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Inside Secure is confident it will be able to announce a design win for an Android NFC phone before the end of the year, according to Rémy de Tonnac, CEO of the struggling No. 2 NFC chip maker.

It would be the first Android NFC phone using a chip not supplied by NXP Semiconductors. De Tonnac made the statement in speaking to financial analysts recently, following release of Inside’s poor first half financial results. The France-based chip supplier had indicated earlier that it would enter the Android NFC market, but the announcement has been delayed, said de Tonnac.

He confirmed to NFC Times that in the conference call he was referring to a design win for an NFC-enabled phone from a tier-two Android phone maker. De Tonnac indicated during the conference call that he believes the emergence of Apple and Samsung Electronics as the two dominant smartphone makers is roiling the market and causing delays in other Android smartphone makers ordering NFC chips.

“In a matter of a few quarters, we moved into a world dominated by two giants, therefore, everybody else is suffering,” de Tonnac said. “We are talking about the tier two. There are only a few tier two, not that many. We know they are going through a difficult time. Nevertheless, they will be announcing a new product.”

Among other things, de Tonnac said he hopes the launch last week by Google of a new version of its mobile wallet, which emphasizes cloud-based applications but also keeps a focus on NFC, would increase demand for NFC chips in Android phones.

Inside’s design win might come from such Android phone makers as ZTE, LG Electronics, HTC or possibly even Google’s Motorola Mobility unit. De Tonnac would not say, however, whether the design win is for the primary NFC chip supply to the Android phone maker or as a second source to NXP’s chips.

In either case, the design win would be a rare piece of good news of late for Inside, which reported its net loss widened during the first half of the year to $16.2 million­, which is more than double the loss for the same period in 2011. Inside’s financial health remains tethered to the falling fortunes of the main customer for its NFC chips, Research In Motion. RIM has seen sales for its BlackBerry handsets sinking.

The design win is unlikely to have much of an impact on Inside’s second half financial results, but would provide a psychological boost.

Cracking the Android Market
Inside is keen to break the dominance of chief rival NXP, which last month touted 200 design wins for its NFC chips in smartphones and tablets, nearly all of them Android devices.

Google, in announcing its first branded tablet, the Nexus 7, in June, noted that more than a million NFC-enabled Android devices are shipping each week.

NXP’s NFC chip shipments contributed to growth of the chip maker’s Identification business segment, which had revenue of $234 million for the second quarter, up 20.6% from a year earlier and an increase of 25% from Q1 of 2012. The revenue increase in the unit surpassed earlier projections by the company.

“NXP got first into the Android ecosystem and, therefore, they were able to get a significant number of design wins in the Android ecosystem,” de Tonnac said in response to a question from an analyst. “Even better for them, the Samsung Galaxy S III is a major success, and they greatly benefit from it. I think the very, very vast majority of NFC shipments from Android NFC shipments are coming from the Galaxy S III.”

Nearly all of Inside’s net loss in the first half came from the vendor’s NFC unit, which saw sales drop by 42% from the second half of 2011 to just $22.6 million. Including its payment and ID divisions, Inside had sales of $62.2 million for the first half, down 23% from the second half of 2011.

Besides the handful of BlackBerry models incorporating its NFC chips, Inside has only been able to announce one other design win–for a single NFC model from Nokia, the Lumia 610. With Inside’s help, Nokia has adapted the phone’s Windows Phone 7.5 operating system to support NFC.

In addition to chips for NFC phones, Inside is offering a new product from its Mobile NFC business unit, a SIM card embedded with its own contactless antenna.

Tethered to RIM
De Tonnac predicted the first shipments of the product, the SIM Booster–which can give non-NFC phones a contactless interface–would happen in the third quarter. He said he expects shipments of, at most, a few million units of the contactless SIMs this year to a customer in China. The lion’s share of the shipments would come during the fourth quarter.

But sales of the SIM Booster also will not be enough to help the vendor out of its slump.

Inside’s financial performance in 2012 remains dependent on RIM, de Tonnac acknowledged to analysts, which doesn’t bode well for an improvement during the second half of the year.

“We have seen the launch of BB10 (BlackBerry 10 platform) postponed twice,” he said. “Again, RIM is to stay as the major contributor on NFC (for Inside). And on that front, until we get to see things happening, we will be careful. NFC, we do not see growth, that’s for sure, in the second half.”

He added that even with the launch of BlackBerry 10, RIM might not use Inside’s new embedded secure element until the third quarter of 2013. Instead, it would continue to use an embedded secure chip made by Infineon Technologies, which Inside stacks as part of its SecuRead NFC chip. RIM needs to sell off old inventories of the stacked chip, de Tonnac said. It also wants to avoid making a change to a new secure element as long as possible.

This will continue to hurt Inside’s profit margins, said the vendor.

In Inside’s other divisions, Digital Security and Secure Payment, the vendor also recorded falling revenue and, in Secure Payment, an operating loss of $2.4 million.

No Improvement Until 2013
As with the Mobile NFC unit, de Tonnac doesn’t see relief until 2013 in the Secure Payment unit, when U.S. banks will begin ordering cards with EMV contact and dual-interface chips that Inside can supply.

Inside had owned a dominant share of the market for standalone contactless chips used by U.S. banks for their credit and debit cards, but the banks have cut back on orders substantially as they prepare for the move to EMV, said de Tonnac. This led to a 48% drop in revenue in the Secure Payment unit in the first half of 2012 to $14.9 million, as compared with the same period in 2011.

The market is promising, with 300 million EMV cards per year projected to be shipped to U.S. issuers starting in 2014, with the ramp-up likely to begin in mid-2013, he said.

Many, but not all, of these EMV cards will have dual-interface chips, and de Tonnac said he’s noticed of late that MasterCard Worldwide is promoting the move to contactless among banks more than Visa Inc., as they both clarify their EMV mandates.

“Visa is kind of backing off a bit from contactless,” he said. “And they anticipate the majority of volume on contact (and) EMV online. Whereas MasterCard is going to be more massively contactless we understand. They are the partner of choice of Google for Google Wallet, based on contactless infrastructure.’

Meanwhile, in Inside’s Digital Security division, which includes ID and pay-TV chips, the vendor saw revenue fall by 24% during the first half to $24.7 million, compared with the same period in the previous year. De Tonnac said promising markets for chips for anti-counterfeiting and smart metering, along with more machine-to-machine volumes, won’t materialize until 2013.

All of this has put off investors, even though Inside continues to stick to its longer-term projections made during the run-up to its initial public offering in February. These would include a forecast to turn a profit in 2013–which would be the first since the company’s founding in 1995–and generating revenue of $400 million in 2014.

Inside stuck to these targets in a profit warning in May, in which the vendor alerted the market that it would not break even by the end of 2012, as it projected in its IPO.

The company also said it had a solid cash balance of $95.5 million as of June 30, close to its balance after its IPO in February, as it watches expenses carefully.

Still, investors sent Inside’s shares down 7% to €2.53 on Euronext Paris last Friday after release of the H1 earnings report. The share price closed down close to that value Wednesday of this week. That compares with a high of just under €10 per share in March–with Inside’s RIM connection souring investors’ attitudes toward the company.

Besides trying to break NXP’s dominance of the NFC market, Inside is facing the threat from even larger semiconductor suppliers, such as Broadcom and Qualcomm, which are introducing NFC chips for smartphones and tablets.

De Tonnac told analysts that while the threat is real, the suppliers are not quite in the market yet.

“We have at least 12 months ahead of us to secure our position,” he said.

But with its falling share price and market capitalization, de Tonnac has had to field questions about whether Inside has become a takeover target.

While he said that other companies, of course, could make offers and “fight for us,” Inside’s objective is to continue to try to win market share and turn a profit.

“Especially with our cash position, we can keep developing the company,” he said. “From that angle, we are not on sale.”