Precise Biometrics AB

STO:PREC

Earnings Call Transcript 2021-Q2

[Operator]

Hello, and welcome to the Precise Biometrics Q2 2021 report. [Operator Instructions] And just to remind you, this call is being recorded. Today, I'm pleased to present Stefan Persson, the CEO; and Ulrik Nilsson, the CFO. Please go ahead with your meeting.

[Stefan Kenth Persson, Chief Executive Officer]

Thank you, and good morning, and a warm welcome to Precise Q2 2021 presentation. I will, together with our CFO, Ulrik Nilsson, present the financial results and also give you some highlights on how we see the next coming quarters. Now turning to Page #2, please. We have a very strong Algo business despite the component shortage and due to the changes in our way of working and a good cost control, we have a stable company now. This paves the way for future investment in DI. So even if one of our largest customers have seen a decrease in volume due to the component situation in Q2, we are still being able to balance the result. The whole strategy is to stabilize the profitable algo business and accelerate the DA opportunity. As you can see, we have been able to increase our unique sales. So even if there have been a lot of questions regarding excess investment to companies due to corona situation, we have been able to increase our sales in the DI area. Due to low volume from one of our customers in Algo, our net sales landed on SEK 18.7 million and with a slightly negative EBITDA. We can, of course, not predict the coming months due to component availability, but we have a good cost control and are flexible to adjust accordingly if needed. The focus is continued stabilization in the Algo area to continue to generate a stable income that we can fully invest into the future. Still no major changes in the Smart Card area. Even if there are some initiatives and activities, there's still no sign of any volume coming out. Our cooperation, for instance, with KONA I is, of course, important when the market takes off. One important step KONA I was when they got the master vendor letter of approval earlier this quarter. To be able to scale YOUNiQ, we need to secure distribution in different channels. Therefore, it's our distribution agreement with Elektroskandia key. With this, we make sure that our solution is available for installation partners, et cetera. We can continue to see increased interest in the digital venture area and our SaaS model, Software as a Service, will be the major revenue contributor in the future. So even if the industry has been hit by corona, we have been able to continue to deliver our software to our partners, and we have today a very strong team in Asia, Europe and U.S. that will continue to support our customer and maximize the opportunity to win new projects. Now turning on to Page #3, the vision. Our strategy and vision, no matter who you are, where you are and what you do, you should always have access to a digital identity, owned and controlled by you in a safe way. And this is what we communicate in all forms, build our solutions around and execute accordingly. You are the key for all applications and resources and everything is owned and controlled by you. Page #4, the digital identity. Our market potential in DI area is huge. We can see the market is demanding solutions with ability to verify a person's identity in a convenient and secure way. We continue to focus on the Swedish/Nordic markets where the accessible market size just in Sweden is identified to more than SEK 1 billion 2025. We can see a good sales increase year-to-year, but still, of course, low sales level compared to where we will be in the future. Our go-to-market strategy start to generate good attention. Our own sales force is creating a lot of leads and good reference and then cooperation with installation partners and distributors will help us to accelerate the business. We have today's time contract with [ Hapolan ] and Elektroskandia for distribution, and we have more than 50 installation partners that help us with sales and installation. One key area in the scale-up is also the integration with key platforms such as [ Indiscernible ] et cetera, and more will come in the -- in this area coming month. This means we have created the base for scale up, market activities with our own channels and scale up we have platform and partner, easy to buy, easy to install and fantastic to use. We have also now the first installation in Norway, and we can see more opportunities there during the coming months. We have also via one of our customers, Algeco, now the first installation in Germany. This shows that product easily can be sold, installed and used different parts of the world without any adaptations. Possibility to scale up is easy. Still, the focus is in the Nordic market with all opportunities. It's a traditional market, access market. The company in the past have been selling hardware, but the change goes very fast now, and we are one of the leading companies in this new area. Today, we have more than 60 installations and thousands of users every day. A very interesting part of YOUNiQ platform is the possibility to add new features. Our open API makes it very easy to integrate with other features, such as environmental control, booking system, et cetera. And we will start to test and sell these integration during the second half of the year. We now had a first generation of our product in market. We have integrated with key players and the organization is prepared for scale up. So the SaaS journey for presales have just started. The growth in the digital identity product area was 169%, and SaaS, Software as a Service, means stable recurring revenues with high margins. It's also nice to see that our number of customer losses is 0%. All the customers had chosen YOUNiQ access are very satisfied, and we have multiple cases of upsell through additional installations. Next page, Page #5, Algo. After introduction of the new way of working in the product area Algo, we have now a solid -- very solid base in the company, a stable and healthy business that enables the opportunity to invest into the new DI business. We had revenues with high margin in the Algo product area, reflecting our strong market position. Our total royalty revenues were, however, reduced by component shortage. Even if the component shortage continues, we have good opportunity to return into early quarters volumes. We have a base of solid key customers such as Qualcomm and Egis, and we can see that our pipeline for coming quarters is really interesting. We will further integrate the fingerprint software in series of mobile devices in collaboration with a partner despite the COVID-19 effect on component availability. Still the situation in the -- still the same situation in the Smart Card area. As I said earlier, we will see together with KONA I, the Mastercard letter of approval for the biometric payment card. We have seen an increased interest in other Smart Card applications in software for instance, access area, but Smart Card is a bonus market for Precise. By that, I hand over to our CFO, Ulrik.

[Ulrik Nilsson, Chief Financial Officer]

Thank you, Stefan. Please turn to Page #7. The execution of our strategy continue. I will be starting with the Algo business. We are an established world-leading company within Algo. Our Algo business is strong, healthy and profitable. We are expanding our role, taking responsibility for larger parts of the delivery. We continue winning projects with our own partners and are selectively adding new partners. Negative is continued component shortage among our customers and the lower production volumes resulted in lower royalties. We, however, foresee a return to prior volumes, which will further increase profitability within Algo. On Digital Identity, we are building customer awareness. We are continuing adding new customers. We are adding partners and sales channels. We are expanding business with existing customers through upsells. And this is accelerating, reopening of additional geographical markets. Focus remains on the Nordics, adding Germany, that is a bonus. On the total company side, the net sales during the quarter totaled SEK 18.7 million versus SEK 23.6 million previous year. Net sales were split between royalty revenues of SEK 10.9 million versus SEK 13 million previous year. License fees, including support and maintenance, SEK 7.0 million versus SEK 11.9 million and other of SEK 2.4 million versus SEK 1.5 million previous year. And as commented earlier, the component shortage among our customers resulted in lower royalties. Increases in license fees, that is a result of the precise strategy focusing on deeper collaboration with key customers. Increase in other that is attributable to growth of Digital Identity and sales of development licenses. The net sales of Digital Identity totaled SEK 1.2 million versus SEK 0.7 million previous year, and this is reported under the other. Gross margin during the quarter totaled 73.3% versus 84.7% previous year. The change is primarily due to increased amortization of capitalized development expenses. The total amortization of capitalized development expenses, that was SEK 2.9 million versus SEK 2.3 million previous year. The changes in the product mix, DI that is in a growth phase, and the lower turnover within Algo. Increase in the amortization of development expenses, that is related primarily to Digital Identity. And we are using quite an aggressive amortization period of 3 years for both Algo and Digital Identity. Please turn to Page 8. As commented previous, our Mobile business delivers healthy profit. We continue executing the strategy working in deeper collaboration with key customers, allowing full leverage and scalability. The Algo business is healthy, profitable and delivering the strong cash flow we need. The negative for the quarter, that is the continued component shortage among our customers, and that is reducing the royalty. Return to previous volumes would further increase profitability within Algo. DI, in the buildup phase, will continue strengthening our market presence and Digital Identity through partners, own resources and sales and marketing and customer excellence. We continue to invest in Digital Identity, which is reflected in the increase of spend in R&D before capitalization. Operating expenses for the quarter fell by SEK 2.8 million and totaled SEK 18.3 million versus SEK 21.1 million previous year. Our cost control is tight, and spend is closely connected to execution of our strategy. Cost reductions comes primarily from reduced research and development costs. An increased proportion of the expenditures for development work, primarily in the area of digital identity is being capitalized. Operating profit loss for the quarter totaled minus SEK 4.6 million versus SEK 1.1 million previous year. The reduction in the operating profit loss is explained primarily by lower net sales combined with lower gross margin. Profit loss at the EBITDA level totaled minus SEK 0.8 million versus SEK 2 million previous year. The earnings per share for the quarter totaled minus SEK 0.01. Please turn to Page 9, cash flow and investments. The cash flow for the quarter from current operations totaled minus SEK 0.7 million, of which is SEK 1 million is attributable to increased capital tied up. The group invested SEK 0.3 million in property, plant and equipment during the quarter. Taking a little bit more about the working capital. We have structured our business model to reduce the need for incremental working capital. Licenses and -- they vary are invoiced versus prepayment. In Digital Identity, we are building the business with prepayments ranging from month to yearly in advance. Royalty invoicing is done based on usage actually reported by our customers, and this accounts for more than 50% of our accounts receivables. Having this setup of the business model that enables growth without the need for incremental working capital. Capitalization and amortization of development work, development expenses of SEK 4.2 million were capitalized during the quarter versus SEK 4.1 million previous year. The amortization of capitalized development expenses totaled SEK 2.9 million versus SEK 2.3 million during previous year's quarter. Capitalized expenses, they are amortized over a 3-year period for both Algo and Digital Identity. And finally, some words about the financial position and liquidity. Our cash position is solid. Cash and cash equivalents at the end of the period totaled SEK 62.5 million versus SEK 76.3 million previous year. With that, I hand the word back to you, Stefan.

[Stefan Kenth Persson, Chief Executive Officer]

Thank you, Ulrik, and then please turn on to Page #10, the summary. So increased client activity and promising growth in the Digital Identity. We have a strong profitability in Algo that provides an opportunity for internal finance development of Digital Identity. Resources, as Ulrik said, are shared evenly between the product areas and we continued growth in the Digital Entity combined with the recovery within Algo, we are seeing that the company will achieve profitability in future. Following initiative in Digital Identity, combined with the impact of the component shortage, EBITDA landed on minus SEK 800,000 despite the fall in royalty revenues. Adjusted for initiative in the Digital Identity, we see a very strong underlying profitability in the company. With the profitability from the outdoor product area that is reinvesting the growth in the DI, we are looking forward to continue to advance our position as a leading global supplier of identification software in which you are the key. Finally, I would like to take the opportunity to thank you, Ulrik, for your efforts over the past years. And a warm welcome to Annika Freij as the new CFO of Precise. She will meet you when we present the Q3 report later this year. So after all, a stable first half 2021, despite the tricky situation with COVID and shortage of components, and it will be -- continue to be a very interesting 2021 with a lot of activities in both the Algo and DI area. You are the key.So now turning on to Page #11, and we open up for questions.

[Operator]

[Operator Instructions] And there are no questions at this time. Please go ahead, speakers.

[Stefan Kenth Persson, Chief Executive Officer]

Thank you. We have received some questions via e-mail and our social media. So I will try to take them one by one. We have got one question regarding our expansion possibilities outside Sweden and the Nordics. And as we have earlier communicated in the DI area, and as we have earlier communicated, we have an installation in U.S., where we're utilizing our sales resources there, and we continue to look into opportunities in U.S. Via our partners, Algeco, we are actually now have that opportunity to do the first installation in Germany. And we have also done the first installation in Norway, and we have more to come in Norway. Our main focus is Sweden and Nordics. And then via our customer, there might be opportunities outside the Nordics that we will look into. But Nordic countries as it is right now is the focused areas. We also got a question regarding the ASSA ABLOY and what does it mean in long term or short term when it comes to the global activities in that area. And of course, that's in line with our strategy to be integrated with the key platforms such as ASSA ABLOY and [ Indiscernible ] et cetera, to be able to grow outside Sweden also and ASSA is one of the major platform suppliers out there and we are really happy and satisfied to be integrated with these guys. And of course, there will be opportunity with ASSA outside Sweden also going forward. And another question is, of course, in the biometric Smart Cards. As I said earlier, it will just be a bonus for us if there will be any volumes in that area. We have a deep collaboration with KONA I for instance, and we are following and tracking the activities there. But we can't see any major volumes this year in the Smart Card area. We have also got a question regarding the unique ID and the setup there and if there are any opportunities in that area. We decided here earlier this year and end of last year that we focus now is to access where we're utilizing IDs to have the passage in access area. We are still looking in the possibility in the ID but no activities as such right now because the focus is access. We have also got a question regarding the car industry and the opportunity there. We are monitoring carefully and via our partners, we have some activities in that area. Extremely long lead time, extremely long sell-in activities. If there will be any activities later this year, then, of course, we will communicate that. So it's not that we are not active in the area, but there is no sell as we speak right now. That were all questions via e-mail and other social medias. Are there any other questions online?

[Operator]

Yes. We have a question now from the line of Jurgen Carlson.

[Unknown Analyst]

I'm curious why you pinpoint KONA I in the card business, they are as I know the card company. But before you have only talked about NXP as a partner, which works with secure element. So is this something new that you will pinpoint card manufacturing companies that you will deliver your software to?

[Stefan Kenth Persson, Chief Executive Officer]

Thank you for the question. So no change in the strategy. Of course, we have explored opportunity both with secure element suppliers and card manufacturers we had cooperation with different type of companies out there. The reason why we are highlighting KONA I right now is, of course, that they were successful in the certification area, which is one very important step towards the commercialization phase. So no change in terms of the strategy. So we are -- as I said earlier also, it's a very complex total value chain there that you need to be in discussion both with the banks, the card manufacturers, the sensor manufacturers, et cetera. And why we, of course, addressing our excellent software to all of these guys so they are choosing us. So no change in the strategy there.

[Unknown Analyst]

So does that mean that you approach both card manufacturing companies, secure element companies and sensor companies? Can you be involved in -- I mean, can you provide the agreements with all these 3 kinds of companies?

[Stefan Kenth Persson, Chief Executive Officer]

No, that's absolutely correct. So we are talking with card manufacturing companies. We are secure element and sensor manufacturers, yes. And the reason we are doing that is of course that we are hardware-agnostic. So many of the, for instance, the card manufacturers, they want to be a hardware-agnostic and have opportunity to choose between different sensor suppliers. So the answer there is yes.

[Unknown Analyst]

So far, you have only mentioned NXP and KONA I, can you mention any other companies that you are directly involved with?

[Stefan Kenth Persson, Chief Executive Officer]

No, we can't do that right now. So that we will take step-by-step when there is some more information in that area. So these are the 2 that we have communicated right now.

[Operator]

And there are no further questions at this time. Please go ahead, speakers.

[Stefan Kenth Persson, Chief Executive Officer]

Okay. Thanks for listening, and I really hope that you will have a lovely day and take care. So, see you soon again. Bye-bye.