Sales and EBIT of SEK 382m and 6m was in line with our expectations (SEK 372m & 13m). However, the gross margin of 22% came in four percentage points lower than our estimate, despite the roll-out of the new cost-efficient 1511 sensor proceeding according to plan. FPC has previously stated that the 1511 would be 80% of volumes in H1'19. In a theoretical example, where the software sales (Delta ID & other) exposure of total sales decreased by five percentage points, we believe the gross margin would have been 26% adjusted for that effect, which is still not good enough, in our view. FPC says that it is taking several actions to improve the gross margin, e.g. a new even smaller and more cost-efficient sensor to be launched later this year.
In-display: The smartphone fingerprint sensors are not dying - they just move into the display
It is now almost two years since Apple scrapped Touch ID from its iPhone X. We can conclude that the market for fingerprint sensors in smarthpones is not dying. In fact, the total adoption rate is actually increasing slightly in 2019. The bad news for FPC is that the growth is located to in-display. Our calculations indicate that the number of launched models with rear and side mounted fingerprint sensors have decreased from 85% of the total in 2018 to about 70% so far during 2019. Looking at the flagship phones, and using them as a guideline for the mid- and entry level phones of the future, we believe that about 60% of the new flagship models have in-display fingerprint sensors and almost all of them combine this tech with face recognition. In other words, the battle for in-display rages on, while FPC seems left in the starting blocks. To our knowledge, about 50 phone models with in-display have launched this year, corresponding to a 30% share of the total new models launched. If this rate continues, it should mean that in-display sensors have ASPs of at least 3 times higher than the capacitive sensors, given that they will capture the majority of sale (this consistent with our estimates). The risk of FPC losing further ground in in-display is therefore a serious bear point.
Smart cards: Increased demand for T-Shape could mean higher ASP
Moving over to the important smart card area, FPC's recently announced partnership with G&D means that FPC now has partnered with all three of the largest card manufacturers, again verifying the company's strong positioning. These beasts together account for somewhere around 70% of the total cards manufactured. FPC also emphasized that it is in all of the 20 payment card pilots around the World, suggesting a potentially high initial market share in the commercial rollouts next year. We estimate that the banks in the 20 pilot programs in total have over 270 million customers (if we include all cards from FutureCards). In comparison, our estimated 2020 smart card volumes are 3% of that number. However, it should be noted that the average number of cards per customer is likely higher than 1. In addition, FPC on the conference call said that commercial launches in 2020 also could come from other players than these fast movers. Last, several more pilots will follow according to FPC.
One very important aspect of the smart card offering is the customers interest in the T-Shape. So far, the pilot programs seem to consist of about half T-Shape, half 1300 sensors, which is also what we expect for the commercial programs. However, in 2019, the demand for the T-Shape has increased. As T-shape should have a significantly higher ASP we believe our card ASP estimates might prove to be too conservative. The information is very limited though, but nevertheless we believe it is an option worth keeping an eye on.
Another interesting area is the BEP software platform. We think the launch of the BEP offering looks a bit similar to when FPC kicked out Precise Biometrics' algorithm from its smartphone offering. We assume FPC has an important advantage in developing algorithms as it ows the sensor hardware and knows its full road map while pure play algo players need to use bold guesswork related to the characteristics of the future sensors. We await more progress for BEP before building in more expectations of FPC capturing a larger part of the smart card value chain with BEP. Thus, we leave our software estimates unchanged for now.
Lower EBIT estimates related to weak the gross margin
There is a mixed bag of factors offsetting each other: Huawei, the Samsung potential, higher fingerprint penetration and a larger share of T-shape than we expected etc. We therefore only make minor sales estimate changes (see the table below). However, we lower our EBIT estimates for years 2019-2021 with on average SEK 20m per year due to the lower gross margin discussed above.
We do not make any changes in our valuation where our base case is SEK 9 per share and our bear and bull scenario SEK 5 and SEK 20 respectively.
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