In The Boardroom With...
LAZARD CAPITAL MARKETS
30 Rockefeller Plaza
New York, NY 10020
SecurityStockWatch.com: Nick, thank you for joining us today. Please
give our audience an overview of your background and your role at Lazard
Nick Andrewes: I’m a sell-side technology analyst
covering security technology and data
services space. On the security focus of my coverage, I cover companies
that provide identity solutions; physical security devices such as secure
credentials and logical access security devices such as authentication
tokens. I joined Lazard Capital Markets in September 2006 from Janney
Montgomery Scott where I also was a sell-side analyst covering security
SecurityStockWatch.com: You recently published a report
regarding Identity Technology. Please share with us the highlights.
Nick Andrewes: We published an industry piece covering specifically the
Government Identity Technology. This report is a high-level analysis of
the overall revenue opportunity and the revenue growth advantages for
companies with government ID technology exposure. We also discuss the
technologies that we feel are important in the space, such as secure credentials,
biometrics, and ID management software.
One of the core theses in the report was the given the focus on security
and the identification of national threats, spending in this area should
be more insulated from reduced spending, if we are in fact heading into
With so many projects underway both in the U.S. and internationally, we
decided to give an overview and analyze some of the largest projects that
we felt were most important to government ID Technology companies, as
well as identify the companies most likely to benefit from these projects.
We estimate total government-funded ID technology market revenue could
reach $6.9 billion by 2010 growing at roughly 15% annually, significantly
outpacing other government technology sectors. I see the strong growth
prospects coming from large-scale projects such as national ID programs,
social services programs, voter fraud prevention, residency status, border
crossing, and in transportation infrastructure.
While the convergence of physical and logical access is likely 12-18 months
away from critical traction on the enterprise side, mandates such as HSPD-12,
establishing a standard for secure identification issued by the federal
government to its employees and contractors should lead to strong industry
growth in 2H08. I believe we have just entered a strong growth cycle,
which could last 5-10 years, depending on the speed of rollout of these
The standard for secure IDs issued by the U.S. government to its employees
and contractors should lead to strong growth in 2H08 as agencies race
to meet the year-end 2008 deadline. Homeland Security Presidential Directive
12 (HSPD-12) established a mandatory standard for secure identification
issued by the federal government to its employees and contractors, also
known as FIPS 201 (Federal Information Processing Standard 201).
We expect consolidation to continue, as companies look to broaden product
offerings to provide a comprehensive suite of solutions, we believe the
fast-growing ID Technology space will become a target to augment growth
in an otherwise slowing spending environment.
SecurityStockWatch.com: What is your perspective on
the market drivers for these companies at the present time?
Nick Andrewes: We continue to see strong market drivers,
some of the projects that we have been speaking about are finally being
starting to take shape. Final regulations, contract awards and expanded
deployment is a main theme of the next 12-18 months. While we always caution
that investors need to be patient as the timing on government projects
typically get pushed out, the commitment by government entities to the
projects are not wavering.
An illustration of this point is the FBI’s Next Generation Identification
(NGI) system, the potential size of the project has not changed, but with
the protest following Lockheed’s award of the potential $1 billion
contract, the timeline for project start was pushed out several months.
Recently the protest was dropped, an the system integrator is ready to begin
We expect implementation of several other biometric programs, such as
US-VISIT 2 to 10 prints and EU-VIS countrywide rollouts, to make 2008
and 2009 a much better year for biometrics as well. Beyond 2009, the EU
is proposing an electronic travel authorization system to register the
entry and exit of non-EU nationals similar to the US-VISIT program, suggesting
still more growth opportunities.
On the credentialing side, The Real ID Act, which call for the revamp
of state issued driver’s licenses has been in the works for several
years. There was significant pushback from state regarding the federal
mandate, which led to delays in the program, but with the uncertainty
surrounding the new rules ended, we expect REAL ID to become a significant
growth driver in the credentialing market starting late 2009. Other programs
such as the Passport Card and enhanced driver’s licenses, which
would allow for non-flight travel to Canada and Mexico, will be drivers
in the coming years. Internationally, we continue to see strong demand
from ePassport programs as well as national ID programs.
SecurityStockWatch.com: One will read in your report
that for Government-focused ID Technology, there is, “Rising demand
driving opportunities, even in an economic downturn”. Much has happened
in the capital markets the past couple of months – is this still
Nick Andrewes: On of the main points we are trying to
make is that government-focused business holds risks such as contract
pushouts, but if we head into a recession, companies with fixed contracts
in place should fare well. We think our statement continues to hold true,
our analysis of historical data shows that in past economic slowdowns
and recessions, government spending on information technology has been
less vulnerable than Enterprise spending.
As you know, the markets have been pretty volatile over the last several
months, and despite the increasingly popular notion that the worst of
the credit crisis is over, it is still very hard to predict what the impact
will be on consumer and enterprise spending for the rest of 2008. I think
the confidence level of C-level executives is not very strong, and corporate
technology budgets will likely suffer in the near-term.
On the other side, government programs that are in place are attractive
to companies looking to increase growth, L-1’s recent announcement
that they are buying Digimarc’s ID Systems business shows the market
opportunity in the REAL ID program. We believe the offer price values
the company at roughly $14, which was a 60% premium to where the Digimarc
stock was trading prior to announcement.
SecurityStockWatch.com: Which companies are you covering
at this time may we have a brief thumbnail on each?
Nick Andrewes: ActivIdentity (ACTI-$4PT)) provides identity
solution for government, enterprises and financial services firms that
enable organizations to manage digital identities for secure physical
and logical access. We rate ActivIdentity a BUY; the stock has come under
significant pressure and currently trades below net cash value. Risks
include disruptions due to management changes, continued operating losses,
increasing competition, and lumpiness and delays in government business.
Cogent (COGT-$15PT) is a leading provider of Automated Fingerprint Identification
System (AFIS) solutions with superior technology, poised for growth fueled
by the increasing demand for government mandated authentication solutions.
We rate the company a BUY, as it is well positioned for several large-scale
contracts that will likely be awarded in 2008 and 2009. Our $15 PT equates
to roughly 20x our estimated 2008 EV/FCF.
Digimarc (DMRC-$13PT) is a supplier of secure media solutions used in
a wide range of security, identification, and digital media content applications.
Its digital identification division issues nearly two-thirds of U.S. driver
licenses. We rate Digimarc a BUY with a price target of $13, which equates
to roughly 10.6x our 2008 EV/EBITDA estimate. Risks include slower-than-anticipated
industry growth, high up-front investment, contract delays, and increased
L-1 (ID-$20 PT) remains the leader in the identity technology market,
with solutions including credentialing, fingerprint services, biometrics
and security/intelligence consulting. We project organic revenue growth
in excess of 20% in 2008. The company has product depth and breadth that
is unmatched in the industry, in our view. Our $20 price target equates
to 20x our 2008 EBITDA estimate. Risks include acquisition integrations
and dilutive effects, slower industry growth; increasing competition;
and capital requirements.
LaserCard (LCRD-$14PT) manufactures secure optical memory cards and other
cards that includes both optical and contactless chip. We rate LaserCard
a Buy as it should enjoy a tailwind throughout the decade from the increasing
demand for secure digital ID cards from established contracts that have
not yet begun full-scale deployment. Our $14 price target equates to roughly
35x our F2009E EPS and 12.3x our F2010E EPS. Risks include lumpiness of
revenues, slower-than-anticipated industry growth, key contract delays
or losses, and increased competition.
VASCO (VDSI-NM) is a dominant player in the high-growth area of strong
authentication for financial institutions and is, in our view, positioned
for substantial and profitable revenue growth. While valuation of 0.5x
2008E P/E/G is interesting, but we maintain our HOLD rating as sales cycles
lengthen, the commotion in financials continues and concerns regarding
IT spending remain. VASCO’s biggest risks are the highly competitive
marketplace and the potential deterioration of the overall business environment.
SecurityStockWatch.com: Are there any recent awards
or contracts with these companies you care to mention?
Nick Andrewes: As part of the government of Angola’s
National ID Card Program, it has contracted with LaserCard for an initial
eight million cards, a $90 million contract with the opportunity for follow-on
orders for an additional 12 million. LaserCard will provide card personalization
systems, printer consumables, installation, and training.
L-1 was awarded the prime contract by the Department of State for the
Passport Card in March. We believe roughly 150k applications for Passport
cards have been accepted by the Department of State. The contract has
a potential value of $107 M over five years. L-1 expects to ship 200-300k
cards in 2Q and to generate $10-$15 million in revenues from the program
Digimarc recently announced it would issue new secure driver’s licenses
for the state of New Mexico's Motor Vehicle Division. Digimarc replaced
existing system with a secure driver license issuance system, designed
to ensure that only one valid license is issued to one legitimate applicant,
helping fight driver license fraud and identity theft.
On the consumer side of the business, VASCO recently announced that the
Brazilian bank Banco Itau would issue 1.6 million one-time password tokens
to its customers. The strong authentication market continues to grow outside
of the U.S.
Outside of our coverage, one of the most exiting programs out there, the
FBI NGI project, which will be an upgrade to the existing national fingerprint
and criminal history system maintained by the FBI, was awarded in February
to Lockheed Martin. This was an estimated $1 billion contract, where Lockheed
will work with the FBI to determine a biometric system, and could potentially
see an award of this program in 3Q.
SecurityStockWatch.com: Nick, many thanks for your time
today. Are there any other comments you would like to make?
Nick Andrewes: Thank you for the opportunity to share
my thoughts with you and your audience. I think these next couple of years
will continue to see focused attention on Identity Technology and the
value surrounding ones identity both in the physical and logical/digital
world. I think it’s an exiting time to cover this space as government
programs that I’ve been tracking for years are now finally coming
to deployment. Finally, I’d just like to say that I appreciate the
work you and your colleagues are doing here, as it’s a great site
for investors looking for information and ideas.
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