Difficulty in timing contracts leads to hit for cogent shares.

COGENT Inc.'s automated identification systems help Los Angeles County sheriff's investigators tell the difference among a million different sets of fingerprints in seconds. But the South Pasadena company's crystal ball for forecasting revenue from anticipated government contracts appears to have cracked.

That news was enough to send the stock of one of Wall Street's homeland security darlings plunging earlier this month, even though Cogent had reported healthy fourth-quarter growth.

Chief Financial Officer Paul Kim, in a Feb. 28 call with analysts, would project just 2006 baseline revenue of $120 million, including only signed contracts or orders close to being signed. That's around haft of what many analysts' models were projecting, based on the company's deal pipeline.

"As the scope and complexity of biometric programs becomes greater, projecting the timing of revenue recognition requires making critical assumptions about timing of awards processes by our customers," Kim said. "The procurement process for large projects is long and subject to unpredictable delays."

Cogent shares, which had been trading at around $23.43 prior to the earnings report, hit a 52-week low at $18.51 on March 1, recovering somewhat to close at $19.44 by March 8.

In the fourth quarter, the company posted net income of $20.7 million, or 22 cents a share, more than double reported in same period a year ago. Revenues grew 46 percent year-over-year to $46.2 million.

In the wake of the Sept. 11, 2001, terrorist attacks, high-tech ID systems suddenly became big business. The International Biometric Group, a New York City-based research organization, expects that the automated fingerprint identification portion of the biometrics market, now estimated at $325 million annually, will pass $1 billion by 2008.

It's that potential that lead BusinessWeek to rank Cogent as No. 1 in its "Top 10 Hot Growth Companies" list for 2005. For 2005, Cogent profits soared 142 percent from the prior year to $65.3 million, as sales jumped 82 percent to $142 million.

Contracting pitfalls

Cogent is a prime contractor for the Homeland Security Dept.'s $10 billion effort to beef up border security, including a system that will collect fingerprints and photographs of everyone who legally enters the U.S.

Timing government contract awards have always been hard to predict. An airline-related homeland security request for proposal that Cogent submitted nearly a year ago, for example, has yet to be awarded.

The company's unwillingness to go out on a limb with guidance prompted three analysts to downgrade Cogent shares, though all continue to be upbeat about the company's longer term prospects.

"Biometics applications for border protection and various ID programs suggest substantial growth potential, but business flow remains lumpy, and politically sensitive," said Bear Steams analyst Peter Barry, who downgraded shares from "outperform" to "peer perform." Needham & Co. and Oppenheimer & Co. also lowered their prospects for the stock.

Barry still expects Cogent, which has $351 million in cash and investments available to quickly execute new contracts, to be able to grow more than 40 percent annually for the next several years.

Morgan Stanley's Julie Santoriello told clients that her company's forecast model saw $215 million in revenues for Cogent this year, and $320 million in 2007.

Fans of the CBS crime forensics series "CSI" are familiar with how automated fingerprint identification systems like Cogent's operate. Its AFIS software captures fingerprint images electronically, then encodes the images into searchable files that can be compared to millions of other prints in seconds.

In addition to local law enforcement contracts, key customers range from the Department of Homeland Security's US-VISIT border security program to the National Electoral Council in Venezuela.

The company also has begun seeking commercial clients, but that division now contributes less than 5 percent of revenues. A recent $5 million contract with a San Francisco-based company called Pay by Touch will develop a system that enables customers to use their fingerprint like a credit card.

Cogent Inc. (COGT)

Stock Prices

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Quarterly Net Income (millions)

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YEAR (Dec. 31)                   2005      2004

Revenue (millions)             $159.9     $87.7
Total Expenses (millions)        84.9      54.3
Operating Income (millions)      33.4      10.4
Net Income (millions)            65.3      42.6
Earnings Per Share               $0.69      0.56

SUMMARY

Business: Automated fingerprint identification systems
Headquarters: South Pasadena
CEO: Ming Hsieh
Market Cap: $1.8 billion    Dividend Yield: n/a
Total Liabilities: $54.6 million    P/E Ratio: 28.15
Long-Term Debt: $0