Aware Inc (AWRE) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to the Aware, Inc. third quarter 2008 earnings release conference call. As a reminder, today's conference is being recorded.

At this time, I would like to turn the call over to Mr. Rick Moberg, Chief Financial Officer, for opening remarks. Please go ahead, sir.

Good afternoon and welcome to Aware's third quarter 2008 earnings conference call. I'm Rick Moberg, the Company's CFO, and I am with Michael Tzannes, our CEO. Thank you for joining us today.

First, I will review the financial results for the quarter. Then, Michael will talk about the business and then we'll take questions. A recording of this call will be available on our Website at Aware.com after the call is completed.

First, I'd like to point out that various remarks we may make about future expectations, plans and prospects for the Company in the DSL and biometrics market constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Our 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", and our annual report on Form 10-K for the year ended December 31, 2007. This Form 10-K is on file with the SEC.

Now I will discuss financial results for the quarter.

Revenue for the quarter decreased 14% to $6.4 million from $7.5 million in the third quarter of 2007. For the nine months ended September 30, 2008, revenue decreased 6% to $18.4 million compared to $19.7 million for the first nine months of 2007.

On a GAAP basis our net loss was $700,000 or $0.03 per diluted share for the quarter. This compares to net income of $1 million or $0.04 per diluted share in the third quarter of last year.

For the first nine months of 2008, our GAAP net loss was $3.2 million or $0.13 per share. During the same period last year, our net loss was $32,000 or $0.00 per share.

We also report net income and EPS on a non-GAAP basis. Our non-GAAP results exclude stock-based compensation expenses. These expenses were $397,000 this quarter and $1.1 million for the first nine months of 2008.

Excluding these charges, our non-GAAP net loss was $266,000 or $0.01 per diluted share for the quarter and $2.1 million or $0.09 per share for the first nine months of 2008. A reconciliation of GAAP to non-GAAP results has been included in today's earnings release.

Product revenue was $3.9 million for the quarter compared to $3.9 million last quarter and $5.1 million in the third quarter of 2007. Sequentially, product revenue was flat. Both biometric software and DSL test and diagnostics hardware and software revenues were relatively unchanged in the last two quarters.

The year-over-year decrease in product revenue was due to lower sales of DSL test and diagnostic hardware and software. Contract revenue which includes license and engineering service fees was $2 million for the quarter compared to $1.8 million last quarter and $1.9 million in the third quarter of 2007.

The sequential increase in contract revenue was the result of increased revenue from DSL licensing contracts, which was partially offset by lower revenue from biometrics Professional Services. The year-over-year increase in contract revenue was the result of increased revenue from biometrics Professional Services which was mostly offset by lower revenue from DSL licensing contracts.

Royalty revenue was $437,000 for the quarter, compared to $443,000 last quarter and $508,000 in the third quarter of 2007. Royalties were substantially flat. The year-over-year decrease in royalties was primarily the result of lower DSL chipset sales reported to us by our customers.

Third quarter spending was $7.3 million versus $7.7 million last quarter. The $400,000 spending decrease was primarily due to lower cogs and lower engineering expenses, third quarter spending of $7.3 million versus $6.9 million in the third quarter of 2007.

The $400,000 spending increase was primarily due to higher cogs on biometrics Professional Services revenue, merit salary increases that were granted in Q4 of last year; legal fees; and these three [expanded] reasons for expenses going up were offset by lower cogs on hardware sales this quarter.

Our reported gross margins, product gross margins were 87% this quarter, compared to 84% less quarter and 82% in the third quarter of 2007. The higher margin this quarter reflects a higher proportion of software revenue in product sales.

Our hardware margins are generally in the 35 to 45% range. This quarter, they were slightly below this range because of a provision we took to preserve a portion of our inventory. Excluding this provision, hardware margins would have been in this range.

Interest income for the quarter was $244,000, which was lower than last quarter and the year ago quarter. The decrease was primarily due to lower money market interest rates since the beginning of the year and our decision in Q1 to shift our cash into safer investments, given the current credit market conditions.

At September 30, our cash was $37.8 million. Our receivables were $4.4 million, which equates to DSOs of 62 days and our inventory was $1.8 million, which was down $300,000 from last quarter. Also as of September 30, we had no debt and there were 23.3 million shares outstanding.

During the third quarter, we repurchased 466,000 shares of our stock at a total cost of $1.5 million. Since our stock repurchase program was initiated last year, we have repurchased a total of 692,000 shares at a total cost of $2.3 million. We intend to repurchase more shares in Q4 subject to the provisions and limitations of SEC Rule 10b-18.

At the end of the third quarter, we had 120 full-time employees -- 85 of whom are engineers.

That completes my financial commentary and now I would like to turn the call over to Michael.

Thank you, Rick. biometrics revenues this quarter continued to excel. The combination of a comprehensive software product line with exposure to multiple biometrics end markets and a broad customer base of OEMs and system integrators delivered revenue across multiple fronts.

We continue to see newer product offerings and secure credentials and border control delivering strong results, validating our strategy to address these opportunities. Border control infrastructure upgrades involving the use of 10 fingerprints are driving increased performance requirements, and we have benefited from the demands of this upgrade cycle.

We continue to participate in PIV infrastructure buildouts and are beginning to see opportunities in post-credential issuance biometrics identity management applications.

We also continued this quarter to see a contribution from our Professional Services offerings. During the quarter, we announced our relationship with Sun Microsystems, involving the integration of our Bio SP and Sun's Identity Management Solutions.

This collaboration is producing a biometrics-enabled identity management platform for smart card issuance and multifactor authentication. It puts us in a position to gain broader exposure to government and private sector credentialing and identity [assurance] applications.

Our biometrics product line over the first nine months of 2008 has grown significantly compared to last year; and it continues to exceed our internal revenue and profitability plans. With our broad exposure to legacy and emerging biometrics applications, we are very pleased with our position in the biometrics market.

In VSL test and diagnostics we continue to make progress with test infrastructure opportunities in the United States, Europe and Asia. Our customer base is comprised of [test head], hand-held and DSLAM suppliers as well as telcos. Our product offerings include hardware and software modules for provisioning, maintaining and troubleshooting DSL networks as well as the software server base product that offers a soft test capability.

This product, [our] LVP, is being marketed as an alternative to or in conjunction with more traditional hardware-based test infrastructure. We are selling this through OEMs such as [Hakem] as well as directly to certain phone companies.

We believe that the trend towards SoftTest is a strong one that we will be able to benefit from. We recently announced the deployment of our LVP at West Kentucky Rural Telephone. This win is an important indication of the readiness of the product and the value proposition we deliver to the market.

We also won a prestigious award from Frost and Sullivan for the growth that our test and diagnostics business has demonstrated since 2006. The opportunity for us in test and diagnostics largely lies ahead of us with IPTV and VDSL2 solutions still in early stages of deployment.

Our OEM customer base gives us global reach and includes market leaders such as Spirent and JDS Uniphase. JDS Uniphase, in fact, is demonstrating an improved DSL hand-held test platform that incorporates hardware and software modules from Aware at the OSP EXPO 2008 show this week.

In licensing, we signed a new contract with one of our existing customers for the development of a next-generation VDSL chip. Our exposure to expansions in the VDSL2 market continues to be good through our relationship with Infineon. We believe that VDSL remains the predominant option for phone companies to deliver IPTV and triple-play services.

While the quality of our DSL IP products is world-class, we continue to pursue a strategy of diversification with our silicon [IT] R&D assets. One of the most promising of these alternatives is the developments we have underway in [G.HM] -- the next-generation technology for high-speed wired home networking.

We are members of HomeGrid, an alliance we founded along with industry leaders such as Intel, Texas Instruments and Infineon and believe that this opportunity is a good match between our silicon IP expertise and the market needs. We are also pursuing other options which leverage our IP assets. Our overarching goal is to return to profitability and deliver shareholder value over a reasonable time horizon.

For the year we are reiterating our $24 million to $28 million guidance for revenues. Achieving the high end of this range will depend upon our ability to execute on our licensing initiatives.

At this point, we would like to turn the call over to you and take your questions.

(Operator Instructions). Jeffrey Meyers with Cobia Capital.

Just a quick question on the DSL test business. I think one of your customers reported a sizable piece of business in the US, and just wondering what the timing on that that you recorded revenue immediately. When they've recorded revenue were before or after and then outside of that what are -- what sort of prospects are you looking at in the DSL test business?

I will answer the second question first. The prospects from the DSL test business are -- appear to be very good to us. We think the driver for those things right now is VDSL2 and IPTV deployments which are, as I said earlier, in the initial phases of rollout around the world. Certainly the economic conditions right now pretty much globally are going to put some sort of question mark around some of the spending the phone companies might incur and we're hearing that from some of the industry participants.

But having said that, broadband continues to be a core offering for many telephone companies around the world. And we think that the test infrastructure around that is generally an efficient way for them to deploy those services more economically.

So we think there is a real opportunity there. We think we have got a good position in that market that begins with the core expertise we have in the underlying technology, and is represented in a pretty broad array of hardware and software and the soft test product, VLDP, that I talked about.

Specific to an opportunity in the US, I can't say anything more than what you heard. There appears to be a real opportunity in one of the really large carriers here. It appears that one of our customers is in a good position there. We generally will see the revenue at around the same time. I would venture to say that they would.

So they will buy from us hardware and software, put it in their product and then sell that product to the phone company. So there will be some lag in terms of when they see the revenue versus when we see it. We would see it shortly before them, but not a significant amount. It would be in a month's kind of time frame.

But when -- we've actually been hearing about this opportunity for some time. And there have been a number of these types of opportunities that exist out there through this particular customer and others.

So until they come to fruition, you can't really count the -- look at the size of that opportunity yet. But it does look like there is a real opportunity there. And it looks like we are in a pretty good position.

Good. Let me ask you want one more and this is -- I'm asking this because it doesn't sound like there are a lot of other people in the queue and not sure this is conference call question, but it's really sort of a fundamental question.

You guys supply the core technology to some important businesses and you know DSL, DSL test, but it seems like your customers are reporting significant revenues, but you guys don't seem to be able to get out of the single digit million revenue area. So I guess at what point or in what business do you see you guys really taking the next step and capturing more of the revenue opportunity in one of the places where you are?

Certainly on the biometrics side we've seen tremendous growth year-over-year. We've expanded the product line there significantly. We've expanded the types of opportunities we are addressing. There's a number of biometrics market segments that we addressed that we didn't addressed several years ago and that is all bearing fruit.

So that product line is progressing in a very healthy way. It is very profitable and it is growing in a significant way pretty much any way you look at it.

The test product line is in a less mature state so you don't see as steady as predictable a set of revenues, but like I was saying earlier, the opportunity really seems to be in the future. It doesn't appear to us to be the distant future, but the near to medium term future and I think we are in a good position there. That could certainly be a very significant amount of revenue when you combine the hardware and software opportunity that we are addressing.

The biggest challenge we have which we have been talking about for some time now is on the licensing side where we have an excellent capability in the Company and, continuing to focus that just on DSL became evident earlier this year, wasn't going to generate the kind of returns that we needed to see. So we've been looking at other areas where we can try to leverage that expertise. And I think there are opportunities for us to do that and that is where we are focused in that particular area.

Right. Let me just take the question back, I guess, to the DSL test business. It sounds like you guys have the major customers you want. Spirent, [JDSU], I'm sure those guys combined are probably doing -- I don't know -- hundreds of millions of dollars in DSL tests? Or $50 million to $100 million in DSL tests? But I guess, what's the -- how do you grow that business? Do you increase penetration within those customers? Do you --?

Yes, it's a combination of things. I mean some of their business is going to be legacy business which we are not exposed to. So our predominant strength is in current and next-generation solutions. VDSL to baste things. IPTV-based things.

They are not widely deployed yet so that's why I talk about the future being important for us. If you go into the companies you talked about, JDS Uniphase certainly has a lot of test solutions that are not DSL at all. And then they have some test solutions that are older generation DSL. So we wouldn't have currently exposure to those things.

They do have test solutions that are next-generation VDSL that are based on our technology and on our hardware and software. And when those grow in size we would also see growth on our side.

Okay. Great. Thanks a lot.

Stanley Cohen with Atrium Advisers.

First in the biometric business, last quarter you had about -- you mentioned you had a $1.1 million contract with a single customer. Was there anything of that sort in this quarter?

There wasn't. No, it was a pretty broad set of customers across a lot of different market segments. And no one stood out to that extent this quarter.

Yes, so if you take out that contract, I mean the growth rate from an actual business, I mean I don't know -- .

It's very strong.

Yes. I mean, like, 70% -- up 70% quarter to quarter.

Yes, I think that the business is up over 50% if you compare the first nine months of last year to the first nine months of this year.

Right but I mean in previous quarters you -- the strong quarters have always been with the large contract and now it seems like you just have a broad base of business that's growing (multiple speakers)

I don't think large contracts are that outside the norm for us. It's just (multiple speakers)

Right but you didn't have one this quarter. You didn't have one this quarter (multiple speakers).

That's correct. That's a good point. I understand your point. It's a (multiple speakers).

Was there anything special with all of these small customers this quarter that caused it to (multiple speakers) like this?

Well, there's a lot -- you know, there's a lot of activity. I think we've -- a lot of activity across a lot of fronts and we have more exposure now to some of the areas that we started getting into several years ago and we have a more mature presence now.

I talked a little bit in the opening remarks about how we are starting to see some post issuance of these PIV cards. You start to see some more general biometric applications emerging where they are actually using the cards for something and we are starting to get exposure there. That, we think, could be a trend that offers some real opportunity for us for some time. So we are encouraged by that trend.

You know, we have exposure to a lot of the government systems. I've talked about these before. A lot of these government programs like US Visit and others. So it's a combination of lots of good things across lots of fronts.

And on the other side, this is the first time that the contract revenue side of biometric business, even though it is only a year old took a slight tick down.

Yes. Of all the things in biometrics that's certainly the least mature. So that's something we started doing -- I think the first revenue we recorded was Q4 of last year where our strategy there is to have a balance of both the software product sales that we have and Professional Services going forward. But it is not nearly as -- it's not something we are as well known for as our product offerings. So it is going to be a little more lumpy at this point.

Okay so I mean is it going to drop off further or still stay about the same or --?

No comment on that at this point. I mean we're going to -- as I said our strategy is to try to keep those things both active in terms of means to grow the exposure of the business.

Rick, I know that you mentioned that you expect to go up slightly because of legal expenses. Is that due to to the unnamed customer dispute with licensed revenue?

Yes.

Thank you. Do you have about how much that was?

There are (inaudible) reasons legal expenses were up. Primarily because of this customer, a suit that we are involved with and also we've been doing a lot of work in patent filings and legal fees there. I don't have a specific number, but probably somewhere in the range of $100,000 or so.

Okay and you are holding on to net loss [of] 266?

Excuse me?

I mean, your net loss was about $266,000.

That's right. So (multiple speakers)

If they would have paid last quarter you wouldn't have legal fees. The financial picture would be somewhat different.

This right. That's true.

All right that's -- as far as you have the current customer doing a contract (inaudible) this quarter, is there more to come from that customer? And also, Michael, can you speak to you [getting] expenses on the licensing side, giving DSL customers (inaudible).

So yes there is opportunity with this customer. Opportunity going forward and there's no sign that that customer or our other -- either of our customers are shying away from the DSL market despite the fact that there's not a lot of interest from new participants. These folks continue to stay very engaged in the market.

So there are opportunities there for us. In terms of getting out of the current situation we're in on licensing, the focus is to find ways to generate revenues through alternative means. We have new technologies we are looking at. We have in the (inaudible) and in 10 gigabit per second. We have a strong asset that we have been looking at, opportunities to try to leverage into revenue. So the focus there is to try to write that situation by improving the topline.

I think that is the first time I've heard (inaudible). Is that something new going on there?

Yes, it may be slightly knew. I mean it's something we've had going on for some, for -- not a real long time, but it's an opportunity we see that's coming from the marketplace back to us so we are responding to it.

Thanks a lot.

With no further questions I would like to the call back over [to Mr. Tzannes] for any closing remarks.

All right, thank you. We will be at the OA conference in San Diego the first week of November. If you happen to be at that conference, please look us up and we look forward to speaking with you again next quarter. Thank you very much. Goodbye.

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