Aware Inc (AWRE) 2009 Q3 法說會逐字稿

Good day, everyone. Welcome to the Aware, Inc. third quarter 2009 conference call. Today's call is being recorded.

At this time, I would like to turn the conference 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 third quarter 2009 earnings conference call. I'm Rick Moberg, the Company's CFO, and I'm with Michael Tzannes, our Chairman and CEO. Thank you for joining us today.

I'd like to first point out that various remarks we may make about future expectations, plans, and prospects for the Company, and the DSL and biometrics market constitute forward-looking statements for the purpose 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 31st, 2008. This Form 10-K is on file with the SEC.

A recording of this call will be available on our website at aware.com after the call is completed.

Today's call will be organized as follows -- first, Michael will talk about the business, then I'll discuss financial results for the quarter, and then we'll take questions.

And now I'd like to turn the call over to Michael.

Thank you, Rick. Good afternoon, everyone.

I'll start today by reviewing the details of the deal we announced this morning with Lantig. I'll then talk about some of the highlights in the quarter and our focus going forward.

We announced today that Lantig will pay us $6.75 million for our DSL and G.hn home networking technology. With this deal we are selling our silicon IP technology, including our StratiPHY product line and our more recently developed home networking technology, related fixed assets, a 41-person silicon design team, and certain of our DSL and home networking patent rights.

This deal is the positive outcome that we've been seeking for our licensing business. It puts an end to the losses that we've recently experienced in our licensing activities, establishes a virtually seamless transition for our employees, who will become a center of excellence for home networking for Lantig, and also generates cash for our other endeavors.

Let me provide some more background on this deal. Infineon has been a longstanding DSL customer of ours. We have developed more than 10 generations of DSL chips with them that support all flavors of ADSL and VDSL. Earlier this year, in July, Infineon announced that they would be spinning off their wireline communications business to Lantig, an affiliate of U.S. based investor, Golden Gate Capital. Lantig is the entity that will be purchasing our licensing technology and team.

A major driver for this deal was our product development in home networking technology. This technology is focused on communications inside the home using any wired medium, telephone wire, electrical wire, electrical wire, or coaxial cable. We've been developing silicon IP focused on a G.hn IT use standard. This is the first worldwide unified standard for the wired home networking market. Lantig will be using our team and technology to address this market.

Lantig is a company that we know well, that knows us well, and that values our team and technology based on over a decade of interaction with us. Through this deal Lantig is obtaining valuable technology and patent assets and a world-class development team. After closing this team will remain in Aware's building, in most cases in the same offices that they have today.

We expect that this transaction will close before the end of the year. It is contingent upon Lantig's completion of its purchase of Infineon's wireline communications business, which is also expected to close before the end of this year.

While we won't be pursuing any new silicon IP licensing business after we close, we will continue to support our other existing DSL customers, the active one being [Econos]. We will also continue to collect royalties from Lantig for DSL chipsets under terms consistent with the contracts we currently have with Infineon.

After closing the Lantig deal our business will focus on our DSL test and diagnostics opportunities, the monetization of our patent portfolio, and our biometrics and imaging business. I'll now spend a little time on each of these.

In biometrics we're delivering value as a software component and subsystem supplier. We also provide professional services to our software customers. This business rebounded sharply this quarter to return to pre-recession levels. Over 50% of our quarterly revenues came from biometrics software and professional services. This is a result of positive customer response to our middleware and client oriented products.

During the quarter we've received a large follow-on software order to support a mobile biometrics application that is used overseas by the U.S. Military. We see healthy growth opportunities going forward in secure credentialing, border control, and defense related applications. We also continue to believe while slow in developing that there will be enterprise market opportunities for biometrics applications that we can benefit from.

In DSL tested diagnostics we continue to see the trend towards broader use of DSL for entertainment and video based offerings, driving the need for sophisticated test and diagnostics solutions. As test infrastructure deploys for DSL services we're in a position to expand our presence in this market. We have established OEM customers in handheld tests, automatic test heads, and DSLAM providers. We have design wins with leading Telco's for our soft test product line.

Our efforts in DSL test and diagnostics will be further enhanced by a cooperation that we've formed with Lantig on embedded wireline diagnostics technology and products. Through this cooperation Aware will gain access to embedded silicon based diagnostics technology, allowing us to uniquely add value to our test and diagnostics product suite.

It's worth noting that one of the many benefits of the G.hn standard is its enhanced testability. This testability will allow improved support of the wide variety of applications that G.hn was designed to deliver, including high bandwidth multimedia and smart energy applications. As the G.hn market develops over the next few years we'll be exploring opportunities in the area of test and diagnostics for home networking applications.

Going forward we'll continue to pursue expansion and strategic monetization of our patent portfolio. This portfolio includes patent assets relating to DSL, as well as other communications and signal processing applications, including home networking. We continue to believe that this asset can generate significant shareholder value and intend to continue to build it and seek means to capitalize on it.

We are selling certain patent assets to Lantig under our deal, but this does not change our strategy or outlook for the opportunities we see. Because of the size of our patent portfolio we're able to deliver valuable patent assets to Lantig without materially changing the value of the remaining portfolio.

We're pleased that we found a solution to the challenges we faced in our licensing business, a solution that is favorable to the Company and our employees. And we're excited about our future and our ability to refresh our Corporate focus on DSL test and diagnostics opportunities and on our biometrics and imaging business.

This deal will have a positive affect on our P&L going forward. On the one hand, contract revenues from our licensing activities will decline post-closing. These revenues were between $500,000 and $1 million in each of the past eight quarters. We will also see a decline in expenses. We expect this to be between $1.7 million and $2 million per quarter, primarily as a result of the transition of 41 employees to Lantig. Excluding cogs related expenses that vary with revenue we expect our quarterly expense post-closing to be in the $4.3 million to $4.7 million range.

Overall revenues have trended up each quarter this year, driven by growth in our biometrics and test and diagnostics businesses. Our visibility, however, regarding future revenues continues to be limited, and we're not able to provide revenue guidance for future periods at this point.

Our goal is to develop growing, profitable product lines, by leveraging our foundations in DSL and communications technology and in biometrics and imaging technology. As a consequence of the deal with Lantig we'll be able to refresh our Corporate focus on DSL test and biometrics, both of which are areas that we believe hold promise for generating significant shareholder value.

At this point, I'll turn the call back over to Rick to discuss financial results for the third quarter.

Thanks, Michael.

Before I begin, I want to point out that the sale of our DSL and home networking businesses to Lantig had no impact on the Q3 results I'm about to present. The agreement was signed on October 14th, and the transaction is expected to close before the end of the year. If the deal closes as expected the sale will be accounted for in the fourth quarter and any affects of the transaction on operating results will begin upon closing.

Now, I'd like to turn to the third quarter results. Revenue for the quarter decreased 3% to $6.2 million from $6.4 million in the third quarter of 2008. On a GAAP basis our net loss was $1.1 million or $0.06 per share. This compares to a net loss of $663,000 or $0.03 per share in the third quarter of last year.

We also report net income and EPS on a non-GAAP basis. Our non-GAAP results excludes stock based compensation expenses. These expenses were $677,000 this quarter. Excluding these charges the non-GAAP net loss was $457,000 or $0.02 per share. A reconciliation of GAAP to non-GAAP results has been included in today's earnings release.

Product revenue was $4.7 million this quarter compared to $3.9 million last quarter and $3.9 million in the third quarter of 2008. The sequential increase in product revenue was primarily due to higher sales of biometric software. The year-over-year increase in product revenue was primarily due to higher sales of DSL test and diagnostics hardware and software.

Contract revenue, which includes patent, license and engineering service fees, was $1 million for the quarter, which compared to $1.4 million last quarter and $2 million in the third quarter of 2008. The sequential decrease in contract revenue was primarily due to lower revenue from DSL licensing contracts. The year-over-year decrease in contract revenue was due to lower revenue from biometrics technology contracts and DSL licensing contracts.

Royalty revenue was $554,000 for the quarter, compared to $470,000 last quarter, and $437,000 in the third quarter of last year. The sequential and year-over-year increase in royalties were due to higher DSL chipset sales reported to us by our customers.

Third quarter spending was $7.4 million versus $7.4 million last quarter and $7.3 million in the third quarter of 2008. Flat sequential spending was the result of two offsetting factors -- expenses were lower due to two cogs related items, that is hardware cogs and cost of contract expenses. These cogs expenses were lower because both hardware revenue and contract revenue were lower this quarter than last.

Lower spending from these cogs items was offset by higher stock based compensation expenses from a onetime noncash charge this quarter. The year-over-year spending increase of $89,000 was due to a number of offsetting factors going in both directions, which I will not list here.

Our reported product margins, overall product margins were 82% this quarter compared to 73% last quarter and 87% in the third quarter of 2008. Higher sequential margins are due to a higher proportion of software revenue in product sales. Lower year-over-year margins are due to a lower proportion of software revenue in product sales.

Interest income for the quarter was $31,000, which was lower than the last quarter and the year ago quarter. The decrease was primarily due to lower money market interest rates.

And now turning to the balance sheet, the September 30 balance sheet. Cash was $32.6 million. We had positive cash flow this quarter of about $800,000. Since the end of last year we've used $12.9 million of cash, but $9 million of that cash was used to repurchase 3.5 million shares in our Q2 self-tender offer.

Receivables were $3.8 million, which equates to DSOs of about 56 days, and inventory was $1.1 million, which was the same as last quarter.

We had no debt and there were 19.8 million shares outstanding.

Finally, at the end of the third quarter we had 124 fulltime employees, 89 of whom were engineers.

So this concludes our prepared remarks. Operator, would you please open the call to questions?

(Operator instructions.)

I'll turn the conference back to our speakers for additional or closing remarks.

All right, thank you very much, everybody.

We're going to be at the AEA Conference in San Diego in the first week of November. If anyone is attending that Conference please come and see us if you have a chance.

Thanks, again. We'll talk to you next quarter. Bye-bye.

That does conclude today's conference. Thank you for participating in the Aware conference call. You may now disconnect.