Inside Secure to Cut up to 20% of Its Workforce To Stem Losses

Mar 7 2013

France-based NFC chip supplier Inside Secure said it would cut up to 20% of its global workforce following the loss of more than $30 million in 2012.

Inside reported its fourth quarter and year-end 2012 earnings Wednesday evening, showing a dismal year for the vendor, especially in its NFC business.

Inside reported its overall revenue fell by 19% for the year to $122 million and recorded a net loss of $30.3 million, compared with a loss of $14.6 million in 2011.

Inside blamed the loss on its NFC business segment, which suffered along with the main customer of its NFC chips, Research In Motion, now called BlackBerry.

“This bad news, which is mainly due to the great upheavals in the business environment in which we operate and to the difficulties encountered by our main client in the mobile NFC segment is leading us to refocus our business and adapt our organization model and our cost structure,” CEO Rémy de Tonnac said in a statement. “In this context, we therefore announce today a reorganization project which might lead us to let go some of our colleagues.”

UPDATE: Investors hammered Inside's stock after trading opened in Paris Thursday morning, with the company's shares down by more than 40% at one point, reaching a record low. They recovered some ground during the day to close at €2.38, down 21.7% for the day. Inside's share price had been climbing since a previous low in October. END UPDATE.

Inside said it would make reductions to save $13 million per year. The job cuts would cost about $7 million in charges. UPDATE: Inside has 465 employees worldwide, with more than 200 working in France and 80 in the UK. The company said it already has implemented some cost savings during the second half of 2012, but announced plans for a much broader reorganization and cuts Wednesday evening. END UPDATE.

Inside’s Embedded Security Solutions unit, which it acquired from U.S.-based AuthenTec in December of 2012 for a total of $43 million so far, would not be affected by the job cuts, the company said. AuthenTec was acquired by Apple for its biometric sensor business, and Apple reportedly divested the Embedded Security Solutions unit, which Inside bought.

The unit designs software and hardware products used for digital rights management, virtual private networks and other network security. Inside believes it can also add an NFC element to the unit's business, putting credentials on a secure element for use for enterprise security in NFC devices.

Inside also supplies secure chip technology for the banking card and ID markets.

Inside in its earnings report also said it would nullify its revenue target of $400 million for 2014, which it had set during its IPO a year ago. That target will not be reached.

Adjusting NFC Strategy
For its mobile NFC unit, Inside said it would adjust its strategy and would give “priority to an innovative and differentiated offering.”

That includes further developing and marketing its embedded secure element, pushing its NFC “booster” technology and stepping up its licensing program for its NFC and related patents.

The booster technology embeds a contactless antenna and booster chip in SIM cards, giving non-NFC phones a contactless interface. Inside said this NFC PicoPulse chip product offers a standard read range no matter the location of the SIM slot in the phone. Inside sold the first volumes of product in China during the fourth quarter. The company has introduced an embedded version of the technology for consumer electronics.

Inside reported that sales in its mobile NFC segment fell by 10% in 2012 to $43.3 million, which the company blamed on a “strong decline” in mobile handset sales by Blackberry and postponement until 2013 of the launch of devices running the BlackBerry 10 operating system.

BlackBerry in January unveiled its first BlackBerry 10 devices, the Z10 and Q10 and, as expected, both support NFC, using NFC controllers from Inside stacked with secure elements from Germany-based Infineon Technologies. Inside’s own secure element won’t be available for production until the end of this year, and it’s not certain BlackBerry will adopt it after that.

RIM previously introduced six or seven BlackBerry phones supporting NFC, but all or most were released in 2011.

According to U.S.-based research firm Gartner, RIM saw its share of the global mobile phone market in 2012 shrink to 2% on shipments of 34.2 million units, down from a 2.9% share with 51.5 million units shipped in 2011.

Inside said revenue in its mobile NFC unit in the fourth quarter came in at $11.6 million, up 28% from the third quarter, on sales to BlackBerry and revenue from a licensing deal with Intel. But Inside added that the NFC unit during the quarter was not “showing signs of sustained recovery.”

Struggling Against the 'Duopoly'
UPDATE: Inside has been unable so far to break into the market to supply NFC chips to Android device makers. It was going to serve as a second source of supply for an Android phone maker, but that supply contract was either cancelled or delayed because of competitive pressures, de Tonnac indicated Thursday in his conference call with financial analysts. Inside also supplied NFC technology last year to Nokia for its first NFC-enabled Windows Phone, the Lumia 610, but revenue was not significant.

“We had to face two major adverse events in 2012,” de Tonnac told analysts. “One is the downfall of BlackBerry and the further delay of their platform BB10, which was introduced, in fact, only last month (late January). And second, 2012 did see a duopoly take control of the smartphone market, which is the segment where NFC is being integrated; a duopoly made up of Android and Apple.” 

He noted that Broadcom had been picked by Google for a “reference design” for devices running Android 4.2, though device makers could choose other NFC chip suppliers. 

“And Apple, as you know, has not yet decided to adopt NFC,” de Tonnac said. “Therefore, the market was very significantly reduced on the NFC front and, indeed, some of the design wins we had, such as Nokia, did not materialize with significant revenue in 2012. That is (to) explain the very disappointing performance of this segment.” END UPDATE.

Inside reported the NFC unit suffered an operating loss of $30.5 million in 2012, accounting for just about all of the companywide losses for the year. Mobile NFC had lost $17.3 million in 2011. The chip supplier said the losses eased in the unit during the second half of 2012.

Besides the drop in revenue, Inside blamed the losses in the NFC unit in part on higher research and development spending, especially for the booster technology and embedded secure element, as well as the need to develop enhancements to the company’s NFC controller, MicroRead, and to design “next generation NFC technology in partnership with Intel.”

Overall, research and development expenses for the NFC business accounted for 70% of all R&D spending by the company.

In its other segments, Inside reported sales in its secure payment unit fell by 26% for the year to $31.8 million on continued lower sales of contactless chips to U.S. banks, which will soon gear up for their move to EMV chip technology.

There was a slight increase in business for chips for pure contactless payment cards in the U.S. during the second half of the year, but de Tonnac said during a conference call with analysts that, “we do not see that as a major event that should last or reverse the trend of (pure) contactless payment cards going down in the U.S.”

The secure payment unit showed an adjusted operating loss of $3.5 million.

Inside is positioning itself to supply EMV chips for the move by U.S. banks to the more secure payment cards. De Tonnac said he believes this market will begin slowly in the second half of 2013 before picking up next year. Inside is in the final stages of finishing, including certifying its product offerings for the market.

Inside also reported sales were down in its digital security segment, by 23%, to $46.1 million, based on lower sales of chips for ID documents and modules for smart metering and anticounterfeiting. The latter two markets are delayed, de Tonnac said. But the unit made $6.4 million during the year.

Inside plans to discuss the results and planned cuts Thursday morning in a conference call with financial analysts.

 

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