed a road map of products that will cover both of those kinds of software -- security levels.The first set of products that we're rolling out is the reader product. This is where we have our first orders that we have announced through our distributor partner in India, AqTronics. After we begin to sell this, we would start to sell a module into a point-of-sale terminal. So as I was talking about the key use case is a point-of-sale terminal at a particular shop or a village. There are also going to be modules that are integrated into the point-of-sale terminal or you can attach directly to your computer a reader, which is what we would be selling. So what we're kind of seeing is that this module sell into a point-of-sale terminal will take close to 6 to 12 months because we have to work with the point-of-sale customer, integrate the solution into that and then be able to deploy that into the market. The next product that will come after that is the Level 1 reader. We expect that in the second half of 2019, we will begin to ship that product into the market. And then in the first half of 2020, we will begin to ship modules into -- for integration into a point-of-sale terminal in the India market.The very nice thing about this set of products, as we had communicated in Capital Markets Day, is because of the high level of certification that's required, we are able to command a larger or a higher ASP than we are able to command in the set of products that we ship today. So in Capital Markets Day, we had kind of spoken about an ASP range of $19 to $30 for this set of products into the India market.So again back to the strategy of going into higher-growth, higher-margin markets, we really see this as a proof point and a cornerstone for the company in this particular space of being able to grow our revenue and our margin.So with that, I would like to introduce our Chief Sales and Marketing Officer, Alain Faburel.
Thank you, Ritu. Good morning. I'm Alain Faburel, very nice to meet you this morning. Very nice to be with you here in Oslo. I've been in NEXT for the past, let's say, 1 month. It sounds like this is months ago, and I'm very excited to join this company. The background is, I've been with Gemalto, and I've been with IDEMIA. I've been with Crocus Technology. This is something like, yes, it's better. Something like 25 years of experience in this digital security market. In Gemalto, I had several roles from operations to sales in -- all over the planet. Crocus Technology was a very rich experience, where business was to create some digital security, a business unit inside this company and to address the key markets, which are -- who is the card makers like Gemalto and IDEMIA. And later, I moved to IDEMIA. And over the past 2 years with IDEMIA, I have been in charge of powered card. So what's the meaning of powered card? This is basically biometric cards, and this is dynamic CVV cards. So it was quite rich experience to be the other slide of the barrier, which is with IDEMIA that is purchasing some biometric components to build the smart card that they sell to the market.And so the question when I informed IDEMIA that I'm going to leave to NEXT was that, why are you leaving NEXT? When are you leaving IDEMIA? And the reason was quite obvious. I believe in this market. I believe in the biometric system and the acceptance of biometry into the smart card. So the question was, why NEXT instead of some other companies? And I do believe that the business model that NEXT has is the one on which we can build a story. There are few market segments that NEXT is addressing, and this is a proof that we hear from various customers, various market segments, and the experience we can get out of this is rich from the customer side. But this is also rich from the product side to have a better know-how, how to build a product. The second factor is that it is a demonstrated technology. And the fact that we have been able to deliver in the past years millions of sensors in the market is very, very important. We have one of the segments, which is the smart card that we want to look after, which is a mass market. And if we have not been able to deliver millions of product in such market, which is mass volume, we'll experience some field return that will not be good. And the very important benefit with NEXT is that we have this experience from the notebook market and to be in this smart card, which is beginner devices, this is a key advantage throughout this background.The smart card is not really an easy one as a market, but this is a mass market. We have billions of devices into the field. This is something like 10 billion, including 3 billion by 2021 only in the banking segment. So this is going to be very important. This is a market, which is also made from 2 technologies: one is contactless, the other one is contact. The contactless is obviously one of the technologies we are going to look after, and we are going to be in the contactless. This is the future. But today and for the coming 2 years, the contact market is still very important. 50% -- a bit more than 50% of the volume, the total volume of card, banking card, pure banking card in the market is still contact card. So before to go to contactless, we have some product to deliver to the contact market. The second aspect is that in that market we also have some, what we call, the closed-loops, which are, in fact, niche market. And niche market means that we can have higher ASP compared to pure banking, debit, credit market, which is one of the key subsegments we're going to look after. And this is also one of subsegment, which doesn't require today but will require tomorrow some contactless products. So with the contact product that we have with NEXT today, we are perfectly ready to address this kind of market.This is also a market where we have to deal with both the Tier-1 players and the Tier-2 and Tier-3 players. So we need to have a strategy. This is what we are clearly building, a strategy to address the Tier-1 guys, which are doing 70% to 80% of the market, but also the Tier-2 and Tier-3, because Tier-3, those one are the one who have some closed-loop projects, which can address -- which we can address immediately. So we have to build and we are building a strategy long term for the Tier 1 and at the same time, a tactic to address the Tier-2 and Tier-3 players, which are providing the market and the market share today.In the past few years, where I have been in charge of the powered card, I could see that there is this development of the biometric smart card. But we have to know that the biometric smart card today, even if we're talking a lot about lot of pilots worldwide, each time there is a pilot, there is few cards. So when we're talking about biometric card, we're really talking about the future. We have delivered 2,000 cards -- 2,000 products to the market a few weeks ago through our partner, Tactilis. And 2,000 card is one of the biggest deployment of biometric smart card as of today. You have to know that when we do a pilot for pure debit, credit banking card, we are delivering 50 cards, 100 cards -- this is the size. And what you have seen in market in the past one year, as announcement of pilot from the carmakers, this is very small. This is very promising, because the banking market is something which is very conservative. So before we are going to ramp up in millions of cards, we have to make some test in the field. And the conservative market like banking has always worked like this. But the beauty of this market is that once we are in, we're in for long time.Ritu?
Thank you. Back to Knut.
Thank you. So let's go through the financials. Revenues in Q2 ended on NOK 25.6 million. This is on level as previous quarters, but it is actually a 10% increase compared to Q1. The revenues are mainly driven by our notebook customer, but we are gradually also shipping products to other customers and segments. But still the volume in this segment is not big enough in order to really create a huge impact on revenues in this quarter.We have also a significant impact of the shipping of the new ASIC. So now we are on 26% gross margin. And for the first 6 months, we are on 23% gross margin. It's really fantastic compared to the gross margin we had in the first half last year of minus 8%. EBITDA loss adjusted for option expenses in the quarter is NOK 41 million. That's a small increase compared to previous quarter, but it really reflect all R&D investments that we are doing this quarters.Then gross margin and the OpEx. Well, the gross margin is expected to increase going forward, and the OpEx is expected to flatten out.If you go more into the OpEx, this chart shows then the costs included payroll and other operating expenses. And we split them into 2 groups. One is for R&D-related activities and the other one is non-R&D-related activities. And as you can see here clearly that our increase in activities is really related to R&D, but the rest of our activities is fairly stable over time. So this is activity-based expenses. It's both the payroll, R&D and also OpEx R&D.The only -- since the payroll and the OpEx expected -- OpEx is expected to stabilize over the coming quarters, it will, of course, be impacted by noncash option expenses as this develops over the quarters.If you go into the cash flow. The cash flow from operation this quarter was minus NOK 41 million and that's compared to NOK 37 million in the previous quarter. We made a license acquisition in Q2. This enables NEXT to offer a turnkey solution to shorten customers' time to market. And this is included in the investment in Q2.NEXT raised NOK 120 million in gross proceeds. It was about NOK 115 million in net proceeds. And in Q1, we got the first NOK 66 million in March and the second tranche was approved at the Extraordinary General Meeting, April 30, and the net proceeds of NOK 49 million was then received in April. In our current forecast for -- with revenues and cash and OpEx for the coming 12 months, we see that we have cash for operation for the coming 12 months.Cash at end of Q2 was NOK 113 million, and that's compared to NOK 109 million end of Q1. Thank you. Ritu?
Okay. So I'm going to move little bit more now into the strategy and where we're headed as a company as well as provide a few more updates, both on the -- primarily in the smart card space because that's where we are spending a lot of our focus. So I've gone through this chart several times now, and I like to use this chart every time because this basically is the 1-page strategy for NEXT Biometrics. So as I've talked about several times, we have come from a place where we are providing sensors into the notebook market. In that space today, what's happening is convenience and the cosmetic look and feel of the sensor has become a larger requirement than the overall security of the system. Our goal in the notebook space is not to really invest anymore. We've already announced contracts with our Tier-1 North American customer. We've announced the deal with Fujitsu. Our plan is to continue to support these customers, but we will not be investing any new R&D, and we are wrapping up almost all activities tied to the R&D side of the notebook space.So as you kind of think about the profile of our R&D spending and our OpEx, in the notebook space, we are largely finished now with the investments, in terms of doing new development, and now we will really be monetizing in that space. The objective here is to go and find high security, rugged types of applications. If we're able to do that, we will sell into the notebook space.As we look at Access Control, what we're finding is this is a very, very broad market. As we talked about in Capital Markets Day, this could be up to NOK 100 million of total available market. One of the things that Alain is going to do as he is here, is to start to subsegment this market into sort of individual vertical markets that we can begin to go after and start to see some traction. Some of those kinds of spaces will be health, there is fintech, there is point-of-sale terminals. And what we'll start to do is paint a picture for everybody on the kinds of verticals that we can go after in Access Control. One of the things that's very important in this space is to provide a complete solution. So as a fingerprint sensor provider, simply providing the sensor is not enough. We have to actually provide the full system solution, something that a customers can go, touch the sensor, you are able to match immediately, and you have a very good experience and it's an end-to-end solution.In the Access Control space, as Knut was saying, we've purchased an algorithm, which is one of the key enablers for a fingerprint sensor. This allows the match on the sensor, and we can then provide a complete system solution. So as we look forward into the next quarter earnings, we will be giving a little bit more explanation of what we're doing in the Access Control space. We continue to be excited about selling our products in that space. We will be doing a little bit more marketing work to see which verticals make the most sense for us.As I've talked about several times, our unique technology is ideally suited in the smart card space. Having a large sensor that meets ISO requirements that is fully physically flexible is one of the key enablers of this particular market.We continue to see, as you heard from Alain, a lot of interest and excitement about this solution. I'll tell you that when I have gone and visited customers and we show how flexible our sensor is, there continues to be a level of surprise at the flexibility of our solution, not flexibility in terms of engineering, but actual physical flexibility of the solution. So we continue to put a lot of investment in this space. A lot of the OpEx that we were talking about is going into developing a compelling roadmap in this space, and I'll talk a little bit more about that.As we look at the government ID space, as I said, we've seen some real traction now in this particular space as we've been talking about. So I feel like for the past 1.5 years, I've been laying out this multimarket, multiproduct strategy. We've been scaling the company to be able to service a lot of these different markets, and this really helps to diversify the company and our revenue streams that will be coming in into multiple products, multiple customers, multiple markets. Being with one customer and one product is one way to run a company, but really being able to diversify what we are selling into the market will create a solid strong company for the future.So what I like to do and you will find, as I do my communications, is really try to go back to what I've talked about before and then kind of give you an update on that. The chart that's on this -- in this particular slide is a chart that I used, I think, in my Q2 last year earnings presentation. This is NEXT's view on the development of the smart card market, and this very much builds on what Alain had just said about what we see in the smart card space. What we are expecting to see and what we've talked about is the early deployments of smart card, biometrics and smart cards, is going to be early adopters, closed-loop systems, contact cards and that will evolve into enterprise cards, financial inclusion smart cards, and then it will end up in the retail payment banking cards. As Alain was saying, the banking industry will do a lot of trials, a lot of pilots. There is a lot of work that has to happen for the payment card market to emerge.And we fully believe that, that will happen. It's just the question is when. And we do see that there are a lot of very interesting opportunities that we can pursue in the smart card space as that particular market continues to develop. So what we're doing from a NEXT perspective, we have already developed the NB-4410 product, which is the biometric flexible subassembly that's actually shown in the picture in this particular chart, and we are now sampling that to multiple customers. And we do expect over the course of the coming quarters to make more announcements around that particular product. That is primarily targeted for closed-loop systems and contact-based systems. We do have several projects ongoing that we have already announced. I'll give a quick update on Tactilis in just a minute, and we continue to stay engaged with First Biometrics on their casino card opportunity.So let's talk a little bit more about Tactilis. So as Alain was just mentioning, they have actually done a fairly large deployment of their cards into their end space. We have been very excited about working with Tactilis because their vision of building out the biometric smart card product line has been very compelling. As I've talked about in the past, I have actually been in their factory in Penang. They have a large-scale operation that they are developing to be able to deploy a large amount of smart cards into the market. As we announced this quarter, we have now shipped 30,000 chipsets, so ASIC and sensors into Tactilis, which they have consumed and bought. They are building that into cards, and they have actually done now volume shipments into their end customers. So as we've been trying to talk about for the past 1.5 years, NEXT has been very ready in working with them on their product development. We have been fully ready to support them, and we're excited to see them ramp their volumes because that will feed right back to us to ship our product to them.So sort of a summary wrap up, as I've sort of talked about this in the past. If you think about NEXT in the phases of the company, if you think about sort of the past, we really spent a lot of time on developing the core fundamental technology, which is our large flexible and rigid sensor technology at a very attractive cost point. We did the early commercialization of the technology with our lead customer and our lead product. We developed a lot of biometric solutions expertise. As I have been kind of talking about for the 1.5 years that I've been here, the goal for me was to set the real key foundation to be able to diversify our revenue and scale the company, and it was finding higher-growth, higher-margin kinds of markets that we could use as the basis of the company's revenue and profitability in the future.We have now established a strong sales organization, a strong product development organization and a strong operations organization. I will say that I'm extremely pleased with my group management team being able to deliver on the promise that we have made to our investors and our shareholders.As I look into the future, into the 2019-2020 time frame, we will now really start to see an acceleration in our smart card and our government ID projects, and we will start to see the revenue and profitability begin to flow based on the strategy that we've created of multi-markets, multi-products and multi-customers. So to kind of wrap up with an overall summary, again, we've increased gross margin. You will continue to see me be extremely proud of that. From my Motorola heritage, I think, gross margin is very, very important. Having high gross margin, I think, can solve a lot of things.So swinging 40 points of gross margin in the 1.5 years, I have -- my old Motorola friends that are very, very proud of that. We've shipped over 4 million sensors. That makes us a proven and credible supplier in this particular space, being able to get to 4 million sensors shipped, getting the supply chain activities that need to happen, the yield learning curves, the cost learning curves, there is a lot of activity that has to happen to be able to ship that many sensors into the market. We're very excited about delivering on the smart card roadmap, so having our NB-4410 ready to sample and ready for integration into customer card projects, that gives us a new level of momentum that we can achieve in the smart card space. And then again, as I've said, after 3 years of very hard work, we've achieved the Aadhaar hardware certification, and we will use that to launch into new product formats for other government projects around the world. So as we look out into the next 3- to 9-month time frame, what you're going to find is that I'm very consistent and I'll continue to repeat the same things. Our goal is to continue to proliferate our products into the smart card and government ID markets. Now that we have products to sell, we will be doing a lot of sales and marketing activities. We will continue to increase the number of smart card integration projects for our NB-4410. We are going to continue to close orders and really increase, again, our sales and marketing activities that are based on this India certification that we have achieved. We will sample our FAP20. So this is the new government ID format that we have been talking about. This will be applicable to other government projects around the world. Our plan is to sample that in Q4 of 2018. That was what we had communicated in our Capital Markets Day. We're still on track to do that. And our goal is to continue to increase our gross margins, flatten out our OpEx and continue to improve our financial performance. I would say that we have delivered on the commitments that we have been making over the past 1.5 years. Everything that we have said that we would do, we have been delivering on. Our objective is to continue to deliver on our commitments and execute our core strategy.So with that, thank you very much for joining our earnings, and we will wrap the presentation portion of the comments.We will be moving into questions.
Are there any questions from the room?
In terms of your revenue, more or less all of it comes from the notebook segment. And during your CMD, you guided a gross margin range of 20% to 25% in this segment.
Yes.
And you're sort of about the very high end or above that now. Could you maybe explain what is driving perhaps a better-than-expected gross margin? Or is there a larger share of revenue from new products that's coming into this mix?
Do you want to?
I can answer that. We have a set of products that we deliver both to our U.S. customer and also to Fujitsu, and it's all about the mix of products. And now we are on a good level. We still believe that is possible to even achieve higher margin in the notebook space. But when we had this forecast in February, we thought this was the realistic level that we should deliver on. Now it's on the high level. We think that's good. We are going to continue to try to increase the gross margin, but we still believe that around 25% should be the notebook margin. But this will swing, depending on what type of products we deliver to the notebook customers. Some is more expensive than the others.
Part of the reason that for us, as we were trying to provide guidance on margin, is it can swing so much by product and by market. And so when I'm asked about our margin target for the company and we say kind of 35% to 40% as a long-term target, it's heavily mix dependent and also heavily product dependent. So we've been trying to just provide ranges, but my objective, as Knut knows, is always to sort of beat the ranges that we provide. But you should expect somewhere, I would say, between 25% and 40% for the company, in general, which is a very large range.
Just I had a question on the OPEX in your outlook, you've got very -- you say it's going to be flat now onwards. Is that [ in a nominal sum ] or is it sort of as a percentage of sales because when I look at the presentation, it looks like the company is really starting to ramp up now and...
Yes. So the short answer on that, first, we have lot of R&D activity. These are on a historical high level. I actually originally expected it to be slightly higher this quarter because of all the activities that we have in pipeline, but we are pretty careful of what we invest in R&D activities. So we believe that as we have said quite a few times in the previous quarters that we are going to peek our expenses now in these quarters and then expect it to flatten out. On the expense side, there will be option-based expenses. That is a noncash thing that we will take out of the numbers that we present, so that we expect to have a more flat development. And of course, it will be a lower percentage of revenue when we increase the revenue line.
There is a couple of questions from the web. What are the application of the smart card orders you got from Tactilis? Is it payment/banking or other applications?
I will take this one. This is basically a multi-application scheme in which we are going to use unique ID of the card, which is in fact the fingerprint template to access to several kinds of application which are coming from insurance benefits to certain right to address and to access to some different applications. It's not a pure banking application. This is multi-application.
I have another question from the web. In conjunction with NEXT Capital Markets Day, Tactilis said that it aimed at expanding capacity by 20 million cards annually by the end of this year. Is this still on track?
I would say that we certainly can't speak for Tactilis. So that's something that we would not want to comment on. What we have publicly said is that in the factory that they have today, in Malaysia, they have stated their capacity ability of 5 million cards. I'm very, very excited about the opportunity with Tactilis. And I'm very hopeful that they can ramp capacity the way they have stated.
There is no other questions from the web.
Okay. Very good. With that, I think, then we can wrap. Appreciate all your attention. Thanks for joining.
Thank you.