Aware Inc (AWRE) 2003 Q1 法說會逐字稿

Good day, everyone. Welcome to the Aware Inc. conference call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Rick Moberg for his opening remarks. Please go ahead, sir.

Hello, this is Rick. I'm joined this afternoon by Michael Tzannes, our CEO. Thank you for joining us today. The agenda for the call today will be as follows. I'll review financial results for the quarter. Next Michael will talk about the business, and finally we'll take any questions you might have. A recording of this call will be available at www.aware.com after the call is completed.

First, I'd like to point out various remarks we may make for the company in the DSL market constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements. As a result are various important factors, including those discussed in our annual report on form 10-K for the year ended December 31st, 2001. -- or 2002, which is on file at the SEC.

Now, turning to financial results. All numbers that we're going to use in this call are based on GAAP. First quarter 2003 revenue was $1.9 million and EPS was a loss of 13 cents a share. Last year, Q1 revenue was $3.6 million, and we lost 11 cents per share. Royalty revenue for the quarter was $907,000, which compares with $552,000 last quarter, and $476,000 in last year's first quarter. The increase in royalties is primary due to increased sales of ADSL chips by Analog Devices, our largest customer.

Contract revenue for the quarter was $330,000, which compares to $620,000 last quarter, and $2.1 million a year ago. Contract revenue was down due to an ADSL licensing environment that continues to be challenging.

Product revenue in this quarter was $710,000, which compares to $1.1 million last quarter and $1 million a year ago. Product revenue consists of hardware solutions for ADSL applications, and compression software for ID applications.

For the quarter, we had two 10% semiconductor customers, Analog Devices, and Infinion.. These two customers accounted for 57% of revenue. Q1 spending war $5.1 million, which pairs for $6.8 million last quarter, and $6.4 in last year's first quarter. Lower spending in Q1 is primarily due to the effect of a reduction in force in Q4, and salary reductions that were implemented on January 1st this year.

Our balance sheet is in good shape, with cash and investments of $43.7 million. Receivables were $1.7 million, which translates into DSOs of 78 days and we have no debt. On March 31st, we had 119 full time employees of which 87 were engineers, and there were 22.7 million shares outstanding at the end of the quarter. Now I'd like to turn the call over to Michael.

Thank you, Rick. I want to start with an update on the ADSL market, focusing on subscriber growth around the world.

ADSL subscribers have continued to be added at a record pace. We're expecting that more than 20 million new subscribers will be added around the world in calendar 2003. This is up conservative from about 17.5 million that were added in 2002. In total, today only about 3.5% of the 1 billion phone lines are used for high-speed service with ADSL.ADSL is already the most widely used wide area network broadband technology. There is little doubt that ADSL will represent the broadband window to the outside world for hundreds of millions of homes.

New standards are also taking hold. We expect that these new standards will dictate what is deployed on many hundreds of millions of lines over the next decade, these standards are called ADSL2 and ADSL2+, and represent the latest technology our industry has to offer. They provide higher speeds, longer reach, better features, all standardized for global use. With these new standards, new opportunities for revenues open for service providers, for equipment suppliers, and for chipset manufacturers.

ADSL is a high-speed access technology, capable now with new ADSL2+ standards of delivering in well of excess of 20 megabytes/second over a single phone line to a home. But it's what this data rate means to a consumer that is the real value. It means a single telephone line can be used for broadband multimedia content delivery like video or games, and that's in addition to high-speed Internet access and regular phone service on that same line, and it means that all of the above can be shared inside the home with a wireless local area network.

In the home, an ADSL modem by itself it a revolutionary technology. When combined with a wireless LAN or network processor, or a video processor, or a personal computer, it acts as the window to the broadband world. ADSL is a must-have capable for the consumer electronics industry. With ADSL, consumers electronics chip and box companies are able to leverage their assets and investments, and enter a rapidly expanding broadband residential industry.

Our goal at Aware is to enable companies to rapidly offer an ADSL capability in their products. This capability allows them to leverage their existing assets and accelerate their entry into new rapidly growing markets that embrace the wide area network of the 21st century, which is ADSL.

Towards achieving this goal, we announced today our StratiPHY +chip, which is the second in a family of chips we announced. This embodies a complete implementation of legacy and new ADSL standards, including ADSL2 and 2 plus. This chip is working today, and we will be demoing it at Supercom in June.

With this chip, we enable a faster time to market for our customers, and integrate ADSL into their solutions. Aware's customers have access to working silicon platforms in StratiPHY and now StratiPHY 2+ , along with complete turnkey packages of RTL and firmware. The same that are used in the chips, StratiPHY and StratiPHY 2+ are available for license in soft form from Aware. We're actively engaged in negotiations to license our ADSL IP. These negotiations involve both existing as well as new customers. We're seeing more activities in our sales opportunities, driven by new deployments and new standards. Our royalties improved from last quarter to this quarter. We believe they will improve further. These are a consequence of increased sales by our two largest customers, Analog Devices, and INFINION.

Spending was down this quarter primarily because of the October 2002 reduction in force, and we expect that our expenses next quarter will be about the same as this quarter, and we continue to have a very adequate cash position at $43.7 million.

We have continued to invest in R&D while keeping a close eye on spending. Our R&D accomplishments are seen in the new StratiPHY 2+ chip and accompanying intellectual property, and further progress in our Dr. DSL, and voice-over DSL developments as well as new compression solutions based on JPEG 2000.

I'd like to turn to some guidance for Q2 of 2003. Our expectation is that revenues will improve in Q2. Our guidance is for revenues to be in the range of $2 million to $3.5 million, with expenses, as I mentioned earlier, at about $5 million. We continue to have limited visibility beyond next quarter.

We remain confident that based upon general industry trends, the sales opportunities that we're seeing, our customers' presence in the ADSL market and our strong ADSL technology, that we will be able to return the company first to profitability, and then to the growth and profitability targets we set before the downturn. At this point, we'd like to open up the call to any questions you may have.

Thank you. Today's question-and-answer session will be conducted electronically. If you would like to ask a question, please do, please do so by pressing the star key, followed by the digit 1 on your Touch-Tone telephone. If you are on a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment. We'll take as many question as time permits. Please press star-1 on your Touch-Tone telephone to ask a question. We'll pause for just a moment, to give everyone an opportunity to signal for questions. We'll go first to Anton Wallman from Needham Company.

Hey, Mike, can you hear me? And I wanted to ask you just a couple of things here, first of all -- by the way, Rick, I assume you're there as well?

I am.

Good. First of all, you didn't mention Intel. Is that project history now? Or is that something that's ongoing in the background? Is that one of the reasons why contract revenue is down? What's the story there?

Well, we made a statement last quarter about Intel, and there's really no update from what we said last quarter. I can give you the gist of what we said last quarter, and that is that we are pretty uncertain about whether Intel and Aware are going to have joint products in the ADSL markets. Because of that uncertainty, we have less confidence than we have had in the past that Intel will be a large source of revenue for us over the long-term future.

Okay. Basically that product is winding down, and has been winding down here, then, for a few months?

You're asking me that?

Yeah.

I can't really comment on any specifics of what Intel products are doing or not doing. What we are at this point telling everybody is that whatever confidence we had in Intel becoming a large customer for us, we no longer have that same level of confidence.

Okay. And in terms of general product cycle upgrade cycle, as see in at least two countries, in Japan and Korea, the phenomenon of sort of the bandwidth equivalent of my SUV is bigger than yours, and something new becomes available, and oops, these people run out and get it. But in order for that to happen, the service providers must offer something new, and I think that would be obviously nothing even close to that happening at least in the United States, and for that matter, in many other countries, where an operator has said, hey, we offered eight megabit service in they're service and now we're going to 12 and 16, and north of that, ADSL2, and ADSL2+. Most residential customers in the U.S. end up buying 768K downstream. Do you see any signs outside of Japan and Korea that lead you to believe we'll see people trading up in other countries as well?

Well, I think there's two possibilities of what you're calling trading up. One is trading up for just pure speed, which you've noted is happening in Japan and in Korea. I think the other reason that people will trade up is for a better technology implementation or a better offering of ADSL, and that's what the new standards, in addition to just raw data rate, which is an important feature of the new standards, but the new standards also provide a number of other important things like better reach, line diagnostic capabilities, power management capabilities, and in various countries, and in various parts of the world.

Those things have as much importance as perhaps, you know, trading up just for data rate. For example, in the United States, power management is an important part of actually enabling digital loop carriers because of the some of the challenge surrounding that in an area that's already using ADSL. Longer reach is also important in the U.S., but also other parts of the world, for many reasons, even at a moderate data rate that most people are signing up for, to the extent that data rate can be deployed over a wider range, you have a larger customer base to sell your service to.

I think you are going to see television and video offering over ADSL. The place that we're seeing sort of the most drive for that is in Europe. A lot of it's coming out of the Alcatel, Dslam equipment marketing work they're doing, and they're very actively -- upselling, as you call it, new types of ADSL, such as ADSL2+, based upon their ability, in addition to doing the things I talked about, you know, longer reach and line diagnostics and things like that, also being able to offer TV channels in addition to high-speed access.

So I agree, the content is important for the high speed. I think the new standards are probably going to be proliferating no matter what, just because they're better than the existing one. And they bring features high data rate is one of those features, but they bring other features that are important as well.

All right. Thank you.

And just a reminder, it is star-1 if you wish to ask a question today. We'll go next to Ryan Bartiman (ph) from Griffin Partners.

The revenue numbers that you gave was $2.5 to $3 million for Q2. Could you break that off in terms of product sales, contract and royalties?

No, we're not going to do that yet. First of all, you see the range is pretty wide. That's because there's still a lot of things moving around. Things appear to be getting slightly better. That's why we guided up a bit. Still we're not happy with these numbers by any stretch of the imagination, but at least they're getting a bit better. But to break it down within that range would be an exercise in ranges that wouldn't mean much.

Understood. And you expect that your royalty revenues will increase, you said?

That's what we said.

Could you provide kind of 10% or 20% increase, or a range? Or 5%?

Just one moment, please. Continue to hold, and we will continue the conference in just one moment.

Okay. Our speakers have rejoined the conference. If you could repeat your question, sir.

The question is, as far as -- you said that royalty revenue you expected to increase. Could you give some guidance as far as what percentage you're looking for there?

No, I can't do that yet. I'm comfortable say it's going to go up, based on trends we're seeing in the industry and some early feedback we've gotten from some of our customers, but I can't put a number on it yesterday.

What about R&D expenses? You want total was around $5 million?

It will be pretty much what it was this quarter, which is all of our expenses will be around $5 million.

Very good. So I guess the burn would be between a $1.5 and $3 million?

That's about right.

Excellent. Thank you very much.

Thank you.

We'll go to Nathaniel Pulfizer with Pulfizer and Associates.

Nat Pulfizer here. What's going on with Dr. DSL?

Well, we've continued to invest research and development dollars in that, and we've continued to work to get it into the field. We think it's a very promising technology for enabling phone companies to do a better job of both deploying ADSL and monitoring the service once the service is on at a person's house. We have several -- I think one announced deal with a company called HAKIMIAN, in which we sell into the test equipment market, which is the same market as Dr. DSL is addressing. There are parts of Dr. DSL that have been incorporated in the new standards, the ADSL2 and 2-plus standard, so part of that technology is used for Dr. DSL is now a requirement in the ADSL2 standards.

And, you know, I don't think there's -- I think the primary things that phone companies are looking to do today with ADSL is to find ways to improve the revenues that they'll get out of ADSL through either new service offerings or expanded capabilities of reach and data rate and whatever else, and then the other thing they're trying to do is try to find ways to limit the costs around, you know maintaining and expanding what is, in many cases, multiple millions of users that are in service. We think Dr. DSL has a real value toward that second challenge that the phone companies have.

Have you seen any interest in Dr. DSL from your Pacific Rim customers?

Yes, we have. We've seen it pretty much around the world, and there are two reasons for that. One is that it is now a large part of what is happening in the new standards. Line diagnostics is a big part of what the new standards have to offer.

The other is, the reason I already stated, which is when you've got two million or five million subscribers growing to a larger number than that over the near term, you've got to start worrying about where you can save money by doing a better job of monitoring and deploying new service to new folks. So we are seeing interest in that from all over the world.

But customers have yet to queue up in line?

There's no real notable revenue to call out now for Dr. DSL, but we're pretty optimistic there will be.

And do the new standards increase reach, or just bandwidth?

They do both. So one of the things that they do is expand the reach by a couple thousand feet. Which, of course, doesn't -- that's a lower data rate, because you're already pretty far down data rate-wise when you're stretching the reach.

You're talking about beyond 15,000, 16,000 feet?

You're into the low 20,000-foot range. Another important part is the ADSL2+ standards expands the bandwidth by a factor of two.

Right.

And gets data rates up over 20 megabits, as well as power management, line diagnostic and a number of other things.

Thank you.

Just a reminder. If you do wish to ask a question today, it is star-1 on your Touch-Tone telephone. And there appears to be no other questions today. I'd like to turn the call back over to Mr. Michael Tzannes for closing remarks.

Thank you. We'll be at Supercom in June in Atlanta, and we'll be in our booth demonstrating new ADSL technology and new product offerings from Aware. We also are holding the annual meeting of our stockholders on May 29th at 10.00 a.m. in Bedford, Massachusetts, we look forward to updating you next quarter. Thank you very much. Good-bye.

That does conclude today's conference call. We appreciate your participation. You may now disconnect.--- 0