It’s no secret out there that the market as a whole has been taking an enormous hit, not just in terms of stock valuations and prices, but more so at the fundamental level of these companies and their deteriorating business conditions.

AuthenTec Inc. (NASDAQ: AUTH), a maker of fingerprint sensors, is no different, and in fact may be hemmed in on all sides not only via the slowdown in the semiconductor industry, as reflected in decreased consumer demand for electronics, but also from the very fact that AuthenTec’s technology is a value-added piece of equipment that is often a luxury.

In addition to this, we will have to contend with AuthenTec’s previous reports of the loss of a significant customer in the back half of 2009/2010, as well as slowing business trends because its sensors are facing increasing competition.

So what does this mean for our investment in AuthenTec as they look to report earnings on Tuesday February 15th after the market closes?

In this post I’ll go over the important aspects that we need to be aware of before AuthenTec announces earnings and then break them down into the following parameters:

• What went right in the quarter: What were some of the positive developments that occurred within the company in the last 3 months.
• What went wrong in the quarter: What were some of the negative developments that occurred within the company in the last 3 months.
• What I want to see: All things considered, what I realistically want to see from the company as it relates to their business.
• What we need to see: At the minimum, what we need to see for our investing thesis to still hold and an investment in this company to be prudent.
• What we’ll probably see: After weighing what’s been going on for the last 3 months, what we can realistically expect when they do announce their earnings.
• Bottom Line: What it all means, and what you should do.

New to the AuthenTec story? 

AuthenTec, Inc. is a fabless mixed-signal semiconductor company that provides fingerprint authentication sensors and solutions to the high-volume personal computer (PC), wireless device, and access control markets.

AuthenTec offers a range of fingerprint sensors that enable users to access and control multiple functions on an electronic device by touching or sliding their finger across the sensor.

The company’s fingerprint sensors utilize unique information in fingerprints to verify the identity of the individual, as well as the unique, individual fingers on the same person.

With more than 40 million sensors sold worldwide, AuthenTec’s award-winning sensors take full advantage of The Power of Touch® by utilizing the company’s patented TruePrint® technology to deliver the most convenient, reliable and cost-effective means available for enabling touch-powered features that extend beyond user authentication.

These sensors are used in various applications related to security, password replacement, financial transaction authentication, and personalization applications.

The company’s products are used in a range of PC products and related peripherals, including laptops, desktops, memory keys, hard drives, keyboards, mice, and other devices.

In addition, AuthenTec’s products also integrate into various wireless devices, such as mobile phones, and personal digital assistants and personal navigation device, as well as access control devices comprising door locks, time and attendance devices, and remote wireless entry keys.

AuthenTec primarily offers its products to original equipment manufacturers, original design manufacturers, and contract manufacturers and sells its products through a direct sales force, a network of independent sales representatives, and distributors.

Want More?

• Read: my last quarterly earnings and conference call breakdown here.

Which Way are We Headed?

Going Out of Business or Take-Over Target?

The more things change, the more they stay the same….I wrote the exact same headline about going out of business the last time around.

I suppose that speaks to the state of AuthenTec right now, a once high-flying darling stock and company, that I believed firmly, was poised for greatness.

Now, I am holding shares merely because from a pure valuation standpoint, and we’ll go into that later in this post, AuthenTec is a steal, and represents a small portion of my overall portfolio.

Let’s break down the earnings announcement.

• What went right in the quarter: Not much…

It has been a surprisingly quiet quarter as far as AuthenTec is concerned.

There were a few new product announcements here and there, but nothing of great significance that would drastically alter the path of the company for the better.

In addition, there were no new announcements as it relates to the stock price or customer acquisitions/losses, and nothing that would have shed more light on the path of this niche company.

Is that good news in and of itself?

Perhaps…I’ll take what I can get at this point. We’ll leave it at the old “no news is good news” mantra.

• What went wrong in the quarter: On the flip side, there really wasn’t anything too terrible that transpired with the company in the quarter, aside from a couple of possible class action lawsuits that were in the queue as a result of the company’s precipitous share price decline when they announced last quarter that they lost a significant customer.

According to the lawsuits, the filings are claiming that AuthenTec’s management new that the business trends were slowing, that they would be losing customers, and that their technology was lacking, but that they did nothing about it in terms of full disclosure to Wall Street and stockholders.

I don’t know if that’s true or not, but we’ll see how the lawsuits pan out. These types of suits are standard procedure when a company announces some really bad unexpected news and people’s shares get wiped out.

In fact, AuthenTec was one of the primary reasons that my portfolio underperformed last year as I lost about 40% in value in one day after their negative announcements.

Now let’s look at what I want to see from this earnings announcement…

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