Next Biometrics Group ASA

OSE:NEXT

Earnings Call Transcript 2022-Q3

[Peter Heuman, executive]

All right. Good morning, everyone, and welcome to NEXT Biometrics Quarter 3 2022. We're going to have a presentation here today regarding the activities and the status of the company at the end of quarter 3.

With me, I have our CFO, Eirik Underthun, who will help me run through the presentation.

The material that we introduce will also be available on nextbiometrics.com. And during the end of the session, we're going to have a Q&A. I know we have received a few questions. [Operator Instructions].

But with that, I think we should go to the agenda, Andrea and get this going. So like I said, a summary of quarter 3 and the status of where we are. Then both the financials, I'm also going to elaborate a little bit on some activities that has been going on and continue to go on in the company, but that -- where we have been very active during quarter 3. And then we're also going to spend a little bit of time explaining what we believe looking forward, both near term and a little bit longer into 2023. And then end with a Q&A session.

So with that, Andrea, I think we can go to the first slide. Before we get to the numbers of quarter 3, I wanted to spend a little bit of time on what we believe is very important. And that's what you hear me talk about quite a lot in those calls, but that's our design wins. And the design win means that we have a customer who have decided to implement NEXT Biometrics fingerprint sensors into their product.

When they confirm to us that they will do that, then they have a run-through of the whole process of evaluation, maybe compare us with competing fingerprint sensors, fingerprint technologies. But then they confirm to us they might buy initially small samples, it might be in the low thousands, to make sure they can build their first -- build up their first test units, maybe market units, proof-of-concept units so they can go out in the market and see how -- and what demand they can create. So I think this is the most fundamental pillar that we are standing on as NEXT Biometrics. And I'm going to come back to that throughout this presentation.

But we have earlier communicated that we are aiming at bringing, on average, 3 new design wins, 3 new customers deciding to implement NEXT Biometrics fingerprint technology into their product every quarter. We managed to do that also this quarter. We are at our win rate pace. So we got 3 new design wins.

One of them you could -- we announced during the quarter 2 because we got it in between the end of quarter 2 and when we announced the quarter 2 results. But 2 of them, you have not seen any press releases or any news about and that's due to the initial small volumes, so it doesn't have any financial large impact short term. But then also that the customers, they want to be a bit secretive with -- when they are building these new products. So that's why you haven't heard anything from us related to it.

But we have 3 new design wins in the quarter, and I think that's very well done by the team. We have accumulated 33 design wins. So we are now sitting with 33 customers by end of quarter 3.

And I think looking at what these customers are telling us and when we look at the volumes that they are doing historically with their product where they are now integrating our sensor, when we look at the volume and the expectation they put on us in terms of what volumes we have to commit to deliver to them, we can now conclude that these 33 design wins, when they are all performing, when they are out in the market, when they have passed their regulatory approvals, if necessary, so when they are all performing, the volumes they are telling us and even when we put kind of a haircut on that, then we see that, that would be enough to take NEXT Biometrics to breakeven.

Exactly when that will happen, difficult for me to say and promise but we can see that the volume that these 33 design wins, 33 customers are expecting from us, that would bring us to enough.

Okay. If we then look at the quarter before I hand over to Eirik. Revenues were NOK 14 million this year. Some of our customers are still hampered by regulatory delays, for example, in India. And some customers, even though supplies -- the global supply chain situation is improving, we still see that some customers are lacking, for example, microcontrollers. And then this is what I mean when I say when we can see that all our 33 customers are performing, then the volumes will be there.

But NOK 14.4 million. We had a very decent gross margin within the target range, I think Eirik will talk a little bit more around this. And the OpEx remains flat.

But I think the most important message that I would like to bring as a summary from the quarter is that with 33 design wins and counting, I mean, we are going to bring more in quarter 4, these historic design wins when they are all performing, that should be enough to take NEXT Biometrics to breakeven.

And with that, I think I should hand over to Eirik.

[Eirik Underthun, executive]

Thank you, Peter. So as Peter mentioned, the revenues were NOK 14.4 million in this quarter. This is an increase of NOK 2 million from quarter 3 2021. And we continued to be having the impact from our customers' semiconductor shortage and this is kind of unpredictable when that will improve. But Peter will speak more about that in the outlook section.

More importantly, for the long-term view of the company, the gross margin was strong in this quarter, 38% versus 24% in the same quarter last year.

And the product mix was improved relative to the quarter last year and slightly improved also from quarter 2 this year.

We had an OpEx excluding option cost of NOK 13.4 million, which is slightly higher than the cost last year.

The adjusted EBITDA improved by NOK 1.2 million relative to quarter 3 2021 and this was due to the increase in the gross margin, as you can see from this table.

The cash position was NOK 72.5 million at the end of quarter 3. And this is down from 82.5% at the end of quarter 2 2022. And this quarter, we had a lot of shipments in the last month of the quarter and this effect was resulting in a high accounts receivable. And we also continued to secure more inventory for the future expected ship -- increased shipment volumes so that we are well ready to increase our volumes going forward.

So the encouraging fact from this quarter is that the gross margin is already in our target range and that even -- this is happening even when we have, let's say, relatively low volumes as opposed to our long-term targets.

And the quarterly operating expense is continuing to be lower than NOK 15 million even though the exchange rates have been unfavorable in terms of the OpEx since the Norwegian krone has weakened lately.

So with this, I turn back to Peter.

[Peter Heuman, executive]

Okay. Thank you, Eirik. Good. So just quickly here then, if we look at it, most of the business fundamentals. When it comes to cash flow, not burning that much cash. If we look at the gross margin, the supply chain situation has improved.

So I think -- I believe I said in an earlier quarterly presentation that the last piece of the puzzle for the company, at least short term, is now to really get revenues out of these 33 design wins. But at least now we have them at hand and we believe that we are now positioned to grow faster than the overall market with these established design wins. And what you should expect and what you could expect and what we are anticipating is that the major increase will start as soon as the India regulatory situation opens up for some of our largest customers. When that happens, we feel confident that the revenue will start to take a first bump in the right direction.

So I think that summarizes a little bit where we are standing and what you can expect going forward. And I'm going to elaborate a little bit more on what market data, et cetera, do we have from our customers from the market and some of these important markets, and we're going to talk more about that in the outlook.

So with that, I think, Andrea, we can go to the next slide. Because if you consider that there's, of course, a lot of other activities happening in NEXT Biometrics and I think these are -- some of these things, especially 2 of them here on the slide that we've been working a lot with during quarter 3, it's important for the long-term potential of the company. You have seen that we have introduced in some news flows that we are -- and we talked a little bit about it during quarter 2, but we are building a global biometric distributor network. So we have now signed up additional distributors and we are now having total 6 biometric distributors in selected markets. They provide us with an expanded market reach and they kind of push up our distribution power globally.

The first orders from these biometric distributors have already been received by NEXT, and we have introduced them to you. One is from the China-based distributor that we announced in quarter 2. And then here in quarter 3, you saw that the newly signed distributor provided us with a purchase order and that was the Singapore-based distributor.

So I think this is going to be very important, and there are more things we are working on here to make sure that we can, both for customers, but that the distributors, we want them to prefer to sell Active Thermal fingerprint technology compared to, for example, optical technology. But they should still make potentially more or the same amount of money, but being able to sell it to a better price point to their customers.

And by doing that and teaching them about our technology, we see that they start to be very interested. So I believe this is going to be an important pillar for having kind of a structured growth agenda for the company going forward.

Another important thing that we worked on during this quarter and started implementation on is related to our updated business model. I think we have talked before historically, we -- since we started kind of the change of the company, one thing that we implemented very quickly was to leave the fairly hardware-focused business model of a so-called cost-plus model to go into a much more value-based pricing. And with our -- the position we have with our technology, that allows us to then reach higher gross margins but still have customers valuing that they get a very good price and a low cost compared to what competition can provide. That was the step number one, that's already why we and how we are selling, for example, our FAP20.

But during quarter 3, we have also started to implement and we have several customers already signed up on it because what's actually included in our offering is not only a hardware, there's software, there's algorithms, there's IP. And customers sometimes need support and they want maintenance, and they want the latest software of our solution where we are working with continuous improvements. And if they want that and if they want our sensors to work, they have to buy the sensors, but they also have to agree and sign a support and maintenance agreement.

I think this is starting to work in a much more professional way with customers. It also provides a clear agreement with customers on how much support they can get from us and that they are prioritized if they sign these agreements. But it also provides us, of course, as a company with the potential to actually increase the gross margins a little bit on our solution.

So this is something that is ongoing and that we are aiming to make sure that all, both existing design wins and new customers, are going to sign in the future. So I think that's a step in the right direction for the company.

The supply chain situation, we have talked a little bit about and it's improving. It has improved for NEXT. We also see that for many of our design wins/customers, it's also improving. Not for everyone, there's still a few microcontrollers specifically that we know are a little bit hard to get ahold of for them. But we see, in general, that it's easing up, which is promising looking forward.

So with that, Andrea, I think we can go to the next slide. And basically, I have 2 slides here and I want to try to illustrate for you, but this is what the company looked like when we started the change and improvement of the company at the year-end of 2019 and early 2020.

The company was depending on 1 main revenue-generating laptop customer and very clear that, that's not sufficient to make NEXT profitable. But then looking back to the steps we have taken, and then you can go to the next slide, Andrea, the map now looks much, much different. So at the end of quarter 3, you can see that we have the 33 design wins and the blue dots are the selected distributors that we have made agreements with.

And that's what I mean. I mean this is a much better illustration of how we are trying to build up and where we can expect the revenues to be -- to come into NEXT Biometrics. And that's what I mean when I said earlier that the existing design wins when they are all performing, that will be enough to take us to breakeven, the volumes that we can expect from these. And you, as a shareholder, should probably expect that the largest short-term high volume potential, that comes from the tech giants and the India OEM.

The reason why you haven't seen that much orders from the tech giant, you have basically seen 1 decent order, is that the main projects we are working with the tech giant on is related to India. And they have a ready product, they have passed certification, but the regulator has not opened up the market for them or not even for anyone yet. As soon as they do, then we know we're going to -- and we believe that the orders will come there, both from the tech giant and India OEM. So I think that's what you can expect in the short term.

So I think this is a much better picture. And you can imagine then if we can keep our design win rate of generating 3 new design wins/customers every quarter, so during 2023, yes, then there's going to be a lot more red dots on this globe and in selected markets. And hopefully, we're going to start to see more and more orders coming from these distributors in the local markets as well. So I think we are, as a company, have a much more strong foundation now, but we continue to bring more and more design wins every quarter.

Okay. Andrea. With that, I think we have summarized quarter 3 both from a financial point of view where we are standing, but also I've tried to elaborate quite a bit on why we are so keen and keep such a high focus on one of the main KPIs for NEXT Biometrics is the design win, the number of customers selecting Active Thermal fingerprint sensor technology and bringing that into their products.

So I think -- like we can see, we should talk a little bit about the outlook and what you can expect. I think we have 2 slides on that. We can go to the first one, Andrea. And of course, as I think many of you know, we have the biggest business opportunity with our so-called FAP20 sensor. And meeting these distributors that we newly assigned, we see a strong interest in replacing and I think we are well positioned and we get a good reasoning with them being biometric distributors why they should help their customers to replace their current optical sensors and then use the FAP20 instead.

So our sales and -- technical sales support team is now providing training to these distributors, and we are intensifying the cooperation. I think you should expect 6 to 9 months at least before you get the initial orders from these distributors. But like I said earlier, 2 of them have already started to provide us with orders.

We are working in selected markets, Africa, Latin America and part of Southeast Asia is where we can also utilize and have potential together with these distributors.

But then, as you heard me say earlier, I think the short-term largest volume potential for NEXT Biometrics where we can bump up the volumes of our production, and hence, the revenues, it comes from the position we have in India. So our main customers there, both the tech giant and the India OEM, as we call them, they do tell us that they believe that the market will open up now by end of quarter 4. I mean we have told you before that this has been delayed. I can't guarantee you that it's quarter 4 but there is way more arrows pointing in the right direction today versus, let's say, 6 months ago. And we try to keep a very tight dialogue with our partners, both the tech giant and the India OEM, so we get basically all -- most updated information from them. We know where they are in the process. They now believe that they're going to get -- be allowed to start to sell their products with our sensor in it as of end of quarter 4.

If it's going to be end of quarter 4 or if it's going to be early quarter 1, I can't guarantee you, but much more is pointing in this time frame. And I think that's a positive sign for NEXT Biometrics. And it's an important sign since here is where we have the biggest short-term volume potential.

And working so close with this tech giant and India OEM, we already have order commitments. I mean we have a contract with the India OEM. We have a frame agreement with the tech giant, but both of them are now communicating with my sales organization in terms of how large these initial orders can be as soon as the market opens up because it's important for us to make sure our production is ready and things like that, so that we can fulfill these orders as well. So this is why I say that the largest short-term volume potential will actually be from India.

So I think we're in a good position there and we are all depending on -- our customers are very dependent on and I know that our customers are in constant dialogue with the regulatory bodies to make sure that they can start and launch on the market as soon as possible.

So with that, Andrea, I think we can go to the last slide and I think it's a summary of what we have talked around the last 30 minutes. But you should expect us to deliver 3 new design wins on average. Don't hold me accountable whether it's going to be 2 in 1 quarter and 4 in the next. On average is what we are communicating. But we are now aiming to have 36 design wins by the end of 2022.

And I think that's a good -- so if we can keep this win rate of design wins, that's what's going to bring next year's revenue. So that's why you have always seen, since I started here, a delay from the moment that we get the design wins until they start to generate revenue. So now we have 33. I hope by the end of the year we're going to have around 36 design wins, and they will then be the foundation for 2023 and the revenue generation.

Like we talked, we're going to have a continued focus on the initiated distributor network that we are building globally.

And maybe I'm repeating myself, but we are well positioned with our partners in India. They have both passed the first test where we are included from a biometric point of view, they have also passed all what they have to do. So now they are basically just waiting for the regulatory body to open up the market. And they believe that's going to happen by end of quarter 4, and that would tell me that the initial orders that has to come by end of quarter 4 or during quarter 1. Because when they open up the market, then these tenders that all are going to run on this certification in India, that's when they're going to open up and that's when they will all run in there and try to gain their market shares and we are then in partner with 2 of the large ones. And when that opens up, of course, they're going to have to place the orders with us so they build up and have the goods for their customers locally in the market. But I think that's a little bit the timing that we are now at least anticipating and preparing for.

Of course, then short-term goal is also to close something. I think that would be great for NEXT Biometrics and for you as shareholders would be if we can sign a large-volume customer with a predefined recurring commitment in volumes, so we can explain for you that this customer has historically done this volume and now they are from this date implementing NEXT Biometrics fingerprint sensor. In that way, you can much easier extrapolate and understand what kind of revenue you can expect going forward. So that's, of course, a focus that I know that Ulf and the sales team they have in the funnel to try to close those in the right prioritized way.

But I think the main message from us today from the quarter 3 report is that with all 33 performing design wins currently at hand, that will be enough. But I actually believe on what we hear from our India partners that the tech giant and the India OEM alone have the potential to bring us to a positive EBITDA in the second half of 2023. Of course, that's going to be depending on that -- the launch of these so-called L1 certification for them that, that market starts to open up during end of quarter 4. But if it does, I think they have the potential alone to bring us to a positive EBITDA in the second half of 2022.

And I think with that, those are the most important messages that me and Eirik wanted to provide you from quarter 3. And we look forward when we are going to introduce the quarter 4 numbers, and I cross my fingers on that we can then talk about the orders we have received from our India partners and explain further on what exact date the India regulator opened up the market.

So with that, Eirik, I think we should open up for Q&A. I think we have a few questions.

[Eirik Underthun, executive]

Yes, that's correct. And it's still possible to submit questions in the chat and the Q&A function in this conference call.

Okay. So this is the first question. The last 2 quarters, you have won several design wins with customers that are confidential. Can you say anything about why that's the case?

[Peter Heuman, executive]

Yes. It's a good question. I think we have to remember that if a product manufacturer who sells, for example, a consumer-related product and they decide to bring in a fingerprint sensor into that product, they don't want us as, if I may say or use the word, one of the components in their product to go out on the market and explain that, that's going to be launched and exactly who that is. So several of these customers, they have, of course, competing product manufacturers and they want to differentiate and sometimes they do that by bringing in a fingerprint sensor on their product. But then we have to sign that we are not going to start to share that information with the whole world before they have done it themselves.

And so I find it quite natural. I don't have a problem with it. I understand that it can be a little bit frustrating for shareholders. But on the other hand, as soon as we see that this new customer will have material impact or if their already initial orders are sizable enough for our current financial situation, of course, we're going to at least say, from a financial point of view, what they will bring. But we sometimes are a little bit hold back to communicate clearly exactly who the customer is.

[Eirik Underthun, executive]

Right. Good. Here's another question and I will answer that one. How many shareholders are there in NEXT?

We had 4,500 shareholders at the end of October. And there are small and big and quite a few have not so many shares, but I can't go into more detail than that.

[Peter Heuman, executive]

No. But Eirik, we could potentially put it in perspective. I remember when we started the change or turnaround of the company, I think we were around 1,000 -- a little bit more than 1,000 shareholders. Currently, like you say, around 4,500. I think we have had around 6,000 also at times here. So I mean, at least there's a lot more shareholders in NEXT Biometrics today compared to 2 years ago.

[Eirik Underthun, executive]

Yes. Absolutely. And there is another question. NEXT is in India, is NEXT working on other partners in India other than the 2 already signed up?

[Peter Heuman, executive]

Good questions, and the simple answer is just yes. I mean we have had historically a presence in India, I think I explained this before. What we try to do now is to bring in larger local or international partners who have large organizations in India, where we can see how big market share they have had on the historic biometric market.

We do this because it's -- and then also bringing, like we explained here recently, about bringing an international solid distributor who can act as a fulfillment center for us because it's quite cumbersome sometimes as a small Scandinavian company to collect money, take financial risk, for example, in a country like India. But having this setup, we get a much stronger local market reach working with partners who then spend the time and the effort and has the resources and the dollars to go and certify their products, but we are included, but we have a strong partner to work with.

Of course, we -- I have explained this before. There is basically on the biometric -- fingerprint biometric side on the historic certification, there's 5, 6 players who cover 80%, 90% of that market. I mean I can mention some of them, no problem. But you have MANTRA, you have what we call the India OEM, you have what we call the tech giant, you have IDEMIA. Here you have 5 who probably covers 70% of the total volume, and now we have partnered with 2 of them.

We are in dialogue with at least one of the other. Can't say much more than that, but we are, for sure, trying to work with as many as possible of those who we know drives the largest volume. Then we have a local organization who is, for sure, working with smaller local India companies as well. So in many ways, we try to drive the large volume potential in a new way, but then, of course, bringing in as much partners as possible.

And maybe to add to that, if you look at, for example, the Chinese distributor that placed an order with us quarter 2, they work with Chinese manufacturers who build point-of-sales terminals, et cetera, that are tailored for the India market. And then they need a certified fingerprint sensor and then they can bring that in. So also a Chinese provider can buy from us and then build products who are for the India market.

[Eirik Underthun, executive]

Right. There's another question here. Do you see any need for a capital increase?

[Peter Heuman, executive]

No is the short answer. But a maybe more flavored answer would be, like I say, the statements that we are making today is we believe that the India market will open up. We believe that, that's where we will short term see the largest volume. Remember, both the tech giant and the India OEM have partnered with us on our FAP20 product.

The volume, if you look at the total market volume in India on the old certification, we are talking 3 million to 6 million units per year. And if we are now partnered with 2 of these, that's why I with confidence say if I just see that this opens up, I feel confident that these 2 companies alone can bring us to breakeven during second half of 2023.

That's our focus. That's what we believe in, then there is no problem with capital. I mean would nothing of this happen, God forbid, yes, we have to find something else that will drive the short-term volume. Otherwise, we might, but we don't work looking in that direction. We work looking in the direction in setting us up to make it successful, and we believe we are in a very good position.

[Eirik Underthun, executive]

Then I have 1 more question here. [Operator Instructions] So we heard about the frame agreement with the tech giant in March 2021. After this, we have seen just 1 order with the tech giant, but not much more. Now nothing has been happening lately.

With what you said now, what makes you more confident that something will happen now in you said -- I think you said quarter 4?

[Peter Heuman, executive]

That's a good question, and I can understand that this could be perceived as a little bit frustrating. And believe me, it is for us as well. But we got the first order for some different projects within the tech giant, but the main volume project we are working together with them on, and believe me, they are frustrated as well that the market -- the India market is not opening up. But that's where we believe the largest volumes will come, I mean, like I said now repeatedly.

And when that opens up, I feel confident that large orders for us will come from the tech giant. I mean to be honest, maybe -- that is, of course, frustrating for us that, that hasn't opened up earlier. It's frustrating for them. We are still in such a good partnership and we know sort of what they are going to -- what kind of orders they are going to place when the market opens up.

What we maybe could have done better at NEXT, to be very open, is that it's -- the tech client is a very large company. Of course, like this initial order, there are smaller projects that they are also involved in where they need fingerprint sensors. And we could potentially have tried to do even more there to get into -- to getting a little bit more of these smaller orders.

So I think the larger volumes, they will come from the tech giant when the India market opens up. The other ones is not going to be comparable in terms of volume and size perspective. But maybe we could have done a job better there. But I think that's what I can say there, Eirik, on that question.

[Eirik Underthun, executive]

Yes, then we don't have any more questions.

[Peter Heuman, executive]

Okay. Then thank you very much, everyone, who attended. And if you come up with any more questions, feel free to e-mail me or Eirik directly and we will try to answer you as quick as possible.

And thank you very much for attending. All right. Thank you. Bye-bye.