Morning, ladies and gentlemen. Thank you for standing by. Welcome to the Year-End Report conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you do wish to ask a question, you will need to press star 1 on your telephone keypad and wait for your name to be announced. I must advise you the conference is being recorded today, Friday, February 15, 2019. I would now like to hand the conference over to our speaker today, Christian Fredrikson. Thank you, and please go ahead, sir.
Thank you. Good morning, everyone. Welcome to the call. Let me, as usual, first go through the main highlights of the quarter and also give you a business update. Our sales came in at SEK 424 million, which is just below what we reported actually in Q3. Our position in the smartphone segment remains strong, and we have clearly and largely defended our market share since the beginning of 2018. I'm very pleased with this performance. Our gross margin is unchanged at 21% compared to the same period last year, but it came down from the Q3 gross margin figures. The introduction of the latest fingerprint sensor generation at our OEM customers is in progress. This sensor has a lower production cost relative to the earlier generation of sensor, yet its biometric performance remains very high. It is a good and even excellent product.
I expect that the positive impact on profitability of this sensor generation shift will be fully realized during the first half of 2019. It did not hit in the impact yet as much in Q4. The operating margin was -6% versus -7% in the corresponding year last year. Our cost reduction program has been executed as planned and communicated, which is reflected in a significant decrease in OPEX. Actually, our OPEX decrease has been 66% from the highest burn rate that we had. Fingerprint's financial position is solid. Our net cash assets increased from SEK 455 million to SEK 540 million in 2018. In the fourth quarter, we repaid the remaining portion of the acquisition loan for the purchase of Delta ID. As a result of this, Fingerprint is now debt-free.
Our consolidated equity to assets ratio was 77% at the end of 2018, which is an 11 percentage point increase since the end of 2017. Next slide, please. Now, looking at the market launches and business development activities. 18 smartphones and one PC model equipped with our sensors were launched in the quarter. This number includes the three new Google devices, which I mentioned already when we presented our Q3 results. The activity level in the smart card area was very high in Q4, with several market tests and partnerships announced. Let me go through some of them. During the quarter, it was announced that our partner Zwipe is piloting contactless biometric payment cards with 10 banks across the Middle East. These cards use a sensor from Fingerprint's FPC1300 series.
Also, we announced that we have entered into a partnership with SafetyPay to launch contactless biometric payment cards integrating our T-Shape sensor module. In addition, Zwipe and Allcard Inc., a leading MasterCard and Visa-accredited payment card manufacturer in the Philippines, have announced a partnership to launch batteryless dual-interface biometric payment cards to customers in the region. We are happy to support our long-standing partner, Zwipe, in this project with our ultra-low power consuming fingerprint sensor. Fingerprint is also supporting Italy's first biometric payment card trial by Intesa Sanpaolo. The card being tested is provided by Gemalto with technology from Zwipe and is once again using a sensor from Fingerprint's FPC1300 series. Finally, our technology is also used in France's first biometric payment card trial by Société Générale in collaboration with IDEMIA. The card is based on IDEMIA's F.CODE technology, which once again features Fingerprint's T-Shape sensor module.
We also made good progress in the embedded area by signing an MoU regarding biometric door locks with China's Junodata, the market leader of MCUs for door locks, and Yanfeng, a leading electronics provider for door locks. Next slide, please. Last quarter, I discussed Fingerprint's strategic priorities going forward, and I would like to follow up on this and talk a bit about the progress we made up against these priorities during Q4. First, an important priority is to continue defending and leveraging our position of strength in the smartphone segment as the mobile phone industry continues to evolve. We have experienced very good traction with our new fourth-generation capacitive fingerprint sensor, with strong volumes starting in Q4, although of course, the main impact of this product will be seen into first half 2019.
This cost-effective product, the FPC1511, will be a very important part of our capacitive sensor portfolio going forward. It is going to a big, high runner for us. Overall, we continue to deliver about one million sensor every working day in 2018, which means about seven sensors sold every single second throughout the year. We will not stop there. We will continue to place major focus also on cost efficiency and cash flow. On our programs to design cost out of our products will continue. As you know, the capacitive fingerprint sensor market is being challenged by the in-display solutions. We expect the value of this market to grow quite significantly this year, and we intend to enter the market in 2019 with our optical in-display solution.
I am happy to report that we conducted customer demos with good feedback in January, and this project is progressing as planned. An equally important area of focus for us is to position fingerprints for future growth in new markets. As we have previously mentioned, it seems likely that the major payment card brands will certify contactless cards during this year. This is an important prerequisite for card issuers to be able to plan and budget for a broad market adoption. Fingerprint's position in this emerging market for biometric sensors is very strong, which is evidenced by the fact that our solutions are used in all contact wear trials announced to date in the world. Another of our goals for 2018 was to generate 10% of our sales outside capacitive sensors for smartphones, which we achieved.
The interest in biometric solution is extensive and increasing with several areas where secure and user-friendly authentication are important. For example, I expect to see continued rapid growth in locks and access system as well as in FinTech. Next slide, please. One of the areas that we prioritize clearly is payments. If we look at the market for personal payment devices, this actually also includes mobile phones, which are used for mobile payments. But the greatest potential lies in smart card area, with around 4 billion smart cards produced every year. This market is clearly moving, although I expect the uptake to take place gradually with major regional differences. 2019 will still be the year of multiple pilots and certification. The adoption rate will be slower than it was the case in the mobile industry, but in the longer term, the potential there is extremely large.
But there are also other opportunities in payment devices. For example, we recently announced the Fingerprint Cards support CardLab and cryptocurrency wallet makers, Spatium, to create and manufacture a new generation of hardware wallets which feature fingerprint sensor. Our technology is also used in USB authentication tokens as well as in PCs. Next slide, please. Access system, finally, is also a very promising area, not least the biometric door lock market, which is growing at a very fast rate in China at the moment. A good part of the revenue that we generate outside of the smartphone segment comes from this area, and we expect this to expand further in 2019. We also expect authentication tokens products to grow in importance. Most of the revenue in these areas come from module sales using our existing FPC1021 and FPC1020 base modules. Next slide, please. So let me briefly summarize.
First, our cost reduction program has been executed according to plan, and our financial position is strong. Both our net cash position and our equity to assets ratio improved during the year. Going forward, we will continue to focus on innovation and also cost efficiency and cash flow. We will, for example, keep developing new improved versions of our latest generation capacitive sensor that are even more cost-effective. I am very pleased with the development of our newest capacitive sensor in the quarter. This sensor is a high-performing yet cost-effective, which will protect our margins going forward. We will continue to drive production cost down, which I know is an expectation in this fast-moving mobile industry. We will also keep making focused investments in product innovation, which is so important for us. For example, the in-display sensors, which are an area of focus this year.
An important objective for 2019 is to launch an in-display sensor solution based on our optical technology. We are on track in this project, and in January, we completed a number of successful customer demos. Diversification into new areas is a key strategic priority for us. We set ourselves a target, which is our aim in this area, to generate about 10% of our revenue outside of capacitive sensor for smartphones, which we achieved, and we expect this to continue. We have had a lot of good news in the biometric smart card area with several market tests and partnerships. And as I already said, Fingerprint Cards has been part of all contactless trials announced to date in the world. So in conclusion, our financial position is strong. We are now debt-free, and our net cash increased during 2018.
With that, we look forward into going into interesting and also challenging 2019, I am certain, as we can also see from the latest development in the mobile phone industry. With that, I'll hand over to our CFO, Per Sundqvist. Go ahead.
Thank you, Christian, and good morning, everyone. Let me now take you through the financial results for the Q4 of 2018. Our revenue came in at SEK 424 million, slightly below the number we reported in Q3, and 31% below the revenue in the same period last year. The drop compared to last year is mainly due to the shift towards smaller and cheaper sensors. Our gross margin is flat compared to Q4 last year. If we compare to the last quarter, the gross margin decreased by six percentage points. As Christian mentioned, we're currently introducing the latest cost-effective fingerprint sensor generation at our OEM customers. We therefore expect that the positive impact on profitability of this sensor generation shift will be fully realized during the first half of 2019. We reported an operative profit of negative SEK 25.5 million, compared to negative SEK 40.6 million in the same period last year.
Next slide, please. As Christian mentioned, our cost reduction program has been executed as planned. Excluding other operating income and expenses, our operating expenses for the fourth quarter totaled SEK 116.9 million, compared to SEK 204.4 million for the same quarter last year, and SEK 101.5 million last quarter. Development costs of SEK nine million were capitalized during the third quarter, which corresponds to 19% of total development costs, versus 38% in Q4 2017 and 25% in Q3 of 2018. In relation to revenues, our operating expenses represented some 28%, compared to 33% for the same quarter last year. Next slide, please. Looking at the balance sheet, it's positive that our working capital, excluding cash and tax items, continued to decrease, and was SEK 128 million at the end of the quarter, compared to SEK 575 million in the fourth quarter.
The decrease in working capital is mainly a result of concerted actions to increase the inventory turnover, whilst also decreasing customer payment days and improving our own payment terms to our suppliers. Next slide, please. Our cash flow from operating activities was a negative SEK 26 million in the fourth quarter, compared to a negative SEK 1.7 million in Q4 last year. Cash flow was impacted by the negative operating results and expenditures relating to restructuring activities. Cash flow from financing activities was a negative SEK 151.3 million. This is mainly amortization and repayment of the remaining portion of the acquisition loan relating to Delta ID. After this payment, Fingerprint has no interest- bearing liabilities left on its balance sheet. At the end of 2018, we had a cash balance of SEK 540.5 million, compared to SEK 742 million at the end of Q3 2018, and SEK 920 million at the end of Q4 2017.
Our net cash position improved during the year from SEK 455 million at the end of 2017 to SEK 540 million at the end of 2018. Thank you, everyone. We are now ready to take your questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star and one on your telephone keypad and wait for your name to be announced. If you wish to cancel that request, please press the hash key. That is star and one to ask a question. Your first question comes from the line of François-Xavier Bouvignies. Please ask your question.
Thank you very much. My first question is on your Q1 commentary, Christian. You say that you expect a challenging year in 2019. Q1 will be impacted. Seasonality, I mean, is against the Q1. If I look at the last two years, quarter-on-quarter, Q1 2017 and Q1 2018, it was down 50%-60% quarter-on-quarter. How should we think about 2019 versus the last two years? Is it more or roughly the same or even or better than that?
Hi, François. Sorry, what percentage did you say?
It was 50%, roughly, quarter-on-quarter decline in the last 2 years.
You're right. Hi, François, by the way, and let me say a few words. I think the seasonality effect is normal. I think that's always there, right? As you know or those who don't know, most of our customers are Chinese OEMs, and they typically have a lower Q1 because they build up the inventory in Q4, and then with the Chinese New Year in Q1, it's more deliveries of that one. That's why Q1 is traditionally weaker. At the same time, we said that the mobile phone industry, as an industry, has had more challenging time for many of the players doing profit warnings in that space. However, it has not been our customers.
In a way, the mobile phone industry is impacted clearly, and as many analysts are saying, there was probably -5% decline of volumes in smartphones last year, and it's probably going to be a decline this year as well as it looks. There is a big difference between the OEMs now, so it really depends on the customer mix, actually, how it goes. I expect the seasonality to have an impact, and we don't know yet, of course, how the market shares will go for the different players. At the moment, our customers have suffered less, if I would say so, from the turmoil in the mobile industry. On your comment, now we don't give guidance on Q1, but of course, I could say that those are exceptionally high numbers.
I think in decline of 50%, that's not a normal, I wouldn't call that a normal seasonality, although we're tough quarters. I don't want to give any guidance, but that's a bit brutal too much, so to say.
Okay. If we look at the gross margin this quarter versus the last one, we saw a decline despite top line was to leave flattish quarter-on-quarter. I just wanted to know why it declined so much in one quarter. Is it price product mix, maybe?
Yeah, it's exactly so. I think the price erosion we said last year was the ASP decline was over 30% last year. It will be less this year, that's clear, In capacitive, which is quite natural when we have gone so hard down for three, four years now. I think the product mix and the fact that our new low-cost sensor, the 1511, which is a substantial difference for us, its full impact will be seen in the first half. In that perspective, this gross margin was lower than what we need to do as a company, I would say. I think as a company, that's not the gross margin we need to run the company on, clearly. I think those mixes were especially hitting us in Q4, even if the volumes, as I said, we delivered basically last year, seven sensors per second.
The volumes stayed well for us. I'm very pleased with that. We need to get the mix and the turn into the qualification of the new sensor takes time with different OEMs. It goes in waves, and we will get it in the first half for all our customers.
Okay, in terms of ASP for 2019, you said previously that 2019 will be still challenging, but maybe less decline than in 2018. Do you-
Yes
stick to this statement?
Yes. In capacitive for sure. I think in optical, the price decline will be very fast. That's hitting the fast moving from this year and next year. I think optical in display, the ASP decline will be fast. The capacity will not be as much as last year.
Okay. In terms of optical, you talk about prototype and demos to your customers. I don't know, maybe if I interpret wrongly, but the wording, you have to go through the certification process. It takes a bit of time from a demo to a certification to a product launch. It takes usually a lot of time. I'm just surprised that you are only seeing demos and prototype and still launch this year in optical. I wonder if the schedule is a bit stretched or maybe you expect to launch quickly. I just wanted to understand.
Yeah. Well, actually, when we talk about demos, the next phase is actually then design wins. You basically get into models. Our demos are, we have phones with optical sensors, and you can get a very good image from them. In a way, maybe demo is, we're not talking a demo in terms of that there's not, it's very concrete working forms for us. That's maybe the world is misleading. I think it's a good question, very good comment, François. From that perspective, the hot zone optical is in good shape for us.
Okay, just last one from me. On the net cash in Q1, given that the challenging environment will continue, how should we think about the net cash in Q1? A significant deterioration or maybe you manage slightly your cash generation in Q1?
Well, we don't give forecasts as you know. We of course, will have focus on running our cash. We want to be a cash positive company. We don't want to deplete the cash if I look at the overall year. There is fluctuation between quarters in terms of how you buy equipment versus how you sell. We have so huge volumes, so it actually fluctuates quite a lot for us. On a year basis, we want to run this in a positive territory.
All right. Thank you very much, Christian.
Thank you, François.
Thank you. Your next question comes from the line of Jörgen Wetterberg. Please ask your question.
Yes. Good morning, Christian. Can you hear me?
Yes, Jörgen, I can hear you right here.
Good morning. I have a question on the next generation sensor and the implications for the production cost. You're saying that it will be quite significantly lower production cost and better performance, but how much lower can we expect the production cost to be, at a target situation when the new generation sensor makes up for most of the sales? How much improvement should we be able to see?
Well, we don't give out those, but in a way, I could say so that in all the generational changes that we've done, it's in the tens of percentages.
Right
useless to do a new generation if you're not hitting those. 10% would be a poor performance. It would be a poor new product, actually, very poor. If I tell you that.
Okay, thank you. The second question is relating to the 10% of sales that is non-capacitive sensors. Could you give a little bit more flavor on how that splits into different segments and which part of that sales is growing the fastest?
Yeah, it's kind of many sub-segments in it. It could be USB, it could be dongles. Door locks is by far the biggest in that area. It is also Chromebooks and all kind of other solutions that are coming into that embedded cryptocurrencies that need that and access solutions, which we call embedded then. We also have there both the fingerprint and the iris. We're also doing a new generation of the iris, which will be a combined iris with face. We have software that actually handles both iris and face functionality in that same offering. I think it's a mixture of all of those. The biggest is door locks, actually.
Just to give you a picture, that last year door locks, I think in China was about 10 million units sold in China alone, it is probably going to be close to 15 million units sold this year. We have a very strong market share in the door lock market, for example.
Okay. Thank you.
That's the third piece of the area.
Third question, last question. On the biometric smart card market there's a lot of quite bullish comments out there, ranging from 100 million to maybe 500, 700 million smart card shipments in 2023. What's your view on that? What should we consider being a likely target from your perspective?
That's 2023. That's a tough one, Jörgen. I think we know this, that this year will be a pilot year and certification year for MasterCard and Visa and pilot year for the banks. We have 17 different pilots in different phases now where we are with the contactless. It's still basically a pilot year. I think every year the volumes will start to increase, but will be slower than in the mobile industry. It doesn't move with the same speed, clearly, it starts probably in different regions a bit differently, high end and so forth in the cards. I think the end result, I don't employ 2023, but the end result, if you look at contactless, it's about half of the produced cards.
I think those volumes, if you look at the, let's say you do half of it, if 4 billion cards will be out, contactless has been about half of it now, it's increasing. Clearly, 2 billion smart cards with biometric sensor will be, of course, what we believe it will become, but that will take time.
That's why we are more cautious. We say that 2019 is still a pilot year because we need the banks, and we need the MasterCard, Visa to do the certification, and it's not in our hands. The predicting of when the volumes really come is more difficult in that perspective. That's how we see it. 2019 will be pilots and certification. 2020, you'll see more deals coming. You'll get into the millions, it keeps on climbing every year for sure. To say what it is 2023, I suppose, is anybody's guess, actually.
Okay, great. Sorry, last question. I saw also that your administrative costs increase from having come down to SEK 23.6 to up to SEK 39. Is that the new structural level for administrative costs or should we expect that to decline after this quarter?
This is Per Sundqvist with the CFO. No, they will decline in the next quarter.
Yeah. Good question. It's an ongoing level.
Okay. Thank you.
Yeah. Thank you again.
Thank you. Your next question comes from the line of Victor Westman. Please ask your question.
Hello. Thank you. I posted my questions on the web also, so maybe you can skip them. The first question is on the effect of the new sensor in H1 2019. You say that the full effect will come in H1 2019. What exactly do you mean by that? Do you mean 100% penetration for the FPC1511, or can you just say something more what you mean?
I think, yeah, Victor, right. That's a good question. What we mean with that is that it will be our biggest product. It will easily be at three-quarters, 75% of the volumes, 80% of the volumes of what we do, will be that product. That will then be going through to all the OEMs during the first half. We've started it in Q4. Late Q4, it started to come in into several of OEMs. Of course, it got into very good volume, but of course, it didn't have time to get into a full volume yet at all. During Q1, Q2, we expect to have that fully in use and fully impacted us.
Okay, understood. I also want to clarify on the 10% sales outside mobile, this is the first time you reached those levels. Just to clarify, in Q3, you did not reach 10% for the year or for the quarter, but you did that in Q4. Is that correct?
We haven't given out specifically on quarters, but in Q4, we were around 10% in Q4, yeah, of our business was non-mobile.
Okay. The third question-
You can assume that it grew during the year. It kept growing up.
Yeah. I had a third question also, and I think that one was answered. You said that door locks is the main contributor for the growth.
That's the biggest segment at the moment, yeah. It's probably 20, 30 different segments there of different kind of products, and door locks is the biggest one. As I said, in China alone, now it's time to go to other countries. China did 10 million biometric door locks last year, and only China will be probably 15 million door locks.
Okay. Very good. No more questions from me for now. Thank you very much.
Thank you, Victor.
Thank you. There are no further questions from the telephone lines, sir. Please continue.
We have some questions from the web as well. The first one being, could you please update us on your iris solution or Delta ID?
We have continued to develop, and I just shortly alluded there that we are also now combining iris and face functionalities into the same algos. We will launch products which has those functionalities. We are continuing to go into a certain amount of mobile, less than we would like to. We are continuing then also in some of the government sectors where we have ongoing business, where border control and so forth, where the solution is being used. We are specifically, of course, also in the automotive industry, there are very big trials with the big players through Gentex, which is by far the biggest market leader at doing actually a back view, rear view mirrors. They actually have over 90% market share in the mirrors globally in that business.
They are doing a lot of pilots and testing now for the automotive industry. We believe that will be a big offering for us and for Gentex going forward now. It will take time as you go through all the test and qualification test with the automotive industry. That's maybe shortly on the iris and the combination of iris and face for us.
We have a question on the fingerprint sensors for the automotive sector. What kind of revenue do you expect going forward from this?
Yeah, at the moment, the fingerprint sensors are more have been discussed inside the car than outside the car. Clearly, that seem more challenging, depending on the weather condition of whatever country. There's a lot of pilots and trials going on in that as well. At the moment, we see much more traction for the iris face combination inside the car or maybe even outside, so that you can look at the certain, when you enter the car, it actually opens up as well. At the moment, there is more traction with the iris than there is with the fingerprint sensor, but we expect that also to be seen. There's a lot of different trials going on in that as well, but I expect the volume because you have to remember that the automotive industry, just the qualification takes a long time, I have to say.
It is an extremely long cycle there. It's easily 18 months when they qualify something and test just for a car.
We have a question on the biometric smart card space. Could fingerprints take a bigger part of the value in this business than just the sensors?
Yeah, I think that we want to take part of the module. Actually, we want to do the fingerprint sensor module, and not only kind of wafer business. We believe that we can add value, clearly by doing that. I think that's a very good question, and we can, with our system capability, combining hardware, software, algo, and module, we can also drive both performance and cost, we believe, better than anybody else. We think that there is a good portion for us to take there. That's what we are aiming at, yeah. It's a very good question also.
Any update about the complaint about Goodix?
No. It is still in the process. I really don't have anything else to say. We will, of course, immediately come out when we have any news on any direction of where it is going. No, it is still in the process. As we said, it is a long journey, and it has proven to be a long journey. That it's clear it can take one, two years easily.
On your optical in-display solution, how would you say it compares to the competition, or what are your advantages?
I think our advantages are. We have to have those advantages because we are coming later to the market where the first generations are already out. I think we will have the same benefits that we have had in the capacity, which is superior performance. The image will be better, the quality will be better, and it is also superior module structure. The structure of the sensor will be thinner. It will be a better one than what anybody else has in the market. Those are important things when you look at a mobile phone. Otherwise we wouldn't actually have a chance in the market if we would come with a me-too product or so, but we will bring new innovation with optical.
On the in-display, earlier you've spoken about an ultrasonic in-display solution. Could you update us on this?
Yeah. The ultrasound is clearly much more complex than doing a hot zone or a large area. The full display is much more complex. We continue, and we progress on it. We haven't shared anything, we have progressed on it. We have an image on the full screen, we can do that. What we have to, before we can do the next steps for us, is actually that for that to be really competitive, it has to be productized, and it has to be cost efficient. The question we have a lot is actually on, what cost can you develop that? That's the kind of next steps for us in it. We haven't really shown anything now. We have only discussions with some key customers going on, we realize that there's a lot about the cost level that we have to do that.
There is a certain limit to how much the OEMs are willing to pay for those solutions as well. At the moment, when we talk about launches, I must say that we will launch the optical, where we are far. It is also easier to develop the optical hot zone or large area. We will go with those now in this year and going into next year.
Earlier you also spoken about cloud solutions and a facial recognition solution. Could you please update us on these?
Yeah, I think I already said that what we're doing now with the next generation of iris is we're combining it with face, we feel that that is the best way of having high security and convenience. We will have the combined, so that's the route we've taken there. When it comes to the cloud, we have some cloud offerings with iris in the government sector, in certain border control offerings, where the iris cloud is used. We have a fingerprint sensor, very simple cloud solution as well, which we have not sold to anybody right now. First we need to get to those and the use cases for that, for fingerprint sensor to fly. We have the iris cloud solution in use, as I said, in some border control cases. That's maybe on it.
For the fingerprint sensor, we would need to get a customer first, before we can even look at it. It has been, I think, the fingerprint sensor cloud, we have a basic solution. We haven't developed that now that much, actually after some of the cuts that we made. That's maybe on those.
Maybe a final question on the optical in-display. Is this for a dedicated area of the screen, or can it be used anywhere on the mobile phone screen?
This is what we call a hot zone, so it's a certain place. It's for kind of one finger. It's a bit like the capacity, but in display. Then, we are working on the next generation, which are in a larger area. They call it the larger area, which you cover as well. Those are in the next phases of that development. You will see this year already large area launches of different kinds. Basically, you can put maybe two by two or three by three centimeters kind of areas, compared to just maybe one by one or so for a finger. Very good. I think with that, we've tried to answer most of the questions, we will close the session with this one. I would like to thank you all for joining us this morning. As usual, very good questions.
Our Q1 report will be published on May 15th. We will get back when it comes to the quarterly reporting on that date. I look forward to talking to you again. I'm sure a lot of things will happen in between, as always, in our industry and our company. Thank you very much for joining. You have a very good day. Talk to you soon. Bye now.
Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you all for participating. You may now disconnect.