AuthenTec (NASDAQ: AUTH), the world’s leading provider of fingerprint sensors and solutions to the PC, Wireless and Access Control markets, released their Q4/2008 and full year 2008 earnings and held their analyst conference call Tuesday after the market closed.

While the 4th quarter earnings and sales were below expectations, it’s the outlook that came in light, as I had previously expected, and in order to remain solvent, AuthenTec is taking drastic measures to cut costs and staff to conserve cash, and see things through to the other side.

What follows is a summary of AuthenTec’s earnings announcement, conference call highlights, and my take on the company’s latest quarter and results, and what you should do if you own the stock.

New to the AuthenTec story? 

AuthenTec, Inc. is a fabless mixed-signal semiconductor company that provides fingerprint authentication sensors and solutions to the high-volume personal computer (PC), wireless device, and access control markets.

AuthenTec offers a range of fingerprint sensors that enable users to access and control multiple functions on an electronic device by touching or sliding their finger across the sensor.

The company’s fingerprint sensors utilize unique information in fingerprints to verify the identity of the individual, as well as the unique, individual fingers on the same person.

With more than 40 million sensors sold worldwide, AuthenTec’s award-winning sensors take full advantage of The Power of Touch® by utilizing the company’s patented TruePrint® technology to deliver the most convenient, reliable and cost-effective means available for enabling touch-powered features that extend beyond user authentication.

These sensors are used in various applications related to security, password replacement, financial transaction authentication, and personalization applications.

The company’s products are used in a range of PC products and related peripherals, including laptops, desktops, memory keys, hard drives, keyboards, mice, and other devices.

In addition, AuthenTec’s products also integrate into various wireless devices, such as mobile phones, and personal digital assistants and personal navigation device, as well as access control devices comprising door locks, time and attendance devices, and remote wireless entry keys.

AuthenTec primarily offers its products to original equipment manufacturers, original design manufacturers, and contract manufacturers and sells its products through a direct sales force, a network of independent sales representatives, and distributors.

Want More?

• Read: my last quarterly earnings and conference call breakdown here.

I’ll break down this report into 4 parts:

• Hit Me With The Numbers: Q4 was bad, margins deteriorating
• Other Business Highlights: Lower Q1 guidance, reduction in workforce, cost cutting
• Conference Call Highlights: Management talked about steps company is taking to conserve cash
• Bottom Line: AuthenTec is on the border, it might be time to sell

Hit Me With Some Numbers

AuthenTec Misses Estimates, Margins Decline

Here are some of AuthenTec’s earnings highlights (growth from previous year’s Q4 or full year 2008/analyst’s estimates where applicable):

• Q4/2008 sales of $11.6 million (down 26% from prior year/vs. $12.9 million projected by analysts)
• Non-GAAP Q4 income of (-$.49 million), or (-$.02) per share (down from $1.3 million, or $.04 per share in the prior year/vs. (-$.02) per share projected by analysts)
• GAAP Q4 income of (-$1.3 million), or (-$0.05) per share (down from $.89 million, or $03 per share in the prior year)
• Gross margin of 45.8% (down from 50.0% from prior year, and down sequentially from 47.4% in Q3/2008, 48.5% in Q2/2008, and 49.6% in Q1/2008)
• Full year 2008 sales of $63.9 million (up 22% from prior year/vs. $65.2 million projected by analysts)
• Full year 2008 Non-GAAP income of $2.9 million, or $.09 per share (up from a loss of (-$.17 million), or (-$.01) per share in the prior year/vs. $.08 per share projected by analysts)
• Full year 2008 GAAP income of $45,000, or $0.00 per share (up from a loss of (-$10.9 million in the prior year)

My Take: AuthenTec came in light on the top line, but managed to meet analyst’s estimates for the bottom line for both the Q4 time period and all of 2008.

On a year over year basis, sales did increase 22% which is still a nice figure in aggregate, but the disturbing trends of the last 2 quarters, as well as guidance (more below) make this a fleeting number.

Finally, gross margins are falling precipitously, and have dropped pretty significantly in each of the last 4 quarters sequentially.

This is a very disturbing sign, but relates to the economies of scale as AuthenTec enjoys a bump in gross margins when times are good, and a drop when times are bad.

It doesn’t hurt that competition is heating up as well.

Overall it was a rather bland earnings release, with a decidedly negative bent.

Other Business Highlights

Lower Guidance, Serious Cost Cutting in the Works

• Q1/2009 revenue expected to range from $6 million to $7 million ($6.5 million midpoint) vs. analyst’s estimates of $12.65 million.
• Q1/2009 non-GAAP loss per share to range between (-$0.14) and (-$0.16) vs. analyst’s estimates of (-$.03) per share loss.
• Total Q4/2008 operating expenses, excluding stock-based compensation charges, were $6.2 million, a decrease of 16% compared to $7.4 million in the fourth quarter of 2007 and a decrease of 22% compared to $7.9 million in the third quarter of 2008. The decrease in operating expenses resulted from cost controls on discretionary spending and reductions in personnel, hiring and commission expense.
• Margins expected in the “mid-40% range” for the rest of 2009 because of the ramp-up of new chips with lower yields and inefficiencies typical of new product introductions and scaling, as well as the overall slowdown in the marketplace.
• No guidance for Q2/2009, but expect better results as a result of lower costs and increases in demand
• Operating cash flow: $1.5 million
• Ended Q4/2008 with approximately $68.7 million in cash and investments vs. $67.8 in Q3/2008
• Inventory in Q4/2008 was $5.8 million down from $6.9 million which represented 69 days on hand in Q3/2008
• Days Sales Outstanding (DSA): 31, down from 45 days in Q3/2008
• Sales breakdown was as follows: PC segment about 83% of total sales, Wireless segment about 12% of total sales, and Access Control was about 5% of total sales.
• Focused on reducing discretionary expenses such as travel, consultants, etc. Will reduce headcount by 20%, cash bonuses are being eliminated, and they are canceling raises.
• $5 million in savings in 2009, offset by legal expenses and other costs, which will rise to about $2.9 million in 2009.

My Take: Revenue was cut by half from analyst’s expectations as AuthenTec is getting crushed by the slowing demand of the PC market, and the glut of inventory that still needs to be worked through.

At the same time, the fact that they are reducing headcount, cutting costs and conserving their cash makes me feel a little bit better.

They also increased their cash collection rate as evidenced by their lower accounts receivable balance, which is down to $5.8 million now.

No matter what though, over time, they will be tapping into their cash reserves, so this might represent one of the last quarters of positive free cash flow generation for awhile, at least until things turn around in a big way for the company.

At the same time, management talked on the call how they expected Q2/2009 to be better than Q1 as a result of increases in business and working through their inventory issues and getting into the next cycle of products by PC manufacturers.

When I previewed AuthenTec’s earnings, I specifically talked about this, and how I thought that there was absolutely no way that the company would be escaping the grip of the failing semiconductor industry caused by weak consumer demand worldwide.

Things were pretty bad at AuthenTec and look to get worse before they get better.

This was not entirely unexpected.

I also wrote that what I really wanted to see was cash conservation, and being conservative in their cash use, and AuthenTec did exactly that.

It is the only reason they are still in my portfolio right now.

The rest of the story dictates what we should look for in the coming months, and predicates my decision whether to hang on or just cut bait and let this one go.

Now let’s take a look at the analyst conference all highlights and management’s discussion of the business.

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