Stephens Inc., 111 Center Street, Little Rock, Arkansas 72201, (501) 374-4361, FAX (501) 377-2666, Member NYSE, NASD, SIPC
Stephens Inc. Research Bulletin
July 26, 2000
AWARE, INC. FYDec. EPS Prior Est.
AWRE– $52.94
Rating: BUY 99A $0.21
Price Target (12 mo.): $71.00 00E 0.48 $0.46
Charles Pluckhahn (617) 239-7514 01E 0.58* NC
*Fully Taxed
Reports Strong Second Quarter; Raising Target Price to $71
Aware Inc. reported a strong second quarter, showing revenues of $7.2 million and EPS of $0.11,
compared with our and analysts’ consensus forecasts of $7.1 million in revenues and EPS of $0.09. Year-to-
year EPS growth continued at triple-digit rates, showing an increase of 181% from the same period in
1999.
For those who wonder whether high-technology firms can make money, we note that Aware’s cash on
hand was $46.6 million, $4.2 million above first quarter’s balance and 47% higher than the level a year
ago.
The Company announced that it has signed Advanced Micro Devices as a customer for its Asymmetric
Digital Subscriber Line (ADSL) chip designs. AMD represents one of three customers that Aware had
told investors it had signed but could not reveal until released to do so. Previously a licensee of
ALCATEL, a major Aware rival, the AMD relationship reopens the door to several major systems
vendors that Aware’s other chip partners had lost, including Nokia, a major vendor of ADSL equipment
in the U.S. and Europe.
We have bumped up our 2000 projections for Aware to reflect the second quarter outperformance,
raising our EPS forecast from $0.46 to $0.48 for this year. Our projection for 2001 of $0.58 remains
unchanged. We note that next year’s projections assume full taxation of earnings, while this year’s
assume no taxation due to loss carryforwards. If we were to compare similar, untaxed results to each
other, past results and our projections call for Aware to grow at an annual rate in excess of 80% through
next year.
We are reiterating our BUY rating on the shares, and raising our one-year target price to $71. This
reflects our belief that, by the beginning of 2002, investors will be willing to pay 90 times our projected
EPS of $0.83 in that year, discounted at an annual rate of 10% to our target a year from now.
The driver of second quarter results was higher-than-projected royalty revenues, reflecting strong sales of
Asymmetric Digital Subscriber Line (ADSL) chips in the first quarter. Aware reports its royalty results
with a one-quarter lag, making the most recent period’s results all the more impressive. The first quarter
is usually seasonally slow, but ADSL chip demand continued apace.
In our opinion, Aware’s competitive position in the ADSL market continues to strengthen. We believe
that, in the months to come, ALCATEL’s semiconductor division will begin to leave the ADSL market.
This will leave ALCATEL’s equipment unit, which manufactures Digital Subscriber Line Access
Multiplexers and Digital Loop Carriers, looking for new suppliers of ADSL chipsets.
We believe that Aware’s chip customers, which include Analog Devices Inc. and eight other chip makers, could be in a strong position to win some, if not all, of ALCATEL’s system business. Combined with Aware’s close relationship to major chip suppliers such as Intel Corp., we think Aware and its partners could see their share of the ADSL software market climb above 50%, and possibly much higher, in the next 12 to 24 months.
In addition, we believe Aware’s ADSL applications, including its previously-announced Voice-enabled
DSL and a newly announced video delivery application, could materially enhance the Company’s chances of gaining market share as time goes by, as well as prevent what would otherwise be a rapid deterioration of royalty payments as prices for basic ADSL chips decline.
These expectations are only partially captured in our forecasts for the Company, and therefore we note
that there is considerable room for estimates to continue rising if Aware’s new applications take off in
the market and/or its ADSL chip market share rises, as we suspect it might.
Stepping back to look at the ADSL market as a whole, we see abundant signs that deployment of high-speed
services aimed at the residential market is accelerating sharply, as major telephone companies within and outside North America ramp up ADSL deployments. In the U.S., major providers SBC Communications and Verizon Communications have stepped up ADSL marketing initiatives; outside the U.S., telecom carriers in Korea, France, Britain and Germany have
announced aggressive ADSL campaigns, several of which involve chips powered by Aware’s software.
We believe more than 15 million ADSL chipsets will be sold this year, with Aware’s software installed on 40% to 50% of them; this is a far higher number than any forecasting service had projected as late as this spring.
At the moment, most of Aware’s ADSL royalties, which increased 245% from year-ago levels, are derived from chip sales made by only two companies, Analog Devices and Lucent Microelectronics. Within a year, we expect Infineon A.G., Intel, AMD and others to contribute significant royalty income; indeed, this is foreshadowed, in our view, by their current, major payments to Aware for chip development assistance.
Aware is, in our view, establishing itself as the premier provider of ADSL intellectual property in a crowded field of companies, a fair number of which are distinguished chiefly by promotional press releases as opposed to actual deployments. As a result, we expect rising earnings and a rising multiple for Aware’s stock in the next 12 to 24 months. |
