Aware Inc (AWRE) 2007 Q2 法說會逐字稿

Good day, everyone, and Welcome to the Aware, Inc. second 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 and welcome to Aware's second quarter 2007 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 www.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 the 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, 2006, which is on file with the SEC.

Turning now to the financial results for the second quarter. Revenue for the quarter increased 34% to $6.4 million from $4.8 million in the second quarter of 2006. For the six months ended June 30 2007, our revenue increased 12% to $12.2 million, compared to $10.9 million for the first six months of 2006. We report net income and basic and diluted net income per share in accordance with U.S. Generally Accepted Accounting Principals, 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 and should not be considered in isolation from, and are 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 2007 was $968,000 or $0.04 per share, which included $252,000 of stock-based compensation charges under the provisions of FAS 123(R). This compared to a GAAP net loss of $1.2 million or $0.05 per share for the second quarter of 2006. Our GAAP net loss for the six months ended June 30, 2007, was $1.1 million or $0.04 per share, compared to a net loss of $688,000 or $0.03 per share for the same period a year ago. Our GAAP net loss for the second quarter of 2007 -- non-GAAP net loss for the second quarter of 2007, which excludes the effect of stock-based compensation, was $716,000 or $0.03 per share. For the six months ended June 30, 2007, we had a non-GAAP net loss, excluding the effect of stock-based compensation, of $579,000 or $0.02 per share.

Product revenue for the second quarter was $3.8 million. up 9% from $3.5 million in the first quarter of 2007 and up 148% from $1.5 million a year ago. The increase in product revenue from the first quarter reflects increased DSL, test and diagnostic hardware sales, partially offset by lower biometric software revenues. Compared to the second quarter of 2006, the increase of $2.3 million in product revenue reflects increased DSL test and diagnostics hardware and software sales, and increased biometric software revenues. Contract revenue, which includes license and engineering service fees, was $1.6 million for the quarter compared to $1.8 million last quarter and $2.2 million in the second quarter of 2006. Lower contract revenue in Q2 '07 is a result of lower license fee revenues associated with the delivery of license, technology and engineering services. Royalty revenue of $1.1 million increased by $582,000 from Q1 '07 and $53,000 from the second quarter of '06. The increase in royalties over Q1 '07 reflects the agreement reached with one of our customers regarding the appropriate royalty amount due on units already shipped by the customer.

Second quarter spending was $7.9 million, including $252,000 for stock-based compensation, compared to $6.4 million in the first quarter of 2007 and $6.5 million in Q2 '06. The $1.5 million increase from the first quarter of 2007 was primarily due to $1.2 million of higher cost of goods related to growth in hardware product revenues, and increases in trade show expense, R&D laboratory materials, and R&D and marketing contractors and consultants. Higher spending in this quarter, compared to last year's second quarter, was primarily due to higher cost of goods related to our growth in hardware product revenues. We had interest income for the quarter of $503,000. Our available cash and short-term investments were $39.2 million at the end of June. Receivables were $4.9 million at quarter end and inventory to support customer orders was $1.2 million. We have $603,000 of deferred revenue relating to contracts and maintenance agreements and we have no debt. As of June 30th, there were 23.738143 million shares outstanding. At the end of the second quarter we had 122 full-time employees, 91 of these were engineers.

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

Thank you, Keith. In DSL a steady rollout of ADSL2+ and VDSL2 networks is driven by phone companies desire to deliver IPTV and triple play services. In June, Aware proposed to the International Telecommunications union that a new standard be drafted that would improve the consumers' quality of experience for IPTV service. The ITU has agreed to complete a new standard by November of 2008. This will focus on technology innovations that improve the integration of IPTV and VDSL for entertainment services. We intend to actively participate in the standardization process and lead the market once again in innovating and developing products that meet the new standard.

With ADSL2+ and VDSL2, phone companies can delivers tens to hundreds of megabits per second by deploying fiber deeper into their networks and reusing existing telephone wires the rest of the way. These technologies essentially increase the life of copper phone lines, since with these speeds phone companies are able to deliver entertainment quality services including, IPTV and HDTV. The new VDSL standard promises to improve the value of DSL networks even further. VDSL2 interoperability is a area we continue to excel. Our StratiPHY products and our customers products lead the market in VDSL2 interoperability. At the NexComm trade show in June, we demonstrated VDSL2 interop across multiple profiles including eight megahertz, 12 megahertz and 17 megahertz with every major supplier of VDSL chipsets. Interop is an important catalyst for rapid VDSL2 market growth and we're committed to maintaining leadership in this challenging area.

Turning now to a discussion of our DSL licensing products. We were able to resolve the disagreement we had with one of our customers regarding royalties due on chipsets sold. The royalties were paid and are included in our royalty revenues this quarter. We've agreed upon the terms for royalty rates going forward and expect to complete the formal paperwork in the very near term. For the quarter and first six months, royalty revenue came predominantly from ADSL2+ chipset sales by our customers. Year-over-year ADSL2+ chipset sales and market share by our customers have improved. We believe that this is a trend that will continue.

The acquisition announced recently by Infineon of Texas Instruments' DSL business is a significant opportunity for us to improve market share and royalties. This acquisition combines Texas Instruments' CPE customer base with Infineon's innovative roadmap and end-to-end solutions. According to IDC, TI held approximately 16% of the overall DSL-related chip market in 2006. Infineon's share was about 11%. So this combination will be one of the market leaders. We also expect that new StratiPHY-based ADSL2+ chipsets will be entering the market this year and will improve our market share going forward.

VDSL chipsets by sales -- excuse me, VDSL chipset sales by our customers have not been as strong in the first part of this year as they were last year. After a surge of chipset sales associated with initial deployments at Deutsch Telecom mid last year, VDSL2 chipset sales have slowed. Deutsche Telecom is expected to deliver VDSL service to millions of subscribers and we expect that this will cause a rebound in VDSL chipset sales. In addition, the Korean market for VDSL has recently exhibited growth, and one of our customers has announced design wins in Korea. And longer term, exposure to VDSL2 royalties should improve through sales by two new customers who recently entered the VDSL2 market. One with integrated VDSL2 and PAWN gateway products, and the other with a comprehensive CO and CPE product portfolio. The VDSL2 market continues to hold tremendous promise and growth for Aware and for the industry, and we expect royalty revenues from VDSL2 to improve over the near and long term.

Some of the product developments with our customers have taken longer than expected to complete and this is reflected in our contract revenues over the first six months of this year. Very few new suppliers have entered the market and those that are doing so are predominantly Aware licensees. We do expect other chipset companies to enter the market, leveraging our StratiPHY product line. We're in discussions with several new licensing prospects and are optimistic that we'll be able to complete licensing contracts with them. We expect contract revenues to improve during the second half of this year, based upon support and development contracts we have with existing licensees and through the addition of new licensees. Longer term we remain confident that contract revenues will improve. We have a solid customer base and comprehensive offerings in ADSL and VDSL for digital and analog silicone and electrical property.

We're seeing an increased interest in DSL as a wide-area network interface and believe that the emergence of the new ICU standard for VDSL will present new licensing opportunities with existing and new customers.. The DSL market remains challenging for semiconductor suppliers. The cost to develop and support new products and technologies that must track a rapid rate of change in the marketplace in terms of new standards and interoperability challenges makes the return on investment analysis difficult. The fact that TI elected to exit the DSL business is recent evidence of this. Yet, DSL is the most widely use broadband wide-area network technology in the world, making it a compelling added value and functionality for semiconductor suppliers. Aware's StratiPHY licensing products present a means to rapidly and cost effectively enter and succeed in this market.

Our test and diagnostic hardware and software products have made great progress so far this year. Test and diagnostic sales were just under $4 million during the first six months of 2007. Most of this constituted modem emulation hardware sales to our OEM test equipment customers. The test and diagnostics market is growing, as phone companies put test infrastructure in place for their ADSL2+ and VDSL2 networks. We're establishing a leadership position for hardware and software solutions for next generation test infrastructure. The ADSL2+ and VDSL2 interoperability that we demonstrated at NexComm are key values that we deliver to the market. Our hardware and software products enable connectivity and diagnostic functionality and have gained significant market traction in the last several quarters. We believe that the trend of higher-speed networks being deployed to deliver higher-value services -- including video and IPTV -- is intact for the long term and that our hardware and software products are well positioned to capitalize.

With our hardware and software modules, as well as our server-based line diagnostics platform, we're well exposed to growth in the traditional rollout in test infrastructure. We're providing hardware and software products in the rollout of test infrastructure at TELUS and in several international deployments. We're also competing through OEM customers for handheld test opportunities in several RFP's in North America and Europe. Our Dr. DSL software modules and line diagnostics platform also give us exposure to emerging opportunities in software-based test infrastructure. We expect test and diagnostics to continue to deliver strong results for the remainder of this year into 2008 and beyond that.

Biometric software sales have also been strong year to date. For the first six months of 2007, sales are up over 20% over the first six months of 2006. An order for over $700,000 of biometric software just missed the quarterly boundary, so it's not part of our quarterly or year-to-date revenues, but I mention it because it's a further indication of the health in the product line. Biometric systems for secure credentialing and border control are increasingly requiring the processing of high-volume, high-throughput, multi-modal biometrics. This plays well into our product portfolio, which supports enrollment and processing of fingerprint and facial images. Some of the opportunities we have exposure to are the transition from two-print to ten-print fingerprints for background check purposes, including Visa applications abroad and border-crossing lanes, as well as the deployment of personal ID verification enrollment systems at government agencies to meet the fall deadline to begin issuance of PIV-compliant cards. We expect our biometrics products to continue to deliver strong results for the remained of the year into 2008 and beyond that.

Turning to our guidance for 2007, our goal of $30 million in top-line revenues is still achievable, but more difficult given the first six months of results. We believe that our revenues for 2007 will be in a range of $26 million to $30 million. Expenses through the first half of 2007 have been higher due to the increased hardware sales in our sales mix. This is reflected in our cost of product sales. We expect expenses to be in the $6.2 million to $6.6 million per quarter on a GAAP basis, not including cost of product sales, which we expect will be between $500,000 and $1.5 million per quarter. Based upon these expenses, our earnings per share are expected for the year on a GAAP basis to be between $0.01 and $0.10 per share.

In conclusion, Aware has established the position as a lead supplier of DSL technology, DSL test and diagnostics hardware products, and biometric software products. The opportunity for our test and diagnostic software products look very promising. For the first six months of 2007, our test and diagnostics products generated 34% of our revenues, our imaging products 28%, and our DSL licensing revenues made up the remaining 38%. We like the diversification in our business through these product lines. We feel that our product offerings have gained important traction this year and that each of the markets we're addressing is vibrant and growing.

With that, we'd like to open up the call to any questions you may have.

(OPERATOR INSTRUCTIONS) We'll go with Bob Lee with Sidoti & Company.

Good afternoon. Thank you for taking my question here. I just wanted to get a little more detail on the cost of goods sold in terms of product side and see what specific items have caused the increase, as you're looking at almost -- more than three times increase over the first quarter.

Well, that would be the standard material cost to support the product that was built is the biggest component of that, Bob.

And was that -- that's more in the biometric side or is that favored more towards the test and diagnostics side?

It's primarily on the test and diagnostics side. It's -- most of the cost of product sales is due to hardware sales and the only place where we have hardware sales is in the test and diagnostics area.

Okay. And then again, just a -- I might have missed it on the notes here -- that you had guided that the product cost of goods sold would range in the $500,000 to $1.5 million, did I hear that correctly?

Yes, I guess it -- I am because there's not a whole lot of -- what's the right word? There's an er -- we're really in an early stage of this market, and there's a combination of hardware and software opportunities for us. And as you just pointed out, from one quarter to the next, we've already demonstrated a significant swing in cost of product sales, and I guess I'm pointing that -- pointing out that that may continue. Over the longer term, we expect a larger percentage of this business -- of our test and diagnostics business to be software related, and that would generally temper probably the swing in the -- in the cost of product sales. But at this point we're -- really what is driving this -- to give you a little background, which might be helpful -- there's infrastructure being rolled out to set up test capabilities inside various phone networks, and when that takes place, high volumes of hardware are installed over reasonably short periods of time. So we've seen a first volume of that -- significant volume of that in the first half of this year and we're not certain whether we're going to see that in the third quarter or fourth quarter or after that, in the latter part of the year.

Okay. I guess if you look at it from the point of the hardware installations, do you see that there's going to be any kind of leveraging as you go forward in terms of the cost of goods sold, or is that more of a -- that's really how much it is no matter what you do and how many times you do it?

Well, there is a leveraging to the extent that our software products leverage the hardware products' presence, and therefore, obviously the cost of software products is significantly lower than that of hardware products.

Right, but I guess from the standpoint of hardware installed, I guess as you do this more often will you gain more leverage --

Hardware sales per se, certainly, yes.

And then if I focus in on royalties, is there any way that you can break out what was the component that had been earned during the quarter and what was part of the settlement?

No, actually we can't, and we -- I mean we probably wouldn't if we could, but we can't because what we've received to date is a -- sort of a lump sum of what was shipped over a certain period, which included periods in the past. So this is predominantly a Q1 -- it's a makeup for sales that took place in Q1 that weren't paid. So I think if you were to look at the first two quarters, as representative of the first six months of royalties, that would be accurate.

And I guess from the little bits of timeframe that you have for the third quarter you're not seeing any kind of residual damage because of that dispute -- that customer?

No, we've reached an agreement on the royalty rate that was the source of the disagreement. We've agreed to those rates going forward, as well. They're in line and fair and comparable with the royalty rates that we have always had as a business, so it has not been pleasant going through this, but it's worked out okay.

Okay, great. Thank you very much.

We'll go next to Abhiram Eleswarapu with Thomas Weisel Partners.

Hi, Keith and Michael.

Hello.

Hi.

This is (inaudible), I'm filling in for Abhiram today.

Okay.

I have a couple of questions, first one would be on the biometrics side. Can you just give us an idea of how the revenue from that segment comes in? I mean, the contracts with respect to agencies like NASA and other government agencies, do they contribute over quarters?

They contribute on a per-seat basis, so they'll typically buy software that is used in a number of installations of -- that they want to use the software in, so on a number of either PCs or work stations, and they'll buy them in bunches. So they'll buy hundred or thousands of them in anticipation of how many they're going to require.

And in terms of newer customers within the biometrics segment, are you in touch with new customers, new agencies?

Certainly with new agencies. Most of the business in biometrics for us -- and this is actually true in all of our product lines, but certainly in biometrics as well -- we transact through an OEM -- a series of OEM customers, so an agency may buy through any number of OEMs. We have relationships with pretty much everyone in the industry. There are occasions when we sell directly to an agency, and in that case that would be considered a new customer, I guess, but we sort of look at the market as we're a supplier of components and server products in the market. We sell primarily through others, through either OEMs or system integrators, and most of those are established customers. And therefore, when a new agency comes up it's typical they'll buy through one of those folks, so it would look like a sale to an existing customer although it is a new agency.

Coming over to the DSL technology side, as regards your new StratiPHY 3 customer, PMC-Sierra, just wanted to get an idea of how see yourself positioning against the MC, because the MC is significantly into fiber and so on, so how do you see yourself positioning against the customer?

I guess I don't understand the question.

I just wanted to ask you about your new StratiPHY 3 customer, PMC-Sierra?

Yes, so they're using our StratiPHY 3 for VDSL2 and PAWN technology that they have -- which I believe they acquired -- but PAWN technology that PMC-Sierra has to offer a gateway product that combines VDSL2 and PAWN in a single silicon product reference design offering. So when they sell that product, the VDSL2 portion of that is based on Aware's technology.

About your analog front-end solutions that you have, are you targeting existing customers you already have or have you made in-roads into the new ones, because most of the major players that you have as customers have their own AFE solutions?

Yes, we are targeting both existing and new. Some of our existing customers don't have AFE solutions or would be interested in replacing the solutions that they are currently using. The primary target is, however, new customers who don't have necessarily an analog solution, don't wish to go to the third-party market to find an analog component that they would put with our digital, and with our analog can buy both from us.

All right, gentlemen, that's all that I have. Thank you so much. I'll get back into the queue. Thank you.

Thank you.

We'll go next to Lilly Wu with TGRA Capital.

Yes, hi, thanks. I was wondering this Infineon acquisition of the Texas Instruments DSL business.

Yes.

What is that likely to look like in terms of Aware? Hasn't Texas Instruments of long standing had their own internal DSL technology, so is Infineon likely to convert to Texas Instruments DSL chip technology infrastructure in the future for future generations to the Aware platform so that, any benefits would be a bit into the future? Or is there likely to be a more immediate merging of the product lines? How do you see this working?

At this point we don't really know. The -- the deal hasn't even closed yet, so we haven't seen any true operating behavior. But I think the story there is that Texas Instruments didn't have a roadmap to VDSL2 and beyond VDSL2. They were late in developing that technology. I would imagine that puts at risk even the existing business because of the roadmap to VDSL which is now a reasonable requirement in the market, is -- not having that capability is certainly -- puts you at a competitive disadvantage. I think they were unwilling to invest to catch up and so they found a buyer in Infineon, who does have the roadmap, has both central office and customer premise solutions, and the combination of TI's customer base, which was pretty significant, and the Infineon roadmap I think is the compelling combination here or the compelling synergy. How quickly they're going to transition we don't know. I think that the requirement, especially on the CPE side, for having VDSL2 in the product quickly is there, because VDSL2 is emerging as a standard requirement in the market. So I think that certainly would bode well for the transition taking place quickly.

Okay. And Texas Instruments current customer base, are they predominantly U.S. telcos?

Some of their larger customers which I know of are efficient networks which is a German -- actually a Siemens division, which I believe sells in the U.S. and in Europe, and they had a number of Asian -- of Asian customers, as well, selling into the Asian market. So I think that they have business internationally.

Okay. And so their (inaudible) then their DSL technology, it sounds like pretty much topped out at that ADSL or ADSL2+?

They actually prior to the last several years had a central office set of products as well, which they abandoned maybe two or three years ago in the transition to the ADSL2+. They didn't follow that. They did follow on the CPE side to some extent, but not past ADSL2+.

Okay. All right, great. Thanks.

Thank you.

We'll go next to [Tom Curdo] with Pacific Asset Management.

My question is really what Lilly just asked, but I just want to be clear on this. Was Texas Instruments using any Aware technology in their CPE ADSL2 product.

They were not a licensee of ours.

They were not?

No.

So this cannot -- does not really benefit you until a VDSL product hits the market. Is that correct?

I'm not sure that's correct. I think it's true to say that it will benefit when a VDSL market product does hit the market, since TI doesn't have one. But the products that Infineon knows best and has spent the most time developing and investing in is their own set of products. So, this is something that at this point we don't know the answer to.

Okay. Switching subjects. The Deutsch Telecom, they had a strike. I gather it has been resolved. Do you know whether that affected their rollout?

You know, I don't. I know that their rollout just -- from our vantage point we see chipset sales, so there was -- as I mentioned earlier, there was a large surge of sales during '06, and then there's a certain period of time you'd expect required to absorb those. I don't know whether the -- whether the strike had anything to do with that or not. I think it's still fair to say that the Deutsch Telecom deployment is one of the more aggressive ones. They continue to be very optimistic and bullish about their intentions to deploy this network. To do so they're going to have to buy a lot more chips than what they've bought in the past. So our feeling is that the VDSL market will improve through -- certainly at Deutsch Telecom and probably in other areas as well, but certainly Deutsch Telecom.

My main reason for the question was, do you expect Deutsch Telecom royalties to -- well, Infineon royalties to Deutsch Telecom to increase in the third quarter from the second quarter?

We -- you know, we don't have that much visibility, Tom, into the sales of the -- of these products by our customers. Part of that is because they're not terribly eager to tell us for competitive reasons, since we do sell across the industry now. So until we get our royalty reports, which aren't typically until the back half of the quarter, we're not going to know. I tend to believe that saying Q3 versus Q4 is difficult. I think in the second half of this year I would expect to see an increase in VDSL2 chipset sales from Infineon into Deutsch Telecom, just based on what Deutsch Telecom has been saying.

Okay. And then again, unrelated but the last question, on biometric did I hear you say it was a $700,000 order that just missed closing?

Well, it closed after the end of the quarter. The reason I mentioned it --

But it was $700,000?

That's right, yes.

Okay. And it has closed?

Yes.

Great. Okay. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) We'll move next to Mike Easson with Merriman.

Hey, good afternoon, gentlemen.

Hi, Mike.

Hey, I'm hoping you can speak to what you're seeing in the carrier rollout landscape. Specifically you alluded to an initial surge VDSL deployments followed by a lull. Can you talk about the cause of that lull? Was it performance-related interoperability? What are you seeing now that gives you confidence that we're going to start to see a new ramp in VDSL deployments?

Okay. Well, what I was speaking about was specifically Deutsch Telecom.

Okay.

And I -- we don't know of any performance issues from an interop perspective. Infineon's products are the most interoperable in the market, as I talked about on the call and as we demonstrated our technology, which is used in their technology -- is used in their chipsets at NexComm. so I don't think that is an issue. And in fact, most of the Deutsch Telecom deployment at this point uses Infineon chips on both sides of the line, so the interop issue wouldn't be one anyway. And the reason for my belief that it's going to rebound is because Deutsch Telecom has continued to say that they intend to roll out this 50 megabit VDSL service to multiple cities and millions of homes in the near future. So given the sales to date, they would certainly require additional chips and equipment to accomplish that.

Beyond Germany I've heard recently that Korea has started ordering again VDSL, which I believe is VDSL2. We have some exposure in Korea through Infineon, who announced that they have been in Korea, so that could be a near to medium-term event. Outside of Korea and Germany, Japan continues to appear committed to a transition to VDSL2. One of our customers, who's actually unannounced, I think has a good historical position in Japan and therefore a good chance of winning that business. The latest I had heard on that was late this year, early next year kind of ramp up of new service. And then in the United States you have the AT&T uverse lightspeed project, which currently doesn't involve any -- we don't have any participation in. It involves ConnexIT chipsets and Alcatel -- in Alcatel equipment primarily. And that from what I've recently heard is ramping relatively to where -- relative to where it was, but it's still pretty modest in terms of its overall size. So it isn't going to have a major impact on a multi-million line market that is out there.

Good, thanks. Also, one of the interesting topics at NexComm was channel bonding where you demonstrated your solution. Any additional data points on bonding and the carriers with the option of that for IPTV?

Not too much right now. We did want to use that forum to show it to folks and we were able to do that. It's a very compelling solution. It does enable phone companies to reuse their existing network to go even higher speeds and get up to multiple hundreds of megabits if they so desire. We think it's something that is very likely to become very popular, but there's not a lot of trial or deployment activity right now.

Great. Thanks, I'll pass it on.

Thank you.

We'll go next to [Matt Copita] with [Copita and Associates].

Hello?

Hello.

Hi. Infineon, does Infineon have a VDSL product of its own right now?

Infineon has a VDSL product of its own that's licensed from Aware.

That is -- and it's exclu -- Infineon product is exclusively Aware-based.

Yes.

So you don't have any incoming competition from them?

Not at Infineon, no.

During your closing remarks, you described DSL and I think I got it as the most accessible broadband access system in the world.

Yes.

Now, is that what you said?

I said most widely used wide-area network technology.

Sorry.

Same thing. Yes, most accessible broadband is I think the same thing.

Okay. Yes, there we are. The test business I'm delighted at last to have Dr. DSL become a significant part of the infrastructure. So what is a reasonable long-term growth expectation for this segment of your business?

Well, we've tried to size that in the recent past, and the way we've done that is by looking at the likely test points in the -- in the test infrastructure. So there'll be points in the network where a piece of test -- either hardware or software -- is deployed to test the network. And by our estimation those test points are anywhere in the tens of thousands to maybe on the high end, low hundreds of thousands. And our hardware and software products sell in the hundreds of dollars approximately per test point, so we see the opportunity as one in the tens of the millions of dollars over the next -- over this rollout, which we expect -- it looks like it's now commenced and we expect will continue for at least the next three to five years. So for the first part of this year, as I mentioned, we did just under $4 million in that area. We think that there's plenty of more opportunity out there in that market.

Yes, that's -- that's very exciting. And as that business grows, do you have any sense as to the overall percentage of Aware's revenues that it could conceivably become -- the whole business ramps up over time, but this is growing at what appears to be a fairly predictable or at least definable rate. Could this become a third or --

It certainly could become a third. It could be --, the problem with answering that question is that you have to make assumptions on the other two product lines, which are also doing their own what we believe is going to be significant growth going forward. All three of these product lines look extremely promising. We're very happy we have them. We think the investments we made in these areas are really beginning to bear fruit. We're certainly less -- in a less mature position in the test and diagnostics industry than we are in the other two.

I'm sorry, a less mature?

Less mature. So we haven't been in that market for as long as we have in the others, so we're still learning some things. And it's -- I think it is going to be harder for us to predict exactly how that revenue's going to grow over the near term and even medium term. But all three of these look extremely promising to us, and conceivably could all be contributing a third of our revenue down the road.

Good, good. My question is on channel bonding was answered so I'll come off. Thank you very much.

Thank you.

We'll go next to Brian Laden with Bonanza.

Hey, Michael.

Hello, Brian.

Question for you. It seems like every quarter now we're having a one or two issues pop up in different business segments. At some point does the board take a step back and say this should really be two separate businesses, or maybe even three separate businesses? How do you think about that, and how should we think about the critical mass needed for the businesses to be separate along the lines of DSL and biometrics?

I think you have a situation where the business in each of the areas we're addressing is growing. And in pretty much every one of our product lines we have some pretty significantly new products, and new products are -- hopefully they get off the ground. That's your first hope. But having them get off the ground in a nice, predictable -- on a 90-day window can't and shouldn't, in my opinion, be your number one priority. We have now an extensive set of customers in DSL licensing facing a market that looks like it's very healthy and moving in our direction. We have a biometric set of products that involve older traditional products that generate a base of revenue to us and new products, which are really starting to gain traction. And they're new products in new areas that are not only new to us but new to the industry so they're not always going to be predictable in terms of when they occur. And in test and diagnostics, which has been sort of the most uncertain of our ventures so far, we're beginning to see significant traction and growth and a presence in the industry that's being acknowledged across the OEM customer base we have as one where Aware is a highly valued supplier of technology and products.

I think the best way to look at the Company and the reason -- one of the reasons we looked at giving annual guidance this year as opposed to quarterly guidance, is on a larger scale than on a 90-day window, and I believe that we can continue successfully going forward. I think we've had a very good last year for that -- to that point, and I think we can successfully continue to grow these businesses. These aren't acquisitions that we recently did that require integration into a company and are causing operational problems. These are businesses that are organic to us, we know how to grow them them, and we're growing them.

Given that you've already made the investments, do you need $40 million of cash on the balance sheet?

I would say if we were sustainably profitable right now, your point would be an excellent one. And -- but given the -- to your previous point of certain things going well and other things perhaps not going so well, I think the right thing to do is to use whatever cash we need to invest in the future, and we've done that over the last several years, we invested quite a bit. And thinking about whether that's a -- whether that's something that we should have or not have I guess isn't the primary focus, right?

Okay. But I mean is there a point in time where you guys are prepared to say, look, we've made the investment, we've been patient, now it's time to fish or cut bait on some of these business lines?

What do you mean by fish or cut bait?

Well, I mean look at separating the business along the lines of DSL or biometrics or doing other things, so we can have more of a predictable revenue stream and cost structure.

Yes, I suppose that could make sense. I think at this point, as I said, I think we're able to manage the operation of these three things, as is evidenced from the last -- certainly the first six months of this year where progress, I think, is without question there. Whether down the road it makes sense for some of these businesses to be spun off, if they gain a critical mass, I think that's a very good possibility, if they gain that critical mass. I think at this point neither the biometrics nor the test and dia businesses are large enough to do that.

Okay. Thank you.

Thanks.

We'll take a follow-up question from Tom Curdo with Pacific Asset Management.

[Econos], in the past you have said that they are competitor or you consider them a competitor in VDSL?

Right.

Is that still the case?

Yes.

So they were not part of the disputed royalties issue?

We haven't talked about who was part of the disputed royalties issue.

Okay, because I continue to see reference to their VDSL product line using the analog device [fiser], is that what it is? I've forgotten.

Fuses.

Fuses, okay. That they're using that in their VDSL product line, so why aren't they paying you royalties?

Well, the product that Econos bought from ADI included ADSL2+ technology -- physical layer technology and network processing technology. The network processing technology is called [fusive]. The ADSL2+ technology is sometimes integrated with fusive, so the deliniation isn't entirely clear. But there's an element of technology that Econos acquired from [Tanalog Devices], namely the networking processing technology, which was not Aware license technology. If they combine that technology with their own VDSL technology, they wouldn't -- that would not be a royalty-bearing product to Aware.

Okay. Okay. Thank you.

Thanks.

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

All right, thank you. We're going to be presenting in September at the Roth Capital conference in New York and the Merriman, Curran, Ford conference in San Francisco, and we look forward to speaking with you next quarter. Thank you.

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