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Edited Transcript of FING B.ST earnings conference call or presentation 15-Nov-19 8:00am GMT

Q3 2019 Fingerprint Cards AB Earnings Call

Gothenburg Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Fingerprint Cards AB earnings conference call or presentation Friday, November 15, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christian Fredrikson

Fingerprint Cards AB (publ) - CEO & President

* Per Sundqvist

Fingerprint Cards AB (publ) - CFO

* Stefan Pettersson

Fingerprint Cards AB (publ) - Head of IR

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Conference Call Participants

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* Francois-Xavier Bouvignies

UBS Investment Bank, Research Division - Technology Analyst

* Viktor Westman

Redeye AB, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 report conference call. (Operator Instructions) After speaker presentation, there will be a question and answer session. (Operator Instructions) I must advise you that this conference is being recorded today, Friday, the 15th of November 2019.

And I'd now like to turn the conference over to your speaker today, Stefan Pettersson. Please go ahead, sir.

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Stefan Pettersson, Fingerprint Cards AB (publ) - Head of IR [2]

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Good morning, everyone, and welcome to Fingerprints' earnings call following the release of our third quarter results this morning. My name is Stefan Pettersson, and I'll be the moderator today. We'll begin the call with the presentation of the report by our CEO, Christian Fredrikson, and thereafter, by our CFO, Per Sundqvist. And following this, we'll have a Q&A session. And if you're following the conference call on the web, you can post questions throughout the call. And for those of you participating on the phone conference, instructions on how to ask questions will be given by the operator before we get into the session.

And with that, I now hand over to our CEO, Christian Fredrikson.

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Christian Fredrikson, Fingerprint Cards AB (publ) - CEO & President [3]

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Yes. Thank you. Thank you, Stefan. Good morning, everyone, and welcome to the call on our performance in the third quarter.

As usual, I would like to begin by giving you the main highlights of the quarter as well as an update on the business. I will also talk a little bit more about the smart card and that opportunity.

If we look at mobile, our business volumes in the quarter were good. Overall, we saw a relatively stable demand from our Chinese smartphone or OEM customers, but there were some quite significant market share shifts between these players. Also, orders related to Samsung, our new OEM customer, developed nicely. I am very pleased with our entry into Samsung, the world's largest smartphone OEM.

We reported sales of SEK 352 million, which is 18% lower than in the same quarter last year. Weaker sales outside of the mobile area impacted our revenue development in the quarter, but the decrease in the average selling price since last year also had an effect. The market for biometrics outside of smartphones is growing, but it is still significantly smaller than the mobile market and it is also quite fragmented. And for this reason, there can be significant swings in demand between quarters. Our latest business outside of mobile is -- our largest business outside of mobile is Fingerprints module sales into door locks.

Our gross margin was approximately at the same level as in Q1 and Q2, a little bit up, and 4 percentage points lower than in the same quarter last year. This is explained by the fact that the share of revenues outside of mobile was lower this quarter as well as by the lower ASP.

While operating profit was negative 1%, our net profit was positive, helped by the strengthening of the dollar against the Swedish krona. I'm very happy about our cash flow performance. It was positive SEK 59 million, and our financial position continues to be strong.

Next slide, please. As you may have noticed, we now display the total number of smartphone and tablet models which use our sensors on our website. We recently passed 400, which is a great achievement in our industry and also shows the success of biometrics in smartphones. Currently, the number stands at 403, including the Samsung Galaxy A10s as well as A20s.

Next slide, please. If you look at the quarter, 11 new smartphones with our technology were launched. We also launched our latest-generation sensor during the quarter, the FPC1520, which is based on our very successful FPC1511 product. This sensor is even more cost-effective than its predecessor while delivering the high biometric performance that we are known for. I think that we will see the first devices incorporating this sensor before the year is over.

Also, we received the first volume order for T-Shape outside of the payments area. It is to be integrated in a card used for safe online access and secure offline data storage. This shows the potential for T-Shape in other applications.

As I mentioned already in the last earnings call, we announced a partnership with Giesecke+ Devrient Mobile Security in July. And now we have partnerships with all top 3 card producers in the world. At the beginning of October, Natwest started the first biometric credit card pilot in the U.K. following a successful debit card trial. The card using this latest trial is provided by Thales using Fingerprints' T-Shape sensor. This means that the total number of announced dual interface, biometric card, payment cards trials now stands at 21. This is the official number which Fingerprints' technology is now being used in all of that.

Next slide, please. At the end of October, we launched Fingerprints' touchless 2.0 platform, combining the convenience of face recognition with the security of iris to meet demand from smartphone and emerging IoT OEMs. In smartphone market, iris still remains a niche. The new platform enables an improved user experience that works indoors or outside, in daylight or in rain. Fingerprints' touchless solution is beneficial on multiple use cases, including mobile devices, payments, automotive and access. This solution recognize the user with or without glasses, with 1 or 2 eyes but not with both eyes closed and up to a distance of 0.5 meter. It has a 1 to 1 million false acceptance rate, and it is easy to integrate using off-the-shelf hardware components.

Next slide, please. I would like to spend a little time discussing our markets. And if we first take a look at the mobile market, it is clear that this is now a mature mass market with over 70% of all smartphones having some sort of biometric sensor. The technology is widely accepted by smartphone users who enjoy the convenience to unlock their devices, make payments and access applications. Obviously, this quick uptake is paving the way for biometrics in other applications outside of the mobile industry.

Next slide, please. Our market is still expanding, and we have already talked about mobile where the attach rate is now over 70%, which means that over 1 billion phones a year are shipped with biometrics. There is still a potential to grow by further increasing the attach rate in mobile phones, and our latest sensor FPC1520 will enable some of this growth, thanks to its combination of cost effectiveness and high biometric performance.

If we look at the whole area which we call access, we can see an aggregated market potential which is about as large as the smartphone market. Here, we are talking about things like connected cars, smart door locks, remote and gaming controls, authentication tokens, computers and printers, et cetera. This market is growing and has a great potential. But as we also pointed out this morning, demand can vary quite a bit from quarter to quarter since this is still quite an immature and fragmented market.

If we then consider the payments area, it's clear that this is where the greatest potential lies in the coming years. As you know, several blanks -- banks are conducting market trials together with card producers and card networks with the ambition of scaling up to a commercial launch with Crédit Agricole in France, as stated, as they go in 2020.

If we look at the addressable market for biometric payment costs, we estimate that it could be between 6 billion to 8 billion cards in a few years time. This number is based on the fact that there are around 22 billion payment cards in circulation today. Assuming that most of these will be converted to smart cards in a few years and also assuming a replacement frequency of 3 years, around 7 billion payment cards will be produced every year. Today, this number stands at around 4 billion.

Next slide, please. I often get the question on how fast will biometrics be adopted for payment costs. This is not an easy question to answer, and there are a number of different projections out there. I'm not now going to give you another one. But in this context, I think it's interesting to consider the adoption rate of new technologies in the card area from before.

If we look at the introduction of chip and PIN from '95, it took around 18 years to reach 1 billion cards. The next technology upgrade came around 10 years later when contactless cards were launched. This time, it took around 8 years to reach 1 billion cards. Important is that in both of these cases, the point-of-sale infrastructure had to be upgraded, which is a major effort and cost. This is not necessary in order to introduce biometric cards which already work in today's contactless or contact-only POS terminals. Therefore, we believe the rollout will be clearly faster this time around. In 2020, all POS terminals will be driven to contactless, which is an important driver as well for biometric payment cards.

Next slide, please. If we look at the biometric payment card ecosystem, it's clear that we have the widest footprint, engaging with all Tier 1 card producers and other major players in the value chain. We are well positioned to enable this technology rollout. As I said, there have been 21 market trials so far and the -- our technology is in use in all of them. The latest one being the biometric credit card trial by Natwest in the U.K., which we announced in October. I expect to see further trials announce. There are also many unannounced trials going on, preparing for commercial rollouts, which look to set and will begin next year pending certification on the card level. In many cases, these pilots will probably transition right into commercial projects for the banks.

Next slide, please. Our strategic priorities are aimed at defending and building on our strong position in the smartphone segment by broadening our business into new areas. I think we continue to make progress in Q3 against this objective. Our technology is used in a smartphone model now from Samsung, which I'm very -- of course, I'm very happy about. In the past, we delivered sensors to Samsung notebook, but this is the first time our products are used in smartphones from Samsung. And already in October, we communicated our second Samsung smartphone, the Galaxy A20s, which uses FPC1511.

We are the global leader in capacitive fingerprint sensor, and we seek to defend our market share margins here by ensuring production cost competitiveness. That work still continues. And we took an important step in Q3 by launching our 1520 sensor, which is a new generation based on our successful 1511 product. As I said, we expect this to be launched even within this quarter.

When it comes to our optical in-display sensor, we recognize that this market is large and we need to enter it. We have not secured any design wins, but our ambition of capturing a significant share of the in-display market remains, and we are continuing to work towards realization of this ambition. We will, of course, communicate whenever we have any design wins.

If we look at the new markets for biometrics, we also saw some positive progress during the quarter. We entered into new partnership with G+ D. And this means, as I said earlier, we have active partnerships now with all top 3 card producers. We also received our first volume order for T-Shape sensor mobile -- module outside of the payments area. And finally, we announced that we are supporting MeReal in their latest order of biometric payment cards that will reach the market in 2020.

Next slide, please. So let me summarize before handing over to our CFO, Per Sundqvist.

We are proud that our FPC1511 sensor is used in 2 smartphone models from Samsung. Now it is a normal case and we need to fight for every order. We recorded good sales and volumes in -- via mobile while revenue in other areas was weaker this quarter. We launched a new capacitive sensor generation, FPC1520. Our ambition of capturing a significant share of the in-display market remains, but we have no design wins yet.

Let me also mention that we recently launched our touchless 2.0 platform, combining the convenience of face recognition with the security of iris. In October, we also launched -- announced the launch of a unique fingerprint authentication module, FPC BM-Lite. This is especially designed for physical and logical access devices and applications such as smart door locks, padlocks, FIDO tokens, crypto wallets and more. This is an all-in-one module containing all components you need: hardware, software and algorithm, ready to be integrated out of the box.

We saw some positive progress also in the biometric payments card area. We announced a partnership with G+ D for a T-Shape sensor, and this card is already used in market trial in France conducted by Crédit Agricole. And we came a step closer to full card certifications since Mastercard certified NXP's module for biometric payment cards, which incorporates Fingerprints' T-Shape sensor module. As I said earlier, it is important to get the full card certified for the banks to actually move into real rollouts.

With that, I would like to hand over to our CFO, Per Sundqvist.

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Per Sundqvist, Fingerprint Cards AB (publ) - CFO [4]

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Thank you, Christian, and good morning, everyone.

Our revenue came in at SEK 352 million, a decrease of 18% compared to the same period last year. As a result, the weaker sales outside of mobile and a declining average selling price. Revenues were however helped by the strong dollar. In constant currency terms, our revenue declined by 23%. While the gross margin improved slightly compared to the last quarter, it declined by 4 percentage points in relation to Q3 last year due to the ASP decline and lower sales in areas outside of smartphones. Our operating profit came in at negative SEK 3.4 million versus positive SEK 2 million in the same quarter last year. Operating profit was impacted by a SEK 5.5 million negative currency translation effect, and the ratio of fixed costs to revenue is also increased as revenue declined in the quarter.

These are the main factors and reasons behind the operating margin development, as you can see in the red line in this chart. However, we improved the gross profit slightly since the last quarter.

Our net income was positive SEK 5.8 million versus SEK 2.9 million in Q3 2018. The positive bottom line result is mainly due to the effects of unrealized changes in the USD-SEK exchange rates currency account.

Next slide, please. This shows the development of revenue and gross margin on a 12-month rolling basis. The decrease in this period is due to the factors I just mentioned, in other words, the ASP decline and the lower sales -- share of revenues from applications outside of the mobile industry in the quarter. We continue to working on mitigating the effect of this by increasing the share of new, more cost-effective sensors in our product mix and also by driving sales in new application areas.

Next slide, please. Excluding other operating income and expenses, our operating expenses for the third quarter were SEK 78 million versus SEK 81 million last quarter and SEK 101.5 million in Q3 last year. Development costs of SEK 24.5 million were capitalized during the third quarter, which corresponds to 51% of total development costs. This is in line with the figure from last quarter, while in Q3 last year, 25% of total development costs were capitalized.

Next slide, please. Our core working capital, that is accounts receivables plus the inventory less the accounts payable, was SEK 257 million at the end of the quarter, which is to be compared to SEK 376 million in the same quarter last year and SEK 294 million last quarter. We continue to work very actively to manage working capital, and working capital as a percentage of revenue is significantly lower than last year and on the same level as in the previous quarter.

Next slide, please. Our cash flow from operating activities was a positive SEK 59.5 million compared to SEK 202 million in Q3 last year. And our net cash position stood at SEK 537 million versus SEK 596 million in the same quarter last year and SEK 486 million at the end of Q2. Cash flow from investing in activities, mainly capitalized development expenditures, was negative SEK 26 million versus SEK 34 million last year.

Thank you, everyone, and we are now ready to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question on the audio comes from the line of Francois Bouvignies.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [2]

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The first one is on your gross margin. So if we look at your gross margin of 23%, and it's roughly stable in the last few quarters, I wanted to ask you, how do you compare this gross margin versus your competitors? I mean if you look at EgisTec or Goodix, they have definitely more than 30% gross margin. EgisTec reported even above 40% this quarter and Goodix, above 50%. So my question is, is there anything structural that could justify such difference versus your peers on the gross margin side?

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Christian Fredrikson, Fingerprint Cards AB (publ) - CEO & President [3]

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Yes, Francois. No, I think there are -- I suppose -- I can't comment, of course, on what the others have as their gross margin. But obviously, there is a big difference in the market price with the optical in-display, right? So I think that is, of course, where we need to enter, where we have not been able to enter so far out.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [4]

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Okay. So the main reason is the optical, but the capacity, if you think, they are in the same kind of margin as you or...

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Christian Fredrikson, Fingerprint Cards AB (publ) - CEO & President [5]

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Yes. I said I can't comment on that, but there is nothing structural or nothing in the competitiveness of our capacitive products, or else we wouldn't be gaining market share there, so...

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [6]

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Okay. Okay. That's clear. And you mentioned it's the optical market. So when should we expect the -- like design wins? I mean -- or maybe if you -- I'm sure you will be limited in terms of comments, what is the feedback you have from your current product? I mean what do you need to improve, is there anything? What is -- prevents you from being in the market today?

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Christian Fredrikson, Fingerprint Cards AB (publ) - CEO & President [7]

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Yes. As you said yourself, so we don't give any guidance. So I wouldn't -- and it's the same like we had with earlier, I get these questions on Samsung, right? So it's -- when do you enter? Well, you can't tell when you enter before you've entered, right? That's how it works. So we can only talk about design wins when we had design wins, right? And so far, we haven't. And I suppose the issue is always with the -- when you do biometric and you're getting to a new technology, it's about biometric performance, right? So you need to have the right biometric performance. And as you -- of course, we are late in the market, so that there you have it.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [8]

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So you still need to improve some performance metrics before getting in some card?

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Christian Fredrikson, Fingerprint Cards AB (publ) - CEO & President [9]

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Well, it's always about biometric performance. So I don't want to get into that at this point. But when we enter, we enter, right? So we will get back to that. Obviously, we are working to watch it, but we have not been able to do it.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [10]

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Okay. That's clear. And the nonmobile, what is the percentage of your revenues today? Because you say it's impacted your group revenues. Can you discuss at least what is the size of this market? This quarter...

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Christian Fredrikson, Fingerprint Cards AB (publ) - CEO & President [11]

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I think the nonmobile -- yes, we don't give it per quarter. But we have said, and that is on a yearly basis, it's about 10% of our revenues. And that's the way it's going to be this year as well, but it was higher in the earlier quarters and now it's lower, right? So there is a shift there.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [12]

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Okay. Okay. On the smart card regulation, I mean certification, you said that you expected some scheme to release some certification by the end of the year. I guess it was a summer, if I remember correctly, then you push to end of the year. Is there any update on this side?

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Christian Fredrikson, Fingerprint Cards AB (publ) - CEO & President [13]

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No. Not really. There is no new updates on that was -- you're right that the full card, we have, of course, gotten a partial card of the module, NXP module with Mastercard. We got the certification there with our sensor. But the full card certification for one of the schemes is, of course, the trigger point for banks to actually be able to really order, and that has not happened yet. That is -- that's hard for us to say more on because it's not in our hands really when you get the full card certification. So the whole industry is working towards that. But so far, of course, it hasn't happened. So I think that's something we'll have to get back to when it happens, right? It's not really up to our -- in our hands to finalize.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [14]

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Okay. And last one, and sorry about the other questions. But the noncash item, it's more -- in your cash flow, it's decreasing, I mean compared to your D&A, it's much lower. Is there anything in there apart from the depreciation and amortization? I didn't see anything in the release.

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Per Sundqvist, Fingerprint Cards AB (publ) - CFO [15]

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No, no. There is nothing. No. Nothing...

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [16]

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So how do you...

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Per Sundqvist, Fingerprint Cards AB (publ) - CFO [17]

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Nothing else. Nothing else. We've got depreciation on product.

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Francois-Xavier Bouvignies, UBS Investment Bank, Research Division - Technology Analyst [18]

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But the depreciation is like if I -- you really -- like around 30-something amortization, and your noncash item is SEK 9 million on your cash flow. What is the difference?

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Per Sundqvist, Fingerprint Cards AB (publ) - CFO [19]

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Noncash. The difference there is that you have a -- if you look at the currency effect, that's why you have it, that was related to the operational side of the working capital. We have this exact scenario that is affecting the sales, it's affecting all the balance sheet items. And we have -- the working capital parts are generating a cash -- non -- unrealized cash effect, cash currency effects of the U.S. dollar. Then the same actually goes for the financial net when you look at that, the -- all of what we have is sitting in currency accounts. It's mainly U.S. dollars right now as well. So we are very much a USD company in terms of all the aspects that are running through our cash flow.

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Operator [20]

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Your next question comes from the line of Viktor Westman.

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Viktor Westman, Redeye AB, Research Division - Analyst [21]

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First one is on smart cards. If you look at the smart card pipeline and the percentage of the T-Shape in there, would you say it's 50-50 or 80-20? Can you give any ballpark number on the interest for the T-Shape?

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Christian Fredrikson, Fingerprint Cards AB (publ) - CEO & President [22]

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Viktor, sorry, can you -- I didn't fully understand what you meant with the pipeline. Can you just elaborate?

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Viktor Westman, Redeye AB, Research Division - Analyst [23]

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Yes. Yes. Yes. So the smart card pipeline for you, is it -- can you say something about how much of that is for the T-Shape module?

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Christian Fredrikson, Fingerprint Cards AB (publ) - CEO & President [24]

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Yes. Okay. So at the moment, T-Shape is -- the module is the only product we sell into the smart card business. It's going to be probably 200,000 units that we sell of T-Shape this year, and that's -- about half is payment cards, half is nonpayment cards. And -- but that's the only module at the moment. We have a new version coming out at T-Shape, which is more effective, more cost-effective, but that's not in the market yet and will not be for...

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Viktor Westman, Redeye AB, Research Division - Analyst [25]

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Okay. So -- but is there any interest from customers in buying sensors only without the module?

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Christian Fredrikson, Fingerprint Cards AB (publ) - CEO & President [26]

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Well, I think it's a little early in the smart card industry, so not really. I think at the moment, it's about getting the module. I'm sure there are many different discussions and will be different versions of that. But at the moment, our performance on the module level is superior because of the combination of, well, the system, the software and the hardware and the algorithms.

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Viktor Westman, Redeye AB, Research Division - Analyst [27]

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Okay. Very good. And a follow-up also on the gross margin. We've seen the impact now from the 1511, and you're at 33% gross margin. If -- when you -- with the 1520 coming now, is that going to have a better effect on the gross margin? If -- can you say something about that?

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Christian Fredrikson, Fingerprint Cards AB (publ) - CEO & President [28]

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We don't give any forecast, Viktor, on the gross margin. I can only say that we obviously need to work to improve our gross margin. We realize that it's not where it needs to be. It's not good enough. We are kind of okay-ish, but not good enough on these numbers, right? So -- but we do new versions all the time to improve. At the same time, it's a running race, right, with the price erosion. That's how this business goes. Yes. But we are not happy where we are. We know we need to improve.

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Operator [29]

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There are no further questions via the audio. Please continue.

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Stefan Pettersson, Fingerprint Cards AB (publ) - Head of IR [30]

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Yes. So we have received a few questions from the web as well.

So the first one is concerning IDEX. IDEX has claimed cost leadership. Have you been able to try their sensors' technical performance to see if their offer constitutes a threat?

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Christian Fredrikson, Fingerprint Cards AB (publ) - CEO & President [31]

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Well, we don't comment on competition. I'm sure they are all capable to comment on their own behalf. I would say so that we are clearly the leader in the smart card pilots. There are 21 of them. And we are in all of them which tells of our performance, and performance always includes biometric performance as well as cost performance. We are developing the road map. And at the end of it, we have -- in May, we passed over 1 billion sensors sold and delivered, and we are in this mobile business, the capacity leader. So I believe that if anybody can drive down the cost in this industry as well in the smart card industry, it should be us. I think we have failed if we are not the one who is able to drive with our procurement power and our capability to drive costs down that we have proven over and over again in this industry. That's maybe from our point. Yes.

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Stefan Pettersson, Fingerprint Cards AB (publ) - Head of IR [32]

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And another question on the in-display. Goodix has released a new ultra-light sensor under glass. Would you say that your sensor is still valid or obsolete compared to their new sensor?

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Christian Fredrikson, Fingerprint Cards AB (publ) - CEO & President [33]

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Yes. Of course, we -- it's a fair question because we haven't entered the market and have no design wins yet. We have -- there is no obsolete, right? We continue on the products and all the learnings and everything we build. But the fact is and remains that we have not entered this market, and we will -- we still have the same ambition. And then I can't give any forecast on when that will happen.

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Stefan Pettersson, Fingerprint Cards AB (publ) - Head of IR [34]

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And why do you believe your touchless 2.0 solution will be a success?

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Christian Fredrikson, Fingerprint Cards AB (publ) - CEO & President [35]

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I think it's an incredible combination of face and iris. I think it actually now brings both convenience as well as security. There's nobody else in the world that can deliver that. So there are quite many segments that we will go into with this solution. Obviously, it takes time, and it has been slow. That is very clear for us in terms of bringing that business to beat the numbers. But clearly, in both access, in border controls, in car, in the automotive industry, are some of the very interesting areas for us where we continue to do business, and then we look at how to grow that business. It is a fact that in mobile, it has become either fingerprint sensor or face at the moment, so -- which is basically Apple, right, and very small for others. So that's how in the mobile business the biometrics has gone so far.

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Stefan Pettersson, Fingerprint Cards AB (publ) - Head of IR [36]

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And what is the status of biometrics in the automotive segment and also PC? When do you expect to see your products in cars?

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Christian Fredrikson, Fingerprint Cards AB (publ) - CEO & President [37]

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It's going -- I think that we have many, many good cases going on for us. We have a good cooperation with Gentex when it comes to the iris. They are, of course, the market leader for high-end mirrors in the whole automotive industry in the world. But it is, of course, just to doing the trials is a long journey in the automotive industry. So I think that is the timing issue and the hindering factor before you actually get, and it's just a long cycle of trials in that industry, which can take actually between 18 and 24 months, actually, the trial period in the car industry. That's the one that is taking so long for us.

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Stefan Pettersson, Fingerprint Cards AB (publ) - Head of IR [38]

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All right. That's it for the questions from the web.

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Christian Fredrikson, Fingerprint Cards AB (publ) - CEO & President [39]

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All right. With that, thank you for joining us again this time, and I look forward to getting back in a quarter again when we get to the Q4 results on this session. With that, I wish everybody a very good day, and thank you, and talk to you soon. Bye now.

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Operator [40]

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That does conclude our conference for today. Thank you for participating. You may all now disconnect.