Fluent, Inc.
Q4 2008 Earnings Call Transcript

Published: 26 Feb 2009

[Operator:]

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the Cogent Systems fourth quarter earnings conference call. (Operator Instructions). I'd like to now turn the conference to our host, Chris Danne. Please go ahead, sir.

[Chris Danne:]

Thank you. Good afternoon and thank you for joining us on today's conference call to discuss Cogent's four quarter and full year 2008 financial results. This call is also being broadcast live over the web and can be accessed in the Investor Relations section of Cogent's website at www.cogentsystems.com for 15 days. With me on today's call are Ming Hsieh, President and Chief Executive Officer and Paul Kim, Chief Financial Officer. After the market close today Cogent issued a press release discussing the results for its fourth quarter and full year ended December 31, 2008. If you would like a copy of the release you can access it online at the company's website, or you can call The Blueshirt Group at 415-217-7722 and we will fax or email you a copy. This conference call will include a discussion of non-GAAP financial measures as that term is defined in Regulation G. Most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures the company's financial results were prepared in accordance with GAAP, are included in the earnings release which is posted on the company's website at www.cogentsystems.com. We would like to remind you that during the course of this conference call Cogent's management may make forward-looking statement including financial projections, statements as to plans and objectives of management for future operations and statements as to the company's future economic performance, financial condition or results of operations. The company believes that its estimates and expectations are reasonable and are based on reasonable assumptions. However, risks and uncertainties related to future events could cause the actual results to differ or differ materially from the expectations. For a full discussion of the risks and uncertainties please refer to today's press release and our recent SEC filings including, without limitation, the company's annual report on Form 10-K for the year ended December 31, 2007. The company does not intend or assumes no obligation to update any forward-looking statements. With that said I would now like to turn the call over to Cogent's President and CEO, Ming Hsieh.

[Ming Hsieh:]

Thank you, Chris. And thank you everyone for being on the call. At the beginning of the year we set out three main goals for the company. We [wanted] more consistent results, solidify our customer base and diversify our revenue. I'm pleased to report that we made a significant improvement toward achieving all these goals in 2008. As we projected we experienced a notable increase in fourth quarter revenue. Revenue grew by 14% sequentially and 83% year-over-year as we experienced strong demand from the Department of Homeland Security, Spain, Pennsylvania and there were other customers. At the beginning of the year we set our goal for $[122] million in sales, later updated to $125 million in sales. And I'm pleased to report that we accomplished this goal, achieving over $125 million in revenue for the year, or 19% of growth. While product mix end of the year we recognized revenue under certain contracts had an impact on gross margin in the fourth quarter, the [SPD] were $0.14 per share on a non-GAAP basis and a $0.52 per share for the year. Clearly we accomplished our goal and there were more consistent results. Another major goal for the year was to solidify and increase our customer base. Throughout the year we saw considerable orders from the Department of Homeland Security, our largest customer. In [approximate], we continue to see a number of potential drivers from this customer that we expect will continue into 2009 as the input to conversion from two to ten print in division with the FBI and the continued growth of the system and the expansion of the number of visitors to be searched. While we'll be conservative in our forecast for the DHS, we feel that ongoing competition for the ten print sub-system and the potential [long print] from any major government agencies. Other flow has been encouraging in the latter half of 2008 and into the first part of 2009. Beyond the DHS this year there was no notable for the effect, that there's no single customer accounted for 10% of the revenue. Chief customer throughout the year included [Arie Condie], the Royal Canadian Mounted Police, Morocco, Pennsylvania, Spain, Italy and U.K. We expect all these customers to continue some level of purchasing in the coming year along with the U.S. Census Bureau which we announced last quarter. The final major goal we laid out for the year was to diversify our revenue base. There are two ways to achieve this goal; adding new customers and develop new products and service. I'm please to announce two major new customers that we are disclosing the first time on this conference call. First, we won a major contract with the Belgian National Police, increasing Cogent's presence in Europe where our technology is already being used by other European Union countries. We will provide the palm print and fingerprint identification system replacing [Print Right], whose system was implemented over 10 years ago. Additionally, I'm very pleased to announce that after a rigorous competition, we were notified last week that we have won the U.K. Post Office contract to provide the integrated biometrics data collection services on a massive scale. The size of this initial award is potentially larger than any other single international win in the company's history. The U.K. Post Office offers a wide range of products including passport, financial services and the main nationwide network of around 12,500 branches, making it the largest retail branch network in the U.K., handling more cash than any other business. We are very pleased with this new win as we continue to solidify our customer base. In addition to Belgian and U.K. Post Office we were notified at the end of last year that we were one of the 12 companies and the only pure biometric provider selected for the BOSS-U contract by the United States Army. BOSS-U provides a range of technical service and a solution to fulfill the DoD's biometric service need. BOSS-U is an [ID/IQ] rate and that is a quantity contract with a maximum ceiling value of $497 million available for [task orders] to other awards. Basically it serves as a potential purchase type for the armed forces and other government agencies. Work on the contract would be conducted for a three-year base period and two one-year option periods. We believe that this has been a major shift within the Department of Defense over the past year. Prioritizing biometrics as a viable technology we feel is a mission and a future requirement around the world. One of the reasons for this shift has been the advent and availability of handheld biometric units that can identify friends and foes. We believe our Fusion device, our handheld multi-modal device that is the capable of capturing, storing tens of thousands of records is now at the forefront of this trend and continues these strong interest in this product. While we're the only cooperating current of others in [inaudible] for Fusion, our guidance, we do believe the additional orders for Fusion will represent an incremental upside for our forecast. Fusion and our Lucent handheld units further diversify our revenue ring along with our security solution business which has started the fourth quarter with orders from NASA. Similarly, we had a strong first quarter and we encouraged by our prospects in 2009. Obviously the current economic climate and the changes in the administration add a degree of uncertainty. But our backlog and deferred revenue at a record level and that we are very pleased to have announced three new major customers today that should have the right revenue. Additionally, our financial position remains very secure as we generated another $24 million in cash this quarter and had over $479 million in cash on our balance sheet on the year end. Looking forward we're also encouraged by the number of selling proposals that we're currently have at a potential customer and the future prospects. In total we have more than a dozen prospects at a proposal stage and another half dozen close behind. It ranges from well known profiles like SCI, NGI, U.K.'s Navy and visas [provenance] to less known potential awards at the same level. And with the [inaudible] in Asia, Europe and Middle East we're certain we will not win all the [programs] and expect that some of them will be delayed, while we do expect a number of those options will be awarded in the first half of this year. I'm now going to ask Paul to go over our Q4 results in more details, and also our financial outlook for 2009. Paul?

[Paul Kim:]

Thank you, Ming. I should mention that unless specifically noted otherwise we're discussing all number in a pro forma or non-GAAP basis. Fourth quarter GAAP results included $1 million in non-cash charges related to FAS 123r regarding expensing of stock-based compensation. Fourth quarter revenues were $40 million. Product revenues grew 27% from the third quarter while maintenance and service revenues decreased sequentially by 16%. During the third quarter we had a significant payment of maintenance on one of our large international customers. Revenue contributions during the quarter came from customers such as the DHS, Fresno, Ohio, NASA, Pennsylvania, as well as Spain. Gross margins were 58% in Q4 down from 71% last quarter due to product mix. For the year gross margin came in at 65.4% in line with our updated forecast from last quarter and ahead of our guidance at the beginning of the year. Looking ahead we expect gross margins to be in the range of 60 to 65% for 2009. Operating expenses as a percentage of revenue were at 24% this quarter down from 26% in Q3; in actual dollars operating expenses to $9.8 million from $9.2 million in the third quarter on higher revenues. Our operating expenses grew as we continued to hire employees to service our ongoing and to be delivered contracts. Excluding stock-based compensation and settlement income we project that 2009 operating expenses will be approximately $40 million. Operating margins excluding stock-based compensation of $1 million were 34% in the fourth quarter. We've recorded $3.8 million in interest income this quarter. Our tax rate was 29% during the fourth quarter. The company had greater than anticipated deductions for high domestic production activities during the back half of 2008 which was recorded in the fourth quarter which caused the low tax rate during the quarter. We anticipate the tax rate to be approximately 38% for the full year 2009. Excluding stock-based compensation fully diluted non-GAAP earnings were $12.2 million or $0.14 per share based on a 90.3 million share count. Cash and investments increased by $24 million from the prior quarter to approximately $480 million or $5.32 per share as of December 31, 2008. Accounts receivable decreased to $30.8 million in Q4 from $41.6 million in Q3. Inventories were $18.5 million at the end of Q4 compared to $22.9 million at the end of Q3. Fixed assets stood at $37.2 million. Deferred tax assets were $41.1 million. The balance is primarily comprised of deferred revenue, research & development credits and foreign tax credits. We believe that it's more likely not be these assets will be realized through the generation of taxable income. Accounts payable and accrued expenses were $25.7 million in Q4 compared to $31.7 million in Q3. Deferred revenue was up $2.3 million to $75 million compared to $72.7 million last quarter. The increase is related to various ongoing projects and reflects the growth of our backlog on some key programs. Our headcount increased to 365 in the fourth quarter from 348 in the third quarter. Backlog which is comprised of deferred revenue and binding purchase orders sit at a record $168 million on December 31, 2008 versus approximately $140 million last year. This backlog does not include any orders we have received to date in 2009, or our new contract with the U.K. Post Office. As noted on past earnings calls deferred revenue as well as backlog can fluctuate. We anticipate deferred revenue will continue to fluctuate in the future based on when contracts and purchase orders are signed, invoiced and recognized into revenue. Backlog for large open pass contracts such as UKvisas could only include outstanding purchase orders and do not reflect future potential order of magnitude for such programs. We reiterate that short-term financial data points such as backlog and deferred revenue are less reflective of the overall health of our business, and the positioning and visibility we have in key customers and programs Moving on to our outlook for the year we're currently forecasting full year 2009 revenue of $130 million based on our backlog entering the quarter and orders received to date. It is important to note that we have not included any contribution to revenues from the U.K. Post Office or Belgium in this guidance because we have not yet determined revenue recognition from these contracts. It is likely that we will be able to recognize some revenues in 2009 from these new customers but we're not yet in a position to predict how much and when. Additionally we have only included orders received to date from our Fusion product and incorporated no benefit from BOSS-U award that Ming discussed earlier. It is also the potential – there is also the potential of additional revenues from greater than anticipated purchase orders from existing customers such as the DHS as well as Northrop Grumman, along with the awards we're still waiting to hear from including Algeria, UKvisas, Israel, FBI, NGI and other programs. As I mentioned we're currently anticipating gross margins to be between 60 to 65% for 2009 and we're not anticipating – we are anticipating operating expenses of $40 million for the year excluding stock-based compensation. We are also anticipating a tax rate of 38% for the year. These factors lead us to forecast non-GAAP EPS of $0.34 to $0.38 per share for full year 2009 excluding stock-based compensation. In summary we're pleased with our strong fourth quarter results. Our 2008 year end results were in line with our latest guidance of $125 million in annual revenues, 65 to 70 points in gross margins, operating expenses of approximately $35 million and EPS of $0.43 to $0.48 which excludes legal settlement gain. Currently our orders and backlog to date give us very good visibility as we head into 2009 and we believe there are several opportunities for upside to our financial targets for the year, some of which we mentioned on the call. Our business is getting more diversified and stronger even in the current economy as we continue to generate cash, drive revenues from an increasingly wide customer base and build our backlog for 2009 and 2010. On this note, we are pleased to announce new contract with the U.K. Post Office that Ming highlighted along with our new contract in Belgium. We began shipping our Fusion product line and expect to benefit from our Northrop Grumman agreement this year. All of these factors should be growth drivers in 2009, although we have primarily included those revenues into our guidance which we have already received orders and minor assumptions of follow-on orders from existing customers. We feel our results are evidence that the demand for biometric solutions and our technology continuing to grow with our diversified customer base and product offerings, we are well positioned to take opportunities of many opportunities ahead of us. We would now be happy to answer questions that you may have. Operator you can open it up for questions.

[Operator:]

(Operator Instructions). Your first question comes from Joel Fishbein – Lazard Capital Markets.

[Joel Fishbein:]

Just very quickly, can you – Ming can you give us a little bit of color around the potential size of the DoD, BOSS-U, the size, the potential opportunity at U.K. Post Office and with the Belgium Police. I understand that you're not, that it's not included in the guidance, but I'm just trying to get some clarity into the potential size of each of these opportunities for you guys?

[Ming Hsieh:]

Okay, Joe, as I mentioned at the conference call, the DoD BOSS-U contract, it is IV/IQ Contract. We are waiting for about a dozen task orders to come out in the next few weeks, so when task orders coming out will be able to try to compete and those results should be known very, very quickly. I couldn't give the specific guidance for what size BOSS-U yet. But the DoD did mention about the potential size for each individual contract. Regarding about the U.K. Post Office we are waiting the contract to be signed next week. Once the contract is signed, we will release the contract value next week.

[Joel Fishbein:]

Okay and then Belgium. How about Belgium?

[Ming Hsieh:]

Belgium is about a few million dollars contract. But as significant is we are competing with a French-speaking territory and we were able to penetrate into the market.

[Operator:]

Your next question comes the Brian Gesuale – Raymond James

[Brian Gesuale:]

Wanted to dig into guidance a little bit, wondering if you could talk to us directionally about what you included from VISIT and DHS, either a dollar number or directionally up, down or flat?

[Paul Kim:]

So, as you probably know we had a record year from our revenues from the DHS in 2008. Order patterns for DHS, what we have in deferred revenues and our outlook's certainly promising for 2009. But we also have other big revenue assumptions in our guidance for 2009 including the Census, Northrop Grumman and a wide variety of other customers. At this point in time, we have only baked in the orders that we have as well as the nominal orders that we anticipate for them to keep up with the program. We did not anticipate the application of additional – the additional bandwidth that they could potentially need for a wide variety of solutions. That could potentially mean revenues for us. So with all that in mind in the $130 million we have determined that the DHS revenues that in the guidance would be lower than what we had in 2008. But also keep in mind that when we started out the guidance in 2008 we didn't anticipate as much revenues from the DHS as what actually ended up coming through for the company. So I think how we're going to approach the DHS is we will continue to talk about that important customer on each of our quarterly calls, but there's certainly the possibility a 2009 revenue contribution from DHS could be as high or if not higher than what we had in 2008, but then again, if that happened and we would change our guidance to the upside.

[Brian Gesuale:]

Okay, terrific. That's helpful. Wondering if you could also give us a little bit more color on gross profits this quarter in terms of product mix and then maybe what's maybe changed your view on gross profits for 2009?

[Paul Kim:]

Sure. Thank you for that question. As you know, Brian, quarterly gross margins for the company has fluctuated over the years. When we had some other international customers we've had quarters where gross margins were below 50%. I think for the fourth quarter gross margins came in in the high 50s, not over 60% based on product mix and that was largely due to one, international contract and the way we recorded revenues from it. It was for the Spain contract. The Spain contract had a multi-year maintenance provision in it and the way you record revenues under our software revenue recognition policy, is you carve out the revenues tied to the maintenance before you record the product. And what happens when you do that is you get a lower gross margin, particularly if you have a multi-year maintenance provision within that contract. And I think for Spain it was something like four, five, six years. Having said all of that, if you look at the gross margin profile for most of our contracts including Spain, they're all within the same range; it was just the way we calculated it. And also, if you look at our gross margin achievements for the past three years they have been progressively getting higher on an annual basis. In 2006 our gross margins were at 58%, in 2007 it was at 62% and in 2008 we ended up at 65.4%. And looking out into 2009, we're ranging that to 60% to 65%, but there's certainly the possibility it could be higher. When we initially guided gross margins at the beginning of 2008 we said that gross margins would be approximately 60% and then after a quarter or two we raised that from 62% to 67% and in the third quarter, we raised it finally to a level of 65% to 70% and we came within that range. So there's certainly the possibility in 2009 that gross margins could be higher that what we're currently ranging, but to the extent that we experience that, we will certainly update you on the future calls and give you that better range.

[Brian Gesuale:]

Okay, terrific. And then maybe could you update us on the stock buyback and what your activity has been and certainly, with the cash you're generating it seems like a very appropriate use of cash?

[Paul Kim:]

Sure, so during the fourth quarter we have bought a nominal amount of shares between 400,000 and 500,000 shares in the fourth quarter. This program what an expansion of what we initially announced of 100 million; we expanded the program to 150 million and today we have been very aggressive in executing on the program and we purchased approximately $60 million worth of stock. This program will be in existence for the next eight months or so. And it's in place so we can have the option of executing aggressively on that program.

[Operator:]

Your next question is from Brian Ruttenbur – Morgan Keegan.

[Brian Ruttenbur:]

First of all some housekeeping on CapEx anticipated and free cash generation that you anticipate in 2009?

[Paul Kim:]

Sure, so our Capital Expenses aren't that large. I believe that during any given quarter they run between $500,000 and $1 million. In 2009, there's a possibility that it could be slightly higher than that if we make some capital improvements in the building that we have. And depreciation will come out of the standing fixed asset balance. You can take a look at the amount that we depreciated. The company’s got very little intangibles and goodwill on the books I think. If you gross everything up on the intangibles and good will it’s between $2 million and $3 million. So largely if you take a look at our net income and then adding back the depreciation and the amortization you will get to the free cash flow for the company. There are going to be some working capital changes because our deferred revenue balance is sizeable, so there’s going to be some changes certainly related to that. But you should be able to get pretty close to that number if you do the math that I just commented on.

[Brian Ruttenbur- Morgan Keegan:]

And then can you talk about the FBI contract? Is it still slated to be awarded in the next 90 days?

[Ming Hsieh:]

I think the Cogent through the FBI's schedule that should be awarded first half of 2009.

[Brian Ruttenbur- Morgan Keegan:]

And do you still feel that you’re a front-runner for that?

[Ming Hsieh:]

Well, Brian, we are. We believe Cogent has the best technology to serve the interest of the FBI. But I’m not sure, I can’t equally sure is our interest is reliant with the old system integrator. To the best interest of the customer Cogent has the solution to deliver the value to the FBI. But the heart of the problem ends up, remember we are competing against one of the world's strong companies, which in backed up by the foreign government, so anything can happen. But I definitely believe that Cogent’s technology will outperform our competition.

[Brian Ruttenbur- Morgan Keegan:]

And then last question, why such conservative guidance given that you are awarded the U.K. contract, the Belgium, you have all these other things on the horizon that you basically have in hand but you’re not including in the guidance. What’s the logic behind giving such conservative guidance?

[Paul Kim:]

If you – you know this already, Brian, by covering us since we went public, but if you look at our prior years, 2007 and 2006, and if you take a look at where we ended up in terms of recordable revenues versus what we anticipated at the beginning of the year, we fell short in both those years. And we fell short not because we didn’t win the programs. We won those programs and we even collected the cash in those programs but we couldn’t record revenues because of revenue recognition implications. And we feel very good with the level of our business right now. Our backlog is at record levels, it’s at $168 million as we commented, and of the $168 million we have $74 million being deployable in the next 12 months and $94 million being long term. But as we kind of lay out exactly what we believe we can record into revenues, these contracts aren’t fully determinable just because some of them we don’t have the contract for. We need to be able to get the contracts and we need to be able to assess when we can record those into revenues. And until we get visibility for that we don’t feel it’s appropriate to include that kind of upside in the guidance. We certainly have time during the course of the year to update you on the revenue recognition implication, so we can color in a better forecast for 2009. But we don’t believe it’s appropriate to do it at this time. I’ll also give you another example. In 2008 we made our numbers, but the contracts that we recorded in 2008 weren’t exactly the contracts that we anticipated. We had a record year from the Department of Homeland Security, which was certainly a positive, but there are a number of programs that we won, we signed, we deployed, we even collected the cash, but we couldn’t record them into revenues. So we will certainly update you on our forecast as we have these quarterly earnings calls.

[Brian Ruttenbur- Morgan Keegan:]

And then last question, of that $140 million in last year's backlog, what was that – what percentage or what dollar amount was deployable? Was it same kind of percentage? That’s what I’m trying to look at.

[Paul Kim:]

So last year the backlog was at $140 million, $70 million was short term, and $70 million was long term. This year again, it's $168 million, $74 million in short term and $94 million is long term. And one other comment since we’re talking about backlog, our backlog has a conversion rate of revenues and cash collections of over 99%. We do not include the potential size of programs. We don’t include all the options. These are hard, practically non-cancelable orders that we’re reporting to you, so the $74 million that we have on the books right for the backlog that will be deployable.

[Operator:]

Your next question is from Daniel Meron – RBC Capital Markets.

[Daniel Meron- RBC Capital Markets:]

This is Daniel Meron with RBC Capital Markets. First question is just trying to maybe give – instead of looking at it on a pure project basis, can you give us a sense what is the amount of projects or the range of projects that may come into recognition in 2009? I realize that there are a few uncertainties but probably that there is some assessment or properties that you can assign to those. If you can just help us there, that would be useful.

[Paul Kim:]

So in 2009 there certainly will be good contribution of revenues from the Department of Homeland Security. You will also see contribution of revenues from Census. You’ll see contribution of revenues from Egypt. You’ll see contribution of revenues from Italy. You’ll see contribution of revenues from L.A. County. You’ll see revenues ticking from the Northrop Grumman arrangement for their use of our biometric technology into their programs. You’ll see contribution of revenues from Morocco. And you’ll see contribution of revenues from the current orders that we have in Fusion, as well as a variety of other smaller international and state and local customers. That’s what we currently have in our guidance, and as we indicated there are a number of programs that we have not incorporated into our guidance.

[Daniel Meron- RBC Capital Markets:]

And out of the extra $80 million give or take that are in longer term backlog, is there a possibility that is part of the contracts that you’re going to recognize, could they be moved ahead or get pushed out? What is the likelihood that stuff like that happens, that projects get moved around? For example if you were to take the 2008 numbers that you indicated before, how much of that was actually executed as you initially expected within 12 months? And how much of that was pushed out?

[Paul Kim:]

Yes that’s a good question. So of the $140 million backlog that we have, we said about $70 million was short term and $70 million was long term. The $70 million that’s in long term, there’s a less likelihood that those get pulled up and get brought into short term. There’s a greater likelihood that the revenue recognition for the items that are in short term could potentially get kicked out. And we believe that that kind of scenario will continue to stand for 2009. And I do have to correct myself. I know I said it was around 75, 90, 93 short term and long term. I think it’s more like $80 million, $90 million something like that. But I can clarify that offline. But the standing backlog that we had at the company at the end of 2008 they were at record levels.

[Daniel Meron- RBC Capital Markets:]

And then can you maybe just give us a little bit of a sense on how we should think about the first quarter or just how the year should progress? I mean this gets out to take the $130 million and kind of even out to like a piece in these early parts. You are assuming there will be a drop in the level. How should we think about the first quarter and how should we think about the progression throughout the year, although bearing in mind that you do have some programs that may be around, may get recognized as the year moves ahead?

[Paul Kim:]

Sure. So, good question, Daniel. So based on the high revenue levels that we had in the fourth quarter, we’re anticipating that first quarter 2009 revenues will be lower then what we currently forecasted, than what we currently posted in the fourth quarter of 2008. Looking at the overall year for 2009, we do not believe that 2009 will be – based on what we have in the $130 million guidance, will be at back-end loaded as what we experienced in 2008. Remember, in 2008, we had $50 million come in, in the first six months and $75 million in the last six months of the year. We believe that in 2009, it will start off in the first quarter and then kind of gradually get higher and then if we get any kind of upside from the revenue recognition implications of these programs, then that will get added onto our guidance. The other thing that I need to make a comment on, because we commented that our operating expenses would increase from approximately $35, $36 million to approximately $40 million, is we do not anticipate our operating expenses would go up should the revenues from some of these incremental programs kick in, because we are anticipating that we are going to be working on these programs. It's just the revenue recognition issue. So, you should see additional leverage within our operating model throughout the course of the year.

[Operator:]

Your next question comes from Scott Zeller – Needham & Company.

[Scott Zeller:]

The first question is on Spain for the quarter. For the summer quarter, what was the revenue contribution from Spain?

[Paul Kim:]

Revenue contribution from Spain was approximately $4 million.

[Scott Zeller:]

And of that number, how much of it was – you made reference earlier to professional services or maintenance.

[Paul Kim:]

It would be roughly $5 to $6 million, because our maintenance term on that contract was for a long period of time.

[Scott Zeller:]

Okay. I got tripped up there. So you recognize $4 million in the quarter of $5 million or $6 million total?

[Paul Kim:]

No, of the $9 million to $10 million total.

[Scott Zeller:]

Of $9 million to $10 million.

[Paul Kim:]

Yes.

[Scott Zeller:]

And could you tell us what the Northrop contribution was for revenue in the quarter, December?

[Paul Kim:]

Zero.

[Scott Zeller:]

And for 2009, what's your anticipated amount of revenue that you'll see from the Northrop Grumman team?

[Paul Kim:]

We do anticipate a decent chunk of revenues from Northrop Grumman based on the discussions that we're having with them. We're proud to report that towards the end of 2008 they have provided us significant purchase orders under their purchase agreement, purchasing our biometric technologies and our software. And based on the indication that we're having, we believe that the contribution for Northrop Grumman for top-line revenues could be anywhere in the $10 to $20 million range for 2009.

[Scott Zeller:]

And that is already baked into the guidance?

[Paul Kim:]

Yes.

[Scott Zeller:]

Lastly, could you go through the components of what you're showing on deferred right now? Can you break that out and tell us how much of it is from Northrop, how much of it is maintenance, etc?

[Paul Kim:]

So, the largest component of what's in deferred revenues is from the Department of Homeland Security, that's approximately $15 to $20 million. We have approximately $15 million of deferred revenues from Northrop Grumman. We have another $67 million of deferred revenues from Spain, another $6 million of deferred revenues from Maryland. We have another $4 million of revenues from Italy. We have over $13 million of deferred revenues just from ongoing maintenance from all of our existing AFIS programs over the years, and then the remaining balance are from smaller projects and contracts.

[Scott Zeller:]

And of those larger numbers such as Spain, Maryland, Italy, are we to assume that those numbers are a mix of both product and services?

[Paul Kim:]

Yes.

[Operator:]

Your next question comes from Paul Coster – JP Morgan.

[Paul Coster:]

Paul, what percentage of your revenues came from international customers and was there any currency impact?

[Paul Kim:]

We did have some currency impact, just because the dollar got stronger. We had a couple hundred thousand dollars of loss because we have some receivables in international currencies, particularly the euro. And then for the balance of the year, we had 60%, 70% of our business, maybe a little bit more, come from domestic customers, just because the biggest customer during the quarter was the Department of Homeland Security. I think I said the year. I'm talking about the quarter, Q4.

[Paul Coster:]

What percentage of your revenue was with DHS? I may have missed that.

[Paul Kim:]

DHS was the majority of our revenues during the quarter, so it was more than half our revenue.

[Paul Coster:]

Why do you think there is suddenly so many opportunities in your pipeline? I think you mentioned 12 and plus this new one coming up as well. What's going on there?

[Ming Hsieh:]

Well, Paul, definitely you probably know a couple of noticeable programs in U.K., [EMBIS], [MAYTAS] and there are several opportunities in the U.K. also related to the Olympics. So that’s only along in the U.K. line there, and we also have U.K. border security projects. We see the continued interest generated from various countries – various from national ID projects to the voter registration project. And also we mentioned for the last several conference calls, we're still awaiting for the contract award from Algeria, NGI and the various other programs.

[Paul Coster:]

Paul, I apologize for this question, but the deferred revenues, is that part of the 12-month bank loan or is that separate from it?

[Paul Kim:]

That is part of it.

[Operator:]

Your next question comes from Brian Blair – Wedge Partners.

[Brian Blair:]

I was wondering if you could just give a little bit of detail on the progress of BlueCheck and what your expectations are for the year, and maybe discuss any geographies, any states that are showing particular interest right now, maybe outside of California?

[Ming Hsieh:]

For the BlueCheck products, definitely we have a pretty good market response. Definitely, our current largest user it is Los Angeles County's Sheriff's Department, as well as the LAPD. So far, we've deployed close to 3,000 devices, and we expect to deploy another 2,000 more within this year. Besides Los Angeles County, we also have a strong demand from Florida, Pennsylvania, as well as the U.K.

[Brian Blair:]

And do you think that that 3,000-unit number, I mean just kind of approximating the demand this year, could that number double this year, or do you think it could be much greater than that by the end of 2009?

[Ming Hsieh:]

I think we've got a pretty strong response for that product line. We also are definitely working on several other states regarding the other products. We do have that potential.

[Operator:]

Your next question comes from [Lewis Gold] – Open Field Capital.

[[Lewis Gold]:]

I was just wondering if you could give us an idea in terms of gross margin range, where the Fusion product sells at?

[Ming Hsieh:]

One of the major components of the Fusion is the software, because the Fusion we could conduct the fingerprint search, latent search, iris search, as well as a facial search. So, it seems that the majority of the accounting is the software, so the margin profile, it could be above 60%.

[Operator:]

There are no further questions in the queue. I will now turn it back to management for any closing remarks.

[Ming Hsieh:]

Thank you for everyone being on the call today and we're very appreciative of your support. We look forward to update you on our programs in the next few months. Thank you, very much.

[Operator:]

Ladies and gentlemen, this concludes the Cogent Systems fourth quarter earnings conference call. You may now disconnect.