L-1 Identity Solutions Q3 2009 Earnings Call Transcript

L-1 Identity Solutions, Inc. (ID)

Q3 2009 Earnings Call

October 28, 2009 11:00 AM ET

Executives

Lisa Cradit - Financial Dynamics

Robert V. LaPenta - Chairman of the Board, President and Chief Executive Officer

Jim DePalma - Executive Vice President, Chief Financial Officer and Treasurer

Analysts

Daniel Meron - RBC Capital Markets

Paul Coster - JPMorgan Securities Inc.

John M. Croke - Jefferies & Company, Inc.

Michael French - MorganJoseph

James Ricchiuti - Needham & Co. LLC

Michael Kim - Imperial Capital

Brian W. Ruttenbur - Morgan Keegan & Co.

Jeff Kessler - Imperial Capital

Presentation

Operator

Welcome to L-1 Identity Solutions Third Quarter 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' Third Quarter 2009 Financial Results Conference Call. Statements that representatives of L-1 Identity Solutions made 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 may today 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 statements.

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

With that I am now pleased to turn the call over to Bob LaPenta.

Robert V. LaPenta

Good morning, everyone. Thank you for participating in our third quarter earnings call. We released our detailed earnings report today and preliminary guidance for fiscal 2010 and before I go through my normal comments regarding the quarter and updating you regarding some opportunities, I'd like to just address some items upfront.

Number one, we -- for the quarter, we reported revenues that were roughly inline with guidance, maybe 3 or $4 million low and we reported EBITDA at the top end of the range. For the year, we lowered guidance by about $25 million in revenue and we again reported EBITDA at the mid-point of the range. So one of the obvious questions is, how can you lower revenue guidance and keep your EBITDA basically inline with the guidance we provided at the beginning of the year and the answer to that question is actually good news. And that is we're seeing a lot more ID and biometric traction which is yielding much higher gross margin.

Typically, on a program that be a mix of product and IP and what we're seeing this year and I think has been above well for the future is that our ABIS and our IP opportunities are increasing proportionately. So we have very favorable sales mix.

Conversely, if you look at our short form in sale, this is coming from relatively low margin areas. We had expected higher sales from IET or the enrollment group in the second half and while they are having a great year, we had expected them to do even better with additional revenues in New York State and on the TWIC program which basically leveled off a lot sooner than we thought.

So although, our enrollment group is up 45% for the nine month period and we expect them to be up probably 50% for the year. The revenues are little lighter than we had originally expected. The other area where we had some sales erosion was in government -- the government Intel business. Now after really profitable business at 15% roughly EBITDA, but again, its margins are much lower than the margins that we incur when we sell IP or when we deliver height.

So basically, it's a favorable sales mix and we expect that to continue on in the next year. I'll try to give you a little more color into what we put into our original estimate of what next year will look like, but I think the bottom-line is, we are seeing a lot more IP ABIS opportunities which is improving the profit and actually putting a little bit of pressure on the sales line. Now when you look at our cash flow, you might say what happened there? Your EBITs are on target. Why did you miss the CapEx? Basically, it amounts to one state; California came in, they actually singed a contract a little sooner than we thought and that generated an additional CapEx requirement this year of over $12 million.

On the other side of that, we have expected that when we incur that $12 million, we will get a milestone payment of three or $4 million and that's not going to happen now until the first quarter. So basically the whole cash flow item for this year is California. The sales mix is basically some government intel. Some of it due to government insourcing and due to the enrollment business, particularly TWIC, New York State ramping up slower than we had expected and again those are not particularly high margin businesses.

So with that, you may have additional questions on that. But I wanted to head some of those questions upfront. Let me just talk about what's going on in the year, what opportunities we're looking at and how some of our businesses are going.

The enrollment services business, as I indicated, is doing exceedingly well. As we indicated in our release, we started the year with 700 enrollment centers and right now we have over 1,000. We think this is a franchise business where these are going to continue to grow, states across the country are just implementing new laws, requiring new groups of people to get background checks, if that's teachers, its healthcare workers, its police department, its education, its mortgage brokers, right on down the line. So this is a business that we expect to continue growing and we're excited about that growth going forward.

In the biometric group as I indicated, I think they are having a terrific year and I think it's been really positioned well for the future particularly with respect to National ID programs with their ABIS capabilities of being used as the database of management capability. We've had a great year with HIIDE. We've delivered about 60% of our orders in the third quarter. We expect to deliver the rest without any new orders in the fourth quarter.

They were selected as the de facto standard for a large opportunity in India, where we basically are there -- going to be their IRIS matching capability and we are looking at a very nice opportunity in Mexico where we expect to have a decision within the next 30 to 45 days. We're teamed with Hewlett Packard on that opportunity, it's for a National ID Program and we think we're positioned well for that opportunity.

We don't have any revenue for that in our forecast if it should come in earlier there could be some upside relative to that program. Secure credentialing having a great booking here and as you're seeing that's both the good news and the bad news. Good news is as we've indicated in our press release, we have won every competitive opportunity we participated in. 16 out of 16 and I think, we were notified yesterday that number is now 17 out of 17. We're also negotiating with number of states which we hope to book in the three or four weeks. The good news there is that this bodes well for the future and as I noted in our press release, once we get through the initial compliment of investment for facilities, trainers and things that we have to stand up prior to starting to deliver on these new opportunities, cash flow is going to be terrific, and Jim will talk you about some of the cash flow margins in that business.

So secure credentialing is having a good year. Now they versus our original forecast of the year, are down probably about $20 million and that comes from a couple of areas. Number one, transports this year are down over 30%. We don't take it down but we didn't think they'll be down 30%.

Number two; the RT program where we had about seven or $8 million of sales last year, we all read that that program basically was stopped and that resulted in about $6 million sales reduction. And relative to RT, let me give you a quick update on that. We are proceeding and we are becoming be encouraged that, that program is going to be restarted. We think L-1 will receive a contract to be the primary of that program and we're relatively confident that this thing could be started as early as the first quarter, next year.

You may recall like said had about $5 million of investment, fixed asset software development on the balance sheet, right now that's looking like we are going to be able to recover that amount. They also had some softness in some of the drivers license sales and that resulted from some of the states like California, being looked later than we anticipated so we're not incurring to sit, we're not getting the sales but we are incurring the CapEx. But overall secure credentialing is positioned very well.

We are looking forward to one TSA opportunity that we think we are in good position on it's basically between us and two other companies. They are -- different RPs issued for this, it's for an airport boarding pass program. That RP is going to be reissued and we think the program is going to be awarded in the first quarter next year. This could provide a nice opportunity for us next year.

You look at our government consulting group, the organic growth this year in that group is down from what we expected. We thought that it will be up north of 10-12%. They're going to be up above 5% for the year. They lost two competitive opportunities one in particular that we thought we were very well positioned on that they weren't successful in that opportunity. And in the CIA in particular, we're seeing increased staffing on the part of the government to insource some of the opportunities that we are working on.

So this growth this year is going to about 5 to 6% and while we are bidding on new opportunities particularly in cyber area at ACI, we're being cautious on our guidance for that for next year.

So the bottom line is we have adjusted our guidance is sales for this year and we've maintained our EBITDA. That's due to much better sales mix than we had originally anticipated. We lowered our cash flow guidance for this year and that's basically the result of California coming in, requiring us to stand up that facility sooner than we expected. Next year we're looking at organic growth between 10 and 15% and we factored basically one opportunity in that. That's the TSA opportunity at secure credentialing and it's mainly Mexico opportunity at biometrics. So that's our preliminary estimate for next year. We have a high CapEx again next year as we complete the build out on the state contracts and as I've indicated in our note here, I expect 2011 and beyond to be very robust as we began recovering these fixed asset investments over the drivers license deliveries in subsequent years.

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

Jim DePalma

Thank you, Bob. The press release provides details about the third quarter and nine month results. I will provide some key points around our financial performance and positioning relative to the remainder of the year. It should be noted that Digimarc was acquired in August 2008 and therefore the results include only two months of the activity for the 2008 third quarter.

Overall, as Bob noted the third quarter represented sound operational performance by expanding our unique franchises and out integrated solutions as highlighted by our growing margins and strong backlog. Our reported revenues for the quarter were up 12% to 173 million from 155 million reflecting strong demand for biometric solutions and enrollment services.

There are several points regarding growth worth highlighting but -- continued its momentum in credentialing by capturing an additional $200 million of sold source business, securing our drivers license and passport franchises for additional five plus years. We currently serve 45 department of motor vehicles in the United States, and we will continue to invest in this significant area over the next 12 months which would drive future growth and cash flows.

Our biometrics division continues to establish itself as the DoD; Department of Defense platform of choice for multi biometric solutions as evidenced by continued demand for HIIDE and ABIS solutions. We shipped over $8 million of multi motor systems and booked another $6 million of HIIDE during the quarter which will bring our total presence to over 13,000 units. Bob noted expense in EBIT and our momentum in solidifying our software and workflow at the agency standard for the coming years.

Other areas of known improved our momentum for division which continues to grow significantly, 42% in the third quarter driven by demand in the existing states, newly won states and key federal programs including TWIC and HazPrint.

Overall, our total backlog increased to 1.2 billion and including unexercised options. The value was approximately $2 billion, which continues to provide a solid base for significant control. Reported gross margins for the quarter approximated 32% with cash margins of 37% as our expectation and an increase from next year reflecting our transition to a solution driven enterprise.

Overall, operating expenses were flat quarter-over-quarter and as a percentage of revenues was 24% down from 26% due to our focus on leveraging infrastructure and implementing effective cost saving strategies. Cash operating expenses as a percentage of revenues were approximately 20%, meeting our objectives and will continue to decline into the next year.

As a result, adjusted EBITDA was 28.3 million in excess of 16% of revenues. Our strength and value aided solutions and our continued focus on cost will continue to drive our EBITDA margins above 16%. Other items I've noted total cash interest, our expense for the quarter was 7.1 million. We expect fourth quarter interest to approximate $7 million as we continue to invest in key department of motor vehicle programs.

Weighted average shares outstanding increase to 86.4 million from 80 million in the prior year, reflecting equity issued in connection with 2008 acquisitions. The company continues to target 85 to 86 million shares on a fully diluted basis for the full year. A few key items to note on the balance sheet. Working capital for the year was virtually flat, reflecting effective management of our supply chain and inventory levels relative to the growth and timing of sales.

Capital spending for the nine months was approximately $38 million and as Bob noted is expected to approximate 50 million for the full year reflecting sole source awards and acceleration of timetables on the California program are awarded going forward.

Our investments over the next 12 months will yield significant increases in operating cash flows, once we complete our programs. Total debt for the company was 461 million, down from 464 in the prior quarter due to possible repayments on our term loan.

The debt balance is comprised of 286 million of term and 175 million of convertible debt. The company remains in compliance with all its financial covenants and we have full access to our revolvers.

Back to you Bob.

Robert V. LaPenta

With that we'll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Thank you. Our first question is coming from Daniel Meron with RBC Capital.

Daniel Meron - RBC Capital Markets

Thank you, hello Bob and Jim.

Robert LaPenta

Hi, Dan.

Daniel Meron - RBC Capital Markets

Hey. So. Bob I am trying to basically understand the difference between the growth on the backlog and the low outlook for next year, is this that basically we are going to see slower implementation of orders in Q as in flow slower into the revenue here?

Robert LaPenta

No, again I should mentioned we have not completed our planning target for next year, but we wanted to get some guidance out there based on the backlog of the individual units and what we saw is deliverable out of that backlog next year.

So, we modeled it looking at the potential new business and what they are going to be delivering on drivers' license we made some projections on passport. But relative to new business, the only new business we included in that forecast for next year was the PSA program, that I talked about, where we think we are in good position and that will generate about 10-15 million of revenue. When it comes to the other businesses, we basically forecasted no material new wins in the Intel Group. And so we forecasted modest organic growth for the Intel Group.

When we got to buy our metrics, we forecasted that they will continue to perform on existing programs, we would complete, substantially complete our program in the Middle East and that would require additional peer and high deliveries next year for that customer. That's part of backlog. And we assumed a measure of win in this Latin American opportunity that we think, we are well positioned for.

Enrollment, we did not factor in any additional wins and we basically rolled out their run rate for the fourth quarter of this year. Again, no major new state wins, and there are couple of competitions coming up, one is in Massachusetts and one is in Pennsylvania.

So, our guidance we think is very reasonable and our cash flow and EBITDA, I think we feel relatively comfortable that we are going to achieve it.

Daniel Meron - RBC Capital Markets

Okay. Thank you good luck.

Operator

Our next question comes from Paul Coster with JPMorgan.

Paul Coster - JPMorgan Securities Inc.

Hi, good morning. I've got actually three very quick questions. First of all, on the DMV business, how does that ramp during current year time, is sort of back end loaded?

Robert LaPenta

No, I would expect it to start to ramp in the first quarter and continue throughout the year. The driver's license business this year, just have some pro forma numbers. It looks like this year driver's license in international ID card and this does include facial recognition, documental identification. It's going to go from a pro forma number of about a 140 million in 2008 to a pro forma number of about or I want to say close to 150-155 million for 2009. We would expect that number to ramp up proportionately next year as these new contracts that we've spending this CapEx on begin the ramp.

So, we're looking at next years not having anywhere near the second half ramp that we had this year.

Paul Coster - JPMorgan Securities Inc.

Okay. The SpecTel business in the intersourcing, do you feel that that's going to be the growth will be difficult in that segment next year?

Robert LaPenta

I think this is a initiative that the government is serious about. We are seeing it particularly in one ABC and that's the CIA. And you know this year SpecTel is going to grow. Their organic growth is up about 5%. We thought they're going to be up 20% this year. There were three large opportunities and we weren't successful on two of them and the rate at which the customer is trying to recruit some of our people has accelerated.

So as apposed to having 20% growth, they are going to come in at about 7 or 8% growth this year. We're looking at some good opportunities. We have great men within our division and I feel confident that next year we'll start seeing some growth again in that state. We're exited about ACI and the opportunities and some of the prime opportunities they're looking at in cyber space.

And with one of the units knowing very well also, so again the growth wasn't what we hoped it would be this year. That resulted in lower sales, but thankfully those are being made up by biometrics and IP revenue.

Paul Coster - JPMorgan Securities Inc.

Alright, last question. You baked Mexico into your guidance or Latin American contracts into your guidance. But, let me do some -- move the needle greatly, am I correct in thinking that the Mexico revenue opportunities were around 10 million?

Robert LaPenta

We factored it in our forecast, but it's more than that Paul. And again, I mentioned we are teamed with HP. We think that award is going to be made sometime in December, President, Calderon has indicated that he wants to start implementing standing up that program in January. So, we discounted it in our forecast but it's larger than that number.

Paul Coster - JPMorgan Securities Inc.

All right, great. Thank you.

Robert LaPenta

You're welcome.

Operator

Our next question comes from John Croke, with Jefferies & Company.

John Croke - Jefferies & Company, Inc.

Good morning.

Robert LaPenta

Hi, John.

c Just three quick questions on the credentialing business. The 16 for 16 or I guess the 17 for 17 it's pretty impressive. I'm just wondering if you can give any color on the competitive dynamic that are there, any new faces showing up at these competitions or is it the same old classic characters and how has pricing been on these new opportunities has there been any need to get a little tighter on pricing or are you still able to win on capabilities?

Robert LaPenta

That's great question. Those of you that have attended some of the investor conferences there we were talking about the opportunity in deals and whether it's real idea, whether it's the pass card. We have incorporated in these new wins and many of the states are already implementing a lot of the real ID/pass card initiatives. So we're putting basic recognition in, we're putting document authentication in, we're putting in and the states are acquiring a higher quality more secure card. So to answer your question we are seeing an increase in card prices of somewhere around 30 or 40%.

We think that should bode well for us in the future. We are not seeing any new competitors thus far. We're competing because of our relationship with the customers, our knowledge of these programs and the fact that we are able to provide all of the biometric and car technology as opposed to our competitors that have to get it from outside sources.

John Croke - Jefferies & Company, Inc.

Great. And just in terms of trying to scale where we are in this current wave of enhancements and upgrades whether it's real ID, pass ID or whatever you call it and you have got 17 in the bag year-to-date. Just looking at all 50 states, can you give us a kind rough order of magnitude of where we, have more than 50% of this states taken a big step in the direction of real ID but where are we in that process?

Robert LaPenta

I think over 30 states now have implemented facial recognition. A number of those states include the ones that are I'm talking about this 17 out of 17. So, next year we're expecting six more I think major competitions. I'm hoping that we fare as well we assume we would win a high percentage of those when we came up with our estimated CapEx for next year. But, as I indicated in our release, 2011 you're going to start to see very robust cash flow and I think very impressive organic growth in that space.

John Croke - Jefferies & Company, Inc.

Great. And that leads into my third and final question. Can you give us any kind of sense of what a normalized CapEx number would be in 2011 and beyond?

Robert LaPenta

That's a great question. We talked about that in late night and we think a normal number will be somewhere in the $25 million range.

John Croke - Jefferies & Company, Inc.

Excellent, all right. Thank you very much.

Robert LaPenta

20 to 25.

Operator

Our next question comes from Michael French with MorganJoseph.

Michael French - MorganJoseph

Good morning, gentlemen.

Robert LaPenta

Good morning.

Michael French - MorganJoseph

Where do you see approximate value of new deliveries for the Mid East opportunities its an biometrics guidance?

Robert LaPenta

There's one program it's in backlog and the revenue on that next year will be somewhere between 10 and 15 million.

Michael French - MorganJoseph

Okay. And just the question on California, where are they in terms of facial recognition and when do you expect the final resolution on that?

Robert LaPenta

They issued a contract as I think we reported without the facial recognition that's going to go above -- Doni you talked to them a lot about that you know when that's going to happen, we don't know we really haven't that into our guidance.

Michael French - MorganJoseph

Right. What I am getting at is potential upside and it's a large states maybe it's a meaningful value there

Robert LaPenta

I think, everybody on the phone and everybody at this table would like to see steep every metric next year and that's we are going to be focused on.

Michael French - MorganJoseph

Okay. Great, thank you and good luck.

Operator

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

James Ricchiuti - Needham & Co. LLC

Thank you. It sounds like you're anticipating pretty strong organic growth in Q4. What drives that especially in light of little more modest organic growth in Q3?

Robert LaPenta

Most of that is coming at a backlog. There's one program that we talked about on our prior phone call it's for an IP license. It's in procurement. The customers working on it, it's funded, when you get as a 90% probability, but that could impact our sales and profit 5 to $6 million.

James Ricchiuti - Needham & Co. LLC

Okay. And one quick follow-up if I may 2010 the guidance that you have given can you a little bit about where you see the debt pay down in next year?

Robert LaPenta

Next year I think our requirement is like 20--

Jim DePalma

$20 million.

Robert LaPenta

Yeah.

James Ricchiuti - Needham & Co. LLC

Okay. Thank you.

Operator

Our next question comes from Brian Gesuale of Raymond James.

Unidentified Analyst

Hi. This is Matt Brigarian (ph) speaking in for Brian. Just had a quick question on passport finished down 30% year-over-year. Just wondering if you are starting to see any stabilization there or perhaps maybe an uptick or anything like that due to the what's--?

Robert LaPenta

Well no, you got to separate the two programs I think that the pass card program which is a Western Hemisphere initiative and there the only anomaly as we pointed it in our release was last year we included an initial compliment of cards and the initial compliment of printers so we don't have the printers this year, so the revenue on the pass card program is going from 19 million last year to 14 million this year. And we think that's relatively steady state.

When you look at the passport, passports now last year we did about $33 million and it looks like this year we're going to do about 20, so that's a major decrease and by the way, that's a relatively profitable program. You'll see that or we announced that we've recently got in a five year extension valued at up to $195 million based on what we are seeing in the travel space we would expect next year we'll improve for the 20, but we're not rejecting any substantial improvement.

Unidentified Analyst

Okay. Thank you.

Operator

Our next question comes from Michael Kim with Imperial Capital.

Michael Kim - Imperial Capital

Hi, good morning.

Robert LaPenta

Good morning.

Michael Kim - Imperial Capital

Just a few question, on RT you mentioned that there is an opportunity be prime possibly as earlier as next first quarter next year, assuming that it restarts, as a prime would is it your expectations that you've seen an revenue opportunity above kind of that 7-$8 million that you've historically seen in that business?

Robert LaPenta

Yes.

Michael Kim - Imperial Capital

And can you quantify maybe scale wise, how much greater is that?

Robert LaPenta

Again I don't want to you add this our net book.

Michael Kim - Imperial Capital

Sure.

Robert LaPenta

So based on what we are looking at as a prime it would be somewhere in the 10 to $15 million area.

Michael Kim - Imperial Capital

Okay. And then on the enrollment center side, you guys, I think you mentioned, up to a 1,000 now you have a target for where you might exit next year. Just given the pipeline of opportunities that you're seeing now?

Robert LaPenta

There are two large states that we're going to be competing on relatively early next year they depending on when they will -- if we they were awarded they would the run-rate in those two states could be as much as an incremental 10 to $15 million again. We don't have that in our forecast, we don't know when the competition is going to take place and we don't know if we are going to win. So, just based on run-rate, and assuming kind of a level run-rate on TWIC which is lower than we had anticipated. TWIC revenue this year is going to be about I think it's going to be about $18 million let me just give a number there.

TWIC revenue this year is going to be a $20 million. We think, next year it could be about the same run-rate. They are going to end the year, that is enrollment with a run-rate of somewhere between 30 and $32 million and we think New York State will continue to ramp. There are lot of additional agencies that are beginning to sign on to that program. So next year we meet IBT, gives you north of a $150 million. Our enrollment gives you a north of a $150 million versus this year 118.

Michael Kim - Imperial Capital

Well, okay. And then just on the international side, are there other any other national, significant national IP opportunity that you guys are bidding for or you anticipate to bid for next year?

Jim DePalma

There is one in Chile which is a $300 million opportunity. We have the very strong team there. The good news there is this if we win, it'll be a great program. The bad news is there've been additional requirement, but for that there I going to be negative cash money held by the enrollment. Through that we would probably go, we had interest on a number of people that want to become our partner and they want to own the capital because it's a long term program and basically like a lease opportunity.

So what we did, with Chile, we probably go looked at partnering with somebody to provide the upfront capital. And the best of our world, there would be an operating lease. But again, that would be incremental EBITDA, but it could be offset a little bit if we go to one operating lease. We are looking at large opportunity in India. We're looking at two opportunities in Africa, particularly in Kenya and Nigeria. And we are looking at an opportunity in the UK on a program called Midas, which is basically a distributed biometric system for their police department.

And again, we've spent a lot of time with the customer. They like our solution. I don't know if we're going to win. But those are kind of the enlargements that we're looking at right now.

Michael Kim - Imperial Capital

And then just on biometrics and on a few. You mentioned this earlier, but any thoughts you can provide on HIIDE, particularly military orders for next year and how we would like to start to think about part our of your business?

Robert LaPenta

There is going to be a re-compete on HIIDE next year. Now, as I indicated in the prior call, I am not sure weather it was a second quarter or the first quarter. We are going to have a very, very nice, I'll call it a lower end device, higher quality finger, face maybe not the super-duper quality iris that we have in HIDE and the large matching capability of so many other breaches we have, but what we are going to start to develop after that and it's only on the drawing board is a call it a Blackberry type HIIDE, that's going to be a very sassy, capable device. We're going to start working on that next year.

As far as sales, we think the HIIDE 4 and HIIDE 5 have legs, we think we're going to sell those in some of these international opportunities that I talked about and in some of these border opportunities and we've being working and Joseph Atick is been spending about 80% of his time in the Middle East in India and we believe next year, we're going to have our second and possibly third customer four HIIDE, either 4 or 5.

Michael Kim - Imperial Capital

And on the military, anything on the military side?

Robert LaPenta

Again, there is again, that is going to be re-compete. I am not sure what the size of that contract's going to be, but I would expect, we 13,000 units of there. There is going to be attrition, there is going to have be a buy. I think we'll start replacing some of those units again. I am not really forecasting any large amount.

Michael Kim - Imperial Capital

Okay. Great, thank you very much.

Operator

Our next question comes from Brian Ruttenber with Morgan Keegan.

Brian Ruttenbur - Morgan Keegan & Co.

Hey, thank you very much. I was just wondering if you could give us a breakdown of revenue for '09 and by segment what you anticipate you've given it on a total amount, but I was just wondering if you could give us a broad growth.

Robert LaPenta

We need services and solutions; it's almost 50:50. I think solutions is a little higher than services. We have that number, I think it's 51, 49 or 48. Solutions or the services.

Jim DePalma

I can give you that for the third quarter. For the third quarter solutions was 88.5 and services 82.

Brian Ruttenbur - Morgan Keegan & Co.

Okay. And then on the year, it's roughly 51% solutions and 49% services?

Jim DePalma

I would say for the nine months to date, it's about 50:50.

Brian Ruttenbur - Morgan Keegan & Co.

Right and you anticipated to be that mix going forward?

Jim DePalma

I think solutions is likely to, I would say a little more solutions depending on where we end up on these new programs a little bit longer. So, it'll still be close to 50-50, it may go 1 or 2 percentage either way.

Brian Ruttenbur - Morgan Keegan & Co.

okay. Can you talk about a little bit about gross margins for '09 and 2010 where you anticipate those shaken out?

Jim DePalma

I would say gross margins on a GAAP basis will be in the 32% range on a cash basis, on a GAAP basis 30% to 32%, on cash basis 37%, depending on again the mix of enrollment and biometrics solutions.

Brian Ruttenbur - Morgan Keegan & Co.

Is that '09 or '10 or both.

Jim DePalma

Sorry?

Brian Ruttenbur - Morgan Keegan & Co.

Was that 2009 you were talking about, 2010 or both?

Jim DePalma

2010, I think, I just gave you, 2009 is similar.

Brian Ruttenbur - Morgan Keegan & Co.

Okay. And then question on the debt. You were planned to pay-off, I believe on a previous call you talk about paying off 10 million in '09, do you still plan to do that?

Jim DePalma

I think, we're going to pay, I think we paid four or probably paid another three, so seven for the year. As you know, we broke out the term loan into two tranches, so 50% is only 1% amortization and the other one will go up to line 2.5% a quarter. So, very little in the fourth quarter, next year or it's scheduled about 20-$21 million of amortization. And we're going to use the balance most likely to invest in our secure credentialing business.

Brian Ruttenbur - Morgan Keegan & Co.

Okay. So the plan next year is to pay down 20 million and the remainder of your cash flow and not to pay-off debt, but to invest in the business, right?

Robert LaPenta

Right.

Brian Ruttenbur - Morgan Keegan & Co.

Very good. Thank you.

Operator

Our next question comes from Jeff Kessler with Imperial Capital.

Jeff Kessler - Imperial Capital

Thank you and thank you for allowing me on the call. A couple of questions here. First, it's clear that your credentialing business is clearly becoming a return on investments type of situation which you are or you can even call an EDA type of situation where you're investing a lot capital upfront in printers and setups and software and the like and reaping it down on the backend on a recurring basis, almost like my favorite alarm businesses.

Bottom-line is can you -- have you been able to quantify what types of return on investment that you're looking for in this type of business, so that we can have some idea that what you are investing is turning out to be a return that is inline or let's say in excess of your cost of capital?

Robert LaPenta

That's a great question. Again something that we're discussing recently. Next year or this year for instance that business, before corporate allocation of about 2.5-3%. They are going to do about 205 million and earn about $55 million. And as we noted, most of that CapEx relates to that group. If you look at next year, again without RT, and without a lot of revenue, but some, for this PSA program I am talking about, they're going to be somewhere in the 215ish, 215-220 range. And we think they're going to earn north of 60, but again most of that CapEx we're talking about, probably 50 million of it, is going to be for investment in the driver's license business.

We're then going to see that 30% increase in 75 million driver's license I talked about, you're going to see the kiosk begin to gain traction. We're going to be able, we're talking about electronic kiosk for passports and driver's license renewal. And with recurring CapEx in 2011 or let's say $20 million for them. We think they'll be earning in excess of 65 to $70 million. So, that's I think that's a very nice business.

Jeff Kessler - Imperial Capital

And the CapEx at that point would be --

Robert LaPenta

20 million for that.

Jeff Kessler - Imperial Capital

Okay.

Robert LaPenta

We're kind of -- I got to tell you, you may not know, I am more excited about this business today than what when we started it. It's been a long road. We've built a great company here. But I got to tell you the space is probably if not where we thought it would be is better than we thought it would be. We're good in the business and you got to make investments. I wish 2011 was 2010 for those in the business and that's just what we got to do. So I am not going to rob there and lose state just because our cash flow could be better next year. So looking at the long-term I am the largest investor. So my interest are aligned with everybody out there and I feel very comfortable with where we are.

Jeff Kessler - Imperial Capital

All right. One other question with regard to TWIC and some of these other programs out there I know that -- I know that you're enterprise access folks we saw the equipment obviously entered some new products out there and while some of the analysts may have pooh, pooh at the some of the end users we talk to, really we are high on some of the higher end TSA and PID and TD-12 compliance users that you have out there. The question is does your TSA numbers depend on the acceptance of some of these new ruggidized devices that are out there, can you compete with them or without them or does this add a significant amount because the devices look nice, but the quest this is obviously the old Bioscrypt first real foray into a lot of new devices in a long time.

Robert LaPenta

Let me talk about Bioscrypt for a minute. Number one, I think while they didn't have a great year sales wise, in the original guidance for them this year we booked they'll do about $20 million. They can commit on 15.5 and I think a lot of that was resulted from the economy, from our labor access, a labor recording devices thing of that nature. They did a phenomenal job after resigning a whole new product line and when the customers saw our outdoor TWIC device they said, this device is unbelievable and they gave a certification, and by two weeks, I mean, it was unbelievable.

Now, what we're doing there is, we going to consolidate the Bioscrypt group in with the biometrics group. We're implementing that as we speak. And we're excited about that because, we think it's going to help them focus and now broaden their sales capability. Also the fact that we have the TWIC program in our enrollment business says looking at all ports I think that's been boding well for us as we try to install those unit in the port. So I make that they did a great job designing product, I think they have a great product and we are hope the next year this is successful.

Jeff Kessler - Imperial Capital

Well the question is are these units beyond the need for some type of ruggidized device in TWIC that's PIV compliant?

Robert LaPenta

Okay. PIV compliant--

Jeff Kessler - Imperial Capital

Are there uses -- are there other government required into these that will would have to have some type of ruggidized device as well?

Robert LaPenta

The answer is yes and that will be in some airport facilities, tarmac type things, in base security, things of that nature. If you saw the whole product line its kind of a scale thing going from the normal indoor with or without PIV to kind of a moderate device that can take moderating temperatures, that's kind of within under guarded from the rain but it can operate outdoors in other than a really harsh environment and then there's a high end devices that's called PIV card and the total capability.

Jeff Kessler - Imperial Capital

One final question then I'll leave you. That is, you've meant -- you've alluded to not having just ABIS device obviously your own matching device capability from time-to-time it's been one of the -- perhaps holding your portfolio of creating a total solution. To what extent can you provide a total solution including matching or ABIS if you want call that and where are you limited at this point in bidding on jobs like that?

Robert LaPenta

We as we -- when we started on this journey three and half years ago, we said, we're going to put together a company that had the state-of-the-art technology if we were going to be able to provide an end solution now I can tell you today, we have every capability, we need, there is no major hope in our ability to provide the solutions that we're currently competing on.

Having said that we continually look at areas where we can enhance our product line we're looking at incorporating new biometrics into our ABIS like DNA, and voice and I think our contract with the DoD is going to facilitate that, our contract in the Middle East with this Middle Eastern customer in the total end-end solution incorporating mobile. So, we're excited about that. I'll also point out where there are couple of other successes this year that I didn't talk about.

We were successful in booking our first state ABIS which is really exciting to us, because I think we're going to be able to now go to other states and offer them solution competing against or different than SHAZAM and we won, I believe a very exciting opportunity in a state to provide facial recognition. That's going to be integrated into their video network. We think that's very exciting, we're going to have a marketing campaign next year, to go and sale lack all of the remaining states in the country.

Jeff Kessler - Imperial Capital

Here you're going to market your ABIS' capabilities because the -- hit on the street lack of recognition, lack of brand in that area, has been your big problem so far?

Robert LaPenta

Well, I agree with that but I got to tell you when it comes to perform its in the multi mobile arena, we're tough to be. In fact, everybody heard about NGI and the fact that Lockheed award gave this to SHAZAM. They basically with the incumbent on the original ABIS. Our performance relative to the competition was very, very strong and I'm not going to go into the details on the procurement but one of the things that we had to work on was becoming CMMI certified. We have a program in place and you know what is that's basically have a good design program, have a lot of documentation, quality assurance that kind of thing. We are going to have Level 3 or Level 4 CMMI by the end of next year.

Jeff Kessler - Imperial Capital

Great. Thank you very much.

Operator

Our final question comes from Jordan Teramo with Brigade Capital.

Robert LaPenta

Hi, Jordon.

Operator

Jordan your line is open.

Robert LaPenta

Okay.

Operator

There are no further questions at this time I'd like to now turn the floor back over to Bob LaPenta, for closing remarks.

Robert LaPenta

Okay well. Thanks again who are participating on the call. I hope you sense that we're committed, we're building a great company and we're going to show signs all over our divisions beat next year's numbers. And I am confident we're going to do that. Anyway with that thanks and we'll talk to you at the end of the next quarter. Have a good day.

Operator

Thank you. This does conclude today's teleconference. Today's call is being recorded and will be available for replay beginning at 02:00 PM Eastern Time today. The dial-in number for the replay is 1800-642-1687 for U.S. callers and 706-645-9291 for those outside the U.S. Please use passcode 3296435. Please disconnect your lines at this time. And have a wonderful afternoon.

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