Gothenburg Aug 16, 2019 (Thomson StreetEvents) — Edited Transcript of Fingerprint Cards AB earnings conference call or presentation Thursday, August 15, 2019 at 7:00:00am GMT

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today’s Q2 2019 report conference call.

(Operator Instructions) I must advise you that this conference is being recorded today, Thursday, the 15th of August 2019.

And I would now like to hand the conference over to your speaker today, Stefan Pettersson. Please go ahead, sir.

Yes. Thank you. Good morning and welcome to Fingerprint Cards’ earnings call following the release of our second quarter 2019 results this morning.

My name is Stefan Pettersson, and I’ll be the moderator today. We’ll begin the call with a presentation by — of the report by our CEO, Christian Fredrikson; and thereafter by our CFO, Per Sundqvist. Following this, we’ll have a Q&A session. (Operator Instructions)

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

Thank you. Good morning, everyone, and welcome to this call once again focused on our progress and performance now in Q2.

As usual, I would like to begin by giving you the main highlights of the quarter as well as an update on the business.

We reported sales of SEK 382 million, which is 2% lower than in the same quarter last year or 12% lower in constant currency terms. This is due to the decrease in the average selling price since Q2 last year. If we look at our delivered volumes, the trend was positive in the quarter. In fact, I estimate that we have been gaining market share in capacity sensors for smartphones.

Our gross margin improved by 7 percentage points in relation to the same quarter last year. However, the margin was slightly lower than in Q1, which has to do with the fact that we had lower proportion of software sales and also less-favorable customer mix than we had in Q1. Business line smart cards and embedded had a strong first quarter with software sales, and less in Q2. These factors impacted slightly our margins, but this was counterbalanced by the fact that the proportion of new and more cost-effective sensors in Fingerprints’ product mix has continued to increase. And so all in all, we saw slight decrease in gross margin from Q1 from 23% to 22%.

It is so that we have variations from 1 quarter to another in terms of our customer and product mix, leading to fluctuations in our sales and margin, but of course the trend line should be positive, and our actions continue to move us in the right direction.

Looking at some of the other key numbers in the quarter. Our operating profit and net earnings were positive, and the positive EBITDA trend continued. And finally, our net cash position also improved clearly to SEK 486 million from SEK 338 million in Q1. That was a good performance.

Next slide, please. 14 smartphones equipped with our sensors were launched in the quarter by 9 OEM customers. The global smartphone market is still challenging, as it always has been, and we saw a decline in global smartphone shipments in Q2 versus last year but not as much as in previous quarters. We have also seen quite a solid smartphone demand in large markets like China. And as you know, we deliver sensors to all the major Chinese OEMs.

2 Acer Chromebooks intended for the enterprise market were also launched during the quarter equipped with our FPC1145 touch sensor, which provides an extra layer of corporate and end user security. We continued to see a lot of progress in the biometric smart card area in the quarter, which is encouraging. Let me get back to this on the next slide. Our T-Shape sensor is also finding applications outside of the payment card space. It is, for example, integrated in a hardware vault called BeamU for safe online access and secure off-line data storage. With the size and shape of the credit card, data and passwords are secured and authenticated using fingerprint biometrics. It comes with features such as FIDO 2-factor authentication and tracking of valuables such as your wallet and phone using Bluetooth.

Next slide, please. On Tuesday morning this week, we issued a press release about the fact that Samsung is a potential new smartphone OEM custom (sic) [customer], which we are of course very happy about. This is something we have worked on for quite a while in this company, and it is great that it has finally paid off. We now have 8 out of the 9 largest global smartphone brands as our customers. Let me just give you the key points of this.

So more specifically, we have delivered fingerprint sensors within the context of a production project, which likely means that our technology will be included in Samsung Galaxy A10s, which was announced a few days ago. As you know, in this industry it is common practice to use more than one supplier for a common component, so there is a possibility that technology from other suppliers will be used as well. We have received orders and delivered sensors within the context of this project, and the volumes in Q2 were not insignificant. Finally, we are also working on an additional production project that could potentially lead to Fingerprints’ technology being included in another model from Samsung. As you know also, in mobile business the chain is long, so it is not possible for us to estimate when and how big volumes a certain phone model will have when it hits the market.

Next slide, please. Fingerprints’ strategy for the coming years is based on defending and building our strong position in the smartphone segment by broadening our business into areas outside of the mobile industry. In Q2, we continued to make good progress against these priorities. As I mentioned earlier, we reinforced our market position in capacity sensors for smartphones during the quarter. We are truly the king of capacitive sensors.

We seek to defend our market share margins in capacitive fingerprint sensors by ensuring production cost competitiveness. Our latest FPC1511 sensor has done very well in the market and this product is now a key pillar of our capacitive sensor portfolio, but we are already far along in our efforts to introduce yet another generation of sensors which will be based on the FPC1511 and be even smaller and thus more cost effective. The development project is proceeding to plan, and I expect the first smartphones to use this new sensor to be launched as early as this year. We are also making progress in terms of introducing our new optical in-display sensor to the market, and we are currently working with OEM customers in order to qualify the product.

In smart cards, we saw a lot of positive developments during the quarter and also after the close of the quarter. An additional market trial was launched conducted by Crédit Agricole in France. The card, which is being used in this trial, is supplied by our partner, Giesecke+Devrient Mobile Security, and features Fingerprints’ T-Shape module. This new announced partnership with G+D means that Fingerprints now has active partnerships with all 3 top card producers in the world. In July, another significant event took place in the smart card space, mainly that Mastercard certified our partner NXP’s module for biometric payment cards, which incorporates Fingerprints’ T-Shape sensor. This certification is another clear indication that we are getting closer to a broader commercial rollout. And we are very happy to collaborate with NXP and other partners along the value chain to create the next mass market for biometrics.

Next slide, please. This is an updated map of all publicly announced dual-interface biometric payment card trials to date in the world. The latest trial in France brought the total to 20, and Fingerprints’ technology has been used in all of them. Let me repeat: used in all of them. I expect to see further market trials this year in other markets as the ecosystem prepares for a broader commercial rollout.

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

We strengthened our market position in capacitive sensors for smartphones. And we continue our positive EBITDA trend, also delivering positive net earnings in the quarter and a very good cash flow. Sales of our latest capacitive sensor FPC1511 continued to develop nicely. The customer feedback has been excellent, and we are now gaining market share again in capacitive sensors. We are soon ready to take another step by introducing an even smaller and more efficient sensor based on the 1511 generation.

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As I said earlier, we are now very pleased to deliver our technology to 8 out of the 9 top global smartphone brands, now including also Samsung. We are also working very hard to capture share of the market for in-display sensors, and we are currently working with customers to qualify FPC1611 (sic) [FPC1610] optical in-display sensor. And finally, there has been some very encouraging news in the emerging biometric smart card area, where Fingerprints’ position is truly very strong, not least the fact that our partner NXP’s biometric payment card module which includes our T-Shape sensor received a compliance assessment and security testing certificate by Mastercard. This is part of the process of establishing specifications and standards for biometric payment cards in preparation for the larger-scale rollout.

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.

So let me take you through the financial results for the second quarter.

Our revenue came in at SEK 382 million, a decrease of 2% compared to the same period last year. Our revenue was helped by the strong dollar, and the constant — in constant currency terms, revenue fell by 12%. This decrease can be attributed to the fact that our average selling price has come down since last year. However, volume-wise, we have been doing well and gained some market share.

Looking at the chart. We have excluded the nonrecurring items that we had in Q2 last year to better highlight the underlying operational performance. So diving into the numbers, you can see that our gross margin improved from 15% in Q2 last year to 22% this quarter, which is more or less at the same level as in Q1, when we recorded 23% in relation to Q1. We had a lower share of software revenues as well as a less-favorable customer mix that explain the slight difference.

So these factors combined have been offset by the positive effect we have had from the continued introduction of our latest-generation capacitive sensor, the FPC1511. Our operating profit was SEK 6 million, which is to be compared to minus SEK 578 million in Q2 last year. However, this figure for Q2 2018 included nonrecurring items totaling to a negative of SEK 495 million. The context of that could be further broken down to restructuring costs and inventory write-down and the write-down of capitalized R&D expenses.

Next slide, please. If we then look at the development on a rolling 12-month basis, as shown in the diagram on this slide, we can see the positive trend shifts both in terms of revenue as well as margin. As you know, we have been facing a decline in average selling price. And an important priority for us has therefore been to increase the share of new, more cost-effective sensors in our product mix both to defend our market share as well as improve our margin. Our latest sensor, the FPC1511, has been an important factor in achieving these results, which now can be seen in revenues stabilizing and margins improving.

Next slide, please. Excluding other operating income and expenses, our operating expenses for the second quarter totaled SEK 81 million, comparable to last quarter. And compared to last — in the same period last year, we have taken down OpEx by almost 50%. Development costs of SEK 26 million were capitalized during the second quarter, which corresponds to 51% of total development costs versus 21% in Q2 2018 and 47% in Q1 2019.

Next slide, please. Our working capital was SEK 183 million at the end of the quarter compared to SEK 182 million in the same quarter last year and SEK 322 million last quarter. We continue to work very actively to manage working capital, and the decrease compared to the previous quarter is a result of that focus.

Next slide, please. Our cash flow from operating activities was SEK 180 million compared to SEK 302 million in Q2 last year. Our net cash position continued to improve to SEK 486 million versus SEK 440 million in the same quarter last year and the SEK 338 million in the end of last quarter. Cash flow from investing activities was a negative SEK 27 million versus negative SEK 41 million last year. Capitalized development expenditure accounts for almost all of the SEK 27 million. And as you may remember, last quarter, we made the final payment of the withheld purchase consideration for Delta ID.

So in summary, the positive trend shifts we saw at the beginning of the year continued into Q2. We are gaining market share in capacitive sensor for smartphones, and our latest product in this area has done very well in the market. Our OpEx run rate is now also below the SEK 400 million yearly target we set to ourselves. And as a consequence of all of this, the EBITDA continues to improve and our financial position is strong.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have one question coming through. It 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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I have a couple of questions. The first one is on the ASP, average selling price, for the year. So you mentioned in the release that the — there is still a declining ASP in the market for capacitive. Can you give us a bit more color of what we should expect for this year in term of ASP decline? This is my first question.

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

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Yes. Francois, yes, as we said — we have said earlier, last year was a very strong ASP decline, over 30% of — for the full year. It is clearly less this year, but there is still, of course, ASP decline. We don’t give an exact figure now. We will see later if — when we look at the full year, but as said, it’s clearly not as high as it was last year. But still we can see the ASP decline hitting us.

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

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Is it still double-digit percentage decline, or single digit? I mean just to give a magnitude.

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

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It’s double digit, yes.

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

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Okay. And then if we look at the macro environment, obviously a trade war uncertainty and what is going on with Huawei. Huawei is part of your customers. I wanted to ask you if you see any impact from this particular customer, or even the Chinese in general, especially in the second half of the year. Do you see any trend in terms of orders from this customer?

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

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I mean we don’t comment on customer-specific cases. I think what — or clearly, the macro environment when it comes to trade wars and others, I mean that’s never positive for any industry and for the high-tech industry, right? But I think in general, if we look at the mobile industry, there has been huge fluctuations between customers and their market shares all the time for us, right? So there are actually big swings going on within the industry. As you know, this mobile industry is quite dynamic, to say the least. And at the same time, you can see from Huawei in general they have, call it, gained in their own Chinese market. And obviously they have lost market share when it comes outside of China because of the activities that they have, [of course, stated themselves] as well, but we don’t comment on this from one customer point of view, right? But obviously we see big fluctuations between customers. And then we focus on gaining new customers and expanding our portfolio as much as we can, right, so that we are not dependent on 1 or 2 or 3 customers only, right?

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

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Okay. And maybe on in-display. And so in-display, supposedly, you see the period be at midyear, end of the year of launches of high-end products, et cetera. I just wanted to check with you that the in-display penetration is going to increase significantly in the second half of the year. I mean is it going to be? And how do you see yourself in this in-display market in the second half of the year? Do you expect any design-ins or anything like that?

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

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Yes. I think the in-display will continue to take share in the high and mid range. And at the same time, capacitive has been doing actually quite well also [and an increase then] going also more low range all the time. Clearly, that has been doing also very good. I think that when it comes to ours, we are working, of course, very hard to qualify and get the product into the first models. We said that we expect that to happen this year, and that’s still what we are targeting. And so obviously, the — any impact would be — any bigger impact would be going into next year then for our part, of course, then.

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

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Okay. And I just want [to delve on] a bit on the full-display technology, I mean, on your side. How is it going? I mean any development on this side?

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

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Yes, we are working on the full in-display. That’s obviously much more challenging and that we continue to develop that. It’s going to take some time. We haven’t gone out with any more details of it otherwise, but we are making progress. And we have a lot to do, of course, before we can be in a full phase of that. There’s a lot of work ahead of us still when it comes to the full display, but we are absolutely working on with it. It’s an ultrasonic solution and that we are doing there, right? So they are seeing some technical hurdles for us, and we have passed several technical hurdles as well.

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

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Okay. And last one for me. It’s on the gross margin. I mean if you look at the decline versus last quarter, you mentioned software revenues and customer mix. How should we think about that for the next couple of quarters? I mean is it going to be similar? Or you expect an improvement from here?

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

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We expect, I mean our actions when we get the new products, that we — I mean we don’t give any guidance. You’ve got to remember that, Francois, right so. But obviously we — all the actions we are doing is to improve the gross margin, right? We understand that it’s not good enough for us to be running on this level where we are now, so we need to keep on improving it with new products. That’s why we are launching a new-generation fingerprint sensor based on FPC, the 1511, to come out later this year or late this year as well. That’s all the actions are ongoing to continue on working on the gross margin and keeping improving it.

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Operator [14]

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We do have another question on the audio lines that comes from the line of Viktor Westman.

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Viktor Westman, Redeye AB, Research Division – Analyst [15]

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And first question is on the in-display side. You mentioned here that this would be the — I think the majority of the market. Can we just translate that into the patterns of new phone models? Do you expect — the pattern of new phone models that we’ve seen so far this year, do you expect that to continue?

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Christian Fredrikson, Fingerprint Cards AB (publ) – CEO & President [16]

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Sorry, Viktor. Now I didn’t catch them. Do you — can you say again just…

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Viktor Westman, Redeye AB, Research Division – Analyst [17]

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Yes. I think that the in-display, the part of the new models is — it’s maybe about 1/4 or 1/3 this year. Do you expect that pattern to continue? Do you expect more models in percentage of in-display?

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Christian Fredrikson, Fingerprint Cards AB (publ) – CEO & President [18]

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Yes. I think there is going to be an increase still when we go into next year as well of in-display, and still strong volumes in capacitive sensors also. And of course, now the price erosion is hitting the in-display also clearly. And the new versions are coming out basically every year now within the in-display segment as well. And you will see both optical and you will see ultrasonic solutions. And now, of course, not only hot zone, but probably next year, you’ll see the first of a little bit larger area, if we may.

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Viktor Westman, Redeye AB, Research Division – Analyst [19]

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Okay. Yes. And on the — on smart cards side, can you say something about the pilots here? If the customers want to launch commercially in 2020, when do they need to start their pilots? Is that right now, or…

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Christian Fredrikson, Fingerprint Cards AB (publ) – CEO & President [20]

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Yes. There is — on the smart cards, we expect the — kind of the broader launch next year. And then of course, it’s not like the mobile industry, so it doesn’t kick off in the same. It’s an increase and goes on for many, many years within the smart card industry, if you look at the history. And we are in 20 pilots, and we expect to see a good increase of pilots. I expect especially now in Europe there will be more banks coming in with pilots during this year. And I think the important thing is to get the certifications, which are planned now for this year. You saw the first one with NXP, which is not for the system level but for their secure element part. So the certifications, we expect the first ones to be done now in Q4, so in the next quarter basically. And then if I look at the pilots and the feedback, I mean you can go — I think some of the pilots are going to be pilots where the banks are thinking and doing assessing and then how — then they do a launch. I mean actually quite a few pilots, they will actually transform into a launch. So basically, the customers just keep the cards and they keep going. And they — it kind of rolls out into live, if I may. That’s probably how it goes. And you typically go to pilots for 2, 3, 4 months, something like that, right?

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

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Okay. 2, 3 months, but does that mean — I mean the — can there be commercial programs next year from new customers that has not launched pilots in 2019?

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

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Yes, yes, in 2020 for sure. I think that — and some of the pilots, as I said, will actually already go into live. And Crédit Agricole — of course, Crédit Agricole is — as I said, already have enabled a go-live in 2020…

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

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Yes, yes, yes. Okay. So maybe just on the gross margin side and on the 1511. You did some guidance before on the 1511. Is that proceeding according to plan?

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

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Yes. 1511 is coming in. And we’re also — and has been taking good share. And I think in Q3, in Q4, it will be, of course, by far the biggest part of our volumes in capacitive. And then we will also bring out the new, more — even more cost-efficient version by the end of the year. So we continue working on improving the gross margin. And we realize, as I said earlier, that it has to improve as well. It’s not good enough for us, clearly. And then of course, we have to get into the in-display business, although the in-display business has — we see price erosion already there happening, but quite fast.

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

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Okay. Okay. Last question, on the BEP software platform for cards there, is — how we should think about that. Is this similar to when you created your own in-house algorithm in smartphone or…

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

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Yes. Exactly. That’s what we have in the smart cards. We do our own algorithm and the software parts. And that’s what we did earlier on in the fingerprint sensor — or in the mobile business.

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

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And how would you sell the BEP? Will you include all the one touch, quick touch, safe touch together? Or will the customer pay for every single future — feature, I mean?

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

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I suppose there will be different kinds of business how you do it, but many times, you will take kind of a basic — I would say the whole basic part of the software will be part of the full deal. And then you — but we’re, of course, seeing now payment for separate new products, software as well in the smart card business. But many times, the feature set is included.

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Operator [29]

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Thank you. There are no further questions over the audio lines. Please continue.

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

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So we have a few questions from the web as well. So the first one on smart cards. And when do you expect this to account for a significant part of your sales?

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

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That — as we don’t give guidance, it’s of course not possible to say, but I think that as a market, smart cards will be clearly bigger than the mobile. We are certain of that, but it will also be a slower acceleration than it was in the mobile business, right, if I look at the trends in, for example, how contactless cards got in or how the chip got in into the smart card business. It’s always been faster than the [earlier new] technology, but it’s also taken some years to actually get into the really big portions or 50% of the whole smart card business. So it will take a while for us, but the commercial — big commercial launches, we would expect — we expect next year.

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

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And then what about applications such as PCs, IoT, door locks, et cetera? Is this market progressing according to plan?

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

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Yes. I think the door lock market is already big in China. It is expanding now to some other markets as well. We see that coming in, in some parts in U.S., India, Indonesia. Some of these markets, we are seeing now the door locks. It was already 10 million units last year. I think the door lock smart roughly, we’re expecting to be 15 million units in the door locks market this year. And then we see all kind of different devices, whether it’s mobile wallets, different USB sticks and others with the fingerprint sensors. So there is an expansion. Of course, the volumes are in the millions. They’re not in the hundreds of millions as you are in the mobile business as — or in even billions that it will be in the card business, but it is expanding. And it’s all kind of coming new ideas there all the time into new devices. I’m sure we will see in different remote controls and gaming devices as well. You will see biometrics in many — coming into many, many different places right now.

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

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Do you have any news to share about your Gentex partnership in iris recognition?

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

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I think the Gentex partnership is progressing very well. They are in — it is — of course, they’re by far over 90% market share globally in high-end mirrors, rearview mirrors. So it’s going very well. I think that the progress is now into a big — they are in big trials with some of the big brands in the car industry. That’s where they are now in. And that is, of course, that smart card business is a slow, solid business taking its time to go through the testing in the car industry, but it is progressing also according to plan. I think that’s an exciting opportunity for us absolutely within the whole car industry.

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

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And on iris, you’ve also talked about the development of an iris-face solution. Do you have a news on this?

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

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Yes. We’re doing a combined. So it’s adding the easiness of the face, some of the algorithms of the face part into the combined iris solution. So we — while our intention is to launch that, it’s kind of a more of a — it’s a software, new software release that will come from us; and that the target is for us still to launch it this year.

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

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And maybe one last question then, on your margins and the possible effects of the trade war on your profitability.

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

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That’s — as we don’t give guidance, I wouldn’t go into that. And I have to say that, as everybody is trying to guess how this trade war is going to go, so do we. We are in a long chain and we’re discussing with all the different partners. We obviously hope that the trade war will be solved, but probably, everything going on in the world, this will take some time. So we have taken our plans and actions with the view that all of these will actually be a bit of a turmoil for — it could be quite a while. In a way, luckily, we are used to turmoil because that’s what the mobile industry is all about. It is an extremely dynamic industry, so this is just an additional part of — to that one, I would say. I think it’s something that every company and every person is following in the world, and nobody knows really what the impacts will be in this game going forward. So far, it hasn’t really impacted mobile industry as a whole because that has already been in decline, slight decline a few percentage points. Of course, there are impacts within customers, as we all know, right, in terms of that. And the market shares are shifting, so what we try to do is keep our costs in very good shape, expand our business into different — all the different mobile operators as we have now done. So we are now — so that’s what we’ve done. So we have expanded and have now 8 out of the 9 largest mobile OEMs in the world as our customers, with Samsung added to the list. So I think that’s the way we have tried to look at it and goal — go with that and then just make our plans accordingly and stay healthy in the business.

With that, thank you for everyone for joining. Again, I am very pleased. We had a good quarter, and we look forward to go into the next one as we already are. And I look forward to talking and — talking to you and taking you forward into — when we are talking about the next quarter, and we will get back then.

With that, I wish you all a nice day and goodbye.

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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.



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