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Hello and welcome to Precise Biometrics Q2 2020 Report. [Operator Instructions] Today, I am pleased to present Stefan Persson, CEO; and Ulrik Nilsson, CFO. Please begin your meeting.
Thank you, and good morning, and warm welcome to Q2 2020 presentation. I will, together with our CFO, Ulrik Nilsson, present the Q2 financial results and also give you some highlights on how we see the next coming quarters. Next slide, please. Highlights Q2. Once again, we show a very good quarter, in line with our plans. We have now stabilized the business and are building for growth. We have increased the sales with approximately 76%. We have a better margin from 79% to 85%, positive cash flow and a positive EBITDA. Once again, we show the stability in the existing business. And by that, increasing our activity in future opportunity in Digital Identity and YOUNiQ. We are building for the future and growth. The strategy to stabilize the existing Mobile business and by that, have enough capacity to invest in the future continue. Everything according to what we earlier have communicated. We have been able to handle the very tricky situation in the world due to the corona COVID-19. So despite the situation, once again, been able to deliver a stable result in the quarter. 2020 is about stabilization of existing business, work with key partners in Mobile, support NXP to launch a smart card and build for growth with a lot of activities in the Digital Identity area with an extended portfolio and a new business model. We are installing, as we speak, our Access system at Temporary Space Nordics in [ Celestial ] and have ongoing discussion with them about further cooperation in the future. More about that later in the presentation. We have all our sites and our staff fully operational and can continue to deliver needed services to our customer. We have even been able to close deals without any physical meetings with the customer, and our view is that we, right now, have found a stable situation for the operation, a combination of online meeting and office work. As for all business, the possibilities to meet face-to-face with customers need to improve to open up for more business. So hopefully, we'll be able to meet customers soon again. We don't see any direct operational issues for the rest of the year. And by that, already now start to drive for more business next year. The result is in line with earlier communicated. We utilized the stable financial situation to accelerate the development for the future. We have been successful in the mobile area, and now we are a key supplier with our partners to Samsung and Huawei, the 2 major Android OEMs in the world. We think that during the rest of the year we will continue to be on a similar financial level, and that means continue to invest in Digital Identity and YOUNiQ. The major focus second half 2020 now is to get more customer in the YOUNiQ area. We have a world-agnostic YOUNiQ digital end-to-end solution. So now we focus to accelerate the sales. We have started to hire more sales resources and looking into different affiliated program to maximize the opportunity. We have also signed a sell-and-support agreement with NVSS for Sweden, and the ambition is to add more customer in Sweden during second half of the year. Now when we can see that we have better control of our sales, we can increase our development of Digital Identity to be able to accelerate the rollout of YOUNiQ Access platform. We invest heavily in 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 any guidelines, but our ambition is to be on approximately the same level during the year. We don't see our operational will be affected, but it's impossible to judge how our customer situation will end up due to corona. We have a strong financial situation with strong cash position, so we're looking forward to a very interesting 2020 and 2021. Next slide, please. The vision. It's all about real customer needs solving problem in today's digital life. Our vision is very important and is part of our daily work. No matter who you are, where you are and what you do, you should always have access to your digital identity, owned and controlled by you in a safe way. Don't make life complicated when you can make it easy. So independent of applications in Digital Identity, mobile or smart card, you are always the key. Next slide, please. The Digital Identity. Increased interest in this area, especially now in corona times, we have a 100% YOUNiQ agnostic digital end-to-end solution. The financial sector is a little bit slow now due to COVID-19, but we are still discussing with companies about the opportunities in this area. During the last month, we have been successful in selling into Friskis & Svettis in Sweden and also with Temporary Space Nordics. We are, as we speak, having discussion with them how to take the next step in their digitalization journey. With our YOUNiQ product, companies can accelerate the digital journey in many areas, and that is our ambition: support them and make them more efficient in many ways. There are many digitalization projects ongoing in the Access area, but Precise are the only one so far that have been able to make a real digital solutions, no keys, no cards, no tags, no mobile, you are the key. Impossible to forget, impossible to copy, everything owned and controlled by you. We are also investing into compatibility to Access management system to be able to address a larger part of the Nordic markets and starting with Sweden. Case by case, so we're also looking into opportunities outside Sweden, but focus now is Northern. There is a huge market opportunity in this area and where we just started a very interesting journey. It will, of course, take some time before we have a huge sales in this area. But the opportunities is there, and this will be the major part of Precise over time. We have now, during some months, been running proof-of-concept with hospitals, and that will continue in the next coming months. This is just some activities we are running in this area. Focus in sales, and that's key for the coming months. Next slide, please. Mobile. We have now stabilized the situation and have, together with our partners, been able to secure products, both with Huawei and Samsung, the 2 major OEMs in the Android environment. There are rumors about volume issues in the market, but our partners have been able to secure needed volume. The setup now with platform development in Sweden, in combination with sales and operational execution in New York State, U.S. and Shanghai in China starts to pay off. Our ambition is now to take the next step in the software value chain and even expand our offering, especially in the preprocessing and integration area to be able to help our partners to win even more OEM projects. The trend is very clear. The optical sensor is gaining a traction versus capacity. But the price pressure continue also in the optical area. The journey from the $5 sensors moving extremely fast towards $1, which means you need to have volume to survive and there will be very few players who will be part of this business in the future. We have a very good foundation for the future with the partners and our delivery capability is great due to our setup. Next slide, the Smart Card. We can see a higher activity in the smart card area, and here, we get some help actually from the COVID-19 situation. We need -- the need of contactless payment has increased. You don't want to touch different devices in public area. So the need of biometric card has increased. Pilots and small volumes are running. And our earlier statement about 2020 in the payment card area is still valid, only small volumes. We are ready to launch, but the whole value chain needs approval from banks, et cetera, and we know it takes time. Hopefully, we'll be seeing more volume during next year. Precise product for the first generation of biometric card is completed. Now we have discussion and development regarding more cost-efficient sensor solution for the future. We need to have a bill of material that is sufficient, lower than today, to be able to address the mass market. Few players are part of the discussion now, but we know that when it will take off and volume will be there, there will be more solutions available from other players. Our digital end-to-end solution is perfect in this physical distancing world we have right now, independent if it's in the Digital Identity area, the mobile or the smart card. By that, I hand over to our CFO, Ulrik.
Thank you, Stefan. Please turn to Page 8. The execution of our strategy continued. Our mobile business generates a healthy and profitable growth year-over-year. Precise YOUNiQ has received a very good reception in the market, and we now accelerate the pace in which we add new customers. Net sales in the quarter increased by approximately 76% in total SEK 23.6 million versus SEK 13.4 million previous year. The net sales that were split between royalty revenues of SEK 11.9 million, license fees SEK 8.8 million, sport and maintenance SEK 1.5 million and other SEK 1.5 million. The increase in royalty was primarily attributable to Egis Technology. The gross margin during the quarter totaled 84.7%, and the increase is linked primarily to the higher net sales. Amortizations and write-downs of capital development expenses was SEK 2.3 million versus SEK 2.5 million previous year. The amortization of acquired intangible assets remained flat and totaled SEK 0.2 million. Please turn to the next page. The operating profit loss for the quarter improved by SEK 6.1 million in total SEK million -- minus SEK 1.1 million versus previous years minus SEK 7.3 million. The improvement in the operating profit loss is explained primarily by the higher net sales, which has generated an increased gross profit of SEK 9.4 million. This is partly offset by the increased operating expenses of SEK 3.3 million. And overall, the operating expenses for the quarter totaled SEK 21.1 million. The investments are in the future growth, primarily in the area of Digital Identity, and this is the driver of the cost increase primarily. We also see that the increase in sales is coming from increased withholding cost and commission cost, which is actually then a positive thing. When we sell more, we will see increases in withholding costs and commission costs. We continue to improve our ways of working and driving both efficiency and effectiveness. The earnings for the period totaled minus SEK 1.5 million. The depreciation and amortization totaled SEK 3.1 million. And the profit/loss at the EBITDA level improved and totaled at SEK 2.0 million. Moving to the next page, cash flow and investments. The cash flow for the quarter from operating activities was strengthened and totaled SEK 2.3 million. SEK 1.0 million is attributable to the reduced capital tied up. The group invested SEK 0.2 million in property, plant and equipment during the quarter, and development expenses of SEK 4.1 million were capitalized during the quarter. On the financial position and the liquidity, cash and cash equivalents increased year-over-year by close to SEK 11 million, and at the end of the period totaled SEK 76.3 million versus SEK 65.4 million previous year. A strong and healthy cash flow from our Mobile business fund our investments in Precise YOUNiQ, building a foundation for continued growth. With that, I hand the word back to you, Stefan.
Thank you, Ulrik, and then we go into the summary slide. So we have now a much more stable situation for the company, a healthy setup in the Mobile area, which generate cash for investment in new business and future growth for the company. The cost control and success in the Mobile is key for the organic growth in DI. To capture the market, it's just a matter of how fast we can accelerate with our own financial situation. The market is there and the journey has just started. The sales will continue on a similar level next coming quarters, which means we will continue to invest in Digital Identity and especially in sales activities for Access second half 2020 and also then start to drive business for 2021 in all areas, Digital Identity, Mobile and Smart Card. Thanks for listening. And now we will open up for questions.
[Operator Instructions] And at this time, there seem to be no audio questions. [Operator Instructions] Okay. We have a question from [ Jorgen Karlsson ].
I have a bunch of questions. First, I want to congratulate to a good result. My first question is the Payment Card business, it's very much talked about that nowadays. And I wonder, is it correct to say that Precise Biometrics software -- the orders for Precise Biometrics software will come from the secure element companies and not from the sensor companies. And I also wonder if Precise Biometrics has any more cooperations besides the one with NXP?
So let's start with the last question first. Thanks, Jorgen, for your question here. We have ongoing discussion with companies besides NXP, yes. But NXP is our major customer, and the majority of our efforts is in the NXP area to help them to be successful and to get this out. So right now, NXP are the major focus here. Yes, it's right and wrong with the secure element. We have the dialogue with the sensor makers and the customer or the sensor makers or like the NXP who are delivering a bigger part of the total solution. We have a match in the secure element, which is one of the key argument to utilizing Precise algo. But of course, you can utilize our algo outside the secure element also. But we are selling primarily to sensor suppliers and to -- and the main focus now are NXP in the Payment Cards area.
Okay. Can I take all my questions now or should I come back?
You just continue. It's -- of course, maybe then you will take questions that others have. So you just continue. No problem.
I wonder if you can name the 3 biggest income sources or companies for Precise Biometrics besides EgisTec. When I read the report, everyone knows that the big income comes from -- on the Mobile side now and Egis is the biggest one. But can you give more examples on actually companies that you get income from?
We are, of course, very careful to get out that information to the market if it's not relevant for the company. But as you said, Egis is the main contributor in the Mobile area. NXP is in the Smart Card area and Temporary Space is in the Digital Identity area as it is right now. Then of course, we have a good collaboration with Qualcomm also. But otherwise, it's spread over many different customers when it comes to the income sources.
Yes. The reason I ask this question is because you all know that Precise Biometrics has a lot of cooperations with other companies, but I think it's hard to actually see which companies and the, what you call it, the collaboration -- the cooperations that is actually active because, yes, there are a lot of companies on your web page, but it's hard to actually connect them to actual business you do. But okay, you will not tell any specific companies then?
No, not any details about that. Once again, when there is strategic contract signed, then of course, we communicate that. When there is any contract that had a significant impact on the financials, we, of course, communicate that. But then, of course, we have a lot of contracts with opportunities in the future, and that will not have any strategic or financial impact right now. So therefore, we don't communicate that as it is right now. So it's important that if a customer have a huge success and generated a lot of income, then of course, we communicate that also.
Next question is about Precise YOUNiQ Identity. I heard when you talked before, you had some information. But from the Q1 report, we could read that you did some pilots on specific platforms. Can you mention any of the platforms that you run pilots on?
And I also got a question about this when it comes to our customers and all that, which platform they are running. Right now, it is like that, that our solution is agnostic. So we work with all different platforms. And the solution so far that we have integrated with customers are outside our -- any platform. So it's our own solution. But we have ongoing development and integration with the major platforms in -- especially in the Nordic countries, like [ Asio ], [ Axe ], Bravida but also like S2 in U.S. So that's an ongoing work. And we will communicate more about that when it has been finalized.
Okay. Is it in near future or is it next year? Or could you say anything about that?
Yes. I -- We will come back when -- we are closer with some of the platforms and we have more development to do with some other platforms. Some platforms are very close, some platforms are very open. So it's a little bit different time scheduled for different platforms here, actually. But hopefully, we can communicate more about some of the platforms during the next coming quarters here.
Okay. Then we have a really interesting subject here about Infinity Optics. When you integrate biometrics with crypto, what you call it, and I'm wondering, can you tell a little bit more about that cooperation and the progress there? Are there any pilots? And when can we expect a launch?
So -- and this is a very -- from a technical point of view, a very tricky area because no one else in the world have done it. And we are trying to take a huge step in a very interesting area when it comes to be able to distribute your biometrics data without any possibility to spread it out, so to say. We have continued to develop it during the last quarter. And right now, we are running what we call a proof-of-concept in our office. So actually, our employees can open up the front door and come into the office with a combination of Infinity Optics/Solution and/or biometrics. This will take some time. We don't see any customers during this year. Hopefully, we will start to run some pilot later this year, beginning of next year. But no financial impact on our result the next coming quarters, that's for sure.
Okay. And next cooperation with Covr Security. I have myself connected that to Precise Biometrics' YOUNiQ Identity, but I guess it's more than that. But can you tell us about the cooperation with Covr Security and do we have any pilots, any products, any customer deals close -- in close future?
Yes, a very good question. Yes. So the cooperation continue there. In parallel, they have, of course, their own product that they sell without any biometric input. And we have our own solution that we are not selling without their technology. The main target have been here is the financial institute of banks. And we know that they are affected by the COVID situation, and they are actually -- if they have been slow before that, they are even slower right now. They don't take any risks. But we have ongoing discussion with banks about this solution, and that will continue to the second half now 2020. But we don't see any major financial impact during 2020 in that area.
Okay. Next question is about Precise YOUNiQ for facility access. I've heard what you said before in the presentation. But one thing I'm not sure if I heard correct before. You have mentioned that you will start to sell YOUNiQ Access outside Scandinavia market. Can you mention anything about any progress outside the Scandinavia market?
So if we start with that one, we -- via our sales offices in Asia and the U.S., we have started to have dialogues and we have folks running in U.S., and we have also in Asia folks running. What is very, very important now is that we have a clear focus of the Scandinavian market, the Nordic market and especially in Sweden. So to really show that this is a product that can fly and that we have enough income from this area. We have announced the first customer, which was Exeger in Stockholm. They are using the product now and are very satisfied. Then we had an agreement with Friskis & Svettis, who are using our product now in some of their facilities. And now the last one here that have been communicated is Temporary Space Nordics in Celestial, which remember, we started from 0 this year. We had absolutely 0 customer in this area. And of course, it will take some time, but we have a huge interest. So and it was -- the pipeline is building up day by day. But the focus now is, especially Sweden, to get more customers here. We think that this area will be the biggest part of Precise in the future. Of course, it will take time. It will always take time when you enter a new market with a new technology and all that, but there is a huge potential here in this area. And luckily now, when we have control our financial situation in the Mobile and generating a lot of cash, we can invest that in the future for further growth.
One on cooperation. I am a little bit more curious about this one specific with ELAN. And -- just a couple of days ago, I read that they have had quite some success. And I'm wondering if you can tell anything about the collaboration or cooperation with ELAN. Are you still in cooperation with them and get income from them? Or can you say anything about that?
Yes. So ELAN is -- ELAN is one of our customers, and we still have cooperation with them. It was announced a long time ago before I joined the company actually. But yes, we have a discussion with these guys. Now it's in the cooperation area of the Embedded. So Embedded Solutions, like, for instance, smart cards, locks, computers, et cetera. But there will not be any major contribution during 2020 from that customer to us. So this is something we are looking in for the future. And if there will be any major breakthrough together, we will, of course, communicate that.
Okay. And now to an interesting area for the Mobile, something about full-screen fingerprint technology. There is an ongoing cooperation a little bit between Egis and FocalTech, and a new product called [ FT DDE ]. I wonder if you can say something about that new technology and if Precise Biometrics has cooperation with Egis and also FocalTech. Do you know if your software will be used for that technology with these companies?
Yes. So I will answer in general terms here. With all our customers, we have, of course, road map discussion and the future collaboration and then of course, we're talking about FDDI and what we call the full-screen fingerprint technology. And our algorithm is possible to use there also, which is good. So there is a future in this area also. When it comes to the cooperation between Egis and FocalTech, that is something that is FocalTech need to answer. That we can't do. But yes, we have ongoing discussions with companies in terms of the full-screen fingerprint technology.
Okay. Next question is about the IoT business. Can you please tell us a little bit about the progress with the IoT business like with BM TrustKey Solutions. Do you have any estimates for this business for 2020? And do you see any chance of new customers in the IoT segment during 2020?
So -- yes, the IoT segment is very tricky. A lot of players in many different locations with very low volume. So that area for us is very low sales. And during the next coming quarter’s period, we don't see any big uptake in that area. Of course, we are selling a standard license product to some of the guys here and have dialogue with these guys. But so far, no huge volume in this area.
Okay. Then I have not so specific question. But in general, you talked about the Payment Card business and you have seen more activities in that area. How does -- how do you notice that Precise Biometrics because, I guess, you don't talk directly to the banks that will do the actual orders. But who do you get the information from? Is it from like NXP or how do you experience that new activity, the more activity that comes in this area?
Yes, correct. We get the information from our partners like NXP. So we know where they are a part of test and all that. So that -- we can see that bigger interest, especially now during COVID-19 situation. But still, as I said earlier, it's a very tricky approval process ongoing with banks and with Mastercard, Visa and all these guys and therefore, it takes time. We just need to have respect for that. We are ready to go. But as we have said from the beginning, there will not be any huge volume 2020. That's for sure.
Yes. I'm just curious because some companies, other biometric companies from Scandinavia, they have really heavy activity on like Twitter and press releases. So if you listen to them, it sounds like it will come tomorrow. But you are more relaxed and say that it will not probably come 2020. But we know that some French banks and British banks have run pilots and are -- yes, if -- yes, they are pretty close to release these biometric cards. Can you tell us anything about that? Is that your view as well that they will come, let's start this autumn or will it not start at all or -- what is your view about that?
So first of all, we never comment any other companies' comments, so to say. They -- each company needs to take the responsibility for their own business, and we will never comment that. We have been very, very strict and we have been very consistent, I would say, in our communication about the Smart Cards. We have said that there will be some proof-of-concept pilots and small volumes during 2020, and we are still thinking that. So what we have seen so far from the banks and from financial institutes, in terms of test and discussion about volumes, there will not be any big volumes this year so if that will change, we will just be happy. But we think that the start of this will come during next year. So we don't see any huge volume in 2020 at all.
Okay. Another interesting area is the car industry. I read about -- you have a cooperation with a company called Cypress and they have a collaboration with Infineon. Have you noticed any progress there? Or can you say anything about the car industry and -- with using biometrics?
In general, I will say that it's not for the car industry only. There are more and more interest into utilizing biometrics in different types of applications: car, house, buildings, computer, mobile phones, et cetera. And I'm sure there will be more and more biometrics in a lot of different applications. So yes, I'm sure there will be more in cars also. Then exactly how the solution will look like and all that, that we need to see over time. But for sure, there is high interest in the market of biometric solutions in all different applications, I would say. Then we should remember that when it comes to fingerprint software solutions, only -- there you need to have a mass market. You need to have huge volume like the mobile phone or like computers or hopefully also smart cards in the future to get up the volumes. So far when it comes to the car industry, it's very, very low volumes. And by that, a limited possibility for income for us. That's a huge difference when it comes to the YOUNiQ area, where we are very much, much closer to the end customer -- end consumer. We have another business model. It's based on the monthly fee that -- and they sign a contract that are approximately 3 years. So that's a totally different business. So we are running now the company with 2 different business models and that we will continue over the next coming period.
Okay. 2 more questions. One question is about the royalty and the fees you get for the different solutions. I wonder, can you say anything about if you get more income from your software when it comes to payment cards than you get from mobile?
No, no, that we can't comment. And to be honest, the smart card have not started yet. So I mean, the income from the smart card is nothing more than license fee we receive now from a customer. So -- and that, we can't comment. But we should remember that the same thing that has happened in the mobile phone area with a pressure on price, pressure on bill of material and all that, that will come in the smart card area also. So even if there are a nice royalty per unit in the beginning, there will be a huge pressure over time in that area also. It's a nature in the business, it will be like that.
But from a technical point of view, is it fair to say that it requires more from the software running on payment cards than it does for open up the mobile phone?
No, I don't think so, not at all. It's a little bit different because it's a capacitive on the smart card and it's optical on the mobile for us. But no, it's the same.
Okay. Last question.
We'll take one last question, so we can -- because we have other questions also.
Okay. That's good. Last question for me then. Have you seen any increased interest from investors or analyst companies now when Precise Biometrics is win-driven company?
So I hand over that question to our CFO, Ulrik. So please.
We continue to see -- investors are continuously approaching Precise in order to investigate if we are, say, interested in taking in more funds. And we keep open dialogue with a lot of the investors. As said earlier in the call, we are having a nice, healthy growth and stability of cash flow in the Mobile business, which allows us to invest in the future growth, both in the Mobile business as well in the Digital Identity area. So yes, we see that the interest is there, which is good.
Okay. And once again, congratulations to a good result.
Thank you, and thank you for a lot of good questions. Do we have any other questions online? Otherwise, we have questions that people have sent in here.
We currently have no further audio questions. So please go ahead.
Okay. Thank you. So some of the questions we have been able to answer now during the other questions here. So -- but let's see. We have one question related to our relationship now with the situation in China and U.S. and a conflict in between China and U.S. And I would say that, first of all, we are lucky with the setup we have. We have an operational setup both in U.S. and in China and we are a company from Sweden. So that's also helped us in this that we can work on both sides, so to say. So no direct impact on us right now. Of course, it might have an impact on our customer, but that's not something we can't handle and take care of. Another question is about the biggest potential is that what voice, eyes, fingerprint codes so, et cetera. We don't believe in codes at all. You should be your own key, so to say. I think that multi-modality will be the winner over time for different -- you need to have a different biometric for different applications. We think that the fingerprint for a local owned device, so that you have your own device, it's a very good solution and will continue to be that. But when it comes to access and other, where a lot of people using for different applications, I would think that face is the winner right now. But it's not black and white, so it will be a combination. Another question is that the contract with NVSS, what does it mean? Have they got exclusivity for YOUNiQ Access? And the answer there is no. They don't have exclusivity for YOUNiQ Access. They are a key partner for us when it comes to installation and sales, and they will handle all services, first-line services in Sweden also. So a very important partner, but no exclusivity in installation and sales. Then I have another question here. It's about the contract between Renesas, MetLife and Sino India cloud. And we never comment our customers' contract with other customers as long as it will not have a strategic impact on our business or a major impact on the financial result for us. So therefore, it's nothing we comment. Okay. Any other questions from the audience?
We currently have no further audio questions. [Operator Instructions]
So we have got one more question here from the webcast here, I can see. And that was what Samsung's phones are we part of? And that -- we can't comment. It's up to our partners, the sensor makers, to communicate that. So that we don't do. So because we are not allowed to say that. And for us, it doesn't matter actually. It's more important for our partners to communicate which fields they are part of. Yes. Okay. Then I thank you all for listening in, and all very good questions. So have a fantastic Friday and weekend, and hope to meet you soon again. Thank you, and bye-bye.