Aware Inc (AWRE) 2003 Q2 法說會逐字稿

Good day everyone and welcome to this Aware Inc. second quarter release conference call. Today's call is being recorded. At this time for opening remarks I would like to turn the call over to the Chief Financial Officer, Rick Moberg. Please go ahead, sir.

Welcome to Aware's second quarter earnings conference call. I'm Rick Moberg, and with me is our CEO, Michael Tzannes. Thank you for joining us. The agenda will be as follows: I will review financial results for the quarter, next Michael will talk about business, and finally we'll take your questions. A recording of this call will be available on our web site at www.aware.com after the call is completed.

First, I would like to point out that various remarks that we may make about plans and prospects for the company and the DSL market constitute forward-looking statements for the purposes of the Safe Harbor Provisions 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 of various important factors including those discussed in the section titled "risk factors" in our quarterly report on Form 10-Q for the quarter ended March 31st, 2003 which is on file with the SEC.

Now turning to our results, second quarter 2003 revenue was 2.8 million and EPS was a loss of 8 cents per share. Last year in Q2 revenue was $4 million and we lost 9 cents per share. For the first six months of 2003 revenue was 4.8 million and EPS was a loss of 21 cents per share. In the comparable 2002 period revenue was 7.6 million and EPS was a loss of 21 cents per share. These results represented inaccordance with GAAP. Royalty revenue for the quarter was $1 million dollars, which compares with 750,000 in last year's second quarter. The increase in royalties is primarily due to increse sales of ADSL chipsets by Analog Devices and the beginning of increased royalties from Infinion. Contract revenue for the quarter was 1.2 million which compares to 30030 thousand dollars last quarter and 2.2million in the second quarter last year.

Contract revenue was down versus the prior year due to an ADSL licensing environment that continues to be challenging. Product revenue this quarter was approximately $600,000 which compares with $700,000 dollars last year quarter and 1.1 million a year ago. Product revenue consists of hardware solutions, radius L applications and compression software for electronic ID applications. For the quarter we had two 10% semiconductor customers, Analog Devices and Intel.

Q2 spending was 4.8 million which compares to 6.4 million in last year's second quarter. Lower spending in Q2 this year is primarily due to the effect of a reduction in force in Q4 of last year and salary reductions that were implemented on January 1st of this year. Our balance sheet is in good shape with cash and investments of $43.1 million dollars. Receivables were approximately $900,000 dollars which translates into DSOs of 28 days. We have no debt. On June 30th we had 117 full-time employees of which 85 were engineers, and they worked 22.7 million shares outstanding at quarter end, and now I'll turn the call over to Michael.

Thank you, Rick.

I will start today with an update on the ADSL market focusing on subscriber growth around the world. ADSL subscribers continue to grow at a healthy rate. We estimate that about 10 million new subscribers were added during the first six months of 2003, so that as of June 30th there were about 46 million subscribers worldwide. The geographic distribution of these subscribers is roughly as follows: There are just under 8 million subscribers in the United States. Just under 2 of the 46 million are in Canada. About 12 million of the 46 million are in Europe. 6.5 million in Korea, 8 million in Japan, 8 million in the rest of Asia, which is primarily China, and 1.5 million in Latin America and the rest of the world.

By the end of this year, we estimate that there will be a total of between 55 and 60 million subscribers. There's been significant progress in the industry towards improving ADSL technology. What is known is ADSL2 and ADSL2+ provide higher speeds, longer reach and better features, and they are standards that have been approved by the ITU for global deployment. With these new standards opportunities open up for new service revenues as well as equipment and chipset revenues. One of the industry highlights of this past quarter was in June, which is the SuperComm trade show which took place in Atlanta. The value of ADSL was show-cased in numerous booths on the show floor. There were powerful demonstrations of high-speed Internet access, as well video. Aware had the only live demonstration of the new ADSL2 standard.

We also showcased our Dr. DSL diagnostics technology. Two of our largest customers had very strong ADSL showings as well. Analog Devices had multiple central office and CPE products and demonstrations, and Infinion showed a 64-port line card that Siemens is deploying, as well as a 24-port voice and data line card being used by Alcatel in their digital loop carrier products. This show confirmed once again that ADSL, when combined with other technologies, such as network processing, wireless networking, or video, is dramatically expanding broadband service offerings. So to recap on the industry update, ADSL subscriber growth remains healthy, and today, less than 5% of the worldwide phone network is being used for ADSL.

Turning now to Aware's business. We have a strong focus at Aware to have the best ADSL technology in the world, technology that leads the market in standards compliance, meets the highest levels of performance, and meets the highest interoperability standards. Over the past several years, we've invested in silicon and software architectures that today, indeed, lead the market. We have an intellectual property package that is truly unprecedented because it makes available software and RTL for chip design and fabrication, as well as a complete chip fabricated at TSMC in .18 micron.

Our intellectual property solutions are the only ones that embody the most advanced of the new ADSL2 and ADSL2+ standards, as well as legacy ADSL standards. With this strong standards-based technology as our foundation we're also investing in board and test-level product solutions and in our Dr. DSL diagnostics products. Our business goal is to leverage our strong technology and products to return the company to profitability. In order to do this, we have to be successful on a number of fronts. One is to attract new customers and ultimately improve our share of revenues from the ADSL market.

This quarter we signed a new contract with a new customer who we will not be announcing today by name but expect we will do so in the future. We also continue to be actively engaged in negotiations to license our ADSL intellectual property. In addition, we have to build a profitable business around our Dr. DSL diagnostics technology. We remain optimistic that as the semiconductor and communications markets recover we will see increased success in our business. We also see opportunities to build further our compression software business. The time frame over which these will occur, both on the communications side and on the compression side, remain difficult to predict.

I'd like to spend a few minutes discussing our revenues this quarter and then turn to guidance. As we predicted, our royalties improved from last quarter to this quarter. These improvements in royalty revenues are a consequence of increased sales by Analog Device and Infinion in the ADSL market. Improvements in royalty revenues are clearly another important step towards returning the company toward profitability.

On our contract revenue line, we had a sharp increase this quarter over last quarter. Although contract revenue is by its nature lumpy, recall that it is based primarily upon our customers' obligations to pay us according to licensing and development contracts. This quarter had a single large payment that isn't typical for us, and I want to point it out. One of our large customers elected to terminate one of their projects with us. This termination right came with a payment obligation which represents a significant portion of the contract revenue this quarter. We don't expect termination fees to be a typical part of our contract revenue in the future.

Turning now to guidance. The range we are giving for Q3 revenues is 2.5 to 4 million dollars. This range is broad because we're involved in a number of business discussions which may or may not close in this quarter. On the spending side, we expect that our expenses next quarter will be about the same as this quarter. And we continue to have an adequate cash position at $43.1 million dollars. Visibility beyond this quarter remains not good enough for us to provide guidance beyond Q3.

In general, we remain optimistic that the value of our technology and IP offerings is strong. We are an industry leader in the new and improved ADSL standards that are gaining momentum in the industry. We are in discussions with numerous potential customers for our products. We remain confident that we can return the company to profitability and to better days for our shareholders. At this point, I'd like to open up the call to any questions you may have.

If you would like to ask a question at this time, please signal us by pressing the star key followed by the digit 1 on your touch-tone telephone. If you are on a speaker phone, please be sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star 1 to ask a question at this time. We'll pause just a moment to assemble the roster. Once again, please press star 1 to ask a question at this time . Again, ladies and gentlemen, please press star 1 to ask a question at this time. And we'll take our first question from Robert Cass with Sinvest International.

Hi. Sounds like there was a mixed quarter, sounds like some very interesting things happening in terms of negotiation for new licensees. Also, you mentioned you had one large customer that terminated worked with you. Can you elaborate on that, what kind of work that was for, and is that one of your 10% customers?

I can elaborate about what kind of work it was for. I really can't get into any more details for probably obvious reasons.

Okay.

About who it was or anything more specific, along those lines.

Right.

Let me answer the first part of the question by giving a little background on how we typically work with the customer. This was a semiconductor customer with which we were developing an ADSL chip, and often with customers we'll develop more than one generation of product. And this was one of those generations of an ADSL chip that they elected to not go to market with.

So was this one of the ADSL2 chips, 2 plus?

No, it wasn't.

Is this customer working on other chipsets with you?

Yes, they have worked on other chipsets with us. I can't comment about, you know, what they're going to do in the future necessarily.

Okay. In terms of active negotiations for new licensees, how far along with you are those, and I imagine that's for the ADSL2 and ADSL2+ technologies.

It is for ADSL2 and ADSL2+. We've seen an increase in interest from the semiconductor industry, and we think it's driven, to a large extent, by new standards emerging and companies seeing an opportunity to intro market when new standards emerge like ADSL2 and ADSL2+. With some of these companies we've been in discussions for many, many months. As you probably know well, the semiconductor industry has been in a tough spot for quite some time. Spending has been down, and design starts, which is what we're really talking about here with new customers, have been very slow. The process to get them completed inside companies has been very slow and is often required very high-level management to be involved in making those decisions. So these are discussions that have been going on for a long time in some cases. And in other cases, they haven't been going on that long. But in general, we're optimistic that as the semiconductor market starts to recover a little bit and because the footprint for ADSL continues sort of its steady march forward, and these new standards are continuing to gain momentum in the industry that will -- that we'll be able to close some of these guys. And that's an important part of our path to success here, and our path back to profitability, and it's a bet we're placing and we're pretty confident that it's a good bet.

When do we start to see the first deployment of ADSL2 and ADSL2+ technology?

I think that's a little difficult to nail down too concretely. We're now seeing requests for equipment proposals from a number of phone companies around the world that include either ADSL2 or ADSL2+ as a requirement. That usually signals anywhere from a year to two years of -- you know, out before deployment begins. In some cases it's less, but I think the kind of -- there is an existing ADSL technology which deploys.

Right.

So there isn't a tremendous need for the new standard to deploy in order for a country or an area to be able to turn on ADSL, but there are some significant advantages to ADSL2. One of them is the reach-extended version of ADSL2 in particular which increases the area over which you can deploy service by nearly 40%. So that means you can start offering service to people you couldn't offer service to before.

Right.

But I still think, given the pace at which telephone companies, which are usually large, you know, slow-moving service providers, move, we're looking at least at six months, and probably more like a year before you'd start seeing service turning on in earnest. Now, that doesn't mean you won't see sales of chips either on the CO or CPE side being sold that include that capability before that, because all these chips that are ADSL2 or ADSL2+ also implement all the previous flavors of ADSL and can be turned on first in ADSL mode and then upgraded later with software to do ADSL2 or ADSL2+.

So in theory you can start selling to your licensees -- your chips sooner then a year out

I would expect sooner than that that any chip that you sell to central offices has to have the capability of ADSL2 or ADSL2+ just because they don't want to have to rebuild equipment for shortly after that where they'd need to turn on those capabilities.

So from your perspective you should start seeing sales of ADSL2+ first half of next year, last quarter of this year? What's your time frame?

The sooner the better for us.

Right.

It's still hard to nail down.

Okay. And what's your thought on what you're going to do with your products business? Why do you have a products business if you're focused on licensing?

It compliments our licensing business. The test and diagnostic products are things that our licensees use. The hardware business that we sell into the test infrastructure is something that directly leverages our expertise in ADSL and our interoperability expertise around all these different flavors of standards that exist and new ones that are emerging, and they're profitable businesses. They're never going to have, at this point when we look at them, the kind of growth potential that the licensing business has, but they're an important compliment to that business.

So you're not actually going to make chips on your own?

We're not going to make chips other than the way we do now, which is as a demonstration vehicle or as a proof of concept of how powerful our technology implementations are; because when you can put in front of a potential customer a nice small TSMC fabricated chip and say, I can license you exactly the chip design and software that runs on this chip, it's a much more powerful statement than having to say, we think it's going to look like this. It actually looks like this. And it also reduces the risk and the time to market for a company to take our technology and take it to market.

The equipment that was being previewed at SuperComm, were they running your chips, or were they running ADI chips?

Well, there was equipment -- whose --

ADI's. From Both

ADI's demonstrations were a combination of our sample chip as well as -- they have a number of ADSL product on the market. So a number of their demonstrations were their own product.

Both ADSL2, right?

Yes.

I'll let someone else ask some questions.

Thank you. Once again, as a reminder, please press star 1 to ask a question at this time. We'll move next to Ryan Bartiman with Griffin Partners.

I was just wondering if you could comment a little more on the royalty stream and how you see that going forward and growing. Thanks.

Well, the royalty stream is directly going to be attached to market share that our customers can get in the ADSL market. So to date, Analog Devices has been a very strong supplier of royalties in some cases, and their revenues fell off into the last couple of years, so did ours. Prior to that, in '99 and 2000 Analog Devices had a very strong presence in the ADSL industry, primarily fueled by their deployments in Korea. Infinion is now coming on very strong on the central office side. They've announced some very significant design wins. We're starting to see very healthy growth. Of course, we're starting from a small number royalty-wise, but we expect that's going to continue. Infinion is very optimistic and bullish about their prospects on the central office side. They have some of the best solution out there that combine both voice and data. Analog Devices continues to invest heavily both on the central office and on the CPE side. And then, the other folks that we're counting on entering the market are customer-premise customers who are going to be new customers, who are going to take our technology, integrate it with something they've got, and bring it into the market and help us capture share. So, you know, if you wanted to look at the knobs, that sort of drive royalty revenue, it's market share, chip price, and volume. And volumes appear to be steadily and healthy growing in ADSL. We're confident we can grow our market share. And pricing has been really bad over the last couple of years, but we're hopeful that as demand grows, as new standards with new capabilities become more prominent, that we will be able to see, at the very least, a stabilization in the pricing and hopefully an increase.

Okay. Thanks.

Thank you.

And there are no further questions at this time. I will turn the conference back to Michael Tzannes for any additional or closing comments.

All right. Thank you very much for joining us today, and we'll talk to you at the end of the third quarter. Good-bye.

This does conclude today's conference call. We thank you for your participation. You may now disconnect.