IPO Analysis: Cross Match, Leader Of Biometric Technology

CrossMatch (CROS) is a leading provider of biometric technologies designed to protect people, property and privacy. Its products include fingerprint, palm and full-hand scanning devices, commonly known in the industry as livescan devices, document readers and proprietary software, such as criminal booking, civil identification and facial recognition applications.

Revenue

Cross Match earns most of its revenue from:

Sale of its biometric products.

Providing services related to its products like installation, maintenance and training etc.

In FY 2006 the company earned most of its revenue from

Finger print scanning devices [mainly from ten figure print scanning devices introduced in 2006.]

Less than 1% of its revenue come from document reader.

Less than 1% from facial recognition software.

Cross Match sells its products through its internal sales team, system integrators and other strategic alliances. It often works as a subcontractor for large Government projects and sometimes handles projects in partnership with others.

Customers

Its customers mainly include various Government agencies from around the world and currently the company depends on various Government contracts for its revenue. In the future the company expects the corporate sector to play a bigger role in its revenue, particularly companies related to travel, finance, critical infrastructure and healthcare sectors.

Market opportunity

The international biometrics market is large, growing and evolving rapidly. According to estimates, the biometrics market is estimated to be $3.0 billion in 2007, with the fingerprint-related segment representing a majority of this market. Overall, this market is projected to grow to approximately $7.4 billion by 2012, representing a compound annual growth rate, or CAGR, of approximately 20%.

Cross Match is expected to capitalize on this opportunity due to:

Its existing relationship with various customers.

Global presence.

Vast range of product offering.

Past strategic acquisitions.

Established acceptance of its products particularly with various Governmental agencies.

Competition

The biometrics industry is a highly fragmented and rapidly evolving industry with many different product offerings. Some of the competitors offer fingerprint image capture devices, while others offer other methods of biometric identification, such as facial, retinal blood vessel or iris pattern, signature recognition, hand geometry, vein-mapping and voice recognition.

Cross Match's primary competitors include Cogent, Inc. (COGT), Cognitec Systems GmbH, L-1 Identity Solutions, Inc. (ID), Precise Biometrics AB, SafLink Corporation (SFLK) and Secugen Corporation, 3M Company (MMM) and Rochford Thompson Equipment Limited.

Offer & Objects of issue

Industry details and outlook

Company Outlook

Cross Match has a positive outlook due to:

Expected growth of industry in which it work.

Recent new orders from various Governmental agencies worldwide.

Rising sale of high margin products.

Its existing relationship with various customers.

Global presence.

Rich R&D.

Range of offering.

Past strategic acquisitions.

Established acceptance of its products, particularly with various Govermental agencies.

Financials ($ in million)

Company's financial year ends on December 31.

The company's revenue shows steady growth since FY 2004 and has risen from $32 million in FY 2004 to $77 million in FY 2006. Although nearly half of FY 2006 revenues was contributed by acquired entities ("Smiths Heimann Biometrics GmbH" acquired on August 1, 2005 and "C-Vis Computer Vision and Automation GmbH" acquired in May 2006).

With its growth in revenue, Cross Match has also been able to bring down its operating losses and has turned profitable in Q1 FY 2007 due to an increased sale of higher margin products and also due to the favorable Euro-Dollar exchange difference. The company's balance sheet is just okay but its cash flows are weak. [Although if this offering goes through the company's cash position will be very comfortable.]

Valuation/Offer value ($ In million)

(The company may not be able to perform this well. The chances of the company performing this well is two out of five)

Assuming Cross Match shows the following:

(assuming nothing negative happens with company and it performs exceptionally well, without considering any acquisition)

1. 30% rise in revenue year on year

Revenue rise is assumed at above industry rate (20%) due to orders that company has won recently and its global reach. This leaves the company with revenues of $100 million in FY 2007 and $130 million in FY 2008.

2. Gross margins rise by 1% from Q1 FY 2007

Company is already earning most of its revenue by selling high margin products and this 1% margin rise can be achieved due to economy of scale, and due to higher sales.

3. Operating margins rise to 8% in FY 2007 and to 10% in FY 2008

Due to reduction in R&D, sales and marketing and administrative expenses in % terms, as compare to revenues.

This leaves the company with operating profits of $8 million and $13 million in FY 2007 and FY 2008 respectively. After detecting interest costs of nearly $0 and $0 and income tax cost of $3 & $5 million, this leaves the company with net profits of $5 million and $8 million, that is EPS of $.17 and $.28 for FY 07 and FY 08 respectively.

This means that even if the company performs exceptionally well, at offer price of $15 Cross Match's shares are available one year forward at a PE of nearly 89 and two years forward at a PE of nearly 54.

We rate this IPO 1 on scale of "1 to 5" (5 for best)

Disadvantages:

Offer price is too high.

Company's loss making history.

Threat of the introduction of any alternative and improved technologies.

Strong dependence on Governmental contracts for revenues.

Increased competition.

Advantages

Expected growth of industry.

Recent win of new orders from various Governmental agencies worldwide.

Rise in sale of high margin products.

Its existing relationship with various customers.

Global presence.

Rich R&D.

Range of offering.

Past strategic acquisitions.

Established acceptance of its products, particularly with various Governmental agencies.

Disclosure: This article reflects the personal view of the author about the company and one must read offer prospectus and consult its financial advisor before making any investment decisions.