ActivIdentity F4Q07 (Qtr End 9/30/07) Earnings Call Transcript

ActivIdentity, Inc (ACTI)

F4Q07 Earnings Call

December 5, 2007 4:30 pm ET

Executives

Thomas Jahn - Chief Executive Officer, Director

Mark J. Lustig - Chief Financial Officer

Mahima Patniak - Investor Relations

Analysts

Sterling Auty - JP Morgan

Nick Andrews - Citigroup

Kevin Link

Sean Jackson – BMO Capital Markets

Joey Muckergee

Fred Ziegel - Mackinac Research

Gregory Fujii - Coghill Capital Management

Presentation

Operator

Good afternoon and welcome to ActivIdentity fiscal fourth quarter and fiscal year end earnings conference call. I would like to remind you that this call is being recorded and simultaneously webcast on the Investor Relations section of ActivIdentity’s website located at www.activeidentity.com. At this time I would like to turn the call over to Miss Mahima Patnaik of ActivIdentity. Mahima.

Mahima Patniak

Thank you and welcome to ActivIdentity’s conference for the fourth quarter and fiscal year ending September 30, 2007. Joining me today are Thomas Jahn, Chief Executive Officer, and Mark Lustig, Chief Financial Officer.

The Q4 and fiscal year 2007 subtrade is available on First Call, Market Wire and on the ActivIdentity website. A repeat of this call will be available via telephone at 800-642-1687, or 706-645-9291 for international callers. The access for both numbers is 24207155.

Before we start the conference call let me remind you that the comments made on this call might contain projections or other forward-looking statements regarding the future financial performance of ActivIdentity. We caution you that such statements are only predictions and that actual events or results may differ materially. We also refer you to the company’s most recent annual report filed on form 10-K on file with SEC. These documents contain important factors that could cause actual results to differ materially from those contained in the company’s projections or forward looking statements.

On today’s call Thomas Jahn will provide you with an overview and perspective on our fourth quarter and fiscal year. Mark Lustig will present you with a review of financial results and financial guidance going forward. Thomas will then provide comments on the company’s business outlook.

Following Thomas’ comments we will be glad to take your questions. I will now turn the call over to Thomas.

Thomas Jahn

Thank you, Mahima, and good afternoon. I would like to start by giving our listeners some information in my background, as this is my first earnings call as the CEO of ActivIdentity.

I have previously held various administrative positions at corporations such as IBM and Phillip Morris. And I’ve held senior executive positions at Tyco and Raychem. And although I'm new at the helm of ActivIdentity, I have been part of the team at ActivIdentity for the past three years.

As such our corporate strategy has been put into place over the last 18 months. It is not going to change. We will discuss the specific strategy items in our three market segments, employer-to-employee, government-to-citizen, and business-to-consumer, later in the call.

Revenue for Q4 2007 was 13.8 million which was in line with our revised guidance range of 13.5 to 14 million. Revenue for the fiscal year, 2007 was 59.6 million. I am disappointed with the results for the quarter and for the full year. And we will take the necessary measures to improve our top line growth going forward.

For the fiscal year 2007 products sales to the enterprise market we had 40 to 54% of total revenues, and product sales for the government organizations was 29% of total revenue. Seventeen percent of our revenues were derived from sales to financial institutions.

Our geography in fiscal year 2007, North America comprised 41% of total revenues, Europe, Middle East. Africa comprised 54% of total revenues. And the balance was derived from Asia-Pacific. Our revenues from the worldwide government sector were relatively flat year-over-year.

In the U.S. government specifically, revenues were delayed in deployment cycles at agencies such as GSA. GSA currently has 67 agencies and about 860,000 users to which it is contracted to deploy imminent services offering. The timing of these deployments is longer than anticipated to the various government agencies. In addition other government agencies have delayed deployments due to budgetary reasons. We are dependant on large steel the revenue of our governmental business can vary greatly from quarter to quarter.

With our U.S. Enterprise market we began to see a trend with our larger customers who placed more orders in a ‘just in time” or “as needed” basis. This is a transition from the up-front purchasing methodology we experienced in previous years. We also saw some commercial deployments delayed due to customers performing higher degrees of diligence on composition and thereby lengthening our sales cycles. In other cases we saw our key decision-makers invest in external customers instead of internal security infrastructure.

ActivIdentity revenues in Europe increased 21% year-over-year. We attribute this increase to some large deals to a number of SmartEmployee customers and to a more progressive European Market. In fact according to market research, Europe leads the world in Smart Card deployments out performing North American markets. While Smart Card deployments in North America are primarily driven by government agencies as part of the broader deployment of formal security, Europe has seen a broader deployment beyond the government in the commercial sector, especially in banking, finance, and the insurance sector. In addition to traditional logical data the network excess functionality, E&V applications in the banking industry have led to more than 200 migration programs in the banking sector. Asia-Pacific remains our smallest region contributing approximately 5% of our revenues.

Although we see the market demand for Smart Employee ID growing as business rely more in the Internet and the identity of business partners and customers becomes more crucial to a secure and trusted business environment.

Now I will go over some of our customer highlights and product events during the fiscal year. In the Smart Employee ID marketplace, the company extended its leadership by securing a contract with the printer division of HP. HP is embedding ActivIdentity Smart Employee middleware in its printers to provide strong smart-card verification prior to initiating specific functions such as scanning a document or e-mailing or printing a sensitive document.

We also worked with IBM to provide the large U.S. police organization with smart card employee ID solutions. In Europe we are growing our base of smart employee ID solutions for regional military and law-enforcement organizations. In the United Kingdom one-third of all of the country’s police organizations are ActivIdentity customers. Law-enforcement organizations in particular value ActivIdentity technology as it is an open-standard space technology enabling police forces to build smart employee identification infrastructures capable of interoperability and evolving to meet the requirements of future standards.

Also in Europe we gained traction with our strong authentication solutions be securing an agreement with BT one of the world’s leading providers of telecommunications solutions and services. We secured this contract with BT after the successful deployment of ActivIdentity through factor of education within BT for its own employees. Over the past three years BT has issued ActivIdentity two-factor authentication devices to over 70,000 employees, and is now selling our products to its customers.

Additionally we secured a substantial contract this year with PNB. We are also strengthening our pipeline with SunMicro Systems by providing our CMS and SecureLogIn to their identity management suite. An example of our partnership with Sun, we secured a significant contract with contract with Telos a communications company in Canada for our entire suite of products, from SSO, Triple A, strong authentication to CMS and active clients. And finally as a subcontractor ActivIdentity was selected as part of the EDS matched services contract.

Now to some of the highlights of the year: ActivIdenty was recognized by the Department of Commerce for excellence in innovation. This award acknowledges ActivIdentity’s continued leadership in the Smart Employee ID market, particularly with our contributions to HSB and the G2000 market. And from a product standpoint, we announced the release of our ActivIdentity Solutions for Microsoft product line.

As part of this platform we introduced ActivClient 3.1 which enabled support for enterprises deploying Microsoft Windows Vista and added full functionality. The ActivIdentity solutions for the Microsoft product line built upon the company’s strong heritage in securing international governments offering enterprise customers a suite of 40 integrated products designed to address the most stringent identification, security and compliance requirements.

This year we also increased our support for pith compliant epilates which are also certified, pith-compliant active clients for Mac, and extended our pith support with our PMS 4.1 service tech version. We interfaced our Smart Employee ID offerings to some identity management platform to IBM’s Tivoli platform and to mobile identity assurance solutions systems. We are in the process of providing support for all of our identity management platforms.

Additionally we strengthened our relationship with Entrust and we secured in excess of 30 new customers during the year. Further we secured a strategic career with our strong authentication solution offering. This pilot program allows us to gain a foothold into a rapidly growing Asian financial market. We believe the opportunity in the Korean market could provide substantial growth over the next five years.

In general ActivIdentity is on track to deliver meaningful results with continued top line growth coming from a focus on over 2,000 accounts with our Smart Employee ID offering and out strong identification solutions.

And now I’ll turn over the call to our Chief Financial Officer, Mark Lustig who will review our financial results for the fourth quarter and the fiscal year. I’ll then provide you with a few remarks about our business outlook for the remainder of 2008. Mark.

Mark Lustig

Thanks, Thomas, and good afternoon everyone.

The perspective product revenues defined as hardware and software for the quarter, the government sector was down 2.5 million to 1.5 million when compared to the prior quarter. The decrease was due primarily to delays of procurement for ongoing projects with various U.S. military and defense installations. The government sector counted for 17% of product revenue down from 38% in Q3.

For the fiscal year the government sector was up 300k to 11.7 million compared to fiscal year 2006 accounting for 29% of total product revenue in each fiscal year. We’ve seen demand in the U.S. government lag primarily due to execution and budgetary concerns. However we are experiencing growth in various international government markets, as the desire to implement secure identity assurance platforms is growing. For the quarter, enterprise products revenues were up approximately 1.3 million to 6.2 million compared to the prior quarter and included a large win through one of our OEM partnerships. Enterprise product revenue represented 70% of total revenue compared to 46% last quarter.

We continue to grow our install base in the enterprise sector, however predicting the timing of large deal closures continues to be a challenge. For the fiscal year enterprise product revenues were up approximately 2 million to 21.5 million compared to fiscal 2006 driven by sales of our Smart Employee ID solutions. Enterprise product revenue represented 54% of total product revenues compared to 49% last year as option-to-buy ID solutions increased. We believe that the global enterprise market is far from saturated. And this market will help drive our revenue growth going forward.

For the quarter, financial services product revenue was down about 600k to 1.2 million due primarily to competitive pressures and the loss of one large customer in Europe. Financial services product revenue was 13% of total product revenue in the September quarter compared with 17% last quarter. Financial services product revenue was down 1.8 million for the year and was 17% of total revenue in fiscal 2007 compared to 22% last year. This decrease was driven by pricing pressure on hardware primarily tokens, and the loss of the aforementioned large European banking customer.

The financial services market we believe has a higher adoption rate for identity and security platforms. However due to the growing demands of this market, we are seeing multiple standards of security and identity assurance emerge. As such, we see many players in this market and the decline of our revenues in this sector was partly due to these competitive and pricing pressures.

We expect the revenue mix to fluctuate due to the long sales cycle applicable to the significant transactions, the related accounting treatments specific to revenue recognition and related deferrals as well as cyclical and somewhat unpredictable nature of the government business and the growth rate of the overall marketplace.

Maintenance revenue in Q4 ’07 decreased from the prior quarter by about 800k which4 represents a return to normalized run-rate as there were several one-time items that occurred in Q3 ’07. Software and its related maintenance revenue accounted for 77% of total for the September quarter compared to 65% for the June quarter. Software and related maintenance revenues increased by 3.6 million to 42.7 million in fiscal 2007 compared to 39.1 million in fiscal 2006 driven by a larger installed base generating maintenance revenues.

Software revenues decreased by 2 million from the previous year to 23.3 million, this decrease reflects a slower adoption rate and execution of programs by the U.S. government, slower than anticipated growth in our enterprise business and the decline in our financial market business in the current year. In addition the timing of large deals as well as their ultimate size continues to impact our execution related to software revenues. Maintenance revenue increased 5.6 million in 2007 versus 2006 as the result of our growing installed base which provides a recurring maintenance revenue stream.

Overall, gross margins including stock-based compensation expense for the September quarter was 68% compared to 63% for the June quarter. A better revenue mix and a lower proportion of professional services in the software revenue accounted for the increase in margins quarter-over-quarter. Gross margins including stock-based expense for 2007 was 65% compared to 63% in ’06, our growth in revenues, a larger proportion of maintenance revenue along with lower professional services cost in software accounted for the increase in margins year-over-year.

We do continue to continue to expect margins to continue to fluctuate in the future based on revenue mix and volume. Including stock-based compensation, sales and marketing, research and development and general administrative expenses were 13.6 million in Q4 versus 15.6 million in June quarter. Operating expense came in below our expectations due to continued focus in headcount, discretionary spending and lower sales driven expenses.

For the year, OpEx, including stock-based compensation was $57.5 million versus $60.6 million in fiscal 2006, a decrease of 5% on higher revenues. We continue to focus on changing operational expenses with the revenues of the company and we have more work to do.

Down to marketing, sales and marketing expenses were basically flat during the quarter compared to Q3. Sales and marketing for the years was 25.3 million compared to 26.9 million in fiscal 2006 reflecting lower marketing program spending and a focus on discretionary spending.

R&D was held relatively flat with the prior quarter at roughly 5.1 million, headcount was kept in check. Research and development for the year was 19.9 million compared to 19.6 million in the previous year.

General and administrative costs return to normalized run-rates in Q4 versus Q3 as we indicated on last quarter’s conference call. For the full years G&A costs decreased by approximately $500,000. Major reductions in the year-over-year expenses included $600,000 of lower stock-option expense, $800,000 for the decreased use of temporaries and contractors, and about $400,000 of reduced fees. These reductions were partially offset by Protocom earn-out settlement with approximately 900k, and the write-up for the receivable of a sales tax issue of 300k incurred during the year.

We do expect the operating expense base to fluctuate slightly going forward, related to resource allocation, strategic initiatives and activities. With respect to SG&A we continue to focus our efforts in simplification and streamlining of our support activities to reduce costs associated with export while improving efficiencies. We are doing so through leveraging in our global ERP platform, centralizing organization structures where appropriate, and increasing our focus on discretionary spending in our control environment. One such example is the redesign of our commission structure which will reward higher margin business more attractively compared to lower business.

Other income net for the September quarter was 2.7 million. Interest income accounted for 1.7 million of that balance. Other income for the fiscal year 2007 was 9.6 million versus 4.9 million in the prior year. This increase was due to higher interest rates on the cash balance and foreign exchange gains that resulted from the weakening U.S. dollar.

Net loss for the fourth quarter was $0.04 per share versus our revised guidance of $0.03 to $0.06 per share. Amortization of technology and amortization of intangible assets was 660k for the quarter, and additional stock-based compensation was 719k. Net loss for the fiscal 2007 year was $0/20 per share versus the prior year loss of $0.50 per share.

Cash and cash equivalents including short-term investments decreased during the quarter by 8 million to 121.7 million, driven by our net loss and working capital changes. Deferred revenue was 13.1 million at the end of the year.

Because they are disappointed with our business relative to our growth expectations over the past several months, and since Thomas has taken over as CEO, we have been developing a cost-reduction plan to better align our expense base with that of our revenues. We are implementing a global cost-reduction program during Q1 and likely into Q2. This cost reduction effort is across the board, although we do not plan to decrease our sales efforts globally.

Although the figures are not finalized at this point, we expect the total cost of the plan to be in the range of 2 million to 2.5 million and result in annualized savings of between $4 million and $4.5 million.

With respect to guidance, given a long sales cycles attributable to large transactions, and the related effect on quarterly revenues we have decided to give annual revenue guidance for fiscal 2008. We expect our revenue growth to be between 10 to 22% for fiscal 2008, reflecting continued growth in the enterprise markets, an increase in overall industry adoption rates and our focus in reducing the sales cycle in our global business.

I’d like to turn the call back over to Thomas for the business outlook. Thomas.

Thomas Jahn

Thanks, Mark.

Now I would like to take a moment to review an emerging trend we are seeing in the markets specifically with the global system integrator and then we will talk about the company strategy.

Our ActivIdentity Smart Employee ID offerings have a significant return on investment on our customers and what we are seeing currently is that a majority of system integrators with whom we partner for large scale product are now building centers of excellence that are highlighting and demonstrating the benefits of identity management deployments. Included in these demonstrations are the edifications of identity management often referred as user provisioning and identity assurance, which become part of the strong identification components of extended identity management.

We view this as positive for ActivIdenty not only because the GSIs are building these centers, but because in many cases our technology is being included in architecture of the GSIs.

And now I will review our strategy for continued top line growth, which is consistent with what we have been doing for about 18 months. I believe we are strategically aligned to grow in three different areas. First the primary focus is employer to employee market. We are confident that this is where we see the greatest uptake of our Smart Employee solutions. Out Smart Employee solutions converge both logical and critical excess into a single card while enabling strong authentication, single sign-on, remote access, PKI and data-encryption. We believe the employer to employee market which encompasses the public and private sector will be instrumental in our expected path to revenue growth and profitability.

The next market we are focusing on is the government to citizen market. We see a global government trend towards the embedding and issuing global identity into traditional government identification and health services cards. As such we have made strategic investments in this space because we believe we are uniquely positioned with our IP proven and transfer technology and our team comprised of industry experts.

Another market we see with growth potential for us is the business to consumer market. We continue to build strong partnerships in this market to deliver strong authentication solutions for banking. We expect this market will become more regulated by standard infusion and our expertise in the E to E and G to C markets will help us emerge in the business to customer space moving forward. But in 2007 we have seen our product face trends toward Smart Employee ID ventures for both commercial and government customers and strong authentication solutions in banking.

The overall strategy for our company remains the same and we are approaching the execution of the strategy in the following ways. We are going to work to increase our sales reach in North America as we believe this region is poised for growth. Additionally in Europe, we plan to continue to leverage our relationships with our partners and other distribution channels to increase our top line growth. Since I have taken over as CEO we have looked to not only grow our revenues but also to decrease our operating expenses.

We are looking to simplify our business and as a result we are implementing cost reduction efforts globally as ActivIdentity to better align our expense base with that of our revenues. Our objective here is to grow our current revenues while making the business leaner and more efficient. The cost reduction efforts undertaken this quarter will yield approximately $4 to 4.5 million in annual savings. The cost reduction efforts are across the board but we will not decrease our sales efforts in this process.

We are decreasing our R&D costs by further concentrating our efforts on more profitable solutions. We are also looking to reduce our general administrative and marketing expenses globally. We believe this cost reduction effort is the right step towards a more efficient business.

Turning to profitability we continue to work toward to attaining attainable GAAP profitability in the second half of fiscal year 2008 and I am making this a top priority for the company. On a revenue basis for the full year, we expect to achieve revenue growth between 10 and 22 %. We believe this range reflects increased adoption rates in the marketplace and increased focus on the enterprise market and executional focus on shortening our sales cycles and broader sales efforts in the United States.

As we look to 2008 from a market perspective we are going to continue to drive our top line growth with our Smart Employee ID solutions in the enterprise, financial and government sectors. Over the next year we are planning to increase the reach of our sales teams in North America. We will continue to leverage our opportunities in the enterprise and government markets and extend our market share in the global 2000 companies.

In Europe specifically we plan to continue to capture market share in this region where we have a strong and growing presence. From an execution point of view in the next year, we are going to work to decrease the length of our sales deployment and development cycles. We plan on achieving this by having our sales team target specific named accounts with which we have strong relationships.

From the R&D Side, we plan on decreasing our lead times by streamlining our products in the development efforts of the product. Also form an execution standpoint this year, we are working to attain a more predictable and reoccurring revenue pipeline. We will reveal more details about this throughout the year.

I would like to thank the employees of ActivIdentity for their hard work and dedication and now I will turn over the call to the operator for questions.

Question-and-Answer Session

Operator

(Operator Instructions) One moment please for the first question.

Your first question comes from Sterling Auty.

Sterling Auty - JP Morgan

Yes, thank you. As you look through the upcoming year you kind of give this range of 10 to 22%, can you give us a sense of all the different opportunities that you described in the prepared remarks, is there a backlog, or if not a contractual backlog at least a pipeline, how much of that 10 to 22% growth is basically already done and how much of it do you still need to go and get?

Thomas Jahn

Well that is very difficult to answer. One thing we already have in the bank of course is the maintenance, because the maintenance is like a subscription moving forward. And you have seen during the last fiscal year already that we have increased the maintenance part of the revenue and this will continue to grow the more solutions you implement, deploy with the customers.

Except for that, of course it depends on deals coming in, I think the normal way these things work.

Sterling Auty - JP Morgan

Okay and then in terms of you have a cost-cutting plan in place that you described, how shall we think about cash-burn and where we may see the bottom in cash balances. Or do you have guidance for where you think cash will be at the end of the next fiscal year.

Thomas Jahn

We have no guidance where the cash balance is for the next fiscal year. We have seen during fiscal year 2007 already quite a significant reduction of the burn-rate. And I think that is something we want to continue, but I don’t want to give you a specific bottom of the cash balances.

Sterling Auty - JP Morgan

Okay, thank you.

Operator

The next question comes from Nick Andrews.

Nick Andrews - Citigroup

Good evening, guys.

Mark Lustig

Hi, Nick.

Nick Andrews - Citigroup

Could you just give us a little bit of detail on the competitive environment out there and who you guys are seeing in the market in different segments?

Thomas Jahn

We see in our different areas, of course, different competitors. It is Vasco in the token business to companies like Intercede and Bell ID, we have RSA. . I think this is all very much known for the different sectors want to get into our market. And for us being 80% of the government deployment up till now, at least that is what we think. It is very difficult to answer that question. But with what we have built especially in the government area, we have built a barrier to entry. And that is an important one and we want to continue to work on that barrier to entry. And that is based on the IP we have. That is based on the industry knowledge we have. It’s based on our installed base and of our industry experts. So that is our strategy to really make it difficult for our competitors to get into our market space.

Nick Andrews - Citigroup

Okay and can you talk a little bit about the growth rate for 2008 and if it has changed over the last six months. Or if six months ago when you looked at 2008, what where you thinking the growth was going to be compared to where you think it is now. And how as that changed and in what segments has that changed?

Thomas Jahn

I don’t give any growth per segment, but let’s go next to the last year. In the last year we saw sales growth of roughly 10% from year-to-year. And part of that 10%, on the lower end, and we also published that already was some kind of a miss during the last weeks of the last fiscal year. Knowing that, knowing what is going on in the industry and knowing the trends of our solutions, and we have identified opportunities in our sales pipeline, that leaves us with a range of from 10 to 22%.

Nick Andrews

Okay great, and can you give us a little more detail on your expectations for next year? Do we look at this quarter as the base case moving forward then sort of model in another million dollars a quarter after the cost cutting efforts?

Thomas Jahn

I will not do your work in your modeling that you have to do, but let me say the following: we are doing a cost-cutting exercise this quarter and we will also incur some cost of this cost0cutting exercise because when you eliminate positions you have to pay a certain amount of severance. At the end of next quarter we will tell you for example how much of our expense was severance and how much of the expense was expense going forward.

We will not book anything under restructuring, because we don’t see it as a big restructuring program. I think we see it as a cost reduction and a slimming effort.

Nick Andrews

Okay, thanks.

Operator

Your next question comes from Kevin Link.

Kevin Link

I think I'm going to ask a variation of the previous question, but in a somewhat different way. Operating expenses in the last quarter were about 13.5 million. You say that you’re going to cut roughly a million a quarter so lets, say down to a base of 12.5 million. As you grow in ’08 though is there going to be growth from the 12.5 million, or is it going to stay pretty much flat?

Thomas Jahn

There are several things to that. Let me go through all of the factors, because that makes it a little bit more difficult. First of all we have to deal with the weakening dollar which of course then means that in Europe we have to deal with higher expenses which sounds a little but bad. But on the other hand we also see higher sales volumes because of the higher conversion rate. So this is neutralizing a little bit. But you see something like a growth in the sales side already and in the expense side, which in a way is top line neutral and that may be a little bit better than neutral.

In other areas of the world it’s a little bit more difficult because for example in Australia the dollar is doing extremely well. We have a development center and our sales base is not that bug. So the foreign exchange is already one factor that is very, very difficult to predict. If you are working on constant dollars, then I think the approach you are taking makes some sense. That’s all I want to say about that.

Mark Lustig

Kevin, this is Mark. The cognizant effect is that our fiscal fourth quarter is traditionally a seasonally low quarter in terms of OpEx because of the benefit we receive from our significant presence in Europe and the related vacation benefit we get out of our European sector. So your starting point is a low point for ’07 just because of that as well.

Kevin Link

Okay. I appreciate that. But under a broader topic the objective of profitability was mentioned earlier in the call and there was a suggestion that in latter quarters of fiscal ’08 there could be profitability. But still even with the outlying expense reductions, you still probably loose on an operating basis somewhere around $5 to $6 million bucks in ’08. On an operating margin basis that’s still almost -10%, where can you cut costs from here if you need to after this cost-cutting insurration?

Thomas Jahn

This cost-cutting insurration we have to see how we are doing. That is what we planned in this fiscal year at any given point of time because we have to keep expenses and the bottom line in some kind of a healthy base. But the opposite of your calculation of what the loss would be during the year. That’s something I don’t want to reveal at this point in time.

Kevin Link

Alright, thanks.

Operator

Your next question comes from Sean Jackson.

Sean Jackson – BMO Capital Markets

Yes, good afternoon, my phone went out about five minutes into the Q&A so excuse me if I'm repeating a question or two. But regarding the cost reduction are the entire $2 to $2.5 million dollars going to be in the December quarter?

Mark Lustig

I think, Sean, some of it might trickle into Q2 by the nature of some of the positions being identified and the nature of the hand-offs and the transitions that we need to move forward with.

Sean Jackson – BMO Capital Markets

Okay, thanks. And regarding the revenue guidance through the year, can you take us on your thinking as far as what the low end assumes 10% and what the high end assume, 22%, with regard to the uptake in the U.S. government. In other words how long does the lag in U.S. government spending have to be in the assumption of the 10% number?

Thomas Jahn

The 10% number is what we see as the lower end. We have seen the government deploying the solutions on a far lower rate than we anticipated. But there are some mandates in place to get into 2008 more deployed than ever before. So there is still a chance that the government because of budgetary reasons will push that out. And we know that the government is a little bit short of money and that this is something that is pushed out. So we have some push out in these numbers. On the other hand the numbers of course improve is the government is really doing what they said.

But the government is only a part of our business. What we also see is more interest, especially here in North America with the G2000 customers because more and more of the business is being done in the internet and authentication is very, very important because otherwise you don’t with whom you’re really dealing.

Sean Jackson – BMO Capital Markets

Okay, so you’re saying that the 10% represents somewhat of a worst case scenario within say the HSP12 and the fact that they do push back some of the dates of compliance with that, is that fair to say?

Thomas Jahn

That is fair to say, but worst case from a normal perspective, because there are always worst cases that can happen. But these are normally acts of God or something like that, and I cannot exclude something like that. But otherwise, it is something on that range.

Sean Jackson – BMO Capital Markets

Okay, now just in general in the U.S. Government spending it sounds like from your words that some of the deals slipped from September have not been signed yet. From your experience in dealing with them, what is the catalyst that has to happen in order for the U.S. government to get back to more normalized spending levels?

Thomas Jahn

I cannot answer that question that is more a question to the government. What has to happen that they are getting back to something more normalized? That is very difficult to answer. I don’t know a security breech can turn everything around as you probably can imagine. But that is very difficult to predict. But let’s not concentrate on the governments of this world, and as I’ve said before it’s about 30% of our business. Let’s also look beyond the government; we are working with our federal government but also with other governments.

But we also have to look at the non-government sector and there we have gotten into agreements with some, we are expanding our engagement with Modelo, and EDS. So what we are doing is we are working with our partners and our partnership arrangement that we put in place about 18 months ago, the Model arrangements is older than that of course. But this is also one of the engines of growth because we believe that in many cases we cannot do it alone. We need to integrate; we need the partners who have the reach.

Sean Jackson – BMO Capital Markets

Okay, just real quick on the hardware revenue, a big sequential decrease this quarter. It’s actually pretty low compared to even throughout the year. That segment stands out. Which product lines are the ones that were sluggish during the quarter?

Mark Lustig

We don’t really speak specifically to product line in the hardware area. But I can tell you that in Q3, I’d like to say the last time I have to refer to this, there was an accounting treatment issue relating to one transaction that actually allocated more revenue to hardware during the quarter than would have been invoiced, per se. So as a result more revenue got allocated to the hardware bucket than the software bucket on one very large transaction in Q3.And that helps give a bigger skew to the Q4 number.

Sean Jackson – BMO Capital Markets

Okay, that’s alright. One more question, sorry. You mentioned in your prepared remarks about Korea and the things that are happening over there with regard to the token business. Can you please go into more detail on what is the catalyst over therefore growth?

Thomas Jahn

Yes, the catalyst is something that I was hopeful was also happening in the United States. But it is not happen up to now. The government is urging all the banks to have a true factor of authentication. Therefore there is a need of tokens or other solutions to get into this two level authentication. This is now something the banks have to deploy during the next year to come. And we have gained a very good foothold with one of the banks and it looks like we can expand that to the other banks. So the banks in Korea have about 20 million bank accounts that are eligible for that. So this is an area for growth.

Sean Jackson – BMO Capital Markets

Okay. Okay, thanks appreciate it.

Mark Lustig

Thank you.

Operator

Your next question comes from Joey Muckergee.

Joey Muckergee

Given the stock prices how much thought have you given to stock buyback?

Thomas Jahn

We have given some thought to a stock buyback. We did that. Up to now, I looked around and I did not find many companies that did a stock buyback while they were still burning money. So this is a little bit if an unheard of, although there are situations where it happened in the past. We are still considering it. We are still discussing it with the board of directors but we have not take a decision one way or the other.

Joey Muckergee

Thank you.

Operator

The next question comes from Fred Ziegel.

Fred Ziegel - Mackinac Research

Hi, guys.

Mark Lustig

Hi, Fred.

Fred Ziegel - Mackinac Research

In past calls there were references to two or three, I think they were all or mostly government-to-citizen projects outside the U.S. My question as to those, have you seen slippage in the awards of those particular projects as well?

Thomas Jahn

It, of course, it’s difficult to answer that question. These are government projects and government projects are unpredictable. So there has not been any decision. Some of the decisions are very political and what is very important in our calculations of growth, we have not included these big projects. So they are not in our growth rate, we still hope that some of them will happen and there are some indications. But we do not take it as a given, it is not in our expenses and it is not in our revenues.

Fred Ziegel - Mackinac Research

The other question relates to the GSA, I think as I keep track the last time they issued a whopping 500 cards or something like that through the end of November.

Thomas Siegal

That’s what I call slow deployment.

Fred Ziegel - Mackinac Research

Yes, what do you think triggers an acceleration in both enrollment and issuance for them specifically? Or are we just going to push the time line out past that 2008.

Thomas Jahn

I don’t know what the government is going to do. My crystal ball doesn’t work for the government, unfortunately. But what can help to really accelerate that is probably an incident that would accelerate that. We don’t hope that any of these incidents would ever happen. But that is something that for sure would accelerate that. And otherwise I think we have to get through these programs to make this country more safe, and to make also our civil servants more safe. I think may get to a higher level on the political agenda over time. I don’t know how fast.

Fred Ziegel - Mackinac Research

Okay, thanks.

Thomas Jahn

But we will keep talking to the government and we will understand where they are going and we will, of course, keep you updated on this.

Operator

Your next question comes from Gregory Fujii - Coghill Capital Management.

Gregory Fujii - Coghill Capital Management

Good afternoon, guys. It’s Greg Fuji from Capital Management.

Mark Lustig

Hey, Greg.

Thomas Jahn

Hi, Greg.

Gregory Fujii - Coghill Capital Management

I have a couple of questions. The first one, I think goes to Mark. In your prepared comments I think when you were talking about a little bit if the weakness in the U.S.G. you said it was due to execution and budgetary concerns. On the execution side is that internal as an identity or is that in the GSA or in the government?

Mark Lustig

If I ask internally, it’s at the government. I think the nature of the transaction, the sales cycle takes quite a bit if time. What we’re finding is in some particular departments the procurement process is relatively thick and hard to get through. And it did actually delay the closure of one deal in particular. So my guys internally are telling me that it’s really the procurement within the government. In reference to that we need to do a better job of helping the government get through their procurement as well. So we certainly have some work to do on our end.

Gregory Fujii - Coghill Capital Management

Okay, and you talked a little bit about the sales cycles lengthening, can you give me a sense of the magnitude of how much they’ve lengthened?

Thomas Jahn

I think we see everything; we were selling something this month to a customer where the sales cycle was just 30 days. And we are still working in a deal we started about 14 months ago. So it is really varying very, very widely. Hoe much is it increasing? I think in terms of giving it a percentage, it’s difficult. But I think overall we see a lengthening and we see a lengthening by probably a month or something like that, outside of the government. The government is more unpredictable. But outside of the government we see one month to two months we see the lengthening of the sales cycle at the moment.

Gregory Fujii - Coghill Capital Management

Okay, and then on the guidance, if we take a look in the lower end of guidance, you did 59.6 million in 2007 on a four year basis. So if you’re looking at fiscal 2008 and looking at the lower end of your guidance of about 10% that’s 65.5 million, so we’re looking at an increase somewhere on the low end somewhere around 6 million of revenue. I guess the question I have is m the fourth quarter of 2007 seemed like it was maybe $3.5 to $4 million light. So if you take 3.5 away from the six on the low end. Is it possible that you’re really only growing 4% next year?

Thomas Jahn

That is a very good question. But I don’t want to comment on that, but it’s a good analysis. Let’s leave it at that at the moment.

Gregory Fujii - Coghill Capital Management

Okay, thanks, guys.

Operator

There are no further questions at this time. Are there any closing remarks?

Thomas Jahn

Thank you for your interest in ActivIdentity. And we will talk to you soon. And we hope you will talk to us soon. Okay, thank you.

Operator

Thank you. This concludes today’s conference, you may now disconnect.

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