Identiv Inc (INVE) 2011 Q1 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Identive Group, Inc.

  • Earnings Conference Call.

  • My name is Alisa and I'll be your operator for today.

  • At this time, all participants are in listen-only mode.

  • Later we will conduct a question-and-answer session.

  • (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

  • I would now like to turn the conference over to your host for today, Ms.

  • Darby Dye, Director of Investor Relations.

  • Please proceed.

  • Darby Dye - Director of IR

  • Hello, everyone, and thank you for joining us today.

  • The purpose of today's conference call is to supplement the information provided in our press release, which was issued earlier today announcing the Company's financial results for the first quarter ended March 31st, 2011.

  • Speaking on today's call are Ayman Ashour, Chairman and CEO; and Melvin Denton-Thompson, CFO.

  • Before we begin, I would like to remind you that various remarks we make on this call including those about our projected future financial results, economic and market trends, and our competitive position constitute forward-looking statements.

  • These forward-looking statements and all other statements made on this call that are not historical facts are subject to a number of risks and uncertainties that may cause actual results to differ materially.

  • The forward-looking statements we make today speak as of today and we do not undertake any obligation to update any such statements to reflect events or circumstances occurring after today.

  • Please refer to today's press release, our annual report on Form 10-K for the year ended December 31st, 2010, and subsequent SEC filings for a description of factors that could cause forward-looking statements to differ materially from actual results.

  • During this conference call, we will also be making reference to non-GAAP results or projections including non-GAAP gross margin, overhead costs, adjusted EBITDA and non-GAAP EPS.

  • These non-GAAP measures exclude all or some of the following; acquisition, transition and integration costs; equity-based compensation expense; overhead allocations; and amortization and depreciation.

  • Identive uses these non-GAAP measures internally and believes they provide a meaningful way for investors to evaluate and compare our operating performance from period to period but cautions investors to consider these measures in addition to not as a substitute for nor superior to Identive's consolidated financial results as presented in accordance with GAAP.

  • A complete reconciliation between GAAP and non-GAAP financial measures is included in today's press release which is available in the Investor Relations section of Identive's website.

  • As a reminder, today's call is also available as a webcast with slides, which can be accessed from the Presentations, Reports and Webcast page within the Investor Relations section of our website at www.indentive-group.com.

  • If you are viewing the webcast, you may enlarge the slides of this presentation by clicking on the magnifying lens in the bottom right-hand corner of your screen.

  • And finally a reminder to our listeners or webcast viewers in the German-speaking audience, if you have a question you would like to submit for the call, please do so through our website and we will be sure that that call is addressed during the Q&A section of our call.

  • I would now like to introduce Ayman Ashour.

  • Ayman Ashour - Chairman and CEO

  • Thank you, Darby, and good morning.

  • Thank you all for joining us today.

  • Before I comment on Q1 performance, I'd like to give a short overview of Identive for those of you who are joining us today for the first time.

  • Identive's focus is in the secure ID market.

  • Our growth model is based on strong technology-driven, organic growth combined with selective acquisitions of companies or technologies that add to our scale, capabilities, certain vertical markets, or geographic reach.

  • Normally, about 50% to 55% of our revenues is coming from the Americas, the vast majority from the US, 30% to 35% from the EMEA region, and 10% to 15% from Asia Pacific.

  • Q1 was particularly strong quarter for EMEA and, in fact, we grew across virtually all parts of our business and the mix for Q1 is a bit skewed towards EMEA as a result.

  • The segment business -- in terms of segments, we stay fairly constant approximately 55% in the systems and solutions activity and 45% in the product and hardware.

  • Our mission is to be the signature company in secure ID.

  • We have not and we are not focused on the simple bar codes replacement business where the main objective is to merely read a number.

  • Our focus is on ID primarily for people or what we call credentials.

  • About 7% to 12% of our business is for object ID applications, focused on higher value items such as pharmaceuticals, libraries, and industrial applications.

  • In the credentials business or people ID business as we call it, millions of our products and systems are used every day to enable people to logon to IT systems, secure online business or personal transactions or data exchange, enter their offices or other secure areas, make payments for lunch or parking, or go to an amusement park.

  • There's a whole new global infrastructure being built around electronic ID.

  • And this is where we play for ID for citizens, employees, and consumers.

  • In Q1, employee ID or enterprise security area in general accounted for about 45% of our sales.

  • E-government and citizen ID was about 21% of our business.

  • Consumer ID, including payment transactions, loyalty, and other similar applications accounted for 23% of our business.

  • These market definitions are indicative and somewhat fluid as the technology makes it possible to use the same credential across multiple applications.

  • It is mostly in the consumer areas where we see a tremendous growth in the range of solutions for tags and stickers and ID applications in general, both for pre NFC enabled phone and NFC enabled phones.

  • We announced a while ago that we are working with Rabobank in the Netherlands on our cashless betalen solution where consumers can access their Rabo online wallets for payments through -- and this is a joint end-to-end solution where we are supplying highly secured, specialized RFID labels, software, interfaces and various apps to make it possible for the consumers to experience the convenience of secured cashless transactions.

  • Expectation for the growth in NFC-enabled phones have been very exciting and here we are working on a large number of projects in many countries on many applications, ranging from the participation in the Austin, Texas, trials of Google to many other applications such as Bluetooth pairing stickers using RFID to make Bluetooth -- using Bluetooth, making Bluetooth pairing more convenient while retaining the security of Bluetooth.

  • So, with this in context, I think for Identive as a whole, we'll now look at Q1 performance specifically.

  • Revenues grew 46% year on year, based on a combination of strong organic growth of 24% and the additional revenues from our 2010 acquisitions.

  • This growth was driven by demand across a diverse range of markets, which included the continued deployment of secure readers for the German electronic citizen ID programs and the initial shipments of products, again it's an order for 10,000 eHealth terminals for the recently re-launched electronic health program in Germany.

  • We also had strong order activity from Japan and China and increased activity with the identity credential issuance for the maritime worker ID program in Australia or MSIC.

  • The MSIC program in Australia is very similar to our TWIC program in the US.

  • Onto to the US, we continue to provide security and ID management solutions for government programs, healthcare, education.

  • And in the US in particular, we see strong momentum for the acceptance of a single credential for both physical and IT or logical access.

  • I will talk about this in more depth later, in particular with some of the new government mandates.

  • In our transponder business, we had a very strong increase in sales of RFID inlays and labels, driven by growing demand for core RFID technology to support the applications for transit ticketing, ski tickets, payments, etc.

  • Our growth in Q1 was somewhat offset by the customary seasonal impact, expounded by temporary delays and some of the previously-announced projects we are doing with the IRS and other government projects.

  • We do expect these delays to end in Q2 or early in Q3.

  • Our focus on cost reduction continued in Q1 and we have achieved very rapid synergies in integrating Smartag, which we acquired around Thanksgiving of last year in November.

  • Our overheads remain broadly in line with the level of overheads from a year ago.

  • So, only up 7% while sales grew 46%.

  • This helped drive a significant swing of $2.1 million improvement year over year in adjusted EBITDA for Q1.

  • Our overheads will continue to decline as a percentage of revenue.

  • Looking now at some highlights of the quarter, we completed the move of Smartag into a new manufacturing facility in Singapore.

  • We also made good progress on integrating Smartag with our transponder businesses.

  • Even without Smartag, our transponder business grew over 120% over Q1 of last year.

  • You would recall that in Q3 of last year, I announced we had a record production of 12 million RFID inlays.

  • We were somewhere north of 20 million to 21 million this last quarter.

  • As I mentioned, a major driver of sales in Q1 was secure ID kits for the German citizen ID program.

  • In total, this generated just shy of $3 million for Q1.

  • We were also encouraged by the receipt of the orders for the German health card program, which I mentioned earlier.

  • During Q1, we also had important wins.

  • We were selected with Palo Verde in Arizona for the development of an emergency management solution for the largest nuclear generation station -- generation facility in the US.

  • And we've also been selected by a major innovative German university to provide a secure multi application solution for a smart community, faculty, staff, students and employees.

  • The solution builds around one card or one credential that enables multiple applications including remote student preregistration, secure kiosk ID issuance, RFID physical access control, ID as a service base PKI, and IT and cashless -- IT access and cashless payment for a variety of campus services.

  • This includes canteen, transportation, parking, bookstore, print and copy services, etc.

  • We are in the early stages of this program, but it is exciting application that leverages many facets or in uses of ID management.

  • With our cashless betalen solution we developed for Rabobank in Netherlands, we experienced positive reception by participants.

  • And the pilot phase has now moved on to broader implementation.

  • Rabo has expanded the program for third-party retailers.

  • Our newly launched physical access control readers have received good reception during Q1 and we have made our first shipments ever of SCM smart phone readers into Saudi Arabia for logical access applications.

  • Onto the challenging side, where we're not performing so well.

  • We continued to perform poorly on inventory management.

  • And you will see significant rise in our inventory.

  • This was a little bit worse than expected because of delays on some of the government projects that I have mentioned.

  • This is an area that's receiving significant attention as we work to improve our management of working capital.

  • We also, on the manufacturing side of RFID inlays, we had very high levels of inefficiency and scrap.

  • We continue to work on this and get better at it.

  • We believe we are running some of the fastest processes in the world.

  • The flipside of being very fast and highly automated is that you have to be perfect or very, very close to perfect, otherwise you suffer.

  • I'll move on to another announcement, which we made today.

  • It's a very significant announcement and an important one in our business and for our company, which is the acquisition of idOnDemand.

  • IdOnDemand is a pioneer in the SaaS or software as a business model, delivering managed identity service that allows organizations to use a single globally-trusted credential for secure access to buildings, computers, mobile devices, and corporate information stored in the cloud.

  • IdOnDemand was originally spun off from the leading smart card and credential management solution provider ActivIdentity or [Activ].

  • And it was born as a concept by ActivIdentity's then CEO, Jason Hart, to solve the complex and typical implementation challenges customers face when they are deploying identity solutions.

  • IdOnDemand is based in Pleasanton, California.

  • And Jason Hart will continue to lead the company as a business unit within Identive.

  • I want to say just a couple of things about idOnDemand before I move on.

  • The whole concept of making it easier for companies, big and small, for governments, to have their identity solution managed by an external provider, we believe is critical for the full growth and the full momentum of the market to take off.

  • So, what the idOnDemand business model is based on annual management fees, card issuance, and initial set up fees and then professional services.

  • The end user really does not need to do a lot apart from just dictating what are the various privileges that the various participants or employees would have.

  • One of the big advantages that got us excited about idOnDemand is their ability to address existing installations through some unique technology for backward compatibility.

  • So, this will make it much easier for users who have many different existing installations to hop on, onto new credential system with secure ID.

  • Last, but not least, is their NFC patent-pending one-time password mobile authentication technology.

  • So, idOnDemand fits in exactly where we're at right now and it already, in partnership with several of our business units.

  • The idOnDemand strengthens our offerings across the whole secure ID value chain and support our vision of building the world's signature group in secure ID.

  • I'm very pleased with the acquisitions.

  • I'm very pleased to welcome Jason Hart and the other members of the idOnDemand team to Identive.

  • With this now, I will be handing over to Melvin Denton-Thompson who will be taking you through our Q1 financials.

  • Melvin Denton-Thompson - CFO

  • Thank you very much, Ayman.

  • On slide 11, as in the following slides, we will compare Q1 2011 financials with both the actuals for the prior year and the pro forma numbers for the prior year to show the impact of the acquisitions on the financials.

  • The revenues for Q1 2011 were $22.4 million, so 46% growth over the 2010 actuals with growth in both our operating segments, ID Management Solutions and ID Products.

  • Organic growth for the period was 24%.

  • Comparing Q1 2011 with the Q1 2010 pro formas, the growth is 19%.

  • As already mentioned by Ayman, revenues were held back in Q1 by some temporary delays in US government projects.

  • These are now expected in Q2 and Q3.

  • Revenues did decrease by 19% from Q4 2010 as a result of the customary seasonal patterns, projects, and these temporary project delays.

  • Gross profit margin at 46%, reduced slightly from the pro forma gross profit margin of 47% due to the product mix in the quarter.

  • Gross profit margin was less than the 49% in the actuals for 2010, again due to the product mix.

  • Total overhead was $0.9 million, less than the pro forma numbers.

  • The resulting EBITDA was a loss of $0.3 million, which is an improvement of $2.1 million over Q1 2010 actuals and an improvement of $2.5 million over the Q1 2010 pro formas.

  • Moving onto the slide 12, the chart on the left of this slide shows the revenue and gross profit development.

  • Gross profit increased from $7.6 million in Q1 2010 to $10.4 million in 2011.

  • The revenue split by geographic region was 43% in the Americas; 43% in Europe, Middle East, and Africa; and 14% in Asia Pacific.

  • Growth in the Asia Pacific region was helped by the acquisition of Smartag.

  • The chart on the right shows the development of the overheads compared to the revenues.

  • While revenues grew 46% from Q1 2010, overheads grew only 7%, reflecting a continued focus on managing overheads.

  • We will work to continue to reduce overheads as a percentage of revenues.

  • On slide 13, we show the reconciling items between the adjusted EBITDA and the GAAP loss from continuing operations before taxes.

  • Depreciation and amortization includes $0.8 million of amortization of intangibles and $0.3 million of fixed asset depreciation, totaling $1.1 million.

  • Fixed asset depreciation has increased due to the acquisition of Smartag and its factory in Singapore.

  • Acquisition and post-acquisition reorganization costs were much reduced from Q1 2010.

  • The resulting loss from continued operations before income taxes was reduced from $6 million in Q1 2010 to $1.9 million in Q1 2011.

  • The loss from continuing operations before income taxes in the Q1 2010 pro forma financials was $7 million.

  • Moving onto the balance sheet.

  • Slide shows the balance sheet comparing 31st of March 2011 with a balance sheet as at 31st of December 2010.

  • Cash at the end of the quarter was $9.9 million, a reduction of $0.9 million from 31st of December 2010.

  • I'd like to discuss some of the cash movements in a little bit more detail.

  • The net cash used in operating activities from continuing operations was $0.2 million.

  • However, this did include $255,000 of quarterly payments relating to the amount outstanding, to related parties.

  • And as we have just seen, it included $375,000 of costs associated with acquisition and post-acquisition reorganization.

  • There was capital expenditure of $365,000 in the period and $423,000 of financing cash outflow, including the quarterly payment relating to the debt note associated with the acquisition of Smartag.

  • Finally, there was a small positive effect from foreign exchange in the cash flow statement.

  • As previously mentioned by Ayman, inventory increased in the period from $10.6 million to $11.8 million with some buildup of inventory for the delayed government projects.

  • Stockholders' equity -- and in fact it remains largely steady at $125 million and I think that's the summary on the balance sheet.

  • So with that, I shall hand back to Ayman, who will talk about the outlook for the remainder of 2011.

  • Ayman Ashour - Chairman and CEO

  • Thanks very much, Melvin.

  • Just a big thing that I'd like to start out with is the Office of Management and Budget of the US government or the Office of the President of the US issued something called OMB M-11-11.

  • In 11-11 accelerates the implementation of PIV cards or Personal Identity Verification cards for physical and logical access for US government employees and contractors.

  • And what OM 11-11 requires all government agencies to have effective plans for the use of the newly-issued cards for both physical and IT access.

  • So far, the government has issued somewhere in the order of 4.3 million cards.

  • So, cards that are suitable for physical and logical access out of a total of about 5.5 million or thereabout.

  • And the relatively small percentage have actually been deployed for effective use of both physical and access -- physical and logical access.

  • So now, the government is requiring all agencies to move and implement immediately these programs with various deadlines.

  • And penalties, budget penalties at the various agencies do not conform to these requirements.

  • So we expect that this will accelerate the growth of convergence of physical and logical systems in the US government and we believe that that's an important development.

  • On the German citizen ID business, we continued to see -- well we still have a fair amount of that business in our backlog.

  • But we're also seeing increased activity on the German health terminals business and in general, lots of other European citizen ID programs.

  • We believe the idOnDemand business will strengthen our position in both government and NFC.

  • We have also just today announced that we have received orders or an order for 7 million inlays for a mass transit application in a major US city, so it's 7 million RFID inlays.

  • Then, as I mentioned earlier, there is significant activity in payment and NFC-related projects.

  • And we're seeing a shift from a lot of the pre-NFC activity to NFC activity.

  • Momentum is strong.

  • We are providing solutions across the value chain from, in some cases, only labels to labels and software to some cases, software and no labels and in some cases apps and in some cases full program management like we are doing with cashless betalen.

  • So significant activity is going on in this area.

  • I'd like to move on to reiterate our guidance for 2011, which is a range of $100 million to $110 million in revenues and $5 million to $7.5 million in adjusted EBITDA.

  • One thing we have always talked about starting from our first webcast as Identive last year is the overheads.

  • Our overheads is very high as a percentage of sales.

  • We enjoy reasonably good margins.

  • And these margins are generally improving as we expand our software business and our solutions business.

  • But there is, obviously, always a degree of competition and competitive pressures.

  • So in the long term, we believe that the margins will be somewhere in the 48% to 54%.

  • Where we see a big change and that long term has been historically where we've been.

  • And I'm talking about adjusted or non-GAAP gross margins.

  • So we exclude amortizations and any allocations of [general] overheads into the margins.

  • Our sales and marketing costs right now remain high and our overhead in general remain high.

  • But our projections that as we grow is that we will see sales and marketing go to 14% to 16% of sales.

  • We expect that we will be increasing our R&D investment and we already started this year.

  • So we expect that that will continue in the 5% to 6%.

  • But where we see a big improvement will be in the G&A where we see that going down to 12% and 14% with scale.

  • You can see that this is very much we are still in the early stages of moving in that direction.

  • But that is -- that's the destination.

  • That's where we're headed.

  • If you think that year ago when we were looking at the pro forma numbers for 2009, we were looking at overheads that I think were close to 60% of revenues.

  • So eventually where we're headed is an EBITDA business or a business with an EBITDA potential of 18% to 23%.

  • So that's what we're managing towards as we grow the Company.

  • With that, I'll thank you very much and I'll hand the presentation -- or the mike back to Darby Dye for the Q&A.

  • Thank you.

  • Operator

  • (Operator Instructions) Ilya Grozovsky with Morgan Joseph.

  • Ilya Grozovsky - Analyst

  • Hi, it's Ilya Grozovsky from Morgan Joseph.

  • Ayman, I wanted to understand if you can quantify for us, obviously you are integrating several companies that you've purchased.

  • What -- but you're not taking the full companies.

  • There are parts of it that I understand that you are not integrating.

  • You are divesting or shutting down or whatever.

  • Can you quantify the dollar amount associated with those revenues so that we can get a little bit better apples-to-apples comparison with historical results?

  • Thank you.

  • Ayman Ashour - Chairman and CEO

  • Thanks, Ilya.

  • I think we've -- it's obvious that when you're growing your business at the level we have been growing, minimizing overhead, it means that you're doing something different.

  • So, we have been exiting a number of activities that we don't call it discontinued business or it is not an official discontinuation but it's a change of emphasis.

  • So there was a lot of card resale or card business that we were doing that was not particularly attractive.

  • There was a lot of activity in Brazil in particular.

  • In the previous webcast, you had heard me talking about problems with the Brazil business.

  • So it has been really moving away from activity that not the best bang for the buck.

  • I couldn't really quantify between Q1 of this year and Q1 of last year because a lot of the changes we started implementing during Q1.

  • So I would say it was for the -- Q on Q it would have been relatively limited.

  • But if I was, for example, to look at 2010 in total and compare it to 2009 in total, I would say somewhere in the order of $3 million or thereabout of 2009 business we've jettisoned.

  • If you look at the Smartag acquisition, there is already business that we have decided not to pursue.

  • And there are certain valued customer that we've decided to walk away from because we're wanting to focus on the more attractive areas.

  • And our main focus is always on where you can have a differentiated product for a real secure ID application.

  • Thank you.

  • Ilya Grozovsky - Analyst

  • Okay, I have one more question on difference.

  • You obviously -- there was a lot of excitement surrounding the announcement that you guys are working with Google.

  • Can you just elaborate a little bit?

  • Obviously, it's Austin, Texas, to begin with, kind of how you see that relationship developing?

  • Whether there's more cities to come or just give us a little bit of color on that?

  • Thank you.

  • Ayman Ashour - Chairman and CEO

  • I think the short answer is no.

  • I cannot elaborate because I think the last time we used the word Google, my phone didn't stop ringing for the whole day.

  • So all I can tell you is that in this whole area of NFC, both pre-NFC and post-NFC or with NFC, we have a very large number of projects in many different countries across really Asia Pacific, Europe and the US.

  • There are probably somewhere north of 40 different projects that we are working on that include NFC in one way or another.

  • And where the Google application is a very exciting one because smart [postering] is just a fabulous -- it's fabulously clever concept where you would be able for the retailer to be able to have direct communication with the consumer with smart couponing, with all kinds of different things to promote themselves.

  • So, it's a wonderful opportunity but it will take time to -- for concepts to develop and for mass rollout to develop.

  • But that's really I think all I can say about this one.

  • Ilya Grozovsky - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Michael Kim with Imperial Capital.

  • Michael Kim - Analyst

  • Hi, Ayman, Melvin.

  • First on idOnDemand, can you talk a little about the revenue run rate for that business and your expectations for accretion either this year or into next year?

  • Thanks.

  • Ayman Ashour - Chairman and CEO

  • Thanks, Mike.

  • I think you will be -- you will shortly be seeing -- we will be filing the entire share purchase agreement.

  • You will be seeing shortly the earn out targets for this year, next year, and really for this year and three years from now.

  • That range of say an EBITDA will give you the full and accurate view of where we and Jason think the business will be.

  • Obviously, if we miss the sort of bottom end of the current year, it will not be accretive.

  • It will be dilutive.

  • But that's not our expectation.

  • So our expectation and really based on extensive work we've done with Jason and his team is that the deal will be accretive in a fairly short order.

  • And I think when you see the numbers in the SPA, you will be able to reach that conclusion.

  • I think the activity that we see with the business would lead us to believe that this is not sort of pie-in-the-sky situation.

  • We are in the same market.

  • So, we can see the demand.

  • Michael Kim - Analyst

  • Following up, is there any legacy agreements with ActivIdentity, just left over?

  • Obviously they've been acquired, but is there any -- still any tie with the former ActivIdentity?

  • Ayman Ashour - Chairman and CEO

  • Well the former ActivIdentity continues to be a shareholder.

  • We already have a good relationship and we are ActivIdentity as a customer of SCM.

  • We are a customer of HID.

  • So there is a little bit of a competitive overlap in the logical access area.

  • But there is generally good, very good business relationship and cooperation between the two companies.

  • Michael Kim - Analyst

  • Okay, then turning to the federal government, given the budget delays, are you assuming that resolves fairly quickly or in the near term?

  • Then how do you see that impacting on the OMB M-11-11 with the federal agencies in achieving compliance this year?

  • Ayman Ashour - Chairman and CEO

  • I think the delays we've had we were really two different kinds of delays, Michael.

  • There was some that were really sort of site specific where the first -- the IRS or that we've won as you know includes a large number of sites.

  • So there was some specific delays in the first round of sites.

  • And that affected our ability to employ some of the work that we're contracting directly with the government on as well as the various work that comes from the prime contractors.

  • So, we expect that and our really best visibility of that is it is going to start coming in, in Q2 and into Q3.

  • That's roughly, I can quantify to be about $2 million or thereabout.

  • The M-11-11 sort of there's a bit of a freeze because some people were not sure is what they are about to do compliant or not.

  • So as typical of any new rule, there is always immediately sort of rather than speeding things up, it actually slows it down a little bit until people figure out what it actually means and what is compliant, what's not compliant.

  • In terms of the big political issues, I think there is fairly broad agreement in various parts of the government and Congress about security and secure ID and all of that.

  • So I think a lot of these programs were programs that were originally launched during the Bush administration and they have been sort of accepted fully and embraced by the Obama administration.

  • So, they are not sort of -- there's not big disagreement or there's no disagreement at all that we know of on a political level.

  • Michael Kim - Analyst

  • And then on cashless payment, as Rabobank starts to broaden to third-party retailers, what are your expectations in terms of the revenue upside or the contribution?

  • And then just secondarily, are you starting to receive more inquiry from additional institutions or your outreach to additional institutions with a similar type program?

  • Ayman Ashour - Chairman and CEO

  • Let me answer the second part of the question first and that's an easy one is yes.

  • The first part of the question is I can tell you that right now it is an incredibly busy time for our Dutch colleagues because it is -- we are having fairly good success, fairly good interest.

  • We are operating as very close partners to Rabo.

  • So we're very involved every step of the way.

  • I can't really -- I'm not really in a position to give you any specific guidance on it right now.

  • But it is -- it is an exciting part of our business.

  • Much, like the consumer, we started breaking out, the consumer, the citizen ID and employee ID to give sort of the analyst community a little bit better visibility of what we're doing.

  • This is the area where there is just tremendous excitement, but also limited ability to project what is happening.

  • All I can tell you right now is that our Dutch colleagues would love our factories to be able to deliver faster.

  • Michael Kim - Analyst

  • And then just on the additional institutions, are you nearly as far along as where you were with Rabobank I guess this time last year or how far along are you with expanding the outreach?

  • Ayman Ashour - Chairman and CEO

  • We are working closely with Rabobank in other areas.

  • We are working with other institutions.

  • We have done some cashless payment projects in the US and elsewhere.

  • It is really our ability to disclose things.

  • It takes two to tango, Michael, so we need to have our partners or our customers happy to disclose the information.

  • So I want to be as transparent as possible with you, but I don't want to be sort of disclosing something.

  • The only thing we'll hold back on is really either tentative competitive information or something that we have not been cleared by our partners or customers to disclose.

  • Michael Kim - Analyst

  • Okay and then in Germany with the EID program, do you have any visibility on follow-on contracts and is it your expectation to finish your initial contract or complete that contract in the current year?

  • Ayman Ashour - Chairman and CEO

  • Again, the second part of the question is yes.

  • That's an easy one.

  • The first one is yes there is some -- is also yes.

  • There's some visibility because remember, I mean Germany the country of some 80 million people.

  • The ID -- the new electronic ID is being rolled out over a long period of time.

  • I think our total supply so far is about the whole contract that we're doing is about 700,000 readers.

  • These are readers for logical ID primarily.

  • They are also being used for other applications.

  • So, not all the German citizens are going to be wanting to activate the electronic features of the card.

  • But all the cards are -- have the electronic capabilities.

  • So it will really depend and over time we believe that the requirement will be expanded and we expect to see more and more growth in that area.

  • But it will all depend on the user experience and the various other applications and possibilities that users can do.

  • I mean you know what it's like we're all using the net and we want to try to do more securely.

  • And if you've got something that is recognized that makes your life easier rather than the different passwords and if you look at internet banking, particularly in the US right now and how many different disclaimers and more and more passwords.

  • If you look at the country like the UK, you have two forms of passwords.

  • So, if you have something that solves that, people will gravitate towards it.

  • So, I would say we are long term in that area.

  • We are optimistic because we have 700,000 out of a population of 80 million, allowing for even competitive issues and allowing for a large number of people who may not activate it.

  • We've got a ways to go.

  • Michael Kim - Analyst

  • Okay and then lastly just on RFID inlays.

  • Is your transponder capacity approaching 100 million?

  • Or maybe can you talk about your capacity levels?

  • And then secondarily, do you expect to resolve a lot of the scrap and inefficiencies over the course of this year or the next couple of quarters or exiting this year?

  • And lastly on -- can you discuss the silicon allocation at this point?

  • Ayman Ashour - Chairman and CEO

  • The capacity is very dependent on turnover because if every -- changeovers.

  • So if you're running a very large volume on the same exact spec with minimal changes, we have very good capacity.

  • So, our capacity, if we were running the one design, we can probably exceed the 100 million.

  • But if you are -- if you have multiple changeovers that eat away from your capacity and also the -- so I think it is -- it's really hard to be very specific on that.

  • But suffice to say, I mean I think we're looking at somewhere -- if you take this 20 million to 22 million or thereabout that we've done in Q1, you can see, we were -- there's probably a little bit more capacity than that but it's dependent.

  • The second part of your question in terms of improving efficiency and reducing scrap, I believe we are running at incredible speed of machinery right now.

  • The problem with that is you're always coming across the need to have the significant training for operators, significant care of making sure that your various raw materials, glues, all of these things are absolutely perfect because if you make -- if you have a screw up, you just blink and you've got fair amount of scrap.

  • So we're getting better at it.

  • But we've been saying we're getting better at it since August.

  • If I look at our scrap rate in Q1, it is better than the scrap rate in Q3 but probably -- it still needs work.

  • But we're really doing some -- I don't overuse the word pioneering but almost pioneering work in how fast we're doing things.

  • So we will get it right and I'd rather that we continue to operate in a super fast, super automated way and work at getting better and eventually get it right.

  • In terms of allocation, there are no significant allocation issues right now, which is a refreshing change from the prior quarters.

  • But I'm sure some of my colleagues will jump on me at some point and say well there is [this thing missing].

  • But no big deals right now on that front, Mike.

  • Michael Kim - Analyst

  • And assuming your line, the production inefficiencies and the scrap issues, what's the sensitivity to the gross margins for either for the overall business or for that business?

  • Ayman Ashour - Chairman and CEO

  • It is -- I mean that business is growing.

  • So, it is -- it affects it.

  • So, it is an opportunity for improvement but I cannot really quantify.

  • I would say that scrap just to give you a feel that the scrap Q3 was probably a couple of hundred thousand bucks and this quarter was probably about a hundred or a little bit over a hundred thousand dollars.

  • But and inefficiency is a bit harder to quantify.

  • But it is -- and I'm sorry I actually need to probably double these numbers business this was just Germany.

  • So it's not major numbers yet.

  • Michael Kim - Analyst

  • Okay, great.

  • Thank you very much.

  • Ayman Ashour - Chairman and CEO

  • Thank you.

  • Operator

  • (Operator Instructions) Henning Cosman with WestLB.

  • Henning Cosman - Analyst

  • Yes, Hi, Jim and Ayman.

  • Apologies in the first place.

  • I missed the very beginning of the call, so I'm sorry if I ask something which has already been answered.

  • Anyway, the first one would be I think slightly follow-up on idOnDemand.

  • If you could just clarify what you mean with being accretive?

  • Is that on an absolute EPS level or would that be accretive as far as your current EBITDA is concerned?

  • And how likely is it actually that the full earn out happened as far as the consideration of 2 million plus 20% shares would be concerned.

  • How close are you to those earnings ratio scenarios that the total consideration would go to that amount?

  • That will be my first question.

  • Ayman Ashour - Chairman and CEO

  • The first part is we're talking accretive, we're really talking a bit about accretive because we're still to go through -- I mean we've only closed the deal yesterday or the day before yesterday.

  • So we got a long way to go in terms of closing accounts and into establishing in the accounting process what is intangibles and what is goodwill and what sort of intangibles between the different IP and other issues that are in place and how these are amortized.

  • So it will be very hard to -- for us to even think about answering an EPS accretive question.

  • The second part of the question, how do we expect the numbers to be achieved?

  • I think we'll be looking at -- we're looking at very significant growth in sales and EBITDA business from the Company for the full earn out to be achieved.

  • I don't want to be projecting that this will be achieved, but I can tell you we have a high degree of confidence in the team.

  • We have a high degree of confidence in the business model.

  • I think it will be -- I would not be in the least bit surprised if we exceed the numbers that are there, but I don't want to be giving you a projection on that right now.

  • Henning Cosman - Analyst

  • Okay and as far as the kind of likely purchase price is concerned and also the kind of run rate there on in terms of EBITDA if it would be towards 10%, 15% allocation of your shares as a consideration?

  • Would we also expect them to generate of the order of 10%, 15% of your adjusted EBITDA or just a ballpark maybe to get an impression?

  • Ayman Ashour - Chairman and CEO

  • I can give you more than ballpark.

  • I can give you exact.

  • I think let me get somebody to pull that number while I take the next question and I'll come back to you on that.

  • I can give you the range exactly because I think we're -- so I'll.

  • If you can hold it one Henning and I'll come back to you with exact numbers.

  • Henning Cosman - Analyst

  • Sure.

  • So maybe on to the second one then.

  • Also kind of a clarification on the government delays.

  • So I'll get you right if I assume that from the US government delays that will be an additional or additional revenues of the order of $2 million in Q2 and Q3 on top of what would we have otherwise expected or to what should I understand from your statement regarding that freeze?

  • Is there something continuing to be pending further and would be lower than your initial expectation with respect to your US government business in 2011?

  • Ayman Ashour - Chairman and CEO

  • No, our expectation is that, as I mentioned, that that 2 million delayed out of Q1 that we'll start seeing that in Q2 or early Q3.

  • That is our best expectation right now.

  • So it is -- and this is business that we sort of planned on and we expect to see.

  • And Henning, I've got the numbers right now and these will be filed, by the way, so you'll be able to see them.

  • Below on a business -- if the business generates less than zero adjusted EBITDA this year, there is no additional earn out.

  • So they need to be at EBITDA neutral.

  • At the level of $500,000 in EBITDA, $2.3 million in sales, the earn out level will be $3 million.

  • And to go to 2014, because all the tables will be filed so you have access to them, but to go to 2014, so you have a scale of what we're looking at, the business will need to generate $18.4 million in sales, $9.4 million in EBITDA, to receive $5 million in earn out.

  • And this will be $5 million in the share price of 2015 actually because it's payable at the end of 2014.

  • So that gives you the range.

  • So, we're looking -- we're looking at the high margin SaaS business with some very good potential.

  • And the numbers are conservative.

  • So, I can tell you that I think Jason is probably spending the money now.

  • Henning Cosman - Analyst

  • So, that is kind of a staggered earn out, yes?

  • So per year and paid in shares at the time of -- in your share price at the time or with the share price at the year end here and can go up to a total consideration of 20% in your shares altogether?

  • Ayman Ashour - Chairman and CEO

  • The 20% is a cap because in US for the -- the reason the agreement -- we don't think that the -- that there is a likelihood of the 20% being reached.

  • But in the US with NASDAQ, if you issue more than 20% of your shares, you need shareholder approval.

  • But so to eliminate the necessity of a shareholder approval, when you have a deal of this nature, it is not unusual to have the statement saying that it will not go above 20% even though that we didn't really need it, but it is in case of the theoretical possibility is there.

  • So you have that statement to do away with that theoretical possibility.

  • Henning Cosman - Analyst

  • Okay, okay, fine.

  • And then on that second question, could you just elaborate on that potential freeze of budget, which you mentioned in the US government business?

  • And maybe also kind of remind me what share of your business currently the US government business accounts for on group level?

  • Ayman Ashour - Chairman and CEO

  • Well the -- I don't believe we are affected by a freeze in the US government business.

  • We're doing US government business every day.

  • So, there is no freeze.

  • What you have is you have some new rules that accelerate the requirements.

  • These new rules cause sort of people -- the freeze is not a real freeze.

  • It causes people to just sit back and say, am I doing the right thing?

  • Am I complying with the new rules?

  • So it's just a use of the English language is to think that people are frozen, just waiting to make the decision.

  • It's not an official freeze.

  • I'm sorry, have I answered the question, Henning, or I lost my train of thought for a minute?

  • Henning Cosman - Analyst

  • Well I just thought in your statement you mentioned something regarding a potential freeze, which could also affect your business.

  • And I wasn't really sure whether I got the point right?

  • So was that concerning some particular project you were expecting to win or was there kind of framework contract where you expected call offs and those have been delayed?

  • In addition to those 2 million, you're expecting to occur in Q2 and Q3, now what exactly was that statement for freeze about again?

  • Sorry.

  • Ayman Ashour - Chairman and CEO

  • Sorry, I was saying that there has been a new mandate issued by the OMB, Office of Management and Budget, that's a part of the executive branch of the US government.

  • That mandate actually accelerates the implementation of converged logical and physical access control.

  • And because of the mandate accelerating the implementation, so we want that.

  • We love that.

  • We're happy with it.

  • But what it does, because there is a new rule so people immediately stop to think, am I complying with these new rules or not?

  • So you end up with a little bit, a lot of the daily business that we'll be getting day in and day out is people just rechecking again, is this going to be compliant or not?

  • So, in terms of the $2 million this is -- would be part of the IRS contract where we have -- there are really multiple contracts with the IRS.

  • We've reported in two previous press releases two of these contracts.

  • And then there are the contracts with the various prime contractors, who will be calling off for the various facilities of the IRS.

  • So, we've had delay on both of these, but it is -- they are related and I don't believe there are any freeze related at all to the best of our knowledge.

  • Henning Cosman - Analyst

  • Okay, that's very clear.

  • And the total order in percentage terms of the US government business, of your group sales?

  • Ayman Ashour - Chairman and CEO

  • I think directly and indirectly we think it hovers between 15% and 20% depending on the strength of everything else.

  • So US government is between -- because sometimes when you are selling to contractors, you're not sure where it is going.

  • So between 15% and 20% would be my best estimate.

  • Henning Cosman - Analyst

  • Okay, great.

  • And third, final question is on cash flow.

  • As you know, I sometimes slightly struggle with those adjustments, so maybe we could talk on operating cash flow level.

  • So if I could ask what kind of number you expect for operating cash flow in current full year and maybe also into 2012?

  • And that would compare to your number of minus 9.3 million last year.

  • And maybe and that's what I possibly missed in the beginning of the call where those changes would mostly come from as far as for example like-for-like growth is concerned with no major additional costs and so on.

  • So I mean there's obviously lots of growth in all your businesses, but if you could kind of point out to me some of those changes which will lead to a swing in operating cash and as to when you actually expect to be positive there?

  • And also kind of to what order that can get within one or two years time?

  • Ayman Ashour - Chairman and CEO

  • Henning, I think what you'll find is there is statement that will take you from a bridging statement in the presentation that takes you from the EBITDA or adjusted EBITDA all the way down to the EPS.

  • And you will find that most -- everything -- most things below the adjusted EBITDA are non-cash.

  • Obviously, the amortization and depreciation equity base.

  • But then you have the acquisition and post-acquisition costs.

  • So, it really depends on acquisitions and post acquisition costs.

  • If we were to say we are going to stop all acquisitions and post acquisitions, we will expect to be cash positive.

  • And what Melvin went through was really going through the Q and showing you that even in the Q, ignoring everything else, we were actually paying down debt.

  • So, it really depends.

  • And we believe we have demonstrated that we can competently do acquisitions.

  • We can competently integrate acquisitions.

  • We have not been sort of overpaying even on transaction costs.

  • So, if you compare -- if you look at our acquisition costs and our post-acquisition costs, you will see some very realistic numbers.

  • So, we believe we are in a target-rich environment and that we can continue to do acquisitions and grow both organically and through acquisitions.

  • I think I'll let Melvin give you a little bit more sort of specifics.

  • I gave you the conceptual bit, but Melvin can -- probably would you like to add to that, Melvin?

  • Melvin Denton-Thompson - CFO

  • Yes, I think you've covered most of it, Ayman.

  • Obviously, from the EBITDA and then mentioned the other cash items in the post-acquisition and acquisition costs, which vary obviously depending on our acquisition activity.

  • We also have really in Q1, we had $365,000 of CapEx.

  • We can't rule out any significant CapEx.

  • Depends on how -- if the business develops more.

  • The other thing is we do have a quarterly payment of the amounts outstanding to related parties, which is a cash item of around $250,000 a quarter.

  • And we do or we are at the moment paying down the debt note relating to the Smartag acquisition.

  • And again that's in the region of $250,000 roughly.

  • Henning Cosman - Analyst

  • Okay, so maybe if I can put it in more precise terms, could you give me the consistent operating cash number which corresponds to your EBITDA guidance then or your adjusted EBITDA guidance?

  • Ayman Ashour - Chairman and CEO

  • Yes, I don't think we want to get into that sort of a guidance, Henning, because I think what we are saying and that we will be looking and continuing to look for opportunities for good EBITDA accretive acquisitions and we'll be pursuing them.

  • So, it is -- I mean for companies our size and in our business model, it is not very usual to be giving guidance.

  • We've been giving guidance and we've been trying to give people as much transparency and as much of a feel for what we're doing.

  • But I think to get into academic sort of guesses, I think would be -- would not make a great deal of sense.

  • Henning Cosman - Analyst

  • Okay, that's fine.

  • Thank you very much.

  • Ayman Ashour - Chairman and CEO

  • Thank you.

  • Operator

  • Veysel Taze with Close Brothers.

  • There are no additional audio questions at this time.

  • Darby Dye - Director of IR

  • All right.

  • Thank you very much, operator, and thank you all for joining our call today.

  • We look forward to updating you about our second quarter results in a few months.

  • Have a good evening or day.

  • Thank you, bye-bye.

  • Operator

  • Ladies and gentlemen, that concludes today's conference.

  • Thank you for your participation.

  • You may now disconnect.

  • Have a great day.