Earnings Call Transcript - AUID Q3 2024

Operator, Operator

Thank you for standing by. My name is Bella, and I will be your conference operator today. At this time, I would like to welcome everyone to the authID Third Quarter 2024 Earnings Call. All lines have been placed in mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Graham Arad. Please go ahead.

Graham Arad, General Counsel

Thank you, operator. Greetings and good afternoon. This is Graham Arad, General Counsel of authID. Welcome to the authID third quarter 2024 results conference call. As a reminder, this conference is being recorded. With me on today’s call are our CEO, Rhon Daguro; and our CFO, Ed Sellitto. By now, you should have access to today’s press release announcing our third quarter 2024 results. If you have not received it, the release can be found on our website at www.authid.ai under the Investor Relations section. Throughout this conference call, we will be presenting certain non-GAAP financial information. This information is not calculated in accordance with GAAP and may be calculated differently from other companies similarly titled non-GAAP information. Quantitative reconciliation of our non-GAAP adjusted EBITDA information to the most directly comparable GAAP financial information appears in today’s press release. Before we begin our formal remarks, let me remind everyone that part of our discussion today will include forward-looking statements. Such forward-looking statements are not guarantees of future performance, and therefore, you should not place undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. Some of these risks are mentioned in today’s press release. Others are discussed in our Form 10-K and other filings, which are made available on www.sec.gov. I’d now like to introduce our CEO, Rhon Daguro.

Rhon Daguro, CEO

Thank you, Graham, and thank you all for joining us today. I am very excited to cover our third quarter results and provide an update across all of our initiatives. authID had a highly productive quarter, and I’m pleased with our progress and our overall path of growth. We are focused on accelerating and diversifying revenue growth. To do that, we must continue to improve our technology, widen the gap from our competitors, and assure our customers that we are offering the best technology, superior security, and customer delight. It is very important for authID’s product leader to have the depth and experience to help us reach $100 million in ARR and beyond. And so we are excited to welcome Erick Soto as our new Chief Product Officer. Erick brings over 15 years of experience in identity verification and financial services and has a proven track record in driving product innovation. Combined with our history of collaboration and building a uniform company, Erick positions us to further strengthen our platform and deliver exceptional value to our customers. I also want to cover the news we issued earlier this week announcing that authID has signed a $10 million agreement with a next-generation AI company to enable biometric authentication for a wide range of industries in India. This agreement represents a $10 million commitment over a three-year period, with a minimum commitment of $3.3 million each year for licensing authID’s identity platform services. We are incredibly excited to enter the Indian market where over the next 10 years, the biometric authentication industry could see exponential growth in transaction volumes as the demand for biometric identification continues to rise. We look forward to closely working with our new partner to deliver biometric authentication accuracy and a frictionless user experience to a wide variety of customers across banking, financial services, emergency services, and transportation industries in India and beyond. We also made good progress in securing new customers and OEM contracts in Q3. We signed a multiyear agreement with a global retail technology organization, which will leverage our biometric identity solutions to enhance digital experiences for multinational retailers and serve as an OEM reseller in the Asia Pacific market. This customer deal was over $1 million in contract bookings, adding another booking over $1 million coming out of our FAT 100 target. Further, we entered the telecommunications sector by signing an agreement with a broadband provider operating in all 50 states, enabling them to streamline and secure onboarding through our biometric identity and document verification solutions. Next, I want to highlight some recent customer Go-Live and the successful adoption of our solutions. Last quarter, I was excited that we took four customers into Production Go-Live. And I’m even more excited to do it back-to-back. For the second consecutive quarter, we have taken four customers to Production Go-Live, and the best part is that two deals signed in Q3 went Production Go-Live in the same quarter, matching our current time estimates for Go-Live, which can take three to six months depending on the size of the company. We recently made key staff appointments to bolster our sales initiatives. I’m very excited to add to our team, Donna Shawhan as VP of Partnerships and Erick Akre as VP of Sales, both of them specializing in financial services. The additions of Donna and Erick further emphasize our commitment to expanding our go-to-market reach. We hired these identity domain experts because of their fantastic track records, and I’m confident they will bring tremendous value to our clients. Continuing to our key metrics, we are seeing growth in the usage of our Proof and Verified products. Looking at the graph, the average number of Proofs processed per quarter before I joined was approximately 20,000. Since the re-launch of the company in June 2023 to June 2024, the number of identities processed per quarter has gone up approximately 25x to an average of 440,000 Proofs. We are also seeing a strong ramp in volume in the third quarter of 2024 with almost 800,000 Proofs being completed, which is nearly double the average volumes we processed during the earlier quarters. And over the last 12 months up to the beginning of October 2024, authID has processed more than 2 million Proofs, which is more than 50x the transaction volume compared to the years before I started. Our Verified product is also seeing strong growth; we have registered an average of 21,000 user identities per quarter, which is 42x growth. Even better, the third quarter has shown strong growth of more than 94,000 registered identities, a greater than 4x increase from previous quarters. However, at the same time, we have experienced delayed customer Go-Live and adjustments to their volume expectations that have pushed out anticipated revenue from 2024 to 2025. In consideration of these delayed customer Go-Live and volume adjustments, we have reduced our full year revenue guidance to a range of $800,000 to $900,000. Ed will walk us through the financials shortly. And while we are disappointed to bring down our guide, I want to emphasize that this is still 4x growth over last year, during which I was only fully operational for six months. Again, the fact that we have successfully signed customers and taken them live within the same quarter shows significant improvement, demonstrating that we are much more capable today than we were six months ago. As we sign more clients and ramp customers, our revenue and RPO projections will get more consistent. We have invested heavily in improving our technology and in making significant innovations that will unlock the adoption of using biometric authentication. We made significant strides in advancing privacy capabilities by completely eliminating every single privacy and compliance concern for adopting biometrics. Very large enterprise customers have told us they are only doing technology evaluations with authID because we have eliminated privacy and compliance issues associated with storing biometric data. They have always wanted to use biometrics but were hesitant due to the potential liabilities while regulations for biometrics are still being enacted. One customer said they would have to hire a compliance officer who specialized in biometrics if they were to use a biometric solution. All of that concern is completely gone with our release of version 4.0 with PrivacyKey. authID can now provide evidence-based identity verification without compromising user biometric privacy. This is critical as the world moves away from passive and predictive-based identity verification and is moving towards evidence-based identity verification. We have also achieved a tremendous leap in accuracy with a false match rate of 1 in 1 billion. This is near perfect accuracy. This is far more accurate than the NIST standard of 1 in 100,000 or Apple’s Face ID at 1 in 1 million. In this new release, we continue to go faster in processing speed, and we have added more capabilities to liveness detection to combat AI and Deepfakes. In addition, we have focused on user flow by improving the algorithms for document capture to improve completion rates as well as enhanced de-duplication capabilities to clean up identity records where fraudulent accounts can exist. I am proud of our team and our third quarter accomplishments, and we remain focused on executing our strategy and driving growth to finish the year strong. With that, I would like to turn over the call to our Chief Financial Officer, Ed Sellitto.

Ed Sellitto, CFO

Thank you, Rhon. As Rhon highlighted, we continue to execute our strategy and expand our market reach to report growth during the quarter. The following highlights compare our GAAP results for the quarter and nine-month period ended September 30, 2024, with the quarter and nine-month period ended September 30, 2023, unless specified otherwise. Total revenue for the quarter was $249,000 compared to $43,000 a year ago. For the nine-month period, total revenue was $687,000 compared with $118,000 a year ago. Operating expenses for Q3 were $3.8 million, flat compared to the prior year. For the nine-month period, operating expenses were $10.7 million compared with $7.6 million last year. The 2024 increase is primarily due to a one-time non-cash expense reversal in Q1 2023 of $3.4 million from the reversal of certain stock-based compensation related to employee terminations, which was not repeated in 2024. Net loss from continuing operations for the quarter was $3.4 million, of which non-cash charges were $0.6 million compared with a net loss of $3.7 million a year ago, of which non-cash charges were $1.6 million. For the nine-month period, net loss from continuing operations was $9.7 million, including $2.2 million in non-cash charges. This compares to a net loss of $16.4 million for the same period last year, which included $10.4 million in non-cash and one-time severance charges with approximately $7.5 million related to the exchange of convertible notes for common stock in 2023. Net loss per share for the quarter improved to $0.31 compared to $0.47 a year ago. For the nine-month period, net loss per share improved to $0.97 compared with $3.05 for the same period last year. We also monitor and manage our Remaining Performance Obligation or RPO, in accordance with GAAP and as noted in our financial statements. As of September 30, our total RPO was $3.8 million, a decrease of $0.4 million over the prior quarter due to the impact from certain customers that have delayed their Go-Live and expected usage ramp. The Q3 RPO includes deferred revenue of $0.3 million. We expect to recognize the full RPO of $3.8 million over the entire life of the contract, which are typically signed with a three-year term. Given the additional insight we now have on our Q4 pipeline and bookings, we also expect to grow our RPO to a range of $13 million to $14 million by the end of the year, up from the previously stated target of $12 million to $13 million. While the RPO is based on contractual commitments as agreed to by our customers, the expected time to recognize revenue is based on our best estimates given the current known facts and circumstances. The adjusted EBITDA loss was $2.9 million for Q3 compared with a $2.1 million loss for the same period last year. For the nine-month period, adjusted EBITDA loss was $7.8 million compared with a $6.0 million loss for the same period last year. The increase in EBITDA loss is primarily due to reinvestment in employees and contractors following the Q1 2023 restructuring. We also monitor and report on ARR, which is defined as the amount of recurring revenue earned during the last three months of the relevant period as determined in accordance with GAAP multiplied by four. The amount of ARR as of Q3 increased to $1 million compared to $0.2 million of ARR as of Q3 last year. Turning to booked Annual Recurring Revenue, which is the projected amount of annual recurring revenue we believe will be earned under contracted orders looking at 18 months from the date of signing of each customer contract. The gross amount of booked ARR signed in the third quarter of 2024 was $1.15 million, up from $1.02 million of gross booked ARR a year ago.

Ricky Solomon, Analyst

Hi Rhon. Congrats on the order from India. Could you expand upon that a little? And then I have a couple of follow-ups.

Rhon Daguro, CEO

To much of keeping the privacy of the customer. But certainly, it is a partner in India that is focused on generative AI coding and coding development. So basically, they are a platform that will act like thousands of human developers, utilizing a generative AI platform to do that coding in probably a quarter of the time. Those applications that are being coded predominantly in the region of India and beyond are being shipped with username and password as the default cybersecurity protocol. The partnership puts in place that authID will be the default OEM security provider for all those applications. We’re very excited about the partnership, looking forward to delivering for those customers.

Ricky Solomon, Analyst

I was wondering if you could help me understand a couple of things. First, it’s great that you brought on new customers and you’re bringing them on faster. But I’m trying to understand why the revenue guidance for Q4, which is implied in your annual guidance, is flat again given that new customers are going live. Also, regarding the $1.1 million de-booking of booked ARR since booked ARR represents revenue 18 months out. I’m trying to understand if they went live slower. Does that mean that, that revenue is now further than 18 months out?

Rhon Daguro, CEO

I’ll take that first part, and Ed, I’ll ask you to jump in on the second part. Essentially, our delays in Go-Lives occur for various reasons. We are focused on supporting the customers and helping them Go-Live and sometimes they have issues. We’re really focused on preserving those relationships instead of just enforcing contracts. If they experience delays, we will assist them through those delays, because once we get them live, we can start to realize that volume. As I said earlier, we believe we’ll ultimately receive all that expected revenue in 2025 instead of 2024. The ramp and getting them live just started happening here in Q3, so the delays impacted our guidance. We don’t expect this to be a trend though. However, I’m really pleased with the usage ramp showing up. We are drastically improving the number of transactions per product, and even jumping from Q2 to Q3 we see double-digit growth on both product sides. So from an investor perspective, you want to see adoption and growth. Again, unfortunately, it came a little delayed, but as we sign more clients, the ramping will allow more consistency in our estimates.

Ed Sellitto, CFO

Yes. Hi Ricky. Regarding the booked ARR point, we measure booked ARR with an expectation of 18 months from contract signing. So in the case of a delayed Go-Live, we reduced the booked ARR to reflect that revenue ramp will likely happen after the 18 months from signing. However, we still have the customer and are working diligently to get them fully ramped as Rhon described. We aim to drive to the original booked ARR and beyond, although it is not reflected in the net booked ARR number for that reason.

Gary Brode, Analyst

Thank you. I’ve got a couple of questions about the guidance you’ve given here. You kept the booked ARR number for the year, the guidance at $9 million. If I look at Slide 11 in the presentation, it looks like your booked ARR for the first three quarters of the year was just under $2 million. And it looks like you signed this approximately $15 million booked ARR contract. Why is the booked ARR number for this year expected to be $9 million if it appears to be higher when adding the contracts?

Ed Sellitto, CFO

Hey Gary. I can clarify the calculation on the $10 million contract that we discussed. The $10 million of RPO over a three-year period is $3.3 million per year in committed ARR. The booked ARR on that deal would be a total of $6.6 million when you add the UAC. Adding that $6.6 million to the nearly $2 million booked ARR year-to-date leaves us with $8.5 million. We do have the pipeline that we believe will at least close the remaining $500,000 gap and get us to $9 million booked ARR for 2024. Yes, recently we had delays in Go-Lives for certain customers. In select situations, we may opt to provide a concession to our customers that could reduce our RPO to retain them and allow us to keep our relationship intact. The delay in the Go-Live of a customer may also lead to a reduction in revenue recognized over the remaining contract period, causing a decline in revenue from one quarter to the next. However, we do expect to turn this around as we ramp up new customers and existing customers exceed their minimums.

Rhon Daguro, CEO

I’ll share as much as I can. The pipeline is focused predominantly in the financial services sector. We just came off of Money 20/20, and our core team focuses on financial services. We do have additional major verticals outside that pipeline—retail management, hotels, casinos, healthcare, and telecommunications. The pipeline is mostly in financial services, targeting banks and large payment institutions. We are in Proof of Concepts with those organizations now, and we’re hoping that’s what will drive bigger opportunities through 2025.

Unidentified Analyst, Analyst

Hi Rhon. Congratulations on the new contract. Could you give us some color on the financial capacity of the Indian firm that is obligated under the terms of the $10 million minimum commitment contract?

Rhon Daguro, CEO

I cannot, unfortunately.

Graham Arad, General Counsel

We certainly believe they’re capable of being able to pay this amount of money.

Rhon Daguro, CEO

As you can see, partnerships are very important to authID’s business. I’ve been talking about this for almost a year now, where in order for the business to see accelerated growth, we need a dedicated partnership focus. So with Donna Shawhan on board, we now have a dedicated expert on the partnership leadership front. Her responsibility is to extrapolate the $10 million commitment and drive further growth through partnerships. Erick Akre is a financial services expert who has already brought in new financial services customers in a short time. Thank you, everybody, for listening to the call today. We look forward to speaking with you when we report our fourth quarter and full year 2024 results in 2025. Thank you again for joining us.

Operator, Operator

Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.