Earnings Call: Q2 2021

Aug 12, 2021

Quarterly report

Hello and welcome to the Precise Biometrics Q2 2021 report. Throughout the call, all participants will be in listen only mode and afterwards, there will be a question and answer session. And just to remind you, this call is being recorded. Today, I'm pleased to present Stefan Persson, the CEO and Olek Nielsen, the CFO. Please go ahead with your meeting. Thank you, and good morning and warm welcome to Precise's Q2 2021 presentation. I will, together with our CFO, Ulrik Knilsdorf, present the financial results and also give you some highlights on how we see the next coming quarters. Now turning to Page number 2, please. We have a very strong algo business despite the component shortage. And due to the changes in our way of working and a good cost control, we have a stable company now. This paves the way for future investment in DEI. So even if one of our largest customer had seen a decrease in volume due to the component situation in Q2, we're still we've been able to balance the results. The whole strategy is to stabilize the profitable ALDO business and accelerate the DA opportunity. As you can see, we have been able to increase our unique sales. So even if there have been a lot of questions regarding excess investment to companies due to corona situation, we have been able to increase our sales in the DI area. Due to low volume from 1 of our customer in Algo, our net sales landed on SEK 18,700,000 and with a slightly negative EBITDA. We can, of course, not predict the coming month due to component availability, but we have a good cost control and are flexible to adjust accordingly if needed. The focus is continued stabilization in the Algo area to continue to generate a stable income that we can fully invest into the future. Still no major changes in the smart card area. Even if there are some initiatives and activities, there's still no sign of any volume coming out. Our cooperation, for instance, with Kullai is, of course, important when the market takes off. One important step for our partner Kullai was when they got the Master Vendor Letter of Approval earlier this quarter. To be able to scale Unique, we need to secure distribution of in different channels. Therefore, it's our distribution agreement with Electroluxandia Key. With this we'll make sure that our solution is available for installation partners, etcetera. We can continue to see an increased interest in the digital dente area and our SaaS model, software as a service will be the major revenue contributor in the future. So even if the industry have been hit by corona, we have been able to continue to deliver our software to our partners and we have today a very strong team in Asia, Europe and Europe that will continue to support our customer and maximize the opportunity to win new projects. Now turning on to Page number 3, the vision. Our strategy and vision, no matter who you are, where you are and what you do, you should always have access to a digital identity, owned and controlled by you in a safe way. And this is what we communicate in all forums, build our solutions around and execute accordingly. You are the key for all applications and resources and everything is owned and controlled by you. Page number 4, the digital identity. Our market potential in the AI area is huge. We can see the market is demanding solutions with ability to verify a person's identity in a convenient and secure way. We continue to focus on the SwedishNordic market, where the accessible market size just in Sweden is identified to more than SEK1 1,000,000,000 in 2025. We can see a good sales increase year to year, but still, of course, low sales level compared to where we will be in the future. Our go to market strategy starts to generate good attention. Our sales force is creating a lot of leads and good reference and then all cooperation with installation partners and distributors will help us to accelerate the business. We have today signed contract with Hutteland and Elektron Scandia for distribution, we have more than 50 installation partners that help us with sales and installation. One key area in the scale up is also the integration with key platforms such as RCO, ASRX, STOLENL, Genentech, etcetera, and more will come in this area coming months. This means we have created the base for scale up, market activities with our VRO channels and then scale up via platform and partners. Easy to buy, easy to install and fantastic to use. We have also now the first installation in Norway. We can see more opportunities there during the coming months. We have also via one of our customers, Algeco, now the first installation in Germany. This shows that the product easily can be sold, installed and used in different parts of the world without any adaptations. Possibility to scale up is easy. Still the focus is Nordic market with all opportunities. It's a traditional market, access market. The company in the past have been selling hardware, but the change goes very fast now and we are one of the leading company in this new area. Today we have more than 60 installations and 1,000 of users every day. A very interesting part of unique platform is the possibility to add new features. Our open API makes it very easy to integrate with other features such as environmental control, booking system, etcetera. We will start to test and sell this integration during the second half of the year. We now have the 1st generation of our product in market. We have integrated with key players and organization is prepared for scale up. So the SaaS journey for Perseus have just started. The growth in the digital identity product area was 169% and the SaaS Software as a Service means stable, recurrent revenues with high margins. It's also nice to see that our number of customer losses is 0%. All the customer have chosen unique access are very satisfied we have multiple cases of upsell through additional installations. Next page, Page 5, the Algo. After introduction of the new way of working in the product area, Algo, we have now a solid very solid base in the company. A stable and healthy business that enables the opportunity to invest into the new DI business. We had revenues with high margin in the Algon product area reflecting our strong market position. Our total royalty revenues were, however, reduced by component shortage. Even if the component shortage continues, we have good opportunity to return into early quarters volumes. We have a base of solid key customers such as called Common Edges, and we can see that our pipeline for coming quarters is really interesting. We will further integrate our fingerprint software in series of mobile devices in collaboration with a partner despite the COVID-nineteen effect on component availability. Still the situation in the Still the same situation in the smart card area. As I said earlier, we will see it together with Kornai, the Mastercard letter of approval for the biometric payment card, we have seen an increased interest in other smart cards applications such for instance access area, but smart card is a bonus market for precise. By that, I hand over to our CFO, Ulrich. Thank you, Stefan. Please turn to Page number 7. The execution of our strategy continue. I will be starting with the Algo business. We are an established world leading company within Algo. Our Algo business is strong, healthy and profitable. We are expanding our role, taking responsibility for larger parts of the delivery. We continue winning projects with old partners and are selectively adding new partners. Negative is continued component shortage among our customers and the lower production volumes resulted in lower royalties. We, however, foresee a return to prior volumes, which will further increase profitability within ALGO. On digital identity, we are building customer awareness. We are continuing adding new customers. We are adding partners and sales channels. We are expanding business with existing customers through upsells. And this is accelerating the opening of additional geographical markets. Focus remains on the Nordics. Adding Germany, that is a bonus. On the total company side, the net sales during the quarter totaled $18,700,000 versus $23,600,000 previous year. Net sales were split between royalty revenues of $10,900,000 versus $13,000,000 previous year license fees, including support and maintenance, €7,000,000 versus €11,900,000 and other of €2,400,000 versus 1,500,000 previous year. And as commented earlier, the component shortage among our customers resulted in lower royalties. Increases in license fees that is a result of the precise strategy focusing on deeper collaboration with key customers. Increase in other that is attributable to growth of digital identity and sales of development licenses. The net sales of Digital Identity totaled €1,200,000 versus €0,700,000 previous year, and this is reported under the other. Gross margin during the quarter totaled 73.3% versus 84.7% previous year. The change is primarily due to increased amortization and capitalized development expenses. The total amortization of capitalized development expenses that was €2,900,000 versus €2,300,000 previous year. The changes in the product mix, DI that is in a growth phase and the lower turnover within ALGO. Increase in the amortization of development expenses that is related primarily to digital identity. And we are using quite an aggressive amortization period of 3 years for both Algo and Digital Identity. Please turn to Page 8. As commented previous, our mobile business delivers healthy profit. We continue executing the strategy, working in deeper collaboration with key customers, allowing full leverage and scalability. The Alco business is healthy, profitable and delivering the strong cash flow we need. The negative for the quarter, That is the continued component shortage among our customer and that is reducing the royalty. Return to previous volumes we'd further increase profitability within Algo. TI, in a build up phase, will continue strengthening our market presence and digital identity through partners, own resources in sales and marketing and customer excellence. We continue to invest in digital identity, which is reflected in the increase of spend in R and D before capitalization. Operating expenses the quarter fell by $2,800,000 and totaled $18,300,000 versus $21,100,000 previous year. Our cost control is tight and spend is closely connected to execution of our strategy. Cost reductions come mainly from reduced research and development costs. An increased proportion of the expenditures for development work, primarily in the area of digital identity, is being capitalized. Operating profit loss for the quarter totaled minus $4,600,000 versus $1,100,000 previous year. Reduction in the operating profit loss is explained primarily by lower net sales combined with lower gross margin. Profit loss at the EBITDA level totaled minus €800,000 versus €2,000,000 previous year. The earnings per share for the quarter totaled minus SEK0.01. Please turn to Page 9. Cash flow and investments. The cash flow for the quarter from current operations totaled minus €700,000 of which SEK 1,000,000 is attributable to increased capital tied up. The group invested SEK 300,000 in property, plant and equipment during the quarter. Saying a little bit more about the working capital. We have structured our business model to reduce the need for incremental working capital. Licenses and there are invoiced versus prepayment. In Digital Identity, we're building the business with prepayments ranging from month to year in advance. Royalty invoicing is done based on usage actually reported by our customers and this accounts for more than 50 percent of our accounts receivables. Having this setup of the business model, that enables growth without the need for incremental working capital. Capitalization and amortization of development work. Development expenses of SEK 4,200,000 were capitalized during the quarter versus 4 dollars 1,000,000 previous year. The amortization and capitalized development expenses totaled $2,900,000 versus $2,300,000 during previous year's quarter. Capitalized expenses, they are amortized over 3 years period for both algo and Digital Identity. And finally, some words about the financial position and liquidity. Our cash position is solid. Cash and cash equivalents at the end of the period totaled $62,500,000 versus EUR 76,300,000 previous year. With that, I hand the word back to you, Stefan. Thank you, Ulrik. And then please turn on to Page number 10, the summary. So increased client activity and promising growth in the digital identity. We have a strong profitability in Algo that provides an opportunity for internal finance development of digital identity. Resources, As Ulrik said, our share is evenly between the product areas and we continue growth in the digital identity combined with the recovery within Algo, we are seeing that the company will achieve profitability in future. Following initiative in digital entity combined with the impact of the component shortage, EBITDA landed on minus SEK800,000 despite the fall in royalty revenues. Adjusted for initiative in the digital identity, we see a very strong underlying profitability in the company. With the profitability from the Algo product area that is reinvesting the growth in the DI, we are looking forward to continue to advance position as a leading global supplier of identification software in which you are the key. Finally, I would like to take Good opportunity to thank you, Ulrik, for your efforts over the past years. And warm welcome to Annika Frey as the new CFO of Precise. She will meet you when we present the Q3 report later this year. So after all, a stable first half twenty twenty one despite the tricky situation with COVID and shortage of components. And it will be continued to be a very interesting 2021 with a lot of activities in both the Algo and DEI area. You are the key. So now turning on to Page number 11, we open up for questions. Thank if you wish to withdraw your question, you may do so by pressing 2 to cancel. There will now be a brief pause while questions are registered. Please press 1 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 2 to cancel. There will now be a further pause while questions are being registered. And there are no questions at this time. Please go ahead, speakers. Thank you. We have received some questions via e mail and our social media. So I will try to take them 1 by 1. We have another one question regarding our expansion possibilities outside Sweden and the Nordics. And as we have only communicated in the DI area. And as we have earlier communicated, we have an installation in U. S. Where we utilize Sales resources there, we continue to look into opportunities in U. S. Via our partners, Algeco, we are actually now have that opportunity to do the first installation in Germany. And we have also done the first installation in Norway and we have more to Come in Norway. Our main focus is Sweden and Nordics. And then we are our customer that might be opportunities outside the Nordics That we will look into. But the Nordic countries as it is right now is the focused areas. We also got a question regarding the Assa Bloy and what does it mean in long term or short term when it comes So the global activities in that area. And of course, that's in line with our strategy to be integrated with the key platforms such as ASSA, BLA, So, etcetera, to be able to go outside Sweden also. And Assai is one of the major platform suppliers out there. And we are really happy and set Try to be integrated with these guys and of course there will be opportunity with ASSA outside Sweden also going forward. Another question is, of course, in the biometric smart cards. As I said earlier, it will just be a bonus for us If there will be any volumes in that area, we have a deep collaboration with Kona I for instance, And we are following and tracking the activities there. But we can't see any major volumes this year in the smart card area. We have also got a question regarding the unique ID and the setup there and if there are any opportunities in that area. We decided here earlier this year and end of last Here that we focus now is the access where we're utilizing IDs to have the passage in access area. We are still looking in the possibility in the IDS, but no activities as such right Now, because the focus is access. We have also got a question regarding the car industry and the opportunity there, we are monitoring carefully and we are partners. We have some activities in that area, Extremely long lead time, extremely long sell in activities. If there will be any activities Later this year, then of course, we will communicate that. So it's not that we are not active in the area, but there is no sell as we speak right now. Yes, via e mail and other social medias. Are there any other questions online? We have a question now from the line of Jurgen Carlson. Please go ahead. Your line is now open. Hi, Stefan. I'm curious why you pinpoint Kona I in the card business. They are, as I know, the card company, but before you have only talked about NXP as a partner, which works with Secure Element. So is this something new that you will pinpoint Can companies that you will deliver your software to? Thank you for the question. So No change in the strategy. Of course, we have explored opportunity both with Secure Element suppliers and Car manufacturers, we had cooperation with different type of companies out there. The reason why we are Highlighting Kona High right now is, of course, that they were successful in the certification area, Which is one very important step towards the commercialization phase. So no change in terms of the strategy. So we are as I said earlier also, it's a very complex total value chain there that you need to be in discussion both with the banks, The card manufacturers, the sensor manufacturers, etcetera. And why we, of course, Addressing our excellent software to all of these guys that they are choosing us. So no change in the strategy there. So does that mean that you approach both card companies, secure element companies and center companies, can you be involved I mean, can you write agreements with all these three kinds of companies? That's absolutely correct. So we are talking with the card manufacturing companies. We are secure element and sensor manufacturers, yes. And the reason we are doing that is because that we are hardware agnostic. So many of the for instance, the card manufacturers, They want to be a hardware agnostic and have opportunity to choose between different sensor suppliers. So the answer there is yes. So far you have only mentioned NXP and Kona, can you mention any other companies that you're directly involved with? No, we can't do that right now. So that we would take step by step When there is some more information in that area. So these are the 2 that we have communicated right now. Okay. Thank you. Thanks. And there are no further questions at this time. Please go ahead, speakers. Okay. Thanks for listening. And I really hope that you will have a lovely day and take care. So see you soon again. Bye bye.