L-1 Identity Solutions, Inc. Q1 2008 Earnings Call Transcript

L-1 Identity Solutions, Inc. (ID)

Q1 2008 Earnings Call

May 7, 2008 4:00 pm ET

Executives

Lisa Cradit - Financial Dynamics

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

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

Analysts

Paul Coster - JP Morgan

Jim Ricchiuti - Needham & Company

Josh Jabs - Roth Capital Partners

Tim Quillin - Stephens, Inc.

Brian Ruttenbur - Morgan Keegan

Jeremy Grant - The Stanford Group

Presentation

Operator

Good afternoon. My name is Pam and I will be your conference operator today. At this time, I would like to welcome everyone to the L-1 Identity Solutions first quarter financial results conference call. (Operator Instructions) Please be advised that this conference call is scheduled to conclude at 5:00 Eastern. Thank you.

It is now my pleasure to turn the floor over to your host, Lisa Cradit. Ma'am, you may begin your conference.

Lisa Cradit

Good afternoon and thank you for joining us for L-1 Identity Solutions' 2008 first quarter financial results conference call. Statements that representative of L-1 Identity Solutions make during this call that are non-historical facts are forward-looking statements made under the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management's current beliefs and assumptions and involve inherent risks and uncertainties. Any statements made today about future expectations or results are necessarily only estimates. Actual results could differ materially from any forward-looking expectations. Factors that may cause differences between forward-looking expectations and future actual results are fully described in the Company's SEC filing. The Company expressly disclaims any obligation to revise or update any forward-looking statements.

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

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

Robert V. LaPenta

Good afternoon, everyone. Thanks for participating in our call. I'm sure everybody's had an opportunity to go through our earnings release, our press release and you're familiar with the numbers and some of the details that are in there. So I'm just going to make my remarks brief, hit some of the highlights and have Jim take you through the details on the numbers and leave as much time as possible for Q&A.

We had a very good first quarter. We had strong organic growth of over 20%. That was led by our Documentation Division Viisage. We've had increase in sales of over 30%, enrollment increase of over 20% and intelligence, again, organic growth of over 20%.

The Biometrics Group had a flat quarter and encouraged by the amount of bidding activity. Everybody believes that this Company is a HIIDE-based product and I think what happened in the quarter was tremendous activity in solutions, in Biometric Solutions that are well beyond HIIDE, and I'll talk a little bit more about that.

But we had a very, very encouraging bidding quarter for Biometrics and we expect Biometrics to accelerate throughout the year and have a very, very solid performance of an excess of 20% growth for the year.

We're investing in IR&D. In the first quarter we invested, on a gross basis, over 18% in developing new products. We developed a new palm device. We're developing a new next generation HIIDE. We completed development of our expansion module on HIIDE and we expect to get an order for that within the next week or two and there is a lot of activity in the DoD. We saw a RFI for a boss program which is a $1.4 billion DoD opportunity and we're seeing accelerated activity, internationally, in South America, in the Middle East and in Europe for biometric, end-to-end, multi-modal solutions. So we're very, very encouraged about the performance and the future for that group.

We had a strong booking quarter, overall. Our bookings came in at about 1.3 times sales so, again, portends well for increased organic growth going forward. Some of the highlights in the quarter include winning the Passcard program. There's a lot of controversy on that program but I've got to tell you the customer is committed, the government is committed, we got off to a strong start on that program, it's a program with over $100 million of potential, and the government is already looking at adding additional cards like the border crossing card onto that program, so we believe that program, when it's all said and done, will be well in excess of $200 million. And again, we got off to a good start. We expect to start delivering 200,000 to 300,000 cards within the next two to three weeks. We concluded the access, both physical and logical access. They have over 400 customers worldwide and it opened up a broad customer base, domestically and internationally for us, so we're very excited about that.

I think, unquestionably, the biggest highlight in the quarter was the announcement of the Digimarc transaction. I mentioned during our last conference call that we were looking at a couple of transactions that I considered to be game-changers and I think Digimarc fits squarely in that category. We've had activity from primes, from international companies since we announced this transaction that want to partner with us. It clearly has brought us into another league, not only in the domestic driver's license business but, internationally, in the offerings we can make in international markets.

What we've seen so far we're very impressed with. They have a great management team, very well-organized and the synergies that I think we're going to realize from this transaction are going to make it a very, very nice financial transaction for us. I'll talk a little bit more about Digimarc and the process in a few minutes.

Our forecast for the second quarter, as was included in our release, is for sales of somewhere around $140 million and EBITDA of $20 million plus and we're very confident about that number. About 85% of that is going to come out of backlog and at least another 10% is going to come out of recurring-type bookings. We have included the expansion device. We have a high degree of confidence that that's going to come in and part of that is going to be shipped in the second quarter.

I'm going to try and answer a couple of your questions before I turn it over to Jim to take you through the details on the numbers and then we'll open it up for Q&A. Some people have said they can't find any HIIDE in the budget process and I could tell you that's far from the truth. There's about $35 million in the supplemental. There is separate money in there for the expansion module and HIIDE is going to be incorporated, we believe, in that and the [inaudible] program. We're also looking at the international market and we believe there's increased activity both on an FMS and a direct sale basis. So the opportunities for HIIDE and Securimetrics really are increasing dramatically and we're very confident.

We're working on a next generation which will have additional capabilities like GPS, like the liquid lensing, like additional memory. It's going to be a very capable device and we think it's going to be a big seller for us.

One of the thing we did, we announced during the quarter was the restructuring of the Biometrics Group. We have a new president, Richard Agostinelli who is a terrific guy with a lot of experience in that group and we're going to bring, basically, Securimetrics and Identix together so they can go to the customer with the complete, both a mobile product and a stationary desktop product. There are good synergies in there and IRAD and we think the marketing approach is going to be very beneficial for us, going forward. So that's moving extremely well and we're excited about the new opportunity that's going to open up.

You may have noticed that we didn't book the Sode Program in the first quarter. We did not include it in our sales in the second quarter. We believe that program is going to go forward. The customer's still evaluating how he wants to proceed with that program. There is no competition and we believe now that what he may do is break the program into two parts and give us an order for the system integration in R&D upfront with some HIIDEs that they can begin using and then order the large portion of HIIDEs later on in the year. But again we do not have that in the second quarter. We settled the long standing LG litigation where they received a paid up license for our 2Pi technology. I can't talk a lot about the details but suffice it to say that both LG and us are very pleased with that settlement. We stopped spending $1 million a month in ridiculous legal fees and we came to a settlement that I think both of us are going to be very happy with, going forward.

Digimarc, again, I think this is a game-changer. No matter what you say about Real ID, whether it's going to be implemented, when it's going to be implemented, there's a tremendous amount of activity around Real ID. Most of our customers now, whether they implement it based on a government directive or whether they improve their systems on their own, are working closely with L-1 and Digimarc to improve their systems. But to give you some of the dynamics on the program, right now we sell driver’s license on average for about $1.75 a driver's license and roughly $65 million to $70 million of 75 million driver's licenses are produced a year with Real ID or some portion of Real ID, the price of that driver's license is going to go anywhere from $4.00, if they do a very minimal implementation, with new material, with a minimal amount of facial recognition, if they wanted that capability in their database and with document authentication. It's going to go anywhere from $4.00 to $8.00 a card. So if you take the average of that times 75 million cards, that's going to be an incremental revenue stream, sometime over the next two to three years, of over $400 million. We think the combination of Digimarc and L-1 working with our customers is going to present a superior, cost-effective solution to our customer base.

Now, having said that, we believe that with the implementation of Real ID, or some form of Real ID, that's going to bring additional competition in the market, so as we model this thing going forward, we believe that the combined entity will probably lose somewhere between 10% and 15% in market share but net/net, we will pick up somewhere north of $300 million of revenue at a reasonable profit and the ability to use, basically, incorporate our biometrics into the Digimarc solution is going to be a great transaction for us.

So we've looked at the synergies, and again, right now without really digging too deeply into it because of the obvious anti-trust issues, we think, comfortably, there's going to be somewhere north of $25 million to $30 million of synergies and I wouldn't characterize it as low-hanging fruit but I would characterize it as highly probable. So when you add that to the $20 million of EBITDA they're current running at, you could see that this is a very, very compelling transaction for L-1.

The process is moving forward. The states have been very supportive of the transaction. I met with DHS and they are supportive of the transaction. The Department of Justice is going through the transaction. We're going to give them an extension of 30 days without them asking for a second request and if the process continues as it currently is, moving forward, we believe we will be able to close this transaction in the third quarter.

Let's see, those were the obvious questions that I had on my list. I'm going to turn it over to Jim to take you through the details in the numbers and then we'll open it up for Q&A.

James DePalma

Thank you, Bob. The press release provides a good summary regarding our first quarter results and Bob has highlighted the important elements of the quarter and our future prospects. I will augment this with some key points regarding our financial performance.

The quarter results for the first quarter of 2008 include acquisitions closed after March 31^st, 2007, advanced concepts or ACI, McClendon and Bioscript. As Bob noted we are off to a solid start for 2008 and exceeded our previously provided guidance on all key metrics. Revenue of $116 million compared to $110 million to $115 million. EBITDA of $13 million compared to $10 million, between $10 million and $12 million and an earnings per share loss of $0.03 per share versus a range of $0.03 to $0.05 loss.

On a reported basis, revenue was $116 million for the current quarter compared to $70 million for the same quarter last year, or an increase of 66%. On a same store basis for the entities under L-1 management for both quarters besides Identix, IBT and SpecTal, revenues grew approximately 28% from $70 million to $90 million. On a pro forma basis for all the companies, revenues increased 20%, as Bob noted, from $99 million to $119 million, driven by strength in our credentialing business, as well as significant growth in our intelligence and background screening or fingerprinting services business.

On the intelligence side, as Bob noted, SpecTal continues to do a great job increasing market share by winning key programs. Regarding fingerprinting services, there's an increasing awareness, locally, statewide and nationwide for the need to do background screening, particularly when it comes to adults interfacing with children, and as a result we are seeing increasing legislative activity to implement or enhance background checking procedures. This is a real growth area. There are a number of states that we're actively seeking opportunities and this IBT acquisition that we did two years ago is proving to be a tremendous success.

Other key items in our identity solutions segment, the secure credentialing business, the passport business has been a great driver of revenue in this quarter. Our credentialing business in federal, state and local and our credentialing solutions and services increased by 45% to approximately $27 million due to continued robust demand by our customer to meet their growth requirements. Our passport business is experiencing terrific growth and as Bob noted, our technology leadership position in this area ultimately led to our Passcard win. The Passcard program will begin to contribute revenues in the second quarter.

The Biometrics Solutions business grew moderately due to seasonal funding and ordering cycles that federal, state and local agencies experienced in the first three months of the year. This business is expected, as Bob noted, to grow significantly beginning in the second quarter which will drive expansion of our gross profit margin.

In our services segment, the intel services business continues to make great strides. SpecTal grew 40% compared to the prior year's quarter, satisfying the strong demand for their unique talents. And again, the fingerprint servicing business grew over 20% reflecting growth in volume in our federal programs and a ramp-up of new agencies added to our existing state contracts.

Gross profit margin, on a reported gross margin our reported gross margin for the quarter was 27% compared to 25% in the prior year, due to organic and acquisition growth and an improved mix of revenues in our identity solutions segment, passports and common access cards. We expect our gross margins to increase throughout the year as our revenue mix improves as we shift towards increasing revenue from our Biometric Solutions software and multi-modal devices and offerings.

Our cash gross margin approximated 34% in the first quarter. Operating expenses as a percentage of sales decreased, once again, this time going to 26% from 33%. Excluding stock-based compensation, operating expenses approximated 22%, reflecting a continuation of improving our overall operating leverage. As a result, the aforementioned EBITDA for the quarter was approximately $13 million compared to $8 million on a pro forma basis, or increase of 63%.

Other items of note, interest expense for the quarter was $3.3 million related to our convertible notes and borrowings under our credit facility which increased slightly due to the share repurchase that we announced in the first quarter concurrent with the closing of the Bioscript transaction.

We recorded a tax benefit of approximately $1.5 million and our overall tax rate for the year is expected to be in the 43% range. Weighted average here is outstanding with approximately $72 million for both 2008 and 2007 and, exclusive the shares we'll issue with regard to Digimarc, it will be consistent in that range, $72 million.

On the balance sheet side we've focused a great deal on accounts receivable. Days outstanding has decreased from 73 days at year end to 66 days. Inventory increased by $7 million, primarily due to some planned increases in inventory in our Biometrics area to support future expectations regarding a revenue and shipments in the second and third quarters and we added a slight amount of inventory from the Bioscript acquisition.

Other key component changes, goodwill and intangibles with an increase of about $37 million related to the Bioscript acquisition. Accounts payable and accrued expenses were relatively flat and as I noted before, our debt increased slightly by $10 million due primarily to the buy back of the stock.

Our cash flow, our outlook for unleveraged free cash flow for the year remains unchanged at $60 million to $65 million. The first quarter is a traditionally slower cash flow quarter and we would expect that our cash to dramatically increase during the year as we generate increased EBITDA.

Capital expenditures for the quarter aggregated $3 million and we expect some capital expenditures of about $5 million or $6 million in the second and third and fourth quarters, primarily related to Montana as we roll out that new program and Bob had noted that our backlog grew from $715 million to $750 million when we compared the end of the first quarter to the end of the year.

That concludes my review and back to you, Bob.

Robert V. LaPenta

So at this point we will open it up for Q&A.

Operator

Thank you. (Operator Instructions) Your first question comes from Paul Coster with JP Morgan. Please go ahead.

James DePalma

Yes, Paul. How are you doing?

Paul Coster - JP Morgan

I'm good, thanks. Just a couple of quick ones. HIIDEs really, just first, how much of HIIDE is in the inventory that you have and is it in finished goods or, sort of, work in progress?

Robert V. LaPenta

We have about I want to say 1,000 HIIDEs in inventory and we're very confident that we're going to be liquidating those over the next three quarters.

Paul Coster - JP Morgan

And how much HIIDE in the backlog?

Robert V. LaPenta

Well, we expect to get some new HIIDE orders this quarter for different agencies and some FMS HIIDEs. So right now we don't have any in backlog. We expect to book some in the second quarter.

Paul Coster - JP Morgan

Okay, the Passcard program in 2Q and 3Q that's going to ramp up, can you just give us a little bit of color around that, what the economics are, initially, whether you have to ramp before you start seeing margins, you know, kind of normalize?

Robert V. LaPenta

Our people are doing a terrific job of getting margin on that program right out of the gate. We've gone back to our subcontractors. We're looking for new ways to produce cards. We think we're going to have gross margin that exceeds what we estimated when we won the program and you may recall that we were underbid on that program by over $20 million and I can't go into details but we did not make that concession in winning the program.

The customer is very happy with us and, as I noted, I believe this program, very shortly, is going ramp-up including additional cards and it's going to be a program that will generate over the next two to three years, over $200 million in revenue.

In this year, I think we conservatively estimate that we're going to have somewhere around $10 million to $15 million of revenue.

Paul Coster - JP Morgan

Okay, and finally, gross margins are going to improve as the year unfolds, can you just give us some kind of events or catalyst that maybe step functions that increase gross margins? I assume HIIDE shipments, for instance, would be one but what else have we got coming up?

Robert V. LaPenta

It's going to be expansion modules, our palm device where we're booking orders now and it's going to be our Live Scan. Now, as I mentioned to you, they are strictly enablers for us now. What we're looking to do is become implementers on a subsystem or system basis. So the profit and the model of our business, the margins are going to improve dramatically as we begin to implement end-to-end solutions. So that's going to include a lot of software, IP, and system integration work.

Paul Coster - JP Morgan

Thank you.

Operator

Thank you. Your next question is coming from Jim Ricchiuti - Needham & Company. Please go ahead.

Jim Ricchiuti - Needham & Company

A follow up question on a comment that you had with respect to bidding activity. You talked about bidding activity in Biometrics and I wonder how would you characterize the overall bidding activity across the organization, Bob?

Robert V. LaPenta

You know, and I was telling somebody at our annual meeting, on my credenza I have a stack that is probably a foot and a half tall of outstanding bids and they're in South America, I mean, they're all over. The bidding activity is really robust and that portends well for the future. The question is when will these programs happen? Every one of them is on the drawing board. Some of them rely on U.S. funding, some of them rely on foreign governments getting the go ahead but I've got to tell you, there's no question the space we're in will grow dramatically and I am confident that our model of 20% organic growth is achievable and I don't want to use the word conservative, but certainly achievable.

Jim Ricchiuti - Needham & Company

Okay. Just on the LG settlement, have you begun to see the savings already on some of the legal expenses? It's a big number and I'm assuming, or do you see that really kick in, in Q2?

Robert V. LaPenta

Well, the legal expenses were a cash charge. The P&L impact of that were that they were reflected in the cost of our Iridian acquisition so it's going to be a cash-positive for us. Again, the settlement, I think, is going to portend well for us in that I believe a lot of these programs that were slow to evolve now, with some of the uncertainty taken out of the market, these programs are going to start moving forward. There are a lot of programs that we're bidding multi-model solutions, including IRIS, and we expect to participate on those programs.

Now, what we licensed to LG was 2Pi. They have it. We've given them the data associated with that technology and they're enhancing it on their own. But I could tell you that we believe our Daugman '07, and soon to be released Daugman '08, is superior to their technology.

Jim Ricchiuti - Needham & Company

Okay. And just switching gears for a second with respect to the pending post acquisition of Digimarc, do you see some meaningful opportunities as early as '09? It sounds like some states are beginning to ramp this up but just in general, what do you see '09 from Real ID?

Robert V. LaPenta

There is, I believe the number $110 million in the President's proposed budget for '09 for Real ID. I think there's about, between a couple of pots, somewhere around $70 million or $80 million in this year. We believe that money is going to start to be released. We don't have it in our forecast but we believe Real ID represents a $200 million opportunity for us, just in doing preparation work for the states over the next year-and-a-half and again not in our forecast, not in Digimarc's forecast but we think it represents substantial upside.

Operator

Thank you. Your next question is coming from Josh Jabs - Roth Capital Partners. Please go ahead.

Josh Jabs - Roth Capital Partners

Good afternoon, nice quarter.

Robert V. LaPenta

Thanks, Josh.

Josh Jabs - Roth Capital Partners

Internationally, can you talk about where some other larger opportunities are for you, specifically, from an end-to-end provider perspective and then maybe what the competitive environment looks like?

Robert V. LaPenta

Well, I can't be too specific for competitive reasons. We have quotes in certain countries in South America that I would say, outstanding right now, represent over $300 million to $400 million. We have had conversations with Sagem and I mentioned earlier in our call that post the Digimarc announcement we've gotten a lot of interest from some of the primes and also some of our competitors. And I'm looking forward to working with Sagem in a, I want to call it a competitive cooperation. And what that means is that we're going to work together on large opportunities where they have a capability that can enhance our offering and they're going to work with us where we have capabilities that enhance their offering.

We're also looking to form a venture with them where we're going to co-develop technology going forward like IRIS on the move, like sensors for computers, so I'm very encouraged about that. I would say right now our biggest competition, if you look at the capabilities is Sagem and I think we're going to be able to forge a relationship that's going to be able to make that a one plus one equals three rather than a one plus one equals one-and-a-half.

 

Josh Jabs - Roth Capital Partners

What were the international revenues in the quarter?

 

Robert V. LaPenta

I don’t. What were they, Jim?

 

James DePalma

About $8 million.

Robert V. LaPenta

Eight million in the quarter so right now they represent less than 8% but I would expect that as we exit the year, our international revenues are going to represent somewhere between 15%, north of 15%. It’s going to double.

 

Josh Jabs - Roth Capital Partners

In the U.S. we have seen some spending issues on the government's side, specifically as some of the duty and intelligence customers are waiting for the supplemental to come through, how is that impacting your business and then, you guys are pretty close to some of those customers, what are they expecting as far as the timing of the supplemental?

Robert V. LaPenta

Well, there's going to be continuing resolution. The supplemental, the amount of the supplemental that is being negotiated or discussed now doesn't really contain a tremendous amount of funding for us. I don’t really see an impact. What they’re looking to do now is combine the $70 million residual from the ’08 with about $108 million residue for this year with $70 million first half of next year, they're looking to put together $180 million proposal. I don't know where that's going to end up but I don't expect that to have a significant impact on our business.

The programs in the U.S. there are a lot of them. I mean, there's a lot of activity in the DoD. DoD opportunity is going to be very large in the future. I mentioned this program called BOSS. It's an RFP that's going to be over $1.4 billion and we're evaluating how we're going to participate on that program. But, again, I think it's an indication of the activity and the increased interest and utilization of identity solutions/biometrics.

The HSPD-12 Program has been extended because they are not enrolling the number of people that they hope to enroll so it's been extended out to next year and TWIC has also been extended. But on the TWIC front I must tell you that our relationship with Lockheed is terrific and we're now beginning to deploy sites to start enrolling TWIC people. So far I think 250,000 people have been enrolled under TWIC and I think the new estimate is that there are going to be over 1.3 million. This is going to end up being a nice program for us.

Josh Jabs - Roth Capital Partners

Then, finally just DSO trends, obviously, they're down here pretty substantially in Q1, how is that likely to transfer out the year?

 

Robert V. LaPenta

Well, we had some large receivables over the past year with a couple of states and the Department of State and our guys have done a great job of building a better relationship with the customer, trying to figure out exactly how we can get paid quickly and that's what resulted in the first quarter and we expect it to be in the 66 day range throughout the rest of the year.

Josh Jabs - Roth Capital Partners

Great. Thank you.

Robert V. LaPenta

My bonus is based on it.

Josh Jabs - Roth Capital Partners

All right. Thanks.

Operator

Thank you. Your next question is coming from Tim Quillin - Stephens, Inc. Please go ahead.

Tim Quillin - Stephens, Inc.

Okay, good afternoon. In terms of backlog, how much backlog came in from Bioscript and how much did you put into backlog related to the Passcard contract?

Robert V. LaPenta

Bioscript was zero. I guess, like, a half a million dollars and Passcard, I'm going to guess at $10 million. Is that a good number?

James DePalma

Closer to $20 million.

Robert V. LaPenta

Okay, $20 million.

Tim Quillin - Stephens, Inc.

Okay and you say you're looking for $10 million to $15 million in revenue from PASS Card this year, though.

 

Robert V. LaPenta

Yes. It could be more but that’s what we currently have in our forecast.

Tim Quillin - Stephens, Inc.

And it's a fixed price volume contract is that right? I mean, how dependent is it on volume and demand ramping up for the cost?

 

Robert V. LaPenta

We given them pricing with certain volume considerations and in that pricing we've put a band around it looking at the best case/worst case scenario and we're comfortable with a reasonable number of cards. If it increases, our gross margin will increase.

Tim Quillin - Stephens, Inc.

Okay and in terms of EBITDA margin expectations, can you bring it down to that level, what you might be able to get off that contract?

Robert V. LaPenta

Again, we're making progress. I think in a prior conference call I said we'd bid it very tight, something like a 17% to 19% gross margin. I think we'll do better than that.

Tim Quillin - Stephens, Inc.

On the HIIDE potential order, can you talk a little bit about what the expansion module consists of and how big an order might be and the timing of that so that it will impact, what does the timing need to be so that it can impact your second quarter results?

Robert V. LaPenta

I can't really go into the pricing in a lot of detail but what it is, the HIIDE device has on-board memory of about 25,000 records. The expansion module will increase that to 250,000. And by the way, in the next generation, 4.5 not 5.0, because that's one beyond that, the next generation HIIDE is going to have 250,000 record capability built-in. We put a minimal amount, I want to say $2 million to $3 million in sales in the second quarter on that and we expect to receive an order, I want to say, within the next two to three weeks.

Tim Quillin - Stephens, Inc.

Okay and presumably it's going to be bigger, though, than $2 million to $3 million in ship over multiple quarters?

Robert V. LaPenta

That's correct.

Tim Quillin - Stephens, Inc.

Okay, how big is it going to be?

Robert V. LaPenta

That's correct.

Tim Quillin - Stephens, Inc.

I had to go one step further. Okay.

Robert V. LaPenta

We saw that.

Tim Quillin - Stephens, Inc.

The last question related to Digimarc. How are you discussing this acquisition with the DoJ on the HSR review considering the fact that you will have 90% plus market share of the U.S. driver's license market.

Robert V. LaPenta

My lawyer tells me there's really not a lot I can say beyond what I did say but, again, I'll reiterate. With Real ID or some form of additional spending we expect companies like IBM, like Unisys, like 3-M, current competitors like Canadian Bank Note, like, who's the one that…

James DePalma

Marquee.

Robert V. LaPenta

Marquee. There's going to be competition in the space and again, we've gone to our customers and they're supportive of the transaction because they realize that there are synergies that we're going to bring to the table here and give them the best of breed and an alternative in capability and implementing their new processes but it's going to be a competitive environment. We think we're well-positioned and we'll just have to see how it goes.

Tim Quillin - Stephens, Inc.

Thank you.

Operator

Your next question is coming from Brian Ruttenbur - Morgan & Keegan. Please go ahead.

Brian Ruttenbur - Morgan Keegan

The first question I have is about your plans with debt where you can take debt up to right now, especially with the Digimarc transaction and what the plan is?

Robert V. LaPenta

The plan is as follows, we, right now, have about $100 million outstanding on our line, $100 million, $105-ish million, we have a convert outstanding of $175 million which really is at the holding company level and is really not counted against any of our covenant ratios. We expect to conclude a banking line and facility of a number which would very handily accommodate this transaction and provide us with additional dry powder for some future transactions which we're considering.

Now, in that vein, if you just take a look at where we are, if we don't do another transaction between now and the end of the year, which I think is unlikely that we will not, at the end of the year which, I think, is unlikely, unlikely that we will not, at the end of the year our line after the Digimarc transaction, let’s say it goes up to $225 million, we’re going to have free cash flow of around $60 million. So we'll be at $160 million in debt with a run rate of EBITDA north of $110 million. A very, very comfortable position.

A future acquisition that we are considering we will not use stock for and we will use cash. And again, the line that we are currently negotiating with the banks will accommodate that.

Brian Ruttenbur, Morgan Keegan

Okay. Thank you very much. I appreciate it.

Operator

Thank you. Your next question is coming from Jeremy Grant - The Stanford Group. Please go ahead.

Jeremy Grant - The Stanford Group

Thanks. Good afternoon, solid quarter.

Robert V. LaPenta

Thank you, Jeremy.

Jeremy Grant - The Stanford Group

I wanted to know if we could talk a little bit about the detail in terms of, I guess, where the revenues came from. I think the one number that Jim gave was from Secure Credentialing which I assume encompasses just Viisage which is $27 million. What did some of the other units do? What did Identix do? And what did the Intel side do?

 

Robert V. LaPenta

The Intel, as Jim mentioned, had a great quarter. We hired over 150 people at SpecTal for that program that I mentioned that we won.

James DePalma

SpecTal it grew in 2007 first quarter they were in the $18 million range. In this current quarter they were in the $25 million, $26 million range. Here's a company that we acquired two years ago that was doing about between $50 million and $60 million of revenue and with a whole lot of confidence we think this year they'll do about double that. This has been a great, great acquisition and…

Robert V. LaPenta

IBT…

James DePalma

…IBT…

Robert V. LaPenta

…had a great quarter.

James DePalma

…right. Great quarter. Great, great prospects, terrific job. They're increased volume, Michigan, across the board as we indicated the Securimetrics and Identix were on the moderately light side in the first quarter but we expect that to improve significantly over the second, third and fourth quarters.

Robert V. LaPenta

From a mixed perspective, first quarter had about a 41% solution and 60% intel and services and we expect, by the end of the year, it's going to be about 50/50, excluding Digimarc.

Jeremy Grant - The Stanford Group

Okay, can you provide a number of the ACI/McClendon side?

Robert V. LaPenta

They grew at 20%, both of them.

Jeremy Grant - The Stanford Group

I guess because they came in the middle of last year. I'm just trying to get a comp on that for my checks.

Robert V. LaPenta

Well, on a pro forma basis, last year ACI did $50 million. This year they're going to do $60 million. On a pro forma basis McClendon did $40 million. This year they're going to do $50 million.

Jeremy Grant - The Stanford Group

Okay.

Robert V. LaPenta

And again, that's pro forma.

Jeremy Grant - The Stanford Group

Sure. Let me shift to the Passcard the expectations of, I think you said, conservatively, was it 10 to 15 you were expecting this year?

Robert V. LaPenta

Yes.

Jeremy Grant - The Stanford Group

How much of that is from actual cards? I know talking to folks at State there was a component where you deliver, sort of, the up-front equipment, the printers and the initial suite of software and everything that's needed with that. How much of that is coming of, I guess, money you get paid up-front when those are delivered versus from cards you expect to issue?

Robert V. LaPenta

I want to say it's probably 65%, 70% cards.

Jeremy Grant - The Stanford Group

65% to 70% cards. Okay. And my other question was just to get into a little bit with some of the trends, I guess, you're seeing with HIIDE, it sounds like right now there's some big orders coming up that you're waiting for. You've also got, I think, somebody else asked about what's in backlog, what kind of trends are you seeing from the customer besides this expansion module?

And I guess, to follow-up on that is a lot of the biometrics in DoD coming through the supplemental right now and the President suggesting that he's only going to really try and fund it until he leaves office in January with a $70 billion chunk, are you hearing from the customer about plans to try and get around that issue for future purchases going forward or are we going to, sort of, have to wait and see how that works out?

Robert V. LaPenta

There are a lot of vehicles, IDIQ, and GWOT vehicles that provide for the acquisition of biometric products. I believe HIIDE and some of our other IBIS products, BISA and BAT are going to be bought in separate line items and they're going to incorporate HIIDE or PIERS. Now, we just finished during the quarter of a BAT key implementation where they're not going to be able to use HIIDEs on a tethered basis to BAT. Well, there are, I think, 3,000 or 4,000 BATs in the field right now. This would be a great application that the customer intends to implement.

So we have right now, $8 million to $10 million of funded development by the customer and I can tell you they're not spending that because they're not going to buy products. And in addition to that, they're looking at providing this capability to the Iraqis and people in Afghanistan and to some of our FMS countries. So we think the HIIDE and its derivatives are going to be a very nice business for us going forward. There may be competition coming in but I've got to tell you, no one has a $25 million to $30 million R&D head start on L-1. So let them try to catch us.

We think, and we don't have a ton of sales in our forecast this year for HIIDEs. There was one other point I wanted to make. The customer is actually thinking of making these products, HIIDE 5.0 standard issue. That would be an enormous opportunity for us. Again, not included in our numbers but if they're standard issue, there are a lot of soldiers that are outfitted every year, that would be a great opportunity for us.

Jeremy Grant - The Stanford Group

Okay and the final question I had was on Bioscript and how it relates to your revised upwards guidance for the year for revenue? Is that upwards guidance coming mostly from the Bioscript deal having closed or are there some other factors as well?

Robert V. LaPenta

Yes. I think Bioscript added about $15 million and they're doing very nicely, by the way. We think next year's going to be a good year for Bioscript and we've reduced costs, we've reduced the billing material on their products. We want to outsource manufacturing. I think Bioscript's going to be a nice acquisition for us.

Jeremy Grant - The Stanford Group

Real good. Appreciate it, thanks.

Operator

Thank you. Your final question is a follow up question coming from Jim Ricchiuti - Needham & Company. Please go ahead.

Jim Ricchiuti – Needham & Company

Bob, in the last call you alluded to another potential acquisition which I guess you described as a possible game changer. Given the pending transaction with Digimarc, is that more on the back burner or is that still something that you're actively pursuing?

Robert V. LaPenta

We're actively pursuing and it would be a cash acquisition.

Jim Ricchiuti – Needham & Company

Okay. Thank you.

Operator

Thank you. I'd like to now turn the floor back over to Mr. Bob LaPenta for any closing remarks.

Robert V. LaPenta

We appreciate you participating in the call at this late hour. I know it wasn't a great day on Wall Street and you guys are all busy but, again, we look forward to a good second quarter and we look forward to talking to you then. Thanks very much.

Operator

Thank you. And this concludes today's L-1 Identity Solutions first quarter financial results conference call. You may now disconnect your lines and have a pleasant evening.

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Comments

[mr money]

Sounds like id has it going on im buying if lapenta has bought all those shares i see he has thats all i need to know keep up the good work forget about the horses you own and keep this train rolling looks great

2008 May 19 07:08 PM

[sailor sid]

the world needs security,so if you want a real winner get in on I.D as soon as you can.

2008 May 20 02:54 AM