Fingerprint

images-2Swedish biometrics specialist Fingerprint Cards reported a new record quarter this morning. During Q3 2016, revenues continued to rise to SEK 1,862.3 M, equal to growth of 93 percent compared with the corresponding quarter of 2015 and to sequential growth of 12 percent.

On top, even profitability improved year-over-year which is impressive, to say the least. The operating margin for the quarter was 41 percent (versus 36% during Q3 2015) and the high gross margin of 49 percent (vs 45%) is evidence of the company’s leadership in a market where gradually increasing competition.

The newly appointed CEO Christian Fredrikson comments in the report: “I am particularly gratified to note that the 121-percent rise in operating profit exceeded the increase in revenues.

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It was the first report to be presented by CEO Fredrikson and we believe that he took the opportunity to adjust the guidance to be more conservative (and easier to beat in the future). For full-year 2016, Fingerprint now estimates that revenues will end up between SEK 7,200 M and SEK 7,500 M, which is in the lower region of the previously stated range of SEK 7,200–8,300 M. As the main reason
for this, the companies states that a couple of customers have reduced their short-term production forecasts for already launched smartphones.

At the same time, the company is raising its guidance for the full-year operating margin to being about 40 percent, which is an update from the previously communicated estimate that it would exceed 37 percent.

Looking at consensus analyst expectations before today’s numbers, the mean estimate was for revenues to reach SEK 7,649 M and an EBIT of 3,163 M, implying a margin of 41 %.

We are very encouraged by the CEO’s comments that the market continues to develop well
and, above all, he notes continued substantial growth potential in the smartphone segment. For this year, Fingerprint, in common with independent industry analysts, expects sales of smartphones
to total approximately 1.5 billion, of which slightly more than half will feature an integrated fingerprint sensor. Aided by Fingerprint’s new low-cost sensors, it will be possible for OEM
customers to supply even cheaper smartphones equipped with fingerprint sensors and the company will thus continue to drive the market.

During the quarter, Fingerprint’s OEM customers launched 36 mobile units equipped with an
integrated sensor from Fingerprint Cards, meaning that the company surpassed 100 launches
for the full year. Fingerprint is the largest supplier of sensors with an estimated market share for 2016 in the mid-range of 50–70 percent of the addressable market, meaning the market excluding Apple.

Fingerprint is highly active on the product development side and thanks to its new products, such as
the previously launched low-cost sensor and more advanced sensor solutions that will be used under glass, there is a very high likelihood that the company will continue to be chosen as a supplier by both existing and new customers.

Another very exciting aspect are potential applications outside of the smartphone segment. PCs represent an obvious opportunity in the near future, since this will enable Fingerprint to build on existing products and business relations. In this context, we note that Apple’s new Mac Book Pro which will be released tonight, is expected to feature a fingerprint sensor. Since Apple is usually a trendsetter, it is very likely to expect other PC developers to include fingerprint sensors soon as well.

There is also a lot of market activities around smartcards, but CEO Fredrikson states that it will take time before it has developed into a mass market since it will require both new products and new approaches in other value chains. Fingerprint is, however, already conducting active product and business development together with relevant partners in these areas and is accelerating its investments to become the leader in these new segments.  We note that during the ongoing Money20/20 conference, two card manufacturers (Kona-i and CPI) announced releases of smartcards which have Fingerprint Cards’ sensor integrated. Also, a number of new customer projects have been initiated in Asia.

Furthermore, Fingerprint has already provided its technology to the automotive market. Leading car makers and other companies in the automotive industry have selected Fingerprint’s sensors for further development and integration into commercial applications. Saying that the potential from such applications is huge is only stating the obvious.

Valuation

Looking at the valuation, we note that the share currently trades at 9,8x expected 2017 earnings. Adjusted for its net cash position of SEK 932 M, the company is valued at 7 times next year’s operating profit (EV/EBIT). Moreover, these consensus estimates include estimates from several investment banks that are extremely bearish on Fingerprint’s development, with eroding market share and prices being the main arguements. We believe, therefore, that there is upside to current consensus numbers.

We believe that Fingerprint’s management would be well advised to market its investment story among institutional investors outside Sweden, not the least in the US. We believe, Swedish institutions neither do understand the biometrics industry nor are they known to be open for new technologies. Their absence of interest allows short-sellers to manipulate Fingerprint’s share price at their own will. Interestingly, one of the Chinese competitors, Goodix, was recently listed in Shanghai. Its shares trade at a P/E-ratio of around 30x on expected 2016 earnings.

Both on its own and from a peer-valuation perspective, Fingerprint stands out as extremely undervalued. Reasonably, the share should trade at least around SEK 150-200 today, given the known facts. This implies an upside of around 110% to current levels.

The company will host a capital markets day on December 8th, 2016 and we expect plenty of newsflow in connection with that event.

We do also expect the new CEO to buy a more significant stake in the company in coming weeks, as a proof of his conviction. So far, Mr Fredrikson owns 2000 shares.

Nordic Investor