[Recommendation: Buy]**** Hambrecht & Quist Company: Aware, Inc.
Price: 61
Recommendation: Buy
Notes: a,
Date: 7/22/99
Reports Second Quarter - The xDSL Momentum Continues, Maintaining BUY
Yesterday, AWARE reported second quarter EPS of $0.04, a penny better than our
estimate and in-line with consensus. The company continued to add licensing
partners in the quarter with the addition of NEC. Intel's entry into the xDSL
market accelerates the market momentum and could have direct benefits for
AWARE. We are raising our 1999 EPS estimate to $0.18 from $0.16 and
maintaining our 2000 EPS estimate of $0.35. We continue to rate AWARE a BUY.
1999 A Previous Est 2000 E Previous Est
Q1 EPS $0.03A $0..03A $0.06 $0.06
Q2 EPS 0.04A 0.03 0.08 0.08
Q3 EPS 0.04 0.03 0.10 0.10
Q4 EPS 0.07 0.07 0.12 0.12
FY EPS 0.18 0.16 0.35 0.35
FY REVS (000) 20,806 20,806 33,250 33,250
CY EPS 0.18 0.16 0.35 0.35
CY P/E NM NM NM NM
FY Ends Dec Current Price $61.00
52-Week Range $87-4 Market Cap(M) $4,444
Shares Out(M) 1,449 Book Value $1.92
Net Cash/Share $1.33 Growth Rate 40%
CY00 P/E-to-Gth NM
Yesterday, AWARE reported second quarter EPS of $0.04, a penny better than our
estimate and in-line with consensus, and compared to a loss of ($0.06) in the
year-ago quarter. Revenues in the quarter were $4.7 million, essentially in-
line with our estimate, and compared to $4.3 million in the previous quarter
and $2.4 million in the year-ago quarter. The majority of the revenues in the
quarter were from contracts, which include up-front fees and software
deliverables, with ADI, Lucent, NEC and ST Microelectronics. The company's
gross margins are divided into product and contract and were 76% and 35% in
the quarter, respectively, which was better than our expectation of 75% and
15%, respectively. Going forward we are increasing our contract gross margin
assumption to the mid 20% range. This change is somewhat offset by higher
operating expense assumptions. Operating expenses of $2.2 million in the
quarter were essentially in-line with our expectations. Based on these
modifications, and the penny upside to our second quarter estimate, we are
raising our 1999 EPS estimate to $0.18 from $0.16, while maintaining our 2000
EPS estimate of $0.35. We continue to rate AWARE a BUY as a way to
participate in the growth of the xDSL market.
Recent significant events
Intel's entry into ADSL
Recently Intel announced that it plans to enter the Asymmetric Digital
Subscriber Line (ADSL) customer premises market through a development
agreement with Cisco Systems. The two companies plan to develop a line of
ADSL modems for PCs based on Cisco's central office (CO) ADSL technology.
Intel plans to ship the modems later this year. This announcement is a major
development for the ADSL industry as Intel's backing and presence in the
market should accelerate broadband's acceptance by PC the industry. This
should in turn spur the RBOCs to accelerate their xDSL deployments. In terms
of the specifics of the Intel announcement, there are still many details that
are unknown, but we are optimistic that there could be some direct benefits
for AWARE. Our optimism stems from Intel's stated goal of having a product
available by year-end, which would most likely not be enough time for Intel to
produce a chipset in-house. As a result, in the near-term, Intel would have
to license its chipset from either Analog Devices (ADI), Lucent
Microelectronics, Alcatel or Globespan. Should Intel license its chipset from
ADI and Lucent Microelectronics aware would benefit as it has relationships
with both of them. It is important to note that for the past year ADI and
AWARE have been working closely with Cisco on its ADSL platform, with which
Intel plans to be interoperable. In the longer-term, Intel would probably try
to produce a chipset internally which might be accomplished through technology
it acquired as part of Level 1, or it could have to buy a chipset
manufacturer. Regardless of whether AWARE is a direct beneficiary of Intel's
plans, Intel's mere entrance into the ADSL market should accelerate ADSL
rollouts and thereby AWARE.
AWARE's signs licensing agreement with NEC
During the quarter AWARE entered into a licensing agreement with NEC
Corporation, the second largest semiconductor manufacturer in the world. NEC
will incorporate AWARE's IP into its full-rate chipset, which provides both
G.Lite and ADSL functionality. NEC will then market this chipset to telecom
and networking systems providers and modem manufacturers worldwide. Currently
NEC is paying AWARE up-front payments that should continue for the next
several quarters at which point future revenues for AWARE will become
dependent on chipset sales volumes, which we believe should result in
meaningful royalties next year. We believe that announcements such as this
one continue to solidify AWARE's role as IP provider for the coming xDSL
deployment. We expect AWARE to continue to announce licensing agreements in
the future.
Raising 1999 EPS estimate, maintaining 2000 EPS estimate and BUY rating
This quarter AWARE continued its strategy of licensing its IP by adding NEC to
its list of partners. The xDSL market continued its momentum with the
entrance of Intel but is still at an early stage in its growth. We continue
to believe that AWARE is going to continue to announce licensing agreements
and thereby solidify its role as IP provider for the coming wide-scale xDSL
deployment. We are raising our 1999 EPS estimate to $0.18 from $0.16. We are
maintaining our 2000 EPS estimate of $0.35. We continue to rate AWARE a BUY
as a good way to participate in the growth of the xDSL market.
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