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L-1 Identity Solutions Inc. (NYSE:ID)

Q2 2009 Earnings Call

July 29, 2009; 11:00 am ET

Executives

Bob LaPenta - Chief Executive Officer

Jim DePalma - Chief Financial Officer

Lisa Cradit - Financial Dynamics

Analysts

Brian Gesuale - Raymond James

John Croke - Jefferies & Company

Daniel Meron - RBC Capital Markets

Michael French - Morgan Joseph

Jim Ricchiuti - Needham & Company

Michael Kim - Imperial Capital

Brian Ruttenbur - Morgan Keegan

Operator

Welcome to L-1 Identity Solutions second quarter and first six months 2009 financial results conference call. At this time, all participants have been placed in a listen-only mode and the floor will be open for your questions following the presentation. (Operator Instructions)

It is now my pleasure to turn the floor over to Lisa Cradit. Ms. Cradit, you may begin.

Lisa Cradit

Good morning, and thank you for joining us for L-1 Identity Solutions second quarter and first six months 2009 financial results conference call. Statements that representatives of L-1 Identity Solutions make during this call, that are non-historical facts are forward-looking statements made under the safe harbor provision of Private Securities Litigation Reform Act of 1995.

Forward-looking statements are based on management’s current beliefs, and assumptions, and involve inherent risks, and uncertainties. Any statements made about future expectations or results are necessarily only estimates. Actual results could differ materially from any forward-looking expectations. Factors that may cause differences between forward-looking expectations and future actual results are fully described in the company’s SEC filings. The company expressly disclaims any obligation to revise or update any forward-looking statement.

Representatives of L-1 plan to use a number of defined financial terms during this morning’s call, such as adjusted EBITDA, organic growth, unlevered free cash flow, backlog, and net debt. Please refer to the company’s earnings press release issued this morning for further definition of and context for the use of these terms.

With that, I’m now pleased to turn the call over to Bob LaPenta. Mr. LaPenta.

Bob LaPenta

Good morning everyone and thank you for joining our second quarter and six month call. I think we had a good quarter inline with our expectations. All of our divisions are performing well. SCD had a great booking quarter, as we indicated booking over $189 million of new driver’s license credentialing orders during the quarter. Many states were implementing facial recognition document of indication and this will enhance our revenue income and gross margins going forward.

It’s important to note and we indicated this is in our forward guidance that our passport sales are particularly impacted by the economy and that could be down almost $15 million for the year. Pass card also is going to be down about $5 million for the year, mainly resulting from the one-time large order printers that we booked and shipped in the second quarter of last year. Despite that their profit, the credential in group profit is going to be up almost 60% from the year. EBITDA from $36 million to over $56 million and they’re going to have over 10% organic growth to the year.

Enrollment had a great quarter open 287 enrollment centers during the quarter, give this over 900 now and we expect to have over 1000 at year end. Their sales were up 65% from the prior year and they performing exceeding with well on our two large new contract opportunities, mainly New York State and TWIC.

With respect to TWIC, we see large opportunities going forward in transportation and we here in a lot of talk by immigration and we think this is going to be the platform should any opportunities rising in the enrollment. We think this is going to the platform that will be impacted. So there is a lot of upside potential. It’s important to note on enrollment, they’re going to be up about 20% for the year. They going to exit the year at a run rate of over a $170 million versus this year $117 million plus in revenue.

Biometrics had a great quarter, bookings on PIER, HIIDE and facial in connection with the additional driver’s license opportunities are increasing. I think more importantly, the customer base is expanding beyond our traditional customer with the army, it’s important. Our ABIS platform with DoD is performing very, very well. We had some additional licensing revenue in the second quarter.

We think there are large opportunities going forward. We also are in the process of implementing the new ABIS opportunity, when an important Intel customer for a national Intel opportunity. This is going well and we expect licensing revenue to start being generated in the third and fourth quarter on that.

Our new banking agreement was really taken advantage of what we saw as an opportunity and nominal cause we dramatically increased our flexibility and we are very comfortable now with meeting our covenants and providing for our working capital and our fixed asset needs.

On the negative side, we do see some slippage; we saw a slippage in one international opportunity, particularly in Mexico where we hope to have a booking on national ID opportunity. We were told by the customers that we are the leading candidate for that opportunity. We still believe we are, the procurement is delayed, but we still believe it's going to happen this year, although we don't really have in any of our numbers for the second half.

We’ve read about Real ID ceasing operations. This was an opportunity we had, where we were basically the system integrator on the clear program, you saw in our results that we wrote-off, our receivable of about $1.2 million, $1.3 million relating to Real ID and then impacted sales by about $5 million for the year.

While that represents downside, we do have upside. There are many of its existing investors that are looking at an opportunity to restart the program. We are looking at being the main system integrator in that opportunity. We’re putting together a business plan that we’ll present to the potential investors and while it remains now a short-term downside. We think this could be an upside opportunity for us going forward.

On the cautious side here, we have about $5 million in fixed assets related to this program. We think we are going to recover those, but again we are cautiously optimistic, we’re going to be able to put this program together and with new investors get this thing restarted sometime in the second half.

So let’s see, what else I want to cover. I did mention the Intel Group, they’re doing very well. We think they’re going to have a good year with over 10% organic growth for the year and we think these good opportunities for them in cyber and various Intel initiatives.

Second half, we all knew and we continue to see a ramp, particularly in the fourth quarter, but we feel good about that ramp and you should know, we’re going to have organic growth in the second half of over 30%. This is going to be led by the Biometrics Group which is going to be up over 25%.

The Enrollment Group is going to be up over 60%. Secure Credentialing is going to be up 15% in the second half and Intel is going to be up over 20% versus the prior year in the second half. This will bring us to over 15% organic growth for the year, which I think we’ll all agree in this economy with company shrinking reporting lower sales across the board to have 15% organic growth is quite an accomplishment.

We’re going to exit the year at over $800 million run rate with sales of over $200 million in the fourth quarter and EBITDA, north of $30 million. So, we are encouraged, we feel good about the second half, it basically boils down to two opportunities, one involves a order for additional HIIDEs that we believe is in procurement.

We should be booking that within a next couple of weeks and the second one involves additional IP, an additional IP opportunity with the U.S. customer. We’ve received the first tranch on that. It’s been approved by the customer. If we book that in the second half or confidence of achieving like second half goals are very, very high.

With that I will turn it over to Jim to give you some color on the numbers and then we will open up for Q-and-A.

Jim DePalma

Thank you, Bob. The press release provides the detailed summary regarding our second half quarter and first half results and Bob has outlined many of the key points regarding our operations to current marketplace and our growing prospects. I will provide additional color regarding our financial performance and positioning relative to second half expectations. For context around our results should be noted that reported results for the second quarter 2009 include Digimarc. As you know, Digimarc was a quite back in August of 2008.

Over all the second quarter results represented a solid performance and a strong second step towards our fully expectations. As we achieved, our previously provided guidance and remained to ahead of our plan through two quarters and all key metrics, revenue, EBITDA and free cash flow. Our reported revenues for the quarter were up 16% to $168 million, from $145 million in the previous year and 22% for the first half.

There are several points regarding growth for the quarter and first six months. As Bob noted, the company had difficult comparisons for the quarter and first half due to the large order from the Department of State.

It should be noted that despite difficult comparables by metric and Secure Credentialing units first half booking of approximately $210 million and key markets such as the driver’s license in the Department of Defense, positioned these businesses for strong second half organic growth.

Excluding these decided items regarding comparables, the company grew over 16% organically, driven by our enrollment and government service businesses. As Bob noted, our enrollment businesses has grown almost 50% organically, adding over $35 million in annual revenue from existing federal and in state contracts and they continue to focus on expanding it’s existing footprint and addressing a new domestic and international opportunities.

The combination of $1.1 billion plus of backlog and our expectations from certain follow on projects provide the strong base and support of our second half estimates. Key items of note, as Bob already noted, increase revenues from our existing driver’s license and federal contracts, delivery of multi-model solutions to our key federal customers and international system projects continued ramp up from our enrollment services contracts in New York and then TWIC to name the couple. Overall approximately 96% of the estimated full year revenues will be derived from backlog and the existing contracts vehicle.

Gross margins, reported gross margins for the quarter approximated 29%, cash margins of 35% and these are inline with our expectations. Operating expenses as a percentage of revenue was 23%, down from 27% in the prior year due to the company’s leverage of existing infrastructure, as well as continued opportunistic focus on synergies and the key focus on effective cost management.

Our target has been 20% and I can say operating expenses as a percentage of revenue will continue to decline to the 20% range on a cash basis for the full year as revenues continue to decline and we effectively leverage our resources.

Adjusted EBITDA was $24.1 million or approximately 14% of revenues. The company continues to target EBITDA margins in the 15% range for the full year. The couple of items of note, total reported interest expense for the quarter was $9.3 million, comprised of cash, interest expense of $6.7 million on our senior and convertible debentures and the remaining $2.6 million relates to non-cash charges for financing fees and other amortization.

On shares outstanding weighted average shares increased to 85.8 million from 74.8 million in the prior year and the company continues to target 85 million to 86 million shares on a fully diluted basis for the full year.

On the balance sheet, key items to note, on the June balance sheet change in working capital for further quarter was a positive $3.5 million, reflecting effective management of our collection and vendors, as well as reduction in the inventory levels. As shipments in our biometrics units were delivered. The company had DSOs of approximately 63 days for the quarter and continuous to drive its overall DSOs to the 60 to 62 day range and manage inventory going to customer demand and back log.

Total debt for the company was $463 million down from $472 million in the prior quarter due to principle prepayments on our term loans repayments. The debt balance is comprised of $288 million of term and $175 million of convertible debt. The company exceeds all of its financial covenants and has a $135 million of capacity under its revolver.

Bob discussed our recent amendment to our term loan and the rational. In this regard the amendment was leverage and maturity neutral. In addition all covenant requirements and thresholds remain the same. The outstanding balance was divided into two tranches, the first tranch of a $159 million remain under the same interest and the amortization terms, the second tranch of $129 million will amortize at 1% annually and have a slightly higher interest rate of 50 basis points.

The effect in lowering our amortization between now and the final maturity payment is $118 million, which will allow us for additional working capital and as a by product we’ll positively improve our fixed charge coverage ratio.

Free cash flow for the quarter was $17 million and $23 million for the first half, almost $5 million ahead of our plan, but company continues to target $70 million to $80 million in un-levered free cash flow for the full year and the company will generate significant second half cash flows as cash operating profits increase and we’ll have significant internally generative funds to cover of our capital, financial obligations, as well as address additional pay down of debt levels. Back to you Bob.

Bob LaPenta

Thanks Jim. With that we will open it up for questions.

Question-and-Answer-Session

Operator

(Operator Instructions) your first question comes from Brian Gesuale - Raymond James.

Brian Gesuale - Raymond James

Bob, I’m wondering if you elaborate on a couple of those big opportunities, again wondering if you could maybe elaborate on some other things you guys are looking at over the next six months, as you’re billing kind of those singles and doubles around some of those bigger opportunities?

Bob LaPenta

I think we’re seeing increased activity in the Intel identity space really around the world. Our bids outstanding are probably on an all-time high. Regarding the second half, we really don't have any large opportunity that we think will impact our near term operations, other than the two I mentioned.

One is the second complement of HIIDEs for the Afghan build up and another one is a IP enterprise opportunity with the U.S. customer that again identify. Both of them have been approved. The HIIDE opportunity is in procurement. We expect to actually book that in a next couple of weeks and the other one has been approved by the customer is in the procurement cycle and if we book both of those, again I think our confidence goes from 90% to much higher than that for the second half.

Brian Gesuale - Raymond James

May be just following up on HIIDE, because its so critical to margins as well, can you kind of give us an expectation of what the first half of the year for HIIDE look like versus what you think this ramp will be in the second half?

Bob LaPenta

I think we indicated we had about $11 million of HIIDE and PIER bookings in the first half and I think we’re talking about the same number in the second half.

Brian Gesuale - Raymond James

My final question, I think you mentioned that Registered Traveler was $5 million any you wrote off a receivable, can you talk about any margin impacts and correct me if those numbers were wrong please?

Jim DePalma

Yes, now we had what margin we’re recording on the recurring sales on it.

Bob LaPenta

Not much.

Jim DePalma

Not much, but it was important. The model on that program was, we made an investment and we provided really the first year of implementation and maintenance for free. That was going to be recovered and in subsequent years on a recurring basis. We basically had a ten contract for the system integration.

We wrote off the receivable that we had on our books at the end of the quarter. Sales were ramping, in fact this year they were probably going to be somewhere around $7 million. Again we’re encouraged by the fact, that lot of the prior and new investors are interested in reinitiating the program, we’re looking at it.

We think there’s an opportunity to restart the program. We are the integrator, we have all the equipment, we provide all the software and with new marketing model, I think it could be an exciting program. Having said that we have about $4 million or $5 million of differed cost and fixed assets on our books relating the program, if you’re unable to get the program restarted that will be on recurring in the second half.

Operator

Your next question comes from John Croke - Jefferies & Company.

John Croke - Jefferies & Company

I had a question with respect to the two programs you highlighted as somewhat of swing factors to outlook for the second half. Is there anyway to maybe size, what the potential revenue contribution of these things are in 2009 and maybe help us get a better sense of what the full year might look like you should being moving around a little bit and maybe slip into 2010?

Bob LaPenta

One is about $6 million and the other one is about $10 million.

John Croke - Jefferies & Company

Then with respect to these biding proposal pipeline you’re looking at today, is there anyway to maybe size it for us or at least give an indication of demand you’re seeing in the market today versus maybe where we were at the beginning of the year?

Bob LaPenta

We have large bids outstanding in New York State, for new competes for driver’s license and I’ll call now Pass ID type opportunities for facial for ABIS, facial recognition systems, things of that nature.

I’m again pleased to note, that over 31 states now have implemented facial recognition and we’re also implementing our document authentication capabilities. We have a large opportunity that we bidding on for TSA. It involves airport, I’ll call it verification registration system. We believe that we are one of two qualify providers, that’s going to be decided in the second half, it’s a very nice program.

In Latin America we have bids outstanding now probably for opportunities of over $3 million to $400 million. We think India is going to be a very large opportunity for us. We are team with TATA. As you know, India is focusing on identity solutions. We are the sole provider to TATA for all government requirements. So we’re encouraged about that.

In the Middle East, I think we’re well positioned our program that we mention and we book last year is going very well. We think that’s going to be a nice opportunity for us next year with additional HIIDE’s and multi-model mobile solutions. So the billing activity is robust. I have to go back to my office to come up with another six or seven name, but it’s very robust. Again none of these going to really impact short term operation with the results.

John Croke - Jefferies & Company

On the aggregate, would you say that the opportunity set today is larger than what it was six or 12 months ago?

Bob LaPenta

I think there is no question about that and although nobody is asked about our backlog. I think, our backlog at the end of the half was around 1.1. We are estimating that by the end of the year would be somewhere between $1.2 billion to $1.5 billion.

Jim DePalma

Absolutely on a macro basis, we see a lot more and a lot bigger.

John Croke - Jefferies & Company

Then lastly, is your headcount up year-to-date and do you expect further growth by the end of the year?

Jim DePalma

Our headcount is flat to perhaps slightly down. We’ve been very provable. We’ve added some resources in key areas where we need them in R&D and sales of marketing, but we’ve been able to synergies with respect to somebody acquisition that we made.

Bob LaPenta

Yes, if there are additions in the second half, but we are going to add some software and system engineers to provide customer support and some of these Intel integrated opportunities we’re looking at, but that’s about it.

Operator

Your next question comes from Daniel Meron - RBC Capital Markets.

Daniel Meron - RBC Capital Markets

Can you give us a little bit of a split between the solutions versus services and how should we think about it going forward? It does sound like cyber security is taking hold here. Should we look for more of mix from this traditional side going forward?

Bob LaPenta

You were breaking up, but I think the question was, can you provide some color on the solution versus service mix going forward.

Daniel Meron - RBC Capital Markets

Yes, then how far does cyber security play into that?

Jim DePalma

So I’ll let Bob talk about the cyber security. From a composition standpoint, they’ve gone like 50-50. We see significant growth on both sides. So, we don’t expect there to be much of a difference between that composition, sort of 50-50.

Daniel Meron - RBC Capital Markets

Then from the competitive landscape, I might have missed this earlier, but there were a few projects that as the competition goes a very few and a lot of these change. [Technical Difficulty] have a lot projects ahead of you, but is there anything specific that caused this to go one way or versus the other or was it this great [Technical Difficulty]

Bob LaPenta

You’d have to break that down into categories or a various divisions of product lines. I think it’s fair to say that, I think we all know what the competitive landscape looks like and it basically is comprised of ourselves as a major provider, Sagem, who continues to increase their presence and aggressiveness in the space and Cogent.

I think our win ratios are impressive. I think the highest profile program that people have been talking about is NGI. We competed in that program, really to establish a benchmark ourselves versus what we saw the competition to be. I got to tell you, we did extremely well in the competition from a technology point of view.

Our software clearly is in the first tier and it continues to get better and close the gap. I think we all know that although I don’t think it’s been formally announced that Sagem is going to continue as the ABIS algorithm provider there, but that’s not surprise and again it didn’t impact our results.

Relative to competitions that we see in the DoD, DHS, TSA, internationally, I would say that we’re wining our fair share of all of those competitions, both in software, in live scans and in credentialing. So I’m pleased with our competitive position and I think we’re really well positioned on some of these future opportunities.

Daniel Meron - RBC Capital Markets

Then, when we look at the backlog, I think you entered the year with about $1 billion [Technical Difficulty] straight correlation, but if we take the say that $1.2 billion to $1.5 billion of backlog that you expect at the end of the year, do you think that we should see the same kind of conversions 2010 or should we see an acceleration rate, because it does sound like there’s a lot of more, but it takes longer to get extended into revenue at this point.

Jim DePalma

Again you broke-up, so I may only be partially answering your question, but I’ll repeat what I said. The second half we’re going to have organic growth of over 30%. That’s going to be SCD plus 15% Biometrics plus 25%, Enrollment plus 60% and Intel 20%. We are going to end the year with a backlog of 1.2 to 1.5. Our organic growth this year is going to be around 15%.

If you take out some of those non-recurring sales for the printers and advanced buys on Pass card that would be north of 15%. Relative to our planning, we are not going to change our mode; I indicated that we’re going to end the year.

We’re around $200 million in sales in the fourth quarter. Again, based on what we said about the opportunities that our key to achieving that, plus or minus a little bit. We’re going to be around an $800 million run rate. So if you assume $700 million this year and around $800 million next year, I don’t think that would be an unreasonable comparison.

Daniel Meron - RBC Capital Markets

If it’s very similar conversions that you had off the back again to leverage this year [Technical Difficulty]

Jim DePalma

2010 is going to be similar to the backlog in…

Bob LaPenta

We haven’t really run that out yet, it’s hard to say. I think we’re confident that by the end of the year we’ll be in the 12 to 15 range, which will be about a 25% increase I think over the last year.

Operator

Your next question comes from Michael French - Morgan Joseph.

Michael French – Morgan Joseph

Question on, if the clear program as we started. What would the structure look like as far as your concern?

Bob LaPenta

Again we’d plan on being the system integrator. We would operate the system and our contribution would be operations, software. We’re not looking to make a large capital or equity investment and the program. That would be provided by current and potential new investors. Again I don’t want to talk too much about, who the current investors are and let them say that. They are sizable institutions that still have confidence in this system. Within expanded marketing program, I think it could be an exciting opportunity.

Michael French - Morgan Joseph

Would you be making the same revenue with the same margins under the new owners?

Bob LaPenta

I think our revenue and margins we go up dramatically.

Michael French - Morgan Joseph

What was that?

Bob LaPenta

Well, because we would be the prime in operating this program.

Michael French - Morgan Joseph

A question for update on California on the process there and are there be any developments?

Bob LaPenta

I don’t know whether contract has been signed, it’s been approved. What they did as they broke out the basic credentialing contract and facial recognition. Facial is going to have to be proved separately, but we were expect in a begin implement in our program in the second half.

Michael French - Morgan Joseph

That seems the projection now.

Bob LaPenta

The very little revenue, Jim indicated they’re 93% as coming at backlog.

Jim DePalma

94%.

Bob LaPenta

94%. So if our sale is going to be somewhere around 375, 380 in the second half 5% roughly.

Jim DePalma

Yes, 96%.

Bob LaPenta

So 4% from that number is about $15 million, which is about what I said.

Michael French - Morgan Joseph

Then lastly on the Mexican opportunity, it seems to be taking a very consecutive approach. Can you just provide a little more color and what’s going on? If you could address, what is the probabilities that matter could be result and next contract let by year end?

Bob LaPenta

With which opportunity you’re talking about?

Michael French - Morgan Joseph

This is for the Mexican national ID.

Bob LaPenta

I think the President, Calderon has made a public statement. I think last week, that a biometric, national ID system involving high risk and fingerprint will be left this year. We’ve been told that we’re in a lead again its Mexico. We’ve been waiting for this now for about six months. It’s not in our numbers, but it would be a very nice one for us.

Operator

Your next question comes from Jim Ricchiuti - Needham & Company.

Jim Ricchiuti - Needham & Company

I just wanted to go back Bob, to the comments you’ve been making about your backlog and the increase that you’re seeing through the end of the year. It’s fairly substantial increase $100 million to $400 million from where you are right now? I mean can you talk a little about, which areas of your business you expect to see that increase? We’re talking about I assume a handful of decent size projects.

Bob LaPenta

Jim, do want to give him some color on it.

Jim DePalma

Sure. Again it’s the bulk of it is in our solution area. It’s a wider array of opportunities, across the board. There are some also opportunities in our government service business. So, I would say the list is there is probably 10 to 12 on them and since some of them range from, $5 million to $10 million to more significant amounts.

Bob LaPenta

To give you a little more color on that. New Jersey, for instance we are expecting an award on that over the next couple of weeks. There is a Latin American opportunity that on a discounted basis is in that number probably for $50 million to $100 million. It’s a national ID program. We have Nigeria; we have about $20 million in therefore. There is Mexican opportunity, but again there are a lot of drivers like we haven’t book California, that’s going to add to that number. So it’s a pretty gross book of opportunities.

Jim Ricchiuti - Needham & Company

Can you talk a little bit about; you’ve talked in previous calls where you see debt going by the end of this year and next year. Can you maybe update that?

Bob LaPenta

Yes, we are going to have free cash flow in the second half of somewhere around $50 million, $55 million. Right now, we don’t see the large CapEx requirements beyond what we’ve seen in the first half, in fact that maybe a little less. So, we should be able to use high percentage of that to pay down debt, borrowing any other opportunities that we see.

Jim Ricchiuti - Needham & Company

Just with respect to acquisition opportunities, Bob what’s your view on that right now at this point?

Bob LaPenta

I think as you’ve seen, we’ve been very, very conservative in that regard. We have seen some opportunities and again they are in the must-have category rather than nice-to-have in order for us to give them any serious consideration.

Operator

Your next question comes from Michael Kim - Imperial Capital.

Michael Kim – Imperial Capital

Just going back to HIIDE you mentioned earlier about some opportunities to move beyond the U.S. Military. Just if you guys expand on that in more detail and where you see some of those opportunities, I think primarily on the international side or other domestic customers?

Bob LaPenta

I would say mainly on the international side. We have been expanded the customer base, a lot of people are testing our systems. They are impressed with it. We recently got HIIDE five to the point where we can now demonstrate it to some of our perspective new customers.

So, I think there is opportunities in the Middle East, in the Far East and a lot of people are looking at this, Israel, I think is looking at this seriously and I think in India could be another major opportunity.

Michael Kim – Imperial Capital

Is it your sense then you’d be able see some of these opportunities come to fruition in the current year or the more that you’d expect to see throughout ’10?

Jim DePalma

We do not have any revenue associated with additional HIIDE opportunities this year. Again, next year the only real HIIDE opportunity we’re kind of looking at including in our forecast is the one associated with that Middle East customer, where the back end of that program incorporates a large HIIDE order, once we complete the development, which will be completed in the fourth quarter this year.

Michael Kim – Imperial Capital

Then switching gears, do you guys have any better visibility on potential stimulus opportunities? Obviously it’s been a little bit slow as they gave but, it seem like may be later in the year, early part of next year, there may be some more contracts being awarded.

Jim DePalma

Stimulus.

Michael Kim – Imperial Capital

Do you see any stimulus related opportunities, any dollars flowing towards the end of the year?

Jim DePalma

I think most of the dollars, particularly with HIIDE are now going to be incorporated in the base budget. So, we’re not counting on a lot of stimulus dollars flowing through. We do think we’ll see some additional dollars. Once Pass ID is enacted, a lot of people look at that likely, it’s a negative, but I actually believe it’s a positive for L-1, because it will eliminate a lot of controversy.

They will get a lot of states moving and it will provide funding. So I think its going to be a good think. Other than that, I really don’t see any stimulus or outside of the normal funding that’s going to be impact us.

Michael Kim - Imperial Capital

Then at this point, as Digimarc is essentially full integrated then your expectations for OpEx being about 20% of revenue driven by the integration of that as well as discontinued execution?

Bob LaPenta

I think the credentialing group has done a wonderful job of integrating the business, their own the same facility. The marketing is coordinated working well, program performance is good across the Board. They’re growing. As I mentioned, they’re going to have EBITDA this year consolidated that’s going to be up over 60% from last year combination of those efficiencies and synergies we talked about. We think additional opportunities may involve consolidating some of our core centers and field service and that could be another $5 million or $6 million.

Michael Kim - Imperial Capital

One last house keeping question, I know if you can provide a breakout on the funded level backlog versus the overall backlog?

Bob LaPenta

It’s primarily all funded.

Operator

Your next question comes from Brian Ruttenbur - Morgan Keegan.

Brian Ruttenbur - Morgan Keegan

The question I had, it’s been asked a little bit so far. About your debt pay down, you paid down $5 million in this quarter and assuming you’re making a acquisitions by year end, would you be paying down $20 million, $25 million, $30 million, $10 million, what’s the number that I could put on? On this assuming don’t making acquisitions by year end and that could be paid down on debt.

Jim DePalma

We paid $8 million in this quarter. Our amortization for the next six months is about to pay at least $10 million and depending on our capital requirements for new projects. My commitment right now is the pay down $10 million, but it could be more.

Brian Ruttenbur - Morgan Keegan

Then next year with the goal beat the pay down in a $50 million or $20 million?

Jim DePalma

I would say our goal next year borrowing any good terrific projects that come all way would be to accelerate the pay down.

Brian Ruttenbur - Morgan Keegan

Then your earnings guidance more in the questions I had. It says excluded certain items $0.06 to $0.12 earnings excluded certain items. Can you tell me what their certain items are?

Jim DePalma

Yes, the just RT.

Bob LaPenta

RT, right it was here. Financing cost we have to expense in M&A cost.

Brian Ruttenbur – Morgan Keegan

RT and M&A cost?

Bob LaPenta

Right.

Brian Ruttenbur - Morgan Keegan

How much are those?

Jim DePalma

About $2 million.

Operator

Your final question comes from Daniel Meron - RBC Capital Markets.

Daniel Meron - RBC Capital Markets

Just a quick follow-up if I may. Any of you from the [Technical Difficulty] you can minus projects?

Bob LaPenta

We’re working with the customer it’s a long process, our biometric division and Joseph Atick leading that opportunity. We have great dialogue with the customer. We think we have a good solution that is going to be decided some time in the fourth quarter. We don’t have any sales associated with that in our forecast.

Operator

There are no further questions at this time. I would like to turn the floor back to Mr. Bob LaPenta for closing remarks.

Bob LaPenta

Again thanks for participating in the call. We will look forward to talking to you at the end of third quarter and are excited about our opportunities and performance in the second half. Thanks very much.

Operator

Thank you. This does conclude today’s teleconference. Today’s call was recorded and will be available for a replay, beginning at 2:00 pm Eastern Time today. The dial-in number for the replay is (800) 642-1687 for U.S. callers and (706) 645-9291 for those outside the U.S. Please use passcode 17939430. Please disconnect your lines at this time and have a wonderful evening.

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Source: L-1 Identity Solutions Inc. Q2 2009 Earnings Call Transcript
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