Ladies and gentlemen, thank you for standing by. Welcome to today's Q1 twenty twenty report. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you that this conference is being recorded today, Monday, 05/04/2020.
I would now like to hand the conference over to your first speaker today, Stephen Peterson. Please go ahead, sir.
Good morning, and welcome to Fingerprint Card's earnings call following the release of our first quarter results this morning. We'll begin today's call with a presentation of the report by our CEO, Christian Fredriksson and thereafter by the CFO, Paisung Krist. And following this, we'll have a Q and A session. If you're following the call on the web, you can post questions throughout the call. And for those of you participating in 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, Christoph Felixson.
Yes. Thank you, Stefan, and good morning, everyone, and welcome to this call focused on Fingerprint's progress and performance in Q1. Now Fingerprints, along with pretty much every other company in the world has been facing a difficult and unusual situation due to the coronavirus outbreak and the extraordinary measures that governments around the world have taken in order to fight the spread of the virus. I know that many of you are wondering about the impact on fingerprints business, and I will get back to this shortly. But in summary, we were impacted by supply chain disruptions in Asia in first quarter.
This is the main reason why our revenue declined by 10% compared to Q1 last year. We did well in the market and actually increased our market share in capacitive sensors for smartphones versus the same quarter of 2019. Also, our gross margin was relatively stable at 24%. If we look at our operating cash flow, it was negative SEK38 million compared to negative SEK161 million last year. Our cash position improved from Q1 last year and stood at $485,000,000 at the end of the quarter.
That includes also the share purchase. Our equity assets ratio improved slightly from last year to 83%. Now let me get back to discussing market launches and business development activities. So let's move to the next slide please. Let me now try to give you some more information on the impact of the coronavirus outbreak and our actions in order to mitigate.
The most direct impact in Q1 was from disruptions in our supply chain. As you know, business in China and businesses in China and other parts of Asia were closed for several weeks during the quarter. And our access to production capacity at external suppliers such as semiconductor foundries was impacted. On top of this, we had difficulties disruptions as well. Now restrictions have gradually been lifted in Asia, so the situation has improved in Asia.
However, we foresee continued issues in terms of insufficient access access to production capacity, meaning that we might not be able to deliver against all of the demand we see in the market. Looking ahead, it's clear that the global smartphone market will decline this year as a result of the economic downturn, although the extent is unclear. The forecast that have been published by different industry observers suggest that this market could decline by as much as 10% to 20% this year. This will of course impact our business as a bulk of our revenues come from smartphone industry. Despite the challenges, I'm happy with the speed with which we were able to adapt our organization in response to the virus outbreak.
Of course, a key concern for us is to protect the health and well-being of our employees, customers and partners, and at the same time contributing to the decreasing of the spread of the virus. For a high-tech company like ours, the R and D organization is of course critically important. We need to continue to innovate. And I am pleased that R and D has been able to maintain full focus on our various development projects even with a lot of our staff working from home. I think that we have probably been able to adapt faster than in many other companies as we first went through this situation at our offices in Asia already starting in February.
These offices are now open again while we have implemented homework in Europe and The U. S. Our organization has been able to adapt very quickly as we have learned a lot about how to modify our work routines during the last few months. We have been able to keep our customers and R and D projects growing despite the ongoing challenges, and I find that very good and of course very important for us. Next slide, please.
And we were able to strengthen our position on the market during the quarter. As I mentioned before, our market share in capacitive sensors increased. And if we look at our product portfolio in this area, it is very strong with a number of newly launched sensors such as the FPC1520 and the thin FPC1540 for side mounted. These have done very well in the market. The FPC1540 works very well in the most recent smartphone models.
For example, in devices that are borderless or foldable. It's also encouraging that the capacitive technology is being embraced to an increasing extent in new application areas. Chromebooks is one example where we saw Samsung Premium Galaxy Chromebook featuring fingerprints, FPC eleven forty five sensor. The payments and access segment of the market holds great potential for us going forward. And we continue to strengthen our offerings in this area as well.
A significant development during the quarter was the expansion of our biometric software platform. This platform was initially developed for the payments area, but it can now also enable different types of access control solutions. This software is part of the global license agreement and sensor volume agreement that was recently signed with Fei Tian in China. Next slide please. If we look at the whole access control area, it is clear that the interest of biometrics is on the rise, which is also reflected in the announcement we made during the quarter, which you can see on this slide.
If we look at the entire area that we call Access, we see a potential market of around 1,500,000,000 units per year over time. This area includes such products as cars, door locks, remote and gaming console controls, authentication tokens, computers and access cards. The growth in IoT is increasing the need for secure and user friendly systems to verify personal identities. These systems must be user friendly, cost effective, and of course, and not least, secure, which is driving the need for biometric solutions. We have a strong portfolio for access control.
And as you saw, we expanded our sensor portfolio with two additional products in this area. Next slide, please. We continue to make progress against our strategic priorities in Q1. First, in terms of strengthening our position in the smartphone market. Our increased share of the marketing capacity sensors is testimony to the strength of our offering there.
We have seen our latest generation sensors being featured in several product launches during the quarter. But in the under display part of this market, we have not yet succeeded. I am not pleased with that. I want to be clear though that our goal of capturing a position here remains and we are continuing to run R and D tracks in this area with different time horizons. We will obviously update you as soon as significant developments occur.
In the payments and access area of our business, we had an eventful quarter, as I have already mentioned, both in terms of product and market development. I believe that our expanded software platform strengthens our offering access control segment, as evidenced by our recent guidance agreement with Fethio. We also saw our solutions being included in recently launched Chromebooks and biometric logs. Biometric continues to make inroads into new application areas, driven by the need for secure and user friendly systems. The species segment is interesting.
It has been quite slow in adapting biometrics, but we actually now see increased interest and demand in this area as well. If we look at card payments, analysts do not seem to expect a major impact from the coronavirus outbreak, although the payment card market is expected to decrease by a few percent this year. At the same time, however, contactless card penetration is expected to increase. There is a big industry push to go contactless, and it looks like the switch to contact sales will be accelerating. For example, Mastercard is enabling 29 markets to raise the contactless transaction cap, which is obviously also good for biometric cards as we will need that for removing the contactless caps, added security, hygiene and convenience as well as speed, compelling reasons I would say.
We still expect to see some bigger commercial biometric card launches later this year, most likely starting in The EU followed by launches in other markets. Finally, if we look at the logical access market, we see increasing interest in demand for biometric multifactor authentication devices. As working from home has become much more common, there is growing concern for improving security, and biometrics can definitely contribute in this area. Fingerprints is well positioned in this new market as well with design wins with several providers. Next slide, please.
So let me quickly summarize before handing over to our CFO, Baschenkryst. We are doing very well in the market for capacitive sensors, increasing our market share, but we have no design wins to announce yet in the under display area where we are continuing our efforts to capture precision in this market as well. The coronavirus outbreak did impact our revenues in Q1, mainly due to supply chain disruptions in Asia. And we expect continued impact from this as well as from lower smartphone demand due to the global economic slowdown. The uncertain situation will continue for quite some time.
It's unclear for how long that's anybody's guess, would say. But we are adapting our ways of working and are able to continue to deliver our customer projects and to drive our R and D project forward. There are a lot of factors we can influence. We focus on those. And I feel that we are in a strong place and in a strong market.
We have a strong financial position and it is truly in our own hands despite any challenges coming our way. And with that, let me hand over to Pat Schulz. Thank you.
Thank you, Christian, and good morning, everyone. So let's move to the first slide in the financial results section. Starting with revenue, we reported a 10% drop in relations to the corresponding period last year. And as Christian pointed out, we have been doing well in the market. This decrease that we see is, however, a consequence also mentioned by Christian in the supply situation that we faced in the quarter, but mainly insufficient access to production capacity with our subcontractors.
In constant currency terms, revenue declined by 14%. In other words, our currencies were affecting us with about 4% positive. Our gross margin improved slightly compared to Q1 last year and was basically in line with what we have delivered in the last few quarters. Our operating profit was negative $18,000,000 versus negative $2,000,000 in the same quarter last year and a negative $15,000,000 in Q4 twenty nineteen. Since last quarter, our fixed cost decreased by around 10,000,000 But as revenue declined, the ratio of fixed cost to revenue increased, which is the reason the operating margin that is the red line in this chart decreased, while we improved the gross margin slightly since last quarter.
Our net income was negative $3,500,000 the same result as in Q1 twenty nineteen. We had a positive impact on net income from the effects of unrealized changes in the exchange rates on currency accounts amounting to €24,200,000 This is due to the strengthening of the USD versus the Swedish SEK. Next slide, please. This slide shows the development of revenue and gross margin on a twelve month rolling basis. The decrease in revenue in this period is due to the factors we discussed earlier, that is the impact of supply chain disruptions in Asia and from the coronavirus outbreak.
Also, the ASP decline continued, however, at a slower pace compared to last year. If we look at the gross margin, it has been quite stable in recent quarters at around 23% to 24%. We are of course not happy with this level and are continuing our efforts to improve profitability both by continuously increasing our efficiency and also 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 $92,000,000 versus 81,000,000 in Q1 last year and 105,000,000 last quarter.
Development costs of $17,000,000 were capitalized during the first quarter compared to $24,000,000 in Q1 last year and $16,000,000 last quarter. We will, of course, maintain a strong focus on cost and efficiency improvements going forward, especially under a year like this. Next slide, please. Our core working capital, that is accounts receivables plus inventory less accounts payable, was $267,000,000 at the end of the quarter, which is to be compared to $458,000,000 in the same quarter last year and $215,000,000 last quarter. The increase quarter to quarter were entirely due to some late payments, which are now settled in full and which explains the increase from last quarter.
We continue to work very actively to manage working capital. Next slide, please. Our cash flow from operation activities was negative $38,000,000 which is to be compared to negative $161,000,000 in Q1 last year. And our cash position ended up at $485,000,000 versus $338,000,000 in the same quarter last year and $564,000,000 at the end of Q4 twenty nineteen. In addition to this, the company also bought back shares for $35,000,000 in the quarter.
Cash flow from investing activities, that is capitalized development expenditures as well as some purchases of patents, was negative 26,000,000 versus a negative 43,000,000 last year. Thank you, everyone. We are now ready to take questions.
Thank Your first question comes from the line of Francois Bavigny.
I have a couple of questions. The first one is on your if you look at your Q1 performance, so minus 14% at constant currency year over year. If we look at China overall, I mean, we look at different industry models and external forecast, the units in China were down more than 20% year over year most likely. So you kind of outperformed the market in Q1. If we look at your comments in for the full year, you said that those externals industry experts forecast minus 10% to minus 20%.
So my question is this outperformance that you we saw in Q1 and you mentioned market share gain, should we expect as well this outperformance to continue in the next quarters for the rest of the year?
Yes. Francois, and thanks for your questions, right? And you're right, minus 14% on constant currency, it's right. And yes, we did outperform, although we had, of course, our challenges as well. I think the it's very difficult.
First, we don't give forecast, of course, and it's very difficult, I have to say, that how the performance continues in terms of if you can continue outperforming the market because it is a question of which models are selling and growing in the market. There is a lot of uncertainty right now on the volumes. Now China is back up, but not fully as you know. And now the rest of the world, specifically Europe and U. S.
Are in a big demand drop. So I think it's very difficult to say and give that kind of commitment, I would say, at this stage.
Okay.
But we will continue to I think that, yeah, we will continue to be hampered by the supply and the demand drop. But at the same time, we do I do believe that we're doing well with the capacitive market.
Okay. And maybe my second point is on optical. So if I try to compare with your thinking and your comments, it seems that this time around, you said that you're not happy with the performance and there is no design win at this stage. So maybe you could have hoped to have it before that. So my question is what do you need I mean, what is did you identify a specific issue to your optical compared to the competition for you to enter the market?
And if yes, how long do you think it's going to take for you to be competitive?
Yes. I think it's so that, Francois, that we need we have all the time learned enormously. And and it is a new technology for us, although it is fingerprint sensors. But it is a new technology for us where we where we have worked ourselves up on the curve. So I think the issue is really to learn and get the competence levels and get the performance and keep the high level of security that we want to have when we launch the product.
We need to have we can't be we can't be going down on security levels. So it's really about getting the right quality and and security on that the system performance. Right? And that has been the the taking more time, if I may say so. It's paying more time for us than we wanted, but we are progressing.
I'm cautiously optimistic on us, us moving ahead all the time, learning all the time, and getting better and closer. But that I can give no schedule on that because it is a situation where you where we will tell when we are have significant news or design. And until we don't don't have them, then we don't have that.
Okay. That's very clear. And then on the smart card, I mean, I would have thought do you feel that this COVID-nineteen could accelerate the roadmap of your smart cards? I mean, do you see an acceleration of any kind for the demand of fingerprint sensors
into the cards?
Well, I think in the immediate, very short term, right, if you look at the kind of in the weeks that are there, obviously, it creates a lot of uncertainty, and and and there's a lot of focus of companies on all kind of things and not rolling out new things. But if I look at even even if I look at the the banks and the it's raising the caps, I think absolutely. This is obviously, you know, other kind of a a great situation, or I think it's the totally wrong words to use the great situation in this this tragic situation, but it is a great opportunity, if you may, for helping consumers and and getting banks to launch services, which are both hygienic factors. You can take the cat away. You will increase security, and you will increase convenience.
So so it's kind of a almost a slam dunk solution to take out to the market, if I may say. So I think, yes, it will. And you can see the caps are being raised and, obviously, then the fraud will increase. So you will need to solve that problem. Know the commute consumers very, very strongly do not want to touch the POS terminals.
They do not want to touch them. So I think that need is going to rise now, and we need to kind of get into that.
Okay. And the last one for me is the cash flow. I mean, Q1 is always a low cash flow quarter historically. Is it still the case this year? Yes.
Yes.
It's exactly the same trend as you see and as you've seen in the past. We had some slight delays on some payments from customers, but that was resolved the week after the end of the quarter. That wasn't a real issue for practical problems. That explains all. Okay.
And do you expect any risk for your cash flow? I mean, maybe receivables from clients, of course, going through this difficult period? I mean, do we should we expect any change in a way for the cash flow or anything you No, can do to
not due to the accounts receivable. And then mind you, we have an insurance on all our accounts receivable as well. So Mhmm. It's insured. So both short term as well as more medium term, I would say no.
Okay. Okay.
What could be the issue is, of course, around what we mentioned earlier around supplier supplier situation.
And but do you see that going back to normal in Q2? I mean, given in Asia
It's a forecast, and I can only highlight the risk there. It's we can't give a forecast on that since we don't have that visibility. Okay. Thank you very much.
Your next question comes from the line of Victor Westman. Please go ahead. Your line is open.
Thank you. Good morning, guys. First question is on I wonder if you can say something about how your customers behave in this current environment. Are there some of them building inventory, or or all of them very cautious at the moment?
Yeah. Hi, Victor. I suppose everybody everybody is has both, I would say. You see a very different mixture. Some companies are doing better.
Some are doing worse. And and some are more aggressive, and they they have built inventory. And then you have some others who have who have kind of put more brakes on. I suppose everybody is down in terms of volumes, obviously, from the q one, q two, if you as as I as I just said. That's maybe it's right then.
Yes. And I I saw earlier also that Xiaomi said that they were back at almost 90%, I think. You saw it also. Can can you say something about the other ones? Is that the way to put it?
And you mentioned also the smartphone decline of 10%, 20% expected for this year. So is that the general picture for everyone?
Well, I think there's going to be winners and losers. There's always big swings in market share for the OEMs, and I'm sure that you will see this again now. I think one thing that seems to be happening is that the big ones consolidate more of market share, the really big players, and and then the rest are losing out more than than what the the big ones are. And then there are shifts between the big ones. So there, I can't comment on any specific OEM, but some of them are growing aggressively out there, and and and some are are having more challenges in it.
Right? And some yes. So there's a big difference there right now. And and in a way, we are, of course, with most of the players in the industry. So we can see that, and it kind of you take a hit somewhere and you win in some other places, right, as it are, depending on how their business go.
Now we don't, on inventory, we we because we have we have still more supply constraints being so far in that we have been demand constraint, if I may. So we we have no we have no inventory. Actually, that's a challenge with us. Right? That that none of the none none of the the new product It's really everything that comes in goes out for us at the moment.
And just to clarify, on your on the capacity side, you mentioned you don't have enough capacity to handle the demand. So does this mean that you you are below 90% capacity at the moment?
Hi, Victor. I I wouldn't give any numbers there, but we are below. We are still more we have been still still supply constrained and not demand constrained. But we have, of course, in a way, the demand has come down, of course, as as you as I said, the best guess, and nobody knows, right, depends on how second half goes between 10 to 20%, right, on the mobile mobile phone district.
Okay. Fair enough. And and maybe question also on the card market there. I wanted to follow-up on the on the hygiene effects of smart card from the virus and all this raised cap from Mastercard, etcetera, which is which could be very good in the long run. I just wanted to understand more what how this will play out for you.
Do you think that banks will be will want to pay a bit more for the cards because of this the high hygiene effect from the virus? Or is there a risk that they would go for the mobile solutions instead since these are cost efficient already?
I think that both will gain. Right? I think cash will lose out the most. And definitely, they I think both mobile and and contactless cards, biometric cards will will be will be the ones winning here. Right?
I think now people want to pay contactless. So I think that that that will be both there, and the same dynamics will continue, I'm sure. And on the question that I think that it will of course, this is a there's a great need right now to go contactless and to take the cap off. I think it's never been as big as it is now. I said it's already with Francois right now.
And think about all of us. Right? Nobody nobody wants to touch the POS terminal right now. And to do that transaction fast and securely and, I mean, a hygiene way is is really obviously what is needed. I think that you will see offerings from banks coming where they will maybe charge something in the beginning as well.
I'm not sure, but some banks will. There will be different there will be different financial ways and incentives to once we get the cards out in in more in in in as we said that we we we hope and expect it's you know, it's we're not the bank, so we don't make the launch. So it's really in their hands, but we expect that in second half, you will see more banks coming out. Later in the year, you will see more banks coming out now with biometric cards starting from European Union.
Okay. Just a last follow-up on on the cards there. With the, you know, the raised caps from from Mastercard, etcetera, what what do you think would be the effect for the for the card users here? Will will they be because they can use the contactless cards a lot more now with the rate caps. But so will they be, you know, more annoyed than in the situation when they have to put the the PIN card?
Or would would it be, you know, would it it be some some kind of a place like that?
Yeah. I think that you can I suppose it's hard to say, but I I think that it's it's clear that the spread of the contactless is moving faster than before? So we can see that impact, that contactless moves. People want to use contactless more. That's why they're raising the caps because the demand has increased strongly, even in countries like Germany, which has been very conservative, taking new use case into their advantage.
So clearly, you can see that contactless are moving up. They want the cap raised. That's why it's being raised. So, yes, that that trend is accelerating. And then I think that, absolutely, it will start to irritate because then you have to think, wait a minute.
What is the amount? Can I use or not? And and you would just want to go and always use contactless, obviously. So I think it it's it's a bit of an irritating factor there to stop there and try maybe, you know, it wasn't enough, what was the cap again. So
Very good. Okay. Thank you very much, guys.
Yes. Thank you. Thank you, Victor.
Thank you. There are currently no further questions on the phone lines. I'll hand back for the web questions.
Yes. We have a few questions from the web as well. The first one on biometric cards. Once Fingerprints receives orders for biometric cards, how quickly can you ramp up capacity of, say, a million sensors per week?
Okay. I I think that, obviously, working with the capacity ramp up is extremely important as well and to have that capability. I I suppose we wouldn't give any predictions on on how difficult or not it is, but, you know, we do, if I take a reference, we do ship about a million sensors per every working day. So to ship a million sensors, of this capacity that that we are have have built, we have tested this thoroughly already. So I I think that it's extremely important that we have that capability, and that's something that we feel that we have built up in in the mobile industry now that we can take into the card industry.
So I don't I don't think that's that's not a big challenge for us to do that kind of ramp. That's basically over 50 something over 50,000,000 cards a year if you put it at that point.
Okay. And on in display, you have an ambition of capturing a significant share of this market, and you have been facing challenges in doing so. How do you plan to improve in being able to offer and ship this product in the future? And how will your approach change in order to succeed?
I think we have done many changes here and learnings in terms of building up the competence, building up our capabilities on system level to give the same security and and, quality that that, we need to have, with our brand and knowledge. So so I think that that's the there's been a lot of learnings on on the road here. And it's it's taken longer than we wanted, and and we will, of course, inform immediately when we when we get in there. And that work continues very hard in quite a few R and D projects now.
All right. And a final question on biometric sensors in cars. When can we expect to see this with Gentex, for example?
Well, that work is continuing in many, many, cases. We can't give a schedule on that one. It's, of course, very important for us. Exciting to work in those cases. Obviously, the car industry has also now in short term, take us a bit of a taken a bit of a hit, but it, of course, will continue and bounce back, I'm sure, over time there as well.
But this work continues, and the project continues. And we will, we work very hard on getting these into the cars, in the in the pilots that are being run. But it is a slow industry. Clearly, they they they test and test thoroughly before it comes out into actual cars. So it will still take some time to get out there, but that will continue full speed.
Okay. That was the that was it for the web questions. And, I'll hand over to you, Christian, for some final comments.
All right. I think that all was said here, from me and Pat as well. And, I thank you all for listening in. I wish you well, and we will talk soon in, and as we go on into Q2 next time. Stay safe and take care of yourselves.
We will talk soon. Bye now.
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.