Next Biometrics Group ASA

OSE:NEXT

Earnings Call Transcript 2024-Q3

[Ulf Ritsvall, executive]

Good morning, everybody. This is Ulf Ritsvall, and I'm here today to present the quarter 3 presentation. But while we're waiting, maybe we wait 1 or 2 minutes for everybody to join, I will present a bit meanwhile, I think. So you can take the next slide, Claudia. And I think we start. We have participants online, and welcome to this. And today's speaker, it's me, Ulf Ritsvall, and I'm the CEO of NEXT Biometrics. I'm here together in Oslo with Eirik Underthun, CFO of NEXT Biometrics. We will today -- you can swap to the next slide, please.

We will today talk about the Q3 summary, of course. I will brief you on a business update, what is actually happening, what is going on in the region, in our international market. I will then go through, as you have seen, we have posted a few product updates lately, especially to the last few weeks. And I will go through the FAP30, as we have communicated earlier. I will go through the Expansion of the PC offering, and I will go through the New Government-ID product, which we announced the last day of October. We will then dig into the Q3 key figures where Eirik will present it in more details. I will wrap it up with an outlook for Q4 and onwards, and we will end the session with a Q&A session. And you can write Q&As in the chat in this, and we will try to answer as many as possible in the latest part of the presentation.

We can go to the next slide, please. So we are -- I'm so very happy that we have done the best quarter ever in NEXT Biometrics. We have -- I'm so proud that what the team has accomplished during the last -- yes, 1 year I've been the CEO, but previously, of course, the sales and marketing head. I'm so proud that we have taken these steps, and we are now definitely on the right track. And we will go through a bit more what kind of opportunity we see with the company going forward as well as what we have achieved so far. Happy to present 360% growth compared to Q3 in 2023. We ended up at NOK 27.6 million in revenues. And very happily that we are continuing our high gross margin of the products at 52%. That's also improved from Q3 2023. But it's as we have seen the trend and the guiding we have done in -- for 2024.

Important is, of course, customers, and we are adding customers every quarter. This quarter, we added 4 new customers -- 4 new design wins. They are all 4 actually based in China. It's ODMs in China. We will look at that a bit later. We have now 59 accumulated customers that we have in our revenue pipeline. Some of them are in active procurement. Some of them are in a design phase and some of them are -- have ended their life of the product, of course. So it varies. As I said, we have expanded our PC portfolio. I'm very happy that we are now taking a next step in this. We are expanding outside the fingerprint sensor domain, and we are going to show this a bit more in a later slide. As I said last October, we announced that we are developing a new governmental-ID product targeted for the Aadhaar and the MOSIP market. And I will go through it in a bit more detail so you understand a bit more of it a bit later.

But let's start with the business update. You can swap the slide, Claudia. So we are continuing to strengthen the presence in China. We are adding presence in terms of manpower, but also the presence of adding more and more customers. We have successfully shipped additional orders to China and the China ID products this Q3 quarter. We are, of course, actively pursuing leads outside this, but mainly within the banking, finance and health care, where we see the major growth in China. We are collaborating with OEMs, partners, and we are deploying our sensors across the China. China is, of course, the house of electronics. So of course, they are deploying -- we have customers that are deploying products outside China as well, such as Africa, Asia and, of course, including India.

Speaking of India, we are expanding our biometric solutions in India, as you're all aware of. The traction of changing the L0 products to L1 products is constantly going on. There's new tenders that we are helping our partner, ACPL, to win. And with the generational update, we see the rising need for biometric solutions going forward as well. We have shipped additional products to ACPL during Q3, and we will see this continuation also in -- remaining of 2024 and 2025. The second OEM that we have communicated, we have a frame agreement with them, are still in the certification process. But according to sources, they are very, very close in actually completing the certification and, therefore, deployment of products with NEXT Biometrics active thermal technology on the Indian market, which will expand our revenue pipe in India.

As you have seen, we are expanding outside India and China. India, China, of course, are the dominant revenue countries currently. But we have a multiyear agreement with Bangladesh, and we have shipped another sensor batch to them during Q3, and we will see this continue. We have actually, after the quarter was closed in Q4, we shipped the first design win to Malaysia. It's also government-ID project, and we are replacing a competitor sensor in this market. It's already shipped and it's already deployed, which is fantastic.

We also, during Q3, shipped our first Oyster III to Pakistan and their NADRA, which is similar to Aadhaar. It's a biometric-enabled authentication method, which is deployed in Pakistan. We have shipped the first parts, mass production parts to them, and we will see continuation of Pakistan going forward. We are, of course, as well continuing the sales to the office and notebooks. We have products outside. We have products in Brazil and so on. But that's -- the high level of the company is, of course, China and India, and that's where we see the majority of the growth.

Talking about PC, you can take the next slide, Claudia. So we are expanding our PC portfolio. We are selling a previous -- historically, we're selling the fingerprint sensor, the high-security fingerprint sensors to Japanese laptop manufacturers and a few others. We are now taking a new step to actually grow the revenue in the existing accounts. So basically, we have our 4 segments. We are innovating in all 4 segments. And this is one innovation in this segment -- in one of the segments. Notebook today have an attach rate with fingerprint sensors that are lower than 100%. So maybe they have 30% attach rate where they put in a fingerprint sensor into a laptop.

But 100% of the laptop have touchpad, which is where we see it fits very good with our technology. It's something you touch and something that actually is adjacent to our technology. The partner we have partnered with have a proven track record with OEMs such as Huawei, Samsung, Toshiba, and Acer among others. So they are well proven in this ecosystem and are shipping since long. We are now expanding this towards and outside China, which is the international expansion in PC makers in Taiwan, in Japan and so on. That's where we see. How will this happen?

We, of course, have our laptop accounts, our Office and notebooks accounts, where we will be main driver to actually add the touchpad into the -- together with the NEXT product. And with this partnership, there's actually a limited need for additional resources in our technical team and also in sales and marketing. We see the first shipment to this market will happen towards end of this year or early 2025. And the target is, of course, when we actually did this partnership is to possibly integrate the NEXT biometrics high security sensor into the partner's touchpad product. Revenue-wise, it's nothing we communicate at this moment, but we will see -- I will come back to the revenue projection of this at a later stage.

So we can take the next slide, please. So I actually have something in front of me. Maybe you can see, I hope you can see. This is the first sample of the NEXT FAP30 product, which is a fantastic pre-engineering sample. We have received them from the factory, and I must say the results are excellent. The technology department have been doing a fantastic job. As you have heard, we are addressing the market segment with higher security and higher quality requirements compared to FAP 20.

It's, of course, based on our active thermal, the patented technology we have. And we believe we are still communicating the same plan as we did in February in Capital Markets Day. We have the first engineering samples are planned during Q4, and we have a mass production during 2025. And we believe we will see the first initial orders in Q2, Q3 and market deployment during second half 2025. We have already discussed and promoted this product to some of our partners, a limited number of partners, and I must say that the market seems overwhelmed of what we can actually achieve.

With a very high security sensor, with the anti-spoofing as a default parts of the product and with a very competitive price and a very competitive form factor, which is the benefits -- the major benefits with the NEXT active thermals. So what we are seeing is, of course, we will do the improved reliability and durability. We have an attractive price for the high-end market in the governmental and health care sector, and we are looking forward to see the next step in this where we have the module, we will demonstrate it to customers and get customer deployment and traction very soon.

You can swap the slide, please. So next product we announced in end of October. It's actually a collaboration. We have the Indian market, the L1 market. It's, of course, in fierce competition. It's, of course, challenging for everybody. We need to stay ahead of the market trend as we have seen. We have today very good traction. We have a good market share. And we are now taking the next step with this governmental-ID product, where we actually are integrating the MCU together with our sensor, the FAP20 sensor. This, of course, means some extra work for us. This also means that we can maintain our gross margin.

We can even -- we will increase the ASP, average selling price as we are actually developing a more comprehensive and integrated product compared to a stand-alone FAP30 -- FAP20. So we will take a bigger responsibility. We will increase the ASP and maintain our gross margins. At the same -- in the same memory of understanding, ACPL has committed purchase orders once the product is certified at least $3.2 million in this case. And we believe the engineering samples will be available in 2025. And with the certification and mass production ready, it will be in 2025.

On top of ACPL, of course, we are selling this outside ACPL as well. So the targeted annual volume and targeted annual revenue of this product will be more than $9 million starting from the second half in 2025. So it's a great step to take. It's a needed step to maintain the -- and increase the ASP and, again, an innovation within 1 of our 4 market segments that we are doing and paving the way for keeping ourselves ahead of the market trends in India.

With this, I would like to hand over to Eirik, where we go through the Q3. You can swap the slide, please, where we do the Q3 financials. Please go ahead.

[Eirik Underthun, executive]

Thank you, Ulf. Next slide, please. I will now run you through the Q3 financial highlights. On this slide, you see a summary of the Q3 P&L. The revenues were NOK 27.3 million (sic) [ 27.6 million ] versus NOK 6 million in Q3 2023. The adjusted gross margin was 52% compared to 37% in Q3 2023. This is due to significantly higher FAP20 and China ID share in the product mix for the quarter. On operating expenses, we ended up with OpEx ex options of NOK 15.7 million compared to NOK 12.8 million in Q3 2023. The quarterly OpEx ex options is increased in line with the plan to increase sales and R&D efforts.

The adjusted EBITDA was negative NOK 1.5 million compared to negative NOK 10.5 million in quarter 3 2023. On cash and cash flow, NEXT had ended the quarter with cash of NOK 45.5 million compared to NOK 40.9 million at the end of quarter 2 2024. And there was a high concentration of sales in September for Q3, and this was impacting operational cash flow as this was not collected during the quarter. So the main message from this quarter is the high revenue growth and strong gross margin and that the operating cash flow was impacted by higher sales and slow cash collection during the quarter.

Next slide, please. The revenue is up considerably in Q3 compared to the lower quarterly revenue levels seen in 2023. The rapid increase in revenues is mainly attributed to higher shipments to India, China and Bangladesh. You can see the KPI gross working capital as a percentage of last 6 months revenue in the graph. This KPI has improved during the last 18 months. We are targeting to further improve working capital efficiency. At the same time, during the last 2 years, we have been focused on ensuring product availability to accelerate market adoption and capitalize on the growth opportunities available in our target markets.

And during this time, NEXT has had high inventory levels, and we also has offered flexible credit terms. What we have seen in 2024 is a gradual decrease of NEXT inventory and distributor inventory buildup for market launch. Moreover, we have seen an increase in account receivables due to the high revenues toward the end of the quarter 3 as well as extended credit terms and delayed payments from certain distributors and OEMs. Looking at our working capital efficiency KPI, we expect further improvements in 2025 following customer project completions and mass deployment of sensors to end customers in India, China and Bangladesh.

Next slide, please. So the gross margin has also increased significantly compared to 2023, and it has now stabilized above 50%. This development can be explained by the change in product mix from the high PC sensor share in 2023, changing to a situation in 2024, where we have a high share of FAP20 and China ID products. During 2024, we have increased the sales and R&D efforts, which has increased the OpEx levels from 2023. But following the considerable increase in revenues, the adjusted EBITDA now has improved significantly to negative NOK 1.5 million in quarter 3 2024. And as you can see in the report, the EBITDA -- the reported EBITDA is at minus NOK 0.3 million.

With this, I will turn you over to Ulf again. Thank you.

[Ulf Ritsvall, executive]

Thank you, Eirik. So I hope you followed us. And I will now end with the outlook, and we will then continue with the Q&A session. So you can take the next slide.

So given the parts we are seeing, we continue seeing and anticipating a very, very strong growth in revenue in 2025. We have secured a revenue pipeline, including purchase orders, frame agreements and customer commitments in a substantial potential in growth for over NOK 550 million. We will, of course, not do all of that in 12 months, but it's like a rolling. We have explained that previously. We are, of course, expecting similar gross margin as previously communicated. We are targeting over 50%, also in Q4. We are continuing the flat run rate of NOK 65 million, and we are targeting profitability in Q4 2024.

However, lastly, I would like to give you a sneak peek of what actually the R&D and this product can actually do. We have some promising research and development today. We are patenting a totally new field of use, which is actually currently underway. We believe this is something totally outside what the product has been doing previously. We have a position in NEXT where many vendors and fingerprint sensor companies have failed, and we believe this is a very substantial growth over the coming years with this new innovation. I will get back to this once we have a bit of more information of this research parts.

I will get back to a separate session with this at the beginning of next year when we have a bit more sort of meat on the bones and actually can explain it a bit more in details when patents are submitted and available and so on. I see high innovation and growth in this specific area, which is something that I very much look forward to. And I encourage our -- it's based out of the technology teams we have today. This will end the slide presentation.

Now let's see if we have any questions online.

[Eirik Underthun, executive]

Yes. So please enter your question in the meeting chat. So far, we don't have any questions.

[Ulf Ritsvall, executive]

So I guess everything was crystal clear. I mean we have an open e-mail box. You can e-mail me. You find my e-mail on the press release. You find it on the website. You can just go ahead. You can give me a call if you have any additional questions.

But with this, I would like to exit this call -- end this call, and I would like to thank everybody who participated. And looking forward to the next step, again, early next year for the technology innovation and then, of course, the Q4 wrapping up in February.

Thank you all, and have a great day ahead. Thank you. Bye.