Aware Inc (AWRE) 2004 Q1 法說會逐字稿

Good day everyone and welcome to this Aware, Inc. first quarter earnings 2004 release conference call. Today's call is being recorded. At this time would like to turn the call over to Mr. Rob Weiskopf, Chief Financial Officer. Please go ahead sir.

Good afternoon everyone. Welcome to Aware's first quarter earnings call. My name is Rob Weiskopf, Chief Financial Officer of Aware and I'd like to thank you for figure us today. On the call with me is Michael Tzannes our Chief Executive Officer. Today we'll forward view our first quarter 2004 financial results which were released after the market close. A replay of this discussion will be available for webcast playback at the Investor Relations section of our website at aware.com. Before we proceed I would like to read the Safe Harbor Statement. Various remarks we make about future expectations, plants, and prospects of the company and the ADSL market constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Such statements are based on our current beliefs and are subject to a number of risks and uncertainties that may cause actual results to differ materially from those indicated by these forward-looking statements. As a result, of various factors, including those discussed in the section titled: factors that may affect future results, in our annual report on Form 10 K for the year ended December 31, 2003 which is on file with the Securities and Exchange Commission.

I will begin today's call by highlighting Aware's financial results for the first quarter and then turn to Michael for discussion about Aware's business. Revenue for the first quarter increased 85% to $3.6 million from $1.9 million a year ago. Revenue also increased 19.1% from last quarter. For the three months ended March 31, 2004, we reported a net loss of $1.1 million or 5 cents per diluted share compared to a loss of $3 million or 13 cents per share, in the comparable quarter a year ago. Product sales were $1.2 million this quarter which compares to $1.6 million last quarter and $710,000 a year ago. Product sales consist primarily of revenues from the sale of hardware solutions for ADSL applications and software products for biometrics applications. Contract revenue was $1.3 million this quarter which compares to $626,000 last quarter and $333,000 a year ago. Contract revenue was up this quarter primarily due to increased business involving the licensing of our StratiPHY products. Contract revenue consists of licensing revenue service fees from the development of ADSL chipsets.

Royalty revenue was $1.1 million this quarter which compares to $816,000 last quarter and $907,000 in last year's first quarter. The sequential increase in royalties was primarily due to higher sales of ADSL chips by analog devices. Royalty revenue consists of royalty payments we received from customers for the right to use our technology in their chipsets or solutions. For the quarter we had three 10% customers: Analog Devices, Simian, and Aspiring. Q1 spending was $4.9 million which compares to $4.6 million last quarter and $5.1 million in last year's first quarter. Lower spending in this quarter compared to last year's Q1 was primarily due to decreased salary and fringe benefits from reduced headcount, lower professional fees and lower depreciation costs. These operating expense decreases were partially offset by increased cost of sales on higher product and contract revenues. The increase in Q1 2004 spending versus the prior quarter was predominantly due to higher costs for fringe benefits and cost of contract expenses. Interest income was $123,000 for the quarter at an annualized interest-rate of 1.3%.

Turning now to the balance sheet, I am pleased to report that our balance sheet is in excellent shape. Cash and investments totaled $38.8 million at the end of March compared with $39 million at year end. Receivables were $2.2 million at quarter end which translates to a DSO of 54 days, our inventory levels were minimal and we have no debt. Regarding headcount, on March 31, we had 111 full-time employees, 80 of these employees were engineers. Finally, we had 22.8 million shares outstanding at quarter end. Now I'd like to turn the call over to Michael for a discussion of Aware's business.

Thank you Bob. I'd like to take a brief moment in this forum to welcome Rob Weiskopf, Aware's new CFO. I know I speak for everyone here at Aware when I say that we're very happy that he has joined our team and we look forward to working with him and together bringing brighter days to Aware and our shareholders. I'd like to start today by talking about the ways in which the ADSL industry is changing and why we believe this will have a positive effect on Aware going forward.

We're seeing a steady increase in interest and service providers to offer new value-added broadband services. We believe that this is driven in part by a need to increase revenues to make up for erosion in voice revenue services -- in voice revenue streams and in part because with new advancement in technology and products it is now feasible to cost effectively add value added services such as IP Video over DSL and Voice over IP over DSL. This triple play offering by phone companies of voice, video, and data provides them with future growth opportunities beyond Internet connectivity. Beyond even IP Video and Voice over IP there is an opportunity for service providers to fulfill the consumer demand for music or video file sharing, streaming media application, instant messaging, and online gaming. We expect over time to see a material shift toward the inclusion by wireline carriers of new services that are supplied thru ADSL to fulfill these demands.

As service providers needs have evolved, so has ADSL technology. We have spoken before about the alignment that we have seen between service provider needs and the New ADSL2 and ADSL2+ standards. This thesis appears to be intact and even stronger today. The new standards enable service providers to indeed improve the services they offer to the consumer because they improve reach, data rates, and service quality. With ADSL2 reach extended, more subscribers can be served than before. ADSL2+ supports data rates in excess of 20 megabits per second and thereby the ability to offer video and TV services over DSL. The diagnostics mode in ADSL2 and ADSL2+ enable centralized access to information about a subscriber line, thereby improving stability and service quality. Over the last few years here at Aware, we have pursued an aggressive a program of product development, and active standards participation supporting these new standards.

In 2003, we were first to market with a digital chip that supports ADSL2 and ADSL2+ called StratiPHY2+. This has positioned Aware at the center of the new and exciting 2, 2+, ADSL landscape. In particular, we have been working with other industry leaders to establish interoperability and industry interoperability of that. We have also engaged directly with market leaders to iron out the kinks and allow for a smooth transition to these new standards. In particular, we have been working with Alcatel and have established comprehensive ADSL2+ interoperability between the Alcatel 7300, Advanced Service Access Manager ,and our StratiPHY2+ chip as well as a new analog devices chip based upon StratiPHY2 +. Alcatel appears focused on delivering solutions that support these new standards to their customers in the near term. Another recent and important development in the DSL industry has been the coming-of-age of VDSL.

There is now standards effort under way at the ITU expected to be completed by early 2005 known as VDSL2 that will capture the latest technology for this exciting application. VDSL is poised to grow significantly in support of basement and courtyard ethernet switch based services. Data rates up to 100 megabits per second will be supported. One important characteristic of this market is that it will be served by a different deployment architecture than the ADSL market. ADSL will be the dominant technology in the access market and VDSL will be used for fiber to the building and fiber to the curb application. This means the video sell market is likely to be complimentary to the ADSL market and presents a significant new opportunity for the industry and for Aware.

Aware is well-positioned to benefit from these market developments. Deployments of ADSL2 and 2+ give us an opportunity to improve our market share through chipset sales from our customers. With our strong position in ADSL2, we're poised to be early to market with VDSL2 solutions. This is another market where we see a significant opportunity to capture market share. Another area of focus in ADSL is addressing the challenge of cost-effective lead employing and maintaining what is becoming an increasing array of ADSL services. We have developed hardware and software products aimed at the tested diagnostics ADSL market for that purpose. These products address a growing segment in the ADSL market. The test and diagnostics infrastructure. We continue to gain traction with our DR. DSL technology, our products leverage years of ADSL know how in standards and deployment and allow us to deliver a value to a level of the food chain other than the chipset manufacturers. Today our test and diagnostics business delivers solutions to equipment manufacturers and our largest customer is Spirent.

Our imaging and biometrics software business continues to be healthy as well. We are taking steps to increase our focus to take advantage of additional investments in security, inside the government, and in the commercial sector. We have traditionally had success selling software tool kits to OEMs in the biometrics industry and in particular in the electronic ID industry. As new requirements emerge in security we are focused on expanding the footprint of this business. We also have developed a JPEG 2000 based image compression product to address the transition to JPEG2000 in medical imaging. In summary, we're well positioned with our industry leading ADSL2 and ADSL2+ technology. A development effort under way to deliver VDSL2 technology. A strong and growing presence in our test and diagnostics business and a biometrics and medical imaging business targeted at a growing industry segment.

Pointing now to catalyst for success for Aware these would be evidence of improved market share for Aware as ADSL2 and 2+ deployments get under way. Evidence of gaining traction in the exciting new VDSL market and growth in our tested diagnostics and biometrics, and medical imaging businesses. We're confident that we will see success in these areas as the relevant markets develop further. I would like to comment briefly on our revenues this quarter and then turn to guidance for Q2. Our contract revenues were up this quarter significantly compared to last. These revenues are primarily for chipset developments with customers who are utilizing our StratiPHY2+ technology. The chips being developed will address the ADSL2 and ADSL2+ market place.

Royalty revenues also increase this quarter compared to last. royalties from both analog devices and Infineon were up this quarter. Infineon has successfully transitioned to the new 2 and 2+ standards in their products and Analog Devices in the process of doing so. Revenues in our Dr. DSL test and diagnostics business and imaging businesses were lower this quarter than last. But the customer pipeline in these businesses is very active and they look promising going forward. Looking to the future, I'll speak first qualitatively and then provide specific guidance for next quarter. Starting with royalty revenue in general. In the medium to long term, we expect royalty revenues to continue to improve. As Analog Devices, Infineon, and other Aware customers expand their presence in the industry with solutions that support all the required standards the new ones being ADSL2 and ADSL2+.

On the contract line, in order for us to maintain and grow revenues we're aiming to continue to add new chipset development activities that use our StratiPHY intellectual property. As the demand for new ADSL standards continues to gain momentum and as a new demand for VDSL develops we're optimistic that we will see a growing number of licensing contracts for our technology. The general business outlook therefore for Aware continues to look very positive. The timing of revenue events remains difficult to predict. Many of the markets we're addressing are undergoing changes and these changes will be positive for Aware over the medium to long term, but make near-term revenue guidance difficult. For this reason, our guidance for Q2 is for revenues to be in the broad range between 2.5 and $4 million.

Turning now to spending, spending this past quarter was $4.9 million and we expect spending will stay in the $5 million range for the coming quarter. As the ADSL industry enters this new phase of deployment, we expect that DSL subscribers will pass the landmark of 100 million users this year. We are poised to take advantage of our leadership position in ADSL2 and 2+. We also see a new set of opportunities in the VDSL market and we see near and long term growth potential in the tested diagnostics and biometrics and medical imaging market. Overall, we remain confident that we've positioned Aware to benefit as these markets develop further. With that, we'll open up the call to your questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question today, please do so by pressing the star key followed by digit one on your touch-tone telephone. If your joining today using speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. We'll take as many questions as time permits. Once again, please press star one if you do have a question. I will pause for just a moment. Our first question today is from Raymond Hinch with A.G. Edwards.

Michael and Rob, I for one want to thank you for a great report. The figures look very good for the quarterly. And your comments about the company are excellent. I'm probably looking at it from a trading viewpoint. I happen to notice that the short interest which has been pretty steady for some time now dropped considerably, I think, with the last short interest report. For the month of April. Do you have any explanation for that? I think it was over like a million and and half shares and I think it dropped down, according to the paper at least, to maybe about 110,000?

I can only confirm that we saw the same thing. We saw it reported on Nasdaq. I saw it reported on Nasdaq. So we believe that it's true. I can't really comment on why.

Very good. I want to thank you very much, both of you gentlemen for a fine report and they got me fired up on the Company now.

Thank you very much.

And as a reminder, if you do have a question today please press star one. And moving on we do have a question from Robert Katz at Cyntest International.

Hi there. Nice quarter. I have a few questions about the business. First of all, how many licensees do you have for your ADSL2 and ADSL2+? Both paying and nonpaying?

Well we have a number of folks who have been licensees in the past. And actively, and announced today in the market, we have Analog Devices and Infineon. There are customers who we have not yet announced. We hope to be able to do so in the near future. There are customers who were licensees in the past, but are no longer either actively participating in the ADSL market or in some cases, actively companies any longer. So the answer to be specific is two announced customers and others unannounced.

I noticed listening in on a few other calls, companies like TI and Broadcom are talking about DSL products. Are they potential licensees? Where are they getting their technology from?

In the case of those specific two companies you mentioned, they have through acquisitions gained access to ADSL, earlier generations of ADSL technology. Texas Instruments purchased a company called Amodi (ph0 Communications in the mid-90s and Broadcom acquired a company called Element 14, three or four years ago. I don't remember the exact date. So this company's certainly had very strong expertise in ADSL. When we start looking at ADSL2 or 2+, or VDSL opportunities, we would certainly be very interested in having them as customers but they do have internal capabilities that are without question, strong.

OK. So they've been focusing on this internally?

That is correct.

On the VDSL side are you doing DFC or QUAM? And can you sort of explain the difference between the two there? What's going on? I know there's a loft of QUAM chipsets being shipped out from Asia and Japan and Korea right now. Which are the dominant chipsets.

Yeah. Well, VDSL has been a market that has gone through a lot of turmoil from the technology viewpoint. Not unlike ADSL in the mid-90s, early '90s, and some of the first development's in VDSL used in these QUAM which is a technology different from DMT and a single signal is used to transmit communication as opposed to a lot of smaller signals being used over a telephone wire. DMT is what is used in ADSL and DMT is what has been determined by the most prominent standards body, the ITU, will be used in what I referred to in my remarks as VDSL2. Which is going to be the, we believe predominant standard for VDSL. So a lot of the standard wars around VDSL have now subsided and people are converging on a DMT flavor for VDSL over the long term. There is still going to be sales of QUAM products until that standard is finalized and possibly to past that. But there is now a convergence toward DMT for VDSL.

And who's heading up the standards body in the ITU? That's Alcatel and -- I mean they're mostly DMT type companies, correct?

Anyone can participate in the ITU. So, you know, in the case of Broadcom, they were actually a QUAM supporter for a long time and then they decided to support DMT. Alcatel has been primarily a DMT supporter there were QUAM companies like Infineon who was a strong supporter of QUAM, VDSL they're very actively participating at the ITU. We participate as you probably know very actively at the ITU. There has been activities at T1 E1 as well as the I Triple E around VDSL and many of those companies, same companies as well as others have taken part. So the answer really is that I think the industry has now converged on DMT as the solution for VDSL and hopefully that will allow that market to accelerate its growth a little bit.

Right. Okay. How many, I guess, chipsets do you think ship this quarter in ADSL? And ADSL2?

Which quarter?

This quarter just finished?

I think the number of subscribers that have traditionally been added in a quarter -- I probably don't have these numbers at my fingertips, but I can probably come up with the number looking over the last year there have been about, between 20 and 25 million new subscribers added. So if you figure a quarter of them were added in the past quarter, that is roughly say 6 million chips. You need a chip on either side of the line so that is roughly 12 million ports of ADSL. Now, there has always been a mismatch or a potential mismatch between the number of chips that ship because sometimes a carriers or equipment suppliers will deploy a larger footprint than what actually gets turned on and services. But if you assume there is a one-to-one alignment between the number of new subscribers and number of new chips, that is the rough chipset number.

Just probably went from 1 to 1.25--

It really varies by country and by maturity of deployment, you know, when a countries first turning on service they'll deploy a lot of central office ports to get the service up and running.

And the 12 million ports is worldwide? or U.S.?

What did I say? 20 million ports? No that would be worldwide.

20 million worldwide?

I said 20 to 25 million worldwide added in the last year. I think if you go to our website you'll see there is a chart that shows you -- I don't have the numbers in front of me, there's a chart that shows you how many subscribers were added each quarter over the last four quarters at least and perhaps further back. You can assume the number of chips conservatively at that number of subscribers times two, one for each side.

Can you talk a bit about the opportunity in China for ADSL2, and are any of your customers shipping into China?

Well, the opportunity in China appears to be very large. That's an area where ADSL has grown rapidly in the last year. It looks like it's poised to continue to grow. It is not entirely clear how important ADSL2 is going to be there. I would put them in the general category that it appears that the whole industry is reasonably rapidly transitioning to ADSL2 and 2+ as a requirement, but I don't have any specific evidence regarding China. Our customers are large, blue-chip semiconductor companies in China and certainly an important target for them as it is for pretty much anyone who is looking at a rapidly growing market like China is.

Okay. Thank you very much.

All right. Thank you.

Our next question is from Nathaniel Fulsifier at Fulsifier and Associates.

Hi. Good afternoon. Can you give us a break down of the chip's sales worldwide? How you see it? And how you see this kind going over the balance of 2004?

I probably can't do that right now.

Okay. Are you going to product that interesting table again?

We do that certainly on our website. And I'd be happy to talk to you offline. I don't have the numbers in front of me right now.

As a general observation, growth offshore exceeds growth domestically.

No doubt. That has been true for a long time and continues to be true.

Any change in sight?

You know, it looks like the phone companies in the United States are taking a little more seriously ADSL then they have. They had a very strong quarter in Q1. I saw one press release that said that it was the first time that more DSL subscribers were added than cable. You know it looks like voice-over Internet protocol, the VoIP service capability is something that phone companies are interested in. Here in Massachusetts,Verizon's advertising giving you a wireless LAN router if you buy their ADSL service and getting a rebate on that. They made another press release recently, this is Verizon again, about offering VoIP service. So I think the general trend continues to be positive. I still think the Far East is more, is showing much more rapid growth.

Who supplies Verizon with chips?

Well, Alcatel is the primary supplier of the central office equipment. There are a number of suppliers on the customer premise side. And each of these equipment suppliers, both Alcatel and the various customer premise guys, don't buy chips solely from one customer. One of our customers,Infineon, had to publicly announce that they have had some success with Alcatel and, you know, we're optimistic that that means that some of the royalties that we're seeing from Infineon, which have continued to grow over the last few quarters are indeed for chips that will end up in either Verizon or other parts of the United States. But we don't have a direct tracking mechanism to know exactly where the chips our customers sell go.

Go team. Thanks.

Okay. Thank you Nat.

That does conclude this question and answer session. Mr. Tzannes, I will now turn the call back over to you.

All right. Thank you. I wanted to make two brief announcements. We will be presenting, Aware will be presenting, at the AA Microcap conference which is at the Monterey Plaza Hotel in Monterey, California. Monday, May 17. And we hope you have an opportunity to come and see us there. Also, I'd like to invite shareholders to our annual meeting that will be held on May 27, at the Renaissance Bedford hotel and at the will be starting at 10 a.m. Thank you very much. We look forward to talking to you next quarter.

Thank you. That does conclude today's conference call. And thank you all for your participation. You may now disconnect from the line.