Commissioned Equity Research • 16 May 2019 Telecom Equipment and IT Fingerprint Cards Sweden KEY DATA Solid report, hard to justify share price rally Stock country Sweden Bloomberg FINGB SS Fingerprint's Q1 sales were SEK 343m, up 18% y/y, marking the first quarter Reuters FINGb.ST of yearly revenue growth since 2016. The gross margin came in at 23.0%, Share price (close) SEK 18.54 2.2 pp below consensus, albeit with a more promising outlook given. We Free Float 100% Market cap. (bn) EUR 0.54/SEK 5.82 increase our estimates for 2019 revenue thanks to stabilising market Website www.fingerprints.com conditions in capacitive sensors. We also see improved gross profit from Next report date 15 Aug 2019 the higher share of high-margin sensor FPC1511, but we reduce our long- term estimates for in-display sensors due to its late entrance to the market PERFORMANCE and need to play catch-up. We trim our EBIT estimates by 3.3%, 2.7% and 2.5% for 2020-22, respectively, and our new DCF-derived fair value range 150 lands at SEK 8.1-15.5 (8.3-16.0). The stock was shorted by around 8% of its 120 market cap ahead of the report, leading to a short squeeze. However, our fundamental view has not changed materially and justifying a higher price 90 would require a brighter outlook than we assume either for the in-display 60 sensor or the smartcard business. 30 0 May16 May17 May18 May19 Increased confidence in short-term profitability With 18% revenue growth y/y and shipment volumes for Fingerprint's core Fingerprint Cards Source: Thomson Reuters Sweden OMX Stockholm All-Share (Rebased) customers declining less than the market, we see stronger conviction in the company's ability to increase market share in capacitive sensors for 2019E. We expect sequential gross margin expansion from the better product mix, VALUATION APPROACH and the company claims to have achieved an annual opex run rate below SEK 400m before capitalisation of R&D. In-display sensor outlook challenged During the Q1 conference call, we learnt that in-display sensors is growing DCF 8.1 15.5 faster as a segment, and Fingerprint has launched a product but not yet secured a design win. Three competitors are already on the market challenging Fingerprint in the race to become the market leader, even though claims are made around better form factor, security and value for 4 9 14 19 money to customers. This leads us to lower our segment market share and SEK thereby decrease company revenue estimates for 2020-22 by 0.5%. Source: Nordea estimates Winning in the short term, long term is a bet ESTIMATE CHANGES All in all, we see a company that has reduced the risk of cash depletion, Year 2019E 2020E 2021E thanks to successful cost-cutting and stabilising core business, but growth Sales 3% -1% 0% of new product lines comes with timing risk. Our updated DCF-derived fair EBIT (adj) 58% -3% -3% Source: Nordea estimates value range is SEK 8.1-15.5 (8.3-16.0). The top end of this would require a leading position in the smartcard market and a quick product launch of the in-display sensor. SUMMARY TABLE - KEY FIGURES Nordea Markets - Analysts Jörgen Wetterberg SEKm 2015 2016 2017 2018 2019E 2020E 2021E Senior Analyst Total revenue 2,901 6,638 2,966 1,535 1,503 1,790 1,907 EBITDA (adj) 939 2,662 234 -737 184 228 278 EBIT (adj) 916 2,613 155 -772 52 172 222 EBIT (adj) margin 31.6% 39.4% 5.2% -50.3% 3.5% 9.6% 11.7% EPS (adj) 12.51 6.61 0.38 -2.01 0.13 0.43 0.55 Henning Zakrisson EPS (adj) growth 638.2% -47.1% -94.2% -624.4% 106.2% 241.4% 28.9% Analyst DPS (ord) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 EV/Sales -0.4 n.a. n.a. n.a. n.a. n.a. n.a. EV/EBIT (adj) n.m. n.a. n.a. n.a. n.a. n.a. n.a. P/E (adj) 9.5 9.5 41.3 n.m. n.m. 43.3 33.6 P/BV 0.0 8.8 2.1 1.8 3.2 3.0 2.7 Dividend yield (ord) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% FCF Yield bef acq & disp n.m. 5.3% -14.0% 3.5% 2.9% 2.3% 2.9% Net debt -1,031 -1,162 -698 -541 -710 -844 -1,011 Net debt/EBITDA -1.1 -0.4 -3.0 0.7 -3.9 -3.7 -3.6 ROIC after tax n.m. n.m. 7.9% -38.8% 3.3% 11.6% 19.1% Source: Company data and Nordea estimates Marketing material commissioned by Fingerprint Cards 16 May 2019 Fingerprint Cards Company update: Q1 2019 report Fingerprint reported Q1 net sales of SEK 343m, 1.8% below our estimate and up 18% y/y. While smartphone volumes declined globally in Q1, Fingerprint's main customers fared better than the market. The gross margin ended up at 23.0%, up sequentially by 2.2 pp. While this was lower than consensus, it is promising since the company claims that a large portion of the quarter's sales were legacy high-cost sensors from the inventory, and that the new high-margin FPC1511 sensor volumes will ramp up and affect numbers more in Q2. Operational costs totalled SEK 81m, down 63.1% y/y as an effect of the executed cost programme. The maintained opex levels bode well for the sustainability of the cost base. FINGERPRINT CARDS: Q1 DEVIATION TABLE Actual NordeaDeviation Cons.Deviation Actual Actual (SEKm) Q1 19 Q1 19Evs. actual Q1 19Evs. actual Q4 18 q/q Q1 18 y/y Net sales 343 349 -6 -1.8% 341 2 +0.5% 424 -19% 290 +18% Gross profit 79 92 -14 -14.9% 86 -7 -8.2% 88 -11% 45 +76% Gross margin 23.0% 26% -3.5pp 25% -2.2pp 21% +2.2pp 15% +7.5pp EBIT -2 2 -4 -207% -13 11 +85% -26 +93% -175 +99% Operating margin -1% 1% -1.1pp -4% +3.2pp -6% +5.5pp -60% +59.8pp EPS -0.01 -0.005 -0.01 -104% -0.03 0.02 +63% -0.06 +83% -0.47 +98% Source: Company data, Thomson Reuters consensus and Nordea estimates Company results Net sales below our estimate Fingerprints reported Q1 net sales of SEK 343m, 1.8% below our estimate and up 18% y/y. While overall smartphone volumes decreased y/y in Q1, Fingerprint claims that the decline was only around 4% (IDC claims it was 6.6%), and the company's core customers were least affected while otherssuch as Apple and Samsung lost market shares. Combined with stabilising prices for the sensors and improved market shares from price cutting, this led to the y/y revenue decline seen in the last eight quarters coming to an end. Non-smartphone revenue The company has previously stated that it aims for 10% of revenues to stem from other target reiterated segments than fingerprint sensors for smartphones, a goal it claims to have reached in 2018. While the company does not give an update on this on a quarterly basis, CEO Christian Fredriksson says that the revenue share is likely to be above 10% for 2019 as a whole, with Chinese door locks with fingerprint sensors being the fastest-growing market outside of smartphones. QUARTERLY NET SALES PROGRESSION 900 30.0% 800 20.0% 700 10.0% 0.0% Q1 2019 was the first quarter 600 -10.0% since 2016 with growing 500 revenues y/y -20.0% SEKm 400 -30.0% 300 -40.0% 200 -50.0% 100 -60.0% 0 -70.0% Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Q2 18 Q3 18 Q4 18 Q1 19 Net sales y/y Source: Company data Slight gross margin expansion, The gross margin was 23.0%, up 2.2 pp q/q and 7.5 pp y/y. The company comments that more to come the margin was better than during the worst quarters, but that it is still being affected by higher-cost sensors being sold off from the inventory at a lower price than expected. Marketing material commissioned by Fingerprint Cards 2 16 May 2019 Fingerprint Cards The new low-cost sensor FPC1511 is said to be gaining traction in the market with volumes ramping up in Q2 2019. While the company gives no guidance on gross margins apart from a long-term goal of >30%, this comment suggests to us that gross margins are expanding in Q2. NUMBER OF FULL-TIME EMPLOYEES 450 400 350 300 250 200 150 100 50 0 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 12 12 13 13 13 13 14 14 14 14 15 15 15 15 16 16 16 16 17 17 17 17 18 18 18 18 19 Source: Company data Stable cost base Q1 2019 opex ended up at SEK 59m before capitalisation of R&D, meaning LTM opex before capitalisation of R&D was SEK 429m. The company stated a goal of less than SEK 400m in operational costs before capitalisation of R&D when the 2018 cost-cutting programme was initiated, and says that this is the current run-rate.