BIO-Key International Inc (BKYI) 2008 Q4 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by and welcome to the BIO-key fourth quarter and year-end 2008 conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Tuesday, February 24, 2009.

  • I would now like to turn the call over to Gus Okwu with DRG&E. Please go ahead.

  • Gus Okwu - IR

  • Good morning, everyone. Thank you for joining us for BIO-key International Inc.'s fourth-quarter year-end 2008 conference call. Joining me today on the call are Tom Colatosti, Chairman and Interim CFO; Michael DePasquale, BIO-key's CEO; and Ken Souza, the Company's Executive Vice President and General Manager of the Law Enforcement division.

  • The agenda for today will be as follows. Mike will first offer some comments on general industry trends and developments within the Company's business and will then offer some thoughts on the state of the market and opportunities for 2009. Finally, Mike will provide details on BIO-key's financial and operating results as well as a closing statement and then open the call up to questions.

  • This conference call may contain forward-looking statements that are subject to certain risks and uncertainties that may cause actual results to differ materially from those projected on the basis of these statements. Words estimate, project, intends, expects, believes, and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are made based on management's beliefs as well as assumptions made by and information currently available to management pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

  • For a more complete description of these and other risk factors that may affect the future performance of BIO-key International please see Risk Factors in the Company's annual report on Form 10-K SV and its other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company also undertakes obligation to disclose any revision to these forward-looking statements to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

  • BIO-key issued a press release earlier today providing details of the Company's quarterly financials and operating results. This document is available in the Press Release section of our company's webpage at www.bio-key.com. A replay of today's call will be available beginning one hour after the completion of this call until 11.59 p.m. Eastern Time on March 4. The replay may be accessed by dialing 303-590-3000. The access code for the replay is 11126733 pound sign.

  • Please note that information reported on this call speaks only as of today February 24, 2009, and therefore you are advised that time sensitive information may longer be accurate as of the time of any replay. I would finally advise you that this conference and this call is being broadcast live through an Internet webcast system that can be accessed on the Company's webpage at www.bio-key.com.

  • And now I would like to turn the call over to Michael DePasquale.

  • Michael DePasquale - President & CEO

  • Thank you, Gus, and good morning, everyone. Thank you for joining us for our 2008 fourth-quarter earnings conference call. We view this past year as transformational for the Company for the following reasons. After five years of developing and refining our core technology offerings to meet with customers' requirements and after closing several major accounts in Biometrics as well as building on our robust Law Enforcement installed account base, we now see clear potential for both segments to produce sustained profitability.

  • Pursuant to the path of profitability, I am very pleased to report that we ended 2008 with a strong financial performance in the fourth quarter and most importantly, achieved our first full year of operating profit. Despite the challenging economic environment, our pipeline of opportunities continues to grow and our products for mobile data delivery and security remain in demand. In addition to our sold backlog, we remain focused on maintaining our fiscal discipline and believe this continued caution will be of significant benefit as we all work through this challenging economic period.

  • Let me address one area of opportunity that has been in the news recently. As you all know, there has been much discussion regarding the allocations from the economic stimulus package as it relates to justice and IT security as well as healthcare. A great deal of early discussion has centered on whether and how the stimulus package would impact our specific business interest in the short and intermediate terms.

  • As we have discussed on earlier conference calls, a number of our law enforcement customers have obtained grants to purchase our mobile and handheld technology. I expect that will not only continue, but will likely grow in the coming quarters. Ken Souza will provide you with additional details on how the stimulus package impacts the grant process later on in the call.

  • Under the terms of the stimulus package approximately $20 billion will be distributed to various healthcare entities in order to promote electronic patient records. This being the result of several earlier mandates that had failed. Security and convenient access is the primary impediment to developing and deploying e-patient records and BIO-key has the perfect solution, as well as the relationships with some of the larger players in the industry.

  • At this early stage in our analysis of the sectors being allocated funds under the stimulus package, we believe that there are a number of opportunities that we can pursue that will lend to the Company's continued growth. We will update you on our progress in identifying and securing benefits under the packages as the year progresses.

  • In Commercial Biometrics, as we have been communicating, we have been involved in a number of large-scale identification programs that have resulted in significant relationships being forged through opportunities such as the Bangladesh voter registration system. As a result, BIO-key is increasingly being recognized as a leader in the development and provision of commercial and simple biometric identification solutions.

  • Our vision of an open, hardware agnostic, highly-accurate, and scalable biometric platform has resonated with the experienced biometric developers and newcomers alike. Specifically, our unparalleled strength and secure web-based consumer identification has brought us to the point that our solutions are now being deployed as platforms for several new large-scale identification initiatives.

  • Successful companies can never be complacent with the quality of their solutions. Consequently, our R&D team is hard at work developing the next generation of our biometric platform that will facilitate easier integration of our large-scale and enterprise solutions. Here is a quick summary of our activity in the Commercial Biometrics segment.

  • In the ID verification area, ChoicePoint, one of our customers, has deployed a highly successful and BIO-key-based identification verification solution. ChoicePoint recently decided to expand their marketing of the solution through an additional 100 salespeople around the world. The solution is already being used to identify and prevent fraud for the MCAT and soon will come online for the CPA and NASD S7 examinations with millions of duplicate check fingerprints passing through the BIO-key system each year.

  • Our South African reseller successfully deployed a fraud prevention application that detected paycheck double dipping within a government agency workforce of approximately 30,000 people. As a result of this successful deployment, which uncovered a number of fraud attempts within the workforce, several other customers have approached our reseller about deploying this solution.

  • In healthcare, McKesson is seeing strong demand for their automated pharmaceutical cabinets that have our identification solution embedded as an integrated component. A key advantage of the BIO-key-based McKesson platform is the ability to have one-touch cabinet authentication for clinicians. The competing solution requires a user ID to be entered due to their inferior biometric platform.

  • BIO-key was recently featured as the 'Cool Technology of the Week' in the widely read industry blog by John Halamka, Beth Israel Deaconess Hospital's CIO and Dean of Technology at Harvard Medical School. Dr. Halamka's comments were based on both institutions positive experience with our Web key platform for emergency room system access. Dr. Halamka chairs the HHS Healthcare Information Technology Standards Panel, which on January 22, 2009, established XML standards for transmitting patient data among recordkeepers.

  • After the announcement of our relationship with the Indiana Blood Center last year, we are now in discussions with a number of organizations all keen on deploying our solution that enables donors to be positively identified with a simple touch of a finger. The organizations we are working with represent nearly 30 million donors nationwide.

  • Moving to retail point-of-sale. AT&T Wireless has been consistently growing their rollout of a BIO-key-based tablet point-of-sale system. Because the biometric authentication has been so well received, AT&T's Carl Ceresoli and our own Jim Sullivan will be presenting at the March 3, 2009, Biometrics Summit in Miami. Radiant Systems, another one of BIO-key's customers, has won major Arby's and Burger King deals for their BIO-key-based POS terminals.

  • In the financial services industry, the Financial Services Technology Consortium has launched a comprehensive biometric project focused on determining how biometrics could be used to improve the customer identification process for fraud prevention for both branch and online authentication. BIO-key is the only biometric company that has a proven track record in all three areas -- fraud prevention, consumer facing ID, and web-based authentication. We hope to be a participant in this project given that we are one of the few companies that can demonstrate value in all of these customer touch points.

  • I would now like to update you on some of our civil ID and government-based biometric initiatives including the upcoming FBI NGI program and other high-profile opportunities that we and our technology partners are competing for. As it relates to the NGI, the project is on track for a biometric matching vendor selection in the coming weeks. As you are aware, we are partnered with Sagem Morpho, who is the incumbent IAFIS vendor to the FBI, and we feel that our fused matching solution puts us in a very competitive position for this opportunity.

  • We are also involved in another very high profile opportunity that will impact visitors to the United States. And, again, are at a very strong competitive position for this deal as well.

  • Moving on to Law Enforcement. Although Ken Souza will comment on the state of the law enforcement market, let me share some very specific information regarding our recent successes. We added 38 new customers to our existing base of 1,000-plus agencies in 2008. A number of the new customers converted from a competitor's system. The bulk of these new agencies are being hosted by existing BIO-key customers, which allows the new agencies to come online quicker at less cost and with the instant ability to share information within statewide data sharing networks.

  • One of the many advantages to this hosting strategy includes providing the new agencies with tiered volume pricing and new software tools for increased management efficiencies with the [apparent] data sharing functionality. We encourage our larger and more sophisticated customers to become hosts since it builds agency value and productivity. The hosting format better benefits BIO-key by creating a stronger relationship with our customers and generating incremental business.

  • During the fourth quarter of 2008 we experienced a solid increase in our partner business which allows us to leverage our BIO-key sales team. We also experienced what appears to be a payoff in our commitment to develop solutions that interoperate easily with one another.

  • Our single largest new customer order in the fourth quarter was for the purchase of 100 MobileCop licenses and another 100 licenses of our mobile rescue product, our mobile data application for fire and rescue agencies. These complementary solutions let first responders from different agencies communicate with dispatchers and with one another even if they have different radio systems.

  • This kind of interoperability is a key requirement for getting federal grant funds. This certainly played a role in the first order we received for SecureMessage, our secure text messaging and e-mail solution announced late in the third quarter of 2008.

  • The Lincoln Nebraska Police Department obtained several Homeland Security grants and funding to host an interoperable data communications network serving 13 counties. Now using SecureMessage communications center staff anywhere in the region can coordinate, communicate, and control incident response with each other, police officers, and any other essential personnel.

  • Along this line, in the third quarter we received the largest single order ever for our PocketCop product, our mobile data product for handhelds, and we received that order from Hawaii County, Hawaii. Also with federal Homeland Security funding the Hawaii County Sheriff's office is deploying 120 PocketCop-enabled BlackBerry smartphones to the watch commander's foot, bike, and beach patrols to provide an integrated information infrastructure for constant contact with their field units which we have outfitted with MobileCop earlier in the year. They have built an any data, any time, anywhere network for the enhanced protection of their island residents.

  • Let me now turn the call over to Ken Souza for some additional comments on our Law Enforcement unit.

  • Ken Souza - CTO & SVP, Development

  • Thanks, Mike, and good morning, everyone. I would like to touch on two related developments in the Law Enforcement market. The impact of the economy on the law enforcement is in significant new stimulus dollars that will be available soon.

  • First on the economy. With the recent downturn there is mounting evidence that there has been significant increase in crime, especially property-related. While official national crime statistics for the first six months are still being compiled, a survey of 233 police agencies by the Police Executive Research Forum reported last month that 44% of the police agencies reported spikes in crime linked to the economy. Additionally, 39% of the police agencies reported increases in robberies, 32% in burglaries, and 40% in theft. The most effective crime prevention tool that police departments have is officers on the street who serve as a visible deterrent to criminal activity.

  • At the same time as crime is rising police departments nationwide are under increasing financial pressure. 63% of the 233 agencies surveyed in the study said that they were bracing for local funding and budget cuts during the upcoming year, especially affecting staffing levels and overtime, making it more important than ever for police departments to find ways to work smarter and more efficiently.

  • Our mobile data solutions serve as a force multiplier by providing officers with the critical information they need any time, any place, anywhere, 24 by seven. Our MobileCop and PocketCop offerings help officers like the downtown foot patrol in St. Paul, Minnesota, remain on the street as a visible deterrent to crime. And with handgun sales up over 400% officers face a very real safety risk every time they put on their uniform.

  • The ability to query federal and state databases instantaneously without solutions and flag outstanding arrest warrants and past violent behaviors helps the officer anticipate risk helping to protect his safety when confronting a suspect. That is exactly what our mobile data solutions do for the Baltimore Police Department's Violent Crimes Impact Division whose officers seek out some of the country's most dangerous criminals.

  • The $780 billion American Recovery and Reinvestment Act or the ARRA stimulus bill signed last week by President Obama acknowledges and addresses these concerns by funding local police departments and keeping officers on the street. The $1 billion community-oriented police services hiring recovery program in the act is expected to fund the hiring or retention of an estimated 50,000 police officers nationwide.

  • There are other provisions of the ARRA stimulus bill that we believe will have an even more dramatic impact on our customers and on our market by providing more than $2.6 billion in new funding for the state and local enforcement programs. The largest component of this funding is for the Edward Byrne Memorial Justice assistance grant, or JAG program, which is designed to help state and local governments prevent, fight, and prosecute crime.

  • The AAR -- excuse me, the ARRA also includes $125 million in rural law enforcement grants to fight drug-related crimes in rural areas and $30 million to assist local law enforcement agencies along the southern border and other high intensity drug trafficking areas, both specific areas that our mobile products are targeted at. The Byrne JAG program is a traditional source of funding for mobile data solutions like MobileCop and now with our industry-leading PocketCop handheld offering specifically designed to be used in undercover and investigatory areas to identify suspected drug sellers and traffickers, these programs should be an additional source of funding for our offerings.

  • To make this even more exciting the new law requires the distribution of grants to state and local government within 60 days placing the whole grant process on a fast track with monies available within as little as 90 days. The CJIS Group, a well-known outside funding -- excuse me -- federal funding tracking group expects that government agencies are more likely to seek vendor assistance under the stimulus conditions than under typical grant programs.

  • Government agencies will be less likely to undertake projects that require hiring and training people or take a long time to get started and will look more to vendors proven offerings and solutions that could be implemented and completed quickly. Leveraging our 1,000 plus customer base of mobile data and message switches in over 43 states is a huge advantage from which we can position our complementary offerings, but that is not the full story.

  • An additional approximately $2 billion in Homeland Security Department funding for state and local government has been appropriated to state Homeland Security, urban area security initiative, and to the interoperable emergency communications group. States must apply for that money by the end of March 2009 and funding will begin to flow to local governments by the third quarter of this year.

  • As has been noted, Homeland Security grants have already helped many of our customers in expanding their mobile data systems and we expect this to continue. All told more than $4.5 billion in new funding will be available to state and local first responding agencies in the current fiscal year.

  • To summarize, what we see in 2009 there is an increased need at the state of local level for our mobile data solutions and there will be a significant increase in federal funding, especially in the second half of the year, which we expect to get more than our fair share. Now let me turn the call back to Mike.

  • Michael DePasquale - President & CEO

  • Thanks, Ken. Now I would like to summarize the numbers for the quarter and the year. Total revenue from continuing operations was $3.9 million, representing an increase of 47% from the $2.6 million reported for the corresponding quarter in 2007. An increase in new orders received by the Company's Biometrics and Law Enforcement business drove growth in the 2008 fourth quarter. Our gross margin for the fourth quarter of 2008 increased to 87.9% compare to 86% for the corresponding quarter in 2007.

  • Operating expenses from continuing operations for the fourth quarter ended December 31, 2008, decreased by 17% to $2.5 million compared to total operating expenses of $3 million for the corresponding quarter in 2007. The Company's quarterly improvement in operating expenses from continuing operations reflected a continued emphasis on cost containment. We reported net income of just over $900,000 for the fourth quarter ended December 2008 compared to a net loss of $600,000 for the corresponding quarter in 2007.

  • Total revenue from continuing operations for the 12 months ended December 31, 2008, increased 29% to $12.9 million from $10 million in the corresponding period in 2007. Gross margin for the 12 months ended December 31, 2008, increased to 86.5% compare to 82.1% for the corresponding period in '07. Operating expenses for the 12 months ended December 31, '08, decreased 18.6% to $11 million. We reported net income of $200,000 for the 12 months ended December 31, 2008, compared to a net loss of $5.5 million for the corresponding period in '07.

  • We are very proud of our collective effort to end 2008 with a strong financial performance highlighted by profitability and solid sales growth. As I alluded to earlier, we believe that we are well-positioned to maintain the momentum that has been created despite the economic environment. Clearly, the continued operating and capital discipline that we have practiced over the last year was a significant contributor to our positive results. We will continue to follow a conservative approach with respect to our capital spending and given the challenging times, we will also continue to identify and evaluate additional ways in which we can improve our productivity and financial results.

  • Turning to the balance sheet. As of December 31, '08, we had consolidated cash and cash equivalents of approximately $1.7 million. Certainly we are concerned with the long-term effects of having such a large portion of our equity in preferred stock. The preferred stock was redeemable on January 1. However, we have reached agreement with more than 60% of the holders to extend the redemption period to January 1, 2010. We are continuing to work with the remaining holders in a way that is mutually beneficial. As we have focused on improving our operations we are similarly continuing to focus on non-dilutive strategies that will enable us to strengthen our balance sheet.

  • In summary, we are pleased with our fourth-quarter performance, our year-over-year profit turnaround, and how well we are positioned for a successful 2009. Thanks for your interest and your support.

  • Before we begin taking questions I would like to remind you that a replay of this teleconference will become available beginning an hour after we conclude the call. We will provide that number again at the end of the call. Now let me turn it back to the operator for Q&A.

  • Operator

  • (Operator Instructions) [Barzan Concari], private investor.

  • Barzan Concari - Private Investor

  • Congratulations on the great quarter.

  • Michael DePasquale - President & CEO

  • Thank you.

  • Barzan Concari - Private Investor

  • And clearly now that the Sagem win has moved the needle on revenues in the fourth quarter, looking forward now that BIO-key has been mostly or fully paid on this contract should we expect lumpiness back to prior quarter revenues or do you see quarter-to-quarter growth ahead?

  • Michael DePasquale - President & CEO

  • You know that is always a very difficult question to answer. Could we see lumpiness ahead? It's possible. On the other hand, we have and are seeing strong demand for our solutions in both the Biometrics market as well as the Law Enforcement side. As Ken just described all of the federal and state and local money that is going to be available to procure products such as the ones that we market.

  • The contract with Sagem, our initial contract with them, which we delivered partially in the second quarter of '08 and then in the fourth quarter, the last quarter of '08, was the start of what we expect to be a much more significant relationship. As you are aware, there are a number of very large programs that we are partnered with and that they are competing for. We would like to believe that over the course of the next few months or into 2009 that we will see some of those contracts awarded and obviously see follow-on business as a result of that.

  • Barzan Concari - Private Investor

  • Thank you. I have another question. Have you been fully paid on the (technical difficulty) county project and what is your average quarterly maintenance base now?

  • Michael DePasquale - President & CEO

  • The Hamilton County project is just about coming to an end and I believe that we still have some receivables outstanding for them as the project moves now off of maintenance -- moves actually off of the warranty period totally into maintenance. Our annual maintenance contract with Hamilton County is in the $0.5 million range.

  • Barzan Concari - Private Investor

  • Thank you.

  • Operator

  • [Dan Cammis], private investor.

  • Dan Cammis - Private Investor

  • Hi, guys. Great quarter and year. Congratulations.

  • Michael DePasquale - President & CEO

  • Thank you, Dan.

  • Dan Cammis - Private Investor

  • Do you expect FBI NGI to be announced in the first quarter and were you able to successfully demonstrate your fuse software, would you say?

  • Michael DePasquale - President & CEO

  • The current plan is that the NGI biometric matcher defender selection will be made in the next few weeks. That is the current plan. And so the question is -- the answer to the question is, yes, we expect to hear on that project before the end of the quarter. And, yes, we were able as were the other vendors, obviously, to demonstrate our solutions. Sagem and BIO-key did demonstrate for not only Lockheed, but the FBI our fused solution and our fused product offering.

  • Dan Cammis - Private Investor

  • All right. Hypothetically, if Sagem wins NGI would you expect to see any sizable incremental revenues in the first year of the contract or would this already be covered in the $2 million upfront fee you received?

  • Michael DePasquale - President & CEO

  • We would expect to see incremental revenues on that project as time evolves. So we would expect to see incremental revenue in '09 and also beyond. That program is a 10-year program.

  • Dan Cammis - Private Investor

  • I got you. One more follow-up here. In January a reputable analyst noted that both Sagem and Cogent are being evaluated US [visits]. Can you tell us whether the BIO-key fuse software is involved in this evaluation at all? And if so, how big an opportunity could this be for BIO-key?

  • Michael DePasquale - President & CEO

  • The answer to the question is, yes, on the fused BIO-key Sagem software solution. I really can't comment on the size at this point in time.

  • Dan Cammis - Private Investor

  • Okay, thanks. I will get back in the queue.

  • Operator

  • [John English], private investor.

  • John English - Private Investor

  • Good morning and thank you very much. You have made me a very happy man today.

  • Michael DePasquale - President & CEO

  • Thank you, John.

  • John English - Private Investor

  • My question is on the new patent for the trusted platform module. I am wondering who the customers might be for that and if you can give us a little more information on just exactly how that might work?

  • Michael DePasquale - President & CEO

  • Yes, we have -- actually in '08 we were issued a total of four patents. And (technical difficulty) that was issued in the fourth quarter is just kind of another step forward in what we believe the industry will require from any full and complete biometric system. It's and end-to-end security solution right from the finger scanner or the reader itself all the way back to the database.

  • This patent that we have been issued in the fourth quarter really provides incremental security techniques and capabilities right at the device at level. Ultimately, if we are doing a web-based authentication or we are doing remote, for example, identification that technology will be critically important to ensure the security of the full and complete solution. So we think it's important.

  • And it's not just one single patent, but it has really been for us the iteration of patents that we have received over the last two years in our Biometrics division.

  • John English - Private Investor

  • Have you heard of any other fingerprint algorithms that have set up to work with trusted platform modules other than yours?

  • Michael DePasquale - President & CEO

  • You know at this point in time I am not aware of any, but TPM, trusted platform modules, are becoming more of a standard part of virtually every notebook computer. And so also understand that finger scanners are also becoming an important part of notebook and tablet computers. So we think, again, that if you want to ensure the full and complete security of a solution back to a database you are going to need a more sophisticated security infrastructure.

  • So not just on the device but one that travels all the way up the network back to the database. And that is what we will are providing more and we see this as a value-add for our enterprise solution customers.

  • John English - Private Investor

  • Dell is heavily invested in that and they use UPAC -- or Lenovo uses UPAC on their laptops and they also have trusted platform module. Is there any particular customers you designed this for or that are interested in this?

  • Michael DePasquale - President & CEO

  • No, this was something that we started a number of years ago. It takes almost today an average of two years to get through the US Patent Office and get a patent not only challenged, but approved. So this is something we started a long, long time ago and something that, again, we believe will apply to the industry as we go forward.

  • John English - Private Investor

  • You know they are starting to roll it out big time now. So that is great news for me because I am invested in other companies who use trusted platform modules so I am great to hear that. I am really glad to hear that. It's making me happier than -- okay, thank you very much.

  • Michael DePasquale - President & CEO

  • You are welcome.

  • Operator

  • Irene McGrath, RBC Wealth Management.

  • Irene McGrath - Analyst

  • Mike and team, congratulations. What a fantastically good news and year and quarter so thank you for your hard work.

  • Michael DePasquale - President & CEO

  • Thank you, Irene.

  • Irene McGrath - Analyst

  • I had a question with regard to the preferred. Can you outline a little bit what the total annual expense, interest expense of the preferred equates to either in stock or actual cash costs versus your current run rate or your projected run rate for '09?

  • Michael DePasquale - President & CEO

  • I think I will turn that over to Tom.

  • Tom Colatosti - Private Investor

  • Hi, Irene. We have just about $10 million in preferred that is in three classes. The blended rate is about 12%, so the annual cost is about $1.2 million and up until now we have been paying that primarily in stock.

  • Irene McGrath - Analyst

  • Okay. And 60% of that you are expecting to be able to resolve by the end of '09 -- beginning of 2010?

  • Tom Colatosti - Private Investor

  • No, what the $10 million in preferred had a redeemable date of January 1 so that the preferred is due and redeemable. We were seeking an extension or a waiver for one year and 60% of those preferred holders have agreed to the one-year extension. We are continuing to negotiate with the other 40%.

  • So what that means is we will not have to pay or redeem that preferred. It will give us time to seek other kinds of alternatives to redeem them in a way that is much more cost-effective than at today's pricing.

  • Irene McGrath - Analyst

  • And then I understand or expect that you have your irons in fires for potential redeemers of that preferred? In other words, ways to work it out ongoing?

  • Tom Colatosti - Private Investor

  • That is correct. I think we have got two or three different alternatives and it's a bit of a negotiation. We are trying to do the best thing for the overall company with an eye towards our common shareholders, so we want to make sure that whatever we do is effective and efficient. And at the same time we have to value the investment on the part of our preferred holders. So we are trying to keep all those things in a mix of ensuring that we do it in a way that is as a non-dilutive as possible.

  • Irene McGrath - Analyst

  • Okay, and ever the optimist, you know should BIO-key on any facet of the business be somewhat bombarded with orders in a positive way -- glommed -- you know whatever, however big they are, assuming oversize maybe a little outside of what we currently expect potentially. Are we equipped to handle that from a manufactured distribution standpoint and staffing standpoint or would there be some kind of need to sort of raise any kind of cash or anything in the next 12 months?

  • Michael DePasquale - President & CEO

  • Well, that is -- first of all, Irene, that is a great question. We are pretty optimistic right now that there are a number of inflection points possible right in Biometrics as we described and also in Law Enforcement as Ken has described. So we would like to see that happen. We are staffed, currently staffed adequately to support our business. But as it grows, we likely will continue to add additional resources.

  • The good news about our business, as you know, it operates at the 87 -- somewhere between 85% and 90% gross margin. So we have a lot of room to be able to operate, but we clearly see -- I see a couple of areas for us in '09 that we will be watching carefully. Number one is we obviously want to make sure we can support this additional business and if it requires an additional support resource here or there obviously we will bring them on board.

  • But we also want to take advantage of the opportunity for incremental sales. We have been actually looking for and we have searched for salespeople, in particular in our Biometrics vertical, where there could be some explosive growth potential. So we are keeping an eye out for that. But right now we are adequately staffed to be able to service our customers and our business.

  • Irene McGrath - Analyst

  • Great. And since the unfortunate part of the economy and layoffs and so forth gives you probably a larger pool of potential candidates or salespeople to pull from, correct?

  • Michael DePasquale - President & CEO

  • It does, but you know interestingly enough, as it relates to Biometrics, it's kind of a very specialized area and we need a unique individual. So we need someone who has experience in the security area, but also someone that has the ability to really prospect and to (technical difficulty) on board from ground zero. So you are right, the economy affords us a bigger playing field to select from, but we also -- we happen to be very, very selective right now because, again, we know the kind of people that we need to grow this business.

  • Irene McGrath - Analyst

  • Right. Okay, last question. Mike, can you detail -- given this wonderful turn however gradually positive we are quite -- we are in good shape right now. Can you detail the plan for visibility for BIO-key through your PR efforts beyond, for example, the conference in Miami on March 3? Will you be at any kind of coverage? Are you looking for -- at what point do you expect to sort of really put something like that in motion so the loyal shareholders can begin to benefit?

  • Michael DePasquale - President & CEO

  • Yes, that is another great question, Irene, and it's sort of the chicken and the egg. I will be doing a number of analyst conferences over the next couple of quarters. In fact, I will be on the West Coast next Monday presenting at the Imperial Capital Homeland Security Growth Conference. So that is the first of a number of conferences that we have lined up with our IR folks. So we are going to be doing much more of that and I think that is the most important way for us to get visibility.

  • But you know, you almost have to get to this point, right, where we are today to get the industry and to get the analysts interested in you as a company. And so what I am hoping as a result of our performance is that not only are we going to be pushing, trying to get as much visibility as we can but some of that is going to come to us.

  • We have been very fortunate recently to get some media pick up on the Biometrics area. Our PocketCop product is getting picked up around the country because of the vast and significant installed base that we have. So I think '09 is going to be a much more visible year for us. Some of that is spawned by and as a result of our performance and some of it just because of the nature of the products that we offer.

  • Irene McGrath - Analyst

  • Right, okay. Well, thank you again Mike and your team up for all the hard work. I have been enjoying being a shareholder and will continue to enjoy it so thank you.

  • Michael DePasquale - President & CEO

  • Thank you very much, Irene.

  • Operator

  • [Joe Osgood], private investor.

  • Joe Osgood - Private Investor

  • Good morning, Mike.

  • Michael DePasquale - President & CEO

  • Good morning, Joe.

  • Joe Osgood - Private Investor

  • PC shipments were down 17% in the fourth quarter; the only area of growth in PC sales were mini notebooks or netbooks. In general, does the slowdown in PC sales slow biometric momentum? And in particular, is this trend towards smaller form factors favorable, unfavorable, or neutral with respect to the biometric industry and BIO-key, specifically?

  • Michael DePasquale - President & CEO

  • Great question. You know for us the slowdown in PC sales really didn't have any impact in our business and we don't see in the short term that it will. The one thing that we have seen is most of the high-end notebook machines were the ones that incorporated the finger scanners in them. We have seen the manufacturers move very, very quickly to incorporating now in the next releases in the next couple of months and beyond installing finger scanners in the less expensive machines.

  • Because, again, what happened with the PC manufacturers is people moved away from buying the more robust, more expensive machines and they went to buying the lower end. So that is a margin problem for them; again, it really doesn't impact us. But we believe that we will continue to see finger scanners deployed in all of the PCs over time, especially in the low-end units.

  • And for us, because we center and focus mostly on the enterprise, it's not necessarily one device or a tablet computer or a notebook computer that is really going to drive our sales. We are really trying to drive biometric security at the enterprise level in the commercial market. And, of course, in the civil ID market most of that really doesn't have any impact at all.

  • Joe Osgood - Private Investor

  • Well, good answer to a good question.

  • Michael DePasquale - President & CEO

  • Thank you.

  • Joe Osgood - Private Investor

  • RIM announced a shift in mix to lower-end consumer phones and a related slip in margins. Is this trend indicating a lid as well on the demand for the higher-end PocketCop enabled BlackBerrys?

  • Michael DePasquale - President & CEO

  • That similar in nature. Exactly what happened to the PC manufacturers is happening -- starting to happen now for the handheld and smartphone, PDA market. The answer to that question is, no, because our PocketCop application runs on all of the BlackBerry offerings. So we don't really have any very specific limitation.

  • We could run on all the latest offerings and we run on all the oldest BlackBerrys that were probably one quarter the performance capability as the units that are in place today. So that is really not an issue for us.

  • Operator

  • [Gary Seronin], private investor.

  • Gary Seronin - Private Investor

  • Good morning, gentlemen. Hey, great quarter. Nice growth, so congratulations.

  • Michael DePasquale - President & CEO

  • Thank you, Gary.

  • Gary Seronin - Private Investor

  • You have covered a lot of ground already, so I will only try to hit you with a few bullet points. In your opening remarks you talked about the stimulus package and the significant amount of dollars going into healthcare and law enforcement. I guess my question is how realistic do you see some timing targets on that? Do you really see the government getting out there and getting this money out and into the bidding process in the next -- less than 18 months?

  • Michael DePasquale - President & CEO

  • I think Ken addressed that very specifically in his talk. We have already seen through contact over the last four working -- four business days that customers are getting money and it's getting passed down very quickly. I believe Ken mentioned that money would be available as little as 60 days -- 60 to 90 days, which puts us before June. That is pretty aggressive.

  • Gary Seronin - Private Investor

  • Okay. Now is there a significant bidding process that will be involved or how will that all work?

  • Michael DePasquale - President & CEO

  • Well, these agencies get grants and this money will get passed down to the agency and the agency will then decide what products they want to deploy. The good news for us is that we are the installed vendor in 1,000 agencies so it's very easy for them to increment their license count or increment their functionality or increment their products set by adding handhelds without a lot of brouhaha.

  • Operator

  • (Operator Instructions) [Dan Cammis], private investor.

  • Dan Cammis - Private Investor

  • Recently Mexico announced a national register for mobile phone users that will fingerprint all customers. Is BIO-key positioned with technology and partners to play in the Mexican cell phone identification market?

  • Michael DePasquale - President & CEO

  • Well, that was recently announced. It has been talked about for a while, in particular the Mexican scenario. We have the perfect solution for that with our web key product and we obviously would enjoy the opportunity to compete.

  • Dan Cammis - Private Investor

  • Thanks.

  • Operator

  • [Richard Pugh], [Richard Pugh Investment Council].

  • Richard Pugh - Analyst

  • I would like to add my congratulations. Great quarter and good financial management to boot. Gentlemen, Mike specifically, do you have any additional color you can add to this branch in online? It seems like a very exciting area for BIO-key as far as banking and the ability to access your cash at the ATM with your fingerprint instead of some sort of code.

  • Michael DePasquale - President & CEO

  • Yes, you know it's interesting. There has been some deployments like this unfortunately outside of the US. In India we are starting to see that happen pervasively. We are starting to see it in the Third World and now, of course, finally in the US it's getting a lot of attention. It has been talked about for a long, long time.

  • We have been part and parcel of the FSTC Consortium for quite some time trying to establish standards, set some tone and direction. But there is kind of a double-edged sword here, right? We are in the middle of a kind of a meltdown in the financial services industry so that causes a lot of contention and difficulty. The fact that the FSTC came out and said hey we really need to move on this, given the negativity of the times is pretty positive. But I don't see any reason why we shouldn't be using a biometric to ensure that an individual who makes a deposit, makes a withdrawal, moves money in and out of accounts is who they say they are.

  • We mentioned on a call back up probably two quarters ago that even Diebold now is incorporating finger scanners in their latest generation ATM machines. I would envision that over time ATMs are going to get upgraded, the branch platform is going get upgraded. It's very easy to just plug in a finger scanner to the branch POS or PC and use that to identify individuals.

  • So it's all possible, I would just say in today's environment it may be more difficult. But it's certainly something that is getting planned for and I think we will see in the coming years.

  • Richard Pugh - Analyst

  • Very good. Just I would throw out that one of our local banks here is constantly recommended as one of the strongest in the country and could possibly be a good target for that and that this Branch Bank and Trust.

  • Another one, another question, you mentioned secure text messaging. How is that being used?

  • Michael DePasquale - President & CEO

  • Well, we have a component of our PocketCop and our MobileCop offering that allows for officers who are administrators to communicate amongst each other in a secure, silent fashion. So if you and I are sending a message on our computer, someone with a sniffer or the technology outside the building to interrupt on a wireless network our message is pretty common. It's very easy to do, let's put it that way.

  • So what we offer is a secure, encrypted technology that allows these officers to communicate silently with one another and ensure that it cannot be interrupted and it cannot be hacked.

  • Operator

  • (Operator Instructions) [Richard Pugh], [Richard Pugh Investment Council].

  • Richard Pugh - Analyst

  • Sorry, I had a follow-on question to that secure texting. I had an image of a policeman in some sort of dire situation trying to communicate with other officers by hand entering data or whatever was the question he wanted to enter or where is the suspect going or something like that. Is it possible that you can incorporate speech-to-text software into this text messaging, secure text messaging and have it so the officer could actually say what he wanted to say and have his device translate that into text and transmit it?

  • Michael DePasquale - President & CEO

  • That is a great question and I am going to have Ken answer that.

  • Ken Souza - CTO & SVP, Development

  • Well, that technology is currently available from a mobile -- well officers in their police vehicle. From a handheld perspective the technology is also available, but I am not aware of anyone implementing that at this point in time.

  • I would also point out though that on the BlackBerrys and with our PocketCop offering that we have an officer needs assistance button. So the officer doesn't need to do any text typing, they hit one button on the unit and it immediately sends out an alarm to all officers that are grouped with them and also to the dispatch.

  • Operator

  • [Joe Osgood], private investor.

  • Joe Osgood - Private Investor

  • -- elections and achievement awards certainly have been a significant public relations success for BIO-key. Should we expect to see follow-on work in Bangladesh and are there currently any active RFPs?

  • Michael DePasquale - President & CEO

  • Great question, Joe. Yes, there is. As you are aware and I think we have articulated a number of times since the end of the year, on December 29 they held the first free and fair election in the country's history. That program enrolled 80-plus million people, eligible voters.

  • Now they have a primary database in Bangladesh and they would like to begin using that and using a biometric for a host of other projects including social services and social programs. Banking, which is on the commercial side, but there is also an e-passport program that is currently in play. We will likely see RFPs and other opportunities come out of Bangladesh in the short term.

  • Joe Osgood - Private Investor

  • Can you give us some color on the business associations who mentioned in prior CCs such as with Oberthur and Unisys and the bank BNP Paribas?

  • Michael DePasquale - President & CEO

  • I can. Of course, Unisys and Oberthur, Gemalto are all system integration partners for us. They do on awful lot of global international identification work. We have bid a number of programs and projects in various countries with them. We are not big enough obviously to go ourselves to these small countries and bid these projects. But they do it and they do a really nice job because they have resources there and they have integration services. And as they win these opportunities we will get our piece and we will share in the revenues.

  • So a whole bunch of those opportunities are in play right now. I think what we have seen, because of the global financial slowdown in general, is a lot of these projects have been kind of delayed. And so you haven't seen over the last few months a lot of international or global announcements but that will soon continue -- will move forward and as it does we will get an opportunity to share in those deals.

  • Operator

  • Thank you and there are no further questions at this time. I would like to turn the conference back over to management for any closing remarks.

  • Michael DePasquale - President & CEO

  • Thank you, everyone, for participating in today's call. We hope that you will join us again for our next conference call to discuss our first quarter results.

  • Gus Okwu - IR

  • Thank you for participating in BIO-key's International Inc.'s 2008 fourth-quarter and full-year earnings conference call. As a reminder this call will be available for replay beginning an hour after the call has ended and may be accessed until 11.59 a.m. Eastern Time on March 4. Dialing 1-303-590-3000 can access the replay and the access code to the replay is 11126733 pound. Thank you.