Idex Biometrics ASA (IDBA) 2021 Q4 法說會逐字稿

Hello, everybody. Good afternoon, good morning, and welcome to the Quarterly Presentation for IDEX Biometrics for the Fourth Quarter of 2021. Thank you, everybody, who's taking time to join in to this audio presentation. And I will take some time for those that are new to the story to go through our presentation deck on the background in status of the company. And I will try to emphasize new items and highlights of things that happened during the quarter before we get to the quarterly results.

So starting out here on the cover page, and we talk about IDEX, we like to talk about a company that is enabling the next generation of smart cards for payments and other card-based applications. And what we mean by that? If you think about the evolution of the payment card. We started out with standard just plastic PVC payment cards. We added high-tech MAG stripes to those that actually were very susceptible to fraud, then came the smart card where they actually added an encryption secure element chip. And in Chip-and-PIN was introduced, and with that introduction of the smart card or secure element, fraud was almost eliminated.

But then there was competition from things like mobile phone payments and other forms of payment. So they remain competitive. The payment card industry came up with a concept of a contactless payment card where you can just tap this card against the point-of-sale terminal, harvest energy from that terminal and power up the card to approve the transaction, very convenient for the user. Unfortunately, now there was no gates on fraud and fraud is actually starting to rise in the industry. So the biometric contactless payment card is really the natural evolution. Very same user experience. You hold it over a POS terminal, the very same POS terminal at harvest energy, then it powers up matches your fingerprint and then approves the transaction all in about 1.5 a second. So same seamless user experience, no fraud. So that is what we're trying to enable. And when you -- and we'll talk more about this, but the same technology can be used for other applications as well. We'll go through this all in detail.

I shouldn't move on without acknowledging the usual disclaimers and investors should take time to read this slide in detail. But as typical, there are forward-looking statements and estimates and want to make sure that people pay attention to those as we go forward.

Then back to IDEX Biometrics. So at IDEX, we are the first company that recognize this large opportunity for the card and set down to build a purpose-built solution for fingerprint biometrics in the payment card form factor. So it's a multibillion-dollar opportunity. We're going to talk about that in detail on the volumes. We have now built our solution. We're on our third generation with superior biometric performance, a very disruptive cost point based on our architecture, and we're really hitting the market right now at its inflection point. And we'll talk about all these points as we go through the presentation here.

At IDEX, we have a very highly experienced leadership team. I really enjoy working with this team. I've been here now 2 years. If you look at the -- this particular slide, it sort of reflects the recent history of IDEX. It is back in early 2017, late 2016, IDEX had great fingerprint technology, but was a little late to the game on the mobile phone space. And the Board was looking for direction. Stan Swearingen at that time, became the CEO and convinced the Board that there was a major opportunity for payment cards, biometric payment cards and that it was technologically feasible to build a superior solution for that. And so Stan built out this technical team that's largely across the bottom half of the screen, and as I mentioned, we now have the solution. We're on our third generation of purpose-built technology for the card environment.

And then I joined the company just about 2 years ago in March of 2020, and we've now built out a new commercial team, including Catharina Eklof, our new Chief Commercial Officer, who was hired in 2021. She comes to us with a combination background from the payments industry background at Mastercard as well as a security background with Securitas and Defentry. So a very good background for IDEX. And then Jamie Simms, our CFO, who has deep experience as a CFO of a publicly listed semiconductor company. Last 13 years before IDEX, he was at a company called Vicor in the U.S. publicly listed NASDAQ semiconductor company. So a lot of experience there on managing finances for publicly listed companies and Investor Relations for tech companies like IDEX.

So what is the case, the business case for at a high level for biometric payment cards. So what are the challenges there? As I mentioned earlier, with the introduction of the contactless card, fraud is an increasing problem. And then security, which actually is becoming even a bigger and bigger issue. And the biometric smart card can protect and add security not only on payment applications, but in many other applications. So we'll go over some of those later in the deck here.

User convenience, as I said earlier, same user experience that you have with your contactless cards today. You pull this card out of your wallet, safe and secure and not connected to the Internet, not susceptible to hackers. You hold it over any device with near field communications and the card will power up. First thing it will do is match your fingerprint to the fingerprint on the card and then proceed. In the case of payment, it will proceed with a payment transaction. But for other applications, it will either be used as crypto keys or a pass for your public transportation or maybe your medical health care. And then for payment cards, there are card economics issues as well. So banks and issuers look at these cards and say, oh, if I have this differentiated car technology, I'm probably going to be able to attract new customers from banks that don't yet have this technology. There's always a top of wallet effect for the payment card industry. Many of us carry multiple cards. And if you have this safe and secure biometric card, you're likely to use that card first. And then there's opportunities for direct monetization for the banks as well. So they can charge consumers for the advantages and value add of the biometric cards. So there's definitely challenges in a definite business case for the biometric card.

So let's look at the opportunity. And as I said earlier, this is a very, very large market opportunity even when compared to the component opportunity in the mobile phone space, payment cards is just a huge opportunity. There are 5 billion smart cards issued every year, that smart card defined as any card that has the secure element chip on the card. And then our addressable market are really the contactless payment cards there are nearly 2 billion contactless cards per year now, and that's growing at 8% CAGR per year. So overall, the market is just a huge market. Biometric card penetration is growing rapidly, and we'll talk more about that later.

So the market opportunity for payment cards is huge and kind of put a real point on it is our largest customer who launched in production last year -- late last year, IDEMIA, alone as one of the biggest 3 manufacturers of smart cards is manufacturing in the range of 800 million cards per year. So a very, very large market opportunity.

If you look at the market, as I said earlier, we're starting to hit that market inflection point. So one thing to note about the biometric smart card is it requires no change to the point-of-sale infrastructure or the banking infrastructure. So when contactless cards were first introduced, all the stores and banks needed to upgrade their technology in the POS and in the back-end infrastructure. Because of that heavy lift on the infrastructure upgrade, it ended up taking about 8 years for contactless cards to go from introduction to 1 billion cards per year. We're seeing that biometric cards are taking off in a much faster pace. And not only is there a big value prop for the biometric card, but there's also no need to upgrade the infrastructure. So that's a big case for biometric cards. It's the standard infrastructure that's in place. Many banks are already starting to roll out biometric cards. And we'll talk more about that later. But in particular, with IDEX, we have our partner, IDEMIA, out in the marketplace. And very shortly, they will be -- there will be several banks announcing new biometric launches based on this IDEMIA production biometric smart card, which is based on IDEX Biometrics.

If you look at additional markets that we can attack with this, and we've talked about the China digital currency initiative in the past. There -- in China, as you probably know or may have read about, China is driven to be the first major economy globally to switch to an all-digital currency. They have their own ECNY or renminbi. And that is a cryptocurrency that is controlled by the government and issued by the central bank, different than bitcoin or other cryptocurrencies, this will become the de facto currency for China, and they want to totally eliminate cash, so coins and paper money.

In the past, we've talked about this as a big upside opportunity because people can make payments based on software wallets on your smartphone, from WeChat Pay and Alipay but also there need to be other forms of payment and therefore, enter the biometric hardware wallet. And what the hardware wallet allows you to do is store some amount of cryptocurrency in a very low-cost form factor of a -- looks like a standard payment card. And that is needed in the environment because if you think about having the entire economy on a cryptocurrency, you need to have a way for payments to occur for those that don't have a smartphone or those that are currently living on cash only that don't even have a bank account. And this is where this hardware wallet comes in to be a convenient and low-cost way to enable payments for that segment of the population, which is very large in China. There are about 400 million people today that don't have access to a smartphone. And about 225 million people who don't have a banking account and basically live off of cash transactions only. So that's a large volume. And when you think about having a store of value on this card, the biometric is a natural and safe way to add security to that card in that environment. So the hardware wallets will be coming.

We talked in the past about the prospect of a large trial happening during the Winter Olympics that just concluded last week in Beijing. Unfortunately, many of us saw how those events unfolded. The Winter Olympics, foreigners were not allowed to come. And the case for the hardware wallet was largely based on this would be the payment vehicle for foreigners visiting to the Olympics who don't have WeChat Pay and don't have Alipay. They would be issued a hardware wallet when they enter so that any transactions they would do inside the Olympic campus would be just based on the ECNY currency, the digital currency. So the large trials we were anticipating and hoping for at the Winter Olympics didn't happen, but the locals that were there did use their software wallets and so there were trials for the ECNY in general and the overall rollout is still predicted to happen, and we anticipate there will be volume shipments starting late this year for hardware wallets for that ECNY application. So while it was delayed and we didn't get what we anticipated at the Olympics, we still see this as a major upside opportunity to the traditional payment cards.

And then our long-term vision, and we've talked about this in the past as well, is using the biometric card for multiple applications. And we're starting to see this come true. In today's environment, cybersecurity is becoming more and more of an issue, especially with the current geopolitical environment and hackers attacking key infrastructure via cybersecurity, cyber attacks happening at all levels at the enterprise level, at the infrastructure level and at the individual level. So consumers and enterprises are looking for ways to up the game on cybersecurity and again, enter the biometric smart card. With these cards, you can store very simply crypto keys on the card. That crypto key is not connected to the Internet. It's encrypted and safely stored air gap in your wallet until you need it. So you can use this for end-to-end authentication for enterprise access, data access systems, access to your computer or console, but also just access to applications on your smartphone. All the smartphones today have near-field communications similar to the POS terminals. So you could use your biometric smart card to store crypto keys, to enable your coin-based account or your cryptocurrency account or any other transaction on your smartphone that you want to make sure is extra secure and locked. It could also be used for end-to-end authentication for card not present when people are shopping on the Internet and the card is not actually present at the retailer.

So there's many applications here. And as I said, what we see is a future where your standard payment card also has these other applets on board so that banks can add value for their customers by adding apps to that very same card and enabling that same customer who's carrying a payment card can also have access to these other apps and other value-added opportunities for the payment cards and the banks. So we're starting to see this. And in fact, in this quarter, we got our first revenue from a company who's doing a cybersecurity data access device in the form of a biometric card. So we really are starting to see this take off.

Our competitive advantage. As I mentioned earlier, we developed a technology from the ground up that was purposely built for this card application. So for cards, what do you need? You need an architecture that can drive low cost, also flexible and rugged so we can survive the card environment and an architecture that can provide good performance. The users will not use this card if it takes multiple seconds to verify your fingerprint. So our architecture provides us game-changing performance. We can do a full fingerprint match and an EMV transaction approval, all in about 0.5 second with our latest technology. We also support versatile enrollment options. So enrolling your fingerprint also needs to be a seamless experience. We have a patented technology for enrolling at home via a disposable sleeve. We also have enrollment applications that can run on a smartphone, and we're working on very advanced enrollment procedures that allow you to just enroll as you pay on the POS terminals, and we'll talk more about that in the future. But we're working very closely with banks and the payment networks on defining these other enrollment options to allow this technology to be rolled out in the mass market.

And then we are a flexible and comprehensive solution. We don't only build a sensor. We do the sensor, the card operating system that matching algorithms, all the software for energy harvesting and power management. So IDEX is a very comprehensive system solution approach to this technology. And as such, with our device, we are the highest integrated technology in the industry. Historically, fingerprint sensors have been made with CMOS image sensors, so basically a silicon chip that captures the fingerprint image from your finger. That is a fine approach for smartphone and other applications where power and form factor are not a big issue. But it presents an interesting problem in the payment card or smart card opportunity and that the only way you can reduce cost of a silicon sensor is to shrink the die. If you continue to shrink the die, you get to a point where you're not capturing enough data any longer from the human finger and then the performance goes down.

With IDEX, we set out to say, how do we break that paradigm. So we came up with a method to build our sensor itself on a very low-cost flexible substrate that is very similar to any multi-chip module in the semiconductor industry. And we laid out a wire mesh on that substrate to build a capacitive sensor that gets a very sharp image from that capacitive sensing element. This allows us to build a sensor that's almost any size and still do that cost effectively. Beyond that, though, it allows us to build our ASIC, a new state-of-the-art ASIC technology. Currently, we're using a 40-nanometer TSMC mixed-signal ASIC technology, which allows us to embed a 200 megahertz ARM processor for running all our biometric algorithms and matching algorithms. It allows us to include all of the energy harvesting and power management circuitry. All of this is integrated and allowing at the bottom line, a passive, simple wire interconnect in the card, making it much simpler to manufacture and much lower cost.

Our ASIC is about 9 square millimeter die. So to paint a contrast. If we took the traditional approach and we built our silicon, the same size as the entire sensor, we could only get about 600 die per 12-inch wafer. With our approach, we get a much more highly integrated ASIC device, and we get almost 7,000 die per wafer. So that overall economy of scale drives cost down and the integration and ability to manufacture the card drives cost down. So that's where we come up with our disruptive total card cost.

And we've talked about in the past, our partnership with Infineon Technologies. This really enables a total complete solution. And in 2021, later in the year, we also announced a full turnkey solution with our partner, Infineon. So not only the hardware reference platform together with Infineon, but now from IDEX, you can get the full card operating system, all the software required and applets. So it is fully a turnkey solution. And it's important to stress how important this is for IDEX. We announced this partnership with Infineon at first in July of last year. And since that time, we now have 6 card manufacturers design wins globally. And when I say globally, that means card manufacturers in the U.S., card manufacturers in Europe, card manufacturers in Japan, in Korea and a card manufacturing in Vietnam, MKSmart, who we announced earlier in the year.

And also important to point out that each one of these card manufacturers is an amplifying effect for IDEX, because each one of these sells to different issuers and banks in their regions. So each design win that we get, then those customers can go out and address many, many banks in their territories. So it's really important to stress how successful this Infineon partnership has been for the company and continues in the future.

And then if you go on to the -- look at the next slide, this is really a good segue to our overall partnership strategy. So IDEX is a small company, but we don't need to build a huge sales and marketing organization because we go-to-market with our partners. So we work with secure element providers like Infineon, STMicro, NXP, we work with inlay providers that are doing the interconnect circuitry inside the card like ACT, [GG] or Linxens and other partners. We provide the overall system for the biometrics, and then we work together with card manufacturers. And they're not only our customers but also our partners. And together, we work on campaigns to help activate the market, educate the issuers and banks on the value proposition for biometric cards. So again, that amplifying effect from each design win then gets out to more banks, more issuers, more personalization bureaus and more payment processors. So with these partnership network that we have in place today, we can address greater than 70% of the overall payment market, and we're constantly working to upgrade these partners and add more partners that can get us even further reach.

A little bit of a review for 2021, because it really was a pivotal year for the company. As I mentioned before, our first major customer out in the market shipping is IDEMIA. They got certification for their F-code card back in late October, early November. and they are now shipping in production out in the marketplace. And they have taken mass production versions of our device in shipments in the fourth quarter, and we anticipate shipping some volumes to them of mass production quantity in Q1 as well. As I mentioned earlier, IDEMIA is a very large player. They're 1 of the top 3 in the West for smart cards in shipping in general, 800 million smart cards a year. So even a relatively small penetration of biometric cards as part of their total volumes is a big revenue stream for a company at the stage of IDEX.

I already talked about the Infineon partnership, which has led to 6 new design wins this year. So again, very important partnership and amplifying effect for the company. We work very closely also with the payment network. So Mastercard and Visa, we are certified by both Mastercard and Visa, but work very closely with them on the specifications for false rejects and false acceptance and all the biometric performance. So these are very close relationships. And as I mentioned earlier, we are the only fingerprint technology with our latest generation that has been now certified by both Mastercard and Visa.

I mentioned earlier the digital currency opportunity in China, and we still see this as a big opportunity, which would start rolling out hardware wallets by the end of 2022. And then again, we're staying ahead of the competition. We've rolled out our TrustedBio Max product. And now the full turnkey version of that, where we sell not only the full biometric solution, but also the card operating system and applets that go with that, including manufacturing recipes. So to make the development of a new biometric card much, much simpler for our card manufacturing partners and to also cut down the time to revenue from the time that a customer chooses to go with IDEX to the time they can start to ship, because they can take advantage of not only our card operating system, but our plan is to have that whole reference platform pre-certified with Visa and Mastercard and the other networks, and that allows our customers to take advantage of the certification and get to market much more quickly and to kind of put a point on that, where it would typically take up to 2 years for a card manufacturer to design the card, then get through all the certification processes, we think we can cut that down well below a year. And we anticipate from some of these Infineon design wins to be in revenue shipments in the fourth quarter of 2022. So that's a big accelerator effect for us.

The overall financials and our financial profile hasn't changed, but we'll go through that. And let's start out with the Q4 financial summaries. And so overall, we had good trends on our revenues. We continue to grow revenue on the payment side of the business. We did have sustained shipments for logical access control, and that was with our -- one of our bigger customers. That revenue there was slightly impacted by the overall semiconductor supply shortage, not a supply shortage of IDEX components, but there was a shortage of other components in that system, which overall impacted our ability to ship -- our customers' ability to ship their end products. So that held back revenue slightly in the quarter. We did ship our first production volumes to cyber access control, a new company that is focused on the cyber access opportunity. And as I mentioned earlier, we anticipate this application will grow and continue to grow and become a very important one. And we'll see cards out there that are multifunction that are payment and cyber access control.

On the expense side, we did see some sequential fluctuation from prior quarters. One of the biggest hits we took there was from a very unlucky foreign exchange accounting transaction that was noncash. But as most -- many of you know, we raised $30 million back in November. That also happened to be a time frame where there was a big change in the exchange rate between the Norwegian Krone the U.S. dollar. And we raised $30 million, and by the time everything settled and we converted it to U.S. dollars, which is our accounting currency, we had a paper loss due to the currency fluctuation of $1.2 million. So very unfortunate had we had a crystal ball, we could have avoided that and perhaps even made money on the other side of it.

We also had onetime charges or some accounting charges, noncash for our employee stock purchase program that hit in the quarter. And then we were also during this quarter, still working through our transition from the -- a pure R&D company to a company that has more of a commercial focus and a balance between R&D and commercial activities. And we anticipate that during this quarter, we had a temporary high point as we're going through that transition, but we'll see expenses coming back down on the OpEx line to our traditional levels that we've had in prior quarters.

Our overall cash balance is $33.8 million in at the end of the quarter. So we're fortunate that we've raised money and at these times of political turmoil and volatility in the market, we're in a good cash position and don't need to worry these days about to try to raise money. We have plenty of cash in the bank.

And on our overall operating model, our model is still the same model we've had in the past. Our targets are 50% gross margins long term. We have clear line of sight to achieving those. It probably is worth noting that in 2022, we will definitely have some squeeze on our margins going into this year. That's largely driven by the semiconductor supply shortage. We had some price increases from our suppliers. And we did further pay some premiums in order to make sure we had plenty of supply for our 2022 shipments. Overall, that will result in a slightly squeeze margin for the business compared to the 50% target, but that's temporary. We anticipate and we have line of sight to those margins recovering by 2023. And that was a strategic trade-off on our part. This is the year we need to get to market to take off. So we want to make sure we have plenty of product to ship to help to enable the market. And if there is a trade-off to be had there with the margins on a temporary basis, we were willing to make that trade off. Overall, we still see the opportunity for 30% operating margins. Our model is very similar to other fabless semiconductor companies like Broadcom and NVIDIA and others in the space. And when we get to scale, we will definitely still be able to maintain this model.

So in summary, we were basically in line with all of our expectations and the company continues to move forward. We still are addressing this massive addressable market for payment cards and cybersecurity, data access, other smart card opportunities. We do have the best technology in the industry and an architecture that allows us to have a very flexible product road map as well, and we enable disruptive system costs.

Again, earlier this week, I was actually engaging with some executives from one of the biggest payment card companies in the U.S. who had 2 years ago looked into biometric payment cards and at that time, looked at the technology and thought it was too expensive, and we're looking forward to a day where a card could be below $15. And clearly, with IDEX we can enable pricing well below that point, approaching the $5 or $6 price range today and even lower over time. So a disruptive system cost, which we think will help the market activate and here we are at an inflection point in the market. We anticipate very near term here. Many banks will be starting to announce together with our partner, IDEMIA. So keep your ears and eyes open for that. We thought that we would get some of those announcements in Q4, but these banks have chosen to delay those for various reasons. Many of the banks are actually struggling with their traditional card business right now due to supply chain shortages on secure element chips and even some of the simple things like the hologram labels that go on payment cards are in short supply. So banks are putting out fires in other places, but we now anticipate that some of these launches that were slightly delayed are going to be coming out very soon. So stay tuned for that.

And thank you, everyone, for tuning in. If you have questions, please direct those to Marianne Boe at IDEX and happy to get back to you. Thanks very much.