Entrust Inc. Q3 2008 Earnings Call Transcript

Nov. 3.08 | About: Entrust Inc. (ENTU)

Entrust Inc. (ENTU) Q3 2008 Earnings Call October 23, 2008 5:00 PM ET

Executives

Bill Conner – Chairman, President and CEO

David Wagner – SVP and CFO

Dave Rockvam – VP, Corporate Business Development and IR

Analysts

Rob Owens - Pacific Crest Securities

Jay Meier – Feltl & Co.

Craig Nankervis - First Analysis Securities

Andrew Holme - Dougherty and Company

Operator

Thank you for participating in Entrust Inc. third result quarter conference call. I would like to remind everyone that this conference call is being recorded. Joining today’s meeting is David Rockvam, Vice President, Corporate Business Development of Entrust Inc. Mr. Rockvam, you may begin.

Dave Rockvam

Thank you and good afternoon, everyone. I would like to thank you for participating in our call this afternoon to discuss Entrust's third quarter 2008 results. On today's call will be Bill Conner, Entrust's Chairman, President and CEO; and David Wagner, Entrust's Senior Vice President and Chief Financial Officer. Today's call is being recorded and the replay information can be accessed from today's press release or on our web site.

As always, before we begin, I would like to point out that we attempt to be as informative as possible. In that effort, we will make projections or other forward-looking statements relating to future events or the future financial performance of the Company including guidance regarding revenue and EPS for the fourth quarter and full year 2008, both on a GAAP and non-GAAP basis, total GAAP expenses, non-GAAP expenses, and GAAP expenses for the fourth quarter 2008 and cash flow from operations excluding the net change and accrued restructuring charges.

These statements are subject to a number of market risks and uncertainties. We caution you that such statements are only Company projections and those actual operating results or events may vary materially. In that context, I would refer you to our most recently filed 10-K and 10-Q reports regarding the various risks elements facing Entrust Inc.

Now I would like to turn the call over to Bill Conner, Entrust's Chairman, President and CEO.

Bill Conner

Thank you, Dave, and good afternoon, everyone. This afternoon, we released our results from operations for the third quarter of 2008. In this challenging business environment, we grew total and product revenues, we reduced cost, we increased earnings and we are cash flow positive from operations.

Specifically in the third quarter, total revenues increased by $500,000 year-over-year to $24.5 million. The increase in total revenue in the quarter was due to the strength of our product revenue which was up 15% over last year. Product revenue in the quarter was driven mainly by a significant growth in our emerging growth businesses which were up 88% from a year ago and are up 50% year to date. Demand for our fraud and risk based authentication solutions continue to be the strongest offering in this group and have now combined for over 100% year-to-date growth.

Our Public Key Infrastructure (NYSE:PKI) product revenue saw some weakness being down 12% in the quarter and 3% year to date. This was due to the continued decrease of resell for Check Point's full disk products. The movement from perpetual license starts subscription based manage service offering in smaller government customer purchases.

In the quarter, we closed 130 transactions which is up from 103 last quarter and up from 115 in the third quarter of 2007. Notably, new customer’s accounted for 44 transactions up 38% of our total transactions. New customers increased 42% in the quarter and 30% year-to-date over last year.

As I look at the vertical markets, financial institutions accounted for 49% of product revenue in the quarter, an increase of 92% from a year ago and 40% year to date. In the quarter, four of our top five product transactions were with financial institutions outside of the United States and Great Britain.

In this vertical, our geographic diversity has clearly benefited us and it could also show us the momentum we are getting in our fraud and risk based authentication solutions globally. The government vertical accounted for 36% of product revenue. This was down from 45% in Q3 a year ago and is roughly flat on a year to date comparison.

Product revenue from our subscription businesses continues to be strong in the quarter. Our PKI managed service offering MSO continues to gain traction and in the quarter, we received a key renewal from the US Federal Government. This renewal was an increase to the prior year reflecting the continued rollout and acceleration of our solution across the different department and agencies.

A PKI base as a sole subscription business also experienced record bookings in the quarter and a 34% increase in revenues. Demand for our managed SSL certificate offering and Unified Communications Certificates from Microsoft Outlook web access remained the key drivers of our growth in the SSL business. As result, our total subscription revenues are up 6% from a year ago and accounted for 56% of the quarter’s total revenue.

Additionally, our support and maintenance renewals continued to be strong in the quarter as we were able to renew nearly 96% of the quarter's revenue. However, we saw some impact on top line revenue as a result of the strengthening US dollar. Year-to-date, our support revenue made up over 42% of total revenue and has grown by over 7% from last year. In our overall services we did experience a shortfall as a result of a decrease in professional services revenue. The decrease is primarily due to weakness in the US market. That said year to date overall service revenue is roughly flat to last year.

Combination of our year-over-year increase in total revenue and product revenue coupled with our decrease in total expenses helped us generate $1 million or a $0.02 non-GAAP profit for the quarter. This is a $900,000 or $0.02 per share non-GAAP increase over the third quarter last year and is a $4 million or $0.07 non-GAAP increase year to date. We were also able to generate $400,000 in operating cash flow for the quarter bringing our year to date performance to $8.4 million in cash flow from operation. We are now just $1.6 million away from our $10 million goal for all of 2008.

We are pleased that in the current economic environment, we were able to grow our revenues, substantially grow our product revenue in earnings while continuing to generate cash in the business.

I will now turn the call over to Dave Wagner for the details of our financial results.

David Wagner

Thanks, Bill. You can tell from Bill's remarks that in the third quarter, Entrust continued execute very well on our objective of increasing our cash flow, increasing our earnings, reducing our expenses and improving our organizational effectiveness as measured by revenue per headcount.

Despite these successes, we achieved lower than expected total revenues. This shortfall was the result of the lower professional services revenue particularly in North America lower third party hardware revenue and also by a small impact of a lower Canadian dollar in September on our support revenue. Despite the services shortfall on a year-over-year basis in the third quarter, we were able to increase overall product revenue 15%, increase subscription revenue by 6% and total revenue by 2%. We were also able to decrease operating expenses by 5%, increase non-GAAP earning by $900,000, increase revenue per headcount by 10% to $233,000 on an annualized basis and increase cash flow from operations by $2.1 million.

Our continued focus on cash, subscription revenues, expense management and operational effectiveness clearly paid off in Q3. The fact that we have a head start on these focused areas will be even more important as we head into challenging market. In my remarks this afternoon, I will be providing a detailed review of our third quarter 2008 financial result from a P&L and balance sheet perspective as well as our guidance for the fourth quarter of 2008.

Looking at our third quarter P&L in more detail, total revenues are $24.5 million, up $500,000 or 2% from the third quarter of 2007 and flat to the second quarter of 2008. Product revenues of $9.4 million increased $1.3 million or 15% in the third quarter of 2007 and $400,000 or 5% from the second quarter. The increases in product revenue are due to the continued growth on our hosted certificate offerings, both ECS and Managed Services and to a stronger revenue contribution from transactions over $500,000. Interestingly, both deals over $500,000 in the quarter were for emerging products in the finance vertical.

Our top five transactions in the quarter accounted for 10% of revenue which is very much in line with the 8% to 11% range we have seen over the past seven quarters. We continue to be pleased with the progress we have made in increasing our subscription revenues. In the third quarter, we achieved an overall 6% growth rate in our subscription businesses. Our product subscription growth from Q3 2007 was 22% and our support revenue growth was 2%. The subscription revenue growth quarter-over-quarter was dampened by currency effects specifically the US dollars strengthening against the Canadian dollar which is the currency in which a significant portion of our deferred revenues are denominated.

From an overall P&L perspective, the strengthening of the US dollar is positive to Entrust' earnings. However, the benefit of decreased expenses is offset in part by a decrease in revenues and particularly in subscription revenues that comes from the deferred revenue backlog.

Highlighting the achievements of the hosted certificate businesses, Certificate Services achieved its fourth consecutive record bookings' quarter and 24th consecutive quarter of sequential revenue growth. Year-to-date revenue from our Managed Service offering is $800,000, a 300% increase over small base in the same period last year. We continue to believe that growth of these businesses is a very positive trend for the Company in the intermediate and longer term.

Service revenues are $15 million decreased 5% from Q3 2007 and 3% from the second quarter 2008. The decrease in services revenue from last quarter is due to lower North America professional services revenue due to budget constraints at our customers. This trend, combined with the impact on support revenue as the result of the strengthening dollar has caused us to reduce our revenue expectation from services. We now expect quarterly services to be in $15 million range similar to the amount recorded in the third quarter.

On a positive services note our US government services team, CygnaCom, increased its revenues quarter-over-quarter and had a solid outlook. Gross margins in the third quarter 2008 were 62%, a one point decrease from both the third quarter of 2007 and from the second quarter. The overall decrease was driven by services margins which decreased 2 points to 53% due to the lower services revenue. We expect the overall margins to return to the 63% to 65% range in the fourth quarter.

Operating expenses on a non-GAAP basis were $14.1 million dollars compared to $14.9 million in Q3 2007 and $14.8 million in Q2 2008. The decrease in offering expenses was primarily due to our continued focus on expense reduction across all our P&L lines. A portion of the expense savings attributable to changes in the Canadian dollar were nil for the year-over-year comparison and approximately $350,000 for the quarter-over-quarter comparison.

Our total numbers of employees ended the quarter 423 versus 458 a year ago. Our hard work and continued focus on expense management and operational effectiveness played an important role in achieving the improvements in cash flow and earnings.

The net result of our revenue attainment and expense management in the quarter was a non-GAAP income of $1 million or $0.03 per share. This compares to a non-GAAP income of $100,000, or breakeven in the third quarter of 2007. The non-GAAP adjustments for the quarter were $1.5 million for impairment of intangible asset, $382,000 of stock option compensation and $353,000 of amortization of tangible assets. On a GAAP-basis we had a net loss of $1.2 million or $0.02 per share compared to a net loss of $1.5 million or $0.02 per share in Q3 2007.

Intangible asset impairment is related to capitalized development cost incurred to develop video based training. This training was originally developed for sale to our customers; however, due to project issues at our lead customer which are outside of our control they will not be licensing the content. This fact, combined with our focus on operational efficiency, has resulted in the decision to discontinue investment in the maintenance of the content. There is no cash impact to this decision.

On a balance sheet perspective, we close the quarter with $23.4 million of cash and cash equivalents, an increase of $1.9 million from the same quarter year ago and an increase of $3 million for the year to date. Cash flow from operations excluding restructuring cost was positive by $400,000 for Q3 and is $8.4 million positive for the year to date. Our day sales outstanding or DSO was 57 days, which is the lowest level since 2004.

Deferred revenue of $27.4 million decreased $800,000 from last year due primarily to the impact of the Canadian dollar on the deferred revenue balance. We expect deferred revenue to decrease in Q4 by $1.5 to $2 million due to the currency impacts.

Moving on to our guidance, Entrust is targeting fourth quarter 2008 revenue between $24.5 million and $27.5 million and we are targeting a net income in accordance with GAAP of between $0.02 cents and $0.04 cents per share and on a non-GAAP-basis, a profit between $0.04 and $0.06 per share. The high end of non GAAP earnings per share for the quarter is in line with the Company’s prior guidance of $0.08 per share for the second half of 2008. The Company’s Q4 2008 total expenses on a non-GAAP basis are expected to be approximately $23 million.

This revenue and expense guidance is predicated on $0.85 Canadian dollar and could move up or down with exchange rates; however, the fourth quarter earnings guidance has been derisked by forward contracts. The Company continues to target cash flow positive from operations excluding restructuring charges for the full year of $10 million

In conclusion, our continued focus on growing our subscription revenues, carefully managing cash and prudent expense control has positioned us well for our fourth quarter guidance and the lower expense base has put the Company in a position where we can improve earnings even on lower revenue attainment in a tough environment.

I will now turn the call over to Bill for some additional comments on our business.

Bill Conner

Thanks Dave. I would now like to give you an update on a few key areas of our business before we open up for Q&A.

The first areas around some key customers successes in our online fraud and risk based authentication solutions. As I mentioned earlier our online fraud and risk based-authentication solutions had combined for over 100% growth year today. In the quarter, our largest transaction was for our financial institution that included IdentityGuard and TransactionGuard. We had our first large shipment of IdentityGuard to our [Coltac] securities as a part of their phase rollout. And in the quarter, 63 of our 130 transactions were IdentityGuard. Up 26% from last year and year to date, we have had 182 IdentityGuard transactions, an increase of 31%.

In the quarter we also won another large continental European bank for TransactionGuard our online fraud detection solution. TransactionGuard was selected because of how it seamlessly deals with fraud in the online banking channel. TransactionGuard key attributes are its ability to be zero touch, keep data in-house, and to stop fraud in real time in the online channel.

These key attributes are major differentiators that Entrust has and are becoming more important especially as financial institutions face compliance with regulations such as faster payments or red flag in the overall increase in online fraud. As these financial intuitions reevaluate past purchases or in-house solutions for online fraud detection, we continue to be better and better positioned.

The second area I would like to cover is our PKI and Managed Service Business. As I mentioned, our overall PKI was down in the quarter and down slightly for the year; however this is going to be a growth driver for our business. PKI business is pure by government projects around citizen employee credentialing and our customer’s desire to purchase our solutions in software as a service model.

As I mentioned last quarter, there are new technical classifications being adopted by the European Commission and others around ePassports. These new technical specifications called Extended Access Control or EAC have an initial deadline for compliance set for June 2009. At the inoperability tests for this second generation passports and fraud in September, we demonstrated the flawless execution of PKI Certificate Exchanges using United Kingdom and Slovenia system in a multi country test environment. Showcasing a point-and-click PKI system, we confirmed that the security infrastructure for second generation ePassports based on EAC is truly ready for global deployment. Our EAC product helps us capture two additional EAC ePassports transaction in the quarter and positions as well as other countries start to make product decision.

Also important to our global ePassport initiative is partners. In the quarter, we announced partnerships with leading ePassport providers in 3M and GET as well as completing integration with L1 that was also demonstrated in the fraud event. EPassport is just one area where PKI continues to be a solution for solving the dilemma of how to cost-effectively protect both identity and information. National IDs, order projects and online applications all have requirements for identity and information protection for which PKI is well-suited.

We are also optimistic on the US federal government. As I mentioned earlier, we received an increased subscription renewal with the US federal government in the third quarter. US government has also passed continuing resolution and a partial budget which should be positive to our business which brings me to my last area and that is around the success we are having on our Managed Services business.

As I mentioned earlier our SSL business continues to experience strong growth both in revenue and bookings. Our hosted PKI offering is also experiencing very strong customer demand. Already in Q4, we had signed contracts with 3 Fortune 350 US enterprises bringing our total number of Managed Services Fortune 350 customers won this year to five. In fact, we are expecting year over year bookings to grow from 300,000 last year to over 4 million this year. These significant subscription bookings will drive modest revenue in Q4 but will be impacted for next year generating roughly 500,000 of additional product revenue per quarter.

So in summary we are continuing to execute our business plan in this market. Fraud and risk based authentication now accounts for 25% year to date product revenue and is up over 100%. In PKI, we have strengthened our global leadership position through product enhancement for government prevention like EAC and HSPD 12 delivering on our software as a service business and by increasing our product leverage with key partnership like Microsoft, Cisco and 3M.

We have also strengthened our financial model. We increased our subscription revenues to 56% of our quarterly revenues. We increased our cash and cash equivalents by $1.9 million from a year ago and we reduced total expenses by $2.4 million and operating expenses by $3 million year-to-date from a year ago. And finally we have a good funnel. We have already booked over 3 million of product revenue and generated nearly one million in managed service bookings in October which puts us in a good position to execute on our revenue target of $24.5 million to $27.5 million for the quarter. Based on our revenue outlook and our lower expense base, we are well positioned to make our fourth quarter non GAAP earnings per share target of $0.46 and our full year non GAAP cash flow from operations of over $10 million.

Once again, I would just like to reiterate how proud I am of the Entrust team and their accomplishments and performance. With that, I will like to turn back the call back over to our moderator and ask you to field your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Rob Owens - Pacific Crest Securities

Rob Owens - Pacific Crest Securities

Dave, did you give the geo breakout? America versus international?

Bill Conner

Rest of the world is about 38%. North America is 62%, Rob

Rob Owens - Pacific Crest Securities

Okay. So, you saw I think international picked up ending the quarter.

Bill Conner

Yes. Yes, very strong pick up in Asia, Latin-America, in Canada and relatively good performance in Europe.

Rob Owens - Pacific Crest Securities

Okay and then what was the linearity of the quarter?

Bill Conner

Fifty percent.

Rob Owens - Pacific Crest Securities

Fifty percent. So, Bill you have had strong starts the last couple of quarters and I guess, maybe you can help put that in perspective or you are just not seeing a lot of that activity in middle month? And then in line of what is going on with the economy in general, it seems like you are off to a pretty good start here in the fourth quarter. You think with $3 million of product revenue and $1 million Managed Services booking, so can you help me flip those two comments?

Bill Conner

Yes. So, first one relative to previous quarters, in Q3 you always have summer effects so actually we had a very good start in July. I think we are of to like a fairly good start with our call was later in the month. It is at the very end of the month and August is always slow there, Rob. As we look at this quarter Q4 that is a very good start for early in October. So, there is activity out there. The funnel looks good, it is just that it is a very strange market right now for what I will call mid sized deals, which is why I see the range we are talking to for what I will call perpetual deals and clearly, you saw a lot of the PS1 down in Q3 that we would have thought would have normally been there, but people are either buying the product and going along or just not doing the PS at all in some cases.

Mid service, we still see that actually picking up steam as we have kind of been predicting each quarter, we see that going well; US federal government has now got a good volume on role out of HSPD 12 which is good for us and clearly as you see, PCS has had strong performance and MSO is building the backlog in terms of orders that is we said we will start to contribute a meaningful product next year

Rob Owens - Pacific Crest Securities

Okay great. In terms of headcount reductions, what functional areas have those been and have you actually reduced quota carrying salesman out there?

Bill Conner

We were down on all lines of the P&L and if you actually look at it, Rob, we have taken it out of R&D. We have taken it out of finance and in our G&A if you want to look at it there and yes, we have taken some out of the back office on sales on non-quota carrying but we always are trimming some quota carrying as we go and as you know, we did take down heads of sales out of North America this year and we took down some other headcount in other areas in leadership categories.

Rob Owens - Pacific Crest Securities

Okay great and one more question if I might since I was only at the queue, for the last three years, you have seen pretty flat revenue growth. First question, is there anything in the portfolio that you think can jumpstart overall growth and second, I guess as your services has grown in one year, your product has suffered as your product has grown, your services has suffered. Now it looks like you might see some pressure on that services line for a while, is there something that you can do to, I guess, reinvigorate that or stabilize that here?

Bill Conner

So, let us break that into two pieces, Rob. On the product side, let us talk that first. If you really think of our business is a kind of a fraud and risk base off, if that is business had grown a 100% year-to-date. That business in Entrust did not exist two years ago or three years ago back in '05. So we have gone from nothing in that category to over a $9 million business maybe as we look toward '08, right? So, 100% year-to-date growth, you look at those numbers and I will say that is certainly a juggernaut and if you look at fraud clearly now catching this next wave of fraud on the internet as some of our competitors struggle there and some of the in-house solution’s banks have deployed are not keeping up with online fraud.

If you go to ECS, not much needs to be said there. That business is tracking along and off 34% which then kind of leads you back to the core PKI piece or the PKI piece itself and there, you can see our strategy has been really to start migrating that business to a subscription business which is our MSO or other certificates. We are doing okay in that. It is just taking us longer to get that booking translated to revenue our other strategy but on the MSO side role to US Fed government that is hitting basis now. If you look at the core perpetual product on PKI, we have leaned in the government there, we have leaned in the EAC and we have seen that business starting to take off and grow there. So if you look year-over-year, it is roughly flat but a lot of that has been pricing pressure from free Microsoft or open store and a lot of that has been migration into NSO or other pieces as we change that model to those pieces and some of the EAC and other stuff will start to kick in more meaningful things next year.

Operator

Your next question comes from Jay Meier from Feltl & Co.

Jay Meier – Feltl & Co.

It seems kind of a weird phenomenon out there, it appears that the banks are actually spending money on some stuff and you appear to have some relatively strong bank spend in this quarter and some of your comps suggested that there are some banks are spending in this quarter. I thought the banks are all going out of business, how do you explain that?

Bill Conner

Well, I think it is not just what we have seen. I think overall banks are spending less in overall IS and IT; however if you look at security and fraud, those are still pretty high mindshare in budget percentages so at least to people I talked to, their overall dollars in maybe percentages are going down, Jay. Clearly, while they are focused on cost and security and fraud, we got a low cost position with risk based authentication and we got a value proposition around fraud that as I say despite money going down, fraud is going up, you cannot deal with it. So, we have been very fortunate to be in a good position with the portfolio globally that even as kind of banks in the US or UK have boiling down in the short term while other banks around are putting their money where their mouth is and unconvinced the other banks here and the UK and the US are also going to be spending dollars as they go into next year.

Jay Meier – Feltl & Co.

Okay. That sounds good. So, following on the last caller’s question, we are talking about an underpinning for growth going forward, hopefully primarily in your product side but we would like to think this is going to kick in and we have been talking about this for a few years now. Care to give us a ballpark at what you think your product growth rate could look like in 2009?

Bill Conner

Of course not. We will do that after we get through Q4. I think you got to look at the risk base off in fraud business, ECS and then PKI, that is what we normally do as we go on to January call. It is not hard enough to figure out what is going to be in Q4, much less next year. We are going to take it a half of the time like we normally do; Jay and we will be back to you in January with that one.

Jay Meier – Feltl & Co.

Okay, David I think you gave us some statistics about how Forex hit your output this quarter and also how services fell off because of some of the economic down draft. Could you repeat those statistics again?

David Wagner

Yes. So, on the expense side quarter-over-quarter, the Canadian dollar added $350,000 effect and around numbers, if you think of it, it is about $120,000 per penny reductions how the expense piece moves down. And on the maintenance side, in deferred revenue I talked about that will be going down quarter-over-quarter as a result of the foreign exchange and that has ran a couple of $100,000 to $300,000 per penny so it will be a million and a half or two down depending on where the Canadian dollar ends up with US from the deferred backlog.

And also you noted that we have for the fourth contract in place for this quarter so we put that in place before this call so that our earnings are derisked. So even though revenue and expense maybe move up or down, the difference between revenue expenses as we covered with forward contracts so the earnings impact is derisked in quarter.

Bill Conner

And that kind of brings it back to, Jay, relative to '09. As you know, we have been focused on getting double digit, ROIs coming out of Q4 which we should be able to do now based on what are outlook is and as you roll back into next year, clearly the cost actions we have taken this year will allow us to have earnings growth at a much lower revenue outlook than where the street is currently modeled on '09.

Jay Meier – Feltl & Co.

But you do not expect that that cost reduction hampers your ability to grow revenue next year?

Bill Conner

I think the only thing hampering our growth is the market and how many people we fit into the street and how much leverage we can get out some of the new partnerships that we are working within some of these new areas. Assuming FX, the FX piece that Dave have already talked about that.

Jay Meier – Feltl & Co.

Alright, who knows about that these days?

Bill Conner

That is my point

Jay Meier – Feltl & Co.

So, a number of companies over the last couple of years’ out there have transitioned from a perpetual license type of model to a subscription model and they all go through kind of the same pains. There is this sort of slow in growth because you do not get the same pop up in the license sale, is there any way for you to kind of give us some color about what kind of trade off there has been?

Bill Conner

That is a really good question, Jay. If you look at just the numbers we talked about, I think we probably brought $800,000 in revenue on MSO year-to-date and we are talking about, for the year, $4 million bookings and that is all PKI. That is not anything other than PKI, so if you take that roughly flat year-to-date, PKI are down 3% I think in aggregate and most of the downturn there was our Check Point piece, right? You take Check Point out in the comp year over year that looks like a very different number. Then you start to look at the subscription piece, but know subscription is usually, perpetual is usually 3 xs, 2 to 3 x well in normal subscription revenue and indoor booking would be. So that could help feel like what the model would look like if we are drawing perpetual as opposed to subscription in your model.

Operator

The next question comes from Craig Nankervis - First Analysis Securities.

Craig Nankervis - First Analysis Securities

I guess my first question is million dollar deals. I think maybe at the beginning of the year, you contemplated two for the year. Does Q4 guidance contemplate one because we had one I think in Q1, right?

Bill Conner

Yes, we really not updated guidance on; I think we had one that was at a million dollars in Q1 and then one just under it in terms of it. Now, there are those kinds of opportunities out in our funnel. It could be a million dollar deal; it could be a half million dollar deal, we kind of derisked in our range kind of moderating those over million dollar deal. Certainly in the high end of that range, you could have a deal or two or one that is a couple of million dollars.

Craig Nankervis - First Analysis Securities

Okay. As you look to '09 and ways to help the growth in '09, did you see pretty much an unchanged outlook from this year relative to the larger deals, Bill?

Bill Conner

Yes, I think in this kind of market, Craig, we started it two years ago trying to derisked as you well know this larger over million dollar deals and our strategy is to continue to do that. We love to have them, but we know those are very hard to get through legal finance and business unit guides in these kinds of markets. So, we love to plan on but we are not going to make our success dependent upon it.

Craig Nankervis - First Analysis Securities

Sure. On the fraud side, it seems that it is a good performance in Q3 for you on that. Do you feel that you have found some sort of steady level to that business because to me it sort of jumps around.

Bill Connor

Yes that is a good question, Craig. I actually do not think that it is steady now. I see it building, I mean I talked about in the quarter our largest transaction was the IdentityGuard and Transaction our second largest or one of the other large European ones, which by the way was not DnB NOR. But that is our second major European bank that has standardized on TransactionGuard and has a good opportunity for IDG on down the line. So what I am pleased by is TransactionGuard now seems to be hitting its phases in terms what I call second relay of fraud detection. We have stayed on that product and development and capabilities and I think we got a leading edge capability for where the market is today is what I am hearing back from the equivalence of DnB NOR and the kind of transactions that we just did this quarter and frankly some that we are going to end either proof of concepts or negotiations work as we speak.

Craig Nankervis - First Analysis Securities

Do you think your mindshare in fraud is better overseas than it is domestically?

Bill Conner

Online share in fraud is the only negative we got. You know what we find; Craig is the more people get to know, the better we sound. Our problem is we are not talking to enough of the fraud guys out in the global world today.

Craig Nankervis - First Analysis Securities

And what is the model? Was there not a sort of question about whether that will be sold as a subscription verse?

Bill Conner

Good question. So, early on a lot of people wanted subscription just because they did not want to play some marker. Thinking of it as a one to three year bet as opposed to a perpetual bet, people we are seeing now are talking more perpetual than subscription.

Craig Nankervis - First Analysis Securities

Okay. So, that is sort of changing. That is all I have. Thank you.

Operator

The next question comes from Andrew Holme - Dougherty & Company.

Andrew Holme - Dougherty and Company

I just want to follow-up on those for larger side transactions for financial institutions. We are going two of those in the emerging markets category and what are the other two in the PKI or..?

Bill Conner

We go along the emerging growth products. So, if you look at it our largest one had IdentityGuard and "TransactionGuard”. The second largest was in emerging growth but included our boundary messaging and then that particular one, one of the things that we are seeing as some of these banks focusing on cost is the need to knowledge is the security but also look at statements instead of putting them out on paper while looking at them as putting them out electronically. So, the second one was around boundary email and bill statement electronically. The third one that I talked about which was our Coltac transaction which was our IdentityGuard tokens. The other one was a large European bank which was TransactionGuard and our final one was around PKI in Europe.

Operator

You have a follow up question from Jay Meier - Feltl & Co.

Jay Meier – Feltl & Co.

I have a follow-up question about the EAC PKI and this deal in EU coming up. We were starting to see some traction. Jamal made the announcement that they got France, surprise, surprise. But I am not sure if they have their own EAC certified PKI and then we got DnB and we have you guys. That sounds like three competitors out there, only one of them is independent of documents, which would be you. So, it is seems like anybody other independent document providers are going to have work with you. Is there any way to quantify sort of the total addressable market for the EU in this past fourth deals? I mean there is like 34 countries or may be 30 now that still have to do this and at least a couple of them were standardized than your PKI but the rest of them are not. How can we quantify that?

Bill Conner

Yes Jay, good question. If you look at traditional EU, Germany is going to stay with; you would assume we would stay with who they are. That is their supplier and it has been part of the government than out private or public and then back in, right? So that is not what we would go. I think we are going out in this place, in terms of it despite of our relatively good performance compared to them, head to head, right?

France, as with local capability, in our stress, the thing we found out in fraud, Jay, was, if you follow press releases. Now this is the first time you have to do service changes. And even there, it was a very limited subset. So, the interoperability piece, not just with the partners up and down the vertical stack, from the passport, to the chip, to the reader, and to the PKI, that is one set of issues, but you also got a set of issues of then how you cross communicate to all of these different DnB and inspection stations and now was a very limited number of certificate that we are having to be played with. That where I feel very good that a lot of people that have used toolkits or even some early open source stuff as you have to interoperate at the volumes and architectures in that EAC. I think point-and-click PKI is not what any of these other people have and that is what we got and that is how it is built in terms of the scalability and deployment. That is where you are going to see the differentiation, not initially in this first phase because in the first phase a lot of people said they already done it and guess what? You saw the results, they did not all work.

Jay Meier – Feltl & Co.

Very few of them actually work but back to my original question. How big of an opportunity is it for you guys? I you want the whole thing; How big will you think it is?

Bill Conner

Well our belief is it is not the EU that is going to be the next global standard in ePassports because as you know BACs and the current way travel documents are done in US, I am sure you have seen in the press for the last few days, have risks. They have risks of being copied. They have risks being forged and they have risks of being knocked off relative to cloning. So, we think this is a much stronger model globally and I think if you look at Oasis, they would talk about this not being just an EU but that is why you had probably 12 other countries there and are looking at EAC as a border in passport mechanism. That does not include market spend into healthcare or other initiatives or national IDs, that could be done not in the standard 509 configuration like they have been around national IDs but more in an EAC configuration. So, I think the best report out there was about what I was talking about the market, that addressable market for us is one of the big growth engines for us over the next two to three years.

Jay Meier – Feltl & Co.

Alright. So, you are not going to tell me how big you think in dollars, how big you think the opportunity is for you?

Bill Conner

No.

Operator

There are no further questions at this time. Please continue.

Bill Conner

That is it. We look forward to talking to you in January and throughout the quarter as we have various inter dialogues with you Thank you

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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