RESEARCH REPORT: AUTH REPRESENTS A SUBSTANTIAL OPPORTUNITY IN THE WIRELESS SECTOR
7-27-12 - Sold 100% of AUTH on 7-27-12 at 8.16-8.17 for a 73% profit since 7-15.
7-15-12 - AUTH reentered on 7-15-12 & 7-16-12 at average price of 4.70
6-5-12 - Note: Took profits on AUTH on at 4.95 - 5 for a 37% gain since publishing this report.
5-8-12 - AUTH is a current long position in accounts at an average price of roughly 3.65. This is a mid-sized position to start. I will make it a large position if the performance warrants.
AUTH represents my favorite type of opportunity in that there are a combination of factors at work that have led to the company being overlooked since it went public in 2007. That is a proper segue to the first reason the company has been greatly ignored: Timing of the IPO. AUTH underwriters and management certainly are not market timers, as they started trading publicly in July 0f 2007 almost precisely at a multi-year top on the S&P 500 that has not been surpassed to this day. IPOs that enjoy the misfortune of going public at multi-year tops are not only ignored but essentially buried at the very bottom of the rotting pile of companies that are victimized by the fear and panic driven selling that is the hallmark of a bear market. AUTH represents a "bottom of the pile" opportunity.
The second factor leading to the company remaining undiscovered for a number of years is the fact that the company is a spin-off. It was a privately held spin-off from Harris Corp taking place during the late 90's. Development of the company did not necessarily shift into overdrive until they went public at what was arguably the worst possible time of the past 10 years. This basically put them back at square one in terms of gaining the recognition the company deserves.
What does AUTH do exactly? This from the company website: AuthenTec is a leading provider of mobile and network security. Our diverse product and technology offering helps protect individuals and organizations through secure networking, content and data protection, access control and strong fingerprint security on PCs and mobile devices.
The company has been aggressively expanding through acquisition:
- In February 2010, AUTH acquired SafeNet’s Embedded Security Solutions division, further enhancing our offering of mobile and network security solutions.
- In September 2010, AUTH acquired privately-held UPEK Inc., a supplier of fingerprint solutions for consumer, business and government applications.
- In November 2011, AUTH acquired PeerSec Networks, an innovative provider of networking security solutions.
- In December 2011, AUTH acquired the assets of Proxure, Inc., a provider of syncing and cloud-based storage services for PCs and mobile devices.
Over the last two years, AUTH generated revenue from over 300 customers, including some of the world’s leading PC and mobile device manufacturers and their suppliers, network providers, content providers and defense technology companies. These companies include Lenovo Group Limited, Fujitsu Ltd., Dell Inc., Juniper Networks, Inc., Home Box Office, Inc., Raytheon Co. and others.
Their customer list is expanding as detailed in the most recent conference call detailing Q1 earnings on May 3rd. CEO Larry Ciaccia states, "During the quarter we signed a license deal with a top 3 handset OEM that will integrate our VPN client into new enterprise class smartphones. We also secured other VPN client wins during the quarter including additional handset OEM's, a license with a major wireless carrier." This means that AUTH has a new client in either Nokia, Samsung of Apple. Obviously, from an investor perspective, the acquisition of AAPL as a customer would create the greatest recognition for the company going forward.
The company only recently became profitable during the 3rd quarter of 2011, after suffering through multiple consecutive quarters of EPS losses. This shows that initiatives aimed at streamlining the company have been effective thus far.
In their recent Q1 results, AUTH announced Q1 revenues of $17.5M, up 13% year-over-year, and non-GAAP income of 1 cent per share, up from a loss of over 6 cents per share in the same quarter last year.
AUTH is cash flow positive and recorded their third consecutive quarter of non-Gaap profitability as the company continues to focus on profitable growth.
It should be noted that Q1 was AUTH's highest quarter ever for bookings in Embedded Security. They expect to recognize revenue from these licensing agreements as the respective programs launch during subsequent quarters.
Here are additional highlights from their Q1 conference call:
We are now entering pre production with a top tier smartphone OEM outside of Japan for a sensor-enabled enterprise phone expected to launch later this year. This handset will also include one of our identity management software applications, consistent with our approach to bundle sensors with software to ease integration for OEMs and optimize the fingerprint experience for the user. We are optimistic about the prospects for this mobile phone which will initially be available to carriers outside of the US.
Additionally, we continue to see strong traction for our sensors within Japan, the most advanced and established mobile payment region on the world, with more new smartphone models planned and in development than at any time in our past. Simplifying mobile payments for both retail and transit through strong authentication continues to be a driver for our expansion in smartphones within established mCommerce regions such as Japan. Mobile payment is also the basis for additional OEM engagements for smartphones that could ship outside of Japan in the future. We expect our sensor business to grow significantly over the next few quarters as multiple new smartphone models are released and the number of carriers offering these devices expands.
We signed agreements with a major network in Europe, a major worldwide content provider, a major carrier in Korea, and one of the largest content distributors in Japan. We also saw numerous existing DRM customers launch their services, including an announced deployment by Canal + in Poland offering its 1.5M subscribers streaming TV content on mobile devices. The typical structure of these deals includes an upfront license and a per download royalty. As our customers launch these services over the next several quarters, we expect to recognize recurring royalties based on the popularity of the respective service as measured by the number of downloads.
In our government and access control touch sensor business, we made significant progress expanding our position and market share in China, particularly with our larger touch-based fingerprint sensors used in banking applications. We announced a deal in the quarter with Miaxis, a leader in biometric solutions for banking and security, in which our TCS2 TouchChip sensors will be used in bank ID terminals throughout China for anti-fraud protection. Miaxis began volume deployment in Q1 of our sensor-equipped ID terminals in banks across China including one of the largest, the Bank of China. We also signed a second deal with a partner who will also be deploying our TouchChip sensors in bank ID terminals across China. I have spoken in the past about the large opportunity this region represents and I could not be more satisfied with our progress in growing our position.
I have talked in the past about the large growth opportunity that mobile ID represents in India, especially with regards to the UID program. We continue to progress with multiple designs in's targeted for this program but now believe material revenue for UID will be in 2013 based on feedback from several of our partners/customers. Such push outs are not unusual in government programs, and we continue to believe that India represents a significant growth opportunity. Based on the strength of non-UID based programs worldwide we expect our overall business around large touch based sensors to continue to grow in 2012.
Within the PC market we are very excited about the opportunities in both tablet and ultra book as these new platforms move toward thinner, cleaner and more minimalist designs. Our fingerprint sensors are the thinnest solutions on the market today and offer totally flat conformal surfaces that play extremely well into this design trend. We expect to participate in a variety of new tablets and ultrabooks based on thin z dimensions and clean cosmetic finishes. In the standard laptop space we continue to progress on several new platforms and opportunities that are using both our sensors as well as our identity management software, which we expect will translate into growth for this business as we move through 2012 and into next year.
Looking ahead to the second quarter of 2012, we expect revenue to be within a range of 18.2 and $19.4 million, reflecting anticipated increases in our PC and wireless product areas.
It is obvious that AUTH is in a extremely high growth arena, with a significant portion of their current and future revenues coming from the mobile market. It is a no-brainer to realize that increasing reliance on our cell phones requires them to become ultra-secure devices. Especially as the mobile payment revolution begins to proliferate. These electronic devices that we spend most of our days staring into for various pieces of up to date information or to reach out to any host of acquaintances are on their way to becoming appendages that contain every single piece of information whether personal or business related. Needless to say, AUTH is in the right sector.
In addition, it is being ignored by the current culture of Wall Street that takes pride in mindless analysis of large-cap companies that only become qualified for investment if the remainder of stampeding herd so approves. There is very little original thought remaining in analysis of company specific situations. It is only natural that given such a lack of depth, companies such as AUTH would be swept under the rug until the details of their success become so overwhelming that the establishment can no longer ignore the simple facts. My job is to make you aware of those facts before the flaccid dolts catch on to the opportunity at hand.
The greatest opportunity in AUTH comes from the fact that it is an undiscovered growth opportunity. Let's play with some numbers to see what we can come up with as a fair price should the universe continue functioning normally over the coming years.
I've seen analyst estimates of ranging from .06-.08 cents EPS for 2012. I think the analyst estimates are way off here, which is part of the opportunity in accumulating shares at these prices. Based on previous results and commentary from the CEO during the recent conference call, I don't think it is out of the question to expect EPS for 2012 of between .15-.20 cents per share. Let's go with the low end of that estimate. That puts the company at a mid-20s multiple at current levels. A mid-20s multiple for a company in as explosive a growth sector as mobile security is average. Multiple expansion is not a question of if but when with a company as buzz-worthy as AUTH.
I have had a difficult time coming with up with a reliable estimate for growth going beyond a couple quarters. I think for the most part, analyst estimates here are useless as their models have yet to catch up with the improvements AUTH has made recently. From a technical basis (see below) the stock looks as if it could head up to $10 or more if the environment for their products becomes accommodating. A $10 per share price at say a multiple of 35 (very possible given the sector and potential for growth...multiple expansion will occur) would require the company to earn .30 cents per share in 2013. Again, very obtainable given the sector, product cycle and recent ascent in earnings the company has experienced. Any hint of increased earnings growth in the quarters ahead could very well catapult the stock into the double digits in anticipation of this outcome.
Market cap is $165 million. AUTH has a float of 35 million shares, 25% of which is institutionally held and 17% is being held by insiders. Insiders have been net sellers of the stock recently. If insiders were accumulating at these levels this would literally be the perfect opportunity. Unfortunately that is one piece of the puzzle that is incomplete.
Institutional holders of the stock are MARXE, AUSTIN W. & GREENHOUSE, DAVID M. representing 5% of the shares outstanding. I know this firm well from previous small-cap stocks I have owned. They are fairly substantial players in the small-cap market specializing in turnaround plays. I have seen their investment acumen result in mixed success over the years.
The second largest holders is RIMA Asset Management representing 4% of the shares outstanding. RIMA is run by Richard Mashaal. Mr. Mashaal was unfamiliar to me before doing research into AUTH. I looked into his firm and track record. It seems that he has had good long-term results, although extremely volatile. I managed to find a question and answer session he did in a transcript from 2004. Here are some details that may shed some light on why he likes AUTH here:
Q: Looking at the small cap fund, I gather there's a technology bent to it.
Mr. Mashaal: Absolutely. Our style of investing we call 'value in growth industries,' and while we look at many different types of industries, we end up finding a lot of our interesting opportunities in technology.
Q: When looking at a technology company, what does it take to get you interested?
Mr. Mashaal: Typically, a lot of the companies we start looking at are out of favor. They're companies that may have missed an earnings estimate or a product cycle, and the growth investors got rid of the stock.
The first thing we look for is a good balance sheet. We look for companies with large cash balances and no debt, so that if there is an issue with their coming up with new products or executing some kind of turnaround, the company has the financial wherewithal to get through it. A good balance sheet typically attracts us. We're also, obviously, looking for some unique proprietary technology. We're less drawn to companies that have sort of me-too business models, or companies that have a lot of competition in an area. We're looking for companies with some unique advantages or unique technology. It doesn't have to be the biggest market opportunity, but it has to be a decent-size market opportunity where, if someone has unique, proprietary technology, that can translate into very high gross margins and profitability. It's not what these companies were doing yesterday as much as what are they going to do going forward. That's mainly what we're looking for. So when we were looking for stocks to buy during the technology bear market, what really would attract us to a stock would be, number one, a good balance sheet, and number two, a company that had recognized the technology bear market for what it was ' which was more than a blip ' and reoriented their business to take advantage of what were going to be the opportunities in the future.
So when we had our pick of tech stocks that were down, we were looking for companies with unique technologies that were addressing large and growing market opportunities, companies with good balance sheets and big growth opportunities. Obviously, you're also trying to find companies where that's not reflected in the price, where you don't have 10 analysts already telling the story saying, 'Hey, this is what's going to happen.' You're looking for companies that investors are skeptical about or that just don't have the analyst coverage. So their stories are not well-known. Our objective is to get involved early. We want to be there when the story is told to other investors, more analysts buy into the story and start writing up and recommending the company, and the stock trades up to fair value.
Again, his fund has done well. I remember seeing his primary investment vehicle Senvest Partners in the top rankings when I was running my fund some years ago. This gives you glimpse of what he sees in AUTH.
Now let's look at the technical picture:
click chart to enlarge
AUTH Monthly
AUTH Daily
AUTH represents a substantial opportunity in the growing mobile security space. The downside here is extremely limited given the progress management has made towards turning this company around since going public at the market top in 2007. They have a clean balance sheet, are generating free cash and growing the top and bottom line. The truth of the matter is that their business is in its infancy. It is impossible to pinpoint how large this market can eventually become and how that will influence AUTH's per share price. What is at present an undeniable fact is that AUTH presents an outstanding risk/reward opportunity in a company that is flying way below the radar of Wall Street. Upside is in the mid-teens from the current price in the 3 dollar range over the next 12 months.
