Thank you for standing by, ladies and gentlemen, and welcome to the Q2 twenty twenty Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to your first speaker today, Stefan Peterson.
Thank you, sir. Please go ahead.
Good morning, and welcome to Syndicate Card's 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 Fredericson, and thereafter by our CFO, Pais Hom Kristin. And following this, we'll have a Q and A session. So if you're following the conference call on the web, you can post questions throughout this call. And 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.
And with that, I now hand over to our CEO, Christian Fiorisson.
Yes. Thank you, Stefan, and good morning, everyone, and welcome to this call focused, as said, on Fingerprint's progress and performance in Q2. Our revenues were $282,000,000. The gross margin was 21%, which was slightly lower than 1% lower than one year ago. And the operating result was negative at 16,700,000.0 Our cash flow was strong with operating activities amounting to 80 from operating activities amounting to $81,300,000 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, Also increases in IoT and cloud computing for because of the big shift into homeworking. 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% to 20% this year. Now 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 these, 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. Also, 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 it it it 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 sensors, supporting new design integrations and placements. The new offering is tailored 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 till this year. As I mentioned earlier, demand for our sensors in the mobile segment is very healthy and several smartphones were launched in q two with our latest generation sensors.
For example, LG k four one one s, LG k 61, the SDC fifteen twenty, and Xiaomi Redmi Note nine Pro and Xiaomi Redmi Note nine Pro Max with FPC 15 Pro sensor. We already announced that Google Pixel four launched with technology from fingerprints. During the quarter, we also expanded our product portfolio in order to address the smallest form factors in the access control segment. To enable maximum flexibility in product design, the new FPC ten twenty five sensor version has a smaller footprint than the other one in service and is optimized for asset devices where every millimeter counts. This is the fourth addition to Fingerprint's 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 highest recognition technology is used in an access control system that CMI tech implemented at the South Korean hospital. I expect to see further implementations of touchless biometrics in the health care sector as this forms as this form of its control helps to prevent the spread of disease. I am going to come back to discussing biometric payment card, but let me just mention that we recently announced the partnership with STM Microelectronics to co develop a biometric system and card platform to offer an advanced feature to enhance consumer convenience and security, combining the latest generation of ST Pay 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 segment source in this segment with a bit more than a third 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 position also in the under display sensor market. We have not yet had any design wins, and I will 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 that 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 biomethic access control during the quarter. And 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 pieces 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 data study found that 67% of small businesses and 78% of consumers have adopted new behaviors to adjust to COVID-nineteen. The pandemic has shifted payment behavior more than any event before in such a short time. In each market survey, contactless payments have become a driving differentiator. Nearly two thirds 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.
And nearly half do not shop at the store that only offers payment methods that require contact with a cashier or shared device. We have seen that payment gaps have been raised in many countries, for example, from 200 to 400 SEK in Sweden. This is of course positive, but for many purchases, this is still clearly insufficient. The increased security of Singapore 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 amount.
Obviously, banks have realized this, and we see the momentum in the market. In January, we saw the first certification of contactless payment card by Mastercard, which makes it possible for card issuers to launch commercially. Hornet Car, as we also know in Switzerland, was the first bank to launch, even if it was with limited volumes. And BNP Paribas announced the first commercial volume launch in France this quarter, and more are shown to follow. Next slide, please.
To gear up for a 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 across these categories. A recent example of a new partnership is the collaboration with STMicroelectronics to develop a biometric system on CAR 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, Thijs Berkelder. 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. 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 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 BNB Paribas of a commercial launch in biometric cards is significant, and we expect more card bans to follow.
I'm 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. But we clearly have challenges to fix in terms of insufficient access to production capacity. And with that, let me hand over to Prashin Khrist.
Thank you, Christian, and good morning to everyone. So let's move on to the first slide of the financial section of the presentation. Starting then with our revenue. We reported a 26% drop in relation to the corresponding quarter last year. And 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% positive impact as the USD has strengthened against the SEK. If we look at our gross margin, it decreased by one 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 negative $17,000,000 versus positive $6,000,000 in the same quarter last year and a negative $18,000,000 in Q1 twenty twenty.
Our net income was negative $22,000,000 which is to be compared to $3,000,000 in Q2 last year. To be noted is that this $22,000,000 net loss corresponds approximately to the negative $22,000,000 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 a vis the SEC in the last portion of the quarter. Next slide, please. This slide shows the developments of revenue and gross margin on a twelve 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 we own the revenue level nor the gross margin level and are therefore continuing to strengthening 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 80,000,000 versus 81,000,000 in Q2 last year and 91,000,000 last quarter.
Development costs of $26,000,000 were capitalized during the second quarter, which is to be compared to $26,000,000 in Q2 last year and $70,000,000 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 $2.00 $8,000,000 at the end of the quarter, which is to be compared to $299,000,000 in the same quarter last year and $267,000,000 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 positive $81,000,000 compared to $180,000,000 in Q2 last year. And our cash position stood at $429,000,000 versus $486,000,000 in the same quarter last year and $485,000,000 at the end of Q1 twenty twenty. To be noted in this context is also that the company has bought back shares of $84,000,000 in the quarter, which, of course, has affected the cash. And the cash flow from investing activities, that is capitalized development expenditures, was unchanged compared to last year at the level of €26,000,000 And by that, thank you, everyone, and we are now ready to take questions.
Thank may also submit your question via the web by using the Q and A panel at the bottom of your screen. Your first question from the telephone lines comes from the line of Francois Bouvines. Please ask your question.
Good morning, gentlemen. Thank you very much. I have a couple, I may. The first one is on your comment, Christian, on the access, you know, to production capacity issues. To be honest, I'm quite surprised to hear this comment in a way that, you know, you are more exposed to Asia.
And Asia has been, to say, that it's very efficient in lifting and easing the lockdowns compared to Europe, for example. So Asia, I mean, I guess, would have been more impacted in Q1 than Q2 to some extent because it was in the early phase of the coronavirus. And 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. So I just wanted to understand a bit more if you can give more details on what it is exactly this problem of capacity constraint? And does it mean that you will have a catch up in the next quarter if the demand is much higher than your production?
And 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.
Yes. Hi, Francois. And a very good and relevant question, obviously. And 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, has basically, they are totally full, especially in the eight inches 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 apart. And 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. But 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 five gs coming in. We can see even if mobile phones are going down in terms of volume by 10% to 20%, the cameras are going up.
Know, you have five, six cameras into one mobile phone now, and everything needs chips. Cars need more chips. And then you have this huge shift in homeworking and the clouds that have come, all the servers need chips. So there is just an incredible increase in demand at the same time, which has basically meant that everybody is struggling at the moment. So we are not losing share because our competitors are also struggling.
This has been a really, really painful process for us actually. You can see that in if you could see my face, you could see the pain, Francois. You know, it's not fun to be in a situation where you could supply so much more and you just cannot. So these are the fundamental reasons. And they and I cannot give you a schedule when it will be over because it is one is to get it takes time because at the moment, the demand is so high that the factories aren't enough.
So you need basically more capacity, more machines and more lines up there to do that. There's a lot work going on in the industry. And then of course, you need to look at other than the eight inches, 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 the suppliers that we work.
I think that's maybe the the reason why we are this, and I can't give you a date, but it is still continuing right now for us. And and, of course, it, as always in market economy, at some point of time, it is over. You always get this fixed, right, but it takes time.
That's very clear. Thank you, Christian. And 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. Right? Everything else we can handle. But that when you don't get silicon, when you don't get chips, that's that's so essential for us.
Okay. And I understand, I mean, if we look at your annual report, I mean, SME can, you know, is very strong partner for you in terms of foundry. Is there any possibility for you to find other foundry partners maybe to in the meantime to get access to extra capacity in the short term? Or is this also challenging?
Of course, now with this capacity constraint, it hits every month at the same time, right? So but yes, we, of course, can we can and we will find our other partners as well. And 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, so we're doing both of it right, both the geographical split new foundries as well as, of course, our key partner, SMIC, I know that is investing in new capacity.
Okay. Okay. That's that's very clear. Now if I look at maybe just one word on optical, I mean, didn't talk a lot on presentation. And you really just wanted to know if you have any update on optical.
I mean 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, And we continue to work on that. And I said, I think that there's no point for me to give any dates because at the end of it, just need to get into a model. And obviously, I think overall, the price erosion in the optical space has been quite fast. It's doing what capacity business did earlier in 2016 and 2017, like 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, when Sorry. You
Sorry. No. No. No worries, Francois. So we will we will obviously tell immediately when and if we are successful in that space.
Okay. And if I listen to you a minute, it reminds me a bit of Synaptics. I mean, one of your competitors, you know, that decided to, you know, move away from the optical given, you know, the fundamentals that you don't see very strong there. I mean, is it something that is possible? Or what do you think about Synaptics' decision to leave this market and focus on something else?
I mean, is it something that you I mean, what's your view on that?
You mean that I mean, if you mean leaving the mobile optical? No, we haven't I think that we would then communicate if we have that. I think it's I mean, we are doing so well in capacity. We're strong in mobile. And obviously, we are looking at expanding and also expanding into PC, of course, now.
So we're expanding both the capacity and, of course, looking at the new technology of optical, which is not only mobile, actually. You can use that in other areas as well. Right? So we don't have any decisions like that in the pipe here.
Okay. That's clear. And 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, I mean, come through?
When are we going to see it at all in your numbers? Or is it still too small? And how do you I mean, should we expect about the ramp? It is obviously a very slow, it's not like mobile industry. It takes a lot of time to get the mass production.
So 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? Or 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 very that's a difficult question. Right? I think that we will, of course, have orders this year. And and that's very clear and that we can say. Right?
But otherwise, I can say that the whole industry 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 in payment card, getting it out. The consumers want it. The banks want it.
All the players want it to get it out, right? And there's a tremendous effort in getting it out in a secure, safe, and volume capable ways, right? And then the timing, as you said, in the banking industry just takes longer time as we have seen, right? But I think that more than ever, the effort is tremendous at the moment. So it's very hard for me to say when the volume is taking off, but clearly the banks are now launching, right, as you said, BMP, the first time we will see many to come here.
So then the volume starts picking up, right? It goes slower in the mobile, yes. But of course, typically, when it gets going, it takes longer than you think in the beginning. And then it goes faster than anything when it moves, right? And 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, right?
And I realize, Francois, 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 Victor 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 something is this a unique approach from BNP? Or do you recognize these statements from your other banks as well?
I think that that's true. That's what the BNB Paribas has stated. I think that, basically, most, if not all, of the banks see that the contactless cards will be biometric cards. Then they have a then there are different views on how do you go to market. Some will go more some will look at, like, BND immediately go there.
Some will go start with the with the high end users and then kind of with the volumes and learnings and scaling in the industry, take it down to the to the kind of all of the consumers. Right? So I suppose you'll see those different players in terms of the marketing, how they go out. Right? But I suppose you could say that most clearly want to do it.
This is a mass market product, right? That's what this is about, right? It's a question of getting the volume cost and with that the price right. But at the same time, there is an understanding that you can actually charge for this service, right? You can charge for it.
And that's why some of them will go high end first.
Okay. Understood. And and, you know, given the capacity constraints, have you considered moving to a newer technology node?
Yes. And and, well, even more than just considered. Right? We are looking at all options, obviously. We need to do that now.
And I know this is a tough question also to talk about, but any comment around Ideamia and IDEX partnership would would be be nice to hear. I mean, you change anything in your did you take any actions or anything after after this was announced? Is is it something that worries you?
No. It doesn't worry me at all, Victor. And 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? And I think that I'm very pleased with where we are with our partners.
I think that that's and then I'll let the others comment on their own solutions, right? I'm sure they are fully capable of giving their own view.
Yeah. And and on the next generation of the t shape, can you say anything about the time line or how much you can are targeting to reduce the cost?
No, we don't reveal the road map in itself. But obviously, we have a road map for several few generations together with our key partners, right, where we will drive the when we drive the volumes and the costs 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.
So those are kind of the steps that we have in the road maps, and we work on those. Very clearly, of course, the cost needs to come down as the volumes go up. So I can't tell you more, but yes, we have I think we have a very good road map in terms of driving cost down as well. There's a lot of innovation. There's Victor, 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. And there's a lot that you can do. So as we have seen, I mean, we look at mobile. We took the sensor from over $5 to below $1 right? Even even in the mobile industry.
Right? So and and so I think that that's that's obvious that we can do what needs to be done there.
It's really good. Just one last question on the pilots. You you said that, you know, a lot a lot of banks, they really wanna roll out this card. But 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, right? And I think that we it's also a limiting factor, how many pilots can you run at the same time. I think that the banks also will you will see that they will more of the pilots will just move into commercial use, right? So it's kind of a shading line there now.
I think that more it's more for the banks to look at how do you do the enrollment, how do you do the marketing of this one. So 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 outright, 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, Victor.
Thank you. There are no further questions from the telephone lines, sir. Please continue.
So we have a few questions from the web as well. So the first one concerns fingerprints and swipe. There's currently a debate going on whether fingerprints and swipe are still collaborating. So that's the first question. Are you still working with Swipe?
And does Fingerprint not need their software solutions?
Well, I think the answer is so that we don't work with Swipe. And we don't have I'm not sure I understand the other part of the question because we have no software at all. We we they don't have any any software in the solution that we are in. So it was our solution. Right?
So I'm not sure. Maybe that's a misunderstanding. But yeah. And
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. And and obviously, we need to do many things. Right? We need to we we work with our existing partners where they are increasing the capacity.
We look at going into different technology or, you know, from eight inch outside of that one to other our form factors or other ways in terms of the the foundry and, of course, new foundries as well for us. Right? Obviously, all actions are in there's 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. Right? So all the actions are in place and and going to to improve the situation.
It just takes some time to get through it.
K. There's a question on the benefits that fingerprint silicon based sensor has compared to IDEXX solution.
Yes, suppose we don't comment on competitors. I'm sure they are fully capable of commenting on their own solution. I can say so that we are a world leading player wherein all pilots, we are in our view, we are clearly 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. And we have the proven, now I have to say, painfully, painfully proven capability to do capacity 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, but it is extremely painful, I have to say. So I think that we are and we are going to be the leader in the biometric payment card industry when it comes, for sure. I'm looking at the PC segment, what level of sensor market for us to get in.
Our solution fits perfectly in it. So I I have very good expectations of the PC market.
And there's a final question on can you comment on the Grudix lawsuit?
That is still ongoing. We have gone back, and COVID-nineteen has clearly also delayed any of the oral hearings. And so so it is it is still pending. I realize that it has been extremely long and continuous. And and it did I I think it will be a long winding road still.
And and, obviously, this COVID nineteen has not made it easier when people cannot travel, and a lot of things are a bit long, taking in a slower mode. So we will get back whenever we have anything new on that one. But I would expect this to take quite 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 12.
Now 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.