We believe there is a tremendous amount of innovation in the biometrics space for consumer handsets coming with Apple's (AAPL) launch of the iPhone 5s, particularly fingerprint recognition that will greatly improve the user experience in mobile. Apple's acquisition of Authentec pioneered this movement, and we believe the use cases for fingerprint recognition will be so strong that the Google (GOOG) Android and Microsoft (MSFT) camp will have to follow to keep up with Apple competitively. We believe Fingerprint Cards is going to be a key supplier for the Android and Microsoft camp for fingerprint recognition.
Apple paid over $350mm for Authentec in July of 2012. There is a great article here that demonstrates how important this acquisition is to Apple. There have been many articles discussing the rumors that Apple is bringing this technology to the iPhone 5s by embedding the touch fingerprint reader within the home button. Hence, anytime you touch the home button the phone will have the ability to recognize if you are the registered user.
We believe that a handset will be able to register multiple people per device, and also multiple fingers. The user will likely have the option to still use a pin code as backup as well (if for some reason the fingerprint scanner is not working correctly). We believe Apple will have many use cases for this technology. Some of our thoughts on the potential use cases are as follows:
- Logging in to your device: A four digit pincode, or Android swipe pattern is quite visible when a user enters their passcode, and somewhat of a pain to enter several times a day. Touching the home button for logging in will make this process more secure (no one can see your fingerprint) and faster for the user.
- With regular 4 digit pin code or Android swipe, the log in procedure is easily visible by on-lookers, we don't necessarily think this is secure enough for corporate use. We think corporations would feel much better with fingerprint security for corporate email.
- Anti theft: With expensive $600+handsets and tablets, it's not surprising that many Apple devices have become a prime target for theft . According to this article by ABC, 1 out of 7 crimes in New York City involves an Apple product. Many of these devices are stolen, reset, and sold on the black market. We think with the iPhone 5s, an anti theft feature could be enabled that would require a user's fingerprints for re-setting the phone. Hence - a stolen phone could not be reset and would be rendered useless to the thief. We believe the fingerprint credentials of the user will be stored on an embedded secure element in the phone, using the same technology that many passports, e-goverment cards, and NFC solutions are using today that is extremely difficult to hack.
- Password replacement for websites: Entering a case sensitive, alpha-numeric password in a website is a pain for users on small keyboards on mobile devices. We think this user pain point could be solved by using your fingerprint instead of typing a case sensitive password. We believe this feature would work well with iCloud Keychain and Password Generator features that Apple released in its iOS7 preview at WWDC; see here and here.
- User authentication for "TV anywhere": One large problem with TV anywhere is authenticating a user. It is widely known that many people share passwords for applications like HBO Go. Market researcher Ipsos OTX MediaCT found that more than a third of subscribers to both Netflix (40%) and HBO Go (36%) admitted they have shared their log-in information with another person. The survey was conducted in early June with 1,076 respondents. By requiring a fingerprint log in, only the registered user could use his or her subscription. Apple has been working very hard on some form of an Apple TV, and we think this user authentication is an important feature that Apple could deploy.
- Furthermore, this use case could be implemented for many websites / subscription services on the web (again many people share passwords for newspaper subscriptions, online magazines etc)
- App short cuts: A user could use different fingers to launch different applications on their device. Their index finger could launch iTunes, their middle finger could bring up their recent calls etc. Obviously the user could customize their device to their liking.
- Purchasing apps from the iTunes store: Requiring your fingerprint vs entering your iTunes password every time is a much better user experience. Also, this feature would prevent your children from purchasing games / apps without your permission
- Mobile payments: Apple has been late to deploy some type of solution for mobile payments, but we think requiring your fingerprint for payments makes the transaction much more secure, reduce fraud rates over time and make the transaction faster / easier for the customer. We believe Apple won't release this functionality right away, they might likely work on this after they can demonstrate that the fingerprint sensor is a secure authentication process and gains traction w/ the consumer.
- We believe the first use of Apples fingerprint scanner for payments will be for online purchases. Syncing your fingerprint to your credit card on file will make it fairly seamless to checkout at a website, and very secure. It's very annoying to complete transactions on your mobile phone, as entering your payment information with a credit card is quite cumbersome on a tiny keyboard. We believe Apple could implement "one touch" checkout and w/ your fingerprint Apple can revert your credit card on file to the merchant. We believe this would help reduce credit card fraud. Moreover - this ties in quite nicely with iCloud Keychain and Password Manager that Apple talked about at the iOS7 preview at WWDC
- We think eventually this secure checkout will be extended to offline commerce . We believe it would make a lot of sense for Apple to introduce a payment API for Passbook that merchants can build apps on top of. The API could again revert your credit card details that you have on file with iTunes when you present your fingerprint. The passbook app would likely be barcode based, as this works with more terminals today vs. NFC (similar to Paypal's approach).
- For example, we believe the initial app built by Starbucks (SBUX) on Passbook was a great app, but a bit troublesome for a merchant to build as they have to build the backend payment functionality to account for prefunding a balance etc. This would be much smoother as Apple could do majority of the work by creating a secure payment API that integrates with a user's credit card credentials stored on the iTunes store. Also - over time, we believe that since this solution would be so secure w/ a fingerprint sensor, that Apple could negotiate card present rates vs. card not present rates as this solution will help reduce fraud. We also believe merchants would like this approach as they could integrate loyalty programs within Passbook as well.
- Apple loves creating an ecosystem - by creating a payment API that integrates securely with an iTunes account that 3rd party developers can build apps on top of fits nicely with Apple's ecosystem strategy
One thing we would like to point out is that some of Authentec's latest capacitive sensors detected pulse and temperature along with a user's unique fingerprints, hence stealing someone's fingerprints is essentially useless (as would be severing someone's hand).
Why are we confident that Apple will deploy this in the iPhone 5s?
- The timeline from which they bought Authentec, 13 months ago, makes sense
- TSMC's CEO, Morris Chang, the world's largest third party fab, said on their 1q13 conference call, "Now a few words on specialty technologies. We don't want to neglect them at all. We talk about advanced technologies most of the time, but the specialty technologies are growing even faster and they already account for a very significant volume in our revenue. And I'm talking about finger-printing technologies, motion sensors technologies and products, near-field communication products, audio codec, power management, touch sensors..". This indicates a large customer has already secured capacity for finger printing technology and it could likely only be Apple or Samsung who could move the needle for TSMC
- Snippets of code released in iOS7 which were disclosed here
- A bunch of other news from blogs etc
Fingerprint Cards and Market Landscape
Authentec was the leader in the fingerprint sensor space. Their solution was based on solid capacitive touch sensors, which are expensive as they use a large amount of silicon, but they present the best user experience vs swipe sensors. They dominated market share for higher end clients, such as Bloomberg, Fujitsu, NEC and others. However, their sensors were expensive as they were north of $6, which limited the amount of adoption that took place.
Validity, a private company, had a different approach and created a flex film swipe (not touch) sensor, that separated silicon from the sensor by using small bits of silicon packaged on flex film. This reduced the cost of the sensors as minimal amount of silicon was used and we believe that ASP's for these swipe sensors are around $1.50.
Fingerprint Cards (FPC) was a smaller competitor in the space that used solid capacitive touch and capacitive swipe sensors. FPC primarily served domestic banks in China, as bank employees are often required use their finger to swipe or touch before major transactions.
We believe Apple bought Authentec for a few reasons:
- Capacitive touch sensors are more accurate vs. swipe sensors and present a better user experience and often enroll with one touch. Swipe sensors have a few drawbacks as they often require the user to have their finger perfectly straight as they swipe for a valid enrollment.
- This is easier in laptops, as the sensor is straight and there is a large amount of room to align their finger correctly, but much harder in a phone. Imagine having to hold your phone perfectly straight before you swipe every time.
- Furthermore, flex film isn't durable and if embedded in a handset it would exposed to dirt, water, tears etc. A swipe sensor in a laptop is protected when the laptop is closed (the sensor is often next to the mouse trackpad), but phones are put in pockets next to keys etc.
- Also - capacitive sensors can eventually be embedded below glass in the screen vs. flex film. As large flat black screens, with small bezels become the favored trend amongst users, we think this feature of capacitive touch sensors will be important down the road.
- Since capacitive sensors are so expensive, we think it made a lot financial sense for Apple to buy Authetec for $357mm. Even with its scale, if Apple got the price point down to $4.00, embedding this device in every Apple phone and tablet would cost Apple $600mm annually (assuming 100mm phones and 50mm tablets).
- Also, from a strategic standpoint, this would prevent the Android camp from being able to use Authentec, the leader in the space and would let Apple be first to market with this sensor.
However, as we discussed above, we believe the use cases for this sensor will be so great that the Android & Microsoft camp will be forced to replicate this technology to make sure they don't lose market share to Apple. We believe the go-to vendor for Android and Microsoft will be FPC for the following reasons:
- FPC already produces solid capacitive sensors just like Authentec. We believe handset OEMs will prefer this solution as we already discussed the many problems with flex film above.
- After Apple bought Authentec, Apple issued a last time buy which allowed Authentec's previous customers to stockpile on sensors for the last time before they found another supplier. Former Authentec customers are already signing up w/ FPC, including Fujitsu and Bloomberg which demonstrates FPC's capability as a supplier in this space
- The Fujitsu win is not trivial. Despite low volumes, this shows FPC 's solution works and got approval of an ex Authentec customer. This is also the first fingerprint sensor that is shipping in a phone that is not Authentec.
- The Sales director for Americas and Japan from Authentec joined FPC- we think they have pretty good insight into who might have the next best solution on the market, since they were coming from the market leader
- The CTO recently joined from ST-Ericson where he was also CTO. He is a veteran in the industry, and has great relationships with handset OEMs from his experience at STE. He likely could have gone to many well established companies after STE, but likely went to a FPC because he thought it was a tremendous opportunity
- Microsoft (which has primarily used Validity in their previous laptops) has been discussing the benefits of fingerprint recognition in their Windows 8.1 dev conferences as they believe the industry will shift this way. They specifically called out the advantages of touch vs swipe sensors and did demonstrations with Fingerprint Cards
- see here from minute 56 -102, and here at minute 19:30, minutes 26-30, and minutes 105-108 to hear Charles Ng from FPC answering some Q&A. There is also another short presentation from MSFT here
- Microsoft can use any vendor they well please, but they specifically have been calling out Fingerprint Cards which we believe is a great validation of their solution
- We believe Samsung has been having discussions with FPC and Validity, which is typical as Samsung tries to dual source components to promote competition amongst their vendors to reduce price. However given FPC's solutions has already been demonstrated (See videos here from MWC w/ Crucialtec as the packager, and also PANTECH VEGA) and now shipping in Fujitsu f07e, we believe Samsung was trying to see if Validity could also produce a sensor that would work well in mobile phone so Samsung could drive prices of the sensor down. However - it looks like Samsung (SSNLF.PK) and Validity weren't able to get a solution to work based on an article here. This isn't surprising to us as we discussed the problems above with flex film.
- We would also like to point out that the Galaxy Note 3 was launched at "Samsung Unpacked" in Berlin on September 4th, which was right before the new iPhone launch on September 10th. We think Samsung didn't want to release the Note 3 w/ a fingerprint sensor, as Fingerprint Cards is only shipping a swipe sensor in phones right now as touch for phones isn't complete yet, and as we discussed above that touch sensors are a much better user experience. We also think it would be disappointing to the consumer (and Samsung's brand) if Samsung released a swipe sensor, and 7 days later Apple released a touch sensor. However, we do believe that that Samsung and Fingerprint Cards are working together so that the Galaxy S5 will have a touch fingerprint sensor at the time when it's launched in early 2014. We think this is consistent with FPC's comments on their updated projections for 2013.
Revenue potential for Fingerprint Cards
As we discussed above, we believe that the use cases for fingerprint sensors in phone will be tremendous. Apple will be the first mover but we believe that the Android camp and Microsoft will need to produce a similar experience for their users because the use cases are so compelling. We think Fingerprint Cards is the best positioned supplier for fingerprint sensors for everyone but Apple as their solution is based on capacitive touch sensors just like Authentec. FPC is already shipping a swipe sensor for Fujitsu and Pantech it will only be a matter of time until they have a touch sensor on the market for mobile phones, and they were already demoing a touch sensor with the MSFT at the Windows Blue 8.1 developer conference.
As far as revenue potential, we think the market could be quite big. We think initially the higher end smartphone market will use fingerprint sensors and as price point comes down, volumes will expand. Here is how we are thinking about the addressable market.
- 100mm Samsung Galaxy s5's, 30mm Note 4's and another 20mm high end tablets from high end Samsung tablet SKU's.
- We think HTC, LG, Sony (SNE), BlackBerry (BBRY) and Nokia (NOK) could each use this in their high end handsets for a total of 30mm units
- We think other tablets could total 30mm including (Nexus 7, Kindle Fire, and Surface tablets)
- We think Microsoft is serious about putting this in a large amount of their Window's 8.1 PC's. There's about 300mm PCs made annually, we think less than 20% could have fingerprint sensors, so let's use 50mm units (and if you listen to the MSFT presentation it makes you think that this could be much higher)
Adding this up is around 260mm units. Authentec's touch sensors sold for $7 USD, but given the increase in volume we thought $4 was more reasonable. At 260mm units and $4 a sensor, this is north of $1bn in revenue. At 20% EBITDA margins that's ~$200mm in EBITDA.
So at a market cap of $2bn USD for FPC ~(vs $638mm USD today), we would note the stock would be trading at 2x sales and 10x EBITDA, which isn't that expensive for a company that has a rapidly growing addressable market. This valuation would put FINGB at a trading price of 260SEK vs 83SEK today.
Note 3rd party estimates that there will be 1.3bn smartphones shipped, 300mm tablets, and 300mm PCs or 1.9bn devices in 2014. We think Apple could be 190mm of those devices (90mm iPhones, 80mm iPads, and 20mm Macbooks). This would leave roughly 1.7bn non Apple devices, of which we are saying 260mm or 15% will have a fingerprint sensor, so there is definitely room for a large non Apple market to grow into.
Given the size of the market, we do think this market will attract competitors. But coming up with a precise analog component of this nature takes time. Given Apple's first mover advantage, the Android and Microsoft camps will need to respond quickly - and we believe Fingerprint Cards is the best positioned supplier to help Android and Microsoft solve that problem. We believe their development of capacitive swipe and touch sensors, their endorsement from Microsoft, their product traction w/ Fujitsu, Bloomberg and Pantech show their early progress and there is much more to come.
Disclosure: I am long FINGB.SS (trades in Sweden). I have no positions in any other stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.