Description

Intellicheck has not previously been written up on VIC. As the stock is down -43% from its highs and faces easy comps going forward I thought it might be an opportune time to introduce the company.

Intellicheck is an offline and online identity authentication startup. They have near 99% accuracy in correctly authenticating drivers licences, the highest among its competitor set. Intellicheck is able to do this thanks to a long-standing relationship with the American Association of Motor Vehicle Administrators (AAMVA) and Departments of Motor Vehicles (DMVs).

Through this cooperation, Intellicheck has been able to build a database of barcode formats across all 50 states over the last 30 years (each state has its own unique barcode format, which changes every couple of years). This unique understanding of ID barcode formats is IDN’s core moat and what lets them outperform OCR / Machine Learning & AI driven competitors.

Intellicheck floundered for many years due to attempting to sell their solution to bars and liquor shops. It turns out bars and liquor shops weren’t actually that interested in correctly identifying fake IDs and reducing customer count. In 2018 a new CEO (Bryan Lewis) was appointed and instantly changed Intellichecks go-to market strategy. Instead of focusing on selling to highly fragmented bars and liquor shops, he started targeting US card issuing banks. The company pegs bank losses from “identity theft at $16.9 billion. Then you throw on top of that chargebacks at about $17 billion. You throw on top of that synthetic identity theft, which is another $6 billion to $8 billion” (IDN Q3 2020 call). In other words, card issuers have a strong incentive to make their retailers adopt IDNs authentication solution to drive down losses from fraud (and have done so).

This explains the rapid adoption as IDN was able to sign on 5 of the top 10 card issuing banks in less than two years, lightning speed in the world of enterprise sales to slow-moving corporations. Much time has been spent on deciphering IDN’s end-clients who they can’t name directly due to standard NDAs. The larger ones are likely along the lines of Wells Fargo, Alliance Data Systems, Citi, Capital One, American Express, TD Bank, Fifth Third and Keybank but the number of large clients and speed of penetration is probably more important than the exact composition here.

Use cases for IDNs solution include private label credit card account openings, verifying cards for card not present transactions, confirming identity for non-receipted returns and identity confirmation for in-store pickups. Since 2018 IDNs entire focus has been on signing on clients so that at present most retailers use their solution for only one of these use cases (mostly account openings). A meaningful part of the go-forward opportunity is getting the existing customer base to adopt additional use cases. As banks bear the loss for PLCC account openings, but retailers bear the loss for card not present, non-receipted returns and in-store pickups, retailers often initially implement IDN for PLCC account openings. Having already implemented IDNs solution, it would make sense for retailers to also apply it to card not present, non-receipted returns and in-store pickups over time to reduce fraud that they are responsible for bearing.

In terms of TAM management guides towards the following approximate metrics: Each bank represents $15m - $25m TAM for PLCC account openings. Already signed banks therefore present about $100m in TAM whereas the top 12 card issuers represent about a $240m TAM. Across all four solutions and all 12 issuers the TAM is probably easily $500m. TAM is clearly large and trailing 12-month revenue only $10 million, so let’s not dwell on the minute details of TAM calculations.

Management also consistently reminds that automotive retailing and hospital groups represents additional large addressable markets, presumably to authenticate the customer and prevent fraud when an auto loan is made / to prevent insurance fraud. In addition, IDN has been very offline retail focused so far. As an ID check through IDN simply entails an API call to their servers, one could imagine a shift towards more online customers over time. Potential use cases entail ride-hailing companies authenticating drivers as part of their sign-on process, online bank account opening, etc etc.

Mais pourquoi maintenant?

IDN revenues have held up reasonably well during the pandemic despite the crash in retail traffic. In fact, they have grown 40% YoY. This is largely thanks to minimum payments built into IDNs contract with banks as well as continued robust expansion in IDNs customer base throughout 2020.

While 40% YoY growth is not bad, it is very likely that growth will accelerate in 2021 for the following reasons:

1)      Addition of new retailers from existing banks as the implementation pipeline has remained steady (see Q4 call). This requires limited additional sales efforts as it is the banks pushing their card customers to implement IDN’s solution

2)      Addition of new customers. IDN is specifically hiring 4 new salespeople in Q1/early Q2 to accelerate sales to new customers and target new markets

3)      Expansion of use cases across existing retailers

4)      Mean reversion to pre-pandemic scanning levels. “Same brand transaction volumes for Q4 2020 versus Q4 2019 were down an average of 20%” (Q4 call). Mean reversion in this metric alone represents a +25% reacceleration in YoY growth

In short, I think there is an easy path to return to a 65-70%+ growth trajectory. At 65% 2020 growth IDN would be trading at <9x 2021 sales, inexpensive for a fast-growing SaaS company with mid 80s gross margins. As a sidenote for those that want to see earnings, sellside consensus estimates have IDN picking up incremental margin in 2022 to the point that it is currently trading at 18.5x 2022 consensus P/E.

However this should at most be an illustration of IDNs steady state earnings power. As mentioned at the beginning of this writeup IDN is really a publicly traded startup. It would be folly to let those earnings come through this early in the company’s growth trajectory. Much better to spend every dollar of cash to accelerate top-line growth, further improve the website and hire more salespeople and tech talent to capture the nascent opportunity. Further partnerships and acquisitions of synergistic product lines/businesses would be another good step.

As IDN is still a startup with a constantly evolving go-to market strategy, TAM and product set I want to avoid making overly precise estimates which are likely to prove inaccurate a year from now anyway. For the sake of putting some numbers down on (electronic) paper, I think IDN can hit $45 million in sales by EOY 2023, representing a sales CAGR of 61%. With a 7.5x 2023 sales multiple, or a 20x FCF multiple on 37% FCF margins this would represent a 30% IRR from today’s prices.

Finally, a note about the board. It is mostly made up of people with a background in the military or alcoholic beverages. The majority of the board is a remnant of what IDN was trying to be 10 years ago. One of the things that could still be improved at IDN is a refresh of the board. To illustrate, current board composition is as follows:

• Lieutenant General Emil R. “Buck” Bedard, a military guy all his life.
• Major General Jack A. Davis, U.S. Marine Corps, Retired. Another military guy
• William Georges spent nine years as senior vice president of The Century Council, overseeing their development of programs to fight alcohol misuse, drunk driving, and underage drinking. He is a retired 25-year veteran of the Albany, NY Police Department where he ultimately achieved the rank of Assistant Chief/Chief of Patrol where he was responsible for all uniformed police services. 
• Dylan Glenn  is CEO of KBBO Americas, L.P. KBBO Americas is the U.S.-based investment vehicle for the KBBO Group, a diversified investment company headquartered in the United Arab Emirates. 
• Dr. Amelia L. Ruzzo's experience includes positions with Thermo Fisher Scientific from 2012 to 2015 and ITT Exelis from 2010 to 2012. In these roles, she was responsible for aligning IT with business objectives in the development of strategic and tactical plans for segment businesses.
• David E. Ullman is a seasoned retail executive, he spent nearly twenty years as Executive Vice President and Chief Financial Officer for billion-dollar retailer, manufacturer and e-commerce company, Jos. A. Bank Clothiers.
• Guy L. Smith has been the Executive Vice President of Diageo, the world’s leading premium drinks company, since 2000 and is responsible for Corporate Relations and Marketing Public Relations.

Reorienting the board in the direction of what IDN wants to be rather than what it was 5 years ago may help further build the company. Bringing in board members from fintech and startups as well as target industries such as retail and banking, as opposed to board members with little or no business experience in the industries IDN operates in would help further align the company with the long-term interest of shareholders.

The recent hiring of Garrett Gafke, an entrepreneur who previously started and sold a digital identity company to IDN competitor Acuant is a step in the right direction.

If VIC utilized its collective network and intelligence to come up with further board additions or hires, I think IDN could come even closer to realizing its full potential as a leading identity company.

Risks

IDN is still evolving into its full potential. The board could be better. More hires such as Garrett Gafke are likely needed, especially on the tech side. More partnerships should be struck to further bolster the product set.

While IDN has the highest accuracy, there are many dynamic competitors in the general identity solutions space who have a more complete and well-rounded product offering. Some of these are Mitek, Acuant and Jumio. While IDN core authentication solution is likely superior, competitors may beat IDN through the completeness of their product set. That being said IDN's focus on selling to offline retail through the bank channel seems to have somewhat insulated IDN from competition so far as most of their competitors are more focused on competing online.

Catalyst

Reacceleration in 2021 sales