Next Biometrics Group ASA

OSE:NEXT

Earnings Call Transcript 2022-Q4

[Peter Heuman, executive]

So good morning, everyone, and welcome to this quarter 4 presentation. My name is Peter Heuman, and with me, as always, I have our CFO, Eirik Underthun. We will guide you through today's presentation. Today, we have a rather short presentation. Just a couple of slides on the quarter 4, which, if you have seen the report, is not the best of reports. But on the other hand, there's a lot of activities that have been going on during quarter 4, and I'm going to spend more time today and explain to you what we've been dealing with here during quarter 4, because I think that could be good for going forward.

If you want the material that we are demonstrating today, it's also available on nextbiometrics.com. [Operator Instructions]

With that, welcome, and, let's go to the next slide. I think we have an agenda, yes. So like I said, quarter 4 report and summary. We will divide that between me and Eirik, and then I'm going to spend most of today on the business update. I think there are some important events and signings that we have been doing for the long-term success of the company, and we're going to spend a little bit of time also on the outlook. So with that, let's dive into the report.

And this is my slide, divided into 4 or 5 sections. So if you look at it, I mean, we are not a very large company yet, but I think we are progressing well. One of the targets that we have communicated to the shareholder community is that we are trying to bring on more products, what we call them, or customers, and that is products that integrate our sensors into their products. We call them design wins.

We have said that we're going to try to bring 12 new customers/design wins/customers then who integrate our product during 1 year. So that is on average 1 per month or 3 per quarter.

We managed to bring 3 new design wins during quarter 4. It's a medical cabinet, it's an airport time and attendance device, and it's a new generation of a portable Bluetooth printer. So there are 3 different products that integrated and decided to integrate NEXT Biometrics sensors, either our flagship FAP20 or one of the standard sensors. So accumulated, we have now 36 design wins by year-end 2022.

And I think it's twofold. I think on one hand, it's fantastic that the sales team, the technical sales support team, the operations team, that they can bring this to us. However, many of these are smaller, because otherwise we would, of course, have seen much bigger revenue. And when I say smaller, they might order everything from 5,000 to 20,000 units a year. That's not going to bring any large numbers. That's perhaps the downside that we don't have enough really large design wins, products that are selling in large quantities.

However, on the other hand, if I compare where we are sitting today compared to where I was sitting maybe 24 months back, when we basically had just a few customers, we started off 3 years back with 1 customer, basically. So now our sales team have much more strong unique selling points and pitch deck materials when they are out communicating with new prospects.

With these design wins, we then have a much better proof points, we have customer references, all from our 4 defined market segments. So it makes that job easier, and we are having much better proof points and can refer to customers when we now try to bring larger design wins into the company. So in that way, I think the work will continue, and I think the team have done a good job of reaching the target during 2022.

Okay. The revenues in quarter 4 were on the low end of our expectations. The main reason is we were, of course, since -- and we will talk more about it. You've heard me talk a lot about it. Yesterday, you saw some news. I would have wished that, that news came almost a year ago. But due to COVID, et cetera, there has been a delay of India, and that is, of course, where we believe that the large numbers will start to be generated.

Some customers are still also lacking some of these important components. I don't see that we have a strong -- or I don't see that we have a large challenge with that anymore from a supply perspective, but we see that some of our customers are.

Gross margin is then lower. I think Eirik will talk to that, but I see it as a temporary glitch. It's mainly due to the low volume of FAP20 shipped just in this quarter. We have a continued cost focus. Eirik will talk more about that. We are in line with what we have communicated. And all said and done, we are burning, I think, maximum NOK 3.7 million during the quarter. So even though the revenue is a little bit lower and the gross margin, we are not burning a lot of cash. They have done a great job in the finance department here in collecting receivables, et cetera.

So with that, I think I'll hand over to Eirik, and he can go through these numbers a little bit more in detail. So we can change slide on there.

[Eirik Underthun, executive]

Good morning, everyone. So in this quarter, we recorded NOK 12 million in revenue versus NOK 13.7 million in the same quarter last year. And as Peter alluded to, the revenues were impacted by the delays in India, and also some of our customers are experiencing semiconductor shortage. So this has been impacting this quarter. And also, we report a gross margin of 24% and also adjusted gross margin of 24%. So the comparable number was 50% in quarter 4 2021. And the reason for this reduction in gross margin is the less favorable product mix and the low level of FAP20 shipments in this quarter as a proportion of the overall number of products that were shipped. At the same time, the operating expenses were at NOK 11.9 million versus NOK 15.1 million in quarter 4 2021.

We have some one-off cost reductions during this quarter, and that's impacting the lower cost level. We are still quite below the NOK 15 million target. And we're expecting to be below NOK 15 million also in the future quarters.

The adjusted EBITDA was lowered by NOK 0.9 million compared to quarter 4 2021. And you can see that our reduction in gross margin is offset by the reduction in operating expense. So we're slightly verse off relative to quarter 1 -- quarter 4 2021.

On cash, we are at NOK 69.3 million at the end of this quarter, and we had a reduced cash burn in this quarter due to collection of receivables and improved working capital. And this operating cash flow is the second best in the company's history. And we had also a very good quarter on operations cash flow back in 2021, but still this is slightly more negative than that best ever quarter. But as Peter alluded to, we are hoping to come back to you with improved financials in the future quarters.

I think the main message in this quarter is that we continue to have low quarterly OpEx and that we had a reduced cash burn during this quarter with continued improvements on operating cash flow and collection of receivables.

With that, I turn back to Peter.

[Peter Heuman, executive]

All right. Thank you, Eirik. So we're going to go through the business update. They're free -- or maybe I should just summarize.

So as -- I mean, me and Eirik, we can clearly admit that the quarter 4 is below our expectations. On the other hand, I'm not too stressed about it because I think building a house, trying to put the foundation in place, I think we do a lot of right things here to be able to scale up the company. So then if 1 quarter is like this, I'm not too concerned about it. Of course, I would have liked it to be better. But I feel confident that there's going to come way better quarters going forward.

So with that, on the business update, there are three things that I mainly will talk about today. And that is, one, India, there was important news that we introduced as late as yesterday. So that's one topic. The other one is regarding a new partnership that we have established for the Chinese market. And the third thing is our focus on executing and building a global distributor network. Those are the three main topics. I think all three are important for us to scale up and drive volumes, which is what we as a product development company should be focusing on.

So with that, we can go to the next slide, and we'll start with the dialogue around India, because as it says, you heard me and Eirik talk for now soon 2 years, I think, about India. But finally, India launched.

So here, end of January, beginning February, the next generation biometrics standard has been launched and is starting from now in quarter 1 2023. This is very good news since we have signed up so far 2 partners, the India OEM and the tech giant, who with the support of our sensor and all the other requirements, they build biometric modules and products that can be sold in the local market. And currently, the current certified products, there has been dates decided that they will sunset, and that should be before June of 2024. This means that already from today, all new biometric products in India need to be sold under the new certification. That means also that during the next 1.5 years, there are millions of devices that need to be replaced. You will not be allowed any longer in India to sell the so-called historic or they are called L0 devices, and they all have to be gone by mid-2024.

Now to be totally transparent with you, do I believe that there's going to be such a firm cutoff date? No, this is India. I actually don't believe that. There's probably going to be some historic L0 devices also being in use into 2025. But the authorities have been very clear, this is what they want, this is the guidelines they are providing, and that the market needs to follow.

So what's happening now? What does it mean that the India authorities have launched this new standard. So smaller tenders under these conditions have already started to open up. Our customers, the OEM at this moment and the tech giant, they expect the larger tenders and the larger volumes to start to take off from somewhere during quarter 3, quarter 4 2023.

There's a number of biometric providers right now. I can mention some of them for you. They are called IDEMIA, they are called Mantra. They are some of the competitors to our OEM and to the tech giant. They have all gone for certification of this new standard.

Our most prominent partner, we believe, is the India OEM. He has approximately 20% to 25% market share in the historic L0 market, and he's now going to fight to try to win and keep that market share in the new market. And this is why we have such a belief in India, because then if there are millions of devices, first of all, in the coming years, towards the end of 2023, especially '24/'25, there are, normally in the historic market, millions of devices sold every year. But on top of that, we have, during the next 1.5, 2 years then, a replacement market that needs to happen where the old L0 devices needs to be replaced with the new standard certified devices. So this is why we are betting so hard and why we changed our go-to-market strategy.

We do then see it -- find it very positively that our India OEM already now, under the purchase order he placed with us in, I think, it was early February or something during 2022, but due to the COVID, et cetera, this has been delayed. But already now, just when the market is -- and the standard is set, he's already requesting us to start to send a recurring, repeated volume every month starting from quarter 2 this year. So that tells us, we have then synchronized this request from him with the established distributor that we have in between us in India, and they do all the cash collection and all that. This has already worked very fine for us. That's also what has supported us in the cash collection during quarter 4.

So I find it very promising that this Indian OEM already is requesting us a minimum monthly delivery starting from quarter 2. And hopefully, we're going to be able to come back during the second half of 2023 that he's going to increase these volumes. Because there is no other way if he's going to try to keep his 20% to 25% market share, he's going to have to increase the initial volume, recurring volumes later on here.

But with the order he placed yesterday, he will have consumed $1.2 million out of the already signed purchase order of $2.2 million.

So after another $1 million, and if we increase these recurring volumes, he's pretty soon going to have filled his purchase order and then he needs to place additional purchase orders with us. So we find it extremely interesting that India is finally launching the new standard and that we have a hungry partner who's going to try to defend the 20% to 25% market share.

Having that said, I think this is why we believe a lot in India. The tech giant is a much larger corporate company, has less market share than the India OEM on the historic market, and I actually believe that this large company, they might also get there at the end, but they are probably not going to be as quick and fast to the market, and I think that's very important as our India OEM. And that's why we're betting on him quite heavily here in the beginning.

So I think this is -- in terms of scaling NEXT Biometrics, this is one of the most promising news that we have come with in the last quarters. We're probably going to come back and update you more. And if there are questions on India, I'm more than happy to talk more about that later on. So with that, that was point #1 in business update.

If we go to the next slide, then I have another large market with over 1 billion people, at least. I think it's 1.3 billion. And so what we have done during quarter 4 and then into quarter 1 is that we have signed a partnership with a company in China, Wiser Group. Wiser Group is located with 3 offices in Shanghai, Guangzhou and Hong Kong. We have partnered and they have experienced biometric team with experience from the technology and biometric market with a proven track record. And they have a long history of successfully assisting Nordic and European tech companies to scale in China.

Wiser Group, I should say like this, there are possibilities for us in this partnership to do much more than what we will do in Phase #1. We can look at more strategic cooperations long term, but what we have told them is that we are extremely interested in phase #1, and that's what we have signed up for is one of their key competencies, which is scaling up Nordic/European tech companies in China. So it's a way for us to accelerate market entry into our key market segments in a large market like China.

Wiser Group has already set up a virtual and physical sales organization for NEXT in China. We have signed an agreement where Wiser had committed to bring us a certain number of design wins with a certain number of committed volume customers. If they should get paid fully, they should bring us then a number of design wins and that we have committed customers' orders at hand before end of 2023 of over $4 million. I cannot guarantee you that they're going to succeed, but I just want to be transparent with you what we have told them that we are happy with. If we end 2023 with a certain number of design wins and with commitment from customers of more than $4 million, then NEXT Biometrics is happy and we can continue from there.

So in the contract we have with them, we have then created priorities and milestones that we have agreed upon. And I can inform you that the first milestone out of 6 milestones that Wiser had since we announced this and up until end of 2023 is already completed. They are now somewhere between, I think, towards the second milestone. And there's a tight cooperation. I have staff in Asia who's supporting them, and yes, we hope that this is going to be a smart way for us, rather effortless compared to hiring people locally, et cetera, to actually set up a structure in a very important market.

And like I said, if we get success out of this, I think there are possibilities. And if you look at wiserasia.com, you can see there are examples of companies who they have helped, Nordic companies, European tech companies. They have built joint ventures locally. They have helped with equity locally, et cetera. So there are all kinds of phases and strategic potential partnerships that we could potentially do, but we are very focused on Phase 1, which is bringing customers in the local market in our market segment. So I hope I will be able to report back to you during 2023 how we are progressing with this cooperation.

So with that, I think we should go to the third important topic on how we are trying to build and scale NEXT Biometrics. So we are basically trying to build a global biometric distributor and partnership network. And it provides us then with this expanded market reach and sales and distribution power.

Currently, we have approximately 8 biometric distributors spread over Latin America where we have 2, Asia where we have 5, and Europe and Africa 1. And now we are adding this partnership with Wiser Group, which is not a distributor, but it's a way of scaling at least. So I put it in here in a distributor and partner network. So that's what we have established.

Our focus and what we can expect from this, when we sign with these partners, we try to look at where are the large and growing biometric markets where high security needs or regulatory demands require an extensive use of biometrics. This is where we try to partner with these partners and distributors.

We also look at the markets where we can expand if there's a large volume of deployed optical sensors. They are normally large, bulky and normally sold historically to an expensive price. This is how we can then train, which is what we have been doing with these distributors now, and the sales organization have been putting a lot of effort in creating pitch decks. The distributors are being trained just like we are doing and have been doing with Wiser Group. We are training them on our product, our unique selling points and why we are better, et cetera, compared to some of the competitors and especially the optical sensors.

So when all these things -- so the market characteristics where we see a deployment of a lot of optical sensors, this is then how we train these distributors. This is, again, building something from the ground in a structured way. We should not expect that they -- I think we have said in the press release before, it can take 9 to 12 months before we start to see the orders. But let me give you a few examples.

We established in India a Singaporean distributor who has a branch in India. And this is how we shipped the last orders to the India OEM. In that way, the distributor in this case placed the order with us. And I think we shipped there for NOK 5 million or something, and they paid us NOK 5 million I think 1 day after due date, which provides us the confidence that all this is working well. That was rather quickly happening. And now with India launching, I feel confident that we have picked a very solid distributor, who can be there for us and help us support our customers in the local important market. That's already in execution.

If I give you another example, we have 2 rather recently signed distributors in Latin America. One is in Brazil. You can imagine, from the moment we have signed them up and did that due to what I just told you about how we focus on this, but now our sales organization have been there. They have been having trainings with the distributor, shared pitch decks, shared unique selling points, compared to competitors. We have provided them with customer potential targets. They have their own customers and then they go out. And my organization is supporting them.

This Latin America distributor currently have approximately 20 prospects that we are now actively together with them working on. But from the moment they start to bring these customers on -- they are probably not going to score all 20 that we have on the list right now, but they might score some of them. But from the moment they do, until that customer starts to build its product, et cetera, of course, that requires some time. So I think this is just to explain how we try to build a foundation for a global distributor and partnership network. And I think that's important for the long run of the success of NEXT Biometrics.

Okay. I think these were the 3 important topics where we in NEXT Biometrics have spent a lot of time and effort on during both quarter 4 and now continue to do in quarter 1.

So with that, we can go to the next slide. And then we come to outlook. And let's see if I will make Eirik nervous or if I can stick to some kind of script here. So if you go to the next slide, Andrea, so it's just 1 last slide. It's a summary of what we've been talking about and what you can expect from us going forward.

We will, of course, like I said in the beginning, continue with at least 3 new design wins per quarter. That means if we continue to succeed with that by end of 2023, we will have 48, so almost 50 customers who have decided to bring NEXT Biometrics sensor into their products.

If I can wish something and if I look at the current funnel versus the funnel and the pipeline we had 24 months back, with all these proof points, I start to see larger potential customers in the funnel today compared to 24 months ago. And I hope that's what we're going to be able to bring to you as shareholders.

I told you and talked a little bit about the engagement and the partnership that we have set up in China with Wiser Group, and we should expect some kind of revenue from that already by end of 2023, but I do believe that if we can have commitment, like I said, from customers of these at least $4 million, I frankly don't really care whether they bring us that revenue already in quarter 4 or at least as long as I have the commitment from the customer, they build the product, and I know I have a recurring revenue going into 2024, that's totally fine.

Then I talked about and where at least we see and put a lot of expectations is on the India new standard that launched and that we made public through this order yesterday. Like I said there, there is a replacement of millions of units of the installed base with new devices, and I think we are in a very good position. But I think we should start to see larger orders and these recurring orders increasing from end quarter 3 and into quarter 4 of this year. That's what we hear from our partners. That's what they say they believe what's going to happen in the market when this now starts to turn into a new standard in the market.

And of course, number 4, without saying too much, we are very focused on trying to bring you, because that's what I believe, if we can bring you -- in building this company in a structured way, if we can also provide a customer with a history and a commitment to NEXT of a large multiyear committed volume, that's what we have a very strong focus on because I think that could help us in not only providing new design wins, but actually also providing a guaranteed revenue so you can extrapolate what that means on an average design win going forward. And that's a strong focus that we have. I cannot guarantee you. I can only guarantee you that, that's a strong focus that we have in the company, in the sales organization, and in every step of this way that is something that we hope we can surprise you with during 2023.

But having that said, as a conclusion, we should be able -- because even if many of our design wins are smaller and only order 5,000 to 20,000 units, yes, but when you start to have many of those and they are not hampered by any supply chain or something, these numbers, and if you look at the existing design wins, that should be enough to bring NEXT to a positive EBITDA during second half of 2023. So that's what we are very focused on.

So with that, a little bit lower-than-expected quarter 4, but a lot of long-term, good structural pillars that we are building here within NEXT Biometrics.

So I think with that, Eirik, we have completed the presentation, and I see that we have some questions. Should we shoot some of these questions?

[Eirik Underthun, executive]

Yes. So the first question is, I see you got some additional distributors and 1 partner in China lately. When do you expect we can get orders and revenue from these distributors and this new partner in China?

[Peter Heuman, executive]

Yes, that's a good question, as always, and I think I touched upon it quite a bit there with the examples I gave, both from India and from Brazil. And I also talked and spent quite some time on the Wiser Group partnership that we have established.

I think what I would expect happening here is where the most defined volumes will be generated most likely is from the Singaporean distributor that supports us with India. Because I think that there are so many devices to be replaced. So if only our partner succeeds to bring and keep his market share, there's going to be volume driven to that Indian partner through this distributor. And so I think that's the most likely short term. But if we can, towards the end of the year and the second half of year, see that Wiser, for example, starts to pass all these milestones and actually bring customers, they might not bring the revenue during 2023, but they might bring commitment to us on volumes in contract for when they need the deliveries and then corresponding revenue for us and I think we can see that.

The last part, I would say, that was the example from, for example, Brazil, where there is a lot of work in making sure that you work with these distributors, you train them. They need to understand. They need to feel that your product is superior to other products, so that could be an easy sell for them. That takes some time. But when you get there and you get the champions in these distributors, that's when we will see the volume. So I think we're gradually going to see that building this network should, during 2023 and the second half, start to contribute, and that's something we can report back on.

[Eirik Underthun, executive]

The next question is, in China, which segments will NEXT and Wiser penetrate when entering the market? What is the yearly potential?

[Peter Heuman, executive]

Yes. I should probably not talk about -- I mean, I've tried to guide you now a little bit on what we have actually asked them and what we expect them to deliver if we together should do something successfully. But on the market segments in China, it's going to be our defined market segments. So it's in the fintech area, it's in the access area, et cetera. So I think those are our normal standard. We try to keep it rather straightforward, et cetera. So we don't see that we need to do adjustments there. But if they can just keep and bring customers from these defined market segments, I think we are broad enough to make sure that we are well positioned together. So I don't see that, that differs a lot from any other markets.

[Eirik Underthun, executive]

Thank you. So you mentioned in your press release that the India OEM is expecting its launch soon. What insight can you provide us on this process?

[Peter Heuman, executive]

Like I talked about India, and if I should go even more specific, I think we have a wording on that in today's report. So the authorities just provided the rules of the game, so to speak, for the India market. Our OEM still have not received from the years past, what he tells us, all the technical steps to get his certification with our sensor, but he still doesn't have the paper at hand. He estimates that he's going to have that within the next 4 to 6 weeks. I think we told you in the report that within 2 months he should likely have his certification.

So what does this mean? And are there any risks? Of course, there are risks. What happens if he doesn't get the certification? Then he can't deliver products with our sensor.

But I would be very surprised in the way he's communicating with us and in the way that he's already -- before he has the certification, he's requesting us a minimum recurring delivery schedule starting during quarter 2. He can already today take part in these tenders that are starting to open up in India, and I know he's doing that, but he's not going to be allowed to deliver his product until he has the certification. But like I said, according to him, he believes that there is nothing to worry about. I think he provides a proof point to us that we could believe in it since he's also adding these recurring delivery requests to us.

And so I think that's -- in general, what you can say and what we hear from our local partners and what our staff in India is telling us is that they believe there's going to be smaller volumes starting off here during quarter 2, but from quarter 3 and into quarter 4 and then into next year, this is when the real volumes are going to start to happen.

[Eirik Underthun, executive]

There is a follow-up question on the India market. How many L0 units does the OEM have in India today? And how many L0 units needs to be replaced in the India market?

[Peter Heuman, executive]

Yes. Okay. I should probably not state an actual number. Like I said, he has 20% to 25% market share. I think he claims that he has 30% himself. We believe it's more likely that it's somewhere between 20% and 25%, but we are then talking about at least millions of devices.

It has historically sold several million devices per year under the L0, so the historic standard. It differs between everything from 2 million to 3 million to 4 million devices. It goes different, but we are talking millions of devices where he has this market share.

And on top of that, like I said, until mid-2024 and before quarter 3 2024, the authorities say that all historic L0 devices should be replaced. And then we are talking more than a couple of million devices. But like I said, I'm not sure that they're going to succeed in the market to force everyone, because that's actually just 1.5 years. So I think most probably we're going to see some of these L0 devices a little bit longer. But at the end of the day, if you compare to the volumes we are doing today, there is such an opportunity for us here to enter this market through our partners. Okay?

[Eirik Underthun, executive]

Okay. And another follow-up question. Who are issuing the tenders in India?

[Peter Heuman, executive]

There are many different industries, many different government-related authorities, et cetera. There are banks. So there are certain categories that -- I mean, if you, as a private person, want to have a biometric dongle to your computer, you can buy that over Amazon or whatever and from whoever you want. But if you, as a company, want to provide certain financial services or verification of people in all kinds of different segments, you need to be connected by the government and the authority biometric database. So all the historic L0 devices and all the new L1 devices, every device has to be connected to this large biometric India database.

So like I said, you have banks, you have government bodies, you have all kinds of different, and they open then up tenders for our partners to participate in and sell their products, and they will, in these tenders say, I need, in this case, in the new standard, the L1 certified biometric product from you. And that's when they can go where we are part of these products.

[Eirik Underthun, executive]

And there is one more question about India. Can NEXT get additional partners in India on top of the 2 you have today?

[Peter Heuman, executive]

So absolutely. There is no reason for us to only have 2 partners. I mean, when we changed our go-to-market strategy for India, since I think most of you know that historically, NEXT went for its own certification. We decided to not do that anymore with all the hurdles that comes in running such a business for being a product development company and a rather small type organization. But we can, for sure, add and we are in dialogues with other partners.

What we find important is that we try to ensure that we partner with companies who we believe can drive volume and that we know are well funded, well established, have a history, or where we can get other proof points, because it's quite a process they're going to have to run through before they have their certification approved, et cetera. A lot of both dollars and resources they need to spend on that in that whole process. So we have 2 so far, and we are in dialogue with a few more. So let's see. But there is no reason for us and there is no exclusivity that we provide to our partners. So we can, for sure, work with others as well.

[Eirik Underthun, executive]

Yes. And then there is another question about India. When can we expect some positive news regarding the tech giant and India?

[Peter Heuman, executive]

Yes, that's a good question. Let's see how I can be a little bit balanced here. I give you 2 points. One, you should remember that the tech giant does not have a corresponding large historic market share on the old standard. They communicated to us as late as just a couple of weeks back what they're going to try to do on the new standard on L1, which is quite a change. But I believe, also to be fair, is that the smaller local hungry companies that really have a business who depend on this, like our India OEM, they are most likely going to be quicker to market. A large European multi-industry global corporate is probably not going to be able to be as quick. So I think with that, we should probably expect that we see more volumes short term at least from the India OEM compared to the tech giant. Okay?

[Eirik Underthun, executive]

I think that's it. So unless we get another question in the next 10 seconds, we will close it off.

[Peter Heuman, executive]

Okay. So hopefully, you've got some good information from us. If there's anything you have, feel free to contact me and Eirik directly or through this event at nextbiometrics.com, and thank you very much, everyone, for attending.

So with that, I think we're going to close the meeting. Thank you, everyone.