Fingerprint Cards Q3 preview – Smaller sensors point towards lower ASP and GM over 50 percent2016-10-21 14:01, Edited at: 2016-10-27 01:18
We remain optimistic regarding FPC’s prospects in the short- and longer term and we believe the market is wrong in its view of FPC as a one-trick pony. The FPC share is down 25 percent for the year and 16 percent the last month and currently trades around SEK 87 at an EV/S multiple of 1.9 and an EV/EBIT multiple of 4.3 based on our 2017 estimates. Prior to the upcoming Q3 report we have adjusted our estimates to reflect an increased share of sales from smaller sensors. We expect revenues of SEK 1.829 billion and EBIT of SEK 800 million – hence we believe FPC will report revenues 6 percent below consensus but beat EBIT estimates by 3 percent. Our fair value ranges from SEK 65 in our bear case to SEK 330 in our bull case with a fair value of SEK 209 in our base case.
Our lower estimates are not a consequence of lost faith in FPC, rather we have been strengthened in our view that FPC will maintain its position as the dominant player in the most important market segment - the mobile device segment. The main reason behind our lower estimates is a lower ASP than we initially foresaw. A bit simplified, the lower ASP is a consequence of three main factors outlined in the below illustration.
Degree of refinement has to do with how FPC sells its fingerprint sensors. As an increasing share of the sensors are sold as fabricated wafers rather than dies FPC essentially gives away some of its revenues to the module houses, though the revenue given away carry a lower gross margin.
As FPC develops its solutions to allow for a smaller sensor area, less silicon is used per sensor. This in turn means that more sensor ASICs can be fabricated on each wafer. Since it is extremely costly with equipment for IC fabrication and a large share of the cost of an ASIC depends on the time required in the fab, smaller sensors are much cheaper to fabricate. FPC is driving this development to drive FPS penetration in mid-range and low-end mobile devices. At the same time, FPC is making it hard for new players to enter the market, effectively creating barriers to entry.
There is a component of general price pressure that drives ASP down. In the general price pressure category, we also include agreements with major customers to continuously lower prices for like-for-like sensors as yield goes up and the sensor in question has been on the market for a while. This pushes FPC to come up with new and better products – products/solutions that have become a commodity will not command premium prices.
Looking at the product mix of FPC in terms of what sensor the mobile devices launched with an FPS from FPC incorporate, we can spot a clear trend. In the figure below all (we believe) mobile devices launched with a FPC FPS from Q4 2014 until 25 October 2016 are summarized.
The sensors in gray color, FPC1020, FPC1021 and FPC1025 all have a sensor ASIC that is considerably larger than the sensors in red. The FPC1020 is the largest sensor and the FPC1035 is the smallest sensor incorporated in a product thus far (FPC1028 is smaller but has not yet been announced as incorporated in a device).
The devices launched per quarter will not tell you the breakdown of sales per device or per sensor. The graph below illustrates the ramp of sensor shipments for a certain mobile device.
As can be seen, shipments start before the device is launched and high volume shipments typically continue for some 9-12 months before the device is approaching end-of-life.
Based on the above discussion we expect ASP to have dropped further. In the below table our estimate for blended ASP and number of units shipped are shown.
As we mentioned, the lower ASP is the main reason as to why we have revised our estimates. In the below table we have summarized our estimates for 2016-2018.
Despite a strong dollar providing tailwinds, we believe 2016 sales will come in at the low-end of FPC’s guidance – that said, we expect gross margin to come in above 50 percent in Q3 providing further evidence of FPC’s leading position. Gross margins around 50 percent are not sustainable unless you have a competitive advantage. We have summarized some key factors affecting FPC’s gross margins.
We believe FPC has sustainable competitive advantages, but it requires continued development and should FPC become content there are competitors ready to take the lead. Right now that is not what we see. Some bullet points to illustrate what we mean:
· 40 patents not yet published have been filed by FPC since May last year (thanks Peter Stern for being a champ in checking those things for me!)
· Well positioned to enter the automotive segment as car manufacturers and tier-1 suppliers increasingly embrace biometrics – we would not be surprised to see a fingerprint sensor in a steering wheel from Autoliv in a few years
· Patents and sensor architecture indicating that FPC is eyeing other biometric modalities, we believe heart rate sensors is an obvious bet
· FPC’s new board has competencies that leads us to believe that FPC is stepping up its efforts to enter new verticals, but also extend its offering to include a software platform for multimodal biometric authentication and personalization – FPC has some patents that could prove very important (referenced by Google, Tencent etc.)
· FPC is extending its network of partners including foundries, module houses, major players in the card industry, wearable manufacturers and the list goes on
Naturally, FPC will have to adapt to what its partners in the respective vertical is offering – value needs to be split – that said, we have seen enough to be confident in saying that this is not the end for FPC.
We see an upside of over 100 percent to our fair value of SEK 209 in our base case.
Also have a look at our financial estimates and other FPC-material at the following link: