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Tuesday, September 22, 2015

Nxt-ID (NASDAQ: NXTD) Slow Progress but Promising Signs; Free Licensing Optionality; Speculative Buy Says Benchmark


Nxt-ID (NASDAQ: NXTD) Slow Progress but Promising Signs; Free Licensing Optionality; Speculative Buy Says Benchmark

Nxt-ID, Inc. (NXTD; $1.01)
Rating: Speculative Buy
Price Target: $6.00
Slow Progress but Promising Signs; Free Licensing Optionality
Daniel L. Kurnos, CFA
561-939-8262
dkurnos@benchmarkcompany.com
September 22, 2015 –Benchmark (http://www.benchmarkcompany.com/) ; Shares of Nxt-ID (NXTD) -- Spec Buy, PT $6) remain under pressure by sellers from the most recent round of funding despite initial signs of traction. While progress towards achieving scale has been slower than anticipated, order volume continues to improve sequentially, with a significant uptick expected in 4Q15, and manufacturing issues are becoming more infrequent. Technical reviews remain positive, with competitor offerings stalled or facing either developmental or implementation headwinds. We acknowledge that Nxt-ID still remains in the show-me stage, but think there is a significant disconnect between the current share price and the potential opportunity, with free optionality on technology licensing deals or a potential takeout.
Although Nxt-ID is pacing behind our original expectations in terms of product rollout, we still expect the company will sell ~30,000 units by year-end, with upside depending on any third-party (3P) distribution deals. Unit sales could improve from 900 to 2,500 from 2Q to 3Q, and ramp significantly into the holiday period, with our forecast calling for 25,000 units sold in 4Q15, resulting in $4.5 million in revenue. We believe 3P distribution has been somewhat deemphasized given the early lack of scale, but expect management is still looking to partner with QVC/HSN or Sam’s Club ahead of the holiday season if possible, depending on the terms. We have not included any 3P sales in our holiday forecast. We note, however, that NxtID has been successfully selling online through Touch of Modern with a reasonable conversion rate (estimated 3-5%), albeit on a small scale, which has also further enhanced Wocket’s organic search ranking.  
Nxt-ID is developing enhancements and additional offerings for its product portfolio. We believe Nxt-ID will possess the first smart card to feature a fully functional EMV solution, expected by year-end, which could further differentiate the product and enhance its relevance, with the EMV implementation deadline set for October 1 (although we anticipate fewer than half the POS terminals will be EMV-compliant by the end of the year). In addition to an EMV solution, we expect a digital, phone-based app could tap into the more traditional mobile payment market, with a launch date anticipated in 2H16. Furthermore, given the prevalence of large players entering or attempting to enter the payments space, we think a licensing deal could be possible, especially if Nxt-ID establishes proof of concept this holiday period. We have not incorporated any benefit from the potential app rollout or licensing deals in our forecast, which calls for standalone Wocket sales of 150,000 units. We note that Nxt-ID would need to sell roughly 180,000 units to operate at breakeven, which could be achieved next year.

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