Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 report conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there'll be a question and answer session. To ask a question during the session, please press Star and One on your telephone keypad. Questions can also be submitted via the web today. I must advise you that this conference is being recorded today, Friday the 15th of November, 2019. I'd now like to turn the conference over to your speaker today, Stefan Pettersson. Please go ahead, sir.
Good morning, everyone, welcome to Fingerprint Cards' earnings call following the release of our third quarter results this morning. My name is Stefan Pettersson, I'll be the moderator today. We'll begin the call with a presentation of the report by our CEO, Christian Fredrikson, thereafter by our CFO, Rasmus Krist. Following this, we'll have a Q&A session, if you're following the conference call on the web, you can post questions throughout the 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'll now hand over to our CEO, Christian Fredrikson.
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. 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 million, 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. The decrease in the average selling price since last year also had an effect. The market for biometrics outside of smartphones is growing, but it is still significantly smaller than the mobile market, and it is also quite fragmented. For this reason, there can be significant swings in demand between quarters. 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 4% lower than in the same quarter last year. This is explained by the fact that the share of revenues outside of mobile was lower this quarter, as well as by the lower ASP.
While operating profit was -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 SEK 59 million, 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 403, including the Samsung Galaxy A10s as well as A20s. Next slide, please. If we look at the quarter, 11 new smartphones with our technology were launched. We also launched our latest generation sensor during the quarter, the FPC1520, which is based on our very successful FPC1511 product.
This sensor is even more cost-effective than its predecessor while delivering the high 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 Giesecke+Devrient Mobile Security in July, and now we have partnerships with all top three card producers in the world. At the beginning of October, NatWest started the first biometric credit card pilot in the U.K. following a successful debit card trial.
The card used in this latest trial is provided by Thales using Fingerprint Cards' T-Shape 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 Cards' technology is now being used in all of them. Next slide, please. At the end of October, we launched Fingerprint Cards' Touchless 2.0 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. Fingerprint Cards' solution is beneficial for 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 a million false acceptance rate, 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. 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 the 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 billion phones a year are shipped with biometrics. There is still a potential to grow by further increasing the attach rate in mobile phones. 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 aggregated 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, et cetera.
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 consider the payments area, it is 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 Crédit 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 billion-8 billion cards in a few years' time. This number is based on the fact that there are around 22 billion payment cards in circulation today.
Assuming that most of these will be converted to smart cards in a few years, also assuming a replacement frequency of three years, around 7 billion payment cards will be produced every year. Today, this number stands at around 4 billion. 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, there are a number of different projections out there. I'm not now going to give you another one, 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 18 years to reach 1 billion cards. The next technology upgrade came around 10 years later when contactless cards were launched.
This time it took around eight years to reach 1 billion 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. 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 1 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, of course, I am very happy about. In the past, we delivered sensors to Samsung notebook, this is the first time our products are used in smartphones from Samsung.
Already in October, we communicated our second Samsung smartphone, the Galaxy A20s, which uses FPC1511. We are the global leader in capacitive fingerprint sensor, and we seek to defend our market share and margins here by ensuring production cost competitiveness. That work still continues. We took an important step in Q3 by launching our FPC1520 sensor, which is a new generation based on our successful FPC1511 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&D. This means, as I said earlier, we have active partnerships now with all top three card producers. We also received our first volume order for T-Shape sensor mobile module outside of the payments area. Finally, we announced that we are supporting MeReal in their latest order of biometric payment cards that will reach the market in 2020. Next slide, please. Let me summarize before handing over to our CFO, Per Sundqvist. 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 2.0 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 BM-Lite. This is especially designed for physical and logical access devices and applications such as smart door locks, padlocks, 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 payment cards area. We announced a partnership with G+D for our T-Shape sensor, and this card is already used in market trial in France conducted by Crédit Agricole.
We came a step closer to full card certifications since Mastercard certified NXP's module for biometric payment cards, which incorporates Fingerprints' T-Shape 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, Per Sundqvist.
Thank you, Christian, and good morning, everyone. Our revenue came in at SEK 352 million, 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 U.S. dollar. In constant currency terms, our revenue declined by 23%. While the gross margin improved slightly compared to the last quarter, it declined by 4 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 SEK 3.4 million, versus positive SEK 2 million in the same quarter last year. Operating profit was impacted by a SEK 5.5 million 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 operating margin development, as you can see in the red line in this chart. We improved the gross profit slightly since the last quarter. Our net income was positive SEK 5.8 million, versus SEK 2.9 million in Q3 2018. The positive bottom line result is mainly due to the effect of unrealized changes in the USD exchange rates currency account. Next slide, please. This shows the development of revenue and gross margin on a 12-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 million, versus $81 million last quarter and $101.5 million in Q3 last year. Development costs of $24.5 million 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, was $257 million at the end of the quarter, which is to be compared to $376 million in the same quarter last year and $294 million last quarter. 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 59.5 million, compared to SEK 202 million in Q3 last year, and our net cash position stood at SEK 537 million versus SEK 596 million in the same quarter last year, and SEK 486 million at the end of Q2. Cash flow from investing in activities, mainly capitalized development expenditures, was negative SEK 26 million, versus SEK 34 million last year. Thank you, everyone, and we are now ready to take your questions.
As a reminder, ladies and gentlemen, star and one to ask a question via the audio. Questions can also be submitted via the web today. First question on the audio comes from the line of François Bouvignies . 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. 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? If you look at Egis Technology or Goodix, they have definitely more than 30% gross margin. Egis Technology reported even above 40% this quarter, and Goodix above 50%. My question is. Is there anything structural that could justify such difference versus your peers, on the gross margin side?
Yeah. Hi, Francois. I think, I suppose I can't comment, of course, on what the others have as their gross margin. Obviously, there's a big difference in the market price with the optical in-display. I think that is, of course, where we need to enter, where we have not been able to enter so far.
Okay. The main reason is the optical. 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. There is nothing structural or nothing in the competitiveness of our capacitive products, otherwise we wouldn't be gaining market share there.
Okay. That's clear. You mentioned it, so the optical market. When should we expect design wins? Maybe if you, I'm sure you will be limited in terms of comments, what is the feedback you have from your current product? What do you need to improve? Is there anything, what is prevents you from being in the market today?
Yeah, as you said yourself, we don't give any guidance, I wouldn't. It's the same like we had with earlier, I get these questions on Samsung. 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. We can only talk about design wins when we have design wins. So far we haven't. I suppose the issue is always with when you do biometry and you get into a new technology, it's about biometric performance. You need to have the right biometric performance.
You-
Of course, we are late in the market, so there you have it.
You still need to improve some performance metrics before getting in, if I'm correct?
Well, it's always about biometric performance. I don't want to get into that at this point. When we enter, we enter. We will get back to that. Obviously, we are working towards it. We have not been able to do it.
Okay. That's clear.
Sure.
The non-mobile, what is the % of your revenues today? You say it impacted your group revenues. Can you disclose at least what is the size of this market this quarter?
I think the non-mobile. Yep. We don't give it per quarter. We have said that it's on a yearly basis. It's about 10% of our revenues.
Okay.
That's the way it's going to be this year as well. It was higher in the earlier quarters and now it's lower. There is a shift there.
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 the summer, if I remember correctly, then it 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 NXP module with Mastercard. We got the certification there with our sensor. 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's hard for us to say more on because it's not in our hands, really, when you get the full card certification. The whole industry is working towards that, but so far, of course, it hasn't happened. I think that's something we'll have to get back to when it happens. It's not really in our hands to finalize.
Okay. Last one, sorry about the other questions, the non-cash item, it's more in your cash flow. It's decreasing compared to your D&A, it's much lower. Is there anything in there apart from the depreciation and amortization? I didn't see anything in the release.
No, there is nothing else besides depreciation on product.
The depreciation is, if you release it around 30-something amortization, and your non-cash item is SEK nine million on your cash flow. What is the difference?
Non-cash. The difference there is that 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 is affecting the sales, it's affecting all the balance sheet items. We have the working capital parts are generating a non-unrealized cash effect, cash currency effect, so US dollar. 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 US dollars right now as well. We are very much a USD company in terms of all the aspects that are running through our cash flow.
Okay. All right. Thank you very much.
Yes. Thank you, Francois.
Thank you. Your next question comes from the line of Viktor 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 the percentage of the T-Shape in there, would you say it's 50/50 or 80/20? Or can you give any ballpark number on the interest for the T-Shape?
Hi, Viktor. Sorry, I didn't fully understand what you meant with the part.
Yeah.
Can you just elaborate?
Yeah. The smart card pipeline for you, can you say something about how much of that is for the T-Shape module?
Yeah. Okay. At the moment, T-Shape 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 about half is payment cards, half is non-payment cards. That's the only module at the moment. We have a new version coming out, that's T-Shape, which is more cost effective. That's not in the market yet and will not be for a while.
Okay. Is there any interest from customers in buying sensors only without the module?
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. Follow-up was on the gross margin. We're seeing the impact now from the FPC1511, and you're at 33% gross margin. With the FPC1520 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, Viktor, on the gross margin. I can only say that we obviously need to work to improve our gross margin. We realize that it's not the way where it needs to be. It's not good enough. We are okay-ish, but not good enough on these numbers. We do new versions all the time to improve. At the same time, it's a running race with price erosion. That's how this business goes. Yeah.
Yeah. Okay.
We are not happy where we are. We know we need to improve.
Yeah. Understood. Thank you so much, Christian.
Thanks a lot, Viktor.
Thank you. There are no further questions via the audio. Please continue.
Yeah. We have received a few questions from the web as well. The first one is concerning IDEX. IDEX 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 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 roadmap, and at the end of it, we have in May, we passed over 1 billion sensors sold and delivered, and we are in this mobile business, the capacitive leader.
I believe that if anybody can drive down the cost 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 costs down, as we have proven over and over again in this industry. That's maybe from our point, yeah.
Another question on the in-display. Goodix has released a new ultra-thin sensor under glass. Would you say that your sensor is still valid or obsolete compared to their new sensor?
Yeah, of course. It's a fair question because we haven't entered the market, and have no design wins yet. There is no obsolete, right? We continue on the products and all the learnings and everything we build. The fact is and remains that we have not entered this market, and we still have the same ambition, and then I can't give any forecast on when that will happen.
Why do you believe your Touchless 2.0 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. 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 big numbers. Clearly in access, in motor 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. Which is basically Apple, right, and very small for others. That's how in the mobile business, the biometry has gone so far.
What is the status of biometrics in the automotive segment, and also PC? When do you expect to see your products in cars?
I think that we have 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. It is, of course, just doing the trials is a long journey in the automotive industry. I think that is the timing issue and the hindering factor before you actually get out. It's just a long cycle of trials in that industry, which can take actually between 18 and 24 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. 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. 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 in your Nadia Connect.