NEXT Biometrics Group ASA (NEXT) Earnings Call Transcript

Good morning, good day, good evening, everyone. Welcome to the Q2 presentation from NEXT Biometrics. I think I will wait just 1 or 2 minutes. We can show the agenda first. I'm here with Eirik Underthun, and I'm Ulf Ritsvall, as you know, as standard. I think I just pause here for just a few seconds because maybe there's a few more people coming in to the meeting. Okay. I think we are set to go. So again, welcome, warm welcome to this quarter 2 results reporting. We have some exciting news today actually. So stay tuned. We actually had the last edits at this very late moment. Today, the agenda will be a kind of standard agenda. We go first the highlights, what has happened in Q2 and up until now. We continue with the Q2 financial reporting. Then I would like to share where we are, the business, market and a few product updates that we have been working on the last few months. ending off with, of course, outlook and Q&A. The Q&A session, you can actually ask questions in the chat or you can e-mail the questions to us. All right. Let's proceed. You can take the next slide, please. So first, maybe you also saw yesterday, we actually have found some irregularities in -- and need to restate our Q2 2025 and 2024 to be ensuring full compliance and accuracy. It's a historic event. It's historic revenues. It has actually no cash impact at this moment in time. It's actually something where we see can be turned into positive as we have taken the goods back and we will reship the goods that has been shipped to certain distributors. This will be one separate slide, and it's detailed described in the quarterly report. We have now restructured the China business. We have tighter control. And we have -- as we communicated in Q1 report that we have increased our financial credit checks and factoring and prepayment, et cetera. So I think you will hear more about that in a few slides. Quarter 2 was coming in low due to mainly India. India was basically stopped, as you all are aware, between November and possibly mid-April. That, of course, affected our sales in Q2. We, of course, would have hoped for a bit more orders and revenues in Q2, but we came in low and lower than expectations. We, on the other hand, I will show later on, we are expecting to grow significantly in Q3 on India as well as in Q4. Adjusted margin -- gross margin came in lower than Q2 2024. 2024 was a very high number, 57%. We came in 39% in this quarter due to the product mix and sending a lot of PC sensors that have 10 size, which has lower margin. We successfully, I'm very proud of actually launching 2 new products. We have launched the NEXT Granite, which is the FAP30 sized sensor. It's a sensor that we communicated back in 2024, and now we actually have it live on the website. And I'm very happy to -- if you look at further down in the slide, we actually got the first order as late as yesterday, and we announced this now at 8:00 a.m. today. It's a breakthrough order. It's a mass production order, the first order of the FAP30, which demonstrates a lot to us. And we're very happy for that. We also launched the next Basalt L1 Slim, we call it previously. It's a FAP20 sized match on ship type of device that is targeted for the point-of-sales terminals and other -- it's L1 certified and targeting the Indian market. We also came in with 6 new design wins. You may have remember last Q1 was actually also 6 new design wins. I believe we had a target 2024 on having 12 design wins, and we had the same target this year. But now after 6 months, we actually have 12 design wins already, showing the actually acceleration in the market. One of the design wins, I will go through in a later slide, which is the IAM, the Oyster III, the first high-volume order for Oyster III reader came in at NOK 2.5 million. Also immediately after Q1 -- Q2 close, actually just left the press release actually, we have a potential private placement to solve the short-term liquidity needs. I'll -- you can take the next slide, please. And we have now -- have guaranteed of NOK 50 million and maximum NOK 20 million on a private -- potential private placement from existing shareholders, which, of course, is very thankful for this contribution. This will be announced and discussed a bit further as well. This, of course, solves the short term and the acceleration growth of FAP30. We do have an expectation that we will be cash positive in Q4. We can go to the next slide. I hand over to Eirik on the Q2 financials, please.

Next slide, please. Thank you, Ulf. So reported revenues were negative NOK 2.2 million and adjusted revenues were NOK 4.3 million in the quarter. And the difference between the adjusted revenues and the reported revenue is NOK 6.5 million, and these are relating to certain adjustments that I will explain on the next slide relating to the difficulties and China in particular. When it comes to the gross margin, the adjusted gross margin was 39% in this quarter, and that's due to product mix that we have in the quarter. Then on adjusted operating expense, we came in with NOK 15.9 million, and it's slightly lower than the previous quarter, and there is some certain element of seasonal adjustments there like vacation and so on. Adjusted EBITDA was minus NOK 14.2 million versus NOK 6.7 million in quarter 2 2024. And the main reason for the lower adjusted EBITDA is the revenue adjustments that we did in the quarter and also the lower -- the impact from lower revenues and product shipments that Ulf mentioned. We ended the quarter with cash of NOK 22.1 million versus NOK 39.9 million at the end of quarter 1, 2025. And we experienced the negative operational cash flow due to the lower revenues in the quarter, but also certain continued slowness in the payment of account receivables. So this is expected to improve in quarter 3 and quarter 4. And we're seeing improvements there, especially on the new business that we are doing following our improved credit review process as well as now we are doing a new factoring deal that we also explained a bit about in this quarterly report. So the highlights in this quarter is the slowness in China and the market pause in India is still impacting the quarterly revenues. Then it's fair to say that we have multiple one-offs that are impacting our quarterly results. And we are expecting improvements in quarter 3 and also expecting to see some new developments in this -- in China that we are targeting there. Next slide, please. So how can we explain the adjusted revenues in quarter 2 2025. So first of all, there was an accrual for extraordinary discount relating to China ID products. So what we have experienced that our distributor has been slow in selling our products. And the main reason for that is the high price that we have set for this product. And in order for the distributor to make a certain margin, we have made them this offer to have the discount so that they can increase the pace of clearing the inventory and then also clear the account receivables to NEXT Biometrics. Moreover, we also have a reversal of revenue in relation to another distributor in China. So this is a part of what we have found on relating to irregularities. And this was not something we could control, but we have booked this reversal. And we're now targeting to repossess the products and try to sell them to other parties in the market. When it comes to the revenue restatement, this is explained in a stock exchange notice that we sent out yesterday evening. And the net effect on the revenues is NOK 12.6 million. So this is unfortunate, but I think it's a fair assessment of the situation as it is now, and we will continue to work on this, and we will inform the market whenever we see an update of the financials for 2024. And this is a preliminary restatement. So we will get back to you once we know exactly how this will impact the already issued financial statements. At the same time, we also booked a cost reversal on other OpEx of NOK 3.7 million in quarter 2 and NOK 3.7 million in quarter -- in 2024. So we expect the impact of these unique stand-alone events to be resolved in the second half of this year. We have a healthy revenue pipeline. So this, together with our efforts to improve compliance and cash collection as well as credit checks and other measures that we're working on like doing more deals on letter credit and prepayment will help us manage this situation. And then I will give it back to Ulf. Next slide, please.

Thank you, Eirik. Thank you. And as we said, there's a Q&A session in the end. So let's move into the business, market and product updates. You can take the next slide. So I think we all in this call know what we have been doing in the last basically few years. We have, of course, developed products. We have the Oyster III ready. We just got the first larger mass production order, as I said. We have a FAP10, which is mainly based for laptops and small access systems. And then we have our FAP20. It's a larger size, and it's perfectly fit for the governmental ID products, high security and reasonable costing on that, high gross margins for us. And then we introduced to you in few -- 1 year back that we will develop the FAP30. That's now in place. It's in mass production grade. It's in our factories right now and looking fantastically good. I have a separate slide on that later on. We as well have -- as a company, have a facial recognition and TouchPads solutions in the same area to have separate legs to stand on. Okay, that's the baseline of the company. Then we have worked with, of course, all our design wins. We are now at a number of 76 different design wins, different customers or different products within the same customers. You have heard about ACPL. We have one additional OEM in India that is very soon to be certified as well. We have Commlink in Bangladesh. We have a number of different point-of-sales customers that are both in India and in China and supplying the world with point-of-sales terminals. We, of course, have other OEMs that are supplying to Africa, to U.S. and so on. And now we are starting to get in FAP30 customers, which is fantastic. That's actually slightly different customers than we have used to and the market is slightly different. I will also go through that on a separate slide. And again, we have total 76 different customers. Some, as you may understand, is a one-off. It's one project, one delivery and then nothing more. But then we have this recurring business, which is what we are relying on. And that's why I'm confident to say that NEXT in the near term will be very profitable. What has taken so much time for us is actually certifications of the different -- in the different countries. There are different certifications in different countries. India have its own, Asia/Africa have mostly relied on MOSIP, which is a Modular Open Source Platform, similar to the L1 in India. We have a few certifications in U.S., which are completed. And we have completed a China certificate, so we can sell into China and Nigeria, Pakistan, Malaysia, I can continue. Right now, we are on the edge of actually being qualified also in Bangladesh. So with this -- this is like the mandatory step in government ID. If you want to be on the market, you have to have these certifications. And as you see, we are soon covering the globe, and we are, therefore, accelerating and expanding the -- both the market and our OEMs market. You can take the next slide, please. So I'm coming back to the NEXT Granite, the FAP30 product. What's new since Q2 is actually we have renamed -- we have named the product itself, so we have used our Scandinavian heritage, and we are using stones. And Granite is a very strong, very powerful, very secure stone itself. And this product actually serves different markets and different use cases compared -- slightly different use cases compared to where we are in the FAP20. It's expanding our product portfolio, of course, moving up in the value chain. It's a higher average selling price compared to FAP20. Repeatingly, it's not a replacement for the FAP20 for a certain customer. It's a totally different market for [indiscernible] it's addressing a market segment with higher security requirements. And it can be, for example, enrollment of a population, enrollment in a bank sort of type of use cases. It is attractive for high-end markets such as this government ID. It could be voting systems, for example, enrollment, I told you, health care identification. And where we see this product being used is in the high end, high market potential in Africa, in the U.S. and South America. We have seen the development we have done lately. And when we planned this FAP30, we have even more impressive result than we expected actually. We have, of course, technical terms that it's -- we have a better image. We have a better sort of coating and so on. But we have much more impressive result than previously FAP20. We have a very, of course, very crisp and phenomenal image quality, which is key in the governmental ID area. And again, early samples are already past customers criteria, and they are, therefore, ready to place the order, which they did yesterday, one of them. We, of course, are expecting additional orders very, very soon as well on this FAP30. We are looking forward to that. And this is, of course, a product with very, very high gross margins compared to FAP20 as well. Then we have the next Basalt L1 Slim, the FAP20 size product, which is actually combining our proven Basalt sensor, the FAP20 sensor with an MCU. It's creating a system, a match on ship system, which is actually the slimmest of its kind going into the point-of-sales terminals. They have limited space, yet they need a large sensor. I would say that we are unique in being able to provide this type of sensor. We are right now being integrated in a number of different point-of-sale terminals. Fantastic to see. If you can take the next slide. Next slide, please. I'm so happy to see this actually. We actually secured the first FAP30 order. It's not just an order. It's a mass production order. It's confirming the product. It's confirming the value proposition we have and it's confirming our market demand. It actually confirms that NEXT Biometrics now have more and higher security products. This partner, we actually announced already with a memory of understanding in December 2024. We -- where they have an ambition to go into market. Now they have tested our product. They have integrated it, and they are now planning 2 new high-demand devices. One is a wired fingerprint reader, pretty common in enrollment scenarios and one non-wired fingerprint reader where the operator can have a more stand-alone type of fingerprint reader. The order value is NOK 3.2 million, and the deliveries are expected to happen before end of Q4 this year. You can take the next slide, please. Also happy to share that we secured our first major order for identity and access management, IAM solutions. So it means that in the connection with the PC. This is actually an order for deployments in the U.S. and EU. And it's a global leading IAM player. They have more than 40 million deployed users and licenses abroad, which is fantastic for us. This is the initial order. And we are -- and deliveries are starting -- actually almost finalizing, I would say, in Q3. And we are expecting sales to grow within this field and with this specific customers to between NOK 2.5 million to NOK 5 million, which is fantastic that we are in this. This was announced August 1. So it's not recent. It's a few days back. Next slide, please. So what are our short-term priorities? I would say, of course, release the cash from the working capital. We need to complete a few customer projects and make sure that we are a part of the ramp-up of the end customer deliveries. So we actually can scale up these deliveries from distributors, but also, of course, from the deliveries from us. I'm expecting a normal quarterly revenue based on where we are at this moment and the pipeline we have. Now we have a few sensors in the channel. And of course, we are now restoring that. And with the following ramp-up in India and China restart, I'm expecting normal quarterly revenues going forward. So the pipeline, I would say, to try to easier explain, it's recurring revenues, the existing contracts, the existing customers of ours that are placing recurring orders. We have then the design wins, which is also something that is on top of the recurring revenues. And then we have the tender based, the onetime revenues, which is -- it could be small, it could be very high. I will have a bit more detail on this, but this is what our short-term expectations are and what we're working on. If you see -- you can take the next slide, please. But if you see, okay, now we are getting into a more stable recurring situation for the company. We are organically growing in this. And we're very close in, again, being cash positive in the next quarter. And we, of course, can grow with these current products. And of course, we have -- we look forward to a fantastic second half year and even more successful 2026. That doesn't mean that we are stopping there. So we are actually looking and considering consolidating the market. There's, of course, potential to grow in this area. I mean, as you saw, the IAM business is one part of -- where it's very close to biometrics. That could be one area to look into. It could also be to look into a higher government ID fingerprint sensor market in -- to complement the technology we have. We are very uniquely positioned in the government ID and high-end fingerprint sensors. So we are actually looking a bit more into our next move in this, not saying that we are doing it right now, but we are seeing in the near future that we should considering the consolidated market to become a better and stronger delivery partner in this area. You can take the next slide, please. So I divided the sort of revenue in 3. So when I add those 3 revenue streams, we will be reaching close to NOK 50 million per quarter. That will happen during 2026. I'm very confident in. We are now seeing recurring quarterly revenues. Despite the Q2, I mean, we have parts of the products in the channel, which is actually AR instead of sales. But now when the channels are moving down in size, we believe the -- we have predictable, scalable between NOK 25 million to NOK 30 million expected with the different contracts we have and partners we have. On top of that, we have the design win revenue. That's less regular, but it's actually expanding our customer base like the 6 design wins we took this quarter. And as we have presented previously, from a design win until its revenue, it could be potentially between 12 to 18 months, depending on what kind of application the customer is actually building. On top of this, where I see actually more and more queries coming into the company is the large tender and onetime revenue. That's a larger things -- larger type of projects we are now bidding in. We have -- our company reputation, our company brand is actually showing that we are actually now inside these large tenders. So we have taken the company to become one of the major player in the government ID. Therefore, the large tender, onetime revenue will actually be very, very fruitful for us. We are ready for the full operational momentum by later this year and early 2026. As of right now, depending on the cash situation, you can read out in the quarterly report. We are, of course, having a few AR coming in from customers since we are now taking deliveries out of the channel. We have a few irregularities in the China channels, which is actually products that will be sold once again when it's actually taken from one customer to another. So we are only, I would say, very few months away from this Holy Grail that we've been working on very, very thoroughly. Looking forward to this -- the next quarter and of course, the next -- I'm always positive in the outlook of this. I think you can take the next slide, and then we can take Q&A. So I'm -- I mean, of course, we have short-term challenges in the channel. We are entering the second half with confidence and optimism of the actual sales pipe, which is fantastic. As we have said, we have 76 different customers in this area. And with our expanded product portfolio, which means the FAP30 with very large gross margins for us, our growing partner network, the NEXT brand and existing innovations underway, NEXT is well positioned in our sustainable growth going forward. I would like to end there, and we'll go to a Q&A session, please. You can take the next slide.

[Operator Instructions] We can start with the question I received on e-mail, Ulf. So there was this question about, when are you going to deliver the first FAP20 order? But I guess that's already answered in the news release that came out today.

FAP30?