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IDN - Intellicheck


wabuffo
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IDN's core technology, authenticating state government-issued ID's (driver's licenses) by reading the secure barcode on each ID (rather than just using OCR to read name, address, etc) is proving to be an almost fool-proof method in helping banks/retailers combat identity fraud.

There are several main use cases right now (though the company is working on others) and the scan of ID barcodes is compatible with most store barcode equipment.

  1. new account acquisition such as credit card applications and loyalty programs
  2. Account look-up for card-not-present transactions (you have Macy's card but forgot it - Macy's cashier can look you up in their system)
  3. Non-receipted merchandise returns (prevents stealing goods and trying to "return" them without receipt)
  4. Omni-channel transactions (buy on-line, pick up in-store).

New CEO in 2018 has revamped business model from selling barcode equipment and annual store licenses to more of a SaaS pay-per-scan model and less emphasis on equipment sales.  This has expanded number of locations using it and increased adoption.  I also like how CEO is controlling expenses in SG&A despite ramp-up in growth.

The Company's moat is their 21-year relationship with AAMVA (American Association of Motor Vehicle Administrators) - a quasi-governmental association that manages drivers' license technological standards for all 50 states, 13 Canadian provinces & territories and Mexico.   IDN has provided testing support to AAMVA for new card issuances (testing barcode readability, accuracy) and in return gets access to the entire barcode database of issued ID cards.  To my knowledge, IDN doesn't pay for this and AAMVA does not partner with anyone else due to trust and security concerns.  

In addition, IDN has access to facial recognition technology supplied by Applied Recognition, a Canadian tech company in Oakville, Ontario via a partnership between the two companies.  Once again, I don't think IDN is paying for it, I think they are doing an exchange - IDN gets to use Applied Recognition's technology in the US and AR gets to use IDN's Driver's License database access in Canada.   Adding facial recognition adds more layers of security to identity verification.  The process goes like this:

  1. scan barcode and license for authentication
  2. take a photo of the front of license picture
  3. take a selfie so that AR software can detect for liveliness and deepfakes.

Verification detects if drivers' license is authentic, fake or expired.  It delivers a score on facial match between selfie and driver's license picture.  It delivers a liveliness score on selfie so that selfie is determined to be real or fake.

I think part of what the fraud identification industry has to deal with is privacy concerns.  There's lots of identity verification like fingerprint scans, face ID, etc.. but they introduce a lot of friction and consumer concern about security into the process.  Using a driver's license barcode is pretty frictionless and most consumers won't object to presenting it for verification.  IDN has the only system that can detect fakes at a 100% hit rate because they are the only company that has access to the barcode database.  Other technologies have to rely on OCR or reading the name and other information and trying to match it with a second ID with less than 100% hit rates.

Ok so all this is nice and good - but what about financials and valuation.  That will be the next post as this is getting too long.

wabuffo

Edited by wabuffo
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Posted (edited)

Ok - so what is this POS worth?   Here are the summary financials for the last few years.  I am presenting this cash income statement on a rolling-twelve month basis so that it is easier to see the trend.  IOW - each income statement is the total for the last four quarters ending on that quarter-end.

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The new CEO came in at the beginning of 2018 and you can see the conversion of the revenue model in the conversion of customers from a site annual license to a per-scan revenue model.   You can also see that the company loses money.   But by keeping some good controls on SG&A, the new revenue model has 85-90% gross profit margins, so as this new revenue model grows the company should become cash flow positive.  Also, due to their NOLs, they won't be a cash tax payer for years.  I do think that the pandemic in 2020 slowed down their implementations and I believe there's some pent-up ramp that might happen in 2021 due to installs that might've been delayed but close to going-live.

Here's where its gets speculative.  I'm going to do a simple projection of their revenue and SG&A trends over the next two years (2021 and 2022).  This is again presented on a rolling-four quarter basis.

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This shows that they are about to hit an inflection point from cash flow negative to cash flow positive.  Will they exceed my SWAG estimates or will they fall short?  No idea - this is just fun with math stuff.

Anyhoo - so yesterday, I was buying at $7.60.  They have 18.6m shares and $13m in cash.  They will also add another $10m in cash from the projection above.  Capex is minimal (another positive about IDN's business model).   At the end of 2020, they will have a pro-forma EV (net of cash) of $117m vs a free cash flow of $7.5m - or a 15.6x EV/FCF multiple for a growing micro-cap that earns excellent cash profits at high margins.

Of course, this is all a speculative purchase so do your own due diligence.  They report Q1 earnings on 5/4 and recently turned over their sales and marketing VPs.  Is that a sign of a stumble?  Or is it a doubling-down on getting the right leaders to ensure they execute against this business model?

What do I know?  We'll see.   All devil's advocate bearish opinions are most welcome.

wabuffo

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Quote

Revenues from our ten largest customers accounted for 75% of total revenues in 2020 and 66% of total revenues in 2019. Two customers accounted for 41% of revenues in 2020 and three customers accounted for 39% of revenues in 2019. Our loss of one or more significant customers could have a significant adverse impact on our business, financial condition, and results of operations.

Quote

Revenues for the year ended December 31, 2020 increased 40% to $10,735,000 compared to $7,664,000 for the year ended December 31, 2019. The increase in revenues in 2020 is a primarily the result of higher commercial Software as a Service (“SaaS”) revenues. SaaS revenues, which consists of software licensed on a subscription basis, increased $3,271,000 or 54% to $9,373,000 for the year ended December 31, 2020 compared to $6,102,000 for the year ended December 31, 2019.

Quotes above from 10k

A bear thesis for playing devils advocate could be the concentration of customers and revenue makes for a big risk to sustainable revenues. 

But I'll be honest, I want to be more devils advocate on this but the more I look at IDN the more bull biased I get. Being in the brand protection / anti-counterfeiting space this is in my wheelhouse. Most the companies that are in this space are private or owned by conglomerates. I'm enjoying diving into this. However, the valuation seems a bit high for me which makes me sad I didn't know about it last March.

When I look at the revenue growth and concentration of customers it almost seems to me that they may have raised prices for their services on existing customers. That's substantial revenue growth without substantial customer diversification growth. So either they raised prices or they were really good at getting a lot of small accounts. 

I was reading the comments in this seeking alpha article. https://seekingalpha.com/article/4412839-intellicheck-identity-fraud-doesnt-end-pandemic. Someone commented on how customer concentration is part of their market. As someone who has done deals with anti-counterfeiting software companies this is true. We anti-fraud professionals rely heavily on recommendations from others in the industry. The anti-fraud industry is the one industry where competitors meet up to talk about how they can work together to benefit this world as a whole. Fraud, Piracy, and Counterfeiting are all crimes and the members of this community want to fight against it regardless of which company they work for. 

Ill keep looking at this one for a while trying to see if I can convince myself to pay for this. 150MM marketcap seems a little high currently. But it is growing so... like you said what is this POS worth... 

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Posted (edited)

Longnose - thanks for your insights. 

That's substantial revenue growth without substantial customer diversification growth. So either they raised prices or they were really good at getting a lot of small accounts. 

I don't think they are raising prices, its all due to their roll-out and their pivot on revenue model.  You have to remember IDN's business model.  IDN is working with private label card issuers (Wells, Citi, Capital One, etc) who in turn partner with their retail chain customers on preventing fraudulent transactions on these private label credit cards.  So one bank like Capital One could have hundreds of retail chain customers with their own store credit card run by Capital One.  As the bank gains confidence and experience with IDN's Retail ID product, they sign up more of their private label card retail partners and revenue increases (which is paid for by the bank since its on the hook for most of the fraud losses.  Though some use cases are the responsibility of the store).

This is also where the revenue model change from an annual site license (per store) to a per-scan revenue model has also increased penetration.  Under the old revenue model, a retail chain and their bank partner would assess which stores would be worth signing up based on their analysis of IDN's annual fixed cost vs potential fraud losses.  Now under the new revenue model pay-per-scan, it makes sense to sign up every store because of the purely variable cost (SaaS revenue model).

Thus, in my opinion, I fully expect to see both increasing revenues per bank customer as well as new bank customers being added.

But I agree with you that I'm kind of leaning in to a not-cheap valuation which I hope can work.  If IDN can't grow into it - then this investment will be a turkey.

wabuffo

Edited by wabuffo
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I think this goes well in a basket of specs. If they execute it's a multi-bagger. If you find ten of these and put 1% into each you'll make money (famous last words). By the way, there was a CC last year where the CEO noted they successfully jacked up the price on a customer. So that's on the radar I think. Also there's a current VIC bullish write-up if you have access. Otherwise it's available in 60 days I think.

 

Thanks as always Mr. Wabuffo.

 

 

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8 hours ago, Longnose said:

Quotes above from 10k

A bear thesis for playing devils advocate could be the concentration of customers and revenue makes for a big risk to sustainable revenues. 

But I'll be honest, I want to be more devils advocate on this but the more I look at IDN the more bull biased I get. Being in the brand protection / anti-counterfeiting space this is in my wheelhouse. Most the companies that are in this space are private or owned by conglomerates. I'm enjoying diving into this. However, the valuation seems a bit high for me which makes me sad I didn't know about it last March.

When I look at the revenue growth and concentration of customers it almost seems to me that they may have raised prices for their services on existing customers. That's substantial revenue growth without substantial customer diversification growth. So either they raised prices or they were really good at getting a lot of small accounts. 

I was reading the comments in this seeking alpha article. https://seekingalpha.com/article/4412839-intellicheck-identity-fraud-doesnt-end-pandemic. Someone commented on how customer concentration is part of their market. As someone who has done deals with anti-counterfeiting software companies this is true. We anti-fraud professionals rely heavily on recommendations from others in the industry. The anti-fraud industry is the one industry where competitors meet up to talk about how they can work together to benefit this world as a whole. Fraud, Piracy, and Counterfeiting are all crimes and the members of this community want to fight against it regardless of which company they work for. 

Ill keep looking at this one for a while trying to see if I can convince myself to pay for this. 150MM marketcap seems a little high currently. But it is growing so... like you said what is this POS worth... 

Any opinion on how they stack up against Mitek? Been a while since I last looked at them; but they were definitely pushing into this space. 

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Posted (edited)

Any opinion on how they stack up against Mitek?

There are a lot of competitors in this space all using different approaches to identity verification.

Mitek is the company behind the software most banks use for mobile check deposits.  Mitek uses computer vision and AI to scan an image of a driver's license in order to record the identity information and the picture of the person.  It then uses its AI to check against publicly known authentication marks of that particular state's driver's license.  But the key is that none of that information is checked definitively against that state's DMV database so its not fool-proof because fake IDs are getting quite sophisticated in quality.  Its also a bit more cumbersome of a process because, in addition to snapping pictures of the front and back of the ID, a selfie must be taken and uploaded to compare against the state ID picture.

IDN through its history of testing AAMVA's barcode technology used on DMV driver's license has a database of the over 250 or so different barcode formats used on the back of each state driver's license.   Think of it as IDN is the only vendor in possession of 250 secret decoder keys that permit its software to read and decode any state DMV license barcode in order to extract all the relevant ID information on the license (name, address, eye color, data of birth, expiry date of license, etc).  In this way, IDN definitively verifies that by matching the barcode format to one of its known official barcode formats that the license is real and not expired.  IDN also extracts definitively the identity information on the license without having to take a picture of the front of the license.  The verification process is less of a bother - because it requires only that the barcode is read by a POS scanner, rather than having to take pictures of the front and back of the license.   IDN claims its solution is near 100% fool-proof based on a test it did recently with New York state's DMV where they ran 1,000 fake IDs through IDN's authentication tech and it caught all 1,000.

wabuffo

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Anecdotally, I noticed the last few times I shopped at Costco, when I show my ID and Costco credit card at the register (my CC has no photo, plus we always have wine), the checker asked me to flip the license over and scanned to back with the regular POS gun.  Sounds like this means COST is a IDN customer.  I have no idea how long COST has been processing IDs this way.  I would assume they were more concerned with speeding up the lines or reducing handed-over licenses during COVID than they were about people's identities matching the membership card.  But IDN's back scan does accomplish several things quickly for them - membership-ID match, age-restricted purchases, faster than human squinting and data input, no germy exchange of ID card, etc...

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Sounds like this means COST is a IDN customer.

Could be - Citi and Capital One are both IDN customers.   But I'm not sure if they've rolled it out to Costco.  I'll try to see if there is anything in any of IDN's press releases.

Citi is Costco's credit card partner in the US and Capital One is their partner in Canada. 

wabuffo

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Thanks for sharing this idea. Had started reading up on it when I saw your post on buying a few days back. Glad you shared further thoughts. It looks interesting,

 

Use cases and addressable market seem huge. Maybe not as high ROI as fincos but retail seems like a no brained. Inline with the potential Costco use I searched around to see what Amazon Go was doing to verify alcohol purchases, surprisingly (or not) they have human verification. Here are some of the things I am looking into.

  • Longevity and staying power of the barcode system - other countries (India/China) have robust biometric Id systems - does that happen here? First blush is likely not, Americans wouldn’t go for the big brother nature of it, would have to happen at the federal level which would be difficult
  • Exclusive relationship with AAMVA - this seems to be the key to them achieving 99% effective rate which can not be matched by any competitor. Is this to good to be true?  
    • Here’s how I understand the relationship but need to verify. 
    • IDN had the tech to create and test barcodes - aamva therefore worked exclusively with them - now IDN has exclusive access to the barcodes - does this symbiotic relationship continue in perpetuity? Does aavma decide to start licensing the barcode repository? Do they see IDN monetizing beyond government end markets and decide they want a cut?
    • Is the barcode forgeable? Based on your comment about the NY test it appears not.
  • Leadership and sales execution. With 85% GMs, high roi/need for customers, and a big old aavma moat the question is then can mgmt execute sales strategy and why haven’t they been able to do this before?
    • Anecdotal comments indicate conversion to pitched clients is high - they don’t loose
    • Saw their job posting for bus dev folks - cites the need for ppl who can close $250k+ deals. $5-6m of sga currently. How much bigger does the sales team need to be to get to $15-20m of revenue. 
  • What do we think m&a value is. Is it foolish to believe that IDN’s  patents and relationship with AAVMA is worth significantly more than $150m to a larger security tech company with existing sales relationships?
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Posted (edited)

Exclusive relationship with AAMVA - this seems to be the key to them achieving 99% effective rate which can not be matched by any competitor. Is this to good to be true?  

This is the key to the whole thesis.   So long as IDN can maintain its historical relationship with AAMVA, then IDN is on a land grab mission and limited, IMHO, only by its own sales and marketing prowess since its main weakness is lack of awareness.   IDN's ID solution has three main competitive advantages:

  1. Reading up on its competitors and their vision system/AI/templating approach, it appears their vision system technology spots fake IDs at a 65-80% rate while IDN is near 100% based on several state DMV tests (New York, Colorado).  
  2. Banks/retailers can use their existing barcode scan reading equipment (retail merchandise gun, bank check scanning machine) whereas competitors vision systems require additional equipment.
  3. IDN's on-site verification is pretty frictionless (give ID card over, bank/retail employee scans it, waits for IDN system feedback).  As highlighted upthread, competitors products introduce more friction (take picture of ID card, take selfie, upload, etc).

What do we think m&a value is. Is it foolish to believe that IDN’s  patents and relationship with AAVMA is worth significantly more than $150m to a larger security tech company with existing sales relationships?

My own 2-cents, FWIW, is I think eventually what would make sense, (especially with the AAMVA involvement/likely consent requirement) is a consortium of big bank credit card issuers (JPM, BAC, WFC, etc) taking it over and turning it into a network public utility for fraud prevention (kind of like how the big banks all owned a piece of Visa before it was spun out/sold off.)  I think that would make AAMVA more comfortable as well (serving a public good, etc).  Jamie Dimon would just tell the AAMVA that the big banks' acquisition of IDN and its relationship with AAMVA is good for America!   LOL.

wabuffo

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6 hours ago, gfp said:

Anecdotally, I noticed the last few times I shopped at Costco, when I show my ID and Costco credit card at the register (my CC has no photo, plus we always have wine), the checker asked me to flip the license over and scanned to back with the regular POS gun.  Sounds like this means COST is a IDN customer.  I have no idea how long COST has been processing IDs this way.  I would assume they were more concerned with speeding up the lines or reducing handed-over licenses during COVID than they were about people's identities matching the membership card.  But IDN's back scan does accomplish several things quickly for them - membership-ID match, age-restricted purchases, faster than human squinting and data input, no germy exchange of ID card, etc...

Now that I think about it, Wegmans also does this. 

@wabuffoThanks for the response on Mitek. I did check out their website and saw they also verify against an Govt ID using FaceID from a mobile device. It's my understanding that most state governments keep databases of photos as well. Some states use facial recognition for verification. For POS it certainly makes sense to use the barcode though as it's simpler and requires no additional hardware. How can we be sure that this relationship will be maintained? Politics aside, there is what dozens of  companies working on concepts for a covid passport. At some point approved companies will need access to data. What other datasets exist? 

https://www.dmv.pa.gov/Driver-Services/Driver-Licensing/Pages/Temporary-(DL)-Information.aspx

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  • 2 weeks later...

Q1 out. SAAS revenue up 24% but they are using stock to pay new sales staff, so SG& A exploded.  Stock down 13%. I do think they are building revenue momentum and at 16 X SAAS run rate, I am sticking with the stock.

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Posted (edited)

I thought the Q was in-line with expectations.   The loss ($1m) looks bad but its mostly due to the stock-based-comp charge they took due to their new exec hires.   When you adjust for that and make the adjustments for depreciation/amortization, Cash EBIT was only a $51k loss - basically break-even. (I look at Cash EBIT because due to NOLs, the company won't be a cash tax payer for years).  I'm actually enthused about them beefing up the executive ranks with seasoned sales and marketing professionals in this space.  

I think the key to this company is not one quarter's performance or even the next 4-6 Q's performance.  Its total addressable market and how quickly and how much of it can they capture.  Their main entry point is 1) through the big banks that issue private label credit cards... 2) the brick-and-mortar retailers who use IDN to open new store credit card applications.  ('thank you for shopping with us today!  Would you be interested in getting our Petco VISA card and save 20% on today's purchase?  Yes - great, please let me scan your driver's license and your credit card application information will be captured and the application approved in 30 seconds!")

IDN has 5 of the top 12 private-label credit card (PLCC) bank issuers - and each PLCC bank issuer probably supports 50 or so retailer credit cards.  Thus, I believe they have a lot of runway to go just in this one use case.   I found this chart from Equifax on the web, that shows PLCC approvals through mid-2020.

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You can see the impact that the pandemic had on this one use case.  On the call, the CEO said that volume was down 20%, yet SaaS revenue was up 24% from Q1, 2020 (when the pandemic impact was still minimal).   That tells me that underlying rate of scan increases will be running soon at 44% (24% y-o-y growth +  20% return to normal levels for brick & mortar retail). 

This chart tells us even more useful information.  If we look at 2019, through 12 weeks there were 7.482m total PLCC originations.  That's an annual rate of 32.4m for all of 2019. For every approved PLCC origination, how many applications get rejected?  2?   So multiply by 3 (1 accept + 2 rejects) and we get almost 100m use cases of TAM for this single IDN use case (if IDN had 100% of all the volume).   At 25-cents per scan, that's $25m of SaaS revenue from just this one use case.   And that's before IDN price increases that may be coming as hinted on the CC.

But there are more use cases - this one is the one paid for by the banks (since they are on the hook for losses to the retailer if the PLCC application turns out to be fraudulent).   Card-not-present and buy-online, pick-up in store uses cases (loss here is borne by the retailer) are probably 4-6x the number of scans that PLCC originations are.   So TAM could be $100-$150m from physical presence identity fraud.

And I don't think it stops there of course.  Bank branches are an opportunity.  On-line shopping is an opportunity.

We'll see how this turns out.  Of course I'm a baghodler so I'm talking my book.

wabuffo

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10 hours ago, wabuffo said:

Its total addressable market and how quickly and how much of it can they capture.

No doubt addressable market is large and use cases are high and don’t disagree with your rough numbers there.

What do you think of managements ability to capture share quickly though? Does it even need to be quick?

I was 50/50 about the comments on the call regarding the 3 new sales hires and bringing them on at a measured pace.

  • On the one hand I appreciate the thoughtful approach, being a smaller business their are nuances of getting it right, longer/difficult sales cycles with banks/security etc
  • On the other hand you see the VC backed SaaS companies moving fast and breaking things, they’d hire 3 sales people a month. 

The chosen method may very well be the right one assuming they don’t need to beat anyone to market but I can’t help but think a more aggressive approach is warranted given the high ROI on each customer that is implemented. 

 

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