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COMPANY ANALYSIS 19 April 2016
Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report.
Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel +46 8-545 013 30. E-post: [email protected]
Key Financials
List: Large cap Market Cap: 36,658 MSEK Industry: Semiconductors CEO: Jörgen Lantto Chairman: Urban Fagerstedt
6.0 points 7.0 points 7.0 points 4.5 points 7.0 points
Share information
Share price (SEK) 568.0
N.o. shares 16E (m) 65.0
Market Cap (MSEK) 36,227
Net debt 16E (MSEK) -2,745
Free float (%)
98 %
Daily turnover (’000) 3000
Analysts:
Joel Westerström [email protected]
Viktor Westman [email protected]
China in your hand Redeye hereby initiates coverage of Fingerprint Cards
(FPC). FPC’s strong operational capabilities providing barriers to entry are overlooked. The capabilities will allow FPC to strengthen its position as the leading global supplier of fingerprint sensors.
FPC will leverage its position in the ecosystem and its full system integration capabilities to penetrate new verticals and extend its offering. Beginning with smart cards in late 2016 and in the longer term automotive and IoT, the verticals will fuel continued revenue growth beyond fingerprint sensors for the mobile device segment.
In our base case we see revenues grow at a CAGR of 15 percent from 2016 to 2021 with EBIT-margins between 36 and 40 percent. Our fair value range indicates a value of SEK 225-1475 per share with a fair value of SEK 625 in our base case.
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10-Mar
OMXS 30 Fingerprint Cards
Management Ownership Profit outlook Profitability Financial strength
Summary
Fingerprint Cards (FINGb.ST)
Redeye Rating (0 – 10 points)
2014 2015 2016E 2017E 2018E
Revenue, MSEK 234 2,901 7,737 9,252 10,822
Growth 145% 1,142% 167% 20% 17%
EBITDA -83 954 3,114 3,528 3,956 EBITDA margin -36% 33% 40% 38% 37%
EBIT -145 910 3,057 3,474 3,887 EBIT margin -62% 31% 40% 38% 36%
Pre-tax earnings -143 910 3,057 3,479 3,893 Net earnings -144 798 2,385 2,714 3,036 Net margin -62% 28% 31% 29% 28%
2014 2015 2016E 2017E 2018E
P/E adj. -14.1 46.8 15.4 13.5 11.9 EV/S 8.3 12.5 4.4 3.4 2.6 EV/EBITDA -23.1 38.1 10.9 8.8 7.2
2014 2015 2016E 2017E 2018E
Dividend/Share 0.00 0.00 0.00 0.00 14.01 EPS adj. -2.28 12.62 36.67 41.72 46.69
Fingerprint Cards
Company analysis 2
Redeye Rating: Background and definitions
The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation.
Company Qualities
The aim of Company Qualities is to provide a well-structured and clear profile of a company’s qualities (or
operating risk) – its chances of surviving and its potential for achieving long-term stable profit growth.
We categorize a company’s qualities on a ten-point scale based on five valuation keys; 1 – Management, 2 –
Ownership, 3 – Profit Outlook, 4 – Profitability and 5 – Financial Strength.
Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted
differently according to how important they are deemed to be. Each key factor is allocated a number of points
based on its rating. The assessment of each valuation key is based on the total number of points for these
individual factors. The rating scale ranges from 0 to +10 points.
The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of
the bars therefore reflects the rating distribution between the different valuation keys.
Management
Our Management rating represents an assessment of the ability of the board of directors and management to
manage the company in the best interests of the shareholders. A good board and management can make a
mediocre business concept profitable, while a poor board and management can even lead a strong company into
crisis. The factors used to assess a company’s management are: 1 – Execution, 2 – Capital allocation, 3 –
Communication, 4 – Experience, 5 – Leadership and 6 – Integrity.
Ownership
Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner
commitment and expertise are key to a company’s stability and the board’s ability to take action. Companies with
a dispersed ownership structure without a clear controlling shareholder have historically performed worse than
the market index over time. The factors used to assess Ownership are: 1 – Ownership structure, 2 – Owner
commitment, 3 – Institutional ownership, 4 – Abuse of power, 5 – Reputation, and 6 – Financial sustainability.
Profit Outlook
Our Profit Outlook rating represents an assessment of a company’s potential to achieve long-term stable profit
growth. Over the long-term, the share price roughly mirrors the company’s earnings trend. A company that does
not grow may be a good short-term investment, but is usually unwise in the long term. The factors used to
assess Profit Outlook are: 1 – Business model, 2 – Sale potential, 3 – Market growth, 4 – Market position, and 5 –
Competitiveness.
Profitability
Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to
generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company
has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 – Return on
total assets (ROA), 2 – Return on equity (ROE), 3 – Net profit margin, 4 – Free cash flow, and 5 – Operating
profit margin or EBIT.
Financial Strength
Our Financial Strength rating represents an assessment of a company’s ability to pay in the short and long term.
The core of a company’s financial strength is its balance sheet and cash flow. Even the greatest potential is of no
benefit unless the balance sheet can cope with funding growth. The assessment of a company’s financial strength
is based on a number of key ratios and criteria: 1 – Times-interest-coverage ratio, 2 – Debt-to-equity ratio, 3 –
Quick ratio, 4 – Current ratio, 5 – Sales turnover, 6 – Capital needs, 7 – Cyclicality, and 8 – Forthcoming binary
events.
Fingerprint Cards
Company analysis 3
Table of contents
Table of contents .......................................................................................... 3
Glossary ........................................................................................................ 4
Investment thesis ......................................................................................... 5
Introduction – read, swipe your finger and move on ................................... 9
Company description .................................................................................. 11
Biometric technologies ............................................................................... 18
Products ...................................................................................................... 54
Strategy and operations ............................................................................. 67
Market - introduction ................................................................................. 89
Mobile devices - smartphones, tablets and laptops .................................. 90
The smart card market ............................................................................. 104
Automotive – Baby you can drive my car ................................................. 114
Other verticals – PC, IoT, wearables ......................................................... 117
Major risks ................................................................................................ 118
Financial estimates ................................................................................... 120
Valuation .................................................................................................. 131
Appendix I – Management and Board ..................................................... 143
Appendix II - A comparison with the CMOS image sensors market ......... 146
Summary Redeye Rating .......................................................................... 149
Fingerprint Cards
Company analysis 4
Glossary
ASIC Application Specific Integrated Circuit
ASP Average Selling Price
BoM Bill of Material
CMOS Complementary metal-oxide semiconductor
EBIT Earnings Before Interest and Taxes
EBITDA Earnings Before Interest, Taxes, Depreciation
and Amortization
EMV EuroPay, MasterCard & Visa
Fabless Without fabrication – fab - a semiconductor
company without its own foundry/production
facility to print integrated circuits
FAR False Acceptance Rate
FIDO Fast Identity Online
FPC Fingerprint Cards
FPS Fingerprint Sensing
FRR False Rejection Rate
FTE Full Time Equivalent, Failure To Enroll
GM Gross Margin
IC Integrated Circuit
IoT Internet of Things
IP Intellectual Property
LGA Land Grid Array
MNO Mobile Network Operators
MWC Mobile World Congress
OEM Original Equipment Manufacturer
OSAT Outsourced Semiconductor Assembly & Test
SVP Senior Vice President
UAF Universal Authentication Framework
VP Vice President
Fingerprint Cards
Company analysis 5
Investment thesis
Fingerprint Cards (FPC) develops and sells solutions for fingerprint
authentication. It is the world’s number one fingerprint sensor supplier1
and one of Europe’s largest fabless semiconductor companies.
Investment case
In 2015 FPC had its major market breakthrough increasing sales by over
1,200 percent. The company’s share skyrocketed and was the best
performing mid- or large cap share in Europe adding close to 1,700 percent
to end the year with a market cap of SEK 37 billion.
The critics have been quick to dismiss the high gross margins of around 45
percent as unsustainable whilst also claiming that an imminent threat of
new competitors will deplete FPC’s market shares to a fraction of the
approximately 45 percent of the fingerprint sensor market it had in 2015.
We believe a more balanced view of the company’s future prospects is
mandated. The market for biometrics is growing rapidly and will continue
to do so driven by increased adoption in existing as well as new verticals as
additional use cases emerge and more players joins the biometric
ecosystem. FPC stands well positioned with a strong product offering,
partnerships with key players in the ecosystem and operational capabilities
that are hard to match.
Market grows with increasing adoption and new verticals
As new use cases emerge, fingerprint sensors are no longer only about
convenience but increasingly an enabler of new business models for the
smartphone OEMs. Increased fingerprint adoption in mid-range and low-
end smartphones will lead to continued rapid growth for fingerprint sensors
in mobile devices. We expect the market for fingerprint sensors for mobile
devices to grow at a CAGR of 48 percent from 2015 to 2018, to reach a
penetration of 68 percent in 2018.
New verticals are emerging and will lead to a high growth for fingerprint
sensors. The next big vertical is smart cards where biometrics will enable
secure payments, financial inclusion and increased efficiency in the health
care sector for billions of people. There are also major opportunities in what
is referred to as IoT, where Ericsson and Huawei expect 50 to 100 billion
connected devices in 2020. Intel betting big on IoT expects 200 billion
connected devices in 2020 and is launching products to make it happen.
1 Cowen, November 2016 (as per FPC presentation material)
A more balanced picture
of FPC’s growth prospects
is mandated
Fingerprint Cards
Company analysis 6
Strong product portfolio from leading IP and full system
integration capabilities
The commercial success of FPC is dependent on the ability to cater to the
needs of the customers with a leading product portfolio. Key enablers for
FPC’s product leadership are the patent portfolio covering both sensors,
packaging and algorithms and the ability to integrate hardware, software
and packaging in one system.
The patent portfolio also gives FPC the right to play and keeps competitors
out as OEMs do not want to risk having their products banned due to patent
infringements of their suppliers.
FPC is active in further developing its technologies to sustain its leading
position and has recently launched sensors capable of sitting under 400
micrometer glass, a proprietary algorithm for the mobile device segment
capable of liveliness detection and sensors developed specifically for smart
cards.
Operational capabilities leveraged to sustain market leadership
FPC seized the opportunity to secure supply of wafers in a situation when
there was spare capacity in the market prior to the demand for fingerprint
sensors skyrocketing in the second half of 2015. As the only player ready to
take on the demand for fingerprint sensors when the market started
booming, FPC, in the right place at the right time, could grab a quite
considerable part of the supply and also position itself as a key player in the
ecosystem.
As reliability of supply is key in the mobile device segment with its short
product life cycles, FPC’s supply chain and system integration capabilities
provide barriers to entry in the short term. Incumbents as well as entrants
aspiring to steal market shares lack FPC’s economies of scale and will have a
hard time competing against FPC.
Partnerships and M&A opportunities to secure long term growth
FPC has built a strong position in the ecosystem and continue to enter into
important partnership agreements. The company recently announced
partnerships with leading companies in the smart card industry,
automotive industry as well as for IoT applications. Partners include global
leaders such as Gemalto and STMicroelectronics.
FPC ended 2015 with a cash pile in excess of SEK 1 billion and can leverage
its financial strength and access to key customers to make accretive
Competitive advantages
from operational
capabilities
Large cash assets
Fingerprint Cards
Company analysis 7
acquisitions of smaller technology companies whose products and
technology are complementary to FPC’s offering.
Are the competitive advantages sustainable?
FPC’s message to competitors is clear - you can’t touch this! The company
has no intention to surrender to the competition, but instead plans to
extend its lead in 2016. Whereas we believe FPC will manage to do so, we
see potential risks in the longer term.
FPC’s message to competitors is clear - you can’t touch this! The company
has no intention to surrender to the competition, but instead plans to
extend its lead in 2016. Whereas we believe FPC will manage to increase its
market shares in 2016, we see potential risks in the longer term.
The major risk is shared by virtually all high-tech companies, namely that of
new, disruptive technologies. Even though active capacitive fingerprint
sensors have become more or less a de-facto standard in the mobile device
segment, eco-system players wishing to capture a piece of the biometrics
market are looking at various ways to capture a piece of the pie. There are
proponents of other biometric technologies, Microsoft for example
incorporates iris scanning in its new Nokia phones and Qualcomm is eager
to promote its ultrasound sensors. In other verticals the jury is still out even
though FPC’s prospects currently look promising.
Incremental technological developments, both in the fingerprint sensing
technologies and in production technologies, as well as competitors pose a
threat. Current competitors are on their toes to come up with better
products and technology. There are strong incentives for competitors to
push for the bundling of components to allow them to leverage their
complementary products and technologies. In this regard, FPC has a
narrower product portfolio than for example Synaptics. Major
semiconductor players could also enter the market for fingerprint sensors,
and they would have easier access to the supply chain as well as an
established position in the value chain as compared to FPC.
All the above could lead to increased price pressure as well as lower market
shares for FPC, which would make it hard to justify the company’s current
valuation.
FPC will need to form new partnerships and leverage its current position to
be competitive over time. As patents expire FPC will need to secure new IP
through acquisitions and internal R&D in order to have a technological edge
and create long term shareholder value. A strategic repositioning in the
Fingerprint Cards
Company analysis 8
value chain to combat commoditization is another strategy we see FPC
starts to pursue.
We believe the market is not fully pricing-in the opportunities FPC has to
extend and broaden its offering through an increased biometric scope and
new business models generating software revenue.
There are many catalysts that can change the market perception
Samsung design win
Commercial success/considerable volumes from smartcards
New segments, for example automotive, show rising volumes
Launch of new products/technologies
Share buy-backs
M&A – accretive acquisition
M&A – acquired by for example Qualcomm
Fair value range
Our Fair value range indicates a value in base case of 625 SEK per
share in a fair value range of SEK 225-1475. These valuations are
based on average EBIT margins for years 2016-2021 of 34, 37 and 41
percent for bear, base and bull case respectively. For the same periods we
have assumed CAGR growth of -7, 15 and 30 percent.
Fingerprint Cards
Company analysis 9
Introduction – read, swipe your finger and move on
In the highly secular country Sweden, technology company Fingerprint
Cards has gathered followers not seen since the Christening of the Nordics
several hundred years ago. So what has sparked all the interest from
supporters, adversaries and curious bystanders?
Fingerprint Cards, henceforth FPC, has a history that entails so much
drama it could just as well have been the plot of a Hollywood blockbuster. It
came as no surprise that during the writing of this analysis, it was rumoured
that a book will be written on the history of the company2.
Founded in the late nineties, FPC got its share of the IT-hype around the
turn of the millennia. Hopes faded amongst investors, management and the
board of the company alike, it even reached a point where the board
contemplated liquidating the company.
Despite continued losses and projections that never materialised, the
company managed to stay independent and raise money to continue
development of its fingerprint sensors and technology. Retail investors lost
hope, but some stayed in the game, certain that the turning point was soon
to be reached.
In 2012, Apple bought mobile security firm AuthenTec specialized in
fingerprint sensor technology. Soon after, Apple started including a
capacitive fingerprint sensor in all its iPhones, starting with iPhone 5S. This
marked a major turning point in the market and fingerprint sensors have
since become standard in high-end smartphones and the adoption into the
mid-range and low-end segments is gaining speed.
FPC were quick to seize the market opportunity that emerged when all
smartphone makers wanted to follow in Apples footsteps. FPC struck
several important deals with smartphone vendors and refocused its
technology from swipe to touch – a wise decision.
The FPC share broke record after record in 2015, the year that marked the
great turning point for the company. FPC’s market cap rose in excess of
1,400 percent from SEK 2 billion by the end of 2014 to almost SEK 32
billion by the end of 2015. Swedish newspapers wrote headline after
2 http://www.breakit.se/artikel/2739/uppgifter-nu-ska-sagan-om-fingerprint-cards-bli-bok
Exciting story
Fingerprint Cards
Company analysis 10
headline about the company. More importantly, sales grew by a whopping
1,142 percent to SEK 2.9 billion and the company turned a 2014 loss of SEK
144 million to net earnings of SEK 798 million in 2015.
With a total of some 37,000 shareholders, many of which are Swedish retail
investors, fortunes have been made. The debate is running high on what the
future holds for the company. The FPC share is a favourite amongst traders,
but how should you think about an investment in FPC as a long term
investor?
In this report we share our view of the future prospects of FPC. We go
through the company’s strategy and operations as well as the market to
better understand FPC’s competitive advantages. Our goal is to focus on the
longer term profit generation potential of the company as that is what really
matters for long-term investors.
Our approach is to focus on fundamental analysis to help investors make
educated decisions. We provide no buy, hold or sell rating, instead we give a
valuation range with a base, bull and bear case. The base case represents a
scenario that is not overly optimistic, nor pessimistic. The bull case
represents an optimistic scenario, but still not unreasonable, the opposite is
true for our bear case where the scenario is pessimistic but not to an
unreasonable extent.
The structure of the report is aimed to provide the investor with the key
information and analysis. In this report we have chosen to have a more
marked distinction between the research on which we have based our
conclusions and the conclusions themselves – the key takeaways and the
“so-what’s”. The reader who already feel they have a good grasp of CMOS
technology, semiconductor manufacturing or the smartphone market can
readily skip the descriptive sections covering those topics. Finally, for those
who feel the report did not fulfil their thirst for reading about FPC,
additional information is given in Appendices at the very end of the report.
Fingerprint Cards
Company analysis 11
Company description
Since its foundation in Gothenburg, Sweden, in 1997 Fingerprint Cards AB,
henceforth FPC, has evolved from a small and loss making technology
company to one of the global leaders in the fast growing biometrics market.
It has been far from a smooth ride to the top, rather the company has had a
bumpy ride to say the least. Today FPC is one of Europe’s largest, if not the
largest, fabless semiconductor company.
History in brief
Still headquartered in Gothenburg, Sweden, where it was founded in 1997,
FPC has during its 18 years gone through both ups and downs to reach its
current position. It comes as no surprise that the media has shown great
interest in the company as FPC’s history involves all the key elements of
classic storytelling – it all began with a great promise of a truly disruptive
shift in how we authenticate ourselves in the age of connectivity.
Source: FPC
Both FPC and its technology sparked great interest during the height of the
dotcom era during the first years of the 21st century. The success however
did not come as soon as some predicted.
Escape from the touch of death
The commercial success never materialized and the interest from the stock
market and the general public faded. In 2005 the board of the company
even contemplated liquidating the company. As we know, those plans did
not materialize, instead the company kept on going and secured additional
rounds of financing through a directed rights issue of SEK 22.5 million in
2005 followed by a rights issue of SEK 62 million in 2006.
Signs of hope
In 2007, FPC received the largest order thus far. The order for area sensor
modules from the Chinese banking sector had a value of SEK 43 million.
The company was now seeing the light at the end of the tunnel. Its patent
One of Europe’s largest
fabless semiconductor
companies
Fingerprint Cards
Company analysis 12
for the swipe sensor (line sensor) was approved in the US, the third
generation ASIC-processor hit the market and new distribution agreements
covering Austria, Germany and Spain were signed. More importantly for the
shareholders, no rights issue was made during 2007.
Total despair – almost (s)wiped out
The promises offered by the large orders from China did not translate into
the major market breakthrough FPC hoped for and a turbulent time started.
The company had to raise capital, not only once, but several times. The
shares of FPC were taking a hard hit and reached rock bottom in mid July
2012 when the stock closed as low as SEK 2.66.
The great resurrection begins
Many of the early players in the biometric industry either discontinued
development, were bought or went bankrupt3. FPC however kept on
struggling as one of the few stand-alone companies entirely focused on
fingerprint technology. The big change came in 2012 when Apple bought
AuthenTec and incorporated an active capacitive fingerprint sensor in its
iPhone 5S. Apple essentially woke the concept of fingerprint sensors in
smartphones from the dead and other major mobile device OEMs quickly
decided to follow in Apples footsteps.
As one of the three major players in the fingerprint sensor market suddenly
got stuck in an Apple tree, there was a gap to fill as the smartphone
manufacturers of Android phones could no longer buy sensors from
AuthenTec. Apple’s major competitor Samsung decided to go with
Synaptics who acquired Validity to enter the market for fingerprint sensors.
FPC instead focused on winning business from the Chinese up-and-coming
smartphone OEMs.
Touch for the very first time …
… at least for Android smartphones. FPC perhaps took the most important
decision in the history of the company when it decided to pursue active
capacitive touch sensors for the smartphone segment rather than
continuing to push for its swipe sensors. In 2013 the company introduced
its first capacitive touch sensor for Android, the FPC1020. 2013 also
marked a year of early commercial success in the mobile device market as
FPC secured 34 design wins and a total of 21 smartphones and tablets
comprising FPC’s technology were launched.
3 http://biometrics.mainguet.org
Fingerprint Cards
Company analysis 13
China in your hand
In 2014, FPC started to take off as it secured its position as the leading
supplier of fingerprint sensors to the Chinese mobile device OEMs. With a
broadened product portfolio of capacitive touch sensors (FPC1021,
FPC1025, FPC1150 and FPC1155), a strengthened organization and new
partnerships, the prospects for the company looked brighter than in many
years. The market however remained sceptical as issues surrounding top
management gathered more attention than the commercial success of the
company. During 2014, eighteen smartphones and tablets incorporating
FPC’s technology hit the market, one of which, the Huawei Ascend Mate 7
incorporated the first capacitive touch sensor for Android4. Another
important milestone in 2014 was the start of a cooperation with Norwegian
company Zwipe to incorporate touch sensors in smart cards, an area that,
according to FPC, holds great promises but yet remain to result in
commercial volumes of sensor shipments.
Position of today
As of today FPC is the global leader in the market for fingerprint sensors
and has seen its share price skyrocket during the past year. In 2015, 55
smartphones featuring FPC’s touch fingerprint sensors were launched by 23
different OEMs. After several revisions of its own estimates, only this time
upwards, the company reported sales of SEK 2.9 billion in 2015. A negative
EBIT of SEK -145 million for 2014 turned into an EBIT of SEK 910 million
for 2015.
FPC has struggled internally to keep pace with its booming sales and has
grown its organization with both consultants and employees. As per 31st
December 2015 the company had 254 FTE equivalents of which 150 were
employed by FPC and 104 were consultants.
With offices in Sweden, Denmark, Japan, South Korea, China, The
Philippines, Taiwan and USA, FPC has established a truly global presence
although the majority of employees are still located in the Nordics.
As of today, the Chinese mobile device market is by far the most important
for FPC. With limited resources it is not possible to pursue every
opportunity. That said, FPC has further expanded its network of partners
and distributors to target new geographies and verticals. Recent
announcements include integration of FPC sensors in automotive, smart
cards and a partnership with Precise Biometrics, Gemalto and
STMicroelectronics on secure fingerprint authentication in wearables and
consumer electronics.
4 http://mobileidworld.com/huawei-announces-first-android-smartphone-to-feature-fingerprint-touch-sensor/
Sales of SEK 2.9 billion in
2015
Fingerprint Cards
Company analysis 14
Management, board and owners
There have been a lot of discussion and debate on FPC’s management and
owners. Much of the debate has been connected to events that took place a
few years ago, involving several former members of FPC’s top management
and board, amongst others former CEO Johan Carlström. As of today the
company is working hard to regain the market’s trust and shift focus away
from past events to current and future developments of the company.
Management – Lantto conducts FPC’s growing orchestra
Subsequent to the events that caused turbulence in 2012, several changes
have been seen in FPC’s top management. CEO Jörgen Lantto, who joined
FPC in December 2012 as Executive Vice President/CTO, took over as
acting CEO in September 2014. Prior to joining FPC Lantto was CTO at ST-
Ericsson, a joint venture between STMicroelectronics and Ericsson. In May
2015 it was announced that Lantto was appointed permanent CEO. Former
CEO Johan Carlström stepped down from his role to shift his focus to
business development activities relating to new market segments.
FPC has further strengthened its organization and its top management
during 2015 and as of today Lantto leads an experienced management
team. Other key members of FPC’s top management include CFO Johan
Wilsby with experience from heading the finance function of listed
companies, SVP R&D Pontus Jägemalm and Thomas Rex who is heading
FPC’s Sales and Marketing.
Further details on FPC’s top management are presented in Appendix I –
Management and Board.
Board
The work of FPC’s board, comprising six members, is headed by Chairman
Urban Fagerstedt, VP R&D at Huawei Technologies Sweden AB. Fagerstedt
has been on the board since 2009 and brings competencies in R&D as well
as a vast network in, and understanding of, the telecom market.
Experiences from the Telecom Industry as well as from the capital markets
have been common denominators for the board of FPC in the past. As the
company has been in need of frequent capital injections whilst struggling to
achieve commercial success amongst the mobile phone OEMs, the previous
composition of the board was a good match against the competencies
required.
As FPC is targeting additional verticals and different challenges arise, the
board composition has been changed to reflect the company’s new reality.
A CEO with solid
experience
Fingerprint Cards
Company analysis 15
Katarina Bonde joined the board in 2015 and has experience from a variety
of sectors, amongst others the payment industry. Alexander Kotsinas has
been on the board since 2013 and holds vast experience from the venture
capital industry. Carl Johan von Plomgren, experienced in compliance
matters and competition law, is another new addition to the board.
Plomgren joined the board in 2015 and possesses a strong network in the
IT-sector as well as in industrial companies.
Jan Wäreby and Lars Söderfjäll both joined the board in 2015. Wäreby is
experienced in sales and marketing from his role as SVP Sales and
Marketing at Ericsson AB. Lars Söderfjäll has been involved in FPC for an
extended period of time as a partner in major shareholder Sunfloro. For the
upcoming 2016 AGM, The Nomination Committee is proposing that Åsa
Hedin be elected in addition to the current board members.
For more details on the board, please refer to Appendix I – Management
and Board.
Owners
FPC has a free float of 100 (98) percent5 and no single owner holds in
excess of 10 percent of the capital, although Sunfloro has over 16 percent of
the votes. The largest shareholder considering the share of capital is Avanza
Pension, in reality, this is an aggregate of numerous endowment insurances
held by Swedish online bank and broker Avanza. Looking at the list of the
top ten shareholders (see page 151), one sees that the top ten shareholders
only hold a little over 30 percent of the shares and a little over 40 percent of
the votes.
Danske Invest & Danica Pension, just like Avanza Pension, is mainly
constituted by endowment insurances. Ranked three in the list of owners,
Oppenheimer Funds is the largest institutional shareholder when not
accounting for endowment insurances.
It can be noted that ownership in the endowment insurances is not fully
transparent, hence, it could be that someone holds a significant amount of
shares in FPC without it being reported in the list of owners.
Short on historic events
A number of events in 2012 and 2013 involving, amongst others, former
CEO, Johan Carlström, led to a severe lack of trust from the stock market.
In September 2014 EBM, the Swedish National Economic Crimes Bureau,
5 Depending on what definition of free float is used, Holdings define free float as the percentage of shares not held by a shareholder with ownership exceeding ten percent of the shares. It should however be noted that
main owner Sunfloro has 16.2 percent of the voting rights through its 1.2 million non-traded A-series shares
Large free float but the
main owner holds 16
percent of the votes
Fingerprint Cards
Company analysis 16
conducted a search of FPC’s Gothenburg headquarters. Carlström and a
former board member of FPC were accused of independently from each
other having carried out insider trades in the FPC stock.6
The events behind the allegations took place in 2012 and 2013. EBM claims
that Carlström intentionally bypassed the reporting rules concerning
insider trading by conducting trades in the FPC share and derivatives from
an endowment insurance. Trades from an endowment insurance does not
provide the same visibility as it does not require the same reporting of
trades and holdings compared to what is required for holdings and trades in
brokerage accounts.
After an extended period of ongoing investigation and much speculation in
the media, the attorney at EBM, Pontus Hamilton, in September 2015
decided to press charges against Carlström and the former board member.
To further complicate the story, Carlström accused attorney Hamilton of
disqualification bias and decided to press charges against Hamilton. The
general attorney dropped the charges against Hamilton.
Regarding the charges against Carlström and the former board member, it
remains to be seen what the final outcome will be, as the case has not yet
been tried in court.
The accusations caused headlines in the press and hurt the reputation of the
company in the stock market severely, especially given two previous
dramatic incidents. A former member of the board of FPC had previously
been found guilty of insider trading and sentenced to one year in prison. It
should be noted that it was FPC who reported the insider trades to the
authorities7.
The other incident was a false press release sent out in 2013 in which it was
announced that FPC had received a bid from Samsung. The press release
was sent by someone with an intention to impact the price of FPC’s shares,
and as it hit the market the shares rallied. All trades were later cancelled
and a criminal investigation to find the persons behind the false press
release was started but as of yet no one has been charged with the crime.
6 http://www.fingerprints.com/corporate/johan-carlstrom-avgar-och-tf-vd-jorgen-lantto-utses-till-vd-for-
fingerprint-cards-ab-fpc/, http://www.gp.se/ekonomi/1.2486004-fingerprints-vd-misstanks-for-insiderbrott,
http://www.expressen.se/dinapengar/aklagaren-sa-lurade-carlstrom-marknaden/ 7 http://www.affarsvarlden.se/tidningen/article3673079.ece
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Company analysis 17
Redeye’s view on management, board and owners
With several new additions to FPC’s management as well as to the board,
we believe FPC has a management team and board well suited to lead the
company going forward.
CEO Lantto has a good reputation amongst former colleagues at Ericsson
and we believe he has the right qualifications to lead the company going
forward. The management team has been strengthened with the addition of
CFO Wilsby who has experience from the role as CFO for a listed company.
Lantto and Rex are both veterans in the telecommunications industry and
their experience and professional networks are extremely important. Rex’s
former position as Vice President Sales Asia/Oceania at Ericsson Mobile
Platforms and Lantto’s previous role at ST-Ericsson have given them a vast
network in the industry, not least in China where customers to ST-Ericsson
and Ericsson included many of FPC’s current clients. Relationships are
important in business all over the world, but even more so in China than
elsewhere and having built solid relationships with key industry players in
China is not so easy to copy for new entrants.
The board members’ competencies span many sectors as well as functions.
We believe FPC’s board provides the competencies required to develop the
company further. We especially value how further competencies in
industries other than telecom are now represented on the board, for
example Bonde’s competencies in the payment industry and Kotsina’s
competencies from venture capital. Naturally, the deep telecom experience
several board members hold is highly relevant also going forward.
Regarding prior events and the communication from the company
management, we believe FPC has taken appropriate measures to rebuild
trust. That said, it is a process that takes time and whilst some start
focusing on the achievements of the company, others will maintain their
scepticism also going forward, especially as long as there are still open cases
against former CEO and board members.
Regarding the accusations against former CEO and board members, in
Sweden you are innocent until proven guilty. A balanced and sober view is
mandated. Carlström as well as the former board members – irrespective of
what happens when their cases are tried in court – were instrumental in
getting the company to where it is today. Carlström managed to secure
several rounds of funding and believed in the company at a stage when
everyone else, expect for a crow or two, had given up hope.
“All our people are very
important, they know the
people in the business all
over the world.” Jörgen
Lantto, FPC
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Company analysis 18
Biometric technologies
The word biometric derives from the Greek words “bio” (life) and “metrics”
(to measure)8. Biometrics allows authentication based on something you
are rather than something you know (for example PIN code or password) or
something you have (for example key or passport).
The concept of biometrics has been around hundreds or even thousands of
years. It is only in the last few decades that it has become possible to replace
the biometric recognition we perform every day (such as recognizing our
colleagues before we let them into the office) with automated processes. The
enabler has been advances in computer processing driven by the
development of increasingly efficient IC. Today there are many different
biometric technologies and fingerprint technology is the most widely used.
We will start by going through the technology used in FPC’s fingerprint
sensors. We also give a description of other fingerprint authentication
technologies and biometric technologies for other biometric modalities than
fingerprints.
The technology section is somewhat lengthy, though we highly recommend
the reader who is not familiar with biometric technologies to read it. Rather
than putting the technology section in an appendix, it is kept here since we
believe it is essential in order to understand FPC’s current and future
prospects.
Biometrics or Semiconductor Company?
Some might see FPC as a biometrics company rather than a semiconductor
company – so how does this fit together? In fact, FPC is both a biometrics
company and a semiconductor company. Whereas semiconductor company
describes the company based on what technology and material is used to
produce the products of FPC, biometric company describes what the
company’s products are used for.
Now that we have established that FPC is a fabless semiconductor company
specializing in biometrics, we continue by having a look at the technology
behind its fingerprint sensors, focusing on the active capacitive technology
of the touch and area sensors.
A fingerprint sensor system consist of both hardware and software. FPC
designs the whole system, including the custom semiconductor chips,
microelectronic packaging and algorithms and software for fingerprint
8 http://www.biometricupdate.com/201501/history-of-biometrics
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Company analysis 19
authentication as well as software for the applications on the devices that
incorporate the fingerprint sensors.
Figure 1: The fingerprint sensor system components Source: FPC presentation
The custom semiconductor chips are called ASICs, as seen in Figure 1.
Basics of FPC’s technology – CMOS ASICs
ASIC stand for Application Specific Integrated Circuit. An integrated circuit,
(IC), often called chip or die, is a piece of semiconductor material (normally
silicon) on which thousands or millions of tiny electronic components like
resistors, capacitors and transistors and their connections have been
fabricated. The fabrication of the electronic components is done on thin
circular slices of silicon called wafers. Each wafer contains multiple ICs.
Figure 2: Semiconductor wafer and IC, source: Redeye, FPC
Despite being highly complex products, ICs cost relatively little to produce
as all the components are printed onto the wafer in an automated
photolithography process, rather than constructed one transistor at a time
like discrete circuits.
The sensor is an ASIC, with an array of small capacitive pixel sensor plates
on it. Each plate has its own electric circuitry embedded in the chip. In the
below illustration, there is a conductive bezel surrounding the pixel sensor
plates. There is also digital control logic embedded on the sensor chip.
ASICs Packaging AlgorithmsSystem and
software
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Company analysis 20
In Figure 3 below, an illustration of an FPC fingerprint sensor is shown.
Figure 3: Illustrative breakdown of an active capacitive fingerprint sensor, Source: company material
We will come back to the production process of the ASIC later on when we
discuss the strategy and operations, and more specifically the value chain of
FPC.
Back to the ASIC, the term application specific means that the IC is
customized for a specific use, for example fingerprint measurement. In
contrast, IC standard products such as microprocessors or memory chips
can be programmed to do many different things.
The technology used to design FPC’s ASICs is CMOS technology. CMOS
(Complementary metal–oxide–semiconductor) is a technology for
constructing integrated circuits that has been around since the 60’ies. The
technology is used for both digital logic circuits and analogue circuits. With
CMOS technology, it is also possible to mix analogue and digital circuits in
the same IC to allow mixed-signal applications.9 FPC’s sensors are of the
mixed-signal type, but the analogue portions heavily dominate.
The CMOS technology possesses two characteristics that are very important
for fingerprint sensors, it gives high noise immunity (little random variation
in the electric signal) and low static power consumption (the ASIC consume
significant power only when the transistors are switched between on and
off). Other semiconductors designed and manufactured with CMOS
technology include for example image sensors for digital SLR cameras and
mobile phones.
Fingerprint recognition – from analog to digital
FPC’s ASIC sensors makes it possible to recognize fingerprints. The process
involves the basic steps described below:
Image capture of fingerprint by the ASIC sensor producing an
image of the fingerprint
9 Baker, R. Jacob (2010). CMOS: Circuit Design, Layout, and Simulation, Third Edition. Wiley-IEEE.
p. 1174. ISBN 978-0-470-88132-3.
FPC uses CMOS
technology
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Company analysis 21
Enrollment - FPC’s algorithm system does image processing and
looks for unique features in the fingerprint image. The unique
features are stored as a digital template.
Authentication – when the enrolled user wants to authenticate
himself/herself the finger is placed on the sensor and a new image
is captured. The new image is not used to produce another
template, instead, the stored template is acting as an operator on
the image (the stored template is compared against the fingerprint
image).
Matching – An algorithm is used to determine if there is a match
between the stored template or not. If there is a match access is
granted, otherwise access is refused
Image capture – I am electric
FPC’s touch sensors capture the fingerprint image by detecting small
changes in electrical charge resulting from the varying distance between the
finger and the capacitive plates on the sensor.
The ridges on the skin of our fingertips form unique patterns shown in our
fingerprints. In biometrics, the patterns that are formed by the ridges are
called minutiae10. Examples of minutiae are ridge endings, crossovers, cores
and bifurcations, see Figure 4.
Figure 4: Fingerprint Minutiae, Source: University of Houston
When the finger is placed on the sensor, a small electrical signal is used to
apply a voltage to the skin. The electric field between the finger and the
capacitive pixel plates vary with the ridges in the dermal11 skin layer since
the skin and thus the capacitor (of which the finger is essentially one part)
can hold a higher charge in areas where the skin is closer to the pixel plates
(ridges) compared to areas further away from the pixel plates (valleys).
The charging of the finger takes place during the charging cycle of the
sensor. At the discharge cycle the charge across the individual capacitive
10 Minutiae is a word borrowed from latin, it means trifles or details. In everyday English the meaning is minor
or incidental details. Source: merriam-webster.com 11 The dermal skin layer is the outermost skin layer that is vascularized and it sits below the outermost skin layer, the epidermal skin layer which in turn consist of the living basal layer and the stratum corneum, or
horny layer, which is dead. Source: http://global.britannica.com/science/epidermis-anatomy
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Company analysis 22
pixel plates is compared against a reference charge and from this the
capacitance can be calculated. As the capacitance is dependent on the
distance between the capacitive pixel plates and the epidermal ridges, the
distances can be calculated giving the unique fingerprint pattern. In Figure
5, an illustration of active capacitive measurement is shown.
Figure 5: Active capacitive measurement, Source: FPC presentation
The signals that are measured in the sensor are analogue signals. The
output from the sensor to the biometric microprocessor is however digital.
On the sensor ASIC there are circuits that digitizes (converts) the analogue
signals to digital signals. The digital representation sent to the
microprocessor is the fingerprint image. The distances measured at each of
the thousands, or even tens of thousands, capacitive pixel plates are
represented by one of 256 gray scale values. The resulting digital image will
look something like the image in Figure 6 below, only the image will be
black and white rather than black and yellow.
Figure 6: 3D fingerprint image, Source: FPC presentation
Enrollment – Now better than DAD
When the microprocessor receives the digital fingerprint image it starts the
enrolment process. In the case of mobile phones, the microprocessor is the
host processor in the phone on which FPC’s algorithms and software are
installed. FPC’s algorithm looks for unique features in the fingerprint
image and stores the features as a mathematical representation in a
template.
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Company analysis 23
Figure 7: Graphic illustration of FPC’s DAD algorithm, adapted from FPC material
A unique features or area is a part of the fingerprint image that contains
characteristic information unique in its surrounding – one element of this
characteristic information is the minutiae described earlier, but other
features are also part of the characteristic information. The template
consists of the unique features and the geometric relationship between
them as schematically shown in Figure 7 above.
The material from FPC that we used as the basis to make the above
illustration shows FPC’s old algorithm called DAD – Distinct Area
Detection. The algorithms FPC currently uses are enhanced compared to
the DAD algorithm – we will discuss FPC’s algorithms in more detail in the
products section.
Authentication and matching – Hello, is it me you’re looking for?
To authenticate is to prove that something is real, true or genuine. A less
generic definition is given by Hitachi systems, “Authentication is any
process by which a system verifies the identity of a user who wishes to
access it.”12 Hence, authentication is related to both identification and
verification.
FPC’s algorithms can be used to carry out both identification and
verification. Identification seeks to identify a person or a biometric and
answers the question “who is this” or “whose biometric (fingerprint) is
this”. Identification is described as 1:n or 1:many matching as it involves
checking the biometric/fingerprint against all biometrics (in the case of
FPC, templates) in the database.
Verification is often described as 1:1 matching (or at least 1:few) as the
verification process seeks to provide an answer as to whether or not the
person really is who he/she claims he/she is.13
In the identification/verification procedure the template stored during the
enrollment is used for matching with the data extracted from the fresh
12 Source: http://hitachi-id.com/concepts/authentication.html 13 Source: http://www.biometricupdate.com/201206/explainer-verification-vs-identification-systems
TEMPLATEUNIQUE FEATURES GEOMETRIC RELATIONS (x,y)
New algorithm replaces
DAD
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Company analysis 24
fingerprint image. This means that the fingerprint image, often referred to
as live scan, is needed for matching rather than a template based on the
fresh fingerprint image. If the match is approved by the algorithm the
authentication is complete and the user can access his/her phone, complete
the payment, unlock the car etc.
Performance parameters of fingerprint sensors
There are several factors that are important to consider when choosing
what technology and specific sensor to use in a certain product, application
or process. The choice of technology and specific sensor will depend on the
customer’s requirements on performance parameters such as power
consumption and speed.
Other aspects that play an important role in choice of technology are what
design flexibility and cost the technology and sensor system have. An
explanation on how the technology relates to the above mentioned
performance parameters is presented in the following paragraphs.
Security, being a key parameter, as well as a much debated issue in the field
of biometrics, is awarded with its own section following the other
performance parameters. There is a trade-off between security and
convenience which is also discussed in the same section.
Power consumption
The power consumption of a sensor system is a critical factor in many
applications, not only because of a limited power supply, but also because of
heating that occurs as power is consumed. For mobile applications and
smart cards the power consumption of the sensor is critical.
The power consumption is determined by both the hardware and the
software of the sensor system. CMOS sensors have low power consumption
as they consume significant power only when they are switched on, that is,
when they are used to scan a finger. Furthermore, the size of the sensor also
affects the power consumption, a smaller sensor consumes less power from
a hardware perspective. Also, the detailed electrical design of the sensor can
heavily influence the power consumption.
Even though a smaller sensor has a lower energy consumption from a
hardware perspective, a smaller sensor has fewer capacitive pixel plates and
thus captures a smaller area of the finger in the image. For a smaller image
to provide enough detail for enrollment and authentication higher picture
quality and a more advanced algorithm is needed. Higher quality images
and more advanced algorithms both may lead to higher power consumption
as it takes more processing power but according to FPC this could be offset
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Company analysis 25
by a smart design. This effect could overshadow the lowering of the power
consumption of the smaller sensor and it is therefore important to have
very effective algorithms for producing the fingerprint image as well as the
authentication.
FPC’s prides itself with having very low power consumption and this is
largely due to the detailed sensor design but to some extent also the
algorithms.
Speed
For applications where biometric processor from FPC is included in the
sensor system the calculation intensive parts of algorithms are executed in
hardware design which makes the authentication process fast and accurate.
For applications where the algorithms are run in the host processor, such as
in mobile phones, the algorithms are key to making the authentication fast.
The analogue to digital conversion carried out by the electronic circuitry on
the ASIC, as well as the calculations involved in the authentication of the
fingerprint needs to be effective to enable a high speed sensor. Writing
algorithms in a minimalistic way is important to achieve the desired
properties.
Another aspect that determines the speed is the time it takes to get the
sensor ready. FPC’s sensors e.g. feature the trademarked OneTouch, which
wakes the sensor up and carries out the authentication in one single step
(read more on FPC’s sensors in the products section).
The speed of the sensor also varies depending on whether the sensor system
performs verification (1:1) or identification (1:n). Since verification only
requires comparison between the image and a stored template (or at least
fewer templates) the results are generated more quickly than identification
systems.
Image quality and FTE – Avoiding blurred lines
Needless to say, the image quality of fingerprint sensors is an important
feature as higher image quality allows for smaller sensors as more details
are captured per area unit. In this regard, FPC uses its HSPA method where
each pixel element can detect very weak signals. The ability to detect weak
signals and filter out noise through well-designed filters improves image
quality. Each pixel element has its own electronic circuit embedded in the
chip which allows an advanced design with very high sensitivity, this in turn
allows for better image quality as well as speed and power consumption.
FPC’s sensors have low
power consumption
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Company analysis 26
Image quality is also related to the resolution, measured as DPI (Dots Per
Inch). With a low resolution, fine details cannot be captured, however, high
resolution does not guarantee high image quality in itself – compare this to
a blurry picture taken with a great camera.
A metric connected to image quality and the ability to capture images is the
FTE (Failure To Enroll) ratio. The FTE ratio gives the percentage of times
the sensor fails to read the fingerprint. Sensor technologies that read the
epidermal, outermost, layer of the skin are far more sensitive to wet and
damaged skin and also typically need a clean sensing surface. Active
capacitive technology as well as ultrasonic technology instead reads the
dermal skin layer which eliminates the need for a clean sensor and dry,
undamaged skin.
Design options/flexibility and durability
Fingerprint sensors need to be incorporated into products in a way that
does not restrict the design of the original product, but rather compliments
and enhances the original product. Smart phone OEMs compete on
functionality but also design. Vehicle manufacturers do not want to
compromise on interior design but want a sensor that blends into the
interior design of the vehicle. Sensors incorporated in entrance control
systems need to endure countless cycles of use and sometimes also harsh
weather conditions.
To comply with the requirements of the above mentioned, as well as other
applications, microelectronic packaging and protective coating are
important to consider. For a sensor to be able to capture a fingerprint
through 400 micro meter glass or a colourful ceramic the sensor must be
able to detect very weak signals.
FPC is working hard to continuously improve its sensors through enhancing
both the software and hardware that go into its sensor systems. Signal
processing and filtering, system integration and patented microelectronic
packaging together allow for a high degree of design flexibility and
durability. FPC have patented solutions like its HSPA (High Sensitive Pixel
Amplifier) technology. According to the company, the HSPA technology
used in the sensor allows for thicker coating than most, if not all other
fingerprint sensors in the market. The HSPA technology also allows the
sensors to withstand static electricity (Electrostatic Discharge, ESD) that
otherwise would have distorted the signal so no image could be captured.
Cost
Needless to say, cost is an important factor when choosing sensor systems.
The cost becomes increasingly important to drive adoption in cheaper
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Company analysis 27
phones, smart cards and other large volume segments that demand low cost
components.
The cost of a fingerprint sensor that is silicon-based, is highly correlated
with the size of the sensor as the material is the major cost driver of the
sensor.
Cost is also influenced by the production process, system integration and
technology used - more on cost and how FPC works to decrease the cost of
the sensors in later chapters.
Size
The size of fingerprint sensors is according to FPC “… driven from the finger
area needed”. This implies that a larger sensor has little value in itself,
contrary to what is claimed by competitor NEXT citing the Madrid Report,
a report commissioned by NEXT and carried out at Universidad Carlos III
de Madrid. The Madrid Report concludes that fingerprint sensor system
quality decreases when the size of the sensor is reduced below
recommended levels. The Madrid Report further states that “Sensor size is
proven as the key factor determining the overall performance of a sensor
system. Other variables like sensing principle and sensor resolution play a
far less significant role.”14
Obviously there are opposing views regarding the importance of having a
large enough sensor. What is clear though is that smaller sensors are
enablers for other important performance parameters:
Additional flexibility in design
Cost, smaller sensors can be made cheaper since they use less
silicon
The importance of sensor size varies between applications and verticals. In
consumer electronics such as smartphones and tablets small sensors are
important for several reasons - the number of sensors and other electronic
components are constantly increasing and components are stacked and at
the same time smaller sensors allows additional design options.
Security
Security is perhaps the most important performance factor of fingerprint
sensors. There are many aspects to take into consideration regarding the
14 http://nextbiometrics.com/convenience/the_madrid_report/, http://www.technology2015.com/pc-
hardware-reviews/size-issues-breaking-down-subsequent-biometrics-madrid-report.html
Size is important
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Company analysis 28
security the sensor system provides. The trade-off between security and
convenience is also a key consideration.
The concept of factors for authentication is another central theme in
security. There are three types of factors, sometimes referred to as classes,
used for authentication.
Knowledge factors – something you know, like a password, PIN or
security question
Ownership factors – something you have, like and ID card, cell
phone, software token or a wrist band
Inherence factors – something you are or do, like signature, face,
voice and fingerprint. Note that biometrics is a subset of inherence
factors
Security research has concluded that at least two of the factors should be
verified for a positive authentication. When two factors are required it is
called two-factor authentication. Preferably all three factors are present and
then the term multi-factor authentication is used.
FAR
A metric that is frequently used in assessing the security of biometric
systems is FAR (False Acceptance Rate, sometimes called FMR, False
Match Rate). The FAR number tells you how often the sensor will
statistically provide a positive match without the right biometric
(fingerprint). The FAR ratio is dependent on the hardware as well as the
software (algorithm) of the sensor system.
The typical FAR of the fingerprint sensors that are used in today’s smart
phones is somewhere around 1/50,000, which essentially means that if you
let randomly selected persons try to log into your phone using the
fingerprint sensor, on average, one in 50,000 persons would succeed.
Convenience
There is a metric frequently used to gauge the convenience of biometric
sensors, the FRR (False Rejection Rate, also called FMNR, False Non Match
Rate). The FRR tells you how often the sensor will wrongfully reject the
valid biometric in the matching algorithm.
Convenience is also related to other attributes of the sensor, such as how
intuitive it is to use, how quickly it wakes up/what operation is required to
wake the sensor as well as how the sensor is incorporated in the end-
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Company analysis 29
product, though that is more a consequence of size and design flexibility of
the sensor.
Security versus convenience – FRR and FAR
One can wonder why the FAR is not lower (= the sensor is more secure) as
it definitely should be possible. The short answer is that it is possible, but
there is a trade-off between security on one hand and convenience on the
other. This trade-off is by no means unique for fingerprint sensors but exist
in virtually all settings and applications for physical as well as digital
security. Furthermore, as the need arise the implementation of security vs
convenience tend to change. The best example is perhaps how security was
enhanced at the cost of convenience for air travellers following the 9/11
terror attacks.
We discussed the trade-off between security and convenience with FPC’s
CEO Jörgen Lantto and SVP R&D Pontus Jägemalm.
“You can rather easily make systems to find spoofs, the challenge is to build
one that will not lock out eligible people. The FRR/FAR trade-off must be
taken into account since you cannot take away convenience” /Jörgen Lantto
An illustration of security versus convenience in relation to biometric
sensors is seen in Figure 8.
Figure 8: Illustration of security vs convenience trade-off, Source: FPC, Redeye
False Acceptance Rate (FAR) HighLow
Fals
e R
eje
ction R
ate
(FRR)
Hig
hLow
D
A
B
C
more secure
mo
re c
on
ve
nie
nt
A – high convenience, low security
B – high security, low convenience
C – high convenience, high security
D – ideal sensor
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Company analysis 30
It is clear that increasing the convenience and the security whilst decreasing
the size of the sensors and allowing additional flexibility in design for the
customers is a top priority for FPC. Jägemalm believes the company has
come a long way and points out how improved hardware design together
with improved algorithms have enabled FPC to design smaller sensors that
can sit under glass without sacrificing security or convenience.
Hackability
Critics of fingerprint recognition as an authentication method often point
out the risks of having someone steal your fingerprint, and how this would
lead to devastating effects as the stolen fingerprint could then never be used
again. The fears are sometimes based on the notion that fingerprint images
are stored in the cloud or in the device ready to steal by a semi-
sophisticated hacker.
It should provide some comfort to know that the fingerprint image is not
stored on the device, instead, it is the template – the mathematical
representation of the extracted fingerprint image – that is stored on the
device. The template cannot be used to re-create the original fingerprint
image, at least it should be extremely hard.
Furthermore, the template is not stored just anywhere on the device. The
template is stored, and the algorithms involved in the authentication
process are run, in a TEE (Trusted Execution Environment). This system
architecture further enhances security as it keeps the biometric data as well
as the processes away from hackers and viruses.15
Spoofability
Spoofing is somewhat of a hobby amongst researchers in the field of
biometrics. A spoof is a forgery of a goods or a document, in connection to
fingerprint sensors a spoof is a fake finger and hence spoofing is the term
used for the process of using a fake fingerprint to trick the fingerprint
sensor.
When making a spoof the fingerprint of the person whose finger will be
used is copied, typically from something the person has touched. A mold of
the fingerprint is then created and used for authentication on the person’s
device.
Needless to say, it is important that fingerprint sensors are spoof-proof or
un-spoofable. The more sophisticated the algorithm and the better the
image quality – the harder it is to spoof the fingerprint sensor. Active
15 http://developer.android.com/training/articles/keystore.html
Mathematical
representations of
fingerprints – not images
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Company analysis 31
capacitive sensors and ultrasound sensors are harder than capacitive and
optical fingerprint sensors. Active capacitive as well as ultra sound sensors
capture 3D-images of the fingerprint involving not only the outermost skin
layer, the epidermis, but also the skin layer below, the dermis. Fingerprint
sensors whose matching algorithm uses not only minutiae, but also other
features of the fingerprint, are harder to spoof.
Up until recently FPC’s sensors had not been spoofed as far as we know,
however, researchers and others are constantly trying to figure out ways to
spoof also the more sophisticated sensors. Early in 2016 a team of
researchers from Michigan State University managed to spoof an FPC
sensor sitting in a Huawei smartphone by using conductive ink to make the
spoof.16
Liveliness detection – I’m (still) alive
Much connected to spoofing, liveliness detection is an important feature of
biometric systems in general and fingerprint sensors in particular. Consider
the below described event and you will realize that liveliness detection is
important also for other reasons than spoofing.
Figure 9: BBC News report on incident involving a fingerprint sensor and a car
Luckily, the fingerprint sensors are now much better than they were back in
2005. Still, liveliness detection is important, not least for automotive
applications where laws in e g California stipulates that a driver needs to be
present for an autonomous car to be allowed to drive on public roads.
Both FPC and Goodix revealed liveliness detection features for their sensors
during this year’s MWC in Barcelona. Whereas Goodix opted for a hardware
based solution FPC launched their FPC LiveTouch – a software based
solution to detect liveliness of the finger used.
16http://www.cse.msu.edu/rgroups/biometrics/Publications/Fingerprint/CaoJain_HackingMobilePhonesUsing2D
PrintedFingerprint_MSU-CSE-16-2.pdf
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Company analysis 32
Overview of biometric technologies There are several other biometric technologies in use today, both other
fingerprint authentication technologies and technologies that are based on
other biometrics such as eyes, voice or face. Some of the technologies
compete with the active capacitive technology FPC uses but many
technologies can also be seen as a complement to fingerprint
authentication.
Other fingerprint authentication technologies
We begin by having a look at the different fingerprint authentication
technologies, all of which are competing technologies in one or several of
FPC’s verticals. There are several different technologies to capture
fingerprints – from manual methods traditionally used in forensic science
to the advanced active capacitive technology used in the sensors from FPC,
Apple and Synaptics. In the following paragraphs we give an overview of the
most common technologies in commercial use today that are relevant to the
analysis of FPC (we exclude pressure sensors from this report as they so far
have not been good enough to be relevant).
Active capacitive technology
We have previously described the active capacitive fingerprint sensor
technology, used by FPC, rather thoroughly, at least the basic principles of
it. Most of the major players in the fingerprint sensor market use active
capacitive technology (also called RF technology as in Radio Frequency,
since a weak signal is sent into the finger)17.
Even though the touch sensors from FPC, Egistec, Apple/AuthenTec and
Goodix use the same basic technology, it does not mean that the solutions
are the same and offer the same benefits to the customers. The companies
use different algorithms, hardware design and packaging to name a few
differences. More on competition and the respective company’s offering in
later chapters.
Synaptics/Validity as well as Norwegian biometrics company IDEX also use
active capacitive technology in its sensors. Unlike the other players
mentioned above, IDEX and Synaptics do not combine the capacitive plates
making up the sensing array with the electronic circuits that reads the input
from the sensor. The solution is referred to as sensor off-chip and the
companies using it claim the following advantages over the active capacitive
sensors where the pixel array sits on the ASIC.
17 http://biometrics.mainguet.org/types/fingerprint/fingerprint_sensors_physics.htm
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Company analysis 33
Cost – since the solution can use another material than silicon for the
sensing element (thus allowing the silicon ASIC to be smaller), the unit cost
can be reduced by more than 30 percent since the other materials, such as
ceramic, polymer or glass, are cheaper than silicon
Design flexibility – the sensors can be used with glass covers by using the
glass itself as the sensor
Bendability – the sensors can be made thin and flexible by using materials
such as polymers for the sensor element
Figure 10: IDEX illustration of its sensor compared to sensors with the pixel array on the ASIC, Source: IDEX
Synaptics is an established supplier of fingerprint sensors and has Samsung
as its main customer, hence, the sensor off-chip method is used in millions
of smartphones. IDEX sees the smart card market as especially interesting
for its sensors as the company claim that flexibility in the sensor is required
to pass ISO-testing.18 We will discuss the claims made by IDEX and the
ramifications on FPC at the end of the technology section.
Capacitive technology
Capacitive fingerprint sensors are similar to the active capacitive fingerprint
sensors in that they have an array of capacitor plates to capture an image of
the fingerprint, this is why the capacitive (or passive capacitive) technology
is sometimes confused with the active capacitive sensors.
The capacitive technology utilizes the conductive property of the skin to
make a capacitive coupling with the capacitive plates on the array. The skin
becomes a third capacitor plate. The way in which the capacitive sensors
captures the image of the fingerprint is then similar to the active capacitive
sensors. Since the ridges of the outermost, epidermal, skin layer are closer
to the plates on the sensor than the valleys the coupling between the
capacitor plate on the sensor and the area of the skin where there is a ridge
will have lower capacitance (be able to hold a lower charge). This will lead
increased capacitance between the two adjacent capacitor plates on the
sensor. The pattern of valleys and ridges on the finger can then be formed
18 http://www.idex.no/technology/#!/technology/idex-off-chip-sensor-the-lowest-cost-touch-sensor-with-
high-biometric-accuracy/
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Company analysis 34
based on the capacitances and a corresponding image of the fingerprint is
created.19
Figure 11: Illustration of direct capacitive measurement versus active capacitive measurement, Source: FPC material
Capacitive fingerprint sensors are silicon-based just like the active
capacitive fingerprint sensors. The sensors are sensitive to ESD (electro
static discharge) as well as dry and damaged fingers, but handle different
light conditions rather well. Another obstacle with capacitive fingerprint
sensors is that they require a very thin coating to read the fingerprint
compared to active capacitive fingerprint sensors since no signal is applied
to the finger.
Ultrasonic
Ultrasonic sensors read the finger by using a high-frequency sound with
reflecting wave measurements from which a digital image of the finger is
formed. Ultrasonic sensors do not only read the epidermal skin layer but
also the dermal skin layer. This makes the ultrasonic sensors good at
reading wet and damaged fingers whilst also verifying liveliness of the
finger. Dry fingers can often be a problem though, think about the gel that
doctors put on bellies before taking an ultra sound scan to look at babies.
The ultrasonic fingerprint sensors have an advantage in that they provide
more biometric information than most other fingerprint sensors. The
problems with the technology have been, and to a large extent still are, that
it is slow, expensive, power hungry, bulky (large sensors) and that it
requires a lot of processing power as the algorithms are data intense.20
Qualcomm and Sonovation are the two major players pushing for the
ultrasonic technology and Qualcomm have included support for its SenseID
fingerprint scanner in its Snapdragon platform. Qualcomm points out
several advantages, such as the ability of its ultrasonic sensors to read
through glass, and also claim to be cost competitive.
19 http://360biometrics.com/faq/fingerprint_scanners.php#6, http://computer.howstuffworks.com/fingerprint-scanner3.htm 20 http://360biometrics.com/faq/fingerprint_scanners.php#6
Ultrasonic technology has
both advantages and
disadvantages over active
capacitive
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Company analysis 35
Thermal and active thermal
Thermal fingerprint sensors creates fingerprint images from temperature
measurements. The sensors have pyro-electric material of the same kind
that is used in infrared cameras. When the finger touches the sensor, the
ridges of the finger come in contact with the sensor surface and the
temperature is measured. Since the valleys do not touch the sensor no
measurement is taken at the valleys. The fingerprint image is then created
based on the measurement of the skin-temperature from the ridges and the
ambient temperature at the valleys.21
There are some major problems with thermal fingerprint sensors:
The temperature change is dynamic, hence, the fingerprint image is
transient and is erased after about a tenth of a second when the
sensor surface has reached the same temperature as the finger
Sensitivity to wear and tear as well as contamination
When the ambient temperature is close to the temperature of the
finger surface the sensors requires heating so that there is a
temperature difference of at least one degree Celsius – otherwise
the temperature difference cannot be measured properly and no
fingerprint image can be created
To solve several of the problems described above Norwegian company Next
Biometrics has launched an active thermal sensor. The active thermal
sensor sends a low-power heat pulse to each sensor pixel when no
movement is detected, in other words when the finger is steadily placed on
the sensor surface. The heat pulse breaks the thermal equilibrium and thus
enables static acquisition of the fingerprint image.
The active thermal technology also has its drawbacks:
High power requirements
No ability to capture fine details like sweat pores, thus requires
larger sensor area and cannot create 3D images
To our knowledge, Next Biometrics is the only company working with active
thermal technology for commercial fingerprint sensors at the moment.
Previously Atmel worked on thermal sensors, but discontinued
development in 2008.22
21 http://360biometrics.com/faq/fingerprint_scanners.php#4 22 http://biometrics.mainguet.org
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Company analysis 36
Optical sensors
There are several different types of optical sensors that differ in how they
function and what material and components go into them. Describing them
all in detail would require hundreds of pages and will hence not be done.
Instead we try to describe the general principles.
Optical sensors capture fingerprint images by capturing light and turning it
into electrical signals that are used to create the fingerprint image. The
sensors have arrays of photodiodes or phototransistor detectors that
convert the energy in the light that hits the detector into electric charge.
Most optic sensor packages include a LED (light-emitting-diode), or array
of LEDs, to illuminate the fingertip to allow the detector to capture the
fingerprint image from the light reflected on the finger. A prism is then used
to reflect the light towards the detector.23
Figure 12: Schematic view of optical fingerprint sensor, Source: FPC, Redeye
The detectors used in optical fingerprint sensors today are either CCD
(charge-coupled-devices) or CMOS optical imagers. The CCD and CMOS
detectors are the same type of devices used in digital cameras. CCD
detectors are sensitive to low levels of light and are good for capturing
grayscales. Previously CCD detectors were much better than CMOS
detectors, but as CMOS technology has undergone much development
during the past ten years or so, CMOS technology has caught up with
CCD.24
CCD fabrication is rather expensive compared to CMOS fabrication. Apart
from the cost, CMOS optical imagers have a clear advantage as they are
silicon based and can be built to hold some of the logic for the image
processing on the same chip as the detector. This has led to that most
optical sensors for consumer electronics, where cost as well as power
consumption are important features, use CMOS detectors.25
Optical sensors have both pros and cons:
Cheap – optical sensors using CMOS can be made cheap
23 http://computer.howstuffworks.com/fingerprint-scanner2.htm 24http://www.techhive.com/article/246931/cmos_is_winning_the_camera_sensor_battle_and_heres_why.html?page=0 25 http://360biometrics.com/faq/fingerprint_scanners.php#3
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Company analysis 37
Prone to spoofing – it is relatively easy to spoof an optical
fingerprint scanner with a fake finger, often it is not even necessary
to make a fake finger but a good picture of a fingerprint is enough
Size – Optical sensors with the standard design including a lens
and prism system are bulky
Sensitive to contamination – optical sensors are sensitive to
several contaminates that are typically present in the environment,
including stray light, oil, dirt, condensation, ice and even
fingerprints left behind from another user
Optical sensors are usually used in e.g. border control, where size is not all
that important, where there often is an operator present that can make sure
a spoof is not used and where there is ample power supply. The problem
with contamination is still present however.
Suppliers of optical fingerprint sensors have come up with different ways to
handle the contamination problem, for example taking 3D images directly
from the finger surface and touchless image capturing of the finger with an
adapted camera. The proposed solutions gives rise to different problems
and are in many cases costly. 26,27
To overcome the problem with spoofs, suppliers of optical sensors have
come up with different solutions. One way to enhance optical sensors’
ability to detect spoofs/validate a live finger is to use electro-optical
imaging. The idea behind electro-optical fingerprint sensors is to make use
of a property held by some polymers. The polymers emit light when excited
with a voltage, but first when there is a current. When the finger is placed
on the light-emitting film it acts as ground and the small current that flows
from the film to the finger creates light. Since only the ridges touch the film
a pattern of the ridges and valley will be formed and captured by the optical
detector that is attached to the light-emitting polymer film. Unfortunately
the voltage required to excite the polymer is typically quite high and thus
the electro-optical sensors have a high power consumption.28
The disadvantages with optical sensors becomes more severe in consumer
electronic applications, especially in mobile devices where the bulkiness of
the optical sensors using a prism and lens system makes the sensors
prohibitively large.
VKansee, a supplier of optical sensors has come up with an optical sensor
suitable for applications where sensor size is important. Early 2015 the
company launched a multi-layered sensor that it calls UTFiS. The prism is
26 http://360biometrics.com/faq/fingerprint_scanners.php#3 27 http://biometrics.mainguet.org/types/fingerprint/fingerprint_sensors_physics.htm 28 http://biometrics.mainguet.org/types/fingerprint/fingerprint_sensors_physics.htm
VKansee is trying to make
its UTFiS sensor popular
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Company analysis 38
replaced with a transparent sheet and the lens is replaced with a MAPIS - a
metal film with pinholes in it.29 The image detector is a CMOS component.
The design gives Vkansee’s UTFiS sensor a thickness of 1.5 millimetres and
according to the company the sensor can be mounted under the cover glass
on a mobile device like a smartphone or tablet.
Figure 13: Illustration of Vkansee’s UTFiS sensor design
VKansee further states that its sensor is capable of producing high
resolution images of 2,000 DPI. The resolution of 2,000 DPI is about four
times as high as for the standard active capacitive sensors and according to
Vkansee. Combined with the company’s proprietary software it allows the
sensor to capture third-level features of the fingerprint, for example sweat
pores, to provide a higher level of security than other optical fingerprint
sensors.30
Other biometric technologies – Butt, head and many more
Biometrics can be classified into either behavioural or biological.
Behavioural biometrics are measurable traits that are acquired over time.
The traits can then be used for authentication of a person’s identity by using
pattern recognition techniques. Behavioural biometrics include for example
signature recognition, speaker recognition and keystroke dynamics.31
Biological biometrics, as discussed before, are something you are rather
than something you do or know. There are many biological biometrics,
including footprint, palm print, cardiac pulse, brain pattern
(electroencephalogram), dental, odor and DNA and many more.32
Many of the biometrics are used for authentication in commercial
applications, though the commercial success varies –we have for instance
29 http://www.tomshardware.com/news/vkansee-optical-fingerprint-scanner,28750.html 30 http://vkansee.net/index.php?a=index&m=Page&id=20&l=en 31 http://360biometrics.com/faq/Behavioral_Biometrics.php 32 http://biometrics.mainguet.org/types/types.htm
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Company analysis 39
not seen the Japanese project on butt shape recognition for automotive
applications33 gain a lot of traction neither in Japan nor elsewhere.
The most common biometric technologies used in biometric systems today
are fingerprint, iris, face, voice, vein and signature.34
Figure 14: Biometrics market share by system type, Source: Texas Instruments
The market shares of different biometrics are a compound of both stand-
alone biometric systems and client-server biometric systems, most
biometric systems belong to one of those types of systems. Stand-alone
biometric systems include. We give a brief description of biometric
authentication based on eye recognition (of which iris is the most common),
vein, face and voice recognition in the following paragraphs.
Eye recognition – Iris, retina and scleral vasculature
Biometric recognition based on features of the eye is compelling as several
of the features of our eyes have high uniqueness, including the iris, retina
and blood vessel pattern in the whites of our eyes – scleral vasculature
recognition. Systems using eye biometrics are common for both
identification and verification in law enforcement and government settings.
Recently eye recognition has started to make its way into mobile biometric
authentication.
Figure 15: Anatomy of the eye
33 Research engineers at the Advanced Institute of Industrial Technology in Tokyo developed an anti-theft
system for automotive based on the shape of the drivers butt as reported by Wired in 2011, see: http://www.wired.com/2011/12/biometric-car-seat/ 34 Texas Instruments white paper ”Processing solutions for biometric systems”, July 2015
31%
16%
15%
13%
10%
4%
11%Fingerprint
Iris
Face
Voice
Vein
Signature
Other
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Company analysis 40
Retina
The first biometric eye scanning systems were retinal scanners introduced
by EyeDentify in 1985. The retina is a thin tissue at the back of the eye that
has a pattern of capillaries that is unique, not even identical twins share a
similar pattern, furthermore, the retina remains unchanged from birth until
death35 – that is, if there are no diseases, such as diabetic retinopathy, that
alters the pattern of capillaries through neovascularization and
haemorrhages.
As the retina sits at the back of the eye and is not directly visible, the image
capturing cannot be done by a conventional smartphone camera or similar
device. The retinal scan is performed by shooting a beam of infrared light
into the eye which traces a standardized path on the retina detecting the
pattern of capillaries used for the authentication.
Although retinal scans provide a high degree of security, the technology
have many disadvantages that has resulted in limited commercial use:
Difficult to acquire image – high FRR
Lengthy enrolment
Requires specialized equipment
Expensive
Retinal scanning has been used for identification (1:n) in high security
settings by organizations like FBI, NASA and CIA. Retinal scanning is also
used in medical diagnostic applications.36 There are new laser-based retinal
cameras/scanners that are better at capturing images from people who have
certain diseases that otherwise makes retinal scans impossible, however,
the devices are expensive, about hundred thousand USD/ seven hundred
thousand SEK, and are mainly used in hospitals.
Iris
Our coloured part of the eye, the iris, is actually a muscle that controls the
inflow of light to the eye. Specific features of the iris, called corona, crypts,
filaments, freckles, pits, furrows, striations and rings, form patterns that are
unique to a person37. Over 200 of these features are typically captured using
one of several scanning techniques, including CCD/CMOS image sensors
and infrared cameras38. Typically there is a need to illuminate the eye with
an infrared lamp so only a mobile camera is not enough to scan the iris.
35 Asian Journal of Management Sciences 02 (03) 2014; 159-165 36 http://www.biometricupdate.com/201307/explainer-retinal-scan-technology 37 A Comparison Based Study on Biometrics for Human Recognition, iosjournals.org 38 http://www.cse.wustl.edu/~jain/cse571-11/ftp/biomet/index.html
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Company analysis 41
Iris recognition is a relatively young technology that was first patented in
1994 and incorporated in commercial application in 1995. Biometrics.gov,
the US Federal Government biometrics information resource, ten years ago
noted that iris recognition was less mature than other technologies and that
the basic patents expired as late as 200539, thus, it was not until about ten
years ago that other companies could start developing solutions using iris
scanning. Since then iris recognition technology has progressed with better
algorithms and hardware. Iris recognition was first used for identification
systems in law enforcement and government settings, but has now started
to make its way into mobile devices.
Fujitsu was the first company to launch a smartphone, the NX F-04G, with
iris recognition and the company has developed an iris scanner for mobile
devices that uses an infrared LED and an infrared camera40. Microsoft
incorporated an iris scanner in its Microsoft 950 XL and it was rumoured
that Irience, a leading provider of iris recognition solutions, had its solution
incorporated in LG G5.41 It was also rumoured that Samsung Galaxy S7
would feature an iris scanner. The rumours proved wrong.
Iris recognition, just like any biometric technology, has its advantages and
disadvantages:
FAR – Iris recognition can achieve very low FAR
Contactless – Makes it suitable for identification
Speed – Iris recognition is not as fast as for example fingerprint
recognition
Processing requirements/power consumption – the
processing power needed for running the algorithms is higher than
for fingerprint recognition, typically by a factor of ten42
Spoofability – Iris recognition technology is vulnerable to
counterfeit techniques and have low security against a variety of
spoofing attacks
Recent research supported by the US NSTC (National Science and
Technology Council) has resulted in a patented method for solving some of
the issues with security. The patent “Person Identification Using Ocular
Biometrics with Liveness Detection“ by a researcher at Texas State
University describes a method where unique behavioural and physiological
featured of the eye are combined with standard iris recognition to
39 http://www.biometrics.gov/Documents/IrisRec.pdf 40 http://webcusp.com/fujitsu-arrows-nx-f-04g-will-be-the-first-iris-scanner-phone/ 41 http://webcusp.com/list-of-all-eye-scanner-iris-retina-recognition-smartphones/ 42 Texas Instruments white paper ”Processing solutions for biometric systems”, July 2015
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Company analysis 42
authenticate a user with a single sensor device. The method is supposed to
be able to ensure liveliness. The method is not in commercial use. 43
Scleral vein
Scleral vein recognition is an emerging biometric technology that has been
integrated in several smartphones including ZTE’s Grand S3, Idol 3 from
Alcatel OneTouch, Vivo’s X5 Pro and UMI Iron Pro44. UMI apparently likes
biometrics, and to be on the safe side, the company opted to include not
only scleral vein recognition, but also a fingerprint sensor and voice
recognition.
Figure 16: UMI’s Iron Pro advertising, Source: UMI
All the smartphones mentioned above use a solution called Eyeprint ID
from the American company EyeVerify. The technology behind the solution
uses the regular CMOS (or CCD) image sensor in the device to capture an
image of the user’s eyes. From the image a template based on the unique
pattern of the scleral vasculature as well as other micro features in and
around the eyes is created and the template is then used for authentication.
The advantages with EyeVerify’s solution is that it requires no additional
hardware, a camera with at least one megapixel resolution is enough.
EyeVerify positions its solution as more convenient and less expensive than
fingerprint and iris recognition whilst it offers a more secure solution than
other biometric solutions not requiring additional hardware. Apart from the
mobile device OEMs previously mentioned, EyeVerify has managed to
partner with a number of financial services companies, including Wells
Fargo, Mountain America and Tangerine. Investors backing EyeVerify
include Samsung and Wells Fargo.45 A former board member of FPC,
Christer Bergman, was also on the board of EyeVerify.
43 Biometricupdate.com 44 http://webcusp.com/list-of-all-eye-scanner-iris-retina-recognition-smartphones/ 45 http://www.eyeverify.com/
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Company analysis 43
Face recognition
Face recognition makes use of multiple features of the face that together can
be used to uniquely identify a person. Examples of features that can be used
are the shape of the nose and the distance between the eyes. In total about
80 different features similar the ones described are present in our faces and
together those are referred to as nodal points. The biometric templates used
for authentication are based on these nodal points.46 Sometimes personal
features like moles are also added for enhanced security.
Pros and cons of facial recognition include the following:
Low cost – No additional hardware needed in mobile devices and
for other applications a camera is enough
Range – Depending on what you want to achieve, facial
recognition has an advantage in that it can be used at rather long
distances and without a person knowing that he or she is being
identified
Requires good lighting – Good lighting is typically required
Low stability over time – Face changes with age as well as
disease and weight loss/gain
Low security – It is rather easy to spoof a facial recognition
system by altering the face with prosthetics, often a photo will do
the job
High FTE rate – glasses, hats, haircuts and a myriad of other
factors can make facial recognition system unable to capture the
required nodal points needed for authentication
As for other biometric technologies, the development of better algorithm
and methods for face recognition has led to improvements. The driving
force behind the interest for face recognition implementation in mobile
devices has been the rise of mobile payments and e-commerce.
Voice recognition
Voice prints, not to be confused with the behavioural biometric speech
recognition, has been used for a long time and is widely employed in for
example customer care centres.
Whilst voice recognition is easily implemented at a low cost, requiring no
additional hardware, there are major shortcomings.47
46 Texas Instruments white paper ”Processing solutions for biometric systems”, July 2015 47 Texas Instruments white paper ”Processing solutions for biometric systems”, July 2015
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Company analysis 44
Voice prints can change over time thus requiring regular updates of
the voice samples
Voice prints can change due to external factors like environment
and health – just think about how you sound when you have
breathed in nitrous oxide a k a laughing gas
There have been advancements in voice recognition technology and some
systems are much better at handling noisy environments and other factors.
A major factor still persist, namely that voice recognition requires the user
to speak which will both time consuming and in many situation
inconvenient.
Vein recognition
The palm has a complex vascular pattern that is unique to every person.
Since the vein patterns lie under the skin they are close to impossible to
replicate/spoof and allows for highly secure authentication with FAR rates
as low as 0.00008 percent according to vein scanner provider Fujitsu. Vein
recognition, or vascular recognition, can also be done on the user’s finger. 48
The high security levels and the contactless recognition make vein
recognition well suited for many applications requiring high security. What
limits the application areas are the size and cost of the scanners – the
scanners are simply too bulky to be incorporated in most mobile devices.49
A prominent provider of vein recognition technology is Fujitsu who has
spent many years perfecting the technology. The company recently
announced a tablet incorporating its palm vein scanner. The tablet is mainly
targeting the enterprise and public sector markets.50
We have had the opportunity to try a vein scanner from Fujitsu
incorporated in a system intended to replace membership cards in sports
clubs, hotels and similar. What we learnt is that the identification involving
1:n matching takes considerable time if the database holds a high number of
biometric templates. This is due to the high processing requirements of vein
systems as the vein patterns are very complex.
Regarding the application areas for vein scanners, Fujitsu points out the
following anticipated practical applications:
Bank offices – Authentication and biometric ATMs
Offices – Entrance control, exit control and time stamps
48 Texas Instruments white paper ”Processing solutions for biometric systems”, July 2015 49 http://findbiometrics.com/solutions/vein-recognition/ 50 http://findbiometrics.com/fujitsu-announces-palm-vein-scanning-tablet-302222/
Voice recognition is time
consuming and sometimes
inconvenient
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Company analysis 45
Government departments - Entrance control and document access
Airports - Security and entrance control
Apartments and houses – Entrance control
Vehicles – Theft and biometric keys
Fujitsu further states:
“The immediate issues in this area are the demand for improved
recognition speed and miniaturization. The size of the device itself is much
larger for vein authentication that scans the palm compared to a finger, etc.
Although the devices that have currently been commercialized fit neatly
into the size of a man's hand and have an authentication speed of just under
one second, this is still not satisfactory for unlocking devices for a normal
house. Technical development is therefore continuing that is further aimed
at commercial products.” 51
Technology comparisons and conclusions
Following our presentation of the different fingerprint recognition
technologies as well as other biometric technologies, we will provide a more
condensed comparison and our conclusions in the following paragraphs.
Fingerprint recognition versus other biometrics
First of all, it is important to recognize the difference between biometric
systems for identification of large groups of people, what is often referred to
as 1:n authentication, and verification often referred to as 1:1 (or one to a
few) authentication. We repeat it once again with the help of
findbiometrics.com – a good site for the interested reader.
Figure 17: Identification vs verification
There is not one biometric technology that is best for all applications.
Different factors bear different weight depending on the application. There
are several factors to take into account, characteristics of the biometrics
51 http://www.fujitsu.com/jp/group/frontech/en/solutions/business-
technology/security/palmsecure/sensor/practical/
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Company analysis 46
modality, performance factors of the technology used and social factors all
affect what biometric technology is best suited for a certain application and
environment.
We have compared the different biometrics against each other. First, we
have looked at characteristic of the biometric modalities. We have base our
comparison on the following factors:
Uniqueness – how unique are the biometric features to the
individual
Permanence - how permanent the biometric is over time
Measurability – whether the biometric can be measured with
simple equipment/simplicity of extraction
Collectability – describes how well the unique identifiers of the
biometric can be identified and quantified
Standards – to which degree there are agreed upon standards for
evaluations, methods, etc. pertaining to the specific biometric
Figure 18: Characteristics of biometric modalities
We conclude that fingerprints have characteristics making fingerprint
recognition the biometric technology of choice in most applications – high
measurability and collectability combined with high uniqueness and
permanence essentially means that a fingerprint is a biometric modality
that can be used to authenticate a person with a high degree of certainty in a
relatively easy way.
Furthermore, the high degree of standardization in fingerprint
authentication increases the network effects by enhancing integration and
functionality over a wide range of platforms, applications and geographies.
Uniqueness
Permanence
Measurability
Standards
Very high High Medium Low Very low
Characteristics of biometric modalities
Collectability
FPS Iris Retina Eyeprint Face Voice Vein
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Company analysis 47
Performance is also important and we made a comparison of the biometric
technologies based on the following factors:
Cost efficiency – how cost efficient the biometric is, a blended
judgement for different applications
Processing speed – the speed of generating a template and
matching it to one or many stored templates, affects processing
power required and hence also power consumption – the higher
speed the better
Security – a blend of several factors, including, but not limited to,
spoofability and FAR
Accuracy – how accurately the scanning devices work in different
environments and how prone they are to disturbances
Stability – not to be confused with permanence, this has to do
with the time until a change occurs in the biometric – or in other
words how it varies in the short term
Figure 19: Technical and performance factors of biometric technologies
First a small comment, the comparison is not only looking at the mobile
device market, we consider several application areas when making our
comparison.
We conclude that fingerprint authentication provides high overall
performance, but only gets the highest rating on stability and processing
speed. In essence, fingerprint recognition is good, even very good, on
several factors and not very bad at any of the compared performance
factors. You could compare fingerprint recognition to a well-rounded
generalist who will not win the Nobel Price but instead become the boss of a
major corporation. Though specialists are needed and this is where we see
vein and retina.
FPS
Cost
efficiency
Iris Retina Eyeprint Face Voice Vein
Very high High Medium Low Very low
Technical and performance factors of biometric technologies
Stability
Processing
speed
Accuracy
Security
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Company analysis 48
Vein scanning is a promising technology for identification purposes in
settings where there are high demands for security, though the technology
suffers from high requirements on processing power and high cost which
will prevent high adoption in mobile devices, smart cards, and many other
applications – especially in biometric verification systems.
We strongly believe that retinal scanning technology will not be used for
verification applications. Retinal scanning is already used for medical
purposes and for high security identification systems in for example law
enforcement and government. We believe that is where the technology has
its potential.
Eyeprint and Iris scanning are similar in terms of performance, eyeprint
has a slight advantage in terms of cost as it requires no special equipment,
at least not for applications where a camera is already present. Eyeprint has
also had more success in mobile devices. A good thing with iris scanning is
that it works in all lighting conditions. Customer reviews seem to mainly
approve of eyeprint and iris recognition, though it takes more time and
requires more processing power than fingerprint scanners. We have already
seen examples of mobile devices combining several biometrics, and
although the supporters of iris and eyeprint scanning put forward the
technologies as substitutes for fingerprint sensors, we believe it will be hard
to dethrone fingerprints. Furthermore, for verticals and applications where
no camera is already present, we believe fingerprint recognition has clear
advantages in verification applications.
Voice and face recognition are technologies whose uneven performance
make them good complementary technologies for multi-factor
authentication. They cost little to implement in many applications but do
not provide the high levels of security other biometric technologies provide.
Voice also has severe drawbacks in speed, you would not even have time to
open your mouth in the time it takes other biometric technologies to finish
the authentication.
What about security?
When talking about security one must remember that it is not other
biometric technologies that are the main competing method today, but
passwords and pin numbers.
Researchers, intelligence agencies and forensic scientists will regularly try
to hack biometric authentication systems, many times to gauge the security
and come up with ways to improve the technologies. Hackers who want to
brag will try to break the toughest systems. Criminals however will focus on
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Company analysis 49
the easiest targets – why climb a tree when you can easily pick the lowest
hanging fruits?
Considering that most people today use passwords and pin codes, and that
at least 60 percent of users use the same password and four digit code for
all their accounts52, it is clear to us that biometrics will overall provide
enhanced security. At the same time there is a trend towards integrating
biometrics in applications with increasingly high demands on security as
noted by Texas Instruments:
“The security requirements for the applications targeted by the biometric
systems have increased multifold in the last few years. In order to provide
robust security capabilities, most of the biometric system manufacturers
are integrating multiple biometric technologies.”
The level of security required differ between different applications and the
industry is proposing solutions that appropriately handles the trade-off
between convenience and security. Layered approaches, two-factor
authentication, multi-factor authentication and multimodality are terms
used in the industry when discussing secure biometric systems. The below
quote from Jim Duchame, VP at security company RSA highlights the
trend:
“Not all access needs the same level of assurance … Organizations need to
focus on balancing the need to assure identity, while not sacrificing user
convenience by taking a ‘one size fits all’ approach to authentication.”
Adverse incidents risk seriously hampering introduction of new
technologies as well as existing technologies in new areas. As more and
more of our daily lives become digital the idea of losing your biometric
information scares many people. This leads us to the social factors.
We made a third comparison based on the following factors:
Ease of use – how easy and intuitive it is to use
Privacy – high privacy means that there is little concern over someone
taking the biometric and using it for remote tracking and the like
Popularity – how well known and how widely used the biometric
technology is
Acceptability – how supportive the society as a whole is of the technology
Introduced – simply what year the biometric came into use
52 https://www.entrepreneur.com/article/242208
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Company analysis 50
Figure 20: Social factors of the biometric technologies
The above comparison explain the widespread adoption of fingerprint
authentication. There are strong network effects – as one type of technology
is used more, economies of scale emerges, it becomes integrated in more
and more products and the value of the technology to the users increases.
This is what has happened to fingerprint authentication and we believe the
effect should not be underestimated – being top of mind certainly helps a
technology in becoming an accepted standard.
Face will be pushed by several players interested in gathering data on
consumers, for example banks and retail companies. This is a key reason
face recognition is pushed in Mastercard’s selfie pay solution, along with
the prospect of making less false rejections when online shoppers are trying
to pay on Mastercard’s network.
Use cases supported
Fingerprint recognition can be used for several other use cases that are
somewhat overlooked today. Personalization is likely to be an important use
case in IoT applications. Furthermore, most of us have ten fingers and one
could think of using one as an emergency finger, having different setting for
different fingers etcetera.
User experience and habit – the softer side of things
It is not always that the technology that is the most promising in theory is
the technology that becomes the de-facto standard. Many other aspects play
a role. As seen in our comparison fingerprints are widely accepted and used
as a biometric and has been around for a long time. We believe fingerprint
will remain the number one biometric modality, though, two-factor
authentication and multi-factor authentication will be increasingly used.
Fingerprint recognition will likely be used together with for example eye
recognition or behavioural biometrics. This is an opportunity for FPC to
widen its biometric scope through adding additional biometrics to its
FPS
Acceptability
Iris Retina Eyeprint Face Voice Vein
Very high High Medium Low Very low
Social factors of the biometric technologies
Privacy
Popularity
Ease of use
Introduced 1981 1991 1995 2008 2000 1998 1994
Additional use cases
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Company analysis 51
biometric system, perhaps eye recognition where FPC should have good
knowledge from prior connections to EyeVerify or eye tracking where boar
member Jan Wäreby will join the board of Tobii.
Different fingerprint recognition technologies
If different biometric technologies often complement each other and are not
mutually exclusive, the different fingerprint recognition technologies
compete head-to-head with each other.
The proponents of the different technologies do their best to make the case
for their solution and at the same time frequently aim to discredit other
technologies. Security, convenience and cost have been the arguments
brought forward most frequently. The size of the sensors and the flexibility
in design offered have been other areas of debate – both when it comes to
the different technologies and the sensors based on the same fingerprint
recognition technology.
We have evaluated the different fingerprint technologies based on cost
efficiency, design flexibility, technology maturity, security, convenience,
power efficiency and mobile device adoption.
Figure 21: Fingerprint technologies comparison
As can be seen in our comparison active capacitive stand out as the overall
winner, followed by flex on film, which of course is just another version of
active capacitive technology. The reason that we have flex on film coming in
behind active capacitive (meaning active capacitive with the sensor and the
sensing elements on the ASIC) is that the connections that must be put on
the silicon ASIC to connect it to the sensing elements set a limit as to how
small the silicon can be. As FPC has pushed the limits as to how small
Active
Capacitive
Security
Capacitive Ultrasonic OpticActive
thermal
Very high High Medium Low Very low
Fingerprint technologies comparison
Design
flexibility
Technology
maturity
Cost
efficiency
Convenience
Power
efficiency
Mobile device
adoption
Flex on
film
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Company analysis 52
sensors it can make we believe the cost advantage claimed by IDEX has
disappeared.
Ultrasonic sensors have their pros and cons, the higher cost of the sensors
and the limited experience in using them from mobile device OEMs are
factors we see limiting penetrations, though with a compelling security
profile and with Qualcomm and Sonovation pushing the technology we do
not want to dismiss its prospects completely. A troubling circumstance for
the proponents of ultrasonic sensor is that FPC and other suppliers of active
capacitive touch sensors have come up with solutions for verifying liveliness
– one of the important arguments for ultrasonic sensors over other
fingerprint recognition technologies. With continued development of the
technology we believe we will see ultrasonic sensors integrated in more
mobile devices, however not becoming a real competitor to active
capacitive. We further believe in an increasing penetration of ultrasonic
sensors in other verticals, primarily automotive and more expensive IoT
devices. Ultrasonic sensors could also be a contender for identification
applications, for example entrance control.
Our view is strengthened by the following comment from Jörgen Lantto
when we asked him about competition from other fingerprint sensor
suppliers:
“We have looked at Ultrasound and we do work there, now that we can
spend more on disruptive technologies, sometimes you must spend on
those things … You can find theoretical advantages with ultrasound
sometimes, but also practical disadvantages at other times. In total, it
might not be better at all. [Active] Capacitive is standard CMOS so it is
always much cheaper than Ultrasound.”
We believe that Qualcomm and Sonovation might push for the integration
of its ultrasonic sensors into chipsets, SoC’s. It is therefore wise of FPC to
build competencies in the area to be able to team up with chipset
manufacturers in the future. Intel, who is now entering the market for
mobile chipsets could be a potential partner for FPC in such a scenario.
Regarding capacitive (not active capacitive), optic and active thermal
fingerprint technology, we see that the prospects are getting increasingly
dim as more time passes and the active capacitive technology is becoming a
de-facto standard in mobile devices. NEXT is using the Madrid report as an
argument for larger sensors, but in the mobile device market the company
is engaging in a David versus Goliath fight as it tries to convince mobile
device OEMs that the active capacitive technology is not safe enough. The
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Company analysis 53
introduction of smaller and smaller active capacitive touch sensors, by for
example FPC, also erases the cost advantage NEXT claims.
Many of companies proposing other fingerprint recognition technologies
outside will likely shift their focus to other verticals that still await the big
boom in biometric penetration. We are willing to say the same regarding
the new type of flat optical fingerprint sensor from Vkansee unless we see it
in a mobile device soon.
Based on our comparison and the previous discussion on the respective
fingerprint recognition technology we believe the active capacitive
technology has gained a position and scale that has raised high barriers for
competing fingerprint recognition technologies in mass market mobile
device applications.
Key takeaways
A few key takeaways before moving on to the product portfolio of FPC.
It is important to distinguish between biometric technologies for
identification (1:n) and verification (1:1, 1:few)
Fingerprint authentication is the biometric modality that today has
the best security versus convenience at a price making it viable for
true mass market adoption
Multi-factor authentication will result in combination of different
biometric modalities, including behavioural biometrics, making
many of the biometric technologies complementary rather than
competing
The active capacitive touch technology will continue to dominate
the mobile device segment in the short- to mid-term
Integration of ultrasonic sensors in chipsets or disruptive technical
solution could change the picture in the longer term, change is
likely to be driven by a leading innovator such as Apple or
Qualcomm and will be first seen in the high-end segment
The low cost, low power consumption, small size and attractive
FAR/FRR ratio of fingerprint sensors using the active capacitive
touch technology will lead to high adoption in other verticals,
especially smart cards and IoT applications where low power
consumption is important and where there are no cameras or voice
recorders installed on the devices as standard
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Company analysis 54
Products
FPC’s product offering consist of hardware and software for authentication
using fingerprints. The product portfolio consist of fingerprint sensors,
biometric processors, algorithms/software and stand-alone biometric
modules.
Figure 22: Product portfolio of FPC
In addition, FPC sells pilot test kits/development kits including FPC’s
software and hardware. The kits, or DevKits as FPC calls them, support
current and prospective customers in including the company’s solutions in
their products – not an important revenue contribution but important to
drive integration in new applications.
Sensors
FPC has three types of sensors in its product portfolio, area sensors, swipe
sensors and touch sensors. In the technology section the active capacitive
technology used in the touch sensors and area sensors was described. The
touch sensors are the most important product category for FPC today.
Swipe sensors
The swipe sensors, sometimes called line sensors, read the fingerprint as
the finger is dragged across the sensor. The sensor captures the image piece
by piece as the finger is moved over the scan area. The image of the
fingerprint is then pieced together from the partial images.
The swipe sensors have both advantages and disadvantages over touch and
area sensors.
Small – they can be made small as the image array is smaller
Cheap – since the swipe sensor IC’s are smaller they require less
material which reduces the cost
Less contamination buildup compared to optical sensors,
where contamination buildup is a problem, due to the swipe motion
Less accurate – as the finger is dragged across the sensor it can
distort the finger surface which in turn decreases the accuracy
Fingerprint sensors
Stand-alone modules
Biometric processors
Algorithms/ Software
FPC’s three types of
fingerprint sensors:
Swipe
Area
Touch
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Company analysis 55
Wear – since the finger is swiped it causes more wear on the
sensor surface
Usability/Convenience – a swipe sensor is less convenient and
more complicated to use
As the touch sensors are made smaller and smaller, making them more cost
effective, the advantages of swipe sensors over touch sensors becomes
smaller, and for some applications disappears. FPC still has a swipe sensor
in its portfolio, the FPC1080A, launched in 2011.
Figure 23: FPC1080A and the press release from SMIC about the launch
The FPC1080A features integrated hardware support for finger navigation
– in other words, FPC added additional use cases for its sensors already in
2011. The FPC1080A targets low cost, high volume, portable devices. In
2015 FPC had close to zero revenue from the swipe sensors as mobile device
OEMs have switched to touch sensors.
Area sensors
FPC’s are sensors use the same active capacitive technology as the touch
sensors. As the first sensors using the technology were developed for
Android, FPC started referring to them as touch sensors rather than area
sensors. FPC describes the area sensor as follows:
“A sensor with the size of a fingertip that can scan an entire fingerprint
simultaneously. The fingertip is simply drawn against the sensor surface;
refer to swipe sensor.”53
The difference between the area sensor and the touch sensors does not lie in
what basic technology is used for the sensors, but rather in the applications
and the marketing of the sensors. The area sensors were intended for
applications with higher demands on security, such as the banking sector in
China, time and attendance systems and medical equipment and storage.
The devices were also marketed toward wireless devices and computer
peripherals. The area sensor that FPC currently has in its portfolio, the
FPC1011F3, is applied in separate reading modules attached to a computer.
53 Source: http://www.fingerprints.com/corporate/en/about-fpc/glossary/
The area sensor use the
same active capacitive
technology as the touch
sensors, the difference
between touch and area
sensors is not the
technology but rather the
marketing and intended
applications.
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Company analysis 56
Figure 24: FPC1011F3, Source: FPC homepage
The area sensors have a larger area that can scan an entire fingerprint at the
same time and a metal frame that charges the finger as well as guides the
placement of the finger. The area sensors also differ in that they demand
the finger to be drawn against the surface in the right angle (as opposed to
the touch sensors that can be touched in any angle, 360 degrees) and that
they are not activated by the simple touch as the touch sensors. However,
those features are software dependent and could be integrated in the area
sensors if demanded by customers.
Touch sensors
The touch sensors represent more than 90 percent of sales in 2015 and the
percentage will continue to grow in 2016. As previously mentioned, the first
touch sensor, FPC1020 for Android devices was launched in 2013 and it was
first incorporated in a smartphone in 2014 with the launch of the Huawei
Mate7. Since the release of the FPC1020, the portfolio of touch sensors has
been extended with new additions to the 1020-family of sensors as well as
new product families.
Figure 25: FPC’s touch sensor portfolio as per the company homepage
The product portfolio has undergone a rapid development in many aspects,
size of sensors, functionality and design flexibility to name a few.
FPC1025
FPC1022
FPC1021
Side-mounted(volume/power button)
Front-mounted(home button)
Rear-mounted (backside button)
FPC’s portfolio of touch fingerprint sensors
FPC1155
FPC1150
FPC1145
FPC1140
FPC1135
FPC1020
FPC1200-series (e.g. FPC1225/45/68)
Under-glass
1145 can also be mounted in the home button
2014
2015
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Company analysis 57
Smaller sensors
FPC’s touch sensors have come down in size since the launch of the 1020,
FPC1021 cut the size by about a third and FPC states that it has taken down
the size of its sensors by 70 percent in 2015. The smaller size of the sensors
enables FPC to bring the cost of the sensors down to increase sensor
penetration in mid-range and low-end smartphones. As we will see in a bit,
improved ASIC design in combination with enhanced algorithms are what
enables smaller sensors. Lannto explained it very well in early 2015:
“Yes. So, algorithm development is something that we have put a lot of
emphasis on during the past two years and that’s really why we are able
to now bring forward these very, very small touch fingerprint sensors that
then by area are really now starting to become a fraction of the first
generation of touch fingerprint sensors that we brought forward some
two years ago.”
Smaller sensors are also suitable for wearables where design flexibility and
low power consumption is very important.
Additional flexibility in design
To allow the OEMs more degrees of freedom in designing their products
FPC has launched sensors in several different shapes - rectangular, oval and
squared - allowing the sensors to be mounted on the side, on the front or at
the back of a mobile device. FPC has also introduced sensor that can be
integrated in the volume and power buttons adding additional functionality
as well as design flexibility.
In September 2015 FPC announced its FPC1200 series that can be mounted
under ceramic or glass. The first products incorporating the sensors were
placed under a layer of zirconia (a glossy ceramic), which had some people
questioning if the sensors would work under real glass and post comments
such as:
“The new sensors can be mounted under a sheet of glass or ceramics. In
fact, only zirconia at the moment, likely thanks to its huge relative
dielectric permittivity... “54
Given the skepticism it must have been a great feeling for the company to
announce that its FPC1268 sensor had successfully been integrated under
cover glass in collaboration with TPK55. The announcement took place at
54 http://www.fingerprints.com/blog/2016/02/18/fpc-and-tpk-integrates-fpc1268-under-smartphone-cover-glass/ 55 A specialist in glass cover and lamination technology
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Company analysis 58
this year’s MWC in Barcelona and FPC claims the sensor can be placed
under a 400 m glass layer.
Sensor adapted for use in smart-cards
There is also the FPC1320 sensor that has not been officially launched yet –
Lantto informs us that it is a sensor adapted for use in smart cards. This is
also confirmed by looking at Zwipe’s presentation of their view of biometric
smart cards. The FPC1320 also appears in import/export documents from
India showing re-export of the FPC1320 to Taiwan.
Figure 26: Customs document from India showing import and export of FPC1320, Source:
Apart from the information about upcoming integration of the sensor in
smartcards manufactured in Bangalore, it is interesting to note that the
document essentially confirms that the sensor is produced at a foundry in
Taiwan. More on that in the section on strategy and operations. The 1320
sensor should be 0.3 mm thick56, which makes it more suitable for smart
cards.
Degrees of refinement - Signed, sealed, delivered …
FPC sells its sensors in several degrees of refinement.
Fabricated wafers where the dies/chips/sensors have not yet been
separated. Sensors are sold in the form of wafers in case the module
house has its own packaging in-house. According to FPC’s annual
report 2015 this is how the company generally delivers its sensors.
Packaged sensors - sensors with LGA (Land Grid Array) and
optional customized coating. The LGA is a grid of contacts
underneath that connects to the processor of the device. The
packaged sensors are ready for integration in modules as they come
with connection and signal processing and are normally sold to
module houses that do not have their own packaging.
FPC sees its ability to offer sensors with a high degree of refinement as an
important competitive advantage as it saves module houses and
OEMs/ODMs time (faster time to market) and money (less spending on
software development).
56 Given we have not misinterpreted the text from a blurry picture taken at MWC2016
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Company analysis 59
The algorithms and other software are delivered directly to the OEM/ODM
and the integration of the software into the device/application is supported
by FPC’s support engineers. In the recently published annual report for
2015, FPC does not talk about delivery of sensors without software,
however, Lantto has recently said that FPC is open to a model where it
delivers sensors ASICs only if that is what customers want – one such
example could be Samsung who has used different suppliers for the sensors
and the algorithms. More on that topic in the market section.
When it comes to packaging, FPC does not specifically mention what
packaging options the sensors with LGA come in when delivered to the
module houses, apart for the FPC1020/21 sensor. The FPC1020/21 is
available for embedded environments in other verticals than mobile devices
and come with either tape ‘n reel packaging or tray packaging (basically
what it sounds like, either the sensor dies are sealed in a tape or they lie in a
tray). Furthermore, some sensors, for example the FPC1020AM version, is
offered as an LGA component with flex film and bezel added for easy
integration, see
Figure 27: Tray package (1), reel with tape (2), FPC1020 as LGA component (3) and FPC1020 as LGA with flex film and bezel (4), Source: Texas Instruments, FPC
Biometric processors
FPC finished development of its first biometric ASIC biometric
microprocessor in 1999. The reason there is relatively little talk about the
biometric processors of FPC is that they are not needed in mobile devices.
In mobile devices the algorithms are executed in the host processor of the
device rather than in a separate biometric processor from FPC. In other
verticals, with applications such as door locks and card readers, where there
is no host processor in the products that will incorporate a fingerprint
sensor/communicate with a fingerprint sensor, a processor will be needed.
Figure 28: FPC’s biometric processor FPC 2020
1 2 3 4
Biometric micro-
processors are only used
for verticals outside of the
mobile device segment
where no host processor is
available for software
execution.
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Company analysis 60
The biometric processors are digital ASICs specifically designed for the
purpose of biometric authentication. The processor has FPC’s algorithms
running on it and performs enrolment, identification and verification. As
power consumption and size are important in many of the other verticals
FPC is targeting, the biometric processors are small and power efficient.
The FPC2020 is according to FPC’s homepage specifically tailored for use
with the area sensor FPC1011F3. FPC2020 stores biometric templates on an
external flash memory and connects to a host via serial interface.
Stand-alone modules
FPC sells stand-alone modules, where the sensor, packaging, software and
biometric microprocessor are all included in a complete biometric solution
that can be embedded in various applications in verticals such as
automotive and IoT.
The stand-alone module appearing on FPC’s homepage is the FPC-AM3
incorporating the FPC2020 biometric processor and the FPC1011F3 area
sensor connected with a flex film. As it can hold around 1,000 templates,
there should be some memory component included in the module unless
storage is included in the biometric processor contrary to what is stated on
the product sheet of FPC2020.
Algorithms and other software
FPC’s algorithms and software are key for the company to be able to offer
complete biometric solutions as well as high performance fingerprint
sensors.
FPC’s software offering incorporates both low level code in the form of
algorithms and software for customization and communication with the
ecosystem. Low level code is very closely integrated to the design and
function of the hardware such as the recently released in-house algorithm.
As mentioned, software is delivered directly to the OEM/OED, or as a part
of an embedded biometric system. Software is also offered in the form of
SDK (Software Development Kit) to prospective clients who wish to
integrate FPC’s sensors in their products.
Algorithms
As mentioned in the technology section, the algorithm is a key component
of the biometric system. Actually, it is not only one algorithm but rather a
system of algorithms that carries out the processes involved in
authentication. The algorithms decides when and with what speed the
”Biometric module - A
complete biometrics
system for the simplest
integration into other
products, consisting of
sensors connected to a
processor and
accompanying software.
Usually integrated into
other products.” FPC
annual report 2015
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Company analysis 61
sensor captures the image, handles the enrolment, optimizes the images
from the sensor, extracts the unique features and matches the live scan
against the stored template.
Since the algorithms are integral to the overall performance of the
biometric system FPC has spent considerable resources on algorithm
development. The goal has been to enable smaller and more power efficient
sensors by enhancing the algorithm. The new algorithms that has been
developed are also faster and require less memory whilst still maintaining a
high level of both security and convenience, measured as FAR and FRR
respectively.
Figure 29: FPC’s algorithm, illustration of perfomance
Since traditional algorithms based on minutiae demand a lot of points to
provide high security levels it was previously hard to make the sensors
smaller for FPC as it used a standardized algorithm. With the development
of an algorithm optimized for smaller sensors it was possible to start
decreasing the sensor size dramatically, as seen during 2015.
The algorithm FPC previously used was from Swedish biometrics company
Precise Biometrics (PB). The algorithm optimized for the smaller sensors
was developed in-house by FPC, but still incorporated certain elements of
PB’s algorithm. However, FPC had hinted about its ambitions to develop a
proprietary algorithm. CEO Lantto was more diplomatic than former CEO
Carlström, but it was still not too hard to understand FPC’s goal:
“The good thing with developing algos in-house is the vertical integration”
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Company analysis 62
Earlier this month, April 2016, FPC announced that it had developed an in-
house algorithm without any external code elements incorporated. The
algorithm, optimized for fast execution on smartphone platforms, will
gradually replace the previous algorithm in sensors for smartphones during
2016 and 2017.
At the same time, earlier during the spring FPC announced a collaboration
with PB, STMicroelectronics and Gemalto to bring end-to-end security
solutions for wearables and consumer electronics to the market and the
company stated that the contributions from its algorithm partners PB for
algorithms to other segments are valued and that the collaborations remain
strong.
Software for enhanced convenience and new use cases
Since the launch of the first touch fingerprint sensor FPC has continuously
added additional software features enhancing the user experience and
adding new use cases for its sensors
Camera control - Introduced with FPC1021 the possibility for users
to control the camera with the sensor placed on the backside of the
phone fits perfectly with the selfie trend
FPC OneTouch, one touch both wakes and unlocks the device
360 degree reading – added convenience as the finger can be read
no matter with what angle it is placed on the sensor
Scroll function for images or pages
Software for integration towards applications and platforms
Apart from the software features that has enabled a more convenient use of
the sensor, FPC has developed software allowing its OEM/ODM customers
to add customized functionality and applications. FPC has also developed
customized software for integration of its biometric systems and the
operating systems of the devices incorporating FPC’s solutions.
Software packages for Android phone
Software for devices running Windows
Protection of information on phone, for example photo album
Possibility to use for mobile payments, FPC’s solution is approved
for Android 6.0 including mobile payment services Android Pay,
PayPal and Alipay
The integration to operating systems and applications such as mobile
payment solutions has opened up for using the fingerprint sensors to
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Company analysis 63
connect to a fast growing ecosystem of applications requiring
authentication. In this regard, FPC ensures that the interface for biometric
verification data and communication is compliant with the standards for
secure mobile payments.
A human touch with FPCLiveTouch
On February 17th 2016 FPC introduced its LiveTouch, a software based
solution for detecting spoofs by ensuring liveliness of the finger used. The
solution is compatible with all previously released touch sensors from FPC
and the company states it does not affect the time required for verification.
The improvement in security was, according to FPC, driven by increased
demands for security in mobile payments57.
Redeye’s take on the product portfolio of FPC
With new competitors offering fingerprint sensors and attempts from
proponents of other biometric technologies to point out weaknesses of
fingerprint recognition FPC is rapidly adapting its product portfolio to
combat competitors in the mobile device segment and also making inroads
to new verticals.
Faster, better, harder, stronger?
Well, maybe rather smaller, better, and faster. FPC’s refinement of its ASIC
design and algorithms has allowed it to develop small sensors that have low
power consumption thus making the company’s sensor portfolio well
aligned with the requirements on biometric solutions in wearables, smart
cards as well as IoT applications. The small sensors will drive further
penetration in mid-range and low-end smartphones.
We believe FPC holds the strongest product portfolio in the fingerprint
sensor market. By making the sensors smaller and lowering the ASP, the
company is combatting entrants looking to engage in pricing wars to steal
customers from FPC in the mid-range and low-end smartphone segment.
With the announcement of the under glass solution and liveliness detection,
FPC is combatting companies wishing to enter the high-end segment by
claiming superior design flexibility and better security compared to FPC, for
example Qualcomm with its ultrasonic technology.
Product portfolio updates hint about strategic repositioning
Even if the enhanced sensors can provide a temporary competitive
advantage, we believe FPC sees a need to reposition itself in the value chain
57 http://www.fingerprints.com/blog/2016/02/17/fingerprint-cards-extends-security-for-fingerprint-sensors/
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Company analysis 64
and steps in that direction can be spotted in announcements of new
offerings as well as in the annual report.
Precise Biometrics has signed several license deals for its algorithm with
companies looking to enter the fingerprint sensor market as well as FPCs
current competitors, including Silead, Cypress, Elan Microelectronics,
FocalTech, GingyTech, J-Metrics, Oxi Technology and ChipOne. Several of
the companies are suppliers of touch panels and they are now looking to
enter the fingerprint sensor market.
Built in API’s for fingerprint recognition in Android Marshmallow and
availability of algorithms lowers the barriers to entry. Furthermore,
participants in the value chain in between FPC and the OEMs do not want
to be too dependent on one dominant supplier.
From software and hardware to biometric solutions
FPC wants to avoid commoditization by owning the whole system. With its
in-house algorithm and FPCLiveTouch FPC is strengthening its ties to the
OEMs and creating lock-in effects through its extended software offering.
FPC is also putting more effort into its product portfolio of biometric
modules and we suspect the company has not had time to fully update its
homepage with the latest additions – in its annual report FPC talks about
embedded system solutions rather than modules:
“Embedded system solutions with broad application potential …
FPC-BM – a biometric module with sensors and a processor/memory for
internal storage of identities. FPC-BEP – a biometric software platform
for easy integration and connection which cuts the customer’s time to
market.”
No comment – what FPC declines to tell us when asked
Some products are not officially launched and do not appear on the FPC
homepage. One such product is the FPC2050, a small so called companion
chip that appeared in photos late spring 2015.
When asked, Lantto confirms that the FPC2050 is a companion chip and at
the same time informs us that it is used to enhance the performance of
FPC’s sensors in certain applications and contexts. Lantto further informs
us that information on the exact functionality of the FPC2050 is only shared
under an NDA (Non-Disclosure Agreement) to not disclose any information
to competitors.
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Company analysis 65
Increased customization of software and algorithm
The new algorithm and FPCLiveTouch also mark a transition where we see
a start of a software offering that can potentially generate recurring
revenues from the installed base as well as position FPC closer to the end
users.
Figure 30: Huawei launch event in London presenting FPC’s new algorithm
The first devices to incorporate FPC’s proprietary algorithm were launched
by Huawei during an event in London 6th April during which FPC’s new
algorithm was presented as a key feature.
Algorithm development is a low level programming language that is closely
related to hardware development. We see the increasingly customized
algorithms as a sign that FPC wants to further highlight its full system
solution, especially in the mobile device segment. For IoT and smart cards
the contributions from Precise Biometric in making lean algorithms that
contribute to low power consumption seem to hold a relatively higher
importance. The whole system, including the algorithm, is hence
customized for different verticals and applications.
FPCLiveTouch is compatible with all released touch sensors and it would
not surprise us if FPC in the not too distant future starts generating revenue
from software upgrades, beginning perhaps with FPCLiveTouch.
What might be next?
In its Q4 2015 presentation February 4th FPC announced that it will soon
provide new sensors for the entry-level segment. We expect the sensors to
launch soon and we also expect to see under glass solutions incorporating
FPC’s sensors in the near future.
The partnership with TPK to bring the under glass solutions to the market
also makes us believe that FPC is preparing for integration of its fingerprint
sensor in the display. Clearly FPC is building capabilities should the trend
shift towards integrating the sensors in the display.
An FPC in-house algo has
been launched
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Company analysis 66
We expect to hear more about different smart card collaborations other
than the announced partnership with Zwipe. We are close to hundred
percent convinced that it is FPC’s swipe sensor solution sitting in Smart
Metric’s biometric payment card.
Combining several biometric modalities is also an option, we believe FPC
will combine several dies in what is usually called SiP (System in Package),
not only its biometric processor and the fingerprint sensor, but potentially
also other sensors like MEMS (micro-electromechanical systems) sensor,
also called micromachines). FPC’s partner STMicroelectronics are rather
big in MEMS sensors – a good match.
Finally it is interesting to have a look at the below picture from
findbiometrics, outlining major barriers to adoption for applications and
technologies. We believe FPC’s product portfolio address many of the
barriers mentioned, cost with small and cheap sensors, ease of deployment
with the embedded systems and lack of liveliness with FPCLiveTouch.
Figure 31: Barriers to adoption for biometric modalities and technologies
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Company analysis 67
Strategy and operations
In this section we have a look at the company’s strategy and operations as
well as FPC’s value chain and market dynamics in the semiconductor
industry.
Growth strategy – mission accomplished?
In 2011, FPC gave a presentation to a group of students at Halmstad
Högskola and boldly stated their mission as follows:
“FPC company mission:
To be a leading provider of fingerprint
verification components and systems”
Notice how the above mission does not even say “… the leading …”, but “… a
leading …”, some would say this is typical for Swedish engineers highly
influenced by Jantelagen58, or The Law of Jante.
Judging from the above, it must have come as a surprise for many at the
company that a mere four years later FPC had become the leading provider
of fingerprint sensors, at least judging from volumes continuously being
shipped. Hence, mission accomplished – so what about now?
Before hitting a home-run in the smartphone market FPC explored several
potential applications for its fingerprint sensors. As the smartphone market
took off FPC wisely decided to put all its focus to seize the opportunity. As
the company is starting to catch up with its growth, it has increasingly
begun to look at opportunities for further growth outside the smartphone
market and has also updated its vision and mission statements, both last
year and once again in the annual report for 2015 published 13 April 2016.
The company also added a description of its business concept:
“Fingerprint Cards, FPC, develops and sells
biometric solutions to companies globally that
develop products involving human interaction.”
FPC’s shift from entirely focusing on fingerprint sensors to define itself
more broadly is clearly seen.
58 Jantelagen, invented by author Aksel Sandemose as a part of a novel, comprises ten rules, the first of which is ”You're not to think you are anything special” 59 www.fingerprints.com
2015
“Vision - FPC aims to be
the leading supplier of
components and systems
for fingerprint
verification.”
“Mission – Beyond keys
and PIN codes – FPC
makes life easier through
secure identification.”59
2016
Vision
“Simple identification of people on all types of devices.” Mission
”Fingerprint Cards, FPC, is at the leading edge of the development of biometric interaction, facilitating the convenience and integrity of the individual.”
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Company analysis 68
Organic growth from new verticals and expanded offering
CEO Jörgen Lantto recently shared his view on the growth opportunities
“I do not recognize we cannot grow more, market has just started – units
to double from 2015-2016 and double again from 2016-207”60
After 2017, FPC forecast other verticals to contribute with significant
volumes to its addressable market. Previously FPC has mentioned that in
2018 the company expects the market for fingerprint sensors to include 500
million units from smartcards, vehicles and IoT etcetera and in 2019-2020
billions of units are expected from other verticals. The annual report of
2015 confirms these statements. FPC in the annual report, as we interpret
it, feels that the growth is coming faster than market pundits etcetera are
expecting.
FPC explains its strategy for growth using the two-by-two matrix in Figure
32 and 32 below.
Figure 32: FPC’s strategy for growth, Source: Company presentation December 2015
60 CEO Jörgen Lantto, Nordnet Live, March 2016
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Company analysis 69
Figure 33: FPC’s strategy for growth detailed per the respective area, Source: FPC
Existing offerings to new segments
Adding new large segments, with tens to hundreds of million, in some cases
even billions of units, is naturally the top priority. FPC points out smart
cards as the most interesting new segment in the short term followed by
automotive, industrial and medical and IoT. For segments where the
market is more fragmented and for smaller segments, the offering can be
more or less the same as for the smartphone segment, though there will
always be a certain degree of customization and adaptation.
After discussing with the company more clarification is given as to how the
company plans to approach smaller segments. As the individual sensors
only cost between two and ten dollars (depending amongst other things on
the sensor size, volumes, if it is a module or only the sensor chip), large
volumes are required to cover sales, marketing and project costs. For
smaller and/or fragmented segments FPC’s challenge is to find good sales
channels.
New offerings to existing segments – Invest and innovate
Regarding new offerings to existing clients and segments, as discussed in
the product section, FPC has started to add additional features and
enhanced performance to its sensors for the smartphone customers. The
strategy of extending the biometric scope through higher security, adding
trackpad functionality and other features has been seen in the recent
product launches.
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Company analysis 70
New offerings for new segments – R&D
FPC has clearly stated that devoting more R&D resources to disruptive
technologies is a prioritized area to secure the long-term competitiveness.
FPC plans to offer new functionality in its existing sensors to make them
suitable for new segments but also plans to offer other sensors than
fingerprint sensors to existing as well as new customers. New offerings also
entails new types of software based solutions. We see some interesting
things when looking at the company’s patent portfolio and have tried to ask
the company who declines to comment further.
Inorganic growth opportunities
Given that technologies can change fast FPC is also actively working on
leveraging not only its fingerprint recognition technologies, but also its
position in the value chain where it has become an important and trusted
supplier to leading smartphone OEMs.
One way to leverage its close ties to both foundries, module houses and
OEMs is to make acquisitions to add complementary technologies and
products to its offering. CEO Lantto has publicly announced61 that FPC is
looking at making additional acquisitions. In the conference call following
the Q4 2015 report Lantto pointed out that increased focus on multi-factor
authentication opens up for interesting opportunities to further grow FPCs
business. The intention was repeated in the recently published annual
report for 2015.
Business model
FPC’s business model is to monetize its capabilities and IP in biometrics
technology and design by selling components and systems for fingerprint
authentication. As all hardware production is outsourced and produced
against customer orders, FPC’s business model is highly scalable as long as
supply can be secured.
FPC aims to be close to its customers and direct sales is combined with sales
through distributors. The hardware and software components or systems
are sold as either component sales or project sales. That said, FPC prefers to
sell products with a high processing rate, in other words, sensors with
accompanying packaging, algorithms and software making up a complete
biometric solution. FPC also signs license agreements with customers, for
example licensing out its packaging solutions to module houses. FPC’s
customers are primarily system integrators/module manufacturers and
OEMs.
61 http://www.di.se/artiklar/2016/2/4/fingerprint-vill-titta-pa-forvarv/
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Company analysis 71
The sales process of FPC is typically rather long and the product life cycles
are short in the mobile device segment, especially for smartphones.
Figure 34: Sales process in the smartphone segment
By re-using the same sensor design for other verticals, such as the FPC1020
for automotive applications, FPC can get long-tail sales with higher gross
margins for an extended period of time from the same ASIC design.
Figure 35: Illustration of the lifetime of a sensor for the smartphone segment
The semiconductor industry value chain
In 2015 there was over-capacity in the semiconductors industry, meaning it
was quite easy for FPC to secure large silicon volumes compared to during
normal conditions. We will further elaborate on this subject and its
importance in the following text.
The upstream segments of the value chain – product design and front end
in Figure 36- will look the same and involve the same players regardless if
FPC sells sensors for use in smartphones, smart cards, cars, entrance
control systems or any other of the countless other potential applications.
The back end process and board assembly steps can differ between different
verticals. We will focus mainly on what the value chain looks like in the
mobile device segment and what role FPC takes.
Evaluation Design win Customization
Start of mass production
Samples Orders
Pre-series in thousands
• Qualification of products
• Software optimization
Decision to start development of commercial product including
FPC’s solution
• Engineering samples
• Qualifying software and
circuits
First order
First deliveries
Launch of device
Volume sales
Device approaching end of life
Sample deliveries
Potential long tail sales for other
application
Month 1-3 4-6 7-9 10-12 19+16-1813-15
Design win
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Company analysis 72
Figure 36: The semiconductor industry value chain, Source: Redeye, various industry sources
The product design and front end of the semiconductor industry value
chain involves the suppliers of raw material and the semiconductor
Companies.62 The semiconductor companies can be grouped into three
main types, depending on their role in the value chain.
Integrated – with both IC production and IC design for example
Intel
Foundries – companies that specialize in the manufacturing of ICs
for example SMIC
Fabless – companies that specialize in the design of ICs like for
example Qualcomm and FPC
There are also IC design companies (IC design houses, chip design
companies) that specialize only in IC design and/or testing. These
companies sell no semiconductors, rather they license out or sell their
designs.
FPC’s role in the value chain – R&D, marketing and sales
FPCs fabless business model means the company produce no IC’s. FPC
focuses on the parts of the value chain it sees as the most critical and where
it can contribute the most value given its capabilities.
Figure 37: FPC’s role in the value chain, Source: Redeye, various industry sources
FPC’s focuses on the design and system integration of ASICs,
microelectronic packaging, algorithms and software that together form the
62 The value chain also involves companies supplying different kinds of services, production material etc. for the raw material suppliers and the semiconductor companies 63 http://www.fingerprints.com/corporate/en/about-fpc/the-value-chain-2/
Circuit design Wafer fabrication Probing
Product design Front end Back end process Board assembly
Assembly Test Board assembly
IC design
Test program
Materials fab
Wafer fab
Wafer bank
Dia bank
Bin inventory
Wafer sort
AssemblyFinal test
Board insertion
Board testing
Finished goods
inventory
Circuit design Wafer fabrication Probing
Product design Front end Back end process Board assembly
Assembly Test Board assembly
• IC design
• Testing and simulation
• Order and forecast
• ICs produced
according to FPC’s
design
• Patented fabrication
processes
• Sell ICs as in the form of dies or wafers to module houses
• Patented packaging technologies and processes used by
module house or distributor carrying out the microelectronic
packaging
• Algorithms and other software
• System integration and customization
Role ofFPC
”FPC focuses on the
business-critical parts of
the processing chain –
development, production
processes, marketing and
sales.”63
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Company analysis 73
fingerprint sensor system. Production is outsourced to semiconductor
foundries who fabricate the ICs according to FPCs patented designs.
R&D is a large share, over 52 percent in 2015, of FPC’s OPEX. A lot of the
R&D that is not capitalized go into proprietary development and design of
ASICs, algorithms, packaging solutions and software. FPC is also actively
involved in customization of its systems for implementation in devices.
Customization projects are carried out in collaboration with device OEMs as
well as other system providers like Alipay, Google and STMicroelectronics.
Manufacturing - from sand to wafer
Semiconductors are used in almost all electronic products around us and
one type of semiconductors, namely processors, are the most complex
products manufactured. Processors and other semiconductors, or IC’s, form
the basis of the digital revolution, still the basic building block of the
products is refined sand. It takes quite a bit of processing for the sand to be
transformed into electronic grade silicon wafers – the purity of the silicon
ingots is 99.9999 percent. 64
IC’s (also chips or dies) are fabricated in the complex semiconductor
fabrication process outlined in Figure 38 starting with production of the
raw wafer from sand.
Figure 38: Manufacturing steps from sand to fabricated wafer, Sources: Intel, FPC, Semiconductors.org, Tensoft, SUMCO and SMIC
Five companies, F.K.S., MEMC, S.E.H., Siltronic and SUMCO, together
account for 85 percent of the global raw wafer production. 65 The companies
have multiple manufacturing sites all over the world in which
monycrystalline silicon ingots are created using the CZ crystal growth
process66. The process is similar to that used to make spun sugar, though
the equipment for making the silicon ingots is a bit more pricy.
64 http://tumblr.benjamintseng.com/post/17047413596/from-sand-to-processor-or-how-a-cpu-is-made 65 http://www.tsmc.com/download/ir/annualReports/2005/pic/E-3-3.pdf 66 There are also other processes that can be used, though the CZ (Czochralski) crystal growth process is the
most common, Source: http://www.sumcosi.com/english/products/process/step_01.html
Producers of silicon
semiconductor wafersSemiconductor wafer fabs
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Company analysis 74
The ingots are then sliced into wafers that are about 0.5-1 mm thick and
typically a diameter of 6-12 inches, 150-300 mm, though there are wafers
with both smaller and larger diameter. Before the wafers are ready to be
shipped to the semiconductor foundry they go through additional processes
where they are ground smooth and chemically polished.67
The raw wafers (or PW as in polished wafers) are then shipped to the
semiconductor foundry where the fabrication process takes place. The wafer
fabrication process involves multiple steps during which hundreds, or even
thousands, of ICs are formed on every wafer. The main steps in the process,
as seen in Figure 38 above, are the following:
Thermal oxidation (not pictured) – To enable high yield (few dies
that are non-functional/of low quality) the wafer is pre-cleaned and
exposed to pure oxygen whilst heated to 1000 degrees Celsius.
During this step a silicon dioxide insulator film forms on the wafer’s
surface.
Patterning – The wafer is spin-coated with a light sensitive film
called photo resist (first picture in fab process). A mask that
functions like a stencil is then used in a process called
photolithography. UV-light68 is projected through the mask using
huge lenses (second picture), 1.5-3 meters/5-10 feet of length69.
The image from the mask pattern is transferred from the mask to
the wafer as the light sensitive film is exposed to the light.
Etching (not pictured) – Much like you do with a photo, the image
on the wafer is developed by chemically removing the exposed
photo resist. The photo resist on the areas that were not exposed
are hardened and protects those areas when the areas that were
exposed to light are etched away using chemicals or plasma. This is
essentially the start of building the transistors on the wafer.
Doping/Diffusion (third picture) – To alter the electrical
character/conductivity of the silicon to make it behave like
intended the areas exposed by the etch process are bombarded with
atoms with either one more or one less electron than silicon. The
areas are called P type (as in positive) if bombarded with atoms
with one less electron, for example boron, and N type (as in
negative) if bombarded with atoms with one more electron, for
example phosphorus.
Repeat the above steps many times – step one to four are
collectively called FEOL (Front End Of Line) and the steps are
67 http://www.semiconductors.org/faq/questions/?print=y 68 Higher resolution photolitographic printing for the recent technology nodes with very little distance between
the printed features, like the 28 nm node and 14 nm node require other light than UV-light since the
wavelengths of the light influence the minimum feature size, Source: http://www.csee.umbc.edu/~cpatel2/links/315/lectures/chap3_lect08_processing.pdf 69 http://www.forbes.com/sites/jimhandy/2014/04/30/why-are-chips-so-expensive/#36299c977895
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Company analysis 75
repeated until the last “front end” layer is completed, in other
words, until all active devices on the wafer have been formed.
During FEOL the array of pixel sensor plates is formed.
Dielectric Deposition and Metallization (picture five) – after the
FEOL is finished comes the BEOL (Back End Of Line). It begins
with the interconnection “backend” of the devices formed in the
FEOL. The interconnection is done by forming layers with patterns
of metal. In between the metal layers, dielectric layers are formed.
The process is reminiscent of constructions of highways in Japan
and depending on the type of IC, there can be in excess of 20 layers
of metal.
Passivation – after the metallization is complete an insulating layer
called passivation is deposited. The passivation protects the circuits
on the wafer from physical damage and different contaminants.
Small openings are etched out to allow the top metal layer to be
accessed in the following process steps. The fabrication of the
semiconductor wafer is now completed, in that all the electrical
components and their connections have been created. After the
fabrication is completed the semiconductor wafer on which
multiple dies (semiconductor ICs or dies) are now created is either
put in inventory (wafer bank) or moved to the probe (sort) process
in which electrical tests are carried out.
Electrical Test (last picture) – The electrical testing of the dies on
the wafer is often offered as an additional service by the fab (not for
free however). Each chip/die on the wafer is tested for functionality
by an automated process called the probe (or sort) process. The
probe process is a test process in which each individual die is tested
and marked as good or bad, alternatively the dies can be
categorized by bins which means the dies get a performance
grading rather than just a good or bad mark – the mark can be a
physical mark but often it is rather created as in the form of a
digital map of the wafer that accompanies it to the assembly
process.70 The tests are conducted by a machine that connects to
the contacts of the die on the wafer and performs various electrical
tests. The tests are not only used to find good and bad dies, but also
to continually improve the fab yield of good dies. This is done by
evaluating patterns of malfunctioning chips on the wafer and other
process parameters. There can also be additional production steps
added in the sort process, such as back-grinding to reduce the
thickness of the wafer and the power consumption.
Both the production of the raw silicon wafers and the semiconductor wafer
fabrication require highly advanced production equipment and specialized
70 https://savysapconsultant.wordpress.com/2010/01/16/semiconductor-industry-%E2%80%93-planning-
process-simplified/
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Company analysis 76
facilities. The fabrication process has to be carried out in a perfectly clean
room as extreme purity is required for the semiconductors to work
properly.71
The high demands on equipment and facilities result in a price per each raw
silicon wafer of several hundred US dollars. Though that cost is only
somewhere around 10 percent, depending on what ICs are produced, of the
finished semiconductor wafer. The high cost is a result of the depreciation
of equipment used in the fabrication process. A semiconductor fab costs
several billion dollars to build and the largest equipment category is
photolithography equipment.72
What makes the whole equation even tougher is that as technology
progresses more advanced, and hence more expensive, equipment and
facilities are needed to produce semiconductor wafers. The development is
driven by new technology nodes. The technology nodes that you sometimes
hear about, for example 14 nm, 28 nm and so on, refer to the resolution
with which the UV-light projects features on the wafer in the
photolithography process.
To get more processing power for the same price in accordance with
Moore’s law, the price per transistor must go down. This has so far been
accomplished by decreasing the distance between the transistors on the
wafers thus giving name to the new nodes. As the new technology nodes are
introduced new equipment is needed and the investment typically must be
paid back within five years.
The reader might wonder why we have elaborated so much about
semiconductor fabrication, we will soon learn that it is important to
properly understand FPC. First we will move on to the next steps towards
integration of the fingerprint sensors in devices, namely the packaging and
assembly.
Packaging and assembly
After the semiconductor wafer has been tested in the probing process the
wafers are often stored, this inventory point is called die bank, but the dies
still are part of the same wafer. From the die bank, or directly from the
probe process, the dies are sent for packaging and assembly. The wafer is
diced into multiple ICs, ASICs in the case of FPC, packaged and then
71 http://www.semiconductors.org/faq/questions/?print=y 72 http://www.forbes.com/sites/jimhandy/2014/04/30/why-are-chips-so-expensive/#665e7431778
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Company analysis 77
undergo final testing. The packaged chips are then ready to be shipped for
integration in devices.
Figure 39: From dicing of fabricated wafer to packaged ASIC, source: Redeye, various industry sources
Microelectronic packaging is complex and it is also very important for the
performance of the ICs. In short, dies are attached to a package base, lead
wires are bonded to the die and the lead frame. Finally, the package is
sealed with a lid. After packaging comes the last step in the semiconductor
manufacturing process, the final test. The IC is put under working
conditions for a while since most malfunctions or ICs occur during the first
few minutes of operation. Other tests might also be carried out, such as
environmental tests and various mechanical tests.73
In the case of FPC, the dicing and packaging is often done by an OSAT
company (Outsourced Semiconductor Assembly and Test, also called
packaging house), though in some cases the module houses do the dicing
and packaging in-house.
The foundries
The foundries used in the sensor manufacturing process mentioned above
are of great importance (we will dig deeper into this concept later in the
text). FPC has a close collaboration with Chinese foundry SMIC. SMIC has
several fabs and FPC has qualified several of them. In November 2015,
SMIC announced 40-50 million pieces for FPC in 2015 and 150 million in
2016, which is not enough to reach FPC’s volume targets. FPC has stated it
works with another foundry, and we believe it is TSMC, though the
foundry’s spokesperson declined to give an answer when we asked.
Partnerships, alliances and collaborations
To succeed in the competitive semiconductor market, partnerships with
other players in the ecosystem are important. FPC has formed several
partnerships that have contributed to its success and recently announced
73 https://savysapconsultant.wordpress.com/2010/01/16/semiconductor-industry-%E2%80%93-planning-
process-simplified/
Dicing of fabricated
waferASICs without packaging
ASICs with microelectronic
packaging
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Company analysis 78
partnerships with key players emphasizes the role partnerships play in
FPCs strategy.
Partnerships to combine and enable offerings
The 22nd February it was announced that FPC, Gemalto, Precise Biometrics
and STMicroelectronics partner to demonstrate “World’s first end-to-end
security architecture for fingerprint authentication in wearable and
consumer electronics”74. For smart cards FPC works with several partners,
one of whom is the Norwegian company Zwipe and as mentioned, we also
dare to say Smartmetric is one of the other smart card partners. The
partnerships allow the companies to combine their respective strengths to
increase the adoption of fingerprint authentication in existing as well as
new segments. New use cases are added and network effects are created, a
good example is FPC’s partnership with Alipay.
The partnerships allow the companies to combine their respective strengths
to increase the adoption of fingerprint authentication in new verticals.
Membership in alliances
As mentioned earlier, standards are important as it promotes increased
adoption and acceptance for technologies. FPC has joined FIDO (Fast
IDentity Online) and Global Platform. FIDO is a non-profit organization
that strives for an open industry standard to decrease the dependency
regarding passwords for authentication of users, so called Universal
Authentication Framework (UAF). FIOD’s board consists of members from
Visa, MasterCard, Google and Microsoft etcetera. Global Platform is
another non-profit industry organization. Global Platform defines
standards for verification units for secured transactions in mobile, smart
cards, SIM cards etcetera.
Partnerships with module houses
Going into 2015, FPC had one module house it worked with, Chinese
Crucialtec. FPC has stated that the number of module houses FPC worked
with had grown to four in early 2015 and that the company currently works
with (at least) 10 module houses.
In the smartphone market, as in many other industries, the OEMs
outsource its component production. Their outsourcing partners are called
module manufacturers or module houses.
74 http://www.fingerprints.com/blog/2016/02/22/gemalto-fingerprint-cards-precise-biometrics-and-
stmicroelectronics-to-demonstrate-worlds-first-end-to-end-security-architecture-for-fingerprint-authentication-in-wearable-and-consumer-electronics/
Several important
partnerships
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Company analysis 79
The OEMs design the products and also involve themselves in integration,
tuning and securing the end-user experience. The module houses
manufacture modules for the OEMs and also do the packaging of sensors.
Distributors are frequently used as intermediaries handling warehousing
and logistics.
Figure 40: Value chain in the mobile device market, Source: FPC material
It is of great importance for FPC to maintain good relationships with both
the module manufacturers and the OEMs. FPC has been successful in
maintaining existing relationships and developing new ones. The number of
module manufacturers that FPC works with increased from one in the
beginning of 2015 to ten in February 2016 (see below). According to CEO
Lantto, the increase in module manufacturers stem from a willingness from
them to work with FPC as it gives them operational as well as commercial
benefits – much needed in an industry that experience margin pressure
from the OEMs as well as from its suppliers.
FPC points out its willingness to allow other players in its ecosystem to also
profit from the relationship as a key success factor. Some important
benefits offered to the module manufacturers by FPC are exemplified (but
not exclusively summarized) below:
Commercial advantage to be able to offer FPC sensors to the OEMs
as it gives access to the largest customers, for example Huawei
Perceived as a sign of quality to work with FPC who are well
renowned in the industry
Technology – fast, accurate and widely implemented/proven
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Company analysis 80
Operational benefits as FPC support the module manufacturers in
the implementation of proprietary production processes driving the
production costs down
As previously mentioned, the relations to the OEMs are crucial for FPC in
order to sustain its leading position. FPC combines its IP, operational
capabilities, product portfolio, price and scale to position itself as an
attractive partner to the OEMs.
Mobile market
FPC actively targets the mobile device OEMs for in-depth collaboration.
Module manufacturers, subcontractors to OEMs, that supply readymade
subsystems in which FPC’s sensors are included. This category is another
important target group in order to reach a broader market. Many OEMs
choose to collaborate with more than one module manufacturer in order to
safeguard delivery readiness and capitalize on the competition. As a result,
FPC has focused on broadening its partnerships with several module
manufacturers and cooperated with 4-5 different module partners at the
end of the first quarter of 2015. The partnership with the US-based global
touchscreen manufacturer Atmel is an example of the type of cooperation
entered into with module manufacturers. An additional partnership, with
the Chinese touchscreen and module manufacturer O-film, was entered into
in 2014.
China is the largest market
Smartphones have come to increasingly replace feature phones also in the
mid-range and low-end segments. Chinese brands as well as white-box
manufacturers capture a large share of the growth.
India will fuel further growth
As the current economic turmoil combined with increasing smartphone
penetration in China leads to slower projected growth in the Chinese mobile
device market going forward, the Chinese OEMs turn their eyes elsewhere.
India is forecasted to replace North America as the second largest
smartphone market in the world. India is lagging behind China in terms of
smartphone penetration as well as mobile payments, but things are
changing quickly.
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Company analysis 81
Figure 41: Smartphone shipments by geography, Source: IDC
MEMS-sensors an opportunity for further growth
Figure 42: MEMS sensor consumption by OEM
Intellectual property strategy
Patents – protection of proprietary technology
FPC’s patents cover several of its key competitive advantages: the sensor –
the sensor architecture with its real-time programming, the low-noise pixel
architecture, the matching algorithm, the swipe sensor’s method for
analysing frames of the biometric identity and methodology for the sensor
packaging solution.
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Company analysis 82
In order to further enhance the company’s technology, FPC strengthened its
patent portfolio in 2014 through the acquisition of just over 20 patents,
including as yet non-approved patent applications. This additional patent
portfolio includes patents that extend beyond the biometric sensor in order
to further enhance the protection.
Patent strategy
FPC pursues an active patent strategy by continuously registering new
patents and monitoring the market closely to evaluate new opportunities for
capitalizing on patents and to identify and take actions to counter any
infringements of the company’s existing patents. The patent portfolio may
also be strengthened through patents acquired from a third party.
Intellectual property and patents is often called a key factor by the
biometrics and fingerprint technology agents. The following are our
reflections on the patent strategy and the strength in the patent portfolio.
According to FPC itself the patent portfolio is solid: “FPC’s patents cover
several of its key competitive advantages: the sensor – the sensor
architecture with its real-time programming, the low-noise pixel
architecture, the matching algorithm, the swipe sensor’s method for
analyzing frames of the biometric identity and methodology for the sensor
packaging solution”75
FPC’s important core patents are from around 2003 and expires in 2023.
FPC has mentioned that the pixel design patent is important for its high
image quality.
The OEMs have studied FPC’s patent portfolio for months before entering
the agreements but an interesting aspect is that the issue is, according to
FPC, not the strength in FPC’s patents themselves. It is much more a
question of whether any patent could render in an infringement lawsuit, i.e.
if FPC’s patents are infringing on some other players patents. Selling in the
US is the acid test for the intellectual property as this is where the patent
wars are fought. Being clean from patent infringements is the most
important part of the strategy and the other part is what patents you have
yourself to use against competitors or “counter fire” (directly translating
Lantto’s own words). We believe this is what FPC’s newly acquired patent
portfolio will be used for.
By the end of year 2014, the total amount of fingerprints patents, according
to KnowMade, reached over 650. However, more than 200 of these patents
75 http://www.fingerprints.com/corporate/en/about-fpc/the-value-chain-2/
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Company analysis 83
are expected to expire by 2020 but on the other hand the number of new
patents has rapidly been rising from 21 annually during 2010-2011 to 73 in
2014
Synaptics acquired 135 patents along with the Validity acquisition. Apple
has well over 100 patents just like FPC was the third company on the list of
companies in Sweden filing for the most new patents during 2015, which
gives a hint on the technological excellence and the pace in the R&D.
FPC has sold substantial amounts of sensors to Chinese banks for 10 years
now and has still not experienced any workaround or patent infringements.
At the same time, patent infringements and lawsuits have historically not
been uncommon in the industry. An interesting aspect is that no one, as of
what we know, has infringed on FPC’s patents despite that FPC previously
was vulnerable to such attacks due to lack of resources to defend itself
against infringements.
One piece at a time?
We have investigated a number of FPC’s patents and speculate that the
company is looking to combine several different biometric modalities into
one and that it also has patents that effectively makes competitors infringe
as of right now.
FPC has also acquired about a hundred patents within wireless
communication. While we are uncertain on width of the usage area one
could for instance consider NFC for smart cards.
FPC’s patents has not been officially disputed. Some litigations in the past
include Atmel vs Authentec, Authentec vs Atrua, Authentec vs Upek and
IDEX vs UPEK & STMicroelectronics.
Challenges and trends in the semiconductor industry
The semiconductor industry is undergoing a lot of changes as technology
advances. New business models emerge and industry players adopt new
strategies to battle competition.
Moore’s law, meaning increasingly smaller and smaller technology nodes, is
positive for FPC. Since less and less investments are made in the old, large
technology nodes, 350 nm and 180 nm, which are used by FPC, the capacity
is rather constant indicated below, implying that competitors will have a
hard time getting access to capacity as the foundries’ main objective is to
run at high capacity utilization and secured revenues.
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Company analysis 84
From small to smaller at a high cost
Figure 43: Worldwide semiconductor fabrication capacity per technology node, MSI (million
square inch)/quarter at year end, Source: Gartner (via Entegris)
In the industry, the raw material companies also struggle, which is good for
FPC as it means little price pressure on the raw wafers on which the ASICs
are fabricated.
Wafer fabrication volumes increase but revenues decline
Figure 44: Fabricated semiconductor wafer volumes and foundry revenues, Source: SEMI
The harsh environment and the unwillingness to invest is also manifested
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Company analysis 85
by sluggish foundry revenues where many have closed and the industry has
seen a lot of consolidation.
The different sizes of the raw wafers, e.g. 150 vs 200 vs 300 mm, affects the
cost per die with a larger-is-better-effect. Lantto has mentioned that FPC
has qualified fabs that are using 300 mm wafers, which should lead to lower
production cost per sensor for FPC.
The fabulous fabless model
Following manufacturing in the foundries the sensors are then sold via
distributors such as WPI (World Peace Industrial Group) to module
manufactures like Crucialtec, O-film, LiteOn, Amkor, Atmel, Signetics,
Patron and Dreamtech. Alternatively the sensors are sold directly to these
module manufacturers. Some of the silicon wafers are sent straight to the
module manufacturers. On the contrary FPC also ships sensors with
integrated software which shortens the time to market for module
manufacturers.
There are complex alliances between foundries, module manufacturers and
OEMs but the aforementioned module manufacturers that are all in the
FPC network, we believe, are a major part of the ecosystem. The lion’s share
of the sensors from FPC are sold to Crucialtec, O-film and WPI.
From the module manufacturers the sensors are sold again to the end
customers where flex (cables), bezels, software and integration is added.
Sometimes these things are done by the module manufacturers instead.
Even though the chain can be complex passing some of the steps is
mandatory. Every product has to be qualified for each fab, module
manufacturer and OEM, i.e. there is a lot of work before shipping and FPC’s
many relations and large network is likely a competitive advantage, at least
at the moment. Any competitor looking to completely overthrow FPC must
pass the same steps.
There have, according to FPC, traditionally been few ways for module
manufacturers to differentiate besides pricing meaning that squeezed
margins due to price competition have likely hurt most in this part of the
value chain.
However, FPC might be able to come to the rescue here as a significant part
of FPC’s IP is related to methods and processes to help module partner in
doing a good packaging job.
A major issue is of course if these large differences in gross margins will
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Company analysis 86
prevail. One possible outcome would be if OEMs would bypass the sensor
manufacturers by forcing them into adopting a license model where the
OEM pays say USD 0.2-0.3 for a license to be used in the silicon wafer
production. FPC would likely not accept being subjected to such a move,
although there are some competitors which may be more or less obliged to
look in that direction if design wins continue to be absent.
Another question on the business model and the value chain is if sensors in
the future, to a larger extent, are to be integrated into chipsets, like
Qualcomm’s Snapdragon.
Precise Biometrics & the matching algorithm
FPC was up until recently dependent on Precise Biometrics’ algorithms for
its sensors for smartphones but not anymore (see further below). Precise
states that its algorithm is fast, secure and small and in this sense takes
pride in a longstanding focus on environments with small process and
memory space, most notably smartphones and smartcards.
Precise also has announced partnerships with many of FPC’s competitors,
such as Synaptics and Silead as well as contenders like Focaltech, OXi
Technology, Cypress Semiconductors, Elan Microelectronics, j-Metrics,
Gingytech and JP Sensor. However, Precise are not bound to a certain
technology or platform.
FPC’s main owner’s agenda has been to own the entire software in-house,
including the algorithm licensed by Precise. It has also been stated that
disruption of Precise by an in-house solution of FPC is only a matter of
time. Perhaps this is now materializing faster than we expected considering
FPC’s new algorithm for smartphones totally free of any third party content.
FPC’s CEO has stated that FPC passes on a small, small, small, single-digit
percentage of its revenue to Precise. We believe it is a fixed amount per
sensor, and as the sensors becomes smaller, PB’s share of the ASP goes up –
thus it becomes more important with an own algorithm as ASP go down in
maturing segments. Dividing 95 percent of FPC’s Q3 and Q4’15 sales by
Precise’s sales in its technology segment we arrive at a revenue share for
Precise of 1.46 percent or 4.38 cents of a dollar (meaning SEK 0.35 with an
average USD of 8). This is somewhat higher than previous statements from
former CEOs of FPC and Precise. FPC likely has agreements with Precise for
the smartphone models that are ramping up during 2016 but somewhere
during 2017 most, if not all, of the new models will be using FPC’s in-house
algorithm.
How much of Precise’s algorithm that is actually used is something that is
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Company analysis 87
not disclosed and something that Precise or the customers of FPC are
unaware of but FPC claims that it is a small part. It is a misconception that
there is only one algorithm and that it is to 100 percent from Precise. There
are rather several parts of the algorithm. First there is enrolment, then
feature extraction and matching but also image processing and quality
enhancement, noise reduction, when to take the picture and with what
speed.
So what? What do we see coming?
Business model from a different perspective
It can be useful to think about what it really is FPC sells from the
perspective of what benefits come out of the features that FPC’s solutions
add.
We have learnt that FPC provides fingerprint sensors, and it is clear the
sensors provide an additional feature to the products they are incorporated
in. The benefit however, we have not discussed much.
Previously, the use case for a fingerprint sensor, at least in mobile devices,
was very much seen as added convenience from not having to use pin code.
If you would ask someone how much they would value the benefit of not
having to press four digits to unlock their phone or computer, chances are
they would not reply with a very high monetary value.
As new use cases emerge, partly due to new features, but also from new
business models enabled by FPC’s solutions, new benefits are given to
users. If you would ask someone how much the benefit of not having your
car stolen or being able to carry out safe transactions online is worth,
chances are you would get a significantly higher monetary value as a
response than in the previous case.
New use cases could also enable FPC to capture significant value from other
players in emerging ecosystems.
New revenue streams for a diversified business model
As FPC’s solutions enable new business models for players in emerging
ecosystems as well as significant operational savings in several sectors, the
prospect of capturing a share of the value created arises.
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Company analysis 88
FPC’s Lantto has mentioned insurance companies as well as providers of
payment solutions as players in the ecosystem benefitting from FPC’s
secure authentication solutions.
Going forward the business model of FPC could very well involve customers
other than the system integrators/module manufacturers and OEMs.
A viable option would be both additional partnerships and acquisition of
companies offering for example, although not exclusively, other (biometric)
solutions for authentication.
Operational capabilities
The quality of produced sensors is not only of vital importance to the
confidence of customers but also to the company’s profitability.
Accordingly, FPC uses the company’s high yield, defined as a low degree of
scrapping, as a tangible sales argument in its marketing.
Attracting the best talents is according to FPC key in the long term. In the
image on the next page FPC’s recruitment of personnel with new skills are
put in relation to FPC’s strategy.
Figure 45, FPC’s focus in recruiting, source: FPC, Redeye
Several roles connected
to Smart Cards and Automotive
Roles in Strategy and
Operations to enter new verticals and
secure competitive
advantages
Securing additional
development capabilities for new
services and products
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Company analysis 89
Market - introduction
FPC’s products can be used across verticals, for example, the sensor FPC
1025 is used in several smartphones and it is also the sensor that will be
used by a major automotive OEM, as announced in January 2016.
Accordingly, FPC does not have any segment reporting as of yet. FPC states
that all its operations is reported in one segment as the business is
undergoing rapid developments where the division into segments is not
clear and where the top management of FPC does not apply different
follow-up methods for the different verticals. Nonetheless it makes sense to
distinguish between the different verticals as they differ in many important
ways.
China continues to be the company’s primary market in terms of both the
smartphone and the bank market. In terms of FPC’s efforts in the
smartphone market, Korea, Japan, Taiwan, North America and India are
also very important markets.
Meanwhile, demand is beginning to increase in other market segments. We
are planning for commercial launches of smartcards during 2016. The
automotive industry is another exciting volume market in which we
anticipate sharply increased use of fingerprint technology in all types of
vehicles. The Internet of Things, meaning all online electronics involving
human interaction, will be a growing phenomenon. Examples include
wearables, portable equipment and smartwatches. On the whole, we believe
that these market segments will reach approximately the same volume in
2018 as the smartphone market for fingerprint technology will achieve in
2016
Different verticals, even though the same products can in some cases be
used, differ in terms of value chain, market size and growth, adoption, use
cases, competition and ASP to name a few factors.
We have chosen to divide FPC’s market into the following market segments:
Mobile devices (smartphones, tablets and laptops)
Smart cards
Automotive
Others
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Company analysis 90
Mobile devices - smartphones, tablets and laptops
The market for mobile devices has grown at high rates as demand in China
has skyrocketed along with a growing middle class. Other contributors to
the rapid growth are the more powerful processor, lower cost models and
introduction of 3G and 4G networks. The development has led to the
devices becoming multi-functional, replacing cameras and portable music
players and feature phones by combining all devices into one.
Figure 46: Estimated market size for smartphones, tablets and laptops 2014-2020, Sources: IDC, IHS, Strategy Analytics, Gartner, Redeye
The multi-functionality trend is continuing and the mobile devices
incorporate more and more sensors per device. In the same way that CMOS
camera sensors found their way into the high-end feature phones some
fifteen years ago and today are standard in virtually all mobile phones,
biometric sensors are now rapidly increasing their penetration in
smartphones, tablets and laptops.
Market drivers and trends
Apple with its app-store and added the touch fingerprint sensor to add
convenience and drive software revenue. Google (Alphabet) with its
Android did not want to be left behind and neither did the OEMs aiming at
battling Apple in the high-end smartphone and tablet market. OEMs
quickly started to incorporate fingerprint sensors into their new
smartphones. At first the fingerprint sensors were mostly seen as adding
little more than additional convenience and a nice-to-have novelty.
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Company analysis 91
“While I have great hopes for Touch ID in the future, for now it is little
more than a tool of convenience.” Adrian Kingsley-Hughes, ZDNet, October
201376
Even though the value added by fingerprint sensors was questioned, OEMs
wanted to differentiate their high-end phones and trigger upgrades to the
latest models. As more phones with fingerprint sensors started hitting the
market, additional user cases quickly emerged.
Mobile banking uses fingerprint sensors for authentication
In 2014, Alibaba Group, through its subsidiary Alipay, announced the
addition of biometric security through fingerprint recognition to its Alipay
Wallet app, the most popular mobile payment solution in China77. Alipay
has an estimated 400 million users and handles 80 million transactions
every day78. Alipay’s support for fingerprint authentication is a key driver
for the growing demand for fingerprint sensors from smartphone OEMs
targeting the Chinese market.
Built-in support for third-party Android apps
With the release of Android 6.0 (Marshmallow), Google built in APIs
(Application Programming Interfaces) that let developers use fingerprints
to authenticate users in apps79. Previous version of the Android OS had
generic APIs only for the native Google apps. The possibility to use
fingerprint authentication in third-party apps opens up for countless new
user cases and thus increases the value of the fingerprint sensor for the
device users.
Out of touch without touch fingerprint sensor
From initially having been seen as a quirky feature with limited practical
use, fingerprint sensors have become a must-have in high end smartphones.
The Verge published an article with the following headline in October 2015:
“Fingerprint readers are now essential - What once seemed like a gimmick
is now the key to mobile innovation”80
FPC’s Lantto noted a big change in the market for fingerprint sensors in
2015.
76 http://www.zdnet.com/article/the-iphone-5s-fingerprint-reader-more-about-convenience-than-security/ 77 http://www.nfcworld.com/2014/09/01/331127/alipay-partners-huawei-add-biometric-security-mobile-
payments/ 78 Source: http://letstalkpayments.com/alipay-claims-to-be-the-worlds-largest-mobile-payment-company/ 79 Source: http://developer.android.com/about/versions/marshmallow/android-6.0.html 80 http://www.theverge.com/2015/10/21/9582100/touch-id-nexus-imprint-fingerprint-reader-essential
“Android 6.0 is really
good for the sensor
market, the API is there so
all apps can use the
sensor.”/Jörgen Lantto,
FPC
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Company analysis 92
“From Q2 and onwards the OEMs started to come to us instead of being
actively approached by our sales people, Android 6.0 and mobile
payments have been important drivers and fingerprint sensors are now a
feature demanded by customers.”
As the prices for sensors have gone down, fingerprint sensors start to make
their way into the mid-range and low-end smartphones.
Market size and growth
The mobile device market is by far the largest market segment for
fingerprint sensors, and within the mobile device market, smartphones is
the largest and fastest growing product category for fingerprint sensors.
Figure 47: FPS in mobile devices, units per device type, 2016-2015, Source: IDC, HIS, Gartner, Redeye
FPC’s TAM grows faster than the total FPS market
FPC does not include Apple in its TAM (Total Addressable Market), as
Apple has its supply of FPS in-house following the AuthenTec acquisition.
Looking at the projected market growth for fingerprint sensors, most of the
growth will come from OEMs other than Apple and Samsung.
The smartphone OEMs that are included in FPC’s addressable market are
projected to grow their consumption of fingerprint sensors at a CAGR of 67
percent from 2015 to 2020. By 2020 the addressable customers will reach a
total unit consumption of 1.2 billion unit compared to less than 200 million
units in 2015. As we interpret FPC’s view on this matter it find it likely that
these market forecasts will need to be raised ahead.
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Company analysis 93
Figure 48: Smartphone FPS market, units per OEM 2014-2020, Source: FPC, IHS, Strategy
Analytics, Redeye
So what about Samsung?
There has been some confusion as to whether FPC includes Samsung in its
TAM. Samsung has not bought sensors from FPC as of yet and when
incorporating sensors in its phones, Samsung has opted to use its own
algorithms. Samsung indeed is included in TAM and has always been.
When we ask Lantto if there has been a change in strategy regarding
supplying sensors without the FPC algo, Lantto clarifies things:
“It is a misunderstanding, Samsung has always been included in TAM and
there has not been a change in strategy around complete vs partial
offering, we have always been open to supply sensors-only to customers
who want to use their own algo.”
As Samsung has thus far opted not to use FPC’s sensors, the current
customer base of FPC, that is, other OEMs than Apple and Samsung, are
projected to increase their consumption of fingerprint sensors from just
under 100 million units in 2015 to almost 900 million units in 2020.
Decreasing ASP in mobile device segment
The market size for fingerprint sensors for the smartphone market is
growing rapidly in terms of volumes, however, the market growth in terms
of value is considerably lower as the ASP is going down. From 2019, the
market is projected to start declining in terms of value.
What can be noted is that the ASP projections are for all fingerprint sensors,
including Apple’s sensors, which according to industry sources are
considerably more expensive than the 3-4 dollars FPC charges for its
sensors.
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Company analysis 94
Furthermore, the ASP projections include swipe sensors as well as touch
sensors.
China is the largest market
Smartphones have come to increasingly replace feature phones also in the
mid-range and low-end segments. Chinese brands as well as white-box
manufacturers capture a large share of the growth.
India will fuel further growth
As the current economic turmoil combined with increasing smartphone
penetration in China leads to slower projected growth in the Chinese mobile
device market going forward, the Chinese OEMs turn their eyes elsewhere.
India recently replaced USA as the second largest smartphone market in the
world. India is lagging behind China in terms of smartphone penetration as
well as mobile payments, but things are changing quickly.
Figure 49: Smartphone shipments by geography, Source: IDC
And after India it is time to say … Hello Africa
Africa is expected to grow at high rates as smartphone penetration
increases. In Africa, there is a big unbanked population and mobile
financial services are widespread. These factors make Africa an ideal market
for fingerprint sensors.
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Company analysis 95
Customers
Depending on how a customer is defined FPC’s customers can be said to be
the module houses or the phone manufacturers. It is the phone
manufacturers that make the decision on whether or not to include a
fingerprint sensor in the respective phone, what technology to use and what
supplier to buy the sensor from. It is then the module houses that order the
sensors from FPC and pay FPC.
The OEMs that FPC has on its list of customers include most of the major
Chinese OEMs as well as several non-Chinese brands.
Figure 50: FPC customers as per autumn 2015, Source: FPC material
Since the customer list above was compiled by FPC, additional models have
been launched, and the customer list now also include Xiaomi and LG.
Regarding brand loyalty FPC has won over for instance Meizu from Goodix
and Lenovo from Synaptics. Goodix under-glass sensor is incorporated in
the new Meizu PRO 6 and it seems Meizu is using a dual sourcing strategy.
Value chain in the mobile device segment
The value chain in general has already been written about in detail in the
semiconductor value chain and applies to the mobile device segment. We
give some further details on the value chain specifically for the mobile
device segment.
In the smartphone market, as in many other industries, the OEMs
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Company analysis 96
outsource its component production. Their outsourcing partners are called
module manufacturers or module houses.
The OEMs design the products and also involve themselves in integration,
tuning and securing the end-user experience. The module houses
manufacture modules for the OEMs and also do the packaging of sensors.
Distributors are frequently used as intermediaries handling warehousing
and logistics.
Competitors and contenders of today
We have divided the competition section in mobile devices into competitors
of today with mass production readiness and new entrants on their way in
(for what the future might bring see the risk section)
The competitors of today are the following:
Apple/Authentec
Apple is only an indirect competitor since it does not sell to anyone outside
its own ecosystem, however, Apple could definitely be seen as a competitor
in other segments where FPC teams up with partners to offer solutions that
compete with solutions from Apple.
Apple, in 2014, had its biometrics patents reviewed by the US Patent Office
following a request from an undisclosed third party. The third party wanted
a so called re-examination to invalidate Apple’s patent and claimed that the
technological specifications were not sufficient enough to be patentable.
Patents from FPC and IDEX were used as evidence. After a first ruling
approved the claims, Apple was forced to make some limiting changes in its
patents
Synaptics
Synaptics of USA is an old arch enemy for FPC that has a significant
amount of resources and talent but so far FPC has not suffered any
problems. Its market cap is around USD 3 billion, making it somewhat
similar to FPC in size but Synaptics old bread and butter business is more in
touch and display technology.
When Apple bought Authentec, Samsung was in a hurry forced to search for
a fingerprint sensor supplier. FPC was at the moment too small to be a valid
alternative. Samsung then talked Synaptics into acquiring Validity with a
promise of a time of exclusivity. It is uncertain how long this period will be
but Synaptics has controlled Samsung since then. Synaptics has delivered
sensors to Samsung but Samsung has its own algorithm, software and
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Company analysis 97
modules, whereas FPC has so far only sold its entire system, while Synaptics
only has sold parts, meaning that Synaptics lacks experience of selling an
entire system.
Goodix
After Synaptics, Chinese company Goodix (formerly Shenzhen Huiding
Technology) is the runner-up in the market. Goodix is to 50 percent owned
by the CEO, David Zhang, but is planned to be listed on the stock market. It
is focused on smartphones and states that smartcards is not needed due to
mobile payment solutions. We find this conclusion believable for emerging
markets.
Goodix received a CES awards 2016 and Goodix before Synaptics
announced that it could manage glass of 200 micrometer (and even 300 in
an interview with Goodix’s sales director). FPC has also stated that it
respects Goodix as a competitor and that Goodix actually has a better
position in China than Synaptics. We believe that Goodix as a Chinese
company has an advantage in understanding China and Chinese culture.
Meizu used to be Goodix only customer prior to being captured by FPC.
According to Goodix’s CEO it delivered 10 million sensors last year,
meaning about 2 percent of the total market volumes. Goodix’s excuse is
that as a Chinese company it has a longer time for take-off due to general
scepticism against Chinese technology.
Goodix design win with TCL in December 2015 and TCL’s estimated market
share of 4 percent in 2015 indicates that Goodix should at least be able to
double its volumes in 2016. As a competitive strength Goodix mentions its
hardware-based anti-spoofing solution “Live Finger Detection” combines
optical and capacitive sensors on one chip. Synaptics has filed patent
infringement charges against Goodix, although not focused on the touch.
This gives some support towards the frequent allegations on Goodix’s
lenient approach towards intellectual property.
Precise Biometrics
When FPC and Precise Biometrics’ chose their path around the millennium
era Precise decided to focus solely on the algorithm and software and not
manufacturing of chips. As FPC remains focused on in-house algorithms
Precise could prove to be more of a competitor going forward, but solely on
the software and algorithm side.
Let us now move over to the other players. These are not really competitors
yet but are rather evolving into competitors in different pace. We are aware
of that some of these are not exactly new but in some cases the threat can be
said to be new as these companies have reached the mass production stage
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Company analysis 98
or won design wins.
New Entrants on their way in
In 2015 FPC had close to 100 percent market share outside of Samsung and
Apple. New competitors are now entering the market, but so far few major
design wins have been presented by competitors.
“Well if you look at 2015, I think it’s interesting that the three companies
that were the pioneers of bringing forward fingerprint sensors already in
the 90s, that’s ourselves, it’s Apple through the acquisition of AuthenTec
and Synaptics through the acquisition of Validity. These three companies
totally dominate the shipment of fingerprint sensors during 2015. But we
have a new entrants that are wanting to start to compete in the market.
We have a few Chinese companies that we are – I think today - is
successfully managing the competition from, but we know that they have
high ambitions, and you mentioned Qualcomm, they have a different
technology than the rest of us. So I think my impression is that they will
have some work to do to finish that development, and I think previously
they communicated that they're expecting to see devices with the sensors
being commercially launched this year. And I haven’t seen those devices
yet. But for sure, I'm sure they are continuing to try to complete their
product development.”
Jörgen Lantto, Q3 2015 conference call
Qualcomm
Qualcomm’s technology, according to FPC, represents not only a new
initiative but the only truly innovative approach in a competitive landscape
were many current agents are well-known for FPC. The ultrasound
approach of Qualcomm is according to FPC a try to come up with
something disruptive against the capacitive standard, focusing on reading
through thick glass. As early as Mobile World Congress 2014, Qualcomm
boasted that its technology has an edge in reading through thick glass.
Qualcomm is behind schedule and if the product was truly as disruptive as
Qualcomm claims it should have been out already. It also seems that
Qualcomm has had some issues with dry fingers (the reason for the
problems are explained in the technology section).
FPC knows Qualcomm are being tested by certain OEMs but they are not
quite there yet. Qualcomm’s new ultrasonic sensor, SenseID, with LeEco
(formerly LeTV) as Qualcomm’s first customer. However, it is far from the
first try to commoditize ultrasonic technology. Qualcomm acquired
Ultrascan in 2013 and if Qualcomm would later shut down the development
it would not be the first time Qualcomm acquires a technology that it later
not uses
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FPC believes Qualcomm is looking to bundle the fingerprint supporting
platform SenseID with its Snapdragon and will try to go for high end as cost
will be much higher than for capacitive solutions. However, the sole fact
that the platform is mounted into the smartphone does not mean that there
will also be a Qualcomm FPS in the phone. On the contrary, FPC’s sensors
have been used together with Snapdragon. We also find it questionable that
Qualcomm would be in a margin position where bundling in a size
matching FPC’s sensor prices is possible.
Silead
Unlisted Silead was founded in 2010 by GalaxyCore. Its focus area is touch
IC technology but it recently got Yu (a subsidiary of Micromax) as a
customer for its fingerprint sensors and it also has some smaller customers
outside of the top 20. With expected revenue of USD 1 billion in 2015 it
seems reasonable that Silead, as it claims, is the fastest growing IC design
house in China. Its capacity boasts a 40 million IC per month. Even though
only 120 million ICs have been shipped worldwide this represents 70
percent of PAD China ODM.
Cypress Semiconductor
Cypress is listed on Nasdaq, has 7 100 employees, 30 000 customers
worldwide and is based in San Jose, California. It provides
microcontrollers, system-on-chip solutions, capacitive touch sensing
controllers etcetera. It has only addressed the fingerprint market for one
year through its strategic partnership with IDEX.
Egistec
Egistec is a Taiwaneese company founded in 2007. It was listed on the
Taiwan OTC market in the end of December 2015 for a valuation of USD
20.7 million following raising capital. Egistec also believe in a continued
explosion of phones featuring fingerprint sensors and expects a 450 million
unit market in 2016, similar to FPC and Synaptics. Its business includes
fingerprint ICs as well as software. The latter area is perhaps where Egistec
has excelled the most. Egistec has also received orders of fingerprint
sensors for Samsung’s Galaxy A8 mobile device. Its cumulative 2015 sales
through October was up 859 percent to about USD 10 million, indicating it
is getting traction. Egistec also has over 100 patents, within active
capacitive sensors.
VKansee
Vkansee of China in an interview boasted with its optical sensor having four
times the resolution and three times the efficiency rate over Apple and
Synaptics. The reason according to VKansee is that the sensors scan at
2000 dpi compared to 500-600 for its competitors, meaning that seeing
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Company analysis 100
deeper into the details of the fingerprint, not just pattern and minutiae but
also micro traits.
VKansee raised USD 7 million by the Aviation Industry Corporation of
China and is now looking to raise another USD 10 million to develop an
even thinner chip than its 1.5 mm chip. At the Mobile World Congress a
year ago, Vkansee demonstrated how to gain access to an iPad Air2 by using
a rubber mold of a fingerprint and how its own UTFIS sensor was secure
against such a hack. However, with a 2D optical camera, the only thing
needed for spoofing is a really, really good photo in high resolution.
The competitive landscape in general
Competitors out of touch?
As mobile device makers rush to adopt fingerprint sensors several of the
competitors wish to join the bandwagon but sensors take years to develop.
This is how Jörgen Lantto puts it: “And then when we go to even smaller
sensors, the 1145 that is fit for sidemounting, for instance, and then the
1035 that we just announced. We haven’t really seen competition bringing
those type of small sensors to market. So, there we believe we are already
competitive. So, we believe that we are in a strong competitive position.”
“The fact that our sensors provide the same performance in terms of
image quality and biometric performance, whether they are rectangular
or square or somewhat larger or smaller, that is really a great tool for the
OEMs and it is now resulting that some OEMs, they are using many of our
different sensors and they are – maybe experimenting with different
approaches for how to integrate the sensors into the phone. So, we really
believe that the broad portfolio is – maybe in the end of the day, our
biggest competitive advantage and edge. “
Jörgen, Lantto, conference call of Q1 2015
Who is the worst competitor (at the moment)?
FPC has respect for Goodix who now starts getting its products out on the
market although Goodix’s under glass sensor is not good enough. There is a
risk that Goodix would try to reverse engineer FPC’s products. Goodix are
Chinese and Chinese like working with Chinese but FPC has so far not seen
any signs of unfair support from Chinese state to Goodix.
Regarding Synaptics Lantto mentioned the following "We believe we have
an advantage over Synaptics in our direct measuring methodology where
we get a better picture from the start and hence it should be easier for us
from the start.” Samsung wants to break up vertically integrated suppliers
and apply price pressure. This is similar to how Apple works. Both Samsung
and Apple furthermore have strong system integration capabilities
internally. They are less dependent on support from their suppliers in
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Company analysis 101
driving innovation and supporting them with system integration and
software customization.
FPC strong position within smartphones makes it less vulnerable in that
vertical. The OEMs will always test new things according to FPC and as
Lantto describes it “… throw a piece of meat to some competitors now and
then.”
Competitive advantages in the smartphones segment
Goodix mainly sells in China, something that has led to speculations on
patent issues. FPC’s customers on the other hand would have already gotten
sued if FPC did not have proper patent protection or infringed on other
patents.
The management at FPC says it do not know the value of the brand – the
brand equity – but it can be noted that several of the Chinese smartphone
manufacturers use the FPC logotype in their marketing.
Figure 51: Chinese smartphone launch with FPC’s sensor highlighted
Lantto describes FPC competitive advantages in relation to Synaptics and
others in the following way: “And so, I think it’s fair to say that our big U.S.
competitor and ourselves, we have been developing fingerprint sensors for
more than 10 years now. So I think we have quite some experience built in
to our products. And they have been successful in penetrating a major
account. So they have a substantial business there. In our case, I think we
believe we have the best fingerprint sensor technology in the industry that
has been developed over the course of the last 10-15 years. And it’s now
manifesting itself in its performance. And so, I think we win today’s
business on the merit of the technology and the product quality
overall…And that I think that is where competition has quite an effort to
overcome because fingerprint sensors, they are quite visible in terms of its
performance towards the consumer. The sensors recognize your finger
each and every time you touch the fingerprint sensor or not. So I think
there is quite a high barrier to entry for competitors to be able to
successfully take meaningful share. And I think we have established a
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Company analysis 102
very, very high performance for our sensors. And competitors that would
like to take meaningful share, they would have to meet the same
performance levels that we do. Meanwhile, of course, we are improving
the performance of our solutions even further”
Jörgen Lantto, Q2 2015 conference call
Redeye’s view
We believe many market participants (analysts for example) fail to credit
FPC for the competitive advantages it has managed to secure, perhaps
especially the ones in system integration and operational capabilities
previously discussed.
In the short terms the most important competitors are Synaptics and
Goodix. Much of the focus in terms of competitors has been put on the
other Nordic players Next and Idex, but one needs to look beyond
Scandinavia’s borders. The toughest competition will come from larger
players with complementary products and established positions in the
ecosystem/value chain, e.g. large semiconductor companies and the
previously mentioned touch display manufacturers that have struck deals
with Precise Biometrics. Those players would benefit from already having
established production, sales channels and operational capabilities. Very
few of the potential competitors could however match the full system
integration capabilities that FPC has in-house.
As mentioned, OEMs typically use several module houses. At times, the
OEMs have dual or multiple sourcing strategies that are implemented
throughout the supply chain. Securing supply of critical components is
critical for OEMs and module houses, and they also want to create
competitive price pressures – this is especially true for commoditized
components and is often a requirement/internal policy on the sourcing
department. Operating with a dual supplier setup does not mean that 50
percent of volumes will be allocated to each supplier. Typically only 10 to 25
percent of the volumes will be allocated to the second source in order to
secure supply but also to provide leverage in price negotiations whilst not
losing out on volume discounts and benefiting from the economies of scale
a supplier can achieve with high volumes of the same type of components.
The way to combat this as a supplier of components is to strategically
relocate yourself towards a supplier of critical solutions and systems where
your integration capabilities help the OEMs as well as the module houses
differentiate. This is exactly what we see FPC is doing when focusing more
on direct sales and closer ties to the OEMs/ODMs.
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Company analysis 103
Figure 52: Redeye’s view on FPC’s ambition in the mobile device segment value chain
FPC, similar to Synaptics claim they can put the sensor under glass,
however, seems like it depends on the type of glass. Goodix has made a
similar statement. Qualcomm can put the sensor under glass with its
ultrasonic sensors. What should one make of all this? Now that FPC, as well
as Synaptics and Goodix has come out with under-glass solutions the risk
for the disruptive effect Qualcomm was hoping for seems to have faded
away somewhat, especially combined with the improved liveliness detection
FPC has released with its FPCLiveTouch.
We believe there is a high likelihood that we will see a design win for
Samsung in 2016, but at the same time we do not necessarily expect this to
contribute significant sales in 2016 as Samsung could opt to phase-in a new
supplier in only one model to begin with.
The rationale from Samsung, apart from its standard strategy of command
and conquering its supply chain by the introduction of additional suppliers,
would be to:
1. Secure the best available solution in its products – coming in
behind Huawei in reviews is not popular – with a system solution
where the sensor, packaging, algorithm and software are all
contributing to high performance
2. Secure supply of fingerprint sensors with a small form factor and
competitive price to incorporate fingerprint sensors in its low-end
smartphones shipping to emerging markets such as India where
Samsung has a strong position
Foundries FPCValue chain
Module suppliersPackaging and
modular production
Mobile device OEMsDistributorsStorage and logistics
Product development and
customization
Marketing and sales
Management and administration
External hardware production
Wafer or encapsulated
sensors
FPC’s external expenses
Direct material
component of COGS
FPC’s internal expenses
Sales
AdministrationDevelopment
WPI
Direct contact with module suppliers and OEMs/ODMs
Software development and provision, integrated support, upgrading/maintenance
Hardware design and support customization
Revenues
Revenues
Payment
Main contributors to FPC’s revenues
Payment
License feesSpecial
Customization
O-film
CrucialTec
Huawei
Close relations to OEMs - avoid
commoditization
Possible recurring revenues from SW
upgrades?
SMIC
Korean (TSMC?)
FPC is looking to strengthen its role as a strategic partner throughout the value chain
Increase share of direct sales
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Company analysis 104
The smart card market
A smart card, chip card or integrated circuit card (ICC) is defined as any
pocket-sized card that has embedded integrated circuits. Smart cards store
and collect information through the use of various computer systems
embedded on the card, at least a processing unit and a memory unit. When
hearing about smart cards, many people immediately think about payment
cards issued by banks, however, smart cards are not only payment cards.
The primary use of smart cards are to store, manage, and maintain user
credentials, but as miniaturization enables more advance and power
efficient ICs to be embedded, the ability of cards to hold additional
functionality increases. The high portability of smart cards enables their
extensive adoption across multiple verticals for a wide range of
applications.
Smart cards are used in a wide range of industries for many applications
including access, identity and payments. The industry association Smart
Card Alliance, lists the following end user industries for smart cards81:
Enterprise ID
Financial
Government
Healthcare
Identity
Telecommunications
Transportation
The global card industry, including all cards, not only smart cards, dwarfs
the smartphone industry when it comes to units. In 2014, close to 35 billion
cards were manufactured worldwide. Traditional cards cost very little
however, on average a little less than $0.5, thus the market size in terms of
value was only $17 billion in 2014.82 The smart card segment that has
drawn most attention in connection to fingerprint sensors embedded on the
cards is the payment/credit cards segment.
Market drivers and trends – why FPS in smart cards?
All the industries where smart cards are used have their specific market
drivers, but there are also drivers affecting the smart card industry as a
whole. Some examples are listed below:
81 http://www.smartcardalliance.org/smart-cards-applications/ 82 ICMA - International Card Manufacturers Association
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Company analysis 105
Additional security
Incumbents wants to protect their business
Enabling new business models
Cost savings
Personalization and personal data storage
Healthcare (Healthcare – allows safe storage of personal data
transferable when you seek care at different providers, you can have
your prescriptions on it, health journals etc., huge trend in
digitization of the health-care sector, and with sensitive personal
data, at least two-factor identification will be required.)
Financial inclusion
Identity for all
The last driver, identity for all, is included in the Sustainable Development
Goals for 2030 outlined by the UN.83 Several hundred millions of people
lack identity credentials, and in countries such as India there are large scale
programs to roll out biometric authentication across the population.
Figure 53: Sustainable Development Goal 16.9
FPS for payment and credit cards
The worldwide fraud costs are growing rapidly, as indicated in the graph
below. Merchants are the ones who bear most of the brunt when it comes to
fraud costs and consumers are usually protected by laws but indirectly pay
in higher prices. Law differ across geographies though, and in Europe you
are often eligible if you lose your EMV-card and it is used.
As seen above the fraud losses was steady below 5 cent per 100 USD all the
way from the millennium shift and the next following 10 years. 2010
marked a shift in the trend were the fraud losses started to surge, quickly
reaching over 5 cent per USD 100 and approaching 5.7 cents per dollar in
2014.
83 https://sustainabledevelopment.un.org/sdg16
“… this SDG would urge states to ensure that all have free or low-cost access to widely accepted, robust identity credentials. Regardless of the modalities to achieve it, the recognition of legal identity—together with its associated rights—is becoming a priority for governments around the world.”
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Company analysis 106
Figure 54: Fraud costs for payment cards, Source: The Nilson Report
We understand that 2-3 percent of the card volumes are related to fraud. As
a majority of the fraud costs are related to card-not-present fraud only the
fact that someone verifies that he or she is a human being by presenting a
fingerprint will lower fraud substantially.
The fraud cost per card averaged USD 1.6 in 2013 and 1.7 in 2014.
According to US based security experts Voltage Security, the payments
industry does not care too much about fraud. aUS fraud costs have fallen
during the last decade and only make up about 1 percent of the total
industry revenue of USD 150 billion compared to 13 percent for default and
bankruptcy. Increased consumer confidence and ease of use are far more
important – and biometrics play a role here as the higher security provided
can pay itself back in an instant by decreasing false rejection rates (when
your transaction will not go through even if it should) and by increased
usage and loyalty of the cards from less fear of fraud.
Anti-fraud measures include e.g. detection of fraudulent transactions,
restrictions on high risk items and address verification service and cross
EMV brand standard for smart cards enabling offline authorization.
Multi-factor authentication and layered approaches
Rather than competing, different biometrics technologies complements
each other in multi-factor authentication:
” The app-based authentication solution, commonly dubbed "Selfie Pay" by
the media, leverages a mobile device to secure online payments and mobile
banking applications using fingerprint and facial recognition.” 84 84 Source: http://www.prnewswire.com/news-releases/daon-to-work-with-mastercard-on-driving-greater-
convenience-security-through-biometrics-300229876.html
0
1
2
3
4
5
6
0
2
4
6
8
10
12
14
16
18
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
CAGR cost per USD 100: 1%
CAGR total fraud costs: 15%
USD billion
CAGR2002-2014
Cost per USD 100
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Company analysis 107
Hence, when hearing about the possibility to pay via a simple selfie, chances
are you could also be required to another form of authentication, such sas
your fingerprint. Major card company VISA only shuts the door completely
to one biometrics technology, namely VOICE – it makes perfect sense as
convenience and speed are important parameter for the biometric
technologies to be implemented in payment systems. Fingerprint
verification in a biometric credit card could speed up processing times a lot
for retailers, maybe combined with a camera for face recognition at the
POS-terminal in the case you pay with a smart card.
Market size and growth
Currently, smart cards are widely used across sectors such as
telecommunications, BFSI, and government. Due to the numerous
advantages they offer, smart cards are increasingly used in the healthcare,
government IDs (e-passports), and retail sectors. Thus, strong ongoing
adoption of smart cards across different sectors is estimated to substantially
spur the market’s growth in the coming years.
The smart cards market is expected to see consistent growth in the coming
years due to the increasing demand for secure and reliable payment
transactions across the retail and BFSI sectors. Moreover, cost-saving
schemes for merchants from payments brands such as Visa, MasterCard,
and Europay is driving the smart card technology innovations. The
decreasing prices of subscriber identification module (SIM) cards and tariff
rates are increasing the number of mobile subscribers, and thus further
contributing to the growth of the smart cards market.
However, factors such as price pressures and technological challenges along
with the cost of migrating to smartcard compatible readers affect the
adoption of smartcards. Conversely, technological advancements, falling
prices, and the introduction of high-end SIMs offer potential opportunities
for the growth of the smart cards market.85
Market size
There is not so much good data on smart cards available. The total global
shipments of smart card ICs is estimated by IHS to grow from 10.4 billion
in 2015 to 12.7 billion in 2019 (see the graph below). According to IHS the
85 http://www.transparencymarketresearch.com/smart-card.html
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Company analysis 108
market for smart cards ICs very well reflects the general trends in smart
cards, which we have earlier mentioned.
Figure 55: Global smart card IC shipments forecast 2014-2019, Source: Redeye, IHS
The growth in China will be somewhat higher judging from the table from
Frost & Sullivan below:
Figure 56: China smart card market forecast, unit shipments 2013-2020, Source: Frost & Sullivan
Bearish views on FPS penetration in smart cards from some
We spoke to quite a few people at card companies, smart card
manufacturers and people in the mobile payment industry.
They were not entirely positive regarding the adoption of biometrics in
general, and fingerprint sensors in particular, for smart cards. It seems
there is still some scepticism in the market as seen in the quote below from
a sales manager at a card manufacturing company in Europe:
However, card companies claim there is no business case in general right
now to fit the cards with sensors to avoid fraud at the current prices but
there could be regional differences. There are e.g. very different levels of
fraud on different markets.
0
2
4
6
8
10
12
14
2014 2015 2016 2017 2018 2019
Global shipments of SmartCard ICs
CAGR 6%
Billion Units
CAGR2014-2019
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Company analysis 109
Value chain
In order to understand the drivers and trends promoting increased
penetration of biometrics in smart cards, the complex ecosystem around
smart cards must be looked at.
The complex payment industry can be summarized by the graph below:
Figure 57: The payment industry authorization transaction flow, Source: Voltage Security
The value chain differs from the smartphone segment, especially the part of
the value chain between the end customer and FPC.
Most modern cards are open loop, i.e. carries a major credit card company’s
name, such as Visa, MasterCard, American Express or Discover. The
opposite are closed loop cards, e.g. store credit cards. One or more
intermediaries are involved in each transaction. The topology varies wildly
due to the merchant size but closed loop cards may verify through open
loop.
The processors process the transactions. The banks who the merchant deals
with are called acquirers and eventually pay the merchant the money that is
charged, i.e. does the settlement. The card issuer is where the card comes
from and these are the banks that the consumers deal with. The card brand
does the authorization at the time of the purchase by contacts with the
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Company analysis 110
issuing bank where it presents card and charge details plus checks the
status of the account, whereafter a transaction is declined or allowed.
Merchants can be divided into different tiers depending on the security
requirements due to processing volume. The fees for the merchants are
typically a transaction charge plus a percentage on the transaction (e.g.
USD 1 + 1%). Credit cards are more expensive than signature debit and PIN
debit are the cheapest. Transactions fees totals USD billions each year,
although the real money though is made on interest and late fees.
The payment landscape, however, is far for static. According to Voltage
Security different layers such as networks or processors are sold or spun off
and partnerships are evolving (e.g. JCB+MasterCard and Discover+ JCB).
Threats are also rising, some examples being international fraud rings
growing. Chip and pin via EMV might help here but might be superseded by
end-to-end encryption, which would make data breaches almost
meaningless.
Customers & customer benefits
Smart cards is an important opportunity for FPC, as indicated below:
“I would like to give you an update on the next growth vehicle for FPC, the
introduction of smart cards with touch fingerprint sensors. We are
accelerating this development and we are now entering the phase at which
the first commercial launches are expected, as part of our partnerships
with both named partners such as Zwipe as well as yet unnamed partners.
Once more our technology brings us strong competitive advantages here.
The small power consumption of our sensors is a key reason why we are
well positioned here, but our sensor technology also allow us to bring
forward very slim sensors, fitting into the constraints of smart cards. Our
ambition is to establish the same leadership in this segment as the
leadership position we have established for touch fingerprint sensors in
smartphones.”
Q3 2015 conference call ,Jörgen Lantto
The customers in the smart card market will be the smart card
manufacturers. In the end though, the customer can be seen as the card
issuers and the cardholder. However, adding fingerprint sensors to smart
cards benefits different stakeholders in the payment ecosystem.
FPC’s most known partnership is with payment card and smart card
designer Zwipe of Norway, on behalf of MasterCard. Zwipe had 10 channel
partners in summer 2015. In February 2016, in a press release, it was
announced that FPC and Zwipe will form a deeper strategic partnership
with joint marketing activities.
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Company analysis 111
Zwipe was founded in 2009 as a start-up and has raised in total USD 11
million. Last in October 2015 it raised USD 5 million from Chinese Photon
Future, a Kuang Chi Science subsidiary (One might wonder why no
Scandinavian investors were interested). Other owners of Zwipe include
Government of Norway, Innovation Norway, Oslo Innovation Center and
Research Council of Norway. The first round, in 2013, amounted to USD 3.5
million. With this capitalization, its 2014 year revenue of barely NOK 3
million Zwipe has a major task in defending its (self-proclaimed) leading
position.
We believe the characteristics of a good FPS solution for smart cards is
similar to an FPS for smartphones, although with some small nuances. An
FPS on the card, i.e. match on card, is safer than an FPS integrated in the
payment terminal as the latter requires a fingerprint database that might be
hacked. Match on card means that an algorithm turns the FPS data to a
unique code.
Regarding form factor the size should not be the same issue as it is for
smartphones since the design aspect is less important. As opposed to
smartphones there is no battery and CPU to take advantage of in smart
cards, meaning that low power consumption, FPC’s specialty, is even more
important in smart cards
A high sensors power consumption when reading is a major issue since it
shortens the lifetime of the card, meaning high costs. Zwipe’s FPC-based
card together with Zwipe’s algorithm works without a battery by using
power from the payment terminal via NFC. Thus, FPC can work with
existing terminal solutions and, in general, as long as there is NFC no
upgrades are needed. According to Zwipe it is the world’s first fingerprint-
activated contactless payment card so we have yet to see how the
competitors can respond to this move.
However, FPC is not entirely dependent on Zwipe; it also has partnerships
with e.g. US firm Smartmetric and Card Lab of Denmark. In addition, in
2013 FPC provided UINT & Mereal with sensors for French Casino
Operator Partouche. Other partnerships within smart cards are on the way
according to FPC CEO. FPC has earlier commented that it expects
commercial volumes from its partnerships in the million in 2016 following
the earlier pilot projects and we have so far not heard anything on delays.
It was recently announced in a press release that Smartmetric now has a
capacity of 1 million smart cards per month, a lot less however than its
ambition in 2014 of 50 million cards during 12-18 months. Smartmetric
also writes that it is talking to card issuing banks in US, Europe and is about
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Company analysis 112
to present it products for banks in Southeast Asia. As mentioned, we are
almost 100 percent certain that Smartmetric is using FPC’s swipe sensor.
Competitive landscape and competitors
FPC is active in building a strong ecosystem in the smart card market.
There are especially two Nordic companies that would like to put an end to
that: Next and IDEX.
Next
Norwegian firm Next and its active thermal technology has already been
mentioned in the technology section. Next has explicitly stated that it is
targeting this market. As late as in the end of 2015 Next announced its shift
to focus on smart cards together with mentioning that it can meet all the
ISO standards of smart cards. Even though Next suffers less from its large
sized sensors in the smart cards segments there are still issues to address,
one of them being controlling for differing outdoor temperatures.
Compared to for instance FPC/Zwipe that are using NFC Next also has to
explain how the issue of power supply should be solved.
We are not sure if Next will make it in smart cards but we find it likely that
the active thermal technology could be used in other ways. Next for instance
has Dell as a customer, which is its first tier 1 customer. It is also well
known for its statement that sensors have to be big in order to be secure,
something we do not agree with. Half of Next’s work force of 55 people are
located in Seattle.
IDEX
The other Norwegian company, IDEX, is also focusing on smart cards. In
June 2015 it was announced that IDEX has an undisclosed global payments
company as a partner, who will incorporate bendable fingerprint sensors
into smart cards in a worldwide program. Italian Card Tech, IDEX’s
partner, has been ready for mass production since December 2014,
featuring IDEX swipe sensor.
IDEX, still has no sensor ready but should perhaps not totally be ignored as
it has recruited key staff from prominent firms Authentec and Synaptics.
IDEX technology is a result from partnerships with SINTEF and
STMicroelectronics. In 2001 IDEX announced a license deal with
STMicroelectronics and in 2007 a press release stated that IDEX had a
license partnership with STMicroelectronics an UPEK. This deal was passed
on to Authentec and in 2013 Apple confirmed the UPEK deal
IDEX technology with islands of silicon on a flex film uses a whole lot of less
silicon, implying a 70-80 percent lower cost of materials for the same ASIC
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Company analysis 113
size, everything else equal. On the other hand IDEX advanced technology
makes reading harder and we believe especially under glass could be
troublesome. However, IDEX has an in glass partnership with a fortune
500 company. IDEX claim to fame is its flexibility, which in its own words
makes it ideal for smartcards.
Possible other competition and concluding remarks
FPC has its partnerships but one should also note that FPC and Zwipe are
not the only ones vying for Mastercard’s attention. In October 2015 it was
announced that Daon works with MasterCard as one of the authentication
technologies. Daon provides a platform for various biometrics technologies
including fingerprints.
Zwipe also has its own competition to manage, e.g. against the large
biometrics pioneer Morphotrak/Safran and its subsidiary within smart
cards, Morpho.
Zwipe most likely know its fellow Norwegian firms from way before so one
could ask why Wzipe and MasterCard are working with FPC if Next or
IDEX’s technology is a real threat. However, the opposite is of course also
true since Next and IDEX has its own partnerships. In summary, the
market is still contemplating which solutions that will win in smart cards
but we believe FPC’s positioning is strong.
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Automotive – Baby you can drive my car
If your car is indeed a big computer with some wheels, hoses, a motor, seats
and other things attached to it – how do you then communicate with it and
steer it?
Market drivers and trends – a personal touch
As vehicles become increasingly connected, it has large implications on the
business model for auto-makers as well as other companies in the eco-
system. Previously the auto-makers owned their product in the sense that
they controlled what went into it. Today, auto-makers worry that they will
face a similar fate as that of many players in the telecom industry. We have
seen how MNO’s like TeliaSonera (Telia) introduced their own portals like
Passagen to control and capitalize on the online experience of their
subscribers. Today MNO’s have increasingly become providers of a giant
information pipeline from which they have an increasingly hard time to
capitalize as companies like Google, Spotify and Amazon own and/or
distribute the content. Auto-makers risk facing a similar situation where the
key differentiating factors for customers are no longer the technical
specifications of the car but the software features provided.
Long gone are the days when you could have any colour of your car you
want, as long as it is black. Nowadays auto-makers wants to customize the
cars for the customers. Customization by means of hardware is very
expensive though, as it adds immense complexity in the supply chain. The
prospect of being able to customize and personalize the owner’s experience
by having the driver log in with his or her fingerprint becomes very
compelling for auto-makers.
Needless to say, increased security is another important user case in the
automotive segment. Other user cases emerge when the automotive
ecosystem in a broader sense is considered, e.g.:
Insurance companies – insurance companies base their premiums
in part on who is driving the car and in addition, theft insurance
make up a considerable share of the total insurance premium for a
car insurance and hence insurance companies will avoid costs
should security increase
On-demand content providers like navigation
Health monitoring of driver
Integrating financial services software, a peer-to-peer payment
technology, into the connected car.
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Company analysis 115
Furthermore, additional features can be built into the sensors, for
example a sensor that also functions as a control button for
multiple things in the car.
"We are very excited about the successful outcome of our integration
efforts and the myriad of opportunities this new capability creates for
OEMs, drivers, and financial institutions," said Vasiliy Suvorov, VP of
Technology Strategy at Luxoft. "From making a smart payment at a
parking garage, a toll booth or a carwash through to performing a money
transfer, the driver is now able to execute all of these on the go, in a safe
and intuitive manner through the built-in Human Machine Interface.
Paymit platform capability, expressed by the means of a context-aware
user interface is functional within both, the autonomous and manual
driving modes."
Luxoft has used this innovative payment technology, originally built for
the financial services segment, and brought it into the autonomous vehicle
enabling a monetization platform for IoT use cases. The underlying peer-
to-peer payment solution, which has been seamlessly integrated into the
vehicle's infotainment system allows drivers to make purchases and
perform routine financial transactions, in real time, both inside and
outside the vehicle. This collaboration is at the forefront of such innovative
change and is demonstrating the convergence of adjacent vertical
technologies. This shows just how digitization is playing an increasing role
in the automotive and the financial services industries.”
Market size and growth – more than cars
Market still in its infancy and different players have very different
projections.
Automotive should not only be seen as passenger cars but also includes
heavy trucks, buses and more importantly – motorcycles. Furthermore,
even the cheapest cars (for example the TATA Nano retailing at about
$2,000) cost considerably more than even the most expensive mobile
phones. The same argument holds true for motorcycles and light
motorcycles where low end models start retailing around$1,000. Hence, the
cost of a fingerprint sensor will not be excessive compared to the total bill of
materials (BoM) for the vehicle. Therefore the total addressable market in
the automotive segment is constituted by all cars, motorcycles, heavy trucks
and buses.
One piece at a time or new vehicles only?
The penetration of fingerprint sensors in the automotive segment currently
is close to zero. Product lifecycles are considerably longer in automotive
than in consumer electronic. This in effect means that reaching a high
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fingerprint sensor penetration will take longer in the automotive segment
than in the smartphone segment assuming that fingerprint modules will
only be fitted in new vehicles rather than retrofitted.
One for the wheel and one for each key brings the total to three
Another important aspect to consider when looking at the TAM for the
automotive segment is the number of sensors that will be used for each
vehicle. For motorcycles one sensor will likely suffice to provide added
security against theft, for cars however, an estimated three fingerprint
sensor per car will typically be needed. Two for the keys and one on for
example the steering wheel. The same argument applies to heavy trucks and
buses where at least three fingerprint sensors will be needed for each
vehicle.
The ASP for new verticals like automotive is projected to undergo a similar
development as the ASP for smartphones.
Customers
Tier-1 or Tier-2 suppliers will integrate the sensors into the sub-system. The
likes of IAC, Magna etc. Given that FPC recently formed a subsidiary in
South Korea we find it likely that FPC are pursuing business opportunities
Hyundai (either that or a Samsung design win). Please note that these are
non-confirmed speculation on our side.
Competitive landscape and competitors
The concept of connected vehicles is quickly evolving from the concept cars
to the cars in serial production. There are already a few high-end cars with
integrated fingerprint sensors.
Synaptics talked a lot about the possibilities in automotive in its latest
capital markets day. Qualcomm are also focusing on this area.
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Other verticals – PC, IoT, wearables
Lantto has previously in a conference call described the great potential
within other verticals in an enlightening way:
“…Beyond this, there are a new emerging opportunities that we see with
other verticals. And that way, we can start to look into now more deeply.
We have automotive, and then we have the government and medical
applications, I think internet of things is an emerging interesting
opportunity where there are millions or billions of devices connected to the
internet with very limited input/output capabilities, where the fingerprint
sensor can be a very easy and convenient way of operating those types of
devices for security and personalization, and on security systems, et
cetera.”
Jörgen Lantto, Q4 conference call
First off, we especially would like to mention wearables - a collective term
for smart devices that you can wear, such as smart watches, clothes with
embedded sensors and connectivity, fitness bands, smart glasses. Ericsson
see the global market for wearables grow 800 percent from an estimated $2
billion in 2015 to $18 billion in 2018.
There are not much data on future penetration within other verticals. In our
valuation we use Lantto’s vision of billion units in a bull case. We see
potential in many more or less creative usage areas such as PCs, locks and
building security, stamp/time clocks, safes, boats, firearms, medical
applications, white goods (households and kitchen applications), gardening
tools, cameras and game consoles. Let us not forget the 50-100 billion IoT
devices that will be shipped in 2020, according to Ericsson and Huawei. In
bear case we instead assume a penetration closer to none (see the valuation
section for more details).
Will any of these potential segments have large volume potential? We
believe so. FPC actually already has a hold on one vertical outside of smart
devices in its 80 percent market share in the Chinese banking and finance
sector. Only the units shipped in this small niche vertical accounts for
several million.
As the general image of the prospects of other verticals is rather blurred we
expect to come back with more details in further analysis updates.
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Company analysis 118
Major risks
The major risks for FPC
There are certainly players who would benefit from opening up the
ecosystem for more participants by commoditizing the design and
manufacturing of biometric semiconductors, including the active capacitive
sensors. One such player could be Alphabet, whose business model would
benefit from low-cost, secure biometric solutions to be a commodity, as this
would open up for increased adoption of biometrics in many verticals. This
in turn would lead to an increase in connected devices – perfect for
Alphabet who would love to see even greater amounts of data produced and
ready to be indexed and packaged by Alphabet’s Google.
In the longer term, should the predictions of some people who envisage an
open innovation system hold true. This would change the future of
technology business models as we know them today. If innovators around
the world combine their knowledge and efforts to come up with open source
solutions that are readily shared over the internet. If they go into the
domains of FPC this could disrupt the business model.
We have already seen some people make their patents available to everyone
with such crazy motives as making the world a better place to live. Should
Mr. Musk hold a bunch of patents in fingerprint sensing technology
companies like FPC would shiver – maybe there is another Elon Musk
sitting around ready to share his patents for free?
FPC tries to avoid commoditization by owning a larger part of the value
chain.
In addition, there have been examples of vertically integrated
semiconductor manufacturers licensing in IP to produce their own
fingerprint sensors. There could therefore be a risk for disruptions in the
value chain.
What competition will the future bring?
FPC’s competitive landscape has been changing rapidly, especially the last
year as new entrants are entranced by the large returns in the market. Here
are a few examples of companies that are developing or are considering
developing fingerprint sensors: M2sys, Egis Tech, CrucialTec, MorphoTrak,
Elan, FocalTech, Pixir and Silead. There are yet no signs of significant
traction for any of these companies, and by consequence we find it hard to
make a meaningful evaluation of these companies at present, although it
does not mean that they should be overlooked going forward. The rational
“The biggest risk is if a
competitor comes out and
becomes much better than
us.”/Jörgen Lantto, FPC
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Company analysis 119
FPC investor ought to follow what happens with these possible new
entrants. In addition, we believe it would be wise to calculate with a black
swan in a pessimistic scenario given how fast the market is moving and how
non-predictable it appears. Remember for instance our market section
where Synaptics, a long-term agent and pioneer in the industry, estimates
the total volumes less than half of FPC’s assumptions, the difference
between the two being more than 1 billion, as early as 2018.
One possible source of new competition for FPC could be players which
previously have focused more on other parts than the mass market FPS, for
example Morpho (France), 3M Cogent, Bio-Key International, Crossmatch
(US), Ekey Biometric Systems (Slovenia), BioEnable Technologies (India)
and Dermalog Identification Systems (Germany). Besides vertical
integration (Crucialtec) the recent trend seems to be that companies in
adjacent applications, like touch solutions, want to pile into the FPS market.
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Company analysis 120
Financial estimates
In this section we present our financial estimates. The estimates presented
are those used for our base case scenario valuation.
Sales assumptions
We expect 2016 sales in the higher range of FPC’s guidance and a solid
growth for 2017-2018 as can be seen in the summarized assumptions in
Figure 58 below. Our calculations for 2016 include increased market share
from a substantial increase in sensor penetration among FPC’s existing
customers. We will in the following explain these and our other
assumptions.
Figure 58: Summarized sales estimates 2016-2018
For 2017 we expect a significantly lower ASP of $2.6, in line with the
expected market ASP trend, due to smaller sensors, which however will be
offset from a smart cards breakthrough (as indicated in the graph on the
next page) and an increased sensor penetration in smartphones that will
continue to drive volume growth. All in all this means that FPC can grow
total sales with a solid 20 percent in 2017 despite losing market share.
Virtually the same trend applies for 2018 where the ASP continues to
decline to $2.5. Still, the solid volume growth of 24 percent will lead to a
comfortable growth rate of 17 percent.
As for the ASP there are some volume discounts but not entirely different
prices towards different customers in the same segment. We estimate
today’s average ASP per sensor at around $3.0. The ASP is highly
dependent on the size, and thus the average ASP varies with the product
mix. The estimated $3.0 per sensor does not include packaging. If
packaging is included an additional $0.5-0.7 is added to the price.
Sales per segment
As indicated in Figure 59, in our base case we assume that automotive and
other verticals start to contribute substantially from 2017, which will
mitigate a slowdown in the smartphones-related growth. In 2017 we believe
that other verticals will account for 5 percent of sales and then rise to 15
percent of sales in 2018. The increase in percentage of sales from other
segments will be higher than the share of units from other segments, as we
expect ASP to initially be higher for other segments to then gradually
Base case: Short term sales assumptions 2016-2018E(SEKm) 2016E 2017E 2018E
FPC Total sales 7737 9252 10822
Sales growth (%) 167% 20% 17%
Volume growth (excl. software) 184% 32% 24%
Average ASP (USD) 2.9 2.6 2.5
Average USD 8.2 8.2 8.2
Growth of 17 and 20
percent expected for 2017
and 2018
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Company analysis 121
experience the same development seen in the mobile device segment, where
mass adoption takes place when there are cost effective solutions.
The new verticals are greatly important for the long term prospects of FPC.
For one thing these other segments will mitigate the pressure on the ASP.
Our assumption is that the starting point for the ASP in the new verticals
will be somewhat higher than for smartphones. One reason is that
compared to smartphones, FPC will to an increased extent add its own
modules and customization in the new applications rather than just
providing components. Another important reason is that ASP is also
dependent on scale, we do not believe FPC will sacrifice its margins to open
the new segments but rather keep gross margins in the communicated 40-
45 percent range.
The ASP will vary between segments depending on volumes and whether
complete modules, sensors and packaging or sensors only are sold.
Altogether, we assume an ASP range for the other verticals of USD 4-10.
Figure 59: Sales estimates per segment, SEKm, 2015-2021
Mobile devices
The foundations of the smart devices segment growth with increased FPS
penetration rate offsetting a shrinking market share has already been
described in the general sales assumptions. We expect the blended FPS
penetration to move from 33 to 68 percent between years 2016-2018 (see
Figure 60). FPC’s 410 units indicate a market share of 33 percent in 2018.
0
2000
4000
6000
8000
10000
12000
14000
16000
2015 2016 2017 2018 2019 2020
Mobiledevices
Smart cards
Automotive
Otherverticals
Non-sensorrevenue
SEKm
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Company analysis 122
Figure 60: Sales assumptions for mobile devices, 2016-2018
Smart cards
The smart card segment holds great potential for FPC, although it does not
necessarily have to be a card. We see great potential for using wearables for
e.g. payments as well. To some extent these segments are overlapping. In
our smart cards estimates (see Figure 61), we assume that shipments start
in the second half of 2016 and that a significant revenue contribution start
in 2017. The assumptions regarding both ASP and volumes are associated
with a large degree of uncertainty at the moment, as we still do not know if
and which partner will have the most success. As mentioned, Zwipe will use
a touch sensor and the undisclosed partner Smartmetric will use an
undisclosed swipe sensor. Furthermore, volumes are still only guesstimates
and there are additional undisclosed partners in the ecosystem.
Figure 61: Sales assumptions for the smart card segment, 2016-2018
Automotive
Product- as well as sales cycles are longer in automotive and therefore we
expect a slower ramp-up here. Before condemning the low automotive sales
of about SEK 200 million for 2018 in Figure 62 below, we believe it is
important to note that e.g. for every car in the world there is more than one
motorcycle, meaning that the size of this market will still be substantial for
FPC after 2018 when FPS penetration soars. Furthermore, for automotive
we expect a significantly higher ASP. Furthermore, as previously
mentioned, each car will likely have several FPS. We expect at least one for
the steering wheel and one for each of the minimum two keys.
Sales assumptions: Smartphones, tablets & laptops(SEKm) 2016E 2017E 2018E
Total sales 7387.1 7797.1 7017.2
Growth (%) 168% 6% -10%
FPS penetration blended (%) 33% 54% 68%
Total volumes FPC (million) 319.0 391.0 410.0
FPC volume growth 184% 23% 5%
ASP (USD) 2.8 2.4 2.1
ASP growth (%) -9% -13% -14%
Average USD 8.2 8.2 8.2
Sales assumptions: Smart cards(SEKm) 2016E 2017E 2018E
Total sales 117.8 965.0 2200.5
Growth (%) 719% 128%
Total volumes FPC (million) 3.0 30.0 90.0
FPC volume growth 900% 200%
ASP (USD) 4.8 3.9 3.0
ASP growth (%) -18% -24%
Sales assumptions: Automotive(SEKm) 2016E 2017E 2018E
Total sales 0.0 39.1 238.4
Growth (%) 509%
Total volumes FPC (million) 0.0 0.6 3.9
Volume growth 550%
ASP USD 8.0 8.0 7.5
ASP growth 0% 0% -6%
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Company analysis 123
Figure 62: Sales assumptions for automotive 2016-2018
Other verticals
As for other verticals we estimate that FPC’s former bread and butter
business within the mature market for complete FPS modules for the
Chinese banking sector will continue to contribute in the region of SEK 80
million per year. In our other verticals estimates (see We expect FPC to
start receiving recurring software revenue
Figure 63), we include wearables, entrance control, PCs, time and
attendance, medical devices, safes, firearms and other connected devices
popularly referred to as IoT. Whereas the market remain to take-off, we
expect other verticals to be a key driver for continued sales growth in the
longer term.
Figure 63: Sales assumptions for other verticals, 2016-2018
Non-sensor revenue (incl. software)
We expect FPC to leverage its position into recurring software revenue, one
example being additional software-based security (for further details see the
other verticals section). In Figure 64 below we have estimated the non-
sensor revenue to SEK 143 million, equal to average revenue of USD 0.46
per unit in an installed base of in total 38 million. This would imply a 5
percent penetration on a conservatively estimated installed base.
Figure 64: Non-sensor revenue assumptions, 2016-2018
FPC’s guidance on sales and operating margin
FPC communicated its 2016 guidance December 9, 2015 and in connection
to its Q4 report February 4, 2016 revised its guidance expecting revenue
from SEK billion 7 to SEK billion 8.5 and an EBIT margin over 37 percent.
FPC previously communicated quarterly guidance, but in 2015
communicated it will only provide full year guidance from 2016 going
forward.
The SEK 1.5 billion span in sales guidance is not attributable to one single
factor, but is a reflection of the rapidly growing market where exact
Sales assumptions: Other verticals(SEKm) 2016E 2017E 2018E
Total sales 232.6 394.5 1222.5
growth (%) 60% 70% 210%
Volumes FPC (mil) 3.2 6.5 25.0
Volume growth 103% 285%
ASP USD 8.9 7.4 6.0
ASP growth (%) -16% -19%
Sales assumptions: Non-sensor revenue (incl. Software)(SEKm) 2016E 2017E 2018E
Total sales 0.0 56.2 143.4
growth (%) 155%
We expect FPC to start
receiving recurring
software revenue
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Company analysis 124
predictions are bound to prove wrong. We believe the following are the
most important swing factors:
Sensor size – uncertainty regarding the product mix for certain
customers especially towards the end of the year
Launch dates – Although FPC has rather good visibility of what
devices will incorporate its sensors 6-9 months in advance, the
exact launch dates are not set and thus sales can be hard to pin to a
specific quarter
Device sales where FPC’s sensors are included – even though FPC
has many customers which limits the dependency on specific
customers and devices, lower or higher sales volumes than expected
in for example the Chinese market would have a direct impact of
FPC’s sales
Dual sourcing strategies – certain customers might chose to use
dual sourcing as discussed in the market section, this makes
volumes harder to predict
Market share – although FPC has good visibility 6-9 months ahead,
the success of competitors in capturing market shares is certainly a
factor for uncertainty, especially in the last quarter
Samsung – we believe that even if FPC would secure Samsung as a
customer, volumes would not be significant until 2017 as Samsung
would likely start off with giving one model with smaller volumes to
FPC as a start
Ramping up of new segments – volumes for segments that are
ramping up are hard to predict as we have seen in the mobile device
segment, this is also true for new verticals such as smart cards
ASP – the ASP will also play a role, especially towards the end of
the year
Regarding the sensor size as an important factor. It should be noted that
FPC’s gross margin is higher for smaller sensors. What this essentially
means is that the gross profit will not be affected to the same extent as the
sales figures if the source of uncertainty is the sensor size.
We interpret FPC’s raised guidance in the Q4 report as a sign that
customers overall have chosen larger sensors than FPC’s initial expectations
and that competition is a bit milder than in the worst-case scenario.
In its market share projection of 50-70 percent of TAM (not including
Apple’s sensors), FPC are calculating with some loss of customers as the
market share for other players (besides Apple and Synaptics) likely
increases in 2016 as more players are entering the field as discussed in the
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Company analysis 125
market section.
Earnings estimates
FPC has communicated that it expects an EBIT margin for 2016 above the
37 percent it achieved in H2 2015. The mobile device market with its high
volumes is highly scalable and we believe FPC will improve its margins
further and expect EBIT margin in 2016 to come in at 40 percent.
Other verticals are not as scalable as the mobile device segment, perhaps
with the exception of smart cards, and as other verticals start contributing
more whilst competition increases, we believe the EBIT margins will come
down a bit. For the next three years we still expect FPC to be able to sustain
high margins, although slightly lower than 2016. For 2018 we expect the
EBIT margin to be 36 percent.
Figure 65: Sales and earnings assumptions, 2016-2018
Gross margins
FPC expects further improved gross margins due partly to the launch of
new, significantly smaller sensors, especially the side-mounted FPC1145
and the FPC1035, which will succeed the FPC1025 backside sensor. The cost
per sensor is to a large extent dependent on the size of the sensor. Smaller
sensors require less silicon, i.e. have a lower material cost (and lower ASP).
FPC has stated that the relation between sensor size and the cost per sensor
is close to 1:1. Thus, a 70 percent smaller sensor, like the FPC1140 in
relation FPC1020, should costs 70 percent less to manufacture, given that
the same fab is used etc.
FPC has previously communicated the size and gross margin for the
FPC1020 and we have compared this sensor to other, smaller sensors below
to show the relation between smaller sensors and higher gross margins to
illustrate the effect of the sensor size on the gross margins.
Base case: Short term sales & earnings assumptions 2016-2018E(SEKm) 2016E 2017E 2018E
FPC Total sales 7737 9252 10822
Sales growth (%) 167% 20% 17%
FPC earnings
EBIT margin 40% 38% 36%
EBIT 3057 3474 3887
Gross margin 47% 45% 44%
OPEX -612 -731 -850
Profit before tax 3058 3479 3893
Net earnings 2386 2714 3036
EPS 36.7 41.7 46.7
EBIT of 40 percent in
2016
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Company analysis 126
It is important to notice that the calculations only represents our
calculations and not the actual sensor gross margins – those are not
disclosed by FPC. Nonetheless, the size and COGS relation implies that FPC
will expand its gross margin anything else equal, which we find likely at
least in the short term. As a margin of safety, considering for example price
pressure, we do not fully discount this effect in our gross margin
assumptions.
FPC has been driving the development towards smaller sensors and states
that it shares some of the COGS-saving from smaller sensors with its
customers thus allowing for increased sensor penetration in cheaper phones
as well as staying competitive on cost. Our interpretation is that FPC retains
at least the same gross profit per sensor for the smaller sensors as for the
larger ones. FPC has even indicated that smaller sensors could potentially
have an even higher gross profit per sensor than larger sensors if FPC can
manage to further decrease the sensor size. By doing this FPC can share the
savings on the COGS side with its customers. For instance, if FPC decides to
set the gross profit at USD 1.5 for the FPC1145 (the same as FPC1020) it
would indicate an ASP of USD 2.6. This lower ASP would benefit the
customers while at the same time the relatively higher gross profit
strengthens FPC’s margins. A calculation with the same COGS in absolute
figures as FPC1020 for the smaller sensors would imply gross margins of
52, 59, 59 and 63 percent for the sensors FPC1150, FPC 1140, FPC1145 and
FPC1022.
The COGS is not only dependent on the sensor size. Different fabs and
production setups (like the size of raw wafers used) and volume discounts
could also affect the COGS. Furthermore, a small part of the software is
sourced from Precise Biometrics (at the moment), and we believe the cost is
not a percentage but rather a fixed amount per sensor. The R&D cost
associated with the sensors partially goes into the COGS of the sensor. Per
each sensor the R&D cost is very small for large volume products, but it will
be higher for verticals where a lot of customization is required.
The prices for the sensors are renegotiated once or twice a year with the
foundries. The prices should be affected by raw material prices, supply and
demand and what terms and conditions are agreed with the foundries – if
FPC can commit to certain volumes thus increasing the visibility for the
foundries and allowing them to run their fabs at high capacity utilization
rates, this should give FPC leverage in the price negotiations. The margins
for packaging are according to FPC hard to break out as they are tied to
customization.
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Operating expenses & depreciation
The major cost driver on the OPEX side is the personnel costs for the skilled
work force in R&D and sales. We are used to see cost associated with hiring
skilled personnel, typically head hunters charge 30-50 percent of the yearly
salary, but according to FPC recruiting is handled without external
consultants. This means that OPEX grows more or less in line with the
increase in staff.
It is worth to note that a relatively large share of FPCs staff are consultants
rather than employed by the company. Consultants are good as it is allows
scaling up and down and also getting people on board faster, however
consultants tend to cost a bit more than internal resources. We believe FPC
actively works to increase the ratio of employees to consultants, which
should allow staff costs to grow at a slightly slower pace compared to the
increase in staff, even though salaries increase.
FPC states that its scale advantages are transferable across its segments.
That said, new segments to a certain extent require new solutions as well as
dedicated resources for sales. FPC will also invest significant amounts in
R&D to continue to be at the forefront of development in the areas it
currently operates as well as in related technological areas and applications.
The above assumptions leads us to expect OPEX at an average of 6-7
percent of sales for 2016-2018.
For our OPEX assumptions we have looked at the ramping between Q3-
Q4’15. OPEX was up 25 percent from Q3, partially from seasonality effects
of vacations in Q3 but also from currency effects $1 million. Most important
perhaps was the one-time effects from bonuses etcetera, which of course is
due to the fact that the growth in 2015 went through the roof on every
parameter. We therefore estimate that OPEX will grow 21 percent QoQ
from Q4 2015 to Q1 2016 and then at a slightly higher rate of around 8-10
percent QoQ for Q2-Q4 2016.
We believe FPC will capitalize more R&D in 2016 than in 2015 due to new
projects for verticals where lead times are longer, as well as increased R&D
towards disruptive technologies. FPC has guided for increased
capitalization of R&D, which further supports automotive and cards to first
make significant impact in 2017. As a percentage of sales we believe that the
capitalizations will be 0.3 percent higher than in 2015.
Net financials and currency effects
As mentioned on the Q4 conference call FPC’s cash is in a bank account in
Sweden, rather than trapped in China. Given the current environment,
where several of Sweden’s major banks have announced they will charge
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Company analysis 128
large corporates negative interest rates on their deposits, we assume an
interest rate of close to zero percent and net financials of SEK 1 million for
2016.
We have used an average dollar exchange rate of SEK/USD 8.2 for our sales
estimates. FPC has no plans of hedging and thus we have made a sensitivity
analysis for potential SEK depreciation/appreciation. Assuming a 10
percent lower USD/SEK instead of 8.2 would lower total EBIT by 12
percent, everything else equal. Consequently, a 10 percent higher SEK/USD
exchange rate of 9.0 would increase EBIT by 12 percent. Calculations are
shown in Figure 66.
Figure 66: Sensitivity analysis, SEK/USD
In addition, if the euro would move 10 percent, this would mean about a
SEK 11 million impact on our OPEX estimates for 2016 using the same
proportion of OPEX as in 2015 (19 percent of costs in euro and DKK (as the
DKK is pegged to the euro), i.e. a close to negligible effect.
Capital allocation
As for capital allocation it has been suggested for the AGM to give
Management mandate for share buy-backs. This could lower the volatility of
the FPC share and work as a catalyst in attracting institutions. (For further
discussion on catalysts see the valuation section).
FPC has been clear that it intends to use its growing cash pool to fund
continued expansion rather than paying dividends. ”The company’s cash
flow in coming years will be used to finance continued expansion. This
means that the Board of FPC does not intend to propose a dividend for the
Sensitivity analysis: SEK/USD exchange rates
(SEKm) 2016E 2017E 2018E
Average USD in estimates 8.2 8.2 8.2
Total sales 7737 9252 10822
EBIT 3057 3474 3887
EBIT margin 40% 38% 36%
USD in sensitivity analysis 7.4 7.3 7.3
Total Sales 6964 8327 9740
EBIT 2692 3055 3415
EBIT margin 39% 37% 35%
Difference (%)
Total Sales -10% -10% -10%
EBIT -12% -12% -12%
EBIT margin (ppt) -0.9% -0.9% -0.9%
A 10 percent USD change
affects EBIT by 12 percent
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Company analysis 129
coming year. The Board of Directors will examine the established dividend
policy annually.”86
The proposal not to pay dividend seems like a wise one given that FPC can
use its capital to maintain and strengthen its position in the market. We
believe FPC will use its cash to increase working capital in order to create
barriers to entry for new competitors.
FPC has communicated that acquisitions is an important element of its
growth strategy, and that payment could be a combination of cash and FPC
shares. This, combined with the expressed intent of major owner Carlström
to grow FPC larger than Swedish telecom giant Ericsson, makes us think it
is wise to keep the cash within the company. Cash will be needed for
acquisitions of technology and companies in order to drive growth.
Working capital assumptions
Going forward, we expect an increase in working capital both in absolute
terms and as a percentage of sales. We expect working capital in 2016 to
increase by close to 8 percentage points to just above SEK 750 million or 10
percent of sales.
The expected increase in working capital is attributable to higher inventory
levels and a decrease in days payable outstanding.
Higher inventory levels
Normally the module houses holds the inventory, we do however
believe FPC will hold some inventory but this is speculative. In
practice this could be done by allowing the module houses more
favourable payment terms – much like a managed inventory
solution – this would make FPC a more attractive partner for the
module houses facing price pressures from the OEMs
With a broadened product portfolio complexity is increased leading
to higher inventory as the number of items to keep in stock
increases
We believe FPC will build inventory to allow for larger batches to be
produced at the foundries to keep utilization high, especially in the
fabs running 300 inch wafers
Decrease in days payable outstanding
We believe FPC will use payment terms as leverage in negotiations
for capacity and prices at the foundries 86 www.fingerprints.com
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Company analysis 130
By offering more favourable payment terms to foundries FPC could
achieve better prices as well as increase its attractiveness as a
partner
Quarterly earnings estimates
The quarterly earnings estimates are based on, among other things, the
following communication from FPC:
Sales to grow sequentially QoQ in 2016
Part of the SEK 1.7 billion backlog going into Q4 2015 to spill over
to Q1 2016
Q1 2016 to be stronger than Q4 2015 due to the backlog as well as
numerous launches in Q4 2015
Furthermore, we have made the following assumptions:
Seasonality in smartphone sales where Q4 is the strongest quarter,
we thus expect a relatively strong sales increase from Q3 to Q4
Commercial volumes in new verticals to show in H2, most likely not
until Q4
We would also like the reader to note that FPC likely will suffer a bit from
the lower USD although we lack information on how sales were distributed
during Q1. In Q1 the USD was on average 8.2 and as mentioned we believe
this will be the level going forward, compared to FPC’s own prognosis of
USD 8.5.
Figure 67: Quarterly earnings and earnings estimates, 2015-2016
FPC: Quarterly earnings estimates(SEKm) Q1'15 Q2'15 Q3'15 Q4'15 2015 Q1'16E Q2'16E Q3'16E Q4'16E 2016E
FPC Total sales 140 445 964 1352 2901 1594 1758 2037 2349 7737
Sales growth (%) 660% 912% 1356% 1187% 1142% 1039% 295% 111% 74% 167%
Gross margin (%) 27% 36% 45% 46% 43% 47% 48% 48% 47% 47%
OPEX -56 -94 -85 -111 -345 -134 -147 -159 -172 -612
EBIT -19 65 346 518 910 617 689 812 940 3057
EBIT (%) -13% 15% 36% 38% 31% 39% 39% 40% 40% 40%
Profit after tax -19 65 347 404 798 481 537 633 733 2386
EPS -0.30 1.03 5.49 6.39 12.62 7.5 8.3 9.8 11.3 36.7
EPS growth n/a n/a n/a n/a n/a n/a 708% 79% 76% 191%
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Company analysis 131
Valuation
In our valuation of FPC we have used a discounted cash flow valuation
(DCF) for three different scenarios:
Base case – the scenario we believe is the most likely
Bear case – a reasonably pessimistic scenario
Bull case – a reasonably optimistic scenario
The purpose behind the bull and bear range is to illustrate the uncertainty
regarding the future of FPC in the case of e.g. disruption on the downside as
well as the upside if FPC continues to be able to reinvent itself. We use peer
valuation as a complement to our DCF, comparing FPC’s current and
expected key ratios to peers.
DCF valuation
In this section we present our DCF valuation. First a few words on our
methodology and assumptions.
We do not calculate a WACC based on the CAPM formula, instead we use
our Redeye Rating to arrive at a required rate of return that reflects the
qualities of the company and the risks it is facing. Our rating is based on the
following factors:
Management - execution, capital allocation, communication,
experience, leadership and integrity
Ownership - ownership structure, owner commitment, institutional
ownership, abuse of power, reputation, and financial sustainability
Profit outlook - business model, sales potential, market growth,
market position, and competitiveness.
Profitability - Return on total assets, return on equity (ROE), net
profit margin, free cash flow, and EBIT.
Financial strength - interest-coverage ratio, debt-to-equity ratio,
quick ratio, current ratio, sales turnover, capital needs, cyclicality, and
forthcoming binary events.
Based on the above factors, we use a required rate of return of 11
percent. A discount rate of 11 percent might appear high for a large cap
company, however we believe it is mandated to add additional safety
margin given the uncertainty in the fast changing high-tech market.
Furthermore, we are also conservative in the sense that we want companies
to show a prolonged period of performance before we give the highest
We use a required rate of
return of 11 percent, based
on our Redeye Rating
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Company analysis 132
rating on the parameters. The same required rate of return is used in all
our scenarios but we have included a sensitivity analysis on changes in the
required rate of return together with a higher or lower long-term EBIT
margin (see further below).
We use a terminal growth of 3.5 percent and a tax rate of 22 percent in all of
our three scenarios.
Furthermore, FPC has close to all of its revenues as well as COGS in USD.
The valuation is thus sensitive to exchange rate fluctuations. Even though
FPC has very low operating leverage, a change in SEK/USD of 10 percent
will result in a change in EBIT of 12 percent as was shown in the estimates
section. For the previous quarter we use the average SEK/USD exchange
rate and going forward we use the exchange rate at the time of publication.
For this report the exchange rates used are SEK/USD 8.4 for Q1 2016 and
8.2 going forward.
Fair value range
Our fair value range estimates for EBIT and sales are summarized below:
In our base case scenario, with a sales CAGR for 2016-2021 of 15 percent,
an average EBIT margin of 37 percent and a 28 percent long-term margin
we have a base case fair value of SEK 625 per share. In our bear- and
bull case we expect CAGR sales growth for the same period of -7 and 30
percent and long term margins of 21 and 37 percent respectively, which
indicates a bull and bear fair value range of SEK 225 - 1475 per
share. For our detailed assumptions on the valuation see below.
The fair value range consists of many various assumptions as illustrated in
the table on the next page. The key differences in volumes and gross
margins are illuminated by red colour.
Valuation scenarios: Estimates summary(SEKm) CAGR (%), years Weighted average Long-term
2016E 2021E 16-21E 16-24E 16-21E 16-24E
Total sales
Bear 7402 5145 -7% -5% 6303 5844 3.5%
Base 7737 15868 15% 14% 11744 14604 3.5%
Bull 8395 31454 30% 23% 20745 27150 3.5%
EBIT
Bear 2962 1833 -9% -7% 2157 1999 -
Base 3057 5953 14% 14% 4296 5400 -
Bull 3388 13641 32% 25% 8573 11596 -
EBIT (%)
Bear 40% 36% - - 34% 34% 21%
Base 40% 38% - - 37% 37% 28%
Bull 40% 43% - - 41% 43% 37%
A fair value range of SEK
225-1475
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Company analysis 133
We use the total mobile device shipments in the total addressable market
calculations as given in all our scenarios and then we make different
assumptions around four factors: sensor penetration, market share, ASP
and gross margin.
We will now move over to explain the rationale behind these different
assumptions in our scenarios. We focus on explaining the major differences
and the most important factors and will not discuss every assumption in the
table above.
Valuation scenarios: Key differing assumptions for sales2016E 2021E CAGR yr 16-21E
(SEKm) Bear Base Bull Bear Base Bull Bear Base Bull
Mobile devices
Total units mobile devices 1663 1663 1663 2072 2072 2072 5% 5% 5%
TAM Units shipments 508 554 594 1107 1466 1870 17% 21% 26%
1. Sensor penetration 31% 33% 36% 53% 71% 90%
2. FPC market share 61% 58% 59% 25% 35% 55%
FPC total volumes 308 319 352 277 513 1029 -2% 10% 24%
3. ASP (USD) 2.8 2.8 2.8 1.7 1.9 1.9 -10% -8% -7%
Total sales (SEK million) 7131 7387 8036 3833 7734 15928 -12% 1% 15%
Smart cards
1. FPC total volumes 1 3 3 20 180 250 82% 127% 142%
2. ASP 4.8 4.8 4.8 1.6 1.6 1.7 -20% -20% -19%
Total sales 39 118 118 261 2347 3464 46% 82% 97%
Automotive
1. FPC total volumes 0 0 0 2 30 45 n/a n/a n/a
2. ASP 8.0 8.0 8.0 6.0 6.0 6.0 -6% -6% -6%
Total sales 0 0 0 73 1467 2201 n/a n/a n/a
Other verticals
1. FPC total other volumes 3 3 3 30 120 300 56% 106% 148%
2. ASP (USD) 8.9 8.9 8.9 4.0 4.0 3.5 -15% -15% -17%
Total Sales (SEK million) 233 233 233 978 3912 8558 33% 76% 106%
Non-sensor revenue
Total sales (SW upgr. etc) n/a n/a 8.2 n/a 408 1304 n/a n/a 176%
Gross margins
Blended gross margin 48% 47% 48% 36% 38% 43%
Gross margins per segment
Mobile devices 48% 48% 48% 36% 37% 40%
Smart cards 40% 40% 39% 33% 35% 40%
Automotive 39% 39% 39% 34% 35% 40%
Other 39% 39% 39% 35% 35% 44%
Non-sensor revenue 90% 90% 90% 95% 95% 95%
Operating expenses
OPEX (% of sales) 8% 8% 7% 13% 9% 8%
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Company analysis 134
Base case assumptions
Mobile devices
The increased penetration in low end and mid-range smartphones will have
a major impact on FPC’s shipped volumes of mobile devices, although we
expect similar market shares in our different scenarios. Our base case
sensor penetration of 71 percent in 2021 is based around weighing,
averaging and laying a puzzle of different market data sources such as e.g.
FPC, Synaptics, IDC, IHS, Gartner and Strategy Analytics. For year 2021 we
expect a 35 percent market share, about 23 percentage points lower than
the expected market share of 58 percent in 2016 but about 61 percent
higher sensor volumes (513 million vs 319 million), which together with an
average ASP growth of -8 percent leads to an expected steady sales growth.
We expect a price erosion and gross margins of 38 percent in 2021, which is
somewhat below FPC’s gross margin target of 40-45 percent.
Smart cards
Smart cards represents a new opportunity (although many have been
developing for years) with a different value chain and partnerships etcetera.
The sensor penetration in smart cards as well as its timing and ramp-up is
yet to be seen and as far as we can see afflicted with high uncertainty. We
have assumed a smart cards penetration of around 2 percent in 2021.
In base case we expect more competitors to reach substantial market shares
compared to FPC’s stronghold in smartphones due to e.g. differing
penetration geographically among the card makers. Nevertheless, FPC with
its current partnerships and technological advantages should be able to
withhold market shares of 10 percent in a base case in year 2021. Similar to
how the smartphones market evolved we expect FPC to take a leading
market position initially and 50 percent market share, which will then soon
erode although more than compensated by the fast volume growth.
ASP
We expect the ASP in cards to start at USD 4.8 in 2016 for all our scenarios
and then in base case reach USD 1.6 in 2021. Compared to smart devices we
expect smart cards in general to be at a higher level on the product lifecycle
trend line in 2021 meaning a higher gross margin of 45 percent.
Automotive, Software and other verticals
The automotive ramp-up will be substantially slower than other verticals
and the product cycles longer, which is why we expect volumes of no more
30 million in 2021. Our assumptions are that the sensor penetration per
vehicle will be of significance compared to the other vertical volumes of 120
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Company analysis 135
million as we expect on average three sensors per car, which of course also
affect our ASP estimates positively.
In other verticals we expect FPC’s volumes shipped to be less than a fourth
of its mobile devices shipments implying that FPC as a market leader will be
an important player in this vertical as well. However, we assume
competitors who have lost the battle of mobile devices and cards will
channelize their time and energy to this vertical. We are also not as sure if
FPC’s lead and advantages have the same importance in this segments,
meaning we adopt a more cautious attitude than for the mobile devices
segment.
In base case we expect software revenue in 2021 to be SEK 408 million,
which would equal on average USD 1 on about 25 percent of the installed
base. The end of life in the installed base is conservatively assumed to be on
average 2 years for cards and smart devices, 3 years for other verticals and 5
years for automotive.
Earnings
In base case we are calculating with an OPEX level reaching 9 percent of
sales, partly because FPC sees great opportunities to invest in but also a
significant effect from increased competition forcing FPC to increase R&D
as a percentage of sales. We expect a 38 percent blended gross margin (incl.
software) that together with the OPEX of 8-9 percent translates to an EBIT
margin of on average 37 percent for years 2016-2021, 34 percent for years
2016-2024 and hereafter 28 percent as a long-term EBIT margin.
Fair value
With all the assumptions above our fair value in base case is SEK 625
per share.
Bear case assumptions
We will now move over to how the bear assumptions differ from the base
case scenario.
Mobile devices
Since our various market shares assumptions for mobile devices are not
huge with a bear case market share of 25 percent (a 10 percentage point
difference for 2021 compared to the base case) the major differentiating
factor in our scenario estimates is the sensor penetration in mobile devices.
For bear case we assume that the blended sensor penetration slows down to
53 percent in 2021, which can be compared to Synaptics’ 2019 penetration
of 47 percent, although Synaptics estimates are only based on smartphones.
It can still be used as a simplified assumption as we believe these numbers
are a good proxy for the total volumes of mobile devices. Smartphones are
such a large part of the total devices, meaning the differences could be
A base case of SEK 625
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Company analysis 136
considered minor.
In bear case there is first and foremost a disruption risk from new
technologies, not so much other biometrics such as iris but rather sensor-
less in-display fingerprint recognition. We do not expect FPC to be totally
wiped out as it has jumped onto the in-display bandwagon (R&D-wise) and
is expected to accumulate considerable amounts of cash flow the next few
years but believe that market shares could suffer. We also calculate with a
growing good-enough-products competition from e.g. Goodix and Egistec,
causing price pressure on the ASP. Compared to our base case of 513
million mobile device units shipped for FPC in 2021 FPC would in a bear
case be able to somewhat defend its total installed base of 308 million units
from 2016 during a few years but only temporarily capture a small part of
the market volume growth until 2018. FPC’s bear case volumes would then
gradually drop to 277 million until 2021.
Smart cards
In a bear case we need to calculate with a higher margin of safety on the
ASP due to the large uncertainties on whether smart cards will be the major
volume market it is expected to be and follow the same mass market trend
as the smartphones. It is worth noticing that FPC and its competitors has
been working for many years to build the market and that the market has
been expected to take-off for several years now. In bear case we expect an
ASP of USD 1.6 in 2021 due to uncertainties on the size of the volumes
shipped, where we take into account that further delays could occur. We
also find it likely that FPC’s gross margin could be compressed down to 33
percent from increased competition.
The requirements for smart cards are similar to but even higher than the
ones of smartphones and should therefore be a good fit for FPC’s sensors.
In our bear case, on the other hand, we expect that the market would be
prolonged (even more) and are thus calculating with volumes of 20 million
compared to the base case of 180 million. The volume CAGR growth for
smart cards would then be 82 percent during 2016-2021, rendering in a
CAGR sales growth of 46 percent for the same period. The market share in
bear case would still be similar compared to 10 percent in base case but on a
substantially lower penetration.
Assumptions for automotive, software and other verticals
In bear case we expect a slower rollout in automotive and no retrofitting of
the installed base plus since we would have overestimated the value for the
automakers.
In other verticals we see a CAGR volume growth of 56 percent during 2016-
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Company analysis 137
2021 which would be more of a scratch on the surface assuming that the
penetration would be a low single digit percentage due to other technologies
winning market shares. In other words, it is still very early to judge if the
other verticals will take off and in our bear and bull scenarios this is almost
a binary situation with a fingerprint sensor in many of the connected
devices in the future but somewhat the opposite in bear case.
In bear case we also as a margin of safety expect no revenue from new
software business.
Earnings
The major difference in our bear assumptions compared to base case is the
gross margin. In bear case we expect current competitors, competing
technologies, old as well as new ones, to depress FPC’s blended gross
margins down to 36 percent in 2021.
The gross margin will in bear case not be improved but instead deteriorated
as FPC then would not be able to continue developing substantially smaller
sensors, in the same way as before, and customers will not pay up so much
for it due to Chinese good enough suppliers, e.g. Goodix and Egistec. In a
bear case were Google or some other major player decides to decisively
commoditize the fingerprint sensors the squeezed gross margins should
also go down rapidly modelling the ASP. The gross margins could then, as
mentioned, rapidly fall to around 36 percent, which by the way would
model Omnivision’s image sensors whose gross margins went from 42 to 25
percent but over a 10 year period (see appendix 2 for more on this matter).
FPC would still make a lot of money in the meantime but total EBIT would
decrease.
The capacity constraints which today is very advantageous for FPC will also
drive the need for new solutions and other technologies. We especially
believe that fingerprint recognition in-display has the potential to disrupt
FPC’s capacitive sensors paving the way for some other player to re-do
FPC’s journey. However, we do not expect the told technology to disappear
over a night.
We expect a higher proportion of OPEX of sales in 2021 compared to base
case (13 % of total sales), which together with the above indicates an
average EBIT margin of 34 percent during 2016-2021 as well ass 2016-
2024. The EBIT margin then drops to a long-term EBIT margin of 21
percent. Altogether the above would mean a fair value in bear case of
SEK 225 per share.
A bear case of SEK 225
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Company analysis 138
Bull case assumptions
Our reasonably optimistic scenario differs in the following ways from the
base case.
Mobile devices
In our optimistic scenario we instead of base case believe that the sensor
penetration could more than hit FPC’s prognosis of 72 percent already in
2018 and then continue to climb to 90 percent until 2021.
In bull case FPC we also believe that we have underestimated the stickiness
of FPC’s advantages in the operating capabilities regarding the position in
the eco system and the access to capacity. FPC is therefore in bull case
estimated to grab 1029 million units of the total mobile devices market,
twice as much as in base case, which together with the higher penetration
would imply a market share of 55 percent compared to 35 percent in base
case.
The ASP differences in our base and bull estimates are not very substantial.
We expect the ASP development from USD 2.8 to 1.9 in bull case to
somewhat model base case but with a slower downturn in the medium and
long run. The reason is larger volume discounts offsetting the scale effects.
In other words, the more units FPC ships the more downward pressure on
the ASP.
Smart cards assumptions
In our bull case for smart cards we, just like as for mobile devices, would
have underestimated FPC’s operating capabilities and the strength of the
technology for smart card applications. This would mean a CAGR volume
growth of 142 per during years 2016-2021, which would therefore result in a
strong CAGR sales growth of 104 percent for the same period.
The future demand is what will be driving the ASP in smart cards. A higher
demand and a faster ramp-up lets FPC lower the ASP more aggressively.
The faster ramp-up, and consequently more rapid ASP movement that we
expect in bull case explains why the ASP is about the same as in base case
despite assuming less pressure on price levels. The bull case ASP is actually
a little lower on average for the period for the very same reason.
Assumptions for automotive, software and other verticals
In bull case we believe the potential is much larger than what meets the eye,
in regards of the 80-90 million new cars shipped annually. Why would else
FPC address the automotive market with such great effort? We see a major
potential in retrofitting already sold cars but it does not end here. For every
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Company analysis 139
car there is more than one motorcycle. In addition there are heavy trucks,
construction vehicles and busses etcetera. The total addressable market in
volumes is thus several times larger than only the annual car shipments. In
bull case we also expect a fast rollout as the automakers soon see a large
value in fingerprint sensors, which at the same time makes them want to
retrofit a substantial part of the installed base.
In a bull case, fingerprint will remain the dominant technology for new
applications as well as FPC and its competitors continue to address the
problems with liveliness etcetera. We believe that the 50 or 100 billion
connected devices in 2020 (50 or 100 billion depending on if one believe
Ericsson or Huawei is right) will be a great opportunity should fingerprint
technology be the de facto standard for many applications. In this blue sky
scenario the market can skyrocket to several billion units per year, just like
Lantto has mentioned. The ASP might go down, modelling the base case,
but we do not see any major risks for squeezed gross margins in these
verticals as we assume FPC has a strong pricing power whereas the new
technologies so far do not.
In bull case we expect FPC to decisively leverage its strong position into
providing different software solutions. Compared to base case of SEK 408
million we expect more than three times higher non-sensor revenue (SEK
1304 million).
Earnings assumptions
In our bull case we expect a blended gross margin of 43 percent for 2021,
which to a large extent is dependent on the expected software revenue.
Excluding the software we expect gross margins to be more in line with base
case. We expect a lower OPEX of sales of 8 percent in 2021 compared to
base case of 9 percent which is basically due to the scalable fabless model
and the higher sales.
Using the assumptions above we arrive at EBIT margins of 41 percent for
years 2016-2021, 43 percent for years 2016-2024 and a 37 percent long-
term EBIT margin. Adding a sales growth of 230percent for years 2016-
2021 and 23 percent for 2016-2024 the fair value in bull case is SEK
1475.
Sensitivity analysis
On the next page we have included a sensitivity analysis for base case to
show the major implications from only making kind of small changes in our
required rate of return.
A bull case of SEK 1475
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Company analysis 140
Peer valuation
Being primarily a large fabless semiconductor company shipping millions of
IC-units a day with sales in the SEK billions, FPC should be treated as such.
This is why we believe that FPC first and foremost should be compared to
major fabless semiconductor peers, illustrated in the first group in our peer
table below:
However, we have also included other listed biometrics-focused players in
our second peer group. The problem in making comparisons with these
firms is that these are small scale or pre-commercial companies.
Substantially smaller FPC should perhaps not be traded at a premium to
semiconductor giants, thinking about the risks with a narrower product
portfolio only consisting of fingerprint sensors (so far). There are several
other risks, which we believe should also be considered in a peer valuation,
including the short profitability history and a small percentage of recurring
revenue. However, FPC is a market leader and is expected to extend its lead
in the short run and therefore keep a fast growth rate ahead FPC, which we
believe means that FPC should at least be traded on par with its fabless
semiconductor peers. At the moment it is instead traded at a discount
judging from EV/EBIT multiples.
Sensitivity analysis: Required rate of returnRequired rate of return 8% 9% 10% 11% 12% 13% 14%
Fair value in base case (SEK) 1061 864 727 625 551 491 443
Source: Redeye
Peer valuationCompanies Currency Mkt Cap Sales Sales growth Gross margin EBIT % EV/S EV/EBIT
2016E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E
Fabless
semiconductor
companies
Major fabless
QUALCOMM USD 77076 22435 -11% 6% 61% 62% 33% 34% 2.6 2.4 7.8 7.1
BROADCOM* USD 60683 13232 92% 21% 60% 60% 36% 37% 4.7 3.9 13.2 10.6
NVIDIA CORP USD 20099 5343 14% 3% 57% 56% 20% 19% 3.1 3.0 15.8 16.0
AMD USD 2186 3863 -3% 5% 32% 33% -2% 1% 0.9 0.9 n/a 75.9
MEDIATEK TWD 368536 240960 13% 4% 39% 39% 10% 10% 1.1 1.1 11.2 10.2
XILINX USD 11816 2209 -7% 6% 70% 69% 30% 30% 4.5 4.3 15.2 14.3
Specialized fabless
IDEX NOK 4250 95 27178% 507% 35% 35% -215% 0% 36.6 6.0 n/a n/a
NEXT NOK 1561 187 3954% 127% 40% 38% -40% 5% 7.7 3.4 n/a n/a
SYNAPTICS USD 3205 1874 10% 7% 39% 39% 13% 14% 1.6 1.5 12.7 11.3
EGISTEC TWD 9696 5849 163% 37% 50% 48% 29% 26% 1.5 1.1 5.2 4.1
Fabless
semiconductor
companies
Mean 48007 16% 7% 53% 53% 21% 22% 2.8 2.6 12.6 22.3
Median 9288 5% 5% 58% 58% 25% 24% 2.8 2.7 13.2 12.4
Biometrics players
Mean 2001 7826% 169% 41% 40% -53% 11% 11.9 3.0 8.9 7.7
Median 1030 2059% 82% 39% 38% -13% 10% 4.7 2.5 8.9 7.7
FPC SEK 36942 7737 167% 20% 47% 45% 40% 38% 4.4 3.7 9.8 8.8
Source: Redeye, Bloomberg
* = Broadcom is at the moment being acquired by Avago technologies in a record tech deal, which distorts its expected sales growth for 2016.
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Company analysis 141
Consensus and price targets
There is a major spread between the price targets of the other four analyst
firms continuously covering FPC, giving a range of SEK 200 – SEK 850 and
a median of SEK 525.
Key catalysts
Below we have listed the key catalysts. There are many more than these
catalysts; hence the prefix “key”.
Commercial success/considerable volumes from
smartcards
If the market sees that the card volumes are about to soon pick up
fast, by a large Gemalto or Zwipe/MasterCard deal it would have a
major impact on the share
Samsung design win
Needless to say, a major Samsung design win would be positive
New segments, for example automotive, show rising
volumes
We believe that the automotive potential is not discounted in the
current share price but that it could be along with rising volumes
Launch of new products/technologies
FPC system integration and software knowledge implies that new
products are
Share buy-backs
Basically all of FPC’s shares are in the free float and the volatility is
staggering, meaning a buyback program could prove to be positive
for the share as it could e.g. attract institutional owners
Value enhancing M&A or dividends
We have assumed dividends instead FPC’s current thin portfolio,
compared to other semiconductor giants, is rather thin but a new
segment from M&A could help out here and we believe a positive
reaction for the share is mandated if the acquisition adds value to a
reasonable price
A takeover bid (by e.g. Qualcomm)
A short squeeze (The FPC share is heavily shorted)
Additional perspectives on the valuation
We believe that much of FPC’s secret sauce in manufacturing the best
sensors is in the patents. Fabless semiconductor companies, as earlier
mentioned, live and die with their patents. One can for instance take a look
at ARM who is also fabless albeit it has another business model than FPC
with licensing its architecture, but nonetheless can make serious returns
and have high margins.
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Company analysis 142
Normally it is said that patents only have the value of the future cash flow it
helps producing but this picture might be a bit oversimplified. At least, FPC
now has the resources to protect its patents which makes them, in theory,
more valuable.
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Company analysis 143
Appendix I – Management and Board
Management
Lantto, born 1963, is veteran within the telecommunications industry who
combines top-management experience with a deep understanding of
technology and operations. Soon after having graduated high-school with
an engineering diploma Lantto joined Ericsson where he spent a total of 22
years. Lantto’s last position at Ericsson was CTO of subsidiary ST-Ericsson
from 2009 until 2012. Prior to joining FPC, Lantto also co-founded telecom
focused strategy consulting firm Northstream and served as CEO of the
Swedish software company Alice Systems, later acquired by Norwegian
company Birdstep Technology87. In 2009, Lantto became a member of
FPC’s Advisory Board, meaning that Lantto’s experience of FPC goes back
beyond joining the company.
The finance function is headed by CFO Johan Wilsby who joined FPC in
2015. Wilsby, born in 1966, received his degree in finance from the
Stockholm School of Economics. Prior to joining FPC Wilsby held several
top management positions, most recently as CFO of Transmode from 2013
to 2015. Transmode, now acquired by Infinera, was a listed company
producing hardware to enhance fiber optic networks88. Prior to Transmode
Wilsby worked as regional head of finance for both HP and Microsoft.
Fingerprint is constantly expanding its organization and by year-end 2015
the company had 254 employees (including consultants), an increase of 79
FTE’s since 31 December 2014. A large portion of the employees work in
Research and Development (R&D), and it is Pontus Jägemalm, Senior Vice
President Research & Development who leads the R&D-efforts. Jägemalm,
born in 1971, has held his position since 2009. Jägemalm has a background
in academia and holds a PhD in Engineering Physics from the well
renowned Chalmers University of Technology.
Another area where FPC is rapidly expanding the organization is Sales and
Marketing. FPC’s Sales and Marketing is headed by Thomas Rex. Rex, born
in 1963, has held his position since 2011. Prior to joining FPC Rex held
senior positions within Ericsson and Nanoradio, most recently as Vice
President Sales Asia/Oceania at Ericsson Mobile Platforms. Rex holds an
MSc in Electronics Engineering from Lund Institute of Engineering.
87 http://www.nyteknik.se/nyheter/it_telekom/allmant/article223385.ece 88 http://www.nyteknik.se/nyheter/it_telekom/allmant/article3899228.ece
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Company analysis 144
Board
FPC has a board comprising six members. The work is headed by Chairman
of the Board, Urban Fagerstedt. Fagerstedt, born 1953, has been a board
member of FPC since 2009. An engineer by training, Fagerstedt brings a
good understanding of the telecom market and a deep understanding of
R&D to the board. He holds an MSc in Electronics Engineering from Lund
Institute of Engineering and currently works as Vice President R&D at
Huawei Technologies Sweden AB. Previous assignments include Vice
President and General Manager of Ericsson AB’s Radio Networks design
unit and board member of Netcom Consultants AB.
Katarina Bonde, born in 1958, joined the board in 2015. She brings
experience from a variety of sectors, amongst others the payment industry.
Bonde also brings an extensive network from her numerous board
assignments and previous top management positions. She holds an MSc
from the Royal Institute of Technology in Stockholm, Sweden. Other
current assignments include Chairman of the Board at Propellerhead
Software and Board member of Micro Systemation, Image Systems,
Mycronic, Avega Group, Nordax Bank and Birger Jarl Fondkommision.
Previous roles include Chairman of DIBS Payment Services Sverige,
Chairman of Netreflector Inc., CEO of Programator Industri, Captura
International and Unisite Software Inc. Bonde also served as a member of
the Swedish government’s council for the sale of state-owned companies
from 2006 to 2010.
The young gun of the board, Alexander Kotsinas born in 1967, brings
experience from the venture capital industry through his role as Partner in
venture capital firm Nexttobe. Kotsinas holds an MSc in Engineering from
the Royal Institute of Technology and is also a graduate in Economics from
the Stockholm School of Economics. He joined the board in 2013. Other
assignments include Chairman of the Board of Madrague Capital Partners,
Nordia Innovation, Linum, Delta Projects and Allgotech.
Lars Söderfjäll, born in 1965, joined the board in 2015 but has been
involved in the company for a long time as partner in Sunfloro, major
owner in FPC. Söderfjäll works as Equity Strategist at Swedbank and was
previously Head of Strategy & Case Research at Ålandsbanken. Söderfjäll
brings extensive experience from the capital markets from his current
position as well as earlier positions at financial services firms
Ålandsbanken, Danske Bank, Handelsbanken and ABG Sundal Collier to
name a few. Söderfjäll is a graduate in Business Management from the
Stockholm School of Economics.
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Company analysis 145
Another new addition to the board in 2015, Carl-Johan von Plomgren,
brings a broad experience from both IT and other industries. Born in 1961
and a Graduate in Law from Stockholm University, Plomgren currently
works as Sales Director Northern Europe and Chief Compliance officer at
Villeroy & Boch Gustavsberg where he also sits on the board. Plomgren has
previously held numerous senior positions within the IT industry at
companies such as Dell, Compaq, WM-data, but also from industrial
companies such as GE. In addition, Plomgren has previously been a
member of various sector boards, for example Belysningsbranschen, the
industry association for lighting companies.
Jan Wäreby, born 1956, also joined the board of FPC in 2015. Wäreby is a
veteran in the telecom industry and currently works as Senior Vice
President and Head of Group Function Sales & Marketing at Ericsson. In
addition, he sits on the board of L M Ericsson International AB. Wäreby’s
previous assignments include several top management and board positions
at Ericsson and Sony Ericsson Mobile Communications, such as Board
member at Sony Ericsson Mobile Communications AB and Senior Vice
President and Head of Group Function Sales & Marketing at Ericsson.
Wäreby holds an MSc from Chalmers University of Technology.
Bonde, Kotsinas, von Plomgren and Wäreby are all independent in relation
to major shareholders and executive management, whereas Fagerstedt is
dependent as a major shareholder and Söderfjäll is independent in relation
to the company but dependent in relation to the company’s major
shareholders.
Fingerprint Cards
Company analysis 146
Appendix II - A comparison with the CMOS image sensors market
One method to forecast the ASP and the market shares etcetera is to look at
what previously happened in adjacent segments. FPC’s sensors are
manufactured in CMOS just like the image sensors in the smartphones and
shared the same market drivers. The evolution of CMOS image sensors
(CIS) in smartphones thus, we believe, provides clues to the ASP
development and the future market shares and so on.
Market shares
In the CMOS image sensor market there were some winners in the end and
many losers which were outcompeted during a major shakeout along the
way. The graph below on market share provides some valuable insights in
how the FPS market might evolve in the long run.
Source: IC Insights, Techno Systems Research, Yolé Developpement, Redeye.
(The graph compiles data from different sources with only the largest players, meaning that
under a certain market share the shares for the remaining players are excluded.)
Omnivision, Sony and Samsung are the big three of today in the CMOS
image sensors market. These three were the winners in the end with a
majority of the market. Quite recently, during the years after 2012 that are
not displayed in the graph above, Sony has gained further ground to about
40 percent of the market. Omnivision and Samsung has at the same time
lost market shares and had around a 15-16 percent share each last year.
While Sony and Samsung are well-known from its other businesses,
Omnivision was one of the original start-ups that started the CMOS image
0%
20%
40%
60%
80%
100%
120%
2007 2008 2009 2010 2011 2012
Omnivision Samsung Onsemi/Aptina Toshiba
SETi ST Galaxycore Sony
Hynix MagnaChip Sharp PixelPlus
Market share (%)
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Company analysis 147
sensor market. Omnivision’s success is probably due to the fact that it was
during a long time the single supplier to Apple.
Average selling price (ASP)
The market size for CMOS image sensors more than doubled during 2010-
2015 according to IC Insights together with the increase in volumes who
showed the same pattern. The ASP for image sensors, on the other hand,
fell rapidly during the earlier years only to then reach a seemingly steady
state (see the graph below). The lighter line represents Omnivision’s ASP.
Source: Redeye Research, IC Insights
One can see that Omnivision’s ASP within a five years’ time fell from high
levels down to the market ASP. As far as this concerns FPC, this is very
similar to FPC’s ASP so far and its guidance of 2016.
Gross margins
The more important thing though is how much of the ASP that is retained.
So, how well did Omnivision in converting its ASP to gross profit and how
high were the gross margin, i.e. how much of the pressure on prices could
be met by a lower COGS?
-
1.0
2.0
3.0
4.0
5.0
6.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Market ASP Omnivision ASP
ASP (USD)
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Company analysis 148
Source: Bloomberg, Omnivision
As can be seen in the graph above, Omnivision was just temporarily able to
offset the pressure on the ASP by a lower COGS. FPC has so far managed to
keep the majority of its cost savings from the smaller and smaller sensor
sizes to itself and has only partly benefited its customers. We assume that
FPC uses the same or similar mark-up on its newer products.
Apple and Samsung are notorious for their will to break up the value chain
and the use of multiple suppliers. FPC’s diversified customer base with
currently none of this major players could perhaps to some extent prevent
the same rapid fall in gross margins. Omnivision was also greatly surpassed
by Sony from a technologic point of view. At the moment there are no signs
of something similar being about to happen to FPC. However, it is a
reasonable scenario to use in our bull, bear and base model (see the
valuation section).
-
1.0
2.0
3.0
4.0
5.0
6.0
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20142 2015
Gross margin Omnivision ASP Omnivision
Gross margin (%)
ASP (USD)
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Company analysis 149
Summary Redeye Rating
The rating consists of five valuation keys, each constituting an overall
assessment of several factors that are rated on a scale of 0 to 2 points. The
maximum score for a valuation key is 10 points.
Rating changes in the report: This is our first rating of FPC.
Management 6.0p
FPC's uniquely fast growth in 2015 has most likely never been done before by a listed Swedish company and implies that all major strategic decision have been right despite a long bumpy road. However, our rating model to a great extent emphasizes the history of execution, communication, incentive programs etc. and so for these matters we adopt a cautious attitude although we have no remarks regarding the current management and its direction. CEO Jörgen Lantto's deep understanding of the technology and its value proposition originates from his time as CTO at ST Ericsson.
Ownership 7.0p
FPC's ownership structure is fundamentally strong. Most of the members in Management and Board are loaded with shares, of which some actually own shares for over SEK half a billion each. The main owner, Sunfloro, controls 16 percent of the votes. The public image of the main owner and former CEO is certainly not without controversy but more important FPC has a dedicated, long-term main shareholder with a large stake in the company.
Profit outlook 7.0p
FPC is located in an endlessly changing competitive landscape were margins are constantly squeezed. However, FPC's supreme technology leadership led to first mover advantages especially in the supply chain, which due to the complex eco system are more sticky than what meets the eye. FPC has a large product portfolio and a proven ability to ship hundreds of millions of flawless sensors, whereas competitors are struggling with its first sensor and 1 percent of FPC's volumes. FPC is well poised for the evolving billion USD smart cards market but with its market leading position FPC are looking to capture other segments as well, such as automotive, laptops, tablets etc.
Profitability 4.5p
FPC's remarkable turnaround resulted in an EBIT margin of over 30 percent for year 2015 and likely it will exceed this level in 2016, as indicated by the company's guidance. Our profitability rating on the other hand is largely retrospective and for a higher score a longer trend of uninterrupted profitability is required. However, FPC's current trend and outlook is strong, meaning that the profitability score will likely be raised in a not too distant future.
Financial strength 7.0p
The electronics business is somewhat cyclical but essentially FPC has a high degree of stability in its business and balance sheet with no debt and large, fast growing amounts of cash. FPC's old, large investments is finally paying off and future capex and working capital needs appear to be minor. The previous, large Huawei dependence seems to be history at the moment.
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Company analysis 150
Income statement 2014 2015 2016E 2017E 2018E
Net sales 234 2,901 7,737 9,252 10,822
Total operating costs -317 -1,947 -4,623 -5,724 -6,866 EBITDA -83 954 3,114 3,528 3,956
Depreciation -4 -6 -9 -11 -9
Amortization -58 -37 -48 -42 -61
Impairment charges 0 0 0 0 0 EBIT -145 910 3,057 3,474 3,887
Share in profits 0 0 0 0 0
Net financial items 2 0 0 5 6
Exchange rate dif. 0 0 0 0 0 Pre-tax profit -143 910 3,057 3,479 3,893
Tax -1 -112 -673 -765 -856
Net earnings -144 798 2,385 2,714 3,036
Balance 2014 2015 2016E 2017E 2018E
Assets
Current assets
Cash in banks 102 1,031 2,745 5,188 7,921 Receivables 116 618 1,625 1,943 2,273
Inventories 99 153 619 740 866
Other current assets 20 37 37 37 37
Current assets 336 1,839 5,026 7,908 11,096
Fixed assets Tangible assets 19 21 27 36 52
Associated comp. 0 0 0 0 0
Investments 0 1 1 1 1
Goodwill 0 0 0 0 0 Cap. exp. for dev. 0 0 0 0 0
O intangible rights 70 50 121 202 301
O non-current assets 0 0 0 0 0
Total fixed assets 89 71 149 238 354
Deferred tax assets 0 0 0 0 0
Total (assets) 425 1,910 5,175 8,146 11,449
Liabilities
Current liabilities Short-term debt 0 0 0 0 0
Accounts payable 66 549 1,315 1,573 1,840
O current liabilities 57 215 215 215 215
Current liabilities 123 763 1,530 1,788 2,055
Long-term debt 0 0 0 0 0 O long-term liabilities 0 0 0 0 0
Convertibles 0 0 0 0 0
Total Liabilities 124 763 1,530 1,788 2,055
Deferred tax liab 0 0 0 0 0
Provisions 0 0 0 0 0
Shareholders' equity 301 1,147 3,645 6,359 9,395 Minority interest (BS) 0 0 0 0 0
Minority & equity 301 1,147 3,645 6,359 9,395
Total liab & SE 425 1,910 5,175 8,146 11,449
Free cash flow 2014 2015 2016E 2017E 2018E Net sales 234 2,901 7,737 9,252 10,822
Total operating costs -317 -1,947 -4,623 -5,724 -6,866
Depreciations total -62 -43 -57 -54 -69
EBIT -145 910 3,057 3,474 3,887
Taxes on EBIT 0 0 0 0 0 NOPLAT -145 910 3,057 3,474 3,887
Depreciation 62 43 57 54 69
Gross cash flow -83 954 3,114 3,528 3,956
Change in WC -92 67 -706 -182 -188
Gross CAPEX -91 -26 -135 -143 -185
Free cash flow -266 994 2,273 3,204 3,583
Capital structure 2014 2015 2016E 2017E 2018E
Equity ratio 71% 60% 70% 78% 82%
Debt/equity ratio 0% 0% 0% 0% 0% Net debt -102 -1,031 -2,745 -5,188 -7,921
Capital employed 199 116 900 1,170 1,474
Capital turnover rate 0.6 1.5 1.5 1.1 0.9
Growth 2014 2015 2016E 2017E 2018E
Sales growth 145% 1,142% 167% 20% 17%
EPS growth (adj) 349% -654% 190% 14% 12%
Profitability 2014 2015 2016E 2017E 2018E ROE -49% 110% 100% 54% 39%
ROCE -49% 126% 128% 70% 49%
ROIC -185% 457% 2645% 386% 332%
EBITDA margin -36% 33% 40% 38% 37%
EBIT margin -62% 31% 40% 38% 36% Net margin -62% 28% 31% 29% 28%
Data per share 2014 2015 2016E 2017E 2018E
EPS -2.28 12.62 36.67 41.72 46.69
EPS adj -2.28 12.62 36.67 41.72 46.69 Dividend 0.00 0.00 0.00 0.00 14.01
Net debt -1.74 -16.31 -42.21 -79.77 -121.78
Total shares 58.42 63.24 65.04 65.04 65.04
Valuation 2014 2015 2016E 2017E 2018E
EV 1,931 36,342 33,481 31,038 28,306
P/E -14.1 46.8 15.2 13.4 11.9 P/E diluted -14.1 46.8 15.2 13.4 11.9
P/Sales 8.7 12.9 4.7 3.9 3.3
EV/Sales 8.3 12.5 4.3 3.4 2.6
EV/EBITDA -23.1 38.1 10.8 8.8 7.2 EV/EBIT -13.3 39.9 11.0 8.9 7.3
P/BV 6.8 32.6 9.9 5.7 3.9
Share information
Reuters code FINGb.ST
List Large cap
Share price 557.0 Total shares, million 65.0
Market Cap, MSEK 36226.8
Management & board CEO Jörgen Lantto
CFO Johan Wilsby
IR To be announced
Chairman Urban Fagerstedt
Financial information
Q1 report April 28, 2016
Q2 report July 22, 2016
Q3 report October 27, 2016
Analysts Redeye AB
Joel Westerström Mäster Samuelsgatan 42, 10tr [email protected] 111 57 Stockholm
Viktor Westman
DCF valuation Cash flow, MSEK
WACC (%) 11.0 % NPV FCF (2016-2018) 5584
NPV FCF (2019-2025) 12550
NPV FCF (2026-) 21635 Non-operating assets 1031
Interest-bearing debt 0
Fair value estimate MSEK 40801
Assumptions 2016-2022 (%)
Average sales growth 14.9 % Fair value e. per share, SEK 625 EBIT margin 32.8 % Share price, SEK 557.0
Shareholder structure % Votes Capital
Avanza Pension 8,5 % 9.9 %
Danske Invest & Danica Pension 4,5 % 5.3 %
Oppenheimer 3.4 % 3.9 % Handelsbanken fonder 2,4 % 2.8 %
Nordnet Pensionsförsäkring 1,9 % 2.2 %
Sunfloro AB 15,9 % 1.9 %
Vanguard 1.3 % 1.5 % Jörgen Lantto 1.2 % 1.4 %
Magnus Unger 1.1 % 1.3 %
Thomas Rex 1.1 % 1.2 %
Fingerprint Cards
Company analysis 151
Revenue & Growth (%) EBIT (adjusted) & Margin (%)
Earnings per share Equity & debt-equity ratio (%)
Conflict of interests Company description
Joel Westerström own shares in Fingerprint Cards: Yes
Viktor Westman owns shares in Fingerprint Cards: No
Redeye performs/have performed services for the Company and receives/have received compensation from the Company in connection
with this.
Fingerprint Cards (FPC) develops and sells hard- and software biometrics technology for reading of fingerprints. It is the world's
number one fingerprint sensor supplier and one of Europe's largest
fabless semiconductor companies.
0.0%
200.0%
400.0%
600.0%
800.0%
1000.0%
1200.0%
0
2000
4000
6000
8000
10000
12000
2013 2014 2015 2016E 2017E 2018E
Net sales Net sales growth
-80.0%
-60.0%
-40.0%
-20.0%
0.0%
20.0%
40.0%
60.0%
-500
0
500
1000
1500
2000
2500
3000
3500
4000
4500
2013 2014 2015 2016E 2017E 2018E
EBIT adj EBIT margin
-10
0
10
20
30
40
50
-10
0
10
20
30
40
50
2013 2014 2015 2016E 2017E 2018E
EPS, unadjusted EPS, adjusted
0.0%
0.0%
0.0%
0.0%
0.1%
0.1%
0.1%
0.1%
0.1%
0.2%
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
2013 2014 2015 2016E 2017E 2018E
Equity ratio Debt-equity ratio
Fingerprint Cards
Company analysis 152
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Redeye Rating (2016-04-19)
Rating Management Ownership Profit
outlook
Profitability Financial
Strength
7,5p - 10,0p 38 41 19 7 17
3,5p - 7,0p 66 56 86 33 38
0,0p - 3,0p 5 12 4 69 54 Company N 109 109 109 109 109
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