Gentlemen, thank you for standing by, and welcome to the Fingerprints Cards Q3 2020 Results. At this time, all participants are in a listen only mode. During today's presentation, you may submit your questions over the web. And I must advise you the conference is being recorded. I would now like to hand to your first speaker today, Stefan Peterson.
Please go ahead.
Thank you, and good morning, everyone, and welcome to our earnings call following the release of our Q3 2020 results this morning. We'll begin today's call with a presentation of the report by our CEO, Christian Frederiksson and thereafter by our CFO, Persson Twist. And following this, we'll have a Q and A session. If you're following the call on the web, you can post 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 this session.
And with that, I'll now hand over to our CEO, Christian Fredericksen.
Yes. Thank you, and good morning, everyone, and welcome to the call, which will focus on Fingerprints' progress and performance in the Q3. Let me start by discussing the status when it comes to the supply chain's constraints, and we can go to the first slide, which we also talked about in our previous report. Demand for our products remained strong in the Q3, but our sales suffered due to the current production capacity deficit in our supply chain. The current high market demand for silicon wafer production capacity also resulted in further purchase price increases this quarter, which is basically the clear reason for our that our gross margin declined.
We continue to focus on working capital and effective cost control as well, which contributed to strong cash flow for the quarter. I am pleased with that. We expect that the situation with insufficient capacity to the production will persist in the short term. But at the same time, we anticipate that the changes in our product mix will, over time, contribute to improved profitability, which is clearly also a must for us and a target. As previously communicated, we plan for significant volume growth in the coming years.
Broadening our supplier base is, therefore, very important priority for us and as it has been during these couple of quarters. And we have intensified our efforts to secure additional suppliers of important components, both within and outside Mainland China. While we expect that the coronavirus outbreak will dampen the demand for smartphones for the remainder of the year, we have seen a clear upswing in the market for capacitive sensors for smartphones. So far this year, about 60% of launched smartphones from the 10 largest OEMs have a capacitive fingerprint sensor, while about 35% have an under display sensor. Both capacitive sensors and under display sensors are increasing, while the proportion of phones without any biometric sensor continues to decrease.
Thus far, biometrics for PCs has been quite a narrow market, but this is now changing rapidly. We have seen a clear increase in interest from PC makers, and we foresee good growth in this segment in the quarters and years ahead. As we have previously stated and let me come back to this discussing PC segment a bit more. Next slide, please. Approximately 460 smartphones have now launched with our sensors, including new customers such as CAT Cat Phones, Transion and WinSmart.
Our Sidemount FPC1540 sensor is doing particularly well in the market, and we expect that its importance in our capacity product portfolio will continue to grow. We also saw a lot of activity during the quarter in the payments area. It was announced that Visa has certified payment cards from Thales, which includes Fingerprints Technology. This biometric card is the 1st in the world to be certified by both Visa and Mastercard, enabling card issuers to conduct major commercial launches. The lack of certification has been a major obstacle to commercial launches, and this has now been removed.
Another important prerequisite for this new mass market for biometrics to gain momentum is a reasonable cost level. Also in this respect, we took a significant step forward during the quarter with the launch of the latest generation T shaped sensor module for contactless biometric payment cards. The new T Shape offers better performance than its predecessor, while also being the world leading in terms of cost effectiveness, with an indicated price below $3 at volume production. We will continue to lower the cost and improve the security in the years ahead, but it is already now an excellent product, and it will enable mass market rollouts. Next slide, please.
As I said, another very interesting market and a growth market for us is the PC segment, which is why we launched a new solution specifically for this segment this August. This solution is tailored for use across a growing number of different form factors and use cases, including notebooks, 2 in-one cardables, convertibles and PC accessories such as keyboards, for example. As you may know, we recently announced a design win with a major PC maker with a planned product launch in Q1 next year, and we have received a number of wins with smaller makers as well, also with planned launches in Q1. This market is finally starting to move after having been quite a narrow market for biometrics so far. Around 260,000,000 PCs are shipped every year, so we see great potential in the coming quarters years.
Our positioning is very strong in PCs. And so far, products from Acer, Asus, Google, HP, Huawei, Microsoft and Samsung have launched with sensors from us. Other circumstances that I believe would benefit us include the fact that our smartphone customers are also gaining PC market share and the traditional smartphone module houses that we partner with are now significant players in PCs as well. Next slide, please. We continue to make good progress against our strategic priorities.
In the mobile area, I would like to especially highlight the success we have garnered with our FPC1540 sensor despite the short term challenges in production capacity. This product has done extremely well in the market, and I would even say it is a key reason for the resurgence of the capacitive sensor in the mobile sector. This sensor is very thin, so it can be mounted on the side of the phone, even doubling as a power button or volume control button. While we are continuing our work to enter the under display market, we are also investing in continued innovation in capacitive sensors, and that road map also continues to evolve. We are, of course, very well positioned now in the strong trend towards side mounted sensors.
And we will be more launching more exciting news in this area. So please stay tuned. If we look at segments outside of mobile, I have already talked about the good progress made in the payment area in the quarter. Let me just reiterate the fact that we saw an important certification by Visa, which means that Fingerprints Technology is now the only contactless biometric payment card that has thus far been certified by both Mastercard and Visa. This finally makes it possible for card issuers to plan for larger scale launches.
As previously communicated by B&B Paribas, they are doing a commercial launch this fall in France. As far as we know, the first cars are being rolled out to customers. Obviously, the current situation with the COVID-nineteen outbreak makes it a bit more complicated, but this is moving ahead now. The launch of our latest T shaped sensor module further strengthens Fingerprints' position in this emerging market mass market for biometrics. Let me also mention our partnership with Sentry Enterprises to enable a first of its kind converged biometric credential for physical and logical access.
The SentriCard replaces standalone biometric solutions while leveraging the existing infrastructure for physical access control, supporting multiple industry standard protocols. More secure and seamless access and authentication methods are now in high demand and on the agendas of large multinational enterprises in order to keep the workplace safe, both for physical access and to log in for corporate systems and applications. Partners like SentriCard and others that we are working in are well positioned now to meet these requirements, and the access industry is also showing good trend for us. Next slide, please. Let me quickly summarize before handing over to our CFO, Kasia Enquist.
Market demand for our sensor was strong in the quarter, including in the PC segment, which is now finally moving. But also clearly, we are not pleased with the results of the supply constraints that I discussed earlier. And we have not been able to satisfy clearly at all the demand in this area. We do expect these supply chain issues to persist in the short term. But at the same time, our product mix is shifting in a way which we will expect contribute to improved profitability, and we are getting into new segments outside of mobile, which also improve the profitability.
And we will obviously work very hard on extending our supply chain. The prerequisites for large scale commercial launches of biometric payments cards are now coming into place and have made things happen. We've done so recently the world's worst contactless biometric card certified by both Mastercard and Visa. So this means that an important obstacle to commercial launching has been finally removed. The cost level is, of course, also important, and I believe it took a huge step forward with the launch of our new chip T shaped sensor module in Q3.
Our recently announced partnership with semiconductor companies Infineon and STMicroelectronics are also important in strengthening our position in this market. We also have partnership with NXP. So we, at the moment, work with all top 3 global secure element providers that have a combined 85% market share in the payment card industry. With that, let me hand over to Persson Christen.
Thank you, Christian, and good morning, everyone. Let's move to the first slide in the financial results section, please. Starting with our revenue. We reported a 17% drop in relation to the corresponding quarter last year. We experienced continued strong demand for our sensors, but our revenue as well as our margins was negatively impacted by the supply constraints like last quarter.
In constant currency terms, revenue declined by 9%, currency having an 8% negative impact as the U. S. Dollar has weakened against the SEK. If we then look further into our gross margin, it decreased by 5 percentage points compared to last year. This is due to the continued upward pressure on our purchase prices due to the tight supply situation.
We have, of course, as Christian mentioned, intensified our efforts to secure more suppliers of key components within as well as outside of Mainland China. And as Christian also mentioned, we expect the shift in our product mix will contribute to improved margins over time. Our operating profit was negative SEK 5,000,000 versus a negative SEK 3,000,000 in the same quarter last year and a negative SEK 17,000,000 in Q2 2020. Our net income was negative SEK 2,000,000, which could be compared to SEK 6,000,000 in Q3 last year. Next slide, please.
This slide shows the development of revenue and gross margin on a 12 month rolling basis. The decrease in revenue in this period is due to the factors discussed and mentioned earlier. That is the continued impact of our supply chain disruptions. The decrease in gross margin is also a consequence of these supply chain issues as our purchase prices have been pushed up as competition for production capacity further has intensified this quarter. We are, of course, not happy with this gross margin level and are continuing our efforts to improve profitability, both by continuously increasing our efficiency and by diversifying our business into new customer segments and application areas.
And as mentioned earlier, we expect that shift in our product mix going forward will contribute to improved margins over time. Next slide please. Excluding other operating income and expenses, our operating expenses for the Q1 were SEK 59,000,000 versus SEK 78,000,000 in Q3 last year
and SEK 80,000,000 last quarter.
Development costs of SEK 32,000,000 were capitalized during the Q2 compared to SEK 24,000,000 in Q3 last year and SEK 26,000,000 last quarter. We will maintain a strong focus on cost and efficiency improvements going forward. Next slide, please. Our core working capital, that is accounts receivables plus the inventory less the accounts payable was SEK161,000,000 at the end of the quarter, which should be compared to SEK257,000,000 in the same quarter last year and SEK208 1,000,000 last quarter. We continue to work very actively and efficiently to manage our working capital.
Next slide, please. As a conclusion, our cash flow from operating activities was a positive SEK68 1,000,000, which is to be compared to SEK 60,000,000 in Q3 last year. And our cash position stood at SEK 453,000,000 versus SEK 537,000,000 in the same quarter last year and SEK 429,000,000 at the end of Q2 2020. And I must reiterate that we continue our focus on working capital and effective cost control during this quarter, which contributed to the strong cash flow. And cash flow from investing activities, less capitalized development expenditures, was SEK 33,000,000 compared to SEK 26,000,000 last year.
Thank you, everyone, and we are now ready to take questions.
Thank you. And your first question comes from Francois Bouvignon. Please go ahead.
Good morning, gentlemen. I have a couple of questions. The first one is on the current geopolitical situation. So when we look at Huawei that has been banned or restricted from September. I just wanted to have your view on how it impacts you, especially in Q4 and beyond given this restriction, maybe it's a big customers of yours, I mean, based on your design wins with them.
So I just wanted to have a view of if you are still shipping to them in Q4, are we going to see an impact on that? And the other thing which is very active in the industry in terms of conversation is the fact that the older Chinese OEMs, so the competitors of Huawei, Xiaomi or Povivo are quite aggressive at the moment to capture the potential of share gain of Huawei. I just wanted to have your view of what you think about this situation of aggressive non Huawei, Chinese local and Huawei that have that can fully produce at the moment? That's the first question and I have a couple of others, if I may ask.
Yes. Hi, Francois. And yes, I think it's very clear that Huawei is being impacted and that we have Huawei is obviously a big customer of ours. And it has been impacted obviously by all the actions in the geopolitical situation when it comes to Huawei itself. Now I cannot comment anymore on the deliveries as such to Huawei, but obviously, there has been a large impact.
And we are, of course, following all of the rules of the international sector, if you may, right? But I can say that when it comes to our capacity situation, that doesn't impact us. I mean, we have there is so much more demand that it just overshadows that. The issue is really about supply. And so that doesn't and I don't see that impacting us either actually.
So there it is clearly this one single issue that we need to fix. And even that customer is not impacting us in terms of the revenues. And then
Just a question, sorry. Can I follow-up just on that? I mean, many some of your peers, they assume 0 revenues from Huawei, for example, from Q4 onwards. Do you are you going to still have revenues from Huawei in Q4? Or I would assume 0?
And did you have any revenues from Huawei in Q3? Just to clarify.
No, I don't want to get into any customer revenues, right? But we're following the international rules. And when there is a blockage, we, of course, follow the blockages according to the rules, right? And we will not go against any of that, right. So and as long as that is owned, that is owned, right, for us.
So clearly, there is an impact, right? But not I don't want to talk anymore about specific customers. But obviously, there is an impact and we follow the rules and the restrictions that are there. And then on the Chinese OEMs, I think you're very right, Francois. And there is obviously, the dust will settle when we get into next year and go through this.
I think there is a there are many big changes happening. Mobile industry always has many big changes in market shares and shifts. And obviously, the other Chinese OEMs have geared up to take that share in the market, right? So there is a big battle coming in that one as well. And that obviously, we will see the impact when we go into the next year.
I think that's very correct analysis from you as well.
Okay. Thank you very much. The other question I had is on your gross margin. It seems in your wording that you said that the product mix will improve over time and I think it was smartly used this over time. So I just wanted to know if we're going to see it from Q4 or it's going to be beyond Q4 just in terms of improvement product mix?
Yes. Thanks for asking, Francois. And I knew, of course, that you would notice the wording because we don't want to give a forecast in the short term. But we see, of course, over time that both the new I think there is 3 elements, right? The new sectors such as the PC, for example, also in access, there are there is growth for us.
We're also growing actually back in mobile, but we cannot just deliver at the moment. So we will we are getting new products also into mobile, growing in other segments. And then, of course, we need to do all the actions when it comes to getting the supply situation improved for us. And there is a lot going on for us there. So we see that clearly these actions will improve the gross margin.
So this is obviously not the gross margin level that we can we want to have and accept ourselves even to have as a company, right? So it will improve. And we took a knock now clearly from just the just an unbelievable very high demand that is hitting the whole supply chain right now. So it has helped us, of course, on the other side, but not enough. I do realize that a good question is that why haven't we raised prices.
Actually, the ASP declined for the first time in my time in this company has stopped. So clearly, there is and in the new product areas, they receive an increase in price levels. But they are coming out, of course, now as we go into the side note. Mode. So that is happening, but there is just so much demand, so overwhelming demand at the moment on the whole foundry industry, right?
And you can see it from their results as well. So there is almost an auction for product at the moment in the supply chain. That's maybe why I'd say that we will improve the gross margin, but we don't give any time scheduled for it.
Okay. That's very clear, Christian. The other one is on Smartcards. I mean, obviously, lots of announcements in the last few months, especially with your long term targets with €3,000,000,000 of payments by 2026. What are the next milestones?
What are you looking forward now just to get an idea of the shape of this strong market. Obviously, payment is a very big market, but also slower than mobile. So to reach €3,000,000,000 in 20 26, I guess, is not going to be in 1 or 2 years. So should we see a strong pickup from next year basically? And what are you looking for if you don't want to give any volume indication about the Millstone like orders from customers that you expect soon?
Or anything around that would be very helpful.
Yes. I think very good point again, Francois. And as a basis, because we don't sell the products to the consumer. So that's why I have understood that and given up on term view term view on this one because we also need to work already looking at the situation of today. We clearly need to work on production capacity over the years, right, to have that capacity when this happens.
So in a way, this has triggered very important actions on our side actually, which were must do for us as a company. And I think that the trigger point that we are looking for now and is, of course, bank launches now. I think there is no need to do pilots anymore. We know this works. There is just there is we have the certification.
We have the technology. It works. And now it is more about basically just getting the banks going out. It's starting now in France and have started, as I said, with P&D, Paribas going out. Obviously, the pandemic with the lockdown happening right now in the very next few months maybe is it's not making it easier, of course, to do all this, but obviously, it's still moving ahead.
So I expect the bank launches to continue, and that is kind of the trigger point where you get it's a gradual growth, but it's obviously going to be good growth, very good growth for us over the years, right, in the payment industry now. And so more and more launches. And one thing, as I said earlier, obviously, we see from all our research and all the discussions with the banks is that the consumers are valuing a lot because that's important at the end of it. At the end of it, this has to bring a lot of value to the consumers and the banks to go out there. And it does.
And it seems to be from all the discussions, all the pilots, all the research, all the work being done with the consumers that there is a huge demand. And it's obviously been helped by this horrible pandemic when people do absolutely do not want to touch the device the terminal, the payment terminals. So clearly, the contactless and taking the cap off finally so that you can pay without caps securely is very important. So I think that, that demand is only increasing right now. So banks, I would say, Francois, it's a summary.
Bank launches, that's what we expect.
Okay. That's very clear, Akashin. Thank you. And the last one for me is on your OpEx and D and A. The D and A decreased significantly this quarter.
And I was wondering why it decreased so much like 4% of your revenues when your CapEx total CapEx including intangibles are increasing a lot as well. So I just wanted to understand what happened this quarter to have D and A so much down? And on your OpEx, obviously, you did a strong work on the cost control. So what should we think about your OpEx run rate at the moment because it's moving a lot? And if just to for model purposes to see how we should forecast in the future?
Yes. Hi, Francois. This is Per Sundqvist here. Well, the OpEx level that you see now is affected by the fact that we have higher activity actually in the portfolio right now, in the R and D portfolio. And that's the reason why that part has increased.
And going forward in time, when you look, look, we don't give any forecast on that one. But you have you know that we have worked hard and diligently with the OpEx in the past over this year, and we'll continue to monitor this in relation to, as I said, 1st cash flow and, of course, in relation to revenue as well.
Yes, Francois.
So R and D decreased a lot this quarter in expenses, I mean, in Q3?
Yes. But they are lower the whole cost base is lower right now outside the capitalization as well.
Okay. Okay. It's just I was surprised by the magnitude that's
Yes, yes. I understand, Francois. And but yes, it's been I mean, we've been running this, I would say. I mean, the teams here have run this very well. And but obviously, we're not going to we can't cut ourselves into victory.
So we are running this well. We're cash flow positive. I'm pleased with that. The teams are doing this very well. And then we're investing heavily still in terms of into the new segments and the new products that we are doing, right?
So we continue doing that. And of course, growth is what we would drive for now and when they have so strong demand for the products as well.
Okay. Makes sense. And the D and A?
Sorry?
The D and A, the position and amortization?
Yes, D and A.
The Depreciation and Amortization came down
from Yes. And that's
18. Yes. And that's just because of the fact that we have had very significant depreciation lowering due to the fact that we've had large projects actually running out of that depreciation, old projects that have been activated and been running for several years now. They have come to an end.
Okay. But your D and A is 4% of revenues and your CapEx is 11%. Should we expect the D and A to come back up?
Well, let's say it's a forecast. And as we said earlier, I don't give that. It depends on what we see in terms of our R and D projects going forward and what kind of business cases we can create based on that. And then I'll just reiterate what Christian just said in regards to what we do on efforts there.
Okay. That's very clear. Thank you very much for your answers, Have a nice day.
Yes. Thank you, Frank.
Thank you. And your next question comes from Victor Westman. Please go ahead.
Thank you and good morning. I was wondering about the price of $3 for the new sensor in cards, is that the total cost for the sensor, including your margin? And when can you reach the $3 cost? How many 1,000,000 sensors do you need to sell to reach this level?
Hi, Victor. We don't give that any of those break points. But of course, this is all built for volume rollouts and in volume when we are in volumes, right? And basically, this is the price that goes to that we go with, right? And then, of course, you have all the other costs, and that's why we say that the total cost will be below $10 for the card.
Okay. And can you compare the total system cost to Trusted Bio from IDEX now? You with your software, there is no need for an MCU anymore. So what's the total system cost?
Yes. I think the whole card cost is clearly below $10 And obviously, we are working and yes, the answer is there's no MCU needed in our system. And we will continue working on this one, right? I think we aim to be, of course, the security, the performance as well as the cost leader in this industry.
Okay. But you don't want to compare
talk about what everybody else does. We want to be the leader. We've said that we want 50% in the long term of this market. So obviously, we need to be the leader in performance, in security and in cost. And that is on system level.
We, of course, understand that we need to drive the system cost of the car together with our partners when it comes to the whole ecosystem, right? The SC suppliers, that's why we work with all the 3 big ones that have in the security element area, for example, that have 85% of the market. We work very closely with them and jointly with them where we will develop this product going forward as well so that the efficiency, the security and the cost and the volume production capability will be the best in the world.
And one question on your on the targets that you announced earlier. I think you mentioned SEK 800,000,000 capacity units and SEK 600,000,000 for in display. Can you discuss why you don't think that in display will not outgrow capacity?
Yes. I think we've seen a bounce back actually quite strongly now with that's why, right? So of course, this is a high-tech industry that moves fast. But clearly, we see that the performance is so good and the side button that we have and we're launching on is taking off very well. And of course, we're glad to see that even Apple launched that on one of the Ipads, right?
So I think that the curve the very nice sensor on the side, that's the reason, right, Which actually has been our innovation that we've been driving for this industry. So it's shifting. And it is very comfortable. It's very good position, right? So it's that's why.
So we see that in the models coming out. That is actually a bounce back into capacity. And on the top of it, of course, this is going also low tier. So it goes actually lower and lower into phones that have been feature phones or have had no biometries. So we see both that.
So expansion also in the lower tier, right?
Okay. That's what Yes. Last question on the capacity issues here. You mentioned in your last in the Q2 report that there is a lot of other products that want to have capacity in the fabs. You mentioned 5 gs, IoT, etcetera.
Can you discuss this a little bit more this issue? Is this some
I think there are industrial shifts, right? So I'll give you a few. One is clearly, there is also a geopolitical shift going on, right? So you will have capacity being built outside of China. And you have the whole geopolitical situation, which has made it more complicated when it comes to the supply chain, right, obviously.
And that's where we are juggling through as well. And you will see that I'm sure everybody is building capacity and capabilities outside of China and in Mainland China, right? And the other one is just that there is despite the pandemic and everything going on in the world, there are a few things which are growing strongly in the high-tech industry. So 5 gs, obviously, is making it possible to put, you could say, IoT, right? So you will have everything that has electricity.
Every device and everything that has electricity is getting connected and is getting a chip, right? So you have a huge demand for chips in that perspective. Then you have in the home working has increased both the cloud business and the servers as well as PC and other sales, which also increases the huge there's a huge demand also for memory, right? MCUs is massive demand for it as well as then, again, increasing the chips. And then you just look at the mobile phone that even if the mobile phones have actually declined this year, year on year, but at the same time, you have gone from 1 camera 2 to 3 to many cameras and all kind of other functionalities coming into the phones, which increases the need for chips, all of them.
So you have multitude of needs for chips, right? And then I suppose, finally, when you look at the automotive industry, where there is just the it's going forward with more and more electricity cars, more and more extreme work on automation into cars. And all of this requires a massive amount of sensors and chips into the cars. So I think that just an explosion in demand, I think, is out of this one. I think all that makes it a short term challenging for pretty much everybody in this industry now.
Thank you, Christian and Per and Stefan. Keep up the hard work, and we look forward to a lot of cards in 2021.
Thank you, Victor. Always good talking to you as well. Thank you for your questions.
Thank you. And your next question comes from
Limke. Hi, this is Farzad. Thank you for taking my questions. I have a couple. One is, you mentioned that you will have a $3 card at volume rollout.
What do you think that level needs to be for a volume roll is that price level or is that $3 fine for a volume rollout for the banks or the issuers? Or do you think the total cost of the card, which needs to go down from $10 what is that number that the issuers need to have to justify a sort of mass market rollout?
I think the price as it is now is enough for volume rollout. I think those and I think in the beginning, the banks will charge at least, and we don't know how there will be different mechanisms for banks when they launch now. So I think the technology is working. The certifications have been done. And now the price level, you can always work harder.
I suppose for the real massive rollouts of getting into 100 of 1,000,000 and 1,000,000,000 of cars, we will automatically, of course, impact the prices for sure. But you can absolutely go ahead with this one into rollout and volume rollout. And I think that the examples in the banks are, for example, that they will charge for this one for them consumers. It seems to be one of the business cases that the banks are doing. So they're charging something for the car per year or per month, for example, to get a biometric car to when they get going.
So that's maybe one of the cases how it's going to start.
So it's not a one off cost. It's a per year or per month cost to use?
Yes, it's different. I think that you will see different launches from different banks. They have different marketing strategies, right? And that's up to them. But I suppose you will see a lot of several of them starting with the high end where they charge something per month or per year.
And in some cases, it might be a one off payment and in some cases, it those amounts, of course, are different. I think there is an acceptance for consumers to pay. Of course, the number is then up to the banks on what they believe is a good case.
Okay. But then therefore, you consider a mass market volume rollout to be in the 100 of 1,000,000. And currently the $3ten cost is okay for tens of 1,000,000. Would that be a fair assumption to make? Because I'm just trying to figure out what as one of the previous questions were asked by Francois, how do you see the trajectory from virtually $0,000,000,000 to $3,000,000,000 in 2026?
Yes. I think it's a it will be, of course, step wise, and it starts now from next year going right. And that's why we had to take such a long view because it takes time. And at the end of it, I have to say, I mean, we don't know exactly. Obviously, I mean, we are not pushing it, but we can see that the whole industry has geared up and is going into it now.
And we're reflecting that a bit on how the contactless rollout into cards went, right? The contactless, which required a change in the POS terminals, that's why it took 8 years to get from 0 to 1,000,000,000 produced contactless cards per year, took 8 years. And then they had to change the POS terminal. There were changes in the end system and the terminals, right, which is a pretty significant change. Here, you don't require changes in the terminal.
You just have something that Mastercard and Visa have done in the back end engine, which has been done. So of course No,
no, I appreciate that. And in fact, I've confirmed that with Ingenico and couple of your sort of Verifone handset manufacturers. Can I just ask one more question on the because speaking to some of the recent announced the companies with which you've made recent announcements, the feedback that I got from one of them was that you require something like a $6 to $7 cost to the issuer for it to be really mass market and that would be a few years from now? Do you sort of agree with that number at all? And do you think you have the trajectory for your solution plus the entire bill of material solution to get to something like $7 in a few years' time?
Well, I think that total I mean, we are now going to USD3 for our system and the total card will be below $10 So I think it takes you quite far. And then we obviously have a road map, and that's what we are building on in terms of both capacity cost and performance and security levels, where we believe that we will take this the whole card cost, the whole $3 the whole card. That's kind of where which is then for billions of cards, right, if you look at it. So and that's where we believe you do billions of cards in the industry. Understood.
Just moving on from that to in a finger on display, have you sort of almost sidelined that in terms of the effort because the sort of biometric cards are taking off or is that still in the mix?
Yes. That's still in the mix. I am not happy with the fact that we have not been able to get in there, obviously. But we are still and we are in the works, and we will, of course, then come out with when we get there. I realize that, that is still a good market to get into, although we have obviously missed quite a lot from in timing from that market so far.
We're still working on it. We still have the project going and the cases on with customers to get into mobiles there. But it's obvious that the payment industry is far, far bigger than that, no doubt about it, right? But yes, we are in there still.
Okay. Just another comment that has been made by some of the players in the sort of face ID market that active stereo vision and this is not in the coming years, but over time will pretty much be have the same bill of materials as a finger on display solution. And at some time at some point, the sort of fingerprint display fingerprint on display market might sort of almost vanish because you have a better higher security or fidelity solution with active stereo vision, which might just completely take away the need for any fingerprint solution on a mobile handset. This might be 5, 6 years out, but this is what they're working towards. I mean, I was wondering what your thoughts were towards that claim?
Yes. I think there will be, of course, many of these biometric markets. I mean, we also have the iris. We have an iris combined with face solution ourselves. So we see that you will have a little bit different use cases in different situations.
Clearly, the from the payment and from the ease of use so far, the fingerprint sensor has been very much preferred still by consumers. We think that is going to have a very strong relevant position going forward as well. Phase has its benefits for sure and also its challenges, right, like with all of them, when comes to cost, when it comes to also the fact that you will have masks worn by a lot of people. And we don't know, not only because of the pandemic, but because of also air quality and others, right? So to use that only, I mean, we can see the challenges clearly now as well with that, also hospitals and others, right?
So we have a lot of challenges with the cure phase as well, and it just doesn't work right. So you will see and there Iris, for example, is an excellent solution for it. So I think that you will see all of these different from fingerprints to iris to face and also gestures and movements and so forth, right? And then I think that for added security, because at the end of it, security is something that needs to move all the time because hackers get better at hacking they get better tools and better capacity. So I think you will also see combination of different biometric use cases for added security and better performance, right, even on top of it, right, depending on the use cases.
So maybe a long answer, but I think that you will see all of this. It's not we don't see Phase only kind of taking over there.
And on the Iris side, you all only provide the software for it, correct? I mean, there's no chip or any hardware that is supplied from by fingerprint, if I'm correct?
Yes. We do a system definition, and we define the hardware parts that can be used, but we deliver ourselves the kind of system and the software.
Okay. And just going back to the supply chain impact that the question was asked on before. If there was a normal quarter, how much do you think given where you are today is the supply impact and how much do you think is the Huawei impact, if that makes sense?
I think that was a bit like Francois was trying to get. I don't want to get into any more details, but I can say that clearly, by far, we are limited by capacity and the production capacity in fact is the one, Not on any single customer has that. I mean, we're still no matter where we do that with single customers at the moment, the biggest issue is capacity by far.
All right. And sorry, I've asked quite a few questions, but just one last one for me. At the $3 level, would the fingerprint sensor be gross margin accretive or gross margin neutral
or Yes. Well, we do yes, we don't give any forecast to prepare there as well. But obviously, with the Q3 18% gross margin, it is obviously clearly better than that.
Thank you. And your next question comes from sorry, go ahead.
Sorry, go ahead. We just concerned that we need to give the web participants a chance to ask a few questions as well. So maybe we can take a couple more from the phone, but then let's switch to the web questions.
Okay. This question comes from Rob Sanders. Please go ahead.
Yes, hi. Just following up on Fazad's question there would be my question. It seems like there's at least sort of 20% of demand. I mean, that's what most companies are seeing that's left on the table effectively in given the supply shortage. So how when you look across trying to diversify your foundry suppliers away from SMIC, when you look around and see what is there in 0.18 micron, whether it's copper back end or whatever it is you need, I mean, are there alternative sources that you can qualify and ramp with?
Is there any single foundry out there that has any capacity right now? And would you be prepared to pay more to, for example, prepay and lockdown capacity in order to deal with this?
Well, I think that what we're doing is, first of all, there is a possibility to get capacity, but we are doing, you could say, maybe 3 things at least. At the minimum. One is that we are we have, of course, increased our teams in terms of capability to go and run-in Batadel several foundries and supply chains, and that's what we needed to do. And second is, of course, that we are doing what we need to do contractually as well. And as I said, it's also this has also stopped the whole ASP decline and actually even turning it around.
So that helps, of course, as well. And then thirdly, what we are doing is, of course, that we are also doing changes in the product when it comes to getting into different kind of foundries with different technology requisites, right? So we're also doing that one, right, which we have not been kind of doing in the same way before, right? But that makes it so for us now. So we're doing also R and D changes in this one.
And I think this has also been in a way, there is always a silver lining in everything. So even this makes us work even harder and better and increasing the plan. And that's why we also went out with this 2026 that we needed to talk about the very long term and making long term relationships now and long term plans and contracts with players to be able to have the capacity to grow here when there is so much more so much more volume to be made in the other business areas.
Got it. And you haven't seen any change in behavior from SMIC in terms of them being a good partner? I mean, they're not prioritizing domestic or anything like that. You haven't seen any kind of behavior that would make you concerned about that relationship at this stage?
No. I think they're one they're good they have been a good partner for us. And obviously, they are also swamped. And we don't have any I mean, we're working well with many players, and we will continue doing so, right? I suppose Stefan will take from the when then.
Yes. We have a few questions from our web participants as well. The first one in the biometric smart card area. Could you please elaborate on the opportunities you have to gain more revenues with biometric smart cards? For example, there's a company that will focus on being a trusted advisor.
So what are your thoughts about fingerprints being able to add more value and offer trusted adviser knowledge as a service to customers and partners?
Yes. I think that we don't plan to be just delivering hardware and a piece of algorithm. We need to look at the whole card. We need to have that competence ourselves. The total card competence.
And we need to look at how do we together with our partners in the secure for example, the secure element players, we're working together with them on how to build the most secure and cost efficient card. And obviously, we want to have that role for ourselves in the industry, right? And that's why we have so close cooperation with many of these big players. And I think that, that's important for us as well.
Okay. And what is the key reason we have not yet seen any large volume orders for biometric cards?
Yes. I suppose it is just so that the timing and how the industry works, right, that this is it's not up to us to put those into the consumers' hands. It's the banks. And first, you have to have the rollouts and get the banks out there and now the first ones have started. And we will see, of course, many more banks coming in here.
It starts in France now, clearly, with the first real rollouts there. So I think it's really about the banks now, many of the banks getting into this one.
Okay. And do you think that the production capacity shortage will affect the rollout of biometric cards?
I suppose this gave I think that this gave us the as I said, the silver lining here is that now we will work on there's a huge effort for us that we need to do together with the industry players here. So this actually has made it so that we really need to work hard together to make these rollout volumes possible. And that's why we also went out with this 2026 numbers, right, which are obviously far ahead so that there is the capability for us to also openly discuss with partners on how to build that step by step capability to be able to meet the demand. It's very important for us, obviously, crucial for us to build that capacity with our partners now. So I think that, that is the good thing that comes out of this.
And why haven't you been able to increase prices to customers if your production cost has increased due to the lack of capacity?
Yes. So I think we have done and the new products that are coming out will actually be increasing the ASP. But obviously, we have not been able to do that faster than what the massive demand that hit the whole foundry industry from 5 gs, IoT, car industry and all the cameras and the cloud and the home working that has come. It has been just and with the pandemic as well and the geopolitical shift on top of it, that is happening. So I think altogether, has meant that, obviously, at least in this quarter, we lost out on that, the difference here clearly.
But it is, of course, impacting and having we have the possibility to discuss also prices, obviously, with the customers. But still, we didn't do that good enough. Obviously, we're not happy with the 18% gross margin, and that's not where this needs to stay.
Okay. Thank you. I think the other questions were pretty much covered by the other speakers. So thank you very much.
All right. I think with that, thank you very much for joining. And we look forward to talking to you again quite soon, coming back on this segment with and this forum with the 4th quarter results. And I look forward to talking to you soon again. Thank you for good discussions and very good questions.
And I wish you well. Stay safe. Take care. Talk to you soon. Bye now.