Aware Inc (AWRE) 2009 Q2 法說會逐字稿

Good day to everyone and welcome to the Aware, Inc. Second Quarter 2009 Conference Call. Today's call 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.

Thank you Operator. Good afternoon and welcome to Aware's second quarter 2009 earnings conference call. I'm Rick Moberg, the Company's CFO, and I'm with Michael Tzannes, our CEO. Thank you for joining us today.

First, I'll talk about 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" in our annual report on Form 10-K for the year ended December 31, 2008. This Form 10-K is on file with the SEC.

Now, I'll discuss financial results for the quarter. Revenue for the quarter decreased 7% to $5.8 million from $6.2 million in the second quarter of 2008.

Before I discuss earnings and EPS results, I should point out that the number of shares outstanding decreased by 3.5 million this quarter as a result of our Dutch auction tender offer. This reduction of shares affected our current quarter EPS results. Please keep this in mind as I discuss year-over-year EPS results.

On a GAAP basis, our net loss was $1.6 million, or $0.08 per share. This compares to a net loss of $1.3 million, or $0.05 per share, in the second quarter of last year.

We also report net income in EPS on a non-GAAP basis. Our non-GAAP results exclude stock-based compensation expenses. These expenses were $409,000 this quarter. Excluding these charges, the non-GAAP net loss was $1.2 million, or $0.06 per share. 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, which compared to $2.8 million last quarter and $3.9 million in the second quarter of 2008. The sequential increase in product revenue was primarily due to higher sales of DSL test and diagnostic hardware, although DSL test and diagnostic and biometric software were up, as well.

The year-over-year flatness in product revenue was the function of higher DSL test and diagnostic and software, which were offset by lower sales of biometric software.

Contract revenue, which includes patent, license and engineering service fees, was $1.4 million for the quarter compared to $1.3 million last quarter and $1.8 million in the second quarter of 2008. The sequential increase in contract revenue was primarily due to higher revenue from DSL licensing contracts.

The year-over-year decrease in contract revenue was primarily the result of lower revenue from biometrics technology contracts, which was partially offset by higher revenue from DSL licensing contracts.

Royalty revenue is $470,000 for the quarter compared to $476,000 last quarter and $443,000 in the second quarter of 2008. Royalties were down about $6,000 sequentially due to lower chipset sales reported to us by our customers. On a year-over-year basis, royalties were up $27,000.

Second quarter spending was $7.4 million versus $6.8 million last quarter and $7.7 million in the second quarter of 2008. The sequential spending increase was mostly due to an increase in product cost of sales which was the result of higher sales of hardware products.

The year-over-year spending decrease of $300,000 was mostly due to lower cost of contract revenue costs on lower biometrics contract revenue and lower engineering expenses due to attrition. These spending increases were partially offset by increased spending on product cost of sales this quarter.

Our reported product gross margins were 73% this quarter compared to 82% last quarter and 84% in the second quarter of 2008. Lower margins this quarter are primarily due to a higher proportion of test and diagnostics hardware sales, end product sales.

Interest income for the quarter was $61,000, which was lower than last quarter and the year-ago quarter. The decrease was primarily due to lower money market interest rates.

At June 30, our cash was $31.9 million, which was down $10.6 million from $42.5 million at the end of last quarter. We used $9 million to repurchase stock in connection with the tender offer we completed in April. Receivables were $4.6 million, which equates to DSOs of 73 days, and our inventory was $1.1 million, which was down $400,000 from last quarter.

Also, as of June 30, we had no debt and there were 19.8 million shares outstanding after the tender offer. Finally, at the end of the quarter, we had 124 full-time employees, 89 of whom were engineers. This completes the financial commentary. Now, I'd like to turn the call over to Michael.

Thank you, Rick. I'm going to start today with a brief update on the home networking market. There is strong interest in home networking from a large and diverse group of companies, from the service provider, consumer electronics, computing and semiconductor industries.

While this opportunity today is fragmented between multiple technologies and standards, we believe that market unification will be accomplished with the new ITU standard for wired home networking, called G.hn.

One of the key organizations focused on assisting in the development, promotion and adoption of the G.hn standard is HomeGrid. HomeGrid, of which we are a founding member, is focused on bringing together companies from diverse industries that have an interest in home networking and the new ITU G.hn standard.

Recent new members include large teleco service provider, British Telecom, and household name, Best Buy. According to HomeGrid, approximately one billion devices per year ship that are candidates for G.hn technology adoption across the consumer electronics, service provider and computing markets.

The target data rates for G.hn vary from 250 megabits per second to 400 megabits per second, depending on whether the medium is electrical wire, telephone wire or coaxial cable.

In order to achieve these data rates, multi-carrier communications technology is being used. This is the same as that used in ADSL and VDSL and is a technology in which Aware has extensive expertise.

The groundwork for this tremendous opportunity is being laid now and we're confident that our leadership role in technology development and G.hn product development will pay off for us as the worldwide home networking market matures.

In addition to our home networking R&D activities, we have ongoing engineering activities supporting our DSL customers and R&D initiatives in DSL test and diagnostics and biometrics.

DSL continues to dominate the worldwide broadband market. There were 277 million DSL subscribers at the end of Q1, according to Point-Topic. While fiber and cable TV continue to grow market share, the dominant means for delivering broadband will remain DSL for the foreseeable future.

While the subscriber base for DSL continues to remain steady, the nature of services that are being delivered is going through profound changes. Higher value services are an important part of phone companies' strategies to grow their average revenue per user. This has been driving DSL standards and demand and has established DSL as a high value interface.

Internet protocol TV, IPTV, is a premier example of the type of higher value service that phone companies are using DSL for. IPTV grew to 24 million users at the end of the first quarter, up 56% over last year. In the United States, AT&T's IPTV subscriber base grew 27%.

The rapid onset of entertainment and value-add services represent an opportunity for our DSL test and diagnostics technology and products. This quarter, we saw an improvement in both our hardware and software sales in DSL test and diag. We see significant opportunities for growth in this area, as phone companies deliver higher value services and consumers demand better quality service.

We have a strong position in the market based upon our deep knowledge of the underlying DSL technology and successful [productization] of this technology into a portfolio of hardware and software products.

An example of this is a recently introduced new member of our UDMT module family, called the 1665. The 1665 leverages our experience and access to silicon-based tests to deliver a low-cost test head that supports VDSL and ADSL modem emulation, broadband digital tests, and electrical tests.

The 1665 is a solution that fits the low cost, high functionality requirements of the node-based test head market well and we are seeing good customer response to this new product offering.

In biometrics, long-term application growth continues to be strong, with healthy activity at large US Federal infrastructure programs, such as the Next Generation IAFIS program, as well as with secure credentialing, border control, and defense related applications.

While developments of more enterprise-oriented biometrics continue to be slow, U.S. federal programs continue to have solid backing and are proceeding with rollouts and upgrades to existing systems.

We continue to see positive customer responses to our middleware and client-oriented products, as well as our combined product and service offerings.

Lockheed Martin recently announced the continuation of their card scanning service contract with the FBI, which involves the conversion of various paper-based biometric records into high quality, standard compliance, fully interoperable electronic records.

As announced by Lockheed in June, Aware is a supplier to Lockheed under this contract. Our role as a supplier in such a competitive and important program as CSS validates our value proposition to a tier one system integrator for a large federal government biometric infrastructure project.

Our participation in major infrastructure programs, such as CSS, provides confidence to our customer base that Aware is a preferred supplier of high quality, interoperable biometrics products.

Biometrics revenues have trended up over both of the last two quarters. An improvement in the overall confidence level of our customers leads us to believe that the worst of the downturn may be behind us.

On the product development front, during the second quarter, we deployed a suite of new functionalities in our BioSP product designed to cost-effectively serve the needs of enrollment and workflow management for secure credential applications.

Specifically, enrollment client configuration management is now supported by BioSP, allowing the management and upgrade of biometric enrollment clients from a centralized site. This reduces administrative costs and risks and further streamlines the integration of biometrics into high volume credentialing applications.

We also added improved workflow management to the BioSP platform, which allows the rapid support of customized workflows within the biometric enrollment client. Both of these features were deployed in a US Federal agency PIV, stands for personal identity verification, environment.

While overall revenues have trended up each quarter since Q4 of '08, our visibility continues to be limited and we are unable to provide guidance for the year. We continue to closely watch our R&D spending across the board, but especially in DSL licensing.

Also, we will continue to pursue opportunities to reduce our share count. In addition to the tender offer we completed for 15% of our outstanding shares earlier this year, we received shareholder approval for an options exchange program that, when implemented, should reduce the stock option overhang, while improving the retention profile for our employees.

Our strategy is to generate shareholder value by growing our product lines into profitable businesses. Our goal is to generate shareholder value by targeting growing portions of the biometrics, DSL test and home networking markets with a collection of technology, products and services. That concludes our remarks today. Operator, please open up the call to questions.

Thank you. (Operator Instructions). And there appear to be no questions at this time. (Operator Instructions).

And it appears that we do not have any questions from our phone audience. At this time, I will turn the conference back over to Mr. Tzannes for any additional or closing remarks.

Thank you, Operator. I just want to remind everyone that we will be at the Tech America AEA Classic Conference in San Diego from November 1 to November 3, in the fall of this year, and look forward to seeing any of you who are attending there. Thank you very much. We'll talk to you next quarter.

And that does conclude today's conference call. Thank you so much, and have a great day.