Executives
Leanne Sivers – Shelton Group
F. Scott Moody – Chairman of the Board & Chief Executive Officer
Gary R. Larsen – Chief Financial Officer
Lawrence J. Ciaccia, Jr. – President
Analysts
Romit Shah – Barclays Capital
Steve Smigie – Raymond James & Associates
John Barton – Cohen & Co., LLC
AuthenTec, Inc. (AUTH) Q4 2008 Earnings Call February 17, 2009 5:00 PM ET
Operator
Welcome to AuthenTec’s fourth quarter full year and 2008 financial results conference call. At this time all participants are in a listen only mode. At the conclusion of today’s conference call instructions will be given for a question and answer session. (Operator Instructions) As a reminder, this conference is being recorded today, Tuesday, February 17, 2009. I would now like to turn the call over to Leanne Sievers with Shelton Group, Investor Relations Agency of Record for AuthenTec.
Leanne Sievers
Thank you everyone for joining us today to discuss AuthenTec’s fourth quarter and full year 2008 financial results. With me today on the call are Scott Moody, Chairman and CEO; Gary Larsen, CFO; and Larry Ciaccia, President. As the operator mentioned, this call is being recorded. It is also being broadcast live in voice mode over the Internet and may be accessed over the Internet in the investor relations segment of AuthenTec’s website at www.AuthenTec.com.
After the market closed today AuthenTec issued a press release discussing the financial results for the fourth quarter and fiscal year ended January 2, 2009. By now everyone should have access to the press release and financial tables. However, if you do not, they are available on the company’s website.
Please be advised that the matters discussed in this teleconference contain forward-looking statements regarding future results or events. We caution you that such statements are in fact predications that are subject to risks and uncertainties that could cause actual events or results to differ materially. Additional risks and uncertainties that could cause actual events or results to differ materially from these forward-looking statements may be found in the company’s filings with the Securities & Exchange Commission.
Forward-looking statements are based on the company’s beliefs as of today, Tuesday, February 17, 2009. Authentic undertakes no obligation or responsibility to publically update any forward-looking statements for any reason except as is required by law even if new information becomes available or other events occur in the future.
Additionally, in the company’s press release and during this teleconference management will discuss certain measures and information in GAAP and non-GAAP terms. A reconciliation of GAAP to non-GAAP results is provided in the financial tables following the text of the press release.
I will now turn the call over to AuthenTec’s Chairman and CEO, Scott Moody.
F. Scott Moody
As always thank you for joining us today for our fourth quarter earnings call. We are certainly all sharing in a challenge economic environment but before I go in to how we are responding I’d like to start with some of our accomplishments with respect to our fiscal 2008. Revenues were up 22% from 2007 as we launched some key new products and added a few brand name customers.
I am also pleased to note that we generated a profit of $2.7 million on a non-GAAP basis, the first full year profit in our company’s history. Finally, we were able to generate $2.4 million in cash bringing our yearend cash and investment total to $68.7 million. However, as the global economy began to deteriorate in the fourth quarter our business was also affected resulting in a 37% sequential drop in revenues and a loss of $0.02 per share. While the loss was at the midpoint of our guidance, any loss is very disappointing especially after five straight quarters of profit.
I’ll leave the rest of the financial results for Gary to address. Let me instead turn my focus towards the future. There is no doubt that we find ourselves in some very challenging times. We expect revenues to be down materially again in Q1 similar to many in the industry and despite the fact that we have more customers today than we did a year ago.
We believe our revenues are being impacted by four factors: first, the macroeconomic conditions are causing both businesses and consumers to substantially cut back on purchases; second, our sensors are generally included on higher end laptops which have been impacted more than other categories of laptops; third, in some cases our sensors are offered on a build-to-order basis, although we might sell our sensor for around $3 or $4 these options are offered for something more like $30; and finally, there continues to be a high level of inventory in the various channels.
At this point we believe we are seeing an abnormally low Q1 and are presently anticipating revenues in the range of $6 to $7 million for the reasons I just stated. However, we also believe that we are under shipping the market demand and thus expect revenues to recover to some degree in Q2 and as the year progresses. The reality of the situation is that other than the macroeconomic conditions nothing is fundamentally changed about our business this quarter. In fact, we have the same set of customers now as we did back in the third quarter of 2008 including HP, Lenovo, Dell, Fujitsu PC, Acer, Asus, Toshiba, Fujitsu Wireless and Samsung. Customers are simply buying less.
Given these circumstances, we are focusing on three strategies to navigate through the downturn and position ourselves for eventually recovery: first, we are lowering our overall cost structure to adjust to the near term decline in revenue; second, we are working to increase our penetration of the lower end laptops and netbooks; and third, we are targeting to expand the adoption of fingerprint sensors in the wireless space. We believe these three strategies are critical to our success.
I’ll now go through the various measures that we are taking to implement these strategies starting with our cost cutting actions. As we have noted before we have taken a number of actions to reduce discretionary spending including such things as outside services and travel. We have also begun to implement a workforce reduction that including contractors will result in a reduction of about 20% from our headcount at the beginning of Q4.
In addition, we have cancelled both merit increases for 2009 as well as our cash bonus program. This applies to everyone in the company. Finally, we will be implementing salary reductions from 5% to 10% for close to half our organization. Gary will go over the full impact of these actions in a minute. Nevertheless, if we do not see revenues recovering, the new products taking hold as we would like, or the cost measures taken to date to be sufficient we will no doubt have to reexamine our position and take further cost actions as necessary.
Let me now turn my attention to the revenue enhancement side of our strategy. To that end, our belief in the potential for this market is as strong has it has ever been. It is simply not that hard to imagine that at a cost of just $2 to $3 that a sensor should be on virtually every PC and cell phone on the market. The natural question then is, why is that not happening? Well, let’s not forget that until the unexpected downturn we believe it was happening.
Over these last few years we have seen the list of customers deploying sensors grow while at the same time seeing PC attach rates climb. As a reminder, we grew 22% last year and until the drop in the fourth quarter our year-to-date revenues through Q3 were up 43%. Until just recently the expansion of fingerprint sensors was following some pretty standard historical trends.
As you would expect, new features tend to be initially introduced as parts of feature rich, more expensive laptops. Then, as the costs go down and the utility go up these new features tend to migrate to the lower end of the laptop market and even the desktops. We began to see this transition in practice with at least one OEM as we recently secured our first material design win in a netbook. This new netbook, actually and upgrade to an existing offering is expected to launch in Q2 with both XP and Linux operating systems.
Netbooks are an exciting new market for us as IDC recently reported the market grew to 10 million units in 2008 and forecast its doubling this year. Certainly good news but, our job now is to make that transition to the lower end laptops happen even faster. Fortunately, we already started down that path last year. First, we continue to make very good progress on the development of our new PC sensor product called Marcy. Marcy is expected to be the lowest cost sensor in our history as we presently estimate that its cost will be roughly 30% lower than the products it’s replacing.
Moreover, without going in to details at this time it will be featured in a more aesthetically pleasing manger, something that is important in the PC market today especially in consumer models. Marcy is presently scheduled to be introduced in the third quarter.
Second, we plan to introduce a new application package with Marcy called True Suite. This is our first endeavor in to the application software market and we believe that True Suite will offer the convenience and ease of use that the average user expects and wants. Up until now the experience that users were having with our sensor was more likely related to the application software provided by third parties then by the AuthenTec sensor itself. We expect that an early version of True Suite will begin shipping in Q2 to one of our existing customers. A more feature rich version is targeted to begin shipping with Marcy when that is introduced later this year.
I’ll also note that both Marcy and True Suite are being targeted for the new Microsoft Win 7 operating system being planned for release later this year. This is the first OS with native fingerprint sensor support which should greatly enhance the overall user experience while helping drive PC attach rates.
The other area that we continue to focus on and invest in is wireless. As in the PC market we are not simply waiting for our new products in order to accelerate attach rates. As a result, I’m pleased to note that yesterday at the Mobile World Congress, Acer announced their first Smartphone’s including their M900 which incorporates our [ADS 1711 sensor. You can see pictures of this new phone and our sensor on their website as well as I understand YouTube and we look forward to providing you more details on this quad bad world phone at a later date.
We are also encouraged by other opportunities that could help drive incremental wireless revenues as early as Q4 of this year. I’ve always been hesitant about speaking about design wins since they don’t always make it to full production but these design prospects represent opportunities between a few 100,000 sensors a year to over a million per design.
Beyond the design opportunities we’re pursuing now primarily based on our [ADS 1711 product, we are seeing a lot of excitement around our new Rogers product for the wireless market. We had originally planned on introducing this market in Q2 but due to the first pass success in silicon design, we are already showing it to customers and received a great deal of positive feedback. I will note that Rogers is the first product designed specifically for our new [touchstone packaging technology.
Both Rogers and Marcy and the solutions that go with them go beyond the minimal utility of being used as a logon device but are truly multifunctional user input devices that take full advantage of our power of touch. We are seeing a great deal of interest in the mobile market, for example for using our sensors integrated TruNav capabilities to replace the nav buttons on the phone with 360 degree touch pad like navigation capabilities. Interest is also high for using the sensor to personalize your device or secure your documents. With the additional focus on digital identities in the cyber world and initiatives like Open ID and Oath, our solutions can solve the problem of uniquely identifying and authenticating the person and not just the device they’re are using whether it be a PC or a cell phone.
In summary, we have three strategies that we are pursuing concurrently beyond the expectations that revenues should recover in Q2. First, as you can see by our Q4 results and the measures I’ve already mentioned we are reducing our costs and will continue to do so as warranted by market conditions. Second, we are working aggressively to position our new Marcy sensor and True Suite application package for the growth portion of the PC market. Third, we are optimistic that our prospects in the wireless market and the interest around our new Rogers product will drive incremental revenues both this year and next.
With that, let me turn it over to Gary.
Gary R. Larsen
Revenue for the fourth quarter of 2008 decreased 26% from the prior year quarter to $11.6 million reflecting weakening demand across our end market as a result of macroeconomic conditions. This compares to $15.7 million reported in the fourth quarter one year ago and $18.4 million reported in the third quarter of 2008.
On a non-GAAP basis gross margin excluding stock-based compensation was 45.8% in the fourth quarter. This compares to 50% in the fourth quarter 2007 and 47.3% in the third quarter 2008. The decrease in gross margin can be attributed to the impact of lower revenues on the absorption of manufacturing support costs and a price decline in one of our older small form factor sensors.
Operating expenses excluding stock-based compensation were $6.2 million in the fourth quarter. This compares to $7.4 million in the same period one year ago and $7.9 million in the third quarter of 2008. The $1.7 million sequential decrease in operating expenses is due to reduced expenses in labor and hiring, decreased commission due to lower sales volume, lower material costs due to timing of tape outs and reductions in discretionary expenses such as travel, outside contractors and consultants.
In addition the fourth quarter included a $300,000 reduction in expenses related to an incentive plan accrual which was adjusted to reflect actual results. On a GAAP basis net loss for the fourth quarter of 2008 was $1.3 million or $0.05 per diluted share. This compares to net income of $898,000 or $0.03 per diluted share in the fourth quarter of 2007 and net income of $550,000 or $0.02 per diluted share in the third quarter of 2008.
Non-GAAP net loss which excludes stock-based compensation charges of $585,000 and an other than temporary impairment charge of $266,000 related to a student loan backed auction rate security was $493,000 or a $0.02 per diluted share. This compares to net income of $1.3 million or $0.04 per diluted share in the fourth quarter of 2007 and net income of $1.4 million or $0.05 per diluted share in the third quarter of 2008. Non-GAAP net loss per diluted share for the fourth quarter 2008 was computed using 28.6 million outstanding shares.
Looking at the full year 2008 results, revenue was $63.9 million which was up 26% compared to $52.3 million in fiscal year 2007. The increase versus the prior year was primarily in the PC market driven by gains in market share and growth in notebook sales during the first three quarters of the year. Gross margin for 2008 improved slightly to 47.9% as compared to gross margin of 47.4% for 2007.
Non-GAAP operating expenses for 2008 totaled $30.2 million compared to $26.7 million in 2007. Operating expenses increased in 2008 primarily as a result of increased investments in R&D for future product development and to support designs going in to production. On a non-GAAP basis net income for 2008 was $2.7 million or $0.09 per diluted share and compares to a net loss of $171,000 or a loss of $0.01 per diluted share for 2007.
Turning to the balance sheet, our cash position improved in the fourth quarter driven by operating cash flow of $1.5 million. Fiscal 2008 ended with approximately $68.7 million in cash and investments an increase from both the $66.3 million at the end of 2007 and the $67.8 million at the end of the prior quarter. As of January 2, 2009 accounts receivable were $4 million which is a decrease from the $6.4 million in the year ago quarter and the $8.4 million as of September 2008.
Days sales outstanding for the fourth quarter were 31 days down 14 days from 45 days in the third quarter of 2008. The decrease in DSO was due to strong collections of customer payments during the quarter and the timing of shipments which were weighted to the beginning of the quarter. At the end of the fourth quarter inventory was $5.8 million which represents 83 days on hand. This compares to $6.9 million or 69 days on hand at the end of the third quarter of 2008. We expect our inventory levels to drop further in the first quarter 2009 as we adjust our inventories to reflect the lower demand level.
Capital expenditures for the fourth quarter were $675,000 and depreciation was $318,000. Before discussing our outlook for the quarter I’d like to go through the actions that Scott discussed that are being taken to reduce our operating expenses. First, we have focused on reducing discretionary expenses. We have instituted additional restrictions and cost controls on travel, consultants and other outside services.
Second, we are implementing a workforce reduction across the various functions of our company which will reduce our headcount by 20% including contractors. Third, the cash bonus plan is being eliminated in 2009 for all employees and finally we are cancelling all merit increases in 2009 and will be instituting salary reductions for approximately half of our employees. In total we expect these actions to save more than $5 million in 2009.
However, I will point out there are certain areas where expenses will increase in 2009. As Scott discussed earlier our new product development activity will be robust in 2009 which will result in higher tape out and other development costs. In addition, litigation related legal expenses will increase as the Atrua litigation proceeds forward. In total these cost will rise approximately $2 million in 2009 offsetting some of our cost saving actions.
I would reiterate Scott’s point that we will be monitoring our expense levels and are prepared to take further actions if conditions require. With regard to guidance we expect the PC market to weaken sequentially in the first quarter as a result of reduction in demand as inventory levels are reduced throughout the various channels. As a result, we expect our revenue to range between $6 million and $7 million for the first quarter.
Driven by the lower revenue, we expect our non-GAAP loss per share to range between $0.14 and $0.16 in the first quarter. To further clarify our EPS guidance I will walk through the various P&L lines. First, we expect our gross margins to remain in the mid 40% range as a favorable mix offsets the negative cost absorption impact from the lower revenues. Regarding operating expenses, as previously discussed we have taken or are in the process of taking actions to reduce these costs in 2009.
However, in the first quarter we are being impacted by increases in certain costs which will result in a sequential increase in op ex. This includes investments in tape outs and other costs related to our new products under development, audit and Sarbanes-Oxley compliance related fees for the 2008 audit and litigation related legal expenses. We expect our operating expenses to be between $7.0 and $7.5 million in the first quarter. This is approximately 15% above the operating expense level that we expect for the second quarter of 2009 which will reflect the full impact of our cost reduction actions.
In addition, the earnings on our investments are being impacted by falling interest rates. This will reduce our interest income earned in the first quarter to approximately $175,000. We believe that the first quarter will be the trough in 2009 from a P&L standpoint as our cost reduction actions lag the rapid decline in revenues. Although we are not providing guidance for the second quarter, we do expect sequential improvement in the bottom line from the full impact of our cost reduction actions and modest improvements in revenues.
We will now hand the call back to the operator who will facilitate the Q&A session.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Romit Shah – Barclays Capital.
Romit Shah – Barclays Capital
I’ve got a couple, just first on the op ex guide of $7 to $7.5 million, can you tell us if you ex out some of the one timers that may be hitting in Q1 what the run rate might look like?
Gary R. Larsen
What we’re expecting Romit, and we should see this in Q2 is that we’ll be probably about 15% down from that range I gave in Q1 so we’d expect to be in the low $6 million range once these actions are fully in place and some of the one timers work their way out in Q1.
Romit Shah – Barclays Capital
If I think about your op ex going forward and some of the cost reduction measures you’ve taken can you give us a sense of what revenues you need to get to cash breakeven?
Gary R. Larsen
Once we’re at the low $6 range with the margin levels we’re expecting this year, that puts us probably in the high $13 million range for cash revenue breakeven.
Romit Shah – Barclays Capital
My last question guys is just on your comments about just the revenues being weak. Some of the other PC suppliers like NVIDIA and [Intersil] have talked about shortages and there’s been some chatter about rush orders and it sounded like the PC chip supply chain may have over corrected at least temporarily so I’m a little surprised to hear you guys talk about inventory still being at elevated levels. So, I’m just wondering if we could get just a little more color on maybe way AuthenTec is in a bit of a different position as we stand here in Q1?
F. Scott Moody
I think two things first off we’re really seeing order trends change on a daily or weekly basis at this point Romit. So, my opinion on any given day might be slightly different in terms of what we see so there’s still quite a bit of fluctuations. I think that’s probably what guys like NVIDIA and [Intersil] see as well. We see some of that with specific OEMs.
At the same time whereas they might be used on larger percentage of the laptops out there. As I had mentioned earlier we have generally been used in the higher end laptops which I think has been hit proportionately a little more. Then, a number of our sensors, a couple of our customers have offered them, at least on certain models, as a build-to-order. So, I think those two things might make us a little bit different than other guys but there is a lot of flexibility between OEMs and even weekly in what we see as order demand now, part of the reason we gave a relatively wide revenue range.
Romit Shah – Barclays Capital
I didn’t hear you mention pricing as one of the factors for the revenue weakness. Should I assume it’s hanging in there?
Gary R. Larsen
Yes, right now Romit we’re not seeing in Q1 any kind of abnormal. I mean in 2008 we had price erosion of about 11% to 12%. Looking in to the first part of the year it looks pretty consistent with that.
Operator
Your next question comes from Steve Smigie – Raymond James & Associates.
Steve Smigie – Raymond James & Associates
I was hoping you could talk about what you think cash flow will look like in Q1?
F. Scott Moody
The guidance we gave for non-GAAP EPS is around the $4 million loss. We do think we’ll probably pick up some from working capital but we will burn some cash in Q1 probably something in the $3 to $3.5 million range.
Steve Smigie – Raymond James & Associates
Now, going in to Q2 that would probably improve some because you probably have some cash costs here for some of the cost reductions or some cash layouts for that so in theory in Q2 you had the revenue op ex down and then you don’t have the charges there for the workforce reductions, etc.
F. Scott Moody
Q1 like I said will be the trough from a P&L and also from a cash basis. So, we expect Q2 between some revenue recovery and the cost reductions being fully implemented to be less of a cash burn in that quarter.
Steve Smigie – Raymond James & Associates
As Romit asked, have you seen any expedite orders like other people? While I have been hearing that as well it seems like it is a little bit fanatic and sometimes you get rush orders and then rush orders are cancelled so have you been part of those rush orders as well even though the guidance is down?
F. Scott Moody
Well, the answer is yes. In fact, we had some last night and the customer pulled in all their CRDs. But, then again, they could change their mind again next week. Not to make light of it but we’re just trying to be conservative. I think one of the things if you look at our Q3 guidance when we provided that, I think there were a lot of the same questions. We seem to be a little lighter if you will then others but that’s at the same time when I think we provided that revenue guidance Intel was assuming a 3% increase sequentially and by the time the quarter ended it was a 23% decrease.
So, we’re just trying to factor in what we’re seeing and provide a proper revenue forecast. But you know in fact, last night we did see one of our customers and a larger one pull in virtually every CRD that they had on our backlog.
Steve Smigie – Raymond James & Associates
Just some housekeeping stuff, can you talk about units and ASP in Q4?
Gary R. Larsen
The units Steve were for the quarter we did a little over 3 million in units and ASP was about 360.
Steve Smigie – Raymond James & Associates
Then Scott, if you don’t mind if you could give the quarterly update on the handset business adoption, opportunities, what are guys doing? I heard some stuff from near field communication guys that you’ll probably start to see some stuff happen in 2010 with a huge ramp in 2011. Again, that was before some of this stuff blew up and that was just sort of near field communication. I would assume you guys are somewhat tied to that potential ramp and just sort of general handset update.
F. Scott Moody
I think actually while I still believe that’s, if you will, the killer app and you certainly need security if you’re going to carry money around on your phone, I don’t think we’re necessarily tied to that. For one, we’re very pleased, we had mentioned it earlier but Acer last night in the conference over in Barcelona announced their entry in the Smartphone market and one of their first products the M900 includes our fingerprint sensor.
That’s not only used for security but I think one of the things I mentioned in my remarks was it starts to take advantage of the idea of the power of touch. So not only is the fingerprint sensor being used as the security device but it’s also being used as a navigation device so you can just move your finger around on that fingerprint sensor and it navs just like a touchpad or a joystick or anything else like that, tap your finger for select. So, we’re seeing what we call TruNav.
Right now that’s actually a software function but I understand there’s actually some videos up on YouTube by people over there that are showing it and it looks pretty good. But, the new sensor Rogers not only uses touch stone, one of the nice thing about touch stone is you now have a completely flat smooth surface so it even feels better for the user, you can do it in multiple colors. Our first color is basic black but we’re actually demoing or will be demoing soon other colors like red, white and blue in fact are our first three colors in addition to black.
So, there’s a lot of interest around Rogers and the thing about that is it actually integrates a lot of that navigation directly in to the sensor so it’s even more responsive, faster, easier to use. I think Acer is a highlight at least for this phone call of what we see as the future opportunity around the cell phone market. It’s going beyond security and using the other power of touch capabilities.
The other thing is and again, I’m always a little leery of talking about design wins particularly in the cell phone space since they have a higher probability of not making it into full production as compared to let’s say a PC design win, usually. But, we do have a few opportunities moving forward now which I think could provide meaningful revenue for us as early as Q4 of this year and certainly in 2010.
So, the interest level in the cell phone market has moved beyond just interest. Acer has clearly designed us in. We have some other design prospects that should show up or could show up in Q4 and then we’re relatively optimistic on a number of other opportunities that we see that could hit revenue in 2010 notwithstanding the incremental opportunity that when you put your money on that cell phone there’s even more interest in securing that device.
Steve Smigie – Raymond James & Associates
If I could squeeze one more in, could you talk about how you’re relationship is going now with the large customer that you loss a major order with and how that situation is development?
F. Scott Moody
When we first announced that design or design loss we expected that we’d see a material impact in probably Q3 of 2009. However, as I believe we mentioned last time that looks more like Q4 or likely even Q1 of 2010. First off in today’s world with things changing so rapidly when you’re talking about Q1 of 2010, that’s almost forever away at this point so certainly a lot of things can change in the next year.
Moreover, we had assumed that our share of that customer would probably go to zero or close to zero in 2010. With what we know now and what we now believe we believe that will not be true although it’s very early to predict share for 2010. However, we believe that we will continue to be a vendor to this customer in 2010. I think probably with each phone call we’ve had the news is probably gotten better.
The first one was it will disappear or materially go away in Q3 of 2009 now on our last call that moved to the first quarter of 2010 and now we do believe that we’ll continue to be a supplier to that customer throughout 2010. I can’t tell you the particular share at this point for one I don’t know. But, I would say that since we made that announcement things have continued to improve.
Operator
Your next question comes from John Barton – Cohen & Co., LLC.
John Barton – Cohen & Co., LLC
Scott, if we could go back to your last response regarding the dynamics of that major customer and I know you don’t want to talk about specifics of who it is or what it is or what happened but categorically can you give us a feel for why did the view improve? Was it new product introductions on your part, slips of schedules potentially on a competitor’s part, a change in strategy at the customer? What do you think is changing that dynamic from rather quickly going to zero to at a distant point going to something a little greater than zero.
F. Scott Moody
Let me just say that even when we did announce that we did say that we continue to have very good relationships with the customer which I think is true and we’ve continued to work at it. I don’t want to get in to any specifics of their plans or their thoughts but we continue to work at it and will continue to work at it to recover.
John Barton – Cohen & Co., LLC
On the topic of op ex you talked about getting to about the $6 million level in Q2 obviously some of those cuts that got you there are at least somewhat temporary in nature. I think you also made a comment in your prepared statements that if the demand profile got even worse you could make further cuts. Could you just give us a sense of how you’re thinking about things going forward? If we see a recovery in revenue how quickly would you expect to reinstitute those pay cuts and vice a versa if it goes the other way what you would do?
F. Scott Moody
I don’t know necessarily if the ones we see are temporary. I mean obviously your question on pay cuts is a good one. I haven’t really thought about reversing that at this point and I’m sure for all the callers and employees sitting on this phone call they might be disappointed to hear that. But, I haven’t really thought that far out John. I think our focus right now is to make sure that our costs are in balance with what we see in the market.
We do expect as Gary mentioned the recovery in revenue in Q2 and then throughout the rest of the year. I mentioned earlier fundamentally we’re shipping to the same customers, the same products and the same laptops this quarter, in essence, at least that’s most true that we were in Q3 so there’s really no fundamental change to our business with respect to Q3 when we did $18 million or so and then of course this quarter. So, we do expect as many other companies, some recovery through the course of the year.
Let’s just see what happens and if that does recover then obviously we’ll look at our costs including salary cuts on the other side of that. If it doesn’t then we’ll have to make other decisions as well.
John Barton – Cohen & Co., LLC
On the topic of netbooks you talked about a win, you talked about it being a primary strategy as you go forward. Other than just price points what is it that you think is going to be necessary to increase the adoption in netbooks?
F. Scott Moody
It’s not just necessarily netbooks, let’s just throw in all lower end or lower cost laptops and I think your point is very right John, it’s not just a matter of cost because in the market today any costs is not a good cost if it doesn’t bring utility and value to the end customer. That’s where I think some of the functionality in terms of the aesthetics of Marcy is important. For competitive reasons we’re not disclosing that at least publically at this point and directly with customers. But, it also plays to the whole value proposition of True Suite.
People are really looking for a product that does replace their passwords, that does authenticate them when they’re getting on to the network or the laptop themselves, it does encrypt their files but, they’re looking for that to be very convenient, very easy to use. That’s not always been true. A number of the application packages offered out there have in essence not been overly convenient. That’s not true for all of them but certainly it’s true for a number of them and they’ve been really targeted towards different markets.
We’re very much focusing the value proposition on that consumer, on the user of the laptop to make their experience a lot easier and a lot more convenient. In fact, John I mean there are a number of cases where people aren’t even aware that there is a fingerprint sensor integrated in to the laptop and are not maybe sure how to use it. Some of the things about True Suite that we’ve developed will help with that discovery and then the learning and using how to fully utilize the sensor.
So, you’re right it’s not just cost, cost is very important and that’s why we continually drive down our cost but at the same time it’s striving up that value proposition. One of the things I didn’t mention with Marcy, although I said that it would be 30% lower than the products, our cost would be 30% lower than the cost it’s replacing. The other thing about Marcy is the [inaudible] the build and material costs.
In the past, generally speaking the build and material associated with our sensors has been in the let’s say $0.45 to $0.50 range. The build and material for Marcy will be more in the $0.07 to $0.08 range. So, you can see that the total cost of integration is going to be a lot less.
John Barton – Cohen & Co., LLC
Would you be willing to just break out revenues basically across PC, wireless and end access for the December quarter?
Gary R. Larsen
John, it was actually relatively consistent with what we saw during the year. So, PC was about 83%, 12% wireless and about 5% access control.
John Barton – Cohen & Co., LLC
Final question if I could, Scott just competitive dynamics what are you seeing out there as far as people pulling back or people coming in to the space?
F. Scott Moody
I’m not seeing anybody coming in to the space at least that I’m aware of. But, to that end it’s a tough market. The fortunate thing is that as a public company we are in good position in terms of the cash. As Gary and I have both said we certainly don’t want to spend it and we’re going what’s necessary to protect that cash value in the company. But of course, a lot of private companies now find it very difficult to raise funds so to that end there may be some advantage to us but at the same time I don’t necessarily see anybody pulling back and we certainly haven’t seen any new entrance.
Operator
Your next question will come from Steve Smigie – Raymond James & Associates.
Steve Smigie – Raymond James & Associates
Just as a follow up on the competitive question, can you talk a little bit about how you guys compare to competitors technology wise and cost of manufacturing wise?
F. Scott Moody
Well I can’t say that I know all of their costs. I do think we certainly have a very competitive cost structure. Our TruePrint technology, the live layer, RF field capability that we do have allows us to significantly reduce the size of our sensor. So, in our understanding is we have a very, very good cost position as compared to our competitors and we continue to drive that down.
Not only did I mention a reduction in Marcy of 30% from prior products as well as the significant reduction in the build and material costs but we actually believe we can drive that down further in the future. So, our cost reduction road map has not stopped and at the same time Steve the value proposition goes up. In a cell phone or in a smaller let’s say netbook we truly can be used as the navigation device replacing the nav costs that may already be in that phone or in that netbook. So, we’re not only driving down cost but we’re driving up that value proposition as well.
Steve Smigie – Raymond James & Associates
Can you give an update on the [Atrua lawsuit?
F. Scott Moody
In terms of the specifics of the patent litigation itself it continues to move forward. We think we’re in a very good position with respect to the patent aspects of that case and overall in the case in general. So, it will be playing out for quite a while I’m sure.
Steve Smigie – Raymond James & Associates
Last is just can you talk about you had had I think some wins in stuff like GPS devices or I guess P&D is a better way to say it, some opportunities for keyboard, lights any of that stuff developing or is that still now pretty far off?
F. Scott Moody
The answer is yes. In fact this last quarter [Menion] introduced three new P&Ds. We’re certainly knocking on the door of many others and we are seeing continued increased interest, especially in some keyboard opportunities. Not as material in terms of their volume opportunities with let’s say the lower end laptops, low cost laptops or cell phones which is why I didn’t specifically mention them but we continue to have a lot of opportunity outside those two spaces.
Operator
At this time I show no more questions in queue. I’d like to turn the call back over to Mr. Scott Moody. Please proceed.
F. Scott Moody
I want to thank everyone for taking the time to listen in today. In closing I want to emphasize once again that we have more customers today than we did a year ago and believe that we are currently under shipping the market demand. When you combine these factors with our continued investments in new products we believe we have every opportunity for a return to growth.
With that said, on the other hand as we move forward in the coming months we will continue to monitor the business conditions and are prepared to take further cost actions to ensure our expenses are properly aligned with what we see as our future revenues. With that we can end the call and again thank you very much to everybody that listened in.
Operator
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.
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