Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Q2 twenty nineteen 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. I must advise you that this conference is being recorded today, Thursday, 08/15/2019.
And I'd now like to turn the conference over to your speaker today, Stefan Pettersson. Please go ahead, sir.
Yes. Thank you. Good morning, and welcome to Fingerprint Card's earnings call following the release of our second quarter twenty nineteen results this morning. My name is Stefan Patersona, and I'll be the moderator today. We'll begin the call with a presentation by of the report by our CEO, Christian Fredriksson and thereafter by our CFO, Christian Krist.
Following this, we'll have a Q and A session. And if you're following the call on the web, you can post your 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, Christian Fiedrichsson.
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. And so all in all, we saw a slight decrease in gross margin from Q1 from 23% to 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. But 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. And finally, our net cash position also improved clearly to $486,000,000 from $338,000,000 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 FPC eleven forty five touch sensor, which provides an extra layer of corporate and end user security. We continue 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 TSAGE 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 ballot 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. So 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 for a 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.
Finally, we are also working on an additional production project that could potentially lead to fingerprint 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 our 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. But 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 and 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, and 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 Credit Agricole in France. The card, which is being used in this trial, is supplied by our partner, Dusek Keflais Bevre and Mobile Security and features Fingerprint's T Shape module.
This newly announced partnership with GND means that Fingerprints now has active partnership with all three top card producers in the world. In July, another significant demand took place in the smart card space, mainly that Mastercard certified our partner PaymexP's module for biometric payment cards, which incorporates Fingerprint's T shaped 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 around the value chain to create the next mass market for biometrics. Next slide, please. This is an updated map of all publicly announced Duo Interface biometric payment card trials to date in the world.
The latest trial in France brought the total to 20, and fingerprints 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. So let me quickly summarize the key points before handing over to our CFO, Per Sinkhrys.
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 fifteen eleven 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 share of the market for in display sensors, and we are currently working with customers to qualify FPC1611 optical in display sensor. And 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, ASP'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. So let me take you through the financial results for the second quarter. Our revenue came in at €82,000,000 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.
However, volume wise, we have been doing well and gained some market share. Looking at the chart, we have excluded the nonrecurring items that we had in Q2 last year to better highlight the underlying operational performance. So diving into the numbers, you can see that our gross margin improved from 15% in Q2 last year to 22% 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 the less favorable customer mix which is explained in slide seven. So these factors combined have been offset by the positive effect we have had from the continued introduction of our latest generation capacitive sensor, the FPC1511.
Our operating profit was $6,000,000 which is to be compared to minus $578,000,000 in Q2 last year. However, this figure for Q2 twenty eighteen included nonrecurring items totaling to a negative of $495,000,000 The context of that could be further broken down to restructuring costs and inventory write down and the write down of capitalized R and D expenses. Next slide, please. If we then look at the development on a rolling twelve 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 SEC fifteen eleven, has been an important factoring 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 $81,000,000 comparable to last quarter. And compared to last in the same period last year, we have taken down our OpEx by almost 50%. Development costs of $26,000,000 were capitalized during the second quarter, which corresponds to 51% of total development costs versus 21% in Q2 twenty eighteen and forty seven percent in Q1 twenty nineteen.
Next slide, please. Our working capital was $183,000,000 at the end of the quarter compared to $182,000,000 in the same quarter last year and $322,000,000 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 $180,000,000 compared to $3.00 $2,000,000 in Q2 last year.
Our net cash position continues to improve to $486,000,000 versus $440,000,000 in the same quarter last year and the $338,000,000 in the end of last quarter. Cash flow from investing activities was a negative $27,000,000 versus negative 41,000,000 last year. Capitalized development expenditure accounts for almost all of the $27,000,000 And as you may remember, last quarter, we made the final payment of the withheld purchase consideration for Delta IV. So in summary, the positive trend shifts we saw at the beginning of the year continued into Q2. We are gaining market share in capacitive sensors for smartphones, and our latest products in this area have done very well in the market.
Our OpEx run rate is now also below the $400,000,000 yearly target we set to ourselves. And as a consequence of all of this, the EBITDA continues to improve and our financial position is strong. Thank you, everyone, and we're now ready to take questions.
Thank you. We have had one question come through. It comes from the line of Francois Bugine. Please go ahead. Your line is now open.
Hi, good morning. I have a couple of questions. The first one is on the ISP average selling price for the year. So you mentioned in the release that there is still a declining ISP in the market for capacities. 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.
Yes. Hi, Francois. Yes. As we said earlier, last year was a very strong ASP decline over 30% for the full year. It is clearly less this year, but there is still, of course, ASP decline.
We don't give an exact figure now. We will see later if when we look at the full year. But as said, it's clearly not as high as it was last year, but still, you can see the ASP decline hitting us.
Is it still double digit percentage decline or single digit, I mean, just to give a magnitude?
Yes, it's double digit, yes.
Okay. And then if we look at the macro environment, 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?
I mean, we comment on customer specific cases. I think what clearly, the macro environment when it comes to trade wars and others, I mean, that's never positive for any industry and for the high-tech industry, right? But 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? So there are actually big swings going on within the industry. As you know, this mobile industry is quite dynamic, to say the least.
And at the same time, you can see from Huawei in general, they have, of course, gained in their own Chinese market. And 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. But we don't comment on this from one customer point of view, right? But 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, so that we are not dependent on one or two or three customers only, right?
Okay. And maybe on in display, so in display, supposedly, you see the period of the midyear end of the year of launches of high end products etcetera. I just wanted to check with you that the in display penetration is going to increase significantly in the second half of the year. I mean, is it going to be? And 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 eDisplay will continue to take share in the high and mid range. And at the same time, has been doing actually quite well also and being increased and then ongoing 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 said that we expect that to happen this year.
And that's still what we are targeting. And so obviously, impact would be any bigger impact would be going into next year than for our part, of course, then.
Okay. And I just want to have an update on the full display technology. I mean, on your side, how is it going? I mean, any development on this side?
Yes. We are working on the full 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 that we are doing there, right. So they are seeing some technical hurdles for us, and we have passed several technical hurdles as well.
Okay. And last one from me, it's on the gross margin. I mean, 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? I mean, is it going to be similar?
Or are you expecting improvement from here?
We expect I mean, our actions when we get the new products that we I mean, we don't give any guidance. You got to remember that, Francois, right? So but obviously, we are 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. So 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 fifteen eleven 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, Francois.
Thank you. We do have another question on the audio line that comes from the line of Victor 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, Vikram. Now I didn't catch them. Can you say again? Yes. I think
that the in display, the part of the new model is maybe about one fourth or one third this year. Do you expect that pattern to continue? Or 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 in display and still strong volumes in capacitive sensors also. And of course, now the price erosion is hitting the in display also clearly. And 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.
And 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. Yes. And on the 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?
Yes. There is
a on the smart cards, we expect the kind of the broader launch next year. And then, 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, you've got the history. And we are in 20 pilots, and we expect to see a good increase I expect that especially now in Europe, there will be more banks coming in with pilots during this year.
And 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. So the certifications, we expect the first ones to be done now in Q4, so in the next quarter, basically. And then if I look at the pilots and the feedback, I mean, you can go I think some of the pilots are going to be pilots where the banks are thinking and doing assessing and then how then they do a launch. I mean, actually, a few pilots, they will actually transform into a launch.
So basically, the customers just keep the cards and they keep going, and they it kind of rolls out into live, if I may. That's probably how it goes. And you typically go to pilots for two, three, four months, something like that, right?
Okay. Two, three months. But does that mean I mean, the can there be commercial programs next year from new customers that have not launched pilots in 2019?
Yes, yes, in 2020, for sure. I think that and some of the pilots, as I said, will actually already go into live and create a role, of course, ready grow AgriCole is, as said, already available go live in 2020. Yes.
Okay. So maybe just on the gross margin side and on the $15.11 you did some guidance before on the $15.11 Is that proceeding according to plan?
Yes. $15.11 is coming in, and we're also and has been taking good share. And I think in Q3, Q4, it will be, of course, by far the biggest part of our volumes and capacity. And then we will also bring out a new more even more cost efficient version by the end of the year. So we continue working on improving the gross margin.
And we realize, as I said earlier, that it has to improve as well. It's not good enough for us, clearly. And then, of course, we have to get into the in display business. Although the in display business has we see price erosion already there happening quite fast.
Okay. Last question on the BET software platform for cards there. How would you 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.
And how will you sell the PEP? Will you include all the OneTouch, QuickTouch, SafeTouch together? Or will the customer pay for every single feature? Suppose
there will be different kinds of business, how you do it. But 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. And then you but we're, of course, seeing now payment for separately for the software as well in the Smart Card business. Times, the feature set is included.
Okay. Thank you very much. Thank you. Keep up the good work.
Thank you, Victor.
Thank you. There are no further questions over the audio line. Please continue.
So we have a few questions from the web as well. So the first one on smart cards. When do you expect this to account for a significant part of your sales?
That 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. But it will also be a slower acceleration than it was in the mobile business, right? 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 early and 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. So it will take a while for us, but the commercial big commercial launches, we would expect that we expect next year. And then what about applications such as PCs, IoT, door locks, etcetera? 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, in some parts in U. S, India, Indonesia. Some of these markets we are seeing now, the door locks, it was already 10,000,000 units last year.
I think the door locks market roughly, we expect it to be 15,000,000 units in the door locks market this year. And then we see all kind of different devices, whether it's mobile wallets, different USB sticks and others with the fingerprint sensors. So 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 as or even billions that it will be in the card business.
But it is expanding, and it's all kind of coming to 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.
And on iris, you also talked about the development of an iris face solution. Do you have any news on this?
Yes, we're doing a combined, so it's adding the easiness of the face, some of the algorithms of the phase part into the combined Iris solution. So we our intention is to launch that. It's kind of more of a it's a software new software release that will come from us and that the target is for us to launch this year.
And maybe one last question then on your margins and the possible effects of the trade war on your profitability.
That's as we don't give guidance, I wouldn't go into that. And I have to say that as everybody is trying to guess how this trade war is going to go, so do 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. So 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. So this is just an additional part of to that one, I would say. I think it's something that every company and every person is following in the world, nobody knows really what the impacts will be in this game going forward. So 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, right, in terms of that and the market shares are shifting.
So what we try to do is keep our cost in very good shape, expand our business into different all the different mobile operators as we have now done. So we are now so that's what we've done. So 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. So 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. And I look forward to talking and talking to you and taking you forward in the 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 for today. Thank you for participating. You may all now disconnect.