Friday, December 19, 1997
Viisage Technology, Inc.
Price (12/18/97): $6
HOW DID IT FIND TROUBLE?
Viisage Technology makes biometric identification systems, the digital world's answer to fingerprinting. The firm went public in November '96 at $10 1/2. By June it had nearly doubled, thanks to a high profile $27 million, seven-year contract to provide a digital drivers' license system to the state of Illinois.
Since then, the stock has been defaced by two straight quarters of poor results. In July, Viisage reported record revenues and EPS of $0.08. That was good, but 20% shy of estimates. Cowen & Co. reiterated a "strong buy" recommendation afterwards, but there was more bad news on the way.
On October 16, the company announced that a slight fall off in sales to $6 million had caused EPS to drop to $0.01, again missing estimates. Though the FY96 comparison number of $0.05 per share was skewed by a lower tax rate, Viisage's blemishes were accurately reflected in the 43% decline in operating income. Sales were hurt by delays in the procurement process for some contracts, a fairly predictable problem since Viisage sells mainly to state government agencies.
When high expectations meet with disappointments, trouble is on the way.
A spin-off of Lau Technologies, Viisage offers digital ID systems based on proprietary software. Its products can be used to make fraud-resistant and tamper-resistant picture IDs. They work with most operating systems (Unix, Windows NT, Windows 95) and database products offered by Oracle and Sybase.
Currently, most of Viisage's business comes from the public sector, such as state motor vehicle departments. They use Viisage systems to make digital records of facial images, fingerprints, and other information that can be stored directly on a card via image, barcode, or magnetic strip as well as being stored in a central database for easy access.
The company has also developed a facial recognition system that allows law enforcement officials to quickly search a database of faces for a match to a digital sketch of a suspect.
Four customers have accounted for 72% of revenues so far this year. Competitors in biometric ID systems include Identix, Polaroid, Unisys, DataCard, and NBS Imaging. Lau Technologies, controlled by Joanna Lau, owns 64% of Viisage.
12-month sales: $28.7 million
12-month income: $1.6 million
12-month EPS: $0.19
Profit margins: 5.6%
Market Cap: $52.3 million
Cash: $1.0 million
Current Assets: $34.6 million*
Current Liabilities: $13.0 million
Long-term Debt: $7.0 million
(*Includes $30.4 million of costs & estimated earnings in excess of billings.)
HOW COULD YOU HAVE SEEN IT COMING?
Remember the Comparator disaster from 1996? Investors seem to lose their senses over companies that make high-tech, biometric identification systems, whether they "read" someone's fingerprint, iris, or face. It just seems to be a compelling story based on the slightly dystopian notion that government and private industry will pay a boatload to create the perfect surveillance society.
Knowing the investor psychology at work and seeing the volatility of Identix shares, Viisage selling at 44 times FY97 projected earnings should have looked suspect. That's especially true since companies that rely on government contracts are susceptible to typical bureaucratic delays, and thus earnings surprises.
WHERE TO FROM HERE?
Believers in the biometric revolution see companies like Viisage providing ID systems for everything from automatic teller machines to accessing PC networks. But an investor should keep a dispassionate eye on the company's actual results while exploring these "big picture" matters.
CEO Bob Hughes's positive spin on the recent shortfalls is that some potential customers are considering more expansive uses of biometric ID systems. In the meantime, gross margins have risen as the company has become more efficient at designing and implementing systems.
The Los Angeles County Sheriff's Department recently showed how Viisage's face ID technology can pay off. Detectives used it to identify and arrest a robbery suspect. They can also use the system to identify a criminal with multiple identities or outstanding warrants. So the product does work.
On the other hand, future billings based on signed contracts account for the majority of Viisage's assets. That's potentially a problem given that a "substantial amount" can be cancelled without penalty.
Also, the firm announced in October that it was teaming up with Unisys to provide licenses for the state of Florida's 12 million drivers. Strangely left out of the press release was the fact that this agreement involved Viisage's purchase and licensing of certain assets from Unisys for $4 million plus contingent additional payments of $754,000. Although Unisys did promise to work with Viisage to develop more public sector biometric business in North America, what appeared to be a sale seems actually to have been a purchase, boosting Viisage's cash outflow for the first nine months of '97 to $13.4 million.
First Call shows current consensus earnings estimates of $0.27 a share for FY97 (down from $0.44) and $0.49 a share for next year (down from $0.75). Annualized growth of 113% over the next five quarters gives us a PEG of 0.31. YPEG fair value is $11 1/4 based on projected long-term industry growth of 23%.
Is Viisage a victim of excessive tax-loss selling and thus due to bounce early in the new year? Maybe. But investors might be smart to ignore the analyst estimates until the company shows some ability to face up to them.
-- Louis Corrigan
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