Thank you. Good morning and welcome to Fingerprint Cards Earnings Call following the release of our Q2 report this morning. We'll begin today's call with a presentation of the report by our CEO, Krist Jafjordigsson and thereafter by our CFO, Pass on Christ. And as mentioned, we'll have a Q and A session after this. We'll begin by questions from the phone line and then move to web questions.
And with that, I'll now hand over to our CEO, Christian Fredericksen.
Yes. Thank you, Stefan, and Good afternoon to everyone and welcome to the call. We just said we'll focus on Fingerprints' progress and performance in the second quarter. I do realize and I'm sorry about the short notice we gave for this call. But as you know, the Board decided to release the report earlier than previously communicated.
Since the work to complete the report could be finalized earlier than planned. Let me start with some comments on our revenue. As previously communicated, we expected part of the revenue in Q2 to be delayed due to the COVID-nineteen related shutdown In our Q2 revenue figure, which came in at SEK 290,000,000, some 12% below the low end of the range of our previously revenue forecast for the quarter, which we withdrew due to the COVID-nineteen related situation and outbreak in Vietnam. These results still represents a constant currency increase of 18% on the current spending period last year, which I think is good given the challenges we faced in Vietnam during the quarter. We expect that we will make up the lost sales Q2 in the coming quarters.
A gradual restart of the production facility in Vietnam Could also begin in June, in line with our previously communicated expectations, and we expect that the facility will be back to full capacity During the Q3 and actually by the end of July, we have also secured additional capacity with other supplier this quarter. And we will continue the important work of further broadening our supplier base, which we have had ongoing for a while Our gross margin improved by some 6 percentage points compared to last year as the share of new higher margin products in the mix Continue to increase. Looking ahead to the second half, we see a positive development of our underlying product in our markets. If we consider the global smartphone market, external analysts expect to see growth of around 6 between 6% and 9% this year. At the same time, the penetration rate of fingerprint sensor is still increasing.
And as we all know, in capacitive sensors, fingerprint cards is the world leader and the most popular technology by far. So we expect demand for our products to continue to be solid in the coming quarters. As I have said before, the limiting factor for us is access to sufficient production capacity. There's a lot of work being done in that all across the globe and it is going to improve, but it takes some time. The PC market is very interesting growth area for us.
The new biometric solution for PCs that we launched last year have done very well in the market, and we now count 2 out of the world's top 3 PC manufacturers as our customers. The consensus view among industry observers seems to be that the PC market will establish itself at a significantly higher level than before the pandemic, And we also hope so. So we expect to see continued growth in the demand for PCs, while the attach rate of fingerprint sensors is also rising. Next slide, please. We are continuing to make good progress against our strategic priorities.
Our unique FPC1542 sensor is the new benchmark in the market for fingerprint sensors for mobile phones And it is continuing to sell very well. As you may know, we are continuously updating a ticker on our website and we also regularly send out Tweets with information on new phones with our sensors. Increased sales of our new products is also having a positive impact on our gross margin. We will also keep investing in driving new innovation in the mobile area. As I just mentioned, the PC market is growing at a good pace and fingerprint touch sensors are becoming increasingly common.
Fingerprints is very well positioned, thanks to our recently launched biometric solution for the PC segment. In fact, 2 out of the world's top 3 PC players as well as 3 out of the 5 top 5 players use Fingerprints technology. I am very pleased with our performance in the PC market, and I believe that that will be a great new leg for us. In the Axis segment, we received a volume order for several 100,000 T shaped sensor modules from Sentry Enterprises to be used in its SentriCard converged biometric credential for physical and logical access. This order is a good testimony to the strength of our offering and the demand for biometric solutions also in access control market.
We see continued growth in this segment providing a smart way to add secure, convenient and hygienic authentication to physical as well as logical access. Biometrics by Fingerprints has achieved the FIDO biometric component certification, which is mandatory for FIDO certified authenticator level 3 and higher. Our solution is certified as part of the Fabian Biometric FIDO security key, The first FICO hardware authenticator integrating biometrics to achieve this approval. This demonstrates the quality, security and Next slide, please. If we look at payments, Credit Agricole France now offers their gold and world elite customers biometric payment cards with biometrics by fingerprints.
Also, BBVA is launching biometric payment cards in Mexico with, once again, biometrics by fingerprints. To date, we have seen 4 commercial launches in the world and our technology is used in all of them. Just recently, we secured an additional volume order from approximately 250,000 T shaped sensor modules from 1 of the world's top 3 car manufacturers. I believe that this new order indicates that the market rollout will continue and accelerate. The pandemic has led to a Sharp increase in consumers' use of contactless payments.
Biometric payment cards are emerging as the next innovation in this area, Enabling a touch free and seamless payment experience regardless of the amount. Together with our partners, we are enabling banks To remove the payment cap and bring consumers the trust and experience needed for contactless payment. We expect to see further commercial rollouts in the coming quarters, and we expect the market take off to accelerate in the coming years. We actually expect a handful of rollouts still, and we hope that happens with the launches of the banks this year. Fingerprint sensors for payment devices, including smart cards, wearables and USB tokens represent very large potential for Biometrics.
As we have stated before, we see a potential TAM total accessible market amounting to around 3,000,000,000 units per year for biometric sensor modules and software in the payments area. And as we have said, our aspiration To lead this market with a market share of around 50%. Next slide, please. I am very pleased with the performance of our newest solutions for the mobile and PC segments. The Theme FPC-fifteen forty sensor is an innovation made possible by our unique capacity technology combined with our advanced matching algorithm.
This product has moved into mass production extremely fast and has really set the new benchmark for excellence in the market. The same can be said about our solution for the PC market, which is now used by 2 of the top 3 PC makers, as I just said, in the world as well as 3 out of 5 top 5 players. I am very proud of this achievement and the Strong position we have already taken in this new growth segment. We expect that pieces equipped With Fingerprints sensors will become increasingly common, and we aim to continue to drive and lead this market as it goes into biometric. Next slide, Luis.
During the quarter, we also announced some notable progress in cooperation with SDM SD Microelectronics. As a second step of this partnership, we have entered into a commercial agreement with SD Microelectronics to bring to market an advanced biometric system on card platform, ST Pay Bio. The platform enables efficiency of Key features of our biometric system on card demonstrating simple user enrollment, very high end to end banking transaction and matching performances. ST Paybio integrates These payment security technologies, the ST-thirty one secondure element and STM-thirty two microcontroller with Fingerprints T Shape 2 Sensor module and software platform for PayVantage, which was recently approved by Mastercard. The 2 companies have been working Tiedly together to optimize all parts of the platform in one solution.
The platform eases integration of biometrics into existing card manufacturing processes, enables global volume deployments and reduces the total production cost. Fingerprints is proud to continue its collaboration with SD Microelectronics to reduce cost and remove complexity from the integration process. This is breaking down major barriers of smaller Tier 2 card manufacturers to add biometric cards to their portfolio and in turn bring fast, frictionless and hygienic install payments to even more consumers. Next slide, please. So in summary, I am pleased that the positive growth trend continued with an 18 constant currency growth on last year, despite the production challenges we have had in Vietnam in the quarter.
We assess that the sales loss in the Q2 due to these chances will be recouped in the coming quarters. Demand for Fingerprints Production Solution is healthy, and we anticipate The production capacity at Aviedema supplier will be fully restored during the Q3, actually already by end of July, while we have also secured additional capacity with other suppliers. The important work of broadening our supply base continues with undiminished effort. We see good growth in our underlying product markets, also in the global smartphone market, and There are always changes in the customer base, and I'm interested to see that our largest customer, Xiaomi, have, according to analyst reports, now become The number 2 mobile OEMs provider by market share in the van volumes in the world. And that is great to be there because they are we are the biggest player when it comes to capacity fingerprint sensors with IXIAR.
Capacity fingerprint sensors, where we are the world leader, remain by far the most common biometric modality in smartphones and our Strong positions and continued high innovation and product quality with security and biometric performance is important for us, and we will continue to invest into that. We are continuously advancing the development of our product portfolio and the most recent generations of the thin side mounted sensor from previous have established a new highest standard in the market. PC Industry had an unusually strong year in 2020, And there is a lot and of course, that is because of the changes of working remotely due to the pandemic. This industry has continued to expand in 2021 and the consensus is that the PC market will establish itself on a significantly higher level than before the pandemic. Computers equipped with fingerprint sensors are becoming increasingly commonplace with our new biometric solutions for PCs, And we are going to take a leading position in this market as well.
During The Q2, we announced that we have gained another customer, which means that 2 of the world's 3 largest PC manufacturers are now using our technology. Fingerprints has also and is the world leader in biometrics for payments, and we saw another commercial launch of biometric payment cards in Q2, this time by BBVA in Mexico using Fingerprints technology. Our technology is now Used in also the 3 previous, so in all 4 commercial launches in the payment industry. In Switzerland, France by Kornibank, So if you could tell us and in France by BNP Paribas and Credit Agricole. And do remember BNP Paribas is the number one bank in Europe And Credit Agricole is the number 3 bank in Europe.
These are significant launches in this business. Our position is very strong, and I look forward to seeing this new mass market for biometrics now taking off. And with that, thank you very much on my behalf, And let me hand over to Per Sundqvist. Go ahead, Per.
Thank you, Christian, and good afternoon to you all. So let's move to the first slide in the financial results section. Starting with our revenue. We're reporting a 3% increase compared to the corresponding quarter last year and an 18% increase in constant currency terms that is despite our previously communicated production challenges in Vietnam during the quarter. A successive restart of the production plant in Vietnam could, however, already begin during the second half of June, but nonetheless, the loss of production has had a negative impact on our quarterly sales.
However, as Christian has mentioned, we assess that this sales loss will be recouped in the coming quarters as demand still is healthy and we expect the production capacity at our Vietnamese supplier to be fully restored during this time period. In addition, new additional production capacity will also come online during the same time period, which will further increase our overall production capacity as well as stabilized current output levels. The product mix Continued to improve this quarter with a high proportion of new higher margin products. This, of 1st, we had a positive impact on our gross margin, which came in at 28% in the quarter, 6% point increase Compared to the same period last year. Next slide, please.
Looking at the development of revenue and gross margin on a 12 month rolling basis, the trend in profitability is clearly positive. This is due to the favorable product mix trend mentioned earlier. We are also continuing our efforts to improve profitability by driving more product innovation as well as continuously increase the diversification of our business into new Considering the revenue in particular, we can see the impact on This slide of the supply chain limitations over the last few quarters as well as the recent shutdown effect in Vietnam this quarter. And as we've said before, I reiterate before the semiconductor shortage is a limiting factor for us at the moment Since market demand for our products and solutions continues to be very strong. Next slide, please.
Operating expenses in Q2 were €104,000,000 versus €77,000,000 in Same period last year, development costs of SEK 17,000,000 were capitalized during the quarter compared to SEK 26,000,000 in the corresponding time period for 2020. This corresponds to 32% Total development costs, which is to be compared to 48% in the corresponding quarter of 2020. Our development expense has increased compared to last year as we are driving a higher number of R and D and operational projects. In other words, the expenses and the costs relating to the broadening and investment of an improved supplier base are the main cause behind the increased Year on year OpEx numbers. It is therefore a very important growth step for us and the future platform investment will act as a growth driver for us going forward.
However, we will, as always, maintain a strong focus on cost and Efficiency improvements going forward while making these necessary investments to drive future growth. Next slide, please. And moving into our core working capital situation, that is, in this case, accounts receivable plus the inventory less the accounts payable. It emanated and resulted at €191,000,000 at the end of the quarter, which is compared to €208,000,000 in the same quarter last year and SEK 147,000,000 last quarter. So as you all can see, we continue to work towards a very active Management of our working capital in a very efficient manner.
Next slide please. As a further positive effect of the efficient working capital management, our cash flow from operating activities It was a positive €50,000,000 compared to €81,000,000 in Q2 last year. Subsequently, our cash position stood at €193,000,000 versus €429,000,000 in the same quarter last year and €314,000,000 at the end of Q1 2021. This, in turn, has enabled us to buy back own shares at the level of 140,000,000 in Q2 2021, which is a proof of the positive results enabled by the continued focus on working capital and efficient cost control during the quarter And the previous ones as well. So cash flow from investing activities, in other words, the capitalized development expenditures, Was €19,000,000 compared to €27,000,000 last year at the same time period.
Okay. Thank you, everyone. And we are now ready to take questions.
So your first question comes from the line of Francois Bouvignet from UBS. Please ask a question.
Hello, everyone, and thank you very much for taking my questions. The first one is on the your results in Q2. So when I look at your previous guidance, I mean it was at the midpoint SEK 350,000,000. And when I see what you delivered is SEK 290,000,000 In Q2, which is 17%, 1.7% below the midpoints. And what I'm trying to understand is why I mean how come one supplier with 1 month's Shutdown in the quarter could have 17% impact on revenues.
Just to understand how It can have such an impact or maybe is there anything else than one supplier? Just trying to understand the impact here would be very helpful.
Yes. Hi, Francois. And we don't give exactly what the impact was, but I It was in the ballpark, you can say, right? And it was we never really gave our gut into how long it was, but it Started slightly actually before June. So it was a bit longer.
And that's why if you look at the percentage, it was more than what it was in June. And we say that it will be up in by the end of July. And we are in Q3. We are already, as we see it on, in a normal situation for that. Plus, we have now secured other partners For this area as well.
And it was actually, of course, more than one factory that was impacted. It was it is such a huge region that was there.
Okay. And I mean, can you give maybe the percentage of exposure of the supplier, the percentage of output or anything like that then?
No, we don't give anything per supplier, but that impact or output is not there anymore Q3, that level of impact cannot be there.
Okay. So even in July, EU, it's fixed, it's full speed From July?
Yes, end of from July, it's full speed, yes, plus that we have other suppliers as well, right?
Okay. So on your Q3 guidance, There is no negative impact embedded into that?
No, we haven't. We are kind of in and then we need to kind of catch up On the sales that was pushed out, right.
Okay. And maybe my next question is on the card, the follow-up order that you've got. Can you give a bit more background on what kind of customer I mean, what Not the customer, but the end user. What do you know about this follow-up orders? What is it?
Is it because they are seeing Demand or was it because in the contract they had the 2nd wave order? Anything you can give around this particular A big order?
Well, not really given on the particular order. I think it's, of course, it's very good and it was an expected step. And it has to do, right, with the fact that there are more there is more consumer demand there. So that needs to be which is So going in a way as the projects are going in, going into life, right? So it just adds on, right?
I think it's more of that, that The process goes on and the more banks that you get out there, the more, of course, days goes on. And we expect a handful of more Commercial launches and all we hope, I would say, expect and hope and believe, I would say the right word, because we are not, of course, the one who is launching. It is the banks and the card issuers who are launching with the in the relaunches, right?
Okay, right. And maybe last question, it's on the strategic review. I don't know how much you can Say about the strategic review, but can you give us maybe an idea of the time line? I mean, when this review, how long it's going to last? I mean, Anything you can give around, yes, how should we think about that going forward?
Well, I think it's really the strategic review is really done by and started being shared by the Board. And the only person We'll give comments on that one. It's the Chairman of the Board, and it's done from a position of strength Right there, where they are now looking at the strategic review. And I can't really comment. I know the question and it's coming, Francois, right?
But I'm obviously Not the right person to comment anything on that or neither the schedule or what to expect.
All right. Thank you very much.
Hey, thanks a lot, Francois.
Thank So we are waiting for other questions to come.
Maybe we can take we have a couple of questions from the web, which we may take them at this point. One is on commercial releases. It seems like all commercial releases so far as well as the most recent orders are based on T Shape 1. Are customers preferring that 1st generation? Or is T Shape too delayed?
And when do you expect commercial rollouts based on T2?
No, I suppose everybody always wants the newest version, but it needs to go to All the processes when it comes to our partners and the certifications. And then it kind of We expect that to happen still this year. And that's the plan and has been. There are no delays from that perspective in that plan. And then it just rolls into the T2, right?
That's how it goes. And of course, that's not going to be the last version either. That's the way it goes as well. We're happy to continue developing and driving costs down and performance up in the payment industry.
Okay. Thank you. Is there anything you can say on touchless or IRS recognition in terms of development or growth going forward?
Yes. We don't give any specifics on the different areas. We have been adding customers in hospitals. It is, of course, still a lot of work going on in the automotive industry. We are bringing also have brought the combined iris and face Recognition, we have bought that and bringing that more into the market.
And we're looking at different form factors in payment To stems, for example, in India, where there is good demand for iris as well. So all of that continues And is adding up in the and there's a lot of interest in the Access segment as well. So that's a Few areas where we are looking at it. And then as I said, there's a lot of work going on in the different form factors as well to get that into different hardware
solutions. Okay. Thank you. And anything about fingerprint sensors in cars or vehicles? Anything you can say about?
There is I'm sure that biometrics and overall will be a very interesting and very good play In the automotive industry, in different form factors inside the car, in different places, whether it is fingerprint sensors, iris or face. And more and more of that will come with more and more automation, more and more payments happening in the car. So I think that's a very interesting area and it just takes time. So there will be many different Kind of trials and pilots going on and launches as well with different car manufacturers launching it in Different cars in different form factors to learn more about it and to get it there and to see what the consumers prefer. So I think that there is going to happen a lot and you'll see different launches happening with different cards.
It takes a while as it is Highly test it takes a long time to certify and test in that industry. That's maybe how it's seen, but it will be a good industry for Biometry as well, I'm sure.
Okay. I think that's it for the questions from the web. I got a message here that someone on the phone line is trying to ask a question. I don't think maybe the operator can Repeat the instructions.
And your first question comes from the line from Farzad Linke from Millennium Capital. Please ask your question.
Hi, guys. Thank you for allowing me to ask some questions. Can I Start with the first one, which is on BBVA Mexico? Do you have any idea what sort of cards or what sort of accounts your Fingerprints, so the biometric cards are being rolled out
in? Well, they are launching in it is a smaller The way it has gone in the other launch, if I've got France as well, they start smaller in the branch. They get to test the enrollment. You get Consumer feedback and you position yourself, your marketing. And then and if I look at the French Play how it has gone.
It doesn't mean that it's going to be exactly the same in Mexico, but that's how they've started now with the Rollout in Mexico, right. And it starts in smaller. That's all we know at this stage, right? And Then they will take it from there. And they decide then on the marketing activities, on how do they want to do the enrollment In the beginning going forward and if and what segments they will go for.
And for example, BNP Paribas has Started with one branch and then they've gone out that they will go into all the branches in France.
Thank you. And are your customers who you are talking to, so not the ones who are already Signed up with you, but are the others waiting for Gen 2 of the FPC T Ship Sensor Because it's cheaper, quicker, has less components, etcetera, etcetera? Or Is it just a matter of banks trying to get the priorities and what they want to roll out?
Yes. I think it's more of the banks getting their rollouts going. We have the cards ready. When you go for smaller starting with Win 1 branch, If it's a T1 or T2, it's not such a critical issue, right? If when you go for bigger volumes, then of course, Immediately, the cost issue comes in and we need to and we will continue working on that to Make it a good case for the banks also to roll it out, right?
But it's only when you get the volumes right. So it doesn't hinder the launches and the commercial launches and so Right. That's important. It would anyhow, they always start with smaller volumes.
Then just coming up on the guidance that you've given for Q3 3 and what you printed for Q2 in terms of turnover. You've mentioned that you'll make this up in the balance of the quarters for this year. If I take what your previous guidance was for Q2 and what you've guided for Q3 and this sort of normal seasonality and the fact that you are actually now Fully up and running in Q3. Based on your guidance, I don't see any catch up actually occurring In Q3, is that fair? Or do you think that what was lost in Q2, some of it is being recuperated and most of it will come in Q4?
How do you see that?
Actually, Farzad, first, we don't really we're not going to distinguish that how it is. But We didn't say that it is going to happen this year. We said that it will be taken we will recoup the sales over the coming quarters, Right. So we need to do that. So we didn't say that it's going to happen all in the second half, right?
And then we need to kind of get now the Factory is going and then we need to do the get the wafers in and do the packaging and kind of Get back into then selling them in what form factor then they go out, right? So I think it's a it becomes normal process for us now.
Okay. Thank you. And last question for me is on access. You always used to This shows different segments. This time in your presentation, you have one section on access.
So clearly, it seems to be An attractive vertical for fingerprint cards. Is there any TAM that you think Is applicable to your products? And what sort of market share you're in to have in the coming years?
I think in Axis, we have said that it's going to be in the 100 of millions of units So far. And it's a big question, how will the access card business go, right? Because it is Quite a big business in the access cost. But if you could take door locks, that's in the tens of 1,000,000 now, 15,000,000 units last year. So in the access, which is about that business is about 10% of we have said that about 10% of our revenues.
And the access business is in the hundreds of millions of units if you look at the market going forward. We have talked about 2020 And beyond, and it's going to that. And we expect to have be the market leader, which is in all the segments where we go in there, right? That's what we have said, which is kind of assuming over 40% market share in the segments where we go into it, right? It's a fairly We will go for the larger parts of the Access segment, not all of the segments.
It's quite scattered. There are many different form factors and Sub segments in that. That maybe gives you a little bit of view of where we are aiming at.
And I'm just guessing based that Access also has a lot of software in terms of the Iris and face recognition, margins on a steady state basis would be much higher in access compared to In a biometric or most certainly mobile?
I think that you can make that assumption, yes, The access. And of course, whenever you have pure software, it's of course all it's basically always better margins. And when you even in the hardware, in access, it is smaller volumes, but of course, typically higher prices and better margins there. And of course, different expectations and very different form factors in the whole access market. So yes, you can You would.
I think it's a good assumption.
Thank you very much.
Thank you.
Thank you. Thank you, Farzad.
There are no more further questions on the audio lines at this moment. Please continue.
All right. With that, we are concluded for this Q2. Thank you for joining. Thank you for listening, and thank you for all the good questions again. And I look forward to talking to you in this format after our Q3.
And thank you for joining once again, And stay safe. Have a good day, everybody. Talk to you soon. Thank you, and bye for now.