Anoto Group AB (ANOT.ST) Redrawing the map

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1 COMPANY ANALYSIS 13 October 2014 Summary (ANOT.ST) Redrawing the map Anoto is a global, combined hardware and software company with 90 percent of sales outside of the Nordics. The Company is a leading pioneer in digital writing, that has changed priorities, from digitizing forms to a license business with global industrial partners like Panasonic, Smartmatic, and TStudy. The new offering includes solutions for editable screens and interactive walls. Anoto s technology has three competitive advantages in its precision, interoperability and unique paper-to-screen solution, making the products desireable for high end users within industrial design. We estimate the DCF-value of Anoto to SEK 0.33 per share (discount rate: 15.5 percent), which together with our peer valuation, provides an upside of percent, compared to today s all time low share price. Our bear and bull scenarios respectively, indicates values of SEK 0.15 and SEK The risk in this investment must be considered higher than most other tech stocks on Small Cap. However, with the current rights issue in place, the short term capital needs are met. Redeye Rating (0 10 points) List: Market Cap: Industry: CEO: Chairman Small cap 174 MSEK* Information Technology Stein Revelsby Jörgen Durban *= Estimates following the rights issue in Q4 14 OMXS Oct 05-Jan 05-Apr 04-Jul 02-Oct Please note that the share price is not adjusted for the ongoing rights issue. Management Ownership Growth prospect Profitability Financial strength 4.0 points 4.5 points 6.5 points 0.0 points 4.5 points Key Financials E 2015E 2016E Revenue, MSEK Growth 3% -27% -1% 16% 19% EBITDA EBITDA margin -13% -55% -33% -14% -2% EBIT EBIT margin -18% -116% -38% -16% -5% Pre-tax earnings Net earnings Net margin -23% -117% -42% -18% -7% Share information Share price (SEK) 0.24 Number of shares (m) 725.4* Market Cap (MSEK) 174* Net debt (MSEK) -30* Free float (%) 66 % Daily turnover ( 000) 150 *= After the rights issue. Analyst: Viktor Westman viktor.westman@redeye.se Important information: Redeye is acting financial advisor to Anoto Group in the announced rights issue with execution during October November The remuneration for producing this research report is a fixed amount agreed in advance, regardless the conclusions in the report and the outcome in the rights issue. The analyst team at Redeye is working entirely independent from the corporate finance team that is engaged in the financial advisory service to Anoto. Important information: All information regarding limitation of liability and potential conflicts of interest can be found at the end of the report. Redeye, Mäster Samuelsgatan 42, 10tr, Box 7141, Stockholm. Tel E-post: info@redeye.se

2 Redeye Rating: Background and definitions The aim of a Redeye Rating is to help investors identify high-quality companies with attractive valuation. Company Qualities The aim of Company Qualities is to provide a well-structured and clear profile of a company s qualities (or operating risk) its chances of surviving and its potential for achieving long-term stable profit growth. We categorize a company s qualities on a ten-point scale based on five valuation keys; 1 Management, 2 Ownership, 3 Growth Outlook, 4 Profitability and 5 Financial Strength. Each valuation key is assessed based a number of quantitative and qualitative key factors that are weighted differently according to how important they are deemed to be. Each key factor is allocated a number of points based on its rating. The assessment of each valuation key is based on the total number of points for these individual factors. The rating scale ranges from 0 to +10 points. The overall rating for each valuation key is indicated by the size of the bar shown in the chart. The relative size of the bars therefore reflects the rating distribution between the different valuation keys. Management Our Management rating represents an assessment of the ability of the board of directors and management to manage the company in the best interests of the shareholders. A good board and management can make a mediocre business concept profitable, while a poor board and management can even lead a strong company into crisis. The factors used to assess a company s management are: 1 Execution, 2 Capital allocation, 3 Communication, 4 Experience, 5 Leadership and 6 Integrity. Ownership Our Ownership rating represents an assessment of the ownership exercised for longer-term value creation. Owner commitment and expertise are key to a company s stability and the board s ability to take action. Companies with a dispersed ownership structure without a clear controlling shareholder have historically performed worse than the market index over time. The factors used to assess Ownership are: 1 Ownership structure, 2 Owner commitment, 3 Institutional ownership, 4 Abuse of power, 5 Reputation, and 6 Financial sustainability. Growth Outlook Our Growth Outlook rating represents an assessment of a company s potential to achieve long-term stable profit growth. Over the long-term, the share price roughly mirrors the company s earnings trend. A company that does not grow may be a good short-term investment, but is usually unwise in the long term. The factors used to assess Growth Outlook are: 1 Strategies and business model, 2 Sale potential, 3 Market growth, 4 Market position, and 5 Competitiveness. Profitability Our Profitability rating represents an assessment of how effective a company has historically utilised its capital to generate profit. Companies cannot survive if they are not profitable. The assessment of how profitable a company has been is based on a number of key ratios and criteria over a period of up to the past five years: 1 Return on total assets (ROA), 2 Return on equity (ROE), 3 Net profit margin, 4 Free cash flow, and 5 Operating profit margin or EBIT. Financial Strength Our Financial Strength rating represents an assessment of a company s ability to pay in the short and long term. The core of a company s financial strength is its balance sheet and cash flow. Even the greatest potential is of no benefit unless the balance sheet can cope with funding growth. The assessment of a company s financial strength is based on a number of key ratios and criteria: 1 Times-interest-coverage ratio, 2 Debt-to-equity ratio, 3 Quick ratio, 4 Current ratio, 5 Sales turnover, 6 Capital needs, 7 Cyclicality, and 8 Forthcoming binary events. 2

3 Table of contents Investment thesis... 4 Company Description... 9 Product summary Business model Technology Licensing Enterprise Solutions Market and industry outlook Financial estimates Valuation Summary Redeye Rating Appendix 1. Digital pen technologies Appendix 2. Touch screen technologies Appendix 3. Suppliers and material for Anoto s products Income statement, balance sheet and cash flow

4 Investment thesis Global, digital writing pioneer in change Anoto Group ( Anoto or The Company ) is a global, combined hardware and software company and a pioneer within digital writing. The Company is in the middle of a large cost cutting program, a rights issue and a major change of strategy. Following these actions, Anoto could be on the verge of a revaluation and is therefore interesting from an investment perspective. Anoto s largest challenge is to increase sales volumes Investment case As of today, Anoto has mostly executed small orders of a few thousand digital pens to different customers, for a few SEK million each. This barely covers the current operating expenses of SEK 144 million. The most important critical factor is therefore to increase top line significantly. There is an operational risk in this task, since management has never been able to reach sustainable break-even sales levels previously. which could be achieved in the creative industry. We believe the best sales strategy is to form an alliance with a major OEM (Original Equipment Manufacturer), since more than pens need to be sold to reach break-even. In August 2014, Anoto completed a prototype for a large OEM-player, not yet announced. We believe Anoto will close a deal with this OEM before the start of In addition, The Company has potential to reach high sales volumes in the four partnerships already formed within education (TStudy), interactive walls (we-inspire), displays (Panasonic) and voting (Smartmatic). We believe that Anoto s technology is especially advantageous and interesting for the professional users in the industrial design industry, due to the competitive advantages (see the product summary). Anoto could therefore win over Wacom s high end customers. The new Anoto Source: Redeye Research 4

5 Anoto is selling to large players like Panasonic, but the stock market takes no notice Limited downside due to e.g. patents and deferred tax assets Panasonic is an impressive reference customer, especially when Anoto approaches the aforementioned high end users in industrial design. However, investors only see the red figures and a Company that doesn t seem to be able to make profit even though it sells for SEK 150 million per year. In other words, Anoto s long history of a large number of rights issues has made the company s share unpopular. Today s share price, in the middle of our base case and bear case, indicates that Anoto will only halfway succeed and barely survive. On the other hand, this could provide a large potential upside, as the Company is embarking on a commercially viable strategy, which is why we see an interesting, but risky, investment potential. Surely the financial situation and dilution from subsequent possible further capital raising is, by far, the largest risk in Anoto, a risk that should not be underestimated. However, in a negative scenario we only see a limited risk of liquidation. This is because of the value in the technology and the know-how, which is manifested in more than 100 patents, and the tax loss carryforwards of at least SEK 270 million. Anoto has built up a technology expertise during almost 20 years and even if the Company itself is not able to capitalize on this, some other player might have that potential. As much as 30 percent of Anoto s shares are held by industrial partners of Anoto. In addition, Panasonic and other large customers have spent a lot of time and money on the partnerships with Anoto. In conclusion, we believe that several players would be interested in acquiring Anoto, or perhaps, parts of the Company. We estimate that Anoto will reach break-even around and that sales will grow with a CAGR of 17 percent , and 13 percent during A digital writing pioneer in transition As mentioned, Anoto is in a transition phase. The company s strategic change can best be described as moving from digitizing of forms, mostly for governments, to the industrial design industry where Anoto s technology is more advantageous. This is done by extending the offer to editable screens and interactive walls. The business model is made more efficient by focusing on partnerships with large OEM-companies. Large OEM:s should result in higher sales volumes and lower operating expenses, meaning that the Company will gradually turn losses into profits. However, these OEM-deals tend to have a long duration until closing, and is then followed by a lengthy product development phase before the fully developed products are sold. Experienced management and owners Working for the principal shareholder prior to becoming CEO of Anoto, Stein Revelsby, has more than 10 years experience from the industry, which also shows in his knowledge about competitors and the market etc. Management s strategy in the past has been far from flawless. However, 5

6 with the strategic changes, management s increased awareness of the financial situation and focus on cost cutting, we believe that Anoto s plan for how to increase sales volumes is a solid first step. Since three partners and customers hold 30 percent of the shares in Anoto, there is a lot of industrial competence on board. A competitive product Anoto s pen is equipped with an embedded IR camera that instantly takes digital snapshots of Anoto s microdot patterned surface. The pattern technology determines the exact position of the digital pen while it moves across the surface, meaning that the writings is recorded. The dot pattern can be printed on any material, such as paper, screens or interactive walls. The two toughest competing technologies are p-cap (projected capacitive) and EMR (electromagnetic resonance). P-cap has in general the best capabilities and the most promising outlook, but the screen making part is expensive and the performance on larger screens is not as good as Anoto s technology. EMR comes at a lower cost than p-cap, but requires additional sensors, which decreases the precision of the technology. Advantages compared to competing technology which could provide value for creative high end users, such as photographers, designers, engineers etc. Interesting value proposal for the industrial design industry Anoto s first two competitive advantages are interoperability and precision. Anoto s pattern makes it possible to use more than one pen per screen as well as using one pen on different screens. The good precision through the whole screen is a result of Anoto s pattern. Competitors, on the other hand, does not have the same precision, when the pen is used at the edges of the screen. In addition, Anoto provides solutions for transmission from paper to interactive walls as well as small and ultra large screens, which is a completely unique solution. We believe that these three benefits in Anoto s technology provide value for the high end users, especially in the industrial design industry. A more efficient business model The first one of Anoto s two business segments, Enterprise Solutions, is stable and on average it generates a smaller profit, according to Anoto. Enterprise Solutions focuses on digitizing forms and capturing data with help from digital pens. About two thirds of the sales of 2013 came from Enterprise Solutions, but we expect this relation to decrease going forward. The reason for the decrease in Enterprise Solutions, is that the future of Anoto lies in the second segment, Technology Licensing. Anoto s new sales strategy is to develop and sell pens directly, as well as selling pen- and software components through licenses, by partnering up with a few large OEM-companies, instead of, as before, having over 160 small partners in Enterprise Solutions. Anoto will, due to this business model, continue to get the Company s revenue from a mixture of hardware, software, nonrefundable engineering, licensing- and royalty fees. 6

7 Growth possibilities in Technology Licensing Historically, Anoto has had a hard time finding a market for the Company s products. Today however, Anoto has four partnerships in four different segments within Technology Licensing that has large volume potential: Editing on screens, Interactive walls, Education and Voting. Anoto s solutions for writing on screens and interactive walls provide value for the creative users, such as photographers, engineers, architects, moviemakers etc. We believe that the reference from the Panasonic deal will lead to more contracts with other large OEM:s. Anoto has interesting partnerships within education (TStudy), in regards of interactive learning solutions, and in voting (Smartmatic) as well. In voting, Anoto s solutions can be used to produce digital and analog copies of the voting results, which provide a large potential, if the security issues can be solved. A large market with viable niches for Anoto A large and growing market for active pens Touch Display Research estimates that the total market for active pens in 2014 will reach close to USD 1 billion, and that the market will grow to USD 4.2 billion until These numbers might sound a bit too optimistic. Nonetheless, it is evident that there is room for Anoto in this market. Viable niches available - but intensive on-going research The active pen technologies is today dominated by the p-cap technology, whose dominance is expected to increase in the future. Geoff Walker at Intel has, for example, stated that p-cap, if costs can be lowered by using metal mesh, is a threat to all other technologies. However, there will still be some viable niches left (see appendix 2), which we believe can be a good opportunity for Anoto. Another threat is the large investments in the active pen field, from for example Apple and Samsung. These two might become future competitors. But tough competitors A changing competitive landscape The largest player on the market is the Japanese Wacom who we estimate holds the majority of the market. Wacom has during a long time had a strong hold on the corporate market. However, the EMR technology of Wacom has a better outlook in retail, which could be why Wacom is positioning the Company s new products for retail. Wacom focusing on retail, gives an opening for Anoto. The second toughest competitor is the Israeli company N-trig, whose p-cap technology has been successful recently. In the spring of 2014, N-trig kicked out Wacom from Microsoft. An important difference from Anoto is that N- trigs p-cap is only compatible with screens that have p-cap controllers, indicating that Anoto s technology has an advantage over p-cap. P-cap active pens is also sold by the American billion dollar revenue company Atmel. Besides these three stronger competitors there are a few small players in the market with different technologies. We agree with Intels Geoff Walker, who argues that there is no perfect technology, but 7

8 different technologies with various advantages and usage areas (see appendix 2). A motivated value of SEK 0.33 per share Valuation In our base case scenario we have estimated a CAGR in sales growth of 17 percent in years and 13 percent during As for EBIT, we expect that the EBIT-margin will turn to positive around , then be on average 10 percent during , and hereafter 14 percent for In summary, this corresponds to a value of Anoto in base case of 0.33 SEK per share..and in our scenario analysis the range is from SEK 0.15 to 0.7 Room for a lower discount rate when Anoto deliver on the promises In our pessimistic and optimistic scenario respectively, we estimate the value to 0.15 SEK and 0.70 SEK. In addition, our relative valuation indicates a potential upside of percent. In summary, the Anoto share, if the transition is somewhat successful, provides a good upside. Our estimated downside is limited, even though there is a, not negligible, possible need for further capital raising. Key catalysts The major catalysts that will move Anoto stock upwards is large deals with major OEM-firms and the approaching of break-even. Larger orders than expected could enhance the stock movement even further. There are also many players that have various incentives to acquire Anoto, such as owners/partners (Smartmatic, TStudy, SOLiD), partners/customers (Panasonic), IT-giants investing a lot in Anoto s field (Microsoft, Apple, Samsung) and competitors (Wacom). This provides an airbag if things go wrong and a potential, positive trigger, when Anoto starts to make profits. If Anoto would start to show continuous growth we have a lot of room to raise our, at the moment, conservative estimates and our Redeye Rating, which would lower our discount rate. Especially the later would significantly affect Anoto s value in a positive way. However, we request Anoto to perform and show sales growth before lowering the discount rate. The results of a lower discount rate alone, everything else equal, can be seen below: Sensitivity analysis - discount rate WACC 18% 17% 16% 15.5% 15% 14% 13% 12% 11% DCF-value Upside from current share price 9% 22% 35% 43% 52% 70% 96% 126% 165% Source: Redeye Research 8

9 Company Description History and position of today Anoto Group (Anoto) is a combined hardware and software company within digital writing, with a listing on Small Cap, Stockholm Stock Exchange since year Founded in 1996 by Christer Fåhraeus, the Company is a pioneer within the digital writing area, even though the Company has never made profit. Owing to over SEK 2,2 billion in capital raised, from a large number of rights issues, the Company is still alive. Nevertheless, Anoto is now in a phase of major transition. The Company has recently implemented a cost cutting program and are currently raising SEK 68 million in a rights issue. Anoto executed three rights issues during 2013; one with the intention to acquire DevelopIQ. The other two were made to bridge the financial situation. The largest change, however, is in the strategy. Anoto has during the years sold millions of pens in aggregate, but usually no orders larger than a few thousand pens at a time. The new strategy of Anoto is to partner up with major players, such as large OEM:s, to identify and address large volume segments. CEO Stein Revelsby refers to this as elephant hunting. Anoto already has five potential elephants, but we believe there is more to come. New products, for a new and more suitable target group Anoto s transition Anoto s strategic changes can be summarized as follows: 1. New target group - from digitizing of forms to the industrial design industry Anoto s technology is more advantageous and has a better fit for the high end users (see the product summary on page 16) 2. New, wider value proposal - from just paper solutions to extending the offer to editable screens and interactive walls Writing on screens and interactive walls gives an extra dimension to the industrial design industry. 3. New and more effective business model - from selling pens via 164 partners to hunting large OEM elephants As aforementioned, large volumes will come with OEM deals. Anoto is down to 30 partners in Enterprise Solutions, which indicates that the Company s sales activities is more efficient. 4. Cost discipline - from SEK 178 million in operating expenses to SEK 144 million Anoto do have cost discipline, unlike what many thinks. The way to break-even is instead through increased top line. 9

10 In the graph below, Anoto s rolling 12-month sales is related to the operating expenses. Anoto s sales still does not cover the operating expenses (OPEX) of SEK 36 million per quarter, but OPEX are on the way down, since Anoto is continuing the cost cutting program the Company launched during From Anoto s statements we assess that the targeted OPEX level will probably not be lower than SEK 31 million a quarter (including depreciation and amortization). Nevertheless, this means that the profitability must come from increased top line. The sales trend, however, also shown in the graph, is declining. Anoto is in other words a turnaround case, since the market, judging from Anoto s share price, is expecting continuing negative growth. Sales & Operating expenses* R12M (SEK million) The operating expenses are on the way down, indicating that Anoto has cost discipline Sales OPEX * = Includes depreciation and amortization Source: Anoto, Redeye Research Historically Anoto started licensing its technology to Nordic electronic giants such as Ericsson and Nokia which produced both pen and software for the end-customers. Through strategy and environmental changes in the business, Anoto then started to consolidate up towards the end-customers. The acquisition of the Maxell digital pen division in 2006 enabled Anoto to sell pens to end-customers directly. The sales of 2013 were SEK 144 million, with a net loss of SEK 168 million, including a goodwill impairment of SEK 69 million. The total number of employees in Anoto is today about 100. Sales all over the world Anoto Group is a global company with subsidiaries in four countries (Sweden, USA, Japan and UK). Main offices are located in UK and Sweden. The head office is in Lund, Sweden. Anoto has a worldwide network of partners selling their products which is reflected in the diverse set of 10

11 countries from which sales originate. Less than 8 percent of sales originate from Sweden. The largest markets are Europe (mainly UK) and the Rest of the World (see the pie chart on the next page). Sales per region 2013 (SEK million) Source: Anoto Sweden EU (excl. Sweden) USA Japan Asia (excl. Japan) Rest of the world Management and Owners The management and the ownership is of particular importance in a company, like Anoto, that does not yet make profit and has a weak balance sheet. It provides either an additional risk or can make the business less risky. Experienced CEO CEO, CFO and management CEO Stein Revelsby was, prior to his CEO position, working for one of the main owners of Anoto, in his role as CEO of the private equity firm Norden Technology A/S. During 2011 Revelsby replaced the former CEO of Anoto Torgny Hellström and left his position in Norden Technology. Prior to that, Revelsby had been in the investment banking and private equity industry since Thus, Revelsby has no direct operational experience from the, customer based, digital writing area prior to Anoto. However, being the CEO of Norden Technology for more than six years, Revelsby has now closely been involved in Anoto s operations for more than a decade and knows the market. Revelsby s holds shares, which corresponds to 0.2 percent of the shares in Anoto (prior to the upcoming rights issue in November 2014). In addition, Revelsby owns 4.6 million options. and CFO Dan Wahrenberg has been the CFO for Anoto for 4 years, but prior to this he has held positions as controller and financial manager in the Company since Previous experience includes a career as an accountant at Arthur D Andersen, controller at Akzo Nobel and supervisory accounting within Unilever. Our conclusion is that Wahrenberg has great experience from Anoto as well as other relevant positions. Wahrenberg owns less than 0.1 percent of the shares in Anoto. 11

12 In the large management team of 10 persons, 3 of the people have been employed after 2012, and 3 others are consultants. An example of the long years of experience in the management team is Dennis Ladd, Anoto s Chief Strategy Offer, who worked in product development at SAP for 9 years. After SAP, Ladd was Chief Technology Officer and CEO at Streamserve for a total of 11 years. The executive team, except CEO and CFO, holds less than 0.1 percent of the shares in Anoto and only three of the members hold any shares at all. The ownership and the board members The ten largest owners of Anoto is shown in the following table. It is important to have in mind that these are the figures prior to the rights issue in November 2014, which is subscribed to 90 percent by underwriters. Largest shareholders Share capital & votes ( %) SOLiD Technologies Inc Mugica Antonio 9.1 Aurora Investment Ltd 6.7 Avanza Pension 4.6 Nordnet Pensionsförsäkring AB 2.9 DoubleDay Holdings Ltd 2.8 Home Capital AB 2.6 Pine AS 2.1 BK Julius Baer & Co Sweden Main AC 2.1 HITACHI MAXELL 1.9 Largest shareholders 48.5 Source: Anoto Strong ownership with three business partners holding 30 percent of Anoto s shares Three customers and partners, TStudy (by TStone Corporation), SOLiD Technologies and Smartmatic (by Antonio Mugica) indirectly owns a large stake of 30 percent of Anoto. We believe it is a good thing that Anoto s board and ownership structure comprise of industrial knowledge. SOLiD Technologies is a part of the joint venture Pen Generations together with Anoto and TStudy (TStone Corporation). Pen Generations was formed in 2011 with an aim to develop and sell digital pens through Anoto and TStudy, in Asia and mainly China. In the board of Anoto, Antonio Mugica represents Anoto s partner Smartmatic where he is the CEO and board member. He personally holds, as seen in the ownership table above, 9.1 percent of the shares. Aurora Investment is owned by TStone Corporation. TStone are represented in Anoto s board by Andrew Hur and Joonhee Won. Hur is the managing director of TStone, while Won is the CEO of the same company. Hur and Won hold no shares in Anoto in person. 12

13 Chairman of the board since 2010 is Jörgen Durban. Durban is a former partner and CEO of the leading law firm Linklaters Nordic. Durban holds 0.4 percent of the shares in Anoto. In total the executive team and the board members hold 9.8 percent of the Company, which indicates a share owner friendly stewardship, according to Redeye. A questionable earlier strategy Redeye s conclusion regarding Management and the board Despite the technical expertise in Anoto, management has not been successful in the past, judging from Anoto s financial figures. Partly this is, according to us, because of management s strategy. As late as 2013 Anoto was still focusing on the segment Enterprise Solutions (previously named Business Solutions) and was making acquisitions, in order to move up the value chain. Thus, it was somewhat surprising this summer when Anoto was in negotiations to sell their Enterprise Solutions segment. The negotiations were terminated since Anoto did not receive a satisfying price. The low offered price indicates a bad growth outlook, and thus provides additional evidence that Anoto s earlier strategic path was wrong. Looking back at the financial reports we are a bit surprised by the serenity in the reports regarding the financial situation, as if there was never any problem with the capital structure and the balance sheet. It seems that the board have been too relaxed about this important issue. However, we feel that management and the board now are more serious when it comes to the financial situation, which is also seen in the announced rights issue and cost cutting programs. however Management seems to have learned their lesson The we-inspire acquisition, in the spring of 2014, marks the first step in Anoto s new strategy. We believe that Anoto s Management has, finally, came to the conclusion that a viable technology is not enough to compete and reach out to the customers. Service and sales are, on the other hand, the specialties of the large OEM firms, which makes Anoto s elephant hunt a logical consequence. Anoto s current Management, would, in conclusion, if these lessons are truly learned, be a better solution than any other. 13

14 Product summary In this section, we describe Anoto s technology together with other competing technologies. The sole purpose is to compare the different technologies. For more information on the competitors, their positioning etc., see the competitors section on page 32. Digital pen technologies Digital pen technologies can be classified as in the graph below. Anoto s technology is a so called active pen. In appendix 1, we go through the differences between these technologies in detail. We highly recommend the reader to study the different digital pen technologies in order to understand Anoto s competitive advantages. Digital pen technologies Source: The Society for Information Display Anoto s camera records everything that is written with the help from a microdot pattern Anoto s Products Anoto s active digital pen solutions turns traditional handwritten information into modern digital data. While the user writes, Anoto s builtin infrared camera 1, instantly takes digital snapshots of the, for the eye almost invisible, microdot patterned surface. This in-house developed technology enables the pen s image microprocessor to determine the exact position of the digital pen while it moves across the surface, meaning that it accurately records what is written. This unique information can be combined by Anoto's partners within handwriting recognition, to make an editable text result. The dot pattern is unique and can be printed upon the 1 The camera technology that Anoto and their customers within the Technology Licensing segment use to manufacture their products is based on an embedded CMOS-camera. (CMOS is an abbreviation for complementary metal-oxide semiconductor.) 14

15 surface of any material, for instance screens, walls and paper. The pen's structure Source: Anoto The combination of the pattern, the IR-camera and a pressure sensitivity tip generates the data required to transfer analog writing to digital text. All data is retained in the pen s memory. A digital pen can store up to 50 full A4 pages of handwritten data. Once in digital form, the captured data can be sent via Bluetooth or a USB-port to different devices, such as computers or mobile phones. Different pens serve different purposes, as for example the Panasonic screen pen, is used in the Panasonic 4k to write on the screen. In some cases the product is simply a variation of the regular pen, but produced by a license company, such as Livescribe. Software associated with the pen Together with the pen, add-on software services are bundled, such as the newly launched Live PDF, which simplifies analog to digital sharing between different parties. Other bundles include Live Forms and Live Enterprise which is used to input values from the analog ink correctly to electronic forms. Traditionally licensing partners have developed their own software. Livescribe for example, uses other software than the above examples. It is only in recent years that Anoto has developed software associated with the pen. The software is now sold as part of Enterprise Solutions. 15

16 The C-pen The C-pen is used to scan printed text and numbers into a digital format. The usage areas are scanning OCR number, transcribing data into business systems and TTS (text-to-speech) applications. The C-pen is still a profitable product, but sales are low and decreasing. We therefore expect that the C-pen will be phased out in due time. Suppliers and materials For the suppliers and the materials in the products, please see appendix 3. The technology compared to the competitors In the table below the technology of Anoto s pen (microdot pattern) and the other most common technologies are put in relation to each other: Pen- and touch technologies Technology P-cap Microdot pattern Optical IR Laser EMR IR LED light pen Major advantage Multi- Inter- N/A scales up to Low cost N/A operability, touch precision 140' Major flaw High screen High pen cost Lower accuray than N/A Perfor- No pressure cost, p-cap mance sensitivity no inter- Higher latency than operability p-cap Used by N-trig Anoto N/A IsiQiri Wacom idti MSFT Sharp Atmel Pen tip mm 1 mm, real pen 4 mm N/A N/A 1.9 mm N/A Sense pen/finger Both Pen Pen N/A N/A Mixed N/A Battery in pen Yes Yes Yes Yes Mixed Yes Available in large Low Low volume Mainstream Emerging Mainstream Emerging format today Volume 5 year prediction Dominant Viable nisches increased reduced N/A Dominant N/A within the large format large format in small creative decreased increased format industry desktop small format (retail) Source: The Society for Information Display, Touch Display Research & Redeye Research Redeye s conclusion - Anoto s competitive strengths Anoto s three major competitive advantages are the following: Anoto s technology can be used in every screen 1. Interoperability and ease of integration Anoto s pattern makes it possible to use more than one pen per screen as well as using a pen on different screens. In a meeting Anoto therefore makes it possible for people to bring their own device. 2. The precision and is the most precise In contrast to the competitors, the performance is the same regardless of where on the screen the user writes. This is due to Anoto s pattern, which fills the whole screen. Competing technologies has not as good precision in the corners of the screen. 16

17 Precision is an important factor in the high end segment, such as the industrial design industry. Anoto s pattern technology scales good and easily in size and is thus cost effective. The larger the screen, the more advantageous is Anoto s technology. A unique paper-to-screen solution 3. Transfer from paper to screen Anoto provides solutions for transmission from paper to interactive walls and small and ultra large screens, which is a completely unique solution. For a more detailed description of the competitor s technology in relation to Anoto s, please see the competition section on page 32 and appendix 1. 17

18 Business model Anoto s business is divided in two main areas: Enterprise Solutions (previously named Business Solutions) and Technology Licensing. Focus is now less on digitizing forms. Enterprise Solutions focuses on delivering solutions in digitizing forms and capturing data with help from digital pens. The business model is indirect, meaning that marketing is done through partners, such as system integrators, software developers and IT consulting firms. Enterprise Solutions is a stable part of the business, and on average it generates a smaller profit. However, Enterprise Solutions is not where the revenue growth is pursued or expected, to the same extent as in Technology Licensing. and more on OEMpartnerships The future of Anoto instead is Technology Licensing. Anoto s new sales strategy is to develop and sell pens, and pen- and software components by partnering up with OEM-companies. In the licensing part of this business, partners, such as Panasonic, develops and produces products such as active pens based on Anoto s technology and assistance. The sales per segment of Anoto in 2013 was as the graph below, but we expect that in 2016 sales of Technology Licensing will be higher than that of Enterprise Solutions. Sales per segment 2013 (SEK million) Enterprise Solutions Technology Licensing C Technologies and other Source: Anoto Mixed types of revenue Anoto thus makes its revenue from a mixture of hardware, software, nonrefundable engineering, licensing- and royalty fees. The graph on the next page shows Anoto s different revenue channels on average, on a rolling 12- month basis. 18

19 Rolling quarterly average sales per product group (SEK million) Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Licenses Royalty Digital pens Non-refundable engineering Other Source: Anoto For each pen sold Anoto receives either a revenue share, of USD per pen, or a royalty fee, USD 3-7 per pen. When Anoto license the technology there is usually a NRE (Nonrefundable engineering) fee of SEK 1-30 million and upfront license payment for future production. The sizes of these fees varies a lot depending on the customer. The revenue for the software addon services, such as Live PDF first has an upfront fee, and then a softwareas-a-service based compensation model that we expect to be around USD annually. The retainer part of this business was launched as late as 2013 and is therefore low at the moment. Increased sales with volume commitments will lower the gross margin Since a typical licensee customer carries the sales costs and most other costs, the gross margins should be higher in Technology Licensing than in Enterprise Solutions. However we believe that Anoto will sacrifice gross margins for volume commitments from the big elephants, meaning that gross margins in Technology Licensing is expected to decrease as sales go up. This is seen in the gross margins graph on the next page. 19

20 Gross margins 90% 85% 80% 75% 70% 65% 60% 55% 50% 45% Enterprise Solutions Technology Licensing Total gross margin Source: Redeye Research, Anoto Anoto s pens and technology can be used in countless of situations, as can be seen on the image below: The Anoto pen's diverse range of usage Source: Anoto Historically, one can say that Anoto has had a hard time finding a market for the products. It has, in other words, been a bit uncertain, where the end customers are. We will therefore, in detail, discuss the opportunities and customers in the following two segments, Technology Licensing and Enterprise Solutions, one by one. 20

21 Technology Licensing As mentioned, the growth strategy of Anoto is to go to market with strong OEM-partners within the Technology Licensing segment. This segment had net sales of SEK 42 million in 2013, (SEK 47 million in 2012), which represented 29 percent of total sales. Editing on screens is the priority number one Within Technology Licensing, we have identified five important potential growth areas that include the much favored elephants. 1. Professional editing on screens This is the single most important sub-segment, where we believe Anoto s R&D is focused right now. 2. Interactive walls We believe that Interactive walls is the second key segment, since the walls can be combined and interact with editable screens. but the other partnerbased solutions are good growth prospects too The three other sub-segments are all partner-based. These segments could generate large revenue, but the success is more based on the partners will and skills, than on Anoto. 3. Education 4. Voting 5. Digital notes (for retail) The five sub-segments are now presented in the following, in the order of our estimated best growth outlooks first. In the end of the section we summarize the potential for all five sub-segments. A valuable offer for industrial designers Professional editing on screens With an active pen made by Anoto s technology, the user can naturally edit and write on the screen. The active pen is of value for the industrial design industry, such as engineers, photographers, designers and architects, among others. These groups want to draw, with high accuracy, on the screen of the tablet while being at home or somewhere else. If the user is in a remote area his or her writings and drawings will appear on the screens of the workgroup immediately, allowing discussions about design and blueprints. Panasonic earlier this year launched their Panasonic 4k tablet for the professional editing screen market. The tablet is sold in retail for USD 6,000 and the Anoto pen will be sold as an option for approximately USD 370. However, we assume that the prices in B2B-sales are lower, and will be even lower with increased production volume. The professional editing screens are very different from the touch screens consumers use, (such as the Samsung Galaxy tablet or the Apple Ipad), in regards to purpose, functionality and price. 21

22 Panasonic's 4K tablet with an Anoto pen Source Panasonic A large OEM-deal is expected before the end of 2014 Even though Panasonic is the third largest electronics manufacturer in the world this is not a high volume deal. A rough estimate would put the possible market up to at most 100,000 tablets, meaning that Anoto need to find additional OEM-partners, which the Company is in a process of right now. In this search Panasonic is no doubt an important reference customer for Anoto which can shorten the negotiation period. In the end of the summer 2014, Anoto completed a prototype for another large OEM. We are expecting a deal (or, less likely, termination of negotiations) before Christmas this year. The reason is that we believe that this OEM would like to present new products on the Consumer Electronic Show (CES) fair in the beginning of next year. Based on Anoto s competitive strengths (see page 16) we also believe that more OEM partners is a likely outcome. There are a lot of potential customers, such as Sharp, Sony, Dell, Microsoft, LG, NEC, Opti, Fuhu etc. Many of the large OEM s have interesting positions in automotive, medicine, construction etc. We believe that Anoto would be able to expand into some of these, or other areas within digital screens. In these segments the potential could be a lot larger than with Panasonic. Interactive walls During the spring of 2014, Anoto bought 25 percent of the shares of weinspire, a developer and seller of technology for interactive walls. Anoto has, as a part of the deal, set up a 100 percent owned we-inspire subsidiary in the US, where we assume Anoto will receive all of the revenue. In the rest of the world we-inspire will receive all the markup on the cost of goods sold, while Anoto s revenue is depending on the amount of pens sold. Anoto retains an option to increase the position to 51 percent gradually until The company we-inspire sells products to set up big interactive walls and states that almost any place can be transformed to a creative team space. The system is based on Anoto s pattern technology and costs about USD. Five key components are needed:, a pc, we-inspire s paper-like but highly durable projection screen, we-inspire s apps and one or multiple projectors to display the content. The fifth element in the offering is Anoto s 22

23 we-inspire is a logic acquisition digital pens, which make it possible to use traditional paper as well. Even the smallest analogously written sketch can be captured and transformed into a billboard sized product. For Anoto these large sizes is a good fit because of Anoto s technology who promises precise writing and drawing with good scaling capabilities. Thus, we-inspire allows multiple users to interact through the use of different devices. The users can for example interact by using laptops, tablets or Anoto s digital pens. As a result workgroups can collaborate by drawing, writing, making notes, and sharing import documents, pictures or movies. Interactive wall from we-inspire Source: we-inspire In the press release of the deal, CEO Stein Revelsby, stated that the weinspire technology is perfect for R&D divisions and the media industry where work is done on storyboards for the making of movies and TV shows. The CEO of we-inspire, Jakob Leitner, in the same press release, said he has experienced that the creative industry still uses traditional whiteboards, with low ability to archive and share information and limited writing space. Skanska already use about 70 systems in the company s headquarter in Stockholm. Skanska has for example 6,000 offices around the world, which gives a hint of the sales potential. In addition, multinational companies such as LEGO, BMW, Procter & Gamble and Daimler are currently using the products, indicating that a lot of segments could be of interest. In the automotive industry, for instance, there are a lot of creative work, but the same of course goes for every product-designing intense market. There are 4 million conference rooms in USA, meaning that the total (American) market, with a price of USD 40,000, is enormous. Penvue, a competitor, states that the US interactive whiteboard market is USD 1.8 billion. 23

24 Education In education, Anoto s pens are used for interactive learning, in primarily TStudy s solutions. Students can, with TStudy s Symphony write on paper, and the text is directly transferred via Bluetooth to a big screen. The teacher can monitor the learning process by following the steps of the student s reasoning. The students can also compare and learn from one another s problem solving methods. All notes are stored in a notes archive for possible future educational use. TStudy is a South Korean company providing products and solutions for education. TStudy and Anoto are parts of the joint venture called Pen Generations, who will address the huge Chinese market. Pen Generations holds a development license from Anoto. In September 2013, TStudy was given an exclusive license to market Anoto based pens in China. The license gives TStudy a possibility to sell 100,000 pens during a three-year period. In the contract there is also an obligation for TStudy, meaning that TStudy needs to order 100,000 pens during 2014 to maintain the exclusivity. We estimate that Anoto will get a royalty of USD 3-5 per pen. The deal was made in connection to a contract that TStudy signed with China Publishing Group regarding delivering digital pen solutions. In addition to TStudy there are other partners in the education sector, such as DNP (Dai Nippon Printing) and PLUS. A large education market due to the need to digitize Asia We expect the potential in the education sector to be relatively high, although we believe until now mostly elite schools have bought the systems. TStudy is currently expanding in China, since there is a larger demand and need to digitize Asia compared to the western world. This is because Chinese, Japanese, Korean and other Asian languages are sign based. In august 2014, TStudy secured financing of USD 6.5 million for further expansion in China. Automatic voting systems In voting, the process need to be safe and transparent and at the same time fast. This is a good opening for Anoto, since there are great advantages in speed when voting is digitized. At the same time we believe that a paper copy is necessary from security reasons, which Anoto also can provide. Anoto is in an alliance with a global USD 400 million revenue company In September of 2012, Anoto signed a contract worth EUR 3 million with the global company Smartmatic, to produce unique government solutions for worldwide use. Smartmatic, founded in 2000 by Antonio Mugica, is an electoral automation company, who has registered 2.3 billion votes in total. Smartmatic s three segments are: sensus, ballot and registration of people. Smartmatic is not a public company, but in interviews it has been revealed that sales where around USD 400 million in The main markets are the emerging markets. Recent projects have been in Venezuela, The Philippines, Brazil, and Colombia. 24

25 Smartmatic sells or rents out a complete kit of voting hardware and software to governments. One part of Smartmatic s solutions is the epen, for digital capture and transmission of count reports. The epen uses a secure pattern who allows electoral authorities to trace the time at which count the report data is captured, by what poll worker and from which physical print-out. Smartmatic s objective is to build trust, make election results more credible, and provide a timely delivery of election results. There is one step in Smartmatic s solutions where the voter sign with his or her name. It is probably in this step that Anoto s technology will be used. 40,000 and 82,000 voting machines used in Venezuela and the Philippines, indicating a huge market It is not clear how many sold pens that voting systems can generate, but in the 2013 Venezuelan president election, a total number of approximately 40,000 voting machines where used. In the Philippines on the other hand, machines were bought. The populations in Venezuela and the Philippines are 30 and 98 million respectively. In Brazil, for example, where Smartmatic previously has done business, the population is more than twice times larger than the Philippine one. It is nonetheless not certain how many pens per voting machine that is needed. Our estimation is that the need must be at least 1-5 pens per machine. but serious security issues to solve first However, this elephant is not without uncertainty. Smartmatic experienced troubles in the 2010 Philippine election. Because of this, the chairman of the authority responsible for automatic voting, Commission On Electronics, advocated that Smartmatic s voting machines should stop being used. 2 The problem seems to be that the software should be able to prevent external security breaches as well as intern manipulation of the software itself. In the Netherlands in 2008, electronic voting machines were banned after activists showed that these machines could be tampered with. The year after, in Germany, the results from the voting machines could not be verified, which led to a decision to stop using the machines. Following these bans, Belgium is the only country in Europe today with a significant use of voting machines 0f in total machines. 3 The attitudes towards electronic voting is of course problematic, but at the same time a large opportunity for Anoto. With Anoto s strong position in handling transmission from paper to screens, voting officers can easily receive identical analog and digital copies. Anoto is therefore to us a perfect fit for Smartmatic s voting solutions, if the trust and security problems can be solved

26 Digital notes - for retail The typical end customer within digital notes is a college student or a professional taking notes. The American Company Livescribe sells digital pens based on Anoto technology, for this purpose. Livescribe s products are positioned to be used with iphones and ipads, and sold online and in Apple stores worldwide. When using a product from Anoto and Livescribe, the writings on the paper immediately appears on the tablet or the smartphone. Here the collected data can be converted to text and for example sent to the contacts of the address book in the phone. A Livescribe pen also includes voice recording, that can be used to record words that one do not have time to write down. By pressing a button in the note the recording can be played at any time. Livescribe sold about one million digital pens from when the company was founded in 2007 until Livescribe is a private company that does not disclose sales, but since a pen cost between USD average annual sales during should at least have been USD 15 million per year. The latest product, the Livescribe 3 pen, sells at a price of USD 150. We estimate Anoto s received royalty to be of approximately USD 6-7 per pen. Anoto also sells their own branded pen to the same segment globally via different partners, but we assess that the market potential outside Livescribe s network is lower. Redeye s conclusion on the Technology Licensing potential Most of the potential is in screens and voting On the graph, on the following page, we have been trying to estimate the separate potential for the five segments. We have also made assumptions of when we think that this potential could manifest. Please note that this is merely estimates of the maximum potential during best possible outcome. We are, in our financial estimates section, not including success in every one of these areas, but rather one of them. 26

27 Total potential within Technology Licensing 2014E 2015E 2016E 2017E 2018E Professional editing on screens Interactive walls Education Voting Retail Source: Redeye Research, Anoto Professional screens has the best outlook, but voting could prove to be a significant sales driver as well, later on. Education has a large market in theory, but is a long known opportunity, and we believe there is strong competition, while the low hanging fruit might be gone. Retail has previously been the segment with the highest pen sales for Anoto, but we believe that this segment will be rather irrelevant in the future. For the coming quarters it is nonetheless still of interest. The outlook for we-inspire is the most uncertain, even though there is a long list of prominent reference customers, due to the lack of insights in the contract between the two parties. 27

28 Enterprise Solutions Following falling revenues from Business Solutions (from now on called Enterprise Solutions) of 29 percent from 2012, Anoto, during the summer of 2014, considered to sell this segment. After failing to receive a reasonable price for this segment, negotiations were terminated in the beginning of September. Anoto, in the press release following the cancelled negotiations, stated that the Company would consolidate the operations within Business Solutions into a separate business unit, Anoto Enterprise Solutions. Anoto Enterprise Solutions will be based in UK under Anoto s subsidiary Anoto Ltd, and will continue to support the customers in UK and worldwide. UK health care is the most important market at the moment. Enterprise Solutions had net sales of SEK 89 million during 2013, which represented 62 percent of total sales. A typical business solution includes an Anoto pen, software associated with the pen and data transfer solutions. The most important market today is health care in UK. In December 2013, NHS England launched a GBP 100 million fund to procure innovative technology to support nurses, midwives and care staff, in order to improve patient care. The funds were divided so that GBP 30 million was spent during Q and GPB 70 million will be spent during The second allocation round of the fund will be in the fourth quarter of We expect that Anoto will benefit from this, in the same proportion as in the first quarter this year, where the effect was at least SEK 12 million. In our estimates, sales of Q will be positively affected by the NHS funds. In the statement from NHS there is a case study which points out digital pens, used at the Midwifery team in Portsmouth Hospital, as an example of innovative technology. 4 Anoto established presence in the healthcare sector in the UK through the acquisition of DevelopIQ, as late as May Prior to the acquisition, DevelopIQ had sold pen solutions to the Portsmouth midwifery (i.e. the same hospital that was mentioned in the NHS statement above) and up to other hospital trusts, of 170 trusts in total. At the time of the acquisition DevelopIQ had annual sales of GBP 1.7 million. but other market or market prospects are Sweden, India, Wales, Taiwan, Japan and Germany Except from UK, there are, as mentioned, other countries which use Anoto s digital pen solutions. There are several customers in Sweden and Anoto offers the Company s solutions worldwide through their partner network. Negotiations are at the moment taking place in for example India, Wales, Taiwan, Japan and Germany. Other important markets except health care include Banking & insurance and Field services. In banking and insurance, Anoto has already customers, in for example Taiyo Life Insurance Company in Tokyo and the Savings Bank of Kaiserslautern in Germany. As for the revenue outlook for Enterprise Solutions, the sales have, as mentioned earlier, an underlying stability, but have been in decline the last years. In our estimates we thus expect zero-growth for Enterprise Solutions

29 Market and industry outlook 94 million active pens to be shipped during 2014 Market size There is no proper, narrow or well-defined market for the products, but the technology is useable in many global markets, why the market potential in theory is huge. According to Touch Display Research, tablets and hybrid tablets will account for 50 percent of the revenue of active pens in This year they are estimating a shipping volume of 94 million active pens, which they believe will have a CAGR (continued annual growth) of 34 percent until year Estimated number of active pens sold (million) Active pens sold Source: Touch Display Research Wacom holds the majority of the market Wacom sold 43.5 million pen components in 2013, indicating that they are controlling the majority of the market. If Wacom this year grows with the same speed as the market, in Touch Display Research s prognosis, Wacom would sell 58 million pen components in If we assume that one pen component equals one pen, this corresponds to a market share of 62 percent, so at least 50 percent would be a reasonable estimate. This is probably the most relevant market for Anoto, since Anoto could go to the largest customers of Wacom and show the advantages of Anoto s technology to win over the users that are the most high-end. There are no available numbers for the rest of the 94 million pens being shipped. A good guess is that Anoto s Israeli competitor, N-trig, has a large stake here, since N-trig s active pens have been adopted by over 10 touch screen device models.5 We also assume that pens that comes with a notebook, such as Samsung Galaxy Note, is included in the 94 million pens. Touch Display Research estimates the market for active pens to go from USD 930 million in 2014, to USD 4.2 billion in Calculating with a penetration ratio of 1 percent, this would mean sales of USD 9.3 million and USD 41.7 million respectively. 5 Touch Display Research, Active pen technologies, supply chain and market forecast 2014 report 29

30 Active pen market forecast (USD billion) Total active pen revenue Source: Touch Display Research Combining the information from the previous two graphs we get a price per pen of USD 10 in 2014, which is estimated to decrease to USD 8 in We believe this is a result from the impact of metal mesh (see the following section). Given the uncertainty of what these fast growing numbers are based on and the non-verifiability, we do not pay so much attention to Touch Display Research s report. It is nonetheless important to remember that Anoto s investment case is not first and foremost a market growth play, but more a question of finding viable niches for the Company s unique technology. Our general conclusion is that, even though Touch Display Research s estimates would be exaggerated, the active pen market could easily feed a player like Anoto with sales of a few hundred millions (in SEK). The main issue would be to find and address the right segments, but we believe addressing Wacom s customers might be the best first step. An additional problem is that the market s segments have historically been volatile. Education was, for example, previously the most important segment, but has now been far surpassed by the corporate segment. Market trends In this section, we examine the most evident and important growth trends and possibilities outside of the announced partnerships, customers and current negotiations. In addition, we take a look at the threats in the industry. Technology outlook As for the consumer segment, Geoff Walker, senior advisor at Intel, argues that the passive stylus (passive pen), like Wacom s, is good enough to become mainstream. 6 Walker also concludes that the active stylus will 6 The Society for Information Display, The Fundamentals of Projected-Capacitive Touch Technology 30

31 Passive stylus will win and active stylus will remain a niche Intensive research going on among the big players remain a niche market product and in this field the p-cap technology will dominate (for more information about p-cap and its capabilities see appendix 1 and 2. There will still be some viable niches left, which we believe can be a good opportunity for Anoto, as previously discussed. However, one have to remember that Anoto is present in an advanced high tech area, where lots of research is made by for example Apple and Microsoft. Apple has ever since 2011 invested in developing active stylus s, which can be seen in over 30 patent filings. In the long run this means that Apple might be a future competitor. Samsung is also currently working on their own EMR technology, following their recent buy of 5 percent of Wacom. In addition, there are a lot of other technologies (see the matrix on page 16 and appendix 1), indicating that this is a research intensive area. A fair question is what Anoto can put up against Samsung s or Apple s financial muscles and large and brainy research divisions. In Anoto s favor is the fact that the Company has been completely devoted to these matters for almost 20 years time. We find it unlikely that, for example Samsung, would have the will to pay the same attention to this market as Anoto. A more reasonable, and perhaps cheaper, outcome for Samsung would be to acquire Anoto. and metal mesh is another threat Future metal mesh solutions will lower the cost for p-cap (see the appendix). Geoff Walker, stated that p-cap with metal mesh is a threat to all other large format touch technologies. Anoto s competitor N-trig in November 2012 joined forces with UniPixel Displays, Mutto Optronics Corporation and Fujifilm to develop metal mesh sensors for pen and touch input. 7 The lack of news during the last two years indicates that this task is not a walk in the park. The larger tablets trend We see a market movement towards larger tablets with HP s Envy Rove of 20 inches and Sony Vaio Tap of the same size. Dell has also recently released an 18 inch tablet. Fuhu is aiming to sell between to giant tablets to families during the next months. The idea is to prop up Fuhu's 20-inch or 24-inch Nabi Big Tab HD on the floor or lay it flat on a table or a bed. From there, a mix of children and adults can read interactive books, play well-known board games and paint across a digital canvas. 8 We believe that the fact that the tablet is easily moved from one room to another makes it a good TV substitute. According to Fuhu, all other OEM s are focusing on smaller units, but about million of the 200 million tablets sold in 2013 was bought by parents who wanted a family tablet, and got disappointed

32 Larger tablets is a clear trend Fuhu s wants to un-separate the family members using one tablet each, and gather them all in front of the same tablet. The tablet will come with dozens of board-style games, such as Candyland for a family game night, and chess and air hockey for multiple players. Videos and books opens up for "family movie night" and "story time" experiences. For Anoto, who following the we-inspire acquisition, focus on the industrial design industry it is especially interesting to see that some content here will come from Disney and Carton Network. Drawing, animation and movie-making apps are some of the creative using areas in Fuhu s tablet. Including a pen in this model or coming ones would therefore make sense. Due to the scalability and the precision in Anoto s technology, the demand for larger displays with better resolution is working in Anoto s favor. Competition Wacom s sales is 30 times higher than Anoto s Wacom The most evident competitor to Anoto is Wacom, a Japanese company founded in 1983 with global sales of USD 650 million and a profit margin of around 10 percent. Wacom has a market cap of around JPY 80 billion. The main brands of Wacom include Cintiq, Intuos, Bamboo and Inkling. Cintiq is a touch screen tablet adapted to digital pens and digital sketching. The Cintiq comes in different IOS`s and sizes. The smallest version is 13, costs around $1 200 and is used for sketching. The largest version, on the other hand, is 24, costs around $4,000 and is used for painting, 3dproduction and high-end photo retouch. The Intuos and Bamboo are both touchpads and serve similar purposes as the Cintiq but comes at a lower cost. During 2013 Wacom experienced an increasing demand for the Cintiq and lower demand for the traditional Intuos and Bamboo input pads. Wacom has also seen a lot of demand for their smart pen, the S-pen, which is included in the Samsung Galaxy tablet. Wacom s product, Inkling, transfers regular handwriting to a digitized format with the help from an IR-camera box that is attached on top of a note book. There are also other competitors that uses the similar technology, such as Myequil. The advantages for Anoto s pen, compared to Wacom s should, in theory, be less complex screen production and higher input resolution. However, the price for a 20 inch Panasonic screen is USD 6,000 while the Cintiq 24 inches costs USD 4,000, so the lower complexity is not reflected in the price. However, this can be due to many factors such as different price strategies or volumes etcetera. An important thing to remember is that Panasonic is focusing on B2B, where the price is probably lower than the retail price. 32

33 An inevitable question is why Wacom have been so successful. Wacom was a first mover, whose technology is proven to work. The Company today has customers all over the world. One explanation could be that Wacom has been successful at locking in customers by making them use their displays and other products. Wacom focusing on retail opens up the corporate market for Anoto Wacom has historically been strong in the corporate market, but recently stated that they are focusing more on retail going forward. Consequently, in April 2014, Wacom released new pen models, to capitalize on the smartphone trend. A plausible explanation is that Wacom has read about p- cap and other technologies and therefore knows that Wacom s technology will not remain state of the art within larger displays for very long. We assess that this repositioning makes sense since Wacom s technology has a good outlook for the retail segment. This could be an opening for Anoto to win some corporate clients from Wacom. Wacom is a very tough competitor for Anoto and its partners in all areas except enterprise form solutions. Wacom has proven that the field professional editing screens, is profitable and Anoto now aims to find space in this segment. Wacom has a war chest of approximately USD 200 million in cash, so if Anoto would come to be a real threat, Wacom might be a potential buyer of Anoto. N-trig and Microsoft Microsoft, in 2012, bought Perceptive Pixel, a leading company in the large scale multi touch and stylus display market. Perceptive Pixel used the p-cap for their pen s technology before being acquired, meaning that Microsoft now have access to p-cap technology. Together the two companies have created the world s largest touch screen. Microsoft recently replaced Wacom with N- trig In the spring of 2014 the Israeli, unlisted company N-trig kicked out Wacom s pens from Microsoft. This means that the Microsoft Surface Pro 3 tablet today includes a pen from N-trig, with the cost of USD 70. Other N- trig customers include for example Fujitsu. The active pens of N-trig have been adopted by more than 10 touch screen device models. 9 Microsoft s quick disposal of Wacom though indicates that next product might as well include a pen from for example Anoto in future products if Microsoft finds that technology better. An important difference from Anoto is that Microsoft s device and N-trig s p-cap pen is not compatible with other touch screens, since it uses a proprietary p-cap controller. In theory, Anoto s pen should also have better 9 Active pen technologies, supply chain and market forecast 2014 report 33

34 precision, since the parallax effect is lower. The reason is that Anoto s pattern is completely, compared to a p-cap controller. Atmel is another tough competitor with billion dollar revenues Atmel Atmel is an American billion dollar revenue company. In January 2014, Atmel released their p-cap active pen MaxStylus. In the press release the effects from p-cap was referred to as no additional sensor lay, which reduces costs. 10 However, the pen was then only available for up to 15.6 inch screens. Integrated Digital Technologies Inc. (idti) An infrared LED light-pen is used by the Taiwan-based Integrated Digital Technologies Inc. (idti) in their light sensing-in cell touch monitor. idti is together with the Japanese company Sharp the only two, to date, who are able to manufacture this kind of technology. The products does not yet support pressure sensitivity. In addition to pens idti also sells displays. idti states the same usage areas for the firm s products as Anoto. The Company s sales seems to take place in Asia, judging from the reference customers and the great lack of English information on the homepage. isiqiri isiqiri s Q-scope sensor technology, is a visible laser pointer that operates by remote control with a special light source in the remote or wand. The light is frequency coded and contains positional information. The sensor strip around the LCD sees the light and because of this the sensor strip knows exactly where on the screen the user is pointing. The information is translated into a visible cursor position on the screen. Q-scope works with styluses and from distance as well as every angle. In addition, it works together with any touch technology and under every light condition according to isiqiri. isiqiri states that the main usage area is within Smart TV interaction. However the technology can also be used within large LCDs in order to create interactive whiteboards by offering multi-touch, user-identifiable multi-pen interaction and multi-pointer interaction from distance. Q-scope can be used on screens up to 150 inches. isiqiri also declares that the Company is aiming for +40 inch screens in the multi touch market. Penvue Penvue is a small US competitor focusing on the US education sector. The technology is a pointing laser with combined pen and mouse, which in Penvue s demonstrations looks very similar to isiqiri s products. In a company press release of June 25, 2012 it was said that Penvue provides devices to disrupt the USD 1.8 billion interactive whiteboard industry. The

35 products enhances the functionality of existing projectors and large screen displays. Penvue states that this is a unique positioning to address the more than 80 million existing installations. The prices for Penvue s pens starts from USD 500 and range up to USD 800. Aver The Taiwanese based Aver, just like Penvue, delivers similar solutions as Anoto s partner TStudy, but differ in price. The price for Aver s products range from USD 100 to USD 150. Oasis Medical Solutions In any government procurement there is competition and the NHS procurement is no exception. One competitor worth mentioning is the Oasis Medical Solutions Company (Oasis). Oasis were recently awarded a 10-year contract to supply electronic whiteboards, dashboards, online clinical coding, real-time reporting and an option for self-service kiosks by East Sussex trust. In addition, Oasis has previously received contracts for North Staffordshire, Brighton and Medway trust. This is to exemplify that a threat to Anoto would be that trusts require a full-service provider, integrated with Enterprise Resource Planning, rather than an isolated form/digital pen solution. However, the largest competitive force in Business Solutions has probably not been the competitors, but different substitutes, which is the next part of this section. Substitutes There are also substitutes like regular pens. Regular pen and paper The pen and paper has survived several thousands of years, all the way into the digitalized age and it is easy to forget how superior this solution is, at times, compared to any digital solution. You can find a pen and paper anywhere in the world at no cost at all and the notes you wish to digitize can easily be summarized when there is a need. Or just typing directly in digital form Pure digital solutions A lot of the problems solved by the digital pen can also be replaced by other IT-solutions. One can for example use electronic forms instead of first typing it into analog and then transfer the data. Anoto has experienced firsthand that a more and more potential customers prefer a pure digital solution. Since a majority of computer users already have adapted to programs such as PowerPoint, Word and Excel the input required is completely different to that of the analog world. For example, you cannot sketch a PowerPoint in analog form and transform it correctly to a digital copy. This factor erodes the value that digitalization adds to the endcustomer. 35

36 Touch screens in general There are a number of companies supplying consumer friendly and business adapted touch screens. There is also a major acceptance by the general population to use different form of touch screens when there is a need to have the input digitized. The launch of the Apple Ipad and Samsung Galaxy, a few years back ago, had a serious negative impact on the demand for Anoto s Enterprise Solutions. 36

37 Financial estimates We have first estimated sales for Enterprise Solutions, year by year, followed by the same approach for Technology Licensing. Sales are also measured in its type of revenue, and then shown in a graph. Last, our detailed estimates include assumptions on the balance sheet, gross margins and the operating expenses. Enterprise Solutions sales estimates In Enterprise Solutions, the subsidiary Destiny has a solid revenue performance, which we estimate to be around SEK million annually. Anoto has had a market churn in Enterprise Solutions during recent years, which we believe will continue going forward. However, for the second half of 2014, that is Q3-Q4, we expect Enterprise Solutions sales to be in line with 2013, due to Anoto s expectations of sales in India, Taiwan and orders from Germany and the US. In 2015, sales will get a boost from the upcoming NHS procurement who starts in Q4, Anoto has, as mentioned in the Enterprise Solutions section, good access to 35 out of the 170 trusts of the fund. This equals a market for Anoto of GPB 14 million in In the procurement of the beginning of 2014, we expected that Anoto would win contracts worth of GPB 1.2 million of the total of GPB 6 million. From Anoto s financial report of the second quarter we do not know what the outcome was other than that it was at least SEK 12 million. Hence, for the second NHS round, we estimate that Anoto will win contracts of at least SEK 24 million in total. For 2016, when there is no more allocation to the NHS trust s, Anoto will have to find another large revenue source in this segment. We believe this can be tough, but estimate that at least one of the many countries and segments Anoto is currently working on will manifest as a large Enterprise Solutions deal. Anoto s CEO, Stein Revelsby, is, in addition, counting on a market recovery, but we are not including this in our prognosis. Technology Licensing sales estimates Sales in Technology Licensing has remained stable of over SEK 40 million a year during recent years, although this is not recurring revenue. With Anoto from now on mostly focusing on the many possibilities in this segment we find it hard to believe that sales would be lower than SEK 40 million annually, even though incremental sales can differ. Within these figures, as a margin of safety, we include education and note taking, although these two areas might have large potential in the long run. 37

38 The question is thus, what can Anoto deliver beyond SEK 40 million a year? We are expecting that Anoto closes a deal with the OEM-company that Anoto finished the prototype work for in late summer We reckon this deal will take place before Christmas, since the OEM:s would likely want to show off their new products on the CES fair in the beginning of The OEM-deal, will, according to our estimates, not affect the revenue of We estimate that the third quarter s sales will amount to SEK 11 million, just like last year. In Q4 we are, however, expecting an increase which we believe most likely will come from additional Panasonic orders for the Toughpad 4K. We are also expecting revenue from TStudy who, in September 2014, managed to secure capital for their Chinese expansion. The contract with TStudy obliges TStudy to order pens during 2014 in order to keep the exclusivity. In addition, we assess that there is a good chance smaller orders will come from either Smartmatic or Livescribe. We understand that Smartmatic also has submitted to volume commitments, to gain exclusivity. For 2015, we expect that the OEM deal will result in licensing revenue, one or two smaller test orders and perhaps also some consulting fees. If there would be no OEM deal, we still believe there is a good chance that Panasonic will fill these hole with one or two new products. In addition we believe that there is a good potential for revenue from a pilot order within voting (Smartmatic) during 2015, and that around 10 weinspire systems will be sold, including pens. As seen above, our assumptions are very conservative, with no other expected new customers, which is a reflection of Anoto s weak performance in the past. As for 2016, we are expecting a breakthrough, with large orders, from a new OEM, Panasonic or Smartmatic. Panasonic is one of the largest electronics companies in the world. Panasonic has invested a lot of time and money in the partnership with Anoto, and the fact that Panasonic is continuing to put together expensive advertising films for the Toughpad 4K verifies their commitment. Anoto states that anything less than volumes of would be a failure for Panasonic. Similar logic can be applied to the other OEM:s. Total Sales estimates In total we expect sales of SEK 142 for 2014 and SEK 165 million for 2015 (see the table below): Sales estimates (SEK million) SEKm Q1 2014Q2 2014Q3 2014Q Enterprise Solutions Technology Licensing C Technology & other Total Source: Redeye Research 38

39 We estimate that sales of pens, as in Anoto s new strategy, will be the driver of the revenue (see the graph below). Sales per product group (SEK million) E 2015E 2016E Licenses Royalty Digital pens Non-refundable engineering Other Source: Redeye Research, Anoto Detailed estimates In our estimates Anoto almost reaches break even on the EBITDA-level in 2016 (-3 SEK million). Instead, Anoto will start to generate profits in the beginning of The net financial income in total from Q until the end of 2016 amounts to SEK -72 million, compared to the rights issue in November of SEK 68 million and the cash and cash equivalents of SEK 13 million, SEK 78 million in total. This means that possibly Anoto need to raise further funds in the market, once again. We want to emphasize that the risk for dilution is not negligible, and that there are small margins separating survival from another round of capital raising activities. It does not take much for events to turn out ugly, which is clearly seen in in the table below. In 2014, our estimated equity ratio for Anoto drops to 27 percent. Balance sheet parameters (SEK million) SEKm E 2015E 2016E Cash and cash equivalents Net debt Equity ratio 38% 45% 33% 27% Source: Redeye Research If Anoto decides to buy back the convertibles of SEK 16 million in the beginning of next year, cash will be even lower. But buying back the convertibles will of course on the other hand decrease the net debt. 39

40 But then again, Anoto has a lot of room to surprise on the positive side. If this would happen, we could raise our estimates substantially, but first we require a positive outcome of the OEM-negotiations. We are also awaiting the first revenue from this partnership. Detailed estimates (SEK million) SEKm Q1 14Q2 14Q3 14Q Total sales Gross margin 67% 73% 63% 64% 58% 64% 62% 61% OPEX EBITDA Depreciation/Amortization Goodwill writedown -72 EBIT Net financials Pre tax profit Minority Net earnings Source: Redeye Research Gross margin Since we expect zero-growth for Enterprise Solutions, we estimate that Anoto will be able to maintain these gross margins on the same levels. In Technology Licensing, however, we are expecting that Anoto will sell a high volume of pens with lower margins. We assume that Anoto will sacrifice gross margins in return for OEM-volume commitments. This explains our estimates of a decreasing gross margin over time (also see the graph on page 20). For the 2014 numbers, it is also a reflection of our assessment that Technology Licensing will have higher sales than Enterprise Solutions, for the first time ever, in Q4. Operating expenses OPEX is estimated to gradually be lowered to the levels Anoto stated in the press release following the consolidation of Business Solutions in September In this press release Anoto argued that the quarterly OPEX of SEK 36 million would decrease with 15 percent. We believe that there could still be some more efficiency improvements, but on the other hand, we also think that Anoto possibly will need to make some investments in we-inspire. 40

41 Valuation In our valuation of Anoto we have first and foremost used a discounted cash flow valuation (DCF) with three different scenarios: our most expected base case, together with a pessimistic as well as an optimistic scenario respectively. In addition, we include a relative valuation with three different peer groups. Since Anoto s value is affected a lot by the discount rate we also perform a sensitivity analysis of the discount rate. Discounted cash flow valuation In all of our three scenarios in the DCF-valuation of Anoto we have used a discount rate of 15.5 percent, which is a reflection of Anoto s past performance, the uncertainty in the strategic shift and the overall quality of the Company. The new shares from the rights issue in November 2014 is included, assuming that this issue is fully subscribed. We have not taken into account any tax payments before year 2022, due to Anoto s large deferred tax assets. The terminal growth has been set at 3.5 percent. In base case we expect approximately one large order per year Sales are expected to grow with a CAGR 0f percent. and the EBIT-margin is expected to gradually approach 15 percent Which translates to a value per share of SEK 0.33 Base case Due to the long sales cycles in the OEM-business, as mentioned in the financial estimates, we expect a slow start for the OEM-business, meaning mostly licensing revenue from the customer s product development during 2015 and some smaller pen pilot orders. In 2016, we predict that Anoto will ship the first large OEM-order of pens, even though the order itself might come as soon as Due to this large order Anoto will, in our estimates, reach the critical sales volume for break-even somewhere around Thereafter, we are expecting two large OEM-orders in In average, after 2017, our prognosis includes one new OEM or some other large customer per year, while Anoto maintains, or slightly increases, the sales levels for the other customers. We are not expecting any recovery in sales in Enterprise Solutions, but a steady level of about 80 million a year. In total, this corresponds to a sales CAGR of 17 percent for For the years , we are expecting sales to grow with a CAGR of 10 percent. The EBIT-margin is expected to be -16 and -5 percent in years 2015 and 2016 respectively, on average 10 percent for , and 14 percent for The long-term EBIT-margin is estimated to 15 percent. The operating expenses are estimated to grow with SEK 2-3 million a year from The gross margin is expected to sink gradually from 64 percent to 53 percent, due to increasing pen sales. In summary, this would correspond to a value per share of SEK 0.33 or a market cap of SEK 240 million. We assume that the probability for base case to manifest is 50 percent. 41

42 In a pessimistic scenario Anoto will not find further financing. however the value is not negative since there are values in the deferred tax assets A pessimistic scenario (bear case) Anoto is in a position where the Company is making one last, big shot for glory. In a pessimistic, but reasonable scenario, if Anoto s strategic changes does not have the desired effects, we assume that the investors, after 14 years of losses, get fed up with losing money in rights issues and other types of financial bailouts. In other words, in our bear case, Anoto is not able to find further financing. Thus, we are not able to calculate a traditional DCF value of Anoto in our bear case since we can not assume a going concern. Now, normally, the value in this case, would be zero or negative. However, we believe that there are liquidation values in Anoto, which could be of interest for other companies. Anoto has, due to the Company s losses, been forced to raise more than SEK 2.2 billion since 2000, meaning that the Company, has large tax loss carryforwards (not recognized in the balance sheet), at least over SEK 270 million according to the annual report. Since the Company s losses most definitely has been suffered all over the world, the distribution of the tax loss carryforwards should be just as wide. These deferred tax assets, even though the total amount that could be used is unknown, provide a value for an acquiring company, especially for a global acquirer. and the technology In addition, Anoto has a technological expertise and a know-how which is manifested in more than 100 valid patents. As seen in the conclusion of the product summary and appendix 1 and 2, there is nothing wrong with Anoto s product itself. Anoto s failures in the past seems to be on a different level and more a matter of management s strategy and the financing. Therefore, Anoto s technology could likely be of use in someone else s hands. Obviously, the bargaining power, for a company facing liquidation is minimal or close to none. A countervailing force, on the other hand, is that there are a lot of potential rational acquirers of Anoto, meaning a bidding war is likely. The partners, TStudy, Smartmatic and SOLiD all hold large stakes of Anoto, and has invested a lot of capital and time in the partnerships. These would probably not want their large investments to turn to sunk costs. The same goes for Panasonic, with the difference that Panasonic does not own shares in Anoto. It would also, as earlier mentioned, make a lot of sense for Wacom to buy Anoto. Wacom s EMR technology has a strong outlook in retail. However Wacom is losing ground to N-trig on the corporate side, while Anoto s technology is more advantageous for the larger screens on the corporate market. In bear case we assume that the burn rate stays high, meaning that all capital is burnt within a year from now. Weighing all the aforementioned aspects, we estimate the sale of Anoto, or parts of the Company to be worth about P/S 0.5x or SEK 100 million in total. 42

43 In bear case the Anoto share could drop to SEK 0.15 If we discount the value with Anoto s Redeye Rating discount rate of 15.5 percent, our present value of Anoto in bear case amounts to 0.15 SEK per share. Our expected probability for bear case is 25 percent. An optimistic scenario (bull case) In our bull case, we expect a faster sales growth due to a more rapid and successful development in the OEM contracts. In general we assume an average of 2-3 larger orders from contracts with OEM:s or other big customers annually. In addition, we also believe that Smartmatic and TStudy, or possibly two other of the current five key customers within Technology Licensing will become so called elephants, ordering large pen volumes of pens or more. Everything else is estimated to be equal, compared to base case. During the period we expect a CAGR in sales of 17 percent, and for 2019 to 2022 we assume that the sales CAGR will be 11 percent. Following this growth Anoto would have sales of close to half a SEK billion in In bull case the share could, on the other hand, be worth SEK 0.7 With the same gross margins and OPEX as in base case, we expect operating margins of the period to reach an average of 14 percent. From 2019 until the terminal year the operating margins is estimated to be between percent, with a terminal year EBIT margin of 23 percent. Together these assumptions indicate a bull case value of Anoto s share of 0.7 SEK or a market cap of just above SEK 500 million. Our expected probability for bull case is 25 percent. Sensitivity analysis Our estimates are a reflection of the uncertainty regarding the execution of the new strategy. When, and if, Anoto starts to deliver continuous sales growth we would be keen to raise our estimates and lower the discount rate, meaning a double positive effect on the valuation. A lower discount rate would substantially benefit Anoto, as shown in the table below: Sensitivity analysis - discount rate WACC 18% 17% 16% 15.5% 15% 14% 13% DCF-value Upside from current share price 9% 22% 35% 43% 52% 70% 96% Source: Redeye Research It is important to understand the dynamics of Redeyes discount rate, which is based on our Redeye Rating. Our rating is a reflection of the company s qualities. As mentioned, Anoto s long period of failures severely affects our discount rate, but also provide a large potential for the future. Anoto s value is also affected a lot by our prognosis of when Anoto will turn profitable. Solid performance from Anoto and an earlier break-even point would also increase the value of Anoto s share substantially. 43

44

45 premium, but we assess that this difference should be a bit smaller than as of today. Key catalysts 1. Large deals with major OEM-firms or the current partnerships in Technology Licensing We have still not seen any major orders from for example Panasonic or the other partnerships. We believe that this will be the most important driver of a coming revaluation of Anoto. If Anoto s technology gets more references, from one more, big player than Panasonic, we believe that Anoto s products could soon become the standard within some specific segments in the industrial design industry 2. A public takeover bid As we previously stated, there are a lot of potential acquirers of Anoto 3. Improved bottom line We believe that when Anoto starts to approach break-even this will affect the share price in a positive way In base case the current upside is 30 percent. In addition our scenario analysis and the peer valuation also indicates a larger upside than downside Valuation conclusion Compared to the current share price, Anoto s valuation indicate a potential upside of about 30 percent in our base case. The investor s view of Anoto s future is currently pessimistic, which is seen when comparing the stock price with our bull and bear scenarios and the peer valuation. Our two bull and bear scenarios suggest a potential upside and downside of 300 and 35 percent respectively. Compared to the EV/Sales multiples among peers for 2014 and 2015, the Anoto share also has an upside, of percent. A lower discount rate in the future would raise the value of Anoto s share It is important to remember that Anoto in the DCF-valuation is severely punished by a high discount rate, which is first and foremost due to the Company s weak history. A discount rate of 15 percent instead of today s 15.5 percent would, for example, change the value of Anoto to SEK 0.35 per share (see the sensitivity analysis of the discount rate on page 43). In summary, an investment in Anoto today is far from risk-free, but has a much larger upside than downside. 45

46 Summary Redeye Rating The rating consists of five valuation keys, each constituting an overall assessment of several factors that are rated on a scale of 0 to 2 points. The maximum score for a valuation key is 10 points. Management 4.0p Ownership 4.5p Growth prospect 6.5p Profitability 0.0p Financial strength 4.5p Anoto has historically not been good at meeting the Company's objectives despite several changes of strategy. Until recently, Anoto was still focusing on the decreasing Enterprise Solutions area and was still making acquisitions in this segment. These acquisitions, thus are questionable in retrospect when put in relation to the many new rights issues Anoto has made during the years. In the financial reports, there were previously more focus on the cool technology than the ominous financial situation. On the positive side, management has long experience and good understanding of the competitor's technology, and the new strategy to search for large OEM partners seems sound. We like the fact that three important customers and partners together owns 30 percent of Anoto. The board members are to the majority representatives from these partnerships and hence possess lots of industrial knowledge. However, the COB is independent and SOLiD is not in the board, making it a bit uncertain who really is in charge. The score would be higher if the CEO and the COB took larger share positons. A bad omen is that Danske Bank has decreased its position lately. The market for active pen solutions and editable screens is large, yet still fast growing and consists of several segments. Anoto has also sold pens for countless of different applications. However, the failure has been to never reach sufficient volumes. Now Anoto has a new strategy meaning that the Company will go to market together with large OEM:s. Panasonic is a good example of an impressive reference customer. What Anoto has done is to evaluate its technology's advantages in relation to the competitors. Anoto then found that the product's precision, interoperability and unique paper to screen solution are strong competitive advantages for high end users in the creative industry. It is this industry that Anoto now will address together with OEM:s. Anoto has never been profitable except a few quarters, despite sales of SEK 144 in year 2013, and about 200 MSEK previous years. The high gross margins of percent indicates scalability. Anoto states that the company has high growth ambitions and therefore will not slash the operating expenses to less than SEK 122 MSEK. This makes the profitability entirely a top line issue. Anoto is in the middle of making a new rights issue of SEK 68 million. Following this, the Company will have a decent balance sheet, as well as a good interest coverage ratio and liquidity. However the current burn rate is fast and at the same time the sales cycles in the licensing business are long. Anoto, at the moment, are focusing all efforts on large screens and the negotiations with a non-official OEM player. Cancelling of the deal could definitely affect Anoto's financial position in the short run, although we believe that Anoto have more chances than this OEM player in the long run. With a non-favorable outcome of the OEM-deal there is a high risk for more capital raising activities, as soon as

47 Appendix 1. Digital pen technologies Available technologies within digital pens As mentioned in the product summary, there are different categories of digital pens, which can be seen in the following graph: Digital pen technologies Source: The Society for Information Display Offline pens are used to capture paper writing and transfer this text to different devices, whereas a device integrated pen is able to interact with screens and allows writing on screens. There are two types of device integrated pens. First, there is touch sensor integrated pens that provide simultaneous pen and touch, as well as palm rejection (a function that separates pen movement from accidental touch of body parts, e.g. the hand palm). The result of using a touch sensor integrated pen is a better user interface with the device. The reason is that these types of pens interact with the grid of capacitive-touch electrodes that exist in most tablets, laptops and smartphones of today. The other type of device integrated pens needs external sensors, such as optical, ultrasonic or electromagnetic sensors. As a result cost, thickness and power need is increased, which impairs the touch integration. Touch sensor integrated pens can also be classified in active or passive pens. The passive pen operates by projected-capacitance (p-cap). P-cap works well for human touch detection, but not as well for pens, because of the fine tips of 1-2 millimeter that is used to enable visibility of the 47

48 underlying pen inking. Consequently, the passive pens have quite large tips and are not that precise. Passive pen technology P-cap drives electric signals on a set of conductive transparent electrodes deposited on one axis of the touch screen sensor. Meanwhile, synchronized sensing of electric signals takes place on a perpendicular electrodes set. The signal transfer between the axes depends on how close the axes are. The proximity are indicated by the axes junction capacitor. When a human finger is placed on the screen near the junction area, the junction capacitor drops percent, leading to weaker sensed signals, and consequently touch detection. For a pen, on the other hand, the junction capacitor is only around 1-3 percent. As a result, writing with a passive pen is not compatible with user touch, and the usage area is thus limited to less demanding situations. Active pen technology In active pens, such as Anoto s, the technology drives unique modulated signals from the pen s tip to the grid of electrodes. Active pen sensing is not confused with touch sensing, since the modulated content-rich signals are orthogonal to the touch-sensing signals. In other words, touch and pen function can be used simultaneously. This is because sensing takes place on both axes simultaneously, and the received signal magnitudes are proportional to the tip capacitance to the electrodes. Signal processing is employed to digest all received signals and extract accurate tip positioning. Active pens compared to passive pens and external sensors Wacom, Anoto s toughest competitor, both manufactures pens with external sensors and a pressure sensitive pens, with the registration of pressure in the screen itself, so called passive pens. This can be compared to for example Anoto s active pen that registers the input in the pen itself with help from Anoto s microdot pattern. As for Wacom s device integrated pens, Wacom s EMR (electromagnetic resonance) technology requests an electromagnetic shield. For this the electromagnetic digitizer has to be buried behind the screen, which worsen the electronic parallax. The former statement came from Microsoft s Corporate Vice President and creator of their new tablet the Surface Pro 3, Panos Panay, during a Reddit Q&A session. The electronic parallax represents where the digitizer thinks the pen is, and that affects the precision, which is the most important characteristic of the active pen according to Panay. A major difference between passive and active pen is that active stylus s hover, while the passive ones does not. The definition of hovering is that the mouse can move the cursor without clicking. Hovering is therefore required for Windows. In addition, active pens provide higher resolution and 48

49 accuracy, among other things, but come at a substantially higher price. The question is if the less costly passive pens are good enough. Geoff Walker, senior touch technologist at Intel, believes so, and thus estimates that passive pens will triumph over active pens. 11 There is a total lack of interoperability within active p-cap pens, meaning that these pens are dependent on p-cap touch sensors and p-cap controllers. Walker suggests that this will prevent the active p-cap pens from ever becoming mainstream. However there are, according to Walker, some relevant niches for the other manufacturers and developers of active pens. We believe this is especially the case for Anoto whose technology does not rely on p-cap. 11 The Society for Information Display, The Fundamentals of Projected-Capacitive Touch Technology 49

50 Appendix 2. Touch screen technologies Active pen- and touchscreen technologies We are not going through all touchscreen technologies, as lots of them are barely used today or will be outdated in a few years. Instead we are focusing on the technologies with capabilities that could be a threat to Anoto. According to Geoff Walker at Intel, there is no perfect technology. Major strengths and disadvantages can be seen in the matrix below. Source: The Society for Information Display Today, all touch technologies use P-cap, except 8 percent that use resistive technology. Only 0.3 percent rely on other technologies. The table on the next page shows today s usage of these technologies for different display sizes. 50

51 Source: The Society for Information Display Projected capacitance (P-cap) The first large scale use of mutual capacitive p-cap was in iphone, which then set the standard. Anoto s competitor N-trig now leads the P-cap movement. The capacitive touchscreen panel consists of an insulator, typically this is glass covered with indium tin oxide (ITO) or some other patterned transparent conductor. When touching the screen, a distortion of the screens electrostatic field appears, since the human body is also an electrical conductor. The distortion is measured as a change in capacitance. Since ITO is costly and of limited quality there is a movement towards ITO replacements, for example metal mesh, silver nanowires, carbon nanotubes, conductive polymers and graphene. These five accounts for 11 percent of the conductors in 2014, but the Society for Information Display expect this figure to grow to 50 percent in P-cap compared to optical and infrared techniques P-cap can today only scale up to 84 inches, meaning that larger sizes will have to be based on other technologies, such as optical or infrared techniques. Compared to these two technologies, p-cap provides higher accuracy and lower latency. The image clarity and the price is also more advantageous. Optical techniques has, in comparison to IR solutions, better scaling at a lower cost, and image clarity on the same levels as p-cap. P-cap possess the same problem as other active pen technologies, (except Anoto s); the total lack of interoperability. This means that p-cap pens are dependent on p-cap touch sensors and p-cap controllers. 12 The Society for Information Display, The Fundamentals of Projected-Capacitive Touch Technology 51

52 Touch technology trends P-cap is obviously here to stay, but the p-cap market is estimated, by the Society for Information Display, to be volatile with new competing, diverse p-cap technologies. ITO replacements will reduce costs significantly and make larger p-cap touch panels possible. Embedded touch with passive pens is good enough for phones but not for tablets or larger screen devices. When looking at the matrix below one can see that p-cap will be the leading technology or the runner up in 9 of the 11 application fields. It is nonetheless also evident that there will be room for other technologies in a few viable niches. Source: The Society for Information Display 52