AuthenTec, Inc. (AUTH)

Q3 2008 Earnings Call Transcript

October 30, 2008, 5:00 pm ET

Executives

Scott Moody – Chairman and CEO

Gary Larsen – CFO

Larry Ciaccia – President

Ryan Bright – IR, Shelton Group

Analysts

Steve Smigie – Raymond James

Steve Dyer – Craig-Hallum

Vishal

Samir Kalucha – Barclays Capital

Darice Liu – Maxim Group

Presentation

Operator

Good afternoon and welcome to AuthenTec's third 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, Thursday, October 30th, 2008. I would now like to turn the call over to Ryan Bright with Shelton Group, the investor relations agency of record for AuthenTec. Ryan, please go ahead.

Ryan Bright

Thank you, Becky, and thank you everyone for joining us today to discuss AuthenTec's third quarter and nine 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 Becky 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 Web site at investors.authentec.com.

After the market closed today, AuthenTec issued a press release discussing the financial results for the third quarter and nine months ended Friday, October 3rd, 2008. By now, everyone should have access to the press release and financial tables. However, if you do not, they are available on the Company's website.

Please be advised that the matters discussed in this teleconference contain forward-looking statements regarding future results or events. We caution you that such statements are in fact predictions that are subject to risks and uncertainties that could cause actual events or results to differ materially. Additional risks and uncertainties that could cause actual events or results to differ materially from these forward-looking statements may be found on the company's filings with the Securities and Exchange Commission.

Forward-looking statements are based on the company's beliefs as of today, Thursday, October 30th, 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

Thank you, Ryan. I'd like to thank everyone that has taken the time to join us this afternoon. Before we get into the Q3 results and the guidance for the next quarter, I'd like to first address some of the questions that I have heard over the last few weeks. First and probably the most important thing to recognize is that our market opportunity has not changed. Without a doubt, we are in a very tough economic environment, but the fact is that the fingerprint sensor market still represents a significant opportunity across multiple end markets, including PCs, cell phones, access control, automotive as well as many others.

We continue to believe that over time, this market represents an annual opportunity approaching 1 billion units a year. Second, we continue to believe that we have the technology, products and team to capture a material piece of this market. Many of you are familiar with our announcement of September 7th, but our focus now is on the future, and we are making rapid progress toward addressing the issues at hand.

Moreover, we continue to believe that the advantages of TruePrint remain critical to our long-term success and this advantage increases as the market grows. All that said, we are facing a tough market right now.

While the semiconductor market has historically experienced significant fluctuations, I'm not sure that we have seen the level of uncertainty that the market is witnessing today. In fact, in a recent article relating to Compow [ph], a large Taiwan ODM, their CEO indicated that as recently as August that their OEM customers were still providing optimistic forecasts and even asking Compow to reserve components supply for what was expected to be a strong fourth quarter. However, the CEO reported that customer demand dropped dramatically in September and the article went on to say that even these recent goals would be tough to reach.

So, things are tough, but the question is, what are we doing about it? First, we will continue to aggressively manage expenses and be conservative with our cash. In Q3, we generated record profits and cash flow on essentially the same revenues as in Q2. More to the point, if you take the midpoint of our Q4 revenue guidance, we are forecasting a loss of just over $0.5 million. To put that in perspective, that is less than 1% of our cash. And this is at a revenue level we expect to rebound. Although that said, there is a great deal of uncertainty in the markets right now.

Second, while we are managing our expenses, we are not giving short measure to our research and development activities. I'm particularly excited about our next wireless product codenamed Rogers, which is on schedule for introduction in the first half of next year. The sensor is smaller, more durable, features improved navigation at lower power and is more attractive aesthetically.

Moreover, we will be able to produce it at a much lower cost. Timing for Rogers seems to be well aligned with customer roadmaps, as we continue to see a great deal of interest in the cell phone space, even outside Japan and Asia. As I've said before, we don't want to confuse interest with demand, but the fact is that the interest level continues to grow at a number of the top cell phone OEMs.

We also continue to make progress on the sister chip to Rogers for the PC market, codenamed Marcy [ph]. This product is very similar to Rogers, as it too will be smaller, more durable, more attractive and produced at a lower cost. We believe that Marcy, together with the new TrueSuite application we are developing, is well positioned to penetrate the fast growing market for low-cost PCs.

And while I do not want to get too far ahead in terms of our product roadmap since they are subject to change, we're in the initial stages of a new product for higher end enterprise portion of the PC market. This product will potentially also have application and access control. Over time, we think that the access control market could potentially be as large as either the PC or the cell phone markets.

Third, we are not the only ones facing challenges, but due to our strong cash position and strong product roadmap, we are in a good competitive position. This is not easy stuff to do, which is why over the years you have seen several, if not tens of companies, big and small withdraw from the market. Unlike some of our competitors, we do not have to raise money in this challenging economic environment. While others might be looking to simply survive, we are working to accelerate our development activities.

And finally, when we reported on a design loss last month, we were estimating that the associated revenues would start to decline in the third quarter of 2009 and materially do so by the fourth quarter. Although these things are very difficult to predict and things change, our latest estimate is that this conversion may not in fact begin until the first quarter of 2010, some five quarters from now.

Let me touch base on Q3 and Q4 before turning it over to Gary. We had what I believe was a very positive third quarter in terms of our financial results. Revenues for the quarter came in at $18.4 million, in line with our revised guidance and a 22% increase when compared to the same quarter a year ago. Year-to-date, our revenues were up 43% from the first three quarters of 2007. With regard to profitability, I'm pleased to note that on a non-GAAP basis, we achieved record net income of $0.05 per diluted share, which was above our revised guidance range.

In addition, we generated over $1 million in cash. Since our last earnings call, we also announced that we had reached the milestone of being designed into 100 Centrino 2 laptops, including a recent announcement by Fujitsu-Siemens using our newest PC product, the AES2550.

In the cell phone market, we began shipments of our new AES1711 product using our new TouchStone packaging technology. This product is now being built into what I believe to be the first biometrically enabled waterproof cell phone. I will also note that this phone not only features TouchStone, but also now takes advantage of our TrueNav capability.

Moving onto the fourth quarter, as presently forecast, at the midpoint, we are roughly anticipating a 30% drop in sequential revenues as compared to Q3. Approximately 10% of this, however, is due to the simple fact that Q3 was 14 weeks long, as compared to Q4 being a standard 13-week quarter. Thus looking at this apples to apples, we are seeing something like a 20% sequential drop in revenues, which seems to be consistent with several other companies, at least those that have reported more recently. Some of this sequential drop is associated with certain customers working through some level of inventory, consistent with the comments made by the CEO of Compow.

I will note, however, that all of our key accounts are presently planning to take delivery of sensors this quarter. So, it would appear that they will have worked through any excess inventory by the end of this quarter.

At this point, I'm going to turn it over to Gary before joining both Gary and Larry to take your questions.

Gary Larsen

Thank you, Scott. Good afternoon, everyone. As Scott mentioned, revenue for the third quarter of 2008 increased 22% to $18.4 million, which was in line with our updated guidance. This compares to $15.1 million reported in the third quarter one year ago, and $18.4 million reported in the second quarter of 2008.

On a non-GAAP basis, gross margin, excluding stock-based compensation, was 47.3% in the third quarter and within our previously stated guidance range of 47% to 49%. This compares to 47.6% recorded in the third quarter of 2007 and 48.5% in the second quarter of 2008. Slightly lower margins reflect manufacturing inefficiencies and ramping our newly introduced packaging technology.

Operating expenses, excluding stock-based compensation, were $7.9 million. This compares to $7.1 million in the same period one year ago, and $8.3 million in the second quarter of 2008. The year-over-year increase in total operating expenses is primarily related to investments in R&D to strengthen our complete solution. Noteworthy to mention, during the third quarter, we incurred a one-time credit to G&A of approximately $600,000 related to a litigation settlement.

Operating expenses as a percent of revenue were approximately 43% as compared to 47% in the third quarter one year ago. On a GAAP basis, net income for the third quarter 2008 was $550,000 or $0.02 per diluted share. This compares to a net income of $517,000 or $0.02 per diluted share in the third quarter of 2007 and net income of $651,000 or $0.02 per diluted share in the second quarter of 2008.

Non-GAAP net income, which excludes stock-based compensation charges of $841,000, was $1.4 million or $0.05 per diluted share in the third quarter of 2008. This compares to net income of $859,000, or $0.03 per diluted share in the third quarter of 2007 and net income of $1.2 million or $0.04 per diluted share in the second quarter of 2008. Non-GAAP earnings per diluted share for the third quarter of 2008 were computed using 30.3 million outstanding shares.

For the nine months ended October 3rd, 2008, revenue was $52.3 million, which represents a 43% increase over the first nine months of 2007. On a non-GAAP basis, net income for the nine months ended October 2008 was $3.2 million or $0.11 per diluted share and compares to a net loss of $1.4 million or a loss of $0.07 per diluted share for the first nine months of 2007.

Turning to the balance sheet, we ended the third quarter of 2008 with approximately $67.8 million in cash and investments. This compares to $66.6 million at the end of December 2007. Operating cash flow for the quarter was $1.9 million.

As of October 3rd, 2008, accounts receivable were $8.4 million, which is an increase from $6.4 million in the year-ago quarter and $8.2 million as of June 2008. Day sales outstanding for the third quarter were 45 days, up 5 days from 40 days in the second quarter 2008. The increase in day sales outstanding was primarily due to timing of customer payments that were received after the quarter closed.

At the end of the third quarter, inventory was $6.9 million, which represents 69 days on hand. This is consistent with the 68 days on hand in the second quarter of 2008. Capital expenditures for the third quarter were $295,000 and depreciation was $289,000. With regard to guidance, as Scott discussed earlier, we are seeing weakness in all of our served markets, as our customers have been reducing forecasts and pushing out orders that were originally scheduled or expected to occur in the fourth quarter.

As a result, we expect our revenue to range between $12.5 million and $13.5 million for the fourth quarter. We will continue to control expenses. However, as a result of the lower revenue, we expect our non-GAAP loss per share to range between $0.01 and $0.03 in the fourth quarter.

We'll now hand the call back to the operator, who will facilitate the Q&A session.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Steve Smigie of Raymond James. You may proceed.

Steve Smigie – Raymond James

Great, thank you. I was hoping you could comment a little bit in terms of the demand (inaudible) across all categories, to what it would be in say computing versus access versus handset?

Gary Larsen

Well, in terms of a drop off, I mean I think the most significant is consistent with what other people have seen. I'd say it was in the PC market, followed a little bit in cell phone. The Japanese market is definitely down if you read some of the articles in terms of total units sold. Not as much as other areas, and particularly in the US. And then finally access control, I think for this quarter, it happens to be down, but that's kind of a pop business, it's not as steady run rate. So, sometimes you'll see big orders one quarter and nothing next quarter. So, the biggest softness is in our primary market. And again, I think that's consistent with what other people are saying and is reflected by the comments that we heard from the CEO of Compow, and that's in the PC market.

Steve Smigie – Raymond James

You mentioned you think you'll work through this inventory that you discussed before. Q1 is typically seasonally down given the big drop here and the fact that you worked through inventory. Would you still be thinking that Q1 would be down seasonally, or is it – how do you think about Q1 at this point?

Scott Moody

Steve, that is a very difficult question. Lot of smart people in the world trying to figure out the economy right now, but it is – we're showing a big dip in Q4, I have some hope on a number of reasons that Q1 would be a little bit better. But certainly from what we're seeing, where there was some level of inventory at an ODM or even on OEM, that of our inventory at their factories, that it appears they have gone through that and hopefully we'll return to a more normal buying level in Q1, although I'm not sure normal means in Q1. That only leaves the only risk element the same thing as any other company; how many laptops may be left on a store shelf or something like that. But right now, we would at least expect some of these customers to pick up from the level that they've been buying this quarter.

Steve Smigie – Raymond James

Okay. Can you comment on what you think cash flow is going to look like this quarter?

Gary Larsen

Yes, Steve, this is Gary. Scott – the guidance we're giving is $0.01 to a $0.03 loss, so roughly in the middle of that, that's about a 500 – roughly, a $500,000 net loss. Just looking at the quarter, I think roughly from a working capital standpoint, we should be pretty much even. So, I would probably say all the things being equal, the net loss would probably fall through as the cash flow, so we use maybe about $0.5 million in cash.

Scott Moody

Steve, just to follow up on that, Gary mentioned the $67 million we had in cash and investments. I think a number of people have expressed concern that we could go through this cash relatively quickly. I'm pleased – one of the things that I've seen for us in terms of managing this quarter in Q4, the market is what it is. Our Q4 is really wholly associated with the macroeconomic level. And yet, even at this level, we're only looking at, again at the midpoint, possibly $0.5 million, which is less than 1% of our cash.

Steve Smigie – Raymond James

Great. I'll let somebody else ask questions. Thanks.

Operator

And your next question comes from the line of Steve Dyer of Craig-Hallum. You may proceed.

Steve Dyer – Craig-Hallum

Thanks. Good afternoon, guys. Sticking with the model, I guess if I could, sounds like you had about a $600,000 credit on G&A. How should we think about that line item going forward? Is that $1.5 million kind of a number? I'm just trying to get to – and I think operating expenses is ultimately where it's going to be. How we should think about OpEx going forward?

Scott Moody

Yes, I'll address all of OpEx, Steve. So looking at last quarter, we reported $7.9 million in total OpEx. Now, we did have the litigation credit of about $600,000. But kind of this extra week we had in the quarter pumped up expenses by about $400,000. So, when I look at Q3 on a normalized basis, that put us at about $8.1 million. So, looking into Q4, there is some volume coming off, so say that there's about $200,000 of variable expenses, mostly commissions coming off.

We have taken some other actions related to reducing costs. We have put the brakes on hiring, we did incur a couple of hundred thousand of say hiring related costs, relos [ph] in that, that were in Q3. We won't be having that in Q4. We have taken a pretty hard look at a lot of the outside services and consultants that we've had; we've cut back in those areas. And we've really looked across the board at all of our discretionary spending. So, at this point, we're looking at taking that OpEx from say the $8.1 million in Q3, something closer to $7.2 million, $7.3 million in Q4.

Steve Dyer – Craig-Hallum

Okay, that's helpful. Thanks. And then as that I would assume tick up ever so slightly going forward just based on R&D spend probably and keeping sales and marketing as a percentage of revenue relatively flat?

Scott Moody

Yes, that's kind of – it's the baseline we have I guess I'd say for today. I mean we will continue to evaluate our operating expenses as we get a better picture of the revenue levels that we're looking out into 2009. But the good thing is we have taken some actions now to get our expenses more in line with the revenue we see near-term.

Steve Dyer – Craig-Hallum

Okay, great. And then moving on to the Marcy chip. How soon will that be shipping? Maybe I missed that, and is that kind of the lower end PC chip that you've targeted to address some of the lower end laptops that you've thus far have been locked out of to a large extent?

Scott Moody

Right, sure. Good question, Steve. First off, just to go back to its sister chip, Rogers, that part's actually, although we won't officially announce it until the first half of next year, I'm pleased to say we do have that back, it's going through tests now, our own internal prototyping tests and things are going quite well. We were waiting for that chip, which we were working to move in the schedules to do the final version of Marcy. So that's moving forward now, we're also looking at that at the first half of next year as well, but will follow Rogers by a little bit. So Rogers, if you remember what I said was is that's targeted toward cell phone. It really does seem well suited for what customers are looking for right now and there's a lot of interest in that.

Marcy, the important part of that is there's a number of features associated with Marcy. I don't want to go into too much for competitive reasons, but it's not just a matter of having a lower cost chip, which is always important, but a feature-rich chip along with the software, which we've talked about before, TrueSuite, which joined with Marcy I think will give a very positive user consumer experience; offer them a lot of features and do it in a very friendly way. So it's as much about the features, the offering, aesthetics, and the feature set within TrueSuite being very consumer friendly, as it is just about a lower-cost chip.

Steve Dyer – Craig-Hallum

Okay, so are you going to have anything that addresses the net books [ph] end of things?

Scott Moody

We in fact hope that Marcy would do that.

Steve Dyer – Craig-Hallum

Okay, great. And then, going back to Rogers, is that something that you feel like cracks things open on the cell phone side for you? Since it's been slow going outside of Japan and certain parts of Asia, is that the answer to what a lot of people have been looking for?

Scott Moody

Well, I don't want to get too carried away, be a little conservative, but it certainly does address the aesthetics, the size, it continually allows us to drive down the cost. TrueNav, which we talked about before, talked about multiple times, is directly integrated into the silicon, it's more responsive, is lower power. So, yes, I mean I think to some extent that's true; Rogers will provide some of the answers customers were looking for.

But at the same time, I just think that the interest level has gone up, especially when you look at the feature set around the power of touch. It's not only about security, and security is important; the more I have on that phone, the more I'm interested in protecting it. But TrueNav I mentioned is now or will soon be used in Japan as that phone hits the market and I think people will take a lot of advantage of that. Eventually I think someday potentially replacing at least the mechanical buttons. There's a number of other features as well in terms of launching applications and a number of convenient features as well. So I think it's been a long-time coming, I would agree. But between costs, the feature set of the silicon and the feature set of the software, I think we're crossing that barrier.

Steve Dyer – Craig-Hallum

Okay. And then Marcy, just hoping back to that effect, will that be ready for the next PC design cycle?

Scott Moody

Well, that's interesting. I know we all talk about the PC cycle, but the PC cycle really goes on quite a bit. A lot of major decisions are being made, but new laptops are coming out all year long. And so, we're definitely targeting – not only would it be ready for the next design cycle, but I actually think it might have some opportunity in the latter part of even this design cycle.

Steve Dyer – Craig-Hallum

Okay, great. And then just one housekeeping question. Gary, I missed the CapEx and also what was cash flow from operations in the quarter?

Gary Larsen

Yes, so cash flow from operations was $1.9 million. CapEx was $2.95 million [ph] and depreciation was about the same amount.

Steve Dyer – Craig-Hallum

Perfect. Thanks a lot.

Scott Moody

Thanks, Steve.

Operator

And your next question comes from the line if Jeremy Grant of the Stanford Group. You may proceed.

Vishal – Stanford Group

Hello, Scott, Gary. This is Vishal [ph] on behalf of Jeremy.

Scott Moody

Okay.

Gary Larsen

Hi, Vishal.

Scott Moody

Didn't sound like Jeremy.

Vishal – Stanford Group

How are you guys doing?

Scott Moody

Very good.

Vishal – Stanford Group

Couple of quick questions; 20% drop you are projecting in revenues in fourth quarter – do you have any estimate of how much of that is because of inventory buildup versus because of deep [ph] market?

Scott Moody

Yes, so just to make sure we're accurate here. It's really number-to-number. It's a 30% drop. We think about one-third of that is really associated with if you look at the transactions that happen in that week, it's roughly about 10%. Apples to apples, then it's 20%. It would be very difficult to split in between what is market and what is inventory. I don't have a perfect figure there. There's obviously some inventory being bled through. It's probably not unfair to assume half, but to be honest I'd be guessing.

Vishal – Stanford Group

Okay. And also the new Bensford [ph], the Centrino 2 chip; will those start shipping out in second quarter of '09, or –

Scott Moody

Yes, those are actually shipping now. So generally we really don't announce things until our customers announce – we don't. Do those are Centrino 2 started shipping in the third quarter. We started shipping to those customers in the second quarter, for their ramp in the third, and then they started introducing that product in the third quarter. The primary product we're shipping into that set, or at least the new product was the 2810, the AES2810, but we're also shipping the AES2550, which is our newest PC product as well as the AES1610, which is our smallest PC product. And I think one of the things you'll see as we go forward, especially with our product roadmap and how aggressive we are being in it is that really there is not a product for the PC market, there is not a PC market. Steve, I think talked about the netbooks, so there's low-cost consumer. There's higher-cost consumer. There's netbooks, there's of course then business, small medium business. So, I think over time, you'll see us have more products which are really tailored for specific segments of the PC market, no less the desktop market as well.

Vishal – Stanford Group

And just last question; are there any big designs that you're competing for right now which you can then hopefully in the next six months help you make up most of the revenue that you lost – a good portion of the revenue that you lost during the last quarter?

Scott Moody

Right. So, one thing I just will note, I mentioned it in the opening comments; things are changing quite a bit, as always, but when we announced on September 7th, we had made the assumption that a good bit of that or half that revenue would start going away in the third quarter, and possibly all by the fourth. That appears no longer to be true, again it's a forecast. But it looks like that will not start moving away from us until Q1 of 2010. So, that point gives us a long time to work a number of things. We continue to have a very good relationship with that customer, and we continue to work on designing opportunities with them as well. But there are a lot of opportunities going on, and I think certainly we all know about the PC market and we're obviously big in that market, but we're not that big in the lower end. So, I think Marcy will help us and hopefully there will be some incremental revenue, certainly by Q1 2010, associated with that product. And then the cell phone; having a couple extra quarters to ramp up cell phone revenue opportunities is an exciting opportunity for us, but if you look all the way out in Q1 2010 it would be very difficult to predict exactly what that would do for us. But there's a lot of opportunity out there, and we're very aggressive about pursuing it and we're very aggressive about having the right products to pursue it.

Vishal – Stanford Group

Okay. Thanks, guys.

Operator

And your next question comes from the line of Samir Kalucha [ph] of Barclays Capital, you may proceed.

Samir Kalucha – Barclays Capital

Hey, guys. Can you hear me?

Scott Moody

Yes, you are fine.

Samir Kalucha – Barclays Capital

Okay, great. This is Samir Kalucha [ph] calling for Romit Shah. I just had a very quick question on the new product ramps that we're talking about here. Could you please provide us with a split between the low-cost market and the high-end market in terms of units? I know, we talked about total 1 billion units a year, but what would be the relevant breakdown between the low-cost and the high-end?

Scott Moody

Frankly, that's a good question. I don't have all of those numbers in front of me, but they're really the available data that you have. So for example, when one calculates that number, and obviously it's over time – we believe that we have the opportunity to be in every laptop. So if you take the data from Dataquest or IDC, we think that's our market. And of course, they break it into many different ways. The thing for us is we do thing that we can be on every laptop over time; probably every desktop and a sizable number of peripherals. In the cell phone market, when we come up with that number, which we generally think our market probably could be 0.5 billion units, we do carve out part of that market. We only assume that we're in, let's say the medium to higher end cell phones. If that cell phone is very low end, it's voice only. We don't assume that as part of our served available market. I'm not going to argue with a customer if they wanted to design us in, but the value proposition is not quite as strong, at least in terms of the security. So, we generally think that we have opportunity to be in all laptops, all desktops and a good number of peripheral products; so those are hard drives, memory keys, keyboards, mice, etc. And then in the cell phone, it's the mid to high end cell phones. And then of course, you can start adding the other markets as well. Access control and the numbers from people like IDC and Dataquest are a little harder to come by, it's a pretty fragmented market. But that clearly is a very big market in terms of home security systems, even door locks inside and out, so there's a lot of opportunity in the access control market. And then, there's other markets as well that we don't really talk about, although in some cases we're in them already. So for example, consumer products; whether it's an MP3 player or a GPS unit where we've had some design wins in that market as well. So, it really is a big pot of different market opportunities.

Samir Kalucha – Barclays Capital

Great, thank you.

Scott Moody

I hope that helped a little.

Samir Kalucha – Barclays Capital

Yes, it did. Thanks so much for taking my question. Thank you.

Operator

And your next question comes from the line of Darice Liu of the Maxim Group. You may proceed.

Darice Liu – Maxim Group

Good afternoon, guys. Can you provide updates on what the current ASPs are?

Scott Moody

Yes. Hi, Darice. So in Q3, we shipped about 5.3 million units, so our ASP, blended ASP, was $3.50, which actually was flat with Q2. Q2 was also $3.50, so looking the trend compared to the same quarter in 2007, the drop in ASP was about 10%.

Darice Liu – Maxim Group

Now, as we look to the future though and any typical downturn, and you see increasing ASP pressure. What are you modeling for ASP trends going forward?

Scott Moody

Yes, so for next year, Dara, a lot of the pricing's already been negotiated. So, looking into next year, we do see ASP erosion greater than what we've seen this year. So, we're probably looking at something in the 15% range, looking into 2009.

Darice Liu – Maxim Group

Okay.

Scott Moody

I would mention that both Rogers and Marcy, of course we're going to offer those in multiple packaging offerings, but some of those packaging offerings are greater than that in terms of our ability to drive down the cost. And actually, good job by our engineering and manufacturing folks in being able to drive down the size of the sensor, the silicon itself and packaging, reduce pin count, etc. etc. So I think you'll probably actually see a better average cost drop, at least for these new products even as compared to the past.

Darice Liu – Maxim Group

Now going along that; in terms of Rogers and Marcy, will the margin profile of your new product be on par with your current margin profile?

Scott Moody

It's a little further out, but certainly that's our target. And then, of course, we are looking as well, and I've talked about this in our longer-terms strategic vision to potentially incrementally get a little bit associated with software. So in terms of the hardware profile, that's still the objection; our objectives haven't changed in that, with maybe the opportunity associated with some of these products to generate not a great deal, but very profitable, some incremental revenue associated with software.

Darice Liu – Maxim Group

So even as you target the lower end market with these new chips, you'll be able to drive down the cost to the point where the margin profile could be on par?

Scott Moody

Certainly that's our objective.

Darice Liu – Maxim Group

And then in terms of your break-even; can you remind us what your break-even level is now? And as you lower your cost profile, you've mentioned cuts and outbacks [ph] and things of that sort, do you have a new target break-even model?

Scott Moody

Looking at Q4, roughly at the expense level we're predicting, that puts our break-even somewhere around the $14.5 million level. Yes, so that's our starting point as we head into next year. And again, like I said we'll be weighing our OpEx spending as we go into the budgeting process as we look at the revenue for next year and beyond. So, right now, roughly that $14.5 million to $15 million or so is our break-even level.

Darice Liu – Maxim Group

Okay, thank you, guys.

Operator

(Operator instructions) And you have a follow-up question from the line of Steve Smigie of Raymond James. You may proceed.

Steve Smigie – Raymond James

Thanks. I was hoping you could provide the breakout in the quarter between the various categories; computing, cell phone and access, in terms of revenue?

Scott Moody

So roughly, Steve, in percentage terms; so PC was roughly 85%, wireless was roughly 10% and access control was about 4% to 5%.

Steve Smigie – Raymond James

Okay, and then a question sort of asked before; any updates in terms of shirking [ph] the share losses since the last time had their conference call?

Scott Moody

I mean, I'm sure some people are wondering if Q4 or our revenue forecast for this quarter has anything associated to do with share or anything else like that. And to the best of our knowledge, we're all completely comfortable in saying I don't think that's true. It's really just the macroeconomic. The strong ramps we saw from some of our customers, the ODM's and the OEM's in Q2 and Q3 and then the economic conditions now and just an inventory level, that I think is being weeded through. So it's a little hard to estimate market shares right now. One, it's hard to get that denominator, I'm not totally sure what total laptops are being sold right now, and we are the only ones to my knowledge that produce anything in terms of quantities. But I don't think we're seeing a change in our market share, and frankly I'm not sure I would see much of a change at least through a good part of next year. And then, as in any case of course, we don't win them all, but we are very aggressive. And as I've said, I think when Samir or somebody asked the question earlier, we're certainly seeing a lot of activity as well in the cell phone, which could certainly bode well for us in 2010, if not sooner.

Steve Smigie – Raymond James

And the large customer where you lost the share and can you have good relations, have you had any wins with them subsequent to the big loss?

Scott Moody

So again, we don't specifically talk about wins and losses with any specific customer until; one, they announce and two, they allow us to announce, which is not always – some customers don't want you to announce. And you see that in the cell phone, in the PC and other markets as well. But we are definitely, we are certainly working with them and I think that will continue.

Steve Smigie – Raymond James

Okay, and then on the phone; you're talking about potentially 2010 ramp. Just any more color you could provide there? Could it potentially happen sooner? Or is the economy maybe pushing that out a little bit?

Scott Moody

I don't think the economy would affect that, obviously maybe the quantity, but I think the value proposition is there. And I think we've reached that plateau. The, again – I usually joke about it, but it is serious, don't confuse interest with demand, but the truth is there are different levels of interest. So I'm not talking about going to a show and having a bunch of people come by our booth and really like what we're showing or going to a meeting and giving them a nice marketing presentation. I'm talking about detailed technical evaluations, trading of information, meeting engineers to engineers, testing of the product whether it's biometric or durability or Nav features. I'm talking as well about negotiating, supply agreements. So the interest level's there, some of these customers are clearly putting in the time. So there's reason for cautious optimism and maybe it can be earlier than the first quarter of 2010.

Steve Smigie – Raymond James

Okay, great. Thank you.

Operator

And I'm showing that you have no further questions at this time. I would like to turn the call back over to Mr. Scott Moody for closing remarks.

Scott Moody

So thanks, Becky. Let me just close by saying that we were founded some ten years ago, and during that time we successfully managed through some pretty difficult times, including the dotcom meltdown, 9/11, and even the simple challenge of being a startup in 1998 with little money, no product, multiple competitors and not to mention an end market for our product that we had to help create. Today, there is no doubt that we are once again facing some challenges, but this time we are facing up to those challenges with a much stronger balance sheet, more resources, multiple customers, an extensive patent portfolio, a strong product roadmap and a clearly defined and large market opportunity. Thank you, and God bless. Thanks, Becky, so you can disconnect us now.

Operator

My pleasure. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Good day.

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