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Subject:  Re: new advice on identix Date:  12/5/2005  7:03 PM
Author:  BioDigger Number:  426 of 429
and particularly, how much longer before there is "the pay-off?"

Well, I've been an investor in this stock since 1999. Very long time. Well underwater but still confident it will work out. Recently bought 3k more shares at 4.40. IDNX is dependent on government and government is not only slow, but often incompetent. So, it will be a while yet before "the payoff". Probably well into 2007. That said, I am even more optimistic about that payoff because a whole technology has come together, thanks to their laboratory, which is recognized as one of the 10 best in the United States. The recent Annual Meeting was as upbeat as any I've heard yet. So, it convinced me to buy more stock. Momentum is building, we have a complete identity package that is scalable (100,000,000), adaptable and interoperable. I would hazard a guess that IDNX will be profitable in 2006. Below is a long discussion by Lehman. Overweight, target $10.00

BD

At Identix, a biometrics software company, chief financial officer Elissa J. Lindsoe spent $22,000 on 4,900 shares for her individual retirement account. This brings quarterly buying by insiders to about $31,000, the highest level in the past five years, according to Thomson Financial. The stock is down 35% for the year.

The entire report is over 300 pages long. Sorry, no link:
[Security Industry Annual 2005
116 November 10, 2005
Integrated Biometric Leaders
Identix Inc. (IDNX)
Investors, in comparing Identix with its presumed "competitors"
(some of which are really closer to partners in biometrics), always
start by asking: "Why can't Identix make money?"
The answer, from an analyst who has watched biometrics develop over
the last 12 years is: Identix actually did make money (not a lot)
when it was selling high-priced, low-volume Live Scan machines to
state and local police departments in the mid-1990s. Indeed, another
one of Identix' predecessor companies in the early years of Live
Scan, Digital Biometrics, also was profitable.
Unfortunately, heavy competition and price trimming with its
erstwhile competitor, Digital Biometrics (now part of Identix) and a
slowdown in the police industry's "early adopter" sales led (former)
management to attempt to generate additional revenues from biometric
software, systems, and environments for corporations that needed
better enterprise security during the Internet bubble.
Unfortunately, in the absence of demonstrable, scalable rollouts
already for reference (i.e., the government), Identix lost millions
of dollars and investor goodwill marketing to a commercial market
that was then, and still is now, waiting for the big reference sites
to justify their confidence.
However, over the last two years, following 9/11, the nature of
Identix' order patterns have shifted back to its government, Live
Scan roots. While marketing the U.S. government has been expensive
and time consuming, the payoff is beginning now. In our view, there
is no reason why Identix cannot consistently improve its gross
margin to more than 40% and operating income to more than 15% in a
couple years, regardless of pricing—if Identix is viewed by
governments as the pre-eminent provider of multibiometric (finger
and face) solutions.
While we continue to believe this purposeful lack of transparency
may be frustrating to investors, we understand and accept
the "competitive issues" criteria as the viable reason for the lack
of current disclosure in the cost of good line. IDNX is at a
critical juncture of potential new contracts and it absolutely
cannot allow the competition to be informed of its strategies.

.We chose IDNX for biometrics one-stop shopping—superior
technologies, strong partnerships, standards-based components, and
unrivaled experience. More than 60% of live scan users today work
with IDNX. The company has the world's largest live scan deployment
with the U.S. Department of Homeland Security, with 1,200-plus
machines.
IDNX face technology uses skin technology for more accuracy.
Over the last two years, following 9/11, the nature of Identix'
order patterns have shifted back to its government, Live Scan roots.
Security Industry Annual 2005
November 10, 2005 117
Figure 59: IDNX Contract Matrix
2/17/2004 600,000 $ San Dieogo County Sheriff 2/3/2005 500,000 $ 10
printers for NY Health (w/ Comnetix)
6/28/2004 BPA 2/15/2005 1,000,000 $ N/A State Law Enforcement Agency
8/17/2004 500,000 $ CA Law Enforcement 2/22/2005 1,100,000 $
NEC/Indiana Live Scan Network
9/2/2004 400,000 $ XYZ Law Enforcement 3/21/2005 200,000 $ Kane
County, Illinois
9/15/2004 550,000 $ PA Chiefs Police Association 3/29/2005 700,000 $
CA State and local Agencies
10/5/2004 750,000 $ US Federal Agencies 4/5/2004 600,000 $ PA HAZMAT
Program
10/6/2004 650,000 $ 2 Local Law Enforcement Agencies 4/7/2005
8,000,000 $ LA CRIS
10/14/2004 900,000 $ DoD & Other Non-DHS Agencies 5/17/2005 900,000
$ PCPA (BPA till 08/05)
10/21/2004 700,000 $ CPB Agency 6/1/2005 225,000 $ Utah State Office
of Education
11/4/2004 700,000 $ 2 Unnamed State & Local Agencies 6/8/2005
700,000 $ unnamed law enforcement agencies
11/16/2004 1,800,000 $ PA HAZMAT Program 7/20/2005 700,000 $ 2 N. CA
law enforcement agencies
11/30/2004 650,000 $ PCPA (part of BPA contract) 8/18/2005 2,000,000
$ DHS w/ reseller under NASA SEWP 3 GWAC
12/14/2004 750,000 $ 4 states ICE - Immigration Customs Enforcement
1/12/2005 500,000 $ 2 State and Local Gov. Agencies 9/1/2005 650,000
$ unnamed law enforcement agencies
1,800,000 $ bulk live scan DPS, rest FaceIt
10/4/2005 1,300,000 $ two unnamed federal agencies
3/4/2004 PCPA 3/15/2005 1,000,000 $ Michigan
9/29/2004 2,200,000 $ Over 12 months from US DoS 3/23/2005 1,000,000
$ Tennesses
1/3/2005 2,000,000 $ 500k-2.2mm Unnamed Arab Cntry 5/12/2005
2,000,000 $ Missouri
1/31/2005 500,000 $ Sweden - FaceIt application 9/6/2005 2,250,000 $
Texas Department of Public Safety (TxDPS)
2/16/2005 1,000,000 $ Nikkon - FaceIt Application
4/12/2005 4,000,000 $ multiple Intl. (ME) (3Q05-1Q06)
8/9/2005 2,000,000 $ Intl. Election System N. Hemisphere
9/7/2005 1,600,000 $ DoD - Office of Navel Research (ONR) - FaceIt
surveillance for warships
prof svsc type licenses
10/11/2005 1,000,000 $ Multi-Yr FaceIt pact with Gaming Co.
10/19/2005 1,400,000 $ single finger readers/35K+ seat licenses
10/6/2005 900,000 $ Hennepin County, MN, Sheriff's Office IBIS....]

.IIS (Identix Information Services)
Original
Touchprint 3000 Series
New Enhanced Definition
Touchprint 3000A-ED Live Scan Series
ABIS
BioLogon
Source: Company reports; Lehman Brothers estimates
The heightened focus on security (along with the avalanche of
password-protected systems) in government, corporate, and consumer
interests bodes well for what has seemed to be an endless adoption
curve for biometric security technologies. We remain patient
regarding the timing of this opportunity, and, in turn, when it
could have a positive impact on Identix' top and bottom line.
Fiscal 1Q06 Review: Solid Quarter; EBITDA Profitable, Driven by
Gross Margin
IDNX reported fiscal 1Q06 loss per share of $0.01, which beat our
and consensus estimate of a $0.03 loss and was higher than the
company's expectations of a $0.02–$0.04 per share loss. The reported
loss per share also came in favorably compared with a loss of $0.05
in fiscal 1Q05. Fiscal 1Q06 revenue of $22.7 million was higher than
our $21.0 million estimate, driven primarily by better-than-expected
product revenue of $15.5 million (up 87% year over year) (versus our
estimate of $13.7 million). This revenue number was also greater
than the high end of the company's previously guided range of $20
million–$22 million. Most important, ex-amortization expense (which
the company has now reclassified into the cost of sales), the
product segment gross margins were 57% compared with our 45%
estimate, and 34% in fiscal 1Q05. Higher margins were driven
Security Industry Annual 2005
118 November 10, 2005
by a greater concentration of software revenue, such as the roughly
$2 million ABIS award for a voter registration program to be used
for an international election system in an unnamed country.
Also of key importance is that IDNX reached EBITDA profitability in
fiscal 1Q06, achieving an "initial" milepost for investors. While we
anticipate EBITDA profitability returning in 2H06, we note that
fiscal 2Q06 may not be EBITDA positive—primarily due to certain new
start-up costs (i.e., new offices) that IDNX will incur for its
three new state Identix Identification Services (IIS) wins—whose
revenues will only begin to flow in fiscal 3Q06 and beyond...]

Fiscal 2Q06: IDNX guided total revenue growth for fiscal 2Q06 in the
13%–24% yearover-year range ($21 million–$23 million). This
expectation is a result of an anticipated 40%–55% growth rate for
product revenues, partially offset by an anticipated 16%–23% decline
in year-over-year services revenues. The slowdown in service
revenues is ongoin as part of a replacement cycle of old "live scan"
systems with installations of updated IDNX systems (which usually
comes with a one-year warranty). With our anticipation of this trend
continuing, we believe IDNX will focus on cost-cutting initiatives
throughout the year in the service segment. We also note that
increases in IIS revenues should offset some of the service revenue
decline in the 2H06. We have reduced our loss per share estimate to
$0.03 from $0.02 with slightly higher-than-anticipated costs (and
including $400,000 of stock option expense) related to new set-up
costs that IDNX will incur in fiscal 2Q06 to accommodate the three
new state wins in IIS. Management guided to a loss per share of
$0.02–$0.04.
Fiscal 2006: Full year guidance remained unchanged: $90 million–$98
million for revenue and a loss per share $0.07–$0.02 (excluding
stock option expenses).
Accounting for the $0.02 beat in fiscal 1Q06, the $0.01 reduction in
our estimates in fiscal 2Q06 and an increase by $0.01 in fiscal 3Q06
(we anticipate lower costs from management initiatives to take
effect and improved margins from IIS business)—our FY06 loss per
share estimate improved to $0.03 from $0.05. We maintained our
revenue estimate of $97 million, but again note that due to the high
uncertainty of the timing of government contracts, this number could
potentially prove to be conservative. In addition, after we estimate
a margin hit in fiscal 2Q06, we then anticipate improved margins
throughout the rest of the year, as IDNX's software offerings
increase as a percentage of sales by gaining further traction in the
marketplace.
In conclusion: With a strong start in FY06, a strong pipeline of
contracts, and what we believe to be a healthy future for the
overall biometrics industry, we have maintained our 1-Overweight
rating on IDNX. In addition, we are encouraged by the new initiative
of the DHS to use 10-fingerprint systems in its border control
initiatives, specifically the US-VISIT program. IDNX is an industry
leader in 10-fingerprint live scan systems, and we believe is well
positioned to benefit from this objective. (The US-VISIT currently
uses a 2-fingerprint
Security Industry Annual 2005
November 10, 2005 119
system known as the IDENT, which will begin to be upgraded to 10-
finger once a "comprehensive plan" is drafted by early next year,
making it even more compatible with the current 10-finger FBI IAFIS
system. The FY06 DHS budget allocates $390 million for the US-VISIT
program, up from $340 million last year.)
Because of the symbolic importance of various single-source awards
to Identix over the years (such as the DoS facial recognition
contract and many statewide live scan contracts) and an increased
frequency of ABIS related program wins, we believe the market
expects this company to double or triple its revenue base over the
next five years. Based on this expectation, we have kept our target
price at $10, which is derived by assuming a 4.7x multiple on
roughly twice our FY06 biometric revenue estimate of $97 million....]
.Segment Review
Identix announced more than $13 million worth of contracts this
quarter. Roughly a little over half of those were related to Live
Scan systems and about 35%–40% were ABIS related, with the remaining
IIS and IBIS. Both the frequency of the award announcements and the
mix amongst IDNX's various products and services are very
encouraging to us.
! Product revenue is the primary indicator of growth for IDNX and
showed an impressive 87% year-over-year growth in fiscal 1Q06.
Product revenues were $15.5 million versus our $13.7 million
estimate and $8.3 million in fiscal 1Q05. Note that revenues that
were delayed in fiscal 4Q05 were pushed out into this quarter and
contributed to the strong performance. Included in this segment are
revenues from: 1) fingerprint (the TouchPrint Live Scan systems)
systems, 2) facial products (ABIS, FaceIt), systems, and 3)
technology licensing (BioLogon). Gross margin for the Product
segment was 57% in fiscal 1Q06, well above our 45% expectations and
34% a year ago. The higher gross margins were a result of a greater
software revenue mix such as the roughly $2 million ABIS award for a
voter registration program to be used for international election
system in an unnamed country. We continue to believe that "live-
scan" revenues from cities and states, international programs (many
of which cannot be announced) and U.S.-VISIT deliveries (many of
which cannot be announced as well) should drive our model in fiscal
2Q06 and beyond. We believe that part of the 87% product revenue
growth and 57% gross margin was due to a carryover of contracts that
were delayed in fiscal 4Q05. Consequently, we estimate that
sequentially margins should drop in fiscal 2Q06 to 45%–50% but then
improve over the remainder of the year, averaging about 50% for the
full FY06.
! Service revenue (primarily maintenance/service revenue related to
its installed systems) decreased 13% year over year to $7.2 million
in fiscal 1Q06. Margins were sequentially up to 18% (from 10.6%),
due to the realized benefit of cutting the related sales force in
fiscal 4Q05 by roughly 10%. The slowdown in service revenues is
ongoing as part of a replacement cycle of old "live scan" systems
with installations of updated IDNX systems (which usually come with
a one-year warranty). With our anticipation of this trend
continuing, we believe IDNX will focus on cost-cutting
Security Industry Annual 2005
120 November 10, 2005 initiatives throughout the year in the
services segment. We also note that increases in IIS revenues should
offset some of the service revenue decline in 2H06.
Note: Economically, product revenue gains more than offset IDNX's
declines in service revenue, and we expect this trend to continue
going forward. This revenue mix shift positively drives a more
favorable margin mix as well. ]

Re: Lehman 10/sh target -Overweight
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