Fingerprint Cards AB (publ)

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stefan Pettersson, Head of Investor Relations. Please go ahead.

Thank you, Sandra. Good morning, everyone, and welcome to Fingerprint Card's earnings call following the release of our Q2 report this morning. So we'll begin by a presentation of the report by our CEO, Adam Philpott, and thereafter by our CFO, Fredrik Hedlund. And if you're following the conference 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 very much, Stefan. Good morning, everyone. Welcome to the Q2 earnings call. I'm joined by our CFO, Frederick Hedlund, today. Let's move straight into the agenda. A few things we're going to be sharing this morning before we take questions from you. We'll start with executive summary with some highlights from what's been going on in the business over the Q2 period. From there, we'll update you on the progress. Many of you have been following the transformation plan that we've been going through. We'll update you on the progress and the performance related to that plan throughout the call. Then we'll come on to some key facts and figures along with product line updates from Q2. Finally, then coming to Q&As. So in terms of the executive summary, in terms of the highlights from the quarter, a few things that we want to call out. Firstly, really positive to see growth in our core business, 10.5% growth in the core business. That's the business that we're focused on as we wind down the mobile business. So really pleased to see nice double-digit growth in our core business, particularly impressive given the backdrop of a massive transformation, huge transformation we're taking the company through. So to be able to maintain that business whilst going through that, really positive. In line with our expectations, it's aligned to market growth rates. So very, very pleased with that. Of course, we saw a total top line reduction of 45%. Absolutely expected. We're winding down the mobile business. That's a big revenue line. We're winding that down due to its poor profitability. And so, again, that's also in line with expectations. We've previously committed to winding that business down by the end of the year. And so I think that's tracking exactly as expected also. So positive news in the core revenue line there for Q2. At the same time, I mentioned a massive amount of change as part of the transformation plan that we're going to spend a lot of time on on the call today. A huge amount of cost takeout. A big part of the cost takeout is, of course, people. And so really focusing on reducing headcount has been a primary focus. We'll spend a little more time on that later, too. Focusing on headcount is really a lead indicator. We've seen OPEX come down, but we'll see more of that come down as we see the costs come out from the reduction in headcount too. So also really impressive as we right-size the business and get the cost model into the right place with the focus, of course, on headcount. So great work done in Q2 in order to right-size that also. All of those things then leading to a significant reduction in our cash burn. So again, showing greater financial control, increased operational efficiency as we improve, as we reduce our cash burn and move the company into a much more positive cash environment. position also. So very pleased with that. Improved by 42 million. They reduced the cash flow by that amount, which was excellent for us to go and do. There was an anomaly as you do a compare with Q2 2023. You'll see a slightly anomalous number there. That was driven by an 80 million inventory reduction. So if you think about backing that out, it gives you probably a more fair compare there too. So that was quite an anomalous reduction. And you can see some details in there, too. In terms of gross margin, as we tidy the business up and drive some of this transformation, you'll see we wash out certain things. Massive depreciation of capitalized R&D. That's a non-cash item, so it doesn't affect cash. But as you can see, as you back that back in, actually, the right compare for our gross margin was actually 25.4%. versus 19.7 in the previous year. So again, lots of things going on as we tidy the business up and as we transform, but if you account for those really positive signs in terms of how the business is running and the things that we're doing to transform the direction of travel. Of course, this is a massive transformation, so I don't just want to grandstand on these really strong results. I also want to share that we'll continue to see volatility as we go through this phase of stability. We're going to see volatility in the business as we implement the transformation plan, and that's something we'll just manage as we go through each quarter. Let's move forward. I want to just remind you all of the transformation plan. We're not going to focus on every item today. We're going to focus on really four items in the transformation plan. We'll talk about the portfolio refresh. We'll talk about cost optimization. We'll talk about how we're strengthening the balance sheet. And we'll be talking about strategy, too. Strategy is a really important one. We've just hired a new chief strategy and technology officer, a really important move for us to look at how we expand the markets that the company is in. And we're also going to talk today about moving from stability to growth. We've been doing a lot of work on cost optimization, and that's really important to get the foundation of the company right. But of course, there's also an important aspect of how we're going to drive growth. Growth in the core markets that we're in, but also expanding into new markets. So we'll spend time on those things today too. Let's go to the next slide and let's start with that stability to growth piece. I think that's a really important conversation for us to now have as we wash some of those challenges out of our balance sheet and out of the system. One thing I will say is this doesn't mean that we're now stable and we're now flipping to accelerating growth. What it does mean is that we're probably midway through that stability phase now. There's still work to do to tidy the business up and get it into a very strong committed to as well but we are then start to think about and how are we going to drive that future growth both in the core markets and in new software markets also make sure that as we stabilize we've got those ingredients baked into the company to be able to go and do that the other thing I would say is it's about our focus on continuing to be a value player best in class both in our core business and and in new markets. That's one thing I've seen consistently since I've joined the company is really valued as a best-in-class product, high-quality, very efficient, high-performing product. That's what we want to continue to focus on. And so as a value player, there's really good opportunities in our core markets. We're in the payment market. We're going to stay in that market. We see a real opportunity there for that market to take off. We've invested a lot in that market. We can also see the ecosystem, our partners investing still investing a huge amount in that market to make it ready for prime time. And so we see a lot of growth ahead in payment. On the access side, similarly, smaller companies, Need our support need great products there too. So we've got a lot more room to run in access We've talked about scaling through the channel in the past and that's something you'll see us start to do in the second half of this year So some good opportunities as a value player there and then finally PC the bigger segment that we're in On a project by project basis as we get into new models again We see an opportunity to be a value player there to working with our large customers in that space. So So good opportunity to grow in core, but also a good opportunity to diversify into new markets. And I'll talk about strategy a little bit later. As we think about how we balance across the portfolio, I think about hardware and software. We've got real strength in our ASICS team. Our algo team can span both hardware and software, helping us move into new markets. And then we're also bringing new skills in for software as well. So it's really about executing the strategy work, the external strategy work we did in Q1, bringing a new chief strategy and technology officer in who starts actually on Monday to help us go and execute and make sure that we're leveraging what we're great at with our existing core team, but also getting in to new markets. Let's talk a little bit about the second element of the transformation plan, which is, of course, our portfolio refresh. So on the last Early school, we talked about winding down mobile graciously. We entered into a partnership there with Aegis in Taiwan to help us also do that and support the customers who had previously committed to us and that we committed to to make that a very graceful wind down. That's proceeding very, very well. We're pleased with how that's going. But of course, we continue to review our business in this way. We review all of the projects that we work on across our core business. And also, of course, in new business to think about what's the right way to invest. Do they meet our IOC requirements to make sure that it's greater hurdle rate than our cost of capital? So very, very much a rigorous process implemented by Frederick, our CFO, to ensure that we're making smart decisions. And then from there to look at, well, how do we invest in these things? Are these things that we want to invest in? Are they build or buy opportunities for us? or are they partner opportunities? So we think about all of the projects we work on in that way and all of the businesses that we're in are by and large project business as well. We've applied that to mobile, we apply that to our core business, we apply that to our new business and we'll continue to do that as we're smart with the funds that we receive and how we think about returns that we're going to get from them as a value player. Let's move to the third box and talk a little bit about cost optimization as well. I touched on this a little bit in some of the headlines. As I said, as we focus, continue to focus dynamically and in an agile way on our cost base, Headcount is a really important area for us to look at. And that's what we've done in the past. We've done a really good job. We were very public about what we were doing with regards to headcount. Headcount is about two-thirds, about 70% of our total cost. And as you can see, from Q1 to Q2, we've been able to bring headcount down by 31%. And that's on top. of the earlier phases that we announced as well. So really pleased with the results there. Of course, that's a really challenging thing to do, but now we end up with a much more agile team, fewer layers between them, less management structure so that we can really focus on being an agile startup type of company with the resources that we have. It's also a need indicator. We've seen good OpEx reduction, but we'll see more coming as a result as the headcount moves out of the company. We'll see more impact there too. And that then flows onto our free cash flow. As you can see, we've massively reduced the cash burn there, 42 million reduction in cash burn. So again, very pleased with the direction of travel, but Rome wasn't built in a day. Still a long way to go in the transformation, it doesn't happen overnight, but pleased with the direction of travel so far. And then the third pillar of the transformation plan was about strengthening the balance sheet. As you will all know very, very well, we did a rights issue. That is nearing completion. That involves an early redemption of the convertible bonds, which then reduces further dilution for the shareholders, of course. There's a slightly delayed settlement in that due to FDI regulation before the convertible bond is paid, but we feel we're nearing conclusion across that rights issue, of course as well and this is part of stability getting in place the right foundation in the balance sheet for the company to become stable to give us more financial flexibility to put our shareholders on a level playing field and of course to reduce the deaths overhang so pleased with the progress also in that pillar of the transformation plan Let's go now to the fourth pillar I want to touch on, which is related to our strategy. We did some great work in, I think it was Q1, where we got an external party in to help us look at our strategy to revitalize it and to move it forward. We're a highly experienced, highly successful biometrics player. We've operated at huge scale. So the way we want to think about our strategy was always, how do we take what we're great at? And it's not just what great products we have, it's what great people we have, what supply chain we have, what partners we have, what market we're in, what the market more broadly that we serve. So we did some great work on strategy in Q1 to reassess the problems that we're solving and that we have credibility to address. And this is also about how we leverage biometrics into the broader identity market. Biometrics is a smaller part of the market. We see identity as a much bigger part and the two are very, very related and we have a right to play in the bigger market. So we wanted to think about how can we leverage what we're great at and how can we explore a bigger market and solve some bigger problems or some other problems that still haven't been solved. And as I think about that, The passwords are very much at the core of that. Passwords are really what biometrics seeks to solve, whether it's pass codes, passwords, or anything else, that's what biometrics seeks to solve. Instead of saying, this is a string of things I know, you're saying, this is something I am. Passwords are still the primary means of identifying and authenticating. And they were established a long time ago where we needed few passwords, we had few internet services, and they were a low cost means of doing so. But the challenge remains today, they are still primary in a time where the world is significantly more complex, the digital world. So the user experience is poor, the number of passwords we need. They're equally the primary source of breaches. that there's a highly complex industry that's grown up around passwords to try and solve this poor UX and this breach issue. And so they're no longer secure, they're no longer easy to use, and they're no longer cost effective. So it's not working. At the same time, the paramount means of securing organizations today zero trust. That is a contemporary framework. It's ubiquitous. Everybody in the enterprise world has a zero trust strategy, a zero trust framework being applied. But zero trust is based on continuous identification. And today, as I've said, identification is based upon passwords. So it's fundamentally flawed. It's a house built on sand. And so our opportunity is to participate in what's happening, how organizations are securing themselves by removing their dependence on very flawed, very poor user experience passwords by bringing other means to bear. That's our opportunity as a biometric company with a great track record. We feel we have a right to play there. And that's exactly the market that we're going to be going after. Let's talk a little bit then about how we're going to do that. Let's talk a bit about the approach we're going to take. We have a new CSTO joining us. He was hired specifically to help us in this errand. I wanted to be a little clearer about the direction of travel. Of course, when David joins us, he'll really bring this together and give even more clarity. But really, you can think about it in a couple of ways. Let me talk about those circles on the outside, first of all. Those things are the inputs and interconnects that we play a role in. And you can see we already play a role in some of them. We already play a role in modalities. So I think of that as business as usual, the things that we're already great at, whether it's our products or whether it's the talent and skills that we have in our organization, We're very strong at biometric modality, and that's an important part of this overall system, this overall solution, and will continue to be. So there's some great things that we can do there to ensure that people can use biometrics to replace passwords to connect to the digital services that they're seeking. But it's not only our modality. It's also about engaging in partnerships with other parties. depending on the technology people have access to. So there's a great opportunity for us to partner in this space too. Another interconnect is FIDO. Using FIDO tokens, for example, is a way of replacing passwords. We already have great partnerships there, people using our technology, we see growth there, and that's the market, as I said earlier, will continue to be committed to in what we do as a company. We're involved in passwordless multi-factor authentication. We have a legacy historical mobile business. We have a PC business. But not only in products, we have experience in that in terms of how we can leverage and integrate those things as part of a passwordless authentication system. And then there are some new areas that we can go into as well. Engaging with enterprise IT stacks such as their single sign-on systems. That's a new opportunity for us. Passwordless login. That may be something we have skills in. It may be a new area. So some new things we can go into there as it relates to the interconnects. But at the core of this is the engine. How these things tie together, how we process them, that's a new area for us. It's software-based. It brings all of those means of authentication together, but it also augments them using things like a digital exhaust, people's data, and how that can also complement an identity decision. using AI. We use AI today in some of our products to make them more efficient. I think there's a lot more we can do with AI as it relates to improving efficiency, risk scoring, continuous improvement, threat mitigation, et cetera. We have experience in anti-deepfake today. The team in our iris business, for example, and on our fingerprint business have been doing anti-spooting for some time and moving into anti-deepfake as well. So again, some core capabilities that we can bring, but reimagine them in a very new way as we help companies remove passwords and replace them with biometric and other means of identification. So that's the direction we're going in. And you can see on the right, the reason we're going in that direction is we're in 20% of the market today. We want to get access to 80% of the market. There are other competitors in there. It's not a market just waiting for someone to arrive, but we feel we have a right to play there and we're very excited about starting to move now in that direction. So that's a little bit on the overall transformation plan, the status of where we're at with different elements of that plan. Let me move now into a bit more data. I'm going to share some views on how we performed across our lines of business, across the product groups for Q2, and then I'm going to hand to Frederick to talk a little bit more about some of the results as well before we close for questions. So in terms of the performance in Q2, I talked about the 10.5% growth in the core business. That's the business we're really focused on. Of course, we saw total top line reduction as we exit the mobile business. We've been very open about what we're doing there, and that's exactly what we expected to see. And actually, we're very pleased with those results because that's moving in the right direction. That's a low margin business. As we go through line by line, good to see continued growth in PC, slightly lower than the growth we saw in Q1, but still nice to see. In terms of that growth, that's about in line with expectation. Volume grew by about 1% in Q2. So if we pegged to that, we feel pretty good about holding or slightly growing share in that space. But not only that, we're relatively new in the PC business. There's quite long cycles, and we've only been in it for a few years. So what we're also focused on is continually getting into new models. I talked about how we allocate capital, the cost of capital and how we select which projects we engage in. We're very focused on using that as we look at the projects that we get involved in with our PC customers and continuing to stay engaged to make sure we're very active with our customers, we're innovating with them and of course we continue to bring our best in class value for them. So we're making good progress with a number of clients on getting into new models. At the same time, as we listen to our customers, they're asking us to have alternative supply chains, international supply chains outside of China, whether that's for political reasons or whether that is for disaster recovery. Having alternative supply chains is something we've been investing in now for PC also. So pleased about holding the penetration rate. One word of caution I will offer is that we are seeing pressure in the PC business for PC companies looking at just using face instead of having face and fingerprint sensors. The reason they're doing that, of course, is they need a camera on most laptops anyway for video calls, et cetera, and so adding an additional means of authentication when they can already do it through the camera adds cost. We haven't seen massive pressure, but we are seeing some pressure from the face modality. To counter that at the same time, interestingly, Apple in their new iPad, in the iPad Air, have reintroduced Touch ID. So quite interesting to see some of those dynamics. It's not on the display. It's capacitive. So interesting to see Apple reintroducing that too. So some really interesting battles going on there between the face modality and the finger modality. I'll come back to face in just a moment. On the access side, really strong growth on access. Logical access was a particular highlight as we think about the different types of segments within the access market. But at the same time, we saw a very broad range of demand. In the access market, very different to PC. Both are project-driven, but PC is big projects with a few customers. access is many projects, smaller projects with many customers. And so we saw demand across a lot of different sectors there. EVs, electric vehicles was a particular standard, not automobiles. Our focus on automobiles is through Iris, but really interesting to see lots of different business coming there. So still see a great opportunity and a long way to run in the access market. I've talked a lot about channel since I've joined and we've got some channel focused products coming to market very soon. And that's how we're going to drive scale into this market. So really nice to see that. We'll talk more about that in due course in the access segment. And of course, we've got, Iris is still a future bet that we have, that we've invested in. Primary focus on that today is DMS for driver monitoring systems. Why? Because that's where there's capable hardware. You know, we have to be able to, if we're going to use Iris, we have to have a capable signal, and therefore we have to go with where the hardware is. That basically defines where the attack surface, if you like, the market opportunity is. What's very interesting in ours is that we're now seeing hardware costs coming down, which start to open up where those cameras are being invested in, what platforms they're arising on. And so we're talking to a number of different sectors around what they're seeing with cameras starting to come to fruition and how we can use those as well. I said I'd mention face again. Because of the rise of deepfake, the face modality is becoming less secure, but also socially less popular people don't really like it as much as more discrete means of Authentication and so of course we have you know one day in fingerprints But we see iris is really a good opportunity for that future much harder to fake And so we see a really really strong opportunity in iris moving forward as the hardware comes down in cost and becomes More ubiquitous as well longer term, but still important for some of the investment cycles. We have as an innovative company and On the payment side, quite a soft quarter on payment. Not a huge amount of business transacted. Of course, we don't fulfill business directly with banks. You'll have seen us make some banking announcements earlier in the year. We fulfill stock, and then it's our partners, our card manufacturers, who then call off that stock to deliver. We're still very much in a pilot phase in this market. We are still very committed to it. We see good opportunity. We monitor early indicators. We monitor signs of life in this market that things are starting to take off. And it's not just customers doing pilots. It's people really starting to kick the tires on the technology. So we're seeing a lot of demand coming from LATAM. and Middle East and Africa in particular. Lots more activity from our partners, both in terms of what they're asking us to do, questions they have as they're starting to really deploy technology, but also a lot of investment coming into the ecosystem or that the ecosystem is pumping in to this market. And a good example of that is POS Enrollment. So today you can enroll your fingerprint on a card in a sleeve. You saw Garanti Bank do that, for example. You can authenticate and enroll your fingerprint through your mobile phone. So there's suppliers who have apps to be able to do that or embed them in banking apps. And then the third pillar of this is being able to do it on the positive and all itself. We're seeing that mature across multiple partners now and suppliers. And of course, we expect that to then roll out to EMV Co. in due course sometime in 2025. So again, continue to see investment coming in. It's investments to get this market even more ready to underpin capability, to overcome some smaller obstacles and different obstacles so that we can get the mass market rollout. So good to see that our ecosystem is also investing. On our part, a lot of the investment's already done. Of course, we want to keep that alive, tweak the technology, overcome issues, et cetera, and maintain it. but we don't get need to move to a next gen of technology. We put a lot of investment in and feel very ready to deliver a high quality product to the market. What I will say is our focus is on after a period of turbulence in the company is we've given a big transformation is to get to that stability. To settle things down that we're spending lots of time with our partners, lots of times with their customers, helping them drive demand and that's something I've been vocal about since I joined. Finally, just on mobile, the Graceful wind down is on track. I call it Graceful because it's really important to us to ensure that we help our customers if they've committed to us and they have commitments to make for their customers. And so with the partnership with Aegis, it's progressing very well. We feel good about that. And our customers are continuing to be supported on those products too. So things moving in the right direction there as we migrate away from that lower margin businesses. focus on the value we can offer elsewhere. With that, Frederick, let me hand over to you just to talk a little bit about some of the other key figures for Q2.