AWRE

Aware, Inc. (AWRE)

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Aware, Inc. (AWRE)

Q3 2008 Earnings Call Transcript

October 23, 2008, 5:00 pm ET

Executives

Rick Moberg – CFO

Michael Tzannes – CEO

Analysts

Jeffrey Myers – Wachovia Capital

Stanley Cohen – Atrium Advisers

Presentation

Operator

Please standby. 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.

Rick Moberg

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

First of all, I’ll 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 would be available on our website at www.aware.com after the call is completed.

First, I’d like to point out that various remarks we may make about the future expectations, plans and prospects for the company and the DSL and biometrics market constitute forward-looking statements for the purposes of the Safe Harbor Provisions under the Private Securities Litigation Form 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 results in 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 decrease 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 with $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 result excludes 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. Our 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 biometrics software and DSL testing 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 testing 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 a result of increase 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 increase revenue from biometrics professional services which was mostly offset by lower revenue from DSL licensing contracts.

Royalty revenue was $437,000 for the quarter compare to $443,000 last quarter and $508,000 in the third quarter of 2007. Royalties was sequentially 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 was $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 expensive reasons for expenses going up were offset by lower cogs on hardware sales this quarter.

Our reported product gross margins were 87% this quarter compared to 84% last 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’re slightly below this range because of the provision we took to reserve a portion of our inventory. Excluding this provision, hardware margin 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 rate 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 the DSO 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.

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