Inside Secure: Ripe for an IPO

Not much information has been escaping Inside Secure’s headquarters in Aix-en-Provence, France, the past few weeks.

The plucky no. 2 NFC chip supplier had always been eager to promote itself. But there’s been none of that of late, except for a couple of official press releases: No projections, no internal figures passed around to employees. No forward-looking statements.

If there is an information clampdown, it is apparently Inside’s effort to get its message straight as it prepares to present itself to investors in a public offering.

The time couldn’t be better for Inside to go public. The buzz on NFC technology continues to build. And Inside has a contract with one of the world’s largest smartphone makers, Research in Motion, to supply NFC chips for RIM’s planned rollout of BlackBerrys supporting the technology. RIM has ordered up to 20 million or 25 million NFC chips from Inside, though the full order isn’t finalized.

The chip supplier is working with other major handset makers as it vies with chief rival NXP Semiconductors for orders.

Inside is trying to break NXP’s early grip on NFC business from Google and such big Android phone makers as Samsung. NXP also is supplying NFC chips to Nokia for the handset maker’s Symbian smartphones and perhaps its forthcoming Windows handsets.

Much Larger Rivals
Another reason Inside is ripe for an IPO is that it needs capital–perhaps desperately so. While Inside and NXP are the only suppliers that are ready now with chips, most of the world’s largest semiconductor suppliers are preparing to enter the NFC market, including STMicroelectronics, Renesas Electronics, Samsung Electronics, Texas Instruments and, later, Broadcom, Qualcomm and Intel. There are others expected to join, as well, such as Sony, CSR and Marvell.

But compared with these multibillion-dollar chip giants, tiny Inside brought in just US$36 million in 2009. The company hasn’t released its 2010 results, but sources told me revenue more than doubled in 2010 as the economy recovered from the financial crisis.

That is still little more than a rounding error on competitors’ earnings reports.

The 2010 sales estimate does not include revenue from the smart card business unit of U.S.-based chip maker Atmel, which Inside bought last year.

Inside paid a base price of $32 million for the much larger Atmel business, which had revenue of roughly $100 million in 2010. The deal, which closed last September, called for Inside to pay up to $21 million more if the Atmel unit meets certain financial targets in 2010 and 2011. Inside probably won’t have to pay much of that $21 million.

The deal was a lifesaver for Inside not only because it gives the contactless chip supplier much needed smart card technology it can use for dual-interface bank cards that are expected to continue to be in high demand, as well as for secure chips in NFC phones.

The acquisition of the Atmel unit by the much smaller Inside also helped the chip vendor to coax another €50 million ($65 million) out of its venture capital investors–some of which have been backing Inside for years.

Spending the Cash
Without that infusion, Inside probably would have burned through its cash by the end of 2010. It spent at least €11 million ($15 million) on research and development alone in 2009, according to its filing with the French commercial court registry. That’s more than 25% of all its expenses and more than 40% of its revenue for the year. Inside CEO Rémy de Tonnac later told me the figure for research and development was actually €17 million for 2009, taking into account all R&D-related expenses.

This R&D will pay off, de Tonnac told me in January. But the expenses will only increase as Inside strives to keep its technology current and not allow its well-heeled competitors to surpass it.

Inside, which has never turned a profit in the 15 years since its founding, probably wouldn’t be able to tap its long-patient investors for more. The company, which lost just under €9.6 million (US$13.5 million) in 2009, did cut its losses by about two-thirds last year. But some of the investors are eager to cash out. And a sale of the company is unlikely, say observers. That makes an IPO the expected option. 

And much is at stake. Of course, projections from analysts for the size of the NFC market vary widely. One recent projection has it that NFC phones will reach 800 million by 2015.

Nearer to the present day, NXP estimates handset makers will ship 70 million NFC phones this year, using chips from all suppliers, doubling to about 150 million units in 2012. De Tonnac agreed with that last month, before he stopped making projections.

In a couple of years, wireless chipset suppliers, such as Broadcom, Qualcomm, CSR and Texas Instruments, are expected to incorporate NFC in their chips that also support variously Bluetooth, WiFi, GPS and other wireless technologies in smartphones.

This could cut demand for standalone NFC chips, such as those produced by NXP, Inside and several of the other chip makers, such as STMicroelectronics, Samsung and Renesas.

But it also could give Inside an opportunity, if it has intellectual property to license to the big wireless chip makers. Broadcom last year purchased the major company providing NFC IP to wireless chip makers, UK-based Innovision.

But there is no way Inside can raise the money it needs to stay competitive in the NFC and overall smart card chip markets without access to public markets—or a large company coming to buy it out.

Either way, I see Inside planning to milk the NFC buzz this year for all it is worth.


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