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I.D. Systems, Inc. (NASDAQ:IDSY)

Q4 2007 Earnings Call

March 4, 2008 4:45 pm ET

Executives

Jeffrey M. Jagid - Chairman of the Board & Chief Executive Officer

Ned Mavrommatis - Chief Financial Officer, Treasurer & Corporate Secretary

Kenneth S. Ehrman -> President, Chief Operating Officer & Director

Peter M. Fausel - Executive Vice President, Sales, Marketing & Customer Support

Analysts

Brian Ruttenbur - Morgan Keegan and Company

[Tom Casera] – Avondale Partners, LLC

Matthew Hoffman – Cowen & Co.

Chris Ryder – Lucrum Capital

Seth Potter - Merriman Curhan Ford

Michael Ciarmoli - Boenning & Scattergood, Inc.

Charlie Anderson – Dougherty & Company

Operator

Good day and welcome to the I.D. Systems, Inc. 2007 year end results conference call. As a reminder today’s conference is being recorded. At this time we would like to turn the conference over to your host, Mr. Jagid. Please go ahead.

Jeffrey M. Jagid

Thank you very much for joining us today. I’m Jeffrey Jagid, the Chairman and CEO of I.D. Systems. Joining me today are Ned Mavrommatis, our CFO; Ken Ehrman, our President and Chief Operating Officer; and Peter Fausel, our Executive Vice President of Sales, Marketing and Customer Support. A Q&A period will follow our prepared remarks.

Before we begin let me reiterate the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. The following discussion contains forward-looking statements that are subject to risks and uncertainties including, but not limited to, the impact of competitive products, product demand and market acceptance risks, fluctuations in operating results and other risks detailed from time to time in I.D. Systems’ filings with the Securities and Exchange Commission. These risks could cause the company’s actual results for the current fiscal year and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of the company.

For the year ended December 31st, 2007 I.D. Systems’ revenues were $17.1 million compared to $24.7 million for 2006. GAAP net loss for the year was $7.3 million compared to GAAP net loss of $1.6 million for 2006. Taking into account the effective stock base compensation our non-GAAP net loss for 2007 was $4.1 million compared to non-GAAP net income of $1.4 million in 2006. We fell short of our revenue goals in 2007 primarily because we entered the year overly reliant on a narrow base of key customers. Most notably the United States Postal Service accounted for $15.1 million or 61% of our revenues in 2006. When postal revenues decreased to $6.2 million this year we did not have enough alternative revenue sources to make up for it. Consequently we have been focused on increasing our investment in our sales and marketing organization, further developing additional sales channels and increasing our market penetration as well as continuing to enhance the market advantages of our patented wireless technology.

Despite our revenue setback we did make substantial progress toward our goals in 2007. We expanded and reorganized our sales and marketing team, enhanced and added marketing partnerships and won initial programs with important new customers including Kellogg’s, John Deere, the US Department of Defense, the San Francisco International Airport to name a few. At the same time we continued to earn repeat business from core customers in 2007 including the Post Service as well as Wal-Mart. Wal-Mart generated 60% more revenue for us in 2007 over 2006 as they nearly tripled the number of distribution centers deploying our system and although our revenues from the Postal Service were lower this year compared to last, this is still our number one customer. Postal has never been more enthusiastic about the economic benefits our technology is generating and we are working closely together with them to make the task order process smoother and easier in 2008. We expect significant revenue contributions from of these key customers in the coming year.

We also continued to advance our technology in 2007 focusing system enhancements on new opportunities for revenue generation including new product applications like our Opti-Kan system, key vertical markets such as aviation and the military and key geographical areas, namely Europe. Our technology continues to set the standard for control, tracking and managing physical assets such as material handling equipment, airport vehicles and rental cars and for generating a significant return on investment for our customers. I am pleased to report that our products and services continue to sustain a strong growth profit margin of almost 48% in 2007 surpassing the 2006 mark of just under 45%.

For 2008 we remain committed to capitalizing on our expanded sales organization, diversifying our customer base, expanding our product offerings and working toward a more predictable quarter-to-quarter revenue stream. As a reflection of this confidence we are providing guidance on revenues for the year ahead for the first time in our company history. As announced in our financial results press release this afternoon in 2008 we expect to achieve revenues of approximately $24 million a 41% increase over 2007. I look forward to reporting on our continued progress to you in the future.

Now let me turn the call over to Ned Mavrommatis, our CFO, to review the company’s financial results for the year in a bit more detail.

Ned Mavrommatis

As Jeff noted revenues for 2007 were $17.1 million compared to $24.7 million for 2006. The decrease was attributable to a decrease of $8.9 million of revenue from the United States Postal Service offset by an increasing revenue from other customers. GAAP net loss for 2007 was $7.3 million or $0.66 per basic and diluted share compared to GAAP net loss of $1.6 million or $0.15 per basic and diluted share for 2006. Non-GAAP net loss for 2007 was $4.1 million or $0.36 per basic and diluted share compared to non-GAAP net income of $1.4 million or $0.13 per basic share and $0.11 per diluted share for 2006. Non-GAAP results are calculated by adjusting GAAP net results for the impact of stock-based compensation which was $3.3 million in 2007 and $3 million in 2006. For the three month period ended December 31, 2007 revenues were $3.7 million compared to $3.9 million for the same three month period ended December 31, 2006. GAAP net loss for the quarter was $2.5 million or $0.22 per basic and diluted share compared to GAAP net loss of $2.6 million or $0.23 per basic and diluted share for the fourth quarter of 2006. Non-GAAP net loss for the quarter which excludes $853,000 in stock-based compensation was $1.6 million or $0.14 per basic and diluted share. Non-GAAP net loss for the corresponding quarter in 2006 which excludes $1.2 million in stock-based compensation was $1.4 million or $0.12 per basic and diluted share.

For the fourth quarter SG&A expenses excluding $662,000 in stock-based compensation were $3.6 million. We expect quarterly non-GAAP SG&A expenses to increase slightly from these levels in 2008. R&D expenditures for the fourth quarter excluding $179,000 in stock-based compensation were $542,000. We also expect quarterly non-GAAP R&D to increase slightly from these levels in 2008. Gross margins for the three month period ended December 31, 2007 were 44% which includes a 38.3% gross margin on product revenue. This resulted from a one time $342,000 inventory write off. Excluding the write off gross margin on product revenues were 51.7% and overall gross margin for the fourth quarter was 53.2%. We expect gross margins in 2008 to be approximately 50% plus or minus a few points depending on the mix of product and service revenue.

Our financial condition remains strong. As of December 31, 2007 we had $65 million in cash, cash equivalents and marketable securities which equates to $5.90 per share outstanding. Before I turn the call over to Pete Fausel I also want to give you an update on our stock buy back program. As of today we purchased approximately 647,000 shares for approximately $7 million at an average cost of $10.88 per share.

With that let me turn the call over to Peter Fausel to give you a little more detail on our sales and marketing efforts.

Peter M. Fausel

As most of you probably know I started with I.D. Systems late in the first quarter of last year and was tasked with instituting significant changes to the company’s sales, marketing and service organization guided by five strategic elements. Number one, implement and execute a proven solution sales process backed up with appropriate technical resources and sales tools to achieve more consistent, predictable domestic revenue growth. Number two, focus on key vertical markets like aviation, automotive, the government and car rental industries. Number three, leverage value-added channel partners to accelerate our market penetration and expand our sales pipeline. Number four, improve and accelerate customer benefit achievement through introduction of an introduction of a new performance services team. And five, expand activities in Europe. I think we made substantial progress in each of these areas in a relatively short period and our efforts started to bear fruit in the second half of 2007. We expanded and reorganized our sales and marketing teams not only adding experienced sales personnel, but also bolstering our business development, our vertical market, customer service, international sales and marketing communications groups.

As a result of these efforts, I.D. Systems added several significant new customers during the year including Kellogg’s, the world’s leading cereal producer; Deere & Company, the world’s leading manufacturer of farm and forestry equipment; 3M, a diversified technology company; FMC, a diversified chemical company; Nucor, a major steel manufacturer with more than 30 operating facilities in the US; the National Center for Manufacturing Sciences, a government funded organization that introduces innovative commercial technologies to the Department of Defense to generate operational benefits and cost savings; and San Francisco International Airport, which launched an initial pilot of our AvRamp system under a transportation security administration program.

The last two wins I just mentioned were a direct result of our emphasis on vertical markets. We now have dedicated market managers focused on the Department of Defense where our technology enhances vehicle maintenance and mission readiness and the aviation market where our system controls and monitors aircraft ground support equipment and airport secure airside area of operations. We also have dedicated vertical market managers for the automotive market where we have enjoyed considerable success in the past and on the civilian side of the government where our program with the Postal Service has been so successful over the past three years. The new business at Deere and Kellogg’s was facilitated by our marketing partnership with NACCO Materials Handling Group, the leading global forklift manufacturer that distributes and supports I.D. Systems’ products through its Hyster and Yale brand dealer networks. NACCO dealers also played a key role in our Wireless Asset Net system deployment at Chrysler this year which incorporates our new Opti-Kan application to automate and optimize task allocation which Ken will talk about a bit more in a few minutes.

Not only did our channel activities with NACCO dealers increase significantly in 2007 guided by our business development team, but NACCO itself became a new customer when it deployed our Wireless Asset Net system at its primary US parts distribution center to optimize its own forklift fleet operations. We engaged many other potential strategic partners in 2007 including other major lift-truck manufacturers and we entered into a marketing agreement with RedPrairie Corporation, a leading supply chain software provider to integrate our real-time asset monitoring capabilities with RedPrairie’s workforce management tools. We have started a cooperative marketing initiative with RedPrairie to target this unique labor optimization solution to manufacturing and distribution enterprises across North America.

I want to go back to Kellogg’s for a moment because it was significant in one other respect. Our new Advantage Support program provided by our performance services group was one of the differentiating factors that helped us win the business there. Our performance services offerings also generated a new revenue stream for the company from existing customers in 2007 when the Postal Services, Walgreen’s, Wal-Mart, Nissan and others entered into Advantage Support contracts. Wal-Mart has clearly derived significant benefits from our Wireless Asset Net industrial vehicle management system as it expanded system deployment to 21 distribution centers in 2007 generating as Jeff noted 60% more revenue for I.D. Systems than it did in 2006. In addition, Wal-Mart assisted us in writing a case study on their experience with our technology and authorized to promote this case study on our website and in industry publications. To our knowledge, Wal-Mart does not often provide this type of implicit endorsement for its vendors. Although Wal-Mart was our fastest growing customer in 2007, the United States Postal Service remained our number one customer overall as Jeff said, expanding the number of facilities implementing our products and services to 80.

Despite our decrease in revenue from the Postal Service in 2007 compared to 2006 this key customer continued to be one of the strongest proponents of the value of our solution and has indicated that it will continue to expand our technology across its enterprise. In fact, we have agreed on a process that will expedite the issuance of task orders in 2008 and we expect to report more soon on the continuance of our national contract with the Postal Service.

Another existing customer that continued expanding implementation of our Wireless Asset Net system in 2007 was Alcoa. Its state-of-the-art manufacturing complex in Iceland became the sixth major Alcoa facility to deploy our technology and the first facility of any kind in Europe. This initial success in Europe reflects both an enhanced product specification which Ken will discuss in a moment and the focused efforts of our European business office. Also on the European front we are in the process of finalizing a strategic marketing agreement with a strong pan-European supply chain technology partner and we are significantly stepping up our marketing efforts in Europe.

I.D. Systems continues to have the core strength that made us one of the fastest growing technology companies in America, a rich portfolio of intellectual property, leading edge wireless technology and software, strong financial resources and an enviable base of blue chip customers generating an impressive return on investment using our products. I look forward to reporting to you again in the near future on our continuing progress.

I would now like to turn the call over to Ken Ehrman, our Chief Operating Officer.

Kenneth S. Ehrman

I’d like to review our new applications market-specific product offerings some of which Pete alluded to which have helped us to increase penetration in our core accounts, diversify our customer base and help improve the predictability of our revenue stream. Adapting our Wireless Asset Net system hardware to comply with European regulatory requirements was an important aspect of winning the business for Alcoa’s new facility in Iceland. Our engineering team augmented our system in 2007 with a new electronic component configuration to meet European compliance and regulatory standards on wireless transmission and electromagnetic emissions known as [ETSE]. In addition we re-engineered our component level circuit boards to meet the new world standard on lead content in electronics known as RoHS. This successful internationalization of our system is an important step in the development of our business worldwide and particularly in Europe. Both in Europe and domestically the 2007 launch of our new AvRamp system, a version of the Wireless Asset Net branded and configured for managing aircraft ground support equipment at airports has generated a high level of interest. AvRamp is the culmination of almost $6 million invested jointly by the Transportation Security Administration and I.D. Systems and it is the only system of its kind both TSA tested and FAA approved for use at airports.

In the fourth quarter of 2007 San Francisco International Airport became the first major airport to acquire the AvRamp branded system. The system is designed to optimize airport ground handling operations by minimizing the quantity of equipment needed in the airport operations area, helping ensure equipment is in the right place at the right time to minimize flight delays no matter what flight schedule changes occur, directing tasks to equipment operators with dynamic automated work allocation tools, reducing damage to airplanes and airport infrastructure caused by ground support vehicles and providing a vital layer of security in the airport operations area through remote vehicle access control, geo-fencing and other security risk mitigation tools. In addition to its comprehensive operational functionality, the AvRamp system communicates an unlimited number of information between mobile equipment and management computers with a zero ongoing wireless communication piece. This capability which we call WiFree communications gives AvRamp an important cost advantage over competing systems that use mobile data subscription services like GPRS.

Another product first in 2007 was the initial deployment of our new Opti-Kan application, an optimized wireless electronic kanban system. Kanban refers to a method of signaling for parts replenishment on an assembly line popularized by Japanese auto manufacturers to achieve just in time production efficiencies. Our Opti-Kan system, used on conjunction with our Wireless Asset Net industrial vehicle management system automatically signals vehicle operators with task assignments prompting them to drop off or pick up materials at specified points in manufacturing operations at the optimal time. This enables fewer operators to cover a larger geographic area on the production line. This year Chrysler became our first customer to deploy the Opti-Kan system and it generated an immediate quantified and significant reduction in labor costs.

Another new productivity tool we introduced in 2007 was an enhancement to the Wireless Asset Net system called Resource Management which automatically collects route and travel times to perform various tasks. This tool is developed under a contract awarded to I.D. Systems by the US Postal Service to help gauge the efficiency of key material handling operations. This tool helps create industrial engineering standards and enforce compliance with those standards. These new optimized standards are then used to determine weekly and annual staffing levels. This Postal Service funded contract is another reflection of Postal’s commitment to and benefit from our technology.

Our ongoing integration of productivity tools such as Opti-Kan and Resource Management to help customers achieve continuous operational improvement is one way our Wireless Asset Net system maintains competitive advantages and provides a sustained value proposition. For some customers, like the US Department of Defense, vehicle maintenance management is just as important as productivity. According to the Secretary of Defense’s Office for Acquisition Technology and Logistics, maintenance costs absorb 16% of the DOD budget or more than $80 billion annually and both the dollars and the percentage of the budget are actually increasing. Maintenance is also a critical factor in the military’s mission to sustain optimal material readiness. In this application our Wireless Asset Net system has a number of unique abilities to reduce maintenance costs and manage vehicle operating conditions. For example, the system has a safety inspection checklist architecture that enables automated system responses from management notification to vehicle shutdown to define maintenance problems. The system also enables enforcement of maintenance schedules to remote vehicle lockout and real-time location visibility so vehicles can be quickly retrieved. We therefore hope to leverage success in our new program at the Sierra Army Depot funded through the National Center for Manufacturing Sciences into much broader opportunities within the GOD.

On a final note, I’d like to mention that in 2007 we continued to refine our automated rental car management system and we expect that our engagements with leading US rental car based companies will result in a revenue contribution from this application in 2008.

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

Jeffrey M. Jagid

That concludes the formal portion of our call. I would now like to open the call to questions from our listeners.

Question-And-Answer Session

Operator

The question-and-answer session will be conducted electronically. (Operator Instructions) We’ll take our first question from Brian Ruttenbur with Morgan Keegan.

Brian Ruttenbur - Morgan Keegan and Company

First question is about the guidance, the $24 million that you give in revenue guidance for 2008, can you give us some kind of breakdown that 20% is going to come from US Postal, or 40% is going to come from US Postal and Wal-Mart, some kind of confidence level?

Ned Mavrommatis

If you look historically obviously the big three customers that attributed to revenue from a percentage standpoint was Postal, Wal-Mart and third was Ford. I think without giving actual percentages we expect that obviously those customers are going play a big part in the $24 million. However, one of the big pushers that we’re doing by building this sales force and the sales engine is to diversify our customer base so we should see additional revenue coming from new customers as well.

Brian Ruttenbur - Morgan Keegan and Company

So do you think that those three customers will contribute more than a third, 40%, 50%? Is there any kind of number that you can give me on that, broad, between those three?

Ned Mavrommatis

Like I said, without giving actual percentages, however, if you put them together I do believe they’re going to be more than a third.

Brian Ruttenbur - Morgan Keegan and Company

And then maybe can you talk about what you have in backlog right now? Why you have confidence in that $24 million?

Ned Mavrommatis

As you know we don’t disclose backlog, however, we do have a backlog that we’re delivering in the first quarter. Unfortunately, I would love to sit here and tell you that the backlog is $24 million and all we have to do is deliver it, there’s still a lot of work to be done. But what gave us comfort in giving guidance is that the pipeline is becoming a lot more real and there’s still work to be done but we feel comfortable with the $24 million, that’s why we’re giving at as the guidance number.

Brian Ruttenbur - Morgan Keegan and Company

So do you think US Postal and Wal-Mart and Ford will be up from 07 levels in your 2008 guidance?

Ned Mavrommatis

You mean from an absolute dollar standpoint?

Brian Ruttenbur - Morgan Keegan and Company

As the absolute dollar. I think you did $6.2 million from US Postal I think you said in 2007. Do you think you’re going to do more in 2008 than you did in 2007 in those three big customers?

Jeffrey M. Jagid

Let me try to provide a little more granularity. I hear where you’re headed with the Q&A.

Brian Ruttenbur - Morgan Keegan and Company

I’m just trying to understand what kind of confidence level that we can have in that $24 million.

Jeffrey M. Jagid

I think it’s a great point and we are trying to be as transparent as possible in light of the circumstances, so there’s no question that without significant contribution from Wal-Mart and Postal it’s going to be difficult to get to the $24 million number. So those two accounts certainly, as Ned said, if you add them together, let’s say you don’t even include a company like Ford or any other new account or existing customer, I think Ned’s absolutely right that we anticipate that it would be over a third. Having said that, if we didn’t, and I think you’ve gotten to know us over time, it’s been always difficult to pin us down and that’s because of some of the lack of clarity and lack of certainty, we’re fairly bullish on Postal as well as Wal-Mart that the new level of attention that the product is getting within the US Postal Service that we hope we can use to transition into a smoother flow of task orders. If we were comfortable that it would be predictable, we would feel comfortable then giving quarterly guidance but we’re not there yet. So, we do feel confident in the $24 million. We do believe that with Pete’s efforts that a lot of that activity is starting to gain some traction. It’s certainly obviously taking time, but I think we expected it to take time.

Brian Ruttenbur - Morgan Keegan and Company

Do you expect the year to start off small and then grow throughout or what we have seen Q3 the last couple years for whatever reason has kind of peaked and then dropped, how do you expect the quarters to shake out? I’m not looking for dollar amounts, but I’m just trying to figure out quarter to quarter, is it going to be a build, is it going to be what?

Jeffrey M. Jagid

It’s certainly a great question. I would continue to anticipate on a quarterly basis some lumpiness but I would not say that the first half is 50% and the second half is 50%. I absolutely believe that there will be a ramp that materializes much more aggressively in the second half of the year. I’m hesitant to tie it to Q3 or Q4.

Brian Ruttenbur - Morgan Keegan and Company

Can you tell us how much of that $24 million is rental car?

Jeffrey M. Jagid

Yes. In our internal model we did not include revenue contribution from the car rental industry. However, and I hope you got this message through some of Ken’s remarks, and I know we continue to talk about car rental industry with not a lot of meat on the bones from a financial contribution standpoint, but I will tell you that if we didn’t feel somewhat confident in its ability in that application’s ability to contribute revenue, we would not continue to revert resources to it. There has been, and I’m hesitant to get into too many specifics on this call, but there has been some real nice activity within that industry that should lead to some revenue, but in light of the history we’ve had with that industry, we are hesitant to build it into the guidance numbers.

Brian Ruttenbur - Morgan Keegan and Company

Are you guys continuing to hire on the SG&A line?

Ned Mavrommatis

Like I said, we expect the SG&A to increase slightly. If you look at SG&A for the fourth quarter, if you back out stock-based compensation, it was $3.6 million. We’ll probably see an increase of that up to $3.7 million but should remain constant after that during the [inaudible].

Brian Ruttenbur - Morgan Keegan and Company

So does that mean more personnel or just same personnel getting paid yearly bonuses and stuff?

Ned Mavrommatis

No, there’s slight increases, there’s a couple of hires that we still need to fill in the sales and marketing area, but we’re pretty much done. There’s a couple more hires that would increase it slightly.

Brian Ruttenbur - Morgan Keegan and Company

And then there’s two other questions, have you seen the acquisition, the GeoLogic acquisition?

Jeffrey M. Jagid

Yes.

Brian Ruttenbur - Morgan Keegan and Company

What’s your opinion on that and are you guys a good peer for them or is Wearnet that a better peer? Because I know that they are just acquired this week.

Jeffrey M. Jagid

I think it’s early to tell what the implication would be on us. I think it has a little do with us. I do believe, however, that you do bring up an interesting sort of more global issue which is our philosophy on M&A activity and although we have been obviously very careful about spending the cash on the balance sheet, we are absolutely open to growing through inorganic means and we do activity look at specific companies. But I’d prefer not to comment specifically on the GeoLogic situation.

Brian Ruttenbur - Morgan Keegan and Company

But you would say that Wearnet is a better comp to you than GeoLogic or who was the – I mean there’s been a couple acquisitions in the last 13 months and I’m just trying to figure out who you think, was @Road a better comp? I’m just trying to figure out.

Ned Mavrommatis

If you look at the space, obviously they all play in our space, so they can all be viewed as comps. Once you start drilling down Wearnet would probably be a better comp than @Road and GeoLogic. But even Wearnet did not do exactly what we did. They all play in the same space and I would consider them as comps with Wearnet probably being the best out of the three.

Brian Ruttenbur - Morgan Keegan and Company

And final question, I’m sorry for all the questions, is there pressure by the Board given your last 18 months of performance to make either management changes or sell the company?

Jeffrey M. Jagid

No and no and I think that’s because the Board understands the business. I think that the Board realizes that the changes that were made in the early part of 07 were not going to result in flicking the switch and having the orders fly in, that it was going to take a significant amount of time. We’re committed to that strategy. There’s no indication at this point that the strategy is not working but obviously the pressure is on. As time goes by ultimately that momentum that we talk about and the traction has to be reflected in the financial performance, otherwise there will absolutely be management changes. So there’s no question that the technology is unique, very compelling and some of the largest companies in the world are deriving economic benefit from its use. So there’s no reason why we should not be expected to take those very powerful selling tools, build around them and have that result in the financials which they certainly weren’t in the 07 numbers. As far as selling the company is concerned, there is no doubt that could argue that our product may make more sense for it to be part of a portfolio of products. Obviously if we are part of a larger company it would accelerate some of the activity but it’s certainly not something that we’re actively pursuing nor is the Board pressuring us to pursue that at these valuations.

Operator

We’ll take our next question from John Bright with Avondale Partners.

Tom Casera – Avondale Partners, LLC

Tom Casera for John Bright. First following up on a question asked earlier in terms of the guidance, could you maybe answer where you expect Postal to move directionally in 2008?

Jeffrey M. Jagid

I’m sorry, can you clarify the question? When you say directionally, do you mean from a revenue standpoint?

Tom Casera – Avondale Partners, LLC

Right, from revenues versus 2007 in terms of up, down or relatively steady.

Jeffrey M. Jagid

From an absolute dollar standpoint, we would expect that to achieve the $24 million number that Postal would increase from 07.

Tom Casera – Avondale Partners, LLC

And also how important do you expect Europe to be in 2008?

Peter M. Fausel

Certainly from an opportunity profile, Europe is one of the bigger opportunities we have out there. The opportunities are tremendous but again what we’ve built into the model is to penetrate the market at a similar pace that we’re penetrating here where our sites tend to start with a pilot site. So we’re very bullish on the activity there but it’s also not largely in the model for 2008.

Tom Casera – Avondale Partners, LLC

And then a question in terms of the cash breakdown, I see that some cash was moved to long term assets, does this reflect a re-categorization or did you maybe move some cash around and maybe you could describe the kinds of securities the cash is in right now?

Ned Mavrommatis

We continue to invest the cash, we’re invested in different types of instruments and whatever matures over a year we classify it as long term. We’re invested in Federal agencies, money markets, corporate bonds, auction rate certificates. We have an investment policy, all our investments are AAA rated and they’re very well diversified.

Tom Casera – Avondale Partners, LLC

And what kind of interest income maybe could we expect? What kind of interest rate for 2008, given that rates are coming down?

Ned Mavrommatis

Rates are coming down, we would definitely see interest income decline year-over-year. Obviously we’ll see where the rates go but I think 3 to 3.5% is probably where we’re going to wind up as an interest rate.

Tom Casera – Avondale Partners, LLC

And last question, Ned, you also mention there’s an inventory write down, could you maybe talk a little more about that?

Ned Mavrommatis

We continue to evaluate our inventory for obsoleteness. During the fourth quarter we took a one time write off of $342,000 and it affected the gross margins and I spoke a little bit about that in my prepared remarks. If you exclude that $342,000 write off you see that our gross margins were very healthy in the fourth quarter, over the 50% level.

Tom Casera – Avondale Partners, LLC

I guess I’m wondering more in terms of does this represent products related to the Wireless Asset Net, is that sort of constantly evolving or what, I guess what exactly is becoming obsolete periodically in your [inaudible]?

Ned Mavrommatis

In this case there were some finished goods which were of an older version that are being used mostly to keep customers that purchased the product over the last couple of years to RMAs and other small reorders. We did have from a quantity standpoint more than we thought we would need over the next year so we took a write down. We did not dispose of the equipment so obviously if needed, we would be able to utilize it but based on our analysis, we felt that we had more than we needed of that type of equipment so we wrote it down.

Operator

We’ll move to next to Matthew Hoffman with Cowen.

Matthew Hoffman – Cowen & Co.

Couple of questions on the balance sheet, you said you wrote down the inventory, I think I caught most of the dialog there, could you just take us through the mechanics of the balance sheet, exactly where the write down, which line it occurred?

Ned Mavrommatis

It increased our inventory reserve which reduced the inventory by $342,000 in the fourth quarter and on the income statement it hit the cost of sales products.

Matthew Hoffman – Cowen & Co.

So the inventory went up – I’m just doing a quick entry of numbers and I could have these wrong, but it looks like inventory went up to $4.4 million and that’s after it was written down?

Ned Mavrommatis

No, it went down. Inventory last year was $6.4 million and it went down to $4.4 million.

Matthew Hoffman – Cowen & Co.

Okay, but sequentially, in September it was $4.1 million and then it went up to $4.4 million. Is that correct or do I have my –

Ned Mavrommatis

I don’t have the September number in front of me, but it could be.

Matthew Hoffman – Cowen & Co.

So it looked like inventory built a little bit in the fourth quarter, is that a function of sales that were less than expected or should we view it as a forward indicator for first half 08 sales?

Ned Mavrommatis

Some of that small build relates to products that we either shipped or we expect to ship in the first half of this year.

Matthew Hoffman – Cowen & Co.

Last question from me, you mentioned something about auction rate investments and I noticed that you’ve got the long term investments kicking up, are there any liquidity issues with your cash portfolio?

Ned Mavrommatis

We do have approximately $20 million of these auction rate certificates, they’re all, like I said before, AAA rated. They’re also all short or long receivables so we don’t have any mortgage type of securities, they’re all short and long receivables. You’ve probably been reading about some of these auctions failing. When they fail obviously you get the new market rate of interest which is higher, also all the securities we have are secured by the Federal Family Loan Education program so we don’t feel that there is any sort of concern from a valuation standpoint. Actually that’s one of the areas that our orders dug in and the valuation is still at 100%.

Matthew Hoffman – Cowen & Co.

I guess the question I’m really asking here is you made a pretty big of $38 million, is the auction rate product, has it been put now into long term investments? Is that part of what you moved out of investments for sale –

Ned Mavrommatis

That’s correct.

- into the long term investments line?

Ned Mavrommatis

Only approximately $20 million like I said, the rest are just regular, whether they’re Federal agencies or corporate bonds, they just mature over a year.

Operator

We’ll move now to Chris Ryder with Lucrum Capital.

Chris Ryder – Lucrum Capital

Pete, in the body of your presentation you mentioned that you were going to have expedited sales with Postal and that there would be a national contract announcement soon, can you discuss that a little bit?

Peter M. Fausel

The Postal Service has been really the number one customer for I.D. Systems for many, many years and continues to be. As we operate together over the last three years, we’re looking at better ways to really roll out the sites and I can tell you that there was a lot of work put in on both sides to try to optimize the process and I think that some of the enhancements and changes that we’ve worked on and put in place now will result in a smoother process that we’ve talked about and also better visibility into really the activity that’s out there. So that’s regarding the actual flow of orders. The other point on the contract, we actually have received a contract extension. I don’t know if you’re aware but the first contract that we signed with Postal for the three-year agreement expired at the end of last year. We actually renewed that agreement until the end of this month and the reason we did that was there was a lot of activity we wanted to be able to have a purchasing vehicle, if you will, while we were finishing negotiating the longer term contract. I can’t provide much more detail than that other than to expect to see some announcements on that shortly.

Chris Ryder – Lucrum Capital

Just to understand, there was a three-year contract that expired in December of 07.

Peter M. Fausel

Correct.

Chris Ryder – Lucrum Capital

There was very little Postal revenue then it got extended until March on the old contract?

Peter M. Fausel

What they’ve done is they’re extending the contract so it’s not really an old contract. So they actually extended the terms on the initial contract to the end of March. We are in the process and have been in the process of discussing new terms for the other extension which will begin April 1st. So on April 1st we will then really extend the original contract for a longer period of time and that contract will be based on some new terms that we’ve been in discussions with them on.

Chris Ryder – Lucrum Capital

You mean longer than three months or do you mean longer than the three years?

Peter M. Fausel

It’ll be longer than the three months and, as I understand it and again I’ll also look it up, I think it’s a one-year extension with options for years two and three. So, in essence, a three-year extension.

Chris Ryder – Lucrum Capital

And is this contract necessary to get any new task orders from the Postal contract?

Peter M. Fausel

No, it’s necessary after April 1st, yes. And that’s why we chose – and it was really a process issue as we went through the discussions to extend the contract, it became clear that we wouldn’t complete those in time and we have a lot of activity with Postal so we chose to extend the original terms from the original agreement until the end of this quarter.

Chris Ryder – Lucrum Capital

And how did the inability to execute an annual contract affect your ability to get orders and what does that suggest about sort of pent up distribution centers that need to be deployed?

Peter M. Fausel

I think the new contract discussions have had zero impact on our ability to get new sites and new orders. It really has been more of a side discussion to get the contract renewed and honestly the priority has been on focusing on the sites that we’ve deployed in terms of launching, roll out, service and support and then really helping the new sites that have raised their hand and say they’re interested in deploying our product and solutions and getting those guys started. So the contract has had really zero impact. I think the comment that Jeff made earlier was there is a lot of momentum in the account and that’s largely as a result of the efforts that have gone in on both sides to really use this tool to drive productivity. Productivity is a huge initiative within the Postal Service and they view our solution as a key element in really helping them achieve their commitments related to productivity. And so as such it’s getting a lot of visibility in the company now at very senior levels. That’s causing this activity.

Chris Ryder – Lucrum Capital

And what will be the role of service in the renewal of the contract?

Peter M. Fausel

When you say service can you be more specific?

Chris Ryder – Lucrum Capital

In some of the older deployments didn’t have a service component. I was wondering if the new contract will incorporate more service in the distribution centers that have already been deployed? And in that context, what’s the rule of competitive bidding going to be going forward as Postal mix for just orders with your technology?

Peter M. Fausel

The service is really a separate issue and we absolutely include service on every transaction. I don’t think these systems will go in without our services and we’re also in discussions with Postal to make sure we have a contractual document in place to continue to support the systems in the field and to get the benefit out of the system. So there are absolutely services in everything we do and so I know that maybe in the past you’re pointing to a situation where maybe there wasn’t services but to my knowledge we very openly talked to them about what services are required to deploy the systems, launch the systems and support the systems and the United States Postal Service is aware of all of those requirements and we’re in negotiations and discussions on all of that.

Operator

We’ll move now to Seth Potter with Merriman Curhan Ford.

Seth Potter - Merriman Curhan Ford

Just a follow up on that question, Pete, you mentioned that you’re in the process now of completing new terms for the Postal Service contract. I know the prior contract you had originally, were utilizing Unisys to install the product. Can we expect to see some alteration in that arrangement, better pricing and maybe can you give a little bit more detail on what you mean by new terms? Besides just like a new contract in place.

Peter M. Fausel

Since it is an extension it does allow us an opportunity to review costs for the services. Obviously the original negotiation was three years ago, we’ve had some items that have through manufacturing efficiencies gone down in price, some that have gone up in price and so it’s really an open opportunity to review all of the components and negotiate a new rate structure, if you will. Regarding Unisys, they are a part of the original contract but we really utilize other contractors as well as Postal and I.D. Systems’ resources to deploy the system so we really have that no impact on the agreement with anything related to Unisys.

Seth Potter - Merriman Curhan Ford

And is there a chance that margins could improve depending on what the terms are or, again, kind of in the mix that Ned had talked about in terms of the 50% plus or minus range as a corporation?

Peter M. Fausel

Yeah, it’s in the mix.

Seth Potter - Merriman Curhan Ford

And then another question, you gave the Postal revenues for the year at $6.2 million. It looks like it backs into about $2 million for the fourth quarter, can you give a breakdown of other large customers I guess besides Postal?

Peter M. Fausel

Are you asking for the year or for the quarter or both?

Seth Potter - Merriman Curhan Ford

I’ll take both.

Peter M. Fausel

For the year Postal was $6.2 million or 37%. Wal-Mart was $5.5 million or 32% and Ford was $1.8 million or 10%. Those were the top three. For the three-month period, Postal Service was $2 million or 54%, Ford was 10% or $374,000 and Wal-Mart was 6% followed by 3M and a couple others at 5%.

Operator

We’ll move now to Michael Ciarmoli with Boenning & Scattergood, Inc.

Michael Ciarmoli - Boenning & Scattergood, Inc.

Just on the guidance, in 2007 you guys did roughly $24 million in revenue and were able to turn a non-GAAP profit of $0.10. Can you give us any indication as to whether you expect to see profitability on that guidance for this year?

Ned Mavrommatis

Obviously I gave all the expenses so you can sort of put the model together. The key here is our goal is to maintain the expenses constant obviously with the slight increase as I mentioned and as revenue ramps up as we get later in the year, we could see quarters that are profitable. For the year we’re not going to be profitable at $24 million.

Michael Ciarmoli - Boenning & Scattergood, Inc.

If you could just comment I guess, Peter, on your sales pipeline, I guess what it’s looking like. I know you said you’re pretty encouraged by it, but in light of the current conditions in the US economy are you seeing any changes with your pipeline or are customers planning on pushing back their current deployments, is it tougher to get a hold of current customers? Can you give us some sense as to what’s happening there?

Jeffrey M. Jagid

That’s a very interesting question, Mike. What’s interesting is our tool, actually when the economy turns actually can be used to achieve the improvements that companies are demanding. So when our customers say, hey the economy is getting worse, we’re being asked to do more with less, our tool is a perfect solution to allow them to be able to do more with less and so I can honestly tell you I haven’t had a single prospect or customer indicate that they were not planning on moving forward with evaluating the technology and eventually investing in the technology as a result of the economy to this point. I guess I’m not naïve enough to think that that will not happen at some point in the future but up to this point it’s been really zero impact and again that’s largely because we promote our tool as a tool that can help provide visibility to things that will allow them to become more productive and it’s the kind of investments you need to be making in this market right now.

Michael Ciarmoli - Boenning & Scattergood, Inc.

Relating to the DOD, the one pilot project you have there, obviously there’s a lot of question marks about future Defense spending with the potential White House party change, the war in Iraq coming to an end, do you guys have line item funding for this yet? I mean is it still, where would you be getting future dollars to go forward with a more expanded deployment of this product?

Jeffrey M. Jagid

Great question. This trial that we’re doing, if you will, at Sierra is very important and very strategic and in fact a lot of what I’ve just mentioned about driving the efficiencies is also true within the Department of Defense and so there’s tremendous maintenance savings and productivity savings that are available to them. So this trial, although there’s no line item funding, is being monitored and watched by multiple agencies and our intention is at the end of the pilot that they’re performing, we have a lot of visibility on the achievement and if we achieve the objectives that we feel like we can achieve, there will be multiple opportunities that will present themselves. Maybe I’ll let Ken Ehrman, who also has been very involved add to those comments.

Kenneth S. Ehrman

The only thing I would add to it is right now it’s being funded by the Department of Defense maintenance organization out of the Pentagon and the line items that would fund beyond this pilot will come right out of the maintenance budget that I referenced during my call. So the associated decreases that you would achieve through the use of our system would really be funding the continued expansion. This isn’t really an earmark or a favor that [Lattenberg] has gotten into, any kind of a bill. This is really directly affecting or as a direct result of the Administration’s request for funding for maintenance.

Michael Ciarmoli - Boenning & Scattergood, Inc.

And then just one more question about another market, in terms of the San Francisco Airport pilot, are you seeing any given airlines profitability conditions, maybe there’s potential commercial up cycle coming to an end, is it getting – do you foresee that being a challenge to more widespread deployment of the solution at some of the major US airports?

Kenneth S. Ehrman

I’m glad someone asked that question around the ground support equipment because that’s a market that I’m quite excited about. It’s very early stage in that market, those of us that fly if you look out the airplane window it’s very rare you’re going to see any motorized vehicle with any system on it that’s managing access and providing any safety and security enhancements, and I believe that the market is ripe for the solution, there’s a business pain that they suffer is exactly the same in many cases with an added security element to it that there is in our core markets. Through really the focus by bringing in focused resource on this space the branding and building a product and a solution for this market, getting much more exposure in trade shows and trade magazines and really now starting to get traction in the market is really tremendous activity out there. It’s an interesting market and that is not totally bound by the airlines. Airlines themselves, as mentioned previously, are also looking for technology that will drive productivity but there’s also ground support equipment suppliers, there’s many elements and many benefactors of the technology and so I’m very bullish on the opportunities although I’m not naïve enough to think that they’re going to translate to major dollars in day one. But the market size is there, we’ve proven that there’s an interest and a need for technology and again I haven’t seen the economy be an inhibitor right now in pursuing that market.

Michael Ciarmoli - Boenning & Scattergood, Inc.

Then just one last quick one, Peter, you’re obviously intimately familiar with LXE, do you think I.D. Systems would make for a good fit operating under that umbrella?

Peter M. Fausel

I have a personal opinion, I think the business model is quite a bit different and we’re a full service solution provider, they are a hardware manufacturer that is an element of a solution. Certainly you can make a case I guess for anything but the business model is quite a bit different.

Operator

(Operator Instructions) We’ll move now to Charlie Anderson with Dougherty & Company.

Charlie Anderson – Dougherty & Company

I want to start out with kind of seasonality we’ve seen in the last two years as it was mentioned before. You guys kind of drop off in Q4, seems to be some issues there with people just really not wanting you in their shop as they’re kind of wrapping up the year, especially on the retail front. I wonder if – you guys talk about a ramp into the back half of the year, do you still see that same dynamic being there or you just think it’s a strong pipeline and that the back half that we won’t see that?

Jeffrey M. Jagid

I would not characterize the issues we have in the fourth quarter as seasonality at this point, I think they’re more of an indication of or a symptom of the problem we have with reliance on too few accounts. So when it comes to, for example, Postal and Wal-Mart, it’s a great point and Wal-Mart certainly doesn’t want us to – you know that’s their busy season, they don’t want to place orders, they don’t want us in their facilities, but I think the issue we have and the way to deal with that is really in large part focused on revenue diversification and less reliance on too few accounts. So you’re right if you look at last year and the prior year, I think there was some lumpiness in the fourth quarter, but I don’t think that that’s because of seasonality. I think it has much more to do with leaving both of those periods with continued reliance on those accounts.

Charlie Anderson – Dougherty & Company

And then I want to talk about the guidance here, the $24 million number, you guys obviously probably had the best predictability with Postal and Wal-Mart some of the accounts you know well. Just trying to figure out where the levers are, where you see the upside? Is it in the organic growth looking at existing accounts and what they can do expanding their number of facilities or is it going out there bringing in new accounts, any particular verticals? Just where you see the lever going from $17 million plus to $24 million?

Jeffrey M. Jagid

I think it’s all of that. One of the strategies we embarked on last year was to really go back to our installed customers to make sure through our performance services team to make sure that they were obtaining the maximum benefit the could from the system and then making sure that that benefit was well known within the organization. So certainly as we build up $24 million if you look at our customer list beyond the two we’ve talked a lot about, there’s a lot of opportunity to continue expanding those systems and we made the investments in both the performance services team and in the sales effort to position ourselves well for business this year. In addition to that, there is new name business that we’re working through, either brought to us through marketing efforts we’re performing, partner relationships we’re building, focused on certain verticals like the ground support equipment and aviation I mentioned or certain markets like in Europe and all of those activities can generate upside and all of those are factored into the number to get to the $24 million.

Charlie Anderson – Dougherty & Company

I just wanted to ask then about the expenses, you guys talked about being relatively flat in 2008. Do you see those being kind of a pause year in 2008 where you would go back and invest again if you’re successful or do you feel like you’ve kind of got the organization where you want it right now and kind of be kind of flattish growth from here on out?

Ned Mavrommatis

At this level we are coming down to, at least from an expense side and from an organization standpoint, we are coming down where we want to. When Pete started, he put together a plan and he had an org chart with a lot of boxes. We filled those boxes, we’re incurring the expense so now it’s time for the revenue to come behind it. Obviously, as we continue to grow we will re-evaluate and see how we want to grow the company and from the expense side. But at least at these levels we feel very comfortable with the exception of the few hires that I mentioned before. We are in good shape from a headcount standpoint.

Charlie Anderson – Dougherty & Company

And then just one quick last question, Ned, do you have sort of a fully diluted share count?

Ned Mavrommatis

11 million shares is what’s outstanding as of December 31 and obviously as we have a profit and you have to calculate fully diluted, I would go around 12 to 12.5 million shares.

Operator

We’ll take a follow up question from Mr. Michael Ciarmoli with Boenning & Scattergood.

Michael Ciarmoli - Boenning & Scattergood, Inc.

Do you have a stock comp outlook for 2008?

Ned Mavrommatis

Yeah, Mike, it should be around $850,000 per quarter, $660,000 in SG&A, $180,000 in engineering and about $10,000 in cost of sales.

Operator

Mr. Jagid, it appears there are no further questions at this time. I’d like to turn the conference over to you for any additional or closing remarks.

Jeffrey M. Jagid

Thank you everyone for participating in today’s call. We look forward to continuing to keep you updated on the progress of the company. Thank you very much.

Operator

That does conclude today’s call. We thank you for your participation and have a great day.

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Source: I.D. Systems Q4 2007 Earnings Call Transcript
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