Precise Biometrics AB

STO:PREC

Earnings Call Transcript 2023-Q1

[Operator]

Welcome to the Precise Biometrics Q1 Report 2023. [Operator Instructions]

Now I will hand the conference over to the speakers, CEO, Patrick Hoijer; and CFO, Annika Freij. Please go ahead.

[Patrick Hoijer, executive]

Good morning, everyone, and thank you for joining today's webcast where we'll run you through the Precise Biometrics Q1 results. My name is Patrick Hoijer. I'm the CEO of Precise. Together with me today, I have our CFO, Annika Freij.

Before we walk you through the results and the operational progress, I would like to start by highlighting that the first quarter was characterized by continued focus on our long-term growth agenda with increased focus on U.S. for our access and visitor management system in our Digital Identity business and the expansion into new verticals for our fingerprint Algo business. This gives me comfort that we are staying focused on our long-term growth plan.

The agenda today, we will walk you through the quarterly highlights and then give you an operational and financial update, and finally explain our long-term growth plans. So let's start.

If we look at the financial highlights, we see a continued overall low demand in the mobile market. As a result, revenue landed around SEK 19 million. For the Algo business unit, revenues were negatively impacted by volume-dependent royalty revenues, explained by lower end user demand in the mobile market and continued high inventories at mobile manufacturers and module houses. In addition, last year, we received a one-off license fee of SEK 1.6 million in the comparison period.

In the Digital Identity business, we showcased the strong continued growth of annual recurring revenue. As we strategically are decreasing our sales of hardware and Digital Identity to create scalability, we see less one-off sales of hardware but more recurring revenue. The macroeconomic situation remains uncertain, which means that we continuously have a strong focus on cost control, and the cost savings that we have initiated should have an increasing impact coming quarters in 2023.

Then looking at our operational highlights. During the quarter, we concluded a strategic reorganization in the Digital Identity area. Through this reorganization, Precise merged the sales, the customer service and the R&D functions of our acquired company, EastCoast, with the corresponding functions of unique in the Digital Identity area. This will improve the commercialization of YOUNiQ, and it will enable the entire sales force to reach the market with both our products.

In our work to strengthen our presence in U.S. for our Digital Identity business, we achieved an important strategic milestone during the quarter when we joined the Genetec Technology Partner Program. We're also proud of the earlier mentioned the increased annual recurring revenue in this Digital Identity business area, now being SEK 17.3 million versus SEK 16.2 million end of Q4 in 2022.

We can also conclude a very strong quarter for our EastCoast business with more than 14 installations, which is a significant increase versus last year's sales. Further, we have achieved another milestone as we entered a partnership with Flowscape for our visitor management in U.S. This should also be seen as a milestone of our dedication to launch our services in the U.S. market.

Finally, after the quarter, we have announced a fully secured rights issue of approximately SEK 50 million to enable a continued focus on our long-term growth plan. I will deep dive into that a bit later in the presentation.

But before we go through the development of our business areas, I would like to start by explaining Precise position and the business model as much has happened during the last years. We have been around for many years and have during these years established a very strong position when it comes to Europe, North America and Asia. This is to secure that we are close to our global customers. We have today 50 employees and full-time consultants. This is a decrease versus last year's of 7 due to our cost optimization program.

We are organizing 2 business units through which we provide our services. In the Algo business unit, we offer software for fingerprint recognition and anti-spoof solutions used in various applications such as mobile phones and door locks and so on. Within this business unit, we have global customers and generate revenues from annual license fees and from volume-driven royalties. Algo generated 74% of the company's revenues in 2022.

In the Digital Identity business, we offer access solutions based on facial recognition, a solution we call YOUNiQ and a visitor management solution, which we call EastCoast. Our customers are today mainly in Sweden and in U.S. and creates recurring revenue from a Software-as-a-Service business model. The Digital Identity business generated 26% of the revenues in 2022.

So let's deep dive then into the segments, and let's start with the Algo business unit. Revenues decreased around SEK 30 million in Q1 from SEK 22 million last year, same period. As I mentioned, this is due to lower demand in the mobile market and high inventory levels at mobile manufacturers and module houses. Furthermore, the decline versus comparable period last year can also be explained by a one-off license deal SEK 1.6 million last year from 2 customers in the automotive industry. Precise, however, stands strong in its strategic partnerships. And as the mobile market recovers, we expect royalty revenues to follow.

I'm also very happy to inform that we have during the quarter, recruited a new Executive Vice President and Chief Commercial Officer for Algo, Joakim Nydemark. Joakim has a strong background with the experience from the mobile phone industry and international sales in connected areas. His latest position were at the Swedish-listed company, Crunchfish. He will start at the first of June, a very welcome, Joakim.

Within Algo, we continued during the quarter to explore new related verticals such as automotive and evaluate new types of sensors that could, over time, provide Precise with the larger market for our world-leading expertise in advanced image analysis.

For the Digital Identity area in Q1, revenue landed at SEK 5.1 million. We have since mid-last year, strategically focused on building scalability in our business while we see less one-off revenues and hardware sales. However, we see a strong increase in annual recurring revenue to SEK 17.3 million from SEK 16.2 million in end Q4 2022. They improved -- to improve commercialization of YOUNiQ service, we have, as I earlier stated, also integrated EastCoast in YOUNiQ respective organization. Through the reorganization, we are able to use the entire sales force to reach the market with both our products.

We are also happy that we have won several deals during the quarter. We have seen over 40 customer installations, primarily from our visitor management system. And we are pleased that we, in February, could announce that YOUNiQ became part of the Genetec Technical Partner Program. This partnership is, as stated, a very important step in building sales channels in the U.S. market.

With that, I would like to hand over to you, Annika.

[Annika Freij, executive]

Thank you. So let's move into the financial performance. Looking at the revenue development over the last 2 years, the variation depends a lot on the royalties. Our royalties are directly related to the number of sold units sold by our customers, mainly within the mobile phone industry. We can clearly see the trend where 2021 was affected by the component shortage.

In quarter 1 and 2 in 2022, the royalty increased again as the manufacturers in the mobile industry were building up inventories as the situation with the component shortage improved. But in quarter 3 and 4 in 2022, the situation rapidly changed into a short decline in demand and an overstock at the global mobile manufacturers, which led to a double negative effect in sales.

In quarter 1 in 2023, the royalty has improved compared to Q4, but it's still not in the same levels as before 2021. Adding to the trend of revenue is, of course, the acquisition of EastCoast, which was finalized in November '21. And after this is contributing with extra revenue. The gross margin development over time is related to the royalty revenue as the royalty revenue impacts the gross margin in a positive way as it basically doesn't add any extra cost of sales at all. The increase in Digital Identity affects the margin in a negative way as the margins for Digital Identity are lower than for Algo.

Net sales for the quarter decreased to SEK 19.2 million versus SEK 28.3 million in Q1 previous year. Net sales were split between volume depending royalty revenues of SEK 4.1 million versus SEK 10.2 million and license fees of SEK 13.2 million versus SEK 15.5 million. This includes, for example, fixed annual fees for Algo and recurring revenue, so-called System as a Service for Digital Identity. And then we have other of SEK 1.9 million versus SEK 2.6 million. The royalties were impacted by the decline in demand, as I explained before, and the decrease in license income is mainly explained by a onetime license income of SEK 1.6 million in quarter 1 '22, this together with some changes in the composition of customers and renegotiated license agreements.

The gross margin in the quarter was 64.8% versus 76.7% previous year. The downturn is due to changes in the product mix as the Algo product segment has higher margins than the Digital Identity products. And then we have amortization of the capitalized development expenses, which increased to SEK 4.5 million compared to SEK 3.3 million. And the increase is relating primarily to Digital Identity -- actually, EastCoast.

Operating expenses were SEK 19.3 million compared to SEK 22.5 million due to increased focus on cost control. We are working on OpEx reductions, which we mainly will see the effect of -- from quarter 2 in 2023.

So from the beginning of 2022, we started to report 2 different segments, Algo and Digital Identity. And this is the Algo segment. Net sales for Algo were SEK 14.0 million versus SEK 22.3 million in quarter 1, '22. And our reported under royalties at SEK 4.1 million versus SEK 10.2 million last Q1 and license at SEK 8.8 million versus SEK 11.2 million. And other at SEK 1.1 million versus SEK 0.9 million last year. We had very low royalties in the second half of '22, as I said before, and the royalties have increased in quarter 1 '23 compared to quarter 3 and 4 last year, but it's still far away from the level as we have seen before. And we hope that this is a sign. This increase is a sign that we have gone through the worst part of the macroeconomic downturn.

License revenues decreased compared to the first quarter of 2022, mainly as we had a one-off revenue during this quarter. And we also have changed the composition of customers and renegotiated license agreements. The gross margin in this quarter was 82.3% compared to 88.7% in quarter 1 last year.

In Digital Identity segment that consists of products EastCoast and YOUNiQ, the net sales for Digital Identity were SEK 5.1 million versus SEK 6 million last year, and this reported on the licenses of SEK 4.3 million versus SEK 4.3 million last year as well and other of SEK 0.8 million versus SEK 1.7 million in quarter 1 last year. The annual recurring revenue from Digital Identity is SEK 17.3 million in the end of quarter 1 and the development of recurring revenue is positive, and we are moving away from point-in-time revenues from, for example, on-prem installation to cloud-based solution, driving recurring revenues. And the decrease in other is mainly due to hardware sales for YOUNiQ, which is increasingly taking place at the reseller level.

The gross margin during the quarter was 16.9% versus 32.4% last quarter 1. Gross margin in Digital Identity is lower than in the Algo segment. And there is a lower gross margin than last year, mainly explained by increased depreciation made on assets related to EastCoast.

And then we move on to the cash position. The cash flow from operating activities for the quarter was minus SEK 5.8 million versus SEK 7.1 million in quarter 1 last year, of which minus SEK 5.1 million compared to SEK 3.4 million depend on changes in working capital. The working capital accumulation is affected by a delayed payment from a major customer of SEK 5.8 million. The total cash flow for the period was minus SEK 12 million compared to minus SEK 6.3 million in quarter 1 last year. Cash and cash equivalents in the end of March was SEK 34.4 million compared to SEK 57.8 million in the end of quarter 1 last year.

And in April, we announced a forthcoming new issue of shares of approximately SEK 50 million before share issue-related costs with preferential rights for existing shareholders.

So ending with the summary of the quarter. Net sales was SEK 19.2 million versus SEK 28.3 million in the same period last year. Net sales per segment Algo was SEK 14 million versus SEK 22.3 million in the same period last year. Net sales for segment Digital Identity was SEK 5.1 million compared to SEK 6 million last year. And the gross margin for the quarter was 64.8% versus 76.7% last year.

Operating expenses for the quarter decreased to SEK 19.3 million versus SEK 22.5 million last quarter 1 due to a strong focus on cost control. In the end of quarter 1 '23, we had 32 employees and 18 consultants compared to the same period last year, where we had 30 employees and 27 consultants. We've had to hear also -- we've been working on reducing the consultants.

The profit at EBITDA level was minus SEK 0.6 million versus SEK 4 million in quarter 1 last year. The cash flow from the operating activities was minus SEK 5.8 million versus SEK 7.1 million. And this is partly affected by the delayed customer payments.

So back to you, again, Patrick.

[Patrick Hoijer, executive]

Thank you, Annika. Before I summarize the key takeaways from the quarter, I would like to go through our priorities and growth strategy for Precise.

Let's start by looking at the global trends that are supporting Precise. And let's start with the trends for our Algo business. In our main vertical mobile phones, the market is expected to recover as stated in the second half of '23 and 2024. Beyond that, the market foresees a continuous trend back to fingerprint and multi identification, such as a combination of fingerprint and facial recognition, which is also illustrated in this slide in the graph to the right.

In bordering verticals such as laptops, we see increased security requirements. Microsoft is driving development with us for biometric match-on-chip for the enterprise segment to further strengthen the security. This will, of course, drive penetration of biometrics in this vertical.

And in the automotive industry, the fingerprint identification market is predicted to double between 2023 and 2024. We see new interesting use case here where biometrics are not only used for convenience, but are used also for authenticating payments in cars. Finally, the market for smart door locks is expected to grow annually by 19%.

Then looking at our -- at the underlying trends for our Digital Identity business unit. Increased security in general is driving demand for biometric identification in access and visitor management systems. The market for biometric access control system is expected to grow by USD 3.7 billion with an annual growth rate of 8% by 2026. Our target market in the United States account for 21% of the global market. The global visitor management system was valued at USD 1.3 billion in 2022, and is expected to have an annual growth rate of 13% to $2.3 billion by 2026 with North America expected to be the largest region. So overall, we foresee a good underlying market trends for our services.

The presented underlying trends, combined with the already communicated proposed rights issue is a strong combination to secure a Precise growth strategy. The rights issue that we proposed or what's proposed by the Board of Directors will provide the company with approximately SEK 40 million of the cost.

I would like to start by saying that initiating a rights issue is not something we do if it's not considered necessary and right for the company. It is a well-balanced decision based on the market situation, payment obligations entered into and to give the company and its shareholders the conditions for a better return in the future.

We have also communicated the priorities for which the proceeds will be used. In order of priorities, they are geographical expansion to the U.S. for our Digital Identity business and partnerships in new verticals for our Algo business unit.

Product development for new customer growth within Digital Identity and continued improvements of the company's algorithms to secure our world-leading position in the mobile phone market and finally, to strengthen our working capital.

As a CEO, I'm convinced that this issue is the right way forward for the company. As a shareholder, I will, of course, also subscribe to the upcoming issue, together with the Board and the rest of the management team.

So let's then have a look at our long-term growth plan. Precise has a clear growth strategy for both business units. For the Algo business unit, we intend to leverage our strong position by focusing our strategic partners -- on our strategic partners within the mobile phone segment to jointly win new projects, which means that we will be included in new generation of smart phones. We will also continue to broaden our business to new verticals such as automotive, laptop, et cetera, and to new sensor types. As we are world-leading in image analysis, we're also exploring more use cases even outside of fingerprint biometrics to broaden the addressable market. Our vision is to become a strong software powerhouse for advanced image processing.

For the Digital Identity business unit, we are focusing on building sales channels through commercial and technical integration with strategic access installation partners in Sweden. This will give us strong go-to-market channels. We're also exploring the U.S. market where we see good potential for our solutions. And we will continue to develop an integrated solution based on existing products to manage people flow combining our visitor management and access solutions. Overall, the focus is on commercialization of the opportunities we see in each of these business areas.

So then looking at the key highlights. I am pleased that we have reorganized our Digital Identity business during the quarter, which puts us in a better go-to-market and cost position where we're also showing solid growth of our annual recurring revenue with Digital Identity to SEK 17.3 million versus SEK 16.2 million in last quarter. We will continue to focus on sales in the U.S. and the unique integration and the technical partnership with Genetec's access platform is an important milestone during the quarter in our work of building sales channels in this market. And finally, we will, with the proposed rights issue, strengthen our ability to deliver on the long-term growth plan where we want to bring our products to new verticals and markets.

To finalize the presentation, let me start by ending with what Precise is all about. We focus our business around identification. This is why we develop our identification solutions with a strong foundation in biometrics. Using our solutions, we enable so that users know that no matter who you are, where you are and what you do, you are the key.

And with these words, I would like to thank you all for listening in. With that, let's end the presentation and start the Q&A session.

[Operator]

[Operator Instructions] The next question comes from [ Olof Nordine ].

[Unknown Analyst]

My name is Olof, and I'm an analyst at [ Analyst Group ], and I have 2 questions. So firstly, you talked about using your expertise within image processing in complete new sensors and application areas. Can you expand on this and maybe give an example? Secondly, can you describe your go-to-market strategy in the U.S.?

[Patrick Hoijer, executive]

Thank you, Olof. Yes. So let's start with your first question around image processing. What we can see today is that we are focusing in on image processing and maybe the most complex and advanced environment you can see, where the highest demands are applied as in the mobile phone vertical. This ability can be used in other areas as well. For example -- I mean just as an example, in event cameras, DDS cameras and other nearby areas where low latency and high accuracy is needed, and there are a lot of use cases for these kind of cameras as well.

What we're trying to do here is also working together with our strategic partners today to explore new areas. So we have a good combination of our abilities in software and their abilities in hardware. More information will be coming around that, of course, when we develop that further. Thank you for that.

Then on the go-to-market in U.S. Yes, that's a very good question as well. As we state also for the Swedish market, Precise has a very strong -- I mean we have a very strong software solution and an R&D organization. And the way to leverage go-to-market for us is partner sales. So we are working close to system integrators and access management companies to sell our products out in these markets as we're not intended to recruit a strong -- a big sort of direct sales team in this market, but rather recruit partner managers and leverage, for example, Genetec and Flowscape and other to bring our products out in the U.S. market.

I hope that was the answer to your questions, Olof.

[Operator]

The next question comes from Nikola Kalanoski ABG Sundal Collier.

[Nikola Kalanoski, analyst]

Just a few questions from my end. Could you perhaps update us on the business momentum in both the Algo and Digital Identity segments? Do you get the feeling that it's a bit easier compared to Q4 '22 in terms of signing new clients and doing business in general? Or would you say that it's basically the same?

[Patrick Hoijer, executive]

Thank you, Nikola. So let's start with the Algo business. I think during Q1, of course, we could see that the explanation already stated that with the lower and faster demand than a high inventory levels, that also goes for Q1, as you can also see that the Algo royalty revenues are lower than previous year. With that said, we see a slight increase of royalty revenues. And our estimation and the market estimation is also that the markets are slowly picking up. And the main pickup will be end of -- or second half of 2023 and then in 2024, of course.

When it comes to the Digital Identity business, we see good sales in Sweden. I mean we see actually an increased sales versus last year. EastCoast is also doing very good in this regard. And in the U.S. market, we have also been able to build strong partnership, which we hope to leverage a good sales channels into this market. So we're also focusing in a lot of our sales efforts into the U.S. market internally operational-wise.

[Nikola Kalanoski, analyst]

And just a final question. I know that in Q1 '23, your reported net sales of SEK 5.1 million for Digital Identity and a gross profit of SEK 860,000 implying around a 17% gross margin. And compared to Q4 '22, this is a 4, 5 percentage points increase. Now going forward, how should we think about the maintainable gross margin in Digital Identity?

[Patrick Hoijer, executive]

Thank you, and I think I'll leave this one to you, Annika.

[Annika Freij, executive]

Yes, there are some relatively fixed costs in Digital Identity, platform related and R&D related. So we are working on building the recurring revenue. And when the revenue is growing, the margin will increase.

[Operator]

[Operator Instructions] There are no more questions on the telephone line at this time. So I hand the conference back to the speakers for any written questions and closing comments.

[Patrick Hoijer, executive]

We have a few questions coming in by e-mail as well. One connects -- one question around the right -- the proposed rights issue and how we intend to use the proceeds. I think we answered that. I think this question came before the webcast itself, and I think we answered that in the presentation when we walk through the priorities.

The other question was concerning payment cards. It's in Swedish, so I will translate. The secured payment cards using biometrics, fingerprint, when will they be released? You did a historical cooperation in this area. What's happening with that cooperation?

So looking at biometric payment cards as well as access cards, I think Precise is well positioned in the sense that our Algo's very generic and can be applied to many different use cases, which is, to some extent, unique in the market. This means that we have a good position in the market when biometric payment cards pick up and reach commercial volumes. Before that happens, we have intentionally chosen not to invest too much into this area, but we'll, of course, closely evaluate when those commercial volumes eventually happen. And then we will ensure, of course, to further invest into the area.

Good. I think maybe that concludes. So I also would like to underline that, for information, there is a recorded Q&A in Swedish that will be published on Precise Biometrics website at 12 noon. And I also would send a strong and warm welcome to all shareholders that will attend the Precise Annual General Meeting tomorrow.

So with that, once again, thank you all for listening in. Thank you.