Fingerprint Cards AB: Interim report January - September 2018

Highlights of the quarter

• Sequential revenue growth, strong cash flow and positive net result
• Cost reduction program proceeding according to plan
• The first volume order was received for FPC1511, the fourth generation of capacitive fingerprint sensor

Third quarter of 2018

• Revenues totaled SEK 431.2 M (841.4), a decline of 49 percent compared with the third quarter of 2017
• The gross margin was 27 percent (33)
• Operating profit amounted to SEK 7.0 M (52.4)
• Earnings per share before dilution declined to SEK 0.01 (0.16).
• Cash flow from operating activities amounted to SEK 202.5 M (174.7)

January-September 2018

• Revenues totaled SEK 1,110.8 M (2,350.7), a 53-percent decrease compared with the same period in 2017
• The gross margin was negative 8 percent (pos: 37)
• The operating result was negative SEK 746.1 M (pos: 195.2)
• Earnings per share before dilution declined to a negative SEK 1.95 (pos: 0.44)
• Cash flow from operating activities amounted to SEK 300.7 M (378.6)

CEO's comments

Sequential revenue growth, strong cash flow and positive net result

The positive sales trend that we experienced in the second quarter continued in this quarter, which was reflected in sequential revenue growth of 11 percent, a positive net result of SEK 2.9 M and positive cash flow of SEK 202.5 M.

We are maintaining our focus on reducing our costs and increasing our products' cost effectiveness to meet the price pressure within capacitive sensors. The cost reduction program launched in June is proceeding to plan. As previously communicated, during the summer we launched a fingerprint sensor with a lower production cost relative to the present generation of sensors, but whose biometric performance remains high. This sensor - FPC1511 - has now undergone all tests with highly favorable results and it has been well received by several major OEM customers. We have already received the first volume orders and we expect the first commercial mobile phones using FPC1511 to be launched at the end of this year or at the start of 2019.

Continued leadership position in a challenging market

Fingerprints' market position remains very strong in capacitive fingerprint sensors for smartphones. We intend to retain our leadership position in the mobile segment by continuing to increase our cost efficiency in parallel with the development of new, innovative products. Biometric solutions for smartphones will remain an attractive market. However, we see a continued decline in the value of the market for capacitive fingerprint sensors for smartphones. This is partly attributable to the average selling price for these sensors declining and partly that the volumes are expected to fall as alternative technology gains ground at the expense of the capacitive sensor. The price decline for capacitive sensors in 2018 will exceed 30%. The negative price trend is expected to continue into 2019, although the pace of decline is expected to be lower than this year.

Commercial in-display solutions that integrate fingerprint sensors in the display of a smartphone were launched in the market in 2018. The volumes are still relatively small, but we anticipate that the in-display technology will make progress in the market in 2019. Since the average price for in-display sensors is currently significantly higher, this means that in-display will probably represent a significant portion of the total value of the market for fingerprint sensors for smartphones in 2019.

I take a bright view of the potential in the mobile segment and of Fingerprints' potential to retain its strong position through continued product innovation. As previously communicated, we are conducting development projects in in-display, and in 2019, we intend to capture a position in the market for in-display sensors with our optical sensor technology.

New markets for biometrics

The interest in biometric solutions is extensive and increasing, also outside the mobile segment. The area in which we foresee the greatest potential in the years immediately ahead is the segment for biometric smart cards. We have already seen one certification of a contact-based biometric smart card, and it seems likely that the major payment card brands will certify contactless cards during the first half of 2019. This is a prerequisite for card issuers to be able to plan and budget for a broad market introduction. Fingerprints is very well positioned to capture a significant share of this emerging market. If we look at the publicly announced market tests conducted to date in the world, we can see that Fingerprints is included in all of the tests of contactless biometric cards, which is the most interesting application for biometrics in the area of cards. During 2019, activity will increase further with a significant number of tests. Business volumes next year will be modest, but we expect to see a broader commercial launch in 2020.

Already during the second quarter, we secured the first orders for our T-Shape-module for biometric smart cards from two global card manufacturers, and during the third quarter, we announced that Fingerprints is supporting its partner of many years, Zwipe, in its work with Silone CardTech - a China-based card manufacturer certified by VISA, Mastercard, China UnionPay and JCB - to launch contact and contactless biometric cards with banks and loyalty programs in China.

During the quarter, we further strengthened our offering towards the automotive industry, adding to our exclusive collaborative agreement with Gentex to develop biometric systems that can authenticate drivers based on iris recognition. We have now also launched a fingerprint sensor that is adapted to the automotive industry, where biometric solutions can contribute to delivering individually adapted functionality that enhances comfort and safety. The product is ready for mass production and integration in vehicles in collaboration with leading module manufacturers and suppliers to the automotive industry. The first product development projects to integrate this fingerprint sensor in vehicles are expected to commence in 2019.

Christian Fredrikson, President and CEO

Today at 09:00 CET Fingerprints' CEO Christian Fredrikson will present the report together with CFO Per Sundqvist 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=137

For analysts and media: The telephone conference dial-in is +44 (0) 2071 928000 (international participants) or 08-506 921 80 (Swedish participants). Please state conference ID 3669919.