Identiv Inc (INVE) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Second Quarter 2011 Identive Group Inc.

Earnings Conference Call.

My name is Lisa and I will 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 ma'am.

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 issued earlier today announcing the Company's financial results for the second quarter ending June 30, 2001 (sic -- see press release).

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

Before we begin, I would like to remain 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 fact, 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 31, 2010 and our subsequent (technical difficulty) 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 and adjusted EBITDA.

These non-GAAP measures exclude many factors including acquisition, transition 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 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 or 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 Webcasts page within the Investor Relations section of our website at www.Identive-Group.com.

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

I would now like to introduce Ayman Ashour.

Thank you Darby.

Good morning.

Thank you all for joining us today.

Q2 was another strong revenue quarter for Identive with strong demand across nearly all of our business activity.

We had some challenges with continued delays in US government (technical difficulty) (inaudible) but overall the sales picture was solid.

And we continued to win new business in key growth markets.

In our Transponder division, which includes RFID inlays, tags and labels, we've seen growth over 126% year on year.

Half of that growth was organic and half came from our acquisition of Smartag in November of last year.

In Q2 we delivered approximately 7 million RFID inlays for the L.A.

metro system.

That is -- and transit ticketing in general is an important market for Identive, as it is a reoccurring purchase model.

And in addition there are several major new RFID transit projects underway worldwide.

Separate from the transit major volume drivers of our Transponder business includes ski ticketing, ticketing in general, farms applications and libraries.

We're in the process of adding additional production capacity on the order of 100% of our capacity, which we expect to start to bring online before the end of the year.

RFID inlays are used in every single contactless application, so demand will only continue to grow as RFID becomes more prevalent especially with consumer applications, offering large opportunities and clearly a focus area for us.

Transponder (technical difficulty) is often a leading indicator of the overall ID market trends.

And our continuing success here is one reason for our optimism about the significant market opportunities for Identive in secure ID in general and our ability to address them.

We are also expanding our capability to offer complete tags.

And this is one of the reasons, while our total production in Q2 was about the same as Q1 of 21 million inlays, we've actually seen our ASP go up.

The ASP for transponders vary a lot depending on the kind of IC that is used in terms of memory, security, computational capabilities and the like, and also on the finishing and the printing of tags.

So for the pricing of typical NFC tags please look at IdentiveNFC.com.

We also delivered additional secure IT kits for the German National ID Program in Q2 as part of our ongoing contract.

And we fulfilled also shipments of eHealth terminals for the electronic health card program in Germany.

Our ID Systems Integration business was strong in Q2 with a lot of the growth coming out of Australia and Europe.

One of our key projects in Australia is the maritime security ID cards.

We have doubled our ID issuance activities this last Q2 as the MSC organization, the Maritime Security Organization, goes through periodic review to update the transport workers' credentials.

Education was an important sector for us in Q2.

During the quarter we began implementing a single-credential, multifunction ID management platform for the University of Arizona with some 51,000 students, faculty and staff.

The new ID cards will allow the holders to enter dorms, different campus buildings, securely log onto IT networks, check out materials from library, validate meal plan participation and on-campus services such as copying, parking, printing as well as serving of course as an ID credential.

We implemented similar projects for a large university in California and we have completed a pilot of a similar program at the Technical University of Munich in Germany.

As a Company we have significant experience in the integration and management of systems and applications onto a single credential, and the education sector continues to be a very active and attractive for us in this area.

In our Enterprise Security business, sales in Q2 were impacted by continued project delays with US government customers particularly the IRS, the FBI and the US Marshal Service.

The delays are of temporary nature and we continue to expect to see implementation activities resume in the second half of the year.

Moving on now to the highlights of Q2, in May we completed the acquisition of idOnDemand, which is a pioneer in the emerging market of managed identity software as a service or SaaS.

We see idOnDemand as being a strategic addition to our business and I will talk more about the opportunities with idOnDemand after Melvin covers the financials.

In April we were selected by Google to supply them with NFC tags for the rollout of Google Places campaign in Austin, Texas.

The tags are used by local businesses to create smart posters that promote products and services directly by downloading information onto a consumer's NFC-enabled smartphone.

Our role has since expanded and we are now offering direct fulfillment of Google Places tags.

The original NFC type 4 tag, as well as new additional NFC types, are now offered for the Google Places program.

We formed a new group within Identive dedicated to mobility and NFC solutions.

And in June we launched our online NFC marketplace or IdentiveNFC.com.

This site is now live and receiving orders for NFC tags, readers and development kits.

And I will again talk a bit more about NFC later on the call.

In June we collaborated with Rabobank in Holland on the first consumer launch of the cashless payment solution called Cashless Betalen.

This is an NFC mobile payment solution that allows the users to make purchases from Rabobank accounts using an NFC-enabled phone or an NFC tag affixed to a smartphone, basically turning the phone into a digital wallet.

We are providing the smart tags, each of which is encoded with a unique digital wallet account number.

And we're also providing secure interface [for] the digital wallet and are also providing ongoing management of the digital wallet accounts, beginning with the activation of the accounts when the user logs on to a secure web portal.

And the same portal is used to deposit or to transfer funds, monitor transactions and check account balances.

Cashless Betalen was originally launched for Rabobank employees.

And this launch to consumers at this scale was a very important milestone and achievement for us.

Not everything was hunky dory in Q2, and I mentioned ongoing project delays within government agencies which added to lower sales and margins.

The SaaS and the idOnDemand present a large opportunity for us going forward.

And I will discuss this more, as I mentioned earlier, but it has also been painful for us on the EBITDA online in Q2, costing us approximately $350,000.

We have high levels of inefficiency on scrap in our Transponder business and we discontinued in Q2.

And while we're making progress, we still have work to do to improve in our performance.

Now I would like to turn over the call to Melvin Denton-Thompson, our CFO, for a review of our Q2 financial performance.

And then I will come back to you with the 2011 outlook.

Thank you very much.

I would like to start off by comparing the Q2 financials with the actuals and pro forma numbers for the same period in the prior year and comparing to Q1 of 2011.

The revenues for Q2 2011 were $25.6 million, so 21% growth (technical difficulty) 2010 Q2 actuals and 14% growth over Q1 2011, with growth again coming from both our operating segments -- ID Management and Solutions and ID Products.

Organic growth for the period was 14% year-on-year.

Growth over the Q2 2010 performance was 10%.

Gross profit margin at 44% did reduce from the pro forma gross profit margin of 47%, and prior-year gross profit margin of 51% as a result of the relative weakness of the Enterprise Security business due to the US government project delays, and also as a result of product mix in the quarter with some lower margin one-off projects.

On the overheads, total overheads for the quarter were $11.6 million including idOnDemand, which was added during the quarter.

The increase in overhead spend from Q1 to Q2, as well as the addition of idOnDemand, was driven by increasing investment in R&D and increased investment in selling and marketing to drive the growth.

This is partially offset by a reduction in G&A between Q1 and Q2.

Resulting EBITDA -- adjusted EBITDA was a loss of $0.3 million.

As we have previously discussed, containing overheads as we grow the business is a priority.

We continue to grow the sales at a higher rate than the increase in overheads, thus reducing the overheads as a percentage of sales.

Comparing Q2 with the prior quarter, sales grew by 14%.

But overheads only grew by 8%, as I mentioned, as the result of the investment in R&D and selling and marketing.

Compared to the period in the prior year, sales grew by 21% and overheads increased 15%.

We will continue to focus on reducing overheads percentage of sales while we continue to invest for growth.

I would like to move on to look at the reconciling items between the adjusted EBITDA measures that we use and the GAAP results.

Depreciation and amortization included $0.9 million of amortization of intangibles and $0.4 million of fixed asset depreciation, totaling $1.3 million.

Acquisition and post acquisition in the organization costs were relatively high in the quarter.

Post acquisition reorganization costs were $0.8 million, principally due to the integration of Smartag into the Transponder Division, and acquisition costs of $0.3 million principally relating to the acquisition of idOnDemand.

Other items amounted to an expense of $0.5 million and the resulting loss from continued operations before income taxes was $3.2 million.

In the acquisition of idOnDemand, the treatment of the deferred tax liability recognized in the idOnDemand purchase price accounting has resulted in a net tax benefit of $1.6 million in Q2.

So the resulting net loss from continuing operations was $1.6 million.

If we look at the balance sheet as of 30 June compared to the balance sheet at the end of Q1, cash and cash equivalents increased from $9.9 million to $20.6 million.

I will discuss the main cash flow items including the working capital movements in a moment.

But the other main changes in the balance sheet includes goodwill increased to $62 million, principally due to the acquisition of idOnDemand.

Intangibles increased to $37.5 million, again principally due to the acquisition of idOnDemand, but offset by the amortization in the period.

We also recognized a long-term liability for earnout of $10 million relating to the acquisition of idOnDemand.

And of course the payment of any earnout required for management of idOnDemand can lead to the targets that were set in the Share Purchase Agreement.

I would like to conclude by turning to the main items in the cash flow statement.

During the quarter we completed a common stock offering with net proceeds of $18.3 million.

The common stock offering together with proceeds from the exercise of warrants and options gave net inflows from these financing items of $19.4 million.

$2.4 million of cash is invested in the acquisition consideration of idOnDemand.

Other items post-acquisition, acquisition and other cash outflow items amounted to $2.8 million.

On the working capital which we discussed previously on previous calls, working capital is a point of particular focus.

We have a number of working capital improvement programs in place.

As a result of these programs, the inventory decreased by $1.6 million during the quarter, even with the growth we're seeing in the business.

Receivables increased by $2.1 million.

This is due to increased sales, with DSOs remaining stable compared to prior quarter.

As part of the working capital improvement and the product cost reduction programs that we have going on, we're working with our suppliers on overall terms including pricing, terms of payment, suppliers holding inventory on our behalf and so on.

As part of this program, we had some significant payments of payables during the quarter and payables actually reduced by [$2.1 million].

As a result of this, the working capital increased during the quarter by approximately $3.6 million.

And, with that, I will hand it back to Ayman, who will talk about the outlook for the remainder of 2011.

Thank you Melvin.

We're entering the second half of 2011 with a solid backlog of nearly $18 million and a significant amount of confidence about our market opportunities.

The $18 million only includes just below $3 million of the German ID program.

So -- and by the way, in Q2 we've only shipped about $2 million of that, so the significant growth of the business is happening independent of that important contract.

In the US government space we do expect that the projects have been delayed, and many of these projects are projects that we have contracts for already, to resume over the course of Q3 and Q4.

And we are seeing already indications of that in particular with the large IRS contract which we discussed before.

The pressure for the federal agencies to comply with the 2011 memo from the Office of Management and Budget, which is referred to as OMB M-11-11, has accelerated.

And the push of implementation for [reg-issued] credentials to actually work is fairly intense right now.

So we're hoping to be able to supply the systems and the software that is needed for the credentials that have already been supplied and issued by the government.

We continue to ship -- again it's the contracts with the German citizen ID, but were also seeing more activity from the health terminals in Germany.

In addition we were awarded new national ID project in Spain and new ID infrastructure orders in Japan.

The demand for ID inlays, tags and labels and other similar projects continue to grow to support the increasing number of ever-larger projects and in transit tracking, mobility etc.

Finally the acquisition of polyright, which we announced in July, further strengthened our capabilities in the areas of single credential management, access control, loyalty, cashless payment, etc.

As a leading ID systems integrator in Switzerland, polyright also brings strong position in the healthcare and education market in Switzerland, and usefully aligns with our multi-card Switzerland operation.

I will now talk about some of the main opportunities that we're investing significant activity, time and bandwidth in, which is NFC and idOnDemand.

NFC is generating huge excitement in the market.

And activity continues to increase around checking-in applications, smart postering, payment, mobility and other different applications.

Identive has an NFC offering along that, pretty much the whole value chain, and we continue to position ourselves as enabling partner for early NFC applications.

Last week we announced that we had received a 1 million tag order the order was just below the $1 million.

And our customer will include the tags in box with their smartphone to encourage and educate their customers to explore NFC applications, such as pulling up a website or automatically dialing a number.

This is a significant sized order given where NFC is today, which is still at the early stages of a longer-term transition towards every phone being NFC-enabled and every consumer being familiar with dozens of NFC applications.

We have piloted similar projects in the past and continue to work on many different opportunities at -- in NFC across the whole -- pretty much globally; US, Europe and Asia-Pacific.

It is important to be aware that Identive has strong partnership with all the major semiconductor companies in the NFC space.

We have announced a VAR agreement with NXP, but it is also important to know that we work very closely with Broadcomm and [Inside Secure].

And indeed, the 1 million tag order is for NFC type 1, where we are using [two pads] from Broadcomm in this case.

As NFC continues to gain traction, I would like to emphasize that Identive is positioned as an NFC infrastructure and solution provider both during the NFC transition phase, or the transition to NFC and after wide adoption of NFC.

This is an important point to be aware of, that NFC is an opportunity for Identive regardless of the speed of adoption, as we serve the market across a wide spectrum of needs.

And I think in the investor event we had earlier in July we discussed this in great detail.

And I believe it is still on the website for those who want to delve deeper into it.

I will move onto idOnDemand.

The rollout of a single credential for users with multiple locations, multiple legacy systems can be a daunting task and very complex.

And it includes lots of interfaces and lots of coordination.

More and more users are moving to a single credential so they can define the privileges of their employees with one transaction.

So it will make it easy to do everything with one keystroke.

So, with idOnDemand, we're providing a cloud-based software as a service or ID as a service to solve these problems.

And the acquisition of idOnDemand clearly strengthened our lead in this important area.

However, is important to recognize that idOnDemand is still an early stage business.

Q2 has hit us with over $350,000 on the adjusted EBITDA basis.

And -- some quick statistics on idOnDemand.

The revenues for Q2 was about $210,000.

We're looking to idOnDemand to generate between $1.5 million to $2.5 million in 2011, and take further investment of EBITDA from us between $1 million and $2 million also in 2011.

I will now move on to discuss the guidance for 2011.

We continue -- there continues to be new sources of economic uncertainty on the macro level.

There is a lot of news and a lot of uncertainty.

And we're all reading newspapers and watching TV and listening to the radio and seeing -- it is all around us.

So, there continues to be a risk with important projects being delayed.

But overall, we feel that our guidance for the year remains solid.

We are looking -- on the sales side, we're looking at being towards the top range of our guidance on the sales, so perhaps the top one-third.

But we're also spending additional R&D and selling expense, and the mix of the product margin has not been fantastic.

So we will probably be closer to the bottom half of our guidance on the adjusted EBITDA on the base business.

So we're reiterating the original guidance for the base business with the explanation I have just provided.

idOnDemand provides start up costs and some uncertainty on the timing of revenues, as is normal with a new start up business, and hence the bigger range of revenues and the EBITDA effect.

With the polyright acquisition just completed a couple of weeks ago, we're still in the immediate post-acquisition period, so as a very preliminary range, I would say we're looking at polyright to add $3 million $4 million in revenue.

This may need further adjustment because we have a lot of long-term contracts, so there is deferred revenue treatment issues we will have to look at.

And we expect that it will be close to neutral on the EBITDA for the year.

So overall, on the revenue side we expect to beat $110 million for the year.

We continue to strive to provide the analyst community and our investors in general with more in-depth and more transparency and information, and we remind investors to look at our blog from time to time where we offer answers to specific questions that we receive.

And with that I will hand it over back to Darby Dye for the Q&A.

Thank you.

(Operator Instructions) Matthew Hoffman.

Okay, I'm still working through the guidance there.

But let's just start with a high-level comment.

So you are maintaining the [$5 million to $7.5 million] EBITDA guidance, pointing more toward the bottom end.

That includes both acquired businesses and the underlying organic businesses -- well, maybe organic today -- as of the day you initially gave the guidance.

Is there -- another way to put this is, the organic businesses, the mix was about what you expected.

But you brought in some newly dilutive businesses during the course of the year?

No.

We've only made two acquisitions this year, Matt.

We made the acquisition of idOnDemand during Q2 and the acquisition of polyright.

So the guidance is really based on everything we had as of January when we entered the year, so we can't obviously guide on companies we have not acquired yet.

Okay.

So, for the base business that we had, the guidance is still solid and we feel bullish on the sales side.

And because of the mix issues, we feel that the EBITDA will be sort of in the -- towards the bottom half of that guidance.

I guess maybe I'm a little confused, because you mentioned the one-time items on the idOnDemand acquisition.

And I didn't necessarily understand that those were in your initial view, but that's okay.

So let's move on to the more housekeepers, really, maybe half for Melvin and half for you.

OCF in the quarter, Melvin, do you have that number?

Operating cash flow.

Operating cash flow?

Cash flow is (inaudible) (multiple speakers)

I think cash flow is -- I think it was -- there was a slide that sort of summarized it.

And it was mainly an outgoing of about $5 million, of which about $3 million was -- over $3 million was the working capital change.

And then keep in mind that our OCF includes the payment of the Hirsch debt as well.

(multiple speakers) (inaudible) [That's a reported -- to a reported] number for the net cash used in operations for the quarter is $5.4 million.

But as Ayman said, that includes the payments as related to the Hirsch debt and post-acquisition acquisition costs and so on.

And we did, as Ayman also said, have a slide on the reconciliation [in] those numbers.

I think in the pack, I don't know if you have actually looked at the (multiple speakers)

I was on the webcast and I couldn't grab the slides, so I was taking notes as fast as I could as they flipped through.

But I'm sure they'll be available on the site afterwards.

The slides should be available in a format where you will be able to find them, yes.

So let's drill down on that payables number.

I'm just looking back in the model historically.

Base payable has historically been in the 90, 91, 97 -- March, 83 days.

Now we have dropped down to the 54 day level in my model.

I don't know what your calculation is.

Everybody does it a little differently.

What is the normal level for days payable?

Can we assume that number will work back up?

What is the right number of days payable?

I think one of the things we started looking at operationally is the very high levels of inventory.

And that was a historical problem that [ICM] had and we have been working on changing their model.

So, one of the things that we have been working on is to get our suppliers to hold more of the inventory, whether it is raw material or finished goods, at their end.

So it's a collaborative approach with the suppliers.

I don't expect that you're going to see the days payables sort of sliding much beyond -- between sort of 60 and 75.

Melvin, I don't know what you think.

Yes.

The way we calculate at the moment is around 60 days, but yes, I think [you're right].

I don't know how you're calculating it, but in our modeling we see between 60 and 75.

Okay.

And then DSOs, they dropped in the model at maybe 10 days sequentially.

Will both these items be relatively neutral moving forward?

So in other words the payables go up, we might see some of the other days metrics go up as well?

We start -- starting from the beginning of this year we added Brent Archer, our VP of Operations, with a specific focus of improving the working capital management.

Our management of working capital has not been very good, has been fairly sloppy.

And if you look at what we call our cash conversion cycle it was very long.

And so we are working very diligently on tightening and improving the performance in all three areas.

So I don't want to be sort of giving you guidance that we are improving, but I can tell you we're working diligently on improving those.

And for me, the main -- the payable -- the [pain] on the payable I see that as more of a one-time, but I am hoping to see continued improvement in inventory.

But it is important to be aware that we have a business that somewhat is seasonal.

So we're looking usually at the second half being a lot stronger than the first half.

And this year is shaping up in the same way.

I think the point here is that all in all you have a -- you see what is going on in the economy.

A little shave on the EBITDA upside not entirely unexpected.

But I want to make sure that the cash is more of a one-time and not a systematic downturn.

So that answers that question real well.

So let's move onto some of the Transponder metrics.

You gave the $21 million number for 1H -- I'm sorry, for Q1 and Q2.

I think you said it was flattish.

So, what does it look like in the back half of the year?

Can we start to see that number move up generally?

And if so, what really tries the Transponder unit number higher in the back half?

We've got to get the capacity, Matt.

We are very close to the capacity.

And depending on the mix, we've been working flat out.

So we're expecting the new capacity increase to start hitting sort of October/November/December, and we're working very hard to try to improve that.

And by the way, when you see the slides, you will notice that we have provided sort of an approximate breakdown of both the product areas between transponders and readers, and between the ID Systems and the Enterprise Security as well.

Yes, I did see the -- that's one of the things I was able to scribble down.

I saw 43% for ID Products and 57% for ID Management, correct?

Yes, roughly.

But within the product we have also -- in the first slide you will see that there is also separation of transponders from readers and for multi-cards from Hirsch.

I'm going to be greedy here.

Have you put that out there historically as well?

No, it's really hard to put all of that historically.

(multiple speakers) I guess I was being greedy.

I will leave some other questions for the other people in line here.

But thanks.

Ilya Grozovsky, Morgan Joseph.

Just I guess to continue on some of the housekeeping, the revenues broken out Management versus Product, can you guys -- I don't think I heard that said.

The Project is, again, about 44%/56% which is -- it's pretty much the same split as always.

I think it is -- I don't know if it's broken down on the press release or not.

(inaudible) But the -- 57%/43%, so 43% is products and components, ID Management Solutions Services 57%, so it is a little bit more on the ID Management Solution.

This is where the idOnDemand business would go.

Okay, got it.

And then so the gross margins came down in the quarter.

Where do you see the gross margins in Q3?

Our expectation is that we -- is that the gross margin would rebound back into normal levels in Q3 and Q4.

The -- for us, you will notice when you go through the Q that the Americas business as a whole for the first half is flat or even down.

So it has been -- we have had -- a lot of the growth is coming from everywhere else.

And our highest profit comes from the software activity and the Identity Management Services with Hirsch that his been the area that is the most impacted by the slowdown uncertainty, freeze concerns with the US government.

So our expectation is that that will pick up again.

Okay, so and when you say back to traditional levels, looks like gross margins have been ticking down for about four or five quarters here.

What level, when you say traditionally, what tradition are we talking about?

I think for us we're the sort of range of 48% without -- exclusive of the amortization and the other allocations, so probably the GAAP level of 45%, 46%; non-GAAP of 48% or thereabout.

Okay.

Well, because on the GAAP this quarter was 40%, so you believe you have about a 5% increase in the third quarter?

Yes.

I mean without giving you -- I mean obviously if you look at all of the guidance I gave you, I think your calculation would be correct.

Keep in mind that idOnDemand also would boost the margin even though it is an issue of a revenue, because idOnDemand -- it takes us into -- the task model is a much higher margin by definition.

Okay.

And then you had mentioned on the call that you have expanded your Google relationship.

Can you just elaborate on that a little bit?

You'll notice on the IdentiveNFC.com website we're now offering NFC type 1, type 2 and type 4.

Originally when we -- the original trial was for the NFC type 4, which is a [test file] based smart card technology.

And we have now added NFC type 1 and type 2 at the request of Google.

And we're also acting as direct fulfillment, so we're actually shipping NFC Google tags today to users as a practical way of getting the tags in the hands of consumers.

You will also notice that on the same IdentiveNFC.com website we are offering SDKs and readers and other tools to help developers come up with solutions and applications for these projects.

So the expansion is not beyond Austin.

It is just that what you are doing with them, you're trying to take a little bit more of the wallet?

I think we have shipped Google NFC stickers to Australia, so we're shipping -- so right now it is -- the -- Google has a specific trial in Austin and they are using us for that.

But there are -- the demand and other applications and people wanting these tags for other projects, and this is what is happening.

Okay, understood, great.

And then lastly, so given your EBITDA guidance for the year, do you believe that Q3 will be -- that your EPS will be profitable on a GAAP basis?

I just want to understand how (inaudible) (multiple speakers)

I think the reason we have not been providing guidance on a GAAP basis is the issue of acquisition and post-acquisition cost.

In the old days when the acquisition and the post-acquisition and all of the stuff was treated in the purchase accounting, that was -- it was easy to do because you really just look at the effect of the EBITDA contribution from acquisitions.

But we have made an acquisition during Q2.

That acquisition had costs.

It will have post-acquisition integration costs.

And there may or may not be additional acquisitions.

We are always on the lookout for opportunities that complement our activities.

And so it is hard to do that.

But again, we're getting to be of a scale where the amortization is becoming a smaller piece of the overall thing.

So again, if I can tell you, assuming we don't do any acquisitions and we don't do any post-acquisition expense, we are certainly heading in that direction.

Okay, and Melvin, share count for the third quarter -- what do you think the share count is going to be?

Because you did the deal during the second quarter, so I'm assuming the 52 million isn't really the share count right now.

Which deal were you talking about?

The offering.

I think we're at 55 million I think is (multiple speakers) but we'll look into -- we'll take the next question and we will be looking at it while -- and we'll report it back when we get the exact number.

Thank you very much.

Michael Kim, Imperial Capital.

Just to talk a little bit more about the federal government delays, can you talk a little bit about your visibility commencing the next round of sites for the IRS contract?

I think last quarter it looked like you would start to commence that right around this period.

And just based on your comments it sounds like that might extend later into Q3, maybe even to Q4.

Well, we have -- the IRS in total is going to be eventually some 700 and some buildings coast-to-coast.

And we already obviously did the head-end and the central system.

And what we're looking at now is that different contractors are being awarded the physical [take out] of different buildings.

So I think we are getting and we have received orders on maybe about 30 different buildings or so.

Based on the activity in July 8 it is looking like we are finally moving forward in a more serious way.

But it is still -- so we are -- internally, Michael, we are looking at probably -- in our makeup of revenues of all of this business, we're probably looking at only about $1 million being deferred into next year.

But most of the business we counted on, we're still believing we're going to be able to do in Q3 and Q4.

I think you are very familiar with things like OMB M-11-11, so you know that the US government has essentially -- or the Office of the President has essentially mandated budget freezes for people -- for agencies who do not do this.

So there is a lot of pressure to implement these systems.

So, we are optimistic that it will happen but again, the US government, the last three, four months, the business has been very erratic.

Okay, and then switching to mobile payment, can you talk about expansion opportunities outside of Holland?

I think you alluded to some US projects.

Can you talk a little bit about how those are progressing and where some of the opportunities you're seeing for mobile payment?

I think in mobile payment we're really looking at projects pretty much everywhere.

We're looking at projects in the US, projects in Switzerland, projects and Germany, projects in Australia and the projects are of two different types.

There are some projects where we're really looking at supply of products, and some projects where we're doing systems.

So, in Australia, we're doing some systems for mobile.

We're doing systems in cashless payment for -- in fact, for a petrol or a gasoline company, gas stations.

We're doing things in Germany for campuses and for city projects in Switzerland, in universities and other applications.

So this is -- these are -- tend to be complete systems where you are doing the architecture of the system and the whole rollout and support and ongoing service.

So that is one set of projects.

The other set of projects is where we are supplying products, either supplying tokens or readers or supplying smart tag stickers or tags or cards, etc.

So these are -- there's a fair amount of activity on both sides of our business everywhere.

A lot of the different customers sort of wait until they want to launch and announce things themselves, and we announce them as much as we can, as customers allow us to.

Okay.

And then just talking a little about the Transponder business; as you double your capacity through the rest of the year, and I think last year you talked a little about the inefficiencies of scrap.

Can you walk us through your confidence level in resolving a lot of that, scrap issues or inefficiency issues, particularly as you dramatically increase your capacity?

Right.

We are operating in a very highly automated fashion.

So you will find that in Germany we're producing something like 3 million transponders per employee, and in Singapore it's just about 1 million transponders per employee.

I believe -- I'm not 100% certain of that.

But I've been to many, many factories in this industry, but I believe this is more automated than anybody else.

And as a result, when you are highly automated and when you are high-speed, when something goes wrong, if you don't catch it very quickly you cause a lot of scrap very quickly.

So the thing we are wrestling with right now is how do we continue to be cost-effective producer, how do we continue to make our process faster and more automated and generate less scrap.

So, to a certain extent, and this does not mean -- is not intended to make it sound unscientific; some of it is trial and error.

So you try a new glue for example on the IC, and then you discover that this it is not suitable, so you will try something else.

So you're studying obviously a lot.

But there is -- it is an iterative process to a certain extent.

In terms of the quality of the team and the people, I think we have some unique competence in this area judging from the amount of IP that we generated.

So if you look at the phenomenal amount of IP we have, particularly in this area, that just gives you a feel for it.

And in your EBITDA guidance for the year, you are assuming that your level of -- your yields on your current production remains consistent through the balance of the year?

Or are you anticipating further improvement?

I think we're not sort of counting.

I don't want to sort of mislead you into thinking these are huge problems.

It is probably -- it cost us probably a couple of hundred grand in Q2 in terms of these problems.

Would we ever be zero scrap?

I doubt it.

My guess is every time you add new capacity and you bring it on, there are always issues.

But I don't think there will be issues that are not manageable.

So if it is the normal sort of range that we had, we will live with it.

If we have something that is much worse than that, then obviously we'll report it.

But we don't expect that.

We continue to have -- and I think, Michael, you know we've been in this industry.

We continue to be operating really phenomenally well in comparison to the industry at large.

And maybe a question for you Melvin.

What are the CapEx requirements for the capacity expansion?

And would that continue?

Assuming that you will need additional capacity next year, what would your CapEx expectation be for 2012?

I think we've always said that our CapEx probably -- our CapEx from when we were raising the funds -- when we did the capital increase, we said that we expect we have about one-third going into CapEx over a couple of years, one-third going into general working capital, and one-third in two acquisitions and NFC type initiatives.

So probably in total, our CapEx in the transponder area over a couple of years would be in the $5 million to $6 million or thereabout.

Melvin, would you --

Yes, that is right.

The machines cost about $800,000 apiece, so depending on (inaudible)

Great.

And then just lastly --

Which we've talked about before when we actually installed a machine (inaudible)

Okay.

Then just lastly, since you did mention the strategic opportunities, can you talk about where you're focused in consolidating the ID industry?

Would it be similar to the idOnDemand area or are there other opportunities that you are focusing on?

I think it continues to be geographic.

We continue to be looking -- the reason you hear us talking about universities in California, in Colorado, in Germany, in Switzerland is that we have physically people in these areas.

So we continue to be looking at geographic expansion to address more of these opportunities.

We do -- our high security business, the Hirsch business we do globally.

Our product business we do globally.

But the other systems activity, our ID Integration Systems, we do where we are physically.

So this is an area where we are continuing to be looking for opportunities.

The other important area is -- and I think you have appreciation for this, Michael -- we are one of the unique companies that is doing a lot of products, but also has a lot of ongoing recurring revenue on the services and software side.

So, for us on the NFC side we are very well-positioned on the product side.

But we want to make sure that we have an ongoing [continued withdrawal] on the different applications.

So this is why the NFC area and mobility solutions continues to be an area of emphasis.

So these will be really the two areas you would expect to see active in, but obviously opportunities do come up and we look at them.

But in terms of focus these are the things we are focusing on.

Great, thank you very much.

Thanks.

Can I just come back on the question on the shares?

The shares at the end of June were 58.2 million.

So Ilya, that is 58.2 million.

Thank you.

Darby, I will hand it over back to you.

Thank you all for joining us today.

And we look forward to updating you in the future and talk to you again on our third-quarter conference call and webcast.

Thank you.

Ladies and gentlemen that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.