Fingerprint Cards AB: Interim report January - June 2018

Highlights of the quarter

• The sales trend stabilized somewhat, with sequential revenue growth of 35%
• Positive cash flow from operating activities, driven by a sequentially improved operating result, excluding nonrecurring items and a tax refund
• As announced on June 4, further cost reduction measures are being implemented, which are estimated to yield savings of at least SEK 350 M on an annual basis
• Operating profit is impacted by restructuring costs of SEK 43.2 M and two non-cash items: an inventory write-down of SEK 305.0 M and a write-down of capitalized R&D projects amounting to SEK 146.6 M
• Excluding restructuring costs and write-downs, the operating margin was negative 21% (pos: 15). The gross margin, excluding the inventory write-down, was 15% (42)

Second quarter of 2018

• Revenues totaled SEK 389.9 M (823.4), a 53% decrease compared with the second quarter of 2017
• The gross margin was negative 63% (pos: 36)
• The operating result was negative SEK 578.2 M (pos: 72.0)
• Earnings per share before dilution declined to negative SEK 1.49 (pos: 0.10)
• Cash flow from operating activities amounted to SEK 302.0 M (528.0)

January-June 2018

• Revenues totaled SEK 679.6 M (1,509.3), a 55% decrease compared with the same period in 2017
• The gross margin was negative 30% (pos: 39)
• The operating result was negative SEK 753.1 M (pos: 142.8)
• Earnings per share before dilution declined to a negative SEK 1.96 (pos: 0.28)
• Cash flow from operating activities amounted to SEK 98.2 M (203.9)

CEO's comments

Although the sales trend stabilized somewhat in the second quarter, with sequential sales growth of 35 percent, market conditions remain challenging. Compared with the same quarter last year, Fingerprints' sales declined 53 percent, mainly driven by the decline in the average selling price for our products. Fingerprints continues to hold a leading position in capacitive fingerprint sensors for smartphones, but during the year we have noted a clear shift in demand toward smaller and cheaper sensors. Currently, around 80 percent of the sensors we deliver are low-cost products. This is a significant change compared with last year, when the market could accommodate a variety of different sensor types in different price ranges.

The domestic smartphone market in China recovered somewhat during the quarter, but volumes remain lower than in the corresponding period last year. We expect the value of the market for capacitive fingerprint sensors for smartphones to continue to decline. This is a consequence of continued price pressure, but also of the introduction of alternative biometric technologies, not least in-display sensors. For Fingerprints, this means we have to lower our costs in parallel with focusing on diversification to increase growth, lower risk and stabilize revenue streams.

Stringent cost control and a new organization

At the start of the year, we initiated a cost reduction program that entailed savings of about SEK 360 M in 2018, with a full impact on cash flow starting in the third quarter. As announced on June 4, we are now taking additional cost-saving measures, which we expect to complete in the third quarter of 2018. The initiatives are estimated to result in additional cost savings of at least SEK 350 M on an annual basis with full effect at the end of the fourth quarter of 2018, resulting in an OPEX level below SEK 400 M on an annual basis, and before capitalization of R&D expenses. This means that OPEX will be reduced by around two-thirds compared with 2017. I am well aware that this will entail difficult changes for many of our employees, but the adaptation is necessary if we are to defend our competitiveness.

We are also simplifying and streamlining our organization by merging Business Line Smartcards and Business Line Automotive & Embedded into one unit. In parallel, we have reduced Group management from ten to six members. More information about the composition of the Group management at July 1, 2018 is available on page 8.

To meet the negative price trend, it is critical that we ensure our production cost is competitive. As announced on June 18, 2018, we have launched a fingerprint sensor with a lower production cost relative to the present generation of sensors, but whose biometric performance remains high. We expect that the first commercial mobile phones using this new sensor will be launched at the end of 2018 or the start of 2019.

Diversification

Diversifying the business is our most important strategic priority. This entails broadening our technology portfolio, not least to defend our strong position in the mobile phone segment, and expanding in other industries through new applications for our biometric solutions. Our goal is that areas outside of capacitive sensors for mobile phones account for at least 10 percent of sales in 2018. During the quarter, we were able to announce a number of transactions in Embedded, including the use of Fingerprints' solutions in a smart suitcase from Xiaomi 90FUN, in USB security keys from Ensurity and Feitian, and a biometric cryptocurrency card from MeReal Biometrics and Unikeys.

In the mobile segment, alternatives to capacitive fingerprint sensors are starting to gain ground. The year saw the market launch of commercial in-display solutions that integrate fingerprint sensors into the screen. In-display technology is a prioritized development area for Fingerprints, since there is considerable interest from our customers. The further development of our unique ultrasound-based in-display technology continues, with the aim of enabling mobile users to authenticate themselves by placing their fingers anywhere on the screen. As regards touchless, we are focusing on further developing our iris recognition solution, with the specific goal of further increasing user-friendliness in smartphones.

In terms of expansion into new application areas, I am pleased that we, during the second quarter, secured initial orders from two global card manufacturers for our T-Shape-module for biometric smart cards. Although at present this pertains only to small volumes, the orders are a key milestone and are another step closer to the creation of a new mass market for our solutions. In June, we were also able to announce the use of Fingerprints' ActiveIRIS® system in an Indian pay terminal from ApnaPay that enables payments through iris recognition, and which can authenticate digital payments through the Aadhaar biometric identity system.

Christian Fredrikson, President and CEO

Today at 09:00 CET Fingerprints' CEO Christian Fredrikson will present the report together with Acting CFO Ylva Blomén in a combined webcast and telephone conference. The presentation will be held in English.

The report will be available at fingerprints.com

The webcast and the presentation material can be accessed through https://engage.vevent.com/rt/fingerprints/index.jsp?seid=131

For analysts and media: The telephone conference dial-in is +44 (0) 1452 560304 (international participants) or 08-506 921 86 (Swedish participants). Please state conference ID 3390799.