Biometrics stocks this week: Nuance overhauls board, DHS face ID tests, NEC contracts
The biometrics sector is an exciting place to be these days. New products are being launched. Biometrics-based devices are popping in all kinds of new and interesting places. New ideas are bubbling up from start-ups. Established companies are reformatting their business plans to get in on the latest trends.
One company that’s been doing a bit of housecleaning of late is Nuance Communications. The company is a leader in medical transcriptions. Its products depend on advanced voice-based biometrics. The company suffered a blow when the NotPetya malware attack of June 2017 knocked one of its key products offline for a period. The company ended up losing out of $92 million in revenue. Since then a new management team has come aboard and is working to address the concerns of investors.
The new CEO at Nuance is Marc Benjamin. He was appointed to the position just a couple months ago and is moving quickly to put his stamp on the company. He’s wasting no time in getting down to business. Last week it was announced Nuance is overhauling its board of directors. Three long-serving directors will leave. Two new committee chairs have been appointed and have, “… adopted majority voting as the standard for uncontested director elections. In addition, the board announced it intends to provide shareholders the right to call special meetings.” These are advances in governance that some shareholders have demanded. According to a press release, “Beginning with the appointment of Mark Benjamin as chief executive officer in April 2018, the Nuance board of directors has embarked on a series of changes to advance the business and address matters raised by shareholders in recent years.” Sanjay Vaswani has been appointed chair of the Compensation Committee and Mark Laret is settling in as chair of the Nominating & Governance Committee. The new Majority Voting Standard for uncontested elections of directors is a change that has been made in response to shareholder feedback according to the release. “In response to feedback from our shareholders and our commitment to strong governance, we are taking steps to improve our practices,” said Laret, the new chair of the Nominating & Governance Committee. “We appreciate the input we have received and will continue this engagement regarding Board composition and corporate governance as we build a stronger Nuance.” That has to sound good to investors.
The company also announced it has been awarded the highest rating for Intelligent Assistants (IA) and bot vendors for the second consecutive year in a key report from Opus Research. According to Opus, “… enterprise spending on Intelligent Assistants will exceed a projected $2 billion in 2018, heading for $5.5 billion in 2021 — a 67% [compound annual growth rate] for the next five years.” According to Opus this is a result of a “perfect storm” that sees technological advancement in Speech Processing, [natural language understanding], machine learning and knowledge management that is giving rise to “heightened levels of comfort and confidence in human-to-machine communications.”
Even so, Nuance still has a way to go before it is again firing on all cylinders. This past week Moody’s Investors Service, a bond rating company, announced that it had shifted its outlook on Nuance’s debt-to-revenue ratio. The debt analysts at Moody’s notched their outlook down, from ‘positive’ to ‘stable.’ So that’s a negative bit of news. But the situation is far from dire. According to the analysts, “The change in outlook reflects the longer than anticipated time required to reach previously outlined upgrade targets.” It is still the case, according to Moody’s, that Nuance has a, “… leading position in the voice recognition and natural language understanding software sector.” It has “challenging revenue growth prospects,” as well as relatively high debt levels. But free cash flow is expected to be strong and the company continues to maintain a leading position within its markets. According to Moody’s, the company’s growth profile, “… slowed in recent years due to changing product mix in its healthcare end market, challenging conditions in the mobile devices end market and a shift to subscription sales.” According to the bond rating service, while revenues were disrupted by the NotPetya malware incident, revenues are beginning to show signs of stabilizing. According to Moody’s, “… we expect flat to modest organic growth over the next several years. The shift to a subscription model for a significant portion of the company’s products contributed to negative organic growth in recent years but appears to be near an inflection point.” That’s positive news. The outlook could be upgraded if the company sustains organic growth, debt levels fall and free cash flow is sustained at current levels. The Burlington, MA-based company reported revenues of $2 billion last year. Nuance is traded on Nasdaq. Shares are currently trading at about USD $14.32 and were up almost 2% on Thursday alone. Could the tide finally be turning at Nuance?
The Department of Homeland Security recently held a biometrics technology rally. Eleven technology providers were given a gallery of 3,000 pictures of 300 people. Contestants were measured on metrics like transaction time and failure rate. NEC and Gemalto came out on top in the standings after participating in the rally under code names Castle and Crestone.
NEC tested its NeoFace Express product, which compares international travelers’ photos with pictures in visa and passport documents. The first place finish will be welcomed at NEC, a company that has suffered some negative headlines of late.
It doesn’t seem as if NEC will suffer any fallout in its stock price, but the company has been booted off a recent biometrics services project in Australia. The company is far too massive for one contract in one country in one product area to have an effect, of course. But it did suffer some negative headlines around a biometric project for the Australian Criminal Intelligence Commission (ACIC). The project was one in which the National Automated Fingerprint Identification System run by ACIC would be replaced by a multi-modal service that included footprints and facial recognition. The project is said to be behind schedule and over-budget, and was reportedly returning a high number of false positives. The USD $39.6 million contract won by NEC Australia in May 2016 is believed to have passed $76.1 million in costs. The cost inflation was too much for the ACIC, which had the access privileges of NEC Australia staff revoked.
NEC has been sure to follow up the news reports with its own press releases noting that NEC has won several other contracts for biometric technology in the country. NEC also said it is “extremely disappointed,” and denied any breach of obligations in the dispute. According to a company statement, the new systems “was ready to be handed over to the ACIC for System Acceptance Testing when the project was placed on hold by the ACIC.” As for the other project, the New South Wales Roads and Maritime agency is preparing to launch a new facial recognition system from NEC Australia. The project involves a database of licensing photos. NEC was awarded several contracts earlier this month to implement and manage the system over the next four years. The contracts are worth a combined total of about USD $8 million. According to the NEC press release, “This contract win comes a few weeks after the Australian Criminal Intelligence Commission cancelled its biometrics services contract with NEC”. The statements from NEC also noted that, “The termination for convenience clause allows government departments and agencies to terminate a contract, regardless of whether or not the contractor has committed a default or breach of that contract”.
NEC stock is at JPG 2,971.
It’s also worth noting that Australia’s Department of Home Affairs is also said to be, “… pressing ahead with a national facial recognition program.”
Gemalto tested its Live Face Identification System (LFIS) in the Homeland Security biometrics technology rally. LFIS matches specific faces to those in different environments such as a large sports arena, railway station or airport. In a one-to-one testing environment, the system had a failure rate (in terms of acquiring images) of less than one percent within 20 seconds.
Gemalto continues to trade at EUR 49.88, which is just under the EUR 50 that French tech firm Thales is offering in its ongoing acquisition of Gemalto (expected to be completed later this year).
As mentioned recently in this column Synaptics and Dialog Semiconductor are in talks to combine forces to beat the smartphone slowdown. A stock analyst recently wrote a piece explaining why the Synaptics-Dialog hook-up is a bad idea. According to the column Dialog would have to stretch its resources to land Synaptic. The British chip maker has $500 million in cash and no debt, which means that it would have to tap the debt markets to finance this deal, or dilute shareholder value by issuing more shares. According to the analyst, “Dialog could end up paying through the nose and also disturb its balance sheet to get its hands on Synaptic’ IoT business… and the IoT business isn’t big enough to justify that.” So that’s one person down on that deal.
Shares of Synaptics are trading at USD $50.31, which is up about $2.00 since rumors of the talks surfaced.
Veridium is a biometrics company based in Quincy, Massachusetts. The company does authentication from a software-only platform that “… replaces such things as passwords, tokens and swipe cards with multiple biometrics derived from a smartphone.” The phone biometrics functions are face, fingerprint recognition and a touchless fingerprint verification system that captures four fingerprints at once using the standard camera on a smartphone. That’s kind of neat. This past week it was announced the company raised a Series B round of venture funding that will allow the company to, “… accelerate development of its multifactor authentication platform and grow its sales and marketing presence in the Americas, Europe and Asia.” Citrix Systems and an executive from the financial services sector, Michael Powell, were said to be two of the main investors in this round of funding. It was also reported that the funding is “unusual” given that there was no official Series A round. The only funding before this point is $150,000 from one investor and an “undisclosed amount” from the existing management team and board of directors. Whatever the case, the newest investors like what they see. Michael Spencer, variously described as an investor, entrepreneur and British philanthropist, is said to have plopped down $14.2 million of his own money in this venture round. It was also announced that Spencer will join Veridium’s board. Spencer is the founder and chief executive of NEX Group PLC, a UK-based company that develops products for digital stock exchanges. He was once described as the, “… richest self-made person in the City of London…” The NEX Group is said to be in the process of being acquired by the Chicago Mercantile Exchange for $5.5 billion. It seems Spencer thinks the action is in the biometrics sector these days.
The financing round also included a contribution from Citrix Systems, an American multinational software company that provides server, application and desktop virtualization products (among others). Citrix products are in use by 98% of the companies on the Fortune 500 list. It generated revenue of almost $3 billion last year. Founded in Texas in 1989, by the 1990s Citrix came to prominence as a leader in thin client tech. In 2016 the company did a USD $1.8 billion product deal with LogMeIn, a company that provides users and administrators access to remote computers. It makes sense these companies would need access to something like the Veridium product. Citrix trades on the NASDAQ.