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Executives

Steve G. Larson – Vice President Finance & Treasurer

Richard Haddock – President and Chief Financial Officer

Stephen D. Price-Francis – Vice President of Business Development

Analysts

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

Jeremy Grant – Stanford Group

Nicholas Andrews - Citigroup

LaserCard Corporation (LCRD) F3Q08 Earnings Call January 17, 2008 5:00 PM ET

Operator

Welcome to LaserCard Corporation quarterly financial results conference call. All participants will be in listen only until the question and answer session of the conference. The conference is being recorded at the request of LaserCard Corporation. If you have any objections you may disconnect at this time. I’d like to introduce the host of today’s conference call Mr. Steve Larson CFO. Mr. Larson you may begin.

Steve G. Larson

Good afternoon and welcome to the LaserCard Corporation’s fiscal 2008 third quarter conference call. With me today is Chief Executive Officer and President, Richard Haddock and Vice President of Business Development Steven Price-Francis. Before we begin I remind you that all the statements made during this conference call including responses to your questions which are not historical facts are forward-looking statements made in reliance on Federal Securities Safe Harbor law. Such, forward-looking statements are not guarantees of future performance or events. Whether they are based upon current expectations, estimates, beliefs and assumptions about the future which may prove incorrect and upon our goals and objectives which may change. Often such statements can be identified by the use of the words such as may, will and can expect, plans, visualizes, believes, anticipates and estimates. Forward-looking statements in this conference call include our expectations for the future, our sales objectives, expected revenue and orders from existing and potential new programs, the green card redesign and operating expense levels for this quarter and our focus on cash conservation.

These forward-looking statements involve a number of risks and uncertainties including but not limited to whether the Italian and Angola ID card programs, timely perceived with full implementation of their secure national ID card programs and place a sizable card orders with us and whether the developing programs materialize and use our products or services as well as those contained in today’s news release and our forms 10K and 10Q and other SEC filings. Due to these and other risks our actual future results may differ materially from those disclosed in this call. Forward-looking statements speak only as of today and we undertake no obligation to publicly update or revise these statements whether as a result of new information, future events or otherwise. Today’s news release can be found at www.LaserCard.com or obtained by calling Laser Card at 650-969-4428. I will now turn the call over to Richard.

Richard Haddock

Good afternoon everyone. Welcome to the review of our fiscal 2008 third quarter results. I’ll begin with the financial and operational highlights and then Steve will follow with a detailed review of the financials. Stephen Parks-Francis will then present an update on our new wins, strategic plans and our ongoing programs before we take questions.

Let’s get started with the financial summary for the third quarter. We reported revenues of $11.2 million and a net loss of $1 million or $0.09 per share. We ended the quarter with approximately $18.5 million in cash. I’m pleased to report program wins in the quarter including new business that demonstrates the progress on our path to diversification. Let me take a moment to summarize the highlights. First in Italy, on January 4th the government of Italy issued a request for proposal inviting interested parties to submit their qualifications to bid on an anticipated follow on RFP specifying the need for more than 9,000 data collections stations for citizen ID cards. We believe this RFP is an encouraging sign of the commitment by the government to a full implementation of the program.

In Angola a contract win was just awarded for the governments’ new secure national ID card program. We are on the winning team as the exclusive suppliers of the cards which if fully implemented according to the reported plans to be worth over $90 million over five years. In Costa Rica we were awarded a contract by the government for their foreign resident ID management system. This is the first time that LaserCard has supplied a government with a comprehensive ID solution including our newly developed fingerprint biometric check system which detects and prevents duplicate enrollments.

CCD our wholly owned subsidiary had two significant wins in the quarter. First, CCD signed an $8.5 million contract with Golden Chip Company of Saudi Arabia who managed the supply and installation of production equipment for a plastic card manufacturing facility which is planned to be operational within about a year. Second, CCD received a three year contract with an expected value of more than $4.5 million from its largest customer, a global sporting event organizer marking the first time this customer has entered into a multi-year arrangement with us.

On a separate topic, those of you who follow the company know that I have announced my retirement which will be effective March 31, 2008, the end of the current fiscal year. As a result the company is in the process of seeking a new CEO. In related changes director Bernard Bailey is now chairman of the board of directors and former chairman Don Mattson has stepped into the newly created role of vice chairman. I have greatly enjoyed my 26 years at the company. It has been a great pleasure to work with such a dedicated team and I would like to extend my thanks to them and to our many loyal investors for their exceptional support throughout the years. With that introduction I will now hand the call over to Steve for details on the financials.

Steve G. Larson

Our total revenues for the fiscal 2008 third quarter were $11.2 million as compared with $10.7 million in the previous quarter. Optical memory card revenues were $7.9 million up 18% from the $6.7 million reported in the previous quarter. Optical memory card revenues included $1.2 million for green cards and laser visas for the US government, about $4.1 million in national ID cards for a Middle Eastern country, about $1.4 million for vehicle registration programs in India, about $1 million for the Canadian permanent residence program and about $200,000 from miscellaneous programs. Optical card average selling price was $4.36 in the third quarter versus $4.66 the previous quarter. The decrease in the ASP is due to a decrease in the percentage of cards sold with chips.

Driving systems segment revenue was approximately $200,000 in the third quarter compared with about $700,000 in the second quarter. This reduction is attributable mainly to the decrease in drives enabling services and software revenues for the national ID card program in the Middle East as compared with the previous quarter. Our sales of specialty cards and printers totaled $3.1 million in the third quarter of this year versus $3.3 million in the second quarter. Our consolidated gross margin on our product sales was 31% in the third quarter as compared with 30% in the second quarter due to the increase in optical memory card revenues. Optical card gross margin in the December quarter was 41.2% compared with 41.6% in the previous quarter. The gross profit margin on specialty cards and printers was 14% compared with 20% in the second quarter.

As to operating expenses selling general and administrative expenses totaled $4 million in the third quarter versus $3.3 million in the second quarter. The increase is due to seasonal expenditures and marketing initiatives, increased lobbying activity in Washington and a partial accrual for retirement expenses. Include about $250,000 for CEO retirement expenses in the December quarter. We will accrue about $550,000 in the March quarter which along with recruiting expenses will result in increased SG&A expenses this quarter. Research and development expenditures were $700,000 for both of the last two quarters. We anticipate that R&D spending will increase about 15% in the March quarter for product development activity. Depreciation and amortization expense was approximately $760,000 in the just completed quarter as compared with $735,000 in the previous quarter.

Cash plus investments totaled $18.6 million on December 31 compared with $18.5 September 30th. Cash provided by operating activities in the third quarter was about $450,000. We continued to focus on conservation of cash. Capital asset expenditures amounted to about $400,000 for the quarter. Our current ratio at December 30th was 4.2 to 1 compared with 4.8 to 1 at September 30th. The optical memory card back log at December 31st was $1.3 million and consists primarily of cards for the Canadian and Costa Rica programs. In addition to the card back log we have about $900,000 in back log for hardware and software for Costa Rica. Additionally, we anticipate optical card orders ranging from $3 to $12 million in the current quarter for green cards, Italian citizen ID cards and cards for programs in the Middle East and India. If we received all of these orders we anticipate that no more than half would be shippable in the quarter. I will now hand the call over to Stephen Price-Francis.

Stephen D. Price-Francis

Good afternoon everyone. I’d like to start with a look at the important developments in the third quarter and follow with a status report on our ongoing card business. First our new program wins. The government of Angola has contracted with DGM-Sistemas of Luanda, Angola for the delivery of a complete national ID management system. LaserCard teamed with DGM as the exclusive supplier of cards for the project. Contract calls for the delivery of an initial 8 million cards as infrastructure is built. In total we believe the program if implemented according to reported plans has the potential to generate up to $90 million for LaserCard over five years. The prime contract awarded to DGM-Sistemas is valued at more than $400 million. Our anticipated piece of the program would include optical memory cards, card personalization systems, printer consumables, installation and training services. We do not expect to record significant revenues on this project during our current fiscal year ending March 31, 2008.

We’re very excited by this win which is our first national level award for optical memory cards in the African continent. It’s an endorsement on our strategy to focus on ID management programs in rapidly developing markets and will be a key reference for other African nations looking at their homeland security requirements. The security characteristics and high data storage capacity of optical memory along with the fact that optical memory’s digital security has never been compromised where key factors emphasized in our proposal. After years of civil war Angola has made a commitment to rebuild a modernized infrastructure and reduce corruption. Angola is a oil rich country whose economic growth is among the highest in Africa. As part of this process Angola has informed our value added reseller that our cards will form the photo verification cornerstone with Angola’s upcoming national elections to be held in 2009. [Inaudible] in the renewal process and saw the need for secure identification for citizens. What started as an ID card for a newly built business friendly [inaudible] center developed into a national ID card project. Our success in being awarded this project is the culmination of three years of hard work. Project meetings will be held in the coming weeks to further define the implementation schedule.

Our second new win also demonstrates our increasing success in expanding revenues by the sale of complete solutions. We were very pleased to be awarded a contract by the government of Costa Rica for the supply and implementation of the complete ID management system for foreign residents. Our deliverables include the installation and implementation of an integrated suite of hardware and software solutions covering enrollment, data base management, card issuance, quality assurance and significantly LaserCard’s newly developed fingerprint biometric check system to detect and prevent duplicate enrollments. Valued at approximately $1.8 million in hardware, software, initial card stock and service delivery, this agreement demonstrates our continuing evaluation from technology supplier to comprehensive solutions provider. This builds upon our recent success installing distributed national ID card issuance solutions for a country in the Middle East. Revenue from the Costa Rica project will be recorded following the governments acceptance of the equivalent software and cards. This is expected to occur during the spring or summer of 2008 once the system is fully installed. We anticipate further card orders in the coming year. Significantly the Costa Rica government designed a new foreign residence card to be inter-operable with the existing US and Canadian optical memory base authentication and ID verification system. At the strategic level we see this program as an important bridge head into Central and South America.

Meanwhile our German operations expertise card manufacturer resulted in an significant win which demonstrates our ability to generate revenues outside traditional ID card business and is further evidence of our continued strategic diversification. CCD our specialty card subsidiary won a supply and consulting contract valued at approximately $8.5 million for the delivery and ongoing support of a turnkey plastic card manufacturing plant in Saudi Arabia. The agreement includes the supply and installation of state of the art plastic card production equipment, transfer of manufacturing know how, training and ongoing production support. The customer Golden Chip Company is a subsidiary of Al Jabr Trading Company. The new factory will produce and personalize a range of card types including high quality scratch off cards, loyalty cards, SIM card and credit cards for the telecommunication and banking sectors. The contract does not include construction or preparation of the factory building. Similarly rights to optical memory cards technology or its manufacturer are not included the arrangement. The factory is targeted by completion by Golden Chip in approximately one year. Revenue recognition is schedule to occur upon the completion and acceptance of the factory.

Let’s now move on to the status of our ongoing card programs beginning with Italy and the citizen ID card program. On January 4th the Italian state printer Poligrafico issued a request for proposal inviting business to qualify for the nationwide client support of more than 9,000 data collection stations for the enrollment of citizens in the program. The deadline for submissions is February 15th and the government has announced the goal of equipping all municipalities with data collection capability by the summer of 2008. We are very encouraged by this RFP and see it as a demonstration of commitment by the government to the full implementation of the program. It is important to note with the anticipated procurement which is valued at up to $85 million also includes installation and support services for approximately 13,000 secure optical memory card encoders. We expect these encoders will be purchased from LaserCard by a separate procurement in the near future.

Turning to North America; in the US we shipped $1.2 million worth of green cards and Laser visa border crossing cards under our subcontract from the Department of Homeland Security. As we mentioned last quarter, the Department of Homeland Security has initiated a project to upgrade the green card design now 10 years old to maintain its preeminent position as a world leading ID card. It appears that DHS is moving forward with the next generation card based on design and security upgrades we have proposed. In a second positive step, the DHS has now contracted the award for updated personalization equipment to be installed in the facility where green cards and border crossing cards are personalized. This contract is a clear commitment by the DHS to their continued use of optical memory into the future and our involvement will be in supplying secure encoders. Transition to a redesigned card could cause delays in orders as the DHS reducing its inventory of existing cards. If the reduction of inventory takes place in the current quarter it would negatively impact revenues for the year. However, as we mentioned last quarter we anticipate that any slowdown in delivery will be followed by a corresponding increase in orders of the newly designed cards required to replace the safety stock. We are working to manage this transition with as little interruption to production and supply as possible and in fact, we anticipate receiving a new purchase order for additional card stock during our March quarter.

Moving on to Canada; the value of permanent resident card shipments was approximately $1 million in the third quarter. We believe that the current quarter will be more in line with historic levels of approximately $500,000. Last week the government of Canada issued a request for information indicating their intention to update the permanent resident card and issue a new five year contract for this program starting in 2009. Naturally, we will work hard with our partners to propose a winning solution for the continuity of this program.

Moving on to the national ID card project in the Middle East. In Q3 we completed the shipment of approximately $4.1 million worth of cards fulfilling orders under two current contracts. These cards will be issued by both a central bureau which will serve smaller remote communities and by the existing countrywide network in service centers in larger cities many which were installed by us during 2006. We are pleased to see that the card issuance infrastructure continues to be strengthened. According to our prime contractor approximately 37 cities now have the ability to issue cards. Under the decentralized issuance contract, the customer has the right to buy $35 million worth of additional cards over the next three years and we understand from the customer that we should anticipate a purchase order in the range of $1.5 to $2.5 million in the next few months.

In India shipment of vehicle registration cards to three states almost doubled in the third quarter to more than $1.4 million worth of chip ready optical cards. Much of the growth was attributable to increased purchases from the state of Maharashtra which is beginning to issue more cards as this program grows. We believe that third quarter purchases were higher than the current issuance rate however, we expect revenues will continue to exceed the historic average of $500,000 to $600,000 per quarter. As we previously said, we expect revenues to double from these levels over the next year driven by the expansion of infrastructure, increasing vehicle ownership and the potential adoption of optical smart cards by other states which are in the progress of upgrading there vehicle document programs.

Coming back to CCD, in addition to the card factory contract with Golden Chip Company discussed earlier, our German subsidiary has signed a $4.3 million three year contract in the third quarter with its largest customer an international major sporting event organizer. This is the first time this customer has signed a multi-year agreement with us and it’s an indication of CCD’s commitment to customer satisfaction. Meanwhile CCD is also pursuing a number of opportunities for the passport data page, university student card and traditional business lines.

Moving on to Eastern Europe, this week executives from Prevent Global DD the parent organization responsible for the second source optical card manufacturing project in Sylvania visited us to plan their projects roll out. They made a payment of $800,000 which covers future program support payments in anticipation of services to be rendered in the summer. Payments received to date total slightly more than $27.3 million. One of the projects that we have been working on is the passport card for the US government. General Dynamics has been awarded the passport card contract. We are the exclusive supplier of optical cards but we are not the exclusive supplier of non-optical cards. We understand that the kick off meeting between the client and general Dynamics is eminent but at this point we have no further information on any decisions regarding card technology.

To summarize the quarter most significantly, LaserCard Corporation is executing on its key objectives to expand our customer base, realize higher project revenues by selling more systems and services based around our core technology and finally to evolve into a fully integrated solutions provider. We are currently focused on winning about 10 national level programs in more than 10 countries around the world where we believe there are opportunities for further growth and diversification. Because of the nature of such projects some of these programs have been in our pipeline for up to three years while others are newly added this month. Our objective to win new business clearly requires a long term commitment as well ongoing attention to each country’s evolving needs. In this fiscal year alone our sales staff has visited government ministries in over 42 countries around the world. Our recent success demonstrates our ability to translate pipeline opportunities into program wins.

Before I hand the call back to Richard for his wrap up I would like to take this opportunity on behalf of my colleagues and myself to thank him for his 26 years of service in numerous executive positions including his role as CEO for the past three years. Richard has been central to the creation and development of our core optical memory card business. Through his tireless leadership and commitment the company’s original secure ID product line started with the flagship US green card in 1997 and has been augmented with more than 10 other US and foreign government programs to date. Now, back to Richard.

Richard Haddock

In wrapping up I would like to congratulate everyone in the company as well as our key value added sellers for their great commitment to making LaserCard one of the leading suppliers of secure ID solutions in the world. We have as a team, successfully planted the seeds for long term prosperous growth for our core optical memory card products with over 12 major government programs in hand and many more in the pipeline. It is with no small regret that I leave the company at this juncture however, I am pleased with our goal of achieving over $100 million in revenue is in sight based upon the implementation of our existing customer programs. I thank the shareholders, customers and most of all my fellow employees for their support and friendship in my career here at LaserCard and wish them great success in the years to come. We will now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Brian Ruttenbur. Your line is open.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

First question, US government in the period - let me back up and say first of all great win in Angola and very good quarter to start with and then I’ll move on forward to the US government and ask about do we expect zero revenue in the current quarter the March period? Is that likely and then it kind of ramps in the June period?

Steve G. Larson

Not necessarily Brian. We right now we do have zero back log there but there is potential for orders in the quarter, their inventory levels are down below what they would normally consider their safety stock. But there’s no guarantee it could move into the next quarter but we would expect to get some kind of an order this quarter whether it calls for deliveries this quarter is unclear.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

And it’s still obviously an optical memory based system that’s going to be similarly priced to what you were providing before?

Steve G. Larson

Well the next order that we get will be for the existing cards because the new cards are still under development.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

When will that be complete? The new card? When will the new card be ready to be issued?

Stephen D. Price-Francis

I’m not sure we can precisely specify that date at this point because there are certain processes that have to be gone through obviously.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

I mean are we talking summer, fall in 2008?

Stephen D. Price-Francis

In our opinion we are talking closer to the fall than the summer.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

And then the Middle East, you currently don’t have any orders right now in back log that you anticipate in the next couple of months there will be some so you could have a situation where there would be no orders or you could have a couple of million dollars worth in this period.

Steve G. Larson

Right.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

Okay. The Italians you don’t have anything in back log right now but you anticipate possible drives by the end of March but maybe not cards by the end of March, is that realistic?

Mark Holiday

No we still believe that it’s possible to get a card order and we do have some inventory on hand so we could even get an order late in the quarter and deliver.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

How much inventory do you have in that area? A couple of million cards?

Mark Holiday

We can’t really talk about that.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

Okay. That’s fair enough. The specialty cards seem to be ramping up. This next quarter you typically a seasonally strong period for that business.

Steve G. Larson

Yes. They have this sporting event access card that will pick up in the next quarter and actually should help the margins also.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

That was one of the other questions, why was the margin dropped from 20% down to 14%?

Steve G. Larson

In the quarter the orders were tough coming and they did accept some jobs that more or less just paid the people instead of laying off the people they were able to keep the factory going.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

But you don’t anticipate that going forward with all these other awards, right?

Steve G. Larson

No.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

Okay so how much of that $4.5 or that sports card order will come in, in the quarter? Half a million, $1 million?

Steve G. Larson

I think well, that’s three years so a third of it is. I think it is over the next three quarters. So, say half a million per quarter for the next three.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

So it could be like a $3.7 million quarter in that area?

Steve G. Larson

That’s been a - it’s a long standing customer that they’ve had.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

Okay so you can’t just add it on there. So maybe $3 to $3.5 million or something like that? Okay moving on down SG&A I understand about $250,000 of that was related to Richard in the period and another half million can be related to him in this next quarter. Is it just to increase travel or what is going on that is causing SG&A to go up so much? I don’t fully understand.

Steve G. Larson

Well we’ve spent more money in the quarter on some heavy lobbying in the DC area because of the activities we saw there.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

Okay.

Steve G. Larson

That was part of it.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

Will that go away this quarter?

Steve G. Larson

Yes. But, it will still go up because of the additional retirement pay accruals that we will see happening.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

It should go up a couple of 100,000 from.

Steve G. Larson

Two to three hundred, yes.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

Okay so let me start asking Stephen Price or Richard these questions about Angola. As I understand there’s 8 million cards that are going to be issued in the next 15 months. When are the exact elections in Angola? The next ones in 09.

Steve G. Larson

Well there’s a Presidential election that is planned in 09 although, they don’t have a specific date fixed to it at this point as far as I know.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

Okay it’s just sometime in 2009 and they’re trying to get all their citizens with a national ID card with a biometric, your optical memory card

Steve G. Larson

But be careful Bryan because this is going to be a big job. I wouldn’t go and throw 8 million cards in your model for the next 15 months.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

Okay so 16 months. Okay so I’m, just trying to figure out how they’re going to attempt to do this it seems like a heck of an undertaking to do it even over two years, let alone 15 months. Are they already carrying paper documents now?

Steve G. Larson

Yes they are. A previous sub-contractor has been supplying them with a simple [peslin] based ID card. While they’ve been going through this procurement they’ve allowed their safety stock of that to dwindle. They actually were interested in us supplying those during the transition period but I think we’ll probably move directly into the new card. So they do have some infrastructure for the issuance of national ID card documents already in place. However, I mean this is obviously a great undertaking and the prime contractor described to me part of their requirement which is to actually have 100 mobile vehicles outfitted with the ability to both collect the data and issue the cards to go out throughout the country to the remoter areas and get these cards distributed on site to the people. So, they will have these 100 mobile stations plus 40 issuance stations at the major cities. So it’s a doable job given somebody wants to go do it and implement on timely manner. So, it’s really up to the prime contractor and the commitment of the customer whether it can be done or not.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

How can that be afforded? It seems like a poor country. How are they coming up with $400 million US dollars?

Steve G. Larson

They have a lot of oil. They are one of the greatest growth areas in Africa; is fueled by their wealth in oil as well as diamonds and gold. They do have strong natural resources, they’re trying to redevelop the country after their years of civil war and they are investing in rebuilding their infrastructure and that is actually how this started. Our buyer had a relationship to the architect to this new urban renewal center there that they were building to attract more foreign business to the country and they wanted an ID card for this new community they were putting together and through those connections it grew into this ID card program. It’s actually going to be one of the best ID cards ever manufactured in the world. It’s the first card that we know that is going to store images of all ten fingerprints as well as their minutia files on the card. They intend to use a portable reader in the field to validate the citizens ID. So it’s really a pretty strong ID credential that they are planning on.

Brian Ruttenbur – Morgan, Keegan & Company, Inc.

There is no chip on there? Or, is there a chip?

Steve G. Larson

They don’t need a chip for that. There’s no chip, pure optical.

Operator

Your next question comes from the Jeremy Grant. Your line is open.

Jeremy Grant – Stanford Group

Congratulations on a strong quarter and the new wins and also before I get started all the best to Richard in your new endeavors. Brian always asks a lot of questions and I don’t have nearly as many as I started with. Starting with the big announcement from today which is Angola. Are you guys able at this point to give some rough guidance as to how much you should see revenues sort of roll out from year-to-year from here with that $90 million target.

Steve G. Larson

We really don’t. I think that as they have the meetings, I think the kick off meeting is next week. We will just learn more as time goes on and as far as how the implementation actually will be.

Jeremy Grant – Stanford Group

Okay. It’s going to be an optical only card is there sort of a rough price point that you are expecting to get per card that you are willing to share at this time?

Steve G. Larson

It’s in our range of our ASP in the $4.00 range.

Jeremy Grant – Stanford Group

The other question I had since the moment I saw the press release this morning I said, “I don’t know much about Angola.” So, I wondered over to the CIA’s fact book on it and as you pointed out before in your conversation with Brian, great GDP growth, a lot of money coming in from oil, also troubled country just emerging from civil war and one thing that the fact book at least talked about it is that it’s a tough place to do business with all the different corruption problems in the country. In your view do the difficulties working in the sort of place present certain risks or challenges that you are going to have to factor in as you are going forward?

Steve G. Larson

We will be somewhat insulated from that because we are a supplier to the buyer and to the prime contractor and we require advanced payments with orders and things like that, so I think that it’ll be sort of normal business for us.

Jeremy Grant – Stanford Group

Okay. Then just too sort of clarify again the goals to get the first slug of like $8 million cards out sort of by before the election that would be toward the end of 2009. From there it would go toward less of a sprint and more kind of a sustainment mode at that point of replacing cards or issuing new cards to people as they become of age.

Steve G. Larson

That’s their goal

Jeremy Grant – Stanford Group

So I guess it’s fair to assume as we are looking at the 90 that there would be a decent chunk of that work that would be front loaded as opposed to being spread evenly over the five years.

Steve G. Larson

Yes it would be more front loaded then spread evenly. Sure

Jeremy Grant – Stanford Group

Do you have any estimate as to what quarter you think you would be in line to see the first revenues? Would there be anything in the March quarter? I realize you still have to have the kick off but this has got to start pretty quick if you are going to get the cards out in time.

Steve G. Larson

Yes if there is anything in the March quarter it won’t be a lot but, there’s possible that there might be some initial cards and encoders that would go out this quarter.

Jeremy Grant – Stanford Group

Okay. So, really we should start focusing on the June quarter when you start to see some ramps of shipments.

Steve G. Larson

Right.

Jeremy Grant – Stanford Group

I think that’s my question on Angola. I am just kind of going down the list, you guys had plenty to talk about. Costa Rica not a lot of questions. On the new Middle Eastern card contract you know, it’s coming from the Germany specialty cards division where I guess gross margins have been as low as 14% this quarter, more typically around the 23 to 25% range. As that 8.5 million contract is factored, in what kind of impact on the gross margin will we forecast?

Steve G. Larson

That will be in that 20 to 25% range.

Jeremy Grant – Stanford Group

So sort of par for the course in terms of impact on that?

Steven G. Larson

Right.

Jeremy Grant – Stanford Group

And to go down a little deeper, do you have a time line of when you think revenue will start to be recognized on that? Do you have to deliver everything at once to get acceptance? And then, you get a big chunk of $8.5 million?

Steve G. Larson

Correct. That’s correct. It will be all at once and probably either in our December or March quarters next year.

Jeremy Grant – Stanford Group

And then on the sporting organization, if I’m hearing correctly this is just sort of to be applied in the average, say right around $3.25 base of business that you have, this won’t be added to it significantly?

Steve G. Larson

That is correct.

Jeremy Grant – Stanford Group

The next question I had was on Italy. So it sounds like the main thing right now would be a separate - there will be support required for the installation and this particular procurement that’s out for the encoders but then separately they will actually directly to you or your buyer in Italy to buy the actual devices?

Steven G. Larson

The encoders will be purchased through our buyer in Italy, yes.

Jeremy Grant – Stanford Group

Okay. But, that will be a separate procurement from the one that you had the press release on a couple of days ago.

Steve G. Larson

It will be yes. We know that.

Jeremy Grant – Stanford Group

Is there any reason to think that the margins on those would be any different, better or worse than they’ve been in the past? I know these have been kind of a loss leader for you in the past.

Steve G. Larson

Generally the encoders are priced near material and labor cost, a little bit of margin in there but, at lower volumes then you result in a loss because you’re not covering your fixed cost. So once you start seeing higher volumes go out to Italy and Angola specifically then, we would expect to at least cover our costs.

Jeremy Grant – Stanford Group

Okay but we should probably factor in a little bit lower gross margin when the chunks of the big shipment [inaudible].

Steve G. Larson

I mean you’re not going to have – if you have a wildly successful quarter, probably not going to have more than 10 to 15% margins in that segment.

Jeremy Grant – Stanford Group

Okay. It just helps as we’re modeling that. If you had to guess when those 1300 encoders would ship?

Steve G. Larson

In this year, I don’t think they’re – they’re not going to go out in one slug. I would expect t they would go out probably in the first three quarters.

Jeremy Grant – Stanford Group

Okay. That’s helpful. US turning to the new win with General Dynamics and congratulations on that. We thought one of your competitors was going to win that instead of General Dynamics. I know you’ve talked before that there’s two bids in one that would be a hybrid optical striped ID card and one that would be a polycarbonate card and I realize that you have not had the kick off yet and so it will be a little bit of time to figure out which option will be chosen. Understanding I guess where your ASP is on the optical striped card but, less in the polycarbonate? Does it really matter to you from a cost perspective or a margin perspective which product they choose?

Steve G. Larson

No. Of course we’d prefer it to be the optical card. RSP on it is higher while the margins are also better so, of course we prefer the optical solution. Of course, it fits in with our optical standard for the rest of the company.

Jeremy Grant – Stanford Group

And if they do go with the polycarbonate option would you guys be the card manufacturer for it getting the RFID inlays from someone else and then assembling them all together? Would that be the role?

Steve G. Larson

Yes. We do that now. But we’re not – we’re the exclusive supplier to them for an optical card but not necessarily for the other cards so there may be some split business. We will just have to see how that roles out.

Jeremy Grant – Stanford Group

Okay. That’s a good point to know. And then the question in Canada you mentioned that there’s an RFP to do an update of the card. Is this sort of a full and open competition looking at different platforms? Or, is this just what you’re doing with the green card right now to update the green card? Just as your doing an update to the green card platform that will still be optical stripe, is Canada doing the same thing?

Stephen D. Price-Francis

Jeremy just to clarify it is not an RFP it is a request for information. It’s the first round and then gathering information about what’s available out there. And, they talked about those vendors submitting information, asking for information on chips and other technologies as well.

Jeremy Grant – Stanford Group

Okay but it’s just an RFI so no one knows what they are going to do at this point?

Stephen D. Price-Francis

That’s right.

Operator

Thank you. Your next question comes from Nick Andrews. Your line is open.

Nicholas Andrews - Citigroup

Obviously, the other guys asked most of the questions out there. I just wanted to turn back to Angola a little bit. I just am trying to get it straight sort of a timing of revenues and what’s expected on margins, maybe not just on the card stuff but on the infrastructure that you’re providing? And, how we could start to see a roll out? And, what Angola has in place right now to be able to issue cards? I know there’s a lot of questions in there but, I can take one at a time.

Steve G. Larson

In terms of what they have in place now is that that they have been issuing a [tezaline] based document which is slightly better than a paper document and for that purpose they have some infrastructure. They have database of some fraction of the population, I really don’t know if it’s the whole population or some part of it. So, it’s possibly that they could use that to drive the start-up without having to go out and get the data from citizens. I’m not really clear on how much of that is usable in the startup role. I believe that there is a base to begin, with you are not walking into an empty room. They’ve also asked us with the prime contractor to help support the transition from that system over to their new system. Our role in this is primarily that of providing the cards and card printers, the interface for some of the data capture systems, but largely the card personalization side of things. We believe that there’s latitude that we could potentially provide more system solutions to them. I think we are eager to have the kick off meeting and serif we can get a bigger piece of the pie.

Nicholas Andrews - Citigroup

Okay great. When can we realistically start seeing a ramp on the issuance of cards?

Steve G. Larson

I think you’re going to have to wait until about this time next quarter when we have a lot more information and there’s enough time for planning to really see how that will go. I mean we’ll really know then a lot more about how quickly this thing can be put together.

Nicholas Andrews - Citigroup

What about post the rush to get all of these cards out the door for the election, what is the expectations for sort of the annual run for these cards?

Steve G. Larson

They have a very high youthful population, think half of their population is only 17 or 18. So they will have a lot of new citizens coming into being deployed here, or so they believe. That’s why the original tendered document called for so much additional potential cards, I think due to that growth. I don’t know what the average run rate will fall back to on a going forward basis.

Nicholas Andrews - Citigroup

Do you know how long the cards are valid for? Are these 10 year cards or are they indefinite?

Steve G. Larson

I don’t actually know that detail.

Operator

(Operator Instructions) Our next question comes from Brian Ruttenbur.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

First of all G&A going forward, how long is Richard going to be a drag on you guys? That was a joke by the way.

Steve G. Larson

That will be completely over by the June quarter.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

Okay. So will there be anything in the June quarter or will it be in to March?

Steve G. Larson

It actually depends, the certain payments will all be booked by the end of the March quarter, the numbers that I’ve mentioned. But there is the potential because we’re going to have to mark-to-market some of the stock options all the until May 24th.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

Okay so there’s going to be option related.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

Zero to maybe $100,000 or 150,000.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

But we should probably see a drop on the.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

You should see a significant drop for the June quarter.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

Then, the Angolan card that currently exists right now, the card that is being issued over there, how long does it last now?

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

I don’t know.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

Okay. I didn’t know if you didn’t know the new one or the old one.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

I think that one of the reasons - well defiantly one of the reasons that their doing this is that the current card issuing has not been too successful with the other vendors.

Richard Haddock

They had, again with many of these programs, difficulties with the previous system integrator that sort of - they’re not happy with. So, they look forward to a much more cooperative relationship with us in the future.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

Okay a couple of follow up questions on the past card. When will you find out if your part of the team?

Stephen D. Price-Francis

We understand Brian that the kick off meeting is eminent between the client and general dynamic and by that I mean in the next day or two. And so, I guess we should expect to have some news certainly within a few days.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

Okay so you’ll make a press announcement if your part of the team? Is that right? Is that fair to say?

Steve G. Larson

Yes. We’ll certainly make an announcement if and when we get an order.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

But, you won’t make an announcement if your just included as part of the team?

Steve G. Larson

It depends upon how clear the information is. I can’t answer that in a yes or no.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

And the past card, as I have read and maybe you guys can correct me, it’s supposed to get issued to around 12 million people potentially, is that right?

Stephen D. Price-Francis

Well the request for proposal speculates it on 14 million cards over 5 years.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

Thank you very much. That was helpful. And what you could provide would be anywhere from just a carbon fiber card to an optical memory card or a chip or the RFID including the optical memory. It’s a whole variety of things that you could potentially be involved with, right?

Stephen D. Price-Francis

Right. Whatever the technology decision is, we can supply the card.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

Okay very good. Moving on to a couple of follow ups on Italy, just to try and understand. On the CIE, the plan is that you have to respond to the tender offer by mid February and the Italian government wants to ramp this before their August break. Is that the goal that they have stated?

Steve G. Larson

Well I think there stated goal was to get the cities outfitted by the spring but I don’t think that’s terribly realistic but they probably could do it in the summer. I think before the August break seems like a reasonable target.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

What about your card capacity. With the Angolan stuff coming on and let’s just say they actually wanted those 8 million cards within 15 months. And let’s just say hypothetically that the Italians wanted their cards and the Middle Eastern customer wanted their cards and everything started going with all the stars lining up. What would you have to do?

Steve G. Larson

We are looking at that right now. We are putting together a plan. If you include equipment that would be upgrades to some of our existing equipment as well as equipment we would need for the capacity to do Angola at 8 million cards in 15 months and say 4 million Italian cards or something like that plus everything else we’ve got going. It would be probably about a $10 million capital expenditure.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

Would that be in California? Or, would that be in Germany? Or, would that be some other place?

Steve G. Larson

Right now it would be in California.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

And you have the ability to rent the square footage you need and things like that?

Steve G. Larson

We don’t need more space.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

You just need more equipment.

Steve G. Larson

We can do it in the space we have, Brian.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

On the PFE we’ve been talking about the CIE card but the PFE, can you talk about what’s going on? I know that this fall there was a hold up because there was a bunch of applications that were incomplete, had incomplete data. The people that had sent the applications in had actually sent their money in and then there was a special group that was working through all these issues to try and get the PFE forms filled out and get them out. Can you give us some kind of update what’s happening there?

Steve G. Larson

Actually I think where we left off is that they had received something over $700,000 paid applications and they were working at trying to get them issued. They have greatly improved the issuance process. They were investing in some automation of processing these enrollment forms and they bought additional issuing hardware to double the capacity of their issuance. But actually, since about Christmas I haven’t specifically asked a question of where they stand in terms of enrollments or number of cards but we think that program is just running fairly well.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

Okay where are card stocks for both the CIE and PSE because they have to be starting to run low.

Steve G. Larson

Well, I think in the case of the PSE we made about 1.5 or 1.6 million cards when that program first started. And as they say they got last quarter applications for about 700,000 or 800,000 so we anticipate that they are doing well in getting that out. But we should see in the order from more PSE cards.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

Okay and what about the CIE, where are there stockpiles? I read an article recently about Maples issuing their cards and other things like that, the CIE card.

Steve G. Larson

Well I don’t have a very timely update on that I knew that the inventory was done to around 1 million cards about a few months and they do continue to issue cards, and they certainly once they - this tender really did distract the management there because it’s the same group of people that put this tender together as it is who has to put together the order for encoders and the order for cards. This thing sort of happened in a serial fashion so we think that as they now sort of have cleared the decks of hardware tender getting out there we should be engaged in some more meaningful conversation about card stock. Actually, I’m planning to go to Europe next week and I will have some discussions about that then.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

The NOL where are you right now Steve on your NOL? So, if all this stuff starts hitting you will be actually dipping into that.

Steve G. Larson

Well, the NOL including our other differed tax assets amounts were right about $20 million. So it would take a while to get into that.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

Okay to burn that all off?

Steve G. Larson

Right.

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

Okay. The last question is what is the status with Richard leaving and a search for a new CEO? Is that maybe one for the chairman of the board, Bernard if he is on the call or somebody else? What is going to happen there? Is it going to be a search from outside or a search from inside?

Brian Ruttenbur - Morgan, Keegan & Company, Inc.

All I can say is that they are working with a national search firm and will be looking outside of the company for the person.

Operator

At this time I show no further questions. I would like to turn the conference back over to Mr. Haddock.

Richard Haddock

Okay thank you all for joining us here today and hopefully we’ll meet again with your new team next quarter. Thank you very much. Bye.

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Source: LaserCard F3Q08 (Qtr End 12/31/07) Earnings Call Transcript
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