Date: May 21, 2013 Source: (
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Aware Inc. (NASDAQ: AWRE) reported that revenues for the first quarter of the year amounted to $5.6 million, an increase of 15% compared to the same period last year. This translates to pre-patent related income of $2 million; significantly higher than the previous year's operating income of $1 million. Overall, net income for the period came in at $1.9 million or equivalent to $0.08 diluted earnings per share. This is also higher than the previous year's net income of $1.1 million.
The strong performance is attributed to the increased profitability of its biometrics and imaging business. It also noted that the controlled operating expenses contributed to the higher operating income. Moreover, the net income included a patent arrangement of $0.8 million. This income is related to the agreement the company entered into several years ago with an unaffiliated party. Under the agreement, Aware assigned patents in return for royalties on proceeds from its monetization efforts. Since the company could not predict how much money it will get from its patent, it reports a pre-patent operating income to put an emphasis on its recurring income. Given that the major driver of its income came from patent, this should be included in the operating income.
Analysts do not have coverage on the stock. Its five year historical financial performance appears satisfactory. Revenues have been relatively flat for the last five years, though the company grew its net income significantly from $2.57 million to $72.31 million during the period. The reason is that it has earned significantly from the sale of some of its assets, which financed the purchase of its new assets and working capital.
For instance, it completed a sale of selected patents and patent applications to TQ Delta LLC for $16 million last year. These patents were related to DSL technologies. The move is part of the company's patent management efforts to sell or license a portion of its patent portfolio. Based on the latest annual report, it spent around between $6 and $7 million on research and development. This implies that it still plans to monetize its patent moving forward. As mentioned above, this is the reason why income from the patent should not be considered as a one-off item.
At present, the stock is trading at extremely cheap levels of 1.38 times earnings. Adjusting for net cash, the company would have traded at only $34 million market cap. It looks like the price tag for this company is significantly lower than its trailing earnings of $74 million. In fact, an investor would have taken its patent for free at the current price levels. Other peer companies are trading at higher valuations. Danaher Corp. (NYSE: DHR) is trading at 17.30 times earnings and Microstrategy Inc. (NASDAQ: MSTR) is valued at 48 times earnings. However, Aware seems like a good acquisition target for a bigger company with interests in the digital and communications space. On a longer term, Aware Inc. investors will be paid handsomely.
