Aware Inc (AWRE) 2006 Q4 法說會逐字稿

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

Thank you, operator. Good afternoon. Welcome to Aware's fourth quarter 2006 earnings conference call. I'm Keith Farris, the company's Chief Financial Officer. With me is Michael Tzannes, Aware's Chief Executive Officer. Thank you for joining us today. I'll review the financial results for the quarter and then full-year 2006. 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 that 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 31st, 2005, which is on file with the SEC.

Turning now to the financial results for the fourth quarter. Revenue increased 76% to $6.4 million from $3.7 million in the fourth quarter of 2005. For the 12 months ended December 31st, 2006, our revenue increased 54% to $24.1 million compared to $15.7 million for the 12 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 income for the fourth quarter of 2006 was $0.9 million or $0.04 per diluted share, which included $243,000 of stock-based compensation charges ,as this was the company's fourth quarter, subject to the provisions of FAS 123(R). This compared to a GAAP net loss of $1.2 million or $0.05 per share for the fourth quarter of 2005.

Our GAAP net income for the 12 months ended December 31st, 2006, was $1 million or $0.04 per diluted share compared to a net loss of $2.5 million or $0.11 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 income for the fourth quarter of 2006, which excludes the effect of stock-based compensation, was $1.125 million or $0.04 per diluted share. For the 12 months ended December 31st, 2006, we had non-GAAP net income excluding the effect of stock-based compensation of $2.971 million or $0.12 per diluted share. Product revenue for the fourth quarter was $2.6 million, compared to $1.7 million in the third quarter of '06 and $1.3 million a year ago. The increase in product revenue reflects increased sale of biometric and medical imaging software and increased sales of test and diagnostic hardware and software. Contract revenue, which includes license and engineering service fees, was $2.6 million for the quarter, compared to $4 million last quarter and $1.7 million in the fourth quarter of 2005. Lower contract revenue in Q4 '06 compared to Q3 '06 is the result of the particularly strong third quarter patent and license fees that we received under agreements with our customers. Royalty revenue of $1.2 million increased by $200,000 from Q3 '06 and exceeded Q4 '05 royalty revenue by $400,000. The increase in royalties reflects increasing chipset sales by our customers.

Fourth quarter spending was $6 million, including $243,000 of stock-based compensation, compared to $6 million in the third quarter of '06 and $5.2 million in Q4 '05. The increase from the fourth quarter of '05 was primarily due to stock-based compensation, increases in salary, and fringe benefit costs and higher cost of sales related to our revenue growth. We had interest income for the quarter of $498,000. Our available cash short-term investments were $39.8 million at the end of December. Receivables were $4.7 million at quarter end and inventory to support customer orders was $819,000. We have $1.1 million of deferred revenue relating to contracts and maintenance agreements and we have no debt. As of December 31st, there were 23,642,753 shares outstanding. On a fully diluted basis we have 24,964,958 weighted average shares outstanding. At the end of the fourth quarter, we had 117 full-time employees. 86 of these were engineers. This completes my financial commentary. Now I'd like to turn the call over to Michael.

Thank you, Keith. During 2006, we made significant progress in all aspects of our business. Our revenues grew 54% to $24 million. Our net income for the year was $1 million. We were profitable on a yearly basis for the first time since 2000. We've now been profitable for three out of the last four quarters and four out of the last six quarters. For 2007, our goal is to grow revenues 25% to $30 million. Our EPS goal for the year is $0.15, up from $0.04 in 2006. From a product and market development viewpoint, 2006 was successful and 2007 looks very promising. Aware's DSL technology is fueling the first worldwide mass deployment using fiber fed VDSL2 cabinets. This is underway in Germany and is on track to deliver 50 megabit per second service to millions of homes. Our StratiPHY2+ product is the engine behind volume deployments in other areas in Europe. Our StratiPHY product family is being used by leading chipset manufacturers. New chipsets from existing and new customers will be entering the market in 2007. Through our customers, and their DSL chipset products, we're in a position to benefit on numerous fronts.

The ADSL2+ market continues to look very healthy for 2007, 2008, and 2009. According to the most recent Infonetics research reports, 490 million ADSL2+ chipsets will sell in that time frame. Of these, 55% are CO chipsets and 45% are CPE chipsets. The total estimate for ADSL2+ chipsets has increased in the last year. This is consistent with announcements from phone companies around the world regarding ADSL2+ network build-outs and service launches. The VDSL2 market is expected to experience very healthy growth in 2007, and over the next three years. Infonetics estimates that 118 million VDSL2 ports will sell over that three year time period of 2007, 2008, and 2009. This is consistent with the notion that VDSL2 network build-outs will occur in certain geographic regions, such as Germany, Korea, Japan, and the U.S. For VDSL2, the split is roughly 70% CO and 30% CPE.

Based upon these forecasts for the 2007 to 2009 time frame, 80% of the DSL chipset market will be ADSL2+ and 20% will be VDSL2. We are very pleased to have a strong licensing presence in both of these markets. A leading ADSL2+ customer recently announced residential gateway design wins with their ADSL2+ products. And a leading customer in VDSL2 recently announced a major design win in the Korean market. Interest in our StratiPHY product line continues to be strong. We have discussions ongoing with several top tier semiconductor suppliers as well as several smaller suppliers. With StratiPHY2+ and StratiPHY3, our customers have an easy to integrate solution with superior performance that interoperates across a broad spectrum of ADSL and VDSL deployments. This gives our customers an opportunity to address deployment opportunities in all markets.

Turning to our test and diagnostics products. Our exposure to the service assurance markets through our test and diagnostics products is very good. We have relationships with leading test head manufacturers, and we also have a number of design wins for our 350, 450, and 550 hardware modules with leading hand-held manufacturers. With these hardware modules our customers can utilize a single design to support ADSL2+ and VDSL connectivity. Our Dr. DSL software solutions work in conjunction with our hardware or on their own, and supply diagnostics capabilities that are central to the deployment, maintenance, and trouble-shooting of DSL service. Our strongest value-add is in ADSL2 and 2+ and VDSL technologies. And we believe the next wave of capital spending by phone companies in test infrastructure is being driven by the deployment of IPTV and triple-play services over ADSL2+ and VDSL networks.

Spending on test infrastructure for service assurance appears to be materializing for 2007. Several of our test set customers have recently announced substantial contracts from which we expect to derive revenues in 2007. In addition, our Dr. DSL software products have begun to gain traction. We had our first revenues for Dr. DSL software from a DSLAM manufacturer in Q4 and expect revenues from this segment to increase in 2007.

Turning now to biometrics. During 2006, we further improved the value proposition of our software products for criminal justice, border control, and secure credential applications. We launched new products addressing personal identity verification or PIV applications and recently recorded our first significant PIV sale with a large U.S. government agency. We're also tracking the potential use of biometrically secure credentials in other government and enterprise applications. We continue to have positive exposure to the fingerprint enrollment and border control markets through our broad line of biometrics software products.

I'd like to expand for a moment on the guidance we've given for 2007. Our goal is to continue to be profitable on a quarterly basis. Our revenue goal, as I said, for the year, is $30 million. We expect expenses to grow by about 10% as we add R&D and sales and marketing resources across all of our product lines. There will also be an increase in the cost of product sales associated with test and diagnostics hardware sales. The EPS goal of $0.15 is on a GAAP basis.

On the R&D front, in DSL silicon technology, we're making progress with multi-port central office solutions, bonded ADSL2+, and VDSL solutions, as well as on our analog front-end technology. We have a second generation analog front-end product that we have demonstrated to select customers and hope to have a customer for this technology later in the year. In test and diagnostics, we launched a number of new hardware and software products during 2006. Our R&D focus is on improving our hardware platforms for test head and handheld applications. We're also improving the functionality in our software Dr. DSL products for service assurance applications. In biometrics and medical imaging, we expanded our product offerings in 2006, adding products that address the PIV market, border control applications and JPEG 2000 Interactive Protocol, or JPIP software. Our goal is to continue broadening our exposure to these markets with new software features and products.

In conclusion, we're excited about the progress we made in 2006. And we're excited about the potential for growth in all of our product lines over the coming quarters and years. We would now like to take any questions that you may have.

[OPERATOR INSTRUCTIONS] Our first question from Stanley Cohen.

Can you hear me?

Yes.

Hi Michael, hi Keith, how are you?

Hello Stanley, very well.

The product sales line was up significantly, almost $900,000. And the [inaudible] was hardly up. So I assume that any growth in test and diagnostics had to be in the software portion of this and not the hardware portion?

Yes, there wasn't much test and diagnostics in the year and in the quarter as well. So most of the increase in sales quarter-over-quarter Q3 to Q4 and Q4 of last year to this year, is related to medical -- or biometrics and medical imaging.

Let us just talk about quarter to quarter, that is a very significant increase. Was it one particular customer? Was there -- ?

Yes, there were several large customers. We had a significant piece of business for our JPIP product that I mentioned, the medical imaging product. This business tends to have a little bit of end of the year activity with the nature of the model where customers use software seats to use the product and often at the end of the year they make up for software usages that they made during the year. So it was primarily in the biometric and medical software area and I think it was partially seasonal. But I think also just indicative of a general positive trend in that area. I wouldn't expect this kind of growth every quarter, necessarily, but we have expanded our product line in this area, and expanded the opportunity that we can address, and some of that worked through in this quarter.

Nothing of a one-time nature or anything like that.

No, not really.

On the contract revenue, again, it was a very strong quarter. Can you give us any color on--

This is what we would like to see contract revenues in the range of $2 to $3 million dollars or so. Last quarter was a little bit unusual because we had a large deal that we talked about, that we didn't expect it to repeat every quarter. We have a number of customers now -- almost all of this revenue is associated with the development of DSL chipsets. So we have a number of existing customers with whom we do numerous chipset development projects. We have several new customers. It's a combination of engineering service activities and technology licensing activities. So in general this is kind of where we would like to see this revenue line.

Usually you give us guidance for one quarter out.

Yes, we've decided to go to the annual guidance, because first of all, we think -- we hope it is a more positive message. We certainly see it that way. And we are talking about maintaining profitability. So it gives you sort of an idea of what the goal is on a quarterly basis. But I think the -- our feeling is the annual guidance was a better spot to go to at this point because I think we have a better view of where the business is going over the next year than we've had in a very long time.

Any idea what the non-GAAP EPS would be for the year?

It would be I think stock-based comp is in the couple million dollars' range is our estimate, because we're basically carrying over last year's -- the '06.

Just $0.01 or $0.02. That's it.

So it would be another $0.08 or $0.09.

$0.08, $0.09.

I was going for -- yes. $0.08, $0.09. Okay. Given that--given all the test revenue is still to come and your strength in contract revenue which will lead to higher royalty revenue, and your strength in biometric -- it seems 25% growth is little on the conservative side, wouldn't you say?

Well, no, I think we would be -- we would be very happy if we managed to grow the way we're talking about. It's -- it assumes a number of things go well. It doesn't assume that everything goes perfectly, but it assumes a number of things go well.

I mean, do you expect the contract revenue is going to drop off? Because, I mean, the contract revenue would indicate much higher royalty growth in the coming year and the biometric business seems to be growing at a rate higher than 25%. I'm trying to reconcile the current growth rate.

I think contract revenue we wouldn't expect to grow much, and we wouldn't expect it to decline much. I think the range it's in, it was in this year, would be -- perhaps it is a little high this year because we had some things that were not necessarily as predictable in terms of their repeat ability. So most of the growth that we're talking about is going to be on the product line, both from the test and diagnostics and biometrics products, and then on the royalty line.

Okay. Pretty high margin businesses. Finally, can you repeat that deferred revenue number?

Yes, it's $1.1 million.

Thanks a lot.

Thank you, Stanley.

[OPERATOR INSTRUCTIONS] And it appears, Mr. Tzannes, we have no further questions. I would like to turn the call back over to you for any further comments or closing remarks.

All right. I'd like to thank everyone for participating. We're also going to be presenting at the ROTH Capital Partners 19th annual OC conference which is in Dana Point, California, the week of February 19th and our presentation is on February 21st. So for any of you attending that, we look forward to seeing you there. We look forward to talking to you next quarter. Thank you very much.

Thank you. Ladies and gentlemen, this does conclude today's Aware, Inc. conference call. We like to thank everyone for their participation, and have a wonderful rest of your day.