Biometrics industry stocks this week

Earnings season is again upon us. Publicly-traded companies are releasing their latest quarterly financial statements. As wider stock markets level off following the recent bout of volatility, fund managers will be scouring earnings releases for clues as to the health of the economy.

Within the biometrics sector a couple of big names released financials. Within the reports are some interesting clues as to the direction of the industry over the year ahead.

One major player releasing results this week was Fingerprint Cards AB. The company pre-released interim financials a couple weeks ago. The stock sold off at that time as the organization reported a loss on the quarter. But with the release of official results the company’s CEO offered up a plan as to how it is the company is about to battle back and exploit new markets.

Christian Fredrikson is the CEO of Fingerprints. In a written commentary accompanying the earnings statement he explained that while he is currently happy with the company’s cash position he is also beginning to reorient the strategic direction of the business.

As it is the market for capacitive sensors for smartphones constitutes the core of the company’s business. Approximately 40 percent of the fingerprint sensor-equipped smartphones shipped during 2017 (excluding Apple) contained a fingerprint sensor from Fingerprint Cards. Such sensors accounted for about 95 percent of the company’s total sales in 2017. That is, the vast bulk of Fingerprint Cards current business is in capacitive fingerprint sensors.

But it is also the case that this market is maturing, and rather rapidly. The sector has become a mass market. That has attracted competition. Prices for the current generation of sensors are declining. Overall, the average selling price of the company’s products declined about 30 percent in 2017 according to Fredrikson. At the same time conditions in the Chinese smartphone market (the world’s largest) deteriorated in the fourth quarter. All in, according to Fredrikson, Fingerprint Cards expects its sales to continue to weaken in the first quarter of 2018 as the overall fingerprint sensor market for smartphones contracts.

As Fredrikson notes in his commentary the accelerating change in the market for capacitive fingerprint sensors for smartphones requires a strategic shift. This is not to say the company is exiting the market. There are still millions of such sensors to be made. But it is time to begin to shift toward new markets. “I would like to emphasize that our ambition is to keep a leading position in smartphones, while moving the focal point in our investments towards new emerging biometric markets,” he says.

In a bid to achieve “a long-term improvement in profitability,” the company has launched a series of new projects that will, “… generate effects early in the second quarter of 2018.” One early step was the recent announcement that the company will cut 185 positions. The reduced will shave SEK 360 million in costs from the company in 2018. But even as headcount is reduced, “At the same time, we will be redirecting resources to ensure that we have a sufficient focus on new growth areas and that the organization is adapted for successfully competing in an expanding global biometrics market,” according to Fredrikson.

What comes next? This is the really interesting question. The new market offering the greatest potential “immediately ahead,” according to Fredrikson, is biometric smart cards.

There are many betting that 2018 is the year that fingerprint-based smart cards go mainstream. According to Fredrikson. “Due to the size of the global market, combined with the benefits of implementing biometric authentication in the payment area, smart cards have all the prerequisites for developing into the next biometric mass market.”

Fingerprint Cards has already started out along this road. There are well-established partnerships with Idemia and Gemalto (via Zwipe). “We also entered into cooperation with NXP Semiconductors during the quarter in connection with the breakthrough for this company’s new contactless technology for fingerprints on cards,” according to Fredrikson. “Although it will take some time for us to achieve commercial volumes, there are distinct indications that the market for biometric cards is finally starting to gain momentum, such as a number of implemented and planned market tests. In early 2018, for example, we announced a collaboration with Visa in connection with the first market test of contact and contactless biometric charge cards in the U.S. These tests are a key feature of efforts to evaluate and qualify various systems for the next step in the process, meaning certification of the technical solution by the mega card brands. This will be a very important milestone and could mean that a completely new volume market is created for Fingerprints’ biometric solutions,” says the CEO. A near term goal for the company is that the investments in new biometric markets will see the organization pulling in 10 percent of sales during 2018 from these new markets rather than capacitive scanners for smartphones.

But there is another new and exciting market Fredrikson discussed in his commentary, the automotive sector. Arguably the auto industry is the world’s largest industrial sector. Cars are certainly the single most valuable consumer item manufactured today on a mass scale. So any business in this is going to be big.

Fingerprint Cards is already making moves into this sector, most recently announcing a partnership with Altran Technologies to offer biometric solutions for the automotive industry and the signing of a long-term deal to collaborate on iris scanning with a company called Gentex, an auto parts supplier.

The Gentex deal was announced at CES. Fingerprints and Gentex showed off a possible use of iris-scanning technology at the show. According to a press release distributed at the time, this vehicle-based biometric identification system authenticates the driver with an iris scan and can be used for, “… vehicle-to-home automation services as well as vehicle-to-infrastructure transactions,” and in-vehicle payments. That is, you get in the car, it recognizes you, and then opens the garage door. When you get to work downtown the parking garages charges your account accordingly. This is exciting stuff. Biometrics-based driver authentication will also be used to improve vehicle security, cabin personalization and provide access cloud-based services. According to Fredrikson’s comments this week, “[The Genetex agreement] is a concrete example of our strategy to broaden our biometric technology portfolio…”

The cash position of Fingerprint Cards is a solid SEK 920 million. Revenues in the latest quarter totaled SEK 615.3 million. That’s down 62 percent compared with the fourth quarter of 2016. Earnings per share (before dilution) were negative, at SEK 0.05. Cash flow from operating activities came in at a loss of SEK 1.7 million.

The board of directors proposed at the annual general meeting that no dividend be paid for the 2017 fiscal year. Which makes sense in a period of reconsolidation. Said Fredrikson, “… 2017 was a challenging year of reduced demand and earnings. However, I am satisfied with our equity/assets ratio, which amounted to 66 percent at the end of 2017… As we now enter 2018, we are downsizing our organization and continuing to realign the business towards new areas. Although I am aware that this will entail difficult changes for many of our co-workers, the adaptation is necessary if we are to defend our competitiveness,” he said.

FPC has had a rough go of it in terms of share price of late. In the wake of the release of the interim numbers shares took a fairly steep dive. They continue to trade down from the highs registered earlier this year. Shares closed trading today at SEK 9.70.

Also releasing earnings this past week was Synaptics Incorporated, which reported financial results for its second fiscal quarter ended December 31, 2017.

According to the company net revenue for the second quarter of fiscal 2018 declined seven percent from the comparable quarter last year, to $430 million. This is up three percent from the quarter before. On a GAAP-basis the company registered a net loss for the second quarter of fiscal 2018 of $82.4 million, or $2.42 per share.

There is a one-time tax charge of $54 million in there due to changes in U.S. tax law (many companies are repatriating taxes to the U.S. and taking one-time tax hits this quarter as a result of the recent tax bill passed by Congress). But even as the company records a loss the stock was up sharply this week. On Valentine’s Day shares in Synaptics jumped ahead a solid 5.3% to close at USD $46.42. It seems investors are looking through current losses to the promise of the company’s technology, which is leading edge right now.

Earlier this quarter the world’s first smartphone with an in-display was launched by Vivo in China. That phone utilizes a fingerprint sensor made with technology from Synaptics technology, and investors clearly like the potential that is firming up around this next gen tech.

“Synaptics is starting to benefit from our transition encompassing a more diversified product portfolio and customer base,” said Rick Bergman, president and CEO, in a press release. “We continue to make meaningful strides across our core growth priorities within chip-on-film, OLED, in-display fingerprint and consumer IoT. This includes retail availability of the Vivo X20 Plus UD flagship smartphone, the world’s first phone with in-display fingerprint powered by Synaptics.”

This week an analyst with KeyBanc reiterated their ‘overweight’ rating on shares of Synaptics. The analyst suggested that Apple and its competitors could begin to focus on lowering the cost of materials used to make smartphones. It seems people aren’t rushing out to buy a $1,000 iPhone. If there is a new focus on cheaper parts this would also benefit Synaptics according to the analyst. But investors are also focused on that in-display sensor. It was only a week ago that shares in Synaptics dipped on a report that screen protectors can interfere with the in-display sensor on the Vivo. The most recent financial results reversed that brief sell-off. The Vivo X20 started to ship this month. The Synaptics’ Clear ID sensor, which went into mass production in December, is working, and investors are buying into that story, even if the books registered a loss this quarter. That show real confidence that the development of this next-gen bit of kit is going to pay off for the company.

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