We’ve had quite a recovery in the market from the lows reached in March, and many semiconductor stocks have followed suit.

While AuthenTec Inc. (NASDAQ: AUTH), a maker of fingerprint sensors, is no different, even with a recovery in its stock price from the absolute abyss, AuthenTec is still trading at a close-out price.

Quite literally, AuthenTec is trading at a significant discount to its cash on hand, as well as its liquidation value taking into account all variables.

I have a special treat today as I’ll be previewing AuthenTec’s earnings and we will be joined by guest columnist Jae Jun of Old School Value with a short write-up at the end of this post breaking down AuthenTec’s current valuation and liquidation value.

In essence, we are getting the company for free at today’s prices assuming nothing changes and conditions don’t improve at all!

So what does this mean for our investment in AuthenTec as they look to report earnings on Tuesday, May 12th after the market closes?

In this post I’ll go over the important aspects that we need to be aware of before AuthenTec announces earnings and then break them down into the following parameters:

• What went right in the quarter: What were some of the positive developments that occurred within the company in the last 3 months.
• What went wrong in the quarter: What were some of the negative developments that occurred within the company in the last 3 months.
• What I want to see: All things considered, what I realistically want to see from the company as it relates to their business.
• Jae’s analysis of AuthenTec’s deep net-net value territory
• Bottom Line: What it all means, and what you should do.

New to the AuthenTec story? 

AuthenTec, Inc. is a fabless mixed-signal semiconductor company that provides fingerprint authentication sensors and solutions to the high-volume personal computer (PC), wireless device, and access control markets.

AuthenTec offers a range of fingerprint sensors that enable users to access and control multiple functions on an electronic device by touching or sliding their finger across the sensor.

The company’s fingerprint sensors utilize unique information in fingerprints to verify the identity of the individual, as well as the unique, individual fingers on the same person.

With more than 45 million sensors sold worldwide, AuthenTec’s award-winning sensors take full advantage of The Power of Touch by utilizing the company’s patented TruePrint technology to deliver the most convenient, reliable and cost-effective means available for enabling touch-powered features that extend beyond user authentication.

These sensors are used in various applications related to security, password replacement, financial transaction authentication, and personalization applications.

The company’s products are used in a range of PC products and related peripherals, including laptops, desktops, memory keys, hard drives, keyboards, mice, and other devices.

In addition, AuthenTec’s products also integrate into various wireless devices, such as mobile phones, and personal digital assistants and personal navigation device, as well as access control devices comprising door locks, time and attendance devices, and remote wireless entry keys.

AuthenTec primarily offers its products to original equipment manufacturers, original design manufacturers, and contract manufacturers and sells its products through a direct sales force, a network of independent sales representatives, and distributors.

Want More?

• Read: my last quarterly earnings and conference call breakdown here.

What’s Going On At AuthenTec?

Going Out of Business or Take-Over Target?

This is a damn good question, and one that I’ve been waiting around to find out the answer to.

AuthenTec has been hard at work developing newer technologies and lower cost chips so that they can increase their market share and penetration, especially in the new netbook category of laptops.

You’ll recall awhile back, AuthenTec lost one of their largest customers, accounting for a huge drop in expected sales going forward, and the stock suffered mightily as a result.

What we didn’t see coming however, aside from this grim news, was the absolute collapse in the PC and consumer marketplace and AuthenTec’s demand absolutely cratering in conjunction.

Let’s review the quarter that was, and turn our attention to what will be discussed on the conference call.

• What went right in the quarter: There were a few things in the quarter as far as news went for AuthenTec that was positive.

The most important piece of news in the quarter was concerning AuthenTec’s patent infringement update vs. one of their rivals, Atrua.

Essentially, AuthenTec won a judgment that denied Atrua’s motion to add a claim of misappropriation of trade secrets as a counterclaim to AuthenTec’s patent infringement claims against Atrua, and further denied its motion for a preliminary injunction against AuthenTec.

The court had already denied a previous motion for a temporary restraining order and also ruled that Atrua violated a previous court order in the case.

In that same press release, AuthenTec also stated that they added several key patents to their intellectual property (IP) portfolio, including patents for fingerprint reading and verification that are among the foundational IP created for the biometrics industry.

AuthenTec continues to own more fingerprint sensor-related patents than any sensor supplier in the world with 75 filed and pending U.S. patents (as well as additional foreign patents).

You can read more about that update here.

There were a couple product announcements to discuss such as:

• a deal with Motion Computing to incorporate AuthenTec’s biometric fingerprint sensor into the new J3400 rugged tablet personal computer in order to protect the device, its stored data and the networks to which it connects
• a deal with ASUS that incorporated AuthenTec’s fingerprint sensors as a standard feature in the world’s first netbook computer to use a fingerprint sensor.

Other than that, it was status quo for AuthenTec.

• What went wrong in the quarter: Well, if you don’t count a flagging stock price, and disastrous industry trends, nothing really went “wrong” in the quarter that was of particular note.

I will comment however that this ongoing litigation with Atrua has been a drag on AuthenTec’s earnings and will continue to be for the foreseeable future.

Other lawsuits that I haven’t heard any updates about, where the ones filed against AuthenTecc when the company’s stock price plummeted as a result of the shocker that they had essentially lost their largest customer.

These types of suits are standard procedure when a company announces some really bad unexpected news and people’s shares get wiped out.

We’ll see how all of these play out.

Now let’s look at what I want to see from this earnings announcement and turn our attention to valuation…

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