Ladies and gentlemen, thank you for standing by, and welcome to the Q3 twenty nineteen Report Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. I must advise you that this conference is being recorded today, Friday, 11/15/2019. And I'd now like to turn the conference over to your speaker today, Stefan Pettersen.
Please go ahead, sir.
Good morning, everyone, and welcome to Fingerprint's earnings call following the release of our third quarter results this morning. My name is Stefan Petron, and I'll be the moderator today. We'll begin the call with a presentation of the report by our CEO, Christian Fredriksen and thereafter by our CFO, Bascome Crist. And following this, we'll have a Q and A session. And if you're following the conference call on the web, you can post questions throughout the 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, then I hand over to our CEO, Christian Fredriksson.
Yes. Thank you. Thank you, Stefan. Good morning, everyone, and welcome to the call on our performance in the third quarter. As usual, I would like to begin by giving you the main highlights of the quarter as well as an update on the business.
I will also talk a little bit more about the smart card and that opportunity. If we look at mobile, our business volumes in the quarter were good. Overall, we saw relatively stable demand from our Chinese smartphone OEM customers, but there were some quite significant market share shifts between these players. Also orders related to Samsung, our new OEM customer developed nicely. I am very pleased with our entry into Samsung, the world's largest smartphone OEM.
We reported sales of SEK $352,000,000, which is 18% lower than in the same quarter last year. Weaker sales outside of the mobile area impacted our revenue development in the quarter, but the decrease in the average selling price since last year also had an effect. The market for biometric outside of smartphones is growing, but it is still significantly smaller than the mobile market, and it is also quite fragmented. And for this reason, there can be significant swings in demand between quarters. Our latest business outside of mobile is our largest business outside of mobile is fingerprint module sales into door locks.
Our gross margin was approximately at the same level as in Q1 and Q2, a little bit up and four percentage points lower than in the same quarter last year. This is explained by the fact that the shares share of revenues outside of mobile was lower this quarter as well as by the lower ASP. While operating profit was negative 1%, our net profit was positive, helped by the strengthening of the dollar against the Swedish krona. I'm very happy about our cash flow performance. It was positive SEK 59,000,000, and our financial position continues to be strong.
Next slide, please. As you may have noticed, we now display the total number of smartphone and tablet models which use our sensors on our website. We recently passed 400, which is a great achievement in our industry and also shows the success of biometrics in smartphones. Currently, the number stands at four zero three, including the Samsung Galaxy A10S as well as A20S. Next slide, please.
If we look at the quarter, 11 new smartphones without technology were launched. We also launched our latest generation sensor during the quarter, the FPC1520, which is based on a very successful FPC1511 product. This sensor is even more cost effective than its predecessor by delivering the high band biometric performance that we are known for. I think that we will see the first devices incorporating this sensor before the year is over. Also, we received the first volume order for T Shape outside of the payments area.
It is to be integrated in a card used for safe online access and secure offline data storage. This shows the potential for T Shape in other applications. As I mentioned already in the last earnings call, we announced a partnership with Giseke plus DevRyan Mobile secured in July, and now we have partnerships with all top three card producers in the world. At the October, NatWest started the first biometric credit card pilot in The UK following a successful debit card trial. The card used in this latest trial is provided by Thales using Fingerprint's T shaped sensor.
This means that the total number of announced dual interface biometric payment cards trials now stands at 21. This is the official number which Fingerprint's technology is now being used in all of them. Next slide, platform, combining the convenience of face recognition with the security of iris to meet demand from smartphone and emerging IoT OEMs. In smartphone market, iris still remains a niche. The new platform enables an improved user experience that works indoors or outside in daylight or in rain.
Fingerprints touch solution is beneficial to multiple use cases, including mobile devices, payments, automotive and access. This solution recognize the user with or without glasses, with one or two eyes, but not with both eyes closed, and up to a distance of half a meter. It has a one to 1,000,000 force acceptance rate, and it is easy to integrate using off the shelf hardware components. Next slide, please. I would like to spend a little time discussing our markets and if we first take a look at the mobile market.
It is clear that this is now a mature mass market with over 70% of all smartphones having some sort of biometric sensor. The technology is widely accepted by smartphone users who enjoy convenience to unlock their devices, make payments, and access applications. Obviously, this quick uptake is paving the way for biometrics in other applications outside of the mobile industry. Next slide, please. Our market is still expanding, and we have already talked about mobile, where the attach rate is now over 70%, which means that over 1,000,000,000 phones a year are shipped with biometrics.
There is still a potential to grow by further increasing the attach rate in mobile phones and our latest sensor, the FPC1520, will enable some of this growth, thanks to its combination of cost effectiveness and high biometric performance. If you look at the whole area, which we call access, we can see an aggregate in market potential, which is about as large as the smartphone market. Here, we're talking about things like connected cars, smart door locks, remote and gaming controls, authentication tokens, computers and printers, etcetera. This market is growing and has a great potential. But as we also pointed out this morning, demand can vary quite a bit from quarter to quarter since this is still quite an immature and fragmented market.
If we then consider the payments area, it's clear that this is where the greatest potential lies in the coming years. As you know, several banks are conducting market trials together with card producers and card networks. With the ambition of scaling up to a commercial launch, which Credit Agricole in France has stated as their goal in 2020. If we look at the addressable market for biometric payment cards, we estimate that it could be between 6,000,000,000 to 8,000,000,000 cards in a few years' time. This number is based on the fact that there are around 22,000,000,000 payment cards in circulation today.
Assuming that most of these will be converted to smart cards in a few years and also assuming a replacement frequency of three years, around 7,000,000,000 payment cards would be produced every year. Today, this number stands at around $4,000,000,000 Next slide, please. I often get the question on how fast will biometrics be adopted for payment cards. This is not an easy question to answer, and there are a number of different projections out there. I'm not now going to give you another one, but in this context, I think it's interesting to consider the adoption rate of new technologies in the card area from before.
If you look at the introduction of chip and PIN from 1995, it took around eighteen years to reach 1,000,000,000 cards. The next technology upgrade came around ten years later when contactless cards were launched. This time, it took around eight years to reach 1,000,000,000 cards. Important is that in both of these cases, the point of sale infrastructure had to be upgraded, which is a major effort and cost. This is not necessary in order to introduce biometric cards, which already work in today's contactless or contact only POS terminals.
Therefore, we believe the rollout will be clearly faster this time around. In 2020, all POS terminals will be driven to contactless, which is an important driver as well for biometric payment cards. Next slide, please. If we look at the biometric payment card ecosystem, it's clear that we have the widest footprint engaging with all Tier one card producers and other major players in the value chain. We are well positioned to enable this technology rollout.
As I said, there have been 21 market trials so far, and our technology is used in all of them. The latest one being the biometric credit card trial by NatWest in The U. K, which we announced in October. I expect to see further trials announced. There are also many unannounced trials going on, preparing for commercial rollouts, which look to set and will begin next year, pending certification on the card level.
In many cases, these pilots will probably transition right into commercial projects for the banks. Next slide, please. Our strategic priorities are aimed at defending and building on our strong position in the smartphone segment by broadening our business into new areas. I think we continue to make progress in Q3 against this objective. Our technology is used in a smartphone model now from Samsung, which I'm very of course, I'm very happy about.
In the past, we delivered sensors to Samsung notebook, but this is the first time our products are using smartphones from Samsung. And already in October, we communicated our second Samsung smartphone, the Galaxy A20S, which uses FPC1511. We are the global leader in capacity pinup sensor, and we seek to defend our market share and margins here by ensuring production cost competitiveness. That work still continues. And we took an important step in Q3 by launching our fifteen twenty sensor, which is a new generation based on our successful fifteen eleven product.
As I said, we expect this to be launched even within this quarter. When it comes to our optical in display sensor, we recognize that this market is large and we need to enter it. We have not secured any design wins, but our ambition of capturing a significant share of the in display market remains, and we are continuing to work towards realization of this ambition. We will of course communicate whenever we have any design wins. If we look at the new markets for biometrics, we also saw some positive progress during the quarter.
We entered into new partnership with G and D. And this means, as I said earlier, we have active partnerships now with all top three card producers. We also received our first volume order of the P shaped sensor mobile module outside of the payments area. And finally, we announced that we are supporting MiReal in their latest order of biometric payment cards that will reach the market in 2020. Next slide, please.
So let me summarize before handing over to our CFO, Per Sundquist. We are proud that our FPC1511 sensor is used in two smartphone models from Samsung. Now it is a normal case, and we need to fight for every order. We recorded good sales and volumes in via mobile, while revenue in other areas was weaker this quarter. We launched a new capacitive sensor generation, FPC1520.
Our vision of capturing a significant share of the in display market remains, but we have no design wins yet. Let me also mention that we recently launched our Touchless two point zero platform, combining the convenience of face recognition with the security of Iris. In October, we also announced the launch of a unique fingerprint authentication module, FPC BMLight. This is especially designed for physical and logical access devices and applications such as smart door locks, catalogs, Fido tokens, crypto wallets, and more. This is an all in one module containing all components you need, hardware, software, and algorithm, ready to be integrated out of the box.
We saw some positive progress also in the biometric payments card area. We announced a partnership with GND for our T shaped sensor, and this card is already used in market trial in France conducted by Credit Agrawal, and we came a step closer to full card certifications since Mastercard certified NXP's module for biometric payment cards, which incorporates Fingerprint's T shaped sensor module. As I said earlier, it is important to get the full card certified for the banks to actually move into real rollouts. With that, I would like to hand over to our CFO, Pat Sundquist.
Thank you, Christian, and good morning, everyone. Our revenue came in at $352,000,000, a decrease of 18% compared to the same period last year. As a result, the weaker sales outside of mobile and a declining average selling price. Revenues were, however, helped by the strong dollar. In constant currency terms, our revenue declined by 23%.
While the gross margin improved slightly compared to the last quarter, it declined by four percentage points in relation to Q3 last year due to the ASP decline and lower sales in areas outside of smartphones. Our operating profit came in at negative $3,400,000 versus positive $2,000,000 in the same quarter last year. Operating profit was impacted by a $5,500,000 negative currency translation effect, And the ratio of fixed cost to revenue is also increased as revenue declined in the quarter. These are the main factors and reasons behind the operating margin development, as you can see in the red line in this chart. However, we improved the gross profit slightly since the last quarter.
Our net income was positive $5,800,000 versus $2,900,000 in Q3 twenty eighteen. The positive bottom line result is mainly due to the effect of unrealized changes in the USDZEC exchange rates currency account. Next slide please. This shows the development of revenue and gross margin on a twelve month rolling basis. The decrease in this period is due to the factors I just mentioned.
In other words, the ASP decline and the lower sales share of revenues from applications outside of the mobile industry in the quarter. We continue to working on mitigating the effect of this by increasing the share of new more cost effective sensors in our product mix and also by driving sales in new application areas. Next slide please. Excluding other operating income and expenses, our operating expenses for the third quarter were $78,000,000 versus $81,000,000 last quarter and $101,500,000 in Q3 last year. Development costs of $24,500,000 were capitalized during the third quarter, which corresponds to 51% of total development costs.
This is in line with the figure from last quarter, while in Q3 last year, 25% of total development costs were capitalized. Next slide, please. Our core working capital, that is accounts receivables plus the inventory less the accounts payable, SEK257 million at the end of the quarter, which is a bit compared to NOK376 million in the same quarter last year and NOK294 million last quarter. We continue to work very actively to manage working capital, and working capital as a percentage of revenue is significantly lower than last year and on the same level as in the previous quarter. Next slide, please.
Our cash flow from operating activities was a positive SEK $59,500,000 compared to $2.00 $2,000,000 in Q3 last year, and our net cash position stood at $537,000,000 versus $596,000,000 in the same quarter last year and $486,000,000 at the end of Q2. Cash flow from investing activities, mainly capitalized development expenditures, was negative $26,000,000 versus 34,000,000 last year. Thank you, everyone, and we are now ready to take your questions.
First question on the audio comes from the line of Francois Bouchins. Please go ahead. Your line is now open.
Good morning, gentlemen. Thank you for taking the questions. The first one is on your gross margin. So if we look at your gross margin of 23% and it's roughly stable in the last few quarters, I wanted to ask you, how do you compare this gross margin versus your competitors? I mean, if you look at AG Steak or Goodyx, they have definitely more than 30% gross margin.
AG Steak reported even above 40% this quarter and Goodix is above 50. So my question is, is there anything structural that could justify such difference versus your peers on the gross margin side?
Yes. Francois, I think I suppose I can't comment, of course, on what the others have as the gross margin. But obviously, there's a big difference in the market price with the optical in display, right? So I think that is, of course, where we need to enter, where we have not been able to enter so far, right?
Okay. So the main reason is the optical. But their capacity, do you think they are in the same kind of margin as you? Or
Yes. I said I can't comment on that, but there is nothing structural or nothing in the competitiveness of our capacity products. Others, we wouldn't be gaining market share there.
Okay. Okay. That's clear. And you mentioned it's the optical market. So when should we expect the like design wins?
I mean or maybe if you I'm sure you will be limited in terms of comments, what is the feedback you have from your current product? I mean, do you need to improve? Is there anything what is prevents you from being in the market today?
Yes. As you said, see yourself. So we don't give any guidance. So I wouldn't and it's the same like we had with earlier. I get these questions on Samsung, right?
So it's when do you enter? Well, you can't tell it when you enter before you've entered, right? That's how it works. So we can only talk about design wins when we had design wins, right? And so far, we haven't.
And I suppose the issue is always with when you do biometric and you get into a new technology, it's about biometric performance, right? So you need to have the right biometric performance. And that of course, we are late in the market. So that there you have it.
So you still need to improve some performance metrics before getting in, if I'm correct?
Well, it's always about biometric format, so I don't want to get into that at this point. But when we enter, we enter, right? So we will get back Obviously, to we are working towards it, but we have not been able to do it.
Okay. That's clear.
Sure.
And the non mobile, what is the percentage of your revenues today? Because you say it impacted your group revenues. Can you disclose at least what is the size of this market?
This I think the non mobile yes, we don't give it per quarter, but we have said that it's on a yearly basis, it's about 10% of our revenues. And that's the way it's going to be this year as well, but it was higher in the earlier quarters and now it's lower, right? So there is a shift Okay.
On the smart card regulation I mean, certification, you said that you expected some scheme to release some certification by the end of the year. I guess it was a summary, if I remember correctly, then you pushed to end of the year. Is there any update on this side?
No, not really. There is no new updates on that one. You're right that the full card we have, of course, gotten a partial card of the module, the NSP module with Mastercard. We got the certification there with our sensor. But the full card certification for one of the schemes is, of course, the trigger point for banks to actually be able to really order.
And that has not happened yet. That is that's hard for us to say more on because it's not in our hands really when you get the full card certification. So the whole industry is working towards that. But so far, of course, it hasn't happened. So I think that's something we'll have to get back to when it happens, right?
It's not really up to in our hands to finalize.
Okay. And last one, and sorry about the other questions. But the noncash item, it's more in your cash flow. It's decreasing. I mean, compared to your D and A, it's much lower.
Is there anything in there apart from depreciation and amortization? I didn't see anything in the release.
No. No, there is nothing. Nothing.
How do
you Nothing else besides depreciation on products.
The depreciation is like if I you release it like around 30 something amortization. And your noncash item is EUR 9,000,000 on your cash flow. What is the difference?
Noncash, yes. The difference there is that you have if you look at the currency effect, that's why you have it. It was related to the operational side of the working capital. We have the same scenario that's affecting the sales, it's affecting also balance sheet items. And we have the working capital parts are generating a cash unrealized cash effect, cash currency effect of U.
S. Dollars. And the same actually goes for the financial net when you look at that. All of what we have is sitting in currency accounts, it's mainly U. S.
Dollars right now as well. So we are very much a USD company in terms of all the aspects that are running through our cash flow.
All right. Thank you very much.
Yes. Thank you, Francois.
Thank you. Your next question comes from the line of Victor Westman. Please go ahead. Your line is now open.
Good morning. Thank you for taking my question. First one is on smart cards. If you look at the smart card pipeline and percentage of the T shape in there, would you say it's fifty-fifty or eighty-twenty? Or can you give any ballpark number on the interest for the T shape?
Hi, Victor. Sorry. Can you I didn't fully understand what you meant with the the part. Can you just elaborate? Yeah.
The so the the smart card pipeline for you is can you say something about how much of that is for t the t shaped modules?
Yes. Okay. So at the moment, T Shape is the module is the only product we sell into the Smart Card business. It's going to be probably 200,000 units that we sell of T Shape this year. And that's about half is payment cards, half is nonpayment cards.
And but that's the only module at the moment. We have a new version coming out of T Shape, which is more effective, more cost effective. But that's not in the market yet and will not be for.
Okay. So but is there any interest from customers in buying sensors only without the module?
Well, I think it's so early in the smart card industry, so not really. I think at the moment, it's about getting the module. I'm sure there are many different discussions and will be different versions of that. But at the moment, our performance on the module level is superior because of the combination of the system, the software and the hardware and the algo.
Okay. Very good. And your follow-up was on the gross margin. We've seen the impact now from the $15.11 and you're at 33% gross margin. Is when you with the $15.20 coming now, is that going to have a better effect on the gross margin?
Can you say something about that?
We don't give any forecast, Victor, on the gross margin. I can only say that we obviously need to work to improve our gross NIM. We realize that it's not the way it needs to be. It's not good enough. We are kind of okay ish, but not good enough on these numbers, right?
So but we do new versions all the time to improve. At the same time, it's running race, right, with Price Erosion. That's how this business goes.
Okay. But
we not happy where we are. We know we need to improve.
Yes. Understood. Thank you so much, Christian.
Thanks a lot, Victor.
Thank you. There are no further questions via the audio. Please continue.
Yes. So we have received a few questions from the web as well. So the first one is concerning IDEXX. IDEXX has claimed cost leadership. Have you been able to try their sensors' technical performance to see if their offer constitutes a threat?
Well, we don't comment on competition. I'm sure they are all capable to comment on their own behalf. I would say so that we are clearly the leader in the smart card pilots. There are 21 of them. We are in all of them, which tells of our performance, and performance always includes biometric performance as well as cost performance.
We are developing the road map. And at the end of it, we have in May, we passed over 1,000,000,000 sensors sold and delivered. And we are, in this mobile business, the capacitive leader. So I believe that if anybody can write down the code in this industry as well in the smart card industry, it should be us. I think we have failed if we are not the one who is able to drive with our procurement power and our capability to drive cost down that we have proven over and over again in this industry.
That's maybe from our point, yes.
And another question on the in display. Kudlix has released a new ultralight sensor under glass. Would you say that your sensor is still valid or obsolete compared to their new sensor?
Yes. Of course, we it's a fair question because we haven't entered the market and have no design wins yet. We have there is no obsolete, right? We continue on the product and all the learnings and everything we build. But the fact is and remains that we have not entered this market, and we will we still have the same ambition.
And then I can't give any forecast on when that will happen.
And why do you believe your Touchless two point zero solution will be a success?
I think it's an incredible combination of face and iris. I think it actually now brings both convenience as well as security. There's nobody else in the world that can deliver that. So there are quite many segments that we will go into with this solution. Obviously, it takes time, and it has been slow.
That is very clear for us in terms of bringing that business to bigger numbers. But clearly, access, in border controls, in car, in the automotive industry are some of the very interesting areas for us where we continue to do business, and then we look at how to grow that business. It is a fact that in mobile, it has become either fingerprint sensor or face at the moment, so which is basically apple, right, and very small for others. So that's how in the mobile business, the biometric has gone so far.
And what is the status of biometrics in the automotive segment and also PC? When do you expect to see your products in cars?
It's going I think that we have many, many good cases going on for us. We have a good cooperation with Gentex when it comes to the Iris. They are, of course, the market leader for high end mirrors in the whole automotive industry in the world. But it is, of course, just doing the trials is a long journey in the automotive industry. So I think that is the timing issue and the hindering factor before you actually get out is just a long cycle of trials in that industry, which can take actually between eighteen and twenty four months actually, the trial period in the car industry.
That's the one that is taking so long for us.
All right. That's it for the questions from the web.
All right. With that, thank you for joining us again this time, and I look forward to getting back in a quarter again when we get to the Q4 results on this session. With that, I wish you, everybody, a very good day, and thank you, and talk to you soon. Bye now.
That does conclude our conference for today. Thank you for participating. You may
all
now disconnect.