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Executives

Jeffrey Jagid - Chairman & Chief Executive Officer

Ned Mavrommatis - Chief Financial Officer & Treasurer

Ken Ehrman - President & Chief Operating Officer

Peter Fausel - EVP, Sales, Marketing & Customer Support

Analysts

Walter Schenker - Titan Capital

Chris Ryder - Lucrum Capital

Brian Ruttenbur - Morgan Keegan

I.D. Systems Inc. (IDSY) Q2 2009 Earnings Call August 4, 2009 4:45 PM ET

Operator

Good day and welcome to the I.D. Systems Incorporated second quarter 2009 results conference. Today’s call is being recorded. At this time, I would like to introduce Jeffrey Jagid, Chairman and CEO of I.D. Systems. Please go ahead, sir.

Jeffrey Jagid

Thanks Anthony, and thank you everyone for joining us today. With me are Ned Mavrommatis, our CFO; Peter Fausel, our Executive VP of Sales and Marketing, and Ken Ehrman, our President and Chief Operating Officer.

I will take you through an overview of the quarter, Ned will go into the details of our financial results and Pete will review recent sales activities. We will then all be pleased to answer any questions you may have.

But before we begin, let me reiterate the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The following discussion contains forward-looking statements that are subject to risks and uncertainties including, but not limited to the impact of competitive products, product demand and market acceptance risks, fluctuations in operating results and other risks detailed from time to time in I.D. Systems filings with the Securities and Exchange Commission.

These risks could cause the company’s actual results for the current fiscal year and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of the company.

During the second quarter of 2009, we continued to face challenges related to the global economic recession including cautionary technology spending and unpredictable timing to close deals. Budget cut backs at the US Postal Service in particular continue to impact our results. Postal spent $3.7 million less on our systems this quarter than it did in the second quarter of 2008.

However, the Postal Service does continue to invest in our wireless vehicle management solutions as do all of our other core enterprise customers, including Wal-Mart, Ford, Walgreens and Alcoa. We think it’s a clear reflection of the significant ongoing value provided by our technology.

Perhaps even more encouraging, we continue to diversify and strengthen our customer base and revenue during the second quarter of 2009 winning new business from some of the world’s leading consumer goods producers and industrial manufactures including Nestle and Audi.

In Q2, our revenue from customers other than the Postal Service, increased $900,000 compared to the second quarter in 2008. So, we remain meaningfully engaged with our customers and prospects, and our sales pipeline remain strong despite the inherent timing uncertainties associated with this economy.

At the same time, as noted in our last quarterly call, we have taken actions to prudently reduce expenses including selective payroll reductions while maintaining investments and activities that will promote growth. Consequently our gross margins remain robust increasing to 54.8% during the quarter compared to 52.5% for the second quarter in 2008. Our balance sheet also remains strong as Ned will detail for you.

In short,. I. D. Systems has the financial wherewithal, the dedicated customer base, the technological leadership and the commitment to invest in our strategic goals to weather these challenging times. That being so, we believe that the current share prices of our common stock represents of significant bargain for investors and marks the company as a potential takeover target.

Accordingly, during the second quarter I.D. Systems board of directors adopted a shareholder rights plan under which a dividend of one preferred stock purchase right will be made for each outstanding share of our common stock. This stock purchase right would be exercisable if an entity acquired or tendered an offer for 15% or more of the company’s common stock.

We believe this Board action will ensure that our shareholders would receive fair value in the event of any attempted hostile takeover.

While this recession continues to be painful in many ways I am confident we are doing the right things to be well positioned to capitalize on growth opportunities as economic conditions improve.

Our mission remains to drive rapid customer adoption and expansion of our unique cost-effective solutions to generate more diversified and predictable revenue stream and ultimately to deliver superior shareholder value.

Thank you for your time today, I look forward to reporting on our continued progress to you in the future. Now, let me turn the call over to Ned Mavrommatis, our CFO, to review the company’s financial result for the period in more detail.

Ned Mavrommatis

Thank you Jeff, and hello to everyone on the call today. As Jeff noted, the harsh economic climate continue to make short term revenue achievement a challenge for us. For the three months ended June 30, 2009, our revenues were $2.7 million, compared to $5.5 million for the second quarter of 2008. The decrease was attributable almost entirely to the $3.7 million reduction in Postal Service revenue that’s just cited, partially offset by $900,000 increase in revenues from other customers.

Our net loss for the quarter was $2.3 million, or $0.21 per basic and diluted share, compared to a net loss of $1.5 million, or $0.14 per basic and diluted share, for the second quarter of 2008.

Taking into account the effect of stock-based compensation, our non-GAAP net loss for the quarter was $1.8 million or $0.17 per basic and diluted share, compared to non-GAAP net loss of $671,000, or $0.06 per basic and diluted share for the second quarter of 2008. Stock-based compensation was $500,000 for the second quarter in 2009 and $857,000 for the Q2 in 2008.

As Jeff mentioned we continue to aggressively manage cost. Excluding stock-based compensation, our selling, general and administrative expenses for second quarter of 2009, decreased to $3.4 million compared to $3.8 million in the first quarter of 2009. The decrease was primarily attributable to non-sales workforce cutbacks in April 2009 which are expected to save more than a $1million annually without diminishing the company’s investments in growth opportunities.

Excluding stock-based compensation, research and development expenditures for Q2 remained flat as compared to Q1. Our gross margins for the quarter increased to 54.8%, as Jeff noted, compared to 52.5% for the corresponding period in 2008. Our balance sheet remains strong.

As of June 30, 2009, I.D. Systems had net cash and investments of approximately $54.3 million which equates to $4.90 per share outstanding.

To reiterate one of Jeff’s central messages, we continue to focus our capital resources and growth opportunities, both organic and inorganic, while we mind the store carefully with respect to expenses we remain committed to expanding our value with our blue chip customers, maintaining our market leadership and capitalizing on new initiatives to increase our sales pipeline and drive revenue achievement.

We remain optimistic about our prospects and I look forward to sharing our results with you as we continue to make progress. Before I turn the call over to Pete Fausel, our Executive VP of Sales and Marketing, I want to mention that we will be presenting up the Morgan Keegan Security Safety and Defense Conference on Tuesday August 11th, at 11:35 a.m. at the Waldorf Astoria Hotel in New York City. Pete?

Peter Fausel

Thanks Ned, and thanks again for joining us in the call today. Despite the macro economic challenges we are facing we are achieving positive results in many areas of our sales pipeline. We are significantly engaged with many Fortune 500 prospects that continue to demonstrate a great need for our technology.

Our extended sales team, including direct and indirect sales executives, key industrial vehicle manufacturers and their dealers, subject matter experts in key vertical markets and our consultative performance services team are busy engaging in meaningful dialogue with a broad range of prospects in our target markets.

In the deals that we are closing where prospects have the vision to act to gain valuable insight to their operations rather than choosing to do nothing, our win-loss ratio is very high. During the second quarter, we initiated business with two especially noteworthy accounts with a potential to roll out rapidly.

As we announced on April 7, 2009, how DAG launched our PowerFleet vehicle management system on fleets of industrial trucks at two automotive production plans in Europe. The orders for these systems were made under a blanket purchase contract that covers not only all Audi facilities worldwide, but also all global sites of Audi’s corporate parent Volkswagen.

Although there is no guarantee as to how many of these facilities will require system or the timing of additional deployments, this is precisely the expansion model that has reaped rewards for I.D. Systems in the past with enterprise accounts like Ford, Wal-Mart and U.S. Postal Service.

Nestlé Waters North America also selected our PowerFleet vehicle management system for deployment on industrial truck fleets at two initial sites with expansion plans in more than a 100 facilities globally based on expected system benefits.

This deal exemplifies how a strategic marketing relationship with NACCO Materials Handling Group, one of the largest industrial truck makers in the word, continues to pay dividends. This is also a deal with tremendous upside.

Corporate parent Nestle is one of the largest food conglomerates in the world and we are already making inroads into other North American divisions apart from Nestle Waters. Although, Audi and Nestle were perhaps the most important new accounts of the second quarter of 2009, they were by no means the only new accounts with corporate expansion potential.

During the quarter, we also earned new domestic business from ConAgra Foods, Dot Foods, GameStop Stores, Graphic Packaging and Kaiser Aluminum. In Europe, we won an initial order from the European arm of a major US consumer package goods manufacturer.

The new customer wins and continued growth of our pipeline gives cause for optimism on our diversification of revenue strategy. However, we must continue to drive for enterprise level deployments to fulfill our true growth objectives.

I’m pleased to report that we have invested in resources focused on organic growth opportunities within our existing customers, like 3M, Alcoa, Ford, Nestle, the Postal Service, Target, Wal-Mart, and Walgreens to name a few. These resources are dedicated to expanding their relationships by helping our customers document the benefits, realize through the deployment of our systems, and supporting the increased visibility of the corresponding financial impact to the customer’s enterprise.

In short, as our world class customer list expands, our focus on delivering meaningful results and driving enterprise expansion becomes more acute. Similarly, we are not overlooking the organic growth potential of our blue-chip customers we established through our 2008 acquisition of the PowerKey brand of industry vehicle monitoring products.

These customers include automotive components holdings, formerly Visteon, PPG Industries, Raytheon and Whirlpool all of which expanded their use of our products and services during the second quarter of 2009.

In addition, we are capitalizing on the recently won customers in the aviation market, American Eagle Airlines, to expand our technology to other airports, airlines and other ground support operators, and we are forging new relationships with more industrial truck manufactures including Raymond Corporation and Toyota Material Handing, to position I.D. Systems to win increased market share from our competitors.

With high levels of activity on so many fronts and measurable progress in so many areas, I am bullish that a momentum we’re building will reap rewards for I.D Systems despite the economy, and that we are positioning the economy for superior growth when the recession eases. I look forward to reporting to you further as we progress.

With that I’d like to turn the call back over to Jeff.

Jeffrey Jagid

Thank you, Pete. That concludes the formal portion of our conference call. I would now like to open the call for questions from our listeners.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Walter Schenker - Titan Capital.

Walter Schenker - Titan Capital

I am a recent shareholder. I think I bought about half the volume over the last two weeks. The opening discussion, there is a question here, talked about the “significant bargain for investors,” given the fact that the stock trades at dramatic discounts to cash and book value, and given the growth prospects for the company.

Can you give me some sense or explain why we will not be pursuing an active share buyback going forward since it is extraordinarily accretive to shareholder value?

Jeffrey Jagid

I appreciate the comments on the question, this is Jeff. Other than to suggest that it is something that the Board evaluates periodically, we do you have a Board meeting on September 11, a few weeks away, it’s not something we’re currently considering although it is something that we periodically evaluate.

In 2008 we did deploy certain element of cash, certain amount of cash for share buyback, about $10 million or so, I think we bought stock back in an average price of about $9 a share, the most recent board meeting that we had, we have decided now that a share buyback was not really the best use of the company’s cash, but it is something that we consistently review.

Walter Schenker - Titan Capital

Well, let me just respond by saying it is inconceivable, underlying inconceivable that virtually any inorganic growth will be at evaluation cheaper than your own stock, and therefore it seems to me fairly clear for this board meeting that this policy should be reconsidered. That’s a statement. Now, just one other quick question, I’ll be done. Since you’ve probably disclosed it in the queue, how much or roughly what percentage of the business was Wal-Mart this quarter?

Ned Mavrommatis

Walter, this is Ned. Just to give you the top four customers for the quarter which includes Wal-Mart, Wal-Mart was the biggest customer at 22% revenue, then it was followed by the Postal Service, American Eagle and Ford were all the top four customers.

Operator

(Operator Instructions). Your next question comes from Chris Ryder - Lucrum Capital.

Chris Ryder - Lucrum Capital

The SG&A line of $3.4 million, should I be thinking that as the run rate SG&A for the quarterly balance of the year?

Ned Mavrommatis

Yes, Chris. In addition we would continue to look at other non-payroll related items. So it could be less than that going forward, but that would be the maximum number.

Chris Ryder - Lucrum Capital

Okay. So that incorporates the $1 million annualized savings target?

Ned Mavrommatis

That’s correct.

Chris Ryder - Lucrum Capital

So then when I think about a gross revenue dollar to get to breakeven, do I assume a 54% gross margin is the stable gross margin?

Ned Mavrommatis

No, I think gross margin is going to be around 50%, it could range plus or minus a couple of points based on the mix of revenue and the mix of services and products. So we feel comfortable with the 50% gross margin.

Chris Ryder - Lucrum Capital

So, what should I be thinking of as cash breakeven, what should the gross revenue dollar be?

Ned Mavrommatis

Well, if you look at our fixed expenses as far as stock-based compensation, roughly $4 million per quarter, so that’s 50% gross margins you are looking from an operating breakeven at $8 million in quarterly revenue.

Chris Ryder - Lucrum Capital

Just a clarification question, Pete, when you are talking about the Nestle Water contract with an extension to 100 facilities, was that all of Nestle or just the division Nestle Water?

Peter Fausel

I actually mentioned in my comments really, both of that counts us really within Nestle Waters, but we are also active within the other divisions of Nestle.

Chris Ryder - Lucrum Capital

So that 100 sites is a subset of what Nestle is potentially able to do?

Peter Fausel

Correct.

Chris Ryder - Lucrum Capital

Okay, and then on the past conferences, you had some discussion about government applications, anything going on there, whether it’s Department of Defense and/or security?

Peter Fausel

Yes, this is Pete again Chris. We are continuing to be very bullish on our opportunities within the government although we are clearly disappointed in the time which it takes to bring the orders forward, but there is certainly is significant DoD business within the pipeline right now that we are actively perusing.

Chris Ryder - Lucrum Capital

Can you give some sense of time table or reasonable expectation should be about contract awards potential significant wins?

Jeffrey Jagid

Chris, this is Jeff. Let me just make a general comment and then I’ll let either Pete or Ken address the question regarding the government a little more specifically. But I hope you can glean from some of our remarks, right now our customers and prospects are very meaningfully engaged with us.

What has been sort of proved to be very difficult is getting income, make contracts for many of these deals. So, really, to us the fact that they are very much engaged with us, they understand the compelling nature of the ROI. We’re just feeling very comfortable that it’s really a question of when, and not if, which to us is certainly a positive sign, not because we’re playing any games, it’s really essentially because we don’t know, it’s hard for us to give you a target date on many of these.

Now as far as very specifically on DoD opportunities let me have Ken Ehrman who has been very much engaged in a lot of that selling activity comment a bit further.

Ken Ehrman

Based upon the value proposition and the safety proposition that came out of the Sierra implementation we did at the Sierra Army Depot, we are pursuing a number of other army depots through opportunities that have a reason for end of year funding. We are not 100% secured on that yet, but it definitely looks promising, but beyond that we had a number of those depots budget for the system for 2010 fiscal year.

So, we definitely have the interest at the highest levels within the army to put this product into the depots and make it a standard, and now it appears that we have the funding lining up, but again the process to move it forward to order something that we’re diligently working every day.

Chris Ryder - Lucrum Capital

So, just to get sort of a sense of what the significance of it, you talked about 2010 budgetary process, are we talking about hundreds of thousands of dollars or a top ten kind of customer?

Ken Ehrman

Well, if you just look at the army depots that we’re pursuing now, it would certainly be something that would move them into one of our higher level customers.

Operator

(Operator Instructions) Your final question comes from Brian Ruttenbur - Morgan Keegan.

Brian Ruttenbur - Morgan Keegan

Can you give us a break down of the revenue by customer this quarter?

Ned Mavrommatis

Sure Brian, this is Ned. Wal-Mart was 22% revenue as I mentioned before, Postal is 21% of revenue, American Eagle Airlines was 19% of revenue and Ford was 10% of revenue. Those were the top four.

Brian Ruttenbur - Morgan Keegan

Okay. Anybody from Europe. You talked lot about in the past of European opportunities. Can you talk a little bit about what opportunities you are close to over there?

Peter Fausel

Hey Brian, this is Pete, let me take a short at that. We definitely have a nice pipeline over there, if you have listened in the past, many of our initial l implementations in Europe are with some automotive manufactures, which they obviously suffered with some of the same slowdown in the industry that we are seeing here in North America.

The good news is I think their turnaround started a little before what might be the beginning of a turnaround, and we are seeing some nice opportunities present themselves in that area as well. Late last quarter we did get initial implementation with the CPG customers. So, some of the revenue opportunities are diversifying outside of automotive and it has some nice upside. I think specifically in the quarter roughly 6% of our revenue came from Europe.

Brian Ruttenbur - Morgan Keegan

Okay. You said 6% of your revenue came from Europe in the quarter.

Peter Fausel

In the quarter.

Brian Ruttenbur - Morgan Keegan

Okay. Plans for additional cost-cutting, from these levels $2.7 million in revenue, I think before previous quarters you said you need to be at $13 million in order to breakeven or make a profit, is that still the case and what are your plan then for additional cost cut?

Peter Fausel

From a headcount standpoint we made a fairly significant cut during the second quarter. We continue to evaluate that, obviously we are in a very good position from a balance sheet standpoint.

As Ned mentioned in his remarks we are also looking at taking a hard look at non-payroll related expense items, and in any instance where there is an ability to make a cut we are certainly moving in that direction. What we don’t want to do is be in a position where we are cutting revenue generating activity or investments in revenue generating activity. So, we continue to believe in the strength of the technology, the size of the market, our position in the market.

So we are hesitant to cut in areas of sales, marketing and service, but we definitely are not pleased with a $2.7 million a quarter and understand, I believe we understand what we need to do to ultimately create shareholder value and that’s going to be reflected in the financials.

Brian Ruttenbur - Morgan Keegan

Okay. So, how many heads did you cut, and how many, from quarter-to-quarter, how many heads did you take down?

Jeffrey Jagid

We went, it sounds approximately 10%. So we had about a 100 people, now we have 90.

Brian Ruttenbur - Morgan Keegan

That’s from March to June or what?

Jeffrey Jagid

That’s correct, April through June.

Brian Ruttenbur - Morgan Keegan

Okay. What’s the bare-bones minimum that you can operate on?

Ned Mavrommatis

I’m not sure I understand. I mean if we believe that there was more cuts that we made, we would be making them. So, right now, the cost structure is extraordinarily lean. Additional cuts today would result in our inability to service our existing basic customers, which obviously would not bode well to the achievement of our objective which is to further penetrate our existing accounts as well as revenue diversification. So it’s really the areas of service where we have headcount and revenue generating activity like sales. So we are hesitant to make cuts there.

We’re in a position now where we believe that we can build the company and have the infrastructure in place to not only facilitate growth but also accommodate it. I think it’s a great point you’re making which is -- if things change then we’re definitely will be dynamic enough to evaluate making additional cuts.

Brian Ruttenbur - Morgan Keegan

One of the things I know, a previous questioner or caller asked about buybacks, it seems like you need to get scale. Are you guys aggressively looking at acquisitions in order to build scale?

Jeffrey Jagid

Great question, I’m glad that you brought that up again. We believe that evaluations have obviously come down quite dramatically. We believe that there are opportunities out there and we have been tasked by our Board to get a little more aggressive from an inorganic growth standpoint.

Having said that, the prior questioner did point out that his belief was that regardless of what the valuations are, there is better value in our own stock, and I think that’s an interesting point and one that, I am not prepared to comment on whether or not I agree with them, obviously I agree that our stock is significantly under valued and we have a negative book value, but it is something that I would bring to the Board’s attention.

Brian Ruttenbur - Morgan Keegan

Then final question, do you anticipate this as your trough quarter in terms of revenue?

Jeffrey Jagid

Well, I’m hesitant to get back into a position where I’m giving guidance, but I certainly would anticipate or expect that the investments that we do continue to make would bear fruit. So we are optimistic, the issue is one of timing, so that’s where it becomes a little complicated. I think that the third quarter, it’s difficult for me to comment on it, I could say that in Europe it’s always difficult because you have August, which is a month where a lot of Europeans are on vacations.

So you have a lot of things going on in the sort of macro economic environment that will impact the quarter. I’m hesitant to comment on the short term, but yes we absolutely expect growth from these levels.

Brian Ruttenbur - Morgan Keegan

There is no word about Wal-Mart or Postal kicking back in this quarter?

Jeffrey Jagid

Not to the extent that I’d be prepared to comment on it on this call.

Operator

There are no further questions at this time. I would like to turn the conference back over to Mr. Jagid. Please go ahead.

Jeffrey Jagid

Anthony, thank you. Thank you everyone for your time today. I look forward to continuing to report you on our progress in the future. Thank you very much.

Operator

Once again this does conclude today’s conference call. We thank you for your participation.

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