December 14, 2017 -
As the biometrics industry continues to grow, Biometric Update is bringing a new focus to the stories around the stocks in the sector. Check in with this space each week for a rundown of the financial news and interesting ideas from the week that was.
Apple has indicated that it expects sales of its iPhone X to be strong this holiday season. That strong demand for the face-based biometric smartphone has resulted in an early Christmas for a company called Finisar, which is the world’s largest maker of optical components, including vertical-cavity surface-emitting lasers (VCSELs).
Apple uses VCSELs in its Face ID biometric application in the iPhone X (the chips are also key to the proximity sensors in AirPods). But according to reports the number of these advanced chips is lagging far behind the number being produced. It is said Apple in the fourth quarter of 2017 will realize demand for VCSEL wafers that is ten times that currently being produced globally. So building out production capacity is fundamental to the ability to do facial recognition. Apple is giving Finisar a $310 million Christmas bonus. The money will be used to build a brand new 700,000-square-foot manufacturing facility in Texas and hire 500 new employees to continue development of the laser sensors in the TrueDepth camera that is the basic device in the iPhone X allowing face-based biometric recognition.
Apple will draw the money from its Advanced Manufacturing Fund, which is a pool of cash set to distribute $1 billion to promote both research & development and high-volume production of these critical optical communications components. The two companies are clearly hustling to get the Texas project done. Finisar management claims the new facility will be online in the second half of 2018, which is remarkably fast. But the company will surely take advantage of this opportunity. The Apple announcement has revived a lagging stock price.
Sunnyvale, California-based Finisar reported second quarter results December 7th. According to CEO Jerry Rawls overall revenues for the second fiscal quarter were $332.2 million, which is a decrease of $9.6 million, or 2.8% compared to the first quarter of the same period the year previous. Rawls is quoted as saying, “This decline was primarily due to lower revenues from our Chinese OEM customers.” However the company did begin shipping “production quantities” of its VCSEL arrays for 3D sensing. The company also announced in that release that it had acquired an already-existing 700,000 square foot facility in Sherman, Texas to ramp up production of VCSELs. The Apple presumably will help convert the facility. According to Rawls, “… this facility will allow us to produce VCSEL arrays using 6″ wafers for both consumer and automotive applications.” The new facility is coming online at the right time.
A market research report released earlier this year suggests the global market for VCSELs will grow at a compound annual growth rate of 21.9% out to 2022. These chips can be used for all kinds of things including biological tissue analysis. According to the report VCSELs offer “… reliability, high precision and efficiency in optical sensors… VCSELs are universal in applications using reflective sensors and scattering or imaging techniques to perceive objects or moving objects.” Increases in the precision of these chips is driving the adoption of VCSELs in medical diagnostics and radiography imaging, as well as the biometric functions being built into smartphones, and eventually autos. Other applications include LiDAR, which is the light-based radar units that will allow automated vehicles to create a picture of the terrain around the vehicle.
According to the report, “Superior power efficiency over LEDs has increase the adoption of VCSELs in proximity sensing applications, which is further fueling the growth of the market.”
The new and burgeoning interest in this technology caps the career of Rawls who informed the board of directors that he intends to retire as CEO of Finisar by the end of calendar year 2018. The search is on for a replacement for Mr. Rawls’ who co-founded the company nearly 30 years ago in a Quonset hut in Menlo Park, California.
Under Rawls’ leadership, Finisar went public in 1999 and has grown to produce revenues of more than $1.4 billion during its most recent fiscal year. The most recent gift from Apple is a nice cap on his career. Shares in Finisar had been trading as high as $36 in February of last year. But the price dwindled over the year to hit a low of just under $18 a share in early December. But once Apple bit, news of the takeover sent the share price soaring last week, with stock in FInisar rocketing up over $24 a share in the wake of the announcement. What a great Christmas gift.
-Another bit of gifting in the biometric sector this week involves an unsolicited tender that arrived at Netherlands-based Gemalto N.V. this week. Monday the company announced it had received an unsolicited and conditional proposal from French firm, Atos SE. Atos sent notice to the Gemalto board announcing a cash offer for all issued and outstanding shares of Gemalto at an offer price of EUR 46. The unexpected offer has turned into a bit of a dust-up between the two companies that has unfurled over the course of this week and seems likely to play out in the weeks to come.
Atos submitted the offer to the Gemalto board November 28 (valid until December 15) and the board of Gemalto promised to carefully review the proposal and respond to before the expiry date. The offer did represent a premium to the current share price of Gemalto. On November 28th shares in Gemalto were trading at EUR 32.65, so there was a premium of a bit more than EUR 13 in the offer. The board of Gemalto retained Deutsche Bank and J.P. Morgan as financial advisors. As news of the offer leaked through markets shares in Gemalto began to spike this past Monday, rising to EUR 46.60 by mid-week. This would be expected in light of the offer price. But when the Gemalto board made its decision on whether to recommend the offer to shareholders, the answer was a very firm, “no.”
According to the official release from the Gemalto board, “The Atos proposal does not form the basis for constructive engagement as it: fails to provide a compelling strategy versus Gemalto’s standalone prospects; significantly undervalues the company; fails to adequately address the interests of its various stakeholders; does not offer sufficient deal certainty.” The board released its rejection Wednesday of this week in Amsterdam at 8:00 pm local time. But it looks like the market is betting the offer, now a hostile takeover, could go ahead anyway. Shares in Gemalto had traded up to EUR 47 on Wednesday as investors piled into the stock in advance of the Atos offer. And while shares sold off slightly Thursday morning they are still trading just above the offer price of EUR 46, suggesting market speculators think the deal will go through (had opinion been otherwise the share price would have likely dropped further). And so now it seems the Gemalto board is suddenly fighting for their independence.
When the board issued its response to the unsolicited offer from Atos it declared that it is “… best positioned to grow successfully on a standalone basis…” Philippe Vallée, Gemalto CEO, said the company has its own internal plans that will result in better results of shareholders. Vallée was quoted as saying, “In eleven years, we have turned Gemalto into a technology blue-chip, recognized in over 180 countries throughout the world. In eleven years, the company has created 5 000 jobs. In eleven years, Gemalto has become the world leader in digital security… We have taken the measure of the recent changes in our historical markets, taken the responsible decisions and are now focused on leveraging the many opportunities of our fast-growing markets.” The board also announced it will present, “… to our stakeholders our ambitious and substantial development plan for the company that will focus on the next generation of digital security for companies, governments and citizens worldwide.” The review of the Atos offer went on to say, “Gemalto – the world leader in digital security – is best positioned to grow successfully on a standalone basis… Gemalto is well advanced in its transition from traditional banking and telecom smartcard markets to fast-growing government, enterprise and cybersecurity and machine-to-machine markets.”
Gemalto, of course, has been dealing with shifts in the market demand for its products. The company is currently repositioning itself (the CFO stepped down recently). As a result the company’s stock has declined from EUR 63.39 in March of this year to EUR 31.50 by the first week of December. This precipitous decline in stock price attracted the unsolicited offer from Atos, which the Gemalto board is characterizing as “opportunistic.” According to the official release, “The [Atos] proposal is unclear as to critical elements of the combination strategy… Gemalto is organized to benefit from innovation across its business units and the potential break-up contemplated by Atos through the contribution of Gemalto’s businesses to three separate divisions of Atos (for example the integration of the payments business into Worldline) would negatively impact Gemalto’s performance and ability to best serve its clients.” The board also complained about the valuation. According to the release, “The board of directors considers that the proposal significantly undervalues the company: The timing of the proposal is opportunistic: the proposed offer price represents a discount of 27.4% vs. Gemalto’s last 12-month high and a premium of only 3.5% vs. Gemalto’s 12-month average share price. It is made at a time when Gemalto has stabilized its performance following a challenging period; As mentioned, Gemalto is well advanced in the transition from traditional banking and telecom smartcard markets to fast-growing government, enterprise and cybersecurity and machine-to-machine markets. The impact of this transition is yet to be reflected in the company’s share price… “ The Gemalto board also criticized the offer for failing to provide, “… adequate deal certainty… the proposal does not contain a substantiated explanation on, and analysis of, the envisaged anti-trust… and other clearance procedures. It [also] lacks details on timing, risks and potential remedies that would be offered to ensure completion. In addition, the proposed merger protocol contains a number of off-market, unclear, unusual and unacceptable terms and conditions.” The board went out of its way to make it clear the deal is not acceptable to Gemalto. “The proposal provides very limited protection for Gemalto’s other stakeholders… [and] fails to include important non-financial commitments customary for a friendly recommended transaction of this size and nature… Atos’ proposal is not reflective of a friendly and collaborative approach as it was not preceded by customary exploratory discussions, the announcement of the proposal was done unilaterally and Atos indicated its intention to [go ahead with the takeover] irrespective of whether it has reached agreement with Gemalto. The Board of Directors is concerned that this could exemplify cultural differences between the two companies,” according to the release.
In a bid to fight back Gemalto management has indicated that its new “strategy and positioning” around its new growth “segments” will be detailed for investors during a forthcoming Capital Markets Day scheduled for March 13th in New York. It will be interesting to see what management presents at that time. But there is still a battle to fight.
Shortly after issuing the formal offer, Atos CEO Thierry Breton announced he has the backing of Gemalto’s biggest shareholder, France’s state-owned investment bank Bpifrance. In a call with reporters he reportedly said, “Bpi is not only favorable to this operation of European consolidation, but it also authorized me to tell you about it.” Considering Bpifrance holds 8.51 percent of Gemalto’s shares, Atos may hold the better hand in this poker game. Vallée, the Gemalto CEO, seemed to realize the precarious situation for preserving Gemalto as a standalone company. In an interview on financial news network Bloomberg Television he said, “We are today facing a low point for Gemalto stock; this is obvious. The approach of Atos is opportunistic. That’s smart on their side, but we need to defend ourselves.” Vallée also said he may move up the Capital Markets Day so that the company can lay out its strategy to investors earlier rather than later. Whatever the case, by Thursday afternoon Gemalto was trading as high as EUR 47.9, which suggests some market speculators think Atos could come back with an offer even higher than EUR 46. The Atos CEO said at the time of the unveiling of its bid on Monday that the company wants to create a “.. European leader in cybersecurity, digital technologies and payment services.” A media report quoted Breton as saying, “The offer has received strong support from the financial markets, investors and the analyst community since announcement.” It was an exciting week for those involved. There is certainly more to come on this story yet.