Update

Equity Research 30 October 2018

Fingerprint Cards
Sector: Semiconductors

Working fingers to the bone – finally paying off FAIR VALUE RANGE

BEAR BASE BULL

Improved gross margins & insider purchases backing up optimistic CEO comments 3.0 8.0 18.0
As we wrote in our initial report comment on Q3, the third quarter can be summarized “nice
work from FPC”, especially considering that it has been hampered by completing major
restructuring programs at the same time. The gross margin improvement from 15 % in FINGb.ST VERSUS OMXS30
H1’18 to 27 % especially deserves to be highlighted. The CEO statement was more OMXS 30
Fingerprint Cards
optimistic and it has also been backed up by substantial insider purchases. Since June,
25
insiders have in total acquired shares for about SEK 19m.
20

Fingerprint & face are complementary (thus far) 15

The fingerprint vs face battle has turned out better than we expected. We have looked at 10

over 80 phone launches during 2018, from the ten largest smartphone OEMs. About 80 % 5

of the phone models still have a fingerprint reader. However, we only find a handful of 0
30-okt 28-jan 28-apr 27-jul 25-okt
phones with iris; about 4 %, while the face recognition penetration is slightly above 60 %.
The most interesting trend is that fingerprint and face is complementary technologies.
Close to half of the new phones include face as well as fingerprint, i.e. the other OEMs do REDEYE RATING
not follow the Apple trend (yet). Only 13 % of the models rely solely on face recognition
technology.
4 4
At last, insiders have bought 2.6m shares – we raise our base case by 60 % 3 3 3

We raise our base case by 60 % from SEK 5 to SEK 8 per share. Our estimate revisions are
related to gross margins and the mobile segment. The gross margin is raised to 33% (26 %)

Profit Outlook
Management

Ownership

Profitability

Financial
Strength
for years 2019-2021 and 35 % for 19-25E (31 %) as we assume that the Q3’18 product mix
is a reasonable base line going forward. We double our average mobile sales from SEK
0.6bn to 1.2bn during 19-25E, partly related to a higher ASP but mostly due to multi-
KEY STATS
modality and higher fingerprint penetration as face and fingerprint seem to complement
each other. The blended ASP assumption for 2019-2025 jumps 12 % to USD 1.3. Our other Ticker FINGb.ST
estimates are left unchanged as several challenges remains, in our view. We note, however, Market Large cap
that insiders in Management and Board have been very active since June. Their total Share Price (SEK) 10.2
purchases amount to 2.6m shares. We assume their optimism is related to the smart card Market Cap (MSEK) 3215
prospects but we have so far not been able to find any unambiguous evidence of major
Net Debt 18E (MSEK) -727
volumes. Based on the positive insider momentum we see potential smart card news in
Free Float 100 %
mid-19 and shares seem more likely to trade towards our bull case than our base case.
Avg. daily volume (‘000) 592

KEY FINANCIALS (SEKm) 2016 2017 2018E 2019E 2020E 2021E

Net sales 6638 2966 1478 1350 1558 1896 ANALYSTS
EBITDA 2661 224 -627 73 113 230 Viktor Westman
EBIT 2613 155 -746 -2 25 134 viktor.westman@redeye.se

EPS (adj.) 2016

6.5 2017
0.4 2018E
-2.0 2019E
0.0 2020E
0.1 2021E
0.4 Dennis Berggren
EV/Sales 2.8 1.4 1.7 1.9 1.7 1.3 dennis.berggren@redeye.se
EV/EBITDA 7.0 19.0 -4.0 34.7 22.8 10.7
EV/EBIT 7.1 27.6 -3.3 -1535.3 103.2 18.4
P/E 9.7 41.3 -5.2 -2499.4 130.5 29.3

Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report
Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, 103 87 Stockholm. Tel. +46 8-545 013 30, E-post: info@redeye.se
REDEYE Equity Research Fingerprint Cards 30 October 2018

FPC has worked its fingers to the bone & it is finally starting to pay off
As mentioned above, insiders in the Board and Management have together bought close to
2.6 million shares during the past four months (see the table below), which is a very
promising sign.

Insider purchases during 2018

Report date Name Position No. Shares added (') Approx. Value (SEK ')
29/10/2018 Urban Fagerstedt Board 25 245
29/10/2018 Dimitrij Titov Board 11 110
26/10/2018 Ted Elvhage Board 670 6833
25/09/2018 Thomas Yngvesson Related to the acting CFO 10 102
24/09/2018 Juan Vallejo Perez Board 100 1039
27/08/2018 Tomas Mikaelsson Board 10 87
15/06/2018 Christian Fredrikson CEO 268 1739
15/06/2018 Johan Carlström Board & main owner 300 1851
15/06/2018 Christian Fredrikson CEO 121 815
15/06/2018 Johan Carlström Board & main owner 751 4586
15/06/2018 Johan Carlström Board & main owner 180 1106
15/06/2018 Johan Carlström Board & main owner 148 897

Total 2592 19410

Source: Holdings

On the call FPC said that its method of being able to grow, despite major restructuring at the
same time, is to focus on the core business where FPC has its edge and leverage other areas
with partnerships. One important asset mentioned in this context is FPC’s strong access and
relations to Chinese OEM customers (yes, the OEMs can be called customers as they buy
software from FPC, although the hardware business is indirect, strictly speaking).

As for the Face ID threat, the absolute majority (almost 80 %) of the new phones launched in
2018 still has a fingerprint sensor. This is better than we hoped for but the face/iris ratio is
still depressing (see data further below).

Q3: Great gross margin improvement from 15 % in H1’18 to 27 %

Q3 sales were 7 % higher than we expected, which is related to the mobile segment (see the
table below). Sales outside mobile is still below 10 % of the total but, according to FPC, it is
tracking towards the 10 % target.

Estimates vs reported
Q3 2017 Q3 2018 Q3 2018E Difference

Net sales 841 431 405 7%

COGS -565 -316 -340 -7%
Gross profit 277 115 64 79%
Gross margin 33% 27% 16% 68%

OPEX
of which sales costs -59 -37 -35 3%
of which administrative costs -33 -24 -23 1%
of which development costs -85 -41 -45 -8%
of which other operating income/expenses -48 -7 -10 -34%
EBIT 52 7 -49 -114%
EBIT margin 6% 2% -12% -113%

Net financials 13 -4 -4 -3%

Profit before tax (PBT) 65 3 -53 -106%

Income tax -15 0 12 -102%

Profit for the period 50 3 -41 -107%

EPS 0.16 0.01 -0.13 -107%

Source: Redeye Research,

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REDEYE Equity Research Fingerprint Cards 30 October 2018

The market is now stabilizing from consolidation both in the OEM space and in FPC’s part of
the value chain. FPC says there are only a handful players left in the mobile capacitive market
as the dust has settled, suggesting that FPC’s market share could remain (more) stable. The
improved sales was also related to a favourable customer mix as FPC has a good exposure
to the six largest customers outside of Samsung and Apple that are advancing.

FPC seems very positive about in-display for 2019. It is crucial that this optimism materialize
because the ASP for in-display is substantially higher than capacitive where the price decline
in 2018 is exceeding 30 percent for the second year in a row.

The gross margin improvement to 27 % (expected 16 %) compared to 15 % in the last two

quarters is clearly the most impressive part of Q3, although it was not at all mentioned in the
report. On the call, however, FPC explained that the gross margin bounce-back is related to
product mix where the company now sells only a handful of models, which is less than half
the previous number of sensors. The aforementioned suggests that the gross margin has
reached a turning point and that the good mix could continue going forward, which is a large
difference from the previous narrative of the stock market that seemed to be more similar to
FPC having completely lost its technology leadership. The ambition is to exceed a 30 percent
gross margin and we deem that this is doable, especially considering the fewer sensor
models plus that there was no 1511 effect in the quarter.

The new 1511 sensor will be important going forward and the internal expectations for the
1511 seem very high. The CEO called it the best capacitive sensor ever made, referring to
especially the price/performance. The 1511 is a single chip sensor, i.e. there is no need for a
companion chip, which should make it an attractive alternative. Also, the technology of the
1511 is the basis for the smart card sensors where the company has a strong position.

The temperature is rising in smart cards – but no major volumes in 2019

As we suspected, there will not be any major smart card volumes in 2019. We are still at trial
and certification stage and this phase needs to be finished before volume orders can be
placed. FPC wrote in the report that the certification of contactless cards will be done by
major card brands in H1’19 but the volume orders also need to be in sync with the banks’
annual budgets.

Overall, the temperature is rising and FPC is poised to capture a major part of the smart card
market with Gemalto and IDEMIA who control the vast majority of the market. Gemalto says
biometric smart cards is a key area and exemplifies with the United Nations’ “Identity for All”
program who targets secure documentation for everyone by year 2030 using citizen
biometric enrolment. Also we note that the FPC partner Zwipe has recruited Pierre Girod who
has a very impressive resume.1

Fingerprint & face are complementary (thus far)

As mentioned above, the fingerprint vs face battle has turned out much better than we
expected. We have studied over 80 phone launches during 2018, from the ten largest
smartphone players. We only find a handful of phones with iris (about 4 %), but on a positive
note about 80 % of the new phones still have a fingerprint reader, as can be seen in the graph
on the next page. The face recognition penetration is slightly above 60 %. The perhaps most
interesting trend though is that fingerprint and face is complementary technologies

1
“Prior to joining Zwipe, Mr. Girod spent more than ten years at Mastercard, leading card and terminal testing and
certification efforts. He served as Head of Labs Accreditation, served on the EMVCo Terminal Approval Working Group and
was a key contributor in Terminal Quality Management (TQM) and Card Quality Management (CQM) processes. His
technical background features both senior and advisory postings with many global corporations including Gemalto and
Sopra Steria.”

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REDEYE Equity Research Fingerprint Cards 30 October 2018

supporting the CEO’s message about multi-modality. Close to half of the new phones include
face as well as fingerprint, i.e. they do not follow the Apple trend, at the moment. Only 13 % of
the models rely solely on face recognition technology.

Biometric technologies in the 2018 phone models

100%

80%

60%

40%

20%

0%
Iris Only face Only fingerprint Both fingerprint Total face Total fingerprint
recognition & face

Source: Redeye Reserach, company data from the respevtive smartphone OEMs

Thus, overall, fingerprint and face are complementing each other, thus far. The important
question is still if the Chinese OEMs will later piggyback Apple and do away with fingerprint
recognition. Apple’s movement towards eventually completely scrapping Touch ID seems
pretty clear, in our view. Apple has e.g. said that Face ID has been incredibly well received.

The weak iris trend is a negative surprise though (it is not a surprise in terms of the almost
non-existing launches but e.g. in relation to what we thought by the time of the Delta ID
acquisition). FPC said it needs to work to increase the convenience for iris as Apple’s Face ID
has the best performance in touchless and clearly has raised the bar for what to expect in
terms of convenience. There is no issue with security though as iris, by nature, is much more
secure than face recognition. Overall, we still believe that iris is a competitive alternative to
face in terms of the technology specs but as previously mentioned this might not be enough
when Apple sets the agenda, which is also what the data in the graph above suggests, at the
moment. Even though face in general has become popular the quality and performance of
the various face solutions out there is, according to FPC, very scattered. We assume it is
referring to 2D solutions as opposed to Apple’s expensive 3D technology. Iris is still a good,
cheaper alternative to face recognition but clearly FPC has thus far not managed to convince
its customers. One interesting question for the future is what FPC can and will do to change
the sad trend for iris.

From the conference call we also understood that even though the Delta ID goodwill now
represents a substantial part of today’s market cap FPC repeated that there is no risk for
impairments regarding Delta ID. This would suggest that FPC has a plan for how to unlock
the Delta ID growth potential that it paid SEK 1 billion for. However, we would like to
understand more about the details of this plan. The company is not really in the position to be
given the benefit of the doubt.

In-display to capture a large market share in 2019?

FPC’s increased optimism around in-display is striking. The in-display solutions out on the
market have not yet become a hit, which gives FPC a second chance. It seems that FPC
believe that it can top the current solutions with better quality, performance and security but,
as the CEO said, FPC needs to prove it. In optical in-display technology, FPC needs to catch
up compared to the competitors and their head start, meaning we would expect the largest

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REDEYE Equity Research Fingerprint Cards 30 October 2018

opportunities to be related to the disruptive ultrasonic sensor.

The smartphone industry is a fashion business and customers constantly want new stuff.
The lower security in in-display is therefore not as important as the design of the device. As
there is virtually no more innovation going on in the capacitive field we find it likely that FPC is
correct regarding that in-display will have a substantial market share in 2019, at least in the
high end space. It is important to note that the value market share for in-display vs traditional
capacitive will be substantially higher than the volume share due to the higher ASP.

Strong operating cash flow & a healthy balance sheet

The operating cash flow was impressive: SEK 203m before working capital and SEK 54m,
excluding the large working capital effect on receivables. Cash at the end of the period
amounted to SEK 742m, despite a SEK 162m repayment of the acquisition loan relating to
Delta ID. This means that only SEK 41m is left from the Delta ID deferred payment. In
conclusion, our thesis regarding the overestimated risk for additional capital raising proved
correct.

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REDEYE Equity Research Fingerprint Cards 30 October 2018

Financial estimates
Our major estimate revisions (see the table below) is primarily related to the Q3 gross margin
of 27 % (expected 16 %), which we believe is a likely new floor. We note that FPC’s objective is
to come back above 30 % but we especially take into account the product mix with fewer
sensors, meaning we do not expect the extraordinary “bad mix” in H1’18 to come back. From
the end of Q4 we will also likely see a positive impact from the new 1511 sensors.

Redeye's revised estimates

Q3'18 Q4'18 2018 2019 2020

Net sales - previous estimate 366 310 1,355 1,184 1,321

Adjustment (%) 18% 19% 9% 14% 18%
Net sales - new estimate 431 368 1,478 1,350 1,558

Gross profit - previous estimate 59 55 -87 263 352

Adjustment (%) 95% 87% -119% 69% 49%
Gross profit - new estimate 115 103 17 443 524
Gross margin 26.7% 27.9% 1.1% 32.8% 33.6%

EBIT - previous estimate -55 -36 -844 -133 -70

Adjustment (%) -113% -100% -12% -99% -136%
EBIT - new estimate 7 0 -746 -2 25
EBIT margin 1.6% 0.0% -50.5% -0.1% 1.6%

Profit before tax 3 -2 -775 -2 32

Tax 0 0 160 0 -7
Profit for the period -41 -1 -614 -1 25
Profit margin -41.6% -0.1% 1.6%

EPS (fully diluted shares outstanding) 0.01 0.00 -1.96 0.00 0.08
Number of shares (millions) 314.0 314.0 314.0 314.0 314.0

Source: Redeye Research

We have also increased our sales estimates by 9-18 percent for years 2018-2020 (as
indicated in the table above), primarily related to higher ASP from the in-display trend, which
is where the industry seems to be moving (since the innovation in capacitive now, in essence,
is over). We assume initial ASP for in-display of about USD 4, albeit a rapid decrease over the
coming years. When it comes to our in-display volumes we make a cautious assumption to
only include them in the high-end phone segment, meaning a total market of about 300
million units. Unfortunately, Apple and Samsung together control about 2/3 of the premium
segment, leaving only around 100 million phones left for FPC to compete for. We assume the
penetration for FPC to start at 12 percent and then gradually work its way to 50 percent in
2022. With an ASP of USD 4-2.5 (declining from 4 to 2.5) our blended ASP would average
USD 1.2 in 2019-2022 (indicated in the table on the next page), using the same capacitive
ASP as before (USD 0.9).

As can be seen in the table above we expect a negative sequential growth in Q4 related to
seasonality and decreasing ASP.

In the table of assumptions for the different segments on the next page it can be seen that
we still have a negative outlook for the smartphone volumes, related to the face ID threat but
the volume drop is estimated to be a bit lower than our previous projections.

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REDEYE Equity Research Fingerprint Cards 30 October 2018

Assumptions for sales estimates:

2018 E 2019 E 2020 E 2021 E

Units
Mobile devices 142 124 107 98
Smart cards 1 5 13 25
PC, peripherals, IoT & other 4 9 16 25
Automotive 0 0 0 1
Delta ID & other non-sensor sales 3 6 15 30

Total units (only sensors) 146 138 136 150

Units, percentage change YoY -30% -5% -1% 10%

ASP
Mobile devices 1.1 1.1 1.2 1.4
Smart cards 3.9 2.7 1.9 1.3
PC, peripherals, IoT & other 2.3 1.7 1.7 1.6
Automotive 9.0 8.0 8.0 7.0
Delta ID & other non-sensor sales 1.9 1.3 0.9 0.7

Weigthed average ASP (only sensors) 1.1 1.2 1.3 1.4

ASP, percentage change YoY -34% 3% 14% 9%

Total sensor/module sales, USD 164 161 181 216

Non-sensor sales, USD 6 8 14 21
Net sales, SEK 1,478 1,350 1,558 1,896
Net sales, percentage change YoY -50% -9% 15% 22%
Source: Redeye Research

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REDEYE Equity Research Fingerprint Cards 30 October 2018

Investment Case
 A deep, general stock market distrust…
 …that makes investors forsake new verticals like smart cards
 Trust needs to be restored by beating consensus

A deep, general stock market distrust…

With an over 90 percent share price decline FPC could potentially be a deep value case. The negative trend is
understandable in relation to all the negative news like e.g. multiple profit warnings. All these factors add up to a
major distrust towards FPC and explains FPC’s current market valuation and share price drop. However, we expect
that it will take a long time before this distrust will pass.

…that makes investors forsake new verticals like smart cards

The general mistrust make investors neglect FPC’s solid first mover position in the new fast growing verticals, most
notably smart cards. Cards as well as other new segments might be delayed but it does not mean that FPC does
not have a strong positioning, an appropriate product offering (the T-shape module) and the partnerships necessary
etc. to put up a solid growth. We assume initial volumes will be low, but nevertheless, the next quarters might show
who will be the winner of the smart card market. Our belief is that FPC is poised to capture a large portion of the
smart card market via Idemia and Gemalto.

Trust needs to be restored by beating consensus

Our base case is SEK 8 per share while our bear and bull case respectively amounts to SEK 3 and SEK 18. However,
all trust has vanished, to put it bluntly. Figures above consensus expectations is probably the only thing that could
break the downward spiral for the share price. A stock price recovery requires that FPC repeatedly beats the
earnings consensus.

8
REDEYE Equity Research
Valuation
Bear Case 3.0 SEK
In our bear case we assume that
FPC has lost its technology
leadership and that the competitors
therefore will win in the in-glass
battle. In addition, We see severe
setbacks in the demand for
fingerprint sensors in mobile
devices due to Apple’s FaceID
similar to when Apple basically killed
all other touch technologies when
pro cap touch technology became
the industry standard. We assume
customers would favour face
recognition over iris, regardless of
iris superior characteristics
compared to face recognition. We
do however find it reasonable that
other verticals, such as smart cards,
would compensate for the sales
drop in mobile devices, meaning
FPC could come back to growing
sales, although with a low, single
digit percentage growth. Our
assumptions are summarized
below. Sales growth at 6 percent
during 2018-2026 as FPC’ market
share in the mobile device segment
quickly goes down to levels around
4 percent and adoption of FPS in
other segments turns out to be
considerably slower than in base
case In our bear case we assume
that FPC will have basically no
revenues from non-sensor sales, i.e.
the Delta ID acquisition is a failure
With less scale, FPC will not have
the resources to continuously
innovate, meaning the technology
leadership is lost and the solutions
face increasing commoditization,
not only in mobile devices Gross
margins averaging 23 percent
during 2018-2025 gradually
decreasing to 20 percent in 2024 as
FPC’s bargaining power diminishes
due to dual sourcing and lost
technology leadership. We expect
FPC to become more frugal and
cautious on the OPEX side with
OPEX averaging 29 percent of sales
during 2018-2025, especially
reflected in significantly lower R&D
spend than in our base case All in
all, we expect FPC to lose money
during 2018-2021 and then EBIT to
be on average around 4 percent and
in the long term, from 2025 and on,
Base Case 8.0 SEK
In our base case we assume that
the problems in the mobile device
segment are structural. We expect a
few tough years before new
verticals start to contribute
significantly to the bottom line. Our
assumptions are summarized
below. Revenue growth at a CAGR
of 7 percent from 2018 to 2026,
meaning revenues of about SEK 2.7
billion in 2026 The mobile device
segment continues to struggle,
meaning flat revenues averaging
SEK 1.2 billion during 2017-2025 As
a consequence from mobile devices
stagnating, other segments start to
significantly contribute to revenues
in 2019, representing about one
third of total sales in 2020. Blended
ASP increases gradually to USD 1.3
in 2022 as we expect in-display,
modules and combinations of
multiple sensors and biometric
modalities to be more expensive
initially whilst the price of capacitive
sensors for the mobile device
segment experience a slower
decrease Gross margins of about
33 percent on average during 2018-
2021. Then, iris and other software
sales trumps the gradually
decreasing hardware gross margins,
meaning the group gross margin
appreciates to a top of 36 percent
by 2023 We expect an OPEX growth
of 3 percent per year during 2019-
2025. Average OPEX during the
period remains high though at 24
percent of sales, as a consequence
of continuing intense R&D spending
(the innovate or die theorem)
Stabilizing gross margins as the
phone devices market matures
should together with the evident
scalability on fixed costs in the
business model imply a gradually
stronger EBIT margin. We assume
an average EBIT margin of 10
percent during 2019-2025 and a
long-term EBIT margin of 15 percent
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Fingerprint Cards 30 October 2018
Bull Case 18.0 SEK
In our bull case FPC manages to
maintain technology leadership and
continually reinvents itself. Apple
discontinues its face recognition
technology in favour of touch ID and
as a result fingerprint sensing
remains the go to technology for
mobile devices as well as most
other application areas. In addition,
we assume Delta ID can reach sales
of USD 100 million in 2022. Our
assumptions are summarized
below. FPC manages to drive
consolidation in the market and
achieves a position allowing it to
launch new business models where
software sales make a larger
contribution to revenues than in our
base case Double digit revenue
growth (24 %) for sales during 2018-
2026, meaning sales of about SEK 7
billion in 2026 The long-term
market shares in the mobile device
segment can range from 15-20
percent but the penetration of FPS
and other biometric modalities,
namely iris, are much higher than in
our base case In the long term,
blended ASP is similar to base case
as FPC receives significantly lower
ASP from software solutions but at
the same time manages to
successfully expand its product
portfolio with a high share of
software and multimodal, biometric
system solutions The gross margin
averages 40 percent during 2019-
2025 and comes back to above 40
percent in 2022, despite a similar
gross margin decrease on hardware
compared to base case, which is
due to a higher share of the non-
sensor sales, especially iris, with a
gross margin of 90 percent The
long-term EBIT margin is 20 percent
supported by large economies of
scale but in the mid-term EBIT
averages 22 percent
REDEYE Equity Research Fingerprint Cards 30 October 2018

we also assume an EBIT margin of

4 percent.

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REDEYE Equity Research Fingerprint Cards 30 October 2018

Catalysts
Customers adopt face recognition

If Apple's Face ID becomes a success it could make FPC's customers prone to quickly also move over to face
recognition and thus scrap their fingerprint sensors.

Commercial success/considerable volumes from smartcards

If the market sees that the smart card segment is taking off, for example due to a major deal with IDEAMIA or
Gemalto it would have a major impact on the share. Not only would it contribute financially, but also make FPC less
dependent on the mobile device segment. We expect to hear about further progress and see volumes pick up in
2019.

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REDEYE Equity Research Fingerprint Cards 30 October 2018

Summary Redeye Rating

The rating consists of five valuation keys, each constituting an overall assessment of several factors that are rated
on a scale of 0 to 2 points. The maximum score for a valuation key is 10 points.

Management: 3.0

The Board as well as Management are basically brand new but have solid track records on paper. The CEO has
relevant experience from having been the CEO of FSecure. FPC’s execution was impressive during the ramp-up to
delivery of one million sensors a day. However, historically it has not been good at meeting its targets and it did not
anticipate e.g. the inventory build-up in 2016 or the problems in 2017. In addition, share buybacks was made around
ATH levels. Communication and transparency need to be improved.

Ownership: 3.0

The insider holdings in Board and Management are insignificant in relation to our rating requirements, with a few
exceptions, such as e.g. the COB. Most of the board members own no shares or close to 0. We find it positive that
the CEO is buying shares, although his position at the moment is too small in relation to his salary. No owner has
nowhere near 10 percent of the equity. On the positive side though a principal shareholder is represented on Board
and controls a corner, which gives some protection against a hostile takeover bid.

Profit Outlook: 4.0

The market for biometrics solutions is still immature. FPC evidently has a highly scalable business model where
new offerings in new, fast growing verticals can provide growth to cope with the issues in the mobile device
segment. What weighs on the downside are especially three factors pertaining to competitive dynamics; the
number of new entrants, price pressure and how sustainable FPC's competitive advantages are. The ASP has
decreased rapidly from competitors and new entrants grabbing market shares. As for the competitive advantages,
we believe FPC has solid firset mover advantages in smart cards in particular but we would like to understand more
how it will build sustainable competitiveness, especially considering the savings programs of in total SEKm 710.

Profitability: 3.0

FPC has been profitable but margins have been rapidly trending downwards. Our profitability rating is conservative
and largely retrospective. For a higher rating we especially require a longer period of high ROE, EBIT margins etc. as
well as an ability to deliver strong, stable cash flows.

Financial Strength: 4.0

FPC’s balance sheet is all in all solid even though most of the cash was used to acquire Delta ID or wasted on share
buybacks. Factors weighing on the negative side are: the cyclicality of the mobile device industry and the high
exposure to a few large customers such as e.g. Huawei and Xiaomi. As FPC enters new verticals, and thereby
lessens its dependence on individual customers and segments, we may re-evaluate our rating.

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 REDEYE Equity Research Fingerprint Cards 30 October 2018

Please
INCOME comment on
STATEMENT the changes
2016 2017 in Rating
2018E 2019Efactors……
2020E DCF VALUATION CASH FLOW, MSEK
Net sales 6,638 2,966 1,478 1,350 1,558 WACC (%) 16.7 % NPV FCF (2018-2020) 273
Total operating costs -3,977 -2,742 -2,105 -1,306 -1,445 NPV FCF (2021-2027) 962
EBITDA 2,661 224 -627 73 113 NPV FCF (2028-) 657
Depreciation -6 -10 -12 -10 -9 Non-operating assets 920
Amortization -41 -59 -107 -36 -79 Interest-bearing debt -222
Impairment charges -1 0 0 0 0 Fair value estimate MSEK 2590
EBIT 2,613 155 -746 -2 25 Assumptions 2017-2023 (%)
Share in profits 0 0 0 0 0 Average sales growth 9.0 % Fair value e. per share, SEK 8.2
Net financial items 0 -13 -29 0 7 EBIT margin -0.1 % Share price, SEK 10.2
Exchange rate dif. 0 0 0 0 0
Pre-tax profit 2,614 142 -775 -2 32
PROFITABILITY 2016 2017 2018E 2019E 2020E
Tax -579 -22 160 0 -7
ROE 121% 5% -30% 0% 1%
Net earnings 2,035 120 -614 -1 25
ROCE 155% 6% -35% 0% 2%
ROIC 1777% 12% -36% 0% 2%
BALANCE SHEET 2016 2017 2018E 2019E 2020E EBITDA margin 40% 8% -42% 3% 7%
Assets EBIT margin 39% 5% -50% 0% 2%
Current assets Net margin 31% 4% -42% 0% 2%
Cash in banks 1,162 920 727 683 636
Receivables 1,132 438 281 277 296 DATA PER SHARE 2016 2017 2018E 2019E 2020E
Inventories 673 646 370 324 358 EPS 6.48 0.38 -1.96 0.00 0.08
Other current assets 435 313 40 44 48 EPS adj 6.48 0.38 -1.96 0.00 0.08
Current assets 3,402 2,317 1,417 1,328 1,339 Dividend 0.00 0.00 0.00 0.00 0.00
Fixed assets Net debt -3.70 -2.22 -2.31 -2.18 -2.03
Tangible assets 29 47 41 36 33 Total shares 313.97 313.97 313.97 313.97 313.97
Associated comp. 0 0 0 0 0
Investments 0 0 0 0 0 VALUATION 2016 2017 2018E 2019E 2020E
Goodwill 0 784 784 784 784 EV 18,570.6 4,265.5 2,488.5 2,531.8 2,579.0
Cap. exp. for dev. 0 245 245 245 245 P/E 9.7 41.3 -5.2 -2,499.4 130.5
O intangible rights 71 159 65 175 249 P/E diluted 9.7 41.3 -5.2 -2,499.4 130.5
O non-current assets 0 0 0 0 0 P/Sales 3.0 1.7 2.2 2.4 2.1
Total fixed assets 101 1,235 1,135 1,241 1,312 EV/Sales 2.8 1.4 1.7 1.9 1.7
Deferred tax assets 0 0 0 0 0 EV/EBITDA 7.0 19.0 -4.0 34.7 22.8
Total (assets) 3,503 3,552 2,552 2,569 2,651 EV/EBIT 7.1 27.6 -3.3 -1,535.3 103.2
Liabilities P/BV 8.9 2.1 1.9 1.9 1.8
Current liabilities SHARE PERFORMANCE GROWTH/YEAR 16/18E
Short-term debt 0 0 0 0 0 1 month 4.6 % Net sales -52.8 %
Accounts payable 1,080 458 340 337 343 3 month 24.9 % Operating profit adj n/a
O current liabilities 61 351 191 182 200 12 month -43.5 % EPS, just n/a
Current liabilities 1,141 809 531 519 543 Since start of the year -35.2 % Equity -12.2 %
Long-term debt 0 222 0 0 0
SHAREHOLDER STRUCTURE % CAPITAL VOTES
O long-term liabilities 0 0 0 0 0
Johan Carlström med bolag 6.4 % 20.1 %
Convertibles 0 0 0 0 0
Avanza Pension 5.0 % 4.3 %
Total Liabilities 1,141 1,031 531 519 543
Nordnet Pensionsförsäkring 1.7 % 1.4 %
Deferred tax liab 0 0 0 0 0
Danica Pension 1.1 % 0.9 %
Provisions 136 190 304 334 368
Svenska Handelsbanken AB for PB 0.9 % 0.8 %
Shareholders' equity 2,226 2,331 1,716 1,715 1,740
Swedbank Försäkring 0.7 % 0.6 %
Minority interest (BS) 0 0 0 0 0
XACT Fonder 0.7 % 0.6 %
Minority & equity 2,226 2,331 1,716 1,715 1,740
DNB Asset Management SA 0.7 % 0.6 %
Total liab & SE 3,503 3,552 2,552 2,569 2,651
Erik Svenonius 0.6 % 0.5 %
Handelsbanken Liv Försäkring AB 0.6 % 0.5 %
FREE CASH FLOW 2016 2017 2018E 2019E 2020E
Net sales 6,638 2,966 1,478 1,350 1,558 SHARE INFORMATION
Reuters code FINGb.ST
Total operating costs -3,977 -2,742 -2,105 -1,306 -1,445
List Large cap
Depreciations total -48 -69 -119 -75 -88
Share price 10.2
EBIT 2,613 155 -746 -2 25
Total shares, million 314.0
Taxes on EBIT -579 -23 154 0 -6
Market Cap, MSEK 3215.0
NOPLAT 2,034 131 -592 -1 20
Depreciation 48 69 119 75 88
Gross cash flow 2,083 201 -472 74 108 MANAGEMENT & BOARD
CEO Christian Fredrikson
Change in WC -1,055 512 428 34 -35
CFO n/a
Gross CAPEX -79 -1,204 -19 -152 -159
IR Stefan Pettersson
Free cash flow 949 -491 -63 -43 -86
Chairman Johan Carlström
CAPITAL STRUCTURE 2016 2017 2018E 2019E 2020E
Equity ratio 64% 66% 67% 67% 66%
Debt/equity ratio 0% 10% 0% 0% 0%
Net debt -1,162 -698 -727 -683 -636
Capital employed 1,064 1,633 990 1,032 1,104
Capital turnover rate 1.9 0.8 0.6 0.5 0.6

ANALYSTS Redeye AB
GROWTH 2016 2017 2018E 2019E 2020E
Viktor Westman Mäster Samuelsgatan 42, 10tr
Sales growth 129% -55% -50% -9% 15%
viktor.westman@redeye.se 111 57 Stockholm
EPS growth (adj) 155% -94% -611% -100% -
2,016%
Dennis Berggren
dennis.berggren@redeye.se

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Redeye Rating and Background Definitions

The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation.

Company Qualities

The aim of Company Qualities is to provide a well-structured and clear profile of a company’s qualities (or operating
risk) – its chances of surviving and its potential for achieving long-term stable profit growth.
We categorize a company’s qualities on a ten-point scale based on five valuation keys; 1 – Management, 2 –
Ownership, 3 – Profit Outlook, 4 – Profitability and 5 – Financial Strength.
Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted
differently according to how important they are deemed to be. Each key factor is allocated a number of points
based on its rating. The assessment of each valuation key is based on the total number of points for these
individual factors. The rating scale ranges from 0 to +10 points.
The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of the
bars therefore reflects the rating distribution between the different valuation keys.

Management

Our Management rating represents an assessment of the ability of the board of directors and management to
manage the company in the best interests of the shareholders. A good board and management can make a
mediocre business concept profitable, while a poor board and management can even lead a strong company into
crisis. The factors used to assess a company’s management are: 1 – Execution, 2 – Capital allocation, 3 –
Communication, 4 – Experience, 5 – Leadership and 6 – Integrity.

Ownership

Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner
commitment and expertise are key to a company’s stability and the board’s ability to take action. Companies with a
dispersed ownership structure without a clear controlling shareholder have historically performed worse than the
market index over time. The factors used to assess Ownership are: 1 – Ownership structure, 2 – Owner
commitment, 3 – Institutional ownership, 4 – Abuse of power, 5 – Reputation, and 6 – Financial sustainability.

Profit Outlook

Our Profit Outlook rating represents an assessment of a company’s potential to achieve long-term stable profit
growth. Over the long-term, the share price roughly mirrors the company’s earnings trend. A company that does not
grow may be a good short-term investment, but is usually unwise in the long term. The factors used to assess Profit
Outlook are: 1 – Business model, 2 – Sale potential, 3 – Market growth, 4 – Market position, and 5 –
Competitiveness.

Profitability

Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to
generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company
has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 – Return on
total assets (ROA), 2 – Return on equity (ROE), 3 – Net profit margin, 4 – Free cash flow, and 5 – Operating profit
margin or EBIT.

Financial Strength

Our Financial Strength rating represents an assessment of a company’s ability to pay in the short and long term.
The core of a company’s financial strength is its balance sheet and cash flow. Even the greatest potential is of no
benefit unless the balance sheet can cope with funding growth. The assessment of a company’s financial strength
is based on a number of key ratios and criteria: 1 – Times-interest-coverage ratio, 2 – Debt-to-equity ratio, 3 – Quick
ratio, 4 – Current ratio, 5 – Sales turnover, 6 – Capital needs, 7 – Cyclicality, and 8 – Forthcoming binary events.

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REDEYE Equity Research Fingerprint Cards 30 October 2018

Redeye Equity Research team

Editorial
Management Jim Andersson
Björn Fahlén jim.andersson@redeye.se
bjorn.fahlen@redeye.se
Eddie Palmgren
Håkan Östling eddie.palmgren@redeye.se
hakan.ostling@redeye.se
Ludvig Svensson

Technology Team ludvig.svensson@redeye.se

Jonas Amnesten
jonas.amnesten@redeye.se
Henrik Alveskog
henrik.alveskog@redeye.se
Dennis Berggren
dennis.berggren@redeye.se
Havan Hanna
havan.hanna@redeye.se
Kristoffer Lindström
kristoffer.lindstrom@redeye.se
Fredrik Nilsson
fredrik.nilsson@redeye.se
Tomas Otterbeck
tomas.otterbeck@redeye.se
Life Science Team
Anders Hedlund
anders.hedlund@redeye.se
Arvid Necander
arvid.necander@redeye.se
Klas Palin
klas.palin@redeye.se
Mathias Spinnars
mathias.spinnars@redeye.se
Erik Nordström (Trainee)
erik.nordstrom@redeye.se
Jakob Svensson (Trainee)
jakob.svensson@redeye.se

Eddie Palmgren
eddie.palmgren@redeye.se

Viktor Westman
viktor.westman@redeye.se

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REDEYE Equity Research Fingerprint Cards 30 October 2018

Disclaimer
Important information
Redeye AB ("Redeye" or "the Company") is a specialist financial advisory boutique that focuses on small and mid-cap growth companies in the Nordic
region. We focus on the technology and life science sectors. We provide services within Corporate Broking, Corporate Finance, equity research and
investor relations. Our strengths are our award-winning research department, experienced advisers, a unique investor network, and the powerful
distribution channel redeye.se. Redeye was founded in 1999 and since 2007 has been subject to the supervision of the Swedish Financial
Supervisory Authority.
Redeye is licensed to; receive and transmit orders in financial instruments, provide investment advice to clients regarding financial instruments,
prepare and disseminate financial analyses/recommendations for trading in financial instruments, execute orders in financial instruments on behalf
of clients, place financial instruments without position taking, provide corporate advice and services within mergers and acquisition, provide services
in conjunction with the provision of guarantees regarding financial instruments and to operate as a Certified Advisory business (ancillary
authorization).

Limitation of liability
This document was prepared for information purposes for general distribution and is not intended to be advisory. The information contained in this
analysis is based on sources deemed reliable by Redeye. However, Redeye cannot guarantee the accuracy of the information. The forward-looking
information in the analysis is based on subjective assessments about the future, which constitutes a factor of uncertainty. Redeye cannot guarantee
that forecasts and forward-looking statements will materialize. Investors shall conduct all investment decisions independently. This analysis is
intended to be one of a number of tools that can be used in making an investment decision. All investors are therefore encouraged to supplement
this information with additional relevant data and to consult a financial advisor prior to an investment decision. Accordingly, Redeye accepts no
liability for any loss or damage resulting from the use of this analysis.

Potential conflict of interest

Redeye’s research department is regulated by operational and administrative rules established to avoid conflicts of interest and to ensure the
objectivity and independence of its analysts. The following applies:
 For companies that are the subject of Redeye’s research analysis, the applicable rules include those established by the Swedish Financial
Supervisory Authority pertaining to investment recommendations and the handling of conflicts of interest. Furthermore, Redeye employees
are not allowed to trade in financial instruments of the company in question, effective from 30 days before its covered company comes with
financial reports, such as quarterly reports, year-end reports, or the like, to the date Redeye publishes its analysis plus two trading days after
this date.
 An analyst may not engage in corporate finance transactions without the express approval of management, and may not receive any
remuneration directly linked to such transactions.
 Redeye may carry out an analysis upon commission or in exchange for payment from the company that is the subject of the analysis, or
from an underwriting institution in conjunction with a merger and acquisition (M&A) deal, new share issue or a public listing. Readers of
these reports should assume that Redeye may have received or will receive remuneration from the company/companies cited in the report
for the performance of financial advisory services. Such remuneration is of a predetermined amount and is not dependent on the content of
the analysis.

Redeye’s research coverage

Redeye’s research analyses consist of case-based analyses, which imply that the frequency of the analytical reports may vary over time. Unless
otherwise expressly stated in the report, the analysis is updated when considered necessary by the research department, for example in the event of
significant changes in market conditions or events related to the issuer/the financial instrument.

Recommendation structure
Redeye does not issue any investment recommendations for fundamental analysis. However, Redeye has developed a proprietary analysis and rating
model, Redeye Rating, in which each company is analyzed and evaluated. This analysis aims to provide an independent assessment of the company
in question, its opportunities, risks, etc. The purpose is to provide an objective and professional set of data for owners and investors to use in their
decision-making.

Redeye Rating (2018-10-30)

Rating Management Ownership Profit outlook Profitability Financial
Strength
7,5p - 10,0p 45 47 17 10 21

3,5p - 7,0p 87 78 116 36 49

0,0p - 3,0p 13 20 12 99 75

Company N 145 145 145 145 145

Duplication and distribution

This document may not be duplicated, reproduced or copied for purposes other than personal use. The document may not be distributed to physical
or legal entities that are citizens of or domiciled in any country in which such distribution is prohibited according to applicable laws or other
regulations.
Copyright Redeye AB.

CONFLICT OF INTERESTS
Viktor Westman owns shares in the company : No
Dennis Berggren owns shares in the company : No
Redeye performs/have performed services for the Company and receives/have
received compensation from the Company in connection with this.

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