sweden - financial analysis, trends, insight into nordic markets | … · 2018-08-16 · market of...

Commissioned research 16 July 2018

Marketing material commissioned by Fingerprint Cards

Fingerprint Cards AB Electronic Equipment, Instruments & Components | Sweden

KEY DATA

ABSOLUTE & RELATIVE PERFORMANCE

Source: Thomson Reuters and Bloomberg VALUATION APPROACH

Source: Nordea estimates

Nordea Markets - Analysts Jörgen Wetterberg Senior Analyst Dan Johansson Analyst Henning Zakrisson Analyst

Looking past the past A new dawn Fingerprint Cards (Fingerprints) today is not the same company as it was during its early phase, and it certainly does not have the same market expectations as it did during the stock price peak in 2015. Nevertheless, we think there are still a few tricks up its sleeve that could chart a path to innovation and growth. The decline of the previously quite profitable market of capacitive fingerprint sensors for smartphone implementation has prompted many investors to give up on the company, but we do not believe it is time to pull the plug just yet.

Innovate or retreat Fingerprints is sitting between a rock and a hard place, as it needs to expand and dominate new and adjacent segments (ie in-display fingerprint sensors and biometric smartcards), while the capacitive fingerprint sensor market is facing price pressure from low-cost competitors. We think the smartcard market, while not fully compensating for the decline of capacitive fingerprint sensors, could help stabilise revenues and gross margins if the product can gain any interest on the market. The biggest risk for the company would be if its new product lines fail to capitalise on the upcoming market window, which is why we base our estimate forecasts on product releases as planned, but with a higher WACC to account for the apparent development risks.

Returning to earnings growth To ensure future competitiveness and a return to earnings growth, Fingerprints has implemented a number of measures to improve its margins. With its recently announced cost-reduction programme, Fingerprints aims to return to annual opex of below SEK 400m before capitalisation of R&D, which is the same level the company had in 2015. In combination with diminishing price erosion and improved product mix, we believe Fingerprints could stabilise its operations and reach a long-term operating profit margin of between 10% and 15%. We value Fingerprints based on fundamental DCF approach with a scenario analysis of market shares and a WACC of 11.4%. Based on this approach, we derive an equity value per share between SEK 5.5 and SEK 9.6

Source: Company data and Nordea estimates

Country SwedenBloomberg FING.SSReuters FINGb.STShare price 6.25Free float 93%Market cap (m) SEK 1,916Website www.fingerprints.comNext report date 2018/07/19

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SUMMARY TABLE - KEY FIGURESSEKm 2014 2015 2016 2017 2018E 2019E 2020ENet sales 234 2,901 6,638 2,966 1,110 1,266 1,452 - growth 1141.7% 128.9% -55.3% -62.6% 14.0% 14.7%EBIT (adj.) -145 916 2,578 155 -393 -25 76- margin -62.2% 31.6% 38.8% 5.2% -35.4% -2.0% 5.2%EPS (adj.) -2.32 12.50 6.48 0.38 -0.65 -0.10 0.19- growth n.m. -48% -94% n.m. n.m. n.m.P/E (adj.) n.m. 9.5 9.7 41.3 n.m. n.m. 33.3EV/EBIT (adj.) n.m. 7.0 7.2 29.2 n.m. n.m. 19.8EV/Sales 1.3 2.2 2.8 1.5 1.5 1.3 1.0RoE 111.0% 120.6% 5.3% -44.2% -2.6% 4.8% 9.0%FCF yield -65.1% 11.9% 5.4% 3.5% -9.2% 3.7% 5.9%ND/EBITDA n.m. -1.1x -0.4x -1.9x n.m. -4.9x -2.7x

16 July 2018 Fingerprint Cards

Marketing material commissioned by Fingerprint Cards 2

Table of contents Factors to consider when investing in Fingerprint Cards ................................................................ 3

Valuation ........................................................................................................................................ 8

Company overview ....................................................................................................................... 12

What’s happened so far ................................................................................................................ 18

Technology and market overview ................................................................................................ 21

Our industry scenario .................................................................................................................... 34

Our views on the most discussed topics ....................................................................................... 40

Historical financials ...................................................................................................................... 45

Estimates ...................................................................................................................................... 50

Risk factors ................................................................................................................................... 56

Detailed estimates ........................................................................................................................ 59

Reported numbers and forecasts.................................................................................................. 60

Disclaimer and legal disclosures ................................................................................................... 63



Factors to consider when investing in Fingerprint Cards Fingerprints has a chequered past, to say the least. Its journey as a listed company was rather uneventful at the outset, despite experiencing slow adoption of capacitive fingerprint sensors because its technology was ahead of its time. When it started gaining momentum, Fingerprints enjoyed a head start and growth was immense, providing its shareholders significant returns. However, competition finally caught up, and the company’s decline came equally fast. The company now faces great challenges, but is not down for the count just yet. With the introduction of new biometric modalities (eg in-display fingerprint sensors, iris recognition and face recognition) and growth in new emerging segments, we see the possibility of a new dawn for Fingerprints. In combination with more streamlined operations, the business could once again return to earnings growth and close the current margin gap to its peers. However, expanding from one to three or more industrial segments, and from essentially one product line to four, is a balancing act when cash is scarce—it carries both high risk and potentially high rewards.

There are four main factors to consider

We consider the following factors critical when evaluating an investment in Fingerprint Cards:

• Its potential to become a next-generation technology leader

• Adjacent biometric market opportunities and an increased attachment rate for new applications that increase earnings diversification

• Streamlined operations and a new product offering set to improve margins

• Its potential as a takeover target

The most important risks are mainly related to future revenue streams

The main risks to consider are the following:

• Fingerprints’ competitive position could be threatened by new smartphone biometric sensor standards

• Uncertainty regarding the future size and growth of new market opportunities within smartcards, automotive and embedded solutions

• Challenging market conditions with immense competition and pressure on price

• The potential need to turn to capital markets in the future due to the pressure on the company’s financial position

• High concentration of existing and potential customers, with the ten largest customers accounting for 98.8% of revenues

We believe that in-display fingerprint sensors will become the future norm in smartphones

Technology leadership position still up for grabs

The (near) future is in-display Touchless biometric modalities have become attractive to customers and manufacturers in the smartphone market. Fingerprints was quick to announce that it is developing face recognition software after Apple’s Face ID launch, in addition to its already available iris recognition solution. These two modalities are likely to become increasingly popular and we have already seen a slight increase in face recognition sensors in non-Apple smartphone models over the last year. However, it is clear that the current high-end smartphone ‘arms race’ is about in-display fingerprint sensors. Due to the constantly shrinking bezels and more minimalistic smartphone designs, space for fingerprint sensor attachment is declining on new devices.

This spring, we witnessed the launch of a handful of devices sporting huge displays with fingerprint sensors built into the actual screen of the device. Despite receiving praise for the design, the sensors are reportedly slow, and there is room for improvement by moving from “hot zone” detection, where only a very small part of the display is able to detect the fingerprint, to full-display detection.



Opportunity for Fingerprints to take a leadership position in next-generation high-end smartphones

So far, Fingerprints is, according to our understanding, the only biometric sensor company to announce the development of a full-display sensor, using ultrasound technology to create a fast and reliable fingerprint sensor that can detect a fingerprint anywhere on the display. While Qualcomm has a finished and ready-to-ship in-display ultrasound sensor, it is ”hot zone-based” and has not gained traction in the consumer market yet. Fingerprints, assuming its product is released ahead of the competition, could enjoy first-mover advantage, and thus once again grab a large share of the high-end smartphone market for biometric sensors.

However, the issue is R&D capability: Fingerprints is a smaller company than most of its competitors. Considering recent cost and personnel reductions, as well as its diversified R&D focus, we are not surprised that Fingerprints will not release the sensor in H2 2018 as previously indicated. The risk of bringing the sensor to market too late, or that it will simply be too expensive, cannot be ignored.

Capacitive sensors likely to be around for the foreseeable future

The opportunities of future product markets Capacitive fingerprint sensors in smartphones have become commonplace, but are likely to be replaced by ultrasound and optical solutions in the coming years because they, contrary to capacitive sensors, work through smartphone displays. However, capacitive sensors are still easy to implement, cheap to produce and offer high degrees of security and convenience. Despite the heavy competition, Fingerprints is still a market leader in this area; as such, when the company ventures into new markets, it brings considerable experience to the table.

New segments like smartcards could add earnings diversification

According to the company, smartcards are the single-largest future opportunity for Fingerprints. With more than 3 billion payment cards shipped annually around the world, the addressable market is huge. Using its newly launched T-shape module and sensor series, the company has already started testing sensor-equipped cards. It is

SMARTPHONE SHIPMENTS FINGERPRINT SENSOR ATTACHMENT RATE

Source: IDC and Nordea estimates Source:Company data, IDC and Nordea estimates

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GLOBAL IN-DISPLAY SENSOR SHIPMENTS EXCLUDING APPLE

Source: IDC and Nordea estimates

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one of only a few players openly planning to enter the maturing market with an actual product. Combined with the increasing implementation of fingerprint sensors in other segments (eg home security, automotive and the Internet of Things), this should diversify Fingerprints’ offering and make the company less vulnerable to volatility in smartphone volumes.

Willingness-to-pay likely low; important to drive cost of sensors down

Even though 3 billion cards seems like a large number, researchers from IDC and ABI forecast the number of biometric payment cards could end up somewhere around 95-160 million by 2022. This corresponds to an attachment rate of less than 5%, out of which Fingerprints would have a market share of 50% at most, according to our estimates. Its gross margins in the early market should reach between 40-60%, but once competition catches up, we would expect this to decline towards 25-35%. Combined with a declining average selling price (ASP) for capacitive sensors and the willingness-to-pay challenge of attaching a sensor to a USD 2 card rather than a USD 400 smartphone, we will most likely see penetration only in the more high-end smart card segments during the first few years. It is clear that this new technology will not return the company to its 2015-16 revenue levels; however, it could help to ensure its future revenue prospects.

New cost-reduction programme to drive opex below SEK 400m before capitalisation of R&D

Product innovation should adapt to demand for smaller and cheaper sensors

Returning to cost leadership To ensure future competitiveness and a return to earnings growth, Fingerprints has implemented a number of measures to improve its margins. The company has already executed one cost-cutting programme and recently announced another one, from which it should reap the benefits during the latter part of this year. The latest programme aims to adapt to the ongoing challenging market conditions for capacitive sensors and is expected to reduce headcount by an additional 179 employees, compared to its total of 401 employees during Q1 2018. These actions will be finalised in Q3 and should generate savings of SEK 350m for 2018, bringing its total annual operational expenses before capitalisation of R&D below SEK 400m, which was the level back in 2015. The recent announcement of the FPC1511 sensor, which the company claims to be its most cost-efficient sensor so far, is yet another driver to adapt to the latest shift in demand, which now favours smaller and cheaper fingerprint sensors. While the pricing of the sensor is not public, it is said to be the most cost-optimised sensor released by Fingerprints so far. If the new cost-cutting programme is executed properly and the FPC1511 gains order momentum by late this year or in early 2019, we believe the company should be able to close the margin gap to its peers and defend its leading position in the market for capacitive fingerprint sensors.

GLOBAL BIOMETRIC SMARTCARD SHIPMENTS

Source: ABI research and Nordea estimates

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Broken industry, not a broken company

Inevitable margin scenario is playing out

The current market situation is tough, which could incite consolidation

Challenging market could trigger industry consolidation With sensor prices in freefall, plummeting 30% annually in the last years, the capacitive sensor is being commoditised at a more rapid pace than likely anyone could have foreseen. On top of this, new industry standards are starting to emerge, creating the need for additional investments in R&D at the worst possible time. Industry experts such as ABI still rank Fingerprints as the market leader in a competitive assessment based on innovation and implementation, so its product and patent portfolio still holds value. Its experience in capacitive sensors should also offer first-mover advantages in new verticals and product categories.

The flipside of the brutal price erosion seen in the past few quarters would be that it amplifies the normalisation of a more realistic margin scenario than seen in 2016. Maintaining an EBIT margin of almost 40% for a commodity product is unrealistic in the long term. However, the rapid margin decline likely increases the odds that we are nearing a point where price pressure will start to subside.

With the market leader on the ropes, smaller competitors are also likely to struggle, which could start a wave of consolidation. Against that backdrop, we do not rule out that Fingerprints itself could be a target for companies such as Qualcomm/NXP, ST Electronics, Samsung, etc. Benchmarking its margins against its peers, we see scope for margin normalisation due to the recent underperformance, although margins likely will not return to previous highs. This has also been acknowledged by Fingerprints’ management along with the announced plans to streamline the organisation. A new owner could likely fast-track this development, although it would eventually require consent from the newly-elected chairman of the board, Johan Carlström, who is also the largest owner.

Price pressure will level out at some point, or consolidation is likely

OPEX BREAKDOWN


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GROSS MARGINS, FINGERPRINTS AND PEERS

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Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18Fingerprints Goodix Synaptics EgisTec



Innovation risk is imminent

Risk factors Fingerprints’ product offering has been almost entirely based on providing capacitive fingerprint sensors to smartphone manufacturers. With this technology losing traction in the market and falling behind newer technologies, Fingerprints must innovate or retreat. If the company does not release its in-display solution soon – or if the FPC1511 sensor cannot cut production costs enough – Fingerprints will fall behind and lose market shares in both the high- and low-end segments.

The market opportunity of biometric cards is still uncertain

While the smartcard market could become huge and Fingerprints could profit from just a small attachment rate and market share, there is still considerable risk that the future of payments does not lie in smartcards, but rather in smartphone mobile payments or another unforeseen technology. Developments in China, where solutions such as WeChat Pay and Alipay already have a large user base, could indicate that a mobile payment solution could become the future norm and replace the decades-old tradition of using payment cards. This could mean that the biometric sensors have a future in payment security, as they are already integrated into smartphones. Moreover, they might even pave the way for the need for multiple biometric modalities in smartphones in order to improve security levels further. In that area, Fingerprints has a head start by offering both fingerprint and iris recognition, but it would be bad news for anyone venturing into biometric smartcards.

Fingerprints’ recent performance raises questions about its current competitiveness

Its net cash position has quickly eroded, which could trigger the need for external funding

Fingerprints’ margins are currently less than half those of some close competitors and have drastically declined in the last year. Heavy competition from new players has pushed the ASPs of fingerprint sensors down and the sheer size of the Fingerprints organisation is no longer a fit for its market share and production volumes. The sensors that Fingerprints produces might be market-leading in terms of technological complexity, but they have been forced to be sold at a lower price due to the demand for smaller and cheaper sensors with lower, but many times, good-enough performance. If this continues, Fingerprints’ financial problems with declining cash flows and high costs will heighten the urgency even further.

Fingerprints had negative operational cash flow of SEK -204m in Q1 2018 and a net cash position of SEK 185m. Guidance is for positive cash flow during Q2 2018, but if the challenging market conditions continue or worsen, it could trigger a need to turn to the capital markets, on top of the recently announced cost-reduction programmes.

PAYMENT METHOD USAGE % WHO USED MOBILE PAYMENTS IN THE LAST MONTH

Source: Company data Source: GlobalWebIndex

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Valuation Using a fundamental DCF approach and applying a scenario analysis to market shares, we derive an equity value range of SEK 5.5 to 9.6 per share. This implies a 2021 E EV/EBITA multiple of 4.9x-10.4x. In our analysis, we complement the DCF framework with a multiples-based relative valuation approach using peers with similar value drivers and characteristics. However, we would argue that a multiple-based approach should be used with caution and more as a sanity check. Based on the current share price and our estimates, FPC trades at 2020E EV/EBITA of 5.9x.

Our valuation approach is primarily based on a DCF framework

One of the most common ways to value an investment opportunity is the discounted cash flow method, or DCF. A model using DCF forecasts future cash flows and discounts them for equity, bond and non-equity holders at the weighted average cost of capital, or WACC. WACC represents a mix of capital costs for all of the capital that is invested in the company. The valuation is performed in three steps:

• Discounting the company’s free cash flow at the WACC

• Identifying the value of debt and other non-equity claims on the enterprise value (EV)

• Deducting all claims to determine the value of the common equity. The fair value per share is then simply calculated by dividing the equity value by the number of outstanding shares.

This valuation method is generally considered to be the best way to capture the underlying fundamental drivers of a company, such as cost of capital, growth rates and reinvestment rates, and aims to approximate the intrinsic value of the company. Compared to other valuation approaches, the DCF framework has the appeal of focusing on streams of actual cash rather than accounting earnings. However, a possible drawback is that the valuation can be very sensitive to input values.

Using a peer multiple approach is not ideal

To complement the DCF valuation, we include a direct peer comparison as a means to see Fingerprints’ relative value in the industry. However, we stress that this is a difficult method to use in this case, as most of its peers have other, often much larger, business lines than their biometric sensors, and rarely report their numbers separated by business line. Therefore, some comparisons are unfair, as the other companies’ revenues might stem from areas in which Fingerprints does not even compete.

Fundamental valuation In the table below, we set out the general assumptions that we use to calculate our DCF estimate of the fair value of the Fingerprints share. Based on the assumption that its future revenue streams and costs are somewhat in line with our forecasts, we arrive at a fair equity value range of SEK 5.5 to 9.6 per share. In the terminal period, we model WACC equal to ROIC (return on invested capital) and 2.5% annual growth.

AVERAGES & ASSUMPTIONSAverages and assumptions 2018-23 2024-28 2029-33 2034-38 2039-43 Sust.

Sales growth, CAGR 10.2% 4.0% 3.0% 3.0% 3.0% 2.5%EBIT-margin, ex. associates -3.1% 14.5% 14.5% 14.5% 14.5%Capex/depreciation, x 0.3 1.0 1.0 1.0 1.0Capex/sales 3.8% 3.0% 3.0% 3.0% 3.0%NWC/sales 37.9% 25.0% 25.0% 25.0% 25.0%




We use a WACC of 11.4%

WACC We apply a WACC of 11.4% in our DCF model. The assumptions of the WACC are outlined in the table below.

Our DCF value with varying EBIT margins and sales growth rates Our DCF value with different WACC and sales growth assumptions

DCF sensitivity To highlight the sensitivity of the DCF valuation, we also provide sensitivity matrices modelling variations in revenue growth, margin assumptions and cost of capital.

In the table below, we provide a sensitivity analysis of the DCF valuation, with varying EBIT margins and sales growth rates.

Below, we also illustrate how the equity value varies with changes in WACC and sales growth.

In addition, we provide a sensitivity table illustrating how the equity value varies with changes in EBIT margin assumptions and WACC.

DCF VALUATIONDCF value Value Per share

NPV FCFF 1,170-2,382 3.7-7.6(Net debt) 455 1.4Time value 96-168 0.3-0.5DCF Value 1,721-3,004 5.5-9.6


WACC ASSUMPTIONSWACC components

Risk-free interest rate 1.5%Market risk premium 5.5%Forward looking equity beta 1.80Cost of equity 11.4%Cost of debt 5.0%

Tax-rate used in WACC 22.0%Equity weight 100.0%

WACC 11.4%Source: Nordea estimates

SALES GROWTH VS EBIT MARGIN

-2.0pp -1.0pp +1.0pp +2.0pp+2.0pp 7.1 7.3 7.6 7.9 8.3

EBIT margin +1.0pp 6.8 7.1 7.3 7.6 7.9change 6.6 6.8 7.0 7.3 7.6

-1.0pp 6.4 6.5 6.7 6.9 7.2-2.0pp 6.1 6.3 6.4 6.6 6.8


Sales growth change

WACC VS SALES GROWTH

9.4% 10.4% 11.4% 12.4% 13.4%

+2.0pp 9.5 8.4 7.6 6.9 6.3Sales growth +1.0pp 9.0 8.1 7.3 6.6 6.1change 8.6 7.7 7.0 6.4 5.9

-1.0pp 8.3 7.5 6.8 6.3 5.8-2.0pp 7.9 7.2 6.6 6.1 5.7


WACC



Our DCF value with different WACC and EBIT margin assumptions Our valuation range is based on variations in market share High end of the range assumes Fingerprints gains some traction in emerging segments and with new sensors Low end of the range is based on continued struggles for the company

Valuation range Our valuation range is derived by a +/- 30% variation in Fingerprints’ market share from a baseline scenario. The upper end of the valuation range represents a scenario where Fingerprints regains some lost ground and is able to maintain a market share of slightly below 25% in the capacitive fingerprint sensor market, while taking a first-mover position in emerging business lines, such as smartcards, with a market share in line with its previous highs in capacitive sensors (around 30-60%). We are currently not pricing in a potential contract win of Samsung, which could provide additional upside, but does not look very probable, at least in the near term, in our view. An argument could also be made for using a lower WACC if this scenario plays out.

The lower end of the valuation range represents a scenario where the market share continues to tumble below 20% and new sensors experience delays, or does not take-off due to technology disruption. This scenario also reflects lost customer contracts. It also implies that Fingerprints will not be a first-mover in new segments, such as smartcards.

Based on these assumptions, we arrive at an equity value per share of SEK 5.5 to 9.6. However, we note that our valuation becomes quite sensitive to input values; hence, we have assigned a higher cost of capital compared to similar companies that we cover in the sector, in order to reflect the uncertainty in cash flows.

We use a global peer group of companies active with biometric sensor capabilities

We prefer EV/EBIT and P/E for peer comparison

Relative valuation In the peer group valuation, we use listed global companies that in one way or another deal in biometric sensors. Most of the companies are briefly described in the ‘Technology and market overview’ section below.

In terms of benchmarking, we regard enterprise value (EV)-based multiples, such as EV/EBITDA (or EV/EBITA) and EV/sales, as the most relevant multiples for the sector, as they are barely affected by the different accounting policies used by the different peers. EV/sales is considered one of the more stable multiples, and is not affected heavily by temporary variations in sales due to large orders or smartphone releases.

P/E is commonly used to compare companies while taking tax rates and financing costs into account, but it is rather biased towards multiples for companies with high financial gearing. In order to use P/E properly, adjustments have to be made.

We consider Goodix and Synaptics as the key peers

Key peers We believe that Goodix and Synaptics are the most relevant peers to use in the valuation. While Qualcomm is similar in many ways, its other semiconductor-related business lines take up too much of its revenues for the comparison to be relevant.

For a short introduction to Goodix and Synaptics, refer to the ‘Technology and market overview’ section.

We recommend using DCF rather than peer group valuation

Peer group valuation We prefer to value companies such as Fingerprints based on a DCF approach, regarding relative valuation as more of a sanity check. As is clearly visible in the table below, the data for the companies varies a lot – an effect of their multiple business lines. Virtually no other company has exactly the same business line and works only in the exact same markets as Fingerprints. This combined with the fact that the

WACC VS EBIT MARGIN

9.4% 10.4% 11.4% 12.4% 13.4%

+2.0pp 9.5 8.4 7.6 6.9 6.3EBIT margin +1.0pp 9.0 8.1 7.3 6.7 6.1change 8.6 7.7 7.0 6.4 5.9

-1.0pp 8.2 7.4 6.7 6.2 5.7-2.0pp 7.7 7.0 6.4 5.9 5.5


WACC



biometric sensor market, at least in its present size, is young and has not yet matured into a stable and easily-grasped market.

PEER GROUP VALUATION

Synaptics Inc USA 1,497 50.55 12.71 10.67 10.28 11.97 9.77 9.28 9.90 9.15 8.46Goodix China 4,019 68.48 36.50 30.79 25.55 37.11 26.21 25.94 36.03 28.10 25.50Qualcomm Inc USA 74,087 58.39 17.91 16.67 15.17 13.78 11.52 11.20 10.90 9.41 8.76Precise Biometrics AB Sweden 59 1.695 33.90 13.04 9.42 27.43 10.65 7.39 14.04 6.32 4.77Next Biometrics Group ASA Norway 69 33.8 n/a 12.92 3.45 -5.03 10.16 2.81 -5.27 9.46 2.76Egis Technology Inc Taiwan 279 141 8.97 6.85 8.68 6.27 4.93 6.06 5.75 4.86 5.96Idex ASA Norway 154 2.7 n/a 18.00 3.55 -6.85 4.74 2.36 -7.20 10.29 2.31IRIS Corporation Bhd Malaysia 79 0.15 n/a 50.00 21.43 14.94 10.92 9.66 10.26 7.60 6.50DDS Inc Japan 150 491 n/a n/a n/a n/a n/a n/a n/a n/a n/aSuprema Inc Korea 123 23000 11.13 8.49 7.13 7.03 5.58 4.85 5.94 4.96 4.31

Average 8,052 20.19 18.60 11.63 11.85 10.50 8.84 8.93 10.02 7.70Median 152 15.31 13.04 9.42 11.97 10.16 7.39 9.90 9.15 5.96

Fingerprint Cards (Nordea) Sweden 186 6.25 n/a n/a 33.2854 n/a n/a 19.84 n/a n/a 8.74- rel. to average (%) -98% n/a n/a 2.86209 n/a n/a 124% n/a n/a 14%- rel. to median (%) 22% n/a n/a 3.53474 n/a n/a 169% n/a n/a 47%Source: Thomson Reuters and Nordea estimates

Peer group Country Mkt cap. (EURm) Price (LC) 2018E 2019E 2020E 2018E 2019E

PE EV/EBIT EV/EBITDA

2020E 2018E 2019E 2020E

PEER GROUP VALUATION

Synaptics Inc 1.17 1.11 1.07 0.75 -0.01 -0.15 -5.0% 5.8% 3.6% 11.9% 9.8% 11.3%Goodix 7.56 6.41 5.47 -2.47 -2.44 -2.62 1.0% 18.0% 17.2% 24.8% 20.4% 24.4%Qualcomm Inc 3.20 3.10 3.10 -1.18 -2.14 -2.02 -5.0% 3.1% 0.2% 29.9% 23.2% 26.9%Precise Biometrics AB 5.16 3.80 3.17 -3.92 -2.46 -2.58 52.6% 35.8% 19.8% -16.0% 18.8% 35.7%Next Biometrics Group ASA 2.37 0.72 0.47 0.22 -0.73 -0.89 120.0% 231.4% 54.0% -156.7% -47.2% 7.1%Egis Technology Inc 1.23 1.07 1.12 -0.90 -1.20 -1.86 49.3% 14.9% -4.2% 16.9% 19.6% 21.7%Idex ASA 7.09 1.26 0.61 0.78 -1.70 -1.12 739.0% 464.8% 105.2% -1231.7% -103.5% 26.5%IRIS Corporation Bhd 1.05 1.02 0.98 n/a n/a n/a -15.2% 3.4% 4.4% -5.8% 7.0% 9.3%DDS Inc n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/aSuprema Inc 2.04 1.72 1.45 -3.26 -3.38 -3.35 19.1% 18.6% 18.7% 27.0% 29.0% 30.9%

Average 3.43 2.24 1.94 -1.25 -1.76 -1.83 106.2% 88.4% 24.3% -144.4% -2.5% 21.5%Median 2.37 1.26 1.12 -1.04 -1.92 -1.94 19.1% 18.0% 17.2% 11.9% 18.8% 24.4%

Fingerprint Cards (Nordea) 1.52 1.28 1.03 0.70 -4.92 -2.70 -63% 14% 15% -37% 4% 11%- rel. to average (%) -56% -43% -47% -156% 180% 48% -159% -84% -39% -74% -270% -50%- rel. to median (%) -36% 2% -8% -167% 156% 39% -427% -22% -14% -410% -77% -56%Source: Thomson Reuters and Nordea estimates

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2018EPeer group 2018E 2019E 2020E 2018E 2019E 2020E 2019E 2020E 2018E 2019E 2020E



Company overview Founded in 1997, Fingerprints is a leading semiconductor company that provides biometric sensors and solutions. The company’s ecosystem consists of sensors, algorithms, software and packaging technologies used to authenticate the identity of a person. Most of its current business consists of fingerprint verification applications for smartphones and tablets, which are sold on a global scale to prominent clients, such as Huawei, Xiaomi, Oppo, Vivo, LG, and ZTE. Fingerprints’ touch sensors are included in more than 300 smartphone models and its products are used over 10 billion times daily.

The company was founded in 1997

Fingerprints held a market share of about 40% in 2017

History After being founded by Lennart Carlson in 1997, the initial goal of the company was to integrate its capacitive fingerprint sensor into payment cards. With the rise of biometric solutions in smartphones and tablets in the early 2010s, its main market shifted and Fingerprints quickly became the market leader in fingerprint sensors for smartphone lock screens. This position was enforced by Apple’s acquisition of AuthenTec in 2012, which removed one of the few competitors overnight, but also excluded Apple from the addressable market. In 2017, Fingerprints acquired American biometric sensor supplier Delta ID, specialised in identification and authentication solutions based on iris recognition, in order to expand its offering.

Last year, almost 700 million units of fingerprint sensors for mobile devices were shipped globally (excluding Apple), and Fingerprints claimed to hold a market share of about 40%. Its customer list is dominated by Asian smartphone vendors. In 2017, the company reported net sales and EBITDA of SEK 2,966m and SEK 236m, respectively. Its share has been traded on the Stockholm Stock Exchange since 1998.

NOTEWORTHY EVENTS1983 Capacitive sensor patent granted for Bo Löfberg1997 Fingerprints founded by Lennart Carlson1998 Fingerprints listed on Nasdaq OMX Stockholm1999 First demo of fingerprint sensor in mobile phone2013 Fingerprints launches the first fingerprint touch sensor for Android and Windows2014 Huawei launches smartphones using Fingerprints' sensors2015 Fingerprints receives four big orders of over SEK 598m

Fingerprints' share price increases by 1142%2016 Fingerprints reports a market share of 55-60%

Fingerprints listed on Nasdaq OMX's Large Cap list2017 Fingerprints acquires Delta ID

Fingerprints starts developing in-display and face recognition technologySource: Company data

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Fingerprints is a leading provider of biometric solutions

Acquisition of Delta ID added iris recognition to the product portfolio

Products and technology Fingerprints creates biometric sensor solutions mostly implemented in smartphones and tablets, but is venturing into smartcards, the automotive industry and Internet of Things applications.

Fingerprints currently offers several fingerprint sensors series, with different specifications meant to suit different application segments (eg spray-on, under-glass and the flexible T-shape module developed specifically for smartcards). While all of these sensors are sold bundled with integration support and detection algorithms, Fingerprints also offers the Fingerprints-BM standalone module meant for self-implementation in product development. In June 2018, the company announced its fourth generation sensor, the Fingerprints1511, set to be launched in commercial products in late 2018 at the earliest. The new sensor is the most cost-optimised solution yet and is suitable for both front- and rear-attachment.

Since the acquisition of Delta ID in 2017, Fingerprints also offers technology for iris recognition, which also is bundled with detection algorithms and mainly targeted towards smartphone manufacturers. Fingerprints has been granted over 200 patents, most of which are related to biometric solutions.

A more thorough description of biometric sensors can be found in the ‘Technology and market overview’ section.

Fingerprints’ sensors are produced externally

Production process Fingerprints outsources all production to external suppliers using a fab-less model, and its operating units are split into three parts: sourcing & purchasing, production planning and quality assurance. These units collaborate closely internally and during development together with the manufacturers and end customers. The silicon chip used in the sensors makes up the majority of the purchase volume and primarily uses two semiconductor manufacturers – SMIC in China and TSMC in Taiwan. OEM or ODM customers order Fingerprints sensors for use in their consumer products, after which Fingerprints provides service and algorithm implementation in the finalisation of the product design. After commercial samples have been approved, the models are produced on a commercial scale.

Fingerprints has focused on smartphone applications in the last five years

Strategy Fingerprints divides its business lines into three segments: mobile (smartphones and tablets), smartcards (payment cards, security cards) and automotive & embedded (cars and other vehicles, Internet of Things, etc). In order to drive the biometric market forward and provide value for end customers, Fingerprints is venturing into areas beyond smartphones by allocating more focus to development of new sensors and new areas of sensor application.

The primary focus over the past five years has been on providing capacitance-based fingerprint sensors for smartphone applications and the development of in-display sensors and touchless identification will further strengthen the Mobile business line.

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FINGERPRINT SENSOR

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Fingerprints is also developing smartcard solutions that are now being tested in customer markets by card manufacturers, and are slated to be released as end customer products in 2019. The company is also looking into possible opportunities in the Automotive & Embedded industries. Key customers and partners are Huawei, Xiaomi, Google, Zwipe, Gentex, and Altran.

Detailed financial outlooks are no longer provided

Company outlook Since the beginning of 2017, Fingerprints has chosen not to provide financial guidance due to the swift changes in its business environment. The last time the company presented long-term financial objectives was in the year-end 2016 report (ie an annual growth rate of 60% in 2016-18), but the latest indication in the Q1 2018 report was that these projections are to be heavily revised and that an amendment would be presented in the Q2 report. While Fingerprints does not plan for its smartcard sensors to hit the market at any major scale in 2018, CEO Christian Fredriksson believes that smartcard shipments will be in the tens of millions in 2019, and the goal is that areas outside of the capacitive smartphone sensors segment will account for 10% of revenue already this year. In a November 2017 Technology seminar, he also forecast that 80 million iris recognition units would be shipped in 2018 for the mobile industry alone.

A restructuring programme was recently announced

Fingerprints announced a further cost-cutting programme on 4 June, which the company predicts will cost around SEK 65m. The restructuring costs are mainly set to affect Q3 2018, and the programme is estimated to reduce costs by SEK 350m annually, with full effect in Q4 2018, resulting in an annual opex level below SEK 400m, before capitalisation of R&D. The company also announced non-cash writedowns of SEK 336m and SEK 143m in inventory and capitalised R&D, respectively. A tax refund is coming in Q2 2018, which will supposedly lighten the current financial stress. Fingerprints also continues to strive towards getting Samsung as a future customer, and the CEO has mentioned a long-term gross margin goal of 40%.

The current CEO is Christian Fredriksson

The Chairman of the board, Johan Carlström, was previously CEO

Executive management and board of directors Since 2016, Christian Fredriksson has been the CEO of Fingerprints. He has had an extensive career with positions such as Head of Asia Region and Global Head of Sales, Mobile Infrastructure in Nokia Networks and Nokia Siemens Networks, as well as CEO of Finnish cybersecurity company F-secure. He was recruited as Fingerprints’ CEO due to his experience in markets relevant for Fingerprints’ future, and has since discussed his vision and the importance of future biometric applications in many interviews and presentations.

The Chairman of the board since 2018 has been Johan Carlström; he is also the largest shareholder in Fingerprints and was CEO of the company during 2009-15. He has 20 years of experience in sales, business development and entrepreneurship in the telecom and IT business.



EXECUTIVE MANAGEMENT

Christian Fredrikson Ylva Blomén Pontus Jägemalm Ted Hansson Thomas Rex

Position Position Position Position Position

President and CEO Acting CFO Senior VP Research & Development

Senior VP Business Line Mobile

Senior VP Business Line Smartcards

Other appointments Other appointments Other appointments Other appointments Other appointmentsBoard member of Remedy Entertainment Ltd, Board member of Stena AB. Member of the foundation for Åbo Akademi University.

- - - -

Background Background Background Background BackgroundMaster’s Degree in Engineering, Åbo Akademi University, Finland. CEO F-Secure 2012-2016. Long career within Nokia Networks and Nokia Siemens Networks (1994-2012), with several leading positions, including Head of Asia Region (2008-2010) and Global Head of Sales, Mobile Infrastructure (2010-2012) at Nokia Siemens Networks.

Bachelor's degree in Business Management, Högskolan Växjö, Sweden. Group Accounting Manager at Fingerprint Cards 2016-, CFO at Serneke 2015-2016

Master’s degree in and PhD in Engineering Physics, Chalmers University of Technology, Sweden. Extensive international experience, including Technical Lead and Head of System Design at Displaytech Inc, USA

Master's degree in Electronics Engineering, Blekinge Institute of Engineering, Sweden. Country Manager Fingerprints, China Shanghai 2013-2016, Marketing Director/China Country Manager Nanoradio AB 2010-2013, Customer Enginering Director ST-Ericsson Corea 2007-2010, Software Manager Ericsson Mobile Platforms Taiwan 2006-2007, Software Consultant Ericsson Mobile Platforms China 2003-2006.

Master's degree in Electronics Engineering, Lund Institute of Engineering, Sweden. Sales Manager Asia, Ericsson Mobile Platform. Sales Manager, Nanoradio. Sales Manager Fingerprint Cards.

No. of shares No. of shares No. of shares No. of shares No. of shares420,750 510 800,125 20,000 1,000,000

Mattias Hakeröd

PositionSenior VP Human Resources

Other appointments-

BackgroundBachelor's degree in International Working life, University of Gothenburg, Sweden. Global Vice President HR Commercial Mölnlycke 2017, Global HR Director Commercial Mölnlycke 2014-2017, HR Director Surgical Division Mölnlycke 2009-2014, Global Business Partner AstraZeneca R&D 2008, Regional HR Business Partner AstraZeneca R&D 2003-2008.

No. of shares33,500Source: Company data



BOARD OF DIRECTORS

Johan Carlström Ted Elvhage Urban Fagerstedt Tomas Mikaelsson Juan Vallejo

Position Position Position Position Position

Chairman of the Board Board memberBoard member. Remuneration Committee. Board member Board member

Other appointments Other appointments Other appointments Other appointments Other appointmentsPrivate investments in own companies. Owner and Member of the Board in Sunfloro AB. Owner of Velociraptor Ltd.

Private investments in own companies. Co-owner and Chairman of the Board of Keiretsu Forum Nordics AB. Owner and Member of the Board of Stockholms Affärsänglar Management AB, E14 Invest AB, Gradientech AB and Wonder Technology Solutions AB.

Owner and Chairman of the Board of Fagerstedt Dynamics Radio AB, Fagerstedt Finance AB and Fagerstedt Dynamics UK Ltd. Board member of Cuptronic AB and Crowdsoft AB.

Member of the Board and CEO of Zetiq AB and Member of the Board of Sourcingprovider Sweden AB.

Chairman of the Board of ITS Energy Group AB and Helenius Ingenjörsbyrå AB. Member of the Board of Coromatic Group AB, Qmatic Group AB, Mercuri International Group AB and Elajo Invest Aktiebolag (publ).

Background Background Background Background BackgroundEconomics programme at Uppsala University and Stockholm University. CEO of Fingerprint Cards, 2009-2015. Member of the Board of Fingerprint Cards AB, 2013-2014. Salesperson, business developer and entrepreneur during 20 years in the Telecom & IT-business.

Bachelor's degree in Biochemistry & Minor Business and Administration, Millersville University of Pennsylvania, USA. Sales and management positions in manufacturing, IT, software and consulting, e.g. former Sales Manager in subsidiary of Indutrade, and later also Sales Manager in Sweden at HP Software, as well as advisor and investor in innovative growth companies via his own company.

Master's degree in Electronics Engineering, Lund Institute of Engineering, Sweden. Vice President and General Manager of Design unit Radio Networks in Ericsson AB, Vice president R&D, Huawei Technologies Sweden AB.

Degree in Business Administration from IHM Business School in Stockholm, Sweden. Expertise in marketing and sales. Longstanding experience and extensive knowledge of the telecom and mobile communications industry, where he has held senior executive positions in such companies as Omnipoint (T-Mobile) and Affinity Internet.

Master's degree, KTH Royal Institute of Technology, Sweden. CEO, Imtech Nordic (2011-2014). CEO, Niscayah Group (2006-2010). Securitas Group Management (1992-2006).

No. of shares No. of shares No. of shares No. of shares No. of shares

6,000,000 class A-shares through Velociraptor Ltd and 14,000,000 class B-shares 202,270 32,000 3,000 0

Dimitrij Titov Alexander Kotsinas

Position Position

Board memberBoard member. Audit Committee, Chairman.

Other appointments Other appointmentsLawyer and Partner, Advokatfirman Fylgia. Chairman of the Board of the Italian Chamber of Commerce in Sweden, Din Studio Sverige AB and Phantome de Genolier AB.

Finance Director Lindorff Sverige AB. Member of the Board of Intervacc AB (publ), Oasmia Pharmaceutical AB (publ), and Delta Projects AB.

Background BackgroundMaster of Laws (LL.M.), Stockholm University, Sweden. 29 years of experience as a business lawyer. Lawyer since 1993 and Partner at Advokatfirman Fylgiasince 1995 with main focus on M&A, corporate law and international agreements in the industry.Previously chairman of the Nomination Committee of Fingerprint Cards AB (publ) chairman of the Nomination Committee of Mr Green & Co AB (publ).

Master's degree in Applied Physics, KTH Royal Institute of Technology, Sweden. Bachelor's degree in Science Economics, Stockholm School of Economics, Sweden. Vice president and CFO Q-Med AB 2008-2011, CFO Life Europe AB 2007, CFO mobile operator Tre(Hi3G Access AB) 2003-2006, vice president Investor AB (publ) 2000-2003 and different positions at Ericsson 1994-2000.

No. of shares No. of shares

3,300 3,500Source: Company data



CoB Johan Carlström has the largest share of both capital and voting power

Shareholders Johan Carlström is the largest shareholder with 6 million A-class shares. He also holds around 14 million B-shares. The second-largest shareholder in terms of capital is Avanza Pension, which represents thousands of Swedish retail investors.

LARGEST SHAREHOLDERS (AS OF MAY 31, 2018)Owner FING A FING B Capital VotesJohan Carlström with companies 6,000,000 14,000,000 6.4% 20.1%Avanza Pension - 13,683,577 4.4% 3.7%Vanguard - 6,083,320 1.9% 1.7%DNB Fonder - 5,725,135 1.8% 1.6%Nordnet Pensionsförsäkring - 4,545,748 1.5% 1.2%Ålandsbanker Fonder - 3,123,989 1.0% 0.9%Danica Pension - 2,966,386 0.9% 0.8%XACT Fonder - 2,069,490 0.7% 0.6%Swedbank Försäkring - 2,055,772 0.7% 0.6%Skandia Fonder - 2,048,790 0.7% 0.6%SEB Fonder - 1,911,037 0.6% 0.5%DNB Asset Management SA - 1,898,368 0.6% 0.5%SPP Fonder - 1,870,900 0.6% 0.5%Tredje AP-fonden - 1,773,359 0.6% 0.5%River and Mercantile - 1,676,600 0.5% 0.5%Other - 242,537,529 77.3% 65.9%Source: Holdings database



What’s happened so far The story of Fingerprints starts at a lunch in a restaurant in Cannes in the 1980s. The original intent of the company was to provide biometric solutions for payment cards—something it now, some 30 years later, is on the verge of launching. The company has experienced periods of slow growth, spurts of innovative applications for its products and record-breaking revenue spikes. Here, we outline the history of the company briefly to put its current situation into perspective.

The patent for Fingerprints’ first capacitive sensor was filed in 1983

In the 1980s, renowned filmmaker and inventor Bo Löfberg visited a restaurant in Cannes, France, during the annual film festival. After paying with his credit card, the waitress handed it back with her fingerprint smeared on the front. Then and there, he came up with the idea of using fingerprints as a security measure in card payments, and filed a patent in 1983. Bo Löfberg passed away in 1986, but years later Lennart Carlsson, former head of development in Ericsson, bought the patents and founded Fingerprint Cards in 1997.

The company initially struggled with finding applications for its technology

The company was listed on Nasdaq Stockholm in 1998. With its capacitive sensors applicable in fingerprint detection, the company originally targeted smartcard manufacturers, but since biometric solutions had not, and still have not, attracted much attention in that market, the business was slow to mature. In the first 10-15 years, the company showed of a lot of proof-of-concept products to customers, such as USB drives, handgun holsters and door security systems, and managed to secure a few large orders, mostly in Asia. Security systems for bank and government use also accounted for a large portion of its early revenue, with a 2013 order of SEK 20m being the biggest inflow. According to a 2015 interview with Jörgen Lantto, the former CEO of Fingerprints, the company came close to shutting down its business in the mid-2000s due to difficulties finding applications for its technology.

The first fingerprint sensor implemented in a mobile phone was demoed in 1999

A demo of fingerprint sensor implementation in mobile phones was developed with Ericsson in 1999, and development of consumer products started in 2003. While Fingerprints started focusing primarily on the smartphone market around 2010, it was not until the 2013 launch of the iPhone 5S and its integrated fingerprint touch sensor that the market started growing. By that time, Fingerprints was in a good position to provide complete solutions to other smartphone manufacturers seeking to implement this innovation. Although Apple was not a customer of Fingerprints, its move into biometric solutions caused competitors to launch their own solutions.

GUN HOLSTER WITH FINGERPRINT SENSOR




Fingerprints launched the world’s first fingerprint sensor for Android and Windows

In 2013, the same year as Apple made its first move in biometric solutions, Fingerprints launched the world’s first fingerprint touch sensor for Android and Windows. This marked a breakthrough for Fingerprints, causing the share price to soar. The following years were the most fruitful for the company to date.

In 2014, the company announced that the Chinese smartphone manufacturer Huawei was set to use Fingerprints’ sensors in its new flagship model Ascend Mate 7. Fingerprints’ revenues increased y/y by 145% that year, and the company also acquired the Swedish licensing and ASIC-developing company Anacatum Design.

2015 was a year of great revenue growth

In 2015, order momentum really kicked off with several big orders from Chinese smartphone manufacturers, which sparked a share price increase. For the full year, revenue amounted to close to SEK 3bn, up over 1,000% from 2014, and slightly higher than Fingerprints’ own forecasts. The share price increased by a record ~1,500%. In December that year, Fingerprints delivered 1 million touch sensors per working day and reported a 43% gross margin for the full year. It claimed to have a market share of 45% in fingerprint sensors for smartphones and tablets, excluding Apple products. In China during January 2016, 11 out of 12 flagship models, and 60 models in total, used Fingerprints sensors.

Sales peaked at SEK 6.6bn in 2016

At the beginning of 2016, there seemed to be no clouds on the horizon. The company estimated that its market share was around 55-60% for Android smartphones, and its products were reported to be used more than 10 billion times per day in 136 different smartphone models. However, its 2015 forecast of SEK 7,000-8,500m in revenue was not met, and instead ended up at SEK 6,638m, although the operating margin was accurately forecast at around 37%. The 2015 report also predicted that the smartcard business would start generating revenue in 2016 and account for a substantial part of sales in 2017, but this did not happen. The sales predictions were continuously reduced during the year due to tightening competition and lower ASPs, which, combined with frequent reports of large new product orders, led to an extremely volatile share price; by the end of the year, the share price had plummeted 47% in spite of the record-high sales.

APPLE'S TOUCH ID

Source: MacWorld



2017 was a year of changed conditions and new perspectives

2017 was a difficult year for Fingerprints. With the fingerprint sensor market in smartphones now being a mass market, Fingerprints’ products became heavily commoditised and other competitors took market shares. At the same time, there was a large channel inventory build-up due to weak smartphone sales in the Chinese market, and a tendency among smartphone manufacturers to dual-source their components, which led to rapidly decreasing ASPs. Fingerprints’ margins and market shares dropped and it lowered its sale predictions accordingly. In Q4 2016, Fingerprints predicted 2017 revenue of SEK 7,500-9,500m, but it came in just below SEK 3bn, down 55% from 2016. However, the company started to look more closely into new business lines such as smartcards and embedded innovations, as well as new sensor solutions, and hence a large portion of the now decreasing income was spent on R&D. The year started with the acquisition of Delta ID, an American company specialising in iris recognition software. In 2017, Fingerprints refrained from posting any guidance or forecasts for 2018 revenue and margins.

The downward trend continued throughout Q1 2018 with revenues down 58% y/y, and the quarter was the second in a row with negative operating profit. This was partly due to a contraction of global smartphone volumes, which declined by 4% y/y. Fingerprints stated in its Q1 2018 report that the long-term financial goals presented in 2016 will be revised in the Q2 2018 report.

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Technology and market overview An old saying in the tech world is that where Apple goes, the market follows. The introduction of fingerprint authentication in the iPhone 5S incited other handset manufacturers to implement biometric sensors as well. Since then, the number of sensors in smartphones has been increasing, and with a current attachment rate of around 60 %, there is no sign of a reversal. In this section, we will briefly introduce readers to the different sensors used today, as well as a few emerging technologies that could emerge as the next industry standard in the market.

There are several ways to read a fingerprint

Biometric sensors

Fingerprint detectors While fingerprint detectors as a security measure in mobile phones have been around since 2004 (with Pantech GI100 featuring the first consumer-available product), it was not until the 2013 launch of Apple’s iPhone 5S and its Touch ID technology that the industry became in vogue. Now, five years later, we see an attachment rate around 60% for fingerprint sensors in smartphones. There are a number of methods to conduct fingerprint detection, such as optical, capacitive, ultrasonic and thermal. The most common one on the market is the capacitive sensor, but optical and ultrasound sensors are gaining traction.

Optical sensors work similarly to a camera

Optical sensors Optical sensors are based on roughly the same principles as a regular camera. A flash of light, usually stemming from a LED, is pointed towards the fingerprint and the photons are bounced back towards an optical sensor, measuring the strength and colour of the light. This basically produces a photograph of the fingerprint, which can be stored and/or compared to others.

A problem with this is that the LED-implementation can be bulky and not suitable for

compact devices. Another major drawback is that the sensor can be fooled by a high-resolution image of the correct fingerprint. While they are cheap to produce, they have historically not been as common as capacitive sensors, but have been in focus recently due to their applicability in in-display sensors. A drawback of the optical sensors in in-display detection is that light needs to travel through the detection surface, making it inapplicable for LCD displays.

Fingerprints’ current sensors are all based on capacitance

Capacitive sensors Capacitance is, simply put, the ability to hold electric charge when a voltage is applied. The most easily understood capacitor is the parallel-plate capacitor, where two plates of a capacitive material are placed in parallel at a distance, d. When an external potential is applied, electrons will gather at one of the plates, resulting in an electric charge. When the potential is turned off, the charge difference will result in a measureable voltage that will be linearly dependent on the capacitance of the capacitor. The lower the distance (d), the higher the capacitance and thus the measureable voltage, effectively allowing the capacitance circuit to measure small distances.

OPTICAL FINGERPRINT SENSOR

Source: Nordea

PLATE CAPACITOR

Source: Nordea



If a human finger is placed on a surface, the ridges and valleys of the fingerprint will result in the skin being at different distances from the surface at different points. If a very fine grid of capacitive sensors is placed on the surface, the distance to the finger can be measured individually, and the information can be translated to a logical value – a ridge or valley. Using all data points, a bitmap-image of a finger can be created.

There are basically two ways to implement this into a smart device sensor: passive or active capacitive measurement. The first is based on applying the voltage to an external circuit in the detection surface to create the charge difference, while the latter runs the (small) electric current through the finger instead. Passive sensors require a thin coating on the sensor, while active sensors require a small bezel (a rim that holds a transparent covering) around the sensor that can induce the current to the finger.

The capacitive sensors work through thin layers of glass

The main benefit of capacitive sensors is that they essentially create a three-dimensional image of the finger using the distance measurements, making it impossible to fool with a 2D-fingerprint copy. They can be constructed to detect the fingerprint both when touching and when swiping across the detection surface, and be placed under a thin layer of glass or ceramics. A drawback of capacitive sensors is that they only work through a thin layer and not through a smartphone display, as the difference in capacitance per circuit becomes smaller the further the detection surface is from the capacitance sensor.

Acoustic sensors have previously been disregarded as too expensive…

Ultrasound sensors Ultrasound sensors are similar to the optical sensors apart from the fact that the reflected entity is high-frequency soundwaves instead of light waves. This is beneficial in that ultrasound can penetrate through thicker mediums, such as a smartphone display or the outer layer of skin. Since the fingerprint pattern in the external, or epidermal, skin is reproduced in the lower layer dermal skin, the “inner” fingerprint can be used instead of the “outer”, eliminating problems with dirty, wet or damaged fingers. This feature also, at least theoretically, makes the solution work for users wearing gloves. The ultrasound sensor can then use the measurements to build a 3D-image of the fingerprint in a similar manner as the capacitive sensor.

…but they can work through smartphone displays

Historically, these solutions have generally been regarded as expensive, power-

hungry and slow, but recent developments in the field suggest that they could play a major part in the next generation of high-end devices with fingerprint detectors, owing to their ability to penetrate through a smartphone display.

CAPACITIVE FINGERPRINT SENSOR

Source: Nordea

ULTRASOUND FINGERPRINT SENSOR

Source: Nordea



Thermal sensors are uncommon due to implementation problems

Thermal sensors Thermal sensors are based on the simple fact that the human body, and therefore its skin, has a higher temperature than the surrounding air. By placing a large number of thermometers in a grid, each thermometer can measure the temperature of the above surface and decide whether or not it is the temperature of a human finger or lower, and can thus create a 2D image. While 3D modelling is not possible, it is not possible to fool thermal sensors with 2D-copies of a fingerprint.

Thermal sensors have not been used much in smartphones due to implementation

problems when the smartphones and the surrounding air are heated. The sensors have also been regarded as too power consuming. However, Norwegian company Next Biometrics bases its sensors on this (or rather a similar) technology and has showcased a smartcard fingerprint sensor able to run on inductive electricity from a point-of-sales terminal.

Touchless sensors have gained more traction after the release of Apple’s Face ID

Touchless sensors Sensors that do not require the user to touch the device have been around since the launch of Fujitsu ARROWS NX F-04G in 2015, which featured an iris scanner. As always with new Apple launches, the iPhone X and its Face ID technology have spurred more interest in touchless biometric solutions. There are two main areas in touchless sensors: iris and face detection. The solutions can also be used in combination, so called multimodality.

Iris recognition is considered very secure

Iris recognition Iris recognition has been described by researchers and developers as the ideal human body part for biometric identification due to its uniqueness and security. Apart from the face, the iris does not change with age and it is not identical for twins. Out of all the biometric measures discussed here, it is generally regarded as having the lowest false acceptance rate (FAR), and apart from fingerprint or face recognition, it is not obscured by any piece of clothing apart from mirrored sunglasses. The technique requires a high-resolution camera in combination with an IR-lamp. A potential issue with iris recognition is that it does not necessarily confirm that the iris being scanned belongs to a live person, which raises security concerns. However, this is an issue for many biometric solutions, and Fingerprints is working on a liveliness detection based on the birefringence property of the cornea of the eye.

Three-dimensional face recognition has gained a lot of popularity

Face recognition Two-dimensional face recognition has, owing to security flaws, been generally brushed aside for use in biometric sensors, although it has been used in a few smartphone models in the last few years. Now, three-dimensional mapping and detection is on the rise: given that it guarantees that images or even videos of faces cannot be used to fool the system, safety is no longer the same issue.

While face recognition requires the entire face to be visible for the scanner, it generally requires less active alignment to the scanner than what is required for the iris, thereby providing some user convenience.

Fingerprints offers a wide range of capacitive sensors

Fingerprints’ offering Current sensors Fingerprints currently offers fingerprint sensors from many different series that can be divided into three main categories: spray, under-glass and smartcard. The new

THERMAL FINGERPRINT SENSOR

Source: Nordea

EYE ANATOMY




FPC1511 sensor has recently been announced and is set to be integrated into commercial smartphones in late 2018 or early 2019.

The spray-on sensors, meant for front-, side- or rear-mounted button integration in smartphones, are the first generation of Fingerprints’ smartphone sensor offering. They use capacitive fingerprint detection, come in various shapes and sizes and supposedly work for both wet and dry fingers.

The under-glass solution was developed in order to give manufacturers greater freedom when it comes to mobile device design. By implementing a passive capacitance detection system, the sensors work through thin layers of glass or ceramics and can therefore discretely be implemented under the front, side, or back glass or ceramic panels of phones.

The Fingerprints1300 Series, using the so-called T-Shape module, is designed for smartcard integration. The sensors are the thinnest in the family, and can be mounted on semi-flexible surfaces such as credit cards. They are ultra-thin and very power-efficient, requiring only a small inductive current to function. The Fingerprints1300 Series is aimed specifically towards the smartcards business line, due to the sensor’s applicability and ease of use in contactless payments.

The fourth generation sensor is the FPC1511 sensor, announced on 26 June. It is Fingerprints’ most cost-optimised sensor so far, and has been created in order to improve the company’s margins as well as penetrating a greater share of the lower-end smartphone market. It is slated to receive full qualification in Q3 2018 and Fingerprints hopes that it will launch in commercial smartphones in late 2018 or early 2019.

BACK- AND FRONT-MOUNTED FINGERPRINT SENSORS


T-SHAPE MODULE




Apart from the main series, Fingerprints also offers the Fingerprints-BM, which is a standalone module containing a robust sensor, biometric processor and on-board template storage for 3D-fingerprint scan images. It contains the software and algorithms needed to work out of the box, and is meant for implementation in new innovations. This module is also available as a development kit.

In terms of touchless sensors, Fingerprints offers iris recognition software previously developed by the American company Delta ID, which Fingerprints acquired in 2017. Fingerprints’ ActiveIRIS Technology is the world’s first iris recognition technology ready for mass-market consumer devices. The solution is also approved for use in Aadhaar, the Indian government biometric identification system, and has been implemented in, for example, point-of-sales terminals in domestic trains.

Fingerprints has several new-generation sensors under development

In development In the November 2017 Technology Update, Fingerprints announced that a few new sensors and technologies were in development. Apart from the new capacitive sensor, whose prime feature is low production cost (later launched as the Fingerprints1511 sensor), the company also spoke of the next generation of biometric sensors for smartphone use.

The headline innovation presented was the new ultrasound-based fingerprint detection technology that, contrary to the in-display solutions presently available on the market, supposedly reads the fingerprint from anywhere on the screen instead of just in a confined “hot zone”. This technology was initially scheduled to make its debut in a consumer product by the end of 2018, but this date has since been pushed back. Fingerprints is also working on an optical solution for in-display fingerprint sensors.

One of the other two modalities discussed in the Technology Update was updates to the iris recognition software, intended to use features in the cornea of the eye to more accurately detect if the iris being scanned belongs to a living, present person or

BM-MODULE


ACTIVE-IRIS DETECTION


ULTRASOUND SENSOR




not. The other new feature presented was face recognition, using an IR technique similar to Apple’s Face ID. In terms of touchless biometric recognition, Fingerprints plans to provide software-only solutions in the future too.

The smartphone market

The smartphone market is constantly changing, with new innovative manufacturers entering the market and growing quickly, while Samsung and Apple continue to account for the majority of both revenue and units shipped. Below, we show the most relevant smartphone manufacturers from Fingerprints’ perspective.

In terms of turnover, Apple is the clear market leader. However, due to the

company’s relatively high pricing, it falls behind in terms of units shipped. With an increasing number of players in the market offering devices with a range of different prices, more than a quarter of the market consists of manufacturers corresponding to less than 5% of the market share. Due to the increasing attachment rates of fingerprint sensors in smartphones, even in lower-range units, the number of units shipped is becoming the more relevant figure to look at in terms of Fingerprints’ addressable market.

Apple Since its launch of the iPhone in 2007, Apple has been a key player in the smartphone market, and has many times taken the lead in terms of innovation and function in its annual iPhone releases. The company was not the first manufacturer to feature fingerprint sensors in its products, but the 2013 launch of the Touch ID spurred interest in the solution in the market. Other manufacturers tend to follow Apple’s lead when it comes to such functions, and hence the recent Face ID solution could be a game-changer in terms of biometric smartphone solutions. Apple designs all of its sensors in-house or through acquisitions, and is therefore not considered as a potential Fingerprints customer.

MARKET SHARE IN UNITS SHIPPED MARKET SHARE IN REVENUES

Source: IDC Source: IDC

Apple20%

Samsung29%

Huawei10%Xiaomi

5%Oppo8%

Vivo9%

LG5%

Others14%

Apple36%

Samsung22%

Huawei8%

Xiaomi3%

Oppo7%

Vivo5%

LG3%

Others16%

HISTORICAL MARKET SHARES


0%10%20%30%40%50%60%70%80%90%

100%

Q409

Q110

Q210

Q310

Q410

Q111

Q211

Q311

Q411

Q112

Q212

Q312

Q412

Q113

Q213

Q313

Q413

Q114

Q214

Q314

Q414

Q115

Q215

Q315

Q415

Q116

Q216

Q316

Q416

Q117

Q217

Q317

Q417

Q118

Apple Samsung Huawei Xiaomi Oppo LG LenovoZTE Vivo Sony RIM HTC Nokia Others




Huawei The Chinese smartphone manufacturer Huawei has, since entering the smartphone market in 2009, climbed to a 12% market share in units shipped. It has utilised fingerprint sensors as a biometric identification and security measure in its products since 2014, and used Fingerprints as its only component provider until 2017, when it started to dual-source its sensors from Synaptics. Its latest premium phone, the Porsche Design Huawei Mate 10, was one of the first to feature an in-display fingerprint sensor, using Goodix as supplier, while the original Mate 10 Pro used sensors from Fingerprints.

Oppo Oppo, also based in China, became the largest smartphone manufacturer in the Chinese market in 2016 and currently holds a 7% market share globally. The company has been a client of Fingerprints for many of its models, but also uses sensors from Goodix. Oppo has also, as of April 2018, patented its own solution for an optical in-display sensor, but it has not yet showcased or built it into any product.

Samsung As the largest smartphone manufacturer in the world in terms of units shipped, Samsung has been key target customer of Fingerprints since it first ventured into the customer electronics market. However, the company has favoured using sensors from Synaptics, whose R&D projects it has also occasionally funded. Fingerprints has been in talks with Samsung, but so far no preferred supplier status has been secured.


HUAWEI MATE 10 PRO

Source: Huawei


OPPO A79

Source: MobileHeadlines




Xiaomi Xiaomi released its first smartphone in 2011 and became China’s largest smartphone company in 2014. The company now has an 8% market share in units shipped and has been dubbed ‘The Apple of the East’ by the New York Times. Xiaomi’s recent IPO raised USD 4.7bn – the world’s biggest tech listing since Alibaba. However, this amount was less than the company’s target of USD 10bn. The company’s management has mainly blamed the current Sino-US trade sanctions, but there is also some uncertainty about how much Xiaomi can grow outside of its current market.

In 2018, the company revealed plans to enter the US smartphone market this year or next, having previously focused on Asia-Pacific. Xiaomi has used Fingerprints’ sensors in its products for many years, with the latest flagship model, Mi 8, featuring Fingerprints’ third-generation sensors. However, the Mi 8 was not only dual-sourced but triple-sourced, and also used in-display sensors from both Goodix and Synaptics and standard sensors from Goodix.

Payment card revenue streams are different than those in the smartphone industry

The smartcard market Payment and security cards belong to a different production ecosystem. Unlike the smartphone business line, where sensors are produced and then sold and integrated into OEM customers’ products in a typically straightforward manner, credit cards have more intermediaries before reaching end consumers, ie the people who plan to use the cards for everyday payments.

Payment cards today have an ASP of around USD 1, while contactless cards have an ASP of USD 2.20 and fingerprint-embedded cards likely around USD 13-25 in the initial phase. It is still uncertain how many customers will be willing to pay this much for a service (payment cards) they are used to getting for free, and what share of the revenue Fingerprints will receive when it is so far removed from the actual consumers in the revenue chain. However, it should be stressed that the share of total ASP for Fingerprints in the smartcard business line could be larger than that in the smartphone business line, as here the company provides the full module and not just the sensor wafer.

Enrolment Enrolment is a frequently discussed issue when it comes to smartcards. Compared to a regular card, where you today are provided with card and PIN-code separately, or to a smartphone with a fingerprint sensor, which has a clear user interface for self-enrolment, a biometric smartcard does not have any obvious method of user on-boarding and initiation. Before describing the smartcard ecosystem and value chain in more detail, we present some of the suggested solutions. Fingerprints has not announced what enrolment solution it will prefer to use, but has made positive comments about several technologies and worked closely with the relevant card manufacturers in order to develop customer-friendly on-boarding processes. The company has showcased contact- and contactless enrolment options, as well as enrolment using the customer’s smartphone.

Biometric smartcards could be activated at a local bank One of Fingerprints’ patents suggests activation with users’ smartphones

Local interaction A very secure but less convenient solution is to activate a smartcard locally by visiting a bank or ATM, where the card would then connect to the system using NFC or a chip. Then, the fingerprint can be detected at the relevant machine and stored on the card.

Smartphone activation Another solution is activating the card through the use of a smartphone app. By connecting the phone to the card using NFC or a cable (as one of Fingerprints’ patent suggests), the smartphone can then supply power to the smartcard and show a user interface meant to guide the user through the enrolment process.


SMARTCARD

Source: Company Data



Smartcards with internal batteries can be activated instantly Some companies suggest sending out enrolment devices in the mail

Standalone activation For smartcards with integrated batteries, the enrolment could be performed on the card itself, and thus could be activated at delivery. The main drawback of this is that it only works on smartcards with integrated batteries. This solution also comes with the security risk of a thief stealing your card in the mail, activating it with their own fingerprint and thereby gaining access to your bank or credit account.

Self-enrolment devices Biometric sensor provider IDEX, together with Mastercard, is testing standalone sensor activation kits, meant to be sent separately from the smartcards to the end user. They are small devices consisting of electric components covered by cardboard, and run on a disposable battery. By following the attached instructions and inserting the card into the device, the user can easily activate the card with a fingerprint. The main issue with this is that the devices can be costly, thus driving up the already stretched price of a biometric smartcard.

Most cards are issued by banks

Card issuers Smartcards for consumer use can be issued by any company or institution willing to provide a customer or employee with a means to identify themselves in order to gain access to restricted areas, prove their identity or authenticate a financial transaction from an account to which they have access. The main use of smartcards today is debit or credit payments, meaning that a majority of the cards today are issued by banks. The second contender is likely entry cards, meant to identify a person trying to enter a certain area and grant or deny access.

FINGERPRINTS' SMARTPHONE ENROLMENT PATENT

Source: EmbeddedSecurityNews

MASTERCARD/IDEX SELF-ENROLMENT KIT

Source: BiometricUpdate



Loyalty programme cards are a decreasing market

Another historical use has been member cards, ie for loyalty programmes, but these are becoming less popular as they are being replaced with card-less memberships; as such, implementing biometric sensors would not benefit this industry much.

Payment schemes Since the majority of smartcards today are payment cards, card schemes and payment methods are important for the future of biometric smartcards. They ensure that the cards are connected to the bank accounts of the users and are useable in point-of-sales terminals and ATMs in the country of issue as well as internationally. Three companies – UnionPay, Visa and Mastercard – together hold around 80% of the market and all are openly collaborating with card manufacturers and solution providers to develop biometric smartcards that will improve customer convenience and security.

Card manufacturers The cards that are ordered by the payment scheme providers are delivered by card manufacturers. Manufacturers order components and solutions and assemble them into an actual card. The card is then connected to the payment schemes before being sent to the banks for customer delivery.

Gemalto Dutch company Gemalto was founded in 2006 as a merger of Axalto and Gemplus. It is now the world’s largest smartcard manufacturer. Gemalto is enthusiastic about the future of biometric smartcards and has showcased products using both Fingerprints and IDEX sensors. The trials using Fingerprints’ sensors were held in Cyprus during 2018. Gemalto holds a market share of approximately 30% and was acquired late 2017 by French aerospace and defence group Thales to create a leader in digital security.

Giesecke & Devrient Giesecke & Devrient, or G+D, is a security solution provider and the world’s third-largest smartcard manufacturer. They are developing biometric payment solutions in collaboration with Fingerprints.

Idemia Idemia is the world’s second-largest smartcard manufacturer and was formed when Oberthur and Morpho merged in 2017. The company was quick to announce that it is developing biometric smartcards, and has showcased two biometric smartcards: one battery-driven that can handle both contact- and contactless operation and one for contact only chip-use. The first uses a sensor from Fingerprints and provides a self-enrolment solution using smartphones equipped with NFC, while the latter uses an IDEX sensor. They have initiated trials in Japan using the Fingerprints sensor.

Kona I Kona I is South Korea’s largest smartcard developer. The company has developed several biometric smartcards using fingerprint sensors from Fingerprints, including a Visa pilot in collaboration with American bank Mountain Credit Union and an Airplus trial in Germany.

Tactilis Founded in Singapore in 2009, Tactilis has developed smartcards with biometric sensors for many years, with its flagship product being a chip-equipped smartcard for contact-only use. The card implements a thermal large area sensor from Norwegian company Next Biometrics.

Solution providers The cards are equipped with technology from an array of different providers, who construct modules and create algorithms for card manufacturers to use in their products. There are many competitors in this segment of the market; here we introduce a few relevant players.










CardLab Copenhagen-based CardLab is a solution provider that has showcased a number of biometric modules and solutions for smartcards. Its latest product showcase features a sensor from the FPC1300 series.

Card Tech Card Tech is an Italian company that announced collaboration with Fingerprints in June 2018. It has also previously worked with IDEX to develop a contact-only card.

Feitan Technologies While China is underrepresented in the smartcard industry due to the popularity of mobile payments in the country and the western-centric history of the payment scheme business, Feitan Technologies is a company that manufactures mobile payment terminals and is currently developing a smartcard featuring an IDEX fingerprint sensor.

Zwipe Norwegian smartcard solution provider Zwipe holds over 50 patents related to biometric payment solutions. It trialled its first functioning fingerprint-featured payment card as early as 2014. Zwipe’s current flagship product uses Fingerprints’ sensors and has been demonstrated as capable of harvesting enough energy to run the sensor using an inductive current from a standard contactless point-of-sales terminal. The chairman of the board of Zwipe is former Fingerprints CEO Jörgen Lantto.

Competitors Fingerprints faces competition from multiple companies. A few specialise in biometric solutions, while others are bigger companies focused on, for example, semiconductors or touch pads, having biometric sensors as only one of several business lines. Below, we give a brief overview of the most relevant competitors and cover their strengths and weaknesses in the biometric sensor market.

Egis Technology Egis Technology, or EgisTec, is based in Taiwan and specialises in capacitive fingerprint sensors. The company focuses on smartphone integration. Since 2014, its main customer has been Samsung, to which EgisTec delivers fingerprint sensors for mid-range devices. Other prominent clients are Lenovo, Acer, ASUS and HP. The company has an in-display fingerprint sensor in development and stated at the Mobile World Congress in Barcelona, in early 2018, that it would be finished by H2 2018.





BIOMETRIC SENSOR MARKET SHARE, IDC 2018 FORECAST

Source: IDC

Fingerprints41%

Synaptics24%

Goodix9%

Apple19%

EgisTec3%

Sliead1%

Others3%




Datang Microelectronics Co Datang Microelectronics Co, or DMT, is Asia’s largest smartcard fingerprint sensor producer. It is currently developing fingerprint sensors for implementation in future biometric smartcards, and provides sensors compatible with cards that run on rechargeable batteries.

Goodix (Shenzhen Goodix Technology) China-based Goodix was founded in 2002 and has historically focused on interface solutions. In the last four years, the company has ventured into the fingerprint sensor business and managed to obtain a significant market share by selling sensors at a lower price than its American and European counterparts. Goodix is one of the core reasons for the plummeting ASPs of capacitive fingerprint sensors in the last few years. The company is also one of the three companies currently offering a consumer-ready in-display fingerprint sensor, which is integrated into a few devices already released. Its fingerprint sensors have integrated heart rate sensors, a solution useful in spoof detection. Apart from the smartphone market, Goodix has presented a few integrations in wearables and door locks.

IDEX IDEX is a Norwegian biometric sensor provider that tried to enter the smart device business a few years back, but faced heavy competition and never gained a significant share of the market. Recently, the company switched tactics to put all of its focus on the smartcard market, and it is one of three big manufacturers with a clear business vision in the area. It has also developed, but never released, products in the Internet of Things market. IDEX has patented its so-called “off-chip” technology, which allows for the polymer sensors to be placed adjacent to the sensor rather than underneath it. This calls for cheaper production, as it does not require a silicon chip, and ease of integration, as it can be made very thin and flexible. IDEX also provides a solution to one of the big obstacles for fingerprint sensors in smartcards: on-boarding. IDEX’s self-enrolment biometric kit provides end customers with a way of registering their fingerprint on the card locally in a safe and secure way, without having to visit a bank or send their fingerprint data through the cloud. IDEX has revealed partnerships with Mastercard, smartcard manufacturer IDEMIA and fingerprint sensor algorithm developer Precise Biometrics and is in the process of receiving ISO certification for its smartcard solution. In 2017, IDEX revealed that it has been working on an in-display smartphone fingerprint sensor for many years, utilising the benefits of its off-chip technology. The company plans to attempt to re-enter the smartphone market as soon as the new sensor in development is finished.

Next Biometrics The second Norwegian company in the market is Next Biometrics, whose thermal sensor also tried to compete with Fingerprints and the like in the smartphone industry a few years back. Owing to implementation problems and higher production costs, the company eventually retreated from consumer electronics and kept focusing on its current business in security and identification solutions. Next’s sensor is notably larger than those of its competitors, which the company claims improves security. In April 2018, Next showcased a smartcard able to run on the energy it could inductively harvest from a standard point-of-sales terminal. Next Biometrics also recently received certification for its fingerprint sensor for India’s Aadhaar government ID programme, allowing it to sell products for identification and point-of-sales terminals as part of the world’s largest biometric identity programme.

Precise Biometrics Precise Biometrics is another Swedish biometric solution provider, focusing solely on the detection algorithm software of identification. Precise Biometrics does not provide any hardware modules for implementation in devices, but rather collaborates with semiconductor chip providers to implement its secure and fast algorithms into sensor chips. Fingerprints formerly partnered with Precise Biometrics for the detection




Source: Embedded Security News




algorithms of its sensors, but has moved on to develop its own software to match the sensors and provide a full implementation service to end customers.

Qualcomm American semiconductor giant Qualcomm is prominent in the wireless communication market and is among the largest companies in this list. The company’s main product offering is its Snapdragon processor unit series. Qualcomm showcased its ultrasound-based fingerprint sensor a few years back, and has already presented an in-display sensor using this detection technology capable of heart rate, and hence liveness, detection. Given that ultrasound detection requires more power than capacitive or optical solutions, a competitive edge is that the sensor is well-paired with Qualcomm’s own Snapdragon processor in order to function efficiently in smartphones. Qualcomm is also developing iris detection technology.

Silead Silead is a Chinese company focusing on low-cost capacitive sensors. It has managed to obtain market shares in the heavily commoditised smartphone sensor business, mostly with Asian manufacturers. The company does not focus on high-end smartphones, but rather offers cheaper sensors for low- to mid-tier consumer electronics.

Suprema Suprema provides biometric and security technology for both smartphone and industrial integration (such as time and attendance devices). The company offers both optical and capacitive fingerprint sensors for smartphone integration, but has yet to achieve a significant market share compared with the bigger competitors, such as Fingerprints, Synaptics and Goodix.

Synaptics Synaptics is based in California and provides “human interface” products, such as touchpads and fingerprint sensors. The company is one of the three current sensor providers that offer in-display fingerprint sensors. Historically, Synaptics has worked in close partnership with Samsung, but it also has clients such as Huawei, ASUS, Lenovo, and Xiaomi. In 2017, Synaptics acquired voice and audio processing developer Connexant Systems, signalling a move into voice-based biometric modalities in the near future.

Technologies and markets In the table below, an “X” indicates technologies that are developed and currently present in markets, whereas a “/” indicates technologies under development.





Company Market Sensor

Smartphone Smartcards Fingerprint In-display Iris Face

Fingerprints X X X / X /

EgisTec X X / /Datang Microelectronics X XGoodix X X XIdex X X XNext Biometrics X X XQualcomm X X X X XSilead X XSuprema X XSynaptics X X X XSource: Company data and Nordea



Our industry scenario With a recent history as dramatic as Fingerprints’, forecasting what is next is not easy. However, using what we know today, we present some likely scenarios for the industry and Fingerprints’ place in it.

In-display fingerprint sensors are likely the next generation high-end smartphone biometric sensor norm

The future of biometrics in smartphones The latest trend in fingerprint sensors mounted on smart devices is in-display sensors. The Vivo X21 UD, the Porsche Design Huawei Mate RS and the Xiaomi Mi 8 Explorer Edition feature this novelty, using optical sensors from Synaptics, Goodix or both. While these models have the sensor in (or rather under) the display, the fingerprint detection is confined to a small area of the screen, which has to be shown on the display. This novelty has spurred a lot of interest, and, in our view, is very likely to become the norm in fingerprint sensors for high-end smartphones in the coming years. Vivo recently announced its flagship phone NEX, containing an optical “half-screen” in-display fingerprint sensor from Goodix, and it is likely that full-screen in-display fingerprint sensors will be the end-game of fingerprint sensors in smart devices. The solution is convenient in that it requires basically nothing from the user apart from starting to use the device, and there are no apparent functional improvements that can be made apart from heightened speed and security performance.

Apple could revert to fingerprint sensors for its new releases

Face, iris or fingerprint? There is little doubt in our minds that one of either face, iris or fingerprint recognition will be the norm for biometric sensors in the next generation of high-end smart devices. The question is which technology will dominate, and if there is room for more than one. The launch of Apple’s Face ID was, according to media sources, plan B for the iPhone X, which was initially planned to include an in-display fingerprint sensor that was not finished on time. Moreover, the recent launches from Vivo, Huawei and Xiaomi also speak to in-display as being the future standard. There is also the possibility that the Apple iPhone launched in H2 2018 or 2019 will revert to (in-display) fingerprint detection.

Face recognition is trendy now, but will it last?

Face ID has generally received praise in the industry, and while some users have shown examples of how to spoof the sensor (it seems, for example, not to be as twin-proof as Apple first claimed), it has made some competitors, such as Xiaomi with its recent Mi 8 release, look into implementing similar solutions. Here, as in the case of in-display sensors, Fingerprints’ agility in providing such a solution soon is key to gaining market share, but it should be mentioned that in contrast to the in-display case (where Fingerprints claims to have better technology than any competitors with its full-screen adaption), Fingerprints does not currently seem to have a clear advantage over any of the other biometric sensor providers.

CAPACITIVE SENSOR SHIPMENTS, EXCLUDING APPLE TOTAL ADDRESSABLE CAPACITIVE SENSOR MARKET

Source:Company data, IDC and Nordea estimates Source: Company data, IDC and Nordea estimates

0%10%20%30%40%50%60%70%80%90%100%

0200400600800

1,0001,2001,4001,600

mill

ion

units

Smartphones CMOS sensors Attachment rate

0

0.5

1

1.5

2

2.5

3

0

200

400

600

800

1,000

1,200

1,400

USD

USD

m

TAM ASP



Iris has not gained much traction, but could be a long-term winner in touchless sensors

Iris recognition has been available for a few years now, and while it has been praised for its extremely high security and low production costs, it has not gained significant traction in the field and has only been used in a few high-end devices, including the troubled Samsung Galaxy Note 7. Some criticism has been directed against its low ease of use, requiring more active alignment with the phone camera than, for example, Apple’s Face ID. Fingerprints has not yet been able to gain much traction for its iris sensors among OEMs, possibly due to face recognition gaining more interest among touchless sensors. This could indicate that this part of the company’s business is not going to constitute a major part of future revenues. However, with coming revisions to the sensor system, Fingerprints claims that the detection will require very little to no active action and work at reasonable distance. This could become more convenient than a face recognition technique that requires both active alignment and an unobstructed line of sight from face to sensor. User convenience is going to be the long-term winner in the sensor race, and this could lead to a rise in iris detection if the face recognition trend cools.

Multimodality is likely to be relevant to a small niche of the market

Another interesting solution that Fingerprints continues to advocate is multimodal sensors. While there are a few devices on the market that feature both fingerprint and touchless sensors, they usually require one of the sensors to give a correct measurement instead of requiring both for identification. Requiring two identification modes would increase security vastly and make spoofing exceptionally hard to pull off, and Fingerprints would be a very suitable supplier of solutions based on fingerprint and iris sensors and integration. However, the inconvenience of use likely makes it attractive to niche segments only.

Taking this all into account, we strongly believe that fingerprint recognition is going to stay the norm in smartphone biometric sensors, with capacitive sensors slowly being replaced by in-display while the combined sector grows. This is due to user convenience: it is hard to argue that there are more effortless ways to open a touchscreen than touching the screen. However, we believe that touchless sensors have a future in smartphones, but as an extra, multimodal feature, and mainly in high-end devices, rather than as a replacement for fingerprint sensors.

All-screen smartphone fronts are becoming the high-end norm

The end of display bezels If we base our predictions on a simple observation in the smartphone market and look further into the future, we find that one thing seems certain – the display bezels are going away. The iPhone X, Huawei P20 and LG G7, among others, feature the so-called “notch trend”, where the display covers the entire screen apart from a small fringe for the front-facing camera, ear detection, phone speaker, and, in the case of the iPhone X, an IR light for face recognition. With Apple, LG and Samsung having filed patents for cameras and other devices mounted inside of, or underneath, the

BIOMETRIC SENSOR ATTACHMENT RATES

Source: Company data, IDC and Nordea estimates

0%

20%

40%

60%

80%

100%

120%

140%

2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023EFingerprint Iris Face



screen, the notch will probably be but a memory in the future. Vivo recently announced its new flagship phone NEX, which, instead of a notch, incorporates the ear detection and phone speaker into the screen and puts the front-facing camera in a periscope latch on top of the phone. This means that 91.24% of phone’s front consists of display, the largest display-to-front ratio on the market today.

No current touchless solutions are practical to use together with all-screen smartphones

So, what does this entail for the biometric sensor industry? First of all, if the pop-up camera solution utilised by the Vivo Nex becomes the short-term norm before the display-mounted cameras hit the market, using face recognition as a means of unlocking the phone would be too inconvenient, and in-display sensors (or the currently more common back-mounted sensor) would be the only viable options.

Patents from Apple and Samsung indicate that components will be integrated into the display rather than underneath it

Now, as soon as full-display smartphone fronts become standard, there are potential new risks for all current biometric sensor providers. While the sensors that are being developed by Fingerprints, as well as those made by Synaptics and Goodix, are mounted underneath the screen, the abovementioned patents from Apple and Samsung indicate that components will instead be implemented into the screen in the future. Creating a fine enough grid would allow display pixels, touch sensors, camera parts and fingerprint detectors to be placed side-by-side without sacrificing display resolution. Such a display-camera-sensor solution would likely have to be manufactured in one piece, meaning that the biometric sensor companies would face new competition from display manufacturers.

We expect capacitive sensor attachment rates will peak in 2019

Our smartphone scenario Based on the above reasoning, we forecast that the capacitive fingerprint sensor attachment rate in smartphones is set to peak in 2019 at around 66%, being slowly replaced by in-display solutions. We strongly believe that fingerprint sensors rather than touchless verification will remain the norm in all smartphone segments, and that face and iris recognition will serve as an extra feature in high-end devices rather than the standard biometric solution. According to speculation in technology media, the Samsung Galaxy S10 will feature both in-display and face recognition, and it seems unlikely to us that Apple would not launch an updated, in-display, Touch ID on top of Face ID in 2019, or perhaps as early as 2018. We therefore predict that touchless sensor attachment rates will remain low, and that Fingerprints’ market share will be initially high in iris recognition but constantly low in face recognition. The upcoming technology indicated by Apple and Samsung patents, with components integrated into the screen, is going to be a game-changer, but we do not see it being implemented in anything but flagship phones from these two manufacturers in the coming five years. Accordingly, it does not affect Fingerprints’ addressable market within the forecast horizon.

THE VIVO NEX

Source: Vivo



Fingerprint sensors will become more common in low-end devices

With falling ASPs and more suppliers, fingerprint sensors have already started to gain attachment rates in lower-end products, and we believe this will be the future arena for capacitive sensors. This leads to our estimate that the fingerprint sensor attachment rate (in-display and capacitive combined) will climb towards 85% in 2023. With Fingerprints’ in-display sensor set for release in 2019, we think the company’s market shares will end up around 15% in both capacitive and in-display from 2020 onwards, leading to Fingerprints getting more revenues from in-display than from capacitive from 2022. This is one of the greatest risks for the future: not being able to release a functioning in-display solution in time to gain market shares would likely ruin future revenue growth due to the diminishing capacitive sensor sales.

Fingerprints has a head start in smartcard sensors, but will it last for long?

Our smartcard scenario The second of the three main business lines of Fingerprints is smartcards, and CEO Christian Fredriksson has claimed that this is by far the biggest opportunity for the company. At the moment, card manufacturers are testing smartcards with integrated fingerprint sensors from Fingerprints and competitors, such as NEXT or IDEX, in product development and market trials. Reports claim that the first contactless smartcards with fingerprint sensors will be available to consumers in 2019, and by then Fingerprints will likely be able to get a fair share of the market. The recently launched T-Shape sensor module is fast and cheap, and it requires very little power and production costs, but as we have seen in the smartphone market, this competitive edge is unlikely to be prolonged. The size of this market will be very dependent on the price of the sensors, as plastic cards today are produced at a very low price, meaning that the addition of a fingerprint sensor could multiply costs for card providers.

Current competitors are smaller than Fingerprints, but the card manufacturers could possibly provide their own solutions in the future

Fingerprints has two main competitors when it comes to fingerprint sensors for smartcard integration, namely the Norwegian companies IDEX and Next. Fingerprints has the advantage of infrastructure. Even with the upcoming cost cuts, the company has vast experience in collaborating closely with chip manufacturers to develop very large volumes and has proved capable of this before, whereas the Norwegian companies have not. Another risk is that the big card manufacturers, such as Gemalto, IDEMIA and G+D, or solution providers such as NXP or Zwipe, develop their own fingerprint sensors for integration into the cards, thereby cutting single-component providers, such as Fingerprints, out of the market. However, we consider this unlikely in the near future and believe that, for single-component manufacturers, the key to the emergence and survival of the market is rather to partner with these players. Fingerprints is on the verge of doing this, having already showcased functioning cards in collaboration with the main players.

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The greatest competitor for smartcards is smartphone payment solutions

There is also reason to look further into the future when it comes to smartcards as a payment solution. China has already started moving towards mobile payments as the norm, with services such as WeChat Pay or Alipay, and with smart devices becoming more and more secure, the end of payment cards as we use them today might not be that far away. One issue with using fingerprint sensors in smartcards is the enrolment process. Upon receiving a new card, the user has to initiate the authentication by providing her or his fingerprint somehow, and how to manage this securely is not a trivial matter (eg if someone steals a user’s mail and ends up with her/his payment card, it could be easily configured to the thief’s own fingerprint for unlimited contactless payments from the user’s account). Payment methods using smartphones will not face this problem, as phones are already configured to their owner, and ordering further services such as payment in the device does not require taking excess risks.

While it seems plausible that payment cards will remain the preferred payment method in a western perspective, mobile payment use is now so big in the APAC region that it represents 22% of the total number of daily transactions globally. This could be compared to the 8% currently represented by the contactless payment card method, which is where Fingerprints plans to implement its sensors.

Our conclusion about biometric measures in future money transactions is clear: we believe that fingerprint sensors could become bigger than PIN codes for payment authentication in the coming five years. However, the overly-high ASP for a sensor module compared with the willingness-to-pay for a payment card, the convenience of using a mobile device you already carry and trust, and the on-boarding issues are likely to cause a strong move towards mobile payments rather than cards. That being said, we strongly believe that there will be significant growth in biometric cards in the coming years, mostly in premium payment cards and identification smartcards. We base our estimates for the attachment rate on market reports suggesting that the number of biometric smartcards shipped will be around 100-150 million in 2022, and that Fingerprints can hold a significant market share in this segment due to its good market position. In our view, Chinese sensor manufacturers are not a huge concern in the short term with regards to competition given that most of them have not ventured into the area yet and given the western-centric smartcard ecosystem of today, where card issuers and solution providers are largely European or American.

The automotive and IoT business lines are highly uncertain

Automotive and embedded Given that Fingerprints has not announced any finished consumer product for the automotive industry, all we can do is look at the addressable market. The sensors that Fingerprints claims to be useful in these solutions are the standard series of capacitive sensors and the iris scanners. For example, Fingerprints has signed a ten-year exclusive partnership with Gentex to develop in-vehicle iris authentication for the automotive industry. Looking at the current ASP for the biometric sensors and the addressable market for cars—which undoubtedly is smaller than that of

GLOBAL BIOMETRIC SMARTCARD SHIPMENTS

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smartphones—the revenue possibilities are probably not huge. Even if all of the potential features for that Fingerprints has presented for the automotive segment (ie driver personalisation, airport security, door locks) are very exciting, the revenues for these solutions will probably go to the manufacturers of the consumer products, and Fingerprints will only get the already low sale price for its fingerprint sensors.

How many IoT products would actually benefit from having fingerprint sensors integrated?

The Internet of Things, or IoT, has been a buzzword for many years now, and in 2017 the number of IoT units was estimated to be around 8.4 billion, with some reports predicting this number will have increased to around 30 billion by 2020. A problem for predicting Fingerprints’ place in this business is the addressable market. Even if there are 30 billion units on the market in two years, how many of these could even make use of a fingerprint sensor or iris scanner? A door lock, oven or vehicle could definitely use the security or childproofing of a biometric sensor, but what use would it really have in a thermostat, a washing machine or a toothbrush? Apart from that, the problem would also be that the sensors most likely to be used in this area would be the capacitive sensors currently used in smartphones. This bodes for high competition, declining ASPs and low margins.

With the uncertainty for the automotive and embedded segment being so large, we are reluctant to give any real scenario forecasts. We believe that the segment will be similar to what it is now—with orders of products spread out among different industries looking into implementing biometric sensors—rather than becoming a clear and stable mass market. However, we argue that the segment will grow along with the IoT industry.



Our views on the most discussed topics After trading relatively flat around the SEK 1 mark since the turn of the century, the Fingerprint Cards share started showing signs of life in 2013 and skyrocketed in 2015, reaching a peak of SEK 135 per share by that December. It has subsequently been highly volatile, and the price started deteriorating as of H2 2016. Currently, it is trading 95% below its peak, but still attracts a lot of attention and many questions have been raised about its future prospects. In this section, we discuss the most common discussion topics surrounding the company and offer our views.

Fingerprints plans to provide all probable future sensors in smartphone use

What are the competing solutions within smartphones? As discussed above, the relevant biometric solutions for smartphones are fingerprint, iris and face recognition. As Fingerprints now has development in all of these areas, it runs practically no risk of missing the target entirely. The battle will instead be between competitors in these solutions rather than between the solutions themselves, while how big the market shares for each solution will be depend to a large extent on the next generation of flagship phones by Apple or Samsung. We believe that in-display touch sensors will receive the biggest share in high-end products, followed by face recognition in the short term, joined by iris recognition in the longer term.

Fingerprints’ market share in capacitive sensors is likely to decline further, while the market share in future generations depends on the new sensors currently in development

Will Fingerprints’ market share in smartphones collapse? Among smartphones using the now largely commoditised capacitive fingerprint sensors, there is reason to believe that Fingerprints’ market share will take further hits from the tightening competition. If it succeeds in cutting production costs to increase margins, it might be able to endure and retain its current share, but we estimate it to decline somewhat over the coming years before stabilising.

In the next-generation high-end market, Fingerprints’ market share is largely dependent on the products currently in development. If its in-display fingerprint sensor for full-screen implementation is released before competitors come up with similar solutions, Fingerprints can use this head start to capture a portion of the market. If not, or if face recognition becomes the norm, its competitive edge will be lower and it is likely to end up with a similar share to what it currently has in fingerprint detection.

The next generation fingerprint sensors are bound to be in-display Fingerprints’ in-display technology is based on ultrasound

Can the company create new, high-end biometric solutions? While there could be a case for Fingerprints creating a new, best-in-class, in-display solution that retains its peak position in the market for many years, we find this very unlikely. Given its employee base of 400 people (Q1 2018), of which more than 50% work within R&D, we believe it is probable that Synaptics or Goodix would quickly catch up even if Fingerprints were to release its full-display solution first, as their engineer bases outnumber that of Fingerprints, and they already have in-display solutions in the market today. Qualcomm is another key competitor in full-display fingerprint detection, as it also has an ultrasound-based sensor already finished and is likely working on improving its range. It should also be noted that the employee count is going to decrease as an effect of the recently-announced cost-cutting programme. Moreover, smartphones are becoming increasingly similar, meaning that we could see a shift among manufacturers to develop their own patents so as to differentiate them from the competition.

We believe that Fingerprints will release their ultrasound in-display solution for full-display implementation by the first half of 2019, meaning it will receive its first large orders around the end of Q4 2019 and get volumes growing significantly in 2020. With the ASP for this product likely being multiple times higher than that of the capacitive sensor, this will increase revenues. However, we stress that this is the major risk in our estimates: a delayed release of such a product could hamper future revenue growth.



Great uncertainty in the other business lines, but they could potentially be big earnings drivers

What obstacles is the biometric smartcard business facing? With smartcards using fingerprint sensors likely to be released to customers in 2019, the market for non-smartphone applications is bound to increase in size. Fingerprints has already started to work with card manufacturers and has shown promising demo products, including its T-shape sensor module. We believe it is likely that this will generate revenues in the coming years, but there is considerable uncertainty about the size and reachability of the market. While fingerprint sensors on cards could greatly improve the user experience, there are practical limitations. The most obvious one is that of costs. Payment cards today are not considered a premium technological product, and most customers expect the issuers to pay for the product. The ASP of a standard payment card today (usually paid by the card issuer) is less than USD 1, and a contactless one is around USD 2.20. Compare this with an average smartphone price of USD 300-400, and note that the attachment rate in this segment, with greater willingness to pay, is around 60% today. Who will pay for the biometric sensor cards, with ASPs estimated to be somewhere in the range of USD 13-25? This is what we believe to be the main cause of a low growth rate in smartcards.

There are several suggested solutions for biometric smartcard enrolment

The next issue of that is that of enrolment. Above we mentioned a few suggested solutions, and Fingerprints have stated that they are open to many options, having patented a few solutions on their own and used several in market trials.

In any case, we expect enrolment will cause the cards to be either more costly (owing to using some self-enrolment scheme or featuring internal batteries) or less convenient (owing to having to activate the cards at some specific location), and this will weigh on demand from issuers and consumers. Card manufacturers have previously stated that they are trying to trim on-boarding costs by, for example, using online activation, and fingerprint enrolment would contradict that ambition. One option is to charge the customers for the cards, which is not common today apart from in the uppermost premium segment.

We find it likely that self-enrolment is going to be the long-term winner in terms of activating biometric smartcards given its customer convenience. However, the cost increase from this will likely push attachment rates downward.

Mobile payments are on the rise Cash payments are becoming less and less popular All payments schemes are subject to regulation

Are payment cards dying? With the rise of payment solutions such as Apple Pay, Samsung Pay and AliPay, companies like Visa, Mastercard and American Express for the first time are seeing a material threat to a market they have dominated for a long time. Furthermore, society is increasingly led by mobile trends, which strengthens the case for Samsung and its peers. Mobile solutions have already reached a 23% share of total global payments today, substantially owing to their popularity in the Asia-Pacific region, which basically hopped over a payment card generation by moving from cash to mobile payments.

The migration from cash to cashless remains one of the key trends in the payment industry. We believe individuals, merchants, banks and corporations worldwide are supporting the shift from cash to digital payments, driving secular volume growth for players in the payments industry. The arguments for cashless are many, including convenience, better security, easier regulatory monitoring (eg for tax, anti-money laundering and counterterrorist financing purposes), reduced transportation costs, and suitability for e-commerce. In our view, the shift towards cashless is thus likely to continue in the years ahead. So, the market trends are still supportive for everyone, but what will happen down the road is not as clear.

Regulation is an important industry driver, and the recent PSD2 regulation in the EU may have important implications for the future of the industry. The Payment Service Directive (PSD) provides a legal platform for the establishment of a common payment area. The new PSD2 regulation extends the PSD to reduce entry barriers for third-party payment providers (TPPs) and to enhance payment security. The



Open banking has been in focus lately Account-to-account payments could become the future norm Payment cards have had a high penetration rate historically Payment schemes are aware of the current situation We expect the card manufacturers to move forward to retain their market positions

directive's changes became mandatory in January 2018, although the guidelines for the practical implementation are yet to be finalised.

In essence, the PSD2 regulation forces banks to open up their account data to third parties and requires significant security measures.

PSD2 has triggered significant focus on so-called “open banking”, where banks open up their systems for third parties through APIs (application programming interfaces) and allow for access to account information and initiation of A2A (account-to-account) payments. In this environment, banks have focused on finding third-party partners with which to collaborate, in order to open up new revenue streams and spur co-innovation. The most obvious area for third parties and banks to pursue is A2A payments.

A2A payments circumvent the established card payment networks and instead utilise the banks' account infrastructure, which has traditionally been mostly used for payments of invoices and direct debits. With the introduction of real-time A2A clearing solutions by large payment service providers, such as Nets and Vocalink, the convenience and speed of the A2A payment system has been upgraded significantly in recent years. The transaction cost for A2A payments is also significantly lower than for the card system, as several intermediaries are taken out of the picture. Data from Swipp and Vipps regarding the Danish and Norwegian markets suggest that A2A transaction fees are ~90% below the already cheap domestic payment schemes. This is where the headache for card companies starts. Mobile payment solutions, such as Apple Pay, could be suitable for A2A, effectively infringing on the market in which card companies have operated for a long time. The same goes for the banks.

Card manufacturers have had a great head start with the acceptance and penetration of cards, and the use of cards is still growing. They are already deeply integrated into the bank system and the banks themselves cater for this. The credit card system is one of, if not the, most reliable system for facilitating transactions, despite involving several intermediaries. For the time being, mobile pay transactions are still facilitated through the card companies. Looking ahead, this is not certain to continue.

Given the implications of PSD2, we believe there is scope for payment volumes to begin migrating from the card networks over to A2A payments. The start of this trend has already been seen across the Nordics, as the banks' own mobile A2A solutions, such as Swish in Sweden, Mobilepay in Denmark and Finland, Siirto in Finland and Vipps in Norway, have grown significantly in recent years (albeit mostly within peer-to-peer payments). That this will be a growing trend is also evident in the card companies investing in A2A solutions.

The payment schemes, Visa and Mastercard, have seen the threat from PSD2 for a while, and we believe they are moving to control the future payment streams in Europe. In 2016, Mastercard acquired the major UK A2A payments provider Vocalink and now controls significant A2A volumes and one of few European real-time clearing platforms. Visa has reacquired Visa Europe and established its own A2A solution, Visa Direct, moving to take its fair share of the new payments space. The two American card schemes have significant scope to conduct M&A and organic investments, which should allow them to maintain control over key parts of the payments value chain (including less obvious but strategically important areas such as tokenisation). Both companies are putting significant efforts into organic innovation. According to Swedish industry sources, we understand that Visa and Mastercard are pushing banks to enable A2A payments via existing cards. In that sense, Visa and Mastercard could optimise operations by shifting between A2A infrastructure and card networks, depending on the nature of the transaction.

With A2A payments entering the market, card-based players could lose out due to lower transaction volumes and potential pressure on fees. However, we believe there are several forces impacting how the industry will look in a few years,



including increasing economies of scale and security requirements, strategic moves by the large card schemes (Visa and Mastercard), and industry consolidation. Our conclusion is that the card infrastructure is likely to remain an important part of the value chain for the foreseeable future and that the distinction between A2A payments and card payments may become less clear ahead. To mitigate this, card manufacturers not only need to retaliate, but also need to cater to the tech giants.

In our view, the entrenched positions of the card schemes and their infrastructure should imply that they remain an important part of the European payments system, despite the rise of new competition.

Card manufacturers will not stand still to see their market deteriorate, but will likely put a lot of effort into these solutions in order to continue to be the dominant force for payments. Still, we cannot rule out, of course, that disruption to parts of the value chain will occur or that fees for industry players will decrease. The industry is moving ahead at a rapid pace, attracting interest from big technology firms, fintech companies and previously uninterested banks. Disruption is likely to remain a risk for all industry players, including Fingerprints’ smartcard business line.

We believe that the biometric smartcard market will be small, but far from insignificant

What about the size of the biometric smartcard market? Using the reasoning above, we do not believe in a contraction of the smartcard business in the foreseeable future. While mobile payment schemes are on the rise, the strong position of card-based payment schemes will likely be prolonged for the coming years, especially outside of Asia. In this segment, we believe that biometric security measures will grow, albeit slowly. With the main issue being the cost of the sensor relative to a standard card, we argue that the biometric smartcards will account for only a small niche of the total market until ASPs can be reduced heavily. In the long term, we think it is uncertain whether card or mobile payments will be the driver of biometric security measures in financial transactions.

The future finances of Fingerprints are largely dependent on the upcoming Q2 report

For how long will Fingerprints’ cash last? We estimate that Fingerprints’ future quarterly running costs amount to about SEK 100m (based on company’s latest guidance for opex below SEK 400m—before capitalisation of R&D—effective beyond Q4 2018), split among sales costs, administration costs, R&D and COGS, all of which are necessary to the company’s upkeep. In developed companies, R&D can be reduced in times of turbulence; however, in the case of Fingerprints, ongoing development is crucial given that the capacitive sensor market is deteriorating. Apart from this, Fingerprints also has SEK ~385m in receivables and SEK 721m in inventory as of Q1 2018. Its inventory was recently (4 June) subject to an impairment of SEK 336m and thus we cannot fully expect the company to be compensated for this in its entirety. Fingerprints also has a net cash position of SEK 185m and guidance is for positive cash flow in Q2. However, if the challenging market conditions were to persist, they would quickly put pressure on Fingerprints finances.

We base our margin predictions on market data

What are reasonable long-term margins? At its historical peak sales in 2016, Fingerprints managed to post an EBIT margin of almost 40%. As it boasted among the highest gross margins among semiconductors for that time, along with low opex-to-sales, it was a fruitful period, to say the least. Considering a streamlined operational setup together with a balancing of the market in terms of units sold per year and a stable ASP, we find it reasonable for the company to reach an operating profit margin of around 10-15%. Looking at the market, it is unlikely that a company active in a market with (currently) high competition and a slim portfolio would manage to maintain superior margins. However, when new technology emerges (ie smartcards or in-display), there might be windows of opportunity to post excess profit margins for the first-mover before competition intensifies.



There is uncertainty as to whether or not Fingerprints could be a takeover candidate

Could Fingerprints be a takeover candidate? There has been an absence of M&A activity in the fingerprint sensor space until recently, while there have been transactions overall among semiconductors, which is quite unusual. The number of players has stayed the same over the years. Typically, consolidation occurs in an industry where companies that do not generate profit go bust, creating opportunities for the remaining players. Just in mid-June, Dialog Semiconductor, which supplies power management chips for Apple, announced that it is in talks to acquire Synaptics. Given the valuation of Fingerprints, as well as its sliding market cap, it could look appealing in the eyes of a bigger player interested in the market. Its gross margins and overall profitability profile have been sluggish lately, which means a potential buyer would probably await an improvement before placing a bid. If there were more transactions in the market, we would have regarded a takeover as more likely; nonetheless, we believe Synaptics deal paves the way for further consolidation.

We base our valuation on the discounted cash flow method

How does one value a company with the characteristics of Fingerprints? In our view, a DCF model, along with an optionality value, is the best method of valuing Fingerprints. With high uncertainty in estimates, shifting market fundamentals, and peak earnings likely behind us, we do not find it relevant to carry out a multiples-based valuation and compare this to semiconductor peers. Price erosion is an issue, as are sliding volumes, making this a tricky case. We expect ASP for capacitive sensors to slide before reaching a balance well below the current level, and we anticipate the same trend for volumes. If market balance is reached, and price erosion is no longer present, valuing Fingerprints based on multiples will be more reasonable.



Historical financials In 2015, Fingerprint was a perfect example of being in the right place at the right time: the company was one of the few providers of a sought-after product. Based on the mass-scale adoption of fingerprint sensors in smartphones, the company’s sales grew from virtually nothing to peak sales of SEK 6.6bn in 2016. However, as seen many times before in the semiconductor industry, technology and competitors caught up, putting severe pressure on margins. In 2017, Fingerprints’ operating profit declined by 94%, despite defending its market-leading position with a 40% market share. The tough business environment has continued so far in 2018, putting further pressure on margins and threatening Fingerprints’ financial position, which has prompted the company to implement strict discipline on costs. At the end of Q1 2018, the company had a net cash positon of SEK 185m.

Revenues increased dramatically in the mid-2010s… …but later eroded in 2017 owing to a mix of inventory build-up, falling ASPs and intensified competition

Group financials Between 2013 and 2016, Fingerprints experienced transformative journey, as its sales multiplied from SEK 95m in 2013 to SEK 6,638m in 2016, following a full-scale adoption of fingerprint sensors for smartphones. Since then, sales have eroded and margins have been pressured by decreasing average selling prices (ASPs) for sensors, a theme that has been common in many other segments of the semiconductor industry. Gross margins have also been pressured by product mix over the past year, as entry-level smartphones are increasingly fitted with cheaper fingerprint sensors. Still, for the period between 2013 and 2017, Fingerprints enjoyed a staggering sales CAGR of 236%. The company reported a peak gross margin of 48% in 2016, translating into EBIT of SEK 2.5bn.

In 2017, operating profit declined by 94% y/y, landing at SEK 155m, despite the company holding a market share of 40% in fingerprint sensors. The tough business environment has continued with intensified competition in 2018. In the last twelve months, as of Q1 2018, Fingerprints reported sales and EBIT of SEK 2,570m and SEK -91m, respectively.

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Recent cost-cutting programme has streamlined the operations

The number of employees steadily increased until the end of 2017, when Fingerprints announced a restructuring programme. Between 2013 and 2017, the number of employees grew at an annual pace of 163%, which is below sales growth during the same period. Recently, the company also announced further cuts to its workforce and the number will likely end up being closer to 200 by the end of 2018. Benchmarking its sales per employee, Fingerprints stands out well compared with many industry peers.

Opex has flattened out Group cost structure Operating costs rose significantly with increasing sales in 2016, but have since remained flat. Between 2013 and 2017, opex increased at a CAGR of 180%. Looking at the cost mix, it has been rather consistent, with some differences in the amounts spent on development between quarters, and a 63% increase in administrative costs in Q1 2018, which was largely due to the costs required to execute its cost-cutting programme.

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Development expenses are the largest cost item

As a technology company in the semiconductor industry, Fingerprints’ largest cost item is within product development. The sharp decline in sales has caused a pickup in costs related to sales during 2017 and the first part of 2018. In absolute terms, sales and administrative expenses are starting to level out, while development costs are starting to decrease. This is likely explained by the cost rationalisation programmes that are starting to yield results.

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Cash flows have been lumpy historically

Cash flow items The cash flow from operations has been lumpy, but stayed in positive territory for a number of quarters until Q4 2017. In Q1 2018, Fingerprints had negative cash flow from operations of SEK 204m and liquid funds corresponding to SEK 534m at the end of the period. Despite the challenging trend, the latest communication from the company has been that it does not see any immediate need for new external capital, as cash flows are expected to turn positive in Q2.

The majority of capital expenditures is R&D

Capex and working capital The majority of Fingerprints’ capital expenditures is intangible and related to research activities. The research activities were enhanced in 2017 to ensure that the company’s product portfolio stays competitive with new innovative biometric solutions as well as cost efficacy. In addition to the capex numbers shown below, the company made an acquisition of Delta ID, a leading supplier of iris recognition technology, for USD 106m. The deal also included an additional earn-out of USD 14m if Delta ID exceeded its revenue forecast for 2017. The company has relatively high working capital, which is largely explained by its inventory.

Balance sheet items The balance sheet expanded during the company’s rapid expansion in 2015 and 2016. Intangible assets also notably increased during 2017, mainly related to an increase in goodwill after the acquisition of Delta ID. The acquisition was financed through cash on hand and a USD 60m loan with a two-year amortisation plan. As of Q1 2018, Fingerprints has disposable cash and cash equivalents totalling SEK 534m and a net cash position of SEK 185m.

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Estimates Our estimates rely on a combination of different sources and forecasts about the future of smartphones, smartcards and other biometric sensor applications. Below, we explain the lines of thought and assumptions about future markets and how these affect our estimates.

Smartphone sales are forecast to grow slowly until 2022

Revenue estimates The smartphone market We forecast 2018 global smartphone volumes to be in line with last year’s levels, after which we expect a growth rate of around 1.5% annually. Note that while the biometric sensor shipments are connected to the number of smartphones shipped, there could be time shifts in the correlation due to channel inventory build-ups, large pre-orders or local volume contractions. Our estimates are based on the assumption that the correlation is instant, as we believe the potential error from this is likely minor if our forecasts for somewhat flat annual smartphone shipments prove to be correct.

Market shares are based on historical data

We base our forecasts of future smartphone market shares on observations from historical data and a slow growth scenario. The most important factor to consider is the future size of Apple, and to a lesser extent Samsung, as these are the only players that could cause a substantial cut to Fingerprints’ total addressable market. Apple’s market share is forecast to remain largely constant, as is Samsung’s. We believe that two brands on the rise, namely Huawei and Oppo, are set to grow their market shares until they stabilise around 10% in 2019. Xiaomi gets practically the same growth except for in 2019 where their US launch grants them a slight further boost. These three companies’ market shares are partly taken from Apple and Samsung but mostly from the Other segment.

SMARTPHONE SHIPMENTS


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Apple’s market share is key in estimating Fingerprints’ addressable market

It should be stressed that while we believe these predictions are realistic, it is mostly Apple’s market share that is relevant to the estimates given that Fingerprints’ addressable market is set to be the total volume shipped minus Apple. As for the Apple market share, it seems to be the easiest to predict as it has basically had the same seasonal pattern and a somewhat constant annual average market share since 2009.

Capacitive sensors We base our capacitive sensor volume forecast on the belief that we will see a 70% attachment rate of fingerprint sensors in smartphones from 2020. However, the expansion of fingerprint sensors is also fuelled by the rise of in-display sensors based on other technology. This is the reason why we expect the attachment rate of CMOS sensors set to peak in 2019.

We believe that Fingerprints, with its new FPC1511 sensor, will be able to grow its market share in capacitive sensors during 2019E, but later lose some share due to tightening competition and further commoditisation, thereafter stabilising at around 15%.

We expect Fingerprints’ capacitive sensor shipments to increase again in 2019

Our historical and future capacitive sensor ASP estimates are based on public statements made by Fingerprints and other industry estimates.

In-display sensors As for in-display sensors, we believe that the high-end launches of H2 2018, such as the Vivo Nex, Xiaomi Mi 8 Explorer Edition and Porsche Design Huawei Mate RS, pave

SMARTPHONE MARKET SHARES


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ZTE Vivo Sony RIM HTC Nokia Others

CAPACITIVE ASP


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FINGERPRINTS' CAPACITIVE SENSOR SHIPMENTS


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In-display sensors are predicted to be the future norm

the way for the future of this modality, and that it will become the high-end norm in the coming years. Even though Apple’s Face ID garnered a lot of attention and the company has a history of feature pioneering, the solution has been greeted with marked scepticism by other manufacturers. During H1 2018, it has been used as a bonus feature on top of in-display fingerprint sensors in high-end smartphones rather than the main biometric security measure.

Our estimates of Fingerprints’ market share are based on a launch of the market-leading full-display solution using ultrasound during H1 2019, giving its market share a boost in 2020 after a late 2019 launch in consumer products. We believe that Fingerprints will be the first player to release such a product, as they are the only developer that has even announced plans of releasing one, resulting in a sharp increase in market share initially. However, we believe it will be hotly pursued by the competition, leading to the market share stabilising at 15% during our forecast period. We start the ASPs at the same levels as the capacitive sensors had during its early smartphone phase in 2014, which are somewhat confirmed by industry reports, and assume that it will be subject to 20% price erosion as a result of mounting competition, also causing the attachment rate to increase. Note that while we write in-display ASP, we mostly refer to the ultrasound-based technology developed by Fingerprints, even though we believe that competition will drive the prices of this and other optical substitutes to roughly the same levels.

We believe the attachment rate/ASP ratio will not be as high as it has been for capacitive sensors. This is because capacitive fingerprint detection is now a highly inexpensive solution that is a valid replacement for in-display in the low- to medium-tier segments.

Touchless sensors are likely to be an extra feature rather than the standard biometric sensor

Touchless We forecast touchless sensors, namely iris and face recognition, will become a multi-modality feature rather than the standard screen-lock solution in smartphones. As soon as in-display technology is fast and useable enough, it will be more convenient than any touchless solution and therefore become the norm. As a result, we set low – albeit still higher than today’s – attachment rate predictions for these solutions.

As for Fingerprints’ market share, we predict that it will be high for iris recognition initially given that the company, through its acquisition of Delta ID, is the market leader. In face recognition, Fingerprints is likely to launch its product late and in competition with many others, therefore gaining a marginal market share. We set the same ASPs for iris and face recognition in our forecasts, at levels reflecting industry research forecasts. We note that this is a cheaper product than a semiconductor-based fingerprint sensor as it is merely a software solution, which many manufacturers can provide.

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Source: ABI Research and Nordea estimates

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The smartcard market is likely to be a premium niche of the total market

The smartcard market Our estimates for the smartcard market are based on industry forecasts claiming that around 95-160 million biometric smartcards will be shipped by 2022, together with public statements from Fingerprints’ CEO Christian Fredriksson. However, our forecasts are on the more conservative side, with lower attachment rates due to the relatively high price of a biometric smartcard, which makes it a premium product, combined with competition from mobile payments. ASPs are set according to statements made by competitors and industry reports.

Automotive & Embedded estimates are based on Fingerprints’ statements

Automotive and embedded With the IoT and automotive markets for fingerprint and other biometric sensors still in their establishment phase, we base our revenue estimates for this business line on the company’s own outlook of having around 10% of revenues stem from business lines other than capacitive smartphone sensors in 2018. We then estimate the business line to grow somewhat annually, and that the business line will be based around iris and capacitive sensor products in low volumes.

FINGERPRINTS' IRIS SENSOR SHIPMENTS FINGERPRINTS' FACE SENSOR SHIPMENTS

Source: Nordea estimates Source: Nordea estimates

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We forecast total revenues to increase, mainly driven by in-display fingerprint sensors for smartphones and smartcards

Gross margins expected to bounce back slightly due to improved product mix

Cost estimates We expect Fingerprints’ gross margin to rebound slightly and stabilise at around 30% in the short term. We base our assumption partly on a better product mix and the fact that direct competitors are reporting significantly higher gross margins. We argue that the product mix is similar among the companies and that product differentiation is low. We therefore see no real reason for the current discreptancy in gross margin estimates for Fingerprints compared with its peers. We find support in the historical data, which shows that Fingerprints has had similar margins as its peers.

Fingerprints had operating expenses of SEK 834m in 2017, the majority of which came from development costs. Group expenses for developent costs and patents surged to SEK 595m in 2017, up from SEK 367m the year before. One-third of this cost has been capitalised and the remaining SEK 391m has been expensed over the income statement.

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GROSS MARGINS

Source: Thomson Reuters and Nordea estimates

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2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023EFingerprints Goodix Synaptics EgisTec



Opex to reach an annual run-rate below SEK 400m before capitalisation of R&D, owing to lower development costs and staff expenses

Our estimate for 2018 group opex is roughly in line with the 2017 result, adjusted for the recently announced inventory write-down and R&D impairment. However, underlying expenses are down almost 18% for 2018, adjusted for the Q1 restructuring expense of SEK 40.2m and our expectation of further one-off costs of SEK 65.0m during H2. According to the company’s announcements, restructuring measures are set to have a full impact on the balance sheet from Q4 2018. For 2019, we expect operational costs to reach a run-rate of below SEK 400m before capitalisation of R&D, which is in line with the opex back in 2015. Beyond 2019, we expect further streamlining of the operations to adapt to the tough business environment.

In our view, the steep decline in cost is credible for two important reasons. First, development costs have been particularly high owing to the development of the new sensor that is due for market release soon. As a consequence, development costs should tumble when the new product hits the market. Second, the company has undertaken restructuring measures with regards to its staff base, thereby trimming the organisation and reducing its headcount considerably. In terms of total opex, we expect the three different cost lines to revert back to their historical levels.

Relative to sales, we also expect costs to peak in 2018, only to drop to levels just slightly higher than the company’s historical trend.

OPEX BREAKDOWN


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2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023ESales Administration Development



Risk factors Below, we list the main risk factors that we find relevant for Fingerprint Cards. The purpose of this is not to provide a comprehensive picture of all of the risks that the company may face, but instead to highlight those that we find most relevant. The main risks we see relate to new industry standards, development speed, uncertainty of the potential in new market segments and the current financial position.

The biometric sensor market is going through a paradigm shift

Technology risk and new industry standards While fingerprint sensors are now used in around 60 % of all smartphones produced, the capacitive fingerprint sensor technology used by Fingerprints has been commoditised and the ASP has plummeted. The industry is also increasingly moving towards new standards, such as touchless recognition or in-display fingerprint sensors, and while Fingerprints has these technologies under development, the company has yet to implement them in a finished product. If Fingerprints does not meet its planned product roadmap, it risks losing market shares to competitors, such as Goodix and Synaptics, who have already successfully implemented and adapted versions of the new technology.

Few major OEMs make up for the majority of Fingerprints addressable markets, leading to volatility in both revenues and development costs

Customer concentration In 2017, 98.8% of Fingerprints’ revenue stemmed from its ten-largest customers, and 3 out of the 5 largest smartphone manufacturers are Fingerprints’ customers. This is primarily because almost all of the company’s large OEM customers are in the highly concentrated smartphone market. If Fingerprints fails to compete on product offerings and prices for now and for future generations of sensors, it could lose customers to its competitors, and revenue is likely to take a considerable beating with every lost customer.

Some of Fingerprints’ competitors have a more convincing history of innovation

Development speed The abovementioned techniques – in-display fingerprint detection and face recognition – are not based on the same technology (capacitance sensors) that launched Fingerprints in the first place and the company does not have a legacy of revolutionising innovations in other areas. The development of in-display sensors presented during the November 2017 Technology Update promises cutting-edge technology in terms of ultrasound fingerprint detection and 3D face recognition. The first would, if presented soon, provide a sensor more advanced than anything currently found in the consumer market, but its development has been delayed. While Fingerprints spends a significant amount on R&D and has a large amount of PhDs in its development force, the company is up against competitors with superior R&D muscle, such as Synaptics and Qualcomm. The recently announced cost cuts and upcoming reductions in personnel could also slow the ongoing innovation process down and hamper the progress of future innovations. The risk is therefore that Fingerprints’ end products will not be competitive enough to maintain the company’s market share in high-end smartphones. With our estimated future revenues being reliant on the in-display launch, this is probably the major risk to consider for investors – a further delayed launch would weaken the outlook for Fingerprints.

There is no consensus on how big the future biometric markets will become

Size and growth of biometric sensor markets In a recent interview, the newly-elected chairman of the board, Johan Carlström, claims that Fingerprint Cards is the market leader in fingerprint detection and that smartcards and IoT will be a new, important market for the company’s detectors. While the current technology that Fingerprints offers would likely be well suited for many products, and the T-shape module for smartcard fingerprint sensors is promising, there is nothing to indicate that the company will enjoy a strong, long-lasting first-mover advantage in these markets. As new markets, price discovery is



still ongoing, and the initial ASPs and the rate of future price decreases are still uncertain. The addressable market size is based on sensitive assumptions relating to the attachment rate, and these ultimately depend on the payment industry’s dynamics and the strategic choices of the major card producers. The ASP in new markets, such as IoT and automotive, is also likely to be lower than in the smartphone industry, as the sensors would not be bundled with the algorithms.

There is a risk that the future payment norm will be mobile phone payments

Future payment methods While using biometric identification as a security measure in payments would benefit consumers and be convenient to use, it is unclear whether or not the future lies in smartcards. In China, mobile payments on smartphones are replacing cash and card payments at a rapid pace, using services such as WeChat Pay and Alipay. Cards as a payment solution have been around for decades, but now that mobile devices are so prevalent, questions are raised regarding the benefits of smartcards as a payment medium compared with smartphones. There is a substantial risk that the smartcard business line levels off before it catches wind and these risks should not be ignored.

The barriers to entry in biometric sensors are not as high as previously thought

Loss of customers and further pressure on ASP Innovation, product mix and an increasing number of fingerprint sensor producers for smartphone implementation have burdened ASPs and proved that the barriers to entry in the biometric market are quite low. Prices could continue to decrease and customers could turn to other competitors in the current market. This customer churn will likely occur even if the company develops new innovations. Dual-sourcing is common in the smartphone industry, with OEMs diversifying their supplier portfolio for components. An extreme example is the recently announced Xiaomi Mi 8, which uses sensors from three different manufacturers (Goodix, Synaptics, and Fingerprints). This is one of the consequences of commoditisation, and the same could happen for future generations of sensors too. Both the Mi 8 and the Vivo X20 use in-display sensors from Goodix and Synaptics.

PAYMENT METHOD USAGE % WHO USED MOBILE PAYMENTS IN THE LAST MONTH

Source: Company data Source: GlobalWebIndex

Cash27%

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11%

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GROSS MARGINS, FINGERPRINTS AND PEERS

Source: Thomson Reuters

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Cash is running low, while profits are tumbling

Cash flow shortage and profitability In the latest quarterly report, Fingerprints reported a cash balance of SEK 534.2m, while the company had negative cash flow from operations of SEK -204m in Q1 2018. If this continues, the company could face financial difficulties. Although high channel inventories are to blame for some of the losses, we argue that new innovations and segments, such as the in-display sensor, must gain traction and that orders for the new cost-efficient FPC1511 sensor need to be secured in order to improve margins. Without these, Fingerprints’ funds could soon be depleted. Net cash was SEK 185m at the end of Q1 2018 and the company has issued guidance for positive cash flow during Q2 2018.



Detailed estimates

FINGERPRINTS' VOLUMES AND ASPQ4 17 Q1 18 Q2E 18 Q3E 18 Q4E 18 2017 2018E 2019E 2020E 2021E 2022E 2023E

USD/SEK 8.23 8.36 8.86 8.86 8.86 8.44 8.74 8.86 8.86 8.86 8.86 8.86Revenues (SEKm) 615 290 270 281 269 2,966 1,110 1,266 1,452 1,586 1,727 1,807Change y/y -62% -58% -67% -67% -56% -55% -63% 14% 15% 9% 9% 5%

Smartphone related units (m)Capacitive 54 38 34 40 43 246 155 161 140 129 125 126ASP (USD) 1.30 0.90 0.81 0.73 0.64 1.40 0.76 0.65 0.55 0.47 0.40 0.36Change y/y -28% -40% -44% -47% -51% -37% -46% -15% -15% -15% -15% -10%In-display 0 0 0 0 0 0 0 1 10 22 37 52ASP (USD) - 5.0 4.5 4.3 4.0 - 4.4 3.5 2.8 2.3 1.8 1.4Change y/y - - - - - - - -20% -20% -20% -20% -20%Face 0 0 0 0 0 0 0 4 8 7 6 6ASP (USD) - 0.24 0.24 0.24 0.24 - 0.24 0.22 0.19 0.17 0.16 0.14Change y/y - - - - - - - -10% -10% -10% -10% -10%Iris - - - - - - - 29 46 60 62 63 ASP (USD) - - 0.24 0.24 0.24 - 0.19 0.17 0.15 0.14 0.12 0.11 Change y/y - - - - - - - -10% -10% -10% -10% -10%

Smartcard related units (m) - - - - - - - 5 13 24 43 66ASP (USD) - - - - - - - 4.00 2.80 1.96 1.37 0.96Change y/y - - - - - - - - -30% -30% -30% -30%

Automotive & Embedded-related units (m)Capacitive 0.50 0.60 0.60 0.60 0.70 4 10 12 14 17 20 24 Touchless - 4.0 4.0 4.0 4.0 - 16.0 19.0 22.7 27.0 32.1 38.2 Source: Company data and Nordea estimates

FINGERPRINTS' P&LQ4 17 Q1 18 Q2E 18 Q3E 18 Q4E 18 2017 2018E 2019E 2020E 2021E 2022E 2023E

Net sales 615 290 270 281 269 2,966 1,110 1,266 1,452 1,586 1,727 1,807Change y/y -62% -58% -67% -67% -56% -55% -63% 14% 15% 9% 9% 5%Cost of goods sold -485 -245 -211 -214 -199 -1,977 -869 -905 -1,023 -1,110 -1,201 -1,274Gross profit 130 45 59 67 70 989 242 361 428 476 527 533 Gross margin 21% 15% 22% 24% 26% 33% 22% 29% 30% 30% 31% 30%

Sales expenses -64 -69 -55 -45 -45 -237 -214 -127 -119 -112 -105 -99Administrative expenses -41 -66 -35 -85 -45 -146 -231 -108 -100 -93 -87 -80Development expenses -100 -83 -75 -70 -65 -391 -293 -152 -134 -118 -103 -91Total opex -204 -218 -644* -200 -155 -774 -1,217 -386 -353 -322 -295 -270Change y/y 1% 10% 231% 13% -24% 29% 57% -68% -9% -9% -8% -8%Opex/sales 33% 75% 239% 71% 58% 26% 110% 31% 24% 20% 17% 15%Other operating incomes/expenses 34 -2 0 0 0 -61 -2 0 0 0 0 0

Operating profit -41 -175 -585 -133 -85 155 -977 -25 76 153 232 263Margin -7% -60% -217% -47% -32% 5% -88% -2% 5% 10% 13% 15%Operating profit (adj.) -135 -106 -83 -70 -393Margin (adj.) -46% -39% -29% -26% -35%Net financial items 0- 13- 10- 5- 5- 13- 33- 15- - - - -

Pre-tax profit 41- 188- 595- 138- 90- 142 1,010- 40- 76 153 232 263 Tax 24 40 131 30 20 22- 221 9 17- 34- 51- 58- Tax rate 59% 21% 22% 22% 22% 15% 22% 22% 22% 22% 22% 22%Net profit -17 -148 -464 -107 -70 120 -789 -31 59 120 181 205EPS -0.05 -0.47 -1.48 -0.34 -0.22 0.38 -2.51 -0.10 0.19 0.38 0.58 0.65*Includes inventory write-down of SEK 336m and writ-off of capitalised R&D of SEK 143mSource: Company data and Nordea estimates



Reported numbers and forecasts

INCOME STATEMENTSEKm 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022ENet revenue 95 234 2,901 6,638 2,966 1,110 1,266 1,452 1,586 1,727 Revenue growth 828.4% 144.9% 1141.7% 128.9% -55.3% -62.6% 14.0% 14.7% 9.2% 8.9% EBITDA -22 -72 939 2,627 234 -394 71 172 249 328 Depreciation and impairments PPE -2 0 -6 -8 -14 -16 -16 -16 -16 -16 EBITA -23 -72 933 2,619 221 -410 55 156 233 312 Amortisation and impairments -11 -74 -17 -41 -66 -567 -80 -80 -80 -80 EBIT -34 -145 916 2,578 155 -977 -25 76 153 232 of which associates 0 0 0 0 0 0 0 0 0 0 Associates excl. from EBIT 0 1 2 3 4 5 6 7 8 9 Net financials 1 2 -0 35 -13 -33 -15 0 0 0Pre-Tax Profit -33 -144 915 2,613 142 -1,010 -40 76 153 232 Reported taxes 0 -1 -112 -579 -22 221 9 -17 -34 -51 Net profit from cont. operations -33 -144 804 2,034 120 -789 -31 59 120 181 Discontinued operations 0 0 0 0 0 0 0 0 0 0 Minority interest 0 0 0 0 0 0 0 0 0 0 Net profit to equity -33 -144 804 2,034 120 -789 -31 59 120 181EPS -0.60 -2.32 12.50 6.48 0.38 -2.51 -0.10 0.19 0.38 0.58 DPS 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 of which ordinary 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 of which extraordinary 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Profit margin in percent EBITDA -22.5% -30.7% 32.4% 39.6% 7.9% -35.5% 5.6% 11.8% 15.7% 19.0% EBITA -24.6% -30.7% 32.1% 39.5% 7.4% -36.9% 4.3% 10.7% 14.7% 18.0% EBIT -35.7% -62.2% 31.6% 38.8% 5.2% -88.0% -2.0% 5.2% 9.7% 13.4%

Adjusted earnings EBITDA (adj.) -22 -72 939 2,627 234 -289 71 172 249 328 EBITA (adj.) -23 -72 933 2,619 221 -305 55 156 233 312 EBIT (adj.) -34 -145 916 2,578 155 -393 -25 76 153 232 EPS (adj.) -0.60 -2.32 12.50 6.48 0.38 -0.65 -0.10 0.19 0.38 0.58

Adjusted profit margins in percent EBITDA (adj.) -22.5% -30.7% 32.4% 39.6% 7.9% -26.0% 5.6% 11.8% 15.7% 19.0% EBITA (adj.) -24.6% -30.7% 32.1% 39.5% 7.4% -27.4% 4.3% 10.7% 14.7% 18.0% EBIT (adj.) -35.7% -62.2% 31.6% 38.8% 5.2% -35.4% -2.0% 5.2% 9.7% 13.4%

Performance metrics CAGR last 5 years Net revenue 36.5% 56.9% 162.7% 213.6% 312.2% 84.7% 52.6% -15.9% -30.1% -12.6% EBITDA 1.0% 48.8% 229.3% 330.6% n.a. 106.9% n.a. -34.6% -44.5% 8.8% EBIT 9.1% 55.8% 389.1% 455.9% n.a. 131.4% -35.4% -46.4% -50.6% 10.7% EPS -14.9% 14.0% 302.6% 203.3% n.a. 43.2% -54.4% -65.0% -50.8% 10.7% DPS n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Average EBIT margin -35.7% -62.2% 31.6% 38.8% 5.2% -88.0% -2.0% 5.2% 9.7% 13.4% Average EBITDA margin -22.5% -30.7% 32.4% 39.6% 7.9% -35.5% 5.6% 11.8% 15.7% 19.0%Source: Company data and Nordea estimates

VALUATION RATIOS - ADJUSTED EARNINGSSEKm 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E P/E (adj.) n.m. n.m. 9.5 9.7 41.3 n.m. n.m. 33.3 16.4 10.9 EV/EBITDA (adj.) n.m. n.m. 6.9 7.1 19.3 n.m. 22.9 8.7 5.5 3.6 EV/EBITA (adj.) n.m. n.m. 6.9 7.1 20.5 n.m. 29.5 9.6 5.9 3.8 EV/EBIT (adj.) n.m. n.m. 7.0 7.2 29.2 n.m. n.m. 19.8 9.0 5.1

Valuation ratios/reported earnings P/E n.m. n.m. 9.5 9.7 41.3 n.m. n.m. 33.3 16.4 10.9 EV/Sales 3.9 1.3 2.2 2.8 1.5 1.5 1.3 1.0 0.9 0.7 EV/EBITDA n.m. n.m. 6.9 7.1 19.3 n.m. 22.9 8.7 5.5 3.6 EV/EBITA n.m. n.m. 6.9 7.1 20.5 n.m. 29.5 9.6 5.9 3.8 EV/EBIT n.m. n.m. 7.0 7.2 29.2 n.m. n.m. 19.8 9.0 5.1 Dividend yield (ord.) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. FCF yield -11.8% -65.1% 11.9% 5.4% 3.5% -9.2% 3.7% 5.9% 6.4% 9.4% Payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Source: Company data and Nordea estimates



BALANCE SHEETSEKm 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E Intangible assets 54 70 50 71 1,188 661 621 581 541 501 of which R&D 0 0 0 0 0 40 40 40 40 40 of which other intangibles 54 70 50 71 1,188 621 581 541 501 461 of which goodwill 0 0 0 0 0 0 0 0 0 0 Tangible assets 5 19 21 29 47 47 47 47 47 47 Shares associates 0 0 0 0 0 0 0 0 0 0 Interest bearing assets 0 0 0 0 0 0 0 0 0 0 Deferred tax assets 0 0 0 0 0 0 0 0 0 0 Other non-int. bearing assets 0 0 0 0 0 0 0 0 0 0 Other non-current assets 0 0 1 0 0 0 0 0 0 0 Total non-current assets 60 89 71 101 1,235 708 668 628 588 548 Inventory 20 99 153 673 646 444 380 363 396 432 Accounts receivable 31 116 618 1,132 438 222 253 290 317 345 Other current assets 8 20 37 435 313 33 38 44 48 52 Cash and bank 212 102 1,031 1,162 920 497 348 463 589 773 Total current assets 271 336 1,839 3,402 2,317 1,197 1,019 1,160 1,350 1,603 Assets held for sale 0 0 0 0 0 0 0 0 0 0Total assets 330 425 1,910 3,503 3,552 1,905 1,687 1,788 1,938 2,150

Shareholders equity 288 301 1,147 2,226 2,331 1,241 1,210 1,269 1,388 1,569 of which preferred stock 0 0 0 0 0 0 0 0 0 0 of which Equity of hyb. debt 0 0 0 0 0 0 0 0 0 0 Minority interest 0 0 0 0 0 0 0 0 0 0 Total Equity 288 301 1,147 2,226 2,331 1,241 1,210 1,269 1,388 1,569 Deferred tax 0 0 0 136 190 190 190 190 190 190 Long term int. bearing debt 0 0 0 0 222 0 0 0 0 0Non-current liabilities 0 0 0 0 0 0 0 0 0 0 Pension provisions 0 0 0 0 0 0 0 0 0 0 Other long-term provisions 0 0 0 0 0 0 0 0 0 0 Other long-term liabilities 0 0 0 0 0 0 0 0 0 0 Convertible debt 0 0 0 0 0 0 0 0 0 0 Shareholder debt 0 0 0 0 0 0 0 0 0 0 Hybrid debt 0 0 0 0 0 0 0 0 0 0 Total non-curr. liabilities 0 0 0 136 412 190 190 190 190 190 Short-term provisions 15 22 101 258 190 111 127 145 159 173 Accounts payable 26 66 549 822 268 100 114 131 143 155 Other current liabilities 2 36 114 61 108 40 46 53 58 63 Short term interest bearing debt 0 0 0 0 243 222 0 0 0 0 Total current liabilities 42 123 763 1,141 809 473 287 329 359 391 Liab.for assets held for sale 0 0 0 0 0 0 0 0 0 0Total liabilities and equity 330 425 1,910 3,503 3,552 1,905 1,687 1,788 1,938 2,150

Balance sheet and debt metrics Net debt 212- 102- 1,031- 1,162- 455- 275- 348- 463- 588- 773- Working capital 32 132 145 1,358 1,021 559 511 513 561 611 Invested capital 91 221 217 1,458 2,256 1,267 1,179 1,141 1,149 1,159 Capital employed 288 301 1,147 2,362 2,743 1,431 1,400 1,459 1,579 1,759 ROE -49.0% 111.0% 120.6% 5.3% -44.2% -2.6% 4.8% 9.0% 12.2% 12.3% ROIC -50.8% -93.2% 367.3% 239.6% 7.0% -43.3% -1.6% 5.1% 10.4% 15.7%

Net debt/EBITDA n.m. n.m. -1.1 -0.4 -1.9 n.m. -4.9 -2.7 -2.4 -2.4 Interest coverage -73.2 -286.4 2,289.0 n.m. n.m. n.m. n.m. n.m. n.m. n.m.Equity ratio 87.0% 70.9% 60.0% 63.5% 65.6% 65.2% 71.7% 71.0% 71.7% 73.0%Net gearing -73.7% -33.8% -89.9% -52.2% -19.5% -22.2% -28.7% -36.5% -42.4% -49.3%Source: Company data and Nordea estimates



CASH FLOW STATEMENTSEKm 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022EEBITDA (adj.) for associates -22 -72 939 2627 234 -394 71 172 249 328 Paid taxes 0 0 -2 -498 -345 221 9 -17 -34 -51 Net financials 1 0 0 0 0 -33 -15 0 0 0 Change in Provisions 15 6 80 157 -68 -79 16 19 13 14 Change in other LT non-IB 0 0 -1 1 0 0 0 0 0 0 Cash flow to/from associates 0 0 0 0 0 0 0 0 0 0 Dividends paid to minorities 0 0 0 0 0 0 0 0 0 0 Other adj. to reconcile to cash flow -15 -20 -64 -157 112 -300 0 0 0 0Funds from operations (FFO) 20- 86- 951 2,130 68- 585- 80 174 229 291 Change in NWC 11- 88- 43- 1,000- 444 462 48 3- 47- 50- Cash flow from op. (CFO) 31- 174- 908 1,130 377 124- 128 171 182 241 Capital Expenditure 38- 76- 17- 63- 204- 56- 56- 56- 56- 56- Free Cash Flow before A&D 69- 250- 891 1,067 173 180- 72 115 126 185 Proceeds from sale of assets 0 0 0 0 0 0 0 0 0 0 Acquisitions 0 -15 0 0 0 0 0 0 0 0 Free cash flow -69 -265 891 1067 173 -180 72 115 126 185

Dividends paid 0 0 0 0 0 0 0 0 0 0 Equity issues / buybacks 221 155 48 -1000 0 0 0 0 0 0 Net change in debt 0 0 0 0 0 -243 -222 0 0 0 Other financing adjustments 0 0 0 0 0 0 0 0 0 0 Other non-cash adjustments 0 0 -9 64 -415 0 0 0 0 0 Change in cash 151 -110 929 131 -242 -423 -150 115 126 185

Cash flow metrics Capex/D&A 104% 123% 107% 173% 1344% 10% 58% 58% 58% 58% Capex/Sales 13.8% 38.8% 0.9% 1.3% 36.1% 5.0% 4.4% 3.9% 3.5% 3.2%

Key information Share price year end (current) 10.9 7.0 118.2 62.9 15.8 6.3 6.3 6.3 6.3 6.3 Market cap 587.6 406.6 7,474.9 19,735 4,964 1,963 1,963 1,963 1,963 1,963 Enterprise value 375.9 304.7 6,443.6 18,573 4,509 1,688 1,615 1,500 1,375 1,190 Diluted no. of shares, year-end (m) 54.2 58.4 63.2 314 314 314 314 314 314 314 Source: Company data and Nordea estimates

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