Idex Biometrics ASA (IDBA) 2023 Q1 法說會逐字稿

Thank you, everyone, for attending the IDEX Biometrics Q1 presentation. Before we begin, it's important to acknowledge the normal disclaimers that go along with any one of these investor presentation, so please take a moment to read over this. And let's get going forward and dive right in. Those of you that have been following the company already know the details about our IDEX Biometric solution strategy. We have the industry-leading technology for biometric sensors and biometric matching technology.

That was our first development and then we decided to expand into a more complete solution. So we've added software in a card operating system to simplify development and speed time to market, and I'll talk more about that. And then we've now got complete solutions working together with partners. We have complete solutions for both payments and digital authentication. Altogether, we're targeting a very large market for -- today, there are more than 3 billion units of contactless cards per year and that number is growing. And also important to note that IDEX is the only solution provider that developed all of this technology, specifically targeting from day 1 of development, the card environment, meaning contactless card, no battery and the card form factor, which presents its own challenges.

Therefore, our technology is highly differentiated. So let's dig in and talk first about the quarterly results for Q1 2023. So year-on-year revenue was growth of 26%. Revenues increased 16% quarter-on-quarter. Our margins were 26%, and that was down slightly from the prior quarter -- but this was actually for us, viewed as good news because the product mix was switching more of our revenue from payments as the payment segment continues to grow in the early days of payments with increasing volumes, we'll have better margins going forward and better margins going forward as we sell more of our full solution products as well. But overall, the margins were at 26%.

And as I said, they will grow on future quarters. Operating expenses were down as expected, quarter-on-quarter. If you take out the government grants that we received in Q4, you'll see that overall, we were down 4% from the fourth quarter. We anticipate operating expenses will continue to decline in the coming quarters as Q1, we still had not fully realized the effect of all of the expense cuts that we did late last year in 2022. So now let's turn over and talk about some of the quarterly highlights here.

So really the main message here is that the biometric payment card continues to get momentum. We talked a lot about 2022 as an inflection point year, and we're just seeing more and more evidence that things continue to grow. On the payment side, we now have 4 Turkish banks and fintechs confirmed to launch. We have 3 major banks just recently announced in Bangladesh, along with DoelPay, our card manufacturer there in Bangladesh. And you see that because of this accelerating demand, -- our fulfillment partner, Linxens, has now ordered 1 million units of the Infineon Secure Element device to be able to support all of these customers coming to market. We did obtain the first milestone of the full MasterCard certification. The FTAS milestone, we've got formal notification on that.

And for those that don't understand the full Mastercard certification process, it's actually 3 major segments to that process. FTAS is one of them. That means our sensor passed all of the fingerprint biometric metrics for Mastercard. And then there are 2 other major tests and IDEX has actually passed all of the major testing for the full certification at this stage. We're really at the point now where we're waiting. There's just remaining administrative tasks on the side of Mastercard before we get formal approval. And that's really important for IDEX because you'll see as we go further on, we have many car manufacturers waiting for that certification and many banks behind those as well. So important that we get that formal notification on that certification soon, and we anticipate it coming very soon.

On the digital authentication space, we did have a new major win with MCS micro systems in Malaysia. We also had a digital authentication partner here in Norway PONE, also launched the product based on our IDEX Biometric sensor. We talked about a new product together with Century, the Century Wallet, which is more on the crypto wallet side. And our partner, eSignus in Spain, is also launching their product during the quarter. This whole digital authentication market is really starting to take off. And there's a lot of talk these days about AI and the benefits of AI in the industry. there's a downside to AI as well.

And if you even went to the U.S. Department of Homeland Security website and talk about and look for search for security threats from AI. There's a growing threat from the deep fake that can be created by AI. So a voice created deep fake is actually one that people anticipate very soon. We won't be able to just accept the phone call from the CEO to the CFO to say, please transfer funds from bank A to bank B because the voice can be faked by AI. And therefore, there's going to be this growing need for personal digital authentication and the biometric card is the perfect answer for that.

It's not connected to the Internet. It can't be hacked and your biometrics never leave the card. It's stored only on the card. So when you get a match on that card, whoever is you're authenticating with is sure that the person holding the card is actually the person he claims to be. So we expect this digital authentication to really grow and grow over the coming months and years. We do have multiple card manufacturers and ecosystem partners in the market that are launching and growing.

E-Kart in Turkey was announced. We now have two metal card manufacturers globally. We think this is a big segment for us. The premium segment, metal segment is a natural for many banks to introduce biometric cards at that premium segment. And we're excited that these two metal card makers will be coming to market very soon. We announced in the quarter MCS micro systems in Malaysia. Malaysia is a huge target market for us. We'll talk about that a little bit more later, but we anticipate a lot of growth out of that marketplace.

And also, we just announced DoelPay in Bangladesh and DoelPay already has multiple banks, 3 banks waiting for this card to come to market behind them. So like many of our other card makers, the local regional card manufacturers also have local regional banks that they work with frequently and are already getting these banks ready in anticipation of cards coming to market.

We also announced in the quarter our partnership with ST Microelectronics in France. ST is 1 of the 3 major manufacturers of secure element chips, been providing these encryption, secure element chips to the smart card marketplace since inception. And together with Infineon ST, we've now done an ST based full solution that we're working on. and that will give customers in the marketplace choice. And in this industry, all the card manufacturers and banks want choice. This is why for many years, they've been three major suppliers for the secure element chips in the marketplace.

So going on to the card manufacturers. Again, this is just a demonstration that the market is accelerating. We now are at a point where we have 13 total card manufacturers in market, and that includes IDEMIA. In this quarter, we wanted to give an idea of what that means for banks behind them. And so on this slide, what we've done is for each of the card manufacturers, we put a number here that represents the number of cards that each one manufactures, but overall, each one of these also can address multiple banks and as a group. Each one of these card manufacturers today addresses more than 3,000 banks.

And so IDEMIA is a very, very large card manufacturer. The by themselves have thousands of banking customers, but each one of these regional banks is also very important. And many of them, 12 of them, are working with our full pre-certified solution. So they're waiting for the certified solution to finally get approved. And then behind them, many of them have banking customers all ready to go. So we're ready to go. The marketplace is more than 1 billion cards. And I think one comment I made last quarter is these manufacturers alone address much, much more than 1 billion cards.

And I made the point that if each one of them had only 1% penetration of their total card manufacturing was biometric, IDEX will be profitable. Now I can clarify a little bit on that point to give investors some idea of where the growth will come fastest. So if you look at Southeast Asia, that is a market that does not have as much proliferation of smartphones and the card -- smart card industry, cards are actually growing at a very high rate at about 20% per year.

So we anticipate that there will be growth will be coming fastest and penetration fastest in these areas in Southeast Asia, including Malaysia and Bangladesh and India, some of the countries where we've recently announced traction. Europe has always been a chip and pin market always fast to adopt new technology. But again, it's already established in Europe. So we do expect growth there, but the growth will come at a more moderate pace as many of the customers already have banking cards and the growth for new cards is more like a 5% growth per year.

So we will see growth in penetration in Europe, but it will be more moderate, and that's why we're actively targeting some of these other growth areas globally. And now also in the quarter, we now have 7 additional banking customers launching cards with IDEX. That's a total of 16 banks now. We were 9 in the last quarter for those who are keeping score. So again, just more momentum behind the biometric card actually coming out at banks and getting into the hands of consumers.

So if we look at biometric cards accelerating globally. Again, as I said, we have a focus on Europe. This is where it's an area that Chip & Pin was first introduced. The banking industry is a very accustomed to the smart card and launching a biometric smart cards will continue to grow at a moderate pace. And then if we look at some of these other areas in the world, we talked about Turkey many times in the past, where about 1 year ago, we started to focus on Turkey. And that market has 265 million payment cards in circulation. It's a growing market.

And then again, in Southeast Asia, in India, these are very, very large markets. So this is why we're targeting those markets with lots of cards. In India alone, there are 1 billion payment cards in circulation, over 4.7 million merchant terminals. So this is a very, very large market and growing. And as I said earlier, these markets in emerging markets, in India, Southeast Asia, Bangladesh, that those are growing at a 20% pace. And we anticipate a fast adoption of the biometric card, both for identity and for payment because, as I said, there's a much lower penetration in these areas already for smartphones as an alternative.

If you look at the markets, again, just to remind everybody, just the size of the very large markets we're addressing. On the EMV type payment cards, there are more than 12 billion cards in circulation today. As I've mentioned many times, there are 3 billion new contactless cards coming to market every year. And there are key drivers here, most importantly, what banks are seeing is customers that get these cards are actually using the cards 25% more for banks that have already launched.

This is an important return on investment for the banks. If you get the biometric card, you're actually using it more frequently, and this is how banks make money. And now we actually have some market data to show that. Obviously, there's reduced fraud and a seamless transaction for the customer. And really that's key for the biometric technology from IDEX is that our biometric contactless card will approve your biometric fingerprint match, and your transaction in a total of about one and a half seconds. So the user experience is totally seamless.

And then as I mentioned earlier, if we look at the identity, digital identity and digital access markets, these markets are just going to continue to grow. Today, it's a $50 billion to $100 billion market total and the biometric card is going to have a much bigger play in that marketplace. As I said, the more and more security threats that come into place, the more there's going to be a need to be able to identify yourself digitally, with a personal card that's never connected to the Internet and can't be hacked. And the answer is the biometric card.

So if we look -- take that all into account and then have a look at the outlook for the markets, if we look at IDEX, we've now accelerated further penetration. We now have 13, I think, as of this morning's announcement, 14 card manufacturers for payment cards. 13 of those will be manufacturing with our full complete pre-certified solution. We have 8 partners coming to market for digital authentication and identity. We anticipate those numbers also to grow. And we are really ideally set up for scale with global operations.

We have our one single platform in our software platform, and we can then address multiple markets. And in terms of scaling globally as well, IDEX also has a world-class commercial team that have done this before in other markets, specifically in the payments market. And I'm happy to say that we do have this world-class commercial team and IDEX was not always able to say that in the past. So we're getting fantastic results. So again, keep in mind on our solutions, we do have one integrated scalable platform in multiple applications. And that's really a key theme is that in terms of development cost and ability to address large market segments.

It's the simplest way to look at it is the card itself is very much like another electronic device. The card has a processor. It has encryption software to encrypt your fingerprint template and store it only on the card. And then it has a versatile card operating system with standard industry APIs that allow you to build various applications for their cards simply by adding new apps. The most obvious ones are secure payment apps, and we have the Mastercard and Visa apps.

There's a different applet for China UnionPay and RuPay. So for the various payment schemes globally, there'll be just a different app to address all of those schemes. And then on access control, Again, the card operating system is standard, and then you can add different access control apps and protocols, including industry standard protocols like FIDO. And then for crypto asset management, you can have different apps as well on the card. You can use the card itself as a crypto cold storage wallet or you can just store the crypto keys to unlock your crypto currency from another storage base in the cloud or on home computer or storage device.

So again, the key to keep mind here is we have the single platform, very versatile in multiple applications. And as we talked about in the past, you'll see many more applications coming to market once this product is fully established. So again, the industry is really accelerating away from pins and passwords to biometrics. And again, I think there are many trends that bear this out. There's consumer interest in biometric payment cards.

Biometrics is top of the agenda for all payment trends and 50% of consumers all surveyed will use biometric cards in the next few years. The regulatory environment is driving more and more towards biometrics. There's an EU directive on accessibility, so disabled, blind people, visually impaired and deaf, other people will benefit from a biometric smart card. The French government is evaluating biometric for a healthcare card. So that would be yet another new applet that would run on biometric card under the standard operating systems.

And in India, there's a nationwide initiative for an ID program. And again, India is a huge population, more than 1 billion members. And so again, we're trending towards this world where everybody is going to need some way to verify their identity and biometrics is quickly becoming the answer for that. And then there's various industry standardization trends that are also helping the biometric card industry. Mastercard and Visa are investing heavily in biometric cards as is the FIDO Alliance is now putting standards in place for passwordless authentication.

And then national payment schemes doing -- running debit and other credit payment schemes locally are all starting to adapt biometric payments as well. So good trends in the industry that will help drive acceleration. So, our overall go-to-market strategy, and I think using Turkey again as an example, when we enter a market for trying to penetrate for biometric cards. We go across the board, across the whole ecosystem. So a little more than a year ago, we decided that we were going to address the Turkish market.

We put a senior executive on the ground there in Turkey, and we originally just did a market assessment. We understood what some of the regulatory hurdles might be there. We got past those regulatory hurdles so that biometric cards could be adopted. Then we worked with ecosystem partners, worked with the payment networks, also worked with a local manufacturer to get set up and ready. And then we started working together with our local manufacturer to sell the value prop to banks and fintechs and then eventually to get the cards into the hands of consumers.

And you've seen the results of this. In a total of 1 year, we've gone from nothing in Turkey to having a card manufacturer set up for volume and already 4 banks and fintechs committed to it. So this go-to-market strategy, we're going to repeat in other areas of the world, and we're starting to see some of the results of that as well. Also, I wanted to take a moment to explain more clearly for people what products we actually sell and what's our go-to-market strategy.

We started out selling just the sensor. And like most of our competition selling a biometric sensor as a component. Now what we've done is really evolve our product strategy. So we sell, yes, we can sell the sensor in the case of some of the large card manufacturers, for example, our partner IDEMIA, we sell to them only the sensor. IDEMIA does their own operating system and their own matching algorithms, et cetera. So we sell just the hardware.

But really to accelerate market adoption and then also capture more of the value chain, we developed the full biometric system. So it's our sensor plus biometric software for full matching algorithms, et cetera, so that our Tier 2 and Tier 3 card makers did not need to have this expertise to put together a biometric system that worked, and we can sell just that system, the sensor plus biometric software. And then what we're seeing is the majority of the customers are choosing is our full certified biometric card solution that includes our sensor, our software, our biometric matching and a full card operating system that's pre-certified by Mastercard and Visa.

And that pre-certified solution not only accelerates the time to market, but it enables IDEX to capture more of the total value chain and that's one of the things that's going to be driving improvement in our margins as we go forward. As we go to market, we, of course, have direct sales to card manufacturers and then we partner with solution providers like Infineon and STMicro, put together full solutions and sell those solutions together with our partners in the car manufacturers.

And then we also sell to resellers, who then repackage the cards potentially add their own software, for example, for authentication or other markets. And those resellers sell the cards into other markets. And therefore, we're addressing today, as we know, the payment and banking market segments public and private services and also we're starting to address the access control and government security and services. So just again to emphasize that our -- what we actually sell are 3 different product types: The sensor, sensor plus biometric software or full solutions.

And we talked about this value chain many times in the past, but the whole biometric card and payment ecosystem is a fairly complex value chain. And IDEX has actually worked with partners across the entire value chain to make sure that we can bring the right solution to the right customer and address the right problem and eventually get those cards into the hands of consumers. So IDEX is a technology provider. We do sensor technology. We also do our card operating system.

We work with other technology providers, Infineon and ST, also Linxens and ACT, who are doing interconnect and inlay products for us or EMV module development for us. Working with all of these partners, we can do a more complete solution that we then bring to the card manufacturers. And then not only with the card manufacturers, there's a key here to deploying these cards as you also need to work with the payment personalization bureaus who actually take these biometric cards and load the personal profile for each consumer with the right scripts on there so that the consumer can take full advantage of the biometric card, the ability to have a large transaction with no PIN required because there was a biometric match.

All of that has to be programmed properly at the personalization level, and the payment processors need to be ready for these biometric cards. So IDEX is working with all of these various components and players in the system to make sure the system is ready. Then we, of course, work with the payment networks Mastercard, Visa and the other large payment networks globally, UnionPay and RuPay. And then we work closely with the issuers. And so in many cases, we're now advising issuers on how to get their first cards out into market and how to properly do a launch, what are the best methods for them for card enrollment, et cetera, so that there's a seamless launch and get those cards into the consumer.

So we really, again, our full team, our technical team and our commercial team, ends up working across this whole ecosystem to make sure these cards are successfully deployed. And then what does that yield for us? It really does yield us a strong operating leverage on our long-term model. We now have 13 -- now 14 card manufacturers serving both payment and access. Our certified card solution, very shortly, will be fully certified, is enabling these Tier 2 and Tier 3 manufacturers. So for them, it becomes a much lower barrier for investment to be able to get cards into the market.

It also shortens their time to market, and it provides them with more value per card. And for IDEX, we're then recovering more value and more of the value chain as we're being paid for our fully certified solution and the software and the value of that total solution to these card manufacturers. So therefore, our target operating model at scale. We follow on the component level, a scalable fabless semiconductor model, meaning we're CapEx light. We do all our manufacturing for our silicon ASIC at TSMC, the world's largest silicon manufacturer.

We do all of our module assembly with Amkor, the largest packaging and test company in the world for the semiconductor industry. So we don't have to have any of our own factories to bring the product to market. Our long-term operating goal is to be higher than 50% gross margins. And as I mentioned earlier, you're going to see those margins grow as we start to really ship our full turnkey solution out there and start recovering more of the -- capturing more of the value chain with our customers. Our long-term operating goal of 30% and we're scalable and sustainable for rapid growth and cash flow.

Our OpEx and CapEx does not need to grow substantially even as we address these very, very large markets. So just in summary, again, we always hit the size of this market opportunity. And I think we did hit an inflection point in 2022, and now we're really poised for rapid growth. We have our industry-leading customer experience. So again, we built this technology targeting card, and therefore, it's not by accident that our card provides the consumer with a totally seamless, contactless experience that's totally secure. We have our disruptive biometric solution, and we really are capturing the market at an inflection point. So it's an exciting time for IDEX and an exciting time for the whole industry.

So with that, that's our Q1 presentation. Thank you very much for listening, and I look forward to talking to you all next quarter. Thanks very much.