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Executives

Michael Gallo - Gutenberg Communications

Grant Evans - Chief Executive Officer and Chairman

Jacques D. Kerrest - Chief Financial Officer and Chief Operating Officer

Analysts

Nick Andrews - Lazard

Sean Jackson - Avondale Partners

[Fred Segal]

Ryan McGaver – Capstone Investments

Joy Mukherjee - State of Wisconsin Investments

ActivIdentity Corporation (ACTI) F3Q08 Earnings Call August 12, 2008 4:30 PM ET

Operator

Welcome to the ActivIdentity fiscal third quarter earnings conference call. (Operator Instructions) At this time, I would like to turn the call over to Michael Gallo at Gutenberg Communications.

Michael Gallo

Thank you, [Therese]. Before we begin I’d just like to remind everyone that statements made in this conference call that are not historical facts are forward-looking statements that may involve risks and uncertainties identified as risk factors in our most recent 10-K and 10-Q filings with the Securities and Exchange Commission. Actual results, events and performance may differ materially from these forward-looking statements, and the company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

It’s now my pleasure to turn the call over to Grant Evans, Chairman and Chief Executive Officer of ActivIdentity. Grant, the floor is yours.

Grant Evans

Thanks, Mike. Good afternoon to everyone. Thank you for joining the call. It’s been 120 days now for me, basically in the position of CEO with ActivIdentity, and we’re – I can definitely say to everybody that we’re well on our way to improvement and a clear strategy to grow the company and move forward.

Let me review a series of specific actionable items that were completed since our last call. We’ve implemented several key initiatives to improve the overall wellness of the company and position the company for future growth which is critical and to stabilize the company going forward. We continue to reduce our headcount and streamline our operations to gain greater efficiency. We’ve held and continue to drive and reinvigorate ourselves, team with stronger initiatives, stronger product offerings and realign and refocus along their core technologies. This is an ongoing process. We anticipate that we’ll have our clear direction launch before the new year.

We’ve signed a number, and continue to sign more key contracts both in North America, Europe and Asia and I’ll touch on those slightly later in the call, and this is part clearly tied to future growth and where we continue to push.

We’ve appointed a new CFO, Mr. Jacques Kerrest. This was a long process. Jacques has an impeccable résumé. He brings significant wealth to the organization from a financial, operational experience. He’s led many companies in the public sector as a CFO. Very excited with him joining the company and combined with our board, more than some 85 years of operating experience in this sector.

Later in the call I’ll also discuss guidance for our 2008, so let me be specific on some of the actions. We began implementing a wellness progress which is comprised of two elements. One is streamlining and reorganizing the organization to be better focused and better aligned with our markets and customers. The second one is to launch and begin to finalize a growth initiative.

In terms of the headcount and realignment, year-over-year we’ve reduced the organizational headcount by 44 people. This last quarter, Q2 over Q3, the headcount reduced by 17. That represents a 13% year-over-year and 6% head count reduction for the quarter. This is clearly an initiative that we have to get the company’s operational budgets in line with our revenue where we are, and stabilize where we are as a company and that will be an ongoing effort for the next quarter as well.

Our gross margins have improved 60% compared to 57% last quarter. We continue to focus on this and realign our energies around our core technology and go-to-market initiatives with an overall sales strategy. We want to be a market-driven company rather than a product driven company. We sell into key markets, and I’ve mentioned this to you previously, but we will continue to emphasize this and focus more on these areas which is based on business to employees, business to consumer and the government to citizen area in which we have customer base in all three of these sectors, and we’ll share more details of that toward the latter part of our physical year and the launch of the new year, what our clearer defined strategy is as we finalize that in the coming months, coming weeks rather.

Some of the sales highlights for this last quarter for North America; we began a number of what we call smart employee ID implementations using our core technology of card management systems. We continue to work with a large number of Fortune 500 enterprise companies in those implementations. We began a series of high level of activity among some of our largest financial services which is a growing sector that we intend to push forward in a very formative manner in the coming periods.

In the federal government side we’re currently working on physical and [inaudible] access control systems with the U.S. Patent and Trademark office. This project’s really driven by the HSPD-12 initiative from the government.

Other highlights in the European sector; we secured several new contracts in the business to consumer and the enterprise market. This included a top tier global bank with what we consider a key product going forward which is a 4TRESS server. The 4TRESS server is a multichannel authentication product that was for about 70,000 user implementation.

We also secured a bank in Africa with the same technology and the same product, and one of the largest Nordic banking groups. So the financial sector is an area that we’ll continue to drive in the future and will continue to be integral to our strategy going forward.

In the enterprise side we launched a program with British telecomm, key long-terms customers in Q3 worked toward steps for secure remote access for their employees. We also secured a top tier U.K. government entity with the smart employee ID implementation.

In Asia-Pacific area; it’s an area that we are experiencing strong growth in. We signed a number of significant deals. A bank in Malaysia with a software purchase of over 100,000 users using, again, our key product called 4TRESS server which is a major pedestal going forward for us. This is the first major 4TRESS deal for us in the APEC area with a bank, technology partner called Temenos, which is one of the top three back end infrastructure partners in the banking industry.

We also delivered on a Australian bank some 10,000 tokens with another 15,000 expected in Q4 for an overall potential of 200,000 tokens. We also have signed one of the largest banks in Korea, which is over 90,000 tokens. We will reach 120,000 to 160,000 in Q4 with a total delivery of over 240,000 units by Q1 of ’09.

I’m going to elaborate a little bit more on our CFO, Jacques Kerrest. We’ll continue to build the management team and strengthen the company in a number of areas. This is a key critical role. We’ll take on the role, not only as the CFO but the COO. Jacques has significant financial experience and will be an asset to the team. We’re looking for a strong leadership and notable record in building the company through transformational M&A and managing new growth and organizational challenges the company faces.

A new management team and four new board members are now in place, and we’re looking for that combined alliance to drive this company in the future and its future growth.

I want to reiterate the company’s commitment to corporate turnaround and market potential for identity access control. We will drive not only our top line with very clear, specific initiatives in sectors that we focus on and will narrow in the coming months, but we’ll also drive our operational efficiencies to ensure that we deliver to the shareholders a well-metric’d and well-driven company that is delivering profitability.

Jacques is in place now and starting to get up to speed. He’ll work closely with [Jerry]. [Jerry]’s done an admirable job of helping us through this transitional process as well as the rest of the financial team again for this quarter. With that I want to turn the call over to [Jerry] for financial review of the quarter.

Jacques D. Kerrest

Thank you, Grant, and good afternoon, everyone. ActivIdentity’s revenue for the third quarter of fiscal 2008 was $14.3 million as compared to $13.6 million in the second quarter of fiscal 2008 and $16.3 million for the third quarter of fiscal 2007. Considering hardware and software revenues, hardware and software revenues from our enterprise business was $6 million in our fiscal third quarter of 2008. This represents an 8% increase from last quarter where enterprise business was $5.6 million and a 24% increase from the same quarter a year ago when enterprise business was $4.8 million.

This enterprise business accounted for 66% of total hardware and software revenue compared to 63% of total hardware and software revenue from last quarter and 45% of total hardware and software revenue in the year ago quarter. We continue to grow our installed based in the enterprise sector; however, again note that predicting the timing of large deal closures, which essentially drives much of our revenue variability, is a challenge and continues to be so.

Revenue from government business was $1.9 million, essentially matching the government business from last quarter and was down from $4 million or 53% down when compared to the same quarter last year.

Government sector customers provided 21% of total hardware and software revenue as compared to 22% last quarter and 38% from the same quarter a year ago. We continue to be affected by a general slowness in the government’s implementation of our GSA managed services offering contract, and essentially less than expected government spending which we feel is due to general economic condition.

Financial services hardware and software revenue was $1.2 million as compared to $1.3 million in the prior quarter and $1.8 million from the same quarter last year. Financial services represented 13% of total hardware and software revenue as compared to 15% in the prior quarter and 17% of total hardware and software revenue in the same quarter last year.

Our maintenance revenue in Q308 was $5.1 million or36% of total revenue, which compares to $4.8 million or 35% of total revenue in the prior quarter and $5.7 million, also 35% of total revenue in the same quarter last year. New sales and timing of renewal activity generally drive these variances in the maintenance revenue.

Considering gross margin, as Grant mentioned, our gross margin for the June quarter was 60%, six-zero, as compared to 57% from the prior quarter and 63% in the same quarter last year. Margin variances are predominantly due to product nicks, and particularly hardware and software revenue combinations as well as volume considerations in terms of hardware pricing.

Our operating expenses; total operating expenses were $13.2 million in the quarter just ended. Q2 2008 operating expenses were $49.9 million, though 35.9 million of this was due to goodwill impairment. Removing the goodwill impairment effect, ongoing operating expenses were down $.8 million or 6% quarter over quarter. Compared to the year ago quarter, operating expenses were lower by 15% or $15.6 million in Q3 of 2007.

Sales and marketing expenses specifically were down $1 million to $5.8 million or 15% down from last quarter, driven largely by lower severance cost in this quarter and lower commission expenses. G&A costs, however, were up $.1 million or 4% from last quarter to $2.6 million, again due to severance costs. R&D expenses were flat at $4.7 million.

Other expenses were $2.9 million this quarter; $1.9 million of this represented a non-cash one time charge related to accumulated translation losses resulting from a dormant Australian entity that we liquidated in this quarter, this causing the translation losses to be transferred from other comprehensive income from the equity section of the balance sheet to the P&L. Point eight million of other expense represented in other than temporary write-down of our option rate securities portfolio again this quarter, so our GAAP net loss for the third quarter was $7 million, or $0.15 loss per basic and diluted share, compared to a GAAP net loss of compared to a GAAP net loss of $42.5 million or $.93 per basic and diluted share in Q2 of 2008. Q2 2008, as I mentioned, included the $35.9 million goodwill charge.

Our GAAP net loss in Q3 of 2007 was $2.7 million or $0.06 per share loss. Our non-GAAP net loss for the quarter ended June 30, 2008 was $2.7 million or a loss of $0.06 per basic and diluted share compared to a loss of $1.5 million in Q2 of 2008 or $0.03 per share.

In the third quarter of fiscal 2007, we had a loss of $1.2 million or again $0.03 loss per share. Non-GAAP net loss for Q3 of 2008 excluded the $1.9 million attributed to the accumulated translation loss due to liquidation of the foreign entity I mentioned. It also excluded the other than temporary impairment charge of $.8 million for option rate securities. It excluded $.8 million of stock-based compensation, $.6 million of amortization expense and $.3 million of severance expenses.

I note – please reference the earnings press release that we – that was dated yesterday for a specific detailed reconciliation between the GAAP and non-GAAP presentations that I mentioned.

Cash, cash equivalents and investments were at $14.3 million in the quarter compared to $116.7 million in the prior quarter. The decrease was due predominantly to the net loss for the quarter and the additional impairment of the option-based securities this quarter.

Our current backlog which consists of all unfulfilled orders as well as all deferred revenue, including software maintenance revenue was $20.7 million as of June 30, 2008. Nine point seven million of this backlog is related to deferred maintenance; $6.7 million is professional services related; $2.7 million is hardware and $2.4 million is software.

I will now turn the call back to Grant for his business outlook.

Grant Evans

Thanks, [Jerry]. Our 2008 revenue is basically the guidance I can give you as roughly a flat year. There’s a number of reasons for this beyond just our own challenges that we face internally as a company, but also certain market conditions are inflection points on that, such as the government simply being slow to adopt. However, having said that we still made some significant accomplishments in the short period of time I’ve been here and we’re driving aggressively to position the company for growth, both at a top line revenue with some very clear initiatives which we will communicate to the market in the coming weeks along with some realignment in our cost areas of operating costs to ensure that we’re getting the efficiencies we need.

One of the major focuses for me in the coming weeks will be refining our go-to-market strategy and making those final adjustments to the operational adjustments of where we are and where we need to be.

Over this last quarter we had some inflection points and from Q2 to Q3 with our operating expenses coming in some $800,000 lower than the previous quarter. We’ll continue to drive in that direction and make the company more efficient.

Our current financials, though, do not reflect the full potential of this company. Over the last four months I’ve taken a lot of time to go out into the marketplace and meet our customers both in Europe, U.S. and recently I’ll be going down – or in the coming days I’ll be going down to meet them in Australia, and we have – this company has one of the most stellar customer lists in the world that I’ve ever seen, and it’s something we need to take advantage of as a company by servicing those customers better, but also being able to communicate to our investors who they are and what segments we’re in and that information is forthcoming as well.

A traction will begin toward the beginning of our new year. That’s the target that I have our team focused on, so for fiscal 2009 our objective is to have a strategy and directives cleanly identified, communicated to the street so that we can drive forward with our growth strategy.

With that I’ll end my review and turn it open for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Nick Andrews with Lazard.

Nick Andrews - Lazard

Good afternoon, I should say. Could you just give us a – actually first of all can I get the backlog number again for the rest of the year?

Jacques D. Kerrest

Backlog is $20.7 million.

Nick Andrews – Lazard

Twenty point seven million, and how much is that going to be recognized in the fourth quarter?

Jacques D. Kerrest

Thirty-nine percent of it [inaudible] million.

Nick Andrews – Lazard

Okay and can you guys just – Grant, can you give us a look into what your initial expectations are for fiscal ’09 on the revenue growth side?

Grant Evans

Yes, I’m – we’re working through that, Nick. We’ll come out with guidance. We’re not through that process. As you know we just brought – Jacques Kerrest's just joined us. We’re still in motion of that. We ask your patience with us on that. We anticipate that towards the end of our calendar year – or excuse me, our physical year for the company, which is September 30, we will be coming out to the street with a clear direction on strategy and guidance on where we’ll be targeting.

Nick Andrews – Lazard

Okay, great, and you talked about headcount reduction. Have you reduced headcount further, you know now that we’ve started fourth quarter?

Grant Evans

Yes. We – when I first joined the company our headcount was 301 people. We’re down to approximately 280, somewhere around there.

Nick Andrews – Lazard

Okay.

Grant Evans

I don’t look at it as specific reduction. I look at it more as realignment and getting optimization done so we can get better leverage out of our organization and better efficiency. So there's further to come and that will become clearer to the investors in the coming days, but overall it’s approximately a – let’s see, about a 20%, 25% reduction overall.

Nick Andrews – Lazard

Great, and could you just remind us – you know the gross margins on the maintenance and support side seems to have, you know, come down significantly from last year. Can you just remind us what’s bringing that down and if we expect to rebound that?

Jacques D. Kerrest

Generally the gross margins have been dropped because of essentially the way we’re reporting. Prior to, I think second quarter of last year, we were not recording the full expense set into the cost of goods sold. We were providing sustaining engineering and other cost, essentially costs of good sold labor that was not being reported, essentially probably just staying in operating expenses, so that’s really the driver there.

Nick Andrews – Lazard

So going forward we should – this 64, [inaudible] 65 level is what we –

Jacques D. Kerrest

Yes. That’s right. It’s stabilizing at around that level right now.

Nick Andrews – Lazard

Okay, and as a final question on the M&A situation; can you give us a little update on what you guys have been doing on that front?

Grant Evans

To date, nothing. I’ve been waiting here to get my – get our CFO and COO in place, which we now have, but we – I am of the belief, and as is our board, you know M&A is always challenging. So we’ve always go to be planning for how we grow the company through alternative methods whether it’s through partnerships or organic, but clearly the sector is under consolidation. I think there’s multiple sectors to it. We’re clearly pushing the company into a broader position of identity insurance, which covers the enterprise, covers the consumer and also covers the citizen market, which is really the government sector, and we believe that strategy lends itself to some opportunities for acquisitions and growth that are much broader than just in the enterprise space. So it’s early days to say a lot about that, Nick. We’ve certainly got our thoughts going, and it’s all tied to our strategy and as we get through that in the coming weeks we will definitely be conveying it to you.

Nick Andrews – Lazard

Okay, thanks.

Operator

Thank you. Your next question comes from [Sean Jackson] with Avondale Partners.

[Sean Jackson] – Avondale Partners

Hey, good morning, guys. Can you hear me okay?

Grant Evans

Yes. Hi, [Sean].

[Sean Jackson] – Avondale Partners

The question I had regarding, you know, what level of quarterly revenue does it take for you guys to be GAAP profitable?

Grant Evans

I can probably calculate on a non-GAAP real quickly for you, so it’s about 16.

[Sean Jackson] – Avondale Partners

Okay, thanks, and the backlog number that you gave, 20.7 million at the end of June; how does that compare with the number at the end of March?

Jacques D. Kerrest

We were not compiling at the end of March. Our first number that we gave out last quarter was as of the week that we had presented, and I can give you that number, and I think it was 22 million. Yes, that’s right. It was 22 million.

Grant Evans

Twenty two million dollars, so some of this financial reporting, as we, you know go forward in time, [Sean], is to get better visibility for yourself and the other analysts and investors into the metrics and get to be able to communicate clear operating metrics which the company was not doing good enough, at least in my opinion, so we’re working towards that. And that’s a work in motion, so the first report of this backlog was last quarter, which was about 22.4 million, I think [Jerry] just mentioned.

Jacques D. Kerrest

Yes, 22.6 million.

Grant Evans

Twenty two point six today, it’s 21 million?

Jacques D. Kerrest

Twenty dot seven, yes, 20.7 million.

Grant Evans

Twenty point seven million.

Sean Jackson – Avondale Partners

Okay. On the expense side, you know at what point do you consider the bottom? I mean you seem to be reducing headcount a little bit every quarter. I mean, is it going to be lower in September than it was June, or are you at the bottom right now?

Grant Evans

I would say it’s going to be lower, but I think after that wave we’re probably pretty close, and this is not initiative of in the way AI is today, or at the beginning I should say. It’s not about just simply cutting expenses, because at some point when you do just cut, you can cut into the bone and it can cause traumatic problems. You have to overlay this with a growth strategy and getting clarity around that, so those two go hand in hand for me, so actually three parts. One is yes, there are expense savings that we can implement, which we are doing. Two we need to have a clear growth strategy and model going forward, and then lastly you need to put the organization in alignment to succeed on that growth strategy, so all three of those initiatives are underway. And I think we are – not think –we’ve got a clear target we were trying to get to. Our objective is to get to that target by the end of September, so that we can kick off the new year October 1 with a clear direction and a clear organization of ownership and responsibility and set for growth.

Sean Jackson – Avondale Partners

And in what areas are you reducing the headcount? Is it a certain product line or is it a particular function? Where are you, I guess reallocating your resources?

Grant Evans

We are putting – so we’re redistributing some of our salespeople and getting focused in certain areas to be more efficient, to make sure that we’ve got coverage in the right areas both on a geographical basis as well as an industry basis. We’re realigning in our engineering group to get focused on our core products and technology and where we had resources perhaps focused in certain areas in the past we’re taking them off those areas because that product is not necessarily important for us in the future.

And so there’s a lot of – what do I call it – cleanup going on that all drives towards a direct alignment of, you know, where we’re going and what we want to do. Some of it is lower hanging fruit than others and easier to implement. Other initiatives take longer in time because you may have customers tied to a certain product so you’ve got to demonstrate and show them an upgrade path to the future.

But in general, you know, it’s really sales, marketing and there are some other areas, G&A as well, that we’re focused on to reduce our expenses.

Sean Jackson – Avondale Partners

Can you comment on which products in particular are the ones that you are emphasizing, that you’re putting more resources toward and have the best –

Grant Evans

So certainly products, I can tell you where we’re putting a lot of emphasis on right now. I won’t go into too much detail what we’re taking off at this stage. But we have a product called 4TRESS. It’s a multi channel authentication server that allows you the ability to do large scale implementations of authentication. I look at it as a backend infrastructure that is very robust. None of our competition that I consider at least [inaudible] has a product that’s equivalent to this. So we have a unique opportunity in that and that’s an area we believe is going to be strong. And it’s starting to show its merit. Recently in the last quarter we have secured four banks using this. So you think of large volume, large transactions in terms of the amount of people going through. And it allows you to play a backend software infrastructure capability, much like a platform play which is an area that we’re pushing into.

So that is an area of focus. We are also focused on certain elements of the card management system which is really a core asset of this company. And there are some projects underway right now that are extremely large in scale that we’ll be notifying the market of shortly.

And so a lot of energy going into those two areas and we’re taking energy off products without being specific that are not key revenue drivers. And there are a number of them that the company has acquired over the years that have been sitting around that may have had one or one-and-a-half resources focused on them. And we’re cleaning them out because they’re not core to our growth in the future as we’re looking at it today. So we will continue to narrow that down. And I would say we are in the last 25% of that process to narrow it down.

But it is an ongoing process and a process that you got to revisit on a, every six months. Where are we with this product or this initiative and we want to keep track of it and implement a metric system. But the CMS card management system and the 4TRESS server are two major products, software products that we’re focused on.

Sean Jackson – Avondale Partners

Thanks, that’s helpful. Just lastly what are your priorities with regard to the use of cash?

Grant Evans

[Inaudible]. I think the best way to make money is to stop losing it. So that’s, that’s, that’s key for us. We’re looking at a number of initiatives at the board level as to how we do want to utilize the cash. And I think there’s a lot of considerations being placed on the table from a stock buy back to M&A areas so, you know, that’s still under review, but I would say to you by the end of next quarter we will have clear direction as to how we’re going to utilize it.

Sean Jackson – Avondale Partners

Thank you.

Operator

Thank you, your next question comes from Adam Adelman - Capstone Investments.

Ryan McGaver – Capstone Investments

Ryan McGaver for Adam today. Grant is Jacques on the call with us today?

Grant Evans

No unfortunately he’s not. He, [Jerry] is still on this quarter, and so [Jerry] finished up the quarter for us and Jacques will be here on the next one.

Ryan McGaver - Capstone Investments

Okay, well I was reviewing the press release and it seemed like you didn’t have any direct experience in the identity space. What are some of the challenges that he might face coming into that space especially as far as the COO role is concerned?

Grant Evans

You know he, certainly coming up the learning curve you know, was something we had to deal with but when we went through this process we felt that between the board and myself and some other people, he’s very well circled with a lot of industry knowledge. And that was not the governing decision on, you know, do we want someone from the industry necessarily. In fact in many ways we wanted fresh, fresh blood that was, could think out of the box that could look at this in a different manner.

You know, the company clearly has been struggling over the last few couple of years to gain growth. So we need fresh outlook, fresh blood in here and Jacques brings that from a different perspective. He’s clearly now got operational experience. And when you take away the industry flavor of it, at the end of the day it still comes down to solid operating metrics that need to be implemented in the company. At all levels, from the revenue side, the sales efficiency all the way down to the operating metrics of costs versus actual.

So he is very capable of doing that, there is no doubt about that. And he’s very capable with the M&A area as he’s done many, many, many of them over his years. So we did not, I did not look at that as a, any crippling issue whatsoever, in fact I look at it as good news because he’s not tainted with the industry.

Ryan McGaver - Capstone Investments

Okay, any idea of how long that learning curve might be for him? [inaudible].

Grant Evans

I think probably very short. He actually has been studying up on it already. I’ve spent an awful lot of time with him and, you know, he’s already participating in some calls with me, with customers and partners. He is the type of person that will be in the field with the customers, which is somewhat unusual with CFOs but that’s the style of Jacques. Which I think is greatly needed for the company paying attention to our customers because, you know, that’s who we work with and that’s who we work for.

So having that capability is incredible but I don’t think it will be a long time. I think that, you know, the more initial challenge for Jacques in the beginning will be getting in up to, up to speed with the company’s internal areas of challenges. The industry is nowhere near as complex compared to the company right now.

Ryan McGaver - Capstone Investments

Okay great. It looks like at the end of the quarter there was about $38 million in option rate securities. Do you know of what percentage of that might be CDOs?

Jacques D. Kerrest

Yes one second.

Ryan McGaver - Capstone Investments

And if so who are they issued by?

Jacques D. Kerrest

One second I’m bringing up the data, $5.8 million is Ballentine both of $2 million of B Tranche and $3.8 million was the D, Double Oak is $3, [Inc] $5.8, Potomac $5.7 and RMI $5.7.

Ryan McGaver - Capstone Investments

So what are your I guess expectations for these?

Jacques D. Kerrest

Excuse me?

Ryan McGaver - Capstone Investments

The expectations for these going forward?

Jacques D. Kerrest

Well as with all of the these auction rate securities that have kind of gone into a purgatory condition, although we are seeing the munis and I think our last muni is called on, on August 15th. But we’re seeing the munis and the mutual funds all being called. I don’t have any visibility in terms of the future of these. The only one I have, I have a concern about is Ballentine as the others seem to be, you know, holding forth. I looked at their underlying portfolios, they’ve got, their debt to equity is one or over. And their portfolio seemed to be doing well enough.

We had a bit of a hit with the downgrade of [Van Back] and MBIA, which actually in some cases, except for Ballentine actually worked out to an advantage because when that happens we get an additional bump on the interest that we receive. But of course the problem is it creates a little bit more risk on the portfolio itself. But I think these are solid and, you know, I did see that UBS pulled and made a promise that they would pull their customers out.

I’m hoping that perhaps that’s a harbinger for the future on the rest of these. But until we really get this whole credit market established and some securitization actually happening out there I think we’re sitting. But I’m still optimistic, I think that these will, that we’ll get out of these. And probably at par.

Ryan McGaver - Capstone Investments

Sure, and one final question in looking through the Q there was a phrase in there about developing financial performance benchmarks to quantify the strategic alignment. Could you give us a little more color on what you mean by this?

Jacques D. Kerrest

In the recent Q?

Ryan McGaver - Capstone Investments

Yes it talked about financial performance benchmarks related to the revised strategic alignment. I guess we were a little confused as to what that referred to, the revised strategic alignment?

Jacques D. Kerrest

Well the strategic alignment is what Grant has been talking about all along. And so the benchmarks are going to be established to align with those so that the people who are performing are going to be held accountable. I believe that that’s as simple as –

Grant Evans

Let me add to that. The in terms of the benchmarks as to be able to create clear metrics for example, you know, making visibility, having visibility to the maintenance backlog which the company, the street did not have before. Putting in, you know, better metrics in terms of our sales performance, our product sales. More details and clarity so that you can measure as an investor, you know, how well the company is truly doing.

And I know you still have your methods of doing that, but we want to make it easier rather than more difficult. And, but that will also help us as well, and so some of those, you know, maybe of those measurements we’re working through the details of those, what and how we would like to report going forward. But the objective is very simple, to give you better visibility, into key metrics that we believe will be representative of the company’s future.

Ryan McGaver - Capstone Investments

And do you know what those metrics might be?

Grant Evans

So for example, you know, I’ll give you a very, you know, markets. How many, how well do we do in the financial market which is a sector we’re involved in. How many customers do we have, how many new customers did we win this year or over the last two quarters, giving you guidance around that. How many of the Fortune 1000 companies do we have as our current customers fully deployed?

So those types of metrics become important as to your success on where you’re focusing in the market. They help us too, because we drive, I’ll be driving initiatives around certain market activity and you know, the financial sector is an area that we’re you know, clearly involved. We have, you know, some 110, 115 customers today around the world. Many of them, some of them are Global 1000 but, you know, in some of these cases customers won’t let us use their name but we can still provide better data to the investor base. And to the industry analysts on where are we in terms of what initiatives we’ve got. What is our customer base, and right now, that’s, as far as I can tell, that hasn’t been communicated, but I think it will be an interesting metric for you to know.

Ryan McGaver - Capstone Investments

Okay great thank you both.

Grant Evans

Thanks.

Jacques D. Kerrest

You’re welcome.

Operator

Thank you, your next question comes from Joy Mukherjee - State of Wisconsin Investments.

Joy Mukherjee - State of Wisconsin Investments

Good afternoon, you talked about the revenue level for profitability being $60 million. Where is that with regards to EBIDTA?

Grant Evans

Good question 64 was the number we had not 60.

Joy Mukherjee - State of Wisconsin Investments

I’m sorry it was what?

Grant Evans

Sixty-four million.

Joy Mukherjee - State of Wisconsin Investments

Okay. And that’s an annual number for?

Grant Evans

On a non-GAAP basis.

Joy Mukherjee - State of Wisconsin Investments

Okay.

Grant Evans

Hold on we’re looking through the document right now.

Joy Mukherjee - State of Wisconsin Investments

All right.

Operator

Thank you, your next question comes –

Joy Mukherjee - State of Wisconsin Investments

Hello?

Grant Evans

[Jay] we’ll have to get back to you directly on that okay?

Joy Mukherjee - State of Wisconsin Investments

Okay couple of more questions.

Grant Evans

Sure.

Joy Mukherjee - State of Wisconsin Investments

In the near term, what kind of milestone would you throw out today for us to be looking at to see, you know, what improvement you’re making?

Grant Evans

I think there’s two, one is the operational expense line coming down. And two growth in the top line. I mean they are the two easiest metrics. I think there’s probably a third one which is better visibility into metrics that are beyond the obvious ones of, you know, revenue increase and operational efficiency and we’re still working through those details.

Joy Mukherjee - State of Wisconsin Investments

In terms of the growth in the top line, from the start of the quarter to kind of at this point, are you more optimistic about the growth in the top line? How is the macro conditions out there for the company?

Grant Evans

Yes I think the company has great, great growth opportunity, there’s no doubt about it. And the market is adopting this technology in lots of sectors. The company needs, we need to get more focused on what we’re doing what we’re going to be when we grow up and what our offering is. And that’s part of this realignment housekeeping I’m referring to in there.

So I think there will be growth, but I don’t think you can, you know, turn around and go from, you know, a company losing money to automatically being, you know, showing up some large percentage growth. But there’s definitely growth in the marketplace and there’s many companies reflecting on that that are competitors to us that are growing quite well. And we need to get our focus on where we’re selling and what we’re doing with our customers better aligned and get our resources aligned working together which has not been the case.

Joy Mukherjee - State of Wisconsin Investments

And finally you had, you talked about how the board was looking at what to do with the cash. From our standpoint, I mean we would definitely encourage a stock repurchase program being put into place.

Grant Evans

Yes I heard that and that’s definitely on the table, are you a seller?

Joy Mukherjee - State of Wisconsin Investments

I’m sorry what?

Grant Evans

Are you a seller of stock?

Joy Mukherjee - State of Wisconsin Investments

No we are not.

Grant Evans

Okay just curious. Yes, no I got that [Jay] and that is definitively, you know a major topic of discussion.

Joy Mukherjee - State of Wisconsin Investments

Okay thank you.

Grant Evans

But I think we’ll have a clear message for you in the coming weeks.

Joy Mukherjee - State of Wisconsin Investments

Okay.

Operator

Thank you, your next question comes from [Fred Segal] with [FLA]

[Fred Segal] – [FLA]

Hi Grant.

Grant Evans

Hey Fred.

[Fred Segal] – [FLA]

Couple of things, I wanted to just get a clarification on what you said about headcount. You said the 301 when you started and it’s now 280 and then you was commenting something about down 20% to 25% was that from the peak peak or what?

Grant Evans

I think that’s when we were completely that’s when we’re completely done, it’s around that 20% mark.

[Fred Segal] - [FLA]

Off of 300?

Grant Evans

Yes.

[Fred Segal] - [FLA]

So we’ve got another 40 people to go or thereabouts?

Grant Evans

Maybe a little less than that but –

[Fred Segal] - [FLA]

Okay.

Grant Evans

But you know it’s still ongoing and as I said it’s not, let me just put it this way, there’s more work to get done in that area to get this company fully optimized.

[Fred Segal] - [FLA]

Okay is that something you think you can be pretty well through by the end of the fiscal year?

Grant Evans

I do, we’ll be very, very close to getting that done.

[Fred Segal] - [FLA]

Okay. Second how strategic is hardware to the story, because it’s been on the decline?

Grant Evans

Yes so I’ll give you my perspective and this is another area we’re working through. So two fronts, our objective is that we want to be a software-driven company. And with enhanced margins. The hardware in the area that we focus in on which is authentication or identity assurance is a requirement. I do not believe as a company we need to build it. There are lots of partners out there who do it much more effective than us. And so having said that, I think we will build on our offering of solutions but I don’t think we need to own it.

[Fred Segal] - [FLA]

Oh what, so there’s a probability that we could see an OEM deal or something to cover that?

Grant Evans

Oh yes. And that makes more sense from our perspective, from my perspective at this stage because, you know, with our engineering teams are valuable. There’s people who do that area much better than us. And so I’d much rather leverage off that. What’s important to us is the customer. So we can tell them what we want and they will build it, but we don’t need to own that piece of hardware necessarily.

[Fred Segal] - [FLA]

Does the 4TRESS architecture limit your market in the sense that there would be instances where somebody would look at that solution and just say that’s way more than I need?

Grant Evans

You could look at that. That’s certainly, you know, it’s buying the Cadillac there’s no doubt about it. But keep in mind we’re not necessarily going after, you know, a ten-person company with that type of product.

[Fred Segal] - [FLA]

Right.

Grant Evans

So we’re after large, you now, Fortune 1000 big, large, scalable relationships. I’d say to you secondly though we do have some initiatives that we’re driving through that we can address that, peak that product in a pre-configuration capability and address other market segments that are slightly smaller than these big, you know, let’s call them elephants that we’re shooting for. And so there are strategies circling around that as well through partnerships that we believe you can still take that product. I think what’s unique about that product is its ability to be hardware agnostic, token agnostic. It gives us a different position. We want to develop a better path for delivery and a better path for go-to-market on it. But it’s a very powerful product and I’ve heard from the customers nothing but great things about it.

[Fred Segal] - [FLA]

Okay last question as to your guidance if we kind of accept flat for the year that would suggest a $16 plus million Q4. In light of slow government business do I assume that that sequential growth is really going to be driven enterprise?

Grant Evans

Yes probably.

[Fred Segal] - [FLA]

Okay is there any life in the government at all these days?

Grant Evans

Yes I think, no, no, there is, there’s a lot of projects going on in the government but it’s on a global basis. It’s not just the U.S. And this, you know, we have some incredible activity running in Europe and other parts of the world which we are excited about and look forward to announcing it to the street. But so, you know, definitely please stay tuned for more information there. But one of the nuances with the government, you know, you win one of these large contracts and it'll, you know, the revenue is spread out over four years. So that’s always one of the challenges with that sector. You know, the good news they come in big, the bad news is it gets spread out over a number of years. But the government’s you know this company has built its strength on governments over the years. And that’s not going to go away.

I think with the U.S. right now you’ve got, you know, a change in government going on, a new president coming in. So there’s a lot of, you know, budget that all of a sudden may get frozen because people want to put their own stamp or seal of approval on the initiative. So that gets [inaudible] delays. But some of the programs we’ve got like [KAK] and some of these other ones are still marching on and they deliver I think people just getting it delivered is being. The adoption rate has just taken longer because the government hasn’t been decisive enough on how to get it done or it hasn’t been, the mandates weren’t clear enough in terms of taxable details of how to implement these things or what the customers are really wanting. So you know, there’s initiatives like that but I think the government is a very healthy customer and in particular in the international market, very strong.

[Fred Segal] - [FLA]

All right thanks.

Operator

Thank you, your next question comes from, and is a follow-up question from Nick Andrews – Lazard

Nick Andrews – Lazard

Thanks for taking my follow-up. Just quickly on the guidance, I know you said basically flat, flat for the year. What brings the confidence in that, that you guys are going to be able to bring revenues back up to, first of all, back up above the $60 million level. And what would you say roughly, you know, what’s the sort of range there are you looking at? For the –

Grant Evans

So you know the confidence level is based on, you know, where the market is and the customers that this company has. The technology it has and simply getting more and more focused on what we sell and what initiatives we drive to market. You know the company has been a culprit of trying to do too many things in the past. And so you end up with torn efforts that don’t achieve a great result versus, you know, better to do one or two things really great, than trying to do 10 things just okay. And the company in the last, you know, period was just, was doing a lot of activities that were just okay. So we need to narrow that down. And drive around some certain initiatives that are showing growth.

For example like this 4TRESS server. We are, you know it’s been a long time in coming but we’re finally getting some traction with that product. And it can deliver large numbers. So that’s clearly where, an area. In terms of guidance or what sort of numbers, you know, as I previously stated Nick, you know, we’re still working through that. With Jacques now onboard we’re looking to close that gap in the coming weeks and be able to communicate better clearly to you. But I’m, we’re not in the position to be able to do that today.

Nick Andrews – Lazard

All right, just, how about on the operating expense side, should we expect the operating expenses to tick down again this quarter again?

Grant Evans

Yes.

Nick Andrews - Lazard

Compared to last quarter?

Grant Evans

Yes we do, Nick

Nick Andrews – Lazard

Can you quantify that at all?

Grant Evans?

It’s a little – it’s probably a little premature. We’ve got a number of initiatives underway. Let me put it that way and we continue to drive that number down. And we’ve got a target plan to it. But I’m not in the, I’m not ready to drive, you know, put that number out there at this stage.

Nick Andrews - Lazard

All right and just lastly kind of a macro question. On the financial services market, I know, you know, it’s been a pretty tough, you know, call it 18 months here. Have you seen any changes out in the market placed that would suggest where this, we’re turning around on the financial services side?

Grant Evans

Say that last part again, Nick?

Nick Andrews - Lazard

Have you seen anything in the financial services market that suggests that we’re seeing a turnaround here?

Grant Evans

Sure, so we’ve been working with a partner called Temenos I’m not sure if you’re familiar with them, but they’re primarily if not 100% international. And they provide financial platforms for the banking industry. They are a very high growth company, they operate in London and out of Switzerland. And we’ve built a very strong relationship with them and it's taken time but within the last, I think three months, since I’ve been here. There’s been four major wins with the 4TRESS server product and so we, you know, we seem to be getting astride running with them.

There is a lot of banking customers that we are in discussions with, and so that’s an area of focus for me as to how many banks are we talking to right now. And clearly areas with, probably more so on international than here in the U.S. but I suspect that U.S. will come along further in the near future. This online banking capability offshore is much more preeminent in terms of adoption than here in the U.S. I think at this stage. It’s a very common practice and just the short polls I’ve talked to people, it’s, it’s not the norm to operate that way in the U.S. at this stage. It’s more, it’s more of a practice in the European markets and international markets.

So you know, the number of conversations with banks is very, it’s very active. And I do look at that as a very strong sector for us. And we have something that some of our other competitors that we compete in this space just don’t have. And they’re trying to get there but it’s going to take them a while. And so I think we’ve got a competitive edge with a product like 4TRESS.

Nick Andrews - Lazard

Okay great thanks.

Operator

Thank you and at this time there are no further questions.

Grant Evans

Okay well I thank you and appreciate you taking the time to listen in to our call. We look forward to communicating to you in the coming weeks, more definitively in terms of our strategy and in terms of our operating metrics coming forward. And we look forward to delivering you enhanced shareholder wealth, thank you.

Operator

Ladies and gentlemen thank you for joining today's ActivIdentity fiscal third quarter earnings conference call. Thank you for your participation. You may now disconnect.

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Source: ActivIdentity Corporation F3Q08 (Qtr End 06/30/08) Earnings Call Transcript
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