Precise Biometrics AB

STO:PREC

Earnings Call Transcript 2021-Q3

[Stefan Kenth Persson, Chief Executive Officer]

Thank you, and good morning, and warm welcome to Precise Q3 2021 presentation. I went together with our CFO, Annika Freij present the financial results and also give you some highlights on how we see the next coming quarters. Now turning to Page #2, please. Despite the tricky situation for our customers such as [ EgisTec ], due to issues in the supply chain and lack of control during part of Q3, we have been able to -- with a very good cost control and [indiscernible] way working keep a positive EBITDA. We can also now see a very good trend, both in the Algo and the Digital Identity, which means we will end the second part of this year in a good way. The foundation for growth in DI is based on that we utilize earnings from the Algo business. Our DI sales will increase a lot 2021 compared with 2020 and the growth will continue. Now after corona, we have seen a lot of new interest and installation continue and more customer interest accelerates quite well. The important part is to get up the ARR, annual recurring revenue via our SaaS model. We have a lot of activities in this area, and we will build a very good foundation for the coming period 2022. June and July were the month so far during the year with the lowest order intake from our customers. September was the month that performed best so far in 2021. This is a clear indication that the negative effect due to the component shortage decreased and that we have a good opportunity in the future to return to previous volumes. The whole strategy for 2021 has been to stabilize the profitability of Algo business and accelerate the DI opportunity. And we follow that with 100%. We're targeting a plus/minus EBITDA in 2021. Our setup for the future is now perfect. We can easily handle ramp-up, but also changes from a customer duty issues. We are 100% agile in our way of working. Now with a focus on acceleration of DI, we have created a perfect base with integration with all major platforms at Integra, [indiscernible] ASSA ABLOY, [indiscernible] . This means all major platform suppliers can sell our product with the system, and we can easily upgrade all existing platforms in the market with our technology. This is key for scaling the business. We have also contract with a major distributor, which means that we easily can get out of product to customers. This also means that we keep a very lean and fast organization, with the support from our distributors we don't need to keep any stock in-house at Precise. Also the cooperation with all major installation firms means that our sales force is huge, and we planned with existing product scale for easily. We continue to look for cooperation and investment opportunities in all relevant areas for further growth, and we have several interesting ongoing discussions. Platform is there now, we have to scale and grow as fast as possible. Our sales landed about SEK 16.9 million due to the component situation for our customers, far from where we will be in the future. But as earlier described, we landed on a positive EBITDA. Now turning 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 core rooms, build our solution around and execute accordingly. You are the key. You want to keep all applications and resources and everything is owned and controlled by you. Now after some hard work done by our marketing team, we also received official approval that Precise on the trademark or you are the key. Stronger and crisble than ever, we own this area, and we'll continue to build it. You are the key. Next slide, please. The Digital Identity. The growth in the Digital Identity product continued and was 133% compared to Q3 2020. The Software as a Service means a stable recurring revenues with high margins. It's also nice to see the run rate equal with 0, number of customer losses is 0. All the customers who have chosen unique access are very satisfied, and we have multiple cases of upside through additional installation. After the Q3, we also attended sector far in Stockholm, a fantastic event, where we present our products in our own both but also by other platforms and distributors. A lot of good feedback and visitors were very impressed about the solution, best innovation in many years in this area. Due to our participation, we now have several leads with our partners. This is the way to scale. We will also attend FastighetsMassan in Stockholm 2021 now in November 24 and 25. So take -- please take the opportunity and meet us and see our product. Also in November, we will attend ISCeast in New York 17 and 18th of November. Focus is on marketing and sales, go to market, we are partners, distributors, installation affiliates and [ onwarces ]. The market is huge. Just in Sweden, addressable market more than SEK 1 billion. And in Nordic, more than SEK 2.5 billion. This means focus now on push to create a bow in the market in Nordic. The journey just started. We can also see that our unique product contribute to a sustainable societies. We have ongoing pilots projects with our vehicle to control electricity and energy consumption through unique. This will help our customers to achieve our environmental targets, more to come during first half next year. We also announced the collaboration with Doro to develop innovative solutions in the field of technology-enabled care. We have planned joint pilots to open up a very interesting area. Finally, a significant ARR growth with 133%. And we can already now see indication of continuous growth in Q4. Please turn to Page #5, Algo. Continued to see extremely high margins in the Algo. Despite the COVID situation, we have been able to keep the momentum and create healthy cash from the Algo. The effect of semiconductor availability have impacted our customers, but we hope now that it has changed and the edit in Qualcomm among other customers will return to a healthy business. Many integrations of our fingerprint software in series of mobile devices in collaboration with our partners ongoing and the introduction of larger just sensor area seems to take off now. We have also started some very interesting new pilot projects to control vehicle setting through fingerprint recognition. This means when it will go after real product, it will be sustainable, healthy revenue. The car industry is always long project lead time, but then the business continued for many years. No major changes in the smart card area. We still have a very good dialogue with our key partners such as Kona, for instance. But as we only communicated, no real volume yet. The cash generating out Algo is key, and we don't see any changes coming in this area. By that, I hand over to our new CFO, Annika Freij.

[Annika Freij, Chief Financial Officer]

Thank you, Stefan. Please turn to Page #6. So this is my first quarterly reporting. And I would like to start by saying that I'm impressed by the transformation that Precise from the last 3 years. Within the Algo business, the organization is much slimmer and more efficient, but still deliver high sales numbers and customer focus. The Algo business is strong and profitable. Compared to last year, we have more big customers, which makes us less dependent on a single customer performance. We are carefully selecting our partners, and there must be a strong business case to select partners. In the last month, we have started to work with new industries like the car industry, as Stefan mentioned before, which is very interesting for the future. We have suffered some component shortage. But after a weak summer, the trend is improving. Our strategy continues with the Algo business expanding the development of the Digital Identity business. Also within Digital Identity Precise some an impressive journey the last 3 years. Starting as nothing. We now have a system unique that works very well. The up sales to the existing customers show that the product adds a great value. The journey for Digital Identity has just started, after 1.5 years of pandemic lingering us for meeting customers. The trade shows this fall is something of a launch for Digital Identify. We have now built up partnerships with distributors resellers, installers, and we are integrated in several systems and now we are ready to do. Please turn to Page #7. Net sales and the gross margin. So the net sales during the quarter were SEK 16.9 million versus SEK 23.2 million previous year. Net sales were split between royalty revenues of SEK 6.8 million versus SEK 11.3 million previous year. License fees, including supported maintenance of SEK 9.7 million versus SEK 10.2 million previous year and other of SEK 0.3 million versus SEK 1.6 million previous year. The component shortage and therefore, lower sales volumes among our customers resulted in the lower royalties. License fees are just slightly below Q3 last year. The reason for the decrease in other is lower sales of hardware due to fewer new Digital Identity installations during the quarter. The ARR annual recurring revenue is the value of the recurring revenue from the Digital Identity subscription per year. This has more than doubled compared to the same time last year. Gross margin during the quarter was 76.4% versus 79.8% previous year. Change is primarily due to lower turnover within Algo and increased amortization of capitalized development expenses. Total amortization of capitalized development expenses was SEK 3.0 million compared to SEK 2.5 million previous year. The increase in amortization of development expenses relate primarily to the Digital Identity. Amortization of acquired intangible assets was SEK 0.2 million, which is the same as Q3 previous year. Please turn to Page #8. The profit/loss at EBITDA level was SEK 1.0 million in Q3 versus SEK 1.1 million previous year. Operating expenses for the quarter fell by SEK 4.8 million and totaled SEK 15.9 million versus SEK 20.7 million previous year. Our cost control is tight. Cost reductions come primarily from reduced resource search and development costs. Earnings per share for the quarter was minus SEK 0.01 versus SEK 0.01 in Q3 last year. The operating loss for the quarter was minus SEK 3 million versus minus SEK 2.2 million previous year. The reduction of the operating profit/loss is explained primarily by lower net sales. The Algo business is healthy and profitable, delivering strong cash flow the component shortage and lower sales volumes among our customers reduced royalty. But information from customers shows that the volumes are increasing after the summer, and this would further increase the profitability within Algo. Digital identity is at the turn point. We have developed unique, which have been received very well in the market. We continue to invest in digital identity. We continue to improve and integrate with other solutions and build partner network, which is an important phase to build for future efficient sales. We have built a team of resources in sales, marketing and customer excellence. And during the fall, we've had more opportunities to meet customers again. Please turn to Page #9. The cash flow for the quarter from current operations was minus SEK 2.4 million versus SEK 0.5 million last year. From this, minus SEK 3.4 million is due to changes in working capital, mainly a reduction of current liabilities. The group invested SEK 0.5 million in property plant and equipment during the quarter versus SEK 0.7 million last year. We have structured our business model to reduce the need for incremental working capital licenses are invoiced versus prepayment. Royalty invoicing is based on actual usage reported by our customers. In Digital Identity, we are working with prepayments from monthly to yearly in advance. This business model enables growth without need for incremental working capital. Capitalization and amortization of development work. The development expenses of SEK 3.6 million were capitalized during the quarter compared to SEK 4.5 million in Q3 last year. Amortization of capitalized development expenses was SEK 3.0 million during the quarter versus SEK 2.5 million previous year. Capitalized expenses are amortized over a 3-year period for both Algo and Digital Identity. Our cash position is solid. Cash equivalents at the end of the period totaled SEK 55.7 million versus SEK 71.3 million in the end of Q3 last year. Back to Stefan.

[Stefan Kenth Persson, Chief Executive Officer]

Thank you, Annika. So now we're turning to Page #10 of the summary. Once again, positive EBITDA despite the COVID-19 effect on semiconductors and the supply chain. We have a strong indication of a return to prior volumes, which would further increase profitability within Algo. We will continue to generate good cash flow in this area, which means our investment in DI will continue. Very clear expansion of SaaS product area Digital Identity would increased client activity and promising growth. Growth will continue in Q4 and a very clear indication that we will continue 2022 also. The journey has started to take as much as possible of the addressable market in DI or YOUNiQ. We're looking forward to finalize this year in a good way. So now turning to Page 11. And thanks for listening in. And now we will open up for questions.

[Operator]

[Operator Instructions]We currently have no registered audio questions. I'll hand back to the speakers for any further remarks.

[Stefan Kenth Persson, Chief Executive Officer]

Okay. Thank you. We have not received any questions via e-mail or any other social programs. So by that, we thank you for listening in. And just have a lovely day, and take care. So I hope to see you soon again. Thank you very much.