A year when the conditions changed

 

The market for capacitive fingerprint sensors for smartphones has very rapidly evolved into a mature mass market with intense competitive pressure. We’re focusing on driving cost-efficiency, while simultaneously developing new biometric technologies and expanding into new application segments.

2017 was a very challenging year for Fingerprints, when earnings were by no means satisfactory. Revenues fell by 55% to SEK 2,966 M, while our operating margin narrowed to 5%, from 39% in the previous year. The market for capacitive fingerprint sensors for smartphones, which makes up most of our business, has very rapidly evolved into a mature mass-market with intense competitive pressure. Demand did not increase to the extent that we, or Independent sector commentators, expected at the beginning of the year.

Our addressable market in the smartphone segment, expressed in volume terms (unit sales of smartphones equipped with fingerprint sensors excluding Apple), amounted to some 700 million units in 2017. Our full-year market share for 2017 was some 40%. However, in the first half-year, a considerable share of demand was addressed by distributors and module suppliers progressively reducing previous stockpiling rather than placing new orders for sensors. This inventory dynamic impacted our earnings negatively in the first two quarters of 2017. Inventory levels didn’t normalize in the value chain until midyear, when the influx of new orders increased. However, the smartphone market is exceptionally dynamic and fast moving, and we experienced a significant shift in our product mix in the second half-year. Another clear change is that premium-segment smartphones are increasingly being equipped with smaller and cheaper sensors. We are also noting a trend towards smartphone displays covering chassis fronts completely. This tendency has meant many of our OEM customers transitioning to rear-mounted sensors, which have lower pricing. Overall, the average pricing of smartphone sensors was down by some 30% in the year.

Several external commentators estimate that smartphone deliveries on the Chinese market were down somewhat in the year compared to 2016. We think the Chinese smartphone market slowed further towards year-end.

I expect negative price progress to continue in 2018, and that in value terms, the market for smartphone fingerprint sensors will contract in 2018. All our major Chinese OEM customers are now using dual/triple sourcing strategies, firstly to guarantee their volumes, and secondly to strengthen their price negotiating position. We have fared well against the competition over business volumes, even if our market share was down on the previous year. This is a natural consequence of being active on a rapidly maturing market. Meanwhile, I want to emphasize that
our ambition is to retain leadership in this segment, simultaneous with shifting the center of gravity of our investments towards new, emerging biometric markets. In the smartphone segment, our investments will primarily target cost-efficiency by developing new, updated sensors that deliver high-performance and security at a competitive cost.

2018 — A YEAR OF ADAPTATION

While we see major potential to grow in new segments—not least biometric smart cards — it will take some time before we achieve significant business volumes outside our core business of smartphones. 2018 will be a challenging year for Fingerprints because we’ll be operating in harsh business conditions on the mobile side, simultaneous with investing for growth in new focus segments.

As previously announced, we initiated an extensive action plan at the beginning of 2018 to adapt the company’s cost base to rapid changes in the market and ensure the company’s long-term development and success. This will involve us downsizing our workforce by some 185 positions, while also reducing our external expenses. We estimate these measures will achieve cost savings of some SEK 360 M in 2018, taking effect in the second quarter. At the same time, we’re realigning our resources to ensure we have a sharp enough focus on new growth segments, and that our organization is shaped to be able to compete successfully on an expanding global biometrics market. About half of our R&D investments already relate to initiatives designed to develop new biometric technologies and expand in new, promising applications in various sectors.

STRONG POSITIONING TO CREATE SUSTAINABLE VALUE IN NEW SEGMENTS

Biometrics made its true global breakthrough in mobile telephony. Fingerprints was one of the segment’s pioneers, and our business in capacitive fingerprint sensors for smartphones represented some 95% of our total sales in 2017. Our objective is for new segments to make up some 10% of sales in 2018, as we diversify our business into new growth segments. The rapid evolution of mobile telephony has also revealed the opportunities that biometrics presents in a raft of other application segments, which is now starting to translate into a growing number of development initiatives, market tests and product launches. We are well positioned to secure long-term advantage from this process. This includes new applications for our existing technology, and developing solutions based on new biometric modalities.

NEW APPLICATION SEGMENTS

Our technology in capacitive fingerprint sensors is tried and tested and something hundreds of millions of smartphone users appreciate worldwide. The fundamental technology can be adapted, enhanced and then applied in all-new segments like biometric door locks, which have sales of several million units every year in China alone.

BIOMETRIC SMART CARDS — THE NEXT MASS MARKET

But in our view, the segment offering the greatest potential in the coming years is biometric smart cards. The potential market is huge, with some 4 billion smart cards (cards with chips) produced every year. About 3.5 billion of them are charge and credit cards, with the remainder being entry cards, ID cards and loyalty cards.

The combination of the scale of the global card market and the substantial benefits inherent in implementing biometric authentication in the payment segment, mean that smart cards have every prospect of becoming the next biometric mass market. The idea of replacing PINs with a fingerprint sensor in charge cards has been around a long time and was actually the foundation of this company (hence our name: Fingerprint Cards).

Even if it will still be some time before we achieve significant commercial volumes, there are clear signs that the market is starting to gather pace, with several market test programs executed and planned. For example, at the beginning of 2018, we announced a partnership with Visa on the first market test of contact and contactless biometric charge cards in the US, in partnership with Mountain America Credit Union. We are also witnessing how card brands have become more active in their communication and marketing about biometric cards, towards groups including retailers, where the advantages of smoother, faster and more secure payments are substantial.

Tests on a number of major markets, not only North America and Europe, but also Asia, are being executed in 2018. These moves are an important step in evaluating and qualifying various systems for the next phase of the process, the certification of technology solutions. Although the brands are in different stages of the process, much of the evidence indicates that the first certification process may be complete in late 2018. This will be a momentous milestone and may create an all-new volume market for Fingerprints’ biometric solutions.

Fingerprints has well-established partnerships with several of the major card producers, such as IDEMIA and Gemalto (via Zwipe). We also started partnering with NXP Semiconductors late in the year on their new contactless fingerprint-on-card technology breakthrough. We launched T-Shape™, an ultra-thin sensor module optimized for integration in smart cards, compliant with the applicable sector standard,
in 2017. This is the lowest-current module on the market, with very positive contactless charging characteristics, a fundamental criterion for functional biometric contactless cards. We are already geared up to deliver commercial volumes.

BIOMETRICS IN MORE SEGMENTS

We are also seeing a significant growth in interest in biometric solutions across anarray of other segments where secure and user-friendly authentication is critical. To some extent, this is being driven by the growing Internet of Things (IoT), which accentuates the need for secure and user friendly systems to verify user identities. The automotive industry is a good example, where biometrics can help deliver individually
tailored functionality that improves security and convenience. This is an important focus for Fingerprints.

In January 2018, we entered an exclusive collaborative agreement with Gentex, a leading automotive industry technology vendor, to jointly develop biometric systems that can authenticate drivers using iris scanning. When the driver’s authorization to use the vehicle has been verified, the vehicle can start and its compartment modify automatically, including mirrors, steering wheel settings, seat positioning and satnav systems.

DEVELOPING AND EXPANDING OUR BIOMETRIC TECHNOLOGY PORTFOLIO

Our strategic partnership with Gentex in the automotive industry is based on ActiveIRIS®, our iris recognition technology. This is a practical example of the strategy of expanding our biometric technology portfolio. In March 2018, we were able to announce our next step—we will be offering a facial recognition solution. This solution will be for smartphones initially, but because Fingerprints is expanding into new application
segments across various sectors, it will also be suitable for customers in other fields.

Our objective is to be the leading biometric company, which requires us to continuously develop and enhance our technology. This is about building out our fingerprint sensing technology and adding specialist technology in other segments. Different biometric modalities have different characteristics, as well as unique advantages and disadvantages, making them more or less suitable for different application segments. Meanwhile, there is great potential in combining several modalities into a single application. This also enables greater security for especially sensitive systems or applications, through multi-stage authentication, for example. But it can also enhance userfriendliness
by offering more authentication options for different situations.

In 2017, we were able to announce our first commercial multimodality launch, in the form of a smartphone that integrates a fingerprint sensor and iris scanning from Fingerprints. The development of multimodal solutions is a critical precondition for becoming a leading biometric company. Secure cloud solutions for central biometric matching are another important component, not least in terms of implementing biometrics in smart cities. We have developed a high-security solution for this application, for fingerprint and iris recognition, and I’m looking forward to being able to sign Fingerprints’ first commercial deal in this segment as soon as in 2018.

Our in-display fingerprint recognition technology is another priority development segment. By applying unique ultrasound technology that Fingerprints is developing, fingerprint recognition will become even more user-friendly. Our ambition is to enable users to authenticate themselves by placing their fingertips anywhere on a smartphone screen. This eliminates the need for a physical button. It also contrasts
with other in-display sensor technologies, where fingerprints can only be read in a small dedicated section of displays. This technology will serve as the foundation for the continued development of a new generation of fingerprint sensing products, in collaboration with new and existing partners.

SUSTAINABLE BUSINESS DEVELOPMENT

Fingerprints’ operations contribute to sustainable development and have a positive social impact, not least through our product portfolio creating value for customers, users and wider society, through secure identification and authentication in an increasingly vulnerable digital environment. In this way, our solutions also contribute to reducing the risk of fraud.

It’s also important that we ensure our business is conducted within ethical guidelines. As a member of the UN Global Compact, Fingerprints stands wholeheartedly behind all its principles in human rights, labor, the environment and anti-corruption. Our sustainability goals are aligned to the UN’s Global Sustainable Development goals.

In 2017, we brought our sustainability work onto a more strategic footing and enhanced our controls by integrating sustainability right across our business. Fingerprints executed a structured stakeholder and materiality analysis in 2017, which served as the foundation for new sustainability goals for 2018-2020. Read more about this on pages 26-31 in the annual report.

We’ll be streamlining our organization in 2018 and continuing to realign our business towards new segments. I know this will involve difficult changes for many of our coworkers, but adaptation is essential to protect our competitiveness. I’d like to take this opportunity to thank all our employees for their hard work and commitment in a challenging 2017.

 
GOTHENBURG, SWEDEN, APRIL 2018
Christian Fredrikson
CEO & President