IDEX Biometrics ASA (IDEX) Q1 2022 Earnings Call Transcript

IDEX Biometrics ASA  (NASDAQ: IDEX) Q1 2022 earnings call dated May. 12, 2022

Corporate Participants:

Vincent Graziani — Chief Executive Officer

Presentation:

Vincent Graziani — Chief Executive Officer

Good morning, everybody, and welcome to the quarterly presentation for the first quarter of 2022 for IDEX Biometrics. And I’m Vince Graziani, the IDEX CEO. First of all, let me just say that I’m very excited to be here in Norway. two years ago when I accepted this job on March of 2020, I had no idea that the pandemic was coming. And one of the reasons I took the job was I was looking forward to traveling frequently here to Oslo. And today is only my second time ever visiting Oslo, and the first chance I get to do the quarterly presentation live from here in Oslo on a beautiful day. So happy to be here. So let’s get started. I think before we go further, we should acknowledge the normal disclaimers that this is a financial presentation, and contains some forward-looking statements, etc. But we can acknowledge all of these normal disclaimers and move on to the IDEX story here for Q1. So first of all, I’ll say that the overall story for IDEX is not changing. We’re addressing a multibillion-dollar opportunity. We have our biometric cards that we are enabling with our technology that have superior biometric performance, and we’re going to talk a lot about performance in today’s presentation. We do enable a disruptive system cost, and we are capturing the market at an inflection point. And what you see there is the IDEMIA F.CODE card. I actually have that same card here, which is now in mass production, so — and fully certified. The case for biometric cards, those of you that know IDEX, and are paying very close attention, you’ll see that this slide has changed but only slightly.

And now we’ve changed the order on the challenges and the benefits of the biometric card because what we’re learning as we’re starting to field these cards out into the wild with real customers they’re — really, it’s all about the user experience. The users understand that the biometric card enables them to forget about their pins. They can have any size transaction, and they really want that seamless tap-and-go transaction that they get from the standard contactless card. And that’s really, really key. It’s still important that we’re protecting user identity. It’s important to the banks that we’re mitigating fraud, and there are economics for the cards because there’s direct financial payoff to the banks for these cards. But really, what we’re finding for fielding this and user acceptance and what’s going to really make it take off is that user experience, and we’ll talk about this a little bit more later, Our technology really enables a superior user experience with these biometric cards. So let’s talk again briefly about the opportunity. This slide has not changed much either since the last time we presented this last quarter. The only thing that’s new is that we do have the actual data for 2021 on the number of biometric cards. If you’re paying very close attention, this used to say more than 1.9 billion. We’re actually well over two billion of contactless payment cards in 2021. So it’s a very, very large market opportunity that we’re addressing, and the opportunity continues to be out there.

We did have some launches recently with the biometric cards. So our partner, IDEMIA, has launched with their first customer. Rocker is a challenger bank out of Sweden. And they were one of the first ones to go to a full commercial launch, meaning they’re putting these cards not in pilot, but launching them and making them available to all customers. And I talked about this earlier that it’s all about the user experience. If it’s a good user experience, customers are very willing to pay extra to get the biometric card. In the case of the Rocker Touch card, they’re paying a monthly fee for this premium package of $10 per month to get the card, and demand has far exceeded expectations. In fact, Rocker is totally sold out of the cards at the moment, and trying to get more cards. So very encouraging sign there. And this technology is actually a finalist for the ICMA Awards, which are going to be in the U.S. next week. They are finalists for card innovation, and we’re rooting for them to come in first place with that. Another launch was another bank, another challenger bank. This one is doing a corporate card for expense management. But again, they understand the value prop of having the fingerprint biometric, so if you issue a card to employees, that fingerprint biometric can ensure that only that employee can use the company card, and also have the ease-of-use of the no pin, any-sized transaction in a quick contactless experience.

So for the same reasons that consumers at Rocker are interested in this card. For corporate cards, it’s a great option as well. So we’re starting to see some real traction out there. And then in terms of market activity, and this is one of the areas where I really wanted to focus this quarter is we’re seeing much more of an increase in overall market activity globally. We were already focused in Europe with six major bank launches in 2022 coming in Europe, more than 100 million units in total TAM there. I think we already knew that the European banks, and in the Nordics, etc., are adopting this technology more quickly than some of the other regions. We were also having traction at the last quarter already in the Middle East. We’ll see some more launches there out of the Middle East and Africa in the coming months. But what’s new is we’re seeing a lot more traction in payments across Southeast Asia. So in India, Japan, Korea, Malaysia, Vietnam, with all of the opportunities we have there, there’s a TAM of over 120 million cards. So we’re really growing very quickly. The Latin America and South America actually are starting to grow as well. We’re seeing demand in Brazil, in Mexico.

We’re working with partners on new designs there together with IDEMIA and other partners. So very, very encouraging signs out of Brazil and Latin America as well. So the market overall is growing quickly. I will note here that I didn’t mention anything about China at this time and in the past we have talked quite a bit about all our activity with China. We are still very focused in China. But with the extreme lockdowns that they’ve had, in the last quarter, everything has slowed down dramatically in China. So we will continue to focus there. In fact, we’re working on some new partnerships that will help us really attack that market when they come out of lockdown, and are ready to move forward. But for now, we’re focusing our attention on these other regions, while China is in a slowdown period, and these other regions are very, very promising. So the markets just continue to grow for this technology. Our long-term vision for our card, it’s really a platform play, our technology. And I’ve talked about this in the past, and this is growing. We’re seeing more traction in this area. So we talk about our full turnkey solution.

We have our biometric sensor, the secure element from Infineon, an IDEX card operating system, and that card operating system has standard APIs so that people can design applets that run on the card. So the same card can be multifunction. And we’ve talked about this for multiple quarters. Now we’re actually seeing multiple cards that are launching in areas like cybersecurity and digital access control, physical access control, pilots are going on for Central bank, digital currencies and crypto wallets. So we’re seeing that this card and this technology really is a platform play. And that’s great news for IDEX because you can build more value and more value into this small tiny platform just by adding new applets and software and creating new applications for the very same card and technology. You’ll see this continue to grow as we go forward. I want to talk a little bit and remind people a little bit of some of our competitive advantage, and how that comes back to the user experience. We focused in the past about our differentiation in terms of performance and cost.

But as I mentioned earlier, really it does come down to driving a better user experience to drive adoption for this. So as a reminder, we have a disruptive architecture, most of the sensors that preceded IDEX, the sensor itself was made out of semiconductor silicon. That has very — many constraints on the system. So what we did was break that paradigm. We make our sensor out of a low-cost polymer on a low-cost substrate. That gives us the ability to make the sensor almost any size we want without driving up cost. And then our ASIC is a tiny 40-nanometer die from TSMC that contains all the integration, the microcontroller unit, the power management unit and all the hardware for our biometric matching as well. So that gives us a key differentiation. But what does that translate into for the user, and we’ll talk about that on this next slide. I was talking about user experience in for the user, they want to be able to pick up this card, put their thumb on and just tap the terminal and go, and have the same experience they have with a contactless card today. Well, how do you enable that? With IDEX, we have the larger area of sensor. And if you look at that large area, what does that mean? It’s very logical.

Every time you touch this card, you’re capturing more of the fingerprint data. The more data you get, the better chance you have of a match. So that pays off dramatically in the user experience. And because we have this larger area sensor, we’ve also done our own enrollment technology. So we — at the beginning, when you get this card, it’s really critical that you have a good enrollment experience. Therefore, the future matches and the user experience will be improved. At IDEX, we have multiple avenues for enrollment. We have the sleeve that’s largely out in the market today with IDEMIA. And we are actually working on a new technology for enrollment as you pay where you just use the card normally for the first several transactions, and then confirm that it’s you with a pin and ultimately capture your fingerprint and enroll just as you’re using the card normally. So again, by enabling this user experience and seamless user experience, we believe we’re really going to enable the market to take off. In terms of customer traction, we’ve talked in the past about our turnkey solution. And today, we’re going to talk about that, but more from what has meant to us from the commercial side.

We first announced this partnership with Infineon back in July of last year. And since that time, we’ve had multiple design wins. And we have six confirmed design wins that will be coming to the market later this year. And then we have six additional new big cards manufacturers in the pipeline. And these are global players. We have recently announced a big design win in Japan. We have two players in Korea that we’ve announced in the past, recent announcement with E-Kart. Turkey is one of — is Europe’s largest payment card market, and E-Kart is, I think, the second largest card manufacturer in Turkey. So this is a major design win for us, also with the full IDEX Infineon Turkey solution. And then we have now activity going on in India, which is another huge payment card market opportunity. And down across the bottom, we have all these flags. These are the other countries where we haven’t been able to announce the card manufacturer yet, but cards are under development in all of these other countries as well. And combined, these design wins with these customers and manufacturers, together, they produce more than 1.5 billion cards today already. So it opens up just a huge addressable market.

So I think back to last July, when we first started talking about this Infineon partnership and how important it could be for us. It’s hard to look at this slide now and not see the evidence that it really, really has paid off in a big way. And further to talk about partnerships, it’s really important to all of our partnerships. So as we talked about in the past, Infineon is our partner with a secure element, and helping work with us on this full turnkey solution. Zwipe is also a secure element partner, leveraging the secure element and software from their partnership with IDEMIA, and they’ve done a great job of getting out in the market as well and helping create demand and getting banks to sign up. So another great partner for IDEX. As part of that total solution is an IDEX sensor. We recently partnered with Linxens. So on our full turnkey solution, Linxens is actually going to be the manufacturer of the secure element EMV plate. So they’ll be building the EMV contact plate for the full turnkey solution with the Infineon Secure element chip mounted including our card operating system, and that will all be done in the certified secure facilities at Linxens. I think Linxens is, if not the leader, one of the leaders in this space globally. And we’re looking to expand that partnership with Linxens as well going forward.

They can contribute more to this full turnkey in terms of card inlay and other subset components for the overall turnkey. And in those partners, again, help us to address the card makers where we have all these design wins we just announced, and those card makers ultimately get the cards out to banks and personalization bureaus, etc. So quarterly performance highlights. Let’s talk about this. So in the quarter, we had three commercial launches with our technology. Not our card, but our fingerprint sensors. So we mentioned Rocker and manager.one. There was another bank called Fidor Bank that announced a card that was also a IDEX sensor. I think that one was together with Zwipe, or one of their partners. And I should acknowledge here that in the past, I think even last quarter, I was talking about getting even more bank launches to come sooner. And we thought that would happen by now, I thought we’d be talking about much more than 3. So things did slow down a bit in the industry. A lot of events outside of our control, including a new war since the last time I presented. But also the global chip shortage has slowed down the overall industry. And I think we’ve — we at IDEX have done a great job of managing our supply chain.

And I think in the past, I’ve answered questions saying, I don’t expect the chip shortage to slow us down at all. And that was mostly focused internally. We did such a good job of managing our own supply chain that that’s not a bottleneck for us. But what we didn’t anticipate was the chip shortage is affecting all card makers. And so banks and card makers are really having a hard time getting secure element chips just to service their standard contactless card business, which is their mainstay business today. And if you read the most recent ABI report, they talk about this phenomenon. They think that the overall shortage and slowing down banks is actually slowing down the overall market adoption for biometric cards. We all expect that to go away eventually. And I fully anticipate, by later this year, second half of ’22 and certainly into ’23, we’ll see some relief on that chip shortage. We do have several biometric cards now out in the marketplace. We now have certified cards from IDEMIA, tag systems and another Zwipe partner, Beautiful cards, is in full certification with Visa and MasterCard, which means these cards can be sold to customers and consumers, so there’s a growing availability of cards out in the marketplace.

And I already talked about the design wins for the Infineon turnkey solution. We have six new card makers coming to market and an additional six right behind in the development stages. In terms of financial summary. The revenue trends continue to remain positive. We have continued growth as a percentage of our revenue in payment space. We are still shipping to our digital access control customer in volume, and we have our first shipments to some of the other makers of cyber access control devices. And again, this is that platform play I talked about, the card form factor, but using it for other applications. And then we have controlled expenses as you’ve seen with IDEX in the past. There’s some expense fluctuation. But overall, we’ve managed expenses very well, and we continue to manage those expenses. And we have a cash balance remaining of a little over $25 million at the end of the quarter.

So overall, the adoption has been slower than we anticipated, but we’ve been doing work to put everything in place to really hit the market, and we anticipate the ramp will come. It’s been delayed slightly, but we have all the pieces in place to really take advantage of that ramp when it happens. Our business model remains the same. We’re a fab-less semiconductor company at scale, we should be able to sustain margins of greater than 50%, 30% operating margins and sustainable cash flow. So that’s it. That’s the story. And again, we’re addressing a massive market. We have really the better product out there. and we’re really capturing this market at the early days of an inflection point, but we see a lot of momentum that inflection point is coming. So thank you all very much. I look forward to getting out of this dark studio and getting out enjoying some of this beautiful day in Oslo. Thank you, again.