A report on Aware which uses a lot of GG terms....I'm hoping to find the time to do a full "Project Hunt" style report on them soon. I know that accepted wisdom is that DSL is a royalty game...but they look promising.
Stephens Inc. Research Bulletin
January 28, 2000
AWARE, INC. FYDec. EPS Prior Est.
AWRE? $35.81
Rating: BUY 99A $0.21
Price Target (12 mo.): $61.00 00E 0.38 NC
Charles Pluckhahn (617) 239-7514 01E 0.56 NC
Reports a Strong Quarter, Beats Consensus
Aware, Inc. reported fourth quarter and full year results for 1999 yesterday. The
Company posted
quarterly revenues of $6.1 million and earnings per share of $0.08, beating the Street?s
consensus of
$0.07 and our estimate of $0.06. For the full year, Aware reported revenues of $20.5
million, a 74%
increase over the prior year, and EPS of $0.21. Our rating on Aware shares remains a
BUY with a one-year
target price of $61.
The quarter?s strength was driven by a more favorable revenue mix than we had
projected. Total sales
were within $31,000 of our forecast, but high-margin product revenues and pure-profit
royalties were a
shade stronger than we had forecast, while lower-margin contract revenues were a bit
weaker than
expected. We note that the upside surprise represented a swing of only $340,000 in
income, $110,000 of
which came from interest income that exceeded our forecast. The impact on EPS is
magnified by the
Company?s untaxed position, which should continue throughout 2000 as Aware works
off its net
operating loss carry-forwards.
Obviously, interest income is a function of cash on hand and rising interest rates, both of
which have
exceeded expectations. As investment bankers, we?d love to find a way for Aware to
lose money, as
would many investors who see profits as a hopeless anachronism in today?s breathless
dot-com market.
Alas, under CFO Rick Moberg?s able stewardship, the Company?s cash on hand
continues to rise at a
smart pace, topping $36 million at the end of the quarter. It might be flawed thinking, but
at some point
we believe investors will want their companies to make money.
Company fundamentals remain positive, in our view. During the fourth quarter, Aware?s
main chip
customer, Analog Devices Inc., announced that it had shipped its millionth Asymmetric
Digital
Subscriber Line (ASSL) chipset. In October, the Company announced that it had
reached a long-term
agreement with Intel Corp. under which the computer giant will incorporate Aware?s G.
Lite and full-rate
ADSL technology in chips to be used in a product line that we expect to appear in the
second half of
2000. If we take a broad view, Aware?s growing collection of chip customers
represents a veritable
who?s-who of the global chip industry, as do the end-users in both the telecom
equipment and consumer
modem spaces.
The Consumer Electronics Show in January saw widespread announcements embracing
G. Lite and full
rate. Many investors have apparently overlooked the fact that most industry players have
embraced
Aware?s ?fast retrain? technology that enables use of ADSL without a telephone
company visit to a
subscriber?s home, as well as helping to ensure high quality transmission as ADSL
penetration grows
within a neighborhood.
Going forward, we believe investors and other market participants will more fully
realize the
Company?s position as one of the key enablers of ADSL technology. In the
coming months, we expect
Aware to introduce a number of extensions to its technology, including software
features that will make
ADSL easier for phone companies to deploy, along with voice over DSL and
other networking
technology enhancements.
Key patents should be issued from the U.S. patent authorities beginning this
year, and while we have not
incorporated revenues from them into models at this point, we think investors
will begin adding royalties
from third parties into their Aware models at some point in late 2000 or 2001.
Perhaps more importantly
in the current press release-driven environment, we think patent awards, along
with promotions by
current customers and agreements with new chip makers, will raise Aware?s
public profile as the premier
ADSL software provider. At that point, we expect investor sentiment to shift,
perhaps dramatically, as it
had done with other prominent suppliers of telecommunications software.
We previously modeled the Company?s revenue growth rate for 2000 at 48% based on
continued growth
of the DSL marketplace with Aware acting as the preeminent supplier of ADSL
technology to chip
manufacturers. We believe the strength displayed in the fourth quarter will continue this
year and will
lead to an 84% increase in EPS to $0.38 per share. Further out, we have projected an
EPS of $0.56 for
the year 2001. Nothing stated in yesterday?s conference call with management nor
anything seen in the
marketplace of late has led us to alter out projections.
Recent events such as the FCC?s decision to require incumbent local exchange carriers
to open their
networks to DSL service providers could help to quicken the roll-out of DSL in 2000
and 2001.
Additionally, the AOL/Time Warner merger creates a formidable foe in the broadband
market and should
help provoke the Regional Bells to roll out service at a more rapid pace so that they can
beat the cable
companies to market.
While it is always advisable to cast a skeptical eye upon any promotional announcements
surrounding
ADSL or any other technology coming from the Regional Bell companies, especially
when such
promises come from top managements with every reason to portray themselves as
technologically up to
date. Still, we think our projections fairly account for the risk of slow roll-out. We
therefore reiterate our
BUY recommendation and one-year price target of $61 on Aware?s shares.
Publicly traded companies mentioned in this report:
Analog Devices (ADI - $96.06)
AOL (AOL - $61.63)
Intel (INTC - $98.13)
Time Warner (TWX - $85.75)
Stephens Inc. maintains a market in the common stock of Aware, Inc. and may act as
principal in these transactions.
BUY?one-year price appreciation expected to be greater than 20%; MARKET
OUTPERFORMER?one-year price
appreciation expected to be between 10% and 20%; NEUTRAL?one-year price
appreciation expected to be less than 10%;
SELL?whenever warranted. |
