"This Not Just About a Business, Not Just About Selling Stuff."
Summary of 3Q conference call for VISG (quotes and paraphrases best I could manage)
Michael Porter began the conference call by mispronouncing the name of VISG's CEO and then giving an unusually abbreviated but assuredly effective Safe Harbor disclaimer. CEO Tom Colatosti and Sean Mack, VP/Finance and Comptroller, also were present.
Colatosti began by saying, "Getting dozens of calls and emails every day. Welcome it."
Then he read a summary of the 3Q earning report Eighth consecutive Q of profits. Revenues = $6.1mm $19.4 mm for 1-3Qs. NOI for the first three Qs were $628K, or 67% earnings earnings growth over the same period last year. Balance sheet improvements also noted. Also, "cash flow positive from operations."
TC said the 9-11 WTC disaster hurt 3Q revenue growth by causing delays in "expected" state DL contracts and by increasing operating expenses to respond to unexpected post-WTC "increased interest" in FR technology. 4Q revenues should be helped, however, by the signing of 6 new states. Also in 4Q, TC expects "to increase our investments in the face recognition market."
"Four extraordinary events are simultaneously coalescing" to affect the company as a result of WTC.
1. Realization of law enforcement, transportation, etc. of the need for FR technology to guard public safety. We have believed this for years, and we have been in the business for years. "Coming to the forefront faster and larger than anticipated."
Then he said a quite extraordinary thing for a quarterly earnings conference in this Era of "Did You Meet Analyst Expectations?"
It is very important to note that while all the media attention is flattering and while we are glad that our shareholders are being rewarded for their belief in us, and while in the day to day discourse sometimes the discourse gets a little too coarse, it's important to keep perspective. We, Viisage, can make a difference to our nation's safety. This is real serious to us. We believe in what we're doing. At a very personal level, at every individual employee level, we believe it's not just about a business or about selling stuff. It's about making a difference and potentially about saving lives. If we stay focused on this, our passion, and if we are successful our stakeholders will do well."
2. Largest competitor in DL sector (unnamed, but certainly Polaroid) filed for bankruptcy protection. Viisage is considering bidding for that part of the business. Since 9-11, the DL issuance business is now seen as more integral to security and public safety than ever before. Illinois as example where DL provides a data base for FR technology.
3. "Entire new level of interest" from "major systems integrators and prime contractors" wanting to form strategic alliances with VISG. Advantages to VISG include partnerships would help FR gain a faster and broader reach.
4. A new (unnamed) "biometric acquisition opportunity" is "being considered" which would enable VISG to "more quickly respond to the market demands ... with more comprehensive and complete quality customer solutions."
To take advantage of these new opportunities developments requires VISG to acquire "additional financial resources to enable us to accelerate our aggressive investment needs." Expects to access new capital "very effectively" because VISG is profitable and cash flow positive.
See market share in both DL and FR growing in ‘02 and ‘03.
Brian Ruttenberg (sp?) (Morgan Keegan)
Q. Increase in FR spending- what mean? More $$ R/D? Sales? Acquisition?
A. The original biz model was to remain profitable in "secure ID and driver license" biz while investing in FR and overall remaining profitable each quarter. Now FR needs more "investment" than originally planned. "We are overwhelmed with calls." This is causing a revision to the biz model. "We thought we could grow our FR biz in the 20-30% range and remain cash flow positive and... still be profitable." But clearly, the "significant" change in the market demand requires a "level of investment" not previously foreseen. Higher expenditures needed in marketing, sales, demonstrations, pilots, projects, R & D....and acquisitions.
Q. Re: Fresno K - specifics? How $$ revenue? Beta/full rollout/cameras/checkpoints?
A. Fresno is a small airport. Pelco donated its system to Fresno. VISG gets "some royalty" but more important is to demo the technology. TC says, "We are growing, we are profitable. We aren't giving away more than we can afford. It's important when you have a new technology to ‘seed the market.' It's one of the best investments we can make." TC adds that Fresno is a small airport, but there will be multiple cameras and locations.
Clint Morrison (Miller, Johnson, Snake (?) and Cannard (sp?))
Q. How big is the previously announced "unnamed" airport?
A. It is not Fresno. Unnamed airport "the first one to make a decision for FR." Still doing architectural planning, designing the environment, software adaptations, etc. Actual roll-out expected about 30 days from now, although when it goes operational FR will not yet be fully deployed because there are so many gates. "In an airport of major size total cost would be about $1-$3 mm for a robust solution."
Q. State DL market - what's VISG market share now & what do you expect?
A. Only 2 companies compete in this space, as a realistic matter. VISG has about 33% of market, about 66% to a company [PRD] "in Chapter 11." Competing against a company in bankruptcy "has certain advantages" so whether VISG competes "directly" or "bids" [meaning bids for the bankrupt? Bids against others?] "we're looking for significant growth."
A. Can you/have you broken out income from FR as contrasted with DL side of biz?
A. Haven't done that before. "Perhaps we will do it for ‘02." For 1Q01 FR "running between 10 and 15% of total revenues."
Shar Tang (?) (Dean Whitter" [do they still exist?])
[This fellow was a little weird and later almost angry sounding. Sometimes his accent was difficult to penetrate.]
Q. Interesting zat Polaroid iss halfing problems. Vat are zee margins on DL?
A. About 15% before taxes.
Q. "I vas concerned about your statement zat you half a 99% accuracy rate compared to the Department of Defense studies vere za failure [sic] rate iss considerably higher." Can you explain how za 99.7% accuracy rate vas achieved.?
A. There has been a lot of confusion about this... the so-called FRV2000. I've heard a lot quoted.... No one has gotten this right. First of all, Viisage did not participate in that test. It was a test with three other vendors. Lau did. Lau doesn't have the application experience that we do. If we had done it we would have approached it in a different way.
Q. Iss za software different?
A. Yes.
Q. Vat specifically iss za difference?
A. Well, they don't have the application experience that we do and if we had done it we would have approached it in a different way.
Q. Iss za software different, za Lau software different?
A. The engine is the same, but the experience and the application ...
[Remaining answer interrupted by Tang. Answer indistinct. Tang is raising his voice and begins almost yelling at TC.]
[Answer continues] I understand one fellow took out a light bulb and then it didn't work. If you change environmental conditions it wouldn't work, just as if you try to take fingerprints with a dirty hand. Second, the test was conducted 18 months ago. 18 months is a very long time in software development. Third, the [FRV2000] test was set up in a lab, not a proper test of accuracy on-site. When you deploy software, you want to deploy it in an environment where it is going to be successful. It's all about the setting where it is deployed.
Q: Ver any off your people [Viisage] present at za DoD?
A: To the best of my knowledge and understanding, no.
Q: Iss zere a new version of za software?
A: It changes every single day based on our experience in the field. The International
Biometrics Group test was done differently. It was an Access Control test. With the IBG "we did quite well" but it was "optimized around a certain set of parameters." "Anyone who puts out any number doesn't know anything about the technology or scientific testing doesn't know anything about FR or how it is deployed. It is all about how it is deployed." It is very important to understand the testing critieria but more importantly not the test, but how would you deploy it in the real world. We agree [with privacy advocates] on one thing. We do not deploy FR in so-called surveillance applications where you are scanning a crowd as on a street with crowds of people. We deploy our technology in a controlled environment. At the Superbowl, we didn;t deploy it inside the Superbowl and scan the faces in the crowd. Too many environmental problems with moving bodies, etc. etc. We deployed it at a choke point, the turn-style, which is a controlled environment similar to an airport at the point where you walk through a metal detector. FR doesn't work in a so-called surveillance environment. Works in a screening environment.
Q. [Heated arguing by Tang. Now, here's a guy who needs to take a mental marquerita.]
Dennis Lazar (Lazard Associates Inc.)
Q: What Ks other than for DL in 4Q?
A: Can't disclose for competitive and security reasons.
Q: Greatest profit, DL or FR?
A: DL
Q: VSNX only competitor? How do they differ?
A: We believe VSNX is the only significant competitor in the market place One point of differentiation is in the algorithms. VSNX system developed @ Rockefeller Univ. Diff. Another differentiation is in enabling the algorithm "and all the other things that make the technology work." Speed, for example, is a feature. VISG system in Illinois includes 8.5 mm photos which our system can fully search in less than 20 secs. No one else has that capability. Also, we can integrate our system into a customer's legacy systems.
Q: Tyco - VSNX. How does this help Tyco? Is there room for them in a project?
A: There is enough business for both. We're both [VISG and VSNX] searching for partners.
Q: Price of your stock? Where do you think the average should be?
A: Peter Lynch metaphor - ‘market has its own mind.' This is a huge market. Not like dot-com. We concentrate on doing a good job. If we do well, our shareholders will do well.
Xavier Blackwell - Solomon Gray Financial
Q Gov't spending re: INS border crossing, points of entry. How does Gov't spending in that area look?
A: Think in terms of the "security chain." If you're moving down the security chain, stopping someone at the metal detectors before they get on an airplane is awfully late. Better to move up the security chain. There is a high level of interest from those agencies who are concerned about who is "getting off the plane" (that is, coming into the U.S. to begin with). We think we'll see a lot of spending on that problem .
Q. Have you seen international interest?
A: Have had inquires from countries that have a huge soccer industry, for example, where fans travel from place to palce and act rowdy.
Q: Any other customers in the sporting area?
A: Stadiums, events, large industrial and commercial bldgs, etc.
Q: Are you guys bullish on the company? Any Insider selling/buying?
A No officer/director sold stocks "in months and months." Maybe some personal gifts. Employees get most of their comp from stock. "Of course we're very bullish. I try to avoid hyping, but people who are long in the stock want a management team that's enthusiastic and I am unapologetically enthusiastic about the company and its prospects." But we will be temperate. Don't want any hyping of the stock for short term gains at the expense of the long term health of the company.
Q: Any other products besides FR and DL?
A Those 2 are our basic focus. Have looked at other things, but we want to remain focused. For example, there are 200 fingerprint cos. World doesn't need 201. Our tech unique, robust, patented. We can do very, very well with the technology we have at hand.
Q: Did you or did you not assign IBM a patent?
A: No.
(Ted Lovejoy, Ladd Capital Management)
Q: Re: accounting. Address the "jump in receivables, y-on-y." Also - what kind of financing are you needing for growth? Secondary? Loans? Also, what are profit margins between products? FR in particular.
A: (Shawn answers:) Volume of receivables has grown. Also, bill more than we are recognizing in revenue/ No receivables written off for bad debts.
Q. Payment day increase? No, lowered collection dates for receivables. Recognize % of completion. Billings strong.
(Tom adds:) Re - financing, 2 years ago company was in dire straits raised. Difficult time. Criticized by some. Having turned around, we see a great benefit now. Can be "more thougthful", selective in offers and timing. "Significant" capital will be needed, but now can do it on a competitive basis..
ReL gross margins in FR - "hugely profitable." 70-80% operating margins - 30-40% Like software.
John Stark ("Stockpickers Club dot com")
Q: Oakland airport company - isn't that another competitor? What are barriers to entry in the same space?
A.: Repeat: We think there's only one significant competitor. Maybe a couple of small Canadian companies. We just don't see them in the marketplace. Oakland wasn't a FR system. It is a plain ID system.
Q. Taking photo off video - aren't there more mistakes than when comparing against a static photo?
A: No, to the contrary. By taking off video, we get 6-8 images/sec. Technology is more sophisticated. Better results.
Q: I've heard things like earrings, glasses can be used to block indicators?
A: VISG tech doesn't use ears as a measurement. But on the larger point, sure, nothing's perfect. The more you change about the face, the more difficult it becomes but we've had success identifying, for example, a woman who had put on 30 lbs and many years.
Q. Humans do it better.
A. On the contrary. Technology is more accurate than human eye. Advantage of image caputirng off video is multiple images of the face, multiple exporessions, angles, etc. Experienced law enforcement will tell you eye witnesses are least reliable.
Q: Humans are better than machines. A robot can't pick up a newspaper.
A: The FR software does it holistically, with precise measurements. Nothing like a robot picking up a newspaper. Computers more accurate, less biased. More accurate than humans.
GREG PALSY (Topaz Investment Advisors)
Q: 8 Qs profit. With all the changes in biz plan, what expect about profitability in 4Q & '02?
A: Tough question. Balancing profitability vs. investment in opportunity. We expect a "much stronger" 2d half of '02. Still evaluating. Leaning toeard investing more in FR even at the expense of profits, to take advantage of a unique opprotunity for growth.
Q: Public equity markets? Investment bankers, etc? How are you coming into the market with
A: "Clearly we expect to be in the markets in the coming weeks and months." Investment banks and funds - cap needs to grow. Coverage will increase. A lot of interest from institutions, investment bankers, etc.
BRAD HERRINGTON - (Penbridge Capital Management)
Q: We can find only 3 players in this sector. VSNX, IMIGIS, VISG We see "almost overwhelming barriers" to entry. Do you see it that way?
A: Huge barriers to entry. (1) R & D cost and time needed is huge. (2) Patents - We have the only parent on RT surveillance technology. (3) References and customer base. We're in a a hundred casinos, a number of other relationships, Fresno, Florida. These in itself become an incredible barrier to entry because potential customers want to know where else it has been used. "We're well positioned competitively."
Q: $1.75-$2 added to air tickets to pay for it? If assume 200 airports for FR and 400 Internat'lly, how can only three companies address this market?
A: Our cost analysis suggests FR can be added for only 5 or 10 cents per ticket. As for the number needed, we're going to do it with partners. Unisys, for example, is "an army."
Q: "We think you're not going to have a problem." We don't think customer funding is going to be a problem. The only problem we see is you'll be spread so thin. How can you not spread self too thin? It's a whole world out there."
A: Partnering and be more selective on "largest" projects, highest margins.
DICK RYAN (Dorian & Co.)
Q: How many FR partners are you working with?
A. Unisys, Pelco, CMS in axis control space, and another dozen not yet announced. "Several others we have arrangements with but haven't announced." Contracts are in pipeline. Good news-bad news problems with large partners: takes more than an afternoon to work through the contracts.
Q: Fresno - bugs - Washington Post story?
A: Every software has bugs, especially when you are installing for first time in the field instead of a lab. Proud of what we accomplished, what we showed. Worked 24/7 in 2 weeks very effectively on a very fast schedule. Amazing what we accomplished in so short a time. What we showed worked very effectively. Pelco happy. We have a strong relationship with them. They're going to be good for us.
Q: Mentioned before, but what is the patent on real time FR technology?
A. This is a technology by which we acquire images off a video for matching against the data base. Gives us a huge advantage.
Closing: Solid industry leader, huge market, robust technology.
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