Aware Inc (AWRE) 2004 Q2 法說會逐字稿

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

Thank you. Welcome to Aware's second quarter 2004 earnings conference call. I'm Rob Weiskopf, the company's CFO. With me is Michael Tzannes, Aware's 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 Mike will talk about the business, and finally, we'll take questions. A recording of this call will be available at our web site at aware.com after the call is completed.

First I'd like to point out that there's remarks we make about future expectations, plans and prospects of the company, and the DSL market constitute forward-looking statements for 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 31, 2004, which is on file with the SEC.

Turning now to financial results. Second quarter 2004 revenue was 3.7 million and EPS was a loss of 4 cents per share. Last year in Q2, revenue was 2.8 million, and we lost 8 cents per share. Product revenue was 1 million this quarter, which compares to 1.2 million last quarter and 586,000 a year ago. Product revenue consists of hardware solutions for ADSL applications and software tool kits for Biometrics applications. Contract revenue was 1.8 million this quarter which compares to 1.3 million last quarter and 1.2 million a year ago. Contract revenue was up this quarter primarily due to increased business involving the licensing of our StratiPHY products.

Royalty revenue was .9 million this quarter, which compares to 1.1 million last quarter and 1 million in last year's second quarter. The sequential decrease in royalties was primarily due to lower sales of ADSL chips by analog devices. For the quarter, analog devices Insineon [Inspirent] continue to be top customers. Q2 spending was 4.6 million which compares to 4.9 last quarter And 4.8 million in last year's second quarter. Lower spending in this quarter, compared to last year's second quarter, was primarily due to decreased salary, [infringe], outside services and lower depreciation costs. The decrease versus the prior quarter was predominantly due to a lower cost of product on lower product sales.

Interest income was $115,000 for the quarter at a 1.2 annualized interest rate. And our balance sheet is in excellent shape. Cash in short-term investments was 37.1 million at the end of join June. And investments were 1.5 million. Receivables were 1.8 million at quarter end which translates into day sales outstanding of 44 days. Our inventory levels were minimal. And we have no debt. On June 30, we had 110 full-time employees, 79 of these employees were engineers. Regarding capital stock, there were 22.8 million shares outstanding at quarter end.

This completes my financial commentary. And now I would like to turn the call over to Michael.

Thank you, Rob. I'm going to start today by giving an update of ADSL service deployments and then I'll present changes that are underway in the ADSL industry that we believe will benefit Aware and our stakeholders. ADSL subscriber numbers have continued to grow at a healthy rate all over the world At the end of Q1 of this year, there were over 70 million DSL subscribers. There are now 13 countries, with over 1 million broad band DSL subscribers and 16 countries with over 10% of phone lines delivering ADSL.

Over the last several months we've seen mounting evidence that ADSL is part of U.S. phone company's mainstream plans. SBC, Bellsouth and Verizon have disclosed new plans for how they will deliver broadband services to consumers. SBC was the most detailed in its descriptions, outlining a fiber to the note architecture, to deliver video over their phone network. Technology advancements have made it possible for phone companies to deliver more than just broadband Internet service more economically than ever before. With ADSL2plus data rates in excess of 25 megabits per second can now be delivered using a standard approved by the ITU. The combination of this and fiber to within 500 homes is the network architecture that SBC will use. With Windows Media Player 9, Microsoft has developed easy-to-use platforms for delivering high-quality video, including TV, at data rates that are very compatible with ADSL2plus speeds.

And, here's why. High definition video can be delivered in an average of between 6 and 8 megabits per second. Regular television quality requires about 1.5 megabits per second. In order to deliver 4 channels, 2 high definition and 2 regular, one would require between 15 and 20 megabits per second. Adding to that, a 3 megabit per second high speed internet access service brings the total required data rate to about 23 megabits per second. Voice, either POTS or voice over IP, comes essentially for free. ADSL2plus delivers these data rates.

It is just the primary reason why ADSL2plus is being embraced by the industry. Another important innovation that phone companies are embracing is the use of bonded ADSL. With two telephone lines bonded together, data rates to consumers can be doubled. For ADSL2plus this means that the data rate can surpass 45 megabits per second over short distances, or can reach more customers with 20 megabit per second service. Our own developments at Aware have been centered around silicon intellectual property that supports the new ADSL2 and 2plus standards.

The SuperComm trade show in June, which took place in Chicago, served as a showcase for our developments this year. I would like to spend a few minutes talking about our product demonstrations at that trade show. We demonstrated high definition video in our booth using an Alcatel 7300 DSLAM with a new line card that supports ADSL2plus. This was connected to a Comtrend modem that used an analog device chip set, which uses our StratiPHY technology. StratiPHY supports all legacy ADSL, as well as the new 2 and 2plus standards.

We also demonstrated bonded ADSL2plus, using two pairs of 2 plus combined together to support more than 45 megabits per second of service. This was the first live demonstration of bonding and was enabled by an Infineon chip at the central office and our StratiPHY at the customer premise end. We were also able to showcase our Dr. Dsl test and diagnostics technology developments. Spirent demonstrated a line card that uses Aware's test and diagnostics technology in an Alcatel ASAM 7300 line card to support functionality typically resident in a dedicated test set. Infineon, one of our largest customers, displayed their multiport ADSL central office solutions that support ADSL2 and 2plus.

At that show, Infineon announced and displayed a ZTE line card based on their Geminax co chip set, which is in production at ZTE. ZTE is the second largest [inaudible] plan provider in China, which is the fastest growing ADSL market today. Infineon added ZTE to a number of other important customers, including Alcatel, Siemens, ECI Telecom, who now has a close relationship with Nortel and others. With these customers, Infineon is in a strong position to gain significant market share over time, which will directly benefit Aware's market share position. Alcatel, in addition to the video demonstration they were showing in the Aware booth, had a number of ADSL2plus solutions on display.

These included line card upgrades for existing DSLAM's, as well as new central office equipment. We believe that an important catalyst for the transition to the new standards will be the rollout of 2plus based central office solutions from Alcatel. Because of the large footprint that Alcatel occupies in the ADSL landscape, new solutions from Alcatel will propagate to a wide audience rapidly. We have worked very closely with Alcatel to secure inter-operability between our StratiPHY technology and their latest DSLAM solutions. We believe that this directly benefits the value proposition that we bring to the ADSL CPE market. While most CPE chips that deploy today still function as legacy ADSL chip sets, we expect to see the move to the new standards to pick up pace over the next several quarters as the availability of central office solutions that support the new standards became more available.

We announced a new customer this quarter that is aiming to address precisely this market opportunity. That customer is Atmel, a multiple billion dollar semiconductor company who intends to use StratiPHY to enter the CPE ADSL market with system on a chip solution that support legacy as well as new ADSL standards . In addition to Atmel, Infineon has announced the customer premise equipment development that we believe will further improve their position in the ADSL industry. And analog devices had the new line of products based upon ADSL2 and 2plus using Aware StratiPHY. In general, we believe that the convergence of communications and multimedia technologies in the home make the market for CPE ADSL a large and heterogenous one.

The value of our StratiPHY technology continues to increase as the move to the new standards and the delivery of multiple services using ADSL picks up steam. We also continue to see a strong interest in the market for VDSL solutions. While ADSL will be the dominant technology in the access market, we see that VDSL is well suited to the fiber to the building or fiber to the curb markets. This means that the VDSL market expands the addressable market for Aware technology. We continue to focus on the exciting new technology in our research and development activities.

The outlook for our business is to a large extent dependent upon our ability to capitalize on the transition to services based upon the new 2 and 2plus standards. We believe we are positioned well to do so in two ways. By attracting new customers who see an opportunity to enter the market at a time when new requirements present new opportunities. And by improving the percentage of lines upon which our customers chip sets are deployed, i.e. their market share. We believe that we positioned Aware to succeed as 2 and 2plus become the primary technologies used in ADSL service deployments.

Another exciting area in our business is our Dr. DSL test and diagnostics businesses. As services roll out in higher and higher volumes, and as multiple services are deployed through ADSL lines, phone companies are increasing their spending on equipment and software that provisions, tests and maintains these services. Our hardware and software products in this area are well-positioned to benefit from these investments.

Turning now briefly to our image compression software products, in that area we're focused on two opportunities. The first is to capitalize on a growing and healthy Biometrics industry driven by the increased interest in security post 9/11. And the second is to capitalize on a transition to JPEG2000 compression techniques by the medical images industry.

I would like to turn for a moment to our Q2 contract revenues. Our contract revenues were up this quarter significantly, compared to last. I should point out that a portion of these revenues is due to a one-time fee paid by a customer who was requested to terminate a chip set development with us. The majority of contract revenues are for chip set developments with customers where utilizing our StratiPHY 2plus technologies.

We're happy to announce that we added a new customer this quarter. We're not yet able to disclose who this customer is. But we can say they licensed our StratiPHY technology for all of the right reasons. In other words, they see an opportunity to enter a growing ADSL market with a high-quality solution that supports both legacy and new standards. This new customer contributed to our contract revenues this quarter, and we're hopeful that they will be a significant participant in the ADSL market and generate royalty revenue for us in the future.

The general business outlook for Aware over the medium to long term continues to look positive. We believe that we've continued to improve the value that we bring to our customers and are confident that that value will translate into revenue improvements over time. It remains, however, difficult for us to predict, the timing of many of the business discussions we're engaged in. And therefore our guidance for Q3 is a broad range of revenue, it's between 2.5 and 4.5 billion dollars. Turning to spending for a moment, we note the following, spending this past quarter was $4.6 million compared to $4.9 in the previous quarter, and we expect spending will stay in the $5 million range for this coming quarter.

Our focus continues to be to return the company to profitability. While we can't predict when that will happen, we remain confident we're on the right track. ADSL is entering a new phase of deployments, one that we believe will increasingly showcase ADSL as a video delivery technology. New ADSL standards and phone company plans are aligned to deliver a host of new services that consumers desire. We believe that this new phase will benefit Aware and our shareholders as we increase the number of customers we serve and their number of lines that they serve. We also see growth potential in test and diagnostics, and Biometrics and medical imaging markets. Overall, we remain confident that we have positioned Aware to benefit as these markets develop further.

And with that we'd like to open up the call to any questions you may have.

Thank you. The question-and-answer session will be conducted electronically. And we'll go first to Ted Moreau with R.W. Baird. Please, go ahead.

Hi, Mike.

Hi, Ted.

I have a, I don't know if this is a complicated question or not, but, I'm looking at some of the news items here on VDSL. And just tell me what, Infineon and analog your major customers are doing here. You kind of described it a little bit. But compared to TI. Because I guess TI has -- they call it UDSL. So my basic question is, are there other chip guys doing something materially different from what you're doing? Is this an in-house development? And might you see more outsourcing of this to get VDSL?

Well, our internal development is focused on the VDSL that is currently being standardized at the same standards body where all the ADSL standards were standardized and continue to be worked on, all the International telecommunications union. The name of the technology in that particular standard body is VDSL2. It's the second generation of VDSL. And it is intended to support very, very high data rates, 100 megabit in multiple direction data rates over shorter distances of regular telephone wire. And it appears that it is mostly targeted at in building, fiber to the building in complex architectures as opposed to the access network. Although there may still be applications in the access network where VDSL is suitable. The development that other companies are pursuing -- I guess the best way to answer that question is, there is an existing VDSL market that is really dominated by Infineon. And that market was pre-this new standard. So it is -- there is a predecessor to VDSL2 called VDSL1. A standard that everyone expects will be superseded by VDSL2 and then everyone will use VDSL2. The VDSL1 standard is what Infineon currently uses to sell VDSL solutions. And in fact, Infineon with that product they have has dominated that market in excess of, I think 90% of the market is theirs. The UDSL that Texas Instruments talks about is a non-standard, currently proprietary approach to expanding the ADSL data rates into VDSL type speeds. You may see some of that technology or some of those ideas adopted by the VDSL2 standard, but that's not certain.

Right.

Analog devices doesn't currently have any product announcements around VDSL2. The other notable company in this area is a company -- there are actually two. One is a company called Metalink in Israel, which sells a product similar to Infineon's VDSL product, but Infineon's had a little more success than they have. And another company is a company called [IKANOS]. I-K-A-N-O-S Who ask a private company, I believe they've filed an S1 in the recent past to go public. And they have a VDSL1 solution as well. So our belief is, that what is going to happen, you're going to see a transition to VDSL2. We're very active in the standards body. We're monitoring what is going on as we have in all these various standards over the years. We're bringing a lot of ideas to the table. I think the most exciting part about VDSL2 is the fact that it looks like it is going to be sort of a new market on top of the ADSL market. So we look at it as a way to have a larger market we can address with our technology. We have to rework some of the technology, because this is higher speed, broader bandwidth. But that's right in the sweet spot of our research and development capabilities.

And just to go a little further, though, is TI -- is Intel involved in this as well or not? Have they pulled back?

Broadcom has had in the past -- I'll talk about some of the other guys I can think of. Broadcom has been involved in VDSL in the past, I don't recall whether they have any recent product announcements. They are not very active, as far as I know. Intel, after the relationship and the engagement they had with us, where we developed the ADSL products with them, and actually fielded some, they have decide not to pursue ADSL or VDSL, as far as we know, and remain on the sidelines. We continue to have a high degree of interest in working with them. But they are currently note pursuing any of the DSL technologies. Certainly not with us. And, as far as we know, not with anyone else. Some of the other companies that you might think of, companies like Motorola or Phillips or a number of the Japanese chip companies, or other companies in the far east. We have to now think about Chinese chip companies as well. Most of these folks don't currently have either ADSL or VDSL products available, so they would all be folks that we would be very interested in.

Just one final thing on this point. I'm intrigued by this. But why is TI -- you know, they are coming out with what you described as a proprietary technology. They indicate that they will want to get -- they work closely with standard unit to make sure that it is compatible. But is this the way to go? Are they doing something radically different?

The reason they are doing this, Ted, I think, is because they are behind in the solutions that are selling today. And when you're behind with your current product, you like to level the playing field by changing everybody's requirements.

Okay.

So that's what I think they're are doing.

Okay. That's interesting. Because they are getting some publicity on this.

Well, sure. They have the wherewithal and the size to push an idea like this. I think the -- at least the general momentum behind standards based solutions and the critical mass of large companies that are interested in standards base solutions is one, that in general when folks show up in the telecom industry with proprietary approaches to things, it is difficult for that to stick, just because of the size of the opportunity. So I think that what they are currently trying to do is bring some very good ideas into the marketplace. And some of these ideas may end up getting adopted in future standards. And, in fact, that may be their end goal. But right now my belief is that they are a little behind some of the current products that are in the market.

But, if anything, it is endorsing a space and could stimulate the market.

Yeah. That's true.

Okay. I'll sign off. Thanks.

Okay.

It appears we have no further questions. I would like to turn the conference back to Mr. Tzannes for any additional or closing.

All right. Thank you. Thanks, everybody, for attending, and we look forward to talking to you again next quarter. Good-bye.