ICx Technologies, Inc. Q2 2008 Earnings Call Transcript

| About: ICx Technologies (ICXT)

ICx Technologies, Inc. (ICXT) Q2 2008 Earnings Call Transcript August 12, 2008 4:30 PM ET

Executives

Jessica Bartlow – Director, IR

Hans Kobler – President & CEO

Deborah Mosier – CFO

Analysts

Brian Ruttenberg – Morgan Keegan

Paul Coster – JP Morgan

James Ricchiuti – Needham & Company

Michael Kim – Imperial Capital

Paul Bard – Renaissance Capital

Operator

Good afternoon, everyone, and welcome to the ICx Technologies Second Quarter 2008 Earnings Conference Call. Today's call is being recorded.

At this time, I would like to turn the call over to Ms. Jessica Bartlow. Please go ahead.

Jessica Bartlow

Thank you, Keith, and good afternoon, everyone. Again, my name is Jessica Bartlow and I'm the Director of Investor Relations at ICx.

The company's Q2 '08 earnings release was issued today at the close of market and is posted on the company's Web site at www.icxt.com. Representing the company today are Hans Kobler, President and Chief Executive Officer, and Debbie Mosier, Chief Financial Officer.

Before I turn the call over to Hans for his opening remarks, please allow me to read the following Safe Harbor statement. This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements may be identified by indicating the belief or expectations of management and include, but are not limited to, statements regarding the outlook for the company's future business and financial performance.

Forward-looking statements are based on management's current expectations and assumptions which are subject to inherent uncertainties, risks and changes and circumstances that are difficult to predict. Actual outcomes and results may differ materially due to various factors that are described more fully from time to time in the company's filings with the SEC.

ICx disclaims any obligation to update or revise any of these forward-looking statements, whether because of future events, new information, a change in its views, expectations or otherwise.

The company will comment on adjusted EBITA results which have been included, together with a reconciliation or explanation compared to US GAAP results in today's press release.

I'd also like to mention that the company will be present at the upcoming Morgan Keegan Investor Conference. Details can be found on our Web site.

At this time, it is my pleasure to turn the call over to Hans Kobler.

Hans Kobler

Thanks, Jessica. Welcome, everybody, and thank you for joining us on today's call. Q2 was a big quarter for us, and it – in our mind, is a strong confirmation that we're on the right track.

First, our revenues came in line with our expectations at $37.4 million, reflecting the slower start of the first half of the year that we anticipated. On those revenues, we reduced our adjusted EBITDA loss by 39% to $4.1 million from the first quarter, largely on better margins and reduced operating expenses.

The biggest news for the quarter is that our program investments are now starting to pay off. We landed our first larger wins here and our backlog jumped to $75 million. That's an increase of 63% over just three months ago.

Growth, this quarter was largely from Detection and Solutions. Surveillance actually was down year-over-year. We expected that, and we are not concerned about it. You all know the government business is lumpy. It rather confirms the attractiveness of our business model, where while Surveillance is down, Detection margins are ahead. In the same quarter, though, Surveillance had record bookings, so they will deliver in the second half of the year.

We offer a compelling index on high-tech security that reduces much of the otherwise common volatility. That's what we do. And in addition, we also have a lot of optionality built in. Just take the recent (inaudible) transportation win which came really a bit as a surprise, so early into this young business.

With that highlight, let me flag a few operational points for you. First, we received a $4 million contract from DHS for our platforms business, and they delivered the first six Cerberus mobile surveillance towers to the U.S. Border Patrol. Cerberus, as you might remember, is a fully integrated mobile surveillance tower that combines radars with thermal cameras on a common software platform, thus making it easier to identify and track potential intruders.

We've developed this jointly with the U.S. Army and the Border Patrol, and this shipment marks the first successful deployment of the mobile surveillance towers along a portion of the southern border virtual fence.

Now, for the same Cerberus platform, we also have been awarded a $14 million contract as part of the U.S. Army's multi-billion dollar BETSS-C Program. That's the Base Expeditionary Targeting and Surveillance Sensor-Combined Program that some of you might be familiar with because (inaudible) is also part of that. That's run by the Asymmetric Warfare Office. That's a huge program, and we expect and are hopeful that there's more to come in the future.

Our Transportation team landed their first big win with a $15.6 million contract to provide intelligent transportation systems for California's Orange County Transportation Authority. The transportation market is huge. And what we like about it is that we can leverage our sensor, software and management capabilities from security into this dual used market.

Our Radiation group has been awarded an order of $4.4 million of identiFINDERs for our OEM partner, Thermo Fisher Scientific. We are also helping secure the Olympics that are going on currently with our spectroscopic detectors which we delivered on a $2.5 million contract to them.

Our Explosives group continues their strong track record as the explosive detector-of-choice for the U.S. military, and received another order for $4.8 million from the Robotics System Joint Program Office for Fido XT.

Now, these handheld systems will be used in both Operations Iraqi Freedom and Enduring Freedom. And last, but not least, our Bio group won a $4.9 million Phase IIbc RAD contract under the DHS Detect to Protect program to develop rapid sensors for a biological attack. These are some tactical wins.

From a strategic perspective, it's worth pointing out a few things that we believe position us very well in the long-run. First, we acquired S3I, the market leader in advanced bio-aerosol detectors. We've been working with S3I for a while and already integrated their IBAC sensor into our solution.

Now, together, we can offer a fully integrated biological detection product line for the military, the first responders, and commercial customers such as Subways, who want the fast, reliable and actionable information in the field or in facilities.

We also believe that with this capability and one of the world's most diversified and advanced chem-bio platforms, we are very, very well-positioned for some of the large programs that are coming up in the near future.

S3I is a good example of our suite spot in M&A. As I said all along, at this stage, we view M&A as part of our build versus buy R&D decision making. And the ideal time for us to buy those technologies is when they're about to take off. That's when the price is still reasonable.

And we also have a pretty good track record for picking those trends at this stage. We are hopeful that S3I will fall in that category and will make us happy very soon.

The second, Q2 marked the first time that we landed and came through with a few bigger multi-year programs. We expect these and similar programs to make a huge difference going forward. Not only do they provide steady revenues, but we also will be able to cover some of our existing overhead with those large programs.

And behind those first encouraging wins, we see a very big pipeline of more to come, and we are confident that you will hear more from us out of this new sales channel soon.

Third, with the success of our infrastructure investments, we continue the process of streamlining our operations. And again, while not all of that might be apparent to you, you will see more of the benefits showing up in the numbers soon as we expect to increase our efficiency significantly.

Lastly, with more than $40 million cash and $30 million in net receivables, virtually, no debt, we maintain a strong financial position to continue successfully executing on our strategy.

In summary, Q2 for us was a great confirmation that we're on the right track. Our strategy is working, and we are executing well.

With that, I'd like to turn over to Debbie for some additional comments.

Deborah Mosier

Thank you, Hans. For the second quarter of 2008, we recorded revenue of $37.4 million, an increase of 12% compared to $33.4 million in the same period in 2007. As Hans mentioned earlier, revenue growth was strong in the second quarter for Detection and Solutions, while revenue in Surveillance declined year-over-year.

In Detection, revenue increased 21% year-over-year to $23.8 million, driven primarily by continued strong showing in our explosive detectors. Solutions revenue increased 19% year-over-year to $5.2 million with increased product deliveries due to the reemergence of the ICx-3 program and growth in our intelligent transportation solutions business.

Surveillance was down 11% year-over-year to $8.4 million which is explained by the overall lumpy nature of our business. For example, in the prior year second quarter, we delivered a significant order for radars that was not repeated in the current quarter. Surveillance has strong bookings in the current second quarter, and we anticipate significant growth for this division in the second half.

Company wide, our gross margins came in at 46%, up from 44% in the second quarter of 2007. Within Detection, gross margins came in at 48% compared to 47% in the second quarter last year due to higher product revenue. Surveillance gross margins for the quarter were 43% which was comparable to the same quarter a year ago.

And finally, our gross margins within Solutions were 38% compared to 31% last year, with the increase primarily as the result of a higher proportion of product revenue and less past-due costs on our contracts during the current year quarter.

Total operating expenses for the second quarter were $25.8 million compared to $24 million in the same period in 2007 and down 6% from $27.4 million in the first quarter of 2008.

The breakdown of the components of total operating expenses were as follows

G&A expenses were $8 million or 21% of revenue, compared to $10.4 million or 31% of revenue in the same period last year, and down $1.6 million from $9.6 million or 27% of revenue in Q1 of '08.

I should note that Q1 of 2008 included significant costs associated with being a public company that accounted for the majority of the declines since the first quarter.

We continue to focus on controlling G&A and are proud of the results we have shown to-date, particularly considering that we continue to incur ongoing costs associated with our company wide enterprise software implementation.

We have begun to streamline some redundancies in our operations as a result of the new system and believe that we will continue to gain efficiencies once the new system is in place throughout the entire organization.

Sales and marketing expenses during the quarter were $8.6 million or 23% of revenue, compared to $5.5 million or 17% of revenue in the same period a year ago, and $7.8 million or 22% of revenue in Q1 '08. The increase is related to our investments in the VAR program channel.

Research and development expenses during the quarter were $5.9 million, or 16% of revenue, compared to $4.7 million or 14% of revenue, in the same period in 2007 and down $0.8 million from $6.7 million, or 18% of revenue in Q1 '08.

Our sales and marketing and internal research and development expenses continue to reflect ICx's commitment to make prudent, deliberate and strategic investments in our sales and marketing and R&D programs.

We believe that this is a good use of capital and will further solidify our position within the market, help foster product innovation, enable us to better compete for increasingly large opportunities.

We also believe that the expenses associated with the expansion of our sales and marketing programs and the accelerated investment in internal research and development will begin to stabilize in the second half of '08 and continuing – and going forward, that's leading to lower expenses as a percent of total revenue.

Adjusted EBITDA for the quarter was a $4.1 million loss which was comparable to the same quarter last year, but is a 39% reduction from the $6.7 million loss from Q1 of '08.

For the quarter, our net loss was $9 million compared to a net loss of $7 million in the year-ago period. A $2.5 million gain on the sale of DiscOps in the prior year second quarter was the primary reason for the increased net loss as the increased operating expenses year-over-year were covered through increased revenues and gross profits.

Net loss per share was $0.26 compared to $0.96 in the year ago period. Weighted average shares outstanding were 34 million at June 30, 2008, compared to 10 million at the end of June last year. As of June 30, 2008, we had cash and cash equivalents of $41 million and accounts receivable of $30.3 million, and we remain virtually debt-free.

As of June 30, 2008, we had total funded backlog of approximately $75 million and unfunded backlog of approximately $195 million. As Hans mentioned earlier, the increase in backlog is primarily the result of some major program wins that we believe will positively contribute to our operations going forward through the stability in revenues and consistent absorption of overhead. At the end of June, our DSOs were approximately 80 days and in line with our recent trends.

Before turning to guidance, let me say just a few words on our six month financial results. For the six months ended June 30, 2008, the company's revenue grew by 22% to $73.7 million compared to $60.4 million for the six months ended June 30, 2007. This is in line with our expectations for a slower first and stronger second half.

Gross profit for the current six month increased 26% to $33 million, or 44.8% of revenue, from $26.2 million, or 43.4% of revenue from the same period a year ago.

Adjusted EBITDA loss for the first six months of 2008 was $10.9 million compared to a loss of $9.9 million for the same period last year. Increased expenses related to the expansion of the company's sales and marketing channels and internal research and development projects impacted year-over-year six month results, but as mentioned earlier, expected to stabilize in the second half and going forward.

Turning to our 2008 outlook, I'm reaffirming the guidance that we provided during our Q4 '07 and Q1 '08 conference call. For the year, we expect revenues between $177 and $184 million and an adjusted EBITDA loss between $2 million and $7 million.

With those comments complete, I would like to open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We will go first with Brian Ruttenberg with Morgan Keegan.

Brian Ruttenberg – Morgan Keegan

Thank you very much. First of all, the cash drop in the period, was that due to higher receivables or what was going on in the period?

Deborah Mosier

It's a combination of – our DSOs are a little bit higher than they have been in the previous quarters. We have also built up quite a bit of inventory in anticipation of the back end loaded nature of our product revenue. And then, the acquisition consumed a little over $5 million in cash during the quarter.

Brian Ruttenberg – Morgan Keegan

What do you anticipate burning the next, the second half of the year?

Deborah Mosier

We don't expect a significant cash burn next year there – or during the second half. There may be a little bit more working capital dilution, but that obviously is just timing differences.

Brian Ruttenberg – Morgan Keegan

And then, the next question I have is about operating expenses. You mentioned something about G&A around $8 million and that's going to be held flat around that level. Is that what I heard or–?

Deborah Mosier

Yes, we–

Brian Ruttenberg – Morgan Keegan

Can you talk about that?

Deborah Mosier

Yes, we believe G&A will stabilize.

Brian Ruttenberg – Morgan Keegan

Around the $8 million, at this level?

Deborah Mosier

Yes.

Brian Ruttenberg – Morgan Keegan

Okay. And sales and marketing will go forward around the $8.6 million or should it grow?

Deborah Mosier

The fixed component of sales and marketing should not grow significantly. There could be some variable costs associated with the revenue growth as it pertains to commissions and bonuses.

Brian Ruttenberg – Morgan Keegan

And then, R&D should stabilize around these levels, maybe a little bit higher.

Deborah Mosier

I would say more a little bit lower.

Brian Ruttenberg – Morgan Keegan

A little bit lower. And then –

Hans Kobler

The programs that we have to pull forward on the R&D side into Q1, which I mentioned earlier, some of them were DHS related and with those out of the way, we are now at more normal levels.

Brian Ruttenberg – Morgan Keegan

And the share count should be stable around the $34 million, is that right, or should – is there any big option or anything else going on that would change the share count?

Deborah Mosier

There shouldn't be a significant change in the share count.

Brian Ruttenberg – Morgan Keegan

Great. And is the goal still to get to positive earnings by fourth quarter? Is that – or can you talk about that a little bit?

Deborah Mosier

A positive EBITDA.

Brian Ruttenberg – Morgan Keegan

Positive EBIDA. Great. Thank you very much.

Operator

We will take our next question from Paul Coster with JP Morgan.

Paul Coster – JP Morgan

Thank you. I've got a few questions. The backlog that has jumped up so significantly. Can you give us some breakout as to the sort of product categories that compose it?

Hans Kobler

Yes, I think you could trace some of it down with our recent announcement. It was much stronger in the Surveillance and in the Solutions business. The transportation win accounted for some of that. The platform wins accounted for some of that. That's where the majority goes.

Paul Coster – JP Morgan

What kind of time line will it be recognized in, do you think is it sort of 12 months backlog or beyond?

Hans Kobler

The transportation deal will take a little bit longer. The platforms should all happen this year.

Paul Coster – JP Morgan

Great. The Surveillance business attracts slightly lower gross margins, is that correct? So, should the corporate – should we sort of be modeling in flat to slightly down gross margins sequentially into the second half of the year?

Hans Kobler

If the mix stays the same – and any particular win in Detection can swing that fairly quickly, but the Solutions business has lower margins than Detection and so does Surveillance. So, I'd take that as a guideline.

Paul Coster – JP Morgan

So, the backlog looks good. And can you talk a little bit about the pipeline? Are you starting to see more opportunities? Are they international, domestic? Are they bigger, smaller? Can you just give us some color there?

Hans Kobler

Yes. Our base business, the many little wins is still coming in and on top of that, we layer those larger programs that we've now had the first two here. There are a few more that we hopefully can declare victory soon which, again, are somewhere between a six and a 24 month run rate. I don't want to talk specifics, but they are in both Solutions and in Surveillance, and a few as well in Detection, so fairly, broadly.

Paul Coster – JP Morgan

So, you know, we're projecting out about 30% plus growth not just this year, but next year. Do you think that's a kind of reasonable way to be thinking about long-term growth opportunities for your business–?

Hans Kobler

Yes.

Paul Coster – JP Morgan

Yes. And obviously, with operating leverage, which brings me to my last question, you should go EBITDA profitable at some point in this second half. Is it the third or the fourth quarter on an adjusted basis?

Hans Kobler

Yes, we obviously forecast the second half to be profitable, to get to our guidance. And we might be starting to scratch on it on Q3, depending on how some of those contracts come in.

Paul Coster – JP Morgan

Well, we look forward to it when it arrives. Thanks.

Operator

We take our next question from Jim Ricchiuti with Needham & Company.

Jim Ricchiuti – Needham & Company

Thank you. Good afternoon. I wonder if you could talk a little bit about the second half relative to your guidance. Are there any big wins or perhaps special events that could impact your guidance one way or the other in the second half?

Hans Kobler

Any big win – the pipeline is long and wide, so any particular big win could impact the year in the positive side. On the flip side, what could go wrong, we have lot of backlog, so, in many parts of our business where we traditionally didn't have such high backlog, it's just about getting the product out. And that's obviously the lower risk than having to win new deals. So, we kind of reiterate our guidance here with where we are today. But, we don't want to promise that some of those other big things that we have been chasing, and there are a few. We don't want to promise that those would come in, but that's the optionality that you always have when you have such a broad portfolio.

Jim Ricchiuti – Needham & Company

Hans, in the last call, I believe you talked about a high level of activity in the imaging surveillance area. Clearly, you had a nice win with the virtual fence program. But, I wonder if you could elaborate where you stand relative to those comments about having the high level of activity in this area?

Hans Kobler

We do still have a high level of activity in those areas. Our imaging business has two or three pretty large opportunities that we are going after right now. We have a first pilot here that we won in one particular commercial area that we like quite a bit, but until we nail the entire opportunity, we don't really want to talk about it too much.

The tower business, as I mentioned, BETSS-C is a huge program. That's – and the beauty of BETSS-C is it's not like the SBI program where the overall thing is moving slowly and is a little bit unclear to me. The BETSS-C seems on a straight forward track. So, we believe there's more to come for our tower business. In radars, we are chasing some very large opportunities where probably there is a higher beta volatility around them. Again, partially, it's the southern border, partially it's the mid east, and whenever you go international, then I think you add two question marks, and you just don't plan on it in the numbers. But, we also have a few larger things going on in Detection, specifically in explosives sensing, both in the military as well as in the TSA market where I don't know if some of you caught it the – they had just announced that they have a 900 order coming out for liquid screening where we believe we have a good shot at playing a role in there. And then, there's radiation of course. Kind of the mix transportation, the transportation, after working for a year, now having the first signature win, that should be the beginning of the beginning and not peak. So, I think we'll pick up a lot in the second half. Those larger programs might not all materialize on day one, but it certainly will increase our confidence for sustainable growth in the long run.

Jim Ricchiuti – Needham & Company

How would you characterize your win rate during the quarter in terms of the business that you were going after, and what you have secured?

Hans Kobler

The core business, all those little wins that used to feed us the $1 million wins, nothing has changed here that you'd chase. And again, there are – there is a good trend that they get a little bit bigger. And it really – I could give you an average or a mean here, but sort of the bigger ones we have, that's where we really spend the most money, and our win rate there is pretty good. It's probably close to one with – one out of three or one out of four for the larger programs. For the little ones, you're tracking I don't know. You cast a wider net because it doesn't cost you that much. But, that's where we're going to use the indirect channel that I talked about last time going forward. But, for the programs, our hit rate is pretty amazing actually.

Jim Ricchiuti – Needham & Company

And just one final question. Just on tax point, the TSA project. What's the timing on that DHS order? And I wonder if you could give us a little sense of the competitive landscape?

Hans Kobler

The timing, they have announced it, I believe in true DHS fashion, they would like to split that between a couple of parties and a couple of different ways to do it, handhelds and desktops. And it should – we expect this to come out this year as an order, probably around the end of the government year. And then, the question is, can this turn into revenues this year for us which depends a little bit on how quickly they do it. But, I believe the first chunk of this will come later on in the year.

Jim Ricchiuti – Needham & Company

And on the military side, is this more Fido or are these some potentially new detection products?

Hans Kobler

We do have a couple of new detection products coming out. The big dollars, obviously still in Fido. We are ramping up in – with the Army. The Iraqis are very excited about our product. And so, we have to figure out how we deliver the next batch here and who is actually paying for it. But, Fido will, in the near term, still be the big mover, but I think we will start seeing contributions from a new product in explosives detection that they haven't announced yet. We just announced at the last show, Health Physics Show [ph] that we have two new radiation products, one for the commercial market, one handheld, and they will contribute. And the Griffin 600 mass spec is also in beta testing in the hands of customers today. So, they will start adding to that in kind of the prototype beta low volume stage, and they will probably make a bigger contribution early next year.

Jim Ricchiuti – Needham & Company

Debbie, what was headcount at the end of the quarter?

Deborah Mosier

I'm sorry. What was the what?

Jim Ricchiuti – Needham & Company

The headcount. I'm just number of employees?

Deborah Mosier

Around 850.

Jim Ricchiuti – Needham & Company

And relative to the – I could check this in the Q, but relative to the March quarter?

Deborah Mosier

Within the same range.

Jim Ricchiuti – Needham & Company

Thanks a lot.

Operator

(Operator instructions) It looks like we have no further questions. Like to turn the conference back to your speakers for any additional or closing remarks.

Hans Kobler

There's Michael Kim.

Operator

We will go to Michael Kim with Imperial Capital.

Michael Kim – Imperial Capital

Hi, Hans. Hi, Debbie.

Deborah Mosier

Hi.

Hans Kobler

Hi, Michael.

Michael Kim – Imperial Capital

Couple of questions. First on the backlog, I think it sounded like Surveillance was tracking higher looking into the second half. Can you characterize a little bit about the backlog, the composition there? And also, in terms of the timing for the backlog, if your sense is that most its the majority will be shippable here in the back half or leading through the next 12 months?

Hans Kobler

The backlog I would group in three or four components. There is our – the little – the smaller deals kind of the product off the shelf, that is usually quick shipped within weeks, months. Then you have the larger Surveillance programs that we just won, specifically BETSS-C and a few similar ones that we expect to ship this year that account for a significant portion. And then, you have – some of it is contract research, and some of it is the transportation deal, and they go generally over 24 months. And I think the average time in there for CRAD is probably somewhere in the middle and transportation, obviously was a recent win, so that will run a little long.

Michael Kim – Imperial Capital

Great, terrific. And then, specifically, to BETSS-C, could you, I don't know, provide a little more color on things that you're starting to see some trends there, if that's starting to ramp into a stronger deployment phase?

Hans Kobler

Yes. We are very excited about BETSS-C. That's a huge win. It's for real. They don't have to fight the political battles that the SBI is going through. There was (inaudible) and a much larger one that just went out. So, we like BETSS-C, and we're glad that we're part of it. The next two phases there, the one we're very hopeful, and another one that will be a little more competitive. So, we'll have to see, but that will, again provide very substantial revenue and on top of that, overhead coverage for us. And again, I think it validates our strategic positioning that we are just really good at not only building great sensors, but at making them work together. And that's what the customer wants, and that's what the Army knows we can do, and that's what the Border Control knows we can do, and we've done it now for both of them, and we believe that, over time, we'll get the word out that people can trust us even with those larger assignments.

Michael KimImperial Capital

Great. Terrific. And nice progress on the quarter.

Hans Kobler

Thanks, Michael.

Operator

We will go next to Paul Bard with Renaissance Capital.

Paul Bard – Renaissance Capital

Hi, guys. Thanks for taking my question here. I was wondering if you can comment on if you still stand behind some of those long-term margin targets that you laid out at the time of your IPO, maybe just review those with us? And then, perhaps give some perspective on the time line or at least the revenue run rate that would be required to get to those target margins? Thanks.

Hans Kobler

Now, during the IPO, I don't have those in front of me. I recall it was in the mid-20s was the EBITDA margin, and we talked about a 30% plus organic growth rate for the company. And the way we will get there was through a slight margin expansion by selling more product and selling more of the high margin Detection, Surveillance product and at the same time, bringing down IRAD which we will compensate by getting more CRAD to pay for this by moving towards more normal levels and largely bringing down G&A. That's what kind of – that's our strategy going in, and nothing there has changed. Jim asked for the headcount. Debbie said it's kind of flat. It will actually – despite the fact that we are on a 30% growth track for the year, our headcount is probably coming down as part of the streamlining. So, the G&A assumption holds true.

Our R&D is after the initial spike in Q1 is now coming down where we have to have some – do some exceptionary work, and it's now coming down and stabilizing at below eight, sort of seven and half-ish. And we'll be able to hold that line while compensating with CRAD. So, the second assumption is true. For the third one, it depends a lot on the product mix.

And there's one revenue run rate we need if the mix is more heavy on the high value Detection products, and there was high value Surveillance product, and there's a different run rate that we would need if we were to win a $200 million integrated program that has lower margins because we sell third-party products. So, I guess my short answer is the goals remain our targets. The run rate associated with the margins shown at the IPO assumed a higher product mix than we will probably have in the second half of the year, but again if we have more large programs, then probably our growth rate would be higher. So it will be somewhere in between, but it could bounce around anytime. Back then, we assume something of a $300 million run rate to get to those numbers.

Paul Bard – Renaissance Capital

Great. That's helpful. Thank you.

Hans Kobler

All right.

Operator

Ladies and gentlemen, this does conclude today's question-and-answer session.

Hans Kobler

Michael is back. Why don't you get Michael –?

Operator

Michael? Okay. We go next to Michael Kim as a follow-up.

Michael Kim – Imperial Capital

Follow-up question for you guys. Just wanted to hear if there were any new developments with the TSA? I think we saw a pretty significant announcement on the bottle liquid scanner front with something up to 900 units being procured here in the next 12 months. Any color you can provide on that particular opportunity?

Hans Kobler

Yes, I said, I mentioned it briefly before, Michael, maybe you missed that comment. They announced it. We believe they probably will place the first order against that towards the end of the government year or slightly thereafter, would be my guess right now. And we believe we are very well-positioned there. We have, by far, the best technology to detect liquids and vapors. Our technology works whether the bottle is clear or not, and you don't have to open it, and it's handheld. But, in true DHS fashion, they probably want to hedge their bets, and they will want to have a few desktop units, and they will probably want to have a second technology that they are not depending on one supplier. But, we believe we are very well-positioned here. And if something happens or somebody reconsiders, it could actually go way beyond those 900 at some point. But, for now, near term, we hope that we get the first order here later in the – second order later in the year, and it should revenue even this year or early next.

Michael Kim – Imperial Capital

Great. Terrific. Thank you very much.

Hans Kobler

All right. Thanks, everybody.

Operator

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may disconnect at this time.

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