Commissioned research 16 July 2018 Fingerprint Cards AB Electronic Equipment, Instruments & Components | Sweden KEY DATA Looking past the past Country Sweden Bloomberg FING.SS A new dawn Reuters FINGb.ST Fingerprint Cards (Fingerprints) today is not the same company as it was Share price 6.25 during its early phase, and it certainly does not have the same market Free float 93% expectations as it did during the stock price peak in 2015. Nevertheless, Market cap (m) SEK 1,916 Website www.fingerprints.com we think there are still a few tricks up its sleeve that could chart a path to Next report date 2018/07/19 innovation and growth. The decline of the previously quite profitable market of capacitive fingerprint sensors for smartphone implementation has prompted many investors to give up on the company, but we do not ABSOLUTE & RELATIVE PERFORMANCE believe it is time to pull the plug just yet. 50 40 Innovate or retreat 30 Fingerprints is sitting between a rock and a hard place, as it needs to expand and dominate new and adjacent segments (ie in-display 20 fingerprint sensors and biometric smartcards), while the capacitive 10 fingerprint sensor market is facing price pressure from low-cost competitors. We think the smartcard market, while not fully 0 jul-17 okt-17 jan-18 apr-18 compensating for the decline of capacitive fingerprint sensors, could help Fingerprint Cards OMX Stockholm PI stabilise revenues and gross margins if the product can gain any interest on the market. The biggest risk for the company would be if its new -1M -6M -12M YTD Absolute 1% -62% -79% -61% product lines fail to capitalise on the upcoming market window, which is Relative 2% -61% -84% -62% why we base our estimate forecasts on product releases as planned, but Source: Thomson Reuters and Bloomberg with a higher WACC to account for the apparent development risks. VALUATION APPROACH Returning to earnings growth To ensure future competitiveness and a return to earnings growth, Fingerprints has implemented a number of measures to improve its margins. With its recently announced cost-reduction programme, DCF SEK 5.5 SEK 9.6 Fingerprints aims to return to annual opex of below SEK 400m before capitalisation of R&D, which is the same level the company had in 2015. In combination with diminishing price erosion and improved product mix, we believe Fingerprints could stabilise its operations and reach a long- 0 2 4 6 8 10 12 14 term operating profit margin of between 10% and 15%. We value Fingerprints based on fundamental DCF approach with a scenario analysis Source: Nordea estimates of market shares and a WACC of 11.4%. Based on this approach, we derive an equity value per share between SEK 5.5 and SEK 9.6 Nordea Markets - Analysts SUMMARY TABLE - KEY FIGURES Jörgen Wetterberg SEKm 2014 2015 2016 2017 2018E 2019E 2020E Senior Analyst Net sales 234 2,901 6,638 2,966 1,110 1,266 1,452 - growth 1141.7% 128.9% -55.3% -62.6% 14.0% 14.7% Dan Johansson EBIT (adj.) -145 916 2,578 155 -393 -25 76 Analyst - margin -62.2% 31.6% 38.8% 5.2% -35.4% -2.0% 5.2% Henning Zakrisson EPS (adj.) -2.32 12.50 6.48 0.38 -0.65 -0.10 0.19 Analyst - growth n.m. -48% -94% n.m. n.m. n.m. P/E (adj.) n.m. 9.5 9.7 41.3 n.m. n.m. 33.3 EV/EBIT (adj.) n.m. 7.0 7.2 29.2 n.m. n.m. 19.8 EV/Sales 1.3 2.2 2.8 1.5 1.5 1.3 1.0 RoE 111.0% 120.6% 5.3% -44.2% -2.6% 4.8% 9.0% FCF yield -65.1% 11.9% 5.4% 3.5% -9.2% 3.7% 5.9% ND/EBITDA n.m. -1.1x -0.4x -1.9x n.m. -4.9x -2.7x Source: Company data and Nordea estimates Marketing material commissioned by Fingerprint Cards 16 July 2018 Fingerprint Cards Table of contents Factors to consider when investing in Fingerprint Cards ................................................................ 3 Valuation ........................................................................................................................................ 8 Company overview ....................................................................................................................... 12 What’s happened so far ................................................................................................................ 18 Technology and market overview ................................................................................................ 21 Our industry scenario .................................................................................................................... 34 Our views on the most discussed topics ....................................................................................... 40 Historical financials ...................................................................................................................... 45 Estimates ...................................................................................................................................... 50 Risk factors ................................................................................................................................... 56 Detailed estimates ........................................................................................................................ 59 Reported numbers and forecasts.................................................................................................. 60 Disclaimer and legal disclosures ................................................................................................... 63 Marketing material commissioned by Fingerprint Cards 2 16 July 2018 Fingerprint Cards Factors to consider when investing in Fingerprint Cards Fingerprints has a chequered past, to say the least. Its journey as a listed company was rather uneventful at the outset, despite experiencing slow adoption of capacitive fingerprint sensors because its technology was ahead of its time. When it started gaining momentum, Fingerprints enjoyed a head start and growth was immense, providing its shareholders significant returns. However, competition finally caught up, and the company’s decline came equally fast. The company now faces great challenges, but is not down for the count just yet. With the introduction of new biometric modalities (eg in-display fingerprint sensors, iris recognition and face recognition) and growth in new emerging segments, we see the possibility of a new dawn for Fingerprints. In combination with more streamlined operations, the business could once again return to earnings growth and close the current margin gap to its peers. However, expanding from one to three or more industrial segments, and from essentially one product line to four, is a balancing act when cash is scarce—it carries both high risk and potentially high rewards. There are four main factors We consider the following factors critical when evaluating an investment in to consider Fingerprint Cards: • Its potential to become a next-generation technology leader • Adjacent biometric market opportunities and an increased attachment rate for new applications that increase earnings diversification • Streamlined operations and a new product offering set to improve margins • Its potential as a takeover target The most important risks are The main risks to consider are the following: mainly related to future • Fingerprints’ competitive position could be threatened by new smartphone revenue streams biometric sensor standards • Uncertainty regarding the future size and growth of new market opportunities within smartcards, automotive and embedded solutions • Challenging market conditions with immense competition and pressure on price • The potential need to turn to capital markets in the future due to the pressure on the company’s financial position • High concentration of existing and potential customers, with the ten largest customers accounting for 98.8% of revenues The (near) future is in-display We believe that in-display Touchless biometric modalities have become attractive to customers and fingerprint sensors will manufacturers in the smartphone market. Fingerprints was quick to announce that it become the future norm in is developing face recognition software after Apple’s Face ID launch, in addition to its smartphones already available iris recognition solution. These two modalities are likely to become increasingly popular and we have already seen a slight increase in face recognition sensors in non-Apple smartphone models over the last year. However, it is clear that the current high-end smartphone ‘arms race’ is about in-display fingerprint sensors. Due to the constantly shrinking bezels and more minimalistic smartphone designs, space for fingerprint sensor attachment is declining on new devices. Technology leadership This spring, we witnessed the launch of a handful of devices sporting huge displays position still up for grabs with fingerprint sensors built into the actual screen of the device. Despite receiving praise for the design, the sensors are reportedly slow, and there is room for improvement by moving from “hot zone” detection, where only a very small part of the display is able to detect the fingerprint, to full-display detection. Marketing material commissioned by Fingerprint Cards 3 16 July 2018 Fingerprint Cards SMARTPHONE SHIPMENTS FINGERPRINT SENSOR ATTACHMENT RATE 1,800 90% 1,600 80% 1,400 70% 1,200 60% 1,000 50% 800 40% million units million 600 30% 400 200 20% 0 10% 0% 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E Source: IDC and Nordea estimates Source:Company data, IDC and Nordea estimates Opportunity for Fingerprints So far, Fingerprints is, according to our understanding, the only biometric sensor to take a leadership position