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Executives

Gary Berger - Chief Financial Officer

Gordon Reichard Jr - President and Chief Executive Officer

Analysts

Tom Bock - Bock Evans

Mark Tonowski - Private Investor

ISCO International, Inc (ISO) Q2 2008 Earnings Call August 19, 2008 12:00 PM ET

Operator

Good afternoon. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to the ISCO International's Second Quarter 2008 Investor Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

I will now turn the call over to Mr. Gary Berger, Chief Financial Officer. Please go ahead, sir.

Gary Berger - Chief Financial Officer

Thank you, Ashley. Good afternoon, ladies and gentlemen and welcome to the second quarter ISCO International Investor conference call. Today, I will have a speaking part, as will Gordon Reichard, our President and CEO of ISCO. And with that, we will start with the Safe Harbor reading and we'll go from there.

Before I start, I will read our Safe Harbor statement and explain the basis of presentation of our financial results. Certain statements in this presentation relate to future results that are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, the accuracy of which are necessarily subject to risks, uncertainties and assumptions as to future events that may not prove to be accurate.

Factors that could cause actual results to differ materially from those expressed or implied include general economic conditions and the factors discussed in our most recent Form 10-K as amended, and other filings with the Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

I will reference non-GAAP information in this presentation. Non-GAAP information should be considered a supplement to, and not a substitute for, financial statements prepared in accordance with Generally Accepted Accounting Principles.

With that, we will spend a couple of minutes going through financial results for the second quarter, the second quarter year-to-date and a brief comparative of the second quarter to the first quarter of this year.

For the three months ended June, 2008 compared to the first quarter of 2007 our net sales decreased approximately $237,000 or 27% to a total of $2,486,000. We attribute this decline largely to the backlog of orders in 2007, beginning with the second quarter. This reduction was partially offset by the addition of our Clarity software business, which was acquired in January of 2008 and therefore not included in the prior period results.

Gross margins declined $546,000 due to lower hardware shipments, again partially offset by the inclusion of our software business at Clarity. Gross margin rates declined to 47% of revenues from 50% for the same period in 2007 due to the inclusion of the hardware business -- or the software revenues, where costs were incurred in excess of revenues.

The software business is a bit different than a hardware business in that, when you are incurring costs in a hardware business or product-related business, most often those costs are captured as inventory and charged to expense as the products or the shipments are sent out the door.

On the software side, expenses are recognized as incurred and the revenues are quite often recognized over the term of the contract. Therefore, you often have expenses that are incurred in advance of the revenues that can be recognized.

Cumulative deferred revenue, which represents revenue that will be recognized in future periods, increased to $800,000 as of June 30, which was up from $300,000 in June of 2007.

Our research and development expenses increased $622,000 for the three months ended June 30, totaling 1,284,000 compared to total research and development expenses in the same period in 2007, which in total 662,000. The entire net increase in our research and development expenses is attributed to the addition of Clarity as the expenses in the hardware business declined approximately $40,000 compared to the prior second quarter period.

We expect research and development spending to continue at approximately the same rate for at least the third quarter as efforts continue in new product developments for both hardware and software product offerings. Sales and marketing expenses remained flat at approximately $698,000 for the three months ended June 30, 2008 compared to 671,000 for the same 90 day period of 2007.

In addition of expenses in the category associated with sales and marketing of our software products, the increase here associated with that were offset by vacancies in the hardware sales organization along with lower sales commissions due to lower bookings in the period. We expect expenses in this category to increase for the remainder of the year, as additional internal and external sales resources are added and as we realize expected increases in order activity specifically in the fourth quarter.

General and administrative expenses increased by 214,000 or 22% when compared to the same period in 2007. Again this entire increase can be attributed to the inclusion of Clarity as there was a slight reduction in expenses during this quarter associated with the hardware business. Our reduction in compensation related charges associated with the stock grants for employee was the primary driver of the lower expenses associated with the hardware business.

The G&A expense category includes stock compensation, legal and audit expenses, building rents, liability insurance, as well as expense associated with being a public company for the entire organization not specifically split between the hardware and the software business and not allocated to any of the functional areas. Expenses in the general and administrative expense categories are expected to continue at second quarter levels for the remainder of 2008.

Comparing year-to-results, June 30, 2008 from June 30, of 2007, our net sales totaled 5,243,000, which represented an increase of about 867,000 or 20% from the same period in 2008. The addition of Clarity accounted for the largest potion of that about $720,000, but we also realized higher hardware sales in this six month period.

Gross margins on hardware sales were $105,000 higher for the first six months of the year compared to the prior year, most of the margin increase was due to the higher volumes in the hardware group. Gross margins increased in the hardware organization to 46% from 45%.

To give you a bit more background the percentage of our dANF, which is our digital noise mitigation product, and the year-to-date period in 2007 dANF revenues accounted for approximately 13% of our total hardware business. In the same six month period of 2008, it accounted for approximately 34% of total revenues in the hardware business, so a definite increase in the predominance of the dANF as a percentage of the total hardware sales.

Research and Development spending totaled $2,874,000 for the six months ended June, an increase of $1,591,000 from the same period in the prior year, again primarily due to the inclusion of Clarity. R&D spending in the hardware business was flat compared to the prior first half of the year period.

Sales and marketing expenses for the first six months of 2008 totaled $1,634,000 which was 30% higher than the prior year. Again, the total increase is due to the addition of the Clarity software business, which was partially offset by reductions in spending on hardware sales and marketing efforts, again due to lower head counts in the marketing organization and lower professional fees.

Sales and marketing expenses represented approximately 31% of total revenues for the 2008 period versus 29% for 2007. So as you can see, there is a higher percentage of revenues. Expenses as a percent of revenue in the sales and marketing expense category were higher in the 2008 period than they were in 2007 reflecting our shift and focus to sales and marketing activities.

General and Administrative expenses for the same period for the first six months of 2008 were $2,444,000, which was about 12% higher than they were in the prior year. General and Administrative expenses in the hardware business were about $150,000 lower than the prior year with the increase being driven by the inclusion of Clarity, which again was not included last year.

For the three months ended June 30, 2008 compared to the three months ended March 31, 2008, our net sales decreased $271,000, or approximately 10% to 2,486,000 for the quarter ended June from 2,757,000 million in the first quarter. Lower hardware sales were the primary reason for the lower sales volumes.

Consolidated gross margins increased to 47% from 44% in the first quarter, so we made progress in the gross margin arena even with lower volumes in the second quarter. The higher proportions of margins in the second quarter were comprised, again, of our dANF product family than they were in the first quarter.

Software revenues were flat in the second quarter compared to the first, while margins were lower in the second quarter, again due to the costs incurred in excess -- in advance of revenues earned, which resulted in an increase in deferred software revenue of approximately $300,000. This is revenue that will be recognized in future periods.

Research and Development expense for the quarter ended June 30 totaled $1,284,000 and was $306,000 or 19% lower than during the first quarter of the year. Software reductions and head count in the software organization, research and development were the primary drivers of those results of the lower expenses.

Sales and marketing expenses for the quarter ended June 30 totaled $698,000 or 25% lower than during the first quarter. Hardware expenses and software expenses were down approximately the same amount, primarily due to lower head count in the sales organization, as previously mentioned, along with lower recruiting and travel expenses.

General and Administrative expense for the second quarter totaled $1,196,000 or 4% lower than during the first quarter of the year, primarily due to lower professional services.

Consolidated net loss for 2008 totaled 5.138 million for the first six months, which is 1.009 million or 59% higher than the previous year. Net loss from the hardware business was 2,874,000, which were $355,000 lower than the prior year-to-date period. The Clarity software business, the loss for the year is $2,263,000 on revenues of approximately $722,000 from the six months ended June 30.

Just a brief mention of a couple of highlights on the balance sheet, inventory has declined $245,000 since the March 31, first quarter, continued focus on the operations team of minimizing the inventory and continued working with our outsourced manufacturing partners to minimize inventory levels.

Receivables were down 566,000 from the March 31 period and the days sales outstanding stood at approximately 60 days outstanding at the end of the second quarter versus 72 days, so a substantial reduction in amount of receivables or days receivables outstanding. Total working capital decreased approximately $500,000 since March 31 and approximately $2.4 million since year-end.

In summary, year-over-year, the core hardware business is better, margins are better with a higher percentage of the revenue coming from the dANF product family. Quarter Two results were better than Quarter One. Operating loss was approximately $500,000 better, and the software business has presented financial challenges that we continue to address.

With that, I will turn the meeting over to Gordon and some comments about the business in general.

Gordon Reichard Jr - President and Chief Executive Officer

Thank you, Gary. Good afternoon, everybody. It is a good day. I'd personally like to thank everyone for attending the ISCO International FY 2008 Q2 earnings call. I appreciate your time this afternoon and look forward to your questions at the end of this session. I also appreciate and thank you for your patience after we rescheduled our earnings release and this call at the last minute last week. As you know by now, we delayed the call in order to allow us the time to complete the negotiation of our new credit agreement.

My comments today, as similar to the previous call, will be divided into three distinct sections. First, I will address the immediate issues facing the Company, along with the challenges and risks. Second, I will refresh everyone about our longer-term focus and the patience that will be required and third, we will focus on execution. I will highlight current activities and successes, because we are making progress. In all cases, there are customer specific successes and activities that I cannot disclose without jeopardizing our business and our future with those customers.

Let's start with immediate issues facing the customer or facing the Company. Most immediate and pressing is our current cash position. As Gary stated, we will continue to burn cash and our plans project we will continue to burn -- we will be a net user of cash for the foreseeable future. This is good news in that our cost-reduction initiatives, including the staff reduction and refocusing efforts, are showing results.

Specifically, our operating expenses have decreased nearly $600,000 or more than 20% from Q1 to Q2, as Gary had described. I'm also happy to announce that we've reached an agreement with the current lenders to provide $3 million of additional funding. This is approximately an additional $2.5 million on top of the $550,000 that was remaining in the current line of credit.

In connection with this incremental round of funding, we will continue to evaluate the Company's various lines of business. We will continue to refine our strategy to spend our limited available funds where we will be most productive and to reduce or eliminate spending in areas where we don't see enough potential or where the returns, if any, will occur too far in the future. This is all in order to reach sustainable, positive cash flow profitability as soon as possible. Additionally, we are investigating other operating models and fresh capital sources for the business that the current lenders have indicated a willingness to consider.

Another concern may seem obvious, but in this instance, it is worth stating. The state of the economy and the expected combination of Verizon and ALLTEL will have some level of impact on network build plans of our customers. That impact will affect our core ISCO hardware business. We don't know, what we don't know is to the extent and duration of the impact on our revenue.

While, in general, the news is good, since our AIM products, the Adaptive Interference Mitigation and Management products can help carriers reduce their build out cost a dramatic slowdown in capital spending will directly and immediately impact our business negatively.

As you can tell from our Q2 revenue, we were a little soft. At this point, Q3 is seeing the same softness. Overall, the wireless marketplace remains strong. It seems, however, we maybe experiencing a short-term pullback in spending that will affect ISCO no differently than some of our largest other infrastructure providers.

I do want to take a moment right now and expand on a comment I just made on how we can actually reduce a carrier's build out cost. We are currently engaged with multiple carriers worldwide to implement our AIM products throughout their networks. When a carrier deploys our dANF and AIM products, they can expand the coverage of their cell sites, or they can turn up additional cell channels, or they can eliminate transition zones, which returns previously unavailable bandwidth, or they can reduce cell sites downtime. All of these applications for our AIM products result into things for our customers -- more calls, more revenues without having to build additional more costly cell sites. As it relates to the software business, our immediate concern is the gap between revenue and the cash needed to fund continuous development of the Clarity solutions. The long sales cycles and customization associated with the state, local federal customers are now understood, but are burdensome to our business. While the relationship with the Department of Homeland Security is very valuable, it may take up to two years to realize sizable business resulting from the introductions and sponsorship we enjoy with the Department of Homeland Security today.

The joint marketing relationship with Raytheon and our other newly added reseller can possibly shorten these sales cycles, but the challenge to fund this business remains. We are evaluating numerous options that will allow this business to realize its potential.

Now, let's shift to the second part of our discussion, the longer-term plan. We are now into the third month of a 12-month plan. The initial initiatives of the plan were cost reductions, staff- related changes, creation of new channels, refocusing of the business on AIM products, new programs, and beginning a transition to a sales and marketing-oriented organization. All of these things have started, they continue, and by some of the numbers that Gary has provided to you, are actually showing results. But we are early in the process.

Take a typical -- you know, for an example, take our typical hardware customer sales cycle. Based on applications for our AIM products, the typical time from the first meeting with a customers to securing the first order with that customer averages about six months. In two recent instances, we have been able to compress the sales cycle slightly, but other engagements have been much longer and are ongoing. With an average of six-month sales cycle, substantial new incremental revenue from new customers will not be realized until 2009.

Equally as time-consuming is the establishing of relationship with OEMs, distributors, and/or resellers. ISCO has never established a successful reseller relationship, so as we do this, we are working through the process for the first time. We are projecting it will take us no less than four months from the first call with a distributor or OEM before a reseller or distributor begins to market our AIM products. We are in talks with multiple prospective channel partners to date. Interest is high and continuing to evolve, but we are in the very early stages of this process. Our current plan includes the addition of new distributors -- I'm sorry, of new distribution channels, and we intend to continue to work to develop them.

Up to now, our customer base has been dominated by CDMA carriers Verizon and Alltel. These are great customers, but having only two customers does not make for a solid business. As outlined in our last call, we are confident that the market for our products go far beyond Verizon and Alltel. Success here continues to be a matter of identifying target underserved markets, the channels to get there, and the value propositions for each of those customers. At this time we have answered those questions and have launched multiple initiatives to pursue the identified market opportunities.

Internationally, we've identified and validated attractive opportunities. These include large carrier deployments of UMTS and smaller carriers with 450 MHz CDMA networks. Both target markets for represent incremental revenue to the Company but both require us to create entirely new distribution capabilities from the ground up and then begin to build those customer relationships before we can recognize those revenues. Collectively, the AIM products with these target customers could be significant in 2009 and 2010.

As you know, -- as I know you have heard these claims before, but this time the network rollouts are real, which creates the need and seems to be occurring, and we are better qualified -- we have better qualified the value propositions to these customers. To be clear, however, we are now projecting thousands of units in 2009, but we strongly believe the international market opportunity is a very large one.

Here in the US, we continue to secure new business from new carrier customers and simultaneously expand our presence within our current customers using our direct sales force. The new customers should begin to impact our revenue noticeably during Q4 of this year. We are not, however, effectively addressing the opportunities that exist with the Tier 2 and Tier 3 carriers. This represents incremental new revenue to ISCO. Our plan is to address this incremental revenue opportunity through distributors, resellers and educating the consultant marketplace. We have initiated efforts to enter these markets through indirect channels, but it is not likely that they will impact our revenue this year.

Overall, we have initiated new market initiatives, both here in the US and internationally, to tap into previously un-addressed opportunities, which we believe will begin to materially impact our revenue and income in 2009. Our plans also reflect that. Our costs-containment efforts will continue going forward. The transition to a more sales and marketing company has started and will continue. You will be able to measure this by the increasing amount of communications that you receive, the number of sales resources that we add, the channels and supporting programs that we create.

While patience will be required as it relates to immediate revenue, you should measure our progress by seeing the new distribution agreements that we announced, the greater number of educated consultants that are promoting our product, the addition of new OEM agreements, expanding the presence within our customers, and brand-new customers. I believe establishing this foundation will result in a longer-term sustainable performance for our shareholders.

Now let's talk about execution and highlight the progress that we've made so far. Personnel-wise, we added Jack Christie as our VP of Sales. Jack will off load Amr of the responsibility of running sales so that Amr can focus his attention on operations and engineering, in particular completing the DIF and ramping up operations of the DIF to meet expected increases in sales volume. Jack brings all important dedicated focus and a new level of discipline to firm.

Since I've arrived, it has become very clear that we are making progress, but at the same time we are missing many very unattainable opportunities. Jack is working closely with the sales team establishing and executing plans to win these newly identified opportunities.

In addition to TVS, our Indian partner, we signed a new sales representative that will focus on opportunities in India and Asia while also supporting opportunities being identified with TVS. This sales rep has already identified and is working AIM opportunities that could possibly occur as soon as late fourth quarter. Remember, as a note of interest, India is projecting nearly 100,000 new cell sites of their own.

New Q2 customers included a major new North American carrier, which I regrettably can't announce, and the South American carrier Telesur, which I referenced during our last call and we announced in a press release just a week ago. In both cases, first units were shipped during Q2 with plans for more during Q3 and Q4 of this year. These are both very positive accomplishments in Q2 and have the possibilities of producing solid revenue for many quarters to come.

Progress continues in Europe and Eastern Europe supporting UMTS deployments and 250 megahertz CDMA deployments. In multiple cases, we have verbal agreements to implement trials of both the currently shipping dANF AIM product and the soon to be available DIF product. This summer's holiday season has added unwanted delay, but we are continuing activities both here and abroad, regardless. We anticipate faster progress will resume later this month and into September as everyone comes back from holiday.

We are planning first customer trials of the DIF in Q4 of this year. Unfortunately, I have to share with you we have experienced several unplanned employee departures that have negatively impacted the product development schedule and availability at DIF. We are cautiously optimistic we can recover some lost time, but we will be delayed from the original release schedule.

I am fully aware this is disappointing given the history of this product. However, what I can offer you this time different than in the past are the following. First, completing the DIF is Amr's highest priority and the highest priority of this company. We are focused on rebuilding the team and launching the DIF product as soon as possible. We are actively interviewing new engineers as I speak.

Our 2009 revenue is counting on the completion of DIF this year. Second, we have stopped the pre-marketing of DIF. We have a fantastic, unique product in the currently shipping dANF. We have identified the markets, the value proposition, the programs, all for the DIF, and we are selling the DIF. Guess what? Customers are buying it. The current products at its current price, its current form, provide real tangible value to customers, but you have to sell it.

The DIF is key to expand the market, but we have a really good product now and we are selling it. Third, previously we were basically selling to one customer. Well, that is over. We have already added three new significant dANF customers and more worldwide have been identified. In fact, many continue -- we may continue to ship the dANF for some period after the DIF begins shipping. That's a product-management decision that does not need to be made now. The key point is that we have a product today that is shipping and demand is growing.

We are deliberately -- and then the fourth, fourth and final for this session, we are deliberately repositioning the dANF value proposition by focusing on messaging that is directly related to improvements of the wireless user experience and the immediate benefits the carrier can realize. This change conveys the true solution for the carriers in how it improves their operation, and we couple it very tightly to the return on investment. It makes it much, much easier for the carrier to make a purchase decision of the dANF today.

On the software side of our business, we've added a resource focused on the sale of Clarity software products. This resource will not only support our current relationships, it is also aggressively pursuing new strategic partners that can bundle our Clarity public safety solution with their network service or their own public safety solution.

We are very pleased to announce that we have achieved the second key Department of Homeland Security milestone during Q2 and we have already achieved the third milestone here in [Q2]. As Gary mentioned, regrettably we had to recalculate the recognition of the DHS revenue, but regardless, these accomplishments are substantial and continue to validate the differentiation of the value of the Clarity public safety solution in the marketplace today. We have now completed three of the four milestones with DHS and are on track to achieve the fourth and final milestone in September, as originally planned.

In September, we will complete Release 8 of the Clarity public safety solution, releasing the first commercial version into the marketplace. In addition to Department of Homeland Security, we continue to demonstrate the pre-released version of Release 8 to potential customers with our joint marketing partners.

Also during Q2, we signed an agreement with a provider of cellular services that intends to bundle the Clarity public safety solution with their cellular service. Even though we have not announced this agreement publicly, we are actively demonstrating the solution to many of their customers.

So let me summarize and then I will open the floor up to questions. First, based on our revised focused approach to the business, we have successfully secured incremental funding. This is a big deal. This is a vote of confidence from the current lenders and a testament to the people here dedicated to see ISCO become successful. At the same time, we remain committed to continuing our analysis of all strategic options available to us for our various lines of business. While our plan is no different than any other plan with all of the unknowns and uncertainties, we believe our approach to leverage channels, employ disciplined account planning, and clearly communicate our products value propositions is a realistic and achievable plan.

Second, we will continue to tightly manage expenses while creatively expanding our business through channels, OEM and performance based partnerships. We will add sales and marketing resources and continue our aggressive transformation to a sales oriented organization.

Third, based on our growing customer base of AIM products and the growing list of applications for our adaptive interference mitigation management products, we believe we are on the right track to maintain the margins we are beginning to realize. We also believe this will lead to a consistent trend of increasing revenue using our dANF products today and evolving to the DIF once it's complete, and not sooner.

Thank you again for your attention. We will now open up the floor to your questions. Thank you very much.

Question-and-Answer Session

Operator

(Operator Instruction). Our first question comes from Tom Bock with Bock Evans.

Tom Bock

Hello gentlemen and congratulations on the funding. I had one question, if I could, for Mr. Reichard and two if I could for Mr. Berger. For Mr. Reichard, what sorts of obstacles or objections to ISCO's dANF solutions are you hearing from operators of the various 450 MHz systems?

Gordon Reichard

This is Gordon. You know, we are not hearing a lot of opposition. It's more of a challenge for us to get in front of the network operator, to communicate what it is a product does, how it does it, and then put the steps in place to execute a trial. I can't point to specific objections. It's, again, it's just brute force getting out there in front of those customers.

Tom Bock

I see. Do you believe -- just a little follow-up to that one if I could? Do you believe the Telesur thing opens the door to other like networks that have a similar operator, like Alcatel or similar systems? Does this help you shorten your timetable?

Gordon Reichard

Yes, we've identified the 450 megahertz CDMA networks around the world, and we are engaging in discussions with them, with those carriers. Yes, the Telesur win is a very meaningful, very valuable success for ISCO because it does clearly prove out the value proposition, one of the value propositions of the dANF adaptive interference product. In the Telesur case, it clearly allowed that network operator to substantially improve the call capacity, cell site coverage, and call performance of their network very, very, mind you, very cost-effectively.

Tom Bock

Thank you very much. Now, if I could, for Mr. Berger, I just had two questions for you. The first one is how are you insulating the Company from currency risks when you do these overseas contracts like the Telesur contract?

Gary Berger

What we did on the Telesur contract is we received half the total amount of the shipment in advance of the shipment, and with that, we felt we were in good shape. We had already shipped them one unit on a smaller trial basis, both for their site and ours, and they had paid that on time. Given the magnitude of the order that we shipped them, we asked for half of the money upfront and they were willing to pay that. On the other part, we received money in less than 30 days for the remainder of the original hardware shipment. That will be our approach go forward. To the extent we can get money upfront from customers, that would certainly be our preference. To the extent we don't do that, we will look for letters of credit that we can go against that, based on the passage of time, once we present shipping documents, we could go out and get the money. As far as currency risks, as far as currency fluctuations, given the short cycle from when we ship the product to when the [monies] are due, first of all, we are asking for payments in dollars and then the short cycle time. I don't think there's much risk there in 30-day payment terms.

Tom Bock

Thank you for that. Then my last question is we saw the deferred revenues in the 10-Q you just filed. Can you tell us what the effect on deferred revenues in Q3 the Telesur contract by itself is going to have?

Gordon Reichard

The only revenue that we have remaining on the Telesur contract are some training work that we need to do, the maintenance contract on that, and the installation work that's presently going on. In fact, we have one of our representatives down there this week working with them to train their employees and also helping with some of the installations. So all of the -- for the contracts we have with Telesur at this point, we've shipped everything that there is but we also have our sales representative down there working with them in an attempt to see if there are other things that they are interested in.

Tom Bock

So just so I understand, that type of a contract, a dANF system contract, does not necessarily have a lot of deferred revenues attached to it for ongoing software, like a Clarity package or something like that?

Gary Berger

To the extent that (multiple speakers) basically the only deferred revenue there is on that is the maintenance agreement. So if I'm offering a maintenance contract for one year, I would recognize that revenue over that one-year period.

Tom Bock

I see thank you very much that’s all I have.

Gary Berger

Thank you.

Gordon Reichard

Thank you.

Operator

Our next question comes from line of Mark Tonowski with Private Investor.

Mark Tonowski

Hello

Gordon Reichard

Good afternoon.

Mark Tonowski

Gordon, you made a statement here about progress should be gauged based on the number of new OEM announcements and partnership PRs that will be coming out here. You also stated that it typically is about a four-month startup time from the time you start a new channel partner before you they are actually out there selling your product.

Gordon Reichard

Right.

Mark Tonowski

I guess I draw attention then to the announcement that I thought came out either in January or February regarding the new channel partner in India. That has certainly been more than four months. Then the group, the sales force in Europe, that's if not four months is coming awfully close to that. Do you see -- starting to get some good traction from either of those two units in the third quarter? If not, why is it taking so much longer for them? I guess, if we had a product that they were eager to sell, I forget the exact wording you used in the sales force Europe PR.

Gordon Reichard

Yeah.

Mark Tonowski

But boy, I would think those things would be selling like hotcakes now.

Gordon Reichard

Well, all right, let me try and address your question. So I will start with salesforce Europe. That was a conscious decision we made to sign up salesforce Europe when we did, because what we did is we started the training and the awareness of the salesforce Europe organization before the holidays, the holiday season over in Europe. Knowing that all of Europe basically goes on vacation, that's -- I mean, that's what we were planning on. But we decided to do that because when everybody comes back from vacation starting probably next week and certainly by the end of August, salesforce Europe will be ready to go. So that was the plan with salesforce Europe. So I'm not all that concerned yet on the performance and what we're seeing out of salesforce Europe, because I am seeing good activity starting to pick up in preparation for a fall season, Q3 and Q4.

Mark Tonowski

Okay.

Gordon Reichard

Regarding TVS, you know, TVS, there was one agreement signed with them initially; that was just the high level. The follow-on agreement, which is the one we announced -- when did we announce that follow-up TVS agreement? About July. That's the agreement that actually had more teeth into it, that actually had more go-to-market, more meaning to what we were going to do. So I can't speak firsthand about the first TVS agreement; I can speak firsthand about the second one. What I can tell you is as well is that we had identified now, since that latter agreement was signed, we have identified real-life customers that were working with TVS in India that we are proposing products to as we speak. So again, I'm looking at a TVS -- revenue from a TVS type of relationship to occur maybe Q3, unlikely, more likely Q4.

Mark Tonowski

Okay. Well, I certainly look forward to hearing about those successful sales. I guess I would remind you that although you may gauge progress based on the number of announcements, as a rather frustrated shareholder, I have to gauge it based on what the share price does and where sales go, so I guess we need a mix of the two realities here. I had a second question for you, if I may? The last time I spoke with you, I asked if you had determined the Clarity pricing as to how you were going to sell the product, and you said you were still working on that. Can you share anything more with how you're going to generate revenue from that when you do sell it?

Gordon Reichard

Yes, so I can tell you for sure we have finalized a pricing model; we finalized the packaging. We have two -- I'm thinking two right off the top of my head where we've actually proposed, with pricing, to end customers and that are under consideration by those customers. The pricing, I will break it down. I won't give you the exact numbers and I hope you understand why, but the components for Clarity public safety include a one-time upfront set-up integration certification. So, this is a large number that is a one-time fee that either the partner, the carrier or the end customer would pay for us to configure, provide training, provide certification of a single handset for their use. There is a second one-time charge per handset, if they happen to be using a BREW handset. That is a standard industry for BREW applications. Then there is a third monthly recurring, there's a monthly recurring subscriber fee. That fee is based on -- there's three tiers to that fee. There's a base fee for push to talk, a secondary fee for push to talk plus land mobile radio, a third fee for push to talk plus land mobile radio plus location-based service.

All include the command/control dispatch portal. So that is the way the pricing is put together. We have informal proposals issued at, like I said -- I think there's another one I'm missing but I can think of two offhand that we've issued. So it's real, it's out there, and we are hoping to announce hopefully our first trials and customers here within the next two quarters, hopefully this quarter.

Mark Tonowski

Is it the release of the Version 8, or 8.-whatever of that software which is holding us up now? Is what you have now not salable to the point you'd like to really mass-market it?

Gordon Reichard

The release 8, as I had indicated in my discussion, release 8, as it has always been planned, was scheduled for mid-September. That is on track. The first customer is the Department of Homeland Security for that release 8. Along with that release, that will give us the commercial version that we can sell with our other reseller partner, as well as to add other end customers that we are in discussions with.

So I don't know that it's called us up, per se. You know, the reality is that the sale cycle for these clarity deals could be as long as two years. So I would suggest we've been -- I wouldn't suggest, I would tell you we have been actively marketing the product for probably 30 days now, now that we've had the packaging done and the pricing done and so on and so forth. So we've been actively aggressively marketing this turnkey solution. That starts what could be in some cases a two-year sales cycle.

Mark Tonowski

Okay. If I'm a citizen of a community and I have a natural disaster, I sure as hell don't want to wait two years for the emergency vehicles to come and help me out. What can you do to market this to maybe get the public to step up I guess? If you have something that's going to make emergency response a whole lot valuable and useful, I would hope that we could get the government wheels rolling a whole lot quicker than two years to get through this.

Gordon Reichard

Well, you know, the good (inaudible) validation regarding your statement. I would have to point to the Department of Homeland Security. The agreement was signed with the Department of Homeland security because they recognized an opportunity to improve the way public servants dispatch and deliver whatever services that they provide for all of us. Department of Homeland Security recognized and has been very vocal that Clarity is the only current provider with a solution that can meet the needs that they've identified and the gaps that currently exist in the public sector, that gap being somebody that can provide coverage from coast-to-coast using push to talk over cellular, coupled with land mobile radio interoperability, coupled with location-based services providing what we call is active situation awareness, or the next generation of user groups. So the Department of Homeland Security recognizes this. We are working very closely with the Department of Homeland Security to promote this solution to state, local and federal agencies across the United States. We are in active discussions with a number of state, local and federal agencies about the deployment of the solution. Now, this will start with a trial. In all cases, in all cases, the deal will start with a trial. Some trials maybe as short as three to six months, others could take a year and a half. It is just the nature of dealing with the public sector. It is what it is.

Mark Tonowski

Okay. I believe, towards maybe the first of the year, that there seemed to be a delay in Europe moving forward to the UMTS migration. I think, at that time, you projected, in third quarter, you thought they would be moving much further in that direction. Where do you see that migration at this point?

Gordon Reichard

Well, you can pick up the trade publications and industry reports and so on, the pace of 3G deployment worldwide, whether that's UMTS or whether that's EVDO Rev A is continuing. In some places, it's accelerating, but at minimum, it's continuing. And that is good for us. The dANF product and the new carrier here in the United States is using our dANF product to aid the deployment of their UMTS solution. It increases their data throughput; it increases the call capacity; it increases the coverage of each cell site. The same holds true for the carriers we are in discussions with over in Europe. As they start to deploy UMTS, they need this type of solution, the dANF and more specifically, in a number of situations, they need the next generation, the DIF product. That will allow them to squeeze every bit of bandwidth out of the spectrum that they have available to them. So we are -- I'm very excited about the opportunities that are in front of us for those products. I want to caveat though, the challenge is not that the need is there, or not that the customers don't recognize the need. It's putting the infrastructure, the sales infrastructure, the distribution infrastructure in place enough to allow us to get in front of these opportunities, to have these conversations with these carriers, these network operators, so they can hear the story, so they can see the value proposition and then we would be able to get into a position and sell the product to them.

Mark Tonowski

That's what sales force Europe should be doing for us?

Gordon Reichard

Part of it, yes, they are a part of it. The new representative that we brought on in Asia, the other representative we have down in Latin America, Sales force Europe, all of them are in the effort of expanding our reach and coverage worldwide.

Mark Tonowski

Okay. And then just a final comment on the DIF and the announcement here that I guess came out just an hour before the conference call here about losing two engineers in late second quarter. It was the fourth quarter last year that I believe we were told that DIF was going to be delivered in fourth quarter. And upon clarification, it turned out, well, that was just the version that Europe was going to use and then Europe got delayed and I can appreciate, but then, for the first two quarters of this year, I would have expected that would've been a priority and we would have been pretty much caught up. Now to find out we are certainly set back from losing a number of key individuals, it just sounds like maybe we weren't as far along as we thought we were on it?

Gordon Reichard

Well, I will agree with you; it is unfortunate. I would also indicate that we were on track. Again, I think on one of the last conference calls with all of you, I personally witnessed the first release of the product working. It works and it works very well, and it's actually quite impressive. It's just unfortunate that we had a number -- a couple of our engineers decide to pursue other opportunities. That happens. Engineers are very valuable personnel. We are actively looking to replace those individuals. There are other engineers out there, and in some cases, we are finding better engineers, and we will replace those engineers. We will, regrettably, experience a delay, but again Amr, the big difference between this time and last time, Amr wasn't involved last time. Amr is involved and almost entirely dedicated to getting that product done. He understands the significance of that, I understand the significance of that, and the balance of the company understands the significance of getting that product done. Because it is the window where I don’t think -- I don't think we missed the window last year. We do risk missing the window this year and because we are having very interesting meetings with potentials in Europe that are anxious to test the product. And it's imperative that we get there as soon as possible with the product. We are doing everything we possibly can to get this thing as close to back on the schedule as we can.

Mark Tonowski

Okay. Thank you for that urgency. Thank you.

Gordon Reichard

Thank you.

Operator

(Operator Instructions). Our next question comes from the line of Mark Tonowski, Private Investor.

Mark Tonowski

I guess there's no one else out there. I do have a few other questions here. You mentioned Verizon and ALLTEL were merging. ISCO has been working with Verizon for a number of years, and yet for all the 3G rollouts they've done in the US, it seems like we've never really broken into that big sales quarter after quarter to them. I view it as still that they use us in just special niche areas. If some of these products we have or if the value proposition is really there, why is it that we are not able to make a massive sale system wide to Verizon?

Gordon Reichard

Well, I would first agree with your assessment; that is accurate. And secondly, as I had indicated, we are doing some very deliberate things on the sales side. We have crafted very carefully our messaging, packaging and value proposition different than it has been done in the past. And we are now in the process of aggressively, deliberately and then very methodically communicating that message appropriately within the rank and file of Verizon, ALLTEL, and many other major carriers. That had not occurred that approach had not occurred in the past. So time will tell but we are doing things different and we are doing things that have worked for myself and others in the past and have proved successful. And I anticipate we could enjoy the same success when we do it again this time.

Mark Tonowski

Okay. Thank you.

Operator

And we have reached our allotted time for questions. There are no further questions at this time. Do you have any closing remarks?

Gordon Reichard

No, I do not. Again, I want to just thank everyone for their participation and ongoing support of the Company. And I wish all of you a good end of summer. Thank you very much.

Operator

This concludes today's conference call. You may now disconnect.

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Source: ISCO International, Inc Q2 2008 Earnings Call Transcript

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