Q2 2023 IDEX Biometrics ASA Earnings Call
<unk> metrics and really appreciate everybody joining for this call for the quarterly results.
It's important to recognize the normal disclaimers here that this presentation does contain some forward looking statements.
And we will just take a moment to pause on that so people can take a look and acknowledge and then <unk>.
Dive right in now to the quarterly highlights.
We now have 18 banks coming to market with biometric Smartcards based on IDEXX biomarker biometric, there's a new market entry with a bank in Azerbaijan This quarter and.
And we did also get a large order of $1 million U S from a large European car manufacturer for <unk>.
Serving banks in Bangladesh, India, and Eastern Europe , and this was the first and largest order so far for the IDEXX biometrics total solution. The IDEXX pay and we will talk more about that later.
Again also on IDEXX pay we were informed this quarter that we have successfully passed all of the mastercard's technical testing for certification of this full solution.
We did hope to by now have our full certification announced.
But we are still in the administrative process on finalizing that there are some details that need to be finalized by <unk> before the full certification certificate is issued but I can assure everybody in the meantime that the all technical testing has passed and Thats, a very exciting milestone for us and this is what enabled.
Our first customer to have the confidence to go ahead and start placing orders with us.
On the digital authentication front we've.
We've made continued progress there. This is a market that just continues to grow globally.
The cyber security and therefore digital authentication is becoming a larger and larger issue.
So we have new market entries coming to market with.
IDEXX biometric based cards that are used for digital Arctic vacation. This includes our thin trend in Taiwan.
CFS in Malaysia.
<unk> biometrics in Europe .
We also joined the Fido Alliance for.
Security and access control and that's another big milestone for IDEXX and our partner century has now also launched a biometric cold storage crypto wallet product that also is in very heavy demand and getting a lot of interest in the marketplace. So that the overall market continues to grow as well.
And then on the car manufacturer side, we just continue globally to add customers and partners and the card manufacturing base.
For IDEXX, our IDEXX pay total solution.
We are winning hands down with every card manufacturer that takes a sample card and does some testing and evaluation. The latest announcement was gold pack in Hong Kong. This gold pack card will be used.
Four.
Banks and issuers outside of China, We have traditionally worked in the past with gold pack for a local card in the Chinese market that was approved by China Union pay this new design win is for our full IDEXX pay solution that will be used to outside of China on the other major payment networks. So this is another.
<unk> deal with one of the world's largest card manufacturing partners were very happy to have that design win.
Beautiful card Corporation in Taiwan is now also committed to using the IDEXX painful solution and they have started to manufacture cards and get the system rolling on their side to be able to rollout in volume.
And then also in Europe teams card a large car manufacturer in the U K has committed that project to IDEXX biometric based.
Card as well as self in Europe , and another major car manufacturer in the Middle East.
Who prefers at this time to remain anonymous but this is one of the larger car manufacturers globally and are focused in this particular case on the middle East.
So overall good progress in the quarter.
So, let's now move on to the financial summary for the second quarter and the first half of 2023.
Once again, we have had a record revenue quarter with nearly $1 5 million in revenues, so revenues were up quarter over quarter and year on year end.
We're very happy to see the revenues continue to grow and this reflects growth in the payment space as well so payment as a percentage of our total revenues also went up.
Gross margins in the second quarter were.
22% compared to 26% in the first quarter.
I should note, though that our gross margins were impacted by some inventory adjustments that we needed to record in the quarter and if not for these inventory adjustments gross margins would have been about the same as in Q1.
These margins largely reflect.
Customers that we signed on in our very early days when we were selling primarily the biometric sensor component and we expect these margins to increase over time as the percentage of shipments begins to shift towards the <unk> XP total solution and we will talk more about that later.
Operating expenses were decreased during the quarter.
Down to seven 3 million, but I think it's more important to note that during this quarter. We took further actions to substantially reduce our operating expenses now that we're at the stage, where the IDEXX pay total solution.
Is complete and has gone through all the certification testing, we're able to continue to streamline our operations focusing more on our commercialization and less on R&D and Thats just going to be the right balance for the company go in future as we switched out of.
The mode of being are nearly pure R&D company to being a balanced R&D and commercial company going forward.
So we took several actions during this quarter and reduced overall operating expenses by 30% when compared to Opex in the first quarter and we have a long term target here of that 30% should get us down to around $5 million per quarter.
A lot of those actions will be in full effect by the fourth quarter, we will see some impact in the third quarter, but the overall impact will be in full effect by the fourth quarter of this year.
In terms of the commercial update.
So we now have a total of 19 card manufacturers coming to market with IDEXX based solutions.
Every quarter. This number just continues to grow.
Also important to note that these 19 card manufacturers.
Now can address a total of $1 4 billion in terms of total volumes of cards. So obviously, we're not going to have that kind of a volume overnight, but as I've said in prior.
Presentations, even a small percentage of the card volume from each one of these car manufacturers will make <unk> a very successful company and it's also important to note that all of these carmakers make a fairly substantial investment to bring biometric smartcards to market so even though.
The banks continue to rollout more slowly than analysts had originally predicted obviously these card manufacturers see the market coming and they are investing now to be ready for the rollouts.
And when we talk about banks and Rollouts. We are now up to 18 banks that are launching.
Biometric smartcards with IDEXX biometric technology onboard and these banks are global and we're seeing other banks globally coming in other regions as well but.
Just with these banks alone, there's 50 million cardholders that can be addressed.
$780 million total payment cards in circulation across all of these markets that we're targeting globally. So as we've said in the past it's a large market.
I think we all would love it if the banks would move more quickly but from our experience what's happening right. Now is the banks are really doing their due diligence, making sure. They have all the pieces in place to have a successful rollout so when they rollout to their broader customer base.
It's a successful product and a good user experience.
And again, we just continue to see momentum building.
We're working in the market development phase within some of the other regions here.
In India.
And in Brazil in other regions in the globe that are preparing and we expect to have bank announcements from some of these other regions in the quarters to come.
On the digital authentication side, we now have nine partners, who are launching products for digital authentication based on Idaho, IDEXX biometric solutions and we're seeing growing momentum for people that want to use this biometric card as part of their digital authenticate.
<unk> and cyber security suite.
One of the big advantages of the biometric card is.
Personal data privacy with the biometric card as a reminder.
Sure your biometric fingerprint is encrypted and stored only on the card so we never need to worry about.
The next data breach, but it gives you.
Dramatic security improvement over standard access control or access card today, because only the user of the card will have the card and be able to match the biometrics and we're seeing this as a global trend.
Any one particular region, but globally the cyber security trend for digital authentication is just a just a very large market.
Overall, this will be over $100 billion in the years to come.
So as I mentioned earlier were.
Accelerating globally, and we're targeting specific markets, we have a very detailed plan for market approach in how we open up new markets I'll talk I'll talk about that again in just a few minutes here, but again, India is a target market for US. We've mentioned this in the past there were $1 billion payment cards and <unk>.
<unk> is still growing in India at 19%.
AGR growth rate, there are 5 million merchant terminals in India, and a 60% market share in India for <unk>, which is the local.
Card payment network in India.
We're working very closely with both Mastercard visa and the local payment scheme with rupee rupee.
And most of the cards are dual interface. These days in India, which all the Pos terminals need to support which means we have built in support for Smartcards with biometric from IDEXX biometric. So again, a large target market and we will continue to work on this there's also a government.
Initiative to have a <unk>.
Digital inclusion across the country and what do you think about some of these larger population areas.
Smartphone penetration is not as large as it is here in the west so the biometric smartcard, even though it's more expensive than a standard payment card is a much lower cost.
Hey to bring people into the to the digital world. So governments like the government in India have initiatives in place to make that happen in Turkey.
This is the largest payment card market in Europe in those who have listened to our presentation before are aware that we've had a focus there now for about 18 months and we've learned a lot in that market that we're now able to apply to different regions as well. So we continue.
Ramp things up in Turkey, we're signing up more and more banks and those will be supported by our local card manufacturing partner E card.
And then we look at other areas like Bangladesh, where.
There is 33 million cards in circulation again cards are still growing.
In large numbers and Theres nearly 5 million merchant terminals.
Percentage of contactless penetration and growing so the volume in a country like Bangladesh could grow dramatically. So again, we're focus across the globe and we will continue to use our method to open up market by market and region by region, signing on banks and card manufacturers low.
<unk> to grow the business in the future.
And speaking about our go to market strategy we.
We did come up with this go to market approach and we perfected when.
When we tried to open up the market in Turkey. So our first step when we enter any new region is to do a market assessment understand the consumer demand.
And try to help create demand in the consumer base.
Then we also make the business case for the biometric smartcards. So that we can educate the.
Card manufacturers locally the banks and issuers and then we also work with the local government agencies to make sure we get all the regulatory approvals so that biometric smartcards can come to market.
Then we work closely with our ecosystem partners.
In many cases, the large payment networks work together with us to help open up a market.
We work with local manufacturers of smart cards. So that we can get biometric smartcard manufacturing set up locally and then we work to make sure we understand total solution readiness and what it takes for the local banks and issuers to successfully rollout pilots and then do volume Rollouts in these local mark.
That's that we worked together with the banks and Fintech to educate them on the key segments, where the rollout first understand how they can.
Tell their customers, what's the value prop and make sure their marketing and go to market plans are in place and then as I said earlier, we also help them put everything in place to do pilots and then launches and rollout the program successfully and ultimately then the goal is to get these cards in the hands of consumers at the end.
And there we work on the full solution, including a variety of enrollment solutions.
Now today, you can from IDEXX enrol, either via the Standalone sleeve or enroll on a smartphone.
And in the future, we intend to have a role at the pls or enroll as you pay as an enrollment option as well in the very near future.
Our go to market approach has been working and we worked very well on this in Turkey. We've taken the same approach to other regions globally and fine tuned it and we're seeing great success, there as well and we hope to be able to announce banks and all of these other regions very shortly.
And then in terms of the regulatory landscape.
It is really a tailwind for us we are getting a little bit of help from regulatory and industrial trends.
To help rollout the biometric smartcards globally.
So if you look at major market trends fraud, and hacking and identity theft is an increased concern globally.
And consumers are very much worried about data privacy. This is this is a big advantage for the biometric smartcard because all of your personal information never leaves the card and the card is never connected to the Internet.
Guaranteed from day, one that our biometric smartcard is GDP are compliant.
That's quite a feature and theres not many other forms of data security that have that feature built in is just inherent part of the technology and then digital exclusion is a growing issue with our.
Global World that we live in today everything is being done more and more digitally.
Most of the younger generation do everything digitally the analog world they've never even been introduced but in parts of the world where smartphone penetration is low access to computers and the internet may be low.
Many people are getting left behind in an all digital world and as I mentioned earlier. This biometric smartcard is a very low cost way to enable people to authenticate themselves to make payments and be included in a digital world. So we.
I believe that we're going to continue to see this trend be a benefit for the biometric smartcard.
Then the regulatory environment as I mentioned earlier.
More and more concern over data privacy and parts of the world. There are laws about data privacy and the biometric smartcard has the benefit of being compliant with these laws just by nature of the design.
In the U S. The White house is looking to modernize multifactor authentication they've asked the industry leaders from around the world to come into a symposium to discuss these topics and we're proud to say that IDEXX was included as part of that conversation and then.
In the EU payment services directive.
PST three is focusing on accessible payments and inclusive authentication solution. So again, the biometric smartcard becomes.
A very good way to be inclusive and bring more and more people into the payment world and the digital payment world specifically.
Then there are some industry standardization happening, which also helps any industry really take off so <unk> co which stands for euro card Mastercard visa is industry.
Association.
<unk>.
Managers, all standardization before the payment networks.
Here in the west and globally and that <unk> Association is now have standardization specification for biometric payment card performance. So that again will help the overall industry to grow more quickly.
Fido Alliance is now set standards for password less authentication again, the biometric smartcard is a fantastic way to have password less authentication. So again, we expect to get some momentum from that initiative and then the national payment schemes continue to progress towards biometric standard.
So these are the debit payment schemes that.
Tend to be country by country and in some cases region by region, but again that debit.
Debit card.
Card market locally is just a massive market as well and those cards.
Also can be easily turned into biometric smartcards. So as the market progresses. There is many many opportunities for biometric smartcards to grow and therefore, the IDEXX biometric solution to grow along with that.
Again, I'll take a moment here to just remind everybody about the biometric IDEXX biometrics business model. So <unk> started out as a biometric sensor company.
And then we evolved our solution to include the full biometric system, including the sensor all of the biometric software, including the Matcher etcetera and encryption software and now in the last 18 months, we've gone to a fully certified card solution, where we have the full card operating system.
A standard API interface, where various athletes can be plugged in for various payment applets for visa Mastercard repay others et cetera, and also applets for authentication digital authentication and even crypto currency wallets, So again, having this.
Platform approach enables us to.
Provide a full solution to the marketplace, but also capture more of the total value chain for IDEXX going forward.
In our go to market strategy, we do direct sales for demand creation. So even though we're a technology provider, primarily we do take our knowledge and go out directly to card issuers and banks as well to educate them on the benefits of biometric smartcards, what would be the benefits to their <unk>.
Customers and primarily educate them on how they can make money with biometric Smartcards then we work very closely with our card manufacturing partners.
Who also do their own marketing and demand creation, but together, we can service the banks and issuers and.
Security Cyber security companies in the digital authentication partners out there and then we have.
Several resale or resellers globally that take the IDEXX solutions either in.
Our solution kit form or in a full card turnkey form and resell that solution to local car manufacturers and banks and issuers as well. So we have a very comprehensive go to market strategy that services the needs of each region and each particular partner.
And again, we're focused on payment and banking public services and private services and then our enterprise and government security marketplaces. So again, we have <unk>.
Partners to go with us to all of these major marketplaces to address the big market opportunity.
And then at the end of the day. It really is all about the customer journey. If these cards aren't intuitive and simple to use than us they simply won't be adopted in the high volumes that we're all anticipating so for the customer journey, we can break that down into three simple steps to step one as you get the <unk>.
Card welcome Kit at home and then you add your fingerprint to the cart at.
At home either via an app on your smartphone or by the sleeve enroll or eventually buy enroll at the Pos terminal.
Then you activate the card very much similar to the way you activate any of your banking cards today through a secure banking channel or the banking apps and then you go out and pay and use the card.
And you have the personal security and confidence that.
You are now paying with no fraud risk you don't need to worry about remembering multiple pins.
And biometric authentication happens in about one quarter of a second your total transaction is about one half a second so the user experience is much more secure but exactly the same experience youre getting from your contactless cards today.
In terms of the market outlook.
Where things are going so we have not changed our forecast view.
Have used this graphic in the past, but if we look at Abi research.
They have a conservative low.
Low penetration scenario, where they anticipate by 2026 the market is around $50 million biometric smartcards globally than they have a more aggressive.
Market model, where they expect by 2026 to be around $250 million.
Biometric smartcards globally at IDEXX, we continue to monitor market penetration. We continue every week every quarter to interface with banks and customers and car makers and we use all our own intelligence to do our own judgment here and again our market forecast is for.
About 100 million cards, or just under 100 million total.
By 2026, this still represents a very very large market opportunity for IDEXX and the others in this space.
And just to remind everybody right now there are really only two major competitors out there that have solutions for biometric smartcards and we would contend that our solution is by far the best So again to repeat we now have certified solutions with 19 car manufacturers 18 banks already coming to market.
And announced more to follow and nine partners in the digital authentication space. So it is these customers in our pipeline and more that we are aware of in our pipeline that those are the basis for how we do our forecast for the overall market penetration and IDEXX is really ideally positioned for a global scale, we have a sim.
<unk> platform that can address in multiple markets in multiple regions and multiple applications. So we are uniquely positioned compared to the competition with our sensors software and full suite operating system. So really just a total solution that we're having pre certified so we can.
Get customers to market quickly.
So in summary.
Yes, just repeat this last point about we have a single platform, that's integrated and scalable hitting multiple applications and targeting multiple regions around the globe.
Just to remind everybody as some of the key attributes of our technology, we have the largest sensor area, which means we capture more data from your fingerprint with each touch which means you have a better user experience.
Much lower false rejection rates.
And overall matching time best in the industry, we have the biometric software platform that secure and it has to minimize risks for any sort of data breach or hacking and then we have already to launch pre certified solutions that enable card manufacturers to choose our solution and then come to market.
Very quickly.
So again, we're flexible on market penetration, we are focusing on secure payments identity access and then crypto asset management all can be done with the same standard card and if you have not seen this photo before this is a new demo card from IDEXX, that's actually a full <unk>.
Functional card, but designed in clear plastic so that people can clearly see how simple. The overall car design is and how easy it is for a card manufacturers to manufacturer card based on IDEXX you simply have the ENB module embedded in the ILEC sensor embedded and no other active components in the <unk>.
<unk> inside the card.
And let's Oh.
Again review our operating model.
We maintain our our current target operating model, we have a solid customer base 19 manufacturers and growing our certified card solutions are addressing the tier two and tier three and now even some tier one manufacturers.
Counting gopac are choosing our fully turnkey certified solution because they see the value there of this full solution coming to market.
It's shortened time to market and they don't need to worry about compliance our certification.
Our target operating model at scale will be improving margins up to 50% gross margins, we still anticipate a 30%.
Operating margins going forward and again I should emphasize that as we bring this full IDEXX pay solution out to market and start ramping that up as a bigger percentage of our volume you will see those gross margins continue to improve because we're providing more of the total solution and therefore capturing more.
Of the total value chain.
So the overall.
Corporate model is very similar to any fabless semiconductor model and we can grow the company and continue our commercialization with our current product for several years to come and we still have our team working on future generation product, but one of the benefits of this whole industry is.
<unk>.
Products tend to last for multiple years three to five years in the marketplace and by the time, we're ready for our next generation product.
We are confident we will be leapfrogging again ahead of the competition.
Okay, and then again in summary.
Let's just some are up with the major points IDEXX is enabling the future of payments and authentication. Our solutions are addressing a multibillion unit multibillion dollar market opportunity, we have by far the leading customer experience in leading technology and I think this is demonstrated by our track record.
Third with all of the card manufacturing design wins, we've achieved in the last year and a half we have a disruptive biometric solution. We finally hit the performance and cost points that we believe are in place to finally allow this market to take off and.
And we believe that we are capturing the market at an inflection point.
Personally convinced that then our full turnkey solution with its performance and.
Ease of use is really going to be the key enabler to drive this market inflection point finally.
We now have 19 card manufacturers coming to market that proves the point.
So in summary, I would just like to thank everybody for joining our Q2.
Presentation, and look forward to more announcements and more progress from IDEXX in the quarters to come.