Aware Inc (AWRE) 2010 Q4 法說會逐字稿

Good day, everyone, and welcome to the Aware, Inc. Fourth Quarter 2010 Conference Call. This conference is being recorded. At this time I'd like to turn the call over to Mr. Richard Moberg, Chief Financial Officer, for opening remarks. Please go ahead, sir.

Thank you, Operator. Good afternoon, and welcome to Aware's Fourth 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 questions. 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 titled, "Factors That May Affect Future Results," in our Annual Report on Form 10-K for the year ended December 31, 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 completed. Now, I will discuss financial results for the quarter and the year. For the quarter, total revenue grew 24% from 5.5 million in the fourth quarter of 2009 to 6.8 million this quarter. Net income for the quarter was $230,000, or $0.01 per share. This compares to net income of 5.8 million, or $0.29 per share, in the fourth quarter of last year. Net income in the fourth quarter of 2009 included a $6.2 million gain on the sale of assets. For the year, total revenue grew 7% from 22 million in 2009 to 23.6 million in 2010. Revenue in 2009 included contract revenue related to our DSL silicon IP product line that we sold in late 2009. 2010 revenue growth, adjusted for the sale of this product line, was 23%.

Net income for 2010 was $180,000, or $0.01 per share. This compares to net income of $1 million, or $0.05 per share in 2009. Net income for 2009 also included a $6.2 million gain on the sale of assets. As today's press release indicates, we reduced our operating loss from 5.5 million in 2009 to approximately $300,000 in 2010. This improvement is due to two principal reasons. Number one, the sale of our DSL silicon IP product line in November 2009, and number two, revenue growth and improved profitability in our DSL test and diagnostics product line.

We also report net income and EPS on a non-GAAP basis. Our non-GAAP results exclude stock based compensation expenses. These expenses were $326,000 this quarter. Excluding these charges, non-GAAP net income was 557,000, or $0.03 per share. For the full year, non-GAAP net income, excluding 1.5 million of stock based compensation charges, was $1.7 million, or $0.08 per share. A reconciliation of GAAP to non-GAAP results has been included in today's earnings release.

Next, I'll provide more detail on revenue. For the quarter, product revenue grew 32% from 4 million in the fourth quarter of 2009 to 5.3 million this quarter. For the year, product revenue grew 23% from 15.4 million in 2009 to 18.9 million in 2010. The revenue--the product revenue increase in both periods reflects increased test and diagnostics hardware and software revenue that was partially offset by lower biometric software revenue.

For the quarter, contract revenue grew 7% from about $900,000 in the fourth quarter of 2009 to about $950,000 this quarter. For the year, contract revenue declined 57% from 4.6 million in 2009 to $2 million this year. The decrease was primarily due to the sale of our DSL silicon IP assets to Lantiq in the fourth quarter of last year.

Royalty revenue of about $550,000 this quarter was essentially the same as the fourth quarter of 2009. For the year, royalty revenue grew 29% from 2.1 million in 2009 to 2.7 million this year. The increase in royalties was due to higher ADSL chipset sales reported to us by our two chip licensees.

Now, I'll provide more detail on spending and margins. Fourth quarter spending was 6.6 million versus 5.9 million in the fourth quarter of 2009. The spending increase was due to two primary factors. Number one, higher cost of goods sold due to higher hardware revenue, and higher legal fees related to patent filings and the proposed spin-off of our patent licensing operations. These spending increases were partially offset by lower engineering spending due to the sale of our DSL chip assets in late 2009. Spending decreased 3.6 million from 27.5 million in 2009 to 23.9 million this year. The spending decrease was primarily due to a $6.9 million reduction of engineering expenses from the sale of our DSL chip assets in 2009. This decrease was partially offset by higher COGs and higher hardware revenue and higher legal fees related to patent filings and the proposed spin-off of our patent licensing operations.

We had 83 full-time employees at the end of the year, which is up one head from the end of 2009. Gross margins on product sales were 77% this quarter, compared to 88% in the fourth quarter of 2009. For the year, gross margins decreased from 81% to 77%. Lower margins in both periods were primarily due to a higher proportion of hardware revenue in product sales.

And finally, I'll provide a quick review of the balance sheet. Cash was 39.9 million at the end of the year, which is up $300,000 from the end of last year. Receivables were 5 million, which equates to DSOs of about 66 days. Inventory was 1.9 million, which is up due to increased demand for our hardware products. We had no debt and there were 20 million shares outstanding as of December 31.

This completes the financial commentary. And now, I'd like to turn the call over to Ed.

Thank you, Rick. Our results for 2010 are encouraging for a number of reasons. First, in terms of the top line, we grew sales on a year-over-year basis despite the loss of revenues associated with the sale of our chip licensing group in late 2009. From a profitability perspective, we finished the year with a small net profit and are looking forward to improving on that performance in the coming year. From a strategic perspective, we made tangible progress during the year toward our goal of extending our primary business model of an OEM supplier to one in which we also sell higher value products and services to customers deeper in the channel, including to end users. This progress is evident in our sales of software products to service providers and a growing pipeline of services opportunities we are pursuing in our biometrics business. In the upcoming year, we hope to build on this success so that we can deliver improved financial performance in 2011.

I'll now review the DSL test business. Highlights for 2010 in our test business included a doubling of unit volume in our hardware business and real progress in developing our software business. On the hardware front, we benefited from orders from tier one test equipment vendors, which produced steady volumes for us throughout the year. We also made progress in the lower cost, higher volume segment of the market during the second half of the year and saw revenue from this segment in the fourth quarter.

The value proposition in our hardware business has historically been based on a superior interoperability footprint and this year was no exception. However, looking forward, we expect to see an increased focus on home networking technologies and cost reductions. As a result, we are focusing on addressing these two issues with a new generation of hardware products we expect to see in volume in the second half of 2011.

In our software business, we saw good demand throughout the year and believe the longer term trends in this market continue to be favorable for us. DSL as a broadband access technology continues to be very strong with an approximately 63% share of the total broadband access market or 320 million lines worldwide as of October 2010. The majority of these lines are testable, or in other words, support ADSL2Plus or VDSL2.

Meanwhile, IPTV subscribers have grown 37% from 30 million to 43 million in the year ending October 2010. These trends are combining to create overall demand for service assurance infrastructure that enables monitoring, management, and trouble shooting of DSL based IPTV networks. This infrastructure consists of a variety of [power layer] IPTV protocol test products, as well as products focused on the DSL physical layer, such as our line diagnostics platform or LDP software product. By utilizing the exiting and deployed DSLAMs and modems, software based test systems, such as LDP, can and are delivering effective service assurance benefits to DSL service providers worldwide.

Based on discussions with service providers, we see an increased understanding and confidence in software based test and management systems for DSL networks. This is reflected in an improved overall understanding of the test capacity that ADSL2Plus and VDSL2 networks provide and related test accuracy metrics. Our customer wins and sales prospects are providing us with substantially improved visibility into a broad range of business processes within the network that we can improve and optimize with our products. Optimizing and cost reducing such processes directly impacts operating costs associated with running a DSL network and allows our LDP product to deliver strong and recurring cost savings to service providers.

While sales lead times are generally long in this market, we have an active customer pipeline we have been developing for some time. We are confident our successes in 2010 will help us expand our customer base in the coming year.

In Q3, we recognized revenues from the sale of our LDP software to a European telco. In the fourth quarter, we recognized LDP related software revenue from a second European telco customer. We expect further LDP revenue in the first quarter of 2011.

T&D sales for 2010 totaled $10.6 million and consisted of $6.5 million in hardware and $4.1 million in software and services. Our goals for 2011 include growing software related revenues and continuing to progress on our overall strategy of expanding upon our existing OEM business model.

I'll now review the biometrics and imaging business. In our biometrics business, we made progress in 2010 on developing our services business and currently have three active customer engagements and a healthy sales pipeline. These engagements are with tier one consulting firms in which we are providing products and design services, or with end user government agencies for whom we are providing the same. We see this as an obvious area for growth given the market demand for customized biometric enrollment applications and middleware solutions that interface the core matching systems.

Border control applications ranging from visa applicant programs to asylum seeker and watch list systems are under development in a number of countries. Our experience and technology depth in such programs make us a strong contender for more business in these areas. In one of the previously mentioned customer engagements we are responsible for designing an upgrade to a system in which we are tasked with delivery of biometric enrollment clients and middleware products. By winning a competitive tender for this system upgrade, we were able to gain exposure to custom software design revenues in addition to growing our footprint of component level products. We expect to begin recording revenue from the services element of this contract in the first half of 2011.

We continue to invest in our OEM biometric component business through modality-based product development, such as our R&D efforts in support of iris related technology. Support of live scan devices for fingerprints and digital cameras for facial images were also an important part of our development efforts during the year. These efforts directly support our value proposition around managing the life cycle costs of biometric enrollment systems by freeing end users to choose the best in class hardware at competitive price points.

It is very clear that the three dominant biometrics, that is finger, face, and iris, all have specific strengths and weaknesses and will all play a role in biometric systems in the coming years. Our strategy is to supply our OEM customers with high IP content, standards compliant components for all these biometric modalities while selectively pursuing a product and services model for those segments of the market where we feel we have a strong competitive advantage.

In our medical imaging product line, we saw reasonable levels of repeat business from existing customers and continue to focus on image streaming solutions with an emphasis on electronic health record applications. In Q4, we did approximately $475,000 in biometric services related revenues and are focused on expanding this customer base and revenue base. For 2010, sales for the biometrics and imaging product line were $10 million and consisted of $9 million from software licensing and maintenance revenues and $1 million of services related revenue.

Now for an update on our patent licensing operations. We had a strong year in terms of patent production, both in terms of patents issued and new applications filed. We are pleased with these developments in our patent portfolio and remain committed to creating shareholder value from these assets. As we have recently stated, we are currently reviewing strategic options with respect to our patent licensing operations, including a potential spin-off. Over the last several months as the spin-off process evolved, we addressed and made progress on various complexities encountered in such an activity. At the same time, we now have new members of our Board who will be involved in our decision making process. We will take the necessary time to work with our new Board members and incorporate their views into our decision making process. We will continue to review our strategic options and we will be providing additional information regarding these activities at the appropriate time.

Our goal for 2011 is to improve from our breakeven performance of this past year. We see 2010's results as a solid foundation for the coming year. Our strategy is to build on our existing OEM sales model to deliver higher value add products and services through more direct selling models. We are looking forward to executing on this strategy in 2011.

This concludes my prepared remarks and I'll now turn the call over to the operator for any questions.

Thank you, sir. (Operator Instructions.) And we did have a question come in from Stanley Cohen with Atrium Advisors.

Hi.

Hi, Stanley.

I'm just going through the G&A line and the comments you made about legal and patent related expenses. It looks like last quarter it was about $300,000 or so above your ongoing run rate for G&A. And then, this quarter it's about 600. So a total of about 900,000 so far. Is that correct in the past six months?

Well, the increase in G&A expense for 2010 over 2009 is primarily related to legal fees for patent filings as well as legal fees associated with the proposed spin-off of the patent licensing operations. So it's both those two type of legal fees. That spending accounts for the increase--that is the primary reason that spending has increased over the previous periods of 2009.

Right. The total for the whole year is about--an increase of about 1.3 million.

That's right.

Okay. And I assume that even the previous year there was some filing of patents also there.

That's correct. So this is an incremental increase over the legal fee spending on patents in 2009 that we're talking about driving this increase.

So at the very least, this year you spent 1.3 million on patent related expenses and more, but we don't know how much it was in 2009.

That's correct.

And spin-off related.

Oh--yes. When we were talking about patents, we were talking about patent filing expenses as well as transactional kind of costs for the spin-off.

Right. And no revenue is recognized at all?

We recognized some patent related revenue for the year, less than $500,000.

Less than $500,000. Okay. Thank you very much.

Thank you.

(Operator Instructions.) And we have no further questions at this time.

Okay. Thank you, Operator. Please visit our website, www.aware.com, for a list of upcoming trade shows we will be attending in the first quarter. Thank you very much for attending today and we look forward to speaking with you on our Q1 call. Thank you.

Once again, that does conclude our conference call for today. We thank you for your participation.