Identiv Inc (INVE) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2011 Identive Group earnings conference call. My name is Carissa and I will be your operator for today.

At this time all participants are in a 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's call, Ms. Darby Dye, Director of Investor Relations. Please proceed.

Thank you. 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 fourth quarter and year ended December 31, 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 are 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 31, 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, and adjusted EBITDA. These non-GAAP measures exclude all or some of the following -- acquisition, transition, and integration costs; equity-based compensation expense; adjustment to earn-out estimates; overhead allocation; 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.identive-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.

I would now like to introduce Ayman Ashour.

Good morning. Thank you, Darby, and thanks to all of you for joining us today. Q4 was a quarter of significant traction in our business, strategically and operationally. We made up for the continuous delays on the ongoing government projects, which is our strongest customer, with actually -- with our strongest quarterly sales yet, reaching $27.9 million, a new record for Identive since the formation of Identive from SCM and Bluehill exactly two years ago. Our Q4 was highlighted by strong sales of readers to the Japanese telcos market. We doubled our sales year on year in Japan.

Our transponder sales continued to be strong and we also had our first sales of inlays and tags into the Japanese market. Sales of integrated IT solutions were driven by one card multi-function ID programs for universities and also by the expansion of our payment offerings.

In the enterprise security division we've seen our first largest deployments for idOnDemand and stronger sales into the non-US government sector. Sales in the US government sector which is as I mentioned our largest customer continued to be impacted by project delays and budget uncertainty. In particular, we made significant progress in the management of our cash and generated $1.2 million in cash from operations. This is the second consecutive quarter of positive cash flow from operations for Identive.

Year on year, our cash consumption or cash used for operations has halved, even with our significant growth and significant investment in R&D, which I will discuss later.

The important thing you would notice in the graphs in Q4 versus the year as a whole is the mix between the US and the rest of the world and also between our products and system divisions. In total, they were both nearly equal in Q4, which had an affect on the overall margin.

Turning on to 2011 as a whole, this was a year of significant accomplishment for Identive. Revenues grew 21% year on year and topped the $100 million mark. While sales to the federal government were nearly $4 million lower in 2011 than in the previous year, we grew our non-US government business 35%; full half of this is organic. We doubled our Asia Pacific business, as we talked earlier about Japan, but it is not just Japan. We also had strong growth in Australia, Singapore, Korea, and China, to name some markets.

On the transponder side, sales of transponders, inlays, and tags grew by 64%. We continued to feed this growing appetite of secure RFID products for many applications, ranging from transit, amusement, and event ticketing; high-value asset tracking; and of course, the emerging NFC applications such as advertising, tag in a box, and payment applications.

Another important source of growth is the cashless payment solutions and I'll be talking more about payment in particular when I address our acquisition earlier this year, in 2012, of payment solution in Germany.

We made progress in improving the transponder manufacturing yields in 2011, but we still suffer from excessive scrap. This is an area that cost us several hundred thousand dollars in margins and we continue to focus on it going forward.

Moving on to the next slide, strategically, we made significant progress in 2011 towards developing a solid platform of technology, manufacturing, and financial capabilities. We boosted our R&D investment in 2011 with a 49% increase in spending over the previous year to capitalize on our core technology and market opportunity. This has already resulted in important new products and some very valuable IP, we believe. During the year 2011, we had three new patents granted -- 20 new inventions covering NFC tagging solutions; NFC software and applications; cloud-based identity solutions; transponder and card manufacture. These inventions would be transforming our business further and allow us to continue to move into wider and growing markets and basically expand our addressable market.

Complementing our investment in new products and markets, in November we completed the process of consolidating our various product brands under the name Identive or the brand Identive, allowing us to leverage unified product brand across new markets and geographic regions.

In the second half of the year, as I mentioned earlier, we've seen improvement in our cash generation from normal operations -- two consecutive quarters of positive cash. And we've also seen improvement in G&A in Q4.

I'd like to talk a moment about the opportunities where we made significant investment in 2011, specifically idOnDemand and NFC.

As we discussed last quarter, idOnDemand is a pioneer in cloud-based ID management solutions. Their SaaS-based identity as a service offering offers a simple, extremely fast-to-deploy, elegant way for our customers to deploy effective IT security platform and to work with multiple different legacy systems quickly and with a cost-effective way.

IdOnDemand originally came out of ActivIdentity, and in January, we acquired the remaining stake that Acti had, so now idOnDemand is 100% owned subsidiary of Identive.

We are in advanced pilot phases with four global customers, covering insurance, technology, utilities and government sectors. And with our partnership with Verizon Business in Asia Pacific, Fuji Xerox integrating our products in their secure multi-function office productivity systems, which I believe we announced yesterday, we feel we are gaining more traction.

While we're still focused on large users through idOnDemand we will be launching this month in Las Vegas at the ISC our SaaS offerings through our Hirsch Identive brand, targeting the physical security channel, expanding idOnDemand reach beyond the very large users and using the infrastructure we already have in-house.

Also, and we mentioned this earlier, to enable the SaaS offering way had to invent some extremely pioneering products. We are now offering these products as part of our ID Infrastructure Division, and we have commenced the process of integrating these products internally within our products group with a focused team headed by John Menzel, an executive that we brought into the company in November with deep experience in this particular sector.

As much as possible, we want to be transparent on the idOnDemand business because of its nature and the numbers you see on the slide, you can feel the startup nature of this activity.

We believe the cloud-based service model will be an important trend in identity management, just like it has been in dozens of other business areas. And idOnDemand pioneering technology, an unmatched understanding of smart card security and security implementation, is a significant advantage for Identive. We also believe that the secure cloud-based approach is an important tool to deliver and manage dynamic content for NFC applications. We have been investing in this area as well and are on track for our initial rollout of our patent pending NFC services platform in Q2.

I'll move on to the next slide. Another exciting opportunity for Identive is the payment market. And here I want to talk a little bit about our acquisition of payment solutions in Germany. We've known and partnered with payment solution and in some cases even competed against them from the founding of that company. Payment solutions is a unique company with a deep understanding of both payment systems in general and specific understanding of how sports market and sports arena operate.

They basically have two approaches. One is an ordinary systems integrator providing software, products, professional services; and the other model, which is unique about them, as an operator. In this approach typically we would have multi-year agreements, usually somewhere in the range of 10 years, with stadium operators and various retailers, caterers, et cetera, to install, operate and manage cashless payment systems. And in return we get the percentage of incremental revenues or a percentage of the total revenues. Currently we have seven such stadiums in operation with over 500,000 active users.

Revenues for us in this business model come from two areas. They come from transaction fees based as I mentioned on the incremental sales or total sales, as well as residual money unused on the card. Over the years, experience has shown that when implemented in sports arena in Germany in particular, cashless payment systems generate somewhere in the range of 20% additional retail volumes. Basically the time and space available for retail in a soccer environment is not like baseball; it is much more limited. You only have about 30 minutes before the game and maximum 15 minutes in the middle. So if you can make things faster and easier, you will be able to sell that much more.

Our expectation is that payment solutions will contribute positively to the group EBITDA this year. The German -- the revenue recognition with US GAAP for payment solutions will be a little bit complex; we're still working through that. But we've included on the slide the German GAAP revenues as you can see. It will take us some time to figure out exactly some of the revenue recognition here. The Company has debt of about EUR4.5 million, which mostly reflects the value of the installed systems.

I want to move on and talk a little bit more about payment in general. With the addition of payment solution, we now have a wide range -- as wide base, actually, of payment systems and capabilities, both on card and cloud or wallet-based. And we are expanding our presence in cashless payment globally. We've talked before about Cashless Betalen in Holland with Rabobank and where we're operating through a number of -- originally we rolled it out to Rabo's employees. We've now rolled it out across about 50 retailers. There are about 50,000 users now of Cashless Betalen in Holland and it is being promoted actively by Rabo's 140 branches across Holland. We believe that Rabobank's online wallet is one of the largest, if not the largest, online wallet outside of Japan.

In Australia we rolled out our first payment application to 6,000 customers across Queensland in Australia for fuel and retail purchases at 140 different gas stations.

In Switzerland, Germany, and France our payment applications tend to be intertwined with other functions so it is basically part of an overall ID solutions or a single credential or a multifunctional ID card is used by an employee, college student, or citizen in a smart city application. These cards are then -- or these IDs or credentials are used for security, access control, loyalty, transport applications, et cetera.

And it is actually the German smart city applications where the one card is used for transport, loyalty scheme, access to stadia, where we have had a lot of interface with payment solutions, the company we just acquired in January in the past. And we expect to work closely between our existing activity in payment solutions, where we approach the cities from the multiple areas of competence, be it loyalty scheme, security, or transport applications and now stadia applications.

We are making significant inroads in payment area and expect that payment will be an increasingly more important component in our overall business and will be a fast-growing segment.

I've talked so far about the software and the solutions we're providing end-to-end, but it is important also to remember that we are supplying a range of payment products both on the tagging, card, and the token and reader side. Overall, we expect that payment will represent somewhere between $15 million and $20 million for us in 2012.

Now I would like to turn the call over to Melvin for a review of Q4 and 2011 financial performance, and I'll come back to you for the 2012 outlook.

Thank you, Ayman.

Revenues for the fourth quarter were $27.9 million, our highest quarterly revenue since the creation of Identive. Revenues in the quarter were split almost evenly between the two reporting segments with 51% in ID management and 49% in ID products.

Revenues for the full year at $102.7 million were up 21% from the $84.8 million in 2010, reflecting organic growth outside of the US government market of 17% as well as growth from the acquisitions.

Margins for the quarter were 45.5% compared to 48% in the previous quarter, held back by the effects of the US federal government agency project delays and as a result of the product and project mix in the quarter.

For the full year the margins were 46%. Margins in 2010 were 48% and 46% in the 2010 pro formas. Again lower sales to the US government decreased the overall margins in 2011, partially masking the margin improvements in other parts of the Company's business, particularly in the ID product segment.

On this next slide we compare the 2011 actuals with the 2010 actuals and pro forma numbers. Revenues up 21% compared to the 2010 actuals and up 8% compared to the 2010 pro forma numbers. The adjusted EBITDA for the year was negative $0.7 million, reflecting the continued investment in software as a service, NFC, and cashless payment solutions in particular.

Pro forma numbers for 2010 were $94.7 million of revenues and a loss at adjusted EBITDA level of just under $2 million. 2011, therefore, showed an improvement over the pro forma numbers while still allowing us to increase investment for growth.

R&D increased by 57% over the 2010 actuals and 15% over the pro forma numbers, reflecting again the investments in growth opportunities as discussed. We've also continued to invest in sales and marketing again to drive growth opportunities.

Overheads continue to grow at a lower rate than sales. However, G&A continued to be high and we are working on a number of projects to improve efficiencies in overheads. Just as a reminder, the overhead numbers that I have been talking about here are non-GAAP OpEx numbers.

The next slide, we show the reconciling items below the adjusted EBITDA comparing 2011 with 2010. Depreciation and amortization increased from $4.7 million to $5.6 million, with both depreciation and amortization intangibles increasing. The amortization of intangibles in 2011 was $4.1 million.

The time value of money adjustment on earn-out liabilities relating to idOnDemand was $0.7 million in 2011.

Both the post-acquisition reorganization and acquisition costs reduced substantially from 2010 to 2011. Post-acquisition reorganization costs reduced from $2.3 million to $1.5 million and acquisition costs reduced from $1.5 million to $0.7 million. Total non-cash items here in 2011 was approximately $7.7 million.

You'll note that 2011 included a net tax credit of $1.4 million, arising principally from the acquisition of idOnDemand, where deferred tax losses acquired were offset against fully reserved deferred tax assets, allowing for a release of valuation allowance.

The next slide shows a summary balance sheet at the end of Q4 compared to Q3. Cash from operations continued to improve. And I will discuss that further in the next slide. Working capital improved from Q3 to Q4, reflecting the continued focus that we're giving to working capital reductions.

Next, property, plant and equipment increased from $5.9 million to $7.2 million in the quarter as a result of the investment in production equipment for the transponder manufacturing operations in Germany and Singapore, partially offset by quarterly depreciation charge.

The next slide we have a summary of cash movements in the quarter. The GAAP net cash provided by operating activities in the quarter was $0.9 million. However, as we discussed before, that includes a payment related to the Hirsch debt. Taking this into account the cash flow from what we might term normal operations is $1.2 million, as Ayman has previously mentioned.

In the full year the GAAP net cash used in operating activities was $4.6 million, showing a considerable improvement over the $9.3 million used in 2010. This improvement came while growing the business. Payments related to the Hirsch debt included in these amounts were approximately $1 million in both years.

The next slide we have quarterly information on sales, gross profit, adjusted EBITDA and overheads from Q1 2010. The business has in the past shown some seasonality with Q1 being a relatively weak quarter and the second half generally of the year being stronger than the first half. You'll see that the gross profit margin shows some fluctuations with product and project mix from quarter to quarter. Overhead as a percentage of sales show a downward trend, having increased in Q3 2011, the percentage of sales was reduced again in Q4.

I'd just like to finish by giving some information on the share count -- outstanding shares and fully diluted share count that I know some of you use in calculations. As of 31 December, the outstanding shares was 57.6 million. As of today, that number is 59.1 million. As of today the fully diluted share count is 71.9 million, just under 72 million. And with that I will hand back to Ayman.

Thanks, Melvin. I want to move on to an update and outlook for both Q1 and 2012 as a whole.

As we move on to 2012, we are encouraged by strong momentum and strong project activity across many parts of our business. Our initial effort to cross-sell our readers and transponders in Japan went very well. We now expect to sell several million inlays in Japan in 2012.

Japan is one of the largest RFID markets and particularly when we're talking about NFC, it is many years ahead of the rest of the world with a large number of consumers walking around already with NFC or NFC-type solutions in their phones.

We had minimal sales in Q4 in our new offerings, SmartCore and the idOnDemand technology as a product, if you will, and we are getting strong interest from customers and existing markets that are now available to us. We are now capitalizing on this.

On the enterprise security, our market-leading solution is gaining traction in many different markets from airports to healthcare, telcos, data centers, insurance, et cetera. We are also adding more focus on the Middle East market, building on our success in the United Arab Emirates and Saudi Arabia with our work on the Emirate Critical Infrastructure Authority and Saudi Aramco.

The US government, we believe, we would ultimately grow our business from the 2010 level, which as I mentioned before, we've seen a decline in 2011. But we believe that we will be growing from that original 2010 level. Cybersecurity, physical access control systems in the government sector remain critical and are under several federal mandates for urgent upgrades. In some ongoing project delays like the IRS, we already have been selected and supplied the heart of the new systems, so we believe we continue to be well-positioned. We also believe we will continue to be the preferred choice for most sensitive and high-security applications.

We are seeing early stages of momentum for our SaaS identity-as-a-service offering from idOnDemand. We expect that that business will grow to $3 million to $5 million in SaaS revenues this year.

We also plan to offer or launch our cloud-based NFC services platform in Q2. We don't expect much revenue from NFC solutions and services until there is a critical mass of NFC-equipped phone in any particular geography.

On the infrastructure side for NFC, we now have blanket order commitments for 10 million to 15 million NFC tags. You recall last year, we had orders for 3.5 million or 3 million, and this number has gone up for 2012 to somewhere between 10 million and 15 million tag and box applications and NFC gift cards.

We are on many projects and continue to expand our relationships with telcos, phone, wallet, and OS suppliers in order to expand the reach of our NFC infrastructure. We are very active in many of the shows that are going on right now, such as the Mobile Phone Congress in Barcelona; [Cart] next week in the US, et cetera.

We are focusing on further strengthening our growth engine with commitment and concrete plans to drive down overheads as a percentage of sales in 2012.

In terms of Q1 2012, we expect the revenues to be in a similar range to Q1 last year. We are running, however, higher overhead base. We also expect cash to go down in Q1 to reflect some of the acquisition activity. As I mentioned, we acquired the remaining shares from ActivIdentity of idOnDemand. We have also had some acquisition costs for payment solutions and we also have some payment of CapEx. However, we expect stronger balance in Q2 and subsequent quarters.

I now want to talk a little bit about the full-year outlook and the longer-term business model.

We're expecting 2012 -- we're projecting our revenues to be in the range of $125 million to $140 million. We're expecting the margin to improve. We're actually encouraged by the underlying improvement in the margins in our product business both the transponder and the reader side, and we're expecting that overall product margin to continue to improve. We're expecting the mix between product and systems to go back to normal which is about 45% to 55% or thereabout.

Overheads -- we're planning to continue our level of investment in R&D and sales and marketing, but we're hoping to be able to curtail any -- or limit any additional growth in G&A as a percentage of sales. So overall on the overheads we are projecting somewhere between $55 million and $60 million. Obviously, that will be dependent on the mix of business and dependent on the revenues. We're projecting adjusted EBITDA between $5 million and $10 million for 2012.

In terms of the longer-term business model, we are remaining confident that the fundamental quality of the business will allow us to get into an 18% to 23% EBITDA business based on continuing to grow and continuing to see the overheads decline as a percentage of revenue with a little bit of improvement in the gross margins. We expect the improvement in the gross margins to come in from the SaaS business; from all of our software offering; and from all of our expansion in payment areas and the like.

And with that I'll thank you and I'll turn the call back to Darby Dye for questions. Thank you.

(Operator Instructions). Bryan Prohm, Cowen and Company.

This is Bryan; I am in today for Matt. My first question, can I get you guys to dig in a little deeper, please, on the weakness in government sales in the quarter? You had mentioned on the last earnings call stronger than seasonal October. But based on the final numbers, it looks like the balance of the quarter was pretty weak. Any comments on the linearity during the quarter?

Yes, I think it was really at the beginning, as of the time when we had our sort of Q3 call, which was sometime the end of October or early November, we really expected that whole enterprise security area to be in the range of $10 million or thereabout. And it ended up being closer to just below $7 million, with the shortfall primarily coming from the US government area. So we have expected a lot of that government business that has been deferred as we went during the year to come up and it just didn't.

And primarily we attribute the delay in that to a number of reasons. And number one, obviously, is all of the budget uncertainty and the like. But in our case there's been really two specific things.

The first thing is that the new federal mandates, particularly the Office of Management and Budget [M1111], or [OMBM1111] as known, which mandated fast implementation of the kind of systems we are actually deploying, resulted in the exact opposite effect because what it did, it caused an additional layer of uncertainty at the various government agencies where they had to check if the money they are about to spend on anything does comply or not. So even though our projects were fully compliant, we have had to go through this whole new added layer. So this is one thing, Bryan.

The second thing was really some of the complexity of the projects we're working on and the nature of them and the scale of them. So some of them -- some of the government departments are working on massive projects that they have not really undertaken coast to coast; nationwide projects of this magnitude, so there's been a lot of project management delays and the like.

The -- fundamentally -- we did -- we estimate because a lot of our government business come directly and indirectly. We estimate that in 2009 we did about $20 million in government. In 2010 we did about $23 million. And we ended up at $19 million in 2011, where we actually expected that to be much higher. Is that business going away? We don't think so. We believe very strongly that that business would be coming back and it is a matter of time. I don't know if I answered your question or not, Bryan.

No, that's fine. And your guidance as I understood it, your latest guidance for fiscal 2012, you expect that revenue number for 2012 to be up from 2010, so greater than $23 million?

Well, we're -- to be honest with you, it's a little bit of once bitten, twice shy. So we're really looking at getting back into that level. And I suppose part of the reason we're giving you a range is if we are to get on the $140 million side and the top end of the EBITDA, we would expect it to be more than that $23 million.

I think it's also important to know that in the government area what we supply is virtually 100% our own product, own software, very little OEM-type product and a lot of professional services. So that tends to be significantly higher margin for us.

A couple quick ones on NFC, so I don't take up too much time. In Q3 you mentioned you had a major OEM order for $1 million, potentially as many as 3 million NFC tags by year end. Where did that number ultimately come in? Did it come in closer to 1 million or closer to 3 million?

I think the actual deliveries was a little bit below 3 million. We were using Broadcom ICs and ended up using a combination of Broadcom and NXP ICs. So there was a little bit of delays in IC deliveries and a little bit of rescheduling here and there. So I think the total ended up being, from that one particular customer, a little bit less than 3 million, but not much less.

And we now have for 2012, the projections are up, as I mentioned on a blanket commitment basis, or what the Europeans call frame order, between 10 million and 15 million for 2012.

And that is for all NFC customers, correct? Or just the one --?

Just from that one customer.

Just from that one OEM?

Just from that one client.

Okay, no, interesting. Last quarter you mentioned there were 40 to 50 NFC customers, roughly, for the Company. Where is that number today?

Quite a bit more. It is -- I mean it's quite significant because remember we are now doing the fulfillment for the Google places, tags, and so a lot of it is retail, so it's quite a bit more in terms of actual live NFC customers now.

In terms of active substantial projects, the number continues to grow. And it is -- sort of it is growing in many different varieties, some with telcos; some with handset manufacturers; some with OS people; some with wallet people. And of course that is really -- your question so far has been on the infrastructure side. The area where we are investing a lot in is also on the solution side, where we are targeting a lot of what we believe will be end users directly, not infrastructure customers.

Thanks. Hey, last question, for Melvin -- you said 71.9 million fully diluted share count; is that as of today or as of the end of calendar Q4?

Just under 72 million is as of today.

Do you have a number for Q4?

For the end of December was 70.5 million.

Very good. Thanks, gentlemen, and we'll speak to you next time.

Michael Kim, Imperial Capital.

I saw that HP had a fairly nice-sized contract in HSPD-12; and just curious if you're starting to see that gain some momentum. You talked a little about that earlier but just wanted to get some expanded comments.

Well, as you know, we are -- our chipsets are heavily used in the HP laptops and keyboards, so that would be -- this is an area where in 2011 we've seen a little bit of drop even in the uptake in that area. And we're expecting more growth in this area in 2012, for sure.

And then on transponder capacity do you continue to expect to increase at the same pace that you did in 2011 just based on your visibility?

No, let me give you very specific guidance on this one, Michael. We've increased our primary capacity which is the making of inlays, by 80% in 2011. We expect to increase the secondary process during the first half of this year, which is the conversion into ticketing and the like. We have also been creating really new equipment because it doesn't exist for the SmartCore manufacturing. And we're going to be expecting during the year to be adding a little bit to that.

Towards the end of the year we expect to be adding more capacity, both for primary and secondary processes and most likely that will be in the USA. So that's just sort of the broad answer.

In terms of CapEx in that the cash out associated with that during the year will probably be in the $3 million to $4 million and similar level in next year as well.

And then you briefly talked about elevated scrap still. How are you progressing on reducing your scrap levels?

Not well enough -- is the short answer. We've improved over Q2 quite a bit. I think Q2, we had a $200,000 or $300,000 hit. Q3, we had a smaller hit, so we are improving. We are getting better.

And the sort of things that we're doing are the following -- part of the problem, Michael, is we're running very, very high speed. So if you have a problem at the blink of an eye, you've got lots of scrap generated. In half an hour of problems you've got thousands and thousands of defective inlays. So one of the -- and we're very highly automated. So one of the things we've been doing is really increased operator training, significant increase in the operator training. The other thing is looking at some of the designs.

So we're continuing to get a lot of improvement, but it' continues to be a disappointment and it continues to be -- quite often it is a few weeks after you've done it that you will discover it, and then you're looking how big a problem. So we're getting much better at it.

I brought in one of my ex-colleagues from retirement who has done a lot of this for me in prior lives, and he's all over the place right now. And so we're optimistic that we will be able to -- we're getting better and better every quarter, and we're optimistic it will continue to get better and better. But I think it's important for us to be also forthcoming and tell you guys what is going on.

No, absolutely. That's certainly appreciated.

And then switching gears to Cashless Betalen now that it has been rolled out more broadly, what is kind of the initial consumer usage? What kind of activity are you seeing on the broader rollout?

I think so far the consumers seem to be happy. It is simple. It is -- you know in Holland, the Dutch have been real pioneers in banking for many, many years. And if you look -- one of the reasons they have the largest online wallet is they really have two approaches where they are interfacing with the online wallet.

One approach where they call remote and one approach where they call proximity. The remote approach is where you're paying for -- let's say you are in a bar, you're paying for your drink while you're sitting and it goes to the bar counter, the barman or the barmaid, and they get an indication that you've already paid, so no card technology. But obviously, in a very crowded setting and the like, that doesn't work too well and it gets confusing.

So the other application is proximity which is the Cashless Betalen, and we're and now sort of the exclusive players with Rabo on this. And that seemed to work very well in these settings.

But it also works very well in other settings such as parking; such as some fast food and especially company cafeteria, catering-type applications. And it's as open loop as you can get because it is really coming -- it is straight cash coming out of this online wallet that you feed in. So the reaction has been positive, customers like it. They find it easy to use and practical, and the retailers like it.

And are you pretty far along or maybe can you comment on how you feel about similar type rollouts in other European or certainly in the US?

I think what we're doing is in other European, yes -- in other European -- we're doing very similar work, obviously, in Germany, Switzerland, and France. We're really trying to build on our existing strength. So if you look at our existing strengths, which is now education and sports card holders and the like, we have a lot of people holding our cards. And the more we get these cards accepted in other areas, the more we can grow.

So it is -- but also it's an area, particularly when you have cash on cards rather than a cloud-based where you have to be making sure that you're not then getting into banking.

So Europe and Australia, we're fairly positive about. In terms of the US, it is really building on the strength in education sector. And of course, we're targeting the payment market with products, be it on the transponder side or on the reader and token side.

Great. And then on idOnDemand, obviously early stage, but some pretty compelling advantages on a service basis. Where do you see sort of the initial demand or the earliest penetration opportunities for idOnDemand?

Two answers, Michael. The first answer is any company that is made up of lots of acquisitions. So any large company where you've got -- that's been built over lots of acquisitions so they have many different legacy systems and they walk around and they have 10 or 15 different cards to get everywhere; and they are trying to foster an environment where there's a lot of cooperation between people but not losing control over their security. So these companies would be the biggest target.

The most ripe of these companies are the companies where they have one unified security structure, so you have the IT security and the physical security are coming together under one chief security officer. So wherever you find the chief security officer who's responsible for both IT and physical security, that is the most ripe environment, so that is sort of the first category.

The second category is anybody who is in the world of PKI and is looking for a fast implementation. Because to roll out a full-blown PKI infrastructure for most people takes 12 to 18 months. We can actually do it in a week or two weeks maximum. So that is just a remarkable speed if you have to do it. So it's either a complex one or someone who is in need of very quickly heightened level of security.

Got it, great. Well, thank you very much.

Joe Munda, of Sidoti.

Real quick, just going over the share count, share count has more than doubled in the last two years, and it seems like every acquisition you guys pursue you guys tend to use equity. I'm just wondering why the preference of using equity as opposed to debt. Is there limited access to debt for you guys to do these acquisitions?

I think it's -- I'm not sure that that is actually true. I think what -- the 70 million is a fully diluted number which includes a lot of under water and a lot of historic stuff.

So -- and if you look at the acquisitions we have made, when we acquired polyright, for example, which was owned by Securitas and SkiData, that was a cash deal.

When we look at idOnDemand and that was a shared deal primarily because the management team, if you just wanted to give them cash, you could not give them enough cash, because they really believe in the future of their business, so that's why it ended up being share with their now being share-based. And quite often when you're looking in a valuation setting, you'll have these companies, especially a company like payment solution again. To give them cash we would have had to pay a much higher amount than we do with shares. Because payment solution is in the same exact business as us. And the people who invested in it invested in it because they believe in that business. So basically, by sitting together with them we can -- they are much more -- we can get into a much more realistic valuation when we're talking share-for-share.

I know if you are a much larger player, quite often people are looking for cash, but in our case that has not been the case. It has been really the case that shares are more highly priced. And when we are very dependent on the people -- and you will note that we have a unique situation where we've acquired a lot of entrepreneurs and we have retained nearly 100% of them if not actually 100%, that that comes in from them believing in what we're doing, wanting to be part of it, for the long term. I hope that answers --

Ayman, yes, I understand that. It's just that okay, you had 21% growth in 2011 but almost no change on earnings year over year. I'm just trying to figure out what you guys are trying to do to reel in these expenses and the integration of all these acquisitions; it just seems like okay, you're adding revenue but the earnings or still losses are staying the same.

Yes, no; I think a couple of things, Joe. I think number one, if you look at last year we entered last year with a much lower cash balance, so we have a higher cash balance now. We're also -- even though it's a little bit we're paying down our debt.

This is not an environment with a lot of uncertainty, where you want to have a lot of debt. And frankly, we want to be in a situation where we don't have -- we're not forced to go raise cash at -- we don't want to be doing that.

I mean we filed in a shelf and the shelf is sitting there, but we really have no immediate and no current plans to pursue that. And we don't want to be increasing our debt.

I understand that. It just seems like you're diluting the shareholders that are currently holding the stock because it's --

Well, actually, Joe, I really beg to differ strongly because if we are keeping the same platform, then we are diluting the shareholders, but if we are actually expanding the platform and improving the story with a shared deal, then that is not what we're doing.

And keep in mind that the number of acquisitions we've done in the last -- since we started Identive is actually minimal. We've added a little bit of volume since -- we've added like 10%, 12% revenue, not a huge amount of revenue coming from acquisitions.

Okay.

My other question is for Melvin. Melvin, what was the -- can you break down gross margin by ID management and ID products for the fourth quarter?

It's actually in the earnings release, but we can pull that out for you immediately.

I think you guys have it for the year; I just need it for the quarter.

For the quarter -- the quarterly numbers -- I've got the annual, the year numbers. ID management -- this is on a GAAP basis, 45% and the ID products 37%.

The quarter was 46% and 35%.

Okay.

That is the GAAP numbers, which will be in the 10-K and so on.

Okay.

Ayman, also, can you give us some more color on time horizon for what you think in your mind for adoption by handset providers and retailers for NFC solutions going forward? Are you seeing -- I know you had mentioned Google Places, but are you seeing increased preference towards NFC by some of these retailers and more handset makers coming to you guys with ideas and solutions that they want to provide?

Well, I think there are two different things happening here. There is the world of the infrastructure providers, be it the handset people or the wallet people and all the rest of -- the people who are creating NFC as a technology and making it available for the consumer. So you are getting just a huge amount of different projects and ideas and applications. And as you know, the projections that -- by the end of this year will be about 100 million smartphones with NFC in them. I think NXP recently disclosed that they have like 130 different models coming out -- BlackBerry or RIMs that they have NFC in most of their phones, if not all. Nokia, which is one of the original players, is very aggressively pushing it. So in terms of how much NFC out there, it is happening and happening pretty fast.

For our infrastructure business the most important thing is the inevitability of NFC. And I think right now we see NFC as inevitable. It is coming. It is being rolled out. And how quickly it happens it doesn't actually matter so much in terms of our infrastructure products because people will be building that up.

In terms of our software and solutions platform, which we will be launching and talking to you guys in more detail in San Francisco in three months, this is really where how many people actually have NFC and are using it becomes much more important. And in terms of that, I think this will vary regionally quite a bit. So in a country like Japan I would say it is going to happen and it is happening more or less now and in the next two to three years. In the US I think it will take a lot longer.

And also, unlike most people, we actually do not necessarily believe and are not necessarily hyper-focused on NFC payment applications which we believe are very important; but we believe that the promise of NFC is much more going to be in the fun-type applications and in the applications where the consumer is getting -- is doing something cool, something that they feel good about, whether they are exchanging a picture; whether they are friending somebody by touching phones; or following somebody on Twitter; or checking into a foursquare, or -- so all of these type of consumer applications; and also the advertising applications and the like.

And then on my last question on the payment solutions in the stadiums, the contactless payment -- how does it work? And where do you refill the money on the card and how long does the money on the card last? Where you had mentioned that you guys also were entitled to any money left over on the card. How long -- what's the expiration time on that card? And where does the user go to refill their card? I'm a little confused by that.

Right; these are very good questions. I think generally if the money is unused after three years, technically, we are entitled to claim it back, so that is the answer to your first question.

In terms of how the users fill in the money, they fill it in, in one of two different ways, either through people who are selling the card and filling the cards at the actual events, or online. And one of the particular reasons we really love payment solution is our view of how that will be in the world of NFC. Because basically, see, right now it is a buy/build/operate sort of model. So we have these long-term contracts with several football stadia. And as we get more cost effective in doing it through NFC or through other applications and through other ideas, then we are improving the EBITDA. It is your sort of -- you can look it financially as buying future EBITDA but you can also look at it as I've got now 500,000 consumers, a total of 850,000. So these consumers are a real value force.

And I'm sorry, and do you get a transaction fee from --?

Yes, yes. We basically get -- we get paid one of two ways -- either we get X% of revenues above Y, or we get Z% of total revenue.

Okay. And do you think that there's any plan in the future where instead of a card that it would be with the person's phone or a chip --?

Absolutely. Absolutely. And we would definitely -- you see, for us right now payment solution has been really happy with the revenue left on card. We are not 100% sure that this is really what we want. We want more consumers and we want them to use the cash on card. So we want to try to make it easier for them to spend the money and easier for them to claim it back because ultimately we want to increase the number of users.

Yes, because I'm just thinking because typically those fans are usually like season-ticket holders. And every year they're going, so I'm just trying to figure how much money do you really expect to be left on a card, you know?

Well, no, keep in mind where we have these systems deployed you can't buy anything unless you have a card.

Oh, you can't buy anything unless you have the card. Oh, okay.

Yes, yes, this was one of the conditions for them deploying these systems. So if you're holding a concert in a stadium, you can pay with cash, but if you're going in for a soccer game, you have to use the card. So next time you're in Europe, we'll take you to a game in Dortmund or something and we'll show you how it works.

I was there last week at San Siro in Milan; they didn't have it.

Yes. So far it is really -- it is Germany, a couple of places in Switzerland, one place in England and now a few places in Ukraine.

Okay. All right, great. Thank you.

At this time I'd like to turn the call over to Ms. Dye for closing remarks.

Thank you. Thanks very much, everyone, for joining us today. We look forward to updating you of our progress as the year progresses. And we'll look forward to talking with you next quarter. Thank you.

Thank you for your participation in today's conference. You may now disconnect. Have a great day.