Good day. Thank you for standing by. Welcome to the Fingerprint Cards AB Q4 2022 results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. To submit a question via the webcast, please use the Ask a Question tab. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stefan Pettersson. Please go ahead.
Thank you very much, good morning, everyone. Welcome to Fingerprint Cards earnings call following the release of our year-end report this morning. I will start with a presentation by our CEO, Ted Hansson, and thereafter by our CFO, Per Sundqvist. We also have our Chairman on the call today, Christian Lagerling. He will say a few words before we move on to the Q&A session. If you're following the call on the web, you can post questions throughout the call. With that, let me now hand over to our CEO, Ted Hansson.
Good morning, everyone, and welcome. I'm Ted Hansson, and as you may know, I took up the position as acting CEO at the beginning of November in 2022. I have been with the Fingerprint Cards for 10 years. Until recently, I was working in China, which is where we generate most of our revenue. My previous role was President of business area mobile PC and access China. Before that, I ran the company's business in the mobile area based in Shanghai, China. Let me first quickly summarize the key figures before moving on to discussing our performance and progress in each of our key product segments. As we expected and previously communicated, our revenue and gross margin in Q4 continued to be negatively affected by the sharp decline in demand for smartphones in China.
This because of COVID-19 related restrictions in the country that were there during 2022. While we saw revenue decline by 57% in constant currency compared to Q4 last year, we saw an increase in relation to the preceding quarter by 42% in constant currency. The gross margin was impacted by a SEK 22 million inventory write-down this quarter, which Per will give in more details about later. Adjusted for this one-time effect, gross margin amounted to 20% in the quarter, which is an improvement compared to the previous quarter, but a 10 percentage point decrease compared to last year, reflecting the increased price competition and lower volumes. Factors we expect will affect our sales and margins at least during the first half of this year, 2023. We continue to implement cost-saving measures to streamline operations and ensure that we return to profitability.
During the fourth quarter, we carried out a set of issue and a rights issue amounting to SEK 341 million after transaction costs. This strengthen our liquidity and enables us to continue financing customer projects and several important product development initiatives, both within and outside the mobile segment. To consolidate our market leading position, we continue to focus on developing innovative products, broadening our supply base, and ensuring a competitive cost structure. Our R&D portfolio is strictly focused on projects that are judged to be able to generate significant profitable business. As I mentioned, China accounts for the majority of Fingerprints' revenue, and most of this revenue is generated in the mobile area, more specifically in Fingerprints' sensors for smartphones. We are a market leader in this area, which is our legacy business.
Let me first start by discussing the mobile area before we move on to the new areas, PC access and payments, which are continuing to grow in importance in our revenue mix. Please, let's turn to the next slide. What happened in 2022 was that the mobile phone demand in China fell sharply as lockdown measures were introduced. This happened at a point in time when inventory levels were very high throughout the whole supply chain. The supply chain is complex with many participants and long lead times. Everyone had planned for significantly higher volumes in 2022, and on top of this, additional inventory had been built up in response to the global component shortage that plagued the industry until the beginning of 2022.
Sensor suppliers like Fingerprints, distributors, module houses, and mobile phone OEMs had to purchase products many months in advance to ensure they had enough products to keep supplying to their customers. As demand fell sharply, everyone stepped on the brakes, focusing on trying to decrease their inventories. This process occurred stepwise for several quarters along the supply chain you can see on the slide. Starting with the mobile phone OEMs on the right-hand side, whose inventory levels are now even lower than usual. As the module houses and distributors have also now begun to place orders again, we could in turn start to bring down our inventory during Q4. You can see this reflected in the revenue increase compared to Q3. We decreased our inventory by over SEK 100 million since Q3, but it is still too high. Our competitors are in a similar situation.
Our view is that some of them built even more inventory than what we did. This has led to increased price pressure, which we expect will affect revenue and margins negatively, at least during the first half of 2023. Recent developments in China are encouraging. In December, authorities began to remove the zero COVID-19 restrictions that were in place during a significant part of the year. There are actually now signs that the recovery in consumer spending is progressing more quickly than initially expected. There is still, of course, a lot of uncertainty, but we expect a return to the historical demand for mobile phones, even if the recovery will be gradual. This trend will benefit Fingerprints as we generate a significant portion of our sales in China. Next slide, please.
At the end of December, we announced Fingerprint's volume order for FPC1632, which is our optical under-display fingerprint recognition solution. As you know, we've been working on this for quite some time, this order is a significant step for us. It means that we are now expanding our addressable market in mobile area in a very meaningful way. Most smartphones sold today have some form of biometric sensors used to unlock devices, make payments, and access applications. The bar chart on this slide shows the estimated market size for fingerprint sensors in volume terms. Phones with under-display sensors are shown in green, and the red part is capacitive sensors, where Fingerprint is a well-established market leader. Capacitive accounts for about two-thirds of the market. The rest is under-display.
Average selling prices are higher for under-display, these two markets are more comparable in size from a value perspective. Our entry into the under-display means that we are now starting to generate revenue from an entirely new product segment. Our objective is to capture a significant part of the under-display market while remaining a world leader in capacitive sensor. Let's move to the next slide. The PC segment is another important growth area, and we are taking significant steps to strengthen our offerings in this area as well. We're developing a microcontroller unit known as MCU, which will enable Fingerprints to offer PC makers a complete biometric system consisting of a fingerprint sensor and an MCU. This is especially important for us given the changes we're seeing in terms of industry requirements.
Today, we still have a situation where PC is intended for private use. The biometric authentication mostly occurs in the computer CPU, the so-called Match-on-Host. In enterprise computers, it's much more common to use Match-on-Chip, which is even more secure since the biometric data is stored on a separate chip. Match-on-Chip solutions for business computers have a higher average selling price and currently account for about half of our addressable market in a PC area. New requirements from Microsoft are expected to lead to a significant expansion of Match-on-Chip solutions at the expense of Match-on-Host. These new requirements mean that Match-on-Chip will become a prerequisite for suppliers of biometric solutions for Windows Hello Enhanced Sign-in Security. In this new situation, having our own MCU will be critical for our success in this market.
Our PC customers support our MCU development project as it will allow for better overall system performance. Other benefits include cost optimization, reduced margin stacking, and increased supply chain control. Adding our own MCU will further refine our Match-on-Chip PC solution, which was already added to Microsoft's approved vendor list AVL for Windows Hello Enhanced Sign-in Security in 2022. We expect to start customer engagement with this new solution during the second half of 2023. Four of the world's six largest PC OEMs are already using our technologies in their products, and I'm very confident we will continue to increase our market share in this growing area. Next slide, please. The access IoT area is a fragmented market and includes such products as access cards, door locks, cars, remote and gaming console controls, smart household appliances, and authentication keys.
This is a very interesting growth area for us, not at least because of higher ASPs for many of these applications. There are significant synergies with other product segments in terms of product development, one example being the MCU project I just discussed. The primary market for this project is the PC area, but there are other interesting applications in access control and IoT systems. Another example is our biometric software platform for payments, which can be used in a variety of access applications. Our T-shaped sensor module developed for payment area can also be used for different types of access cards. During the fourth quarter, we launched FPC1523, which is our latest addition to Fingerprints' access control portfolio. It features an integrated security block enabling integrity and [cycling] functionality, which are important features to meet the increasing demand in the secure devices.
Door locks is currently the most common application in access control, particularly in Asia, where biometric door locks are more common than in Europe and the U.S. We're seeing that biometrics is a growing in smart locks outside Asia as well. An example announced in Q4 is the Nuki Keypad 2.0, which can open a Nuki smart lock with a six-digit entry code. For now, as a new feature, you can use fingerprint as recognition. The Nuki keypad is equipped with fingerprint sensor FPC1025 and can store up to 20 fingerprints. We're also seeing increased use of biometric access cards and security keys. In many cases, the same key can be used to facilitate uniform secure access to IT system as well as to physical spaces. During the quarter, the ProFIDO Bio Access card was launched by Valmido.
It is equipped with a biometric fingerprint sensor with a typical use case, including password-free Windows login and website authentication. Next slide, please. Let me finish by discussing the payment area, which for us constitutes a very large potential market. This market is still in its infancy, but it's clearly the largest long-term market opportunity for us. Our technology is so far being used in 10 commercial launches of biometric payment cards. This number includes two additional launches in the Middle East, North Africa region that were announced in Q4. We continuously conduct development work aimed at furthering sharpening our offering in the payment area, and often this is done in close partnership with key players in payment card manufacturing. The world's three largest suppliers of secure elements for payment cards, Infineon, NXP, and STMicroelectronics, have all chosen Fingerprint's technology for their reference designs.
Already in 2021, we announced that we, together with Infineon, had taken a very significant step forward by enabling execution of full biometric authentication in the secure element on a payment card with retained performance and high security. This removed the need for separate MCU. In November last year, we announced the next step in this cooperation, a joint development and commercialization agreement of a plug-and-play, turnkey solution for biometric payment card. The goal of the cooperation is to make a biometric smart card production as simple and easy as producing a standard dual interface payment card. The solution, named SECORA Pay Bio, will make the overall biometric smart card manufacturing process significantly simpler. It will also reduce the bill of material considerably.
This will allow card manufacturers to use already existing card manufacturing equipment for the production of biometric payment cards, enable scalable and efficient volume production. This is a very important prerequisite for this mass market to materialize. In parallel with this, we are seeing that important initiatives by card issuers aiming to drive the adoption of biometric cards. Some banks have begun to simplify the process for enrollment so that you now can do it at home without having to visit a bank branch. This will make the rollout phase much more efficient and cost-effective, which is the key as volumes start to increase beyond the relatively low numbers we have seen so far. Another interesting development is that some banks have now started issuing biometric cards automatically to certain customer segments, and not just to those customers who actively order a biometric card.
With that, let me hand over to our CFO, Per Sundqvist.
Okay. Thank you, Ted, and good morning, everyone. Let us now swiftly move over to the first slide of the financial results section. First of all, let me discuss the background and the reason for the quite substantial non-cash flow affecting writedowns that we have done this quarter. Firstly, we have reevaluated parts of our wafer inventory. This concerns products that we have purchased at a much higher price at the time when there was a global component shortage, which was not so far long ago. The situation is now very different, and the replacement value of these products are much lower, hence the writedown. Secondly, we have written down the value of a number of our capitalized R&D projects.
The main reason here being that the WACC discount rate that we apply in our IP valuation models has increased significantly due to the higher general global market interest rates that we all currently are living through. At the same time, we have also discounted projects which are no longer deemed financially viable due to the same WACC effect. We have also assessed that some cash flows may be delayed primarily due to other macroeconomic factors as well. Thirdly, and the final factor, and in this case, a goodwill-related impairment is related to our Delta ID acquisition and is twofold. Firstly, also here, the discount rate that we apply has increased due to higher global market interest rates.
Secondly, we have also assessed that cash flows may be delayed also here, primarily also in this case, due to the macroeconomic factors we mentioned earlier under the IP section. We still, and I have to emphasize, still see a very positive view on the long-term prospect of iris recognition. If anything, I would say that the long-term prospects in this area actually have improved, not the least in the automotive industry and in the automotive sectors. Next slide, please. The impact of the non-cash writedowns I just discussed is clearly visible on the operating result on this slide.
The silver lining is that after a few challenging quarters with declining sales, we did see our revenues go up by 42% in constant currencies compared to Q3, a quarter when our sales were very, very low due to the fact that our customers further down the supply chain were focusing on bringing down their inventory levels. Let us turn to the next slide, and we will have a more closely detailed look at the gross margin. As you can see, the gross margin has been quite volatile in the last year, mostly due to product mix changes from quarter to quarter.
In the last couple of quarters, gross margins have also been impacted by the increased customer price pressure we have experienced since our competitors are focusing on lowering their inventories and freeing up cash, much the same manner as we are doing. Note that on this slide, we're showing the gross margin this quarter, excluding the SEK 22 million inventory writedown, which represents an increase on the previous quarter by about 8 percentage points. Having said that, ours as well as our competitors' inventory levels are still too high, and we thereby expect a continued price pressure, which is likely to put continued pressure on primarily mobile margins, at least for the next couple of quarters in 2023. Next slide, please. This rolling 12-month trend clearly shows the impact on our revenue and margins of the demand drop due to the Chinese lockdowns.
The restrictions have now been removed, we do expect gradual increase towards the historical demand for mobile phones, as well as a gradual continued growth in the PC, access, and payment segments. However, as mentioned earlier, we do expect continued price pressure in the short term as sensor supplies inventories are still too high in the whole ecosystem. Looking ahead, we do expect that our revenue will continue to diversify, thereby lowering our risk level as well as driving our long-term growth in the new segment. Revenues outside of our legacy mobile capacitive business amounted to a bit more than 30% in Q4. We expect this share to increase to around 45% already by the end of 2023. Next slide, please.
Operating expenses in Q3 were SEK 111 million, versus SEK 108 million in Q4 last year and SEK 77 million last quarter. Development costs of SEK 27.4 million were capitalized during the quarter, which is to be compared with SEK 19.9 million in the same period last year. This corresponds to 46% of the total development costs, compared to 34% in the same quarter, 2021. We are now, of course, continuously making necessary cost adaptations and reductions to mitigate for the temporary demand drop in the market. We have implemented a number of measures to reduce our costs, mainly staff reductions. Since Q2, we have reduced employees and consultants by roughly 40 people, or about 70%.
During the quarter, we had some extra one-time costs, mainly related to redundancies, and we also see a certain delay in terms of some of the cost reduction. For example, it is to be mentioned that we have reduced our office space, which will benefit us fully, first from this quarter in 2023. On an annual basis in 2023, our OpEx will have decreased according to our plan. We are continuously working to further streamline operations and OpEx to ensure that we return to profitability as soon as the market so it deems. As usual, we will keep maintaining a very strong focus on cash, optimize our cost, and make sure that our efficiency improvements are moving us forward and preparing us for the future. Next slide, please.
Our core working capital, that is accounts receivables plus our inventory, less our accounts payables, was SEK 358 million at the end of the quarter. To be compared to SEK 217 million in the same quarter last year and SEK 355 million last quarter. If you look at the development of core working capital in relation to our rolling twelve-month revenue, it increased to 42% from 16% in Q4 last year and from 34% last quarter. However, while we de facto have decreased our inventory by over SEK 100 million since last quarter, this was counterbalanced by a decrease in accounts payable of SEK 116 million.
Since we judge our inventory to be still too high, we are still focusing very hard on making further reductions in the quarters to come to further improve and free up more of our cash. Next slide, please. During the fourth quarter, we also carried out the set-off issue and the rights issue amounting to SEK 341 million after transactional costs. As Ted Hansson mentioned earlier, this has strengthened our solvency and our liquidity, and of course, enables us to continue to finance the important customer projects and product development initiatives currently running. Our cash flow from operating activities in the quarter was a negative SEK 104 million, compared to negative SEK 17 million in Q4 last year and a negative SEK 112 million last quarter.
At the end of the quarter, our cash position stood at SEK 274 million, versus SEK 374 million a year ago and SEK 71 million at the end of Q3 2022. Cash flow from investing activities, that is capitalized development expenditures, was in this quarter negative SEK 28 million compared to SEK 24 million last year. By that, thank you everyone from me. Now let me hand over to our Chairman, Christian Lagerling.
Thank you, Per, and thank you, Ted, and good morning, everyone. Christian Lagerling here, I'm the chairman of the board. I wanted to join this call this morning to take the opportunity to give you a brief overview of the board's proposal for a long-term incentive plan. This was published this morning, and there will be an extra shareholder meeting on February 24th, and all the details will be published on the company's website. This is an important proposal for Fingerprint to establish a new, strong, long-term incentive program to be able to retain and to continue to attract the very best talents in our industry. At the same time, very importantly, aligning some very clearly defined long-term financial goals that are in the strong mutual interest of investors, employees, as well as all stakeholders.
The proposed program has been very carefully structured to provide a deeper buy-in into our corporate performance, encouraging Fingerprint colleagues to invest in Fingerprint and to commit to this long-term ownership, and importantly, profitable growth and performance of the company. As mentioned, details of the program will be outlined and shared near term. But in brief, the proposal is to offer colleagues to make investments in the Fingerprint stock at the launch of the program planned for this spring, with the potential of share and option grants that can be awarded after a period of three years, subject to the company meeting certain profit and financial performance goals, including strong share price performance. This incentive program represents up to circa 4.3% of our total shares outstanding and subject to the goals as mentioned.
My final comment, I'm very pleased that this program is now put in place, which is very important for us. It's designed to support company's long-term competitiveness and performance, benefiting all investors and stakeholders. Thank you very much from me. I believe after this, we're now ready to answer some questions.
Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Once again, please press star one and one if you wish to ask a question. There are no questions on the phones at this time. Please continue.
Okay. I think we will, take some questions, from the web. The first one being on the Infineon collaboration, when do you see rollout of, pilots or launches from this SECORA Pay Bio that was launched, just recently?
We have, of course, been working with Infineon now for a while. We expect to start customer engagement relatively soon. Our target is to have pilots in the second half of this year.
All right. Sounds good. On the FPC1632, there's a question on this one. Is this a good enough solution to be used for payment and other high security features on Android?
Absolutely. I mean, we are, at core, a biometric company, and we know biometry. We have been in this for 20 years. The products that we put on the market, they are, you know, good from biometric security point of view. It's also one of the reasons that we were entering this optical a bit later than some of our competitors, because we wanted to get the security on the right level. The FPC1632 has passed our internal benchmark testing. It has passed several OEM benchmark testing. It has also passed the Android certification, as well as payment schemes like Alipay in China, where it has also passed liveness test and so on. We are very confident about the performance of our FPC1632, also when it comes to security.
All right. Thank you very much. Also a question on the incentive program proposal. Will there be a lockup period of the shares?
Yeah, I can address that. It's a three-year plan to achieve certain financial goals. For beneficiaries of the incentive program, you need to stay with the company. There is also a vesting schedule, which will be part of the details that we will share here near term.
All righty. Thank you. On cash, how confident are you that your cash position is sufficient?
Yeah.
Yeah.
Please go ahead.
No, no. I was just saying that, at this stage, we feel confident that this will be enough given our current situation.
Okay. All righty. Thank you. There is another question for our Chairman, concerning your long-term view or plan for the company, if you can comment anything on long-term plans and what you would like to achieve with the company.
Yeah. I mean, briefly, as we know, we're living through a very special time with some external factors that have been quite exceptional on a geopolitical level. We're making a number of actions and good progress to weather through this. I'm very confident long-term for the company with our fantastic team and IP and opportunity, given how biometric market still is. It's of course, you know, some of these factors are more difficult for us to, you know... We're dependent of some outside factors that needs to play out, and I think that's been well addressed by the team here, how we see that. I think you'll see continued and new innovation from the company in existing areas, but also in new areas.
There's a lot of new exciting areas related to biometrics that we're looking very carefully into, where we could leverage our technology and platform. We have a lot of work ahead, but I'm very excited about the future for the company. I'd love to talk more about this overcoming calls together with investors.
All right. Thank you very much. On the optical fingerprint sensors, will you communicate further design wins that you get, or was that only for the first one?
No. We will in the future, I expect we will, you know, start announcing multiple launches. Like we announced the normal capacity, you know, we have been doing for a long time on Twitter and with a counter, and we are going to use the same concept also for the optical display launches. Of course, we are not happy with the one launch. We want to achieve more.
All right. Okay. Thank you. Could you also please elaborate on the automotive segment? Do you still have a collaboration regarding iris recognition in cars?
Definitely. We are still working with Gentex, who is a world leader in rear view mirrors. What's very interesting now is that the driver monitoring systems known as DMS are becoming mandatory by legislation in the U.S. and other regions. Now we are working on improving, or we have been working continuously on improving our asset and so on. It's very nice to see that we see inquiries now about adding the biometric support in the driver monitoring system, which is a very positive development that we're looking forward to, that we will follow closely going forward.
All righty. Excellent. Thank you very much. I see that people are interested in the proposal also for the EGM, we refer to information that will be published on our website shortly on those details. I think that's it for questions from the web. I think if you have any final comments, Ted or anyone else, please go ahead.
No. Thank you for participating.
All right.
There is one question off the phone, if that's allowed.
Okay.
Yeah. One moment, please. Thank you. The question on the line comes from Alexander Thiel from Jefferies. Please go ahead. Your line is open.
Hi. Good morning, gentlemen. A quick one from my side. Could you provide some kind of guidance for 2023? I understand it's highly uncertain, but do you have any kind of planning for the short-term, but also for the midterm that you could provide? Thank you.
No, we are not able to, add any forecast or give us in time.
Thank you. There are no more questions at this time.
Okay. Okay, thank you. I think we'll be closing the call. We'll be releasing our Q1 report on April 25th. Thanks everyone for joining the call, and, bye for now.
That does conclude our conference for today. Thank you for participating. You may all disconnect.