Aware Inc (AWRE) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the Aware Inc. first quarter 2007 earnings release conference call. Today's call is being recorded. At this time I would like to turn the call over to Mr. Keith Farris, Chief Financial Officer for opening remarks. Please go ahead, sir.

Thank you, operator. Good afternoon welcome to Aware's first quarter 2007 earnings conference call. I'm Keith Farris, the company's Chief Financial Officer. 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, and then Michael will talk about the business and we'll take questions. A recording of this call will be available on our website at www.aware.com after the call is completed.

First, I'd like to point out that various remarks that we 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 10K for the year ended December 31st, 2006, which is on file with the SEC.

Turning now to the financial results for the first quarter, revenue for the quarter was $5.8 million compared to $6.1 million in the first quarter of 2006. We report net income and basic and diluted net income per share in accordance with US generally accepted accounting principles or GAAP and additionally on a nonGAAP basis. NonGAAP net income where applicable excludes the effect of stock based compensation expense. The company uses the nonGAAP information internally to evaluate its operating performance and believes these nonGAAP measures are useful to investors as they provide additional insight into the underlying operating results. However, nonGAAP 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 nonGAAP results has been included in today's earnings release. Our GAAP net loss for the first quarter of 2007 was $98,000 or $0.00 per share, which included $235,000 of stock based compensation charges under the provisions of FAS 123 (R). This compared to GAAP net income of $521,000 or $0.02 per diluted share for the first quarter of 2006. Our nonGAAP net income for the first quarter of 2007, which excludes the effect of stock based compensation was $137,000 or $0.01 per diluted share.

Product revenue for the first quarter was $3.5 million, up 31% from $2.6 million in the fourth quarter of 2006 and up 102% from $1.7 million a year ago. The increase in product revenue reflects increased sales of biometric software and increased sales of DSL test and diagnostic hardware and software. Contract revenue, which includes license and engineering service fees was $1.8 million for the quarter compared to $2.6 million last quarter and $3.7 million in the first quarter of 2006. Lower contract revenue in Q1 '07 is a result of lower license fee revenues associated with the delivery of licensed technology and engineering services. Royalty revenue of $0.5 million declined by $700,000 from Q4 '06 and $200,000 from the first quarter of 2006. Royalty revenue this quarter does not include royalties from a significant number of units that have been shipped by one of our customers. First quarter spending was $6.4 million, including $235,000 of stock-based compensation compared to $6 million in the fourth quarter of 2006 and $6 million in Q1 '06. The increase from the fourth quarter of 2006 was primarily due to higher cost of goods related to growth in the hardware product revenues and an increase in compensation and fringe benefits.

We had interest income for the quarter of $505,000. Our available cash and short-term investments were $39.5 million at the end of March. Receivables were $5.3 million at quarter end and inventory to support customer orders was $1.137 million. We have $1.137 million of deferred revenue relating to contracts and maintenance agreements and we have no debt. As of March 31st, there were 23,698,962 shares outstanding. At the end of the first quarter, we had 117 full-time employees, 86 of these employees were engineers. This completes my financial commentary. Now I'd like to turn the call over to Michael.

Thank you, Keith. Starting with several highlights from this quarter. Product revenues this quarter were especially strong. Biometric software was up both quarter-over-quarter and year-over-year. Most of the increase was due to new PIV suite and server-based products. DSL system diagnostics hardware and software product sales were sharply up this quarter. We generated more revenue from our test and diagnostic products this quarter than we did in all of 2006.

Turning now to a general discussion. Our DSL licensing products are central to the new ADSL2+ and VDSL2 networks that are going to be the backbone of the next phase of DSL service offerings. Internet protocol television, IPTV will enable telephone companies to deliver IP based TV centric services, including broadcast TV, video on demand, video telephony and high definition TV or HDTV. We have pioneered the core technology at the heart of the ADSL2+ and VDSL2 standards. And our solutions are engaged in the most exciting deployments in the world today. Aware's DSL technology is fueling the first worldwide, mass deployment using fiber-fed VDSL2 cabinets, which is taking place in Germany. One of our customers supplies the VDSL2 chip sets in the German Deutsche Telecom deployment, which is on track to deliver 50 megabit service to millions of homes. This deployment promises to be significant for Aware. The triple play combination of voice, data, and video services is driving new ADSL2+ deployments in other parts of Europe based upon our StratiPHY2+ technology. Ikonos is using StratifPHY-based CPE products at (inaudible) for a large footprint ADSL2+ offering in France.

Broadband deployments using ADSL are now underway in over 75 countries and new deployments using ADSL2+ and VDSL2 are expected throughout Europe, Korea, Japan, and North America. This exciting market is being addressed by our existing customers, Ikonos and Infineon, and new customers chip sets will be entering the market this year. Thompson and PMC-Sierra both have solutions and another unannounced customer is also in a strong position to win business later in the year. Interest in our StratiPHY DSL technology remains high at a number of other semiconductor companies. These prospects see Aware as a reliable high-quality source for DSL intellectual property that allows them to rapidly introduce DSL functionality into their product offerings.

I'd like to take a moment to talk about our royalty revenues this quarter. That the number we reported, $500,000, does not include royalties from a significant number of units one of our customers has shipped. The reason for this is that we have a contractual disagreement with this customer regarding the appropriate royalty amount that is due on those units. We're actively discussing a resolution to this disagreement and expect to reach agreement. Based upon the current status of our discussions, we expect that we will be able to include the royalties for these units in our Q2 royalty revenues. In summary, our royalty revenue this quarter is artificially low and this will be corrected in a future earnings report.

Turning now to our test and diagnostics products. As I mentioned we generated significant revenues from our test and diagnostics products this quarter. This is the result of product traction with our OEM customers coupled with the fact that spending by phone companies on solutions that provide, maintain, and troubleshoot DSL service is on the rise. This spending is being driven by the emergence of advanced entertainment quality triple play services. We are in a unique position to deliver high quality solutions to this industry because of our deep understanding of the complex DSL technologies that are utilized in these new ultra high-speed offerings. One of our test and diagnostics customers, a supplier of automated test head and hand-held equipment announced that Telus will be using their products in a large scale deployment across its Canadian network for service assurance of its IPTV service. This deployment will utilize both hardware and software products from our test and diagnostics product line. We also have a number of hardware product design wins within the hand-held DSL tester market. We see a number of opportunities in the United States and international markets for handhelds over the coming months and through our OEM customers believe we're in a strong position to secure business.

In addition, our test and diagnostics software products are gaining momentum with DSLAM equipment vendors. First quarter revenues from Dr. DSL software were healthy and our software products are being well received at numerous equipment manufacturers. An example of this activity is the relationship with Occam Networks that we announced earlier this year. We expect our position in the service assurance market to continue to improve based upon our strong product offerings and our OEM customer base. Our biometrics and medical imaging software products also generated healthy revenues this quarter. Momentum is building with our server products, which are new, higher value-add products that Aware introduced to the market during 2006. One notable success during the quarter was our role in bringing the NASA credentialing system into full compliance with personal identity verification or PIV standards. With our biometrics work flow platform and PIV suite, NASA was able to deploy a system to produce standard compliant PIV cards in just 12 weeks. Other government agencies are actively developing credentialing systems compliant with PIV and these represent additional opportunities for us.

Through our R&D efforts, we are continuing to expand the value of our IP to our DSL customers, thereby increasing the pool of potential licensees. We've developed an analog front-end solution that we are demonstrating to select customers that supports ADSL2+ and VDSL2 requirements. With this, Aware is now able to offer a complete network interface to [tip and ring] solution for DSL. We're also developing DSM, multiport CO, bonded ADSL2+ and VDSL2 extensions to our StratiPHY product line. In our test and diagnostics business, we're aggressively extending the functionality footprint and performance of our Dr. DSL software in response to requests from customer deployments. Our Dr. DSL product line leverages the significant advancements in signal processing capabilities that recently released DSL chip sets provide, delivering to the industry a high-quality and flexible DSL test solution. In our biometrics product line, experience gained in the PIV marketplace is driving a variety of product enhancements focused on overall throughput, performance, quality, and ease of integration.

We believe that in the coming months, we'll be able to dispel a myth that is widely held in the DSL industry. It's believed that interoperability is nonexistent in VDSL -- in VDSL and that it will become -- and that it will be very difficult to achieve. It's true that there are many versions of VDSL and that it's a more complex technology than other flavors of DSL, since it requires support of 8 megahertz, 12 megahertz, 17 megahertz and 30 megahertz band plants. It's also true that there are preVDSL2 versions of chip sets often called VDSL1 from Ikonos and Conexant in the market that also require interoperability. We have accomplished interoperability in our labs today with Conexant, Ikonos, Broadcom and Infineon chips. For our DSL licensees, interoperability means that their products could participate in any deployment around the world. For our DSL test and diagnostics customers, it means that with a single product, they can deliver service assurance solutions for any VDSL deployment.

Turning now to guidance, which we gave last quarter. We remain confident that our $30 million revenue and $0.15 EPS goal for the year is the right one. To achieve this will mean that we've had significant success in all three of our product lines and will mean that we're exceptionally well positioned for continued future growth. The opportunities in DSL, test and diagnostics, and biometrics are each very exciting. We're focused on execution and feel very confident about our ability to capitalize on them. With that, we'll open up the call to your questions.

Thank you. The question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We take as many questions as time permits and we will take the questions in the order that you signal us. (OPERATOR INSTRUCTIONS) We'll pause for just a moment. We'll go first to Lilly Wu with TGRA Capital.

Yes, hi, thanks. Can I get some color on the nature of the contractual disagreement which arose? Was it centering around the number of units that were shipped or the unit pricing?

It was centering around the royalty that is due on the units that shipped so the royalty rate that is due.

So a unit pricing issue?

Right.

Yes, and this presumably is for one of your larger established customers, for example, like Infineon, like Ikonos?

It's a significant number of units. I -- we're not going to discuss who it is in particular. But it's a significant number of units. Therefore, it's a significant amount of revenue.

Yes, but -- because most of your major customers are ones who have been customers of yours all through the years even for prior generations, it seems surprising that a disagreement will come up since this isn't a new business model for you or your major customers.

Surprising. Well it's -- as I said earlier it's a contractual disagreement that we have. I guess I can say that our contracts are complex. It's something that we're very constructive dialogue about and are confident at this point that we'll be able to reach a resolution to the disagreement. And in the event that we do, which we expect we will, we would be including in the next period that we report. So if we conclude it when we think we will in the second quarter, we would see the royalties from these units included in that quarter.

Okay. And just to -- I'm sorry just to finish up on this, then shipments continue to go on with this customer?

Yes, indeed.

Unaltered, if you will. Uninterrupted I should say.

That's correct.

Okay. One other thing is that -- is there any plans in the future to break out product sales between ADSL tests and biometric software? I mean, a lot of companies do not break out product sales because often times their products are all bundled. And so there's not distinct pricing differentiation between what goes with which product, but in your case these are so separate and so very, very different that I -- it almost seems odd that they're bundled together and that lack of transparency is kind of -- it would be great to be able to understand separately, because they are just entirely unrelated businesses.

Yes. Well, we'll try to give as much color regarding the various product lines as we can in the commentary that we provide, but our -- we don't currently have a plan to break those out separately.

Okay. Well, thanks. I'll get back in the queue.

Alright. Thank you.

We'll go next to Tim Savageaux with Merriman.

Hi, good afternoon.

Good afternoon.

A couple of questions. Just to come back to the royalty issue one more time. Is it possible for you to -- well, first would you -- would this qualify as a renegotiation or a contractual dispute? That's question number one. Question number two is, can you provide some quantification as to the magnitude of what was not recognized? Or -- I realize the terms may be changing so that number could change. Based on the scenario that was in place before or the one that you see likely, is there any sense you can give us of how significant that number would be?

So to answer your first question, it's not a renegotiation, it's a disagreement on a term in a contract.

Okay.

And regarding the -- the size, it's really difficult for us to say at this point. And it's probably not from a -- even a business perspective a good idea to talk about that. I think we're close, as I said earlier, to reaching agreement at which point we'll probably be able to shed a little bit of light on it when we report this revenue in addition to the normal royalties we'd be reporting in the next quarter.

Okay. And on Germany. ECI, on their call, indicated a couple of things, it's sort of a bit of a mixed bag, a bit of somewhat of a rebound in spending among their key broadband access customers, one of whom is Deutsche Telecom, but also some degree of uncertainty as to how material VDSL revenues will be for them in 2007. As you look at it and it seems the feedback from Deutsche itself is pretty positive with regards to their plans. What sort of metrics do you look at to gauge that? Is this possible we're seeing more Siemens and less ECI. If you could sort of discuss that?

Yes, we don't really have too much visibility into the Siemens/ECI split of Infineon business and is in fact, there is much of one at all and don't have a whole lot of insight into what Deutsche Telecom's -- what their -- when they state their plans what it really means in terms of either equipment purchases or what it means in terms of equipment purchases, which eventually will be or will translate into chip sales. During 2006, Infineon did sell a large number of VDSL chips, it's not enough to support the type of deployment that Deutsche Telecom's talking about. So it would, if indeed they go and deploy the size of the network that they've been very openly discussing in -- even in the very recent past. There would be a significant requirement for more chips.

I'm going to -- given that remains uncertain, what is behind your very positive outlook for the future then? What sort of supports that commentary?

Well, I think VDSL2 rollouts by Infineon are one element of the future for us. One of the characteristics of VDSL, which is something we've talked about in the past, as well and is evident if you look at the industry in any detail. It's still a very spotty technology. There's really one deployment taking place in Germany. It looks like there's going to be some deployments in Japan, there's going to be some business in Korea. It looks like the US is going to finally turn on some VDSL2. But the bulk of the royalty revenue that Aware has seen in the last year and probably will see this year will still be from VDSL2+. So the VDSL2 piece is definitely a significant part of the royalty revenue going forward. And we are expecting that Deutsche Telecom will continue to roll out significant volumes of both CO and CPE equipment and that that will continue to be using Infineon chips. And when we talk about the business going where we think it's going, that's certainly factored in. But there are a number of other things that are taking place. It's not the only thing that drives the business, I guess is my point.

Great, and you can also count me as a proponent of breaking out the test and biometrics revenue and I'll pass it back. Thanks.

Thank you.

Moving forward, we'll take our next question from Joel Achramowicz with MDB Capital Group.

Thank you. Joel Achramowicz. Hi, Michael.

Hi, Joel.

I just have -- in the follow up with -- I don't want --Tim, in the previous caller about this important royalty issue. But obviously the important thing here is you get what's due you as far as you feel it's justifiable in your contract and at the same time not jeopardize that relationship --

That's correct.

-- long term. So can we just assume that those two factors are uppermost in your mind and trying to basically accomplish both objectives?

Yes, yes, indeed. You're absolutely correct, Joel.

And do you feel confident that you can resolve this and still keep a good customer going forward?

Yes, we do.

Good. And from a material perspective could -- final question on this -- can we assume perhaps then the materiality of this -- of the amount is at least 10% of total revenues? Or do you want to go there?

I'd really rather not go there. I think we'll know and we'll be able to talk about this. My guess is we'll be able to talk about this in more detail in the near future. And I -- and I don't see any real benefit to talking about it at this point. I do see potential detriment to talking about it in the other situation we're dealing with. So I'd -- I'd really rather not.

Fair enough. Excited about the interoperability issue, do you see any intellectual property coming out of your interoperability successes in the lab?

It's certainly a -- a big piece of know how. Whether -- and therefore there's a lot of intellectual property in know how. It's not an easy problem to crack. In many cases, one has to go perform interoperability without cooperation from the -- the party on the other side. And we've had to do that. And it takes, I think, a certain skill set that we have because of our years and years of experience in DSL, and also the architecture of our solutions are such that we can adapt to some things people interpret differently in standards. So I think it's a very important value that -- that we deliver to both sets of product lines that we have. And I think it's something that -- the reason I mention that I think we'll have an opportunity to sort of dispel this myth is because I think it's become sort of folklore that there is no interoperability in VDSL and there potentially never will be. And I actually think that in order for VDSL to get out of the little pockets of success that it's going to see and little is probably not the right term. We're talking about billions of euros and millions of lines it's not little. But in terms of the worldwide opportunity, it's still spotty, as I said earlier. I think for VDSL to really become the worldwide success it has the potential of becoming, because it offers so much to the phone companies, I think interoperability is really important. And that's one of the drivers that pushes us to really try to get this accomplished rapidly.

Do you see this representing a leadership position?

Certainly, yes.

Do you expect at all, and maybe Keith can chime in here on the -- to see the license revenue bounce back?

You mean on the -- the contract side?

On the contract side.

Yes. I think the way contract revenue works is -- it's really a combination of things. It's technology that we deliver through licenses and then it's engineering services that we perform. The engineering services are reasonably predictable, although they also will fluctuate to some extent depending on the activity that our customer's engaged in. The technology deliverables, or the milestones in contracts don't march to a 90-day clock. So there will be quarters where some of them don't happen and other quarters where more of them do happen. So this quarter was one in where not as many happened as in the prior quarters that we reported. Our goal for this revenue line is to be in the $10 million to $12 million this year. We think that's a very achievable goal for the year, I mean. And in order to do that, we're going to have to see steady progress and reasonable success with all the current products that are under development here at Aware. And we're going to see some new customers or new developments take place either with existing customers or new customers. And we expect that both of those things will happen during the year.

Very good. Final question, Keith, just a little confusion on the diluted shares outstanding. You had 40 -- 24.9 million, or about 25 million and now you're down to 23.6 million in the first quarter. Any comment on that?

Those are our basic shares. Because with the loss --

Okay, I understand. Very good. Thanks, good luck going forward, guys.

Thank you, Joel.

And moving on, we will take our next question from Stanley Cohen with Atrium Advisers.

Yes. Hi Michael, hi, Keith, how are you? Following on the question everyone's asking about breaking out the product revenue. Mathematically your cost of goods sold and product area is up $200,000. Assuming -- now the only question is most of the test and hardware and software and was it predominantly hardware?

So actually that's --

Basically that's like $100,000.

That's a question we can handle as opposed to -- anyway we'll certainly consider breaking things out. But I think the way to look at the product revenue this quarter is most of it when compared with Q1 of last year. So most of the increase quarter-over-quarter with Q1 of last year was due to test and diagnostics products. And most of that was hardware.

Okay. I'm sorry.

So within the hardware our target margins are to be in the 35% to 45% range. So obviously the cost of goods as you're pointing out, cost of goods for hardware is different or much more significant for that than software. So indeed the increase you're seeing in cost of product sales is because of the increase in hardware sales in the quarter.

Mathematically we could basically figure out what your test and hardware sales were?

Right. Yes.

Okay. You mentioned something earlier in the call about possibility -- that other new companies are looking at potentially becoming licensees.

Yes.

And the question I have is, well one -- at this point in time it seems that there are a number of players already in ADSL2 and VDSL2, so will those potential new licensees be someone who's already in the market? Or are these people that for some reason would want to enter the market and why at this point in time?

These are -- these are primarily people who would want to enter the market now as opposed to people who are already in it. And the reason they would want to enter it now is the same reason that you're very familiar with and we've spoken of many times. And that is that having a DSL functionality in their offering, which is going to typically be something that is currently adjacent to DSL, whether it's network processing, increasingly video processing or VoIP or some other -- some other silicon technology. Having the ability to deliver a DSL piece of functionality in their solution would give them a competitive advantage. One of the reasons -- one of the things that's changed in the last year or so is we now have an analog portion to our -- to our solution, as well. So by being able to offer something that goes all the way from some generic network interface like utopia or ethernet or something like that, to what gets plugged into the wire the little telephone jack enables us to offer this functionality sort of in a complete fashion to someone who would like to include it in their product.

Has anybody licensed AFE yet?

We haven't discussed that. We're talking to a number of people about it.

Okay.

We don't have any announced customers.

Okay. You didn't mention anything about any deployments of bonded ADSL2+ going on out there.

No, we didn't. There's activity that continues. There's been -- we heard that one of SPC's or AT&T's interest is to move to bonded VDSL2 because it gives them an even higher data rate. Bell South has been a proponent of bonded ADSL for some time. There have been some trials going on there. But there haven't been any to date any significant rollouts of that technology.

And the point I think I brought up last time or the time before, you mentioned there's one unannounced customer who has product. Are there any unannounced customers who you have -- that have already paid you license contract revenue who are about to announce product any time soon?

There are some unannounced customers who are in -- not yet in the market. Whether they're going to enter the market or not isn't -- we don't know too much about.

Is that singular or plural would you say?

I would say it's -- well, if I -- if it's singular -- if I was thinking about Atmel as well. Atmel is not.

Okay, besides Atmel.

-- unannounced, but other than Atmel, it was -- I think there's one other. There may be more than one other, but --

One other customer who is not only unannounced but is not to announce product yet.

Right. Actually, there's -- no, there's more than one, Stanley, sorry.

And you have hope -- and they are serious? These aren't like Atmel.

Some of them are serious. And others are in less -- we have less visibility to their intentions.

Got you. And Keith, did you give the amount for deferred revenue this quarter?

$1.1 million.

$1.1 million. And some of that was taken out, I assume the test and diagnostic revenue you recognized in the quarter. Previously that was in deferred revenue and now it's recognized?

That's correct.

And so somebody else added on something there?

That's correct.

And was that also a test and diag customer?

There's test and diag and there's also software -- deferred software maintenance from our --

Right.

-- impression software business.

Okay. Great. Thanks a lot.

Thanks, Stanley.

We'll take our next question from Tom [Curdle] with Pacific Assets.

Getting back to this contractual disagreement. Let's go back to the basics. Help me. How do you know each customer -- what each customer ships in terms of units and unit prices? And in other words, how do you know they're telling you the truth? And how did this particular issue come up? Did -- did -- and I want to be clear, was it an issue of price per unit or the units shipped?

So the way we know what our customers ship is each of our contracts has a reporting obligation where our customer's obliged after their quarter ends to provide us with a report of the number of units they shipped or the amount of revenue they generated. It's not always -- it really depends on the nature of the royalty payment. If the royalty payment is based on units -- number of units, then obviously they need to report to us the number of units. If the royalty amount is based on a percentage of their revenues, then they can elect to report revenues or units and revenues. We have audit rights in our contracts, which we exercise to make sure that people are telling us the truth. And we also have a reasonable, I think, understanding of the various opportunities that our customers are addressing to be able to -- at a not so final level perform some checks and balances of our own. The particular dispute is something that I really don't want to get into in too much detail. It has to do with the amount of royalty that is due on a -- on a unit. And it's a contractual interpretation of -- or it's an interpretation in a contract that we have a disagreement upon.

Okay, that's helpful. So was this something you discovered through an audit or something that they basically came to you with and --

Yes, it was the result of open dialogue that we have with the customer.

Okay. In the royalties, this you may have covered this, was ADSL, plain old ADSL a meaningful amount? Or was that really --

It's pretty -- it's pretty small now.

Pretty small.

So most of the royalties are ADSL2+ and those are coming from Ikonos and Infineon. And then VDSL2, which is coming from Infineon.

Okay. And I'm sorry, getting back to this contractual disagreement. If it's settled, are you suggesting you would announce it during a quarter?

No, I'm not. I think we would report it at -- at our next earnings call. So it would be -- hopefully at that point we would be discussing a -- as opposed to an artificially low royalty number, something that we would characterize as artificially high.

Okay. Okay. And then my last question is regarding the contract revenues. I'm still not clear. As I remember a year ago, so we're talking year-over-year, you had this kind of one-time thing from I think Ikonos.

That's right.

If -- so that's not in this current first quarter.

Yes, the --

What would the amount -- would contractual revenues have been up year-over-year?

It would have been just about flat year-over-year.

Okay.

But I've always contended that, that revenue even though it was a lump sum wasn't really a one-time event. It was a piece of licensed technology that was licensed to Ikonos because of the acquisition by Ikonos of the analog devices product line. But if you wanted to remove that large amount that took place last quarter, we would be roughly even quarter-over-quarter revenue, is that right. Keith?

Up just about $100,000.

Up $100,000.

Okay. Thank you.

Thank you.

Moving on, we'll take a follow up from Ted Moreau with Cardinal Research.

Hi, Mike. How you doing?

Hi, Ted, how are you doing?

Pretty good. Wanted to just address the subject of any regulatory initiatives that might be helping your business. I understand in Europe and in Germany there's been some broadband deregulation rulings coming out. I wondered what the status of that was and would that be behind Deutsche Telecom and Infineon and some of the broadband rollouts there? Especially on -- I thought it was on line sharing.

Yes. I saw something that was published just yesterday. And this has been a sort of an ongoing battle between Deutsche Telecom and the regulators. Deutsche Telecom has not wanted to open up their network, the regulators have wanted them to. The most recent move that I read about yesterday was that the regulators are now obliging Deutsche Telecom to open their network and it's -- I don't -- I can't gauge whether that's a positive or a negative thing. I can think of the various ways that could play out. It could cause Deutsche Telecom to accelerate their deployment further or even more because of competitive threat. It could cause them to slow down, I suppose if they're forced to open up portions of their network that they feel others would be able to take advantage of. It could be beneficial to us, even if the competitive networks begin to deploy, because I would think that a rational approach would be to go and select the same technology that Deutsche Telecom works so hard to pick, because they went through a very significant diligence to select the Infineon chips.

So perhaps it means additional business for our customers. But I -- it's been -- it's kind of been an interesting ride over there from a regulatory viewpoint. And so far, it looks like Deutsche Telecom has stayed the course and insisted upon their intention to roll out a super slick fiber-fed VDSL2 network. So I don't know whether this most recent thing is going to change that or not.

Right. You would think that would -- I mean, their plans seem to reflect confidence that they can move ahead without any real competitive threats.

Yes. That's true.

This has been going on and off now for six months to a year, I think.

That's right.

So I -- I -- would it be possible that competitors would use some of your initiatives, as well, or --

Yes, I think it's -- I would even say it's likely. You have a solution you know works in the environment that this is being deployed in, the German network.

Right.

So, it would seem to make sense to me. But again, that's a level of detail. I don't know.

Right. Well, are there viable competitors out there? It sounds like the CLEC thing all over again.

Well, sure, from an equipment viewpoint, not all DSLAMs use chip sets from our customers. Alcatel uses chips from Conexant and Ikonos, I think Nokia uses chip sets from Broadcom and probably others. Currently the German deployment, which is being really served by ECI and Siemens both use Infineon chips. The Korean -- Infineon has announced they won some business in Korea I think through Hyundai for the Korean deployment. So there are certainly competitive solutions available out there.

Right. Well I was referring more to the carrier competition.

Yes, I don't know how strong the CLEC infrastructure is. I don't know that.

Because we found out in the United States that they didn't -- the reselling model wasn't really a viable model.

Right. We sure did.

I don't know if these rulings require facility-based competition, which would be interesting, but --

Yes, I don't either, Ted.

Right. I guess we'll have to watch what Deutsche Telecom has to say about it.

Yes, it's very interesting.

Great. Thanks.

Thank you, Ted.

We'll go next to Stanley Cohen with Atrium Advisers.

Yes. On the test and diagnostic hardware sales, at some point way back when you mentioned there's a possibility of add-on software sales once you sell the hardware to a customer.

Yes.

Is that still the case?

Oh, yes. Yes, sir.

And the customer who we had the revenue from this quarter, would they fall into that category?

Well, we had revenue from a number of customers this quarter. And in some cases they're both hardware and software customers, in some cases they're just software customers, in other cases they're just hardware customers.

Any new test and diag customers that you signed this quarter?

We have a strong set of what I'll use a term that's sort of common in the industry of design wins on the hand-held side. So there are a number of hand-held devices that have been developed using hardware from Aware, and in many cases software from Aware, as well. And the manufacturers of these devices are off competing for business at the various opportunities that exist for handhelds, you know, the RFPs that are out there for hand-held devices. So I guess you could say that they are -- we've secured new customers in the sense that they've decided to use our hardware in their products and they're marketing their products. And, in fact, we think that some of them will be successful and that we'll see business from them over the -- over the -- certainly over the year.

And you've yet to see anything significant on the hand-held side revenue wise?

That's correct. Not too much yet on the hand-held side.

Okay. And back to your point of interoperability. Is there any truth that customers -- your licensees that use StratiPHY3, that they're easier to be interoperable, or is that just -- they're just like anybody else?

For people to interoperate with us, or for us to interoperate with others?

That two StratiPHY3 customer licensees of yours that the interoperability testing and compatibility --

Yes, that's trivial. They can talk to each other easily.

Easily. And is that -- is that becoming a selling point for potentially new licensees?

Yes, it can be. If you see -- if you see, Infineon, for example, deploy a very large footprint of central office equipment in Germany, other parts of Europe in Korea, then certainly the ability to sell a CPE that can talk to that would be an attraction. Our objective is to be able to talk to anybody at the same level of integration, the same level of ease.

But you -- but all the work you're doing to talk -- to interoperate with nonAware licensees is --

It's beneficial.

-- is a selling point to future licensees as well, I assume?

Yes, that's right, and it's very beneficial to our own developments.

Okay. And then finally, you didn't mention anything about adding new customers in the biometrics businesses. Anything new?

Well, we talked about in the quarter the NASA deal, which was a big deal for us. It was a big deal because it was a new product, it was a big deal because it's a program that we think is going to be one of many inside the government where the credentialing these PIV federal ID cards are -- are a requirement. So again there, we've got a lot of companies who use our products who are marketing those products into a number of opportunities. We don't think of that -- there isn't -- there isn't really revenue associated with that until they win business. But there's a number of opportunities that I suppose would probably qualify as new this quarter.

Okay. Great. Thanks a lot.

Thank you.

And there are no further questions at this time. I'll turn the conference back over to our speakers for any additional or closing remarks.

Alright. Thank you very much, everybody. We will be at NexCom, which is what SuperCom is now called in Chicago in the early part of June. We'll be demonstrating a number of the things that I talked about today on DSL licensing and on the test and diagnostics side. If you're in the area, please come by and see us. And we'll talk to you again next quarter. Thank you very much.

And that does conclude today's conference call. We thank you all for your participation, and you may disconnect.