Executives
Scott Moody - Chairman and CEO
Gary Larsen - CFO
Analysts
Steve Smigie - Raymond James
John Barton - Cowen & Company
Brian Ruttenbur - Morgan Keegan
Paul Coster - JPMorgan
Steve Dyer - Craig-Hallum Capital
Darice Liu - Maxim Group
AuthenTec Inc. (AUTH) Q2 2008 Earnings Call July 28, 2008 5:00 PM ET
Operator
Good afternoon and welcome to AuthenTec's second quarter 2008 financial results conference call. At this time, all participants are in listen-only mode. At the conclusion of today's conference call, instructions will be given for the question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded today Monday, July 28, 2008.
I would now like to turn the call to Kellie Nugent with Shelton Group, the Investor Relations Agency of Record for AuthenTec. Kellie, please go ahead.
Kellie Nugent
Thank you Jahaira, and thank you everyone for joining us today to discuss AuthenTec's second quarter and six months ended 2008 financial results. With me on today's call are Scott Moody, Chairman and CEO; Gary Larsen, CFO; and Larry Ciaccia, President. As Jahaira mentioned, this call is being recorded. It is also being broadcast live in voice mode 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 the financial results for the second quarter and six months ended June 27, 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 website.
Please be advised that 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, July 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 table following the text of the press release.
I will now turn the call over to AuthenTec's Chairman and CEO, Scott Moody.
Scott Moody
Thank you, Kellie, and thanks to everyone for taking the time to join us for our fifth earnings call as a public company. As I am sure many of you are aware having quickly read through our earnings release. We once again had a very solid quarter in terms of our financial results.
Highlighting the quarter was a 50% year-over-year growth in revenues as we continue to realize increased attach rates in the PC market, while also benefiting from the expansion of our customer base. In addition, we recorded a 350 basis point year-over-year improvement in gross margin, and probably most importantly, we recorded our fourth consecutive quarter of profitability.
Looking at each of these metrics in a little more detail, revenue for the second quarter was a record $18.4 million, well above our guidance of $17.2 million to $17.8 million. The material part of this was the faster ramp of our new AES2810, as well as the continued success of our AES1610, the smallest form factor device available in the PC market. These two products have now been designed into a number of Centrino 2 models being introduced by our OEM customers in the second half of this year.
Turning to our gross margin, we continue to benefit from the favorable shift in product mix to our newer sensors as well as stronger than anticipated yield performance for our newly introduced products. Together these factors resulted in gross margin of 48.5%, which was at a high range of our expectations.
With regards to profitability, our non-GAAP net income came in at over $1.2 million and improvement of over $1.8 million, as compared to the same quarter last year. On a per share basis, I am pleased to note that we generated just over $0.04 per diluted share, again exceeding our previously stated guidance of $0.02 to $0.03.
Beyond our financial results, I would like to take a few minutes to mention some of our other achievements during the quarter. As I said before, our opportunity is that our products will one day be a ubiquitous part of our every day lives.
In turn key to realizing that vision is the aggressive development and introduction of new technologies and products, as well as securing and defending the associated patents.
To that end, I am pleased to note that in just the first six months of 2008, we've introduced three new products, the AES2810 and AES2550 for the PC market, as well as the AES1711 for the wireless market. The fact is that it was not that long ago that we just introduced about one new product per year.
Our newest product the AES2550 was introduced in Q2 and offers improved imaging and sensor durability over our best-selling AES2501. The 2550 is well suited for the growing value segment of the PC market that requires higher security and convenience, yet at a highly competitive price. Together with our 2810 introduced in Q1, and the AES1610, our three newest PC products are designed into new models from eight of the world's top 10 notebook PC OEMs. Also in Q2, we publicly unveiled our new TouchStone packaging technology.
We're pretty excited about these new technologies as it will bring a whole new level of durability and aesthetics to the market. Initially targeted for our wireless products, we plan to expand its application to virtually all of our products for all of our markets over time.
Rounding out our new product focus so far in 2008 is our TrueSuite application software. Last quarter, we announced that we completed the purchase of the software assets with a company called EzValidation. Key attributes of this software are being integrated now into our planned TrueSuite application, a new addition to our growing portfolio of authentic products and capabilities.
We believe that the TrueSuite application will provide us with a more complete PC client offering, as we now provide everything from the sensor to the application software. Altogether we believe these new products, and these packaging technologies, along with those that are in the pipeline, will help drive new design wins in the future and enable a new generation of products that leverage our power of touch technologies and features.
Now, switching gears from our new products to the end markets, we continue to see progress in both the PC and the wireless market segments. Within the PC market, we have long said that the AES2810 has been designed in by three of the top four laptop manufacturers in the world. Although we are not at liberty to mention who those customers were until such time is they themselves announced their own products.
Today I'm pleased to note that all three of those customers have announced PC products secured by our AES2810. This product is the combination of a significant collaboration with our customers, the results being the world's most secure fingerprint sensors and a winning line-up of highly secure laptops and notebooks.
The first of these customers to announce was HP who have introduced five business notebook PC models featuring our AES2810 sensor. These base models include three new balanced mobility notebooks which can be ordered today from HP along with HP's ProtectTools suite of security software.
We also broaden our already diverse base of PC customers as Dell announced the first of their new laptops featuring our AES2810 during the quarter. These include the new Studio 15 and Studio 17 notebooks and are the first of many consumer and profession models that will offer our sensors from Dell. According to Dell, the Studio line-up of very colorful PCs combines aesthetics and technology into our fresh approach to high definition mobile lifestyles.
And yet a further expansion of our business, I am also very pleased to note that for the first AuthenTec sensors are being featured on Lenovo's ThinkPad series of laptops. The fact is that the IBM ThinkPad was one of the first to offer fingerprint sensors, although they were not AuthenTec sensors at the time.
While Lenovo has been a customer in the past, Lenovo's new ThinkPad X200 widescreen ultra portable is the first ThinkPad to offer one of our sensors. You'll see more ThinkPad models roll out in the weeks ahead. And including like HP and Dell, all these models will be using the Intel Centrino 2 processor.
In addition to the customers that have announced laptops featuring our AES2810, our AES1610 is also seeing a good bit of success as several customers have integrated to small form factor device into their PC products.
Included among the many laptops now offering the AES1610 is Toshiba's new Toshiba's new Protege R550 reportedly the world's lightest laptop. Our sensor brings convenience and security enhancements to this 2.4 pound notebook one of the first to include a solid state device to replace the hard drive.
The small form factor AES1610 was also added to two new ASUS ultra-mobile portable PCs, the R2 and the R50. Both UMPCs offer ASUS' Security Protect Manager feature to enhance PC security with our fingerprint sensor being a key component of their end-to-end offering.
The AES1610 sensor has also been integrated into yet another Motion Computing TabletPC, the FR. Motion Computing is a mobile computing and wireless communication leader that produces tablet PCs for specific end markets, such as medical and industrial applications.
When the Motion laptop is used by say either a doctor or a delivery person, the 1610 sensor is used to protect the device, the device's patient or customer-stored data and the networks to which the tablets connect.
Now turning to the wireless market, we recently announced that our AES1710 has been integrated into the NTT DOCOMO new FOMA F906i world phone. This is the 16th Fujitsu phone to integrate on AuthenTec sensor, but the first to offer the full capabilities of our TrueNav. TrueNav's technology enables full touch pad emulation, thus providing highly intuitive and accurate on-screen menu navigation.
Our integrated TrueNav feature gives users a full range of device navigation by sensing movement of their finger across the surface of the center in order to control the variety of phone functions. While we continue to have success in the Japanese wireless market, probably the most exciting thing about the wireless market is the continued interest outside of Asia.
I have always joked with folks that someone should never confuse interest with demand. And I am not here to announce any specific design wins outside of Japan. But the fact is that interest continues to grow and grow rapidly with new lower cost of AuthenTec wireless products plan for sampling later this year.
We continue to be cautiously optimistic that we will see a material expansion of this market in the coming several quarters. To properly support both our wireless and PC business in Japan, we also recently announced the opening of a new sales and technical center in Tokyo.
Customers in Japan include such brands as Fujitsu, Toshiba, Lenovo Japan, Hitachi, JRC, Sony, along with several others. With Japan sales having doubled over the last few years, this new sales office and our expanded technical staff will provide enhanced customer support while hoping drive growth opportunities.
Of course I can see Gary is waiting for his turn to speak here. But before I turn it over, let me just kind of update everybody on our patent litigation situation.
First, while patent litigation can be expensive, I see it is something akin to an investment than simply a tactical exercise. The fact is that we have not only invested a great deal of our investors' money in our leading-edge technologies, but we have also spent a great deal over the years in filing for and obtaining patents for these technologies all over the world.
However, those investments are really not much of value. If we do not defend and protect our technologies, especially what can certainly be considered the early stages of a whole new market opportunity. With that in mind, our decision some time ago to defend ourselves against the patent suite brought by Atmel in 2006 turned out to be the right now. As we previously announced, we won a summary judgment during the quarter, as the US District Court of North California issued a ruling that our products do not infringe either of these two patents asserted in the lawsuit.
In the Atrua case, we recently modified our original suit by adding two additional AuthenTec patents to the original three patents cited in our March 2008 lawsuit. I will not that we are also considering further additional modifications to this suit as well.
In summary, as everyone in our team knows there are many things that we would like to do better, but our team has been working very hard over this last year and it is nice to be able to report such a positive quarter as a result.
So now here's Gary to provide some more details on our financial performance. Gary?
Gary Larsen
Great. Thank you, Scott. Good afternoon, everyone. Revenue for the second quarter of 2008 was $18.4 million, which exceeded our guidance range of $17.2 million to $17.8 million. This compares to $12.3 million reported in the second quarter one year ago and $15.5 million reported in the first quarter of '08.
The 50% year-over-year revenue growth primarily reflects growth in the PC segment of our business, driven by increasing attach rates in the initial ramp of the AES2810. Partially offsetting this growth was the decline in our access control revenue driven by softness in our customers end market demand.
On a sequential basis, revenue increased 19% due to growth in both the PC and wireless segments. The sequential wireless segment growth was driven by the completion of the customers' transition from one phone model to the next AuthenTec-enabled phone model.
On a non-GAAP basis, gross margin excluding stock-based compensation was 48.5% in the second quarter and in line with our previously stated guidance range of 47% to 49%. This represents a 350 basis point improvement when compared to the 45% that was recorded in the second quarter of 2007.
The year-over-year gross margin expansion was primarily due to a favorable product mix shifts to higher margin sensors and lower production costs. Sequentially, this represents a modest decline primarily due to the start-up costs related to the AES2810.
Operating expenses excluding stock-based compensation were $8.3 million. This compares to $6.1 million in the same period one year ago and $7.9 million in the first quarter of 2008. The increase in total operating expenses primarily related to investments to further our growth including R&D associated with new product development activities to support the AES2810 introduction.
Also during the second quarter, we incurred additional legal expenses due to the pending litigation with the Atrua and legal costs related to the Atmel case, in which we were awarded a summary judgment. Operating expenses as a percent of revenue decreased to 45% from 49.6% in the year ago quarter.
On a GAAP basis, net income for the second quarter of 2008 was $651,000 or $0.02 per share. This compares to a net loss of $6.7 million or $7.37 per share in the second quarter of 2007 and net income of $188,000 or $0.01 per share in the first quarter of '08.
Non-GAAP net income, which excludes stock-based compensation charges of $593,000, was $1.2 million or $0.04 per share in the second quarter of 2008. This compares to a net loss of $571,000 or $0.03 per share in the second quarter of 2007 and net income of $587,000 or $0.02 per share in the first quarter of 2008.
Non-GAAP earnings per share for the second quarter of 2008 were computed using 30.6 million outstanding shares. On a year-to-date basis, revenue for the six months ended June 27, 2008 were $33.9 million. This compares to revenue of $21.6 million for the first six months of 2007.
On a GAAP basis, net income for the first six months of 2008 was $839,000 or $0.03 per share and compares to a net loss of $12.3 million or $14.69 for the first half of '07. On a non-GAAP basis, net income for the six months ended June 2008 was $1.8 million or $0.06 per share and compares to a net loss of $2.3 million or $0.12 per share for the first half of 2007.
Turning to the balance sheet, we ended the second quarter of 2008 with $66.6 million in cash and investments. This compares to $66.3 million at the end of December 2007. As of June 27, 2008 accounts receivable was $8.2 million which compares to $6.5 million as of March 28, 2008.
Day sales outstanding for the second quarter were 40 days, up 2 days from 38 days in the first quarter of 2008. Increase in day sales outstanding was primarily due to the timing of revenue during the quarter. At the end of the second quarter, inventory was $7 million which represents 68 days on hand is in line with our growth and revenues.
Compared to the first quarter of 2008, this represents an increase of $2.9 million primarily due to the build-up of inventory to support our customers ramp-up for the third quarter of this year. Capital expenditures for the second quarter were $779,000 which represents an increase from the $190,000 reported in March 2008.
The increase is primarily related to equipment purchases supporting the manufacturing test of our new products. Depreciation was $258,000 in the second quarter of 2008.
With regard to guidance, notwithstanding the macroeconomic weakness that is impacting a number of other technology companies, we expect our strong growth to continue supported by new product introductions and robust pipeline and design win which will drive increased revenues on a year-over-year basis.
For the third quarter of 2008, we expect revenue to range between $19 million to $20 million. Accordingly, we expect the third quarter non-GAAP earnings per share to range between $0.04 to $0.05 per share compared to a profit of $0.03 per share in the third quarter of 2007. For the full year of 2008, we expect revenue to range between $72 million to $78 million consistent with our previously provided annual revenue guidance.
We will now hand the call back to the operator who facilitate the Q&A session.
Question-and-Answer Session
Operator
(Operator Instructions). Your first question comes from the line of Steve Smigie with Raymond James. Please proceed.
Steve Smigie - Raymond James
Great. Thank you. Congratulations on a nice quarter.
Scott Moody
Thanks Steve.
Steve Smigie - Raymond James
Just curious on the revenue, you beat by quite a bit, I am just curious is any of that revenue in Q2 that pull forward maybe from Q3 stuff ramping a little faster than anticipated I think maybe you said?
Scott Moody
Well, it's actually a little bit hard to judge where it's necessarily pulled from, but we certainly were pleased with the quarter. We did see a reasonably significant ramp on the 2810. The 2550 was also shipping and it didn't seem like the slips on the Montevina, the Centrino 2 platform. We're really having a material effect on us in Q2 as maybe some people expected.
And as Gary just alluded to, we do expect a uptick to continue in our third quarter in our revenues. So Q2 have been a little bit less and maybe closer to our guidance and Q3 been a little bit higher, I mean our objective at the end of the day is to satisfy out customers. They wanted the product in Q2 and we shipped it.
Steve Smigie - Raymond James
Right. You reiterated your guidance for the overall year. So you guys are still confident in the tracks you are seeing. Is it possible to you being a little bit cautious in Q3 revenue guidance?
Scott Moody
Well, I tell you right now, I mean everyday you open the paper or drive by a gas station, you read another horror story or you see it on the sign. So I think a lot of people were very leery about the overall economy. I think the important part for us is that we are executing and doing what we said. We mentioned HP of course with the 2810, Dell coming on as a new customer and Lenovo ThinkPad as well. So we are getting the design-ins. We are seeing a lot of interest again jokingly not to be confused with demand, but I wouldn't be mentioning it unless, we thought it was material. We are continuing to see a lot of interest and growing interest in the cell phone.
So Steve, frankly there is only so much I can do about the overall economy. We went into the year relatively, I would say, pessimistic about the overall economy. I am pleased that we've been able to attain or retain the guidance we provided earlier on. So as long as we continue to execute, gain share, start penetrating that wireless market, smarter people than us can estimate on what the overall economy and the market will do.
Steve Smigie - Raymond James
Okay, great. And then just last one was, you opened the design center, you've got the litigation costs just curious what R&D and SG&A costs look like here in Q3?
Gary Larsen
Well, Steve, not to give specifics out, but we do expect R&D will increase. As we said, we're continuing to invest in that space. We have some tape-outs in the quarter. Most of the other expenses should be in line and we did out litigation expenses this quarter related to Atmel and Atrua, as I mentioned. This quarter will also be impacted by those expenses. So, our OpEx will increase in the next quarter, but we do expect, we showed a lot of leverage this quarter from last year going from 50% to 45%. So we still expect OpEx to increase in dollar terms but to show some leverage.
Steve Smigie - Raymond James
Okay. Congratulations again and congratulation on the Dell win.
Gary Larsen
Thanks.
Operator
Your next question comes from the line of John Barton with Cowen & Company. Please proceed.
John Barton - Cowen & Company
Thank you very much. Scott, again congratulations on a Dell win and ThinkPad, etcetera. Could you give us some insight into competitively, how you won those sockets? What is it that those customers saw from AuthenTec, your product offering that made them make the change from a previous supplier?
Scott Moody
Well, let me specifically talk to our products. And to that end, as we mentioned the AES2810, it's a new product, we started designing it in with customers last year mid to late, and of course the first customers are announcing now. I think the key attribute of the 2810 is that it does the final match, this is John or this is not John directly on our silicon. Compared to prior fingerprint sensors that did it in one or two ways, either A, the final math was done on the host processors. And there were some that feel that that was not secure enough or in other cases and our competitor will offer this.
The final math was done on a microcontroller, microprocessor that was shipped with the fingerprint sensor. In other words, there was a two-chip solution. So we took what was a two-chip solution made it one and made it secure. So, I think those are the things that drove that business for us.
John Barton - Cowen & Company
And based upon what are you seeing in the marketplace, what do you think the competitive response will be to that, I mean how long until some of those competitors have a single-chip solution?
Scott Moody
Well, you have to assume a lot of people are working on similar solutions, but I think more importantly, where we're at and now we're developing products to take it beyond that. I will actually mention John is that one is a more secure, more integrated solution for the higher end laptops. At the same time, we are working aggressively on lower cost fingerprint sensors as well. The value end of the laptop markets is doing relatively well. The overall laptop markets is doing very well. The value end, if you will, the lower cost end, is also doing very well. And what we want to do is get integrated into those.
We've talked about before the adoption rate in laptops being say 25%. For the most part those are, if you will, on a higher end or at least the medium end laptops. What we would like to spread that to is 50 and eventually a 100%. So over this next year not only of course improvements to the 2810 medium range products like the 2550, and then in our pipeline, we have these lower cost product. So we will be able to really cover the entire portfolio of laptops as well as desktops and peripherals. So we're as much about extending our market opportunity in laptops, desktops which are not penetrated at all right now and peripherals, then just tete-a-tete with a competitor year in and year out.
John Barton - Cowen & Company
On the top little gross margins I think what I heard you say was that some of the upside in gross margins that came this quarter was because of good yields on the 2810 and we either say better than expected or you had it basically padded there in case the initial ramp was a little slower than expected. A little more insight, if I could, I mean as we look at this gross margin this quarter as a base line, how much more room is there for enhancements and the yields of the 2810 and the other new products as we look at over the next couple of quarters?
Scott Moody
Yeah. So first off, myself, I have been in the semiconductor business for almost 30 years. And I have introduced many new products into the market. So usually they not only have lower yields but things like higher test times. So, I think our operations team really did an excellent job introducing this into manufacturing, ramping exceedingly quickly and doing that with good yields, as well as efficiencies in test and so on and so forth.
Generally speaking, I think we are looking at, this last quarter we provided range of about 47 to 49. We will probably keep in that range for this quarter, the 47 to 49, but we continually have a lot of opportunity as we approach our real goal of over 52%.
John Barton - Cowen & Company
And last question, if I could. Gary you didn't want to breakout your R&D, SG&A, etcetera. Could you give us some sense with respect to the legal expense just because it can be such a step function type spending? Are you at a steady state spending that supports at least the legal efforts that you have on the horizon? Could we see it step either up or down in the coming quarters?
Gary Larsen
Well, yeah, as you say, John, I mean legal expenses when you are involved in litigation can bounce around pretty substantially depending on what stages of the litigation you are in. I mean this quarter we did have both Atmel and Atrua to some extent hitting us. So that spending the quarter we have reflects that level of spending. So I am looking forward. We expect that it will be somewhat in the $0.5 million range on a quarterly basis, may get down a little next quarter. But then after that, we expect with the Atrua case, it is in full bore and will probably somewhere in the $0.5 million range, plus or minus in any given quarter.
John Barton - Cowen & Company
Thank you.
Gary Larsen
Thanks, John.
Operator
Your next question comes from the line of Brian Ruttenbur with Morgan Keegan. Please proceed.
Brian Ruttenbur - Morgan Keegan
Okay. Thank you. Great quarter. The slowdown of the economy, I know that you've talked about this before, but the economy slowing obviously and it doesn't seem to be slowing you guys down. Can you talk about what you see out there and why you seem to be dodging the bullet?
Scott Moody
So I did notice the gas at the corner gas station this morning was 389. So that was a material improvement over last week. One of the things, I guess is that we are in some of the higher end laptops and I think business is still moving along with investments. We are not in maybe some of those more cynical consumer laptops, although frankly over time we would like to be. And also I think more than any thing that we have introduced new customers associated with new products and we're in more laptops than we were last year so the attach rate is up.
So whatever effect the economy is having on us and Brian, it has to have some. I mean if the economy was much better, could our numbers in Q2 have been higher? Yeah, I am sure, they could have been higher for the year. So I think one thing is that we did a reasonable job going into the year in at least our expectations of the economy. And then the second is, is that whatever affects the economy or the markets, having overall we're making that up with new customers and a higher attach rate.
Brian Ruttenbur - Morgan Keegan
Okay. And the last question, how long is again day before we're actually going to see the cell phone in the US or Europe popping up, where you actually can get them at your local Verizon, Sprint, AT&T, whatever?
Scott Moody
With respect to our fingerprints sensor, I stop by the Verizon store every morning. But anyway I really can't give you an exact quarter brand.
Brian Ruttenbur - Morgan Keegan
I mean are we talking two, three years, five years, ten?
Scott Moody
I mean, I said it cautiously optimistic as probably as good a words as I want to put around it that we will see something in 2009. And probably every time we've had the phone call this year, I have been a little bit more positive about that. So if we look at the phone call we had ramping up 2007, the Q1 and the Q2, my guess is if I went back and I looked at my verbiage associated with these, it's become a little more positive not to be confused with the design win and are projecting a specific quarterly uptake. But we are definitely more positive.
Brian Ruttenbur - Morgan Keegan
Okay. Last question, once you get the design win, let's just say, how long before we actually see the product out there, is it six months?
Scott Moody
Well, first off, I think in the cell phone, we have to be a little bit careful. We will probably announce a design win relatively close to when the customer actually introduces the product. And the reason for that is cell phones historically don't always make it to the end market. If you get a laptop design win, it usually gets there, that's not always true for cell phone. So we'll always be conservative, we don't want to mislead the market, we don’t want to said expectations that we can't make.
With that said, the design cycle for our cell phone is anywhere from six to nine months, six being short, nine probably being a little bit more realistic. The good news is that we have worked on a lot of different cell phones out there so that we have experience on multiple different processors, whether from TI or analog devices, NXP so and so forth. And we also have a good amount of experience in the various OS's like Symbian. So we can move along with our customer relatively quickly.
Brian Ruttenbur - Morgan Keegan
Thank you.
Scott Moody
Thanks, Brian.
Operator
Your next question comes from the line of Paul Coster with JPMorgan. Please proceed.
Paul Coster - JPMorgan
Yes, thank you. Most of my questions have been asked, but just real quickly on the subjects of the gross margin normalization for the AES2810 and how many quarters does it take for the yield to optimize?
Scott Moody
Historically, and I am probably going back on my overall semiconductor experience, usually two to three quarters, where you're seeing it at the end of the third quarter and it's probably the second or the fourth quarter where you're seeing some benefits associated with just overall manufacturing efficiencies. Those are things like test times, more efficiencies in assembly, etcetera, etcetera. So in response, I'd probably say two to three quarters.
Paul Coster - JPMorgan
Got it. And then my last question is, once you have one of these design wins in the bag, you must have revenue visibility from unit shipment visibility stretching out several quarters, how far does that visibility stretch out?
Scott Moody
Well, there are two elements. One, we do know what models were designed into and thus we have visibility theoretically out probably as long as 12 months and in fact, with this cycle, maybe as long as 15 months. With the Montevina, I think we will last over long time into model year 2009. But that said, of course, how many of those units they ship while they provide us some level of visibility whether its an HP or Dell, Toshiba, Lenovo, ASUS, Acer, all those different customers.
Of course the question I think John was asking about the overall market conditions, they are dependent on how many they sell and of course we're dependent on that. But we have very good visibility in terms of the models we're on, what customers and a general idea of what they expect to sell over the next 12 to 15 months.
Paul Coster - JPMorgan
Last question, I am sorry, I want to append here, but is there a pricing differential for the laptops that include the fingerprints sensor and what is it?
Scott Moody
Some customers offer it as an option and those vary. But I would say more customers or more laptops offer it as part of the standard product, as part of the overall laptops so there is a really no breakout. And I would say that a lot of those laptops, not the fingerprints, not the only difference between them. So it would be hard to break down exactly what the fingerprint is. But of course with out ASPs below four, the billing material in the same category, it's a relatively inexpensive product to integrate.
Paul Coster - JPMorgan
Okay. All right. Thank you very much.
Scott Moody
Thanks Paul and welcome.
Paul Coster - JPMorgan
Thank you.
Operator
(Operator Instructions). Your next question comes from the line of Steve Dyer with Craig-Hallum. Please proceed.
Steve Dyer - Craig-Hallum Capital
Thanks. Good afternoon, guys.
Scott Moody
And welcome as well.
Steve Dyer - Craig-Hallum Capital
Thank you. Just a couple of quick things, most of might have been asked. Regarding ASPs, if you don't care to spell it out, can you at least any color directionally as to kind of how they've trended this last quarter?
Gary Larsen
Yes, Steve. I mean our ASP this quarter was about $3.50, so that's about 12% down from the prior year. So a good portion of that ASP change was due to our access control revenue as I talked being substantially lower, the access control products tend to be a multiple of three, four, five times average ASP and that business dropped quite a bit in the quarter. So when you take that out, our ASP erosion was probably more in the 9% to 10% range.
Steve Dyer - Craig-Hallum Capital
Okay .And then I could probably figure it out, but I'll be just ask you what was cash flow from operations in the quarter?
Gary Larsen
Yeah, the cash flow from operations was about 400K positive Steve. The one another thing just to get back on the ASP issues, we do expect ASPs next quarter, we do expect actually to increase as the 2810 gets fully rolled out. So we will actually see a sequential increase in ASP.
Steve Dyer - Craig-Hallum Capital
Okay, prefect. And then I am curious on the TrueNav functionality, is that something that you ever see being at all possible on a laptop PC replacing or augmenting a touch pad or is that strictly in your view a handset solution?
Scott Moody
My personal opinion is we don't see it as a direct competitor in the touch pad or so the competitor to some of the guys that do that. Where we see the fingerprint sensor being used as the touch pad, if you will, as TrueNav, is in the smallest form factor devices. The mobile phone is one but there are other applications as well, even in laptops. So for example, if it's a tablet, some of these UMPCs, if even those aren't big enough for touch pad, the opportunity is there to utilize or sense the TrueNav capability offered by our sensor.
Steve Dyer - Craig-Hallum Capital
Okay. Great. That's all I have. Thanks guys.
Scott Moody
Thanks, Steve.
Operator
You have a follow-up question from the line of Steve Smigie. Please proceed.
Steve Smigie - Raymond James
Great. Thank you. On the ASP, can you talk about what the pricing looks like on the lower cost products that you have developed and when do that start to impact overall ASP?
Scott Moody
We don't break them out individually. There is some difference now, I think the new products that we have in the pipeline which you would probably see in production at the end of next year, because obviously not only do we have to design but then they have to get designed in, so I don't think you'll see those impact till the end of next year.
And the good news is that usually and I think we can keep this up is that our newer products are actually our best margin products. So our plan obviously to drive down pricing associated with the elasticity of these markets to get in more and more laptops as well as we talked about the wireless market. We do think that we'll be able to drive down our cost materially faster.
Steve Smigie - Raymond James
Right. That makes a lot of sense. And along those lines, looking out into Q4, because that gross margin there as your manufacturing goods could that get over 50% in Q4 or at 50%?
Gary Larsen
I would never answer that question in the affirmative range. It will be difficult to say, we'll have to see as the quarter comes along. Generally before the 2810 ramp, we were talking in the 48 to 50 category, as these new products, remember it's not only the 2810, it's the 2550 and also in the last quarter we'll be ramping our new, the first TouchStone packaging products. So keeping in that 47, 49 kind of category best case 48 to 50 is probably a very reasonable with all the new stuff we have.
Steve Smigie - Raymond James
Okay. And can you talk about any, do you have any 10% customers in the quarter?
Scott Moody
Yes, Steve. We don't specifically get into that on a quarterly basis, I guess what I would communicate though is the top five customers in Q2 were about 70% of our revenue and that's down from about 87% in Q2 of last year. So this is showing that we have been diversifying our customers base and we expect that percentage will continue to improve going forward.
Steve Smigie - Raymond James
Great. And I guess just in terms of looking at the market share, sometimes you get some guidance or some thoughts on where you guys think you are in terms of market share on notebooks?
Scott Moody
So generally, I mean, again it's a little bit difficult to estimate because we're some times guessing what the competitors might be doing. Generally, last year, I think we had talked about in the 50% category and this year I think we've been generally probably going out of the year talking about 55% to 60% category.
Steve Smigie - Raymond James
Okay.
Scott Moody
Those are somewhat of obviously an estimate.
Steve Smigie - Raymond James
Okay. And last question was just, you mentioned the access control stuff a little bit, would you expect the recovery here in the coming quarter or is that you've taken economic type issue or is it just, you could help us understanding that a little better?
Scott Moody
Yeah. There are two things, I don't really see it as a negative line on our business other than it attracts ASP. There is drop off in revenue from last year to this. One, we have very aggressively focused on the PC and the wireless, that aggression is certainly paid off in the PC market and I believe will pay off in the wireless market. Number two, most of these access control companies are much smaller companies, here today, gone tomorrow, or at least here last year, gone this year. So they are not the big players like you see we are targeting in the PC and the cell phone market.
So I don't know that we are loosing any designs there, just some of these smaller customers are buying less, have inventory no longer exist. But all that said, I don't think that there is any doubt in my mind as well as most of our team here at AuthenTec that access control is an excellent market opportunity for us. Some of the products that we're developing in the PC and wireless, we think will play directly or with some modification, play better into the access control market and we are excited about that market.
The fact is there are a lot of doors, there are a lot of safes, there are a lot of home security systems, and access control numbers are much more difficult to come by just in industry report, as compared to wireless and PC. But my expectation is that market is probably as big as either of the other two.
Steve Smigie - Raymond James
Right.
Scott Moody
But I don't really see us having the bandwidth to really start to hit it until probably 2010 with wireless coming to being our big new market for next year at least incrementally big. The good thing about access control though is, is that it is a longer, it does take longer to get designed in usually. But once you designed in and although individual socket volumes are smaller, they last a long time and they drive to get margins. So we are very positive about it longer-term, but in the short-term we're not focused on it very much.
Steve Smigie - Raymond James
It makes sense. And just a follow-on. Could you see what the mix was in the quarter of notebooks versus wireless versus access?
Scott Moody
Yeah. So, I mean, the PC was very strong in the quarter, that was approximately 85%. So access control was only about 1.5 with the remainder in wireless.
Steve Smigie - Raymond James
Thanks very much guys. I appreciate it.
Scott Moody
Thanks, Steve.
Operator
Your next question comes from the line of Darice Liu with Maxim Group. Please proceed.
Darice Liu - Maxim Group
Good afternoon, guys.
Scott Moody
Good afternoon, Darice.
Darice Liu - Maxim Group
On the competitive front, AuthenTec has been able to differentiate itself from its peers, with the ability to read the skins live layer versus just a superficial skin which is what your peers do. Last month UPEK launched a new product that claims to read the "live layer". Can you provide some how this may impact the competitive landscape?
Scott Moody
Sure. Without addressing any specific competitor, if you go back and you read literature for the history of biometrics, a number of people tend to, let's say, copy what we say sometime later. I don't think that claim is anything new. What I can tell you is that the technologies between the various companies do operate materially different and we continue to believe that our TruePrint technology provides the best image across the greatest percentage of the population out there. And I also believe the biometric performance becomes more important as this market grows.
The fact of the matter is if you haven't integrated on just your laptop, and it doesn't work very well, for example who is from a competitor, you just turn it off and you go back to your old ways. But if the sensor is integrators on to your laptop, at work, your home desktop, your cell phone, your home security system, your ca, the technology better work and I think TruePrint really gives us differentiated advantage. Again I can talk to what people may claim, but I can tell you that there are significant differences between our TruePrint RF technology and other DC capacitor technologies in terms of how they operate.
Darice Liu - Maxim Group
Have you seen this product within (inaudible) recently?
Scott Moody
Yes. I am familiar with it. Not in terms of, it's actually, I mean I haven't seen it necessarily in biometric performance, but we are currently aware of it. I think we do a pretty good job of keeping up on the competition and working hard. The fact of the matter is it what we want to be as our own best competition, that's why you see as so aggressive in coming out with new products, so aggressive in coming out with new technology.
And the other point of that is, yes, our revenues have been doing very well. We've generally been guiding up and then beating our numbers in the last five quarters, but we then that take additional incremental money and continue to enhance our R&D investments. So I really think it's important for us to be our own best competition. I said it in my prepared remarks if you will that we are really at the forefront of this market. So we are going to continue to invest not only in technologies but patents as well.
Darice Liu - Maxim Group
Fair enough. Gary, a quick financial question, option expense were about $600,000 this quarter, is that we really should be modeling for the second half of '08?
Gary Larsen
Well, yeah, we did have a grant in Q2, where we granted options in RSU so was main annual grant. So that impacted about half the quarter. So I would actually model upwards from there Darice because we will get the full quarter effect of that grant and this grant was our first full grant kind of post-IPO. So that grant was at, the stock price was at 13.50. So it was at a higher level than say our pre-IPO grants. So I would model a higher number for Q3 and Q4.
Darice Liu - Maxim Group
Can you give little bit more color in terms of how much higher?
Gary Larsen
I would probably add about 150K to 200K per quarter.
Darice Liu - Maxim Group
150K to 200K to the 600 base?
Gary Larsen
Yes.
Darice Liu - Maxim Group
Okay. Thank you, guys.
Gary Larsen
Thanks.
Operator
You have a follow-up question from the line of John Barton. Please proceed.
John Barton - Cowen & Company
Just got one quick question on TrueNav, now that you have a design win out there, at least one that you are talking about, I am sure more with DOCOMO. How is the customer perceiving that functionality, meaning is it nice to have, are they willing to pay a premium for it, is it becoming a must have from a product offering perspective when you compete with your competitors, how are they looking at it?
Scott Moody
Well, I think the thing that people value the most always is around the security, that's the thing that gets people originally interested. But like any product, any semiconductor product, you continually want to add feature, so we've talked in the past about TrueYou, where you can personalize the phone or the laptop depending on what websites you like or applications that you use most. TrueNav falls into same category, increasing our value proposition.
We're not adding really any incremental cost to us at least on a recurring basis. There is obviously the development associated with the Nav feature itself both in software and a little bit in silicon. So I think it's very important, I think it's one of the keys for cell phone on that. There is one thing you can just lower price to hit that elasticity curve, but at the same time you can increase the value and what we're trying to do is both. So I do think it's important.
John Barton - Cowen & Company
And what I think I heard you say that doesn't really do anything to the dye size though, correct?
Scott Moody
Yeah.
John Barton - Cowen & Company
Okay. Thank you.
Scott Moody
You're welcome.
Operator
At this time, we do not have any more questions in queue and I would like to turn the presentation back to Mr. Moody for closing remarks.
Scott Moody
Okay. So before we conclude the call, I'd like to just a take moment to thank Dr. Ben Yu, CR of interest for his five years of service and many significant contributions. He is a member of Board of Directors, a few years ago when AuthenTec was selected as the most respected private semiconductor company by the Fabless Semiconductor Association. In the acceptance speech, I thanked Ben for his ability to really always see the forest through the trees. The fact is that while we faced many tactical challenges over the years, Ben never lost sight of the much larger opportunity in front of us.
Additionally, I'd like to welcome Bill Washecka to our Board of Directors. Bill is a recognized leader and accounting expert in the financial community and he brings a wealth of financial and technology business experience to our Board of Directors. In fact, given his experience with the big four accounting firm and as a CFO. Bill will cheer our audit committee going forward.
And then lastly after that we have scheduled to attend several financial conferences in the coming months, including those hosted by the AeA, Canaccord Adams, the Deutsche Bank, Jefferies, the Maxim Group, Morgan Keegan and UBS. It sounds like we will be flying all over the place there. Of course, you can visit our website for updates on these and other upcoming events.
And with all that said, thanks again for listening everyone and have a great evening. And operator, we can now disconnect and thanks for your help as well.
Operator
Thank you. And thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Good day.
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