Next Biometrics Group ASA
OSE:NEXT
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Next Biometrics Group ASA
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So good morning, everyone, and welcome to this webcast. My name is Peter Heuman. I'm the CEO of NEXT Biometrics. And today, we're going to introduce the quarter 2 results.
With me today, I've decided to bring both our CFO, Eirik Underthun, as well as with all the activities happening during quarter 2, I have decided to introduce our SVP of Sales and Marketing, Ulf Ritsvall, to give some perspectives of all the activities and contracts that has been signed during quarter 2. So Ulf is also with us today.
As always, we have the material that we are presenting here today available on nextbiometrics.com under Investors. And we are also going to end the session with the Q&A. You can send in your questions to events@nextbiometrics.com, but you can also put them here in the chat function.
So without further ado, I think it's time to change slide and go to the agenda, and I will explain a little bit what we're going to do today. So I will just start with a short introduction, a summary of some of the important aspects that happened during quarter 2. Then Eirik will run through the more financial part of the report. And then in the outlook and the market insight and status of where we are with many of these important contracts and some of the most important markets, I'm going to allow Ulf to spend and provide some more insight there, and then we end with the Q&A session.
And having that said and before we go to the next slide, I just want to say, and if you have managed to now this early in the morning already viewed the report, I'm the first one to, of course, say that, yes, we are, of course, not satisfied with the short-term quarterly revenue. What I'm, on the other hand, extremely excited about is the contracts that have been signed and the activity during quarter 2 that we're going to outline further today.
And I hope that you will have a better understanding of why you get the impression that maybe we as management of the company are excited about the foundation we are building for future volumes and scaling this business versus the short-term quarterly results. But that's going to be something that we -- that's going to be the theme of today's presentation.
So with that, Laif, I suggest you go to the first slide. So some of the highlights. And as you can see on the right hand of this screen, that's what we talked about when we signed the breakthrough Asian contract a couple of months back and how we are building up the revenue and how we are looking at scaling up the revenue for NEXT Biometrics.
So -- but if we take a snapshot looking back at quarter 2, there are 2 main important contracts that we have won. It's with our high-margin product, the FAP20, and it's building -- important building blocks of the foundation for scaling the company.
Of course, the first one is the breakthrough, what we call the breakthrough contract with this Asian distributor, where we have received an exclusive preferred supplier status in the contract, where there is a minimum value or volume, you can say that the customer believes he's going to do minimum and where he also asked us to guarantee a higher volume because most probably he's going to end up somewhere in between there. It's a 3-year contract with a 2-year automatic renewal and extension possibility for the customer. And Ulf is going to talk more about this.
We also signed an additional OEM, as we call, or customer in the important Indian market. And Ulf is going to outline more why this is important and how that complements the already existing important OEM customer we have in the Indian market.
The big difference is this company -- this OEM has their own product. They are not depending on tenders. They are having and building their own product at point of sales terminals, selling already today and historically in certain volumes. And that's why they also managed to -- at the same time, has designed the commercial long-term agreement, signed an initial purchase order. Ulf will tell you much more details about this later on during the presentation today.
I think these are 2 very important parts. And as you can see, you can refer to them into this diagram here where the Block B is the important India market and what we believe that can -- when that's up and running, how that can contribute with millions of dollars in revenue and volume.
And the C and D is related to the breakthrough contract in terms of the minimum volume versus what the customer has asked us for. But like I said, Ulf will go into much more detail and explain for you what has happened during the last couple of months since those contracts have been signed.
Other positive activities that happened during the quarter is that the team has managed to get our high-margin product certified by the GSA in U.S. And that means that now government-related bodies, but not only that, but they are now -- they are allowed to buy products that are GSA approved. But it also enables, and we know that many other companies and OEMs in U.S. prefer to buy GSA-approved products because then they know that the government has authorized these products.
There is no problems in buying them. So I think this also opens up further possibilities for us in the important American market. In addition, we continue with a more smaller medium segment of bringing -- getting more products to use NEXT Biometrics sensors.
And an example during quarter 2 was a kind of point of sales again, bringing in 2 FAP20s into a terminal that's going to be implemented by a company for all taxi companies in South Africa. So that was also a good addition to the design win pool.
So I think, like I said, of course, we are not satisfied with the short-term quarterly revenue. But from an activity perspective and bringing large volume contracts, there was a great activity during the quarter. So I think that's my summary.
And with that, I will hand over to Eirik, who will now give you the summary of the financials of the quarter. And after that, we will start to introduce Ulf, who will provide more information related to this contract. So with that, Laif, I suggest you go to the next slide, and then I hand over to our CFO, Eirik Underthun. Eirik, please?
Thank you, Peter. So on the revenues, Q2 was affected by the slower PC market and the number of sensors sold were reduced compared to earlier quarters.
In India, we had the L1 launched. But as we communicated in quarter 1 report, then the main growth is going to come from quarter 3, quarter 4. And this was a small contribution from that segment during this quarter.
Also from our new market in China, we're still working on the preparations of the launch there, and this is expected to provide the revenue from quarter 4. Gross margin was 17% during this quarter. As in the previous quarter, we had a high share of PC sensors in the product mix, and this contributed to the lower gross margin during this quarter.
As well, there was a low production volume, which provided also some scale effects in the cost of the product, which also reduced the gross margin. We had a quarter with continued cost control and delivered OpEx in line with the expectations. The inventory increased in line with the preparation of the expected ramp-up in India and China.
And as Peter summarized, there was a strong development of new business opportunities for the long term, while the revenue was lower than what we experienced earlier in this year. So please proceed to the next slide.
So in comparison with quarter 2 2022, the revenues were down, and we already explained the developments there. On the gross margin, it was 17% versus 36% in quarter 2 2022. Operating expenses of NOK 14.4 million versus NOK 14.2 million in quarter 2 2022. The adjusted EBITDA was NOK 13.1 million negative relative to minus NOK 9.9 million in quarter 2 2022.
We ended the quarter with NOK 38.6 million in cash versus NOK 53 million at the end of quarter 1, 2023. And during this quarter, we had a cash burn or a reduction of cash of NOK 14.4 million, and this was a result of lower shipments and collections of receivables and a small increase also in inventory. So I think the main message for this quarter is that we have continued low quarterly OpEx and the cash position has been affected by our inventory increase and our preparations for the ramp-up in China and India.
With this, I will hand back to Peter.
Very good. Thank you, Eirik. Okay. So before I let Ulf up on the stage, to summarize, like I said in the beginning there, of course, I do actually believe that the strategic direction that we have set out, the building blocks that we -- that I talked a little bit about. And if you look at some of our better quarterly, short-term quarterly reports, I think the main thing that demonstrates is that we have almost an unheard of hardware biometric margin in our flagship product. And actually, the contracts that Ulf and the team has signed during quarter 2, that sets a very important building block in that strategic direction with that high-margin product.
So even though we are not satisfied with our short-term quarterly revenue, but on the other hand, we are, as you can probably hear and we'll hear from a very satisfied with the customer contracts that we have won, and I think it solidifies the foundation of high margin scaling of NEXT Biometrics in the mid- to long term.
And I believe our high-margin product with this foundation now in place, we are kind of on the doorstep to just generating the volume, which we have been waiting for, for a long time.
And I think with that, I will hand over to Ulf, and he's going to explain a little bit further around this. So with that, over to you, Ulf.
Thank you, Peter. You can change the slide, please, Laif. Good morning, good day, good afternoon. I always start my meetings like that because I'm a global sales and marketing manager in NEXT Biometrics working with different regions. Thank you for having me.
I would try to explain why we believe China and India are key markets. Of course, they're large and dominant from the beginning. But if you look at where our product will fit into the market, these are the key aspects of why heading for India and China.
They are 2 different countries, of course. But we believe that 70% of our expected target annual revenues will actually come from China and India. I will try to demonstrate a bit more insight. I think you've heard us talk about India a lot. But I will try to explain a bit more about China as well on the following slides. So please, Laif, if you proceed to the next slide.
So yes, we have heard about the new L1 standard from India, a bit more secured compared to the previous generation called L0. It's finally deployed in India. And we have seen the first tenders. We have seen the first devices on the market. And also, they have given an end of life for the L0, the previous generation.
That, of course, have short-term effects on our sales, which is one of the reason why the sales is low because there's no L0 tenders out in India. There's an estimated 4.5 million devices that needs to be migrated between -- from L0 to L1. On top of that, of course, there's new sales.
So the market in general that we can address is decent -- decently large. And the Indian authorities, so when we see now the first initial 300,000 tenders, actually, and the majority of that came from the postal service, the Indian authorities have chosen similar way they have done in the smartphone industry and in laptop industry, they want to do make India. They want to have the Indian OEMs, Indian -- our Indian customers serving the market.
So they actually prefer to have local Indians supplying to the tenders, and that's been showed in the first tenders where 10% actually went outside India from a non-Indian company and the remaining 90% were done with an Indian OEM.
One of our Indian OEMs, the ones we presented, the first Indian OEMs we presented for L1. He actually -- he has historically 20%, 25% market share in a reader market. He actually won in this tender more than 30%. And that shows that actually, the authorities give him a higher percentage, which also demonstrates that we have chosen the right go-to-market strategy.
He will then -- he has supplied the 300,000 tenders with his old L1 device. As soon as he is certified with the NEXT Biometrics enabled reader, he was swapped, because of the product fit, because of the form factor, because of the performance and so on.
So as soon as that happens, we will see volumes in this region. We added in June, during Q2, we had a new Indian OEM. They are making point of sales terminals. They are also making readers and so on. They have a very aggressive time plan. So they actually started integrating their -- our software, hardware and actually are planning a launch already in Q2 2024.
And then you can back calculate when our -- or we can back calculate when the orders are coming into us. So if you look at the 2 won OEMs from our customers, we have already, at this moment, above 30% market share potential in the Indian market.
We, of course -- our growth plan is, of course, to go after to replace the optical -- the big and bulky and very expensive optical sensors. Laif, you can change the slide, please.
So moving into China. I don't think we have discussed and talked so much about this and communicated too much. There's a few market basics in this industry or in China. There's a similar regulatory certification required called China ID in China. That's handled by the Chinese authorities. And typically, you have public security, you have payment devices, you have police devices and so on in this part. And then you have a noncertified, nonregulatory required certification, and that's consumer goods. So that can be smartphone, tablet, and so on.
We are, with our go-to-market strategy, which is beyond -- the next slide, addressing both categories. And if you look at this, of course, it's important to be mandate or to be compliant to the China ID. And under the China ID, we are -- NEXT is required to work with approved algorithm providers.
There's a few approved vendors in China. We are already working with 2 of them. And of course, we will not stop there. We will continue working with these as partners and addressing even more OEMs or customers. We expect it's not as lengthy testing as in India. It's actually fairly quick. So we believe the certification will be done by October this year.
So you can change the slide. So we have 2 go-to-market partners. As you heard Peter say, we have the Asian distributors. We have an exclusive contract. They are targeting the China -- mostly the China ID part. So public security domain like Police. It could be camera-based sort of handheld device, bank, it could be a reader in the bank. Health care could be medical dispenser and these kind of things. That's 1 go-to-market partner.
The other one we announced in early this year, and that's a strategic go-to-market partner. They are targeting consumer and commercial products. Of course, some of them are China ID as well. But more digital wallets, USB tokens, ATMs and so on. And then these will be supported by our already existing distributor, XM Holder as a fulfillment partner in this. You can change to next slide, please.
So what's the latest status? So yes, we have now worked with the Asian distributor very closely. We have looked at it 5, even if we have even more OEMs or customers. We have looked into the inventory levels, the expected volumes, timing of when they will change and the mass production launch dates for the 5 different OEMs. We believe that there will be a stocking order, an initial order from the Asian distributor early Q4. And the initial product launch will be -- is expected in the beginning of next year.
We are also WISER. They have facilitated and helped us. And actually, we are now in -- on the verge of multiple design wins. Actually, yesterday, I got a stamped design win with an OEM in China. It's not anything that we will make public. It's not as significant as we need to publish it. But it's a first initial step for WISER, which is great. It's a sort of ATM machine in the China ID part. And it will be the first OEM, and we are expecting more to come very soon as well as we are working with new partnership agreement that is currently under negotiation.
So with the new OEM design win, I'm expecting XM Holder to place the initial stocking order for addressing these design wins well before Q3. I hope you got share -- that I shared a bit more information insight.
Now I hand over to Peter. Thank you very much.
Okay. Thank you. Very good. I hope you get more details around why we find China and India are key for success that we have established a foundation. Like you heard Ulf said, if we take China and both with the Asian distributor, they -- so basically, what Ulf told you is they have been involved now for months with -- since we announced it with this OEM with the Asian distributor and the different OEMs, we know when they're going to replace and put us into their products, timelines, what they have in inventory level. I think they've done a great work. And that's what we mean why we are on the doorstep.
Also, the size of these countries, both China and India and how they work with biometrics, I think, is explaining the foundation that we have in place now with contracts that doesn't generate short-term revenue. We need to do this work to get into the products before the demand is arriving, but it looks like we are on the doorstep of getting these.
For India, it's depending on that our main partner, historic partner gets the certification stamp, which hopefully should happen very soon. And then that volume will start to be driven. He already have proven that he has a great potential for acquiring a good market share that will drive volume for us.
So we have the 2 key markets. We have the volumes in sight with the contract, with the partners. So I think we are set for mid- to long-term success, even though it looks a little bit challenging in the short-term quarter. So I think that's the main takeaway that we try to bring during today's call and with this report.
So with that, I think we should hand over for a Q&A. I think we have seen a few questions coming in. So maybe, Eirik, if you distribute to me maybe the questions and then we see how we can do this.
Thank you, Peter. So we have some questions there. And the first one is about China. And Peter, can you explain a little bit more about China? The question is interesting presentation today. You seem to be very excited about China. Could you please explain when and why the revenues will arrive?
Yes. But I think we just spoke quite lengthy about it. So like Ulf said, the -- we have already established 2 different partners, 1 with the Asian distributor, where we have a preferred supplier contract. We now have awareness of the volumes, timelines, et cetera.
In the contract with the Asian distributor, I think we, even when we signed the contract, informed you that the initial order should arrive no later than end of quarter 4. I think what Ulf has said is he expects it to be during quarter 4, maybe even early in quarter 4 with the knowledge we now have. So I think that's a great way of generating volumes being aware of what's going to happen, which gives us more confidence.
The other one is the market entry partner, WISER, where Ulf has provided them with a historic partner or distributor based in China, who has helped Newland, for example, and has a good relationship with us. We are actually bringing them new business through all the activities that Ulf's team and the WISER team is regenerating and where Ulf, I think, said today that the first design is in place, and I think that's also why we expect that this distributor will start to place the first stocking order.
So we have 2, a little bit different approaches of starting to enter a very large market, but one with a very strong volume contract and one where we are opportunistically entering into new design wins and businesses already backed up by an existing fulfillment center. So I think that's what drives the excitement from our part to have these kind of contracts and to enter the market in a good way.
Okay. There is a couple of questions here relating to cash burn and about raising capital. First of all, we don't forecast or give a detailed guidance on the cash burn nor detailed revenues forecast. But maybe you could talk a little bit about the capital situation, Peter. Some participants in the call they are worried about the cash position. Is there a need for more capital going forward? Do you need to raise capital soon?
Yes. That's an interesting question, because I don't know how I should end. But I think like, guys, it's a valid question looking at this report, and we can be excited. But I think I said before, this is going to be a tight race with the available cash pool that we have. Having that said, now sitting here, having contracts, having much more insights, it's going to be a tight race. But when we talk capital, there are different ways you can do it with contracts and purchase orders, there are other ways how I can finance if there is just a couple of months, a quarter or 2 where more capital is needed. That might not be that I have to go out to any shareholders about that. There are different ways of solving that.
We are looking at all different ways. Like I said, it's going to be a tight race. But having these things in place, if we are lucky with timing, this might not even be an issue. So I don't think I should generate any more speculation or so.
We are monitoring. We look at different alternatives. It's going to be a tight race, I said that before. But I think that's a little bit how I would respond to that question.
Okay. Another question. Recently, several Nordic biometric companies have been struggling with their business. Why is NEXT any different?
Now that's a wonderful question. On the other hand, I mean, for us, it would be great if all biometric companies succeed. I think that would be good for everyone. I feel confident that we have dared to take some tough decisions. One of them was when we said we are not going to go into payment cards of all the different reasons of plastics, but we also -- we are all aware of, in this part of the world that I think already many now are using their digital devices phones.
I know from my time in Africa, they are also using their phones. We don't believe in that. There are many companies, biometric companies and in Nordic, who are still very focused on these things, have said for years that's going to drive more volumes. We have said we don't believe that, that might happen. We don't believe it. We don't think our product fits that. We have an unheard of margin potential in a different market segment, which can drive volumes for NEXT, which is what we are executing upon, where we have started to gain contracts.
All these contracts, based on our flagship product, will generate an unheard of margin. And we have seen proof of that in some historic reports here when we had a higher volume. So that's why I believe we are very well positioned, we have a clear target of whom we are competing with, which are the optical sensors. They are sold very expensively. We can provide the same security, provide our customers with a much lower price and still generate great margins for the company.
So I think we feel confident we have decided and chosen the right strategic direction, which drives these opportunities. I can't speak for how the other ones are executing, why they have taken their decisions. But I feel confident that we are on the right path.
Right. There's another question. Can you reflect on the U.S. market and on possible new products for the future? And what do you expect for the GSA approval in the U.S.?
Good question as well. A little bit difficult to guide any explicits. I think what I heard from Ulf, maybe I should even let him respond. But it's -- we now have the FBI PIV certified flagship product. The same product is now approved by the GSA. I know our -- Ulf has recruited a new head of sales in U.S. I know they are in dialogues with different OEMs who are providing products into different government bodies of United States. We cannot have dialogues with these companies, and we are not valid if we don't have a GSA-approved product. Now we have that. So these dialogues are being intensified.
I do hope that we're going to see something there. We have already signed up with a partner who saw companies can already go directly and buy from this company in U.S. our sensors. And I think it opens up, like I said, also possibilities for different OEM manufacturers who feel more confident in producing products in U.S. buying DSA-certified products.
But let me not overpromise anything here, and I hope that Ulf will come back in the coming quarters and explain a little bit the status and if there are some interesting deals that can come out of that. I think it's a long-term positive thing that our flagship product is FBI certified, GSA certified, that we have certifications arriving in India based on our products, that we have the China ID certification. I mean it starts to build up a very solid foundation.
There are no more questions. Peter?
Okay. Then I would like to thank everyone for joining. Like we said, we are, of course, not satisfied with the short term. But as you can probably hear from us, we are excited about the long term or mid- to long term with the contracts that we now have at hand.
So hopefully, we will come back and demonstrate this during quarter 3 and the remaining part of the year during quarter 4 with some larger volume orders, et cetera. I think that's something we are fighting for to make sure we can demonstrate. All right. Thank you very much.