Exhibit 99.1
[LOGO] Aware, Inc.
On our August 4, 2005 earnings release conference call, we invited investors to
email questions to us. We are pleased with the healthy response to our request.
The following represents a selection of questions that we believe serves our
intended purpose of furthering the understanding of Aware by our investor base.
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Can you estimate the total available worldwide market for ADSL2+ and VDSL?
Specifically, how many installed ADSL lines world wide are there currently that
are available to be upgraded to ADSL2+ or VDSL2?
According to Infonetics Research, there were just over 97 million subscribers as
of 12/31/04. And according to Point Topic, there were 107 million subscribers as
of 3/31/05. The vast majority of these are legacy ADSL lines and therefore
currently available for upgrade to ADSL2+ or VDSL2.
How many phone lines are there world wide currently and are thus, potential
ADSL2+ or VDSL2 customers?
There are, according to the DSL Forum, over 1 billion phone lines installed and
this number is continuing to grow. The DSL Forum has established a goal of 500
million subscribers by 2010.
What are the estimates for new phone lines and ADSL2+/VDSL2 connectivity in
emerging geographic markets (e.g. China, India, Africa, etc.)
According to Infonetics, at the end of 2004, DSL subscribers were geographically
distributed as follows:
41% of lines were in the Asia and Pacific (including Japan and Australia)
region
36% of lines were in the Europe, Middle East and Africa region
17% were in the North America region
6% were in the Caribbean and Latin America (including Mexico) region
We have not compiled enough research data to provide reliable references
addressing new line additions in specific emerging geographic markets at this
point in time.
When speaking of the demand for new applications, you mentioned something about
180 million in 2008. What exactly was this in reference to?
Infonetics has published the following estimates for the size of the ADSL
chipset market (includes VDSL). (Note that we generally refer to what Infonetics
calls "DSL aggregation hardware" as central office (CO) equipment):
In 2006: 93.6 million CPE chipsets and 62.9 million DSL aggregation hardware
chipsets. Total 2006 ADSL chipset market: 156.5 million.
In 2007: 109.7 million CPE chipsets and 63.7 million DSL aggregation hardware
chipsets. Total 2007 ADSL chipset market: 173.4 million.
In 2008: 120.4 million CPE chipsets and 65 million DSL aggregation hardware
chipsets. Total 2008 ADSL chipset market: 185.4 million.
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AWARE, INC. O 40 MIDDLESEX TURNPIKE O BEDFORD, MA USA 01730-1432
TEL: (781) 276-4000 O FAX: (781) 276-4001 O E-MAIL: AWARE@AWARE.COM
These forecasts presume that new services and/or devices will be deployed in
large numbers on lines already in service. The emergence of a replacement market
for DSL chipsets is new and is being driven by new applications such as IPTV and
triple play services.
In your profitability example, you used 140 million chips as your base. What
year was this for?
We didn't specify a year. As we've detailed above, Infonetics forecasts estimate
that the ADSL chipset market will be greater than 140 million in each of 2006,
2007 and 2008. Infonetics also estimates that the VDSL chipset portion of the
market will be 14.9 million units in 2006, 23 million in 2007 and 30.3 million
in 2008.
In our illustration we used market estimates of 115 million ADSL and 25 million
VDSL chipsets.
In the same example(s), you mentioned 30% and 50% profitability based on 50% and
75% market shares. Again, what year was this scenario for? Moreover, was this
"profitability" gross profit, EBIT or after-tax net income? What level of
contract revenue and revenues from product sales, biometric and compression did
this factor in?
As we mentioned above, it was not for a specific year, but instead for that time
period for which the market is 140 million units.
The estimates of percent operating margin are derived from the estimates of
revenue generated from licensing products minus the expenses associated with
that revenue, divided by the revenue generated from licensing products.
We assumed that, during the 140 million unit year, our estimated contract
revenues from licensing were $7.5M. We believe this is a conservative estimate,
based upon the fact that our contract revenues were approximately $7.5M in 2004
as well as over the last twelve-month period. We're optimistic that based upon
new product developments such as StratiPHY3 that we will be able to grow
contract revenues.
We assumed no revenues or expenses from product sales or biometric or
compression sales. We also assumed no income taxes.
What ratio of CPE to COE do you expect in the next five years? Likewise for
chips.
The Infonetics ratios appear to be reasonable to us. These are provided in a
previous answer. (Note that we call "central office equipment" what Infonetics
calls "DSL Aggregation Hardware"). Note that these ratios suggest that there is
a growing replacement market for the CPE DSL market, i.e. a market for new
devices being sold for lines already in service.
Are ADSL2+ modems based on StratiPHY2+ backwards compatible with ADSL? If so,
would telco carriers start shipping ADSL2+ modems even to plain new ADSL
customers so that they can more easily upgrade those customers to ADSL2+ service
when it becomes available?
Yes, StratiPHY2+ supports ADSL2+/ADSL2 and legacy ADSL. The idea that carriers
would ship modems capable of supporting ADSL2+ prior to turning on ADSL2+
service so that they could easily upgrade makes sense to us.
Can you elaborate on the strategic thinking behind providing new solutions such
as an analog front-end solution to the existing StratiPHY platform?
We see the ability to enable new entrants into the market as a key value
proposition. StratiPHY2+ and StratiPHY3 provide the digital functionality needed
to support DSL. In order for an equipment
supplier to connect to the telephone network, analog functionality is also
required. This is typically called an analog front end (AFE) and supports
conversions from the digital to the analog and from the analog to the digital
domain. These conversions are required to send and receive the ADSL signals over
the telephone wires.
The primary reason for developing this technology is to enable a larger group of
companies to enter this exciting industry. With Aware's AFE, technology
companies who do not have their own AFE technology or do not wish to purchase
from the third party AFE market, can access analog functionality from Aware,
their ADSL vendor.
On the AFE development -
a) Is this AFE meant to be integrated into the current StratiPHY2+ or StratiPHY3
designs - to make it a single-chip solution similar to what BRCM's ADSL2+
chipset have today?
b) Will AWRE sell an actual chip itself or just be selling the IP to the AFE
design?
c) Will the AFE be supporting both VDSL2 and ADSL2+ standards?
d) Its a CMOS based design I guess. Does it include an integrated line driver?
At this point, we have not disclosed those details. We may be doing so as we get
closer to product release.
What portion of the new standards (ADSL2+ and VDSL2) are based on IP protected
by your patents?
In how many countries do you have DSL patent protection?
Aware has a strong DSL patent position and has filed for patents in many
countries around the world to protect our intellectual property. Certain of our
inventions are being used in ADSL2/2+ and VDSL2 standards. Our intention is to
protect our inventions with our patents.
How many customers contributed to your contract rev line in Q205?
You had mentioned 6 customers (ADI, IFX, Thomson, ATML and 2 others undisclosed
names) in total. Specifically, did ADI and/or IFX contribute any revenue on this
line item in Q2?
We have six companies currently under license for StratiPHY2+ based product
developments. We did not, and do not intend going forward, provide details on
which customer projects contribute to contract revenues in a given quarter.
Do you have the % of DSL market share of AWRE's licensee now occupies - in Q205?
You had mentioned that your licensee has about 10-15% share on your Q1 earnings
call.
On our Q1 conference call, we presented that:
Based upon then-current Infonetics data, the total 2004 ADSL chipset market was
about 94 million DSL ports (58 on the central office side and 36 on the customer
premise side) and we believe that our customers captured between 10 and 15
percent of that market.
We do not have sufficient new information to be able to update this share
estimate at this time.
Is your contract revenue a good indicator or does it have a strong correlation
as to how much your future royalty revenue will be? Or there is no correlation
at all.
Contract revenues are generated from customers who are developing ADSL chipsets
based upon our technology. We believe that a larger number of customers'
chipsets in the market should
increase our likelihood of capturing market share, which should improve royalty
revenues. There is therefore a correlation.
How should I think about the time lag in which contract revenue today will lead
to royalty revenue tomorrow as your licensee start to deploy their product in
the market place? Does it take 6-months, 12-months or 18-months?
StratiPHY is a complete digital implementation of DSL standards. One of the main
objectives with this product solution was to make it was to make it easier for
our customers to get to market, thereby reducing our time-to-royalties. Analog
Devices introduced a production version of StratiPHY2+ (the EaglePlus ADSL2/2+
PHY) within six months. In other cases, and depending largely upon the amount of
additional functionality being integrated by our customers, this takes longer.
The 6-18 month range is a reasonable estimate. Note that there is no guarantee
that a specific chipset development will lead to market success and royalty
revenues for Aware.
Can you break out in % of revenue in your royalty line - how much ADSL2+
contribution vs. ADSL? I would like to get some sense of ADSL2+ penetration your
licensee has to-date and the upside potential of ADSL2+ contribution in the
future.
We expect that by the end of next year, most deployments of ADSL will involve
ADSL2+ technology. We do not have enough data relating to what percentage of the
overall ADSL market today is ADSL2+-based to be able to provide a sense of
ADSL2+ penetration.
Could you give us more OEM/ODM that are using chipsets from your licensee other
than the ones you mentioned on the conf call? You mentioned 3 CPE names
Comtrend(TWN), Netopia(US), Sagem(Fr) using ADI and Alcatel, Adtran, ZTE,
Siemens that are using IFX's CO chipsets.
We generally defer to our customers to announce their customers. As of our last
check, this was the list that our customers had announced. We intend to continue
to monitor and update this list.
It seems some equipment vendors, i.e. Netopia, announce multiple chip suppliers
for various DSL equipment. Is this unique or normal?
We think this is normal. Netopia is likely to use any chipset that has the
potential for improving Netopia equipment sales.
How many licensee do you currently have for DSL2+ ? Please name them when
possible. How many of them have produced working chip? Please provide chip name
when possible.
We have announced that we have six licensees of StratiPHY2+. These are ADI, IFX,
Thomson, Atmel and two others. All of these customers are developing chip
solutions using StratiPHY2+.
Infineon and ADI have also licensed previous generations of DSL technology from
Aware (prior to StratiPHY).
Announced working chipsets from our customers that support ADSL2+ are:
ADI: EaglePlus and Fusiv chipsets.
Infineon: Geminax Max chipset, Amazon chipset, VINAX chipsets.
How many licensees do you currently have for VDSL? How many of them have
produced working chips? Please provide chip name when possible. Do you have any
licensee paying you on VDSL2 technology on the contract revenue line? If so, can
you provide some color as to the % contribution by technology; VDSL2 vs. ADSL2+.
We have only announced our relationship with Infineon who is one of our largest
customers. Their VDSL2 chipset (which also supports all flavors of ADSL) for CO
and CPE applications is called VINAX. We do not provide a breakout of contract
revenues by technology.
Who is your direct competition in DSL2+? VDSL? How do their products compare to
yours?
Our competition is mostly from chipset companies who have ADSL, ADSL2+ or
VDSL1/VDSL2 chipsets but are not Aware licensees. These include: ST
Microelectronics, Conexant, Broadcom, and Texas Instruments. In VDSL the
competition includes Conexant, Broadcom and Ikanos.
We believe that our technology is as good as or better than these companies'
technology. Our customers compete effectively against these companies in the
marketplace.
Another important element of differentiation is that we provide a solution to an
economic challenge that the DSL semiconductor industry is facing. We presented
this in detail on our earning release conference call on August 4, 2005.
In your press release of the licensing agreement with Atmel, you mentioned their
intention to integrate Aware IP in LAN and WAN applications. Please describe how
this is accomplished technically and practically and who would be vendors making
equipment integrating this chip?
Our StratiPHY product is typically integrated by our customers with other
functionality into a chipset. A common example of additional functionality is
known as a network processor, which processes the ADSL packets received from
StratiPHY. This packet processing generally supports local area network (LAN)
functionality. In some cases the LAN is wireless. StratiPHY's DSL processing
supports wide area network (WAN) functionality. The combination of StratiPHY and
the network processing functionality addresses LAN and WAN applications.
Manufacturers of ADSL CPE equipment would be target customers for this chip.
Thomson SA has been mentioned as a major "blue-chip" licensee. Do you know if
they intend to use Aware IP exclusively in their own CPE equipment or will they
be selling their chips to 3rd party vendors? How are they going to use your IP?
Will they outsource semiconductor production to TSMC? Where will they get their
AFE?
Thomson intends to use StratiPHY2+-based silicon that they develop for Thomson
modems. We cannot comment on any intentions that they have not made public.
You mentioned going after "a whole new set of companies". What are kinds of
companies are these? Please describe. Are they equipment companies (i.e. not
semiconductor companies)? Please give an example.
The new set of companies was in reference to companies that are not in the DSL
market today and are enabled by our technology and business model to do so
efficiently and cost effectively. With our StratiPHY licensing products, we have
simplified a complicated, diverse set of DSL technologies so that they can
easily and cost-effectively be used by any semiconductor developer.
On our most recent earnings release conference call we mentioned network
processor companies who are not in the DSL industry, such as Intel, Freescale,
Philips. We also mentioned that companies in the video processing or wireless
LAN markets would be targets. There are a number of companies who sell chipsets
for these markets.
Have you spoken with STM, TI, CXNT, or LU about licensing your IP? If so, are
these discussions still ongoing or ended?
Is your expressed "optimism" based on discussions with competitors or just on
the possibility of discussions with competitors?
We are in contact with a number of companies, including some of the ones you
mention, on a regular basis. We contact them when new products are released
(such as StratiPHY2+ and StratiPHY3) and when we can present new value
propositions.
We believe that the emergence of the new ADSL2+ and VDSL2 standards, the
opportunity for new applications and services, the availability of StratiPHY2+
and StratiPHY3 and the attractiveness of the economic model that we enable, have
improved Aware's value proposition to newcomers as well as to established DSL
chipset suppliers.
When do you expect to begin realizing royalties from VDSL2? How quickly do you
see existing pre-ADSL2+ deployments being replaced with VDSL2 deployments?
Infineon's VINAX chipset has been introduced to the market. We don't know how
quickly sales will ramp. It is too early for us to predict the impact that the
new VDSL2 standard will have on the market.
I am trying to understand Aware's position within the biometrics, epassports and
smart card industry. You have mentioned working with Cogent and Identix and
annually participate in the NEC conference, are these companies purchasing Aware
biometric software? How many engineers do you have working on Biometrics &
Imaging?
When do expect to see consistent and meaningful revenue from this product line?
Are your products commercially deployed? Or are they still in the testing phase?
Who are your customers? Who is your competition in this field?
Our biometrics products are software tools that enable integrators, solution
providers, and government agencies to compress, analyze, optimize, format, and
transport biometric images and data according to international standards.
We have a number of commercially deployed products, including:
- WSQ BY AWARE, to compress digital fingerprint data for use by law
enforcement agencies such as the Federal Bureau of Investigation.
- NISTPACK, SEGMENTER, CJIS WEB, ACCUPRINT, AND ACCUSCAN, used by law
enforcement agencies for transaction processing such as to format,
edit, validate, store, and print fingerprint and facial images.
- JPEG 2000 CODEC BY AWARE used primarily by medical imaging OEMs for
the compression and decompression of still images using the
high-quality, wavelet-based method defined by the JPEG 2000 standard.
Our target markets in biometrics are OEMs that provide biometric enrollment
systems and system integrators. This market includes companies such as Lockheed
Martin, Crossmatch, Unisys, SAIC, Identix, Northrop Grumman, Heimann Biometrics
and NEC. Fingerprint matching and/or biometric transaction management systems
are provided by companies such as Motorola, Sagem, NEC, Cogent, Identix, and
numerous system integrators. We have a large number of customers in this area,
but have not to date disclosed our customer list in detail. Cogent is not
currently a customer.
Our goal is to grow revenue from our biometrics products by capitalizing on:
- the expanded use of biometrics other than fingerprints.
- the expanded use of biometrics outside law enforcement applications.
Our e-passport and personal identity verification (PIV) products are new
products in our biometrics area.
Why were your product sales down year over year? Are they expected to be growth
businesses in the future over the long term?
Products sales were down because of lower hardware sales associated with our
ADSL test and development systems, modules and modems.
What are the prospects for JPEG2000 being used for HDTV?
We believe that the standards for HDTV are in place: Microsoft VC-1 and ITU
H.264 both have HDTV modes of operation. Neither of these use JPEG2000 today.
What are your plans to increase the awareness of your company among financial
institutions?
We believe that as we continue to build our business, that awareness will come.
Aware has had many analysts covering the company in the past and we are hopeful
that we will be able to attract analysts again.
What was the deferred revenue at June 30? Is it up or down from the $572K level
at Mar. 31?
Deferred revenue at June 30 was $562K down slightly from Q1.
Why is your basic and fully diluted share count the same? Shouldn't the fully
diluted share count be greater to reflect outstanding stock options under the
treasury stock method?
Because we had a net loss, we are required to calculate loss per share using
basic shares so that the loss per share is not smaller or diluted.
How much in NOL tax loss carryovers does the company have available?
As disclosed in our 2004 Form 10-K, at December 31, 2004, the company had
approximately $58 million of Federal and State net operating loss carryforwards,
and $14 million in Federal and State research and experimentation credits.
As a long time investor in Aware, I was disappointed in the Q2 earnings
announcement yesterday. My main concern going forward is Aware's negative growth
and lack of any quarterly accountability that all public companies are subject
to. Seems like you are dealing with a moving horizon of success that is always
12-18 months away. Here are my questions.
Is Aware's ability to grow revenues to and past profitability tied to timing
issues? If not, then what?
As we laid out on our conference call, there are a number of factors underway in
the market that we believe are beneficial to us putting us in a position to
benefit as the ADSL2+ and VDSL2 markets take shape. We also feel that there is
an economic advantage to working with Aware that will attract new customers. We
encourage you to listen to a replay of our conference call for more details.
When do you believe that Aware will be able to forecast quarterly earnings with
some predictability?
We have been able to in the past. We hope to be able to do so again in the
future.
The Verizon announced approach to "triple play" seems crazy to me. But, I have
to assume they are not dumb and that they understand ADSL, VDSL, 2way cable,
wireless, etc. Why are they doing this?
I know it would be easy for you to say "you have to ask them". But please give
it a try.
We believe that Verizon thinks that fiber-to-the-home provides them with a
future-proof solution. A solution that, while it takes longer and is more
expensive, provides a capability that will be able to beat the cable companies
over the long term. By doing this, we believe that they believe they are
providing a vision for success for their company.
I should have added that I can understand that if a telco is in a very dense
city like NYC it could make sense to go to the home/apt. But, why not stop there
and use the existing copper to go to the tv, pc, tele etc.? If you did that
wouldn't you need Aware technology?
Most phone companies are in fact intending to deliver fiber to points near homes
and then using existing copper (with ADSL2+ and VDSL2) to connect the rest of
the way to the home. Our DSL technology is addressing this market. If you
deliver fiber all the way to the home, you would probably use existing cable or
wireless inside the home. There is also the potential of using electrical wiring
to distribute content around the home. If one were to use wireless, cable or
power line, you would not need Aware's DSL technology.
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Safe Harbor Warning
Portions of this Form 8-K contain forward-looking statements regarding future
events and are subject to risks and uncertainties, such as estimates or
projections of future revenue and earnings and the growth of the DSL and/or the
biometrics market. Aware wishes to caution you that there are factors that could
cause actual results to differ materially from the results indicated by such
statements. These factors include, but are not limited to: we have a unique
business model, our quarterly results are difficult to predict, we depend on a
limited number of licensees, we derive a significant amount of revenue from a
small number of customers, we depend on equipment companies to incorporate our
technology into their products, we face intense competition from other DSL
vendors, DSL technology competes with other technologies for broadband access,
and our business is subject to rapid technological change. We refer you to the
documents Aware files from time to time with the Securities and Exchange
Commission, specifically the section titled Risk Factors in our quarterly report
on Form 10-Q for the quarter ended June 30, 2005 and other reports and filings
made with the Securities and Exchange Commission.