Changewave Research: Smart Card and Biometric ID Report

ChangeWave Research: Smart Card and Biometric ID Report

ChangeWave Research Report:

Smart Card and Biometric ID Report

Fingerprint ID and Advanced ID Cards Now Lead the Industry

Overview

Recent Alliance surveys have identified Smart Cards and Biometric IDs as growth areas. During the week of April 5-8, 2005 we surveyed Alliance members knowledgeable about Smart Cards and Biometric IDs to unearthkey industry trends, including which companies stand to win and lose. A total of 326 Alliance members participated.

(A) Industry Trends: Biometric IDs and Smart Cards

Fingerprint ID Considered Most Advanced Technologically.In a key finding, 37% of respondents identified Fingerprint ID as the most advanced of the Biometric ID/Smart Card technologies – a 14 point jump from our July 2004 survey results. Advanced ID Cards (32%) came in second – up 4 points since July.

Advanced ID Cards and Fingerprint ID Best Suited To Meet Current Demands. Respondents chose Advanced ID cards (43%) as the technology best suited to meet current market demands. Fingerprint ID (42%) came in a close second.

Which Technology Will Attract the Most Spending? You Guessed It.When asked about spending over the next 12 months, 45% of respondents thought Advanced ID Cards would capture the most gains in spending (up 9 points since July); 35% said the same for Fingerprint ID products (up 16 points).

I. Biometric IDs

Identix Seen as Company Most Likely To Benefit. Identix received multiple mentions as the company most expected to benefit in the Biometric ID market. Respondent JTO2813 writes, “Identix has the largest base of fingerprint capture devices.” Regarding Facial Recognition, DRP2747 writes, "Identix…has a head start, both at consumer level and sophisticated enough for government security agencies."

Who is Most Likely to Gain Market Share in Biometric IDs. Identix (14%) and Viisage Technology (12%) are the Biometric ID companies seen as most likely to pick up market share over the next 12 months, echoing our July 2004 results.

II. Smart Cards

Top Trends. Security (28%) and Enhanced Technology/ Performance (28%) are considered the most important trends in Smart Cards today. Storage Capabilities (14%) also received double digit mention.

Smart Card Companies Most Likely to Gain Market Share.There are no predominant suppliers in this market. Public companies mentioned by respondents as most likely to gain market share include SCM Microsystems (5%) and ActivCard (5%).

(B) Contract Opportunities in Smart Card/Biometric Space

EDS Seen as Likely to Benefit from E-Passport Contract. Among companies awarded initial government contracts to develop and implement technology for the E-Passport Contract, Electronic Data Systems Corp (8%) is expected to benefit most over the next 12-24 months. Infineon Technologies (6%) is also expected to benefit.

(C) More on Smart Cards and Biometric IDs

Top Smart Card/Biometric ID Systems in the Work Place. Nearly three-in-ten respondents (29%) say their company currently uses a smart card or biometric ID system. Among these respondents, nearly twice as many use Contactless Proximity Access Cards (60%) as use Standard Swipe Cards (33%). Another 24% say they use Dual Access Cards (Combination Contactless Proximity & Swipe Cards).

HID Corporation is Top Supplier for Smart Card/Biometric ID Systems. Thirty percent (30%) of respondents say HID Corporation is the vendor/supplier of their smart card/biometric ID system, and another 11% say it is Honeywell.

Bottom Line: The current survey findings show Fingerprint IDto be leading among Biometric ID technologies, and Advanced ID Cards among Smart Card technologies. Not only are these seen as most technologically advanced, but respondents also find them:

(a) Most suited to meet current market demands, and

(b) Most likely to attract the greatest spending over the next year.

Both Identix and Viisage Technology are seen as likely to benefit from current trends in Biometric IDs.ChangeWave Research Director Michael Shulman also notes that two other categories –Facial Recognition and Retina Scans – have lost ground since our July ‘04 survey (Facial Recognition fell from 24% to 18%, Retina Scans from 16% to 10%).

Regarding the Smart Card market, there are no predominant suppliers, butpublic companies mentioned as most likely to gain market share include SCM Microsystems and ActivCard.

The survey results also found that Contactless Proximity Access Cards are the top Smart Card system now used in the work locale. Privately held HID Corporation (30%) was identified as a top vendor/supplier, along with Honeywell (11%).

The ChangeWave Alliance is a group of 5,000 highly qualified business, technology, and medical professionals in leading companies of select industries—credentialed professionals who spend their everyday lives working on the frontline of technological change. ChangeWave surveys its Alliance members on a range of business and investment research and intelligence topics, collects feedback from them electronically, and converts the information into proprietary quantitative and qualitative reports.

Helping You Profit From A Rapidly Changing World ™

Table of Contents

Summary of Key Findings...... 4

The Findings...... 5

(A) Industry Trends: Biometric IDs and Smart Cards...... 5

I. Biometric IDs...... 7

II. Smart Cards...... 8

III. A Closer Look at 4 Companies...... 10

(B) Contract Opportunities in Smart Card/Biometric Space...... 12

(C)More on Smart Cards and Biometric IDs...... 15

ChangeWave Research Methodology...... 25

About ChangeWave Research...... 26

I. Summary of Key Findings

Introduction

Recent Alliance surveys have identified Smart Cards and Biometric IDs as growth areas. During the week of April 5-8, 2005 we surveyed Alliance members knowledgeable about Smart Cards and Biometric IDs to unearth key industry trends, including which companies stands to win and lose. A total of 326 Alliance members participated.

II. The Findings

Total Respondents (n = 326)

(A) Industry Trends: Biometric IDs and Smart Cards

(1) Question Asked: Which of the following Biometric ID and Smart Card technologies do you believe are currently the most technologically advanced?(Please Choose No More Than Two)

Current
Survey
Apr ‘05 / Previous
Survey
Jul ‘04
Fingerprint ID / 37% / 23%
Advanced ID Cards (Smart Cards, Digital Identification) / 32% / 28%
Retina Scan / 25% / 25%
Facial Recognition / 16% / 13%
Iris Recognition / 13% / 14%
Voice Recognition / 5% / 4%
Don't Know / 23% / 30%
Other / 1% / 1%

Fingerprint ID Considered Most Advanced Technologically. In a key finding, 37% of respondents identified Fingerprint ID as the most advanced of the Biometric ID/Smart Card technologies – a 14 point jump from our July 2004 survey results. Advanced ID Cards (32%) came in second – up 4 points since July.

(1A) Question Asked: And which of the following technologies do you believe are best suited for meeting the demands of the current market? (Please Choose No More Than Two)*

Current
Survey
Apr ‘05 / Previous
Survey
Jul ‘04
Advanced ID cards (Smart Cards, Digital Identification) / 43% / 31%
Fingerprint ID / 42% / 27%
Facial Recognition / 16% / 21%
Retina Scan / 15% / 24%
Iris Recognition / 8% / 13%
Voice Recognition / 6% / 4%
Don't Know / 19% / 22%
Other / 1% / 1%

*The July 2004 survey question asked about “the current homeland security market”, vs. “the current market” in the April 2005 survey.

Advanced ID Cards and Fingerprint ID Best Suited To Meet Current Demands. Respondents chose Advanced ID cards (43%) as the technology best suited to meet current market demands. Fingerprint ID (42%) came in a close second.

(1B) Question Asked: Which of the following technologies do you believe will attract the most spending over the next 12 months?(Please Choose No More Than Two)

Current
Survey
Apr ‘05 / Previous
Survey
Jul ‘04
Advanced ID cards (Smart Cards, Digital Identification) / 45% / 36%
Fingerprint ID / 35% / 19%
Facial Recognition / 18% / 24%
Retina Scan / 10% / 16%
Voice Recognition / 7% / 4%
Iris Recognition / 7% / 11%
Don't Know / 22% / 26%
Other / 0% / 1%

Which Technology Will Attract the Most Spending? You Guessed It.When asked about spending over the next 12 months, 45% of respondents thought Advanced ID Cards would capture the most gains in spending (up 9 points since July); 35% said the same for Fingerprint ID products (up 16 points).

(2) Question Asked: What company do you think most stands to win in each of the following areas? (Simply skip any areas in which you are not knowledgeable)

Identix Seen as Most Likely To Benefit. Identix received multiple mentions as the company respondents most expect to benefit in the Biometric ID and Smart Card market.

Regarding Fingerprint ID, Respondent JTO2813writes, “Identix has the largest base of fingerprint capture devices.”

Regarding Facial Recognition,Respondent DRP2747 says, "Identix - Advanced has a head start, both at consumer level and sophisticated enough for government security agencies." Respondent JTO2813 adds, "Identix has the most accurate facial recognition system according to the latest government tests."

A more complete Sample of Alliance Member Responses can be found in Appendix A on page 16.

I. Biometric IDs

(3) Question Asked:What is the most important trend today in the Biometric ID space? Which company(s) do you think is best positioned to capitalize on this trend and why?

Fingerprint ID / 21%
Facial Recognition / 15%
Retina Scans / 9%
Identity Theft / 6%
Terrorist Countermeasures / 6%
Smart Cards / 6%
Digital Signature / 6%
Security in General / 12%
Other / 24%

What’s Hot and Who’s Best Positioned in Biometric IDs?Fingerprint ID (21%) wasidentified as the most important trend today in Biometric ID, with Identix considered the leading company positioned to capitalize on this trend.

Facial Recognition (15%) was second, withViisage Technology and GE mentioned as well positioned companies in this area.

Respondent DRP2747 summarizes trends in the Biometric ID space as follows: "I think there are at least three very important trends. One is low cost protection for consumers. Here I think fingerprint companies and maybe face recognition companies are best positioned. Then there is the trend for better high security access control. Here iris scan and maybe fingerprint companies are best positioned. Finally, there is recognition in a crowd or from a phone call where face recognition and voice recognition respectively are really the only players."

A more complete sample of Alliance Member responses to this question can be found in Appendix B on page19.

(4) Question Asked:Here is a list of companies within the Biometric ID space. In your opinion, which companies are most likely to pick-up market share over the next 12 months?(Please Choose No More Than Two)*

Current
Survey
Apr ‘05 / Previous
Survey
Jul ‘04
Identix (IDNX) / 14% / 14%
Viisage Technology (VISG) / 12% / 11%
Imagis Technologies (IMTIF) / 3% / 4%
BIO-key (BKYI) / 2% / 1%
Nuance Communications (NUAN) / 2% / 5%
PEC Solutions (PECS) / 2% / 3%
Saflink (SFLK) / 1% / 5%
Don't Know / 64% / 63%
Other / 1% / 3%

*The July 2004 survey question asked “which companies are most likely to pick-up market share over the next 12 months within the Homeland Security market.”

Who is Most Likely to Gain Market Share in Biometric IDs. Identix (14%) and Viisage Technology (12%) are the Biometric ID companies seen as most likely to pick up market share over the next 12 months,echoing our July 2004 results.

II. Smart Cards

(5)Question Asked:The Smart Card market is expanding, even as the technologies are changing rapidly. What is the most important trend today in the Smart Card space? Which company(s) do you think is best positioned to capitalize on this trend and why?

Security / 28%
Enhanced Technology/Performance / 28%
Storage Capabilities / 14%
Access to Financial Services / 8%
Biometrics / 6%
Other / 17%

Top Trends. Security (28%) and Enhanced Technology/ Performance (28%) are considered the most important trends in Smart Cards today. Storage Capabilities (14%) also received double digit mention.

As respondent JAS5505writes, "Those vendors that integrate smart card technology in a larger security solution that provides authentication with a large perceived benefit to the end-user without a significant impact to network/system administrators.” Respondent SKY5085 adds, "Smart cards can be reprogrammed to meet the most current needs. Bio-Metric is read and that's it. Smart cards are flexible."

A more complete sample of Alliance Member responses to this question can be found in Appendix C on page 22.

(6) Question Asked:Here is a list of companies within the Smart Card space. Which companies do you think are most likely to pick-up market share over the next 12 months?(Please Choose No More Than Two)*

Current
Survey
Apr ‘05 / Previous
Survey
Jul ‘04
SCM Microsystems (SCM) / 5% / 7%
ActivCard (ACTI) / 5% / 3%
Drexler Technology (now LaserCard Corporation – LCRD) / 4% / 7%
Fargo Electronics (FRGO) / 4% / NA
GemPlus International (GEMP) / 4% / 4%
ImageWare Systems (IW) / 4% / 4%
Cubic Corp. (CUB) / 3% / 4%
Maximus (MMS) / 2% / 3%
On Track Innovations (OTIV) / 2% / NA
Oberthur Card Systems (OBTHF) / 1% / 2%
Sense Holdings (SEHO) / 1% / 2%
Don't Know / 61% / 66%
Other / 1% / 1%

*The July 2004 survey question asked “which companies are most likely to pick-up market share over the next 12 months within the Homeland Security market.”

Smart Card Companies Most Likely to Gain Market Share.There are no predominant suppliers in this market. Public companies mentioned by respondents as most likely to gain market share include SCM Microsystems (5%) and ActivCard (5%).

(6A) Question Asked:Above and beyond this list, what other Smart Card Companies (or suppliers) are poised for growth over the next 12-24 months? Please mention the company(s) and why.

NAN5912 writes, "HID Corp.provides a platform and lets anyone use write to the chip, owned by ASSA ABLOY they have lots of cash for R&D."
JFE5370 writes, "HID Corp, they make multi-function cards that can save a lot of money for large deployments."

REM5670 writes, "Philips, due to their multiple technology offerings and advanced manufacturing processes."

GUA9841 writes, "Hypercom is expanding in Europe and also Lipman."

EIG1583 writes, "Major cc companies... Amex, Visa, Master Card."

DCK0418 writes, “Again, DynaSig Corporation. They have the system level software completed as well as hardware so they are poised. As to why, please read previous comments.”

III. A Closer Look at 4 Companies

We took a closer look at four companies in the Smart Card and Biometric ID Space. Here’s what we found:

(7) Question Asked:In the Alliance's last Homeland Security survey Identix, Viisage Technology, Drexler Technology (now LaserCard Corporation), and SCM Microsystems were identified as companies likely to gain market share. In the 9 months since, these companies have not performed as well as expected. If you are familiar with any of these 4 companies, please give us your thoughts as to recent performance issues and current prospects.

(a) Identix (IDNX):

PKM7870 writes, "Face it software works, however the required hardware is expensive."

JTO2813 writes, "Seems to have a lot of promise however they have not yet been able to deliver that promise to the bottom line. They keep saying that profitability is right around the corner. They need to deliver before the street will believe."

BAT1265 writes, "Corporate market not yet accepting of fingerprint technology or smart cards. Not convinced of need for multi-factor authentication."

DRP2747 writes, "I think they will do very well. They have products in at least two spaces, fingerprint and face recognition. They also handle at least two and maybe all three of what I consider the important industry trends."

DPB4534 writes, "If you look at this company the fundamentals are weak. The sector has been weak with investors moving into the sector in the past few weeks. If the big money keeps moving into the sector this could pick up."

EDD0142 writes, "Not winning government contracts."

GAN7111 writes, "USGovernment contract may be on the way."

NAN5912 writes, “Good product, price is ok, not innovating as fast as they should.”

(b) Viisage Technology (VISG):

NAN5912 writes, "Good product but one dimensional."
JTO2813 writes, "Viisage is a disaster in progress. There are a number of lawsuits against them right now for the way they handled their finances. Stay far, far away from them."

JJP3936 writes, "Highest public awareness."
DRP2747 writes, "Should do okay, but I think Identix is better positioned."

TMA3415 writes, "Adoption rates of technology have been lower than expected, but public safety typically does not embrace new technologies until they are proven."

DPB4534 writes, "Again Viisage has weak fundamental analysis. The big money is moving away from this sector. Poor outlook."

EDD0142 writes, "Not winning Government/Homeland contracts."

NAN5912 writes, "Too expensive."

NED2415 writes, "Everybody is waiting, we still have to cross the chasm so to speak. Investments by companies are still limited to trials. Suppliers (f.i. to Walmart) only do as little as possible. And many companies found out that it is not so easy to make the systems work (We should know because we've been in the business for more than 30 years)."

HOS8562 writes, "They have a niche with their product, but they might get new competition."

DRP2747 writes, "Drexler [LaserCard] should do very well in the smart card space."

(d) SCM Microsystems (SCM):

BAT1265 writes, "Mixed businesses. Old technology."

DPB4534 writes, "Very Poor Fundamentals. The sector has no money and no indication of a move upward."

(B) Contract Opportunities in Smart Card/Biometric IDSpace

We asked the Alliance about some specific major contract opportunities in the government Smart Card/Biometric ID space. Here’s what we found:

(8) Question Asked:The new US Government Visa Waiver Program (US-VISIT) will allow visiting citizens of participating countries to enter the United States using a machine-readable passport. They will be allowed to stay in the country for up to 90 days without obtaining a visa.

The US-VISIT contract was awarded to the Smart Border Alliance, which is lead by Accenture LLP and includes key members Raytheon, The Titan Corporation, and SRA International, Inc. Are there other companies that stand to benefit from this contract? Please mention why?

NAN5912 writes, "Other than size none of these companies have the best technology for this job. They'll have to buy better technology from somewhere. Unfortunately, it's a government contract so don't expect the best stuff at the best price."

DCK0418 writes, "Unknown until now, DynaSig has gotten very positive response from recent NIST conference in Washington DC. They now know they have options."

PGA2743 writes, "Possibly Sun Microsystems, Oracle, and whoever is supplying the custom software to implement.All because of their security products offered."

JJP3936 writes, "Slow rollout will hamper this system and suspect conflict of interest activities with Accenture."

STR2345 writes, "I believe that many firms will benefit including those that provide databases, hardware on which databases are stored and which must be used to query in real-time to determine access to US borders, and several printing firms across the visa-waiver countries."

(9) Question Asked:The US Government Printing Office has been charged with designing and printing the new US electronic passports. Eight companies have received initial government contracts to develop and implement the technology that will go into the e-passports. Which one(s) do you believe will benefit most over the next 12-24 months and why?(Please Choose No More Than Two)