Aware Inc (AWRE) 2005 Q4 法說會逐字稿

Good day, everyone and welcome to the Aware, Inc. fourth quarter 2005 earnings release conference call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to Mr. Rob Weiskopf, Chief Financial Officer. Please go ahead, sir.

Thanks, Melinda. Welcome to Aware's fourth quarter 2005 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 Michael 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's completed.

First, I'd like to point out that various remarks we make about future expectations, plans, and prospects for the Company and the DSL and Biometric markets cons---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 September 30th, 2005, which is on file with the SEC.

Turning now to financial results. Fourth quarter 2005 revenue was 3.7 million and EPS was a loss of $0.05 per share. Last year, in Q4, revenue was 4.6 million, and we lost $0.02 per share. Product revenue was 1.3 million this quarter, which compares to 2.4 million last quarter, and 1.5 million a year ago. Product revenue this quarter consisted of software sales for Biometrics and medical imaging, as well as hardware sales for ADSL test and diagnostics. Product revenue decreased this quarter versus last quarter due to lower software sales.

Contract revenue was 1.7 million this quarter which compares to 1.9 million last quarter and 2 million a year ago. Contract revenue was down this quarter versus last quarter and last year's comparable quarter, primarily due to lower license fee revenues associated with the delivery of licensed technology and engineering services. Royalty revenue was 0.7 million this quarter, which compares to 0.8 million last quarter, and 1.1 million in last year's fourth quarter. The decrease in royalties was primarily due to lower sales of ADSL chips by our customers. For the quarter, Analog Devices and Infineon continued to be top customers. Q4 spending was 5.2 million, which compares to 4.8 million last quarter, and 4.3 million in last year's fourth quarter. The sequential and year-over-year spending increases were primarily due to higher compensation costs on increased headcount, and increased chip and board design and development costs. Interest income was 352,000 for the quarter, at a 3.8 annualized interest rate.

Turning now to the balance sheet, our balance sheet is very strong. Cash and short-term investments were 38 -- 36.8 million, at the end of December. Receivables were 3.7 million at year-end, which is an increase of $600,000 compared with year-end 2004 levels. This increase is attributable to the timing of the quarter's revenue and an increase in deferred revenue when compared to Q4 of the prior year.

Our inventory levels were minimal, and we have no debt. On December 31st we had 112 full-time employees, 82 of these employees were engineers. Regarding capital stock, there were 23.3 million shares outstanding at quarter-end.

This completes my financial commentary, and now I'd like to turn the call over to Michael.

Thank you, Rob. 2005 has been a very solid year for us in terms of product development and addition of new customers. We introduced VDSL2, StratiPHY 3 product in the middle of the year and we already have three licensees, including a new customer we added in the fourth quarter of the year. We've also made progress on a number of hardware and software products for the test and diagnostics market and have added a number of new customers for these as well.

In Biometrics, we continue to have a strong position in our traditional market and have introduced several new products targeting new rapidly growing parts of that industry. We're optimistic that in 2006 all three of our product lines, licensing, test and diagnostics, and biometrics, will be able to contribute to the top and bottom line at Aware. Strategically, our goal has been to improve our position in the DSL and Biometrics markets and we've done so. In 2006, ADSL2+ and VDSL2 will become widely adopted. We predicted this and we've developed products and established customer relationships to capitalize on these trends in the market.

I wanted to focus more on the European DSL market which is the most exciting DSL region in the world for us, and where the outlook for 2006 is very positive. The highlight in Europe this year will be the Deutsche Telekom VDSL2 deployment. This is a massive access infrastructure upgrade that is the first of its kind. Deutsche Telekom has chosen to use 50 meg bit per second VDSL2 in their access network to deliver high definition TV as part of a comprehensive entertainment package. We expect that Infineon binex chip set will be a major part of the Deutsche Telekom deployment for both the central office and customer premises equipment. This deployment will prove, in our opinion, to be the first of many of its kind, involving fiber fed 50 meg bit per second VDSL2 access notes.

At 50 mega bits per second, HDTV as well as other entertainment services can be delivered. Deutsche Telekom intends to showcase its offerings, which involve the comprehensive entertainment package including TV, ChannelAccess, Movies on demand, and HDTV broadcasts of soccer games at the upcoming CBIT show. This will be the first glimpse of what 50 meg bit VDSL2 can do, and we believe the world will be watching.

During 2005, Infineon and Analog Devices, our two largest customers, maintain share in significant portion of the central office and customer premise European deployments, especially in ADSL2+ deployments, our customer products have had strong market share position. We expect that our customers' unit shipments and market share will improve in 2006, because of the growing proportion of ADSL2+ lines and because of the onset of the VDSL2 market, where Infineon is supremely positioned. The European market is about 30%----33% of the worldwide market at about 42 million lines in service, and we're in a position to gain share as this large market grows.

Analog Devices has a strong presence in the European market as well. They recently announced that they'll be selling their broadband division to Ikonos; the highly successful ADSL2+ CPE products that are very strong in Europe, especially at France Telecom are part of that sale. Ikonos is in a position to capitalize on a terrific foundation and expand in a material way into a region of the world other than Japan. There are other opportunities with Ikonos as well.

Another highly advanced solution, we believe the best on the market, is our Bonded ADSL2+ solution. Bonded ADSL2+ is a technology that treats two telephone lines going into a home as one and allows a doubling of the data rates. BellSouth has been the most vocal about its intention to use Bonded ADSL2+ to build out its broadband access network, but there are numerous other service providers who are considering Bonded ADSL2+ as well. Aware and Ikonos are in a position to break into the Bonded ADSL2+ CPE market in the United States, a significant opportunity for both companies.

Our other large customer, Infineon, also has a number of design wins, one of which is Atran that we expect will bear fruit in 2006 in the U.S. market. We're also very enthusiastic about the products that our new licensees will be bringing to the market. Thompson, Atonel, and several other unannounced customers have released, or are very close to releasing, ADSL2+ products that are in the right place at the right time. We expect that these customers will begin to see material chip set sales in 2006 and 2007.

For the VDSL2 market, our position is exceptionally strong. Infineon is already in the market with a winning solution that will deploy in Deutsche Telekom in the very near future. During Q4, we signed a large development contract for VDSL 2 with a new customer, and with this new customer we now have three VDSL2 customers. The VDSL2 market has the potential of being explosive in the way it changes the service provider value proposition. We believe that 50 meg bit per second VDSL2 will prove to be the winning technology choice for the broadband access network that will be used to deliver HDTV.

Our StratiPHY 3 technology is ahead of the market today, and we deliver easy to integrate chip designs to our semiconductor customers under a low-risk cost-effective business model. With our current customers, we expect that during 2006, we'll grow market share in Europe, break into the United States central office and CPE markets, and expand our presence in the Asian market as that market deploys more ADSL2+ and VDSL2. Some of our new customers are particularly strong in the Asia-Pacific region, and we're confident that their products will be well-received there.

We're also confident that we'll be able to add new StratiPHY customers. The value proposition for StratiPHY has been validated. The market is moving towards positions of strength for us, namely VDSL2 and Bonded VDSL2+, and there's a significant number of companies on the sidelines that we believe will see DSL as strategic to their success. We have a healthy pipeline with potential customers.

I'd now like to turn a little to the Biometrics business, and spend a few minutes on that. The Biometrics products experienced both top and bottom-line growth in 2005. Our traditional products had solid growth, and we expanded into new Biometric opportunities with new product offerings. Our business model in Biometrics is to license software to a wide variety of OEMs and system integrators on a per seat or per computer basis. Examples of OEM customers include Biometric hardware and software vendors, who bundle or integrate our software into their products and in turn sell to systems integrators or end users. For example, a Biometric hardware vendor selling life scan devices may bundle Aware's Biometric software with the live scan device and sell the resulting package to an end user such as a government agency.

We also sell directly to system integrators who purchase hardware and software components from a variety of vendors and take responsibility for the integration and installation of a complete Biometric system. Through our OEM and system integrator customer base, we address a range of Biometric market segments, including the U.S. federal government driven applications, such as criminal and civilian background checks, as well as similar applications internationally. Historically these market segments have provided the majority of our Biometric-related revenues. We've recently gained exposure to emerging Biometric opportunities in the electronic passport and United States federal ID card, also known as PIV or P.I.V. market segments. This has resulted in an expanded OEM and system integrator customer base for our Biometric products. Our goal for these products is to maintain growth at a rate consistent with or greater than the Biometric market as a whole.

The market, according to the international Biometric's Group, is growing at a compounded annual growth rate of 40% through 2009. Our goal is to track this growth rate in our products by establishing strong exposure to that portion of a Biometrics system that lies between the hardware, which acquires a Biometric sample, for example, a fingerprint, and the associated Biometric matching system. Our focus is on providing software products to OEMs and system integrators which are easy to integrate and ensure a high quality, fully interoperable standard compliant Biometric system. We believe that given the recent growth in Biometric applications and market size, this focus addresses both the needs of our customers and our goals for growth of this business. Because of this, we're very optimistic about the prospects for our Biometrics products in 2006.

Our test and diagnostics products had a very good end to 2005. We've signed a number of new customers in this area for both our hardware and software [redoctor] DSL products. And are more optimistic than ever that 2006 will be the year in which our test and diagnostic products become an important contributor to our revenues. The value proposition is sound. Aware products deliver value as new ADSL2+ and VDSL2 standards deploy, because we know how to leverage late testing capabilities that previously DSL standards didn't have. And new services, such as triple play and TV, demand better test and diagnostic functionality and Aware's test and diagnostic products deliver that functionality.

Turning now to guidance for Q1. We're entering the year with a better revenue outlook than we've had in years. For Q1 of 2006, we're expecting revenues to be in the $5 million to $6.5 million range and expenses to be between 5.25 and 5.5, not including the effect at any stock-based compensation expense may have. This means that we'll most likely break even this quarter and possibly show a profit. We hope this is the first of many such quarters.

With that, I'll open the call to your questions.

Thank you, gentlemen. [OPERATOR INSTRUCTIONS] And our first question will come from Stanley Cohen of Atrium Advisors.

Hi, Mike, how are you?

Hi, Stanley.

Can you---you just explain the royalty revenue in the quarter, was it still mostly from ADSL or are we beginning to see a contribution maybe from ADSL2+ and VDSL for that matter?

First of all, we're not seeing any VDSL2 yet, as most of you know, and I'm pretty sure you remember. This is now royalty from chips that were sold in our customers' Q3, so September/ October time frame. So we still haven't seen the impact of whatever's going on in the latter part of '05, Q4 of '05. So from our vantage point, and we don't have a complete report yet of exactly how large the chip set sales were for the market in '05. We have a lot of data that takes us through the third quarter, but the fourth quarter hasn't really been tallied yet. But from what we can see, the primary are---area where ADSL2+ really caught on was in Europe, and that began in the latter part of '05, and we think we've got very good exposure to that, and we've seen a steady increase in the ADSL2+ chip sets that our customers are selling into that region, and we expect that to ramp, to continue to ramp up. So we would expect royalties from those products to go up from what we just reported to what we'll be reporting next quarter.

But most of what you reported is still from ADSL?

Yes, I think that's true. Yes.

Do you think there was any negative impact based on ADI getting out of the business, possibly them working off inventory or lowering prices to get out of---?

Yes, I think there's---there's a possibility that sort of in the middle of the year ADI, when they put the business up for sale, which I think was towards the middle of the year, that may have had some negative impact. ADI's primary customer here is [Sajem]; they've got very good market share, Analog Devices does, at [Sajem] both in the modem side as well as in the gateway side of that business. From what we can tell, they track pretty closely what [Sajem] sells, and [Sajem] has about a 10%, 12% worldwide market presence, 5% on the gateway side, and about 25% of the European market. So they have a good presence, especially in Europe. But there could have been some price -- there could have been some price erosion there that may be affecting this.

I think the important thing from our vantage point is we see sort of a steady revenue stream from both Infineon and AVI, with a lot of potential for upside given some of the statements they've made. Infineon is being very bullish even about their ADSL2+ business now, and a real positive input on royalties from VDSL2, especially through Infineon. So we have also a little more exposure, a little more disclosure from the analog camp on -----the Analog Devices side of the business, based on this sale, because Analog Devices and Ikonos have said there's some 25 to $30 million in revenue, which we think is probably a conservative number. So that would mean that 2006 is going to be a healthy year for their ADSL2 products.

Okay. The---in the testing business, some of what you sell is hardware, some is software. Does that -- are the ones that's software, is that a royalty model? Does it go into your---does it go into the royalty portion of sales? Or is it put into the product revenue?

No, it would go into product revenue, most likely. There's a ----in some of the contracts, some of our customers have the right to manufacture a piece of hardware from us themselves, and pay a royalty instead of buying our manufactured hardware. And that, of course, would show up as a royalty. But the software looks very much like actually the Biometrics seat software, sort of on a per-board basis. And that would end up in product revenue as typical software revenue.

Do you participate on the Biometric side on the cards that are being produced out there, or just on the readers and on the per-seat side?

Our primary exposure today is in the traditional market, is on the devices that are used to capture fingerp---- biometric samples like fingerprints. As we get into the e-passport market, we're entering areas where now different types of data are being captured for those identity cards, in this case an e-passport, but we don't have direct exposure to sort of the per-card market.

Don't they need compression also? Why--why would you not?

It's just the nature of the relationships we have are to the OEMs who are used to enroll the data, and catalog the data, and build the identity cards themselves.

Okay. Do you break out the deferred revenue, or can you for us?

We don't typically break it out, but Rob, do you want to comment on that?

Yes, deferred revenue was $423,000 for the quarter.

And last quarter what was it?

Compared to last -- a year ago Q4, it was $115,000.

And last quarter?

Last quarter, -- last quarter was 105.

Oh, so it's kind of a lot.

Yes.

Okay. Well, why has it gone up so much?

It's related to the billings of our maintenance and our software products and also due to the timing of when we recognize contract revenue milestones, compared to when they're billed.

Okay. And finally, Mike, it's been about at least six months, maybe more since you announced that you have these two low known unnamed licensee. Any idea when we're going to know their names?

Yes, I think one of them is very close to releasing their product, and that would be a time when that would be a normal event, as we've said. Typically, the reason we don't do this until a customer release as product, we don't want to talk about that, to the extent that they don't want to talk about it. The second customer's also, I would say, months, if not weeks away from being in that state. So I would expect in the next three months or so to be able to announce several of these guys.

And it's been so long, are they going to have products ready to ship right away?

Yes, they are.

So it's going to be a pretty quick transition to royalties once these guys announce?

That's the hope. We deliver a very comprehensive intellectual property that allows them to hit the ground running, and obviously they benefit from all the development that we've done in the product. So they are hitting the market with a very mature product, because it's -- it encompasses all the technology that we've been developing for years.

Great, I'll let someone else ask a question. Thanks a lot.

Thanks.

Thank you, sir. [OPERATOR INSTRUCTIONS] Next, we'll hear from Lilly Wu of TGRA Capital.

Yes, hi. Firstly, a small point. Guidance coming into the fourth quarter was 4 to 6 million. I know when the revenue numbers are small, things can be kind of lumpy, but did we have business that we were expecting in the quarter that didn't happen?

Well, yes. We had a number of opportunities that either didn't happen or happened at a point in time when there weren't recognizable as revenue in the quarter. So when we look at -- that's the primary reason for the shortfall.

There's also situations where milestones or certain things in development contracts may not happen when we want them to. That wasn't really the issue in Q4. The issue in Q4 was we had a number of new customers that we were negotiating contracts with. In fact, we closed a number of those contracts, but they didn't happen at a point in time where we were able to recognize as much revenue as we had hoped, or we weren't able to deliver as much technology as we had expected to deliver earlier in the year.

And those customers that didn't close, as we had hoped, they're more on the product Biometric testing side or in terms of contracts for engineering for ADSL product line?

There was -- there were three contracts that did end up closing, but they closed at a time, as I just mentioned, that was too late for us to deliver the thing, so we're in the process of doing that now. And they were in the DSL side, both on the test and diag and on the licensing side.

Okay. Okay. And you mention that had they have since closed so it's more a timing issue?

That's right.

Okay. And more broadly, when you were talking about the Deutsche Telekom rollout, it kind of reminded me of recently the SBC or the new AT & T, I guess, in their presentations and also in Verizon's, they put a lot of emphasis on their fiber to the home or some segment to give a substantially improved competitive base to go up against cable, and that they're rolling that out on a very rapid pace. Who do you see -- I mean, those should also be business opportunities right for TDSL or ADSL2+?

Certainly, yes. I think the SBC's plans have been -- they were sort of first expressed several years ago, and I think the original idea was that SBC was going to use ADSL2+ to deliver some 20 to 25 mega bits per of data, and then they, I think, for a number of reasons, those plans didn't occur when they had hoped. That was over 18 months ago that those plans, I think, were put in place.

Then in '05, they talked about using a VDSL2 or a VDSL solution to deliver data rates in the -- I think they were still thinking at about a 5,000-foot distance, so data rates in the 20 to 30 mega bit range. And I've recently seen some reports that say that they're looking as well at something more akin to what Deutsche Telekom's doing right out of the chute, which is the 50 mega bit VDSL2 infrastructure. And that demands that fiber, or requires, that fiber get to within 2,000 or 3,000 feet, or about 1,000 meters to be able to get that kind of data rate.

And, the economics here for a phone company are how far do I spring the fiber? Because there's a cost associated with that. The further I string it, the fewer homes that are actually hit by that end point. But as the data rate goes up, obviously I'm able to deliver a more valuable service.

We tend to think that Deutsche Telekom has picked the right point with 50 mega bit being a good data rate to deliver really high quality and differentiable service, and with using what is really the state-of-the-art latest technology in VDSL2. So our confidence that Deutsche Telekom will deploy in the next six months is much higher than our confidence that, say, SBC will deploy, just because of the track record that SBC has had.

But hasn't Verizon already made quite a bit of progress in terms of, they've already got fiber laid out to a certain percentage of their homes.

They're delivering, though, fiber all the way to the home in these. So that's not a VDSL --

Opportunity?

Right. That's for of a fiber all the way to the home, so there's no decision that has to be made as to where --

Oh, I understand.

-- that fiber point, yes.

Right. So in Verizon's case, when it goes all the way to the home, there isn't actually a business opportunity for --

That's correct. It's fiber, there's no DSL at that point.

Right, right. Okay. Okay. All right. Got it. Thanks a lot.

Sure.

Thank you. And next we'll hear from Ken Luskin of Intrinsic Value Asset Management.

Hi Michael, I wanted to kind of elaborate a little bit more on the question about guidance. The guidance for the first quarter, do you feel stronger than like the last quarter where things got pushed out, or is there a possibility they can get pushed out again?

That's a good question. I do feel stronger. At the time when we presented the 46 million, I felt pretty good about that. And, in fact, although some-- if you just purely look at the revenue accomplishment or the revenue number we hit in Q4, it wasn't what we wanted to do from a business perspective and operational perspective, and a perspective of adding new customers. We did a very--we did accomplish what we wanted. But, yes, to answer your question succinctly, I do feel more confident that this quarter we'll be able to very likely show a profit.

Okay. That's good news. And then let me ask a couple other quick questions. The----your competitors [Broadcom and Connectics], it doesn't look like they've got any plans to license from you. And so the---the---it would seem that they would most likely have to be caused to pay you royalties from some kind of legal action unless -- I just can't imagine they're just going to just pony up. What is the strategy for dealing with infringers? Is it to wait long periods of time, or is it to -- is there any strategy at all?

Well, the strategy now is to focus on building this business based on licensing what we think is the best technology on the market. And we think we're expanding the footprint in terms of the customer base, and hopefully get it to a point where it's just economically very attractive even to incumbents to come and license from Aware, because----the cost of doing so is going to be significantly lower than trying to run your own program. And if we have -- today we have six ADSL2+ licensees, we have three VDSL2 licensees, we hope to add more over the coming quarters, and if those two guys are the two primary, and I agree that they are, the two primary competitors, you get it to a point where their market share is low enough that they're spending a lot of money on what amounts to be a strategically important technology to them, but not an economically viable one. That's the current strategy.

Okay. So basically just you're -- there is no plan----it's a wait for them to decide that it makes more sense long term, is essentially what you're saying at this point? And Ikonos, would you expect them to take the ADSL2 and integrate that into their VDSL to come up with a VDSL2 at this point in time, or would you expect them to maybe try to license from you?

Well, we don't really know. It's a new relationship at this point. The two markets, the VDSL 2 market and ADSL2+ market are pretty distinct right now, and our relationship with them is, I think, getting off on a very solid foot in the ADSL2+ market. I think they're very highly incented to take what they acquired, which is a great presence in a very healthy growing market in Europe and build on that. I mentioned, I think earlier that some of our Bonded technology that we've been working on is very well positioned in the U.S. market and I think they're excited about that as we are.

And how VDSL2, primarily Ikonos is involved in the Far East VDSL2 market which has a different nature to it really than the access network VDSL2 market; it's more of a multiple dwelling unit market. So to the extent that Infineon is the primary participant in the access market, and Ikonos is the primary participant in the VDSL2 market, that's one scenario to the extent that they enter their---there's the central office side of things and the CPE side of things, obviously we have terrific technology, we have a relationship with these guys that's starting out on a very healthy note, and we'll see where it goes.

Great. Test and diagnostics, you seem to indicate that you have this -- basically that same type patent position, essentially. Are there people in that area that are infringing, you believe, also, or because, again, there are a number of different players that are in that area. Is Sunrise one of your licensees?

They're not a licens---they're not an announced customer. Announced, we have Spiron and Tollgrade, who are [overlapping speakers] we're very active in the handheld market right now, there's really a lot of pull for --

The Spiron Tollgrade----then JDSU, bought up one of the----didn't they buy one of the --

Yes, Acterna, yes.

Right, okay. So there---they're not----there are a number of players that are not licensed from you. Do you believe that they're infringing?

I haven't looked into what exactly the patent position is on -- in the test and diagnostics market. To the extent they're using standard compliant solutions where we have a very strong patent position, they may be.

But, again, the strategy's going to be to build a hardware and software business that delivers value around what we think is going to be a really large opportunity as the new standards roll out, which is finally taking place. These sometimes take longer than you want, but it looks like it is catching on. And the reason it's rolling out, these standards are being used is to deliver higher value and more complex services, and being able to test and diagnose those services is going to be really important to phone companies.

Do we have any numbers for the size of that market?

Yes, I do. I don't have them here today. Frost & Sullivan has been the source for us of that type of those---of what you're asking about. I could try and pull something together. You know, we're going to do this e-mail question thing in, so if you'd like to e-mail the question, I can try and pull something together and post it next week in our answers. It's a market that right now is, I think, difficult to forecast, but I know those guys try to do it-----Frost & Sullivan tries to do it. The reason I say it's difficult to forecast is because a lot of aspects are new, and we have -- this market for us is as you know pretty well, Ken, is not as mature as either the Biometrics or the licensing. So there's a smaller number of customers. But those customers, I think, are in a position, and Spiron, in particular, in a position to really hit some successful deployments as tests have started getting used more widely in these DSL deployments.

And it's very much a binary set of decisions. If indeed Spiron wins large business at a carrier for their test head or their handheld or one of our other customers does a similar thing, we'll directly benefit. And we feel like there's been a lot of reasons why it hasn't happened yet, but it looks like this year there's a good likelihood that we'll start to see significant increases in revenue and product sales in that area.

And you expect most of it would be -- I mean, it's going to be split up as far as royalties, or product revenues, or how --

It will mostly be a combination of hardware and software. So hardware platforms that go inside one of our OEM's boxes, so it's a module, a hardware module that's used to connect into the network and then software that gathers data from that module and interprets it for diagnosing a problem.

How much -- what do you expect, if the end market, let's say, is $200 million, or whatever, what percentage of that do you think will roll into you as revenue? I mean, on the DSL chip side, you're out at approximately a 5%, maybe, whatever, royalty rate, is there any way to figure out --

Yes, I'm sure there is, I don't think I want to do it on the fly here, I think I'd rather think about it and get back to you. But I understand the question.

Okay. And the Biometrics, same thing, difficult to quantify the opportunity here?

Well, the Biometrics, we look at the goal that we're trying to accomplish there. And I talked about that today. We're trying to track what is a pretty healthy-growing biometrics industry. We think we've got a series of products that address a core part of that industry, which has to do with sort of the software that sits between a device that captures the biometric, such is a fingerprint, and the system that's used to match that against some database. And that's really a core part of any biometrics system.

And when we look at what's happened in this industry over the last couple years growth-wise and what's happened in our business, we have tracked it, so we're pretty pretty confident that we're reasonably well-position. This particular set of products has a large number of customers, both on the OEM side and the dir---and the system integrator side.

So it's different than either the licensing or the test and diag business. It's a lot easier for us to point to being able to track a growth rate because of the diversity that we have in the business. I think we can look into -- I don't know the answer to what percentage of the overall market does Aware capture, but that's something we can look into as well. I'm not, again, prepared to answer that one on the fly either.

Any indication on the Identix acquisition by Visage; whether you're going to retain them as a customer or whether Visage and some other acquisitions have the needed technology that they can use in-house?

We don't have any indication that we wouldn't retain them, so we expect---our ambition is to expand into some of the Visage product lines, so we think we're pretty well positioned inside Identix with their---with software on their live scan devices.

You had nothing to do with Visage prior to this point though?

We didn't. No.

Okay. So they were using someone else or --

They didn't really have products in this area.

I see. Okay. Okay. They didn't have capture type stuff. All right, well, the outlook seems to be good, I appreciate your hard work. Thanks, Michael.

Thank you, Ken.

Gentlemen, we do have a follow-up question from Stanley Cohen.

Mike, you mentioned you signed I think a few testing and diagnostic during the quarter?

Yes.

Were any of those [deaseland] vendor or where they----are they the card type of vendors that you've had previously?

We're not going to answer that just yet, so we'll be, I think, in a position in a quarter or two to be able to really lay out where we are in this industry, and talk more about it. It's really premature to do that right now.

The goal is that ADSL2, VDSL2 there would be a test and diagnostic card in every [deaseland] or more than there were in with [inaudible] ADSL; correct?

That's one architecture, yes.

Or embedded into [overlapping speakers].

Right, there's numerous -- there's still a test head architecture out there, where there's a dedicated test head sitting somewhere. There's more the test head on a card that slides into either a deslammer, [inaudible] I think last year at SuperComm Spiron had such a card inside and [inaudible] Tollgrade had such a card inside an [inaudible] loop carrier system, then there are just pure software solutions that can be used around either of those architecture to diagnose and interpret problems.

Okay. So my question is, given the visibility you have, for example, the Deutsche Telekom or BellSouth, you don't have to specifically identify those particular ones doing this, but have they given you any indication when they deploy, they will use the type of architectures, therefore, you have some visibility that the market for testing and diagnostic will be significantly larger in the future?

Tough to say. Right now at Deutsche Telekom the focus is on getting this infrastructure up and running, and making sure that the CO and CP equipment functions the way it's supposed to function, and the testing aspect of it is, I think, there's some activity, I believe, going on I've heard of in the handheld side. But in terms of the test head architecture, and whether it's deslam integrated or stand alone or stuff, it's really too early, I think, for us to know.

Okay. And also just on the question I asked you earlier about the two unannounced customers you announced like two or three quarters ago, you gave me indications when you expect them to announce, I didn't ask about in between, about four or five months you announced another VDSL2 customer, when do you expect them to announce?

We'll probably be announcing our first new VDSL2 customer in the next, I'd say, three or four months. And the second one, who's reasonably new, I really can't say yet. I'd say it's reasonable to assume we'd announce their product this year. Maybe in the second half of this year. Could be in the summer, could be later in the year.

And finally, in the -- I believe in the [Ikonos] press release or maybe they said it verbally in a conference, they said something along the line they expect to use you for future ADSL2+ products.

Sure. Yes.

Can you give us any color on that?

Well, they look -- I think the real positive way to look at the Aware-Ikonos relationship is that Ikonos now has an ADSL2+, world leading ADSL2+ CP product line with an embedded base or an installed base in Europe, and particularly at transtelecom. If you look at a number of opportunities, number of products that Ikonos has to attack the market with, it's VDSL products and this ADSL2+ products. I would expect them to embrace it, from all accounts we're seeing, that's their intention. It's a terrific product, it has applications, obviously, in Europe but in other parts of the world as well, and it makes tremendous sense to them and obviously it's good for us. But it makes tremendous sense for them to pursue aggressively the selling of that product.

Okay. And you mentioned examples of Infineon and Analog Devices and Ikonos about deployments that have. You haven't mentioned any deployments, or maybe you did, that Thompson has using your product.

Yes, we don't have any specific things we can point to just yet for Thompson. And the products from Thompson is now, it either is released or is very, very close, and so that's not a big surprise that we haven't seen volume from it yet. It is targeting a very healthy part of their market, or of the Thompson modem group. So the intention here is for Thompson to sell this chip set to the internal modem group, and for Thompson modem to use an internally developed piece of silicon. Thompson has about -- and this particular device is really targeting the modem market as opposed to the gateway, the higher end modem market. This is really at the ADSL modem, targeting the ADSL modem market. Thompson has, according to Infinetics, I think, [and I know] they're first in the world some 25% of the modem market and about half of the European market, so they're in a very good position to deliver this device rapidly into a large share. But we haven't seen that yet.

Okay, things look pretty good going forward, thanks a lot.

Thank you, Stanley.

And at this time, there are no further questions. Mr. Tzannes, we'll turn the conference back over to you for any additional or closing remarks.

All right. Thank you very much. I want to remind everyone that we are accepting any questions that you may have, I'm going to look for the website, I think it's called investorquestions@aware.com. Please send us your questions and we'll post the answers, the questions and answers next week. Thank you for attending. We look forward to talking to you again next quarter.

We do thank you for your participation in the Aware conference call. You may now disconnect.