Aware Inc (AWRE) 2004 Q4 法說會逐字稿

We would like to welcome you to this Aware Inc. fourth quarter 2004 release conference call. As a reminder today's call is being recorded. And now at this time for opening remarks and introductions, I would like to turn the conference over to Mr. Rob Weiskopf, Company CFO. Please go ahead, sir.

Welcome to Aware's fourth quarter 2004 earnings conference call. I am 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 Michael talk about the business, and finally we will take questions. A recording of this call will be available on our website at Aware.com after the call is completed.

First, I would like to point out that various 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 entitled Risk Factors in our quarterly report on Form 10-Q for the quarter ended September 30, 2004 which is on file with the SEC.

Turning now to financial results. Fourth quarter 2004 revenue was 4.6 million, and EPS was 2 cents per share. Last year in Q4 revenue was 3.0 million and we lost 7 cents per share. Product revenue was 1.5 million this quarter which compares to 1 million last quarter and 1.6 million a year ago.

Product revenue this quarter consisted of hardware sales for ADSL Tests and Diagnostics and software sales for Biometrics and Medical Imaging. Contract revenue was 2 million this quarter, which compares to 2.6 million last quarter, and .6 million a year ago. Contract revenue was up this quarter compared to last year's fourth quarter, primarily due to the an increase in license fees and engineering services from our StratiPHY2+ products.

Royalty revenue was 1.1 million this quarter, which compares to 1 million last quarter and .8 million in last year's fourth quarter. The increase in royalties was primarily due to higher sales of ADSL chips by our customers. For the quarter Analog Devices and Infineon continue to be top customers.

Q4 spending was 4.3 million, which compares to 4.5 million last quarter, and 4.6 million in last year's fourth quarter. The sequential decrease was primarily due to lower cost associated with our contract revenues and lower cost of product sales. The year-over-year spending decrease was primarily due to lower cost of product sales. Interest income was 177,000 for the quarter, at a 1.9 percent annualized interest rate.

Turning now to the balance sheet. Our balance sheet is very strong. Cash and short-term investments were 35 million at the end of December, and investments were 3.3 million. Receivables were 3. (ph) million at year end, which is an increase of .6 million compared with year end 2003 levels. This increase is attributable to the increase in the current quarter's revenue when compared to Q4 of the prior year.

Our inventory levels were minimal, and we have no debt. On December 31, we had 103 full-time employees, 74 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.

This quarter was another successful one for Aware. Financially we generated an operating profit for the second quarter in a row. This is a significant accomplishment for Aware, and further builds our confidence that we're on the right track.

Revenues this quarter were strong in our licensing business, our core licensing business, where we continue to see a powerful alignment between our latest generation intellectual property products, centered around our StratiPHY2+ platform and the demand for ADSL2 and 2+ from the industry. Our StratiPHY2+ platform is a comprehensive intellectual property offering which provides our customers with chip design technology, run-time software, and test chips. This platform supports ADSL, ADSL2, and ADSL2+. And we're continuing to add features through our research and development activities.

Contract revenues this quarter included revenues from a new customer with whom we executed a StratiPHY2+ agreement during the quarter, as well as licensing and engineering service revenues from existing customers. We look forward to providing more details about the new customer in the future as their product development gets further along.

Royalty revenues this quarter were comparable to last quarter, and reflect a steady volume of ADSL chipsets sales from Analog Devices and Infineon. We believe that the majority of these sales represent older generation, i.e., legacy ADSL and not ADSL2 or 2+ chipsets. As ADSL2+ chipsets begin to ship in volume, we do expect to see our customers with a strong market share position in those shipments.

Turning to each of the customers for a moment. Infineon today offers a series of ADSL central office products based upon Aware's ADSL technology that is one of the few solutions that meets today's needs. Infineon chipsets are being used by leading ADSL equipment suppliers, including Siemens, Alcatel, ZPE and others. Infineon is very well-positioned to grow market share within the central office ADSL2+ market.

Analog Devices offers a series of ADSL customer premise equipment products that integrate Aware's technology, including their newest product that incorporate our StratiPHY2+ platform. Analog Devices today offers a production version of our StratiPHY chip, partnering AD64-87, which is one of the few truly standard compliant ADSL2 and ADSL2+ CPE solutions available on the market. Analog Devices has network plus (technical difficulty) technology that they have developed that is targeted at delivering triple play services through ADSL2 and 2+ to the home. This family of products is poised to deliver strong market share on the customer premise equipment side.

Actnow (ph) has announced that they are developing a product based upon our StratiPHY2+ platform. Thomson, the leading supplier of ADSL modems in the world is developing an ADSL2+ solution based upon StratiPHY2+. And as I mentioned earlier, during this quarter we signed a license agreement with a new customer for our StratiPHY2+ platform.

The ADSL industry continues its steady march towards these new 2 and 2+ technologies. They are becoming compulsory in today's industry because they improve data rates, reach and other features. With ADSL2+ phone companies are intending to deliver video service, including television. China Telecom, France Telecom, Telstra in Australia, Tiscali in Italy, and others have announced their plans to deploy ADSL2+ service. BellSouth and SBC are looking to use ADSL2+, bonded ADSL2+ and VDSL2 to support their build out of video services. These standards are what service providers around world are turning to improve their service offerings.

Our product revenue line also had a strong quarter. This was primarily because of improved sales in our biometrics software products. These were a series of software products for fingerprint compression and transaction processing. This quarter we also announced a new product in this area focused on the ePassport market. Our product revenues also included sales of hardware products that support test and diagnostics solutions at our OEM customers, the largest of which is Pyred (ph) (technical difficulty) into the ADSL industry.

Our R&D activity this quarter focused on a large number of fronts. Our largest R&D activity is targeted at improving our portfolio for licensing to the ADSL industry. We have been investing in ADSL technology to support next generation VDSL standards known as VDSL2. We also continue to invest in new product development in our test and diagnostics, as well as our biometrics and imaging software product areas.

This quarter we built more confidence that the product developments that we undertook during the last few years were time and money well spent. Our customers see value in being able to deliver ADSL products that support legacy, as well as the new ADSL2 and ADSL2+ standards. Our customers are able to get to market faster with an ADSL solution, because our IP platform is easy to integrate. And our customers see the economic benefit of licensing from a quality intellectual property supplier as opposed to taking the research and development costs and risks of going it alone.

Our primary goal continues to be easy to articulate, increased market share in the new ADSL2+ landscape. We plan to accomplish this by increasing the number of available chipsets on the market that use our technology, through development efforts with existing as well as new licensees. If we are able to execute on this plan, our contract revenues and our royalty revenues will benefit.

We also see opportunities in our Dr. DSL test and diagnostics technology, and our imaging technology to expand our product portfolios in the automated ADSL test industry and in the biometrics and medical imaging markets.

I will spend a moment now on guidance for this quarter, the Q1 2005 quarter. We expect revenues to be in the 3 to $5 million range. And we expect spending to be in the 4.5 to $5 million range. Our outlook continues to be very positive. While there is no guarantee that we will continue to show a profit in each of our upcoming quarters, we're more confident than ever that we are on the right track. That we have developed products that deliver value to a changing ADSL landscape. That we are developing products that deliver value in the test and diagnostics and imaging markets. And that we will see a return for that value on our bottom line over time.

At this point we would like to open up the line to any questions you might have.

(OPERATOR INSTRUCTIONS). Ken Luskin.

Congratulations on another profitable quarter. I just want to talk about your guidance a little bit. Would expect that your first quarter is somewhat similar to this last quarter, and as you go out the quarters should beginning better, I would assume?

We would certainly like to see things get more predictable. But the truth is we're still in a transition I think in the ADSL market. There is a steady demand for these technologies that we have developed. As I mentioned a few times, we were able to add another customer this quarter which is very important for us.

Would that customer be developing again for telcos, or would it be some other product? By the way -- I stopped at Crisco's linksys (ph) division announced that they had -- were offering ADSL2 -- ADSL2+ in all their networking gear.

This is targeted on the customer premise side of ADSL2 and 2+ solutions. That is what this customer is going to be developing. And like I said, we will probably have an opportunity to talk more about them as they get closer to getting their product into the market.

But the general trend in the business right now is very positive. The demand for the technology continues to be steady and strong. We have a number of projects under development with existing customers. We have a number of customers that we're talking to about licensing this technology. There is new technology under development here called VDSL2, which I think holds some promise, both on a sort of industry scale in the sense that it is going to open some new opportunities up for the industry, but I think it is going to open some opportunities up for us as well. And the guidance reflects a little bit of uncertainty as to the timing of a lot of these events.

Right. You guys think that you're being conservative, but clearly the trend is in place. And now with this new one you have signed you have got 5 people signed up.

That's correct.

You've got -- well, maybe Atmill (ph) doesn't count -- is Atmill going to be selling to telcos or not?

Yes. All these guys will ultimately -- it looks like the primary model today is to still sell, if not through the phone company with reference to the phone company. The phone company still qualify this equipment. And you may go buy it from a store but it is going to be still very telco oriented in terms of its qualification.

You have essentially signed up over 50 percent of the market share it would seem like to me.

Yes, there are still a number of companies that don't license from us. Broadcom doesn't license from us. Texas Instruments doesn't license from us. Conexant doesn't license from us. But every time we are able to sign someone else, you're right, the percentages swing our way.

You've got 5, you just named 3. So that is like 5 out of 8. So and as --.

There are probably others.

And do you have some of these awesome -- not just numbers -- marketshare leaders here. I mean -- does Thomson did something like 40 percent of the European market?

That could be. I know they have a very high percentage of the world wide modem market, just under 20 percent of the worldwide market. I'm not familiar with their European number offhand.

So right now I know you guys are really conservative, but you're approximately half or so, if not higher. You've got 5 out of 8 and maybe there's a couple of other little guys, Concillium (ph) or something like that. But you are --.

No, we're very optimistic that the sell-through plus is playing out. And the requirement across the entire globe for this new technology is playing really well into our hands and into the technology we have developed.

So you could be signing further people in this quarter. And your numbers -- your numbers be exceeding the range? You just add another 3 to 5. Last quarter you gave 3 to 5, you came in just (indiscernible) the 4.6. Could you be more upper range if you --?

You know, it is hard to say. As I pointed out on the main part of the call, there are a number of businesses that -- a number of products that we have across a diverse set of businesses. And it is true that ADSL is our primary business, but some another businesses are important revenue generators as well.

The biometrics.

We try to give a range that we're not going to have to repeat down the road in terms of being either too high too low. So I'm pretty confident that we're going to fall inside this range at this point.

But surprises could be on the upside? There is very little chance you are going to have --.

I suppose that's true. But I'm pretty confident this is the right range. That's why that's what we're saying.

So then when will we expect really to kind of break out of this range sometime in the second half?

I think is going to depend on how rapidly our customers can capture ADSL2+ share. And that is going to depend on how rapidly ADSL2+ really rolls out. We're starting to see very strong intent from a number of countries, France -- I mentioned some of these on the earlier -- France and China and a lot of plans inside the U.S. to utilize ADSL2+ or bonded ADSL2+ or (indiscernible) ADSL.

And the driver for all this is the ability of phone companies to deliver higher value services and generate more revenues, and compete more effectively with cable companies, whatever other service providers they are competing with around the world. So sort of the macro trends are very much in the favor of seeing these new technologies deploy rapidly. If that happens, and our customers are successful, it will immediately be reflected on Aware's financials.

Can you switch over to the biometrics side and talk a little bit about -- ?

I can talk about that for a minute, and then we'll let someone else ask a question. Yes, the biometrics business here, as I mentioned, is primarily targeted at -- today the most of the sales are primarily generated from electronic identification products, fingerprints, compression and transaction processing products. We have been investing in this area, just as we have in other areas in the Company, over the last period of time to try and expand the product portfolio.

Obviously there is a lot of opportunity in the biometrics space, as there is in the medical imaging space that we hoping that we will be able to capitalize on it. We are making some good process in product development. The payout for the positive sort of feedback from product developments inside of where it has been very good over the last couple of years. We invested a lot in our ADSL product line and we're starting to see a return on that. So we're pretty ambitious about pursuing new product development in some of these other areas, and we're pursuing that as well.

Great. I will talk to (indiscernible) about some of the sell side analysts that I talked to recently. So thanks, Mike.

From Needham we have Anton Wallman.

A quick one for you on -- you mentioned here most of their revenue that you're getting from licenses, from your 2 major licensees are still ADSL as opposed to ADSL2 or ADSL2+ chipsets. And would you expect -- pardon?

That's the royalty revenue.

Royalty revenue, exactly. Now is there any meaningful kind of difference in the royalty price once you move up to the newer standards, or is kind of going from 3 GHz Pentium to a 3.3 GHz Pentium? This is, this is just a natural way of things and prices don't really change?

We would certainly like to see prices go up. You start to see some changes in the industry even over the last several months that might lead towards that kind of result. So you see ST Microelectronics, for example, announcing that they are going to be exiting to some extent the CPE/ASL business. I don't really know exactly what that means, or what the consequences are. But very superficially it means that there is 1 fewer large supplier in the industry, and that may affect pricing in a positive way.

You see Texas Instruments announcing that they're going to consolidate pretty significantly inside their Company around their DSL activities. So I don't think the ASL2+ market, or even the VDSL2 market, certainly not the VDSL2 market either, are mature enough to know whether there is going to be price increases or a supply demand situation that improves the financial outlook for the equipment suppliers and the chip suppliers and us as well. I don't expect to see pricing necessarily go down. Certainly not as much as it has over the last several years, which has been really bad in the ADSL chip industry.

But when we look at the real opportunity for us, as we add new customers to the mix, the benefit of our economy of scale as an intellectual property supplier into this industry just continues to get more and more powerful. And as I said on the call, the goal is to expand market share of our customer base, and then consequently of ours as these ADSL2 and 2+ market take hold. And we are aggressively pursuing the VDSL2 market as well, and anticipate being there at the right time.

Ted Moreau with Cardinal Group.

I just want to get your comments on some of the news items here in terms of the consolidation in the sector and what that would mean. Is there opportunity or not in terms of SBC, AT&T for example moving to an IP-type network? And now we're getting news of Qwest and MCI. And I know the stall on the domestic front, but just wondered -- Qwest -- I think it was a little bit behind on DSL deployments, but was intending to catch up. I just wanted to get your take on what if some of these mergers prospectively provide opportunity or would it impact -- (multiple speakers)?

I can't see them being negative. I think certainly as the larger carriers consolidate around a technology base, that being the IP platform, which appears to be pretty conducive to triple play. In that it seems like with a progress in IP technology, and I don't mean intellectual property, I mean Internet protocol technology, the ability to deliver voice, video and data -- voice video and data over 1 service line is improving.

The challenges the phone companies have encountered over the years with that is getting I think more easy to manage as you look at IP networks. It is hard for me to say really whether those mergers are going to materially change the rate of deployment. Like I said, I can't see them hurting. But whether we would see a dramatic increase because of them, I can't say at this point.

Do you know if any of your key chip customers were involved, heavily involved in -- like AT&T for example? I know pretty well where they are in SBC, but I'm not sure on AT&T.

Not that I am aware of really. I don't think of AT&T as a large deployer of DSL.

Right. But I do know they have a fairly extensive IP network and I --.

Sure, yes. I guess the idea that the combination of that IP backbone and SBC's access network, it may very well improve the speed or the volume of which phone companies can deploy. And that would be terrific.

Great. Thanks Mike. Nice quarter.

With Atrium Advisers, Stanley Cohen.

First just to follow up on Anton's question about revenue from ADSL1 versus ADSL legacy products. Do you have more IP than ADSL2 and ADSL2+ chips? And if so, does that translate to a higher royalty percentage?

Do we have what IP? I'm sorry?

Do you have more IP in the ADSL2 product versus the (multiple speakers).

We have a better product offering today than we did before ADSL2 and 2+ came along. And we took about our StratiPHY2+ platform which is -- it is very complete all the way from -- all the pieces you need in order to to turnaround and build a digital ADSL chip.

Does that translate to a higher royalty percentage, or is it -- it means you get more business?

We're going to always try and get as much royalty as we can. And if we are able to get a higher royalty, that is certainly --.

Is it leading you to get a higher royalty than you currently have in your legacy products?

I don't think I can comment, and actually even if I wanted to, I'm not sure I could calculate here without a lot of work, whether the royalties are going to go up or down. The primary benefit of the new product is our ability to get our customers to market much more rapidly than in the past. The value of the product is, in our opinion, much higher. The sort of completeness and the comprehensiveness of the package we deliver is higher. And like I said, we will try and get a higher royalty if we can from whomever we can.

Also, did you mentioned if the Actnow and Thomson chips are for a CO or customer premises product?

I did mention that the Actnow as being for customer premise. And what was the other question?

And the Thomson?

And the Thomson is also for the customer premise for their modem products.

Actnow hasn't announced a chip over customer premise yet, have they?

They have announced the relationship, and they demonstrated a chip or displayed a chip at SuperComm this year, which was a customer premise ADSL2+ device.

And on the test and diagnostic side, our you seeing your customers getting any more traction due to the decent end (ph) going to be used for IPTV, which requires more reliability and so on and so forth?

You know we certainly expect to see that. I can't say yet that that has translated into increased capital spending by phone companies. We think it is inevitable that -- we think that as phone companies deliver higher value services, whether it is a bundle of multiple services, and ultimately television, or whether it is just television, or what is they are delivering, now the complexity of what they're trying to deliver is clearly growing up. And the need to do a better job of maintaining and provisioning, perhaps in some cases, but certainly maintaining that network is going to become more complicated. That complexity is going to go up. So when we look at that industry we think that one of the consequences of new technology being able to deliver higher speed capabilities and being able to deliver broader services is going to positively impact the developments we make.

And because of -- are you seeing any -- besides your current customers are any new customers getting to the market because of that potential market increasing?

At this point most of that industry appears -- it doesn't appear to be a rapidly growing industry. So we're not seeing a lot of new entrants. We're seeing a lot of new -- a lot of changes in the way that equipment and the infrastructure of equipment is being deployed. A lot of it is still kind of in flux so it is sort of premature to talk about. I would say you would see more of the current customers changing their nature a bit, as opposed to seeing new folks entering the market.

Would the equipment guys embed it into their product instead of buying from a third-party? And that therefore --?

How do you mean by that?

For example, instead of buying -- what is that new customer -- your large customer in that market again?

Pyred.

Instead of buying it from them, would it possibly at Alcatel or someone else embed it into their box (indiscernible)?

Well, for example, at SuperComm this year both Alcatel -- Alcatel's DSLAM and Alcatel's loop carrier products had embedded test heads being demonstrated. One of them was provided by Spiron as a line card in the DSLAM. The other was being provided by Tollgrade as a line card in the loop carrier device.

Is Tollgrade a customer of yours?

Yes, they are.

So the Alcatels of the world they're going to buy it the same way. You don't see them --.

No, like I said, there's flux right now. So that -- if you look at what happened at SuperComm, that would be evidence that they are still going to rely on the traditional automated test head guys for the bulk of the test capability in their device. But you'd you see a lot of things changing.

Okay. And a few quick financial questions. Did you say that your expense guidance is 4.5 to 5, or did I misunderstand you?

That's what we said.

Given that you were 4.2 this quarter, and because you were only 4.35, is that just a soft number or do you expect to increase expenses somewhat?

You know, there's some things that we know are going to happen this quarter related to developments that are underway that put us into that range of 4.5 to 5.

But is there anything major that is going up, expenses or just --?

No, there's not a major change from 4.3 to the (multiple speakers).

Right. But if -- what it says sort of, even if you hit the high range of your revenue, you would still be at break even. Is that just on a soft type of statement or --?

That if we hit the high end of the expenses as well.

Okay. And finally, what is your current NOL carryforward?

Our current NOL carryforward is 48 million.

48 million. Okay. Thanks a lot. Good luck guys.

(OPERATOR INSTRUCTIONS). We will now conclude our question-and-answer session. I will turn the conference back over to our presenters for any additional or closing remarks.

Thank you. We look forward to talking to you again at the end of our first quarter. Good bye everybody.

That concludes today's conference call. Thank you everyone for your participation.