Fluent, Inc.
Q4 2007 Earnings Call Transcript

Published: 27 Feb 2008

[Operator:]

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Cogent Systems fourth quarter full year 2007 financial results conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions). This conference is being recorded, Tuesday, February 26, 2008. Now, I'd like to turn the conference over to Rakesh Mehta with the Blueshirt Group. Please go ahead, sir.

[Rakesh Mehta:]

Thank you. Good afternoon, and thank you for joining us on today's conference call to discuss Cogent's fourth quarter and full year 2007 financial results. This call is also being broadcasted live over the web, and can be accessed in the Investor Relations section of Cogent's website at 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; Jim Jasinski, Executive Vice President, is also joining Ming and Paul for the Q&A session. After the market closed today, Cogent issued a press release discussing the results for its fourth quarter and full year ended on December 31, 2007. If you would like a copy of the release, you can access it online at the company's website or you could 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. The most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to the company's financial results, prepared in accordance with GAAP, are included in the earnings release, which is posted on the company's website, at cogentsystems.com. We would like to remind you that during the course of this conference call, Cogent's management may make forward-looking statements, including financial projections, statements as to the 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 based on reasonable assumptions. However, risks and uncertainties relating to future events could cause the actual results to differ or differ materially from these 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 report on Form 10-Q for the quarter ended September 30, 2007. The company does not intend and assumes no obligation to update any forward-looking statements. With that said, I'd now like to turn the call over to Cogent's President and CEO, Ming Hsieh. Please go ahead, Ming.

[Ming Hsieh:]

Thank you, Rakesh, and thank you everyone for being on the call. 2007 was a challenging year, but not without a significant account position and promise, as a number of potential applications for biometrics solutions continue to grow. We are seeing new opportunities in all facets of our business -- border control, law enforcement, civil and commercial. We continue to be excited about the potential of each of our market. We are optimistic about the delivery and the improving financial performance in 2008. Our revenue over the last two quarters has been lower than anticipated, due to the delays, and the falling short of certain projects in the second half of 2007. Despite this, we still delivered a good earning growth for the year, with non-GAAP EPS, excluding legal fees, coming in at a $0.09 per share for the quarter, and the $0.39 per share for the year, which is well within the revised guidance ranges, we gave in our last conference call. We were also pleased with our success over the last year in winning a numbers of new contract awards, and obtaining further orders from existing customers. As samples, some of our contracts awarded over the last year include AFIS contracts in Spain, Uganda, Hong Kong, Egypt, Houston, Canada and Syria. I am pleased to announce that we were also awarded a contract from a large banking consolid in India to provide authentication identification transaction based services for Indian banks. Moreover, we continue to expand our background checks, probably in Pennsylvania and Georgia. We also have major follow-up orders from over the last year to expand the new Cogent technology from existing customers, including DHS, RCMP, Italy Jamaica, Bulgaria, Chile, Singapore, Connecticut, Fresno, [Simlas] and others. Also in early 2008, I am pleased to announce that we were awarded a material [firm] order from L.A. County Sheriff Office. In terms of DHS, we are benefited from US Visa system expansion. US Visa has grown to over 90 million subjects and processes in average of over 150,000 daily transactions. This is the largest biometrics database in the world, and we are the only company with a proven technology in the field that has demonstrated the ability to operate a system of this size, with super identification accuracy, and no operation downtime. Over the last year, we have enhanced the US Visa system with our latest matching technology, which reveals a number of latent trends requiring human [notification], by an order of magnitude. Importantly, with the migration from 2 to 10 print product now being -- it is, along with the continued expansion of the program, a major new growth opportunity for us in 2008. Looking ahead, based on a recent contract award, we have received our expanded base of customer, who continues to make follow others. We are confident that we can return to a stronger revenue in 2008, while continuing to deliver improved margins and profit. Importantly, Cogent remain focused on winning more businesses, in order to increase our growth potential. We have outstanding proposals for over dozen biometric programs and solutions around the world. These proposals cover a wide variety of opportunities include ID card programs, [card swap] programs in South Asia, Central America, Central Asia and Africa. We also have many law enforcement related opportunities in countries such as Algeria, Belgium, El Salvador, Oman, Libya and Argentina. We will also be closely [pursuing] major new opportunities, including the biometrics components of the FBI-NGI program, and working with Lockheed Martin. As many of you know, Lockheed Martin, who we have worked closely within the past, was recently chosen as the lead systems integrator for this project, and it was noted that the FBI will send $1 billion over next 10 years to build this new database. Based on the integration portion of the content being awarded later than expected, we now believe the AFIS provider will be selected sometime late in 2008. We feel we have the capability to compete at a high level on this opportunity, which will be one of the largest biometrics system ever deployed, and we will have defined landscape of inventory for years to come. In addition to the FBI, we are seeing many other opportunities in the US, Europe, South America, Africa and Asia. This includes major opportunities related to the DoD's new biometric system, the UK National Identity Scheme, which is another massive program, Israel, Greece, Turkey, New York and many other [equal] state and local government programs. Product wise, we have introduced the [world] products, including our own technology suite of live-scans. We are also now have our National WebCheck system, which is 100% Cogent product, both hardware and software. This solutions idea for application processing is currently being used by Pennsylvania and Georgia for their Background Check-In Program. And we were recently selected to be a channeling agency to submit the application checks directly to the FBI. We have continued to penetrate and pass ourselves for growth in the commercial market. We are levering ourselves through a lot of agreements with many companies. On access control, we are one of the two companies that have passed TSA testing, and are well positioned for several port projects. In the R&D area, we continue to keep Cogent as a leader in biometric technology and applications. I am pleased to announce that our latest generation PMA are now able to search 6 million comparisons per second, which is 200% improvement over our previous generation technology. As always, we have continued to improve our fingerprint and thumbprint searching algorithm, including a certain level of details matching technology and at once our [PNV] technology. In addition, we're excited about the ANP, which is a biological detection company for using nano assays. As you may remember, we cemented this relation a few years ago, and we have been signing our patent recognition [reader] products to them. In the first quarter of 2008, we took 20% of equity stake in ANP for a transfer of our reader technology and $3 million in cash. The transfer technology is active only for the biological diagnostics market. We feel excited about this agreement, and the other markets where our technology can be applied, including the market for identifying biologic information. ANP has strong interest from both US and international government agencies for yields of this technology and the commercial pharmaceutical companies. Under the agreement, we will continue to provide and sell various reader products to ANP. In summary, in 2008, we believe we will deliver a stronger revenue, and continuously improve the profitability, and that we will remain focused on increasing our growth potential. We really were encouraged by the large pipeline of opportunities that we are seeing in front for us, and we have high number of proposals already outstanding. At the same time, when we use the [purchase level of Cogent] in our forecasting, as we know from experience, the timelines of the government project can trigger longer than expected. Cogent's competitive position remains strong. I will mention the market is expanding, and we believe we are meeting the programs in all our market, setting up for long-term success. And now, I am going to ask Paul to go over our Q4 2007 results in more detail, and also our financial outlook in 2008. Paul?

[Paul Kim:]

Thank you, Ming. I should mention that, unless specifically noted otherwise, we are discussing all numbers on a pro forma or non-GAAP basis. Fourth quarter GAAP results included 532,000 in non-cash charges related to FAS 123 regarding the expensing of non-cash stock-based compensation. In today's discussion, I will first give you an overview of our fourth quarter results, then give you our financial guidance for a full year 2008, and finally finish with an update on our pipeline and opportunities going forward. Fourth quarter revenues were $21.9 million. Product revenues decreased sequentially by 7%, while maintenance and service revenues increased by 8% from the third quarter. Revenue contribution during the quarter came from customers such as the DHS, Delivery Identity Systems, Chile, Bulgaria, RCMP, Ohio, San Joaquin County, LA Sheriff's Department, and Pennsylvania. Last quarter, we noted a delay in specific follow-up on orders from LA County, and delay in recognizing revenue for the Maryland contract. Also we anticipated an award and revenues from Algeria for a Criminal AFIS system, which is now being bid as part of our larger program. We do not see contribution from any of these opportunities in the fourth quarter, which led to overall revenue for the year to come within our revised guidance range. Gross margin rose 71.5% in Q4, compared to 55.6% last quarter. Higher gross margin is primarily due to product mix. For the year, gross margin came in at 62.1%, which is above our annual target range of 55 to 60 points. This is also very good improvement from our full year 2006 gross margin of 57.8%. Looking ahead, we expect gross margins to be above our annual target range for 2008. At this time, we foresee 2008 annual gross margins to be more, possibly higher than the 62 point margins achieved in 2007. Operating expenses as a percentage of revenue were 35% this quarter. In actual dollars, operating expenses decreased to $7.8 million from $10.2 million in the third quarter, as we only incurred $340,000 in litigation expenses in the fourth quarter versus $3.7 million in the third quarter. In 2008, we do not anticipate any major legal expenses related to our previously settled losses. Excluding stock-based compensation, we project 2008 operating expenses to be between $32 million and $33 million. Operating margins were at 36% in the fourth quarter excluding stock-based compensation of $532,000. Excluding stock-based compensation and $340,000 outside legal expenses related to the lawsuit, operating margins were at 38%. We recorded $5.6 million in interest income this quarter. Our tax rate was at 39% during the fourth quarter. We anticipate the tax rate to be between 38% to 40% for full year 2008. Excluding stock-based compensation, fully diluted non-GAAP earnings were $8 million, or $0.08 per share based on 95.5 million share count. Excluding stock-based compensation and lawsuit expenses, fully diluted non-GAAP earnings were at $0.09 per share. Captured investments dropped by $13.9 million from the third quarter to approximately $444 million, or $4.65 per share as of December 31, 2007. The decrease is due to cash spent on our share repurchase plan, as well as changes in working capital. During the quarter we repurchased 1.1 million shares of common stock at an average price $12.13 per share, for an aggregate purchase price of $13.9 million. These purchases actually took place only in a half a quarter's time, from mid November, when the program began, to the end of the year. We have continued to repurchase shares during the first quarter of 2008. Today in the first quarter, we purchased an additional 2.3 million shares at an average of $9.62. From the time we announced the $100 million buyback at the end of the last quarter, we have expended over $36 million repurchasing our stock. Accounts receivable increased to $31.8 million in Q4, from $15.1 million in Q3, due to timing of billings from two large governmental agencies. We deem the outstanding balance to be fully collectible. Inventories were $11.4 million at the end of Q4, compared to $9 million at the end of Q3. The increase in inventory is due to deferred cost for ongoing projects. $7.9 million of the $11.4 million inventory balance is comprised of deferred cost of sales for ongoing projects, and the remaining $3.5 million is tangible inventory net of reserves, which is recorded at lower cost to market. Fixed assets were at $33.6 million. Deferred tax assets were at $26.1 million. The balance is primarily comprised of deferred revenue, R&D credits and foreign tax credits. We believe it is more likely than not that these assets will be realized in the future, through generation of taxable income. Accounts payable and accrued expenses were $13.3 million in Q4 compared to $21.6 million in Q3. Deferred revenue was $27.6 million, compared to $15.4 million last quarter. This increase is attributable to various projects including Spain, Maryland, DHS and other governmental agencies. Our headcount increased to 260 in the fourth quarter, from 249 in the third quarter. Backlog, which is comprised of deferred revenue and binding purchase orders, stood at $140 million on December 31, 2007, versus approximately $120 million last. This backlog does not include any orders we have received to-date in 2008. As we 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 opencast contracts, such as US-VISIT, only include outstanding purchase orders and do not reflect the future potential order of magnitude for such programs. We reiterate that short-term financial data points, such as backlog and deferred revenues, are less reflective of the overall health of our business than the positioning and visibility we have in key customers and programs. Moving on to the outlook for the year, we are currently forecasting full year 2008 revenue of $120 million, based on backlog and orders received to-date in 2008. The forecast for 2008 revenue is anticipated to be comprised of approximately $90 million of revenue recognition on contracts previously announced, and from follow-on orders we have received to-date from customers such as Morocco, Spain, Maryland, Hong Kong, each of them DHS. The remaining $30 million, we anticipate receiving from core customer such as DHS, LA County and various programs within Europe. We anticipate recording these orders into revenues in 2007. It should be noted that some of our large customers have recently indicated that they are seeing an increased need for enhanced capacity. We have not incorporated this yet into our guidance, because we have not received the purchase orders, and do not yet have the visibility into when these potential revenues might be recognized. Regardless, we are very encouraged by these signs of increased demand. We will give you an update on the progress of our pipeline accounting treatment for major contracts and guidance, as we report in future quarters. This guidance represents 13% growth over 2007 levels, and at this time, we anticipate quarterly revenues to be slightly larger in the back half of 2008. As I mentioned, we are currently anticipating gross margins to be higher than our long-term range of 55 to 60 points. We anticipate gross margins to be between 60% to 66% for 2008, and we are anticipating operating expenses of $32 million to $33 million for the year, excluding stock-based compensation. And we anticipate the tax rate to be around 39% for the year. These factors lead us to forecast non-GAAP EPS of $0.41 o $0.44 per share for full year 2008, excluding stock-based compensation. Now, before we open it up for questions, let me close by discussing some of the opportunities that have not been included in our 2008 forecast. Starting with the DHS, we believe DHS revenues will grow in 2008, based on expansion of the system and the migration from 2 to 10-prints. We have anticipated a slower roll out over a multiyear period, but the exact timeline is still being determined, and may be accelerated from our estimates. Additionally, we are very encouraged by the proposed expansion of the US Visa program to incorporate a broader range of travelers, but have not included much anticipated revenues from this in our 2008 guidance. We also continue to anticipate additional contract awards during the year, both domestically and internationally, across all of our market segments in border control, law enforcement, civil and in the commercial arena. As Ming just mentioned, we have a number of proposals outstanding, including ID card programs and ID systems in South Asia, Central America, Central Asia as well as Africa. We also have many law enforcement related opportunities in countries such as Algeria, Belgium, El Salvador, Oman and Libya. Additionally, we are closely pursuing major new opportunities, which we expect to come in for bid during 2008, including the biometric component of FBI's NGI program, DoD's new biometric systems, the UK National Identity Scheme, opportunities in Israel, Greece, Turkey, the State of New York, and many other opportunities in the US, Europe, South America, Africa, as well as Asia. The commercial business remains a very small percentage of our overall revenues, but as Ming described, we are making strides in terms of our business partnerships and development work with a variety of companies and partners. We also are seeing a growing number of access control projects in the commercial space. The pipeline of opportunities is very strong. However, we know from experience, the timing of government awards can be difficult to predict. We will continue to update you on the status of these and other major programs on each of our quarterly earnings call. In summary, this year, we were pleased with our ability to increase profits versus the prior year, despite a lack of substantial revenue growth. In addition, we are focused on winning additional customers, increasing our market share and building an even broader base of customers. Based on current expectations, we believe we will continue to accelerate growth in 2008 and continue to widen our profits and cash flows even beyond our current levels. With our strong balance sheet and commitment to leading the market and technology, we believe we can capitalize on the future growth of our industry and continue to establish ourselves as a leader in the biometric market. We would now be happy to answer any questions that you may have. Operator, you may now open it up for questions.

[Operator:]

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) And our first question is from the line of Julie Santoriello. Please state your company name followed by your question.

[Julie Santoriello:]

Hi. Thanks. It's Morgan Stanley. Paul, question around the guidance, sounds like you've taken a conservative approach again and looking just at revenue that you can see from follow-ons and recent wins and long-term customers. Can you share with us and it sounds at the same time, is though you remain still very confident about the pipeline and just state the size or magnitude of that pipeline? Can you put a general range around it for us in terms of potential opportunity for additional revenues in 2008?

[Paul Kim:]

Sure. So, I'll will answer the first part of the question and then I'll turn it over to Ming, who can talk about the upside, if any, that will come from probably the most important and large customers that we have. The pipeline for the company as well as backlog, backlog can fluctuate based on certain scenarios as I have mentioned in my script. But backlog that we have at the end of 2007 is at records levels. It's at $140 million. If you compare that to what we had last year, even back in 2005, it was at $133 million, 2004 it was at $127 million. We feel very good with the orders that we have in place that's in backlog as well as the opportunities I had. I think the other point to note is we have a much broader set of customer. As you know, in the last three or four years Venezuela has been a big component of our revenues and we have nothing in terms of Venezuela that's big into the guidance for 2008. It doesn't mean that we can't get work there. We're going after opportunities but that's not in the $120 million guidance. So given that we have a lot of orders, and given that the pipeline looks very promising, and given that we have a much broader set of customers, we feel good about the pipeline. On the flip side, as both of us know, revenue recognition and the timing and predictability on when the orders are going to be placed by the customers and when we can record it into revenues will and has been an issue. And we don't want to take any kind of aggressive assumptions for that, so when you kind of wrap all that in, we feel very comfortable with the $120 million of guidance that we're giving out to the street, but there is a potential for upside. And as I indicated, the upside could potentially come from a feel of our large customers and I'd like Ming to talk about that.

[Ming Hsieh:]

Yes, Julie. We are working with the couple our major customers. At the present time it's redefining some of their goals and their performance targets. Those numbers are not finalized, so we cannot give the details about what is size of the project at the present time. But definitely, we do see the increase demand from a couple of our key customers and they show strong indications that they want to get new performances terms are defined. But we are looking on and we defined those parameters at the present time, that's why we are not able at this conference call to give this numbers.

[Julie Santoriello:]

Okay. Can you talk about with the picture become clear in terms of with those larger customers are planning on doing. Will it become clear in the near-term or in the next few months or is there something that's more backend unloaded for 2008?

[Ming Hsieh:]

It should be next few months it will be getting clear.

[Julie Santoriello:]

Okay. Thanks. And Paul can you just share with us the revenue contribution from DHS in the fourth quarter and also if you would share with us your assumptions from DHS in 2008 guidance?

[Paul Kim:]

During the fourth quarter revenues from DHS was the largest contributor to our top line and looking at 2008 we anticipate the revenues from the US-VISIT program to continue to grow. And we believe that it will be the largest customer in 2008 unless if some of these variables from large programs that are not related to a DHS comes together in a really promising way.

[Julie Santoriello:]

Okay. That's all for now. Thank you.

[Operator:]

Thank you. Our next question is from the line of Jeff Kessler. Please state your company name followed by your question.

[Monatha Jeff:]

Hi, this is Monatha Jeff with Lehman Brothers. A few quick questions for you. First on the NGI, I know it's a little far out, but I was just wondering if you could gives us a little more color in terms of how we should size up the contract value that you guys are potentially bidding for the AFIS portion and maybe some sort of guide line historically or it would pass contracts in terms of not only the size but also sort of the margin opportunity there?

[Ming Hsieh:]

As you probably know the NGI does award the systems integration contract. However the [swift] application for the biometrics of fingerprint item key general requirement is not released yet. We did see the draft [RFI] version of that specification, which has required enormous processor power to handle the system. To satisfy that requirement, we do introduce a new technology, which we call the PME, [Unique 4], which is 6 million comparisons per second. It is a very, very powerful machine and which we target for the FBI's opportunities, but in terms how many they need to buy, we need to see their detailed project specifications. We do believe with the new machine, we could set us apart from our competition by the way continued increase our effort, try to continue improve our own products efficiencies.

[Monatha Jeff:]

So, what the AFIS portion of the contract come, did the contract value come from the $1 billion awarded to Lockheed Martin or could that be in excess of that?

[Ming Hsieh:]

We believe for the FBI stated their project is about a $1 billion. They will spend about $1 billion for the projects and we believe the fingerprint identification should be a large portion of that project.

[Monatha Jeff:]

Okay. And then could you maybe give us a little color. I know you said you have a lot of awards and customer discussions that are going on just with respect to your cash usage. I mean clearly using some of it clearly not a big portion to buy back shares. What is sort of your I guess medium to longer-term goals with the healthy cash balance that you guys have?

[Ming Hsieh:]

Okay. I can answer your questions in two ways. The one is about our new products. We are receiving a strong interest from our global customers regarding about our PMA technology as well as our mobile and LiveScan products. So, that strong interest is pretty high. We have lots of meetings with the customer in first part of January and we continue to try to schedule the meeting with our customers. That's in terms of new product issue. In terms of how do we use the cash, we are pursuing opportunities. We are looking for the target, but for adding some merger and acquisition target. Some of the target is short-term. You might see some results shown late in next one or two months. Although, the job opportunities work on may take a little bit longer but we expect sometime happening in 2008.

[Monatha Jeff:]

Okay. And just one final question for FY'08, what sort of stock compensation assumption should we use? I know you gave your guidance in a non-GAAP excluding that, should it sort of be the 532,000 run rate this quarter?

[Paul Kim:]

Yeah. I think that's appropriate estimate.

[Monatha Jeff:]

All right. Thanks guys. I'll step back.

[Paul Kim:]

Right.

[Ming Hsieh:]

Thank you.

[Operator:]

Thanks you. Our next question comes from the line of Matthew Mckay. Please state your company name followed by your question.

[Matthew Mckay:]

Yes. Well, Jefferies. Good afternoon, guys.

[Paul Kim:]

Hello, Matt

[Matthew Mckay:]

You talked about this new PMA server and if you could talk a little bit about just this new server ability to drive an upgrade cycle with your exiting customers and also maybe its ability to potentially drive additional service revenues as well.

[Ming Hsieh:]

Matt, yes, as you know, every almost 18 months or two years, we introduce a new technology and this time we introduced a technology, which is a two times more performance than our previous generation technology. We do see through mobile identifications deployment and many of our customers require real-time identifications and it's not more, any minutes they want to see seconds. Based on those kind of demands, we are pushing for the new technology and try to give it faster. And we see that requirements from where is state and local governments and they have to give us an enormous forecast in terms of matching capability requirement because of these mobile demands. Because these are new products and because we have such a high super capabilities, we do believe that we can define better margins for our product rollout for this year.

[Matthew Mckay:]

Okay. Have you sort of shown this to, for example, US-VISIT or any other customers and kind of what interest have they expressed in terms of potentially upgrading and over what time?

[Ming Hsieh:]

We do present the product to all our key customers.

[Matthew Mckay:]

Okay. And if they express

[Ming Hsieh:]

Include the DHS, yes.

[Matthew Mckay:]

Yeah. And have they expressed any interest to move to upgrade?

[Ming Hsieh:]

As I indicated, all of our customers were encouraged, because we expect us to roll out the new products, but they expect maybe 4 million match per seconds. But we surprised everybody for much, much better performance for this product.

[Matthew Mckay:]

Yeah. And it's very impressive. And then, just secondly, maybe if you could share a little bit about looking into the pipeline for new product introductions and what we might be able to expect over the next couple months or during 2008?

[Ming Hsieh:]

We will introduce some new products in mid of this year via the new mobile identification devices, a new life skin devices and the some products for the commercial market.

[Matthew Mckay:]

Okay. Look forward to. Thank you a lot guys.

[Ming Hsieh:]

All right. Thank you.

[Operator:]

Thank you. Our next question is from the line of Brian Gesuale. Please state your company name followed by your question.

[Brian Gesuale:]

Hey, guys. Raymond James. Congratulations on the quarter here. It sounds like you're entering the year with record backlog and I don't want to words in your mouth but it sounds like the pipeline of stuff you are bidding on or have bid on plus you expect to bid on short lease as broad and as deep as it has being in quite some time. Can you add a little bit in how we should we should expect the year to unfold seasonally. I would imagine the first quarter perhaps being the softest and maybe a first half versus second half of the year revenue split and then just a little bit to bog you down a little bit more Paul when, how should we expect that Northrop Grumman License revenue to come in throughout the year?

[Paul Kim:]

Okay. Lots of few questions I will try and answer each and every one of them. In terms of our pipeline it does look as good as its ever being in terms of what we have in there as well as the number of customers and looking at 2008 we definitely know that we will have revenues from customers such as the department of Homeland Security, Egypt, Hong Kong, Maryland, LA, Morocco, Spain, Texas, Pennsylvania and Santa Cruz and possibly Northrop Grumman mostly likely Northrop Grumman. I'll get back to that in a little bit. In terms of the proposals that we have outstanding, we have submitted these proposals and we are waiting to hear back on Algeria. That's a very sizable program. Belgium, El Salvador, Oman, Libya. And then, we've various ID card, an ID systems proposal that we're waiting to hear back on. And then looking out ahead, we do know that there are opportunities associated with the FBI, DoD, UK and various countries like Israel, Greece, Turkey and New York. So, when you kind of wrap all that together and taking a look at the things that we have, the things that we are waiting for and things that we are going to be going after, we feel that the pipeline looks very promising. Now having said all of that because most of these are governments, we also have experienced the risk of timing of a war and how the revenue flows in from the government and that's why we're taking a conservative view with our guidance at this time. We can certainly change that, as we get additional data points and we certainly will update you on our guidance and our outlook for the year. As far as the variables that can turn that needle and we're hoping to turn that upward, it will come from the biggest customers, either the procurements that we know that definitely will be happening and then more importantly customers that we already have outstanding relationships with, if they want to expand our capabilities, we're ready to satisfy their needs by deploying our products and our technology, very good technology, the fastest technology that Ming just mentioned. In terms of how the revenues breakout during the course of 2008 with the diversification of customers that we have. We don't believe that we will encounter quarterly revenues that we encountered, for example, in 2006. We don't believe that it will be linear 30-30-30-30 at this time. We believe that it will kind of gradually increase from the results that we have in Q1, if the $120 million is what we actually end up doing for the year. If we are going to go beyond the $120 million, which is certainly our intention to do so, it can accelerate quite nicely as we get deep within the year. And then, I think the last question that you had was about Northrop Grumman and how that will be incorporated? The accounting for the Northrop Grumman agreement is still in the process of being determined. But it appears as though there will be an allocation between revenue and settlement income. We know that the product and purchases agreement that they have will likely be revenue. There is a minimum value tied to it over the course of the next five years, that's pegged at $20 million, but the licensing portion that's what's being worked on right now. But as that come together, we will certainly be in a position to share that with you as we get finalization of the revenue treatment. But having said all of that, we can say that the business and the discussions that we're having with Northrop Grumman and deploying our technology into critical programs that they have is going extremely well.

[Brian Gesuale:]

Okay. That's a great answer. Thanks, Paul. I'm wondering just on the housekeeping side of things if you can give us the revenue contribution from the top three customers in the fourth quarter.

[Paul Kim:]

So the top customers that we had in the fourth quarter, DHS was a very important customer, and then we also had Rwanda, Ohio, Chile and Bulgaria that made up a decent chunk of revenues in the fourth quarter.

[Brian Gesuale:]

Okay. Thanks very much.

[Paul Kim:]

You're welcome.

[Operator:]

Thank you. Our next question is from the line of Brian Ruttenbur. Please state your company name followed by your question.

[Brian Ruttenbur:]

Yes. It's Brian Ruttenbur with Morgan Keegan. First question deals with the guidance, I'll get that on out of the way first. In your $120 million revenue guidance, does that include Northrop in there, and if so, how much of Northrop is included in there?

[Paul Kim:]

So it does include Northrop Grumman, but it's a very nominal amount. It's less than 10%.

[Brian Ruttenbur:]

Less than 10%? Okay, great. The next question I have is they will include FBI in '08, is that correct?

[Paul Kim:]

That's correct.

[Brian Ruttenbur:]

Okay. If the FBI were to hit, what's the timing of that right now? I heard the second half of '08, I think in Ming's comments, can you tell us a little bit more specifically on where you're seeing that shake out? Does that mean July, does that mean December?

[Ming Hsieh:]

Let's play it safe. We didn't count any of the revenue from FBI for this year. We expect the contract award probably later this year versus July. It could be higher than earlier. But as I said, let's plan for the end of the year.

[Brian Ruttenbur:]

Okay. Can you give us a complete update on what's going on right now as in they are currently evaluating, they are going to evaluate for 90 days just walk us through the process maybe?

[Ming Hsieh:]

I probably let Jim to cover that issue with you what's the issue.

[Jim Jasinski:]

They had the kickoff meeting with the systems integrator last Thursday and the first task that the systems integrator has is to prepare for the AFIS evaluation. And that will probably take anywhere from four to six weeks before we really have any schedule or progress beyond that general guidance.

[Brian Ruttenbur:]

Okay. So you don't have real timeline then yet where you can say it's going to take three moths of evaluation and then and four to six weeks our next conference call you should be able to walk us through kind of the process?

[Paul Kim:]

That's correct. We can not give any further detail because we don't have it. And I think that something is still being developed by the FBI. The main thing I think is that the only once that can be evaluated for the AFIS those who are been through NIST Certification process. So, it's only those companies that are eligible through that NIST evaluation that has already conducted through their SDK testing and as a result that will limit the number of participants.

[Brian Ruttenbur:]

Okay. And then final question is the breakdown of expenses in the fourth quarter you did R&D of about 2.9 sales and marketing 3, G&A 2.4 going forward legal expense should drop, which comes out of the G&A. Can you tell us kind on a going forward basis R&D should be at that 2.5, 2.9 level was fourth quarter aberration. I'm just trying to get some kind of seasonals into this.

[Paul Kim:]

Sure. So, R&D based on our projected headcount and the 39 people that we have allocated for hiring in 2008, it will primarily being an engineering and that includes R&D engineering as well as operational support engineering and then sales and marketing. So, when looking out at 2008 in terms of total R&D expense it should be below $30 million, but in the high 12 like between $12.5 million and $13 million. So, I think that the run rate that you're taking to look at right, it is the appropriate run rate and then you kind of have to tack it up a little bit for the additional people that we are going to be hiring.

[Brian Ruttenbur:]

Okay. So, it should be incremental from quarter to quarter kind of building or every quarter?

[Paul Kim:]

Yes. If we have some equipment, they can fluctuate it somewhat, but it's not a capital intensive type of R&D. I mean these are software engineers. So, its largely labor-driven, head count driven.

[Brian Ruttenbur:]

Okay. And can you go through the same thing on sales and marketing in G&A for us?

[Paul Kim:]

Sure. So, sales and marketing, it should be approximately little bit over $10 million and then G&A should be right at about $9 million. We are going to try and keep it under that and that's the target that we have.

[Brian Ruttenbur:]

Great, that's helps a lot. And all of those should build throughout the year?

[Paul Kim:]

Yes.

[Brian Ruttenbur:]

Okay, great. Thanks.

[Operator:]

Thank you. Our next question is from the line of Scott Zeller. Please state your company name followed by your question.

[Scott Zeller:]

Hi, Needham & Company. Could you just tell us with the RFTs that are outstanding right now? Have you seen any changes where they have been either expanded or contracted with scope over the past couple of months?

[Ming Hsieh:]

I think is Scott, we have seen pretty typical RFPs and these are the kinds of RFPs that we're seeing all the time. But you probably try to mean whether they include multi-modal biometrics or not. We still see RFP we are working on majority of the component is the fingerprint. We do see the requirements for the mugshot photos and with option for the searching capability and we do occasionally get some requirements they may need iris as an option, but in general that what we have seen.

[Scott Zeller:]

I guess to be more specific once you submitted RFPs and responded to them. Have you had any changes where scope has been tightened and the project is shrunken? I guess this is really what I'm trying to get out.

[Ming Hsieh:]

I see. No, normally, we see the otherwise. Once the RFP is expect all contracts are award, customers always adding more changes and adding more options. So we are not even shrinking the contracts. We see the contract size getting expanded.

[Scott Zeller:]

Okay. And then could you give us approximate share count for the March quarter that you're expecting?

[Paul Kim:]

For the March quarter, it should be between $92 million and $93 million, probably closer to $93. And that's only estimating the number of shares that we bought back so far. I mean, if we continue to buyback shares obviously that can go down even lower.

[Scott Zeller:]

Okay. So that doesn't really factor on the continued buyback.

[Paul Kim:]

No, its not.

[Scott Zeller:]

And could you review the details of your 20% investment that you did this quarter in ANP?

[Ming Hsieh:]

The ANP is a technology company. They currently divide the products for DoD for the biological warfare detections and the same technology can be used to extend into the medical field for the home diagnostics or the diagnostics at the point of [home cares]. So this is the company we have been working with them. They produce a biological detection assays. For Cogent, we provide our pattern recognition technology and the reader technology to quantify what is the density. And this is the project we've been working with them for past three years. We do see there is a lot of growth potential for that product and we do see there is a potential market to extend into the commercial and the home cares area and that's why we made our investment and also we contributed our technology to them.

[Scott Zeller:]

And how much of a revenue -- its sounds like a passer but how much revenue would you expect to pass through them in calendar '08?

[Ming Hsieh:]

We during the historically, we're doing about the close to $1 million a year with them.

[Scott Zeller:]

Okay.

[Ming Hsieh:]

We're hoping to do a little more

[Scott Zeller:]

Thank you.

[Operator:]

Thank you. (Operator Instructions). And our next question is from the line of Ben Radinsky. Please go ahead.

[Ben Radinsky:]

Thanks. Last year if you look at the backlog number, it was $120 million in revenues came in at $105 million. Was there a change in the quality of that backlog throughout the year, or was $15 million just pushed into the outer years?

[Paul Kim:]

So last year, our backlog was at $120 million, but not all of the $120 million was short-term backlog. We have backlog that goes beyond one-year. So I believe I am answering your question. Most of the short-term backlog that we had last year was converted over into revenues in 2007.

[Ben Radinsky:]

So the $140 million in backlog that you presented today, what percentage is short-term versus long-term?

[Paul Kim:]

Little bit over half is short-term and then the remainder is long-term.

[Ben Radinsky:]

And how long-term?

[Paul Kim:]

Some of these contracts, it can extend out for say like a period of three years or so. But I mean most of it is converted within 18 months.

[Ben Radinsky:]

Okay. From a bigger picture vantage point, the NGI press release was very clear and that they were focusing on multi-model systems. Do you find that surprising? Do you believe that you still have this same competitive advantage as AFIS moving through different place than it had been in the past?

[Ming Hsieh:]

If you take a look for almost all the system we installed is equal the multi-model. It has the fingerprints. It has the facial. The fingerprints are always used as the primary biometrics. If fingerprints does not exist, the customer can select either use of facial or other biometrics to conduct the searching. So I do not believe that we are surprised with the NGI's approach. But I think that's a pretty typical for us.

[Ben Radinsky:]

Okay. And then from technological point of view, it's very impressive what you've been able to do in terms of matches per second. Is that still the relevant feature though that your customers are looking for as the processing power becomes cheaper? Is it really necessary to have the server that can do so much instead just buy another server and you have regular processing?

[Ming Hsieh:]

I do believe that a real-time response provides the value. If you take a look at the US-VISIT as example if we are not able to process data at such rapid speed, you're going to back out all the travelers at the airport. You have to build a new airport waiting facility to host those travelers. I do believe for the mobile identifications they cannot wait for minute or hours, they need a seconds response. So for those kind of demands, you need higher throughput powers to provide the services.

[Ben Radinsky:]

Right. But can't that throughput be provided not by one super powerful server, but you just have lots of, you have the server farm that is doing the matching with multiple processing points?

[Ming Hsieh:]

Sure, it did. Our competitor is using thousands of Intel processors to compete with one of our box. So that definitely will give us a better competitive advantage against the competition.

[Ben Radinsky:]

Okay. Thanks. That is it for me.

[Operator:]

Thank you. And our next question is from the line of Jeremy Grant. Please state your company name, followed by your question.

[Jeremy Grant:]

Thanks guys. That's Jeremy Grant with Standford Group. I wanted to talk a little bit about US-VISIT. It seems like you can't read a story about DHS Secretary Chertoff, without him mentioning that he wants to get the 10-print upgrade done by the end of the calendar year. So obviously, you are seeing some of the high profile roll-out of the 10-print scanners at the airports. But what can you tell us about the timing of what is going on upgrading the back-end of IDENT to support those 10-fingerprints?

[Ming Hsieh:]

Hi, Jeremy. As you probably know, for the US-VISIT 10-print process, even though they updated all those 10-print scanners, it takes us some period of time to get all databases collected and built. So we are taking a conservative approach to make the linear model over the next few years inside the once locked procurement.

[Jeremy Grant:]

Okay. So you are not assuming a huge change then in revenues this year. Rather, you think this is going to be built over several years?

[Ming Hsieh:]

Until we see their new specifications, and how do they handle that the DHS make out a new vision of how they handle the process. And we are encouraged to see their new visions. And as they give you more details, release how they handle the new process, we will have more data to provide you. At the present time, we just don't know it.

[Jeremy Grant:]

And what do you think timing is, in terms of when DHS is going to provide all that?

[Ming Hsieh:]

We believe in next few months, those picture will be clear.

[Jeremy Grant:]

Okay. And then the other thing I wanted to ask about was the EU. I know they have also had some big announcements that they want to step up what they are doing with biometrics to actually be not just part of the Visa application process but also roll it out to border entry points, much like we do in the US. But a year and a half ago, you had the big battle with Sagem, and they came in at a much cheaper pricing. You lost that bid. Are you expecting that this next round of EU work, that they are talking about to just roll into that Sagem contract? Or do you see new opportunities over there for bids in the countries coming out?

[Ming Hsieh:]

I believe, Jeremy, that we do see the new opportunities. You mentioned the battle we have with our competitor and low balled jobs. Until now, that system is still not running. So I think, as we do have new opportunities, and I think that's why with the new technology we introduce, it will be harder for our competitor to continue to give system away.

[Jeremy Grant:]

Okay. Another question I had Northrop Grumman and I know the terms of the settlement. I think you were supposed to get $15 million cash payment as part of the settlement from them last month. Did that go forward?

[Paul Kim:]

Yeah. We were paid with respect to the terms of the settlement agreement. We were fully paid.

[Jeremy Grant:]

Okay. So that show up on this quarter, is like a one-time exceptional item below the line?

[Paul Kim:]

The payment that we have that will be recorded in cash, how it's going to roll through the income statement, I believe I answered that earlier. We are still assessing it.

[Jeremy Grant:]

Okay. I know there was the settlement fee and then was the licensing fee. So I was just trying to get an idea of how that was going to, if those are or you are assessing both of them I guess is the question? And then the other question I had that might be tied to that, is your optimistic gross margin forecast of 62% to 66% this year, what do you see changing in the business or, I guess, your revenue mix over the next year, that's going to allow you to grow that so significantly? And is a lot of it tied to anticipated revenues coming in from Northrop that will drop mostly to bottomline, or are there other efforts as well?

[Paul Kim:]

No. As I indicated, the Northrop accounting is still being assessed. What we have in the guidance is well below 10%. So it's not a big factor, in terms of the guidance that we laid out. In terms of the treatment for Northrop Grumman, on the income statement that's being assists. As far as the cash, that's pretty straightforward, that we don't have to assess. They paid us $20 million in early January and that was recorded into our cash balance. As far as what's leading us to give this positive increase to the gross margin range, it's primarily due to the introduction of better technology, more accurate and faster products having the lowest cost, with the least amount of investment, sheer high customization, and we feel very, very good with it. I mean the other way to look at it is to take a look at the gross margins that we achieved for the balance of 2007. We have zero revenues from Northrop Grumman. But the fact that we're developing new technology, the fact that we are introducing new suites of products even in this competitive environment, we are able to increase our gross margins. And we feel very confident in our ability to continue to deliver high gross margins and to expand our profit going forward.

[Jeremy Grant:]

Okay. And then, the final question I wanted to get into was just cash flow on the quarter. I know there was a lot of deferred revenue. Can you just talk a little bit more about whether this was sort of a one-time event, and when you expect some of that to be recognized in cash flows, which have generally been very strong quarter-to-quarter, should pick up in terms of what we're used to seeing?

[Paul Kim:]

Sure. Two things on the cash flows. I mean, one, we purchased a significant amount of stock in Q4 and we purchased even more stock in Q1. So, you're going to have to strip that out in doing your cash flow analysis. And then, the other thing is our accounts receivable that went up. But the accounts receivable, the reason why it went up is related to two of our largest customers and we had zero history of write offs or uncollectibility from those customers. So we feel fully confident that we can collect on those receivable.

[Jeremy Grant:]

Okay. In terms of timing on that though, is there something you think will get resolved this quarter or could it drag another quarter or two before that gets resolved?

[Paul Kim:]

It wasn't due at the end of last quarter. It is due during this quarter. So, you should see the AR balance related to those two customers being relieved at the end of this quarter.

[Jeremy Grant:]

Okay. I appreciate it. Thanks

[Paul Kim:]

No problem.

[Operator:]

Thank you. And there are no additional questions at this time. I'll turn it back to management for any closing remarks.

[Rakesh Mehta:]

All right. Thank you very much for you to be on the conference call and we'll keep you updated for the next quarter. Again, thank you.

[Operator:]

Ladies and gentlemen, this concludes the Cogent Systems fourth quarter full year 2007 financial results conference call. If you'd like to listen to the replay of today's conference, please dial 800-405-2236 or 303-590-3000, using the access code of 11107530 followed by the "#" key. AT&T would like to thank you for your participation. You may now disconnect.