Ladies and gentlemen, thank you for standing by and welcome to the Fingerprints Cards Q4 twenty nineteen Report. At this time, all participants are in a listen only mode. After the I must advise you that this conference is being recorded today, Thursday, of February twenty twenty. And I would now like to hand the conference over to your first speaker today, Stefan Pettersson. Please go ahead, sir.
Good morning, everyone, and welcome to this call. My name is Stefan Pettersson, and I'll be the moderator. So we'll begin the call with a presentation of the report by our CEO, Christian Frederiksson and thereafter by our CFO, Paisohn Frist. And following this, we'll have a Q and A session. And if you're following a conference call on the web, you can post your questions throughout the call.
And for those of you participating on the phone, instructions on how to ask questions will be given by the operator before we get into the session. And with that, I now hand over to our CEO, Christian Frederiksson.
Yes. Thank you, Stefan, and good morning, everyone, and welcome to the call as usual. We will be discussing Finrofin's progress and performance in Q4. And let me start by giving you the main highlights as well as always an update on the business. If we look at our top line, it is encouraging that we grew our sales by 8% compared to Q3, which has traditionally been a seasonally stronger quarter for us than Q4.
This was driven by strong sales of capacitive sensors for smartphones, where we continue to have an even improving our world leading position. In relation to Q4 twenty eighteen, sales was down by 10%, even driven by the decrease in average selling price as well as relatively weaker sales outside of the mobile area. Our gross margin was in line with the level we saw in the 2019. So we have stabilized around that pace of 23%, and it was a couple of percentage points higher than in Q4 twenty eighteen. Despite the lower ASP and the relatively low proportion of sales outside of mobile, where margins are typically higher, We are not happy with this gross margin level and continue our efforts to ensure a competitive production cost as well as broadening our business into new product and application areas.
As you may recall, last quarter, our net profit was helped by the strengthening of the dollar against the Swedish krona. In Q4, the effect was reversed as the dollar weakened against SEK. This had a 17,000,000 negative impact on net profit in the form of unrealized changes in exchange rates on currency accounts. Our cash flow from operating activities was strong at 82,000,000 and our cash position at the end of the year at $564,000,000 was good. I would like to say a few words about the coronavirus outbreak as well.
Obviously, this is a lot in the news, and we can all see the strong actions the Chinese government have taken to contain the virus spread. There is a great deal of uncertainty as this is a developing situation. Both myself and my team are personally in daily contact with our customers as well as all parts of the supply chain. This is to make sure that we understand how different partners are getting their factories and logistics back online. What is clear is that this outbreak is having an impact on the tech supply chain, and China is a big part of the global tech supply chain of today.
Many factories in China are not running at full capacity, although many of them expect and have done significant capacity improvements in will do in the next few weeks and have done already in the last few days. Also, there have been challenges and continue to be challenges in terms of transportation of goods. Our analysts expect the lower GDP and consumptions of smartphone sales in China will be impacted in the short term. There will, of course, also be a bounce back of some kind as the situation improves. All in all, we are expecting a dampening effect on our operations, although the extent of the impact is still unclear and we're working on.
But we have good cooperation across the whole chain at the moment. Next slide, please. Looking at market launches and business development, 12 new smartphones with our technology were launched. Two of these were equipped with our new UltraClim side mounted sensor, the FPC1540, which we launched in Q4. This sensor works very well in the most recent smartphone models, for example, in devices that are borderless or foldable.
We are seeing that the capacity technology is being embraced to an increasing extent in new areas of applications. Examples in Q4 include Chromebooks, smart suitcase and a door lock expansion. During the quarter, we also launched our Touchless two point zero platform. By combining iris and facial recognition, we can offer a high security level without compromising user friendliness. Touchless two point zero offers a more secure and most cost effective alternative to advanced facial recognition, not only for smartphones, but for a number of applications in various industries.
As you know, we have been talking about biometric payment cards for a long time, both as a company, as an industry. But I think recent developments indicate that biometric is now finally on the way to making its entry into the card payments area. First, we saw the world's first commercial launch of biometric payments cards in Q4, albeit in very limited volumes. This launch was conducted by Corner Card in Switzerland in November 2019 with our partner Thales as the supplier of the card, which includes Fingerprint's T Shape sensor module and software platform for payments. This was a great moment for us as a company and for the industry as a whole.
And at the beginning of 2020, Thales announced that the company's card in which Fingerprint's technology is integrated has been certified by Mastercard. Mastercard. This is an important step that enables card issuers throughout the world to offer their customers, now finally biometric payment cards. Next slide, please. The Mastercard certification is certainly positive news, but I think that we will still need to wait for a while for any large scale commercial rollouts.
And with mass or large scale commercial rollouts, I mean hundreds of millions of biometric payment cards. I think we'll see that some of the market trials we've involved in will transition now directly into commercial And they will start targeting likely premium segments in the first wave. There will also continue to be follow on trials during this year, and we will see additional parallel trials now coming up in 2020. While we don't expect material volumes this year, we are prepared and refining our offering and working together with our partners to make the whole system flow even better.
We engage directly with all top three car producers in the world, who together control around three quarters of the market. We also work with, for example, secure element and inlay partners. And this allows us to reach smaller card producers lacking in full in house capabilities. Next slide please. If you look at this from the consumer's perspective, it's clear that there is appetite for biometric payment cards.
We recently did a study in China, France, and The UK which confirmed this. And we actually see a significantly high interest also in China, which was quite interesting. Next slide please. So what has the feedback been so far for these trials? In general, it has been very good.
The statements on this slide are based on feedback from market trials in several countries. What we can see is that people find these cards to be convenient, secure, and reliable. Fingerprint authentication for contact lens transactions is clearly and greatly appreciated since it means that the payment can finally be lifted, thanks to the higher security level. Most people say that they would upgrade their current favorite cards to a biometric one if offered and when offered. In fact, one study concluded that half of the participants would actually be willing to pay a higher monthly fee for a biometric card.
These trials have also generated insights into the preferences for enrollment, and it clearly seems that home enrollment is preferred. Also, a limited number of POS terminals have old software releases, which we have learned, and this should be easily fixed by the schemes. Discovering issues such as this during limited market trials is of course valuable, trying out different solutions under real conditions, collecting feedback from consumers, and fine tuning parts of the system ahead of the coming broader rollout. Next slide, please. We continue to make progress against our strategic priorities in Q4.
When it comes to strengthening our position in mobile area, we expanded our product portfolio, as I have already mentioned, the slim FPC1540 side mounted capacitive sensor as well as the Touchless two point zero platform. We're also continuing our work to capture a position in a growing market for under display sensors. We are now running a few R and D tracks in this area with different time horizons. So far, we have not secured any design wins, but our ambition of capturing a significant share of this market remains. But it has clearly taken more time than we initially estimated to enter this market.
And we will continue, and it is important for us, to ensure the level of security and quality that Fingerprint is known for once we enter. We will, of course, update you when we have something more tangible to communicate around this. If we look at the new market outside of the mobile area, we participate in the world's first commercial launch of biometric credit cards by Corner Card in Switzerland as well as in The UK's first market trial for biometric cards by NatWest with the card provided by our partner Thales. We also strengthened our portfolio in this area by launching FPC BMLight, our biometric software platform for payments. This platform is, for example, used in the commercial launch in Switzerland, I just mentioned, as well as in The UK's first biometric credit card pilot.
Next slide, please. So let me quickly summarize before handing over to our CFO, Vasu Enkryst. Our sales performance was good with an 8% sequential increase. We are doing and continue to do well in the capacity sensors for smartphones, and we have again strengthened our position in this market. We are not happy with our margins, and we will continue to focus on improving successful new products and working on the product mix, which will be important in this context.
In the quarter, we expanded our product portfolio with the FPC1540 sensor responding to customer demand. This slim sensor enables a range of the latest smartphone designs, including borderless and foldable phones. Also, launched our Touchless two point zero platform combining iris and face recognition. As I have pointed out, our goal of capturing a significant share of the under display markets remains even if we have not entered yet. In the quarter, we participated in the world's first limited commercial launch of biometric payment cards in Switzerland.
And our technology was also, as I said, used in The U. K. First biometric credit card trial. With that, I thank you, and I would like to hand over to our CFO, Pat Sundquist. Please go ahead.
Thank you, Christian, and good morning, everyone. Our revenue came in at million, a decrease of 10% compared to the same period last year. The main reasons behind the decrease are weaker sales outside of mobile and the declining average selling price. As a mitigating factor, however, the strengthening of the dollar against the SEK has had a positive impact on our revenue. And that means that if expressed in constant currency terms, the revenue declined 16%.
A side note on that is that for us, the average SEK 2 USD rate was 9.63 versus 9.04 last year. On a positive note, our revenue grew by 8% compared to the previous quarter, which historically has been a seasonally stronger quarter for us than Q4. Our gross margin improved by 2% points compared to Q4 last year and was in line with the first three quarters of this year. Our operating profit came in at a negative $15,000,000 versus a negative $25,000,000 in the same quarter last year. Operating profit was impacted by a $2,000,000 positive currency translation effect.
However, the ratio of fixed cost to revenue also increased as a result of the decline in the quarter. These factors combined are the two main factors behind the decrease of the operating margin, and that can be highlighted in the red line in this chart. Our net income was a negative $19,000,000 versus a negative $17,000,000 in Q4 twenty eighteen. We had a significant negative impact on net income from the effect of unrealized changes in exchange rates on currency accounts amounting to $17,200,000 This is entirely due to the weakening of the U. S.
Dollar versus the SEK during the fourth quarter. Next slide please. This slide highlights the development of revenue and gross margin on a twelve month rolling basis. The decrease in revenue in this period is due to the ASP decline and the relatively lower share of revenue from applications outside of the mobile industry in the last couple of quarters. However, if we look at the gross margin over time, it has been quite stable in recent quarters at 23%.
As Christian already pointed out, we are, of course, not happy with this level and are continuing to strengthen our efforts to improve profitability, both by increasing efficiency across the board and also by diversifying our business into new segments. Next slide, please. Excluding other operating income and expenses, our operating expenses for the third quarter were $105,400,000 versus $116,900,000 in Q4 last year. Development costs of $16,300,000 were capitalized during the fourth quarter, which corresponds to 31% of total development costs versus 19% in Q4 twenty eighteen and fifty one percent last quarter. The OpEx increase compared to last quarter is mainly due to a, currency effects as well as to the fact that b, we capitalized a smaller portion of the R and D expenses in this quarter.
Next slide, please. Our core working capital that is in this context accounts receivable plus inventory less accounts payable was $215,000,000 at the end of the quarter, which compared to $324,000,000 in the same quarter last year and $257,000,000 last quarter is slight improvement. We continue to work very actively to manage our working capital and working capital as a percentage of revenue is significantly lower than last year. Next slide, please. Our cash flow from operating activities was positive EUR82 million, which should be compared to a negative EUR26 million in Q4 last year.
Our cash position remained strong at $564,000,000 versus $540,000,000 in the same quarter last year and $537,000,000 at the end of Q3 twenty nineteen. Our investing activities, mainly capitalized development expenditures, was negative $19,000,000 versus negative $31,000,000 last year. And by that, I thank everyone for listening, and we are now ready to take questions.
Your first question comes from the line of Francois Bouvougouenais. Please ask your question.
Hi gentlemen. Good morning. The first question I
had is
on the virus. Just to clarify, you have been very clear on your statement. I was just wondering if the impact do you see any impact now? Or is it something that for now you don't see anything and we will see going forward?
I think that we see I think typically, maybe Francois, I can answer like this, that typically you have the Chinese New Year and that always makes the quarter weaker, as you know well. But clearly, with the shutdown that has happened and the strong actions that the Chinese government has taken to stop the spread of the virus, it has had an impact in and it will have an impact in Q1 in terms of dampening the demand and because factories have not been in full capacity.
And also, I mean, if we look at last year, you had a very good quarter last year. So I was just wondering if in Q1, it's not going to have more impact in terms of year over year trend?
I don't want to give any guidance as we don't give that now, but it will have a dampening impact. Of course, this has been a very Chinese phenomenon in the beginning, right? So all else part of the world, it has not had an impact. But of course, the logistics of China is a big part of the high-tech industry overall, right? So then it kind of spreads from there, and that's why it's dampening in the industry.
But the demand has been the main impact has been China, obviously, if you look at the demand part of it. And the supply chain has a kind of secondary impact a bit later, if you may, right? Because you have filled the channel before with phones, right? So maybe that comes in kind of two phases in that perspective, the dampening impact.
Okay. That's
But also, I would say I would also say, by the way, that all the learnings, if I look at the it's very it's not easy to compare different outbreaks, right? We have the SARS. But at the time, China wasn't as dominant in high-tech industry at that time. But clearly, we expect also and everybody expects a bounce back once this kind of resolver. But when it is over, I suppose none of us knows actually how that, and I'm not a medical expert either.
We're following this very closely. We have very close discussions with all the supply chain partners as well as all the customers daily actually on exactly how their factories are now coming up.
And what can you do, I mean, on yourself to limit the impact
in terms of that? I think what we are doing is, including me personally, is a daily contact now. So we are in daily contact all the time, and we have a very good view from that, I would say, in terms of what the customers can see in terms of demand in China and how that is progressing. But also then the whole supply chain, how people are returning to factories, how the factories are getting up to speed again after this. They are coming up now.
But there are different parts when it comes to either substrates or LGA or production of wafers. So they are very different places where we have factories. So what we can do is, of course, understand clearly how it goes and see through that we can help in using the factories that we have in China and outside of China as our partners to maximize our capabilities to support our customers in this ramp up still. And everybody knows that there will be a bounce back also, so that's why people are looking at how to build also the capabilities to respond to that one once it happens, right?
Okay. Thank you very much, Christian. One word on optical. I mean, you said that this guy is taking a bit more time, but should we still expect some design win this year, you think?
I mean our target is absolutely to have design wins this year. Yes, for sure. Absolutely. And but yes, it has taken us longer than we wanted. There is no getting away from that one, for sure.
Okay. And on R and D, I mean, you said that the OpEx has been up. I mean, this quarter was particularly strong versus last quarter. Just wondering exactly, I mean, you mentioned currency, but I mean, versus last quarter, it's not that different. So just quarter on quarter, it's a big bump.
So just maybe it's a seasonal high quarter, but just trying to understand, I mean, should we take this OpEx as a run rate? Or how should we think about 2020, just to get an idea?
I think you should see Q4, in this case, more of a situation where we have had a little bit less activity on what we have been capitalized to the balance sheet. We have the same run rate on OpEx normally in R and D as we've had in all the other quarters this year. However, this particular quarter, what we put on balance sheet and the project activities was slightly lower. Hence, the actual money flowing through the P and L rather than into the balance sheet was a bit higher than they've been in the couple of last quarters.
So for 2020, what kind of level of OpEx we should
It's a forecast, so we usually don't go into that type of discussion.
Okay. But basically, Francois, we are not increasing we haven't been increasing the OpEx, So it's exactly this balancing that you can see between activations. So we're not increasing our cost base here, maybe slightly, but very small. It's not a big increase in cost.
Okay, understood. Thank you very much, guys.
Thank you, Francois.
Thank you. There are no further audio questions.
So we have a few questions from the web as well. So the first one is on the T Shape sensor. The question is, do you announce T Shape orders after you have the first volume order from Gemalto in February 2019?
I suppose we will we don't see ourselves announcing specific purchase orders anymore going forward. But once we get new launches or commercial launches in certain banks and certain countries, we would see ourselves launching those for sure, yes, so that we can keep the information on the correct level. But just to go for smaller purchase orders, no, That we wouldn't go for it. We have huge volumes, there's no point in going out for specific purchase orders. Thales or as it used to call, Trimoto, It's just calling in basically then all the existing contract that we have, basically.
Thank you.
And previously, you've said that you're working on a new generation of T shape. Do you have any updates on this?
Yes. We will continuously work on improving both technically as well as the cost efficiency. And as always, we will drive cost down, and it will be actually quite clearly strong moves that we need to do in the payment card industry as we did in the mobile industry. So I think that, that learning, we will utilize them. And there's a lot that we can improve actually when it comes to cost efficiency, which we will take into the parent car industry as in new versions.
So we will have many new versions, I'm sure, when we get into it. And we are working on the next version full speed, actually. And that is also also being at going through with the with our partners at the moment. So, yes, there is a new t shaped version for sure. But it's not a t shaped.
We don't call it the t shape anymore. But yes, there will be.
And do you expect volume orders for smart cards to start on the current generation of T shape or only on the next?
No, we will have orders on T Shape for sure. And that's of course what we are now order delivering into the both the trials and when the new commercial deals will happen. So it will be T shaped now, and then we will gradually phase over with the new one as that has gone through all the getting ready and going through all the tests and so forth.
And if we look at the areas access and smart cards, which one do you expect to grow faster this year, so 2020?
I access I suppose the percentual growth in Smart will be quite good if you look at it starting from such a small volumes, but it will not be big volumes this year still for us in SmartCards. But we will see several commercial launches, so access could be far bigger still for us. Percentage wise, the growth will be much higher in, of course, in SmartCards, but still not huge volumes for us for sure. And mass market, I would define as hundreds of millions of cards as we have in mobile phone industry. So that would that is still a bit away for us in smart cards.
And how much do you think biometric smart cards need to cost in order for banks to be interested in a major rollout?
I think now when we start, prices are clearly a part of the formula for sure. Now it is more important to get going. And I think that we will see a very strong price erosion in the cards. I think the first ones have been the price thing with everything that is there. It's been even around $10 I'm sure it will go below $5 very fast, actually.
And then from there, a bit down, and then you are actually in the in the levels where you can do volume rollouts. And I don't remember how how we have taken the prices in mobile have gone from, you know, $5.06 dollars to $1.1.5 dollars right? So I think that we know how to take cost down and the industry will for certain expect that as well. So but I don't see our capability to take cost down that would hinder the mass volume rollout. So we will be in time for that.
That's what we we have planned as well.
And if we look at iris recognition, when do you expect touchless two point zero to be launched in a device?
This year. Yeah. So I think that's that's the plan to get it out after the new for the new version. So we will we will be out this year. That is the target that that we have set ourselves.
Okay. And you've also talked about an ultrasound sensor. When can when can we expect this to be launched by by an OEM?
I think there our our was a full screen development that we are working on. We have said earlier as well, we don't give updates on on this one. We are clearly focusing on optical now to get the optical out, And the the full screen is is much more complex. So we don't even give any dates on this one. That's a that's a very different project for us, clearly, in terms of the difficulty and technological challenges.
Okay. And that was the last question on the web.
Alright. Yes. With that, if no more questions, I thank you very much. And, thank you for joining us for this call. And I look forward to discussing with you again in this format when we do our Q1 report, which will be published on May 13.
Thank you very much for joining. Have a very nice day and afternoon wherever you were calling in or logging in from. Thank you very much, and take care. Bye now.
Thank you. That does conclude our conference for today. Thank you for participating. You may now all disconnect.