Idex Biometrics ASA (IDBA) 2021 Q2 法說會逐字稿

Welcome to the IDEX Biometrics Second Quarter 2021 Earnings Release Presentation. The presentation today will be held by our CEO, Vince Graziani. Please -- go ahead, please.

Thank you, Marianne, and thank you to everybody who has connected in today for our first half report, results report. And with that brief introduction, let's just dive right in.

So good morning, good afternoon, good evening depending where you are in the world today watching this. I should first acknowledge the usual disclaimers regarding any financial presentation, and then we can move on quickly to give a little bit of an introduction to IDEX. My main goal today is to highlight some of the major developments we had in the most recent quarter.

But in case there are some folks on the line who have not seen this IDEX story in prior quarters or did not know the background, at IDEX Biometrics we like to say that we are enabling the next evolution in payment cards. So as a business model, IDEX Biometrics is a fabless semiconductor company for the most part. We would have a similar business model to a Broadcom or an NVIDIA, or those of you in the Nordics, the Nordic Semiconductor, where we develop semiconductor chips.

In our case, we also develop sensors in specialized packaging. And we develop software and firmware and algorithms to go around that, and sell this as a technology bundle for certain applications. In the applications we're going after, our total solution was to enable the addition of fingerprint biometric authentication to battery-less credit card form factor devices, and the most obvious one is the payment card.

And why do we say that it's the next natural evolution of payment cards? If you know any of the history of payment cards, they started out -- the first technology introduced was a mag stripe, cards were then very susceptible to fraud. Then people got smart and added encryption chips and the smart card was introduced with chip and PIN. It more or less eliminated card-present fraud. And then fast forward multiple years later and people wanted more convenience, so the contactless card was introduced.

Now contactless cards are very convenient. You can just hold the card over a terminal, the card harvests enough energy from the terminal to power up and approve your transaction. Unfortunately, with the convenient transaction, fraud creeps back into the picture because you don't have any PIN, you don't have any signature and the amount of fraud was starting to increase again. And then enter the biometric payment card, and this is where IDEX comes into play.

We enable a full solution that allows you to have your fingerprint biometric stored from home, encrypted and stored only on the card. And then the user experience at payment terminal is that same exact convenient tap-and-go transaction you have with the contactless card except now with the protection of your fingerprint biometrics. It's much, much more secure transaction.

And so it reduces fraud. It also has identity protection. Your fingerprint is only on the card in encrypted form, nowhere in the cloud for banks and issuers. The more secure card offers top of wallet effect. Customers will use these cards ahead of others. IDEX enables very low cost and it's overall a very convenient transaction. And we'll talk a lot more about that as we go. But that's a quick intro to IDEX and who we are. I suspect many of the folks on the line already know a lot about the company from prior presentations.

I'd like to go quickly through the Q2 financial summary. If you look at the numbers for Q2, the main messages are that you'll see, we continue to grow revenues that are product-based revenues. The company has been in business for a long time. And in the past, we had some NREs. We had some license-based revenue. Now primarily the source of our revenues are product-based.

The second message here is that those product-based revenues are increasingly growing from the payment card space, which is our major target market for high growth, and we'll talk a little bit more about that as well.

Others to note is we are starting to hit some of that growth that we have talked about in prior quarters. The revenues for the first half of the year in total exceed the entire year for 2020. And we have increased order backlog going into the back half of the year as well. So things are going quite well on the revenue generation front.

On the OpEx side, we're more or less flat on a sequential basis. You'll see the OpEx is basically under control. We've had some very small incremental headcount additions primarily focused on the commercialization efforts in the operations side as we're starting to ramp up production. We do have a slight increase in our overall quarterly OpEx that's related to our U.S. NASDAQ listing that happened during the first quarter of this year.

And then one other comment I think I should make, because it sticks out if you look at this chart, is that the quarter 2 of 2021, the current, most recent quarter, was a little bit higher than quarter 2 of 2020. And I think I should just make a comment on quarter 2020 OpEx.

That was my first quarter in the company. It was also the quarter when COVID-19 hit in March. As soon as COVID hit, we took some drastic onetime expense cuts because we weren't certain what COVID impact was going to be on any business, as most CEOs were. In addition, during that quarter, we also realized some R&D tax credits. So quarter 2 2020 was sort of an anomaly on the low side of OpEx. And overall, we're doing quite well managing expenses.

Our cash balance is roughly USD 20 million. So we're in good shape there on cash balance. Hopefully -- not just hopefully, we plan to have much more to talk about on the financial side in the quarters to come as the business continues to ramp.

Now let's talk about some of the highlights on the investment side. So just as a reminder, for those that might be new, IDEX is addressing a massive market opportunity. When you look at the payment card market, there are 5 billion new smart cards generated every year. And IDEX is 1 of only 2 suppliers that are providing fingerprint technology for biometric smart cards.

And looking at various analysts, the industry analysts are now predicting that biometric smart cards will be about 400 million units per year by 2024. This represents still below 10% of the total market penetration for biometrics, but it shows that it's a very sizable TAM. And for IDEX, if you want to think about revenue generation, our solution is about $3.50 ASP per card.

We've just introduced our TrustedBio solution. We're going to talk more about that briefly in a minute. But TrustedBio is really the only pure-play contactless fingerprint authentication solution. And what I mean by pure play is, starting in late 2017, IDEX set out to build an optimized solution for the card form factor.

So our sensor is flexible. Our technology is designed and optimized for the battery-less operation inside the card, so very low power, very efficient and very highly integrated in order to get the cost down. And we'll talk about -- more about this, but we are the first solution that really enables a cost point that will help allow market activation to have this market really take off.

And that's actually proven out by some of our accelerating commercial momentum. We've announced in the quarter a partnership between Infineon and IDEX. We're going to talk a lot more about that in the coming slide here. And we're already seeing high demand for this Infineon/IDEX reference platform solution. None of the companies are at the point where we're ready to make announcements, but we have several pending design wins with well-known companies globally that are very interested in signing up to leverage this reference platform developed by IDEX and our partner, Infineon.

We do have a growing backlog from our existing customers. We have some customers who partnered with us very early like IDEMIA. And those customers are already in the market and marketing their product and starting to ramp. And we have multiple new design wins pending, and there'll be more announcements coming in the coming months.

We do have also opportunities in adjacent markets. When you think about this biometrically protected card, there starts to be other applications you can consider. One of the big ones for us, we've talked about in the last several quarters is the Digital Currency Electronic Payment initiative in China, which is their Central Bank-backed digital currency initiative. We'll talk more about that.

But also, when you think about hardware wallets for cryptocurrencies or IDs or data access control, or the same card actually performing all of these functions at the same time, is also possible. So we are also getting volume production orders from a major Asian customer in one of these adjacent markets as well.

We have the large-scale certifications from the big Mastercard and other payment networks, including China UnionPay. We are anticipating in the coming weeks, a Visa certification. So all the major payment networks have tested and certified IDEX-based biometric technology. So good overall momentum in the company.

If we go to the next slide, this is really the major points that I wanted to talk about. As I mentioned, I joined the company on March 1, 2020. And since I've been here, this -- I think in the whole history of the company, this is probably the most important quarter in terms of commercial milestones the company has ever had.

We've been talking about our solution, TrustedBio, for well over a year, almost 2 years now. And we're finally at the point where our first major customer, IDEMIA, is actively marketing their biometric card based on our technology. We have some significant orders from IDEMIA. This card will be the best-performing card in the industry by far, and we are building order backlog and we anticipate future growth and continued benefit from this customer and partner.

We recently announced our partnership with Infineon, it's both technical and commercial partnership. And with Infineon, they're taking advantage of the full TrustedBio solution, including the sensor and all of our software and integrated functions. I'll speak more to that one because that's worth some more mention.

Infineon, by the way, for those who don't know the company, has been the leading provider of Secure Element chips to the smart card payment card industry for more than 2 decades. So we couldn't ask for a better partner in this industry to help us go to market here with a full biometric card solution.

And this solution, by the way, is also one of the best performing solutions in the industry. We have transactions 3x faster than cards out in the market today. What that means is a full EMV payment transaction in about 0.5 second. So for the user experience, no change from a standard contactless card. And that's really going to be a big deal for user adoption and acceptance of biometric cards. People are happy to have the security of the biometric, but they want that same tap-and-go payment transaction that they're used to with current contactless cards.

Our TrustedBio Max product was also launched. I'll talk more about that as well. This is the most advanced and highly integrated member of the TrustedBio product family. I'll talk about that in great detail, but that is the product that's being leveraged in the IDEX/Infineon reference platform. And then we're progressing as planned on our digital currency initiatives in China, and we'll talk more about that in the coming slides as well.

But overall, these commercial highlights from the quarter really do drive the point home that this is probably the most important quarter in the whole history of the company at IDEX.

So next slide, let's talk more about TrustedBio Max, the product that we introduced because it allows us to talk a little bit more about IDEX as a company. When you think about IDEX and you think about many semiconductor companies, in many cases, they're largely just component providers. And in the case of IDEX, we're much different. We provide total solutions.

So we build the sensor itself. And we also build the complicated ASIC that drives the sensor. That ASIC has a high-end ARM processor embedded, a power management unit, specialized hardware that we've developed to accelerate our own matching algorithm for biometric match. So we do all of that hardware development.

But not only that hardware development, we have a team that does all these high-end algorithms for biometric matching and anti-spoof. So protection against fake fingerprints. So we have quite a sophisticated algorithm and system engineering team as well. And then beyond, we provide full system solutions. We have a team that works on the card layout designs and works with card inlay providers so that we can provide a full turnkey solution to our customers, including devices for the enrollment.

And as many of you already know, IDEX has patents on the enrollment sleeve that enables in-home enrollment of your fingerprints. Because our technology is so advanced, we are working also on ways to minimize the number of touches for enrollment to make the enrollment process more convenient for the user at home. And we also have an option to enroll via the smartphone app for those that want to do that.

And with IDEX TrustedBio, we would see a home enrollment could happen on 5 or 6 touches. And if you look at some of the fingerprint sensors that are out there, they require many, many more touches, which is an inconvenience for the user, especially at start-up. But overall, it's a fantastic and highly integrated system solution.

And I wanted to repeat the message that TrustedBio is actually a whole family of products. TrustedBio Max is the high end of that family. But basically, what we have is a hardware and software platform that allows us, through firmware, to launch various products on the same platform.

And when you think about IDEX in that way, you think very differently about the company, where the TrustedBio platform today supports various types of Secure Element architectures. That same platform with different applications running even on the same card can support an app for a crypto wallet or an app for a hardware wallet for a central bank digital currency and an app for digital access control. So it really changed the whole thinking about what's possible in that card form factor. The same form factor, many applications, adding value every step of the way.

Now let's talk a little bit more about the Infineon/IDEX reference platform that we've done together. This was a pretty exciting platform. We have been working on this together with Infineon for well over a year, and we are excited that we finally got to the point where both companies were ready to unveil all this effort that we have put in over the last year.

So on the IDEX side, we are contributing the TrustedBio Max product and all the related software and firmware. Our full biometric matching algorithm technology, which takes advantage of our hardware accelerator in our biometric ASIC. We have a 200 megahertz ARM processor device integrated into our sensor, ASIC, and ably developed a full software development kit for users.

Together with Infineon, this is leveraging their latest generation secure element chip, the SLC38. This is a very advanced secure element, high processing power. It's running on a 40-nanometer node and has significant amount of memory on board, which allows us to add these other applications that we talked about into the same platform. So overall, the system is integrated. We're demonstrating significant performance.

We do our biometric match in under approximately 250 milliseconds. The full EMV transaction, including biometric match is about 0.5 second, and it integrates all of our presentation attack detection, which is basically ability to detect fake fingerprints, also core technology from IDEX. And we have a false rejection rate well below 3%. So this solution finally hits the point of performance and overall card costs that we believe, and as does Infineon, will help enable the overall card market to take off.

And when I say Infineon also believes in that, I will say that about 1.5 weeks ago, Infineon did their quarterly results conference call and the Infineon CEO, Reinhard Ploss, mentioned this as one of the key highlights of the quarter for Infineon as well, the IDEX and Infineon partnership and the expectations they have for growth in the biometric card market as a result of this team up with IDEX. And I encourage you to go pull up that Infineon quarterly release transcript and read it, it's quite a good quote.

Then moving on to the Digital Currency Electronic Payment initiative in China. Again, we're making progress there as anticipated. As a reminder, China is -- has declared that they want to lead the world in digital currency. They want to replace the renminbi with a digital version of renminbi, which is a cryptocurrency, blockchain-based, but it is controlled by the Central Bank of China, and then it's distributed to users by the 6 major regional banks.

And these major regional banks have started in the last -- during the first half of this year, running pilots with various experiments on this whole digital payment initiative. And so there are different types of payment. There's a digital wallet that can exist on a smartphone. There's a hardware wallet. And the hardware wallet is meant to service the people that don't have smartphones. About 40% of the total population in China today do not have access to smartphones, and this is where IDEX comes in.

When you consider a digital hardware wallet will actually have cryptocurrency stored there. You need to protect that in order to deter the motivation for theft. And this is where the fingerprint biometrics comes in. IDEX has partnered with all the main card manufacturers in China that have signed on to participate in the Digital Currency Electronic Payment initiative.

Several of our customers have already announced, including Chutian Dragon, that they have participated with IDEX. Also, Goldpac has recently made an announcement as well as our partner Hengbao. And we've already announced some early trials with 2 of the major banks, and we anticipate announcing more trials to come in the coming weeks and quarters.

And one other thing to remind people of this initiative is moving very quickly in China, and it is going to happen. They have a plan to allow only Digital Currency Electronic Payment as the currency at the Winter Olympics coming up in less than 6 months from now in Beijing in 2022. So you'll see this market accelerate much more quickly.

And even when I joined IDEX, this was not even part of our target addressable market. And clearly, it represents an opportunity for more than $1 billion of upside on top of the traditional payment market that we were targeting here in the West. So a big opportunity.

So those are the main points we wanted to talk about this quarter. I think just to remind on the investment highlights for IDEX. It is a massive addressable market. And I think the more you understand about the capabilities of our TrustedBio product family, then the market -- the addressable markets become even bigger.

We're demonstrating accelerating commercial momentum. We have large-scale certifications and validation from partners like IDEMIA, Infineon and others. And we have opportunities in some of these other adjacent markets, including crypto, digital currency, ID, et cetera. So I think we're just at the cusps. We're looking forward to some exciting quarters to come.

And with that, I'd like to say thank you all for tuning in and listening. If you have further questions or would like to dig in deeper. Please contact our Investor Relations, Marianne Bøe, who introduced me at the beginning of this call, and we'd be happy to set up some time and answer more questions for you. Thanks very much.