BETWEEN the exploding batteries and the discontinuation of Samsung’s Galaxy Note 7, it is easy to overlook the iris-scanning technology that came with the company’s now-defunct flagship smartphone.
Iris scanning is not exactly revolutionary. But it is interesting to ponder if the security feature could have gone mainstream, had the Note 7 remained on the shelves and in users’ hands.
It would have been of particular interest to Inari Amertron Bhd, as the company is said to be venturing into the technology.
Word in the industry is that Inari has been working to supply testing equipment and services to Germany’s Osram Licht AG for the latter’s iris-scanning technology.
“They (Inari and Osram) are still at an early stage, testing their first batch for early next year. But ultimately, the demand depends on the smartphone makers. If adoption of iris scanning takes off, the volume will be huge,” says a source.
“The Note 7 was supposed to test the waters for iris scanning. The Galaxy brand may be over, but Samsung is going to launch a new flagship phone. And if it is a top-of-the-line product, it will likely have iris-scanning technology. Of course, others like Apple may also have to follow suit,” he explains.
Inari’s management declined to comment when contacted, but this is to be expected. Vendors for large multinational companies are typically bound by strict non-disclosure agreements and are unable to talk about their work or their clients.
Keep in mind that Osram is already Inari’s second largest client. Its largest client is US semiconductor giant Broadcom Ltd. Supplying radio frequency (RF) testing equipment and services to the latter accounts for some 80% of Inari’s revenue.
Inari’s venture into iris-scanning technology featured prominently in analysts’ reports following a recent non-deal roadshow in Singapore.
“While the recent introduction of an iris scanner (featured in Samsung’s Galaxy Note 7) offers a more secured alternative, there are doubts on whether the iris scanner would be an instant hit to benefit Inari’s venture into the IR LED (infrared light-emitting diode) components for the scanners,” Maybank IB research says in a recent report.
The reports noticeably omit any mention of Inari’s technology partner for the venture. The Malaysian company does not have the technology to develop or manufacture the actual iris scanners. Instead, it is expected to supply back-end support for companies that do.
Osram is the obvious choice. The German company specialises in LED lighting and recently diversified into IR LEDs under its opto-semiconductors arm.
IR LEDs produce non-visible light that can be directed at eyes to enable sensors to scan the iris.
It is not clear if the IR LEDs will be manufactured in Malaysia, but Osram is investing RM4.6 billion in an LED chip plant in Kulim, Kedah. Earlier reports suggest that the Kulim plant will be used to manufacture relatively large six-inch LED wafers and, potentially, eight-inch wafers as well.
A more recent but unverified report by Reuters suggests that Osram will retain the production of its IR LEDs in a German plant, in which it has also invested €100 million (RM469 million).
But even if the company retains its IR LED manufacturing in Germany, the massive investment in Kulim is already expected to generate some positive spillovers for Inari from the supply of back-end services and equipment.
Of course, it would be even better for Inari if the IR LEDs were also produced in Kulim.
In a best-case scenario, iris-scanning technology would be widely adopted and Inari contracted to support Osram’s IR LED production.
But as Maybank IB’s report points out, there is still a lot of scepticism about the adoption of iris scanning.
After all, the Note 7 was not the first smartphone to attempt it. The Microsoft Lumia 950 XL, Fujitsu Arrows NX F-04G, Vivo X5Pro, ZTE Grand S3 and Alcatel Idol 3 were listed as examples alongside the Note 7.
“For now, contribution from this segment is a dark horse in that only less than 5% of annual smartphone shipment is expected to adopt the iris scanner in our current forecast,” writes Maybank IB.
However, the research house notes that the volume would be relatively sizeable coming from a low and almost non-existent base.
“While the adoption may not be immediate for all smartphone brands, the likelihood of Samsung resuming this feature in its next smartphone launch is high as it was one of the attractive features to consumers in the Galaxy Note 7. This should form a sizeable base volume,” says Maybank IB.
A key period to look out for will be next year’s mid-year phone launch season as well as the year-end Christmas rush when new models often hit the shelves. Samsung will have to deliver big volumes during this period to make up for the US$3.1 billion in estimated losses from the Note 7.
Looking back, it is interesting to see how fingerprint-scanning technology has taken off. Recall that Apple’s fingerprint-scanning feature, Touch ID, which was introduced with the iPhone 5s, did not receive a particularly warm reception back in 2012.
But since users reacted positively to the feature, competitors quickly played catch-up and today, fingerprint scanning is a common feature in all top-of-the-line smartphones.
Could iris-scanning technology find similar traction?
First off, it is important to remember that fingerprint scanning was introduced to phones as early as 2007 by Toshiba. The hardware at the time just could not support a seamless user experience.
Similarly, iris scanning could struggle to achieve widespread adoption if the user experience is less than perfect, especially when fingerprint scanning offers a well-entrenched alternative.
But fingerprint scanning has its shortcomings.
For starters, fingerprints are relatively easy to physically replicate — either with moulds or relatively basic 3D printers. Furthermore, most people have their fingerprints digitally stored on one database or another, usually by the government or enforcement agencies.
Other than hacking such databases, fingerprints can literally be stolen from anything a person touches. In 2014, a German hacker took it one step further by replicating a German minister’s fingerprints from high-resolution pictures of her hands.
Unlike passwords, fingerprints cannot be changed if the data is stolen.
While not foolproof either, iris data is much more difficult to steal.
As more transactions are done on mobile devices via e-payment services, device security will become a growing concern. More demand for security may well drive the demand for iris scanning on mobile devices.
Last Friday, Inari’s share price closed at RM3.30, down 6.54% year on year, and 16.7% lower than the 52-week high of RM3.96 at the beginning of the year.
Based on the RM148.25 million in net profit Inari generated in the financial year ended June 30, 2016 — down 2.8% y-o-y — the company is currently valued at 20.97 times historical earnings.
Maybank IB has a target price of RM4.10 on Inari on a forward price-earnings estimate of 15.1 times. This is based on a forecast three-year compound annual growth rate of 19%, primarily underpinned by strong earnings visibility from the company’s Broadcom contract.
Looking ahead, Inari’s venture into iris scanning is unlikely to generate huge returns in the near future, while earnings will be well supported by its existing RF business with Broadcom. However, if iris scanning becomes widely adopted, there will be a new growth catalyst for the company down the road.
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