ICx Technologies, Inc. Q4 2008 Earnings Call Transcript

ICx Technologies, Inc. (ICXT)

Q4 2008 Earnings Call

March 19, 2009 4:30 pm ET

Executives

Dan Mongan – General Counsel

Hans Kobler – President & Chief Executive Officer

Deborah Mosier – Chief Financial Officer

Analysts

James Ricchiuti - Needham & Co.

Brian Ruttenbur - Morgan, Keegan & Co., Inc.

Michael Kim - Imperial Capital

Presentation

Operator

Good day and welcome everyone to the ICx Technologies fourth quarter 2008 earnings conference call. Today’s call is being recorded and at this time I’d like to turn the program over to Mr. Dan Mongan. Please go ahead sir.

Dan Mongan

Thank you Millicent and good afternoon everyone. Again my name is Dan Mongan and I’m the General Counsel at ICx.

The company’s fourth quarter 2008 earnings release was issued today at the close of the Market and it’s posted on the company’s website at www.icxt.com. Representing the company today are Hans Kobler, Chairman and Chief Executive Officer and Debbie Mosier, Chief Financial Officer.

Before I turn the call over to Hans for his opening remarks, allow me to read the following Safe Harbor statement. This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by indicating the beliefs or expectations of management, and include but are not limited to statements regarding the outlook for the company’s future business and financial performance. Forward-looking statements are based on management’s current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Actual outcomes and results may differ materially due to various factors that are described more fully from time to time in the company’s filings with the SEC.

ICx disclaims any obligation to update or revise any of these forward-looking statements whether because of future events, new information, a change in its views or expectations, or otherwise. The company will comment on adjusted EBITDA results which have been included together with the reconciliation or explanation compared to U.S. GAAP results in today’s press release.

At this time it’s my pleasure to turn the call over to Hans Kobler.

Hans Kobler

Thank you Dan. Welcome everybody and thanks for joining us on today’s call. Q4 is a record quarter for us in both revenues and profits. At $53.1 million we grew 28% over the prior year and we have now done so in double-digit growth every quarter since we started as an operating company. Seven out of eight of those were in excess of 25% growth.

For the second time in a row we are adjusted EBITDA positive and with $2.4 million that’s our highest number ever and an improvement of $4.7 million over the same quarter the year before. Our balance sheet and liquidity remain strong. We are sitting on approximately $39 million of cash, $37 million of net receivables and are practically debt free as of 12/31/08. We continue to look at this market turmoil from a position of strength and view it as an opportunity for us to press ahead.

The growth for this quarter was particularly strong in Surveillance and Solutions, where we benefited from our strong deliveries on the BETSS-C program and platforms and a huge quarter in Transportation. Detection is still hurting somewhat from the change in administration and the resulting delays in certain programs, in particular as they relate to DHS. And we’re also seeing little movement in the commercial market as one can expect in this environment. Thankfully our exposure here is limited to less than 25% of our sales.

Our funded backlog more than doubled year-over-year to $94 million. In addition, our unfunded backlog is now more than $500 million as a result of the strong traction in our program business. In addition to the financial measures, there are a few operation highlights I’d like to [flat] for you. Our program group continued their successful ramp and won a highly strategic program called JFPASS. JFPASS is a fully funded development to provide the joint forces of the Army, Navy and Air Force with the next generation of integrated force protection systems. This is a $9 million CRAD program which pays us for what our mission statement says which is building effective solutions by making senses work together. We’ve already made great progress on this program and just last week had a successful demonstration at Eglin Air Force Base.

Second, our J2 program is marching full steam ahead. We are knee deep in development and have already ramped up hiring significantly. We’re currently looking for some expansion offices in the Baltimore area to better serve our customer for this program with a value of up to $700 million. We are mildly optimistic that we will start seeing more benefits from this development as early as the beginning of 2010 if not later this year. We continue to expect J2 to be one of the key guarantors for exceptional growth in 2010 and beyond.

We just made a press announcement the other week that our Analytical Systems group won a multi-year design and development contract for next generation mass spectroscopy sensors from the South Korean military. Mass spectroscopy as you know is the gold standard in detection and this contract will provide us with a two year – smaller two year design and development phase followed by procurement. Think of this as similar to J2 just much smaller. Having said that, though, in the mass spec world this is a key contract and will push our technology forward very quickly and helps us then to attack other huge markets such as air cargo and checkpoints.

Our Transportation group continued their run and won a $12 million contract with Caltrans to provide advanced fog warning and detection systems for a 13 mile stretch on Highway 99 near Fresno. The system will again rely on our ICx sensor fusion software and would also leverage solar and other green power technologies to support the system. It’s got a big problem over there with accidents, and many people throughout the country look at this pilot to be possibly deployed more broadly, particularly when stimulus funds come in, we expect heavy spending in the intelligent and green transportation sector.

Surveillance continued their strong performance on BETSS-C, resulting in record sales of $19.1 million. That’s a 49% increase over the same quarter in the prior year. And the group’s reputation experience keeps building and there are many larger programs on the horizon such as MSS, GBOSS rate, etc. where we could imagine very well playing a role in the future.

Detection as I mentioned earlier didn’t do so well this quarter. They had some impact here from delays in the government business but particular DHS, which we attribute to some extent to the change in administration. We also had a few delays here with some international orders that got pushed out probably into Q1. Still they achieved sales of $22.3 million which is slightly less than they had in the same quarter the prior year.

I did talk a lot about programs and you can tell that our success and traction gets us excited and in particular in times like this where the commercial security and the non-security businesses are under pressure, and the government is about to spend a lot of money with the stimulus bills. We feel pretty good about our momentum here.

In response to the tough market in commercial acuity and some of the big opportunities we see on the horizon for stimulus, we also did some refocusing on our sales efforts and we will continue to take out costs as part of our streamlining initiative that we started in the middle of last year. All in, by eliminating redundancies and leveraging synergies we brought down our workforce in 2008 by more than 60 people while we grew the business 25%.

This puts us in a strong position as we keep growing towards profitability on this much leaner platform. So with ’08 behind us, let me turn our attention to the future and what we are going to focus on. Our first and main focus in ’09 will be Washington. You know, a lot of things are happening there and we remain very bullish on the prospects with the incoming administration as we said all along. Not only will they have to address much of the pent up problems that have not been dealt with yet, but they will also have a lot more money to spend on fixing those problems. The current stimulus bill foresees money to improve and create intelligence transportation, protect our borders, secure our critical facilities, ports, seaports, screen containers, build a new headquarter, increase park security, much, much more.

Plus there are a lot of open mandates such as securing the air cargo, preventing nuclear material from entering the country, the southern border, etc., that have not been addressed yet. So when you read the list and see that it says Buy American, you can tell why we are focused on this.

Now we’ve reviewed the bill in detail and you know the total address of the market for us is probably in the billions and of course we won’t win it all, but as diversified as we are, we sure expect to get our fair share here somewhere. The timing is somewhat harder to predict as much depends on how quickly the administration gets this plan turned into action and how Congress acts. As it currently stands we would conservatively assume that the full impact would only hit us in 2010, perhaps as early as Q4 ’09.

The second big focus for us is to continue on the strong momentum in the program business. In 2008 we had an exceptional run with J2, JFPASS, BETSS-C, [inaudible], Fresno, KCBMS and sit today on more than $0.5 billion of unfunded backlog. So our main focus here will be just turning that into revenue. Next we hope to add a few more strategic programs here and there. Don’t expect anything of the size of J2, which at $700 million was way ahead of plan, but at least we hope to book another $100 million in contracts in ’09. Similar to the stimulus, however, we expect most of the benefits of this to only come in in 2010, possibly though at the end of 2009.

Our third focus in ’09 will be on our international expansion. ICx today is still predominantly in the U.S. government business. Where other comparable companies are selling 30, 50% abroad, our sales aren’t even at 10%. Now we are seeing some very encouraging signs of our careful efforts here in the Mideast and are hopeful that after some initial delays we are about to gain more traction there soon, but we will clearly intensify our efforts and expect to see the first fruits soon.

So with this background, we are extremely bullish on 2010 and expect to go back above 30% organic growth then. For ’09 as can be expected in this environment, we take a more cautious position and currently forecast growth between 14 and 20% which should result in revenues between $196 and $206 million. With this more conservative outlook on growth, we will maintain our strict focus on costs. As I mentioned earlier, we have already made some necessary adjustments in our operations and cost structure with our streamlining initiative and in 2008 we grew 26% while keeping operating expenses flat. And we expect to maintain this strict spending discipline throughout 2009 and intend to make further adjustments as needed.

We expect operating expenses to come down somewhat, which will result in much of our growth hitting the bottom line straightaway. With that, we should be able to improve our adjusted EBITDA even more than we did in 2008 and come in between $2 and $7 million positive. So all in we view 2009 as the launch pad for bigger things during which we will keep a lot of powder dry to push forward for takeoff and react quickly when new opportunities arise, which we expect coming out of Washington.

With that, I’d like to turn over to Debbie for additional comments.

Deborah Mosier

Thank you Hans. For the fourth quarter of 2008 we recorded revenue of $63.1 million, an increase of 28% compared to $41.5 million in the same period in 2007. As Hans mentioned earlier, revenue growth was particularly strong in the fourth quarter in our Surveillance and Solutions divisions. Surveillance was up 49% year-over-year to $19.1 million primarily because of the deliveries of mobile surveillance towers under the BETSS-C program. Solutions revenue increased 125% year-over-year to $11.7 million which was almost entirely due to the growth in our Intelligent Transportation Solutions business.

In Protection, revenue decreased 5% year-over-year to $22.3 million due to delays in DHS and international orders. Company wide our gross margins came down to 34.2% compared to 48.5% in the fourth quarter of 2007. The decline is due to our revenue mix which was more heavily weighted toward the custom development service contracts in our Solutions and Surveillance divisions, and CRAD contracts such as JFPASS and J2 in our Detection division.

Custom services and CRAD contracts have lower margins to products. Specifically, Surveillance gross margins for the quarter were 32.1%, down from 53.3% last year and contract revenue comprised 62% of total Surveillance revenue in the fourth quarter compared to only 3% last year.

Solutions gross margins were 30.1% compared to 37.1% last year. Our contract service revenue in Solutions comprised 76% of total Solutions revenue in the current fourth quarter compared to 53% last year. Additionally, our custom service work relied more heavily on external contractors which results in lower overall gross margins. anHH

For Detection, gross margins came in at 38.2% compared to 48.3% in the fourth quarter last year. The decline in gross margins is directly related to the decline in Detection product revenue from Q4 last year. In Q4 2008 product revenue was 54% of total Detection revenue compared to 74% last year.

We start 2009 with a backlog of $94 million, up 114% from last year. This includes significant long term service contracts work for our Surveillance and Solutions divisions, and the addition of long term service work under the J2 and JFPASS programs, all of which is beneficial to us in that it provides a predictable base of business that we believe we can continue to build on.

Total operating expenses for the fourth quarter came in at $20.6 million compared to $28.3 million last year, a decrease of 27%. The components of total operating expenses were as follows; G&A expenses were $7.2 million or 14% of revenue compares to $11.7 million or 28% of revenue in the same period last year; sales and marketing expenses during the quarter were $6.4 million or 12.1% of revenue compared to $7.1 million or 17% of revenue in the same period a year ago. The decrease in SG&A is a direct result of our focused efforts to eliminate redundancies in our operations primarily through reductions in personnel. In 2008 total headcount was reduced from 900 at the beginning of the year to 835 at the end of the year, which on an annualized basis results in approximately $7.5 million of total savings.

Research and development expenses during the quarter were $3.6 million or 7% of revenue compared to $5.9 million or 14% of revenue in the same period in 2007. The decline in internal research and development expenses during the fourth quarter is primarily due to increased utilization of technical resources on CRAD and customer service contracts. CRAD in 2008 increased by 65% over 2007 to $10.2 million. As we continue in our success in bringing in CRAD dollars to pay for research and development, we will be able to reduce our [inaudible] spending further towards raises more common in the industry and still benefit from significant innovations.

Adjusted EBITDA for the quarter was a positive $2.4 million, a $4.7 million improvement over the $2.3 million loss in the prior year. As explained above, our total revenue growth and recent downward trend in total operating expenses were the primary factors for positive results. For the quarter, our net loss was $2 million compared to the net loss of $6.6 million in Q4 of 2007. Net loss per share was $0.06 compared to $0.21 in the year ago period.

Weighted average shares outstanding were 34.4 million at December 31, 2008 compared to 31.5 million at the end of December last year. As of December 31, 2008 we had cash and cash equivalents of $38.8 million, accounts receivable of $37.1 million and working capital of $76.7 million. We also remained virtually debt free. Our DSO was 90 days at the end of the year, a little higher than previous quarters due to more contract revenue and product orders near the back end of Q4.

As of December 31, 2008 we had total funded backlog of approximately $94 million, 114% increase over the $44 million reported for 2007. Unfunded backlog at December 31, 2008 approximated $508 million, a majority of which is related to our J2 win.

Before turning to guidance, let me just say a few words on our 2008 annual financial results. For the year ended December 31, 2008 the company’s revenue grew by 26% and despite a tough environment came in close to the expectations we set at the beginning of the year at $171.7 million. Gross profit as a percentage of revenue was 41.4% in 2008 compared to 45.5% last year due to the shifts in our revenue mix. We continue to invest heavily in internal research and development which totaled $21.8 million or 13% of revenues. This complemented the $40.9 million in contract research and development. In total this represents $63.7 million of R&D initiatives and exemplifies our continued commitment to innovations.

We reduced overall G&A by 18% to $32.6 million in 2008, showing the benefits of our streamlining efforts. With G&A coming in at 19% of revenues, we expect some more room for improvement in 2009. Lastly, we kept investing in the build-out of our sales channels and increased our overall sales and marketing spending by 25% to $30.2 million.

Adjusted EBITDA loss for 2008 also came in close to expectations at $7.6 million compared to $16 million in 2007, an improvement of $8.4 million. The improvement in adjusted EBITDA loss was entirely related to revenue growth as we managed to keep total operating expenses flat at $98 million at both years while growing 26%.

Turning to our 2009 outlook, we expect revenues in the range of $196 to $206 million and positive adjusted EBITDA of between $2 million and $7 million. Overall we expect that our revenue mix will be similar to 2008, with lower gross margins particularly at the beginning of the year when our revenue mix is more heavily weighted towards service and program work. We expect those margins to come in below what we saw in Q4. We also expect that total operating expenses will continue to trend downward due to more of our technical resources being dedicated to billable contract activities rather than internal research and development.

We expect to see a decline in sales and marketing expenses in 2009 as we scale back activities related to our commercial channels due to the overall uncertainty of the economy. We could also see some slight reductions in G&A as we continue streamlining our operations.

With our strong success and momentum in CRAD, we expect to further reduce using [IRAS] to pay for innovations. Finally, we expect that consistent with prior years, revenue will be more back-end loaded towards the second half of the year. While we expect to be adjusted EBITDA profitable for the full year, for Q1 we expect to be adjusted EBITDA negative.

With those comments complete, I would like to open up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from James Ricchiuti - Needham & Co.

James Ricchiuti - Needham & Co.

Just a question on the guidance and Debbie you may have just touched on this, but as we think of the profile of the revenues in 2009, a similar type of profile where you should see more maintenance service revenue as part of the – I guess your backlog has a significantly higher portion of revenues associated with that area. Product, it looks like based on the way you’re talking, that your product revenue – product expectations, the orders there are probably a smaller portion of your backlog than they’ve been in the past.

Deborah Mosier

Yes. I would agree with that.

James Ricchiuti - Needham & Co.

If we think of that your margins, can you give us a sense as to where you might see gross margins as we get into the back half of the year? I mean, clearly the margins will be lower in the first half of the year based on the mix of revenue, but any sense as to how we might see your gross margins play out towards the second half?

Deborah Mosier

I think towards the second half you’ll probably see it more in the range of what you saw in the middle of our year, so above 40%, 40 to 45.

James Ricchiuti - Needham & Co.

Question for you, Homeland Security has been very slow to pick up on the order flow that most people anticipated. What’s your expectation now? The administration’s been in office a few months. I assume you have had more contact with DHS. What about the status of some of the programs that you guys have been targeting? You know, for instance the HPRDS and ASP and also on the liquid explosive side.

Hans Kobler

I think the administration is doing what we expected them to do. They go very pragmatically after the problems that they try to resolve, you know, from the border program to the ASP. And they look for the best solution and then next to what the solution could be they have this big pile of money going to be lined up to be spent and I think people try to reconcile one with the other. Because some of the people in DHS they want to wait and have the perfect thing, not what is available today which is running counter to what the stimulus provides which says buy today and have an impact tomorrow, right? So I think that’s partially what they are wrestling with and we will benefit in some areas and we will probably be left out in others. Until we get the final tally here, I don’t know.

We are fairly bullish as far as the borders are concerned, because there we have the tried and trusted solutions. People have tried other solutions that didn’t work so well, so I think we are very well positioned there. In terms of the liquids, etc., the challenge that DHS faces there is that they ideally they want to have a lot more things resolved and have no support costs and so the perfect thing is not on the market, so that’s more of a question mark for us. The good news is that we are so diversified as is nobody else and we are American. That puts us in a lot of good starting positions where we should be able to benefit from.

James Ricchiuti - Needham & Co.

Last question from me. On the DoD side of the business do you see opportunity for increased mobile power business as we scale up in Afghanistan?

Hans Kobler

Yes.

James Ricchiuti - Needham & Co.

Is that something you would anticipate in the first half of the year?

Hans Kobler

Conceivable probably more towards the latter part.

Operator

Your next question comes from Brian Ruttenbur - Morgan, Keegan & Co., Inc.

Brian Ruttenbur - Morgan, Keegan & Co., Inc.

My first question is also mix of revenue. You had 40% product revenue, 40% services. What exactly is the mix going to be? Is it going to be that same kind of mix on the year in ’09?

Deborah Mosier

That’s our current expectation, yes.

Brian Ruttenbur - Morgan, Keegan & Co., Inc.

And the stimulus funds you were talking about, what all is factored into your guidance that could be impacted by stimulus? Any of it?

Hans Kobler

No. Very modest. Very modest. We are not assuming that we win $100 million big part in any one of those. And if it would happen, I doubt it would happen in ’09. So from a timing perspective, the way this is coming out of the blocks slowly, I’d anticipate that the benefits would really only start in ‘010. We could be surprised positively, but it’s certainly not in our numbers.

Brian Ruttenbur - Morgan, Keegan & Co., Inc.

Your margins on your services side were lower in the quarter. Is that just because of the mix of business? And should we anticipate that same kind of margin going forward?

Deborah Mosier

Yes. It is because of the mix of business and we do expect those kinds of margins, particularly early in the year because the products are expected to come on later in the year.

Brian Ruttenbur - Morgan, Keegan & Co., Inc.

So we could have even stronger services revenue in the first half of the year than we do products?

Deborah Mosier

I’m sorry. Could you repeat the question?

Brian Ruttenbur - Morgan, Keegan & Co., Inc.

I guess I’m trying to – we should have a 40-40 mix on the year between products and services, what you said, and then but we could have even a higher mix in the first half of the year for services versus products?

Deborah Mosier

Yes, particularly in the first quarter. The second quarter is a little uncertain.

Brian Ruttenbur - Morgan, Keegan & Co., Inc.

Okay, but first quarter should mimic then in terms of services revenue levels of fourth quarter? Of that $21 million that you did? Or should we have a fall off from that level in terms of services?

Deborah Mosier

No, I wouldn’t expect a fall off in service revenue. I mean, I think it should be more in the first quarter than what you saw in the fourth quarter and it would be a higher proportion of our total. Our overall total revenue will come down in the first quarter compared to fourth quarter.

Brian Ruttenbur - Morgan, Keegan & Co., Inc.

What portion of your commercial business – what percentage of the total revenue is commercial?

Hans Kobler

Not including the Transportation business because it stayed local, so we estimate it at less than 25%.

Brian Ruttenbur - Morgan, Keegan & Co., Inc.

And DHS is also 25%?

Hans Kobler

In ’08 roughly.

Brian Ruttenbur - Morgan, Keegan & Co., Inc.

Okay. Do you –

Hans Kobler

It’s probably in ’08 slightly less because I think I said it on the last call and that was reconfirmed, the change in administration I think affected us mostly in the DHS department and there it’s mostly product. So that is kind of explaining some of the slowdown here and we expect that to come back second half roughly.

Brian Ruttenbur - Morgan, Keegan & Co., Inc.

What was the share count in the quarter?

Deborah Mosier

34.4 million.

Brian Ruttenbur - Morgan, Keegan & Co., Inc.

And the DSOs, that is – what were DSOs in the third quarter?

Deborah Mosier

We reported at the end of the third quarter around 80.

Brian Ruttenbur - Morgan, Keegan & Co., Inc.

And is there any concern about, you know, bad receivables or anything like that?

Deborah Mosier

No.

Brian Ruttenbur - Morgan, Keegan & Co., Inc.

These are all to the government? To different governments? The DSOs that are outstanding for so long? Or are some of them commercial or?

Deborah Mosier

Mostly government and state and local in particular.

Brian Ruttenbur - Morgan, Keegan & Co., Inc.

Is it the state and local that’s paying slower in this economic environment? Or is it the federal government with the change of administration?

Deborah Mosier

Part of it is that on some of this we act as subs to larger primes, and so there’s a delay that goes along with that. But it just takes a little bit longer to collect on our contracts because we can only bill once a month and that’s all comes in back end loaded.

Brian Ruttenbur - Morgan, Keegan & Co., Inc.

And then it takes – so the state and local are still paying within 30 days or was it 30, 45 days or what is the?

Deborah Mosier

I would say probably more like 60. And if we’re going through primes it’s probably higher than that.

Operator

Your next question comes from Michael Kim - Imperial Capital.

Michael Kim - Imperial Capital

Just touching on Transportation, you know, given the pressures on state and local, can you expand a little bit on what you’re seeing out there in terms of some of the projects that you guys may have had in the pipeline and how much in Transportation have you assumed in the revised guidance? Thanks.

Hans Kobler

Transportation is kind of works both ways. Some of the – first of all they’re all very excited about the stimulus funds and they should be clearly one of the key recipients. Our expectation is that people will spend a lot of money on Transportation infrastructure, they will attempt to combine it by calling it green transportation infrastructure which not only means intelligence, which generally means good for us. That money is not here yet. Until that money comes in, the state local in some areas might be scrambling to pay and especially in California, one would be more concerned about that and we are having on some [context] discussions are proceeding more cautiously because of that.

But again the big push we expect to come in the second half from this. What we have in our numbers again, we don’t assume any big stimulus hit in our ’09 numbers. We would assume that most of that will benefit us in 2010.

Michael Kim - Imperial Capital

And then just a follow up on an earlier question on the shift to Afghanistan and the need for mobile surveillance, can you frame the opportunity just in terms of how that might layer in in the second half for the company or looking out into the next – into the follow on year?

Hans Kobler

Well, Afghanistan is a big opportunity for us in general, not limited to our Cerberus or our mobile systems but also to our Fido explosives sniffer. So there are a number of products that we are excited about in Afghanistan and we are actually ramping up our sales efforts there quite considerably. In terms of the mobile systems, Afghanistan is one of the markets. You know, we still have BETSS-C, MSS, there’s the border. So there are several that larger programs or very large programs that we feel we are very well positioned at and should expect to book something during the year. When that revenue is harder to say, probably in latter part, Q4 would be my guess.

Michael Kim - Imperial Capital

Okay. Great.

Hans Kobler

I forgot to mention one thing. On the Transportation group I should also say the backlog is much higher than our revenue assumption for this year, you know, just because of their big booking success. But some of those are long term things.

Michael Kim - Imperial Capital

Would that be upside to what you’re looking at right now in terms of the current guidance?

Hans Kobler

The MSS to Afghanistan?

Michael Kim - Imperial Capital

No, I’m sorry. In Transportation.

Hans Kobler

Oh Transportation. There will be again some upside but most likely 2010 or Q4, late Q4.

Michael Kim - Imperial Capital

And then just lastly on J2, I don’t know if you can expand a little bit further on that and any developments that you can share and also how much of that you might think you can start to layer in this year, next year? You know, obviously it’s still a little bit of a longer tail, but any framework would be helpful.

Hans Kobler

Yes. J2 obviously is the biggest undertaking that we have here. You know we have ramped up hiring, we’ve transferred a lot of people. The team is up and running. We’re working out of temporary facilities right now. We are looking for a big expansion. We’re actually negotiating a lease for 40, 50, 60 thousand square feet facility near Baltimore that will I think accelerate the ramp up there. So once that is in place we will draw down the development money faster and as I mentioned in my opening remarks, we are somewhat optimistic that we will see more benefits out of J2 in terms of product procurement earlier in certainly in ‘010, perhaps even first elements later on this year. So we are pleased with the progress on J2.

Michael Kim - Imperial Capital

And then lastly any significant shift in CapEx that are expected this year, you know, just given some of the things in the pipeline?

Hans Kobler

No. Debbie?

Deborah Mosier

No.

Hans Kobler

CapEx is in the bucket of costs. We are sitting tight on our money in this environment. So you know it’s good we have some powder drying, because we don’t – you know a couple of larger bids out there that we have been bidding for would require more cash. We don’t know what opportunity will jump on us out of this stimulus. So we want to have our powder dry to really push hard and accelerate when we see an opportunity.

Operator

Your next question comes from James Ricchiuti - Needham & Co.

James Ricchiuti - Needham & Co.

It sounds like you’re starting the year at a fairly low level of product revenue. Is it fair to assume that at the low end of your revenue guidance your product revenue potentially is down for the year? And then at the high end of your guidance you would be potentially up on product revenue? Is that one way to look at this?

Deborah Mosier

I don’t think that in either the low or high end that we’re expecting this to be down on product.

James Ricchiuti - Needham & Co.

Now Hans you talked about opportunities for Fido in Afghanistan. I’m wondering do you see opportunities for Fido on the handheld side with potentially the Iraqis as we begin to withdraw from Iraq.

Hans Kobler

Yes. You know, that’s actually one of the delays I was referring to was with the Iraqis. I think we have great opportunity. Fido keeps proving itself in theatre. It’s making great progress towards with the U.S. military. We’re getting a lot of interest in Afghanistan with the Afghans and the Iraqis who, if you recall, have used our detectors for awhile now are interested in buying more. And that’s one of the transactions that we’re still hopeful that some of that will happen in ’09.

James Ricchiuti - Needham & Co.

The other application for Fido and also for PaxPoint – you talked about a broader opportunity in cargo screening and I wonder if you could comment on where you see some opportunities in that area in 2009, recognizing that DHS is moving slowly.

Hans Kobler

Air cargo – I think when we met, I was at your conference awhile ago, we added air cargo as one of the key markets for us. And I call it $1 billion market, where Congress mandated that you have to screen air cargo. And there is no real good technology out there today that is qualified doing that, because the challenge of the IMS technology is that they have a tendency for high false alarms and that doesn’t work so well if you have to open up entire containers. So we are looking at that very well positioned, not only with Fido but also with the mass spec technology which is really the gold standard there. And we think we have a role to play on both accounts.

We made a press announcement a couple of months ago with one of the freight forwarders in Houston who also happens to be the president of the Freight Forwarder Association who are using Fido in trials to follow the Congressional mandate as probably the best suited technology available today.

And then there is a second avenue for us to say that we further developed the technology we have in out of our analytical systems units. If we take what we just gave to the Koreans, push it forward, you know, in six to nine months timeframe and go through QPL and make it the official product for the air cargo market, that would be obviously the Holy Grail for us because that’s a huge $1 billion market and it would also be the stepping stone for the [inaudible] market. So between those two I see Fido available and opportunity today, and long term I believe we are very well positioned with mass spec to own that market or at least have a serious shot at it in the next 12 months.

James Ricchiuti - Needham & Co.

Hans, you alluded to some larger bids that you’re going after. Is there any time line on when you might hear on some of those this year?

Hans Kobler

The environment is not so clear. We believe that one has to be QPL qualified in the next 12, 18 months. It would be nice. You know, we’re trying to get some money from the TSA to help pay for the development and that would always be nice because A, it would help us save money and B, it would I think bring us closer to the customer and sort of increase the odds if we’re going to be successful here. But we’re going to pursue this path anyways because mass spec is one of the key game changing technologies that we can bring to security market worldwide, you know, from explosives to chemical to drug sniffing. And so we just want to keep the momentum going that we are building here.

Operator

And at this time we have no other questions standing by. I’d like to turn the program back to Mr. Kobler for any closing remarks.

Hans Kobler

Okay, well thank you all for your time. Talk to you next time.

Operator

Thank you everyone for your participation in today’s conference and you may disconnect.

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