Transcript
Good afternoon and welcome to Aware’s Third Quarter 2023 Conference Call. Before we begin today’s call, I would like to remind everyone that the presentation today contains forward-looking statements that are based on the current expectations of Aware’s management and involve inherent risks and uncertainties that could cause actual results to differ materially from those described. Listeners should please take note of the Safe Harbor paragraph that is included at the end of today’s press release. This paragraph emphasizes the major uncertainties and risks inherent in forward-looking statements that management will be making today. Aware wishes to caution you that there are factors that could cause actual results to differ materially from those results indicated in such statements. These risks and uncertainties are also outlined in the company’s SEC filings, including its annual report on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statements should be considered in light of these factors. You are cautioned not to place undue reliance upon any forward-looking statements, which speak only as of the date made. Although it may voluntarily do so from time to time, Aware undertakes no commitment to update or revise the forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable securities laws. Additionally, this call contains certain non-GAAP financial measures that are defined by the SEC and Regulation G. Non-GAAP financial measures should be considered in isolation from or a substitute for information presented in compliance with GAAP. Accordingly, Aware has provided reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures in the company’s earnings release issued today. I would like to remind everyone that this presentation will be recorded and made available for replay via a link in the Investor Relations section of the company’s website. Now, I’d like to turn the call over to our CEO and President, Bob Eckel.
Thanks, Matt. Good afternoon, everyone, and thank you for joining us today. I am excited to talk to you about the exciting developments that have been taking place at Aware. After the market closed, we announced our results for the third quarter ended September 30, 2023. A copy of the press release is available in the Investor Relations section of our website. Before reviewing our financial and operational highlights from the third quarter, I want to give you a quick overview of Aware and what sets us apart. That way, those of you who are new to us can have a better understanding of Aware. Aware is a global biometric platform company that utilizes data science, machine learning, and artificial intelligence to tackle everyday business and identity challenges through biometrics. We’re working to enhance trust in an increasingly connected world through our mission of balancing security and user experience through our technology. Our offerings facilitate digital onboarding, authentication, and lifecycle management of the user’s biometric identity through proven, responsible, and trusted multimodal adaptive biometrics. Over the past 30 years, Aware has demonstrated the value of our offerings by being consistently chosen by governments and commercial organizations alike for our experience and robust portfolio. Our reputation in the biometric industry has earned us trusted partnerships with core government agencies in the United States, Canada, the UK, Germany, Australia, and more. In fact, we are a worldwide leader in biometric data orchestration for immigration and border management. We are also trusted by industry leaders like the largest banks in Brazil and Turkey, among others, for onboarding and authentication. Furthermore, we have championed the responsible use of technology, particularly leveraging artificial intelligence and machine learning to create software that ethically achieves demographic neutrality and equity, meaning we deliberately emphasized the need for treating all individuals equitably. During research, design, development, testing, and refinement, we train our algorithms on some of the largest and most diverse datasets in the world. This has allowed us to achieve a position of minimizing, practically eliminating, bias based on age, gender, or race, as independently tested and confirmed by NIST. Additionally, we prioritize consent-based biometric technology, meaning outside of specific forensic applications and law enforcement, only people who consent to leverage biometrics are users of our technology. Moreover, our agnostic approach allows customers the flexibility they need to build upon past investments rather than tear and replace, a common industry practice that promotes waste. Thirdly, we’ve earned our trusted status through a portfolio that mitigates threats and asserts the integrity of identity in a future-proof manner. Since Aware doesn’t outsource any biometric technology, we are the only biometric provider our customers need to work with. If a new attack vector emerges, we can work directly to address it without needing to wait on a third party to upgrade their algorithms first or get recertified. Furthermore, we set the bar for liveness in the industry. In a recent independent NIST benchmarking study, Aware took the top spot in security for both impersonation and evasion detection for one of the presentation attack types, the only provider to achieve this distinction. Our ranking in the top 5 in security and top 10 in convenience across the majority of presentation attack types for evasion demonstrates that Aware is the only provider who has successfully achieved the balance of security and user experience with the ability to configure solutions appropriately for every use case. Lastly, before I discuss the progress we’ve made to accelerate growth and drive greater scale for Aware, it’s crucial for us to offer future-proof solutions. An organization’s business requirements will evolve over time, as will the external landscape. Our offerings and platform can scale with customers, adapt to changing environmental conditions, risk profiles, or consumer demands, and respond to future attack vectors. This positions us well to maintain the customer satisfaction needed to retain and expand the recurring revenue we’ve been building. In fact, since I joined the company at the end of 2019, we’ve grown recurring revenue by 83% or 16% annually from $5.4 million in 2019 to nearly $10 million over the trailing 12-month period ended September 30, 2023. We expect to end 2023 with more than $11 million in recurring revenue, providing solid visibility going into the new year. Now, with that background and context, I’d like to discuss our operational and financial achievements for the third quarter of 2023. In Q3, we expanded our recurring customer base through our continuous efforts to enhance our market-leading technology and develop our partner ecosystem. Q3 was a very strong quarter for Aware and reflects the tremendous progress we’ve made in driving profitable and more predictable growth. This quarter, we generated $2.5 million in operating cash flow and continued to build upon the foundation for future recurring revenue. After addressing several deals that were delayed over the past months, we secured a $3.4 million contract that, along with annual maintenance options, has a five-year value of up to $5.1 million, which expands our footprint in the U.S. government. We are also beginning to recognize revenue from the five-year, $5 million contract we secured with our largest BioSP customer in Q2. Both contracts reflect the trust leading government agencies place in us and, when combined with our new AwareABIS contracts, are expected to contribute more than $1.5 million to our annual recurring revenue. Additionally, our partner-focused selling motions have enabled us to reduce our selling costs while increasing new business conversion at an accelerated pace. In fact, during Q3, we had four new accounts go live and signed two new contracts with our partners for AwareID. Our strong third-quarter performance reflects our continued efforts to increase ARR and drive sustainable future growth. Craig will walk you through our key customer wins and progress on our go-to-market initiatives in more detail. But I wanted to highlight a few more points first. After emphasizing the development of our customer success team over the past few quarters, we’re excited to finally have a formal partnership program in place. Aware is dedicated to partner success and we look forward to collaborating directly with our partners to convert the growing market demand into increased wallet share for us and our partners. Our AwareABIS offering has delivered as intended, and we believe the solution has found an excellent niche in the underserved market. We've deployed AwareABIS to three law enforcement agencies, of which one is on-prem and two are cloud-based. Of the three deployments, one began producing recurring revenue in Q3, and the other two will begin producing recurring revenue in Q4. In conjunction with an enhanced partner ecosystem, we also optimized AwareID to make it even more versatile, secure, and accessible by introducing facial identification capabilities and improving backend functionality. Now businesses of all sizes can easily incorporate our world-class biometric authentication without changing their backend. Furthermore, we've added a developer hub platform, which encourages developers to experiment with AwareID’s capabilities to help build brand affinity among the engineering and developer communities. Even though we are continuing to optimize AwareID’s market fit, it’s important to note that AwareID is opening doors across all our biometric solutions to high-quality opportunities with large and recognizable brand names. As I mentioned earlier, our technology is recognized as a top performer industry-wide, and most recently, our pad algorithms were ranked number one in security for both impersonation and evasion for presentation attack Type 4A in the NIST fake benchmarking test. Aware has also recently been named an industry catalyst and role model in the 2023 Biometric Digital Identity Prism Report. While we can’t and don’t plan to announce every contract secured or in the works, Aware is consistently winning business in competitive markets. Our ability to anticipate market trends and adapt our award-winning solutions to specific customer needs continues to contribute to our market leadership. Before moving on to our financial performance, I’d like to briefly address last week’s 8-K filing. As noted in the filing, Aware has streamlined its financial organization. Dave Barcelo is no longer with Aware. As part of this realignment, we have promoted our Corporate Controller, David Traverse, to Principal Financial Officer. Dave Barcelo was with Aware for over three years, and we are thankful for his leadership. We cannot thank him enough for his contributions and wish him all the best in his future endeavors. We have total confidence in David Traverse fulfilling the financial leadership role. Some of you may recall David from a previous earnings call when he stood in for Dave Barcelo. David joined Aware three years ago as Vice President and Corporate Controller. He has an extensive background in finance and public accounting. Prior to joining Aware, David was Vice President and Corporate Controller at SeaChange International and Vice President, Finance, and Chief Financial Officer at Airtel Video Systems. He has also worked as a certified public accountant in several public accounting firms. We may not have filed a 10-Q on time and do not anticipate this change to impact our filing cadence or Investor Relations activities. Lastly, we are committed to exiting this year with neutral operating cash flow and continue to optimize our cost structure, focusing on maximizing our operating cash flow as we prepare to enter 2024. I’ll now turn the call over to David to walk us through our financial results for the third quarter of 2023. David, over to you.
Thank you, Bob, and good afternoon, everyone, on the call. It’s a pleasure to be back here again with you today. Turning to our financial results for the third quarter ended September 30, 2023, total revenue was $6.4 million compared to $3.2 million for the second quarter of 2023 and $3 million for the same year ago period. The increase in total revenue was primarily due to higher software license sales in the period. For Q3 2023, recurring revenue was $2.2 million. The $2.2 million in recurring revenue was up 5% sequentially and 4% year-over-year. Operating cash flow for the quarter was $2.5 million compared to usage of $2.2 million in the prior quarter and usage of $2 million in the same year ago period. Looking at our operating expenses, including the impact of one-time events, our third quarter 2023 operating expenses were $5.6 million, a decrease from $6.1 million in the prior quarter, and up from $600,000 in Q3 of last year. Operating income for the third quarter of 2023 was $700,000 compared to an operating loss of $2.9 million in the prior year quarter and operating income of $2.4 million in the same year ago period. For the third quarter of 2023, GAAP net income totaled $1.1 million or $0.05 per diluted share compared to a GAAP net loss of $2.7 million or $0.13 per diluted share in Q2 2023 and GAAP net income of $2.6 million or $0.12 per diluted share in Q3 last year. Please note that operating expenses, operating income, and net income for Q3 of 2023 included an $800,000 one-time gain related to our adjustment to the fair value of the contingent acquisition payment from our 2021 acquisition of FortressID, and that operating expenses, operating income, and net income of Q3 of 2022 included a $5.7 million one-time gain related to the sale of the company’s building located in Bedford, Massachusetts, in July of 2022. Our adjusted EBITDA for the quarter, which we reconcile to GAAP net income in our earnings release, totaled $400,000, which compares to an adjusted EBITDA loss of $2.4 million in the prior quarter and a loss of $2.5 million in the same year ago period. The significant improvement in adjusted EBITDA was primarily due to higher revenue. Looking at our balance sheet, we ended the quarter at $27.5 million in cash, cash equivalents, and marketable securities compared to $25.1 million at the end of the prior quarter. We repurchased 81,083 common shares of stock at an average price of $1.52 per share as part of our previously announced share buyback program. We believe repurchasing our common stock at certain valuation levels presents an attractive opportunity given our strong balance sheet and growth prospects. As we exit 2023, we are supported by a strong and improving cash balance and no debt. Our robust balance sheet enables us to evaluate every high ROI opportunity that has the potential to advance our strategic growth roadmap. That completes my financial summary. I’d now like to turn the call over to Craig to discuss the advances we made in our go-to-market strategy. Craig?
Thanks, David. It’s great to be here with you all today. As Bob discussed, Q3 was a very strong quarter for Aware. We continue to protect and scale our recurring revenue base through the implementation of a formal partner program, further product enhancements and capabilities, and capitalizing on the high-quality opportunities in the pipeline. Building upon the foundation we laid last quarter for future recurring revenue, we closed several deals that were previously pushed to the right, including the large multimillion-dollar, multiyear U.S. federal government contract Bob mentioned earlier. After receiving a lot of positive feedback from our customers, we incorporated facial identification capabilities, enhanced front-end document capture, and better processing functionality into AwareID. In addition to the backend support and user experience improvements, we included new mobile application frameworks, Flutter and React Native. The AwareID platform now provides value for various use cases without compromising accessibility, improved security, user experience, and offers various levels of technical access for developers. As Bob mentioned, we also debuted a developer hub, which is generating excitement for the platform and the developer community while providing easier access to development resources for our customers. We also partnered with a reputable outside firm to strengthen AwareID’s SaaS infrastructure to expand the potential reach of our previously announced partnership with Software One. We expect these changes will positively impact our opportunities in the U.S. commercial market and Latin America. During Q3, we launched a formal partner program to accelerate the adoption of our offerings and expand our global reach. Our partner ecosystem is built around three focus areas to maximize the program’s potential. The first is transparency. Providing greater clarity around products, roadmaps, pricing tiers, and incentives for current and future partnerships is crucial for integrating our partners into the ecosystem rather than merely treating them as vendors. The second focus is education. After conducting a formal survey with our partners and leveraging an outside consultant, it became evident that not all partners had a clear understanding of everything Aware offers. That's why we opened access to our library of product and marketing resources. Partners are now equipped with our product guides, sales decks, API guides, etc., which have allowed them to better understand our solutions and become more effective sales agents. The third aspect is a co-marketing approach, which includes regular communications, such as attending trade shows together, assisting with marketing collateral and costs, and helping with signage. We have conducted several webinars with our partners over the last few months on relevant topics to continue showcasing Aware’s thought leadership in the industry. A great example of the evolution of our partner ecosystem is our relationship with Uqoud. Recently, we shared a booth with them at the largest Middle Eastern Technology Conference, Gitex. Since announcing the partnership in March of this year, Uqoud has been instrumental in expanding Knomi’s footprint in the Middle East, growing from a system integrator to a product company. The launch of our partner ecosystem now allows Uqoud to leverage both their local market knowledge and presence alongside Aware’s marketing resources to broaden the reach of all our solutions in the region. With an ever-improving product portfolio and formal partner ecosystem, we believe we are well positioned to capitalize on the high-quality opportunities flowing through our pipeline. We continue to see strong demand on the government side in North America and Europe and are working to close multiple deals with the U.S. federal government. The confidence the U.S. government has in our fraud protection is translating into promising leads with prominent government agencies in Canada, the United Kingdom, Latin America, and the Middle East. Furthermore, by leveraging these robust government relationships, we are accelerating our breakthrough into the U.S. commercial market. We've recently observed an uptick in interest in the commercial side for Aware, gaining a lot of traction in the gaming space as well. Latin America remains our strongest and most competitive market, especially Brazil, where we have several encouraging competitive opportunities. We are also deep in the selling process with several deals in Mexico, Chile, and other Latin American countries. Despite the geopolitical turmoil in the Middle East, we remain optimistic about the demand and opportunities in Egypt, the UAE, and Jordan. Previously, we were very bullish on our prospects in Israel and Iraq; however, considering recent events, we have consulted an outside source to gain a better understanding of how it will affect the market. As we look forward, my team’s initiatives for Q4 and 2024 will revolve around solidifying AwareID’s position in our target markets as well as strengthening relationships with our government customers, driving incremental revenue from the commercial side, and closing out our pipeline. I would now like to turn the call back to Bob for more insights on our key business drivers. Bob?
Thanks, Craig. Building upon the foundation we’ve laid over the past few quarters, we’ve generated meaningful cash flow and recurring revenue in Q3 through our efforts in new contract structures and our newly secured and expanded customer base. Through the continuous evolution of our technology and the launch of a formal partner program, we continue to leverage our customer relationships to optimize spending, drive recurring revenue, and accelerate adoption of our SaaS-based platform. I’m proud of the revenue team and their efforts that have led to our highest quarterly revenue since Q2 of 2016 and the highest level of quarterly operating cash flow since Q4 of 2018. Looking at the remainder of the year, we are increasingly confident in our ability to achieve or exceed our financial goals, which include growing total revenue and ARR by 15% in 2023 and exiting the year with neutral operating cash flow, which means we manage both inflows and outflows towards profitability while taking into consideration seasonal timing of cash outlays. With our strong performance this year and particularly in Q3, we are confident we can meet or exceed our cash goals and believe we are well positioned to continue ramping up recurring revenue and driving sustained growth. We are excited about Aware’s future and appreciate everyone’s ongoing support. With that, we are ready to open the call for questions. Matt, please provide the appropriate instructions.
Thank you, Bob. David, what was the recurring revenue for the quarter? How much of that came from subscriptions compared to maintenance?
Thanks, Matt. Recurring revenue for the quarter was $2.2 million, with $1.8 million of that coming from maintenance and the rest from our subscription-based revenue.
Thanks, David. Apart from the gaming space, what other markets on the commercial side are you seeing increased interest in?
Sure. Thanks, Matt. We are seeing a lot of opportunity in online gambling, education, workforce management, healthcare, and financial services. As we have discussed in the past, we are continuing to leverage our government relationships to gain market share in new geographies and expand our commercial use cases. An example of this is leveraging our strong foundation in the Turkey financial sector. We have been able to streamline our breakthrough into North Africa, and this has really accelerated our expansion in the Middle East.
Thanks, Craig. David, another question for you. With a strong balance sheet, what are your capital allocation plans?
Yes. We ended the quarter with $27.5 million in cash, cash equivalents, and marketable securities and no debt. We are continuing to capitalize on the higher interest rates as well as our previously announced share repurchase program. Moving into the remainder of 2023 and then 2024, we aim to maintain a robust cash position that will enable us to evaluate strategic opportunities with the potential to maximize shareholder value and drive scale.
Bob, a question for you. Can you give some color as to why you chose to appoint a Principal Financial Officer as opposed to a Chief Financial Officer?
Sure, Matt. Obviously, this is not a traditional management structure for most public companies. However, it aligns well with our current organizational scale and needs, and it complements our cost optimization initiatives that we have ongoing. Promoting David to Principal Financial Officer allows us to reduce costs without compromising our ability to achieve our financial and operational goals. Additionally, having a streamlined financial team aligns with our strategic growth and cash plans. David has done a fantastic job as our Corporate Controller over the past three years, and we believe he is the right person for the position.
Thanks, Bob. I am going to combine a couple of questions here. We have received queries looking for more details around Dave Barcelo’s departure, specifically if severance is owed and if any violations, legal proceedings, or items of consequence transpired or are pending.
I will take that one. Dave Barcelo’s departure from the company is not the result of any dispute or disagreement on any matter. As Bob mentioned earlier, we are thankful for all of Dave’s leadership during these past three years. We do anticipate incurring some one-time severance costs, which will be reflected in our Q4 and full-year 2023 results. However, we still remain on track to exit the year due to operating cash flow.
Thanks, David. A question for Craig. Over the past couple of quarters, you have announced a few product enhancements. How are you picturing the evolution of Aware’s technology?
Sure. Aware’s technology is primarily driven by our ability to both predict and adapt to the market’s needs. Right now, we are focused on three trends in this market. The first is increased adoption of cloud-based solutions. Two is cross-platform mobile support. Finally, there's greater interest in deep learning and AI. By concentrating on these three areas, we can tailor our technology to be easily and rapidly deployable for any emerging use case or changes in the market. Following the pandemic, digital crime has become more advanced and widespread.
Thanks, Craig. Another one for you. You mentioned in previous calls that you are focused on growing the commercial side of the business. What progress have you made?
Yes. As we mentioned earlier, Aware’s strong reputation in the government space has generated momentum for the company on the commercial side. The confidence government agencies, especially those in larger governments like the U.S. and Europe, have in our technology is starting conversations with larger, more recognizable brands, which we can leverage to accelerate our entry into the commercial space.
Next question, Bob, there was a significant improvement in operating cash flow compared to last year. What drove this?
Well, thanks, Matt. This improvement in cash flow boils down to our persistent execution of our growth strategy and our cost structure optimization efforts. We have been working on optimizing our costs, as you know, and continue to ramp adoption for all our solutions, driving for a leaner operational model. Through our recent product enhancements that Craig discussed earlier and the launch of our formal partnership ecosystem, we have expanded our technologies' use cases and made them more accessible to a wider audience. The upgrades rolled out this year to Knomi and AwareID have enabled our partners and sales teams to go to market with more versatile, secure, and user-friendly solutions, resulting in increased sales and upselling. Furthermore, our formal partner ecosystem and pricing tiers have now unlocked opportunities for organizations of all sizes, from startups to global enterprises, to adopt Aware’s technology. Lastly, our partnership program maximizes the potential reach of our current and future partnerships without significantly increasing our go-to-market costs.
Thanks, Bob. Our next question, Aware spoke with the CIO of Banca Decebal at Identity Week America last month. How has the partnership evolved over the years? And what impact has the relationship had in terms of other opportunities for Aware?
Sure. Banca Decebal was one of the pioneers in the Brazilian financial sector to incorporate biometrics and has been using Knomi for the past seven years to validate account access and credit applications for their customers. Since deploying Knomi, the bank has experienced very low levels of fraud, even as the number of transactions has increased nearly ten-fold in the last five years amid the recent evolution of criminal activity. Digital crime has become more advanced and widespread throughout Brazil as technology has become an integral part of everyday life. This increase in online fraud and digitization has created opportunities for Aware to gain market share in sectors like e-commerce and sporting events. Moreover, Aware’s success in warding off new malware designed to attack banks like Banca Decebal could translate into additional opportunities within the global financial sector as the software is now being exported to the United States and Europe. For anyone who’s interested, you can watch the interview between our Lat-Am General Manager and the Banca Decebal CIO on Aware’s YouTube channel. I would recommend checking out our YouTube channel, as we continue to build it as a key piece of our marketing strategy to communicate with our audiences and prospects.
Thanks, Craig. What kind of feedback are you receiving from customers regarding AwareID or your other solutions?
Sure. The feedback from our clients regarding AwareID is primarily focused on two areas: ease of use and the breadth of the offering. Following our latest release, customers and prospects are utilizing AwareID to replace multiple technologies, thereby enhancing the user experience in their apps or online presence. The addition of documentation, authentication with cutting-edge AI-driven face liveness is delivering a better and more secure user experience. The speed of deployment has improved from months to days, enabling customers to deploy, test, and iterate with minimal assistance and/or developer resources.
David, a question for you. Why was the company not more aggressive in its buyback program?
Yes, thanks, Matt. As I mentioned earlier, we do believe in buying back our stock as an attractive use of capital. However, we are limited based on Nasdaq rules regarding how much we can repurchase based on historical trading volumes.
Thanks, David. At this time, this concludes our question-and-answer session. If your question wasn’t answered, please e-mail Aware’s IR team. I would now like to turn the call back over to Bob for closing remarks.
Yes. I would like to thank all of you for joining today’s call and also, of course, thank our employees, partners, and shareholders for the continued support they provide us. As a reminder, you can learn more about our strategy in the investor presentation available on our website. We look forward to updating you on Aware’s progress on our next call. Matt, over to you.
Thanks, Bob. I would like to remind everyone that a recording of today’s call will be available for replay via a link in the Investors section of the company’s website. Thank you for joining us today for Aware’s third-quarter 2023 conference call. You may now disconnect.