Fingerprint Cards AB (publ)

good day and thank you for standing by welcome to the q1 2024 results webcast and conference call at this time all participants are in a listen-only mode after the speaker's presentation there will be a question and answer session to ask a question during the session you will need to press star 1 and 1 on your telephone you will then hear an automated message advising your hand is raised to withdraw your question please press star 1 and 1 again on Alternatively, you may submit your questions via the webcast. Please be advised that today's conference is being recorded. I would now like to have the conference with your first speaker today, Stefan Petersson, Head of Investor Relations. Please go ahead, sir.

Thank you, Sharon. And good morning, everyone, and welcome to Fingerprint Card's earnings call following the release of our first quarter report this morning. And with me here, I have our CEO, Adam Philpott, and our CFO, Fredrik Edlund, who will be presenting today. And if you're following the call on the web, you can post questions throughout the call. And with that, let me now hand over to our CEO, Adam Philpott.

Thank you, Stefan, and good morning, everybody. As Stefan said, I'm going to be walking you through our Q1 interim earnings results. I will also be joined by Frederick Hedlund, our CFO. Frederick has just recently joined us, so I'm pleased to be here with him today. What I'm going to do is I'm not just going to focus on the Q1 results, but you will have seen that we made some announcements after Q1 as well. I'm going to talk a little bit about those on the call today in the context of Q1, because it's a really important phase that we're now going through in our company's turnaround. So let's come to the agenda, please, Stefan. I'll start with an executive summary giving you some of the headlines from Q1, and then we'll spend a bit of time talking about those strategic initiatives that relate to the post-Q1 announcement. We'll talk about the transformation plan that we're going through. The transformation plan that I actually announced back in October on my first earnings call when I joined the company. So we're going to talk about the transformation plan to remind you the process that we're going through, what we're doing on the transformation. We're going to talk about why we're winding down the mobile business. I know that's a big topic, so we'll spend a little bit of time on that. We'll also talk about the core business we have outside of mobile and why that's a really strong business that warrants extra focus given the margins that we yield from that business and the growth that we see. And we'll talk about the overall portfolio refresh that results from those two things. We'll then come and spend some time on the queue on financials. I'll ask Frederick to step in and help me there as we talk about our revenue and clients and some of the key figures. And then we'll talk about some of the other financial and operational changes we're going through before we pause. And I'm sure there'll be lots of questions today. So we'll pause for Q&A for the back half of the call. So let's keep moving. Let's go to the executive summary, please, Stefan. First of all, top headline you can see is that we had great top line revenue increase, 25% year-on-year increase in our revenue. Very, very strong performance. Also, what's most notable and what's most exciting for us is that we saw an 80% growth in our PC product group. And that's a much higher margin. That's really good revenue that we want to yield. There is a phrase, revenue is vanity, profit is sanity. So not all revenue growth is good. We saw good growth in our mobile, which you'll see a bit later on in the presentation, but because it's not profitable margin, that isn't the revenue we're looking for. What we are looking for is our core revenue, and certainly PC being our biggest, most mature core market, really, really pleased with that profitable growth there. Because of the mobile business, and we've been very consistent with talking about mobile and its poor profitability and the distraction that is mobile because of the mobile performance, we did see a drop in gross margin. We saw gross margin come down year on year, six percentage points. However, What we also saw is a one percentage point increase quarter on quarter. So slight improvement versus the 10% gross margin that we reported in Q4, but still not where we need to be. What we have done is stabilize it, but there's a lot more we need to do. And that's exactly why we're winding down the mobile business that we'll touch on in a second and a bit later. And of course, both the revenue and the margin, that margin performance then really falls down to both the adjusted EBITDA line and the free cash flow line. We're going to keep reporting the numbers in this way moving forward. And the reason we're going to do that is because cash is absolutely critical. That's what we're really focused on as a new executive leadership team is to ensure that there's sufficient cash, that we're running the business profitably. We are eradicating that cash flow. So really driving that free cash flow into positive. Part of what we're doing in order to do that is also taking costs out of the business. So again, we've spoken about this in the past on previous earnings calls. We'll continue to talk about it. We'll spend a bit more time on that today. But you can see this isn't just something we've announced this quarter. It's something we've been doing for the last few quarters and now something we are concluding as we move forward in Q2 that we announced after the Q1 results. And you can see headcounts coming down. Headcounts is a huge part of our overall strategy. cost base and so we're bringing that down obviously to drive profitability too. Post Q1 we did announce we're winding down the mobile business. I'm going to touch on that in just a moment but it's essential that we focus on profit. The revenue has been great but the margin has been bad so it's not the revenue we're looking for. We are looking for profitable revenue and that's what we get in our very profitable core business and that's where we need to focus as an organization. We also announced a partially guaranteed rights issue of up to $310 million SEC. That's to strengthen the balance sheet, reduce the debt, and increase the equity. And it also means we're facilitating the repayment of the outstanding convertible bond that you're all aware of, too. And what it also does is really allows us to focus in the expanding and large market that we're in. The identity and authentication market is a big market, and it's growing at about 14% CAGR, depending on who you ask. That's a pretty good, credible study. And so it's a great market to be in. The good news is we're in the right place. We also have a very strong core business in that market, as illustrated by our PC growth. So we're in a great market, but we need to focus on where our premium is valued and therefore where we can monetize at the right level of profitability. And that's all we're moving away from mobile into those other areas and some new areas beyond, which we'll talk about also today. So those are the headlines from Q1 and in terms of the announcements we made after the Q1 results. Let's move forward, please, Stefan. I will quickly remind all of you who are longer-term followers of Fingerprints on the transformation initiatives that I announced back in the October earnings call. There was really a six-point plan that I put in place. I'd only joined in September. The first 30 days I spent putting in place the pillars of this transformation plan, starting with a portfolio refresh to get out of the businesses or wind down those businesses that were not profitable. That's mobile. To focus on the core businesses that are profitable, but also look at expansion opportunities. On cost optimization, ensuring that we have the right cost base for the size of market that we're in and to fuel the R&D necessary to pursue those markets. to strengthen the balance sheet, make sure that we've got a really good engine driving this business forward, to refresh the strategy so that we're really capitalizing and moving up the value chain and staying ahead of technology as a leader in this great market that I mentioned a moment ago, and that we have the right talent and the right organization in place, plus the right governance and incentives to drive that talent forward in pursuit of company goals. So that's the transformation plan I announced. We're in the first phase of that, which is about stability, tidying up the organization, getting out of areas that are just unprofitable and creating too much cash burn, focusing our capital where we can get a very, very strong return, which is exactly what we've announced. Next slide, please, Stefan. And so the question I get asked is why are we winding down mobile? Well, I've been pretty consistent in talking about the challenges of mobile since I've joined, and there was some discussion about that before I joined. Mobile has had a long-term decline, as you can see on the right here, in terms of the average selling price. The selling price dropped significantly between 2016 and 2019, but then it's continued to drop double-digit ever since. As a company, we are a premium provider, and we've been able – to justify a premium in the market. However, even at our premium, we've been unable to sustain the level of margin necessary based on the cost of capital and to return to shareholders. Just too low margin creating a cash burn for us despite us charging a premium. And so that creates a real challenge. You can also see the drop in gross margin there for that business too, which makes the mobile business simply untenable for us. And that's why we've chosen to wind it down, that the market, it's a mature market. There are also geopolitics at play that create challenges for us, some customers, some products that we can't fulfill because of regulations, a myriad other geopolitical challenges that as a non-Chinese company, we face in our ability to compete. It's also a highly commoditized market, so very little value left to offer there, despite having the best in class product, very price sensitive. And of course, it's a silicon business, very, very high volume business to very capital intensive with very, very low investment returns. And so our choice is to focus not on revenue, but to focus on margin in our core business where we make very, very strong margin. So that's why we've chosen to wind down mobile. I have in the past spoken about moving investments away. We started doing that when I joined to start to invest in other areas. And instead of putting our capital into mobile where we couldn't drive the right return, now we're going to go further and accelerate that and wind that business down. So let's also talk on the next slide, please, Stefan, about our core business, because we have a very, very strong core business, a mixture of markets. as well. PC, a maturing market, really hitting that growth curve now. Great market, great margin. We have the access market. A little newer is a market, a little more fragmented is a market. Some interesting opportunities that are starting to materialize there beyond physical access in the logical access space. So a slightly earlier market in the access space, and then a very early market on payment. On the payment market, we focused over the last few years on ensuring that we've got the right ecosystem, the right partners. We've got technology that can be delivered at scale so that it can be delivered with high volume to consumers with a high success rate in terms of biometric payment cards. We've done a great job in getting that established. Now we're switching our attention over to the demand side. We've got a huge pipeline of banks that we're looking at now developing and closing on the demand side now that the market's ready. So a real premium product on the payment side, but still a nascent market that we're now switching gears to focus on demand side and the adoption side of that market to move it from an early market into a growth market. On the access side, similarly, we've got a really strong ecosystem in the access space. We continue to make great announcements there in terms of new customers that we have. Fido, as I mentioned, that's logical access, really seeing demand take off in that space with our huge partners that we have delivering Fido solutions with biometric access. And also, it's a fragmented market, and so we're about to launch a channel-ready product to get into our partners with documentation, with test kits, development kits, so that they can go out and embed our technology in other products and give us scale in the market, too, in a way that they monetize both through the product and through their integration services. And then coming back to the top there, PC, we're in four of the five top Windows players. We're talking to the fifth. It doesn't make sense for us not to be in the fifth one there as well. And we continue to be a leading innovator. We've won awards from our partners for their best supplier. We've recently launched the Asus Match on Chip solution, so expanding beyond just core systems. So very, very good, large, growing, and profitable market. So as we look across these, really strong margin, but also a great track record of growth across these markets too. If we go to the next slide, please, Stefan. And here we'll touch on how we're refreshing them. So if I bring all of this together, What are we doing with mobile? What are we doing with our core? And beyond that, as I've said, in mobile, we're going to discontinue. We're going to wind that business down. We're going to do that gracefully with our customers to ensure that we don't leave them stranded. But of course, we need to do that profitably as well. You'll have seen from the chart here, we've been gradually winding that down or reducing the dependence the companies have in terms of the revenue mix there on mobile. But really, it's not about the revenue mix. It's about the margin that we make. And so that is our core focus, which is why in PC payment and access, those are the markets that we're really focused on. You can see in the PC space, for example, strong consistent growth last year, 63% for the full year. We talked about 80% a second ago for Q1. So really nice to see that continue and building out our capabilities there, continuing to add capability. On the payment side, we're starting to see an acceleration in deployments. We saw the guarantee bank announcement in Q1. We've got a number of others in the pipeline. We've seen additional partnerships already. We haven't finished with our partnerships. We've got a really strong beachhead. But, of course, we continue to close out with additional partners there like Facium, for example, and even some of the enrollment capabilities like Smart Enroll that we announced in Q1, of course, also announced. And then on the access side, I talked about FIDO. We expect a surge of revenue from FIDO. That's a really popular capability to move away from passwords if people look at logical authentication for application access, for example. But what I haven't spoken about is then some of the new business. Beyond those core areas, there's some great new areas that we're in too. You will all know that we have Iris technology. We see huge potential for Iris moving forward. In the age of deepfake, in the age of passive authentication, we think there's a huge capability or a huge need rather for Iris. As always, we have best-in-class capability there, very good at making the highest possible performance identification prosecution, but off the lowest possible signal. So some amazing work the team are doing there to make IRIS technology ubiquitous also. And of course, we've been very open about some of the things we're doing, for example, in the automotive space. And we see cross-sell opportunities too. We see, for example, potential in PC for Iris. So there's a range of new business areas that we also have in the chamber for future growth, for longer-term, medium- to long-term growth also. And the final one I would call out in new business is monetizing our patents. You would have all seen a press announcement yesterday afternoon. We had our first monetization of our patent. We can talk about that a little later if there's any questions on that. But we've got lots of other areas where we can monetize patents that other players are potentially using. So lots of growth potential there with the incredible IP that we've built over many years. Let's keep moving and go to the Q1 financials in a little more detail, please, Stefan. So as we look at Q1, I'll give a quick view on some revenue and client insights, and then I'll hand over to Frederick to give a few additional insights also. As we think about it, I've structured it with our core business here, followed by mobile. And as I said earlier, PC, absolutely fantastic growth in PC. It's by far the most mature market we're in in our core business, and we're seeing really good strength there. Not only that, we see a lot of gas in the tank. We see a lot of potential for that market. to continue to run we are expanding the offers that we have there uh increasing to systems level with mcus that you would have seen we completed that uh in q1 that system is now ready for mass production uh we're winning awards with our customers you can see the lenovo award on the screen here that we won recently i mentioned earlier the ass the assets matching chip pc launch so continue to launch with new pcs we see more penetration of biometric on pc as a share of mix And so we see a great opportunity there. But we also see multimodality as a future. And I talked about Iris as an example of that. So really good to see that. As I mentioned earlier, access and payment, much smaller markets, much more lumpy. We've talked about this in the past. We have fits and starts in terms of when you get a deal or two makes a big difference to the quarter. And then when you don't, it also makes a difference in a different way. And so we saw some patchy business, I think, on payment. Our focus, as I've said, is switched over to driving long-term growth. We've spent a lot of time with our ecosystem and they've spent money with us in the past to build out their capability. Now we're switching gears to then drive demand upon that. We saw Guaranty Bank, for example, in payments in Q1. That was our 11th biometric card launch with TALIS. Looking to ramp more of those up, and we have a great pipeline. As I said, our focus is on both building pipelines but also converting. We've already got a significant pipeline of banking demands. So now the focus is on converting those in a meaningful way. And so that's where our focus is as a go-to-market organization. On the access side, as I said, early stage, our focus is primarily outside of China. We've seen construction industry declines in China for some time. That market has been pretty depressed, which has impacted the numbers. However, it's had a greater impact on the revenue than on the margin, lower margin in China. And so our focus is outside of that looking at both physical access. We still see lots of opportunity there. We made an announcement A few days ago around a new vector for sales, which was on some e-scooters in India, for example, we see lots and lots of different potentials as where fingerprint access is superior to other forms of access, passwords, phones, et cetera. So we see more opportunity in physical access, but FIDO and logical access is really where we see big market growth. In terms of that physical access, that's where the channel product that's now ready to market comes into play because we can scale significantly through channels into lots and lots of different use cases with those partners. So lots of potential ahead, good growth in the core, very good profitability in the core. With that, Frederick, let me hand over to you to talk about some other data points from Q1.