Identiv Inc (INVE) 2002 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by welcome to the SCM Microsystems third quarter earnings conference call. During the presentation all participants will be on a listen only mode. Afterwards we will conduct we will a question and answer session. At that time if you have a question please press the one followed by the four on your telephone. As a reminder this conference this conference is being recorded Thursday October 24th 2002. I would now like to turn the conference over to

Director of Investor Relations. Please go ahead Mam.

Thank you

. Hello everyone and thank you for joining us today as we discuss the results of SCMs third quarter of fiscal 2002. Speaking on today's call are Andrew Warner Chief Financial Officer who provides financial analysis of SCM three cent quarter and forward looking commentary as well as an update of SCM digital media and video business. And Robert Schneider Chief Executive Officer who provide an over view of SCM security business.

As we begin today's call let me remind you that during the course of this conference call management will make certain forward looking statements regarding future events or the future of financial performance in the company. We caution you that such statements involve risks and that actual events or results may differ materially. Referring to the companies 10-k and recent SCC filings which explains several important factors that could cause actual results to differ from those contained in any projections or forward looking statements.

Any forward-looking statements made on this call are based on information that is currently available and which is likely to change over time. Although our projections were lightly changed we do not plan to update them. As

will provide our analysts and investors with information and forward looking guidance in our quarter financial news releases and conference calls. We will not provide any further guidance during the quarter unless

news release, conference call or SCC filing in accordance with regulation fair disclosure. now I'd like to introduce Andrew Warner.

Thank you

. The results of our third quarter reflect a mixture of positive and disappointing performance in our business. We performed well in meeting the company's revenue and expense targets we had set for ourselves coming in at $40.9 million top line with an arrange of guidance we gave a $38 to $46 million and coming in at $13.3 million on expenses at the low end of guidance which was 13.2 to $13.7 million.

Because of the specific mix of sales between our divisions and the mix of products within east division became in the lower gross margin and operational targets. At the same time we managed to preserve our cash levels ending the courser at $58 million in cash and equivalents and

our day sales outstanding to 75 days. In terms of the various factors that influence our results at digital media and video division actually out performed expectations in terms of revenue as we experienced strong demand for our hardware and software photo and video products in the retail sector.

Based on the strong revenue performance and expense management disciplines already put in place this division broke even for the quarter demonstrating tremendous progress compared with an operational loss of $1.7 million in the year ago quarter and fulfilling the goal we had set for ourselves to reach profitability during 2002. Revenues in our security division however were below expectations and were impacted by sales reserves we took in the quarter to address the potential channel inventory exposure with aid digital TV customer.

This revenue short fall in our digital television product sales was partially up set by continued strong momentum in sales of our smart card readers used for the US government common access card program. SCM continues to be an important supplier to this department of defense program through several partners. However due to the lower level of sales in that digital TV commission access modules we recorded an operating loss of $1.3 million in our

division.

I'd like to take through the numbers in more detail. We reported revenues of $40.9 million in Q3 within the range of guidance we gave for the quarter. Total revenues were down 12 percent from the $46.5 million recorded in the third quarter 2001 and down nine percent sequentially from revenues of 45 million in Q2 2002.

Gross margin for Q3 was 29 percent below the range of 32.5 to 33.5 we had set ourselves for the quarter and below the previous quarter's level of 33.3 percent. Again this gross margin performance was due to lower sales of digital TV products as well as an adverse mix of digital media product margins during the quarter.

Underlying expenses came in at $13.3 million at the low end of the range of we had previously indicated. We have continued to exercise tight discipline over expenses throughout the company and we were able to limit the expense increases in the quarter despite higher sales of our digital media and video products.

I will provide a more detailed analysis of operating expenses in a moment. But first let's take a look at the overall performance on a divisional basis. Revenues from our digital media and video business were $26.6 million exceeding the range of guidance we had set of between 21 to 24 million dollars. This represents a 19 percent increase in sales of $22.4 million in the first quarter of 2001 and an increase of 15 percent from the $23.1 million recorded in Q2 2002.

Revenues from this division comes from sales of our digital media - we either write as well as sales of our video capture and editing products. Both product lines sold under the

brand in to the retail channel as well as to OEM customers in the PC OEM and consumer electronics industries.

In the third quarter we benefited from continued strong consumer demand for products that leveraged digital, video, DVD and digital photography technologies. Sales of our digital media readers remain strong in the direct retail channel under our

brand and we also benefited from the introduction of new hardware and software products during the quarter.

This is - included the launch of our first digital

products the DCS 200 and

that incorporate both digital photo and video applications as well as award winning new versions of three software applications now bundled with all our video hardware products on DVD for creating digital photo albums, DVD complete for digital video or video altering and

for digital video and analogue editing.

Gross margin for the digital media and video division was 24 percent below our target of 26 percent and below the previous quarters 26.5 percent level. Gross margin performance in Q3 was due to an adverse product mix towards lower margin products, which are being discontinued during Q4.

Operating expenses for the division were $6.4 million, which resulted in a break even operating performance. We are very encouraged by the steady improvements this division has demonstrated over the past few quarters. We have gone from a position of multi-million dollar operational losses to now break even.

Turning to our security division where revenues were below the expected range of $17 to $22 million coming in at $14.3 million for the quarter. As I mentioned earlier this short fall was due to an approximately $4 million sales reserve that we took to address a potential channel inventory exposure with a digital TV customer. While this clearly impacted revenues we believe it was a prudent action to take from a financial point of view.

Due to security revenue levels which includes this $4 million reserve represent the decrease of 41 percent for a $24.1million recorded in a year ago quarter and we're down 35 percent from the $21.9 million recorded in the previous quarter.

Revenues in our security division consists of sales of digital TV conditional access modules for the European and Asian market as well as sales of smart card reader products to government financial and enterprise markets worldwide.

Sales of conditional access modules for digital TV description continued to be under pressure in Q3 due primarily due to conditional state of this market. The financial difficulties experienced by major European operators is creating significant confusion in the market and resulting in the slow down in sales for SCM in this sector.

Over time as larger operators move towards lower costs financial model that includes conditional access modules rather than embedded set top boxes we believe the market opportunities for SCM will expand.

And during Q3 we did in fact strike an agreement to sell conditional access modules to our first large operator customer

which is the third largest PAY-TV operator in Europe.

Robert will provide further commentary on this deal and dynamic's in this market in a few moments.

smart card reader products again increased in Q3 given by continued roll out for the readers to the U. S. on courses as part as the common access card program for personal identification and net work access.

Our deployments to the U. S. government are in conduction with contracts we had once with partners such

and

. And as we have most recently announced with computer maker

PC.

As we have said before orders under these contracts tend to be large but the variable in tend of timing resulting in possible fluctuations in revenue levels quarter to quarter. Looking at margins in our security division gross margin came in at 39 percent slightly below our target of 40 percent and below the previous quarter of 40.6 percent.

This lower gross margin was directly tied to lower sales on conditional access modules. Operating expenses in our security division was $6.9 million resulting in an operating loss of $1.3 million in this division.

So looking

combined basis the mixed performance in our business in terms of revenue and gross margin and expense management and SCM recorded an operating loss of $1.3 million in the third quarter. Compared with guidance of operating performance in the range of a loss of 700,000 to a profit of $1.7 million.

Looking at revenues by geography the U. S. represented 61 percent Europe at 27 and Asia Pacific 12 percent of Q3 revenues. And the backlog at the end of Q3 stood at $17 million against $17 million at the beginning of the quarter.

Turning to the outlook for the fourth quarter we expect revenues from our security business to be in the range $15 to $18 million. This reflects continued near term pressure from sales of our conditional access modules to the D TV Margot which we expect that it will be somewhat off set by continued strong momentum around the implementation of smart card programs by the U. S. government.

We expect gross margin for the security division to be around 40 percent for the fourth quarter. We expect revenues from our digital media and video business will be in the range of $25 to $27 million in the fourth quarter, effecting strong demand for our products in the consumer market but it's holding firm. And we expect gross margins from this division to be around 25 percent.

On a combined basis therefore we expect total company revenues will be in the range of $40 to $45 million for the fourth quarter, and the blended gross margin will be around 30 percent.

Based on our year to-date performance and our expectations for Q4, we expect full year 2002 revenues to be in the range of $169 to $174 million. And full year gross margins are expected to be around 31 percent.

Total operating expenses in Q3, excluding the amortization of intangibles, stock based compensation expense, separation, and other one time charges were $13.3 million, at the low end of the range we had given which was $13.2 to $13.7 million. And are down nine percent from the $14.6 million of expenses recorded in the year ago quarter. As a percentage of sales, total underlying operating expenses were 33 percent of revenues.

Research and development expenses were $3.5 million for the quarter, sales and marketing were $7 million, and G&A stood at $2.9 million.

Amortization of intangibles was $543,000 in Q3, effecting our acquisition in Q2 of

, a competitor in the smart-card reader market. We expect the quarter's amortization expenses will remain at this level going forward.

Stock based compensation

expense was $87,000, resulting from the acquisition of the remaining portion of

towards the end of the year 2000. And going forward quarterly stock based compensation expense will remain around this level.

Looking at one-time charges due in Q3 we wrote down our investments in two public company's resulting in a charge of $1.8 million. We also recorded a charge of $1.8 million in separation costs and other one-time charges which compares to guidance of $1.5 million that we gave in Q2.

We expect to incur additional charges related to the eventual separation of our digital media video division of around about $500,000 in Q4.

Q3

a loss at - of $211,000 resulting from interest income that was more than offset by a loss on foreign exchange.

As we announced in our press release, we have taken a re-evaluation reserve against our deferred tax asset. This is a non-cash item, which does not impact our ability to utilize operating loss carried forward in the U.S. in the future. We have appropriately reserved against these assets in accordance with U.S.

. However they do still remain available for us to offset against future income tax liabilities, and we fully expect to realize the value of our net operating loss carry forwards through future profitability.

SCM has reported net loss for the third quarter 2002 was $19.8 million or $1.26 per share. Which compares to a reported net loss of $2 million or 13 cents per share in the year ago quarter.

On the pro forma basis net losses for the third quarter were $1.7 million or 11 cents per share, which excludes the effect of the increase in the valuation allowance for the deferred tax asset, amortization of intangibles, stock based compensation expense, separation costs and other one-time charges. This compares to a proforma net profit of $1.8 million or 12 cents per share for the third quarter of 2001.

Looking at the balance sheet cash and investments were at $58 million at the end of Q three that is compared with $60.2 million at the end of Q two. At Q three cash levels reflect cash expended to increase inventory during the quarter. Both growing inventories of digital TV and digital media video products.

Counts a seeable were $33.5 million for the end of Q three compared to $42.1 million at the end of Q two with inventory levels increased to $44.1 million compared to $37.8 million in the previous quarter.

Our base sale outstanding at the end of Q three was 75 days compared to 84 days at the end of Q two and 93 days at the end of Q three 2001.

Just to recap on our guidance for the next quarter we expect revenues from our security business to be in the range of 15 to 18 million dollars. The gross margin around 40 percent and we expect revenues from our dues from media and video business to be in the range of 25 to 27 million dollars with gross margin around 25 percent.

On a combined basis therefore we expect total revenues to be in the range of 40 to 45 million dollars with a blended gross margin of around 30 percent and we expect operating expenses for the fourth quarter to be in the range of 13.3 to 13.8 million dollars.

Based on these expectations we expect full year total company revenues to be in the range of 169 to 174 million dollars with an operating performance ranging from break even to an operating profit of $2.4 million.

As a reminder we expect to incur charges related to the

of intangibles to remain around half a million dollars and stock base compensation expense to remain at $87,000 and we also expect separation costs of around half a million dollars in the fourth quarter resulting from the eventual separation of the digital media and video business from our card security business.

At the beginning of the year we announced the

to separate our digital media and video business from SCM leaving a card security business which would then be our focus.

We have worked though out the year to position this business for successful economy and not make considerable progress in this regard is evidence by the division strong revenue momentum and break even performance in Q three.

We had originally intended to complete the separation by the end of the third quarter so that each division could follow a completely independent business plan consistent with their very different business models and markets.

However during the third quarter it became quiet clear that the capital markets were not accepted to new offerings. No matter how exciting the markets space our how we'll positioned the company.

Likewise indications were efforts by potential

arranged capital also likely to be unsuccessful. We discussed the situation with our financial advisors

Bank or

and concluded that could be very difficult at this time to spin out all

division for evaluation that reflects it's true worth. Therefore we will continue to retain the digital media and video division with in SCM until such time as it's value can be appropriately realized managing it as an independent business with SCM and benefiting from it's growth and success.

In our press release this morning we also announced our plan to buy back shares on our common stock with the goal of producing dilution resulting from insurance's under our various stock option plan and past business acquisitions. The SCM board of directors has approved a plan whereby the company may use up to $5 million of cash to repurchase

shares of common stock on the open market over the next two years.

The timing and amount of these purchases will depend on market conditions stock prices and other factors. SCM's management and board believe this investment in the company's common stock will be

beneficial both to the company and its stockholders.

With that I'd now like to turn the call over to Robert.

Thank you Andrew. As Andrew indicated Q3 was a mixed quarter for us. There were areas of very strong performance including sales of our digital media and video products to the retail market and of our smart-card reader products for the U.S. Government.

At the same time our performance in the digital TV market was disappointing as this sector is in the midst of massive transition. We believe that over the long term the digital TV market is one of tremendous opportunity for us as operators must reduce the capital of expenditures and

then the way to do exactly that.

In the European digital TV market television operators are now being forced to change the way they do business. For many years large European operators have managed to lock in subscribes by maintaining ownership of everything from the rights to the television content to

equipment - this is the broadcasting equipment, to

receiver that fixes in the subscribers living room.

This business model was barely affordable under the analogue system but with more complex digital technology it has proven to be extremely expensive for operators like

in Germany and ITV digital in the UK the role model of

a set of boxes to subscribers have added so much cost that they are no longer able to sustain their business models.

They can no longer afford to buy subscribers loyalties by carrying all the costs of the digital conversion. SCM offers operators the means to implement an alternative business model by separating the conditional excess which is the security the payment system from the platform hence allowing the consumer to buy the box or the

digital TV sets.

Our conditional excess modules or CEMs can be used with any retail separate box with a common interface slot allowing our

to bare the costs of only a small

of end user decryption instead of the entire system.

For several years now our CEMs have been

used by smaller operators who could not afford anyway to deploy their own set of boxes and therefore we now a proven technology.

Now they are proved an alternative

for those large broadcasters as well since they are in a financial squeeze. Not only is this technology more cost effective it is also more secure

of all European viewers for PAY-TV are non-authorized today. So a need for more secure technology is very real.

We have been working with two European organizations to fight pay TV privacy together with all other major market players. Our efforts to make the

more secure have allowed us to partner with the leading security companies in the world for example

and

who together represent over 50 percent of the worldwide condition

market for pay TV operators.

As a lot of operators feel a financial strain of maintaining their traditional business models, they certainly have impact on the

industry. Small aim to operators two now are being impacted resulting in the slow

slow down in news subscribers in channel and we can see this from other announcements in the

box manufacture field. For SCM this resulted in a potential channel inventory exposure with one of our smaller customers that Robert - that Andrew discussed.

In the near term the turmoil in the

TV industry in Europe were likely to continue to put pressure under selling environment for SCM condition

.

as I mentioned before large operators are now looking at our technology. First as

announced a few weeks ago

the largest and actual the only paid TV operator in Germany the Europe's

paid company has announced that it will pursue a common interfaced territory for new subscribers that means there not having there own separate boxes

.

That's for new subscribers and that's as

announced SCM is the one who has been choosing to pull white a conditional excess

for their new program.

will co write new subscribers with a smart card and a conditional access model called

and

others will buy their own center box or off cost their own

on the market now from Sony and other major consumer companies.

expects to get about 800,000 new subscribers within the next twelve months and we hope to sell about 400,000 models to them to support the delivery of

technology to those new subscribers.

For this common interface open plat form model the work the center boxes must be compelling devises that add value beyond male signals

so that consumers are willing to but them. And so to launch it's territory SCM held the past conveyance on October 10 in which the COO of

was shown to executives from various center box manufacturers like Nokia, Panasonic,

who all highlighted the use of complying the face as a major breakthrough in the European pay TV landscape. For the center box industry and for the consumer industry channel this is a huge opportunity to expand the markets for the retail channel while adding

decisions to their products and it's the first time they can independently have an operator mark it those devices.

has stated that they will no longer develop it's own center box technology but partner

make us to the benefit of the consumer.

The opportunity is also opening up for SCM in Asia where a whole lot of digital TV is being actively managed by local country governments who ensure a competitive fanatically stable environment. In China SCM's working with local operators to develop and supply conditional access models based on their European DVD common interfaced

for the Chinese, cable TV market and this is for the so called head end applications. Also in Asia and Korea

reading conditions excess

create an open end to end cable TV systems based on the US open cable point of the broadman specification which is very similar to the European conditional access

specification. The Korean government is preparing to deploy digital cable television to between five and eight million households in Korea over the next five years.

Cable TV broadcasts will be secured through to additional

procedures but will be decrypted to subscribers while conditional access modules are

or by their receptive boxes.

The option of a common interface module, open set top model by

was a major mild stone for SCM. We believe we'll see another major operator to help us adopt this model as well within the next six months.

For SCM the worldwide

digital TV

is a tremendous long-term opportunity and we're confident that the shift to a common interface platform will occur in the digital A TV market.

As a pioneer the common interface technology and the leading supply in the current conditional access module market we are uniquely positioned to leverage from this shift as it occurs.

Now moving to the PC security scenario. Our other major opportunity in the security business is enabling secure access to computer net works and we address this market with our smart card reader products for the PC platform.

Currently this market is being validated and significantly fuelled by major programs taking place in the U. S. government due to there smart cards for personal identity and authorization of personal.

SCM already supplied hundreds of thousands of readers for the Department of Defense, common access card program. We've worked with our partners

and others to provision the U. S. army and air force whose

.

And we're now working with additional partners such as

PC to supply readers for this program. The DUD initially planned to roll out the common access card program to 4.2 million full time personal and I'm now expanding the program to include contractors and part of temporary workers.

This should expand the program to additional 30 million cardholders in total. In addition to this DUD program there are new initiatives on the horizon that could further expand our opportunities in the U. S.

For example the transportation worker I. D. card program is an initiative of the U. S. transportation security administration to utilize smart card technology to secure all transportation areas.

Over the three years 15 million workers at airports and seaports and railways and bus lines will be issued identification cards that will work with the smart card reader to identify or to indicate and also have access to sensitive areas and data.

Pilot programs are operating already and SCM is actively engaged in this product in pursuit of this business. So SCM is extremely well positioned to win these business as the products take shape.

Due to our technology leadership coupled with a strong partnership with our strong partnerships and relationships so close to smart card industry with

and

and active card.

Beyond the government sector smart card programs are being deployed in less dramatic numbers but they continue to grow forward. In the enterprise area there's a goal

that net work access must be made more secure to put

and companies

also expect that the governments experience with these large deployments will have to raise awareness of smart cut program benefits within the enterprise. For SCM the expansion of IP budgets will signal a significant

to capitalize on relationships that are already in place now.

The Larger potential is of course in the on-line financial transactions for consumers. Financial institutions worldwide continue to push for smart-card use as it would provide additional security for customers and more importantly for the banks themselves.

However the adoption of a full fledged smart-card modems in this sector continues to be hampered by slow downs in IT spending in channel but once again SCM has

work to play in the leading role in supplying this industry as well, and when it takes off we expect to participate in early stage

if they occur.

Because the smart-card market is changing rapidly, we're continually evaluating our new technologies in time to ensure that we are prepared during proper time if data come critical, for example, when all the phases of deployment of countless leaders which is an area that is showing considerable honors for physical excess.

And now there are areas by mythic technology that it experienced tremendous interest specifically in the US right now and for some time, we have been partnering with leading

to indicate biometrics authorization capabilities within our leader products.

By

highly secured method of identifying and

individuals, and face some recognition of their specific elements that are unique to each person, so basically, it's the placing of pin entry.

Using combination with smart cards by a metric technology is highly affective in reducing the incidence of fraud and unauthorized access to data.

To date, we have developed leader products in conjunction with biometrics chip companies like Authentic

and

allowing us to participate in this emerging area of smart-card authorization market.

To sum up, SCM has significant opportunities across all our markets, smart-card base security, digital television, digital media and video, worked on a strong and unique position in each of markets with the technology partnerships and experience in providing solutions to our customers over the last several months, we have achieved strategic corporations with leading European and Asian

as well as other security companies.

We have also made great progress in positioning potential media and media business for profitability.

While thanking the data brand in the worldwide retail channel, we've maintained a very strong financial pace with a solid cash position that has grown during the year and worth no depth. We intend to leverage this potential strength and go forward, to build on our market technology and build strength for long time success. Now I would like to turn the call over to the operator for questions and answers.

Thank you, Ladies and Gentlemen if you would like to register a question please press the one followed by the four on your telephone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your polling request, please press the one followed by the three. If you're on a speakerphone please lift your handset before entering your request. One moment please for the first question.

Our first question comes from the line of

with SG Cowen, please proceed.

Yeah I was wondering if you could give us a sense as to what percent of your security revenues was generated from the US Government programs.

On the smart card for basic security it's about three-quarters of the overall smart card reader market.

So about three-quarters of Q3 revenues - of Q3 security revenues.

For smart card readers only.

OK.

So as I said earlier the maturity of the PC security which is the smart card reader market segment for us has come internally from the ... deployment of the US department of defense. We've got as many other projects being prepared containing in the US with transportation - the transportation industry the personal ... transportation industry and the other major new market would be coming as the financial markets.

OK and you mentioned a deployment of about 4.2 million cards with the US department of defense, I was wondering what other plans for actual readers because you could actually have I would think a lower amount of readers versus cards in the whole program.

Yeah it's about it's not quite one to one so it's somewhere between 0.5 to 0.8 if you'll have attached rate from cards to readers.

Right and then I was just wondering I guess for Andrew, can you tell me what the head count was and also capex for the quarter.

Capex was pretty minimal in terms of head count we running at around about 500 people.

OK thanks.

Our next question comes from the line of

with HSBC, please proceed.

Yeah good afternoon. I've only two short questions first of all could you please elaborate a little on the DSOs, why they're going down so drastically in Q3 and is there a possibility or do you think we will see some extraordinary ... right down in Q4 this year. That's all.

I'll take that in terms of the DSO, over the last few quarters as you've seen from our DSOs we've been heavily focused onto bringing down our DSO to extensive collection activities and that's essentially the results of that hard work behind the scenes. We've been aggressively chipping away at DSO quarter on quarter and now got it down to a level which is more acceptable from the levels we had before which were close to 90 plus days.

Let's say more dedicated to a better mention of receivables or is it ah just using settling or something like that.

No it's all due to in house activity and it's basically better focus better management.

OK.

In terms of good will the primary analysis we have done would indicate that there is no impairment charge.

OK and probably one follow up you mentioned that lets say that the separation - the separation process is in line but the overall decision when you want to say spin off or make trade sale its pending, do you expect that markets will recover in terms of valuations that you could probably thought at the first quarter of 2003 to bring the

we accompany to the market.

It's given what happening when they're towing the capital markets of this PonX, it's difficult to predict exactly when the markets will recover. What we are focused on is maximizing value out of that business.

We clearly done a lot of good work within that business to turn it from a loss making business into now break even points with profitability in Q4, a business like that clearly has value and we dive into our shareholders clearly to get value out of that business through the eventual separation.

So I wouldn't watch put a time on when that would be specifically, but it was very clear during the third quarter which was our initial intention. The capital markets were not congestive to us separating that business in the third quarter.

OK. That's all, thank you.

Ladies and Gentlemen as a reminder if you do have a question, please press the one followed by the four on your telephone.

Our next question comes from the line of Adrian Hopkinson with

, please proceed.

Good afternoon, good afternoon Gentlemen.

Just to catch up on the developments in two strategy's aspects, I think you mentioned the 528 SCM potential household inventory and market. Now is it the case that all of these households would be expected to use a conditional access module system of the SCM Variety or is there an alternative access system, which they might develop.

Perhaps you could outline what use, what you see is the actual accessible market there and I have another follow up question on the subject of readers for contactless smart card. So contactless readers have you actually deployed contactless readers or is that still in the development stage?

OK. Yes on the

cable TV market there set before the

government in conversion to

cable to we fetch all of the setter boxes and virtual TV sets.

It's orchestrated of course the industry and they would like to have modern technology, so there was several seminars there I

variety of tests happening. There's one in September, there's another one in November and of course all the security companies and operators are involved working currently with us to make those modules available.

It is very difficult for us of course to put the forecasts and predict any numbers of this fetch. For us to be honest three or four months, four or five months ago when this happened this was a bad positive support.

It's a very serious doubt the whole industry have to participate in this mobility test and we believe that this would actually benefit the

industry like the Samsons and the

because they would be the first on the market to have equipment or receiving technology to these sets and setter boxes available also for the U.S. Market which starts in 2005.

But the most specific in terms of volume it's very difficult. I - we're not in the location right now to give any indication about any volume. But presumably it is highly probable if the decryption is to occur on a module, or at least if the system is to be open between different set-top boxes, then your technology is the dominant technology at the moment.

Yes.

Can only - it is the

company's who have been invited to participate in this initial technology demonstrations and tests, are all working with us, so that's a very good position indeed.

And I mean this is the general

that since we've done such an early investment, and since securities are very sensitive

issue. You know, those company's do not want to deal with too many company's on producing modules. And currently we're the only one.

OK. Thanks. Thanks very much.

OK.

.

And on the

readers?

Yes.

readers is something we've been approached over the last four to six months from some large customers of ours to provide prototypes, look at the technology. And so we are basically driven here by our customers. We are ready to use

technology, in many cases actually even a combination of contact and

technology.

For example, physical access to buildings can be done with the same card as logging onto a network. But because of higher security levels on logging onto networks, there you would always use a contact card for security reasons. But for the physical access to a building, the same card could be

card, and actually they are today at affordable prices of let's say $5 to $8.

There are smart cards on the market, in volume of course, are available which have a combination. So a contact and a

technology in one and the same smart card.

So hence there is - there becomes a need to have of course the equivalent technology also on the reader technology. And we are just - we're ready to do this whenever our customers need it.

OK. Thank you very much. Thank you.

Gentlemen I'm showing no additional questions at this time, so I'll turn the call back to you for any closing remarks you may have.

OK. In summary we are confident in our ability to leverage from our strong financial, and of course our strong market position to take advantage of upcoming market opportunities.

Thank you for joining us today.

Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.