Aware Inc (AWRE) 2002 Q4 法說會逐字稿

Good day everyone and welcome to the Aware, Inc. fourth quarter earnings conference call. Today's call is being recorded. At this time I'd like to turn the call over to Mr. Rick Moberg, CFO, for his opening remarks. Please go ahead, sir.

Welcome to Aware's fourth quarter 2002 earnings conference call. With me is Michael Tzannes, CEO. Thank you for joining us today. The agenda for the call will be as follows. I'll review financial results for the quarter. Next Michael will talk about the business, and final we'll take questions. A recording of this call will be available on our website at aware.com after the call is completed. First I'd like to point out various remarks we may make about future expectations, plans, prospects for the company in the DSL market constitutes forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated from these forward looking statements as a result of various factors, including those in risks factors in the quarterly report 10Q for quarter ended Sept.30, 2002 on file with the S.E.C.

Fourth quarter 2002 revenue was $2.3m and EPS was a loose of $0.19 a share.

Last year in Q4, revenue was $3.2m and we lost 11 cents a share. Current quarter $1.4m of charges or 6 cents a share. Royalty revenue was $552,000 this quarter comparing to $729,000 last quarter.. A contract revenue $620,000 this quarter which compares to $1.9m last quarter and $1.8m a year ago.

Contract revenue down this quarter due to a challenging ADSL licensing environment. Product revenue was $1.1m this quarter which compares to $1.3m last quarter and $859,000 a year ago.

Product revenue consists of hardware solutions for ADSL applications and compression software for electronic ID applications.

We had 2 10% semi-conductor customers, Analog Devices and Infinion. These 2 customers accounted for 45% of revenue.

Q4 spending was $6.8m comparing to $6.8m last quarter and $6.1m in last year’s fourth quarter.

Spending this quarter includes $700,000 of severance cost related to our October reduction in force and a $707,000 charge for receivables. As a result of headcount and salary reduction we estimate that spending will be approximately $5m per quarter starting in January 2003.

Our balance sheet is in good shape. Cash and investments were $47.1m at the end of December, receivables were $1.3m at quarter end, which translates into DSOs of 50 days. Inventory levels were minimal. On December 31, we had 120 full-time employees, 89 of these employees were engineers.

There were 22.7m shares outstanding at quarter end. Now I'll turn the call over to Michael.

Thanks, Rick. Two important trends in the broadband communications market are playing out. First of all, ADSL is on its way to becoming the most widely used broadband wide area technology in the world. This continues to be validated by steady subscriber growth around the world.

2002 ended with over 35m subscribers, and we're estimating that between 17m and 22m new subscribers sign up in 2003. The other important trend is that ADSL itself is evolving into a more robust and feature-rich technology. Two new sets of standards improve the current set of ADSL standards. These new standards raise the bar on ADSL performance, functionality, ease of installation, and support.

One of these new standards is known as ADSL2 or G992.3, and provides numerous improvements over existing ADSL standards including increase in reach of 1,000 to 2,000 feet and lower service operating expenses by adding loop diagnostics and power consumption management.

Aware has led the introduction of many of these new features at the International Telecommunications Union. This standard was consented by the ITU in all of 2002. The ITU also, just last week, consented on a second new standard, ADSL2 plus or G992.5, which builds on ADSL2 by expanding the bandwidth to approximately 2 megahertz and increasing achievable data rates to 24Mbits, thereby enabling new services such as support of video over ADSL.

These new standards with being embraced by the whole ADSL industry, with express support from Alcatel and other equipment companies as well as phone companies around the world.

These new standards are raising the bar on ADSL semiconductor suppliers who must now support solutions as well as new standards. Aware not only pioneered many of the innovations in these new standards.

We are already offering a comprehensive, intellectual property conclusion including a complete digital chip.

We've developed a comprehensive patent portfolio to protect the technology that we've developed and brought to standards bodies. Because of these developments in the ADSL industry, continued growth and new standards, we're optimistic about our future business prospects.

However, today's business environment remains challenging for Aware. ADSL2 and ADSL2 plus are just beginning to emerge as requirements. Chip companies looking to secure business next year must have these capabilities, but most solutions this year are based on legacy ADSL.

In the meantime, the existing solutions are being offered by companies willing to win designs at any cost. So far this environment has caused many companies not in ADSL today to remain on the sidelines, and our customers have not managed to gain share in this environment.

And now I'll tell you why I think things are going to change. In our view, a healthy CPE ADSLI industry has multiple companies with solutions that integrate ADSL abilities with other functionality.

One popular example today is ADSL plus wireless LAN, but there are many, including ADSL plus Network, video and cable modem.

Aware’s role in this industry, that we foresee, is one of high value. By supplying IP, we enable multiple companies to add ADSL to their solutions. This constitutes a future landscape and it's difficult to predict what things will look like between now and then.

We internally have focused on facilitating this change by offering high-performance CPE solutions that support legacy and new standards and allow multiple suppliers to add ADSL. We come out a winner because long term we perceive the landscape being reshaped and see a winning role for Aware in that landscape.

At the central office a handful of companies will outpace the others. They possess strong analog plus digital capability and support multiple standards in multi-port silicon solutions. Two of our largest customers, Analog Devices and Infinion possess these success criteria and are well positioned on the central office side. Let me talk more about how we're enabling the CPE world and why we succeed as it plays out.

In January, we announced our new Stratiphy chip, which is the first IP solution in the market to support legacy as well as the new ITU ADSL2 standard. It is a powerful proof statement of the functional capability and performance of our technology. It has been very positively received by the chip set and equipment suppliers we have demonstrated it to in the last month.

We brought it this week to Plug Fest, which is the ADSL forum sponsored interoperability event and which is the first interoperability event for ADSL2.

With the addition of Stratiphy to Aware's intellectual property offerings, Aware's customers have access to a working silicon platform along with the complete turnkey package of RTL and firmware. The same RTL and firmware that are used in Stratiphy are available in license in soft form from Aware. We have rounded out our intellectual property packages in response to low risk, fast time to market, state-of-the-art, intellectual property.

From a business model, we're an intellectual property company. We win when lots of companies leverage our research and development to develop solutions to take advantage of our technology. They bring complementary technology, such as wireless LAN, they bring manufacturing, and they bring sales and support.

Aware is successful when our technology reaches a large share of the market. This market share generates both contract revenue during product development and royalty revenue when our customer's products reach the market. Within the landscape that we foresee, where numerous new chip set companies add ADSL's technology to their solutions, Aware is a very successful business.

With our powerful combination of the Stratiphy chip, complete RTL and run-time software, we are in the bests position we've ever been in to enable chip set companies to enter the ADSL market.

We expect some companies to use Stratiphy as an entry product while integrating our RTL and software onto their own processes. We expect others to offer Stratiphy with other silicon level offerings of their own. The completeness of our IP portfolio with the inclusion of the Stratiphy chip opens numerous new opportunities for our customers to enter the market using our technology.

We've seen interest in our intellectual property in the marketplace increase significantly in the last several months.

This is true both for our CO as well as CPE solutions. We are counting on adding new licensees. That is the way we will grow revenues. In the near term, prospects remain uncertain. New design starts in the chip companies we're interacting with are few, but we're seeing a notable increase in interest.

The challenging ADSL semiconductor environment is also affecting our existing customers. Our three largest customers over the recent past have been Analog Devices, Infinion, and Intel. While we still remain optimistic about prospects in the industry with Analog Devices and Infinion, we have to reset expectations about Intel.

We are no longer able to state with as much confidence as we have in the past that Intel will be a large source of revenue for us in the future.

Turning now to spending. Rick mentioned we had a reduction in force in October and salary cuts that became effective on January 1st.

Our spending is now down to a bit more than $5m per quarter. We've retained many of our capability and remain confident that we can execute towards our strategy despite the reduction in force.

On guidance for this quarter, Q1 of '03, our guidance is that revenues will be in the range from $1.5m to $3m for Q1.

Guidance beyond this quarter is too difficult for us to forecast. We do believe that as the new phase of ADSL market develops, the one in which ADSL2 and ADSL2 plus become dominant standards, we'll return to profitable and are hopeful the new market takes shape over the next six to twelve months.

The industry is at an important cross roads with new standards and opportunities for challenges for phone companies to increase service and reduce cost. We’re confident that we’re addressing these issues head on with introduction and support in new technology in a comprehensive IP portfolio.

Despite these difficult times, Aware remains strong and intends to remain a market leader through a combination of technology superiority and aggressive support of our customers.

We see a bright future for our products, services, and company. We have plenty of cash to meet our objectives. We have a robust technology, and we have a winning strategy.

We certainly believe we will and look forward to rewarding our shareholders as this market develops. With that, if there are any questions, we would be happy to take them at this point.

Thank you. Our first question today is from Brad Solteck from Robert W. Baird. Please go ahead.

Hello. I had a question. What do you think the broadband bill will mean to you going forward.

I'm sorry?

The broadband bill, what will it mean to you going forward?

Well there's been two initiatives underway, one in Congress and one with the FCC, and my understanding is that there's not a whole lot going on in Congress. Michael Powell, however, at the FCC, has been an advocate of loosening some of the regulations on phone companies so DSL will be more widely employed here in the United States. I kind of monitor what's going on with the FCC on a regular basis, and I think we're all waiting for the broadband initiative to get finalized there. I'm not sure when it's going to happen, but it will be sometime this year.

Okay.

To the extent that broadband takes off in the United States more than it is today, because DSL in particular, because that's really our main focus, it's not growing as explosively in the United States as it is in some other parts of the world, but it is steadily growing.

One of the opportunities in this country is the enabling of digital loop carriers with DSL. And one of our large customers in Infinion has a relationship with Alcatel, who owns many of the digital carrier cabinets, and we think there's a real potential as this broadband bill and other market and commercial forces push ADSL to grow more rapidly in the United States. The loop carriers will stop being enabled and that we'll benefit in our relationship with Infinion.

Outside the United States, which is where most of the action is on DSL around the world, you know, there are a number of hotspots or areas experiencing explosive growth. Parts of Asia, Japan, --China is now demonstrate ago lot of potential and track record for rapid growth, and some of the European countries, Germany and France and Italy and, more recently, the United Kingdom. Britain is really pushing hard for roll-out. So, you know, the grass roots ADSL movement around the world continues very healthily. Without question the broadband bill will help things in this country.

Great. Thank you.

Thank you.

And our next question is from Bob Stilasko with Palisade Capital..

In the guidance for the $5m per quarter spending, does that include manufacturing or cost of product sales?

It does. It includes all our spending.

Okay. So that's almost down to where the R&D was. So I gather the R&D expense probably came down substantially?

That's true.

Going forward, I mean.

Yeah.

Okay. Thanks.

And we'll take our next question from Hasain Carmme (ph) from Pacific Edge Investment Management

Just a question on contract revenue. I was wondering how much visibility you have into contract revenue in any given quarter?

Well, these days, not too much. In the past, to the way a contract typically works and the way contract revenue works is Aware and a customer agree to -- a customer agrees to use Aware's technology and Aware delivers certain things.

Today they could be base basic designs in software and perhaps the chip we develop for people. And when we deliver those things, we'll collect contract revenue.

Today, our primary customers, we really only have several of them. So the visibility within those customers is pretty good, but there's just not as many of them as we've had in the past.

Generally, contract revenue is something that we can foresee pretty well into at least the near future. The biggest problem, the biggest challenge that we have right now is there just aren't as many customers as we've had in the past.

And then another question on the Infinion relationship, they had introduced a board where they basically have the same port for DSL as well as a regular pots line.

Right.

I guess your intellectual property is on that chip.

On the DSL part. I mean the relationship with Infinion is where we bring the ADSL technology, and they are a leading expert in analog design, both for the broadband part of the analog, which is the part that connects up to the DSL, but they have many years and probably tens if not hundred of millions of units of experience in voice circuits and in selling pots circuits. And the combination of these two things has what's made the Aware-Infinion combination a powerful one and made it attractive to Loop carrier companies like Alcatel, ---there's announced relationship with Akem, and there's a combination of those things. The board you saw that Supercom?

Yes. So the current life span products, then, don't carry your intellectual property, or Infinion’s boards.

To the extent they have ADSL and to the extent that ADSL is Infinion based is definitely Aware’s intellectual property.

So some so the products have capability of dropping DSL line cards in there? I'm not sure if they're Infinion chips.

If they are, it's and a ware-based solution. If they're Alcatel's chips, they would not be.

All right. Do you know if the lower-line product that Alcatel is going to announce at Supercom this year is going to carry the Infinion chips and so you would potentially get royalty revenues from that?.

What's been publicly announced is. I don't think they've announced, at this point, any other designs with Alcatel. That's the extent of the public announcements with Alcatel.

Thank you.

Once again, it's star 1 if you wish to ask a question today. At this time, there appears to be no other questions. I'd like to turn the call back over to the speakers for any closing remarks.

Thank you very much, we look forward to talking to you next quarter. Bye bye.

That does conclude today's conference call. Thank you for your participation. You may now disconnect.--- 0