Aware Inc (AWRE) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the Aware, Inc. first quarter 2010 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 first quarter 2010 earnings conference call. I'm Rick Moberg, the Company's CFO, and I'm with Edmund Reiter, our President and CEO. Thank you for joining us today.

First I'll review financial results for the quarter, then Ed will talk about the business, and then we'll take any questions you might have.

Before we begin, 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.

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 entitled, "Factors That May Affect Future Results," in our Annual Report on Form 10-K for the year ended December 31st, 2009. 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 complete.

Now, I'll discuss financial results for the quarter. I'd like to remind everyone that we sold certain technology assets to Lantiq in the fourth quarter of 2009. As part of that transaction we transferred 41 employees to Lantiq. Financial results for Q1 last year include revenue and expenses associated with assets sold and the transferred employees. Financial results for Q1 this year no longer include such revenue and expenses.

So, with that in mind, revenue in the first quarter was $5.6 million, which is a 23% increase from $4.6 million in the first quarter of 2009. Net income for the quarter was $22,000 or $0.00 per share. This compares to a net loss of $2.1 million or $0.09 per share in the first quarter of last year.

We also report net income and EPS on a non-GAAP basis. Our non-GAAP results exclude stock based compensation expenses. These expenses were $345,000 this quarter. Excluding these charges non-GAAP net income was $367,000 or $0.02 per share. A reconciliation of GAAP to non-GAAP results has been included in today's earnings release.

Now, turning to revenue. Product revenue for the quarter was $4.7 million compared to $2.8 million in the first quarter of 2009. The $1.8 million increase was largely due to higher sales of biometrics software and DSL test and diagnostics hardware. We believe that higher biometrics software revenue was primarily due to an improving economic environment, which led to increased customer demand. Higher DSL test and diagnostic hardware revenue was primarily due to shipments to an OEM customer that is shipping handheld test devices into a large DSL service provider.

Contract revenue, which includes patent, license, and engineering service fees, was about $200,000 this quarter. This compares to $1.3 million in the first quarter of 2009. The $1.1 million decrease is due to two reasons. Number one, the sale of assets to Lantiq in Q4 '09 which ended contract revenue from Lantiq and, or Infineon, and lower revenue from biometrics professional services contract due to the completion of a large project in the first half of 2009.

Royalty revenue was $756,000 for the quarter compared to $476,000 in the first quarter of 2009. The quarterly increase in royalties was due to higher ADSL chipset sales reported to us by our two principal licensees.

And now turning to spending and margins. First quarter spending was $5.6 million versus $6.8 million in the first quarter of 2009. The $1.2 million spending decrease was due to two primary reasons. Number one, engineering spending was approximately $1.8 million lower than the year-ago quarter due to the transfer of 41 engineers to Lantiq in Q4 of last year. Number two, lower engineering spending was partially offset by higher product cost of goods sold. Cost of goods sold was approximately $500,000 higher this quarter due to the higher hardware product sales that I mentioned a few moments ago.

Our gross margins on product sales were 78% this quarter compared to 82% in the first quarter of 2009. Lower margins this quarter were primarily due to a higher proportion of hardware revenue [and] product sales.

Interest income for the first quarter was significantly lower than the corresponding period in 2009. The decrease was primarily due to much lower money market interest rates.

And now turning to the March 31st balance sheet. Cash was $39 million at the end of the quarter. Receivables were $4.2 million, which equates to DSOs of 67 days. Inventory was $1.1 million, which was unchanged from yearend. And we had no debt.

There were approximately 19.9 million shares outstanding at March 31st, which is up slightly from yearend. As we mentioned on our yearend earnings call, we completed an employee stock option exchange program in early January. Under the terms of the program rank and file employees had the right to exchange certain stock options for common stock. Employees exchanged about 820,000 stock options, and we issued 118,000 net shares of common stock.

And, finally, at the end of the quarter we had 83 fulltime employees, 49 of whom were engineers.

This completes my financial commentary, and now I'll turn the call over to Ed.

Thank you, Rick.

We are encouraged by our first quarter results and by events within the biometrics and DSL test markets. In our first full quarter following the Q4 2009 sale of our licensing assets to Lantiq we achieved operating breakeven performance through the impact of reduced R&D expenses and reasonable performance on the revenue line.

Overall spending was down compared to the year-ago period by $1.2 million, while revenue was up by $1 million, which led to our bottom line improvement from a $2.1 million loss in Q1 2009 to breakeven in the current quarter. We see this quarter as a positive first step toward our goal of delivering sustained profitability.

I'll now discuss our DSL test business. Our test business benefitted from solid demand in the handheld segment for our hardware products, and we continue to invest in strengthening our position in this portion of the market. We view the handheld test segment as an important growth area for our OEM hardware business.

Especially as service providers deploy a new service, such as VDSL2, we see demand for equipping the technician workforce with updated test equipment follow. Our OEM hardware products allow test equipment vendors to satisfy this demand. Our strategy of delivering differentiated hardware products based on our access to DSL silicon technology is working, and we continue rapidly meeting new market requirements based on this approach.

These requirements may include specialized interoperability needs due to legacy equipment in an operated network or specific line diagnostics, such as impulse noise detection and single-ended estimation. In either case, we're as uniquely positioned to quickly respond to changing requirements in the handheld DSL test market, and our customers appreciate this expertise.

We recognized a small amount of revenue from a telco with whom we are engaged in a field trial of our LDP software, and we're excited about this. This trial involves troubleshooting, monitoring, and optimization of the DSL plant with a focus on controlling costs and delivering quality of experience in an IPTV, DSL context.

In the software segment of the DSL test market we see healthy activity from service providers looking for software products to improve the testability of their ADSL2+ and VDSL2 networks by combining the embedded test capabilities of their DSL infrastructure and products, such as our line diagnostics platform, or LDP.

This activity in the form of request for information and request for proposals is evidence of solid emerging demand for software based DSL test products, and is a positive trend for our test business.

We continue to see IPTV and VDSL2 as major drivers in the DSL test marketplace. VDSL2 based deployments often require a build out of the network from the central office or cabinet to the node, creating a network architecture favorable for software based test solutions.

Since VDSL2 deployments are often accompanied by IPTV service, which is the most demanding service yet deployed over DSL and hence requires high quality tests, we see the combination of these technologies as a focal point for our product development and strategy. While the strength of these market drivers varies from region to region around the world these technologies are undoubtedly impacting DSL test infrastructure requirements and demand.

We are finding test infrastructure capital spending decisions lagging deployments as service providers seek solid return on investment data prior to making CapEx commitments on their test infrastructure. This data, which involves tracking, troubleshooting, and maintenance costs takes time to collect and analyze and successful test vendors must demonstrate acceptable return on investment cases prior to purchasing decisions.

According to Infonetics, VDSL2 is estimated to have accounted for less than 10% of the overall DSL market as of the end of 2009 and is expected to grow to 25% of the DSL market by 2014. Both IPTV and VDSL are expected to have annual compound growth rates of greater than 30% over the next three to four years. As a result, we anticipate a favorable climate for demand looking forward.

By complementing our early [on] hardware business model with a more direct sales based software model our goal is to uniquely position ourselves in this market and drive profitable growth. We believe the major market trends are favorable to our product mix and strategy and are optimistic about our prospects.

Now, for biometrics and imaging. In our biometrics and imaging business we announced our participation in the FBI's next generation IAFIS Program, or NGI, through our customer, Lockheed Martin. IAFIS, which stands for Integrated Automated Fingerprint Identification System, is the FBI's main fingerprint identification system. Lockheed's advanced technology workstation, or ATW, is a state-of-the-art product which is an important element of the NGI system, and as we announced in February contains a number of Aware biometric products.

These products allow for the effective management of costs over the lifecycle of systems, such as the ATW, by allowing our customers to choose the best peripheral hardware to be used based on price and performance, while at the same time assuring compliance with all relevant standards and interoperability requirements.

The NGI Program is an important upgrade to the original FBI IAFIS system, which came online in 1999. IAFIS is growing rapidly with 10-print submissions doubling between 2007 and 2009, all while delivering a two-hour response time for criminal submission and a 24-hour response time for civilian submissions.

The NGI upgrade is targeted at substantially expanding IAFIS' original service footprint, reducing response times, and supporting a broad array of biometric types. We are pleased to be associated with NGI, and will look forward to leveraging technology and know-how developed through our association with this program in related markets.

Also announced in the quarter was compatibility between Aware's BioSP and URC products with AOptix' InSight Iris system for the Department of Defense Automated Biometric Identification System, or DoD ABIS environment. They [offered] it to California based companies with a background in adaptive optical image processing market the InSight Iris product, which acquires iris images at a distance of 2 meters. This represents another successful example of our cooperation with providers of biometric acquisition hardware, whereby end customers benefit from high quality standard space compatible biometric hardware and software solutions.

As the role of biometrics expands across an increasing number of applications, fingerprint, facial, and iris biometrics all appear to have significant value. Our strategy is to deliver value to our customers for any type of biometric, including these three, by focusing on software components and end user products that enable high quality standards based interoperable solutions.

NGI support for a broad class of biometrics is expected to drive demand for years to come, just as the original IAFIS program did for digital fingerprint technologies after it came online in 1999. We are focused on meeting this NGI driven demand and leveraging it as an important element of our overall growth strategy.

Overall in the quarter we saw good demand from existing customers and were active in bidding on new opportunities which involve both software licensing and services revenue. Our product portfolio and skill sets position us well for pursuing such opportunities, as we have the technology and engineering talent to quickly and cost effectively bring high quality biometrics solutions to system integrators and end users.

Turning to medical imaging, in early March we participated in the HIMSS 2010 Interoperability Showcase with our AccuRad ImageShare product. HIMSS, which stands for Healthcare Information and Management Systems Society, is a leading advocate for the cost effective use of interoperable standards based electronic health records and healthcare. This activity allowed us to demonstrate interoperability with a variety of vendors who participate in the overall electronic health record market.

Our focus is specifically on the high performance streaming and viewing of medical images using accepted industry standards. Standards and trainer operability in the electronic health record market are crucial, and we are pleased to have successfully participated in this event.

We continued to invest in our patent portfolio in the quarter, with a focus on high quality standards based patents in the digital communications and signal processing areas and patents related to our product strategies in the DSL test and biometrics and imaging areas. We're committed to leveraging Aware's patent portfolio to deliver shareholder value.

Overall, we are excited about the end markets we are participating in and believe successful execution of our announced strategies will deliver substantial value to our shareholders. These markets meet our criteria of valuing difficult signal processing content, system architectures and sales channels that allow us to operate in OEM business, as well as more direct selling model and, of course, grow. Our challenge is to execute and build substantially larger businesses than we currently operate in these markets, while delivering consistent profitability.

We exited the quarter with $39 million in cash, 19.9 million shares outstanding, a reduced option overhang, and breakeven performance. We fully recognize the need for growth and are working hard on exactly that goal.

This concludes our prepared remarks, and I will now turn the call over to the Operator to take any questions you may have.

Okay, great. Thank you, Mr. Reiter. (Operator instructions.)

And at this time we have no questions from the phone lines. I'll turn it back over to our hosts for any additional or closing remarks.

Thank you, Operator.

00 a.m. at the Doubletree Bedford Glen Hotel, located at 44 Middlesex Turnpike, Bedford, Massachusetts.

Thank you very much for attending today, and we look forward to speaking with you on our Q2 conference call. Thank you. Bye-bye.

And, again, that does conclude today's conference call. Thank you for your participation.