Exhibit 99.2
L-1 IDENTITY SOLUTIONS
MODERATOR: LISA CRADIT
JULY 30, 2008
11:00 A.M. EST
OPERATOR: Good morning, my name is Crystal (ph) and I will be your conference
operator today. At this time I would like to welcome everyone to the L-1
Identity Solutions second quarter 2008 conference call.
All lines have been placed on mute to prevent any background noise. After the
speaker's remarks there will be a question and answer period. If you would like
to pose a question during this time, please press star and then the number one
on your telephone keypad.
If you would like to withdraw your question press the pound key. Thank you. It
is now my pleasure to turn the floor over to your host, Lisa Cradit. Ma'am you
may begin your conference.
LISA CRADIT: Good morning and thank you for joining us at L-1 Identity Solutions
2008, second quarter and first six months financial results conference call.
Statements that representatives of L-1 Identity Solutions make during the call
that are not historical facts are forward-looking statements made under the Safe
Harbor provision of Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based on management's current beliefs and
assumptions, and involve inherent risks and uncertainty. Any statements made
today about future expectations or results are necessarily only estimates.
Actual results could differ materially for any forward-looking expectations.
Factors that may cause differences between forward-looking expectations and
future actual results are fully described in the company's SEC filings. The
company expressly disclaims any obligation to revise or update any
forward-looking statement.
Representatives of L-1 plan to use a number of defined financial terms during
this afternoon's call, such as adjusted EBITDA, organic growth and unlevered
cash, free cash flow.
Please refer to the Company's earnings press release issued this morning for
further definition and contacts from the use of these terms. With that, I will
now turn the call over to, Bob LaPenta. Bob?
ROBERT LAPENTA, CHAIRMAN, PRESIDENT AND CEO , L-1 IDENTITY SOLUTIONS: Thanks,
Lisa. Good morning, everyone, and thanks for participating in our second quarter
calendar '08 conference call.
I'm assuming everybody read our press release today. We went through a lot of
numbers. I'm not going to spend any time on the numbers. Jim DePalma will take
you through the numbers and provide color on some of the items behind the
numbers.
I think overall it was a very good quarter for us. All of our divisions are
performing extremely well, and I'm especially pleased with the fact that they're
now beginning to work together and we're getting a lot of opportunities for L-1
as a joint entity.
Bidding activity is robust, and we're seeing large National ID, ePassport, and
border security opportunities in Latin America and the Middle East, Africa, and
India, and I'll give you a little bit more color on that in a few minutes.
We spent a great deal of time as I'm sure everybody knows on the Digimarc
transaction during the quarter, and I'm pleased to announce that today we're
still on track with completing that transaction hopefully in the beginning of
August.
You've all read that we changed our offer from that 50 percent cash and stock
offer to an all cash offer. The valuation of our previous offer was about $263
million, and the value of our offer today is about $310 million, so it was an
increase of about $47 million.
With that we still believe that this is going to be an exceptional transaction
for L-1, both from a strategic and financial standpoint, so we're pleased with
the way that's going right now. I really am not going spend too much time
talking about it. We have a couple of more days left on our tender.
Some of the highlights for the six months - we announced a couple of days ago
that the U.S. Passport Card Program, that had an initial value of about $105
million was increased to $215 million. And in addition to that, the Border
Crossing Card was added onto that program.
So right now it has a valuation of about $239 million over five years. We
believe that as additional cards are added to that program that's going to
continue to increase and it's going to be a very, very valuable program for us
going forward.
In Enrollment Services, our IBT division is doing extremely well. Their organic
growth this year is going to be well in excess of 20 percent. We continue to
open additional enrollment sites. Right now we're approaching 600, and for the
first half as noted in our press release, we've enrolled over 647,000 people.
We are bidding on opportunities that will provide substantial upside, and we
believe that as more states continue to pass laws, requiring enrollments in
schools and nursing homes, by their police departments, health care
organizations, real estate, insurance brokers, this business is going to
continue to grow at a very, very, rapid, rapid pace.
The demand for HIIDE continues to increase. We announced during the quarter that
we booked a $4.9 million dollar order. This was part of a basic ordering
agreement of approximately $24 million. That includes 4100s in jump kits and
expansion modules.
And these were from 4.0 so it basically eliminated the remaining inventory of
our 4.0s at SecuriMetrics.
In addition to that, a program that I was talking about earlier in the year for
middle eastern countries, the budget has been approved for that program, and we
are now working with that customer to put together a program to deliver either
4.0s or 5.0s, depending on the customer's preference.
And we are hoping to be able to book that within the next three to four weeks.
It's a substantial program for us, and we're excited about it because it will be
our first booking for a customer outside of a U.S. entity.
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We announced in the quarter that we released our new Touch Print enhanced
definition 4800 live scan; this captures forensic-quality pen, print, and palm
images. And the early reception in the market is very favorable and we expect
this to be a nice revenue generator for us as we move forward.
Also in the quarter we announced the B5000 which is document authentication -
our next generation document authentication product. Again here, the reception
has been very favorable.
We're already booking and shipping quantities of these new devices, and we think
this is going to have substantial upside in programs like Real ID. In Bioscript,
we've now had them for about four or five months and I'm pleased to announce
that they're doing extremely well.
You may recall that when acquired them, they were running at about an $18
million run rate. They were losing $2 -$3 million dollars in EBITDA. Right now
they have 75 employees. They're well focused, and they're growing north of 20-25
percent.
So we're very pleased with the way they're performing, and we expect continued
organic growth. We just released a new 3D face reader and we're going to be
releasing our new PID device within the next one to two months. So things are
going very well at Bioscript.
The Secure Credentialing division continues to perform and I would say
outperform, they're doing exceedingly well. They had $16 million in extensions
on existing driver's license contracts, and as you read, finally, the initial
grants of $80 million for RealID were released.
Our states received about $16-$18 million of those grants. And Digimarc;
actually their states received about $50-$57 million. We're now preparing
proposals and responding to requests from our states in providing solutions for
enhanced security, enhanced card production, and we expect this to start
generating revenue sometime in the fourth quarter.
Registered Traveler continues to be a program that is starting to build momentum
for us. As you know, we are the system integrator on that program with teams of
Lockheed, General Electric and VIP.
The enrollments of subscribers are starting to pick up and, as you know, we
provide both the hardware and we provide the IP and we get a per subscriber fee
so as those subscribers increase, we stand to make you know additional revenue
for it.
So, with the background, I'd say that we're seeing increased activity both in
the U.S. and overseas. Our bidding activity is increasing dramatically. We're
seeing U.S. programs like HSPD-12 and Real ID start to really gain momentum.
And as a result of the momentum we are seeing in the first half, we are issuing
guidance in the third quarter of $140 million to $150 million with EBITDA of
about $20 million to $23 million, and we are reconfirming our guidance for the
full year at about $555 million to about $575 million with free cash flow of
somewhere between $60 million to $65 million.
Jim will talk to you about the numbers and will also give you some color on our
recent negotiations with the bank and putting together a new bank facility. With
that, I will turn it over to Jim and then we'll open it up for questions.
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JIM DEPALMA, EXECUTIVE VP, CFO AND TREASURER, L-1 IDENTITY SOLUTIONS: Thank you
Bob. As Bob noted the second quarter was an extremely successful quarter,
highlighted by strong organic growth across all of our segments, expanding
operating cash margins and strong free cash flow, healthy bookings and a growing
backlog.
The press release provides a good summary regarding our operating results for
the second quarter and six-month period. And Bob has covered the key highlights
of various targeted opportunities and overall, business momentum heading into
the second half of the year.
I will cover some of the key items related to our financial performance. The
quarter results for the second quarter of 2008, as you know, include ACI,
McClendon and the Bioscript acquisitions, all which were acquired subsequent to
June 30, 2007.
We continued our strong momentum this quarter meeting the high end of our
previously provided guidance on all key metrics; revenues of $145 million
compared to $135 million to $145 million. EBITDA up $23 million compared to $20
million to $22 million and earnings per share of $0.04 in the middle of our
$0.03 to $0.05cent range.
On a reported basis, revenue was $145 million for the second quarter compared to
$90 million for the same quarter last year or an increase of 61 percent. On a
"same store" basis, for the entities under L-1 management for both quarters,
Viisage, ACI, Bioscript and McClendon, revenue grew approximately 27 percent
from $90 million to $115 million.
On a pro forma basis, revenues increased 22 percent from $119 million to $145
million, driven by strong demand in our Federal and State credentialing and
background screening services, as well as our intelligence services businesses.
Our continued pace of organic growth represents a tangible reaffirmation of our
strategic vision to bring together the leader in identity management combining
end-to-end multi-modal offerings with high-end intelligent consulting and
services.
Our secure credentialing business Viisage increased by 62 percent to
approximately $32 million due to continued demand by our Federal customers to
meet their growth requirements in the implementation of the PassCard program.
Our long-term relationship in alignment with our Federal customers and their key
priorities remains very strong as highlighted by the expansion of the Passport
Card program as noted by Bob from $107 million to $215 million and the addition
of the Border Crossing Card program.
We expect this unit to continue strong growth for the second half as we begin to
deliver under these key programs. The potential combination of our credentialing
business with Digimarc will create a truly unique asset and a specialized
identity management provider, which will provide significant backlog, revenues
and cash flow, enhancing future growth prospects.
Our Biometric solutions business grew significantly on a sequential basis to
$37,000,000 or over 70 percent reflecting orders from key Federal, international
and State agencies for multi-modal solutions.
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In particular, as Bob noted, our jump kit solution, which integrates our finger,
face and iris offerings, additional HIIDE devices and funded development from
our DoD customer, enhancing L-1's leading position and brand as the multi-modal
identity management partner for the Department of Defense.
We now have over 8,000 units deployed worldwide. Continued growth in this
business will continue to drive expansion in our gross profits and cash
operating markets. Intelligence services businesses continue to make great
strides, well over 20 percent driven by tremendous growth in our human
intelligence, analysis and operation support and information systems and
engineering businesses, which grew 40 percent and 20 percent respectively,
compared to the prior year's quarter, reflecting the addition of key new
business wins.
Billable full time equivalents have grown from close to 700 professionals in the
2nd quarter last year to over 900 at the end of this quarter. Primarily driven
by our SpecTal unit, which has added over 110 cleared specialistsin the last 12
months to meet demand for new contract wins and existing requirements. We expect
these businesses to grow well in excess of 20 percent addressing current
contract demands and new bidding activity.
We are currently addressing over $200 million in new near term primecontract
opportunities in this area. It has been a terrific area for us. As Bob noted,
the background screening business grew over 23 percent reflecting growth in
volume of new agencies added to existing State contracts: Texas and Michigan to
name two, and continued growth of Federal programs HAZPRINT and HSPD-12.
Print volume for the quarter has grown from 240,000 prints to over 350,000
prints in this quarter and is expected to be at a $1.8 million annual run rate
by year-end or approximately $100,000,000 in annualized revenues.
Our goal is to continue to outperform customer expectations and capture the
significant growth that States implement in much needed programs. We have a
dominant position in this space and with the number of sites across the country,
approaching 600 as Bob noted800 by year-end in 46 of the 50 states.
Our reported gross margin was 33 percent compared to 31 in the prior year,
primarily due to improved mix in revenues in our identity solutions segment
(passports, printers, multi-modal solutions) and our gross margins grew over
five basis points sequentially as our mix improved.
We expect our gross margins to continue to increase for the balance of the year.
Our cash gross margin approximated 39 percent in the second quarter when you
back out non-cash amortization.
Operating expenses as a percentage of sales decreased to 26 percent from 30
percent, excluding non-cash items. Operating expenses as a percentage of
revenues approximated 23 percent reflecting effective management of costs and
our overall operating leverage.
As a result EBITDA for the quarter was approximately $23 million or 17 percent
of revenues compared to $13 million on a pro forma basis or an increase of 77
percent. We continue to target 16 to 17 percent cash operating margins for the
full year and anticipate that the Digimarc acquisition will improve these
margins.
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Looking ahead we see our cash gross margins reaching in excess of 40 percent and
cash operating expense reducing to the 20 percent range as we target 20 percent
EBITDA results for the future.
Other items of note: interest expense for the quarter was $3.2 million related
to our convertible notes and borrowings under our credit facility which
decreased by $6 million, and as Bob noted, we have spent the last couple of
months addressing a new facility andthe banks have been terrific.
Our requirements were, as noted, about $350 million and we were well
oversubscribed and so it's been a tremendous support from the banking community
and we're going to be in a position to quite frankly expand our facility.
In connection with tax expense we were going to record - we recorded $2.4
million during the quarter. It's non-cash. We donot anticipate to be a federal
cash taxpayer for at least another three to four years.
Weighted average shares outstanding was approximately 74.6 million, up from 71.3
million in the second quarter of 2007. The increase reflects the shares issued
in connection with the Bioscript and McClendon transactions.
And just briefly on the balance sheet - just some highlights - we're obsessed
and we continue to be obsessed with collections. As a result, our DSO has
decreased from 73 days to 63 days. We're targeting 60 to 63 days.
Inventory increased slightly by $5 million to address upcoming requirements for
biometric devices and credentialing solutions to meet our needs. Goodwill is up
$34 million primarily relating to the Bioscript acquisition and accounts
payable, just a $7 million increase through the normal vendor cycles.
At the end of the second quarter we've continued to enjoy strong leverage with
our coverage of debt to EBITDA of 1.2 to 1.0, well below our requirement of 4.50
to one, and this will obviously change when we complete the Digimarc
acquisition.
Bob mentioned unlevered cash flow for the quarter was approximately $15 million
impacted slightly by timing of sales and receivables that were done towards the
end of the quarter, and as I noted we continue to focus on working capital.
A small amount of capital expenditures; just a little point on backlog. It grew
from $750 million at year end to $800 million at the end of the second quarter
reflecting a book to billof 1.4 times, outpacing revenues by almost 40 percent
and the Digimarc acquisition is expected to bring our backlog at year end to
over $1 billion, positioning us for strong performance in 2009.
That concludes my overview. Back to you, Bob.
ROBERT LAPENTA: Very good, Jim. Thanks, and now we'll open it up to questions.
OPERATOR: Thank you. At this I would like to remind everyone, if you would like
to pose a question, press star and the number one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
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There appears to be no questions at this time.
UNKNOWN FEMALE: No questions?
UNKNOWN MALE: No.
(INAUDIBLE).
OPERATOR: Again, that's star one to ask a question. There appears to be no
questions at this time.
ROBERT LAPENTA: Well, I hope we don't have a technical problem here. We've
obviously had a problem getting this call hooked up with AT&T, but if that is in
fact the case, we thank you for your participation and if there are any
questions later on, Doni, myself or Jim will be available to answer them.
Thanks very much and we'll talk to you again in the next quarter.
OPERATOR: Thank you. This concludes today's conference call. You may now
disconnect.
END
L-1 IDENTITY SOLUTIONS
MODERATOR: LISA CRADIT
JULY 30, 2008
2:00 P.M. ET
Operator: Good afternoon, my name is (Pam), and I will be your
conference operator today. At this time, I would like to
welcome everyone to the L-1 Identity Solutions supplemental
second quarter 2008 financial results Q&A conference call.
All lines have been placed on mute to prevent any background
noise. After the speakers' remarks, there will be a question
and answer period.
If you would like to pose a question during this time,
please press star, then the number one, on your telephone
keypad. If you would like to withdraw your question, press
the pound key. Thank you. It is now my pleasure to turn the
floor over to Lisa Cradit.
Ms. Cradit, you may begin your conference.
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Lisa Cradit: Good afternoon and thank you for joining for L-1 Identity
Solutions 2008 second quarter and first six months financial
results supplemental conference call. Statements that
representatives of L-1 Identity Solutions make during this
call that are not historical facts are forward-looking
statements made under the safe harbor provision of Private
Securities Litigation Reform Act of 1995.
Forward-looking statements are based on management's current
beliefs and assumptions and involve inherent risks and
uncertainties. Any statements made today about future
expectations or results are necessarily only estimates.
Actual results could differ materially from any
forward-looking expectations. Factors that may cause
differences between forward-looking expectations and future
actual results are fully described in the company's SEC
filings.
The company expressly disclaims any obligation to revise or
update any forward-looking statements. Representatives of
L-1 plan to use a number of defined financial terms during
this afternoon's call, such as adjusted EBITDA, organic
growth and unlevered cash, free cash flow. Please refer to
the company's earnings press release, issued this morning,
for further definition and context on the use of these
terms.
With that, I will now turn the call over to Mr. Bob LaPenta.
Bob?
Bob LaPenta: Good afternoon, everyone, and I apologize for the technical
issues we've been having. I understand they emanate from an
AT&T new facility, or something like that. At any rate, I
appreciate you devoting some additional time to us and we'll
open it up right for questions.
Operator, are there any questions?
Operator: Thank you. At this time, I would like to remind everyone, if
you would like to pose a question, press star, then the
number one, on your telephone keypad. We will pause for just
a moment to compile the Q&A roster.
Thank you. Your first question is coming from James
Ricchiuti from Needham & Company. Please go ahead.
Bob LaPenta: Hi, Jim.
Operator: Mr. Ricchiuti your line is live.
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(Jim Ricchiuti): OK, I'm having some audio problems on my end.
Bob LaPenta: Oh, boy. We've got to reschedule our second quarter
conference call for tomorrow.
(Jim Ricchiuti): There you go, Bob.
Bob LaPenta: Yes, go ahead, (Jim). Sorry.
Male: I think we lost him.
Operator: Mr. Ricchiuti has left queue. Your next question is coming
to Jeremy Grant from the Stanford Group.
Jeremy Grant: Hey, can you guys hear me?
Bob LaPenta: Yes, we can.
Jeremy Grant: Fantastic. Hey, just one question. I wanted to know if you
could talk a little bit about what HIIDE and PIER sales
looked like in the quarter and sort of the outlook going
forward. I know in the first part of the call you mentioned
a lot about the 4.0s versus the 5.0, and I'm wondering what
kind of new things are we going to see in the 5.0 that are
going to be an advancement?
Bob LaPenta: OK, well, we saw about 1,000 or 1,100 HIIDEs, which
basically consumed the invested that we had of the 4.0s. You
may recall that at the beginning of the year we said we had
about $8 million in funding toward development of jump kits
and the next generation HIIDE, the 5.0.
The 5.0 is going to have liquid lensing. It's going to have
GPS. It's going to have networking capability and a larger
onboard matching capability. I think it's going to go up to
about 350,000, from an onboard capability now of about
25,000.
So it's also a little lighter - well, no, it's actually just
slightly heavier, but it has a lot more capability.
Jeremy Grant: OK, and what is the outlook do you think for the second half
of the year in terms of DoD procurements or international. I
know you mentioned there was one international that you
hoped was in the Q.
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Bob LaPenta: Yes, and you may recall that I mentioned that at the
beginning of the year. Actually, that was a program we were
hoping to book toward the end of last year and I guess it's
typical for these type of opportunities, when you're dealing
with foreign countries and entities. But the budget was
approved and we are currently negotiating with the customer.
Can't talk about numbers, but the program's going to involve
initially an integration phase and then there are going to
be a number of HIIDEs, and we're not sure whether they're
going to buy 4.0s or 5.0s - I guess it depends on timing.
The 5.0s are going to be available around the fourth quarter
of this year, probably in November, and relative to demand -
you saw that we announced a basic ordering agreement of
about $24 million. That just includes jump kits, expansion
modules, some additional batteries, the initial complement
of 4.0s that they acquired. And up to now, about $8 million
of that has been released, so we would expect some portion
of that remaining $16 million to be released during the rest
of this year.
Relative to the 5.0s, and I think you mentioned this
yourself, this is one of the items that is being considered
for a (Palm), to become a program of record type item. So,
again, the customer is spending money, developing this
capability. We think beyond there's going to be a 6.0, which
will be a lot smaller, a lot lighter and a lot more capable
also, but we expect them to buy 5.0s next year.
Jeremy Grant: OK, and the question on the (Palm) was my second question,
so that's about all I had. Thanks.
Bob LaPenta: Thank you.
Operator: Thank you. Your next question is coming from Tim Quillin
with Stephens Inc. Please go ahead.
Tim Quillin: Good afternoon.
Bob LaPenta: Good afternoon, Tim.
Tim Quillin: The G&A expenses were up quite a bit quarter to quarter. Was
that a number that we should plan on for the rest of the
year, or will that come down a little bit in 3Q and 4Q?
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Male: A couple of things happened there. Again, we're making
investments in our marketing infrastructure in Washington,
but the largest increase there was as a result of our
integration of SecuriMetrics and Identix into the Biometric
group. We took a look at a number of people and, as a
result, there were some severance charges that hit the
second quarter.
Bob LaPenta: Yes, and they were what?
Male: Two million dollars, yes.
Tim Quillin: OK, that's helpful. Can you also walk me through the revenue
model for Registered Traveler? I think you talked about a
per-enrollment type of fee, but can we look at this per
kiosk and then per applicant, as well?
Bob LaPenta: Yes, but, again, we're not talking material numbers, but
I'll give you a little color on what it looks like. Right
now, there are 19 airports. You may have read recently that
TSA has now approved this basically to go in all airports
and we provide all of the hardware. We provide the IP and we
get a per-subscriber fee. The subscribers are ramping up
nicely and the re-up, where people basically renew their
subscription, is running north of 90 percent.
So right now it's probably generating $2 million to $3
million a year, and we would expect that as their
subscribers increase, it's going to create a very nice
annuity or revenue stream for us. We also get a maintenance
fee per airport, and, again, I don't want to talk about
numbers there, but it's a decent number and it pays for all
of our equipment upgrades and maintenance of those airports.
Tim Quillin: OK, that helps us think about that. And during your prepared
comments earlier today, you talked about an inventory build
for certain programs that you expected later this year. Can
you talk about exactly what you're building inventory for?
Male: I think we increased inventory overall by $5 million. There
were a couple of programs related to - we're still selling,
even though HIIDEs are a tremendous product and sale for us,
we still sell a lot of PIERs, so there was an order for
PIERs that we got that we will deliver in the third quarter.
There were some live scan systems as part of the jump kit
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that Bob talked about. And for the past - pardon, program,
we were beginning to build inventories to be able to meet
the customer demands in the third quarter.
Bob LaPenta: Yes, and I'd say US Passport Card is probably the largest
percentage of that.
Tim Quillin: OK, good, and then just a couple of details. Cash from
operations during the quarter and Capex.
Male: Yes, we had free cash flow, almost $15 million, and my
recollection was that Capex was $4.6 million for the
quarter.
Tim Quillin: OK, the free cash, is that an unlevered free cash. Is that
what you're referring to?
Male: That's correct.
Tim Quillin: OK, OK, and then if you could just talk about acquisitions
after Digimarc. Thank you.
Bob LaPenta: Digimarc is a large acquisition for us. We're going to make
sure that we get that integrated. When we start realizing
the synergies and get that operating as one integrated
entity. Jim mentioned our new bank facility. We're currently
negotiating that. We would expect that after the Digimarc
transaction, we're going to have dry powder somewhere in the
$100 to $150 million range. We are now going to look at
acquisitions for the next six to nine months as a must-have
mode as opposed to a nice-to-have acquisition.
So with our cash flow we would expect to pay down debt, look
at opportunities very critically and those that we consider
to be very compelling, we continue to pursue.
Tim Quillin: Thank you.
Operator: Thank you. Your next question is coming from
(BrianRuttenbur), with Morgan Keegan.
Please go ahead.
(Brian Ruttenbur): Thank you. My first question deals with the G&A breakdown.
You said that in the third quarter there should be about a
$2 million drop, so we should be modeling $21 million. Is
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there anything else that should be ramping up in the third
quarter, ex Digimarc?
Male: I would say that our plan for the third quarter is about $2
million less than what we have in the second quarter.
(Brian Ruttenbur): And then gross margins, you were roughly 33 percent. Should
we expect that level or higher going forward, or will there
be any dips, do you anticipate?
Male: We believe that without the Digimarc acquisition, we'll
continue to grow that margin a little bit. With the Digimarc
acquisition, it will also enhance the margin. So we see that
growing 33, 34. I don't to say 35 - Bob will say 35, but I
think certainly it's going to grow and certainly the cash
gross margin is going to be I expect north of 40 percent.
(Brian Ruttenbur): OK, and the debt breakdown, can you give it to us?
Bob LaPenta: Yes, right now we have about $75 or $80 million outstanding
on our line. We would expect to get a bank facility north of
about $400 million. It's going to be composed of a line of
credit and a term loan. We're finalizing the split relative
to that, but we would expect a line of credit somewhere in
the $100 to $150 million range.
(Brian Ruttenbur): OK, and what are you paying for that? What kind of interest
rates should we be modeling? That's what I was kind of
shooting -
Jim DePalma: I think we indicated in the tender we're talking about on
the revolver 3.75 above libor and we indicated that the term
would be in the four to five range above libor, and I think
it's going to be about 4.5, and there might be a little OID,
probably a 1.5 percent discount.
(Brian Ruttenbur): OK, very good. Thank you very much.
Bob LaPenta: Thank you.
Operator: Thank you. Your next question is coming from Jim Ricchiuti
with Needham & Company.
Please go ahead, (Jim).
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(Jim Ricchiuti): Thank you. I'll givei it another try. I wonder if you can
give a little bit more breakout on the revenues. You
mentioned, I believe, that biometrics was around $37 million
in the quarter and secure credentials around $32. Can you
give us a little breakout on intelligence services and some
of the other components.
(Jim): Well, intelligence services was about - north of $50
million. That's ACI, McClendon and SpecTel. And when we
looked at the service business, we include IBT as well, and
that we said was...
Male: Seventy million.
(Jim): So around $72 million, $52 was intelligence services.
(Jim Ricchiuti): OK, and that $52 was up around 20 percent, did you say, year
over year?
(Jim): Right, and that includes, again, on a pro forma basis, we
haven't had the time to work our magic with ACI and
McClendon yet, like we have with SpecTel. SpecTel is up
about 40 percent and ACI and McClendon are up a little bit
in the first quarter.
(Jim Ricchiuti): OK, and regarding PASS card, how should we think about the
revenues for that program in the second half of the year and
I wonder how would you characterize the margins? I guess
initially the margins will be fairly low and then ramp up
once you go through the printer deployment and some of the
startup costs.
Bob LaPenta: Right. We delivered our initial complement of cards. I think
we delivered maybe 200,000, 250,000 cards. The Department of
State has indicated that the demand, the initial demand for
these cards, is rather robust. But until we get a better
sense of what the rollout is going to be, we've been fairly
conservative in projecting revenue. We think these cards,
there's just to the PASS card itself, they've (punted) about
$215 million five years, so you would expect when it's fully
ramped up for this to be somewhere around a $40 to $50
million a year program, and that would represent somewhere
north of 10 million cards a year.
(Jim Ricchiuti): OK, and, Bob, with pretty decent margins on this?
Bob LaPenta: I think as I indicated way back when we initially lost the
program, it was somewhere around a 20 percent range. I think
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we've made progress now. We've taken some cost out of the
cards. We've gotten our subcontractors, they've become more
comfortable now that they're in production of these cards,
and I think the margins are going to increase and continue
to increase as we increase production.
But right now we're saying somewhere incrementally in the
north of 20 percent range.
(Jim Ricchiuti): OK, and just a final question, just regarding REAL ID and
the grants that came out of Homeland Security. So about $80
million, and it looked like Digimarc has the biggest chunk
of that and it appears to be heavily concentrated also with
the State of Missouri. How should we think about the initial
revenues that could begin to flow out of REAL ID for you
guys and perhaps for Digimarc if you're willing to
speculate, over the next 12 months?
Bob LaPenta: Well, I would expect that a great majority of that, of the
roughly $74 million that we receive, I would expect that a
large percentage of that will be spent over the next 12
months.
(Jim Ricchiuti): OK, and can you give us some flavor as to which pieces of
your business are going to be affected, whether it's
equipment, identity verification. I'm just trying to get a
sense as to how this funding is going to impact you
directly.
Bob LaPenta: Right, and each state is now looking at their requirements
and approaching it actually differently, I guess based on
their requirements or what their current system and
facilities look like.
But basically we're going to be providing consulting. We're
going to be providing software. We developed in house a
software capability that basically walks every state through
the REAL ID certification process and actually it's a great
piece of software, because any impact or anything they want
to change, whether it's where they take the photo, how they
take the photo, how they do the document authentication,
what happens if they change the material? What happens in
the back-end processing?
What if they go from basically over the counter to
centralized processing? And we are going to help the states
work through each of these issues and how it impacts their
process and their cost. So a high percentage of it we think
is going to be in software, consulting, and then providing
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them with equipment that they'll be able to use on a trial
basis in order to become comfortable on how they start
implementing the REAL ID.
So it will also include - for instance, it could include our
facial recognition capability, cameras, document
authentication. We could start providing them with
additional cards. We're also going to hope that we can get
those states that are interested in enhanced driver's
license maybe to take a look at our PASS card program to
create synergies there.
So we think there are a lot of opportunities for us, but
until we actually get into the process and see how they want
to move forward, we'll be a little conservative.
(Jim Ricchiuti): OK, that's very helpful. Just did you guys by any chance
give out your international revenue component in the
quarter? What were international revenues?
Bob LaPenta: I'm going to say they were probably less than 10 percent?
(Bobby), do you have a better number than that?
(Bobby): I think that's about right.
(Jim): We'll be filing a 10-Q here in the next day or two and
you'll be able to see that.
(Jim Ricchiuti): OK, thanks a lot.
Operator: Thank you. Your next question is coming from Paul Coster of
JPMorgan. Please go ahead.
Mark Strouse: Hi, it's actually Mark Strouse on behalf of Paul. Bob, in
your prepared remarks, you mentioned that your divisions are
beginning to work together on bids. Can you give a few
examples of that?
Bob LaPenta: Well, I have actually about five or six examples, but for
competitive reasons I think I'd rather wait until we start
booking these things to tell you about them. But I could
tell you that they involve many projects in Latin America.
They involve projects in India and Vietnam, and where else
did we put a joint bid together?
(Jim): In the United States, we had a number of them.
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Bob LaPenta: In the U.S., Africa. And, again, I don't want to really talk
too much about specifics, but we're finding that the
opportunities for National I.D., e-passport programs, border
security programs, are increasing and our bidding activity
is increasing along the way.
Now, all of these are going to be competitive, but I think
the fact we bid together, we've got our divisions
coordinated and we do offer an end-to-end solution from
credentialing to enrollment to the biometrics to the AFIS
gives us a pretty good positioning on these programs. We've
spent a lot of money - you're seeing some of that come
through in the G&A line and international marketing, I think
we have some more to do there.
But the bidding activity I would describe as robust, and a
lot of them include multi-divisional activity.
Mark Strouse: OK, thanks. And then a few of the companies we talk to that
sell into the state and local government market, at least in
their areas, are seeing some cutbacks in budgets. Are you
guys seeing any evidence of that and what do you think the
risk of that going forward is, given the weak economy?
Bob LaPenta: I think that's certainly a consideration, but when it comes
to driver's license, things of that nature, I think that's
basically out of their control. If it comes to implementing
new systems, there may be some impact, but our state and
local business right now probably represents, aside from our
enrollment, probably represents I want to say $25, $30
million. So if there were a 10 percent reduction there, it
would not be that material.
Mark Strouse: OK, perfect. Thank you. Congrats on the question.
Bob LaPenta: Thank you.
Operator: Thank you. Once again, if you would like to pose a question,
you may press star, followed by the number on your
touch-tone phone at this time. Thank you. Your next question
is coming from (Joshua Jabs) of Roth Capital. Please go
ahead.
(Joshua Jabs): Good afternoon.
Bob LaPenta: Hi, (Josh).
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(Joshua Jabs): Just following up on the passport side, a couple of
questions. First, can you describe the relationship that you
have with Stanley, given their recently expanded passport
contract and then are you getting any visibility on the 2009
deadline in the E.U. to move forward on the fingerprint
side?
Bob LaPenta: What was the last part of your question?
(Joshua Jabs): The second question was on the June 2009 deadline in the
E.U. to move towards the second - or to start issuing second
generation passports with the biometrics?
Bob LaPenta: OK, let's see. So the first question was regarding...
Male: Stanley.
Bob LaPenta: Our relationship is excellent with Stanley. We work with
them well. We've been working with them, I would say, for
the past five to 10 years, and we have a great relationship
with the Department of State, particularly after what
happened with G.D. on the PASS card program, and our good
performance, A, on this program and, B, on passports. So we
would only expect our relationship with Stanley to get
better.
We're going to continue working with them and our
relationship with the Department of State is very good.
Relative to the U.K. e-passport opportunity, we currently
are not on that program. We're exploring opportunities with
Northrop and Raytheon in that area, but we don't have any
revenue forecast on that program.
(Joshua Jabs): Bob, I guess I was talking more broadly about the European
market on the passport side.
Bob LaPenta: Yes. We're working with a number of partners. In India, were
working with Tata. We are considering a relationship with
(Jamaco) on some of these passport opportunities. But I
think Digimarc is really going to help us internationally
with their capability and the fact they do produce national
ID cards in Russia and I guess, where? In Malaysia they have
facilities, and Mexico.
But, again, we have not won any passport program per se as
yet.
(Joshua Jabs): OK, great, thank you.
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Operator: Thank you. Your final question is coming from (Ryan
Cunningham) with Solis.
Please go ahead.
(Ryan Cunningham): Hey, guys. Sorry if this question was already asked, because
I joined a little late, but on the acquisition front, in
terms of what you guys are looking at in the strategic
pipeline, are you absolutely focused on integrating Digimarc
for the near term, or are there other things you're
potentially looking to acquire over the next 12 to 18
months.
Bob LaPenta: There are a couple of opportunities we're looking at, but as
I indicated, we're going to be very careful which
opportunities we pursue. And for the next six to 12 months,
these acquisitions are going to have to be in the must-have
category, as opposed to the nice to have. So we're really
going to concentrate on getting Digimarc integrated, getting
the synergies together. And I've got to tell you, speaking
of the synergies, we think we uniquely have great
opportunities for those synergies because of our involvement
in the driver's license market.
Again, I don't want to talk in too much detail about that,
but we're very encouraged about the integration and the
synergies we see in the two companies.
(Ryan Cunningham): That's great. And just in terms of potential must-have
acquisitions, are we talking, size wise, like similar to
Digimarc, potentially, or smaller?
Bob LaPenta: I'm not going to comment right now.
(Ryan Cunningham): OK, all right. Just curious because I saw the credit
facility got upsized, and so I was curious if maybe you guys
would be using some of that excess capacity to go out and
potentially make some acquisitions over the next 12 months.
Bob LaPenta: I would say that the odds are pretty good that that will
happen.
(Ryan Cunningham): OK. OK, great. Thank you.
Bob LaPenta: OK. Well, again, I appreciate your participation here and,
again, I apologize for the technical difficulties. We look
forward to talking to you in the third quarter and, again,
we feel good about the quarter and the rest of the year and
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we look forward to talking to you about it in our next
conference call. Thanks again. Take care.
Operator: Thank you, and this concludes today's L-1 Identity Solutions
supplemental second quarter 2008 financial results Q&A
conference call. You may now disconnect your lines, and have
a pleasant day.
END
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