COMPANY ANALYSIS 20 September 2017

Summary

Fingerprint Cards (FINGb.ST)

List: Large cap Another slap in the face Market Cap: 7,140 MSEK  This is a short update following the launch of iPhone X Industry: Semiconductors CEO: Christian Fredrikson and Monday’s press release from FPC stating that Q3 Chairman: Jan Wäreby sales will only be SEK 800-840 million – almost half

of consensus at the time. OMXS 30 Fingerprint Cards  In short, our investment case did not play out. iPhone 140 X and the non-existent recovery despite normalized 120 inventory represent major, negative events adding to 100 80 an already high insecurity. 60  We have lowered our EBIT estimates for 2017-2019 by 40 20 on average 67 percent and we see no alternative but to 0 20-Sep 19-Dec 19-Mar 17-Jun 15-Sep revise our long term estimates as well since we were completely wrong. Our new base case is SEK 27 (52) and in our reasonably pessimistic scenario we estimate

a fair value of SEK 10 per share (22).

Redeye Rating (0 – 10 points)

Management Ownership Profit outlook Profitability Financial strength

5.0 points 2.0 points 6.0 points 6.0 points 7.5 points

Key Financials

2015 2016 2017E 2018E 2019E Share information Revenue, MSEK 2,901 6,638 3,177 3,738 3,849 Share price (SEK) 22.7 Growth 1,142% 129% -52% 18% 3% Number of shares (m) 314.0 EBITDA 954 2,661 415 705 758 Market Cap (MSEK) 7,140 EBITDA margin 33% 40% 13% 19% 20% Net debt 17E (MSEK) -1,246

EBIT 910 2,613 345 567 633 Free float (%) 100 % EBIT margin 31% 39% 11% 15% 16% Daily turnover (’000) 18000 Pre-tax earnings 910 2,614 319 539 612 Net earnings 798 2,035 244 421 477 Net margin 28% 31% 8% 11% 12%

2015 2016 2017E 2018E 2019E

Dividend/Share 0.00 0.00 0.23 0.40 0.46 Analysts:

2015 2016 2017E 2018E 2019E EPS adj. 2.54 6.48 0.78 1.34 1.52 Viktor Westman

P/E adj. 46.8 9.7 29.2 17.0 15.0 [email protected] EV/S 12.5 2.8 1.9 1.5 1.4 EV/EBITDA 38.1 7.0 14.2 8.0 7.1

Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report.

Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel +46 8-545 013 30. E-post: [email protected] Fingerprint Cards Redeye Rating: Background and definitions

The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation.

Company Qualities

The aim of Company Qualities is to provide a well-structured and clear profile of a company’s qualities (or operating risk) – its chances of surviving and its potential for achieving long-term stable profit growth.

We categorize a company’s qualities on a ten-point scale based on five valuation keys; 1 – Management, 2 – Ownership, 3 – Profit Outlook, 4 – Profitability and 5 – Financial Strength.

Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted differently according to how important they are deemed to be. Each key factor is allocated a number of points based on its rating. The assessment of each valuation key is based on the total number of points for these individual factors. The rating scale ranges from 0 to +10 points.

The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of the bars therefore reflects the rating distribution between the different valuation keys.

Management Our Management rating represents an assessment of the ability of the board of directors and management to manage the company in the best interests of the shareholders. A good board and management can make a mediocre business concept profitable, while a poor board and management can even lead a strong company into crisis. The factors used to assess a company’s management are: 1 – Execution, 2 – Capital allocation, 3 – Communication, 4 – Experience, 5 – Leadership and 6 – Integrity.

Ownership Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner commitment and expertise are key to a company’s stability and the board’s ability to take action. Companies with a dispersed ownership structure without a clear controlling shareholder have historically performed worse than the market index over time. The factors used to assess Ownership are: 1 – Ownership structure, 2 – Owner commitment, 3 – Institutional ownership, 4 – Abuse of power, 5 – Reputation, and 6 – Financial sustainability.

Profit Outlook Our Profit Outlook rating represents an assessment of a company’s potential to achieve long-term stable profit growth. Over the long-term, the share price roughly mirrors the company’s earnings trend. A company that does not grow may be a good short-term investment, but is usually unwise in the long term. The factors used to assess Profit Outlook are: 1 – Business model, 2 – Sale potential, 3 – Market growth, 4 – Market position, and 5 – Competitiveness.

Profitability Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 – Return on total assets (ROA), 2 – Return on equity (ROE), 3 – Net profit margin, 4 – Free cash flow, and 5 – Operating profit margin or EBIT.

Financial Strength Our Financial Strength rating represents an assessment of a company’s ability to pay in the short and long term. The core of a company’s financial strength is its balance sheet and cash flow. Even the greatest potential is of no benefit unless the balance sheet can cope with funding growth. The assessment of a company’s financial strength is based on a number of key ratios and criteria: 1 – Times-interest-coverage ratio, 2 – Debt-to-equity ratio, 3 – Quick ratio, 4 – Current ratio, 5 – Sales turnover, 6 – Capital needs, 7 – Cyclicality, and 8 – Forthcoming binary events.

Company analysis 2 Fingerprint Cards Another slap in the face

Our previous investment case suggested that the stock market’s perception of FPC’s problems was too one-dimensional. Our belief was that in addition to the excess inventory the big shortage of displays disfavoured FPC’s customers while the other non-targeted tier 2 and tier 3 smartphone manufacturers (especially those that did not rely on Samsung’s AMOLED panels) won market shares. Our conclusion was therefore that these factors were surmountable and short-term meaning that the fear of competition was exaggerated. This reasoning obviously proved totally wrong and what makes matters worse is that we still neither understand FPC’s problem nor the magnitude of them.

As we wrote in our initial comment the profit warning is one more proof of how hard it is for FPC to foresee the rapid market movements in Asia and especially China. Besides the USD movement and product mix FPC mentioned Apple as a part of the market decline. The 10 year anniversary of the iPhone and the customers’ cautious waiting for the Apple event was known in advance but still FPC were surprised by the standstill among anxious customers waiting for Apple to reveal its secrets. As usual, there was a lot of smoke screens from Apple. It should be noted that the customers’ insecurity was not necessarily related to the eventual survival of Touch ID but could also have been a lot of other things such as e.g. display technology etc. However, there must be more reasons behind the market softness. Consequently, FPC named Apple as only one of the factors of the cautious market. We believe one other important reason is a slower penetration ratio in the low end segment but we request more information from FPC regarding what caused the softness in the coming Q3 report. However, FPC emphasized that besides a (short term) delaying Apple effect there is in general nothing new in particular on the market, which leads us to believe that we have severely underestimated the ASP decline, possibly from intense competition, while overestimating the growth in market penetration.

Following the Apple event and launch of iPhone X without Touch ID we commented on the risks of FPC customers following suit. We will now elaborate more on these ideas and compare face recognition to iris.

Face or iris? The general theory is that Apple wanted to have a clean front of the phone with a bezel-less display design. When Apple was not able to put the fingerprint sensor under the display it refused to compromise regarding the design and added face recognition instead of Touch ID. Under glass is therefore likely an important priority for FPC ahead. However, we are not sure how FPC is doing in this area as e.g. the LG project as far as we know has been discontinued.

Company analysis 3 Fingerprint Cards Looking at FPC’s view of iPhone X first, it is evident from FPC’s optimistic posts in its brand new blog that FPC does not believe that fingerprint sensors will be replaced by face recognition as it praised Apple for embracing multimodality. In addition, 2 out of 3 Apple phones launched at the Apple event had fingerprint sensors (on the front).

FaceID has some distinct disadvantages compared to iris. The iPhone X is a very high end premium phone and FaceID is likely not for everyone. Face recognition needs more light sources and hardware components compared to iris, meaning iris by definition is more cost effective. Iris is more secure by a factor 10x compared to Apple’s claimed FAR of 1/1 million. Apple’s FAR is likely good enough but in addition we believe iris is less spoofable than face. However, according to FPC, Apple’s FaceID is not only about biometric security but also seems to be a bigger play in e.g. augmented reality. Most important, perhaps, is the speed and convenience factor. iPhone X took 2-3 seconds to open which we believe is significantly slower than Delta ID’s solution. Face recognition will also have to fight scarfs, hats and veils as well as changes in the face such as someone growing a beard or gaining/losing weight. By contrast, the iris remains basically unchanged throughout a person’s lifetime.

FPC’s most important take on iPhone X seems to be that FaceID could increase the demand for iris from the customers who want to provide a similar user experience for a lower price. The question on what will happen next is hard to answer as the market is complex. Some of FPC’s customers could be called Apple copy cats while others are more self-propelled. However, we argue that it does not matter if the iris technology is a lot better than face recognition since Apple is such an important trend setter, which is troublesome. The important question is therefore rather if Apple decisively will pursue the FaceID over Touch ID approach for coming models or not. We notice that Apple CEO, Tim Cook, stated that the iPhone X is "the biggest leap forward since the original iPhone" and that it is the future way of unlocking the phone.

Thus, we still find the long term consequences of iPhone X and FaceID hard to grasp. As we mentioned in our initial comment, Apple has previously killed or almost killed numerous of other businesses and technologies when deciding the industry technology agenda and setting the example for its peers, one prominent example being the popularization of pro cap touch sensors. FaceID might have a significant, negative, long term impact if the FPC customers cannot withstand the pressure from the iPhone X. We do however on the other hand note historical examples of Apple previously being forced to sometimes retreat following introducing new inventions.

It is worth noticing that Synaptics in January announced a partnership with KeyLemon to include KeyLemon’s face recognition technology on its platform. Thus, Synaptics also has a multimodal approach although it has bet on another horse – the same horse as Apple. KeyLemon’s technology

Company analysis 4 Fingerprint Cards has previously been spoofed by photographs and the FAR levels have reportedly been at only 1/10 000. However, as mentioned above, it would not be the first time that Apple and its peers have settled for an inferior technology.

Company analysis 5 Fingerprint Cards Financial estimates

Our OPEX and gross margin estimates are virtually unchanged. However, we have lowered our sales estimates for 2017-2019 with on average 50 percent per year, meaning 67 percent lower EBIT for these years in total (see the table below).

Redeye's revised estimates

Q3'17E Q4'17E 2017E 2018E 2019E

Net sales - previous estimate 1,684 1,978 5,637 6,920 9,054 Adjustment (%) -51% -57% -44% -46% -57% Net sales - new estimate 824 843 3,177 3,738 3,849

Gross profit - previous estimate 647 764 2,440 2,921 3,693 Adjustment (%) -51% -57% -49% -51% -60% Gross profit - new estimate 319 329 1,243 1,438 1,480 Gross margin 38.7% 39.0% 39.1% 38.5% 38.4%

EBIT - previous estimate 426 575 1,144 1,525 2,052 Adjustment (%) -77% -82% -70% -63% -69% EBIT - new estimate 98 104 345 567 633 EBIT margin 11.9% 12.3% 10.9% 15.2% 16.4%

Profit before tax 98 104 319 539 612 Tax -22 -23 -75 -119 -135 Profit for the period 77 81 244 421 477 Profit margin 9.3% 9.6% 7.7% 11.3% 12.4%

EPS (fully diluted shares outstanding) 0.24 0.26 0.78 1.34 1.52 Number of shares (millions) 314.0 314.0 314.0 314.0 314.0

The revisions in our sales estimates above are based on: lower ASP, slower TAM growth especially in the entry level segment, lower smartphone market share and delays in the roll-out in new verticals. We believe that the market share in smartphones will go down somewhat faster to around 20 percent by 2020. The ASP appears to already be down at around USD 1.6 and not at USD 1.85 as we thought. Thus, the product mix and/or the price pressure from competition is worse than we expected. According to our calculations the ASP decline CAGR since Q1’16 is about -8 percent per quarter, corresponding to -28 percent per year. We expect this rate to slow down to -18 percent in 2018 and -11 percent in 2019 due to higher ASP in the new verticals.

On the conference call FPC stated that there are no large differences in gross margins between back- and front mounted sensors respectively. On a positive note Apple put the fingerprint sensors on the front in the latest models but for FPC we are not assuming a quick comeback for front mounted sensors (if these are not successfully mounted under the glass).

Company analysis 6 Fingerprint Cards Sales Assumptions Our sales assumptions per segment are listed in the table below:

Assumptions for sales estimates - 2016-2021 CAGR 2016 2017 E 2018 E 2019 E 2020 E 2021 E 17-21

Units Mobile devices 319.5 223.0 305.0 331.4 365.6 397.1 15.5% Smart cards - 1.8 8.0 15.0 30.0 55.0 PC and PC peripherals 0.1 5.8 12.0 22.3 36.1 41.0 63.4% Automotive - 0.0 0.1 0.3 1.0 2.0 Delta ID & other non-sensor sales 0.7 3.3 8.9 25.0 42.9 179.7% IoT 1.6 2.4 5.0 9.0 16.0 26.0 81.4% Total units (only sensors) 321.2 233.0 330.1 378.0 448.7 521.1 22.3% Units, percentage change YoY -27.5% 41.7% 14.5% 18.7% 16.1%

ASP Mobile devices 2.4 1.6 1.3 1.1 1.1 1.0 -11.6% Smart cards - 2.6 1.9 1.7 1.6 1.5 -12.8% PC and PC peripherals 2.7 2.6 2.5 2.2 2.0 2.0 -6.3% Automotive - 0.0 9.0 8.0 7.5 7.0 Delta ID & other non-sensor sales 2.0 1.5 1.0 0.8 0.7 -23.1% IoT 7.6 5.5 3.2 2.9 2.6 2.4 -18.7% Weigthed average ASP (only sensors) 2.4 1.7 1.4 1.2 1.2 1.2 -8.0% ASP, percentage change YoY -29.5% -17.9% -10.8% -1.6% -0.4%

Total sensor/module sales, USD 777 397 462 472 552 638 12.6% Non-sensor sales, USD - 1.4 5.0 9.0 20.0 30.0 Net sales, SEK 6,638 3,177 3,738 3,849 4,573 5,344 13.9% Net sales, percentage change YoY 228.9% -52.1% 17.7% 3.0% 18.8% 16.9%

Company analysis 7 Fingerprint Cards Investment case

 Major stock market distrust from missed targets, insider crime accusations etc.  Trust needs to be restored by beating consensus  Upside potential in base case but still a considerable downside risk

Major stock market distrust from missed targets, insider crime accusations etc. We are not overly surprised by the negative trend for the share price given all the negative news such as profit warnings, insider crime accusations, fines from NASDAQ Stockholm Disciplinary Board due to shortcomings in the information disclosure and so on and so on. All these factors add up to a major distrust towards FPC, which should not go away anytime soon. As investors do not trust FPC they also tend to ignore e.g. the market leadership and the advantageous position with access to capacity as well as the strategic transition moving from selling semiconductor components to providing biometric solutions (e.g. own algorithm, Delta ID, SoC etc.). We also feel that the mistrust for FPC make investors neglect FPC’s solid position in the new verticals that will contribute to a fast total market growth. The coming new segments may be way delayed but it does not mean that FPC does not have the partnerships necessary etc.

Trust needs to be restored by beating consensus All trust has vanished. Forget about the number of launched smartphone models, bid rumours, Samsung orders, stock repurchases, Delta ID or other value-adding acquisitions, etcetera. Figures above consensus expectations is what is required to break the downward spiral for the share price. We need one or more likely multiple, strong “one finger salute” reports that beat earnings consensus.

Upside potential in base case but still a considerable downside risk There is upside potential in relation to our base case of SEK 27 per share relation but despite the major fall for the FPC shares we still see a considerable downside risk in our reasonably pessimistic scenario of SEK 10.

Company analysis 8 Fingerprint Cards Valuation

For the same reasons mentioned in our short term estimate changes as well as the negative effect from FaceID we have made revisions in our long term estimates (see below for our estimates in detail). Consequently, we have a new fair value range where base case amounts to SEK 27 per share. Our new reasonably pessimistic and optimistic scenarios are SEK 10 and SEK 48 respectively.

In our previous research report we wrote that the st0ck market’s confidence regarding FPC is close to rock bottom. Little did we now that FPC had another nasty surprise for us. As we described in our investment case above we believe the only thing that would really make a positive difference for the current share price is strong reports well above consensus estimates

FaceID has given birth to a fear on the stock market that the FPC customers will follow Apple and replace fingerprint sensors with face recognition instead of adopting iris. We suspect that this fear is exaggerated but nevertheless it will remain present during a foreseeable period of time.

DCF valuation In our valuation of FPC we have used a discounted cash flow valuation (DCF) for three different scenarios to come up with our fair value range:

 Base case – the scenario we believe is the most likely  Bear case – a reasonably pessimistic scenario  Bull case – a reasonably optimistic scenario

The purpose behind the valuation range is to illustrate the uncertainty regarding the future of FPC as well as to illustrate what is factored in at a given price.

Based on our Redeye Rating model we use a required rate of return of 12.4 percent. This required rate of return, a terminal growth rate of 2.0 percent and a tax rate of 22 percent are used in all three scenarios.

Base case – biometric solutions for multiple segments In our base case FPC completes the transition from component supplier to a leading provider of biometric solutions. Our assumptions are summarized below.

Company analysis 9 Fingerprint Cards FPC: valuation assumptions in Base Case Assumptions 2016-26 2017-26 DCF valuation CAGR Sales -0.1% 8.5% WACC 12.4% EBIT margin (weighted avg.) 22.2% 20.0% NPV of FCF 3,855 ROIC (average) 208.9% 52.2% NPV of terminal value 3,526 ROE (average) 27.2% 17.8% EV 7,381 Terminal Net cash 17E 1,246 Terminal FCF growth rate 2% Adjustment for dividend 0 EBIT margin (terminal) 21% DCF value 8,544 EV/SALES exit multiple 1.6x Fair value per share 27 EV/EBIT exit multiple 7.5x Current share price 23 Potential/Risk 18%

 Revenue growth at a CAGR of 9 percent from 2017 to 2026, meaning revenues of SEK 6.6 billion in 2026, i.e. in line with 2016  Revenues from the mobile device segment averages SEK 3.1 billion during 2017-2026 and reaches SEK 3.2 billion in 2024  Other segments start to significantly contribute to revenues in 2019, representing 23 percent of total sales in 2019 and the majority of sales (51 %) in 2026  Blended ASP stays more or less flat from 2019 to 2026 as we expect modules and combinations of multiple sensors and biometric modalities to be more expensive whilst the price of fingerprint sensors for the mobile device segment experience a slower decrease  Gross margin for hardware gradually decreases by 1-2 percentage points per year to 30 percent on average in 2026 but overall gross margin only drops to 36 percent as non-sensor sales/software solutions have higher gross margins  OPEX increases to 17 percent of revenues in 2026 as other segments are less scalable than the mobile device segment and also as a consequence of rapidly increasing R&D spend  EBIT-margin reaches 20 percent in 2026

Bear case – market share losses and margin pressure In our bear case we see severe setbacks in the demand for fingerprint sensors in mobile devices due to Apple’s FaceID similar to when Apple basically killed all other touch technologies when pro cap touch technology became the industry standard. We do however find it reasonable that other verticals could compensate for the sales drop in mobile devices. Our assumptions are summarized below.

FPC: valuation assumptions in Bear Case Assumptions 2016-26 2017-26 DCF valuation CAGR Sales -8.0% -0.8% WACC 12.4% EBIT margin (weighted avg.) 15.1% 9.4% NPV of FCF 1,249 ROIC (average) 177.8% 17.9% NPV of terminal value 582 ROE (average) 17.3% 7.0% EV 1,831 Terminal Net cash 17E 1,237 Terminal FCF growth rate 2% Adjustment for dividend 0 EBIT margin (terminal) 8% DCF value 2,993 EV/SALES exit multiple 0.6x Fair value per share 10 EV/EBIT exit multiple 7.5x Current share price 23 Potential/Risk -59%

Company analysis 10 Fingerprint Cards  Growth at close to 0 percent during 2017-2016 as FPC’ market share in the mobile device segment goes down to 10 percent and adoption of FPS in other segments is considerably slower than in base case  In our bear case we assume that FPC will have no revenues from non-sensor sales  With less scale, FPC will not have the resources to continuously innovate and its solutions face increasing commoditization  Gross margin decreases and falls to 37 percent in 2018 to reach 30 percent in 2026 as FPC loses bargaining power due to dual sourcing.  With less scale, OPEX as a percentage of sales only comes down to 22 percent, despite significantly lower R&D spend than in our base case  In the long term, from 2026 and on, we assume the EBIT margin to be 8 percent

Bull case – Nvidia of biometrics In our bull case FPC manages to continually reinvent itself and reposition itself in the value chain. Apple discontinues its face recognition technology and fingerprint sensing remains the go to technology for mobile devices as well as most other application areas. Our assumptions are summarized below.

FPC: valuation assumptions in Bull Case Assumptions 2016-26 2017-26 DCF valuation CAGR Sales 4.0% 12.7% WACC 12.4% EBIT margin (weighted avg.) 28.2% 27.2% NPV of FCF 7,654 ROIC (average) 236.5% 82.4% NPV of terminal value 6,297 ROE (average) 33.2% 24.5% EV 13,950 Terminal Net cash 17E 1,281 Terminal FCF growth rate 2% Adjustment for dividend 0 EBIT margin (terminal) 25% DCF value 15,113 EV/SALES exit multiple 1.9x Fair value per share 48 EV/EBIT exit multiple 7.5x Current share price 23 Potential/Risk 109%

 FPC manages to drive consolidation in the market and achieves a position allowing it to launch new business models where software sales make a larger contribution to revenues than in our base case  Double digit revenue growth until 2022 for revenues of about SEK 10 billion in 2026  The market share in the mobile device segment gradually declines to reach 25 percent in 2025, though the penetration of FPS and other biometrics is higher than in our base case  In the long term, blended ASP is similar to base case as FPC receives lower ASP from software solutions but at the same time manages to successfully expand its product portfolio with a high share of multimodal biometric system solutions  Gross margin averages 42 percent despite a similar gross margin decrease on hardware compared to base case, which is due to a higher share of non-sensor sales with a gross margin of 90 percent

Company analysis 11 Fingerprint Cards  The long-term EBIT margin is 25 percent supported by large economies of scale

Company analysis 12 Fingerprint Cards Summary Redeye Rating

The rating consists of five valuation keys, each constituting an overall assessment of several factors that are rated on a scale of 0 to 2 points. The maximum score for a valuation key is 10 points.

Management 5.0p The Board as well as Management are basically brand new but have solid track records. The CEO has relevant and important experience from being CEO of FSecure. FPC’s execution was impressive during the ramp- up to delivery of one million sensors a day. However, historically it has not been good at meeting its targets and it did not anticipate the inventory build-up in 2016. In addition, share buybacks was made around ATH levels. Communication is gradually improving but we believe more transparency is needed. All in all, this results in an average management rating.

Ownership 2.0p The insider holdings in Board and Management are insignificant in relation to our rating requirements, with a few exceptions, such as e.g. the COB. Most of the board members own no shares or close to 0. We find it positive that the CEO is buying shares, although his position at the moment is too small in relation to his salary. No owner has nowhere near 10 percent of the equity. On the positive side though a principal shareholder is represented on Board and holds a corner, which gives some protection against a hostile takeover bid.

Profit outlook 6.0p With a highly scalable business model, several new verticals as well as new offering that can provide growth beyond mobile devices and a leading position in a fast growing market, FPC is awarded with a high rating. What weighs on the downside are especially three factors pertaining to competitive dynamics; the number of new entrants, price pressure and how sustainable FPC's competitive advantages are. The market for biometrics solutions is still immature and new entrants attempt to steal market shares. There is a downward price pressure in the market but so far FPC has done a good job in combating declining ASP. Finally, as for the sustainability of the competitive advantages we believe FPC has a strong market position but we need to see a prolonged period of market leadership before we adjust our rating further upwards. Profitability 6.0p

Our profitability rating is retrospective and conservative. For a higher rating we require a longer period of high ROE, EBIT margin etc. and an ability to deliver strong cash flows.

Financial strength 7.5p FPC’s balance sheet is all in all solid even though most of the cash was invested in Delta ID or spent on share buybacks. The factors that weigh on the negative side are: the cyclicality of the mobile device industry and the high exposure to a few large customers such as Huawei. As FPC enters new verticals, and thereby lessens its dependence on individual customers and segments, we may re-evaluate our rating.

Company analysis 13 Fingerprint Cards

Income statement 2015 2016 2017E 2018E 2019E DCF valuation Cash flow, MSEK Net sales 2,901 6,638 3,177 3,738 3,849 WACC (%) 12.4 % NPV FCF (2017-2019) 684 Total operating costs -1,947 -3,977 -2,762 -3,033 -3,091 NPV FCF (2020-2026) 3170 EBITDA 954 2,661 415 705 758 NPV FCF (2027-) 3525 Non-operating assets 1162 Depreciation -6 -6 -10 -15 -23 Interest-bearing debt 0 Amortization -37 -41 -59 -123 -103 Fair value estimate MSEK 8541 Impairment charges 0 -1 0 0 0 Assumptions 2017-2023 (%) EBIT 910 2,613 345 567 633 Average sales growth 11.5 % Fair value e. per share, SEK 27 EBIT margin 18.5 % Share price, SEK 22.7 Share in profits 0 0 0 0 0 Net financial items 0 0 -26 -27 -21 Exchange rate dif. 0 0 0 0 0 Profitability 2015 2016 2017E 2018E 2019E Pre -tax profit 910 2,614 319 539 612 ROE 110% 121% 10% 16% 16% ROCE 126% 155% 13% 18% 19% Tax -112 -579 -75 -119 -135 ROIC 401% 1777% 25% 36% 38% Net earnings 798 2,035 244 421 477 EBITDA margin 33% 40% 13% 19% 20% EBIT margin 31% 39% 11% 15% 16% Balance 2015 2016 2017E 2018E 2019E Net margin 28% 31% 8% 11% 12% Assets Current assets Data per share 2015 2016 2017E 2018E 2019E Cash in banks 1,031 1,162 1,754 1,911 2,031 EPS 2.54 6.48 0.78 1.34 1.52 Receivables 618 1,132 540 617 616 EPS adj 2.54 6.48 0.78 1.34 1.52 Inventories 153 673 302 280 269 Dividend 0.00 0.00 0.23 0.40 0.46 Other current assets 37 435 50 60 70 Net debt -16.31 -3.70 -3.97 -4.79 -5.50 Current assets 1,839 3,402 2,646 2,868 2,987 Total shares 63.24 313.97 313.97 313.97 313.97 Fixed assets

Tangible assets 21 29 51 76 38 Valuation 2015 2016 2017E 2018E 2019E Associated comp. 1 0 0 0 0 EV 36,343. 18,570. 5,894.0 5,635.1 5,413.2 Investments 0 0 0 0 0 0 6 Goodwill 0 0 698 698 698 P/E 46.8 9.7 29.2 17.0 15.0 Cap. exp. for dev. 0 0 332 332 332 P/E diluted 46.8 9.7 29.2 17.0 15.0 O intangible rights 50 71 189 187 192 P/Sales 12.9 3.0 2.2 1.9 1.9 O non-current assets 0 0 0 0 0 EV/Sales 12.5 2.8 1.9 1.5 1.4 Total fixed assets 71 101 1,269 1,292 1,260 EV/EBITDA 38.1 7.0 14.2 8.0 7.1 Deferred tax assets 0 0 0 0 0 EV/EBIT 39.9 7.1 17.1 9.9 8.6 P/BV 32.6 8.9 2.9 2.5 2.3 Total (assets) 1,910 3,503 3,915 4,160 4,247 Share performance Growth/year 15/17e 1 month -33.7 % Net sales 4.7 % Liabilities 3 month -32.6 % Operating profit adj -38.4 % Current liabilities 12 month -78.3 % EPS, just -44.7 % Short -term debt 0 0 0 0 0 Since start of the year -63.8 % Equity 46.8 % Accounts payable 650 1,080 349 374 346 O current liabilities 114 61 518 489 349 Current liabilities 763 1,141 868 863 695 Shareholder structure % Capital Votes Long-term debt 0 0 508 406 305 Avanza Pension 7.2 % 6.2 % O long-term liabilities 0 0 0 0 0 Velociraptor LTD 1.9 % 15.9 % Con vertibles 0 0 0 0 0 Nordnet Pensionsförsäkring 1.8 % 1.5 % Total Liabilities 763 1,141 1,376 1,269 1,000 Vanguard 1.8 % 1.5 % Deferred tax liab 0 0 0 0 0 Magnus Unger 1.3 % 1.1 % Provisions 0 136 68 73 78 Danica Pension 1.2 % 1.0 % Shareholders' equity 1,147 2,226 2,471 2,818 3,169 BlackRock 1.0 % 0.9 % Minority interest (BS) 0 0 0 0 0 Folksam 0.9 % 0.8 % Minority & equity 1,147 2,226 2,471 2,818 3,169 Ålandsbanken Fonder 0.9 % 0.8 % Swedbank Försäkring 0.9 % 0.8 % Total liab & SE 1,910 3,503 3,915 4,160 4,247 Share information Fre e cash flow 2015 2016 2017E 2018E 2019E Reuters code FINGb.ST Net sales 2,901 6,638 3,177 3,738 3,849 List Large cap Total operating costs -1,947 -3,977 -2,762 -3,033 -3,091 Share price 22.7 Depreciations total -43 -48 -70 -138 -125 Total shares, million 314.0 EBIT 910 2,613 345 567 633 Market Cap, MSEK 7139.6 Taxes on EBIT -112 -579 -81 -125 -139 NOPLAT 799 2,034 264 442 494 Management & board Depreciation 43 48 70 138 125 CEO Christian Fredrikson Gross cash flow 842 2,083 334 580 619 CFO Hassan Tabrizi Change in WC 67 -1,055 1,076 -70 -166 IR Christian Fredrikson Gross CAPEX -25 -79 -1,238 -161 -94 Chairman Jan Wäreby

Free cash flow 883 949 171 349 360

Capital structure 2015 2016 2017E 2018E 2019E Equity ratio 60% 64% 63% 68% 75% Debt/equity ratio 0% 0% 21% 14% 10% Net debt -1,031 -1,162 -1,246 -1,505 -1,726 Analysts Redeye AB Capital employed 115 1,064 1,225 1,313 1,442 Viktor Westman Mäster Samuelsgatan 42, 10tr Capital turnover rate 1.5 1.9 0.8 0.9 0.9 [email protected] 111 57 Stockholm

Growth 2015 2016 2017E 2018E 2019E Sales growth 1,142% 129% -52% 18% 3% EPS growth (adj) -654% 155% -88% 72% 13%

Company analysis 14 Fingerprint Cards

Revenue & Growth (%) EBIT (adjusted) & Margin (%)

7000 1400.0% 3000 60.0%

6000 1200.0% 2500 40.0% 1000.0% 5000 2000 20.0% 800.0% 4000 600.0% 1500 0.0% 3000 400.0% 1000 -20.0% 2000 200.0% 500 -40.0% 1000 0.0% 0 -60.0% 0 -200.0% 2014 2015 2016 2017E 2018E 2019E 2014 2015 2016 2017E 2018E 2019E -500 -80.0%

Net sales Net sales growth EBIT adj EBIT margin

Earnings per share Equity & debt-equity ratio (%)

7 7 0.8 25.0% 0.7 6 6 20.0% 5 5 0.6 15.0% 0.5 4 4 0.4 10.0% 3 3 0.3 2 2 5.0% 0.2 1 1 0.0% 0.1 0 0 0 -5.0% 2014 2015 2016 2017E 2018E 2019E -1 -1 2014 2015 2016 2017E 2018E 2019E

EPS, unadjusted EPS, adjusted Equity ratio Debt-equity ratio

Conflict of interests Company description Fingerprint Cards (FPC) develops and sells biometric solutions. It is the Viktor Westman owns shares in Fingerprint Cards: No world’s number one fingerprint sensor supplier and one of the largest fabless semiconductor companies in Europe. Redeye performs/have performed services for the Company and receives/have received compensation from the Company in connection with this.

Company analysis 15 Fingerprint Cards

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Rating Management Ownership Profit Profitability Financial outlook Strength 7,5p - 10,0p 44 42 17 11 22 3,5p - 7,0p 71 65 99 35 45 0,0p - 3,0p 12 20 11 81 60 Company N 127 127 127 127 127

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Company analysis 16