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AuthenTec (NASDAQ:AUTH)

Q1 2008 Earnings Call

April 28, 2008 5:00 pm ET

Executives

F. Scott Moody – Chairman of the Board, Chief Executive Officer

Larry Ciaccia – President

Gary Larsen – Chief Financial Officer

Kellie Nugent – Vice President, Investor Relations, The Shelton Group

Analysts

John Burton - Cohen and Co.

Brian Ruttenbur – Morgan Keegan & Co.

Unidentified Analyst– Lehman Brothers

Steve Smigie – Raymond James & Associates

Steve Dyer – Craig-Hallum Capital Group

Operator

Good afternoon and welcome to AuthenTec’s first quarter 2008 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 the question-and-answer session. If anyone needs assistance at any time during this conference call please press * followed by 0 on your touchtone telephone. As a reminder this conference call is being recorded today, Monday, April 28, 2008.

I would now like to turn the call over to Kellie Nugent, The Shelton Group, and the investor relations agency of record for AuthenTec.

Kellie please go ahead.

Kellie Nugent

Thank you and thank you everyone for joining us today to discuss AuthenTec’s first quarter 2008 financial results. With me on today’s call are Scott Moody, Chairman and CEO, Gary Larsen, CFO and Larry Ciaccia, President.

As J.D. mentioned, this call is being recorded. It is also being broadcast live in voice mode and may be accessed in the Investor Relation’s section of AuthenTec’s website at investors.authentec.com.

After the market closed today, AuthenTec issued a press release discussing the financial results of the first quarter ended March 28, 2008. By now everyone should have access to the press release and the financial tables. However, if you do not they are available on the Company’s web site.

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 and Exchange Commission. Forward-looking statements are based on the Company’s beliefs as of today, Monday, April 28, 2008. AuthenTec undertakes no obligation or responsibility to publicly update any forward-looking statements for any reason except as required by law even as 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.

Scott Moody

Thanks Kellie. Welcome to our first quarter conference call. I’d like to thank everyone for taking the time to join us this afternoon. I am pleased to report our first quarter results in which we achieved a 67% increase in revenue, a 350 basis point improvement in gross margin and an 11% non-GAAP improvement in profits over the same quarter a year ago.

Starting with revenue, we finished the quarter at $15.5 million, thus exceeding the top end of our guidance which was $15 to $15.3 million. These revenues were driven by continued strength in the PC market as we saw our attach rates and laptops increase across both existing and new OEM accounts.

With respect to margins, we continued to experience the benefits of a favorable product mix shift to our new, higher margin products as well as lower manufacturing costs during the quarter resulting in gross margins of 49.6%.

With respect to profitability on a GAAP basis we finished at $0.01 while in a non-GAAP earnings came in at $0.02 per share. I will note that our non-GAAP EPS results were at the top end of our guidance of $0.01 to $0.02 even with the impact of an in-process R&D charge we took for the Validation asset acquisition. Had it not been for this charge of $0.01, our non-GAAP EPS would have come in at $0.03 per share.

While on the subject let me provide a few quick points regarding the EzValidation transaction. As some of you have read in our press release, EzValidation was a California based provider of fingerprint authentication and user interface software for PCs. We acquired the software assets of EzValidation for $250,000 in cash that included their Ez Passport PC Client based software. Client based software resides specifically on the PC as opposed to residing on say a server or some kind of enterprise wide type solution. As you know, we already offer a number of client software elements including such things as the drivers and matching algorithms. Adding select features of Ez Passport including password replacement, file encryption, network log on and the like will further enhance the user experience associated with our fingerprint metrics.

Our software team is already hard at work integrating Ez Passport features into our True Suite application which we will begin demonstrating to PC customers in the third quarter. Of course we continue to work with a number of partners as part of our solution provider network who interface with our products at the client level to provide those server based software solutions I just mentioned.

From an overall business perspective we continue to execute on three key objectives that will extend our reach into what we believe is a $1 billion plus market opportunity for our product. As a reminder, these objectives include ramping new products and executing on our new product road map as evidenced by the fact we introduced two new products and one new technology during this last quarter. Expanding fingerprint sensor attach rates with existing customers while also diversifying our customer and market base as evidenced by our 65% revenue growth and finally integrating new functionality into our products and solutions as highlighted by our Ez acquisition.

Moving to our market segment, in the PC market we efficiently introduced our fifth generation sensor, the AES2810. The 2810, which had been code named BORA, is the most highly integrated single chip match on solution in the market and is targeted for notebooks, desktops and PC peripherals. Every year millions of dollars worth of corporate and personal information is lost and stolen by way of unprotected laptops, stolen passwords or data breaches. The 2810 establishes a new benchmark for security and cost effectiveness and will be introduced in both commercial and consumer products by three of the top five PC OEM’s during this second quarter.

As we said before, we estimate that as many as 1 in 4 notebook PC’s shipped in 2008 will include a fingerprint sensor. A noteworthy number of these will ship with our 2810, creating a new generation of highly secure PC’s.

We expect the 2810 to make a material impact on our revenues starting this quarter. In addition to the success of our new products, our existing products continue to be adopted as a standard security feature across a wide range of notebook PC models including some of the most innovative notebooks being offered today. As an example, in February we announced that our AES1610 was integrated in two of the world’s first notebooks to offer 1 terabyte. That is one trillion byte of storage capacity.

ASUS tech’s new M50 and M70 entertainment PC’s unveiled at the Consumer Electronics show offer AuthenTec security to protect the large amounts of data and multimedia content that will be stored on these new notebooks. Our sensors also bring the convenience of password replacement since these entertainment notebooks will likely be connected to MP3 and video download sites requiring a log in and a password.

I would like to note that AuthenTec achieved strong growth in the PC market despite the fact that Q1 is historically a seasonally slow quarter for PC’s. Our sensors are now integrated into consumer and enterprise notebooks of eight of the nine leading notebook manufacturers.

Turning now to wireless, as discussed on our last quarter’s call our largest wireless customer shifted production from one phone model to their next AuthenTec enabled product as they have historically done in the first quarter. This is what led to the slight decrease in our sequential sales of about $200,000. However, despite this transition we realized 100% year-over-year revenue growth in wireless and achieved several key milestones during the quarter as well.

Also during last quarter’s conference call I briefly mentioned we are on track to announce our fourth generation product targeted specifically to the low-power needs of the mobile wireless market. In February we officially announced the AES1711, which is already designed into new mobile phones that will ship in the fourth quarter of this year. The 1711 offers both power savings and added durability needed for today’s mobile devices and provides new revenue opportunities for services providers and OEM’s by giving device users quick and secure access to mobile content and applications.

As in the PC market, our existing wireless products continue to be incorporated into new fingerprint enabled phones to protect sensitive phone data and in certain geographies even mobile commerce transactions. In March we announced that the AES1710 would provide security and navigation to the first fingerprint enabled phone ever offered by ASUS Tech, one of the world’s largest and fastest growing mobile device manufacturers. The M3536 World Phone incorporates our 1710 to protect sensitive personal data, enable convenient access to Internet portals and to provide on-screen navigation.

The 1710 has also been incorporated into to two new Fujitsu phones including DocoMo phone 905i world phone and Fujitsu’s first ever fingerprint enabled Windows mobile phone the FOMA F1100. Fujitsu has now deployed and shipped fifteen AuthenTec enabled mobile phones with plans to launch several additional models in 2008 and beyond.

Although Japan is presently the largest market for fingerprint enabled phones, we are now seeing carriers outside of Japan add an AuthenTec enabled mobile device to their subscriber offerings. Highlighting the broadening of the market, the HTC Shift which incorporates an AuthenTec fingerprint sensor is now available in both the U.K. and the United States. Specifically, Orange in the UK announced in February they would carry the Shift which is a UMPC like device which supports 3g in Europe and quad-band GSM in the USA.

Following this roll out in the UK, in March Sprint and HTC announced that the Shift would be available to U.S. subscribers, marking the first fingerprint enabled mobile device supported by a U.S. carrier.

The Shift will operate on the Sprint mobile broadband network and will be available nationwide. We believe these are the first signs of AuthenTec enabled phones beginning to proliferate outside of Asia. Not necessarily just related to mobile commerce, but focused on protecting the information on the phone, protecting the network links back to the office or even to your personal bank account and securing the asset itself from theft.

As a way to showcase our new wireless sensors and technologies during the quarter AuthenTec has hosted customers and prospects at major wireless venues including CES, The GSM World Congress and CTIA. At CTIA we unveiled our new Touchstone packaging technology. This technology will enable a new class of fingerprint sensors that combine all the features of Trueprint technology with highly durable, easy to integrate, water proof and surface mountable package capabilities. Touchstone will help expand the aesthetic and product integration options available to makers of cell phones, ultra mobile computers and other consumer electronics.

The first product with Touchstone will be introduced later this year but more importantly we are very excited about our product road map around Touchstone. Future Touchstone variants will be available across all our market segments as well in the future.

Technologies such as our [RF] based Trueprint live layer sensing technology and our new Touchstone packaging technology have helped us not only in essence create the consumer and enterprise markets for fingerprint sensors, but have established AuthenTec as the market leader. Our intellectual property which includes more than 60 filed and pending U.S. patents is one of our most important assets and a true competitive advantage for AuthenTec. To protect our portfolio we recently filed a patent infringement lawsuit against a small, privately held competitor. The suit was initially filed alleging infringement on three AuthenTec patents but has since been expanded to include a total of five U.S. patents.

While the market for fingerprint sensors is expansive and allows for multiple competitors we will continuously and vigorously protect our technologies and IP.

In summary, during the first quarter we focused on execution and progress toward the achievement of our strategic objectives. We introduced two new products that will continue to increase revenue during the course of the year as well as strategically invested in R&D that will further advance our new product road map. We also took steps to expand our software offerings in order to provide a more complete solution for our customers and unveiled new packaging technologies which will expand design options and help guide down product costs over time.

Finally, we drove increased revenues and profitability as we expanded our customer base and increased attach rates with existing customers.

Now I will turn the call over to Gary for a detailed review of our financial results.

Gary Larsen

Thanks Scott. Good afternoon everyone. Revenue for the first quarter of 2008 was $15.5 million, which as Scott mentioned exceeded our guidance range of $15.0 to $15.3 million. This compares to $9.3 million reported in the first quarter one year ago and $15.7 million reported in the fourth quarter of 2007. The 57% revenue growth compared to the prior year reflects strong growth in the PC market as the attach rates for our product increased and we further penetrated new customers.

Revenue was relatively flat on a sequential basis as growth in shipments in the PC market were offset by lower wireless revenue as the customer transitioned from one phone model to their next AuthenTec enabled product.

On a non-GAAP basis gross margins including stock based compensation was 49.6% in the first quarter. This represents a 350 basis point improvement when compared to the 46.1% that was reported one year ago.

First quarter gross margin was comparable to the 50.0% reported in the fourth quarter of 2007.

As Scott mentioned, the year-over-year gross margin expansion was primarily due to a continued favorable product mix shift at higher margin sensors and lower production costs. Operating expenses excluding stock based compensation were $7.9 million compared to $6.1 million in the first quarter one year ago and $7.4 million in the fourth quarter of 2007.

Operating expense as a percent of revenue declined 51% in the first quarter of 2008 from 55% in the year ago quarter. The sequential increase in expenses primarily recollects higher R&D spending to support product development initiatives as well as a $250,000 R&D charge related to the EzValidation transaction.

On a GAAP basis, net income for the first quarter of 2008 was $188,000 or $0.01 per share. This compares to a net loss of $5.7 million or $7.30 per share in the first quarter of 2007 and net income of $398,000 or $0.03 in the fourth quarter of 2007.

Non-GAAP net income in the first quarter of 2008 was $587,000 or $0.02 which excludes stock based compensation charges of $399,000. This compares to a net loss of $1.7 million or $0.09 in the first quarter of 2007 and net income of $1.3 million or $0.04 per share in the fourth quarter of 2007.

Non-GAAP earnings per diluted share for the first quarter 2008 were computed using 30.5 million shares.

Turning to the balance sheet we ended the first quarter with $57 million in cash and investments compared to $66.3 million at the end of the fourth quarter 2007. Operating cash flow was $545,000 this quarter.

As of March 28, 2008, accounts receivable of $6.5 million are nearly flat with the $6.4 million in the fourth quarter of 2007. Our collections remain strong with DSO of 38 days in the first quarter, roughly flat with a DSO of 37 days in the fourth quarter 2007.

At the end of the first quarter inventory was $4.1 million which represents 48 days on hand. These levels reflect an 11-day improvement in our inventory management from the 59 days at the end of the fourth quarter.

Capital expenditures for the first quarter were $190,000 and depreciation was $239,000. With regard to guidance we expect our strong growth to continue for the remainder of 2008 driven by new product introduction and a robust pipeline of design wins. For the second quarter of 2008 we expect revenue to be in the range of $17.2 million to $17.8 million driven by the startup of volume shipments of the AES2810 into the PC market. The mid-point of this range represents 42% growth over the prior year and 13% sequential growth compared to the fourth quarter of [2008].

Gross margins in the second quarter was expected to range from 47-49% reflecting the ramp up of the AES2810 and the initial lower yields of production and efficiency typically experienced with new product introduction. In order to continue our momentum we plan to accelerate our R&D investments in the second quarter to support several new product developments and other initiatives.

Correspondingly we expect our non-GAAP earnings per share to range between $0.02 to $0.03 per share which is an improvement over the loss of $0.03 per share for the same period one year ago.

Let me now hand the call back to the operator who will facilitate our question-and-answer session.

Question-And-Answer Session

Operator

Ladies and gentlemen if you wish to ask a question please press *1 at this time. If your question has been answered or you wish to withdraw your question please press *2. Questions will be taken in the order received.

Please press *1 to begin.

Your first question will be coming from the line of John Burton of Cohen and Co.

John Burton - Cohen and Co.

Thank you. Scott, as you look in to the June quarter obviously that is some great growth forecasted at 13% sequentially. Could you kind of break that down? Obviously the PC market in general probably will be slightly down. How much of that will be share gains, increased attach rates, and I know you have highlighted the 2810 as a driver but if you could break it down even more than that it would be great. Thank you.

Scott Moody

Frankly John I don’t think we have that level of specificity between new customers or existing platforms versus new platforms. Clearly a good part of our growth in the second quarter will be driven by two material new accounts for us; one particularly in Q2 and another one a little bit more in Q3/Q4. As we mentioned earlier the 2810 has three major design wins right now, three out of the top five PC OEM’s have designed it in. One of those is an existing account. Two of those are in essence new accounts. Then in terms of the ramp over this quarter a good bit of that is directly associated with the 2810. I’m not sure I gave you the level of specificity you wanted, but hopefully that was good enough.

John Burton - Cohen and Co.

Good enough. Thank you. As far as the annual revenue for the calendar year, if I’m not mistaken you had originally targeted 72-78 range. Closure of March your view of June now does that change that range whatsoever for the year?

Gary Larsen

We’re only providing annual guidance twice a year as a result of the Q4 quarterly call and again in the Q2 quarterly. So we won’t provide that until we…an update to that. So right now we are staying at our $72-78 million which is an increase from about $52 million last year.

John Burton - Cohen and Co.

On the acceleration of the R&D spending could you give us an idea of how that should trend as we go out further in time or specific areas it is intended to be targeted on please?

Scott Moody

If you look at it, John, we’re flowing through not quite $2 million of incremental revenue from at least what many of the analysts have been expecting. We’re taking probably ¼ of that instead of letting it just flow to the bottom line we are investing that into R&D as you picked up. For one, yes we are very happy with our growth. Clearly our volumes and our revenues are picking up, but we are still relatively small part of the total available market that we think is in front of us. Last year we shipped about 13 million sensors but we believe that is a part of a billion unit market opportunity. So we see this really as an opportunity to be accelerating revenue to actually advance our R&D projects. Specifically in that I mentioned Touchstone. It is pretty exciting technology really being developed by our packaging engineers as part of operations and now we’re working to accelerate as much of that technology as possible.

We are introducing…the first one is going into production now; the first version of that technology…but as I had mentioned we are pretty excited about the product road map and really instead of waiting until next year we are trying to move it in as fast as we can.

Packaging is one thing. Software, we mentioned the EzValidation. So in the past we only provided the drivers, the matching algorithms…we didn’t usually go up to the point of offering the application, i.e. the graphical user interface, the actual password replacement capabilities. Now with the EzValidation acquisition which I think we have done at a very good price, we will be able to add that capability. So software is another area where we are adding resources. That is going to do two things for us. One it is going to make the user experience better. Second, in terms of our long range margins obviously software can be a profitable business and that will incrementally improve our margins as well. Finally, we saw this as an opportunity to try to pull in some of our new silicon products. We’re really not talking about them yet. We will probably talk about them a little bit more as part of the Q2 earnings call.

So in summary we are taking as much of that as possible and reasonable and allocating it towards Touchstone, our software True Suite and of course our silicon products. So a lot of things.

John Burton - Cohen and Co.

Okay. Last question if I could. You mentioned the expanded legal strategy so to speak, or at least the one initiative. How should we be thinking about legal expense as we look out at the next four quarters or so?

Scott Moody

John obviously the actual timing and amount of the expense is going to be dependent on court and the schedule it puts together. We do have some rough estimates. We think it will be about $150k in Q2 and probably about $500,000 in the second half of the year.

John Burton - Cohen and Co.

Thank you.

Operator

Your next question will be from the line of Brian Ruttenbur of Morgan Keegan & Co.

Brian Ruttenbur – Morgan Keegan & Co.

Thank you very much. Excellent quarter. The first question I have is on your long term investments. Is any of that in auction rate securities? I don’t recall the answer.

Scott Moody

We reclassed about $9 million of auction rate securities from short term to long term.

Brian Ruttenbur – Morgan Keegan & Co.

Okay.

Scott Moody

They failed auction…all of these are AAA or AA rated securities and we don’t see any kind of default risk with them but so they are parked in long term until they become liquid again.

Brian Ruttenbur – Morgan Keegan & Co.

Okay. How much in total do you have in auction rates? Is that the $17 million and that’s it?

Scott Moody

There are some other investment CD’s and some other notes and stuff that are in there. Those all come due the second quarter of next year so there’s no issue with those. Only $9 million of the $17 million are auction rates.

Brian Ruttenbur – Morgan Keegan & Co.

Okay. That clears that up. Okay, the R&D I was a little bit confused. I know it has already been hit upon, but so you went up from quarter-to-quarter from about $500,000…should we expect basically this level about $4.1 million going forward? I know some of it was the in-process R&D charge.

Gary Larsen

So in the first quarter about $250,000 was the in-process R&D. So as Scott talked about we are going to be making some more investments so we do expect it to go up in Q2 somewhere above $4 million.

Brian Ruttenbur – Morgan Keegan & Co.

Okay so basically holding it flat from where your actual number was, $4 or $4.1, is where you are going to run going forward?

Gary Larsen

I think for Q2 somewhere in that range.

Brian Ruttenbur – Morgan Keegan & Co.

And do you expect $100,000 or $200,000 growth in the quarter? What do you see project wise?

Gary Larsen

What I was referring to was specifically for Q2.

Brian Ruttenbur – Morgan Keegan & Co.

Okay. I was trying to get more information out of you for the next third and fourth quarter but I’m probably reaching. Let me go on to another question.

Scott Moody

The one thing I would say, Brian, is as a percentage of our revenues or operating expenses continue to drop obviously materially from a year ago but even with that our ramping and spending a little bit more our operating expense as a percentage of revenue will go down Q1 to Q2. So what we’ve done, I think, is we are managing those expenses associated with those revenues. They will continue to go down as our objectives reach our long term objectives and will probably go consistent with that philosophy driving them down but of course any revenue ramps we do want to use that as an opportunity for securing future R&D.

Brian Ruttenbur – Morgan Keegan & Co.

Okay. Then, the last question…I have a couple more but I’m going to shut up. The last question I have is you talked about the laptop market you hope that 25% penetration. I assume that is a worldwide laptop market for new laptops. Is that correct?

Gary Larsen

That is correct. That is our estimate of total fingerprint sensors…ours and others.

Brian Ruttenbur – Morgan Keegan & Co.

Okay. You have dominant market share like 95+ percent, right?

Gary Larsen

That is in the cell phone market we believe that of all the cell phones shipped we have probably 90% plus.

Brian Ruttenbur – Morgan Keegan & Co.

What is your market share for laptops then?

Gary Larsen

Again it is an estimate. Obviously we have to estimate with competitors. Last year we had been usually saying around by mid-year 50% but I believe that went up as the year went along. You know this year we’re probably looking at, again a guess, but probably 60%.

Brian Ruttenbur – Morgan Keegan & Co.

Okay. What part of movement…market penetration…the main question I had was on the PC market. What kind of penetrations do have there and where do you see it going?

Gary Larsen

Well that’s where, you know, we would probably say again…let me refer to all fingerprint sensors entering the market. Last year we estimated 15-20% of all new laptops to your point earlier included a fingerprint sensor. We believe that during the course of this year that number will move up 20-25 and that is when we said as many as before. We do believe probably 1 in 4 laptops certainly by the end of the year will be shipping with a fingerprint sensor and again roughly we believe, and I haven’t run these numbers all the way through frankly, probably a 60% market share for us is not unreasonable.

Brian Ruttenbur – Morgan Keegan & Co.

Okay. I’m sorry. I was talking about desktops. PC desktops. Do you have any kind of market penetration numbers on the actual stand alone hard desktops versus the laptop?

Gary Larsen

I’m sorry about that and my apologies for answering that question wrong. In the desktops we are still relatively negligible. There are several desktops and PC peripherals out there but relatively low volume. I don’t think you’ll start to see anything in that market any more material until the fourth quarter of this year.

Brian Ruttenbur – Morgan Keegan & Co.

Okay. Thank you very much. Great quarter.

Operator

Your next question comes from the line of Romit Shah with Lehman Brothers.

[Unidentified]– Lehman Brothers

Hi, this is [inaudible] for Lehman Brothers. Just a couple of questions with respect to ASPs. Can you remind us what the ASP averaged for last quarter and any color on what they might be in this quarter?

Gary Larsen

Yes, so the average ASP last quarter was about $3.90. So we expect quarter-on-quarter probably something like 2% erosion.

[Unidentified]– Lehman Brothers

Okay. Then just with respect to close margins in order to get to your longer term target of 52-55%, what kind of revenue run rate are you looking for?

Scott Moody

The revenue run rate we are looking for are overall target model is $150 million per year.

[Unidentified]– Lehman Brothers

Then just one last question. In regards to the solid quarter this quarter is that pulling from the second half or do you feel that…I know that the street has you modeled up roughly 30% in the third quarter and then 25% in the fourth quarter. Do you see those levels as achievable? Or was this quarter reflective of some [inaudible] in the third quarter?

Scott Moody

I don’t necessarily think it is pulling from the third quarter, just looking at it a slightly different way. What I do see is an increase as customers are forecast frankly were a little bit light particularly on the 2810 and we are seeing that, but I don’t think it is necessarily pull in. Whatever kind of numbers were out there for Q3 and Q4 probably, and to be honest I don’t remember what those are right off the top of my head, but are probably still right. The growth numbers might not be the same by definition because Q2 is going to be much higher than a number of analysts had in their model to start with. I think a lot of the folks had something in the mid 15’s. So now we are looking at the mid point of 17.5 and then of course Q3 and Q4. But I don’t think it is pulling from Q3 at all.

[Unidentified]– Lehman Brothers

Do you think it is safe to still assume that approximately 30% improvement Q over Q in the third quarter or do you think that might need to be adjusted?

Scott Moody

I probably would adjust that. Again, I don’t have these numbers in front of me but remember…and I’ll assume the number you are quoting is right…30% growth from Q2 to Q3…that was when Q2 was at a level of 15.2. If you assumed Q3 is stable to where it was before and again I don’t know where that number is, then a growth rate of 17.5 would be obviously less.

[Unidentified]– Lehman Brothers

Okay. Thank you.

Operator

Your next question will be from the line of Steve Smigie with Raymond James & Associates.

Steve Smigie – Raymond James & Associates

Great thank you. I was hoping you could talk about EzValidation a little bit more. Will you have a gooey interface available relatively soon for people to use? Is the point of this to make it so that people whoa re getting their PC’s it will sort of automatically pop up and let them use it? I know a challenge you’ve been having a little bit is just making people really aware they have got a sensor there and they can be using it.

Scott Moody

To some extent your answer is right on. What we are going to be providing is of course the graphical user interface in terms of enrollment or day-to-day use obviously the applications that go along with that, the password replacement, the fast user switching, file and folder encryption, all of those kinds of things. So now we’ll do all that. You had mentioned soon…it really will be something we will start demonstrating or demo’ing to customers in the third quarter.

Steve Smigie – Raymond James & Associates

Okay. Is the plan to have that sort of automatically shipped with your sensor on the PC?

Scott Moody

At the end of the day it is up to our customers. They can use our software, their own software which some customers have, and/or a partner’s software. So our customers will have available all three choices. For the first time, to your point, that choice will be available from AuthenTec.

Steve Smigie – Raymond James & Associates

Could you say what the percent of revenue was of PC versus handset versus access control?

Gary Larsen

It was pretty close to what we ended the last year, about 15% wireless, 5% access control and the remainder PC.

Steve Smigie – Raymond James & Associates

Okay. You picked up some very interesting stuff on the handset side. It sounds like you are going to be shipping product to Sprint. Is that one mostly at this point just as you mentioned for protection of data? If that is the case has Sprint already talked to you about when they might be rolling out commerce type services?

Scott Moody

So, first off it is focused…as I expected, in Japan when we first rolled out it was really focused on protecting the information on the phone so for the business guy that might be email or for consumers that might be some teenage girl’s pictures.

So, it really plays to both markets. Then it rolled in Japan into armors as another value added feature. I think the same thing is happening ASUS introduced it first focused on protecting the information on the phone and again with the Sprint case or the HTC case it is protecting the information on the asset.

With respect to m-commerce and/or our conversations with any mobile provider we can’t go into any specifics on those but I can say we are talking to everyone out there and I remain relatively optimistic that we will see a relatively large uptake in our wireless revenues in 2009. I’m not saying we have a design win, etc. that would drive that volume at this point but based on discussions I am more optimistic.

I have always joked with people never confuse interest with demand. But the fact of the matter is there are different levels of interest and those interest levels go everywhere from coming to contractual agreements on terms of vendor requirements to more generic discussions.

So, these discussions are going forward with a lot of different companies both OEM’s and service providers, so again without claiming a design win that would drive that kind of volume that you are looking for I am more optimistic each day that will happen in 2009.

Steve Smigie – Raymond James & Associates

On the PC side, I think you said you are in…or the notebook side you said you are in with eight of the nine largest. Would one of those nine be Apple? Is that correct?

Scott Moody

That would be correct.

Steve Smigie – Raymond James & Associates

And any difference in ASP handsets versus notebooks?

Scott Moody

It is still relatively minor. I don’t think with the introduction of some new products later this year, and again I’ll address those a little bit more in the second quarter call, there is not that much of a difference right now and you won’t see any I think until next year.

Steve Smigie – Raymond James & Associates

Okay. Sorry, last question. Could you say what your top five customers were a percentage of revenue?

Gary Larsen

They were about 79% in Q1, and that is actually down from 85% in 2007. So we are starting to see some of our concentration dissipate.

Steve Smigie – Raymond James & Associates

Great. Thanks a lot.

Scott Moody

It will continue during the course of the year.

Operator

As a reminder ladies and gentlemen that is *1 to ask a question.

Your next question will be from the line of Steve Dyer with Craig-Hallum Capital Group.

Steve Dyer – Craig-Hallum Capital Group

Thanks guys. Most of mine have been answered already. Just kind of drilling down a little bit further in the upward revision for Q2 it sounds like maybe BORA is shipping in volume a month or two earlier than you initially thought. Is that fair?

Scott Moody

Yes. It is shipping a little earlier than at least our customers were forecasting at some point. Luckily Steve we at times though those forecasts were a little bit low, so we did make some investments in inventory so we’d be able to meet all of our customer requirements. But definitely a good part of that uptake is associated with, if you will, increased forecasts for the 2810.

Steve Dyer – Craig-Hallum Capital Group

Okay. And then I think in talking to you guys and after your Q4 call it sounded like people were a little bit gun shy looking out over the course of the year. Does it seem like visibility has just gotten better and maybe people’s outlooks were initially kind of conservative relative to how sales have built up?

Scott Moody

Well first off we’re really not seeing too much of an impact of, if you will, what you read in the paper or see what is on the news every night. At least we are not seeing it. We try to go into the year with some conservativism ourselves and the bottom line really is that again while we shipped a lot of units in the last…some 4 million units last quarter, it is still a very small part of the total available market out there. So we are really not impacted too much by overall demand for total laptops if you will or total cell phones. So, we’re not as seasonal maybe or as impacted by let’s say recession as some others that may be on all PC’s or all cell phones. So, our customers seem to be and continue to be positive about the market.

Steve Dyer – Craig-Hallum Capital Group

Okay. Then, have you seen any changes really in the take rate? Obviously they continue to tick up a little bit or is that too hard to tell sort of inter-quarter?

Scott Moody

I’m sorry. I’m not sure I understood your question.

Steve Dyer – Craig-Hallum Capital Group

I think the overall take rate you had assumed would tick up as the year goes on to maybe 25% of all people taking one by the end of the year. Is that trended faster, slower than you expected?

Scott Moody

Well probably not faster than I expected, parsing words here a little bit. But maybe a little bit faster than the forecast we had gotten from our customers, i.e. that is why our Q2 numbers have gone up.

Steve Dyer – Craig-Hallum Capital Group

Okay. Lastly did you guys bring any headcount from EzValidation? Or was that strictly software?

Scott Moody

It was strictly software. We are working with some people that work there on a contractual basis to help us integrate it into our own products. So that is some of the R&D expense that I mentioned earlier.

Steve Dyer – Craig-Hallum Capital Group

Okay great. That’s it for me thank you.

Operator

You have a follow-up question from the line of Steve Smigie Raymond James & Associates.

Steve Smigie – Raymond James & Associates

Are you able to talk about any 10% customers in the quarter, who they were and what they were as a percent of revenue?

Scott Moody

We don’t disclose that, Steve, only in the 10K at the end of the year.

Steve Smigie – Raymond James & Associates

Okay.

Scott Moody

To that point I made earlier, we saw a slight decrease between 2007 and Q1 with respect to the top five and our other customers’ ramped and I mentioned these new customers coming on line. Now with eight of the top nine PC manufacturers even those top five will continue to go down through the course of the year.

Steve Smigie – Raymond James & Associates

Okay. Can you talk about how many notebook models you are actually shipping on in saw Q3 timeframe and similarly handsets?

Larry Ciaccia

Hey Steve this is Larry. I would say by Q3 once Montevina fully launches that number has got to be 50-75 new models shipping across the customer base at least.

We can get back on that number. It is a good question. I don’t know that we have counted them all up.

Steve Smigie – Raymond James & Associates

Okay. My last question…can you talk about penetration into the GPS devices and any other sort of peripheral device penetration please?

Scott Moody

GPS in terms of…okay. We didn’t really talk about that…or actually at all during the call. As I said before our real focus is in the PC and the cell phone. We generally announce usually some smaller volume opportunities usually associated with access control, GPS devices and other consumer electronics. So that is still, Gary had talked about the 5%. That generally is still a very small piece of our business. Some of the work that we are doing in new products will allow us to have new products that are better suited towards some of those end markets, i.e. access control, which I think is a huge market as well as GPS PND devices. So it is an area we are not really focused on but we still do continue to get design wins but I don’t think it will start to become material until the 2009 timeframe.

Steve Smigie – Raymond James & Associates

Okay. Sort of a follow-up on that I think you guys have maybe a contract with the U.S. government and handheld devices for the census. I’m curious what year that ramps and if you are building that in 2009 for the 2010 census or something like that. Is that part of your assumption about being on more handset devices in 2009? Or is this separate?

Scott Moody

No, most of those will be built in 2008 and 2009. The volume now frankly to be honest, because we were excited about it when we first got it, but the volume is now getting smaller and smaller. That’s not what I’m talking about. When I’m talking 2009 I’m talking about cell phones for real people.

Steve Smigie – Raymond James & Associates

Thanks a lot.

Scott Moody

With all due respect for census workers.

Operator

There are no more questions at this time. I will turn the call back over to Scott Moody for closing remarks.

Scott Moody

Thanks everyone for again taking the time to join us today. Before we conclude the call I’d like to take a moment to thank Kent Buchanan for his contributions to our Board of Directors and welcome on board Chris Fedde. Chris is a well respected leader in the information security industry and we believe he is a very positive addition to our board. He brings a great depth of security and management experience and we look forward to his insights as we build upon our leadership position and address the exciting growth opportunities that we have ahead.

As a reminder for everybody we are scheduled to host our 2007 Annual Stockholder Meeting on May 9, about two weeks from now. Additionally we will participate in a number of financial conferences in the coming months including those being hosted by Cowen, Craig-Hallum, JMP Securities, Lehman Brothers, Morgan Keegan and Oppenheimer.

Please visit our website for these and other exciting upcoming events. Thanks again and have a great evening everybody.

Operator

Thank you for your participation in today’s conference call. You may now disconnect.

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