Here's the latest Lehman Bros Report:
Identix Inc (IDNX - $5.15) 2-Equal weight
Company Update
DHS Reaffirms Key IDNX Award Win
IDENTIX March 12, 2004
Investment conclusion
The Dept of Homeland Security (DHS) has affirmed
its decision to award IDNX a Blanket Purchase
Agreement (BPA) for 10-print live scan fingerprint
booking stations & desktops systems to the
Citizenship & Immigration Services (CIS). The
agreement had originally been awarded in Oct 2003,
but was held-up due to a protest from a competing
bidder. The reaffirmation solidifies the leading
competitive position of IDNX's products & technology
within the growing biometrics industry.
Summary
This contract win is significant for many reasons: (1)
it is a big boost for the biometrics industry (2) while
calling for roughly $27m over the next 5 years, it is
actually open ended & can accommodate funding for
DHS programs beyond the CIS, (3) it is highly visible
& was won vs. 2 well-known & intense rivals in live
scan, (4) future DHS programs, like U.S.-VISIT, may
look to vehicles like this one for equipment &
services, & (5) there is a service contract starting in
the 2nd year.
Stock Rating: Target:
New: 2-Equal weight New: 10.00
Old: 2-Equal weight Old: 10.00
Sector View: 2-Neutral
-- PLEASE SEE END OF DOCUMENT FOR IMPORTANT DISCLOSURES -
Contract Win Bigger Than Meets the Eye
The highly visible nature of this contract made it one which Identix needed to win, because of the ramifications for future
contracts with the U.S. and foreign governments, as well as for the “reference site” nature of the contract for possible future
commercial contracts. The reaffirmation of the win maintains IDNX’s perceived leadership position within the nascent
biometrics industry.
We believe that the competitor’s protest that had held-up this award was primarily based on the contention that IDNX had a
privileged relationship with the relevant government agencies. The review of the DHS’s decision process was fully
evaluated this second time around and it is apparent that IDNX has won the agreement based on merit and not a privileged
relationship. Since IDNX has actually won this award twice it demonstrates the company’s leading technology and product
positioning. It is important to note that, positively, IDNX does have strong relationships with the DHS.
The contract is actually a “blanket purchase agreement,” or BPA. The buyers will be the Office of Border Control and the
U.S. Customs, as part of Citizenship and Immigration Service (CIS). The first installation, a $2.3 million order for IDNX
TouchPrint 3500LC Live Scan Booking Stations, was held up by the suspension of the project, but has now been reinstated.
IDNX had included a revenue impact of this order in its F2H04 guidance, so on a near-term basis this alleviates risk.
Obviously, the short-term ramifications pale against the importance of this agreement for IDNX overall.
We expect the agreement to contribute over $5 million annually to IDNX revenues (at hopefully what eventually approaches
typical lives scan gross margins well north of 40%). We anticipate the equipment ordered will be mainly, but not
exclusively, “Touchprint 3000” live scan booking stations and desktop systems, with a fairly broad range of pricing. This
contract, by itself, will not bring IDNX to profitability, but we believe it cuts down our annualized revenue requirement for
profits by about one-third. Combined with the recent sale of IDNX’s IPS division, new and innovative skin biometric
technology recently acquired from Delean Vision Worldwide, a new Chairman of the Board and streamlined operations via a
reduction of roughly six percent of its total workforce, the BPA positions IDNX well for future improvement in earnings.
Estimates, Rating and Target
At this time we are maintaining our 2 –Equal weight rating, our F3Q04 EPS estimate of ($0.05), our F4Q04 EPS estimate of
($0.04), and our F2005 EPS estimate of ($0.15). IDNX, as it has for the last ten years, remains our most significant “show
me” story. Given the huge potential of the biometrics market, which is currently $300-$500 million and could be a multiple
billion dollar industry in 3-5 years, and because IDNX certainly the indisputable leader in the biometrics industry, we believe
investors have been and will continue to value the company on a multiple of its biometric revenue, and eventually earnings.
IDNX has traded on a multiple of 3x-10x revenues over the last five years. Because of the BPA and our belief that IDNX is
getting closer to fulfillment of several large contracts, we believe shares should be valued toward the upper end of the
historical range. We believe the market expects this company to double or triple its revenue base over the next five years.
Based on this expectation, our target price remains $10.
Lehman Brothers does and seeks to do business with companies covered in its research reports. As a result, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
Analyst Certification:
I, Jeffrey Kessler, hereby certify (1) that the views expressed in this research note accurately reflect my personal views about any or all of
the subject securities or issuers referred to in this note and (2) no part of my compensation was, is or will be directly or indirectly related to
the specific recommendations or views expressed in this note.
Company Description:
Identix is the leading producer of personal identification and verification systems for security access control and law enforcement
applications.
EQUITY RESEARCH
Important Disclosures:
The analysts responsible for preparing this report have received compensation based upon various factors including the Firm’s total revenues,
a portion of which is generated by investment banking activities.
C - Lehman Brothers Inc. makes a market in the securities of this company.
Risks Which May Impede the Achievement of the Price Target:
IDNX: Identix's operating environment and end markets remain challenging. The continued lack of visibility into economic recovery and/or
corporate and governmental adoption of Identix's product solutions creates uncertainty and will continue to do so until these issues are better
addressed.
Other Material Conflicts:
IDNX: Identix was advised by Lehman Brothers, in its merger with Visionics, the leading provider of facial recognition technology.
Key to Investment Opinions:
Stock Rating
1-Overweight - The stock is expected to outperform the unweighted expected total return of the industry sector over a 12-month investment
horizon.
2-Equal weight - The stock is expected to perform in line with the unweighted expected total return of the industry sector over a 12-month
investment horizon.
3-Underweight - The stock is expected to underperform the unweighted expected total return of the industry sector over a 12-month
investment horizon.
RS-Rating Suspended - The rating and target price have been suspended temporarily to comply with applicable regulations and/or firm
policies in certain circumstances including when Lehman Brothers is acting in an advisory capacity on a merger or strategic transaction
involving the company.
Sector View
1-Positive - sector fundamentals/valuations are improving.
2-Neutral - sector fundamentals/valuations are steady, neither improving nor deteriorating.
3-Negative - sector fundamentals/valuations are deteriorating.
Stock Ratings From February 2001 to August 5, 2002 (sector view did not exist):
This is a guide to expected total return (price performance plus dividend) relative to the total return of the stock’s local market over the next 12
months.
1-Strong Buy - expected to outperform the market by 15 or more percentage points.
2-Buy - expected to outperform the market by 5-15 percentage points.
3-Market Perform - expected to perform in line with the market, plus or minus 5 percentage points.
4-Market Underperform - expected to underperform the market by 5-15 percentage points.
5-Sell - expected to underperform the market by 15 or more percentage points.
Stock Ratings Prior to February 2001 (sector view did not exist):
1-Buy - expected to outperform the market by 15 or more percentage points.
2-Outperform - expected to outperform the market by 5-15 percentage points.
3-Neutral - expected to perform in line with the market, plus or minus 5 percentage points.
4-Underperform - expected to underperform the market by 5-15 percentage points.
5-Sell - expected to underperform the market by 15 or more percentage points.
V-Venture – return over multiyear timeframe consistent with venture capital; should only be held in a well diversified portfolio.
Distribution of Ratings:
Lehman Brothers Equity Research has 1626 companies under coverage.
40% have been assigned a 1-Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating, 38% of
companies with this rating are investment banking clients of the Firm.
40% have been assigned a 2-Equal weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating, 10%
of companies with this rating are investment banking clients of the Firm.
20% have been assigned a 3-Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating, 67% of
companies with this rating are investment banking clients of the Firm.
^^^^^^^^^^^^^^^^
ize
©¿©
-<>- |
