AWARE RESPONDS!!! DSL Companies and the Stock Market
I told them to get the stock price out of the toilet or I was going to be knocking on their door.
--------------------------------------------------------------------------------
October 27, 2000
The stock prices of DSL companies have experienced sharp declines over the last few weeks. In our opinion, stock prices have fallen because certain DSL companies reported disappointing earnings or future outlooks, which have created the perception that the entire DSL industry has slowed. This perception appears to be negatively affecting Aware’s stock price. In this perspective piece, we intend to analyze what’s happening in the DSL industry and to explain why Aware is healthy and thriving. To do this, we have identified three key factors about ADSL and Aware.
FACTOR 1 – Market Distinction
Investors must first distinguish between those DSL companies that offer ADSL products and services from those that offer non-ADSL DSL products and services. Non–ADSL DSL products and services include those based on HDSL, HDSL2, SDSL, SHDSL, and VDSL. ADSL is a worldwide market that is driven by the growing desire for high-speed Internet access. ADSL serves a mass residential market. ADSL chipsets are expected to grow to 20 million chipsets this year and to over 40 million next year. This market is growing and healthy.
The other forms of DSL serve smaller business markets (e.g., HDSL, SDSL, SHDSL) or a limited subset of the residential market (e.g., VDSL). These forms of DSL do not represent the growth potential of ADSL.
Some of the DSL companies that have disappointed Wall Street are focused on products and service offerings based on non-ADSL DSL. In particular, we are referring to CLECs and the equipment companies that provide equipment to them for symmetric services.
Aware is focused on the ADSL market.
FACTOR 2 – ADSL Industry Trends
Now that we’ve separated the ADSL from the non-ADSL DSL market, let’s focus on what is happening within the ADSL segment. Strong worldwide demand for ADSL services is shaping the fabric of the ADSL value chain. As ADSL has grown, dominant players have benefited most. Dominant companies in their segment of the chain are winning because they have natural advantages.
Incumbent service providers around the world are winning because: 1) they own their networks and customers, 2) they have the capital to build out their networks, 3) they can deploy without depending on others, and 4) they can bundle service offerings, such as voice and data.
Large multinational equipment companies, like Nortel, Lucent, Alcatel, Cisco, and 3Com are winning because: 1) they have strong relationships with service providers, 2) they have manufacturing scale and capability, 3) they have high value solutions today, and 4) they have strong product roadmaps for the future.
Dominant semiconductor companies are winning because: 1) they have an early mover technology advantage, like Analog Devices and Alcatel, 2) they have strong customer relationships with equipment companies, and 3) they have a feature-rich roadmap that improves equipment and services.
Some of the ADSL companies that have disappointed Wall Street are smaller ADSL pioneers that do not possess the natural advantages listed above. Their results reflect the emerging dominance of the better positioned larger companies. We believe that because of the spotlight on these pioneers, investors have incorrectly assumed that their problems mean the ADSL market has slowed. We do not see this at all. Customer demand for ADSL services remains robust and far from satiated.
FACTOR 3 – Aware Specific Advantages
Finally, we believe that there are three advantages that Aware enjoys that positions us to be successful within the ADSL industry.
Aware has an early mover technology advantage - ADSL technology is not a commodity. Technology can favorably affect the profitability of service providers’ ADSL offerings. Better technology means more subscribers. Aware has been working on physical layer ADSL technology since 1993. We have developed extensive know-how based on the deployment of millions of Aware-enabled chips around the world. We have built a feature-rich technology based on core ADSL and enhanced by new developments, such as VeDSL, Dr. DSL, DMT-Flex, and video-over-DSL. We believe that most of our competitors’ technology is today where we were several years ago.
With ADSL technology from Aware, our customers bring our early mover advantage to bear in their ADSL chipsets quickly.
Product diversification – Aware has diversified its presence in the ADSL market by working with different customers on chipsets targeted at specific DSL platforms. We have 11 separate development projects under way to develop ADSL chips for DSLAMs, digital loop carriers, switch upgrades, modems, personal computers, and gateway/integrated access devices. Regardless of which ADSL platforms dominate the market, we have positioned ourselves so that we and our customers will be in the market with successful solutions.
Business model - Our business model combines the strength of our technology with the strengths of some of the largest, most prestigious, and most innovative semiconductor companies in the world. In other words, we are aligned with some of the dominant semiconductor manufacturers that possess the natural advantages we discussed above. We believe this is a powerful combination that will enable Aware-based ADSL chips to capture more than 40% of the ADSL market.
These advantages have produced a track record for Aware of which we are very proud. On Thursday October 19, 2000, we held an earnings conference call during which: 1) we reported Q3’00 earnings of $0.15 versus a consensus estimate of $0.12, and 2) provided a positive outlook for the company, including Q4’00 and full year 2001 financial guidance.
In conclusion, based on our focus on ADSL technology, continuing favorable trends in the ADSL industry, and Aware specific advantages, we are confident that Aware will continue to thrive in one of the most exciting industries today.
This commentary contains certain statements of a forward-looking nature relating to future events or the future financial performance of Aware. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include the risks that Aware has a new and unproven business model, that Aware depends on a limited number of licensees, that Aware depends on equipment companies to incorporate its technology, and that DSL technology competes with other technologies for broadband access. These and other risks are described in various filings that Aware has made with the Securities and Exchange Commission, which risks are incorporated herein by reference. |
