Yuck.
That’s all I can say about AuthenTec right now…
After shocking the market a on September 8th with a mid-quarter “business update” the stock has cratered and sits now about 80% below previous levels.
At these prices the stock is trading below its cash on hand, and is priced for ultimate failure.
Is this warranted? Should we dump the stock now and get something instead of nothing, or is there a sliver of sound reasoning behind keeping shares for the short term?
Today we’re going to preview PeakStocks.com portfolio recommendation AuthenTec Inc. (NASDAQ: AUTH), which will be announcing their third quarter earnings and hosting their analyst conference call after the market closes on Thursday October 30, 2008.
In this post I’ll go over the important aspects that we need to be aware of before they announce earnings and then break them down into the following parameters:
- What went right in the quarter: What were some of the positive developments that occurred within the company in the last 3 months.
- What went wrong in the quarter: What were some of the negative developments that occurred within the company in the last 3 months.
- What I want to see: All things considered, what I realistically want to see from the company as it relates to their business.
- What we need to see: At the minimum, what we need to see for our investing thesis to still hold and an investment in this company to be prudent.
- What we’ll probably see: After weighing what’s been going on for the last 3 months, what we can realistically expect when they do announce their earnings.
- Bottom Line: What it all means, and what you should do.
New to the AuthenTec story?
AuthenTec, Inc. is a fabless mixed-signal semiconductor company that provides fingerprint authentication sensors and solutions to the high-volume personal computer (PC), wireless device, and access control markets.
AuthenTec offers a range of fingerprint sensors that enable users to access and control multiple functions on an electronic device by touching or sliding their finger across the sensor.
The company’s fingerprint sensors utilize unique information in fingerprints to verify the identity of the individual, as well as the unique, individual fingers on the same person.
With more than 35 million sensors sold worldwide, AuthenTec’s award-winning sensors take full advantage of The Power of Touch® by utilizing the company’s patented TruePrint® technology to deliver the most convenient, reliable and cost-effective means available for enabling touch-powered features that extend beyond user authentication.
These sensors are used in various applications related to security, password replacement, financial transaction authentication, and personalization applications.
The company’s products are used in a range of PC products and related peripherals, including laptops, desktops, memory keys, hard drives, keyboards, mice, and other devices.
In addition, AuthenTec’s products also integrate into various wireless devices, such as mobile phones, and personal digital assistants and personal navigation device, as well as access control devices comprising door locks, time and attendance devices, and remote wireless entry keys.
AuthenTec primarily offers its products to original equipment manufacturers, original design manufacturers, and contract manufacturers and sells its products through a direct sales force, a network of independent sales representatives, and distributors.
Want More?
- Start: with my initial company overview here.
Going Out of Business or Take-Over Target?
AuthenTec absolutely dropped a bomb on the market when it announced the it was lowering guidance for the remainder of 2008 (not that big a deal), and losing a customer that represented about 30-45% of sales for next year (a HUGE deal).
You can read all about that debacle here.
So the question to ask as AuthenTec gets set to report their third quarter earnings and update us on their business trends is, what does this mean for the company as an ongoing concern, and will AuthenTec be able to make up for that customer loss somehow, and if not, what is their exit strategy?
- What went right in the quarter: Um…nothing really.
I’m not even exaggerating when I say that.
Aside from a couple of new deals announcing fingerprint sensor additions to various new PC models, which we knew were coming anyway, AuthenTec did little this quarter to enhance their standing in the investment community or their standing with analysts, this one included.
It’s all wait-and-see at this point.
- What went wrong in the quarter: Everything, including the very essence of AuthenTec as an ongoing concern, which has seriously been thrown into question at this point due to the severity of the customer loss, decreasing average selling prices for the sensors that AuthenTec sells, and the very fact that their competition is heating up, and hot on their tails.
Included in this bad news was the fact that margins are going to deteriorate further, AuthenTec’s competitive advantages are being eroded due to the very nature of the semiconductor industry, and the fact that PC and mobile phone manufacturers want smaller and cheaper sensors that last longer and use less silicon, and AuthenTec is having trouble meeting those requirements.
In addition, as a result of the slashing of estimates, the customer loss and the precipitous stock price decline, AuthenTec is now faced with several class action lawsuits, of which I and any other stockholder, will automatically be a part of should they be certified as legitimate and achieve class action status.
I’m not worried about those too much, as they always seem to come out of the woodwork when investors get bent out of shape because they were wrong about a company and lost money, but it’s one more thing to add to the negatives list.
You can read all about the earnings revision and mid-quarter conference call here.
Now it’s not all gloom and doom in that AuthenTec still has a large built-in client base, recurring sales and several new upcoming products that are all still positive developments
In addition, AuthenTec is trading below it’s cash value, and by the very nature of their intellectual property (IP), they could be of great value to another semi manufacturer as an add-on to already existing chip sets and product offerings.
With a market cap of about $50 million, and $60 million in cash, it isn’t inconceivable that AuthenTec could get bought out for double where it is at today, or about $4 per share, and still be a total bargain for a large semi, or PC company.
Now let’s look at what I want to see from this earnings announcement.
- What I want to see: All things considered, what I realistically want to see from the company is for them to hold the line.
I don’t want to hear of any further deterioration in the business, fundamentals, or other customer losses, and it certainly wouldn’t hurt to get some good news out of the quarter, however doubtful that might be.
- What we need to see: At the minimum, what we need to see for our investing thesis to still hold and an investment in this company to be prudent is for AuthenTec to follow through with its promises of finding new customers to fill the gap left by the customer loss and to at least be break-even on an earnings and cash flow basis to restore a little confidence in the management team and AuthenTec’s business fundamentals, at least in the short term.
- What we’ll probably see: I honestly don’t know.
If I did, I would be buying options on AuthenTec right before the earnings announcement.
I suspect that things will be about the same in terms of management’s outlook (lowered to grim), we’ll get an update on the current potential litigations (AuthenTec will say that all claims are frivolous and baseless), and some better visibility into the next few quarters.
- Bottom Line: The last time I posted an update on AuthenTec before their earnings, I stated that: “It would take an utter shift in business trends at AuthenTec to shake my confidence in the company, the story and management.”
Well, much to my surprise, that’s exactly what happened.
We’ve had an utter and severe shift in business trends, the company, the story, and management.
Suffice it to say, my confidence in the company is shaken, and I no longer believe in management’s ability to see things through, and come out on the other side of things intact.
I think at this point, AuthenTec is a dead man walking, and it’s only a matter of time before the business deteriorates and things head downhill.
However, with that being said, I still feel that in the interim, AuthenTec represents a compelling case for bottom fishers, and for those that see AuthenTec as a classic take-out target.
At about $2.00 per share, with the intellectual assets alone, AuthenTec is worth at least double, considering they are sitting on about $2.14 per share in cash.
At this point in the game, that’s my exit strategy, and one that I will be watching for closely in the coming months to play out.
If things start to decelerate quickly and it’s apparent that AuthenTec will start burning through its cash hoard, I will not hesitate to dump the shares, take my large loss like a man, and move on to bigger and better things.
This earnings release will allow us to look a little deeper inside that window, and make a more informed decision as to how things will play out.
