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Executives

Gus Okwu – IR, DRG&E

Mike DePasquale – President & CEO

Frank Cusick – CFO

Analysts

Dan Chaemis [ph]

Joe Osgood [ph]

Jerry Seronian [ph]

BIO-key International, Inc. (OTCQB:BKYI) Q3 2008 Earnings Call Transcript November 14, 2008 10:00 AM ET

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to BIO-key’s third quarter earnings conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator instructions) This conference call is being recorded today, Friday, November 14 of 2008. I would now like to turn the conference over to Gus Okwu with DRG&E. Please go ahead, sir.

Gus Okwu

Thanks, Maria. Good morning, everyone. Thank you for joining us for BIO-key International, Inc.’s third quarter 2008 conference call. Joining me today on the call are Tom Colatosti, the company’s Chairman; Mike DePasquale, CEO; and the company’s CFO, Frank Cusick.

The agenda for today will be as follows. Mike will first offer some comments on general industry trends and developments within the company’s businesses. Frank will then provide you with some detail on BIO-key’s financial and operating results. And finally, Mike will follow up with a closing statement and then open the call up to questions.

Today’s conference call may contain forward-looking statements that are subject to certain risks and uncertainties that may cause actual results to differ materially from those projected on the basis of these statements. Words estimate, project, intends, expects, believes, and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are made based on management’s beliefs as well as assumptions made by and information currently available to management pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. For a more complete description of these and other risk factors that may affect the future performance of BIO-key International, Inc., see Risk Factors in the company’s Annual Report on Form 10-KSB and its other filings with the SEC.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The company also undertakes no obligation to disclose any revision to these forward-looking statements to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

BIO-key issued a press release earlier today providing details of the company’s quarterly financial and operating results. This document is available in the Press Releases section of our company’s webpage at www.bio-key.com. A replay of today’s call will be available beginning one hour after the completion of this call until 11.59 PM Eastern Time on November 23. The replay may be accessed by dialing 303-590-3000. The access code for the replay is 11122159#.

Please note that information reported on this call speaks only as of today, November 14, 2008, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay. We would finally advise you that this conference call is being broadcast live through an Internet webcast system that can be accessed in the company’s webpage at www.bio-key.com.

And now, let me turn the call over to Mike DePasquale.

Mike DePasquale

Thank you, Gus. And good morning, everyone. Thank you for joining us on our third quarter earnings conference call. Let me begin by stating that out commitments to improving the company’s operational efficiencies continued to show solid results in the third quarter. As we’ve mentioned on prior calls, we’ve been committed to deploying various operational and strategic objectives and in improving our competitiveness in the marketplace, as well as efficiently managing our balance sheet while supporting our business units.

As a result, we have been able to reduce our business cost dramatically over the first nine months of the year while growing revenues at the same time. We intend on continuing to focus on discovering new ways, in which we can improve productivity with a continued focus on revenue growth, given that with our current operating structure, revenue growth quickly leads to profit and positive cash flow.

With that said, we experienced a slight setback in the third quarter due to a delivery delay on a large biometric contract that I will discuss in a minute. I might add that despite our shortfall to expectations in revenue, the third quarter represented one of the largest bookings quarters for our law enforcement division in over two years. In addition, we also saw strong biometrics order flow from commercial customers. Let me also add that our backlog position, which we define as orders to be delivered in future quarters, is also very strong.

The company’s recurring revenues continue to grow, and our gross margins had been above 85% through the first nine months of the year. As you are aware, in May, we announced the contract with the largest biometric company in the world, Sagem Morpho, a division of Sagem Sécurité and the SAFRAN Group headquartered in France. The contract was for the delivery of software licenses for components of our VST matching technology that would be fused with theirs resulting in a significant increase in both accuracy and speed for matching fingerprints in very large database.

We delivered the first component of the contract in the second quarter of this year and the accuracy software was successfully integrated into Sagem’s algorithm. We delivered the software licenses for the second portion of the contract in the third quarter of 2008. However, part of our agreement with Sagem required that they integrate our intelligent indexing software in order to increase speed of matching into their technology and also performed various tests and evaluations prior to final acceptance. We anticipated that would take place before the end of the third quarter. Unfortunately, the integration was not completed as planned, and as a result, we expect to finalize the second phase of our arrangement in the fourth quarter of 2008.

Our partnership agreement with Sagem provides BIO-key with significant upside for the following reasons. First, Sagem is the largest domestic AFIS provider, especially in light of their recent announced plan to acquire Motorola’s Printrak business, and clearly the largest biometric company in the world. Our fused offerings will be utilized in a number of government programs including the upcoming FBI-NGI IAFIS program opportunity.

Second, Sagem is the world’s leading fingerprint matching provider. And upon completion of the integration of BIO-key in Sagem’s technologies, the partnership will be well positioned to compete for this important contract. As we’ve mentioned on previous calls, the number of proposals for large global civil ID projects is expanding. In our non-exclusive partnership with Sagem, the largest global biometrics company, provides us with an opportunity to be involved in many of these contracts.

As always, these opportunities are very competitive. Consequently, we plan on offering our technology to other capable companies that also compete with these opportunities, including but not limited to Gemalto, Oberthur, Smartmatic, Oakwell, Unisys and others. Our WEB-Key in this key biometric technology is growing in acceptance and attracting significant attention, as evidenced by our successful deployment in Bangladesh. The deployment in Bangladesh was regarded by many as one of the most successful programs of its kind. In fact, we recently received news that General Shafiqul Islam, the Bangladesh Army representative responsible for the implementation of our project has been nominated by the IT world international congress as one of the few being considered for its People ID Outstanding Achievement Award. That award will be decided and granted at the annual meeting in Milan next week.

As we’ve also stated many times over the past four years, our advanced VST technology, which is highly scalable with unprecedented accuracy, can accelerate the performance of any finger biometric software application for government, civil or commercial use. And we continue to focus on expanding the sales of our technology through partnerships on a global basis.

As I mentioned before, we also experienced strong order flow from our commercial biometrics segment in the third quarter of 2008, including orders from McKesson, AT&T Wireless, BNP Paribas Financial Services, Brand New Technologies in South Africa, ChoicePoint and others. We believe that the trends continue to point in a positive direction.

Let me highlight one of these orders for you. With respect to the McKesson order, BIO-key received multiple software license orders from McKesson Provider services in the third quarter to be used with their advanced access solution offered with the AcuDose product line. With a simple swipe of the finger, healthcare professionals can access medications and supplies securely, and most importantly, conveniently with a full order trail that exceeds HIPPA compliance requirements, all utilizing our WEB-Key product. The general belief is that the healthcare market where we have a strong installed base will remain vibrant despite the current economic environment. In fact, we recently received an additional $240,000 order from McKesson for additional licenses in the last few days.

BIO-key continues to offer an attractive value proposition that grows in acceptance as finger scanners become more ubiquitous and inexpensive to deploy. A perfect example of this is our recent contract with AT&T Wireless. BIO-key technologies now deployed in over 100 of AT&T’s retail stores, including several in New York City, as part of AT&T’s security access solution for their office mobility retail point-of-sale platform. An AT&T Wireless store associate can now consummate a secure transaction using Fujitsu tablet computers with an integrated finger scanner.

The state-of-the-art mobile units include BIO-key’s advanced finger matching software along with our partner identifies network logon software to ensure secure and convenient access to office. AT&T plans on rolling out this solution across the country even through the holiday season, which is typically not the case in the retail market, in light of overwhelming positive response from store managers and consumers.

According to AT&T, deploying our integrated solution has increased employee efficiency and has also enhanced the consumer shopping experience by reducing long checkout lines. Our Direct of Sales, Jim Sullivan, along with AT&T Wireless representatives will be presenting a case study on this deployment at the upcoming Biometrics Summit to be held in Miami next March.

Let me now turn to our Law Enforcement group. The business unit received total orders of approximately $1 million in the third quarter of 2008, representing the group’s best quarter in terms of total order value in more than two years. Even more significant was that over 40% of the orders came from new customers and new user agencies that are hosted by current customers. A good portion of this new business came through partners, including InterAct Public Safety Systems and Independence Communications, which help us grow our footprint in the market. The business continues to have significant national presence as we received orders from public safety agencies based in 26 states.

Key deals in the third quarter of 2008 included $175,000 order from the Hawaii Police Department for the second phase of their rollout of MobileCop, our in-vehicle laptop-based mobile data product that began deployment earlier inn the year and $199,000 for a new MobileCop solution responding [ph] Georgia. MobileCop remains our cornerstone law enforcement product. However, we are now beginning to see traction with PocketCop, our mobile data product for BlackBerry, smart phones and Windows mobile handhelds.

Last quarter I informed you that we were seeing an increase in momentum for PocketCop driven by strong support from wireless service carriers as well as agencies recognizing the lower cost of deploying mobile data on a handheld versus a laptop. As a result, the third quarter of 2008 was our best with respect to the number of PocketCop units sold. I should also highlight that we received a number of enterprise-level PocketCop deployments in the third quarter of 2008. These orders came from three large customers, specifically from the St. Paul, Minnesota Police Department; the Baltimore, Maryland Police Department; and Hawaii County Police Department.

The St. Paul Police Department funded their purchase to a federal grant for security at the National Republican Convention where PocketCop supported foot patrol officers in maintaining order during the (inaudible). The Baltimore Police Department and Hawaii County Police Departments were two PocketCop deployments purchased with Homeland Security grants available for local agencies to enhance communications and data sharing.

During the third quarter, we continued to benefit from the support of our wireless carrier partners; AT&T Wireless, Verizon Wireless, Sprint-Nextel, and RIM in seeding pilot projects in many BIO-key installed accounts as well as in potential new customer sites. We believe that the adoption cycle of PocketCop will shorten as we add business and we add additional customer referrals.

We also released two new products for public safety in the third quarter of 2008. We released the latest software updates of MobileCop and InfoServer, the server side software that support MobileCop and PocketCop. The InfoServer updates include enhancements for officers in the field, including roll-call, which allows officers to receive critical announcements and information on their in-vehicle laptops rather than having to drive to the station, saving time and fuel.

Addition features of InfoServer include administrative items that facilitate the hosting of other agencies as well as enhanced security measures. Several of our existing customers initiated the hosting process for the first time during the third quarter. We also launched MobileCampus, a secure messaging and infinite modification solution for campus security, administration and faculty. Like MobileSRO, a similar product for the K-12 market, MobileCampus leverages the secure messaging capability and cross platform interoperability we built for MobileCop and PocketCop.

We began a national MobileCampus marketing campaign with Sprint that includes national events and ad placements in national publications. This MobileCampus marketing campaign with Sprint grew out of the success we experienced in co-promoting PocketCop with them. These events have given us exposure to new prospects that we wouldn’t otherwise have been able to reach.

We participated in a total of 20 seminars co-sponsored with our wireless carrier partners in the third quarter of 2008. We also continued our program with local BIO-key customer product updates. Ten of these events completed so far that have seen more than 125 customer agencies participating. We have found all of these marketing events to be extremely productive as they facilitate customer interaction that ultimately enhances customer loyalty and also drives interest in new products.

With that said, let me turn the call over to Frank for additional detail on our quarterly numbers.

Frank Cusick

Thanks, Mike. Earlier today we released our results for the 2008 third quarter ended September 30, 2008. Third quarter 2008 total revenue from continuing operations was $2.9 million, representing an increase of 33% from the $2.2 million reported for the corresponding period in 2007. An increase in third quarter 2008 new orders for both of the company’s business units grew [ph] revenue growth when compared to the third quarter of 2007.

On a quarterly sequential basis, total revenue from continuing operations for the quarter ended September 30, 2008 decreased 19.5% from the $3.6 million that was reported for the quarter ended June 30, 2008. As Mike mentioned earlier, the sequential reduction was attributable to delays in converting several booked orders into third quarter revenues. We believe that the conversions of these orders into revenues should be completed in the fourth quarter of 2008.

Our gross margin for the third quarter of 2008 increased 85.9% compared to 78.7% for the corresponding period in 2007. Sales of higher margin license product facilitated the improvement in year-over-year margins. On a sequential basis, our gross margin decreased from 88.2% reported for the quarter ended June 30, 2008.

Gross profit increased by 45% to $2.5 million in the third quarter compared to $1.7 million in the corresponding period in 2007. Operating expenses from continuing operations for the third quarter of 2008 decreased by 15.5% to $2.7 million compared to total operating expenses of $3.2 million for corresponding period in 2007.

Company’s net loss for the third quarter of 2008 improved to $45,000, representing a reduction of $1.1 million when compared to our net loss of $1.2 million reported for the corresponding period in 2007. Our third quarter 2008 net loss per share was $0.01 compared to a net loss per share of $0.03 for the corresponding period in 2007.

Total revenue from continuing operations for the nine months ended September 30, 2008 increased 22.6% to $9 million from $7.3 million in the corresponding period in 2007. Gross margins for the nine months ended September 30, 2008 increased to 85.9% compared to 80.9% for the corresponding period in 2007. Gross profit increased by 30.1% to $7.7 million compared to $5.9 million in the corresponding period in 2007.

Operating expenses from continued operations for the nine months ended September 30, 2008 decreased 19.2% to $8.6 million. This operating loss from continued operations for the nine months ended September 30, 2008 improved by $4.2 million to $0.7 million from a loss of $4.9 million in the corresponding period in 2007.

The net loss for the nine months ended September 30, 2008 was $0.8 million compared to a net loss of $0.4 million for the corresponding period in 2007. Note that the net loss in 2007 included a gain of $4.1 million from the sale of BIO-key’s Fire/EMS Services division to ZOLL Data Systems.

Our third quarter financial highlight was clearly shown in the ongoing reduction in costs that have enabled us to operate our business more efficiently, as a result of these ongoing efforts, which include reducing lease costs associated with our Marlborough facility. We have been able to generate significant cost savings and have also improved our margin by over 300 basis points since the beginning of the year.

Given the economic environment, we feel it is prudent to continue our efforts to uncover additional ways in which we can improve productivity and ultimately our financial results. As we have reported to you on our most recent earnings call, a great deal of energy and focus has been expended on identifying ways to integrate our candid biometric technology into new applications and solutions for our Biometrics and Law Enforcement business units.

We have discovered that deploying these types of solutions serve to deepen our relationship with all of our customers and also acts as a base to referral business from existing customers to new opportunities. During the third quarter we booked approximately $1 million in new law enforcement contracts that demonstrated our success in meeting our customers’ requirements for cutting edge and easily integrated applications and solutions. Over 40% of the law enforcement contracts booked in the third quarter of 2008 were from new customers, additional agencies hosted by current customers. As a result, law enforcement revenues increased 11% in the third quarter of 2008 compared to the 2008 first quarter.

Turning to the balance sheet, as of September 30, 2008, we had consolidated cash and cash equivalents of approximately $1.1 million, almost $500,000 more than we have reported in the second quarter of 2008. We continue to focus on managing our balance sheet efficiently, particularly given the state of the economy.

With that, I’ll turn the call back to Mike for additional comments and Q&A.

Mike DePasquale

Thank you, Frank. In summary, our third quarter was solid, as we continued to manage our cost base and balance sheet efficiently. Additionally, in spite of the delay in the deliver of one biometric contract, we believe that we are well positioned for solid financial performance in the fourth quarter. We will continue to fully evaluate all non-dilutive strategies that will enable us to strengthen the company’s balance sheet and competitive position. We look forward to updating you on our fourth quarter results.

Thanks for listening. And we’ll now open the call to Q&A.

Question-and-Answer Session

Operator

Thank you, sir. (Operator instructions) Our first question comes from the line of Dan Chaemis [ph], a private investor. Please go ahead.

Dan Chaemis

Hi, guys.

Mike DePasquale

Hi Dan, morning.

Dan Chaemis

Last quarter US visit was held out by Congress. First part of my question is, are you seeing any forward motion on this contract? And secondly, about six months ago, the Cogent’s CEO at their CC mentioned ex-interest request for white papers. Has this developed into request for technology, or should we just assume that Cogent has a lock on this project?

Mike DePasquale

I’m really not – Dan, this is Mike, by the way. I’m really not at liberty to speak regarding Cogent’s lock on the project or program. I really don’t know what their situation is or what their position is. I do know that the program in general has had many iterations. It’s been discussed in Congress in terms of being funded and not being funded. My impression is that under any circumstances, given two things, the change in the administration and probably the need to ratchet up our Homeland Security initiatives that this project is likely to move forward. I also believe – and I was at a Homeland Security conference, the Imperial Capital and Civitas contract – conference about two or so weeks. And I had the privilege to listen to a number of presenters from the Department of Homeland Security, including their Chief Operating Officer. And he made it clear that their budget, which is approximately $55 billion, a $5 billion increase over last year, so they got a 10% increase, is the only one that’s actually approved and sanctioned and will be moving forward under any circumstances, including change of administration. So – US visitors [ph], one of those programs, and I think it’s likely going to move forward.

Dan Chaemis

All right. On NGI, I’m wondering if there is any technical issues for the delay of that combined software? And in particular, at the most recent one CC, for example, kind of stated although somewhat cavalierly, you’ve been informed of a 20X improvement in ID basis software (inaudible) talked about their advanced PMA server. Are you at all concerned that even your Sagem-combined product will be significantly surpassed by soon to be unveiled R&D developments of your NGI competitors?

Mike DePasquale

Well, one can never tell what competitors have in their portfolio or in their bag of tricks. But I can say that our partnership with Sagem and our exclusive arrangement with them regarding the NGI program, it’s exclusive with NGI, it’s non-exclusive in any other contracts or opportunities. We think puts us in a very good position. They are the incumbent vendor for the FBI IAFIS system today. And when you combine again the increment in accuracy that we saw in the first phase of our deliverable infusion with their algorithm and technology, it’s very impressive. Now, the trade study and benchmarks are about to begin. In fact, we are days away from the start of those evaluations. And in the end, somewhere near the first quarter of the year or slightly thereafter, we will see exactly how we faired against the competition. Remember that we are providing a software-only solution that’s platform independent, that’s also device independent. And Sagem also integrates palm-based and other – including iris types of technologies to bring together a full and complete solution. So my impression is that we are in a very, very good competitive position to not only compete but win that program.

Dan Chaemis

I got you. One more quick housekeeping question for Frank. Did you guys pay Dataradio off anything in the quarter?

Frank Cusick

Well, we reached an agreement with Dataradio and we did in fact – I think that was in July. So we did make some payments to them. So at the end of the quarter, Dan, I think we probably – let me just see – in total, I want to say we had paid a couple of hundred thousand dollars against that. Additionally, in November we paid another couple of hundred thousand dollars.

Dan Chaemis

So you had a breakeven quarter, yet trade Dataradio and some cash and have (inaudible) of 500,000 over the last quarter. So then your cash flow is actually $700,000 to $1 million over your stated revenues. Am I reading that right?

Frank Cusick

Absolutely. You’re right. I want to say we paid Dataradio approximately – just find it here, Dan – during the quarter we paid them approximately 250. Yes, you’re right. We did generate cash of about $700,000 if you look at it that way.

Dan Chaemis

Okay. Thanks.

Operator

Thank you. Our next question comes from the line of Joe Osgood [ph], private investor. Please go ahead.

Joe Osgood

Good morning.

Mike DePasquale

Hi, good morning.

Joe Osgood

The June 10-Q states that the company expects to remain profitable through the remainder of 2008 with the expected caviar. Do you still hold to the statement? And if so, can you give some color on what you are looking at here that could replace the Sagem revenues and generate Q4 profitability?

Mike DePasquale

Well, the second half of the Sagem contract is in our backlog to be delivered. So we expect – obviously we still have work to do. There is no question about that. But we expect to deliver that in the fourth quarter. So under those circumstances, should all of that come together, we would clearly expect that the company would be profitable in the fourth quarter. So I don’t think anything has changed fundamentally to the statement that we’ve made, except the timing on the delivery of really one order.

Joe Osgood

Okay, that makes sense. Another question. A recent release said that the Bangladesh database was betted [ph] by region only. What will be a full betting of the database? And if so, what could be expected in terms of revenues and the timeframe for such use of the VST matching algorithm?

Mike DePasquale

That’s a great, great question. Absolutely, yes. The first part of the Bangladesh program was to, first of all, enroll 80-plus million people. And we succeeded in doing that, 80.5 million. They didn’t have the infrastructure in the early stages and really the time to be able to bet everybody in the country against everyone else. So, on a regional basis, they betted, let’s say, no more than 10 million people against each other. Feeling that for the most part people weren’t going to travel from one side of the country to the other to register again. And that got them kind of through the first phase. Now, the next phase of the program, which we are in, contract negotiations and discussions with the army and our partner TigerIT in Bangladesh is for the full and complete solution. I’m really not at liberty to discuss the terms and pricing and so forth at this point. But certainly that’s an incremental business opportunity for the company, and that would fully bet the entire nation. That is one individual against every other individual in the database, as they proceed forward and use this collection of data and information to produce a national ID, to support all their social programs. And then there is another incremental opportunity, which was really in the discussion stages here, is to move back into the commercial market. So, for example, for the banking industry to take advantage of that – not only the database that exists, but the technology that we can make available to them to ensure secure access and the reduction of identity theft and fraud for – again, for their private sector enterprise deployments.

Joe Osgood

Thank you. I’ll get back in the queue.

Operator

Thank you. (Operator instructions) Our next question comes from the line of Jerry Seronian [ph] with – a private investor. Please go ahead.

Jerry Seronian

Good morning. Mike, BIO-key announced significant new bookings in the Law Enforcement division in the last six weeks somewhere in the tune of over $1 million. Clearly states and local governments are retrenching, in particular since October. Have you noticed the slowdown in the government attitudes or purchasing or even your partners in the last month? And do you think you can match the Law Enforcement division’s third quarter performance for the fourth quarter and then moving forward into 2009?

Mike DePasquale

Jerry, that’s a great question and one that I’m getting as consistently, especially over the last six weeks with the financial crisis and meltdown that we’ve seen. So I’m going to answer that question in two parts. First, in general. Certainly, we are in territory that’s never been seen by any American before. Right? Nationalization of industries, $1 trillion government bailouts, 1,000-point daily swings, and the DOW companies that were AAA rated two months ago are seeking government loans today. Right? A 100-year old company is just disappearing. So we don’t really yet know what the overall budget picture will be for state and local public safety agencies next year. We do see anecdotal reports of freezes and cuts and out-of-state travel, training and other kind of non-mission critical areas across government. Whether those will go deeper, we really don’t know until we get into the year. On a positive note, however, is the continued kind of federal commitment. I mentioned before that we had a couple of customers last quarter that purchased our PocketCop product through grants, in particular Homeland Security grants. Where that is pretty much locked in, the budget for Homeland Security is the only one that we could feel really comfortable and secure about, and that’s where the majority of the money to buy our products comes from. So there is about $1.7 billion in grant programs where funds could be used for mobile data. Especially since our solutions meet the HS goals for greater interoperability in regional data sharing. The $1.7 billion is actually increase over the 2008 levels. So, although we have not seen any cutback or setback based on our performance in the third quarter, it would be probably prudent for us to say we really need to see what happens as we get into the next year. But the fuel – for example, just the fuel prices for some local agent – local municipalities and small cities were critical. I mean, having to waylay [ph] money from one function of the budget through another just to keep cars on the door, that’s kind of dissipating now and the pressure is off as gas prices continue to decline. So we have not seen that. But will we see it going forward? It’s hard to say. The good news about BIO-key is that we are small relative to the market. So if we execute, and we have a great product, it’s cost-effective and it’s inexpensive to buy, I believe there is still certainly opportunity for us and maybe some growth there as well.

Jerry Seronian

Okay. Let me follow up a little bit on Research in Motion. In the last couple of quarters in your reports, you’ve been quite enthusiastic about BIO-key’s developing relationship with Research in Motion. And from your opening remarks I can see why it sounded like there is an awful lot going on there. Are we seeing the fruits of this collaboration with RIM and other major telecoms in the recent law enforcement bookings? Or if not, when would you expect the revenue needed to really start to move in a more significant way in this market?

Mike DePasquale

Well, we did see it in the third quarter and we continue to see it. It’s pretty clear that RIM is looking for additional market opportunities and more importantly, the carriers which they really sell to. You don’t buy a BlackBerry directly from RIM. You buy it from your communications carrier. And the communication carriers obviously are pushing subscriptions, subscriptions, subscriptions. And municipalities and agencies are looking to reduce their infrastructure cost. And so many of them are taking their old radio networks down, and they are starting to travel on the public network. And there are a number of them available. So yes, we think that that relationship not only has successfully pour results but that we think it will continue to do that. And there are more and more examples of PocketCop being used by agencies, specialty patrol officers in a significant way. There was an interesting article that came out on the sixth from the Oklahoma Sheriff's department where they are actually using these mobile stations for traffic stops, for – to test for alcohol, to test for driver’s license, registrations, those kinds of things. And our PocketCop is being used there very aggressively. So we have kind of two initiatives going forward. We want to sell these products in volume. So we have a program in place to go after Federal level opportunities. The FBI has a very big deployment of BlackBerries. And we see no reason why our PocketCop application shouldn’t be running on every BlackBerry they have. FBI agents roam state-to-state. They investigate all types of criminal activity in almost every area you can imagine. They certainly need access to this information. And so what we need to do and the energy that we’re going to spend especially going forward, in particular with the Department of Homeland Security, is we’re going to continue to force them to try to make this information available on a national level for national agents. So FBI agents, US Marshals, Border Patrol, ICE, all those agents should have access to the national database and not be limited to access to the state that they happen to be residing in or the state they happen to be traveling to that particular day. And that’s more of a political play than it is a technical play for us. But we are spending a lot of time and energy there. RIM is behind us to do that and so are the carriers. So I would say that business has a lot of runway.

Jerry Seronian

Okay. Certainly sounds logical. Great. Thanks.

Operator

Thank you. Our next question is a follow-up from the line of Dan Chaemis. Please go ahead.

Dan Chaemis

Yes. Some analysts have noted that Sagem buying Printrak where the net positive for Cogent is there is one last competitor on the market. Can you provide us your analysis of the deal for BIO-key and your competition?

Mike DePasquale

Well, certainly, Dan, for Sagem, this is a very important move. They are the largest biometric company in the world. They have been probably the second largest provider of AFIS systems here in the US. Domestically now, by far, they are the largest player. They tick up some 300 accounts that will give them an opportunity to up-sell not only their palm and iris and facial recognition technology, but to provide these customers with the pathway to better technology. One of the things that we all know about Motorola is they have good stuff. The problem is that they haven’t invested in updating and enhancing their technology as most of us in the industry have. So I believe this deal is just a great, great opportunity for Sagem. It will put them in the number one position. If you go back and look at their play to potentially acquire Digimarc, I believe this is a much better, much more focused, and clearly will be much more profitable for them than if in fact they had gotten into the driver’s license with no real base. So I think this is great for them. And clearly, it’s an opportunity for BIO-key because we are heavily involved and engaged in providing technology to Sagem.

Dan Chaemis

Just as (inaudible) little bit, there has clearly been no slowdown for Sagem in the biometrics market. We’re seeing headlines like Printrak and TSA approves Sagem Morpho biometric readers for TWIC, Republic of Mali chooses Sagem, Sagem wins European Commission. Yesterday I think they were selected for the latest-generation APFIS system. So the picture looks very good for Sagem, but it’s not – the picture for BIO-key is much more opaque in that relationship. Can you tell us –?

Mike DePasquale

As I mentioned before, what we have is what we have. We have fused our technology together to – the initial thrust of our relationship with them was the NGI, which is the largest biometric initiative in the world trumps our Bangladesh deal by a factor of two. And we have what we believe will be the fastest, most accurate technology that exists in the world. And I suspect, as they continue to win opportunities, they will have the choice of providing the fastest, most accurate technology that’s available in the world. And that will create business opportunity for BIO-key. So I mean, that’s the way it goes. We are non-exclusive in any other arrangement short of NGI. So we certainly as a small company did not want to limit our potential to market through the other large integrators who are winning contracts on a global basis as well. But we’d rather have two horses or three horses in every race than ride one at this stage of the game. So our relationship with Sagem is one that will evolve, one that will certainly begin to get greater and larger as they win more and more global deals, but they are not the only player on the planet. And we want to make sure that we can compete and play with as many potential winners as possible.

Operator

Thank you. Our next question is a follow-up from the line of Joe Osgood. Please go ahead.

Joe Osgood

This is with respect to the Trusted Platform Module patent. Is this basically a partial port of VST into the TPM environment? Apparently this somehow secures the link between the user and the computer. What are the ramifications of this patent, financial and otherwise?

Mike DePasquale

Well, this is just one of a string of patents that we’ve either received or have – or in process to review. We believe that in order for biometric technology to be totally secure, it’s not only matching a fingerprint against a fingerprint that’s in a database. But it’s securing the connection between the finger scanner and the computer. It’s got to do with ensuring that there is encryption at multiple levels so that fingerprints cannot be decrypted or used for ulterior purposes. And so the TPM, this particular patent that we received, gets us one step further along in providing a full and complete security solution for fingerprint matching, well beyond just the software component that matches again a template against the template. So you will see others as well evolve in the near-term from us that kind of build on this patent. What are the implications? TPM is a very popular and almost becoming a standard, deployable, and in particular, in laptop computers. And so this gives us some protection against other vendors perhaps utilizing similar claims or for their software. But I think again this is just the first of a number of, we believe, innovations that we’ve developed that are going to create a full and complete secure infrastructure for finger matching that goes well beyond the software.

Joe Osgood

Okay. Different subject entirely. Can we safely project a drop in SG&A of about $180,000 in Q4 from Q3 due to the decreased lease fees?

Mike DePasquale

I’ll let Frank answer that.

Frank Cusick

Right. The impact on the operating costs for the lease were approximately – we were paying about $114,000 per month. But the actual P&L impact was about $60,000 a month, the way we had accounted for under purchase accounting. So the net impact on the P&L is probably going to be about $50,000 per month. The cash impact is going to be about $90,000 per month. So we’ll reduce the operating cost by approximately from a P&L basis about $40,000 per month.

Operator

Thank you. Our next question is a follow-up from Jerry Seronian. Please go ahead.

Jerry Seronian

Yes, thank you. We’ve been waiting about a year now for additional wins in the blood bank segment. And with the numbers of statements during that time period that such new business was considered closely tanned [ph]. Are there technical, economical administrative reasons that this market has not developed at the speed originally expected by you guys?

Mike DePasquale

Not at all. In fact – and good you brought that up, Jerry, because in my comments, I didn’t want to – although I had written a 45-minute speech, our IR folks reduced it down to about 20 minutes. I did mention that we believe healthcare is a market despite the financial crisis implications that that may have that’s going to hold pretty solid. And we’ve been fortunate, some of it again of course intentional and some of it just because again that’s where the opportunity is, to have a very good solid base of installed business in healthcare. Blood banks are one very, very important component for us because it’s very high margin business. It’s not price sensitive. And I’ll tell you why it’s not price sensitive. The cost to process a kind of blood is north of $100. And adding a couple of bucks to ensure the identity of the individual who gave it is not really a significant amount of money. And we do have a host of better than 70 prospects for that business in the pipeline. And generally you have to make sure you fall within their budget cycle and budget timeframe. So we believe very strongly that you will see our blood bank business like we saw with the Indiana blood bank continue to evolve in the coming quarters. And we have, as I mentioned, a number of what I would call very serious high probability prospects in our forecast in our pipeline. So that business has certainly not dried up. It has not gone away. We certainly have a very strong position there, not just because we’re going after some of the larger individual blood banks, but because we’ve also closed on relationships with the OEMs that provide donor management software. That means blood banks buy to ensure that they have – first of all, that they need all these government regulations, and second of all, that they can positively identify the donors on an individual basis. So we think that’s a great business. We think it’s somewhat recession proof. And blood donations, generally speaking, do not rise nor fall in a recessive environment.

Jerry Seronian

Has Indiana completely rolled out now?

Mike DePasquale

Indiana is in the process – yes, they rolled out our solution and we certainly have registered donors over the last I guess nine months. Indiana is also in the process of installing a brand new donor management solution. So right now, we’re working on the integration and change from the old to the new. But that is their mode of donor ID. And more and more donors are registering with the system. It’s been very, very successful. And that’s an industry that has a very strong regulatory component and a mandate for positive ID, and they are still using mediums of identification like social security cards – social security numbers and driver’s licenses. And as concern on the donor’s part, as you might expect, that people are concerned about donating blood and having to give up their social security number and all that stuff, which may lead to identity theft and fraud. So by installing this system, it gives the donor confidence that there is a more secure scenario in place for them and that they don’t have to give up that information every time they go to donate blood to individuals who may be at the front desk taking that information. So, it’s a good solution. And again, it’s less price sensitive than almost any market that we deal with today.

Operator

Thank you. And Mr. DePasquale, we’ll turn it back over to you for closing comments.

Mike DePasquale

Great. Thank you. And thank everyone for joining us for our call. We appreciate the opportunity to speak with you and we look forward to the same opportunity to update you on our fourth quarter results early next year. Thank you and have a good day.

Gus Okwu

Thanks for participating in BIO-key International, Inc.’s 2008 third quarter earnings conference call. As a reminder, this call will be available for replay beginning an hour after the call has ended and may be accessed until 11.59 PM Eastern Time on November 23. Dialing 1-303-590-3000, you can access the replay. And the access code for the replay is 11122159#. Thanks.

Operator

Thank you. Ladies and gentlemen, that will conclude today’s teleconference. We do thank you again. And at this time, you may disconnect. Have a nice day.

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Source: BIO-key International, Inc. Q3 2008 Earnings Call Transcript
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