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Inside Secure Completes Acquisition of AuthenTec Embedded Security Unit

France-based chip supplier Inside Secure announced today it has completed its acquisition of the AuthenTec Embedded Security Solutions unit for $41.6 million in cash.

Inside said it has agreed to pay up to $5.2 million more for the unit based on transactions completed by next March. Inside on Nov. 19 had announced it would acquire the unit for up to $48 million in cash.

The Embedded Security Solutions unit is the part of AuthenTec that Apple is either not acquiring or does not want to keep.

Apple is buying AuthenTec for its fingerprint sensor products, which are part of AuthenTec’s separate Smart Sensor Solutions unit. A filing by AuthenTec with the U.S. Securities and Exchange Commission in August confirmed the planned July 26 acquisition by Apple, which would close before the end of the year. Apple was reported to be paying $356 million for U.S.-based AuthenTec.

Inside is likely acquiring the Embedded Security Solutions unit directly from AuthenTec, but Inside still refuses to confirm the name of the party it is acquiring the unit from or even to mention AuthenTec in its public communication on the purchase.

Inside, mainly a supplier of NFC and contactless chips, is hoping the acquisition will broaden its customer base, as NFC Times reported earlier. The Embedded Security Solutions unit designs software and hardware products used for digital rights management, virtual private networks and other network security.

The financially struggling Inside is counting on a steady stream of licensing and royalty revenue from the unit, while also looking to the technology it is acquiring to make its new secure element chips for NFC devices even more attractive to customers. Inside also hopes the new unit, with its healthy gross margins, will help it eventually turn a profit.

Former SafeNet Unit Quadruples in Price
Inside said it would make Embedded Security Solutions its fourth business unit, after mobile NFC, digital security and secure payment and has appointed Simon Blake-Wilson as executive vice president of the unit.

Blake-Wilson has headed the Embedded Security Solutions unit since 2006, first at U.S.-based data protection company SafeNet, then continuing in the role after AuthenTec acquired the unit from SafeNet in February of 2010. AuthenTec paid $11.3 million in cash and stock for the unit. The mostly cash transaction included a provision for an additional payment by AuthenTec of up to $2.5 million based on the unit hitting revenue targets.

The unit had revenue of $15.5 million for SafeNet, according to unaudited results for 2009, said AuthenTec at the time. The unit had gross margins of more than 90% and operating margins of more than 20%, AuthenTec noted at the time.

By 2011, revenue for the unit had increased to $25.3 million, and the unit had operating income of $6.3 million.

For the first nine months of 2012, the unit had $21.4 million in revenue and operating income of $6.2 million. According to AuthenTec, sales in the unit increased by 55% during the first half of 2012, largely due to an increase in licensing revenue from IP and digital rights management, or DRM, products, royalties for security toolkits, as well as revenue from nonrecurring engineering projects.

Inside, which has been too dependent on sales of NFC chips to BlackBerry maker Research In Motion, paid about 40% of its cash on hand for the unit, not counting the possible extra payment of up to $5.2 million.

Inside’s shares, which had been climbing since hitting a low in October, fell by a little more than 4% today in trading in Paris, following announcement of the completed acquisition. Inside’s shares are down sharply since its initial public offering last February.

Counting on Recurring Revenue
As NFC Times earlier reported, Inside’s CEO, Rémy de Tonnac noted that about 80% of revenue for Embedded Security Solutions, or ESS, comes from licensing and recurring royalties and maintenance fees.

“(For example), AT&T and Verizon are offering a few million Galaxy S IIIs, and they recommend to Samsung to embed in those units the secure (ESS) toolkit,” said de Tonnac. “Each time Samsung is shipping (a) Galaxy S III to AT&T and Verizon, ESS is getting a few (tens of) cents of royalties.”

AuthenTec supplies DRM software to content providers or networks, such as music or movie distributors, and to device makers or mobile operators or mobile platform providers.

For example, consumers could download an app for their iPhone or Android smartphone from a content provider through an app store, and the app would come with a software-based encryption key secured by AuthenTec technology. The key enables the user to view the content.

AuthenTec also earned revenue from virtual private network, or VPN, software and other network security software used by device makers and network equipment makers. And AuthenTec also licenses security IP to chip makers. The company's customer list for its embedded security unit includes Alcatel-Lucent, Cisco, HBO, LG, Motorola, Nokia, Samsung, Sky and Texas Instruments.

In addition, de Tonnac said the unit’s DRM, VPN and other software could be combined with Inside’s secure elements for NFC phones to offer higher-grade security.

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