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

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 |  About: ActivIdentity Corp. (ACTI)
by: SA Transcripts

ActivIdentity, Inc (ACTI) F4Q07 Earnings Call December 5, 2007 4:30 PM ET

Operator

Good afternoon and welcome to ActivIdentityfiscal fourth quarter and fiscal year end earnings conference call. I wouldlike to remind you that this call is being recorded and simultaneously webcaston the Investor Relations section of ActivIdentity’s website located at www.activeidentity.com. At this timeI 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 thefourth quarter and fiscal year ending September 30, 2007. Joining me todayare Thomas Jahn, Chief Executive Officer, and Mark Lustig, Chief FinancialOfficer.

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

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

On today’s call Thomas Jahn will provide you with anoverview and perspective on our fourth quarter and fiscal year. Mark Lustigwill present you with a review of financial results and financial guidancegoing forward. Thomas will then provide comments on the company’s businessoutlook.

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

Thomas Jahn

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

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

As such our corporate strategy has been put into place overthe last 18 months. It is not going to change. We will discuss the specificstrategy 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 withour 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 andfor the full year. And we will take the necessary measures to improve our topline growth going forward.

For the fiscal year 2007 products sales to the enterprisemarket we had 40 to 54% of total revenues, and product sales for the governmentorganizations was 29% of total revenue. Seventeen percent of our revenues werederived from sales to financial institutions.

Our geography in fiscal year 2007, North America comprised41% of total revenues, Europe, Middle East. Africacomprised 54% of total revenues. And the balance was derived from Asia-Pacific.Our revenues from the worldwide government sector were relatively flatyear-over-year.

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

With our U.S. Enterprise market we began to see a trend withour 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 weexperienced in previous years. We also saw some commercial deployments delayeddue to customers performing higher degrees of diligence on composition andthereby lengthening our sales cycles. In other cases we saw our keydecision-makers invest in external customers instead of internal securityinfrastructure.

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

Although we see the market demand for Smart Employee IDgrowing as business rely more in the Internet and the identity of businesspartners and customers becomes more crucial to a secure and trusted businessenvironment.

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

We also worked with IBM to provide the large U.S.police organization with smart card employee ID solutions. In Europewe are growing our base of smart employee ID solutions for regional militaryand law-enforcement organizations. In the United Kingdom one-third of all of the country’spolice organizations are ActivIdentity customers. Law-enforcement organizationsin particular value ActivIdentity technology as it is an open-standard spacetechnology enabling police forces to build smart employee identificationinfrastructures capable of interoperability and evolving to meet therequirements of future standards.

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

Additionally we secured a substantial contract this yearwith PNB. We are also strengthening our pipeline with SunMicro Systems byproviding our CMS and SecureLogIn to their identity management suite. Anexample of our partnership with Sun, we secured a significant contract withcontract with Telos a communications company in Canadafor our entire suite of products, from SSO, Triple A, strong authentication toCMS and active clients. And finally as a subcontractor ActivIdentity wasselected as part of the EDS matched services contract.

Now to some of the highlights of the year: ActivIdenty wasrecognized by the Department of Commerce for excellence in innovation. Thisaward acknowledges ActivIdentity’s continued leadership in the Smart EmployeeID market, particularly with our contributions to HSB and the G2000 market. Andfrom a product standpoint, we announced the release of our ActivIdentitySolutions for Microsoft product line.

As part of this platform we introduced ActivClient 3.1 whichenabled support for enterprises deploying Microsoft Windows Vista and addedfull functionality. The ActivIdentity solutions for the Microsoft product linebuilt upon the company’s strong heritage in securing international governmentsoffering enterprise customers a suite of 40 integrated products designed toaddress the most stringent identification, security and compliance requirements.

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

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

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

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

Mark Lustig

Thanks, Thomas, and good afternoon everyone.

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

For the fiscal year the government sector was up 300k to11.7 million compared to fiscal year 2006 accounting for 29% of total productrevenue in each fiscal year. We’ve seen demand in the U.S.government lag primarily due to execution and budgetary concerns. However weare experiencing growth in various international government markets, as thedesire to implement secure identity assurance platforms is growing. For thequarter, enterprise products revenues were up approximately 1.3 million to 6.2million compared to the prior quarter and included a large win through one ofour OEM partnerships. Enterpriseproduct revenue represented 70% of total revenue compared to 46% last quarter.

We continue to grow our install base in the enterprisesector, however predicting the timing of large deal closures continues to be achallenge. For the fiscal year enterprise product revenues were upapproximately 2 million to 21.5 million compared to fiscal 2006 driven by salesof our Smart Employee ID solutions. Enterpriseproduct revenue represented 54% of total product revenues compared to 49% lastyear as option-to-buy ID solutions increased. We believe that the globalenterprise market is far from saturated. And this market will help drive ourrevenue growth going forward.

For the quarter, financial services product revenue was downabout 600k to 1.2 million due primarily to competitive pressures and the lossof one large customer in Europe. Financial servicesproduct revenue was 13% of total product revenue in the September quartercompared with 17% last quarter. Financial services product revenue was down 1.8million for the year and was 17% of total revenue in fiscal 2007 compared to22% last year. This decrease was driven by pricing pressure on hardware primarilytokens, and the loss of the aforementioned large European banking customer.

The financial services market we believe has a higheradoption rate for identity and security platforms. However due to the growingdemands of this market, we are seeing multiple standards of security andidentity assurance emerge. As such, we see many players in this market and thedecline of our revenues in this sector was partly due to these competitive andpricing pressures.

We expect the revenue mix to fluctuate due to the long salescycle applicable to the significant transactions, the related accountingtreatments specific to revenue recognition and related deferrals as well ascyclical and somewhat unpredictable nature of the government business and thegrowth rate of the overall marketplace.

Maintenance revenue in Q4 ’07 decreased from the priorquarter by about 800k which4 represents a return to normalized run-rate asthere were several one-time items that occurred in Q3 ’07. Software and itsrelated maintenance revenue accounted for 77% of total for the Septemberquarter compared to 65% for the June quarter. Software and related maintenancerevenues increased by 3.6 million to 42.7 million in fiscal 2007 compared to39.1 million in fiscal 2006 driven by a larger installed base generatingmaintenance revenues.

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

Overall, gross margins including stock-based compensationexpense 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 thesoftware 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 alongwith lower professional services cost in software accounted for the increase inmargins year-over-year.

We do continue to continue to expect margins to continue tofluctuate in the future based on revenue mix and volume. Including stock-basedcompensation, sales and marketing, research and development and generaladministrative expenses were 13.6 million in Q4 versus 15.6 million in Junequarter. Operating expense came in below our expectations due to continuedfocus in headcount, discretionary spending and lower sales driven expenses.

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

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

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

General and administrative costs return to normalizedrun-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. Majorreductions in the year-over-year expenses included $600,000 of lowerstock-option expense, $800,000 for the decreased use of temporaries andcontractors, and about $400,000 of reduced fees. These reductions were partiallyoffset by Protocom earn-out settlement with approximately 900k, and thewrite-up for the receivable of a sales tax issue of 300k incurred during theyear.

We do expect the operating expense base to fluctuateslightly going forward, related to resource allocation, strategic initiativesand activities. With respect to SG&A we continue to focus our efforts insimplification and streamlining of our support activities to reduce costsassociated with export while improving efficiencies. We are doing so throughleveraging in our global ERP platform, centralizing organization structureswhere appropriate, and increasing our focus on discretionary spending in ourcontrol environment. One such example is the redesign of our commissionstructure which will reward higher margin business more attractively comparedto 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 thefiscal year 2007 was 9.6 million versus 4.9 million in the prior year. Thisincrease was due to higher interest rates on the cash balance and foreignexchange gains that resulted from the weakening U.S. dollar.

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

Cash and cash equivalents including short-term investmentsdecreased during the quarter by 8 million to 121.7 million, driven by our netloss and working capital changes. Deferred revenue was 13.1 million at the endof the year.

Because they are disappointed with our business relative toour growth expectations over the past several months, and since Thomas hastaken over as CEO, we have been developing a cost-reduction plan to betteralign our expense base with that of our revenues. We are implementing a globalcost-reduction program during Q1 and likely into Q2. This cost reduction effortis across the board, although we do not plan to decrease our sales effortsglobally.

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

With respect to guidance, given a long sales cyclesattributable to large transactions, and the related effect on quarterlyrevenues we have decided to give annual revenue guidance for fiscal 2008. Weexpect our revenue growth to be between 10 to 22% for fiscal 2008, reflectingcontinued growth in the enterprise markets, an increase in overall industryadoption rates and our focus in reducing the sales cycle in our globalbusiness.

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

Thomas Jahn

Thanks, Mark.

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

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

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

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

The next market we are focusing on is the government tocitizen market. We see a global government trend towards the embedding andissuing global identity into traditional government identification and healthservices cards. As such we have made strategic investments in this spacebecause we believe we are uniquely positioned with our IP proven and transfertechnology and our team comprised of industry experts.

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

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

We are looking to simplify our business and as a result weare implementing cost reduction efforts globally as ActivIdentity to betteralign our expense base with that of our revenues. Our objective here is to growour current revenues while making the business leaner and more efficient. Thecost reduction efforts undertaken this quarter will yield approximately $4 to4.5 million in annual savings. The cost reduction efforts are across the boardbut we will not decrease our sales efforts in this process.

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

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

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

In Europe specifically we plan to continueto capture market share in this region where we have a strong and growingpresence. From an execution point of view in the next year, we are going towork to decrease the length of our sales deployment and development cycles. Weplan on achieving this by having our sales team target specific named accountswith which we have strong relationships.

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

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

Question-and-AnswerSession

Operator

(Operator Instructions) One moment please for the firstquestion.

Your first question comes from Sterling Auty.

Sterling Auty - JPMorgan

Yes, thank you. As you look through the upcoming year youkind of give this range of 10 to 22%, can you give us a sense of all thedifferent opportunities that you described in the prepared remarks, is there abacklog, or if not a contractual backlog at least a pipeline, how much of that10 to 22% growth is basically already done and how much of it do you still needto go and get?

Thomas Jahn

Well that is very difficult to answer. One thing we alreadyhave in the bank of course is the maintenance, because the maintenance is likea subscription moving forward. And you have seen during the last fiscal yearalready that we have increased the maintenance part of the revenue and thiswill continue to grow the more solutions you implement, deploy with thecustomers.

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

Sterling Auty - JPMorgan

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

Thomas Jahn

We have no guidance where the cash balance is for the nextfiscal year. We have seen during fiscal year 2007 already quite a significantreduction 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 - JPMorgan

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 thecompetitive environment out there and who you guys are seeing in the market indifferent segments?

Thomas Jahn

We see in our different areas, of course, differentcompetitors. It is Vascoin the token business to companies like Intercede and Bell ID,we have RSA. . I think this is all very much known for the different sectorswant to get into our market. And for us being 80% of the government deploymentup till now, at least that is what we think. It is very difficult to answerthat 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 tocontinue 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 installedbase and of our industry experts. So that is our strategy to really make itdifficult for our competitors to get into our market space.

Nick Andrews -Citigroup

Okay and can you talk a little bit about the growth rate for2008 and if it has changed over the last six months. Or if six months ago whenyou looked at 2008, what where you thinking the growth was going to be comparedto where you think it is now. And how as that changed and in what segments hasthat changed?

Thomas Jahn

I don’t give any growth per segment, but let’s go next tothe last year. In the last year we saw sales growth of roughly 10% fromyear-to-year. And part of that 10%, on the lower end, and we also publishedthat already was some kind of a miss during the last weeks of the last fiscalyear. Knowing that, knowing what is going on in the industry and knowing thetrends of our solutions, and we have identified opportunities in our salespipeline, 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 yourexpectations for next year? Do we look at this quarter as the base case movingforward then sort of model in another million dollars a quarter after the costcutting efforts?

Thomas Jahn

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

We will not book anything under restructuring, because wedon’t see it as a big restructuring program. I think we see it as a costreduction 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 previousquestion, but in a somewhat different way. Operating expenses in the lastquarter were about 13.5 million. You say that you’re going to cut roughly amillion 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 tostay pretty much flat?

Thomas Jahn

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

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

Mark Lustig

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

Kevin Link

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

Thomas Jahn

This cost-cutting insurration we have to see how we aredoing. That is what we planned in this fiscal year at any given point of timebecause we have to keep expenses and the bottom line in some kind of a healthybase. But the opposite of your calculation of what the loss would be during theyear. 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 – BMOCapital Markets

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

Mark Lustig

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

Sean Jackson – BMOCapital Markets

Okay, thanks. And regarding the revenue guidance through theyear, 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 seenthe 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 everbefore. So there is still a chance that the government because of budgetaryreasons will push that out. And we know that the government is a little bitshort of money and that this is something that is pushed out. So we have some push out in these numbers. Onthe other hand the numbers of course improve is the government is really doingwhat they said.

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

Sean Jackson – BMOCapital Markets

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

Thomas Jahn

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

Sean Jackson – BMOCapital Markets

Okay, now just in general in the U.S. Government spending itsounds like from your words that some of the deals slipped from September havenot been signed yet. From your experience in dealing with them, what is thecatalyst 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 thegovernment. 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 turneverything around as you probably can imagine. But that is very difficult topredict. But let’s not concentrate on the governments of this world, and asI’ve said before it’s about 30% of our business. Let’s also look beyond thegovernment; we are working with our federal government but also with othergovernments.

But we also have to look at the non-government sector andthere we have gotten into agreements with some, we are expanding our engagementwith Modelo, and EDS. So what we are doing is we are working with our partnersand our partnership arrangement that we put in place about 18 months ago, theModel arrangements is older than that of course. But this is also one of theengines 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 – BMOCapital Markets

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

Mark Lustig

We don’t really speak specifically to product line in thehardware area. But I can tell you that in Q3, I’d like to say the last time Ihave to refer to this, there was an accounting treatment issue relating to onetransaction that actually allocated morerevenue 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 thesoftware bucket on one very large transaction in Q3.And that helps give abigger skew to the Q4 number.

Sean Jackson – BMOCapital Markets

Okay, that’s alright. One more question, sorry. Youmentioned in your prepared remarks about Koreaand 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 thereforegrowth?

Thomas Jahn

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

Sean Jackson – BMOCapital 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 tostock 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 stockbuyback while they were still burning money. So this is a little bit if anunheard of, although there are situations where it happened in the past. We arestill considering it. We are still discussing it with the board of directorsbut 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 thinkthey 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 thoseparticular projects as well?

Thomas Jahn

It, of course, it’s difficult to answer that question. Theseare government projects and government projects are unpredictable. So there hasnot been any decision. Some of the decisions are very political and what isvery important in our calculations of growth, we have not included these bigprojects. So they are not in our growth rate, we still hope that some of themwill 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 keeptrack the last time they issued a whopping 500 cards or something like thatthrough 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 bothenrollment and issuance for them specifically? Or are we just going to push thetime line out past that 2008.

Thomas Jahn

I don’t know what the government is going to do. My crystalball doesn’t work for the government, unfortunately. But what can help toreally accelerate that is probably an incident that would accelerate that. Wedon’t hope that any of these incidents would ever happen. But that is somethingthat for sure would accelerate that. And otherwise I think we have to getthrough these programs to make this country more safe, and to make also ourcivil servants more safe. I think may get to a higher level on the politicalagenda 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 willunderstand where they are going and we will, of course, keep you updated onthis.

Operator

Your next question comes from Gregory Fujii - CoghillCapital Management.

Gregory Fujii -Coghill Capital Management

Good afternoon, guys. It’s Greg Fuji from CapitalManagement.

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 toMark. In your prepared comments I think when you were talking about a littlebit if the weakness in the U.S.G. you said it was due to execution andbudgetary concerns. On the execution side is that internal as an identity or isthat in the GSA or in the government?

Mark Lustig

If I ask internally, it’s at the government. I think thenature of the transaction, the sales cycle takes quite a bit if time. Whatwe’re finding is in some particular departments the procurement process isrelatively thick and hard to get through. And it did actually delay the closureof one deal in particular. So my guys internally are telling me that it’sreally the procurement within the government. In reference to that we need todo a better job of helping the government get through their procurement aswell. 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 cycleslengthening, can you give me a sense of the magnitude of how much they’velengthened?

Thomas Jahn

I think we see everything; we were selling something thismonth to a customer where the sales cycle was just 30 days. And we are stillworking 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 apercentage, it’s difficult. But I think overall we see a lengthening and we seea lengthening by probably a month or something like that, outside of thegovernment. The government is more unpredictable. But outside of the governmentwe see one month to two months we see the lengthening of the sales cycle at themoment.

Gregory Fujii -Coghill Capital Management

Okay, and then on the guidance, if we take a look in thelower end of guidance, you did 59.6 million in 2007 on a four year basis. So ifyou’re looking at fiscal 2008 and looking at the lower end of your guidance ofabout 10% that’s 65.5 million, so we’re looking at an increase somewhere on thelow end somewhere around 6 million of revenue. I guess the question I have is mthe 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’rereally only growing 4% next year?

Thomas Jahn

That is a very good question. But I don’t want to comment onthat, 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 anyclosing remarks?

Thomas Jahn

Thank you for your interest in ActivIdentity. And we willtalk 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 nowdisconnect.

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