Precise Biometrics AB

STO:PREC

Earnings Call Transcript 2019-Q4

[Stefan Kenth Persson, Chief Executive Officer]

Thank you, and good morning, and warm welcome to Precise Q4 and 2019 presentation. I will, together with our CFO, Ulrik Nilsson, present the financial result and also give you some highlights on how we see the next coming quarters. Next slide, please. Highlights of Q4. As we presented at the last Q report, we can now see that we have continued to deliver according to our strategy. We have been able to deliver a very strong quarter with 178% sales growth compared to last year Q4 and with a positive cash flow. By this, we have been able to deliver the strongest quarter ever for Precise. The result is a consequence of our strategy implementation, where we focus on mobile business on fewer sensor suppliers with a combination of that we now can utilize the full effect of the organization setup between Shanghai, Lund and Potsdam. The new way of working also means we are much, much faster to release the products in line with needed requirements from our customers. As always, in the mobile industry, it's a very volatile situation and that means very tricky to predict the forecast for the future. Our ambition is, of course, to continue the mobile business in a profitable way. We have now also developed and released our first product in the Digital Identity, the YOUNiQ Access. 2019 were a year where we focused our Digital Identity activity in development, proof of concept, and then end of the year, we executed several pilots. In January, we installed a product at Strandudden, a gated community in Smaland, Sweden. And with this installation, we now have the possibility to be part of all new buildings in the community. We have also announced the cooperation with Innovatrics and Infinity Optics. This is part of the strategy to work with key partners and bring new innovative products to the market together with -- for our partners. We still have a lot of improvements to be executed, but we start to get the base in place. In the past, have we been very dependent on the mobile business area and we still have that situation, but gradually, we will have another setup with 3 business focus: Digital Identity, mobile and smart card. We had a quarter with a very strong performance in the mobile area with deep collaboration with one of the leading sensor suppliers in the world, EgisTec. And we also, in parallel, expanded our Digital Identity business by launching YOUNiQ Access. Overall, a very good quarter with significant growth, improved margin and a positive operating profit. Due to the result in Q3 and Q4, we now closed 2019 in a very strong way in all aspects. Next slide, please. According to our strategy, we are now addressing 3 major areas: the Digital Identity, the traditional mobile and the smart card. Part of the strategy is to balance the company in a better way between the 3 areas, and our plan is to increase the sales in DI during 2020, keep the sales in mobile and start with some small volumes in smart card, all to get the balance and opportunity to grow the business going forward. We will still -- we will -- during 2020, still be very dependent on the mobile business, but step-by-step move and create the balance situation between the product areas for the future. Next slide, please. Our vision is that no matter who you are, where you are and what you do, you should always have access to your digital data in a safe and convenient way. It should be controlled and owned by you and it should also be accessible for different type of applications, such as access to buildings, open apps, car, mobile, et cetera. It's all about real customer needs, solving problems in today's digital life. We are now with our technology development, building the enabler for the future distribution and opportunities, which means that all part of the product areas is building blocks for the future total setup. It's all about enable access with your biometrics without risk of losing the data and the identity. Next slide, please. The demand for using Digital Identity in different applications is increasing every day in all areas. It's not only bank and other financial institutes that need a digital solution. In all areas of life, you need to be able to identify and verify you, and here Precise can play an important role. 2019, we announced the launch of the YOUNiQ product and we have been running several proof of concept and last part of the year, we have been focusing on pilots in the access area. We have now installed a product at many facilities, such as gym, university and office, and a focus, first half 2020, will be to sign more orders. In general, we installed a system at Strandudden's gated community. They wanted a system that was high security but also very convenient for the users. No cards, no tags, no keys or mobile phone set, and therefore, have they decided to install our YOUNiQ access product. They will start to build new apartments during this year, and we will be integrated there. We have more ongoing discussion and the plan is to sell our product to small and mid-sized companies during 2020 and then scale it up with larger integration during next year. Focus now is Nordic countries and each installation will generate approximately SEK 50,000 to SEK 100,000 per installation end year. It's very clear that the market is demanding a solution to verify a person's identity in a convenient and secure way and that we can deliver with our YOUNiQ product. Next slide, please, 6.Mobile. 2019, a fantastic year with a good result. We can now see that our focused strategy and new organization setup can execute in a very efficient and fast way with extremely good quality. We have been able to deliver products where other have failed. And once again, we showed our capability, now with speed also. Our ambition is, of course, to continue to generate stable business in the mobile area, but we know that it's a very competitive business with huge price pressure. We can also see that the situation with the coronavirus will have some impact on the mobile business during Q1 and maybe also Q2, and that means that we will be affected in one way or another. Impossible to judge the total impact but we monitor the situation carefully day-to-day together with our partners. Next slide, please. Smart cards. As earlier communicated, we are ready to launch the product. But due to a very complex value chain setup, where we are just 1 part of several partners such as sensor suppliers, card manufacturers, financial institute, bank, et cetera, we can't control when the launch will happen. But it's very clear now that there will not be any significant volumes during 2020. There might be a new opportunity to launch the smart cards to the market, and that is to use them for access. Of course, limited volume, but a good opportunity to commercialize the product. We have ongoing discussion about exploring this opportunity. This will, of course, not generate a huge sale, but might be the first way to the market in a very controlled way. By that, I hand over to Ulrik and the financial update.

[Ulrik Nilsson, Chief Financial Officer]

Thank you. So please turn to Page 9. Looking at it, the execution of our strategy yields growth and results. We do what we say. Net sales in the fourth quarter increased by 178% and totaled a record high of SEK 39 million. Net sales is split between primarily royalty revenues, SEK 20 million and license fees of SEK 16 million. The royalty report is based on actual received reporting from our customers. We see that we leverage in our investment, and this is reflected by that the gross margin for the quarter totaled 92%. The amortization of capitalized development expenses totaled SEK 2.8 million, which is SEK 0.7 million higher than for the same period in 2018. And the amortization exceeds the new capitalized development by SEK 1.6 million in the quarter. Tying that back to what Stefan said is that we are working in a much more agile and automated way where we really leverage on capabilities. Please turn to Page 10. The operating expenses for the quarter decreased by SEK 2.4 million and totaled SEK 23 million versus SEK 26 million last year. We have reduced the annual operational cost by approximately SEK 10 million as a result from the reorganization communicated in quarter 4 2018. And there, we took a charge to P&L of SEK 5.5 million. We have since then increased the cost in R&D related to investments in Digital Identity and mobile. We see that the higher turnover has also led to increased cost for commission and foreign withholding tax. The operating profit loss for the quarter totaled SEK 12.5 million versus minus SEK 14.3 million last year. The improvement of the result is primarily explained by the higher gross profit, SEK 24.4 million and lower operating expenses. The operating profit loss totaled SEK 13.4 million versus negative SEK 15 million last year. The depreciation write-downs totaled SEK 3.5 million versus SEK 2.4 million last year, making the profit and loss at EBITDA level to SEK 16 million, whereas it was negative 12% last year. The improvement of the results, they are primarily attributed to the higher turnover. And the earnings per share for the quarter totaled SEK 0.04. Please turn to Page 11 on the cash flow and the investment. Cash flow from the company's total operating activities in the quarter totaled positive SEK 14 million versus negative SEK 9 million previous year. And this is driven by the operational performance during the latest 2 quarters. The revenue from the fourth quarter has also increased the working capital. So we are seeing that we're going out of the year, we have increased our accounts receivable as a result of the higher sales. The investments in the quarter are primarily related to the capitalized R&D. Should we adjust for the pay out of the charges for the reorganization, we're also coming with an operational result on the cash flow for the year that is positive. The cash increased in the quarter and we ended on SEK 74 million. And with that, I hand the word back to you, Stefan.

[Stefan Kenth Persson, Chief Executive Officer]

Thank you. Next slide, the summary. So we see a very strong quarter and year in all aspects. The new strategy implemented, and we consider the results of the execution in the new setup. We have the base in place for further growth and success. Digital Identity POCs and time of executed during 2019 according to the plan, with very good feedback. First commercial installation ongoing, and we are working to scale up YOUNiQ to facilitate access and prepare the company for high inflows of order from new customer in 2020. There will not be any major volume for smart card during 2020, but we will explore other opportunities to start with in the access area. The risk received for 2020 is the situation with the coronavirus, but we monitor it carefully together with our partners. The most important part now is that we're building the company for growth with a clear vision: No matter who you are, where you are and what you do, you should always have access to a Digital Identity in a secured and convenient way, owned and verified by you. Next slide. So thank you for listening. And now we open up for questions.

[Operator]

[Operator Instructions] And our first question comes from Bertil Nilsson from Carlsquare.

[Bertil Nilsson, Senior Equity Analyst]

Congratulation to a very good result and extraordinary in many ways. My first question is revenue allocation, if you look at Note 22 in the report. And there you can perhaps combine royalty license and support maintenance with geography. And you say that 30 million come from Taiwan. But my question is, Egis Technology, have you received both royalty and licenses from them in Q4? Or is it just royalty?

[Stefan Kenth Persson, Chief Executive Officer]

Okay. Absolutely. We have a license fee that stands over the full year for most of our customers so then we are recognizing the revenue, the license fee over the period. So -- and that is the same thing for Egis Technology.

[Bertil Nilsson, Senior Equity Analyst]

Okay. Yes, because it's -- yes because it's so huge this quarter, and that's why I asked, actually. And the second question is regarding YOUNiQ. You indicate installation fee of SEK 50,000 to SEK 100,000. But I assume that on top of that, you have your transaction fees when installed? Correct?

[Stefan Kenth Persson, Chief Executive Officer]

So this is related to the total income per year and installation as we see right now. As I said earlier, this is -- we are targeting small companies with very few number of users. So then instead of actually communicating every time we do the installation and how much we will gain from that installation, we have now summarized the payer installation as it is right now.

[Bertil Nilsson, Senior Equity Analyst]

Yes, yes. But when installed, then I assume that your receivables receive some kind of license fee or transaction fee for the users.

[Stefan Kenth Persson, Chief Executive Officer]

This is related to everything, both the, what we call the installation fee and the license fees that we see for this type of installation we will do during 2020.

[Bertil Nilsson, Senior Equity Analyst]

Okay. So that's a value of such an order during a few years or 1 year, per annum? Okay. I see. Yes. Okay, good.

[Stefan Kenth Persson, Chief Executive Officer]

Yes. I can actually comment that also. So in the traditional mobile business area, there you actually -- you're launching a product, you get the royalty and then after 6 months, it's gone. So say, because the mobile phone is phased out. But when you do this type of installation, you have that for many, many years. So in those cases, actually, the installation and the contract is -- has minimal, 3 to 5 years. So this is a total different way of handling the business going forward.

[Operator]

[Operator Instructions] And we have a question from Jesper Jensen from ABG.

[Jesper Birch-Jensen]

Congratulations for the strong quarter. My first question is in regard to Egis, which obviously contributed a lot to the Q3 and Q4 results. And I know you mentioned in your report that you expect further integration of your software, but do you expect the same kind of volumes, like in terms of revenues from Egis during 2020? Or what type of levels are you expecting? If you could elaborate.

[Stefan Kenth Persson, Chief Executive Officer]

Yes. So as I said earlier, also in the presentation, it's very volatile and we can't control that, to be honest, because they are doing the tail end to the big accounts like Samsung, LG, Huawei, OPPO, Viva, and all these guys, which we can't control. But we have a lot of ongoing projects with EgisTec and hopefully, they will be successful to get their solution into the firms. So -- and that, the tricky part to do the forecast in the mobile area because we can't control that. The only thing I can tell say there is that we have a lot of ongoing projects with them. So hopefully, they will, together with us, will win some projects.

[Jesper Birch-Jensen]

And my second question is in regards to the smart card segments, where you mentioned that you might expand to accessibility. And I was just wondering, would that require further development on your part? And also is the value chain ready for those types of cards, like the -- or is it still the same problems within that?

[Stefan Kenth Persson, Chief Executive Officer]

Yes, that's a really good question. So the value chain is totally different there because there is not so many certification and that type of things that is needed for that value chain. So our software is ready for that one also. The only thing that is important there is the integration with other type of access system, which is not ready. So there is some development needed with our partners to be able to do that. As I said earlier also, we don't see any huge volume in this. But it can be that it's an interesting way to go to market already during this year with some volumes.

[Operator]

There appear to be no further audio questions. I return the conference to you.

[Stefan Kenth Persson, Chief Executive Officer]

Yes. We have received a lot of questions. So thanks for that, via e-mail, and we will try to answer as many as possible. We got a lot of questions regarding the cooperation with Infinity Optics. And when we think there is a launch of the product together. This is still in development phase. We are planning the first half of this year to run some POCs, proof of concept. And the result of that will determine the possibility to launch the product. It's an extremely interesting technology and it's in line with our strategy in terms of that, no matter who you are, where you are and what you do, you should always have access to a Digital Identity in secure and convenient way. So this fits perfect into that. But today, we don't know when it will be available. So still development ongoing, proof of concept during the first half of 2020 and the result of that, we will come back to later. Also got a lot of questions regarding the cooperation with Innovatrics, and if their technology are integrated in Precise YOUNiQ? Yes, it is. So both for the access and the Digital Identity, we are utilizing their face as one part of the modalities. We have another company supplying the liveness. We have another company supplying the voice. We have our own fingerprint matcher. And we are looking into behavior and these things also. So they are absolutely part of this and we have a very good cooperation, collaboration with these guys. We have got more questions regarding EgisTec. And a question related to -- if we're discussing with EgisTec other type of business like smart cards, et cetera. And today, the cooperation and collaboration is within the mobile phone area. Of course, we have a very open dialogue about other type of business like access and smart cards, et cetera. But today, it's related to the mobile business. Also a lot of questions regarding the payment card, when it will happen. As we said earlier, we don't see any indication of huge volume during 2020. And -- but we're following this carefully together with our partners, of course. Let's see if we have more questions here. The questions regarding the cooperation with Qualcomm. And we have ongoing discussion and projects with Qualcomm regarding the ultrasonic sensor, but we have not been able to win any project so far with, together with them. We have got some questions regarding other type of pilots with both Mastercard and Visa, and we are following the general business there. We don't have any more information than is available out there. Yes. I think that's most of the question that we tried to summarize here in terms of the questions that have been sent to us. So if there are no further questions online, we close this webcast. And I wish you a fantastic Friday and weekend. Thanks a lot for listening in. Bye.