Next Biometrics Group ASA
OSE:NEXT
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Next Biometrics Group ASA
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Good morning. Welcome to the Q4 report for NEXT Biometrics. My name is Ritu Favre, and I'm happy to welcome all of you to our report today. We had done a business update on January 24 of 2019. So a lot of what we'll talk about today is covering that material as well as providing some updates on what we've done since that report. As we've talked about, NEXT has been on a really interesting journey over the past few years. We've been really working to grow the company. So if you look at the phases of the company, we were in a phase where we were really establishing the core technology, the actual sensor technology for the company. Over the 2017 to 2018 time frame, we started to pivot the company to go from being a single-customer, single-product, single-market focus to a multicustomer, multimarket, multiproduct focus. And during 2017 and 2018, that's really what we worked on. It was to create this foundation for growth in those markets. During the 2019 and 2020 time frame, we are very much focused now on scaling the business. Our strategy is shifting to revenue generation and real work in the Dual Interface space of the payment card market. And so what we'll be doing during these next couple of years is ramping our smart card product portfolio that we had begun to lay the foundation for over the past couple of years, leverage our government certification, specifically in India, to begin to launch into the government ID space, and then significantly ramp our revenue and profitability for the company.So to do a little bit of recap on our financial highlights. So we'll separate it out now on the financial side as well as the business side. Our financials for the fourth quarter were improved on the gross margin side and largely flat on the revenue side. For the full year 2018, we saw a revenue growth of 10% to NOK 108.4 million, and our gross margin increased for the full year to 28%. So this is the first year of full positive gross margin for NEXT Biometrics.On the business side, we've had a lot of highlights and a lot of kind of news and updates. So we'll be kind of unpacking that through the presentation. On the smart card side, I would say one of the more significant announcements that we made was the joint reference platform with Infineon. So Infineon is the largest secure element provider in the world, and we are partnered with them to provide biometric smart card solutions into the market. That's been a really exciting partnership for us, and we'll continue to provide more information on that as we continue to work with them.We also announced a joint R&D program with MK Group in Vietnam. They're a very significant payment card player in Vietnam, and we're excited about continuing to provide more news on that customer that we're working with for the payment card space.And then finally, we've spoken quite a bit about Tactilis over the past few presentations. They were selected for 3 UN programs, and that will be using the NEXT technology. And I'll speak a little bit more about what's happening with Tactilis in the coming slides.On the government ID side, we had several purchase orders that have come through and then we'll have some more updates on that in terms of where we are since the January 24 update. We had a purchase order from Telpo and TYSSO for a point-of-sale terminals. We also announced a cooperation with Digitsecure, which is another point-of-sale mobile POS maker in India. And then on the Access Control side, we had committed that we would begin sampling our FAP20 sensor, and we were able to achieve that milestone of beginning sampling. I'll speak a little bit more about that as I speak about government ID, but we're seeing a lot of interest in our FAP20 sensor offering.Finally, on the technology side, we published a study from the University of Madrid, which does show, again, the benefit of the large-sized sensor to the security of the overall system. And so this is the largest study that's been done to really look at false accept/false reject rates, and we were excited to see that the science bears out that the security of the system is higher the larger the sensor size is.And then finally, we achieved the UIDAI certification for Android in India. So this completed all of the software work that we needed to do to be able to service the Indian market for the Level 0 products. And then so far, to date, we announced a few things on the January 24 and then this completes sort of the picture of what we had announced since the January 24 update. On the smart card side, we received a purchase order from Tactilis that was a call off of the 250,000-unit PO that we had gotten from them. So we received the purchase order. We've also delivered the same 30,000 chipsets now to Tactilis. So that's been completed inside the past couple of months. We also have expanded our smart card ecosystem with some further agreements in Asia that I'll be talking about when we get to the smart card section, and then we announced that we will be sampling our Dual Interface sensor starting in the second quarter of 2019. So that was actually a very significant announcement as well, that we're now able to demonstrate Dual Interface operation with our sensor technology and that will very well position us in the payment card space.On the government ID side, we are seeing increased interest in India. We're beginning to see orders fill in. We are seeing a lead pipeline begin to form. I'll speak a little bit more about those contracts that we're beginning to see. And then in terms of some of the more financial side, we did initiate our cost-reduction program. We talked about that in the January 24. We are largely underway on that and that's commencing per plan. We also were able to raise NOK 160 million in gross proceeds in the private placement. And then there will be a subsequent offering, where we expect to get NOK 28 million.So with that, I will turn it over to Knut to go through the financials.
Thank you, Ritu. So overall, the financials are more or less in line with what we presented in January 24 update. As Ritu mentioned, our gross margin has substantially improved compared to last year, and we have now 36% gross margin from our -- on our revenue. The drivers for this improvement is mainly that we have the new ASIC that was implemented during Q1. We have also improved yields and the scaling impact. This is very important when you have a business, you have revenues, you have products, and you can improve the yields and the scaling. And we are gradually also moving into new segments with higher gross margins. The future gross margin is expected to stay on a high level, and we have also indicated the range in the lowest graph over here.The P&L. On full year, we have a revenue growth of 10% and the gross margin is then up from minus 4% in Q4 2017 to Q4 2018 of 36%. Going back to the EBITDA a little bit later, but still, the notebook volumes are the main driver here. Okay. Thank you. We also passed 6 million sensors shipped in Q4, and we have some pilot projects and samples that have some limited impact in the numbers.We are now passing the peak OpEx and R&D investment level. You can see here is that we have still the main increase in our OpEx is related to R&D, and that reflects the high activity level in our development department. We have -- both in Q4 '18 and in Q4 '17, we have received the government grant of Skattefunn of NOK 5 million that impacts their number.On the cost-reduction plan. We have initiated that with a target of 20% decrease, and we see a full impact of these activities. We will see that in the financials in Q3 2019. This is optimizing the organization, and we are still making sure that we focus on our card development, but scaling back on other development processes.This is a new chart, and this is showing the EBITDA ex option performance over the last 8 quarters. And as you can see here, it's gradually improving. And if you compare Q4 '17, that we also had this same amount in government grant with Q4 '18, it's a NOK 5 million improvement year-over-year.The lower graph here shows the cash flow from operation and investment activities, meaning all the operational activities and also investments in fixed asset, capitalization of R&D, so it's a complete burn of cash over the period. And you can see here that it has gradually improved over the last quarters. If you compare with Q4 '17, where we had a negative cash flow of NOK 44 million, we had in Q4 NOK 25 million in negative cash burn. So it's going in the right direction.I think that was -- no, I have 1 more slide. This also show the balance sheet and the cash flow development. And if you include the net proceeds from the product placement, including the subsequent offering, we have adjusted cash position of NOK 226 million. So we see that we have a very solid balance sheet.
Okay. So we will walk now a little bit through some of the business highlights. So we've spoken through this chart before. So this is, in one page, the strategy for NEXT. We were playing in the notebook space. Our intention there is to continue to stay strong and relevant. We believe that there's still a nice market for high-security, commercial-grade notebook kinds of applications. And with the new portfolio that we've come out with, we're seeing a lot of interest from our customers. We have our Tier 1 North American customer we'll talk about a little bit. Fujitsu, we're seeing some real upside in terms of their volumes and their orders. We're also seeing a lot of interest in this space for our FAP20 sensor. As we look at Access Control, the strategy remains very much the same: continue to leverage our product portfolio through distribution channels. I'll speak a little bit more about that, but in this space, we've really been fragmenting the market and looking at the markets where we can win with our solutions. And we're beginning to see some impact from that.On the government ID side, again, we will certify our existing products. A key achievement for 2018, really, was getting the Aadhaar certification in India. We're beginning to see some of the momentum based on that certification. And then the FAP20, we're beginning to look at that in other government markets.The #1 priority for our company remains smart card. Our technology is very well suited and differentiated for the smart card space. The large sensor, the flexible sensor, the ease of enrollment of our solution is very well-suited in the smart card space. And this is where we will be putting the bulk of our R&D resources for the coming quarters.So if you take a look kind of at the payment card portion of the market, the way that we have been describing it is, this is a market that today is fairly small, remains fairly small, but we expect to see real growth in this market. There's a lot of question about when this growth will exactly occur. And if you kind of look at all of the analyst data, it's looking like sometime in the 2021 time frame, there will begin to be significant volume in the payment card portion of this space. And then as it goes out further, there will be even more growth in this space. What we're seeing from an early -- kind of an early adopter perspective is there's closed-loop systems in government cards. Our engagement with Tactilis has been really good in this particular space. We've been able to sell our chipset to them, and we're beginning to see the early volumes that they are able to deploy in that space. As we look out a little bit further, it's financial inclusion and then really into the payment card, and there's a lot of activity happening in this market right now. A lot of interest in this space from kind of all aspects of the ecosystem. Our One Touch Flex contact solution is out. This is where we've been doing a lot of our announcements and we'll continue to do more announcements here. We have our contactless solution that's in development today. This is where we did the announcement about the Dual Interface sampling in the second quarter. And then our intention is to do a chipset, which will really be a highly optimized, very, very cost-efficient solution for that market as we begin to see this market really begin to ramp up and take off.So in the January 24 session, we had talked about each of these markets, and I'll provide a little bit of an update to what we had presented in the business update. So during 2018, we signed 4 agreements with Tier 2 customers in APAC. We are seeing an additional lead pipeline behind that. We recently announced an agreement with M-Tech in India. They're a smart card maker there. And between the MK Group, which is the Vietnamese company that we're working with, and with M-Tech, we're seeing again a lot of interest in our contact-based solution as it migrates over to the contactless. So there's still a lot of markets in the world that are interested in the contact solution. And then as long as they're seeing a really nice migration path to the Dual Interface, we're seeing a great deal of interest from this portion of the market. Again, I spoke a little bit about our Infineon partnership. We're seeing that yield a lot of fruit. They have a lot of contacts in this space. And as we're working with them, we're beginning to see more and more leads come our way.Then on the Tactilis side, as I mentioned a little bit, there's a total of 60,000 chipsets that we have now shipped to them. We shipped 30,000 during the course of the first quarter. We do see a significant opportunity within Tactilis. They have announced the 3 UN pilots. They have announced the Madeira Smart City. They have also announced the U.S. Veteran Cards program. And so in this case, we've -- as we've spoken about before, we're very ready to ramp with them as they're ready to ramp their business. We're fully engaged and ready to support them as they begin their ramp.Then on the government ID side, we had shown this slide -- pretty much this exact slide in the January 24 update. So again, as I said, the key achievement for 2018, I would say, is the Aadhaar certification for L0. We've been doing a lot of discussions with many, many vendors. Alain had shown sort of a lead pipeline that's coming for India. We announced an agreement with MobiOcean. We've already begun some shipments to them to do mobile POS for India. We have 3 additional agreements that are in the pipeline that we will continue to announce news on as those develop. And then our goal for 2019 is to continue to increase market share with our product portfolio in India, as well as begin work on the L1 device, which is the next generation of the specification in India.For the rest of the world, we are finding a lot of interest in our FAP20 solution. We're having discussions in China and other markets around the world for the FAP20 solution. And our goal is to continue to increase our market share in government ID worldwide with the FAP20 and the India offering. The other announcement that we made after our January update was the additional orders from AqTronics. And so what we've seen is, they're our distribution partner in India and we're beginning to see more orders coming through them. And we are planning to announce more news around that as that develops.On the Access Control side. As we have spoken about a little bit, this is -- again, it's a very fragmented market. We have targeted certain markets where we can be successful with our large sensor size. And our goal is to leverage the FAP20, some of the biometric POS opportunities that are out there with our existing portfolio. After the close of the January business update, we announced a contract with Prima, who is doing educational displays in North America. So we've received our first order from them. We also expect to do -- to announce some distribution agreements that we're going to be having in this space so that we can target this market correctly.And then, finally, on the notebook side. This is where we've had the bulk of our shipments to date. We do continue to see a lot of interest from customers in the notebook space. So our new products that we have, both the SPI and the USB as well as our FAP20 product, continues to be very attractive to customers. We had done our initial volumes to Fujitsu in the 2018 time frame. We expect a significant ramp in the number of models and the total volume that we ship to Fujitsu during the course of 2019. And this was an announcement that we made a couple of days ago, that we are seeing an increase in the pickup of orders for Fujitsu.So just to sort of wrap, again, as a company, we are in the secure authentication for identity management. We have shipped 6 million sensors to date. This does make us a credible, reliable vendor in this space. We actually have customers tell us that the fact that we have shipped 6 million sensors, puts us in a different sort of a playing field relative to other competitors that are out there. Key differentiation is the cost-efficient mass production of our large, rigid and flexible sensors. We do believe that the next wave of markets that's coming will be ideally suited for the technology that NEXT has. We see this as a 1 billion unit market today, and that the next wave of applications coming will require the large size. So smart card and government ID have mandates for the size of the sensor, and again, NEXT is very well-suited in that space.So from an outlook perspective -- this is actually becoming a longer and longer list as we go forward. We have a lot of things that are going on as a company. Our goal is to really again pivot to increasing our design wins and revenue, a lot of work on lead generation; increasing our pipeline of opportunities and then turning that into revenue; continue to ship to Tactilis for these high-end, government-grade smart cards; sample our Dual Interface solution, and again, continue the R&D and the development that is needed for the payment card ecosystem in the Dual Interface space; continue to expand and capitalize on the network in the payment smart card ecosystem. Here, we really want to begin to manufacture our contact solution and begin to ship that into customers so that we can start to see a pipeline of contact-based opportunities; really ramp India sales. A lot of work is happening in India. We have a lot of people on the ground in India, working to design our solutions into Aadhaar; increase our interest for the FAP20 products. Here, the goal is to get design wins, get design-ins, increase our lead pipeline, sample the product and begin to get that designed into opportunities. We really do expect an increase in our sensor module shipments to Fujitsu during the course of 2019, so really, work on supporting that important customer; and then, as we've talked about reducing our OpEx, improving our overall financial position, reducing our cash burn as the year progresses.So that concludes the prepared portion of it. And I think from there, we can turn to questions.
And are there any questions from the audience? Yes.
My name is [ Connor ]. I have some questions about payment certifications. Do you know how that's developing? Do you have any sign there, how is it going? Can you say anything about this?
So the payment certification itself, the primary one is EMV certification. And typically, that's done by the card makers. So we would provide our solution into these card makers. So for instance, the MK Group that we talked about, we would provide our sensor solution to them. The -- for instance, the Infineon secure element would be married to that. It would put into a card format, and then the card maker would take that through certification. So it's a process that we would not necessarily be doing ourselves. It would be in partnership with the card maker.
When do you see the customer trials starting with payment?
There's different trials that are going now. So I think it's -- it will be sort of an ongoing process of just different kinds of trials. If not, I would say it's not a centralized process. You have to find the card maker, you have to have a bank that's actually interested and then to they would be growing through some level of trials. So I would say, I mean, there is open announcements now that certain trials that are occurring. But I think those could be happening at all different times, and we would announce that on our product as that would be happening.
Anyone else that have questions? No? There's no questions on the web, so thank you.
Okay, well then, I think that will conclude our Q4 presentation. Thank you very much.