Next Biometrics Group ASA

OSE:NEXT

Earnings Call Transcript 2021-Q2

[Peter Heuman, Chief Executive Officer]

Good morning, everyone, and welcome to NEXT Biometrics quarter 2 webcast. This time, you can meet us via this Teams application. And today, we will introduce the material and the report from quarter 2. This material can also be found on nextbiometrics.com, our website. And during -- or at the end of this session, we're going to open up for a Q&A. And this time, there are 2 ways how you can put your questions and direct your questions to me, and our CFO, Eirik Underthun, who will join us here during the session. [Operator Instructions] And I see we have received 1 or 2 questions there as well already. So really appreciate that. We will take -- bring this up during the end at the Q&A session. So with that, once again, welcome, and let's get started. So Andrea, if we go to the agenda slide, please. And as you can see here in the agenda, I have a few points that I find important, and I want to bring them up before me and Eirik run you through the financial numbers, the outlook and the Q&A session. Two of these topics are related to announcements that NEXT -- that we have done as NEXT Biometrics, and one of them is related to what you have heard me talk about since I started as a CEO on some kind of structured growth agenda. And I want to talk and outline a little bit about that as well before we get to the numbers. The reason for this is I think it's important that we try at this stage at NEXT to inform you what we have been busy working on during quarter 2, but -- which might not directly reflect the quarter 2 numbers. So that's why I want to do that. So with that, Andrea, we can go to the next slide. So the 2 announcements that I wanted to highlight and provide a little bit background about, the first one is the 5-year agreement that we announced in early March. We have also guided you about that we had our best guesstimates related to the projects that we are working on, together with this customer, that the initial orders would start to come and arrive at NEXT Biometrics around midyear. And clearly, that has not happened so I find it important that I try to guide you a little bit of where we are with this customer. And I do believe and I feel confident that we have a very good engagement going on with this customer. I can say as much as that we are in multiple products that we are working on together with them. We are working on multiple different markets and projects related to different markets. I'm not going to now, this time, update you and I'm not allowed due to the contract we have to neither tell you exactly who this customer is or exactly what products and markets we are working together with them on. They want to be able to launch their products in those markets, and I don't think we, as a supplier, should make that public. But -- so the message I want to convey is that we are well ahead with projects with this customer. But I think all of you have also seen and heard what's going on in the global supply chain challenges, and this is also affecting some of our customers. So naturally, it might take a little bit longer than we first anticipated with the information we have today compared to what we had in February, March. But I feel confident we will get orders from this customer. We are involved in several projects, and now I'm going to decide not to guide you too much exactly when we believe that, that's going to happen. But we feel confident that we're going to get orders. So that's a little bit background about that announcement. The other topic or item is related to the recent announcement that we have teamed up with a world-leading face recognition company, a company called Paravision. This will broaden NEXT Biometrics product offering in the biometric industry. I do believe we're going to, with this, be able to get into some -- a little bit faster sales cycles and have a potential to bring us as some kind of icing on the cake on top of our own revenues and margins some recurring software revenues. And the reason why we did this and why it's facial recognition as a biometric modality and not an iris or something else is -- part of the reason is that we, as NEXT, we already have customers who offer, through their products, dual authentication methods where we are in with a fingerprint sensor, but that product also caters for a facial recognition. And it's face who is integrated into those products so we saw face biometrics as a good alternative to complement our technology. We can go to the next slide, I'm going to try to provide you a little bit more information for the ones who don't know who are -- who's Paravision. So Paravision is a U.S. California company based out of San Francisco. They are -- their core business is face recognition utilizing AI and computer vision software. There are approximately 60 employees. They have already customers mainly in U.S., in EU and in part of Asia. They are backed by venture capital firms as well as strategic investors. And here, you have some of the reasons on why we decided to go together with Paravision compared to other companies. So what does it bring NEXT and our customers? Yes, we found it a great match as a complementing biometric modality to our fingerprint, our core business. We also thought that why not team up with a well-renowned American face recognition company? Because we saw a great match in the combination of a highly ranked by U.S. authorities U.S.-based face recognition technology provider with our FAP20 FBI, meaning American authority-certified fingerprint sensor. So there -- here is some part of the reasons as well and also why it's the face biometric modality. And I think by doing and partnering in this way instead of developing everything ourselves, we can enrich our product offering kind of overnight. And I think it's going to make NEXT more relevant in the general and broader biometric industry. The partnership is a multiyear contract. Both companies are already in talks establishing execution plans for go-to-market, et cetera. What we can expect from it, I'm going to be very careful saying too much right now, but both teams are establishing go-to-market models, identifying customers, projects, et cetera, that potentially can lead to recovering software revenues later on for NEXT Biometrics. All right. Then, Andrea, if we go to the last point before we get to the actual quarter 2 report. So why do I bring up this slide before the quarter 2 report? For me, I want you to know that as a CEO of NEXT Biometric, I find this one of the most important key performance indicators that I'm measuring the organization on weekly, monthly and have a constant monitoring of. Because when I started as a CEO late 2019, NEXT Biometrics were basically implemented with one customer, one -- what we would call one design win, one product that was generating revenue and bringing some margins. To scale up this business, I firmly believe that we need to be in multiple products. If we should do that, we need to start to measure what sensor are we selling and where do we win these design wins, in what segments, et cetera. I think if you look at this, since we started the turnaround of this company and we started with 1 design win, we are now adding up to almost 20 design wins. That means that we have been, during the last 18 months, added, on average, a little bit more than 1 design win per month. And I can tell you, I have all intention to keep that pace or to increase that pace. The interesting aspect here and why I bring it up before we get to the numbers is that there is a very -- to me, it's very obvious. It's clear and I think it's very logical that we have a lag from the moment that we have a design win until the customer has put product development, secured their supply chain, put their production in place for that product, manufactured that product and sold that product so they can come to us and request orders and repeating orders. There's going to be a natural time lag. Since I have been here now for approximately 1.5 year, I don't know exactly what will be the average lag from design win to an average customer starts to initiate orders and put repeating orders. But this is something that we're going to try to define more and more clearly the further we get down the road and increase the number of design wins. So I think that's an important parameter. And the other parameter is, of course, what's going to be the average revenue per design win because, clearly, and I already know that some of these trend are going to be fairly small. But I do also know that, for example, one of them here is the tech giant, and like I told you earlier, we are in multiple product -- products -- projects with that customer. If that ends up with becoming several products that drives volume, I think that needs to be catered for. And then we need to see what is that average volume, which is probably going to be much higher compared to some of the smaller. And as NEXT, we're going to find an average design win time lag and we're going to find an average design win revenue. So I think this is my way of trying to demonstrate to you how we are, in a structured way, trying to grow the company. Another important part of this is that you can see here, as of end quarter 2, more than 50%, up to 60% of these design wins are on our FAP20 sensor, which provides higher revenue per unit as well as an improved margin compared to historic sensors that NEXT has provided. So I think I will end there with those 3 items, the 2 announcements and this key performance indicator. And now let's get into the report. So if we change one more slide, Andrea. Yes. So before I hand over to Eirik, some main takeaways here. You might have seen in the report that we implemented a new statement here called orders booked. Eirik will tell you much more about this, but I found it important that our team has actually managed, I think, for the first time in history to get more orders with request of delivery in quarter 2 than we are actually able to deliver. This has to do with the global supply chain challenges, but I think that's a positive note. If you compare that to last year where NEXT reported revenues of NOK 13.5 million, we have actually -- would we have been able to ship that, that what our customers have asked for, we would have grown the quarter with around 15% to 17%. While we managed to book and ship NOK 10.5 million, the FAP20 shipments are rather low in the quarter due to this supply chain challenges for many of our customers, but 50% of the quarter's design wins are on FAP20. We have a very strong PC sensor order booking, but we also have an unfilled backlog of around NOK 5.2 million, and most probably, we're going to have to carry this into quarter 3 and maybe even part of that into quarter 4. Another good factor, I would say, is that I think we have managed to book at least the lowest-booked OpEx level in the company history and that has to do, of course, with the positive onetime effect of a loan relief that our finance department managed to negotiate with the U.S. authorities, and Eirik will talk to you more about that. And at the end, we have almost NOK 120 million in cash position. And I think that with a strong balance sheet and the slim operation that we manage to run and a continued focus on scaling up for more design wins, we should be able to make something very good out of this. And with that, I hand over, for the numbers, to Eirik Underthun, our CFO.

[Eirik Underthun, Chief Financial Officer]

Thank you, Peter. Can we go to the next slide, please? So quarter 2, as Peter mentioned, we had orders of NOK 15.7 million in the quarter and revenues of NOK 10.5 million. And how we define orders received is that is the orders that we received from our customers with a requested delivery in the same quarter that we are talking about. So this means that we, during this quarter, were not able to deliver approximately NOK 5.2 million in orders that we're carrying into quarter 3. And the revenues compared to last year were impacted by the strengthening of the Norwegian kroner and as well the semiconductor shortage that we already mentioned. So if the components would have been available, we could have had the revenues of close to NOK 16 million in this quarter.On the gross margin, we had a gross margin of 21% compared to 13% in quarter 2 2020. And we have an improved product mix during this year, but at the same time, we -- as Peter mentioned, we had a low volume of shipped FAP20 products. So our gross margin in this quarter was lower than quarter 1. But the underlying business is improving, as you can see, with improved pricing and improved product mix. The operating expense was NOK 5.8 million in this quarter versus NOK 24.8 million in the quarter 2 last year. And we had a number of cost-reduction measures that are still in place. And in addition, we had, let's say, one-off gains of NOK 9.2 million relating to the U.S. loan relief. It was the COVID-19 loan program in the U.S. that we applied for, and now we also got the relief on the loan. So our loan in the balance sheet has been reduced. And this was already announced back in July, so everybody should know about it, but this is how it's impacting our financial statements. When we're looking at the EBITDA ex options, it has improved by NOK 19.4 million compared to last year, and this has much to do with the cost reductions we already mentioned, and of course, this one-off gains that we have during this quarter. At the same time, if we're looking at our operating expense -- or let's say, underlying operating expense, we're still at our NOK 15 million target per quarter, as we have mentioned before. Our cash position was NOK 119 million versus NOK 97.8 million last year. So to sum up, we had growth in the orders received during this quarter compared to last year and we had a record-low reported OpEx. With that, I turn it back to Peter.

[Peter Heuman, Chief Executive Officer]

All right. Thank you very much, Eirik. And let's -- we would like to end this before the Q&A with -- in a careful way, still try to guide you a little bit what is the status and what's happening going forward. In general terms, as I spent quite a lot of time in the beginning here, I think you are all understanding how we are trying to scale up the company. We do that mainly on the FAP20. It is about these design wins. And if we can continue to add 1 design win per month, it's quite easy to calculate where that's going to end up if we can keep that pace and we're going to continue to report to you how this is progressing going forward. And then we will, during quarter 3 and into quarter 4 here, start to implement and make sure that we are also being -- offering, together with our face recognition partner, a complementary biometric offering. If you look at the laptop segment, I'm actually very positive. I think it has to do with the whole COVID situation that has been a global challenge, but I think that has supported the PC and laptop manufacturers. So we see great demand there. But I think you have heard us talk quite a long time that we are in the process of potentially winning a design win with an additional PC manufacturer. First of all, I apologize if we are stating this time after time and you might wonder why does it take such a long time. I mean I was not here, but I have learned throughout the history of the company that it took the company x number of years before they were finally designed in to our current PC customers. So these are long sales processes, not due to us, but due to that industry. But I feel rather confident that we are in a good position. This PC laptop manufacturer that we are talking about is looking at entering into and updating their sourcing strategy to make a dual-sourcing strategy, and I think we are in a very good position to step in there. When we do, we will announce that to you. But I do believe when and if we win that, we should expect rather low volumes in the beginning because we're going to have to gain the share of pocket with this customer. But we will come back and inform more about that. So that's on a potential new customer in the segment. If you look going forward, like Eirik explained, the orders booked for quarter 3 from our existing PC laptop segment is really high. It's already better than last year, for example. And on top of that, we have that backlog of over NOK 5 million that we have to carry forward. We cannot guarantee that we can deliver that NOK 5 million on top of the already high requested and orders booked for quarter 3 for the segment, but that's something we're going to keep you updated on around the quarter 3 report. If you look at India, another important segment. India has had a very tough year when it comes to the COVID situation and that has, of course, delayed tenders, et cetera. But I think, more importantly, the authorities have then had to postpone and delay the launch of the new certification of biometric solutions in India, the so-called L1, that was actually originally supposed to be launched already in the beginning of this year. So there is a delay there. We are now, of course, working both with our existing customers, particularly in the payment and fintech segment where we are in very good relationship with several of the point-of-sales manufacturers, for example. So that's our existing customers. When it comes to the new certification, we are currently working on and establishing kind of a readiness for that L1 launch. So we keep a very close eye on India. And maybe adding to this as an outlook. Like I said, you should expect us to, during 2021 and beyond, increase the number of design wins. And soon, you're going to also see on our website and in our offering that we offer more than just fingerprint included then a facial recognition biometric modality. I think that's a little bit of the outlook. And hopefully, you have received a little bit of a good understanding of the numbers from quarter 2 and why we started to implement a new definition of orders booked. We have no intention to do that maybe long term, but we thought it was important during this quarter. And before I end, should I say something about that supply chain because I've seen that we have received some questions around that as well here on the chat. I would like to state it like this: I think I have more respect for that many of our customers, existing but also customers that we have in our funnel, so potentially new customers, new design wins. I have more respect for the challenges some of them are facing, potentially will face with the global supply challenges because they build electronic products with several different components in there. And I think everyone knows that for certain components around the globe, it's quite challenging and this will then delay when they put their orders with us. I have more respect for that. I think we, as NEXT, even though we have to present to you a backlog, we have very few components where we are challenged right now. I'm not saying it's not important, but I think we are lucky that it's very few components where we have the challenge. And where we have the challenge, our internal team, actually together with some of our customers, we are doing everything we can to close the gap here between our orders booked and the revenues in actually what we can ship. Long term, I think this is going to sort itself out. I don't know how long time that will take. But we have to keep a close eye on this in the coming quarters. That's for sure. Okay. So should we go to the next slide, Andrea, and I think we should open up for Q&A.

[Eirik Underthun, Chief Financial Officer]

I received some questions. I think you mentioned already about orders booked and I said something about it, too. "But why are you reporting orders booked? And what was that number for the same quarter last year?"

[Peter Heuman, Chief Executive Officer]

But I think we both stated it, so I'm not going to put a lot of time on it. This is the orders that we have been requested to ship in the quarter, meaning that when we ship we can recognize the revenue. These orders were up to almost NOK 16 million for the quarter. I thought it was important to -- in the stage where we are at NEXT, where there is a natural lag from design win until you can get your initial orders, I think it's at least important that we try to guide our shareholders of what is the revenue that we could have provided would we have had all the components. So that's why before -- I think that is a measurement of how the team is performing, at least. So yes, I think that's the explanation why we put it in there.

[Eirik Underthun, Chief Financial Officer]

Yes. And the comparable number was NOK 13.6 million last year quarter 2 2020 because there was no difference between the orders booked and the revenues during that quarter. Okay. New question. Then about the tech giant. "Can you tell us something about the potential of the revenues from these customers in the future?"

[Peter Heuman, Chief Executive Officer]

No. I think I would make a big mistake if I say anything here now and put any wrong expectations out in the audience. I mean I can just say that, for me, as a CEO of the company having the focus on winning design wins, this was one of my top 3 prioritized customers that I really wanted to have because I do believe there is potential. But how large potential, et cetera, I don't dare to say. But it's a very -- I believe it's going to be a very important customer for NEXT, but I don't want to put it in relation. I think it's going to be above average of the design wins that I demonstrated, the 20 that we have so far, we're up towards 20. I think this is a candidate who can be absolutely much higher than average.

[Eirik Underthun, Chief Financial Officer]

Then next question, "Why can't you tell us who the tech giant is?"

[Peter Heuman, Chief Executive Officer]

But I think I almost said that earlier. I mean we have a contract and they have asked us not to reveal who they are. I think this could probably be found if you really dig. But I think it has to do with that they have chosen our technology, which is new to them because we are not a classic capacitive or optical. I mean -- and the products where they're going to put our sensors in and the market projects that they're going to try to win and enter, I don't think that they want us to reveal that before they do themselves and before they launch with this new technology. So I just want to make sure we respect that contract and their wishes. The only thing I want from them is actually that they place orders with NEXT Biometrics and that they are a happy customer with us.

[Eirik Underthun, Chief Financial Officer]

Yes. Good. "And then I think you mentioned something about the supply chain challenge and the expectations going forward. But what do you foresee in quarter 3, quarter 4 and in 2022 with relating to availability of components and NEXT's ability to supply products?"

[Peter Heuman, Chief Executive Officer]

Yes. But I think I stated something around it. But like I said here, I think as I said in the outlook, I mean, we already -- we have a very good order request from -- for quarter 3 from, for example, our PC manufacturer. But on top of that, we have the backlog. I know for sure that we can deliver the standard quarter 3 request, which has been increased. We can deliver almost all of that. But on top of that, we have the backlog we need to carry forward. What I'm not sure about yet is how big part of that backlog can we kind of backfill during quarter 3 and how much of it do we need to carry forward also into quarter 4. I don't know exactly that at this stage. I think most likely, we will have to carry some of this backlog also into quarter 4, but then we can report that more in detail during quarter 3. But I think you should expect that some kind of carryforward in quarter 3, that I can almost promise, into quarter 4. And ending on quarter 4, much more difficult for me to say. But like I said, there's a few components where we are challenged in our supply chain, but this is very important still as you can see -- clearly see that it's influencing, not our orders, but our capability to deliver and hence our revenue.

[Eirik Underthun, Chief Financial Officer]

Good. Then there's a question about PC sensors. "We have heard about the new -- possible new agreement with a new PC vendor for some time. Why is it taking so long time to get it?"

[Peter Heuman, Chief Executive Officer]

I would say it is the nature of the industry. It takes them very long time. And you can imagine a PC manufacturer with multi components when you build a laptop. And when you start to change that, you have old stock. You have to design hardware, firmware, software, design a new line of PC where you're going to include this type of new hardware meaning a sensor and solution. I would say if there are long lead times for designing and manufacture and sell products, including biometrics, in other segments, I think the PC segment is one of the one -- one of the segments who takes the longest and has the longest lead time before you are integrated. The good thing is if you manage to deliver during all these test phases, et cetera, you get in, as we can clearly see, you have a very good stickiness with those customers. So that's why we have heard about this one for quite some time in NEXT. And hopefully, we can, at the later stage, say that we are designed in and have won and have a door in there.

[Eirik Underthun, Chief Financial Officer]

I have no further questions. I don't know whether you have received any additional questions, Peter.

[Peter Heuman, Chief Executive Officer]

No. I see you brought up the ones that were here on the chat as well. So no, no further. So with that, I think we should -- we have spent quite some time here now. So thank you very much, everyone, for attending. If there's anything, reach out to me and Eirik and we will try to accommodate for those questions. And once again, thank you very much for joining. Bye-bye.