As usual PeakStocks.com portfolio recommendation AuthenTec (Nasdaq: AUTH), a maker of patented fingerprint authentication sensors and solutions to the high-volume personal computer (PC), wireless device, and access control markets, continues to innovate and execute.

I wanted to update you on latest happenings in which AuthenTec has made an acquisition, released a brand new fingerprint sensor technology (their 3rd new sensor/enhancement since the beginning of the year), and updated their earnings expectations as a result of that acquisition.

I’ll break down this report into 4 parts:

• AuthenTec Acquires EzValidation: Acquisition designed to improve AuthenTec’s end-to-end product offerings
• AuthenTec Introduces TouchStone: Enhances existing fingerprint designs
• Earnings Guidance: Acquisition changes things somewhat
• Bottom Line: Wait and see

 

Click here to read my complete AuthenTec research report and buy recommendation

 

AuthenTec Acquires EzValidation

Makes a Move to Bolster Intellectual Property

On April 16th, 2008 AuthenTec announced that they had purchased all the software assets of EzValidation, formerly a California-based provider of fingerprint sensor authentication and user interface software.

AuthenTec acquired the entire portfolio of EzValidation software, including its offering called EzPassport, which is fingerprint authentication software developed by EzValidation.

The transaction is expected to strengthen AuthenTec’s complete client offering, providing complementary authentication software that enhances the fingerprint sensor user experience.

EzPassport is an easy-to-use fingerprint authentication software application for Microsoft Windows-based systems and offers easy user setup and enrollment, and features Windows login, password replacement, file and folder encryption, application launch, screen-saver lock, and auto logoff via a very intuitive graphical user interface.

The first offering of a bundled software solution from AuthenTec, which includes key features of EzPassport, is expected to be available in the third quarter of 2008.

“This transaction will help further strengthen our complete solution, making client applications for our sensors more intuitive and easier to use,” said AuthenTec Chairman and CEO Scott Moody in a statement.

“We plan to add the best features of EzPassport to AuthenTec’s software offering, enhancing the fingerprint sensor user experience. I would note that application enhancement efforts such as this are focused on the PC client, and that we will continue to collaborate with our Solution Provider Network to enable complete end-to-end enterprise solutions, ” continued Mr. Moody.

My Take: We were told in the last conference call that AuthenTec was looking to make some acquisitions, and if they did, they would merely be software related, and not designed to increase market share and the like via an acquisition of a direct competitor.

True to those words, I think this is just the kind of smart and purpose-based acquisition a small company like AuthenTec needs to make their products more desirable, not just from a functionality standpoint, but also from the end-user experience whereby their clients are looking to integrate AuthenTec’s solutions with as little headaches as possible.

Think of this as a type of upgrade that makes your computer easier to use. It might not make you want to buy that computer, but if you keep making things easier on your client base, you continue to incrementally improve your offerings and thus make your solutions more appealing when pitching to potential customers and keeping the ones you already have happy.

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AuthenTec Introduces TouchStone

Enhances Flexibility and Aesthetic Options for Mobile Phone Designers

On April 1st, 2008 (hopefully not an April Fool’s joke!) AuthenTec’s unveiled a new patent-pending packaging technology called TouchStone that is designed to enable a new class of fingerprint sensors that combine all the features of AuthenTec’s TruePrint technology with thin, durable, easy to integrate, waterproof and surface-mountable packaging for today’s stylistic cell phone designs.

ToushStone is designed to allow fingerprint sensors to be more durable and withstand the daily grind of being in one’s pocket and rubbing on change, keys, pens and the like, as well as the potential for wear and tear from normal use that might render a sensor not protected by this technology, less useful and have a shorter life, than one that is protected with TouchStone.

TouchStone technology extends the already proven durability of AuthenTec sensors by tripling the protective coating over the fingerprint sensor die.

Its thin package profile also enables flat surface mounting on the outside of a mobile device’s case, providing improved tactile feel when using AuthenTec’s TrueNav menu navigation feature.

TouchStone’s sensor packaging thickness is less than half the thickness of a typical fingerprint sensor package.

As usual, TouchStone-packaged sensors will be based on the company’s patented TruePrint technology, AuthenTec’s unique solution that reads below the surface of the skin to the live layer where a person’s true fingerprint resides.

This unique subsurface approach enables AuthenTec sensors to read virtually every fingerprint, every time — a critical requirement in any fingerprint-enabled device. And like previous generations of AuthenTec sensors, TouchStone technology will allow the use of the company’s TrueNav menu navigation features, TrueFinger anti-spoofing security, and TrueMatch pattern matching.

The first AuthenTec product available in TouchStone packaging will be the new AES1711 low-power sensor for the wireless market, with production quantities expected in the fourth quarter.

My Take: Another great product enhancement for AuthenTec.

The addition of TouchStone technology will allow AuthenTec’s customers to now integrate their fingerprint sensors in devices that previously were not suitable for fingerprint sensors because of the added wear-and-tear that would render them useless.

Now manufacturers can incorporate AuthenTec’s fingerprint sensor designs into any product that requires high levels of durability and waterproofing, from cell phones, to computers, to key fobs, but with the ability to still be accurate and dependable.

TouchStone is a great step in accelerating and diversifying AuthenTec’s adoption and product penetration at the manufacturer and partner level.

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Earnings Update

Acquisition Related Charges Impact Q1/2008 Earnings

With the purchase of EzValidation, AuthenTec’s GAAP earnings will be impacted somewhat in the first quarter.

According to AuthenTec, this asset purchase is being recorded as in-process Research and Development (R&D) and will be dilutive to AuthenTec’s first quarter earnings per share by $0.01 per share.

However, first quarter non-GAAP earnings per share are still expected to be in a range of $0.01 to $0.02, per the guidance provided by AuthenTec on February 4, 2008.

In addition, AuthenTec has just announced that they will be hosting their first quarter conference call and earnings report on Monday April 28th, 2008 after the market closes.

This earnings report will allow us to check-in with AuthenTec and see how things are stacking up thus far in 2008.

My Take: I certainly don’t mind a company making smart and value-added acquisitions that will enhance their product offerings and make them more appealing to current and future customers, even at the expense of short-term earnings.

What will be more important for me as far as AuthenTec is concerned, is their quarterly report and conference call, as well as their future guidance.

I don’t expect any surprises or downward revisions to past guidance, but I also don’t expect any significant upward revisions or a “blow-out” quarter either.

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Bottom Line

Still Wait and See

This is all good stuff, and the rate at which AuthenTec continues to execute and enhance their product offerings is exactly what I want to see.

However that being said, I want to see what AuthenTec has in store for us this quarter and next before upgrading them based on my past article about the valuation and risk/reward scenario not favoring us as much as it should, as well as the insider selling that has not yet stopped.

You can read that initial downgrade here.

In hard-line terms, there is nothing “wrong” with the AuthenTec story, just a bunch of small stuff (the insider selling could be a “big” thing) that make me less comfortable recommending new money be put to work in AuthenTec at this time.

Once again, I recommend dipping your toes into the water here because there is a possible positive catalyst (earnings) coming up, and the shares have been beaten up pretty good, but don’t expect this stock to rocket anytime soon, barring any major announcements, partnerships, or business deals.

That’s why I would recommend a small buy at these levels, and otherwise, hold onto the shares you already have until we get some more visibility in the coming months and valuation gets more favorable for us.

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• Click here to read my complete AuthenTec research report and buy recommendation

*Variables You Should Know About AuthenTec (Nasdaq: AUTH)
Current Recommendation:	HOLD
The Company:	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.
Why Buy Now:	Proprietary and Patented Technology Low-Cost Advantage Huge Growth In an Expanding and Rapidly Developing Market Strong Relationships With Leading Global PC and Wireless Device Manufacturers Addressable market of over 1 Billion units per year New Company on the Precipice of Fundamental Breakout Fantastic Stock Price, below IPO level High Margin Business Multiple Revenue Streams
Market Cap:	$306.79
Revenue (TTM):	$52.34
Cash/Debt:	$66 / $0
Current Price:	$11.00
Risk Rating (?):	7.5 (Moderate-High)
Position Size (?):	1/4 (12-17-07), 1/4 (1-17-08), 1/4 (1-23-08)
Buy Around Price (?):	$13.50 (12-17-07), $13.25 (1-17-08), $12.00 (1-23-08)

*As of 4-17-08. Except share price, all values in millions.