Thank you for standing by, ladies and gentlemen, and welcome to the Q2 2020 results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question on the audio lines, you will need to press star and one and wait for your name to be announced. If you wish to submit your question via the web, please use the Q&A panel in the bottom of your screen, type in your question in the blank area, and send. I must advise you that this conference is being recorded today, Thursday the 13th of August 2020. I would now like to hand the conference over to your first speaker today, Stefan Pettersson. Thank you, sir. Please go ahead.
Good morning, and welcome to Fingerprint Cards earnings call following the release of our second quarter results this morning. We'll begin today's call with a presentation on the report by our CEO, Christian Fredrikson, and thereafter by our CFO, Per Sundqvist. Following this, we'll have a Q&A session. If you're following the conference call on the web, you can post questions throughout this call. For those of you participating on the phone conference, instructions on how to ask questions will be given by the operator before we get into the session. With that, I now hand over to our CEO, Christian Fredrikson.
Yes. Thank you, Stefan, good morning, everyone, and welcome to this call. Focus that's set on Fingerprints' progress and performance in Q2. Our revenues were SEK 282 million. The gross margin was 21%, which was slightly low and just 1% lower than one year ago. The operating result was -SEK 16.7 million. Our cash flow was strong, with operating activities amounting to SEK 81.3 million. Now, while we experienced continued healthy demand for our sensors in the quarter, our sales were impacted by supply constraints, as we have indicated before. Now, domestic demand for silicon chips from Chinese OEMs has increased as a result of the geopolitical situation. Increases in IoT and cloud computing because of the big shift into home working. All this requires more chips, and this means that we have been facing a production capacity deficit.
These supply constraints have also had an impact on our gross margin due to the upward pressure on our purchase prices. It is unclear how this situation will develop in the short- term, but we are still facing difficulties in securing sufficient capacity. We expect that the outbreak of the coronavirus will dampen the demand for smartphones for the remainder of the year. Consumers are waiting longer and longer to replace their phones, so the replacement cycle is expected to be of record-breaking length this year. As we have previously communicated, we expect that the global smartphone market could shrink by as much as between 10%-20% this year. If we look at our total demand side, it is healthy for us. At the moment, demand clearly exceeds supply.
We are seeing positive demand trends in other applications, not least in PC, where biometric authentication provides a much more convenient and secure authentication method. This has perhaps been made even more clear by the outbreak of the coronavirus, which has led to a significant increase in remote working. As a result of this, companies have become more exposed to cybersecurity threats as devices are less secure outside of company-managed firewalls. Biometrics can help manage access to different services while boosting security. It provides a more convenient way to access devices and applications for individuals who are becoming increasingly tired of having to remember passwords and pins. Next slide, please. This is not mentioned on the slide as we just announced this Tuesday, but we have launched a new biometric solution for the PC segment in order to meet the increased demand that I just described.
The solution includes tailored software and a range of fingerprint touch sensors supporting new design integrations and placements. The new offering is tailored for use across a number of different form factors and use cases, including notebooks, two-in-one convertibles, and PC accessories. We expect the first PCs integrating this new offering to be launched still this year. As I mentioned earlier, demand for our sensors in the mobile segment is very healthy, and several smartphones were launched in Q2 with our latest generation sensors. For example, LG K41S, LG K61 with FPC1520, and Xiaomi Redmi Note 9 Pro and Xiaomi Redmi Note 9 Pro Max with FPC1520 sensor. We recently announced that Google Pixel 4a launched with technology from Fingerprints. During the quarter, we also expanded our product portfolio in order to add the smallest form factors in the access control segment.
To enable maximum flexibility in product design, the new FPC1025 sensor version has a smaller footprint and optimized for access devices where every millimeter counts. This is the fourth addition to Fingerprints' growing access control portfolio, which focuses on offering the highest biometric performance with the lowest power consumption and enable a variety of form factors. I'm also very pleased that our iris recognition technology is used in an access control system that CMITech implemented at the South Korean hospital. I expect to see further implementations of touchless biometrics in the healthcare sector, as this form of access control helps to prevent the spread of disease.
I am going to come back to discussing biometric payment cards, but let me just mention that we recently announced a partnership with STMicroelectronics to co-develop a Biometric System-on-Card platform to offer an advanced feature to enhance consumer convenience and security, combining the latest generation of STPay secure payment technology with Fingerprints' biometric solution expertise. Next slide, please. We continue to make progress against our strategic priorities in Q2. First, in terms of our position in the smartphone market, we are leading the global market for capacitive sensors in this segment with a bit more than 1/3 of the market, according to our estimates. Our latest generation sensors are doing very well, as evidenced by several launches during the quarters. Our sensors have now been integrated in over 440 smartphones and tablets, and one of the latest models launched is the Google Pixel 4a.
We are continuing our efforts to capture a position also in the under-display sensor market. We have not yet had any design wins, and we will update you as soon as significant developments occur in this area. Now, if we look at market outside of mobile, we made good progress. I would say that the pandemic has made even more clear the value of biometrics in, for example, payments and access applications. I have already mentioned the implementation of iris-based access control in a hospital. The growth opportunities are positive throughout the access area, and we continue to expand our portfolio for biometric access control during the quarter. This now also includes the PC segment. This is a very important breakthrough for us into a new sector where we see good growth opportunities going forward.
As I just said, we expect the first PCs to be launched with our biometric solution already this year. Next slide, please. If we look at the payments, it is clear that the coronavirus outbreak has led to an upswing in contactless payments in many countries, as consumers want to avoid touching surfaces in public environments. Using of cash is going down rapidly. A global Visa study found that 67% of small businesses and 78% of consumers have adopted new behaviors to adjust to COVID-19. The pandemic has shifted payment behavior more than any event before in such a short time. In each market surveyed, contactless payments have become a driving differentiator. Nearly 2/3 of consumers would switch to a new business that installed contactless payment options.
For close to half of global consumers, using contactless payment method is among the most important safety measures for stores to follow. Nearly half would not shop at a store that only offers payment methods that require contact with a cashier or shared device. We have seen the payment caps have been raised in many countries, for example, from SEK 200- SEK 400 in Sweden. This is, of course, positive, but for many purchases, this is still clearly insufficient. The increased security that fingerprint authentication offers means that the payment cap that currently applies to contactless card payments can be removed, as we well know. The banks can thus offer their consumers and customers a safe and easy way to pay, regardless of the exact amounts. Obviously, many banks have realized this, and we see the momentum in the market.
In January, we saw the first certification of contactless biometric payment card by Mastercard, which makes it possible for card issues to launch commercially. Cornèrcard, as we also know in Switzerland, was the first bank to launch, even if it was with limited volumes. BNP Paribas announced the first commercial volume launch in France this autumn, and more are sure to follow. Next slide, please. To gear up for the next generation of biometric payment cards for commercial volume deployment, we are focusing on scaling up with the right partners. We will do this by working together with a broad range of leading established smart card industry players that have the reach and scale to grow this business. These partners include payment networks, top card manufacturers, card issuers, leading secure element providers, and top inlay providers.
On this slide, we have listed some examples of companies we are partnering with across these categories. A recent example of a new partnership is the collaboration with STMicroelectronics to develop a Biometric System-on-Card platform, which I mentioned earlier in the call. Stay tuned, because I expect that we'll be able to announce more new partnerships in the near future. Next slide, please. Let me quickly summarize before handing over to our CFO, Per Sundqvist. We saw continued healthy demand for our sensors in the quarter, but clearly our revenue and margins were negatively impacted by insufficient access to production capacity. We are obviously not pleased with the fact that at the moment we cannot supply as per demand for our products. We continue to innovate in the mobile segment, and we see great interest from OEMs for our products.
There is still room for us to innovate also in the mobile segment, and we will also do so then. We are intensifying business development activities, not least by launching new products, a new solution for the PC segment, and in addition to the access product portfolio. We are also focusing on scaling up with the right partners in the biometric payment card value chain, as we are seeing clear signs that this market is about to take off. As I said earlier, the announcement from BNP Paribas for the commercial launch in biometric cards is significant, and we expect more banks to follow. I am also pleased to see our iris recognition technology implemented at the hospital in South Korea.
This type of touchless authentication technology is ideally suited for environments where there are high demands on hygiene and security, and this has been made even more clear in the wake of the pandemic. Shortly, I am pleased and optimistic with the demand and opportunities in our key segments, in mobile, in PC, in access, and in smart cards . We clearly have challenges to fix in terms of insufficient access to production capacity. With that, let me hand over to Per Sundqvist.
Thank you, Christian. Good morning to everyone. Let's move on to the first slide of the financial section of the presentation. Starting with our revenue, we reported a 26% drop in relation to the corresponding quarter last year. As Christian mentioned earlier, we have experienced a continued healthy demand for our sensors. However, our revenue has been negatively impacted by supply constraints as we have had insufficient access to production capacity. In constant currency terms, revenue declined by 28%. The currency is thus having a +2.8% impact as the USD has strengthened against the SEK. If you look at our gross margin, it decreased by a percentage point compared to last year, and this is due to higher purchase prices on the back of the supply situation.
Our operating profit was -SEK 17 million, versus +SEK 6 million in the same quarter last year, and a -SEK 18 million in Q1 2020. Our net income was -SEK 22 million, which is to be compared to SEK 3 million in Q2 last year. To be noted is that this SEK 22 million net loss corresponds approximately to the -SEK 22 million impact on net income from the effect of unrealized changes in exchange rates on the currency accounts. This is due to the weakening of the USD vis-à-vis the SEK in the last portion of the quarter. Next slide, please. This slide shows the developments of revenue and gross margin on a 12-month rolling basis. The decrease in revenue in this period corresponds to the factors discussed earlier. That is the impact of the supply chain disruptions.
The slight decrease in gross margin can also be attributed to these supply issues as our purchase prices have gone up as the competition for production capacity has intensified. We are, of course, not happy at all with this development, and neither were on the revenue level nor on the gross margin level, and are therefore continuing to strengthen our efforts to improve profitability, both by continuously increasing our efficiency and also supply capacity, and also, of course, by diversifying our business into new customer segments and application areas. Next slide, please.
Excluding other operating income and expenses, our operating expenses for the first quarter were SEK 80 million, versus SEK 81 million in Q2 last year and SEK 91 million last quarter. Development costs of SEK 26 million were capitalized during the second quarter, which is to be compared to SEK 26 million in Q2 last year and SEK 17 million last quarter.
We will maintain a strong focus on cost and efficiency improvements going forward. Next slide, please. Our core working capital, that is our accounts receivable, plus our inventory, less our accounts payable, was SEK 208 million at the end of the quarter, which is to be compared to SEK 299 million in the same quarter last year and SEK 267 million last quarter. As you can see, we continue to work intensively and hard and actively managing our working capital. Next slide, please. Our cash flow from operating activities was a +SEK 81 million, compared to SEK 180 million in Q2 last year. Our cash position is at SEK 429 million versus SEK 486 million in the same quarter last year, and SEK 485 million at the end of Q1 2020.
To be noted in this context is also that the company has bought back shares of SEK 84 million in the quarter, which of course has affected the cash. The cash flow from investing activities, that is capitalized development expenditures, was unchanged compared to last year at a level of SEK 26 million. By that, thank you everyone, and we are now ready to take questions.
Thank you. Ladies and gentlemen, if you wish to ask a question on the telephone lines, please press star and one, and wait for your name to be announced. If you wish to cancel the request, please press the hash key. You may also submit your question via the web by using the Q&A panel at the bottom of your screen. Type in your question into the blank area and send. That's star and one to ask a question. Your first question from the telephone lines comes from the line of Francois-Xavier Bouvignies. Please ask your question.
Good morning. Thank you very much. I have a couple, if I may. The first one is on your comment, Christian, on the access to production capacity issues. To be honest, I'm quite surprised to hear this comment in a way that you are more exposed to Asia. Asia has been, to say the least, very efficient in lifting and easing the lockdowns compared to Europe, for example. Asia, I guess, would have been more impacted in Q1 than Q2 to some extent because it was in the early phase of the coronavirus. If we look at your semiconductor peers, the level of production has been quite efficient and we didn't see any impact on the capacity side as such.
I just wanted to understand a bit more, if you can give more details on what it is exactly this problem of capacity constraint , does it mean that you will have a catch-up in the next quarter if the demand is much higher than your production? If your production is going back to normal, should we see a catch-up or should we see more your competition grabbing the share that you can't have at the moment? Thank you very much.
Yeah. Hi, Francois. A very good and relevant question, obviously. It is always painful when you cannot supply to your customers according to the demand at the same time in so many segments for us. I think it is very clear that the semiconductor industry has at the moment, and has since Q2, basically they are totally full, especially in the 8-inch wafers that we are buying. If you look at the semiconductor industry at the moment, it is absolutely full. All the factories that they have are running full. There are several reasons. One is, of course, because of the geopolitical situation between U.S. and China, which has shifted a lot of the purchases into the Chinese and the Asian manufacturers. There are many other kind of business-related reasons now, which has increased the need for supply so much. One is the whole IoT area.
You see 5G coming in. We can see, even if mobile phones are going down in terms of volume by 10%-20%, the cameras are going up. You have five, six cameras into one mobile phone now, and everything needs chips. Cards need more chips. You have this huge shift in home working and the clouds that have come, all the servers need chips. There is just an incredible increase in demand at the same time, which has basically meant that everybody's struggling at the moment. We are not losing share because our competitors are also struggling. This has been a really painful process for us, actually. You can see that. If you could see my face, you could see the pain, Francois. It's not fun to be in a situation where you could supply so much more and you just cannot.
These are the fundamental reasons, and I cannot give you a schedule when it will be over because one is it takes time because at the moment, the demand is so high that the factories aren't enough. You need basically more capacity , more machines, more lines up there to do that. There's a lot of work going on in the industry. Then, of course, you need to look at other than the 8-inch. Even for us, I suppose, we have to look at other options now. We look at all options and there's a lot of hard work going on on our side because we understand that we need to fix this together with some of the suppliers that we work.
I think that's maybe the reason why we are this, and I can't give you a date, but it is still continuing right now for us. Of course, as always in market economy, at some point of time, it is over. You always get this fixed, but it takes time.
That's very clear. Thank you, Christian. Can you clarify maybe, is there a specific area in your supply chain where you see constraint? I mean, is it at your foundry partners? I mean, is it at your packaging or assembly? Where is it? Is there a specific area?
It is specifically in the foundry. It is in wafer capacity . Everything else we can handle. When you don't get silicon, when you don't get chips, that's so essential for us.
Okay. I understand, if we look at your annual report, SMIC is a very strong partner for you in terms of foundry. Is there any possibility for you to find other foundry partners maybe in the meantime to get access to extra capacity in the short- term, or is it also challenging?
Of course, now this capacity constraints hits everybody at the same time, right? Yes, we of course can, and we will find our other partners as well. Also, I know that SMIC has invested and investing a lot more into capacity . As I said, it takes a bit time to get this done, but yes. We're doing both of it. Both the geographical split new foundries, as well as, of course, our key partner, SMIC, I know that is investing in new capacitive.
Okay. That's very clear. If I look at maybe just one more on optical. You didn't talk a lot on the presentation and your release. I just wanted to know if you have any update on optical. How is it your product doing versus competition at the moment on the performance side, and how you see maybe a potential ramp in the second half of the year?
No, I think it's clear that we're not happy that we are delayed in the optical area, we continue to work on that. I said, I think that there is no point for me to give any dates, because at the end of it, we just need to get into a model. Obviously, I think overall, the price erosion in the optical space has been quite fast. It's doing what capacitive business did earlier in 2016 and 2017. It's happening in the optical business. There's a big shift in terms of the overall market value, I would say as well at the same time.
I mean,
We will get back.
Sorry.
No worries, Francois. We will obviously tell immediately when and if we are successful in that space.
Okay. If I listen to you, it reminds me a bit of Synaptics, one of your competitors that decided to move away from the optical given the fundamentals that didn't seem very strong there. Is it something that is possible or what do you think about Synaptics' decision to leave this market and focus on something else? What's your view on that?
You mean leaving the mobile?
Optical
Optical?
Just optical. Yeah.
I think that we would then communicate if we have that. We are doing so well in capacitive. We're strong in mobile, and obviously we are looking at expanding and also expanding into PC, of course, now. We're expanding both the capacitive and of course looking at the new technology of optical, which is not only in mobile, actually. You can use that in other areas as well. We don't have any decisions like that in the pipe here.
Okay. That's clear. The last one is on smart cards. BNP, like you said, they're ramping in the second half of the year. When did the orders come through? Are we going to see it at all in your numbers or are you still too small? Should we expect about the ramp? It is obviously very slow. It's not like mobile industry. It takes a lot of time to get a mass production. Just trying to help us understand how we should think about it in the second half of the year and maybe 2021, if you have any orders. If you have any orders, when is it going to happen that you get the orders for 2021? Just trying to understand how the moving parts are.
That's a difficult question. I think that we will, of course, have orders this year. That's very clear and that we can say. Otherwise, I can say that the whole industry is working extremely hard now to get this out. The demand is there. Everybody knows that all the logic of getting the product, the payment card, getting it out, the consumers want it, the banks want it, all the players want it to get it out. There's a tremendous effort in getting it out in a secure, safe, and volume capable ways. The timing, as you said, in the banking industry, it just takes longer time as we have seen. I think that more than ever, the effort is tremendous at the moment.
It's very hard for me to say when the volume is taking off, but clearly the banks are now launching. As you said, BNP the first, and we will see many to come here. Then the volume start picking up. It goes slower in the mobile, yes. Of course, typically when it gets going, it takes longer than you think in the beginning, and then it goes faster than you think when it moves. I suppose that's very difficult for me to give a forecast on when we are not the banks who are actually making the orders. I realize, Francois Bouvignies, that you're struggling with when that hits us, as everybody is in the industry.
Great. Thank you very much.
Thank you, Francois.
Thank you. Your next question comes from the line of Viktor Westman of Redeye. Please ask your question.
Thank you so much, and good morning. I have a follow-up on BNP Paribas. They said that their objective is to make the biometric card accessible to all customers after the first batches. I just wanted to ask, is this a unique approach from BNP, or do you recognize this statement from your other banks as well?
I think that's true, that's what BNP Paribas has stated. I think that basically most, if not all of the banks see that the contactless cards will be biometric cards. There are different views on how they go to market. Some will look at, like BNP, immediately go there, some will go start with the high-end users, with the volumes and learnings and scaling in the industry, take it down to the all of the consumers. I suppose you'll see those different plays in terms of the marketing, how they go out. I suppose you could say that most clearly want to do it. This is a mass market product. That's what this is about. It's a question of getting the volume cost and with that the price right.
At the same time, there is an understanding that you can actually charge for this service. You can charge for it. That's why some of them will go high-end first.
Okay, understood. Given the capacity constraints , have you considered moving to a newer technology node?
Yes. Well, even more than just considered. We are looking at all options. Obviously, we need to do that now.
I know this is a tough question also to talk about, but any comment around the IDEMIA and IDEX partnership would be nice to hear. Did you take any actions or anything after this was announced? Is it something that worries you?
No, it doesn't worry me at all, Viktor. I think we didn't take any specific actions because of that. We continue, we have excellent product, excellent partners, and we continue working with those full speed ahead right then. I think that I'm very pleased with where we are with our partners. I think that helps. I'll let the others comment on their own solutions. I'm sure they are fully capable of giving their own view.
Yeah. On the next generation of the T-Shape, can you say anything about the timeline or how much you are targeting to reduce the cost?
No, we don't reveal the roadmap in itself, but obviously we have a roadmap for a few generations together with our key partners where when we drive the volumes and the cost down. That is obviously one task. Security up, convenience up, cost down, and that is obvious to be able to drive this to tens and hundreds and even billions of cards. Those are kind of the steps that we have in the roadmaps, and we work on those. Very clearly, of course, the cost needs to come down as the volumes go up. Can't tell you more, but yes, I think we have a very good roadmap in terms of driving cost down as well.
Mm-hmm.
Viktor, there's a lot of innovation once you get in there. There's a lot of innovation that can be done and will be done. There's a lot that you can do. As we have seen, just look at mobile. We took the sensor from over SEK 5 to below SEK 1 even in the mobile industry. I think that's obvious that we can do what needs to be done there.
It's really good. Just one last question on the pilot. You said that a lot of banks, they really want to roll out this card. I'm just curious, why have we not seen any more new pilots?
Well, it's very simple, actually. There is also the fact that we don't really need any more pilots. I think that it's also a limiting factor how many pilots can you run at the same time. I think that the banks also, you will see that more of the pilots will just move into commercial use. It's kind of a shading line there now. I think that it's more for the banks to look at how do you do the enrollment, how do you do the marketing of this one. It's much more around that. The technology in itself works now for the card, but they really have to think about what is the segmentation, what is the marketing, what is the enrollment of their consumers, and how do you get them out, and how do you do customer support and so forth.
I think it's more about those than actually with technology when it comes to our product.
Very good. Thank you so much.
Thank you, Viktor.
Thank you. There are no further questions from the telephone lines, sir. Please continue.
We have a few questions from the web as well. The first one concerns Fingerprint and Zwipe. There's currently a debate going on whether Fingerprint and Zwipe are still collaborating. That's the first question. Are you still working with Zwipe, and does Fingerprint not need their software solutions?
Well, I think the answer is so that we don't work with Zwipe. I'm not sure I understand the other part of the question because we have no software at all. They don't have any software in the solution that we are in. It was our solution. I'm not sure. Maybe that's a misunderstanding. Yeah.
There's a question on the capacity constraint situation in Asia. If this situation gets worse, how will you mitigate this risk?
I don't see it getting worse. I think it has been challenging enough, as I said, painful enough as it is for us. Obviously, we need to do many things. We work with our existing partners where they are increasing the capacity . We looked at going into different technology or from 8-inch outside of that one to other form factors or other ways in terms of the foundry and of course, new foundries as well for us. Obviously, all actions are in. There is a lot of learnings for us as we go through this as well in terms of building the capability to get better on this one also. All the actions are in place and going to improve the situation. It just takes some time to get through it.
Okay. There's a question on the benefits that Fingerprint silicon-based sensor has compared to IDEX solution.
I suppose we don't comment on competitors. I'm sure they are fully capable of commenting on their own solution. I can say that we are the world leading player. We're in all pilots. In our view, we have the best security in our solution. We have the best speed of performance. We have, by far, the lowest power consumption. We have the best overall functionality of the full sensor. We have the proven, now I have to say, painfully proven capability to do capacitive and even go through such a painful period as we are now in terms of building even better capacity . I'm sure we will come out even stronger out of this one. It is extremely painful, I have to say. I think that we are going to be the leader in the biometric payment card industry when it comes, for sure.
Looking at the PC segment, what level of sensor.
Market for us to get in. Our solution fits perfectly in it. I have very good expectations of the PC market.
There's a final question on, can you comment on the Goodix lawsuit?
That is still ongoing. We have gone back, and the COVID-19 has clearly also delayed any of the oral hearings. It is still pending. I realize that it has been extremely long and continuous, and I think it will be a long winding road still. Obviously, this COVID-19 has not made it easier when people cannot travel, and a lot of things are a bit on, taking even slower mode. We will get back whenever we have anything new on that one. I would expect this to take quite a while still.
Okay. Thank you. That's the question.
Okay. Thank you very much for joining. Thank you for all the good questions, and I look forward to talking to you again on our Q3 report in this forum, which will be published on November 12th. I wish you all the best. Stay safe, everybody, and have a nice day. Bye for now.
Thank you. Thank you, ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.