Idex Biometrics ASA (IDBA) 2022 Q2 法說會逐字稿

Hello, everyone. This is Vince Graziani, CEO of IDEX. I'd like to thank everybody for joining us for the second quarter 2022 quarterly presentation for IDEX. Thank you very much. Let's jump in.

First of all, it's important that we acknowledge the usual disclaimers that this presentation will contain some forward-looking statements, et cetera. Now having acknowledged that, let's move on and talk about IDEX and the opportunity.

For those new to the story, a few of these slides will be a little bit -- I'll repeat them for those that know the story already. And for those that are new, we're addressing a multibillion opportunity -- multibillion-dollar market opportunity. The market for payment cards is just huge, and we'll talk about the details on that. IDEX has a solution for biometric payment cards. It has superior performance. We'll talk about the details there, a disruptive cost and we're capturing the market at an inflection point.

And I think for me, personally, and many of us that know the company, we'd like to see that inflection point happen sooner, but we do have lots of evidence in the market that it is, in fact, happening.

So what is the real case for biometric cards in the industry? So many of you use your contactless payment cards today, or you may have a government ID, or some ID for your office, or other function where you're using actual card form factor. And the idea behind the biometric payment card is it behaves just the same as your standard payment card, debit, credit cards that are contactless except that you use a fingerprint sensor instead of the pin.

So the idea behind this is you hold the card, hold it over a point-of-sale terminal. The card powers up, it matches your fingerprint and approves the transaction. And with the IDEX total solution, all of that can happen, including the fingerprint matching about 1.5 a second. So really, the key there for the payment card is simple ease-of-use. For the user, it's the exact same user experience as you get with a contactless card today, but infinitely more secure.

And one of the other big concerns with people is identity protection when it comes to biometrics. The beauty of the biometric card is none of your biometric data is stored in the Internet or on the cloud. When you get the card at home, you enroll your fingerprint locally in the privacy of your own home or you can enroll it with your -- on your smartphone. But in any case, your fingerprint is captured on the card, converted to a digital image and then stored in an encrypted format only on the secure element on the card. So you don't need to worry about your biometric data somehow being breached in the next big data breach on the cloud somewhere.

Obvious benefits, for fraud mitigation. The biometric card uses your fingerprint to authenticate you. So dramatic reduction in fraud. And for the banking industry, there are direct economic benefits. The differentiation enabled for banks by having a biometric card will attract new customers. Many customers polled, say that if they had the biometric card available, that would be the first card that they would use. So it's a top-of-wallet effect for the banks. And banks are able to actually charge more for these cards, and there are banks already out in the industry that are charging a monthly fee and customers are happy to pay that to have all the benefits of the biometric card.

And just in recent last few weeks, we've seen other applications come into the space for fingerprint authenticated biometric cards. So many of you may have seen the articles from France where the French health care system has a card today in the -- that they use for access to the French health care system. It's called the Carte Vitale. And the interesting thing is that France has now funded a pilot to start launching cards using biometrics for this. And it actually checks many of the boxes here.

So for a health care card that also can be used as a payment card, you want it to be simple and easy-to-use so that all people in the society, even folks that might have disabilities or memory issues, the fingerprint biometric card makes it simple. You don't have to remember a pin.

One of the big concerns in the French biometric card program, what people were worried about, storing their biometrics out in the cloud, just the example that I gave just a moment ago. The fingerprint biometric card actually eliminates that problem. As I said, your fingerprint data is encrypted and stored only on the card.

In the case of the French health care card, it's interesting, fraud was a major problem here. In fact, one of the articles I read said there are 7 million more health care cards in France than there are people. So people are out there printing up fraudulent cards and fraud is a big concern costing the French government billions per year. So when you think about the use case for the biometric card, this is a very recent example that really checks all the boxes for fingerprint authenticated biometric cards.

So we, again, look at the size of the opportunity. The total market for smart cards globally is about 5 billion smart cards per year, and it's still growing. These are all cards that have secure element chip built into the cards. And if you look at the market that IDEX is targeting today, we're targeting contactless cards. And so today, there's -- last year, in 2021, there were more than 2 billion contactless cards issued, and that's still growing at a rate of 8% growth rate per year. So the market is just a massive, massive market for biometric cards.

The penetration rate is rising very quickly for biometric cards. Personally, I would like that to go even faster, but the growth rate is faster than it was for the adoption of contactless cards when they first came to market 7 or 8 years ago. And so we're forecasting a penetration rate of around 18% in the market by 2025, several years from now, which would give us a total market of about 500 million cards. So it's a very, very large market. It's a multibillion dollar market just for payment cards alone. And as I talked about with this health care card, there are many other emerging applications as well in the marketplace.

2022 has had its challenges. I have presented at these quarterly presentations in the past and talked about all the bank launches that we anticipated this year with our customers. Many of those have been delayed. I want to make a clear point that these launches have been delayed. But to the best of our knowledge, none of them have been canceled. We've not heard of a single bank that had a plan for a biometric card that has totally scrapped those plans. Everything has just been delayed in the marketplace.

And the biggest issue that banks are relating to us is the chip shortage for Secure Element chips. Secure Element chips are typically the most -- the current nodes that are being used that are 40-nanometer CMOS node. We all know there's a shortage of chips in the industry, particularly for the Secure Element chips, many banks are on allocation and only able to get about 50% of the standard contactless payment cards that they are issuing the customers today in the millions.

So banks are very focused on getting their allocations and getting cards out there to renew large card bins. And so with this current environment, many banks have just put on hold any initiatives to launch new cards with biometrics. Those launch plans are still in place. But as I said, many of them have been delayed.

And then the war in Ukraine has not helped. Again, Europe is one of the areas where we anticipated bank launches to come early and more often. And with the war in Ukraine, again, it's not a good market environment for people to think about launching new products in the banking world.

And just overall, getting the momentum and getting the ball rolling in the banking industry in this -- particularly in the payment card industry, it's a fast follower type of industry. Many people saw this when the metal payment card was introduced. Some of the higher-end premium cards first came out with metal cards and then many banks followed. They launched -- many, many different banks had launched with metal cards and there's a growing momentum there.

We anticipate the same thing will happen with biometric cards, as once more and more of the larger banks launch, others will have to quickly follow. So again, the key message here is all the data that we have shows the market is delayed, but not canceled.

And so what do we anticipate happening? We talk about segment launches during 2022. And here is an example of the specific types of customer segments that are really driving early adoption. So we anticipate that the Affluent segment will be among the first. So the high-end premium cards where these clients are already paying a premium to carry a metal card or a premium card with additional services. Those same clients will want to have the very latest and most secure biometric cards, and we're working to -- with several partners to bring biometric metal cards to market for that segment.

In the sort of the Tech Savvy Mass market to younger professionals who want differentiation, these younger professionals don't even go into a bank branch. Many of them work with the all digital banks and the bank challengers, like our joint customer with IDEMIA Rocker. So this is another segment that's driving adoption early. And you'll see more and more of these challenger banks also coming out with these biometric cards to be a challenge.

Then on the Corporate side, companies that are focused on corporate expense control and corporate cards, et cetera, this is another area where people want to be able to ensure that the payment cards are being used by the employees who are exactly assigned to that card. And security is a big deal also in corporate transactions, large expenses on cards for corporate payments. So this is another area we had launched with manager.one together with IDEMIA last quarter in Q1.

And then another segment that is growing is the Special Needs segment, so I mentioned this earlier. Anywhere where people are memory impaired or maybe have other impairments that they're not easily remembering their pass codes or their pins, this biometric card is another way to include them in the system. And as I talked also about the card fatal, you can have a biometric payment card that is multi-use. So that same card can also contain all of your access information to your medical insurance and your health care records, et cetera, all protected by your fingerprint biometrics.

So in terms of launch activity, we're seeing -- still, there's growing activity all around the world. We still see the European banks as among the first to get out there. They were among the first with chip and pin and among the first with contactless, and we're seeing banks prepare for launches there.

We're getting much more traction in the Asia Pacific region. We're seeing lots of activity in Japan. We're now having activity in Vietnam and Malaysia. And most recently, we're starting to see activity with banks and issuers and payment schemes in India with a very large population there as well. So the number of potential cards with the customers that we're connected with more than 120 million by 2025, potential total cards in just the Asia Pacific region alone.

Latin and South America is now becoming a much bigger market for this as well. It looks like the Latin and South America markets will also be among the early adopters for this. We're seeing growing momentum there. In fact, part of the IDEX commercial team is actually at a large banking conference in Brazil this week and meeting with customers there. And so we expect launches to be coming out of Latin and South America in the near future.

And then in the Middle East and Africa, there are more than 10 launches there in the pipeline. And fraud is a big issue in this region, and that's what's driving demand. And there's also a big Affluent segment in the Middle East as well. So all of these segments are still out there and still growing, and we anticipate being able to announce specific customers and launches over the coming quarters.

Beyond Payment, one of the visions that we've talked about at IDEX in all of these presentations in the past is the ability to use the biometric card and other applications besides payment. The people that know me have heard me talk about the biometric card becoming a small electronic device. And this is really the beauty of the full platform of turnkey solution that we're doing together with Infineon, where we have the electronic device that includes the Secure Element processor chip for encryption. It has our biometric sensor, which includes a high-end processor and now a card operating system. And the card operating system is set up so that you can add applets to that card very similar to the way you add apps to your smartphone.

In the initial applets that we're working on are the -- obviously, the EMV, Eurocard, Mastercard, Visa payment applet for standard payment card. But beyond that, you can then add very simply an app that you would use this card for digital currency or cryptocurrency storage for cold storage as a crypto wallet, or you could use the same card as a digital authenticator to unlock an app on your smartphone and using the NSE in your smartphone, together with your card, add security to your smartphone.

I think there's a growing awareness from everybody that our smartphones are protected by biometrics, but your smartphone alone is not secure enough because it's always on and it's always connected to the Internet, we're all susceptible to malware. And I think all of us at one point or other and me almost every day, receives a text with a link that's phishing in order to try to get me to install some sort of malware on my phone that would then perhaps attack my digital crypto accounts or my other banking accounts.

If you use that biometric card in conjunction with your smartphone, the biometric card is secure, and we call it cold storage because it's never connected to the Internet. So if the last step to unlock my bank account is to validate that I am indeed Vince and hold my biometric card against my phone I get that much more security.

And just this week, we announced a partnership with Reltime. And they're really the first company that's building this multipurpose, multiuse card to realize the IDEX vision for our full turnkey platform. With this Reltime card, it's a full EMV payment card. It also can be used for cold storage for cryptocurrencies and digital currencies. It also has the biometric authentication for unlocking either access to apps on your phone or your PC or laptop. So it's really exciting to see the first one come to market that realizes that full vision, and we anticipate launching other customers with that same type of application.

Also noteworthy was today, we actually received yesterday, but announced today, a very large purchase order, in fact, the largest purchase order in the history of IDEX with a very large customer that's been an ongoing customer for IDEX, but this customer is actually in this digital authentication, digital access business. And so this is a large global company that has been a customer for us for over a year. And they're seeing growth in this market as well and just placed the biggest order -- purchase order on IDEX, the biggest one in our company's history. So I'm very happy to have that increase in the business.

So let me talk a little bit about our competitive advantages. I think it's important to discuss what's different about IDEX in a market this big and this large. Of course, there will be competitors, and there'll be emerging competitors coming after the marketplace.

So IDEX has a very disruptive card architecture. When we decided to pivot towards the payment card -- biometric payment card or biometric card marketplace, we put a lot of effort and time into R&D and came up with a patent-protected disruptive card architecture all based on our trusted biosensor architecture. So it's a disruptive architecture approach. It enables a disruptive card cost. It enables seamless -- or the best performance in the industry, therefore, a seamless user experience, which is really what matters.

And we also have versatile enrollment options, so we can enroll via a [sleeve] that you receive at home and plug the card in and enroll in a sleeve. You can enroll using an app on your smartphone. And very soon, we will have other more seamless enrollment options out there, and we're working with the major banking schemes on getting those fielded as well.

So it's a flexible and comprehensive solution, including the operating system and applets to enable other applications such as the medical cards, or access control, or crypto wallets. Again, I think there'll be more and more applications coming out with this flexible system.

And we talked a little bit about some of our differentiation and why it matters for user experience. But IDEX has the largest sensor in the industry with our architecture. And because our large sensor is made of a low-cost polymer material, and -- we can build this large sensor and still keep the cost down. In this industry, size does matter because the larger the sensor area, the more data you capture from the fingerprint every time you touch that.

And what are the benefits there? Well, it makes the enrollment process simpler and more reliable. It gives us the opportunity to have industry-leading security and forms of anti-spoof, and we still have end-to-end transactions in 1.5 a second. So again, more data is captured so it improves the user experience. And all of this is really important.

We're now exceeding the performance requirements in terms of security with Visa and Mastercard, but both of these big payment scheme networks are continuously raising the bar on security levels. And it's an interesting conflict because when they make the security requirements more difficult, the user experience generally would go down because the false reject rate on the card would inevitably go up because we have this large sensor area and are able to capture more data with each touch, we're able to react to those increased security requirements and still enable a very high-performance user experience at the same time. So suffice to say, we have a very differentiated product, and we believe we can keep a lead in the marketplace.

And many of you are aware that we have done this complete turnkey solution together with Infineon, as I talked about -- alluded to earlier. This includes Infineon's latest generation SLC38 Secured Element chip, our TrustedBio Max product. The full solution includes a card operating system and custom inlay. We have many design wins for this already that are announced, and we now have an additional six in the pipeline. And these are design wins that are announced globally.

And we continue to make progress on this. So we've talked about this in the past, just to give an update of where things are. We are now at the point where we're able to provide customers with sample cards that actually function with the full card operating system and the full turnkey solution. Those customers that adopted early will probably be in the pilot phase during Q4 this year. And then as soon as we are able to clear certifications with Visa and Mastercard, those cards will come to market commercially.

Based on prior experience, it's very difficult to predict exactly how long these certifications will take with Visa and Mastercard. But we expect cards with this new full platform to be in production in the first half of next year. So this is really paying off for us. We continue to build momentum with more and more design wins each quarter.

And we've talked about this in the past. It's very important to work with partners and collaborate with partners in the ecosystem here. The payment card ecosystem is quite complicated. And therefore, we can't cover it all alone. So for this full turnkey platform solution, we work with several suppliers of Secure Element's. We currently work with a Secure Element with Infineon, also with the IDEMIA Secure Element and with Zwipe who is a partner as well and have their own Secure Element chip. They license from IDEMIA.

A big part of the card makeup is really based on the interconnect, the EMV module and the rest of the components that go into putting together this tiny electronic device that is a biometric card. Linxens is the global leader in the industry for these interconnect technologies, including advanced inlays with the NFC antenna designs. They're the global leader in the EMV contact plate modules, which include the Secure Element chips.

So we are -- we announced during the quarter our collaboration with Linxens as well. And together with Linxens, we can supply all the parts of the card to the card manufacturers basically everything but the ink. And the beauty of collaborating with Linxens on this as a partner, is that Linxens is already a supplier -- the largest supplier in the world to all of these card makers. So we're very happy to have this collaboration together with Linxens. It's really going to help accelerate the adoption of this full platform. And obviously, we target all the card manufacturers.

And then on the back end of this, it's also very important to have collaboration partners on the backside, including personalization bureaus and payment processors. One of the things we learned with some of the launches is you need to have the seamless end-to-end ecosystem ready to go so that the user experience at the end of the day is seamless. The person that gets issued a biometric card has no idea how complex the ecosystem is behind their card. It's really up to all of us in this ecosystem to make that behave seamlessly.

And again, through all these partnerships, we can address more than 70% of the total payment card market, and we have additional cooperations and partnerships in the pipeline that will even expand that number further.

So let's talk about performance highlights over the first half of the year. We have had several launches. We still anticipate several more to come in the -- towards the end of this year, and we're already August. So we're still planning to see 10 launches or more from our early customers, IDEMIA and Zwipe. And therefore, we anticipate several more bank launches to come out this year.

And again, a lot of that is out of our control, but we -- from everything we're told, those bank launches are not canceled. Most of them have just been delayed for various reasons, and we anticipate seeing those this year. If they slip into next year, it still could happen, but those banks will eventually launch, and we're very confident about that.

We have currently certified cards out there in production with several suppliers to several partners, and we anticipate many of the cards, together with the Infineon platform, to start coming out into the marketplace for pilots later this year and full certified production early in 2023.

And these are global. It's really great to see this global momentum building. Many of you have seen that we talked about E-Kart in Q1 as a design win for this turnkey card. And now we were happy to hear that E-Kart has already signed up a card issuer as a partner in Turkey. So as soon as the card is ready and certified, this card issuer, we'll be ready to bring the card out to customers. And we're working closely with E-Kart and other issuers in Turkey and anticipate we'll be able to announce even more behind that one in the coming months.

So let's talk about the quarter. First, on the positive news side, the revenue trends are definitely positive. We continue to grow. We sustained shipments in the digital authentication space. And as you saw today, we had a large order in that space.

I want to address the margin topic head on. Obviously, our margins in this quarter are much lower than our long-term target goals. But largely, this was expected. We did contracts with our first few customers over 2 years ago on biometric cards and what the pricing would be for our modules in the early days. And at that time, we anticipated that when cards first launched in the early days, our margins would get squeezed.

In our industry, your pricing with your suppliers is all based on volume. So in the very early days, we're fairly low volume. So we're paying a high price that was always planned in. But in order to help activate the market, we committed to a very low pricing -- the volume pricing with our first customers. So -- and we took purchase orders for those very early on.

Now we're at the point where the industry is in a big shortage. We have had our suppliers raised pricing on us 2x and then we additionally paid expedite fees in order to get product allocated to us in the chip shortage times.

So at the end of the day, we knew we were going to have very squeezed margins for a few quarters. We anticipate those margins will bounce back as soon as Q4. And we are working on that, both on passing on some price increases to our customers. Our product mix will change. So with the introduction of product coming out from our full turnkey platform, we will improve margins there as well. So you'll see margins start to bounce back for us, and we expect to see that as soon as Q4 of this year. And our long-term projections for margins have not changed.

Because of uncertainties in the marketplace, we have done some cost reduction initiatives in the company. We started this actually much earlier. These are not new now, but throughout the year, we've been slowly reducing costs. And we're reducing our spend on R&D. When you think about IDEX as a company, when we made the pivot to the biometric payment card, we were very focused on R&D, and invention and filing of new patents.

Now we have the technology. We have a good leadership position. We need a strong engineering team to keep that road map going, but we don't need that same level of intensity of R&D and development. So we've been able to reduce headcount on R&D and reduce expenses. And we're targeting reducing those expenses at least 15%, and we will continue to work on cost reduction measures in the quarters going forward.

So in terms of the commercial engagements, again, this is still a growing pipeline. So beyond the engagements we've already announced and talked about, there's many things still in the pipeline and our commercial team is out there constantly calling on new card manufacturers, banks and processors and payment schemes. And there are many, many customers and potential customers in the pipeline. In fact, our team has talked to over 150 banks about this trying to create demand and demand pull. We continue to see momentum in the industry, and we expect the market just to grow.

In terms of our operating leverage long-term, as I said, we don't see any change in our long-term operating model. The margins will improve towards 50% when we get scale and potentially even higher than that. And again, that will come with product mix and with volume. And our differentiated product will allow us to grow and still achieve that 50% margin goal. We expect 30% operating margins and sustainable cash flow.

We don't need to grow our headcount dramatically. This is a very small customer base, relatively speaking, and you can have a reasonable-sized commercial team to attack a very large opportunity. So we expect the company to be able to grow and scale very quickly when the market finally does take off.

So in summary, IDEX is addressing a massive market opportunity, and we're seeing signs that it is starting to take off not only for payments, but in cyber authentication and digital access and digital currencies. We have a disruptive product that enables a disruptive overall system cost. And while we are hoping that this market inflection point comes to us sooner, we do believe we're positioned to really capture the market at inflection point and really grow the business quickly when that finally does happen.

So thank you very much for listening to our Q2 presentation and I wish you all a good day. Thanks again.