FPC Q2-15 earnings call transcript JL JW - t1.daumcdn.net

FINGERPRINT CARDS Moderator: Jens Reckman

08-20-15/14:00 GMT Confirmation # 15047931

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FINGERPRINT CARDS

Moderator: Jens Reckman August 20, 2015

14:00 GMT

OPERATOR: This is Conference #: 15047931

Thank you for standing by and welcome to the Q2 Report 2015 Conference

Call. At this time, all participants are in a listen-only mode. There will be a

presentation followed by a question-and-answer session. At which time, if

you wish to ask a question, you will need to press star and one on your

telephone keypad, or alternatively you can submit your question by using the

Q&A panel on your screen. I must advise you that this conference is being

recorded today on Thursday, the 20th of August 2015.

I would now like to hand the conference over to your speaker today, Jörgen

Lantto. Please go ahead, sir.

Jörgen Lantto: Thank you. Welcome, everyone, to the Fingerprint Cards second quarter 2015

conference call. Joining today’s call are myself, Jörgen Lantto, I’m the

president and CEO, and Johan Wilsby, who just joined us as chief financial

officer. Also joining us today is Jens Reckman, until recent the CFO, now in

our finance unit.

So let’s go to slide three in the presentation. The revenue in Q2 was SEK445

million, an increase of 218 percent quarter-over-quarter and an increase of 912

percent year-over-year. The adjusted gross profit for Q2 was SEK171 million

compared to SEK21 million the same quarter previous year. The gross profit

was SEK159 million compared to SEK13 million the same quarter previous

year. The operating results for Q2 was SEK65 million compared to minus

SEK45 million the same quarter previous year. The earnings per share was



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SEK1.12 compared to minus SEK0.79 the same quarter previous year. The

order backlog when ending Q2 was SEK1.335 billion compared to SEK63

million at the same day last year, the previous year.

Looking at market development, we see the adoption of touch fingerprint

sensors amongst OEMs, mainly in China but now also broader in Asia,

continuing to grow and now at an increased pace. For the fingerprint sensor

industry in general and for us in particular, a major event during Q2 was

Google’s announcement of the support for fingerprint sensors in the Android

M release during Google I/O in May. Google has now named the M release

Marshmallow or Android 6.0.

We’re happy to have seen more OEMs launched in France with our touch

fingerprint sensors. Huawei launched two smartphones using FPC1025 since

our last quarterly report. Gionee, Meizu, Dazen, ZTE, OnePlus, and ZUK

also announced smartphones with FPC’s touch fingerprint sensors solidifying

our very strong position with leading China OEMs. And today, we are very

pleased to have just announced that Huawei today launched Honor 7i

embedding FPC1145 as a side button in Honor 7i.

Let’s move to the next slide, slide four. The revenue of SEK445 million in

Q2 is higher than the guidance of around SEK390 million we provided on

June 16. The reason why we came out higher than our guidance was due to

the fact that we were able to increase our supply capacity faster than originally

planned during the end of Q2 resulting in higher revenues than expected

during the quarter.

We are also pleased to report the positive operating result of SEK65 million

during Q2 in line with our guidance that the quarter will yield a positive

operating result. We are also pleased to report that cash flow from operating

activities has been SEK49.5 million during the first quarter, which follows the

positive cash flow we reported for Q1 2015.

Let’s move to slide six. So looking at the guidance for Q3 2015, we expect

that revenues will amount to approximately SEK860 million, which would

amount to an increase of more than 1,200 percent year-over-year. When



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entering into Q3, we had an order backlog of SEK1.335 billion. And a major

part of this order backlog is expected to generate revenues during Q3

amounting to SEK860 million in our guidance. The reason why we don’t

expect to generate revenues for the full order backlog is that some of the

orders received during Q2 relate to deliveries taking place in Q4. Having said

this, the significant order backlog is clear indication of a very strong demand

for supply over our touch fingerprint sensors.

Looking at operating result, it’s natural that the increase in revenues will

generate an increased gross profit during the quarter. This leads to an

improved operating margin and an improved operating result during Q3

compared to Q2.

So let’s go to page seven. Here, we can see the revenue guidance for the full

year 2015. Previously, this has been increased twice during 2015 to

approximately SEK2,200 million or SEK2.2 billion. Due to the increase in

revenues in Q3, the large order backlog and that revenue in Q4 is estimated to

grow versus Q3, our updated revenue guidance for 2015 is that revenues will

be approximately SEK2.5 billion, SEK2,500 million.

As for the operating result, we expect to see a positive result for the full year

2015 in line with previous guidance. We also don’t foresee any need for any

additional capital injection to fund the operation.

Let’s go to slide nine for a business update. As mentioned, we are seeing a

surge in interest from smartphone OEMs in integrating touch fingerprint

sensors for launch during 2015. Much of this comes from China where 12

smartphone OEMs, including HTC have launched phones during 2015 with

our touch fingerprint sensors. But there are also smartphone OEMs from

other countries in Asia integrating our touch fingerprint sensors with

smartphones to be launched later.

The Android M release is, as mentioned, highly significant, and we consider

this a major catalyst for further growth in 2016. Android M fingerprint

capabilities were demonstrated by Google using our touch fingerprint sensor,

FPC1025, during the preview of Android M. So this collaboration has been



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very important for us. And I think this is proof point for our technology

leadership.

The payment service, Android Pay, will be an integral part of Android M. It

uses the fingerprint sensor to add security and convenience to mobile

payments, making the fingerprint sensor a key feature Android Pay.

I also want to highlight that we have seen many OEMs in China referring to

the touch fingerprint sensor being an FPC sensor when launching the device to

the public. And even in some cases inviting FPC for the launch event to

present the fingerprint sensor capabilities in the phone. So the FPC brand is

being associated with industry-leading performance and quality. This is a

tremendous acknowledgement to our technology and our R&D team who

continues to impress me in bringing forward outstanding products.

Let’s go to slide 10. Many new phones were launched during the quarter, the

second quarter. And now, we can see sensors integrated on the backside of

the phone with Huawei’s Honor 7 being the example shown here on the left as

well as sensors with a front side home button with Meizu’s MX5 and an HTC

phone being used to exemplify this to the right.

And as mentioned, today we also saw Huawei launching Honor 7 using

FPC1145 integrated as a side button. And I believe this is the first phone in

the industry to integrate a touch fingerprint sensor as a side button. Today,

Huawei, OPPO, Newman, HTC, LeTV, Coolpad, Gionee, Meizu, Dazen,

ZTE, OnePlus, and ZUK have launched smartphones embedding our touch

fingerprint sensors.

We’re also pleased to note that all of our touch fingerprint sensors that have

been launched to date are being integrated into smartphones for subsequent

launch, and that orders have been received for volume deliveries. Our broad

portfolio of sensors with great performances is one of the major reasons why

we are so competitive in the market.

On the product side on page 11, we show four new products, FPC1140 and

FPC1145, and recently FPC1022 and FPC1035. These are our smallest touch

fingerprint sensors to date. These sensors enable an easier integration into the



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smartphone while maintaining industry-leading biometric performance.

Today, as mentioned, Huawei launched Honor 7i integrating FPC1145. This

shows the readiness of our sensors since we announced this new sensor as late

as in January this year.

So, in summary, I believe we have reasons to be pleased with the performance

of FPC during Q2. And I believe we have an exciting period ahead. Thank

you.

With this, I hand over to our new Chief Financial Officer, Johan Wilsby,

whom I really pleased to introduce to you and to welcome to FPC. Johan will

take you through the financials for the second quarter. Johan, please.

Johan Wilsby: Thank you, Jörgen. I’m delighted to join the company in this exciting growth

phase. And I will lead you through a summary of our Q2 financials this

afternoon. Let me start to give you an overview of our Q2 performance and

current trends in slide 13.

In the top left corner, we first see the revenue development for the past five

quarters where our Q2 revenue SEK445 million and a growth of more than

900 percent is a clear proof of the growth in this market as well as the

competitiveness of FPC. Q2 meant an all time high revenue and our supply

organization has worked hard to provide enough delivery capacity in this

extreme growth environment.

Below the revenue graph, you can see our order backlog trend at the end of

recent quarters. We follow up the strong Q1 with an even stronger Q2 from

an order intake perspective. Our order backlog at the end of Q2 was an

impressive 1.3 billion. And this provides us a solid base for continued

material growth in second half of this year.

In the upper right-hand corner, the chart shows the adjusted gross margin.

This key financial indicator shows the decline year-over-year from 47 percent

to 38 percent. However, sequentially, we’re up from Q1 2015, which had an

adjusted gross margin of 36 percent. The product mix in each quarter is the

key driver of the adjusted gross margin. And with increased volumes and new



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competitive sensors, we see potential to improve our gross margin. One key

aspect in it is how we design our product efficiently from a cost perspective.

The last chart on this slide summarizes our P&L performance showing the

development of earnings per share. Q2 is the first quarter in recent years

where we can present a positive operating profit. This is, of course, mainly

driven from our material growth in our revenues, but gross margin

improvement just mentioned contributes as well.

Next slide, please. Continuing with slide 14, a few words about our expansion

and our cash position. Our net cash in Q2 ended up with a solid positive

SEK45 million and showed a continuation of the positive performance from

Q1 2015. Key drivers had been increasing revenues and the cash improving

measures taken earlier this year.

The chart at the bottom of the slide illustrates the development of our net cash

position and as Jörgen pointed out, we see no need for further capital

injections into the company.

In the upper table, you can see a steady growth in the organization. And at the

end of Q2, we almost had 200 people in the company. With a current revenue

growth and future opportunities we see, we will continue to add talent into

many of our teams in the next quarters. So a lot of focus is put on ramping up

and developing the organization.

Next slide, please. Continuing with slide 16, the income statement, with the

revenue increase of more than 900 percent compared to Q2 of 2014, even

sequentially with the material growth of more than 200 percent from Q1 2015,

I mentioned cost of goods sold and our adjusted margin situation in my first

slide, but here you see the total gross margin and the improvement here is

even better, up 17 points from Q2 and nine points from Q1 2015. The reason

for this is that we have less amortization and impairment of capitalized R&D

in Q2.

Our gross profit in absolute terms is now becoming a material and giving us

the foundation to fund our future opportunities and innovation within our own

P&L. Looking at our operating expenses, we clearly see the effect of a



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growing organization, which is needed to manage all growth opportunities we

see. On top of the headcount growth, we also need to invest in tools and

infrastructure as well as business development activities, which have

contributed to non-recurring cost in the quarter.

One important cost driver in the quarter is the development of the U.S. dollar.

In Q2, we had a negative effect of almost SEK9 million in other operating

expenses coming from revaluation of the balance sheet items while the same

number was a positive SEK13 million in Q1. As we mentioned in Q1, we’re

also capitalizing less of R&D expenses to the balance sheet, and hence this is

driving our expenses in a different way this year.

If we look at our expenses in relation to our revenues, we can see a clear trend

downwards even sequentially from Q1. Our operating margin for the second

quarter was 15 percent, which we’re pleased to report.

Next slide, please. Finally, the last slide shows the cash flow for Q2 2015

compared to 2014 and also the full year. We had as already mentioned

experienced net positive change in cash flow during the second quarter mainly

driven from our operating profit. Our working capital is obviously affected by

the strong revenue growth with materially higher accounts receivable at the

end of the period. All in all, I believe we’re managing our working capital

well in the circumstances growing with a modest SEK25 million in Q2.

Investment activities have clearly decreased including lower capitalization of

R&D expenses. As mentioned before, we added SEK45 million in Q2 to our

net cash position, which is now at SEK166 million.

With this, I turn it back to you, Jörgen.

Jörgen Lantto: Thank you. And I think now, we can enter into the Q&A session. Thank you,

Johan.

Operator: Thank you. As a reminder, if you wish to ask a question, please press star and

one on your telephone keypad, and wait for your name to be taken by an

operator.



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We would like to finish this conference at 4 p.m. CET. If we’re unable to

answer all the questions today, please email your questions to us.

We have one question in the line. We will just take the name.

Male: Any questions?

Jörgen Lantto: So any questions?

Operator: We have two questions on the line. My colleague is just taking the names.

Your first question comes from the line from Per Lindberg. Please ask your

question.

(Per Lindberg): Good afternoon. Thanks for the presentation and the solid report of this

morning. I have a few questions of separate nature, if we could start with the

nature of the industry per se. I assume -- correct me if I’m wrong -- that you

are now heading towards total volumes of shipments in mobile devices in the

region of 100 million units for calendar 2015. And judging from that and

your upwardly revised sales estimation, one can construe that your average

selling price mobile devices only hovers around $3 for calendar 2015. That’s

my first question. Perhaps, we should start that. If you could shed some light

on that.

Jörgen Lantto: Thank you, Per. So, we don’t comment on the volume predictions that we

have for the year. However, when it comes to our average price for the year,

that will depend on the product mix overall. And previously, we have stated

that we anticipate this to be somewhere in the region of $3 to $4. Whether it is

on the lower side closer to $3 or on the upper side between $3.50 and $4, I

think that will depend on the volume mix. I would anticipate more closer to

$3. But I don’t have any exact figure.

(Per Lindberg): Thank you. And related to that, too, if this is approximately correct as a crude

estimation, who are the other suppliers involved in the, say, 150 million unit

balance? If we say that the market outsiders, Apple communities 260 million

units, and you represent some hundred million thereof, who are the other



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contenders, i.e., those representing some approximately 160 million units?

And how do they perform vis-à-vis you in the marketplace?

Jörgen Lantto: Yes. So I don’t know if you refer to the fingerprint sensors suppliers or the

OEMs, but I think if we start with the OEM side and in the smartphone

market, Samsung is the leader in volume and then we have Apple. And, of

course, Apple is outside of our addressable market. So, Samsung is still

shipping significant volumes. And so far, they have used – or they have

launched phones with one of our competitors embedding touch fingerprint

sensors in a number of devices. So –– that is, of course, a significant part of

this market. And they are also still selling, in our understanding, significant

volumes of phones with swipe fingerprint sensors that build up for the

penetration of fingerprint sensors into smartphones.

(Per Lindberg): Yes. So you do not anticipate or experience any change in the competitive

landscape even though we understand that a number of players from Norway,

China, Taiwan, and the not at least San Diego and elsewhere are mounting

efforts into this domain.

Jörgen Lantto: So if you look at this year, – it’s pretty much two suppliers that command the

absolute majority of the volumes. Then we have some Asian companies that

are entering into the market. And some of them have started to ship volumes

as well. But on an overall basis this year, it’s really quite marginal relative to

the two major suppliers that command most of the market. And probably, they

can start to take in some share next year as well, but this year two players

command most of the market.

(Per Lindberg): Thank you. That’s very clarifying. Can I then turn to the gross margin in

relation, A, to your, I think, your informal targets of the mid 40s or so? Your

gross margin on a purely (cost) basis reached to 36 percent in the second

quarter even though I understand you had a relatively fresh and price

commanding product portfolio.

Where does the cost go? I mean if we say that you currently enjoy a third of

the revenue that your customers, presumably mainly module partners pay for

your gear, who picks up the balance, i.e., the 2/3 or nearly of the total revenue



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accruals? Are these the ASIC providers or software partners, et cetera?

Could you elaborate a bit on that metric?

Jörgen Lantto: I see, OK, yes. An absolutely dominant part of our cost of good sold is the

manufacturing cost for the ASIC – in case when we just sell silicon wafers to

module houses, and they do the packaging. And in some cases, we also

provide our own packaging. In that case there is also assembly and test cost

that is part of our cost of goods sold. Then we have some royalties that we

provide to third party IP companies as well. But that is a very small part of

our cost of goods sold.

(Per Lindberg): Yes. Thank you. And could you also spend some time on the gross margin

outlook provided that you have ecosystems and similar customer-based

module partners, vis-à-vis OEMs, et cetera? Do you still envisage the mid 40s

at the state level which could be sustained?

Jörgen Lantto: No. I think what we have discussed previously are adjusted gross margin.

(Per Lindberg): Yes, yes, true.

Jörgen Lantto: We have talked about that we typically, over time, over a longer period of

time, in average, have the ambition of having some 40 percent to 45 percent

GM, in that range. And so, that’s the target in a steady state situation. It will

fluctuate quarter-over-quarter dependent on the product mix. And as I stated

before we see that at as the gross profit start to become this high, the gross

margin and the adjusted gross margin start to converge. So there is over time

a very small difference between the gross margin and the adjusted gross

margin.

(Per Lindberg): Yes. Thank you. And if you were to compare the second half product

portfolio and the pricing powers that may emanate from that compared with

the first six months of this year, how would that manifest itself in the gross

margin? Do you believe that the level seen in the second quarter is a low bar

for you in Q3 and Q4? Or is it representative or anything different?



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Jörgen Lantto: Well, we don’t want to give any guidance on the gross margin for second half.

It really depends on the product mix. There is opportunity to improve it

further. But, I don’t want to give any statements beyond that.

(Per Lindberg): And volume discounts, isn’t that – I mean, from my experience, that is an

almost inescapable feature of all forms of contracts, not least the consumer

electronics industry. As you now move, say, 5x or at least 4x higher in the

second half compared with the first half, doesn’t that manifest itself in the

price concessions related to the volumes of purchase of your customers?

Jörgen Lantto: Yes, of course. When we have customers, sometimes, we work with long-term

commitments, and that is projected in the pricing that we really have already

agreed with the customers. And with the large order backlog that you see

when entering into Q3, the SEK1.3 billion, that is, of course, already

including the prices that have been agreed upon. And so, I think it’s a rather

stable outlook that we have. We have to wait until we report the third quarter

to see the eventual gross margin and what the outcome will be.

(Per Lindberg): Thank you, Jörgen. That’s quite elucidating. My final question – I’m sorry

for the time I spent. But my final question is actually related to the financials

and specifically the stock option program, the 4.82 million stock options,

which can be converted into shares as I understand from the 6th of September,

i.e., in the third quarter.

How will this be accounted for? I presume this is a question more for the

financial director. Are we going to treat this cost as part of comprehensive

income? Or will anything related there to manifest itself over the profit and

loss account? And related there, too, also, how will the stock options now

worth approximately SEK1.3 billions at prevailing share prices – how will

these stock options be settled? Will they be settled in cash, in part, or in hold,

i.e., the company paying cash to settle the stock options? Or will they lead to

the issuance of new shares? Thank you.

Jens Reckman: Jens Reckman here. The 4.8 million stock options will be – they will be cash

added. Approximately about SEK10 per stock option.

(Per Lindberg): Yes. And they will then be converted into new shares …



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Jens Reckman: Yes.

(Per Lindberg): … which you will hand over to the recipients.

Jens Reckman: Yes.

(Per Lindberg): Are there any lockups associated with these transactions or with these extra

fare distributions?

Jörgen Lantto: Well, we have no comments about that.

(Per Lindberg): And how will you treat the costs? Are there going to be any costs? Or will

there just be an adjustment to comprehensive income statements, i.e., nothing

seen in the income statement in Q3 and beyond?

Jens Reckman: The costs related to this transaction are just administrative expenses to process

the transaction.

(Per Lindberg): OK. So we won’t see any effect of this in Q3 from an income statement

perspective then.

Jörgen Lantto: No.

(Per Lindberg): OK. Thank you very much. I’m sorry for the time. Thank you again for your

answers. Thank you.

Jörgen Lantto: Thank you. So we can take the next question please?

Operator: Thank you. Your next question comes from the line from (Johan Broström).

Please ask your question.

(Johan Broström): Thank you. (Johan Broström). Congratulations to a great report. I have a

couple of question if I may. The first one is related to, well, market

positioning. You mentioned that you have virtually one large competitor

outside Apple. And you’re competing with them for this year’s market as

well.



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Could you describe a bit about the background why this is the situation

because we have seen a number of new players in China, Taiwan, and so forth

entering the market with new product concepts and so on. Is it because you

and your biggest competitor have such a competitive pricing that it’s difficult

for new players turn to the market? Or is it that you have developed product

ranges that are difficult to compete with? Could you give us a bit of flavor on

this?

Jörgen Lantto: Yes. Thank you, (Johan). And so, I think it’s fair to say that our big U.S.

competitor and ourselves, we have been developing fingerprint sensors for

more than 10 years now. So I think we have quite some experience built in to

our products. And they have been successful in penetrating a major account.

So they have a substantial business there.

In our case, I think we believe we have the best fingerprint sensor technology

in the industry that has been developed over the course of the last 10-15 years.

And it’s now manifesting itself in its performance. And so, I think we win

today’s business on the merit of the technology and the product quality

overall.

And that I think that is where competition has quite an effort to overcome

because fingerprint sensors, they are quite visible in terms of its performance

towards the consumer. The sensors recognize your finger each and every time

you touch the fingerprint sensor or not. So I think there is quite a high barrier

to entry for competitors to be able to successfully take meaningful share. And

I think we have established a very, very high performance for our sensors.

And competitors that would like to take meaningful share, they would have to

meet the same performance levels that we do. Meanwhile, of course, we are

improving the performance of our solutions even further.

(Johan Broström): Do you see that as a – is that a competitive factor today? Is it performance?

Or is – could I – could you go to market with a so-so fingerprint sensor if your

price was low enough?

Jörgen Lantto: It’s a big market so this is an interesting aspect overall in the market we serve.

Smartphones is a very high volume market with a, maybe this year, 1.5 billion



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devices being sold. So there is probably room for many different type of

flavors. But if you look at the more premium brands, top 10- 20 mobile

OEMs, I don’t think they’ll settle for second-hand quality. So they would

really like give a great user experience. And the fingerprint sensor is a key

ingredient in many OEM’s phone launches.

(Johan Broström): OK. And follow-up on the discussion of gross margins from before. Could

you perhaps give us some indication on what the specific steps you will take

or what the drivers are to increase the gross margin by a couple of percentage

points to meet the 40 percent to 45 percent range long term?

Jörgen Lantto: Yes. So, basically, as stated previously, when we reduce the size of the

fingerprint sensors, then the manufacturing cost is reduced correspondingly.

And as we penetrate the channel with more of the newer and smaller touch

fingerprint sensors, then the opportunity is there to improve the gross margin

as well. So the ratio at which this happens really depends on the mix.

(Johan Broström): All right. So it’s fair to say that the newer the product you sell, the higher the

gross margin.

Jörgen Lantto: That’s the case today, yes. And then of course, competition might change that

going forward. But, today, that’s the case.

(Johan Broström): OK. I read the – well, almost at – between the lines. But you say it’s pretty

much straightforward in the report, I mean your presentation, that one of the

key drivers for great results in second quarter was that you were able to

produce more sensors than you had perhaps anticipated and be able to, what,

sell them. Is this a potential bottleneck for the rest of the year? How large is

the risk that you will have troubles with producing enough sensors going

forward?

Jörgen Lantto: Ramping up our supply capacity is naturally quite a major undertaking given

the steep increase in volumes that we are delivering to the markets here. So

it’s not something that is happening by itself. So during second quarter – and

actually, for the full year, we have taken major measures to improve our

supply capacity.



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We have qualified many of our products in multiple manufacturing sites with

our foundry. Today – some of our products are being manufactured at – 4

manufacturing sites corresponding to 2 when we started the year. And we

have worked across the supply chain with all sorts to measures to secure

ramping the capacity that we need to manage in order to meet the demand

from the customers. And that is a daily task that we are working on. And so

far, I think we have managed to do that well and then improve over time.

That’s one of the major reasons why we are increasing our guidance. As the

demand is increasing, our ability to meet the demand is increasing in parallel.

That leads to higher growth potential and higher revenues.

(Johan Broström): Are there any other bottlenecks that everyone could see? I see that you have

ramped up your personnel including consultants to accelerate during the

second quarter compared to the first quarter. Do you feel that you’re

sufficiently invested in R&D resources and administration in selling

resources? Or do you expect that this will be a challenge going forward to get

enough personnel?

Jörgen Lantto: So last year, we grow the organization with 100 percent. And as I have stated

previously, last year we dimensioned the business, our operation to the

anticipated size of the business this year. That’s why we didn’t grow the

organization much during the first quarter.

However, as you know, we have then seen a much faster growth than we

originally anticipated. And we have increased our guidance in terms of

revenues a couple of times. So as a result of that, we have now increased the

pace at which to grow the organization. So you will see more growth in

headcount as we continue. Across the board, we are strengthening each part of

the organization to make sure that we can satisfy the demand from the market.

(Johan Broström): OK. Finally and last question related to finances and most specifically cash

flow, yes, the positive cash flow for the quarter. And I can see that or my

theory is that one of the reasons is that you managed to deliver a large, many

products towards the end of the quarter. And I see that for instance, the

inventory is more or less on the same level today as it was back by the end of

the year, end of last year. Could you perhaps tell us at least about the – how



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much the known cash working capital might swing quarter-to-quarter, yes, to

prepare me for whether to expect a continuous positive cash flow every

quarter going forward or perhaps more probable that it will be both positive

and negative depending a bit on the (inaudible)?

Jörgen Lantto: I can start and then Johan can complement. Generally, the way we operate

now is as a result of our increased revenues with the terms that we have with

both suppliers and customers, we grow our cash when we grow the revenues

as well. So –with today’s setup, we have the possibility to continue to

generate a positive cash flow while increasing our revenues that’s built into

the business model, both with suppliers and with customers.

Johan, you want to complement that further?

Johan Wilsby: No, not really. I mean we don’t foresee any large increases in our working

capital as Jörgen concluded.

(Johan Broström): OK. Well, thank you very much for your answers to my questions, and once

again congratulations to a great report.

Jörgen Lantto: Thank you, Johan. Then we can go to the next question, please.

Johan Wilsby: Yes. So we will start now with the questions that have been submitted over

the web. The first one is so what are you doing to develop under glass touch

sensors. When do you expect the product that contains this?

Jörgen Lantto: So under the glass sensor is something that many are talking about in the

industry. And we are also very active in that space. We will disclose more our

product plans when we have products to announce and more details to share.

So you have to bear with us until we are ready to disclose what we are doing

there.

Johan Wilsby: Next question. Besides the mobile market, what other markets do you see as

taking in fingerprint sensors that will be added to the order backlog later, that

is?



Page 17

Jörgen Lantto: What we have previously communicated on many occasions is various type of

smart cards is a market opportunity that is going to be quite substantial in the

coming period when then we start to penetrate the fingerprint sensors into

credit cards and those type of solutions. That is now in its early deployment

phase. There are ongoing trials during this year, and we will probably start to

see the first small commercial efforts under developments by end of this year.

So maybe, next year, that will start to become a meaningful market. But we

don’t have any more details to share today when it comes to the share of that

market opportunity relative to the smartphones.

Johan Wilsby: There are many questions around the bank verticals. So you know I will refer

to that question and Jörgen’s answer around that.

Here’s another one. How about the PC market? Are you in there? Or are

they’re focused in the mobile market?

Jörgen Lantto: Yes. As previously stated, in the PC market, there are longer development

cycles. And we have also made product decisions in terms of our sensors.

That means that there is more development to be done between ourselves and

some of the platform suppliers for us to have a meaningful offering in this

space.

That is on the way. So we have high ambitions when it comes to entering into

that market as well. But development efforts or cycles longer, and it takes

longer time to penetrate into that market. So it will happen. But it happens

later than the smartphone penetration.

Johan Wilsby: OK. What are you doing to increase the gross margin profitability on

produced products in Q3 and Q4? What is your benchmark on gross

profitability for the end of 2015?

Jörgen Lantto: When we look at this, there are very few competitors out there. We think then

we have a competitive gross margin. And as we report our earnings today, we

are basically on par with competition on that. And we have ambitions to

improve further from here. We have to follow up on that as we report the

result later on. So bear with us for that development.



Page 18

Johan Wilsby: Next question. There’s a couple of questions around 2016, if we have any

comments or guidance, forecast for 2016.

Jörgen Lantto: Well, we can talk about the market growth overall. And as previously stated

we see that in 2015, the penetration of fingerprint sensors in our estimation

will be approximately 30 percent. That is including Apple as well. So 30

percent of the global, about 1.5 billion smartphone devices will embed

fingerprint sensors, both swipe and touch, and including Apple.

And then in 2016, our previous estimate, we don’t have any reason to change

this. That is that it will increase to 50 percent of the market. And as we look at

the growth from 30 percent to 50 percent, it is estimated to more come from

other players than Apple and Samsung because Apple already have virtually a

full penetration of their portfolio with fingerprint sensors. And Samsung

taking a large share of that market has already had fingerprint sensors in their

portfolio already from 2014. So they are already well penetrated. Naturally,

that leads to major growth that we anticipate to come from the other market

outside of Apple and Samsung, where we anticipate to hold a very strong

position as we enter in to 2016.

Today, we are not ready to share any targets for 2016 in terms of our market

share and under the overall market. But we think we have a good position to

take a strong share of the market growth in 2016 as well. And so, there is an

opportunity for continued growth in 2016 as well relative to 2015 for us.

Johan Wilsby: OK. Next one. Could you also say something about the FIDO Alliance and

your participation there? Is it a meaningful goal for FPC to be at the board

level member? And what advantages would it bring?

Jörgen Lantto: So – and today, I don’t remember exactly what the name of our membership

status is, if it’s associate or – I don’t remember. But the participation in the

board is not highly important matter. What is more important is what we are

doing. And together, with partners and the OEMs, in order to qualify our

sensors to be FIDO compliant, that is very often being done together with the

OEM. Actually, if we go back to even 2013, we announced a cooperation with



Page 19

Nok Nok Labs, who is a key company in the FIDO ecosystem. That

cooperation has continued since then.

And so, as you see a wider penetration of our fingerprint sensors into OEMs,

mainly outside of China because in China many of the services are embedded

with them in more proprietary solutions. So, as you start to see fingerprint

sensors embedded in OEMs with brands that are more visible from a global

market perspective, then you can anticipate to see more FIDO-related

capabilities in those devices.

Johan Wilsby: OK. Next question. Are you working on the relevant or your own algorithm

for your sensors instead of buying from Precise Biometrics? Is your goal to

become independent with sensor and algorithm in the future or just

development sensor the company’s goal?

Jörgen Lantto: So, generally speaking, we have a highly ambitious algorithm development

including highly capable organization as well. And we are developing a

complete algorithm asset. As part of that, we license IP from Precise

Biometrics, sometimes from other algorithm related IP companies as well.

But in the smartphone business that we are in now, Precise Biometrics is

embedded into the touch fingerprint sensor shipments that we have today.

And so that is the case today. When it comes to the situation in the future, that

would be announced later on. So I don’t have any comment as to the case for

the future.

Johan Wilsby: OK. Next question. There are so far few mobiles with fingerprint or FPC

sensors sold in and positioned for the U.S. market. Are there any uncertainties

related to FPC’s patents?

Jörgen Lantto: I have been asked this question many times, and the answer is no. We have no

constraints to operate in any market in the world. So you can anticipate to see

phones with our fingerprint sensors in any market in the world. That’s the

answer to that question.

Johan Wilsby: OK. Next one. What is your share of wallet in the OEMs you are involved

with? Are you the only supplier of fingerprint sensors to say at Huawei, for

example? Would you expect it to remain that way?



Page 20

Jörgen Lantto: I’m not going to comment on particular OEMs. You mentioned Huawei, for

instance, we have launched I think four devices to date with fingerprint

sensors in Huawei devices including two in the summer this year with

FPC1025. And today with FPC1145, we launched the most recent Huawei

phone.

So I think we have a very, very strong position with Huawei to date. I’m not

going to comment on their behalf to the extent that that will be the case

forever. But I think to date, we have established a very strong position.

Generally speaking, we have to assume that there would be competition going

forward with any account. But our new sensors provide even higher

performance and better solutions, and this makes it very hard for competition

to enter into our customer base.

Johan Wilsby: OK. There’s a couple of financial questions on the web. Do you have any

deferred tax assets? And how much can you utilize? Yes, we have as we have

said in our annual report from 2014. And it’s around SEK400 million.

Next question is please explain the drop in other liabilities quarter-over-

quarter. As we mentioned in Q1, we had prepayments from our vendors that

had now gone away in Q2. So that explains the drop in other liabilities.

And there’s third financial-related question. Apart for the FX effect in OPEX

that I mentioned in the presentation, how much of this was nonrecurring? I

can say it’s around a handful of millions Swedish that is nonrecurring in the

Q2 financials.

Let me now see if there’s any remaining questions on the web. I don’t believe

so. Let me check here again. To my knowledge, there is no remaining

questions to be answered now.

Operator, anyone from the phone line?

Operator: We have no further questions on the phone lines.



Page 21

Jörgen Lantto: So with that, I would like to thank everyone for joining today’s call. And as

mentioned before, we are really pleased to report a positive result for the

second quarter. And as guided previously, we have a very exciting period

ahead. We see more growth in the coming quarters.

So thanks very much for your participation, and we look forward to having

you at the next quarterly earnings call as we close the third quarter. Thank

you very much and bye for now.

Operator: That does conclude our conference for today. Thank you all for participating.

You may now disconnect. Speakers, please stay on the line.

END

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FPC Q2-15 earnings call transcript JL JW - t1.daumcdn.net