U.S. Markets closed

Edited Transcript of NEXT.OL earnings conference call or presentation 20-Aug-19 6:30am GMT

Q2 2019 Next Biometrics Group ASA Earnings Call

OSLO Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Next Biometrics Group ASA earnings conference call or presentation Tuesday, August 20, 2019 at 6:30:00am GMT

TEXT version of Transcript

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

Corporate Participants

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

* Alain Faburel

NEXT Biometrics Group ASA - Chief Sales & Marketing Officer

* Dan Cronin

NEXT Biometrics Group ASA - Interim CEO

* Knut Stålen

NEXT Biometrics Group ASA - CFO

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

Presentation

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

Dan Cronin, NEXT Biometrics Group ASA - Interim CEO [1]

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

I'm Dan Cronin. I am the newly named interim CEO. Myself, Knut Stålen and Alain Faburel will be walking us through the presentation this morning. So let's jump right into it.

I start with the highlights. Q2 was a very good quarter for NEXT, excellent quarter, actually. And we're going to walk you through the details as to why we believe that and why we believe that we're positioned to capitalize on the strategy that we've put into place about 2 years ago.

So in the government ID section, as you're aware, we've been investing in this market for a while now. We've had some -- I shouldn't say we, the market has had some setbacks. Recently, the first being the Supreme Court decision, and then the second being the election that slowed down the market and basically, slowed down our ability to turn our investment into return.

The good news is that that's changing, and that the market, once again, is picking back up, and we're actually seeing traction starting in the form of PO. So we fully expect for those POs to materialize into revenue for the second half of this year, and Alain will go into more detail about exactly what we're seeing.

So once again, a lot of work, some unfortunate circumstances, but you can feel it is starting to pick up. It's getting real, so good news.

Smart card, once again, a lot of investment in this area. It's a market that hasn't taken off yet, but it's a very complex market. And we've been working diligently to not only put our solution into place but to build out the ecosystem that it takes to launch a product successfully into this market. This is not, obviously, a mature market. It's not like you can go out and tap an existing ecosystem. You have to create it, and that's something we've put a lot of effort into. We've made a lot of progress, and one big step, this quarter was signing an agreement with ABCorp to partner with them to commercialize a solution based on our biometric subsystem. So once again, a big step forward. And once again, an affirmation that our technology has value in the marketplace.

Notebook, we have some really good news in Q2. It was our highest revenue quarter, I think, on the books that we've had. That's the good news. The maybe not so good news, but it's not a surprise, is that a major Tier 1 customer is reducing the number of platforms starting in Q3. And obviously, we'll see that in our numbers.

We have some other things that are highlights that, once again, Alain will go into in a bit more detail. The first is we signed agreements with TROIKA and Wiseasy for our POS terminals. Once again, it's our technology, our products are being pulled into the marketplace, they're being accepted and starting the revenue.

We have spent a fair amount of time developing this FAP20 One Touch sensor. So this is a 500 DPI sensor. We're in the process of getting PIV certification, which is the government stamp of approval. It's a high security solution. We signed our first commercial contracts this month. So once again, we put a strategy in place. We have executed on the development side, and now, we're starting to see the customers, once we've sampled to them, showing interest and beginning a pull of the technology.

And then the last one is where I started, and that's the fact that, as everyone's aware, Ritu Favre resigned effective the end of last month, end of July, and I have taken over as the interim CEO.

From a financial perspective, once again, a lot of good news here in Q2. Our revenue was up NOK 30.1 million. I think, once again, it's not an all-time high, pretty close. We're up 18% from the same quarter last year and 10% from last quarter.

We continue to deliver on the gross margin. So we're at 32% compared with 26% a year ago and 34% last quarter. So I think this has been a recurring theme, something that, once again, was put in place a couple of years ago to get us here, and I think we're showing a track record of being able to maintain this level of gross margin.

We also announced last quarter that we had executed a cost reduction program and that we would start to see the results. And the good news is we are, and it's on track with what we expected, and you'll see that in the numbers that Knut will show. And finally, all these actions together have moved our EBITDA in a positive and a good direction, improving it to a minus NOK 30.5 million.

So once again, it's a very strong quarter. It's one that, as an organization, we're proud of. And I think it reflects the hard work that the team has done over the last couple of years.

So as I mentioned, Ritu Favre recently left the company to pursue another opportunity. And I wanted to make sure one, that everyone understands we still have a very strong executive team, a very strong management team. Even though Ritu chose to move on, it -- as an organization, we've maintained our team. So we're still very strong.

I think you're familiar with Magnus Mandersson, our Chairman. You've obviously met Knut and Alain. I want to take a little bit of time to introduce myself because they sort of kept me hidden for the last couple of years. I've been a little busy executing on the strategy.

But my background, I spent a little over 30 years before I came to NEXT as a Development Lead Executive in some large companies, in the semiconductor space, companies like IBM, Motorola, Freescale, NXP.

What I do is I build products. I build them, and I deliver them. That's what I've done my entire career, and that's what I believe we're doing here now at NEXT. You can say that's my talent, is to take products to market. And once again, when I had the opportunity to join NEXT, one of the first things that I did was looked at where NEXT technology stood and where the people stood. What did we have? What resources, both from an IP perspective and from a company perspective, resource-wise that we have to be successful?

And really, what I saw was a very compelling story. I joined March -- March -- May of 2017, and I deep dived the technology. And what I saw was something that was very competitive but also had the opportunity to be very compelling, and a couple of reasons.

One was we build our technology based on, as you know, the same technology that's used to build displays. So why is that important? Our competitors use very high cost infrastructure to build their products. For the case of the silicon guys, it's a 300-millimeter wafer, 12-inch wafer. They're very expensive. I did that business, like I said, for over 30 years. I know what it cost.

To spend designs in that type of infrastructure is very expensive, so you have to be very cautious and very careful and cycle times on spins are slow.

We have the advantage with this infrastructure, with this manufacturing technology that we can do very fast and very efficient R&D development. So we can optimize our current products, and we can create new products that allow us to open up different parts of the market with much less investment, both in dollars and in people than our competitors. So to me, that was extremely interesting.

The second piece was that it's one thing to develop a prototype. That's a -- I'm not going to sit here and say it's easy, it's not. But to take it from a prototype to something that you can manufacture, that you can yield, that can pass long-term reliability, that can pass a Tier 1 stringent requirement and that you can support in a cost-effective manner, that's a whole different challenge. And what I saw was a team that, while immature, had a lot of the process and capability that allow them to do this. So these were the factors that caused me to decide to join NEXT Biometrics. I saw a foundation of something that we could build on and take to the next level.

So one of the first things that we did, myself and Ritu and the management team at the time is what you would expect, a straightforward SLOT analysis, and came to similar conclusions, our strengths and our weaknesses, and we've put a strategy in place to capitalize on those strengths, which is aligning our product roadmap with this technology.

And that's the chart I'll show later on, it's the 4 boxes, it's the smart card as our priority. It's the government ID as a place where we can invest and grow. It's the access where we can leverage our technology with small investment and take advantage of the distribution. And also, maybe what's changed a little bit is in the notebook market, we see the opportunity with our FAP21 touch sensor to remain a strong player in that market and actually take advantage of the fact that we have some compelling features that are attractive to those high-end notebook guys that are playing in government markets and medical markets, for example.

So what you end up with when you're all said and done is a set of portfolio of products, platforms, if you will, that allow us to address these multiple markets in a very effective manner. When I say effective, effective from an R&D investment to develop and support them and effective from the ability to scale them. So as a customer, you have a choice of a single vendor that can supply a big portion of your portfolio from low-end to high-end and a roadmap that allows you to service that customer along their roadmap.

So once again, starting from a single product and a single customer and a strategy to diversify that, build on our strengths and create multiple products, multiple platforms to serve this market that fits into our sweet spot.

And I believe the reality is we're the only company in the space that can do that based on our technology. Why do I believe that? So once again, we start with our base technology. We recognize the fact that just having a product, having a module, having a reader is not enough to be successful in the market. You need to be able to deliver a solution. Sometimes that's a solution that you completely own, sometimes that's a solution where you've built up the ecosystem and the partners to support it. But you bring a solution to the customer, and that's what we have done. It requires getting the government regulations. It requires a lot of work building up the partnership.

Why do I think we're in a unique position? I'm not going to go through this line item by line item, because it's obviously a lot of bullets there. But I do want to hit the highlights.

So in the government ID and in the Access Control, we're able to deliver a product. Let's take our competitors in the optical world. We can deliver a product that is much lower power than what they can deliver because of our technology. It's -- you can go look at the datasheets. It's public information. Our products are lower power.

Because of our manufacturing, we can produce products. And in our underlying technology, we can produce products that are much more cost effective, which is extremely important, obviously, to our customers, and we can also offer a product that has a form factor that is much thinner than what anyone else can do.

So our optical friends, they advertise the world's slimmest, optical FAP20 sensor. And it's all over. You can Google it, world's thinnest optical sensor.

We are 5x, 5x thinner than their solution. So why is that important? That size, that thickness can sometimes, many times, set the thickness of the product, the end product that it's going into.

So if you can make it thinner, you can go out with a lot of different form factors, which once again, opens the door to new products.

So you take just those 3 things combined, the lower cost, the lower power and the better form factor, and in my mind, you end up with a compelling solution.

Access Control is a similar story. We have the cost. We have the power. We have the 500 DPI. So once again, we have a competitive, if not compelling solution.

Where we really shine is in the biometric cards. And this is something where it's -- I'm sort of passionate about it. Sort of is an understatement. I believe this is NEXT's birthright, that our technology is required for these biometric cards. No one else can create a sensor of the size that we can create and put it in a flexible form into a smart card and have it live.

Our silicon friends cannot do that. Their solution is based on glass. If you make glass too big and you bend it, it breaks. They can't get bigger, they're stuck. There's no easy solution. They could thin it, they could -- there's techniques you can thin. So if you -- once again, I did it for 30 years, but it cost a lot of money and there's yield issues. So they're not going to get there any time in the short term.

Why is a large sensor important? And we've had a lot of discussions around this, and I sit back or have sat back for the last couple of years, and I see all these charts that we've created to try to explain it. And I'm an engineer. I am a -- graduate degree in electrical engineering. I've worked in engineering my entire 30-plus year career. So I understand technology.

I don't understand the damn graphs that we've been showing our investors as to why our technology is better. It's hard to understand. And we throw out these terms like FAR and FRR, and what does that mean? And it's really very straightforward. And you've lived it in your daily lives.

So when you want to enroll on your phone, the way that you enroll, we've all lived through it, is you touch it, 9x, 10x. You hope you pass the first time. If not, you restart, and you do it again.

And that's with a smartphone that has a nice display, has a user feedback mechanism that can tell you if you're touching it right.

Now try to do that with a card that doesn't have a great display. That enrollment gets a little more difficult. It's because it's small. The sensor's small. So if you think about it, why am I doing that? Why am I touching it so many times? Well, because when you go to use the card, you're not going to touch it the same way each time. So if you grab it a little different, it needs to have that version of your fingerprint stored in its memory so that it can do a match for you. If it doesn't have that exact version, it rejects you, and it's only using that little bit of data. So you think about your finger, it's only grabbing a little piece, and it can only use that little bit of data.

So that's what we refer to as the FAR/FRR. It's the false acceptance rate. It means if you make it too easy to recognize the finger then people that don't own the card can use it. It was useless to put the fingerprint sensor into the card if that's the case. If you ramp that up so that it rejects people, then you have to have almost a perfect match with that little sensor.

With our large sensor, you can capture most of the finger. So you get all of the data on one touch. So once again, think about it in a card format. You touch it, the light turns green, you're enrolled. That's convenient. You go to the store, the difference between our card and our competitors' cards, and there's data, this isn't fantasy, this isn't made up, this is real, and you can think of it because of the physical reasons that you go to a store, and you go to use the card. It's the holiday. There's 20 people standing behind you. You try to use your card. You don't touch it exactly the same way. The card doesn't work. You try it again. The card doesn't work, what do you do? You put it back in your wallet. You pull out a different card. You use that. That's not good business for our customers. You take our card, odds are much higher. You touch it, it's going to work the first time.

And that's why, to me -- and once again, I apologize, I'm passionate about this, we have the solution that no one else can meet. And we talk about we're late. There's discussions we're late to the market. I push back on that some because I don't see the market. I don't see that the market's materialized. And we're going to talk about a little bit later on that we are working on introducing a dual interface solution by the end of this year, a pay card that I believe strongly will show that we have leapfrogged our competition.

So once again, this is why I'm here. This is why I feel strongly that NEXT as a company is positioned with a solid foundation built on a solid technology, a strategy that's been in execution for 2 years, and what we're going to show you today is the results are starting to manifest themselves. We're starting to see the customers, once we're able to put this into their hands, we're starting to see the pull happening and some of the momentum.

So once again, the strategy is the same as it was as when we started. Slight tuning as you do with any strategy but the same. #1 priority is smart card. I hopefully explained why we feel like that's a market that we should dominate.

The second is government ID. Once again, this is a market that exists, but we are offering a solution that I believe is a game changer to the marketplace.

Notebook, we made the decision that we don't play well in the lower end for various reasons, but our FAP20 with the form factor that we have today and the quality and our ability to service Tier 1 customers puts us in a position where we believe we can stay relative and, in fact, be strong in this marketplace.

And finally, Access Control is a market that allows us to leverage this investment that we've made into these other areas and capitalize a very broad and diverse market.

So I believe that, that strategy is working. It's something that -- it will be obvious to everyone, as the revenue and the design wins start to ramp. And like I say, Alain will discuss more details on the customers and then Knut will jump into the financials. So Alain?

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

Alain Faburel, NEXT Biometrics Group ASA - Chief Sales & Marketing Officer [2]

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

Thank you, Dan. Good morning. I will go through all different verticals, market segments as I used to do. One word, if you don't remind anything of my 4 slides, I will ask you to remind one thing, we deliver. We deliver our promises.

Go back to the presentation that I did and with the team, we did back in January. We had some information to give you. We passionately said what we have, what we're going to do in 2019. Check each of the bullets, and check what we're going to tell you today, and you will see that we delivered our promises. NEXT Biometrics is a company that deliver. We are not selling dreams. We are delivering on our promises.

We announced that we would sign some additional agreement with card makers. You know that we have signed a few of them. We have the logo. All these companies are our partners. You can see that for some of them with whom we have been working in the past 6 to 8 months, we have real product. You can see the logo of this company. You can see our sensor on this card. Those customers are customers who have been testing our product. Dan was talking about the stress test that we give to a card before we can qualify it to make a payment transaction. All products have been through this testing and qualification.

In the last couple of months, we signed an agreement with ABCorp. ABCorp is a U.S. company. They are in the smart card business for many, many years. They are headquarter in -- close to Boston and a rural business in U.S., in Canada, in Australia, in New Zealand, in Hong Kong, in many places in the world. They have been working the past few years to identify which are the next technology gap that are interesting for them to address their market and to provide to their customer new offering that we generate for them better revenue, better margin differentiation, and they decided to pick NEXT Biometrics.

And what's the reason why they decided to choose NEXT Biometrics? This is not because of the product. Dan told you that market is not yet there. We're not lead in the market. The market is not there. What's the point of having all our investment in the smart card business when it's not there? We're putting our investment in market where we have revenue today. This is government ID. This is Access Control. This is notebook. We have revenue there. And smart card, we'll have revenue soon. So we have to make sure that we manage our effort, resources and money so that it match where we are going to do our revenue or profitability or margin. That's what we do. And the reason why they choose NEXT Biometrics is because we have something that is really convenient. When you have a large-size sensor, you have a one touch to do the enrollment, you have one touch to do the transaction, this is extremely important for the ramp up of this industry. You can imagine that if you have a sensor that doesn't work at first time when you try to do a transaction at Christmas time, the merchant is not going to be happy. The merchant is going to reject the technology. If a merchant reject the technology, the user is going to reject the technology.

The only way to make sure that we are going to ramp up in volume -- I'm talking about the industry, I'm not talking here about NEXT. If this industry wants to ramp up in volume, in the smart card, we definitely need to have a product that is user convenient. A technology cannot be something that ramp up without convenience to be very humble. You know big names in the IT with Microsoft, with Apple said this many years ago. You see the result. This is because they do computer that are convenient, easy to use for the customer. This is the only reason why this market is going to run. I'm convinced about this. Convenience is the only way to make sure that this industry is going to grow in volume. And this is why this customer and the other customer we have on the screen are trusting what we do at NEXT Biometrics.

So what we have in the pipeline? Of course, we are going to continue. (inaudible). We are still working with our partners, Tier 2 partners, in the market, and we'll announce soon something else. So in the next quarterly presentation, we have some other news on this. So we're going to continue to give you and to deliver our promises. We extend our partnership with some major company in the semiconductor industry, in the Secure Element that we need to connect our sensor. You know that we have this agreement with Infineon. That Infineon is one of the major player in the market, and we need to be able to work with the other one. As a technology provider, we have to be agnostic, and we are agnostic. And as much as we can find Secure Element vendors that are going to adapt our technology, ultimately integrated with sensor, we'll have more business. So we have a second source, and we're going to work, and we'll be able to announce quite soon another partner with whom we're going to develop a solution that is going to address some of the verticals. So we are not only targeting the banking industry. In the smart card, we have banking, we have government ID, we have secure authentication and we have some other smaller subsegment, like transportation. Basic one and biggest one is banking. Government ID is a large one, not as large as banking but this is a large one, with interesting features in global solution for government ID that drive the added value of value added to the top, and we are going to have a platform to address this specific vertical. So we extend our positioning into the smart card industry so that not only we have something that is going to match the banking industry but also the government ID industry. When we look at the numbers when we look at the forecast from the analysts, it's not only NEXT Biometrics' forecast, what we can see is the forecast is saying that the banking is going to ramp up from 2022, in 2 years from now, almost 2 years from now. That's what the analysts are saying.

But this is banking vertical. When we look at the government ID, we have good hopes because we have seen some demonstration of this that there are already some project that require biometric fingerprint onto a smart card. We had to work on a tender a couple of weeks ago in an African country that require this feature. And here we do not need Dual Interface, which means that the product that we have that is ready today, that we can see here is a product that perfectly fit with what this vertical needs.

So we are on time. Not only we deliver our product, we deliver our promises, but we are on time in this industry.

What we're going to do in the second half in terms of priority? For the banking industry, we need this Dual Interface. There is something that we have demonstrated to our preferred partners and customers; they know perfectly our roadmap. And we're going to show this in a smart card form factor. We'll have one big show related to the smart card in South of France before the end of the year, and we'll be able to show this product at this time. And we will be able to show that this product is perfectly compatible with all the constraints in term of power requirement, in term of stress test of the card. And this is the ideal product that is -- not only gives you the convenience but also the technology advantage that you need to have for kind of a smart card in this industry. So again, we deliver here what we said in January we would deliver this year.

When I moved to India, wow, what a tough year. If you remember when I had the first meeting with you in August last year, we just had the certification of hardware in India. We got this in June. It's a year ago. It's not that far away. It's a year ago we got the certification of the hardware. Then in October, we got the certification of the software, which means that between June and October, basically, we could not sell anything because we did not have yet the certification of the software. So it came October. And when it came October, it also came the Supreme Court verdict in India that frozen all the business because they were preventing from selling to the operator. It was a mess in the ecosystem in India. We didn't know exactly what to do, and we saw the business going down, reducing a lot. So we hope in Q1 that we could start again, and we took some orders in Q1. And then came the election in India, and don't ask me why but when there are election in India for 3 months, everything is stopping. So we could not have anything to sell between end of March and June.

And then came the end of June. And you know what, since June, it's a wonderful business. We are not stopping from answering tenders every week. We rebuilt a totally fresh new organization in India to be able to match the business we have. Again, I want to say what about my promises. You remember what I promise is beginning of the year? I told you we have 4 targets, which are the 3 customer, which are mentioned here and customer D. And in May, you asked me what is customer D? I did not answer because it was not totally cooked. It has been cooked since this time. So customer D is Datamini. And what we did in Q2, we signed with Customer D, and we also signed with a new distributor, which is FOXBase. And FOXBase has a lot of relationship with this customer D, and together with FOXBase, we managed to bring on board this customer D. So -- because I know that you like numbers. And when I said in January that we would match the 140,000, I also said -- I took a risk. I also said that our objective -- I think it was one of your question. The objective is to reach the 200,000 number, and we are in good shape.

For our sales guy, it's not always of use to say some confirmation of the numbers. But I'd like to say that what I see from now, what we are entering in the past few weeks in the backlog, what we have delivered to the customer, the network we are putting together and the team we have built, I am very confident. I'm very confident that not only we are going to reach that bar of 140,000 but I see that we are answering tenders every week and every week tender can be 10,000 unit, can be 20,000 unit, can be 50,000 unit. We have the product.

In the past 2 years, we have been working on delivering the product. We are executing a strategy, which was, we moved the company from R&D and engineering company to a company that delivers a product. Now we have the product, and now we have built a team in the sales, in the field to sell what we have. So we are selling to all those partners, Wiseasy, TROIKA, MobiOcean, FOXBase is a distributor that is selling our readers and our modules to the industry. We have this network today that is ready.

On top of this, we can see 2 important new factors. First one is, we see an opportunity with the thermal printer. What does it mean? It means that many of the transaction you can do in India, you do it with a smartphone, but a smartphone is not able to print any paper, and sometime you need to have a receipt. So they are inventing a thermal printer on which they're going to put a sensor so that you make an authentication by using your finger when you want to print something. We're going to be the first one in this market for this product.

This is not counted in my 140,000. So I have good hopes that with this product, in addition to what we already have, we're going to exceed the numbers.

And last, again, remember, we deliver. We said beginning of the year, we are investing in a new product, which is L-1. This L-1 product is ready. We have an expo, a trade show in September in Delhi, and I'm grouping all my privileged, preferred customers to whom very humbly, we are going to do a Knut tour to presenters -- to present them our new L-1 product. So we have a strategy. We have developed what we call the L-0 product. We are now selling this L-0 product in the market. And all the customer who have this L-0 product are going to be migrated to the L-1 product.

So what we had in the past, we were trying to, 1 year ago, to introduce NEXT as a player in the market. We do not have to do this anymore. We are recognized in India. We have product. We have sales. We have distribution channel. Now we are executing our sales. And we are seen as the one who are very dangerous in India because we are taking some market share. So I see -- I'm confident, really confident in India.

In the rest of the world -- well, before the rest of the world, let me introduce my good friend, the policeman in the street of Delhi. So why I'm showing you this picture is that I want to explain you the use case. The use case is the Delhi police is using this POS, this terminal that he has in hands, which is a terminal, in which there is a NEXT Biometrics sensor integrated in. And the use case is that the Delhi police is going to use in real time the ID of the citizen, and that citizen is going to put the finger onto the device to authenticate the online payment. You know that India is a country where, unfortunately, this is the fact and it's public, there is a lot of corruption. One of the interest of this technology is that the organization, the global organization, is making sure that the payment is going where it has to go and the POS device is something that helps to do this.

So what is the ecosystem? Just so that you understand what it does. NEXT Biometrics is selling to the POS vendor. The POS vendor is buying the sensor to NEXT Biometrics. There is an application provider that is doing a software and is integrating the software with the POS device, and there's application vendor that is called MobiOcean here is selling to the government agency. So they are bundling the POS that is already integrated with sensor from NEXT Biometrics, and they bundle this with the software and service, and they sell it to a government agency.

What does it mean for NEXT Biometrics? It means that not only we need to have good friends from the companies that are doing application software development, like MobiOcean, they are a prescriptor for us. They are the ones who have the power to say to a POS vendor, "You pick the technology from NEXT Biometrics."

And on the other side, we need to make sure that we have partnership with all the POS vendors. So in the previous slide, you saw that we have partnership with Wiseasy. We are here selling to Telpo. You remember, last quarter, I announced that we have signed a deal with Newland. It's extremely important for NEXT Biometrics' strategy that we have all or almost as many as we can POS vendor that have already integrated our technology. It's extremely important that we are working with them in advanced phase, and they are doing some design of our technology, integrating into their POS system. If they do this, they are ready. When there is an application vendor that comes with the application to sell to the government authority, this is ready. There is no additional effort. Decision reassured. This is a turnkey solution. And that's what we are doing in our strategy in India.

Let me tell you about the rest of government ID outside of India. This is extremely important to understand here that when we decided to address this segment a year ago, we said, "Okay, we want to address a segment, but we are not sure that we have the product that matches this segment." And we decided to invest in the One Touch ID FAP20, which is an ultra-slim device. And this, together with the cost that it allow us to sell it on the market and other technical advantages, is making this product a future flagship product in this industry.

When I see the feedback of this product -- we have been proposing the samples of this product since beginning of July and even June for some customers in all the markets outside of India -- there is an extremely good feedback of the customer. This is a product that is going to make the difference.

In a month, we have managed to sign agreement on top of Newland with SUNMI, with wizarPOS, with Coppernic in France. You have to imagine that the use case is we put a sensor into a tablet form factor. We go in a small village in Tanzania, Namibia, South Africa and the police or any other government authority is going to use an application onto a tablet or a POS form factor to proceed to law enforcement that need authentication. And in those countries where the mobility is something which is an issue, the connection to network is also something that is an issue. It is absolutely mandatory to have devices like tablet or POS that we can use without any connectivity, that it is going -- that it is going to allow you to make the authentication on the spot in a small village in nowhere, and this is why they like our technology. Our technology is easy to integrate. It's so small. It's so convenient to use that it can integrate this in any form factor. And what they like is to have the form factor of a handheld device like any kind of smartphone, for instance. And if you have a big device, and this is optical and it's not Siemens. If it's that thick, then you cannot integrate this in your device. With the NEXT Biometrics technology, you can do it.

So this is basically why all those partners and customers are delighted to sign with us. The next step with them is that we have provided them the sample. We're going to help them to make -- to finalize the design and do the integration, the final validation integration in all devices. And we're going to work with them to get the first order in Q4 this year.

We're going -- this market is a worldwide market. We cover a good part of Asia Pacific, but we need to extend our footprint. We are not yet present in Middle East Africa. We are not yet present in some of the Southeast Asia and Latin America, and we have progress to do here. And it's one of my next action to be able to cover those territories we do not cover enough at the moment.

When I go to the Access Control, I'm very proud that we managed to sign an agreement with one of the biggest access control provider. In the world, there are, let's say, 2 large companies that are providing this kind of solution, and we managed to sign with one of them. And the ambition is that this company is going to replace the technology they are using today with our technology. So we are not creating a new market. When you try to make a parallel with smart card, in smart card, we create a new market. There is no market today of biometry onto the smart card. Here, we are replacing technology.

So this is also a demonstration that the strategy of NEXT is not to go in only one segment that is extremely risky because we don't know what's going to be in the future. Even if we believe that there are good chance that we will have smart card with Biometric, it's not today something that has been demonstrated, validated, and it's not something that is absolutely 100% secure. We are going in some places, and we have invested our money in some segment where we are in a replacement market. So the market exists.

So the money that we invested to develop our product is money that we have invested because we are sure that we're going to be able to make some profitable business in this industry that exists. This is extremely important to understand this. And one of the reason why we have this large company not only in Access Control, not only in POS, not only in smart card but they trust NEXT Biometrics. This is because they see that we have a strategy that is very clear. We are investing in the short term for some -- in some product that are going to give us revenue in the short term. But at the same time, we want to plan for the future. We have a vision in the future and for the future that smart card today is going to be extremely important. This is our priority #1. This is not saying that we are not investing in the other segment. We are investing in the other segment. 2019 is a year where we have made a lot of investment, 2018 as well.

The result of this, as I said to you is that we have an L-1 product for India. We have this One Touch ID FAP20 for POS in government and for Access Control. And we have also this new range of product we're going to launch early September. This is a product that is based on our legacy product that has been improved to resist to harsh conditions.

We are extending our network and our footprint to sell in some countries. Here, you can see the logo of UniComm. This is in Russia. When you sell in Russia, well, it's a bit difficult in Siberia to have some devices that resist to temperature. Even if there are not a lot, I would admit a lot -- not a lot of volume in Siberia of devices. But anyone that we have to sell in -- any single unit that we have to sell in Siberia has to comply to some harsh condition that is in their specification of the customer. So if we want to be able to sell in this country, if we want to be able to sell in some country with a lot of humidity environment, then we have to match this harsh condition. We are going to launch this product that is going to be made of 2 different product by beginning of September.

So the money that we have is money that we use to build product. Now that we have product, it's our role in assessing to deploy and execute our wholesale strategy. We have a very good lead. We have a very good opportunity with this Tier 1 Access Control partner. The potential with this one is several hundred thousand units per year. This is extremely important. In that market, several hundred thousand units per year is extremely important.

We signed the one in Korea that is also -- was open to some countries in which we were not really installed yet. And again, I want to put emphasis on this. We continue to work and to extend our network and our activity in some places we are not really well covering today.

So the notebook. You know this is our legacy market segment. And we have made an excellent second quarter in the notebook. We went through some volume with Fujitsu, which are above all the expectation that we had so far. So we have done something very good with Fujitsu. And at the same time, Fujitsu, we have started, last fall, a key account strategy with them. And not only we are delivering our legacy sensor with this customer, but we also extend our partnership with them with the One Touch ID FAP20. They are testing this product. They are doing a designing today.

So we are -- we said in the past that notebook is an industry where we question whether we should stay in or not. And after a long analysis and review of our strategy, this -- definitely this is a market in which we see there is a potential for NEXT Biometrics.

And all the Tier 1 notebook makers to whom we have been proposing, introducing, demonstrating our FAP20 product said, "Yes, this is a product that could make the difference." We are going to design it.

Unfortunately, notebook is made of Tier 1 customers. So this is good, but this is bad as well. This is good because this is large. This is bad because it takes lot of time. The cycle time between the moment that we introduce this technology to a Tier 1 notebook maker and the time they are going to place the first volume order is 1 year. It's not before this because of their process.

So we introduced this technology June, July. For some of them, it's going to be in a couple of months coming. We will be in a cycle where once they have validated the technology, we'll get the first small order somewhere in Q1, Q2 next year. Then we will have to go through all the procurement process, which is long and fastidious, and we have some volume order from Q3 next year, something like that. This is to give you an idea of the cycle of this. And this is also to tell you how and why it's so important that we are good in India and in the rest of the world in government ID. So we see a good balance with all these segments. And we have to be good in all the segment because unfortunately we also see a decline of the volume of the U.S. Tier 1 notebook maker. This is not a surprise. We already mentioned this. We see it materializing in Q3 and in Q4 this year. And of course, we work with Fujitsu to try to compensate. It's not going to be enough before the end of this year, but we have some good hopes that next year with the traction of this new FAP20 and the end user notebook maker, we are going to compensate all this.

So this is the message I wanted to pass you on all different verticals. I think that, again, keep in mind that NEXT Biometrics deliver the promises. We are executing our product development. We have our product this year that are going to be finalized on the field. It's going to be Dual Interface product or smart card. It's going to be the L-1 product for India. It is the FAP20 product for Access Control and government ID outside of India. It is sensor for harsh condition. Four family of products that we deliver to the market this year, and now we are executing the sales strategy.

Knut, I think that next one is yours.

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

Knut Stålen, NEXT Biometrics Group ASA - CFO [3]

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

Thank you. And then to the numbers. This is probably -- it is the best set of numbers that we have been able to achieve in my time as CFO. As Dan said, our revenue in the quarter was NOK 30.1 million, that's on the high level -- highest level that we have had for revenues. It is 18% above a comparable quarter last year. And year-to-date, we reached NOK 57 million in revenue and that's also 18% increase year-over-year.

We continue to deliver on the gross margin. We had 32% in Q2, and we have now 4 quarters in a row to be above 30%. And that's according to our target, and the main changes that these are swinging a little bit is a variation on the product mix.

The EBITDA in the quarter is now negative. It's adjusted for options. It's negative 30.5%. And this is also the lowest loss that we have had for many, many quarters. Previous quarter, it was negative 35.4%, and a year ago, we had NOK 41 million in negative, and now, we have reduced that to NOK 30.5 million.

When it comes to costs, we had approximately NOK 40 million in expenses in the quarter. And as you can see here, we have reduced the cost levels since Q4 '18. If we adjust for the government grant to Skattefunn in Q4, we had a cost level of about NOK 50 million and this means that we have already achieved the target of the cost reduction program of 20% decrease.

We are still focusing on -- and at the same time, we are moving resources into sales. And we are also making sure that all our development projects are on track, both within smart card and government ID.

When it comes to EBITDA and cash flow, and as you can see on this chart, we have an EBITDA ex option that is better than any other quarter before. And our cash used for operations in Q2 was negative NOK 25 million. This is a level that we have not had before. And the main difference between the cash flow that we generate from the P&L and the cash flow we have in the balance sheet is that in addition we have reduced our inventory and we have a slightly higher debt to vendors. So that shows that we have been able to have this low level of cash flow spending.

To sum it up, the negative cash flow in the Q2 was negative NOK 25 million, and we have NOK 163.5 million in the bank end of quarter.

Thank you.

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

Dan Cronin, NEXT Biometrics Group ASA - Interim CEO [4]

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

So in summary, I want to, once again, reiterate, this was a really good quarter for NEXT by just about any measure. I said it in the start, I'll say it at the end, we put in place a strategy to move from a single product, single customer to move to multi-product, multi-markets, and it's taken time to get there across the board. And the good news is, we are there. We have products that are starting to roll out. These are our mass market products. They're manufacturable. They've been built and tested to have the yield and the manufacturability that we need to support the volumes that we expect to see in these markets. And I'm really happy to say that this -- we're starting to see the pull. And for me, that affirmation that the strategy is working, and it reaffirms the fact that it's all about execution at this point. So as our customers start to use these new products, we need to make sure that we're there to support them because getting them to start is just the beginning of the battle.

But once again, I have a lot of confidence in our team. We've done this before. We've done this with some very demanding customers that are used to a very high level of quality and service, and we've shown that we can be successful. So I have confidence that we can take this to the next level. And once again, you should expect to see that in the numbers that we return going forward.

So 2019 is going to be really more of the same because, once again, it's about executing. So we need to capitalize on our products. We need to ramp in India, we need to ramp the FAP20, we need to continue to work closely with Fujitsu to expand that footprint, if possible. Smart card, like I said, this is a place where it is a market that can be huge, should be huge for NEXT Biometrics. We've positioned ourselves to be where the market takes off. We're going to demonstrate this Dual Interface solution by the end of the year to the public audience where, once again, I think it will make it very clear that we are not following, we're actually leapfrogging the competition.

So that's our Q2 presentation. I'd like to open it up now to any questions.

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

Questions and Answers

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

Unidentified Company Representative, [1]

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

Are there any questions in the room? No? There is a question from the web. So I'm just going to start. Large sensor is great and it's more secure, but will the market adopt it? When do you estimate a large increase in volume shipments?

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

Alain Faburel, NEXT Biometrics Group ASA - Chief Sales & Marketing Officer [2]

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

I'll take this one. We expect to have some increasing volume in India starting this quarter. We started in Q1 with small volume. We have new orders in India almost every week. It starts slowly, but it starts, and we have this every week. When we look at the business outside of India, and I'm talking about Access Control, for instance, we have a lot of designing that we have started with our One Touch ID FAP20 product. And this is going to give us some volume that are going to start in some more orders in Q4 and deployment starting in Q1 and Q2 next year.

In the notebook and for the same product, it's going to take a bit more time. I expect to see volume growing from H2 next year because notebook industry has cycle time that is longer than Access Control and government ID.

In summary, what I see in our 3 segments outside of smart card is volume starting really in Q4 this year and Q3 and Q4 in India, with the FAP20 product starting in Q1 with early adoption and early volume in Q4 but starting ramping up in Q1 next year. And for smart card, it's going to be something that is going to ramp up not before the end of 2021 and 2022 as for the brand that we already communicated.

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

Unidentified Company Representative, [3]

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

Okay, next question. When do you estimate breakeven results?

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

Knut Stålen, NEXT Biometrics Group ASA - CFO [4]

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

I can take that one. The breakeven result is, of course, our target, and we are working to achieve that all the time. It really depends on how fast we can scale the revenues. And we just need to monitor our business and see how we are progressing on that. But we will not going out with a specific quarter or a specific timing of the cash flow breakeven situation.

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

Unidentified Company Representative, [5]

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

Do we have time for more questions?

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

Dan Cronin, NEXT Biometrics Group ASA - Interim CEO [6]

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

Yes, one more.

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

Unidentified Company Representative, [7]

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

Okay. With low market value and a unique technology, do the company see a probability of merging with another player or other forms of consolidating?

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

Knut Stålen, NEXT Biometrics Group ASA - CFO [8]

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

That we cannot comment on. We focus on NEXT and our business and our operations, and these things are something that others need to worry about or think about. This is not our focus at all. We focus on NEXT and our delivery of our products.

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

Dan Cronin, NEXT Biometrics Group ASA - Interim CEO [9]

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

All right. Thank you. Thank you very much.