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 $10.00BDAt 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 2005116 November 10, 2005Integrated Biometric LeadersIdentix Inc. (IDNX)Investors, in comparing Identix with its presumed "competitors"(some of which are really closer to partners in biometrics), alwaysstart by asking: "Why can't Identix make money?"The answer, from an analyst who has watched biometrics develop overthe last 12 years is: Identix actually did make money (not a lot)when it was selling high-priced, low-volume Live Scan machines tostate and local police departments in the mid-1990s. Indeed, anotherone of Identix' predecessor companies in the early years of LiveScan, Digital Biometrics, also was profitable.Unfortunately, heavy competition and price trimming with itserstwhile competitor, Digital Biometrics (now part of Identix) and aslowdown in the police industry's "early adopter" sales led (former)management to attempt to generate additional revenues from biometricsoftware, systems, and environments for corporations that neededbetter enterprise security during the Internet bubble.Unfortunately, in the absence of demonstrable, scalable rolloutsalready for reference (i.e., the government), Identix lost millionsof dollars and investor goodwill marketing to a commercial marketthat was then, and still is now, waiting for the big reference sitesto justify their confidence.However, over the last two years, following 9/11, the nature ofIdentix' order patterns have shifted back to its government, LiveScan roots. While marketing the U.S. government has been expensiveand time consuming, the payoff is beginning now. In our view, thereis no reason why Identix cannot consistently improve its grossmargin to more than 40% and operating income to more than 15% in acouple years, regardless of pricing—if Identix is viewed bygovernments as the pre-eminent provider of multibiometric (fingerand face) solutions.While we continue to believe this purposeful lack of transparencymay be frustrating to investors, we understand and acceptthe "competitive issues" criteria as the viable reason for the lackof current disclosure in the cost of good line. IDNX is at acritical juncture of potential new contracts and it absolutelycannot allow the competition to be informed of its strategies..We chose IDNX for biometrics one-stop shopping—superiortechnologies, strong partnerships, standards-based components, andunrivaled experience. More than 60% of live scan users today workwith IDNX. The company has the world's largest live scan deploymentwith the U.S. Department of Homeland Security, with 1,200-plusmachines.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 2005November 10, 2005 117Figure 59: IDNX Contract Matrix2/17/2004 600,000 $ San Dieogo County Sheriff 2/3/2005 500,000 $ 10printers for NY Health (w/ Comnetix)6/28/2004 BPA 2/15/2005 1,000,000 $ N/A State Law Enforcement Agency8/17/2004 500,000 $ CA Law Enforcement 2/22/2005 1,100,000 $NEC/Indiana Live Scan Network9/2/2004 400,000 $ XYZ Law Enforcement 3/21/2005 200,000 $ KaneCounty, Illinois9/15/2004 550,000 $ PA Chiefs Police Association 3/29/2005 700,000 $CA State and local Agencies10/5/2004 750,000 $ US Federal Agencies 4/5/2004 600,000 $ PA HAZMATProgram10/6/2004 650,000 $ 2 Local Law Enforcement Agencies 4/7/20058,000,000 $ LA CRIS10/14/2004 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 Officeof Education11/4/2004 700,000 $ 2 Unnamed State & Local Agencies 6/8/2005700,000 $ unnamed law enforcement agencies11/16/2004 1,800,000 $ PA HAZMAT Program 7/20/2005 700,000 $ 2 N. CAlaw enforcement agencies11/30/2004 650,000 $ PCPA (part of BPA contract) 8/18/2005 2,000,000$ DHS w/ reseller under NASA SEWP 3 GWAC12/14/2004 750,000 $ 4 states ICE - Immigration Customs Enforcement1/12/2005 500,000 $ 2 State and Local Gov. Agencies 9/1/2005 650,000$ unnamed law enforcement agencies1,800,000 $ bulk live scan DPS, rest FaceIt10/4/2005 1,300,000 $ two unnamed federal agencies3/4/2004 PCPA 3/15/2005 1,000,000 $ Michigan9/29/2004 2,200,000 $ Over 12 months from US DoS 3/23/2005 1,000,000$ Tennesses1/3/2005 2,000,000 $ 500k-2.2mm Unnamed Arab Cntry 5/12/20052,000,000 $ Missouri1/31/2005 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 Application4/12/2005 4,000,000 $ multiple Intl. (ME) (3Q05-1Q06)8/9/2005 2,000,000 $ Intl. Election System N. Hemisphere9/7/2005 1,600,000 $ DoD - Office of Navel Research (ONR) - FaceItsurveillance for warshipsprof svsc type licenses10/11/2005 1,000,000 $ Multi-Yr FaceIt pact with Gaming Co.10/19/2005 1,400,000 $ single finger readers/35K+ seat licenses10/6/2005 900,000 $ Hennepin County, MN, Sheriff's Office IBIS....].IIS (Identix Information Services)OriginalTouchprint 3000 SeriesNew Enhanced DefinitionTouchprint 3000A-ED Live Scan SeriesABISBioLogonSource: Company reports; Lehman Brothers estimatesThe heightened focus on security (along with the avalanche ofpassword-protected systems) in government, corporate, and consumerinterests bodes well for what has seemed to be an endless adoptioncurve for biometric security technologies. We remain patientregarding the timing of this opportunity, and, in turn, when itcould have a positive impact on Identix' top and bottom line.Fiscal 1Q06 Review: Solid Quarter; EBITDA Profitable, Driven byGross MarginIDNX reported fiscal 1Q06 loss per share of $0.01, which beat ourand consensus estimate of a $0.03 loss and was higher than thecompany's expectations of a $0.02–$0.04 per share loss. The reportedloss per share also came in favorably compared with a loss of $0.05in fiscal 1Q05. Fiscal 1Q06 revenue of $22.7 million was higher thanour $21.0 million estimate, driven primarily by better-than-expectedproduct revenue of $15.5 million (up 87% year over year) (versus ourestimate of $13.7 million). This revenue number was also greaterthan the high end of the company's previously guided range of $20million–$22 million. Most important, ex-amortization expense (whichthe company has now reclassified into the cost of sales), theproduct segment gross margins were 57% compared with our 45%estimate, and 34% in fiscal 1Q05. Higher margins were drivenSecurity Industry Annual 2005118 November 10, 2005by a greater concentration of software revenue, such as the roughly$2 million ABIS award for a voter registration program to be usedfor an international election system in an unnamed country.Also of key importance is that IDNX reached EBITDA profitability infiscal 1Q06, achieving an "initial" milepost for investors. While weanticipate EBITDA profitability returning in 2H06, we note thatfiscal 2Q06 may not be EBITDA positive—primarily due to certain newstart-up costs (i.e., new offices) that IDNX will incur for itsthree new state Identix Identification Services (IIS) wins—whoserevenues will only begin to flow in fiscal 3Q06 and beyond...]Fiscal 2Q06: IDNX guided total revenue growth for fiscal 2Q06 in the13%–24% yearover-year range ($21 million–$23 million). Thisexpectation is a result of an anticipated 40%–55% growth rate forproduct revenues, partially offset by an anticipated 16%–23% declinein year-over-year services revenues. The slowdown in servicerevenues is ongoin as part of a replacement cycle of old "live scan"systems with installations of updated IDNX systems (which usuallycomes with a one-year warranty). With our anticipation of this trendcontinuing, we believe IDNX will focus on cost-cutting initiativesthroughout the year in the service segment. We also note thatincreases in IIS revenues should offset some of the service revenuedecline in the 2H06. We have reduced our loss per share estimate to$0.03 from $0.02 with slightly higher-than-anticipated costs (andincluding $400,000 of stock option expense) related to new set-upcosts that IDNX will incur in fiscal 2Q06 to accommodate the threenew 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–$98million for revenue and a loss per share $0.07–$0.02 (excludingstock option expenses).Accounting for the $0.02 beat in fiscal 1Q06, the $0.01 reduction inour estimates in fiscal 2Q06 and an increase by $0.01 in fiscal 3Q06(we anticipate lower costs from management initiatives to takeeffect and improved margins from IIS business)—our FY06 loss pershare estimate improved to $0.03 from $0.05. We maintained ourrevenue estimate of $97 million, but again note that due to the highuncertainty of the timing of government contracts, this number couldpotentially prove to be conservative. In addition, after we estimatea margin hit in fiscal 2Q06, we then anticipate improved marginsthroughout the rest of the year, as IDNX's software offeringsincrease as a percentage of sales by gaining further traction in themarketplace.In conclusion: With a strong start in FY06, a strong pipeline ofcontracts, and what we believe to be a healthy future for theoverall biometrics industry, we have maintained our 1-Overweightrating on IDNX. In addition, we are encouraged by the new initiativeof the DHS to use 10-fingerprint systems in its border controlinitiatives, specifically the US-VISIT program. IDNX is an industryleader in 10-fingerprint live scan systems, and we believe is wellpositioned to benefit from this objective. (The US-VISIT currentlyuses a 2-fingerprintSecurity Industry Annual 2005November 10, 2005 119system 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 IAFISsystem. The FY06 DHS budget allocates $390 million for the US-VISITprogram, up from $340 million last year.)Because of the symbolic importance of various single-source awardsto Identix over the years (such as the DoS facial recognitioncontract and many statewide live scan contracts) and an increasedfrequency of ABIS related program wins, we believe the marketexpects this company to double or triple its revenue base over thenext five years. Based on this expectation, we have kept our targetprice at $10, which is derived by assuming a 4.7x multiple onroughly twice our FY06 biometric revenue estimate of $97 million....].Segment ReviewIdentix announced more than $13 million worth of contracts thisquarter. Roughly a little over half of those were related to LiveScan systems and about 35%–40% were ABIS related, with the remainingIIS and IBIS. Both the frequency of the award announcements and themix amongst IDNX's various products and services are veryencouraging to us.! Product revenue is the primary indicator of growth for IDNX andshowed an impressive 87% year-over-year growth in fiscal 1Q06.Product revenues were $15.5 million versus our $13.7 millionestimate and $8.3 million in fiscal 1Q05. Note that revenues thatwere delayed in fiscal 4Q05 were pushed out into this quarter andcontributed to the strong performance. Included in this segment arerevenues from: 1) fingerprint (the TouchPrint Live Scan systems)systems, 2) facial products (ABIS, FaceIt), systems, and 3)technology licensing (BioLogon). Gross margin for the Productsegment was 57% in fiscal 1Q06, well above our 45% expectations and34% a year ago. The higher gross margins were a result of a greatersoftware revenue mix such as the roughly $2 million ABIS award for avoter registration program to be used for international electionsystem in an unnamed country. We continue to believe that "live-scan" revenues from cities and states, international programs (manyof which cannot be announced) and U.S.-VISIT deliveries (many ofwhich cannot be announced as well) should drive our model in fiscal2Q06 and beyond. We believe that part of the 87% product revenuegrowth and 57% gross margin was due to a carryover of contracts thatwere delayed in fiscal 4Q05. Consequently, we estimate thatsequentially margins should drop in fiscal 2Q06 to 45%–50% but thenimprove over the remainder of the year, averaging about 50% for thefull FY06.! Service revenue (primarily maintenance/service revenue related toits installed systems) decreased 13% year over year to $7.2 millionin fiscal 1Q06. Margins were sequentially up to 18% (from 10.6%),due to the realized benefit of cutting the related sales force infiscal 4Q05 by roughly 10%. The slowdown in service revenues isongoing as part of a replacement cycle of old "live scan" systemswith installations of updated IDNX systems (which usually come witha one-year warranty). With our anticipation of this trendcontinuing, we believe IDNX will focus on cost-cuttingSecurity Industry Annual 2005120 November 10, 2005 initiatives throughout the year in theservices segment. We also note that increases in IIS revenues shouldoffset some of the service revenue decline in 2H06.Note: Economically, product revenue gains more than offset IDNX'sdeclines in service revenue, and we expect this trend to continuegoing forward. This revenue mix shift positively drives a morefavorable margin mix as well. ]Re: Lehman 10/sh target -Overweight
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