Larry Ciaccia - CEO
Philip Calamia - CFO
Brett Perry - Director of IR, Shelton Group
AuthenTec, Inc. (AUTH) Q4 2011 and Full Year 2011 Earnings Conference Call March 1, 2012 5:00 PM ET
Welcome to AuthenTec’s fourth quarter and full year 2011 financial results conference call. At this time all participants are in a listen only mode. At the conclusion of today’s call instructions will be given for a question and answer session. As a reminder, this conference is being recorded today, Thursday, March 1, 2012. I would now like to turn the call over to Brett Perry with Shelton Group, Investor Relations Agency of Record for AuthenTec.
Thank you everyone for joining us today to discuss AuthenTec’s fourth quarter and full year 2011 financial results. With me today on the call are Larry Ciaccia, AuthenTec’s CEO, and Philip Calamia, CFO. As the operator mentioned, this call is being recorded. It is also being broadcast live over the Internet and may be accessed in the investor relations section of AuthenTec’s website at investors.authentec.com.
After the market closed today AuthenTec issued a press release discussing its financial results for the fourth quarter and year ended December 30, 2011. 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 predictions 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, Thursday, March 1, 2012. AuthenTec undertakes no obligation or responsibility to publicly 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 today’s press release.
I will now turn the call over to AuthenTec’s CEO, Larry Ciaccia. Please go ahead Larry.
Thanks Brett. Good afternoon and thank you for joining our call today. Phil and I will be reviewing our fourth quarter results in detail but before we do that I would like to recap and highlight what was a very successful 2011 for AuthenTec.
We ended the year at $69.8M in revenue, up 56% Y/Y from the $44.7M in 2010
Were profitable on a non-GAAP basis for the last 2 quarters of the year
2H’10 to 2H ’11 we improved our non-GAAP operating income from a loss of $7.3M to a profit of nearly $3.5M, an improvement of over $10M on an operating basis
Full Year Gross margin up nearly 500 basis points from prior year
Successfully completed a major integration of UPEK ahead of our cost synergy targets
Completed 2 tuck-in acquisitions to advance our strategic direction
Had several major customer programs launch including : the first Android smartphone in the US with fingerprint sensor, HBO Go with our content protection services, multiple smartphones with our IPSec VPN clients, HP consumer notebooks with a version of our TrueSuite Software called SimplePass, and also announced architectures with ecosystem partners around NFC based mobile payments.
With regards to our Q4 results we had revenues of $18.8M at the midpoint of our guidance, down 2.7% sequentially and up 30% Y/Y. On a non-GAAP basis our EPS was $.04 per share, ahead of our guidance of $.01 to $.02 per share.
Our Smart Sensor Revenue in the quarter was $10.4M, down 13% sequentially and up 5% Y/Y. The sequential decline was due to several factors, including softness in the PC market and platform transitions in Wireless.
In our Embedded Security business, we had an outstanding Q4 with revenue of $8.4M, a record quarter for this business -- up 15% sequentially and 83% Y/Y. This achievement was driven in part by ongoing growth in the two revenue categories that we view as key: license revenue from new design wins, and royalty revenue. A primary driver of the sequential growth was royalties associated with our HW IP and DRM product lines. This business, by its nature, is subject to variability quarter by quarter and we have benefited from particularly strong royalty revenues over the last several quarters. We continue to focus on a solutions-based market approach, leveraging our broad portfolio of mobile and network security products in order to provide security to and from client devices and the cloud. During the quarter we announced several new initiatives and customer programs in support of this.
Our content protection and DRM solutions for server, iOS and Android devices are experiencing solid revenue growth, and numerous customer programs have recently launched. Three North American content providers launched new mobile services using our DRM solution. We are now part of live content services in 8 European countries, some of which are associated with very well known network and content providers; and our second DRM customer in Asia, a large wireless carrier, launched a major mobile video service.
As we have stated on previous calls, our standard business model in this area involves an upfront license fee and per unit royalties, so we believe these launches will drive future revenue as adoption grows and customer downloads of the applications increase. Many of these customers are utilizing our downloadable DRM agent for content viewing applications that can be found in the iTunes app store and the Android Market.
We continue to expand our content protection solutions and recently announced the first of our planned offerings around High Bandwidth Digital Content Protection or HDCP. This specification was developed by Intel to protect digital entertainment content as it is sent from PCs, set-top boxes, tablets and mobile phones to displays like flat panels, TVs, and projectors. Our solution includes a dedicated hardware engine that protects full HD content and DRM agent software for mobile, set-tops and consumer electronics makers. HDCP has broad industry support from content providers including Disney, Warner Brothers, and Sony Pictures.
With regard to our IPSec VPN client for Android Smartphones, our mobile VPN client is well positioned to leverage the growing trend by IT managers to extend security policies for laptops to new mobile devices including smartphones and tablets. I have previously mentioned design wins with Motorola, LG and NEC. Our mobile VPN client continues to gain traction, and it was shipped on more than 4 million smartphones during the fourth quarter.
In our sensor offerings for smartphones we have begun volume shipments of our AES-850 for Fujitsu’s first Android smartphone, the REGZA T-01D. Our 850 provides security that locks and unlocks the phone and enhances the speed and security of NFC mobile payments. The phone also incorporates our DataDefender app, allowing users to secure access to their favorite Android applications with one swipe of a finger. This is significant as it is the first consumer android smartphone to take advantage of our portfolio of mobile applications that combine security with convenience, and expand sensor functionality. We are very excited about the launch of this phone as we believe it represents the expansion of fingerprint-enabled NFC smartphones in Japan and will help drive growth in that region this year.
We continue to focus on establishing fingerprint sensors as foundational security for NFC transactions. To that end, we demonstrated at CARTEs a secure SIM based solution for NFC mobile payments with Oberthur, another leader in the field of secure technologies and authentication. The fingerprint/NFC demonstration combined Oberthur’s NFC FlyBuy and SIMFlex with our sensor to enable single-swipe, biometrically secured NFC payments. Oberthur and AuthenTec worked with INSIDE Secure, a leading provider of NFC technology, to implement control of NFC functions using the fingerprint/FlyBuy solution. This represents an extension of our previously announced SD and microSD based NFC architectures with NXP chipsets as we continue to aggressively partner with leaders in the ecosystem.
At Mobile World Congress this week we demonstrated our extensive offering around mobile security, including our new VPN Client 2.0 which launches VPN via fingerprint authentication. a fingerprint-enabled soft card launch application for NFC, DRM content protection, new HDCP solution, and new sensors for smartphones and tablets. Fujitsu displayed a new quad-core Android phone that integrates our 850 sensor and NFC mobile wallet application, with plans to offer it in Japan and Europe. We also introduced our new Secure Device Architecture, or SDA at the show to address the growing needs of our customers around security and encryption. Our new SDA includes a new “data at rest” solution and new SafeZone middleware that meets FIP-140 security requirements. This architecture is our latest offering to enhance mobile security as we continue to innovate around this important strategic direction for our company.
Now to touch on a few other areas of the business:
During CES earlier this year we announced our fingerprint solutions are being used in multiple new Lenovo ThinkPads. Lenovo has been using our unique offering to enable Power on Authentication, where a simple finger swipe powers up the laptop, providing a very secure, yet easy to use, environment. Working together with Lenovo we have extended this feature to reduce the time to boot up, or the time needed to come out of standby. We believe this will be an important differentiating feature as the trend to reduce PC response time continues.
We also announced a new solution for Apple OSX Lion and Snow Leopard based MACs. We have updated our MAC software suite to leverage many of the features of our windows based TrueSuite offering and combine it with our Eikon USB fingerprint reader. This is the first of several initiatives to enable the growing number of Apple platforms with our fingerprint based offerings as well as make them available through multiple channels including our webstore and Apple.com.
In our government and access control touch sensor business we have secured design wins in China that we expect to drive revenue growth. China has been a key focus area for this business, and we believe we will significantly grow our share in the banking and government sectors.
Also during the fourth quarter, we completed two small acquisitions that will extend our solutions offerings in multiple areas of our business.
We acquired Seattle based PeerSec Networks to extend our secure communications offering around mobile and network security. We offer products around many of the industry standard communication protocols like IPSec and MacSec. With the addition of Peersec, we now add SSL (secure Socket Layer) and TLS (transport layer security) to our offering. We now offer a proven software solution that uses a very small footprint and is optimized for embedding in a broad array of IP connected devices that communicate with each other and to the cloud. The PeerSec integration is essentially done. We have begun full integration into our product roadmap, secured our first design win and launched our first new product as part of the secure device architecture.
We also acquired Southern California-based Proxure during the quarter, adding cloud based and online back-up and syncing services between PC and mobile devices. This is a B2C as well as B2B business and is very synergistic with our existing product plans. Proxure’s KeepVault service has been offered on our webstore and enables fingerprint enabled cloud based back-up and restore. We have planned to offer sync-ing of fingerprint enabled identity management functions like password replacement and quick launch across tablets, smartphones and PC’s, and through this deal will now be able to accelerate those efforts. We announced this morning a deal with Western Digital that bundles our KeepVault backup service with their DX4000 family of Sentinel storage servers for business. Our KeepVault provides an integrated, cloud based backup service option for this new server offering from Western Digital.
Although both of these acquisitions were small compared to some of our prior deals, we are very excited about their role in advancing our strategic initiatives.
I will now turn it over to Phil for the detailed financials.
Thanks Larry, and good afternoon everyone.
Revenue for the fourth quarter of 2011 was $18.8 million. The $18.8 million was comprised of approximately $10.4 million of revenue from Smart Sensor Solutions and $8.4 million from Embedded Security Solutions.
Smart Sensor revenue decreased from the $12.0 million recorded in the third quarter of 2011 and increased from the $9.9 million recorded in the prior year quarter. The sequential decrease of $1.6 million or 13% was attributable to lower sales in each of the Smart Sensor Product lines which, as Larry mentioned, was impacted by softness in the PC market and various customer platforms being completed in the prior quarter.. The increase of $500 thousand from the prior year period was primarily due to an increase in our Government and Access Control product line offset by lower sales in our PC and wireless product lines.
The Embedded Security revenue of $8.4 million represented a record quarter and a 15% sequential increase and a $3.7 million or 81% increase over the fourth quarter of 2010. Both the sequential and year over year increases were driven primarily by increased license and royalty fees associated with our HW IP and content protection products.
On a GAAP basis, consolidated net loss during the fourth quarter was $600 thousand dollars, or one cent per share. This compares to GAAP net income of $201 thousand, or break even per diluted share in the third quarter of 2011 and a loss of $17.7 million or $0.48 cents per diluted share for the prior year quarter.
Looking now at our results on a non-GAAP basis, non-GAAP gross margin for the fourth quarter was 63.7 percent, compared to 57.9 percent in the third quarter of 2011 and 51.4 percent in the fourth quarter of 2010.
The 580 basis point sequential improvement in gross margin was due primarily to a higher mix of Embedded Security Solutions revenue during the quarter. Total operating expenses on a non-GAAP basis of $10.0 million were $400 thousand or 4% higher than the third quarter of 2011primarily due to higher R&D spending. Fourth quarter non GAAP operating expenses were $1.4 million or 12% lower than the prior year quarter primarily due to synergies realized as part of acquisition integration activities.
On a non-GAAP basis, consolidated net income for the fourth quarter of 2011 was $1.8 million, or $0.04 per diluted share. This compares to non-GAAP income of $1.7 million, or $0.04 per diluted share, in the third quarter of 2011 and a non-GAAP net loss of $3.8 million, or $0.10 per diluted share, in the fourth quarter of 2010. Non-GAAP results exclude certain legal and other one-time costs, stock-based compensation, amortization of acquired intangible assets and severance.
Non-GAAP EPS for the fourth quarter was calculated using a weighted average of 45.7 million shares outstanding.
Turning to the balance sheet, we ended the fourth quarter of 2011 with $20.4 million dollars in cash and investments. This compares to $20.6 million dollars in cash and investments at the end of the third quarter of 2011.
As of December 30, 2011, accounts receivable were $9.4 million dollars, as compared to the $11.3 at the end of the third quarter of 2011.
Days sales outstanding for the fourth quarter were 46 days, as compared to 53 reported at the end of the third quarter of 2011.
At the end of the fourth quarter, inventory was $8.1 million dollars, which represents 99 days on hand. This reflects an increase as compared to $7.7 million dollars or 80 days on hand at the end of the third quarter of 2011.
Capital expenditures for the fourth quarter were $401 thousand dollars. Depreciation was $489 thousand dollars and amortization was $1.3 million dollars.
Looking ahead to the first quarter of 2012, we expect revenue to be within a range of $16.5 and $17.7 million dollars, comprised of a modest overall increase in our Smart Sensor Segment offset by a decrease in our Embedded Security Solutions segment from lower royalties compared to the fourth quarter. We expect our non-GAAP blended gross margins to be approximately 56% percent in the first quarter. Regarding non-GAAP operating expenses, we expect our first quarter expenses to range between approximately $9.6 and $10.2 million dollars.
Lastly, our current estimate of non-GAAP results for the first quarter is a range of approximately a net loss of one cent to net income of one cent based on 46 million shares outstanding.
Thanks Phil. As a recap, I am pleased with the significant achievements that we made as a company in 2011 and believe that the fundamentals are in place to drive growth in 2012. We have expanded design win opportunities with new and existing customers in PC and mobile, and expect continued traction across our VPN, DRM and Secure network solutions. We also believe there is additional opportunity to capitalize on the India and China ID programs in our Government business throughout 2012. I look forward to sharing our continued progress with you on next quarter’s conference call. That concludes my prepared remarks.