High-tech

Due Diligence: Innova Card

By Bipin Parmar

Introduction

Innova Card is a post Chilli R1, fabless chip company founded in June 2002 and located in the southern French coastal town of La Ciotat, near Marseille. La Ciotat is located in the heart of the French smart card industry and is also famous as the birthplace of cinema, invented in 1895 by Louis and Auguste Lumiere.

The four co-founders of Innova Card are Bruno Bernard, Christophe Cornillon, Frank Lhermet and Arnaud Dehamel. Their relevant domain expertise is in the semiconductor and smart card industry, which is spread around this local region.

Bruno Bernard, president and CEO of Innova Card, has extensive chip design management experience. He was previously at a startup called Neotion and a leading semiconductor vendor ST Microelectronics, where he was the design leader of the group carrying out chip designs for set top boxes using microcontroller and DSP (ST100).

Frank Lhermet was the design leader of a joint venture design centre of Gemplus and ST Microelectronics. Prior to that he was a design manager of ST Microelectronics' smart card division. Arnaud Dehamel had previously worked with Bruno Bernard in design at ST Microelectronics, and Christophe Cornillon has over seven years sales and marketing experience in smart cards. He was previously the marketing manager of Gemplus' mobile payment division. The management team is complemented by the CFO, Bernard Colace, ex FD at SCM Microelectronics.

The motivation for starting Innova Card came with a vision that the new EMV (Europay, MasterCard, VISA) smart card payment standard creates a whole new set of market opportunities, and that there will be a need for low cost, single SoC (system on a chip) which combines the security, hardware, software and tools on a single unified platform. This together, with the relevant domain expertise in the vertical smart card ecosystem of the founders was the main motivator behind the founding of Innova Card.

Vital statistics

Value proposition

Partners

The Chilli perspective

Vital statistics

Innova Card raised €218k from a group of business angels in April 2003. The technology angels market, which until recently was not as well developed in France as in the UK, created a special set of challenges for Innova Card. Nonetheless, they managed to secure some well renowned angel investors and industry heavyweights such as Dietrich Erdmann, co-founder of Mostek, investment director at Sven Rosen VC fund; Rolland Triffaux, ex VP of Xilinx Europe; Dan Barrett, VP of Cypress Semiconductor; Volkmar Schaldach, VP Analog Devices, Remy De Tonnac, ex US CEO of Gemplus and now at Vertex Partners plus many others.

The French government backed agency for innovation (ANVAR), also matched this with €200k making a S3 round of around €400k. Innova Card raised a Chilli R1 totalling € 1.6 million in March 2004. This was made up of €600k loan notes from ANVAR, €600k from existing investors, and a local fund of €300k, some of which came in as a subsidy for creating additional jobs in an assisted region. Innova Card currently employs 16 people, of which 12 are in r & d, two in marketing, one in sales and one in management. It is expected that the headcount will increase to around 22 people by the end of 2004 and around 55 by end of 2006, subject to successful R2 funding and milestones being achieved. The company is currently negotiating a Chilli R2 round.

Value proposition

EMV (Europay, MasterCard, VISA) is a secure standard for chip based smart card payment system. EMV is designed to reduce card fraud and facilitate multiple applications like loyalty and health cards in the future. EMV terminals accept EMV smart cards at a merchant site and process the payment transaction using PIN codes. EMV terminals are currently being rolled out in Europe with some major supermarkets already having deployed first generation EMV solutions. This validates the EMV infrastructure.

Current EMV readers, payment terminals and pin pads (those pads that you have to type in your four digit pass code , instead of using personal signatures) in the market use a multitude of off-the-shelf hardware and proprietary software components. This creates an opportunity to consolidate the parts onto a single lower cost chip with a unified solution offering security, smart card reader functionality and EMV compliance.

Innova Card has developed a secure payment platform called USIP, which consists of a single, secure and integrated SoC, a validated reference design for EMV payment terminals and smart card readers; software suite consisting of OS (operating system), drivers and libraries, application profiles and development tools. The company currently has eight patents in the area of secure payment platform and architecture.

The 260-pin SoC IC is based on MIPS Technologies SmartMIPS 32-bit RISC processor with the appropriate ROM, RAM and flash memory plus proprietary analogue and digital circuitry dealing with chip security and multitude interface requirements such as USB, ISO 7816 smart card interface.

The company has been well advised to using off-the-shelf IP (intellectual property) blocks where available, in order to hit their time to market window - instead of developing everything in-house. The use of Gemcore's smart card interface and MIPS 32-bit 4KSd processor core specifically aimed at the smart card markets are two such examples. The smartMIPS processor was chosen to leverage the extensive work carried out by the joint research/design team of Gemplus and MIPS Technologies. Other notable features of USIP include a secure way of adding external memory for additional applications and features, without compromising the security aspects, as this could lead to back door attacks by hackers.

Innova Card's real value creation is in the integration, validation and verification of disparate parts onto a single SoC, together with seamless integration with software OS, drivers, middleware and applications, in a secure platform as required for security applications. The company plans to achieve at least an EAL4+ common criteria security certification.

Innova Card is initially targeting its USIP platform solution in the emerging market for EMV smart card readers and point of sale terminals. Payment terminals vendors face two major trends: one is to migrate existing customer base towards an EMV compliant standard, and second, obtain a critical cost-effective integration of various hardware and software components required to meet security, functionality and EMV compliance issues. Innova Card is clearly positioning itself in short-circuiting some of these resource intensive activities in a timely, cost efficient manner.

Partners

Besides MIPS for the smartMIPS processor core, other strategic partners include Trusted Logic, whose middleware has been validated on the USIP platform. Trusted Logic middleware is already used by seven payment terminal manufacturers, which will provide Innova Card with additional design opportunities.

Innova Card has a commercial relationship with Philips Semiconductor, to provide a secure foundry for the SoC; it will be made under same conditions and environment as Philips' own smart card products, thus giving Innova Card's potential customers assurance in terms of not only the security but also volume supply. The company has partnerships in place with Synergies CAD, ARC, Gemplus, Serma Technologies and participates in local and European research programmes.

The Chilli perspective

BOM: We estimate that the current bill of materials (BOM) for EMV compliant payment terminals is around €100 to €130. If Innova Card can reduce this to around €65 BOM cost with its USIP solution, then the market will be motivated enough to seriously consider this solution as there are other related advantages, besides BOM, such as inventory testing and compliance costs. The company has already shipped many development kits to potential major customers based on Xilinx FPGA designs; final chip roll-out is due in Q4 2004, which will displace the FPGA part seamlessly.

Markets: The total market for USIP is estimated to be in the 30 million mark, in 2006, with its core market of EFT POS (electronic fund transfer point of sale terminals) garnering around 10 million units. This represents a market opportunity of around €100 million for POS terminal alone, assuming a conservative ASP of €10. So market size will not be a constraining factor on Innova Card's growth. What would be constraining is the sales channel to key players in the terminal market, both existing and new ones in Asia. Other possible constraints include the elapsed time to get new EMV type approval for payment terminals. But this is momentum based, as the third party testing and verification houses build sufficient confidence for the required EAL levels.

Besides EFTPOS there are other opportunities in vending machines, kiosk, ATM, and add-ons for home PCs, mobile phones, modems, PDAs, set top boxes. However, the kiosk market will be inhibited by the unrelated heavy charges made by credit/debit card companies, the current cost of which exceeds the cost of pilferages.

Sales channels: the company has a direct sales person for Europe, plus a sales rep in the UK and China. We recommended that a huge part of its R2 funding is spent on direct sales and marketing in order to secure future design sockets. The company has a potential to go to a far higher revenue trajectory with a more robust Chilli R2. We believe the biggest market opportunity lies in the 'four tigers' region (Korea, Hong Kong, Taiwan, and Singapore), as well as China and country specific markets like India, Russia and Brazil where vertical integration in the supply chain is more prevalent.

Competitors: Major competitors, include, Atmel and Hitachi, as well as chip vendors offering 8-bit legacy solutions which may or may not meet the functional and performance requirements of the EMV compliant terminals. The issue is not whether it is 8-bit or 32-bit, as the size of the memory far exceeds the processor real estate. The packaging, reliability and compliance with EMV solutions are other major factors. Other competitors eyeing this market are Safenet, based out of US and Wave Systems, as well as some new startups operating under stealth mode. Innova Card has a home advantage which it should make more use of as major terminal manufacturers are based in its home grounds. This will allow the company to offer better logistics and application support.

Summary: the market has been buzzing with the potential of EMV rollouts throughout Europe and Asia since the specifications were initially agreed. Banks have been mandating their merchants to switch to EMV terminals to avoid more fraud losses and avoid penalties for non-use of EMV terminal after 2005. Credit card fraud has been a big problem especially in the UK where credit card fraud amounted to greater than $600 million in 2002 alone. The biggest hurdle facing banks is to switch the small to medium size merchants, where costs are a very sensitive issue (since it is the merchant who has to pay for a benefit which goes back to the bank, ie. fraud avoidance). A simple, lower cost EMV compliant payment solution, facilitated by low cost components, will be very much welcome by the whole payment industry. This together with concern about homeland security and increasing use of biometrics and online payment applications in music and movies downloads for home use presents a huge set of opportunities for Innova Card.

None of the large semiconductor players have publicly declared any plans for a chip solution for payment terminals. When the market goes beyond the critical mass, Innova Card would be a tempting acquisition target for them. Large semiconductor players do not get out of bed unless they smell a market bigger than $300 million or face a strategic threat to their current customer base. The EMV smart card reader market is just below their current radar screen.

Once its initial USIP solution is proven in sufficient volume, the company will have built a capability to deliver even lower cost solutions in a more diverse market, and potentially get on a high trajectory curve.

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© Chilli Publishing Ltd 2004

16SEP2004