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Biometrics industry stocks this week

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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.

-In the months after the American election markets boomed as investors assumed a Republican administration would be good for Wall Street. Many thought he would cut taxes and promote business friendly policies. But now the Trump administration finds itself bogged down in yet another disheartening row caused by Trump’s unstable, erratic behaviour. This time the distress was caused by his sympathetic take on events in Charlottesville. Finally, the optimism from the business community is starting to fade. Worries about future economic growth are emerging as it becomes clear that Trump’s problematic character and personality is creating more chaos than business. In the wake of the disturbing Charlottesville comments the CEOs on his business advisory councils abandoned him. He hasn’t been able to make headway on any of his major issues. And so as the Dow fell 177 points on Wednesday some market commentators chalked it up to a dawning realization that the once so-called “Trump Bump” in the stock market isn’t going to last as long the Republicans and conservatives had hoped. Market types who put up with Trump’s flawed personality in the hopes a pro-business agenda would emerge are giving up hope–or so goes the new theme emerging this week among market pundits.

Within the biometric sector this week a flurry of earnings releases continued to dominate the news. There were some fascinating details about the remarkable growth happening in the biometric sector buried in the various transcripts of conference calls held this week.

ImageWare Systems was one of those reporting. The company released financial results for the second quarter. Some of the highlights include an expanded agreement with Fujitsu to support mobile devices and actively market the company’s Microsoft-based, enterprise-wide security product, GoVerifyID, in Europe, Middle East, India, Africa and the Americas. ImageWare also announced a resell agreement with Info X Distribution, as well as the completed installation of biometric management and credentialing software into five Alaskan airports. Financial results saw total revenues rise by 6% to hit $1.1 million in the second quarter of this year. Gross margin—a basic measure of profitability—increased in the second quarter to 76.4% from 72.4%. The increase was attributed to higher revenues from software licensing. Even so, the company did report an overall net loss in the second quarter of $2.5 million or 3¢ per share. This is compared to a net loss of $2.1 million or 2¢ per share in the same quarter last year. “Our second quarter was highlighted by several partnership developments… In May, we were honored to be recognized by CIO Applications as one of the ‘Top 25 Cyber Security Companies for 2017,’ further validating our strong positioning and brand awareness in the marketplace.” said Jim Miller, ImageWare’s chairman and CEO.

-Also reporting this week was Sweden’s Precise Biometrics. According to a press release distributed last week sales at the firm’s fingerprint technology division are increasing. A partnership with chip designer Silead has resulted in substantial royalty revenues, while the company’s Precise BioMatch Mobile product was integrated into a new series of ultrasound based fingerprint sensors developed by Qualcomm. “It is gratifying that we have increased sales during the quarter, both sequentially and compared with the corresponding period in the previous year. The partnership with Silead has resulted in substantial royalty revenues… We now have royalty revenues from nine customers and continue to broaden the customer base in terms of both different technologies and geographical regions…” said the company’s CEO on a conference call. The company also concluded an agreement with German company IDENTOS to divest its mobile smart card (non-fingerprint) business in order to, “… focus its activities on the fingerprint technology business area.” That transaction will be completed January 1, 2018. According to the company, “Resources are being reinforced in order to meet the market’s demand for increasingly advanced solutions in the field of fingerprint technology.” Speaking on the conference call the CEO went on to describe the tough competition in the fingerprint market. “There is currently a surfeit of sensor manufacturers offering capacitive sensors for fingerprint recognition. This has resulted in very tough competition with rapidly increasing demands for smaller sensors, better performance and lower prices, with suppliers that are already established enjoying competitive advantages. This makes it more challenging for many sensor manufacturers to break into the mobile phone manufacturers and capture bigger market shares…” The CEO went on to say that ultrasound and optical sensors are making it possible to integrate fingerprint sensors under the display of devices, creating new design possibilities and lowering costs. “There is a large interest in these kinds of solutions among mobile phone manufacturers. Many of our customers are offering ultrasound or optical sensors, which means that we are well positioned for the upcoming technology shift. We are working together with customers on several test projects, which we expect to result in product launches starting in the first half of 2018…” The company also announced that it had launched a new security suite during the quarter that incorporates the “latest developments in spoof and liveness detection, as well as standalone anti-spoof products and services.” According to a press release the software is particularly suitable for optical and ultrasound sensors, “… and enhances security significantly for fingerprint recognition by identifying fake fingers and thereby combating fraud. The new solutions have generated a high level of interest among our customers and give us a unique position, as we are the only supplier that can offer software-based fingerprint software with spoof and liveness detection.” A licensing agreement signed with Korean sensor manufacturer Melfas was also announced. As well, after quarter-end, a licensing agreement was signed with module maker O-Film. The company also announced a couple of deals involving smartcards. “Cards with fingerprint technology are on the rise,” said the CEO. To that end, the company announced a project with Elan MicroElectronics that will see the companies produce a payment card with fingerprint technology that is to be supplied to premium customers of a South Korean bank. A company called MeReal announced that they will use the V2 biometric smart card in a contract with Pleinair Casino. “It is clear from work with our customers that the card market is developing quickly for both payments and other areas of application. We are involved in a number of card projects and are holding advanced discussions with several players in the card industry. We maintain our view on net sales for the remaining operation during 2017 and estimate that it will be on par with the comparable net sales for 2016… even though the volume trend among our customers is more difficult to estimate than before. The company continues to expect an operating profit for the full year 2017 for the remaining operation.” Overall, Precise Biometrics announced net sales of USD $2.48 million. The company’s stock is still trading below recent highs at about $1.95 a share.

Nuance Communications also held a conference call to discuss its third quarter 2017 earnings. According to CEO, Paul A. Riccie, “Our fiscal 2017 has been a year of strong performance, enabled by opportunities in our most attractive markets… which have enhanced our earnings and cash flows.” That said, Nuance did fall victim to a malware attack earlier this year and management discussed that in the call. According to Riccie, “Our third quarter in particular was set to be an excellent quarter by nearly all measures prior to the onset of the June 27 global malware incident… As noted, the incident had an effect on our third quarter, primarily in our healthcare transcription and imaging businesses. Although the impact [in Q2] was limited since it occurred just four days before the end of the quarter… the effects of the incident in the fourth quarter will be extensive… Without the malware incident, Q4 and the fiscal year would have landed well within the previous revenue and EPS guidance ranges we provided.” Riccie also stated the pipeline of upcoming business remains strong. During the call an analyst with Vancouver-based broker Canaccord Genuity asked about about a major biometrics deal the company recently completed that is the largest yet for the firm. According to Riccie, “The interest around voice biometrics in the financial services industry in particular has been quite keen, and we’ve seen a great deal of success over the last 18 to 24 months in focusing on [the] security solution that the financial services industry is trying to implement.”

-Recent NASDAQ listee BIO-key International also announced results this week. Discussing second quarter financials on a call was Michael DePasquale, chairman and CEO of BIO-key. He was happy to announce that software license sales rose 76% in the second quarter based on both new and existing customer demand. “Regarding Q2, our improved performance reflects the rising demand for secure biometric technology, as more organizations and individuals are realizing that fingerprint authentication is indeed the fastest, most secured and most convenient option among various authentication modes. Rapid digitization is leading to increased cybersecurity incidence, which is why we continue to pursue a range of larger corporate and enterprise software opportunities,” said Depasquale. He went on to discuss a $600,000 deal that will be booked in the second half of the year. “We are particularly gratified to build upon our relationship with a Fortune 500 telecommunications customer that selected BIO-key to support their endpoint security implementations through a $600,000 professional service engagement we expect to fulfill over the next two quarters,” according to the CEO. DePasquale also mentioned that hardware sales were moving at a good clip. “[We] also shipped initial orders of our new TouchLock line of biometric and Bluetooth enabled padlocks. We are pleased to see growing interest and encouraging demand trends building… and expect this area to be an important contributor to second half results.” Second quarter results included $158,000 in revenue from initial shipments of the biometric padlocks and bicycle locks to Asia. According to DePasquale, “We started distribution of TouchLock in the Asia-Pacific market in June and the sales momentum has been gaining significant traction.” The company’s Hong Kong sales team is talking with some large bicycle manufactures in the region both about bundling BIO-key’s biometric locks with the purchase of their bicycles. Elsewhere in Asia the company signed a contract with SmarTone, a wireless telephone services provider in Hong Kong and Macau, to offer TouchLock padlocks to its online store and 30 retail outlets. “Additionally, we partnered with a leading Asian airline that will be distributing TouchLock padlocks, which it will feature as an incentive item in its customer loyalty reward programs that includes 8 million members. The airline will also feature touch locks in an electronic direct mail promotion to its customers slated for this month,” said the CEO. In Japan the company also has a contract to supply DDS Inc., a Japanese security systems integrator, with an initial 30,000 unit order of the SideSwipe fingerprint scanners. The company is the main system integrator for NTT, Nippon Telephone and Telegraph Group, Japan’s largest telecom. “Having DDS as a major BIO-key OEM customer in Japan is a great strike for BIO-key and we look forward to working closely with them for now and future revenue opportunities… Asia-Pacific represents one of the world’s largest markets for physical security and we are pleased to see the spike in demand for our enterprise and consumer hardware solutions and we expect this area to be an important contributor to second half results,” said DePasquale. Other notable contracts in the quarter include a significant one with a global financial institution that selected the company’s biometric ID produced to secure Windows 10 devices. According to DePasquale, “… they were seeking a secure biometric authentication solution that would be compatible with their newly upgraded solution. To support this, BIO-key provided an initial 5000 SideTouch compact fingerprint readers that been qualified and tested by Microsoft to support the biometrics sign-in capabilities of Windows Hello… This contract is a significant gain for BIO-key in many respects as it increases our global prominence and list of client references across the financial services sector where we are actively seeking opportunities to expand our footprint.” DePasquale went on to discuss why it is BIO-key has been winning some big government accounts. “One critical factor that gives BIO-key an edge over the competition is our ability to meet rigorous government compliance requirements. Government contractors and sub-contractors are constantly seeking solutions that will ensure they are in full compliance with the guideline set by the authorities. BIO-key’s core VST algorithm earn top level accuracy scores from this after demonstrating top performance in key metrics amongst other commercially available fingerprint biometric products… As a result of this, we signed a global firearms manufacturer and Department of Defense government contractor that was required to meet the National Institute of Standards and Technology multi-factor compliance guidelines that impact all government contractors and subcontractors with an implementation deadline of December 31, 2017. BIO-key biometric authentication solutions met all of the requirements and we were selected to deliver a secure, convenient and compliant biometric authentication solution to enable access to workstations and kiosks within their manufacturing facilities,” said DePasquale. Interestingly the company is, “… currently in discussions with a leading national television shopping network that reaches nearly 100 million U.S. households to develop BIO-key product-based programing. According to DePasquale, “We think that the television shopping network opportunity really gets us to a different level. [That] will take place in the September timeframe, so our initial televised broadcast will be in September, So we will keep everybody posted on that obviously as it emerges.” The company is also engaged in preliminary discussions with a number of big box and specialty retailers regarding the stocking of the biometric locks. Said the CEO, “… bundling our fingerprint scanner products with the sale of PCs, laptops, notebooks, tablet computers, is really a big opportunity and they are as enthused about it as we are.” All in total revenues rose 113% in the second quarter to $887,000, while hardware sales rose 281% to $467,000. Nevertheless the company did report a loss of 32¢ a share, or about $1.8 million total. The reason? Gross margin plunged to 10% in the second quarter 2017 from 67.2% last year due to a higher cost of sales along and a $388,000 non-cash amortization write-down on a license for a portfolio, mobile and online payment security software technology. “If we remove the non-cash amortization, our gross margin would have been 54%,” said DePasquale.

On the patent front the CEO noted that, “… in May, we were awarded a new patent for the utilization of biometric data. The patent method enables BIO-key and its licensees to leverage existing small area sensors to capture substantially more fingerprint service area leading to a higher degree of accuracy when performing a match. As you know, better accuracy leads to superior end user experiences and for the first time provides a means for higher security fingerprint authentications scenarios using small area sensors.”

Going on to discuss overall sentiment in the biometric market DePasquale said, “There is a lot of pressure right now at the senior levels in companies to protect against cybersecurity and inactivity meaning doing nothing puts the company at tremendous risks. So any company that deals with consumer information has huge exposure if they don’t take the steps to secure their infrastructure and that’s not only from external attack, but it’s also from internal attack… and when I say attack, I mean internal malfeasance… So that’s what I am seeing right now, I am seeing a heightened awareness and a deeper concern that something has to be done and it needs to be cost effective, it needs to be straight forward and it needs to be supported across the infrastructure.” Some of the other interesting comments from the BIO-key call (edited slightly for clarity) follow:

“The fact that we have got that in a Microsoft support and we are really closely partnered with them, gives us a really good competitive advantage and that’s how we won the international bank deal, which got us a 5,000 unit order quite quickly in fact that deal probably went start to finish in 90 days.”

“[Concerning] TouchLock… We are in the process of sampling and meeting with the distribution in retail channels to get the product into the consumer venue certainly in the next few months. So, we are production-ready meaning that we are now producing a volume product… so it is going to be available and you will see it available in the next 30 to 60 days in different channels and venues.”

“Whether we put the products up on Amazon, as we do today with our finger scanners, or not, we’ve not made the final decision. It really depends on the pickup from the other retail channels. So for, example if it’s readily available in the retail venue—and I am always thinking of examples here like Wall-Mart, Kmart, Best Buy or Staples—it may make sense for us to have end users fulfill through those channels and not directly through Amazon.”

“[As well] … we may move to [another] side of Amazon, which is a stocking distribution arrangement. And so we are considering all of those things right now, but the idea and the goal here is to get these products in volume, out in a significant way in front of consumers in the next couple of months… I would say, the business is still strong, it’s episodal. It’s interesting, one day you will get a few unit sold. This is finger scanners we’re talking about. We are not selling our other products on Amazon… So you will get a few units sold and then the next day it will be 25 or 30. So it goes up and down on Amazon.”

“In the context of the other online e-tailers I just mentioned, dell.com, wallmart.com, jet.com, B&H Photo… that business is also going quite well and very strong. Our business has grown year-over-year. We began selling the finger scanners in August of 2016 and our business again, when you look at it on a daily snapshot basis or otherwise, is up about anywhere from 100% to 200%. So the business is definitely growing… And we are looking at other channels, as I mentioned… the home shopping, television type channel which we think will also ramp volume and create additional visibility for us. But we also have additional new products that we’ll be launching into that channel that I think will make it more exciting and they will include not only new hardware products but also some of these software items as well.”

During the Q&A part of the conference call a few questions stood out:

1. An analyst asked a technical question: “IDEX announced refined matching algorithm for smartcards. Do you expect them to provide an enrollment capability as well… is there an opportunity for BIO-key there?” DePasquale answered: “That’s a great question. There is an opportunity. The interesting thing, they have a—we haven’t seen it yet, but we will shortly—a really, really good (from what we hear), embedded algorithm. It’s low-power, runs in a very small space, and that again could be accommodated on a card. So all good… they’ve develop that, that’s not an area of investment that we wanted to make, we don’t want to sell an algorithm for $0.125 or $0.25 of the penny… But keep in mind that self-enrolment for a credit card may not necessarily be very effective from a security perspective. So, mass enrollment might require, for example, that you go to the branch or you go to some central location to enroll in a master system and then your template is downloaded to that particular card… So, there is certainly is opportunity for BIO-key there. And as you know we have a very strong partnership with IDEX. We buy their fingerprint sensors. They’re embedded in our finger scanners… not all of them, but some of them… and we’re using them in our locks today. So, we’ve a very strong bifurcated relationship.”

2. Another analyst asked the following question about Microsoft: “How long would you say before web-based biometric capability becomes native to Microsoft’s active director… any feel for that?” DePasquale’s answer: “Well, we are selling it pervasively, really. It’s something that customers demand and want. They don’t want device-only authentication (i.e. enrolling on every single device with no control)… I mean it’s okay for certain applications. But most enterprises… if they deal with consumers or any sensitive information… want to be sure that they have a centrally managed identification or authentication schema, and that’s what we provide. That’s the level above the Windows Hello that we’re selling to Microsoft customers… especially if they are upgrading to Windows 10.”

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