Next Biometrics Group ASA
OSE:NEXT
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Next Biometrics Group ASA
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Good morning. I'd like to welcome all of you to NEXT Biometrics' Q4 Financial Presentation and Capital Markets Day. My name is Ritu Favre, and I'm the CEO of the NEXT biometrics. I'm not going to read the slides to you.So let me talk to you a little bit about today's agenda. We have a very packed and full agenda today and we're kind of trying to do a few different things during the course of the presentation today. The first thing that we will do is go through our Q4 results and financials, all of this has already been published, and then we're going to segue into our Capital Markets Day. And I wanted to give a little bit of a description of what we're trying to do this year with the Capital Markets Day. We've done these in the past as a company but today, which are trying to do a few different things in this session. One is really trying to explain our markets, our technology, our product roadmaps, the vision for the company as we go forward and so for me, this is really a foundational setting expectations correctly for everybody on what we are trying to do as a company. So this may not feel completely like the traditional Capital Markets Day, there's a piece of this that's trying to explain to investors what we actually are trying to do as a company.So what we'll do inside our Capital Markets Day segment, I'll be going through a kind of our strategy, I've been doing a lot of thinking of not been here for a year in this role, which seems incredible to be and have to cold Oslo all the team, so thank you very much for that weather, but it will be talking a lot about the vision, the strategy, what I've really been thinking about for the company. Then I'm going to segue over to Dr. Mathias Troccoli, our Chief Technology Officer who's here, he can wave his hand at everybody, and he'll be talking a lot about our differentiated and unique technology and how that enables what we're looking at doing with the vision for the company.Then we're going to go over to Radek Matyasek, who is our Senior Vice President of Sales for Europe, Asia and India, he can wave at everybody, and he's really going to have the meat of the presentation today, not that what I'm saying and Mathias is saying is not important, but he's really going to try to tie together our market strategy to our product strategy and why we are going to win in the market segments that we have chosen for our unique center technology.We'll take a brief break, and then we're going to be transition and over to an external view of the markets. So we have Marc Muller here from Tactilis, that's our -- one of our primarily Smart Card customers, we've been very excited to have him here today. So Mark actually spent about 30 years at and has recently joined Tactilis. And so we really consider him an industry experts in the biometrics smart card space. And so he'll be talking about Tactilis as well as technology trends in the biometrics smart card space. And while I'm introducing Mark, I would like to also introduced Michael Gartner, if you can just wave, I know you're trying to hide, but he's the CEO of Tactilis, and we have actually gotten a lot of really interesting products demos outside that we would like to share with you today during the course of the day.And then we're going to wrap up with the closing remarks and question-and-answer. And throughout the day, if you want to go take a look at our demos outside, please do that. We have a lot of really exciting technology and products and Smart Cards that we would like to share with everybody.So let me start at a very high level, and then I'm going to dive down into the Q4 financials. So from a overall perspective, NEXT has an innovative and distinctive technology advantage with our large size sensor that we can produce at a cost efficient point for rigid and flexible sensors. This is the key foundation of the company's technology differentiation. This particular technology allows us to create differentiated product solutions. So I'll be talking a little bit about the build up of the company as we've progressed through the different stages, but we've been able to take this very innovative technology and create differentiated biometric product solutions for the market. So we have 3 different products [indiscernible]. fingerprint modules, fingerprint readers and biometric subassemblies. So we'll be talking quite a bit about that as we go forward and I feel like that's one place that there's been little bit of confusion is that we have a grouping of product families that are being targeted at particular markets that we're focusing on.We are a proven biometric supplier, this is something that at the stage of the company we're at, we've been able to ship 3.5 million sensors into the market to stringent Tier 1 OEMs. This is a real milestone for a company to be able to deliver that many sensors in this amount of time. So we'll be talking quite a bit more about being a natural proven supplier. It's not easy, I won't say that is easy, but you can make technology but being able to scale that technology in a class-efficient manner, being able to manufacture that reliability and with quality is a NEXT stage of a company, and that's definitely clear NEXT is at today.We are very focused on high-growth markets. So what we are doing is saying we have a differentiated, unique large sensor technology, and we want to be playing in markets that will be ideally suited for that particular technology, and I'll be talking quite a bit more about the markets, Radek will be spending a lot of time talking about the markets and the shape of these markets.And then finally, we are quite focused and I think ever since I've been here, I've been talking about having financial discipline and really improving our operating leverage in our financial outlook. So we'll be talking about that throughout the day as well.So with that, I'm going to dive into a very microcosm and narrow focus. So this is the Q4 earnings portion of the presentation and then after this, we'll go into the capital markets. So from a Q4 2017 highlights perspective, we achieved NOK 24.7 million versus a NOK 25.4 million in Q3. We also, for the first time in the history of the company, actually, I'm sorry, I get very excited about things, but for the first time in the history of the company, we've achieved positive gross margin. So this, for me, is a huge milestone, huge relief activity, and I'm very, very excited that we got to a positive gross margin in January.Lots of by a lot of people inside the company.Key milestones. We demonstrated a flexible sensor solution at [indiscernible] with Tactilis. This particular card is actually outside, we would like for everybody to take a look at it, it's functioning. You'll be able to see this card functioning outside. We've also made good progress on our smart card biometrics supper simply project that we've talked about in the past, and that is proceeding according to plan, and we've also launched our latest generation of the Oyster II peripheral fingerprint product, and that's also demonstrated outside, if you want to take a look.So kind of driving a little bit deeper into the gross margin improvement and kind of what we've done. So again, the company's first gross margin recorded in January. We're expecting to see gross margin of about 20% during the month of February and we're not ready commenting beyond that, but you'll kind of see that the trend is an improving trend versus what we did Q4 -- Q1 -- through the course of 2017, we've been improving over gross margin, and we've seen the pop into positive territory.The key drivers of this positive gross margin improvement, we've talked about the new ASIC that we've launched and that we're actually in production with now. This has also enabled us to have improved yields and there's also a scaling impact that allows us to improve gross margins.We also have new segments that do provide higher gross margin contribution. As we've talked about in the past, every new piece of business that NEXT will take will be a positive gross margin contribution.In terms of sort of where we're looking at for the future, we do expect to see a continued positive trend, we'll be talking a little bit more about that throughout this presentation. Knut will actually be offering a little bit more outlook in terms of future financials.And then the other piece that I've commented on earlier is that we have now crossed 3.5 million censorships. So the last time we have talked about this, we were at 3 million. We have now 3.5 million censorship as a company.So with that, I will turn it over to Knut.
So I was be going to repeat some of the numbers, figures that just presented, but I'm going through the P&L update of Q4. Revenues in Q4 were up NOK 24.7 million, and that's the same level as the previous quarters. This is still driven by our Tier 1 U.S. customer. And NEXT is gradually delivering volumes through other customer segments, but these initial volumes are still not large enough to make a substantial impact on our revenue line.Revenues for 2017 as a total, it was NOK 98.2 million, and that's an increase of NOK 6.1 million compared to 2016. The contribution margin has to say, has gradually improved during the year. And by end of Q4, our contribution margin was minus 4%. And then we have this revenue level, even small changes on the cost of goods, have percentage-wise, quite a lot of impact on the gross margin. But now, in January, we have the first month of positive contribution margin and we expect [indiscernible] will be at about 20% in February, in the month of February.EBITDA loss ex-option expenses was NOK 36.9 million, that's a little bit up, that's also according to what we said in the last quarter is that we are going to invest a little bit more in smart card and government ID, and we expect that expense level are going to peak in their coming quarters.If you compare -- the one special thing about this numbers is that we order our first machine 5 years ago, and we used that for deliveries up until mid 2017. We installed them in new technology last summer and now, yields have further improved and the cost have gone down using this new machine. So going forward, aiming to let our suppliers handle the investment and the assets, and beside the write down this first coating machine completely, [ph] 11.4, it's a non-cash one-off item in our PNL. So that's why our operating profit adjusted for this one-off is NOK 43.4 million compared to NOK 48 million in Q3.So total operating expenses, that means payroll and other expenses, including the option expenses, in Q4 was NOK 40.5 million versus $37.6 million. This is an increase of expenses of about NOK 2.9 million and NOK 2 million of this increase is related to option expenses.We have added a few more employees in the quarter, and we are now 90 employees. And we continue to shift toward smart card and government ID projects as we previously have announced. We saw -- and as I've in the previous guide, we expect that expense level to peak in the next quarter of 2018.Cash flow from operations this quarter was NOK 42 million, we reclassified our cutting machines from prepays to fixed assets, and that's included in the NOK 42 million from operation, and we did a small investments and the only book external development costs related to ASIC development in that quarter. We do not capitalize any internal development costs, so it's only subcontractors, that is easier to specify that we capitalize.We have now NOK 80 million in cash and as the contribution margin improves during 2018, the cash in the bank brings us into the second half of 2018. And the board has done initiated activities to secure that we have [indiscernible] going forward.
So as we've talked about, and we'll be spending a lot more time today as Marc Muller does his presentation, we announced the first ISO compliant smart card with flexible sensor that's fully functional. Again, we partnered with Techtilis, our key customer for Smart Cards, this does provide this high level of security. And again, I'll be spending a lot of time talking about the high-security advantage with a large-size sensor and Mark will also be discussing that as we go forward.And then in terms of product highlights from Q4. So we announced at the Oyster II fingerprint peripheral at Trust Tech as well. As I've spoken about in the past on access control, these are going to be 10,000 unit volume per socket kinds of opportunities. These are long design cycles. So in access control, from the time that we begin sales activities to the time that we would see revenue, that can be up to 9 months. As we've talked about it, I believe, we talked about that in our Q3 presentation. So we announced the Oyster II in November. So I would expect to start seeing some level of sales on that in the second half of 2018. So the way that I would like investors to think about this is that access control is long cycle to revenue, but they are very attractive in the 10,000 units per socket kind of volume. And again, Radek will be spending quite a bit of time talking about the Access Control market and the kinds of products that are relevant in that space. But in this particular case, we expect second half volume on our Oyster II announcement.As we've talked about, we'll continue our shipments into the notebook space with this new module that we're transitioning into, our U.S. customer has been fully transitioned over to that new module during the course of Q1, and then Fujitsu has also ramps the 2023 U. And then as we've communicated in the past, our R&D activities in the access control in the notebook space for my NEXT perspective, are largely complete. We will now be transitioning into sales and marketing activities for the Access Control and the notebook spaces.So it's kind of summarize the Q4. In terms of our achievements we talked about, that's what we're trying to do is read you say here's what we're planning to do, and then show that to be that of her that we have pivoted the company focus for R&D to smart card and government ID solutions. We've achieved our objective of positive gross margin in January, our commitment was inside Q1, we've managed to achieve that in January. And I've now moved at the scaling the organization for growth to something that we've largely competed. As Knut mentioned, we're at about 90 employees, we pivoted the company for being a lot of technology development and semiconductor process development to a solution development, and we've made the changes inside the organization to be much more focused on product development and operational scaling.As we look forward, we expect to surpass 4 million sensors by the end of the first quarter. We will be sampling our new smart card module in the second quarter [indiscernible] a lot of sales activity on this, we've announced the NV 44 10 in the prior quarter. We've started doing the drawings, software development kits and early hardware into customers today. But in terms of sampling an actual prototype module, that will be in the second quarter.We expect to see customer progress in the smart card and government ID space, a lot of what I want to talk about today is of our product development in these spaces and what we're expecting is that as we start to complete these product developments, we'll start to see a lot of customer progress in these 2 markets. And then we're focused now on establishing a financial runway to breakeven.So that wraps my Q4 commentary. And we're going to hold questions to the end of the presentation, but we're going to move into the Capital Markets Day portion of the presentation now. You need to get your mic. So let me -- what I'm going to be doing now, and I expect that we're going to be here for a few hours. So what I want to do is tee up what we'll be talking about throughout the course of this entire Capital Markets Day presentation. So I want to start with some of my comments on the company vision, the company strategy, where I would like to take the company going forward. I want to really try to boil down some key messages because I believe as a company, we have not done a very good job of boiling down why is what we have so differentiated and unique, what markets will that play in and why our products going to be interesting in those markets and with the technology that we have. We'll talk quite a bit about our proven track record as a supplier in the space. We're going to be talking a lot about the markets that we're playing and why those markets are so interesting for the type of technology that we have. And you're going to continue to hear me talk about constantly improving financial performance.So I'm going to take this at a very high-level. I'm assuming that nobody has ever heard of NEXT before, and that's the way that we do talk about the company. And then we'll start to dive into a lot more detail as we go through this. So NEXT overall. So if you think about us, we have kind of 3 buckets that I would think about us in. There's a proven supplier category, there's our unique technology that differentiates us and there's the market. And if you have -- a few kind of think about those different pieces, they have to go altogether to be able to create a really interesting and compelling company in the long run.So again, we talked quite a bit about being able to deliver 3.5 million sensors. As a lot of you may know, I actually had experienced in running a biometrics business in the past when we were selling million and billions of sensors. Being able to get from 0 sensors to even 100,000 censors shipped in a quality and reliable way, is not an easy achievement. So getting to 3.5 million sensors shipped makes us a credible supplier in this space, especially when we're shipping to stringent Tier 1s. The other piece is kind of mentioned is we're up to 90 employees. And I will say that there is team, as I've gotten to know them and I've spent kind of the past year with them, has been a phenomenally functional and able to create very interesting value compared to a lot of technology business that I've run. So that will kind of come through as we talked through the rest of the day. But we have 3.5 million censorship, and we've also achieved positive gross margin. So these are some interesting milestones from a company perspective.If you think about the technology and again, Mathias is going to spend quite a bit of time talking about the technology, the differentiating thing about this technology is we're able to create a large-size sensor at a very cost efficient point, and I have another couple of slides that are going to explain that because I think that's the key message that until now, has not very clearly gotten out into the market. We also see that the next wave of markets that are coming for biometrics are going to have different characteristics than this prior wave that we've gone through. This next wave of biometrics is going to require a higher level of security than what has been demanded in the consumer spaces, and I will be talking a little bit more about that.Biometrics, being kind of a biometrics geek, if you want to call me that, I've been doing this for about 4 years, it's actually become mainstream with Apple in 2013 when they introduced it into the iPhone. So fingerprint censoring hits the commercial mainstream back in about 2013 and today, it's actually, a very large market with more than 1 billion units of fingerprint sensors shipped into the market up to now. But if you look at NEXT and again, we'll be talking quite a bit about this to try to connect these dots that we are positioned for the emerging high-security requirement markets, Smart Card and government ID.So I've been thinking about sort of the transformation of NEXT and where have we been, where are we and where we are going. I've actually spent quite a bit of time thinking about how to characterize the company at the different phases. So if you say, okay, let's say 2015, 2016, you can even say 2004 through 2016, what kind of things is the company doing? The company was establishing a basic foundation of technology that could then be used to leapfrog into interesting products and interesting markets. So again, as we've talked about, you'll to hear me mentioned this over large-size is really important, I will have failed in my job today. So we've created a unique, large flexible sensor solution, the other piece that I want to make sure that we're clearly communicating is that in addition to this large sensor that we have, we've also created a lot of biometrics solution expertise. So not only do we have a really interesting, large sensor technology, but in the course of ramping commercial volume to a Tier 1, the team has also gathered a lot of biometric product expertise. And this is something that you gain by actually launching volume and ramping volume. So -- and I'll be talking a little bit more about sort of this core technology that we've established. But the 2 key things I will say, the large-size sensor and biometric product solution expertise.So if you look at kind of where we've been in the past year, where I see us going through the course of this year, it's really laying these foundational elements. We've pivoted away from creating sensor technology only, creating semiconductor process coating kinds of activities and into really doing product development. So we've strengthened our operations and R&D. What we'll be talking about a little bit is we have 3 full unique product families, and we're looking to play in 4 unique markets. What we've been doing historically is playing in 1 large notebook market with kind of one product family. As so we're really expanding what we are tied to do from an activity base and this requires a little bit of a spend in our R&D and our operations, and we've been going through that process through the past year.And then if you say, okay, where we are going to the future. As a kind of look out into the future, and we can cut in 2019, 2020, we could say that we're doing that through the course of 2018, we will be doing -- we are in our rapid product development phase right now. The goal of this company right now is to create products and solutions for the government ID and Smart Card spaces. Through the course of 2019 and 2020, we will be ramping these products, the Smart Card module products, we will be getting the government certifications and begin to ramp into the government ID space and really look to drive revenue and profitability.So now, I'm going to kind of go a little bit deeper into the slide and into the basics foundational pieces to help set up of the presentations for Mathias and Radek. So if you look at the market spaces, as I've been talking about quite a bit, today, we are going to go into much deeper detail on sub-segmentation in the Smart Card space. We've talked a lot about Smart Card, and we're really trying to again boil down some key messages for investors. I've shown this, a version of this chart in the past. If you think about where the market has been until today, it's primarily the biometric market has been primarily in the consumer space. Smart phones and notebooks. If you think about your own phone, if it takes quite a while to get into your phone, you get very, very annoyed. At least I get very annoyed, maybe you don't get annoyed. So what you want to do, this is a very convenient focus market, you want to be able to get into your phone. Security is not as important, it's always important, it's not as important. Typically, you don't have multiple people trying to get into your phone. So the primarily driver on the consumer space is a convenience focus. Here, cost is king but you'll see is that the cost levels or the ASPs and that space are crashing and those smaller that you can get the with a certain type of a sensor, the lower the cost is going to be. That is not NEXT focus and I've talked about that in the past. The pace again that we're strong is in the large sensor size areas that we can provide a true differentiated advantage. So in the Smart Card space, it's 169 square millimeters is the minimum requirement for ISO standards. So Radek will be spending quite a bit of time dissecting the sub-segment vision of this market in talking about why NEXT is going to win in those spaces. If you looked at the government identification, we've made a slight change to how this chart did that what we presented in the past. In the bottom left-hand corner, you will see that the number now goes out to 300 square millimeters. And part of what we're going to be talking about today is a portfolio of products that we're looking to create in the government identification space that allowed us to an average of the large-size advantage that NEXT has.So let me talk briefly as well, a little bit more about these building blocks that the company has created that we will be able to use to create a differentiated value in our product portfolio. So again, Mathias will talk quite about it, quite a bit about it but he has been a key inventor of this entire technology, and so he essentially, will be talking a little bit about these foundational building blocks of the company technology.So NEXT Active Thermal principal is the basic building block of our differentiation. This allows us -- this particular technology allows us to create the cost-efficient LTPS sensor in both rigid and flexible formats. Then if you say, okay, what have we been able to do with that? Well that, we have been able to take that technology and leverage that into a volume manufacturing working with large Tier 1s that have very stringent quality requirements. We have also, in addition to this very unique sensor technology, we've been able to create ASIC software and firmware capability inside the company that again, as I've said, with the 90 people that we have, we have a very diverse set of capabilities. Having the sensor technology, the volume manufacturing, ASIC software and firmware, allows us to create very unique and compelling fingerprint products. And so as you think about this, we have the 3 different product families that we're able to create leveraging these unique capabilities inside the company, which is the modules, the readers and the biometric subassembly. These products can be delivered to customers for them to be able to deliver biometric solutions into the marketplace.So the next couple of slides will once again, talk about the large-size benefit. And so what I want to do is talk a little bit more about why this is so critical. I believe that we have I would say, probably a billion words out of the web about why large sizes and [indiscernible] and what I want to try to do is really boil down truly why is it important. Let me just tell you in 1 sentence why it's important. The bulk of the competitive landscape today is a sensor on silicon. So if you think about silicon, which is the graph on the left-hand side, silicon, as the silicon gets bigger, you're going to be paying more and more for that silicon. So if you have to get to a 200 square millimeters sensor, which is sort of our average size, you are going to be way on the far end of the expensive part of that chart. We can offer a sensor at a larger size format for the exact same size as a much smaller silicon sensor. So what we are able to do is offer a large sensor at a small sensor sort of ASP. So then you say, okay, why does that matter, why is that important? The reason is important is if you think about a fingerprint sensor, it is much better to be able to put your entire finger on a fingerprint sensor. Part of the reason that the silicon sensor, smaller sensor folks need to be small is because of cost, there's a huge gross margin issue that they end up facing if they go larger. So if you do guide the small sensor competitors, you have to enroll your finger 10x, 20x, 30x to get a full fingerprint template that is actually virtually stitched together with software to create an image of your fingerprint. That is not as secure as taking data on a large finger placement and storing that data, and then being able to do that in a single touch. So the key thing here is large-size at a lower cost, more data, higher security. The other thing that sort of an additional benefit, not so much of the size but at the LTPS technology, is we're able to create a fully flexible sensor, and I actually asked somebody earlier to go and look at our sensor they're being very careful. I kind of want to bend it too much. No, no, no bend it all the way, bend it half way, and we are actually able to be extremely flexible. And this is something as we've shown in the customers, they're very interested because it's much more flexible than what many people are doing. It does not break at the larger size and again, as if talked about what our volume capabilities, it is easy to manufacture.This one, this chart, does my engineers are proud. I basically as we were putting this chart together that it's very clear when you have a long chart in an investor presentation. So I'm going to try to boil this down in as easier way as I can. The issue with looking at security in a biometric system is it's actually fairly complicated, unfortunately. When you say the way that biometric security is measured, is you're trying to look at how many times did somebody touch a fingerprint sensor that is not that the right person touching that sensor, how many times will that system unlocked for a person that should not be touching that sensor. That is the key security requirement in a biometric system and unfortunately, it becomes a very longer and complicated system to be able to portray. So the way to kind of read this chart is there something called the false accept rate. So if you're not the person that should be touching that fingerprint sensor, and you're able to open that system, that's a false accept, that's it's not. So typically, what people would be looking from a security perspective in the 1 in 10,000x, 1 in 100,000x, 1 in 1,000,000x, that would be considered the security level of the system. The higher that you are trying to of in security, the issue with that is the more times, you're going to get the false reject. So if you are the person that's trying to get a system, and you're trying to open that system up, you won't to be able to get into your phone or into your government border or wherever you're trying to go. So it's sort of this balance. So when you've talked so fingerprint people and everything that I tried to talk through this, I have to figure out how to explain it in a way that's explainable. Typically, you will hear [indiscernible] that's what everybody talks about compromise. What you'll see on this particular chart this as false accept, this is false reject. The lower that you have a false reject for a given security level, the better. Now a lot of people will say, okay, well you just made this up. This is actually not made up, we literally have gone through a lot of data collection. And there's about 180,000 fingerprints in a database to kind of come up with these curves. But the key thing here is that our false reject rates is lower at a given security level than similar -- that the competitive small and midsize answers. So this so important. And the key take away here again, is at a given security level, a larger sensor will have a higher level of security. And in a way, I would just say trust me, but we can also provide all of the data.So now moving to the markets. We've talked about this a little in the past. What you'll see here, and again, Radek is going to be spending quite a bit of time here so I'm not going to spend too much time, we've talked about notebook, we're not doing any new R&D investment here. We want to stay strong and relevant. Access control, same thing, no new product development, we want to leverage our existing portfolio to the distribution channel. And then you'll see some slight changes on the top part of this progress out of our R&D and product development focuses in the Smart card and government ID space. Smart Card as of the #1 priority for the company, this is where we believe our unique flexible, large-size sensor has an advantage in this particular market. And then in the government ID space, we will be certifying our existing products, but we are also looking now to extend our sensor portfolio and Radek and Mathias will be talking a little bit more about that.So I don't -- NEXT shared our assessment over the overall market. And so this is the chart that demonstrates SAM. SAM is Serviceable Available Market, which means that 4 of the products that's NEXT sells or has available, this is the market available to NEXT in that particular space. So what you'll see here is we have the notebook space, the access control, government ID and Smart Card. What we see is that the access control and the notebook space is largely flat, there is a market today, we expect to take a portion of that.Government ID exist today. So if you took a 2018, you'll see that there is a healthy government ID market. Smart Card is still starting to emerge. In the 2020 to 2021 timeframe, we've seen an inflection point in the Smart card space. And that's where we start to see Smart Card really take off. So what you'll see here is we have a compound annual growth rate in the government ID space of 15%, part of the reason for that is it's an existing market today that is still continue to grow at a healthy rate. Smart Card is going from almost 0 today up to a fairly large level with 122% compound annual growth rate.So the overall SAM that we see for 2022 is USD 1.3 billion. The way to think about that is that we would be taking a percentage of that market with the products that we will be selling and coming out to market with. And we do believe that in the government ID and the Smart Card space, we have a differentiated advantage with our sensor solution.And then my final wrap up slide is going to be in terms of our product and again, to just reiterate, TS and will be really unpacking a lot of this much more through their presentations, but I wanted to leave you with we have 3 product families going into 4 market segments. We have our fingerprint modules, which are now shipping in the notebook and access control segment, our integrated fingerprint readers, they will be going into access control and government ID and our biometric subassemblies that are intended for the Smart Card market that should ease customer integration and help to reduce power.So with that, I will wrap up for this portion and hand it over to Mathias.
Hello, my name is Mathias. I'm the CTO. Thank you, Ritu, for the introduction. For those of you who don't know me, I've been around since the early days in the company. I brought the first generation modules into our Tier 1 and finance production. These days, I mostly focused on long-term doing a little bit of sensor design itself. And I'm going to talk a little bit about that, the technology and the road map itself. I'm going to let Radek later on address the product development part and more of the go-to-market strategy.First of all, for those of you who are a little bit new t o the company, I want to briefly cover whether technology is all about. Our operating printable is called the Active Thermal principal. The way we are exist, we apply a very small amount of heat to each pixel in our sensors, and then measure a response. This is very different from where the rest of the competition is at. They actually handle electrical signals. This creates a very clean IP position for us, which is actually a great advantage. And another key point about this is that it allows us to manufacture using this process called TFT, it's the same process that you guys having your cellphones, displays, so we use that technology. And it's the key for the low-cost advantage.It's also the reason why we can make a flexible sensor because these guys the way do it is they manufacture a big array on glass. But on top of that, they put a polymer, which is a flexible material. And then they lift it off, and that's how you get the flexible sensor. We'll talk a little bit more about that in a little bit. So before I get into the details, I wanted to discuss a few things about sensor performance and biometric system performance. Ritu already covered quite a bit of this, but there's a couple of questions that always comes up when we meet customers or when we do our rounds with conferences and such. And they always try to nail this down to 1 or 2 metrics where there is power or speed or a couple of small things. And the reality is it's a very complicated matter, and there's a lot of aspects to play into making a good biometric system. So as Ritu mentioned, the key metrics are FAR and FRR, your false acceptance and your false reject, but there's also latency. Latency is basically the speed of the system or how quickly you can get into your computer or into your device. And those are the things that the user usually perceives. And in contrast to the metrics, we have the limiting factors and those usually are cost, of course, the system resources. And by that we mean what is available to you in your hardware or in your software. Sometimes you have more power, sometimes you have more processing capabilities, that is a limiting factor. And then integration, integration could be things like, for example, how easy is it to manufacture. And obviously, in systems like Smart Cards, that is a very difficult question to address. Now on this side, what we have here is one of the key questions that everybody ask how do you make your system work in an environment like a Smart Card? And power is definitely a question that comes up and the worst -- the most. Your sensor is that low enough power so that we can run it off an NFC terminal. But the reality is, even though we're working on reducing our system power consumption quite a bit, it's not just about the sensor itself, there's also an MCU inside the Smart Card that runs the algorithm. There's usually an ASIC that is a custom silicon device that most manufacturers need in order to process the signal. All of these, from a system perspective, need to be able to fit into your power budget. So that means power management is key, and we are investing quite a bit not just on reducing the sensor power consumption itself but also in power management. And I'll speak about this a little bit later. Now the great equalizer to all of this or actually differentiator is the performance of the sensor itself. And the size, again, is key here. So once you have the big size, things like FAR or the FRR or even the speed can be mitigated and to make the whole system work right. Again, the focus for us is to balance all key performance variables, not just 1 or 2 aspects of the system. Okay. Let me talk a little bit about price and cost advantage and why this is something that is key for our technology. What I'm showing here is a graph of how you can compare cost of the sensor device itself. And the red dots, what you have is typical scaling factors for silicon sensors. And you can see as you grow in size, they really start shooting up in cost. In contrast, the LTPS technology, again, is build on this big, big sheets of glass, sometimes even a square meter or more. The cost per area is really low. In addition, it doesn't scale as fast as silicon. The reason for that is because we have some overhead in it. It stays constant regardless of the size of the sensor. On top of that, there's another element to all this, which is that we have a 2-component solution. So most capacitive sensors, they use a single silicone die. In our case we have 2 pieces. There's this sensor itself, which we manufacture in the glass or the flexible polymer; and then there's the separate ASIC, which we use to capture the image. Now that ASIC it stays there regardless of how big your sensor is. So what that means is as you scale up in size, the price or the cost doesn't go up as quickly. In contrast, the silicon the minute you scale up in size, it really scales up quickly. It's almost linear. That's not the case for us. And then there's a third element to -- key to our technology and size advantage, which is the fact that this glass technology, this TFT technologies that we have in our sensor and that you see on your cellphones, it has active components. They're called TFTs and that allows you to build intelligence onto the material itself. And when you do that, you can grow the size without having too many problems. There are some technologies out there were the minute you try to grow it and make it bigger and bigger, it gets very, very complicated to handle those signals. We don't have that problem. So that allows us to build even bigger and bigger sensors. Here in comparison, you can see S2, which is our current-generation sensors, which we use for most of our markets. And right next to it we have what we call a [ Fab 20 ]. I'm going to let Radek later on speak a little bit more about what is but Fab 20 is basically a standard for sensor size. And it's roughly 300 square millimeters, which is really, really big. And it gives you automatic -- or actually much simpler access to markets in the government ID as well as some other agencies in places like in the U.S. and so. So once you start scaling up in size, what you see is that the cost is reduced per unit area. And what's more interesting, the performance in creases on a per unit cost basis. That means as we get higher in size, we have a much better data set, bigger image but the cost hasn't changed too much. So performance per unit cost basis really goes up. Okay. So before I get to our technology road map, I want to spend just 2 minutes talking about technology trends, and in particular about the BSoC. The BSoC is what we call Biometric System-on-Card. And there's a lot of work that is being invested into this field. And this graph here is going to try to explain what we see happening in the next few years and also it's going to try to explain a little bit why we invested so much, not just on the sensor technology itself but also in the system as a whole, as a solution. What you see on this graph here, on this axis is product generation, so how a technology evolves over time. Over here you have the system capabilities. Some people call that system resources. And again, this is maybe how much power you have, what processing capabilities you have, things like that. Now the first curve is the occurrence Smart Card technology trend. It basically shows that it is a mature technology. And you can see that over time you do get some marginal improvements, but it's very mature by now. This curve is the biometric system requirements. So it basically shows that at the beginning, when we were all developing new sensors and new technologies, we need a lot of help to make it work. But as it matures over time, we maybe consume a little less power or we may be a little bit more efficient, and then our system requirements go down. What you can clearly see here is that there's a gap, and this gap between what the biometric system needs and what the current technology has to offer is what we call the cost of entry. So this cost of entry for a new technology means either more expensive components or it means that you have a larger bill of materials. It also means that there's maybe some limitations in performance. Now what we see happening now because of all this interest in Smart Cards and actually very typical for most technologies. There's usually a new inflection point. And this is what we're seeing happening. And you can almost think of it as a new paradigm shift almost in the smart Card industry, which is where people start investing in creating new capabilities for that technology, maybe you hear about people starting to invest in new generations of secure elements. Those are the smart chips inside your Smart Card. And as they invest on that, they become more powerful. And then -- or people you hear a lot about investing in energy harvesting. So that means that you have more resources in the card itself. And as this new inflection point is created, now what you have is the value opportunity. And that's means better user experience, new applications, reduce system complexity. And in our case, when we start putting in there, this big sensor becomes increased security. Now this is an example here what I'm showing one of those things creating a new inflection point in the industry. And what I'm showing here is what is called an active inlay. An active inlay is basically an electronic system that is put inside the card. And I know that this is something that is probably a little bit new for most of the Smart Card industry or at least not very mainstream, but is indeed one of those inflection points that is being created. Now there's a lot of advances in elimination technology. They are streaming -- streamlining this into mass production, so we see this again as a value opportunity being created. One other thing this enables is to not only just the Biometric System-on-Card, but also create a lot of new applications. There's companies out there that want to put a display in the card. There's companies out there that want to do Bluetooth. There's many things that are trying to happen. Because of that, system architectural knowledge is an essential asset to our team. So we're growing quite a bit in trying to acquire this know-how. This includes digital embedded systems, includes power management, RF, energy harvesting, manufacturing, et cetera. Okay. Moving now to the technology road map. What I'm showing here today is a very high level where our chipset offering. And our chipset is basically the core components, the sensor and the ASIC itself that go into our modules. And Radek will speak a little bit later about the modules themselves. What you have here today is S2, A1.5 and A2. That's our current offering. It's being used for our Tier 1 customers. It's also being used in the First Biometrics subsystems that we're delivering to address the contact-based Smart Card sector, and it's been the foundation of our first-generation products. Later on, we have S3 coming online. S3 is a lower-power offering especially designed for the Smart Card industry. We also have Fab 20 coming up. Fab 20 is the sensor I was talking about before to address the government ID sector. It is 300 square millimeters at 500 [ dpi ]. And then as a last step we have A3. A3 is our new generation ASIC that's going to address extreme low-power applications in the future. It is also going to incorporate a few extra features in it that is going to help reduce the complexity of the system and reduce the cost of the overall solution. Again, from a very high level, what our road map tries to do is leverage or lean on our core advantages. And those are the flexible sensor and the big area. And this is what we call our focused approach to try to leverage our key technology. And with that, Radek.
Thank you, Matias. So just to briefly introduce myself, my name is Radek Matyasek. I'm in charge for sales in Europe, Asia and India for NEXT. To give you a little bit of my background, I have been with NEXT since 2014. I have been in the biometrics industry for 16, 17 years by now. So I've seen quite a lot of evolution and change in this market since the early days in the 2000. So what I am going to do, I'm going to take you through the markets that we are targeting at NEXT and the kind of products that we are going to address these markets with, the market sizes as well as the road map that we have, the new products that we have in development that we will aim to go after with these markets. So I'll start off with looking at the notebook and access control markets. As Ritu mentioned, these are markets where we already have developed products for so we are not really planning to do any major investment in creating some new product. And later on, I'm going to go through the Smart Card and government ID market, which are really the focus market for us for future growth of the company. So notebook market is a market which is stable. It's a very mature market. Majority of the market today is taken by low-cost swap area sensors. So it's a very dense marketplace, and it's very competitive. So it's really all in that market went about pricing and really not focused on security or user experience that much. So if you look at that market, the shipments in that market are kind of stable or even slightly declining. Depending on the source, this market sizes somewhere between 150 million to 170 million units a year of shipments. Where we as NEXT are playing, and you have seen that with our Tier 1 design win in the U.S. and with the Fujitsu win that we announced, we are really targeting the high end of the market, the top of market that appreciates the size of the sensor the performance. So it's really the commercial, the enterprise applications, enterprise notebooks, ruggedized notebooks. So in our assessment, that market size is somewhere around 8 [ million ] units in a year, and we don't really anticipate that market will be expanding for us. With the ASP erosion, the ASP price pressure will be more see in the market in terms of the driving new potential it's going to be slightly declining from now on moving forward. Moving to the next, it's the access control market. So as you know, this is one of the most traditional markets for fingerprint sensors. It has been here for 20-or-more years. And it's really about providing sensors for access control applications such as door locks, access control applications, time and attendance systems but also point-of-sale terminals. Where we see this market has been growing -- I mean, the adoption of fingerprint sensors has been increasing in that market, especially what we have seen, for example, in the Chinese market is there is really a traction and market is increasing for door locks. It's really become very popular application to put fingerprint sensor in your lock. It's very convenient. So there is some growth based on that. But as a market, it's very fragmented. There is a lot of players, a lot of small, medium companies that are building products. So it's a pretty challenging market to actually address. What we are doing here, we are really leveraging the products that we have developed for the market in some small changes like better ceiling of the sensor to the correct enclosure, but it's really not a major changes compared to our standard portfolio. And we are addressing that market through really the large-scale distribution partners, the partnership we have signed with Arrow. I think we announced that in summer last year. Arrow is the world's leading electronics distributor so and we are serving the American and European markets. We also have a partnership with WPG. It's a major distributor in China, and we are addressing the Chinese market with them. And then for the finished products, we are working with specialized channel partners like Fulcrum Biometrics in Americas and MTRIX in Europe to address the system integrators and the basically, the finished products business. In terms of the market size, we project here that the market is going to be slightly growing. We see some new trends coming up, such as the FIDO for the fast identity online. It's a way for the consumers but also enterprises to authenticate. So we see based on the discussion we have of the industry partners that there will be some growth in the FIDO application in geographies such as North America or Japan or China. So there's some growth predicted in our production here and also the Internet of Things as kind of a new application where there is also opportunity for biometric sensors. So we don't expect to get a major market share because the market is so fragmented, but still it will provide some increasing revenue for us opportunistically. So we're now moving to the more interesting market: government ID. Ritu mentioned about government ID. We will be showing much more detail about what a government ID market is and what the opportunity for NEXT is there. So the government ID market is really a market which exists today, and it's still expanding. And I will show you some major markets, which actually go on the government ID biometric sensors and really even laid the foundation of kind of growth of the some of these markets. The special thing about government ID market is really there is a lot of fibrillation, which tells how the sensor should be designed, how should they look, how should they operate. So it is not a market that any company can enter. You have to really design a focus products for that market, and you also have to go for certification process, and I will explain that a little bit later on. NEXT is really uniquely positioned for this market because we can provide large-size sensors at a significant lower cost than competition. And mostly competition in this market is bulky optical sensors, which are also more expensive. And also in this market, it is not only about selling sensors, but you need a little bit more of that biometric solution expertise to be able to build a little bit more than just the sensor. So this is something that Matias was talking about that is an expertise that we have been building this company for the past few years. So we will be leveraging that greatly in this market. And what is, I think, really great for us in this is that our sensors, as you've seen them, they are very compact. And most of the new market applications in the government ID market is going into integrated devices. So you put the sensor into an equipment like handheld terminal or point-of-sale terminal. So this is where our sensors really nicely fit in. So that really is opening an opportunity for us there. So talking about government ID market. I have to start talking about the market in India, which is today really the world's largest market for government ID solutions government ID sensors. So I'm not sure how many of you are familiar with what's happening in the Indian market, but it's really been -- currently, it's considered the world's largest biometric program. So the Indian government has decided to really go onboard biometric in a broad way, and they enrolled the entire Indian population by now, the entire adult population and even some of the children population into the system with their face, fingerprint and iris. And the goal is really to enable people to have them get an identity -- unique identity based on the biometric data. So every Indian citizen has a unique ID number and the biometric identity stored in the centralized, basically, cloud-based system. And the goal of that is not only to get people the identity so they can verify in front of their government as a citizen, but also there's a bigger vision and that is to use that system for basic associating the idea of a banking account and using that for payments. So you can get on your Aadhaar account, you can get government subsidies, but also you can pay. And there is also a growing use cases for other applications like access control. So the market is currently estimated just for the payments-associated area at about 30 million units that will be deployed over the next 3 to 5 years. So you may think that market seems to be small, but the interesting and exciting thing about the government ID market is that really this is not the same as the commoditized notebook market, where the ASPs, especially in the low-end segment, are really in $2 to $3 range. But this market ASPs are much, much higher, and I'm going to talk about it a little bit later. But you can think this is really like almost like a 10x of an ASP price compared to the commoditized market. And the market is really dominating today by optical sensors, so we are going to be competing in those markets against those with our compact and lower-cost solution. So I think we talked a bit about our status in India in our past earnings presentations. So we are going -- we are making progress, we are going step by step basically to get our products certified for this Indian ID project. We passed some steps already such as the performance, testing. We've recently passed this January also a software compliance testing, which has been fairly complex as well. And we are now moving through the hardware certification process. We currently don't really put a prediction on when that certification is going to be complete as we new technology and the process is really complex. So we will announce our progress in the coming earnings as we are moving forward in that market. Looking at the government ID. The second-largest market that we are seeing currently is the China ID market, where again the China government has been rolling out new generation of ID card, which has the fingerprint data stored on the card. And again, there is a need to reliably verify the identity of the citizen. So sensors are needed both for the enrollment, the registration of the citizen to the card, but also for the verification of the citizen that is showing the card and then you need to verify his fingerprint. So again, you need the large-size sensor to comply to the China ID government requirement to be able to supply. And equally in the Americas market, there's a standard called [ FIPS201 ] or sometimes also it's referred to as [ FAP20 ], as Matias explained and that is a standard that's been adopted widely around the world to basically comply with to be able to provide sensors not only to government but also become a de facto standard in banking around the world like Africa and Southeast Asia. So I think for you, from the investor perspective, I think what's the takeaway from this is that this is a market, which there are barriers-of-entry to competition. And by being able to get certified and being able to get at a low price point and with some attractive form factors, you can really get a very exciting market during that market. Going a little bit into the product. This summary really shows you the different geographies of different government ID standards and the markets. So I've talked about India. India is really interesting market because the way they set up the standards, it has been designed as a standard open to new technology. So this is where actually we are trying to qualify in and pass a little of the milestones that the Indian government set for us. The other markets has really all centered around a large size of approximately 300 square millimeters. So this is where we are developing the Fab 20 sensor size to be able to address those markets and that means the China ID market but also the U.S. FIPS 201 market but as well as some of the markets around the world like the Brussell ID, which also requires FAP20. The Indonesian ID card market verification again FAp20, and Turkey ID. I mean, there are so many of those projects happening around the world. So looking at our strategy. Our strategy is really to sell our existing modules and readers that we have already developed and existing into the Indian markets will get them certified, get them to market there. And at the same time, develop this large-format, the FAP20 to be able to address international markets, including the China ID market. So from the market size perspective, we see this market currently based on the intelligence we have as we have local sales course in these markets. Today's kind of a market with a potential of 6 million units a year, but we see it expanding pretty significantly over the next 3 to 5 years to be really a market of potentially $300 million. And we really want to take the market share in that pie. Looking at our product road map. I think this is the first time we are showing more comprehensive road map for our government ID solutions. So the first line is the existing products that we are certifying in India, so it's our module and it's our Scallop reader. You will also see a sample in the demo table area. For the future changes in the India market, the India government is really coming with a more secure device specification, which has also digital signature capability in it. And what the Indian government wants to do once they're introducing more and more payment function with ID project, they need a more secure device design. So to be able to meet that requirement, we are designing also on the second line the [indiscernible] module and reader, which has digital signing capability as required by the government. So it's a small enhancement of the existing product to include that capability, and we are planning to intersect the new spec, which the Indian government is basically working on sometime by the end of 2018 and into the early 2019. And at the same time, we are now developing the Fab 20 the large-size sensor, in different formats to be able to address the international market. One thing that I need to stress here is on the good side is we are only developing here new sensor technology, and we will leverage our existing ASIC technology on those products. So there is no new investment on ASICs. In terms of the market, the downside of this is once you develop the product you have it ready, and then you have to go for certification. So in every market like U.S. market, China market, you will need to certify. So that time frame is also has some unpredictability in it. Typically, this may take 6 months, but it can take also significantly longer, depending on the complexity of the certification process. So I think in summary, I think NEXT has really a great opportunity in that market. We are anticipating that with all the certifications granted, we could really get a great market share in the government ID market that could go up to 20% or 25%. So lastly, this [indiscernible] market, which I think many of you come here and are very excited about to hear. As Ritu mentioned many times, really the smart card market is a market where the large size, in our opinion, is really going to plays a key role. With the large-size sensor what is key is really the intuitiveness with which the user can use the sensor to register but also to verify. Imagine you want to pay with your card. You really don't want to be standing at the payment place, at the point-of-sale terminal trying to make it work. You really need to put your finger in it. It has to work. So that is going to be very important, especially as some of these markets that I'm going to talk about are really even also in challenging environments like Southeast Asia and Africa. And there's all challenges posed if you only have a small sensor. What is key with our solution because we have a large-size sensor and a little bit ties to what I was talking about in the government segment is interoperability. So I don't know how many of you really can think what interoperability means. We see it really in 2 main aspects. Number one is because we have a large-size sensor, which complies to standards and can leverage the standardized system, which already existing on the biometric market. And I talk about government ID applications and how much there's happening. So we really complied with all of those standards, the ISO standards. So that's one step interoperability is we can really -- with our sensors, we can plug into the those existing systems, to those existing enrollment stations so that it's a proprietary solution that you need to use. So makes our solution really flexible to plug into those existing systems. And the other side of interoperability is the interoperability inside the card. So because we are using a large-size sensor, we can you standardized algorithms to run with our sensors and Smart Cards. These are again ISO-based formats. And many of the Smart Card makers, as we are engaging with them, we're basically, learning, yes, we have these algorithms already in our cards. They are actually already certified according to the MasterCard and Visa, the payment standards. And also because these are based on standardized formats, there's been a lot of development over the past 10 years certifications. So the performance of those systems has proven these systems are very fast for matching. So actually, the Smart Card maker feedback that we have is this is really great. This works so fast. This plugs into our existing systems. So they really love the sensor for the interoperability aspect of it. So that's more for the ease of integration and also the speed of how the system is going to work. And lastly, where we are really excited is the solution that I'm going to be presenting we really are going to be addressing the majority of the value in the biometric Smart Card, the modules of the biometrics that we are going to be building. So let me take you through the market. Firstly, really a general introduction to the smart card market. This is data from Eurosmart. I think some of you have probably seen them. It is the market size by application. We have taken by telecom market, which is really SIM card. So that's something where biometric is not really going to play. And the market is really broken between payment cards, government ID cards and then transportation access control and other cards. So you can see the market today for payment cards is approximately 3 billion units shipped every year. So there is a little over 10 [ billion ] in payment cards in circulation because the payment cards typically 3-year or 4-year validity. The rest of the market smaller in size, but very important for the future is the government ID in access control, which in the range of today shipments of about 0.5 billion units. And there's going to be some market share for biometric Smart Cards in each of those segments. So this is, I think, the first time we are also showing projection, a more detailed projection for the size of the Smart Card -- biometric Smart Card market. So what we are showing here is really predictions from some of the largest companies in the Smart Card ecosystem ID [indiscernible] that have been published in conferences. And our projection is really in line with what the projection from these Smart Card ecosystem companies use. We think the market is now in pilot stages in 2018, so the shipments will actually be very small. But it will be gradually increasing in 2019 and 2020, and it will really take off in a bigger way by the 2021 and 2022 that we are going to see more significant expansion. We think the market is going to be reaching over 200 million cards by 2022. And really, this is in line with what also our ADM links have been showing. So the 200 million units by 2022 is still a small, small share compared to the total market size. So the biometric Smart Cards will be really only kind of 4%, 5% of the total Smart Card market. In terms of the ASPs, we see some difference between providing complete or almost complete part of the biometric Smart Card, the inlay versus just the sensor. So NEXT is really going to play in that first part, at least in the initial years. So that will also contribute to a bigger revenue that we can generate. So now, I'm going to walk you through the submarkets of the Smart Card market looking a little bit at the different segments of the Smart Card market and the specific characteristics of the market. So I'll start with the retail payment card market. Really, it's a market for -- it's the largest market. This is the first thing that I need to say for biometric Smart Cards could potentially. It's a very convenience-focused market. I mean, the biometrics market really has to work for the consumer when they are paying. Because if you think about Smart Card today, your payment card, it's really, you take your card, you go to a merchant and you pay. So you almost can trust, I mean, this card is always going to work. I'm going to be able to buy products. It's going to be very smooth. So that frictionless is really critical in that market. So that's on the usage side, and this is where we think large size is going to make a big difference. On the enrollment side, it's equally important. So with a large-size sensor, you can do a very smooth and easy enrollment, and we will demo it after the sessions on the [indiscernible] card. So think about how are you actually as a bank, how are you going to manage the enrollment. The banks are closing down branches. So is this not really imaginable that all the -- all of us will go to a bank to enroll fingerprints in the bank. It would be very tedious, a lot of work to be done. So really, if you look at what the banks are planning and also the payment that MasterCard is planning, they're planning to do enrollment at home, self-enrollments. So you as a user need to be able to do it at home. And it's very difficult to imagine you have to do stitching of your fingerprint, touching your finger on a sensor on a card like 10x. Some of our competitors are trying to design schemes where you do enrollment on your smartphone, which also have sometimes even smaller sensor than what is on the Smart Card. So this is all very difficult and that's why also a lot of companies are kind of stumbling on this. We think this is where the large size is going to play a key role. In terms of the mass deployments, we already talked about it. So we really see that market started to go into volumes in 2019 and 2020. The next market for the biometric Smart Card is financial inclusion, and this is a very interesting market because it's kind of a blend between payments and government ID. So the goal here is to really give the biometric cards or cards to the people that so far do not even have a bank account. So this is some of the efforts that some of the payment networks and the banks, the efforts that they are making in that market. So the market potential in financial inclusion is huge. One good example I want to actually give you this market is, for example, the Hoodlum in Kenya, the government issues the card together with banks. So a few banks in Kenya are issuing the cards. They are currently not having the biometric sensor on it, but it's an application that really have a potential for it. The government can transfer the government benefits into those cards, and then the user can actually pay with the card at the merchant, and they can also top up the card with their own money and use it for payment.So often, these cards will be used in a very challenging environment. We are talking Africa, we are talking South East Asia. So the performance and that works well will be really key, in our opinion, in that market. So larger size, again, will be a great asset.In terms of the market size. We have really not broken up the size for the financial inclusion. It's kind of very difficult to separate the financial payment cards from the government ID cards. So it's kind of somewhere in the middle, but we all agree that the market potential there is very significant. You have this huge un bank population today. Moving to the next subsegment, it's the government ID cards. So these cards are really very security-focused. I mean, these cards are going to be used to prove the identity of the citizen, so they really have to work very lively. And in addition, those cards can be also used to give government benefits, government -- for example, pension payments, social benefit payments. But you think also about health cards. Health care is an area where the governments and the -- the government -- the health care insurance companies are facing a lot of fraud with who's actually getting the service, the health care services. But also, there's a little fraud associated with actually the hospitals and the doctors asking for the reimbursement for the care, right? So when you have the proof of identity that a person has been there physically, they have to sign on the transactions, sign on the -- basically, the expenses that the health care segment is reimbursing. This is, again, an area where we can reduce fraud, so potential in this market is huge. Where we think next is going to have a significant competitive advantages because we are aiming to have these -- all of these government-certified sensors. So we think the market is really going to appreciate that, it's going to even demand that, and we think we can get a major market share in that market and be really the leader in the government ID. Of course, having a certified sensor also means that the governments will be willing to pay a premium for that, so that will be a very positive contribution towards our margins as well. And last market that we have here for is access control. It's a kind of the smallest market. I think the opportunity there for us is also pretty big because in access you want the sensor to work reliably well, so I think we can also have a meaningful market share in that market with the large-size sensor. With applications that are really -- we see a lot of emerging applications in that market even now. Tactile is I think can also talk a bit about the opportunities they're addressing in the market segment. So if you look at the biometric Smart Card, with the product offering that we are planning with the B44 I'm going to talk about it a little while, we are really going to be taking most of the value of the Smart Card with our product, which is shown here in the red box. So the product that they are designing now and that we begin sampling in Q2, so really, in a few months from now are -- is our module. So it's a complete system that only with a secure element the Smart Card chip, basically, that the card maker has, so it will ease the integration of the entire system together. We currently have over 20 customer engagements. So there is a lot of interest in the market in that type of a complete module. And we are going to be targeting the financial inclusion, government ID and access control markets, primarily. We've mentioned also here. So is among our first customers which are using our products, and he will be demonstrating the card after this session. Marc Miller will also be saying quite a bit about the tactless technology and how it works, and what's the unique benefits of what they have designed. So now, going to take you through our roadmap and the products that we have for the Smart Card segment. So the first 2 lines is our chipsets, the original chipset. I think some of you know from our past announcement, this is really the first-generation product we have for Smart Card for specialized cards because the sensor was not flexible. I think these are still having a few samples of those cards there. Tactile shipping the product today to its customers. The second line is our flexible sensor chipset, so it's our sensor. And this is already demonstrating here, has announced these chipsets in the cards integrated by last year, when we presented them at the [indiscernible] Exhibition in December in France, and we are showing the samples here. So this product is currently being ramped up to production, and we will see [indiscernible] shipments of this in really a few quarters from where we are now. The product that we are designing, as I mentioned, to advance the mass market for Smart Cards, it's our NB4410. So I talked about that. We are going to start something the product in the next quarter. And our product roadmap for the modules is really going to address in the next steps also the contact list market. And as we move forward towards the end of 2019 with our third generation module, we are really driving down the cost of the entire system, driving down the number of components, so reducing the total cost of the system of our introduction of our new ASIC, and also driving down the power, which is very critical to meet the power consumption requirements. So really our -- if you look at our product roadmap and how we see the market really take off by 2020 and going into 2021, 2022, we have the products here that will address that expanding market for also the retail payment card at that time frame. So in conclusion, based on what I've shown you, we think really the large size sensor makes a huge difference to the Smart Card market, and we can -- we are thinking that we -- that with that solution we are really providing some unique advantages and some distinguishing features towards the banks and payment networks. So we are very confident that we can get a significant market share in the Smart Card market with the products that we have in development and in our plans. Thank you.
So I think now we have a -- and I was a time for the coffee break. And after the coffee break, will have Marc Miller from [indiscernible] presenting the technology, as well talking about the general requirements of the smart card market, some of the challenges there are for biometric smart cards.[Break]
Yes? Okay. So first of all, thank you for giving me this opportunity to talk here. So my name is Marc Muller. So I started in the research center of [indiscernible] I guess, and are waiting you know [indiscernible] and holding several position up to the top. Then to make it short, in 2003, I joined the Smart Card group of starting managing that is the [indiscernible] that is the management of every information that you have in your SIM card. And then to make it shorter, to manage all the technology for the Smart Card in 4 years for [indiscernible], okay? On few months ago, I took the retirement package of [indiscernible] and it lasted only 1 month. And I met again Michael on the I'm so excited that I forgot to stay at home and back to business, okay? So today, I will give a sure information about what I know from the market. And then why and how Tactilis on NEXT will be successful in the future. Okay. So first, few words about the market. The market is huge. On this year, is the first year that the ecosystem is going to deliver 10 billion securement. So securement is a new name for Smart Card because Smart Card, I will tell you later on, exchanging form factor, so that we are delivering 10 billion devices this year. I will later on explain you a little bit the evolutions and the dynamics, but I want to highlight one thing. It's about so classical your SIM payment card, [indiscernible] government card, government ID, blah, blah, blah, so new [indiscernible] is here is device manufacturer. On this, you're going to roll like hell -- but they introduce something very key. It's a new form factor, which is called embedded securement. That is, there's no more plastic. It's like a chip you put into the device. On the next-generation is even more it's what is called that is on the same that chipsets from the chipset maker you will have the securement. This is a big description for market. That means -- that's why [indiscernible] is in trouble today because evolution is going to be significant, okay? Next, just to show you the evolution of volume. So you see that SIM card, the telco SIM card is flat. Payment is growing slowly, but with 2 descriptions. So in 2004, you had Target and Home Depot in the U.S. hack. This triggered the market in the U.S. change from Max type to SIM card -- to Smart Card. On this year, in 2018, we will see the switch for the retailers because the chipset in retail was hacked and all to switch to Smart Card too. So you have also the evolution of government card that is smaller. So this is picturing volume. If you do the same picture in revenue, ASP are very touchy in that ecosystem. So this would really disappear, and you would have only payment card, okay. Okay, so now this is the card from Tactilis. Obviously, this is only one part of the solution on services offer is going to provide. Because with the card, you can do things that you need, car management systems, you need app stores, you need other things to complement the card. Car the offer but it's not only a piece of this offer. So what is inside? First, a NEXT sensor. Then you have microcontroller to manage all the pictures coming from the -- on the data coming from the sensor. One key point that is very unique to Tactilis is this huge flash memory, I think. So we have 4 gigabytes of memory into the Smart Card. As far as I know, nobody else is able to do that in a reliable way, okay, very key. So we will see it now. So payment card is a $5 billion market. The point is that it's not coming fast enough for me, at least. So that's why there is, in fact, over the years, we are going to provide to the market key value position. That is first, convenience because I was in many focus group with longer -- secured longer. You see people playing with it. If it's not simple, they don't use it. Even if you need security, if it's not convenient, if it's not easy to use, nobody's going to use it. On what we are introducing with this fingerprint is mutual trust security. This is really what will introduce. That is the card is going to trust the user or the holder of the card. And the holder of the card is going to trust that all the credentials in the card are secure, okay. This is much more than what is a classically pushed as pin on password replacement. You will see there are plenty of application on top of pin and password replacement. Another point that is not very clearly understood is we have -- we discussed about 4 rate, 4 rate. But what is unique here, thanks to the large sensor, we are going to manage it that if some application need medium level security. On some application, we need very high security. And we are able to manage it, thanks to this [indiscernible] And something very unique to also is the way the card is [indiscernible]. So now, payment is coming in a few years, the simple, for example, the dynamics EBV and the security code on the back to 4 years from the availability in the market to really making some volumes -- significant volumes that is more than a few millions. So here, over the years, Michael is here on the team has developed a strategic view of where we can add value with this senior print-based approach. I will not go into detail. But the point is that it's ID-centric, obviously. And the key that we can make it happen faster than 3 to 4 years. Understand, this is again, the appropriation that is all everybody could benefit, will benefit from such a card. And even if it's 7 population plus, because in some cases, you will need at least 2 cards for ID and backup. The simple answer is bitcoin, you have your private key. If you lose your private key, you lose everything. Here, we will be able to provide a secure backup of this private key that is [indiscernible], okay? Now what else is [indiscernible]? And real estate it's location, location, location in Smart Card it's convenience, convenience, convenience I insist because this focus groups seeing people lost in the middle of how do you security. But again, for the user, what we will have. We have fast, easy self-enrollment, it was already mentioned. So what we say fast enrollment is less than 1 second enrollment. And this is going to be the industry standard. We are setting Tactilis on the NEXT, we are setting the industry standard. Because competition, I know them a little bit, even quite well, far away, far away. They are far away from that, okay. So really one second enrollment and fast verification. You do not want to await for even 1 second, a few seconds is long. So 1 second verification. And for the user, some user have 5, 10 Smart Cards in their wallet. We will put all this, the ambition is to put all this Smart Card into 1, because you will see, we are providing multiple app environment. So for the service provider. They need an easy deployment end-to-end solution. I was already mentioning it. We should provide the card on the integrators knowing a little bit about the ecosystem of how to manage Smart Card blah, blah, blah, it will go nowhere. So we are going to provide end-to-end solutions. If people want to buy only the card, they have the capability to read the solution no problem, we provide the card. But we are also providing end-to-end solutions. And we are very flexible. My colleague is a big businessman, and he knows everything about how to make a successful businesses. So we are going to be flexible in the business models, okay. And finally, the career ambition that is providing card as a service. The trick is as a service, everything is as a service today, but we can provide that too. So what are the key requirements to be successful? The first is durability of the card. And there are plenty of tests, ISO test [indiscernible] the test, there is one which is a critical one, it's called a 3 wheel. When you work on the card on this stress test is very key, and we are going through that. There are plenty of stratification that are needed for making the business for the securement [indiscernible] that is a common criteria to be sure that the security are at the right level, and nobody's going to be able to hack the card itself. Same for software and for application also there are plenty of certification. We are going to get all the needed certification for making a secure product. On [indiscernible] I mentioned the card West is providing an open platform for multiple applications. It's like in the seller side, you have a virtual machines. So inside the Smart Card, we will have virtual Smart Card, very securely firewall, and each provider will have its own security domain to pay his applications, okay. And other key the key players they have focused them a published rate and projection rates was the classical pin replacement, you have 4-digit pin so you have 12, have one in 10,000, at least, before acceptance. And as you mentioned, we can go up to one in 1 million, whatever needed. So the technical challenges. I think you understood that we have to have a sensor that is large, flexible, and low-cost, by the way, don't forget that. So why large? You will see it's quite easy to understand. This is what competition has. And here, the red spots are what we call mini shares. That is the key point that are characteristic of -- that are extracted from the images, that are kept as a reference. So if you have a small sensor, you get 5, 8, whatever statistic is, on together. For a large sensor you have 20 to 40 [indiscernible] is around 32, but you have them all in 1 touch in less than 1 second. Here, you have to touch 5 times, 6 times several seconds, it takes forever. So clearly, we have, thanks to the NEXT sensor, we have the 1-touch verification on the security at no cost, we hope. So there are some other challenges for So power management, because no batteries, competition is providing card with battery for every customer I guess. Form factor is a challenge because you have to put everything into the 800 microns of the Smart Card. On lamination, you heard certainly about the call, warm, hot lamination, it's something very touchy to manage. On the [indiscernible] when I was very, very impressed by on the -- maybe I think it's manufacturing edge. So there will be 2 offers in there ready for lamination. So the Smart Card makers, the classical one on the new commerce could come on laminate -- sorry -- on laminate classically, or we can provide them with finished card. So the molding -- it's a molding process we are using here on -- it's a very unique molding process that is -- has been developed by Michael and the team, and is going to provide reliability, high yield on tamper resistance. And one last point to highlight for the manufacturing edge of is the silicon. Because I guess, I already stated that nobody's able to put 4 or even coming 8 gigabytes into smarter form factor. Okay, that's it so if you have questions or I don't know what you can.
We'll leave the question to the end, if that's okay.
Okay. Good.
Thank you, Marc.
Yes.
So we are no our presentation and our assessment of the different segments of markets and technology. And we want to sum it up in a financial outlook section. And as we see here, here we have the main segments that we are targeting. The amounts are in million U.S. dollars our serviceable available market. If you see on the right side -- left side for you, we have the notebook and access control markets. They are the smallest one that we target, and they are expected to be pretty flat or have a small increase. Still, they are markets that we are serving, and I'm going to serve it to large investments on the product side. Government ID is in the markets that is growing, and how fast and how large we expect them to be are something we then have been trying to be pretty specific throughout the presentation. Our product offering in these markets are, and will be strong and follow the evolution of the market segments as they develop. And -- but on present government ID, we are also dependent on certification processes. And these processes are something that we really do not control. So we have then also said that we believe that our air product offering are so strong or are going to develop so strong that we believe that we will have a good chunk of the market, in particular, in government ID and Smart Card, and our target market share for 2020 will be around 25%-plus. So the other thing that is quite good so as we said is our gross margin is finally positive, and it's much easier for us to be able to talk about positive gross margin that -- compared to what we have done before. And we have positive margin in January, and we have -- expect to be 20% in the month of February. We are continuing to focus on reducing costs. We are not satisfied, but we have at least a good traction on positive gross margin, and our volumes and our [indiscernible] levels is very important to further reduce costs. We have year levels of about 95% today, and that's something that you need sometimes to get to that level. But we have this as an absolute minimum on what we want to have. We are above that for the time being. Another thing that is also makes it easier for us as a company is that also the positive gross margin that support funding of working capital elements, being able to deliver negative contribution margin it's very difficult from this element, but now it's a different situation. We have also, based on our understanding on the market competitiveness and also the different offerings that we have in the segments, we have also some target gross margin, and that's at scale volumes. And OpEx is slightly above 20%; access control and government ID, plus 25%; and Smart Cards, around the same level. Long-term company growth is somewhere between 30% and 40% on scale volumes. That's what we have been using in our models for quite some time, also when we evaluate the offerings. You have, as Radek mentioned, some markets, we are selling readers at a very high ASP, and modules at a much lower ASP. So if course, it's a more blended ASP assumption that we have in this market. Cash, we have NOK 80 million and at year-end 2017. We then expect a positive contribution margin and the increased revenue driving us into the second half of 2018. And the board has then initiated activities to ensure adequate financing through 2018. We have positive gross margin that supported 4 working capital elements. And also going forward, we are working with our suppliers and so that we can be even more asset-light, not having to invest in any tools. Because now, they see that we have a real business, and we are selling, and we have positive contribution margin. So it's a very strong dialogue we can have with our suppliers and owners. If we look at operational expenses, we are currently [indiscernible] employees, and we are moving to 100 during 2018. And as I said earlier, the expenses will be slightly higher in the coming quarters to fund the Smart Card and government ID solution. By reaching the targets we have shown here, we are establishing the financial run rate to breakeven and positive cash flow. And I think that's what I wanted to say.
Okay. So with that, I will just be doing some final concluding remarks, and then we will move into the question-and-answer. So what I wanted to do is just do a recap, make sure that we get some of those key messages out. So in terms of what we've done as a company accomplishments, this is just a recap of what we've announced over the past year or so. So we've installed our first phase of flexible sensor capacity. We're ready for mass production and have done shipments of our new ASIC and flexible sensor products. We pivoted the focus from a product development perspective for the company to Smart Card and government ID, and achieved our positive gross margin in January of 2018. So as we kind of look forward, from a milestone perspective, just so that investors can start to think about different things that we're -- that we should be announcing. In the near term, sampling the new Smart Card module, the that Radek talked about quite a bit in the second quarter, we've already begun a lot of engagement activity on that module already. In terms of the actual hardware delivery, we expect that in early second quarter. Again, we would expect that through the course of this year, we will start to see more customer projects announced in the Smart Card and government ID space. That depends again on certifications and product delivery, product development. We will be sampling our fact 20 product offering by Q4 of 2018. And as we talked about, establishing the financial runway to breakeven for the company. So I will leave you with kind of the final key messages for the company. Just I want to make sure that we bring it all together in terms of the all the presentations that you've heard throughout the day. So very innovative differentiated unique technology that's not always the most important thing in a given company. What's important is how do you take that unique technology, go into interesting markets with interesting products. And so this unique technology allows us to do the large, cost-efficient area sensors with this increased security and enhanced user experience. Again, very differentiated solutions. We are offering a wide portfolio of products that add high-value add to our customers for their solutions. Again, we're a proven supplier. We've established both core biometrics expertise, volume and scaling expertise from an operations perspective. We talked quite a bit today about the markets that we're targeting. Again, these are markets we want to go after that will value the large sensor size and the higher security that we can offer in the government ID and Smart Card space. And again, a lot of focus on financial discipline, really working on achieving positive gross margin, getting to a long-term target of 35% to 40% and then getting that runway to breakeven. So with that, we will be moving to our Q&A.
And we'll take your first since -- can we just get us up here so that then -- I promise, I'll call on you first.
Sure. And then you'll do the web. So Marc, do you want to come up here as well? Because I think this particular question that's coming might be for you, maybe.
Christopher here from DMV. We talked with since you're up there. Can you first elaborate on why you chose NEXT specifically for the biometrics? And also could you elaborate on, not the cost of the sensor or the card, but how much does it cost you to add the biometrics to the card in itself?
So we selected the NEXT because of the sensor there's a new one company providing transfer at low-cost as you have seen it. On the -- with the cost of adding sensor is, I don't know. Because we started from the beginning with this fingerprint. So it's not an addition, it's a starting point, okay? So we are not building yet another Smart Card company. We are all in trouble so.
Then on the Smart Card market. It seems you're assuming an ASP of around 4 in your market value position. Does this mean that you are cautious because you're not putting any inlay figures into that forecast? Or do you believe that you mostly supply sensors and not the kind that are totally in the solution?I don't remember the slide # but.
I think in that slide, we've shown that actually in the -- at least in the initial years, with our gen 1 and before the second generation, we will be providing almost majority of the inlay. So actually, we plan, we will be selling at a higher ASPs than just the sensor. I think we showed in the slide, if we go, if you go back, I think it shows $8 to $10, I believe. And then as the market is going to go more aggressive, we also need to go more aggressive. So the -- I think we will be moving towards a more simplified solution, that's the generation 3. And so the ASP will be lower. We will be providing less of value for the card. But this is also where we think the more competition resources will go directly into the Smart Card chip. This is also what Matias was showing. So because to get into the smart markets, especially by 2021, 2022, the cost of the entire card will be even more critical. So that's what we are planning to hit relatively the gen-3 module. So the ASP will be going lower.
We're kind of expecting is as volumes increase, in order to get this market to actually become a very large market, we're going to see ASP pressure. And so that's the way we're kind of building the model is that in the beginning time frame is we're servicing some of these different markets, we will be able to command a higher ASP in the beginning. But as the market starts to mature, there's going to be ASP pressure, and that's the way we're modeling the market.
Especially in the payment card, so we think the government ID there will still be payment, especially if they're willing to pay more for the certified sensor for the large even larger sensor. But in the retail payment card, there will be the pressure and I mean the prices to really go down to hit -- if I can say, what we heard in the market is really the banks are for the mass rollouts to be able to reach those 100 million cards, the card costs for the bank needs to go under $10 so the ASP will need to reflect that.
On Dell and Fujitsu, could you say anything about when or how long these contracts are, when they're up for renewal?
Say that again?
The Dell contract, for example, when is that up for renewal?
So Dell, I mean, if you look at the way any notebook company works, they're -- they will do kind of a refresh every year. That's how notebook companies work. So I can comment at all on what that refresh cycle looks like, but notebook companies, not just Dell, but all notebook companies do their refreshes on an annual basis. Havard?
Havard Nilsson, Carnegie. All of this technology, I guess, the key fundamental question is perhaps you can explain why you insist on comparing sensors using [indiscernible] points, while any capacity player will insist that their micro feature approach, which are looking more into the details, will help them use a smaller sensor instead. And then the second part of that question, I guess, is, to be approved for the fab, do I need I guess, the FIPS you need to go through 500 DPI resolution as well, and how do you -- how will you get there?
So I'll -- so let me answer the second question first because it might be a little bit simpler. We've already -- we already have a sensor that's 500 DPI for fab 20. So I'll let Matias talk a little bit about that, and then we can come back to the other question.
In that road map that I was showing earlier, the fab 20 designs are implying the 500 DPI resolution already. So it requires just to be a fab 20 sensor. So we are already having some tests being done on those, and it's coming along very well, so we're very sure that we can achieve the 500 DPI resolution.
So is at a fundamental change to your technology to ...
No, it's not a fundamental change. It's just a slightly different pixel design, slightly different circuits around the sensor. But as you know, the display companies that make this technology, they have really matured their production capabilities. And as you see in your phones today, they have very, very tight resolutions already. So we're really leveraging what they have done for many years of development. It's not really not a big step in terms of making a change. It's just a redesign of the pixels, yes.
So let me get back to your original question. So I'll answer it in a way that may not be overly satisfying. The best way to get fingerprint data is through There's -- that's a -- in my opinion, that's a fact. The small sensor people, because they don't have enough have to go through advanced algorithmic and processing techniques. So again, having done small sensors in my prior life, you have to try to get more information because your sensor -- you have a lower security sensor because you're not getting enough data from the fingerprint. So if you can use pores or sweat glands to try to get a little bit more fingerprint data, then you are able to say okay, now we can say that we're offering a higher security solution. So again, the reason that the governments and some of these other bodies are looking for manusha-based fingerprint sensors is that is the most secure way to gather fingerprint data. If you say you have to go into a small space as in a consumer electronics application, then you have to say okay, I have to find other ways to this. Now you can do sweat pores, I can do pattern matching, I can do a very elaborate algorithm, stitch a fingerprint together, and now say that I have a very high security solution. So again, as I said, that may not be the most satisfying answer, but it is the best way to get a high security fingerprint reading.
And I guess, the next evolution of that, I mean, we do see some work are being done on the standardization parts where they are looking to sort of include these types of fingerprint recognition in future standards as well.
You mean pattern based?
Pattern based. And are you confident that your clients for the next say, 4 or 5 years will still require you to have an ISO certification?
I believe in the markets that we're going after, especially Smart Card and government ID, the ISO certification and the government certification, like FIPS, will require these. They will require us to meet these certification. There are some markets that may say, okay. Again, with access control and notebooks, you're not going to need certification. But in the markets that we're choosing to go after, I believe we will need ISO and FIPS. So we're going after, again, the security-critical applications. And I believe in those markets, those certifications will be required.
Right. And lastly, could you address the U.S. Smart Card contract as well, and when you are expect to run and when you expect to ship volumes on that?
So I don't know where Michael is. Michael?
[indiscernible]
You get to be our guest speaker for a moment.
Good afternoon. How is everybody? Actually, can you hear me?
You have to do it for the web. You have to do it for the web. It's on. They can hear you, the web can hear you.
Can you repeat the question?
Just seen you guys the call when you guys start shipping [indiscernible]
Yes, the project that we're starting with this 650,000 users initially, the total program is approximately 14 million users. We've gone through the first beta and we're going in, we're completing the second beta now. We use to -- we're preparing to ship in Q2 starting with volume ramp. This particular program, they will take product as fast as we can supply it. So it's -- our goal is it will complete the beta-2 this quarter and start ramping into production in Q2.
Thank you, Michael. Thanks for being a guest speaker.So I think we have a couple of questions from the web.
So yes. The first one is, is it a concern if -- I don't know if the English on this -- over sometime is moving from fingerprint to face recognition. Does NEXT have any plan to adopt face recognition technology?
So again, what I'll continue to do kind of as we talk through some of this is we have to talk about the markets that we're going after. So if you think about the Smart Card, it's very difficult to imagine a scenario in which there's going to be a camera on your Smart Card for facial recognition. So there's nothing that we're implying that says that iris isn't a real biometric or palm scanning or vein scanning or facial recognition is not a biometric mode. But in the markets that we're choosing to go after, I do not see facial recognition as a threat.You again?
Chris from DMV again. I was wondering, I understand you have the contact resolution ready for 2019. Could you say anything about when you expect it to be ready? Is that Q1? Q2? Or towards the end of the year? Or ...
I think we put that -- how did we characterize that?
It says '19.
I think maybe I need to lay it over to Matt Matias. We would like to have it, of course, as fast as we can and I think they are making good progress on the contact resolution. So I think this way coming out, really the second half of 2019. For the web, so I think we see it coming out in the second half of 2019.
Fredrik Steinslien from Pareto Securities. So impressive jump in gross margin in February. Is this kind of on an upwards trend from January? Or are you seeing gross margins leveling out at this level or how should we think about that?
So the key driver to this is then related to the implementation of the new ASIC. As we have announced before, during December and into January, and that's the main driver for this jump into the contribution margin. And then it comes up to how we then add on the larger customer contracts going forward and how their contribution margin are on them. We have -- we are very proud and happy to have the 20% margin expectations for February, and we need to -- well, we are not satisfied with that. We are continuing to driving it up, but it will -- you will see some developments, and the levels that we are on now, only small changes in the yield and someone will have relatively huge impact on percentages. Our revenues are increasing we are more [indiscernible] changes on contribution margin.
Thank you. And on government ID, you talked a little bit about the certification uncertainty in that. Is that something that you see a more of a timing uncertainty? Or how do you view the risk of not being able to passing the certifications? Can you address a little bit of the moving parts there, please?
With a large sensor size that we have, we -- I believe, to your point, it's more of a timing uncertainty that we will never get to the certification. The one thing I can say for sure is the fab 20, because we're designing it at the standard size and the standard DPI, that one again will be more time. But again, there's 2 components to it. One is we have to have the product ready. And again, that's part of what we're doing through the course of 2018 is ensuring we have the products ready. Once we have the products ready, then we go through certification, and I believe that it's time.
If I may.
Yes, absolutely. We have all day.
So Christopher from [indiscernible] again. So on seems to be going into the [indiscernible] terminals for example, in India. Can you say anything about what kind of terminal vendors -- U.S. vendors that you're working with at the moment?
I'm not sure that we're announcing -- if you want to take that, Radek, but I'm not sure that we're really talking about the actual active engagements we have today. But it's the point of sale terminal vendors.
Yes, [indiscernible] so we are -- I can say, we are engaged with all the major POS makers in India, as well as outside. I mean this opportunity in India is so huge that also all the major POS makers outside India are going after it, so it means POS makers really in China, of course, because they are growing very much in the market. So yes, I can say we're engaged with all of the leading POS vendors, both India and outside India, and they have a -- they are -- I think they are really pressing us hard for getting certified. So pressure is high from customers as well now, because they -- I think they got very interested by our technology and the cost at which we can supply. So yes, we're facing really a very strong interest. On this question you had about the certifications, maybe one more comment. As we have announced I think in Q4, we have passed this PIV certification, to's not a full PIV certification because full PIV certification requires 500 DPI but we have passed all the image quarterly compliance checks. So now that we have mastered it, and we have been going the this process, it took us really almost 6 months to figure out the way to get PIV compliant with the Active Thermal sensor. Because so far, as you can imagine, no one ever tried to get on an active terminal, so there was a lot of things that we have to figure out, how to really prove compliance, prove certifiable lab. So now that we have proven and that we know how to do PIV compliance, it will be far easier to do it in the 20 sensor because we are going to replicate what we have done on the 385.
Can you say anything also about which car integrators you are working with at the moment? You mentioned [indiscernible] in the presentation deck, can you say the names that you are working with?
I think we cannot.
And the last one for me. When you will now launch the new modules, what external components, except for the EMV chip, will be needed in the cards going forward as you integrate more and more of these components into your solution?
So what I'll say is that you do -- for a very basic card, you'll need the secure element. But there's a lot of -- as somebody was saying earlier, there's a lot of very interesting what I would call, power cards. So there are people doing displays on the cards they're doing dynamics EBV they're doing onetime programmable. So that sort of thing is not what we're interested in. We're really interested in providing just the biometric of portion of the system. So our goal is to provide the biometric subsystem, and we are leaving it to card integrators and card manufacturers to do anything else that they want to do. So if you want a very, very simple card, you can take our biometric sub assembly, hook it into the secure element, and you'll have a card. But typically, what we're finding right now in this market is there's a lot more that people want to do with cards, similar to what has been talking about.
[indiscernible] I have a question for Tactilis. How do you see the volumes going forward the next 2, 3 years?
I'm sorry, it must be my hearing. Can you repeat that?
How do you see the volumes for Tactilis going forward the next years?But I asked the guy from ductless. Are you from ductless.
He's the CEO. Mike is the CEO the guy.
[indiscernible] and in any case, this -- just so you have a little bit of background, this program that we're talking about right now is not something that we started 2 or 3 years ago. Although Tactilis was formed in 2014, we developed this technology in 2004 to 2006. We built cards, integrated sensors and cards back in that period of time when around the world looked at promoting the technology, and it was way too early. So we put it on the shelf, and we waited until -- actually, the tipping point for us to look at commercializing this technology was in 2013 when Apple Computer bought Authentic, which is one of the censoring manufacturers around the world. They spent $300 million doing that, and they integrated biometrics into the smartphone. That became the tipping point for biometrics to go into the data life. So that's when we formed Tactilis and started to commercializing technology that we have developed previously. In that process, we chose NEXT. We went around the world and looked at all the different technologies and chose NEXT as the preferred sensor technology because of size, because of its ability to migrate from its current technology to polymer. So the roadmap of NEXT several years ago, which is now starting to come to fruition, is the reason we chose NEXT. Looking at the market, for us, we're working on lots of different kinds of programs. As I mentioned, there's a program in the United States that has 14 million members. We're at the beginning of that program. We're in dialogue with several countries around the world for national ID, which when the -- you go to the smallest country in the world, and you have a few million people. So the potential upside is dramatic. Then we have some private programs, in particular, in the transport industry. Some airports around the world are already signed up with us to do the adoption, to complete the secure ecosystems because of border requirements for security. So our volumes, it's very, very difficult to predict volumes in the new market. But we have built a factory in Penang, Malaysia. That is a 5 million card capacity annually, and we're looking at building another facility at the end of this year that has a 20 million card capacity. So that gives you some idea of the kind of market. And when you see people transform or decide to shift technologies, the problem is, they don't just have 1 million or 2 million members, they have multiple millions of members. So we have to be armed and prepared for very large transition of adoption of biometrics in this kind of card form factor. Okay? Does that help?
Thank you very much.
Do you have another question?
Thanks. I'm just curious, why you chose to go with 4 gigabytes of memory in the card.
Is that for him or is that for you? You'll take it?
Sorry. Apologies, Marc. We decided to put memory in the card because there's a driver and we have customers that want to use this kind of a product line as a medical card. They want to be able to download files into the card that allow people to carry their medical records with them. It's one of the primary drivers. And the application we have in the United States has a requirement for memory. We -- what was the magic number 4 is cost. Because I buy wafers for everything that we do, and I could get the best cost performance wafers at 4 gigabytes, so there's nothing magic other than cost. As far as capacity, we can integrate 8 gigabytes, 16 gigabytes, 32 gigabytes. Adopting more memory in the card is just an element of cost only, so we chose 4 because it was available and it hit the price point we were looking for.
I guess, just a follow-up. It seems like you're working with the veteran affairs type of application and it's not something which is accurate, you'd say?
Yes, it's a veterans program. Remember, veterans no longer are a U.S. government employees. So they go into the private sector as soon as they exit the military. So there are private programs around the veterans. We're dealing with the integrator that we've teamed together with that supplying systems to the private veterans programs. Correct.
Thank you.
[indiscernible] if you're comfortable.
You handle that Mike?
I'm going to say negative because we just started shipping production in October of last year. We spent millions of dollars doing the preparation for this project. We're going to spend millions of dollars more putting it into the market. We're really the first mover in any commercial application. But we had a 0 revenue -- no, that's not true. We won an award from Frost & Sullivan and they gave us a $2,500 check, because of the award. So we had to put it under revenue, I guess, but 0.
Okay, I think we have a question from the web.
Yes, this is a competition question. It says, I'dx claims that their technology is incredibly cheap. How do you compare your costs with theirs?
We can't answer on competitive kinds of questions. We believe that we add value with our large size sensor. We believe we're very cost-efficient, and I can't comment on competition.
Another question revolves around the Smart Card market where you broke it out into different segments, and the question is, how active are you in the payment portion of the Smart Card market?
So the markets that we sub segmented are the markets that we are -- we consider our technology to be ideally suited for. So we're active in all of the segments that we covered in the sub segmentation today. So it's retail payment cards, financial inclusion, government ID and access. Okay, it looks like we've kind of come to an end to the questions. So with that, I will thank all of you so much for all of your attention. I appreciate all of you being here. I know it was long and pretty dense, but I appreciate that you all came and I personally will be very interested in any feedback that you have. [indiscernible] I'm also outside. I believe we have lunch, maybe or maybe we don't.
We are now working on the supplier.
So you might have lunch or you might just get to talk to us a little bit more. So thank you very much and we'll talk to you soon.