Biometrics industry stocks this week
It had to happen sooner or later. Stock markets have churned out a year’s worth of advances in a month. This kind of hyper growth can’t go on forever. A reckoning arrived earlier this week when U.S. stocks suffered the first major sell-off of the new year.
The Dow Jones industrial average dropped over 350 points Tuesday. At one point it was off more than 410 points in the session. Few were surprised. Central banks have begun to raise interest rates. The rate on the benchmark U.S. government 10-year bond hit 2.7% of late. That higher rate makes it a bit more difficult for companies to borrow money from bond markets, and that’s going to slow corporate activity. The price of oil has also been rising sharply, adding new weight to corporate costs like transportation. So the sell-off was no surprise. What was a shock was that some of the biggest decliners were the big for-profit healthcare companies, like UnitedHealth Group, which suffered the largest loses early in the week.
Why are the health management organizations (HMOs) trading down? The declines have everything to do with an intriguing, vaguely-worded announcement from three of the most dominant business titans in America. The Oracle of Omaha, Warren Buffett (and head of conglomerate Berkshire Hathaway) released a statement saying he was teaming up with Jamie Dimon, head of the biggest bank in America (JPMorgan), and Jeffrey Bezos, the head of world’s most innovative, radically-digital retailer, Amazon. These three came together to announce they are in the very early stages of creating a not-for-profit healthcare company to administer health programs to the 1.2 million employees that work for Amazon, JP Morgan and Berkshire Hathaway (which owns insurer Geico, among many other companies).
According to reports the organization would be run on a non-profit basis and would rely heavily on technology to reduce costs. It could eventually be the kind of company that could offer services to other corporations who are desperate to cap health care costs that are sometimes rising over 20% a year. The huge and rising cost of health plans are a massive headache for the corporations that pay for these plans. The really interesting idea here is that this new organization, as a non-profit, would cut out the intrinsic drive among the big for-profit, publicly-traded American health management organizations (HMOs) to increase profits. One of the reasons that the most minor health procedures cost so much is that the HMOs have to hustle to show profit growth as publicly traded companies. As Buffett, Dimon and Bezos see it, the better way to run a health system would be to simply run it in a way that sustains the system. This will have huge benefits to owners of corporations that pay for the health plans of employees. It was remarkable to see Jamie Dimon, CEO of JPMorgan, the archetypal American capitalist, quoted as saying the initiative would be “free from profit-making incentives and constraints.” It was also interesting to see that the former CEO of Apple, John Sculley, pop up in the Times coverage of the announcement. Sculley is now chairman of a health care start-up called RxAdvance, which is hoping to deliver digital efficences to those who manage corporate benefit pharmacy plans. One of the other strategies of this new generation health company would be to rapidly advance application of digital technology to the delivery of health services. Get rid of the paper. Use smartphones for ID verification. Rely on telemedicine and virtual doctor visits. Biometric technologies will play a role in this revolution as biometrics are necessary for proper functioning and security of healthcare IT processes (according to statistics from the Identity Theft Resource Center, in 2014 about 45% of all data breaches regarding identity thefts were of healthcare). It’s worth noting a company named SAASPASS recently created a biometrics-based password manager for the rxadvance.com site to autofill and auto login plan members from their computers and mobile phones. There will be great demand for biometric tech in the digitization of the currently paper-based health care system. And that’s exciting. The overall possibilities are intriguing. Amazon has been rumored to be moving towards offering pharmacy services. The plan is extremely early stages. But in the hours after the announcement the stocks of the big for-profit healthcare companies plunged as much as 30%.
Of course, if the digitization of the healthcare system is ever going to come to be there will have to be real advances in security. James DeBello is the chairman and CEO of Mitek Systems Inc. The company does mobile capture and identity verification. Mitek’s products enable financial institutions, payments and other businesses operating in highly regulated markets to transact business safely. On a recent conference call DeBello spoke about the pressing need for a new level of security in the internet economy.
This past year has sidelined the commercial online ecosystem. According to Mitek rising levels of fraud are threatening to slow the advance of the digital economy. “Online auctions, dating websites, social media platforms, travel sites, care provider associations are struggling to prevent fake profiles, bot accounts, and fraudsters from overrunning their platforms,” according to an outlook document released by the company. The issues around online dating scams have grown significantly. ID verification is a new priority. “New, previously unimaginable services delivered remotely need a trusted digital environment in which to thrive. But it’s hard to trust what you can’t see… Our identity platform is a key enabler for ecommerce, allowing consumer facing businesses to know for certain that the customer with whom they are doing business in a digital world is truly who they claim to be,” said DeBello on the conference call. “There is an urgency to establish trust in digital commerce. Evidently, Facebook feels the same way. Earlier this week they announced an acquisition of an ID verification technology company that they will devote to protect the integrity of their platform. We think this is a pivotal validation of the market opportunity ahead of us. Businesses are increasingly agreeing and our identity business is growing rapidly as a result.”
DeBello went on to outline three key market trends that favour continued growth: the ubiquity of mobile devices and the demand from consumers for easy self-service solutions; increased instances of data breaches eroding confidence in traditional identity verification methods such as the social security number, and; strict global anti-money laundering and so-called “Know Your Client” regulations in the financial sector. According to the company’s outlook document there were 150 million new account opening fraud attempts at financial institutions and more than 80 million fraud attempts using fake or stolen identity credentials. The many large-scale data breaches that occurred in 2017 comprised the personally identifiable information of billions of consumers. According to Mitek, “… we expect this number to spike in 2018 to more than 150 million new account opening fraud attempts using stolen or synthetic identities.” According to Mitek 60% of marketplace websites will require users to verify their identities. “… we expect 2018 will be the year they start making identity verification a priority, with 60% of online marketplaces and trust-driven businesses adopting technologies and techniques for verifying new users’ identities,” according to the document. The promise of business on the internet depends on it.
According to DeBello this new need for a higher level of security is driving business. “During the quarter SaaS ID transactions increased 117% year over year, and we ended the quarter with 29% more ID customers than a year ago. With our continued momentum in both markets, we are well positioned for growth in fiscal 2018 and beyond,” he said. According to a press release the first quarter of 2018 saw an increase in revenue of 31% year over year to $12.1 million. The company still recorded an overall loss (based on GAAP) of $5.7 million, or $0.17 per share. That loss included an estimated one-time non-cash charge of $4.4 million ($0.13 per share) related to the enactment of the Tax Cuts and Jobs Act. Excluding the impact of tax reform the net loss was just $1.3 million, or $0.04 per share. Non-GAAP net income was $1.0 million, or $0.03 per diluted share, up 4%, according to the company.
DeBello also talked about the company’s biometric systems being installed at airports. “We also signed one of the world’s largest airlines for mobile check-in for international flights and we added one of the largest global rental car companies who plans on using our identity verification to facilitate a self-service check-in,” he said. “We see the travel vertical as a huge opportunity for our solutions as it represents a significant recurring transaction opportunity… the advent of 5G networks and connected devices, even cars, will accelerate this.” It is widely thought that 5G is going to be key for the emergence of connected cars and smart infrastructure. This past week leaked documents from the Trump White House disclosed that the government was thinking of creating a national 5G network. Shares in Mitek are doing well. The stock hit $9.67 in the middle of January. It’s off since then, down around $7.65. But this is a company that was trading at $2.20 only a couple years ago.
Spain-based mobile biometrics specialist FacePhi realized a mighty 307% gain in profit last year. FacePhi delivers biometric products to the financial services sector. Its technology has been embraced as a way of doing mobile customer authentication. Based on facial recognition, FacePhi’s Selphi solution uses a standard smartphone camera for biometric verification. This allows banks to cheaply and easily satisfy Know Your Client regulations on a smartphone. FacePhi now claims 21 banks among its client roster, including two of the world’s biggest institutions, HSBC and ICBC. The company’s stock rose from €0.68 at the start of 2017 to €1.09 at the end of the year. In a statement announcing its most recent results FacePhi asserted that the “upward trend will continue in 2018, given FacePhi’s aim to increase the size of its international business with a presence in the U.S., European and Asian markets.” Shares in FacePhi trade in Madrid. Shares are currently around €1.16. That’s off from it’s 52-week high €1.36. But it’s far above the company’s 52-week low of €0.38
Elan Microelectronics Corp. announced plans this week to allocate 15 to 30 percent of its annual research and development spending to artificial intelligence (AI) technologies that are mixed with 3D-sensing facial recognition technology. The Taiwanese company supplies touchpad controller and fingerprint sensors. The chairman of Elan was quoted in a statement as saying, “Tapping into the AI industry, Elan plans to launch its first 3D facial recognition chips later this year, targeting the smartphone market, which sees annual shipments of 1.5 billion units.” The company also announced this week it has launched the Taiwan AI Academy in Taipei to help foster local AI talent. Elan announced a deal this past summer with South Korea-based MagnaChip Semiconductor, which will be the foundry partner for the production of biometric smart cards. Elan has licensed fingerprint algorithm software from Precise Biometrics. Last year, Elan posted 12.9 percent growth in revenue, which came in at NT $605 million (USD $20.8 million). The company supplies fingerprint sensors for smart cards used by Woori Bank, South Korea’s second-biggest bank. The stock has had a good year. It’s currently trading around $46.20, which is off a high of $52.00. But above recent lows of $34.85.
Also this week, Prime Intelligence Solutions Group Limited, a provider of biometrics-based identification solutions in Hong Kong, Macau and the People’s Republic of China (PRC), announced the details of the proposed listing of its shares on the Growth Enterprise Market (GEM) of The Stock Exchange of Hong Kong. According to the offering documents the group proposes to issue a total of 200,000,000 shares, of which 90% or 180,000,000 will be privately placed. The remaining 10%, 20,000,000 shares, will be offered to the public in Hong Kong in an IPO that is scheduled for the end of this week. Shares are expected to price between HK $0.27 and HK $0.35 per share. Net proceeds expected are approximately HK $40.2 million (assuming a mid-range offer price of HK $0.31). Ample Capital Limited is the sole sponsor of the listing. The group’s biometrics identification devices offer face, fingerprint and finger vein identification. The company also offers hand geometry identification and iris identification. According to the offering documents this has enabled the company to claim a leading position in biometrics in the Hong Kong and Macau markets, particularly in the construction industry. According to an Ipsos Report the company’s revenue from the Hong Kong and Macau markets accounted for approximately eleven percent of the market for biometric ID devices in those two regions. Macau, of course, is a huge gambling destination. According to the filing documents the company has a customer base of around 780 customers across the casino, construction, hotel and catering, financial service, manufacturing, property management and office leasing businesses. But the company has big growth aspirations. It’s also looking to China proper. The company just announced that it is setting up three customer services centers in the world’s most populous country, in the Changning district of Shanghai the Furong district of Changsha and Huli district of Xiamen.