Precise Biometrics AB

STO:PREC

Earnings Call Transcript 2020-Q1

[Operator]

Hello, and welcome to the Precise Biometrics AB Q1 2020 reports. [Operator Instructions]. Just to remind you, this conference call is being recorded. Today, I'm pleased to present Stefan Persson, CEO; and Ulrik Nilsson, CFO. Please begin your meeting.

[Stefan Kenth Persson, Chief Executive Officer]

Thank you. Good morning, and a warm welcome to Precise in the Q1 2020 presentation. I will, together with our CFO, Ulrik Nilsson, present Q1 financial results and also give you some highlights on how we see the next coming quarters. Next slide, please. We have a very tricky situation in the world due to the coronavirus COVID-19, and people and companies are affected in many ways. There have been a huge change in our way to operate, but we are fully operational and running all function at 100% despite the situation. We have 3 major sites: one in Asia, Shanghai; one in Europe, Lund; and one in Potsdam, U.S. and this is, of course, a huge benefit now during the very tricky situation. All offices are open, but people have also the opportunity to work from home. If you're in a critical project or can't work from home, then you work from the office. But of course, we follow each country's rules and regulations very strictly. So our own capabilities to deliver have not changed, but we are, of course, affected by the fact that our customers are affected. Now we can see the full effect from the changes we implemented last year. Agile development in combination of closeness to our customer and focus has started to pay off. We are very successful in a cooperation with Egis Technology, and that means that we have secured the base for this year 2020. Q1 result ended up in a very strong growth compared to last year Q1, 90% up. And we deliver a positive EBIT result. Now when we can see that we have better control of our sales, we can increase our development of the digital identity to be able to accelerate the rollout of the YOUNiQ Access platform. We invest heavily into our new business area, Digital Identity, and we'll continue to do that during 2020 to secure further growth for Precise. We can't give you any guidance, but the base for 2020 is in place. Operational, we will not be affected, but it's impossible to judge how our customer situation will be affected due to the COVID-19 situation. We have a very strong financial situation with a strong cash position. So we're looking forward to a very interesting 2020. Next slide, please. We can now see that touchless interface are more and more important, digital onboarding, digital control and seamless access to different applications had never been more needed than now. The need for this type of technology will just increase. And we are in the start of a new era with huge opportunity in the digital identity space. We are building towards our vision, no matter who you are, where you are and what you do, you should always have access to your digital data in a safe and convenient way. You are your own key. Next slide, please. The company is built on 3 business areas, the Digital Identity, where we have the product Precise YOUNiQ, access to your own digital identity in a convenient and secured way; in mobile, where we have the Precise BioMatch, mobile verified finger prints in mobile phones and tablets; and then the smart card with a product Precise BioMatch card, verified fingerprint in smart cards. Next slide, please. We are delivering according to our plans in digital identity. We built a platform during 2019 and started some proof of concepts and pilots, both internally in our office in Sweden and U.S. and then we moved step-by-step over to pilots such as Softhouse in Malmo, CrossFit in Stockholm and Clarkson University in U.S. Now we're into the third phase. The third phase just started with installation at some customers, such as Exeger in Stockholm, Friskies & Svettis, as we communicated last week, we will now also have the first installation together with Temporary Space Nordics in their module houses with opportunity for further integration going forward together with them. In this phase, we will now continue to sell directly to key customers to get even more references and optimize the product for the end customer. So they get the best ever user experience, ease of use with great security. The business setup in digital identity is totally different compared with our traditional mobile business. In digital identity, we sell systems that are integrated into an application and running in the background for identification and verification. Our normal contract in this area is minimum 3 years and payment every month. So that means long stable contracts. The product is also very scalable. So our focus can be to implement new features and add functionality instead of optimizing towards specific customer situation. We have, during the last month, been focusing on [ access part ], an industry that will more and more be digitalized. Our solution fits perfect into that journey, a digital onboarding, digital management and a secure and easy entrance. With our system, you can optimize buildings to maximize efficiency in how we use it. Not only onboarding and access, also about heating, energy, security, fire alarms, et cetera. The market is huge, and timing for our YOUNiQ product couldn't have been better. The need of a digital solution hasn't been stronger and now during the COVID-19 situation, the need of a solution has even more increased. Our solution, where we combine the on-premise experience with the cloud management is the best combination of 2 worlds, locally and cloud. Next step in the journey is to integrate with larger access management system. We are agnostic when it comes to hardware, camera, server, et cetera, but we will integrate with specific access management system to scale up. With a strong financial situation, we will continue to invest for growth in the digital identity area. Next slide, please. Our fantastic results 2019 in the mobile area continue now in 2020. We continue to deliver together with our partner, Egis Technology, and from last year's success with Samsung, we have now also been able to move into the optical sensor supply area of Huawei. Several smartphones are launched with our latest software generation. Due to this, we have signed a base contract with Egis for 2020, and this is, of course, a very important milestone. We can see that our world-class software solution gets the right attention now. And by that, we make changes in the industry. Which we still always remember, that the mobile industry is and will remain very volatile. Very few players are successful. The winner takes it all, and that we always shall remember also. Due to our organization setup with a lot of support, interaction and customer development from Shanghai, we can now even more focus on core developments such as new features and quality improvements on the platform from Lund. Our organization in Potsdam handle our customer base in U.S. and also handle the [ lines ] contribution. With this set up, we have a good structure for the future. And we're also in a critical situation, such as now during corona, organized so we can continue to support our customer independent where they are in the world. In parallel, we will continue to work with other sensor suppliers for future opportunities, such as Qualcomm in the ultrasonic area and also with new development in larger sensor areas. The size of market will continue to increase, but price pressure will also continue. We have secured some part of our business for 2020, but the coronavirus might have some impact on the mobile business. Impossible to judge the total impact, but we monitor the situation carefully every day together with the partners. Next slide, please. Smart card. No major changes since last quarter's report. We have needed approval and are ready to go. But once again, we are only one part of the total change with sensor suppliers, module houses, card manufacturers, financial institute, et cetera. The need of a hassle-free contactless card identification has increased due to the virus situation, but we don't see any major volumes during 2020. We hope the volume shipment will start second half this year, but we see this as a bonus for us if it will happen. By that, I hand over to our CFO, Ulrik.

[Ulrik Nilsson, Chief Financial Officer]

Thank you, Stefan. Please turn to Page #9. The execution of our strategy continues following the plan we laid out in late 2018. So we see in revenue that is now increased by 90% versus previous year, and we reached SEK 23.1 million. The revenue is primarily distributed between royalties, license fees, support and maintenance and others. The royalties, they are based on actual reported volumes from our customers and the increase versus 2019 is reflecting our success in winning projects together with our customers. So the royalties, SEK 13 million versus SEK 2.1 million last year; licenses on SEK 7.0 million versus SEK 6.5 million last year; support and maintenance, SEK 1.5 million versus last year's SEK 2.6 million; and then we have others of SEK 1.6 million versus last year's SEK 1 million. The gross margin for the quarter increased to 88%, which is 17% up versus previous years. So we'll leverage on the investments we have done and the increase in revenue is also very reflected in the higher margins. Looking at the depreciation of capitalized R&D. We're seeing a smaller decline that is driven by that. We have assets fully depreciated that were capitalized in 2016, and we have capitalized less in 2019. Going back to what Stefan said earlier, we are running an agile development process. We are becoming much more efficient in what we're doing. So we're actually delivering more, costing less. Amortization of SEK 2.2 million exceeds new capitalized development by SEK 0.5 million in the quarter. If you're stretching that forward, you're obviously seeing that these numbers should go to equal over time. Please turn to Page #10. We continue to invest in the Digital Identity, and this is reflected mainly in the increase of spend in R&D with SEK 3.6 million versus previous year. The total spend in R&D reached SEK 11 million in the quarter, and that accounts for more than 50% of our spend. The cost increase in sales is primarily coming from increases from withholding tax and commission costs. And to be honest, this is positive as they are very correlated with the increase in sales. Other includes the positive exchange impact. We continue to improve the ways of working, and we're driving the efficiency and effectiveness. And you can see that in other areas as the administration as an example. So overall operating expenses for the quarter increased by SEK 3.6 million and totaled SEK 20.1 million. The improvement of the results, they are primarily explained by the higher gross profit, SEK 11.6 million, then partly offset by the increase in operating expenses. The operating and profit and loss totaled positive SEK 0.1 million, and this is an improvement versus 2019 by SEK 8 million. Total depreciation amounts to SEK 2.9 million versus SEK 3.2 million previous year. Making that the EBITDA was positive with SEK 3.1 million versus negative SEK 4.7 million last year. Please turn to Page 11. Cash flow and the investments, we're pleased with presenting a positive cash flow. The cash flow from the operating activities in the quarter improved by SEK 17 million versus previous year. And totaled SEK 6.9 million. The improvements are driven by the operational performance that we have seen, especially during the last 2 quarters. The investments in the quarter, they are primarily related to capitalized R&D. Looking at what we're having as cash. The cash increased in the quarter and ended on above SEK 78 million, making -- it's a very good position for us, so we continue to show financial strength.And by that, I'm handing the word over back to Stefan, please.

[Stefan Kenth Persson, Chief Executive Officer]

Thank you, Ulrik. Next slide, please. So the COVID-19 pandemic has not had any significant impact on our business. And as Ulrik presented here, Q1 is a very good quarter with a 90% growth versus Q1 '19, positive result and a positive cash flow. We have a stable situation in the mobile area due to the base contract with Egis Technology in the optical sensor area. And by this, we strengthened our market position in software for optical sensors for smartphones. Several contracts in the business area, Digital Identity, Exeger, Friskis & Svettis and Temporary Space Nordics, and we continue to invest in the Digital Identity area to catch up the opportunity and grow the business. We see some opportunity in smart card area with indication of small volume later this year. And there is a global economic slowdown, but no major effect to the sales expected right now. Everything, of course, pending the development of the corona situation. Most important is that we built the company for growth with a clear vision, no matter of who you are, where you are and what you do, you should always have access to a Digital Identity in a secure and convenient way. Thank you for listening, and now we open up for questions.

[Operator]

[Operator Instructions] And we have one question in the queue so far. That's from the line of [ Jorgen Carlson ], who is a private investor.

[Unknown Attendee]

First of all, I want to congratulate you for good results. So can you please tell us a little bit about the progress with Infinity Optics like progress in pilots, any commercial phase soon for any custodies yet?

[Stefan Kenth Persson, Chief Executive Officer]

Thank you, Jorgen. Yes. So we have a lot of internal testing ongoing built on Infinity Optics premises and our own, where we're testing and verify the system as we speak. We still have development to be done. We need to make sure that the quality is extremely good on this type of product before we release it. And therefore, we can't see any sales during 2020. Hopefully, end of the year, we will be able to run some proof-of-concept and maybe pilots with some customers. But right now, the focus is to get the code and the stability into the system. But we have it up and running here in Lund, and it works, but we have more developments that will be done before we can release anything.

[Operator]

[Operator Instructions] There seems to be no further questions coming through, so I'll hand back to our speakers for the closing comments.

[Stefan Kenth Persson, Chief Executive Officer]

Okay. Thanks a lot. We have a lot of questions via mail and our social media and all that. And we will try to summarize them a little bit and take them one by one here. So I got a question in terms of the knowledge about the cooperation between Egis and FocalTech. And as always, we never comment any other company's activities. We have ongoing contract with Egis, and we work very close with Egis. We also have several question about Covr Security and the cooperation there. Cooperation is still ongoing. And we have had proof-of-concept here during the Q4 and Q1. And the only thing is that this is part of the YOUNiQ ID and that we are targeting towards financial institutes and bank. The situation now with the COVID-19 is that the banks are focusing on the day-to-day operation and not put a lot of effort into the future. So we can see some delays in more pilots for the banks and all that. Right now, no impact on our schedules overall for the company because we are really fully booked with all the activities in the access area. But of course, hopefully, when the corona situation change and the banks open up again, that we can continue the dialogue with the banks there. We have also questions about the IoT business and all what's happening there. We have some activities. It will not have any financial impact on the company during 2020. But of course, it can be interesting to see how we can utilize our product in other area outside the mobile phone and the smart card also. Yes. That's a lot of questions about the payment and the card business. And as I said earlier, we don't foresee any huge volume 2020. Our focus corporation right now is NXP and support NXP to get out the product and release it. Hopefully, there will be volumes end of the year. And it's just a bonus for us if it will take -- go faster than what we can see right now. But we are ready to go. So as I said earlier, it's about the total value chain that needs to be in place before actually the volume can come.Yes. I think that was a summary of all the questions. So thanks a lot for listening in. And once again, I hope you are safe, no matter who you are and where you are and what you do. So take care and hope to meet you soon again, and have a great weekend. Thank you. Bye-bye.