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Awareness Growing of Aware, Inc.
Aware, Inc., which develops DSL technology and software, reported a significant jump in earnings last night. The company may benefit from the increased rollout of DSL equipment, and it has an impressive, high-margin business model. However, investors should also keep in mind that the company has a small number of customers and is already pretty highly valued.
By Chris Rugaber (TMF RFK)
July 26, 2000
Digital subscriber line (DSL) technology developer Aware, Inc. (Nasdaq: AWRE) reported bang-up earnings last night and also announced a new customer for its system designs and software. The company's revenues were up 53% to $7.2 million, while earnings leapt 182% to $2.6 million, or $0.11 per share, compared to $0.04 EPS in last year's second quarter.
Aware designs, develops, and licenses DSL technology that enables high-speed communications over current phone networks. The company's customers are semiconductor and equipment manufacturers. Aware is in a position to benefit from the continued rollout and use of DSL technology to provide high-speed data, voice, and video to consumers and businesses.
What's the deal with DSL?
Many telecom carriers have increased the transmission speeds of their "backbones," the long-haul sections of their networks that connect many central offices (COs), which provide local call switching. One of the remaining challenges facing local telecom providers, if they want to offer their customers services such as broadband Internet access, is the so-called "last mile" or "local loop" from the CO to homes and businesses. Most of this local loop is copper wire, rather than the newer, faster fiber optic lines. Companies such as the Regional Bell Operating Companies (RBOCs) -- for example, Bell South (NYSE: BLS) or SBC Communications (NYSE: SBC) -- must implement DSL technology to significantly speed up voice and data transmission over the "local loop."
Until recently, many observers were skeptical of the RBOCs ability to deploy DSL on a large scale. However, spurred on by local competitors and the threat of broadband cable services, many of the RBOCs are quickly ramping up their deployments of DSL. SBC announced last week that it had added 198,000 customers to its DSL service in the second quarter, and would likely meet its year-end target of 1 million. In the first quarter this year, overall DSL deployments by RBOCs and other local providers were up 50% to 754,770 lines, according to a report from Chase H&Q.
Where does Aware fit in?
This greatly -- if indirectly -- benefits Aware. The company essentially designs chips for both COs and for consumer equipment, such as DSL modems. Its customers are chip companies such as Analog Devices (NYSE: ADI) , Infineon (NYSE: IFX) , Intel (Nasdaq: INTC) , and Lucent's (NYSE: LU) Microelectronics Group. Aware earns contract revenue for designing chipsets and software for these companies, then frequently earns high-margin royalty revenue after licensing the same products for volume sales. Its largest customer is Analog Devices, which expects to sell more than 6 million Aware-designed DSL chipsets in its current fiscal year.
During last night's conference call, the company announced that one of its newest customers is the Communication Products Division of chip maker Advanced Micro Devices (NYSE: AMD) . AMD will incorporate Aware's technology into central office multiport chips.
Aware's risks and rewards
On the plus side, Aware is very much involved in a growth market. In addition, the company is generating more high-margin royalty revenue, having shifted focus from product manufacturing to licensing intellectual property in 1998. In the most recent quarter, royalty revenues increased 266% over the previous year, and represented about 40% of the company's sales. The company expects royalties to grow to over 50% of the company's revenues by the fourth quarter of this year.
On the risk side, investors should keep in mind that the company is still small -- and dependent on a few customers, claiming only seven overall. The bulk of the company's royalties is from Analog Devices, and five customers each account for more than 10% of Aware's revenues. A loss of any of them would probably cause a significant hit to the company's earnings.
The company's stock is not exactly cheap either, with a triple-digit P/E. Nevertheless, the company's market cap is only about $1.1 billion, so there is plenty of room for growth. If DSL deployments continue to increase, investors may benefit from awareness of Aware.
Perry P. |
