NEXT BIG HIT: IDENTIFYING AND TRACKING GOODS
RFID - SAMSYS MAY HAVE THE BEST READERS
Investor's Digest of Canada
By Laurel de Yturralde
Issue; January 23, 2004
The stars are aligning for a widespread breakout of Radio Frequency Identification (RFID) in 2004 and the investment potential is enormous. RFID is being heralded today as a "silent revolution" (Wireless Data Research) a "transforming technology"(Procter &Gamble), a "killer application on the verge of revolutionizing manufacturing" (Credit Suisse, First Boston), "an almost infallible tracking system" (Wal-Mart), an impending "inventory revolution" (Bear Stearns), "bigger than the Internet" (CNBC MSN) and a "tectonic shift about to hit retail and the military" (ChangeWave).
Powered by radio signals, RFID is a complex, wireless technology that identifies and tracks goods in real-time without manual intervention, transmitting large quantities of data to computer systems - sort of like barcode on steroids.
The business case is compelling, hundreds of billions may be saved from automation of stocking, inventory, anti-theft and anti-counterfeiting capabilities . A Wal-Mart spokesperson says jumping from bar codes to RFID "will be like going from the telegraph to the Internet."
Twenty-five years ago, after Wal-Mart told suppliers to use bar codes or get lost, bar codes were widely adopted. So there was a sense of deja-vu in the automatic data collection industry in June 2003, when Wal-Mart announced its top 100 suppliers must put RFID tags on every case and pallet delivered to the giant retailer by January 2005.
This deadline is just 12 months away; smaller suppliers have an extra year to comply.
The US Department of Defense (DoD) quickly followed Wal-Mart with a comprehensive plan requiring all of its suppliers to use RFID by the January 2005 deadline. The DoD decision will have an even bigger impact than Wal-Mart's mandate; it has the largest supply chain on the planet, encompassing the automotive, aviation, electronics, munitions, pharmaceutical and retail sectors.
TOGETHER WAL-MART AND THE DOD REPRESENT A TRILLION-DOLLAR SUPPLY CHAIN
Opportunities for pure-play investments in RFID are scant, according to a recent report by CNBC-MSN. Toronto's SAMSys Technologies Inc. (SMY-TSX/VEN, $2.90, 888-894-8222, www.samsys.com) made CNBC's short list, along with Texas Instruments, Philips, Intermec, Tyco, Zebra and Symbol, several of which have alliances with SAMSys. A recent Bear Stearns' report on the upcoming RFID revolution also mentions SAMSys' readers.
SAMSys currently has a very large installed base of pilot projects in progress and has already completed projects with top retail suppliers. The company recently raised $13.2 million to insure it has funds to aggressively pursue contracts in 2004.
The Ontario Teacher's Pension Fund disclosed a $3.3 million investment in SAMSys in this equity financing round. BTG, a global technology commercialization company which made a record $8.8 million investment in SAMSys last year, came back for more in the recent financing.
RFID contains two basic components: chips and readers. SAMSys' intellectual property (IP) places the company in a unique and enviable competitive position in the global reader marketplace.
President and CEO, Cliff Horwitz , a pioneer in RFID technology, spearheaded development of multi-protocol/multi-frequency (MP/MF)readers and filed for patent protection over three years ago.
A comprehensive MP/MF reader patent was received in September 2003. This patent, in addition to a patent received for the "method and system for tracking clustered items", throws a wide net, providing the legal strength to pursue against a variety of IP infringements.
The MP/MF patent is broad, it is unlikely the same functionality can be achieved outside the scope of SAMSys' patent.
Wal-Mart has specified two classes of RFID tags suppliers can use. The two classes are not interoperable, only multi-protocol readers can read either or both. Various countries require use of differing radio frequencies, as do the physics of RFID. With standards and chips still evolving; MP/MF readers remove the threat of near term obsolescence.
Together; Wal-Mart and the DoD represents a trillion-dollar supply chain.
SAMSys has developed and field-tested a complete line of high quality RFID reader products that include portal (entrance) systems, conveyor systems, retail/industrial smart shelves and forklift applications.
The systems, developed in SAMSys' manufacturing facility in Raleigh, North Carolina, are modular, user-friendly, and easily upgraded. The company's distributors can download software to customize readers for specific customer needs; SAMSys readers can also be upgraded remotely over a network.
The ability to control readers over the Web as new protocols become available is critical, versus sending out an army of technicians to do special installations. SAMSys has also developed a concentrator module that supports a network of up to 256 readers to avoid tying up servers.
Over the last year, SAMSys has signed close to twenty VAR (value added reseller) agreements. The VARs provide an army of salesmen over a broad geographic region, in a vast array of industries.
Many of these technology distributors deal with Wal-Mart's top 100 suppliers. Intellident, a SAMSys VAR partner and one of the most experienced RFID systems integrators in England, recently installed an RFID system using SAMSys readers for Marks & Spencer (M&S), one of Britain's biggest retailers.
M&S is "delighted" with initial results and named Intellident sole supplier of reader equipment.
SAMSys' main sales focus will be on the high margin reader market where barriers to entry are growing. The company will use a three-pronged market approach: 1) direct sales to large end-users; 2) OEM agreements; and 3) sales through VARs in Europe and the US.
Revenues are also expected from integration consulting services (consulting at the technology level is one of the capabilities in shortest supply), IP licensing, and a 50%-owned venture with BTG developing ultra-high frequency (UHF) tags.
End-user demand, standards, prices, technology, and industry cooperation are all coming together rapidly to jumpstart the commercialization of RFID.
A snowball effect has begun as major retailers like JC Penney, Target, Home Depot, and The Gap scramble to remain competitive.
Tesco, the largest retailer in the UK, announced it will deploy case-level RFID tracking in April, 2004. Procter & Gamble is requiring its suppliers to be RFID-ready in major Wal-Mart markets this spring. The FDA is considering RFID as an anti-counterfeiting strategy and the automotive industry already accounts for a large amount of current RFID spending.
INFINITE APPLICATIONS
Investment interest in SAMSys is still speculative. Most of the activity in early 2004 will be behind the scenes, in active consulting and in pilot projects. A TSX listing and analyst coverage is expected.
While there are an infinite number of opportunities and applications for RFID in the future, this is an evolving technology and should not over promise in the early stages. The first focus will be on logistics, where privacy issues are not a concern. Item level tracking and widespread adoption seem inevitable.
Kevin Ashton, Executive Director of the Auto-ID Center, testifying before the California State Senate on New Technologies in August 2003, said "it's a bit like we are in RFID's equivalent of the year before the personal computer was born."
Laurel de Yturralde, former editor of Bidding on Bay Street, owns shares of SAMSys Technologies Inc .and lives in Shediac Cape, N.B.
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Gerry Wimmer
Investor Relations
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