Aware Inc (AWRE) 2003 Q3 法說會逐字稿

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

Welcome to Aware's third quarter earnings conference call. I'm Rick Moberg and with me today is Michael Tzannes thanks for joining us today. The agenda for today will be as follows. I'll review financial results for the quarter, next Michael will talk about the business and we'll take any questions that you may have. This call is being recorded and it will be available on our Website at aware.com after the call is completed. First I'd like to point out that various remarks we may make about future expectations 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 risk factors including those that are discussed in the section entitled risk factors in our quarterly report on 10-Q for the quarter reported June 30th, 2003 which is on file with the S.E.C. Now the results. Third quarter 2003 revenue was 3 million and EPS was a loss of 8 cents per share. Last year in Q3 revenue was 4 million and we lost 43 cents a share. Last year's loss includes a deferred tax asset write-off of 7.1 million or 32 cents per share. For the first nine months of 2003 revenue was 7.8 million and EPS was a loss of 29 cents per share. In the comparable 2002 period revenue was 11.5 million and EPS was a loss of 63 cents a share and the nine month period also includes the deferred tax asset write off of 32 cents per share. These results are presented in accordance with GAAP. Royalty revenue for the quarter was about $930,000 which compares with 1 million last quarter and 729,000 in last year's third quarter. The slight sequential decrease in royalties is primarily due to lower sales of ADSL chips by Analog Devices. Contract revenue for the quarter was about $700,000 which compares to 1.2 million last quarter and 1.9 in the third quarter of last year. Contract revenue was generally down due to a tough ADSL licensing environment. The sequential decrease is primarily due to the termination fee that was part of last quarter's revenue that was not repeated this quarter. Product revenue this quarter was approximately 1.4 million which compares with $600,000 last quarter and 1.3 million a year ago.

Product revenue consist of hardware solutions for ADSL applications, compression software for electronic id applications. For the quarter we had two 10% semiconductor customers, Analog Devices and Infineon. Q3 spending was 4.9 million which compares to 4.8 last quarter and 6.8 million last year's third quarter. Lower spending in Q3 compared to last year is primarily due to effect of reduction of force in Q4 last year and salary reductions that were implemented on January 1st of this year. Our September balance sheet is in good shape with cash and investments of 41 million, receivables were approximately 1.2 million which translates into DSOs of 37 days and we have no debt. On September 30th we had 114 full time employees of which 82 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 the Michael.

Thank you Rick. The last 12 months have continued to show notable ADSL subscriber growth around the world. We estimate that there are now more than 50 million lines in service, and that 20 million of these were installed in the last 12 months. Because of the combination of steady growth over many years now and rapid growth over the last year, service providers are able to express more clearly than ever what they need to further improve their services. In different parts of the world, these needs have evolved differently. In the Asia Pacific region, for example, we've seen a steady demand for higher and higher speeds. In the United States, the focus is on extending the reach of ADSL. Lines in the United States are longer than in other parts of the world, and extending the reach of ADSL has a significant impact on the addressable market. At European carriers, improved diagnostics and service maintenance capabilities are a current requirement. It is important to these carriers to be able to isolate the source of a problem during installation, and be able to adapt to changes in the network during service operation. Finally, all over the world, interoperability is a requirement. And it's interoperability of legacy as well as the new ADSL standards that must be supported. Interoperability is important because it increases the likelihood of new equipment can be brought into service rapidly, enables a large collection of CPE choices for consumers and it enables effective integration of ADSL with other consumer electronics and computing solutions such as wireless local area networks. Turning now to advances that have been made in the ADSL standards, through two new sets of standards, ADSL 2 and ADSL 2-plus there now exists a collection of standards that represent the best our industry has to offer in terms of features and line code robustness. ADSL 2-plus expand the bandwidth and the downstream through put to a factor of 2 to well over 20 megabits per second. ADSL 2-plus also expands the up stream bandwidth to support multiple mega bits. Rich Expanded ADSL 2 which is known as NXL expends the reaches of ADSL addressing the need that we identified earlier in the United States.

Newer and faster interop is one of the stated goals of the new standards and several companies including Aware have made very strong showings at the University of New Hampshire interop events and this is good and strong indications that interop for ADSL 2 and 2- plus will be a smooth development. ADSL 2 and 2-plus have integrated diagnostic modes for gathering and communicating data for assistance in diagnosing problems and maintaining service. These ultimately reduce operators' costs. ADSL 2 and 2-plus also support power down and online reconfiguration that allow service providers to adapt their service offerings to changes in their networks and keep high quality service up and running. The alignment that we're seeing between the industry's needs and the new standards bodes very well for the continued growth of ADSL. Higher speeds and longer reach mean that there are opportunities for new sources of revenues for carriers. Lower costs through better diagnostics technology means that operating margins can be improved for carriers. Turning now to how Aware benefits from the emergence of newly acquired standards. We have developed IP solutions that implement this new standers and are one of the first to do so successfully. Our [StratiPHY] and StratiPHY plus chips and intellectual property implement legacy ADSL, ADSL 2 and ADSL 2-plus for both the customer premise equipment and central office markets. With this technology from Aware as a building block companies can fulfill the new requirements in the ADSL market in a rapid time to market low risk fashion. We continue to have discussions with numerous companies about licensing our ADSL technology. While the licensing environment has continued to be challenging we remain optimistic that the value that our IP offers will result in new deals with customers and expanded market share in the future. In order to return Aware to profitability we have to successfully attract new customers and improve our share of the ADSL market. We also have opportunities based upon our Dr. DSL tested diagnostic technology that we need to capitalize on. Another part of our business is worth noting is our compression software business.

This business is seeing growing interest in the use of biometrics technology outside of the traditional criminal justice community with our electronic ID products have historically addressed. Our goal is to provide off the shelf software solution that implement the various biometric standards for our OEM and system integrator customer base. There is increased amount of activity as well at various industry setting bodies that we're involved in and the opportunities for us are generally growing. I'd like to spend a few minutes discussing our revenues this quarter and then turn to guidance. This quarter's 10% customers were Analog Devices and Infineon. We generally expect that Analog Devices and Infineon will continue to contribute to our revenues. We have very good relationships with both of these companies, and they both have numerous generations of ADSL chipsets on the market using Aware technology. Intel, on the other hand, although they were a 10% customer in Q2, which was last quarter, they were not a 10% customer this quarter. I'll reiterate what I've stated in previous quarters, and that is that we continue to have a low level of confidence that Intel will be a large source of revenue for us in the future. Turning to some of the specifics in our revenues. Our royalties were roughly flat from last quarter to this one. Our two largest customers, ADI and Infineon continue to be the primary contributors to this revenue line. Our contract revenue line was lower this quarter than last. This is primarily because of the termination fee that was part of last quarter's revenue that was not repeated this quarter. And our product revenue was up from last quarter driven primarily by strong compression software sales in the electronic ID market. Turning now to guidance. For Q4-2003, our revenue guidance is in a range of $2.5 million to $4 million. This range is relatively broad, because we're involved in a number of business discussions which may or may not close this quarter. On the spending side, we continue to expect that our expenses will be about the same as they have been for the last few quarters. And we continue to have an adequate cash position with $41 million. In general, we remain optimistic that the value of our technology and our intellectual property offerings is strong. We're an industry leader in the new and improved ADSL standards that are gaining momentum in the industry. We're in discussions with numerous potential customers for our core ADSL licensing technology, our test and diagnostics, Dr. DSL, technology and our compression technology and we remain confident that we can return the company to profitability and to better days for our shareholders. At this point, we'll open the call up to any questions you may have.

Today's question-and-answer session will be conducted electronically. If you would like to ask a question you may signal us by pressing the star key followed by the digit 1 on your touch tone telephone. For those of you using a speaker phone today please release the mute function so your signal will reach our equipment. Again, this is star 1 if you have a question and we'll pause for just a moment to assemble the roster. Again, it is star-1 if you would like to ask a question. Our first question comes from Nathaniel Pulsifer (ph). With Pulsifer and Associates. .

Good afternoon, gentlemen. On Dr. DSL, this is a product that to me, has tremendous potential, but nobody seems to care. Could you tell me why this hasn't taken off?

Um -- well, I agree with you, we agree with that you Dr. DSL has tremendous potential. And the problem that it is really targeting is a problem that has, for a long time, been a challenge for phone companies, and that is how to provision service more effectively and how to maintain service once it's up and returning. Some of the important aspects of Dr. DSL have been incorporated into these new standards. And that makes us more optimistic that we'll see better adoption of this technology going forward, as we see adoption of the new standards, the new standards being ADSL 2 and ADSL 2-plus. And I think the general answer to your question is, the rollout of ADSL takes longer than everybody would like, than anyone would like. And this is true in all the various country that ADSL is rolled out around the world. There are now reports showing that ADSL has surpassed cable significantly in its ability to add subscribers. But those are recent events. And for those of us who have been in the ADSL industry a long time we've expected that to happen. We believe it should have hatched a long time ago and yet it still took much longer than we think.

Isn't Dr. DSL a product that facilitates the rollout of ADSL, whether it's old-time or DSL 2 or 2-plus, doesn't it facilitate the company's ability to roll it out?

There are aspects of Dr. DSL that do that and there are aspects of Dr. DSL that improve the maintenance costs of service.

Yeah, but until you get it rolled out you don't have anything to maintain.

That's correct.

Put that one aside. How do you sell Dr. DSL to people who are considering or rolling out DSL?

I think the best way to answer that question is to look at the trend that is formed around the deployments of broadband services. And what we see are really two important trends. And I'll talk about the one that's related to this technology, and that is that there's an entirely new and very extensive infrastructure being deployed around the world to support the test and diagnostics of these new services that have been rolling out now for some time, but that are really rolling out in a mass market way in the last year, and we think that's going to continue going forward. And this infrastructure involves test equipment, and that test equipment sits either inside a central office, as an integrated piece of equipment, or inside a central office as a dedicated piece of equipment. It involves software that integrates into software systems inside the phone company's network. We have a relationship with Achemion at Spirant, which is a division of Spirant which is in the test head business so that's one of the ways that we sell that technology. And then we've, as I said earlier, we've taken key parts of Dr. DSL and incorporated it into the standards, and the way we sell our normal standard compliant technology, we're also selling our Dr. DSL technology in that case.

Very good, thank you, keeping my fingers crossed. Thank you.

Thank you Matt.

As a reminder, if you would like to ask a question today, please press star one on your touch tone telephone. We'll pause for just another moment. As a final reminder, it is star 1 to ask a question. And gentlemen, there appears to be no further questions. I'll turn the call back to you for any additional or concluding remarks.

Okay. Thank you very much for attending. We will look forward to updating you again at the end of next quarter. Good-bye.

That does conclude today's conference. We thank you for your participation. Have a good afternoon.