Finance & Investment ClubTechnology, Media, and Telecommunication Sector

Senior Analyst: Cole SecorJunior Analysts: Osamah Aamir, Tudor Dorobantu, Kirstin Fong, Jiayi Ren, Joshua Sussman, Kevin Zhang, Yi Zhu

Fall 2015

Fraud Detection Software Developers

 

2

Agenda

Fund Suggestion

Risks

Comparable Company Analysis

TrendsE-Commerce Sales Growth Crime Rate Government Spending and Contracts

Industry Overview

Industry Definition

 

3

Industry Definition Businesses that develop software to detect fraudulent payments made to clients. The software

also protects against fraudulent payments.

Support the detection, analytics and management of fraud across users, accounts, products, processes and channels

Monitor and analyze user activity and behavior at the application level

Watch what transpires inside and across accounts

Analyze behavior among related users, accounts or other entities

 

4

Agenda

Fund Suggestion

Risks

Comparable Company Analysis

TrendsE-Commerce Sales Growth Crime Rate Government Spending and Contracts

Industry Overview

Industry Definition

 

5

Industry OverviewLife Cycle Stage:

GrowthA growth of 30.5% for the past 8 years is a good sign of the future.

Regulation Level: Light

Government struggles to keep up with the rapidly changing industry.

Industry Globalization: Medium

China and India are becoming bigger players.

Revenue Volatility: Medium

Uncertainties surrounding contracts and pricing pose risks to revenue.

Technology Change: High

The continuing competition between fraudster and firm drives innovation.

Competition Level: High

With an extreme ease of entry, companies of any size can compete for market share.

 

6

Industry Overview

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

0

200

400

600

800

1000

1200

1400

1600

1800

Industry Revenue

Revenue ($m)

30.5% CAGR

15.5% CAGR

 

7

Market Segmentation The financial sector represents the

largest market segment– Includes commercial banks, retail

banks, and brokerage firms

Public sector is another large contributor to market revenue– Ranges from national security to

welfare

Information sector accounts for the third largest segment of revenue– Continued growth as more and more

companies move data into digital forms

Insurance and Healthcare sector widely uses fraud detection software to detect fraudulent claims

 

8

Industry Overview

Market Cap: $3.72B Market Cap: $2.87B

Market Cap: $2.75BMarket Cap: $3.01B

 

9

Agenda

Fund Suggestion

Risks

Comparable Company Analysis

TrendsE-Commerce Sales Growth Crime Rate Government Spending and Contracts

Industry Overview

Industry Definition

 

10

Total E-Commerce Sales Growth

As electronic payment transaction volumes increase with consumers increasingly using the internet for a diverse range of services, such as online shopping, online trading and online banking, the risk of theft and fraud over the internet rises.

Percentage of services conducted online is expected to increase for the foreseeable future, creating opportunity for the industry.

Extremely strong correlation between E-Commerce volume and industry growth in recent history– R2 of .97904

The fraud detection industry will continue to grow as the amount of E-Commerce traffic volume increases.

100 200 300 400 500 600 700 8000

100

200

300

400

500

600

700

2006 2007

20082009

20102011

2012

2013

f(x) = 1.00795897068217 x − 147.888109079518R² = 0.979043129882692

Industry Growth vs. E-Commerce Volume

E-Commerce Volume (Billions)

Indu

stry

Rev

enue

(Mill

ions

)

Years Percent Growth2006 - 2007 26%2007 - 2008 10%2008 - 2009 32%2009 - 2010 10%2010 - 2011 26%2011 - 2012 19%2012 - 2013 10%

CAGR: 19.06%*

*Since 2006

Source: Ibisworld

 

11

Agenda

Fund Suggestion

Risks

Comparable Company Analysis

TrendsE-Commerce Sales Growth Crime Rate Government Spending and Contracts

Industry Overview

Industry Definition

 

12

Crime Rate

In addition to rising concerns of international terrorism and money laundering, occupational fraudsters have become more sophisticated.

Several major US retailers have experienced data breaches, threatening and simultaneously stimulating industry revenue.

As the number and intensity of these crimes increase in 2014, financial institutions, retailers and electronic payment processors will seek ways to leverage new technologies to protect customers by preventing fraudulent transactions.

Qualitative analysis show that as crime, be it digital or physical, increases so too will the amount of fraud.

2008 2009 2010 2011 2012 2013 2014 2015e 2016e 2017e 2018e05

101520253035

Credit Card Fraud $bn

Cred

it Ca

rd F

raud

$bn

*forecasted using averaged past 4 years CAGR*Source: Ibisworld

 

13

Agenda

Fund Suggestion

Risks

Comparable Company Analysis

TrendsE-Commerce Sales Growth Crime Rate Credit Card Chips

Industry Overview

Industry Definition

 

14

Chip Inclusion in Debit and Credit Cards

The new credit and debit smartcards use an encrypted chip rather than a magnetic stripe, reducing electronic payment fraud.

U.S. fraud rate expected to follow Canada’s dramatic decrease.

Industry will need to rely on a continuing growth from other areas of fraud within the U.S. and Canada

“In every country that has switched to EMV cards, online fraud has jumped.” –Aite Group

UK saw a 79% increase in online fraud once chips were introduced.

As credit and debit cards increasingly use computer chips the amount of fraud will be decreased hurting revenue.

2008 2009 2010 2011 2012 20130

50

100

150

200

250

Canada's Decrease in Retail Fraud Since Chips

Debit and Credit Card Fraud LossesExponential (Debit and Credit Card Fraud Losses)

Source: Yahoo Finance

 

15

Agenda

Fund Suggestion

Risks

Comparable Company Analysis

TrendsE-Commerce Sales Growth Crime Rate Government Spending and Contracts

Industry Overview

Industry Definition

 

16

Comparable Company AnalysisCompanies are highly valued on the market despite lackluster revenue generation.

Company Name

P/E EV/EBITDA

EV/Revenue

PEG Gross Margin

Net Profit Margin

Debt to Equity

Nice Systems 29.85 14.84 2.72 2.22 62.87 10.19 0

Fair Isaac Corporation 20.09 11.35 2.80 1.39 68.40 12.03 1.20

ACI Worldwide 34.42 13.92 3.08 1.31 55.25 6.65 1.53

Verint Systems 93.31 23.33 3.26 29.61 63.21 2.74 0.74

Collective DataHigh 93.31 23.33 3.26 29.61 3.26 29.61 1.53

Mean 44.42 15.86 2.97 8.63 2.97 8.63 0.87

Low 20.09 11.35 2.72 1.31 2.72 1.31 0

Median 32.14 14.38 2.94 1.81 2.94 1.805 0.97

 

17

Agenda

Fund Suggestion

Risks

Comparable Company Analysis

TrendsE-Commerce Sales Growth Crime Rate Government Spending and Contracts

Industry Overview

Industry Definition

 

18

Risks

Suffer from dependency on on a small number of customers for a significant amount of profit

A decrease in government spending poses as threat as the public sector accounts for 20% of industry profit

Unsuccessful mergers and acquisitions will result in growing companies falling behind

Losing the right to third-party software that is an integral part of the fraud detection software being developed

If software has a base code that has been open sourced they may have to make the resulting software open sourced and free

The industry suffers from many software-based risks that will need to be navigated carefully.

 

19

Agenda

Fund Suggestion

Risks

Comparable Company Analysis

TrendsE-Commerce Sales Growth Crime Rate Government Spending and Contracts

Industry Overview

Industry Definition

 

20

Fund Suggestion

Strong Buy

Strong growth

prospects

Correlated growth with Ecommerc

e Insulation from EMV

chip effects

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