Precise grows despite weak demand for mobile phones

INTERIM REPORT FOR THE PERIOD JANUARY TO SEPTEMBER 2022

THIRD QUARTER

  • Net sales totaled SEK 18.8 (16.9) million.
  • EBITDA totaled SEK –1.8 (1.0) million.
  • The operating profit/loss totaled SEK –7.3 (–3.0) million.
  • Earnings for the period totaled SEK –7.4 (–2.9) million.
  • Earnings per share totaled SEK –0.2 (–0.1).
  • Cash flow from operating activities totaled SEK –7,0 (–2.4) million.

INTERIM PERIOD

  • Net sales totaled SEK 71.7 (55.9) million.
  • EBITDA totaled SEK 3.1 (0.2) million.
  • The operating profit/loss totaled SEK –12.3 (–11.4) million.
  • Earnings for the period totaled SEK –12.9 (–11.0) million.
  • Earnings per share totaled SEK –0.3 (–0.3).
  • Cash flow from operating activities totaled SEK 3.7 (–4.6) million.

SIGNIFICANT EVENTS DURING THE QUARTER

  • Precise decided on a directed share issue of 3,959,639 shares to Egis Technology, and a preferential rights issue of up to 6,599,399 shares and an over-allotment option of a maximum of 2,339,787 shares to Egis Technology.
  • An extraordinary general meeting held on September 5, 2022, decided on the approval of the preferential share issue, authorization for the Board of Directors to decide on the issue of ordinary shares and authorization for the Board of Directors to decide on the issue of ordinary shares and/or convertibles.
  • A total of 2,871,564 ordinary shares were subscribed for in the preferential rights issue, corresponding to approximately 43.5% of the preferential rights issue.
  • Precise announced changes in the management to better reflect the company’s growth strategy in the Digital Identity and Algo business areas. As a result, Fredrik Sjöholm was appointed EVP and CCO of Algo, and Patrick Höijer assumed the role of CCO Digital Identity in addition to the role of CEO of Precise.
  • In accordance with the incentive program adopted by the 2022 AGM, the company’s CEO subscribed for 100,000 options, corresponding to 100% of the total stock options.

SIGNIFICANT EVENTS AFTER THE END OF THE INTERIM PERIOD

  • In connection with the directed new share issue to Egis Technology and the completion of the preferential rights issue, the number of shares and votes in Precise increased by 6,831,203. All members of the Board of Directors and the company’s management group participated in the preferential rights issue in proportion to their holdings.
  • The issues were registered with the Swedish Companies Registration Office on October 4, and Precise received SEK 44 million before issue costs on October 6.

FINANCIAL DATA AND KEY INDICATORS
Amounts in SEK thousands unless otherwise stated

KEY INDICATORS

20222021202220212021Rolling
Amounts in SEK thousands unless otherwise statedQ3Q3Q1 – Q3Q1 – Q3Full-year12 mth
Net sales18,81616,90571,74255,88583,31999,176
Net sales growth, %11.3%-27.1%28.4%-20.0%-9.8%26.5%
EBITDA-1,8299983,1322061,8724,798
Gross margin, %63.2%76.4%73.6%75.7%76.3%74.6%
Operating profit/loss-7,341-2,972-12,252-11,380-14,073-14,945
Operating margin, %-39.0%-17.6%-17.1%-20.4%-16.9%-15.1%
Cash flow from the operating activities-7,028-2,3613,656-4,649-1,4773,530
Cash and cash equivalents41,27855,65841,27855,65864,10241,278

See the Financial Glossary for definitions.

INVITATION TO PRESENTATION OF THE INTERIM REPORT

In connection with today’s interim report, Precise invites investors and the media to an informational conference call.

The conference call starts at 10:00 AM (CET) on November 11, 2022.

Link to webcast:

https://financialhearings.com/event/44151

To take part, click on the link above to listen and follow the presentation online.

Please send any questions to investor@precisebiometrics.com.

The conference call will be held in English.

Participating on behalf of Precise:
Patrick Höijer, CEO
Annika Freij, CFO

CEO COMMENTS

It has been an eventful quarter for Precise. First of all, we continue to grow despite lower demand in the mobile industry. This shows the strength of our new business model, where the recurring revenues in the Digital Identity business area, mainly through the acquisition of EastCoast, combined with the stable trend in license fees in the Algo business area, compensate for the lower royalty revenues. In total, revenues grew by 11.3% to SEK 18.8 (16.9) million, with an EBITDA of SEK -1.8 million (1.0). During the quarter we also carried out a directed new share issue to Egis Technology, which is a major customer to Precise, and a preferential share issue to our existing shareholders. These share issues will contribute a total of approximately SEK 41 million to Precise, which, combined with the extended collaboration with Egis, will support our ability to deliver on our strategy.

The Algo business area
The lower demand for mobile phones in 2022 has meant that mobile phone manufacturers (OEMs) have large inventories of components and phones. They have therefore focused on reducing their inventories by reducing purchases from the module houses, i.e., the subcontractors that supply components to OEMs. Precise’s customers supply fingerprint sensors to the module houses, and they therefore experienced significantly lower volumes during the third quarter, which affected Precise’s royalty revenues. If we look at revenues for Algo as a whole, they totaled SEK 13 (16.6) million, primarily as a consequence of royalty revenues falling by 72% compared with the corresponding period last year, while license fees increased marginally. As soon as mobile phone manufacturers start to reduce their inventories, we expect a gradual recovery and thus an increase in royalty revenues. Exactly when this will happen is difficult to predict, but our best assessment at the moment is that we will see a gradual normalization of inventory levels during the first half of 2023.

In Algo, we have spent many years building up world-leading expertise in the development of algorithms for fingerprint recognition, a technology based on advanced expertise in image analysis. Our solutions are used primarily in phones in the medium to premium segment, as a consequence of our success in delivering more complex software for sensors under the mobile phone’s display, primarily sensors based on optical and ultrasound technology. In recently completed tests of our algorithms, we can see that they are maintaining a world-leading level, especially in terms of biometric performance and latency. This is a proof point for our business, which is also confirmed when I meet customers in markets such as the USA and Asia. During the quarter, we saw our solutions being launched in new mobile phones from Vivo and in smart door locks from Aqara and TP-Link.

Our growth strategy for Algo is clear. We continue to support our partners in order to win business in the mobile segment and support new sensor suppliers. At the same time, we are exploring new verticals and evaluating new types of sensors that can use our algorithms.

The Digital Identity business area
Digital Identity, which focuses on access and visitor management, reported a strong third quarter. Revenues increased to SEK 5.8 (0.3) million, driven by our visitor management solutions within our latest acquisition, EastCoast. The company is seeing increasing demand for our visitor management systems, where the value of the sales pipeline in the first nine months of 2022 increased by 50% compared with the corresponding period last year. We currently have two visitor management solutions, an on-premises solution and a cloud-based solution that generates recurring revenues. In 2022, we have been driving several initiatives to increase sales of the scalable cloud-based solution. This has been fruitful, as the value of the sales pipeline of this solution for the first nine months of 2023 almost doubled compared with the same period last year.

During the quarter, we won new YOUNiQ contracts with Paras Bygg and additional projects with Algeco. We have also won EastCoast contracts with customers including ATEA and Smurfit Kappa.

With YOUNiQ, in recent years we have developed a market-leading solution for biometric physical access through facial recognition. Our product development is now focusing primarily on creating additional scalability and simplicity in the solution. The overall focus for YOUNiQ is to build up strong sales channels by ensuring the right partnerships, both commercially and technically. One step on this journey is that YOUNiQ in September was certified by our US partner Genetec for inclusion in their security platform Genetec Security Center.

I am therefore particularly pleased that we won a contract in the USA with St Lawrence Health Hospital in the state of New York. This involves us providing the hospital and pharmacists with a secure access solution based on facial recognition. The US market is considered to have good potential, given its size and maturity when it comes to knowledge and use of biometric solutions compared with Europe. Going forward, we will focus more sales efforts on the US market to support growth in the business area.

Increased commercial focus and cost control
We are operating in an increasingly uncertain macroeconomic environment. Precise has so far demonstrated resilient revenues despite this, as a consequence of developments in Digital Identity and a stable trend in license fees in both our business areas. But in order to best meet the uncertainty in global demand for mobile phones, we have increased our cost control, and have already taken the initiative during the quarter to reduce our operating costs. This has been done by such means as reducing the number of consultants and optimizing our R&D initiatives. This is in line with our strategy and increased commercial focus.

During the quarter, Precise was reorganized into two distinct business areas, Digital Identity and Algo, in order to further focus on the growth opportunities of our respective business areas. This has created a clearer focus and a forward-thinking approach that makes me comfortable that we will be able to continue to deliver on our strategy.

I have had the opportunity during the fall to meet our customers around the world, and I am pleased to see how much confidence they have in Precise’s technology. The underlying global trend of increased use of biometrics benefits us, and I look forward to continuing to commercialize our position as a leading global supplier of identification software.

Patrick Höijer, CEO