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AuthenTec, Inc. (NASDAQ:AUTH)

Q1 2012 Earnings Call

May 03, 2012 05:00 pm ET


Larry Ciaccia - CEO

Philip Calamia - CFO

Brett Perry - Investor Relations, Shelton Group


Welcome to AuthenTec's First Quarter 2012 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, May 3, 2012.

And I would now like to turn the call over to Mr. Brett Perry with Shelton Group, Investor Relations agency of record for AuthenTec. Please go ahead, sir.

Brett Perry

Thank you everyone for joining us today to discuss AuthenTec's first quarter 2012 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

After the market closed today AuthenTec issued a press release discussing its financial results for the first quarter ended March 30, 2012. 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, May 3, 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.

Larry Ciaccia

Thanks Brett. Good afternoon and thank you for joining our call today. We completed a very solid Q1 in which we achieved revenue of $17.5M, up 13% year-over-year, and non-GAAP income of 1 cent per share, up from a loss of over 6 cents per share in the same quarter last year. Both Q1 revenue and non-GAAP EPS were at the high end of our guidance. We added cash to our balance sheet and recorded our third consecutive quarter of non-Gaap profitability as we continue to focus on profitable growth.

Our Smart Sensor Revenue in the quarter was $10.5M, up slightly from last quarter and down about 3% year-over-year, driven primarily by anticipated platform transitions in Wireless and seasonality in PC.

In our Embedded Security business, revenue was in line with our expectations at $7M or down 17% sequentially as we came off a record Q4 in this business driven primarily by some particularly large royalty and license revenue. As we have mentioned in the past, this business has a tendency to be lumpy and is not a run rate business. Total embedded revenue is comprised of license revenue from IP delivered and accepted in the quarter, recurring royalties dependent on end customer product shipments, and/or application downloads as well as support and maintenance. Our embedded business was up significantly by 50% year-on-year as we continue to gain traction with many of our offerings for mobile and network security. I would also like to point out we have built a solid pipeline, and, despite this segment being down sequentially, Q1 was our highest quarter ever for bookings in Embedded Security. We expect to recognize revenue from these licensing agreements as the respective programs launch during subsequent quarters.

Phil will be reviewing the financials in more detail after I summarize the activities and progress around our market and product offerings.

Starting with our mobile and network security offerings - we had a very active quarter in terms of new design wins and progress on programs that will generate revenue over the next several quarters and into 2013. We are now entering pre production with a top tier smartphone OEM outside of Japan for a sensor-enabled enterprise phone expected to launch later this year. This handset will also include one of our identity management software applications, consistent with our approach to bundle sensors with software to ease integration for OEMs and optimize the fingerprint experience for the user. We are optimistic about the prospects for this mobile phone which will initially be available to carriers outside of the US. Additionally, we continue to see strong traction for our sensors within Japan, the most advanced and established mobile payment region on the world, with more new smartphone models planned and in development than at any time in our past. Simplifying mobile payments for both retail and transit through strong authentication continues to be a driver for our expansion in smartphones within established mCommerce regions such as Japan. Mobile payment is also the basis for additional OEM engagements for smartphones that could ship outside of Japan in the future. We expect our sensor business to grow significantly over the next few quarters as multiple new smartphone models are released and the number of carriers offering these devices expands.

Looking at US based smartphones and NFC, we continue to work with partners to integrate fingerprint based security into various architectures spanning NFC, baseband and application processors, the OS and the secure element. We are executing on our strategy of expanding our footprint in mobile payment through increased partnering activities within the NFC ecosystem that leverage our expertise in mobile security. Beyond strong fingerprint authentication that turns the NFC radio on, we will be adding embedded control that enables secure communications via payment applets within the secure element directly from our sensor. As the payment infrastructure continues to proliferate, there is a growing awareness of the need for effortless security to help drive user adoption, and our newest smart sensor will excel at supporting highly simplified, one touch transaction security. AuthenTec's new 'made for mobile payment' smart sensor will be introduced next week at CTIA in New Orleans, and we are engaged with mobile wallet providers, carriers and handset OEMs on NFC-related programs. NFC remains a significant long term opportunity for our company, and we continue to make tangible progress in this area. However, given the complexity of the eco-system, this is certainly a process that can take time to fully materialize.

In addition to our progress surrounding sensors for mobile and NFC, we also continue to expand and gain traction with our encryption-based mobile security solutions for smartphones. During the quarter we signed a license deal with a top 3 handset OEM that will integrate our VPN client into new enterprise class smartphones. We also secured other VPN client wins during the quarter including additional handset OEM's, a license with a major wireless carrier and a license for government focused secure smartphones. Through the first quarter, our VPN client solution has now shipped on well over 10 million smartphones.

During last quarter's call we announced plans to extend and grow our position in enterprise class smartphones via our new secure device architecture or SDA around encryption and security. This includes a Data-At-Rest or DAR solution that encrypts data on a device hard drive or removable media such as an SD card. This new SDA supports Android Gingerbread and Ice Cream Sandwich as well as a FIPS 140 secure middleware solution, and we have secured our first design wins. Moving on to our content protection, or DRM-based solutions for iOS and android based mobile devices, we continue to build on our momentum as we signed a record number of deals during the quarter. We signed agreements with a major network in Europe, a major worldwide content provider, a major carrier in Korea, and one of the largest content distributors in Japan. We also saw numerous existing DRM customers launch their services, including an announced deployment by Canal + in Poland offering its 1.5M subscribers streaming TV content on mobile devices. The typical structure of these deals includes an upfront license and a per download royalty. As our customers launch these services over the next several quarters, we expect to recognize recurring royalties based on the popularity of the respective service as measured by the number of downloads. The size of these customer programs and their potential to generate notable revenue for AuthenTec vary greatly. As such, our strategic focus remains on building a very broad DRM customer base to maximize future royalty potential, and we continue to execute on this strategy.

Also around content protection we announced last quarter our High Bandwidth Digital Content Protection or HDCP solution. This offering insures that devices such as TV's and other displays playing HDCP content are licensed to do so. Since introducing our solution, we have secured several licensing deals, including one with a major mobile application processor semiconductor company. The success of this new offering, combined with our ongoing traction in DRM and user excitement around multiscreen content, gives us confidence in our growth prospects in the content protection space.

In our government and access control touch sensor business, we made significant progress expanding our position and market share in China, particularly with our larger touch-based fingerprint sensors used in banking applications. We announced a deal in the quarter with Miaxis, a leader in biometric solutions for banking and security, in which our TCS2 TouchChip sensors will be used in bank ID terminals throughout China for anti-fraud protection. Miaxis began volume deployment in Q1 of our sensor-equipped ID terminals in banks across China including one of the largest, the Bank of China. We also signed a second deal with a partner who will also be deploying our TouchChip sensors in bank ID terminals across China. I have spoken in the past about the large opportunity this region represents and I could not be more satisfied with our progress in growing our position.

Also within the Mobile ID market, our TouchChip solutions continue to see increased adoption in iPhone and Android phone sleeves and mobile ID devices that require standards-based multi-factor authentication capabilities. This quarter another of our Mobile ID partners was listed on the FBI's Approved Products List, expanding the number of solutions using our technology. Because our TouchChip solutions are thin and low power, they offer substantial benefits over optical devices in Mobile ID applications where small size, weight and battery life are critical.

I have talked in the past about the large growth opportunity that mobile ID represents in India, especially with regards to the UID program. We continue to progress with multiple designs in's targeted for this program but now believe material revenue for UID will be in 2013 based on feedback from several of our partners/customers. Such push outs are not unusual in government programs, and we continue to believe that India represents a significant growth opportunity. Based on the strength of non-UID based programs worldwide we expect our overall business around large touch based sensors to continue to grow in 2012.

Within the PC market we are very excited about the opportunities in both tablet and ultra book as these new platforms move toward thinner, cleaner and more minimalist designs. Our fingerprint sensors are the thinnest solutions on the market today and offer totally flat conformal surfaces that play extremely well into this design trend. We expect to participate in a variety of new tablets and ultrabooks based on thin z dimensions and clean cosmetic finishes. In the standard laptop space we continue to progress on several new platforms and opportunities that are using both our sensors as well as our identity management software, which we expect will translate into growth for this business as we move through 2012 and into next year.

I will now turn it over to Phil for the detailed financials.

Philip Calamia

Thanks, Larry, and good afternoon, everyone. As you probably read and as Larry mentioned earlier, revenue for the first quarter of 2012 was $17.5 million, comprised of approximately $10.5 million of revenue from smart sensor solutions and $7 million from embedded security solutions.

Smart sensor revenue was slightly higher than the $10.4 million recorded in the fourth quarter of 2011 and decreased from the $10.8 million recorded in the prior-year quarter. Sequential growth in our GAC business during the quarter was mostly offset by decreases in our PC and wireless product lines, reflecting seasonality and anticipated product transitions.

The embedded security revenue of $7 million represented a decrease of $1.4 million, or 17%, compared to the prior quarter and an increase of $2.3 million, or 50%, over the same quarter a year ago. As we have touched on previously, the sequential decrease was primarily attributable to lower license and royalty revenue. The year-over-year revenue increase was driven primarily by increased royalty fees associated with our hardware, IP, and content protection products.

On a GAAP basis, consolidated net loss for the first quarter was $1.5 million, or $0.03 per share. This compares to a GAAP net [loss] of $600,000, or $0.01 per diluted share, in the fourth quarter of 2011 and a loss of $5.6 million, or $0.13 per diluted share, for the prior-year quarter.

Looking now at our results on a non-GAAP basis, non-GAAP gross margin for the first quarter was 58.7%, compared to 63.7% in the fourth quarter of 2011 and 52.6% in the prior-year quarter.

The 500-basis-point sequential decline in gross margin was due primarily to a lower mix of embedded security solutions revenue during the quarter.

Total operating expenses on a non-GAAP basis of $9.8 million were $200,000, or 2%, lower than the fourth quarter of 2011, and first quarter non-GAAP operating expenses were $500,000, or 5%, lower than the prior-year quarter, primarily due to reduced labor and outside services costs.

On a non-GAAP basis, consolidated net income for the first quarter of 2012 was $263,000, or $0.01 per diluted share, which was on the high end of our guidance. This compares to non-GAAP income of $1.8 million, or $0.04 per diluted share, in the fourth quarter of 2011 and non-GAAP net loss of $2.6 million, or $0.06 per diluted share, in the first quarter of 2011.

Non-GAAP results exclude certain legal and other one-time costs, stock-based compensation, as well as amortization of acquired intangible assets.

Our non-GAAP EPS for the first quarter was calculated using a weighted average of 46.1 million shares.

Looking now at the balance sheet, we ended the first quarter of 2012 with $22.8 million in cash and investments. This compares to $20.4 million in cash and investments at the end of the fourth quarter of 2011.

As of March 30, 2012, accounts receivable of $9.4 million were essentially flat as compared to the end of the fourth quarter of 2011. Day sales outstanding for the first quarter were 49, as compared to 46 days reported at the end of the fourth quarter of 2011.

Inventory was $7.6 million, which represents 93 days on hand, and this reflects a slight decrease as compared to the $8.1 million, or 99 days, on hand at the end of the fourth quarter of 2011.

Capital expenditures for the first quarter were $234,000, depreciation was $441,000, and amortization was $937,000.

Looking ahead to the second quarter of 2012, we expect revenue to be within a range of 18.2 and $19.4 million, reflecting anticipated increases in our PC and wireless product areas.

We expect our non-GAAP blended gross margins to be approximately 56% in the second quarter. Regarding non-GAAP operating expenses, we do expect our expenses to grow moderately as we are actively investing to support significant pursuits in 2013 in several areas of our business. We have more new products in development than at any time in the past, spanning fingerprint sensors, security software, content protection, and hardware IP. Additionally, we have also made a concerted effort to increase our activities in securing our IP and are entering a phase where we will be filing a number of new patents. As such, we expect our second quarter operating expenses to range between approximately 10.4 and $11 million, reflecting these increased investments.

Lastly, our current estimate of non-GAAP results for the second quarter is a range of approximately breakeven to net income of $0.01 based on 46.3 million shares outstanding. Back to you, Larry.

Larry Ciaccia

Thanks, Phil. I am very pleased with our results for this past quarter and our continued progress towards driving profitable growth. We are building our pipeline of new design wins and license deals across multiple markets leveraging our unique portfolio of security based products as we also continue to invest in our innovative new product roadmap. The market opportunity is large, we are executing and we are very well positioned. That concludes my prepared remarks. I'll turn it back to the operator to start the question and answer session.

Question-and-Answer Session


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