Biometrics stocks this week: NEXT Biometrics, BIO-key, Fingerprint Cards

NEXT Biometrics is having a fantastic week. The company just announced that one of its products has been certified for use in the world’s largest biometrics program, India’s Aadhaar program. Shares in NEXT spiked 11% on the news.

Taking time to discuss the importance of this news Ritu Favre, CEO, NEXT Biometrics, hosted a conference call to explain the importance of the certification. “This is a significant milestone for the company,” said Favre. “We’ve been involved in a certification process for some time… This is one more proof point that we are a full provider into the Aadthaar program.”

A relatively new appointment to the position of CEO, Favre is clearly hustling hard to build out the business. India’s Aadhaar program is the world’s largest biometrics-based identification program. India, of course, is the world’s second most populous country after China. As a result an amazing 1.2 billion people have now been enrolled in Aadhaar. It is a massive program.

No wonder Favre wanted to publicize this key certification.

“The key client test for the Windows software was in January. And now we have certification on the hardware… [And] we’ll be certifying more software in the months to come,” said Favre on the call. “We believe this is a cornerstone that allows to pivot to sales and marketing… The certification of NEXT’s fingerprint sensor technology by the government of India is a confirmation of the reliability, security and convenience of our sensors… We are very pleased to have reached this milestone after a long and rigorous testing process. Delivering products for the Aadhaar program is an important part of NEXT’s business strategy.”

The company began the certification process in August of 2016. Considering the size of the program the certification process is rigorous. A branch of the Indian government, the Ministry of Electronics and Information Technology, Directorate of Standardisation Testing and Quality Certification (STQC), does the testing for Aadhaar. Certification requires separate testing for the hardware device as well as each version of software that will run on the platform. In the case of NEXT, the company just had a hardware sensor pass a test that involved more than 6,000 people.

“The key hurdle is to overcome the certification process. Not everyone can do this,” says Favre. “What I would say is that the large hurdle we have cleared in terms the certification process is one that not a lot of people were able to do.”

But what potential investors will really want to see are actual sales generating hard cash. On the call Favre was careful to temper expectations. But she said initial revenue is expected to begin to flow in the fourth quarter of this year. And that could be the start of a long ramp-up in sales.

The market opportunity for fingerprint sensors in Aadhaar is initially projected to be about three to four million units annually. But demand will expand after that.

“We expect to ramp up sales and volume through 2019. This market could grow to five to ten million units annually, with 30 million units deployed over the coming years in India,” said Favre.

The road map for the introduction of NEXT Biometrics products into the Indian market sees the company’s “Scallop” (3023-U) fingerprint reader launched first. That product will be followed by sensor modules (the 2023-U) used in devices such as point of sale (POS) terminals in the first half of 2019. Following that an encrypted, highly-secure fingerprint reader is planned for introduction in the second half of 2019, followed by another sensor module in the first half of 2020. These encrypted products all comply with “Level 1” specifications from the Unique Identity Authority of India (UIDAI) .

Interestingly, these products are also being designed to support broader use of Aadhaar for payments (that may be a future expansion of the program).

“The [lessons] that we have achieved through this process will apply with other government programs as we go forward,” said Favre. “This program will also provide a new use case as India moves toward a more digital currency.”

The NEXT products are being designed to satisfy the unique demands of large government ID programs. These programs involve vast numbers of people. They’re also spread over wide geographic areas, so they have to be durable. According to Favre the NEXT sensors can handle these demands. Looking ahead the Aadhaar certification establishes a track record for products that will satisfy other national ID programs that are expected to come into existence in the years ahead.

“As we look at the other government programs beyond the Indian market, China is the second largest. More than two million sensors are shipped into this market annually. We’ve begun development on this opportunity and we continue to look at other markets with new products,” said Favre. “We’ve been doing a lot of exiting stuff inside NEXT. I’m very excited about this roadway in the government sector. We feel we are very well positioned for these large government programs. We’ve been achieving the milestones that we have outlined.”

During a Q&A segment on the call an analyst asked about competition in this area. “We talked a bit about this during our the Capital Markets day. These sensors are a bit different from the smart card market. They have large optical sensors, and they’re pretty big. If you look at what you find in airports, those are the kind of products we’re competing against. We’re competing against the manufacturers of large optical vendors. I don’t want to mention names, but you can research… and you’ll see the names on the devices in airports.”

Favre went on to say that, “We’re confident that we have the reader ready. That is ready today. And so we can go through the rest of the software certification processes. We already have Microsoft certification. And then we’ll see shipments. I’m not going to estimate volume or number of units, but we’re now at a place where we can engage heavily in sales and marketing activities. We can start talking to potential clients… We have our products ready and our manufacturing site is ready to go.”

Another question from an analyst was about the possibility that this government sensor market could evolve into a smart card market. According to Favre, “There is no project that says we’re moving to a market for smart cards today in India or anywhere in the word. There’s no project that’s been announced,” said Favre. “But it would be interesting to see that evolve. We have a flexible sensor and a card sensor ready to go. And so I think we’re ideally suited if the market goes that way. If government went that way we are very well situated to take advantage of that. We could then be ready for that market should it emerge.”

Considering the massive size of the markets involved in these government program, as well as the potential for evolution in these markets to new products, it is no wonder that shares in NEXT Biometrics Group ASA are now trading around NOK 40.90, up 11.14% on Tuesday alone.

Shares in BIO-key International also enjoyed a bit of a spike this week, rising from USD $2.11 to about $2.60 before settling back to $2.26 later in the week. The bump in share price seems to have followed on an announcement this week that all of the remaining preferred shares in the company have been converted to common stock.

The official announcement from the company is that, “Series A-1 and Series B-1 Convertible Preferred Stock, and all accrued and unpaid dividends, have been converted into common stock at a conversion price of $3.60 per share.” What this means is that the company’s share structure has been simplified, and that’s something that investors generally applaud.

By removing the tier of preferred shares (which see some investors with more rights to company assets than others) the company’s share structure is easier to understand. How it is dividends will be split up among share classes (as well as has rights to assets in the case of a bankruptcy) becomes clearer, less complex. And that’s a good thing.

In the case of this conversion common shareholders will benefit from the elimination of approximately $638,000 in future annual dividend payments promised to preferred stock holders. That is, the $638,000 that would have gone to the holders of preferred stock will now be distributed to holders of common shares.

The conversion involved an issuance of 4,885,569 new shares of common stock, increasing the total number of shares outstanding to 12.6 million. So there is a bit of dilution to the holdings of existing shareholders. Nevertheless, the conversion cleans up the share structure, and that’s a sign the company is moving beyond an earlier “start-up” phrase.

Companies sometimes use preferred shares as a way of enticing investors to make an early investment in a company. Preferred shares sometimes have specified dividend payments attached, which gives the early speculative investor a bit more certainty. That seems to have been the case with BIO-key. “We are grateful for the support and confidence of these long-term investors who converted preferred stock and accrued dividends into common stock at roughly a 61% premium to the Friday June 1st closing price of $2.23,” said Michael DePasquale, CEO, BIO-key. “The conversions simplify and strengthen BIO-key’s capital structure while eliminating all future dividend payment requirements.”

BIO-key has had some good successes of late. The company is finally earning revenue on its line of biometrics-based locks. As it cleans up the early “start-up” share structure there is a signal here that the company is moving on to a more mature stage in its development. And that’s a good sign for investors.

Another company making news in the biometrics sector this week is Fingerprint Cards AB (FPC). The company has had some issues of late as market trends change. To deal with the shifts in business the company announced this week that it has initiated cost reduction measures and will write down some previous investments.

FPC announced it will write off non-cash inventory of approximately SEK 336 million. The company will also write off some non-cash R&D projects amounting to approximately SEK 143 million.

FPC management has been admirably upfront about the fact that the company’s sales and earnings have been negatively impacted by a weak market for its capacitive fingerprint sensors. The market is now demanding smaller and cheaper fingerprint sensors. FPC, which produces the premium product in the market, has suffered.

These market shifts are a classic example of how it is an industry matures. In the early days FPC’s sensors were first to market, and success was immediate. But after a while competitors caught on. Low-cost producers in China began knocking out lower priced products. FPC’s sensors, still considered the premium product in the marketplace, suffered. As a result, “The company has therefore taken resolute measures in order to adapt its costs.”

According to a press release the cost reduction initiatives are estimated to yield additional savings of some SEK 350 million on an annual basis. The implementation of the cost cutting actions are expected to be finalized during the third quarter of 2018. The company is also reducing the workforce by some 179 positions. Restructuring costs related to the reduction in headcount are expected to cost about SEK 65 million. Those costs will also be recorded in the third quarter of 2018.

“We are continuing to adapt our operations to the fundamental and rapid change in business conditions, with the objective of returning to profitable growth. The cost reduction measures we are communicating today are important in order to strengthen our competitiveness”, said Christian Fredrikson, president and CEO. Fingerprints.

The company was obligated by Swedish securities law to make the announcements. Shares in the company declined a bit to about SEK 6.26.

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BIO-key  |  biometrics  |  Fingerprint Cards  |  Next Biometrics  |  stocks