Aware Inc (AWRE) 2006 Q2 法說會逐字稿

Good day, everyone. And welcome to the Aware Inc. second quarter 2006 earnings release conference call. [OPERATOR INSTRUCTIONS] At this time, I would like to turn the call over to Mr. Keith Ferris, Chief Financial Officer, for opening remarks. Please go ahead, sir.

Thank you. Welcome to Aware's second quarter 2006 earnings conference call. With me today is Michael Tzannes, Aware's Chief Executive Officer. Thank you for joining us today. I'll review the financial results for the quarter, then Michael will talk about the business and then 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 to point out; various remarks we may make about future expectations, plans and prospects for the Company and the DSL and biometrics markets 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 "Factors That May Affect Future Results" in our annual report on Form 10-K for the year ended December 31, 2005, which is on file with the SEC.

Turning now to the financial results for the quarter. Revenue increased 79% to $4.8 million from $2.7 million in the second quarter of 2005. For the six months ended June 30, 2006, our revenue increased 58% to $10.9 million, compared to $6.9 million for the first six months of 2005. We report net income and basic and diluted net income per share in accordance with U.S. generally accepted accounting principles, or GAAP, and additionally on a non-GAAP basis. Non-GAAP net income where applicable, excludes the effect of stock-based compensation expense.

The Company uses the non-GAAP information internally to evaluate its operating performance. And believes these non-GAAP measures are useful to investors as they provide additional insight into the underlying operating results. However, non-GAAP measures are not stated in accordance with, should not be considered in isolation from, and are not a substitute for, GAAP measures. A reconciliation of GAAP to non-GAAP results has been included in today's earnings release.

Our GAAP net loss for the second quarter of 2006 was $1.2 million or $0.05 per share, which included $745,000 of stock-based compensation charges, as this was the Company's second quarter subject to the provisions of FAS 123R. This compared to a GAAP net loss of 1.5 million or $0.07 per share for the second quarter of 2005. Our GAAP net loss for the six months ended June 30, 2006, was $688,000 or $0.03 per share, compared to a net loss of $1.8 million or $0.08 per share for the same period a year ago. GAAP results prior to 2006 do not include a charge for stock-based compensation.

Our non-GAAP net loss for the second quarter of 2006, which excludes the effect of stock-based compensation, was $465,000 or $0.02 per share. For the six months ended June 30, 2006, we had a non-GAAP net income, excluding the effect of stock-based compensation, of $555,000 or $0.02 per share. Product revenue for the second quarter was $1.5 million, compared to 1.7 million in the first quarter 2006, and $784,000 a year ago. Second quarter product revenue decreased from the first quarter as a result of a decrease in software revenue, partially offset by an increase in ADSL hardware revenue. Compared to the second quarter of 2005, product revenue increased by $735,000, as a result of increases in both biometric and medical imaging software revenue, and intestine diagnostics hardware revenue.

Contract revenue, which includes license fees and engineering services, was $2.2 million for the quarter, compared to $3.7 million last quarter and 1 million in the second quarter 2005. First quarter revenue exceeded the second quarter revenue due to a large fee recognized in the first quarter of 2006 resulting from the transfer of certain technology licenses as a result of the acquisition of a customer's business. Second quarter contract revenue exceeded the second quarter of 2005, primarily due; to license fee revenues, increased engineering service revenues, and recognition of the final payment of fees relating to the first quarter transfer of certain technology licenses as a result of the acquisition of a customer's business.

Royalty revenue was $1 million, which exceeded Q1 '06 royalty revenue by $306,000 and exceeded Q2 '05 royalty revenue by $110,000. The increase in royalties reflects increasing sales of ADSL and new VDSL2 chips by our customers. Second quarter spending was $6.5 million, including 745,000 of stock-based compensation, compared to $6 million in the first quarter of 2006, and $4.5 million in Q2 '05. The increase over the first quarter of 2006 was primarily due to increases in stock-based compensation, patent legal expenses, travel and promotion expense for trade shows and severance.

Higher spending in this quarter compared to last year's second quarter, was primarily due to the stock-based compensation and increases in salary and fringe benefit costs, patent legal fees and other professional services, non-capitalized equipment and software and general increases in other operating expenses. We had interest income for the quarter of $459,000. Our available cash and short-term investments were $37.9 million at the end of June. Receivables were 4 million at the quarter end and inventory to support customer orders was $548,000.

We have $818,000 of deferred revenue relating to contracts and maintenance agreements and we have no debt. As of June 30, there were 23,536,812 shares outstanding. At the end of the second quarter, we had 116 full-time employees. 86 of these employees were engineers. This completes my financial commentary and I would now like to turn the call over to Michael.

Thank you, Keith. First of all, I'd like to welcome Keith as our CFO, this is his first conference call with us. He's been here two months now and brings a wealth of experience. We're very happy to have him join our team.

I'm going to start today with our DSL licensing products. The DSL market is without question steadily moving towards ADSL2+ and VDSL2 technologies. Our royalties were higher due the sales of VDSL2 chips for the Deutsche Telekom deployment. DT announced that the first subscribers will be going live this month in Germany. And Deutsche Telekom continues to be the most ambitious rollout of a VDSL2 IPTV network in the world targeting million of subscribers in 10 cities initially and then expanding to 40 smaller cities more over time.

Being part of this first ever VDSL2 IPTV network is very exciting and puts us a position to capitalize on other deployments that utilize VDSL2. We expect to continue to see improved royalty revenues as our customers pursue a steadily growing number of ADSL2+ and VDSL deployment opportunities. We continue to have a healthy of ADSL2+ and VDSL2 development contracts underway as well. The concentration of our technology around the StratiPHY2 platform has allowed us to efficiently scale the number of chipset developments that we can support.

Because of these projects, the pipeline for new royalty bearing products is a healthy one. We're also in discussions with a number of companies about licensing StratiPHY technology for new chipset development efforts. We hope to be able to add new development contracts in the near future.

In DSL licensing and research and development, we continue to innovate in directions that we believe are important in the industry to deliver additional value to our customers. A complete digital and analog for VDSL2 and ADSL will be available later this year. We are developing features that support the reliable delivery IPTV over DSL networks. And we're improving the density and central office applications through the development of new multiport architectures. The transition to ADSL2+ and now VDSL2 is on its way and we've begun to see the benefits and expect to continue to see them.

Turning to our biometrics and medical imaging products, we had a good quarter. The majority of our product revenue this quarter is again attributable to these software products. We have a suite of biometric software products that target a number of existing and emerging biometric market opportunities, including APHIS and client systems that require APHIS interoperability, order control and secure credential applications. New products that address e-passports and the PIV initiative in the United States are also gaining traction.

Because of the broad-based exposure we have through a large customer base as a software component OEM supplier, we're optimistic about the growth prospects for these biometrics products. For the remainder of this and into next year, we see the prospect of growth from biometrics, DSL licensing contract revenue and DSL royalties as our customers improve their market share position. And we're optimistic that we will begin to see significant contributions to revenues from test and diagnostics, hardware and software products.

I'm going to spend the next few minutes describing in some detail the test and diagnostics opportunity and the way that we intend to address it. The opportunity we're addressing can be divided into two market segments; the automated test equipment market and the handheld market. The size of the automated test market is related to the size of the remote terminal market, we believe. Based upon this, we believe that the potential size of this market is in the tens of thousands of units or low hundreds of thousands of units worldwide.

On the handheld side, we believe that the size of the market is based upon the number of technicians that a network operator employs. We believe that this is also a tens of thousands of units market. From a revenue standpoint, Frost and Sullivan has forecast a 14.4% compound annual growth rate between 2004 and 2011 for DSL test equipment, with revenues of between $400 and $500 million in 2007 and 2008. The major trends in this market that are changing are the emergence of ADSL2+ and VDSL2 technologies and the increased importance of triple play services that these technologies enable on a widespread basis.

We expect that the majority of the DSL test equipment market, both on the automatic test head and handheld side will migrate to supporting ADSL2+ and VDSL2 by the end of 2007. This plays into our product strengths as we develop products that support these new technologies today. Our goal is to successfully supply hardware and software components to OEM's who sell automated test head handhelds. Trends we see toward IPTV and triple play using VDSL2 and ADSL2+ and the requirements for more sophisticated testing and monitoring of DSL networks, is addressed with the functionality in our hardware and Dr. DSL software technology.

Our hardware products enable connectivity into legacy ADSL, as well as ADSL2, ADSL2+ and VDSL2 networks. Our selling price is typically in the low hundreds of dollars per unit. Our product support, all standard compliant modes of operation and world class interoperability. Our software for the test and diagnostic product line sells on per node or per line basis. This includes, for example, software that performs single ended line and dual ended line testing.

This software is sold to OEM's typically integrate our solutions into larger software or systems solutions that are sold to DSL service providers. Pricing is typically in the hundreds of dollars per license, depending upon volumes and the levels of functionality that are supported. We see an opportunity that amounts to potentially tens of millions of dollars in hardware and software revenue over the next few years from these products.

We continue to make progress in product development and marketing in our test and diagnostics area. Our customers and prospective customers include; test head manufacturers, as well as handheld manufacturers. And through these, we have good exposure to opportunities in North America and Europe. Two areas that present large opportunities for DSL test equipment. As these companies succeed in penetrating the market with their solutions, we expect to see increases in our test and diagnostics revenue. We expect this to begin ramming in the latter part of this year and then to grow significantly in 2007, based upon current understanding of the market and of our customers' opportunities.

Our goal for this year is to show healthy revenue growth in each of our product lines. We are on track for the first six months. Our products are aimed at growing markets. We have validation that our product features are correct. And believe that we can grow revenues and with revenues, earnings over the near and long term.

For guidance for this quarter, for the Q3 quarter, we expect revenues will be in the $5 to $7 million range. We hope to be able to show a profit this quarter and over the longer term this year, by establishing strong market positions within each of our three product lines. It should be evident that we see tremendous promise for our DSL licensing, biometrics and DSL test of diagnostics products. We expect expenses, without stock-based compensation expense, to be under $6 million. The main source of the increase in spending from last quarter will be the cost of anticipated test and diagnostics hardware product sales.

Overall, the first six months of this year have been very good. Our biometrics and medical imaging products are on track for solid growth for the year, as are our DSL licensing revenues. These are both the consequence of exposure we have to growth in the biometrics and DSL industries. Our test and diagnostic revenues are emerging and the market for automated test head and handhelds for ADSL2+ and VDSL2 looks very promising and our products are well positioned. With that, I'll turn the call over to your questions.

[OPERATOR INSTRUCTIONS] We'll take our first question from Stanley Cohen from Atrium Advisers .

Hi Michael, hi Keith, how are you? First, I couldn't quite hear the deferred revenue number that you mentioned.

818,000.

And that compares to last quarter of?

668,000.

And the primary reason for decrease?

Most of the deferred revenue at this point is associated with test and diagnostics product sales that are not yet recognizable as revenue.

Basically people testing hem out and you couldn't recognize it yet.

That's not -- the general reasons are around how and when -- why don't you talk for a minute of what constitutes deferred revenue? Because that's not exactly right.

Basically, deferred revenues are due to the timing of the completion of contract milestones and delivery or payment of the products or services relative to when these items are recognized. So, examples such as payments in advance for maintenance contracts, or billings in advance of completed milestones on engineering service agreements you come up with a difference in timing from when you actually invoice and you can actually recognize that revenue.

I understand, but Michael just said it is for the testing part of the business which typically ins't a contract. When you ship it -- you ship it when they buy it.

Well, there can still be constraints around other obligations that we may have that don't allow us to recognize the revenue.

Okay, okay. I assume that as good as the licensing number looked this quarter it was muted by decrease in the old vanilla DSL business. Is that correct?

Well, there were a couple of decreases that we should mention. In general, the ADSL2+ revenue -- I haven't actually checked this but I'm pretty sure this quarter, royalties from ADSL2+ were higher from ADSL. And that may be the first quarter that that actually happened. The other thing, however, that happened this quarter, was because of the transition from Analog Devices to Ikanos of those products and because of Ikanos fiscal year and calendar, we actually only recognized royalties for February and March. Whereas, if ADI had still been the customer we would have recognized February, March and April because their fiscal ends in April. So, we actually had a two month quarter of royalties from Analog Devices Ikanos this quarter. Next quarter, we'll go back to the normal three month, which will in this case be April, May, June. So we had a little bit of a lower royalty number because of that. And, yes, it's true we're seeing a fall-off on the legacy stuff at this point pretty steadily but we're also seeing a pickup on the ADSL2+ stuff.

And the VDSL2. You mentioned the VDSL2.

VDSL2, of course, is primarily now in Germany for us. That's the main deployment that's actually taking place.

Okay. So, the growth was muted by those three factors.

Correct.

Okay. That's good. Contract usually -- contract revenue goes up 2 something million. You announced that you have any new chip contracts. Can you reconcile the two?

And in fact we probably did. What's happening in right now in DSL and it's something we saw maybe five years ago, the competitive landscape is about as heated up as anything I've seen. I think that's a consequence of the size of the market opportunity and what's at stake for everyone who is going after this market. And our judgment has been that we're going to take a very low profile and speak very little about what our customers are either doing or planning on doing and what their specific product plans are, what their specific successes are. In the end, their success is going to mean revenue for us and that's what's going to matter most. So, you're going to see a little bit of a change in our -- about how forthcoming we're going to be regarding customers and their plans. And I think at this point, that's the right thing -- that is the right posture for us to take, given the competitive landscape.

Is it possible customers, even if they announce their ships won't want to publicly say that they're using your IT?

Sure it's possible.

Good luck. Thanks a lot.

Moving on we'll take our next question from Tom [Kurto] from Pacific Asset Partners.

I have a couple questions. I'll ask one or two and then let others go in in before I ask others. On this royalties thing, follow up on the last question asked, so of the 1 million of royalty revenues, how much was ADSL2+ and VDSL combined?

We're not going to say.

You're not going to say.

No, it actually goes back to the competitive comments I was just making even though this was an easier one to judge. VDSL2 royalties at this point are coming from a specific customer, so any discussion of that would be -- we wouldn't do it.

Okay. And also in the previous question you mentioned Ikanos, two months. I don't follow the company but I think I saw somewhere where they have announced a new VDSL2 chip optimized for IP television. How do you fit in that situation?

Well, there are products inside Ikanos that are licensed products from Aware and these include all the products that Ikanos acquired from Analog Devices, which I think Ikanos continues to call the FUSIV product line. And they are typically addressing the CPE market and the ADSL2+ CPE market. And I'm actually going to take a second to talk a little bit about that because that's a very vibrant market right now and I think they're well positioned in it, as are a number of our other customers. Ikanos also has and has prior to acquiring anything from Analog Devices, VDSL products, which are not licensed from Aware. So I'm not intimately familiar with the product that you're discussing. But if it is it is a VDSL product, my guess is they developed it without any technology from Aware.

Okay. Because the same place where I saw this, I can't remember where, all said that it did have the FUSIV technology incorporated into the chip.

Well, if they used technology, then they will certainly be obligated to pay us. If they didn't, then they won't.

Okay. And ADSL2+, I think it is worth spending just a second on. Yes.

Obviously VDSL2 is a big, exciting opportunity. It is really more in the future today. And obviously, the Deutsche Telekom deployment is one of the largest and hopefully will be an extremely successful one. But we actually in sort of an effort to get an idea of how the rollout of ADSL2+ and VDLS2 is going, looking into announcements that have taken place in the last six months or so.

So if you look at just ADSL2+ announcements for service launches, which means that there is already some sort of network infrastructure in place and they're now turning on service, so it is an opportunity for the CPE side of things because that is required to actually turn on service. There were announcements in the last six months or so, lots of them in Australia, from multiple ISP's, the United Kingdom, 02 and Bull Dog, Telenor in Norway, French Telecom is entering the Spanis market, FastWeb in Italy, Magyar Telekom in Hungary, [Farquar] in Germany, Primatel in Croatia, PDC in Denmark.

And this is, we think, is a ground swell -- these are ADSL2+ now service launches, a ground swell of deployment that presents an opportunity for a number of our customers because we have a number of customers addressing the ADSL2+ CPE market. Including Ikanos, PMC-Sierra Infineon, Thompson, Atmel. And so this critical mass that it appears ADSL2+ is reaching, we think, is a very positive thing for the Company.

Okay. Thank you. I'll hold off and see if there are other questions.

Our next question will come from Stanley Cohen.

First a quick question for Keith. Can you give us an update on what the current amount of usable net loss tax carry forwards and you also have a number of R&D tax credits available? What's the current amount?

Yes, that's going to take a little bit of digging Stanley. Maybe we can take another question while we get that.

I have another one. Mike, I don't know if you can answer this, given your previous comments but I'll give it a try. Deutsche Telekom is the basically the largest VDSL2 deployment and they're using Infineon and therefore using you. Yet, we've heard a lot of design wins from other VDSL chip manufacturers who don't have robust as a chip. Can you reconcile the reason for that?

Well, I think the one thing to look at is the difference between design wins and network deployments and actual network build-outs. So, service launches and network build-outs. I think there is a possibility that, again, because of the competitive landscape I was talking about earlier, you may not see all companies desire to talk about every design win they necessarily are after or believe they have secured for competitive reasons. I think most of the -- certainly Ikanos has very successful deployments that they're involved in, in Japan, and in Korea to some extent.

That would be VDSL, not VDSL2.

Correct. And I think most of the newer announcements -- they've made some announcements around Swisscom and Belgiacom, which are actually are about a year -- from last year anyway. And then the other things have really been more design win as opposed to either network build-out or product launch -- or service launch announcement.

Okay. So it's fair to say that your customers have other design wins in the VDSL2 area?

It is fair to say that our customers know that they have a terrific product because they've tasted success in a number of places. They're chip companies whose business it is to go out and sell chips and I have to imagine that they have a number of other opportunities that they're pursuing.

And also a comment on your ADSL2 comments, on the previous call, they mentioned besides built-out being in trials for a ADSL2+ products, they're seeing robust business just with vanilla ADSL2 products.

Sure. Well, I talked a bit about this service launch groundswell we're seeing which, -- we had -- our marketing development had a great job pulling this information together. When you see 10 or 15 countries announcing -- now, some of these are small but some of them are very large deployments of service. It is, I think it means the opportunity out there is large. And our outlet or our potential of addressing these various opportunities is pretty strong and growing stronger because we've got new customers entering the market. So we might -- do we have the NOL number?

Yes, the cumulative through the end of 2005 we had federal net operating loss carry forwards of about $17 million. R&D and other tax credit carry forwards of 14 million. And another capitalized R&D of 10 million. So, the total was 43 million.

We have another follow-up from Tom Kurto from Pacific Asset Partners.

I realized VDSL+ gets too much attention probably. But on Deutsche Telekom, you can't help but see articles in the Wall Street Journal about the regulatory issues that they're facing that sounds so similar to the United States. And they also had the Europe Commission to deal with. You, in previous calls -- and I realize you're far back in the chain. You sell to Infineon and you don't -- may not know what Deutsche Telekom is doing. But do you get any indication that they are being forced to slow down their rollout while waiting for this regulatory environment to clear up a little bit?

Well, we don't have any specific knowledge of anything other than what you've probably read and whatever is publicly openly published. I did find a release from Deutsche Telekom from Friday, that on August 2 they would begin actually offering service with their network. And that they're going to have access to more than 70 TV broadcasters and 100 TV channels and that they're going to roll out the 10 -- very consistent with what we've heard before.

10 cities?

Initially 10 cities and then 30, 40 more after that. According to this article, already 3 million households are already connected. By the end of next year, it aims to have 6 million subscribers in the 10 German cities. And I've also seen the things about regulatory stuff. Unfortunately, we don't really know.

All right. So you're seeing an article that says they're pushing ahead as far as you can tell.

Correct.

Okay. And then my last question would be, Verizon has a kind of a weird group of companies working together on a protocol, Cisco, Lucent, Nortel and it's going to be expanded to be offered to others in the Internet multi-media area. Are you with me, Michael?

I'm here. It is not ringing a bell.

Okay. They're calling it IMS, it's Internet protocol for multi-media systems.

Yes.

And I just wanted to see if you -- to see if that has any -- how you fit into that?

I think that that is a sort of further removed from the specific technology that's being used to deliver broadband.

Right. Maybe back in the central office.

Yes. In terms of the network, you think of things in this network stack. And high up in the stack means applications and services. And low-down in the stack is physical layer technology, specific stuff. So, DSL, or cable, or wireless, or dial-up or something like that. I think those -- the network you're talking about and the cooperation has to do with sort of the bundling of a number of services using IP, Internet protocol, not intellectual property, but Internet protocol for -- and thereby being able to deliver voice, video data efficiently over a number of different networks, including DSL. So, I don't think it has any direct impact on necessarily on our business.

Okay. Thank you.

Moving on we'll take our next question from Kim from Intrinsic Value.

Congratulations on moving the company forward.

Thanks, ken.

So basically what's going on in the DSL business; is that some of the folks who don't really have the newer flavors of DSL are just kind of bottom feeding on the old DSL and probably at really horrible margins. And so your guys who have licensed from you are not really competing very aggressively in that area. And so that is tailing off because as the whole industry goes, the -- it would seem to me that still the primary amount of DSL chips that are being implemented are still the old DSL. Is that correct?

Well, I think you can now probably talk about old VDSL as well as old ADSL. And I think in VDSL, it is probably true that most of what has deployed so far is pre-VDSL2 VDSL. Although, now you're starting to see roll-outs of true VDSL2.

Right.

I think there's been a fair number, especially on the central office side, and in particular from Broadcom in the last year or more of sales of chips that are capable of both ADSL and ADSL2+ and were possibly installed initially and turned on in ADSL mode. And I think many of the service launch announcements I talked about where ADSL2+ service is being offered in various areas, could be based on those solutions. They could also be based on solutions from other companies, including Infineon who is one of our customers, as you know.

Right.

So I think there is a pretty strong ADSL2+ component, or element already in the network in certain geographies. Not everywhere in the world. And we've said that by the end of this year we've thought that most deployments would have transitioned entirely to ADSL2+ and we still think that's right.

So, we should start seeing that -- basically, what I'm trying to get at is besides Infineon, the rest of your -- well, you have two CO customers from what I recall, and but you have a lot more on the CPE side.

Right. And so, that's what I was trying to say earlier. Perhaps it wasn't clear enough. That when you start seeing this groundswell of service launches, that's going to require CPE. And on the CPE side, Ikanos, PMC-Sierra, all of these customers of ours have terrific products that can address those.

You said it but I'm trying to elaborate on it. I don't think -- it hit my ear but I wanted to get at it. And the idea here is, and I know you can't -- we don't want to discuss individual companies and I know you can't pinpoint it exactly; but what do you think is the potential market share in the ADSL for your customers on the CPE side? Do you think it is 25%, 30%, 40%, 50%?

I think it could be 100, but that is why I'm CEO of this Company.

Broadcom is not going to go away, so it is not going to be 100.

I guess that's right, Ken. I think a --

TI still has a CPE, I don't know how effective it is.

They haven't been really aggressively, as far as we've heard, pursuing that. But yes, they have had a -- [Connexion] has a solution. You can take the number of available solutions and divide it into Aware versus non-Aware and you probably get to about 50%. I think we would be -- so having said this sort of this glib 100% comment, I think we would be happy at 50% of the market.

So, you think that is actually realistic, that that --?

Yes, we do.

Okay. That would be excellent. And then you would kind of say there or greater for VDSL you have a stronger position.

You got the leadership position value, which is going to -- we'll see over the next year or two what it amounts to. If VDSL2 continues to roll out rapidly, I would expect other deployments to leverage what Germany is investing in and that would be very beneficial to us.

Okay. So, getting back to my initial question was, essentially by the end of this year, you would think it would be very few deployments of old DSL.

I think there will continue to be -- so a new ADSL2+ chip will continue to support old ADSL.

No, no, of course we know that. What I'm pointing out is that -- I'm --?

You won't see new service launches for ADSL. They'll be for ADSL2.

Or VDSL2.

Or VDSL2. Although realistically, they're going to be more -- if you look at the number of launches of ADSL2+ that have been made and the number of VDS2, there is only one of VDSL2. If you look into -- as I said, we think by the end of this year most of these will be 2+.

So, looking at '07 and '08 opportunity for Aware, the potential is -- 50% market share is attainable. So, then we just need to go back to the services that are that they're making the projections. And if those projections are correct we just take 50%, take your royalty rate on that, and accomplish some kind of numbers, essentially?

Yes, the specific numbers of the size of the market and the specific percentage are obviously going to have a lot of impact with what you come up with there but that is a perfectly viable way to model it.

So we're finally -- we've been talking about this for maybe about 1.5 year or so. '07 is finally the year if it's first quarter, then it will hit your second quarter numbers by that point?

Yes. I think we have looking at '07 versus '06, for example, we have a lot more customers addressing the market. The market is moving or will at that point have moved to be primarily addressing the technologies that we're strongest in. Those being ADSL2+ and VDSL2. Hopefully, we'll have new customers addressing the market during the year. We think that we can expand the geographic footprints that we can address through new customers. So, it's all moving in the direction we hoped it would move.

But the key point was figuring out if you got a 50% market share, then that would be an awfully big number for Aware's bottom line.

That would be a big number. And it's not an easy thing to accomplish but I think we can do it. And that's what we're going to try to do more than that, obviously.

Right now, you're saying your position essentially -- in other words, you can't tell what your customers, how effective they're going to be. But essentially you believe right now you're positioned -- your customers are positioned to get 50%.

Our customers are well positioned in a growing market. There is a lot of them. And percentages will fall out where they fall out.

Okay. All right. And you would expect the same thing with DSL test and diagnostics.

The DSL test and diagnostics is an area we are -- we think on the -- with a foot or two in a couple of doors, and it's an area where IPTV and all the kinds of service improvements that we see being rolled out around the world; there is IPTV forecasts that are up to 16 million forecasts in 2008. And 50% of them are in Europe, which is a particularly strong market for our technology. So, the idea that these services are going to require better testability and better diagnostic capabilities from phone companies because the expectation by the consumer base is going to be that they have to be reliable, we think is very sound. There is a lot of activity going on in this market through the customer base that we have. And we're still waiting for it to happen but we think it's all moving in the right direction.

All right. So again, it would appear that rolling all this stuff out they need the test and diagnostics to go along with it. So, again --?

We've built hardware and software products that address it, that leverage the expertise we have in the licensing business that adds some technology expertise we developed specific to the testing business. And I would think we've got a good position.

Great. So again, with another-- it would indicate that next year should see, I mean --?

That's our hope. I think I said in the remarks, we expect that this would grow significantly in 2007. That's our expectation and our hope.

And the biometric area is continuing to grow at a rapid rate but probably won't have the explosive growth that this will have unless you get into some new pieces of the business?

And we have new products that are trying to get into new pieces of the business.

So there is potential for that. Even if you don't get into the pieces, you're still going to see 30% to 40% growth there.

We hope to be able to track where the industry is going. We have broad based exposure to industry through lots of different customers. We don't see the ups and downs of the market quite as much because of that, which is good for the downs and perhaps not as good for the big ups that you might see, but it's a very healthy set of products. It's a healthy market. We have terrific relationships with lots of different customers. And it's definitely moving in the right direction, as you can see from the financials. All right.

So maybe some of these guys will -- analysts will get on board at some point here. They might want to wait until it actually shows up in the numbers, but '07 looks like a -- it looks like everything you've been doing for the last few years, spending lots of money and foregoing what could be better profitability short-term is going to start showing up in '07.

We've always had a pretty -- and you've known this because we've been in touch for a long time now, you know that our goal is a long-term big success, not small-term medium.

Right. All right. Well, good. It looks like we're finally on a cusp of this thing, barring some world war. Great. Thanks for your time, Michael.

And at this time, gentlemen, there are no further questions. I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you all very much for joining us today. We're going to be attending the AEA Classic Conference in the fall. I think we'll probably have another conference call between now and then but I wanted to give people a heads up on that. If you happen to be there, please come and see us. We think that's a great forum for people to get to know the Company and for us to get to know some investors and potential investors. We'll talk to you again next quarter. Bye-bye.

Thank you for participating in the Aware conference call. You may now disconnect.