U.S. Markets open in 1 hr 52 mins

Edited Transcript of IDEX.OL earnings conference call or presentation 15-Aug-19 1:00pm GMT

Q2 2019 Idex Biometrics ASA Earnings Call

Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Idex Biometrics ASA earnings conference call or presentation Thursday, August 15, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Derek P. D'Antilio

IDEX Biometrics ASA - CFO

* Stanley A. Swearingen

IDEX Biometrics ASA - CEO

* Stuart Hunt

IDEX Biometrics ASA - Head of IR & Communications

================================================================================

Conference Call Participants

================================================================================

* David Sillars;Louis Capital Markets;Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the IDEX Q2 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Stuart Hunt. Please go ahead, sir.

--------------------------------------------------------------------------------

Stuart Hunt, IDEX Biometrics ASA - Head of IR & Communications [2]

--------------------------------------------------------------------------------

Good morning, good afternoon, everyone, and welcome to IDEX Biometrics Conference Call for the Second Quarter of 2019. Speaking first today will be Stan Swearingen, CEO; followed by CFO, Derek D'Antilio. After their prepared remarks, we'll open the call for questions.

Before we begin, please note that some of the information you will hear during this call may consist of forward-looking statements. Such statements are based on current information and management's expectations as of this date. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict. For more information, please refer to the Q2 report, which is published earlier today and our annual report published in May.

Stan, over to you.

--------------------------------------------------------------------------------

Stanley A. Swearingen, IDEX Biometrics ASA - CEO [3]

--------------------------------------------------------------------------------

Okay. Thank you, Stuart, and welcome to everybody for joining us today.

When IDEX started our journey to produce biometric sensors into a smart card format, we had a clear vision that the fundamental advantages in security and convenience that biometrics could bring would create an entirely new market based on existing infrastructure. That new market would offer fresh growth opportunities for payment schemes, card issuers, merchants and those involved in the supply chain.

Over the past few years, our vision has played out as we had expected. Increasing investment has gone into the entire biometrics smart card ecosystem. The progress that has been made by all parties is evidence that there is considerable demand for biometric smart cards. The feedback we received from our customers, issuers, payment schemes is that biometric smart cards offer a compelling value proposition.

Since I joined IDEX, I've had no doubt that for IDEX to succeed and maintain its leadership in biometric technology, it would require investments in the right people and environment to deliver on their expertise. Today, we've built a company staffed with some of the industry's best talent, from system engineering, software and silicon engineering and material science experts to operations and a sales team that all have a successful track record in high-volume markets. I highlight this because I don't think enough has been said about the talent within IDEX and the confidence that I have that we will be successful in this new market.

So when we look at the achievements that IDEX has made this quarter, it's clear we're making excellent progress and that our confidence is fully justified. Let's now look at those achievements in more details and what it means for IDEX.

Earlier this year, I spoke about the challenges that card manufacturers face making the transition from a fairly simple smart card to the mass production and more complicated biometric smart card. Today, I'm delighted to say that through a lot of hard work, there are now multiple card integrators who have overcome these challenges. They are now ready for mass production of biometric smart cards in million of units using both hot and cold lamination techniques and are experiencing very high yields. This is a major step in the development of biometric smart card market. We no longer view manufacturing as an inhibitor of volume order set, and that's why IDEX has deliberately made crucial partnerships within the ecosystem.

In the quarter, we announced partnerships in China with Sian and Silone Cardtech. These companies specialize in making high-quality components for smart card integrators. The strategic rationale is to ensure that crucial components within the biometric smart cards such as sensor (inaudible) compatible and ready for high-volume orders. We also announced a collaboration with Tongfang. This is an important relationship for us as Tongfang is a major player in the Chinese secure element market. Together, we are working on a dual-interface solution that will support both match in biometric MCU and match in the secure element. This provides for an enhanced level of security for multiple smart card verticals. This combined solution creates a compelling value proposition for card manufacturers by reducing card complexity and overall cost.

This leadership -- this leads me on to a more recent announcement and a significant development, which is the multiyear partnership agreement with IDEX -- between IDEX and Feitian. Feitian has become the leading manufacturer of pre-lams for smart cards. A pre-lam is the inlay layer carrying the components and connectors inside a biometric smart card. By joining forces with Feitian, IDEX now provides a mass-produced, low-cost, end-to-end solution.

Certification is another important step in the evolution of biometric smart card market, and I'm pleased to say that this process is well underway. I expect to see certification for multiple card integrators during the fourth quarter. In June, we announced a major global payment scheme in Asia began its certification process for various biometric smart cards containing IDEX' dual-interface sensors. This process should be completed in the third quarter.

Last month, our dual-interface sensor technology passed the key requirements for biometric performance and security audit by multiple payment schemes. This is another major landmark achievement for IDEX and makes us the first company to achieve this.

It's important to highlight that several card integrators are using our dual-interface system's reference design for certification. The reference design includes a fingerprint sensor, our proprietary energy harvesting technology, our flex design, power management software and our distributed ledger. We're the only company offering this full system capability, which will be vitally important for the next phase in the market when cost reduction and performance improvements are required.

Innovation is at the heart of IDEX. And this is exemplified in our technology road map and intellectual property portfolio. In Q1, I shared some early concepts of our remote enroll solution, which we currently have patent protection from the U.S. and Australia. We expect to receive a new grant -- patent grants in other strategically important territories very soon. These remote enroll patents are very important to IDEX not just financially but because of what they represent. We've seen statements from schemes, card integrators and card issuers all saying that remote enroll is critically important to biometric smart card adoption.

In the coming weeks, we expect to sign multiple license agreements with major card integrators. Recently, our remote enroll solution is used by an independent third-party testing house to gather real-world fingerprint images as a part of its certification process for a global payment scheme. The results of the image-captured data from the test far exceeded the FRR and FAR benchmarks required for certification. This is a clear validation that our remote enroll solution delivers the required performance.

As a company, we are continuing to make great strides on the commercial front. We're expanding our design win pipeline. And we expect to add to the list of the top 10 integrators in China. We've already delivered on our first major commitment to the landmark customer we announced in April and pleased to say that this triggered an NRE payment. We're expanding our footprint in India, Korea and Japan as well as Eastern Europe as well as -- and I expect to share more details on this in the coming quarter.

Now that mass manufacturing issues have been solved, the technology is improving and remote enroll is in place, we expect to ramp in orders post-certification. To deliver on this, we have expanded our sales team and made key hires in Asia, Europe and U.S.

Before I hand it over to Derek, I want to reiterate how pleased I am with the progress that IDEX made this quarter. With the development in customers and ecosystem partners, the whole market is moving in the right direction on manufacturing and certification. I'm looking forward to reporting on further progress in the second half of the year. Derek?

--------------------------------------------------------------------------------

Derek P. D'Antilio, IDEX Biometrics ASA - CFO [4]

--------------------------------------------------------------------------------

Thank you, Stan, and welcome to everyone on the call. I am very excited about the opportunity here at IDEX. From what I've seen so far, we have a very differentiated strategy built on compelling systems-based approach. IDEX also has a very talented team across the entire organization: engineering, sales, management, Board and the partners to capitalize on large market opportunities.

As Stan mentioned, we continued to make significant progress in the first half of 2019 with partnership developments, certification, building on our IP portfolio with very important new product design wins and orders. These are significant milestones because we now have multiple revenue stream opportunities.

We are growing our customer base in new revenue streams. But with the market at this early stage, revenues by quarter can be lumpy and difficult to predict and dependent on timing of design wins, certifications and ultimately shipments.

And now I'll turn to the financial results for the second quarter. During the quarter, we continued to shift thousands of units to customers for use in engineering and production testing. During our Q1 presentation, we announced that we received the first NRE payment for the large access control order that Stan mentioned. And in July, we achieved another key milestone on this project and invoiced for the second milestone payment.

In terms of expenses, operating expenses in the quarter were NOK 60.1 million, down from NOK 64.6 million in Q1 of 2019 and NOK 63.3 million in Q2 of 2018. The decline sequentially was primarily due to a decline in payroll-related expenses, largely due to the timing of incentive compensation and staff coming and goings. Payroll-related expenses remain the largest cost item for IDEX. And we expect the operating expenses to remain fairly balanced between the first half and second half of the year.

During the quarter, our cash flow was minus NOK 69.6 million and includes operating expense funding, increased store inventories and an investment in manufacturing equipment placed at one of our suppliers in order to be positioned to ship orders in a timely manner. Our cash position at the end of Q2 was NOK 155 million or USD 18.2 million and we have no financial debt.

We expect low single-digit millions of units shipped per quarter would bring the company to operating breakeven at current expense levels. We monitor our cash position very closely, including the working capital requirements to support the potential rapid growth in revenues. In addition to product sales, we have the ability to continue to do joint development projects and monetize our IP in many ways to generate additional cash flow streams.

In closing, I look forward to working with our very talented team, our customers, our partners and our very supportive shareholders. Thank you, and now I'll hand the call back to the moderator and open the call for your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And we do have a question from David Sillars at Louis Capital.

--------------------------------------------------------------------------------

David Sillars;Louis Capital Markets;Analyst, [2]

--------------------------------------------------------------------------------

I've got a few questions. But why don't I start with the obvious one. I'd like to look at the remote enroll, if I can. Can you hear me, first of all?

--------------------------------------------------------------------------------

Stanley A. Swearingen, IDEX Biometrics ASA - CEO [3]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Derek P. D'Antilio, IDEX Biometrics ASA - CFO [4]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

David Sillars;Louis Capital Markets;Analyst, [5]

--------------------------------------------------------------------------------

Okay. Remote enroll, I think that's a largely overlooked and an incredibly important component of all of this. Do you have any ASPs for 2020 and gross margins like you provided before for the biometric module?

--------------------------------------------------------------------------------

Stanley A. Swearingen, IDEX Biometrics ASA - CEO [6]

--------------------------------------------------------------------------------

No. We haven't disclosed nor are we prepared to disclose ASPs module. We have said in past calls that our margin expectations for the business are 50 points of gross margin. And we would expect with things like remote enroll that, that would further support maybe even something a bit higher.

--------------------------------------------------------------------------------

David Sillars;Louis Capital Markets;Analyst, [7]

--------------------------------------------------------------------------------

Okay. And you spoke about making licensing agreements with the integrators, I think, you said over the next few weeks or a couple of weeks. Could you talk more about that? Are you talking specifically about the remote enroll or about IP or about the entire module?

--------------------------------------------------------------------------------

Stanley A. Swearingen, IDEX Biometrics ASA - CEO [8]

--------------------------------------------------------------------------------

Okay. My comments were relating to the remote enroll intellectual property and...

--------------------------------------------------------------------------------

David Sillars;Louis Capital Markets;Analyst, [9]

--------------------------------------------------------------------------------

So can we say that over the next few weeks, you're going to monetize the remote enroll?

--------------------------------------------------------------------------------

Stanley A. Swearingen, IDEX Biometrics ASA - CEO [10]

--------------------------------------------------------------------------------

Correct. The way the license is structured, there will be a royalty element to it.

--------------------------------------------------------------------------------

David Sillars;Louis Capital Markets;Analyst, [11]

--------------------------------------------------------------------------------

Okay. If I could, could I jump over to something you'd mentioned in the previous quarter or so? And that was you were talking about a strategic partner making a potential -- or taking a potential ownership stake or some sort of alignment with the strategic partner perhaps on the back of an exclusive deal with you guys? Is anything further on that strategic partner ownership to date?

--------------------------------------------------------------------------------

Stanley A. Swearingen, IDEX Biometrics ASA - CEO [12]

--------------------------------------------------------------------------------

We still have inbound interests from several parties. So that's still in play. I think you -- I mentioned exclusivity because each one of the parties is -- has different considerations. And we're also -- obviously, we have our own considerations. So we want to make sure we're protecting the value and ensuring that we can play across the whole market. And we also want to have a partnership if we go down that path with somebody who's going to bring significant value to the business via the partnership. But I can say that there are multiple parties interested or in continuing dialogue with them.

--------------------------------------------------------------------------------

David Sillars;Louis Capital Markets;Analyst, [13]

--------------------------------------------------------------------------------

Okay. Talking about the economics of actually who's going to bear the additional costs of creating these cards. I think last time, you said the market participants, that the integrators, banks and schemes are kind of, at the moment, at present, trying to work out who's going to take what share of the additional costs. Is there any further information on that? Do you feel that there's kind of a consensus about who's going to be assuming those sort of costs?

--------------------------------------------------------------------------------

Stanley A. Swearingen, IDEX Biometrics ASA - CEO [14]

--------------------------------------------------------------------------------

And I'll caveat my comments with we're several steps removed from that whole dialogue. However, from what we've heard, it's a very regional scheme specific. So in some regions, it may be the issuer. In other regions, it may be the scheme. In some regions, it's a combination thereof. So there -- we're not seeing kind of a cookie-cutter approach. It's really depending upon the issuers' objectives and where and how they're going to promote the card.

--------------------------------------------------------------------------------

David Sillars;Louis Capital Markets;Analyst, [15]

--------------------------------------------------------------------------------

Okay. Cool. And perhaps one of my final questions is the LSE that was mentioned, I think, about the Chairman a couple of presentations ago. Do you feel that that's been put on the back burner for -- at present? Or do you think the LSE listing will happen in 2019?

--------------------------------------------------------------------------------

Stanley A. Swearingen, IDEX Biometrics ASA - CEO [16]

--------------------------------------------------------------------------------

No, it's not on the back burner actually. No, I'm comfortable answering it. It is not on the back burner. What we're doing -- and with Derek joining, he brings a really unique set of perspectives. What we're looking at and assessing is really where can we get the most value for the company and where will the company realize its full potential for valuations. So it is a very top priority actually for the executive team right now. And we're working through that. And we're doing all of the analytics, and then we're preparing to make a recommendation.

--------------------------------------------------------------------------------

David Sillars;Louis Capital Markets;Analyst, [17]

--------------------------------------------------------------------------------

And with the -- an additional listing on the London Stock Exchange, would that be an additional equity? So a kind of a capital raise or some other way?

--------------------------------------------------------------------------------

Stanley A. Swearingen, IDEX Biometrics ASA - CEO [18]

--------------------------------------------------------------------------------

We haven't got that far into the process. And so the 2 listing venues we're considering are the NASDAQ and London. Obviously, we're respectful of our existing shareholders and our shareholders in Norway. So we want to make sure that we do this in a way that adds value to everybody. And so that's kind of the analytics I alluded to that we really need.

It's a very complex equation. And we want to make sure we do this in such a way that it brings value importantly to our existing shareholders because a lot of them have been with us for quite a while. And we want to make sure we're respectful of their position. And the reason we're doing this is to give them a better return. So that's all. And as you can imagine, it's a very complex equation. And that's why we're not taking this lightly.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

And we'll go next to [Ulf] (inaudible) with [HCAP].

--------------------------------------------------------------------------------

Unidentified Analyst, [20]

--------------------------------------------------------------------------------

Yes. My name is [Ulf]. I'm from Norway, from [HCAP]. And I have roughly 5 questions I want to ask you. First off, how did the Board and management view the company's financial position up against its scale and structure? And I ask this in light of IDEX' biggest financial contributor in the last year's capital raises now who also find himself in economic issues.

--------------------------------------------------------------------------------

Stanley A. Swearingen, IDEX Biometrics ASA - CEO [21]

--------------------------------------------------------------------------------

Excellent question. I'm glad you asked that. I'll turn it over to Derek. And then maybe I might add a little color.

--------------------------------------------------------------------------------

Derek P. D'Antilio, IDEX Biometrics ASA - CFO [22]

--------------------------------------------------------------------------------

Sure. I'll make sure I understand the question here. I mean we take -- we look at our cash and monitor it very, very closely. The management team along with the Board have those discussions regularly on -- about cash position and the financial position of the company. We look at all different options here. We've got multiple potential monetization streams. Of course, selling product and revenue is one of them, as we mentioned, monetizing our IP through either our licensing agreements or other ways to monetize the IP or other things there. Finally, we've done some already joint development in NRE payments. So there's multiple ways we're looking at that in addition to vehicles to fund working capital going forward and those sort of things. That's an ongoing discussion.

--------------------------------------------------------------------------------

Stanley A. Swearingen, IDEX Biometrics ASA - CEO [23]

--------------------------------------------------------------------------------

And I think the color I'd add is as we sit here today, we feel we're capitalized where we need to be. And the multiple streams Derek mentioned, our confidence level of those materializing, so I would that as a bit of color.

--------------------------------------------------------------------------------

Unidentified Analyst, [24]

--------------------------------------------------------------------------------

Yes. Okay. Do you find the downsizing in staff relevant in the coming 6 to 12 months?

--------------------------------------------------------------------------------

Stanley A. Swearingen, IDEX Biometrics ASA - CEO [25]

--------------------------------------------------------------------------------

No. I think we are sitting here with the markets poised to explode. The last thing we want to do out there kind of doing all of this is to not capitalize on it. So we don't foresee the need -- we don't think that's a -- wouldn't be a prudent thing to do at this time.

--------------------------------------------------------------------------------

Unidentified Analyst, [26]

--------------------------------------------------------------------------------

No? Okay. Do you think Neil Woodford will continue his fund's engagement in IDEX?

--------------------------------------------------------------------------------

Stanley A. Swearingen, IDEX Biometrics ASA - CEO [27]

--------------------------------------------------------------------------------

I can't really comment on Neil's strategies or thoughts. We're thankful he's been a very loyal investor and he has showed a lot of support for us. So I can't comment on what's going on with his thought process, but just to say that we're quite thankful for what he has done for us in the past. And that's about all I can say on that topic.

--------------------------------------------------------------------------------

Unidentified Analyst, [28]

--------------------------------------------------------------------------------

Okay. And last question. How do you at IDEX view the structural changes we see around in the world regarding mobile payments being a more dominant and preferred solution for the consumer? For example, I talked to some people from South Korea and China. They told me they use their mobile phone as their only payment tool and authenticator. And we also see Apple and Samsung putting pressure on their payment schemes alongside Alipay having close to 1 billion users.

--------------------------------------------------------------------------------

Stanley A. Swearingen, IDEX Biometrics ASA - CEO [29]

--------------------------------------------------------------------------------

Okay. Yes. I think most of the things -- I think about that quite often. And in previous calls I mentioned last year in China where you just mentioned, it's a dominant form of payment. China UnionPay issued 10% more cards.

As far as it being a dominant scheme globally, it's actually in the low-single digits, and in some geographies, in decline. So I think it's a very geographically specific dynamic. But even as a microcosm in the geography where it's a fairly dominant payment method, the card issuer in that geography is issuing 10% more cards. So I think that's a statement that these payment approaches will coexist.

As an example, Apple just issued a card. I think that's another, I don't know, gamble, right? So yes, I think -- and again, I don't have a special crystal ball. But in the time horizon, I'm looking at the next 4, 5, 6 years, yes, we see payment cards really flourishing.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

(Operator Instructions) The next question will come from (inaudible).

--------------------------------------------------------------------------------

Unidentified Analyst, [31]

--------------------------------------------------------------------------------

This is (inaudible) calling from Norway and (inaudible) Holding. Can you hear me?

--------------------------------------------------------------------------------

Stanley A. Swearingen, IDEX Biometrics ASA - CEO [32]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Unidentified Analyst, [33]

--------------------------------------------------------------------------------

I only have one question, and I think maybe you have answered it. But my question is during the last capital increase, the Chairman said that he really thought that you had enough money to take you to profitability. And is that still the case that you're working from? Or...

--------------------------------------------------------------------------------

Stanley A. Swearingen, IDEX Biometrics ASA - CEO [34]

--------------------------------------------------------------------------------

Yes. As I mentioned earlier -- good question. We look at our cash very regularly. And we have those discussions with the Board and with ourselves here internally. And as I mentioned, we believe we have sufficient capitalization right now to do the things we want to do. And we have multiple streams of potential cash flows. Those include some things we've already announced, some joint development agreements and NRE payments. And there's ongoing discussions there along with discussions to monetize aspects of our IP with licensing agreements and royalty payments and other opportunities there, strategic opportunities.

So -- and then finally, as the ramp does materialize, potential ramp does materialize, there'll be a build working capital. And we'll look at ways to fund that working capital with traditional methods to fund working capital increases.

--------------------------------------------------------------------------------

Unidentified Analyst, [35]

--------------------------------------------------------------------------------

Yes. But that also means that you have not changed the view on potential orders?

--------------------------------------------------------------------------------

Stanley A. Swearingen, IDEX Biometrics ASA - CEO [36]

--------------------------------------------------------------------------------

No. We haven't changed the view. I think in my prepared comments, I talked about certifications happening in Q4. And in our view, that really is the last milestone. And then we'll start to see the ramp materialize.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

At this time, there are no further questions. I'll turn the conference back over to management for any closing remarks.

--------------------------------------------------------------------------------

Stanley A. Swearingen, IDEX Biometrics ASA - CEO [38]

--------------------------------------------------------------------------------

Well, thank you, everybody, for attending. And thank you for the people who asked the questions. I thought they were well considered and gave us an opportunity to add a little more color. So thank you and have a good day.

--------------------------------------------------------------------------------

Derek P. D'Antilio, IDEX Biometrics ASA - CFO [39]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

And that does conclude today's conference. Again, thank you for your participation.