⏳ Final hours! Save up to 60% OFF InvestingProCLAIM SALE

Earnings call: Fingerprint Cards shifts focus to streamline operations

EditorEmilio Ghigini
Published 2024-11-04, 02:50 a/m
© Reuters.
FINGb
-

Fingerprint Cards AB (FING-B.ST) has outlined a strategic shift during its Q3 earnings call, emphasizing a transition towards high-margin Access and Payment segments and exiting commoditized markets.

CEO Adam Philpott and CFO Fredrik Hedlund detailed the company's transformation plan, which includes a significant reduction in operational expenses and headcount, aiming for an operational expense structure of less than SEK 70 million by June 2025.

Despite a slight year-on-year revenue decline, the company reported improved gross margins and has become debt-free after a successful rights issue.

Key Takeaways

  • Year-on-year revenue slightly declined due to the strategic exit from the Mobile business.
  • Gross margins improved following the company's shift away from commoditized markets.
  • Operational expenses are being reduced, with a 40% decrease in headcount since last year.
  • The company is targeting less than SEK 70 million in operational expenses by June 2025.
  • Fingerprint Cards is now debt-free after repaying convertible bonds through a rights issue.
  • Focus is shifting to Access and Payment segments, with new product launches like AllKey and an advanced IRIS version.
  • Access business reported strong sequential growth with substantial orders in Q3 2023.

Company Outlook

  • The company is actively seeking partnerships to manage cash burn as it exits the competitive PC market.
  • A new CTO, David Eastaugh, has been hired to drive expansion into the broader identity market.
  • The company is committed to moving from volume-driven to value-driven business strategies.

Bearish Highlights

  • Exiting the PC business due to unsustainable margins and high operational costs.
  • Payments segment growth is slow due to challenges in ecosystem build-out.

Bullish Highlights

  • Access revenue grew from SEK 9 million in Q1 to SEK 18 million in Q3.
  • The company is focusing on high-margin areas and innovative partnerships.

Misses

  • Negative adjusted EBITDA of SEK 22.8 million.
  • Negative free cash flow of SEK 27 million, with cash reserves at SEK 49 million.

Q&A Highlights

  • The company is largely exiting the Mobile market, focusing on Access and Payments.
  • Efforts are concentrated on improving deal progression in the Payments sector.
  • The Access market remains fragmented, offering opportunities for value and innovation.

Fingerprint Cards AB is navigating a challenging financial landscape with a clear strategy to optimize its operations and focus on profitable segments. While exiting low-margin businesses, the company is leveraging its expertise in biometrics and identity management to position itself for future growth. The Q3 earnings call has set a tone of cautious optimism as the company executes its transformation plan, aiming to adapt to market dynamics and drive profitability.

Full transcript - None (FGRRF) Q3 2024:

Stefan Pettersson: Good morning, everyone, and welcome to Fingerprint Cards earnings call, following the release of our Q3 report this morning. We'll begin by a presentation of the report by our CEO, Adam Philpott, and thereafter by our CFO, Fredrik Hedlund. And as Sharon pointed out, if you're following the conference call on the web, you can post questions throughout the call. And with that, let me now hand over to our CEO, Adam Philpott.

Adam Philpott: Thank you, Stefan. So as Stefan said, great to be here. Thank you for joining the call. Great to have Fredrik, our CFO, on the call with me also. Let me jump straight in through the agenda. We're about a year into the transformation plan. This time a year ago was my first earnings call, where we announced our transformation plan. We're now obviously a year into that, and here's what we're going to cover on today's session. I'll start with an executive summary of the Q3 results. Then we'll talk a little bit about some of the key pillars of those strategic initiatives of that transformation plan. We'll talk about our transformation to drive profitable growth, which is what the point of the transformation plan is. And within that, we'll talk about cost optimization, how we're now debt free, and we'll talk a little more on how the strategy has evolved. We'll then dig into some key financial results with the help of Fredrik, and then go to Q&A. So let's get on straight into the executive summary. So first of all, I'll start with how we perform financially and against the transformation plan. You can see from the chart on the right that revenue is down slightly year-on-year as a result of us getting out of the Mobile business. That was a key pillar of the transformation plan itself. You will also see, though, that the point of the transformation plan is to improve gross margin. So when we adjust for R&D depreciation as a result of getting out of some of those unprofitable markets, you can see a really strong performance in how gross margin is improving. And we expect gross margin to continue to improve as we continue to execute the transformation plan. Another key pillar of the transformation plan is, of course, rightsizing the organization, so driving cost reduction. So we've really focused on that with the team. Obviously, headcount is a key pillar of our OpEx, about 70% of the OpEx, so we've continued to focus on that and we'll continue to drive rightsizing in the organization as we'll talk about today. We completed the rights issue, and a key part of that was removing the convertible bond, so we're now debt free on our balance sheet too. And our Mobile plan is phasing out as expected. We announced that earlier in the year. That is now phasing out as expected. We continue to see some revenue and therefore we continue to see some damping on the gross margin. But as we exit that, we see those gross margins improve. We do, of course, expect to see continued volatility. This is a big transformation plan. It doesn't happen overnight. I've said that over a few quarters. We continue to see that, but that's what we're managing as an executive team. I think the big highlight, though, that we saw or was low light even, was on the on the PC business. We did see increased headwinds in our PC business. We'll spend a bit of time on that later. We expected to see PC commoditized, similar to Mobile. We are starting to see that, perhaps a little earlier than we expected, but we will be exiting the PC business just as we did with Mobile because of the untenable margins now in that business. And as a result, we'll be exiting the China market. That's something we've spoken about in the past. We're now moving to conclude that as well. As a result of exiting PC, we'll see further OpEx reductions too, of course, associated with that as a large chunk of OpEx for the business. And we'll touch on some of the data just later in the presentation with regards to that. At the same time, we have a strong core business. So, with Access continue to be robust, particularly sequentially as a business, we're starting to see signs of the Payment pipeline moving forward as well. And whilst we're exiting PC, we are in active conversations across all of these lines of business around investment partnerships. So, people coming in to support the cash burn, particularly for a PC as we exit that business to do a similar move to that which we made with Mobile to have someone take on those assets and those customers as we wind that down. We really continue to increase our focus on that core business. So, while we're leaving those volume markets where it's very China centric and super competitive, tolerating volume over value, we continue to focus on those markets that value our products slightly lower volumes, of course, in those markets. And so really focusing on the Access product group. We see Payment is upside in the market. We're not deeply invested in that. We've done a lot of the investment upfront on that. And so we have a very strong position in Payment with the ecosystem. And so we see that as an absolute upside to pay off for some of the investments we've have made in previous years. And of course, we maintain very active engagement with that ecosystem too. And then finally, it's also about expanding the business, getting into new markets. I've spoken about our strategy in the past. We hired a new CTO, David Eastaugh, in Q3. David works tirelessly to help us really ruggedize that strategy and identify both partners and M&A investment opportunities that we want to look at in order to drive expansion into the broader identity market. So that's absolutely something we're going to continue to do and we're going to continue to execute on. If we go to the next slide, once again, I want to refresh you on what the transformation plan is, because we're going to touch again on four pillars of the transformation plan. We're going to touch on portfolio refresh, how we're changing the portfolio. We're going to touch on cost optimization, how we're continuing to optimize the cost base and drive down OpEx in the organization. We're going to touch quickly on the balance sheet, of course, and how we've now moved to a debt free balance sheet. And then I want to expand on some of the strategy that I've spoken about in the past, thanks to David's help, as we've been able to drive a new level of specificity around that. And in doing so, identify a number of partners and potential investment opportunities for the business as we seek to expand into cash and margin rich areas and into software in particular. So I'll touch on that a little bit later also. And of course, this is also about how we move from our stability phase into accelerate growth. This plan takes time, so it's going to take time to shift between these pillars. It's not an overnight transition, but that's the transition that we're starting to make is to move through stability and move into executing growth. Let's move to the next slide to talk a little bit about that. And so as we move towards growth, it's really about looking at removing some of the loss-making revenue, bad revenue, if you like, where there's good top line but there's very, very weak bottom line, particularly when you take into account CapEx, not just looking at GM but looking at the CapEx that some of those businesses have carried as well. That's particularly true of PC. And so really, this is about to get to stability, moving from volume to value, retooling the business that we're not chasing very, very low margin business, gross margin business, but instead focusing on value. And that's something we've been retooling the business for so far, and we'll continue to retool against as well. So that's a key part of how we move through that. It's also about building out new revenues, of course, moving to new areas that we can grow. And I talked about the expansion into the identity market that our new CTO has helped us really bring into focus. We talked last quarter about how we make those decisions. We review the businesses we're in. We look at the return on capital compared to the cost of capital, then we choose whether to invest or partner or, of course, in the case of Mobile and PC, to divest in those businesses too. And then we move to accelerate. So, let's keep moving and talk a little bit about some of those key pillars in the transformation plan. And so the first one is portfolio refresh. You know, we are continuing to develop our core products. You can see Access and Payments remain as core products. Those business much less subject to some of the rapid commoditization that we've seen in the volume markets, a much more value driven. Markets much more fragmented, also markets that can support design services and NRE. So really focusing on those markets to continue to drive growth. We've actually had a number of launches in those markets in Q3. Of course, also we have a new IRIS launch with our 4.0 technology, an AllKey launch in our Access space on the fingerprint sensor and with Infineon (OTC:IFNNY), the SECORA Pay Bio launch also in Q3 too. So as you can see, not standing still in those markets, continuing to drive new products with customers and continue to develop those markets for future growth also. We are also targeting new partnerships. So if you look at the business that will one day move into the core as we start to make investments and partnership choices there. I'll talk a little bit about what some of those companies will look like, but really targeting new partnerships and investments specifically in the identity space. So, I'll show you some information on that just a little bit later. And then, if we think about our core business, it's not just about us investing with our partners and continuing to build new technology, but a lot of our customers and partners depend on our technology. And they're also interested in and coming and investing with us. Because, as all of you know, some of the cycles for this productization takes time. It's not just us building new products, it's also then embedding those in our customers' new products. So there's a long-life cycle associated with that. We've talked in the past, for example, about automotive, long-life cycle. So as we work with our partners, there's a renewed interest from those partners to come in and invest with us and help sustain the R&D efforts. So, we're sharing resources, pooling capital to help us drive innovation. And we're talking to a number of partners in Access, in IRIS and in Payment around doing exactly that. And then, of course, as we exit the PC business, PC fell below the return on invested capital but it's very capital-intensive, long-life cycles and constant refresh in the models that PC companies put out to their consumer and enterprise customers. So it's not a case of get a product in and then sit back, you're constantly having to invest in new products for their new products and show constant innovation, super capital intensive, very, very competitive. They have many choices, so they spread their business across multiple different vendors. And so the returns fall below the ROIC versus cost of capital bar. That's why we've chosen to exit. At the same time, as we're talking to potential partners on Access and Payments, we're also talking to potential partners on PC who may want to pick up those assets and take our best-in-class technology to serve customers who have already baked it in and want to continue to bake it into new products as well. So that's how we think about portfolio refresh, big change being PC moving out of Core and being wound down due to the OpEx that it carries and the return it delivers. With that, let me hand over to Fredrik. And Fredrik, perhaps you can talk a little bit about cost optimization, how we're progressing there and how you see us moving forward.

Fredrik Hedlund: Yes. Thank you, Adam. So we are pushing really hard on our controllable cost. And we try to get ahead of adjusting our cost structure to the new operating reality. And a key driver of OpEx is headcount, as Adam mentioned. And headcount represents a bit more than 2/3 of our OpEx cost. And you can see there on the left-hand side, the reductions that we've done since the end of the year, down more than 40% and also quarter-over-quarter is down 10%. And most of this headcount reduction has been done due to the wind down or been enabled because of the wind down in Mobile. And if you look at the right-hand side of the chart, you see how that translates in reduced OpEx. And we've had a discussion to see how we can rightsize our OpEx further beyond the SEK 150 million target that we set in the first -- as part of the first quarter earnings call. And we believe that an OpEx structure of less than SEK 70 million by June 2025 is the right OpEx structure to support the new commercial reality. And with that, let's -- Adam, let's move to the next page. And here, we talk about being debt-free. It's a big deal for us. When we completed the rights issue in the third quarter, we were able to repay all of our outstanding convertible bonds. And this means that we have no interest-bearing debt on our balance sheet. And this was a key goal of our transformation plan. And what we have done is that we now have leveled the playing field for all of our shareholders. And with that, let's move on in the presentation and talk about strategy. Adam?

Adam Philpott: Thanks, Fredrik. So as you can see, we're managing the fundamentals of the business. We are ensuring that we're taking control where we're seeing market forces not working in our favor. We have very much the China-centric businesses on our radar, starting with Mobile and then PC. But of course, we feel very good about the remaining business that we're focused on because they have very, very different dynamics. But at the same time, we don't just stay there in those markets. We look to expand. And so let me update you on how we're thinking about the strategy, how it's evolved. I shared an initial view on strategy. I started talking about platform. About a year ago is when we first started talking about where we could go as a company. That was -- I'd only been on board about a month at that time. So that was very early stage thinking. We've then done a huge amount of work entering this calendar year and then building out the team to help us go and really finesse this and then execute it to bring this together in a really clear and compelling way. Before I talk about edge and core, let me say a couple of other things. For me, this is about what problems we solve as a company. And what's been very interesting is some of the reasons I joined the company, I think, are still very, very compelling. The reality is that many organizations are still digitizing. They're taking manual process and still enhancing the way they execute that with more efficiency using technology. It started with the Internet, and that was a long time ago, now we're at the phase of even AI being core to most companies' digitization strategies. So, using technology remains essential. As a result of that, we continue to see cyber attacks. The cost of cyber breaches are significant, around 4% of global GDP. The core of that is passwords are fundamentally flawed. Not only that, they are a really poor user experience. So, these are some of the things I've spoken about in the past, and they remain unsolved. There's many companies trying to solve them, but they remain unsolved today. The way the industry is aiming to solve that is using Zero Trust. There was something I've spoken about a little bit in the past. This is a common framework for how organizations establish their cybersecurity platform. And the challenge with Zero Trust is that passwords are very much at the core of that. Zero Trust is about identifying encryption every step of the journey of data but that identification and authentication is based on passwords and passwords, as we've said, are the primary threat vector today. So there is an opportunity for us in identity. Identity is based on something I have, something I know, something I am. Something I know is where password sits and is very, very flawed. So that means those other 2 pillars, particularly something I am, but also something I have become more and more important. And what we're looking to do is combine those together or rely heavily on one of them, particularly something I am because you can identify that. And so our role is to really change that dynamic and make sure we're using biometric identity to improve cybersecurity to help customers overcome cyber breaches and to help them digitize at pace as well. So those are the challenges that we're trying to solve. The powerful thing about fingerprints is that it's been something we've been doing at the edge for many years. We talk about you are the key to everything. That is still absolutely core to who we are and where we're going as a company. And so when I think about it, we've been at the edge. We've been at the very gateway between humans and digital. So where you put your finger on a fingerprint or where you use your iris for a camera, we're at that gateway between you and the cloud. And so as we think about that, when we think about the edge, that's you. When we think about getting access to everything, that's the cloud. That's where we give you access to all of those resources you're looking for. Now we're currently in the edge, and we will continue to be in the edge. We will continue to develop fingerprint and iris technology. There are other things we're looking at as to how we make those more available. We've had some announcements, particularly in the iris space around that recently. But we'll also expand what we're doing in the edge. We'll partner. We'll work with other organizations. We may even invest in some of these additional modalities. You can see a few on there. Space, I've spoken about a lot before, behavior is a really interesting one for us too, because the whole point here is that you ensure that anyone can use whatever technology they have access to, to deliver whatever signals that technology can transmit. If it doesn't have a fingerprint sensor, you use iris and face and behavior. And that allows us to make a much better assessment for authenticating who you are, not just what device you're on and certainly not something you know such as a password. So that's where we're going on the edge, staying where we are, building out those capabilities, but also expanding. We transmit those signals then into the core so that we can take you on the identity lifecycle. Today, the identity lifecycle is extremely fragmented. There's some people doing some bits. They're not joined up in any way. For example, if you do KYC, know your customer or also known as IDV, identification and verification. You go through that process of sharing your face in your documents in your iris and then that information goes away, and it's not used for when you reconnect. So, what we're looking to do, and we have some investments and partnerships in sight on doing this is joining this process up. So onboarding you as an individual using biometrics to make an assessment and ensure that you are who you say you are, then tether you to your device. That doesn't mean that we use the device instead of you, but it adds a level of identification and authentication security to that as you continue to get access to information that you're seeking or transact for whatever the use case is. Then we move into the IAM space, really powerful, really large market that currently depends on passwords that we can bring biometrics into. A big pillar, which doesn't happen today is continuous authentication. I talked about Zero Trust earlier. It's not about assessing you once and once you're in the front door, you can do whatever you want. There's a major challenge in cybersecurity around dwell time where hackers get in and they hide in plain sight, they just stay in your network unseen, continue to do reconnaissance and make assessments of what information they can exfiltrate and how they can breach you. In order to prevent that, we can bring continuous authentication to the table so that we not only authenticate you once, but on an ongoing basis, using passive technology. So you're not having to physically do things, but we can continue to authenticate you by your iris, by your behavior, et cetera. Another big challenge is account recovery. What happens when you lose your account? Again, that then defaults to passwords. People don't recover their accounts very often, and therefore, they forget their passwords. And this is a real challenge for organizations to solve. And then finally, offboarding. We don't want to be having access for people who are no longer in the organization. We don't need to retain biometric data when we do that. So offboarding is a key part of that. And thus, this becomes a cycle in the cloud as well. This is a really powerful new area for us to move into. David's done some great work in helping us really finesse what this is, where there are opportunities, what problems aren't being solved, but also identifying target organizations with whom we could work or conduct M&A activity in order to really get a footprint into this new space and then expand. So great opportunity for us as we expand in our strategy also. So that's a little bit on strategy. We'll continue to talk more about that as we make progress into executing it. But for now, let's come back and talk a little bit about some of the financial metrics. I'll kick off with a view on revenue and some client insights on a product line basis, and then Fredrik, I'll hand to you just to talk a little bit about some of the key financial metrics. So as you can see from the financials, whilst we had a difficult year-on-year, we had a very large set of orders in Q3 2023. We have seen really good performance in our access, strong sequential growth Q1 to Q2, Q2 to Q3. So a really robust business in Access, particularly given the transformational changes that we've been through as a company, the disruption that we've been through as a company. So really positive to see that. Not only from a sales perspective, but also really importantly, from a product perspective. The product team is doing a great job in launching new products. On the sensor side, we announced a product called AllKey. Really, really powerful product that allows customers to more easily integrate our technology into their products. In the past, we've had to do a lot of work, which has required a lot of capacity and a lot of our time to help customers customize and embed our technology into their products. With this new launch, we give them all the tools they need, the software development kit, the documentation, everything they need to be able to embed this product into there. So it allows really for us to get out of their way and let customers be in control and do what they need to do. Really powerful channel play for us as well. So we've got some really interesting things going on with our channel partners as it relates to AllKey. Not only that, but in a single sensor, not only can we do identification and verification just as we would with a typical fingerprint sensor, but we can also have swiping on this. So they can use it for menu navigation up, down, left, right. So then it becomes a much more powerful asset for them to integrate to small displays, et cetera. So multifunction products, easy for customers to integrate. So launch that. We go full production launch later in the year in December. So really, really pleased to have that product in the market and seeing great demand from all of our customers on that also even at this early stage. We also announced our latest version of IRIS as well. That really expands our market reach because the team have done an incredible job. It's something I think is a core strength to us, which is really bringing down the hardware necessary to deliver a viable iris signal. So really squeezing out as much information as we can over the lowest possible hardware. And what that means for our customers is it brings down the cost of the hardware. We don't provide the hardware. It's mass-market hardware. But what we try to do is ensure that the lowest possible bar is set so the lowest possible cost of hardware can deliver that iris signal. Really strong performance, indoors, outdoors in the rain, wearing glasses, really, really powerful capability, primarily today focused on automotive, but some interesting expansion vectors is that technology moves into production. So great job from the IRIS team there also. On the Payment side, last year was really about us putting a lot of stock for our partners starting to stock up on our technology. This year is about throughput. So really getting that pipeline moving through. I will say the pipeline movement is slow. There's still the build-out taking place in the ecosystem around things like enrollments. The deal progression has been slower than we'd like. So we're working with our partners and with our customers in the pipeline to ensure that they're really pulling through that stock that we're starting to see momentum and new stocking orders coming in, in order to drive the Payment business. At the same time, we're not standing still, continuing with our partners to launch new products to continue to raise the bar to make production simpler. So SECORA Bio Pay is a great example of that, where it's much, much easier to produce that technology. And therefore, of course, it brings cost down because there's less complexity. So again, just getting the right value proposition there to continue to drive that payment market. And we're also seeing some interesting signs, both from the ecosystem and from customers on multifunction products, but also wearables. There's some new areas that the team are looking at there as we see Payables continue to move from traditional to more secure and easy-to-use ways of paying. We talked a bit about PC already. We've seen significant headwinds, not only in the sensor market itself, but also with our customers. As we've seen a reduction in our market cap, we've seen customers allocate volumes away from us to other competitors in the market. You can see a big downshift there in terms of the volumes we've been allocated as a provider, and that clearly accelerates our shift away from PC. We are exploring monetization opportunities for that just as we did with Mobile. We went through the same thing with Mobile. We saw the commoditization. We moved quickly to get out of it in PC, perhaps a little slower in Mobile and exploring monetization opportunities for our customers to continue to be served with our best-in-class asset. And then finally, on Mobile, we're now towards the end of that. We've successfully spun it out, and we've completed inventory clearance. So that business now really moves into a very small number on the P&L moving forward. With that, let me hand over to you, Fredrik, to talk about some other aspects of our performance.

Fredrik Hedlund: Yes. Thank you, Adam. Let's look at the third quarter key figures. And on the revenue side, you heard the revenue story from Adam, but it's worth emphasizing Access. And in the first quarter, we booked SEK 9 million of revenue. In the second quarter, SEK 16 million. And as you saw in the third quarter, SEK 18 million of revenue. So really good growth. And when we talk about gross margin, so the gross margin is up versus prior year, it's up versus prior quarters. So we're starting to see the effects of the transformation plan. And last quarter, we started to talk about gross margin, excluding this R&D depreciation, which is a very large noncash cost element that sits in cost of goods sold. And for the third quarter, it was about SEK 21 million. If we just do that one adjustment as we did in the second quarter, our gross margin rose to 38.7%. But what's important is the comment that Adam made on the first slide, where he said that -- and I say as well, as we continue to execute on our transformation plan, we expect further margin gains. So we're not done yet. We're going to continue to push these numbers higher and higher. And when we look at adjusted EBITDA for the quarter, it was negative SEK 22.8 million. Free cash flow, which includes operating cash flow negative SEK 25 million, investing cash flow negative SEK 2 million, for a total free cash flow of negative SEK 27 million. Laser focus on this number to bring it down. Cash and cash equivalents, SEK 49 million on the balance sheet at the end of the third quarter. And the key driver for the reduction in cash is when we repay the convertible loan, we paid our transaction cost related to the rights issue. We just talked about the free cash flow burn and then some other minor things. So that's cash. And finally, headcount that we talked about already, right? Really, really solid progress. And with the exit from the PC markets, we need to see how much we can do. But you saw on the OpEx side of things, the less than SEK 70 million by June 2025 on an annual run rate basis, I think that will give you a few ideas of everything that we're doing to improve cash and the P&L. And with that, Adam, over to you.

Adam Philpott: Thanks very much, Fredrik. So let me bring us home, and then we'll go to some Q&A. I'm sure there's some great questions out there. So in summary, we continue to focus on those high-value markets that have not commoditized, and we see a good outlook for. We've launched new products in Access, such as AllKey that I talked about and our fourth-generation IRIS software. We've also launched new products with Infineon in Payments as well. So continue to invest and see a good outlook for those markets. In terms of cost optimization, though, we are executing our transformation plan. We're not finished with that transformation plan. And so we are still ensuring that we focus our resources and our invested capital where we can get a great return. And so as a result of that, we are exiting the PC business. We're driving down our OpEx as a result of that to rebalance the company in the right way and reducing our geographical footprint moving out of China in particular. So key part of the transformation plan. We talked about the balance sheet as a part of that transformation plan, now fully repaid the convertible bonds. So we have a very level playing field for all of our shareholders and are debt-free. And then finally, on the strategy side, it's not just about us continuing to execute in the markets that we're focused on, but it's about us expanding into new areas, particularly software-rich, and we see great opportunities in the cloud there too, whilst continuing to execute on our edge modalities and expand what we're able to offer there. But overall, it is very in line with the transformation plan we announced a year ago. It is a big transformation, so we continue to execute that. And with that, Stefan, let me hand back to you, and we'll take some questions.

Stefan Pettersson: Yes. I think we'll begin by taking questions from the phone line.

Operator: [Operator Instructions] And your first question comes from the line of Markus Almerud from Carnegie.

Markus Almerud: Number of questions. If I start with PC maybe, can you talk a little bit about the timing of the wind down?

Adam Philpott: Yes. We're starting to wind that business down immediately. That's something we've started on as a team a little while ago, but we're executing that as we speak. So we expect that to move pretty quickly. You've seen us move very fast before, particularly as we made a call on doing the same on Mobile. Of course, what's really important though is we do that with the utmost respect for our team and, of course, for our customers also. So that's something that's very much in flight right now, Markus.

Markus Almerud: And then if I can just dig down a little bit on that, just what has changed really in PC? I mean, it's kind of a swift change. So, if you can talk a little bit about that and what's driving this rapid move. And if you would say that, if you would weigh the 2 together, I mean, that your customers moving out as you say, because of your market cap in decreasing the risk and the market actually commoditizing. If you can talk a little bit about those 2.

Adam Philpott: Yes, happy to. There's a few things I'll talk about before I touch specifically on those as well. So first thing is this is absolutely part of the transformation plan. We had a plan in place to get out of commoditized and commoditizing markets, right? And so as we see that happen, it's critical that we move quickly to move out of those. We also talked very early in the transformation plan about there being a specific risk in China because there's a lot of customer centricity there in the Mobile and the PC business. It's a very competitive market from a cost perspective. It values cost over innovation, particularly in some of those markets. and those aren't really markets that we can thrive in. We can thrive where value is appreciated over cost. And so that is certainly -- as we've talked about the dynamics in those Chinese-specific markets. For some time they've been on our radar, and we've publicly spoken about them. I think in terms of the change, we have seen a few changes that have happened. So with all of those customers, there is an oversupply. They can make choices about how they reallocate volumes quite easily without taking significant risk. And so it's quite easy for them to just quickly move volumes around. As soon as we saw that, that's something we had to make a decision on because we can't be in a market where we can just quickly lose volumes like that. That's just not a sustainable market to be in. So that was one dynamic that I think we saw that's related to oversupply. The other thing I would say is that the nature of PC is that it's not just selling a sensor into one model and then you get volumes forever. There's constantly new models coming out and each new model requires innovation and innovation requires capital, but at the same time each new model we're being asked to drive costs down. And so you get in this untenable position where you're constantly asking to do more but somehow sell it for less. And that just became a difficult position for us to be in. And again, as we look at that strategic framework of making decisions based on the return on investment versus the cost of capital, that was no longer working for us. And so we had to make a different call on how to pursue that market. So those are some of the key dynamics. A couple of things in answer to your question, that volume shift is we saw a change in our market cap, there was an increased flag on our risk rating with some of those customers, and they chose to shift volume away from us. Because of that oversupply, it was very easy for them to do that and very quick for them to do that. That's not a great market for us to be in where that can happen. The other thing I would say is the second part of your question. You talked about the sensor demand and dynamics. What we see in the PC market is there's this competition going on around the camera, which they -- which all PCs or most notebooks have nowadays for video calls, using that infrastructure that's already there, a cost that's already there to do identification such as face and maybe in future iris, versus adding another piece of hardware on the platform to do fingerprint, there's this internal battle going on around, well, why do we need 2 things? Why don't we use what we've already got there as well? So I think that's an interesting dynamic that we're seeing. There are still fingerprint volumes in PC, but we're seeing that real competition going on between those 2 modalities because of that cost dynamic also. So I would add that. Fredrik, I don't know if there's anything else you want to add to that question.

Fredrik Hedlund: No, I don't. I mean, that's perfect.

Markus Almerud: And I would assume that this increased competition, which we started talking about last quarter, has come quite quickly, I mean, from the iris side and the face side. I mean, it's always been there, but it felt like it accelerated all of a sudden.

Adam Philpott: I mean, it's been there for some time. It ebbs and it flows. So it's obviously not just about that. It is a real challenge out there, particularly as you look at the higher-value enterprise products versus consumer products, it's certainly a challenge out there. And I think at the moment, kind of globally, there are consumer spending challenges, of course, and therefore, cost becomes super critical. So I think right now, there's a heightened anxiety around adding extra cost into those devices that needs to be passed on to the consumer.

Markus Almerud: My next question is on cost. So you're bringing operating costs down to SEK 150 million by the end of the year and then down to SEK 70 million by the half -- by the end of Q2 2025. Is that the point when we should expect it to be cash flow positive as well?

Fredrik Hedlund: I mean, we don't give forecasts like that. So what we're saying here is just given the revenue dynamics, we felt like we had to give something around matching cost to revenue. And based on the revenue dynamics that we saw here in the third quarter, we had to go and reset the cost structure, and we have a tremendous opportunity to reset the cost structure. That's why it wasn't appropriate to stick with $150 million OpEx target that we talked about in the first quarter, right? We're going to glide past that and way past that. So what I can say is that we will take this opportunity to go really hard on cost to make sure that we are in a strong position, especially obviously on controllable costs. And as you know, 100% of our manufacturing is outsourced. So when we talk about this cost structure, it's really, really only OpEx. It's commercial, it's tech and R&D and the support functions. And with the latest technology available, you can really -- you can do tremendous things today. Now on top of that, Adam talked about us leaving China. We have a fairly big infrastructure in China and other places in the world. So we have non-FTE cost reduction opportunities as well that are incremental to the Mobile wind down at this point in time.

Markus Almerud: And then a quick question on Mobile. You were talking about the inventory reductions and just selling out what you already had in inventory and that's -- because we saw a sequential increase in sales in Mobile in the quarter. But it also sounds like if I read you right that we're pretty much done now that you have kind of emptied out what you had in inventory, and that was the reason why we saw an increase but that's now kind of done. Do I read you right there?

Adam Philpott: Yes, that's correct. We're pretty much out of that market. We'll see some small long tail coming out of that, but we're pretty much done on that transition.

Markus Almerud: And then a couple of more questions, if I may, maybe on Access because, I mean, now the core business is Access and Payments. So if you could maybe just talk a little bit more about the, I mean, near term or maybe 6 to 12 months. I know this is the right forum for it, if not, then we can touch upon some other time. But if you talk about Access and also talk about Payments, just kind of what the status is, what's your kind of 6 to 12 months plans on those, something like that. And I appreciate if it's not the right forum for it. [Indiscernible] another time.

Adam Philpott: No, that's okay. Yes. Obviously, what I'm not going to do is give guidance. But what I will say on -- let me start with Access, first of all. So I think on the Access side, we feel good about that market. And I'll tell you why we feel good about that when we've seen commoditization in other markets, it's global. It's not China-centric market, right? So we see sustainable innovation values in that market, completely different dynamics to those high-volume China-centric markets that we've now exited. So I think that's a really important aspect because we know we can invest with confidence, and we know that we can get a better return on invested capital on Access by far than we can get on some of those other technologies that we've exited. So that's really important because it tells us that we can invest with confidence there in a sustaining way that continues to give us value. What I would also say is that I think in Access, in the past, we've done some bigger projects but that's required us to be involved. And so think about it as a pyramid. The top of the pyramid is your bigger customers, you can have fewer of them, but you touch them in a higher way. You get more invested in them because the overall deal value is there. We'll continue to do that because we can get customization and various other design services fees for that type of business, which is really valuable to us as well and comes with good margin. But what we haven't then done is been able to serve a high volume of customers, so further down in the pyramid, because it's required us to be heavily involved in many of those design wins. So what we've done by launching AllKey is to be able to get out of the way of that, to give the customers the tools they need to be able to design that product in, to set up channels that can help them go and do that so that we're leveraging a channel network to help us scale as opposed to being dependent on our limited capacity, which would always provide -- which should always give a ceiling to how much we can do. And therefore, we'd always prioritize bigger customers over smaller ones because it was the only economic model we could have. By launching the AllKey product, it allows us to scale. It allows us to go through the channel. It allows customers to take control over what they need to do to design it in and allows us to access the many, many customers that make up that Access market. We've only just launched that product. It's very new. It takes time, of course, for customers to become aware of it, and we're doing some work with our DMS. It takes time for customers to then get that technology and try it and start to embed it in their products and then finally launch their own products. So there is a lead time associated with that, but there's also a volume that comes with it across many, many customers. I think that's a really powerful play for us in Access, and that's why we feel very confident about that market also, particularly as a global market, not China-centric. So that's super important too, economically. On the Payment side, yes, I mean, the Payment numbers have been small for some time because that market hasn't taken off. So you can look at the year-on-year, but look at the absolute numbers, the numbers are small. This market hasn't yet taken off, right? Even last year where the number was a bit bigger, the market hasn't taken off yet. So what we're doing is working with our ecosystem to make sure that the technology is in place for customers to adopt, the value proposition stacks up. That's why we've launched a new product in Q3, SECORA Bio Pay, really important steps to get this market to take off. It takes time to establish a new market that has never existed before. But ourselves and our ecosystem, they're heavily embedded to go and do exactly that. What I would say is I think about input, throughput and output. My sales team hear me talk about this all the time. Input, where am I getting new deals from? Throughput, am I progressing those deals through the sales cycle? And output, am I closing them and then manifesting in profit? In Payments, we've had a lot of input over the years. We've built up a pretty good pipeline. However, that pipeline isn't moving quickly enough. And so what we're focused on is throughput, that middle phase to make sure those deals are moving forward. That's where we've turned our attention to. Not adding more deals. I think that would just then get an even bigger funnel that gets stuck. What we want to do is drive throughput so that as we then start to bring new deals in, they move quickly through the pipeline and out into profitability and revenue. So that's where our focus is with our partners in the Payment space. Long answer, sorry, Markus. I got a bit carried away there, but hopefully, that answers your question.

Markus Almerud: Yes, it does. It's very helpful because the way I read this is Payments -- once you're out of PC and once you're out of Mobile, and then we don't know when and in what shape the Payments will kick off, you're basically going to -- Access is going to be your focus. So you're going to be an Access company. So if I read you right about Payments again, Payments is going to be -- you don't put a lot of money into there. You just basically -- you're ready for takeoff when [indiscernible] happens.

Adam Philpott: That's exactly right. That's exactly how to think about it. We've done a lot of upfront investment. We are, of course, heavily engaged with that ecosystem. So we are spending time there. But I think that's exactly right the way you phrase it. But the only other thing I would say is that if you think about the strategy, it's also about us expanding. So it's not just forever just being an Access company. I think I would also define Access is edge if you think about that strategy I shared earlier. So I think Access and edge are kind of similar principles, right? It's about how we get a biometric signal or a number of signals that we can correlate to make an authentication decision, but then what do we do with it? What are we giving you access to? And that then moves us into that core cloud space, whereby we're taking you on that life cycle journey. So that's a really important aspect of where we're going, and there'll be more to come on that also, of course. Stefan, let's come back to some more questions.

Stefan Pettersson: Yes. Let's take some questions from the web. There's one on the automotive industry. What is your current view on your opportunities there?

Adam Philpott: Yes. I mean, we are heavily engaged with a number of different DMS, driver monitoring system partners at this time. We have been for a little while. The automotive sector takes time. It's because of the criticality of technology in cars, it has to be heavily tested to make sure it's very durable, of course. And so that -- so whilst cars go quick, the automotive sector can go relatively slowly. But what I would say is that we are heavily engaged with a couple of partners. What's really interesting about that is how we combine iris and face. There's some really interesting dual partnerships going on in that space as well. We see a lot of interest in IRIS, and that's manifesting in obviously active bookings and revenue for our IRIS assets. That's probably the primary sector that we're engaged in at the moment because that's where the great technology exists to be able to deliver an iris signal in the right environment. But what we are seeing, I would say, is also because of the great work the team have done to launch our latest IRIS software is we're actually now able to, no pun intended, expand the aperture. So we're able to start to see new markets where that technology is becoming available. It's tripling down from the top end of products. Let's take PC, it's a good example there, but it's becoming more and more available. Another one is Access in high security environments, for example. So we're really seeing some interesting things start to happen is that signal becomes available to a broader set of customers. So automotive remains the primary one, but we're seeing others now start to become available in that market also.

Stefan Pettersson: All right. Thanks very much. Yes, maybe we'll take one more question before closing. And I think this one is related to a previous question from Markus that you commented on, Adam. But there is a question on the risk of falling demand and more challenging market conditions for fingerprint sensors and Access [indiscernible].

Adam Philpott: Yes. A few things I would say. So I mean, I did give some color to that, but maybe I can answer it more fully because it's maybe a slightly different question and more specific. So one of the things I did say earlier, of course, is that in those markets we've left, it's a highly consolidated set of customers. So that's one dynamic, very few customers. And secondly, very China-centric. And in China, those China-centric companies, they're looking -- those customers are looking to sell products at the lowest possible cost. They're competing with each other. And therefore, their demands on their suppliers are typically low cost, right? And so that's not a great space for us to be in where cost is valued over value, over innovation. So that was a specific dynamic that we see in those segments and also that customer consolidation is really important there, too. We don't see that in Access. Access is highly fragmented, lots and lots of customers. Those customers appreciate value. They appreciate innovation, and we can see that from the margins that we've been able to generate from that space, and we don't see that changing anytime soon. And so I think Access is a completely different set of dynamics. Those customers are global. They're here in Europe. They're in the U.S., of course, as well. Of course, there are some in Asia too, but we make choices about where we -- which projects we work on based upon the margins available, of course. So I think that's a really important piece. The other thing I would say is the volumes are there in Access, but it's fragmented volume because it's not consolidated into a few customers, it's spread across many customers, which again, has a different dynamic. Because then you don't have a few big customers demanding economies of scale and playing you off against each other, much smaller buying power, much more fragmented buying power, which is why they appreciate value over everything else because that's what they're looking to do with their own products as well. So we've really retooled how we're focused as a company, moving away from volume at any cost, more to value, including where we can get design services, of course, as I mentioned earlier. So that's how I would look at it, like almost diametrically opposed markets.

Stefan Pettersson: Okay. Thank you, everyone, for your questions. And let me now hand back over to you, Adam, for any closing remarks that you may have.

Adam Philpott: Yes. Very good. Thank you, Stefan. So as you guys can see, we're really running the business to drive profitability. That's the focus of the company. We've been very clear on the transformation plan for some time in how we're going to do that. We've called out where we see challenges to profitability over time based on some of those market dynamics, and we're continuing to move the business in that direction. As we now move into this kind of stabilization piece, as we exit the final commoditized market and then look to expand into new markets, that's what sets us up to continue to improve those gross margins as Fredrik talked about earlier. We are seeing some great early signs of doing that. We're going to continue to see signs of doing that. And then as we expand, we have a greater revenue base to build those revenues off also. So that's really where we're focused as a company, continuing to execute the plan, sticking to the plan, but adjusting it as we see market dynamics change and continue to drive profitability. So with that, thank you so much for joining, and I look forward to speaking to you all again soon.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.