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Finance & Investment ClubTechnology, Media, and Telecommunication Sector
Senior Analyst: Cole SecorJunior Analysts: Osamah Aamir, Tudor Dorobantu, Kirstin Fong, Jiayi Ren, Joshua Sussman, Kevin Zhang, Yi Zhu
Fall 2015
Fraud Detection Software Developers
2
Agenda
Fund Suggestion
Risks
Comparable Company Analysis
TrendsE-Commerce Sales Growth Crime Rate Government Spending and Contracts
Industry Overview
Industry Definition
3
Industry Definition Businesses that develop software to detect fraudulent payments made to clients. The software
also protects against fraudulent payments.
Support the detection, analytics and management of fraud across users, accounts, products, processes and channels
Monitor and analyze user activity and behavior at the application level
Watch what transpires inside and across accounts
Analyze behavior among related users, accounts or other entities
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Agenda
Fund Suggestion
Risks
Comparable Company Analysis
TrendsE-Commerce Sales Growth Crime Rate Government Spending and Contracts
Industry Overview
Industry Definition
5
Industry OverviewLife Cycle Stage:
GrowthA growth of 30.5% for the past 8 years is a good sign of the future.
Regulation Level: Light
Government struggles to keep up with the rapidly changing industry.
Industry Globalization: Medium
China and India are becoming bigger players.
Revenue Volatility: Medium
Uncertainties surrounding contracts and pricing pose risks to revenue.
Technology Change: High
The continuing competition between fraudster and firm drives innovation.
Competition Level: High
With an extreme ease of entry, companies of any size can compete for market share.
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Industry Overview
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
0
200
400
600
800
1000
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1800
Industry Revenue
Revenue ($m)
30.5% CAGR
15.5% CAGR
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Market Segmentation The financial sector represents the
largest market segment– Includes commercial banks, retail
banks, and brokerage firms
Public sector is another large contributor to market revenue– Ranges from national security to
welfare
Information sector accounts for the third largest segment of revenue– Continued growth as more and more
companies move data into digital forms
Insurance and Healthcare sector widely uses fraud detection software to detect fraudulent claims
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Industry Overview
Market Cap: $3.72B Market Cap: $2.87B
Market Cap: $2.75BMarket Cap: $3.01B
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Agenda
Fund Suggestion
Risks
Comparable Company Analysis
TrendsE-Commerce Sales Growth Crime Rate Government Spending and Contracts
Industry Overview
Industry Definition
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Total E-Commerce Sales Growth
As electronic payment transaction volumes increase with consumers increasingly using the internet for a diverse range of services, such as online shopping, online trading and online banking, the risk of theft and fraud over the internet rises.
Percentage of services conducted online is expected to increase for the foreseeable future, creating opportunity for the industry.
Extremely strong correlation between E-Commerce volume and industry growth in recent history– R2 of .97904
The fraud detection industry will continue to grow as the amount of E-Commerce traffic volume increases.
100 200 300 400 500 600 700 8000
100
200
300
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700
2006 2007
20082009
20102011
2012
2013
f(x) = 1.00795897068217 x − 147.888109079518R² = 0.979043129882692
Industry Growth vs. E-Commerce Volume
E-Commerce Volume (Billions)
Indu
stry
Rev
enue
(Mill
ions
)
Years Percent Growth2006 - 2007 26%2007 - 2008 10%2008 - 2009 32%2009 - 2010 10%2010 - 2011 26%2011 - 2012 19%2012 - 2013 10%
CAGR: 19.06%*
*Since 2006
Source: Ibisworld
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Agenda
Fund Suggestion
Risks
Comparable Company Analysis
TrendsE-Commerce Sales Growth Crime Rate Government Spending and Contracts
Industry Overview
Industry Definition
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Crime Rate
In addition to rising concerns of international terrorism and money laundering, occupational fraudsters have become more sophisticated.
Several major US retailers have experienced data breaches, threatening and simultaneously stimulating industry revenue.
As the number and intensity of these crimes increase in 2014, financial institutions, retailers and electronic payment processors will seek ways to leverage new technologies to protect customers by preventing fraudulent transactions.
Qualitative analysis show that as crime, be it digital or physical, increases so too will the amount of fraud.
2008 2009 2010 2011 2012 2013 2014 2015e 2016e 2017e 2018e05
101520253035
Credit Card Fraud $bn
Cred
it Ca
rd F
raud
$bn
*forecasted using averaged past 4 years CAGR*Source: Ibisworld
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Agenda
Fund Suggestion
Risks
Comparable Company Analysis
TrendsE-Commerce Sales Growth Crime Rate Credit Card Chips
Industry Overview
Industry Definition
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Chip Inclusion in Debit and Credit Cards
The new credit and debit smartcards use an encrypted chip rather than a magnetic stripe, reducing electronic payment fraud.
U.S. fraud rate expected to follow Canada’s dramatic decrease.
Industry will need to rely on a continuing growth from other areas of fraud within the U.S. and Canada
“In every country that has switched to EMV cards, online fraud has jumped.” –Aite Group
UK saw a 79% increase in online fraud once chips were introduced.
As credit and debit cards increasingly use computer chips the amount of fraud will be decreased hurting revenue.
2008 2009 2010 2011 2012 20130
50
100
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Canada's Decrease in Retail Fraud Since Chips
Debit and Credit Card Fraud LossesExponential (Debit and Credit Card Fraud Losses)
Source: Yahoo Finance
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Agenda
Fund Suggestion
Risks
Comparable Company Analysis
TrendsE-Commerce Sales Growth Crime Rate Government Spending and Contracts
Industry Overview
Industry Definition
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Comparable Company AnalysisCompanies are highly valued on the market despite lackluster revenue generation.
Company Name
P/E EV/EBITDA
EV/Revenue
PEG Gross Margin
Net Profit Margin
Debt to Equity
Nice Systems 29.85 14.84 2.72 2.22 62.87 10.19 0
Fair Isaac Corporation 20.09 11.35 2.80 1.39 68.40 12.03 1.20
ACI Worldwide 34.42 13.92 3.08 1.31 55.25 6.65 1.53
Verint Systems 93.31 23.33 3.26 29.61 63.21 2.74 0.74
Collective DataHigh 93.31 23.33 3.26 29.61 3.26 29.61 1.53
Mean 44.42 15.86 2.97 8.63 2.97 8.63 0.87
Low 20.09 11.35 2.72 1.31 2.72 1.31 0
Median 32.14 14.38 2.94 1.81 2.94 1.805 0.97
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Agenda
Fund Suggestion
Risks
Comparable Company Analysis
TrendsE-Commerce Sales Growth Crime Rate Government Spending and Contracts
Industry Overview
Industry Definition
18
Risks
Suffer from dependency on on a small number of customers for a significant amount of profit
A decrease in government spending poses as threat as the public sector accounts for 20% of industry profit
Unsuccessful mergers and acquisitions will result in growing companies falling behind
Losing the right to third-party software that is an integral part of the fraud detection software being developed
If software has a base code that has been open sourced they may have to make the resulting software open sourced and free
The industry suffers from many software-based risks that will need to be navigated carefully.
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Agenda
Fund Suggestion
Risks
Comparable Company Analysis
TrendsE-Commerce Sales Growth Crime Rate Government Spending and Contracts
Industry Overview
Industry Definition
20
Fund Suggestion
Strong Buy
Strong growth
prospects
Correlated growth with Ecommerc
e Insulation from EMV
chip effects
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