Good morning, ladies and gentlemen. Thank you for standing by. Welcome to today's Q2 2019 report conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you'll need to press star one on your telephone and wait for your name to be announced. Questions can also be submitted via the web today. I must advise you that this conference is being recorded today, Thursday the 15th of August, 2019, and I was going to turn the conference over to your speaker today, Stefan Pettersson. Please go ahead, sir.
Yes. Thank you. Good morning and welcome to Fingerprint Cards earnings call following the release of our second quarter 2019 results this morning. My name is Stefan Pettersson, and I'll be the moderator today. We'll begin the call with a presentation of the report by our CEO, Christian Fredrikson, and thereafter by our CFO, Per Sundqvist. Following this, we'll have a Q&A session, and if you're following the call on the web, you can post your questions throughout the call. 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. With that, I now hand over to our CEO, Christian Fredrikson.
Thank you. Good morning, everyone, and welcome to this call. Once again, focused on our progress and performance now in Q2. As usual, I would like to begin by giving you the main highlights of the quarter. I estimate that we have been gaining market share in capacitive sensors for smartphones. Our gross margin improved by seven percentage points in relation to the same quarter last year. However, the margin was slightly lower than in Q1, which has to do with the fact that we had lower proportion of software sales and also less favorable customer mix than we had in Q1. Business line smart cards and embedded had a strong first quarter with software sales and less in Q2. These factors impacted slightly our margins, but this was counterbalanced by the fact that the proportion of new and more cost-effective sensors in Fingerprint's product mix has continued to increase.
All in all, we saw a slight decrease in gross margin from Q1 from 23%-22%. It is so that we have variations from one quarter to another in terms of our customer and product mix, leading to fluctuations in our sales and margin. Of course, the trend line should be positive, and our actions continue to move us in the right direction. Looking at some of the other key numbers in the quarter, our operating profit and net earnings were positive, and the positive EBITDA trend continued. Finally, our net cash position also improved clearly to SEK 486 million from SEK 338 million in Q1. That was a good performance. Next slide, please. 14 smartphones equipped with our sensors were launched in the quarter by nine OEM customers.
The global smartphone market is still challenging as it always has been, and we saw a decline in global smartphone shipments in Q2 versus last year, but not as much as in previous quarters. We have also seen quite a solid smartphone demand in large markets like China, and as you know, we deliver sensors to all the major Chinese OEMs. Two Acer Chromebooks intended for the enterprise market were also launched during the quarter, equipped with our FPC1145 touch sensor, which provides an extra layer of corporate and end-user security. We continued to see a lot of progress in the biometric smart card area in the quarter, which is encouraging. Let me get back to this on the next slide. Our T-Shape sensor is also finding applications outside of the payment card space.
It is, for example, integrated in a hardware vault called Beam U for safe online access and secure offline data storage. With the size and shape of the credit card, data and passwords are secured and authenticated using fingerprint biometrics. It comes with features such as FIDO, two-factor authentication, and tracking of valuables such as your wallet and phone using Bluetooth. Next slide, please. On Tuesday morning this week, we issued a press release about the fact that Samsung is a potential new smartphone OEM customer, which we are, of course, very happy about. This is something we have worked on for quite a while in this company, and it is great that it has finally paid off. We now have eight out of the nine largest global smartphone brands as our customers. Let me just give you the key points of this.
More specifically, we have delivered fingerprint sensors within the context of a production project, which likely means that our technology will be included in Samsung Galaxy A10s, which was announced a few days ago. As you know, in this industry, it is common practice to use more than one supplier per component, so there is a possibility that technology from other suppliers will be used as well. We have received orders and delivered sensors within the context of this project, and the volumes in Q2 were not insignificant. We are also working on an additional production project that could potentially lead to Fingerprint's technology being included in another model from Samsung. As you know also, in mobile business, the chain is long, so it is not possible for us to estimate when and how big volumes a certain phone model will have when it hits the market.
Next slide, please. Fingerprint's strategy for the coming years is based on defending and building a strong position in the smartphone segment by broadening our business into areas outside of the mobile industry. In Q2, we continued to make good progress against these priorities. As I mentioned earlier, we reinforced our market position in capacitive sensors for smartphones during the quarter. We are truly the king of capacitive sensors. We seek to defend our market share margins in capacitive fingerprint sensors by ensuring production cost competitiveness. Our latest FPC1511 sensor has done very well in the market, and this product is now a key pillar of our capacitive sensor portfolio. We are already far along in our efforts to introduce yet another generation of sensors, which will be based on the FPC1511 and be even smaller and thus more cost-effective.
The development project is proceeding to plan. I expect the first smartphones to use this new sensor to be launched as early as this year. We are also making progress in terms of introducing our new optical in-display sensor to the market. We are currently working with OEM customers in order to qualify the product. In smart cards, we saw a lot of positive developments during the quarter and also after the close of the quarter. An additional market trial was launched, conducted by Crédit Agricole in France. The card, which is being used in this trial, is supplied by our partner, Giesecke+Devrient Mobile Security, and features Fingerprint's T-shaped module. This newly announced partnership with G+D means that Fingerprint now has active partnership with all three top card producers in the world.
In July, another significant event took place in the smart card space, namely that Mastercard certified our partner NXP's module for biometric payment cards, which incorporates Fingerprint's T-Shape sensor. This certification is another clear indication that we are getting closer to a broader commercial rollout, and we are very happy to collaborate with NXP and other partners along the value chain to create the next mass market for biometrics. Next slide, please. This is an updated map of all publicly announced dual interface biometric payment card trials to date in the world. The latest trial in France brought the total to 20, and Fingerprint's technology has been used in all of them. Let me repeat, used in all of them. I expect to see further market trials this year in other markets as the ecosystem prepares for a broader commercial rollout. Next slide, please.
Let me quickly summarize the key points before handing over to our CFO, Per Sundqvist. We strengthened our market position in capacitive sensors for smartphones, and we continue our positive EBITDA trend, also delivering positive net earnings in the quarter and a very good cash flow. Sales of our latest capacitive sensor, FPC1511, continued to develop nicely. The customer feedback has been excellent, and we are now gaining market share again in capacitive sensors. We are soon ready to take another step by introducing an even smaller and more efficient sensor based on the 1511 generation. As I said earlier, we are now very pleased to deliver our technology to eight out of the nine top global smartphone brands, now including also Samsung.
We are also working very hard to capture a share of the market for in-display sensors, and we are currently working with customers to qualify FPC1611 optical in-display sensor. Finally, there has been some very encouraging news in the emerging biometric smart card area, where Fingerprint's position is truly very strong. Not least the fact that our partner NXP's biometric payment card module, which includes our T-Shape sensor, received a compliance assessment and security testing certificate by Mastercard. This is part of the process of establishing specifications and standards for biometric payment cards in preparation for the larger scale rollout. With that, I would like to hand over to our CFO, Per Sundqvist.
Thank you, Christian, and good morning, everyone. Let me take you through the financial results for the second quarter. Our revenue came in at SEK 382 million, a decrease of 2% compared to the same period last year. Our revenue was helped by the strong dollar and in constant currency terms, revenue fell by 12%. This decrease can be attributed to the fact that our average selling price has gone down since last year. Volume-wise, we have been doing well and gained some market share. Looking at the charts, we have excluded the non-recurring items that we had in Q2 last year to better highlight the underlying operational performance.
Diving into the numbers, you can see that our gross margin improved from 15% in Q2 last year to 23% this quarter, which is more or less at the same level as in Q1 when we reported 23% in relation to Q1. We had a lower share of software revenues, as well as a less favorable customer mix, which explain the slight difference. These factors combined have been offset by the positive effect we have had from the continued introduction of our latest generation capacitive sensor, that's the FPC1511. Our operating profit was SEK 6 million, which is to be compared to -SEK 578 million in Q2 last year. However, this figure for Q2 2018 included non-recurring items totaling to a negative of SEK 495 million. The context of that could be further broken down to restructuring costs and inventory write-down, and the write-down of capitalized R&D expenses. Next slide, please.
If we look at the development on a rolling 12-month basis, as shown in the diagram on this slide, we can see the positive trend shift, both in terms of revenue as well as margin. As you know, we have been facing a declining average selling price, and an important priority for us has therefore been to increase the share of new, more cost-effective sensors in our product mix, both to defend our market share as well as improve our margin. Our latest sensor, the FPC1511, has been an important factor in achieving these results, which now can be seen in revenues stabilizing and margins improving. Next slide, please. Excluding other operating income and expenses, our operating expenses for the second quarter totaled SEK 81 million, comparable to last quarter. Compared to the same period last year, we have taken down our OPEX by almost 50%.
Development costs of SEK 26 million were capitalized during the second quarter, which corresponds to 51% of total development cost, versus 21% in Q2 2018, and 47% in Q1 2019. Next slide, please. Our working capital was SEK 183 million at the end of the quarter, compared to SEK 182 million in the same quarter last year and SEK 322 million last quarter. We continue to work very actively to manage working capital, and the decrease compared to the previous quarter is a result of that focus. Next slide, please. Our cash flow from operating activities was SEK 180 million, compared to SEK 302 million in Q2 last year. Our net cash position continued to improve to SEK 486 million, versus SEK 440 million in the same quarter last year, and SEK 338 million in the end of last quarter. Cash flow from investing activities was a negative SEK 27 million, versus negative SEK 41 million last year.
Capitalized development expenditure accounts for almost all of the SEK 27 million. As you may remember, last quarter, we made the final payment of the withheld purchase consideration for Delta ID. In summary, the positive trend shift we saw at the beginning of the year continued into Q2. We are gaining market share in capacitive sensors for smartphones, and our latest product in this area has done very well in the market. Our OPEX run rate is now also below the SEK 400 million yearly target we set to ourselves. As a consequence of all of this, the EBITDA continues to improve and our financial position is strong. Thank you, everyone, and we now are ready to take questions.
Thank you. As a reminder, ladies and gentlemen, should you wish to ask a question over the audio, it is star and one on your telephone keypad. We have had one question come through. It comes from the line of François Bouvignies. Please go ahead. Your line is now open.
Hi. Good morning. I have a couple of questions. The first one is on the ASP average selling price for the year. You mentioned in the release that there is still a declining ASP in the market for capacitive. Can you give us a bit more color of what we should expect for this year in terms of ASP decline? This is my first question.
Yeah. Hi, François. Yes. As we have said earlier, last year was a very strong ASP decline of the 30% for the full year. It is clearly less this year. There is still, of course, ASP decline. We don't give an exact figure now. We will see later when we look at the full year, but as said, it's clearly not as high as it was last year, but still can see the ASP decline hitting us.
Is it still double-digit % decline or single digits, just to give a magnitude?
It's double digits, yeah.
Okay. If we look at the macro environment, obviously, trade war uncertainty and what is going on with Huawei. Huawei is part of your customers. I wanted to ask you if you see any impact from this particular customer or even the Chinese in general, especially in the second half of the year. Do you see any trend in terms of orders from this customer?
We don't comment on customer-specific cases. I think what clearly the macro environment, when it comes to trade wars and others, that's never a positive for any industry and for the high-tech industry, right? I think in general, if we look at the mobile industry, there has been huge fluctuations between customers and their market shares all the time for us, right? There are actually big swings going on within the industry. As you know, this mobile industry is quite dynamic, to say the least. At the same time, you can see it from Huawei in general, they have, of course, gained in their own Chinese market. Obviously, they have lost market share when it comes outside of China because of the activities that they have, of course, taken themselves as well. We don't comment on this from one customer point of view, right?
Obviously, we see big fluctuations between customers, and then we focus on gaining new customers and expanding our portfolio as much as we can, right? That we are not dependent on one or two or three customers only, right?
Okay. Maybe on in-display. In-display, supposedly, you see the period of mid-year, end of the year of launches of high-end products, et cetera. I just wanted to check with you, that the in-display penetration is going to increase significantly in the second half of the year. Is it going to be? How do you see yourself in this in-display market in the second half of the year? Do you expect any design-ins or anything like that?
I think the in-display will continue to take a share in the high and mid-range. At the same time, capacitive has been doing actually quite well also and been increased and are going also more low range all the time. Clearly, that has been doing also very good. I think that when it comes to ours, we are working, of course, very hard to qualify and get the product into the first models. We say that we expect that to happen this year. That's still what we are targeting. Obviously, any bigger impact would be going into next year then for our part, of course then.
Okay. I just want to have an update on the full display technology. On your side, how is it going? Any development on this side?
Yes, we are working on the full in-display. That's obviously much more challenging, and we continue to develop that. It's going to still take some time. We haven't gone out with any more details of it otherwise, but we are making progress, and we have a lot to do, of course, before we can be in a full phase of that. There's a lot of work ahead of us still when it comes to the full display, but we are absolutely working on with it. It's an ultrasonic solution, and that we are doing there right. There are some technical hurdles for us, and we have passed several technical hurdles as well.
Okay. Last one from me. It is on the gross margin. If you look at the decline versus last quarter, you mentioned software revenues and customer mix. How should we think about that for the next couple of quarters? Is it going to be similar, or you expect an improvement from here?
We expect our actions when we get the new products. We don't give any guidance, you got to remember that, François, right? Obviously all the actions we are doing is to improve the gross margin, right? We understand that it's not good enough for us to be running on this level where we are now. We need to keep on improving it with new products. That's why we are also launching a new generation fingerprint sensor based on FPC, the 1511, to come out later this year or late this year as well. That's all the actions are ongoing to continue on working on the gross margin and keeping improving it.
All right. Thank you very much.
Thank you, François.
Thank you. We do have another question on the audio line that comes from the line of Viktor Westman. Please go ahead. Your line is now open.
Thank you and good morning. First question is on the in-display side. You mentioned here that this would be the, I think, the majority of the market. Can we just translate that into the patterns of new phone models? Do you expect the pattern of new phone models that we've seen so far this year, do you expect that to continue?
Sorry, Viktor. Now I didn't catch. Can you say again, just?
Yeah. I think that the in-display, the part of the new models is maybe about one-fourth or one-third this year. Do you expect that pattern to continue? Do you expect more models in percentage of in-display?
Yes, I think there is going to be an increase still when we go into next year as well of in-display and still strong volumes in capacitive sensors also. Of course, now the price erosion is hitting the in-display also clearly. The new versions are coming out basically every year now within the in-display segment as well, and you will see both optical and you will see ultrasonic solutions. Now of course, not only hot zone, but probably next year you'll see the first over a little bit larger area, if we may.
Okay. Yeah. On smart card side, can you say something about the pilots here? If the customers want to launch commercially in 2020, when do they need to start their pilots? Is that right now, or?
Yeah. On the smart cards, we expect the broader launch next year. Of course, it's not like the mobile industry, so it doesn't kick off in the same. It's an increase and goes on for many, many years within the smart card industry, if you've got the history. We are in 20 pilots, and we expect to see a good increase of pilots, especially now in Europe. There will be more banks coming in with pilots during this year. I think the important thing is to get the certifications which are planned now for this year. You saw the first one with NXP, which is not for the system level, but for their secure element part. The certifications, we expect the first ones to be done now in Q4. In the next quarter, basically.
If I look at the pilots and the feedback, I think some of the pilots are going to be pilots where the banks are thinking and doing assessing, and then they do a launch. In actually quite a few pilots, they will actually transform into a launch. Basically, the customers just keep the cards and they keep going, and it kind of rolls out into live, if I may. That's probably how it goes. You typically go to pilots for two, three, four months, something like that.
Okay, two, three months. Does it mean, can there be commercial programs next year from new customers that has not launched pilots in 2019?
Yes. In 2020, for sure. I think that some of the pilots, as I said, will actually already go into live and carry that role, of course. Agricole has said already that they will go live in 2020.
Yeah. Okay. Maybe just on the gross margin side and on the 1511, you did some guidance before on the 1511. Is that proceeding according to plan?
Yes, FPC1511 is coming in, has been taking good share. I think in Q3, Q4, it will be, of course, by far the biggest part of our volumes and capacity. We will also bring out a new, even more cost-efficient version by the end of the year. We continue working on improving the gross margin. We realize, as I said earlier, that it has to improve as well. It's not good enough for us, clearly. Of course, we have to get into the in-display business. Although the in-display business has, as we see price erosion already there happening quite fast.
Okay. Last question on the FPC-BEP software platform for cards there. How we should think about that? Is this similar to when you created your own in-house algorithm in smartphone?
Yeah, exactly. That's what we have in the smart cards. We do our own algorithm and the software parts, and that's what we did earlier on in the fingerprint sensor or in the mobile business.
Mm-hmm. How will you sell the FPC-BEP? Will you include all the FPC OneTouch, FPC QuickTouch, FPC SafeTouch together, or will the customer pay for every single feature?
I suppose there will be different kinds of business, how you do it. Many times you will take kind of a basic, I would say the whole basic part of the software will be part of the full deal. We're, of course, seeing now payment for separately for the software as well in the smart card business. Many times the feature set is included.
Okay. Thank you very much.
Thank you.
Keep up the good work.
Thank you, Viktor.
Thank you. There are no further questions over the audio line. Please continue.
We have a few questions from the web as well. The first one on the smart cards, when do you expect this to account for a significant part of your sales?
As we don't give guidance, it's of course not possible to say, but I think that as a market, smart cards will be clearly bigger than the mobile. We are certain of that. It will also be a slower acceleration than it was in the mobile business. If I look at the trends in, for example, how contactless cards got in or how the chip got in into the smart card business, it's always been faster than the earlier new technology, but it's also taken some years to actually get into the really big portions, over 50% of the whole smart card business. It will take a while for us, but the big commercial launches, we expect next year.
What about applications such as PCs, IoT, door locks, et cetera. Is this market progressing according to plan?
Yes, I think the door lock market is already big in China. It is expanding now to some other markets as well. We see that coming in some parts in U.S., India, Indonesia, some of these markets we are seeing now. The door locks, it was already 10 million units last year. I think the door locks market, roughly, we expect it to be 15 million units in the door locks market this year. Then we see all kind of different devices, whether it's mobile wallets, different USB sticks and others with the fingerprint sensors. There is an expansion. Of course, the volumes are in the millions. They're not in the hundreds of millions as you are in the mobile business, or in even billions that it will be in the card business.
It is expanding and it's all kind of coming new ideas there all the time into new devices. I'm sure we will see in different remote controls and gaming devices as well. Absolutely within the whole car industry.
On IRIS, you've also talked about the development of an IRIS face solution. Do you have any news on this?
Yeah, we are doing a combined, so it is adding the easiness of the face, some of the algorithms of the face part into the combined IRIS solution. Our intention is to launch that. It is a new software release that will come from us, and that the target is for us still to launch this year.
Maybe one last question then on your margins and the possible effects of the trade war on your profitability.
As we don't give guidance, I wouldn't go into that. I have to say that, as everybody is trying to guess how this trade war is going to go, so do we. We are in a long chain, and we're discussing with all the different partners. We obviously hope that the trade war will be solved, but probably everything going on around the world, this will take some time. We have taken our plans and actions, with the view that all of this will actually be a bit of a turmoil for could be quite a while. In a way, luckily, we are used to turmoil because that's what the mobile industry is all about. It is an extremely dynamic industry. This is just an additional part to that one, I would say.
I think it's something that every company and every person is following in the world, and nobody knows really what the impact will be in this game going forward. Far it hasn't really impacted mobile industry as a whole because that has already been in decline. Slight decline, a few percentage points. Of course, there are impacts within customers, as we all know, in terms of that and the market shares are shifting. What we try to do is keep our cost in very good shape, expand our business into all the different mobile operators as we have now done. That's what we've done. We have expanded and have now eight out of the nine largest mobile OEMs in the world as our customers, with Samsung added to the list.
I think that's the way we have tried to look at it and go with that, and then just make our plans accordingly and stay healthy in the business. With that, thank you for everyone for joining again. I am very pleased we had a good quarter, and we look forward to go into the next one, as we already are. I look forward to talking to you and taking you forward when we are talking about the next quarter, and we will get back then. With that, I wish you all a nice day and goodbye.
That does conclude our conference call today. Thank you for participating. You all now disconnect.