Precise Biometrics AB

STO:PREC

Earnings Call Transcript 2022-Q1

[Fredrik Sjoholm, executive]

Thank you very much. Good morning, everyone, and thank you for joining today's presentation of Precise conference call on the Q1 results for 2022. I am Fredrik Sjoholm, Interim CEO of Precise and we welcome our new CEO, Patrick Höijer, taking office in June. With me, I have the CFO of Precise, Annika Freij. Before we switch slide, let me start by acknowledging that Precise continues to do well, and we have demonstrated a solid performance in both of our product segments during the last quarter.

Please turn to the next Slide #2. So as stated earlier, this has been a good quarter for Precise. We have continued to do installations within Digital Identity. All the installations made within Digital Identity will provide stable recurring revenues going forward. In total, revenues within Digital Identity amounted to SEK 6 million compared to SEK 500,000 the corresponding period last year. In line with the recent quarters in 2021, the component shortage remained and even slightly worsened in Q1, affecting our customers and subsequently our royalty revenues within Algo. But thanks to new customers and projects and the vertical broadening by our recent entering into the vehicle market, we were able to present a double-digit revenue growth over the same period last year. So in total, Precise revenues grew to SEK 28 million with an EBITDA of SEK 4 million for the quarter.

Now please turn to the next Slide #3. Before we get to the segments update, let me remind you of our core vision of Precise, a vision that applies to both of our business units. We focus our business around identification and specifically identification in a digital way for use in various applications. Identification of the user must, of course, be done in a secure way, but to make sure that the solution is used by all parts of the trust chain, especially the end user. It must also be easy and convenient to use, of course. And this is why we develop our identification solutions with a strong foundation in biometrics, always with the end user in mind. Using our solutions, she or he should always know that no matter who you are, where you are and what you do, you are the tool.

Now please turn to Slide #4. As we have touched upon earlier, we have been and we are continuing to grow our SaaS software service business model. We see a continuously increasing demand for the products we offer in convenience and secure access solutions and visitor management. In the first quarter, we grew Digital Identity revenues of more than SEK 5.5 million, where SEK 4 million were added from the acquisition of EastCoast Solutions. This is a clear sign of our commitment and ability to invest in our operations and also that our initiative throughout 2021 have been fruitful. We've made several installations during the quarter. For example, at Sodexo's headquarter in Stockholm and for Algeco in [indiscernible] in the north of Sweden.

As announced earlier, we have also made the first YOUNiQ installation to assist in controlling electricity and energy consumption. This was made for our customer, Algeco in Kiruna. Looking ahead, we have signed a number of new agreements during the quarter, including to install YOUNiQ for Algeco's 2 Swedish offices. Again, all these installations will provide future recurring revenues steadily contributing to our continued growth journey. I would also like to update on the progress that we've made in integrating the products from YOUNiQ with the acquisition from EastCoast. In March, we have demonstrated the first integration project where visitors in EastCoast ran visitor management system, can check in both via facial recognition and not only the traditional QR code. So all in all, it has been a busy quarter with solid progress.

Please turn to next Slide #5, please. We continue to demonstrate solid revenues also within Algo. We have seen a deteriorating component shortage in the segment compared to Q1 2021 and also slightly reduced sale of the new smartphones globally in the third quarter. However, as we have expanded into new verticals and as we continue to work with strategic partners and winning new projects, we were able to reach double-digit growth of our sales in Algo in Q1 year-over-year. In terms of strategic development, we also entered an agreement with Infineon to provide our BioMatch Algo product to the automotive industry. We expect that the additional application areas will continue to contribute to Algo revenues going forward. And by that, I would like to hand over to Annika for some more details of our financial performance. So please turn to the next slide, #6.

[Annika Freij, executive]

Thank you, Fredrik. We are happy to present a good first quarter with growth for both our product segments, Algo and Digital Identity. The Algo segment showed a stable growth despite a challenging macroeconomic situation and component shortage. The Digital Identity segment, we have presented our first product offerings with EastCoast and YOUNiQ and also show good sales growth. For YOUNiQ, we have substantial sales of hardware as we have some new installations in the quarter. Our strategy continues where the Algo segment is funding the development of the Digital Identity segment.

Please turn to Page 7. Net sales during the quarter were SEK 28.3 million versus SEK 20.3 million previous year. Net sales were split between royalty revenues of SEK 10.2 million versus SEK 10.9 million previous year. License fees, including support and maintenance of SEK 15.5 million versus SEK 8.8 million previous year and other of SEK 2.6 million versus SEK 0.7 million previous year. From 2022, we are reporting 2 product segments, Algo and Digital Identity. The Digital Identity segment has increased with the acquisition of EastCoast that was done the 30th of November last year, but we also see a lot of activities when it comes to YOUNiQ.

Net sales for segment Digital Identity were SEK 6 million versus SEK 0.5 million last year. Net sales were split between licenses of SEK 4.3 million versus SEK 0.1 million last year and other of SEK 1.7 million versus SEK 0.4 million last year. The increase depends mainly on EastCoast, which contributed with a net sales of SEK 4 million, but also due to hardware reported under other related to YOUNiQ installation. Gross margin for the segment was 32.4%. The margin for Digital Identity is lower than the Algo segment due to margins on hardware is a lot lower than on software. The Algo segment is healthy and profitable delivering a strong cash flow. Net sales for segment Algo was SEK 22.3 million versus SEK 19.8 million previous year. Net sales were split between royalties, SEK 10.2 million versus SEK 10.9 million last year and licenses SEK 11.2 million versus SEK 8.6 million last year and other SEK 0.9 million versus SEK 0.3 million last year. The royalties have only decreased marginally, which is good considering component shortages and licenses have increased due to increase in the mobile industry and due to new customers in the automotive industry.

Gross margin for segment algo was 88.7%. The total gross margin for the quarter was 76.7% versus 77.4% previous year. The decrease in gross margin is primarily due to lower margins on hardware than on software. Total amortization of capitalized development expenses was SEK 3.3 million compared to SEK 3 million previous year. The increase in amortization of development expenses related primarily to EastCoast. Amortization of acquired intangible assets was SEK 0.3 million compared to SEK 0.2 million previous year.

Please turn to Page 8. The profit at EBITDA level was SEK 4 million in Q1 versus SEK 0 million previous year. Operating expenses for the quarter increased with SEK 3 million and totaled SEK 22.5 million versus SEK 19.5 million previous year. The increase in operating expenses is explained primarily by the added cost for EastCoast. Earnings per share for the quarter was 0 versus minus SEK 0.01 in quarter 1 last year. The operating loss for the quarter was minus SEK 0.8 million versus minus SEK 3.8 million previous year. The lower operating loss is explained by higher net sales, but it is lower slightly due to the higher operating expenses.

Please turn to Page 9. The cash flow for the quarter from current operations was SEK 7.1 million versus minus SEK 0.7 million last year. Of this SEK 3.4 million is due to changes in working capital. The group invested SEK 0.1 million in property, plant and equipment during the quarter versus SEK 0.3 million last year. Total cash flow for the period amounted minus SEK 6.3 million versus minus SEK 5.9 million previous year. Development expenses of SEK 4.8 million were capitalized during the quarter compared to SEK 4.6 million in Q1 last year. Amortization of capitalized development expenses was SEK 3.3 million during the quarter versus SEK 3.0 previous year. Capitalized expenses are amortized over a 3-year period for Algo as well as Digital Identity. Cash and cash equivalents at the end of the period totaled SEK 57.8 million versus SEK 64.1 million in the end of 2021.

So back to you, Fredrik.

[Fredrik Sjoholm, executive]

Thank you, Annika. So as already stated previously, we have started the year in a strong manner in many aspects. But before I summarize the key takeaways from the quarter, I would like to reiterate the overall strategy for Precise that we announced in the end of last year.

So please turn to next Slide #11. Our progress and growth within Digital Identity is not a coincidence. We have and we will continue to work according to the strategic agenda presented in December, where we continue to expand our customer base organically by securing that our products are integrated with existing platforms and security companies in the markets we operate in. Also that we continue to integrate our 2 product families, YOUNiQ and EastCoast, both from a technical, product and sales perspective. But of course, also that we focus on strategic partnerships to address new geographic markets and enter new market verticals when opportunities arise. We are also open to look at further potential acquisitions and opportunities present themselves, as we have showed that we can be efficient and fast to integrate new acquisitions, such as we did with the recent addition of EastCoast into the side.

Please turn to the next Slide #12. We have built a stable Algo business for many years, providing strong margins and good cash flow. This has enabled Precise to explore the expansion into additional verticals. In the end of 2021, we entered into the automotive sector, and this is a market that is characterized as having significantly longer product life cycles. In addition, we expect the market to grow in the coming years that biometric solutions would become more mature and thereby more widely available in future vehicles for various use cases. Our Algo business provide a balanced and resilient product portfolio that I believe is demonstrated by our performance this past quarter.

Please turn to the next slide, #13. All in all, to summarize our strategic growth agenda. We see a significant potential both commercially and in terms of market potential for physical access and visitor management. With our scalable business model within Digital Identity, we focus on achieving recurring revenues with strong margins over time. As I said on the previous slide, our Algo business has been strengthened by recent vertical expansion. We will continue to serve our customers in existing segments and explore additional segments when commercially solid opportunities and market needs arise.

Please turn to the next slide, #14. So to summarize our Q1 report. As I started out this presentation, this was a strong first quarter in both product segments. We have made numerous installations within Digital Identity. And again, this will provide a foundation for future recurring revenues. We were able to demonstrate the resilience within Algo and also that our focus on strategic partnerships was fruitful during the quarter. Despite the deteriorated component shortage and weakened smartphone sales, we provided double-digit revenue growth compared to the same quarter last year.

In March, we demonstrated the first product integration of our newly acquired EastCoast offering. For visitors in EastCoast visitor management systems can now check in via facial recognition as an alternative to the traditional QR code. This marks the first step in enabling cross-selling initiatives from the acquisition. So all in all, Precise is well positioned for continued growth during 2022 and beyond. Finally, before we open up to questions, I would like to thank the contribution of the outgoing CEO during the past quarter, for all his contributions to Precise over the last 4 years. We welcome Patrick Höijer as he joins as Precise new CEO from June 1st. And by that, please turn to the last slide, Slide #15, and we can now open up for questions.

[Operator]

[Operator Instructions] We have a question from the line of Rebecka Gärderup from ABG. Rebecka, if your line is on mute, can you please unmute yourself?

[Rebecka Gärderup, analyst]

Can you hear me now?

[Fredrik Sjoholm, executive]

Yes.

[Rebecka Gärderup, analyst]

Fredrik and Annika. I have a couple of questions. The first one regarding the automotive industry. And you mentioned in the report that you are developing a partnership with Infineon. And can you tell us a little bit about how that is progressing? Is it likely to see more contracts like the 2 that you've currently signed? And if so, about when?

[Fredrik Sjoholm, executive]

Yes. The partnership is progressing. We have been focusing on the first -- on delivering to the first 2 ODMs that we've announced. And as we also stated in the report, we expect to see the first rollouts of the first vehicles by the end of this year. As for future projects, it's still a bit early to say when and to what extent those will happen. We, of course, believe that there is a large potential. And we believe that once the first projects have been -- have come out into the market, that will spread and raise interest from other customers that Infineon can bring us.

[Rebecka Gärderup, analyst]

Very clear. And a question regarding -- yes, you also mentioned new contracts that you've entered during the quarter. Can you give us any flavor about the pipeline and when these contracts are expected to be rolled out?

[Fredrik Sjoholm, executive]

You mean within the Algo business segment?

[Rebecka Gärderup, analyst]

Yes, exactly. Just when we can expect to see these turning into sales revenue please?

[Fredrik Sjoholm, executive]

Yes. So I think what we saw in Q1 is a result of both projects being -- and new customers actually being added during the last year. So if you compare Q1 over Q1 last year, we have added new customers during 2021, but also see new projects starting in the end of last year and beginning of this year. So our customers, Qualcomm and EgisTec, for example, they have announced new projects where they win new smartphone models. So it's a combination of winning new projects but for totally new phones that we have not been into before, but also that we continue to remain and follow our customers when their end customers, the mobile phone OEMs upgrade to a new version of the existing phone model.

[Operator]

And as there are no further questions, I'll hand it back to the speakers.

[Fredrik Sjoholm, executive]

Okay. Thank you very much. We have received one question here from e-mail regarding the vehicles. The question is, will you expand your cooperation with Infineon to also include the secure element business?

I would say that, that is too early to say right now. This -- as we -- I think we have explained before, the cooperation we have with -- in the automotive industry is both relating to -- I mean, our products are both integrated on the MCUs. So the microcontrollers, but also on the fingerprint sensor itself. As to when we will see secure elements being used for fingerprint sensors in the automotive industry, I would say, is still to be -- it's still too early to say. We have seen, in general, there are some initiatives globally to explore whether you can use fingerprint sensors for payment in vehicles. And if that will materialize, then it is likely that you will also see secure element being used. As I said, it's a bit too early to say that right now.

We also have a question, how many YOUNiQ access installations have you done so far?

And today, we have around 70 installations, both for commercial and pilot projects, mainly in Sweden, but also we have a few starting to materialize outside of Sweden, in Norway, Germany and the U.S.

And the question is that if that is according to your own plan? Or if you think that it will go faster when you started this journey?

Well, it's -- we've been in this journey for Digital Identity since end of 2018. We took a decision in 2019 to focus on physical access between the beginning of 2020, we have the first customer and in using our YOUNiQ system in a commercial project. And since then, in 2020 and 2021, we have, as I said, expanded to more than 70 installations now. We think that is a pretty good achievement. But of course, we're never satisfied with the feed. You can always go faster. So we will continue to invest and to accelerate our rollout of YOUNiQ into the market.

Another question if Precise software is included in the new Samsung S22 and the question is also if it's always Precise offering Qualcomm fingerprint sensors.

And we cannot really comment on our customers' use of potential competitive solutions or whether they use us in all that is up to our customers to announce. And regarding if we are included in a certain phone model, we always do announce if there are significant new information that would -- where there would be, so to say, new larger commercial rollouts that would impact the valuation of Precise, that we would, of course, inform the market as well. So I think that's what we can say about that.

So I think that's the questions we have received so far. So if there are no further questions, I would like to thank you all for listening in, and hope to see you and hear you for our upcoming Q2 report in August again. Thank you very much.