Aware Inc (AWRE) 2004 Q3 法說會逐字稿

Good day everyone and welcome to Aware, Inc., Third Quarter 2004 Earnings Release Conference Call. You are reminded that today's call is being recorded. At that time for opening remarks and introductions I'll turn things over to Mr. Robert Weiskopf CFO. Please go ahead, sir.

Thank you. Welcome Aware's third quarter 2004 earnings conference call. I'm Rob Weiskopf, company CFO and with me is Michael Tzannes CEO, thank you for joining us today. The agenda for the call will be as follows, I'll review financial results of the quarter, next Mike will talk about the business and finally we'll take questions. A recording of this call will be available on our website at aware.com after the call is completed.

First I'd like the point out that various remarks we make about future expectations, plans, and prospects for the company and the DSL market constitute forward looking statements for the purposes of the Save Harbor provision 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 10Q for the quarter ended June 30, 2004 on pile with the SEC.

Turning now to financial results. Third quarter 2004 revenue was 4.6 million and I'm pleased to announce we had earnings of one cent per share. Last year in Q3 revenue was 3.1 million and we lost 8 cents per share. Product revenue was 1 million this quarter which was equal to the amount last quarter and compares to 1.4 million year-ago. Product revenue this quarter consisted of ADSL related hardware sales and biometrics and imaging related software sales. Contract revenue was 2.6 million this quarter which compares to 1.8 last quarter and .7 million a year-ago. Contract revenue was up this quarter primarily due to an increase in license fees and related engineering services from our StratiPHY2+ products. Royalty revenue was 1 million this quarter which compares to .9 million and in last years third quarter. The sequential increase in royalties was primarily due to higher sales of ADSL chips by our customers. For the quarter Analog Devices, Infineon, and Spirant continue to be top customers.

Q3 spending was 4.5 million which was equal to last quarter and compared to 4.9 million in last years third quarter. Lower spending in in this quarter compared to last years third quarter was primarily due to decreased salary in fringe, professional fees and depreciation cost. Interest income was 143,000 for the quarter at 1.5% annualized interest rate.

Turning now to the balance sheet, your balance sheet is very strong. Cash and and short term investments were 33.1 million at the end of September an investments were 3.9 million. Receivables were 3.9 million at quarter end, which is an increase of 1.4 million compared to year-to-date 2003 levels. This increase is attributable to the 1.5 million increase in the current quarter's revenue when compared to the fourth quarter of the prior year. Our inventory levels are minimal and we have no no debt. On September 30 we had 105 full time employees, 77 of these employees were engineers. Regarding capital stock there are 22.8 million shares outstanding at quarter end. This completes my financial commentary, now I'd like to turn the call over to Michael.

Thank you Rob. We're very encouraged by our results this quarter. Our ability to show a a profit is an important milestone for aware as as we try to rebuild a successful company. It is a strong indication that we're headed in the right direction. The majority of the improvement in our revenues came from core licensing products. The investments that we've made in R&D are paying off. We developed an IP platform that supports multiple ADSL standards and can be licensed to multiple customers. We call this platform our StratiPHY2+ Platform and it is the center of the licensing universe. It supports ADSL, ADSL2 and ADSL2 plus today and continuing to innovate on this platform by adding new capabilities. This quarter's increase in contract revenues is the result of new licensing agreements with customers to develop and sell new ADSL chipsets using StratiPHY2+.

ADSL is a worldwide success story. Broadband service using ADSL will exceed a 100 million lines by the end of the year. And DSL has grown twice as fast as other broadband access technologies over the recent past. ADSL has been so far been primarily used for high speed internet access, but we see an increase in demand for the use of ADSL for video services, including television. This demand is driving many of the new developments in the ADSL industry today. It is one of the primary motivations driving the steady march towards the new ADSL 2 and ADSL 2 Plus technologies. We expect much of the worldwide deployments will transition to these technologies starting over the next several quarters and that this transition will occur over the next several years. We're capitalizing on this transition because we have available and are selling this technology today. The number of ADSL chipset that is use our technology continues to grow. We now have four StratiPHY2+ licensees, three of whom are announced Analog Devices, Infineon, and Atmel, and we're optimistic we will be able to sign new licensing agreements over the coming quarters.

The transition to ADSL2 Plus that I mentioned also positions was well to see market share improvements as the the those roll-outs commence. We're forecasting that ADSL lines will continue to grow by 35-45 million new lines per year. With numerous chipsets in development or design wins at equipment companies, we expect to see improvements in market share and with an increase in royalties. We are not sure sure how quickly this transition will take take place but we're confident that over the medium to long term, we're going to benefit.

We also continue top see growing demand for bonded ADSL as well as for VDSL 2, the new VDSL standard developed at the International Telecommunications Union Standards Body. These are technologies we've had had for for some time and for which we intend to have complete IP packages, just as we do for ADSL. The combination of ADSL 2 Plus including bonding and VDSL 2 is likely to be the future of broadband over copper. We feel we are well positioned to grow our business as the roll-outs of these technologies occur.

Turning now to our largest customers, Infineon and Analog Devices. In the near term we expect chipset sales at Infineon will be driven by design wins in China [at ZPE] and at Alcatel, AFC and Siemens. Analog Devices today provides a steady stream of legacy ADSL solutions and is transitioning to new products based upon ADSL 2 Plus, for example AD64-87 is a standard compliant ADSL, ADSL 2, and ADSL 2 Plus CPE solution. They continue to have success in the European market with their current solutions.

In summary our licensing business is looking very good. We have numerous chip sets development underway and we have numerous customers' chipsets poised to capture market share as new standard deploy in volume.

Another area that we continue to be optimistic about is our test and diagnostics, Doctor DSL product line. We set hardware and software that allows automated test equipment to improve the testing and maintenance of ADSL lines by service providers. We expect this business to grow as the automated test equipment market grows to address the challenges of mass market market deployments as well as the deployment of new services like video. In our biometric and image compression software products, we continue to see opportunities to address growing biometrics market with our core library products, as well as to address medical and digit imaging markets with our .Jpeg 2000 products.

Turning now to financial guidance for the coming quarter. On the spending side we believe it will remain in the in the same $4.5-5 million range that we've been in over the last quarters. We're optimistic that we will be able the grow revenues in certain key elements of our business over time without having to to grow spending because of the effort we've put into product development over the last several years. Revenue guidance for the fourth quarter is to be in the range $3-5 million. Overall, our business outlook is very positive. We've hit an important milestone in this quarter by making an operating profit. While we we can't predict with certainty whether we can keep this up, we do believe more than ever that we're headed in right direction.

With that I'd like to open the call up for any questions.

Thank you, gentlemen. The question and answer session will be conducted electronically. If you have a question, please signal by pressing star 1 on your touch tone telephone. Again, that's star one one if you have a question. If you are on a speaker phone, could you please make sure that your mute function is turned off or please pick up your handset to allow your signal to reach your equipment. Again, that's star one one if you have a question. We'll pause for a moment to let everyone respond for a question. First question comes from Ted Moreau with Robert W. Baird.

Hey Mike, how are you doing?

Hey Ted, very well, how are you?

Interesting quarter. Just have some macro questions. I guess the main one that I would ask would be, where does the ADSL initiatives fit in, in light of the fiber build outs an the regulatory changes that have advanced that. Will that -- where I'm going with this is I assume unless you get fiber all the way to the premise that it would actually help ADSL to, um, at the customer prem, if you go fiber to the curb or fiber to the node or something?

I still see fiber too, even to the home as something that is sort of additive overall to the ADSL opportunity. You are not going to get fiber in everyone's home over any reasonably compressed period of time. So, I think phone companies, in this country and all over the world are going to continue to look at using some aspect of their already installed telephone network to deliver broadband services. The closer you can get to home the faster you can get over whatever distance is left the shorter distance of copper the faster the the DSL technology can go. In the U.S. today we're seeing a strong push by one of the large RBOCs for bonded ADSL technology, and that's at Bell South. Their intention to deliver video using that technology. SBC has been very public and they announced an award I'm sure you saw, to Alcatel for their fiber to be, I think they call it fiber to the node, it's not yet clear whether that's going to be within 500 feet or not. But, I tend to think that the regulatory environment isn't really impeding today the roll out of broadband services in the U.S. you see those things, the numbers in the U.S. continue to be pretty healthy.

Right, I'm sure even if we do go ahead with fiber in the premise, it is probably a 10-20 year build out I would imagine.

I don't think it can replace unless they want to put broadband out of the phone company on a really slow -- on a slow track. That's the only way you could really do it. I don't think that's what they are going to do. I think phone companies have to deploy broadband and they have to deploy video and that's why we're we're seeing a such a tremendous push for video using DSL these days.

Would you benefit at the customer premise? I mean, let's say they bring fiber up to the curb or up to the driveway or up even to the house. Would within the customer premise --?

I suppose it is possible. If they continue to use some sort of copper inside the building for something like that. I believe the current architecture for fiber to the home has an optical unit at the premise as well. We are not targeting that market currently.

Right. In light of the improved revenue here with your chip customers.

Yes.

Are you seeing any movement now that the technology is becoming more accepted?

Yes.

And the market is moving ahead to more and more of a shift by the chip manufacturers to outsource and move away from a captive market, in other words doing it themselves as opposed to beginning to --

I think it is a terrific question, Ted, we'd love to certainly see that because that would be directly --

The name of the game here.

Directly beneficial to us and be certainly something we'd been we'd be very interested in serving in the industry. I don't think we can say yet that we're seeing that that with any certainty. I think there are some companies who today, rely on us for technology and they intend to continue to rely on us. There are a number of companies today that don't have any ADSL capability, and I believe they should be considering and anyone who is considering, I believe is speaking to us about licensing the technology from us. But to go so far at this point to say that even company who that have ADSL technology today would look to outsource to us next generation technology would be a little optimistic. I don't think it is out of the question, but I condition say we are seeing that right now. It makes tremendous sense.

You are not seeing discussions or thinking about it.

No, people are thinking at it, but people have been thinking about things in this area, as you know, for a long time.

But I mean the market is more of reality.

It is. As new standards comes along it just becomes more and more of a -- of something that makes sense. VDSL 2 isn't that far around the corner that is another whole set of inter-operability and backward compatibility and functionality challenges. And the cost of of developing this technology, we know very well, is very high. It is going to be more more and more difficult for companies to justify vertically integrated technology development programs we think.

Right one one more then I'll turn it over to someone else. Are we pretty far along now on the key regulatory changes that need to be in place for ADSL and standard initiatives as well. Is it more a question of market now as opposed to any superficial--

I think it would be very nice in the U.S. for, again I'll remind you but more everyone else on the call. The regulatory inventory environment outside the United States has never really been problematic and the primary ADSL market is outside the U.S., the majority of ADSL lines are outside the U.S. by a large percentage. But I don't see the current activity of phone companies being impeded -- from our vantage point. We are not in the thick of it, really, but being impeded by regulatory rules. It would be nice, I think, actually I think we were together at this thing at SuperComm, if they sort of redefined fiber of the node to not necessarily be only 500 feet away. They asked one of the FCC folks that in a meeting we were in. If they could extend it to 5-6,000 feet, that would certainly help whatever it is SBC is planning doing. But it doesn't seem to be slowing them down. You know, Bell South is moving ahead with, like I said, this bonded approach it appears, as well as, I think they have a number of other options in mind. And then when you look at the technology standards, there continues to be a lot of momentum and a lot of activity to continue to improve ADSL and most of that is now focused on this next generation VDSL I was talking about which is going to offer up to 100 megabits of service and things like that. I think if I were to point to one thing I would say one of the interesting areas of the ADSL right now is the marriage finally of video and television, in particular, and ADSL as an access technology. But you really want to see video - ADSL as a video delivery technique or a video delivery technology. That is what the phone companies want to use it for, certainly in the U.S. but I think all other the world. It hasn't been done on a wide scale yet. It don't the think that's a regulatory issue or a standards issue, I think it's a challenge and it's an opportunity and thing that will get worked out. We're certainly very excited a bit.

Does the election race, the possibility we might finally get a national broadband policy, or is that far down on the --

I would say it doesn't hurt. The trend we saw out of the administration so far, has been pretty good.

Great, I'll let someone else on.

Thanks Ted.

Once again that is star one if you have a question today. We do have a question from Ken Luskin with Intrinsic Value Asset Management.

Hi guys. A couple of questions. One, does -- do any of your IP have applications in the wireless area, Y-max for instance? Two, can you be -- could you explain the range in our revenue forecast for the fourth quarter, what you are basing it kind of upon, the 3-5 and can you talk a little bit about more of the medium term, like next year, what you think you are looking for on a sequential basis?

Y-max and wireless in general was the first question.

Right.

The platform we developed is specifically targeted today at DSL. It is something that in its first [INAUDIBLE] was an ADSL and ADSL 2 capable device and then we moved it to include ADSL 2 Plus and we are in the process of adding more and more functionality to that platform to support new features and standards, etcetera. We have had over the last several years an activity going on in the wireless communications area, and we continue to look at opportunities outside of ADSL where we might use the same type of platform. So there's certainly the ability to leverage, that development towards new new applications and Y-max is a good example. There are broadband wireless local area networking standards that I would put in the same category as being potentially interesting. The broad answer is yes, the technology applies to those things, we haven't made any product announcements in those areas so so far.

The range in our revenues is a continued indication that, while things have improved and we've had a nice set of results this quarter, there is still a lot of uncertainty in the market, we're not really sure how quickly a number of deals that were in discussions with semiconductor companies and others how quickly those things are going to come top fruition. In the past couple of years it has taking a long amount of time for those things to conclude. So the the range is really directly related to how much business we can close by December 31st. And it reflects some uncertainty in the amount of business we think we can close. Beyond this quarter, we're not prepared yet, to make financial forecast. In the past we have been able to do that and we certainly look forward to doing it again. One of our big financial goals was to to get to breaking even and making money again and that's going to be the near term continued goal. We want to stay in the black. It is a very positive thing for a company to be making money. So, over the medium an long term that is the objective.

One more question, can you talk a little about the contributions maybe, percentage wise and the potential for -- besides the ADSL business and your other businesses that your mentioned, that are not really getting much attention generally speaking?

Well, the other businesses that we are targeting in addition to the core licensing business is a business that leverages a lot of what we do in licensing, it is our test and diagnostics business. And we -- in terms of how that shows up or our revenue line it's a percentage of the product revenue number. That is a business that we hope, that's a set of products that we hope adds -- more and more investments goes in in by carriers to testing and diagnosing phone networks that use broadband, ADSL in particular we will continue to see growth in that area. It is an area where we sell today hardware products that are used by automated test equipment one of you are our largest customers is a company is called Spirant. Another company that's in that area is a company called Colgrade. In the biometrics area we've had a long history of selling software solutions to OEMs who sell biometrics products both to the government as well as to commercial applications. We see opportunities there and we've investing in product development in that area. We see opportunities to expand the library products we sell beyond electronic identification which is the primary market we sell in today, into other markets like e- passports and some of the emerging biometric applications. And we also sell medical and digital imaging products to OEM's out of the compression software side of the business. There is a software element to the line as well, products of those industries, which is in that product revenue line. We're look really looking at all of these businesses as having good potential going forward. They are all at different stage of development, they provide diversity because they address different industries -- similar but different aspects of the industries. Over the last several years we transitioned some of our focus to these areas I spoke about because we feel there is real opportunity to grow revenues in those areas as well.

Sounds overall like you guys are on the right path. And -- I would assume -- you are not really breaking it out, but the bulk to have business is the ADSL area, do you plan on breaking out at all ever, the percentages of the other operations and more about what their potentials are on a shorter term basis, because most people obviously will look at this this company and think of you a DSL player.

Well that it's been our primary business and it is today the bulk of the revenues, most to have contract revenue, most of the royalty revenue is ADSL related. I'd encourage you to read the 10Q that's going to come out next week and we do a reasonable amount of breaking down the various aspect of the business. We're not going to be doing forecasting on a product by product basis any time soon.

Okay. Do you -- for the medium an long term still see that DSL as being the bulk of your business business? That is pretty much --

Yes, that is accurate, I think think for the near to medium term for sure. Long term term can be very long, I guess, so . If we look really long term we think the other businesses have some real potential.

Okay.

Thank you very much.

Thanks a lot.

Next we have a private investor, Mr. Lyle Pearson.

Are you there, Mike?

Yes.

Hi, congratulations man, you returned a profit.

Thank you.

Any idea when we might be able to announce the name of the new contractor?

You know, generally the policy obviously we follow and I know you've followed the company for a long time, so it is not news to you, is we're not going announce anything until our customer wants to. And generally I think the rule that most of the customers we have seem to be following is that when they have a product that's ready to be announced, they will announce the product and then the relationship will become public as well. I think they do this for for reasonably well thought out reasons. So, we announced Atmel in the spring, or right around SuperComm, they'd been a customer for a while, they wanted to display their product at SuperComm, that was a good time for the display and the announcement to take place. Our other customer I would expect will do that when the time comes, and hopefully that will be soon.

Okay as it relates to the biometrics, is there anyway that we can find out what are your customers in biometrics side? There is a lot of discussion about this U.S. visit program.

Yes. I can give you some names of folks that we worked with, I think we at least in the 10K disclosed this, I'm not sure we get into on a quarter basis, maybe we should think about doing that. Identix is a large customer of us in in that area, E-med has been a customer in the medical imaging area, they were just acquired by a company called Cedara, Crossmatch is a customer. These are all OEMs that sell bio metrics products or medical imaging products and we sell to them, so the channel's an OEM sales channel. On the medical side, large medical imaging companies like Siemens, and Serter and Phillips would be target customers were us.

Okay, and then one final follow up. Is there anyway you can list on your web-site the chipset numbers, whether it is Black Fin or Tiger Shark that incorporate it the StratiPHY2+ technology?

What we usually do is post press releases that relate to product announcements from customers that are based on our technology. So, as you look at -- so one of the parts those were analog devices-- chips -- the part that they use that is currently available on the market is called the AD 6487. That is the part that is base on StratiPHY2+ today, and I'll check as to whether we have a link on on your web-site to that press release. What we do try to do on the web-site is link to news that is related to our products. Maybe -- at some point we should -- I'll bring it up with the marketing department, have a little table that lists the product name an the company that sells it and things like that.

Everything I can see is that [Saygym], I guess is one of ADI's largest customers.

That's correct.

He's doing block buster business in Europe and Asia.

That's right, and they are -- that is using Aware's technology. Has been for a long time.

Thank you Mike, have a great evening and congratulations again.

Thanks, I like to talk to you. Bye bye.

Unfortunately, that is all the time we have your questions today. I'll turn the conference back over to our speakers or further closing comments they may have.

Thank you. Thanks very much. We will look forward to speaking to you after your fouth quarter, early next year. Good night.

Once again everyone this will concludes today Aware, Inc. program. Thank you all for dialing in.